HELPING SMALL
BUSINESSES
WIN
Funding Circle Holdings plc
Annual Report and Accounts 2020
OUR MISSION
Build the place where small
businesses get the funding
they need to win.
HOW WE DO IT
We deliver an amazing
experience for small
businesses powered
by machine learning
and technology.
Strategic report
Highlights
A year of two halves
‐ H1 2020 responding to Covid-19
‐ H2 2020 strong demand with H2 2020 UK originations
c.£1.5 billion, up 91% year-on-year
Our technology platform is transforming
the SME borrowing experience
‐ 50% of applications now getting instant decisions
Resilient funding and loan performance
through the recession
‐ All investor cohorts expected to deliver positive returns
Profitable in H2 2020
‐ Group: H2 2020 £20.3 million AEBITDA FY: £(63.8) million
and H2 2020 £7.2 million operating profit. FY: £(106.3) million
‐ UK: H2 2020 £28.6 million AEBITDA. FY: £6.5 million and
H2 2020 £21.3 million operating profit. FY: £(7.9) million
Robust net assets of £218 million
‐ Small increase in net assets since June 2020
Building a dynamic team
‐ All Circlers are owners of the business through an
equity programme
‐ 83% would recommend Funding Circle as a place to work
‐ 41% gender diversity across the business
Loss before tax
£108.1m
2019: £84.2m
Statutory financial
KPIs
Total income
£222.0m
2019: £177.3m
APM1
KPIs
Adjusted EBITDA¹
£(63.8)m
2019: £(27.5)m
Operational
KPIs
Loans under management
£4.2bn
2019: £3.7bn
Originations
£2.7bn
2019: £2.4bn
1. For reconciliation of alternative performance measures (“APM”) to
statutory measures refer to page 171.
Contents
Strategic report
Investment case
01 Highlights
02 Funding Circle at a glance
03
04 Our 2020 story
06 Chairman’s statement
08 Chief Executive Officer’s statement
10 Our market
13 Technology and data
14 Our model
16 Borrower experience
17
18 Strategic priorities
19 Our people
22 Sustainability
26 Engaging our stakeholders
28 Key performance indicators
30 Finance review
36 Risk management
40 Principal risks and uncertainties
48 Viability statement
Investor experience
Corporate governance
Financial statements
51 Chairman’s introduction
53 Board of Directors
56 Corporate governance report
62 Division of responsibilities
63 Composition, succession and evaluation
65 Audit, risk and internal control
66 Report of the Nomination Committee
69 Report of the Audit Committee
75
Report of the Risk and
Compliance Committee
78 Directors’ remuneration report
89 Annual report on remuneration
99 Report of the Directors
102 Statement of Directors’ responsibilities
in respect of the financial statements
104 Independent auditors’ report
112 Consolidated statement of
comprehensive income
113 Consolidated balance sheet
114 Consolidated statement of changes
in equity
115 Consolidated statement of cash flows
116 Notes forming part of the consolidated
financial statements
160 Company balance sheet
161 Company statement of changes in equity
162 Company statement of cash flows
163 Notes forming part of the Company
financial statements
171 Glossary
172 Shareholder and Company information
The Strategic Report was approved by the Board on 25 March 2021.
Samir Desai
Chief Executive Officer
Annual Report and Accounts 2020
01
Funding Circle at a glance
About Funding Circle
At Funding Circle we deliver an amazing customer experience
for small businesses using machine learning and technology.
Larger
ecosystem
More
repeat
customers
New
products
More
operating
leverage
Better
borrower
experience
More
data
Better
machine
learning
models
A great customer experience is built on exceptional
fundamentals and seamless technology.
Over the past ten years, we have built a technology
platform that is revolutionising SME lending. Small
businesses can complete a loan application and
receive a decision in a matter of minutes, enabling
them to access funding quickly and at an
affordable rate.
Today, as a leading global platform for small
business loans we have helped over 100,000 small
businesses to access more than £11.5 billion.
Our investment in technology has resulted in strong
customer satisfaction scores and high repeat rates,
helping us to grow alongside our small businesses.
We believe that as we get bigger and help more
small businesses access the finance they need
to grow, we create a stronger platform that drives
significant 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.
135,000
jobs supported by
SME borrowers1
£10 billion
GDP contribution1
<2%
SME lending as a share
of bank balance sheets2
£305 billion
Total addressable market3
1. Source: Supporting SMEs through the crisis and recovery: Funding Circle’s 2020 impact, Oxford Economics, March 2021.
2. Source: Bank of England, US Federal Reserve, FDIC.
3. Source: OC&C analysis, 2019.
02
Funding Circle Holdings plc
Strategic report
Investment case
WHAT MAKES
FUNDING CIRCLE UNIQUE
Illicon
Unlimited Lending Potential
Ground breaking technology
Instant Decision Lending is reinventing SME lending
using machine learning and technology
Read more on page 13
50%
of loan applications
automated
Proven #1 UK platform
Leading SME loans platform with ten years’ experience
Read more on page 04
3rd
Largest CBILS1 provider
Significant addressable market
SMEs are underserved by traditional lenders and represent
a significant addressable market
Read more on page 10
£305 billion
Total addressable market
in the UK and US
Attractive financial profile
Profitable in H2 2020 and expect to be AEBITDA profitable
going forward
Read more on page 30
£
£7 million
Operating profit in H2 2020
Strong future growth opportunities
Launch new funding products to solve more small
business problems
Read more on page 18
£1.3 trillion
SME payments annually
in the UK
1. Coronavirus Business Interruption Loan Scheme, a UK government-guaranteed loan scheme.
Annual Report and Accounts 2020
03
Our 2020 story
Accelerating technological
innovation and navigating
Covid-19
Funding Circle was founded
in the aftermath of the global
financial crisis, when small
businesses struggled to access
finance through traditional
channels. Ten years later,
our technology is helping
businesses to get fast and
affordable finance at a time
when they need it most.
Laying strong
foundations
Powerful machine learning
A decade of research, development
and technology has created an
inflection point for Funding Circle.
Our Instant Decision Lending platform
is underpinned by eighth generation
machine learning risk models using
Open Banking data and ten years of
proprietary data. This enables SME
owners to receive a decision in minutes.
Starting the year strongly
2019 saw us lay strong foundations for
2020, with the roll-out of Instant Decision
Lending. We started the year with a clear
focus on improving conversion across the
platform, providing attractive net returns to
investors, and delivering profitable growth.
Following the UK General Election in
Q4 2019 and Brexit in January 2020,
demand for small business loans was
high in the first two months of 2020
as businesses started to plan for the
year ahead.
Covid-19 response
A seamless transition
to working remotely
As the Covid-19 crisis started to unfold,
our first priority was to ensure the health
and safety of our people. The company
switched to working remotely, with
minimal disruption and no down-time
in the UK and US.
Strengthening our
customer service teams
and forbearance support
We moved quickly to significantly
bolster our customer support capacity,
redeploying staff to frontline roles.
Teams worked around the clock to provide
support to small business customers.
By the end of March, we had developed
and introduced new payment plans for
businesses that were struggling with the
impact of Covid-19. These plans provided
much-needed breathing space by
allowing businesses to reduce or stop
their monthly repayments, giving
them time to get back on their feet.
Borrowers
Investors
Circlers
93%
of UK and US businesses
are making payments
Read more on page 16
£2.5bn
investor capital raised
since the start of
Covid-19 to lend to UK
and US SMEs
Read more on page 17
700+
Circlers transitioned to
working remotely in a
matter of days
Read more on page 19
04
Funding Circle Holdings plc
Strategic report Following an initial spike, the number of
borrowers becoming late on their loan
repayments has fallen back to below
pre-Covid-19 levels.
Launching government-
guaranteed loan schemes
In order to help as many small businesses
as possible through the pandemic,
we shifted our focus from core loans to
government SME guarantee programmes.
We were proud to become one of the first
FinTech lending platforms to become
accredited for the Paycheck Protection
Programme (“PPP”) in the US and the
Coronavirus Business Interruption
Loan Scheme (“CBILS”) in the UK.
In the UK, we completed our application
for accreditation, created a new product
and launched under CBILS within six
weeks. To support our existing customers,
we later received accreditation to the
Bounce Back Loan Scheme (“BBLS”).
Accelerating the roll-out of
Instant Decision Lending
With applications in six minutes,
automated decisions in nine seconds
and 24–48 hours to pay-out, the
platform has been instrumental in
helping thousands of SME owners
access funding at speed during
the pandemic.
This market-leading functionality now
services 50% of all loan applications,
and delivers a credit performance as
accurate as non-instant decision
lending loans, using the same credit risk
models developed over the last decade.
Getting an instant decision can improve
borrower conversion by up to a quarter.
It also lowers costs and has greater
scalability. We reached record levels of
origination in the second half of 2020
without additional headcount and are
well placed to capture this growing
opportunity going forward.
Securing funding and
protecting investor returns
We have seen strong investor demand
to purchase UK and US SME loans.
We have also made significant progress
in our goal of diversifying our investor
base. More than half of our funding
agreements were signed with new
institutional investors, including banks
and asset managers.
As part of our measures to protect investor
returns, we tightened our credit risk
parameters and strengthened the
criteria for businesses from vulnerable
areas of the economy. As we moved to
providing CBILS loans, we were able to
begin helping a wider range of businesses.
Supporting Circlers
To keep teams connected and engaged
while working remotely, we increased
our communications across all levels
of the business. We also adapted our
approach to learning and development
to ensure Circlers could continue to grow.
Recognising the impact of the pandemic on
mental and physical well-being, we hosted
events throughout the year to ensure
Circlers were well equipped to manage well-
being for themselves and their teams.
Clear strategy for
post-pandemic
In the UK, we will operate our core loan
product alongside the new government
programme, the Recovery Loan
Scheme, which will replace CBILS.
We will also leverage our technology to
launch new solutions to help SMEs. This
includes an Application Programming
Interface (“API”) embedding Funding
Circle natively into partners’ websites and
platforms. A new payment finance product
will enable small business owners to pay
invoices and spread costs over three
months, and a new card for Funding Circle
borrowers will enable them to better
manage their business spending habits.
In the US, once PPP ends, we will continue
to expand our core loan product, as well as
originating government-guaranteed loans
through the Small Business Administration
(“SBA”) programme on behalf of banks.
We will also continue to operate our
referral model for other borrower needs.
Government and regulators
Market
27%
share of the number
of CBILS loans
approved since scheme
participation
Read more on page 25
£1.7bn
CBILS loans originated
and $500m PPP loans
originated in 2020
Read more on page 10
Annual Report and Accounts 2020
05
Chairman’s statement
An extraordinary year that has
strengthened the business
Funding Circle becoming one
of the UK’s largest lenders is an
extraordinary vindication of the
power of technology to solve
problems for small businesses.
A year ago, just days ahead of the first
national lockdown, I wrote that we had
started 2020 in good shape as a sharper,
leaner and more resilient business, but
we faced unknown social and economic
consequences created by the virus.
This resilience was tested beyond
all expectations during the year. The
consequences of the virus for borrowers,
for investors and for our employees could
have created an existential crisis. It is a
credit to Funding Circle that a potential
crisis was turned into an opportunity to
step up, to serve and to strengthen. By
stepping up to supply new government-
guaranteed loans in the UK and the US,
we served the needs of our customers
and in the process we strengthened our
own business.
Credit must go to all those involved in
making this happen: the UK and US
Governments for understanding the role
FinTechs could play in supporting their
economies, and the management team
for its commitment to building the
technology and processes which meant
Funding Circle was ideally positioned to
respond to a physical lockdown of bank
and office premises. Above all, our
thanks must go to the wider team of
Circlers, all my colleagues who rose
to the occasion and showed themselves
to be passionate about their mission
and nimble in their approach.
It has been humbling to witness the
exceptional employee contribution at
all levels of our company. The whole
workforce was able to operate remotely in
a matter of days with minimal disruption.
This is a testament to their planning and
use of technology across every aspect
of our business. Teams worked around
the clock to be able to offer these new
government-guaranteed loan schemes
and Circlers adapted their roles overnight
as we moved to support small business
customers at a critical moment. The
senior management team, together with
the Board, faced critical decisions on an
almost daily basis and I am extremely
grateful to all for their commitment and
effort in the face of increased pressure.
Our team and governance
Your Board’s strategic and tactical
decisions also needed to be nimble.
I wrote last year about a balanced focus
on profit and growth. As Covid-19
escalated we refocused our sights and
prioritised an acceleration to profitability.
We cut costs where it made sense, with
a lighter touch strategy for European
markets and reduced headcount in our
US business. As the governments’
support initiatives took shape, we
decided where to focus our resources.
Together with an exceptional period of
lending, we delivered Group profitability
in the second half of the year – an
important milestone for the business.
Our governance structures proved
themselves robust and fit for purpose
through the crisis. I thank the members
of all our Board Committees for their hard
work, always acting constructively and
honestly during many hours of countless
virtual meetings. During the year Oliver
White joined as our new Chief Financial
Officer and his calmness and experience
06
Funding Circle Holdings plc
Strategic report Teams worked around the clock to
be able to offer new government-
guaranteed loans and Circlers adapted
their roles overnight as we moved to
support small business customers at
a critical moment.
SUPPORTING OUR PEOPLE
CIRCLERS PROVED
THEIR RESILIENCE
It has been humbling to witness the
exceptional employee contribution
at all levels of our company.
Andrew Learoyd
Chairman
have been invaluable during the crisis. I
would also like to pay particular thanks to
Cath Keers, Bob Steel and Ed Wray, who
are stepping down this year. Each has
made a significant contribution to the
Board and its Committees, and they have
played an important part in a Board which
continues to support and challenge in
equal measure. Above all, they have made
it fun to be a part of too. I wish them well.
I also offer an equally warm welcome
to Helen Beck, who will chair our
Remuneration Committee, and to Matthew
King, who will join the Board while
continuing to chair the Board of Funding
Circle Ltd, our UK regulated subsidiary.
Both Helen and Matthew bring a wealth
of relevant experience for the next stage
of Funding Circle’s development.
Transforming the SME
borrowing experience
I have always highlighted the
extraordinary passion of our team
and, in part, this is driven by the strong
values inherent in our mission. This
passion and these values, so reflective
in our commercial endeavours, also
need to be harnessed in our impact on
the environment and on society. To this
end, I am pleased that the Board has
formed an ESG Committee dedicated
to proactively deciding on our goals and
implementing steps to deliver them.
Since its formation in 2010, many
people have questioned the survival
of Funding Circle during an economic
downturn. During the worst economic
downturn in decades our company has
not only survived, it has thrived. In my
last report, I congratulated our tech
team for building a platform in 2019 that
reinvented SME lending, using machine
learning to provide instant decisions for
small business borrowers.
I said then that our customer research
told us that small company owners
preferred to access financial products
online rather than “in-store”. Like online
retail, our platform was built for normal
times but has more than proved its
value in a time of crisis. Funding Circle
becoming one of the UK’s largest SME
lenders, larger than banks which have
been in business for centuries, is an
extraordinary vindication of the power
of technology to solve problems for
small businesses.
Furthermore, and particularly pleasing
for the future, the business has
continued to produce positive net
returns for investors through the cycle.
Looking forward
For the last two years I have written at
a pivotal time for the economy – first,
Brexit uncertainty, then the pandemic.
With the roll-out of vaccinations and a
roadmap for the easing of lockdown,
light is now at the end of the tunnel.
Small businesses will begin to drive the
recovery in our economies and it is
more important than ever that they
have the ability to access finance.
With such an extraordinary year behind
us, it is impossible to make accurate
predictions for the year ahead. But some
things are now certain. The crisis has
proven the fundamental strength of our
business, the attractiveness of our
financial model and the competitiveness
of our loan product; governments have
shown their commitment to supporting
SMEs; our customers have proven that
they like us – we have unprecedentedly
high Net Promoter Scores from borrowers
– and want to do more with us; and we
have a team that has proven it can
deliver more volume, more products
and more technology enhancements
with speed and accuracy.
Whatever the new normal looks like,
these certainties are a truly exciting
vindication of our founders’ vision to
make Funding Circle a dominant force
in our FinTech future.
Andrew Learoyd
Chairman
25 March 2021
Annual Report and Accounts 2020
07
Chief Executive Officer’s statement
Here to make a difference
Our Instant Decision Lending
platform is transforming the
borrower experience and laying the
foundations for the launch of new,
exciting products that will solve
more problems for SMEs.
Funding Circle was founded in response
to the financial crisis that rocked the
global economy at the start of the last
decade. We knew there was a better
way for small businesses to get the
funding they need to win; one that
leveraged technology and machine
learning to make a real difference.
Ten years later, over 100,000 small
businesses have borrowed over
£11.5 billion.
In 2020, SMEs found themselves in a
crisis again. This time round though
– the strength of the platform and
position we have built over the last
decade allowed us to play a key part
in helping SMEs to weather the storm.
During extraordinary global events,
Funding Circle was one of the first
FinTech platforms to become accredited
to PPP in the US and CBILS in the UK.
We knew that small businesses were
having to make big decisions fast.
Underpinned by our Instant Decision
Lending technology, we were able to
offer SMEs access to finance quickly
at low rates when speed and certainty
were absolutely critical.
Through careful management of our
existing loan book, I am pleased that
93% of UK and US customers are
making payments and all loan cohorts
are expected to deliver positive returns.
I’m incredibly proud of the support we
have been able to provide to businesses
in a challenging year. This wouldn’t have
been possible without the hard work
and dedication of our people. Ensuring
their health, safety and well-being was
also a key priority.
Financial and
operational overview
2020 was truly a year of two halves.
In the first half we focused on adapting
to Covid-19, helping customers and
supporting Circlers in the transition
to remote working. We increased the
capacity of our frontline teams and
introduced a range of forbearance
measures to give businesses the
breathing space they needed.
We also made some difficult decisions,
including restructuring our German and
Dutch businesses and making changes
to our US business. These choices were
not taken lightly but were in the interests
of the long-term success of Funding
Circle and our customers. I want to
thank everyone who has contributed to
our journey in those countries.
The second half of the year saw strong
borrower and investor demand, with UK
originations up 91% year-on-year. Along
with record originations of £2.7 billion
and loans under management of
£4.2 billion, we ended the year with a 25%
increase in total income at £222 million.
08
Funding Circle Holdings plc
Strategic report I am pleased that we have exceeded our
target of being AEBITDA profitable in
H2 2020 by delivering £20 million of
AEBITDA and £7 million of operating
profit in H2 2020. This is a significant
milestone for the business.
Overall AEBITDA was impacted by
a significant fair value adjustment
incurred on SME loans held for sale in
H1 2020, the majority of which was
caused by Covid-19.
Going into 2021, we are in a strong
position, with net assets of £218 million
and £103 million in cash, of which
£39 million is held within the warehouse
and securitisation vehicles.
A year of huge
technological innovation
We are reinventing SME lending using
machine learning and market-leading
technology. Our technology platform is
transforming the borrower experience
and laying the foundations for the launch
of new, exciting products that will solve
more problems for small businesses.
It is proof that our relentless focus on
technology and machine learning is
helping businesses access finance faster.
We also met our IPO goal of automating
50% of loan applications by the end of
2020 and have set a long-term target to
automate 80% of all loan applications.
This technology is freeing thousands
of SMEs from the hassle of outdated
loan application processes and will help
thousands more over the coming years too.
Our people
There is no escaping the fact that this year
was a difficult one for many people. I have
been inspired by the way our team has
been able to meet the challenges head on
with creativity, passion and resilience.
I thank them for their exceptionally hard
work and results.
SUPPORTING BUSINESSES
TAKING CUSTOM
CABINS GLOBAL
Plankbridge
Plankbridge manufactures bespoke shepherd’s huts.
The business was founded by Richard Lee and his
partner Jane Dennison in 2020.
The shepherd’s hut manufacturer borrowed from Funding Circle in order
to expand their product offering and their overseas market.
Over the past 12 months, as people have been forced to work from home,
there has been a surge in interest from customers looking to create an
office in their garden.
They now employ 24 staff who typically work on around ten hand-made
huts at a time – with each hut taking at least six weeks to complete.
The company remains loyal to local suppliers within a ten-mile radius
for timber and fixings, keeping the value within the local economy.
Looking ahead
As we turn our attention to what the
future holds, we are well positioned
to take advantage of the structural
changes that are currently reshaping
the SME lending market. We are seeing
a significant acceleration in the move
towards online borrowing among small
businesses, and our ten years of online
experience means we can capture this
enlarged opportunity going forward.
We will operate core lending alongside
government-guaranteed loan schemes.
SMEs are central to our economic
recovery, and we will do all we can
to support them.
We are excited to build on the foundation
our technology platform and ten years
of R&D provides. As we launch more
products to support businesses with
their everyday needs and spending,
I feel confident in saying that you
can expect more innovation in the
next year than the entire last decade.
I look forward to updating you on
our continued progress in 2022.
Samir Desai
Chief Executive Officer
25 March 2021
Annual Report and Accounts 2020
09
Our market
Small businesses are underserved
by traditional lenders
SMEs are a fundamental part of the global economy, driving growth, employment
and innovation. They account for 70% of employment and 50–60% of the
economic value created across the OECD region. But they are underserved by
traditional lenders and typically represent less than 2% of banks’ balance sheets.
The events of 2020 and the support
provided by governments to SMEs
further demonstrates their strategic
importance to economies. Small
businesses have shown remarkable
adaptability and Covid-19 has led to a
rapid acceleration in the shift towards
online lending. We believe this change in
the SME finance market is permanent.
A challenging year for
small businesses
Covid-19 and the initial lockdown
restrictions that were put in place by
governments significantly impacted
the ability of small businesses to trade,
resulting in a sharp decline in economic
activity as many were forced to temporarily
close their doors. However, we saw large
numbers of small businesses quickly
pivot to offer goods and services online.
Restaurants began selling meal kits and
coffee companies adopted subscription
models. 2020 was the year that the
country fell in love with SMEs again, as
they adapted and showed their resilience,
creativity and passion in the face of
incredible difficulties. Their response to the
pandemic has been inspiring. While further
lockdown restrictions have continued to be
necessary in the UK and parts of the US, the
ongoing roll-out of government vaccination
programmes offer hope of a return to some
sense of normality later this year.
But we will not be returning to things
exactly as they were before. Covid-19 has
driven a number of structural changes
that Funding Circle will benefit from.
SMEs are strategically
important to economic growth
The response of governments all over
the world to Covid-19 has recognised the
strategic importance of small businesses
to economic growth and job protection.
Small businesses are underserved by traditional lenders
£305bn
Total addressable
market in UK and US3
50–70%
<2%
SME loans as a
% of banks’
balance sheets¹
SMEs as a %
of GDP and
employment²
1. Source: Bank of England, US Federal Reserve, FDIC.
2. Source: OECD SME and Entrepreneurship Outlook 2019.
3. OC&C analysis:, 2019.
10
Funding Circle Holdings plc
Strategic report Significant acceleration in
adoption of online borrowing
Small businesses had to move fast in 2020,
and many found that lending platforms
offered them the speed and simplicity they
needed. In a year where everything went
online, small business borrowing was no
different. Our ten years of experience in
originating business loans online meant
we were well positioned to accommodate
an increase in online loan applications.
In 2021 we will continue to leverage
our technology and machine learning
to offer small businesses more ways of
accessing the finance they need to win.
Greater choice and competition
Governments across the world rightly
identified the crucial value of small
businesses and acted swiftly to introduce
a range of support measures in response
to the crisis. While the CBILS programme
in the UK initially focused on the banking
sector, the British Business Bank worked
hard to get FinTech firms like Funding
Circle accredited fast. With over 100
CBILS lenders accredited, small
businesses had more choice than ever
before. Funding Circle was founded in
the aftermath of the global financial
crisis when small businesses struggled
to access finance through traditional
channels, and ten years on, we are
proud to have contributed to providing
businesses with a greater range of
options through the pandemic. The
agility of the FinTech sector means it can
respond quickly to meet the funding
needs of SMEs in both crises and benign
times, and is helping to make the funding
landscape for SMEs, as well as the
economy, more resilient. We are seeing a
similar situation in the US market, where
large numbers of FinTech firms are driving
growth and innovation in the sector.
5x
increase in search
terms for online
business loans in the
UK
Strong demand from investors
Despite the pandemic, in 2020 our
platform attracted record levels of capital.
We are confident we will continue to attract
strong demand from institutional investors
to fund SME loans throughout 2021.
All UK and US loan cohorts are expected
to deliver positive annualised returns.
£2.5bn
investor capital raised
since the beginning
of Covid-19 to lend
to UK and US SMEs
SMEs expect to have
ongoing finance needs
More SMEs experienced accessing
finance in 2020 and we believe they are
likely to continue to do so in the future.
For some, this was because they wanted a
cash-buffer or needed to mitigate against
the impact of Covid-19. Others used
funding to invest and grow their business
to take advantage of new opportunities,
having successfully pivoted to trade
through the pandemic. Whether
businesses needed funding to survive or
thrive, our platform ensured they got a fast
decision with minimal work at their side.
40%
of SMEs expect to require
finance in the next
12 months, primarily for
growth or investment
SUPPORTING BUSINESSES
BUSINESS GROWTH:
JUST OUR CUP OF TEA
Bird & Blend Tea Co.
Mike Turner and Krisi Smith, are the co-founders of
Bird & Blend Tea Co – an independent, award-winning
tea company based in Brighton which has shops across
the UK as well as an online store.
When the pandemic hit, they had to adapt their operations to comply with
social distancing regulations. They made structural changes to their
workspaces, including the transformation of their office into a production
facility and moving the office team to working remotely.
Mike and Krisi took out a Funding Circle CBILS loan to give themselves a
cash flow buffer and continue to drive forward their growth plans. They
employed 80 members of staff when the pandemic hit and they’ve now
been able to grow that number to 100.
Annual Report and Accounts 2020
11
SUPPORTING BUSINESSES
TURNING A CHALLENGE
INTO AN OPPORTUNITY
Fashionizer
Debbie Leon set up Fashionizer in 1993 when she noticed a
gap in the market for luxury and bespoke uniform design.
The pandemic had a major impact on the business, after many clients in the
hospitality and spa industries closed during the first lockdown. Debbie needed
a cash injection to keep her business going at a time when production had
slowed. She initially applied for a CBILS loan through her bank, almost a full
two months later she’d had no response. By the time she did, Debbie had
already received a Funding Circle CBILS loan.
The business adapted quickly, and switched to making fabric face masks.
They spent the first three weeks researching best practice, sourcing the
correct filters and making the patterns and samples. They successfully set up
a manufacturing supply chain in London that operated throughout lockdown.
12
Funding Circle Holdings plc
Strategic report Technology and data
Delivering an amazing
customer experience for small
businesses using machine
learning and technology
Our data accumulation and technology built over the last decade
has laid the foundations to solve more small business problems.
Long-term target of
80%
of loan applications
automated
These exceptional risk capabilities
are powered by leading technology.
Continuous deployment enables us
to scale quickly, efficiently and securely.
The backbone of our technology includes
distributed data streaming and functional
programming which allow us to build
scalable applications at speed. Using these
systems gives us the ability to handle large
amounts of data and manage complexity
more easily than ever before. Our
proprietary marketing data lake is called
Panoramic. It contains 2 billion data
points on 26 million small businesses.
Finally, we have a dedicated cross-
functional team of over 300 engineers,
product managers and data scientists.
Unleashing instant decisioning
By combining machine learning credit
risk models with technology we have
been able to build our Instant Decision
Lending platform, which is revolutionising
SME lending.
With our decision oriented platform, we are
able to customise every element of the
borrower experience. For example, at the
application stage, 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.
With an average application time of six
minutes and lending decisions provided in
an average of nine seconds, the platform
has been instrumental in helping
thousands of SME owners access the
funds they need without the rigmarole of
applying for a loan the old-fashioned way.
This market-leading functionality now
services 50% of all loan applications.
Instant Decision Lending delivers credit
performance as accurate as non-instant
decision lending loans, using the same
credit risk models developed over the last
decade. Getting an instant decision can
improve borrower conversion by up to
25%. It also lowers costs and has
greater scalability. We reached record
levels of origination in the second half of
2020 without additional headcount and
are well placed to capture this growing
opportunity going forward.
We are just getting started
There are significant opportunities to
support more customers by leveraging
our technology platform. This includes
an API embedding Funding Circle
natively into partners’ websites and
platforms. A new payment finance
product will enable small business
owners to pay invoices and spread
costs over three months, and a new
card for Funding Circle borrowers will
enable them to better manage their
business spending habits.
Annual Report and Accounts 2020
13
Small businesses need to be able to
make decisions fast. Our technology
and machine learning capabilities
enable them to do this.
By combining strong fundamentals such
as credit risk management, with seamless
technology, we create a great customer
experience. Over the past ten years,
we have built a huge SME knowledge
base and aggregated vast amounts
of information including 700,000
applications and 750 million repayment
events. This enables our machine learning
risk models to precision-credit assess
small businesses significantly better
than traditional credit bureau scores. For
example, our eighth generation credit risk
model is three times better at predicting
risk than bureau scores in the UK.
Our model
How we create value
Covid-19 is proving the resilience of our unique model and showing
that we are the preferred way for SMEs to access finance.
Borrowers
Platform
Larger
ecosystem
More
repeat
customers
New
products
More
operating
leverage
Better
borrower
experience
More
data
Better
machine
learning
models
The Funding Circle flywheel drives competitive advantage
Small businesses can access fast,
affordable finance
c.100,000
borrowers globally
Borrowers
Our borrower base is highly diversified
across geographies and industries, which
helps ensure stable returns and mitigates
the effects of adverse economic conditions.
Typical businesses that borrow through
the platform have:
‐
‐
‐
‐
‐
‐
11 years’ trading history
Eight employees
~£1 million revenue
~£80,000 loan size
50 months average term
Six-minute application and
24-hour turnaround
Marketplace borrowers
By connecting borrowers with other
lenders in the market, we offer a range
of products beyond our core term loan
product such as larger loans, asset
finance and invoice finance.
14
Funding Circle Holdings plc
Strategic report
Investors
Value created
Investors can earn resilient returns
£2.5bn
investor capital raised in 2020
Investors
Our original innovation ten years ago
opened up the SME asset class to
investors. The platform model enables
investors to make incremental
investments, and our investor base
is deep, diverse and stable, including
a wide range of institutions and
public bodies:
‐ 36% asset managers
‐ 35% banks
‐ 12% bond programme
‐
‐
‐
11% retail funds
3% national entities
3% funds
How we make money
As a company, Funding Circle makes money
in two principal ways:
Operating income
‐ Transaction fee income from the fees
we charge borrowers
‐ Servicing fee income from the fees we
charge investors
Investment income
The interest income on loans invested
within Funding Circle’s investment vehicles.
For borrowers
We provide SMEs with fast, flexible, affordable
finance, delivering an amazing customer experience
using machine learning and technology. This means
they are free to get on with what they do best,
growing their business while contributing to the
local community and economy.
£11.5bn
lent to businesses
For investors
Access to an attractive asset class, previously
mostly held on bank balance sheets, that is of
strategic importance to economies.
4.5–5.5%
expected investor returns for loans
originated in 2020 in the UK
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. Our new HMRC-approved share
incentive plan, Equity for All, means Circlers will be
granted free shares each year. We have always
believed in the value of employee share ownership,
and this new scheme will help more Circlers benefit.
83%
would recommend Funding Circle
as a place to work
Annual Report and Accounts 2020
15
Borrower experience
Fast, simple
and affordable
In an extraordinary year, we introduced a range of measures that helped SMEs weather the
storm, from rolling out new forbearance measures to offering government-guaranteed
loans. We continued to make it simpler and faster for borrowers to get the finance they
need so they could adapt their business and prepare to drive the economic recovery.
Fast and affordable finance at
a time when SMEs need it most
For the last ten years, we have strived to
provide an amazing borrower experience
by combining cutting-edge technology
with a human touch. In 2020, we wanted
to go further and the accelerated roll-out
of Instant Decision Lending was the next
step. This market-leading functionality
has transformed the entire customer
experience, reducing the average
application time to six minutes, with
decisions being made in an average of
nine seconds. It has never been simpler
or faster for small businesses to secure
the funding they need to win.
Helping borrowers
through the pandemic
To help as many small businesses
as possible through the pandemic,
we became one of the first FinTech
platforms to gain accreditation to
government SME programmes in
both the UK and the US.
In the UK, we completed our application
for accreditation, created a new product
and launched under CBILS within six
weeks, all whilst working remotely.
Because of our unrivalled customer
experience, we were well placed to
support the UK Government in delivering
CBILS loans, with £1.7 billion loans
originated in 2020. We are proud to have
become the third largest CBILS lender.
To support our existing customers, we
also received accreditation to BBLS,
with £27 million of loans originated
in 2020. In the US, Funding Circle was
approved by the SBA for PPP with
$500 million loans originated in 2020.
We significantly grew our marketplace
offering, enabling access to a diverse
range of partner lenders to help expand
SME funding options, with originations
tripling in the second half of the year.
To provide customers with breathing
space and give them time to adapt, we
developed and introduced new payment
plans within two weeks of the first
lockdown being announced in the UK.
These plans allowed businesses to reduce
or stop monthly repayments, giving
them time to get back on their feet.
We also expanded our customer-facing
teams to deal with the large rise in
contacts, by assigning and retraining
Circlers. By investing in new technology,
we were able to streamline our processes
and make them more efficient. This
allowed customer-facing teams to
spend more time supporting
businesses, discussing their
circumstances on the phone and
managing their cases more effectively.
As a result of the steps taken, we were
pleased that the number of borrowers
becoming late on their loan fell back to
below pre-Covid-19 levels as reported
in our Half Year results in September.
Now 93% of UK and US businesses are
making full repayments, demonstrating
their resilience and adaptability.
Our strategy for supporting
borrowers post-pandemic
In the UK, we will operate our core loan
product alongside the new government
programme, the Recovery Loan Scheme,
which will replace CBILS.
We will also leverage our technology
to launch new solutions to help SMEs.
This includes an API embedding
Funding Circle natively into partners’
websites and platforms. A new payment
finance product will enable small
business owners to pay invoices and
spread costs over three months, and a
new card for Funding Circle borrowers
will enable them to better manage
their business spending habits.
In the US, once PPP ends, we will continue
to expand our core loan product, as well
as originating government-guaranteed
loans through the SBA programme on
behalf of banks. We will also continue
to operate our referral model for other
borrower needs.
80–90 NPS
in UK and US in 2020
89%
of UK businesses return to
Funding Circle first before
exploring other options
50%
of all loan applications
automated
9 seconds
average wait for a decision
6 minutes
average application time
16
Funding Circle Holdings plc
Strategic report Investor experience
Mature, proven
and trusted
We continued to deepen and diversify our funding sources in
2020. By taking quick and prudent steps, investor returns remain
positive, further demonstrating the strength and viability of
our model.
Over the last decade we have opened
up the SME asset class to investors,
providing investment opportunities that
were previously mostly not available
before as SME loans were on the whole
held on bank balance sheets. This has
attracted a diverse range of investors
including asset management companies,
government-backed entities, public and
private funds and individuals. The ABS
Bonds and Private Funds launched in
2019 further widened the universe of
investors that can access the platform,
providing them with more choice around
how they access the asset class. This
diversification has helped to ensure the
sustainability of our business.
Investor returns are positive
We expect all UK and US loan cohorts
to deliver positive annualised returns.
Tightening our credit risk
parameters and enhancing
risk monitoring
As part of our measures to protect
investor returns, we tightened our credit
risk parameters and strengthened the
criteria for businesses from vulnerable
areas of the economy. As we moved to
providing CBILS loans, we were able to
begin helping a wider range of businesses.
We combine cutting-edge technology
with the use of proprietary scoring
models to boost the precision and
efficiency of our credit risk and
performance predictions. Enhancing
our risk monitoring using more frequent
and detailed data analysis helped us
to spot potential signs of borrower
stress much faster, and our increased
customer support capacity allowed
us to act on potential risks as soon as
they emerged.
Retail lending
To concentrate on supporting the
government’s SME stimulus programme,
we refocused all UK lending to go
through CBILS once accredited. As a
result, we paused all non-CBILS lending
from retail and institutional investors.
As retail investors were not able to
participate in CBILS, they continued to
receive payments from existing borrowers
with funds returned on a monthly basis.
Given the uncertain economic
environment, to protect investor
returns we also took the decision
to pause the secondary market for
retail investors.
Unlocking new investment
opportunities as an accredited
CBILS and PPP lender
There has been strong investor demand
for SME loans and we made significant
progress in our goal of diversifying our
investor base. More than half of our
funding agreements were signed with
new institutional investors, including
banks and asset managers. Since the
beginning of Covid-19, more than
£2.5 billion of investor capital has been
raised to lend to UK and US SMEs on
the Funding Circle platform. In 2020, the
UK Private Fund was also given approval
to expand its investment strategy to
include investing in CBILS loans. This
means more investors have been able
to support small businesses as they
seek to recover from the impact of
Covid-19 and look toward future growth.
There will continue to be new investment
opportunities in 2021. In the UK we will
operate our core loan product alongside
the new government programme, the
Recovery Loan Scheme, which will
replace CBILS. In the US, once PPP
ends, we will continue to expand our
core loan product as well as originate
government-guaranteed loans through
the SBA programme on behalf of banks.
Annual Report and Accounts 2020
17
Strategic priorities
Shaping the future
of funding
Our mission is to help small businesses get the funding they need to win. As we look ahead
to 2021 and beyond, we are focused on growing the UK and US businesses and introducing
new solutions that will help even more small businesses with their financing needs.
2020 saw us come to the end of our medium-term plan; FC 2020. While 2020 turned out to be
a year far different than we expected, we were able to deliver against our strategic priorities:
1
The roll-out of our Instant
Decision Lending platform
is driving a better borrower
experience. This market-
leading functionality has
reduced the application
time and wait for a decision
to minutes.
2
Our investment in data,
technology and analytics
has underpinned the build
of this new technology.
3
We were able to draw on
our existing deep and
diverse investor base to
fund government-
guaranteed loans and
continued to attract new
investors to the platform.
4
We continued to build
our base of SMEs, while
introducing changes to
accelerate the Group’s
path to profitability.
Our new plan is based on two key pillars and will ensure we are well positioned to respond to
the needs of small businesses as they begin to drive the economic recovery:
Grow the UK and US businesses
Launch new products
In the UK, we will operate our core loan product alongside the
new government programme, the Recovery Loan Scheme,
which will replace CBILS.
Over the next 12 months we will leverage our technology to
beta launch new funding solutions to help small business
owners solve more problems.
This includes an API embedding Funding Circle natively into
partners’ websites and platforms. A new payment finance
product will enable small business owners to pay invoices and
spread costs over three months, and a new card for Funding
Circle borrowers will enable them to better manage their
business spending habits.
In the US, once PPP ends, we will continue to expand our core
loan product, as well as originating government-guaranteed
loans through the SBA programme on behalf of banks.
We will also continue to operate our referral model for
other borrower needs.
Diversifying our funding base helps to ensure that small
businesses can access finance whatever the weather.
We will look to secure funding agreements with both new and
existing institutional investors for our core loans alongside the
government guarantee programmes in both the UK and US.
18
Funding Circle Holdings plc
Strategic report Our people
Building the
incredible together
Just like the small businesses we support, Funding Circle also had to work
differently during 2020. The difference we were able to make to customers is the
result of the talent and dedication of our people. United by passion, purpose and a
commitment to our mission and values, we are building the incredible together.
Supporting well-being
and keeping connected
Recognising the impact of the pandemic
on mental and physical well-being,
we hosted training and workshops,
Mindfulness Mondays and panel
discussions to help ensure Circlers
were well equipped to manage
well-being for themselves and their
teams. FC bootcamp, a Circler-led
initiative, brought online workouts to the
company and raised money for a mental
health charity. Among all the hard work,
the company stayed connected through
quizzes, lockdown lunches and Zoom
parties. Teams showed creativity in their
virtual bonding, hosting everything from
‘Dragon’s Den’ projects to cocktail
master-classes and book clubs.
Maintaining frequent dialogue in the
remote working environment was crucial.
We conducted regular surveys to help
us understand how Circlers were feeling
during a period of sudden changes and
uncertainty, and measure employee
engagement and satisfaction. We were
pleased that scores increased from 73%
in 2019 to 75% in 2020, demonstrating
the value of increased communication
and other support measures we had
put in place. Workforce engagement
will continue to be a key priority in
2021, as we focus on rewarding
success, supporting well-being and
nurturing development.
75%
Employee
satisfaction scores
We are a values-driven business with
a unique culture that helps us harness
the abilities of our employees to fuel
long-term success. But the true test of
culture is how it adapts to challenges
and the solutions it creates. In 2020 our
people rose to the occasion and provided
customers the support they needed
while navigating some big changes
themselves. The launch of our new Circler
Promise, Build the Incredible, is helping
us to challenge ourselves to create even
better careers, experiences and ways
for businesses to get the funding they
need to win.
Moving to remote working
As the Covid-19 crisis started to unfold,
the company switched to remote
working immediately, with minimal
disruption and no downtime. Every
Circler lived our company values to the
fullest, with many temporarily moved
to frontline teams, taking on new
responsibilities to provide customers
with as much support as possible.
To keep teams connected and engaged
while working remotely, we increased
our communication across all levels of
the business. Weekly Local Gatherings
became twice weekly and managers
maintained team interactions through
frequent catch-ups and check-ins.
We adapted our approach to learning
and development, to ensure Circlers
could continue to grow during the
pandemic. This included the launch of
Summer Learning which made more
learning and development resources
available online through our Circler Portal
and introduced the LinkedIn Learning app
and resources. We also introduced new
management development training that
helped managers to support teams and
promote collaboration and creativity in
remote environments.
Building the Incredible
We launched our new people promise,
Build the Incredible, at the start of
2020. Our people promise sets out the
two-way deal and proposition between
Funding Circle and its people, and
ensures we provide an attractive and
compelling offering to Circlers who
choose to work at Funding Circle. More
than that however, Build the Incredible
is a challenge to all Circlers, to create
and build the place for small businesses
to get the funding they need to win.
It’s also a challenge to Funding Circle
to create incredible careers and
experiences at our company. In an
extraordinary year, every Circler was
united by this challenge, building the
incredible for customers under the most
unique conditions and circumstances.
Annual Report and Accounts 2020
19
Our people continued
Our values
Our shared values, passion
and purpose underpin
everything we do at
Funding Circle. Together
we are providing small
businesses with the funding
they need to win.
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.
20
Funding Circle Holdings plc
83%
would recommend
Funding Circle as
a place to work
Building the Incredible continued
As part of this promise, we introduced
a new benefits package for all Circlers
which includes the introduction of dental
coverage, doubling paid maternity leave
and increasing employer pension
contributions. We have always believed in
employee equity ownership, and want
every Circler to be an owner of Funding
Circle and share in our long-term success
together. This remains part of our Circler
promise, under ‘Equity for All’, an
HMRC-approved share plan launched
in 2020. As part of this, all Circlers will
be granted free shares each year.
The Circler Promise will continue to be
implemented and embedded throughout
2021, helping us to continue to acquire,
develop and retain the best and brightest
talent the industry has to offer.
Women @FC
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, through FinTech Women, where
women can connect, share and encourage one another
to reach their goals. In 2020, Women@FC went virtual,
hosting speed networking, industry thought leadership
and borrower spotlight events.
Strategic report Gender breakdown
As of 31 December 2020
Overall1
Female
318 / 41%
Male
450 / 59%
Senior Management2
16 / 33%
33 / 67%
41+
33+
Female
Male
Group Board
Female
Male
2 / 20%
8 / 80%
20+
Global Leadership
Team
Female
Male
3 / 38%
5 / 62%
38+
1. There are a small number of Circlers who do not
identify as male or female, and those who prefer not
to disclose gender identity (<1%), and are not
included in the reported data.
2
Defined as those reporting directly into Global
Leadership Team).
In the past 18 months we have refocused
our efforts and placed greater emphasis
on the development and progression of
female talent through the organisation,
whilst also requiring a 50:50 split of
candidates for most roles where we are
hiring externally. As of December 2020,
we are pleased to report overall female
representation at Funding Circle of 41%.
Our Global Leadership Team (“GLT”)
is 38%. We are also committed to
achieving 40% gender diversity across
our senior management population by
the end of 2025.
Our policy for the employment of
disabled persons is to provide equal
opportunities 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.
A values driven culture
At Funding Circle, we are dedicated
to implementing and maintaining the
highest standards of behaviour, ethics
and integrity, and to creating a culture
where adherence to these standards
is recognised and rewarded. Our new
Code of Conduct, implemented this year,
outlines these standards. It supports
our mission and complements our
values against which each Circler’s
performance is appraised, providing
guidance as to what conduct Circlers
should expect of each other and how
they should interact with others. The
Code of Conduct incorporates the FCA’s
individual Conduct Rules, which set out
the baseline level of conduct and good
behaviour expected by our regulator
and will apply to all UK Circlers from
31 March 2021.
Diversity and inclusion
We know we can only Build the Incredible
through an inclusive and diverse culture
where Circlers of all backgrounds feel
confident in bringing their whole selves
to work, where they can contribute
their ideas, have opportunities to be
successful, and their talents nurtured.
Through empowering our people,
we are not only building something
incredible for customers, but an
incredible place to work too. In 2020,
with social movements boosting global
awareness of issues relating to inclusion,
we continued to build a workplace that
provides equal opportunities to everyone
and ensures Circlers feel at home.
2020 brought a renewed focus on
co-ordinating our efforts on promoting
diversity and inclusion and communicating
this more effectively. With the support of
an external provider, we offered diversity
and inclusion training as part of our
learning and development programme,
helping Circlers to understand issues
such as unconscious bias. Equality,
diversity and inclusion are important
parts of our new ESG framework, which
has been approved by the Board and will
be rolled out throughout 2021. As part
of this, we will continue to embed these
values through our corporate governance
frameworks and further utilise our
global and Circler led groups such
as Women@FC, Circle of Pride and
Let’s Talk About Race. We will also
introduce a new diversity and inclusion
engagement plan in 2021 to further
build on our work in 2020.
Funding Circle is committed to support
the progression of women in the financial
services and technology sectors.
We have launched a range of initiatives,
including the adoption of family-friendly
policies and benefits, and play an active
role within the FinTech industry to
support female representation.
However, we recognise the challenges
that exist in both these sectors with
regards to gender diversity, which we
have experienced first hand, particularly
in the engineering and capital markets
fields. This has made us even more
determined to bring about long-term
change to our industry.
Annual Report and Accounts 2020
21
59
+
L
67
+
L
80
+
L
62
+
L
Sustainability
Sustainable thinking and
sustainable results
We are here to build the incredible at Funding Circle. That means not only having a positive
impact on our customers, but on the environment and the communities we live and work in too.
We are proud to play our part in creating a sustainable economy for future generations.
but achievable goals to align our
business to The Paris Agreement
goals to target carbon reduction and
offsetting strategies for our full value
chain in line with the science based
target level of decarbonisation required
to limit global warming to 1.5°C, and
striving for net-zero emissions by 2050
— at the latest. This first, important goal
is the first objective step to provide clarity,
motivation and focus to our goals. We
are engaging with industry experts to
more accurately measure and validate
our scope 1, 2 and 3 emissions and to
assist us in developing strategies to
reduce, replace or offset our scope 1
and 2 emissions beginning in 2021.
We also intend to begin to measure and
validate our scope 3 emissions in 2021
and devise a strategy for reduction,
replacement or offsetting of those
emissions as soon as practicable.
We are also committed to implementing
the recommendations of the Task Force
on Climate-related Financial Disclosures
(“TCFD”) to inform our stakeholders
about our climate-related financial
risks and opportunities. The TCFD
recommendations are structured
around four core areas: governance,
strategy, risk management, and metrics
and targets. We intend to implement our
approach to the TCFD recommendations
during the course of 2021. The table
on the next page shows our current
progress against the recommendations.
Small businesses are at the heart of
our communities, and play a vital role in
our economies. That is why we take our
role as the bridge between them and
investors so seriously – because
ensuring SMEs have the funding they
need to win creates wider benefits for
us all. There is growing consensus
that companies, investors and other
stakeholders must consider corporate
responsibility, the environment, social
impact and governance issues in
their day-to-day business practices,
investment decisions and community
interactions. Our approach to
Environmental, Social and Governance
(“ESG”) is driven by our corporate culture
and values, our corporate governance
practices and our enterprise risk
management framework. In 2020,
we took a number of important steps
in this area to drive better stakeholder
experiences as well as enhanced
shareholder value.
Environmental, social and
governance framework
Our goal is to build the place where
businesses can get the funding they
need to win. To make this goal a reality
that future generations can continue
to benefit from, we also need to ensure
we are contributing positively to the
creation of a fairer, more sustainable
low-carbon economy. We began
formalising our ESG strategy in 2019
to clearly set out how we are going to
do this by limiting our emissions and
creating a more diverse and inclusive
working environment.
The Board approved a new ESG
framework in 2020 and set up a new
Board level ESG committee. The ESG
framework formalises our approach to
corporate social responsibility, including
integrating ESG factors within our
enterprise risk management framework
and our day-to-day operations. We will
begin implementing the new ESG
framework throughout 2021. We intend
to take an incremental and proportionate
approach to the implementation of
industry practices related to ESG risk
management. We believe it is important
to start to frame our position; to
incorporate these issues into our
governance framework; to understand
resource and competence requirements;
to set strategic goals; and to formulate
a plan to achieve these goals and to
annually measure performance against
these stated goals.
We intend to align ourselves to the ten
principles of the UN Global Compact
with respect to human rights, labour,
environment and anti-corruption. In
addition, in March 2021 we became
a signatory to the UN Principles of
Responsible Investment (“UN PRI”)
to support providing, developing and
promoting services that support asset
owners and investment managers’
implementation of the six principles
of the UN PRI, in particular as they
relate to private debt.
Environment and
climate change
Funding Circle is committed to addressing
the impact of climate change. Despite
the impact of Covid-19, we took a
number of important steps in this area
and there is more we want to do in the
coming years. As a first step, the Board
reviewed and approved a formal carbon
strategy. Our strategy sets ambitious
22
Funding Circle Holdings plc
Strategic report Governance
Disclosure
Describe the board’s oversight of climate-
related risks and opportunities
Describe management’s role in assessing and
managing climate-related risks and
opportunities
The Board assumes overall responsibility and accountability for the management of climate-related
risks and opportunities. During the year, the Board reviewed and approved a new ESG Framework to
manage, among other things, the company’s approach to governance around climate-related risks and
opportunities. The Board also constituted a new ESG Committee to provide strategic focus, support
and oversight for the implementation of the Group’s environmental and carbon strategy. The GLT is
responsible for the ESG Framework, including the climate-related risks and opportunities, with
management responsibility sitting with the General Counsel. A working group of senior leaders
and Circlers from across the business are responsible for implementation of the environmental
and carbon strategy.
The principles of sound risk management are embodied in our values, operating principles and policies,
which all employees are expected to follow. Our Enterprise Risk Management Framework (“ERMF”)
describes our risk management approach and provides for the clear ownership of and accountability for
managing risk well across the company. A core principle of the ERMF is that all employees are accountable
for identifying, escalating and debating risks facing the company. We have established a new ESG
Framework to provide additional clarity and transparency around how we approach environmental risks,
which may arise in many areas of our business. As part of our new ESG Framework we intend to review our
ERMF, risk appetite statement, and risk taxonomy with respect to environmental risks in 2021.
Strategy
Describe the climate-related risks and
opportunities the organisation has identified
over the short, medium, and long-term
Our new carbon strategy formalises our approach to begin addressing climate-related risk and
opportunities in our business, including clear and ambitious but achievable goals in the short and
long-term, including:
‐ alignment with The Paris Agreement Goal of 1.5°C;
‐ a commitment to become carbon neutral by 2021–2023, and net carbon zero by 2030 – at the latest;
‐ a goal to offset difficult to reduce or replace Scope 1 & 2 Emissions starting in 2021;
‐ a goal to measure and verify Scope 3 Emissions starting in 2021; and
‐ a goal to offset difficult to reduce or replace Scope 3 emissions starting in 2023 at the latest.
Climate-related risks and opportunities are to be further integrated into our business, strategic and
financial planning as part of our new ESG Framework in 2021.
As part of our new ESG Framework, we intend to review our risk assessment and risk appetite in
respect of environmental and climate related risks in 2021, including climate-related scenario analysis
as part of this risk assessment.
We consider climate-related risks through the ERMF. As part of our new ESG Framework we intend
to review integration of climate-related risks into our ERMF in 2021.
Absolute and intensity-based energy and GHG emission metrics are disclosed in our Annual Report.
2020 Scope 1 and 2 GHG emissions are disclosed in our Annual Report. We intend to begin to more
accurately collect, measure and validate Scope 1, 2 & 3 emissions in 2021.
Describe the impact of climate-related risks
and opportunities on the organisation’s
businesses, strategy, and financial planning
Describe the resilience of the organisation’s
strategy, taking into consideration different
climate-related scenarios, including a 2°C or
lower scenario
Risk Management
Describe the organisation’s processes for
identifying, assessing and managing
climate-related risks, and how the processes
are integrated into the organisations overall
risk management
Metrics and Targets
Disclose the metrics used by the organisation to
assess climate-related risks and opportunities in
line with its strategy and risk management
process
Disclose Scope 1, Scope 2, and if appropriate,
Scope 3 greenhouse gas (GHG) emissions,
and the related risks
Describe the targets used by the organisation to
manage climate-related risks and opportunities
and performance against targets
As part of our new carbon strategy, we intend to set clear, science-based targets to support our
strategic ambitions of net carbon zero by 2030 at the latest. We intend to explore further opportunities
during 2021.
Annual Report and Accounts 2020
23
Sustainability continued
Disclosing our impact
This section includes our mandatory reporting of greenhouse gas emissions pursuant to The Companies Act 2006 (Strategic
Report and Directors’ Report) Regulations 2013. 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 total income.
Global GHG emissions data for period 1 January to 31 December 2020
GHG emissions scope 1 (direct)¹
GHG emissions scope 2 (indirect)²
Total gross emissions (scope 1 and 2)
Total income (£m)
Intensity ratio – tCO2e per £m of total income³
2020
tCO2e
123
372
495
222.0
2.23
2019
tCO2e
147
493
640
177.3
3.61
1. Scope 1 includes combustion of fuels and operations of facilities, principally oil and gas related to our leased office space.
2. Scope 2 includes electricity purchased for use in connection with our leased office space.
3. The intensity ratio for this reporting period is calculated using total income. In 2019, the intensity ratio was calculated using total revenue, a financial item no longer reported in
our Consolidated Statement of Comprehensive Income. The 2019 intensity ratio presented as a comparative has therefore been restated to be calculated based on total income.
Regional breakdown of energy consumption data
for period 1 January to 31 December 2020 (Kilowatt-hour equivalent – kWhe)¹
Scope 1²
Scope 2³
2020
2019
2020
2019
Region
UK
US
CE (Germany and Netherlands)4
Total
370,846
295,981
—
380,719
421,159
—
927,189
686,193
72,132
954,078
855,662
132,506
666,827
801,878
1,685,514
1,942,246
1. The equivalencies for kWhe shown are derived from our various leased office space premises using information provided by the applicable building owner
or building management companies, which in some cases may apply different equivalency calculators to derive the applicable kWhe amounts.
2. Scope 1 includes combustion of fuels and operations of facilities; principally oil and gas related to our leased office space.
3. Scope 2 includes electricity, heat, steam and cooling purchased for use in connection with our leased office space.
4. No Scope 1 data was reasonably attainable in CE for these reporting periods.
Creating value for society
Covid-19 proved to be a major disruption
to our planned charitable activities in
2020, with most events and initiatives
cancelled in order to protect the health
of everyone involved. We are hopeful
that we will be able to begin returning to
these activities in 2021, but the health
and safety of our people will remain
our key focus. The pandemic couldn’t
completely block the passion of Circlers
and the FC Impact team though, as we
raised money for food banks and held
virtual workshops on zero-waste living
among other activities.
The effects of the pandemic had a
significant impact on the operation of
our offices and resulted in a significant
reduction in our carbon emissions in
2020. To ensure the health and well-being
of our people, we switched to working
remotely in line with government
guidance, resulting in a decrease of
our Scope 1 and 2 emissions of
approximately 22%. While we have not
specifically measured our Scope 3
emissions, we also saw a significant
reduction in business travel, particularly
air travel, in favour of online
communication platforms.
Our GHG emissions reporting period is
1 January to 31 December and is aligned
with our financial reporting year. We report
on certain material emission sources
that we are responsible for within our
Group companies, primarily in relation
to our leased office space and generally
limited to electricity and gas usage.
We believe these encompass the most
material emissions to our business, but
this data does not include all sources of
emissions, for example waste, fugitive
refrigerants or other miscellaneous
and less material sources of emissions.
Our emissions reporting data is from
our global operations, including the UK,
US, Germany and The Netherlands.
Our methodology underlying our
disclosed emissions remains consistent
with previous years. Emissions related
to our office space are estimated based
on an allocation of total emissions
(generally based on square footage
occupied) for the building as reported
by the building owner. We did not
undertake any specific measures to
reduce our emissions during the period;
however, we did begin the process to
address our GHG emissions within our
ESG framework, which are intended to
include improvements to the collection,
measurement, validation and reporting
of emissions data as well as tracking
and reporting progress against targets
for reduction or offsetting of emissions.
24
Funding Circle Holdings plc
Strategic report Being a positive force
in our industry
Our aim is for Funding Circle to continue
to be a trusted and reputable company,
working with government, regulators
and industry to uphold the highest
industry standards. We continue
to actively engage with local, national,
federal and supra-national government
agencies, legislators, policymakers and
industry groups to provide insight and
policy leadership in connection with
policy and rulemaking related to issues
affecting small businesses, investors
and the wider FinTech industry.
We submit position papers, and
participate in expert hearings and
consultations, forums and other
forms of policy engagement.
In 2020, we campaigned for SMEs by
working with the industry and
government to shape the support and
access to finance that was available.
This included the government-
guaranteed loan schemes in both the
US and the UK, and BBLS forbearance
measures in the UK. Funding Circle also
became a member of UK Finance, the
trade association for the financial
services sector, and the Confederation
of British Industry, a broader business
advocacy group. Our membership of
FinTech industry body Innovate Finance
and lending platform 36H Group also
helps to amplify the important role that
FinTechs play in the UK. In the US, we
engaged with regulators and legislators
as founding members of the Innovative
Lending Platform Association and
member of the Responsible Business
Lending Coalition, primarily focusing on
SME access to capital, disclosure and
more recently access to government-
guaranteed loan schemes for SMEs.
This further boosted our ability to
influence, and play a key role in, creating
better results for SMEs.
Additional commitments
As part of our broader commitments
as a progressive and responsible
company, we also take a stand on
the following areas:
Human rights
‐ We respect and promote human
rights through our employment
policies and practices.
‐ We apply these policies and
commitments equally to everyone
who works at or is part of
Funding Circle.
Modern slavery
‐ We have a zero-tolerance approach to
modern slavery and human trafficking.
‐ We have published a Modern Slavery
Act Transparency Statement in
compliance with section 54 of the
Modern Slavery Act.
Code of Conduct
‐ We are dedicated to implementing
and maintaining the highest standards
of behaviour, ethics and integrity
among our workforce.
‐ We have created a culture where
adherence to these standards is
recognised and rewarded.
‐ We implemented a new Code of
Conduct in 2020 outlining these
standards and addressing subjects
such as integrity and conflicts
of interest.
Anti-corruption and anti-bribery
‐ We recognise that our reputation
for integrity and trustworthiness
is critical to our success.
‐ 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 2020
25
Engaging our stakeholders
We actively engage with
all of our stakeholders
We are committed to building open and constructive relationships with all our stakeholders.
Our shared mission with business owners, investors, and our own people is to ensure that a vital,
and historically underserved, part of our economy has access to the funding it needs to win.
In 2020, we adapted the ways we engaged with our stakeholders to ensure they
continued to feel connected and supported throughout the pandemic.
Shareholders
Circlers
Borrowers
SMEs are the growth engine of the
economy, and it is our mission to
help them fulfil their ambitions.
How we engage
‐ Constant monitoring of customer
feedback including customer
satisfaction surveys.
‐ Regular focus groups with SME
borrowers around product changes
and new marketing campaigns.
‐ The Board reviews strategy and monitors
performance in light of customer
feedback, with the aim of meeting the
needs of borrowers more effectively.
‐ Throughout the Covid-19 pandemic, we
provided regular email updates, including
on our accreditation to government
SME guarantee programmes.
Outcomes of engagement
Net Promoter Score (NPS) of 80–90 for
borrowers in the UK and US.
We maintain transparent and open
engagement with shareholders at
all times. This enables the Board
to clearly communicate its strategy,
provide updates on our performance
and receive regular feedback.
How we engage
‐ Regular shareholder communications
such as full and half year results, and
ad-hoc trading statement updates.
‐ Analyst and investor meetings and
presentations/investor roadshows, as well
as ad-hoc meetings and events with larger
shareholders and prospective shareholders.
‐ Due to Covid-19 restrictions, the 2020
AGM was closed to shareholders, but the
Board is committed to enabling greater
shareholder engagement at this year’s
AGM, subject to Covid-19 guidance, and
looks forward to welcoming shareholders
to our AGM in person in future years.
‐ The Chairman, Chief Executive Officer,
Chief Financial Officer and Director of
Investor Relations regularly communicate
with larger shareholders and analysts as
required and provide regular reports to
the Board on shareholder interactions.
‐ The Chair of the Remuneration Committee
engaged with our key shareholders
regarding our Remuneration Policy.
Outcomes of engagement
Shareholders’ opinions were taken into
account in the shaping of Company strategy
and our Remuneration Policy to be proposed
to shareholders at the 2021 AGM.
26
Funding Circle Holdings plc
Our people are our business and we
are committed to creating a culture
where Circlers thrive and share in our
mission, values and ambition.
How we engage
‐ Regular all-hands meetings for all
Circlers including the weekly Global and
Local Gatherings and bi-annual Full and
Half Circle events, provide an opportunity
for Circlers to share information and
interact with senior management to
hear about the Company’s performance
and response to Covid-19.
‐ Frequent meetings between Cath Keers,
our workforce engagement Non-Executive
Director, and employee groups, with
employee representatives providing an
update on those meetings to the Board
and, in turn, updating Circlers on the
feedback from the Board.
‐ Circler group FC Impact co-ordinates our
internal volunteering and charity initiatives.
‐ Regular culture surveys, with results
shared with the Board along with
diversity reports and updates on
diversity and inclusion initiatives.
Outcomes of engagement
We launched a new Circler Promise, Build the
Incredible. Alongside this, we introduced a
new benefits package and a new Equity for
All share incentive plan. Our average
employee satisfaction scores increased
from 73% in 2019 to 75% in 2020.
Strategic report Section 172(1) statement
The Directors recognise that they have a duty to promote the success of the Company in accordance with s.172(1) of the
Companies Act 2006. Further details on how the Board operates and the way in which it reaches decisions, including the
matters discussed and debated during the year, are set out in the Governance section on pages 51 to 65. Some examples of
how the Directors have had regard to the factors set out in section 172(1)(a)-(f) when discharging their duties are on page 61.
Investors
Communities
Government and regulators
Providing resilient returns to a wide
range of investors is a central part of
our strategy.
How we engage
‐ We provide bi-annual reporting on loan
performance including on our website.
These are updated in line with our full
and half year results.
‐ We provide information and support to
retail investors in a range of accessible
formats. In response to Covid-19, the
Chief Risk Officer provided regular updates
on our strategy to protect returns.
‐ Active investor engagement on their
direct lending, investment products as
well as the wider investment community.
Outcomes of engagement
We onboarded a number of new institutional
investors, including banks and asset
managers, which has further diversified
our investor base and funding sources.
£2.5 billion investor capital raised since
the start of Covid-19 to lend to UK and
US SMEs.
The SMEs we serve are at the centre of
our communities and we are passionate
advocates of charitable causes and
issues related to social impact and
community engagement.
How we engage
‐ Continual development and
implementation of our ESG strategy,
including developing our understanding
and priorities in respect of engagement
with our various stakeholders.
‐ Regular meetings with investors
regarding their ESG investment
criteria as they apply to our loans and
loan-backed investment products.
‐ Circler group FC Impact co-ordinates our
internal volunteering and charity initiatives.
‐ Covid-19 meant we had to adapt our
planned charitable and community
activities in 2020 to ensure the health
and well-being of everyone involved.
Outcomes of engagement
We launched our new ESG strategy, which
sets out a formal framework for operating
as a responsible business and will be
overseen by our newly formed ESG
committee. We were also able to hold
virtual workshops with stakeholders
from the charity sector and continue
to raise money and awareness for local
foodbanks through campaigns from
the FC Impact team.
Our goal is for Funding Circle to always
be known as a trusted and reputable
company, and to work with regulators
and industry to ensure best practice.
How we engage
‐ Engagement with local, national, federal
and supra-national government agencies
including regulators, legislators, policy
makers and industry groups to provide
insight and leadership in connection with
policy and rulemaking related to issues
affecting SME borrowers, investors or
lending in the FinTech industry.
‐ We contribute to the discourse and debate
on industry issues, including submitting
position papers and participating in expert
hearings, consultations, forums and
other policy engagement initiatives.
‐ The Board ensures it uses the results
of the above engagement as well as
the key legal and regulatory changes
affecting the business to inform its
strategy and decision making.
Outcomes of engagement
We worked with the British Business
Bank in the UK and the Small Business
Administration in the US to become one of
the first UK FinTechs to be an accredited
CBILS and PPP lender. We also worked
with industry to shape the Recovery Loan
Scheme and forbearance measures under
BBLS in the UK.
Annual Report and Accounts 2020
27
Key performance indicators
Delivering our strategy
Financial
Statutory
Total income (£m)
£222.0m
222.0
177.3
141.9
Loss before tax (£m)
£(108.1)m
Loss per share (pence)
(31.2)p
2018
2019
2020
2018
2019
2020
(50.9)
Links to strategy:
1 2 3 4
(84.2)
(108.1)
Links to strategy:
1 2 3 4
(18.2)
(24.4)
(31.2)
Links to strategy:
1 2 3 4
2018
2019
2020
Definition
The Group generates total income
principally from: transaction fees earned
from originating loans with borrowers;
servicing fees from servicing of loans
under management; and investment
income net of investment expense
from Funding Circle sponsored
(ABS) programmes.
Definition
Definition
Loss before tax is defined as net income
after taking into account all operating
expenses and finance income, costs
and share of loss of associates.
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.
Alternative performance measures (“APMs”)
Adjusted EBITDA (£m)
£(63.8)m
2018
2019
2020
(23.4)
(27.5)
Free cash flow (£m)
£15.4m
2018
2019
15.4
2020
(63.8)
Links to strategy:
1 2 3 4
(40.9)
(49.4)
Links to strategy:
1 2 3 4
Definition
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. This is the principal
profit measure used by the Directors in
assessing financial performance in the
Group’s three geographical segments.
28
Funding Circle Holdings plc
Free cash flow represents the net
cash flows from operating activities
less the cost of purchasing intangible
assets, property, plant and equipment,
lease payments and interest received.
It excludes the warehouse and
securitisation financing and funding cash
flows. The Directors view this as a key
liquidity measure and is the net amount of
cash used or generated to operate and
develop the Group’s platform each year.
Strategic report 2020 saw us come to the end of our medium-term plan;
FC 2020 and we delivered against our 4 existing strategic
priorities. Our new plan is based on two key pillars of grow
the UK and US business and launch new products and
impacts all KPIs illustrated.
Focus areas relevant to our KPIs
1
2
3
4
The roll-out of our Instant Decision Lending platform
Investment in data, technology and analytics
Draw on our diverse investor base and continue
to attract new investors to the platform
Build our base of SMEs and introduce changes
to accelerate the path to profitability
Operational
Loans under management (£m)
£4,214m
+13%
Originations (£m)
£2,742m
+17%
4,214
3,731
3,148
2,742
2,292
2,350
Marketing costs as a %
of operating income
30%
41
42
30
Links to strategy:
1 2 3 4
Links to strategy:
1 2 3 4
Links to strategy:
1 2 3 4
2018
2019
2020
2018
2019
2020
2018
2019
2020
Definition
Definition
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.
This represents the monetary value
of loans originated through the Group’s
platform or through marketplace
referrals in any given year. This is a key
driver of both transaction fees and
future expected servicing fees and
loans under management.
This represents the total cost of
third party marketing expenditure
in any particular year divided by
the operating income earned in
that year.
SUPPORTING BUSINESSES
BREWING UP
GROWTH ONLINE
Wild Card Brewery
Andrew Birkby and William Harris launched
Wild Card Brewery after making their own beer
from a home brew kit. They took a shot in the
notoriously difficult industry, renting equipment
at an Essex brewery in 2012.
Eight years on, and with the help of one of the UK’s few female
master brewers, Jaega Wise, Wildcard is now an award-winning
business turning over more than £1.2 million per year.
To help with working capital, the brewers used Funding Circle
on three occasions, including through the Coronavirus
Business Interruption Loan scheme.
On the day of the first UK lockdown started they opened
an e-commerce store and started delivering to doorsteps
straight away. Their online shop has continued to grow ever
since and in 2020, the business t grew by 12% despite the
challenges of lockdown.
Annual Report and Accounts 2020
29
Finance review
Our results
In 2020, the Group delivered total
income growth of 25% to £222.0 million.
Loans under management grew
13% to reach a record £4,214 million
with originations growing 17%
to £2,742 million.
Overview
United Kingdom
United States
Developing Markets
Total
United Kingdom
United States
Developing Markets
Total
Loans under Management
(as at 31 December)
2020
£m
3,271
759
184
4,214
Change
36%
(6%)
(71%)
17%
2019
£m
2,583
882
266
3,731
Change
27%
(14%)
(31%)
13%
Originations
(half year ended)
H1 2020
£m
H2 2020
£m
662
410
40
1,112
1,449
171
10
1,630
Originations
(year ended 31 December)
2020
£m
2,111
581
50
2,742
2019
£m
1,556
619
175
2,350
2020 was a year of two halves as shown in the originations table above. The year started strongly with originations at the high
end of expectations with strong demand for SME loans in the UK, following Brexit and the General Election in 2019, and in the
US where originations in January and February were the highest levels seen for 12 months.
With the emergence of the pandemic and associated impact on economic activity, originations were impacted significantly
during March and April as we waited for approval for the SME government guarantee programmes in the UK and the US. Total
originations rebounded strongly from May onwards, following accreditation to these programmes, and reached record levels.
Overall, loans under management were £4,214 million as at 31 December 2020, a 13% increase on 2019. Total originations
increased by 17% to £2,742 million.
30
Funding Circle Holdings plc
Strategic report Geographic highlights
United Kingdom
Following the impact of Covid-19 in March 2020, the
Government introduced the Coronavirus Business Interruption
Loan Scheme ("CBILS"), which provides an 80% government
guarantee to investors. Funding Circle received accreditation
to this scheme in late April 2020 and started lending in May
2020. Under the scheme’s rules, retail investors are not
permitted to invest in CBILS loans.
As we started to operate under the scheme, we paused all
non-CBILS lending. From May 2020, and through the rest of
the year, the UK secured a number of funding agreements with
institutional investors such that we were able to meet the high
demand from SME borrowers.
As at 31 December, we had originated c.£1,700 million of
CBILS loans. In addition to the CBILS accreditation, we
also received accreditation to originate loans under the
Government’s Bounce Back Loan scheme in July 2020 but
this was only made available to existing Funding Circle
borrowers and represented c.£27 million of loans.
In 2020, loans under management rose by 27% to £3,271 million
whilst originations grew by 36% to £2,111 million. The UK
delivered total income growth of 37% to £153 million in 2020,
benefiting from a full year of investment income from the ABS
products first launched in June 2019, alongside increased
transaction fees driven by the high demand for CBILS loans.
Despite the fair value loss in H1 2020 Adjusted EBITDA for the
UK business was positive at £6.5 million. Adjusted EBITDA
profit in H2 2020 was £28.6 million compared to Adjusted
EBITDA loss in H1 2020 of £22.1 million. The UK business
was also operating profitable in H2 2020.
HM Treasury announced in November 2020 that CBILS will
be extended to March 2021, with applications made prior
to 31 March 2021 being processed in April and May 2021.
In March 2021, HM Treasury announced that CBILS and BBLS
would end on 31 March and be replaced by a new 80% SME
guarantee loan scheme called the Recovery Loan Scheme.
United States
The US business had a strong beginning to the year with
January and February being our highest months for originations
for 12 months. In April 2020, the US Government introduced
its Paycheck Protection Program (“PPP”) through the Small
Business Administration (“SBA”) programme. Under this
scheme, the SBA will forgive the loans if the funds are used
to pay eligible expenses such as payroll costs of employees.
The US business was approved by the SBA to originate PPP
loans during April 2020.
Following approval the US business originated $474 million
from May 2020 through to August 2020 when the scheme
paused awaiting the next round of stimulus packages from
the Government. The US initially funded these loans under two
models; the core model and a referral model whereby it refers
borrowers that meet their eligibility criteria to other institutions.
PPP loans are 100% guaranteed and the average transaction
fee across the two models was 3.15%.
By July 2020, the US business was granted access to the use
of the Federal Reserve’s PPP liquidity facility. This allows for
lending to be undertaken with funds coming directly from this
facility. The US originated £24 million of loans through this
facility during 2020. When loans are forgiven by the SBA, the
debt associated with them from the facility is also extinguished.
As anticipated, borrower demand was suppressed from
August to December due to uncertainty over whether there
would be further PPP lending. We relaunched our core lending
product in December and continued to offer our referral model
during the second half of the year. Overall for the year, loans
under management decreased by 14% to £759 million with
overall originations down 6% at £581 million.
The US Government approved a new round of stimulus
measures in December 2020 and, following the relaunch of
the PPP programme in January 2021, the US business funded
loans directly from the Federal Reserve PPP liquidity facility.
Once PPP finishes, we will continue to grow our Core lending
product, originate long term government guarantee loans
through the SBA programme on behalf of banks and continue
to operate our referral model for other borrower needs.
Total income for the US was £63 million (2019: £52 million)
up 20% year on year, again benefiting significantly from
a full six months of investment income from the new
investment products. AEBITDA was negative £62.4 million
(2019: £22.0 million) largely driven by the significant fair value
adjustment in H1 2020 of £61.3 million and the slowdown
in trading in the final quarter of the year whilst waiting for
government stimulus to restart. In H2 2020, the fair value
adjustment was negative £13.2 million.
In July 2020, the Group announced the reorganisation of the
US business centralising the US technology team in the UK
and moving sales and marketing to Denver to accelerate its
path to profitability, with a net reduction of 85 roles. This
resulted in £1.5 million in relation to reorganisation costs
including right-of-use asset impairment and £12.0 million
in relation to the impairment of goodwill associated with the
US business which were recognised as exceptional items in
the year.
Developing Markets
In March 2020, the Group announced the decision to
restructure the Developing Markets business to a referral only
model where loans would be referred to lenders rather than
originating loans for institutional and retail investors. As part
of the restructure, we centralised operations in London. The
restructure was completed successfully and the business was
AEBITDA breakeven in H2 2020. Due to the impact of Covid-19,
the Group decided not to scale up the new model and
headcount numbers in London, which resulted in a limited
number of loans originated. Costs associated with the
reorganisation of £5.2 million were recognised within
exceptional items in the year.
Annual Report and Accounts 2020
31
Finance review continued
Finance review
Overview
Group total income was £222.0 million (2019: £177.3 million),
up 25%. Net income for the year was £103.7 million (2019:
£167.4 million). Net income is less fair value movements
on SME loans held for sale.
AEBITDA loss was £63.8 million (2019: loss £27.5 million).
H1 AEBITDA loss was £84.1 million, which comprised of
negative £24.4 million operating AEBITDA¹ and negative
£59.7 million investment AEBITDA¹, driven by a large fair value
adjustment on SME loans held for sale. This compared to
a strong AEBITDA profit in H2 2020 of £20.3 million, which
comprised of £12.6 million operating AEBITDA and £7.7 million
investment AEBITDA.
Profit and loss
The Group’s operating loss was £106.3 million for the full
year (2019: £84.7 million loss). H1 2020 operating loss was
£113.5 million, compared with an operating profit in H2 2020
of £7.2 million. Before exceptional items of £18.7 million in 2020
for the restructuring of the European business (£5.2 million),
restructuring cost in the US business (£1.5 million) and US
goodwill impairment (£12.0 million), the operating loss was
£87.6 million (2019: £50.4 million loss).
1. Adjusted EBITDA represents EBITDA (Earnings before Interest, Tax, Depreciation
and Amortisation) excluding share-based payments, exceptional items and foreign
exchange gains or losses. Investment AEBITDA refers to net investment income
(being investment income, investment expense and fair value adjustments) as
previously reported and operating AEBITDA represents AEBITDA excluding
investment AEBITDA.
31 December 2020
31 December 2019
Before
exceptional
items
£m
Exceptional
items
£m
122.5
30.2
3.0
155.7
89.0
(22.7)
222.0
(118.3)
103.7
(81.3)
(46.8)
(17.2)
(6.2)
(39.8)
(191.3)
(87.6)
—
—
—
—
—
—
—
—
—
(4.0)
—
(13.7)
—
(1.0)
(18.7)
(18.7)
Total
£m
122.5
30.2
3.0
155.7
89.0
(22.7)
222.0
(118.3)
103.7
(85.3)
(46.8)
(30.9)
(6.2)
(40.8)
(210.0)
(106.3)
Before
exceptional
items
£m
Exceptional
items
£m
121.2
30.4
5.3
156.9
28.3
(7.9)
177.3
(9.9)
167.4
(90.3)
(66.5)
(14.9)
(6.5)
(39.6)
(217.8)
(50.4)
—
—
—
—
—
—
—
—
—
—
—
(34.3)
—
—
(34.3)
(34.3)
Total
£m
121.2
30.4
5.3
156.9
28.3
(7.9)
177.3
(9.9)
167.4
(90.3)
(66.5)
(49.2)
(6.5)
(39.6)
(252.1)
(84.7)
Transaction fees
Servicing fees
Other fees
Fee income ("operating income")
Investment income
Investment expense
Total income
Fair value (losses)/gains
Net income
People costs
Marketing costs
Depreciation, amortisation and
impairment
Loan repurchase charge
Other costs
Operating expenses
Operating loss
Total income
The Group delivered total income of £222.0 million (2019:
£177.3 million) up 25%. Total income represents operating
income and investment income, less investment expense.
Operating income includes transaction fees, servicing fees,
and other fees and was £155.7 million (2019: £156.9 million).
Transaction fees, representing fees earned on originations,
grew 1% to £122.5 million. This was driven by higher originations
in the UK, offset by lower yields on CBILS loans which are
fixed at 4.75% together with the lower originations in the US,
where the majority were generated through the marketplace
(referral) model driving average yields in the US to 3.7% for the
year (2019: 5.4%).
Servicing fees, representing fees for servicing loans under
management, remained flat at £30.2 million. With a large
proportion of the UK originations occurring in the second half
of 2020, the impact on the UK’s servicing fees will be more
pronounced in 2021. Servicing yield was 0.8% compared with
0.9% in 2019 as servicing fees are not earned when Funding
Circle is servicing its own loans in warehouses and
securitisation vehicles that are on balance sheet.
32
Funding Circle Holdings plc
Strategic report 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.
Depreciation and amortisation costs of £30.9 million (2019:
£49.2 million) largely represent the amortisation of the cost of
the Group’s capitalised technology development and
impairment of goodwill.
A charge of £12.0 million was recorded in H1 2020 in respect
of the goodwill of the US business (2019: £29.0 million in
respect of the Developing Markets goodwill and £5.3 million
with respect to other non-financial assets). 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.
An exceptional impairment charge of £1.7 million was also
recognised in relation to the impairment of right-of-use
property related assets driven by the reorganisation of the
US and Developing Markets businesses.
Loan repurchase charges relate to certain historical
circumstances when in new markets, predominantly Germany
and the Netherlands, Funding Circle entered into arrangements
to buyback certain defaulted loans from certain financial
institutions under a loan purchase commitment. In return the
business has received a fee premium (reflected in Other fees).
Under IFRS 9 this commitment is accounted for under the
expected credit loss model.
Other costs principally includes cost of sales, data and
technology costs and property costs and remained broadly
flat year on year.
Operating loss was £113.5 million in H1 2020. In H2 2020, we
made an operating profit of £7.2 million. This led to an overall
operating loss for the full year of £106.3 million (2019: loss
£84.7 million) due to the non-cash fair value adjustment on
investments primarily as a result of the impact of Covid-19 and
exceptional items related to the reorganisation of the US and
Developing Markets businesses. Excluding exceptional items,
operating loss was £87.6 million (2019: £50.4 million).
Net investment income² represents the investment income,
less investment expense, on loans invested within Funding
Circle’s investment vehicles and was £66.3 million (2019:
£20.4 million). This is significantly higher than 2019 as these
programmes only commenced in June 2019.
Net income, defined as total income after fair value adjustments,
was £103.7 million (2019: £167.4 million). The Group considers
a large proportion of this negative fair value movement of
£118.3 million was attributable to the impact that Covid-19
economic stress had on SME borrowers. The fair value
adjustment in H1 2020 was £96.1 million, compared with
H2 2020 of £22.2 million.
2. We have redefined net investment income, first described in the 2019 financial
results, to be investment income less investment expense. Investment AEBITDA is
net investment income less fair value (losses)/gains.
Operating expenses
Cost management initiatives led to a 12% decrease from H1
2020 to H2 2020. Overall operating expenses for the full year
were £210.0 million (2019: £252.1 million). 2020 operating
expenses included certain exceptional items driven by goodwill
impairment and restructuring costs of the Developing Markets
and the US business. Excluding these items, operating expenses
were down £26.5 million to £191.3 million (2019: £217.8 million)
principally driven by salary related savings following the
restructurings and reduced marketing spend.
People costs (including contractors) which represent the
Group’s largest ongoing operating cost decreased during
the year by 9% to £94.7 million, before the capitalisation of
development spend. This was driven by a decrease in average
headcount of 14% and includes total exceptional costs related
to the reorganisation of the US and Developing Market
businesses of £4.0 million. The share-based payment charge
for the year, included in people costs, was lower at £5.6 million
(2019: £8.0 million) driven by credits from leavers as part of
the US and Developing Markets restructuring of which
£1.0 million is recognised in exceptional items.
31 December
2020
£m
31 December
2019
£m
Change
%
People costs
94.7
104.6
(9%)
Less capitalised development
spend (“CDS”)
(9.4)
(14.3)
(34%)
People costs net of CDS
85.3
90.3
(6%)
Average headcount
(incl. contractors)
Year-end headcount
(incl. contractors)
1,002
1,165
(14%)
863
1,139
(24%)
Marketing costs decreased in the year from £66.5 million
in 2019 to £46.8 million in 2020 as the Group managed
discretionary marketing spend tightly. Marketing spend overall
was 30% of operating income during the year (2019: 42%).
Annual Report and Accounts 2020
33
Finance review continued
Segmental reporting
During the year ended 31 December 2020 organisational changes led to greater ownership of costs being managed within
geographies. As a result, the way the operating segment performance is reported to, and reviewed by, the Global Leadership
Team was modified to allocate product development, corporate costs, depreciation and amortisation, share-based payments
and exceptional items across the geographical segments.
The comparatives for the year ended 31 December 2019 have been restated to reflect the revised segmental presentation.
The Group also reviews the results of the Group using Adjusted EBITDA as an alternative performance measure. The table below
sets out a reconciliation between these measures and the statutory operating loss:
31 December 2020
31 December 2019 (restated)
Total income
Fair value (losses)/gains
United
Kingdom
£m
152.9
(43.8)
United
States
£m
Developing
Markets
£m
63.0
(74.5)
Net income/(loss)
109.1
(11.5)
Total
£m
222.0
(118.3)
United
Kingdom
£m
111.6
(3.1)
103.7
108.5
Segment adjusted EBITDA
Product development
Corporate costs
Adjusted EBITDA
Depreciation and amortisation
Share-based payments and social
security costs
Exceptional items
Operating loss
30.2
(14.7)
(9.0)
6.5
(9.4)
(5.0)
—
(52.8)
(6.5)
(3.1)
(62.4)
(6.5)
(1.2)
(13.5)
(7.9)
(83.6)
(14.8)
(106.3)
6.1
—
6.1
(6.3)
(1.1)
(0.5)
(7.9)
(1.3)
(0.4)
(5.2)
(28.9)
(22.3)
(12.6)
(63.8)
(17.2)
(6.6)
(18.7)
34.0
(15.1)
(7.9)
11.0
(8.0)
(5.0)
—
(2.0)
United
States
£m
Developing
Markets
£m
52.4
(6.8)
45.6
13.3
—
13.3
(10.3)
(12.5)
(8.3)
(3.4)
(22.0)
(5.2)
(2.7)
—
(3.0)
(1.0)
(16.5)
(1.7)
(0.3)
(34.3)
Total
£m
177.3
(9.9)
167.4
11.2
(26.4)
(12.3)
(27.5)
(14.9)
(8.0)
(34.3)
(29.9)
(52.8)
(84.7)
Balance sheet and investments
As previously reported, in 2019 the Group launched new funding products whereby it aggregates loans in warehouses for sale as
ABS bonds to widen the universe of investors that can access investment in Funding Circle loans.
The SME loans are held in bankruptcy remote warehouses and securitisation vehicles. The value of the investments are regularly
assessed and have been impacted due to the stress of Covid-19 on SMEs.
Whilst total loans consolidated on balance sheet for accounting purposes is c.£560 million, Funding Circle’s exposure is limited
to its investment of £118 million (2019: £145 million). The investments are valued by discounting future cash flows and the Group
may crystallise higher amounts in future periods as the discounting unwinds. The tables below breaks down the Group’s balance
sheet into its constituent parts:
Investment in SME loans
Cash
Other assets
Borrowing/bonds
Cash & Investments
Other assets
Other liabilities
Equity
0.7
64.4
—
—
65.1
109.0
(74.8)
99.3
2020
Operating
business
£m
PPP Loans
£m
Warehouse
SPVs
£m
Securitisation
SPVs
£m
Other
investments
£m
24.3
—
—
221.8
18.9
—
279.8
20.0
11.1
(24.3)
(171.2)
(294.3)
32.2
—
—
—
2019
Total
£m
723.5
164.5
8.4
Total
£m
558.8
103.3
11.1
(489.8)
(614.5)
—
—
—
—
69.5
16.6
32.2
183.4
281.9
—
—
—
—
—
—
109.0
(74.8)
99.1
(62.0)
69.5
16.6
32.2
217.6
319.0
Funding Circle has various investment vehicles it uses to invest in SME loans. Given the different risk dynamics, each vehicle is
affected by Covid-19 economic stress in different ways.
34
Funding Circle Holdings plc
Strategic report The Group had warehoused loans in the US and UK during
2019 and securitised both of them in August 2019 and
November 2019 respectively. In January 2020, the US
undertook a second securitisation. When lockdowns began in
March 2020, the Group had one UK warehouse at 100% of
capacity and two US warehouses at a combined 30%
capacity. Our invested capital increased following the 2019
year end, prior to the reassessment of the investment portfolio
fair value in light of Covid-19. The fair value of each of these
investments was assessed for the interim results in June
2020, with the resultant value determined to be £110 million
collectively as shown below.
The Group values its investments using discounted cash flows
that take into account projected cash flows from the underlying
SME loans, which include principal repayment and prepayment
rates and expected levels of default. Since the 30 June 2020,
there has not been a significant deterioration in the expected
level of defaults when these investments were revalued at
31 December 2020.
The table below provides a further breakdown of Funding
Circle’s investment in these vehicles:
Investment type
1. Securitisation SPVs
(vertical)
2. Other Investments
3. Warehouse SPVs
4. Securitisation SPVs
(horizontal)
At
31 December
2019
£m
At
30 June
2020
£m
At
31 December
2020
£m
13
13
94
25
18
16
66
10
12
32
70
4
Total
145
110
118
1)
2)
3)
4)
Securitisation SPVs (vertical): Funding Circle is required by
regulation to retain a 5% equal participation in all classes
of bonds issued (vertical). The vertical investments are
measured at amortised cost.
Other Investments: There are a small amount of Other
Investments, comprising seed investments in Private
Funds and participation in investments in the UK CBILS
programme. The increase since 2019 is principally driven
by CBILS Investments.
Warehouse SPVs: In warehouses we deploy our equity and
third party bank debt to aggregate loans temporarily prior to
securitisation. The debt is senior which means the equity is
more exposed to changes in the valuation of loans. When
Covid-19 hit, the Group had one UK warehouse at 100% of
capacity and two US warehouses at a combined 30%
capacity. The intention was to securitise the SME loans in
the warehouses but this was not feasible due to Covid-19.
Securitisation SPVs (horizontal): Once loans are
securitised, we temporarily hold the residual horizontal
tranches with the intention to sell once seasoned. These
tranches have the potential to earn greatest returns, but
they also absorb losses first. As at December 2020, we
held horizontals in three securitisations which were
securitised in H2 2019 (UK and US) and H1 2020 (US).
The timing of the pandemic meant that it was not feasible
to dispose of all these horizontal tranches in 2020. Since
June 2020, the Group sold a tranche of the UK vehicle for
c.£4 million.
Cash flow
As at 31 December 2020, the Group held cash and cash
equivalents of £103.3 million, down from £164.5 million at the
end of 2019. Of the balance, £38.9 million (2019: £14.2 million)
was held within the warehouse and securitisation vehicles.
Included within the £61.2 million decrease, £20.9 million has
been due to the co-investing in CBILS loans and £57.9 million
invested into the ABS vehicles principally in the first quarter of
the year prior to Covid-19.
As at 31 December 2020, the Group was due net £27 million,
of transaction fees which were subsequently received in
February 2021.
Free cash flow, which is an alternative performance measure,
represents the net cash flows from operating activities less
the cost of purchasing intangible assets, property, plant and
equipment, lease payments and interest received. It excludes
the warehouse and securitisation financing and funding
cash flows.
Free cash flow has principally improved due to operating cash
flows from transaction fee income and investment income
while controlling marketing and people costs year on year.
The table below shows how the Group’s cash has been utilised:
Adjusted EBITDA
Fair value adjustments
Purchase of tangible and intangible
assets
Payment of lease liabilities
Working capital/other
Free cash flow
Net investment in associates
Net investment in trusts
Net investment in warehouses
Net investment in securitisations
Other
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
2020
£m
(63.8)
118.3
(10.3)
(7.8)
(21.0)
15.4
2.3
(20.9)
(234.0)
176.1
0.2
(0.3)
2019
£m
(27.5)
9.9
(17.2)
(7.1)
(7.5)
(49.4)
(13.9)
—
(79.3)
(27.7)
3.9
(2.1)
(61.2)
(168.5)
164.5
333.0
103.3
164.5
Annual Report and Accounts 2020
35
Risk management
Successfully
navigating the crisis
with focus and
determination
2020 has been a formidable test of our
risk management capabilities given the
pandemic and the resulting credit stress.
The magnitude and speed of the
pandemic, and the breadth of impacted
regions and sectors, created significant
challenges with an unprecedented rise in
SME borrowers seeking support. Funding
Circle reacted swiftly to the situation by
offering forbearance plans to customers
in difficulty, augmenting capacity in the
collections department and tightening
credit parameters for new lending. We
were quickly accredited to offer CBILS
loans in the UK and PPP loans in the US
to support our customers and the
broader economy diligently, thanks to our
adaptable online lending capabilities.
We are pleased to see that the majority
of customers who needed help have
resumed repaying their loans, and as of
December 2020, 93% of UK and US
businesses are making payments. This
turnaround is the result of active efforts
to engage with our borrowers and
investors to provide loan-curing
solutions, and speaks to the intrinsic
credit quality of the portfolio of loans we
had originated before the crisis.
The credit environment remains uncertain
in all our markets and highly dependent on
the development of the pandemic and the
efficacy of vaccines and government
measures. Our central stress scenario
outlook for now is a prolonged economic
crisis with gradual credit de-stressing over
2021–2022. Under such a scenario, we
have simulated that all historical annual
cohorts of unsecured loans originated
in the UK and the US should still deliver
positive lifetime returns to investors.
We are also confident that government-
guaranteed loans issued during the crisis
will deliver satisfactory returns to investors,
due to adapted credit criteria and the loss
protection through the guarantee. Finally,
36
Funding Circle Holdings plc
under such circumstances, we believe that
we can re-start offering unsecured loans
to low risk segments through the course
of 2021.
Despite the complexity involved in
carefully managing our historical loan
portfolio whilst pivoting our lending
processes to distribute government-
guaranteed loans, we have also made
good progress in strengthening our risk
management framework. In 2020,
we have:
‐
reduced process risks through
increased automation and enhanced
controls, leading to fewer instances of
loan repurchases related to
operational errors;
‐ developed more sophisticated
governance and controls to manage
our funding and balance sheet risks,
recognising the growing materiality of
our balance sheet positions as we
diversify our funding sources into
securitisation;
‐
refined our model risk governance
and controls including more granular
performance monitoring and data
quality controls;
‐ strengthened our data governance
and security controls including rolling
out a new data governance tool; and
‐ continued to enhance our financial
crime and fraud prevention tools to
ensure strong controls and
compliance with regulation.
Overall, we are proud of the good work
accomplished in 2020 across the
organisation to keep our employees,
borrowers and investors safe at a time of
high disruption. The future is highly
uncertain and we will remain very vigilant.
We have demonstrated we can be resilient
and adapt well to exceptional conditions,
and we will continue to navigate this crisis
with focus and determination.
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 Company, our shareholders, our
customers and fellow Circlers.
At Funding Circle all employees,
regardless of their position, play their
part in managing risk within the
business. A strong risk culture enables
us to manage the risks inherent to our
business activities seamlessly, every
day, through the active participation of
all. 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
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.
Strategic report 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 Global Chief Risk Officer (‘CRO’),
Jerome Le Luel, 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.
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 adapt to changes in
the business environment.
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 clear risks aggregation to determine their overall impact to the organisation.
We have identified five principal risks:
1
2
Strategic risk
Funding and balance
sheet risk
3
Credit risk
4
5
Regulatory, reputation
and conduct risk
Operational 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 Group Board, the UK Board and Principal Risk
Committees as appropriate.
We operate a Three Lines of Defence model across all markets in which we operate. 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
Europe MD
US MD
CFO
Global CRO
Global General
Counsel
Second line
Europe CRO
US CRO
ERM
Credit
quality
Data and
analytics
European
compliance
US
compliance
Compliance
monitoring
and testing
Third line
Internal Audit
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Annual Report and Accounts 2020
37
Risk management continued
Risk governance structure
Board Committees
Funding Circle Holdings Board
Funding Circle Holdings Board
Funding Circle Holdings Board
Audit Committee
Risk and Compliance Committee
Funding Circle Ltd Board
Group Committees
Executive Risk Committee
Balance Sheet Management
Committee
Disclosure
Committee
Technology Security Risk
Sub Committee
Business Unit
Committees
Operational Risk Committee
Credit Risk Committee
Regulatory, Reputation &
Conduct Risk Committee
The Board Risk and Compliance Committee (“RCC”) is supported by the Executive Risk Committee (“ERC”), comprising the
members of the Global Leadership Team. The ERC has sub-committees focused on each principal risk, as set out below.
Executive Risk Committee
Regulatory, Reputation and Conduct Risk Committee
The ERC 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.
The Reputation and Conduct Risk Committee, focuses on the
management of regulatory, reputation and conduct risks, and
oversees new product approvals.
Balance Sheet Management Committee
Operational Risk Committee
The Balance Sheet Management Committee is responsible for
oversight of funding risk and Group balance sheet risk.
Credit Risk Management Committee
The Credit Risk Management Committees focus is on
ensuring that the credit risk of each Business Unit’s loan
portfolio is adequately managed.
The Operational Risk Committee focuses to ensure that
operational controls are effective and that operational and
financial crime risks are adequately managed in each
Business Unit.
Disclosure Committee
The Board has delegated to the Disclosure Committee
responsibility for overseeing the disclosure of information by
Funding Circle to meet its obligations under the Financial
Conduct Authority (“FCA”) Market Abuse Regulations, Listing
Rules and 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 other stakeholders.
38
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 or 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 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 within
appetite. At Funding Circle we have 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.
Risk assurance
Assurance on the management of risk is provided by the Three Lines of Defence model including the Internal Audit function. We
also execute an external annual controls assurance report in the UK (ISAE3402) certified by auditors.
Annual Report and Accounts 2020
39
Principal risks and uncertainties
The Board confirms that throughout 2020 a robust assessment of the principal risks facing Funding Circle was completed.
A comprehensive list of Group-wide risks and emerging risks was reviewed and monitored throughout the year. The most
significant risks and uncertainties faced by Funding Circle are listed in the table below, categorised by principal risk:
Strategic risk
Strategic risk is defined as the failure to build a sustainable, diversified and profitable business that can successfully adapt
to environment changes due to the inefficient use of Funding Circle’s available resources.
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 health of our loan
portfolios and perform stress test simulations to
help ensure that investor returns remain resilient in
the context of risk volatility. Key mitigating actions
include (but are not limited to):
‐ annual stress testing of loan portfolios in
each market;
‐
‐
resilient credit strategy and continuous tuning of
risk and pricing parameters to correct for possible
deviations in returns;
independent validation and continuous monitoring
of the performance of credit risk models;
‐ monthly monitoring of internal and external
signals as part of the Credit Risk Management
Committees;
‐ agile capability to rapidly deploy pricing and credit
strategy adjustments deemed necessary;
‐ experienced in-house collections and recoveries
capabilities with built-in scalability; and
‐ with regards to government-backed programs,
controls and audits of all guarantee eligibility
criteria.
The Covid crisis has severely impacted
the economies where we operate (UK,
US, Germany and the Netherlands),
resulting in elevated credit stress across
our SME markets.
In this context, Funding Circle reviewed its
credit strategy and decided to focus from
April 2020 on government guaranteed
loans, with tight underwriting parameters.
Concerning the assets originated prior
to Covid, the priority has been to offer
forbearance programs to borrowers in
difficulty whilst ensuring high performing
collections through upsized capacity and
increased productivity with technology.
We have reflected this deteriorated
credit environment in our forecasts and
recorded an adverse fair value adjustment
in respect of Funding Circle’s own
investment exposures.
The Brexit deal with the EU and the
conclusion of US elections remove some
uncertainty in the short term, but new
issues can arise. We are carefully
monitoring the environment, and as
the Covid situation normalises, we will
update our credit outlook.
As the environment improves, Funding
Circle aims to resume lending in the
course of 2021 outside of the government
guaranteed programs, with appropriate
credit parameters.
40
Funding Circle Holdings plc
Strategic report Funding and balance sheet risk
Funding and Balance Sheet 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 demands 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 FC loans
as an investment, the
level of diversification of
funding sources and the
level of resilience of these
funding sources through
economic cycles.
Funding Circle’s business model is to be a lending
platform that efficiently matches the supply of
capital to the demand of SME borrowers.
We carefully manage this matching by:
‐ building long term relationships with investors
and developing a forward-looking pipeline of
new investors;
‐ actively managing concentration risk and
diversifying sources of funding;
‐ managing Funding Circle’s lending activities
whether through direct lending capacity,
securitisation capacity or investment fund
lending vehicles;
‐ monitoring a broad range of management
information and key performance indicators at
the Balance Sheet Management Committee, RCC
and Board;
‐
leveraging a seasoned team for Capital Markets
sales and transactions structuring; and
‐ managing potential conflicts of interest between
investors and Funding Circle.
Given the launch of government
guarantee loan programmes and lower
investor demand, we stopped unsecured
lending in the Covid environment;
Funding Circle focused on government
guaranteed lending.
With government-backed loans, we
on-boarded a range of new investor
relationships – from banks through to
asset managers.
As CBILS lending is not available to retail
investors, the retail platform in the UK
was paused from March 2020.
Overall, funding supply has been
sufficient in 2020.
There is some uncertainty about the
securitisation market and investor
appetite for government-guaranteed
loans versus unsecured lending. We
continue to work closely with investors
on various loan product and transaction
structure options and indications received
so far suggest that investors would be
keen to keep funding Funding Circle
beyond current government-backed
programs – subject to adequate terms.
Annual Report and Accounts 2020
41
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
managements’ 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
Balance sheet risk
The risk that Funding
Circle investment
positions reduce in value
or cannot be exited at an
economically viable price.
The risk that Funding
Circle liabilities cannot be
met when and where they
fall due or can only be
met at an uneconomic
price.
We carefully manage this risk by:
‐ setting clear guardrails for FC balance sheet;
‐ 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 Balance Sheet Management Committee and
RCC; and
‐ developing a dedicated and effective Balance
Sheet Management function.
Our overall approach to having a robust
balance sheet and prudent management
of liquidity remains unchanged.
The pandemic resulted in a material fair
value impact on some investment
positions held by Funding Circle held
with the intention to sell and temporarily
disrupted the market for such
investments. The liquidity and appetite
for these investments is expected to
improve in 2021.
We have sufficient disposable cash to
cover our liquidity needs, including when
tested against stressed liquidity scenarios.
42
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
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,
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, 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
model risk (including the independent validation
and monitoring of credit scoring models);
‐ performing annual stress tests with high quality
standards; and
‐ with regards to government programs, tightly
controlling adherence to eligibility criteria.
There is an increased credit risk of
borrowers not meeting their repayment
obligations due to the impact of
lockdowns and continuing economic
slowdown. This can lead to an increase
in credit defaults and a decrease in
investor net returns.
Investor net returns are also contingent
on the continuous effectiveness of
collections and recoveries activities
during the crisis.
To account for these risks, we have
paused unsecured lending and
intensively managed the historical book
through customer service and
collections. For this purpose, we have
increased staffing and adapted our
collections capabilities and tools to help
borrowers in difficulty.
In the case of government-backed loans,
credit risk significantly reduces for new
borrowers acquisitions, thanks to the
credit loss reduction guarantee offered
by these programs, and those loans have
formed the majority of our lending in 2020.
Annual Report and Accounts 2020
43
Principal risks and uncertainties continued
Regulatory, reputation and conduct risk continued
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.
‐ We remain vigilant 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 educating 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.
‐ We have expanded our teams focusing on
governance and controls, and continue to train
all employees in such matters as are relevant
to their role.
There is increased regulatory scrutiny as
a result of the economic uncertainty and
the perceived increased risk to viability
of firms.
The volume of collections activity also
poses an increased regulatory risk
regarding the adequate management
of borrowers in difficulty.
Proactive engagement with the
regulators continues.
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 is heightened reputational risk
from pursuing collections from
borrowers, who have missed payments.
Forbearance measures have been
offered to help borrowers in difficulty in
an empathetic way and processes for
dealing with vulnerable customers have
been reviewed and enhanced.
Quality monitoring and training have also
been enhanced in our collections and
recoveries department.
Conduct Risk/Treating Customers Fairly
Funding Circle’s activities
(or the failure to
satisfactorily perform its
activities) could impact
the delivery of fair
customer outcomes.
‐
Improvements have been made to the way in
which loan performance is reported and
additional oversight and controls have been
implemented.
‐ Code of Conduct launched in US and UK and
conduct rules training developed and rolled out
across the UK business.
‐ Further investments have been made in our
Compliance Monitoring and Testing and the
Internal Audit function has been enhanced with
the hire of a Head of Internal Audit with an
internal team.
‐ There has also been an overhaul of complaints
handling and reviews of other customer-
impacting topics such as collections, recoveries
and litigation and vulnerable customers.
Complying with applicable laws and
regulations and ensuring positive
customer outcomes continues to be a
fundamental priority for Funding Circle.
Despite the challenges of oversight and
monitoring of employees and controls in
a remote environment, we do not
consider this risk to have increased.
44
Funding Circle Holdings plc
Strategic report Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from
external events.
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
Process risk
Failure to originate and
service loans in line with
Funding Circle internal
policies, investor
guidelines and third party
loan guarantees (e.g.
British Business Bank,
Small Business
Administration) may
result in Funding Circle
repurchasing loans from
investors.
We actively manage process risk by:
‐ continuing to automate key controls;
‐ performing robust first line quality assurance
and secondary checks on manual processes;
‐
reviewing Key Risk Indicators as part of the
Business Unit Operational Risk Committee;
‐ performing independent quality control checks;
and
‐
implementing adequate policies and procedures.
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.
‐ Our Head of Information Security is responsible
for managing information security 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.
‐ We have a robust, multi-layered security
infrastructure that includes prevention and
detective controls.
‐
In addition, we have robust risk governance
structures with direct oversight for information
security risk to ensure that they are within risk
appetite – Board Risk and Compliance
Committee, Executive Risk Committee,
Operational Risk Committee and Technology
Security and Risk Sub-Committee.
Funding Circle implemented new
processes to support government-
backed lending schemes.
There is a risk of operational errors
leading to loans becoming ineligible for
government guarantees and that may
result in repurchasing loans from
investors, with a potential impact on
Funding Circle’s financials.
We have implemented robust controls,
as well as independent quality checks to
ensure that all loans originated under
government schemes are fully compliant
with eligibility requirements.
We also have external 3rd Party audits
to ensure full compliance with
government schemes.
Monitoring and oversight of government-
backed loan programs is also in place to
ensure ongoing program compliance.
There is heightened risk driven by staff
working remotely and using electronic
communication channels that may be
susceptible to cyber attacks.
During the Covid crisis, our monitoring
controls were enhanced to protect
Funding Circle from the changing threat
landscape, enabling secure remote
working and data protection controls.
As cyber security threats continue to
evolve and affect the financial industry,
we continue to actively monitor and
manage this risk within our risk appetite.
We continue to develop our security
tooling to identify new and emerging
cyber risks. In 2020, we focused on
vulnerability management and increased
visibility, alerting, and response to stay
ahead of cyber attackers.
Annual Report and Accounts 2020
45
Principal risks and uncertainties continued
Operational risk continued
KEY RISKS
MANAGEMENT OF RISK
CHANGE IN RISK IN YEAR
Financial crime
Risk of regulatory breach,
financial loss or
reputational damage
arising from a failure to
adequately manage or
prevent money
laundering, terrorist
financing, bribery and
corruption, or to comply
with sanctions
regulations.
Technology risk
Failure of the technology
platform could have a
material adverse impact
on Funding Circle’s
business, results of
operations, financial
condition or prospects.
‐ Complying with the laws and regulations
designed to counter money laundering, terrorist
financing, corruption and bribery is fundamental
to Funding Circle’s operations.
‐ 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 Crime Operations
team within the first line of defence that is
advised, challenged and monitored by the
second line Financial Crime Compliance team.
‐ We have robust risk governance structures in
place with direct oversight for technology risk to
ensure that they are within risk appetite – Board
Risk and Compliance Committee, Executive Risk
Committee, Operational Risk Committee and
Technology Security and Risk Sub-Committee.
‐ We invest significantly in the Group’s technology
infrastructure to ensure that the platform is resilient
and scalable to support business growth.
Due to the speed and nature of the
government-backed loan schemes roll
out there is heightened industry risk that
fraudsters as well as other organised
crime groups could attempt to exploit
these schemes.
As an accredited lender, we have
continued to undertake rigorous Fraud,
Anti-Money Laundering (AML) and Know
Your Customer (KYC) checks as part of
the schemes’ application process.
We have also chosen not to participate
to sections of programs that could
present elevated fraud risks (e.g. British
Business Bank loans to new customers).
In response to Covid restrictions,
technology risks did not materially
increase as a result of moving to a remote
workforce, since the capability to do so
was already largely in place. There is
however increased reliance on technology
with remote working arrangements.
We continued to progress our automation
roadmap during 2020, and at the same
time adapted systems to enable Funding
Circle participation in government-
backed lending schemes. To meet these
needs, we made extra investments in the
reliability and maintainability of our
technology platform.
Also in 2020, we consolidated our
engineering and technology operations
into our London technology centre
without affecting overall technology risk.
46
Funding Circle Holdings plc
Strategic report Operational risk continued
KEY RISKS
MANAGEMENT OF RISK
CHANGE IN RISK IN YEAR
Client money risk
Failure of Funding Circle
to adequately protect and
segregate client money
may lead to financial loss,
reputational damage and
regulatory censure.
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 through:
‐ 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;
‐ annual CASS external audit providing opinion;
and
‐
internal audit focusing on regulatory returns and
governance, as well as specific compliance
monitoring activity.
In 2020 we have maintained a robust
control environment in relation to
payment creation, payment
authorisation, reconciliation review
and monthly reporting.
Additional complexity arose in 2020 and
new controls have been created for the
money flows related to the new trust
structures needed to participate in the
UK government schemes. To assist
borrowers through the pandemic, we
have also increased our range of
forbearance options, which meant that
we revised our policy to accept partial
payments, requiring enhancement to our
payment systems. Additional controls
and monitoring have been deployed to
mitigate risks whilst these changes
were built.
The FCA have increased focus on client
assets, publishing two ‘Dear CEO’ letters,
addressing the increased client money
balances and adequate client asset
arrangements, which the UK Board
have considered.
Annual Report and Accounts 2020
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 2023 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 notwithstanding the shorter term considerations
of the impact of Covid-19 described below; 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 14, 15 and 18, 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:
‐
transition away from the current government stimulus
packages currently operating in the UK and US which will
move the Group back to its more traditional lending products
together with the new, post CBILS, government backed
scheme in the UK;
‐ diversify and increase funding from a variety of investors
in order to meet future borrower demand;
‐ develop and introduce new lending products; 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 medium-term plan by
the CEO and CFO. This is done in conjunction with the Global
Leadership Team, consisting of regional and functional leaders,
together with a presentation and discussion at the Board.
The first year of this strategic plan consists of the Group’s
2021 annual budget and is subject to reforecasting during the
course of each year. The budget is extended into the second
and third year of the plan using the Group’s various drivers and
expected growth rates experienced across the Group.
Progress against the financial budget and forecasts is then
reviewed each month 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:
‐
levels of marketing spend, conversion rates, average loan
sizes and mix of product channels which drive originations
and Loans under Management (“LuM”);
‐ expected yields on loans originated and service fee charges
which drive fee income;
‐
Interest income receipts and interest expenses which drive
net investment income;
‐ costs across geographies are controlled which specific
focus on fixed costs and those that fluctuate with income
such as marketing costs;
‐ an assumption of continued investment in the Group’s IT
infrastructure to meet the needs of the business and its
product set but with the expectation of no fundamental
breakdown in the IT infrastructure or major data loss;
‐ an orderly transition from the current government stimulus
packages with the reintroduction and growth of the Group’s
core lending product;
‐ a longer-term tail of Covid-19 economic stress into 2022
and therefore we have assumed tighter credit boxes through
to mid 2022.
Since the outbreak of Covid-19 the governments in the UK and
the US have provided financial stimulus packages to SMEs.
We expect that the economy and SMEs will recover from the
current Covid-19 market conditions and that Brexit does not
result in long lasting negative implications on SMEs in the UK.
We have therefore not assumed further stimulus packages
over the medium term if there were longer lasting negative
implications from Covid-19, although longer-term stimulus
packages would likely improve the Group’s financial prospects
further given the move to online that the Covid pandemic
has driven.
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. As part of this assessment, the Directors have
considered and carried out a robust assessment of the
principal risks as set out on pages 40 to 47. They have also
considered the potential impact of the risks on the viability
of the Group with specific focus on shorter-term liquidity
needs and its availability, including liquidity currently tied
up in investment products and the Group’s ability to crystallise
this should the need arise.
48
Funding Circle Holdings plc
Strategic report The financial plan was then subject to differing scenarios to
assess those risks and quantify their financial impact on the
Group. The Group also operates liquidity guardrails that it
monitors which are of particular importance in the short term
during the Covid pandemic.
Going concern and Viability
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 or the Group’s financial covenants.
In all cases including the severe but plausible scenario above,
with appropriate management actions, the scenarios were
controllable to mitigate the impact on the Group’s liquidity for
the broader assessment of the Group’s viability.
The shorter-term projections within the Group’s strategic plan
are also used to assess the Group’s ability to operate as a
going concern. As at 31 December 2020, the Group had net
assets of £218 million, together with total cash of £103 million
of which £38.9 million was held within the warehouse and
securitisation vehicles. In February 2021 the Group received
net £27 million in cash relation to fees owed to the Group at 31
December 2020. Additionally, within the net assets the Group
holds £118.3 million of invested capital some of which is
capable of being monetised if liquidity needs arise. At all times
during the assessment, and after stress scenarios are
modelled, the Group retains sufficient financial resources.
The Group has financial covenants with institutional investors
for servicing agreements and related to debt facilities associated
with borrowings used to fund SME loan originations in
warehouses, for which there are unrestricted cash, tangible
net worth and debt to tangible net worth ratios. At all times
through the forecast period, and after stress scenarios, the
Group remains within the required levels.
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 2023 as well as for at least the next
12-month period from the date of this Annual Report.
The scenario 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 together with an initial dislocation between
existing government stimulus schemes and moving to the
Group’s core product offerings.
Under this scenario we have assumed that there would not
be additional government intervention as this would likely
improve the Group’s performance as in that instance we
would expect to be originating loans under government
stimulus schemes.
Link to principal risks and uncertainties
‐ Strategic risk
‐ Credit risk
‐ Liquidity risk
Impact on the business model
Under a severe but plausible downturn scenario it is
expected that:
‐
‐
‐
‐
there would be a short-term period in year 1 where there
would be limited transaction fees earned as the Group restarts
its core lending products following the cessation of
government stimulus packages;
following a further severe global downturn there again 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.
Annual Report and Accounts 2020
49
Corporate governance
CORPORATE
GOVERNANCE
51 Chairman’s introduction
53 Board of Directors
56 Corporate governance report
62 Division of responsibilities
63 Composition, succession and evaluation
65 Audit, risk and internal control
66 Report of the Nomination Committee
69 Report of the Audit Committee
75
78 Directors’ remuneration report
89 Annual report on remuneration
99 Report of the Directors
102 Statement of Directors’ responsibilities in respect of the financial statements
Report of the Risk and Compliance Committee
50
Funding Circle Holdings plc
Chairman’s introduction
Promoting long-term sustainable
success while maintaining an
open and inclusive culture
In times of crisis, good governance and
effective decision making are more
important than ever, and the Board
remains committed to the highest
standards of corporate governance.
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
In times of crisis, such as we have seen
this year with the Covid-19 pandemic,
good governance and effective decision
making are more important than ever,
and the Board remains committed to
the highest standards of corporate
governance. 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
In January 2020, we announced that
Oliver White would be replacing Sean
Glithero as Chief Financial Officer, and
Oliver joined the Company and the
Board in June 2020. Oliver brings a
wealth of financial services experience
to the Board, and has made a significant
impact since joining.
As previously announced, Cath Keers,
Bob Steel and Ed Wray will be stepping
down from the Board, and will not be
standing for re-election at the
Company’s AGM in May.
Cath will be succeeded by Helen Beck,
who has extensive remuneration and
broader human resources experience
(including serving on remuneration
committees), and I look forward to
welcoming Helen to the Board when she
joins on 1 June 2021. I have taken on
Cath’s role as designated workforce
Non-Executive Director in the meantime.
Matthew King, who currently chairs the
FCL Board and has a deep understanding
of the Group and its sector, will also be
joining the Board and Audit Committee
as a new independent Non-Executive
Director later this year, and Geeta Gopalan
will be replacing Bob as Senior
Independent Director and on the
Nomination Committee.
More details on these changes, and the
Nomination Committee’s approach to
succession planning generally, is set out
in the Nomination Committee Report on
pages 66 to 68.
I would like to thank Cath, Bob and Ed
for the significant contribution they have
made to the Board; their insight and
support will be missed.
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:
Governance
53
Board leadership and
Company purpose
62 Division of responsibilities
63
Composition, succession
and evaluation
65 Audit, risk and internal control
65 Remuneration
Annual Report and Accounts 2020
51
Chairman’s introduction continued
To this end, we have established a
standalone ESG Committee to ensure
appropriate focus is given to the
implementation of our ESG framework
and objectives to be rolled out in 2021
(as set out in more detail on page 22)
and to workforce engagement. I chair
this Committee, with Neil Rimer and
Matthew King joining me as members.
Further details on the ESG Committee
are set out on page 58 of the Corporate
Governance Report.
Values and culture
Our culture is fundamental to the
success of our business; our ability to
adapt to the changing environment and
remain resilient in a challenging year is
in large part down to our strong and
inclusive culture. The Board leads by
example, focusing on our purpose and
values in decision making, and has
overseen several initiatives this year
with the aim of promoting our culture
and values, including our new Code of
Conduct, our Circler Promise "Build the
Incredible", the roll-out of Company wide
(including the Board) diversity, equity
and inclusion training and the approval
of our ESG framework. More details of
these initiatives are set out on page 56
of our Corporate Governance Report
and in Our people on pages 19 to 21.
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 2020.
Andrew Learoyd
Chairman
25 March 2021
Governance activity
The primary focus of the Board this
year has been on the operational and
economic impact of the Covid-19
pandemic, and supporting our business
and wider stakeholders, including our
borrowers and our people, through
these uncertain times. We have focused
on strategic decision making and the
management of risk, enabling the
business to adapt quickly to the
changing environment while retaining
effective controls. Frequent Board
meetings and the regular provision of up
to date management information and
stakeholder engagement results enabled
the Board to oversee the changes
implemented, and to monitor the risks
and control environment effectively.
Our Corporate Governance Report
provides more details on the Board’s key
decisions and areas of review during the
year, as well as the steps we have taken
to continue to develop and improve our
governance structure. I would like to
thank the Directors for their continued
support in ensuring timely, robust and
constructive challenge around the
Board table and for their significant
additional time commitment in
response to the pandemic.
Our stakeholders
We consider a sound governance
framework key in the creation of value
for our shareholders and for the benefit
of our wider stakeholders. In this
environment, particularly with remote
working, maintaining a two-way dialogue
with our stakeholders remains a key
area of focus for the Board, with the
well-being of our people and communities
our highest priority. Further information
on how we considered the interests of
our key stakeholders, as well as the
matters set out in section 172 of the
Companies Act 2006, are set out in
Engaging our stakeholders on pages 26
and 27 and on page 61 of the Corporate
Governance Report and this will be a
continued area of focus in 2021.
52
Funding Circle Holdings plc
Corporate governance Board of Directors
An experienced and effective
leadership team
Andrew Learoyd
Chairman of the Board
N
R
E
D
Samir Desai CBE
Founder, Chief Executive Officer
D
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 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
and the Market Disclosure Committee. He also chairs the ESG Committee,
and attends meetings of the Risk and Compliance Committee and Audit
Committee by invitation. Andrew also took on the role of designated
Non-Executive Director for workforce engagement with effect from
1 January 2021.
Independent: On appointment.
Skills and experience: Andrew spent 23 years working in investment
banking as a research analyst, in corporate finance, 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. Andrew has been involved as an angel investor, Non-Executive
Director and consultant to several start-up businesses.
External appointments: Andrew is also a director of Funding Circle Ltd.
He is currently a non-executive director of Schwanhäußer Industrie Holding,
a consumer products manufacturer based in Germany, and Threshold
Sports Limited which creates and delivers outdoor events for the public,
corporate and charity sectors.
Committee membership: Samir is a member of the Market Disclosure
Committee and 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.
Oliver White
Chief Financial Officer
D
Hendrik Nelis
Non-Executive Director
RC
Term of office: Oliver was appointed to the Board as Chief Financial Officer
on 15 June 2020.
Term of office: Hendrik was appointed to the Board as a Non-Executive
Director in September 2013.
Committee membership: Oliver is a member of the Market Disclosure
Committee and attends meetings of the Risk and Compliance,
Remuneration and Audit Committees by invitation.
Independent: Not applicable.
Skills and experience: Oliver has spent the majority of his 30 years’
experience working in financial services, payments and lending. He joined
from Vanquis Bank where he served as Chief Financial Officer. He was
formerly the Chief Financial Officer at Barclaycard, where he managed a
global business with combined assets of £40 billion, £5 billion of revenues
and £1.6 billion of profits. Oliver is a chartered management accountant
and holds an MBA from Warwick Business School.
External appointments: None.
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), Callsign,
Celonis, CHECK24, Instana, Miro and WorldRemit.
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 Director and/
or Member at a number of Accel entities, as well as a director or
supervisory board member of several other companies.
Annual Report and Accounts 2020
53
Board of Directors continued
Neil Rimer
Non-Executive Director
E
Bob Steel
Senior Non-Executive Director
N
Term of office: Neil was appointed to the Board as a Non-Executive
Director in March 2011.
Committee membership: Neil is a member of the ESG Committee.
Independent: No.
Skills and experience: Neil is a Co-Founder and Partner of Index Ventures.
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 the Co-Chair 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. As announced, Bob will be stepping down from the Board
with effect from the AGM, and Geeta Gopalan will take on the role of Senior
Independent Director.
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 and the Chair 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. Bob holds directorships at
Union Square Hospitality Group, Regional Plan Association (for New York
tri-state) and several arts institutions in New York City. He is also a trustee
of the Economic Club of New York, Hospital for Special Surgery and the
Aspen Institute.
Eric Daniels
Non-Executive Director
RC
A
Geeta Gopalan
Non-Executive Director
A
RC
D
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: Eric chairs the Risk and Compliance Committee
and is a member of the Audit Committee.
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 a partner at Abako Partners, an adviser, a mentor, a
non-executive director of Russell Reynolds Associates and a board
member of Smithsonian Tropical Research Institute. He also advises
several innovative technology companies.
Committee membership: Geeta chairs the Audit Committee and is a
member of the Risk and Compliance Committee and the Market Disclosure
Committee. Geeta will also join the Nomination Committee and take on the
role of Senior Independent Director to succeed Bob Steel later this year.
Independent: Yes.
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, governance and nomination, and
remuneration committees), Wizink Bank S.A. (where she is Chair of the risk
committee and a member of the audit committee) and Ultra Electronic
Holdings plc (where she is a member of the audit, nomination and
remuneration committees).
54
Funding Circle Holdings plc
Corporate governance Cath Keers
Non-Executive Director
R
N
Ed Wray
Non-Executive Director
A
R
Term of office: Cath was appointed to the Board as a Non-Executive
Director in May 2018 and became Chair of the Remuneration Committee
in September 2018. Cath will be stepping down from the Board with effect
from the AGM and will be succeeded by Helen Beck as Chair of the
Remuneration Committee.
Committee membership: Cath chairs the Remuneration Committee
and is a member of the Nomination Committee. Cath also served as
the designated Non-Executive Director for workforce engagement until
she was succeeded by Andrew Learoyd with effect from 1 January 2021.
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 was appointed as Chief Marketing Officer of
Sage in June 2020. She also 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 and Chair
at Trustedhousesitters Group Ltd. She is also an adviser to a number of
small businesses predominantly in the technology sector.
Lucy Vernall
Company Secretary, General Counsel
and Chief People Officer
D
Term of office: Lucy was appointed Company Secretary in July 2014.
Committee membership: Lucy chairs the Market Disclosure Committee
and attends all other Board Committee meetings by invitation.
Independent: Not applicable.
Skills and experience: Lucy is responsible for the Legal, Compliance and
People functions of the business, in addition to being Company Secretary.
Prior to joining Funding Circle, Lucy was one of the founder members of
Kemp Little LLP, a technology focused City law firm. She was managing
partner of the firm from 2009 until 2011, when she became Wonga’s first
General Counsel.
External appointments: Lucy serves on the Board of the charities Bardhan
Research and Education Trust of Rotherham and The Emerson Trust.
Term of office: Ed was appointed to the Board as a Non-Executive Director
in August 2011. Ed will be stepping down from the Board with effect
from the AGM, and Matthew King will be appointed as an additional
Non-Executive Director and a member of the Audit Committee.
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 the Prodigy group of companies, the
LMAX group of companies and London House Exchange Limited. He is
also Chairman of Coach Core Foundation and Mental Health Innovations.
Board Committees
A
R
N
Audit Committee
Remuneration Committee
Nomination Committee
RC
Risk and Compliance Committee
E
D
ESG and Workforce
Engagement Committee
Market Disclosure Committee
Committee Chair
Annual Report and Accounts 2020
55
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, and in 2020 the Board approved the launch of
"Equity for All", which operates as a share incentive plan in the
UK. The Board regularly receives reports on people-related
matters, including results from our culture surveys, which
have enabled the Board to monitor employee engagement and
satisfaction, as well as how Circlers have adapted to remote
working. The Directors also spend time with employees, for
example by participating from time to time in our local and
global gatherings or as part of the workforce engagement
programme run by Cath Keers in 2020 in her role as the
designated Non-Executive Director for workforce engagement
(which Andrew Learoyd took on with effect from 1 January 2021).
For more details on the Board’s engagement with the workforce,
please see Engaging our stakeholders on pages 26 and 27.
Matters reserved for the Board and role
of the Committees
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;
‐
‐
remuneration of Directors and the Global Leadership Team; and
the Group’s environmental, social and governance policy,
framework and reporting.
Corporate governance report
The Board has a collective objective of promoting the
long-term success of the Company for its shareholders and
wider stakeholders and provides dedicated leadership in the
development and promotion of the Group’s strategy, and
monitoring its implementation. A key part of the Board’s role
is ensuring the Group has the appropriate people, financial and
other resources available to achieve its aims. Along with the
Committees, we are responsible for ensuring an appropriate
system of governance operates throughout the Group. This
includes a robust system of internal controls and a sound risk
management framework.
Details of the current composition of the Board (including gender
diversity) are set out below. There has been no change from
2019, but female representation on the Board will increase in
2021 as a result of the Board changes previously announced.
Board gender diversity
Board composition
Female
Male
2 / 20%
8 / 80%
Executive
2 /20%
Non-Executive 8 / 80%
20+
L 20+
Purpose, values and culture
We consider our employees and culture fundamental to the
success of our business, and in 2020 this has been more
important than ever as we have adapted to the challenges
created by the pandemic. Our team consists of a talented
group of individuals who have a 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 company culture, as well as a set of
five core values that represent who we are and how our team
behaves (as described in Our people on page 20). In 2020, this
has been enhanced by our new Circler Promise "Build the
Incredible" and our new Code of Conduct, which was rolled
out globally in late 2020, together with conduct rules training
for all UK employees, to further embed our values and respond
to the needs of remote working.
The Board approved a new ESG framework in December 2020,
to be rolled out in 2021 and overseen by the newly formed ESG
Committee. Equality, diversity and inclusion are important parts
of this new framework and the Directors have participated in
training, along with other Circlers, which covers issues such
as unconscious bias.
56
Funding Circle Holdings plc
Corporate governance80
+
80
+
L
Each Board Committee has written Terms of Reference defining its role and responsibilities as summarised in the table below, 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.
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 66
‐ 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 processes
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 69
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’s Enterprise Risk Management
Framework, the Group’s compliance with legal
and regulatory requirements and policies and the
effectiveness and appropriateness of the Group’s
corporate governance framework.
Membership
Eric Daniels (Chair)
Hendrik Nelis
Geeta Gopalan
Risk and Compliance Committee Report – page 75
‐ 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 for the purpose of achieving its long-term strategic objectives
‐ 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, platform funding and liquidity,
operational, credit and regulatory, reputation and conduct risks and
managing their impact on the Group
‐ Considers and approves the annual compliance monitoring and testing plan
Annual Report and Accounts 2020
57
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.
‐ Determines the remuneration of the Chairman, the Executive Directors
and the Global Leadership Team (the “Executive Group”)
‐ 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
Membership
Cath Keers (Chair)
Andrew Learoyd
Ed Wray
Directors’ Remuneration Report – page 78
‐ Promotes long-term shareholdings by Executive Directors that support
alignment with long-term shareholder interests and develops a formal
policy for post-employment shareholding requirements encompassing
both unvested and vested shares
‐ Considers, determines and approves the provisions of the service
agreements of the Executive Group and ensures that any payments that
may be made under such provisions are fair to the individual and the
Company, or the relevant member of the Group (as appropriate)
‐ 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 Group
‐ Reviews and approves 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
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. The Committee has at least
three scheduled meetings a year and meets more frequently on an as needed basis. In 2020, the Committee met nine times.
ESG Committee
The Board has delegated to the newly formed ESG Committee responsibility for overseeing and monitoring the implementation
of the Company’s environmental, social and governance policy and framework, as approved by the Board. The Committee also
oversees the Board’s workforce engagement in conjunction with the designated workforce engagement Non-Executive Director.
The Committee is chaired by the Chairman of the Board, who is joined by Neil Rimer and Matthew King.
Global Leadership Team
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.
58
Funding Circle Holdings plc
Corporate governance Board activity
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 and a weekly portfolio risk update. During
the initial months of the Covid-19 crisis in 2020, the Board held
biweekly meetings, as well as receiving weekly management
and portfolio risk reports, to ensure the Board remained
informed and to enable timely decision making as the situation
unfolded. The Chairman and Non-Executive Directors have
had regular discussions without Executive Directors present,
including by way of informal discussions between the Chairman
and other Non-Executive Directors outside formal Board meetings.
The table below sets out attendance at Board and Committee
meetings in 2020, including the strategy meeting held virtually
in October 2020.
The Company Secretary or her nominated deputy attended all
of the Board and Committee meetings in 2020. Matthew King
(Chair of the Funding Circle Ltd Board) attended six Board
meetings in 2020 as an observer to ensure his awareness of key
areas impacting the UK business. Matthew will continue to
attend Board meetings as an observer until his appointment to
the Board later in the year. In addition, Andrew Learoyd and
Matthew King attended all Audit Committee and Risk and
Compliance Committee meetings as observers.
No. of meetings
Andrew Learoyd
Samir Desai
Oliver White5
Eric Daniels
Geeta Gopalan4
Cath Keers4
Hendrik Nelis
Neil Rimer4
Bob Steel4
Ed Wray
Former Director who served during 2020
Board ¹,4
15
15
15
7
15
14
13
15
11
13
15
Audit
3
3
3
3
Risk and
Compliance ²
Remuneration ³
Nomination
5
5
5
5
5
5
5
5
1
1
1
1
Board ¹
Audit
Risk and
Compliance
Remuneration
Nomination
Sean Glithero6
6
1. The Board held biweekly meetings from March until July 2020 in response to the Covid-19 pandemic. The Board therefore held nine additional meetings in 2020, as well as the
six originally scheduled.
2. The Risk and Compliance Committee held two ad-hoc meetings due to the Covid-19 crisis, in addition to the three originally scheduled.
3. The Remuneration Committee held two ad-hoc meetings, in addition to the three originally scheduled, primarily to approve Oliver White’s remuneration on his joining the Company.
4. Geeta Gopalan, Neil Rimer, Bob Steel and Cath Keers were unable to attend certain meetings (particularly those called on relatively short notice and as indicated in the table)
due to prior commitments.
5. Oliver White was appointed to the Board on 15 June 2020 and has attended all Board meetings since his appointment.
6. Sean Glithero retired from the Board at the Company’s AGM on 20 May 2020. In addition to the six meetings he attended as a Director, he also attended two meetings following
his resignation as an invited attendee.
The Board and Board Committee meeting schedule for 2021
has been approved by the Board and the Committees and the
Board will meet formally at least six times during the year,
including a Board strategy meeting. Ad-hoc meetings may
be called as and when appropriate, as was the case in 2020.
The Audit Committee will hold an additional meeting from
2021 (being four meetings in total), as an action arising
from the Committee evaluation process, to ensure the
Committee continues to provide appropriate oversight
of the Group’s control environment and evolving business
with additional products.
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 2020 is set out on the next page. In addition,
some examples of key decisions taken by the Board in 2020,
in the context of its section 172 duties, are set out on page 61.
Annual Report and Accounts 2020
59
Corporate governance report continued
2020 Board activities
Q1 2020
‐ Full-year results announcement
‐ Annual Report and Accounts
‐ Securitisation deep dive
‐ Bringing the employee voice into
the Boardroom
‐ Reorganisation of German and
Dutch businesses to centralise
operations in UK
‐ Long-term succession planning
‐ Marketing deep dive
‐
Investor relations
Q4 2020
‐ Strategy meeting
‐ 2021 budget and plan
‐
Investor relations
‐ Product strategy review
‐ ESG framework and objectives
‐ Bringing the employee voice into
the boardroom
Q2 2020
‐ Covid-19 response:
• Financial stability, cash
preservation, cash forecasting
and scenario planning
• Update to 2020 budget and plan
• Review of credit, funding
and liquidity risks
‐ Approval of CBILS and PPP loan
products and funding transactions
‐ High level strategy review
Q3 2020
‐ Continued Covid-19 response:
• Financial stability, cost
reductions and profit and cash
generation
• Review of 2020 budget and plan
• Review of credit, funding and
liquidity risks
‐ Restructuring of the US business
‐ Approval of BBLS loan product
and funding transactions
‐ Half-year results and Government
Schemes announcements
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 69 and the Risk and Compliance Committee Report on page 75).
60
Funding Circle Holdings plc
Corporate governance Board decision making and section 172 duties
As set out in the Section 172(1) Statement on page 27, the Directors are fully aware of their section 172 duties (and receive
training on their duties on an annual basis). In discharging these duties, the Directors have regard to the factors set out in section
172(1)(a)-(f) of the Companies Act 2006, 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 the Board’s decisions are consistent and
predictable. Some examples of how the Directors 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.
Key stakeholders
considered
Borrowers
Investors
Communities
Government
Principal decision
Becoming an accredited
lender under
government guaranteed
programmes, including
CBILS in the UK and
PPP in the US
Introducing new
forbearance and other
measures to support
borrowers
Borrowers
Investors
Communities
Regulators
Supporting Circlers
Our people
Communities
Restructuring in
Germany, Netherlands
and the US
Our people
Our shareholders
Borrowers
Investors
Regulators
Approving the new
ESG framework
Communities
Our people
Our shareholders
Investors
Board’s decision-making process
The Board’s primary focus was to ensure Funding Circle was able to use its unique
position to support as many small businesses as possible through the pandemic.
A key part of this was helping government to distribute much needed finance to
SMEs, in line with the Group’s long-term strategy. The Board responded rapidly,
approving the shift to offering government guaranteed loans, the temporary pause
of core lending (and retail investment due to retail investors being unable to
participate in government loan schemes), together with several new funding
arrangements with institutional investors.
The Board (in conjunction with the Risk Committee) also oversaw the implementation
of new processes to support the government guarantee programmes, including to
ensure the implementation of robust controls and continued monitoring and
oversight of the programmes.
In response to the deteriorating economic outlook, the Board also carefully
considered the need to protect investor returns, moving quickly to tighten credit
criteria and reduce origination levels in the first months of the crisis.
The Board approved a number of measures to ensure small business customers
struggling with the impact of Covid-19 had sufficient breathing space, which in turn
helped to protect investor returns. These included the implementation of payment
plans and holidays, as well as the expansion of the support capacity of frontline
teams to deal with an increase in queries, redeploying and retraining Circlers from other
teams. The Board oversaw and monitored the implementation of these changes,
including by monitoring customer complaints and employee feedback and ensuring
regular engagement with our regulators.
The health and well-being of Circlers was central to the Board’s response to Covid-19.
The Board received regular updates on the transition to remote working, the reallocation
of staff to different teams and the overall welfare of our people. This included the results
of regular surveys and direct feedback from workforce engagement sessions (led by
Cath Keers in her role as the designated Non-Executive Director for workforce
engagement) to measure employee engagement and satisfaction and ensure
Circlers continue to feel supported while remote working.
The Board approved the reorganisation of the model in Germany and Netherlands and
the introduction of changes to streamline the US business (including centralising the
technology team in the UK and moving the sales and marketing teams to Denver from
San Francisco), both of which included some workforce reductions. In reaching
these decisions the Board considered a wide range of operational and financial
scenarios, and the interests of multiple stakeholder groups, and ultimately determined
that the restructurings would promote the Group’s long-term success by
accelerating its pathway to profitability.
Following the implementation of these restructurings, the Board has carefully monitored
the progress of the relevant businesses against agreed milestones, along with the
satisfaction and engagement of Circlers in those geographies through regular
employee surveys and direct feedback from workforce engagement sessions.
In approving the new ESG framework, the Board took into account the views and
ever increasing focus of the Company’s key stakeholders (including our shareholders,
investors, borrowers and our people) on ESG performance, coupled with the Board’s
desire that Funding Circle be a force for good in our communities. The Board also
established a new ESG Committee to oversee the implementation of the ESG
framework and provide regular reports to the Board to ensure ESG considerations
remain at the heart of the Company’s strategic objectives.
Annual Report and Accounts 2020
61
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 including
financial planning, tax, treasury
and procurement;
‐ providing objective and constructive
challenge to management;
‐ being available to all Directors to
provide advice and assistance;
‐ assisting with the development
‐ providing governance advice; and
‐
investor relations;
of strategic proposals; and
‐ working with the CEO to develop
and implement the Group’s
strategic objectives, annual
budget and business plan; and
‐ ensuring effective financial
compliance and control.
‐ scrutinising and monitoring
financial and operational
performance and the Group’s risk
management framework.
‐ ensuring compliance with the
Board’s procedures and with
applicable laws and regulations.
62
Funding Circle Holdings plc
Corporate governance Composition, succession and evaluation
Board Composition
The Board comprises the Chairman,
the Executive Directors and the
Non-Executive Directors, including the
Senior Independent Director. There was
one change to the Board during the year
as previously noted, with Oliver White
succeeding Sean Glithero as CFO in
June 2020. All other current Directors
served throughout 2020. Cath Keers,
Bob Steel and Ed Wray will be stepping
down in 2021, with Helen Beck and
Matthew King joining the Board as new
independent Non-Executive Directors
later this year. More details on these
changes are set out in the Nomination
Committee Report on page 67.
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 or has served on the Board
for a period of more than nine years.
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 have been or will be granted
to Non-Executive Directors under
any of the Company’s share plans
and the options held by the relevant
Non-Executive Directors are all vested.
Further details are set out on page 93.
The Board does not consider that
the historical granting of options
to Non-Executive Directors impairs
the independence of those
Directors concerned.
In addition, Ed Wray and Andrew Learoyd
have served on the Board for more than
nine years (Ed Wray was appointed in 2011
and Andrew Learoyd was appointed to
the Board in 2010, becoming Chairman
in 2016). However, the Company
understands that a Director’s tenure for
the purposes of the Code resets at the
time of IPO (October 2018) when they
take on new roles and responsibilities as
a Director of a listed company. Taking
this into account, together with the fact
that both Ed and Andrew consistently
demonstrate objective judgement and
challenge in their decision making, and
in line with the recommendation of the
Nomination Committee, the Board does
not consider that their tenure in any way
impairs their independence. In the case
of the Chairman, this is further
supported by the results of his annual
appraisal by the Non-Executive
Directors, led by Bob Steel as Senior
Independent Director. Furthermore,
detailed succession plans are in place
for each Board member, which will be
implemented when Ed steps down from
the Board later in 2021 to be succeeded
by Matthew King. Further details of the
Nomination Committee’s consideration
of the Directors’ independence, the
Chairman’s performance review and
succession planning are set out in the
Nomination Committee’s Report on
page 68.
Accordingly, the Board 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. Further detail on the Nomination
Committee’s consideration of the
composition of the Board is set out in
the Nomination Committee’s Report on
pages 67 and 68.
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 reviewed
the other directorships and commitments
held by the Non-Executive Directors.
In particular, the Committee noted
Cath Keers’ executive role with The
Sage Group plc, but confirmed that it
was comfortable with the position,
given that it was temporary pending
Cath stepping down from the Board and
that Cath had remained fully dedicated
to her role with the Company.
See further details in the Nomination
Committee Report on page 68.
In line with the recommendation of the
Nomination Committee, the Board
considers all Directors to be effective,
able to devote sufficient time to
discharge their duties and committed
to their roles. All members of the Board,
with the exception of Cath Keers, Bob
Steel and Ed Wray who will be stepping
down from the Board with effect from
the AGM, will be offering themselves for
re-election at the Company’s AGM in
May 2021, in compliance with the Code.
Board induction and training
All new Directors receive a
comprehensive induction plan on
joining the Board (and a tailored
induction was provided to Oliver White
when he joined the Company in June
2020), which is reviewed and enhanced
as necessary by the Nomination
Committee. This includes the following:
‐ overview of Funding Circle, including
its structure and strategy, 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 professional development of Directors
and employees. The Nomination
Committee also considered, with the
assistance of the Company Secretary,
any development needs or training
requirements of the Directors, including
those arising out of the Board and
Committee evaluation process.
Annual Report and Accounts 2020
63
Composition, succession and evaluation continued
Board induction and training
continued
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. For example,
the Directors undertake annual refresher
training on their duties and responsibilities
as a director of a listed company, and,
along with other Circlers, have taken
part in diversity and inclusion training
as part of the Company’s diversity
initiatives. In addition, those Directors
who sit on the Board of Funding Circle
Ltd also complete annual training on
"CASS" and the Senior Managers
Certification Regime (including the
Company’s new Code of Conduct).
The Board was also given various
presentations during the year by the
Company’s advisers, brokers and senior
management (including a "teach-in"
session by the CFO on some of the
Group’s more complex accounting
estimates and judgements as an action
arising from the Audit Committee’s
effectiveness review), and updated on
key legislative and regulatory changes
by the Company Secretary.
Board effectiveness
The review of Board effectiveness for
2020 was run internally in the final
quarter of the year. The Chairman
considered the benefits of an externally
facilitated Board evaluation but
determined that the internal evaluation
process was sufficiently formal and
rigorous and therefore, on balance, was
appropriate for this year. This will be
reviewed again in 2021. The evaluation
was led by the Chairman and managed
by the Company Secretarial team
following the process set out below:
Tailored questionnaire prepared
covering all aspects of Board
effectiveness including:
‐
‐
‐
‐
‐
‐
‐
the Board’s response
to Covid-19;
the Board’s performance
when compared to 2019;
the effectiveness of the
Board’s internal
relationships and with
the management team;
the effectiveness of the
Board’s engagement
with stakeholders;
the composition,
experience and dynamics
of the Board;
the Chairman’s leadership;
and
the extent to which the
Board fulfils its role and
responsibilities with
particular regard to
strategy, oversight of risk
and succession planning.
64
Funding Circle Holdings plc
Questionnaire
provided to
‐ All Directors
‐ Company
Secretary
Results of the
questionnaire
The results of the
evaluation were
collated by the
Company Secretarial
team and presented
to the Board in
January 2021.
Assessment
The results of the evaluation were
considered and discussed in detail by the
Board and it was agreed that the results
highlighted that the Board is operating
effectively, offering good challenge and
adding value, with improved performance
from 2019. Examples of areas positively
evaluated included:
‐
‐
‐
‐
the Chairman’s leadership;
the Board’s oversight of key risks
and controls;
the response to the Covid-19 crisis, with
the Board taking decisive action and
providing appropriate challenge and
support to management; and
the effective management of remote
meetings to maintain constructive
Board relations and facilitate openness
and debate.
The key areas identified as possible
opportunities to develop the Board’s
effectiveness further include:
‐ more focused executive summaries to
be included in Board papers to enable
more effective pre-reading and facilitate
discussion;
‐ a more structured and proactive focus
on ESG matters, following the Board’s
approval of the ESG policy framework
and establishment of the ESG
Committee; and
‐
increased diversity on the Board,
with diversity remaining a key focus for
the Nomination Committee.
The Chairman, CEO and Company
Secretary are putting in place appropriate
action plans in response to the review
findings and will review progress
during 2021.
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 2020.
Each Committee Chair agreed a tailored
questionnaire which was circulated to
Committee members and other individuals
who regularly attend Committee meetings
by invitation. The results were analysed
by the Company Secretarial team and
discussed in detail by the Committees
where 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 70 to 74 of the Report of
the Audit Committee.
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 102 in the
Statement of Directors’ Responsibilities.
The Company’s external auditors explain
their responsibilities on page 110.
Risk management and internal
control systems
The Board is responsible for promoting
the long-term success of the Company
for the benefit of shareholders, while
taking into account the interests of our
other key stakeholders including our
people, borrowers, investors in our loans
and the communities in which we
operate. This includes ensuring that an
appropriate system of risk governance
is in place throughout the Group. To
discharge this responsibility, the Board
has established frameworks for risk
management and internal control using
a “Three Lines of Defence” model and
reserves for itself the setting of the
Group’s risk appetite.
The Board oversees the Group’s risk
management and internal control system
and is responsible for reviewing its
effectiveness. 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 40 to 47 of the Strategic
Report and the Reports of the Risk and
Compliance and Audit Committees.
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
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.
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 Enterprise Risk
Management Framework ("ERMF").
More information on the ERMF
is provided on page 36.
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
in the “Three Lines of Defence” model.
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 provided by an in-house team led by
an experienced Head of Internal Audit,
with co-source specialist support from
Deloitte as required. 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 73.
Remuneration
The Board has delegated responsibility
to the Remuneration Committee for the
remuneration arrangements of the
Group’s Chairman and Executive Group.
Details about this can be found in the
Directors’ Remuneration Report starting
on page 78.
Annual Report and Accounts 2020
65
Report of the Nomination Committee
The Committee is focused on improving
diversity at all levels of the business and
believes organisations perform best when
diverse voices are heard and individuals
feel they belong.
Members and attendance
Member
Andrew Learoyd (Chair)
Bob Steel (Senior Independent Director)
Cath Keers (Independent Non-Executive Director)
Meetings Attendance
1/1
1/1
1/1
100%
100%
100%
Dear shareholders
On behalf of the Board, I am pleased to
present our Nomination Committee Report
for the year ended 31 December 2020.
Key highlights include:
‐ Overseeing the implementation of
succession plans in respect of
changes to the Board and Global
Leadership Team, including the
nominations of Oliver White as Chief
Financial Officer and Matthew King
and Helen Beck as new Non-Executive
Directors to succeed Bob Steel,
Ed Wray and Cath Keers.
‐ Continuing work on succession
planning for both the Board and the
Global Leadership Team, including
reviewing and updating the plan to
ensure emergency interim cover in
the event of illness or incapacitation
during the Covid-19 pandemic and
the launch of a long-term succession
planning project working with a
leadership advisory firm.
‐ Approving the Group’s diversity
and inclusion initiatives for 2020,
as well as monitoring the impact
of those initiatives.
2021 priorities
‐ Renewing the Board and senior
management succession plans in
light of the recent and upcoming
changes and continuing work on the
long-term succession planning project
with a leadership advisory firm.
‐ Overseeing the appointment of
Matthew King and Helen Beck to the
Board, and ensuring they receive a
comprehensive and tailored induction
process on joining.
‐ Working in conjunction with the newly
formed ESG Committee to oversee
the implementation of the Company’s
diversity, equity and inclusion 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 57 of the
Corporate Governance Report and
further details on the Committee’s roles
66
Funding Circle Holdings plc
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 meets at least once a
year, with additional meetings scheduled
as required. The Committee met once
in 2020 and also met in January 2021,
when it reviewed the results of the
Board and Committee evaluation
process and discussed (among other
things) succession planning and the
overall composition of the Board. In
addition, a number of matters falling
within the Nomination Committee’s
remit (such as changes to the Global
Leadership Team) were discussed at a
Board level during the biweekly Board
meetings that were held in the initial
months of the pandemic.
Board induction and training
All new Directors receive a comprehensive
induction plan on joining the Board, and
a tailored induction was provided to
Oliver White when he joined the Company
in June 2020. A full induction process,
tailored to their experience and roles,
will also be provided to Helen and
Matthew when they join the Board this
year. Further details of the induction
plan are set out on pages 63 and 64 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
Corporate governance regular training on key and developing
areas. Recent training has included
refresher training on the duties and
responsibilities of a director of a listed
company and diversity and inclusion
training taken along with other Circlers
as part of the Company’s diversity initiatives.
Directors of Funding Circle Ltd ("FCL"),
which is regulated by the Financial
Conduct Authority, also undertake
annual training on the protection of
client assets and money ("CASS") and
the Senior Managers Certification
Regime (including on our new Code of
Conduct). The new Directors will also be
required to take part in all applicable
training on joining the Company.
Diversity and inclusion
The Company is committed to creating
a diverse and inclusive culture, free from
discrimination of any kind, as evidenced
by both our diversity policy and our
Company diversity, equity and inclusion
("DEI") statement, and this extends to
Board appointments. While there have
been improvements in gender and
ethnic diversity at both a Board and
Global Leadership Team level over the
last few years, with the appointment of
Cath Keers and Geeta Gopalan to the
Board in 2018, Lisa Jacobs as UK
Managing Director in 2019 and Swati
Lay as Chief Technology Officer and
Vipul Chhabra as US Managing Director
in 2020, the Committee recognises that
there is more work to do.
A breakdown by gender of the Board,
Global Leadership Team and their direct
reports is provided on page 21. In
addition, the UK’s gender pay gap
update for 2019 is available on our UK
website, which shows successive
improvements over the past two years.
The Committee is focused on improving
diversity at all levels of the business,
including the Board, Global Leadership
Team and their direct reports, and
believes that organisations perform
best when diverse voices are heard and
individuals feel they belong. To this end,
the Committee resolved that a female
Board member should be appointed to
succeed Cath Keers.
The Committee has also approved and
overseen the implementation of a number
of diversity and inclusion initiatives in
2020 to drive positive change, including
to achieve our target of 40% female
representation across senior levels by
2025. Further details of these initiatives
are set out on pages 20 and 21, and
include an increased focus on gender
diversity in tech hiring, the launch of our
DEI statement and Code of Conduct and
the roll-out of diversity and inclusion
training, which members of the Board
and FCL Board have undertaken along
with other Circlers. The Committee
receives reports on gender pay gap
data, overall gender diversity, culture
survey scores and completed diversity
and inclusion training to enable it to
monitor the impact of these initiatives.
Equality, diversity and inclusion are
also important parts of the new ESG
framework approved by the Board in
December 2020, which will be rolled
out through 2021, together with a new
diversity and inclusion engagement plan
to help ensure delivery of our objectives.
This will be monitored by the newly
formed ESG Committee (which I chair),
with regular reports provided to the
Board to ensure ESG considerations
remain at the heart of the Company’s
strategic objectives. The Nomination
Committee will work in conjunction
with the ESG Committee to provide a
governance structure to support and
oversee the implementation of our
diversity goals.
Changes to the Board
As referred to in our 2019 report,
following a formal and rigorous
selection process, the Committee
recommended that Oliver White be
appointed as a Director, and Oliver
joined the Board in June this year.
As previously announced, Bob Steel,
Ed Wray and Cath Keers will step down
from the Board with effect from the
AGM, and will not therefore be standing
for re-election.
In line with our succession plan, the
Committee recommended the following
to the Board:
‐
‐
‐
the appointment of Helen Beck as a
new independent Non-Executive
Director and Chair of the Remuneration
Committee, and as a member of the
Nomination and ESG Committees;
the appointment of Matthew King as
a new independent Non-Executive
Director and a member of the Audit
Committee; and
the appointment of Geeta Gopalan as
Senior Independent Director, to
succeed Bob Steel.
In addition, I have taken on the role of
designated Non-Executive Director for
workforce engagement with effect from
1 January 2021, and will work in conjunction
with the newly formed ESG Committee
to ensure the Board continues to fully
engage with Circlers at all levels. It is
expected that Helen will take on this role
once she is fully established on the Board.
The Committee engaged Egon Zehnder in
the search for suitable female candidates
for the role of Remuneration Committee
Chair, and these candidates were
considered against those already
identified by the Committee as part of
its succession planning. The selection
process included Helen meeting with
members of the Global Leadership Team
and the Board and took into account
Helen’s extensive remuneration and
broader human resources experience
(including serving on remuneration
committees). The Company has
engaged Egon Zehnder on previous
leadership searches and succession
planning projects, but Egon Zehnder
does not otherwise have any other
connection with the Company or
individual Directors.
The Committee was of the view that,
given his wealth of financial services
experience and deep understanding of
the Group (being Chair of the FCL Board
and FCL Risk and Audit Committees
and a member of the ESG Committee),
Matthew was the natural choice to join
the Board, in line with the Committee’s
succession plan. Accordingly, the Committee
determined that it was not necessary to
advertise the role or engage an external
search consultancy for this appointment.
Board composition
The Committee assessed the Board’s
current balance of skills, knowledge and
diversity, taking into account the recent
and proposed changes to the Board and
the results of the Board evaluation
process, and how this aligns with the
Company’s strategic priorities. The
Committee concluded that the mix of
the Directors’ skills, experience and
knowledge is appropriate to enable the
Board to effectively discharge its
responsibilities and support the
Company’s future development.
Annual Report and Accounts 2020
67
Report of the Nomination Committee continued
Board composition continued
The Committee also considered the
Directors’ independence, including in
light of the fact that certain of the
Non-Executive Directors hold vested
options granted under the Company’s
pre-IPO share option plan and that
Ed Wray has served on the Board for
more than nine years. Taking into account
the factors set out on page 63 (Board
Composition), the Committee concluded
that these factors did not impair the
relevant Directors’ independence.
See also the statement from Bob Steel
below for further detail on the
Chairman’s performance and tenure.
Chairman’s performance
and tenure
In my role as Senior Independent
Director, I have met with the other
Non-Executive Directors without the
Chairman present to appraise his
performance and to discuss his
tenure and succession. Although
Andrew was appointed to the Board
in 2010, he was only appointed as
Chairman in May 2016 and the
Board understands that the Chair’s
tenure is reset at IPO (October 2018)
for the purposes of the Code, due
to the new responsibilities that are
taken on as a director and Chairman
of a listed company. The Directors
are of the firmly held opinion, taking
into account the unanimously
positive feedback on Andrew’s
leadership, that it is in the best
interests of the Company and its
shareholders that Andrew remains at
the helm at this pivotal time for the
business. Stability of leadership was
particularly beneficial following the
Company’s IPO in 2018 and remains
even more so in the current climate.
Nevertheless, the Committee has
developed a clear succession plan to
cover both interim and longer-term
solutions for the whole of the
Board, including the Chairman.
Bob Steel
Senior Independent Director
68
Funding Circle Holdings plc
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, which was
especially demonstrated during 2020
with the significant increase in Board
and Committee meetings, as well as the
management information provided to
the Directors, as a result of the pandemic.
The Committee also monitors additional
external appointments of the Directors
from both an availability and conflict
of interest perspective, which are not
undertaken without the prior approval of
the Board. As part of this process, the
Committee noted the time commitment
required by Cath Keers’ executive role
with The Sage Group plc in particular.
Following consideration, the Committee
confirmed that it was comfortable with
the position, given that it was temporary
pending Cath stepping down from the
Board and that Cath had remained fully
dedicated to her role with the Company.
The Committee was of the view that
no other Director had taken on any
additional significant commitments in
2020. Accordingly, the Committee
agreed that the external commitments
of the Directors standing for re-election
would not prevent them from
committing an appropriate amount of
time to their roles with the Company.
Succession planning
The Committee has developed and
maintains a succession plan for the
Board and the Global Leadership Team,
which covers both interim and longer-
term solutions and has due regard for
the importance of a diverse pipeline. This
was reviewed and updated in early 2020
to ensure emergency interim cover was
in place in the event of illness or incapacitation
during the Covid-19 pandemic.
The Company’s succession plan was
successfully implemented on several
occasions in 2020, including on the
appointment of Oliver White as Chief
Financial Officer, Swati Lay as Chief
Technology Officer and Vipul Chhabra
as US Managing Director. It has also
been implemented in 2021 as a result
of the upcoming Board changes
(see further details under Changes
to the Board above).
This will continue to be a focus in 2021,
with the Committee looking to update
and enhance the existing succession plan,
including to reflect the recent changes
and ensure diversity remains a key focus.
The Committee has also engaged
a specialist consultant to work on a
long-term succession planning project
to ensure the development of a diverse
pipeline of emerging talent within the
Global Leadership Team (including by
identifying their key strengths and
development needs), as well as
maintaining an awareness of proven
business leaders externally, which
will continue to be a priority for the
Committee in 2021.
Committee effectiveness
As introduced on page 65, the
Committee undertook an effectiveness
review during 2020 whereby each
Committee member completed a
tailored self-assessment questionnaire.
The question set covered topics such as
the composition of the Committee,
succession plans for the Board and
senior management and the process in
respect of Board appointments made or
proposed, and the Committee’s
involvement in such process. The
feedback from the review was positive
and was discussed in detail at the
Committee meeting in January 2021,
including the appropriate frequency of
Committee meetings and succession
planning in particular. The review
process was also instrumental in
directing the Committee’s focus for
2021 (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 2021, 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 (other than Cath
Keers, Bob Steel and Ed Wray, who will
be stepping down with effect from the
AGM) stand for election at the
forthcoming AGM.
Andrew Learoyd
Chair of the Nomination Committee
25 March 2021
Corporate governance Report of the Audit Committee
The Committee’s focus this year was on
ensuring appropriate oversight over the
evolving business and new loan products
as well as continuing to maintain
oversight over the Company’s control
environment under some very
exceptional circumstances.
Members and attendance
Member
Geeta Gopalan (Chair)
Eric Daniels (Independent Non-Executive Director)
Ed Wray (Independent Non-Executive Director)
Meetings
Attendance
3/3
3/3
3/3
100%
100%
100%
Dear shareholders
On behalf of the Board, I am pleased to
present our Audit Committee Report for
the year ended 31 December 2020. The
exceptional and unprecedented challenges
posed by the Covid-19 pandemic has
clearly tested the Group’s business and
the strength and robustness of the
financial processes and controls. The
Group’s control environment has been
resilient and adapted well to remote
working and new product launches in
the UK and US. The Committee would
like to thank all colleagues for the
continued focus and support of
customers at this time, all the while
maintaining a strong control environment.
The Committee’s focus this year was on
ensuring appropriate oversight over the
evolving business and new loan products
as well as continuing to maintain
oversight over the Company’s control
environment under some very
exceptional circumstances.
Key highlights during the
year include:
‐ Focusing on the integrity of financial
statement reporting for both the
Half Year Report and Annual Report
and Accounts, the significant
accounting judgements, estimates
and disclosures, with careful
consideration of the impact of
Covid-19 on the valuation of loan
assets and bond liabilities, expected
credit losses, liquidity, financial
covenants and the Group’s ability to
continue as a going concern, together
with its viability disclosures. In this
context, the Committee also reviewed
guidance published by regulators in
response to Covid-19 to ensure the
disclosure was detailed and
transparent and the guidance
appropriately applied.
‐ Reviewing the effectiveness of the
Group’s internal controls and the
internal audit function, including
monitoring the development of the
in-house internal audit team.
‐ Reviewing and approving revisions to
the 2020 internal audit plan and the
internal audit plan for 2021 (including
changes made as a result of Covid-19),
in each case providing challenge to
priorities, processes and reporting.
‐ Reviewing and approving the external
audit plan and fees for the 2020
financial year and carrying out a
formal evaluation to assess the
independence, objectivity and
effectiveness of the external auditors.
‐ Reviewing and approving the Group’s
non-audit services fees in line with
the Group’s policy.
‐ Recommending the reappointment of
the external auditors.
‐ Reviewing the adequacy and security
of the Group’s whistleblowing
arrangements, receiving whistleblowing
updates and providing reports to the
Board where appropriate.
‐ Reviewing and overseeing (in
conjunction with the Risk and
Compliance Committee) the Group’s
procedures and policies for detecting
and preventing fraud and its systems
and controls for preventing bribery
and money laundering.
2021 priorities
‐ Continue the assessment of
accounting judgements and
estimates, particularly in relation to
valuations of loans and expected
credit loss provisions associated with
SMEs which are heavily impacted by
the prevailing macroeconomic
environment and the accounting
treatment in respect of the new loan
products which will evolve as new
lending schemes are rolled out and
core lending restarts.
‐ Continue to review the Group’s
internal financial controls and control
systems to ensure these are
developed to reflect the Group’s
evolving business, including
government guaranteed loans and
the relaunch of term loan products, as
well as controls on balance sheet and
funding management.
‐ Oversee, in conjunction with the Risk
and Compliance Committee and
internal audit function, enhancements
to the Group’s collections and
recoveries processes, controls and
systems to ensure the delivery of
consistent and effective borrower
outcomes as part of a robust credit
cycle management process.
Annual Report and Accounts 2020
69
Report of the Audit Committee continued
2021 priorities continued
‐ Oversee the ongoing development of
the in-house internal audit function,
along with the requisite formal
evaluation of its effectiveness.
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 53 to 55. Furthermore, the
Committee undertakes appropriate
training, including presentations from
senior management and the external
auditors, to ensure the Committee is
kept fully appraised of the Group’s
evolving business, key accounting
policies and principles, as well as key
legislative and regulatory changes. 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 and
systems 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 57
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
2020. All members of the Committee
attended all meetings, together with (by
invitation) representatives of the
external auditors, the Head of Internal
Audit, the CEO, the Chairman, 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 Financial
Conduct Authority, it has its own Audit
Committee, chaired by one of FCL’s
independent directors, Matthew King.
The FCL Audit Committee meets at the
same time as the Committee and
Matthew King has therefore attended
all Committee meetings.
The external auditors and Head of
Internal Audit 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 audit
partner and the Head of Internal Audit,
as well as the CFO.
A summary of the Committee’s 2020
highlights and 2021 priorities is set out
on page 69, with further detail on certain
key matters which warrant further
consideration set out below, including
the key considerations and conclusions
of the Committee.
From 2021, the Committee will meet
four times a year to ensure we continue
to provide appropriate oversight of the
Group’s control environment and evolving
business with additional products.
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 half year ended 30 June 2020 and year ended
31 December 2020 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 going concern and viability of the Group.
The period over which the Directors have determined
the viability assessment is three years.
The onset of Covid-19 and uncertainty it has created
has led to increased importance of clear disclosure
and transparency with respect to risks, going concern
and viability.
The Committee reviewed reports from management that set out its
view on the shorter-term going concern and longer-term viability of the
Group. These included:
‐
reviewing the Group’s principal risks as set out on pages 40 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 short and medium-term plan, its cash and liquidity;
reviewing the outcomes of stress testing after applying severe but
plausible scenarios aligned to the principal risks; and
reviewing the risk, going concern and viability disclosures with regard
to the clarity surrounding scenarios, uncertainties, sensitivities and
management actions with regards to Covid-19 in particular.
Having challenged and considered the outcomes of management’s
assessment, the Committee concluded to recommend the Viability
Statement to the Board for approval and that related disclosures are
sufficiently clear and transparent.
70
Funding Circle Holdings plc
Corporate governance Reporting issue
Audit Committee action
Goodwill, non-financial assets and carrying value of
investments in the Parent Company
The Group is required to annually assess any goodwill
and non-financial assets for impairment. The Group
holds goodwill in respect of the previous acquisition of
Endurance Lending Network in the US (referred to as
FC USA 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
Parent Company accounts in respect of the
UK investments.
However, following a strategic re-set of the US business,
along with an update to the Group’s income and cost
forecasts, the underlying projected cash flows of the
US business cash-generating unit were insufficient to
cover the carrying value of goodwill and the Parent Company
investment in the US was also significantly impaired.
Accordingly, the Group has taken an impairment
charge of £13.7 million consisting of goodwill of
£12.0 million taken in June 2020 and other tangible
and intangible assets of £1.7 million (of which
£0.6 million is in relation to assets associated with the
developing markets business). Additionally the Parent
Company investment of in the US has been written
down by £155.9 million.
Exceptional items
The Group has a defined accounting policy for the
treatment of non-recurring and material items
as exceptional.
The impairment of goodwill and right-of-use assets
totalling £13.7 million has been disclosed as an
exceptional item. In 2019, the impairment of assets
totalling £34.3 million had been disclosed as an
exceptional item.
The Group also incurred restructuring costs during
the year of £5.0 million for the US and European
businesses which have been treated as exceptional.
The Group additionally presented exceptional items
in a columnar fashion on the consolidated statement
of comprehensive income in order to increase
transparency and understanding for readers.
Valuation of financial instruments
Following the introduction of the warehouses and ABS
programme in 2019 and continued investment in these
products, as well as the launch of CBILS, in 2020, 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 onset of Covid-19 has significantly impacted
the fair value of some of these investments during
the year and led to increased estimation uncertainty.
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 2021 budget process.
The Committee also reviewed papers from management during the
year which set out the key assumptions underpinning the impairment
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, including their challenge of the discount rates and
management’s medium-term plan assumptions.
After due challenge and discussion, the Committee concluded that the
goodwill associated with the businesses in the US was impaired and
should be written down. The Committee also concluded that there was
insufficient headroom in the Parent Company investment in the US
business and this should be partially 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.
The Committee received papers 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 and challenged the appropriateness
of presenting the impairment separately from other costs.
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.
The Committee received and reviewed papers 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, including benchmarking
the assumptions with the external auditors’ internal valuations team.
The Committee considered the disclosures within the Annual Report
and after due challenge concluded that the valuations were reasonable
and the disclosures were appropriate.
Annual Report and Accounts 2020
71
Report of the Audit Committee continued
Significant issues considered in relation to the financial statements continued
Reporting issue
Audit Committee action
Loan repurchase liability (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 139 to 141, in return for a fee premium.
The Group is therefore required to make its best
estimate for the expected credit losses 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 including the significant impact
of Covid-19.
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 130 and in the glossary on
page 171.
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.
Fair, balanced and understandable reporting
The Board is required to report as to whether the
contents of the 2020 Annual Report and Accounts,
when taken as a whole, is fair, balanced and
understandable.
72
Funding Circle Holdings plc
The Committee received and reviewed information from management
during the year on the levels of loan repurchases and the associated
repurchase liability also referred to as expected credit loss provisions.
The Committee also received the views of the external auditors,
including the use of their own internal specialist to challenge
management’s assumptions.
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 considered separately disclosing the impact that
Covid-19 had had on the Group’s investment portfolio during 2020.
However, in light of the level of estimation and judgement involved,
and following the FRC’s published guidance, the Committee concluded
that the Group should not seek to quantify or present the impact as a
specific one-off or non-recurring exceptional item or treat it as an
alternative performance measure.
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 2020 Annual Report and
Accounts, when taken as a whole, is fair, balanced and understandable.
Corporate governance Whistleblowing
The Board adopted a revised
whistleblowing policy in March 2020,
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. Where
it considers appropriate, the Committee
raises such concerns to the Board.
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, and Nick Morrison was appointed
as the Company’s lead audit partner
in respect of the year ended
31 December 2019.
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,
and this will remain an area of continued
focus to ensure controls are developed
and improved to reflect the Group’s
evolving business, including the new
government guaranteed loan products
and the relaunch of our term loan products.
In particular, the Committee will
oversee, in conjunction with the Risk
and Compliance Committee and Internal
Audit function, enhancements to the
Group’s collections and recoveries
processes, controls and systems to
ensure the delivery of consistent and
effective borrower outcomes.
Internal audit
The Group has established an in-house
Internal Audit team led by an experienced
Head of Internal Audit, with co-source
specialist support provided by Deloitte
as required. The Internal Audit work
focuses on areas of key business risks
and priorities, significant processes and
current areas of concern to define the
audit plan.
Appropriate adjustments were made to
the Internal Audit plan throughout 2020
in response to the heightened levels of
uncertainty and risk caused by Covid-19.
All proposed audit plan adjustments
were reviewed, challenged and approved
by the Audit Committee. Areas reviewed
by the Internal Audit team during
2020 included:
‐ development, deployment and
operation of the Coronavirus Business
Interruption Loan Scheme product;
‐ credit decisioning strategy updates;
‐ collections, recoveries and litigation
activities and arrangements in the UK,
US, Germany and the Netherlands;
‐ AML & sanctions framework
in the US; and
‐ procurement and third party
management.
The Internal Audit plan for 2021 was
approved by the Audit Committee in
December 2020 and aligns to areas
of highest inherent risk and continued
strategic, operational and regulatory
focus, including:
‐ strategic change portfolio
management;
‐ product governance and operational
management;
‐ credit portfolio monitoring and
stress testing;
‐ electronic payments;
‐
interest and repayment calculations;
‐ operational resilience; and
‐ balance sheet management.
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, and has been pleased with the
improvements to the function following
the introduction of the in-house team
and co-source support. A formal review
process of the effectiveness of the
Internal Audit function will take place
in 2021.
Annual Report and Accounts 2020
73
Report of the Audit Committee continued
External auditors continued
The Committee undertook a formal assessment of PwC’s effectiveness during 2020 by following the process below:
Tailored questionnaire
prepared covering
Questionnaire
provided to
Results of the
questionnaire
Assessment
‐ Handover to new lead audit
partner and improvement
following 2019 effectiveness
review
‐ External audit partner
accessibility and time
commitment
‐ Quality of the team
‐ Quality and cost of the
service provided
‐ Accounting, technical and
governance insight
‐
Independence and
professional scepticism
‐ Quality of communication
and interaction
‐ Committee members
‐ Chair of FCL Audit
Committee
‐ CFO
‐ Director of Finance
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 PwC’s audit plan,
reports, conclusions 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
this was not impacted by remote
working) and that PwC remain
independent and objective and
possess the skills and experience
required to fulfil the external auditor’s
duties effectively and efficiently.
Following the above evaluation, the
Committee has recommended to the
Board that PwC be 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 2021.
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 is in line with PwC’s
internal policies and the FRC’s revised
ethical standard, and gives 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
74
Funding Circle Holdings plc
a summary of all non-audit services is
provided at Committee meetings.
During the year ended 31 December
2020, PwC were engaged to provide
non-audit services relating to the following:
Description
Interim review of Half Year
results announcement
CASS reporting
Other assurance
related work
Total
£000
118
80
119
317
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). PwC are prohibited from
providing certain non-audit services
to safeguard auditor objectivity and
independence, including but not limited
to internal audit work, valuations work
and tax-related work.
The audit fees payable to PwC for the
year ended 31 December 2020 were
£700,000 and the non-audit service
fees were £317,000. Further details on
audit and non-audit fees are shown in
note 4 to the financial statements.
Committee effectiveness
As introduced on page 65, the
Committee undertook an effectiveness
review during 2020 whereby each
Committee member, and by invitation
the CFO and the Chair of the FCL Audit
Committee, completed a tailored
questionnaire. The question set covered
topics such as the:
‐ composition of the Committee;
‐ quality and timeliness of
information provided;
‐ Committee’s oversight of, and
ongoing engagement with, the
internal and external auditors; and
‐ Committee’s understanding of the
financial reporting and key financial
issues facing the Group as a result of
the prevailing economic climate and
Group’s evolving business.
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 2021, including for
an additional Committee meeting to
be held each year in recognition of the
Group’s evolving and increasingly complex
business and for management to provide
a "teach-in" session to the Board on
some of the more complex accounting
estimates and judgements.
PwC have confirmed to the Committee
that they remained independent during
the year.
Geeta Gopalan
Chair of the Audit Committee
25 March 2021
Corporate governance Report of the Risk and Compliance Committee
The Committee has monitored
the Group’s risk management and
governance framework in a year which
has seen unprecedented change and
challenges due to the pandemic.
Members and attendance
Member
Eric Daniels (Chair)
Geeta Gopalan (Independent Non-Executive Director)
Hendrik Nelis (Non-Executive Director)
Meetings
Attendance
5/5
5/5
5/5
100%
100%
100%
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 2020.
The Company’s approach to risk and
risk management, together with the
principal risks that face the Group, is set
out on pages 36 to 47 of this report. The
Committee has monitored the Group’s
risk management and governance
framework in a year which has seen
unprecedented change and challenges
due to the pandemic. I am pleased
with the response of the Group’s risk
management capabilities in the face
of these challenges, which enabled
Funding Circle to respond quickly,
pivoting to government-guaranteed
loans to support our customers and the
broader economy, while also ensuring
appropriate processes and controls
were adopted to protect investors’ returns.
The Committee’s highlights from 2020
are set out below.
‐ Continued focus on funding
and liquidity risk, both to ensure
diversification of funding sources
(including for the government
guaranteed loan products) and to
maintain a prudent level of balance
sheet liquidity. The Committee
recognised funding and liquidity
risk as an additional principal risk
and developed and implemented
a specific funding and liquidity
risk management framework in
early 2020, which was reviewed
and enhanced throughout the
year. As part of this process, the
Committee approved the establishment
of a new executive level Balance
Sheet Management Committee to
oversee balance sheet strategy and
risk and to review capital, funding
and liquidity strategies.
‐ Conducted a detailed review of
the Group’s people risk (excluding
the Board and Global Leadership
Team, which falls within the remit of
the Nomination Committee), including
monitoring the transition to home
working and reallocation of staff
to different teams in the face of the
pandemic, and ensuring the provision
of appropriate support to Circlers.
The Committee also reviewed the
Group’s employee survey results,
with a particular focus on these
issues, as well as the importance
of diversity and inclusion.
‐ Received regular reports on the
information security and technology
risks, especially in the context of the
move to remote working and the
increased risk of cyberattacks in light
of the pandemic, and challenged the
priorities on outstanding internal audit
items to ensure high risk
vulnerabilities were addressed.
‐ Oversaw steps to improve borrower
outcomes and protect vulnerable
customers, while also protecting
investor returns. This included
tightening new lending criteria,
augmenting capacity and enhancing
quality monitoring in the collections
and recoveries team and offering
forbearance and curing plans to
customers in difficulty. As part of
this process, the Committee also
monitored complaints to ensure
they were appropriately addressed.
‐ Reviewed and challenged risk
assessments of the new government
guaranteed loan products and oversaw
the implementation of new processes
to support those schemes, including
robust controls, independent quality
checks and continued monitoring
and oversight of the programmes
(including to manage the risks of
financial crime).
‐ Reviewed and challenged the Group’s
portfolio loss forecast, including its
methodology and assumptions, for
use to assess the fair market value
of the Company’s loan assets and
bond liabilities (in conjunction with
the Audit Committee).
Annual Report and Accounts 2020
75
Report of the Risk and Compliance Committee continued
‐ Oversaw the Company’s engagement
with the Financial Conduct Authority
("FCA"), given the increased scrutiny
of the regulator (particularly with
regards to ensuring viability) in the
light of the pandemic, including in
relation to liquidity, partial repayments
(which were approved by the Committee
to enhance borrower and investor
outcomes) and forbearance plans.
‐ Reviewed and challenged risk
assessments (including, in particular,
people risk) in relation to the Company’s
restructuring in Europe and the US.
2021 priorities
‐ Continue to review of the Group’s
risk strategy, risk management
capabilities and risk tools to reflect
the Company’s evolving business,
new loan products and any emerging
risks by, among other things, reviewing
and revising the Enterprise Risk
Management Framework ("ERMF")
as necessary and improving risk
management controls, including
through the increased use of centralised
recordkeeping in a governance risk
and compliance tool to enable clear
visibility of control ownership and
risk mitigation relationships.
‐ Continue to monitor the economic
and political environment, including
in relation to the pandemic and the
UK’s exit from the European Union,
and contingency planning to respond
and mitigate the impact of any adverse
macroeconomic conditions. The
Committee will also continue to
monitor the health of the loan portfolio
and stress/loss forecast simulations
in the context of risk volatility.
‐ Continue to expand the Group’s
balance sheet management
capabilities, providing close oversight
of the newly created Balance Sheet
Management Committee to track the
embeddedness of new balance sheet
stress testing, capital and liquidity
risk appetite metrics and deepened
balance sheet investment oversight.
‐ Continue to review the Group’s
people risk, particularly in the light
of any continuing restrictions due
to the pandemic.
‐ Oversee, in conjunction with
the Audit Committee and internal
audit function, enhancements to the
Group’s collections and recoveries
controls and systems to ensure
the appropriate management of
borrowers in difficulty (including
vulnerable customers), while also
maximising investor returns, including
in the event of an increased volume of
collections activity.
‐ Continue to focus on information
security and technology risks to
ensure high risk outstanding internal
audit items and vulnerabilities are
appropriately prioritised.
‐ Continue to monitor and oversee
controls relating to loan products
under the existing, and any new,
government guaranteed loan
programmes (including to manage
the risks of financial crime) and on
the restart of the Company’s core
term loan products.
‐ Continue to monitor model
performance and the adequacy
of model governance and control
framework to ensure ongoing viability
of significant models in use.
Role and composition
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 57 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.
76
Funding Circle Holdings plc
The Committee reports regularly to
the Board on its activities and makes
recommendations, all of which have
been accepted during the year.
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
53 to 55 of this report.
Operating rhythm
of the Committee
The Committee met five times during
2020, including two off cycle meetings
held in March and September in response
to risk matters arising as a result of the
pandemic. All members of the Committee
attended all meetings, together with (by
invitation) the CRO, CEO, CFO, Chairman
of the Board, Company Secretary, Head
of Internal Audit 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 Funding Circle Ltd ("FCL") is
authorised and regulated by the FCA,
it has its own Risk and Compliance
Committee, chaired by FCL’s
independent director, Matthew King
(who will also be joining the Board later
this year). The FCL Risk and Compliance
Committee meets at the same time
as the Committee, and Matthew King
has attended all Committee 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 in
place, and as reviewed by the
Committee on a regular basis.
During 2020, 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 2020 highlights and
2021 priorities is set out on page 75,
including the key considerations and
conclusions of the Committee. In
addition, a number of risk management
issues were discussed and decisions
made at the biweekly Board meetings
held during the initial months of
the pandemic. This included the
decision to temporarily suspend our
non-government backed lending and
Corporate governance Following a productive discussion,
the Committee agreed a number
of actions to be implemented,
including that the Committee
include model risk as an additional
focus for 2021 and continue to monitor
people and information security and
technology risks. The Committee also
discussed environmental, social and
governance ("ESG") related risks, and
it was subsequently agreed that the
newly formed ESG Committee would
have primary responsibility for the
oversight of such risks in line with the
enhanced ESG framework approved
by the Board in December 2020,
with the support of the Committee
where appropriate.
Eric Daniels
Chair of the Risk and Compliance
Committee
25 March 2021
retail investment in the UK, the
onboarding of a range of new investor
relationships and the renegotiation of
the terms of certain of the Group’s
investment positions. The CRO also
provided a weekly risk update to the
Board (and continues to do so).
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 risk control self
assessments ("RCSA") and ongoing
risk reports including risk appetite;
review of internal risk controls
(further details of which are
covered on page 65 of the
Corporate Governance Report);
review of the compliance programme
and the compliance and risk
monitoring and testing plan;
‐ approval of funding and liquidity risk
management framework; and
‐ approval of annual risk
assessment summary.
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 65, the Committee
undertook an effectiveness review
during 2020 whereby all Committee
members, and by invitation the CRO and
Chair of the FCL Risk and Compliance
Committee, completed a tailored
self-assessment questionnaire. The
question set covered topics such as
the composition of the Committee,
the quality and timeliness of information
provided, the Committee’s oversight of
the Group’s risk management systems
and its understanding of the key and
emerging risks facing the Group.
Annual Report and Accounts 2020
77
Directors’ remuneration report
The revised policy proposals achieve a more
market aligned and balanced package with
appropriate focus on short and long term
performance, underpinned by our core
reward proposals.
Dear shareholders
On behalf of the Board, I am pleased to
present the Directors’ Remuneration
Report for the year ended 31 December
2020. In addition to my annual statement
as Chair of the Remuneration Committee,
this report contains:
‐ our proposed Directors’ Remuneration
Policy (the “Remuneration Policy”),
which will be put to a binding
shareholder vote at the 2021 AGM
and will apply for three years from
the date of approval; and
‐
the Annual Report on Remuneration,
which sets out payments made to
the Directors for the year ended
31 December 2020 and how our
proposed Remuneration Policy is
intended to be implemented in 2021.
The Annual Report on Remuneration
is subject to an advisory shareholder
vote at the 2021 AGM.
2020 Committee highlights
‐ Consulted with shareholders to guide
our review of our Remuneration Policy.
‐ Considered the appropriate
remuneration package for our
new CFO.
‐ Oversaw the development of a new
approach to reward members of
the Global Leadership Team and all
other Circlers.
‐
Introduced an all-employee Share
Incentive Plan (“SIP”) to further align
all Circlers with shareholder interests.
2021 Committee priorities
‐ Continue to engage with shareholders
in order to receive support for our
proposed Remuneration Policy.
‐
Implement the Remuneration Policy
subject to shareholder approval at
the AGM.
‐ Continue to monitor remuneration
practice across the Company as a
whole, keeping abreast of market
practice.
Review of 2020
The Covid-19 pandemic has caused
uncertainty for many people and
especially for our small business
customers over the course of 2020 and
remains a very real challenge at the time
of writing this annual statement. I would
like to start by recognising and thanking
all our Circlers who have responded so
well, demonstrating the Funding Circle
values as they quickly adapted to new
ways of working. This enabled Funding
Circle to become part of the solution in
getting much needed government
guaranteed funds to borrowers in both
the UK and the US and to support our
existing borrowers, many of whom
experienced unprecedented difficulties
when the pandemic hit. As well as a
strong second half in terms of investor
and borrower demand, with record
originations of £2.7 billion and Loans
under Management (LuM) of £4.2 billion,
the team has carefully managed the
existing loan book, expects positive
investor returns in each cohort and
has managed the Group’s cost base
effectively. I am proud of how we
have performed this year and of the
leadership shown by our CEO, CFO and
Global Leadership Team through this
difficult time.
I am also pleased to say that, while the
Global Leadership Team and the Board
volunteered 20% reductions to their
salaries and fees over the period from
March to May 2020, there were no salary
reductions for the wider employee base
and the Company did not claim any
furlough or other government support
for payment of salaries.
Board changes
Sean Glithero resigned as CFO on
20 May 2020 and Oliver White was
subsequently appointed as CFO on
15 June 2020. Sean did not receive any
payments linked to his resignation.
Unvested Growth Shares and unvested
LTIP awards held by him lapsed in
full on cessation of his employment.
Oliver White’s remuneration
arrangements were determined in
accordance with the Remuneration
Policy as follows:
‐ A salary of £400,000 per annum.
‐ A 2020 performance based LTIP
award equal to 200% of salary subject
to EPS and Fee Income performance
over a three year performance period
ending 31 December 2022. The
maximum opportunity was set circa
30% less than the maximum
opportunity under the Remuneration
Policy. See page 92 for further details.
‐ A buy-out award in compensation for
the forfeiture of his 2019 and 2020
bonus from his previous employment.
Further details of the buy-out awards
are set out on page 92.
The Committee considered the
remuneration arrangements to be
appropriate in the context of recruiting a
high calibre and experienced individual
given the scale and complexity of the
business as well as the requirement for
specific financial services skills.
78
Funding Circle Holdings plc
Corporate governance ‐
• Key terms: Restricted Share
awards will vest after three years
following the date of grant, and will
then be subject to a two-year
holding period, ensuring that the
overall time horizon of awards is
five years from the date of grant.
Vesting of awards for the Executive
Directors will be subject to robust
financial and non-financial
underpins. See page 98.
Introducing an annual bonus enables
us to incentivise and reward Executive
Directors for the achievement of
stretching annual financial and
strategic objectives and deliver a link
between pay and performance. It also
brings the Remuneration Policy more
in line with other FTSE Main Market
listed companies and helps to align
the Executive Directors’ incentive
structure with the wider Group (as an
annual cash bonus was introduced in
2020 for the leadership team and for
those in manager and specialist roles).
40% of any bonus earned would be
deferred into shares for three years
therefore providing additional
longer-term shareholder alignment.
‐ Ensuring total target remuneration
does not increase. The quantum
of Restricted Shares and annual
bonus awards has been calibrated to
ensure that the target remuneration
opportunity is unchanged from the
previous Remuneration Policy.
The total maximum remuneration
opportunity is however significantly
lower than under the previous
Remuneration Policy. The CEO’s total
incentive opportunity (which currently
includes a performance based LTIP
only) has decreased by circa 46%,
reflecting that the performance based
LTIP has been replaced with a
performance based annual bonus
and Restricted Shares. If the
performance based LTIP had been
replaced purely with Restricted
Shares, the overall reduction in
incentive opportunity would have
been in excess of 50%.
Review of the Executive
Directors’ Remuneration Policy
As I noted in my annual statement last
year, the Committee conducted a
comprehensive review of the existing
Remuneration Policy in 2020 which
included consultation with our major
shareholders and proxy agencies.
We have rebalanced the package from
a highly leveraged one (with a low
salary and high long-term only variable
component) to a more market aligned
and balanced package with appropriate
focus on short and long term performance,
including an annual bonus and Restricted
Shares. More details on the proposed
changes are set out below:
‐ Replacing the current performance
based LTIP with Restricted Shares.
The rationale driving this change
includes:
• Better alignment with our
remuneration philosophy and with
shareholders: The Committee
considered at length introducing
Restricted Shares following its IPO
in 2018 given our remuneration
philosophy and that Restricted
Shares were (and continue to be)
operated below Board level.
However it was felt at the time that,
as the use of Restricted Shares
within the UK environment was very
uncommon, a more conventional
performance based LTIP for
Executive Directors was more
appropriate. As part of the Policy
review, the Committee reconsidered
Restricted Shares for Executive
Directors and, on reflection, we
strongly believe it is the right
approach for Funding Circle.
Restricted Shares fully align with
our remuneration philosophy of
ensuring that senior management
are significant share owners,
promoting good stewardship and
incentivising Executive Directors
to create long term value as the
business continues to mature.
• Simplification: Operating Restricted
Shares provides a much simpler
long-term incentive framework than
the current LTIP which is measured
against a performance matrix. In
addition, the move to Restricted
Shares removes the significant
challenges of setting stretching
yet realistic long-term targets for
a maturing business.
CEO salary review
As part of the Remuneration
Policy review and consultation with
shareholders, the Committee took the
opportunity to review the CEO’s salary
positioning. The CEO’s salary has
remained unchanged since 2017 and
is significantly below market, being
amongst the lowest in the FTSE Main
Market. The Committee strongly
believes that an increase to the CEO’s
annual base salary is needed to address
some of the gap to market, bring the
ratio of salary to other compensation
more into line with market practice and
to begin to reflect the size and complexity
of Funding Circle’s operations. We believe
that a salary of £400,000, which still
remains below the lower quartile of
FTSE SmallCap Top Half companies,
is appropriate at this current time.
While the Committee recommends that
this new salary level is established for
the CEO, Samir Desai has expressed a
preference for no change to his current
salary of £210,000 in the current
economic and societal climate and has
therefore notified the Committee of his
intention to waive the increase for 2021.
Incentives will be determined based on
the reference salary of £400,000.
Taking into account the repositioning
of the CEO’s salary (as noted above)
his total maximum remuneration
opportunity has decreased by circa
33%. Once the waiver by the CEO of any
increase to his 2021 base salary is also
taken into account, his total maximum
remuneration opportunity has
decreased by circa 42%.
Annual Report and Accounts 2020
79
Directors’ remuneration report continued
CEO salary review continued
Illustration of calibration of the proposed total remuneration for the CEO.
2,190
1,980
£2,500k
£2,000k
£1,500k
£1,000k
£500k
0
210
2020 opportunity
at maximum
1,200
1,200
990
210
533
267
400
1,010
533
267
210
1,277
533
533
210
1,467
533
533
400
2020 opportunity
at target/LTIP
reduced by 50%
2021 opportunity
at target
(pre waiver)
2021 opportunity
at target
(post waiver)
2021 opportunity
at maximum
(post waiver)
2021 opportunity
at maximum
Salary
Bonus
PSP
Restricted shares
Remuneration arrangement for 2021
The CFO and Non-Executive Directors will not receive a salary/fee increase in 2021.
The maximum annual bonus entitlement for the CEO and CFO will be equal to 133% of reference salary and 100% of salary
respectively. The annual bonus measures will be AEBITDA, Fee Income and strategic objectives (each weighted one-third),
with the intention that the targets to achieve the maximum bonus are appropriately calibrated to reflect the growth aspirations
for the Group. 40% of any bonus earned will be deferred into shares for three years.
The CEO will be awarded a grant of Restricted Shares with a value equal to 133% of reference salary and the CFO an award with a
value equal to 100% of salary. Vesting of the Restricted Shares will be subject to a financial underpin based on operating income
as well as qualitative underpins to ensure that Executive Directors are not rewarded where the Committee considers there to
have been a failure in performance, including serious breach of regulation, material reputational damage and gross misconduct.
The financial underpin has been set such that annual operating income must be on average £150 million over the period of three
years from 2021 to 2023. Prior to the vesting of the Restricted Shares the Committee will assess whether actual performance of
the Company and Executives is reflected to guard against payment for failure or against windfall gains. The Committee retains
the discretion to make any adjustment to vesting if it deems necessary.
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.
Funding Circle is a founder-led business. From inception, the remuneration philosophy has been to support share ownership
across the business and every employee that has joined Funding Circle has been entitled to an equity award. Equity incentives
encourage all Circlers to behave as owners – taking decisions that balance long-term value creation with achieving shorter-term
strategic priorities. See page 89 for the key elements of the incentive arrangements.
CEO v employee pay ratio
All FTSE Main Market listed companies with more than 250 UK employees are required to publish the pay ratio of the total
remuneration of the CEO compared to other UK employees. Our median ratio was 3.8:1 for 2020, which is amongst the lowest
across the FTSE Main Market. Further information can be found on page 97.
Conclusion
I look forward to receiving your support at our 2021 AGM, where I will be available to respond to any questions shareholders may
have on this report, our proposed Remuneration Policy or in relation to any of the Committee’s activities.
Cath Keers
Chair of the Remuneration Committee
25 March 2021
80
Funding Circle Holdings plc
Corporate governance Remuneration Policy
The Remuneration Policy, as set out in this section, applies to the roles of Chair, Executive Director and Non-Executive Director. If
approved by the shareholders in a binding vote at the 2021 AGM in May, the Remuneration Policy will apply for a maximum of three
years from the AGM.
Changes to the Remuneration Policy and summary of decision making process
The Committee has conducted a comprehensive review of the Remuneration Policy to ensure that it continues to align with our
remuneration philosophy of share ownership and core reward principles. In determining the changes to the Remuneration Policy
the Committee followed a robust process which included discussions on the executive remuneration structure at several meetings.
The Committee considered input from management and our independent advisers, consulted with major shareholders and
took into account views raised by Circlers during workforce engagement sessions. As set out on page 79, the key changes to
the Remuneration Policy are the replacement of our current performance based LTIP with Restricted Shares and the introduction
of an annual bonus. Other minor changes have been made to the wording of the Remuneration Policy to simplify and aid its
operation and to increase clarity.
Executive Directors’ remuneration
Element of
remuneration
Key features
Purpose and
link to strategy
Maximum opportunity
Performance measures
Salary
Reviewed annually in March.
Salaries take account of the
external market and the overall
employee context.
Supports the attraction
and retention of the
best talent.
No prescribed maximum
salary level or salary
increases.
n/a
Account will be taken of
increases applied to
employees as a whole when
determining salary increases.
Committee retains the
discretion to award higher
increases where it considers it
appropriate, such as, but not
limited to:
‐ where an Executive Director
has had a change in scope
or responsibility;
‐ where an Executive
Director’s development or
performance in role has
changed (e.g. to align a
newly appointed Executive
Director’s salary with the
market over time);
‐ where there is a significant
change in the size and/or
complexity of the Company;
and
‐
where salary has previously
been positioned behind
market, and there is a
re-basing of the overall
remuneration package.
Allowances
and benefits
Executive Directors’ benefits
currently include, but are not
limited to, 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.
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. Benefits
offered to Executive Directors
are in line with those available
to other employees in the Group.
n/a
Annual Report and Accounts 2020
81
Directors’ remuneration report continued
Executive Directors’ remuneration continued
Element of
remuneration
Pension
Key features
Executive Directors are
entitled to receive employer
contributions to the Funding
Circle Ltd defined contribution
pension plan.
Individuals are entitled to
receive some or all of their
pension allowance as cash in
lieu of pension contribution.
Purpose and
link to strategy
To provide retirement
benefits for Executive
Directors.
Maximum opportunity
Performance measures
n/a
Maximum contribution in line
with contribution to other
employees in the Group,
which is currently 5%
of salary.
All-employee
plans
Executive Directors are eligible
to participate in HMRC
tax-efficient plans that are
available to all employees.
To encourage share
ownership and
alignment with
shareholders.
Participation levels are in line
with HMRC limits.
n/a
To motivate and
reward the
achievement of
the Group’s annual
financial and
strategic targets.
A maximum opportunity
in respect of any financial
year of:
CEO: 133% of salary.
Other Executive Directors:
100% of salary.
Measures and targets will
normally be set annually by the
Committee and will be in line
with Funding Circle’s strategy.
A mix of both financial and
non-financial measures will be
used, with at least 60% of the
annual bonus normally based
on financial measures.
The target annual bonus is 50%
of maximum opportunity, with
100% of maximum payable for
maximum performance. Details
of pay-outs between these
levels will be disclosed in the
relevant Directors’
Remuneration Report.
Funding Circle currently operates
a Share Incentive Plan.
Annual Bonus Awards are based on
performance (typically
measured over a financial
year) against key financial and
non-financial measures.
40% of any bonus earned will
normally be deferred into
shares for three years.
The Executive Directors
may, at the discretion of the
Committee, receive dividend
equivalents on the deferred
shares.
Malus and clawback provisions
apply.
The Committee has discretion
to amend the pay-out should
any formulaic outcome not
reflect the Committee’s
assessment of overall
business performance, the
performance of the individual,
or the experience of
shareholders or other
stakeholders over the
performance period.
82
Funding Circle Holdings plc
Corporate governance Element of
remuneration
Key features
Purpose and
link to strategy
Maximum opportunity
Performance measures
Align Executive
Directors with
shareholders’
interests and promote
stewardship and good
governance over a
long time horizon.
Restricted
Share awards
Executive Directors are granted
Restricted Share awards with a
three-year vesting period,
subject to performance
underpins.
Following the end of the
vesting period, the awards will
be subject to a two-year
holding period.
Awards may be granted in the
form of conditional share
awards or nil-cost options.
The Executive Directors may,
at the discretion of the
Committee, receive dividend
equivalents on vested shares.
The awards are subject to
malus and clawback
provisions.
In-post
shareholding
requirement
Executive Directors are
expected to build and
maintain a holding of
shares in the Company.
Supports our
ownership mentality
focus, promotes
stewardship and helps
align management
with shareholders.
Post-exit
shareholding
requirement
Executive Directors are
expected to retain a proportion
of their shareholding for a two
year period after they have left
Funding Circle.
To reinforce long-term
alignment of
Executive Directors’
interests with those
of shareholders post
cessation of
employment.
A Restricted Share award may
be granted to an Executive
Director in respect of each
financial year over a fixed
number of shares.
The maximum number of
shares that can be awarded in
respect of each financial year
will be calculated based on
such number of shares as
have a market value at the
grant date of the awards in
respect of the 2021 financial
year equal to 133% of salary
for the CEO and 100% of
salary for the CFO.
For these purposes, the
market value of a share will be
determined by the Committee
using an average share price.
Granting as a fixed number of
shares further aligns Executive
Directors to shareholders,
rewarding share price
appreciation whilst
depreciation is penalised.
Prior to each grant, the
Committee will review the
number of shares to be
granted to ensure the fixed
number of shares remains
appropriate, taking into account
factors including the share
price at the time of grant and
the target total compensation
for companies of a similar
size and complexity.
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,
subject to consideration by
the Committee of the factors
at the time, 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.
Minimum post-exit shareholding
requirement of “guideline
shares” equal to 200% of salary
for all Executive Directors or
the actual shareholding on
departure, if lower. “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.
Performance underpins may be
based around key financial and/
or strategic measures.
In addition, the Committee has
discretion to reduce the vesting
outcome should it not reflect
the Committee’s assessment of
overall business performance,
the performance of the
individual, or the experience of
shareholders or other stakeholders
over the vesting period.
n/a
Annual Report and Accounts 2020
83
Directors’ remuneration report continued
Performance measure selection
The measures used under the annual bonus plan will be selected annually to reflect the Group’s key financial and strategic
objectives for the year. In setting performance targets, the Committee takes into account a range of factors including business
forecasts, prior year performance, degree of stretch against the performance targets in the business plan, market conditions
and expectations.
Restricted Share awards will be subject to performance underpins which will be determined prior to the grant of an award taking
into account the Committee’s assessment of the measures which will best reflect overall business health over the vesting period.
Malus and clawback policy
Malus and clawback provisions apply to annual bonus awards, deferred bonus awards and Restricted Share awards over the
following time periods:
Annual bonus
To such time as payment is made.
Up to two years following payment.
Malus
Clawback
Deferred bonus awards
To such time as the award vests.
No clawback provisions apply (as malus provisions apply
for three years from the grant date).
Restricted share awards
To such time as the award vests.
Up to two years following vesting.
Malus and clawback may apply in the following circumstances:
‐ a material misstatement of the audited accounts of a member of the Group;
‐ an error in assessing a performance measure or underpin, or an error in the information or assumptions on which awards
were granted, vest or released;
‐ a material failure of risk management in any member of the Group or a relevant business unit;
‐ material corporate failure;
‐ serious reputational damage to any member of the Group or a relevant business unit; or
‐ serious misconduct or material error on the part of the participant.
Discretions reserved in administering incentive awards
The Committee will administer the annual bonus, deferred bonus awards, Restricted Share awards and Share Incentive Plan
awards in accordance with the relevant plan rules and the above Remuneration Policy table. The Committee retains certain
discretions, consistent with market practice, in relation to the administration of the awards including:
‐
the determination of performance measures, underpins and targets and resultant vesting and pay-out levels;
‐ adjusting the number of shares vesting up or down where:
• the vesting outcome does not reflect the underlying financial or non-financial performance of the Company;
• the vesting level is not appropriate in the context of circumstances that were unexpected or unforeseen at the start of the
year; and/or
• there exists any other reason why an adjustment to the level of vesting of the award is appropriate;
‐
‐
‐
the ability to amend or substitute a performance measure or underpin if one or more events occur which cause the Committee
to reasonably consider that an amended or substituted performance measure or underpin would be more appropriate and
would not be materially less difficult to satisfy than originally intended;
the determination of the treatment of individuals who leave employment, based on the relevant plan rules, and the treatment
of the awards on exceptional events, such as a change of control of the Company; and
the ability to make adjustments to existing deferred bonus awards, Restricted Share awards and Share Incentive Plan awards
in certain circumstances (e.g. rights issues or corporate restructurings).
Remuneration Policy for Circlers
The approach to annual salary reviews is consistent across the Group, with consideration given to the level of experience,
responsibility, individual performance and salary levels in comparable companies.
The majority of Circlers are eligible for either the annual bonus plan or other bonus arrangements. Opportunities vary by
organisational level.
Funding Circle is a founder-led business. From inception, a key element of the remuneration philosophy has been to support
share ownership across the business. This has been achieved through making equity incentives available to all Circlers to
encourage them to behave as owners – taking decisions that balance long-term value creation with achieving shorter-term
strategic priorities.
Further details of remuneration arrangements for Circlers are set out on page 89.
84
Funding Circle Holdings plc
Corporate governance Illustrations of the application of the Remuneration Policy
£2,000k
CEO
£2,000k
CFO
£1,500k
£1,000k
£500k
211
0
100%
Minimum
1,011
53%
26%
21%
Target
1,544
52%
£1,500k
£1,000k
1,278
42%
42%
35%
£500k
1,021
39%
20%
41%
421
100%
1,421
42%
1,221
33%
33%
28%
34%
30%
17%
Maximum
14%
Maximum +
50% share price
increase
0
Minimum
Target
Maximum
Maximum +
50% share price
increase
Fixed
Bonus
Restricted shares
Illustration assumptions
Element of pay
Minimum
Target
Maximum
Maximum + 50% share
price appreciation
Fixed remuneration:
‐ Base salary – Effective 1 March 2021
‐ Benefits – in line with 2020 benefits disclosed in the single figure table
‐ Pension – 5% of salary (the CEO has opted not to take up his right to a pension contribution)
Annual bonus
No payout
Restricted shares
No vesting. Assumes the
underpin is not met
50% of maximum
(target payout)
Grant value vests
Maximum payout
Grant value multiplied by 1.5
Legacy Arrangements
The Committee reserves the right to make remuneration payments and payments for loss of office, to exercise any discretion
available in relation to any such payment, notwithstanding that they are not in line with the Remuneration Policy set out above
where the terms of the payment were agreed:
‐ before 5 June 2019 (the date the first shareholder-approved Remuneration Policy came into effect);
‐ at a time when the first shareholder-approved Remuneration Policy was in place provided the payment is in line with the terms
of that Remuneration Policy; or
‐ at a time when the relevant individual was not a Director of the Company and, in the opinion of the Committee, the payment
was not in consideration of the individual becoming a Director of the Company.
For these purposes, ‘payments’ includes the satisfaction of variable remuneration and, in relation to an award over shares, the
terms of the payment are ‘agreed’ no later than the time the award is granted.
The Executive Directors legacy arrangements include:
‐ 2020 performance based LTIP awards granted to the CFO. See page 92 for details;
‐ unvested Growth Shares granted to the CEO prior to IPO, which, subject to continued employment, will be fully vested by
August 2021; and
‐ vested but unexercised and unvested nominal cost options granted to the CEO prior to IPO. Subject to continued employment,
the unvested options will continue to vest on a quarterly basis, until they are fully vested in June 2023.
Executive Directors’ service contracts
The Executive Directors’ service contracts are on a rolling basis and are terminable by either the Company or the individual on
12 months’ notice for the CEO and six months’ notice for the CFO.
Samir Desai, CEO
Oliver White, CFO
Date of service agreement
18 September 2018
10 June 2020
Annual Report and Accounts 2020
85
Directors’ remuneration report continued
Payments for loss of office
The principles on which the determination of payments for loss of office will be approached are set out below.
Policy
Payment in lieu of notice The Committee has discretion to make a payment in lieu of notice based on salary for the unexpired period of
notice. The payment would be made in monthly instalments and subject to mitigation.
Annual bonus
Deferred bonus award
Per the CEO’s service agreement, the CEO will not receive a payment in lieu of notice where the Committee
determines that unvested share awards may remain capable of vesting (which otherwise would ordinarily lapse
on cessation of employment).
This will be at the discretion of the Committee on an individual basis and the decision as to whether or not to
pay a bonus in full or in part will be dependent on a number of factors, including the circumstances of the
Executive Director’s departure and their contribution to the business during the performance period in question.
Any bonus earned will normally be pro-rated for time in service during the performance period and will, subject
to performance, be paid at the usual time (although the Committee retains discretion to pay the bonus earlier in
appropriate circumstances) and in the normal manner. Any bonus earned for the year of departure and, if
relevant, for the prior year may be paid wholly in cash at the discretion of the Committee.
If an Executive Director leaves for any reason (other than being dismissed for cause) during the deferral
period then unvested awards will continue and vest at the normal vesting date. In exceptional circumstances
(including if a participant dies), the Committee may decide that the Executive Director’s unvested award
will vest and be released early at the date of cessation of employment, in which case the Committee has
discretion to apply time pro rating in limited circumstances.
Restricted Share awards The extent to which any unvested awards will vest will be determined in accordance with the LTIP rules.
Unvested awards will normally lapse on cessation of employment. However, unless a participant is
dismissed for cause, the Committee has discretion to determine that the unvested awards will continue
and remain capable of vesting at the normal vesting date. To the extent that the awards vest, a two-year
holding period would then normally apply. In exceptional circumstances (including if a participant dies), the
Committee may decide that the Executive Director’s awards will vest and be released early at the date of
cessation of employment or at some other time (e.g. at the vesting date).
In either case, vesting will depend on the extent to which the performance underpins have been satisfied
and will be subject to a pro rata reduction for time served during the vesting period (although the Committee
has discretion to disapply time pro rating if the circumstances warrant it).
If an Executive Director leaves for any reason (other than being dismissed for cause) after an award has vested
but before it has been released (i.e. during a holding period), their award will ordinarily continue to be released at
the normal release date. In exceptional circumstances (including if a participant dies), the Committee may
decide that the Executive Director’s award will be released early at the date of cessation of employment.
Change of control
Deferred bonus awards and Restricted Share awards will vest early in the event of a takeover, merger or
other relevant corporate event.
Deferred bonus awards will typically vest in full.
As regards Restricted Share awards, vesting will depend on the extent to which the performance underpins
have been satisfied, with the Committee taking into account relevant factors at the time, and will be
subject to a pro rata reduction for time served during the vesting period (although the Committee has
discretion to disapply time pro rating if the circumstances warrant it).
Alternatively, the Committee may permit deferred bonus awards and Restricted Share awards to be
exchanged for equivalent awards of shares in a different company (including the acquiring company).
Other payments
Executive Directors will be entitled to payment for accrued holiday.
Awards under the Share Incentive Plan may be released in the event of cessation of employment or change of
control in accordance with the plan rules.
The Committee reserves the right to make payments by way of settlement of any claim arising in connection
with cessation of employment.
Legacy awards
The extent to which the 2020 performance based LTIP awards vest will be determined in accordance with the
LTIP rules and the Remuneration Policy at the time they were granted.
The extent to which unvested Growth Shares and pre-IPO options vest will be determined in accordance with the
terms of the awards agreed prior to IPO. In particular, additional protection will apply in the event of a termination
of 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 participant will be entitled to receive a cash payment or other form of award
(the “replacement award”) which vests upon the termination of their employment. The value of the replacement
award will be determined by reference to the portion of the participant’s unvested pre-IPO awards that would
have vested (but for the change of control) over the period of 24 months following the change of control or, if
later, the 24 months following their termination. The agreed provisions are subject to the Company’s discretion to
determine that a greater number of shares subject to a pre-IPO award should vest upon a change of control.
86
Funding Circle Holdings plc
Corporate governance Recruitment policy
The Company’s recruitment remuneration policy aims to give the Committee sufficient flexibility to secure the appointment of
high calibre executives to strengthen the management team and secure the skill sets necessary to deliver the Group’s strategic aims.
When hiring a new Executive Director, the Committee will typically align the remuneration package with the Remuneration Policy
as set out above. The Committee may include other elements of pay which it considers appropriate, however, this discretion is
capped and is subject to the principles and the limits referred to below. The key terms and rationale for any such element would
be disclosed in the Directors’ Remuneration Report for the relevant year.
Policy
Salary
Buy-out awards
Salary will be set at a level appropriate to the role and the experience of the Executive Director being appointed.
This may include agreement on future increases up to a market rate, in line with increased experience and/or
responsibilities, subject to good performance, where it is considered appropriate.
It may be necessary to make additional awards in connection with the recruitment to buy-out
remuneration terms forfeited by the individual on leaving a previous employer if it considers the cost can
be justified and it is in the best interests of the Company. Buy-out awards are not subject to a formal cap.
The Committee will seek to make buy-outs subject to what are, in its opinion, comparable requirements in
terms of service and performance.
Where considered appropriate, buy-out awards will be liable to forfeiture or recovery provisions on early departure.
Maximum level of variable
remuneration
The Committee will not offer non-performance-related variable remuneration. The maximum level of
variable remuneration which may be granted (excluding buy-out awards) will be in line with the limits for
the CEO as set out in the Remuneration Policy above.
Other elements of
remuneration
Other elements may be included in the following circumstances:
‐ An interim appointment being made to fill an Executive Director role on a short-term basis.
‐
‐
If exceptional circumstances require that the Chair or a Non-Executive Director takes on an
executive function on a short-term basis.
If an Executive Director is recruited at a time in the year when it would be inappropriate to provide
an annual bonus or Restricted Share award for that year. Subject to the limit on variable remuneration
set out above, the quantum in respect of the period employed during the year may be transferred
to the subsequent year.
‐
If the Executive Director is required to relocate, reasonable relocation, travel and subsistence
payments may be provided (either via one-off or ongoing payments or benefits for up to two years).
For an internal appointment, any legacy arrangements will either continue on their original terms or be adjusted to reflect the new
appointment, as appropriate.
Any share awards referred to in this section will be granted as far as possible under the Company’s existing share plans.
If necessary, and subject to the variable remuneration limits referred to above, awards may be granted outside of these plans
as permitted under the Listing Rules which allow for the grant of awards to facilitate, in unusual circumstances, the recruitment
of an Executive Director.
Fees payable to a newly appointed Chair or Non-Executive Director will be in line with the fee policy in place at the time of appointment.
Policy on external appointments
Executive Directors may hold external directorships and retain any fees for such directorships if the Board determines that such
appointments do not cause any conflict of interest.
Annual Report and Accounts 2020
87
Directors’ remuneration report continued
Non-Executive Directors’ remuneration
Element of
remuneration
Fees
Key features
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.
The fees paid to the Non-Executive Directors are determined by the
Board as a whole. The Chair and the Non-Executive Directors are paid
annual fees and do not participate in any of the Company’s incentive
arrangements or receive any pension provision or other benefits.
Additional fees are payable for additional Board duties, including
acting as Senior Independent Director and for chairing the Audit
Committee, Risk and Compliance Committee and Remuneration
Committee. Additional fees may be paid in the exceptional event that
Non-Executive Directors are required to commit substantial
additional time above that normally expected for the role.
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. Additional fees or benefits may be provided at
the discretion of the Committee in the case of the Chair, and the
Board in the case of the other Non-Executive Directors.
Overall fees paid to the Chair and Non-Executive Directors will remain
within the limits set by the Company’s Articles of Association.
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 forwards, no further options have or will be granted to Non-Executive Directors post-IPO
under any of the Company’s share option plans. The options held by the relevant Non-Executive Directors are all fully vested.
Letters of appointment
All Non-Executive Directors have letters of appointment with the Company. The appointments of each of the Non-Executive
Directors are for an initial term of three years (which thereafter may be extended) and are terminable by either the Company or
the individual on one month’s notice. The appointment of each Non-Executive Director is subject to re-election at the AGM.
Date of original appointment1
Expiry of current term
Andrew Learoyd
Eric Daniels
Geeta Gopalan
Cath Keers
Harry Nelis
Neil Rimer
Bob Steel
Ed Wray
10 September 2018
18 September 2018
1 November 2018
20 March 2018
5 September 2018
5 September 2018
6 September 2018
10 September 2021
18 September 2021
1 November 2021
20 March 20212
5 September 2021
5 September 2021
6 September 2021
18 September 2018
18 September 2021
1. The date of appointment reflects the commencement date of the initial term as set out in the letter of appointment entered into prior to the IPO.
2. Cath Keers’ term will not be extended as she is not standing for re-election at our 2021 AGM.
Consideration of pay and employment conditions
Pay and employment conditions generally in the Group are taken into account when setting Executive Directors’ remuneration.
The Committee receives regular updates on overall pay and conditions in the Group.
In 2020 we launched our Circler Promise – our employee value proposition. As part of this we have a new all-Circler 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.
88
Funding Circle Holdings plc
Corporate governance The key elements to the incentive arrangements are:
‐ The Global Leadership Team and other senior management and senior specialist roles participate in a discretionary share-based
LTIP with grant size increasing with seniority. The grants for Circlers in leadership roles include a multiplier for achieving
significant share price growth.
‐ The leadership team, managers and specialists participate in an annual bonus plan (and the majority of Circlers participate in
either the annual bonus plan or another form of bonus). 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.
‐ All Circlers participate in an equity grant that operates in the UK as a Share Incentive Plan.
‐ 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.
Workforce engagement
As set out on page 26, our workforce engagement director, Cath Keers, has held workforce engagement sessions with Circlers
during the course of the year. Feedback from those sessions in relation to employee remuneration was taken into account when
considering the new Remuneration Policy and how it would be viewed by Circlers generally. This feedback was also taken into
account when determining the new employee value proposition and reward for all Circlers referred to above.
Shareholder engagement
The Committee understands the importance of listening to the views of the Company’s shareholders and takes account of the
guidelines of investor bodies and shareholder views in determining the remuneration arrangements in operation within the Group.
The Committee consulted with the Company’s major shareholders on changes to the Remuneration Policy. The Committee is very
appreciative of the feedback provided by shareholders which was taken into account when developing the Remuneration Policy.
Annual report on remuneration
This part of the report sets out how the Remuneration Policy has been applied in 2020 and how the Committee intends to apply
the new Remuneration Policy in 2021. An advisory shareholder resolution to approve this report will be proposed at the 2021 AGM.
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. In doing so, the Committee ensures that the Remuneration Policy is aligned with the Company’s key remuneration
principles as well as taking into account the principles of clarity, simplicity, risk, predictability, proportionality and alignment to
culture set out in the 2018 UK Corporate Governance Code.
Alignment to strategy
and culture
The design of remuneration at Funding Circle is aligned to our values, culture and strategy.
The annual bonus is based on Group financial and strategic performance, promoting collective accountability
and helping to align the Executive Directors’ incentive structure with the wider Group (as an annual cash bonus
was introduced in 2020 for the leadership team and for those in manager and specialist roles).
Restricted Share awards fully align with our remuneration philosophy of ensuring that senior management are
significant share owners, promoting good stewardship and incentivising Executive Directors to create long term
value as the business continues to mature.
Clarity and Simplicity Our 2021 Remuneration Policy aligns the Executive Directors’ pay with pay for other Circlers.
The new remuneration policy is simple to understand for participants and shareholders and promotes
long term stewardship.
Risk
The proposed Remuneration Policy reduces the amount of leverage from the current policy by rebalancing fixed
and variable pay as well as short- and long-term incentives.
Opportunities are set at a level which rewards performance at the same time as not unduly encouraging
excessive risk taking.
The annual bonus and Restricted Shares are subject to malus and clawback provisions and the Committee has
the discretion to adjust pay outcomes.
The Restricted Shares are granted as a fixed number of shares rather than a fixed % of salary. This means that
share price appreciation is rewarded and depreciation is penalised.
A significant portion of the total remuneration opportunity for Executive Directors is variable pay. This variable
pay is aligned to Company strategy through the choice of performance measures and the link to share price.
The Remuneration Policy is clear on the threshold, target and maximum levels of pay that Executives can earn.
Notwithstanding that actual outcomes will vary based on the level of achievement and share price performance.
Proportionality
Predictability
The key responsibilities of the Committee are summarised on page 58 and further details on the Committee’s roles and
responsibilities can be found in our Terms of Reference on our corporate website.
Annual Report and Accounts 2020
89
Annual report on remuneration continued
Committee composition
None of the members who have served on the Committee during the year had any personal interest in the matters decided by
the Committee and are all considered to be independent. The Company Secretary acted as Secretary to the Committee.
Committee members
Cath Keers, Chair
Andrew Learoyd
Ed Wray
Number of meetings attended
5/5
5/5
5/5
The Committee’s composition, responsibilities and operation comply with the principles of good governance.
The Executive Directors, Chief People Officer, other members of the senior management team and our external remuneration
consultants, Deloitte LLP, were invited to Committee meetings where it was deemed appropriate. No individuals were involved
in decisions relating to their own remuneration.
Committee effectiveness
As noted on page 65, the Committee undertook an effectiveness review during 2020, whereby each Committee member and, by
invitation, the Chief People Officer, completed a tailored questionnaire. The question set covered topics such as the quality of the
remuneration support provided to the Committee and the appropriateness of the remuneration policies and practices implemented
in 2020. Following a productive discussion, the Committee confirmed that the support provided to the Committee had improved
over the course of the year and also agreed a number of actions to be implemented to further enhance the Committee’s effectiveness.
External advisers
The Committee is satisfied that the advice it has received from Deloitte LLP as remuneration consultants is independent and
that the engagement partner and team that have provided remuneration advice do not have connections with the Company that
might impair their independence. Deloitte is a founder member of the Remuneration Consultants Group and, as such, voluntarily
operates under its Code of Conduct in relation to executive remuneration matters in the UK.
The fee paid to Deloitte LLP in 2020 in relation to advice provided to the Committee was agreed by the Company in advance for
specific projects and was £37,350. Deloitte also provided advice to the Group during 2020 in relation to risk advisory and share
plan advisory services.
Shareholder voting
The Committee’s resolutions at the Company’s 2019 AGM in respect of the Remuneration Policy and the Annual Report on Remuneration
and the 2020 AGM in respect of the Annual Report on Remuneration received the following votes from shareholders:
2019 AGM
Remuneration Policy
2019 AGM
Remuneration Policy
2020 AGM
Annual Report on Remuneration
Votes cast in favour
Votes cast against
Votes withheld
256,886,226
99.6%
256,867,652
99.6%
250,701,355
769,531
317,854
0.3%
0.1%
783,726
322,233
0.3%
0.1%
34,346
2,272
99.99%
0.01%
0.0009%
Total votes cast (including withheld)
257,973,611
100%
257,973,611
100%
250,737,973
100%
90
Funding Circle Holdings plc
Corporate governance Single total figure of remuneration (audited)
The following tables set out the aggregate emoluments earned by the Directors in the year ended 31 December 2020 and
2019 respectively.
2020
Executive Directors
Samir Desai
Oliver White
(appointed 15 June 2020)
Sean Glithero
(resigned 20 May 2020)6
Non-Executive Directors
Andrew Learoyd
Ed Wray7
Eric Daniels
Bob Steel
Cath Keers
Geeta Gopalan
Hendrik Nelis8
Neil Rimer8
2019
Executive Directors
Samir Desai
Sean Glithero6
Non-Executive Directors
Andrew Learoyd
Ed Wray7
Eric Daniels
Bob Steel
Cath Keers
Geeta Gopalan
Hendrik Nelis8
Neil Rimer8
Salary
and fees 1
£000
Taxable
benefits 2
£000
Bonus
£000
Pensions 3
£000
Long-term
incentives 4
£000
200
215
137
190
55
62
62
62
62
—
—
210
300
200
65
65
65
65
65
—
—
1
1
1
—
—
—
—
—
—
—
—
1
1
—
—
29
—
3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7
4
—
—
—
—
—
—
—
—
—
8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
£000
201
223
142
190
55
62
62
62
62
—
—
211
309
200
65
94
65
68
65
—
—
Other
—
2885
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
fixed
£000
Total
variable
£000
201
223
142
190
55
62
62
62
62
—
—
211
309
200
65
94
65
68
65
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1. The Board and the Global Leadership Team voluntarily reduced their salaries and fees by 20% over the period March to May 2020 in response to the Covid-19 pandemic.
The figures disclosed above are after the 20% voluntary reduction.
2. 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.
3. Executive Directors were eligible for a 5% of base salary pension contribution with effect from October 2020 (previously 3% of base salary). The CEO has opted not to take up his
right to the pension contribution.
4. No long-term incentives vested in respect of 2019 or 2020.
5. The buy-out of Oliver White’s Vanquis 2019 and 2020 bonus awards forfeit on cessation of employment. See page 92 for details.
6. Salary includes nine days of accrued annual leave.
7. Ed Wray stepped down as Chairman of Funding Circle Ltd in April 2020, at which point his Non-Executive Director fee became £55,000 in line with the Non-Executive Director
base fee.
8. Hendrik Nelis and Neil Rimer, who are not independent Non-Executive Directors, have waived their entitlement to a fee.
Annual Report and Accounts 2020
91
Annual report on remuneration continued
LTIP award granted during 2020
As disclosed in the RNS announcement dated 23 June 2020, a performance based LTIP award was granted to Oliver White on
19 June 2020 equal to 200% of salary. Samir Desai decided not to take up his LTIP award for 2020. Details of the award are set out below:
Type of award
Nil-cost share option
Number of
shares
925,390
Face value
at grant 1
% if award vesting
at threshold
Performance period
£800,000
25%
3 years to 31 December 2022
1. Based on a grant date share price of £0.8645.
Given the uncertain outlook presented by the Covid-19 pandemic and in line with guidance published by the Investment
Association, the Committee deferred the approval of performance metrics and targets. Following careful consideration,
the performance metrics and targets were subsequently approved in December 2020. The LTIP award is subject to EPS
performance (as regards 50% of the award) and Fee Income performance (as regards 50% of the awards). The Board
considers the actual targets to be commercially sensitive at this time, however, we will provide retrospective disclosure
of these targets at the time of vesting.
The Committee may apply its discretion to amend the vesting outcome should any formulaic assessment of performance
not reflect the Committee’s assessment of overall business performance, the performance of the individual, or the
experience of shareholders or other stakeholders over the performance period. This includes consideration of ‘windfall
gains’ over the performance period.
To the extent that the award vests, a holding period will apply from the date of vesting to the fifth anniversary of the grant
date (19 June 2025).
Buy-out awards for Oliver White
As set out in the letter from the Remuneration Committee Chair, on joining Funding Circle, Oliver White forfeited his 2019
and 2020 bonus at his previous employer.
With regards to the 2019 bonus buy-out, the value of the award (£208,000) was determined based on the 2019 bonus
that Oliver would have received had he not ceased employment. The award will vest and become capable of exercise
on 19 June 2021 subject to continued employment. Details of the award are set out below:
Type of award
Nil-cost share option
1. Based on a grant date share price of £0.8645.
Number of
shares
Face value
at grant 1
240,602
£208,000
With regards to the 2020 bonus buy-out, Oliver White’s 2020 Vanquis bonus had a maximum of £285,000 and a target of £178,500.
It was originally agreed to replace this bonus with a Funding Circle “buy out bonus” on comparable terms. In May 2020 (before
he joined the Company), the Committee reconsidered the 2020 bonus buy-out award in light of advice from its remuneration
advisers on the likely impact of the pandemic on the banking sector and agreed a safeguard equal to the threshold bonus amount.
Following the commencement of Oliver White’s employment with Funding Circle, it was agreed that for any bonus to be paid, the
award would be subject to two metrics based on Funding Circle’s performance in the period as follows:
‐ AEBITDA (70%): achievement of the H2 forecast.
‐ Strategic: (30%): Utilise financial services expertise to initiate and begin development of core capability in respect of balance
sheet management (ALM). Create and build strong relationships among internal, external, regulatory (FCA) and investor
stakeholder groups, enhancing the reputation of both the Finance function and the wider company in day to day interactions.
Both of these performance metrics were met in full. In March 2021 the Committee reconsidered the safeguard in light of performance,
the external environment and the approach being taken within the banking sector on bonus awards. Reflecting on these factors,
the Committee agreed that a 2020 bonus buy-out award at just under target performance of £80,000 (once pro-rated for time)
was appropriate. This bonus buy-out will be paid 100% in nil-cost options which will be granted on 26 March 2021 and will vest
on 26 March 2022, subject to continued employment.
92
Funding Circle Holdings plc
Corporate governance Directors’ shareholding and share interests (audited)
Table of Directors’ share interests as at 31 December 20201
Executive Directors
Samir Desai
Oliver White (appointed 15 June 2020)
Sean Glithero (resigned 20 May 2020)
Non-Executive Directors
Andrew Learoyd
Ed Wray
Eric Daniels
Bob Steel
Cath Keers
Geeta Gopalan
Hendrik Nelis
Neil Rimer
Beneficially
owned shares 2,3
Vested but
unexercised
awards
Unvested
awards
(not subject to
performance
conditions)
Unvested
awards
(subject to
performance
conditions)
Total
15,867,386
806,250
1,746,875
—
18,420,511
5,336
541,908
—
107,692
240,602
323,888 4
925,390
1,171,328
584,246 4
1,557,734
1,689,991
1,543,538
—
614,754
12,045
33,216
—
—
100,000
671,400
383,204
350,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,789,991
2,214,938
383,204
964,754
12,045
33,216
—
—
1. Or date of leaving employment from the Company if earlier. Sean Glithero resigned from the Board on 20 May 2020 and left employment on 2 July 2020.
2. Includes shares owned by connected persons.
3. Vested Growth and ESS Shares are treated as legally owned shares.
4. Unvested Growth Shares and unvested LTIP awards held by Sean Glithero lapsed in full following his cessation of employment.
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 2020 financial year, the CEO
complied with this requirement. The CFO was appointed to the Board on 15 June 2020 and currently holds unvested options
subject to continued employment only (which count towards the shareholding guideline) equal to 54% of salary, calculated on
31 December 2020 when the share price was £0.90. Unvested awards subject to performance conditions 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 have or will be granted to Non-Executive Directors post-IPO
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 2020
93
Annual report on remuneration continued
Table of Directors’ vested and unvested share awards (audited)
Executive Directors
Samir Desai
Vested
Unvested
Oliver White
Unvested
Sean Glithero
Vested
Unvested
Non-Executive Directors
Andrew Learoyd
Vested
Ed Wray
Vested
Eric Daniels
Vested
Unvested
Bob Steel
Vested
Award type1
Growth
ESS
Growth
Unapproved
SIP
Growth
ESS
Growth
Unapproved
2018 Long Term Incentive Plan
2018 LTIP Bonus
SIP
Growth
Growth
2018 Long Term Incentive Plan
Unapproved
No. of
awards at
1 January
2020
600,000
625,032
1,209,375
—
—
—
—
940,625
2,150,000
—
—
—
379,336
433,527
584,246
431,850
Unapproved
100,000
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
571,400
100,000
195,704
175,781
11,719
250,000
100,000
Awards
granted
in the year
Awards
lapsed
in the year
Awards
vested
in the year
Awards
exercised
in the year
No. of
awards at
31 December
2020
Exercise price/
subscription price
Market price
on exercise
—
—
—
—
4,991
—
—
—
—
925,390
240,602
4,991
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(270,955)
(584,246)
(323,888)
—
—
—
—
—
—
—
—
—
Date of
grant/vesting
commenced
10/03/2014
18/06/2015
01/08/2017
13/06/2018
03/11/2020
10/03/2014
18/06/2015
01/08/2017
13/06/2018
19/06/2020
19/06/2020
03/11/2020
01/10/2017
01/10/2017
28/06/2019
13/06/2018
19/08/2011
18/06/2015
22/04/2013
01/03/2016
01/03/2016
15/07/2014
18/06/2015
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
600,000
625,032
1,746,875
806,250
4,991
403,125
1,343,750
925,390
240,602
4,991
541,908
—
—
—
—
—
571,400
100,000
195,704
187,500
—
250,000
100,000
(107,962)
100,000
18/06/2015
537,500
806,250
(537,500)
(806,250)
162,572
(162,572)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11,719
(11,719)
£0.00
£0.00
£0.02
£0.001
£0.00
£0.00
£0.00
£0.02
£0.001
£0.00
£0.00
£0.00
£0.02
£0.02
£0.00
£0.861
£0.32
£0.03
£0.32
£0.03
£0.39
£0.39
£0.21
£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
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 86 (e.g. on termination of employment or change of control),
vested unapproved options can be exercised during a period of ten years from the date of grant.
Payments for loss of office
Sean Glithero resigned as CFO and from the Board on 20 May 2020. He did not receive any payments linked to his resignation.
Unvested Growth Shares and unvested LTIP awards held by Sean lapsed in full on cessation of his employment.
Payments to former Directors
There were no payments made to former Directors during the year.
94
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
No. of
awards at
31 December
2020
Date of
grant/vesting
commenced
10/03/2014
18/06/2015
01/08/2017
13/06/2018
03/11/2020
10/03/2014
18/06/2015
01/08/2017
13/06/2018
19/06/2020
19/06/2020
03/11/2020
01/10/2017
01/10/2017
28/06/2019
13/06/2018
600,000
625,032
1,746,875
806,250
4,991
—
—
403,125
1,343,750
925,390
240,602
4,991
541,908
—
—
—
100,000
18/06/2015
571,400
100,000
195,704
187,500
—
250,000
100,000
19/08/2011
18/06/2015
22/04/2013
01/03/2016
01/03/2016
15/07/2014
18/06/2015
—
—
537,500
806,250
—
—
—
(537,500)
(806,250)
—
—
—
162,572
(162,572)
—
—
—
—
—
—
—
11,719
(11,719)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(107,962)
—
—
—
—
—
—
—
—
—
Executive Directors
Samir Desai
Vested
Unvested
Oliver White
Unvested
Sean Glithero
Vested
Unvested
Vested
Ed Wray
Vested
Eric Daniels
Vested
Unvested
Bob Steel
Vested
2018 Long Term Incentive Plan
2018 LTIP Bonus
SIP
Growth
Growth
2018 Long Term Incentive Plan
Unapproved
Award type1
Unapproved
Growth
ESS
Growth
SIP
Growth
ESS
Growth
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
No. of
awards at
1 January
2020
600,000
625,032
1,209,375
940,625
2,150,000
—
—
—
—
—
—
—
379,336
433,527
584,246
431,850
571,400
100,000
195,704
175,781
11,719
250,000
100,000
Non-Executive Directors
Andrew Learoyd
Unapproved
100,000
4,991
925,390
240,602
4,991
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(270,955)
(584,246)
(323,888)
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 86 (e.g. on termination of employment or change of control),
vested unapproved options can be exercised during a period of ten years from the date of grant.
Payments for loss of office
Sean Glithero resigned as CFO and from the Board on 20 May 2020. He did not receive any payments linked to his resignation.
Unvested Growth Shares and unvested LTIP awards held by Sean lapsed in full on cessation of his employment.
Payments to former Directors
There were no payments made to former Directors during the year.
Exercise price/
subscription price
Market price
on exercise
£0.00
£0.00
£0.02
£0.001
£0.00
£0.00
£0.00
£0.02
£0.001
£0.00
£0.00
£0.00
£0.02
£0.02
£0.00
£0.861
£0.32
£0.03
£0.32
£0.03
£0.39
£0.39
£0.21
£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
n/a
n/a
Annual Report and Accounts 2020
95
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
Dec 2019
Dec 2020
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
2020
201
2019
211
2018
4,081
2017
204
2016
160
1. The 2018 figure includes share options that were granted prior to IPO which were subject to continued employment only.
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.
Total income and adjusted EBITDA have been presented as these are two key performance measures used by the Directors in
assessing performance.
Total income
Adjusted EBITDA
Employee costs
Average number of employees
2020
2019
£222.0m
£(63.8)m
£89.5m
911
£177.3m
£(27.5)m
£96.9m
1,055
%
Change
25%
132%
(8)%
(14)%
96
Funding Circle Holdings plc
Corporate governance
Percentage change in Directors’ remuneration compared with employees
The table below sets out the annual percentage change in remuneration from 2019 to 2020 for each of the Directors compared
to that for an average employee.
Executive Directors
Samir Desai
Oliver White2
Non-Executive Directors
Andrew Learoyd
Ed Wray3
Eric Daniels
Bob Steel
Cath Keers
Geeta Gopalan
Hendrik Nelis4
Neil Rimer4
Average employee5
2019 to 2020
Salary/fees 1
Benefits
Annual bonus
-5%
n/a
-5%
-15%
-5%
-5%
-5%
-5%
n/a
n/a
0%
n/a
—
—
-100%
—
-100%
—
—
—
n/a
n/a
—
—
—
—
—
—
—
—
-1.7%
+1.8%
+61.2%
1. The Board and the Global Leadership Team voluntarily reduced their salaries and fees by 20% over the period March to May 2020 in response to the Covid-19 pandemic. There
has therefore been a reduction in salaries and fees received by Directors during 2020 compared to 2019.
2. Oliver White was appointed to the Board on 15 June 2020.
3. Ed Wray stepped down as Chairman of Funding Circle Ltd in April 2020, at which point his Non-Executive Director fee became £55,000 in line with the Non-Executive Director
base fee.
4. Hendrik Nelis and Neil Rimer, who are not independent Non-Executive Directors, have waived their entitlement to a fee.
5. The annual percentage change of the average remuneration of the Company’s employees, calculated on a full-time equivalent basis.
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.
Year
2020
2019
Method
25th percentile pay ratio
Median pay ratio
75th percentile pay ratio
Option A
Option A
5.8:1
6.8:1
3.8:1
3.9:1
2.3:1
2.5:1
There has been no significant change to the employee pay quartile figures, however as the CEO voluntarily reduced his salary by
20% over the period March to May 2020 in response to the Covid-19 pandemic our CEO pay ratio has slightly reduced.
The Board has confirmed that the ratio is consistent with the Company’s wider policies on employee pay, reward and progression.
Total pay and benefits used to calculate the ratios
The table below sets out the UK employee percentile pay and benefits used to determine the above pay ratios and the salary
component for each figure.
CEO
25th percentile
Median
75th percentile
2020
Salary component
Total pay and benefits
2019
Salary component
Total pay and benefits
£199,500
£200,695
£210,000
£211,000
£29,379
£34,669
£27,576
£30,921
£44,083
£53,195
£45,818
£54,035
£77,667
£88,401
£78,798
£83,298
The CEO remuneration is the total single figure remuneration for 2019 and 2020 as disclosed on page 91. The UK employee total
remuneration has been calculated based on the amount paid or receivable for 2019 and 2020. The calculations for the UK
employees were performed as at the final day of the relevant financial year.
Annual Report and Accounts 2020
97
Annual report on remuneration continued
Fees for the Chairman and Non-Executive Directors
The fees payable to the Non-Executive Directors in 2020 and for 2021 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
Implementation of the Remuneration Policy for the year ended 31 December 2021
Salary
As per the Chair’s statement, we believe that the CEO’s annual base salary should be more closely aligned to the market. The
CEO’s salary remains unchanged since before IPO and is some way behind the market. We believe that a salary of £400,000,
which still remains below the lower quartile of FTSE SmallCap Top Half companies, is appropriate at this current time.
Due to the pandemic and the impact on key stakeholders (Circlers, customers and the wider society) Samir feels strongly that
now is not the right time to receive his salary increase. Therefore for 2021, he has chosen to waive his salary increase and will
therefore only receive £210,000. His incentives will be based on his reference salary of £400,000.
The table below shows the salaries for the Executive Directors as at 1 January 2021 in comparison to base salary as at
1 January 2020.
Samir Desai
Oliver White
1 January
2021
£210,000
£400,000
1 January
2020 1
£210,000
£400,000
% change
—
—
1. Oliver White’s salary was set at £400,000 on his appointment to the Board (15 June 2020).
Annual bonus
The maximum opportunity for the CEO is 133% of reference salary and for the CFO is 100% of salary. The target opportunity for
both is 50% of maximum opportunity. The annual bonus measures will be AEBITDA, Operating Income and strategic objectives
(each weighted one-third). 40% of any bonus earned will be deferred into shares for three years.
The Board considers the actual targets for 2021 to be commercially sensitive at this time, however, we will provide retrospective
disclosure of these targets in next year’s report.
The Committee may apply its discretion to amend the bonus pay-out should any formulaic assessment of performance not
reflect the Committee’s assessment of overall business performance, the performance of the individual, or the experience of
shareholders or other stakeholders over the performance period.
Restricted Share awards
Restricted Share awards will be granted in 2021 under the new Remuneration Policy, if approved. The CEO will be awarded
Restricted Shares with a value equal to 133% of reference salary and the CFO an award with a value equal to 100% of salary.
For these purposes, the market value of a share will be determined by the Committee using an average share price. The number
of shares will be disclosed at the date of grant.
Vesting of the Restricted Shares will be subject to a financial underpin based on operating income as well as qualitative
underpins to ensure that Executive Directors are not rewarded where the Committee considers there to have been a failure in
performance, including serious breach of regulation, material reputational damage and gross misconduct. The financial underpin
has been set such that annual operating income must be on average £150 million over the period of three years from 2021 to
2023. Prior to the vesting of the Restricted Shares, the Committee will assess whether actual performance of the Company and
Executive Directors is reflected to guard against payment for failure or against windfall gains. The Committee retains the
discretion to make any adjustment to vesting it deems necessary.
2021 Non-Executive Director remuneration
It has been determined that the Non-Executive Director fees will remain as set out in the table above.
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), the 2018 UK Corporate Governance Code
and the UK Listing Authority’s Listing Rules.
98
Funding Circle Holdings plc
Corporate governance Report of the Directors
for the year ended 31 December 2020
The Directors present their report (the “Directors’ Report”) and the Annual Report and Accounts for the year ended 31 December 2020.
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
Corporate Governance Statement (page 51)
Going concern and viability statement
Viability statement (pages 48 and 49)
Directors’ interests
Long-term incentive schemes
Waiver of emoluments
Remuneration Report (page 93) and Directors’ Report (page 100)
Remuneration Report (page 92)
Remuneration Report (pages 79 and 91)
Powers for the Company to buy back its shares
Directors’ Report (page 100)
Allotment of shares during the year
Note 18 to the financial statements
Significant shareholders
Related party agreements
Diversity Policy
Statutory information
Stakeholder engagement
Employee engagement
Directors’ Report (page 101)
Note 26 to the financial statements
Nomination Committee Report (page 67)
Stakeholder engagement (pages 26 and 27). See also Board decision making
and section 172 duties on page 61 of the Corporate Governance Report
Stakeholder engagement (pages 26 and 27) and Our people (page 19). See also
Board decision making and section 172 duties on page 61 of the Corporate
Governance Report
Policy concerning the employment of disabled persons Our people (page 21)
Financial instruments
Note 17 to the financial statements
Future developments of the business
Strategic Report (pages 4 to 18)
Greenhouse gas emissions, energy consumption and
energy efficiency action
Significant agreements
Non-financial reporting
Sustainability (page 24)
Directors’ Report (page 101)
Strategic Report – see below
Management Report
This Directors’ Report, together with the Strategic Report on pages 1 to 49, 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 49.
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 Our people on pages 19 to 21, Sustainability
on pages 22 to 25, Our model on pages 14 and 15, Strategic priorities on page 18, Key performance indicators on pages 28 and 29
and the Risk management, Principal risks and uncertainties and Viability statement sections on pages 36 to 49.
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)
Oliver White – appointed on 15 June 2020
(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)
Sean Glithero was a Director (and Chief Financial Officer) during 2020 up until his resignation on 20 May 2020.
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 separate deed of indemnity. The Company also indemnifies each Director under its
Articles of Association. Such indemnities are qualifying indemnities for the purposes of, and permitted under, section 234 of the Act.
Annual Report and Accounts 2020
99
Report of the Directors continued
for the year ended 31 December 2020
Directors’ interests
The number of ordinary shares in
which the Directors were beneficially
interested as at 31 December 2020 is
set out in the Directors’ Remuneration
Report on page 93. In the period
between 31 December 2020 and
19 March 2021 (being the latest
practicable date prior to the date of this
report), the following additional ordinary
shares were allotted to Samir Desai
and Oliver White under the Company’s
Share Incentive Plan (and as announced
via RNS):
Name of Director
Samir Desai
Oliver White
Number of
Partnership
Shares
Number of
Matching
Shares
410
410
410
410
There were no other changes during
that period to the number of ordinary
shares in which the Directors were
beneficially interested.
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). The
Board has formal procedures to deal
with Directors’ conflicts of interest.
None of the Directors has a material
interest in any significant contract
with the Company or any member of
its Group.
Results and dividends
The Group’s and the Company’s audited
financial statements for the year are set
out on pages 112 to 170.
The Directors do not recommend
payment of a final dividend for 2020
(2019: £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. All Directors will offer
themselves for re-election to the
Company’s Board at the AGM, with the
exception of Cath Keers, Bob Steel and
Ed Wray who, as mentioned previously,
will be stepping down from the Board
with effect from the date of the AGM.
100
Funding Circle Holdings plc
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 2021 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 34,905,603 of the Company’s
ordinary shares. However, the Company
did not repurchase any of its ordinary
shares during the year.
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 2020
comprises 352,943,975 ordinary shares
of £0.001 each. Further information
regarding the Company’s issued share
capital can be found on page 149 of the
financial statements.
Details of the shares held by the Group’s
Employee Benefit Trusts 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 Trusts rank pari passu
with the shares in issue and have no
special rights. Voting rights and rights of
acceptance of any offer relating to
shares held in trust rest with the
Trustees and are not exercisable by
employees, although the Trustees will
exercise such rights arising from
allocated shares in accordance with
the relevant participant’s directions.
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 dealing
and market requirements relating to
closed periods) and requirements of the
Disclosure Guidance and Transparency
Rules, as well as the Company’s own
dealing codes, whereby Directors,
persons connected to the Directors
and certain employees of the Company
require approval to deal in the
Company’s securities.
Change of control
The details of the protections that apply
in the event of termination of employment
due to a takeover bid in respect of certain
of the CEO’s pre-IPO awards are set
out on page 86 under “Legacy awards”.
These additional protections also apply
to LTIP awards held by the GLT (excluding
the Executive Directors). Save in respect
of these awards, there are no agreements
between the Company and its Directors
or employees providing for compensation
for loss of office or employment (whether
Corporate governance 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. In addition, the
Group participates in one or more lending
schemes that benefit from a form of
government-backed guarantee and it is
expected that, in the event of a change
of control of the Company, the consent
of the relevant loan guarantor would be
required to enable the Group’s continued
participation in those schemes.
Significant shareholdings
As at 31 December 2020 and 28 February 2021, 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 CBH
Accel London Management
T Rowe Price Global Investments
Jupiter Asset Management
DST Managers
Mr Samir Desai
Capital Group
Union Square Ventures
Ninety One
Number
of ordinary
shares as at
31 December
2020
58,618,351
46,507,936
26,906,743
24,092,587
17,329,661
16,505,378
15,867,386
14,196,606
12,269,474
8,960,382
Percentage
issued share
capital as at
31 December
2020
16.61
13.18
7.62
6.83
4.91
4.68
4.50
4.02
3.48
2.54
Number
of ordinary
shares as at
28 February
2021
58,618,351
46,507,936
26,906,743
24,097,998
18,617,864
16,505,378
16,002,369
14,713,073
11,339,637
11,336,226
Percentage
issued share
capital as at
28 February
2021
16.61
13.18
7.62
6.83
5.27
4.68
4.53
4.17
3.21
3.21
Nature of
holding
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
In the period between 28 February and 19 March 2021 (the latest practicable date prior to the date of this report), the Company
received no further notification pursuant to DTR5.1.
Research and development
The Group invests in the research and
development of technology and software
products that enable it to achieve its key
performance objective of growing
lending to small businesses whilst
delivering resilient 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, 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
2021 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.
2021 AGM
The Company’s AGM will take place on
19 May 2021 at its offices at 71 Queen
Victoria Street, London EC4V 4AY.
The Board is closely monitoring the
applicable Covid-19 restrictions, and will
provide an update on our website at
corporate.fundingcircle.com/investors/
shareholder-meetings and, where
appropriate, by an announcement via a
Regulatory Information Service, if any
changes are required to the AGM
arrangements.
Given the uncertainty around whether
shareholders will be able to attend the
AGM, we strongly recommend that all
shareholders appoint the chair of the
meeting as their proxy. Shareholders
can do this by completing and returning
their proxy form or by submitting their
proxy form electronically through the
Company registrars’ website, the CREST
service or via the Proxymity platform.
Shareholders who have already
registered with our registrar’s online
portfolio service, Shareview, can submit
their proxy by logging on to their
portfolio at 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.
Annual Report and Accounts 2020
101
Statement of Directors’ responsibilities in respect of the financial statements
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.
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’s 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
international accounting standards in
conformity with the requirements of
the Companies Act 2006 and
international financial reporting
standards adopted pursuant to
Regulation (EC) No 1606/2002 as it
applies in the European Union, give a
true and fair view of the assets,
liabilities, financial position and loss
of the Group and profit of the
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
25 March 2021
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 accounting standards in
conformity with the requirements of the
Companies Act 2006 and international
financial reporting standards adopted
pursuant to Regulation (EC) No 1606/2002
as it applies in the European Union.
Under company law, 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 for that period. In
preparing the financial statements, the
Directors are required to:
‐ select suitable accounting policies
and then apply them consistently;
‐ state whether applicable international
accounting standards in conformity
with the requirements of the
Companies Act 2006 and
international financial reporting
standards adopted pursuant to
Regulation (EC) No 1606/2002 as it
applies in the European Union have
been followed, 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’s and Company’s transactions and
disclose with reasonable accuracy at any
time the financial position of the Group
and Company and enable them to ensure
that the financial statements and the
Directors’ Remuneration Report comply
with the Companies Act 2006.
102
Funding Circle Holdings plc
Corporate governance Financial statements
FINANCIAL
STATEMENTS
104 Independent auditors’ report
112 Consolidated statement of comprehensive income
113 Consolidated balance sheet
114 Consolidated statement of changes in equity
115 Consolidated statement of cash flows
116 Notes forming part of the consolidated financial statements
160 Company balance sheet
161 Company statement of changes in equity
162 Company statement of cash flows
163 Notes forming part of the Company financial statements
171 Glossary
172 Shareholder and Company information
Annual Report and Accounts 2020
103
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 2020 and of the Group’s loss and
the Group’s and Company’s cash flows for the year then ended;
‐ have been properly prepared in accordance with international accounting standards in conformity with the requirements of the
Companies Act 2006; and
‐ have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements, included within the Annual Report and Accounts (the “Annual Report”), which comprise:
the consolidated and Company balance sheets as at 31 December 2020; 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.
Separate opinion in relation to international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002
as it applies in the European Union
As explained in note 1 to the Group financial statements, the Group, in addition to applying international accounting standards in
conformity with the requirements of the Companies Act 2006, has also applied international financial reporting standards adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
In our opinion, the Group financial statements have been properly prepared in accordance with international financial reporting
standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities
under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided
to the Group.
Other than those disclosed in note 4 to the financial statements, we have provided no non-audit services to the Group in the period
under audit.
Our audit approach
Overview
Audit scope
‐ Our audit included full scope audits of the UK and US components which accounted for approximately 97% of the Group’s total
income and 85% of the Group’s loss before taxation.
‐ We performed audit procedures over specific balances in respect of the Funding Circle Central Europe (“FCCE”) component at a
Group level which together with the full scope audits accounted for 98% of the Group’s total income and 93% of the Group’s loss before
taxation.
Key audit matters
‐
Impact of Covid-19 on the audit (Group and Company)
‐ Valuation of SME loans and related liabilities recorded at fair value (Group)
‐ Valuation of loan repurchase liability (Group)
‐ Carrying value of investment in the US subsidiary and valuation of the non-financial assets in the US CGU (parent and Group respectively)
Materiality
‐ Overall Group materiality: £1,890,000 (2019: £2,500,000) based on 5% of the average of loss before taxation for the previous three
years, adjusted for exceptional items and fair value gains and losses.
‐ Overall Company materiality: £3,400,000 (2019: £5,000,000) based on 1% of total assets.
‐ Performance materiality: £1,400,000 (Group) and £2,500,000 (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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Financial statements Report on the audit of the financial statements continued
Our audit approach continued
Capability of the audit in detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined in the Auditors’ responsibilities for the audit of the financial statements section, to detect material misstatements
in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud,
is detailed below.
Based on our understanding of the Group and industry, we identified that the principal risks of non-compliance with laws and regulations
related to the Group’s provision of regulated products and services under its Financial Conduct Authority (“FCA”) licence, and we considered
the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations
that have a direct impact on the preparation of the financial statements such as the Companies Act 2006. We evaluated management’s
incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and
determined that the principal risks were related to the posting of inappropriate journals to increase income or reduce costs and the
application of management bias in key 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:
‐
‐
review of correspondence with, and reports to, the FCA;
review of customer complaints to identify any indicators of breaches in laws and regulations;
‐ enquiries of management, the Directors, the Chair of the Audit Committee, the Head of Internal Audit, the Group’s general counsel
and the Group’s head of legal and regulatory, including consideration of known or suspected instances of non-compliance with laws
and regulation and fraud;
‐
‐
‐
review of all internal audit reports issued in the period to identify any indicators of breaches in laws and regulations;
identifying and testing journal entries and period end adjustments, including those with unusual account combinations, posted
with certain descriptions, posted by unexpected users or posted at unusual times;
incorporating unpredictability into our testing, including sample testing of senior employee expenses, validity of supplier listings
and initial checks on loans originated in the period, including BBLS and PPP loans; and
‐ challenging significant assumptions and judgements made by management in its accounting estimates, in particular in relation to
the valuation of SME loans and related liabilities recorded at fair value, the loan repurchase liability and impairment assessments.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance
with laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also, the risk of not
detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve
deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud)
identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the
audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures
thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we
do not provide a separate opinion on these matters.
This is not a complete list of all risks identified by our audit.
The valuation of the loan repurchase liability, the valuation of the non-financial assets in the US CGU and the impact of Covid-19 are new
key audit matters this year. The accounting for the Asset Backed Securities (‘ABS’) bond programmes and the capitalisation of development
costs, which were key audit matters last year, are no longer included because this is the second year of the ABS programmes and the
accounting has not changed, and improvements in internal procedures over the capitalisation of development costs has reduced the
level of audit effort associated with this area. Otherwise, the key audit matters below are consistent with last year.
Annual Report and Accounts 2020
105
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
Impact of Covid-19 on the audit (Group and Company)
Refer to Report of the Audit Committee – Significant issues
considered in relation to the financial statements (page 70) and
note 1 (accounting policies).
The impact of the Covid-19 pandemic has resulted in
unprecedented economic conditions and resulting government
support programmes and regulatory interventions to support
businesses and people. The Covid-19 pandemic has also
changed the way that companies operate their businesses, with
one of the most substantial impacts being the transition to
remote working.
All of Funding Circle’s employees have been working remotely
during 2020, with some consequential changes on their
processes and the control environment, some of which were
relevant for financial reporting purposes. Our audit team has
also been working remotely for all of 2020 including during the
period when we performed the audit.
The impact of the Covid-19 pandemic and resulting uncertainty
has impacted a number of the estimates in the Group and
Company financial statements. The impact on the most
significant accounting estimates and the related audit work is
set out in the following other key audit matters in this opinion:
valuation of SME loans and related liabilities recorded at fair
value; valuation of loan repurchase liability; and carrying value
of investment in the US subsidiary and valuation of the
non-financial assets in the US CGU.
Valuation of SME loans and related liabilities recorded at
fair value (Group)
Refer to Report of the Audit Committee – Significant issues
considered in relation to the financial statements (page 71);
note 1 (accounting policies); note 2 (critical accounting
estimates and key sources of estimation uncertainty);
note 13 (investments in SME loans); and note 17 (financial risk
management) of the Consolidated financial statements.
As at the balance sheet date, the Group had not sold its residual
holding in three securitisation vehicles and these were consolidated.
As a result, the underlying SME loans held in the securitisation
vehicles remain on the 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 with resultant gains
and losses recognised in the income statement.
As at the balance sheet date, the Group holds investments in
SME loans amounting to £501.6 million and unrated bond
liabilities of £7.8 million which are recorded at fair value with
gains and losses reported in profit and loss. The estimation of
the fair value of the SME loans and the bond liabilities requires
complex models which utilise both observable and unobservable
inputs, with reasonable movements in each key assumption
resulting in material changes to the fair value. The level of
estimation uncertainty has increased as a consequence of
Covid-19 and judgement is required to determine an appropriate
discount rate and the other key assumptions. As a result the
valuation of the SME loans has been a focus in our audit.
We engaged with the Audit Committee and management at Funding Circle in
a manner consistent with our previous audits, albeit remotely using video and
telephone calls.
All of the information and audit evidence we need for the audit is provided
in electronic format. We shared information, including the audit evidence
provided to us by Funding Circle, using share-screen functionality in video
calls and our secure encrypted information sharing software.
We understood and assessed the transition of the Group’s employees to
working remotely on the control environment relevant to financial reporting,
and reflected this in our audit approach for new or changed processes
and controls.
Where the Group has undertaken new business activities as a result of
Covid-19, for example, the government sponsored lending programmes
in the UK and US, we assessed the audit risks and designed appropriate
audit procedures to address these.
We were not able to visit the US audit during our 2020 audit. However,
we engaged with and directed this team in a manner consistent with our
previous audits using video conferencing and telephone calls. This included
a ‘virtual visit’ to the US where we met with both the audit team and local
management. To ensure we were satisfied with the audit work performed by
the US team we evaluated and reviewed audit evidence by remotely reviewing
electronic audit files or using share-screen functionality in video conferencing.
Our audit procedures comprised the following:
‐ We understood and evaluated the design and implementation of controls
relating to the valuation of the Group’s portfolio of SME loans.
‐ We engaged our valuation experts to assess the appropriateness of the
methodology used by management in determining the valuation of the
investments in SME loan assets and bond liabilities held at fair value.
This included assessing the appropriateness, in the context of Covid-19,
of the key assumptions within the valuation model which we considered
to be the discount rate, default rate, recovery 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 was within a reasonable range.
‐ We built our own independent model to re-calculate the fair value using
management’s assumptions.
‐ We performed sensitivity analyses over each of the key assumptions in
light of market rates, comparables and underlying performance of the loans.
‐ We performed testing over the historical loan performance data that is a
starting point for the forward looking assumptions.
‐ We 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 cash payments.
Based on the above procedures performed, and the evidence obtained, we
concluded that the estimated fair value of the SME loans and bond liabilities
was reasonable.
We evaluated the appropriateness of the critical accounting estimates and
key sources of estimation uncertainty in note 2 to the Consolidated financial
statements and the disclosures on financial instruments in note 17 and
considered these to be reasonable.
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Financial statements 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
Valuation of loan repurchase liability (Group)
Refer to the Report of the Audit Committee – Significant issues
considered in relation to the financial statements (page 72);
note 1 (accounting policies); note 2 (critical accounting estimates
and key sources of estimation uncertainty); and note 16 (provisions
and other liabilities) of the Consolidated financial statements.
The Group takes the credit risk on two portfolios of SME loans
through financial guarantees. As at the balance sheet date the
total value of the SME loans subject to guarantees amounted to
£24.3 million (2019: £41.5 million). These fall within the scope of
IFRS 9 and require the Group to estimate the value of the
guarantees using the expected credit loss (‘ECL’) model.
The loan repurchase liability has increased from £2.9 million
(2019) to £5.2 million (2020) with an increase in the estimated
loss ratio from 7% to 21%. This is a result of the increase in actual
and expected defaults given the current and future economic
environment. The estimation of the value of the loan repurchase
liability requires complex modelling which utilises both
observable and unobservable inputs, with the most sensitive
input being the expected default rate. As a result the valuation of
the loan repurchase liability and specifically the expected default
rate has been a focus in our audit.
Our audit procedures comprised the following:
‐ We understood and evaluated the design and implementation of controls
relating to the estimation of the loan repurchase liability.
‐ We engaged our risk modelling specialists to assess the appropriateness of the
ECL methodology used by management in determining the valuation of the loan
repurchase liability.
‐ We assessed the appropriateness of the key assumption within the model,
which we consider to be the expected default rate, and how management had
incorporated forward looking economic information.
‐ We performed testing over a sample of the historical default and recovery
performance data as well as over other model assumptions including the
staging and exposure at default.
‐ We performed testing over the mathematical accuracy and integrity of the ECL
model, including independently fitting the default curve data to assess whether
the curve being used in the model was appropriate.
‐ We challenged management to consider forward looking information in their staging
allocation resulting in additional analysis showing a stepped increase in stage for
all the higher risk sectors did not result in a material change in the liability.
‐ We performed sensitivity analyses on the assumptions used in the model to
assess whether reasonable alternatives would present the possibility of a
materially different liability.
Based on the above procedures performed, and evidence obtained, we concluded
that the valuation of the loan repurchase liability estimated by management
was reasonable.
We evaluated the appropriateness of the critical accounting estimates and key
sources of estimation uncertainty in note 2 and the disclosures in note 16 to the
Consolidated financial statements and considered these to be reasonable.
Carrying value of investment in the US subsidiary and
valuation of the non-financial assets in the US CGU (Group
and parent)
Significant issues considered in relation to the financial
statements (page 71); note 2 (critical accounting judgements and
key sources of estimation uncertainty); and note 10 (goodwill) of
the Consolidated financial statements and 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 pre-impairment of £244.1 million. 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 investments in the Company is higher than
the market capitalisation of the Group at 31 December 2020; and
the impact of Covid-19 has had a negative impact on the
performance of the US business.
Management performed an impairment assessment and estimated
the recoverable amount using a value-in-use model. As a result of
this assessment, an impairment of £155.9 million has been
recognised in order to reduce the investment value to its value in
use of £88.2 million. The significant assumptions in this assessment
included the revenue growth rate and the discount rate.
Additionally, the carrying value of non-financial assets in the US
CGU as at 31 December 2020 is £19.9 million. Management
identified indicators of impairment given the poor financial
performance of the business in 2020 due to Covid-19.
Management estimated the recoverable amount using a
value-in-use model and concluded there was no impairment of
the non-financial assets in the CGU. The significant assumptions
in this assessment included the revenue growth rate and the
discount 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.
Our audit procedures comprised the following:
‐ We understood and evaluated the design and implementation of controls
relating to the Group’s impairment assessments.
‐ We assessed the methodology used by management against the requirements
of the financial reporting framework and tested the mathematical accuracy of
the model.
‐ We agreed the forecast financial information to budgets and forecasts approved
by senior management and the Board, including the Medium Term Plan.
‐ We evaluated the reliability of management’s forecasting by comparing actual
results with previous years’ forecasts.
‐ We compared the forecast growth rates with those achieved by the UK business
when it was at a similar stage in its life cycle, those achieved by the US business
in the past, as well as those of similar businesses in the US market.
‐ We 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 and obtained corroborating
evidence to support these assumptions.
‐ We assessed the appropriateness of the discount rate assumption by using our
valuation experts to derive an independent view on the rate.
‐ We assessed the appropriateness of the long term growth rate by agreeing it to
independent external evidence including OECD publications and analyst reports,
as well as using our valuation experts to derive an independent view.
‐ We performed sensitivity on the significant assumptions in the model.
Based on the above procedures performed, and evidence obtained, we considered
the Directors’ conclusion that the carrying value of the US subsidiary is impaired by
£155.9 million to be reasonable. We also considered the conclusion that the remaining
non-financial assets within the US CGU are not impaired to be reasonable.
We evaluated the appropriateness of the related disclosures in note 2 (the critical
accounting estimates and key sources of estimation uncertainty) to the Consolidated
financial statements and note 1 (accounting policies) and note 5 (Investments in
subsidiary undertakings) to the Company financial statements and considered
these to be reasonable.
Annual Report and Accounts 2020
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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
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.
1)
2)
Audit approach to Funding Circle’s operations: We designed our audit approach for the products and services that substantially make up
Funding Circle’s businesses in the UK, US and CE, such as platform lending, marketplace referrals and the origination of, and investment in,
SME loan portfolios. The audit approach was designed by a partner and team members who are specialists in the relevant areas. The
approach was provided to the US audit team who contributed to the Group audit.
Audit work for in scope components: Through our risk assessment and scoping we identified the US and UK as full scope components due
to being financially significant. We considered the FCCE component as a limited scope entity for specific balances including exceptional
items, the loan repurchase liability, other fee income and cash. We instructed our network firm in the US to perform a full scope audit of
the US component. The Group audit team performed the audit work for the UK component and the specific work over FCCE balances.
We assigned materiality levels to components reflecting the size of their operations. The performance materiality levels ranged from
£1.125 million to £1.35 million. We determined the level of involvement we needed to have in their audit work to be able to conclude whether
sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group financial statements as a whole. This
included active and regular dialogue with the partner and team responsible for the audit of the US component, the issuance of instructions,
reviewing their audit strategy and a review of the results of their work on significant risk and other areas and formal clearance meetings.
Analytical review procedures were performed over FCCE, a non-significant component with material balances, to mitigate the risk of
material misstatement.
3)
Audit procedures undertaken at a Group level and on the Company: We ensured that appropriate further work was undertaken for the Group
and Company. Certain account balances were audited centrally by the Group engagement team, including the impairment assessment of
non-financial assets, and the Company’s investment in subsidiary undertakings, the investments in associates, the valuation of SME loans,
the consolidation of the Group’s results, the preparation of the financial statements, certain disclosures within the Directors’ remuneration
report and taxation.
4)
Using the work of others: We used the evidence provided by our valuation experts and specialists for our work on the significant
assumptions used in the impairment assessment over non-financial assets and the Company’s investment in the US subsidiary, the
valuation of the SME loans and related liabilities recorded at fair value and the loan repurchase liability.
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
£1,890,000 (2019: £2,500,000).
Financial statements – Group
How we determined it
5% of the average of loss before taxation for the previous
three years, adjusted for exceptional items and fair value
gains and losses.
Financial statements – Company
£3,400,000 (2019: £5,000,000).
1% of total assets.
Rationale for
benchmark applied
We determined materiality by applying 5% to the average
consolidated loss before taxation for the previous three years
after adjusting for exceptional items and fair value gains and
losses. We consider loss before taxation to be the most
appropriate benchmark used in assessing the performance
of the Group as the business is listed and profit orientated.
Given the volatility in the underlying performance caused by
challenging economic conditions resulting from Covid-19
through the course of 2020, we consider it appropriate to take
an average of the results of the preceding three years. We
believe that loss before taxation adjusted for exceptional items
and fair value losses is an appropriate measure as it eliminates
the impact of one-off non-recurring charges or those which
significantly impact comparability.
We consider total assets to be the most
appropriate benchmark to apply on the
basis that the Company is a non-trading
investment Company that holds
investment in the Group’s 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 £1,500,000 and £1,800,000.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected
misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the
nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes.
Our performance materiality was 75% of overall materiality, amounting to £1,400,000 for the Group financial statements and £2,500,000
for the Company financial statements.
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Financial statements Report on the audit of the financial statements continued
In determining the performance materiality, we considered a number of factors – the history of misstatements, risk assessment and
aggregation risk and the effectiveness of controls – and concluded that an amount at the upper end of our normal range was appropriate.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £95,000 (Group audit)
(2019: £125,000) and £95,000 (Company audit) (2019: £250,000) as well as misstatements below those amounts that, in our view,
warranted reporting for qualitative reasons.
Conclusions relating to going concern
Our evaluation of the directors’ assessment of the Group’s and the Company’s ability to continue to adopt the going concern basis
of accounting included:
‐ evaluation of management’s going concern assessment;
‐ understanding and evaluating management’s financial forecasts and liquidity position over the going concern period including
an evaluation of the continued impact of Covid-19 on the financial outlook of the Group;
‐ evaluation of the stress testing performed by management including their severe but plausible downside scenario;
‐
review of management’s covenant compliance monitoring and the impact of the stress scenarios on the covenants;
‐ substantiation of financial resources available to the Group as at the balance sheet date including the unrestricted cash; and
‐
reading and evaluating the adequacy of the disclosures made in the financial statements in relation to going concern.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually
or collectively, may cast significant doubt on the Group’s and the Company’s ability to continue as a going concern for a period of at
least twelve months from when the financial statements are authorised for issue.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the Group’s and the
Company’s ability to continue as a going concern.
In relation to the directors’ reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or
draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate
to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of
this report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report
thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other
information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any
form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are
required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material
misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic report and Report of the Directors, we also considered whether the disclosures required by the UK
Companies Act 2006 have been included.
Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and
matters as described below.
Strategic report and 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 2020 is consistent with the financial statements and has been prepared in accordance with
applicable legal requirements.
In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit,
we did not identify any material misstatements in the Strategic report and Report of the Directors.
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.
Annual Report and Accounts 2020
109
Independent auditors’ report continued
to the members of Funding Circle Holdings plc
Report on the audit of the financial statements continued
Corporate governance statement
The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability and that part of the
corporate governance statement relating to the Company’s compliance with the provisions of the UK Corporate Governance Code
specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are
described in the Reporting on other information section of this report.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance
statement is materially consistent with the financial statements and our knowledge obtained during the audit, and we have nothing
material to add or draw attention to in relation to:
‐
‐
‐
‐
‐
the directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks;
the disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an
explanation of how these are being managed or mitigated;
the directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of
accounting in preparing them, and their identification of any material uncertainties to the Group’s and Company’s ability to continue to
do so over a period of at least twelve months from the date of approval of the financial statements;
the directors’ explanation as to their assessment of the Group’s and Company’s prospects, the period this assessment covers and
why the period is appropriate; and
the directors’ statement as to whether they have a reasonable expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any
necessary qualifications or assumptions.
Our review of the directors’ statement regarding the longer-term viability of the Group was substantially less in scope than an audit and
only consisted of making inquiries and considering the directors’ process supporting their statement; checking that the statement is in
alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with
the financial statements and our knowledge and understanding of the Group and Company and their environment obtained in the course
of the audit.
In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate
governance statement is materially consistent with the financial statements and our knowledge obtained during the audit:
‐
‐
‐
the directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the
information necessary for the members to assess the Group’s and Company’s position, performance, business model and strategy;
the section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and
the section of the Annual Report describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to report when the directors’ statement relating to the Company’s compliance
with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review
by the auditors.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors’ responsibilities in respect of the financial statements, 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.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations.
We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit
sampling to enable us to draw a conclusion about the population from which the sample is selected.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditors responsibilities. 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.
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Funding Circle Holdings plc
Financial statements Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
‐ we have not obtained all the information and explanations we require for our audit; or
‐ adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from
branches not visited by us; or
‐ certain disclosures of directors’ remuneration specified by law are not made; or
‐
the Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the
accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were appointed by the directors on 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
six years, covering the years ended 31 December 2015 to 31 December 2020.
Nick Morrison (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
25 March 2021
Annual Report and Accounts 2020
111
Consolidated statement of comprehensive income
for the year ended 31 December 2020
31 December
2020
Before
exceptional
items
£m
Note
Exceptional
items 1
£m
31 December
2020
£m
31 December
2019
Before
exceptional
items
£m
Exceptional
items 1
£m
31 December
2019
£m
Transaction fees
Servicing fees
Other fees
Fee income
Investment income
Investment expense
Total income
Fair value (losses)/gains
Net income
People costs
Marketing costs
Depreciation, amortisation and
impairment
Loan repurchase charge
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
3
4, 6
4
4
4
4
4
7
7
30
8
Other comprehensive
income/(loss)
Items that may be reclassified
subsequently to profit and loss:
Exchange differences on
translation of foreign operations
20
Total comprehensive loss for
the year
Total comprehensive loss
attributable to:
Owners of the Parent
Loss per share
122.5
30.2
3.0
155.7
89.0
(22.7)
222.0
(118.3)
103.7
(81.3)
(46.8)
(17.2)
(6.2)
(39.8)
(191.3)
(87.6)
0.4
(1.4)
(0.8)
(89.4)
(0.2)
(89.6)
—
—
—
—
—
—
—
—
—
(4.0)
—
(13.7)
—
(1.0)
(18.7)
(18.7)
—
—
—
(18.7)
—
(18.7)
122.5
30.2
3.0
155.7
89.0
(22.7)
222.0
(118.3)
103.7
(85.3)
(46.8)
(30.9)
(6.2)
(40.8)
(210.0)
(106.3)
0.4
(1.4)
(0.8)
(108.1)
(0.2)
(108.3)
121.2
30.4
5.3
156.9
28.3
(7.9)
177.3
(9.9)
167.4
(90.3)
(66.5)
(14.9)
(6.5)
(39.6)
(217.8)
(50.4)
1.8
(1.2)
(0.1)
(49.9)
(0.5)
(50.4)
—
—
—
—
—
—
—
—
—
—
—
(34.3)
—
—
(34.3)
(34.3)
—
—
—
(34.3)
—
(34.3)
121.2
30.4
5.3
156.9
28.3
(7.9)
177.3
(9.9)
167.4
(90.3)
(66.5)
(49.2)
(6.5)
(39.6)
(252.1)
(84.7)
1.8
(1.2)
(0.1)
(84.2)
(0.5)
(84.7)
1.7
(87.9)
—
1.7
(18.7)
(106.6)
(7.7)
(58.1)
—
(34.3)
(7.7)
(92.4)
(87.9)
(18.7)
(106.6)
(58.1)
(34.3)
(92.4)
Basic and diluted loss per share
9
(25.8)p
(5.4)p
(31.2)p
(14.5)p
(9.9)p
(24.4)p
1. Exceptional items are detailed within note 5. During the year ended 31 December 2020 the presentation of exceptional items on the face of the consolidated statement of
comprehensive income was amended to illustrate them in columnar fashion to aid users of the accounts’ understanding of the impact of such items. The comparative year
ended 31 December 2019 was re-presented accordingly for comparability.
All amounts relate to continuing activities.
The notes on pages 116 to 159 form part of these financial statements.
112
Funding Circle Holdings plc
Financial statements
Consolidated balance sheet
as at 31 December 2020
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Investment in associates
Investment in trusts
Investment in SME loans (other)
Current assets
Investment in SME loans (warehouse)
Investment in SME loans (securitised)
Investment in SME loans (other)
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Bank borrowings
Bonds
Short-term provisions and other liabilities
Lease liabilities
Non-current liabilities
Long-term provisions and other liabilities
Lease liabilities
Total liabilities
Equity
Share capital
Share premium account
Foreign exchange reserve
Share options reserve
(Accumulated losses)/retained earnings
Total equity
Total equity and liabilities
31 December
2020
£m
31 December
2019
£m
Note
10
11
12
30
13
13
13
13
13
14
23
15
17
17
16
12
16
12
18
19
20
21
—
24.4
28.7
11.0
21.2
0.7
86.0
221.8
279.8
24.3
67.0
103.3
696.2
782.2
34.1
195.5
294.3
8.7
7.3
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
539.9
645.8
1.2
23.5
564.6
0.3
292.6
9.7
13.6
(98.6)
217.6
782.2
0.9
29.8
676.5
0.3
292.3
8.0
11.9
6.5
319.0
995.5
The financial statements on pages 112 to 159 were approved by the Board and authorised for issue on 25 March 2021. They
were signed on behalf of the Board by:
Oliver White
Director
Company registration number 07123934
The notes on pages 116 to 159 form part of these financial statements.
Annual Report and Accounts 2020
113
Consolidated statement of changes in equity
for the year ended 31 December 2020
Balance at 1 January 2019
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
Balance at 31 December 2019
Loss for the year
Other comprehensive income
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
Note
21
20
21
18, 19
21
20
21
18, 19
Share
capital
£m
0.3
—
—
—
—
—
0.3
—
—
—
—
—
Share
premium
account
£m
291.8
—
—
—
0.5
—
292.3
—
—
—
0.3
—
Foreign
exchange
reserve
£m
15.7
—
Share
options
reserve
£m
Retained
earnings/
(accumulated
losses)
£m
6.0
—
87.2
(84.7)
Total
equity
£m
401.0
(84.7)
(7.7)
—
0.5
9.9
319.0
(7.7)
—
—
—
—
8.0
—
(4.0)
—
9.9
11.9
—
—
4.0
—
—
6.5
(108.3)
(108.3)
1.7
—
—
—
—
(3.2)
—
4.9
—
3.2
—
—
1.7
—
0.3
4.9
Balance at 31 December 2020
0.3
292.6
9.7
13.6
(98.6)
217.6
The notes on pages 116 to 159 form part of these financial statements.
114
Funding Circle Holdings plc
Financial statements
Consolidated statement of cash flows
for the year ended 31 December 2020
Net cash inflow/(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)
Proceeds from sale of investment bonds
Investment in trusts
Redemption/(investment) in associates
Dividends from associates
Interest received
31 December
2020
£m
31 December
2019
£m
33.1
(27.0)
Note
23
11
12
17
17
17
17
17
17
17
26, 30
26, 30
7
(9.5)
(0.8)
—
(25.0)
(286.9)
—
146.9
211.7
4.0
(20.9)
1.9
0.4
0.4
(14.5)
(2.7)
4.7
(1.5)
(381.2)
(414.5)
32.5
37.4
—
—
(13.9)
0.1
1.8
Net cash inflow/(outflow) from investing activities
22.2
(751.8)
Financing activities
Proceeds from bank borrowings
Repayment of bank borrowings
Proceeds from issuance of bonds
Proceeds from sale of bonds
Payment of bond liabilities
Proceeds from the exercise of share options
Payment of lease liabilities
Net cash (outflow)/inflow from financing activities
Net decrease 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
23
23
23
23
23
23
23
230.1
(299.1)
186.5
—
(226.1)
0.2
(7.8)
(116.2)
(60.9)
164.5
(0.3)
103.3
462.1
(192.7)
379.5
—
(30.1)
0.7
(7.1)
612.4
(166.4)
333.0
(2.1)
164.5
The impact of exceptional items on the consolidated statement of cash flows is detailed in note 5.
The notes on pages 116 to 159 form part of these financial statements.
Annual Report and Accounts 2020
115
Notes forming part of the consolidated financial statements
for the year ended 31 December 2020
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 172. The consolidated financial statements of the Group for the year ended
31 December 2020 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 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 at least 12 months from the date of approval of the
financial statements).
The Group made a total comprehensive loss of £106.6 million during the year ended 31 December 2020 (2019: loss of £92.4 million).
As at 31 December 2020, the Group had net assets of £217.6 million (2019: £319.0 million). This includes £103.3 million of cash and
cash equivalents (2019: £164.5 million) of which £38.9 million (2019: £14.2 million) is held within the warehouse and securitisation
vehicles. In February 2021 the Group received a net £27.0 million of cash in relation to fees owed to the Group at 31 December 2020.
Additionally, within the net assets the Group holds £118.3 million of invested capital some of which is capable of being monetised
if liquidity needs arise.
The Group has prepared detailed cash flow forecasts for the next 15 months and has updated the going concern assessment
to factor in the potential impact of Covid-19 and related economic stress.
The base case scenario assumes:
‐ non-government scheme lending and the new government guarantee scheme in the UK resume in Q2 2021;
‐
there is no further extension to the PPP government programme in the US beyond March 2021; and
‐ costs and headcount remain relatively flat with marketing at c.30% of operating income.
Management prepared a severe but plausible downside scenario in which:
‐
there is a further deterioration in the global economy and there is a dislocation period of two months between current
government schemes ending and non-government schemes/new schemes commencing; and
‐ a downside loss scenario is applied to Funding Circle’s on-balance sheet investment in SME loans resulting in higher fair value
losses and lower cash flows to the subordinate tranches of investments it owns.
In this downside scenario sufficient cash is forecast to be available to meet liabilities as they fall due without the requirement
to take significant mitigating actions, restructuring or monetising investments.
The Group does not currently rely on committed or uncommitted borrowing facilities with the exception of borrowings, which
are held in bankruptcy remote SPVs, to fund warehouse SME loan purchases, and does not have undrawn committed borrowing
facilities available to the wider Group.
Management has reviewed financial covenants the Group must adhere to in relation to its servicing agreements. These are with
institutional investors and debt facilities associated with borrowings used to fund SME loan originations in warehouses, for which there
are unrestricted cash, tangible net worth and debt to tangible net worth ratios. In the downside scenario the risk of covenant
breach is considered remote.
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 pages 48 and 49.
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 adopted pursuant to Regulation (EC) No 1606/2002 as it applies in 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”).
116
Funding Circle Holdings plc
Financial statements 1. Accounting policies continued
Basis of preparation continued
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 2020:
i) Covid-19
As a result of the global Covid-19 pandemic and the related uncertainty and restrictions required in the geographies that Funding
Circle operates within, lending was proactively brought down in the latter half of March 2020 and continued to be low into April.
SME government guarantee programmes were introduced by the UK and US Governments, and Funding Circle’s subsequent
accreditations, resulted in originations restarting with new borrower products as detailed below and the temporary cessation of
non-government-guaranteed lending. The Group’s exposure to ABS products resulted in significant fair value losses as detailed
below. Additionally, forbearance measures were introduced to support small business borrowers.
ii) The UK Government’s Coronavirus Business Interruption Loan Scheme (“CBILS”) and Bounce Back Loan Scheme
(“BBLS”) funding
During the year, due to the Covid-19 crisis, Funding Circle became an accredited lender under CBILS and BBLS. Funding Circle
is required by the BBB to co-invest in loans originated under CBILS. The loans are beneficially owned by investors under trust
structures in which Funding Circle retains a small stake in CBILS trusts.
The Group does not consolidate the trusts or the loans held within the trusts, recognising its interest in the loans instead as an
investment in trust assets on the balance sheet. This investment is held at FVTPL. The Group earns transaction and service fee
income from originating and servicing CBILS and service fee income for servicing BBLS loans.
iii) The US Government’s Paycheck Protection Programme (“PPP”) loan funding
During the year, due to the Covid-19 crisis, the US business was approved to originate loans under the US Government’s PPP scheme.
Funding Circle funded PPP loans via its lending platform by partnering with financial institutions and institutional investors, for
which it earns a referral fee or origination fee. Additionally Funding Circle was accredited to draw down on the US Government’s
Federal PPP lending facility. As a result the Group holds £24.3 million of PPP loans on balance sheet included within Investment
in SME loans (other) with corresponding draw down on the SBA facility of £24.3 million included within Bank borrowings. These
loans are recognised initially at fair value and are subsequently held at amortised cost as the business model under which the
assets are held is to collect contractual cash flows. Once a loan is forgiven, the loan and related borrowing are extinguished.
iv) Asset-backed securities (“ABS”)
The Group continued its bond programmes which commenced in the prior year in the UK and US, investing in SME loans during
the “warehousing phase” of the programme using both its own cash and amounts borrowed under credit facilities with lending
institutions. An additional credit facility was utilised and warehouse vehicle created in the US in the year to 31 December 2020.
The loans are held within bankruptcy remote special purpose warehouse vehicles which are consolidated on 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. During the year to 31 December 2020 a further £214.2 million of SME loans have been sold to SPVs
(31 December 2019: £292.2 million).
The bonds are split into senior rated bonds (referred to as “rated”) and junior unrated bonds (referred to as “unrated”) and
Funding Circle is required by regulation to retain a 5% equal participation in all classes of bonds issued.
Additionally, once loans are securitised, Funding Circle has temporarily held the residual horizontal tranches with the intention
to sell once seasoned. These tranches have the potential to earn greatest returns, but they also absorb losses first. As at
31 December 2020, Funding Circle held horizontals in three securitisations which were securitised in H2 2019 (UK and US)
and H1 2020 (US). The timing of the pandemic meant that it was not feasible to dispose of all horizontal tranches in 2020.
In July 2020 the Group sold 95% of its investment in one of the subordinated unrated tranches in the UK securitisation vehicle,
for £4.0 million. The sale price was considered to represent the fair value of the bond at the time of sale. The sale did not result in
deconsolidation of the securitisation vehicle, as the variability in cash flows continues to be concentrated in the Group’s remaining
holding of unrated tranches of the vehicle. The portion of the bonds sold were subsequently held by a third party and no longer
eliminated on consolidation resulting in the recognition of an additional bond liability at FVTPL on the Group’s balance sheet.
Annual Report and Accounts 2020
117
1. Accounting policies continued
Changes in accounting policy and disclosures
The Group has adopted the following new and amended IFRSs and interpretations from 1 January 2020 on a full retrospective basis.
Standard/interpretation
Amendments to IAS 1 Presentation of Financial
Statements and IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors, definition of material
Amendments to IFRS 3 Business Combinations,
definition of a business
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
Definition of material
1 January 2020
Business combinations
1 January 2020
Associates and joint ventures
1 January 2020
Amendments to IFRS 7, IFRS 9 and IAS 39 –
interest rate benchmark reform – Phase 1
Reliefs relating to interest rate
benchmark reforms
1 January 2020
The 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 2020
reporting years, have not yet been endorsed pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union
and have not been early adopted by the Group as follows:
Standard/interpretation
Amendments to IFRS 7, IFRS 9 and IAS 39 –
interest rate benchmark reform – Phase 2
Content
Reliefs relating to interest rate
benchmark reforms
Applicable for financial
years beginning on/after
1 January 2021
Amendments to IFRS 16 – Covid-19 related rent concessions
Leases
1 June 2020
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.
Summary of new and amended accounting policies
Investment in trusts
The Group holds a small beneficial ownership in trusts set up to fund CBILS loans with the remaining majority of the beneficial
ownership held by institutional investors. Whilst SME loans are originated by a Group subsidiary, Funding Circle Focal Point
Lending Ltd, which retains legal title to the loans, it holds this legal title of trust on behalf of the majority investors who substantially
retain the economic benefits the CBILS loans generate and therefore the trusts and the assets held within, including the SME loans,
are not consolidated.
The Group assesses whether it controls the trust structure under the criteria of IFRS 10. Control is determined to exist if the
Group has the power to direct the activities of entities and structures and uses this control to obtain a variable return. As the
Group’s holding is pari passu, the Group is not exposed to the majority of the variability in the cash flows of the trust, and it is
not considered to control the trust structures, so they are not consolidated by the Group.
Investments in trusts are classified at fair value through profit and loss. 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.
The Group recognises transaction fee income on origination of loans within the trust and service fee income on the assets within
the trust, eliminating its proportional ownership share of the service fees. A scheme lender fee is charged in relation to the
origination of CBILS loans and investment income is recognised in relation to returns on the investment.
118
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements 1. Accounting policies continued
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.
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.
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; acquisitions and disposals; major
restructuring programmes; significant goodwill or other asset impairments; and other particularly significant or unusual items
(see note 5).
Annual Report and Accounts 2020
119
1. Accounting policies continued
Income recognition
Fee income 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 income when (or as) the entity satisfies its performance obligation.
Fee income earned for the arrangement of loans is classified as transaction fees and is a cost of the borrower except for
government-guaranteed loans which are a cost to the government. 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
(or subsequently invoiced in the case of government-guaranteed loans) and recognised at that point as the Group has the right to
consideration and the performance obligation has been satisfied.
Fee income earned from referrals to partner institutions is classified as transaction fees and is a cost to the partner institution.
There are contracts in place with partner institutions with clearly identifiable terms. The performance obligation in the contract is
considered to be the referral by the Group and subsequent funding of the referred loan by the partner institution and the transaction
price is clearly stated in the referral agreement. Fees are recognised once the referred loan has been funded by the partner
institution and accepted by the referred borrower. At this point the performance obligation has been met and there are no
significant clawback provisions.
Fee income earned from servicing third party loans is classified as servicing fees and is a cost of the investor, except in the case
of government schemes that permit a service fee such as CBILS, where the government bears the cost in the first year. 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 servicing
the loans and allocating repayments of the loan parts to the respective lenders. The transaction price is allocated as a percentage
of the outstanding principal balance, representing the outstanding performance obligation. Fees are recognised on a monthly
basis upon repayment of loan parts. Due to the conditions of the loans, there are no partially completed contracts at the balance
sheet date and no advance payments from customers.
Other fees include excess premium earned from arrangements to buy back defaulted loans from certain institutional investors
and income earned on bought back loans. These are recognised as services are performed on an accruals basis.
Net income includes the following elements under which the recognition criteria of IFRS 9 and not IFRS 15 are applied:
Investment income includes:
‐
interest income from SME loans and investments in trusts that the Group holds on balance sheet.
Investment expense includes:
‐
‐
interest payable on funds borrowed to finance the acquisition of underlying loan investments;
interest payable on bond liabilities held on balance sheet;
‐ amortisation of costs associated with the issuing of bonds and the credit facility; and
‐ gains/losses from changes in fair value of interest hedging instruments.
Fair value gains/losses includes:
‐ gains/losses from changes in the fair value of financial assets and liabilities held on balance sheet.
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.
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.
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Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements 1. Accounting policies continued
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, net income, 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.
Dividends
Dividends are recognised when they become legally payable, in accordance with the Companies Act 2006.
Annual Report and Accounts 2020
121
1. Accounting policies continued
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 (“CGUs”) expected to benefit from the synergies of the combination. CGUs
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 CGU 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 non-financial 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 2020.
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.
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.
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Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements 1. Accounting policies continued
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 CGU) is estimated to be less than its carrying amount, the carrying amount of the asset
(or CGU) 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 CGU)
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 CGU) in prior years.
A reversal of an impairment loss is recognised immediately in profit or loss.
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.
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.
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123
1. Accounting policies continued
Leases continued
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.
Consolidation of special purpose vehicles (“SPVs”)
Subsidiaries are those entities, including structured vehicles, 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 SPVs 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.
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 an indication that the investment in the associate is impaired.
If there is such an indication, 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.
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Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements 1. Accounting policies continued
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; and
financial assets that do not meet the criteria to be amortised cost or FVTOCI 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 FVTPL 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.
In certain circumstances the Group buys back loans from investors. The nature of the buy-back is such that these are not treated
as an investment in loans categorised below and the loans are included within other receivables measured at amortised cost
less provision for impairment.
With the exception of investment in SME loans under cure period, investment in trusts, investment in SME loans (warehouse) and
investment in SME loans (securitised), all financial assets are held to collect contractual cash flows.
Under certain circumstances the Group holds investments in SME loans. The four types of investment in SME loans 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 consolidates 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 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.
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 would deconsolidate the securitisation SPV. The Group would subsequently apply the
derecognition rules of IFRS 9 to the investment in SME loans. Cash on the sale of the Group’s investment in the residual is
treated as an investing activity.
Annual Report and Accounts 2020
125
1. Accounting policies continued
Financial instruments continued
Financial assets continued
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). Additionally the Group has originated PPP loans using the SBA’s PPPLF facility, both of which
are held on balance sheet.
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.
PPP loans are fully guaranteed by the SBA.
Other financial assets
Financial assets recognised in the balance sheet as trade and other receivables are classified as amortised cost.
They are recognised initially 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.
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 income 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.
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Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements 1. Accounting policies continued
Financial instruments continued
Financial assets continued
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 measured at fair value
with gains and losses recognised in profit or loss. See note 17 for details of interest rate risk.
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.
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 repurchases
Loan repurchase 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 repurchase 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 and Share Incentive Plan Trust
The Company has established an offshore Employee Benefit Trust (“EBT”) and an onshore Share Incentive Plan (“SIP”) Trust.
The EBT and SIP provide for the issue of shares to Group employees principally under share option schemes and SIP respectively.
The Group has control of the EBT and SIP Trust and therefore consolidates the Trusts 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. The costs are transferred to retained earnings when options are exercised.
Annual Report and Accounts 2020
127
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.
The significant judgements and 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 2019.
Critical judgements
Consolidation and deconsolidation of special purpose vehicles (“SPVs”) (Note 17)
As part of its asset-backed securitisation programmes, the Group has established warehouse and securitisation SPVs.
Judgement is required in determining who is most exposed to the variability of returns and who has the ability to affect those
returns and therefore who should consolidate these vehicles and subsequently deconsolidate them. Where the Group has a
significant interest in the junior tranches of the securitisation vehicles or the subordinated debt in the warehouses, the Group
is deemed to be exposed to the majority of the variability of the returns of those vehicles and controls them, and therefore
consolidates them. Where this interest is reduced, the Group considers whether the vehicles should be deconsolidated.
During the year a tranche of unrated bonds was sold, reducing the Group’s holding in a UK SPV. However, the Group retained
a significant holding of the subordinate unrated tranches of the vehicle and was considered to be exposed to the majority
of the variability of the returns and the vehicle was not deconsolidated.
Loans originated through the platform
The Group originates SME loans through its platform which are funded primarily by banks, asset managers, other institutional
investors, funds, national entities, retail investors or by usage of its own capital. Judgement is required to determine whether
these loans should be recognised on the Group’s balance sheet. Where the Group, its subsidiaries or SPVs which it consolidates
have legal and beneficial ownership to the title of those SME loans, they are recognised on the Group’s balance sheet. Where this is
not the case, the loans are not recognised at the point of origination.
Key sources of estimation uncertainty
The following are the key sources of estimation uncertainty that the Directors have identified 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 non-financial assets (notes 10, 11 and 12)
Non-financial assets (primarily goodwill, intangible assets and property, plant and equipment) are held within the Group within cash-
generating units (“CGUs”) which are expected to benefit from the assets. The Group has three CGUs, being Funding Circle USA (“FCUSA”)
and its subsidiaries, Funding Circle Ltd (“FCUK”) and its subsidiaries and the German and Dutch businesses (Funding Circle Continental
Europe or “FCCE”). These assets are assessed annually for impairment or when indicators of impairment are identified. Following the
impact of Covid-19 and a change in the Group’s income and cost forecasts, an event indicating the possibility of impairment was identified
and the Group undertook an impairment review of non-financial assets in each applicable CGU.
The impairment test involved comparing the carrying value of the non-financial assets held for use to their recoverable amount
for each CGU. The recoverable amount represents the higher of the CGU’s fair value net of selling costs and its value in use,
which were determined using discounted cash flow methodology. In undertaking the impairment assessment it was noted that
the recoverable amount of FCUK was not sensitive to estimation uncertainty, nor was FCCE as the non-financial assets were
previously impaired for the year ended 31 December 2019.
The review identified impairment to the goodwill in FCUSA as the recoverable amount calculated was below the carrying amount
and the goodwill was fully impaired by £12.0 million. IAS 36 allocates impairment losses first to goodwill followed by other
non-financial assets; however, it prohibits the reversal of goodwill impairment. As a result the impairment assessment is not
sensitive to a higher estimation of the recoverable amount; but a lower estimated recoverable amount could lead to impairment
of intangible assets within the CGU which are held at a carrying value of £8.7 million and property, plant and equipment totalling
£11.2 million (excluding certain right-of-use assets identified as separate CGUs).
The Group prepared a five-year forecast for the FCUSA CGU for which the majority of the sensitivity to estimation uncertainty 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 a reduction in the recoverable amount for each key assumption:
‐
‐
fifth-year income growth of 27.0%. A 480 bps reduction in projected fifth-year income growth rate with no cost reduction
would decrease the recoverable amount by £16.2 million to be equal to the carrying value;
fifth-year cost growth of 16.0%. A 520 bps increase in projected fifth-year cost growth rate with no income increase would
decrease the recoverable amount by £16.2 million to be equal to the carrying value;
‐ pre-tax discount rate of 13.0%. A 270 bps increase in discount rate would decrease the recoverable amount by £16.2 million to
be equal to the carrying value; and
‐
income beyond the five-year period extrapolated using an estimated growth rate of 1.5%. A reduction in the growth rate to
0.0% would reduce the recoverable amount by £6.9 million.
128
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements 2. Critical accounting judgements and key sources of estimation uncertainty continued
Key sources of estimation uncertainty continued
Estimated impairment of non-financial assets (notes 10, 11 and 12) continued
During the prior year ended 31 December 2019, 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 previously 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.
Fair value of financial instruments (note 17)
At 31 December 2020, the carrying value of the Group’s financial instrument assets held at fair value was £547.9 million
(31 December 2019: £754.8 million) and the carrying value of financial liabilities carried at fair value was £7.8 million
(2019: £20.0 million).
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 and default rates.
Sensitivities to the default rates and discount rates are illustrated below.
Description
Investment in SME
loans (warehouse)
Fair value
£m
221.8
Unobservable input
Inputs
Lifetime cumulative default
rate as % of original
US:18.1% and
21.6%1
UK: 15.4%
Investment in SME
loans (securitised)
279.8
Lifetime cumulative default
rate as % of original
US: 21.9% and
24.0%1
UK: 16.8%
Bonds (unrated)
(7.8)
Lifetime cumulative default
rate of associated assets
16.8%
Relationship of
unobservable inputs to fair value
A change in the lifetime cumulative
default rate would have the
following impact:
US: +/-300 bps would decrease/
increase fair value by £3.8 million.
UK: +/-330 bps would decrease/
increase fair value by £7.1 million.
A change in the lifetime cumulative
default rate would have the
following impact:
US SPV1¹: +/-140 bps would
decrease/increase fair value by
£2.0 million.
US SPV2¹: +/-200 bps would
decrease/increase fair value by
£4.0 million.
UK: +/-300 bps would decrease/
increase fair value by £2.6 million.
A change in the lifetime cumulative
default rate by +/-300 bps would
decrease/increase fair value by
£2.3 million and £(0.9) million
respectively.
1. Two cumulative default rates are presented for the US representing the portfolios in each of the two respective warehouses and two respective securitisation vehicles. Separate
sensitivities to default rates for the US securitisation vehicles represent the respective seasoning of the loans and the different reasonably possible range of outcomes.
The above sensitivities represent management’s estimate of the reasonably possible range of outcomes and as a result the fair
value of the assets and liabilities measured at fair value could materially diverge from management’s estimate.
Description
Investment in SME
loans (warehouse)
Investment in SME
loans (securitised)
Fair value
£m
221.8
Unobservable input
Discount rate
279.8
Discount rate
Inputs
US: 7.8%
UK: 7.8%
US: 7.8%
UK: 7.8%
Bonds (unrated)
(7.8)
Discount rate
21.7%
Relationship of
unobservable inputs to fair value
A change in the discount rate by
+/-100 bps would decrease/
increase fair value by £3.1 million.
A change in the discount rate by
+/-100 bps would decrease/
increase fair value by £3.7 million.
A change in the discount rate by
+/-100 bps would decrease/
increase fair value by £0.2 million.
Annual Report and Accounts 2020
129
2. Critical accounting judgements and key sources of estimation uncertainty continued
Key sources of estimation uncertainty continued
Fair value of financial instruments (note 17) continued
It is considered that the range of reasonably possible outcomes in relation to the discount rate used could be +/-100 bps and
as a result the fair value of the assets could materially diverge from management’s estimate.
As the discount rate is risk adjusted, it should be noted that the sensitivities to discount rate and to lifetime cumulative default
rate contain a level of overlap regarding credit risk. The sensitivity in expected lifetime cumulative defaults should not also be
applied to the sensitivity of the credit risk element of the risk-adjusted discount rate and the sensitivities are most meaningful
viewed independently of each other.
Loan repurchase liability (note 16)
In certain historical circumstances, in less mature markets, predominantly Germany and the Netherlands, 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.
In order to quantify the ECL, IFRS 9 is followed. 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 in each market together with the impact of loan
defaults. It is estimated that in both the European markets defaults will have already peaked in H2 2020 and will de-stress gradually
afterwards, with Germany expected to fair more favourably than the Netherlands as a result of the government stimulus programme.
The most significant estimation is with default rates on performing loans. For the year ended 31 December 2020 the weighted
average lifetime default rate is estimated at 20.5% under stress assumptions (2019: 12.9% without Covid-19 stress). If the
weighted average default rate estimate were to change by +/-240 bps, the liability would change by £1.2 million for the year ended
31 December 2020 (2019: £1.5 million). It is considered that the range of reasonably possible outcomes in annual default rates used
might be +/-240 bps and as a result it is possible that the liability in future could materially diverge from management’s estimate.
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 previously 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 previously consisted 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 businesses 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.
During the year ended 31 December 2020 organisational changes led to greater ownership of costs being managed within
geographies. As a result the way the operating segment performance is reported to and reviewed by the GLT was modified to
allocate product development, corporate costs, depreciation and amortisation, share-based payment charges and exceptional
items across the three geographical segments. The comparatives for the year ended 31 December 2019 have been restated to
reflect the revised segmental presentation.
Net income/(loss)
Total income
Fair value (losses)/gains
Net income/(loss)
31 December 2020
31 December 2019 (restated)
United
Kingdom
£m
152.9
(43.8)
109.1
United
States
£m
63.0
(74.5)
(11.5)
Developing
Markets
£m
6.1
—
6.1
Total
£m
222.0
(118.3)
United
Kingdom
£m
111.6
(3.1)
103.7
108.5
United
States
£m
Developing
Markets
£m
52.4
(6.8)
45.6
13.3
—
13.3
Total
£m
177.3
(9.9)
167.4
130
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements 3. Segmental information continued
Segment profit
31 December 2020
31 December 2019 (restated)
United
Kingdom
£m
United
States
£m
Developing
Markets
£m
30.2
(14.7)
(9.0)
6.5
(52.8)
(6.5)
(3.1)
(62.4)
(6.3)
(1.1)
(0.5)
(7.9)
Total
£m
(28.9)
(22.3)
(12.6)
(63.8)
(9.4)
(6.5)
(1.3)
(17.2)
(5.0)
—
(7.9)
(1.2)
(13.5)
(83.6)
(0.4)
(5.2)
(6.6)
(18.7)
(14.8)
(106.3)
Segment adjusted
EBITDA
Product development
Corporate costs
Adjusted EBITDA
Depreciation and
amortisation
Share-based payments
and social security costs
Exceptional items (note 5)
Operating loss
Net income by type
United
Kingdom
£m
United
States
£m
Developing
Markets
£m
Total
£m
11.2
(26.4)
(12.3)
(27.5)
(12.5)
(3.0)
(1.0)
(16.5)
(1.7)
(14.9)
(0.3)
(34.3)
(52.8)
(8.0)
(34.3)
(84.7)
34.0
(15.1)
(7.9)
11.0
(8.0)
(5.0)
—
(2.0)
(10.3)
(8.3)
(3.4)
(22.0)
(5.2)
(2.7)
—
(29.9)
In addition to the segmental reporting of performance under IFRS 8, the table below sets out net income by its type:
31 December
2020
£m
31 December
2019
£m
Transaction fees
Servicing fees
Other fees
Fee income
Investment income
Investment expense
Total income
Fair value (losses)/gains
Net income
4. Operating expenses
122.5
30.2
3.0
155.7
89.0
(22.7)
222.0
(118.3)
103.7
31 December 2020
31 December 2019
Before
exceptional
items
£m
Exceptional
items
£m
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
Impairment of goodwill
Impairment of intangible
and tangible assets
Other expenses
Total operating expenses
9.0
8.2
(1.1)
—
0.1
81.3
46.8
10.9
6.2
—
—
29.9
191.3
—
—
—
—
—
4.0
—
—
—
12.0
1.7
1.0
18.7
Before
exceptional
items
£m
Exceptional
items
£m
Total
£m
9.0
8.2
(1.1)
—
0.1
85.3
46.8
10.9
6.2
12.0
1.7
30.9
7.8
7.1
—
0.1
0.1
90.3
66.5
9.4
6.5
—
—
30.0
—
—
—
—
—
—
—
—
—
29.0
5.3
—
34.3
121.2
30.4
5.3
156.9
28.3
(7.9)
177.3
(9.9)
167.4
Total
£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
210.0
217.8
Annual Report and Accounts 2020
131
4. Operating expenses continued
Auditors’ remuneration
Audit fees
– Fees payable to the Company’s auditors for the audit of the Parent Company and consolidated
financial statements
– Fees payable to the Company’s auditors and its associates for the statutory audit of the financial
statements of subsidiaries of the Company
Total audit fees
Non-audit service fees
– Audit-related assurance services
– Other non-audit services
Total assurance-related fees
5. Exceptional items
Restructuring costs
Share-based payment credit relating to restructuring
Impairment of goodwill (note 10)
Impairment of non-financial assets (notes 11 and 12)
Total
31 December
2020
£m
31 December
2019
£m
0.6
0.1
0.7
0.2
0.1
0.3
0.3
0.2
0.5
0.1
0.2
0.3
31 December
2020
£m
31 December
2019
£m
6.0
(1.0)
12.0
1.7
18.7
—
—
29.0
5.3
34.3
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.
As announced in March 2020, the Group restructured the German and Dutch (Developing Markets) businesses to focus on
referring loans it originates to local lenders. This restructuring has resulted in one-off costs totalling £4.6 million comprising
redundancy costs of £4.0 million, a related share-based payment credit of £(0.4) million and other costs of £1.0 million.
An additional impairment on right-of-use assets was incurred of £0.6 million. Cash payments associated with these items
totalled £3.8 million to 31 December 2020. See note 16 for movement in associated provisions and note 23 for cash flow.
As announced in July 2020, the Group reorganised the US business, centralising the US technology team in the UK and
moving sales and marketing to Denver, resulting in a net reduction of c.85 roles. This restructuring has resulted in one-off costs
totalling £0.4 million, comprising redundancy costs of £1.0 million and related share-based payment credits of £(0.6) million.
An additional impairment on the right-of-use assets was recognised of £1.1 million. Cash payments associated with these items
totalled £1.1 million to 31 December 2020. See note 16 for movement in associated provisions and note 23 for cash flow.
Following a change in the Group’s income and cost forecasts, an event indicating the possibility of impairment was identified
and the Group has undertaken a goodwill impairment review as a result of which it was identified that goodwill in relation to the
Funding Circle USA business was carried at a value higher than the CGU’s recoverable amount driven by a reduction in the future
discounted cash flows of the CGU. As a result, an impairment was recognised of £12.0 million. There was no cash movement in
relation to the impairment.
In 2019, 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 CGU. 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 CGU and an impairment of £0.7 million and £4.6 million
respectively was recognised. There was no cash movement in relation to the impairment.
132
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements
6. Employees
The average monthly number of employees (including Directors) during the year was:
UK
US
Developing Markets
2020
Number
601
240
70
911
2019
Number
599
292
164
1,055
In addition to the employees above, the average monthly number of contractors during the year was 91 (2019: 110).
Employment costs (including Directors’ emoluments) during the year were:
31 December 2020
31 December 2019
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)/income
Interest receivable
Total finance income
Interest on lease liabilities
Total finance costs
Net finance (costs)/income
Before
exceptional
items
£m
Exceptional
items
£m
70.8
6.9
1.2
6.6
85.5
5.2
(9.4)
81.3
4.0
1.0
—
(1.0)
4.0
—
—
4.0
Total
£m
74.8
7.9
1.2
5.6
89.5
5.2
(9.4)
85.3
Total
£m
80.1
7.8
1.0
8.0
96.9
7.7
(14.3)
90.3
31 December
2020
£m
31 December
2019
£m
0.4
0.4
(1.4)
(1.4)
(1.0)
1.8
1.8
(1.2)
(1.2)
0.6
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% (2019: 19%).
Current tax
UK corporation tax
Total current tax
Total tax charge
31 December
2020
£m
31 December
2019
£m
0.2
0.2
0.2
0.5
0.5
0.5
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 2020. In the prior year, the tax charge represents the amount of tax deducted from the RDEC
receivable for the years 2017 to 2019.
Annual Report and Accounts 2020
133
8. Income tax continued
The Group charge 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 for the year
Loss before taxation
Taxation on loss at 19% (2019: 19%)
Effects of:
Research and development
Effect of foreign tax rates
Non-taxable/non-deductible expenses
Temporary differences not recognised
Impairment charge and other exceptional items
Tax charge
31 December
2020
£m
31 December
2019
£m
(108.1)
(20.5)
0.2
(7.7)
(0.1)
23.2
5.1
0.2
(84.2)
(16.0)
0.5
(2.4)
0.8
10.7
6.9
0.5
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 (30.0%) and the Netherlands (25%). The effective tax rate for the year was (0.2%) (2019: (0.6%)).
The statutory UK corporation tax rate is currently 19%, and remained at 19% from 1 April 2020 following it being substantively
enacted on 17 March 2020. This reverses the previously enacted reduction to 17%. 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 of 21% 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
Other
Unrecognised deferred tax asset
31 December
2020
£m
31 December
2019
£m
1.3
88.6
2.1
0.5
1.1
93.6
(1.9)
61.5
1.0
0.4
—
61.0
The Group has unrelieved tax losses of £342.8 million (2019: £248.0 million) that are available for offset against future taxable
profits. The Group has not recognised a deferred tax asset in respect of these losses as there is not sufficient 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.
The UK Government announced on 3 March 2021 that the rate of corporation tax will be increased to 25% from 1 April 2023.
This measure will be legislated in the Finance Bill 2021 published on 11 March 2021. As such, it is not substantively enacted for
the accounting year ended 31 December 2020 and deferred tax has been recognised at 19%. Although not substantively enacted,
the effect of the announcement would increase its unrecognised deferred tax asset as at 31 December 2020 by £5.3 million to
£98.9 million (property, plant and equipment £(0.4) million; carry forward losses: £5.0 million; deferred stock options £0.6 million;
others £0.1 million).
134
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial 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)
Basic and diluted loss per share before exceptional items
10. Goodwill
Cost and carrying amount
At 1 January 2019
Impairment charge (note 5)
Exchange differences
At 31 December 2019
At 1 January 2020
Impairment charge (note 5)
Exchange differences
At 31 December 2020
31 December
2020
£m
31 December
2019
£m
(108.3)
(84.7)
347.0
(31.2)p
347.6
(24.4)p
(89.6)
(50.4)
347.0
(25.8)p
347.6
(14.5)p
Total
£m
42.3
(29.0)
(2.0)
11.3
11.3
(12.0)
0.7
—
Goodwill is reviewed annually for impairment, or more frequently when there are indications that impairment may have occurred.
Following the impact of Covid-19 and a change in the Group’s income and cost forecasts, an event indicating the possibility of
impairment was identified and the Group undertook an interim goodwill impairment review for all CGUs at 30 June 2020.
Goodwill acquired in a business combination is allocated, at acquisition, to the CGUs that are expected to benefit from that
business combination. At the previous balance sheet date, the Group had one CGU to which remaining goodwill was attached,
being Funding Circle USA (“FCUSA”) and its subsidiaries.
FCUSA
FCCE
Total
31 December
2020
£m
31 December
2019
£m
—
—
—
11.3
—
11.3
The impairment test involved comparing the carrying value of the non-financial assets held for use to their recoverable amount.
The recoverable amount represents the higher of the CGU’s fair value less cost to sell and its value in use. The recoverable
amount was determined using fair value less cost to sell calculations utilising discounted cash flows.
Further details of the impairment assessment are detailed within note 2. The review identified impairment to the goodwill in
FCUSA as the recoverable amount calculated was below the carrying amount. The cumulative amount of impairment losses in
relation to goodwill recognised in the year was £12.0 million (31 December 2019: £29.0 million in FCCE).
Annual Report and Accounts 2020
135
Capitalised
development
costs
£m
Computer
software
£m
Other
intangibles
£m
34.2
(0.5)
14.3
—
(0.7)
47.3
47.3
(0.5)
9.4
—
(10.7)
45.5
13.4
(0.1)
(0.3)
6.9
4.6
(0.5)
24.0
24.0
—
8.0
—
(10.7)
21.3
24.2
23.3
0.8
—
0.2
—
—
1.0
1.0
—
0.1
—
(0.3)
0.8
0.3
—
0.3
0.2
—
—
0.8
0.8
—
0.2
—
(0.3)
0.7
0.1
0.2
1.3
(0.2)
—
—
—
1.1
1.1
—
—
—
—
1.1
1.1
(0.1)
—
—
—
—
1.0
1.0
—
—
—
—
1.0
0.1
0.1
Total
£m
36.3
(0.7)
14.5
—
(0.7)
49.4
49.4
(0.5)
9.5
—
(11.0)
47.4
14.8
(0.2)
—
7.1
4.6
(0.5)
25.8
25.8
—
8.2
—
(11.0)
23.0
24.4
23.6
11. Intangible assets
Cost
At 1 January 2019
Exchange differences
Additions
Reclassification
Disposals
At 31 December 2019
At 1 January 2020
Exchange differences
Additions
Reclassification
Disposals
At 31 December 2020
Accumulated amortisation
At 1 January 2019
Exchange differences
Reclassification
Charge for the year
Impairment
Disposals
At 31 December 2019
At 1 January 2020
Exchange differences
Charge for the year
Impairment
Disposals
At 31 December 2020
Carrying amount
At 31 December 2020
At 31 December 2019
136
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements
12. Property, plant and equipment, right-of-use assets and lease liabilities
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
31 December
2020
£m
31 December
2019
£m
Property, plant and equipment (owned)
Right-of-use assets
Reconciliation of amount recognised in the balance sheet
3.9
24.8
28.7
Leasehold
improvements
£m
Computer
equipment
£m
Furniture
and fixtures
£m
Right-of-use
assets
(property)
£m
Cost
At 1 January 2019
Reclassification
Disposals
Additions
Exchange differences
At 31 December 2019
At 1 January 2020
Disposals
Additions
Exchange differences
At 31 December 2020
Accumulated depreciation
At 1 January 2019
Disposals
Charge for the year
Impairment
Exchange differences
At 31 December 2019
At 1 January 2020
Disposals
Charge for the year
Impairment (exceptional)
Exchange differences
At 31 December 2020
Carrying amount
At 31 December 2020
At 31 December 2019
5.3
(0.2)
(0.5)
1.4
(0.2)
5.8
5.8
(0.1)
0.4
—
6.1
1.7
(0.3)
1.0
0.6
—
3.0
3.0
(0.1)
0.8
—
—
3.7
2.4
2.8
4.0
—
—
0.9
(0.1)
4.8
4.8
(1.6)
0.4
—
3.6
3.0
—
0.9
0.1
—
4.0
4.0
(1.6)
0.8
—
—
3.2
0.4
0.8
2.2
—
(0.4)
1.2
—
3.0
3.0
(0.2)
—
—
2.8
1.5
(0.4)
0.4
—
—
1.5
1.5
(0.2)
0.4
—
—
1.7
1.1
1.5
33.8
0.2
(5.3)
21.1
(0.4)
49.4
49.4
(2.2)
—
(0.4)
46.8
13.9
(3.7)
5.5
—
(0.2)
15.5
15.5
(2.2)
7.0
1.7
—
22.0
30.6
24.8
33.9
28.7
39.0
5.1
33.9
39.0
Total
£m
45.3
—
(6.2)
24.6
(0.7)
63.0
63.0
(4.1)
0.8
(0.4)
59.3
20.1
(4.4)
7.8
0.7
(0.2)
24.0
24.0
(4.1)
9.0
1.7
—
During the year right-of-use assets were identified as part of the FCCE and FCUS restructures, which were considered to be
individual CGUs for which the recoverable amount was considered to be the future potential sub-let value. The estimated
discounted cash flows from sub-let income were compared to the carrying value of the asset and an impairment of £1.7 million
was recognised. See note 5 for related exceptional items.
Annual Report and Accounts 2020
137
12. Property, plant and equipment, right-of-use assets and lease liabilities continued
Lease liabilities
Amounts recognised on the balance sheet were as follows:
Current
Non-current
Total
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
2020
£m
31 December
2019
£m
7.3
23.5
30.8
8.5
29.8
38.3
31 December
2020
£m
31 December
2019
£m
7.0
1.4
0.1
5.5
1.2
0.2
The total cash outflow for leases (excluding short-term and low-value leases) in 2020 was £7.8 million (2019: £7.1 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 2020 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 (2019: £nil).
31 December
2020
£m
31 December
2019
£m
0.7
21.2
21.9
24.3
221.8
279.8
525.9
547.8
1.7
—
1.7
—
342.0
366.6
708.6
710.3
13. Investment in SME loans
Non-current
Investment in SME loans (other) – amortised cost
Investment in trusts – FVTPL
Total non-current
Current
Investment in SME loans (other) – amortised cost
Investment in SME loans (warehouse) – FVTPL
Investment in SME loans (securitised) – FVTPL
Total current
Total
138
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements
14. Trade and other receivables
Trade receivables
Other receivables¹
Prepayments
Accrued income²
Rent and other deposits
31 December
2020
£m
31 December
2019
£m
1.6
15.5
3.6
43.7
2.6
67.0
0.9
17.3
4.2
7.3
3.9
33.6
1. Includes £7.5 million (2019: £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.
2. Includes £36.2 million (2019: £nil) in relation to transaction fees receivable on CBILS originations. Accrued income outstanding at the start of the year was subsequently collected.
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. Other receivables includes amounts related to bought back loans, some of which
are past due or impaired.
Included in rent and other deposits are £1.9 million of rental deposits (2019: £3.3 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.
15. Trade and other payables
Trade payables
Other taxes and social security costs
Other creditors
Accruals
31 December
2020
£m
31 December
2019
£m
2.1
3.7
5.6
22.7
34.1
3.2
3.1
1.7
11.7
19.7
Total
£m
4.6
—
7.3
(7.9)
4.0
—
0.1
15.4
(9.6)
9.9
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
16. Provisions and other liabilities
At 1 January 2019
Reclassification
Additional provision/liability
Amount utilised
At 31 December 2019
Reclassification
Exchange differences
Additional provision/liability
Amount utilised
At 31 December 2020
Dilapidation
£m
Loan repurchase
£m
Restructuring 1
£m
0.8
—
0.1
—
0.9
—
—
—
—
0.9
3.1
0.5
6.5
(7.2)
2.9
—
0.2
6.2
(4.1)
5.2
—
—
—
—
—
—
—
6.0
(4.9)
1.1
Other ¹
£m
0.7
(0.5)
0.7
(0.7)
0.2
—
(0.1)
3.2
(0.6)
2.7
1. Restructuring provision is in relation to reorganisation of the USA, German and Dutch businesses; see note 5. Other provisions includes provisions for operational buy backs.
Current
Non-current
31 December
2020
£m
31 December
2019
£m
8.7
1.2
9.9
3.1
0.9
4.0
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.
Annual Report and Accounts 2020
139
16. Provisions and other liabilities continued
Loan repurchase liability
In certain historical 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. 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 income.
Under IFRS 9, the Group is required to provide for these loan repurchases under the expected credit loss (“ECL”) model.
The liability 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, which reflects the point at which the loan is considered to be credit-impaired. Under the loan repurchase
contracts, this was the point at which there is an obligation for the Group to make a payment under the contract or buy back
the loan. However, while the buyback agreement is contractually defined as 90 days past due, due to the impact of Covid-19,
a consent letter was signed with the institutional investors in April 2020 to accommodate loans on forbearance plans whereby
loans on such plans will be repurchased at 180 days past due. However, the definition of default for the purposes of expected
credit losses remains 90 days past due and the buyback may lag the default definition applied.
If the loan is bought back by the Group, at the point of buy back, the financial asset associated with the purchase meets the
definition of purchased or originated credit impaired (“POCI”); this element of the reserve is therefore based on lifetime ECLs.
The Group bands each loan investment using an internal risk rating and assesses credit losses on a collective basis.
Performing:
12-month
ECL
£m
Underperforming:
lifetime
ECL
£m
Non-performing:
lifetime
ECL
£m
2.1
2.8
(3.6)
—
(0.5)
1.3
2.1
—
0.1
(0.3)
—
(0.8)
1.1
2.2
0.8
—
(0.1)
—
—
0.1
0.8
—
0.1
0.5
—
—
0.1
1.5
0.2
—
7.4
(7.2)
—
(0.4)
—
—
—
4.9
(4.1)
—
0.7
1.5
Total
£m
3.1
2.8
3.7
(7.2)
(0.5)
1.0
2.9
—
0.2
5.1
(4.1)
(0.8)
1.9
5.2
Expected credit
loss coverage
%
Basis for
recognition of
loan repurchase
liability
Gross assets
of external
parties subject
to loan repurchase
liability
£m
5.0 12-month ECL
81.3
Lifetime ECL
100.0
Lifetime ECL
Total
40.6
0.9
—
41.5
Loan
repurchase
liability
£m
2.1
0.8
—
2.9
At 1 January 2019
Liability against new loans originated
Liability against loans transferred from performing
Amounts utilised
Loans repaid
Change in probability of default
At 31 December 2019
Liability against new loans originated
Exchange differences
Liability against loans transferred from performing
Amounts utilised
Loans repaid
Change in probability of default
At 31 December 2020
At 31 December 2019
Performing (due in 30 days or less)
Underperforming (31–90 days overdue)
Non-performing (90+ days overdue)
140
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements
16. Provisions and other liabilities continued
Loan repurchase liability continued
At 31 December 2020
Performing (due in 30 days or less)
Underperforming (31–90 days overdue)
Non-performing (90+ days overdue)
Expected credit
loss coverage
%
Basis for
recognition of
loan repurchase
liability
Gross assets
of external
parties subject
to loan repurchase
liability
£m
10.8 12-month ECL
71.5
Lifetime ECL
79.0
Lifetime ECL
Total
20.3
2.1
1.9
24.3
Loan
repurchase
liability
£m
2.2
1.5
1.5
5.2
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 stress 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; and iv) very high losses reflecting Covid-19 stress scenarios with the peak of defaults
having occurred in H2 2020 and then de-stressing gradually afterwards.
The stress scenario used was a geography-weighted scenario reflecting higher losses on the Netherlands book than that of
the German portion of the loan book. This reflects the impact of the German Government’s stimulus programme, resulting
in a blended stress of defaults having peaked in H2 2020 and de-stressing gradually afterwards.
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. Estimated recoveries from defaults are discounted back to their present value using the effective interest rate.
The items that the model is most sensitive to are default rates. Management has applied an estimated weighted average lifetime
default rate across cohorts of 20.5% (31 December 2019: 12.9%). See note 2 for a sensitivity analysis on the impact of a change
in default rates. At 31 December 2020, 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 £24.3 million (2019: £41.5 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.
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;
‐
‐
lease liabilities; and
loan repurchase liabilities.
Annual Report and Accounts 2020
141
17. Financial risk management continued
Principal financial instruments continued
Categorisation of financial assets and financial liabilities
The tables show the carrying amounts of financial assets and financial liabilities by category of financial instrument as at
31 December 2020:
Assets
Investment in SME loans (other)
Investment in SME loans (warehouse)
Investment in SME loans (securitised)
Investment in trusts
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
Loan repurchase liability
Bank borrowings
Bonds
Lease liabilities
Fair
value through
profit and loss
£m
—
221.8
279.8
21.2
0.3
24.8
547.9
Fair
value through
profit and loss
£m
—
—
—
(7.8)
—
(7.8)
Amortised
cost
£m
25.0
—
—
—
19.4
78.5
122.9
Amortised
cost
£m
(7.7)
(5.2)
(195.5)
(286.5)
(30.8)
Total
£m
25.0
221.8
279.8
21.2
19.7
103.3
670.8
Total
£m
(7.7)
(5.2)
(195.5)
(294.3)
(30.8)
(525.7)
(533.5)
The tables show the carrying amounts and fair values 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 (warehouse)
Investment in SME loans (securitised)
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
Loan repurchase liability
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
Fair
value through
profit and loss
£m
—
—
—
(20.0)
—
(20.0)
1.7
—
—
21.9
118.5
142.1
Amortised
cost
£m
(4.9)
(2.9)
(265.8)
(328.7)
(38.3)
(640.6)
Total
£m
1.7
342.0
366.6
22.1
164.5
896.9
Total
£m
(4.9)
(2.9)
(265.8)
(348.7)
(38.3)
(660.6)
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), bank borrowings, lease liabilities, certain bonds, loan repurchase liabilities 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.
142
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements
17. Financial risk management continued
Financial instruments measured at fair value
IFRS 13 requires certain disclosures which require the classification of financial assets and financial liabilities measured at fair
value using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurement.
Disclosure of fair value measurements by level is according to the following fair value measurement hierarchy:
‐
‐
level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the
measurement date;
level 2 inputs are inputs other than quoted prices included within level 1 that are observable for the 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 relate to derivative financial instruments.
If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.
31 December 2020
Financial assets
Trade and other receivables
Investment in SME loans (warehouse)
Investment in SME loans (securitised)
Investment in trusts
Cash and cash equivalents
Financial liabilities
Bonds
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
Fair value measurement using
Quoted prices
in active
markets
(level 1)
£m
Significant
observable
inputs
(level 2)
£m
Significant
unobservable
inputs
(level 3)
£m
—
—
—
—
24.8
24.8
—
—
0.1
—
—
—
—
0.1
—
—
0.2
221.8
279.8
21.2
—
523.0
(7.8)
(7.8)
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
(20.0)
(20.0)
Total
£m
0.3
221.8
279.8
21.2
24.8
547.9
(7.8)
(7.8)
Total
£m
0.2
342.0
366.6
46.0
754.8
(20.0)
(20.0)
Annual Report and Accounts 2020
143
17. Financial risk management continued
Financial instruments measured at fair value continued
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 £221.8 million at 31 December 2020
(2019: £342.0 million).
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 £279.8 million at 31 December 2020 (2019: £366.6 million).
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 £7.8 million at 31 December 2020 (2019: £20.0 million).
Investment in trusts represents the Group’s investment in the trusts used to fund CBILS loans for which the government-owned
British Business Bank will guarantee up to 80% of the balance in the event of default and is measured at fair value through profit
and loss. The fair value has been estimated by discounting future cash flows in relation to the trusts 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 trusts was £21.2 million at 31 December 2020 (2019: £nil).
The most relevant significant unobservable input relates to the default rate estimate and discount rates applied to the fair value
calculation, details of which are set out in note 2 for those with material estimation uncertainty.
Fair value movements on investment in SME loans (warehouse), investment in SME loans (securitised), investments in trusts and
bonds (unrated) are recognised through the profit and loss account in fair value (losses)/gains.
A reconciliation of the movement in level 3 financial instruments is shown as follows:
At 1 January 2019
Additions
Securitisations
Repayments
Net (loss)/gain on the change in fair value of financial
instruments at fair value through profit and loss
Foreign exchange loss
At 31 December 2019
Additions
Securitisations
Transfers
Repayments
Disposal
Net (loss)/gain on the change in fair value of financial
instruments at fair value through profit and loss
Foreign exchange loss
At 31 December 2020
Investment in
SME loans
(warehouse)
£m
Investment in
SME loans
(securitised)
£m
Bonds
(unrated)
£m
Investment
in trusts
£m
Trade and
other receivables
£m
—
673.4
(292.2)
(32.5)
(0.5)
(6.2)
342.0
286.9
(214.2)
(0.2)
(146.9)
—
(43.4)
(2.4)
—
—
414.5
(37.4)
(5.8)
(4.7)
366.6
—
214.2
—
(211.7)
—
(87.2)
(2.1)
221.8
279.8
—
(17.1)
—
0.7
(3.6)
—
(20.0)
—
—
—
4.2
(4.0)
12.0
—
(7.8)
—
—
—
—
—
—
—
20.9
—
—
—
—
0.3
—
21.2
—
—
—
—
—
—
—
—
—
0.2
—
—
—
—
0.2
144
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial 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)
Investment in trusts
Current
Investment in SME loans (other)
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
2020
£m
31 December
2019
£m
0.7
21.2
24.3
221.8
279.8
1.6
15.5
2.6
103.3
670.8
(489.8)
181.0
1.7
—
—
342.0
366.6
0.9
17.3
3.9
164.5
896.9
(614.5)
282.4
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 financial guarantees were every eligible loan required to be bought
back would be £24.3 million (2019: £41.5 million).
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: £78.3 million (2019: £112.6 million), A+ or
better: £24.8 million (2019: £51.1 million) and below A- rated: £0.2 million (2019: £0.8 million).
Annual Report and Accounts 2020
145
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 liquidity requirements of the
bonds are met from cash flows generated by the investment in SME loans (securitised) and the liquidity requirements of bank
borrowings are met from cash flows generated by investment in SME loans (warehouse) and SME loans (other).
The maturity analysis of financial instruments at 31 December 2020 and 31 December 2019 is as follows:
At 31 December 2020
Financial liabilities
Trade and other payables
Bank borrowings
Bonds
Loan repurchase liability1
Lease liabilities
At 31 December 2019
Financial liabilities
Trade and other payables
Bank borrowings
Bonds
Loan repurchase liability1
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
(7.7)
(171.2)
(45.9)
(5.2)
(1.8)
—
—
(101.7)
—
(5.5)
—
(24.3)
(164.3)
—
(24.3)
(231.8)
(107.2)
(212.9)
—
—
—
—
(2.2)
(2.2)
(7.7)
(195.5)
(311.9)
(5.2)
(33.8)
(554.1)
—
—
17.6
—
3.0
20.6
(7.7)
(195.5)
(294.3)
(5.2)
(30.8)
(533.5)
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)
1. Financial guarantees provided for in the loan repurchase liability are allocated to the earliest period in which the guarantee could possibly be called.
2. Included within the impact of discounting on bonds is £2.5 million of deferred bond issuance costs (2019: £2.7 million).
During 2020, the Group maintained revolving credit facility agreements of up to £220 million and $180 million for the Group’s UK
and US ABS programmes respectively, including a new facility in the US of up to $175 million in the year. The facilities are drawn
down in order to fund the purchase of SME loans for the warehouses. Due to the impact of Covid-19 and the refocus towards
CBILS and PPP loan originations, the warehouses have ceased reinvestment of proceeds from SME loans and commenced
paying down the outstanding facility balances. As at 31 December 2020, the amounts drawn in the UK and US totalled £120.6
million (2019: £144.8 million) and $69.2 million (2019: $159.8 million) respectively. Interest is payable on the borrowings in the UK
at 2.0% plus 1 month London Inter-Bank Offered Rate (“LIBOR”) and in the US at 2.5% plus the 3 month commercial paper rate on
the initial facility and at 3 month USD LIBOR + 3.0% on the new facility respectively.
Additionally in the US the Group has drawn $33.1 million (2019: $nil) on the PPP Liquidity Facility available from the Federal
Reserve Bank at a fixed interest rate of 0.35%.
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.
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.
146
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements
17. Financial risk management continued
Financial risk factors continued
Market risk continued
b) Cash flow and fair value interest rate risk continued
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
2020
£m
2019
£m
2020
£m
2019
£m
At 31 December
Fixed rate
Investment in SME loans (other)2
Investment in trusts
Investment in SME loans
(warehouse)¹
Investment in SME loans
(securitised)¹
Bank borrowings2
Bonds¹
Floating rate
Cash and cash equivalents
Bank borrowings
Bonds
—
—
1.6
0.2
—
—
—
—
0.3
0.6
—
—
103.3
(171.2)
—
164.5
(265.8)
—
—
—
2.8
8.3
—
—
—
—
—
2020
£m
25.0
21.2
2019
£m
1.7
—
—
—
11.5
217.4
330.2
4.9
—
—
—
—
—
271.3
(24.3)
(169.9)
—
—
361.1
—
(128.9)
—
—
(124.4)
(219.8)
(66.1)
(100.4)
11.1
16.4
216.3
344.3
1. The bonds, investment in SME loans (warehouse) and investment in SME loans (securitised) are classified as current on the balance sheet, reflecting 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.
2. The fixed rate bank borrowings and investment in SME loans (other) represent the Group’s drawing of the PPP liquidity facility in the US in order to fund PPP loan originations.
These are classified as current on the balance sheet, representing the expectation that the PPP loans will be forgiven by the SBA and the associated liability will be repaid from
the proceeds within 12 months of the balance sheet date. 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 (warehouse), investment
in SME loans (securitised), investment in trusts, certain bank borrowings (in the US) 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 the impact of movements in interest rates on the value of the assets 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 1.0% increase in LIBOR would result in
an increase of annual interest paid on facilities drawn to their current levels of £1.7 million.
Interest on bonds (in the UK) is subject to movements in the Sterling Overnight Index Average Rate (“SONIA”). However, the
Group has mitigated the risk of increases in interest rates through the use of interest rate caps. A 1.0% increase in SONIA would
result in an increase of projected annual interest expense for the year ended 31 December 2021 of £1.1 million.
Following the financial crisis, the reform and replacement of benchmark interest rates such as GBP LIBOR and other inter-bank offered rates
(‘IBORs’) has become a priority for global regulators. There remains some uncertainty around the timing and precise nature of these changes.
As described above the Group is exposed to GBP and USD LIBOR on bank borrowings and cash and cash equivalents. The Group
has monitored the market and output from industry working groups and regulators which manage the transition to the new
benchmark interest rates away from GBP LIBOR to SONIA and USD LIBOR to SOFR. In response to the transition the Group has
identified all its LIBOR exposures and is undertaking a plan to smoothly transition to alternative benchmark rates. Given the
Group’s exposures relate to bank borrowings and cash and cash equivalents, the impact is limited and the Group expects to rely
on fall-back language within the contracts.
The amendments to IFRS 9 will be applied until uncertainty arising from the benchmark interest rate reforms that the Group is
exposed to ends. This uncertainty will remain until the Group’s contracts that reference LIBOR are amended to reference the
alternative benchmark.
Annual Report and Accounts 2020
147
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 income. Derivatives are not designated into formal hedging relationships within the Group.
At 31 December 2020
Notional amount
Underlying
Strike rate
Maturity
Fair value
Interest rate cap
US warehouse
Interest rate cap
US warehouse
Interest rate cap
UK securitisation
$180m
USD LIBOR
$87.5m
USD LIBOR
4.0%
4.0%
June 2021
March 2022
—
—
£177m 1
GBP SONIA
2.0%
July 2024
£0.1m
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 income 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 table below sets out the Group’s currency exposures from financial assets and liabilities held by Group companies in currencies
other than their functional currencies and resulting in exchange movements in the income statement and balance sheet.
31 December 2020
31 December 2019
Cash and cash
equivalents
Intra-Group assets
Intra-Group liabilities
US dollars
£m
0.2
—
(0.5)
GBP
£m
—
—
(10.1)
EUR
£m
2.3
—
(8.3)
Total
£m
US dollars
£m
2.5
—
(18.9)
0.2
0.1
(0.1)
GBP
£m
—
1.5
—
EUR
£m
0.1
0.8
(0.7)
Total
£m
0.3
2.4
(0.8)
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.
148
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements 17. Financial risk management continued
Financial risk factors continued
d) Foreign exchange risk continued
The Group’s sensitivity to fluctuations in foreign currencies is related to the US dollar and euro amounts held in the Parent Company.
Appreciation in pound sterling
Depreciation in pound sterling
Income
statement
2020
£m
(0.5)
(0.3)
(0.8)
Equity
2020
£m
(2.9)
0.5
(2.4)
Income
statement
2019
£m
—
—
—
Equity
2019
£m
(6.7)
(2.0)
(8.7)
Income
statement
2020
£m
0.6
0.3
0.9
Equity
2020
£m
3.2
(0.5)
2.7
Income
statement
2019
£m
—
—
—
Equity
2019
£m
7.4
2.2
9.6
At 31 December
US dollars
Euros
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
2020
Number
31 December
2020
£
31 December
2019
Number
31 December
2019
£
352,943,975
352,944
348,399,274
348,399
During 2020, the Company issued 4,544,701 ordinary shares of £0.001 ranking pari passu with ordinary shares in issue (2019:
2,366,196) in connection with employee share schemes, giving rise to a total share premium of £0.3 million (2019: £0.5 million).
Included in the total number of ordinary shares outstanding above are 1,114,518 (2019: 2,282,239) shares held by the Group’s
Employee Benefit Trust and 2,508,079 (2019: nil) shares held by the Group’s Share Incentive Plan Trust.
19. Share premium account
At 1 January
Exercise of options – proceeds received
At 31 December
20. Foreign exchange reserve
At 1 January 2019
Exchange difference on translating the net assets of foreign operations
At 31 December 2019
Exchange difference on translating the net assets of foreign operations
At 31 December 2020
2020
£m
292.3
0.3
292.6
2019
£m
291.8
0.5
292.3
£m
15.7
(7.7)
8.0
1.7
9.7
Exchange differences relating to the translation of the net assets of the Group’s subsidiaries from their functional currency into
the Company’s functional currency are recognised directly in the foreign exchange reserves within equity.
Annual Report and Accounts 2020
149
21. (Accumulated losses)/retained earnings
At 1 January 2019
Capital reduction
Transfer of share option costs
Loss for the year
At 31 December 2019
Capital reduction
Transfer of share option costs
Loss for the year
At 31 December 2020
£m
87.2
—
4.0
(84.7)
6.5
—
3.2
(108.3)
(98.6)
The transfer of share option costs is in relation to the exercise of share options during the year and their associated costs in the
share options reserve which are transferred to retained earnings.
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 Plans
Since the Company’s admission on the London Stock Exchange to the year ended 31 December 2019, the Company operated a
single discretionary share-based long-term incentive plan (“LTIP”). In November 2020, the Company introduced a Share Incentive
Plan (“SIP”) approved by HMRC, which includes free shares, partnership shares and matching shares. This plan is only relevant
for UK based employees; the LTIP will continue to make awards for non-UK based employees and employees in senior
management positions.
The main features of the LTIP and SIP are set out below.
Post-IPO – LTIP
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).
150
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements 22. Share-based payment continued
Post-IPO Employee Share Plans continued
Post-IPO – SIP
Form of SIP awards
The Board grants awards in the form of: free shares, partnership shares and matching shares.
Performance conditions
There are no performance conditions attached to free shares, partnership shares and matching shares.
Free shares
Under the SIP, UK employees are eligible to receive up to a maximum of £3,600, or ten percent of annual salary if less, of Free
Shares per tax year. Free Shares will be awarded annually with a forfeiture period of two years and a holding period of three years.
Matching shares
UK employees are invited to buy partnership shares from pre-tax salary with a maximum investment in each tax year of £1,800
or 10% of annual salary, if less. Partnership shares are purchased every month. Employees can withdraw partnership shares
from the SIP at any time although there are tax advantages if the shares are retained in the SIP for at least three years.
Participants are awarded one matching share for every one partnership share they purchase. There are tax advantages if the
matching shares are retained in the SIP for at least three years.
Whilst employed by the Company, a participant will forfeit a corresponding number of matching shares if they choose to transfer
partnership shares out of the SIP within three years of the date of purchase.
Under normal circumstances, if a participant leaves the Company before the second anniversary of the date of award, they will
forfeit their matching shares. If they leave between two and three years of the date of award, they retain their matching shares
but those shares must be removed from the SIP and any tax advantages are lost. If a participant leaves under special
circumstances, they will retain all of their matching shares, regardless of how long they have been held in the SIP.
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 Options 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.
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 market
prices. When market prices do not exist for shares or rights to shares with similar characteristics, fair value is determined by using a
valuation technique (either the Monte Carlo or Black-Scholes pricing model as is most appropriate for each scheme).
Annual Report and Accounts 2020
151
22. Share-based payment continued
Charge for the year
Included in operating expenses of the Group is a charge for share-based payments and associated social security costs of
£5.6 million (2019: £8.0 million) that arises from transactions accounted for as equity-settled share-based payment transactions.
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 2019
Granted during
the year
Exercised during
the year
Forfeited during
the year
Outstanding at
31 December
2019
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
EMI Options
Unapproved Options
Free shares and
matching 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
£
481,312
0.027 7,315,334
0.298
—
— 8,513,092
— 4,606,207
0.426 20,915,945
0.199
—
—
—
—
2,519,616
— 11,340,072
—
—
— 13,859,688
—
(170,000)
0.027
(486,791)
0.309
—
—
(944,652)
—
(208,008)
0.390
(1,809,451)
0.131
(5,000)
0.027
(536,454)
0.266
(20,319)
— (4,393,292)
—
(743,344)
0.444
(5,698,409)
0.083
306,312
0.027 6,292,089
0.300 2,499,297
— 14,515,220
— 3,654,855
0.424 27,267,773
0.140
Outstanding at
1 January 2020
Granted during
the year
Exercised during
the year
Forfeited during
the year
Outstanding at
31 December
2020
1. Weighted average exercise price.
152
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements 22. Share-based payment continued
Movements in share plans continued
The following table summarises information about the share awards outstanding at 31 December 2020:
EMI Options
Unapproved Options
Free shares and
matching shares
LTIP Awards
US Options
Total
Range of
exercise prices
Number and WARCL2
Number and WARCL
Number and WARCL
Number and WARCL
Number and WARCL
Number and WARCL
Number
Years
Number
Years
Number
Years
Number
Years
Number
Years
Number
Years
£0–£0.008
—
—
2,260,017
£0.009–£0.176
306,312
2.2
789,918
£0.177–£0.471
£0.472–£1.75
—
—
— 2,866,949
—
375,205
7.4
1.1
6.9
7.5
2,499,297
— 14,515,220
7.4
120,969
7.6 19,395,503
—
—
—
—
—
—
—
—
—
—
28,456
—
1,124,686
— 2,855,402
4.4 5,722,351
—
650,028
6.3 1,025,233
6.3
1.3
5.7
6.7
306,312
2.2 6,292,089
6.4
2,499,297
— 14,515,220
7.4 3,654,855
4.8 27,267,773
6.0
The following table summarises information about the share awards outstanding at 31 December 2019:
Range of
exercise prices
£0–£0.008
£0.009–£0.176
£0.177–£0.471
£0.472–£1.75
EMI Options
Unapproved Options
LTIP Awards
US Options
Total
Number and WARCL2
Number and WARCL
Number and WARCL
Number and WARCL
Number and WARCL
Number
Years
Number
Years
Number
Years
Number
Years
Number
Years
—
— 2,728,326
8.4 8,513,092
8.2
273,095
8.6 11,514,513
481,312
3.6
797,981
—
—
— 3,358,705
—
430,322
2.1
8.1
8.5
—
—
—
—
35,893
0.9
1,315,186
— 3,368,358
6.0
6,727,063
—
928,861
7.2
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
2. Weighted average remaining contractual life.
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 at grant date as the fair value of the LTIP
Awards granted during the year to employees.
In the prior financial year, the only exception to this was for awards made to the former Chief Financial Officer, who departed
prior to the end of this financial year (these awards have therefore lapsed). These awards contained market-based performance
conditions and the fair value at grant date was calculated using a Black-Scholes model.
The incumbent Chief Financial Officer’s LTIP Awards do not contain market-based performance conditions but do include non-market
performance conditions (refer to Remuneration Report for further detail) and, therefore, the Company’s share price at grant date
is the fair value used, with the likelihood of achieving the non-market performance conditions factored into the accounting charge.
In line with IFRS 2, the likelihood will be reassessed at the end of each reporting period.
Free shares and matching shares
The Company has used its share price at grant date as the fair value of free shares and matching shares granted during the year
to employees.
Annual Report and Accounts 2020
153
23. Notes to the consolidated statement of cash flows
Cash inflow/(outflow) from operating activities
Loss before taxation
Adjustments for
Depreciation of property, plant and equipment
Amortisation of intangible assets
Impairment of goodwill (exceptional item)
Impairment of intangible and tangible assets (exceptional item)
Share based payment restructuring credit (exceptional item)
Interest receivable
Interest payable
Non-cash employee benefits expense – share-based payments and associated social security costs
Fair value losses
Movement in restructuring provision
Movement in loan repurchase liability
Movement in other provisions
Share of losses of associates
Other non-cash movements
Changes in working capital
Movement in trade and other receivables
Movement in trade and other payables
Net cash inflow/(outflow) from operating activities
Cash and cash equivalents
Cash and cash equivalents
31 December
2020
£m
31 December
2019
£m
(108.1)
(84.2)
9.0
8.2
12.0
1.7
(1.0)
(0.4)
1.4
6.4
118.3
1.1
2.3
2.5
0.8
1.2
(35.3)
13.0
33.1
7.8
7.1
29.0
5.3
—
(1.8)
1.2
7.7
9.9
—
(0.2)
(0.4)
0.1
(0.1)
(9.1)
0.7
(27.0)
31 December
2020
£m
31 December
2019
£m
103.3
164.5
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 £1.0 million
(2019: £1.2 million) which is restricted in use in the event of rental payment defaults and cash held in the securitisation and
warehouse SPVs of £38.9 million (2019: £14.2 million) which has been collected for on-payment to lenders and bond holders
and is therefore restricted in its use. A further £4.3 million (2019: £nil) of cash is held which is restricted in use to repaying
investors in CBILS loans and paying CBILS-related costs to the UK Government.
At 31 December 2020, money market funds totalled £24.8 million (2019: £46.0 million).
Analysis of changes in liabilities from financing activities
Bank borrowings
Bonds
Lease liabilities
Liabilities from financing activities
Bank borrowings
Bonds
Lease liabilities
1 January
2019
£m
—
—
(25.1)
(25.1)
1 January
2020
£m
(265.8)
(348.7)
(38.3)
Cash flow
£m
(269.4)
(349.4)
7.1
(611.7)
Cash flow
£m
69.0
35.6
7.8
Liabilities from financing activities
(652.8)
112.4
154
Funding Circle Holdings plc
Exchange
movements
£m
Other non-cash
movements
£m
31 December
2019
£m
3.6
4.3
(0.3)
7.6
—
(3.6)
(20.0)
(23.6)
(265.8)
(348.7)
(38.3)
(652.8)
Exchange
movements
£m
Other non-cash
movements
£m
31 December
2020
£m
1.3
6.8
(0.3)
7.8
—
12.0
—
12.0
(195.5)
(294.3)
(30.8)
(520.6)
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements
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
2020
£m
31 December
2019
£m
0.1
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
2020
£m
31 December
2019
£m
—
—
—
—
0.1
—
—
0.1
Operating lease payments represent payments for lease assets that are individually considered low value.
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.
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
2020
£m
31 December
2019
£m
3.3
1.9
0.1
5.3
4.2
2.7
0.1
7.0
Further details on Directors’ remuneration are disclosed in the Remuneration Report in the Corporate Governance section of the
Annual Report and Accounts on pages 78 to 98.
Transactions with other related parties
During the year the Group invested £0.4 million (2019: £13.9 million) into entities accounted for as associates, received capital
redemptions of £2.3 million (2019: £nil), and received dividends of £0.4 million (2019: £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
There have been no subsequent events since the balance sheet date.
Annual Report and Accounts 2020
155
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
Directly
Indirectly
Indirectly
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
Indirectly
71 Queen Victoria Street, London EC4V 4AY
Subsidiary undertakings
Funding Circle Ltd
Funding Circle Asset Finance Limited
Funding Circle BB Limited
Funding Circle Eclipse Lending Limited
Funding Circle Focal Point Lending
Limited
Funding Circle Global Partners Limited
Funding Circle Midco Limited
Funding Circle Property Finance Limited
Funding Circle Trustee Limited
Made To Do More Limited
Funding Circle USA, Inc.
Funding Circle Notes Program, LLC
FC Marketplace, LLC
Funding Circle Investor Funds, LLC
FC Partners, LLC (dissolved 23 November
2020)
Funding Circle Securities LLC
(dissolved 13 November 2020)
FC Capital US LLC
FC Capital US II LLC
FC Depositor US LLC
FC Partners, LP (dissolved 19 October
2020)
Funding Circle Diversified Income Fund, LP
(dissolved 23 November 2020)
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Directly
Directly
Indirectly
Indirectly
Indirectly
Directly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
100%
100%
100%
100%
100%
Directly
Indirectly
Indirectly
Indirectly
Directly
Indirectly
Funding Circle CE GmbH
Funding Circle Deutschland GmbH
Funding Circle Connect GmbH
FC Forderungsmanagement GmbH
Germany
Germany
Germany
Germany
Juwel 182 VV UG (dissolved 29 May 2020)
Germany
Funding Circle Espana S.L.
Spain
Funding Circle Nederland B.V.
Netherlands
100%
Indirectly
Funding Circle Canada Inc.
(dissolved 5 October 2020)
Funding Circle Capital Canada Inc.
(dissolved 8 September 2020)
Canada
100%
Indirectly
Canada
100%
Indirectly
156
Funding Circle Holdings plc
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
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
Calle Claudio Coello número 91,
3a planta, 28006 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
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements 30. Interests in other entities continued
Investments in associates
Set out below are the associates of the Group as at 31 December 2020 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 Fund¹
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
8%
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. 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
2020
£m
Funding Circle
UK
SME Direct
Lending Fund I
31 December
2020
£m
Funding Circle
European
SME Direct
Lending Fund I
31 December
2019
£m
Funding Circle
UK
SME Direct
Lending Fund I
31 December
2019
£m
5.4
0.8
—
—
6.2
5.0
0.3
—
—
5.3
8.3
0.3
—
—
8.6
4.9
0.2
—
—
5.1
Annual Report and Accounts 2020
157
30. Interests in other entities continued
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 2020
Shares issued in the year
Profit for the year
Exchange differences
Other comprehensive income
Capital redemptions in the year
Dividends paid in the year
Closing net assets as at 31 December 2020
Group’s share in %
Group’s share of net assets as at 31 December 2020
Accounting policy alignment
Group’s carrying amount
Summarised statement of comprehensive income
Gross income
(Loss)/profit for the year
Other comprehensive income
Total comprehensive (loss)/income
Dividends received from associates
Capital redemptions received from associates
Interest in other entities
Funding Circle
European
SME Direct
Lending Fund I
2020
£m
Funding Circle
UK
SME Direct
Lending Fund I
2020
£m
Funding Circle
European
SME Direct
Lending Fund I
2019
£m
Funding Circle
UK
SME Direct
Lending Fund I
2019
£m
35.1
1.2
(1.9)
1.9
—
(9.6)
(0.4)
26.3
23.6%
6.2
(0.2)
6.0
35.6
30.4
0.9
—
—
—
(2.8)
64.1
8.3%
5.3
(0.3)
5.0
—
34.9
0.4
—
—
—
(0.2)
35.1
—
35.0
0.8
—
—
—
(0.2)
35.6
24.4%
14.3%
8.6
(0.3)
8.3
5.1
(0.2)
4.9
Funding Circle
European
SME Direct
Lending Fund I
2020
£m
Funding Circle
UK
SME Direct
Lending Fund I
2020
£m
Funding Circle
European
SME Direct
Lending Fund I
2019
£m
Funding Circle
UK
SME Direct
Lending Fund I
2019
£m
0.7
(0.4)
—
(0.4)
0.1
2.3
0.5
0.1
—
0.1
0.3
—
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.
158
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2020Financial statements 30. Interests in other entities continued
Consolidated structured entities: Small Business Origination Loan Trust 2019-3 DAC, Great Trinity Lending 1 DAC, Small
Business Lending Trust 2019-A, Small Business Lending Grantor Trust 2019-A, Small Business Lending Trust 2020-A and Small
Business Lending Grantor Trust 2020-A are consolidated structured warehouse and securitisation entities 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 Focal Point Lending Ltd Subsidiary via which CBILS loans are originated and which holds legal title to loans which are
held via trust structures for the beneficial ownership of institutional investors.
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 2020
159
Company balance sheet
as at 31 December 2020
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
2020
£m
31 December
2019
£m
Note
5
7
7
6
11
8
9
9
10
303.3
—
303.3
10.1
1.0
27.8
38.9
416.2
—
416.2
0.9
0.6
80.8
82.3
342.2
498.5
1.7
1.7
0.3
292.6
13.6
34.0
340.5
342.2
1.3
1.3
0.3
292.3
11.9
192.7
497.2
498.5
The Company’s loss for the year was £161.9 million (2019: loss of £81.6 million).
The financial statements on pages 160 to 170 were approved by the Board and authorised for issue on 25 March 2021.
They were signed on behalf of the Board by:
Oliver White
Director
Company registration number 07123934
The notes on pages 163 to 170 form part of these financial statements.
160
Funding Circle Holdings plc
Financial statements
Company statement of changes in equity
for the year ended 31 December 2020
Balance at 1 January 2019
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
Loss for the year
Transactions with owners
Transfer of share option costs
Issue of share capital
Employee share schemes – value of
employee services
Note
Share capital
£m
10
9
10
9
0.3
—
—
—
—
0.3
—
—
—
—
Share
premium
account
£m
291.8
—
—
0.5
—
292.3
—
—
0.3
—
Balance at 31 December 2020
0.3
292.6
The notes on pages 163 to 170 form part of these financial statements.
Share options
reserve
£m
6.0
—
(4.0)
—
9.9
11.9
—
(3.2)
—
4.9
13.6
Retained
earnings/
(accumulated
losses)
£m
270.3
(81.6)
4.0
—
—
Total equity
£m
568.4
(81.6)
—
0.5
9.9
192.7
(161.9)
497.2
(161.9)
3.2
—
—
—
0.3
4.9
34.0
340.5
Annual Report and Accounts 2020
161
Company statement of cash flows
for the year ended 31 December 2020
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
Proceeds on the issue of shares from the exercise of share options
Net cash inflow from financing activities
Net decrease 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
The notes on pages 163 to 170 form part of these financial statements.
Note
11
7
7
5
31 December
2020
£m
31 December
2019
£m
(3.5)
(4.1)
(29.0)
20.7
(41.6)
0.2
(49.7)
0.2
0.2
(53.0)
80.8
27.8
—
0.2
(220.9)
1.2
(219.5)
0.7
0.7
(222.9)
303.7
80.8
162
Funding Circle Holdings plc
Financial statements
Notes forming part of the Company financial statements
for the year ended 31 December 2020
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 adopted pursuant to Regulation (EC) No 1606/2002 as it
applies in 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.
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 made a comprehensive loss for the year of £161.9 million (2019:
comprehensive loss of £81.6 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).
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 higher of value in use and fair value less cost to sell, with value in use being applied for this
assessment. 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.
Following the impact of Covid-19 and a change in the investments’ income and cost forecasts, an event indicating the possibility
of impairment was identified and an impairment review undertaken. Impairment was identified in relation to the investment in
the Funding Circle USA CGU as the carrying value exceeded the value in use determined by this impairment assessment. The
investment was impaired by £155.9 million to £88.2 million. It is considered that there are reasonably possible outcomes that
may differ from management’s estimation assumptions that could lead to material additional 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:
‐
fifth-year income growth of 27.0% and fifth-year cost growth of 16.0%. A 400 bps decline in the projected fifth-year income
growth rate with no cost reduction or a 400 bps increase in the projected fifth-year cost growth rate without income growth
would reduce the estimated value in use by £16.1 million and £14.7 million respectively;
‐ pre-tax discount rate of 11.6%. A 100 bps increase in the discount rate would reduce the estimated value in use by £10.1 million;
and
‐
income beyond the five-year period is extrapolated using an estimated growth rate of 1.5%. A reduction in the growth rate to
0.0% would reduce the estimated value in use by £9.3 million.
The above assumptions are based on historical trends and future market expectations.
During the prior year ended 31 December 2019 impairment was identified in relation to the investment in Funding Circle CE 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 recoverable value. The investment was fully impaired by £77.5 million.
Annual Report and Accounts 2020
163
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 2020:
Assets
Loans due from related undertakings
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
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
10.1
0.9
13.4
24.4
(0.2)
(0.2)
10.1
0.9
13.4
24.4
(0.2)
(0.2)
—
—
14.4
14.4
—
—
—
—
—
—
—
—
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 categorised as level 1.
164
Funding Circle Holdings plc
Notes forming part of the Company financial statements continuedfor the year ended 31 December 2020Financial 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 2019:
Assets
Loans due from related undertakings
Trade and other receivables
Cash and cash equivalents
Liabilities
Amounts 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
—
—
—
—
—
—
—
—
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 2020 and 31 December 2019 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
2020
£m
31 December
2019
£m
—
10.1
0.9
27.8
—
0.9
0.3
80.8
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 2020
165
2. Financial risk management continued
Financial risk factors continued
Liquidity risk continued
The maturity analysis of financial assets and liabilities at 31 December 2020 and 31 December 2019 is as follows:
At 31 December 2020
Financial assets
Trade and other receivables
Cash and cash equivalents
Loans due from related undertakings
Financial liabilities
Trade and other payables
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
Market risk
Less than
3 months
£m
Between
3 months
and 1 year
£m
Between 1
and 5 years
£m
Over
5 years
£m
0.9
27.8
10.1
38.8
(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
0.3
80.8
0.9
82.0
(0.2)
(0.2)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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.£0.1 million (2019: c.£0.4 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 reporting 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.
166
Funding Circle Holdings plc
Notes forming part of the Company financial statements continuedfor the year ended 31 December 2020Financial statements
2. Financial risk management continued
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.
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
The Company made a comprehensive loss for the year of £161.9 million (2019: comprehensive loss of £81.6 million).
4. Employees
The Company had no employees during the current or prior year other than Directors who numbered 10 (2019: 10). 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 (2019: £1.2 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
Balance at 31 December
2020
£m
416.2
4.1
41.6
(158.6)
303.3
2019
£m
264.6
8.2
220.9
(77.5)
416.2
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 £nil (2019: £127.1 million), £2.0 million
(2019: £9.1 million), £38.9 million (2019: £84.7 million) and £0.7 million (2019: £nil) to Funding Circle USA, Inc., Funding Circle CE GmbH,
Funding Circle Ltd and Funding Circle Canada respectively. These amounts have increased the value of investments in subsidiary
undertakings before impairment.
In addition to the above, the Company recognised a capital contribution of £4.1 million (2019: £8.2 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 £155.9 million to the Company’s investment in Funding Circle USA, Inc.
to a value of £88.2 million, £2.0 million in relation to the Company’s investment in Funding Circle CE GmbH to a value of £nil
and £0.7 million in relation to Funding Circle Midco Limited to a value of £nil (2019: £77.5 million to the Company’s investment
in Funding Circle CE GmbH to a value of £nil) as the value in use calculated was below the carrying amount.
The cumulative amount of impairment losses in relation to investment in subsidiaries is £236.1 million (2019: £77.5 million).
6. Trade and other receivables
Amounts due from related undertakings
Prepayments
Accrued income
31 December
2020
£m
31 December
2019
£m
0.9
0.1
—
1.0
0.3
0.2
0.1
0.6
The Directors consider that the carrying amount of trade and other receivables is approximately equal to their fair value.
Annual Report and Accounts 2020
167
7. Loans due from subsidiary undertakings
Funding Circle USA, Inc.
Funding Circle CE GmbH
Stichting Derdengelden Funding Circle
Funding Circle Global Partners Limited
Less: non-current portion
Current portion
Amount due from Group undertakings
31 December
2020
£m
31 December
2019
£m
10.0
—
0.1
—
10.1
—
10.1
—
0.8
0.1
—
0.9
—
0.9
During 2020, the Company operated a loan facility agreement with Funding Circle Ltd (subsidiary company). Under the terms of
the agreement, the Company provided an unsecured sterling revolving credit facility of a total principal amount not exceeding
£20.0 million (2019: £30.0 million) to Funding Circle Ltd which is repayable at the end of the facility term of five years on 5 August 2025.
Any drawn amount under the facility bears an interest of 3.5% above the base rate of the Bank of England. A term loan facility of
£16.0 million was amended in 2019 to operate as a revolving credit facility (2018: £16.0 million term loan facility) under the same
terms above which expired on 23 November 2020. In the prior year a term loan facility of up to £30.0 million expired on
31 December 2019 under the same terms above.
During the year the Company has provided £19.0 million (2019: £5.1 million) of additional funding under the facility agreement.
Total interest income of £nil (2019: £0.1 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 £19.0 million (2019: £6.6 million) with Funding Circle Holdings plc. £10.0 million of this was settled via cash, and
£9.0 million settled via a capital contribution from the Company to Funding Circle Ltd of £9.0 million. The facility was drawn by
£nil (2019: £nil) at the balance sheet date.
During the year the Company operated a revolving credit facility to Funding Circle CE GmbH of up to €2.0 million (2019: up to
€2.0 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 18 July 2024. The facility was drawn by £nil (2019: £0.8 million) at the
balance sheet date. Funding Circle CE GmbH repaid £0.8 million of the facility during 2020.
During the year, the Company continued to operate an unsecured sterling revolving credit facility for £1 million with its subsidiary
(Funding Circle Global Partners Limited (“FCGPL”)). Under the 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. The facility was drawn by £nil (2019: £nil) at the balance sheet date. 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 undrawn (2019: £0.9 million) at the balance sheet date. In 2019 the
Company impaired this loan balance in full under the expected credit loss model. During the year the loan was repaid in full and
the impairment was reversed as a credit of £0.9 million to profit and loss.
During the year, the Company provided a term loan facility to Funding Circle USA, Inc. of up to £7.7 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 13 January 2025. The facility was fully drawn at the balance sheet date. In addition, the Company provided
a revolving credit facility to Funding Circle USA, Inc. of up to $3.0 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 27 January 2025.
The facility was fully drawn at the balance sheet date.
168
Funding Circle Holdings plc
Notes forming part of the Company financial statements continuedfor the year ended 31 December 2020Financial statements
8. Trade and other payables
Accruals
Taxes and social security costs
Other creditors
Amounts due to related undertakings
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
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 2019
Transfer of share option costs
Loss for the year
At 31 December 2019
Transfer of share option costs
Loss for the year
At 31 December 2020
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)
Reversal of prior year impairment charge
Changes in working capital
Movement in trade and other receivables
Movement in trade and other payables
Net cash outflow from operating activities
Cash and cash equivalents
Balance at 1 January
Cash flow
Balance at 31 December
31 December
2020
£m
31 December
2019
£m
1.1
0.4
0.2
—
1.7
0.7
0.4
—
0.2
1.3
£m
270.3
4.0
(81.6)
192.7
3.2
(161.9)
34.0
31 December
2020
£m
31 December
2019
£m
(161.9)
(81.6)
(0.2)
1.1
158.6
(0.9)
(0.6)
0.4
(3.5)
2020
£m
80.8
(53.0)
27.8
(1.4)
1.5
78.4
—
(0.4)
(0.6)
(4.1)
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 2020, money
market funds totalled £14.4 million (2019: £46.0 million).
Annual Report and Accounts 2020
169
12. Related parties
Short-term payables/receivables
Funding Circle Ltd
Funding Circle USA, Inc.
Funding Circle CE GmbH
Intercompany loans
Funding Circle USA, Inc.
Funding Circle CE GmbH
Stichting Derdengelden Funding Circle
Amounts owed by related parties
Amounts owed to related parties
31 December
2020
£m
31 December
2019
£m
31 December
2020
£m
31 December
2019
£m
0.8
0.1
—
10.0
—
0.1
11.0
0.2
0.1
—
—
0.8
0.1
1.2
—
—
—
—
—
—
—
—
—
0.2
—
—
—
0.2
During the year, the Company received payment of expenses for amounts of £0.4 million (2019: received payment of expenses
for amounts of £1.5 million) from Funding Circle Ltd.
As at the year end, the Company was owed a cumulative amount of £10.0 million (2019: £nil), £0.1 million (2019: £0.1 million)
and £nil (2019: £0.8 million) from loans with Funding Circle Ltd, Stichting Derdengelden Funding Circle and Funding Circle CE
GmbH. An impairment was recognised in 2019 in relation to amounts owed from Funding Circle Canada, which was
subsequently repaid in 2020, and a credit to the profit and loss account was recognised.
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 BB Limited
Funding Circle Eclipse Lending Limited
Funding Circle Focal Point Lending Limited
Funding Circle Global Partners Limited
Funding Circle Midco Limited
Funding Circle Property Finance Limited
Funding Circle Trustee Limited
Registration number
07832868
12593368
12570773
12407296
10554628
11793162
08896582
07239092
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 CE 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.
170
Funding Circle Holdings plc
Notes forming part of the Company financial statements continuedfor the year ended 31 December 2020Financial 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.
Investment AEBITDA
and
Operating AEBITDA
EBITDA, while not defined
under IFRS, is a widely
accepted profit measure.
Refer to note 3.
Adjusted EBITDA before product development and
central costs.
Refer to Finance Review.
Investment AEBITDA refers to net investment income
(being investment income, investment expense and fair
value adjustments) as previously reported and
operating AEBITDA represents AEBITDA excluding
investment AEBITDA.
Net investment
income
Net income.
Refer to Finance Review. We have redefined net investment income, first
Exceptional items
None.
Refer to note 5.
Earnings/loss per
share before
exceptional items
Earnings per share.
Refer to note 9.
Diluted earnings/
loss per share before
exceptional items
Diluted earnings per share.
Refer to note 9.
Cash flow
Free cash flow
Cash generated from
operating activities.
Refer to Finance Review.
described in the 2019 financial results, to be investment
income less investment expense. Investment AEBITDA
is net investment income less fair value (losses)/gains.
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 plus the cost of
purchasing intangible assets, property, plant and
equipment, lease payments and interest received. It
excludes the warehouse and securitisation financing and
funding cash flows.
Annual Report and Accounts 2020
171
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
25 March 2021
14 April 2021
19 May 2021
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. It is expected that this year’s
report will be available on our website in September.
Company information
Directors
Executive Directors
S Desai CBE (Founder, Chief
Executive Officer)
O J White (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
7 More London Riverside
London SE1 2RT
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 2020 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.
172
Funding Circle Holdings plc
Financial statements CBP006416
Funding Circle Holdings plc’s commitment to environmental issues is reflected in this
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Funding Circle Holdings plc
71 Queen Victoria Street
London
EC4V 4AY
corporate.fundingcircle.com