ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 SEPTEMBER 2019 IntegraFin Holdings plc Company Registration Number: 08860879 PERFORMANCE HIGHLIGHTS OPERATIONAL FINANCIAL Funds Under Direction (FUD): Revenue: £37.80bn 14% £99.2m 9% Net inflows: Operating profit attributable to shareholders: £3.50bn 15% £48.6m 19% Client numbers: Profit after tax: 179.5k 8% £40.1m 22% Adviser numbers: Earnings per share: 5.9k 8% 12.1p 22% Interim dividends in 2019: 7.8p 22% INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 1 2 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 CONTENTS Strategic Report Financial Statements Chair’s Statement . . . . . . . . . . . . . . . . . . 4 Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Chief Executive Officer’s Review . . . . 6 Consolidated Profit or Loss and Other Comprehensive Income . . . . . . . . . . . . . . . 92 Transact - Our Business Model . . . . . 8 Company Profit or Loss and Other Comprehensive Income . . . . . . . . . . . . . . . . . . 93 Our Strategic Objectives . . . . . . . . . . 12 Consolidated Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 Key Performance Indicators . . . . . . . 18 Company Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Business Review . . . . . . . . . . . . . . . . . . . . 20 Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Chief Financial Officer’s Review . . . . 24 Company Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Risk and Risk Management . . . . . . . . 36 Consolidated Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Viability Statement . . . . . . . . . . . . . . . . . 42 Company Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Corporate Social Responsibility . . . . 43 Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Approval of the Strategic Report . . . 45 Other Information Governance Directors, Company Details, Advisers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 Board of Directors . . . . . . . . . . . . . . . . . . 46 Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 Corporate Governance Report . . . . . 49 Audit and Risk Committee Report . 54 Nomination Committee Report . . . . . 58 Directors’ Remuneration Report . . . 60 Directors’ Report . . . . . . . . . . . . . . . . . . . 79 Statement of Directors’ Responsibilities . . . . . . . . . . . . . . . . . . . . . 83 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 3 STRATEGIC REPORT Christopher Munro Non-executive Interim Chair CHAIR’S STATEMENT Overview The board The last twelve months have proved challenging given the political, economic and market conditions. Trade tensions between the USA and China, combined with great uncertainty over the eventual outcome of the Brexit negotiations, do not provide a healthy environment for the global financial industry. Indeed, the temperature is rising, as we approach important events such as our departure from the EU and the 2020 US Presidential Election. Markets have been buffeted by these difficulties but, generally, have been more resilient than in many of the worst case forecasts. The Group operates predominantly in the United Kingdom and we are affected more by the health of domestic than international markets. Against this background, our annual figures are robust and make good reading. In his Chief Executive’s Report, Ian comments on them in more detail. As I highlighted in last year’s Annual Report, we made significant changes to the composition of the board prior to listing on The London Stock Exchange. Victoria Cochrane and Caroline Banszky have now been board members for over a year and have contributed invaluable advice as we moved from being a private limited company to a quoted FTSE 250 company. During the last year we conducted an extensive search to identify a new Chair and I am delighted to welcome Richard Cranfield who took office on 1 October 2019. Richard is a long term partner of Allen & Overy LLP, one of the City of London’s eminent commercial law firms, where he is the Global Chair of the mergers and acquisitions department and co-head of the Financial Institutions Group. We are also most fortunate to welcome Robert Lister to our board as a non-executive director. Robert brings a wealth of experience in both the buy and sell side of the financial services industry and has extensive knowledge of boards both as a director and as chair. Looking forward, we have planned some changes to senior roles at Group and operating company levels. These are described in more detail in The Chief Executive’s Review which follows. 4 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Governance and culture Closing I would, on behalf of the board, like to thank all our hard working colleagues for their resolute efforts throughout the past year. These results and Transact’s ranking within the platform sector are the product of their efforts, and play an important part in the growth of our Group. Finally, on a personal note, I would like to thank the board and the company for placing their trust in me as interim non-executive Chair. It has been a privilege to serve. Christopher Munro Non-executive Interim Chair (22 August 2018 to 30 September 2019) 17 December 2019 The board is focused on good governance and we continue to strengthen all aspects of this throughout the Group. We have rigorous compliance, risk, audit and remuneration committees which meet regularly and review in depth the work of the executives. Strong governance is a vital ingredient of any successful company and we commit significant resources to the process and all its constituent parts. I am pleased the Nomination Committee worked effectively in choosing a new Chair and also that our board reflects a better gender balance than in the past. We have a strong tradition of taking great care of our corporate culture and values. This is reflected both in our staff relations and in our customer interactions. I find it particularly pleasing that we rank so highly in client service polls and that our senior staff have such longevity of service with the Group. We have always endeavoured to create a “family” atmosphere amongst all our staff. Remuneration The Remuneration Report is set out on page 60. Dividend In line with our dividend policy and in recognition of our financial performance we have declared a second interim dividend of 5.2 pence. Together with our first interim dividend paid in January of 2.6 pence per ordinary share, this takes the total dividend to 7.8 pence. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 5 STRATEGIC REPORT continued Ian Taylor Chief Executive Officer CHIEF EXECUTIVE OFFICER’S REVIEW Headlines The market background Given the political, economic and regulatory instability of the last twelve and more months, we are very pleased with a solid set of results this year. Gross inflows of £5.70 billion were 4% lower than last year and net inflows were 15% lower. The fall in net inflows was largely due to the fall in inflows as the rate of outflow remained within its expected and historically predictable range. We ended the year with 179,500 clients (+8%) and FUD of £37.80 billion (+14%). Many other major metrics were positive. This means that we are able to report that profit after tax increased by 22% to £40.1 million (or by 13% when taking into account the exceptional IPO costs incurred in 2018). During the year, the softening in the rate of inflows onto platforms that started towards the end of our last financial year continued. Many platforms saw very significant decreases in inflows and some also suffered increases in outflow - a very different picture from the previous year. Nevertheless, Platforum estimates that FUD across the advised platform sector grew from £492.07 billion (September 2018) to £530.28 billion (September 2019)*. The FCA completed and published the findings of its Investment Platform Market Study. The recommendations of the study are many and varied, but a great deal of them are designed to make it easier and quicker for customers to move from one platform to another. Because we have always understood that it is their money, we have never tried to prevent clients from departing – we want them to stay on Transact because they want to stay on Transact. And, of course, as net importers of platform business, we are enthusiastic supporters of the FCA’s measures! 6 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 *Note: Part way through the year, Platforum changed the method by which it estimates advised platform FUD, so the September 2018 figure quoted differs from that which we quoted last year. Furthermore, if certain direct consumer and institutional assets are excluded, we and Platforum agree that underlying retail advised FUD is currently closer to £430 billion (September 2018: £393 billion). We have therefore used this figure in the Business Review section. Our activity The outlook Against the rather murky background, we managed to increase market share. Indeed, according to statistics gathered by Fundscape, Transact had the highest net inflows of any advised platform in the first three quarters of 2019. How did we achieve this? Mostly, by sticking to our knitting. We continued to provide incremental additions to functionality whilst providing the best combination of technology and human service available. We like to think of our business as doing more than just providing a “platform”. And we certainly do not think of ourselves as a “fintech” business. When asked, we prefer to describe ourselves as providers of financial infrastructure – the infrastructure upon which financial plans can be built and maintained. During the course of the year we won awards from: Adviser (Five Star Investment Provider); Professional Adviser (Best Platform for Advisers (AUA over £20 billion)); PLC Awards (New Company of the Year 2018); Professional Paraplanner (Best Platform). We also retained top spot for Overall Satisfaction in both the Investment Trends and CoreData 2019 adviser surveys, as well as topping the Platforum Adviser Rated Leaderboard in the second and third quarters of 2019. With the shape of the UK following an exit from the European Union still anybody’s guess, it is very difficult to frame an outlook. Nevertheless, whatever happens, people will continue to need to manage their financial plans and so we will continue to improve Transact, maintain our excellent customer relationships, keep recruiting the best staff and remain sober in our spending. Looking also to the future, after more than 20 years at the group, I have decided that, with the business in an extremely strong position and with superb senior management in place, now is the right time for me to step down from my roles as CEO of the holding and the operating companies. The business’s success has always been to a large extent due to its strong and highly collaborative senior team and I am pleased that my successors will come from within that team. On 2 March 2020, Alex Scott will take over from me as Chief Executive of IntegraFin and Jonathan Gunby will take over from me as Chief Executive of Integrated Financial Arrangements Ltd and also join the IntegraFin Board. Alex is currently Group Director of IntegraFin and Jonathan is currently Chief Development Officer of IFAL. I have known Alex for twenty years and Jonathan for thirty and they will make excellent CEOs. I wish them both well. I will remain an executive director of IntegraFin and continue to be involved in its development and its key relationships. I am relinquishing the two CEO roles so that I can spend more time with the business. Ian Taylor Chief Executive Officer 17 December 2019 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 7 STRATEGIC REPORT continued TRANSACT – OUR BUSINESS MODEL Making financial planning easier Transact is a market leading investment platform that delivers an infrastructure which enables advisers to implement financial plans as simply and efficiently as possible. Its leading platform functionality is supported by a high-touch client service team, which provides real time day-to-day and technical support no matter how basic, or complex, the query may be. A key feature of our operation is the control we have over every aspect of what we do. We aim always to insource the components of our service and technology to enable us to have control over the quality and cost of our whole operation. The main components of our business model are: Operational excellence ▪ Award winning client servicing model ▪ High-touch, regionally allocated Client Service teams ▪ 190 highly trained client service staff ▪ Client service staff cover our entire proposition ▪ Staff are not product centric ▪ Highly efficient client and adviser experience ▪ Strong adviser relationships In-house wrappers We provide a wide range of in-house tax efficient wrappers, including: ▪ ISAs (including the LISA and JISA) ▪ Pensions ▪ Onshore life insurance bonds ▪ Offshore life insurance bonds ▪ General Investment Accounts 8 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 In-house technology ▪ Proprietary software systems technology ▪ Ownership of the software company ▪ Full control of development direction and priorities and costs ▪ Full control of the client experience ▪ We set our own development priorities ▪ Control management of development costs ▪ Agility Open architecture Whole of market, and provide access to a wide range of investment types, including: ▪ Mutual funds ▪ Investment trusts ▪ Exchange traded funds ▪ Other shares ▪ Gilts and bonds ▪ Venture capital trusts ▪ Cash and term deposits Proven reputation ▪ A long established investment platform ▪ Consistently high level of service for close to twenty years ▪ Numerous awards received including best adviser platform in adviser surveys run by CoreData and Investment Trends ▪ The fair treatment of clients, shareholders and employees Trusted by independent advisers ▪ Long-standing relationships with many financial planning firms across the UK ▪ Over 5,800 advisers have independently chosen Transact as an administration platform for their clients Strong balance sheet ▪ Highly cash generative business model ▪ No debt on the balance sheet ▪ Closely managed expenses in line with the business plan ▪ Strong regulatory capital position that remains stable through the economic cycle INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 9 STRATEGIC REPORT continued Using our resources to create value 3. Growing FUD by attracting and retaining clients 1. Investing in our people 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. These teams are supported by a dedicated technical specialist department that has the expertise to deal with more complex queries that may arise. This team consists of high calibre staff, many of whom have previously worked in Client Service teams, combined with specialist technical staff with years of industry experience. 2. Building our infrastructure We design our systems and processes to meet the needs of our clients and their advisers. We listen to user feedback when considering the improvements we will make to our bespoke system. The development and implementation of these enhancements has been carried out in a steady and controlled manner over the past twenty years and this successful approach is expected to continue for the foreseeable future. The Transact business model incorporates “responsible pricing”, which means sharing profits with our clients through price reductions, when circumstances permit. We do this when we are comfortable that doing so will not have a negative impact on service levels and it means that the best service in the platform market continues to be even better value for money. We are able to create this value for clients partly because we do not outsource any component of our service or technology, and this gives us absolute control over the quality and cost of our whole operation. Through closely managing expenses, in line with the business plan, and regularly implementing process efficiencies, our per unit cost base has been growing at a slower rate than business volumes. Transact was established nearly 20 years ago, and we have consistently differentiated it from competitors through sustained customer service excellence. It has a reputation of being a trusted investment platform and we currently work with over 5,800 advisers who have independently selected Transact for their clients. 4. Growing earnings from increasing levels of FUD Our revenue is generated from the fees paid by clients for using our platform. We are confident that the business model we operate is truly sustainable as over 96% of revenue, as detailed on page 26 in the Chief Financial Officer’s Review (CFOR), is of recurring nature, and has been for many years. 10 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 5. Managing costs Shareholder returns In respect of financial year 2019, the first interim dividend of 2.6p per share (£8.6 million in total) was paid in June, and the second interim dividend, as detailed in the Chair’s statement, of 5.2p per share (£17.2 million in total), has been declared. The dividends in respect of financial year 2019 equate to a return to shareholders of 64% of post-tax profit, this is in line with our dividend policy. Through insourcing the key components of our service and technology, we have total control over the quality, development and cost of our proposition. In particular, control of our software systems development is crucial to our business model as it enables our Client Service teams to operate particularly effectively. Investment in software has been carried out in a steady and controlled manner over the past twenty years and this successful approach is expected to continue for the foreseeable future. 6. Delivering fair returns for all stakeholders Central to our business model is the fair treatment of clients, employees and shareholders. As previously mentioned, we often reduce charges to share our success with clients. We have introduced a Share Incentive Plan (SIP) that is open to all staff and a Performance Share Plan (PSP) for management. The schemes aim to reward performance, recognising the contribution all staff have made to the success of the firm and to encourage loyalty. We also aim to deliver fair returns to shareholders delivering on dividend policy, in line with Strategic Objectives on pages 12 to 15, whilst maintaining a strong and stable regulatory capital base. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 11 STRATEGIC REPORT continued OUR STRATEGIC OBJECTIVES We aim to create, maintain and improve value for our three groups of stakeholders – our clients, our shareholders and our employees. To do this we need to maintain our reputation for delivering a high quality, value for money service. This is achieved by keeping our platform relevant to current and future new clients through ongoing development of the service to ensure it meets the needs of clients and their advisers. The key risks mentioned below are described, along with risk management activities and controls, on page 16. 12 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 1. Drive organic growth We aim to continue to grow FUD by attracting and retaining clients through their advisers, by delivering a superior service and value for money. The business considers developments to its core proposition and business plan where such changes are likely to improve the administration of financial plans for clients and their advisers. The business looks to implement new wrappers and services where it sees opportunities that will benefit all customers. Financial year 2019 progress: FUD ended the year at £37.80 billion (2018: £33.11 billion), growing 14% over the year. Financial year 2020 outlook: We will continue to target advisers not yet using us that are in our identified core market. We also expect that adviser users will continue to move their clients onto Transact, as they experience the benefits that our service brings and those clients already using us will put more money into their portfolios. Key risks: ▪ Service standards failure ▪ Stock market volatility £ 2. Investment in the business A history of investment in our staff and our technological infrastructure has ensured our service quality has been award winning and operationally resilient. This will not change. We recognize that high calibre, well-trained staff and an intuitive, progressive system are critical to our ongoing success. We are guided by feedback from clients and advisers when prioritising changes to Transact. The emergence of new investor practices and product, wrapper and functionality additions may all require the deployment of new technologies. We continue to adapt to these changes and invest in our software in a steady and controlled manner, building on our development experience over the past twenty years. Where new opportunities have been identified, the business looks to introduce insourced solutions. New developments must: ▪ Not risk Group capital beyond reasonable levels; ▪ Not bring us into commercial conflict with our customers’ advisers; and ▪ Not make it difficult for us to meet our regulatory responsibilities. Through these measures we aim to continue to grow profits and generate the best returns we can for our shareholders. Financial year 2019 progress: £9.0 million invested in platform development in the year. Financial year 2020 outlook: We look forward to focussing on progressing the implementation of enhancements that benefit the client and adviser online experience in financial year 2020, as well as other system improvements which are already designed and timetabled. Key risk: ▪ Reduced investment INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 13 STRATEGIC REPORT continued £ 3. Grow earnings 4. Maintain cash generation We expect to continue growing FUD and revenue by attracting more assets onto our platform. We aim to achieve this through: ▪ Our on-platform advisers and clients. The wealth managed by Transact’s current adviser base is expected to increase through stock market growth and new contributions. ▪ Increasing penetration of Transact’s current adviser base. That is, increasing the share of wallet from advisers on our platform by winning new clients. ▪ Attracting new advisers by maintaining leading ratings amongst advisers and keeping our platform relevant to new advisers and clients by constantly developing the service to meet their needs. The expectation that the UK wealth management market will continue to grow, leading to a consequential growth in investable assets managed by advisers, provides a positive outlook for the demand for investment platform services. We are a highly cash generative business because all our fees are received in cash, which we collect directly from client portfolios as the fees are earned. Combined with prudent expense management, we expect to continue generating cash profits. Financial year 2019 progress: Operating cash profit attributable to shareholders in financial year 2019 is £48.6 million, which is an increase of 19% from £40.7 million in financial year 2018. Removing the costs of the IHP float (including VAT) incurred in financial year 2018, then the normalised increase is 12%. Financial year 2020 outlook: We will continue to manage expenses and it is expected the Group’s strong liquidity profile will be maintained. Key risks: ▪ Stock market volatility Financial year 2019 progress: ▪ Expense overrun Revenue increased by 9% to £99.2 million (2018: £91.2 million). Financial year 2020 outlook: Client numbers grew by 8% and adviser numbers by 8% in financial year 2019. We aim to maintain and potentially increase both metrics in the coming year, but recognise that an uncertain outlook politically and economically may prove challenging. Key risks: ▪ Service standards failure ▪ Stock market volatility ▪ Increased competition 14 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 5. Maintain strong balance sheet 6. Deliver on dividend policy We continue to maintain strong capital resources, which are supported by emerging profit. We have no debt and our regulatory capital position remains robust through the economic cycle. Financial year 2019 progress: The Group capital position has grown 10% and ends the year at £115.5 million, up from £104.9 million at 2018 year end. Financial year 2020 outlook: Our policy is to pay 60 to 65 per cent of full year profit after tax as two interim dividends. Financial year 2019 progress: A first interim dividend was paid of 2.6p per ordinary share and a second interim dividend declared of 5.2p per share. Financial year 2020 outlook: Our dividend policy remains unchanged, but our income may be impacted by continuing market uncertainty, as a result of Brexit, USA/China trade relations. We will continue to manage our capital prudently to enable us to meet our regulatory capital requirements as the business grows. Key risks: ▪ Stock market volatility Key risks: ▪ Stock market volatility ▪ Capital strain ▪ Expense overrun ▪ Capital strain INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 15 STRATEGIC REPORT continued Key risks: There are factors both within and outside our control that may affect the achievement of our strategic objectives. We always aim to mitigate our risk exposures that are outside appetite where possible. The key risks associated with our strategic objectives are: 1. Stock market volatility: Heightened geopolitical risk has created uncertainty in markets and, in particular, Brexit uncertainty may continue to have a negative impact on stock markets for some time, which impacts the value of our FUD. Risk management and control: The risk of stock market volatility, and the impact on revenue, is mitigated through a wide asset offering that ensures we are not wholly correlated against one market, and which enables clients to switch assets in times of uncertainty. In particular, clients are able to switch into cash assets, which remain on our platform. Our wrapper fees are also not impacted by stock market volatility as they are a fixed quarterly charge. We also closely monitor and control expenses, which assists in maintaining profit in turbulent times. 2. Service standards failure: Our high levels of client and adviser retention are dependent upon our consistent and reliable levels of service. Failure to maintain these service levels would affect our ability to attract and retain business. Risk management and control: We manage the risk of service standards failure by ensuring our service standards do not deteriorate through providing our Client Service teams with extensive initial and ongoing training, supported by experienced subject matter experts and managers. Service levels are monitored and quality checked and any deviation from expected service levels is addressed. We also conduct satisfaction surveys to ensure our service levels are still perceived as excellent by our clients and their advisers. 16 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 3. Increased competition: We operate in a competitive market. Increased levels of competition for clients and advisers; improvements in offerings from other investment platforms; and consolidation in the adviser market may all make it more challenging to attract and retain business. 5. Expense overrun: Higher expenses than expected and budgeted for would adversely impact cash profits. The key constituent of expenses is salary costs, but other expenses are more likely to change unexpectedly, for example legal, compliance or regulatory costs and levies. Risk management and control: Competitor risk is mitigated by focussing on providing exceptionally high levels of service and being responsive to client and financial adviser demands through an efficient expense base. This allows us to continue to increase our value for money service by reducing client charges, subject to profit and capital parameters when deemed appropriate. Risk management and control: The most significant element of our expense base is staff costs. These are controlled through modelling staff requirements against forecast business volumes, factoring in efficiencies that it is expected will emerge through platform development. Any expenditure request that deviates from plan is rigorously challenged and must be approved before it is incurred. 4. Reduced investment: To maintain our quality and relevance requires ongoing investment. Any reduction in investment due to diversion of resources to other non-discretionary expenditure (for example, a change in the taxation regime or other regulatory developments) may affect our competitive position. Risk management and control: The risk of reduced investment in the platform is managed through a disciplined approach to expense management and forecasting. We horizon scan for upcoming regulatory and taxation regime changes and maintain contingency to allow for unexpected expenses e.g. FSCS levies, which ensures we do not need to compromise on investment in our platform to a degree that affects our offering. 6. Capital strain: Unexpected, additional capital requirements imposed by regulators may negatively impact our solvency coverage ratio. Risk management and control: The Group has allocated specific resources to continuously monitor the current and expected future regulatory environment and ensure that all regulatory obligations are or will be met. This provides a proactive control to mitigate this risk. Additionally, the Group carries out its own assessment of capital requirements, which includes assessing the capital required for the unlikely event of regulatory failure. This provides a capital buffer over and above the regulatory minimum solvency capital requirements. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 17 STRATEGIC REPORT continued KEY PERFORMANCE INDICATORS The key performance indicators presented below are based on quantifiable measures that we use to gauge the performance of our business. FUD* has increased by £4.69 billion (14%) The value of FUD is a primary driver of revenue as it forms the basis of annual commission payable which, as detailed on page 26 in the CFOR, is the largest component of Group revenue. Net inflows are down 15%, but Transact has the largest share of adviser net flows We achieved the highest net inflows of all advised platforms in each of the first three quarters of 2019, according to Fundscape statistics. TOTAL FUD 40bn 35bn 30bn 25bn 20bn 15bn 10bn 5bn 0bn ) £ ( D U F NET INFLOWS ) £ ( s w o l f n i t e N 5bn 4bn 3bn 2bn 1bn 0bn 27.9bn 33.1bn 37.8bn FY17 FY18 Financial Year (end) FY19 3.7bn 4.1bn 3.5bn FY17 FY18 Financial Year (end) FY19 Client numbers are up 8% to 179,500 The increase in the number of clients demonstrates the continued appeal of our service. CLIENT NUMBERS s r e b m u n t n e i l C 180k 160k 140k 120k 100k 151k FY17 166k 179k FY18 Financial Year (end) FY19 18 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Client retention remains at 96% per annum Client retention is an important measure of satisfaction. It is also a driver of ongoing revenue and we attribute our high level of client retention to satisfaction with our service and offering. Financial year 2019 2018 2017 Levels of client retention 96% 96% 96% Adviser numbers are up 8% to over 5,800 We have experienced steady growth in the number of advisers using the platform. We help advisers to “onboard” their clients through a mixture of face-to-face local support, online assistance and via our extensive head office-based servicing and technical teams. Once again we retained the highest Net Promoter Score (NPS) of the Adviser Platforms in the annual Investment Trends survey. The rate of growth of adviser numbers continues to increase steadily year-on-year. Investment in the business continues* In financial year 2019 we invested £9.0 million in platform development, including software development, platform infrastructure and staff training. Continuous investment ensures the proposition remains award winning and operationally resilient. Operating profit has increased to £50.0 million (9%) We have maintained income growth in a difficult market and continued to control expenses, as covered on page 28 in the CFOR. ADVISER NUMBERS s r e b m u n r e s i v d A 6,000 5,500 5,000 4,500 4,000 5,143 FY17 5,453 5,871 FY18 Financial Year (end) FY19 Capital stability maintained The Group maintains a strong balance sheet with shareholder funds increasing by 10% to £115.5 million. We retain a sensible capital base, with capital resources predominantly in cash and UK Gilts generated from the core business. In order to determine the capital base, we consider the capital position after dividends, investment and meeting increases in regulatory capital requirements. *Our KPIs include alternative performance measures (“APMs”) which are indicated with an asterisk. APMs are financial measures derived from the financial statements but are not defined under IFRS. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 19 STRATEGIC REPORT continued BUSINESS REVIEW The evolving platform market The advised platform market has shown great resilience in what has been a challenging political environment with cautious investor sentiment and volatile stock markets. However, investors continued to place great value on financial planning and advice and advisers continued to place most of their clients’ investment flows via investment platforms. This led to advised retail platform FUD growing to £427.70 billion from £393.45 billion a year earlier. How the platform market year unfolded Quarter 1 (October 2018 to December 2018) Q1 saw the FTSE All Share index fall almost 11% in the three months to December and platforms felt the effects of a challenging global political and economic climate. Consequently, retail advised assets dropped 5% over that quarter to £372.83 billion. This also signified the start of a period of lower net sales as retail advised net flows were over 20% lower than the final quarter of financial year 2018, with some platforms even experiencing negative net flows for the first time. We too felt the effects with a drop in FUD to £31.65 billion, although proportionately this was one of the smallest downturns across the market. Quarter 2 (January 2019 to March 2019) There was improved performance across global stocks, meaning platform assets soon recovered. Market FUD at the end of the first half of financial year 2019 showed net growth, finishing at £397.91 billion. Transact FUD experienced 9% growth over the quarter, ending at £34.41 billion. Quarter 3 (April 2019 to June 2019) The third quarter saw a period of steady growth as stock markets continued to show signs of recovery. Advised platform market gross inflows grew in the first quarter for the first time in over a year, although net flows continued to decline as platforms struggled to retain business. During the year some competitors continued to face technology and servicing issues, leading to volatility of inflows figures from some. Once again, we were ranked number one in the two major annual industry research surveys. Market FUD at the end of Q3 was £416.44 billion and Transact FUD grew to £36.35 billion. Quarter 4 (July 2019 to September 2019) We topped the Platforum Adviser Rated Leaderboard and also attracted record attendance at numerous regional adviser events. Market FUD at the end of Q4 was £427.70 billion and Transact FUD grew to £37.80 billion. During the year, there was also some corporate activity with private equity acquiring one platform and the announced possible sale of an international insurer’s UK platform. 20 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Transact vs the market MARKET GROSS INFLOWS FUD Growth We finished the year with FUD of £37.80 billion up 14% on prior year (£33.11 billion). This compares to market growth of 9% during the same period. Pension business continue to represent a higher proportion of assets year-on-year, now making up over 46% of FUD on Transact, whilst GIAs and ISAs are at 23% and 24% respectively. Insurance bonds as a proportion have remained steady at 7%, with the offshore bond making up the majority. Inflows Transact was not immune to the uncertainty caused by political issues in the UK; both gross inflows and net inflows were down on the prior year, however in the context of the market, we invariably outperformed the majority of our competitors. For the financial year to 30 September 2019, gross inflows were down 4% year-on-year, compared to a reduction of 20% across the market. For the same period, net flows were down 15% to £3.50 billion, where at a market level they were down over 40%. Despite this, we have consistently ranked in the top three for gross inflows, and we have achieved the highest net flows to date in 2019 among retail advised platforms, according to Fundscape statistics. This has been achieved in four ways: ▪ Advisers who have used Transact for more than one year bringing across new clients; ▪ Clients already on Transact for more than one year making further contributions to their portfolios; ▪ New clients from advisers new to Transact; £12.5bn £12.0bn £11.5bn £11.0bn £10.5bn £10.0bn Q1 FY19 Q2 FY19 Q3 FY19 Q4 FY19 TRANSACT GROSS INFLOWS £1.50bn £1.45bn £1.40bn £1.35bn £1.30bn £1.25bn £1.20bn Q1 FY19 Q2 FY19 Q3 FY19 Q4 FY19 MARKET NET FLOWS £6.0bn £4.5bn £3.0bn £1.5bn £0bn Q1 FY19 Q2 FY19 Q3 FY19 Q4 FY19 TRANSACT NET FLOWS £950m £850m £750m £650m ▪ Outflows remaining broadly stable £550m as a proportion of FUD which compared favourably to the rest of the industry. Q1 FY19 Q2 FY19 Q3 FY19 Q4 FY19 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 21 STRATEGIC REPORT continued Award-winning service Our superior performance is attributable in part to our overall proposition and the high levels of service we achieve. We continue to deploy regular software releases, with enhancements to code as well as new functionality, and released eleven in the year. Such high levels of service have resulted in Transact retaining the top spot in annual independent research studies, Investment Trends and CoreData, for the tenth year running, as well as consistently performing strongly in quarterly and annual Platforum surveys. As a result, our market share of gross inflows has shown notable improvement throughout the year, and now sits at 12% among retail advised platforms. Another positive indicator is the ratio of client asset transfers onto the platform versus asset transfers off the platform. For the financial year, the ratio was 5.7:1 in our favour. There was, however, an industry wide slowdown in defined benefit pension transfers, during which our transfers onto the platform fell by over 50% compared to financial year 2018. Conversely, defined contribution pension transfers onto the platform increased by 15% year-on-year and made up almost 78% of our pension transfers in financial year 2019. TRANSACT ADVISER RATINGS Category: Large Platforms (> £12bn FUD) Category: Large Platforms (> £10bn FUD) Category: Large Platforms (> £10bn FUD) 1st 1st 1st 1st 1st 1st 1st 1st 1st 1st 1st 1st 1st 1st 1st 2019 2018 2017 2016 2015 22 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Adviser and client numbers The number of advisers using the platform increased by 8% over the year to 5,871. The rate of growth continues to increase steadily year-on-year and represents a sustainable level of change that allows us to help the advisers efficiently “onboard” their clients. 7,000 6,000 5,000 4,000 3,000 2,000 5,871 0 1 / 9 0 Y F 1 1 / 0 1 Y F 2 1 / 1 1 Y F 3 1 / 2 1 Y F 4 1 / 3 1 Y F 5 1 / 4 1 Y F 6 1 / 5 1 Y F 7 1 / 6 1 Y F 8 1 / 7 1 Y F 9 1 / 8 1 Y F Client numbers too have shown good growth, increasing by over 8% across the year to almost 179,500. In our own client satisfaction survey, over 80% of client respondents said that they were either “Very likely”, or “Likely” to recommend Transact to others. 200k 170k 140k 110k 80k 50k 179k 0 1 / 9 0 Y F 1 1 / 0 1 Y F 2 1 / 1 1 Y F 3 1 / 2 1 Y F 4 1 / 3 1 Y F 5 1 / 4 1 Y F 6 1 / 5 1 Y F 7 1 / 6 1 Y F 8 1 / 7 1 Y F 9 1 / 8 1 Y F INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 23 STRATEGIC REPORT continued CHIEF FINANCIAL OFFICER’S REVIEW The backdrop to our last financial year was UK and global political turbulence. The FTSE All Share Index fell nearly 13% before the end of our first quarter and, despite recovering to peak at just over 1% up midway through our fourth quarter, fell back, ending our financial year nearly 2% down. Against this background we continued to grow FUD generated increased revenue and delivered increased profits. FUD increased to £37.80 billion (2018: £33.11 billion) with gross inflows of £5.70 billion (2018: £5.96 billion). Outflows increased in line with expectation to £2.20 billion (2018: £1.86 billion) resulting in positive net inflows of £3.50 billion (2018: £4.10 billion). Income continued to grow. We generated revenue of £99.2 million (2018: £91.2 million) up 9% leading to increased operating profit attributable to shareholders of £48.6 million (2018: £40.7 million before adjusting for non-recurring listing costs incurred in the year; £43.3 million after adjustment). This performance was achieved through our focus on doing more of the same, better and more efficiently. Our business model remained unchanged throughout the year and this is expected to continue. We continue to develop the delivery of our high quality service by investing in our people and our proprietary technology. These developments allow us to benefit from ongoing process efficiencies which are reflected in our increased operating margin. 24 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 FUD, inflows and outflows For the financial year ended 30 September Opening FUD Inflows Outflows Net flows Market movements Other movements1 Closing FUD 2019 £m 33,113 5,700 (2,203) 3,497 1,197 (8) 2018 £m 27,927 5,957 (1,863) 4,094 1,138 (46) 37,799 33,113 1Other movements includes dividends, interest, fees and tax charges and rebates. Financial year 2019 saw continued market volatility. Despite this, the level of client inflows onto Transact has remained strong, albeit down on the prior year. Outflow rates as a percentage of opening FUD remained consistent with prior years. FUD ended the year at £37.80 billion, up £4.69 billion from 2018, an increase of 14%. Financial performance Financial year 2019 was another year of positive financial performance. By continuing to generate positive net inflows, through our ability to attract new inflows and retain business already on the platform, we increased FUD. This drove revenue growth and, when coupled with careful management of our expense base, has resulted in increased profits. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 25 STRATEGIC REPORT continued 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 Total gross profit in the financial year to 30 September 2019 increased by £8.0 million, or 9%, to £98.4 million from £90.4 million. This increase is after the reduction in the buy commission rebate threshold, reflecting the increases in the value of FUD, number of clients and 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 fee income 2019 £m 99.2 (0.8) 98.4 (49.8) 48.6 0.4 49.0 (8.9) 40.1 2018 £m 91.2 (0.8) 90.4 (49.7) 40.7 0.2 40.9 (8.0) 32.9 2019 £m 86.7 9.0 3.5 99.2 2018 £m 79.2 8.1 3.9 91.2 26 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Our revenue comprises three elements. Two of these elements, annual commission income (an annual, tiered fee on FUD) and wrapper fee income (quarterly wrapper fees for each of the tax wrapper types clients hold) constitute our recurring revenue. Other income includes “buy commission” charged on asset purchases. Annual commission income in the financial year increased by £7.5 million, or 9.5%, to £86.7 million (2018: £79.2 million). This growth has been achieved through growth in FUD despite volatile market conditions affecting asset values throughout the year. Wrapper administration fee income in the financial year ended 30 September 2019 increased by £0.9 million, or 11.1%, to £9.0 million (2018: £8.1 million). This reflects the net increase in the number of open tax wrappers on the platform. The increase in wrappers is driven by the increase in number of clients with open tax wrappers and clients already using Transact at the start of the financial year opening new tax wrappers, offset by tax wrappers being closed. Recurring revenue streams constituted 96.5% (2018: 95.7%) of total fee income. Other income, mainly buy commission and dealing charges, reduced by 10.3%, £0.4 million, to £3.5 million (2018: £3.9 million). The primary reason for this fall was the reduction in the buy commission rebate threshold. The required portfolio value for clients to receive the rebate was reduced from £1.0 million to £0.5 million, with effect from March 2019. IHP FEE INCOME 100m 95m 90m 85m 80m 75m 70m 65m 60m 55m 50m ) £ ( e m o c n i e e F £3.9m £8.1m £79.2m £3.5m £7.3m £69.5m £3.5m £9.0m £86.7m FY17 FY18 Financial Year End FY19 Annual Commission Wrapper Fee Buy & Dealing INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 27 STRATEGIC REPORT continued Operating expenses Total operating expenses for the financial year ended 30 September 2019 increased by £0.1 million, or 0.2%, to £49.8 million (2018: £49.7 million). The increase was mainly due to an increase in staff costs, offset by a reduction in regulatory and professional fees as the prior year included the costs arising from the listing of IntegraFin Holdings plc (IHP) on the main market of the LSE. 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 Staff costs increased by £1.3 million, or 3.7%, to £36.3 million (2018: £35.0 million). Over the year average staff numbers increased from 507 to 509, an increase of 0.4%. It was possible to hold staff numbers stable as the business continued to grow due to the efficiency gains delivered through platform development. The rise in staff costs in the period was mainly due to general inflationary increases, the full year impact of staff benefit changes made post listing and an increase in pension contribution levels. 2019 £m 36.3 3.6 5.5 3.7 49.1 0.7 49.8 2018 £m 35.0 3.6 6.8 3.7 49.1 0.6 49.7 The Share Incentive Plan (SIP) available to all staff was launched in March 2018, incurring seven months of costs in the prior financial year. The timing of the launch of the Performance Share Plan (PSP) for management was such that no costs were incurred in the prior financial year. A full year of costs for both of these schemes was incurred in the financial year to 30 September 2019. More detail of the cost in financial year 2019 is given in note 26. 28 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Depreciation and amortisation costs increased by £0.1 million from the prior financial year to £0.7 million (2018: £0.6 million), reflecting our program of rolling replacement and improvement of IT hardware. Total capitalised expenditure for the financial year was £1.2 million compared with £0.6 million in the prior year. Profit before tax attributable to shareholder returns Over the course of a challenging year, given political, economic and market conditions, we have continued to deliver award-winning service to our clients and their advisers, implemented further charge reductions - reducing costs for our clients - and delivered robust financial results. Adjusted operating profit For the financial year ended 30 September Operating profit attributable to shareholder returns Adjustment for listing costs (incl. VAT) Adjusted operating profit attributable to shareholder returns 2019 £m 48.6 - 48.6 2018 £m 40.7 2.6 43.3 We operate defined contribution pension schemes for all of our staff. From 1 January 2019 company-paid staff pension contributions increased by 1.5% of annual salary raising the company’s contribution level to 9.0% per annum from 7.5% per annum. We are not currently planning any further increases. The group has no exposure to any defined benefit pension scheme. Regulatory and professional fees reduced by £1.3 million, or 19.1%, to £5.5 million in the year. There were several factors that drove this net reduction. The most significant of these was the non-recurrence of direct costs attributable to listing on the LSE, reducing professional fees by £2.3 million. After adjusting for this, underlying professional fees increased by £1.0 million over the year. Regulatory fees are due to the Prudential Regulation Authority, the Financial Conduct Authority and the Financial Services Authority in the Isle of Man in respect of the Group’s three regulated entities, together with Financial Services Compensation Scheme levies in the UK and the Isle of Man. Overall there was a 28.6% increase in these costs over the financial year. This was in part due to increases in business volumes and in part due to an increase in fee levels. Other costs in the year were £3.7 million (2018: £3.7 million), showing no change year on year. Other costs in the prior financial year included non-recurring indirect costs of £0.3 million attributable to listing. After adjustment, other costs increased by £0.3 million, or 8.8%, over the year. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 29 STRATEGIC REPORT continued Tax The Group has operations in three tax jurisdictions, UK, Australia and Isle of Man, making Group profits varyingly subject to tax at three different rates. However, the vast majority of the Group’s income is earned in the UK. Tax on ordinary activities described below solely comprises 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. Tax for the year increased by £0.9 million, or 11.1%, to £9.0 million (2018: £8.1 million). Our effective rate of tax over the period decreased to 18.3% from 19.9% having been higher in the prior year mainly due to listing costs. Our tax strategy can be found at: www.integrafin.co.uk/ group-tax-strategy/ In financial year 2018, our operating margin was 44.6%, before any adjustment for the non-recurring listing costs incurred in that year, and 47.5% after adjustment. In the financial year to 30 September 2019 our operating margin increased to 49.0%. After including interest income on corporate cash and returns on corporate gilt holdings profit before tax in the financial year to 30 September 2019 was £49.0m, an increase of 19.8% on the unadjusted prior year; 12.6% increase on the adjusted prior year. IHP – PROFIT BEFORE TAX X A T E R O F E B T I F O R P £50m £45m £40m £35m 0.4m 48.6m 2.6m 0.2m 40.7m FY18 Financial Year End Interest Income FY19 IPO Adjustment 0.9m 0.2m 36.8m FY17 Operating Profit 30 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 2019 £m 48.6 0.4 49.0 (8.9) 40.1 2018 £m 40.7 0.2 40.9 (8.0) 32.9 331.3m 12.1p 331.3m 9.9p 40.1 35.5 331.3m 12.1p 331.3m 10.7p Earnings per share Operating profit attributable to shareholder returns Interest income Profit before tax attributable to shareholder returns Tax on ordinary activities Profit after tax for the period Number of shares in issue Earnings per share – basic and diluted Profit after tax for the period adjusted to exclude listing costs Number of shares in issue Adjusted earnings per share – basic and diluted Earnings per share to 30 September 2018 was 9.9 pence before any adjustment for the non-recurring listing costs incurred in that year and 10.7 pence after adjustment. In the financial year to 30 September 2019 earnings per share increased to 12.1 pence, an increase of 22.2% to prior year unadjusted, 13.1% to prior year adjusted. IHP - EARNINGS PER SHARE ) e c n e p ( S P E 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 9.0 9.9 12.1 FY17 FY18 Financial Year (end) FY19 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 31 STRATEGIC REPORT continued Consolidated statement of financial position The material items on the consolidated statement of financial position that merit comment include the following: Intangible assets (note 10) The Group’s intangible asset as at 30 September 2019 of £13.0 million (2018: £13.0 million) comprises goodwill arising from the purchase of Integrated Application Development Pty Ltd (IAD) in July 2016. Goodwill is tested for impairment each financial year. Deferred acquisition costs and deferred income liability (notes 13 and 19) Deferred acquisition costs and deferred income liability arise in our life insurance subsidiaries, IntegraLife UK Limited (ILUK) and IntegraLife International Limited (ILInt). They are driven by the level of adviser fees payable by clients from new insurance wrappers opened in each year. These two line items are required to be shown under IFRS, however, the timing and magnitude of movement in the items always nets off exactly, resulting in zero net effect each of the companies and in the consolidated statements of financial position. Both items increased by £4.3 million to £50.4 million over the financial year. Investments and cash held for the benefit of policyholders and liabilities for linked investment contracts (note 14) ILUK and ILInt write only unit-linked insurance policies. They match the assets and liabilities of their linked policies such that, in their own individual statements of financial position, these items always net off exactly. These line items are required to be shown under IFRS in the consolidated statement of financial position, but have zero net effect. Investments and cash held for the benefit of policyholders and liabilities for linked investment contracts both increased to £16.70 billion (2018: £14.50 billion). This reflects the increase in the value of FUD held in life insurance wrappers. Deferred tax liabilities (note 20) Deferred tax liabilities increased by £0.6 million to £13.2 million (2018: £12.6 million). This increase was primarily due to market movements in the assets held in the ILUK’s onshore bond tax wrappers during the year. Sufficient cash is held by ILUK to meet this liability. Liquidity and capital management At 30 September 2019 the group held cash and cash equivalents of £132.3 million (2018: £116.8 million). Cash generated through trading also covered dividend payments totalling £29.8 million. This comprised £21.2 million interim dividend in respect of the full financial year 2018 and £8.6 million first interim dividend in respect of the first half of financial year 2019 (2018: £30.8 million, comprising £19.4 million interim dividend in respect of the full financial year 2017 and £11.4 million special dividend.) To enable the Group to offer a wide range of tax wrappers there are three regulated entities within the Group, a UK investment firm (IFAL), a UK life insurance company (ILUK) and an Isle of Man life insurance company (ILInt). Each regulated entity maintains capital well above the minimum level of regulatory capital, ensuring sufficient capital remains available to fund ongoing trading and future growth. Cash and investments in short dated gilts are held to cover regulatory capital requirements and tax liabilities. 32 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 The regulatory capital requirements and resources in ILUK and ILInt are calculated by reference to economic capital based regimes, and therefore do not directly equate to Integrated Financial Arrangements Ltd’s (IFAL’s) expense-based regulatory capital requirements. Regulatory Capital For the financial year ended 30 September 2018 Regulatory Capital requirements Regulatory Capital resources Regulatory Cover IFAL ILUK ILInt £m 23.5 173.4 19.4 £m 30.9 227.4 33.1 % 131.4 131.1 170.6 All of the company’s regulated subsidiaries continue to hold regulatory capital resources in excess of their regulatory capital requirements. We will maintain sufficient regulatory capital and an appropriate level of working capital. We will use retained capital to further invest in the delivery of our service to clients, pay dividends to shareholders and provide fair rewards to staff. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 33 STRATEGIC REPORT continued £m 115.4 (16.6) 98.8 (17.2) 81.6 50.2 31.4 Capital For the financial year ended 30 September 2019 Total equity Loans and receivables, intangibles assets and property, plant and equipment Available capital pre dividend Interim dividend declared Available capital post dividend Additional risk appetite capital Surplus Additional risk appetite capital is capital the board of IHP considers to be appropriate for it to hold to ensure the smooth operation of the business such that it is able to meet future risks to the business plan and future changes to regulatory capital requirements without recourse to additional capital – see Viability Statement on page 42. The board considers the impact of regulatory capital requirements and risk appetite levels on prospective dividends from all of its regulated subsidiaries. Our Group’s Pillar 3 document contains further details and can be found on our website at: www.integrafin.co.uk/ legal-and-regulatory-information/ Pillar 3 Disclosures. 34 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 As stated in the Chair’s report, the Board has declared a second interim dividend for the year of 5.2p per ordinary share, taking the total dividend for the year to 7.8p per share (2018: 6.4 pence) Given the net cash, liquidity and capital coverage positions as set out above, the Group is well positioned to fund the £17.2 million dividend. Dividend Type Share Class Ordinary All Per share Ordinary Ordinary All All Alexander Scott Chief Financial Officer 17 December 2019 2019 £m 25.8 2018 £m 21.2 5.2 pence 2.6 pence 6.4 pence - INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 35 STRATEGIC REPORT continued RISK AND RISK MANAGEMENT Overview The risk management process assists the board in understanding its current and future risks and provides appropriate information that is incorporated into our strategic decision making and business planning processes. It encompasses all financial, strategic and operational risks that may prevent us from fulfilling our business objectives. Given the nature of the activities we undertake, the key risks that we face are non-financial risks (comprising operational risk, competitor risk, regulatory risk, reputational risk, and geopolitical risk) and financial risks (comprising market risk, liquidity risk, outflow risk, expense risk and credit risk). The Chief Executive Officer, supported by the Chief Financial Officer, is responsible for executing the strategy set by the board within the approved risk appetite. Guidance and oversight is provided by the Audit and Risk Committee which reports to the board. The Audit and Risk Committee is supported in this process by the IFAL Risk Committee, which itself guides and oversees the company’s regulated subsidiaries, assisting their boards in setting appropriate risk appetites in line with Group strategy. 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 and effectiveness of policies and procedures designed to detect any risk of failure to comply with regulatory obligations. The directors have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity. 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. Any material changes are approved by the board following guidance from the Audit and Risk Committee and approval by the boards of the regulated subsidiaries, which receive guidance from the IFAL Risk Committee. We have established our Risk Management Framework with consideration of the Committee of Sponsoring Organisation of the Treadway Commission (COSO) Integrated Framework Principles, providing a consistent, proactive approach to identification, assessment, mitigation and reporting of risks throughout the Group. 36 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Our 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 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 37 STRATEGIC REPORT continued Risk appetite ▪ we do not actively seek to take operational risk to generate returns. We accept a level of operational risk that means the controls in place should prevent material losses, but should not excessively restrict business activities; ▪ we have very limited risk appetite for unfair client outcomes arising from systematic failures in our cultural outlook or in any element of the client life cycle; and ▪ we have a very limited risk appetite for material regulatory breaches. Actual risk exposures are regularly assessed by the Group’s risk management function against risk appetite using a comprehensive set of key risk indicators which are reported to the Audit and Risk Committee, the IFAL Risk Committee and senior management. Our risk appetite is the degree of risk that we are prepared to accept in pursuit of our strategic and operational objectives. Our Risk Management Policy and Framework provides the mechanism to define our risk appetite. From this, each of our operating companies sets its own appetite within this framework to meet the common aims of the Group. We have generally adopted an overall conservative approach which is reflected in our risk appetite values and preferences and in the overall approach to risk management. Our risk preferences can be articulated as follows: ▪ we ensure risks that are taken are aligned with our strategic aims and provide an acceptable level of return; ▪ we accept certain risks and ensure that these are appropriately managed, mitigated and monitored; ▪ we have a prudent capital management approach and we currently invest shareholder assets in high quality, highly liquid, short-dated investments; ▪ we have a preference for products with low capital requirements and without financial guarantees. Additionally, we have a preference for secondary market risk through charges determined based on clients’ portfolio values. This is central to our proposition and we accept the potential impact on financial performance; 38 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Risk governance Our 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 our activities towards the achievement of our objectives. The board has established a non- executive committee, the Audit and Risk Committee, to provide guidance and oversight on risk matters. This committee of the company is responsible for reviewing the manner in which the Group implements and monitors the adequacy of the Risk Management Framework. For risk oversight of the regulated subsidiaries it is supported by the IFAL Risk Committee, itself made up of independent non-executive directors of IFAL. Together they assist the board and senior management 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. We implement 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 Audit and Risk Committee and the IFAL 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 Chair of the Audit and Risk Committee then provides a summary to the board. 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 which provides at least three stages of oversight to ensure that all companies operate within their risk appetites. First line of defence Our first line of defence is the 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 our business, from the senior management team to departmental 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 us are considered by the management team, with each key risk owned by the member of the management team responsible for the strategic management of that risk across the Group. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 39 STRATEGIC REPORT continued Second line of defence Risk Capital Frameworks Our second line of defence comprises two functions: the risk management function and the compliance function. The risk management function is responsible for coordinating 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 Audit and Risk Committee and the IFAL Risk Committee. The Chairs of the committees then provide a summary to the members of the boards. 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 Our third line of defence is internal audit, which provides independent assurance on the adequacy and effectiveness of the Group’s risk management and major business process control arrangements. It performs regular audits across the business, reporting to the committees on the implementation and effectiveness of the Risk Management Policy and Framework. The Head of Internal Audit reports directly to the committee chairs. The board is satisfied that internal audit provides sufficient assurance on the Risk Management Policy and Framework. The company’s regulated subsidiaries fall under various risk capital regimes. All of the regimes are guided by similar underlying risk principles, albeit the results and reporting requirements are regime specific. The company’s regulated subsidiaries maintain a sound and appropriate system of capital management in order to meet their strategic capital objectives. They have a preference for a simple system of capital management which reflects the nature of their businesses. At a legal entity level, the regulated subsidiaries are capitalised at the required regulatory minimum plus an adequate buffer defined as part of their capital management, risk appetite and dividend policies. Common Reporting Framework Under the FCA’s Prudential sourcebook for Investment Firms (“IFPRU”), IFAL is an IFPRU 125K limited licence firm. IFPRU requires that such firms as IFAL comply with the EU’s rules, except where the FCA has expanded on the underlying rules or specifically exempted IFPRU firms from compliance. This means that IFAL manages its capital and risk requirements using the Basel III framework of the Basel Committee on Banking Supervision (“Basel Committee”) as applied by the EU to investment firms in amendments to the Capital Requirements Directive (“CRD”), and the CRR. As at 30 September 2019, IFAL has regulatory capital resources of £30.9m (2018: £28.8m) and a regulatory capital requirement of £23.5m (2018: £21.8m) which gives a capital requirement coverage ratio of 131% (2018: 132%). 40 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Isle of Man Risk Based Capital regime As at 30 September 2019, ILInt has Own Funds of £33.1m (2018: £23.0m) and SCR of £19.4m (2018: £15.4m) which gives a SCR coverage ratio of 171% (2018: 150%). During the reporting period, ILInt was fully compliant with the SCR. Additionally, the Risk Based Capital balance sheet and SCR are regularly monitored and in line with standard regulatory requirements reported to the Isle of Man Financial Services Authority on a quarterly basis. During the reporting period, IFAL was fully compliant with its regulatory capital requirement. Additionally, regulatory capital resources and capital requirements were regularly monitored and in line with standard regulatory requirements reported to the FCA on an annual basis. Discussions are taking place between the company and the Regulator about the Prudential Consolidation Group (PCG) status. Whilst these discussions are ongoing the Group has ensured that it has sufficient capital, taking into consideration any potential dividends payable, to meet the capital requirements of any possible PCG structure outcome. Solvency II ILUK has adopted the standard formula approach in calculating the Solvency Capital Requirement (SCR), and has not adopted any of the transitional measures in the calculation of the Solvency II balance sheet. As at 30 September 2019, ILUK has own funds of £227m (2018: £183m) and a SCR of £173m (2018: £143m) which gives a solvency coverage ratio of 131% (2018: 129%). During the reporting period, ILUK was fully compliant with the SCR. Additionally, the Solvency II balance sheet and SCR were regularly monitored and in line with standard regulatory requirements reported to the PRA on a quarterly basis. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 41 STRATEGIC REPORT continued We are targeting organic revenue growth, with moderate margin improvements that are driven by efficiency delivered from process and system enhancement. Assessment period and measures 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. Consideration is also given to projections beyond this period, though this does not form part of the formal assessment. 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. The directors’ assessment has been made with consideration and reference to: the Group’s current position and three year business plan; the Group’s risk appetite; the Group’s financial projections; and, the Group’s principal risks and uncertainties, including geopolitical uncertainty, as detailed in the strategic report. Going concern We continue to maintain a robust financial position. Having conducted detailed cash flow and working capital projections, and appropriate stress-testing on liquidity, profitability and regulatory capital, taking account of possible adverse changes in trading performance, the board is satisfied the Group is well placed to manage its business risks. The board is also satisfied that it will be able to operate within the regulatory capital limits imposed by regulators, being the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA), and Isle Man Financial Services Authority (IoM FSA). Accordingly, the board has concluded that the Group has adequate resources to continue in operational existence for the foreseeable future, being a period of at least twelve months from the date this Annual Report is approved. For this reason, they have adopted the going concern basis for the preparation of the financial statements. Viability Statement In accordance with the Code, the directors have assessed the Group’s prospects by reference to the three-year planning period to September 2022, and have a reasonable expectation that the Group will continue to operate and meet its liabilities as they fall due, over the period of this assessment and beyond. By order of the board, Helen Wakeford Company Secretary 17 December 2019 VIABILITY STATEMENT In accordance with the UK Corporate Governance Code, the directors have assessed the future prospects of the Group over a longer time period than the twelve month going concern assessment. Key factors influencing prospects The key factors affecting the Group’s prospects are its market position and recurring revenue. Market position Market position can be assessed as follows: Independent research consistently rates Transact as the top platform in the market (page 22); the number of advisers using the platform increased by 8% during the year; the number of clients on the platform increased by 8%; and, our Net Promoter Score increased marginally, and remained the highest score for an advised platform. The above measures all demonstrate adviser and client satisfaction with the service provided. Recurring revenue The absolute level of revenue is dependent on market values, but key to the recurrence is the retention of FUD which is achieved through retaining client and advisers through our service delivery. 96% of revenue is of recurring nature (page 26). 42 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 CORPORATE SOCIAL RESPONSIBILITY We are wholly committed to acting ethically and with integrity and transparency in all business dealings and in all our employment practices. These are core principles by which all entities within the Group abide. The Group demonstrates its social responsibilities primarily through Group companies that operate ethically and deliver commercial benefits to the three groups of stakeholders: clients, staff and shareholders. We also acknowledge our responsibilities more widely in relation to effects on environmental and social wellbeing. Our people and our culture One of our main assets is the staff we employ and we aim to ensure all staff are respected, motivated and safeguarded whilst at work. This is achieved through a corporate culture of which we are proud, one of: ▪ aiming for as little hierarchy as possible, through a relatively flat organizational structure; ▪ emboldening staff to voice opinions and ideas; ▪ encouraging all staff to develop and progress, be it through internal training, or professional qualifications; and ▪ considering any additional requirements staff may have, or additional support they may need. We encourage staff to maintain open dialogue with direct management, not just concerning work issues, but other issues that may impact their day at work. Our HR business partners also provide support for staff when they need extra assistance and, in addition, there is an Employee Assistance Programme that staff can use if they wish to speak to an independent party, in confidence, about any issues that may be impacting them. The Group aims for a collegiate, industrious and sociable work environment, and this is supplemented by various social and charity events. Human rights are respected by management and all staff and other stakeholders are treated equitably. All staff Share Incentive Plan (SIP) Following the launch of an HMRC approved SIP scheme in financial year 2018, eligible staff received free shares and were given the opportunity to buy additional shares (partnership shares) out of monthly before tax salary. They received two free matching shares for every partnership share. We were delighted that 82.7% of staff took up the opportunity to buy shares and participate in the company’s success. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 43 STRATEGIC REPORT continued Diversity and gender pay gap Across the Group we employed 486 staff and six NEDs are officers of the company. The breakdown by gender as at September 2019 was as follows: Board Directors Senior Managers Direct Reports All Staff Total Male % 77.8 66.7 68.2 66.8 67.1 Female % 22.2 33.3 31.8 33.2 32.9 2 1 7 152 162 7 2 15 306 330 IntegraFin Services Ltd, the company’s services provision subsidiary, published its second gender pay gap report in April 2019. The report can be found on our website, at www.integrafin.co.uk/ legal-and-regulatory-information Our reported mean gender pay gap fell to 11.9% and compares favourably with results reported by others in the sector in which we operate and the national average. Equality and inclusion We believe in equality. We treat all stakeholders fairly and with respect. The Group remains committed to continuous improvement by ensuring that recruitment is not discriminatory; all staff are treated equitably; all staff have equal opportunities to work flexibly, regardless of seniority or role; and all staff are remunerated fairly and in line with the role they perform. Our policy regarding the employment, training, career development and promotion of disabled employees, and employees who became disabled whilst in employment, is to make reasonable adjustments as necessary in order that they can embrace opportunities in the Group. Payment practices We endeavour to pay all suppliers within agreed payment terms. We do not seek to disadvantage, or compromise, suppliers with whom we conduct business, in line with one of our core principles of ethical behaviour. In financial year 2019 the Group paid 92% (2018: 90%) of suppliers within 15 days. Anti-bribery and anti-corruption The Group strives to maintain high standards of governance, personal and corporate ethics, compliance with laws and regulations and values integrity, fairness and honesty when dealing with employees, clients, financial advisers and suppliers. The Group has a zero tolerance for bribery and corruption and takes all reasonable steps to ensure its staff and Third Parties understand what is and what is not permitted and act with integrity at all times. The Group has implemented an Anti-Bribery and Corruption policy and has put appropriate contractual and other controls in place to manage all forms of bribery and corruption risk. Modern slavery We do not tolerate modern slavery, servitude, human trafficking or forced labour. The Group’s modern slavery statement is found at: www.integrafin.co.uk/ modern-slavery/ 44 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 APPROVAL OF THE STRATEGIC REPORT A statutory requirement of the Annual Report is that the directors produce a Strategic Report. Section 172 of the Companies Act states that the purpose of the report is to inform members of the company and help them assess how the directors have performed their duty. To fulfil this, directors must act in a way they consider, in good faith, would be most likely to “promote the success of the company for the benefit of its members as a whole”. The Strategic Report should provide shareholders with a comprehensive and balanced overview of the Group’s business model, strategy, development, performance, position and future prospects. The Strategic Report should be clear, concise and unambiguous, and should demonstrate how the company has considered the interest of employees, and the impact of the company’s operations on the community and environment. The directors believe that the Strategic Report on pages 4 to 45 meets all relevant statutory objectives and requirements. By order of the board, Helen Wakeford Company Secretary 17 December 2019 Environmental impact Community A variety of events is organized each year to raise money for, and awareness of, a number of charities chosen from staff suggestions. Political donations The Group does not make political donations. Tax strategy We manage our tax affairs to the same high ethical, legal and professional standards as the delivery of our services to clients. In summary, our tax strategy is to comply fully with all statutory obligations, make full disclosure to tax authorities in all appropriate jurisdictions, and to pay all tax when it is due. The full tax strategy document is available at: www.integrafin.co.uk/ group-tax-strategy/ We pay all tax as it falls due and make full disclosure to all relevant tax authorities. The UK corporation tax and employer’s national insurance payable in respect of the year ended 30 September 2019 was £11.8 million (2018: £11.0 million). In addition other taxes such as VAT and business rates were paid. Non financial information statement The Corporate Social Responsibility report includes information in accordance with sections 414 CA and CB of the Companies Act 2006. We recognize the importance of managing and minimizing the Group’s environmental impact as much as reasonably possible, and we are now Energy Savings Opportunities Scheme (ESOS) Phase 2 certified. Initiatives taken in financial year 2019 to reduce our carbon footprint include: saving 287 trees through recycling confidential waste; increasing the volume of recyclable waste to 51% of total waste (financial year 2018: 46%); installing LED lighting in communal areas of the head office; using a chemical free cleaning system; and by having head office electricity supplied by a green energy supplier. We also continue to encourage adviser firms and clients to use electronic, rather than paper based, instruction delivery and statements. Greenhouse gas emissions Our emissions data for financial year 2019 is presented here. We have calculated the emissions in line with the Greenhouse Gas Protocol Corporate standard. We do not generate emissions directly through our operations, but emissions arise indirectly through business flights, driving for work and electricity and gas consumption. Therefore our emissions are classed as indirect emissions, which are Scope 3 emissions under the standard. Gross emissions of greenhouse gas (GHG): Scope Total CO2 emission 1 – Direct GHG emissions 2 – Electricity indirect GHG emission - - 3 – Other indirect GHG emissions 220 tonnes INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 45 GOVERNANCE BOARD OF DIRECTORS TO 30 SEPTEMBER 2019 Christopher Munro Ian Taylor Alexander Scott Chief Executive Officer (CEO) Chief Financial Officer (CFO) Appointed to the board: 24 January 2014 Appointed to the board: 11 February 2014 ▪ Chief Executive Officer of the Group since April 2002, prior to which he was Executive Director and General Manager from 1999 to 2002 ▪ Executive Director of the Group since 2011 ▪ CFO since November 2010 Experience includes: ▪ AIB Govett Asset Management – Marketing Director 1992-1999 ▪ Royal Life Holdings Group ▪ Joined the Group as Actuary and Head of Group Technical Operations in October 2009 Experience includes: – Marketing Development Manager ▪ Sterling Insurance Group 1990-1992, Business Planning Manager – Life Director and Chief Actuary 1988-1990. Committees: Nomination Committee. 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. Non-executive Interim Chair (to 30 September 2019) Appointed to the board: 1 February 2017 ▪ Non-executive Director of the Group from 29 March 2017. ▪ Interim Chair of the Group from 22 August 2018. Experience includes: ▪ London and Continental Partners LLP – Founding Partner 2016 ▪ Beckwith Asset Management - Director 1994-2016 ▪ Pacific Capital Partners – Director 2004 to present ▪ Jupiter Enhanced Income Trust – Director 1996-2009 ▪ River & Mercantile Investment Management – CEO 1994-1996 ▪ Robert Fleming Holdings Limited – Director 1988-1994 ▪ Jardine Fleming Holdings – Director 1983-1986. Committees: Remuneration Committee, Nomination Committee (Chair). 46 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Michael Howard Caroline Banszky Victoria Cochrane Executive Director Appointed to the board: 11 February 2014 ▪ Co-founded the Group in 1999, Executive Chair of the Group from 2001 until stepping down in October 2017 and becoming Executive Director. ▪ Founded ObjectMastery in Australia in April 1992 which developed the software underpinning Transact Experience includes: Independent Non-executive Director Senior Independent Non-executive Director Appointed to the board: 22 August 2018 Appointed to the board: 28 September 2018 Experience includes: Experience includes: ▪ 3i Group plc - Chair of Audit and ▪ Euroclear Bank SA/NV – Non-executive Compliance Committee 2014 to present Director 2016 to present ▪ Gore Street Energy Storage Fund plc ▪ Perpetual Income and Growth – Chair of Audit Committee 2017 to Investment Trust plc – Non-executive present Director 2015 to present ▪ The Open University – Member of the ▪ HM Courts and Tribunal Service Investment Committee 2016 to present – Non-executive Director 2014 to ▪ The Law Debenture Corporation plc present – Chief Executive 2002-2016 ▪ Bowater Industries Ltd ▪ Norwich Union Life Insurance ▪ SVB Holdings PLC (now Novae Group – Non-executive Director 2014-2017 – responsible for marketing and plc) - COO 1997-2002 ▪ Gloucester Insurance Ltd administration of investment funds ▪ N M Rothschild & Sons Limited – Non-executive Director 2008-2013 including the launch of the platform – Finance Director 1995-1997 ▪ Ernst & Young (Global) – Global Navigator in 1990 ▪ Touche Ross – Audit division in Melbourne office Committees: – Executive Board Member 2008-2013 ▪ Ernst & Young (NEMIA and UK) – Executive Board Member 2006-2008 1984-1986, in London office 1980- Audit and Risk Committee (Chair). 1984. Committees: Audit and Risk Committee, Nomination Committee. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 47 GOVERNANCE continued Richard Cranfield Neil Holden Independent Non-executive Director (Chair from 1 October 2019) Appointed to the board: 26 June 2019 Experience includes: ▪ Allen & Overy LLP Independent Non-executive Director Appointed to the board: 11 February 2014 Experience includes: ▪ Stanbic International Insurance Limited – Non-executive Director 2003 to present – Partner 1985 to present ▪ Crocus Home Loans Limited Committees: Nomination Committee. – Non-executive Director 2014 to present ▪ Saffron Building Society – Non-executive Director 2014 to present ▪ Albaco Limited – Non-executive Director since 1 October 2018 to present ▪ Sberbank CIB (UK) Limited – Non-executive Director since 1 October 2018 to present ▪ Calmindon Limited – Director 2010-2017 ▪ Bank of London and The Middle East Plc – Non-executive Director 2006-2018 ▪ 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: Audit and Risk Committee, Remuneration Committee (Chair). Robert Lister Independent Non-executive Director Appointed to the board: 26 June 2019 Experience includes: ▪ Credit Suisse Asset Management (UK) Limited – Non-executive Director 2012 to present ▪ Investec Wealth and Investment Limited – Non-executive Director 2010 to present ▪ Aberdeen Smaller Companies Income Trust PLC – Director 2012 to present ▪ The Salvation Army International Trustee Company – Director 2016 to present ▪ Rensburg Sheppards PLC – Director – 2008-2010 ▪ Dresdner Kleinwort Wasserstein –1998-2008 ▪ Barclays de Zoete Wedd – 1983-1998 Committees: Audit and Risk Committee Richard Cranfield and Robert Lister were appointed Non-executive Directors on 26 June 2019. All other directors were in office throughout the financial year up to the date of the report. 48 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Statement of compliance The Code sets out the principles and provisions relating to good governance of UK listed companies and can be found on the Financial Reporting Council (“FRC”)’s website at www.frc.org.uk The following report sets out how the company has complied with the provisions of the Code, and an explanation of any areas of non- compliance. The areas of non- compliance comprise the following: 1. The non-executive directors did not undertake an evaluation of the Interim Chair of the board. Further explanation is set out in the board effectiveness review below; 2. The Remuneration Committee composition does not comply with the Code. Detailed reporting on remuneration, and the composition of the Remuneration Committee, can be found in the Directors’ Remuneration Report on pages 60 to 78. CORPORATE GOVERNANCE REPORT Introduction The Group’s corporate governance arrangements reflect the standards of practice required by the 2016 UK Corporate Governance Code (“Code”) in relation to the management of the Group and are designed to: ▪ Promote long term sustainable success of the company, 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 necessary disclosures to stakeholders to make a meaningful analysis of the Group’s business activities and its financial position. Throughout the year IHP has complied with the principles and the provisions recommended by the Code as set out in the Statement of Compliance below. IHP is considering the application of the new 2018 Code, which has applied to the company since 1 October 2019, and will explain any areas of non- compliance in the financial year 2020 Annual Report. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 49 GOVERNANCE continued Board composition The company has three executive directors and six independent non-executive directors (including the Chair) and therefore complies with the Code in respect of board composition. Board and committee meetings and attendance The board met eight times, in accordance with its terms of reference. Eligibility to attend, and attendance, by each member of the board as at 30 September 2019 is set out below. Board Meetings Audit and Risk Committee Nomination Committee Remuneration Committee Eligible Attended Eligible Attended Eligible Attended Eligible Attended Caroline Banszky Victoria Cochrane Richard Cranfield Neil Holden Michael Howard5 Robert Lister Christopher Munro Alexander Scott Ian Taylor 1 Chair 8 8 1 8 8 1 81 8 8 7 7 1 7 4 1 7 8 8 71 7 - 7 - 12 33 - - 7 7 - 7 - 1 3 - - - 6 14 - - - 61 - 6 - 6 1 - - - 6 - 6 - - - 51 - - 5 - - - - - 5 - - 5 - - 2 Mr Lister joined the A&RC on 4 September 2019 3 Mr Munro stood down from the Audit and Risk Committee in March 2019 in accordance with the requirements of the Corporate Governance Code 4 Mr Cranfield joined the Nomination Committee on 3 September 2019 5 Mr Howard was unable to attend the board meetings relating to the approval of the staff share plan awards, the interim results and to the preparation for the AGM due to the timing of board meetings and his residence in Australia. Note to the table: Mr Howard and the non-executive directors did not attend the board meeting on 22 January, the sole purpose of which was to set the date of the Annual General Meeting. 50 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 The role of the board Board leadership The board is responsible for leading and controlling the company and has overall authority for the management and conduct of the Group’s business, strategy and development. The board is also responsible for ensuring the maintenance of a sound system of internal controls and risk management (including financial, operational and compliance controls) and for reviewing the overall effectiveness of systems in place as well as for the approval of any changes to the capital, corporate and/or management structure of the Group. The board promotes the long term success of the company and the Group and ensures effective operational management and strategic development of the proposition, having due regard to all stakeholders including safeguarding of its clients’ interests. To achieve these goals the board: ▪ Ensures the company acts within the articles of association; ▪ Ensures that the company and the Group implements good management policies and practices to ensure that the company and the Group are managed in an accountable, efficient and effective manner; ▪ Considers and scrutinises advice and reports from the executive and, where appropriate to the company and Group, matters escalated by the committees; ▪ Reviews and approves the Annual Report and Financial Statements, half-yearly reports and quarterly financials for the company on a stand-alone basis and on a consolidated basis in relation to the Group; ▪ Ensures the company and the Group as a whole remains compliant with all applicable statutory standards, rules and guidelines; ▪ Considers recommendations from the Nomination Committee and approves appointments to the board; ▪ Approves the remuneration arrangements for non-executive directors; and ▪ Approves the appointment of any providers of outsourced services to the company or Group and considers reviews of their performance. Relations with shareholders The board maintains close relationships with the company’s institutional shareholders through periodic meetings with the executive directors. Board members receive copies of analysts’ and brokers’ reports on the company along with a quarterly Investor Analytics report which details the top shareholders, shareholder history, top buyers and sellers, market analysis and share price performance to aid familiarity with details of shareholdings. The CEO and CFO hosted shareholder roadshows at which the company’s half year and annual results were presented to institutional investors invited by the company’s brokers. The company secretarial and investor relations functions engage with private shareholders, providing support and information as required whilst the company’s registrar provides a range of shareholder services. The Chair, senior independent non-executive director and other non-executive directors are available for consultation with shareholders upon request and will attend and be available for questions at and after the Annual General Meeting (“AGM”), further details of which will be sent out in the Notice of AGM. Independence The Code recommends that at least half of the board of directors of a UK listed company, excluding the Chair, should comprise non-executive directors determined by the board to be independent in character and judgement and free from relationships or circumstances which may affect, or could appear to affect, this judgement. Taking into account the provisions of the Code, the board has considered the independence of each of the non-executive directors and has determined that all are “independent non-executive directors” within the meaning of the Code. Neil Holden was appointed to the board of Integrated Financial Arrangements Ltd (“IFAL”) in 2011. IFAL is the Group’s main operating company and was the Group’s parent company until the incorporation of IHP in 2014. As a result, Neil Holden has been appointed to the board of the Group’s ultimate parent company for a total period of nine years. In the light of this, and when reviewing Neil’s independence, the board gave particular consideration to whether his long standing relationship with the executive directors had in any way impacted factors such as his ability to ask challenging questions, insist on high quality responses and remain aligned with the interests of shareholders. The board found that Neil continued to exhibit a robust approach and maintained an independent viewpoint. The board also considered the need to strike an appropriate balance between continuity of experience and succession. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 51 GOVERNANCE continued The board considers and, if appropriate, authorises any conflicts or potential conflicts of interests of directors and imposes any limitations, qualifications or restrictions as required. Additionally, when making new appointments, the board takes into account other demands on directors’ time. Significant commitments are disclosed with an indication of time involved and any additional external appointments must be approved in advance by the company. The board has reviewed the other commitments of the non-executive directors and concluded it is satisfied that the non-executive directors remain able to commit sufficient time to the company’s business. Committees There are three committees of the board: Audit and Risk; Nomination; and Remuneration. The Remuneration Committee and the Audit and Risk Committee are wholly non-executive committees and the members are all independent non-executive directors. The Chair of the board is a member of, and chairs, the Nomination Committee. The other member of the Nomination Committee is the CEO. The membership and terms of reference of these board committees are reviewed annually and are available on the company’s website (www.integrafin.co.uk) or on request from the Company Secretary. Neil’s skills and attributes continued to allow him to make valuable contributions to the board and his experience provided continuity in the light of the recent appointments of two new non-executive directors. The board concluded that Neil Holden remained an independent director and a valued member of the board. The Code recommends that a Chair should meet the independence criteria set out in the Code on appointment. The board has concluded that both the outgoing Chair, Christopher Munro and the incoming Chair, Richard Cranfield, are independent for Code purposes. Mr. Cranfield’s other commitments are listed in his biography and the company has concluded these do not affect his ability to undertake the role. Any significant commitments must be disclosed to the board as and when they arise for consideration. 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. 52 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 FTSE350 companies are required by the Code to have an externally facilitated board effectiveness evaluation at least every three years. The company will ensure this is done in 2020. Election and re-election of directors The company’s articles of association require all existing directors to retire from office at each AGM and be eligible for re-election. As non-executive directors appointed since the last AGM, Richard Cranfield and Robert Lister will be standing for election at the next AGM. Annual General Meeting The AGM provides shareholders with an opportunity to communicate with the board both formally during the AGM and informally afterwards. Notice of the AGM will be sent in accordance with the Companies Act 2006 and made available on our dedicated shareholder website www.integrafin.co.uk/ shareholder-information along with any other relevant documentation. By order of the board, Christopher Munro Interim Chair 17 December 2019 Matters reserved for the board The board is the main decision making and review body for the company. It determines the overall strategic direction of the company and is responsible for the overall management of the company and the business operations for its subsidiaries. The board’s remit is documented in its terms of reference which include details of matters reserved for the board and matters delegated by the board. The terms of reference are reviewed and updated annually. Matters which are reserved for the board include strategy and management, structure and capital, financial reporting and controls, internal controls, contracts, communication, board membership and appointments, remuneration and corporate governance matters. The board makes decisions as to the delegating of matters to committees of the board and the management team. Matters which are delegated to the management team include changes to the company’s management structure and the approval of resolutions and corresponding documentation to be put to shareholders at general meetings. Setting the business model and strategy The board retains responsibility for the overall management of the company and approval of any long-term objectives of the company. A review of performance against the company’s strategy, objectives, business plans and budgets is considered at each board meeting. Maintaining oversight of the company’s operations, ensuring competent and prudent management, sound planning, an adequate system of control, adequate accounting in addition to reviewing any significant risks faced by the company and establishing and maintaining risk management systems in co- ordination with the Audit and Risk Committee ensures the company fulfils its business objectives. The board also retains responsibility for considering the balance of interests between shareholders, employees, customers and the community. Board effectiveness review - 2019 The board conducts an annual evaluation of its own effectiveness and that of individual board members. The evaluations are based upon data gathered in a questionnaire and are designed to review performance against the matters delegated in the terms of reference. The findings and any action points arising are discussed and addressed. Each board member is responsible for identifying training appropriate to their needs, and the non-executive directors maintain individual annual training logs. The non-executive directors did not undertake a review of the interim Chair during the annual evaluation process. The purpose of the evaluation is to appraise the performance of the Chair over the financial year and to provide feedback to the Chair with a view to continuous improvement. Given that the company has identified and appointed a new Chair who assumed the role at the commencement of the new financial year, the board concluded that an appraisal of the interim Chair was not necessary. The effectiveness of the board and its committees; the experience, independence and knowledge of the directors; the diversity of the board; how the board works together; and other factors relevant to its effectiveness were all considered as part of the performance evaluation. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 53 GOVERNANCE continued AUDIT AND RISK COMMITTEE REPORT Statement from the Chair of the Audit and Risk Committee I am pleased to present the Audit and Risk Committee’s report for 2019. The report sets out committee governance and the work the committee has undertaken this year. We meet at least four times each year, in line with the company’s governance schedule. We met six times during this financial year and maintained focus on the Group’s risk management internal controls and accounting procedures, to ensure there are continuing, appropriate levels of external and internal audit and risk assessment to cover all material controls, including financial, operational and compliance controls. We undertook an effectiveness review of the external auditor in August. We discussed performance and the FRC’s Audit Quality Inspection on BDO LLP (BDO)’s audit of IHP for the year ended 30 September 2018, and have concluded that actions suggested by BDO address the FRC’s findings. There were a number of business critical audits undertaken throughout the year by the internal audit team, and we discussed and commented on the findings, requesting follow up actions where necessary. The audits included Group adherence to the Code, Group adherence to GDPR, corporate culture, cyber security controls, and Group business continuity plans. The CEO, CFO, Group Counsel and the Group Head of Internal Audit were routinely invited to and attended the majority of committee meetings, although the committee reserves the right to request any of these individuals to leave the meeting. The Group’s external auditor, BDO, also attended specific committee meetings for external audit planning and reporting purposes. I met privately with the CFO, Head of Internal Audit, external Audit Partner and Head of Assurance at BDO to discuss issued reports and relevant financial reporting and regulatory developments. Caroline Banszky Chair, Audit and Risk Committee 17 December 2019 54 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Governance Committee membership during the year Name Date of appointment Caroline Banszky – Appointed Chair 02 February 2019 22 August 2018 Neil Holden Victoria Cochrane Robert Lister 22 August 2018 28 September 2018 04 September 2019 Composition of the Audit and Risk Committee All members of the committee, including the Chair, are independent non-executive directors. In adherence with the Code both the Audit and Risk Committee Chair and Neil Holden have recent and relevant financial experience, and are also qualified accountants. On an on-going basis, membership of the committee is reviewed by the Chair of the committee, in collaboration with the Nomination Committee, and any recommendations for new appointments are made to the board. The Group also provides initial and on-going training for committee members to support them in carrying out their duties effectively. Role of the Audit and Risk Committee The purpose of the committee is to provide oversight and advice to the IHP board and it has overall responsibility for the risk management and internal control processes of the Group. This aids the board of IHP in fulfilling its responsibilities of: presenting a fair, balanced and understandable assessment of the Group’s position and prospects; and, establishing financial and operational controls and risk management across IHP and the companies within the Group. 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 on the steps to be taken. The role and responsibilities of the Audit and Risk Committee are set out in its terms of reference, which can be found at www.integrafin.co.uk/ corporate-governance/ INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 55 GOVERNANCE continued The committee’s work through the year Risk management ▪ Oversight of the risk management framework and its effectiveness in relation to IHP, and on how Group companies have implemented the framework. ▪ Review and challenge of Risk Reports provided by the Head of Actuarial and Risk for IHP, and consideration of the progress of management action taken in order to address management points raised on IHP specific risks. ▪ Assurance was sought from the Chair of the IFAL Risk Committee that management points raised have been addressed through appropriate management actions. ▪ Assistance to the board in maintaining an appropriate culture within the Group which emphasises and demonstrates the benefits of the risk-based management of the Group. ▪ Consideration of the points escalated from the Group company boards or committees which affect IHP, or which may affect the Group as a whole. Financial reporting ▪ Consideration of the consistency of accounting policies and the financial reporting process. ▪ Review of the key accounting and financial risks and the steps taken by management to address them. Further information on the key financial and non-financial risks can be found on page 36. ▪ Review of the External Auditor report. The report confirmed that the External Auditor found no issues with non-compliance with Group accounting policies, and that there has been no material change to accounting policies during the financial year. Internal audit effectiveness and reporting ▪ Receipt and challenge of internal audit reports at each committee meeting. The reports detail audits of IHP recently completed, including the co-sourced IT Audit, and any control recommendations made to management, and management response; ▪ Review of all formal internal audit reports escalated by the IFAL Audit Committee, or activities within other companies in the Group, which represent a significant risk to the Group as a whole. ▪ Review and challenge of the ▪ Approval of the Group Internal Audit financial reporting undertaken by the Group, with input and support from the Group’s external auditor. ▪ Review of the Annual Report and Financial Statements, half-yearly reports, interim management statements and other formal announcements relating to financial performance. ▪ Review of and recommend the Annual Report to the board with an emphasis on ensuring that the report is fair, balanced and understandable. Plan including specific areas of review on matters relating to IHP. ▪ Receipt of updates from the Chair of the IFAL Audit Committee on the management actions in response to the findings and recommendations of internal audit reports. ▪ Assurance sought annually on the adequacy and security of the Group’s arrangements for employees and contractors to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters. 56 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 ▪ The committee reviewed the Whistleblowing Policy and the framework for reporting, and confirmed that they are appropriate to the Group structure and organisation. Committee self-evaluation The Audit and Risk Committee has conducted a self-assessment of its own effectiveness, as well as an evaluation of the Chair in the period, and was satisfied with the results achieved and has agreed actions where improvements were suggested. ▪ Assurance sought that these arrangements allow proportionate and independent investigation of such matters and appropriate follow up action. ▪ Receipt of reports on matters relevant to the financial reporting processes including assurances on internal controls, processes and fraud risk. ▪ Based on the scale and focus of the work conducted by Internal Audit during the year, and the committee’s annual and ongoing review and ongoing discussion of the audit approach, work and findings, the committee concluded that the Internal Audit function is working effectively and independently and that the team is appropriately qualified and staffed. Effectiveness and independence of the external auditor ▪ Monitoring of the external auditor’s independence, objectivity and compliance with ethical and regulatory requirements. company intends to do so during the financial year 2020. The committee concluded that it is satisfied with the performance and effectiveness of BDO and has concluded that BDO continues to display the necessary attributes of independence and objectivity. The company is in compliance with the requirements of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, in the year ended 30 September 2019. ▪ Non-audit fees comply with the Group’s non-audit services policy, and are disclosed in note 7. In addition, KPMG provide audit services to the company’s life company subsidiaries, ILUK and ILInt. ▪ The FRC performed an Audit Quality Inspection on BDO’s audit of IHP. The findings from the FRC have been addressed by BDO and agreed by the Group. ▪ Making recommendations on Whistleblowing appointment, reappointment and removal of external auditors to the board to be put to shareholders for approval at the AGM. ▪ Review of the external auditor’s remuneration and whether fees for audit and/or non-audit services are appropriate. ▪ There are no contractual or similar obligations restricting the Group’s choice of external auditor, and IHP’s external auditor, BDO, has confirmed that it remains independent. BDO has been Group auditor for nine years, and company auditor since its incorporation. Given that public interest entities are required to put the external audit contract to tender at least every ten years, and BDO has been appointed for nine years, the ▪ The company encourages employees to raise their concerns within the existing line management structure but, recognising that not all concerns can be effectively managed through those channels, the company also provides the means for confidential reporting of concerns by contacting any of three nominated internal individuals who will investigate the issues raised. The company provides for employees to make anonymous reports of suspected wrongdoing by way of an email tool. ▪ Mr Holden, as a member of the Audit and Risk Committee, is a key contact in the Whistleblowing Policy and fulfils the role of “whistleblower’s champion” under the Senior Managers’ Regime. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 57 GOVERNANCE continued NOMINATION COMMITTEE REPORT Statement from the Chair of the Nomination Committee I am pleased to present the Nomination Committee’s report for 2019. The primary purpose of the committee is to develop and maintain a formal, rigorous and transparent procedure and to lead the process for board and committee appointments and reappointments, including making recommendations to the board. To achieve optimal composition of the board, the committee has regard to the board’s size and composition, the extent to which skills, experience and attributes are represented and the need to maintain high standards of corporate governance. We meet at least once a year in accordance with the company’s governance schedule and the committee’s terms of reference. We met four times during the financial year and a key aspect of our work was the consideration of the appointment of a new Chair of the board. In accordance with the provisions of the Code, this process was led by the senior independent non-executive director. We also reviewed the composition of the board to ensure that the necessary skills, knowledge and experience were available. In doing so, we considered the successful achievement of the company’s long-term objectives whilst taking into account relevant regulatory requirements, market conditions and value for money. In searching for a new Chair, we evaluated the composition of the board, and we recommended that the board appoint two non-executive directors during this financial year. In June, Richard Cranfield and Robert Lister were appointed and Mr Cranfield was subsequently appointed to the Nomination Committee in September. To facilitate the search for a new Chair, the company used Nurole Ltd. Nurole Ltd does not have any other connection with the company or any director. We have considered succession planning for the board members and the members of the senior management team and made recommendations to the board which will ensure orderly succession to both the board and senior management positions. As set out in his review on page 6, Ian has decided to step down from the role of CEO during 2020. We have considered the plans for the transition of the role of CEO and assured the board that those plans will provide for the continuation of appropriate expertise on the board. In all our activities we give due consideration to laws and regulations, the provisions of the Code, the requirements of the UK Listing Authority’s Listing, Prospectus and Disclosure Guidance and Transparency Rules and any other applicable rules, as appropriate. Christopher Munro Chair, Nomination Committee 17 December 2019 58 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Governance Committee membership during the year The members of the Nomination Committee at 30 September 2019 were: Name Date of appointment Christopher Munro (Chair) 02 February 2018 Ian Taylor Victoria Cochrane Richard Cranfield 19 January 2018 28 September 2018 1 August 2019 Role of the Nomination Committee The role and responsibilities of the Nomination Committee are set out in its terms of reference which can be found at www.integrafin.co.uk/ corporate-governance/ Composition of the Nomination Committee In adherence with the Code, the majority of members of the Nomination Committee are independent non-executive directors. The Chair of the board chairs the committee. However, he does not chair when the committee is dealing with nominating a successor to the Chair. The Group also provides initial and on-going training for committee members, to support them in carrying out their duties effectively. This is delivered by in-house technical staff, through the attendance at formal conferences as required, and an in-house training programme. The committee’s work through the year Board appointments ▪ Identified potential candidates for the position of Chair of the board, undertook a selection process and made recommendations to the board. ▪ As part of that selection considered the skills and attributes required in a chair, the diversity of skills within the current board composition, the culture of the business and the strategic direction that the company wishes to take. ▪ Considered a range of candidates from a diverse demographic background with differing skills and experience, shortlisted with the help of an external search agency. ▪ Identified a candidate for Chair of the board. ▪ Identified a candidate who was recommended for the position of non-executive director of the board. ▪ Provided the board with sufficient information to enable the board to assure itself that appropriate succession plans are in place to ensure the ongoing skills, expertise, stability and diversity of the board. Diversity When reviewing the composition of the board and considering the appointment of the Chair and non-executive director the committee: ▪ Considered the diversity of board members and, when possible, recommended appointments with a view to achieving a balance of skills with diversity. ▪ Considered the benefits of all aspects ▪ Reviewed the composition of the of diversity. board committees and made recommendations regarding further appointments. ▪ Considered the independence of the non-executive directors and made recommendations to the board. Succession planning ▪ Reviewed the succession plans in place for the board and senior management team. Considering the succession plans for the CEO of the company and the orderly communication thereof. ▪ Considered all candidates on merit against objective criteria with due regard to the balance of skills and experience and the benefits of diversity on the board. Committee self-evaluation The Nomination Committee conducted a self-assessment of its own effectiveness as well as an evaluation of the committee’s chair in the period since formation and has agreed actions where improvements were suggested. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 59 GOVERNANCE continued DIRECTORS’ REMUNERATION REPORT Statement by the Chair of the Remuneration Committee Remuneration overview On behalf of the board, I am pleased to present the Directors’ Remuneration Report for the year ended 30 September 2019. We were delighted to receive a vote of 98% for both our remuneration policy and our remuneration report at the 2019 AGM. During the coming year we will be reviewing our remuneration policy in the context of the new UK Corporate Governance Code which applies from 1 October 2019. Given the recent focus on pensions, it is worth noting that, while executive directors are eligible to receive the same level of pension contribution as all employees, the current employer contributions in respect of executive directors’ pensions are less than 4% of salary. The minimum employer contribution available to all employees in 2019 was 9% (or higher where employees make additional salary sacrifice). We also reviewed the UK Government changes to reporting regulations and chose voluntarily to disclose the CEO pay ratio in this year’s report. Since my 2018 report, Transact has expanded and, as at 30 September 2019 has 179,500 client investment portfolios, £37.80 billion of FUD and just under 500 staff across the Group companies. We continued to retain a loyal work force, with more than 27% of our staff having been with the Group for longer than 10 years. It remains one of our key principles to create, maintain and improve value provided to our principal stakeholders - customers, shareholders and employees. Whenever possible we are committed to sharing profits between all three of these stakeholders, and we believe all three should benefit from any of the Group’s activities. Against this background we take a very distinctive approach to remuneration. The key features of our reward framework are as follows: ▪ Base salary – Our remuneration is structured so the level of base salary represents a sufficiently high proportion of the total remuneration, so employees are not required to maximise their income through significant variable remuneration awards. ▪ Relatively modest additional incentives – Above basic salary, our maximum total additional incentive opportunity is only 100% of salary per annum. Ordinarily, we do not expect total annual variable remuneration awards to exceed 65% of salary. ▪ Distinctive approach to performance measurement – We do not have mechanical performance targets which apply to variable pay awards, because we believe that applying formulaic measures can lead to undesirable behaviours and/or outcomes. Instead, the committee exercises independent judgement and discretion when authorising remuneration outcomes, taking into account company and individual performance. Our performance measurement framework considers at least four “quantitative anchors” – profitability, stakeholder outcomes, risk and regulation and strategy delivery. ▪ Alignment with wider workforce – Our approach to remuneration for executive directors is consistent with that for all employees. Our incentive structure is aligned across the workforce and all employees are made awards under the same performance 60 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 framework. The pension policy for executive directors is equivalent to that of the workforce and at 1.25% for the CEO and 3.8% for the CFO, the actual employer pension contributions made in respect of executive directors are well below the 9% of salary contribution available to all employees. Employees (including the executive directors) may elect to sacrifice their remuneration and receive additional employer contributions. Our current pension arrangements therefore align with the new Corporate Governance Code. ▪ The Group’s deferred bonus Performance Share Plan 2018 has a maximum award opportunity of 33% of salary. ▪ We do not operate a long-term incentive plan, as we believe long- term targets have the potential to drive inadvertent behaviours. ▪ For executive directors, we reference performance against four key areas – financial, stakeholder, risk and regulation and strategy, taking a holistic approach to reviewing performance. ▪ Share ownership – Our executive ▪ We operate an HM Revenue & directors are significant shareholders in the company and all staff with the required accrued service are invited to become shareholders by way of the all staff Share Incentive Plan (SIP) which we are delighted to report has, during financial year 2019, had a 100% uptake for Free Shares and 82.7% for Partnership and Matching shares. The company was nominated for New Share Incentive Plan of the year at the ProShare awards in recognition of the outstanding take up of the scheme. The Group launched the parallel plan for all eligible employees in Australia towards the end of the year, with all employees able to participate on terms as close as possible to the UK scheme. The Group also operates a discretionary deferred bonus share option scheme which is open to all employees, at the discretion of the Remuneration Committee or the CEO. In financial year 2019 awards were made to all members of the management team both in the UK and Australia. In summary, we believe in simple and transparent reward linked to Group success and personal performance and delivered in a way that does not drive undesirable behaviours or encourage excessive risk taking: Customs tax-advantaged Share Incentive Plan (SIP) for UK and Isle of Man employees, as well as a parallel scheme for our Australian employees. We believe our distinctive approach to remuneration supports both the objectives of the Group, our shareholders and our other stakeholders and is aligned to the key principles shared between us. Application of the Directors’ Remuneration Policy The Directors’ Remuneration Policy (“the Policy”), as set out on pages 60 to 76 of the Annual Report and Financial Statements for the year ended 30 September 2018, was approved at the company’s AGM held on 21 February 2019. The Policy will remain in force until the AGM in 2022, unless the board proposes a new policy for shareholder approval. Directors’ salary and bonus awards were made in accordance with the Policy. Salary increases were broadly in line with all employee awards at 3.8% for the CEO and 3.8% for the CFO, compared to the award of 3.6% to all UK and IoM based staff. Directors’ bonuses were awarded within the parameters of the Policy. The CEO was awarded a cash bonus of 40% and a bonus award deferred into shares of 31%. The CFO was awarded a cash bonus of 30% and a bonus award deferred into shares of 30%. In making these awards the Remuneration Committee considered the quantitative anchors and in particular, the financial performance of the company over the financial year, the delivery of the business strategy, the impact of the reduction in charges to clients and maintenance of staff engagement as evidenced by the stable turnover levels. Taking into account investor proxy agency feedback we have sought to improve our annual bonus performance disclosure this year. We were delighted to welcome Richard Cranfield to the board as non-executive director and Chair-elect as well as Robert Lister as a non-executive director. Details of their remuneration can be found on page 78 of this report. Signed on behalf of the IHP Remuneration Committee. Neil Holden Chair of the IHP Remuneration Committee 17 December 2019 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 61 GOVERNANCE continued Governance Committee membership during the year The members of the Remuneration Committee at 30 September 2019 were: Name Date of appointment Neil Holden (Chair) Christopher Munro 19 January 2018 19 January 2018 Role of the Remuneration Committee The purpose of the committee is to review, set and agree aspects of the overall remuneration policy and strategy for the Group and the total compensation package for certain officers and employees within the Group. It does so with a view to aligning remuneration with the successful achievement of the Group’s long-term objectives while taking into account the Code, relevant regulatory requirements, market rates and value for money. The Group monitors the list of employees who are considered to be Code Staff by reference to the Financial Conduct Authority (FCA) Remuneration Code. To the extent that the committee does not approve the remuneration of Code Staff individually, the committee considers whether the total reward for each Code Staff employee remains compliant with the provisions of the Remuneration Code. The committee is also responsible for reviewing a remuneration policy statement (RPS) prepared by IFAL setting out how the UK regulated companies within the Group comply with UK regulatory requirements on remuneration. In all its activities, the committee gives due consideration to laws and regulations, the provisions of the Code, the requirements of the UK Listing Authority’s Listing, Prospectus and Disclosure Guidance and Transparency Rules and other applicable rules, as appropriate, and to shareholder feedback. Composition of the Remuneration Committee The Remuneration Committee composition does not currently comply with the requirements of the Code. The board intends to appoint Richard Cranfield as a non-executive member to the committee upon his appointment to the IFAL board, as a result of which the committee composition will comply with the Code provisions. The committee ensures that members take individual responsibility for identifying training appropriate to their needs and for keeping appropriate records of such training. Each committee member provides copies of their training record to the Company Secretary annually and undertakes all regulatory training requested by the Group. 62 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Committee meetings and attendance The Remuneration Committee meets at least twice annually and more frequently when required. The committee has met five times during this financial year. Attendance by each member of the committee as at 30 September 2019 is set out in the board and committee attendance table above. Only members of the committee have the right to attend committee meetings. However, other individuals such as the CEO, directors of subsidiaries, the Company Secretary, the Group Counsel, the Head of Human Resources and external advisers may be invited to attend for all or part of any meeting. The committee’s work throughout the year Awards ▪ Reviewing the appropriateness of the proposed annual staff pay award by reference to the RPS and the Remuneration Policy. ▪ Approving the proposed remuneration for the executive directors and senior managers. ▪ Approving the annual fee for the Chair of the board. ▪ Considering the appropriateness of remuneration for Code staff and the staff pay award. ▪ Reviewing and approving the making of PSP awards to executive directors and senior managers. ▪ Approving the establishment of the Share Incentive Plan and granting the 2018 Free Share Award and making an evergreen award of Partnership and Matching shares. Committee self-evaluation The Remuneration Committee conducted a self-assessment of its own effectiveness as well as an evaluation of the Chair in the period since formation, was satisfied with the results achieved and has agreed actions where improvements were suggested. The committee has performed its duties with a view to aligning remuneration with the successful achievement of the Group’s long-term objectives while taking into account the Code, relevant regulatory requirements, market rates and value for money. The committee has undertaken the following this financial year: Governance ▪ Reviewing the Remuneration Committee Terms of Reference to ensure their continuing appropriateness. ▪ Considering the membership of the committee and the provisions of the Code. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 63 GOVERNANCE continued Remuneration “at a glance” Element Operation Out-turns financial year 2019 and implementation in financial year 2020 Base salary Benefits1 Pension Annual bonus and deferred bonus award of shares ▪ Increases will take into account a number of factors including the scale of the role and the individual’s experience and wider workforce increases. The salary increase awarded was 3.8% for the CEO and 3.8% for the CFO which was broadly in line with the UK and IoM workforce increase of 3.6%. ▪ Includes, for example, death in service and private medical insurance. Salary with effect from 1 June 2019: ▪ CEO: £410,000 ▪ CFO: £270,000 Benefits for CEO and CFO comprise private healthcare. Overnight accommodation in London is provided for the CEO. ▪ The pension policy is equivalent to that of the wider workforce. CEO received a £5,000 pension contribution (1.3%). ▪ The CEO and CFO’s current pension arrangements are lower than those of the workforce. CFO received a £10,000 pension contribution (3.8%). ▪ Total maximum opportunity is ▪ Ordinarily, we do not expect 100% of salary. ▪ The committee retains flexibility to adjust the balance between cash and deferred bonus awards. ▪ The deferred bonus awards will usually vest on the third anniversary of the grant date. ▪ Deferred bonus awards granted under the company’s PSP are subject to malus and clawback provisions as described below. awards to be in excess of 65% of salary. ▪ The committee uses judgement and discretion when determining outcomes under the annual bonus and deferred bonus awards. ▪ Outcomes are made by reference to the four quantitative anchors - profitability; customer; risk and regulation and strategy delivery. ▪ For financial year 2019 the CEO was awarded a cash bonus of 40% and a bonus award deferred into shares of 31%. The CFO was awarded a cash bonus of 30% and a deferred share award of 30%. Executive directors are eligible to participate in the all-employee SIP on the same terms as all employees. All employee share incentive plan ▪ The plan is operated in line with HMRC guidance. 1 Directors are entitled to receive an employee discount on platform charges, in line with all employees. 64 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 2019 remuneration outcomes for our executive directors (audited) Cash bonus – £164k Deferred bonus – £128k Cash bonus – £81k Deferred bonus – £82k Total remuneration £751k £444k Ian Taylor, CEO Fixed – £459k Alexander Scott, CFO Fixed – £281k Directors’ Remuneration Policy The Directors’ Remuneration Policy was approved by ordinary resolution at the company’s AGM held on 21 February 2019 and can be found on pages 61 to 71 of the company’s Annual Report and Financial Statements for the year ended 30 September 2018, which is available in the Investor Information section of the company’s website www.integrafin.co.uk Statement of voting at the AGM The company remains committed to ongoing shareholder dialogue and takes a close interest in voting outcomes. The following table set out voting outcomes in respect of the resolutions relating to approving directors’ remuneration matters at the company’s AGM on 21 February 2019: Resolution Votes for / discretionary % of vote Votes against % of vote Approve the Remuneration Policy 182,328,173 Approve the Remuneration Report 182,738,516 98.19 97.98 3,365,297 3,768,710 1.81 2.02 Votes withheld 1,121,272 307,516 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 65 GOVERNANCE continued How the Policy was applied in financial year 2019 Summary of total remuneration – executive directors (audited) Director Ian Taylor Alexander Scott Michael Howard Gross Basic Salary Benefits Annual Bonus LTIP Pension Other2 Total Cash bonus Deferred shares Year 2019 2018 2019 2018 2019 2018 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 400 384 263 253 0 0 471 481 11 01 0 0 164 200 81 100 0 0 128 125 82 80 0 0 0 0 0 0 0 0 5 10 10 10 0 0 7 23 7 23 0 0 751 769 444 445 0 0 1 Benefits for Ian Taylor were £46,945 for 2019 and £48,407 for 2018 Benefits for Alexander Scott were £630 for 2019 and £497 for 2018 The difference is the value of overnight accommodation for Ian Taylor. 2 Other remuneration relates to Share Incentive Plan awards and the employee discount on platform charges. 3 In the 2018 report these figures were reflected in the Deferred Shares award. They have been separated out in this year’s report. Note to the table: Michael Howard receives nil remuneration from the company, but his employer, ObjectMastery Services Pty Ltd, receives a fee of AUD 80k for his executive appointment to IAD Pty, a company within the Group. The fee was reviewed in June 2019 and was increased from AUD 50k with effect from 1 July 2018 resulting in a backdated payment which adjusted the total fee paid in respect of the company’s 2018 financial year to AUD 57k. 66 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Base salary (audited) The basic annual salaries for Ian Taylor and Alexander Scott were reviewed in June 2019 in accordance with the company’s all-employee pay review resulting in the following changes to the annualised salary figures: Basic annual salary as at 1 June 2018 Salary effective as at 1 June 2019 £’000 £’000 395 260 410 270 Director Ian Taylor Alexander Scott Benefits The CEO is entitled to overnight accommodation in London during the working week. Otherwise, executive directors do not receive any benefits which are not available to all employees. Benefits for CEO and CFO comprise private health care and an employee discount on platform charges, in line with all employees. Incentives IntegraFin has a distinctive culture focussed on our principal stakeholders – customers, shareholders and employees. Our incentive structure has been developed to support this culture: ▪ Alignment across all staff - All staff are eligible for an annual cash bonus award. Our incentive structure is aligned across the workforce and all employees are made awards under the same performance framework. ▪ Modest incentive opportunity – Our maximum total variable remuneration opportunity for executive directors is only 100% of salary, and ordinarily in practice we do not expect awards to exceed 65% of salary. ▪ Deferred bonus awards – Part of the incentive award is in cash and part is in shares through deferred bonus awards. We maintain flexibility on the proportion of each. Deferred bonus awards is our preferred long-term alignment mechanism and we do not operate a long-term incentive plan, as we believe long-term targets have the potential to drive inadvertent behaviours. ▪ Our performance framework is also distinctive. We do not set predefined targets. Instead the committee considers qualitative and quantitative actual performance against at least four “quantitative anchors”: - Profitability - Stakeholder outcomes - Risk and regulation (including Environmental Social and Governance) - Strategy delivery We also consider individual performance. Within those broad categories the Remuneration Committee considers a wide variety of management information available to the board and its committees. The committee is not constrained by the metrics it places particular emphasis on as this can change year on year. The essence of the process is to use the metrics to arrive at a balanced judgement as to whether an award is warranted and, if so, at what level. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 67 GOVERNANCE continued Annual bonus (cash and deferred share) awards for financial year 2019 (audited) Director Cash award Deferred award Ian Taylor Alexander Scott £’000 £’000 164 81 40% of salary 128 31% of salary 30% of salary 82 30% of salary The cash and deferred award percentages are by reference to the basic salary on 30 September 2019. The bonus for the CEO and CFO are recommended by the board Chair and the CEO respectively, after consultation with board members. The Remuneration Committee members considered detailed information which covers factors such as financial performance, risk, compliance, conduct, internal controls, client and client adviser metrics, and delivery of strategy. This year, as in past years, the committee reviewed the board Chair’s and the CEO’s proposals in that context, and considered whether the executive directors had delivered appropriate stakeholder, financial and strategic performance, whilst also managing risk and maintaining internal controls. Each year the committee refers to the “quantitative anchors” described previously to frame that discussion and challenge. The approach to performance assessment is part of our distinctive approach to incentives, with relatively modest incentive opportunity and a structure which is aligned across the workforce. The committee believes that applying formulaic measures and targets can lead to undesirable behaviours and outcomes which are not in the interests of long term sustained performance. Instead, the committee exercises independent judgement and discretion when considering remuneration outcomes. For financial year 2019 the assessment of whether cash and deferred bonus awards were justified was in particular informed by the following metrics and performance in the year: 68 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Quantitative anchor (metrics and performance) Financial performance ▪ Costs and headcount well managed in a volatile market where growth of FUD is mainly from net inflows rather than market changes; ▪ Financial performance was delivered in the context of reduced platform fees from 1 March 2019; ▪ Dividend flow and distributable reserves/regulatory capital from subsidiaries to support group dividend managed effectively; and ▪ Improved financial performance in other metrics (net inflows, earnings per share, expense ratio, profit margin, share price and market cap) has also been delivered. Stakeholder outcomes Clients and advisers ▪ The business continues to maintain or improve its market share and achieve high standards of satisfaction with clients and their advisers; ▪ Market share has increased as set out in the Transact Business Model section of the Strategic Report; ▪ Transact is the top advised platform for net flows; ▪ Transact reduced its platform charges to clients on 1 March 2019 ensuring the clients share in the Group’s success. This aligns with a key principle of sharing profits between our key stakeholders - customers, shareholders and employees; ▪ High net promoter score which at 60% is the highest of all platforms; ▪ The Group received 4 awards during the financial year - Financial Adviser Service Awards: 5* Investment award; - Professional Adviser: Best Platform for Advisers (AUA over £20billion); - PLC Awards: New Company of the Year 2018; - Professional Paraplanner: Best Platform; ▪ Topped the Platforum User Leaderboard in September 2019; and ▪ Achieved top position in both the CoreData Investment Platform Study and the Investment Trends UK Adviser Technology & Business Report for the tenth year running. Employees ▪ Employees remain loyal and committed to the organisation with over 46% having service of more than 5 years and over 27% having service of more than 10 years; ▪ 100% of eligible employees took up the SIP free share award and 82.7% took up the Partnership Share award; ▪ The company has been shortlisted for an award for the best new share plan at the ProShare awards. Shareholders ▪ The company has distributed dividends in accordance with its dividend policy. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 69 GOVERNANCE continued Risk and regulation and ESG ▪ Implementation of SM&CR is on track to embed senior management accountability for customer outcomes; ▪ Complaint and error and fraud rates are low and stable; ▪ Internal Audit programme completed; ▪ Risks including regulatory compliance have been managed within appetite and minor risk appetite breaches have been promptly identified and addressed; and ▪ Inaugural culture audit completed, and confirmed business operating in accordance with board’s approved values and principles. The above achievements are also underpinned by the following: ▪ The company has early adopted some new Corporate Governance Code provisions and has made progress with regard to compliance with the remainder. ▪ From a risk appetite and conduct perspective the Group has shown appropriate adherence to internal, legal and regulatory policies, laws and rules and board reports demonstrate appropriate understanding and implementation of regulatory change projects; ▪ Monitoring, auditing and other assurance activities demonstrate appropriate attention to maintaining the internal control environment. Strategy delivery ▪ Continuous improvement in platform functionality for advisers and customers and resilience of core platform and associated services; ▪ The delivery of the Vertus project remains within plan and in accordance with forecast; The above achievements are also underpinned by the following: ▪ An assessment of the Group’s delivery of the Overriding Business Principles did not identify any material indicators that actions are taken outside of the Principles. Based on a holistic assessment of Group performance, including consideration of the quantitative anchors and in particular the 2019 outcomes set out in the table above; and individual performance, the committee granted Ian Taylor a cash bonus award equal to 40% of salary and a deferred bonus award of 31%. The committee granted Alexander Scott a cash bonus award equal to 30% salary and a deferred bonus award of 30% of salary. The deferred bonus award will be granted following the announcement of the Group’s annual results. Awards will vest after three years and will be subject to malus and clawback provisions as detailed in the Remuneration Policy. In certain circumstances the committee has the right to reduce or withhold the deferred bonus award. In determining the award for the CEO, the committee considered the performance of the Group in difficult market conditions and the extent to which the Group met its strategic objectives and exceeded the performance of the Group’s competitors. In the light of these factors the committee concluded that it was appropriate to make a total bonus award in excess of 65%. The committee is satisfied that the performance of the CEO and the Group as a whole justifies an overall award of 71%. 70 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 LTIPs Pension contributions Pension contributions for Ian Taylor and Alexander Scott are currently made by reference to the relevant personal allowance. In the 2019 performance year the employer’s pension contribution for Ian Taylor was £5,000 and for Alexander Scott was £10,000. In line with our remuneration principles, pension contributions for executive directors are aligned with those available to the wider workforce. The minimum employer contribution available to all-employees in 2019 was 9%. For employees other than executive directors the Group has made contributions to personal pension arrangements for those employees who have sacrificed salary. Whilst this benefit is available to executive directors, neither the CEO nor the CFO has sacrificed salary. In line with the Group’s approach to remuneration, no awards will be made to executive directors that are dependent on performance conditions relating to more than one year and no such award was made in financial year 2019. SIP Executive directors are able to participate in the SIP. The board may make an award to participants of Free Shares up to the value of 3% of salary or £3,600 (whichever is lower) and may permit participants to subscribe for Partnerships Shares up to the value of 1.5% of salary or £1,800 (whichever is lower). For every Partnership Share purchased, two Matching Shares were awarded. The £3,600 and £1,800 limits are set by applicable legislation and will be revised automatically in the event of any changes to the legislation. During financial year 2019, the maximum SIP award was granted to qualifying employees (including Ian Taylor and Alexander Scott). The Partnership and Matching Share Award was made on an evergreen basis and therefore all qualifying employees will be able to continue to participate in the plan unless it is revoked by the committee. Based on the Group’s performance in 2019 the board has not revoked that award. The board has considered the Group’s performance in financial year 2019 and, with the approval of the Remuneration Committee, has approved the making of a further maximum SIP Free Share award to qualifying employees (including Ian Taylor and Alexander Scott) when the company is not in a closed period. This will be following the announcement of the Group’s financial results. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 71 GOVERNANCE continued Percentage change in CEO remuneration compared to average employee The graph below shows the percentage movement in the salary, benefits and annual cash bonus for the Chief Executive between the current and previous financial year compared to that for the average Group employee. PERCENTAGE CHANGE IN CEO REMUNERATION COMPARED TO AVERAGE EMPLOYEE e g n a h c e g a t n e c r e P 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 26.8% 3.8% 3.6% -3.0% 1.1% -9.9% Salary Benefits Bonus CEO Average Employee The SIP scheme is provided to all staff, including executive directors, and is not included above. Notes to the table: The CEO received a lower annual bonus in 2019 and his accommodation costs were reduced. The average staff annual cash bonus was 18.4% in 2019 compared to 19.1% in 2018. Some employees received a deferred share bonus award. The table does not include salary and benefits movement for Australian employees as their employment benefit package differs from the UK staff package in recognition of different compensation and benefit rules in Australia. It has therefore been deemed inappropriate to include their remuneration in this comparison. 72 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 CEO pay ratio table The following table sets out the ratio of the CEO’s pay to each of the Group’s median, lower quartile and upper quartile pay for UK employees. Year Method 25th percentile pay ratio Median pay ratio 75th percentile pay ratio Financial Year 2019 Option A 18:1 15:1 10:1 The CEO pay ratios were calculated using “Option A”, set out in the Companies (Miscellaneous Reporting) Regulations 2018. Under this method, the full pay and benefits of each UK employee were used to identify those employees that represented the Group’s median, lower quartile and upper quartile pay for UK employees. The full pay and benefits of these employees were then used to calculate the ratios as at 30 September 2019. The Group elected to use “Option A” as its method of calculation as it felt that using the full pay and benefits of all employees was the most accurate method of identifying those employees that represented the Groups’ mean median, lower quartile and upper quartile pay for UK employees. To determine the full time equivalent pay and benefits of non-standard workers, part-time workers’ remuneration was grossed up to the equivalent full time pay. Executive director remuneration compared to wider workforce Our approach to remuneration for executive directors is consistent with that for all employees. ▪ Incentives - Our incentive structure is aligned across the workforce and all employees are made awards under the same performance framework. For more senior employees a portion is deferred into shares. ▪ Pension - For all employees the maximum company contribution available in financial year 2019 was 15.2%. Whilst executive directors are eligible to receive the same level as (but no more than) all employees, the pension currently provided to executive directors is less than 4% of salary, considerably lower than the pension provided to the workforce. ▪ SIP - All employees receive SIP shares based on company performance. This year the maximum of 3% of salary (up to a maximum of £3,600) was awarded, with additional partnership and matching shares available. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 73 GOVERNANCE continued Relative importance of spend on pay The following table sets out the percentage change in profit, dividends paid and overall spend on pay in the year ending 30 September 2019, compared to the year ending 30 September 2018. 2019 £’000 2018 £’000 Percentage Change IFRS profit after tax 40,147 32,906 Dividends 29,8072 30,7801 Employee remuneration costs 30,233 28,646 22.0% -3.1% 5.5% 1 Full year interim dividend plus pre-IPO special dividend 2 Full year interim dividend plus half year interim dividend Payments to past directors There were no payments to past directors Payments for loss of office There were no payments for loss of office 74 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Share awards made during the year (audited) Type of interest awarded Basis on which award made 1 2 Ian Taylor Deferred bonus Conditional share award SIP Free Shares Partnership Shares Matching Shares Alexander Scott Deferred bonus Conditional share award SIP Free Shares Partnership Shares Matching Shares 33% salary less award of SIP Free and Matching shares 3% (Free and Matching shares) of Salary subject to maximum of £3600 each per annum pro-rated for the period that the company was listed and 1.5% (for Partnership Shares) subject to a maximum of £1800 per annum 33% salary less award of SIP Free and Matching shares 3% (Free and Matching shares) of Salary subject to maximum of £3600 each per annum pro-rated for the period that the company was listed and 1.5% (for Partnership Shares) subject to a maximum of £1800 per annum Face value awarded3 Percentage receivable for minimum performance Number of shares awarded End of deferral period 19/12/18 £124,252.32 100% 45,681 19/12/21 03/01/19 £2,101.20 100% 21/01/19 £1,352.96 680 (Free) N/A4 21/01/19 £2,705.92 19/12/18 £79,845.60 100% 29,355 19/12/21 03/01/19 £2,101.20 100% 21/01/19 £1,353.96 680 (Free) N/A4 21/01/19 £2,705.92 1 Deferred share awards form part of the annual incentive, for which awards were determined based on performance to 30 September 2019. 2 SIP Free Share awards were determined based on Group performance to 30 September 2018. SIP Partnership and Matching awards are loyalty awards and were granted in January 2019 and will continue unless revoked by the Remuneration Committee. 3 The face-value of the deferred bonus share award is calculated using average share price from 14/12/2018 to 18/12/2018 which was £2.72. The face value of the Free Shares is calculated using the share price paid by the SIP administrator on the date of purchase which was £3.09. The face value of the Partnership and Matching Share award is calculated using the total number of Partnership and Matching Shares bought on behalf of the relevant individuals during the financial year and an average share price for matching share purchases. 4 The SIP is operated in line with HMRC guidance. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 75 GOVERNANCE continued Shareholding requirements and Directors’ share interests No share awards other than the all staff Share Incentive Plan and the deferred bonus Performance Share Plan share award were awarded to executive directors during the financial year. There are no minimum shareholding requirements in place for the company’s directors. Director/ Connected person 1p ordinary shares SIP Shares Deferred bonus share Scheme (no performance conditions) Vested but unexercised Options exercised Shares held at 30.09.2019 Total Shares held at 30.09.2018 Total Ian Taylor Michael Howard Alexander Scott Christopher Munro Neil Holden Caroline Banszky Victoria Cochrane Richard Cranfield Robert Lister 12,805,258 206,8741 45,681 50,038,247 0 0 1,148,260 1,774 29,355 1,426,324 15,000 7,500 0 10,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 13,057,813 12,805,258 0 0 0 0 0 0 0 0 50,038,247 50,038,247 1,179,389 1,148,260 1,426,324 1,426,324 15,000 7,500 0 10,000 0 0 0 0 - - 1 Includes 205,100 shares held in the company’s 2005 Share Incentive Plan prior to the IPO 76 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Shareholder return performance graph and CEO pay over the same period This graph shows the company’s total shareholder return performance from Admission to 30 September 2019. The company has chosen to show total shareholder return against the FTSE 250 total return over the same period, as the board considers this to be the most appropriate comparator. Total shareholder return performance vs FTSE250 since 2 March 2018 IHP vs FTSE250 Total return 160 150 140 130 120 110 100 90 80 70 60 e g n a h c e g a t n e c r e P 8 1 0 2 / 3 0 8 1 0 2 / 5 0 8 1 0 2 / 7 0 8 1 0 2 / 9 0 8 1 0 2 / 1 1 9 1 0 2 / 1 0 9 1 0 2 / 3 0 9 1 0 2 / 5 0 9 1 0 2 / 7 0 9 1 0 2 / 9 0 IHP FTSE 250 TR The following table shows the Chief Executive Officer’s remuneration for financial year 2019: CEO remuneration CEO single figure of remuneration Annual bonus payout (as a % of maximum opportunity) LTIP vesting out-turn (as a % of maximum opportunity) 2019 2018 £751k £769k 71% 82%1 N/A N/A 1 At the point of the 2018 award the annual bonus was operated on an uncapped basis. In order to facilitate comparison, the current 100% of salary cap has been applied retrospectively. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 77 GOVERNANCE continued Chair and non-executive director remuneration (audited) There has been no increase to the remuneration paid to the Chair and non-executive directors during the financial year. In respect of the financial year ending 30 September 2019 the amounts are as follows. Element of remuneration by director Christopher Munro Neil Holden Caroline Banszky Victoria Cochrane Richard Cranfield Robert Lister Year 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 Fees £’000 Expenses £’000 100 57 60 52 60 7 60 - 27 - 16 - 0 0 0 0 0 0 0 - 0 - 0 - De minimis expenses are for reimbursement of extraordinary communication costs and taxable travel expenses grossed up for the tax payable thereon. ADVISERS Deloitte LLP (“Deloitte”) is retained as adviser to the Remuneration Committee. Deloitte was appointed by the committee, and the committee is satisfied the advice provided by Deloitte is objective and independent. Deloitte is a founding member of the Remuneration Consultants Group and voluntarily operates under the Code of Conduct in relation to executive remuneration consulting in the UK. Deloitte has provided advice on the content of this Directors’ Remuneration Report. For financial year 2019, total fees were £21,800, with fees on a time and materials basis. Deloitte has provided no other services to the company during the financial year. In addition to Deloitte the following people have provided material advice or services to the committee during the year: David Johnson – Group Counsel; and Helen Wakeford – Head of Legal and Company Secretary. 78 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Details of unexpired contract terms The following non-executive directors will have the stated unexpired contract terms when they stand for re-election at the AGM Director Christopher Munro Neil Holden Caroline Banszky Victoria Cochrane Richard Cranfield Robert Lister Unexpired Contract Term (years) 1 year 2 years 1.75 years 1.75 years 2.25 years 2.25 years Status of company The company is registered as a public limited company under the Companies Act 2006. Stakeholders The Group considers its principal stakeholders to be the customers using the platform, the employees of the Group and the company’s shareholders. The Group also has longstanding relationships with a number of key suppliers. DIRECTORS’ REPORT Directors The directors present their report and Financial Statements for the year ending 30 September 2019. The content of the “Management Report” required by the FCA Disclosure and Transparency Rule DTR4.1 is in the Strategic Report and the Governance section of the Annual Report and Financial Statements, which also contains details of likely future developments identified by the board. The Corporate Governance Report on page 49 forms part of the Directors’ Report. Information disclosed in accordance with the requirements of the applicable sections of the FCA Listing Rule LR9.8 (Annual Financial Report) can be found here: Details of long-term incentive schemes – The Directors’ Remuneration Report Directors’ interests in the company’s shares – The Directors’ Remuneration Report Major shareholders’ interests – Directors’ Report Directors’ unexpired contract terms – Directors’ Report Directors transactions in the company’s shares – Director’s Report Details of non-financial reporting – Corporate Social Responsibility Report The review of the business and principal risks and uncertainties are disclosed in the Strategic Report. The Directors who served during the financial year were as follows: Christopher Munro Caroline Banszky Victoria Cochrane Richard Cranfield (from 26 June 2019) Neil Holden Michael Howard Robert Lister (from 26 June 2019) Alexander Scott Ian Taylor According to the Register of Directors’ Interests in the company, no rights to subscribe for shares were granted or exercised by any of the directors or their immediate families during the financial year. Rights for share options were granted to Ian Taylor and Alexander Scott under the company’s deferred bonus Performance Share Plan. Richard Cranfield and Robert Lister are standing for election at the upcoming AGM. All other directors are standing for re-election at the upcoming AGM. The appointment and replacement of directors is governed by the company’s Articles of Association, the UK Corporate Governance Code, the Companies Act 2006 and related legislation. The directors may exercise all the powers of the company. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 79 GOVERNANCE continued Diversity and inclusion Restrictions on share transfers There are no restrictions on the transfer of shares held by executive directors and senior managers. Purchase of own shares At the 2019 AGM, shareholders authorised the company to buy back up to 10% of its own ordinary shares by market purchase at any time prior to the conclusion of the AGM to be held in 2020. Whilst such authority would only be used if the board was satisfied that to do so would be in the interests of shareholders, the board considers it desirable to have the general authority in order to maintain compliance with the regulatory capital requirements or targets applicable to the Group. The company did not purchase any of its own shares during the financial year. Substantial shareholders As at 16 December 2019, the company had been notified of the following interests in 3% or more of the company’s issued ordinary share capital disclosed to the company under Disclosure Guidance and Transparency Rule 5. The information provided below was correct as at the date of notification. It should be noted that these holdings are likely to have changed since notified to the company. However notification of any change is not required until the next applicable threshold is crossed. The Group recognises the benefits of companies having a diverse board and sees diversity at board level as important in maintaining good corporate and board effectiveness. The Group has an established diversity policy dealing with appointments to the board. The objective of the Group’s diversity policy is to ensure that new appointments to any board within the Group are made on merit, taking into account the different skills, industry experience, independence, knowledge and background required to achieve a balanced and effective board. When determining the composition of the board, consideration is given to the diversity of board members and, when possible, appointments are made with a view to achieving a balance of skills with diversity. Share capital Structure of the company’s capital The company has 331,322,014 ordinary £0.01 shares in issue. There are no treasury shares, other than those held by the Employee Benefit Trust to satisfy options awarded under the PSP scheme. Voting rights At any General Meeting, on a show of hands, any member present in person has one vote and every proxy present who has been duly appointed by a member entitled to vote on a resolution has one vote. On a poll vote every person present in person or by proxy has one vote for every share held. All shares carry equal voting rights and there are no restrictions on voting rights. 80 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Shareholder BlackRock Inc Number of Ordinary Shares at 30 September 2019 % of Voting Rights at 30 September 2019 Number of Ordinary Shares at 16 December 2019 % of Voting Rights at 16 December 2019 Nature of Holding Indirect 19,238,883 5.80% 19,238,883 5.80% Securities Lending Contracts for difference 2,726,710 0.82% 2,726,710 0.82% 2,437,303 0.73% 2,437,303 0.73% Montanaro Asset Management Limited Direct 10,015,000 3.02% 10,015,000 3.02% Michael Howard Direct 43,950,000 13.26% 37,950,000 11.45% The percentage provided was correct at the date of notification. The interests of the directors, and any persons closely associated, in the issued share capital of the company are shown on page 76. Directors’ interests Indemnity provision Save for the shareholding details set out in the Directors’ Remuneration Report, there has been no change to the interests of any of the directors or their Persons Closely Associated during the financial year. Dividends In financial year 2019 the company paid two interim dividends. Both dividends were paid by reference to the company’s issued and allotted share capital on the record date. An interim dividend of 6.4 pence per share, which equates to £21.2 million, was paid on 18 January 2019. An interim dividend of 2.6 pence per share, which equates to £8.6 million, was paid on 21 June 2019. An interim dividend of 5.2 pence per share, which equates to £17.2 million, has been declared by the board and will be paid in January 2020. 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. Employee information and engagement The company has no employees (2018: nil), but the Group has 486 employees (2018: 519). The Group continues to promote a culture whereby employees are encouraged to develop and contribute to the overall aims of the business. The company has considered the requirements of section 172 of the Companies Act to ensure that the interests of employees are considered by the board in discussions and decision making, and the associated provisions of the 2018 Corporate Governance Code regarding the method of engagement with the workforce. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 81 GOVERNANCE continued The company and individual directors engage with the work force on an informal and regular basis. The work force is predominantly based in the London office and the CEO and CFO provide opportunities for all UK based staff to attend presentations following the publication of the interim and year end results during which updates are provided on the Group’s performance. A recording of the presentations is made available on the Group’s staff intranets for those who cannot attend. The CEO also communicates with all staff following each quarterly market announcement, and in the event of any developments within the business. The CEO and CFO are available to all staff and the Group’s culture is one of openness and inclusivity. Given the size and location of the workforce; the flat and accessible nature of the hierarchy; and the many long and close working relationships that exist within the Group; the board has determined that it is appropriate to continue to establish and take into account the interest of the workforce by way of extensive informal engagement combined with occasional quantitative research and feedback. Engagement with suppliers Post year end events The Group monitors its relationships with key suppliers and relationship meetings are held with suppliers of critical business services. The Group monitors its payment performance with suppliers and further details are set out in the Corporate Social Responsibility report on page 44. Articles of Association The Articles of Association may be amended by special resolution of the shareholders. Greenhouse gasses For commentary on greenhouse gasses, please see the Corporate Social Responsibility report on page 45. Political donations As per the Corporate Social Responsibility report on page 45 the Group does not make political donations. Employment of disabled people For commentary on the Group’s policy regarding the employment of disabled people, please see the Corporate Social Responsibility report on page 44. Events after the reporting date are detailed in note 29. There are no reportable events (2018: none). Auditor BDO LLP has indicated its willingness to continue in office, however, the audit contract will be up for tender in 2020 in compliance with the requirements of the The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014. 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 they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the company’s auditor is aware of that information. This confirmation is given in accordance with the provisions of section 418 of the Companies Act 2006. By order of the board, Ian Taylor Chief Executive Officer Alexander Scott Chief Financial Officer 17 December 2019 82 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 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 Annual Report and Financial Statements, taken as a whole, give a fair, balanced and understandable view which provides the information necessary for shareholders to assess the company’s position and performance, business model and strategy. The directors are also responsible for preparing the financial statements in accordance with International Financial Reporting Standards (IFRS) 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 the 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. 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, whose names and functions are listed on pages 46 to 48, 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 auditor for the purposes of the audit, and to establish that the auditor is aware of that information; ▪ they are not aware of any relevant audit information of which the auditor is unaware; ▪ to the best of their knowledge, the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer and the undertakings included in the consolidation taken as a whole; ▪ the management report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and ▪ the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the performance, strategy and business model of the company and Group. The directors consider it appropriate to adopt the going concern basis of accounting in preparing the consolidated Financial Statements as they believe the Group will continue to be in business, and meet any liabilities as they fall due, for a period of at least twelve months from the date of approval of the Financial Statements. By order of the board, Helen Wakeford Company Secretary 17 December 2019 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 83 FINANCIAL STATEMENTS INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF INTEGRAFIN HOLDINGS PLC Opinion We have audited the financial statements of IntegraFin Holdings plc (the “parent company”) and its subsidiaries (the “Group”) for the year ended 30 September 2019 which comprise the Consolidated and company Statement of Profit and Loss and Other Comprehensive Income, 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 2019 and of the Group’s and 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; and, as regards the group financial statements, Article 4 of the IAS Regulation. 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 as applied to listed public interest entities, 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 principal risks, going concern and viability statement We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs (UK) require us to report to you whether we have anything material to add or draw attention to: ▪ the disclosures in the annual report that describe the principal risks and explain how they are being managed or mitigated; ▪ the directors’ confirmation in the annual report that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; ▪ the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the Group and the parent company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; ▪ whether the directors’ statement relating to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or ▪ the directors’ explanation in the annual report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. This matter was addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on this matter. 84 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Key Audit Matter How we addressed the key audit matter in the audit Revenue Recognition The Group’s revenue is made up of distinct components which comprises of: ▪ Annual commission income of £86.7m charged for the administration of products on the Transact platform (“IAS”); ▪ Wrapper fee income of £9m charged for each of the tax wrappers held by clients; and ▪ Other income of £3.5m comprising buy commission and dealing charges. Refer to page 26 of the Strategic report, note 1 (d) (accounting policies) and note 5 (financial disclosures). Annual commission and wrapper fees comprise majority of the Group’s revenue and constitute the recurring revenue. There is a presumption associated with revenue that a fraud risk exists due to its nature as the main driver of profit for the Group. Revenue is automatically calculated by the IT system based on Transact published rates. Due to the high level of automation involved, any fraud or error associated with revenue recognition may result in a material misstatement of the financial statements. Because of the level of automation involved and because of the significant effect that a weakness or failure in the IT system over revenue may cause, this is considered to be a key audit matter. Our procedures focused on the key IT processes and controls over IT systems critical to the recognition and calculation of revenue. We updated our understanding of the Group’s key IT applications, processes and controls that drive the recognition and calculation of revenue by carrying out walk-through procedures. We then performed the following procedures: ▪ We tested the operating effectiveness of the IT General Controls (ITGCs) governing Logical Access Control, Program Change Control and Data Processing Management; ▪ We tested the operational effectiveness of relevant application interfaces; and ▪ We performed testing on relevant reports and information extracted from the IT system to ensure accuracy and completeness of information produced by the entity (“IPE”); and Controls testing: We tested the controls in place over accuracy of inputs into the IAS IT platform, as these represent key controls over the accuracy and completeness of revenue recognition. These procedures included: ▪ Testing the controls over the opening of new client portfolios, as the number of clients impacts the value of FUD and the number of wrappers on which revenue is generated from; ▪ Testing the execution controls in place over trade instructions from clients to provide assurance over accuracy and validity of revenue generated from these trades; ▪ Testing the controls in place covering the identification and resolution of rejected trades to provide assurance over revenue recognised; and ▪ Testing the controls in place covering the approval of fee exceptions (i.e. staff discounts), as changes in rates could affect revenue recognised. We tested the controls in place covering client money and asset records held within the IAS IT system as revenue is generated from these balances which comprise FUD. The control procedures provided assurance over the integrity of the data within the IAS IT system. These procedures included: ▪ Testing the controls over external and internal client money reconciliations, with external client money balances being agreed to external bank statements; ▪ Testing the controls over external custody asset reconciliations and agreeing the asset balances to external custodian confirmations; and ▪ Testing the controls in place covering the Internal System Evaluation Monitoring procedures (“ISEM”) which encompasses management’s controls in place over completeness and accuracy of IAS records, for both individual client records and for aggregate records of assets. These controls also cover the systems and controls in place that identify and resolve discrepancies in any records of custody assets. Tests of detail procedures: ▪ We tested the accuracy and completeness of revenue by performing a recalculation of key income streams including annual commission; buy commission and wrapper fee income. This was then compared against the amount recognised in the financial statements; ▪ We validated the key inputs into the revenue recalculation by corroborating them to supporting documentation and testing the report logic within the IAS IT system, and ▪ We assessed the revenue accounting policies and confirmed they are applicable to International Financial Reporting Standards (IFRSs) as adopted by the European Union. Our results: From testing we have found no material exceptions over this matter. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 85 FINANCIAL STATEMENTS continued Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. Based on professional judgement, we determined materiality for the financial statements as a whole as follows: 86 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Materiality Basis for determining materiality Group financial statements Overall materiality: £2.45m (2018: £2.05m) Performance materiality: £1.84m (2018: £1.54m) The principal measure considered in both the current and prior year was a benchmark of 5% of profit on ordinary activities before taxation attributable to shareholders of £48.9 million (2018: £40.9m). Profit on ordinary activities before taxation attributable to shareholders has been used as it is the most significant determinant of the Group’s financial performance used by shareholders. Performance materiality was calculated using 75% of overall materiality based on our risk assessment procedures and the expectation of a low number of misstatement. Parent company financial statements Overall materiality: £415k (2018: £418k) Performance materiality: £311k (2018: 314k) We used 1% of total assets of £41.5m (2018: £41.8m) as the basis of materiality as the company is the parent entity of the Group, and does not earn any income other than dividends from subsidiary entities. Performance materiality was calculated using 75% of overall materiality based on our risk assessment procedures and the expectation of a low number of mis-statement. Not applicable Not applicable Materiality for policyholder assets and liabilities and associated income statement line items Overall materiality: £168.86m (2018: £146.89m) Performance materiality: £126.6m (2018: £110.17m) Basis for determining materiality Based on the guidance on the audit of insurers issued in the United Kingdom issued by the Financial Reporting Council we have applied a higher materiality for the policyholder assets and liabilities, solely for the purpose of identifying and evaluating the effect of misstatements that are likely only to lead to a reclassification between line items within assets and liabilities. The entities manage investment linked assets on behalf of their clients (long term insurance business). Any liability owed to its client is covered by the assets held by the entities and the investment return derived on the associated assets is offset by the change in provision for investment contract liabilities. Therefore using 1% of total assets is appropriate for determining this materiality level. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 87 FINANCIAL STATEMENTS continued An overview of the scope of our audit Our audit approach was developed by obtaining an understanding of the Group’s activities and the overall control environment. Based on this understanding we assessed those aspects of the Group’s transactions and balances which were most likely to give rise to a material misstatement. As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements. We performed an assessment to determine which components were significant to the Group. All components which financially contributed greater than 15% of the Group’s profit before tax, net assets or total expenses were identified as significant and requiring a full scope audit of their complete financial information. Five components were considered to be financial significant to the Group, with four of them being located in the United Kingdom and one being located in the Isle of Man. All five components were subject to a full scope audit. The work for three of the components (all within the United Kingdom) was performed by the group audit team and the other two was performed by the component auditors. For each component in the scope of our Group audit, we allocated a materiality that is less than our overall group materiality. Audits of the components were performed at a materiality level calculated by reference to a proportion of group materiality appropriate to the relative scale of the business concerned. For the two components not audited by the group audit team, an overall materiality of £2.21m was used for each component, and £151.97m was used for the application of a higher materiality for the policyholder assets and liabilities. For components out of scope of our Group audit and considered non- significant, these components were principally subject to analytical review procedures, together with additional testing over audit risk areas. We agreed with the Audit Committee that we would report to the Committee all individual audit differences identified during the course of our audit in excess of £49,000. For policyholder assets and liabilities and associated income statement line items we agreed with the Audit Committee that we would report to the Committee all individual audit differences identified during the course of our audit in excess of £3.4 million. We also agreed to report differences below these thresholds that, in our view, warranted reporting on qualitative grounds. There were no misstatements identified during the course of our audit that were individually, or in aggregate, considered to be material in terms of their absolute monetary value or on qualitative grounds. 88 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. There are inherent limitations in the audit procedures described above and the further removed non- compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. As in all of our audits we also addressed the risk of management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. Based on our assessment, there were three insignificant components of the Group. Two components required an audit due to company law requirements and were subject to a full scope audit performed by the group audit team. The other insignificant component was subject to analytical review procedures by the Group audit team. Our assessment performed is consistent with the prior year, with no significant changes identified in the Group structure or analysis of components. During the course of the audit, we issued detailed Group instructions to the component auditors, we visited their offices in the Isle of Man to conduct a full review of their work, we engaged regularly with them, we attended the component audit committee meeting held on the 28 November 2019 and we reviewed their component reporting. A dedicated member of the Group audit team was assigned to facilitate an effective and consistent approach to component oversight. These procedures were performed to an appropriate level of materiality having regard to the level of group materiality descripted above as well as aggregation risk. All significant components of the Group have conterminous year ends. Capability of the audit to detect irregularities, including fraud We gained an understanding of the legal and regulatory framework applicable to the Group and the industry in which it operates, and considered the risk of acts by the Group which were contrary to applicable laws and regulations, including fraud. These included but were not limited to compliance with Companies Act 2006, IFRSs as adopted by the European Union, the Financial Conduct Authority’s regulations and the Listing Rules. We designed audit procedures to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. We focused on laws and regulations that could give rise to a material misstatement in the financial statements. Our tests included, but were not limited to: ▪ agreement of the financial statement disclosures to underlying supporting documentation; ▪ enquiries of management; ▪ review of correspondence with the regulator; ▪ review of minutes of board meetings throughout the period; and ▪ considering the effectiveness of the control environment in monitoring compliance with laws and regulations INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 89 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. The directors are responsible for the other information. 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 the other information, we are required to report that fact. We have nothing to report in this regard. In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: ▪ Fair, balanced and understandable – by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or ▪ Audit Committee reporting – the section describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; or ▪ Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with 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 the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements and those reports have been prepared in accordance with applicable legal requirements; and ▪ the strategic report and the directors’ report have been prepared in accordance with the applicable legal requirements. 90 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company and we remain independent of the Group and the parent company in conducting our audit. Our audit opinion is consistent with the additional report to the Audit Committee. Use of our report This report is made solely to the parent 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 parent 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 parent company and the parent company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Neil Fung-On (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor London December 2019 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 or the directors’ 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 and the part of the Directors’ Remuneration Report to be audited 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. Responsibilities of directors As explained more fully in the Statement of Directors’ 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 determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group’s and the 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 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 on the Financial Reporting Council’s website at: www.frc.org.uk/ auditorsresponsibilities This description forms part of our auditor’s report. Other matters which we are required to address Following the recommendation of the Audit Committee, we were appointed by the board of directors to audit the financial statements for the year ending 30 September 2011 and subsequent financial periods. The period of total uninterrupted engagement is 9 years, covering the years ending 30 September 2011 to 30 September 2019. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 91 FINANCIAL STATEMENTS continued CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Revenue Fee income Cost of sales Gross profit Administrative expenses Impairment losses on financial assets Net income attributable to policyholder returns Operating profit Operating profit attributable to policyholder returns Operating profit attributable to shareholder returns Investment 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 for the financial year Other comprehensive income Note 2019 £’000 2018 £’000 5 7 9 9 9 8 8 99,165 (806) 98,359 91,194 (824) 90,370 (49,726) (49,651) (20) 7,115 (32) 5,309 55,728 45,996 7,115 5,309 48,613 40,687 37 308 23 211 56,073 46,230 7,115 5,309 48,958 40,921 (7,115) (5,178) (8,811) 40,147 (8,146) 32,906 Exchange losses arising on translation of foreign operations Total other comprehensive income for the financial year (20) (20) (66) (66) Total comprehensive income for the financial year 40,127 32,840 Earnings per share Earnings per share – basic and diluted 6 12.1p 9.9p All activities of the Group are classed as continuing. Notes 1 to 30 form part of these Financial Statements 92 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 COMPANY STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Revenue Cost of sales Gross profit Administrative expenses Impairment losses on financial assets Operating loss Dividend income Interest income Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit for the financial year Other comprehensive income Total comprehensive income for the financial year All activities of the company are classed as continuing. Note 2019 £’000 2018 £’000 - - - - - - 7 (1,096) (24) (1,120) (3,377) - (3,377) 30 30,118 40,130 66 93 29,064 36,846 8 - - 29,064 36,846 - - 29,064 36,846 Notes 1 to 30 form part of these Financial Statements INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 93 FINANCIAL STATEMENTS continued CONSOLIDATED STATEMENT OF FINANCIAL POSITION Non-current assets Loans Intangible assets Property, plant and equipment Deferred tax asset Deferred acquisition costs Current assets Financial assets at fair value through profit or loss Other prepayments and accrued income Trade and other receivables Investments and cash held for the benefit of policyholders Cash and cash equivalents Current liabilities Trade and other payables Liabilities for linked investment contracts Current tax liabilities Non-current liabilities Provisions for liabilities Deferred income liability Deferred tax liabilities Net assets Capital and reserves Called up equity share capital Capital redemption reserve Share-based payment reserve Employee Benefit Trust reserve Foreign exchange reserve Non-distributable reserves Non-distributable insurance reserves Profit or loss account Total equity Note 10 11 20 13 15 16 17 14 18 14 22 19 20 23 24 25 26 2019 £’000 1,185 12,951 2,405 157 50,443 67,141 2018 £’000 1,189 12,966 1,813 44 46,073 62,085 5,066 13,082 6,510 16,665,048 132,340 16,822,046 6,219 11,471 4,058 14,489,933 116,849 14,628,530 17,024 16,665,048 3,342 16,685,414 14,764 14,489,933 3,195 14,507,892 24,564 50,443 13,248 88,255 19,137 46,073 12,570 77,780 115,518 104,943 3,313 2 1,008 (275) (44) 5,722 501 105,291 115,518 3,313 2 530 - (24) 5,722 501 94,899 104,943 These Financial Statements were approved by the Board of Directors on 17 December 2019 and are signed on their behalf by: Ian Taylor Director Company Registration Number: 08860879 Notes 1 to 30 form part of these Financial Statements 94 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 COMPANY STATEMENT OF FINANCIAL POSITION Non-current assets Investment in subsidiaries Loans Current assets Prepayments 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 Share-based payment reserve Employee Benefit Trust reserve Total equity Note 2019 £’000 2018 £’000 12 16 17 18 23 24 25 15,800 1,184 16,984 30 86 24,342 24,458 518 518 14,563 1,189 15,752 33 52 26,309 26,394 723 723 40,924 41,423 3,313 37,006 880 (275) 40,924 3,313 37,760 350 - 41,423 These Financial Statements were approved by the Board of Directors on 17 December 2019 and are signed on their behalf by: Ian Taylor Director Company Registration Number: 08860879 Notes 1 to 30 form part of these Financial Statements INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 95 FINANCIAL STATEMENTS continued CONSOLIDATED STATEMENT OF CASH FLOWS Cash flows from operating activities Profit before tax Adjustments for: Amortisation and depreciation Share-based payment charge Interest on cash held Investment returns Increase in trade and other receivables Increase/(decrease) in trade and other payables Decrease in current asset investments Increase in provisions Increase in liabilities for linked investment contracts Increase in investments and cash held for the benefit of policyholders Cash generated from operations Income taxes paid Net cash flows from operating activities Investing activities Acquisition of tangible assets Decrease in loans Interest on cash held Investment returns Net cash used in investing activities Financing activities Purchase of own shares in Employee Benefit Trust Settlement of share-based payment reserve Equity dividends paid Net cash used in financing activities 2019 £’000 2018 £’000 56,073 46,230 669 1,237 (308) (37) 608 350 (211) (23) (4,064) (3,871) 2,260 1,153 5,993 (444) 2,676 9,101 2,175,115 2,542,281 (2,175,115) (2,542,281) 62,976 54,416 (15,779) 47,197 (12,932) 41,484 (1,246) (542) 3 308 37 (898) (275) (706) 684 211 23 376 - - (29,807) (30,780) (30,788) (30,780) Net increase in cash and cash equivalents 15,511 11,080 Cash and cash equivalents at beginning of year 116,849 105,829 Exchange losses on cash and cash equivalents Cash and cash equivalents at end of year (20) (60) 132,340 116,849 Notes 1 to 30 form part of these Financial Statements 96 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 COMPANY STATEMENT OF CASH FLOWS Cash flows from operating activities Loss before tax and dividends Adjustments for: Interest Increase in trade and other receivables Decrease in trade and other payables Net cash flows from operating activities Investing activities Dividends received Interest received Decrease in loans Net cash generated from investing activities Financing activities Purchase of own shares in Employee Benefit Trust Settlement of share-based payment reserve Equity dividends paid Net cash used in financing activities 2019 £’000 2018 £’000 (1,054) (3,284) (66) (30) (205) (93) (78) (433) (1,355) (3,888) 30,118 40,130 66 3 93 684 30,187 40,907 (275) (706) - - (29,818) (30,791) (30,799) (30,791) Net increase in cash and cash equivalents (1,967) 6,228 Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 26,309 24,342 20,081 26,309 Notes 1 to 30 form part of these Financial Statements INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 97 FINANCIAL STATEMENTS continued CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Share- based payment reserve £’000 Non- distrib- utable reserves £’000 Non- distrib- utable insurance reserves £’000 Employee Benefit Trust £’000 Share capital £’000 Other reserves £’000 Retained earnings £’000 Total equity £’000 Balance at 1 October 2017 57 44 308 5,722 501 - 95,894 102,526 Comprehensive income for the year: Profit for the year Movement in currency translation Total comprehensive income for the year Distributions to owners: - - - Issue of share capital 3,256 Dividends Other movement Total distributions to owners Balance at 1 October 2018 Comprehensive income for the year: Profit for the year Movement in currency translation Total comprehensive income for the year Distributions to owners: Dividends Share-based payment expense Settlement of share-based payment expense Purchase of own shares in EBT Other movements Total distributions to owners - - 3,256 3,313 - - - - - - - - - - (66) (66) - - - - (22) - (20) (20) - - - - - - - - - - - 222 222 530 - - - - 1,237 (707) - (52) 478 - - - - - - - - - - - - - - - - - - - - 32,906 32,906 - (66) 32,906 32,840 (3,256) - (30,780) (30,780) 135 357 - (33,901) (30,423) 5,722 501 - 94,899 104,943 - - - - - - - - - - - - - - - - - - - - - - - - (275) 40,147 40,147 - (20) 40,147 40,127 (29,807) (29,807) - - - 1,237 (707) (275) - - 52 (275) (29,755) (29,552) Balance at 30 September 2019 3,313 (42) 1,008 5,722 501 (275) 105,291 115,518 Notes 1 to 30 form part of these Financial Statements 98 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 COMPANY STATEMENT OF CHANGES IN EQUITY Share- based payment reserve £’000 Share capital £’000 Employee Benefit Trust £’000 Retained earnings £’000 Total equity £’000 Balance at 1 October 2017 Comprehensive income for the year: Profit for the year Total comprehensive income for the year Distributions to owners: Issue of share capital Dividends Other movement Total distributions to owners Balance at 1 October 2018 Comprehensive income for the year: Profit for the year Total comprehensive income for the year Distributions to owners: Dividends Share-based payment expense Settlement of share-based payments Purchase of own shares in EBT Total distributions to owners 57 - - 3,256 - - 3,256 3,313 - - - - - - - Balance at 30 September 2019 3,313 - - - - - 350 350 350 - - - 1,237 (707) - 530 880 - - - - - - - - - - - - - (275) 34,961 35,018 36,846 36,846 36,846 36,846 (3,256) - (30,791) (30,791) - 350 (34,047) (30,441) 37,760 41,423 29,064 29,064 29,064 29,064 (29,818) (29,818) - - - 1,237 (707) (275) (275) (29,818) (29,563) (275) 37,006 40,924 Notes 1 to 30 form part of these Financial Statements INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 99 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. The Financial Statements have been prepared on a going concern basis following an assessment by the directors. The company has a positive 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 for 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 IFRS 9, 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) New accounting standards The Group has adopted both IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers in the period. These standards are effective for accounting periods beginning on or after 1 January 2018, and have therefore been adopted for the accounting period beginning on 1 October 2018. Due to the method of transition selected comparative figures have not been restated in order to reflect the requirements of these new standards. IFRS 9 Financial Instruments (i) Reclassification and re-measurement IFRS 9 sets out requirements for recognising and measuring financial assets and financial liabilities, introduces a new expected loss model for recognising impairments and requires enhanced disclosures in the financial statements. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which the assets are managed and their cash flow characteristics. 100 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Debt instruments that meet the following two conditions are measured at amortised cost: ▪ Business model test: the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and ▪ Cash flow characteristics test: the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Reclassification and re-measurement requirements have been assessed against the financial instruments of the Group and, whilst certain financial instruments have been reclassified in line with the new categories, no financial instruments required re-measurement. The below table highlights the key financial instruments and their reclassifications: IAS 39 carrying value IFRS 9 carrying value £’000 6,510 9,783 £’000 6,510 9,768 Financial instrument IAS 39 classification IFRS 9 classification Trade and other receivables Accrued fees Cash and cash equivalents Loans and receivables Loans and receivables Loans and receivables Amortised cost Amortised cost Amortised cost 132,340 132,340 Fair value through profit or loss Fair value through profit or loss Fair value through profit or loss Fair value through profit or loss 16,665,048 16,665,048 5,066 5,066 Amortised cost Amortised cost 17,024 17,024 Loans and receivables Amortised cost 1,209 1,185 Unit-linked investments Other investments Trade and other payables Loans (ii) Impairment model IFRS 9 replaces the incurred loss model in IAS 39 with an expected credit loss model. For assets within the scope of the IFRS 9 impairment model, impairment losses have generally increased and become more volatile. Accrued fees For fees owed by clients, the impairment policy adopted by the Group, in line with IAS 39, was to fully impair all pending fees three months or more past due, as well as fees due on portfolios made up of limited liquidity assets. Both of these were considered to be current indicators of impairment. In the current year the group recognised an impairment reversal of £20k (2018: impairment of £32k) as a number of old pending fees were collected. Under IFRS 9, a forward-looking approach is required, and consideration has therefore also been given to potential losses on pending fees one and two months past due. For these, historical loss rates have been used to estimate expected future losses. This led to an additional impairment of £15k. Loans Whilst there have been no indications of impairment or financial difficulty with regard to any of the loans held by the company, management has concluded that, based on the new expected credit loss model, an impairment should be recognised to account for future uncertainty. On a forward looking basis, the maximum credit loss associated with the recoverability of the loans has been assessed to be £24k. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 101 FINANCIAL STATEMENTS continued IFRS 15 Revenue from Contracts The standard provides a comprehensive new model for revenue recognition, based on the following steps: ▪ Identify the contract with the customer; ▪ Identify the performance obligations in the contract; ▪ Determine the transaction price; ▪ Allocate the transaction price to the obligations in the contract; and ▪ Recognise revenue when the entity has satisfied its performance obligations. It is the view of management that the revenue recognition methods previously employed by the company already satisfied the requirements of IFRS 15. This is because the contract, performance obligations and transaction price for all revenue streams can be clearly identified in the Transact terms and conditions, and all revenue has always been recognised only after all performance obligations have been satisfied. There was therefore no impact on the Group on adoption of the standard. Further information regarding the performance obligations for each of the company’s revenue streams is set out in section d of this note. c) Future standards, amendments to standards, and interpretations not early-adopted in the 2019 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 16 Leases IFRS 16 brings most leases on-balance sheet for lessees under a single lessee accounting model, eliminating the distinction between operating and finance leases. The Group adopted IFRS 16 on 1 October 2019. The Group used the cumulative catch-up method of transition, which uses the net effect of applying IFRS 16 on the first day of the first accounting period in which the new standard is applied. The net effect is recognised through an adjustment of retained earnings or other relevant parts of shareholder’s equity. On adoption the Group recognised right of use assets of £5.6m and lease liabilities of £8.4m. Liabilities of £2.5m previously recognised in relation to the rent free reserve were also derecognised and adjusted through retained earnings. The overall reduction in retained earnings on 1 October 2019 was therefore £0.1m, which is the cumulative effect of recognising the asset and corresponding liabilities for each of the leases, and the release of the rent free reserve. This reduction is caused by a change in the timings of expenses, as operating lease accounting requires straight line recognition of expenses, whereas under IFRS 16 the effective interest method is used. This means that the interest expense on the lease liability is higher at first and reduces year on year. The negative impact will therefore reverse over the lives of the leases. IFRS 17 Insurance Contracts IFRS 17 was issued in May 2017 and will replace IFRS 4 Insurance Contracts. An exposure draft was issued in June 2019. IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the Standard. The Group would be required to provide information that faithfully represents 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, subject to EU endorsement, though the IASB has proposed that the effective date is deferred to 1 January 2022. The Group has performed a preliminary assessment regarding the impact of IFRS 17 on the Financial Statements and, due to the vast majority of contracts written by the business being investment contracts, it is expected such impact will be negligible. 102 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 d) Principal accounting policies Revenue from contracts with customers Revenue represents the fair value of services supplied by the company. All fee income is recognised as revenue in line with the provision of the services. Fee income comprises: Annual commission income Annual commission is charged for the administration of products on the Transact platform, and is levied monthly in arrears on the value of assets and cash held on the platform. Wrapper fee income Wrapper fees are charged for each of the tax wrappers held by clients, and are levied quarterly in arrears based on fixed fees for each wrapper type. Annual commission and wrapper fees relate to services provided on an on-going basis, and revenue is therefore recognised on an on-going basis to reflect the nature of the performance obligations being discharged. Other income This comprises buy commission and dealing charges. These are charges levied on the acquisition of assets, due upon completion of the transaction. Revenue is recorded on the date of completion of the transaction, as this is the date the services are provided to the customer. Deferred acquisition costs and deferred income liabilities Incremental costs directly attributable to securing investment contracts are deferred. These costs consist of fees paid to policyholders’ financial advisers. In line with IFRS 15, the costs relating to Pension, Onshore Life and Offshore Life contracts are capitalised as deferred acquisition costs and are amortised over the directors’ best estimates of the lives of the contracts which are deemed to be fourteen, sixteen and eighteen years respectively (2018: fourteen, sixteen and eighteen years), over which 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 contract’s inception to meet obligations to financial advisers. Deferred income liabilities are also amortised over the directors’ best estimates of the lives of the contract, which are again deemed to be fourteen, sixteen and eighteen years. At the end of each reporting period, deferred acquisition costs are reviewed for recoverability, against future margins from the related contracts at the statement of financial position date. An impairment loss is recognised in the statement of profit or loss and other comprehensive income if the carrying amount of the deferred acquisition costs is greater than the future margins from the related contracts. 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. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 103 FINANCIAL STATEMENTS continued 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. Dividends Equity dividends are recognised in the accounting period in which the dividends are declared and become payable. 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 is not amortised, but is subject to annual impairment reviews in accordance with IAS 36. 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 statement of profit or loss and other comprehensive income during the period in which they are incurred. The major categories of property, plant, equipment and motor vehicles are depreciated as follows: Asset class All UK and Isle of Man entities Australian entity Leasehold Land and Buildings Straight line over the life of the lease Straight line over 40 years Fixtures & Fittings Straight line over 10 years Reducing balance over 2 to 8 years Equipment Motor vehicles Straight line over 3 to 5 years Reducing balance over 3 to 10 years N/A Reducing balance over 2 to 8 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 2. 104 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 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 in reserves as other comprehensive income. 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 2019, 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 IFRS 9. 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. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 105 FINANCIAL STATEMENTS continued 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 27. 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. 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, based on the business model in which the assets are managed and their cash flow characteristics: (i) Financial assets and liabilities at fair value through profit or loss This category includes financial assets and liabilities 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) Financial assets at amortised cost This category includes non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. This is comprised of 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. Assets held at amortised cost are initially recognised at fair value. Subsequent measurement is at amortised cost using the effective interest method less any expected credit losses. (iii) Financial liabilities at amortised cost Financial liabilities at amortised cost comprise trade and other payables. These are initially recognised at fair value. Subsequent measurement is at amortised cost using the effective interest method. They are classified as current liabilities due to their short-term nature. Impairment of financial assets Expected credit losses are required to be measured through a loss allowance at an amount equal to: ▪ the 12-month expected credit losses (expected credit losses from possible default events within 12 months after the reporting date); or ▪ full lifetime expected credit losses (expected credit losses from all possible default events over the life of the financial instrument). 106 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 A loss allowance for full lifetime expected credit losses is required for a financial instrument if the credit risk of that financial instrument has increased significantly since initial recognition, as well as to contract assets or trade receivables that do not constitute a financing transaction. For all other financial instruments, expected credit losses are measured at an amount equal to the 12-month expected credit losses. Impairment losses on financial assets carried at amortised cost are reversed in subsequent periods if the expected credit losses decrease. Provisions 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. Share-based payments Equity-settled share-based payment awards granted to employees are measured at fair value at the date of grant. The awards are recognised as an expense, with a corresponding increase in equity, spread over the vesting period of the awards, which accords with the period for which related services are provided. The total amount expensed is determined by reference to the fair value of the awards as follows: (i) SIP shares The fair value is the market price on the grant date. There are no vesting conditions, as the employees receive the shares immediately upon grant. (ii) PSP share options The fair value of share options is determined by applying a valuation technique, usually an option pricing model, such as Black Scholes. This takes into account factors such as the exercise price, the share price, volatility, interest rates, and dividends. At each reporting date, the estimate of the number of share options expected to vest based on the non-market vesting conditions is assessed. Any change to original estimates is recognised in the statement of comprehensive income, with a corresponding adjustment to equity reserves. 2. 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. 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 financial assets As noted in note 1, financial assets are assessed for impairment based on the requirements of IFRS 9, using an expected loss model. This has led to additional impairments of £39k in the year. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 107 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. The goodwill relates to the acquisition of IAD Pty in July 2016. The carrying amount of goodwill is allocated to the two cash generating units that are benefiting from the acquisition as follows: Investment administration services Insurance and life assurance business Total Other assumptions are as follows: Discount rate Period on which detailed forecasts are based 2019 £’000 7,313 5,638 2018 £’000 7,314 5,637 12,951 12,951 2019 4.6% 5 years 2018 4.5% 5 years 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 2024. It was not considered necessary to extrapolate the projections beyond this period as the results showed no indication of impairment, so no terminal value has been included. Based on experience, the key assumptions on which management has calculated its projections are net inflows, market growth and expense inflation. The results of this showed that no impairment has taken place throughout the historical financial period. A sensitivity analysis has been performed, which showed that there were no reasonable foreseeable changes in the assumptions which would result in the recoverable amount falling below the carrying amount. 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 statement of profit or loss and other comprehensive income. The following tables show the carrying values of assets and liabilities for each of these categories. 108 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Investments in quoted debt instruments 4,997 6,171 Fair value through profit or loss Amortised cost 2019 £’000 - 69 - 2018 £’000 - 48 - - - - - 2019 £’000 2018 £’000 132,340 116,849 - 1,185 - 9,768 2,766 - 1,189 - 8,857 1,519 Financial assets: Cash and cash equivalents Listed shares and securities Loans Accrued income Trade and other receivables Investments and cash held for the policyholders Total financial assets 16,670,114 14,496,152 146,059 128,414 16,665,048 14,489,933 - - Financial liabilities: Trade and other payables Accruals Fair value through profit or loss Amortised cost 2019 £’000 - - 2018 £’000 - - 2019 £’000 5,889 6,908 - 2018 £’000 3,157 6,599 - 9,756 Liabilities for linked investments contracts 16,665,048 14,489,933 Total financial liabilities 16,665,048 14,489,933 12,798 (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 expected credit losses recognised, the carrying value of these financial instruments approximates their fair value. (iv) Financial instruments measured at fair value - fair value hierarchy The table over the page 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 on the next page. 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 statement of profit or loss and other comprehensive income. 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 Group’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). INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 109 FINANCIAL STATEMENTS continued 2019 Investments and assets held for the benefit of policyholders Policyholder cash Investments and securities Bonds and other fixed-income securities Holdings in collective investment schemes Other investments Total 2018 Investments and assets held for the benefit of policyholders Policyholder cash Investments and securities Bonds and other fixed-income securities Holdings in collective investment schemes Other investments Total Level 1 valuation methodology Level 1 £’000 Level 2 £’000 Level 3 £’000 Total £’000 1,213,371 444,076 4,485 14,731,562 16,393,494 5,066 16,398,560 Level 1 £’000 1,115,223 394,768 14,167 12,684,265 14,208,423 6,219 14,214,642 - 140,991 9,320 109,714 260,025 - 260,025 Level 2 £’000 - 127,537 504 141,279 269,320 - 269,320 - 2,447 3,005 6,077 11,529 - 11,529 Level 3 £’000 - 2,655 14 9,521 12,190 - 12,190 1,213,371 587,514 16,810 14,847,353 16,665,048 5,066 16,670,114 Total £’000 1,115,223 524,960 14,685 12,835,065 14,489,933 6,219 14,496,152 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. The key unobservable input is the pre-tax operating margin needed to price asset holdings. 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. Changes to valuation methodology There have been no changes in valuation methodology during the year under review. 110 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 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 2019 and 30 September 2018 are presented in the table below at their valuation at 30 September 2019: Transfers from Transfers to Level 1 Level 2 Level 2 Level 1 2019 £’000 9,642 38,194 The reconciliation between opening and closing balances of Level 3 assets are presented in the table below: Opening balance Unrealised gains or losses in the year Transfer in to Level 3 Transfer out of Level 3 Purchases, sales, issues and settlement Closing balance 2019 £’000 12,190 (218) 5,938 (6,040) (341) 11,529 2018 £’000 16,153 19,172 2018 £’000 4,214 (737) 8,644 (173) 242 12,190 Any resultant gains or losses on financial assets held for the benefit of policyholders are offset by a reciprocal movement in the linked liability. (v) Capital maintenance The regulated companies in IntegraFin Group are subject to capital requirements imposed by the relevant regulators. As detailed in the CFOR, Group capital requirements for 2019 were £216.3 million (2018: £179.7 million). The Group has complied with the requirements set by the regulators during the year. The Group’s policy for managing capital is to ensure each regulated entity maintains capital well above the minimum requirement. 4. Risk and risk management This note supplements the details provided in the Risk and Risk Management section of this report on pages 36 to 41. 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. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 111 FINANCIAL STATEMENTS continued Market risk from reduced income The company’s dividend income from its regulated subsidiary IFAL is exposed to market risk. The Group’s main source of income is derived from annual management fees and transaction fees which are linked to the value of the clients’ portfolios. The Group mitigates the second order market risk by applying fixed per tax wrapper 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 Group and the company have limited exposure to primary market risk as capital is invested in high quality, highly liquid, short-dated investments. (a) Interest rate risk The Group and 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. The table below shows a breakdown of the material foreign currency exposures for the unit-linked policies within the Group: Currency GBP USD EUR Others Total 2019 £’000 16,564,270 79,716 14,263 6,799 2019 % 99.4 0.5 0.1 0.0 2018 £’000 14,404,344 67,799 11,180 6,610 2018 % 99.4 0.5 0.1 0.0 16,665,048 100.0 14,489,933 100.0 99.4% of investments and cash held for the benefit of policyholders are denominated in GBP, its base currency. Remaining currency holdings greater than 0.1% of the total are shown separately in the table. A significant rise or fall in sterling exchange rates would not have a significant first order impact on its results since any adverse or favorable movement in policyholder assets is entirely offset by a corresponding movement in the linked liability. (c) Inflation risk The Group and the company has exposure related to expense inflation risk, where actual inflation deviates from expectations. The Group and the company have 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 loans directly held by the company. Counterparty default risk exposure to loans The company has loans of £1,185k (2018: £1,189k). There are no other loans held by the Group. Counterparty default risk exposure to Group companies As well as inconvenience and operational issues arising from the failure of the other Group companies, there is also a risk of a loss of assets. The company is due £86k (2018: £52k) from other Group companies. 112 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Counterparty default risk exposure to other receivables The Group has prepayments of £3,314k (2018: £2,614k) and the company has prepayments of £30k (2018: £33k). The company has no other receivables arising, due to the nature of its business, and the structure of the Group. Across the Group, there is exposure to counterparty default risk arising primarily from: ▪ corporate assets directly held by the Group; ▪ exposure to clients; and ▪ exposure to other receivables. The other exposures to counterparty default risk include a credit default event which affects funds held on behalf of clients and occurs at one or more of the following entities: ▪ a bank where cash is held on behalf of clients; ▪ a custodian where the assets held on behalf of clients; and ▪ Transact Nominees Limited (TNL), which is the legal owner of the assets held on behalf of clients. There is no first order impact on the Group from one of the events in the preceding paragraph. This is because any credit default event in respect of these holdings will be borne by clients, both in terms of loss of value and loss of liquidity. Terms and conditions have been reviewed by external lawyers to ensure that these have been drafted appropriately. However, there is a second order impact where future profits for the Group are reduced in the event of a credit default event which affects funds held on behalf of clients. There are robust controls in place to mitigate credit 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. Additionally, maximum counterparty limits and minimum credit quality steps are set for banks. Corporate assets and funds held on behalf of clients There is no significant risk exposure to any one UK clearing bank. Counterparty default risk exposure to clients The Group is due £9.8m (2018: £8.9m) from fee income owed by clients. Impact of credit risk on fair value Due to the limited direct exposure that the Group and the company have 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 main liquidity risk is related to paying out shareholder dividends and operating expenses it may incur. Additionally, the company has made short term commitments, in the form of a capped facility arrangement, to Vertus Capital SPV1 Limited (“Vertus”) (as one of Vertus’ sources of funding) to assist Vertus in developing its business, which is to provide tailored niche debt facilities to adviser firms to fund acquisitions, management buy-outs and other similar transactions. Across the Group, the following key drivers of liquidity risk have been identified: ▪ liquidity risk arising due to failure of one or more of the Group’s banks; ▪ liquidity risk arising due to the bank’s system failure which prevents access to Group funds; and ▪ liquidity risk arising from clients holding insufficient cash to settle fees when they become due. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 113 FINANCIAL STATEMENTS continued The Group’s liquidity risk arises from a lack of readily realisable cash to meet debts as they become due. This takes two forms – clients’ liabilities coming due and other liabilities (e.g. expenses) coming due. The first of these, clients’ liabilities is in the main covered through the terms and conditions as clients take their own liquidity risk, if their funds cannot be immediately surrendered for cash. Payment of other liabilities depends on the Group having sufficient liquidity at all times to meet them as they fall due. This requires access to liquid funds, i.e. working banks and it also requires that the Group’s main source of liquidity, charges on its clients’ assets, can also be converted into cash. Thus the company has two requirements: first, to ensure that clients maintain a percentage of liquidity in their funds at all times, and second, to maintain access to cash through a spread of cash holdings in bank accounts. There are robust controls in place to mitigate liquidity risk, for example, through regular monitoring of expenditure, closely managing expenses in line with the business plan, and, in the case of the Vertus facility, capping the value of loans. Additionally, the Group holds corporate cash across a range of banks in order to mitigate the risk of a single point of counterparty default failure. Maturity schedule The following table shows an analysis of the financial assets and financial liabilities by remaining expected maturities as at 30 September 2018 and 30 September 2019. Financial assets: 2018 Investments and cash held for the policyholders Investments Accrued income Trade and other receivables Loans Cash Total 2019 Investments and cash held for the policyholders Investments Accrued income Trade and other receivables Loans Cash Total Up to 3 months £’000 3-12 months £’000 1-5 years £’000 Over 5 years £’000 14,489,933 - - 6,219 8,857 1,462 - 116,849 - 50 - - - - - 7 1,189 - 14,617,101 6,269 1,196 - - - - - - - Up to 3 months £’000 3-12 months £’000 1-5 years £’000 Over 5 years £’000 16,665,048 69 9,768 2,571 - 132,340 - - - 188 - - - 4,997 - 7 1,185 - 16,809,796 188 6,189 - - - - - - - Total £’000 14,489,933 6,219 8,857 1,519 1,189 116,849 14,624,566 Total £’000 16,665,048 5,066 9,768 2,766 1,185 132,340 16,816,173 114 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Financial liabilities: 2018 Liabilities for linked investment contracts Trade and other payables Total 2019 Liabilities for linked investment contracts Trade and other payables Total Up to 3 months £’000 3-12 months £’000 1-5 years £’000 Over 5 years £’000 Total £’000 14,489,933 6,568 14,496,501 - 3,188 3,188 - - - - - - 14,489,933 9,756 14,499,689 Up to 3 months £’000 3-12 months £’000 1-5 years £’000 Over 5 years £’000 Total £’000 16,665,048 9,391 16,674,439 - 3,407 3,407 - - - - - - 16,665,048 12,798 16,677,846 Financial assets held in portfolio investments and the corresponding liabilities are deemed to have a maturity of up to 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 focussing 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 stable and within historical norms. (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. 5. Segmental reporting The revenue and profit before tax are attributable to activities carried out in the UK. The Group has two classes of business as follows: ▪ provision of investment administration services ▪ transaction of ordinary long term insurance and underwriting life assurance INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 115 FINANCIAL STATEMENTS continued Analysis by class of business is given below: Revenue Investment administration services Insurance and life assurance business Administrative expenses Investment administration services Insurance and life assurance business Interest income Investment administration services Insurance and life assurance business Shareholder tax on profit on ordinary activities Investment administration services Insurance and life assurance business Profit before tax Investment administration services Insurance and life assurance business Net assets Investment administration services Insurance and life assurance business 2019 £’000 52,045 47,120 2018 £’000 48,833 42,361 99,165 91,194 29,304 20,422 49,726 145 163 308 4,230 4,581 8,811 22,392 33,682 56,073 61,009 54,509 29,705 19,946 49,651 101 110 211 3,890 4,256 8,146 18,700 27,530 46,230 57,857 47,086 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. 115,518 104,943 6. Earnings per share Profit 2019 2018 Profit for the year and earnings used in basic and diluted earnings per share £40.1m £32.9m Number of shares Number of shares used in basic and diluted earnings per share 331.3m 331.3m Earnings per share Earnings per share - basic and diluted 12.1p 9.9p 116 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 On 2 March 2018, as part of the IntegraFin Holdings plc listing process, a bonus share issue occurred resulting in the number of shares in issue increasing from 1,137,278 to 331,322,014. The nominal value of each share was also reduced through the bonus share issue process, from £0.05 to £0.01. The calculation of earnings per share for the comparative period presented has been adjusted retrospectively to reflect the new share structure as if it were in place for the full year. Earnings per share is calculated based on the share capital of IntegraFin Holdings plc and the earnings of the consolidated Group. 7. Expenses by nature The following expenses are included within administrative expenses: Group Depreciation Amortisation Wages and employee benefits expense Other staff costs Auditor’s remuneration (BDO): ▪ Auditing of the Financial Statements of the company pursuant to the legislation ▪ Auditing of the Financial Statements of subsidiaries ▪ Other assurance services ▪ Non-audit services Other Auditor’s remuneration (KPMG): ▪ Auditing of the Financial Statements of subsidiaries ▪ Other assurance services Other professional fees Regulatory fees Operating lease costs: ▪ Land and buildings ▪ Equipment Other occupancy costs Other costs Total administrative expenses 2019 £’000 654 15 36,093 241 70 91 100 - 115 147 2,314 2,689 1,822 3 1,817 3,555 2018 £’000 588 20 34,282 704 49 84 90 502 146 141 3,681 2,058 2,044 9 1,580 3,673 49,726 49,651 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 117 FINANCIAL STATEMENTS continued 2019 £’000 2018 £’000 Company Wages and employee benefits expense Other staff costs Auditor’s remuneration: ▪ Auditing of the Financial Statements of the company pursuant to the legislation ▪ Other assurance services ▪ Non-audit services Other professional fees Regulatory fees Other costs Total administrative expenses Wages and employee benefits expense 514 59 70 17 - 314 16 106 1,096 The average number of staff (including executive directors) employed by the Group during the financial year amounted to: 523 141 49 16 502 1,796 19 331 3,377 2018 No. 1 232 59 29 41 92 53 2019 No. 1 230 57 30 43 96 52 509 507 CEO Client services Finance Legal and compliance staff Sales, marketing and product development staff Software development staff Technical and support staff The company has no employees (2018: nil). Wages and employee (including executive directors) benefits expenses during the year, included within administrative expenses, were as follows: Wages and salaries Social security costs Other pension costs Share-based payment costs 2019 £’000 28,987 3,203 2,657 1,246 2018 £’000 28,296 3,074 2,562 350 36,093 34,282 118 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 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 Other benefits Highest paid director: Short term employee benefits Post employment benefits Other benefits Number of directors for whom pension contributions are paid 8. Tax on profit on ordinary activities Group a) Analysis of charge in year The income tax expense comprises: Corporation tax Current year – corporation tax Adjustment in respect of prior years Deferred Tax Current year Adjustment in respect of prior years Change in deferred tax (credit)/charge as a result of lowered tax rate Total tax charge for the year 2019 £’000 2,331 47 192 2018 £’000 2,130 41 48 2,570 2,219 564 5 86 5 2019 £’000 8,856 7 8,863 29 (96) 15 8,811 584 11 48 2 2018 £’000 8,173 (33) 8,140 6 - - 8,146 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 119 FINANCIAL STATEMENTS continued b) Factors affecting tax charge for the year The tax on the Group’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 Less: policyholder tax Effect of gross overseas withholding tax Profit on ordinary activities multiplied by the standard rate of Corporation Tax 19% (2018: 19%) Effects of: Non-taxable dividends Group relief Expenses not deductible for tax purposes Adjustments in respect of prior years Effect of lower tax rate Rate differences Overseas tax Changes in tax rates 2019 £’000 56,073 (7,115) - 48,958 2018 £’000 46,230 (5,178) (133) 40,919 9,302 7,775 (71) - 12 (459) 15 12 - 8,811 (106) - 604 (75) (185) - 133 8,146 The main rate of UK Corporation Tax is due to be reduced to 17% with effect from 1 April 2020. The reduction in Corporation Tax rates does not impact on the policyholder rate. Company a) Analysis of charge in year There is no tax charge for the current year or prior year. b) Factors affecting tax charge for the year Profit on ordinary activities before tax 2019 £’000 29,064 2018 £’000 36,846 Profit on ordinary activities multiplied by the standard rate of Corporation Tax 19% (2018: 19%) 5,522 7,001 Effects of: Non-taxable dividends Group relief Expenses not deductible for tax purposes Total tax charge for the year (5,722) (7,625) 181 19 - 156 468 - 120 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 9. Policyholder income and expenses - Group Net income attributable to policyholder returns Policyholder tax charge 2019 £’000 7,115 (7,115) 2018 £’000 5,309 (5,178) This relates to income and expenses, and the associated tax charges, on policyholder assets and liabilities. As any gains and losses on assets are offset entirely by the gains and losses on linked liabilities, the net impact on profit is £nil. The remaining difference in the prior year related to the overseas tax charge and the movement on policyholder deferred tax, which were included within the shareholder tax charge in the statement of profit or loss and other comprehensive income. 10. Intangible assets - Group Cost At 1 October 2018 At 30 September 2019 Amortisation At 1 October 2018 Charge for the year At 30 September 2019 Net Book Value At 30 September 2018 At 30 September 2019 Cost At 1 October 2017 At 30 September 2018 Amortisation At 1 October 2017 Charge for the year At 30 September 2018 Net Book Value At 30 September 2017 At 30 September 2018 Software and IP rights £’000 12,505 12,505 12,490 15 12,505 15 - £’000 12,505 12,505 12,470 20 12,490 Goodwill £’000 12,951 12,951 - - - 12,951 12,951 £’000 12,951 12,951 - - - Total £’000 25,456 25,456 12,490 15 12,505 12,966 12,951 £’000 25,456 25,456 12,470 20 12,490 35 15 12,951 12,951 12,986 12,966 Amortisation of the software and IP rights is recognised within administrative expenses in the statement of profit or loss and comprehensive income. The goodwill is not amortised, but is assessed for impairment on an annual basis in accordance with IAS 36. As detailed in note 2, this assessment showed that no impairment is required for 30 September 2019 (2018:nil). INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 121 FINANCIAL STATEMENTS continued 11. Property, plant and equipment - Group Leasehold Land and Buildings Equipment Fixtures and Fittings Motor Vehicles £’000 £’000 Cost At 1 October 2018 Additions Disposals Foreign exchange At 30 September 2019 Depreciation At 1 October 2018 Charge in the year Disposals Foreign exchange At 30 September 2019 Net Book Value At 30 September 2018 At 30 September 2019 Cost At 1 October 2017 Additions Disposals Foreign exchange At 30 September 2018 Depreciation At 1 October 2017 Charge in the year Disposals Foreign exchange At 30 September 2018 Net Book Value At 30 September 2017 At 30 September 2018 £’000 1,731 - - (3) 1,728 842 167 - (1) 1,008 889 720 £’000 1,708 42 - (19) 1,731 680 164 - (2) 842 £’000 2,461 1,228 (1,077) (5) 2,607 1,705 395 (1,077) (3) 1,020 756 1,587 £’000 2,072 502 (85) (28) 2,461 1,433 379 (85) (22) 1,705 1,028 889 639 756 The company holds no property, plant and equipment. 122 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 (31) (1,130) 208 - (22) - 186 130 19 (22) - 127 78 59 120 38 (46) (1) 111 30 73 - 72 93 39 £’000 £’000 263 2 (57) - 208 165 22 (57) - 130 98 78 100 26 - (6) 120 7 23 - - 30 93 90 Total £’000 4,520 1,266 (1,145) (9) 4,632 2,707 654 (4) 2,227 1,813 2,405 £’000 4,143 572 (142) (53) 4,520 2,285 588 (142) (23) 2,707 1,858 1,813 12. Investment in subsidiaries Company At 1 October 2018 Capital contributions in the year At 30 September 2019 Net Book Value At 30 September 2018 At 30 September 2019 At 1 October 2017 Capital contributions in the year At 30 September 2018 Net Book Value At 30 September 2017 At 30 September 2018 Total £’000 14,563 1,237 15,800 14,563 15,800 Total £’000 14,213 350 14,563 14,213 14,563 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 123 FINANCIAL STATEMENTS continued 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 Administration 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 Assurance 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. ILInt’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 ILInt and ILUK are included as described in the basis of consolidation accounting policy in note 1. 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 Pty) 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. 124 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 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. 13. Deferred acquisition costs Opening balance Capitalisation of deferred acquisition costs Amortisation of deferred acquisition costs Change in deferred acquisition costs Closing balance 2019 £’000 46,073 11,668 (7,298) 4,370 50,443 2018 £’000 38,295 14,836 (7,058) 7,778 46,073 14. 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 2019 Cost £’000 2019 Fair value £’000 2018 Cost £’000 2018 Fair value £’000 101,065 101,065 83,494 83,494 1,218,143 1,440,852 1,124,244 1,324,860 1,319,208 1,541,917 1,207,738 1,408,354 1,109,214 1,109,214 1,029,957 1,029,957 11,994,153 14,013,917 10,249,290 12,051,622 13,103,367 15,123,131 11,279,247 13,081,579 Total 16,665,048 14,489,933 All amounts are current as customers are able to make same-day withdrawal of available funds and transfers to third-party providers are generally performed within a month. 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 2019 125 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 Other receivables 18. Trade and other payables Trade payables PAYE and other taxation Due to Group undertakings Other payables Accruals and deferred income Group 2019 £’000 9,768 3,314 13,082 Company 2019 £’000 - 30 30 Group 2019 £’000 - 6,510 6,510 Group 2019 £’000 498 1,343 - 8,242 6,941 17,024 Company 2019 £’000 86 - 86 Company 2019 £’000 - 70 9 49 390 518 Group 2019 £’000 69 4,997 5,066 Group 2018 £’000 8,857 2,614 11,471 Group 2018 £’000 - 4,058 4,058 Group 2018 £’000 129 1,301 - 6,712 6,622 14,764 Group 2018 £’000 48 6,171 6,219 Company 2018 £’000 - 33 33 Company 2018 £’000 52 - 52 Company 2018 £’000 6 44 367 50 256 723 126 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 19. Deferred income liability Opening balance Capitalisation of deferred income Amortisation of deferred income Change in deferred acquisition costs Closing balance 20. Deferred tax – Group 2019 £’000 46,073 11,668 (7,298) 4,370 50,443 2018 £’000 38,295 14,836 (7,058) 7,778 46,073 Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 17% (2018: 19%). Deferred Tax Liability At 1 October 2017 Charge to income At 30 September 2018 Charge to income At 30 September 2019 Deferred Tax Asset At 1 October 2017 Charge to income At 30 September 2018 Charge to income At 30 September 2019 Accelerated capital allowances £’000 Share based payments £’000 Policyholder tax £’000 - - - 61 61 - - - - - Accelerated capital allowances £’000 Share based payments £’000 50 (6) 44 (44) - - - - 110 110 10,781 1,789 12,570 617 13,187 Other deductible temporary differences £’000 - - - 47 47 Total £’000 10,781 1,789 12,570 678 13,248 Total £’000 50 (6) 44 113 157 The company has no deferred tax assets or liabilities. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 127 FINANCIAL STATEMENTS continued 21. Client monies and client assets 2019 Client monies Client assets 2018 Client monies Client assets £’000 2,626,624 Amounts due to clients 35,172,798 Corresponding liability £’000 2,356,438 Amounts due to clients 30,756,997 Corresponding liability £’000 2,626,624 35,172,798 £’000 2,356,438 30,756,997 The above client monies are held separately in client bank accounts and the above client assets are held on behalf of Integrated Financial Arrangements Ltd by Transact Nominees Limited. 22. Provisions Balance brought forward Increase in dilapidations provision Increase in ILInt non-linked unit provision Increase/(Decrease) in ILUK tax provision Release of rent provision Other provisions Balance carried forward Dilapidations provisions ILInt non-linked unit provision ILUK tax provision Rent provision Other provisions Group 2019 £’000 19,137 38 3 5,585 (102) (97) Group 2018 £’000 11,831 52 7 7,150 - 97 24,564 19,137 413 39 374 36 24,112 18,527 - - 102 97 24,564 19,137 The dilapidation provisions relate to 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 related to potential litigation regarding disputed rent. This was released in March 2019 as the legal time frame for making a claim had passed. ILUK tax provision comprises claims received from HMRC that are yet to be returned to policyholders, charges taken from unit-linked funds and claims received from HMRC to meet current and future policyholder tax obligations. 128 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 23. Called up share capital - Company and Group Allotted, called up and fully paid 2019 Number 2018 Number Ordinary shares of £0.01 each 331,322,014 331,322,014 2019 £’000 3,313 2018 £’000 3,313 Prior to admission to the London Stock Exchange in March 2018, the share capital of the company was increased from £56,863.90 to £3,313,220.14 by virtue of a bonus issue of a further: 122,017,456 A Ordinary Shares of £0.01 each; 102,244,000 B ordinary Shares of £0.01 each; 97,063,720 C ordinary shares of £0.01 each; and 6,859,560 D ordinary Shares of £0.01 each. Immediately prior to admission each A, B, C and D share was then re-designated an Ordinary Share of £0.01 each. All Ordinary Shares have full voting and dividend rights. 24. Share-based payment Share-based payment reserve Balance brought forward Movement in the year Transfer to profit and loss reserve Balance carried forward Group 2019 £’000 530 531 (53) 1,008 Company 2019 £’000 350 530 - 880 Group 2018 £’000 308 350 (128) 530 Company 2018 £’000 - 350 - 350 The reduction in reserves of £53k (2018: £128k) is due to former members of staff leaving the SIP 2005 scheme. Share schemes (i) SIP 2005 The company implemented 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. Shares issued under the SIP may not be sold until the earlier of three years after issue or cessation of employment by the Group. If the shares are held for five years they may be sold free of income tax or capital gains tax. There are no other vesting conditions. The cost to the company in the financial year to 30 September 2019 was £nil (2018: £nil). All options have been exercised, and there have been no new share options granted. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 129 FINANCIAL STATEMENTS continued (ii) SIP 2018 The company implemented an annual SIP awards scheme in January 2019. This is an approved scheme under Schedule 2 of the Income Tax (Earnings & Pensions) Act 2003, and entitles all eligible employees to ordinary shares in the company. The shares are held in a UK Trust. The scheme includes the following awards: Free Shares The company may give Free Shares up to a maximum value, calculated at the date of the award of such Free Shares, of £3,600 per employee in a tax year. The share awards are made by the company each year, dependent on 12 months continuous service at 30 September. The cost to the Group in the financial year to 30 September 2019 was £641k (2018: £350k). Partnership and Matching Shares The company provides employees with the opportunity to enter into an agreement with the company to enable such employees to use part of their pre-tax salary to acquire Partnership Shares. If employees acquire Partnership Shares, the Board grants relevant Matching Shares at a ratio of 2:1. The cost to the Group in the financial year to 30 September 2019 was £427k (2018: £nil). (iii) Performance Share Plan The company implemented an annual PSP scheme in December 2018. Awards granted under the PSP take the form of options to acquire Ordinary Shares for nil consideration. These are awarded to executive directors, senior managers and other employees of any Group company, as determined by the Remuneration Committee. The exercise of the PSP awards is conditional upon the achievement of a performance condition set at the time of grant and measured over a three year performance period. The cost to the Group in the financial year to 30 September 2019 was £194k (2018: £nil). This is based on the fair value of the share options at grant date, rather than on the purchase cost of shares held in the Employee Benefit Trust reserve, in line with IFRS 2 Share-based Payment. 130 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 Details of the share awards outstanding are as follows: SIP 2018 Shares in the plan at start of the year Granted Shares withdrawn from the plan Shares in the plan at end of year Available to withdraw from the plan at end of year 2019 Shares (number) - 264,661 (13,120) 251,541 61,446 2018 Shares (number) - - - - - Details of the share options outstanding during the year are as follows: SIP 2005 2019 Weighted average exercise price (pence) 2018 Weighted average exercise price (pence) 2019 Share options 2018 Share options Outstanding at start of the year - 2,307,274 - 3,948,175 Shares withdrawn from the plan 342.39 (677,084) 322.48 (1,640,901) Outstanding at end of year Available to withdraw from the plan at end of year - - 1,630,190 1,630,190 - - 2,307,274 2,307,274 PSP Outstanding at start of the year Granted Forfeited Outstanding at end of year Exercisable at end of year 2019 Weighted average exercise price (pence) 2019 Share options (number) 2018 Weighted average exercise price (pence) 2018 Share options (number) - 272.9 - 272.9 - - 261,396 (5,970) 255,426 - - - - - - - - - - - The expected remaining lives of all outstanding PSP share options are 2-3 years. INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 131 FINANCIAL STATEMENTS continued The fair value of options granted during the year has been estimated using the Black-Scholes model. The principal assumptions used in the calculation were as follows: PSP Share price at date of grant Exercise price Expected life Risk free rate Dividend yield Weighted average fair value per option 25. Employee Benefit Trust reserve Balance brought forward Purchase of own shares Balance carried forward 2019 276.5 - 3 years 0.73% 1.4% 265.1 p 2019 £’000 - (275) (275) 2018 - - - - - 2018 £’000 - - - The Employee Benefit Trust (“EBT”) was established by the company pursuant to a trust deed entered into between the company and Intertrust Employee Benefit Trustee Limited (“Trustee”). The company has the power to remove the Trustee and appoint a new trustee. The EBT is a discretionary settlement and is used to satisfy awards made under the PSP. The Trustee purchases existing Ordinary Shares in the market, and the amount held in the EBT reserve represents the purchase cost of IHP shares held to satisfy options awarded under the PSP scheme. The EBT is being accounted for as an agent of IHP, rather than as a subsidiary. The shares held in the trust are therefore treated as treasury shares in both the individual IHP financial statements and the consolidated financial statements. 26. Non-distributable reserves – Group Balance brought forward Balance carried forward 2019 £’000 5,722 5,722 2018 £’000 5,722 5,722 This relates to share premium held by one of the company’s subsidiaries, IFAL, which is classified within other reserves on a Group level. 132 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 27. 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 Land and Buildings 2019 £’000 2,511 6,257 - Land and Buildings 2018 £’000 2,704 9,555 - 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. 28. 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 Integrated Application Development Pty Limited Amounts owed by/(to) related parties 2019 £’000 11 70 (9) 4 1 2018 £’000 53 (358) (9) 1 - Intercompany balances are interest free and settled on a monthly basis. The Group has not made any allowance for bad or doubtful debts in respect of related party receivables nor has any guarantee been given or received during 2019 or 2018 regarding related party transactions. Payments to key management personnel, defined as members of the Board, are shown in the Remuneration Report and note 7. Directors of the company received a total of £3.6m (2018: £7.3m) in dividends during the year. At the end of the year key management personnel held 54,440,708 (2018: 16,319,523) IHP shares. All of the above transactions are commercial, arm’s length transactions undertaken in the normal course of business. During the year the executive directors received beneficial staff rates in relation to personal portfolios of £4k. 29. Events after the reporting date There are no events subsequent to the year end that require disclosure in, or amendment to, the Financial Statements. 30. Dividends During the year to 30 September 2019 the company paid interim dividends of £21.2m and £8.6m (2018: £19.4m) and no special dividend (2018: £11.4m) to shareholders. The company received dividends from subsidiaries of £30.1m (2018:£40.1m). INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 133 OTHER INFORMATION DIRECTORS, COMPANY DETAILS, ADVISERS Executive Directors Corporate Advisers Ian Taylor Michael Howard Alexander Scott Non-executive Directors Richard Cranfield Christopher Munro Neil Holden Caroline Banszky Victoria Cochrane Robert Lister Company Secretary Helen Wakeford Independent Auditors BDO LLP 150 Aldersgate Street London EC1A 4AB Solicitors Eversheds Sutherland (International) LLP One Wood Street London EC2V 7WS Peel Hunt LLP Moor House 120 London Wall London EC2Y 5ET Principal Bankers NatWest Bank Plc 135 Bishopsgate London EC2M 3UR Registrars Equiniti Group plc Sutherland House Russell Way Crawley RH10 1UH Registered Office 29 Clement’s Lane London EC4N 7AE Investor Relations Jane Isaac 020 7608 4900 Website www.integrafin.co.uk Company number 08860879 134 INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 GLOSSARY OF TERMS AGM Annual General Meeting ISAs (UK) International Standards on Auditing (UK) CASS Client Assets Sourcebook IT Investment Trust CEO Chief Executive Officer CFO Chief Financial Officer COO Chief Operating Officer COREP Common Reporting, as required by the Capital Requirements Directive IV COSO Committee of Sponsoring Organisation of the Treadway Commission ETF Exchange-traded Fund FCA Financial Conduct Authority FRC Financial Reporting Council FUD Funds Under Direction GDPR General Data Protection Regulation MiFID II Second Markets in Financial Instruments Directive NED Non-executive Director Net inflow Net new business onto the platform OEIC Open Ended Investment Company ORSA Own Risk and Solvency Assessment Outflow Business leaving the platform SCR Solvency Capital Requirement TCF Treating Customers Fairly The company IntegraFin Holdings plc The Group IntegraFin Holdings plc 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 IFRS International Financial Reporting Standards ILInt IntegraLife International Limited ILUK IntegraLife UK Limited Inflow Gross new business onto the platform IntegraFin IntegraFin Holdings Limited IP Intellectual Property ISA Individual Savings Account INTEGRAFIN ANNUAL REPORT YEAR ENDED 30 SEPTEMBER 2019 135 M137 September 2019 IntegraFin Holdings plc, 29 Clement’s Lane, London, EC4N 7AE Tel: (020) 7608 4900 Fax: (020) 7608 5300 (Registered office: as above; Registered in England and Wales under number: 08860879) The holding company of the Integrated Financial Arrangements Ltd group of companies.