IntegraFin Holdings
Annual Report 2017

Plain-text annual report

ANNUAL REPORT AND FINANCIAL STATEMENTS YEAR ENDED 30 SEPTEMBER 2017 IntegraFin Holdings Limited Company registration number: 08860879 CONTENTS Strategic Report Financial Statements Chairman’s Statement . . . . . . . . . . . . . . . . . . 2 Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Chief Executive Officer’s Review . . . . 4 Consolidated Profit and Loss and Other Comprehensive Income . . . . . . . . . . . . . . . . 46 Transact at a Glance . . . . . . . . . . . . . . . . . . . . . 6 Company Profit and Loss and Other Comprehensive Income . . . . . . . . . . . . . . . . . . . . . 47 About Transact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Consolidated Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Our Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Company Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Our Business Model . . . . . . . . . . . . . . . . . . . . . . 9 Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Strategic Priorities and Progress . . . . 9 Company Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Operating and Financial Review . . . 10 Consolidated Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Risk and Risk Management . . . . . . . . . . 19 Company Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Principal Risks and Uncertainties . . 24 Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Corporate Social Responsibility . . . . 27 Other Information Governance Directors, Company Details, Advisers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Board of Directors . . . . . . . . . . . . . . . . . . . . . . 28 Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Corporate Governance Report . . . . . . 31 Audit Committee Report . . . . . . . . . . . . . . 33 Directors’ Remuneration Report . . . 36 Risk Committee Report . . . . . . . . . . . . . . . 37 Directors’ Report . . . . . . . . . . . . . . . . . . . . . . . . 41 Statement of Directors’ Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . 42 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 1 STRATEGIC REPORT Michael Howard Chairman CHAIRMAN’S STATEMENT Dear Shareholders, Welcome to the annual report of your company for 2017, another financial year that has been kind to us. My friend and colleague, Ian Taylor, provides further information on the year elsewhere in his report but, suffice for me to say, your company has had an excellent profit outcome. Since 2000, wrap services, or platforms as they are often called, like ours, have transformed the financial services landscape because they represent, quite simply, a better proposition than the “old way”. Diversified investment together with consolidated administration has made financial planning easier and more effective for advisers and for their clients. Financial advisers are thriving in this reconfigured environment, and we thrive with them. Current indicators point to continuing bright prospects for your company due to the accumulation of investors’ annual savings, plus the literally trillions of pounds still retained in “old fashioned” investments that are moving onto platforms. This latter process looks set to continue for many years to come. As well as our usual business operations, this has been another year of getting ready to list our company on the London Stock Exchange. So far, matters are progressing as we would hope, and we continue to be optimistic that conditions remain favourable and we plan to list in the first half of 2018. As part of our preparation, and in line with corporate governance best practice for listed companies, changes have been made to IntegraFin Holdings Limited (IntegraFin), Integrated Financial Arrangements Ltd (IFAL), IntegraLife UK Limited (ILUK) and IntegraLife International Limited (ILInt) Board members. On 1 October 2017, I stood down from the chairmanship of IntegraFin, as well as the chairmanship and Boards of IFAL and ILUK and the Board of ILInt. I remain as a Director of IntegraFin. On 1 October 2017, Patrick Snowball took up the reins as Non-Executive Chairman of IntegraFin and IFAL. Patrick has an impeccable background in financial services having been the CEO of Aviva UK from 2005 to 2007 and from 2009 to 2015, the CEO of the ASX 100, financial services giant, Suncorp. 2 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 Finally, and most importantly, I would like to take this opportunity to thank all those involved in making our business, and our year, successful. This includes our customers, our business partners and, of course, our staff and Directors. Without the support of all of these groups, we would have no business. May our 2018 year deliver all that we hope for it. Michael Howard Chairman for financial year 2017 12 December 2017 I welcome him as a most valuable addition to our merry band and thank him for agreeing to join us. On 1 October 2017, the chairmanship of ILUK was taken up by Neil Holden. Neil has been a Director of the Group since 2011. I wish them all well in their new roles. While Jeremy Brettell, Stuart Bazley and Judith Davidson each stepped down from the IntegraFin Board on 1 October 2017, they continue to be Directors of IFAL, plying their skills on behalf of the Group, where most needed. Finally, on matters directorial, we have made the Board of IntegraFin more compact. In the past, IntegraFin and IFAL have had identical boards. We did this to avoid making too many changes at once. In fact, the role of IntegraFin, the holding company, is to direct the strategy and oversee the execution of its operating subsidiaries. It is the subsidiaries that do the actual work involved in providing Transact. The IntegraFin Board now comprises Patrick Snowball, Ian Taylor, Alexander Scott, Neil Holden, Christopher Munro and myself. We believe this representation better reflects the particular needs of each of the Group companies. Penultimately, to the matter always of interest to shareholders – your company’s dividend. Based on our 2017 profit and our policy of distributing 65% of what we have earned, post tax, we will be paying an interim dividend to shareholders of £19.42 million, according to our usual schedule, in January, 2018. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 3 STRATEGIC REPORT continued Ian Taylor Chief Executive Officer CEO REVIEW Headlines By many measures, the year to 30 September 2017 was one of our most rewarding so far. Gross inflows of £5.31 billion were 48.6% higher than last year and net inflows were 66% higher. We ended the year with 151,000 clients (+13%) and funds under direction of £27.9 billion (+13.5%)1. This, combined with sensible control of expenses, means that we are pleased to report that profits after tax increased by 43% to £29.9 million. The market background The year was a busy one for the UK investment platform industry. Many platforms saw substantial uplifts in new business and Platforum estimates that funds under direction across the advised platform sector grew from £405 billion (September 2016) to £488 billion (September 2017). Not all platforms were winners, however, and it seems, to this observer at least, that advisers are concentrating flows of business ever more to those platforms that are seen to be significant players now and, more importantly, into the future. There was also some consolidation of platform ownership during the year and more evidence of the potential for technology costs to become very substantial indeed for those platforms who outsource this key component. Our activity Alongside the daily provision of Transact, a number of developments took place during the year. Most notably, in July 2016 we bought Integrated Application Development Pty Ltd from Michael Howard and its other owners. This was the final step in our longer term plan to bring entirely within the Group the ownership and control of the technology upon which we rely so heavily. This continues to contribute to profits and will stand us in good stead as we prepare for listing. We also continued to support the implementation of financial planning by developing new functionality, enjoyed by advisers and by their clients. In particular Transact was the only adviser platform to introduce a Lifetime ISA wrapper when legislation changed. 1 Platform assets experienced a one off drop in April 2017 following the account closure of a single private client for which we were charging a nominal fee for custody. 4 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 In April we made further adjustments to some of our prices. We have an established record of sharing some of our profits with our customers when circumstances permit. We do this when we are comfortable that doing so will have no negative impact on service levels or revenues. We call this ‘responsible pricing’ and it means that the best service in the platform market becomes even better value. During the course of the year we won awards from Moneyfacts (Best Wrap/Platform), Professional Adviser (Best Platform for Advisers – AUA above £15bn), Professional Paraplanner (Best Overall Service for New Business), Money Marketing (Best Platform) and FT Adviser (Investment Innovation and Five Star Investment). Transact was rated the best adviser platform in adviser surveys run by CoreData, Investment Trends and Platforum. The outlook The closing months of 2017 and the early months of 2018 will involve us in a great deal of work driven by changes in regulation and legislation. From Europe we have the second Markets in Financial Instruments Directive (MiFID II) and the General Data Protection Regulation (GDPR), and from the FCA the investment platform market study. Nevertheless, there is no reason to think that the natural flow of business from old world administration and custody to new world administration and custody should slow down – and we will benefit from this. Our plan is simple – we will continue to drive organic growth and to provide the best adviser platform in the UK. Ian Taylor Chief Executive Officer 12 December 2017 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 5 STRATEGIC REPORT continued Transact is only marketed in the UK and is designed specifically to meet the needs of UK financial advisers and their clients. TRANSACT AT A GLANCE About IntegraFin IntegraFin Holdings Limited (IntegraFin) is the holding company for all of the entities involved in the provision of the Transact service. Our corporate structure as at 30 September 2017 is shown below: INTEGRAFIN CORPORATE STRUCTURE lntegraFin Holdings Limited Integrated Financial Arrangements Ltd lntegraFin Services Limited Transact IP Ltd Integrated Application Development Pty Ltd ObjectMastery (UK) Limited Transact Nominees Limited IntegraLife UK Limited IntegraLife International Limited Transact Trustees Limited 6 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 How we operate Transact provides a market leading platform infrastructure for advisers and their clients to make the implementation and management of client portfolios as simple and efficient as possible. Our leading investment platform functionality is supported by a high-touch client service team which provides extensive day-to-day and technical support no matter how simple or complex a query may be. As an independent platform we provide access to a wide range of tax wrappers and investment products. There are currently over 8,000 funds available on Transact and we can provide access to any asset listed on a major stock market. INTEGRAFIN PROPOSITION Advice fees 151k Clients Financial planning and advice 5k Advisers 3k Adviser Firms Services and platform functionality Platform fees Statements Instant portfolio valuations On-line access Proprietary Platform Functionality Asset custody Transaction processing Adviser fees Portfolio monitoring Reporting tools Wide Range of Wrappers ISAs GIAs Pensions Onshore bonds Offshore bonds Open Investment Architecture ~ 8,125 Funds ~ 350 ITs ~ 850 ETFs ~ 3,100 Stocks ~ 425 Gilts ~ 100 VCTs Cash INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 7 STRATEGIC REPORT continued The rapid growth of the sector has occurred because the platform proposition is extremely attractive to both clients and advisers. Ultimately, platforms provide clients with greater control over their investments as they offer the visibility and convenience of having all tax wrappers and a wide range of investments, held and managed in one place, and at a lower price than the pre-platform era. Transact has over 151,000 clients across the UK managed by over 5,000 fi nancial advisers. £488.76bn - Sept 2017 Our marketplace Transact was the fi rst investment platform service to launch in the UK back in 2000, providing a revolutionary solution for fee based fi nancial advisers. Since then other providers have continued to enter the market and the UK platform sector has grown rapidly and now totals £488.76 billion of assets (Platforum, Issue 32, November 2017). UK PLATFORM MARKET GROWTH XXX £500bn £400bn £300bn £200bn £100bn £0 2 0 0 2 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 Financial year (end) D T Y 7 1 0 2 Award-winning service TRANSACT ADVISER RATINGS Category: Large Platforms (> £12bn FUD) Category: Large Platforms (> £10bn FUD) Category: Large Platforms (> £10bn FUD) We have become renowned for high quality service. The results of independent research studies stand testament to this as Transact has consistently been rated by advisory professionals as the top platform year on year in both the Investment Trends and CoreData quantitative research studies (2010 to 2017 inclusive), and consistently performs strongly in Platforum quarterly and annual surveys. This year we also completed our second annual client survey, the results of which were extremely positive with 98% of respondents saying that they would recommend Transact to others. 2017 2016 2015 2014 8 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 Our business model A key aspect of our proposition is the control we have over every aspect of what we do. We do not outsource any material component of our service or technology and this gives us total control over the quality and cost of our whole operation. We also set our own priorities when deciding on the service enhancements we make and the frequency with which we make them. The main components of our proposition are: Control of our systems development is crucial to our business model as it enables our Client Service teams to operate effectively. We design our systems and processes around the needs of financial advisers and their clients and regularly consult with them to ensure our solutions are appropriate. Similarly, our Client Service teams receive extensive training through our internal training programmes and have been instrumental in our success and the many accolades and awards Transact has received over the years. Systems Technology ▪ Proprietary software systems technology. ▪ Full control of the client experience. ▪ We set our own priorities and control management of associated costs. ▪ We react quickly to client and industry demands. Operations ▪ High-touch client service team of over 160 of our own staff. ▪ The teams cover our entire proposition and are not product centric. This means that the adviser and client experience is highly efficient. ▪ This also enables us to build strong adviser relationships. Manufacturer of Wrappers ▪ We provide a wide range of tax efficient wrappers. ▪ First B2B platform to introduce the Lifetime ISA. We do not own any financial advice firms. We are proud to have long-standing relationships with many firms across the UK and currently work with over 5,000 advisers who have independently selected Transact for their clients. We receive all of our income from the fees paid by clients via our platform. Our Board and Senior Management Team are confident that the business model we operate is truly sustainable as over 85% of revenue is of a recurring nature. Strategic priorities and progress Our focus for the coming year will be to make continuous improvements to maintain our reputation as a premium service provider and a leading platform within the market. We continue to see a strong uptake in advisers choosing our platform, with more registering with Transact each month. This year has presented new legal and regulatory challenges for the platform industry. These include MiFID II and GDPR, both coming into effect in 2018. We are on track to meet our obligations and have been providing support to advisers, where appropriate, in helping them to meet theirs. We continue to monitor government announcements regarding the savings and investment tax regime and are ready to respond accordingly to any changes in the provisions of pensions and ISAs in particular. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 9 STRATEGIC REPORT continued OPERATING AND FINANCIAL REVIEW It has been a year of significant net inflow growth which together with good market performance has led to strong growth in funds under direction (FUD). Year ended 30 September Funds under direction (FUD) 2017 £m 2016 £m Opening fee generating FUD Inflows Outflows Net Inflows Market and other movements2 Closing fee generating FUD Other FUD3 Total Closing FUD Average fee generating FUD 22,686 5,310 (1,647) 3,663 1,578 27,927 1 27,928 25,307 18,027 3,574 (1,378) 2,196 2,463 22,686 1,914 24,600 20,357 Total gross inflows for the financial year to 30 September 2017 increased by £1.74 billion, or 48.6% to £5.31 billion from £3.57 billion, averaging £442 million per month, whilst a far smaller increase in the level of gross outflows saw a significant increase in net new inflows on the prior year, totalling £3.66 billion, an increase of 66.8%. The 2017 financial year has seen the Group experience its highest total gross inflows since inception. This growth, coupled with good market performance has led to fee generating funds under direction increasing by 23.1% to £27.9 billion at 30 September 2017. During the year the majority of other FUD was removed from the platform as the Group continues to make preparations towards an IPO. INTEGRAFIN GROUP – TOTAL FUD ) £ ( D U F 30bn 25bn 20bn 15bn 10bn 5bn 0bn 19.1 17.9 FY15 24.6 22.7 27.9 FY16 Financial year (end) FY17 Fee generating FUD Other FUD3 INTEGRAFIN GROUP – NET & GROSS FEE GENERATING INFLOWS ) £ ( s w o F l 6.0bn 5.0bn 4.0bn 3.0bn 2.0bn 1.0bn 0.0bn 5.31 3.37 3.57 3.66 2.04 2.20 FY15 FY16 Financial year (end) FY17 Net Flows Gross Inflows 2 Other movements includes dividends, interest, fees and tax charges and rebates. 3 FUD held on behalf of a single private client for which the only charge was a nominal fee for custody. Other FUD is being removed from the platform with no material impact on revenue. 10 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 Maintaining strong relationships with both advisers and clients already using Transact is as important to the continuing growth of the business as bringing new advisers to the platform. As at 30 September 2017 over 68% of registered advisers recommending Transact had been using the platform for over five years. At the year end the number of registered advisers with funds on the platform averaging greater than £1,000 had increased to over 5,000. Both advisers with long standing relationships, and new advisers, bring new clients and new money to Transact. With our focus on premium service delivering strong client retention, and attracting new clients, this has seen our total number of clients increase by 13% to 151,000 from 137,000. This has led to continuing growth in the number of open tax wrappers, increasing by 10% over the year. INTEGRAFIN – TOTAL NUMBER OF CLIENTS 128k 137k 151k s t n e i l C f o r e b m u N 175k 150k 125k 100k 75k 50k 25k 0 FY15 FY16 Financial year (end) FY17 INTEGRAFIN – TOTAL NUMBER OF WRAPPERS AT THE END OF THE YEAR s r e p p a r w f o r e b m u N 300k 290k 280k 270k 260k 250k 240k 230k 220k 247k FY15 294k 266k FY16 Financial year (end) FY17 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 11 STRATEGIC REPORT continued Financial performance Income for the financial year ended 30 September Revenue Cost of Sales Gross Profit Operating Expenses Operating Profit attributable to shareholder returns Interest Income Profit before tax attributable to shareholder returns Tax on ordinary activities Profit after tax 2017 £m 80.2 (0.6) 79.6 (42.8) 36.8 0.2 37.0 (7.1) 29.9 2016 £m 68.4 (0.5) 67.9 (42.1) 25.8 0.4 26.2 (5.4) 20.8 Total gross profit in the financial year to 30 September 2017 increased by £11.7 million, or 17.2%, to £79.6 million from £67.9 million. This growth has been driven by the increase in value of funds under direction, which has resulted from strong new inflow growth and good market growth together with an increase in the number of tax wrappers held on the platform. Components of Revenue for the financial year ended 30 September Annual Commission Income Wrapper Fee Income Other Income Total Revenue 2017 £m 69.5 7.3 3.4 80.2 2016 £m 58.9 6.5 3.0 68.4 Revenue comprises three elements, of these annual commission income and wrapper fee income constitute the recurring revenue. Other income includes ‘buy commission’ and ‘dealing income’. 12 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 These recurring revenue streams constituted 95.8% (2016: 95.8%) of total fee income. Other income, including transactional revenue, increased by £0.4 million, or 13.3%, to £3.4 million in the financial year ended 30 September 2017. This was due to an increase in the number of transactions, and the average value of those transactions. Annual commission income increased by £10.6 million, or 18.0%, to £69.5 million in the financial year ended 30 September 2017. This growth was due to the increased value of FUD arising from strong new inflow growth, and market growth. This increase in annual commission income has been achieved even after allowing for the reduction in the annual commission rate charge effective from 1 April 2017. Wrapper administration fee income increased by £0.8 million, or 12.3%, to £7.3 million in the financial year ended 30 September 2017. This was due to an increase in the number of clients on the platform with open tax wrappers and new tax wrappers opened in the year by clients already using Transact at the start of the financial year. This has been offset by wrappers being closed. INTEGRAFIN – REVENUE e u n e v e R £80m £70m £60m £50m £40m £30m £20m £10m £0m 53.9 58.9 69.5 3.8 5.9 FY15 6.5 3.0 FY16 Financial year (end) 7.3 3.4 FY17 Other Income Wrapper Fee Annual Commission INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 13 2017 £m 30.5 3.5 4.5 3.7 42.2 0.6 42.8 2016 £m 25.5 3.2 4.6 6.9 40.2 1.9 42.1 Depreciation and amortisation costs decreased by £1.3 million, or 68.4%, to £0.6 million compared to £1.9 million in the prior financial year. This decrease was due to the amortisation of the platform intellectual property ceasing in July 2016, resulting in a cost reduction of £1.3 million. Depreciation charges increased marginally in the year due to the fixed assets brought into account on the acquisition of IAD. Total capitalised expenditure for the financial year was £0.4 million compared with £1.5 million in the prior year. This was mainly attributable to our policy of replacing information technology hardware on a regular cycle with a small amount also spent on office refurbishment. STRATEGIC REPORT continued Operating Expenses for the financial year ended 30 September Staff Costs Occupancy Regulatory and Professional Fees Other Costs Total Expenses Depreciation and Amortisation Total Operating Expenses Total operating expenses increased by £0.7 million, or 1.7%, to £42.8 million in the financial year ended 30 September 2017 compared to £42.1 million in the financial year ended 30 September 2016. This increase was due to general inflation of staff costs, a small increase in staff numbers, in part offset by a reduction from the full year effect of the acquisition of IAD and subsequent Group reorganisation. Staff costs increased by £5.0 million, or 19.6%, to £30.5 million in the financial year ended 30 September 2017 compared to £25.5 million in the financial year ended 30 September 2016. There are several factors affecting staff costs in this period. This is the first full year following the acquisition of IAD, our development company, in July 2016, which added 65 staff to the Group. This acquisition reduced other costs by £2.4 million. We believe this acquisition will generate a long-term benefit for the Group, bringing experience and capability in house, giving us full control over our platform offering and software costs. The average number of staff employed by the Group increased from 442 to 451 over the financial year, reflective of the increase in business volumes and our commitment to maintaining premium service. There were general inflation increases in staff costs as well as a budgeted increase in the percentage of salary paid by the Group to the staff money purchase pension arrangement. 14 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 Profit before tax attributable to shareholder returns Over the course of the year we have continued to invest in our infrastructure and people, delivering award-winning service to our advisers and clients, whilst also implementing charge reductions that have lowered the costs to our clients. This has been achieved whilst also increasing our operating margin from 37.8% to 45.9%. Profit before tax increased by £10.8 million, or 41.2%, to £37.0 million in the financial year ended 30 September 2017 compared to £26.2 million in the prior financial year. This is reflective of our strong operating performance delivering significant inflow growth and expense control. As required by IFPRU 9.1.3, IntegraFin’s consolidated net return on assets, calculated as net profit divided by total balance sheet is 29% in 2017 (2016: 24%). Tax Tax on ordinary activities described below comprises solely the Group’s ‘shareholder corporation tax’ which is distinguished from the ‘policyholder tax’ that the Group collects and remits to HMRC in respect of ILUK, which is taxed under the “I minus E” tax regime. Whilst the Group has operations in three tax jurisdictions, UK, Australia and Isle of Man, Group profits are therefore varyingly subject to tax at three different rates, the vast majority of the Group’s income is earned in the UK. Taxation increased by £1.7 million, or 35.6%, to £7.1 million in the financial year ended 30 September 2017 compared to £5.4 million in the prior financial year. Due to a reduction in the UK standard rate of corporation tax, effective from 1 April 2017, the effective rate of tax over the period reduced to 19.2% from 20.2%. Our tax strategy is published on our website at www.integrafin.co.uk. Earnings continue to show growth, increasing by 43% from £18.41 per share to £26.39 per share, for the A, B and C shares, demonstrating the continuing strength of the business and reflecting the strong performance over the year. Earnings per share for the financial year ended 30 September Operating Profit attributable to shareholder returns Interest Income Profit before tax attributable to shareholder returns Tax on ordinary activities Profit after tax Ordinary A, B, C shares – earnings per share (Pounds per share) Ordinary D shares – earnings per share (Pounds per share) 2017 £m 36.8 0.2 37.0 (7.1) 29.9 26.39 22.39 2016 £m 25.7 0.5 26.2 (5.4) 20.8 18.41 14.41 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 15 STRATEGIC REPORT continued INTEGRAFIN – PROFIT BEFORE TAX T B P £40M £35M £30M £25M £20M £15M £10M £5M £0M £36.98m £20.32m £26.20m FY15 FY16 Financial year (end) FY17 INTEGRAFIN – EARNINGS PER SHARE S P E £30 £25 £20 £15 £10 £5 £0 £14.50 £10.50 £18.41 £14.41 £26.39 £22.39 FY15 FY16 Financial year (end) FY17 EPS A,B,C EPS D Liquidity and Capital Management The Group monitors its liquidity position on a regular basis, having cognisance to cash and cash equivalent holdings and levels of outgoings. At 30 September 2017 the Group held £105.8 million cash and cash equivalents compared with £90.6 million at 30 September 2016. Cash is used to expand the business through: continued organic growth, paying the operating expenses of the business; further enhancing the premium service; further developing the resilience of the Group’s systems through investment in technology and infrastructure; and paying shareholder dividends. There are three regulated entities within the Group, a UK investment firm and two life insurance companies, one in the UK and one in the Isle of Man. Each regulated entity is required to maintain a minimum level of regulatory capital. Cash is chosen as the main deployment of regulatory capital required by the regulated subsidiaries. The regulatory capital for insurance companies under the Solvency II regime is based on a modelled stressed value-in-force concept for the business, rather than on the accounting concept of capital. The solvency requirements for Isle of Man insurance companies are due to change with effect from 30 June 2018. 16 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 Regulatory Capital for the financial year ended 30 September 2017 IFAL ILUK ILInt (Current requirement) ILInt (Estimate based on proposed new rules) Regulatory Capital Requirement £m Allowable Capital Resource £m 14.2 134.9 4.1 17.5 34.7 154.0 13.5 31.9 The table above details the regulatory capital requirement for each of the Regulated Subsidiaries. Consolidated Capital for the financial year ended 30 September 2017 Shareholder funds Goodwill, intangibles and other deductibles Available capital pre dividend Dividend provision Available capital post dividend Estimated capital for regulatory capital requirements4 Estimated surplus £m 102.5 (16.8) 85.7 19.4 66.3 38.4 27.9 Note that for the purpose of this estimate, ILUK’s capital has been taken using the accounting concept of capital, rather than on a Solvency II basis. The Board considers the impact of prospective dividends on its regulatory capital requirements and risk appetite levels. Our Pillar 3 document contains further details and can be found on our website at www.integrafin.co.uk Dividend for the financial year ended 30 September Total ordinary dividend Dividend pounds per A, B and C class shares Dividend pounds per D class share 2017 £ 19.4m 17.18 13.18 2016 £ 13.5m 12.00 8.00 4 Estimated capital required to cover regulatory capital requirements takes consideration of COREP, Solvency II and Isle of Man life insurance capital requirements. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 17 STRATEGIC REPORT continued The strategy and business plan is approved annually by the Board and updated as appropriate. It considers the Group’s profitability, cash flows, capital requirements, dividend payments, and other key variables such as liquidity and the solvency requirements of the regulated entities. These are considered under stress and scenario tests to ensure the business has sufficient flexibility to withstand such impacts by adjusting its plans within the normal course of business. Viability Statement The Directors have assessed the Company’s prospects by reference to the three-year planning period to September 2020, and have reasonable expectation that the Company will continue to operate and meet its liabilities as they fall due over the period of this assessment. The Directors’ assessment has been made with consideration and reference to: the Group’s current position and business plan; the Group’s risk appetite; the Group’s financial projections; and the Group’s principal risks and uncertainties, as detailed in the Strategic Report. It is the Board’s view that a three year time horizon is an appropriate period over which to assess its viability and prospects, and to execute its business plan. This assessment period is consistent with the Group’s current business plan projections and the ICAAP and ORSAs of the Group’s regulated entities. 18 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 and effectiveness of policies and procedures designed to detect any risk of failure by any of the Regulated Subsidiaries to comply with their obligations under the regulatory system. The Group has a prudent capital management approach and currently invests shareholder assets in high quality, highly liquid, short-dated investments. How risks are managed The Risk Management Policy provides general guidelines for the design and implementation of the Risk Management Framework with the Board responsible for establishing the risk strategy and Senior Management responsible for its implementation. The Risk Management Policy is overseen by the Chief Financial Officer and is reviewed at least on an annual basis. All material changes to this policy are considered by the Risk Committee and approved by the Board. The Board is responsible for, and provides oversight of, the Group’s Risk Management Framework with guidance provided by the Risk Committee. The Group has established its framework with consideration of the Committee of Sponsoring Organisation of the Treadway Commission (COSO) Integrated Framework Principles, providing a consistent, pro-active approach to identification, assessment, mitigation and reporting of risks throughout the Group. RISK AND RISK MANAGEMENT Overview Risk management assists the Board in understanding its current and future risks and provides appropriate risk management information that is incorporated into its strategic decision making and business planning processes. Risk management activities encompass all financial, strategic and operational risks that may prevent IntegraFin Holdings Limited (the Company) and the Group from fulfilling their business objectives. Given the nature of the activities undertaken by the Group, the key risks that the Company faces are financial risks (comprising market risk, liquidity risk, outflow risk, expense risk and credit risk) and non-financial risks (comprising regulatory risk, operational risk, competition risk, geopolitical risk andreputational risk). The Chief Executive Officer, supported by the Chief Financial Officer, is responsible for executing the strategy set by the Board within the risk appetite defined by the Risk Committee of IFAL (Risk Committee) and approved by the Boards of Directors of each of IFAL, ILUK and ILInt (collectively known as the “Regulated Subsidiaries”). The Chief Financial Officer reports directly to the Chief Executive Officer and is additionally accountable to the Board and the Group’s regulators for the effective management of risk across the business. The Chief Financial Officer is responsible for overall management of risk controls, including the monitoring of risk exposures, reporting in relation to risk management arrangements and for assessing the adequacy INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 19 STRATEGIC REPORT continued The Group’s Risk Management Framework is shown below: OVERSIGHT ENTERPRISE RISK MANAGEMENT OWNERSHIP RISKS Risk and governance framework Board Strategy/Business Market Credit Operational Insurance Liquidity Conduct Group t i d u a l a n r e t n I e c n a i l p m o c d n a t n e m e g a n a m k s i R Model governance and data quality Risk management policies Board with Risk Committee guidance Systems and Controls policies (Group policy, process and procedures principles and guidance documents) Procedures, manuals, operational limits, methodology, specifications, control activities, training, reporting Management, Corporate and Client Accounting, Operations, Sales and Marketing, Information Technology, Human Resources, Legal, Technical, Quality Control, Actuarial 20 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 ▪ the Group does not actively seek to take operational risk to generate returns. It accepts a level of operational risk that means the controls in place should prevent material losses, but should not excessively restrict business activities ▪ the Group has no risk appetite for unfair client outcomes arising from systematic failures in its cultural outlook or in any element of the client life cycle; and ▪ the Group has a zero risk appetite for material regulatory breaches. The actual risk exposures of the Regulated Subsidiaries are regularly assessed by the Group’s Risk Management function against risk appetite using a comprehensive set of key risk indicators and reported to the Risk Committee and Senior Management. Risk appetite The Group’s risk appetite is the degree of risk that the Regulated Subsidiaries are prepared to accept in pursuit of their strategic and operational objectives. The Group’s Risk Management Policy and Framework provides the mechanism to define the Group’s risk appetite. The Group has generally adopted an overall conservative approach which is reflected in its risk appetite values and preferences and in the overall approach to risk management. The Group’s risk preferences can be articulated as follows: ▪ the Group ensures risks that are taken are aligned with its strategic aims and provide an acceptable level of return ▪ the Group accepts certain risks and ensures that these are appropriately managed, mitigated and monitored ▪ the Group has a preference for products with low capital requirements and without financial guarantees. Additionally, the Group has a preference for secondary market risk through charges determined based on clients’ portfolio values. This is central to the Group’s proposition and it accepts the potential impact on financial performance INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 21 STRATEGIC REPORT continued Risk governance The Risk Management Framework defines risk governance as the combination of processes and structures implemented by the Board in order to inform, direct, manage and monitor the activities of the Group towards the achievement of its objectives. The Risk Committee is made up of independent Non-Executive Directors (NEDs) and is responsible for reviewing the manner in which the Group and the Regulated Subsidiaries implement, and monitor the adequacy of, the Risk Management Framework. The Risk Committee also assists in fostering a culture that encourages good stewardship of risk and emphasises and demonstrates the benefits of a risk-based approach to management of the Group. The Group implements a comprehensive “top-down” and “bottom-up” approach to managing risks through regular assessments, monitoring (including horizon scanning) and reporting in conjunction with Senior Management and risk owners. The Risk Management function reports to the Risk Committee, on at least a quarterly basis, information and analysis on the key risks the Group faces (including forward- looking risks), capital requirements and comparison against risk appetite. The Chairman of the Risk Committee then provides a summary to the members of the Boards. The “three lines of defence” risk governance model For risk management to be effective it is important that the roles and responsibilities of all those involved are clearly defined. Accordingly, the Group’s Risk Management Framework is designed along the “three lines of defence” model (illustrated below), which aims to ensure at least three stages of oversight to ensure that the Regulated Subsidiaries operate within the risk appetite defined by the Risk Committee and approved by the Boards of Directors of each of the Regulated Subsidiaries. THE ”THREE LINES OF DEFENCE” RISK GOVERNANCE MODEL OF THE REGULATED SUBSIDIARIES: The Board Risk Committee Audit Committee Risk Ownership Risk Oversight Risk Assurance Managers Business Operations Risk Management Compliance Internal Audit First Line of Defence Second Line of Defence Third Line of Defence 22 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 First line of defence Second line of defence The Group’s first line of defence is its business departments which have responsibility for managing and controlling their risks in accordance with agreed risk appetites through the implementation of a sound set of processes and controls. Responsibility for risk management resides at all levels within the Group’s business lines, from the Senior Management Team to department and team managers. All staff members are accountable for managing risks within the business areas for which they are responsible, ensuring compliance with prescribed company plans, policies and prevailing regulatory and legislative requirements. The business lines are also responsible for complying with the policies and standards which comprise the Group’s Risk Management Framework. Current key risks and issues facing the Group are considered by the Management Team, with each key risk owned by the member of the Management Team who is responsible for the strategic management of that risk across the Group. The Group’s second line of defence comprises of two functions: the Risk Management function and the Compliance function. The Risk Management function is responsible for co-ordinating all the risk management activities within the business. This includes the development, maintenance and enhancement of the Risk Management Policy and Framework, as well as Risk Management reporting. The Risk Management function provides regular risk reports to the Risk Committee, which is comprised solely of NEDs. The Compliance function is primarily responsible for supporting the Group to ensure that its activities are conducted in accordance with all applicable regulatory requirements. Third line of defence The Group’s third line of defence is the Internal Audit department, which provides independent assurance on the adequacy and effectiveness of the Group’s risk management and major business process control arrangements. The Head of Internal Audit reports directly to the Chairman of the Audit Committee, which is comprised solely of NEDs. Internal Audit conducts regular audits on the implementation and effectiveness of the Risk Management Policy and Framework across the business. The results of these audits are reported to the Audit Committee and the Board. The Board is satisfied that Internal Audit provides sufficient assurance about the Risk Management Policy and Framework. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 23 STRATEGIC REPORT continued PRINCIPAL RISKS AND UNCERTAINTIES The principal risks and uncertainties to which the Company is exposed relate to the upstream of capital, predominantly from its regulated subsidiary, IFAL, in order to support its dividend-paying capacity to its shareholders. The key drivers of this upstream of capital are the underlying financial performance and solvency position of IFAL and its regulated subsidiaries, provided in the relevant supplementary accounts. In summary, due to the nature of the business written by IFAL and the other regulated subsidiaries, profitability arises primarily from charges on the assets held in the portfolios less the expenses of administering those portfolios. As a consequence, the predominant risks to which the Company is exposed are market risk, liquidity risk, outflow risk, expense risk and operational risk. The Company seeks to limit its exposure to these and any other applicable financial and non-financial risks. The following tables (split between financial and non-financial risks) describe the key risks of the Company with a summary description of how we manage and mitigate the risks: Solvency II ILUK has fully embedded the requirements of the Solvency II regime which came into force on 1 January 2016. The new regulations brought in detailed requirements covering risk and risk management, including stress and scenario testing, as well as new valuation and reporting requirements. However, this has not fundamentally changed ILUK’s business or risk profile and ILUK continues to safely manage its solvency position through the economic cycle. ILUK has adopted the Standard Formula approach in calculating the Solvency Capital Requirement (SCR), and has not adopted any of the Transitional Provisions in the calculation of the Solvency II balance sheet or SCR. As at 30 September 2017, ILUK has Own Funds of £154m and an SCR of £135m which gives a solvency coverage ratio of 114%. 24 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 FINANCIAL RISKS KEY RISK DESCRIPTION MANAGEMENT AND CONTROLS Market risk – the impact changes in equity and property market values, currency exchange rates, credit spreads, interest rates and inflation, may have on the value of clients’ portfolios, resulting in a reduction in future charges or an increase in future expenses. The upstream of capital to the Company is exposed to second order impacts from market movements as future charges are predominantly determined based on clients’ portfolio values. The Regulated Subsidiaries of the Group do not offer any guarantees on portfolio values and currently invest their shareholder assets in high quality, highly liquid, short-dated investments. Expense inflation risk is mitigated through regular stress testing, monitoring of expenditure and closely managing expenses in line with the business plan. Liquidity risk – this is the risk of the Company not having available sufficient financial resources to enable it to meet its obligations as they fall due, or can secure such resources only at excessive cost. The Company’s principal liquidity risk is limited to paying out dividends and operating expenses as they occur. There are robust controls in place to mitigate liquidity risk, for example, holding corporate cash across a range of banks, in order to mitigate the risk of a single point of counterparty default failure. Outflow risk – loss of future profits due to more clients than expected terminating policies or more outflows (e.g. withdrawals or transfers) than expected. The Group seeks to mitigate outflow risk by focusing on providing the highest level of service that it can. Outflow rates are closely monitored and unexpected experience is investigated. Despite the current challenging and uncertain economic and geopolitical environment, outflow rates remain low and stable. Expense risk – administration costs exceed expense allowance, which can occur due to costs increasing faster than expected or from one-off expense “shocks”. As a significant percentage of the Group’s expenses are staff-related, the key inflationary risk arises from salary inflation. Expense risk is mitigated through regular stress testing, monitoring of expenditure and closely managing expenses in line with the business plan. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 25 STRATEGIC REPORT continued NON-FINANCIAL RISKS KEY RISK DESCRIPTION MANAGEMENT AND MITIGATION Regulatory risk – the risk of new regulatory requirements having adverse impacts on the Group’s business model, or the Group failing to comply with existing or new regulations resulting in a fine or regulatory censure. Regulatory risk is mitigated through regular monitoring of regulatory developments and maintaining open and transparent dialogue with the regulators to which the different regulated subsidiaries are subject. On-going compliance with existing rules is monitored by the Compliance function with additional assurance provided by the Internal Audit function for the key regulatory risks on a regular basis. Operational risk – the risk of loss arising from inadequate or failed internal processes, people and systems, or from external events. The Group aims to minimise operational risk at all times through a strong and well-resourced control and operational structure. This is supported by the strong corporate governance structure that is embedded in the Group as a whole. Competition risk – the risk of competitor activity resulting in loss of new business, increased outflows of existing business or pressure on profit margins. Geopolitical risk – the risk of changes in the political landscape disrupting the operations of the business or resulting in significant development costs. Competitor risk is mitigated by focusing on providing exceptionally high levels of service and being responsive to client and financial adviser demands through an efficient expense base. Geopolitical risk cannot be directly mitigated by the Group. However, through close monitoring of developments through its risk horizon scanning process, potential impacts are taken into consideration as part of the business planning process. Reputational risk – the risk that current and potential clients’ desire to do business with the Group reduces due to perception of the Transact service in the market place. The Risk Management Framework provides the monitoring mechanisms to ensure that reputational damage controls operate effectively and reputational risk is mitigated, to some extent, by internal operational risk controls, error management and complaints handling processes as well as root cause analysis investigations. 26 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 CORPORATE SOCIAL RESPONSIBILITY IntegraFin demonstrates its social responsibilities primarily through its relationship, as ultimate parent company, with companies in its Group that operate ethically and deliver commercial benefits to customers, shareholders and staff. IntegraFin also acknowledges its responsibilities more widely in relation to the Company’s effects on environmental and social wellbeing. Culture Transact was founded on the principle of offering adviser firms and clients a high quality service with transparent charging (for clients in relation to payment for platform services and adviser firms’ services) and a demonstrably agnostic attitude to clients’ investment choice. This ethical approach informs all of the Group’s business principles. Environment IntegraFin has a limited direct impact on the environment. However, we still take steps to reduce our environmental impact by encouraging adviser firms and clients to use electronic rather than paper based instruction delivery, by encouraging staff to reduce consumption of electricity, other utilities and paper and by recycling waste materials. Community We organise a variety of events each year to raise money for, and awareness of, a number of charities chosen from staff suggestions. We do not make political donations. The Group also makes tax payments. The UK corporation tax and employer’s national insurance payable in respect of the year ended 30 September 2017 was £9.2 million. In addition other taxes such as VAT and business rates were paid. This Strategic Report (up to page 27) was approved by the Board of Directors on 12 December 2017 and signed on its behalf by David Johnson Company Secretary INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 27 GOVERNANCE BOARD OF DIRECTORS TO 30 SEPTEMBER 2017 Michael Howard Executive Chairman Appointed: 24 January 2014 Ian Taylor Chief Executive Officer Appointed: 24 January 2014 Alexander Scott Group Director Appointed: 24 January 2014 ▪ Executive Chairman of the Group from 2001 until stepping down in October 2017 and becoming Executive Director. Prior to this he was the Managing Director from April 1999 to December 2001 ▪ CEO of the Group since April 2002, prior to which he was Executive Director and General Manager from 1999 to 2002 Experience includes: ▪ AIB Govett Asset Management – Marketing Director 1992-1999 ▪ Royal Life Holdings Group – Marketing Development Manager 1990-1992, Business Planning Manager 1988-1990. ▪ Founded ObjectMastery in Australia in April 1992 which developed the software powering Transact Experience includes: ▪ Norwich Union Life Insurance – launched platform Navigator in 1990, Managing Director of Norwich Australia Asset Management from 1989-1992, Marketing Development Manager 1988-1989 and Accounts & Company Secretary 1986-1988 ▪ Touche Ross – Audit division in Melbourne office 1984-1986, in the UK 1980-1984. ▪ Group Director since May 2013 ▪ CFO and Head of Risk from November 2010 to May 2013 ▪ Joined the Group as Actuary and Head of Group Technical Operations in October 2009 Experience includes: ▪ Sterling Insurance Group – Life Director and Chief Actuary 2004-2009 ▪ Criterion Assurance Group – Non-Executive Director 2003-2010, Group Director 2002-2003, Director 1999-2002, Actuary 1997-1999 ▪ National Provident Institution – Actuarial Division 1991-1997. 28 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 Judith Davidson Chief Operating Officer Christopher Munro Non-Executive Director Neil Holden Non-Executive Director Appointed: 24 January 2014 Appointed: 29 March 2017 Appointed: 24 January 2014 ▪ COO of the Group since Experience includes: Experience includes: November 2010 Experience includes: ▪ Symbiotic Consulting – Founder and Managing Partner 2009 to present ▪ Sodexo UK – Client Relations and Commercial Director 2005-2009, Director of Strategy UK & Ireland 2002-2005, SAP Implementation Director 2000-2002, UK & Ireland Sales Director 1997-2000, Divisional MD, Business and Industry 1996-1997, Managing Director Education 1995-1996 ▪ Gardner Merchant – Sales and Operational Roles 1986-1995 ▪ Trust House Forte Airport Services – Operational Roles 1983-1986. ▪ London and Continental Partners LLP ▪ Saffron Building Society – – Founding Partner 2016 ▪ Beckwith Asset Management – Director 1994 to 2016 ▪ Pacific Capital Partners – Director 2004 to present ▪ Jupiter Enhanced Income Trust – Director 1996 and 2009 ▪ River & Mercantile Investment Management – CEO 1994-1996 ▪ Robert Fleming Holdings Limited – Director 1988 and 1994 ▪ Jardine Fleming Holdings – Director 1983-1986. Committees: Remuneration Committee, Risk Committee, Regulatory Compliance Committee, Audit Committee. Non-Executive Director since 2014 ▪ Calmindon Ltd – Director since 2010 ▪ Stanbic International Insurance Limited – Non-Executive Director since 2003 ▪ Bank of London and The Middle East Plc – Non-Executive Director since 2006 ▪ Quadrant Risk Management International Limited – Non-Executive Director 2006-2009 ▪ Standard Bank Group and Standard Bank Plc – Consultant 2006-2008, Managing Director in Corporate and Investment Banking Financial Risk 1999-2006 ▪ WestLB – Director and Head of Risk Management Support & Control 1996-1998. Committees: Remuneration Committee (Chair), Risk Committee, Regulatory Compliance Committee, Audit Committee (Chair). INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 29 GOVERNANCE continued Appointment subsequent to 30 September 2017 Jeremy Brettell Non-Executive Director Stuart Bazley Non-Executive Director Patrick Snowball Non-Executive Chairman Appointed: 24 January 2014 Appointed: 24 January 2014 Appointed: 1 October 2017 Experience includes: Experience includes: Experience includes: ▪ Chair of Airdrie Savings Bank ▪ Visiting Professor in Financial ▪ Dabre Insurance Group plc – since 2015 ▪ Chair of Guarantee Protection Insurance Ltd since 2014 ▪ Chair of Anderson Strathern Asset Regulation and Compliance at BPP 2008-present Non-Executive Chairman 2017 to present ▪ IFAL – Head of Compliance 2011-2012 ▪ IFAL – Consultant 2010-2011 and ▪ Aviva UK – CEO 2005-2007 ▪ Suncorp Group Limited – Management since 2014 2012-2013 CEO 2009-2015 ▪ Wesleyan Bank – Non-Executive ▪ Momenta – Head of Regulatory ▪ Towergate – Deputy Chairman Consulting 2004-2008 2007-2008 ▪ Edward Jones – UK General Counsel and Compliance Director 1999-2004 ▪ Irish Life Assurance UK – Legal Adviser, Head of Legal and Compliance and Money Laundering Reporting Officer 1991-1996. ▪ Jardine Lloyd Thompson plc – Non-Executive Director 2008-2009 ▪ Member of the Financial Services Authority (UK) Practitioner Panel, representing Life and General Insurance, 2006-2008. Committees: Remuneration Committee, Risk Committee, Regulatory Compliance Committee (Chair), Audit Committee. Director and Chair of Audit Committee since 2013 ▪ UnLtd – Audit Committee Member 2012–2014 ▪ NHS Lothian – Non-Executive Board Member and Chair of Audit & Risk Committee 2012–2015 ▪ Accountant in Bankruptcy – Non-Executive Board Member and Chair of Audit Committee 2012–2014 ▪ Helvetia Wealth Management – Strategy Consultant 2011-2012 ▪ SL Investment Management Ltd – Chief Executive 2006-2012. Committees: Remuneration Committee, Risk Committee (Chair), Regulatory Compliance Committee, Audit Committee. 30 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 CORPORATE GOVERNANCE REPORT Governance Statement IntegraFin Holdings Limited is not required to comply with the UK Corporate Governance Code (Code). Nevertheless, the Company’s Board considers the terms of the Code in determining appropriate and proportionate corporate governance arrangements for the Company and its Group of companies by reference to the nature, scale and complexity of its business. Accordingly, the Group’s corporate governance arrangements reflect the standards of practice required by the Group in relation to the management of the Group and are designed to: ▪ promote business effectiveness, efficiency, responsibility and accountability ▪ assist the effective review and monitoring of the Group’s activities ▪ help identify and mitigate significant risks to the Group; and ▪ provide the disclosures to stakeholders necessary to make a meaningful analysis of the Group’s business activities and its financial position. Board of Directors The Role of the Board Michael Howard Executive Chairman Ian Taylor Chief Executive Officer Alexander Scott Group Director Judith Davidson Chief Operating Officer Neil Holden Independent Non-Executive Director Jeremy Brettell Independent Non-Executive Director Stuart Bazley Independent Non-Executive Director Christopher Munro Independent Non-Executive Director A number of resignations and appointments have taken place since the financial year end in preparation for listing IntegraFin on the London Stock Exchange in 2018. On 1 October 2017 Michael Howard stood down as Chairman of IntegraFin and the Boards of IFAL, ILUK and ILInt. On the same date, Patrick Snowball was appointed as Non-Executive Chairman of IntegraFin and IFAL. Jeremy Brettell, Stuart Bazley and Judith Davidson stepped down from the IntegraFin Board on 1 October 2017 but continue to be Directors of IFAL. Board Leadership The Board is responsible for the leadership and management of the Group. The Board oversees the Company’s business affairs, the maintenance of internal controls, and compliance with statutory obligations. Michael Howard has chaired the Board since the Company’s incorporation in January 2014. The Board comprises four Executive Directors (including the Chairman) and four NEDs. Matters reserved to the Board The Board’s remit is documented in its terms of reference which includes details of matters reserved to the Board and matters delegated by the Board. The terms of reference including matters reserved to the Board are reviewed and updated annually. Board Meetings The Board met each quarter, in accordance with its terms of reference. All members of the Board attended all Board meetings throughout the year. Conflicts of interest The Company’s articles of association permit the Board to consider and authorise situations where a Director has an actual or potential conflict of interest in relation to the Group. The Company maintains a conflicts of interest register which is reviewed annually by the Board. In addition, prior to each Board meeting, the Directors are asked to declare any conflicts they may have with regard to the business meeting. Directors who declare a conflict of interest may be authorised by the rest of the Board to participate in decision making in accordance with section 175 of the Companies Act 2006. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 31 GOVERNANCE continued Board effectiveness Annual General Meeting The Board undertakes a review of its effectiveness each year. At the next Board meeting the Directors discuss the findings and agree any action points arising. Re-election of Directors The Company’s articles of association require Directors to retire by rotation at each annual general meeting (AGM) of the Company. Directors required to retire and seek reappointment are those who have been appointed by the Board since the last AGM and who were not appointed or reappointed at one of the preceding two AGMs. Shareholder engagement The Board provides a detailed annual communication to shareholders which includes a business update and financial performance results. The AGM provides shareholders with a further opportunity to communicate with the Board both during the AGM and informally afterwards. Notice of the AGM is sent in accordance with the Companies Act 2006 and made available on a dedicated shareholder website along with any other relevant documentation. Group Committees The Board delegates relevant matters to the Audit, Strategy and Risk Committees for consideration. Independently, the Boards of Integrated Financial Arrangements Ltd, IntegraLife UK Limited and IntegraLife International Limited (the regulated companies in the Group) have delegated relevant matters to a Regulatory Compliance Committee and a Remuneration Committee. 32 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 AUDIT COMMITTEE REPORT Annual Statement by the Chairman of the Audit Committee. I am pleased to present the Audit Committee’s report for 2017. The Audit Committee has worked closely with the Risk Committee and Regulatory Compliance Committee to ensure the Group maintains robust controls. It has overseen the integrity of the financial reporting process and reviewed the work of both external and internal auditors. Role of the Audit Committee The role and responsibilities of the Audit Committee are set out in its terms of reference and are summarised below: ▪ monitoring the integrity of the Group’s financial reporting process ▪ ensuring the integrity of our Annual Report and Financial Statements ▪ reviewing the manner in which the Group implements, and monitors the adequacy of, internal financial and operational controls ▪ monitoring and reviewing the effectiveness of the Group’s Internal Audit function ▪ reviewing external audit arrangements and making recommendations to the Board regarding any changes to the external auditor as well as review and approval of their remuneration and terms of engagement ▪ reviewing and monitoring the independence and objectivity of external auditors as well as the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements. The Committee reports its findings to the Board, identifying any matters in respect of which it considers that action or improvement is needed, and makes recommendations as to the steps to be taken. However, the Board retains ultimate responsibility for reviewing and approving financial reports and other public statements. Composition of the Audit Committee The members of the Audit Committee at 30 September 2017 were: Neil Holden – Chairman (Chartered Accountant) – appointed 9 February 2011 Jeremy Brettell – appointed 16 July 2012 Stuart Bazley – appointed 20 May 2015 Christopher Munro – appointed 1 February 2017 All members of the Committee, including the Chairman, are independent Non-Executive Directors. On an on-going basis, membership of the Committee is reviewed by the Chairman of the Committee and any recommendations for new appointments are made to the IFAL Board. In adherence with the UK Corporate Governance Code requirement to include at least one Committee member with recent and relevant financial experience, the Audit Committee Chairman is a fully qualified chartered accountant. The Group also provides initial and on-going training for new and existing Committee members to support them in carrying out their duties effectively. This is delivered by in-house technical staff, through attendance at formal conferences, and an online training programme. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 33 GOVERNANCE continued Meetings and attendance The Audit Committee meets at least three times each year but more frequently when required. The Committee regularly meet in private with external and internal auditors. The Committee met eight times during this financial year. Attendance by each member of the Committee at 30 September 2017 is set out below. MEETING ATTENDANCE Eligible to attend Meetings attended Chairman Neil Holden Members Jeremy Brettell Stuart Bazley Christopher Munro 8 8 8 5 8 8 8 3 The Group Chief Executive Officer, Group Chief Financial Officer, Group Counsel and Group Head of Internal Audit are routinely invited to, and attend, the majority of meetings, although the Committee reserves the right to request any of these individuals to withdraw. The external auditors for the Group and Life Companies (BDO and KPMG respectively) also attended specific Committee meetings for external audit planning and reporting purposes. In between the formal schedule of meetings the Committee Chairman keeps in regular contact with the Group Chief Executive Officer, Group Chief Financial Officer, Group Head of Internal Audit, and the Senior Engagement Partners of the Group’s two external audit firms (BDO and KMPG). Overview of the actions taken by the Audit Committee to discharge its duties The Audit Committee has focused on four main areas during the year: ▪ Financial Reporting ▪ Internal controls and key risks ▪ Effectiveness of internal audit ▪ Effectiveness and independence of the external auditor. The Audit Committee has also conducted a self-assessment of its own effectiveness for the year and was satisfied with the results achieved and has agreed actions where improvements were suggested. Financial reporting The financial reporting undertaken by the Group has been reviewed and challenged by the Committee, with input and support from the Group’s external auditors. It assessed whether suitable accounting policies have been adopted, whether management have made appropriate estimates and judgements and whether disclosures in published financial statements were fair, balanced and understandable. As part of its work during the year, the Committee, on behalf of the Board, has examined the Annual Report and Financial Statements, related disclosures, consistency of accounting policies and the financial reporting process. This included the review and approval of the Annual Report, and consideration of the Income Statement, Statement of Comprehensive Income, Statement of Financial Position, Statement of Changes in Equity, Going Concern statement and the Statement of Cash Flows, with an emphasis on ensuring that these are fair, balanced and understandable. 34 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 The Committee did this by ensuring there was a thorough process of challenge, including challenge by the Committee itself. The Committee’s own challenge process included questioning the Group Chief Executive Officer on the overall messages and tone of his review statement, examining and challenging reports from both management and the external auditor relating to the Annual Report, and reviewing consistency with internal reports presented to the Board by management, the Group Chief Financial Officer, Group Head of Internal Audit and Group Chief Risk Officer during the year. Following this assessment the Committee recommended to the Board that the 2017 Annual Report and Financial Statements are fair, balanced and understandable. Internal controls and key risks The Audit Committee receives reports at each meeting from the Group Internal Audit function. The content and accuracy of these reports was assessed and challenged by the Committee to ensure that management takes appropriate and prompt action to address audit findings and we monitor management’s progress in implementing the agreed actions. The Group will be audited for the first time this year under the FRC’s new standard regarding CASS assurance reports. This Committee has discussed the impact of the new standards and is satisfied that they have been dealt with appropriately. Effectiveness of Internal Audit The Audit Committee assists the Board in determining the adequacy of the resourcing and plans, and the ongoing effectiveness, of the Internal Audit function. The Internal Audit function presents its Annual Audit Plan, using a risk based approach, to the Committee once a year for prioritisation and approval. The Annual Audit Plan is then reported to the Audit Committee on a quarterly basis for review against changing risks to the Group and for tracking its completion. There are no contractual or similar obligations restricting the Group’s choice of external auditors and the Group’s external auditors, BDO and KPMG, have both confirmed to the Committee that they remain independent. In line with the EU audit regulations our UK life insurance subsidiary (ILUK), as a Public Interest Entity, was required to put its external audit engagement to formal tender (as the engaged auditors had been in place for 10 years). Following a competitive tender process carried out in 2017 KPMG were re-appointed as the external auditor to ILUK, and also to our Isle of Man life insurance subsidiary (ILInt). The tender process included assessing the auditor’s audit approach and delivery, the composition of the engagement team, audit quality and fees and terms. The Audit Committee met with both external auditors privately this year in order to discuss any matters directly in the absence of management. The Committee is satisfied with the performance and effectiveness of BDO and KPMG and has concluded that they both continue to display the necessary attributes of independence and objectivity. On behalf of the Audit Committee Neil Holden Chairman of the Audit Committee 12 December 2017 Having conducted a review of the Internal Audit department the Committee considers that its resources and plans are appropriate for both its resources and plans. In line with the recommendation by the Institute of Internal Auditors whereby an external review of the Internal Audit function should be carried out no less than every five years, our Internal Audit function had a satisfactory external review carried out in February 2017. The Audit Committee met with the Head of Internal Audit privately this year in order to discuss any matters directly in the absence of management. Effectiveness and independence of the external auditor The Audit Committee has primary responsibility for the Group’s relationship with the external auditors (BDO and KPMG) and for monitoring their independence, objectivity and compliance with ethical and regulatory requirements. There were non-audit fees during 2017 paid to BDO of £105,800 (2016: £153,650). The non-audit fees paid to BDO related to quarterly reviews, pension reviews, the annual CASS audit, and other assurance assignments. Non-audit fees paid to KPMG during 2017 were £100,300 (2016: £105,400). The non-audit fees paid to KPMG related to quarterly reviews, and a Solvency II audit. Fees paid to BDO for the audit for 2017 were £111,800 (2016: £109,500), and audit fees paid to KPMG were £98,800 (2016: £96,400). INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 35 GOVERNANCE continued DIRECTORS’ REMUNERATION REPORT Annual Statement by the Chairman of the Remuneration Committee. I am pleased to present a report relating to the activities of IFAL’s Remuneration Committee in 2017. During this year, as in previous years, the Committee’s primary activities have been to review, set or agree (as detailed in the Committee’s terms of reference), overall remuneration and that of senior individual officers as required by the Remuneration Code. It has done so with a view to aligning remuneration with the successful achievement of the Group’s long-term objectives while taking into account relevant regulatory requirements, market rates and value for money. The Group provides a simple remuneration package for all staff consisting of base salary, annual bonus and a benefits package (including pension contributions). There is no long-term incentive plan. The anticipated total bonus pool is accrued during the year as a percentage of the Group’s total base salary costs based on forecasted financial performance and post-tax profits for the year. After the end of the financial year the Group’s financial performance is reviewed before bonuses are awarded. Individual payments are expressed as a percentage of base salary. Individual awards may be increased by reference to individual performance but the majority of the bonus payment is determined by reference to the Group’s financial performance. A relatively low proportion of remuneration is paid in the form of bonus. Payments are generally made in three tranches over a period of six months after the year end. The Group’s business model ensures that profit is quickly translated to cash and therefore the Committee deems that these timescales are appropriate. As part of the process of listing IntegraFin’s shares, it is anticipated that IntegraFin will establish its own Remuneration Committee. On behalf of the IFAL Remuneration Committee Neil Holden Chairman of the IFAL Remuneration Committee 12 December 2017 36 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 RISK COMMITTEE REPORT Annual Statement by the Chairman of the Risk Committee I am pleased to present a report of the Risk Committee’s activities in 2017. During another busy financial year the Risk Committee has reviewed and considered a wide range of topics including information technology security and cyber risks, client money management, risk appetite frameworks (including conduct risk) and the impact of the UK voting to leave the EU. Additionally, the Committee recommended for approval the IFAL Internal Capital Adequacy Assessment Process (ICAAP) to the IFAL Board, the ILUK Own Risk and Solvency Assessment (ORSA) to the ILUK Board and the ILInt Individual Capital Assessment (ICA) to the ILInt Board. Role of the Risk Committee The Committee is a committee of the Board of IFAL and assesses known and foreseeable risks seeking to anticipate future issues, enabling action to be taken to minimise the impact should any of those risks materialise. The Committee reviews the manner in which the Group implements, and monitors the adequacy of, the Risk Management Framework. It assists the regulated companies’ Boards in fostering a culture within the Group that encourages good stewardship of risk and emphasises and demonstrates the benefits of a risk-based approach to management of the Group. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 37 GOVERNANCE continued ▪ review the Group’s top risks and the progress of identified management actions to manage those risks that are outside appetite ▪ review the Departmental Risk Registers with the relevant Heads of Department with top risks and ensure that mitigating actions are progressing to completion ▪ review the risk mitigation techniques and approaches adopted by the companies and ensure that those mechanisms are appropriate and are in line with the Group’s overriding business principles at least annually. This includes the appropriateness of decisions which have resulted in mitigation not being put in place ▪ review the effectiveness of the performance of the risk function and the adequacy of its resources ▪ escalate matters of relevance to the appropriate regulated companies’ Boards. The risk appetites of the Groups’ businesses are determined by the regulated companies within the IntegraFin Group. The Committees’ report their findings and any recommendations to the regulated companies’ Boards. The role and responsibilities of the Committee are set out in its terms of reference and are summarised below: ▪ maintain oversight of the Group’s risk management activities and monitor their effectiveness ▪ review annually the Group’s overarching risk appetite and each company’s specific risk appetites in relation to the Group’s strategy ▪ identify risk trends, exposures or concentrations within the Group or individual companies within the Group that may necessitate policy changes ▪ review annually the Group’s Risk Management Framework ▪ review annually and recommend to the regulated companies’ Boards, for approval the Group’s policies in relation to risk, including mitigation of the risks identified as a result of implementation of the Risk Management Framework ▪ review and challenge as necessary, at least half-yearly, management information reporting the status of the Group’s risk profile – by reference to risk appetite, risk trends and risk concentrations – against the top risks as recorded in the Group Risk Register ▪ review the ICAAP, the ICA and the ORSA documents and Wind Down Plan for the Group; capital adequacy and regulatory capital usage; external risk disclosures including risk statements in the Annual Directors’ Report and Financial Statements and Pillar 3 Disclosures; annual Internal Audit reports where they relate to the effectiveness of risk management operations ▪ review financial crime risk controls and remedial action taken regarding fraudulent activity 38 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 Composition of the Risk Committee The members of the Risk Committee at 30 September 2017 were: Jeremy Brettell – Chairman – appointed 16 July 2012 Neil Holden – appointed 9 February 2011 Stuart Bazley – appointed 20 May 2015 Christopher Munro – appointed 29 March 2017 On an annual basis, membership of the Committee is reviewed by the Chairman of the Committee and any recommendations for new appointments are made to the IFAL Board. Meetings and attendance The Committee meets at least four times each year, there were five scheduled meetings during the financial year and additional ad-hoc meetings where required. The attendance by each Director is set out in the table below. All members of the Committee, including the Chairman, are independent Non-Executive Directors. The members of the Committee at 30 September 2017 who attended the five scheduled Committees held during the twelve month period were: MEETING ATTENDANCE Eligible to attend Meetings attended Chairman Jeremy Brettell Members Stuart Bazley Neil Holden Christopher Munro* *appointed to the Risk Committee on 29 March 2017. 5 5 5 2 5 5 5 2 The Chief Executive Officer, Chief Financial Officer/Chief Risk Officer, Group Counsel, Head of Quality Control, Head of Actuarial and Risk and Risk Manager are routinely invited to attend meetings, although the Committee may request any of these individuals to withdraw or call for additional attendees to provide amplification on specific risk matters. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 39 GOVERNANCE continued Overview of the actions taken by the Risk Committee to discharge its duties Risk reporting and risk profile discussions The Risk Management function provides reports to the Committee at each meeting. During the 2016/2017 financial year the main topics discussed included: top risks, risk horizon scanning, risk appetite statements and assessments, bank account and custodian dashboard review and updates on the external environment following the UK’s vote to leave the EU. The Committee agrees that the Group’s approach to risk continues to be appropriate. ICAAP, ORSA and ICA The Committee recommended for approval the ILUK ORSA to the ILUK Board and the ILInt ICA to the ILInt Board in November 2016 and the IFAL ICAAP to the IFAL Board in December 2016. As part of this, the Committee provided risk management challenge to key underlying processes including formulation of scenarios, stress and scenario testing, reverse stress testing and wind down plans. Risk Management Policy and Framework The Committee received a report from the Head of Actuarial and Risk regarding the improvements in the design and effectiveness of the Risk Management Framework. This included the expansion of related risk policies and further linking the Group’s business principles to the regulated companies’ risk appetite frameworks. Risk effectiveness The Committee has ensured that the Risk Framework has been implemented successfully and adhered to appropriately in the 2016/2017 financial year. In addition, the Internal Audit function issued an Annual Report on the overall effectiveness of the governance and risk and control framework of the regulated companies. The Annual Report concluded that overall the regulated companies’ documented risk and control governance framework is effective at mitigating the major risks to the Group. On behalf of the Risk Committee Jeremy Brettell Chairman of the Risk Committee 12 December 2017 40 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 DIRECTORS’ REPORT Indemnity provision Auditors The Directors present their report and financial statements for the year ended 30 September 2017. The review of the business and principal risks and uncertainties are disclosed within the Strategic Report. Directors The Directors who served during the year were as follows: M Howard I A Taylor A Scott N J Holden C I C Munro (appointed 1 February 2017) P J R Snowball (appointed 1 October 2017) J M Davidson (resigned 1 October 2017) J Brettell (resigned 1 October 2017) S Bazley (resigned 1 October 2017) According to the Register of Directors’ Interests in the Company, no rights to subscribe for shares or share options were granted or exercised by any of the Directors or their immediate families during the financial year. Directors’ and officers’ insurance is in place to indemnify the Directors against liabilities arising from the discharge of their duties as Directors of the Company. BDO LLP have indicated their willingness to continue in office. A resolution to reappoint BDO LLP as auditors for the ensuing year will be proposed at the next AGM. Employee information The Company has no employees (2016: nil), but the Group has 467 employees (2016: 447). The Group continues to promote a culture whereby employees are encouraged to develop and contribute to the overall aims of the business. Policy on disabled employees The Group’s policy regarding employment, training, career development and promotion of disabled employees, and employees who become disabled whilst in employment, is to make reasonable adjustments as required. Political donations No political contributions were made during the year (2016: £nil). 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 auditor is unaware; and ▪ the Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provision of s418 of the Companies Act 2006. By Order of the Board David Johnson Company Secretary Registered Office 29 Clement’s Lane London EC4N 7AE 12 December 2017 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 41 GOVERNANCE continued The Directors are responsible for keeping adequate accounting records that show and explain the Group’s transactions, disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The current Directors, at the date of approval of this report, confirm that they have taken all of the steps that they ought to have taken as Directors to make themselves aware of any information needed by the Company’s auditors for the purposes of their audit, and to establish that the auditors are aware of that information. The Directors are not aware of any relevant audit information of which the auditors are unaware. STATEMENT OF DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the Annual Report and the financial statements in accordance with the Companies Act 2006 and for being satisfied that the financial statements give a true and fair view. The Directors are also responsible for preparing the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and Group and of the profit or loss of the Group for that year. In preparing those financial statements, the Directors are required to: ▪ select suitable accounting policies and then apply them consistently ▪ make judgements and estimates that are reasonable and prudent ▪ state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and ▪ prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and Group will continue in business. 42 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT TO MEMBERS OF INTEGRAFIN HOLDINGS LIMITED Opinion We have audited the financial statements of IntegraFin Holdings Limited (the Parent Company) and its subsidiaries (the Group) for the year ended 30 September 2017 which comprise the Consolidated and Company Income Statement, Consolidated and Company Statement of Financial Position, Consolidated and Company Statement of Cash Flows, Consolidated and Company Statement of Changes in Equity and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. In our opinion, the financial statements: ▪ give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 30 September 2017 and of the Group’s profit and the Parent Company’s profit for the year then ended; ▪ have been properly prepared in accordance with IFRSs as adopted by the European Union; and ▪ have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: ▪ the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or ▪ the Directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group or the Parent Company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 43 FINANCIAL STATEMENTS continued Other information The Directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion 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 such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in 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 in this regard. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: ▪ the information given in the Strategic Report and Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and ▪ the Strategic report and Directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the Group and the Parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic report and Director’s report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion; ▪ adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or ▪ the Parent Company financial statements are not in agreement with the accounting records and returns; or ▪ certain disclosures of Directors’ remuneration specified by law are not made; or ▪ we have not received all the information and explanations we require for our audit. 44 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 Responsibilities of Directors As explained more fully in the Statement of Director’s Responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. 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 auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located at the Financial Reporting Council’s website at: https://www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditor’s report. Neil Fung-On Senior Statutory Auditor For and on behalf of BDO LLP, statutory auditor London 15 December 2017 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 45 FINANCIAL STATEMENTS continued CONSOLIDATED PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME 2017 Note £’000 2016 (Restated) £’000 5 7 8 9 6 6 6 6 80,242 (599) 79,643 68,357 (488) 67,869 (42,837) (42,122) 7,905 44,711 7,905 36,806 178 44,889 7,905 19,358 45,105 19,358 25,747 451 45,556 19,358 36,984 26,198 (7,819) (19,445) (7,181) 29,889 (5,296) 20,816 - - 29,889 20,816 2639 2239 2639 2239 1841 1441 1841 1441 Revenue Fee income Cost of sales Gross profit Administrative expenses Net income attributable to policyholder returns Operating profit Operating profit attributable to policyholder returns Operating profit attributable to shareholder returns Interest income Profit on ordinary activities before taxation Profit on ordinary activities before taxation attributable to policyholder returns Profit on ordinary activities before taxation attributable to shareholder returns Policyholder tax Tax on profit on ordinary activities Profit after tax Other comprehensive income Profit for the financial year Earnings per share Ordinary A, B and C shares – basic (pence) Ordinary D shares – basic (pence) Ordinary A, B and C shares – diluted (pence) Ordinary D shares – diluted (pence) All activities of the Group are classed as continuing. Notes 1 to 33 form part of these financial statements 46 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 COMPANY PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME Revenue Cost of sales Gross profit Administrative expenses Operating profit Dividend income Interest income Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit after tax Other comprehensive income Profit for the financial year All activities of the Company are classed as continuing. Note 7 8 9 2017 £’000 - (-) - (1,015) (1,015) 19,281 24 18,290 - 18,290 - 2016 £’000 - (-) - (1,010) (1,010) 39,649 2 38,641 (78) 38,563 - 18,290 38,563 Notes 1 to 33 form part of these financial statements INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 47 FINANCIAL STATEMENTS continued CONSOLIDATED STATEMENT OF FINANCIAL POSITION Non-current assets Loans and receivables Intangible assets Property, plant and equipment Deferred acquisition costs Investments and cash held for the benefit of policyholders Current assets Financial assets at fair value through profit or loss Other prepayments and accrued income Trade and other receivables Current tax assets Cash and cash equivalents Current Liabilities Trade and other payables Current tax liabilities Non-current liabilities Provisions for liabilities Deferred income liability Liabilities for linked investment contracts Deferred tax liabilities Net assets Capital and reserves Called up equity share capital Share premium account Capital redemption reserve Share-based payment reserve Other reserves Non-distributable reserves Profit or loss account Total equity 30 September 2017 £’000 30 September 2016 £’000 Note 10 11 13 14 15 16 17 18 22 19 14 20 23 24 25 26 27 1,873 12,986 1,858 38,295 11,947,652 12,002,664 - 13,006 2,072 31,792 11,316,471 11,363,341 8,895 10,252 1,456 - 105,829 126,432 15,208 2,803 18,011 8,976 9,842 1,597 199 90,571 111,185 14,289 1,685 15,974 11,831 38,295 11,947,652 10,781 12,008,559 15,550 31,792 11,316,471 8,495 11,372,308 102,526 86,244 57 5,722 2 308 42 501 95,894 102,526 57 5,722 2 308 32 501 79,622 86,244 These financial statements were approved by the Board of Directors on 12 December 2017 and are signed on their behalf by: Ian Taylor, Director Company Registration Number: 08860879 Notes 1 to 33 form part of these financial statements 48 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 COMPANY STATEMENT OF FINANCIAL POSITION Non-current assets Investment in subsidiaries Loans and receivables Deferred tax asset Current assets Other receivables Cash and cash equivalents Current liabilities Trade and other payables Net assets Capital and reserves Called up equity share capital Profit or loss account Total equity 30 September 2017 £’000 30 September 2016 £’000 Note 12 20 17 18 23 14,213 1,873 - 16,086 7 20,081 20,088 1,156 1,156 14,213 - - 14,213 9 16,422 16,431 388 388 35,018 30,256 57 34,961 35,018 57 30,199 30,256 These financial statements were approved by the Board of Directors on 12 December 2017 and are signed on their behalf by: Ian Taylor Director Company Registration Number: 08860879 Notes 1 to 33 form part of these financial statements INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 49 FINANCIAL STATEMENTS continued CONSOLIDATED STATEMENT OF CASH FLOWS Cash flows from operating activities Profit before tax Adjustments for: Amortisation and depreciation Interest Decrease/(increase) in loans and receivables (Decrease)/increase in payables Decrease/(increase) in current asset investments Decrease/(increase) in long term investments Decrease/(increase) in provisions Cash generated from operations Income taxes paid Net cash flows from operating activities Investing activities Acquisition of tangible assets Acquisition of subsidiary Interest received Net cash used in investing activities Financing activities Equity dividends paid Net cash used in financing activities 2017 £’000 2016 £’000 44,889 45,556 571 (178) (2,142) 920 81 - (1,432) 42,709 (13,684) 29,025 (434) - 178 (256) (13,521) (13,521) 1,932 (451) 4,213 5,579 (2,031) 392 (5,252) 49,938 (24,149) 25,789 (730) (13,505) 451 (13,784) (9,652) (9,652) Net increase in cash and cash equivalents 15,248 2,353 Cash and cash equivalents at beginning of year Exchange gains on cash and cash equivalents Cash and cash equivalents at end of year 90,571 10 105,829 88,186 32 90,571 Notes 1 to 33 form part of these financial statements 50 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 COMPANY STATEMENT OF CASH FLOWS Cash flows from operating activities Profit before tax Adjustments for: Interest Decrease/(increase) in long term investments Decrease/(increase) in loans and receivables (Decrease)/increase in payables Cash generated from operations Investing activities Interest received Net cash used in investing activities Financing activities Equity dividends paid Net cash used in financing activities 2017 £’000 2016 £’000 18,290 38,641 (24) - (1,872) 769 (2) (13,764) (9) 311 17,163 25,177 24 24 2 2 (13,528) (13,528) (8,978) (8,978) Net increase in cash and cash equivalents 3,659 16,201 Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 16,422 20,081 221 16,422 Notes 1 to 33 form part of these financial statements INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 51 FINANCIAL STATEMENTS continued CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Share capital Share premium Other reserve Share based payment reserve Non- distrib- utable reserve Retained earnings Total equity £’000 £’000 £’000 £’000 £’000 £’000 £’000 Balance at 1 October 2015 57 5,722 2 308 501 68,376 74,966 Comprehensive income for the year: Profit for the year Other comprehensive income Other movement Total comprehensive income for the year Distributions to owners: Dividends Total distributions to owners – – – – – – – – – – – – Balance at 1 October 2016 57 5,722 Comprehensive income for the year: Profit for the year Other comprehensive income Other movement Total comprehensive income for the year Distributions to owners: Dividends Total distributions to owners – – – – – – – – – – – – Balance at 30 September 2017 57 5,722 – 32 – 32 – – 34 – 10 – 10 – – 44 – – – – – – – – – – – – 20,816 20,816 – 82 32 82 20,898 20,930 (9,652) (9,652) (9,652) (9,652) 308 501 79,622 86,244 – – – – – – – – – – 29,889 29,889 – (96) 10 (96) 29,793 29,803 – (13,521) (13,521) – (13,521) (13,521) 308 501 95,894 102,526 Notes 1 to 33 form part of these financial statements 52 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 COMPANY STATEMENT OF CHANGES IN EQUITY Share capital £’000 Share premium £’000 Capital redemption reserve £’000 Share based payment reserve £’000 Balance at 1 October 2015 Comprehensive income for the year: Profit for the year Total comprehensive income for the year Distributions to owners: Dividends Total distributions to owners Balance at 1 October 2016 Comprehensive income for the year: Profit for the year Total comprehensive income for the year Distributions to owners: Dividends Total distributions to owners 57 - - - - 57 - - - - Balance at 30 September 2017 57 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Retained earnings £’000 Total equity £’000 614 671 38,563 38,563 38,563 38,563 (8,978) (8,978) (8,978) (8,978) 30,199 30,256 18,290 18,290 18,290 18,290 (13,528) (13,528) (13,528) (13,528) 34,961 35,018 Notes 1 to 33 form part of these financial statements INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 53 FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS 1. Basis of preparation and significant accounting policies a) Basis of preparation The financial statements have been prepared and approved by the Directors in accordance with Part 15 of the Companies Act 2006, Schedule 3 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and International Financial Reporting Standards (IFRSs) as adopted by the EU. The financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial instruments, which are stated at their fair value, have been prepared in pound sterling, which is the functional currency of the Company and are rounded to the nearest thousand. There have been a number of presentational changes to the Consolidated Profit and Loss and Other Comprehensive Income statement, leading to the restatement of certain prior year figures. The purpose of this is to make the accounts more understandable to the user by splitting out policyholder income and expenses in a clear way. These changes are all presentational, and there is no change to the profit for the financial year figure. The financial statements have been prepared on a going concern basis following an assessment by the Directors. The Company has a net asset position, strong solvency position, is currently profitable and, based on the latest forecasts, expects to remain profitable. As a result, the Board has reasonable expectation that the Company has adequate resources to continue in operational existence from at least 12 months from the date of approving these financial statements. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries. Where the company has control over an investee, it is classified as a subsidiary. The company 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. Subsidiaries are fully consolidated from the date on which control is obtained by the Company and are deconsolidated from the date that control ceases. Acquisitions are accounted for under the acquisition method. Intercompany transactions, balances, income and expenses, and profits and losses are eliminated. The financial statements of all of the wholly owned subsidiary companies are incorporated into the consolidated financial statements. Two of these subsidiaries, IntegraLife International Limited (ILInt) and IntegraLife UK Limited (ILUK) issue contracts with the legal form of insurance contracts, but which do not transfer significant insurance risk from the policyholder to the Company, and which are therefore accounted for as investment contracts. In accordance with IAS 39, the contracts concerned are therefore reflected in the consolidated statement of financial position as investments held for the benefit of policyholders, and a corresponding liability to policyholders. b) Future standards, amendments to standards, and interpretations not early-adopted in the 2017 annual financial statements. At the date of authorisation of these financial statements the following standards, amendments to standards, and interpretations, which are relevant to the Group, have been issued by the International Accounting Standards Board. IFRS 9 Financial Instruments The IASB has issued IFRS 9 Financial Instruments to replace lAS 39 ‘Financial Instruments: Recognition and Measurement’ in its entirety. The project has three main phases: ▪ Phase I: Classification and measurement of financial instruments; ▪ Phase II: Amortised cost and impairment of financial assets; and ▪ Phase III: Hedge Accounting. 54 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 IFRS 9 includes requirements for the classification and measurement of financial assets and liabilities, liability derecognition requirements and additional disclosure requirements. The main changes from IAS 39 include the following: ▪ Financial assets are to be classified and measured based on the business model for managing the financial asset and the cash flow characteristics of the financial asset, either at fair value or amortised cost; ▪ A financial asset or liability that would otherwise be at amortised cost may only be designated as at fair value through profit or loss if such a designation reduces an accounting mismatch; and ▪ For financial liabilities designated as at fair value through profit or loss a further requirement is that all changes in the fair value of financial liabilities attributable to credit risk be transferred to ‘Other Comprehensive Income’ with no recycling through profit or loss on disposal. This standard has been endorsed by the EU and is effective for accounting periods beginning on or after 1 January 2018. An assessment of the impact of IFRS 9 has been conducted and there is no material impact on the Group on its adoption. IFRS 15 Revenue from Contracts with Customers The standard provides a comprehensive new model for revenue recognition. The Company will be required to disclose information about its contracts with customers, disaggregating information about recognised revenue and information about its performance obligations at the end of the reporting period. This standard has been endorsed by the EU and is effective for accounting periods beginning on or after 1 January 2018. An assessment of the impact of IFRS 15 has been conducted and there is no material impact on the Group its adoption. IFRS 16 Leases The new standard brings most leases on-balance sheet for lessees under a single lessee accounting model, eliminating the distinction between operating and finance leases. This standard is effective for accounting periods beginning on or after 1 January 2019; it is yet to be endorsed by the EU. An initial assessment of the impact of this standard has been conducted, which indicates that whilst there will be a material adjustment to gross assets and liabilities as a result of bringing leased assets on balance sheet, there is unlikely to be a material net impact at Group level. IFRS 17 Insurance Contracts IFRS 17 was issued in May 2017 and will replace IFRS 4 Insurance Contracts. IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the Standard. The Company would be required to provide information that faithfully represent those contracts, such that users of the financial statements can assess the effect insurance contracts have on the entity’s financial position, financial performance and cash flows. The standard is effective for accounting periods beginning on or after 1 January 2021. The Group has performed preliminary assessment regarding the impact of IFRS 17 on the financial statements and, due to all contracts written by the business being insurance contracts, it is deemed such impact will be negligible. c) Critical accounting estimates and judgements Critical accounting estimates are those which involve the most complex or subjective judgements or assessments. The areas of the Group’s business that typically require such estimates are the determination of the fair value for financial assets, impairment charges, deferred acquisition costs, deferred fee income and deferred taxes. Each of these is discussed in more detail in the relevant accounting policies and notes to the financial statements. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 55 FINANCIAL STATEMENTS continued d) Principal accounting policies Revenue recognition Revenue represents the fair value of services supplied by the Group. The main revenue streams comprise: charges levied on the acquisition of assets, due when transactions complete; annual commission levied on the value of assets and cash held on the platform, due at the end of each month; and an annual wrapper charge levied on certain wrapper types, due at the end of each quarter. Charges are levied on Portfolios as stated in the Transact Terms and Conditions. Revenue is recognised as follows: Fee income Fees charged for managing investment contracts comprise fees taken both on inception and throughout the life of the contract. All fee income is recognised as revenue in line with the provision of the investment management services. Deferred acquisition costs and deferred income liabilities Incremental costs directly attributable to securing investment contracts are deferred. These costs consist of fees paid to policyholder financial advisers. The costs are capitalised as deferred acquisition costs and are amortised as an expense over the Directors’ best estimate of the life of the contract which is deemed to be ten years, as the services are provided. Equal service provision is assumed over the lifetime of the contract and, as such, the deferred costs are amortised on a linear basis over the expected life of the contract, adjusted for expected persistency. A corresponding deferred income liability is recognised in respect of charges taken from customers of the Company at the contracts’ inception to meet obligations to financial advisers. Deferred income liabilities are also amortised over the Director’s best estimate of the life of the contract, which is again deemed to be ten years. Investment income Interest on cash and coupon on shareholder gilts are the two sources of investment income received. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that financial asset’s carrying amount. Investments Fixed asset investments in subsidiaries are stated at cost less any provision for impairment. Other investments comprise UK Government fixed interest securities backing insurance contracts or held as shareholder investments. All investments are classified as ‘fair value through profit or loss at initial recognition’ and are stated at quoted bid prices which equates to fair value, with any resultant gain or loss recognised in profit or loss. Purchases and sales of securities are recognised on the trade date. Investment contracts – investments and cash held for the benefit of policyholders Investment contracts are comprised of unit-linked contracts in ILInt and ILUK. Investment contracts result in financial liabilities whose fair value is dependent on the fair value of underlying financial assets. They are designated at inception as financial liabilities at ‘fair value through profit or loss’. Valuation techniques are used to establish the fair value at inception and each reporting date. The Company’s main valuation techniques incorporate all factors that market participants would consider and are based on observable market data. The financial liability is measured both initially and subsequently at fair value. The fair value of a unit-linked financial liability is determined using the fair value of the financial assets contained within the funds linked to the financial liability. 56 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 Dividends Equity dividends are recognised when they become legally payable. Interim equity dividends are recognised when paid. Liquid resources For the purposes of the statement of cash flows, liquid resources are defined as current asset investments and short term deposits. Intangible non-current assets Intangible non-current assets, excluding goodwill, are stated at cost less accumulated amortisation and comprise intellectual property software rights. Intellectual property rights are amortised over seven years on a straight line basis as it is considered that the code is replaced every seven years, and therefore has a finite useful life. Goodwill is held at cost and, in accordance with IFRS, is not amortised but is subject to annual impairment reviews. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. Repairs and maintenance costs are charged to the profit and loss and other comprehensive income statement during the period in which they are incurred. The major categories of property, plant and equipment are depreciated on a straight-line basis as follows: Short Leasehold Land and Buildings Fixtures & Fittings Equipment Over 10 years/over the life of the lease Over 10 years Over 3-5 years Residual values, method of depreciation and useful lives of the assets are reviewed annually and adjusted if appropriate. Impairment of non-financial assets Property, plant and equipment and intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverable amount is the higher of an asset’s fair value less costs to sell and value in use (being the present value of the expected future cash flows of the relevant asset). The Company evaluates impairment losses for potential reversals when events or circumstances warrant such consideration. Goodwill is tested for impairment annually, and once an impairment is recognised this cannot be reversed. For more detailed information in relation to this, please see Note 10. Pensions The Group makes defined contributions to the personal pension schemes of its employees. These are chargeable to profit or loss in the year in which they become payable. Foreign currencies Transactions in foreign currencies are translated into the functional currency at the exchange rate in effect at the date of the transaction. Foreign currency monetary assets and liabilities are translated to sterling at the year end closing rate. Non-monetary assets denominated in a foreign currency that are measured in terms of historical cost are translated using the exchange rate in effect at the date when the fair value was determined. Foreign exchange rate differences that arise are reported net in profit or loss as foreign exchange gains/losses. The assets and liabilities of foreign operations are translated to sterling using the year end closing exchange rate. The revenues and expenses of foreign operations are translated to sterling at rates approximating the foreign exchange rates ruling at the relevant month of the transactions. Foreign exchange differences arising on retranslation are recognised directly in the reserves. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 57 FINANCIAL STATEMENTS continued Taxation The taxation charge is based on the taxable result for the year. The taxable result for the year is determined in accordance with enacted legislation and taxation authority practice for calculating the amount of corporation tax payable. Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the statement of financial position differs from its tax base. Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised. The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the deferred tax assets/liabilities are recovered/settled. Segmental reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments and has been identified as the chief executive officer of the Company. For the year ended 30 September 2017, the business of ILUK and ILInt was the direct insurance of investment linked pensions business, written by single premium in the United Kingdom, single premium life assurance linked bonds and linked qualifying investment plans written in the United Kingdom. Insurance risk is minimal as all contracts have been classed as investment contracts. ILInt and ILUK policyholder assets and liabilities Investments held for the benefit of policyholders are stated at fair value and reported on a separate line in the statement of financial position. The assets are classified using the ‘fair value through profit or loss’ option with any resultant gain or loss recognised through the income statement. Investments held for the benefit of policyholders also includes cash and cash equivalents held within policyholders’ portfolios of assets. Investment inflows received from policyholders are invested in funds selected by the policyholders. The resulting liabilities for linked investment contracts are accounted for under the ‘fair value through profit or loss’ option, in line with the corresponding assets as permitted by IAS 39. As all investments held for the benefit of policyholders are matched entirely by corresponding linked liabilities, any gain or loss on assets recognised through the income statement are offset entirely by the gains and losses on linked liabilities. The net impact on profit is therefore £nil. Client assets and client monies IFAL client assets and client monies are not recognised in the parent and consolidated statements of financial position (see Note 21) as they are owned by the clients of IFAL. Operating lease agreements Rental costs under operating leases are charged to the statement of profit or loss and other comprehensive income on a straight line basis over the term of the lease. Where an incentive to sign the lease has been taken, the incentive is spread on a straight line basis over the lease term. Details of the operating lease commitments are set out in Note 28. Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits, money market OEIC funds and other short-term deposits with an original maturity of three months or less. The carrying amount of these assets approximates to their fair value. 58 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 Financial instruments Financial assets and liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expires. At initial recognition, the Company classifies its financial instruments in the following categories: (i) Financial assets and liabilities at fair value through profit or loss A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short-term. Financial instruments in this category are recognised on the trade settlement date, and subsequently at fair value. Purchases and sales of securities are recognised on the trade date. Transaction costs are expensed in the consolidated profit and loss and other comprehensive income statement. Gains and losses arising from changes in fair value are presented in the consolidated profit and loss and other comprehensive income statement within “administrative expenses” for corporate assets and “net income attributable to policyholder returns” for policyholder assets in the period in which they arise. Financial assets and liabilities at fair value through profit or loss are classified as current except for the portion expected to be realised or paid beyond twelve months of the balance sheet date, which are classified as long-term. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Company’s loans and receivables comprise accrued fees, trade and other receivables, loans and cash and cash equivalents. These are included in current assets due to their short-term nature, except for loans which are included in non-current assets. Loans and receivables are initially recognised at the amount expected to be received, less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortised cost using the effective interest method less any provisions for impairment. (iii) Financial liabilities at amortised cost Financial liabilities at amortised cost comprise trade and other payables. These are initially recognised at the amount required to be paid, less, when material, a discount to reduce the payables to fair value. Subsequently, trade payables are measured at amortised cost using the effective interest method. They are classified as current liabilities due to their short-term nature. Provisions for liabilities Provisions are recognised when the Company has an obligation, legal or constructive, as a result of a past event, and it is probable that the Company will be required to settle that obligation. Provisions are estimated at the Directors’ best estimate of the expenditure required to settle the obligation at the reporting date, and are discounted to present values where the effect is material. Trade and other payables Other payables are short-term, not interest-bearing and are stated at their amortised cost which is not materially different to cost and approximates to fair value. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 59 FINANCIAL STATEMENTS continued 2. Critical accounting estimates and judgements In preparing these financial statements, management has made judgements, estimates and assumptions about the future that affect the application of the Group’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. Impairment of accrued fees pending The Group has recognised an impairment of £128,073 (2016: £181,460) for accrued fees owed by customers. This comprises accrued fees that have not been received after three months, and also all fees due on portfolios that comprise only limited liquidity assets. Management believes, based on past experience, that these fees are unlikely to be received, and an impairment has therefore been recorded in the statement of profit or loss. In addition to the above, an amount of £192,103 (2016: £155,839) relates to accrued fees that are past due but not impaired. Management believes that these fees are likely to be received, and an impairment is therefore not required. Impairment of financial assets At each reporting date, the Company assesses whether there is objective evidence that a financial asset (other than a financial asset classified as fair value through profit or loss) is impaired. A financial asset is only impaired if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (a ”loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the receivable that can be reliably estimated. The criteria used to determine objective evidence of an impairment loss include: (i) significant financial difficulty of the obligor; (ii) delinquencies in interest or principal payments; and (iii) it becomes probable that the borrower will enter bankruptcy or other financial reorganisation. For equity securities, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired. If such evidence exists, the Company recognises an impairment loss, as follows: (i) Financial assets carried at amortised cost: The loss is the difference between the amortised cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument’s original effective interest rate. The carrying amount of the asset is reduced by this amount and the amount of the loss is recognised in the profit or loss for the period. 60 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 3. Financial instruments (i) Principal financial instruments The principal financial instruments, from which financial instrument risk arises, are as follows: ▪ Trade and other receivables ▪ Accrued fees ▪ Cash and cash equivalents ▪ Investments in quoted debt instruments ▪ Listed shares and securities ▪ Trade and other payables ▪ Loans. (ii) Financial instruments by category As explained in Note 1, financial assets and liabilities have been classified into categories that determine their basis of measurement and, for items measured at fair value, whether changes in fair value are recognised in the profit and loss and other comprehensive income statement. The following tables show the carrying values of assets and liabilities for each of these categories. Financial assets: Fair value through profit or loss Amortised cost 30 Sep 2017 £’000 30 Sep 2016 £’000 30 Sep 2017 £’000 30 Sep 2016 £’000 Cash and cash equivalents Listed shares and securities Loans and receivables - 83 - - 51 - Investments in quoted debt instruments 8,812 8,925 Accrued income Trade and other receivables Investments and cash held for the policyholders Current tax asset - - - - 11,947,652 11,316,471 - - 105,829 90,571 - 1,873 - 7,951 1,456 - - - - - 6,806 1,597 - 199 Total financial assets 11,956,547 11,325,447 117,109 99,173 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 61 FINANCIAL STATEMENTS continued Financial liabilities: Trade and other payables PAYE and other taxation Corporation tax Accruals Fair value through profit or loss Amortised cost 30 Sep 2017 £’000 30 Sep 2016 £’000 - - - - - - - - 30 Sep 2017 £’000 7,524 1,229 2,803 6,454 - 30 Sep 2016 £’000 5,800 1,621 1,685 6,867 - Liabilities for linked investments contracts 11,947,652 11,316,471 Total financial liabilities 11,947,652 11,316,471 18,010 15,973 (iii) Financial instruments not measured at fair value Financial instruments not measured at fair value include cash and cash equivalents, accrued fees, loans, trade and other receivables, and trade and other payables. Due to their short-term nature and/or annual impairment review, the carrying value of these financial instruments approximates their fair value. (iv) Financial instruments measured at fair value – fair value hierarchy The table opposite classifies financial assets that are recognised on the statement of financial position at fair value in a hierarchy that is based on significance of the inputs used in making the measurements. The levels of hierarchy are disclosed in Note 1. Investments held for the benefit of policyholders are stated at fair value and reported on a separate line in the statement of financial position. The assets are classified using the ‘fair value through profit or loss’ option with any resultant gain or loss recognised through the income statement. Assets held at fair value also comprises investments held in gilts, and these are held at fair value through profit and loss. The following table shows the Company’s assets measured at fair value and split into the three levels described below: ▪ Level 1: quoted prices (unadjusted) in active markets for identical assets; ▪ Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset either directly (i.e. as prices) or indirectly (i.e. derived from prices); and ▪ Level 3: inputs for the asset that are not based on observable market data (unobservable inputs). 62 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 Level 1 £’000 Level 2 £’000 Level 3 £’000 Total £’000 1,091,744 351,308 12,378 11,716,405 8,895 - 94,521 399 132,113 227,033 - - 1,091,744 1,541 5 2,668 4,214 - 447,370 12,782 10,395,756 11,947,652 8,895 11,725,300 227,033 4,214 11,956,547 Level 1 £’000 Level 2 £’000 Level 3 £’000 Total £’000 - Holdings in collective investment schemes 10,260,975 At 30 September 2017 Investments and assets held for the benefit of policyholders - Policyholder cash - Investments and securities - Bonds and other fixed-income securities Other investments Total At 30 September 2016 Investments and assets held for the benefit of policyholders - Policyholder cash - Investments and securities - Bonds and other fixed-income securities 802,924 306,461 11,035 - 65,480 12,743 - 1,885 1,606 2,235 802,924 373,826 25,384 10,114,337 - Holdings in collective investment schemes 8,069,840 2,042,262 Other investments Total Level 1 valuation methodology 9,190,260 2,120,485 5,726 11,316,471 8,976 - - 8,976 9,199,236 2,120,485 5,726 11,325,447 Financial assets included in Level 1 are measured at fair value using quoted mid prices that are available at the reporting date and are traded in active markets. These financial assets are mainly collective investment schemes and listed equity instruments. Level 2 and Level 3 valuation methodology The Group regularly reviews whether a market is active, based on available market data and the specific circumstances of each market. Where the Group assesses that a market is not active, then it applies one or more valuation methodologies to the specific financial asset. These valuation methodologies use quoted market prices where available, and may in certain circumstances require the Group to exercise judgement to determine fair value. Financial assets included in Level 2 are measured at fair value using observable mid prices traded in markets that have been assessed as not active enough to be included in Level 1. Otherwise, financial assets are included in Level 3. These are assets where one or more inputs to the valuation methodology are not based on observable market data. Level 3 sensitivity to changes in unobservable measurements For financial assets assessed as Level 3, based on its review of the prices used, the Company believes that any change to the unobservable inputs used to measure fair value would not result in a significantly higher or lower fair value measurement at year end, and therefore would not have a material impact on its reported results. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 63 FINANCIAL STATEMENTS continued Changes to valuation methodology There have been no changes in valuation methodology during the year under review. Transfers between Levels The Company’s policy is to assess each financial asset it holds at the current financial year-end, based on the last known price and market information, and assign it to a Level. The Company recognises transfers between Levels of the fair value hierarchy at the end of the reporting period in which the changes have occurred. Changes occur due to the availability of (or lack thereof) quoted prices, whether a market is now active or not, and whether there are indications of impairment. Transfers between Levels between 30 September 2016 and 30 September 2017 are presented in the table below at their valuation at 30 September 2017: Transfers from Transfers to Level 1 Level 2 Level 2 Level 1 £’000 4,073 9,169 The reconciliation between opening and closing balances of Level 3 assets are presented in the table below (all balances are in £’000s): Opening balance Unrealised gains or losses in the year ended 30 September 2017 Transfers in to Level 3 at 30 September 2017 valuation Transfers out of Level 3 at 30 September 2016 valuation Purchases, sales, issues and settlement Closing balance £’000 5,726 (1,890) 1,506 (622) (506) 4,214 Any resultant gains or losses on financial assets held for the benefit of policyholders are offset by a reciprocal movement in the linked liability. 64 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 4. Risk and risk management This note supplements the details provided in the Risk and Risk Management section of this report on pages 19 to 26. Risk assessment Risk assessment is the determination of quantitative values and/or qualitative judgements of risk related to a concrete situation and a recognised threat. Quantitative risk assessment requires calculations of two components of risk, the magnitude of the potential impact, and the likelihood that the risk materialises. There are also qualitative aspects that are more difficult to express quantitatively, but are still taken into account in order to fully evaluate the impact of the risk on the organisation. (1) Market risk Description of risk Market risk is the risk of loss arising either directly or indirectly from fluctuations in the level and in the volatility of market prices of assets, liabilities and other financial instruments. Market risk from reduced income The Company’s dividend income from its regulated subsidiary IFAL is exposed to market risk. IFAL’s main source of income is derived from annual management fees and transaction fees which are linked to the value of the clients’ portfolios. IFAL mitigates the second order market risk by applying fixed per policy charges in addition to the charges determined based on clients’ linked portfolio values, offering an element of diversification to its income stream. Market risk from direct asset holdings The Company has limited exposure to primary market risk as its capital is invested in high quality, highly liquid, short-dated investments. (a) Interest rate risk The Company’s balance sheet and capital requirements are relatively insensitive to first order impacts from movements in interest rates. (b) Currency risk The Company is not directly exposed to significant currency risk. (c) Inflation risk The Company has exposure related to expense inflation risk, where actual inflation deviates from expectations. The Company has no exposures to defined benefit staff pension schemes or client related index linked liabilities. Expense inflation risk is mitigated through monitoring of expenditure and closely managing expenses in line with the business plan. (2) Credit (counterparty default) risk Credit risk is the risk that the Company is exposed to a loss if another party fails to meet its financial obligations. For the Company, the exposure to counterparty default risk arises primarily from: ▪ Corporate debt assets directly held by the Company; and ▪ exposure to other debtors. Counterparty default risk exposure to other debtors The Company has no prepayments or other debtors arising, due to the nature of its business, and the structure of the Group. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 65 FINANCIAL STATEMENTS continued Impact of credit risk on fair value Due to the limited direct exposure that the Company has to credit risk, credit risk does not have a material impact on the fair value movement of financial instruments for the year under review. The fair value movements on these instruments are predominantly due to changes in market conditions. (3) Liquidity risk Liquidity risk is the risk that funds are not accessible such that the Company, although solvent, does not have sufficient liquid financial resources to meet obligations as they fall due, or can secure such resources only at excessive cost. As a holding company, the Company’s direct liquidity risk is limited to paying out dividends and operating expenses it may incur. There are robust controls in place to mitigate liquidity risk, for example, through monitoring of expenditure and closely managing expenses in line with the business plan. Maturity schedule The following table shows an analysis of the financial assets and financial liabilities by remaining expected maturities as at 30 September 2016 and 30 September 2017. Financial assets: 2016 Up to 3 months £’000 3-12 months £’000 1-5 years £’000 Over 5 years £’000 Total £’000 Investments and cash held for the policyholders 11,316,471 Investments Accrued income Trade and other receivables Current tax asset Cash Total 2017 Investments and cash held for the policyholders Investments Accrued income Trade and other receivables Loans Cash Total 51 6,806 1,576 - 90,571 - 8,925 - 21 199 - 11,415,475 9,145 - - - - - - - - - - - - - 11,316,471 8,976 6,806 1,597 199 90,571 - 11,424,620 Up to 3 months £’000 3-12 months £’000 1-5 years £’000 Over 5 years £’000 Total £’000 11,947,652 - - 8,812 7,906 1,557 - 105,829 - 20 - - - - 7 - 1,040 - - - - - 833 - 11,947,652 8,812 7,913 1,577 1,873 105,829 12,062,944 8,832 1,047 833 12,073,656 66 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 Trade and other payables Current tax liabilities Total 2017 Financial liabilities: 2016 Up to 3 months £’000 3-12 months £’000 1-5 years £’000 Over 5 years £’000 Total £’000 Liabilities for linked investment contracts 11,316,471 14,289 (45) 11,330,715 - - 1,731 1,731 - - - - - - - 11,316,471 14,289 1,686 - 11,332,446 Up to 3 months £’000 3-12 months £’000 1-5 years £’000 Over 5 years £’000 Total £’000 Liabilities for linked investment contracts 11,947,652 Trade and other payables Current tax liabilities Total 15,208 - 11,962,860 - - 2,803 2,803 - - - - - - - 11,947,652 15,208 2,803 - 11,965,663 Financial assets held in portfolio investments and the corresponding liabilities are deemed to have a maturity of up three months since the liabilities are repayable on demand. In practice the contractual maturities of the underlying assets may be longer than three months, but the majority of assets held within portfolios are highly liquid. (4) Outflow risk Outflows occur when funds are withdrawn from the platform for any reason. Outflows typically occur where clients’ circumstances and requirements change. However, these outflows can also be triggered by operational failure, competitor actions or external events such as regulatory or economic changes. Outflow risk is mitigated by focusing on providing exceptionally high levels of service. Outflow rates are closely monitored and unexpected experience is investigated. Despite the current challenging and uncertain economic and geopolitical environment, outflow rates remain low and stable. (5) Expense risk Expense risk arises where costs increase faster than expected or from one-off expense “shocks”. As a significant percentage of the Group’s expenses are staff related the key inflationary risk arises from salary inflation. The Group’s expenses are governed at a high level by the Group’s Expense Policy. The monthly management accounts are reviewed against projected future expenses by the Board and by senior management and action is taken where appropriate. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 67 FINANCIAL STATEMENTS continued 5. Segmental reporting The revenue and profit before tax are attributable to activities carried out in the UK. The Group has three classes of business as follows: ▪ provision of investment management services ▪ transaction of ordinary long term insurance and underwriting life assurance ▪ provision of consultancy services. Analysis by class of business is given below: Revenue Investment administration services Insurance and life assurance business Consultancy services Profit before tax Investment administration services Insurance and life assurance business Consultancy services Net assets Investment administration services Insurance and life assurance business Consultancy services 2017 £’000 44,019 36,223 - 2016 £’000 37,854 30,403 100 80,242 68,357 17,224 27,121 544 44,889 51,176 50,397 953 102,526 11,393 34,024 139 45,556 38,100 47,456 688 86,244 The figures above comprise the results of the companies that fall directly into each segment, as well as a proportion of the results from the other Group companies that only provide services to the revenue-generating companies. This therefore has no effect on revenue, but has an effect on the profit before tax and net assets figures. 6. Earnings per share Year ended 30 September Profit 2017 £’000 2016 £’000 Profit for the year and earnings used in basic and diluted earnings per share 29,889 20,816 Number of shares 1,137,278 1,137,278 Weighted average number of A, B, C shares used in basic and diluted earnings per share 1,107,278 1,107,278 Weighted average number of D shares used in basic and diluted earnings per share 30,000 30,000 Earnings per share is calculated based on the share capital of IntegraFin Holdings Limited and the earnings of the consolidated Group. Separate calculations have been performed for A, B and C shares, and for D shares, to reflect the different dividend rate attached to D shares. 68 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 7. Expenses by nature The following expenses are included within administrative expenses: Group Depreciation Amortisation Wages and employee benefits expense Auditor’s remuneration: - auditing of the financial statements of the Company pursuant to legislation - auditing of the financial statements of subsidiaries - other assurance services - taxation service Other Auditor’s remuneration: - auditing of the financial statements of subsidiaries - other assurance services Impairment losses Operating lease costs: - Land and buildings - Equipment Company Auditor’s remuneration: 2017 £’000 551 20 30,036 25 81 73 - 114 115 128 2016 £’000 494 1,438 25,059 10 92 99 78 73 83 574 1,812 8 1,783 8 - auditing of the financial statements of the Company pursuant to legislation - other assurance services - taxation services Impairment losses Wages and employee benefits expense 25 - - - The average number of staff (including executive directors) employed by the Group during the financial year amounted to: 10 10 78 392 2016 No. 194 54 50 85 35 23 1 2017 No. 201 54 49 84 37 25 1 451 442 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 69 Client Services staff Finance staff Technical and support staff Software development staff Sales, marketing and product development staff Legal and compliance staff CEO The Company has no employees (2016: nil). FINANCIAL STATEMENTS continued Staff (including executive Directors) costs during the year, included within administrative expenses, were as follows: Wages and salaries Social security costs Other pension costs 2017 £’000 25,474 2,268 2,294 2016 £’000 20,966 2,391 1,702 30,036 25,059 Compensation of key management personnel Key management personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the entity and as such, only Directors are considered to meet this definition. Short term employee benefits Post employment benefits Highest paid Director: Short term employee benefits Post employment benefits Number of Directors for whom pension contributions are paid 8. Interest income 2017 £’000 1,645 37 1,682 505 8 3 2016 £’000 1,417 119 1,536 455 33 3 Interest income on bank deposits Interest income on loans Interest income on financial assets at fair value through profit or loss Other interest Group 2017 £’000 Company 2017 £’000 Group 2016 £’000 Company 2016 £’000 64 16 98 - 178 8 16 - - 24 145 - 306 - 451 2 - - - 2 70 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 9. Tax on profit on ordinary activities Group a) Analysis of charge in year The income tax expense comprises: Corporation tax Corporation tax – under-provision in previous year Movement in deferred tax asset (Note 20) Movement in deferred tax liability (Note 20) Deferred tax charge/(credit) Total 2017 £’000 7,234 9 7,243 (50) (12) (62) 2016 £’000 5,197 21 5,218 78 - 78 7,181 5,296 b) Factors affecting tax charge for the year The tax on the Company’s profit before tax differs from the amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows: Profit on ordinary activities before tax 42,590 38,341 Profit on ordinary activities multiplied by effective rate of Corporation Tax 19.5% (2016: 20%) Deferred tax charge/(credit) (see Note 20) Effects of: Income not taxable and expenses not deductible for tax purposes, multiplied by effective rate of Corporation Tax 19.5% (2016: 20%) Profits not taxable, multiplied by effective rate of Corporation Tax 19.5% (2016: 20%) Corporation tax – under-provision in prior year Profits charged at different rates to UK Corporation Tax rate 8,305 (62) 7,668 78 (834) (2,191) (292) (285) 7 57 12 14 7,181 5,296 Changes in tax rates The main rate of UK corporation tax reduced from 20% to 19% with effect from 1 April 2017 and will reduce to 17% with effect from 1 April 2020. The reduction in corporation tax rates does not impact on the policyholder rate. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 71 FINANCIAL STATEMENTS continued Company a) Analysis of charge in year Deferred tax charge/(credit) (see Note 20) Total b) Factors affecting tax charge for the year Profit on ordinary activities before tax Profit on ordinary activities multiplied by effective rate of Corporation Tax 19.5% (2016: 20%) Deferred tax charge/(credit) (see Note 20) Effects of: Income not taxable and expenses not deductible for tax purposes, multiplied by effective rate of Corporation Tax 19.5% (2016: 20%) 2017 £’000 - - 2017 £’000 2016 £’000 78 78 2016 £’000 18,290 38,641 3,567 - 7,728 78 (3,567) - (7,728) 78 72 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 10. Intangible assets – Group Cost At 1 October 2016 At 30 September 2017 Amortisation At 1 October 2016 Charge for the year At 30 September 2017 Net Book Value At 30 September 2016 At 30 September 2017 Cost At 1 October 2015 Addition in the year At 30 September 2016 Amortisation At 1 October 2015 Charge for the year Prior year adjustment At 30 September 2016 Net Book Value At 30 September 2015 At 30 September 2016 Software and IP rights £’000 Goodwill £’000 12,505 12,505 12,951 12,951 12,450 20 12,470 - - - Total £’000 25,456 25,456 12,450 20 12,470 55 35 12,951 12,951 13,006 12,986 12,505 - 12,505 11,105 1,438 (93) 12,450 1,400 55 - 12,951 12,951 - - - - - 12,951 12,505 12,951 25,456 11,105 1,438 (93) 12,450 1,400 13,006 Amortisation of intangibles is recognised within administrative expenses in the profit or loss account. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 73 FINANCIAL STATEMENTS continued Goodwill impairment assessment The Group is required to test, on an annual basis, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the determination of a discount rate in order to calculate the present value of the cash flows. This the first year in which an impairment test has been performed. The goodwill was first recognised upon acquisition of IAD in July 2016, and must be tested for impairment annually, so a test was not required in the previous financial year. The carrying amount of goodwill is allocated to the two cash generating units that are benefiting from the acquisition as follows: Investment management services Insurance and life assurance business Total 2017 £’000 7,449 5,501 12,951 The recoverable amounts of the above cash generating units have been determined from value in use calculations based on cash flow projections from formally approved budgets covering a five year period to 30 September 2022. The results of this showed that no impairment has taken place throughout the historical financial period. No sensitivity analysis has been performed on the basis that there were no reasonable foreseeable changes in the assumptions which would result in the recoverable amount falling below the carrying amount. 74 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 11. Property, plant and equipment – Group Short Leasehold Land and Buildings £’000 Equipment £’000 Fixtures and Fittings £’000 Motor vehicles £’000 Cost At 1 October 2016 Reclassification Additions Disposals Foreign exchange 1,615 1,613 - 95 - (2) 307 208 (50) (6) At 30 September 2017 1,708 2,072 Depreciation At 1 October 2016 Reclassification Charge for the year Disposals Foreign exchange At 30 September 2017 Net Book Value At 30 September 2016 At 30 September 2017 Cost At 1 October 2015 Additions Disposals At 30 September 2016 Depreciation At 1 October 2015 Additions Charge for the year Disposals At 30 September 2016 Net Book Value At 30 September 2015 At 30 September 2016 525 - 155 - - 680 1,090 1,028 1,242 373 - 1,615 362 39 124 - 525 880 1,090 902 214 356 (35) (4) 1,433 711 639 1,463 739 (589) 1,613 1,045 214 232 (589) 902 418 711 553 (307) 17 - - 263 356 (214) 23 - - 165 197 98 226 327 - 553 121 124 111 - 356 105 197 101 - 43 (43) (1) 100 27 - 17 (37) - 7 74 93 - 101 - 101 - - 27 - 27 - 74 Total £’000 3,882 - 363 (93) (9) 4,143 1,810 - 551 (72) (4) 2,285 2,072 1,858 2,931 1,540 (589) 3,882 1,528 377 494 (589) 1,810 1,403 2,072 The Company holds no property, plant and equipment. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 75 Total £’000 14,213 14,213 14,213 14,213 449 14,156 (392) 14,213 449 14,213 FINANCIAL STATEMENTS continued 12. Investment in subsidiaries Company At 1 October 2016 At 30 September 2017 Net book value At 30 September 2016 At 30 September 2017 At 1 October 2015 Additions Impairment At 30 September 2016 Net book value At 30 September 2015 At 30 September 2016 76 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 Name of Company Holding % Held Incorporation and significant place of business Business Direct holdings Integrated Financial Arrangements Ltd Ordinary Shares 100% United Kingdom IntegraFin Services Limited Ordinary Shares 100% United Kingdom Transact IP Limited Ordinary Shares 100% United Kingdom Integrated Application Development Pty Ltd Ordinary Shares 100% Australia Investment Management Services Company Software provision & development Software maintenance Objective Asset Management Limited Ordinary Shares 100% United Kingdom Dormant Indirect holdings IntegraFin Limited Ordinary Shares 100% United Kingdom Non-trading Transact Nominees Limited Ordinary Shares 100% United Kingdom Non-trading IntegraLife UK Limited Ordinary Shares 100% United Kingdom Life Insurance IntegraLife International Limited Ordinary Shares 100% Isle of Man Life Assurance ObjectMastery (UK) Limited Ordinary Shares 100% United Kingdom Consultancy Objective Funds Limited Ordinary Shares 100% United Kingdom Dormant Objective Wealth Management Limited Ordinary Shares 100% United Kingdom Dormant IntegraFin (Australia) Pty Limited Ordinary Shares 100% Australia Non-trading Transact Trustees Limited Ordinary Shares 100% United Kingdom Non-trading The group has 100% voting rights on shares held in each of the subsidiary undertakings. All the UK subsidiaries have their registered office address at 29 Clement’s Lane, London, EC4N 7AE. IntegraLife International Limited’s registered office address is at 18-20 North Quay, Douglas, Isle of Man, IM1 4LE. IntegraFin (Australia) Pty’s registered office address is at Level 4, 854 Glenferrie Road, Hawthorn, Victoria, Australia 3122. Integrated Application Development Pty Ltd’s registered office address is 19-25 Camberwell Road, Melbourne, Australia. The above subsidiaries have all been included in the consolidated financial statements. The results of IntegraLife International Limited and IntegraLife UK Limited are included as described in the basis of consolidation accounting policy in Note 1. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 77 FINANCIAL STATEMENTS continued Integrated Financial Arrangements Ltd is authorised and regulated by the Financial Conduct Authority. The principal activity of the Company and its subsidiaries is the provision of ‘Transact’, a wrap service that arranges and executes transactions between clients, their financial advisers and financial product providers including investment managers and stockbrokers. IntegraFin Services Limited (ISL), is the Group services company. All intra-group service contracts are held by this services company. Integrated Application Development Pty Ltd (IAD) provides software maintenance services to the Group. IntegraFin Limited is the trustee of the IntegraSIP Share Incentive Plan, which was set up to allocate Class C Shares in the capital of the Company to staff. IntegraFin Limited undertakes no other activities. Transact Nominees Limited holds customer assets as a nominee company on behalf of Integrated Financial Arrangements Ltd. IntegraFin (Australia) Pty Limited is currently non-trading. Transact IP Limited licenses its proprietary software to other members of the IntegraFin Group. IntegraLife UK Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Its principal activity is the transaction of ordinary long term insurance business within the United Kingdom. IntegraLife International Limited is authorised and regulated by the Isle of Man Financial Services Authority and its principal activity is the transaction of ordinary long term insurance business within the United Kingdom through the Transact Offshore Bond. 78 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 13. Deferred acquisition costs Opening balance Capitalisation of deferred acquisition costs Amortisation of deferred acquisition costs Change in deferred acquisition costs Closing balance 2017 £’000 31,792 12,950 (6,447) 6,503 38,295 2016 £’000 29,736 7,964 (5,908) 2,056 31,792 14. Non-current asset investments – ILInt and ILUK Investments and cash held for the benefit of policyholders ILInt Cash and cash equivalents held for the benefit of the policyholder Investments held for the benefit of the policyholder ILUK Cash and cash equivalents held for the benefit of the policyholder Investments held for the benefit of the policyholder 2017 Cost £’000 2017 Fair value £’000 2016 Cost £’000 2016 Fair value £’000 74,565 74,565 82,931 82,931 985,912 1,175,098 1,637,842 2,928,144 1,060,477 1,249,663 1,720,773 3,011,075 1,014,314 1,014,314 715,881 715,881 8,049,078 9,683,675 6,898,345 7,589,515 9,063,392 10,697,989 7,614,226 8,305,396 Total 11,947,652 11,316,471 All amounts are current. These assets are held to cover the liabilities for unit linked investment contracts. All contracts with customers are deemed to be investment contracts and, accordingly, assets are 100% matched to corresponding liabilities. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 79 FINANCIAL STATEMENTS continued 15. Financial assets at fair value through profit or loss Listed shares and securities Gilts Investments are all UK and sterling based and held at fair value. 16. Other prepayments and accrued income Accrued income Prepayments 17. Trade and other receivables Amounts owed by Group undertakings Interest receivable Other receivables 18. Trade and other payables Trade payables PAYE and other taxation Due to Group undertakings Other payables Accruals and deferred income 80 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 Group 30 Sep 2017 £’000 - 5 1,451 1,456 Group 30 Sep 2017 £’000 265 1,229 - 7,259 6,455 15,208 Company 30 Sep 2017 £’000 7 - - 7 Company 30 Sep 2017 £’000 - 31 11 21 1,093 1,156 Group 30 Sep 2017 £’000 83 8,812 8,895 Group 30 Sep 2017 £’000 7,951 2,301 10,252 Group 30 Sep 2016 £’000 - 8 1,589 1,597 Group 30 Sep 2016 £’000 364 1,621 - 5,437 6,867 14,289 Group 30 Sep 2016 £’000 51 8,925 8,976 Group 30 Sep 2016 £’000 6,806 3,036 9,842 Company 30 Sep 2016 £’000 9 - - 9 Company 30 Sep 2016 £’000 - 12 8 5 363 388 19. Deferred income liability Opening balance Capitalisation of deferred income Amortisation of deferred income Change in deferred acquisition costs Closing balance 20. Deferred tax 2017 £’000 31,792 12,950 (6,447) 6,503 38,295 2016 £’000 29,736 7,964 (5,908) 2,056 31,792 Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 19% (2016: 19%). This new rate has been applied to deferred tax balances which are expected to reverse after 1 April 2017, the date on which that new rate becomes effective. Liabilities – Group Balance brought forward Release in year at 19% (2016: 19%) future corporation tax rate in respect of: - Accelerated depreciation Deferred tax (credit)/charge Movement in policyholder tax Balance carried forward Analysed as: - Accelerated depreciation - Policyholder deferred tax The Company has no deferred tax liabilities. Assets – Group and Company Balance brought forward Release in year at 19% (2016: 19%) future corporation tax rate in respect of: - Unused capital losses Accelerated depreciation Balance carried forward 30 Sep 2017 £’000 30 Sep 2016 £’000 8,495 1,279 (12) (12) 2,298 10,781 - 10,781 10,781 - - 50 50 - - 7,216 8,495 12 8,483 8,495 (78) 78 - - INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 81 FINANCIAL STATEMENTS continued 21. Client monies and client assets 2017 Client monies Client assets 2016 Client monies Client assets £’000 2,297,792 Amounts due to clients 25,629,954 Corresponding liability 1,836,756 Amounts due to clients 22,763,205 Corresponding liability £’000 2,297,792 25,629,954 1,836,756 22,763,205 The above client monies are held separately in client bank accounts which are excluded from the Company’s net current assets. In addition the above client assets are held on behalf of Integrated Financial Arrangements Ltd by Transact Nominees Limited, the holdings are also excluded from the Company’s net current assets. 22. Provisions for liabilities Balance brought forward (Decrease)/increase in dilapidations provision Increase in ILInt non-linked unit provision Increase in ILUK tax provision Balance carried forward Dilapidations provisions ILInt non-linked unit provision ILUK tax provision Rent provision Group 30 Sep 2017 £’000 15,550 44 4 (3,767) 11,831 323 29 11,377 102 11,831 Group 30 Sep 2016 £’000 20,802 95 13 (5,360) 15,550 279 25 15,144 102 15,550 The dilapidation provisions relate to the former leasehold premises at 5-7 Singer Street, the current leasehold premises at 29 Clement’s Lane, and the current ILInt leasehold premises at 18/20 North Quay, on the Isle of Man. The Group is committed to restoring the premises to their original state at the end of the lease term. Whilst it is probable that payments will be required for dilapidations, uncertainty exists with regard to the amount and timing of these payments, and the amounts provided represent management’s best estimate of the Group’s liability. The rent provision relates to potential litigation regarding disputed rent. There is potential for a claim to be made against the Group until March 2019, though uncertainty exists as to the timing of any potential claim and whether the claim will be successful. ILUK tax provision is made up of tax relief due to policyholders. It comprises claims received from HMRC that are yet to be returned to policyholders and charges taken from unit-linked funds and claims received from HMRC to meet future policyholder tax obligations. 82 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 23. Called up share capital – Company and Group Allotted, called up and fully paid: Ordinary Class A shares of £0.05 each Ordinary Class B shares of £0.05 each Ordinary Class C shares of £0.05 each Ordinary Class D shares of £0.05 each 30 Sep 2017 Number 417,868 357,000 332,410 30,000 30 Sep 2016 Number 417,868 357,000 332,410 30,000 30 Sep 2017 £’000 30 Sep 2016 £’000 21 18 17 1 57 21 18 17 1 57 There has been no movement in called up share capital during the year. Class A and Class B Ordinary Share Capital have full voting and dividends rights. Class C Ordinary Share Capital has no voting rights, but ranks equally for dividends. Class D Ordinary Share Capital has no voting rights, and shareholders are only entitled to receive dividends to the extent that the amount per Ordinary Share paid to the holders of Class A Shares, Class B Shares and Class C Shares in any financial year exceeds the amount per Ordinary Share received by holders of those Ordinary Shares (excluding any Special Dividends) in the financial year prior to the financial year in which relevant Class D Shares are issued. 24. Share premium account – Group Balance brought forward Premium on shares issued during the year Balance carried forward 25. Capital redemption reserve – Group Balance brought forward Purchase of own shares Balance carried forward 2017 £’000 5,722 - 5,722 2016 £’000 5,722 - 5,722 2017 £’000 2016 £’000 2 - 2 2 - 2 On 12 December 2013 IFAL (formerly IFA plc) was granted authority by shareholders to repurchase £4,500,000 worth of ordinary shares from shareholders. IFAL purchased 45,917 shares, and they were then cancelled, giving rise to a capital redemption reserve of £2,271. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 83 FINANCIAL STATEMENTS continued 26. Share-based payment reserve – Group Balance brought forward Transfer to profit and loss reserve Balance carried forward 27. Other reserves – Group Balance brought forward Currency Translation reserve Balance carried forward 28. Operating lease commitments The total future minimum lease payments of operating leases are due as follows: Group Within 1 year Within 2-5 years Over 5 years 2017 £’000 308 - 308 2017 £’000 32 10 42 2016 £’000 308 - 308 2016 £’000 - 32 32 Land and Buildings 2017 £’000 Land and Buildings 2016 £’000 2,398 9,304 1,396 2,365 9,468 3,490 The lease commitments relate to the current leasehold premises at 29 Clement’s Lane, the current ILInt leasehold premises at 18/20 North Quay on the Isle of Man, and the current IAD Pty leasehold premises at 19-25 Camberwell Road, Melbourne, Australia. 84 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 29. Related parties During the year the Company did not render nor receive any services with related parties within the Group, and at the year end the Company had the following intra-Group receivables: Company Integrated Financial Arrangements Ltd IntegraFin Services Limited IntegraFin Limited IntegraLife UK Limited Amounts owed by/(to) related parties 2017 £’000 6 - (11) 1 2016 £’000 8 (2) (6) (1) The Group has not made any allowance for bad or doubtful debts in respect of related party debtors nor has any guarantee been given or received during 2017 or 2016 regarding related party transactions. All of the above transactions are commercial, arm’s length transactions undertaken in the normal course of business. 30. Share incentive plan (SIP) The Company introduced a SIP trust scheme for its staff in October 2005. The SIP is an approved scheme under Schedule 2 of the Income Tax (Earnings & Pensions) Act 2003. This scheme entitles all the staff who were employed in October 2005 to Class C shares in the Company, subject to their remaining in employment with the Company until certain future dates. The trustee for this scheme is IntegraFin Limited, a wholly owned non-trading subsidiary of Integrated Financial Arrangements Ltd. The cost to the Company in the financial year to 30 September 2017 was £nil (2016: £nil). 31. Share-based payments There are no share options outstanding. All options have been exercised, and there have been no new share options granted. 32. Events after the reporting date There are no events subsequent to the year-end that require disclosure in, or amendment to the financial statements. 33. Dividends During the year the Company paid an interim dividend of £13,527,336 (2016: £8,978,224) to shareholders. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 85 OTHER INFORMATION DIRECTORS, COMPANY DETAILS, ADVISERS Executive Directors Ian Taylor Michael Howard Alexander Scott Judith Davidson (resigned 1 October 2017) Non-Executive Directors Christopher Munro (appointed 1 February 2017) Patrick Snowball (appointed 1 October 2017) Jeremy Brettell (resigned 1 October 2017) Neil Holden Stuart Bazley (resigned 1 October 2017) Company Secretary David Johnson Independent Auditors BDO LLP London Solicitors Eversheds Sutherland, London Principal Bankers NatWest Registrars Neville Registrars Registered Office 29 Clement’s Lane London EC4N 7AE Website www.integrafin.co.uk Company number 08860879 86 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 GLOSSARY OF TERMS AGM Annual General Meeting IPO Initial Public Offering CASS Client Assets Sourcebook ISA Individual Savings Account CEO Chief Executive Officer ISAs (UK) International Standards on Auditing (UK) CFO Chief Financial Officer IT Investment Trust COO Chief Operating Officer MiFID II Second Markets in COREP Common Reporting, as required by the Financial Instruments Directive Capital Requirements Directive IV NED Non-Executive Director COSO Committee of Sponsoring Organisation OEIC Open Ended Investment Company of the Treadway Commission ETF Exchange-traded Fund FCA Financial Conduct Authority FRC Financial Reporting Council FUD Funds under Direction ORSA Own Risk and Solvency Assessment SCR Solvency Capital Requirement TCF Treating Customers Fairly The Company IntegraFin Holdings Limited The Group IntegraFin Holdings Limited GDPR General Data Protection Regulation and its subsidiaries GIA General Investment Account VCT Venture Capital Trust HMRC Her Majesty’s Revenue and Customs IAD Integrated Application Development Pty Ltd ICA Individual Capital Assessment ICAAP Internal Capital Adequacy Assessment Process IFAL Integrated Financial Arrangements Ltd IFPRU Prudential Sourcebook for Investment Firms IFRS International Financial Reporting Standards ILInt IntegraLife International Limited ILUK IntegraLife UK Limited IntegraFin IntegraFin Holdings Limited IP Intellectual Property INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2017 87 M137 September 2017 IntegraFin Holdings Limited, 29 Clement’s Lane, London, EC4N 7AE Tel: (020) 7608 4900 Fax: (020) 7608 5300 (Registered offi ce: as above; Registered in England and Wales under number: 08860879) The holding company of the Integrated Financial Arrangements Ltd group of companies. 

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