LSL Property Services plc Annual Report and Accounts 2018 LSL Property Services plc is a leading provider of residential property services to its key customer groups incorporating estate agency, financial services, and surveying and valuation businesses. L S L P r o p e r t y S e r v i l c e s p c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 8 c115055_LSL.indb 3 22/03/2019 19:02 Annual Report and Accounts 2018 Contents Overview, Strategic Report and Directors’ Report Overview 1 Highlights 2018 LSL Today 2 4 Milestones 5 Chairman’s Statement 7 Group Chief Executive’s Review Strategic Report 14 Strategy 15 Business Model 16 Markets 19 Business Review – Estate Agency Division 23 Business Review – Surveying Division 24 Financial Review 27 Principal Risks and Uncertainties 35 Corporate Social Responsibility 44 The Board w e i i v e R s s e n s u B d n a t r o p e R ’ s r o t c e r i D 47 Directors’ Report (including Corporate Governance Reports) Statement of Directors’ Responsibilities in Relation to the Group Financial Statements Report of the Directors Corporate Governance Report 48 53 65 Audit & Risk Committee Report Directors’ Remuneration Report 78 Financial Statements 104 Independent Auditor’s Report to the Members of LSL Property Services plc 114 Group Income Statement 115 Group Statement of Comprehensive Income 116 Group Balance Sheet 117 Group Statement of Cash-Flows 118 Group Statement of Changes in Equity 119 Notes to the Group Financial Statements 170 Statement of Directors’ Responsibilities in Relation to the Parent Company Financial Statements 171 Parent Company Balance Sheet 172 Parent Company Statement of Cash-Flows 173 Parent Company Statement of Changes in Equity 174 Notes to the Parent Company Financial Statements Other Information 187 Definitions 192 Shareholder Information Forward Looking Statements This Report may contain forward looking statements with respect to certain plans and current goals and expectations relating to the future financial condition, business performance and results of LSL. Further information about forward looking statements can be found in the Shareholder Information section on page 192. Segmental Reporting To reflect the increased importance of LSL’s Financial Services businesses, the LSL Board has decided to update the Group segmental reporting effective from 1st January 2019. From 1st January 2019 LSL will report three segments: Estate Agency; Financial Services; and Surveying and Valuation Services. The Financial Services segment will incorporate all LSL’s Financial Services businesses. The Estate Agency segment will primarily incorporate the results from the Estate Agency networks (Your Move, Reeds Rains, LSLi and Marsh & Parsons) and Asset Management. The Surveying and Valuation Services segment is unchanged. Some sections of this Report contain information based on two segments and others contain information based on the new three segment reporting, to reflect the changes effective from the 1st January 2019. c115055_LSL.indb 4 22/03/2019 19:02 Highlights 2018 Resilient performance despite subdued market conditions Group £324.6m Group Revenue (2017: £311.5m) £35.9m Group Underlying Operating Profit (2017: £37.5m) 11.1% Group Underlying Operating Margin (2017: 12.0%) £41.6m Group Adjusted EBITDA (2017: £42.7m) £25.4m Group Operating Profit (2017: £42.1m) £23.1m Profit before tax (2017: £40.1m) £3.0m Net exceptional cost (2017: gain of £9.3m) 27.2p Adjusted Basic Earnings Per Share (2017: 28.3p) 10.9p Full year dividend per Share (2017: 11.3p) Estate Agency and Related Services Surveying and Valuation Services £20.6m Underlying Operating Profit (2017: £26.9m) £20.4m Underlying Operating Profit (2017: £18.9m) Group Revenue – £m Group Underlying Operating Profit¹ – £m Group Underlying Operating Margin – % Group Adjusted EBITDA2 – £m Group operating profit – £m Profit before tax – £m Net exceptional (cost)/gain – £m Basic Earnings Per Share (EPS) – pence Adjusted Basic Earnings Per Share (EPS) – pence3 Net Bank Debt4 at 31st December – £m Final proposed dividend per Share – pence Full year dividend per Share – pence 2018 324.6 35.9 11.1 41.6 25.4 23.1 (3.0) 17.4 27.2 32.1 6.9 10.9 2017 % change 311.5 37.5 12.0 42.7 42.1 40.1 9.3 32.6 28.3 30.0 7.3 11.3 +4 -4 -3 -40 -42 -47 -4 +7 -5 -4 Notes: 1 Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 5 to the Financial Statements) 2 Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property, plant and equipment (as defined in Note 5 to the Financial Statements) 3 Refer to Note 10 to the Financial Statements for the calculation 4 Refer to Note 32 to the Financial Statements for the calculation c115055_LSL.indb 1 01 22/03/2019 19:02 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview LSL Today LSL has established leading positions in its market segments LSL is a leading provider of residential property services to its key customer groups. Services include: residential sales, lettings, surveying, conveyancing, and mortgage and non-investment insurance brokerage services. Services to mortgage lenders include: valuations and panel management services, asset management and property management services. To reflect the increased importance of LSL’s Financial Services businesses to the Group, the Board has decided to change the Group’s segmental reporting effective from 1st January 2019. With effect from 1st January 2019, LSL will report three segments: Estate Agency, Financial Services, and Surveying and Valuation Services. Further details of the new segment reporting are set out in the Financial Review of this Report. Information included in this section of this Report is split into the three principal segments and reflects the position as at 5th March 2019. For further information on all LSL brands please visit lslps.co.uk See also Note 35 to the Financial Statements for information relating to LSL’s subsidiaries and joint ventures. 02 c115055_LSL.indb 2 Estate Agency Division Residential Sales and Lettings LSL is one of the largest estate agency networks in the UK¹. It has strong established high street estate agency brands. These include: Your Move, with 175 branches, national coverage and one of the most visited estate agency websites in the UK2; Reeds Rains, a predominantly northern based network of 106 branches and one of the most recognised estate agency brands in the North of England3; Your Move and Reeds Rains operate a successful franchise model in approximately 50% of the branch networks; Marsh & Parsons, operating out of 28 branches, a leading London premium brand estate agency which brings exposure to the prime and outer Central London property markets; LSLi, nine estate agency companies with a combined network of 59 branches (including franchised branches) based in the South East of England; and owned by the holding company LSLi; LSL Land & New Homes, a land and new homes business that provides a complete range of specialist services for house builders, developers and investors of all sizes; and Homefast, which provides conveyancing panel management and support services to LSL’s Residential Sales and Lettings branches and customers. All LSL’s Residential Sales and Lettings estate agency companies are members of The Property Ombudsman Scheme (TPOS), which operates a residential sales and lettings code of practice approved by the Trading Standards Institute (TSI) under its Consumer Codes Approval Scheme (CCAS). Asset Management LSL’s asset management companies are market leaders in the sale of residential properties on behalf of corporate clients and property investors. LSL’s three asset management companies are: LSL Corporate Client Department operates a repossessions asset management business and a property management business for multi- property landlords; St Trinity Asset Management specialises in repossession property sales and a range of other services; Templeton LPA a Law of Property Act fixed charge receiver. 22/03/2019 19:02 03 Financial Services Division Surveying and Valuation Services Division LSL’s Financial Services businesses provide services to financial services intermediaries relating to the arrangement of mortgages and non- investment insurance products. With 8564 affiliated authorised firms, LSL’s combined appointed representative network is the second largest in the UK5. e.surv Chartered Surveyors is one of the country’s largest providers of property risk and residential valuation services6. With a network of over 600 surveyors, e.surv is the UK’s largest employer of RICS registered surveyors. They use industry-leading technology to provide a range of products and services to a customer base that includes lenders, intermediaries, social housing entities, estate agents, and consumers. In 2018 e.surv was awarded a material contract to supply valuation and surveying services to Lloyds Bank plc. Walker Fraser Steele is one of the longest established Chartered Surveyor brands in Scotland, Walker Fraser Steele was founded in Glasgow in 1884 and became part of e.surv Chartered Surveyors in 2013. The acquisition substantially expanded LSL’s geographic coverage within Scotland and the business now provides surveying and valuation services from locations across Scotland for both local and national clients, including the Home Report, an essential component of the Scottish home buying process. PRIMIS is the trading style of LSL’s mortgage and protection networks that are all authorised and regulated by the FCA, formerly trading as First Complete, Pink Home Loans (Advance Mortgage Funding) and Personal Touch Financial Services. The Mortgage Alliance is a trading style of Advanced Mortgage Funding and distributes mortgages and financial services products to mortgage intermediaries who are directly authorised and regulated by the FCA. Embrace Financial Services is an appointed representative of First Complete and employs financial consultants who deliver services to customers of the Group’s Estate Agencies. Linear Financial Solutions is an appointed representative of Advanced Mortgage Funding and provides financial consultants who are based in the branches of independent estate agents. Mortgages First and RSC New Homes are both appointed representatives of First Complete and specialise in arranging mortgages and non-investment insurance products to customers financing the purchase of new-build properties. Insurance First is an appointed representative of First Complete and specialises in arranging non-investment insurance products for customers purchasing new-build property. First2Protect is a specialist business arranging household insurance for customers of LSL’s Estate Agency Division and third party introducers. Included within the Financial Services segment is LSL’s investment in Mortgage Gym which is a digital marketplace that matches mortgage borrowers with mortgage lenders, but without taking away real people from the process. LSL owns c35% of the equity in Mortgage Gym. 02 Notes: 1 The LSL Estate Agency network is made up of wholly owned and franchised branches. The market position is based on LSL’s own calculations and assessment of branch numbers using publicly available data 2 Google Analytics January-December 2018 3 Research Bods independently commissioned research July-September 2018 4 856 was at 31st December 2018 5 Which Network – network performance figures for January 2019 showing the combined numbers for PRIMIS (First Complete and Advance Mortgage Funding) 6 The market position is based on LSL’s own calculations and assessment using publicly available data c115055_LSL.indb 3 03 22/03/2019 19:02 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Milestones 2015 Acquisition of Thomas Morris. Completed 30 lettings book acquisitions. 2017 Extension of contract to supply UK residential surveying and valuation services to Barclays Bank PLC. Extension of contract to supply UK residential surveying and valuation services to Santander UK plc. Investment in and commencement of a strategic partnership with Mortgage Gym Acquisition of Personal Touch Financial Services 2014 Commencement of a new contract with Lloyds Banking Group for surveying and valuation services. Commencement of renewed contract with Barclays Bank PLC for surveying and valuation services. Zoopla IPO and special dividend of 16.5 pence per Share paid to Shareholders. Acquisition of Hawes & Co. Completed ten lettings book acquisitions. 2016 Extension of banking facility to May 2020. Acquisition of Group First (including Mortgages First and Insurance First Brokers). Sale of entire shareholding in ZPG plc. Completed nine lettings book acquisitions. Launch of PRIMIS brand Commencement of new Lloyds Bank plc surveying and valuation services contract including the transfer of Lloyds Bank plc surveyors and back-office employees into e.surv 2018 Extension of banking facility to May 2022 Acquisition of RSC New Homes 04 c115055_LSL.indb 4 22/03/2019 19:02 0505 Chairman's Statement Introduction The Group delivered a highly resilient revenue and operating profit performance in 2018 despite challenging residential property market conditions. Group Underlying Operating Profit1 of £35.9m in 2018 was 4% below the prior year (2017: £37.5m) with Group Adjusted EBITDA2 down 3%. Group Revenue in 2018 grew by 4% to £324.6m (2017: £311.5m) reflecting overall growth in both Divisions. We continue to deliver a range of proactive self-help initiatives demonstrating the breadth of opportunity across the Group. These initiatives included the material contract win for the supply of surveying and valuation services to Lloyds Bank plc, the acquisitions in our Financial Services business of Personal Touch Financial Services and RSC New Homes, the acquisition of a c.35% holding in Mortgage Gym, a digital mortgage marketplace business, and the recommencement of our lettings book acquisition programme with six lettings books acquired during the period. The changes to the structure of the Your Move and Reeds Rains estate agency branch networks and operations announced on 5th February 2019 demonstrate our commitment to evolve our business model to adapt to changes in the landscape and customer demands in order to drive value for our Shareholders. The Your Move and Reeds Rains future focus on 144 keystone branches is to create a platform that will benefit from their larger scale, enabling us to invest in people and technology with the aim of providing enhanced levels of service to our customers whilst ensuring operational performance is optimised by competing more effectively in local markets. Delivering the ways of working programme into Your Move and Reeds Rains is expected to deliver material improvement in Your Move and Reeds Rains operating profit, assuming no material change in market conditions. LSL retains a strong position in its traditional Estate Agency business. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that Estate Agency branches will continue to remain core to providing the service our customers expect LSL has a 14.7% minority shareholding in Yopa. LSL’s previous carrying value of £20.0m for Yopa has been written down through reserves by £12.2m to £7.8m as at 31st December 2018 to reflect the Board’s assessment of fair value. Dividend The Board continues to support our previously communicated dividend policy, to apply a dividend pay-out ratio of between 30% to 40% of Group Underlying Operating Profit1 after interest and tax. The Board has reviewed the policy while considering the risks and capital management decisions facing the Group. Adjusted Basic Earnings Per Share for 2018 was 27.2 pence, a decrease of 4% on the prior year (2017: 28.3 pence). The Board has a positive view of the future prospects for the business whilst also being mindful of the uncertain economic and political landscape which has an impact on consumer sentiment. The proposed dividend payment is at the upper end of the range of our stated policy and a final dividend of 6.9 pence per Share (2017: 7.3 pence per Share) will be proposed to Shareholders at the forthcoming AGM, giving a total dividend for 2018 of 10.9 pence per Share (2017: 11.3 pence per Share). The ex-dividend date for the final dividend is 21st March 2019 with a record date of 22nd March 2019 and a payment date of 7th May 2019. The last date for election is 5th April 2019. Corporate Governance and Board The Board remains committed to high levels of corporate governance and during 2018, LSL has complied in all respects with the UK Corporate Governance Code (April 2016 edition). We note the publication of the revised UK Corporate Governance Code and Guidance on Board Effectiveness which was published in July 2018 and will apply to LSL from 1st January 2019. We have begun the implementation of actions to reflect the 2018 Code in our corporate governance arrangements, 04 c115055_LSL.indb 5 including the implementation of measures to support greater stakeholder engagement (including workforce engagement) and the development of LSL’s culture, purpose and values. Further details on the steps we are taking are contained in our Corporate Governance Report. In relation to 2018, as Chairman, I am responsible for leadership of the Board, and I have together with my fellow Directors reviewed the effectiveness of the Board and its Committees. The 2018 annual evaluation exercise had regard to the requirements of both the 2016 and 2018 editions of the Code and its associated guidance. In particular, we reviewed the composition of the Board and its Committees and our succession arrangements. Following this review we concluded that we have the appropriate balance of skills, independence and knowledge of the Group together to enable the Board to discharge its duties and responsibilities effectively. The evaluation also considered other matters such as leadership, division of responsibilities, meeting arrangements, and included a review of the annual evaluation process itself. Details of our corporate governance arrangements and the recommendations arising from the 2018 evaluation exercise Simon Embley Chairman 05 05 22/03/2019 19:02 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Chairman's Statement £324.6m Group Revenue Up 4% (2017: £311.5m) £23.1m Profit before tax Down 42% (2017: £40.1m) 27.2p Adjusted Basic Earnings Per Share Down 4% (2017: 28.3p) 10.9p Full year dividend per Share Down 4% (2017: 11.3p) Full year 2018 Underlying Operating Profit £35.9m 50% 50% n Estate Agency n Surveying 06 c115055_LSL.indb 6 are contained within the Corporate Governance Report of this Report together with details of how we have implemented recommendations which arose from the 2017 evaluation exercise. I would like to take this opportunity to thank Kumsal Bayazit Besson who has been a Non Executive Director since September 2015 and who intends to retire from the Board and its Committees with effect from the 2019 AGM. Kumsal has made a significant contribution during her tenure as a Director and she is leaving LSL to focus on her new role as CEO of Elsevier. I would also like to welcome Darrell Evans, who joined the Board and its Committees as a Non Executive Director on 28th February 2019. Darrell joins LSL with significant experience in Financial Services and he is currently the Chief Commercial Officer at the Co-Operative Bank plc. The Nominations Committee will, on behalf of the Board, review the Board’s composition during 2019. Details relating to all our Directors are included in The Board section of this Report and our website. Outlook Market conditions in 2019 have been notably softer than the equivalent period in 2018, whilst LSL’s financial performance so far in 2019 has been marginally behind the Board’s expectations. Nevertheless, at this early stage in the year, the Board’s current expectation is that the Group will deliver a full year Underlying Operating Profit in line with its prior expectations, as the business is expected to continue to benefit from the range of LSL’s ongoing self-help measures. We continue to remain cautious on the residential property market outlook for 2019 given the current uncertainty over the UK and global political and economic environment and the potential impact on UK consumer confidence. The Board currently expects to see a material reduction in the volume of house purchase transactions compared to the prior year. Mortgage costs continue to be low by historic standards and mortgage availability remains good. The medium to longer term fundamentals of the UK housing market remain solid. The final arrangements for the planned exit from the European Union are uncertain. In the eventuality that the outcome leads to a changed impact on consumer confidence and our business, we will update our Shareholders. Although Brexit and the current political environment continues to create uncertainty, the Group has a robust balance sheet with relatively low levels of gearing and is very cash generative at an operational level. LSL continues to execute on its stated strategy and we are confident that LSL, with its market leading brands, broad portfolio of residential property services and the benefits from the proactive self- help measures, remains well positioned to perform well given a range of potential market conditions, in order to maximise Shareholder value. The Board remain confident of the opportunities for further positive progress for the Group. Simon Embley Chairman 5th March 2019 Notes: 1 Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 5 to the Financial Statements) 2 Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property plant and equipment (as defined in Note 5 to the Financial Statements) 22/03/2019 19:02 07 Group Chief Executive’s Review 2018 Overview In the context of challenging market conditions, the Group delivered a highly resilient performance in 2018, underpinned by a continuing range of self-help measures delivered across the Group. Group revenues for the year ended 31st December 2018 increased by 4% to £324.6m (2017: £311.5m) reflecting overall growth in both Divisions, with Estate Agency revenue up 3% and Surveying revenue up 9%. Group Underlying Operating Profit1 was down 4% to £35.9m (2017: £37.5m), and Group Adjusted EBITDA2 was down 3% to £41.6m (2017: £42.7m). Profit before tax of £23.1m was down 42% compared to the prior year (2017: £40.1m). The Group has a strong balance sheet with closing Net Bank Debt at 31st December 2018 of £32.1m (2017: £30.0m) and low level of gearing3 at 0.8 times Group Adjusted EBITDA (2017: 0.7 times). The modest increase in Net Debt in 2018 is after incurring total cash consideration of £11.8m for the funding of two Financial Services acquisitions (Personal Touch Financial Services and RSC New Homes), one Financial Services investment (Mortgage Gym) and six 06 Ian Crabb Group Chief Executive Officer c115055_LSL.indb 7 e.surv iPad in use - investment in technology has enabled e.surv to optimise efficiency lettings books acquisitions during the year. LSL also maintained the payment of dividends to Shareholders during the year. The Group generated strong cash from operations of £36.9m (2017: £41.5m) converting 103% of Group Underlying Operating Profit to cash-flow from operations (pre PI and exceptionals) (2017: 117%). In the Estate Agency Division, we continued to invest in the growing parts of our businesses and delivered strong year-on-year revenue growth in Lettings (+4%) and Financial Services (+17%). In the Surveying Division, we delivered strong operating profit growth (+9%) and strong margins (29.3%). During 2018, we continued to execute on our stated strategy and made positive progress across the Group as follows: • In May 2018, we were pleased to announce the material contract win for the supply of surveying and valuation services to Lloyds Bank plc. The initial performance of this contract is in line with expectations • During 2018, LSL continued its strategy to evaluate selective acquisitions and completed two Financial Services related acquisitions, Personal Touch Financial Services and RSC New Homes which are both performing in line with expectations. These acquisitions support LSL’s stated strategy of enhancing its position as a leading mortgage distributor and are an excellent fit with our existing Financial Services businesses. LSL also acquired a c.35% holding in Mortgage Gym, a digital mortgage marketplace business in July 2018 • During 2018, LSL restarted its lettings book acquisition programme with six lettings books acquired during the period Reshaping Your Move and Reeds Rains branch networks The changes to the structure of the Your Move and Reeds Rains estate agency branch networks and operations announced on 5th February 2019 are proceeding in line with expectations. The Your Move and Reeds Rains branch networks have been reduced from 308 to 144 keystone branches following the closure and merging of 81 neighbouring branches into the keystone branch network, the franchising of 39 branches and the closure of 44 branches. Delivering the ways of working programme into Your Move and Reeds Rains is expected to deliver material improvement in Your Move and Reeds Rains operating profit, assuming no material change in residential property market conditions. 07 22/03/2019 19:02 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Group Chief Executive’s Review The Market in 2018 The UK residential property market was subdued in 2018. Approvals for house purchases4 in 2018 were down by 1.9% with the decline in market transactions continuing to be more substantial in London and the South East5. Total mortgage approvals4 increased by 0.6% in 2018, with the increase in remortgage approvals of 3.9% offsetting the fall in house purchase approvals. The increase in remortgage approvals included strong growth in the first half of 2018 (+7.9%) compared to the same period in 2017 reflecting an increase in remortgage activity due to the widely anticipated interest rate increase announced by the Bank of England in May 2018. Second half mortgage activity in 2018 was broadly flat against the same period in 2017. Average house prices6 in England and Wales grew by 0.1% (2017: 3.9%) to £305,284 with a decline in Greater London (-1.1%). Excluding Greater London and the South East, the average increase was 1.0%. The proportion of residential housing stock available for sale with online and hybrid estate agents sector continued to grow modestly on a year-on-year basis, increasing from 7% in 2017 to 8% in 20187. Total gross mortgage lending in 2018 was £269bn8 (2017: £261bn). The proportion of mortgage lending in the market placed through intermediaries increased to 71% in 2018 (2017: 68%)9. Following market declines in the repossession market in the past few years, market repossessions volumes declined in 2018, reducing by 9.2% to 6,75010 total repossessions as interest rates remained historically low and this was the lowest number since 1981. Our market position LSL continues to hold market leading positions in its core Estate Agency business comprising 12 Estate Agency subsidiaries: Your Move, Reeds Rains, LSLi group (nine companies) and Marsh & Parsons. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that our Estate Agency branches will continue to remain core to providing the service our customers expect. In Your Move and Reeds Rains, the newly established keystone network of 144 branches are situated in core locations across the UK and generally have larger teams of dedicated experts in Residential Sales, Lettings and Financial Services roles than the average Your Move and Reeds Rains branches previously had in place. The ambition for these keystone branches is to create a platform that will benefit from their larger scale, enabling us to invest in people and technology with the aim of providing enhanced levels of service to our customers whilst ensuring operational performance is optimised by competing more effectively in local markets. Our commitment to the new IT platform and investment in enhanced technology is intended to give these Your Move and Reeds Rains branches the opportunity to cover a wider geography and benefit from further scale. Marsh & Parsons continues to implement its well established strategy of expanding its branch network with a focus on locations outside prime Central London. During 2018 we opened one new Marsh & Parsons branch in Chiswick, in outer prime Central London, which is performing in line with expectations. The LSLi group of companies today operate 57 owned branches and they will continue with their existing strategy to develop the nine well established local companies in their existing markets in the South East of England. In addition, in 2019 the LSLi group of companies will continue to actively evaluate opportunities for lettings book acquisitions. LSL has continued to monitor the progress of the Government’s review of tenant fees which sets out to ban letting fees paid by tenants in the private rented sector and capping tenancy deposits in England and Wales. The Government has confirmed that the legislation will come into effect on 1st June 2019. In response to the change in legislation, LSL has made the necessary preparations to ensure these changes will be fully implemented across all of LSL’s Estate Agency brands. We have also put in place a range of commercial measures in lettings across our Estate Agency brands to optimise future organic revenue growth. In Financial Services, during 2018 the Group arranged total mortgage lending of £29.0bn (2017: £21.0bn). Measured by the number of appointed representatives, as at 31st December 2018, LSL’s overall combined broker networks are the second largest in the UK11. Financial Services income represented 27% of total Group Revenue in 2018 (2017: 24%) demonstrating LSL’s growing position as a leading financial services distributor. Our Surveying Division became the clear market leader in 2018, maintaining strong relationships with many of the UK’s largest lenders. During 2018 LSL was awarded a material contract to supply surveying and valuation services to Lloyds Bank plc. The five year contract included the transfer to e.surv of the existing Lloyds Bank plc surveyors and back-office employees. LSL’s Surveying Division is the UK’s largest provider of residential valuation services nationwide and is the largest employer of surveyors in the UK5 with 503 qualified operational surveyors as at 31st December 2018. Yopa LSL retains a strong position in its traditional Estate Agency business. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that Estate Agency branches will continue to remain core to providing the service our customers expect. LSL has a 14.7% minority shareholding in Yopa. LSL’s previous carrying value of £20.0m for Yopa has been written down through reserves by £12.2m to £7.8m as at 31st December 2018 to reflect the Board’s assessment of fair value. 08 c115055_LSL.indb 8 22/03/2019 19:02 09 Change to segment reporting LSL’s Financial Services revenue has grown materially in recent years, through both organic growth and selective acquisitions. LSL’s Financial Services Revenue CAGR over the five year period, 2014 to 2018, has been 19%, representing approximately 27% of total Group revenue in 2018, compared to 14% in 2013. The Board has carried out a review of the structure of the financial information it requires in order to assess the performance of the Group, allocate resources and assist in investor understanding of the underlying performance trends and drivers of value. To reflect the growth and increased importance of LSL’s Financial Services businesses, the Board has decided to update the Group segmental reporting effective from 1st January 2019. The Group currently reports two segments: Estate Agency and Related Services, and Surveying and Valuation Services. From 1st January 2019 LSL will report three segments: Estate Agency; Financial Services; and Surveying and Valuation Services. The Financial Services segment will incorporate all LSL’s Financial Services businesses. The Estate Agency segment will primarily incorporate the results from the Estate Agency networks (Your Move, Reeds Rains, LSLi and Marsh & Parsons) and Asset Management. The Surveying and Valuation Services segment is unchanged. The 2018 and 2017 financial results contained within this Preliminary announcement are on the previous segment reporting basis. Strategy LSL remains committed to delivering on our stated strategy which now includes the separate Financial Services segment: Estate Agency • Ambition to achieve £80k-£100k profit per branch12 in the medium term based on the expectation of a normalised level of market transactions • Ambition to expand the number of Marsh & Parsons branches to a total of 36 in the medium term, particularly outside prime Central London • Grow recurring and where market conditions permit counter-cyclical income streams • Evaluate selective acquisitions of Residential Sales businesses and Lettings books Financial Services • Enhance LSL’s position as a leading distributor of mortgage and non- investment insurance products • Consistent delivery of appropriate outcomes for consumers with a focus on “best practice” standards of regulatory compliance • Enhancement of technology solutions to improve the customer experience and operational efficiency • Evaluate further selective Financial Services acquisitions Surveying and Valuation Services • Optimise contract performance and revenue generation from business to business customers • Achieve further improvement in efficiency and capacity utilisation • Use technology to target further improvements in customer satisfaction and performance • Continue the graduate training programme LSL performance in 2018 Estate Agency Division Total Estate Agency income of £254.8m (2017: £247.4m) increased by 3%. This increase resulted from the consistent execution of our strategies with strong growth in both Lettings income (+4%) and in Financial Services income (total growth +17%, organic growth +1%). Operating profit being down 24% reflects the effect of operational gearing on lower residential exchange volumes which more than offset the benefits from Financial Services income and Lettings income growth. Residential Sales exchange income Residential Sales exchange income decreased by 9% to £69.9m (2017: £76.6m) due primarily to the final quarter of 2017 residential property market conditions impacting opening 2018 pipelines and subdued activity during 2018. Residential Sales exchange income was also impacted by selective branch closures in the final quarter of 2017 (2% of wholly owned branch network). LSL has remained extremely disciplined in its Residential Sales exchange fee strategy throughout 2018. Average LSL Estate Agency Residential Sales 08 c115055_LSL.indb 9 09 22/03/2019 19:02 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Marsh & Parsons LSL estimates that Residential Sales volumes in the prime Central London market reduced by 15% to 20% in 2018 with Greater London house prices falling by 1.1%. Given the overall challenging prime Central London market, Marsh & Parsons delivered a resilient top line performance with revenue down by 2% in 2018 to £33.5m (2017: £34.3m). Marsh & Parsons Residential Sales income fell by 13% in 2018 which represents a solid performance in light of the overall prime Central London market conditions. We are pleased with the Lettings performance with income growth of 4%. Lettings revenue now represents 63% of Marsh & Parson’s total revenue (2017: 59%). Expenditure at Marsh & Parsons was broadly flat year-on-year reflecting the increased staff costs of the Chiswick branch opened in April 2018 and the full year impact of the two branch openings in 2017, being largely offset by lower costs in a number of expenditure categories. Full year operating profit fell to £2.3m (2017: £3.9m). Adjusted EBITDA was £3.4m (2017: £4.9m). Profit in 2017 included a gain on sale of property of £0.7m (2018: £nil). We continued with our branch expansion strategy in 2018, opening one new branch during the year in the outer prime Central London location of Chiswick. We are pleased with the performance of this new branch. This takes our total number of Marsh & Parsons branches to 28 as at 31st December 2018. LSL’s ambition remains to expand the number of Marsh & Parsons branches to a total of 36 in the medium term, particularly outside prime Central London. Outer prime Central London has not been as negatively impacted by subdued market conditions as prime Central London and Marsh & Parsons is looking to expand its branch footprint in outer prime Central London locations. Group Chief Executive's Review exchange fee (£) per unit increased by 1% to £3,071 (2017: £3,042). Lettings income In 2018 we delivered growth in Lettings income of 4% (organic growth: 3%). Lettings income represented 30% of total Estate Agency Division income in 2018 (2017: 30%). In line with our stated strategy, we restarted our lettings book acquisition programme during 2018 and acquired six lettings books in 2018 for a total consideration of £1.9m. The lettings books are performing in line with expectations and have been successfully integrated into the Estate Agency network. Financial Services Total Financial Services income grew strongly again with 17% year-on- year growth in 2018. Adjusting for the acquisitions of Personal Touch Financial Services and RSC New Homes in the first quarter of 2018, we delivered organic growth of 1% which was slightly higher than the market as measured by Total Mortgage Approvals. Financial Services income increased as a proportion of the Estate Agency businesses and represented 34% of total Estate Agency Division income in 2018 (2017: 30%) reflecting our continuing strategy to enhance LSL’s position as a leading distributor of mortgage and non- investment insurance products. In 2018, LSL further strengthened its position as a leading distributor of mortgage and non-investment insurance products and LSL delivered strong overall growth in the value of mortgage completions which were up 38% to £29.0bn in 2018 (2017: £21.0bn). LSL’s market share is estimated to be 8% of the total market value of mortgage completions13. 10 c115055_LSL.indb 10 22/03/2019 19:02 11 Estate Agency profit per branch (Your Move, Reeds Rains and LSLi) Operating profit per owned branch in 2018 was £18,300 (2017: £32,000) due to the impact of the challenging residential sales market conditions on Residential Sales exchange income partly offset by growth in Financial Services income and Lettings income. Surveying Division The Surveying Division delivered strong revenue performance increasing by 9% to £69.8m (2017: £64.1m), which included a material contribution in the second half from the successful commencement of the Lloyds Bank plc surveying and valuation services relationship, up 25% year-on-year. The first half was down 6% year-on-year, impacted by market conditions and lender mix. The Surveying Division delivered strong growth in operating profit of 8% to £20.4m (2017: £18.9m) and continued to deliver strong operating margins of 29.3% in 2018 (2017: 29.4%). Total number of jobs performed during the year was 366,000 (2017: 309,000) with income per job of £191 (2017: £207). The total number of qualified operational surveyors at 31st December 2018 was 503, an increase of 182 over 2017 due primarily to the transfer to e.surv of the existing Lloyds Bank plc surveyors as part of the contract awarded to e.surv during May 2018, to supply surveying and valuation services to Lloyds Bank plc. The initial performance of the contract for the supply of surveying and valuation services to Lloyds Bank plc is in line with expectations. Our on-going graduate programme continues to be successful and assists in alleviating the impact of capacity constraints in the market. In 2018 the Group continued to make positive progress in addressing historic claims and there has been a net £2.2m exceptional gain and reduced PI Costs payments of £1.7m during 2018 compared to the previous year (2017: £3.3m). Our customers Our continued focus on providing the best service to our customers has been recognised in 2018 with numerous industry awards including: • Marsh & Parsons: UK Property Awards 2018: Best Estate Agency Marketing, London – Gold Award, Best Real Estate Agency London – Gold Award, Best Lettings Agency, London – Gold Award. International Property Awards 2018: Best Estate Agency Marketing, UK – Gold Award, Best Estate Agency, UK – Gold Award, Best International Real Estate Agency, UK – Gold Award. London Magazine Club Awards 2018: Advertising Campaign of the Year – Silver Award. Creative Pool Awards 2018: Bronze for Photography. • Davis Tate: Best Estate Agent Guide 2018: (*) Abingdon, Burghfield, Shinfield and Wantage – Rated Highly (Sales) and Rated Excellent (Lettings), Henley and Pangbourne – Rated Highly (Sales) and Rated Exceptional (Lettings), Didcot and Reading – Rated Highly (Lettings), Goring – Rated Excellent (Lettings), Wallingford – Rated Excellent (Sales) and Rated Excellent (Lettings), Woodley – Rated Exceptional (Sales) Sonning Common and Twyford – Rated Exceptional (Sales) and Rated Exceptional (Lettings). • Frost’s: The Negotiator Awards: Lettings Agency of the Year (2-5 branches) – Gold Award. The ESTAS – Estate Agency of the Year Awards: Letting Agent (rated by tenants), Hertfordshire and Middlesex – Silver Award, Letting Agent (rated by landlords), Hertfordshire and Middlesex – Silver Award. • Thomas Morris: Guild of Property Professionals 2018: Lettings (East Anglia) – Gold Award, Sales (East Anglia) – Gold Award. Fine & Country Awards 2018: Best Property Presentation and Best Overall Operator. The ESTAS – Estate Agency of the Year Awards: Best Local Agency in Central England, Letting Agent (rated by tenants), East of England – Silver Award. The 2018 all Agents Awards: Best Estate Agent in East of England – Gold Award. Relocation Agent Network: Best Agent in East Anglia and Essex, Customer Relocation Award – Winner. The Negotiator Awards 2018: Lettings Agency of the Year (6-9 branches) – Gold Award, Estate Agency of the Year (6-9 branches) – Gold Award, Community Champion of the Year – Silver Award, East of England Agency of the Year – Silver Award. Agents Giving Awards 2018: Best Team/Company Fundraiser. Best Estate Agent Guide 2018(*) : East of England (Lettings) – Gold Award, East of England (Sales) – Gold Award, Outstanding Contribution To Estate Agency – Simon Bradbury. • e.surv Chartered Surveyors: Money Age Awards 2018: Mortgage Surveyor of the Year. Mortgage Introducer Awards 2018: Best Survey/Valuation Business • LSL Financial Services: Precise Mortgage Awards: Best Distribution Group 2018. Lifetime Achievement Award – David Copland. (*) As judged and announced in 2018 Post balance sheet events On 5th February 2019 LSL announced an Estate Agency Strategy: ways of working programme update and work has now commenced on the reshaping of the Your Move and Reeds Rains branch networks. As disclosed on 5th February 2019, LSL expects to incur an exceptional P&L charge of approximately £14m in 2019 and £1m in 2020, with cash costs amounting to approximately £12m over the three years from 2019 to 2021 including approximately £9m cash costs in 2019. 10 c115055_LSL.indb 11 11 22/03/2019 19:02 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Group Chief Executive's Review LSL continues to execute on its stated strategy and we are confident that LSL, with its market leading brands, broad portfolio of residential property services and the benefits from the proactive self- help measures, remains well positioned to perform well given a range of potential market conditions, in order to maximise Shareholder value. The Board remain confident of the opportunities for further positive progress for the Group. Ian Crabb Group Chief Executive Officer 5th March 2019 The changes to the structure of the Your Move and Reeds Rains estate agency branch networks announced on 5th February 2019 has reduced the total number of Your Move and Reeds Rains branches from 404 to 279 of which 144 are owned keystone branches and 135 are franchised. Our people The continued success of our business model is attributable to, and underpinned, by our strong brands and excellence in the delivery of high levels of customer services by our colleagues in our Estate Agency, Financial Services and Surveying businesses. I would like to take this opportunity to thank all my colleagues across our businesses for their professionalism and dedication during 2018. I look forward to working with my colleagues to deliver a successful year in 2019. Outlook Market conditions in 2019 have been notably softer than the equivalent period in 2018, whilst LSL’s financial performance so far in 2019 has been marginally behind the Board’s expectations. Nevertheless, at this early stage in the year, the Board’s current expectation is that the Group will deliver a full year Underlying Operating Profit in line with its prior expectations, as the business is expected to continue to benefit from the range of LSL’s ongoing self-help measures. We continue to remain cautious on the residential property market outlook for 2019 given the current uncertainty over the UK and global political and economic environment and the potential impact on UK consumer confidence. The Board currently expects to see a material reduction in the volume of house purchase transactions compared to the prior year. Mortgage costs continue to be low by historic standards and mortgage availability remains good. The medium to longer term fundamentals of the UK housing market remain solid. The final arrangements for the planned exit from the European Union are uncertain. In the eventuality that the outcome leads to a changed impact on consumer confidence and our business, we will update our Shareholders. Although Brexit and the current political environment continues to create uncertainty, the Group has a robust balance sheet with relatively low levels of gearing and is very cash generative at an operational level. Notes: 1 Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 5 to the Financial Statements) 2 Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property, plant and equipment (as defined in Note 5 to the Financial Statements) 3 Operational gearing is defined as Net Bank Debt divided by Group Adjusted EBITDA (Group Adjusted EBITDA is Group Underlying Operating Profit (Note 5 to the Financial Statements) plus depreciation on property plant and equipment) 4 Bank of England for “House Purchase Approvals” and “Total Mortgage Approvals” - January 2019 5 LSL estimates and including Land Registry regional data – February 2019 6 LSL Property Services/ACADATA HPI – February 2019 7 LSL sources/data analysis 8 UK Finance ‘New mortgages by purpose of loan’ – February 2019 (excluding product transfers) 9 UK Finance ‘New mortgages sold by intermediaries’ – February 2019 10 UK Finance ‘Possessions on mortgaged properties’ – February 2019 11 Which-Network – network performance figures – January 2019 12 The profit per branch methodology has been consistently applied since the profit per branch ambition of £80k-£100k was first announced by LSL in March 2014. Profit per branch is calculated for Your Move, Reeds Rains and the LSLi owned branches and excludes Marsh & Parsons 13 LSL’s market share is calculated using gross mortgage completions excluding product transfers 12 c115055_LSL.indb 12 22/03/2019 19:02 Strategic Report In this section 14 Strategy 15 Business Model 16 Markets 19 Business Review - Estate Agency Division 23 Business Review - Surveying Division 24 Financial Review 27 Principal Risks and Uncertainties 35 Corporate Social Responsibility 44 The Board c115055_LSL.indb 13 13 22/03/2019 19:02 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Strategy LSL is committed to delivering long-term Shareholder value by building market leading positions in the residential property services market through organic growth, selective acquisitions and the delivery of high quality service and appropriate outcomes for customers Group Revenue 2018 £324.6m 13% 22% 78% 87% n Estate Agency n Surveying Full year 2018 average FTE 4,763 13%15% 85% 87% n Estate Agency n Surveying 14 LSL remains committed to delivering on its stated strategy which with effect 1st January 2019 is separated into three segments: Estate Agency, Financial Services, and Surveying and Valuation Services. Estate Agency • Ambition to achieve £80,000 to £100,000 profit per branch in the medium term based on the expectation of a normalised level of market transactions. • Ambition to expand the number of Marsh & Parsons branches to a total of 36 in the medium term, particular outside prime Central London. • Grow recurring and where market conditions permit, counter-cyclical income streams. • Evaluate selective acquisitions of Residential Sales businesses and lettings books. Financial Services • Enhance LSL’s position as a leading distributor of mortgage and non-investment insurance products. • Consistent delivery of appropriate outcomes for consumers with a focus on “best practice” standards of regulatory compliance. • Enhancement of technology solutions to improve the customer experience and operational efficiency. • Evaluate further selective Financial Services acquisitions. Surveying and Valuation Services • Optimise contract performance and revenue generation from business to business customers. • Achieve further improvement in efficiency and capacity utilisation. • Use technology to target further improvements in customer satisfaction and performance. • Continue the graduate training programme. c115055_LSL.indb 14 22/03/2019 19:02 15 Business Model Business Model Customers LSL’s Assets B2C Home Owners House Sellers House Purchasers Landlords Tenants B2B Banks/Building Societies Housebuilders Lenders Banks/Building Societies Market Leading Positions 12 Estate Agency Companies 3 Asset Management Companies 3 Financial Services Networks 5 Financial Services Intermediary Companies Land & New Homes Business Conveyancing Support Business Joint Ventures, Investments and Associates Lender Relationships e.surv and Walker Fraser Steele Brands Building a market leading position in the residential property services market. Estate Agency Financial Services Surveying and Valuation Services Acquisitions and Investments Expertise Technology and Infrastructure Brand Investment New Graduates Capital Expenditure Investment Strong Revenue and Profit Margins Dividends Cash-flow LSL’s business model is how LSL puts its strategy into action. The execution of the strategy results in market leading positions in the Group’s business segments which produces a virtuous circle of strong revenues, profitability and cash-flow which allows significant reinvestment in the business in order to further enhance LSL’s market positions, while also paying out a meaningful proportion of earnings as a dividend to Shareholders. Note: Business Model describes the Group’s operations as at 5th March 2019 • LSL is the market leader in Surveying and Valuation Services, second largest combined network in Financial Services, and has market leading positions in Estate Agency. ensuring operational performance is optimised by competing more effectively in local markets and utilising central hubs to handle certain administrative tasks centrally. • LSL serves retail customers in its Estate Agency businesses, • The Financial Services business is a leading financial services such as house sellers and buyers, and landlords and tenants by providing Residential Sales, Lettings, as well as mortgage and non-investment brokerage services and other related services. • LSL serves business customers in its Surveying and Asset Management businesses, such as banks and building societies, and benefits from long-term relationships and contracts. • The growth and reputation of LSL is dependent on providing exceptional service and appropriate outcomes for customers. • The business model has demonstrated resilience to changes in the residential property market due to its market positions in Lettings (recurring income) and Asset Management (counter- cyclical income). • The recent creation of keystone branches in Your Move and Reeds Rains creates a platform that will benefit from their larger scale, enabling us to invest in people and technology with the aim of providing enhanced levels of service to our customers whilst distributor and includes highly regarded back-office and administration technology (Toolbox) which has been designed to build scale and opportunity for its financial services intermediaries. • The model benefits from scale and investment to ensure the Surveying and Valuation Services business has the best technology in the market to help it maintain its market leading position and to improve quality, service performance and risk management for clients. • The business has low capital requirements and is highly cash generative. • LSL allocates the strong cash generation between paying dividends to Shareholders, reinvesting in the business to drive future organic growth, and in making selective, value adding acquisitions. 14 c115055_LSL.indb 15 15 22/03/2019 19:02 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Markets LSL operates across the residential property services value chain Information in this section of the Report is as at 31st December 2018 In 2018 total mortgage approvals increased by 0.6% to 1,535,000 (2017: 1,526,000)¹. Overall house purchase approvals fell by 1.9% to 781,000 (2017: 797,000)¹. Remortgage (and other) volumes of 754,000 were up by 3.4% compared to 2017 (2017: 729,000)¹. Market transaction data Total mortgage approvals for house purchase1 ‘000s Total mortgage approvals1 ‘000s 9 7 7 4 1 8 8 0 8 7 9 7 1 8 7 2014 2015 2016 2017 2018 7 9 2 , 1 5 0 4 , 1 1 9 4 , 1 6 2 5 , 1 5 3 5 , 1 2014 2015 2016 2017 2018 Remortgage (and other) volumes1 ‘000s Total gross mortgage lending3 £bn 8 1 5 1 9 5 3 8 6 9 2 7 4 5 7 3 0 2 2 2 2 7 4 2 1 6 2 9 6 2 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 16 c115055_LSL.indb 16 22/03/2019 19:02 17 LSL’s markets: During 2018 LSL’s markets were categorised into two principal segments: that the legislation will come into effect on 1st June 2019. In response to the change in legislation, LSL has made the necessary preparations to ensure these changes will be fully implemented across all of LSL’s Estate Agency brands. The Group has also put in place a range of commercial measures in lettings across LSL’s Estate Agency brands to optimise future organic revenue growth. In Financial Services, during 2018 the Group arranged total mortgage lending of £29.0bn (2017: £21.0bn). Measured by the number of appointed representatives, as at 31st December 2018, LSL’s overall combined broker networks are the second largest in the UK8. Financial Services income represented 27% of total Group Revenue in 2018 (2017: 24%) demonstrating LSL’s growing position as a leading financial services distributor8. LSL’s Surveying Division became the clear market leader in 2018, maintaining strong relationships with many of the UK’s largest lenders. During 2018 LSL was awarded a material contract to supply surveying and valuation services to Lloyds Bank plc. The five year contract included the transfer to e.surv of the existing Lloyds Bank plc surveyors and back-office employees. LSL’s Surveying Division is the UK’s largest provider of residential valuation services nationwide and is the largest employer of surveyors in the UK4 with 503 qualified operational surveyors as at 31st December 2018. Estate Agency and Related Services; and Surveying and Valuation Services. The Market in 2018 The UK residential property market was subdued in 2018. Approvals for house purchases1 in 2018 were down by 1.9% with the decline in market transactions continuing to be more substantial in London and the South East4. Total mortgage approvals1 increased by 0.6% in 2018, with the increase in remortgage approvals of 3.9% offsetting the fall in house purchase approvals. The increase in remortgage approvals included strong growth in the first half of 2018 (+7.9%) compared to the same period in 2017 reflecting an increase in remortgage activity due to the widely anticipated interest rate increase announced by the Bank of England in May 2018. Second half mortgage activity in 2018 was broadly flat against the same period in 2017. Average house prices5 in England and Wales grew by 0.1% (2017: 3.9%) to £305,284 with a decline in Greater London (-1.1%). Excluding Greater London and the South East, the average increase was 1.0%. The proportion of residential housing stock available for sale with online and hybrid estate agents sector continued to grow modestly on a year-on-year basis, increasing from 7% in 2017 to 8% in 20186. Total gross mortgage lending in 2018 was £269bn3 (2017: £261bn). The proportion of mortgage lending in the market placed through intermediaries increased to 71% in 2018 (2017: 68%)7. Following market declines in the repossession market in the past few years, market repossessions volumes declined in 2018, reducing by 9.2% to 6,7502 total repossessions as interest rates remained historically low and this was the lowest number since 1981. LSL market positions LSL continues to hold market leading positions in its core Estate Agency business comprising 12 Estate Agency subsidiaries: Your Move, Reeds Rains, LSLi group (nine companies) and Marsh & Parsons. LSL continues to believe that traditional estate agents will represent the substantial majority of the residential sales and lettings markets for the foreseeable future and that LSL’s Estate Agency branches will continue to remain core to providing the service Group customers expect. In Your Move and Reeds Rains, the newly established keystone network of 144 branches are situated in core locations across the UK and generally have larger teams of dedicated experts in Residential Sales, Lettings and Financial Services roles than the average Your Move and Reeds Rains branches previously had in place. The ambition for these keystone branches is to create a platform that will benefit from their larger scale, enabling LSL to invest in people and technology with the aim of providing enhanced levels of service to Group customers whilst ensuring operational performance is optimised by competing more effectively in local markets. LSL’s commitment to the new IT platform and investment in enhanced technology is intended to give these Your Move and Reeds Rains branches the opportunity to cover a wider geography and benefit from further scale. Marsh & Parsons continues to implement its well established strategy of expanding its branch network with a focus on locations outside prime Central London. During 2018 LSL opened one new Marsh & Parsons branch in Chiswick, in outer prime Central London, which is performing in line with expectations. The LSLi group of companies today operate 57 owned branches and they will continue with their existing strategy to develop the nine well established local companies in their existing markets in the South East of England. In addition, in 2019 the LSLi group of companies will continue to actively evaluate opportunities for lettings book acquisitions. LSL has continued to monitor the progress of the Government’s review of tenant fees which sets out to ban letting fees paid by tenants in the private rented sector and capping tenancy deposits in England and Wales. The Government has confirmed 16 c115055_LSL.indb 17 17 22/03/2019 19:02 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Markets Estate Agency and Related Services Surveying and Valuation Services Estate Agency and Related Services 78.5% Asset Management 1.7% Surveying and Valuation Services 21.5% of Group Revenue in 2018 (2017: 20.6%) Valuation services for lenders for residential mortgage purposes, surveying services for -private house purchasers, and the provision of Home Reports and professional services in Scotland. of Group Revenue in 2018 (2017: 79.4%) of Group Revenue in 2018 (2017: 2.0%) • Repossessions asset management services for lenders. • Property management services for multi- property landlords. • Repossession volumes fell by 9% to 6,800 (2017: 7,400) in 20182 in a declining market. Other income 4.8% of Group Revenue in 2018 (2017: 5.2%) Includes franchising income, conveyancing services, EPCs, Home Reports, utilities and other products and services to clients of the Estate Agency branch networks. The Estate Agency and Related Services segment (the Estate Agency Division) includes Residential Sales and Lettings and the related markets of Asset Management (including repossessions asset management services for lenders and property management for multi- property landlords) and Financial Services – predominantly mortgage and non- investment insurance brokerage services with revenue earned directly by the Estate Agency brands and through the operation of intermediary networks. Residential Sales and Lettings 45.1% of Group Revenue in 2018 (2017: 48.3%) • Estate Agency services for residential property sales. • Comprehensive Lettings service for residential landlords and tenants. Financial Services 26.9% of Group Revenue in 2018 (2017: 23.9%) • Financial services networks which are authorised and regulated by the FCA and provide support and supervision to financial services intermediaries. • Brokerage services for mortgages and non-investment insurance products. • Arranged £29.0bn mortgage completions in 2018 (2017: £21.0bn). • Combined appointed representative networks is the second largest in the UK8. Notes: 1 Bank of England for ‘House Purchase Approvals’ and ‘Total mortgage approvals’ – January 2019 2 UK Finance ‘Possessions on mortgaged properties’ – February 2019 3 UK Finance ‘New mortgages by purpose of loan’ – February 2019 4 LSL estimates and including Land Registry regional data – February 2019 5 LSL Property Services/ACADATA HPI – February 2019 6 LSL sources/data analysis 7 UK Finance ‘New mortgages sold by intermediaries’ – February 2019 8 Which-Network – network performance figures – January 2019 18 c115055_LSL.indb 18 22/03/2019 19:02 19 Business Review Estate Agency Division +3% Total income 2017: +2% -9% Exchange income 2017: -9% +4% Lettings income 2017: +4% +17% Financial Services income 2017: +16% +1% Fee per exchange unit 2017: -1% 8.1% Operating margin 2017: 10.9% Financial Residential Sales exchange income Lettings income Financial Services income Asset Management income Other income1 Total income Operating expenditure Underlying Operating Profit2 KPIs Exchange units Underlying Operating Margin (%) Fees per unit £ Market data House purchase approvals (000s)3 Total mortgage approvals (000s)3 UK housing transactions (000s)4 Repossessions5 2018 £m 69.9 76.6 87.4 5.5 15.4 2017 £m 76.6 73.9 74.4 6.3 16.2 254.8 (234.2) 20.6 247.4 (220.5) 26.9 2018 22,747 8.1 3,071 2017 25,176 10.9 3,042 781 1,535 1,195 6,750 797 1,526 1,220 7,430 % change -9 +4 +17 -13 -5 +3 -6 -24 % change -10 +1 -2 +1 -2 -9 Notes: 1 ‘Other income’ includes franchising income, conveyancing services, EPCs, Home Reports, utilities and other products and services to clients of the branch network 2 Refer to Note 5 to the Financial Statements for the calculation 3 Bank of England for “House Purchase Approvals” and “Total Mortgage Approvals” – January 2019 4 HMRC Stats “Monthly property transactions completed in the UK with value of £40,000 or above” – January 2019 5 UK Finance ‘Possessions on mortgaged properties’ – February 2019 Estate Agency Division performance Year-on-year income growth in the Estate Agency Division was 3%. Lettings income and Financial Services income showed positive growth with Residential Sales performance reflecting market conditions. Residential Sales exchange income Residential Sales exchange income decreased by 9% to £69.9m (2017: £76.6m), average fees per unit increased by 1% to £3,071 (2017: £3,042). Residential Sales exchange volumes fell by 10%. Lettings income As in 2017, Lettings income grew in each quarter of the year as LSL continued to focus on this recurring revenue stream. Lettings growth for the year was 4% (organic: 3%). Financial Services income Total Financial Services income is delivered through the Estate Agency Division’s branches, Group First, RSC New Homes (acquired in March 2018), Personal Touch Financial Services (acquired in January 2018) and the intermediary networks trading as PRIMIS and grew strongly again with 17% year-on-year growth in 2018 (organic: 1%). Other income Other income fell by 5% year-on-year in large part due to a fall in conveyancing income due to lower Residential Sales transaction volumes. Asset Management Asset Management maintained its market position in a smaller repossessions market. Estate Agency Division operating margin The Estate Agency Division Underlying Operating Margin was 8.1% in 2018 (2017: 10.9%). 18 c115055_LSL.indb 19 19 22/03/2019 19:02 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Business Review Branch numbers The total number of Estate Agency branches reduced by 14 in 2018, following the closure of six owned branches and six franchise branches and the opening of one new branch in Marsh & Parsons and the merging of three into existing local branches. The changes to the structure of the Your Move and Reeds Rains estate agency branch networks announced on 5th February 2019 has at the 5th March 2019 reduced the total number of Your Move and Reeds Rains branches from 404 to 279 of which 144 are owned keystone branches and 135 are franchised. Regulation Residential Sales and Lettings The Estate Agency Division’s branches adhere to the Codes of Practice issued by industry professional and regulatory bodies, including The Property Ombudsman (TPO) and/or the ARLA Propertymark and NAEA Propertymark. Membership of these bodies is in addition to observing compliance with relevant legislation, such as Data Protection, the Consumer Protection Regulations and the Consumer Rights Act; guidance material published by relevant regulators, including the Competition and Markets Authority (CMA) (and its predecessor the Office of Fair Trading (OFT)), the National Trading Standards Agency/Trading Standards Institute (TSI), HMRC; and codes published by other relevant bodies, including the Advertising Standards Authority (ASA). LSL has also on behalf of all its Estate Agency businesses entered into a primary authority agreement with York Trading Standards Office. During the year LSL implemented the General Data Protection Regulations ahead of the May 2018 commencement date which included a review of and updates to the Group’s Data Protection arrangements. LSL from time to time also enters into direct dialogue with the regulators and consumer groups. During 2018 there continued to be significant focus on housing issues and LSL has been monitoring and responding to the wide range of consultations published by the Government as part of its review of the housing market which commenced at the Breakdown of LSL’s Estate Agency branches as at 31st December 2018 and 31st December 2017: Your Move Reeds Rains Sub total LSLi Marsh & Parsons Total Owned Franchise Total 2018 Total 2017 194 114 308 57 28 393 58 38 96 2 - 98 252 152 404 59 28 491 260 154 414 64 27 505 Your Move and Reeds Rains branch summary: Total owned branches Total franchise branches Total branches (combined) Branch numbers (31st December 2018) Branch numbers (5th March 2019) 308 96 404 144 135 279 start of 2017 and is expected to continue during 2019. This includes legislation and consultations impacting and relating to both Residential Sales and Lettings activities. In relation to the Lettings business, this has included the introduction of the tenant fee ban, the review of client money protection arrangements, the proposed regulation of lettings agents, the implementation of selective licensing by local authorities, the review of measures which seek to improve rental arrangements in the private rental sector and the proposal to create a specialist housing court. In relation to Residential Sales this has included monitoring the work being undertaken by the Government’s Regulatory Property Agents: Working Group, the review of the home buying and selling process (which included a review of referral fees) and the proposal to create a single property ombudsman. The Estate Agency Division has a dedicated compliance team which together with the in-house Legal Services team provides support to the Estate Agency businesses. The Estate Agency Compliance team is subject to oversight by the Estate Agency Management Committee and annual review by the LSL Audit & Risk Committee. The Estate Agency’s Financial Services activities are subject to the oversight of First Complete (see Regulation – Financial Services for further details). Financial Services LSL’s Financial Services business includes three intermediary networks which provide products and services to financial services intermediaries: First Complete, Advance Mortgage Funding, and Personal Touch Financial Services. All three networks are directly authorised by the FCA in relation to the sale of mortgages together with non-investment insurance products. Personal Touch Financial Services also has permission in relation to the sale of investment products. During 2018, First Complete and Advance Mortgage Funding both traded under the PRIMIS brand which was launched in 2018. With effect from 31st January 2019, Personal Touch Financial Services also commenced trading as PRIMIS. First Complete acts as principal for most of the Estate Agency businesses within LSL’s Estate Agency Division, enabling the Estate Agency businesses to refer their customers to Embrace Financial Services whose employed financial advisers provide Financial Services advice to customers of the branch networks. 20 c115055_LSL.indb 20 22/03/2019 19:02 21 Your Move, Reeds Rains, First2Protect, Mortgages First, Insurance First, RSC New Homes and Embrace Financial Services along with the LSLi subsidiaries are all appointed representatives of First Complete. Linear Financial Solutions is an appointed representative of Advance Mortgage Funding for mortgage and insurance business and also an appointed representative of Openwork for investment business. LSL’s Financial Services businesses are also members of the Association of Mortgage Intermediaries (AMI) which is an industry representative and trade body and the Financial Services businesses are subject to the Financial Ombudsman Service and contribute to the funding of the Financial Services Compensation Scheme through regulatory fees and charges. During 2018, LSL has been monitoring and engaged in Government and Regulatory consultations and review, including in relation to the senior managers regime and the review of the mortgage market. During 2019, LSL will continue to monitor reforms and engage with the FCA in addition to taking steps to implement the senior managers regime across the Group. The Financial Services businesses have dedicated compliance teams which together with the in-house Legal Services team provides support to the Financial Services businesses. The Group’s Financial Services activities are subject to the oversight of the Financial Services Risk Committee and Financial Services Management Committee and annual review by the LSL Audit & Risk Committee. Please also refer to the Principal Risks and Uncertainties section of this Report for details of how the Estate Agency Compliance and Financial Services Compliance teams form part of the Group’s risk management and internal control arrangements, together with details of how the Group describes and mitigates risks and uncertainties relating to regulation and compliance. 20 c115055_LSL.indb 21 21 22/03/2019 19:02 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview 2222 c115055_LSL.indb 22 “People with Wonderful Properties” campaign, created to celebrate the talented staff at Marsh & Parsons 22/03/2019 19:02 23 Business Review Surveying Division +9% Revenue 2017: -1% -8% Income per job 2017: +2% 29.3% Profit margin 2017: 29.4% 503 Number of qualified surveyors 2017: 321 Financial Revenue Operating expenditure Underlying Operating Profit1 KPIs Underlying Operating Margin (%) Jobs performed (000s) Revenue from private surveys (£m) Income per job (£) Historic PI Costs provision (balance sheet) at 31st December (£m) Number of qualified operational surveyors at 31st December (FTE)2 2018 £m 69.8 (49.4) 20.4 2018 29.3 366 2.1 191 12.4 503 2017 £m 64.1 (45.2) 18.9 2017 29.4 309 2.4 207 15.9 321 Total mortgage approvals (000s)3 1,535 1,526 Notes: 1 Refer to Note 5 to the Financial Statements for the calculation 2 Full Time Equivalent (FTE) 3 Bank of England for “House Purchase Approvals” and “Total Mortgage Approvals” – January 2019 % change +9 -9 +8 % change +18 -13 -8 -22 +57 +1 Surveying Division performance Surveying Division revenue increased by 9% to £69.8m (2017: £64.1m), with total number of jobs performed during the year of 365,504 (2017: 309,499). improved profit performance. As a result, the Surveying Division delivered an increase in Underlying Operating Profit1 to £20.4m (2017: £18.9m), maintaining profit margin at 29.3% (2017: 29.4%). First half revenue was down by -6% year- on-year, impacted by market conditions and lender mix. In May 2018 the Surveying Division announced the successful negotiation of a material contract to supply surveying and valuation services to Lloyds Bank plc, with e.surv becoming the lead supplier for the Lloyds Bank plc group of companies with instructions commencing from September 2018. This led to an improved second half performance with revenue up 25% year-on-year. The decrease in income per job to £191 (2017: £207), a reduction of 8% year-on-year, was offset by strong cost control leading to The total number of qualified operational surveyors at 31st December 2018 was 5032, an increase of 182 against the 2017 position due to the transfer of Lloyds Bank plc surveyors into e.surv. In 2019 the Surveying Division will continue to focus on its successful graduate training programme, which assists in alleviating the impact of capacity constraints in the market. At 31st December 2018 the total provision for PI Costs was £12.4m (2017: £15.9m). In 2018 the Surveying Division continued to make positive progress in addressing these historic claims. There was an exceptional gain of £2.2m during the year. 22 c115055_LSL.indb 23 23 22/03/2019 19:02 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Financial Review £324.6m Group Revenue Up 4% (2017: £311.5m) £35.9m Group Underlying Operating Profit Down 4% (2017: £37.5m) £36.9m Cash generated from operations Down 11% (2017: £41.5m) £25.4m Group operating profit Down 40% (2017: £42.1m) Income Statement Group Revenue Revenue increased by 4.2% to £324.6m in the year ended 31st December 2018 (2017: £311.5m). Other operating income Other income of £557,000 (2017: £555,000) for the year ended 31st December 2018 was in line with previous year and comprised of rental income. Gain on sale of property, plant and equipment There was a small gain of £34,000 (2017: £668,000) in the year ended 31st December 2018 resulting from the disposal of a commercial property. Income from joint ventures and associates Income from joint ventures and associates was £259,000 (2017: £1,583,000) as challenging residential property market conditions impacted the financial performance of the joint ventures, LSL recognised its share of the early-stage costs of the newly acquired interest in Mortgage Gym. Total operating expenses Total operating expenses increased by 4.6% to £289.6m (2017: £276.8m). Increases in the Estate Agency Division were primarily a result of the acquisition of Personal Touch Financial Services and RSC New Homes in the first quarter of 2018. Surveying operating expenses were ahead of prior year in the second half of 2018 due primarily to the transfer to e.surv of the existing Lloyds Bank plc surveyors and back-office employees as part of the contract awarded to e.surv during May 2018, to supply surveying and valuation services to the Lloyds Bank plc group. Group Underlying Operating Profit Group Underlying Operating Profit1 decreased by 4.3% to £35.9m (2017: £37.5m) with an Underlying Operating Margin of 11.1% (2017: 12.0%). On a statutory basis, the Group operating profit decreased to £25.4m (2017: £42.1m) largely reflecting the impact of exceptional items. In 2018 there were net exceptional cost of £3.0m compared to the 2017 financial results which included an exceptional gain on the disposal of LSL’s share in GPEA (£5.6m) and a net exceptional gain on historic PI claims (£3.7m). Group Adjusted EBITDA Group Adjusted EBITDA2 decreased by 2.7% to £41.6m (2017: £42.7m) with the decreased Group Underlying Operating Profit being slightly offset by an increased depreciation charge of £5.7m (2017: £5.2m). Share-based payments The share-based payment charge of £349,000 (2017: £47,000) in 2018 consists of a charge in the period of £1.3m offset by the lapse of the 2016 LTIP scheme as well as adjustments for leavers in the period. Amortisation of intangible assets The amortisation charge for 2018 was £5.3m (2017: £4.1m). The increase in 2018 is mainly a result of the amortisation of in-house software in both Personal Touch Financial Services and e.surv. Exceptional items Total 2018 net exceptional cost of £3.0m including a £2.2m PI Costs exceptional provision release (H1: £1.2m, H2 £1.0m) as claims were settled below previous expectations and £5.2m of exceptional costs, the majority of which were in relation to initial one-off transition and integration costs for the contract to supply surveying and valuation services to Lloyds Bank plc and also restructuring costs in the Estate Agency Division including planned restructuring costs incurred following the acquisition of Personal Touch Financial Services. The exceptional gain in 2017 consisted of a £5.6m gain on the sale of the Group’s share in GPEA and a £3.7m gain relating to the historic PI Costs provision. Net financial costs Net financial costs amounted to £2.3m (2017: £2.0m). The finance costs related principally to interest and fees on the RCF. Additional costs relate to the unwinding of discounts on provisions and contingent consideration. Taxation The UK corporation tax rate reduced to 19% with effect from 1st April 2017. A future UK corporation tax of 17% has been enacted and is effective from 1st April 2020, and this is the rate at which deferred tax has been provided (2017: 17%). Corporation tax is recognised at the headline UK 24 c115055_LSL.indb 24 22/03/2019 19:03 25 corporation tax rate of 19% (2017: 19.25%). The effective rate of tax for the year was 22.5% (2017: 16.7%). The effective tax rate for 2018 is higher than the headline UK tax rate for a number of reasons, including non- deductible costs in relation to contingent consideration and the depreciation of assets which do not qualify for capital allowances. Deferred tax credited directly to other comprehensive income is £0.0m (2017: £0.6m). Income tax credited directly to the share-based payment reserve is £0.0m (2017: £0.0m). In 2018 corporation tax payments of £6.9m (2017: £11.1m) were made which is greater than the current year corporation tax charge of £5.9m (2017: £7.5m). This is a result of two quarterly payments being made in the year in respect of the year ended 31st December 2017 liability – which is higher than the corporation tax charge for the year ended 31st December 2018. Basic Earnings Per Share The Basic Earnings Per Share was 17.4 pence (2017: 32.6 pence). The Adjusted Basic Earnings Per Share3 is 27.2 pence (2017: 28.3 pence), a decrease of 3.9% which is in line with the decrease in Group Underlying Operating Profit1. The Group seeks to present a measure of underlying performance which is not impacted by the unevenness in profile of exceptional gains and exceptional costs, contingent consideration, amortisation and share-based payments. The Directors consider that the adjustments made to exclude the after tax effect of exceptional items, contingent acquisition consideration and amortisation provides a better and more consistent indicator of the Group’s underlying performance. Balance Sheet Goodwill In 2018 goodwill has increased by £7.8m to £159.7m (2017: £151.9m). The increase is due to the acquisitions of Personal Touch Financial Services (£0.3m), RSC New Homes (£7.1m) and the lettings book acquisitions (£0.4m). Other intangible assets and Property, plant and equipment Total capital expenditure in the year Simon Embley, Chairman and Ian Crabb, Group Chief Executive Officer amounted to £6.0m (2017: £5.6m) which includes expenditure of £1.1m (2017: £0.6m) for new software which has been treated as an intangible asset. Financial assets LSL holds financial assets of £11.6m (2017: £25.3m); the decrease in the year is a result of the revaluation of LSL’s shareholding in Yopa and the exercise and subsequent sale of the ZPG warrants in October 2018. LSL has a 14.7% minority shareholding in Yopa. LSL’s previous carrying value of £20m for Yopa has been written down by £12.2m to £7.8m as at 31st December 2018 to reflect the Board’s accounting assessment of fair value. LSL has elected to recognise any changes to fair value through the Statement of Other Comprehensive Income (i.e. reserves) and not through the P&L account in accordance with IFRS 9. Joint ventures, investments and associates The Group has two joint ventures and one associate: a 33.3% (2017: 33.3%) interest in TM Group, whose principal activity is to provide property searches, a 50% (2017: 50%) interest in LMS whose principal activity is to provide conveyancing panel management services. LMS and TM Group are held in the balance sheet at £8.2m and £1.5m respectively (2017: £8.3m and £1.2m). During the second half of 2018, LSL acquired a 34.69% interest in Mortgage Gym, a digital mortgage marketplace, for cash consideration of £4.1m. Mortgage Gym is held in the balance sheet at a value of £3.6m as at 31st December 2018 (2017: nil) reflecting the original investment of £4.1m and the post-tax loss of £0.5m in the period. Financial Liabilities Net Bank Debt As at 31st December 2018 Net Bank Debt was £32.1m (2017: £30.0m) and Shareholders’ funds amounted to £142.6m (2017: £148.6m) with a balance sheet gearing of 22.5% (2017: 20.2%). The increase in Net Bank Debt4 incorporated acquisitions made in the year (Personal Touch Financial Services, RSC New Homes and six lettings books) which totalled £7.7m along with the investment in Mortgage Gym of £4.1m. The 2018 gearing level was 0.8 times5 Group Adjusted EBITDA (2017: 0.7 times). Bank facilities In January 2018, LSL extended its bank facility until May 2022. The facility includes a £100m RCF (2017: £100m). During the period under review, the Group complied with all of the financial covenants contained within the facility. Deferred and contingent consideration Within financial liabilities LSL has £2.1m of deferred consideration (2017: £0.1m) and £15.0m (2017: £9.1m) of contingent consideration. The deferred consideration relates primarily to the acquisition of Personal Touch Financial Services and this has been settled since the balance sheet date. The contingent consideration relates primarily to Group First (£9.5m) and RSC New Homes (£4.8m). Provisions for liabilities: Professional indemnity (PI) claim provision At 31st December 2018, the total provision for historic PI Costs was £12.4m (2017: £15.9m). In 2018 the Group continued 24 c115055_LSL.indb 25 25 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Financial Review Notes: 1 Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 5 to the Financial Statements) 2 Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property, plant and equipment (as defined in Note 5 to the Financial Statements) 3 Refer to Note 10 to the Financial Statements 4 Refer to Note 32 to the Financial Statements for the calculation 5 Operational gearing is defined as Net Bank Debt divided by Group Adjusted EBITDA2 to make positive progress in addressing historic claims and there has been a net £2.2m exceptional gain. Onerous lease As at 31st December 2018 LSL held onerous lease provisions of £130,000 (2017: £210,000). Net assets The Group’s net assets as at 31st December 2018 were £142.6m (2017: £148.6m). Statement of Cash-flows The Group generated strong cash from operations of £36.9m (2017: £41.5m) converting 103% of Group Underlying Operating Profit to cash-flow from operations (pre PI and exceptionals) (2017: 117%). The decrease in conversion from 2017 is primarily related to the increase in trade receivables of £3.8m (2017: decrease of £1.7m) resulting from significant growth in the surveying business in quarter four. Provisions also decreased by £3.6m (2017: decrease of £5.4m) due to the positive progress in addressing historic PI claims. Treasury and Risk Management LSL has an active debt management policy. LSL does not hold or issue derivatives or other financial instruments for trading purposes. Further details on the Group’s financial commitments as well as the Group’s treasury and risk management policies are set out in this Report. Post Balance Sheet Events On 5th February 2019 LSL announced an Estate Agency Strategy: ways of working programme update and work has now commenced on the reshaping of the Your Move and Reeds Rains branch networks. As disclosed on 5th February 2019, LSL expects to incur an exceptional P&L charge of approximately £14m in 2019 and £1m in 2020, with cash costs amounting to approximately £12m over the three years from 2019 to 2021 including approximately £9m cash costs in 2019. International Financial Reporting Standards (IFRS) The Financial Statements have been prepared under IFRS as adopted by the European Union. 26 c115055_LSL.indb 26 22/03/2019 19:03 27 Principal Risks and Uncertainties LSL has an overall framework for the management of risks and internal controls to mitigate the risks. Through this framework, the Board (which has overall accountability and responsibility for the management of risk and is supported by the Audit & Risk Committee) on a regular basis identifies, evaluates and manages the principal risks and uncertainties faced by the Group; as well as areas which could adversely affect its business, operating results and financial condition. Management of risk appetite During 2018, in line with the FRC’s Guidance on ‘Risk Management, Internal Control and Related Financial and Business Reporting’, the Board continued to manage the Group’s risk appetite through the risk appetite framework to ensure continued compliance with the 2016 Code and the related FRC guidance (published in 2014). The Board through its established processes expresses and reviews the types and level of risk which it is willing to take or accept to achieve LSL’s strategy and business plans; and to support consistent, risk-informed decision making across the Group. The risk appetite framework was developed following the approval by the Directors of a risk framework policy which included defining individual risk appetite statements for LSL’s principal risks and uncertainties, and for key decisions made by the Board. These statements provide parameters within which the Board typically expects LSL’s businesses to operate, facilitating structured consideration of the risk and reward trade-off for the decisions made around how the Group conducts business. This includes monitoring risk measures and the identification of actions needed to bring any specific outlying areas of risk within target levels. During 2018, the Group has continued to take steps to enhance the existing risk framework within each of the Group’s subsidiary businesses, including the maintenance of risk appetite measures by each subsidiary. Each year, each subsidiary business quantifies their highest ranked risk areas and routinely provide the Audit & Risk Committee with graphical management information to facilitate the tracking of risk status versus tolerance by the subsidiary boards and divisional governance committees. The framework continues to improve the visibility of action plans to address any core risk areas considered outside tolerance. Risk management activities in 2018 included a ‘deeper-dive’ on information security risk and a business-wide questionnaire was issued to enable the Audit & Risk Committee to compare how well risk management practices are embedded at each subsidiary business, with a view to identifying any areas for improvement. These developments have in turn served to provide a more robust means for evaluating the capture and measurement of risk factors within the Group’s established risk appetite framework. The framework covers a wide range of risks, which reflect the nature of LSL’s businesses and acknowledges that there is not a ‘one size fits all’ approach to establishing risk parameters. During 2019, LSL will continue to review the framework to ensure it remains in line with emerging best practice and continues to foster the maturity of risk appetite routines at both LSL and its subsidiary businesses. The Board has established clear risk parameters, whilst at the same time fostering an environment within which innovation and entrepreneurial activities can thrive. Where there is any proposal to shift the Group significantly closer to or outside agreed risk parameters, this is discussed and is subject to Board approval before commencing any activities to ensure that appropriate mitigation controls are put into place. On-going evolution of the risk management framework is carried out as part of an on- going cycle of continual improvement, and remains a key priority for the Audit & Risk Committee and the Board in 2019. Further, during 2018 the Audit & Risk Committee and Board commenced a review of the Group’s risk management framework to ensure it reflects the requirements of the 2018 Code and the FRC’s Guidance on Board Effectiveness (also published in 2018) and this work will continue during 2019. Developing the financial viability statement Assessment of prospects The Group’s business model and strategy are central to an understanding of its prospects, and details are included in the Strategy and Business Model sections of this Report. Through organic growth, selective acquisitions and a delivery of high quality services to customers, the Group’s key objective is to build market leading positions and ultimately deliver long-term Shareholder value. Prospects of the Group are assessed by the Board throughout the year at its meetings, including a particular focus during the strategic planning process. This process includes an annual review of the on-going plan, led by the Group Chief Executive Officer and Group Chief Financial Officer in addition to the relevant business functions involved. The Directors participate fully in the annual planning process by means of a Board meeting and part of the Board’s role is to consider whether the plan continues to take appropriate account of the changing external environment including macroeconomic, political, regulatory and technical changes. This process allows the Board to produce strategic objectives and detailed financial forecasts over a three year period. The latest updates to the on-going plan were finalised in December 2018. This considered the Group’s current position and its prospect of operating over the three year period ending 31st December 2021, and reaffirmed the Group’s stated strategy. Furthermore, the Group’s future prospects have been further strengthened with the extension of the RCF which was renewed in January 2018 for a period up to May 2022. Brexit Since the 2016 EU referendum result, LSL has been monitoring Brexit developments to assess the impact on LSL. ‘Brexit’ is a subset entry within the Group’s risk appetite framework and in addition during 2018 LSL has conducted a specific impact assessment in relation to Brexit which was completed in line with FRC guidance. The impact assessment considered whether LSL will be impacted directly by 26 c115055_LSL.indb 27 27 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Principal Risks and Uncertainties the outcome of the negotiations between the UK and the EU, for example due to regulatory changes or due to changes that may impact our employees or whether the impact would be indirect, i.e. resulting from the broader economic uncertainties. The Group concluded that whilst LSL is not directly impacted by the Brexit negotiations due mainly to its UK based business model it is indirectly impacted by the impact that the continued economic uncertainty has on the housing market. This approach has ensured that Brexit developments are being formally monitored, and the risk status regularly reassessed with reactive action plans identified to respond to the effects of on-going uncertainties and the outcomes of the UK and EU negotiations and any transitional period arrangements. These practices will continue throughout 2019 as the UK progresses to the Brexit date of 29th March 2019, along with wider consideration of the likely impacts of other major economic and political events, and their influence on viability assessment modelling. The Group’s principal risks and uncertainties are set out below. The Board reviewed LSL’s principal risks and uncertainties when assessing the Group’s prospects, and noted that none of these individual risks would, in isolation, compromise the Group’s prospects. See the Directors’ Report in this Report for details of how Brexit was taken into account in completing the going concern assessment. Assessment of viability Although the strategic plan reflects the Directors’ best estimate of the prospects of the Group in accordance with provision C.2.2 of the 2016 Code (which is now contained in the 2018 Guidance on Board Effectiveness), the Directors have assessed the viability of the Company over a longer period than the 12 months required by the ‘going concern’ provision. For the purposes of assessing the viability of the Group, it was determined that a three year period ending on 31st December 2021 should be used, as this corresponds with the Board’s strategic planning cycle. This assessment has been made with reference to the Group’s current position and prospects, the Board’s risk appetite and the Group’s principal risks and uncertainties. The Directors’ financial viability statement is contained in the Report of the Directors section of this Report. A number of severe but plausible scenarios were considered and two of these were modelled in detail with input from across a functional group of senior managers, including representatives from the finance teams. The following scenarios were modelled: • severe downturn in the UK housing market close to the level seen in 2008 during the last recession caused by Brexit and/or political uncertainties; and • a data breach causing a regulatory fine and reputational damage, with the potential loss of customers. Detailed assumptions for each scenario were built up and modelled by month across the three year period. The models measured the downside impact on revenue and the management action which would be taken to retain cash reserves and maintain the operating capacity of the business as a result of the stress scenarios. Assumptions were also made for the potential growth of LSL’s recurring income and counter-cyclical businesses, notably Lettings and Asset Management, and the extent to which some activities, such as Lettings, tend to be less affected through the cycle. The modelling and assumptions took account of the broad range of services across a wide geography which allows some protection from the impact of stress scenarios. The results from the stress testing indicated that the Group would be able to withstand the financial impact of each scenario and therefore continue to operate and meet its liabilities, as they fall due, over the three year period ending 31st December 2021. Furthermore the Board also considered it appropriate to prepare the Financial Statements on the going concern basis, as explained in the Basis of Accounting paragraph in the Principal Accounting Policies section contained within this Report. The Audit & Risk Committee oversaw the process by which the Directors reviewed and discussed the assessment undertaken by the Management Team in proposing the viability statement. Risk management and internal controls framework LSL’s risk management and internal controls framework for 2018 included: • ownership of the risk management and internal controls framework by the Board, including a risk framework policy, supported by the Group Chief Financial Officer, the Company Secretary, the Head of Risk and Internal Audit and the Group Financial Controller; • a network of risk owners in each of LSL’s businesses with specific responsibilities relating to risk management and internal controls, including maintenance of detailed risk analyses; • the documentation and monitoring of risks are recorded and managed through risk appetite measures which undergo regular reviews and scrutiny by subsidiary boards, divisional governance committees and the Head of Risk and Internal Audit; • the Board routinely identifies, reviews and evaluates the principal risks and uncertainties which may impact the Group as part of the planning and reporting cycle to ensure that such risks are identified, monitored and mitigated in addition to carrying out specific risk assessments as part of its decision- making processes; ·• the development and application of LSL’s risk appetite statement and associated framework (for further details on steps taken during the year, see the Audit & Risk Committee Report included in this Report); and • reporting by the Chairman of the Audit & Risk Committee to the Board on any matters which have arisen from the Audit & Risk Committee’s review of the way in which LSL’s risk management and internal control framework has been applied together with any breakdowns in, or exceptions to, these procedures. The risk framework includes the following: • a risk framework policy; 28 c115055_LSL.indb 28 22/03/2019 19:03 29 • a boardroom culture which promotes risk assessment and management in decision-making; • determination of risk appetite, with management and mitigation of risks in line with risk appetite tolerances; • assessment of prospects and viability; • review of the effectiveness of the risk management and internal control systems; and • going concern confirmation (for LSL’s going concern disclosure see the Report of the Directors included in this Report). During 2019 the areas of focus will be to develop underlying subsidiary risk appetite metrics policies. During 2018, the Directors carried out a robust assessment of the principal risks and uncertainties facing the Group, including those that threaten the Group’s business model, future performance, solvency or liquidity. The Directors believe that the assessment which has been completed is appropriate to the complexity, size and circumstances of the Group, which is a matter of judgement of the Board and has been supported by the Management Team. The Directors also carried out a risk appetite assessment exercise which involved the evaluation of continually evolving aspects of risk management. During 2018, this included further strategic responses to the threat of external technology-based business models, integration planning for newly acquired business activities, articulation of risk appetite tolerances with action plans to counter key aspects of information security risk, implementing responses to a fast changing regulatory environment (including new GDPR and tenant welfare requirements) and consideration of major scenarios of further external political and economic change on the UK housing market including the impact of Brexit. The identified risks may change over time due to changes in business models, performance, strategy, operational processes and the stage of development of the Group in its business cycle as well as with changes in the external environment. This robust assessment is focused on the principal risks and uncertainties and it differs from the review of the effectiveness of the systems of risk management and internal controls. In accordance with the requirements of the 2016 and 2018 Codes, this Report includes descriptions of principal risks and uncertainties together with a high level explanation of how they are being managed or mitigated. This includes clear descriptions of the risks together with an evaluation of the likelihood of a typical risk event crystallising and its possible impact. Mitigating steps and any significant changes to specific areas of risk are also referred to within the tabular summary. As noted above, this robust analysis of principal risks and uncertainties has also contributed to the Group’s viability statement which is included within the Report of the Directors. The Directors have also considered the impact if risks coincide, namely a combination of non-principal risks and uncertainties could potentially represent a single compound principal risk or uncertainty. The Group also faces other risks which, although important and subject to regular review, have been assessed as less significant and are not listed in the Preliminary Results Announcement or this Report. This may include some risks which are not currently known to the Group or that LSL currently deems as immaterial, or were included in previous Annual Report and Accounts and, through changes in external factors and careful management, are no longer deemed to be as material to the Group as a whole. However, these risks may individually or cumulatively also have a material adverse effect together with other risk factors which are beyond the direct control of LSL, and may have a material adverse impact on LSL’s business, results of operations and/or financial condition. The risk management framework and procedures in place can only provide reasonable but not absolute assurance that the principal risks and uncertainties are managed to an acceptable level. Further information relating to how LSL managed these risks and uncertainties during 2018 is set out in the Audit & Risk Committee Report (Internal Controls) of this Report. 28 c115055_LSL.indb 29 29 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Principal Risks and Uncertainties Risk Strategic: 1 UK housing market 2 New UK housing market entrants Description Mitigation Group performance is intrinsically linked to the overall performance of the UK housing market (including subsets – e.g. prime Central London). The housing market is also impacted by changes in national and global political and economic environments (e.g. Brexit). The impact of this risk can be direct (such as changes in Government policy or legislation arising from a change in Government) or indirect (such as changes in consumer behaviour/ sentiment arising from changes in Government policy or legislation). • Daily, weekly and monthly monitoring of trading and market performance data. • Market share, product mix and segmentation initiatives. • Development of counter-cyclical and recurring revenue income streams. • Responsive investment and cost control measures during the housing market cycle. • Investment in teams to deliver strategic projects. • Balanced UK-wide geographical spread. • Monitoring of wider macroeconomic and political developments (including domestic and international developments). • Enhanced impact analysis relating to Brexit completed and considered as part of going concern analysis in addition to budgeting and planning processes. Traditional business models and pricing structures for residential property services are exposed to new business models and technological advancements (e.g. online/hybrid estate agents, automated valuation models and automated financial services operating models). • Competitor and industry benchmarking. • Development of strategies in response to market disrupters, including exploring options to capitalise on digital opportunities. • Infrastructure investment, including investment in innovation and technology, with upgrading, consolidating and replacing core or legacy operating systems to increase functionality, improve customer experience, reduce costs and deliver efficiencies. • Service delivery enhancements, product/services differentiation and experimentation. • Engagement of specialist external consultative support as necessary. • Monitoring of acquisition, investment, associate and joint venture opportunities. • Marketing initiatives. • Operation of staff incentive schemes to mitigate staff attrition. 3 Investment, acquisitions and growth initiatives Realising appropriate targets for investment, acquisition and major project initiatives, including delivery of appraisals, due diligence and integration/implementation requirements, in line with LSL’s strategy to complete selective acquisitions. • Monitoring of opportunities which support delivery of Group strategy. • Engagement of strategy consultants to support identification and evaluation of strategic investment and acquisition opportunities. • Defined pre and post-acquisition reporting to the Board and Audit & Risk Committee. • Establishment of structured authority levels for expenditure. • Responsive flexing of risk appetite during the housing market cycle. • Flexible resource pool to support and deliver investments and acquisitions. • Defined due diligence processes completed ahead of all investments and acquisitions. • Due diligence is undertaken by in house teams with support from subject specialists as required (e.g. the use of IT experts to carry out technology due diligence or use of strategy consultants to advise on business models). • Completion of risk assessments including RCF leverage stress testing ahead of all significant investments and acquisitions. • Flexible resource pool to deliver integration/implementation activities following completion of acquisitions. • Engagement of specialist external consultative support as necessary. • Established integration/implementation planning methodology. • Promotion of Group-wide relationships in business arrangements. • Post-acquisition and post-integration/implementation review programmes. • Risk and Internal Audit engagements. 30 c115055_LSL.indb 30 22/03/2019 19:03 31 Risk Description Mitigation Sales/distribution: 4 Professional services Exposure to major PI claims arising from any lapses in professional services, including surveying and valuation practices, financial services advice, and estate agency services. Surveying and Valuation Services Division • Robust framework and monitoring routines to maintain valuation accuracy. • Dedicated surveying risk team. • Timely data capture of all claims and associated trends with regular scenario modelling undertaken. • Utilisation of technology to monitor valuation trends, trigger alerts and ‘real time’ checks. • Board-level authorities for PI claims settlement payments and governance of underlying claims handling and accounting processes. • Integration of new business assets into the established valuation controls framework. • Development of lender on-boarding policy with Board oversight to ensure instructions are within risk appetite. Estate Agency Division (including Financial Services) • Defined responsibilities for claims management and operation of PI insurance together with management of underlying risk areas. Group-wide • Risk and Internal Audit engagements. • Experienced claims handling personnel supported by legal and compliance experts. • Culture promoting effective sales conduct and open lines of communication with clients with a focus on customer outcomes. 5 Client contracts The performance of the Estate Agency and Surveying businesses is dependent on entering into appropriate and relevant agreements and retaining contracts with key clients (e.g. lenders, portfolio landlords and house builders). • Customer outcomes focused forums and initiatives. • Designated senior members of staff with responsibility for relationship management at subsidiary and Group levels. • On-going investment in resources, innovation, technology and service standards to ensure LSL has the capacity to meet service level demands. • Targeted marketing and training events for corporate clients. • Monitoring of client dependency, service delivery, risk and compliance with contractual requirements. • Robust control framework supporting the risk profiling of prospective clients, contract renewals (including contract terms) and the quality of professional services. • In-house legal services and compliance teams, with specialist external legal and compliance support engagement when necessary, together with dedicated claims/customer complaints management teams within business areas. • Risk and Internal Audit reviews. 30 c115055_LSL.indb 31 31 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Principal Risks and Uncertainties Risk Description Mitigation Operations: 6 Business infrastructure (including IT) The Group has varied operations which require robust internal controls, infrastructures and business continuity arrangements (including in relation to IT). The controls environment needs to remain adaptable to support growth initiatives, harness technological advancements and counter business continuity threats, including in relation to IT systems, malicious and cyber- related attacks. LSL’s strategy recognises the importance of investing in the Group’s infrastructure (including IT) to maintain both competitive advantages and deliver controls and system security – all within the context of changing business models within the residential property services markets. 7 Information security (including data protection) Group operations involve the processing of high volumes of personal data, with potential for unintended data loss and exposure to increasing levels of external cyber crime. • Group-wide internal controls processes and policies which are subject to regular review to ensure they are in line with best practice. • Group IT governance, policies, base standards and initiatives supported by the Group IT Director and with oversight from the Information Security and Governance Committee. • Focus on investment and development of innovation and systems development within the Group’s strategies. • Combination of dedicated in-house IT teams and engagement with external IT specialist suppliers to deliver efficiencies and market leading service. • Maintenance of business infrastructure to ensure effective service delivery with appropriate controls. • On-going infrastructure investment and development programmes. • Identifying and securing innovation and technology opportunities through the Group’s investment and acquisition strategies. • Implementing business continuity and disaster recovery solutions (encompassing IT premises, transportation and employees). • Monitoring of compliance with relevant contractual and regulatory requirements. • Inter-Group IT governance forums. • External consultative support as necessary. • Risk and Internal Audit engagements. • Oversight by the Information Security and Governance Committee, the Audit & Risk Committee and the LSL Board. • LSL Information Security and Governance Committee and IT Teams with policy implementation and oversight responsibilities. • Defined Group-wide base policy standards. • Dedicated information security and data protection personnel (including DPOs). • Group cyber insurance cover in place and reviewed annually to ensure the cover remains appropriate. Data protection • Group data protection policies and training in place supported by in-house legal and compliance teams. • Tracking of data assets/data sharing and any breach incidents, in line with authority levels. • Implementation of regulatory changes – (e.g. General Data Protection Regulation) via defined project teams with support from in-house legal and compliance teams. Systems security • Penetration testing and intrusion scanning programmes. • Benchmarking against and accreditation by best practice standards – e.g. ISO27001 accreditation for e.surv. • Second and third-line risk-based thematic reviews. 32 c115055_LSL.indb 32 22/03/2019 19:03 33 Risk Description Mitigation 8 Regulatory and compliance Compliance with legal and regulatory requirements, including relationship with regulators. Regulations govern roles as an employer and as providers of services. Any compliance breaches could result in sanctions and reputational damage (e.g. prosecutions or fines). This includes compliance with existing regulations and implementing new regulations (e.g. Senior Managers Certification Regime). Regulatory and compliance risk extends to oversight of standards adopted by business partners (e.g. franchises, appointed representatives, joint ventures, minority investments, associates and suppliers). The market and business operations are also impacted by regulatory reforms (e.g. Government reviews relating to the housing market, including reforms relating to the tenants fees and conveyancing referral fees) which may have an impact on Group revenue and expenditures. Regulatory costs, fees and charges continue to grow due to the growth of LSL’s Financial Services businesses and the funding requirements of the Financial Services Compensation Scheme (FSCS). • Top-down management culture focused on fairness, transparency and delivery of good customer outcomes. • Open dialogue with regulators and monitoring of emerging developments and regulatory reforms. • Group risk framework policy incorporating a ‘three lines of defence’ model to track compliance with regulations. • Group policies including ethics (i.e. whistleblowing structures, anti- fraud and anti-bribery policies) and employee welfare. • Subsidiary businesses have in place health and safety arrangements with an associated Group reporting framework which covers the welfare of employees and visitors to Group premises. • Group-wide forums with regulatory focus and oversight (e.g. Financial Services Management Committee, Financial Services Risk Committee and Information Security and Governance Committee). • Dedicated second-line compliance teams in higher risk/regulated functions. • Investment in recruitment of expertise within the compliance teams to ensure the Group is able to maintain appropriate procedures and risk measures for regulatory compliance. • Harmonisation of best practice compliance standards following acquisitions. • Evolution and development of IT systems to strengthen oversight routines. • Responsive complaints tracking of any emerging themes. • In-house legal and compliance teams, with access to specialist external legal and compliance support when necessary. • Group Risk and Internal Audit engagements. • Membership of industry trade bodies and participation in Government and regulatory consultations. • Responsive business model changes to mitigate and address the impact of any regulatory changes. 32 c115055_LSL.indb 33 33 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Principal Risks and Uncertainties Risk People: 9 Employees Description Mitigation Securing and retaining key strategic populations and controlling attrition in key business critical areas (e.g. through e.surv’s graduate training programme), as well as ensuring the effective management of personnel standards and policy frameworks across varied Group businesses. • Oversight by LSL Remuneration and Nominations Committees supported by the Company Secretary and Group HR Director. • Group remuneration policies and incentive schemes to retain key strategic populations. • Regular benchmarking and appraisals of Executive Directors and senior management. • Succession planning reviews and targeted development programmes for high achievers. • Dedicated in-house talent acquisition teams within Group HR. • Targeted retention and recruitment initiatives. • Employee surveys and Group HR initiatives to monitor culture, attrition, morale, and any areas of pressure. • Group-wide HR IT systems. • Monitoring of statutory reporting requirements and developments (e.g. gender and ethnic pay reporting). • Employee policies and monitoring frameworks in place (e.g. health and safety and lone working arrangements to ensure employee welfare). • Monitoring subsidiary culture, values and ethics and the development of LSL’s culture, values and ethics. • Implementation of workforce engagement measures to ensure employee considerations are included in decision making. • Adoption of reporting arrangements to demonstrate consideration of key stakeholders, including employees in decision making. • Clear Group policies and whistleblowing procedures to enable employees to confidentially raise or report concerns. 34 c115055_LSL.indb 34 22/03/2019 19:03 35 Corporate Social Responsibility e.surv chartered surveyor completing a marathon in Kenya in aid of Compassion UK The Board has overall responsibility for establishing the Group’s Corporate Social Responsibility (CSR) statement and associated policies with the Group Chief Financial Officer, taking individual responsibility for the creation, operation and implementation of the Group’s CSR statement and strategy. LSL believes that it is necessary to support responsibly grounded business decision making and consider the broad impact of corporate actions on stakeholders including employees, customers, local communities, and the environment. The continued focus, importance and attention to social responsibility issues has many benefits for corporations such as LSL. LSL recognises that its employees are central to the Group meeting its CSR, environmental and community investment objectives. Guidelines, progress and achievements are communicated to employees at regular intervals through bulletins, intranet sites and notice boards as appropriate (including the Group HR online service systems). The ways in which LSL communicates with its employees will be evaluated and assessed in 2019 as part of the work that LSL is undertaking in relation to the new workforce engagement requirements contained in the 2018 Code. Further, enhanced reporting requirements introduced in 2018 ensures that papers presented to the Board clearly identify consideration of all key stakeholders including employees in decision making. LSL’s focus is on actions that the Group can take, over and above its legal or Code requirements, to address its competitive interests as well as those of the wider society. This approach underpins all other internal policies that the Group adheres to. LSL actively ensures that its businesses are compliant and proactive in respect of legislation and takes into consideration where appropriate its key stakeholders, including employees, customers, suppliers, local communities and other relevant stakeholders’ interests. LSL believes that the objective of providing goods and services needed or desired by members of society while returning a profit to Shareholders can be – and should be – fully compatible with addressing social responsibility concerns. For example, LSL’s environmental policy demonstrates the Group’s commitment to the reduction of energy consumption and the positive impact that this will have both on the environment and on reducing costs to the Group’s businesses. LSL’s social responsibility scope extends to its relationships with customers and suppliers, and all Group companies conduct business in a manner which seeks to be honest and fair in these relationships. Further, ethics, hospitality and conflicts policies are in place to support the business and to govern these relationships. The Board recognises that it is important that Group companies operate in a responsible way. LSL’s stakeholders expect LSL to take issues into account and LSL in turn has a duty to demonstrate to them how it is living up to this expectation. This can often mean balancing competing demands, which are placed on LSL as a public company and as a residential property services group. This section of this Report details how LSL seeks to manage these interests and deliver on corporate social responsibility. 34 c115055_LSL.indb 35 35 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Corporate Social Responsibility Environmental, Social and Governance (ESG) matters As part of LSL’s regular risk assessment procedures and in its decision making, LSL takes into account the significance of ESG matters relevant to the Group. LSL will identify and assess the significant ESG risks to LSL’s short and long-term value, as well as the opportunities to enhance value that may arise from activities. The Board will also receive information and training on relevant ESG matters. The Board ensures that LSL has in place effective systems for managing and mitigating significant risks, which, where relevant, incorporate performance management systems and appropriate remuneration incentives. For further details on LSL’s internal controls and risk management arrangements, see the Principal Risks and Uncertainties section of this Report. Employees LSL recognises that its employees are a valuable asset and the Group’s businesses are committed to providing working environments in which employees are supported in their professional and personal development. By creating such an environment, the Group seeks to recruit and retain the right individuals to work at every level throughout the Group. An essential part of LSL’s strategy is to encourage and promote effective communication with all employees which includes the use of an annual employee opinion survey to obtain employee views and the establishment of a Group-wide Group Employee Engagement Forum, which discusses the outcome of the employee survey each year. These engagements support the Group, in its decision making, ensuring it takes into account employees’ views. LSL will also during 2019 review the Group’s employee engagement arrangements as part of the evaluation of arrangements relating to the 2018 Code and the requirements relating to workforce engagement. For further details of the employee survey arrangements and the Group Employee Engagement Forum, see Communication (Employees) below. LSL’s approach LSL’s aim is to be recognised by existing and potential future employees as a responsible employer that values its employees and the contribution they make both to the business and the wider community. LSL recognises that its market leading positions in Estate Agency, Financial Services and Surveying and Valuation Services are achieved by the quality and service provided by the Group’s employees. LSL’s employees are its key differentiator and it is this principle that guides decision making on how the Group approaches the management of its workforce. Communication During 2018 LSL continued to implement improvements to its governance arrangements to reflect best practice introduced by the joint guidance issued by the Investment Association and ICSA in relation to stakeholder engagement in addition to the guidance issued by the GC100 on directors’ duties under section 172 of the Companies Act 2006. This included the introduction of new reporting requirements to assist the Board in its oversight of the impact on stakeholders of decision making and updates to the Directors’ induction and training programme. Specifically, the Directors also received a presentation on section 172 of the Companies Act 2006 which was delivered by Pinsent Masons LLP. The Group’s businesses evaluate and monitor how they each communicate with LSL’s stakeholder groups, including employees. Examples of the communication methods are set out below: Employees LSL ensures that employees are kept informed of Group affairs via information distributed by post, email, handbooks, various intranet sites and employee forums (including roadshows/management presentations). LSL’s businesses all value employee feedback and all Group employees are encouraged to discuss strategic, operational and business issues within their teams and with their management teams. In addition, the Board receives employee feedback via the Group’s employee opinion surveys which are undertaken across all parts of the Group’s businesses on an annual basis. The employee opinions that are captured are then presented to the Board as part of a regular review of employee matters which focuses on considering issues relevant to the Group’s employees. Key performance indicators such as labour turnover and responses to key questions are also monitored to measure staff morale and review culture. In relation to the annual employee opinion surveys, LSL engages an external consultant to assist and this engagement allows LSL to not only generate an accurate picture of engagement across the Group, but also to assess the results and feedback received against similar organisations using the benchmarking data retained by the consultant. As in previous years, the 2018 survey which related to 2017, covered all aspects of the working environment including culture, training, careers, performance and Group companies’ communications, together with questions on the effectiveness of Group companies’ management and leadership. The response from employees to the 2018 survey was positive with 3,302 (65%) (2017: 3,574 (72%)) returns received. The survey relating to 2018 will be conducted in 2019 and the findings reported in the Annual Report and Accounts 2019. 36 c115055_LSL.indb 36 22/03/2019 19:03 37 The Group has also established a Group Employee Engagement Forum, a cross business team which has been established in the last two years with individuals from across the Group, including members of senior management teams. The forum meets via webinars and it has proved positive with initiatives being shared across the Group to improve employee engagement. The employee opinion survey results also provide the Board with insight into what factors concern and motivate the Group’s employees and contribute to action plans and/or focus groups across the Group. The employee survey process is continually evaluated and developed to maximise the validity and reliability of the data that is captured. The process is planned to be repeated again in 2019 as LSL remains committed to the continual development and improvement of employee engagement across the Group. LSL has also during 2018, continued to build on the work that started in 2017 in relation to stakeholder engagement. In 2019 LSL will continue to review how the Group engages with employees as part of its review of corporate governance reforms including identifying how it will implement workforce engagement requirements. This will include a review of existing employee engagement arrangements (e.g. employee surveys and forums). Customers In relation to its customers, all Group businesses regularly seek feedback from customers. This feedback is obtained in a range of ways, including relationship management meetings, formal questionnaires, mystery shopping exercises and consumer focus groups. This feedback is taken into account in LSL’s decision making processes and in particular in the development of its services to customers. Feedback from customers including monitoring complaints and business performance against agreed service levels is also undertaken by LSL’s Executive Committee as part of the Group’s regular Customer Outcomes reviews. Suppliers LSL has in place supplier relationship management arrangements across all its businesses and has developed a Supplier Code of Conduct to capture and communicate LSL’s policies and procedures to its suppliers which includes provisions relating to modern slavery and anti-bribery. Equal opportunities LSL promotes equal opportunities in employment, recognising that equality and diversity are a vital part of the Group’s success and growth. The Group’s recruitment, training and selection processes seek to appoint the best candidates based on suitability for the job and to treat all employees and applicants fairly regardless of race, gender, marital status, nationality, social backgrounds, ethnic origin, age, disability, religious belief or sexual orientation, and to ensure that no individuals suffer harassment or intimidation. Specific employment policies exist which employees are required to observe and which the Group Chief Executive Officer has overall responsibility for, with certain policies being submitted annually for review and approval by the Board. Compliance with legislation and Group policies is audited by the Group’s Risk and Internal Audit team alongside regular reporting to the Board, which includes indicators such as staff turnover. The reporting will be reviewed in 2019 as part of the work being undertaken in relation to LSL’s purpose, culture and values and the ways in which the Board can assess and monitor culture. Gender diversity During 2018, LSL has remained committed to diversity and equal pay and commenced reporting on gender pay for all LSL Group companies with more than 250 employees, in accordance with the new reporting requirements, to the Government’s website for report submissions (gender-pay-gap.service.gov.uk). The Group is also monitoring the Government’s review of reporting in relation to ethnic pay. Disability LSL has in place policies and procedures to achieve its objective that where appropriate, upon employment, reasonable adjustments will be made to accommodate disabled persons wherever the requirements of the organisation will allow and if applications for employment are received from suitable individuals. If existing employees become disabled every reasonable effort is also made to ensure that their employment with LSL can continue on a worthwhile basis with career opportunities available to them. 36 c115055_LSL.indb 37 37 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Corporate Social Responsibility Employee key performance indicators The Group uses a number of key performance indicators to measure its progress during the year, including employee turnover and the makeup of its workforce by gender. Total employees at 31st December Total employee turnover percentage (%)¹ Breakdown by gender Male Female Note: ¹ Data excludes forced leavers 2018 5,463 27.0 2018 2,562 2,901 2017 2016 2015 2014 5,084 28.7 2017 2,273 2,811 4,990 30.8 2016 2,206 2,784 5,181 28.5 2015 2,285 2,896 5,222 27.8 2014 2,316 2,906 The gender split for the Board, the senior Management Team and the Group employees as at 31st December 2018 and 2017 is as follows: Directors Senior Managers Group employees 2018 2 17 Female 2017 2 15 2018 5 59 Male 2017 5 61 2,882 2,794 2,498 2,207 Employee training LSL’s businesses place strong emphasis on the quality of service they provide to customers with employees (and where appropriate consultants) undergoing suitable training. During 2018, LSL continued its commitment to recruit, develop and invest in colleagues. LSL’s approach is to prioritise colleague learning and development to strengthen the Group’s businesses and to ensure the Group’s continued success. The Group has also during 2018, and will in 2019 continue to review its processes and put into place arrangements to ensure compliance with new legislation. LSL monitors all relevant legislative changes affecting its businesses and keeps under review its training programmes to ensure that employees receive specially designed training courses, with the quality of service monitored on a regular basis. LSL also regularly monitors and contributes to consultations relating to legislative and regulatory reviews and reforms. For further details relating to laws and regulations which impact LSL’s business, see the Business Reviews sections of this Report. Details of LSL’s approaches to training are summarised below. Group HR – Talent Development Team LSL’s Group HR function includes a ‘Talent Development Team’ which delivered classroom and webinar based training to a total of 5,089 Group employees during 2018, equating to the delivery of 2,418 training days. During 2018 LSL moved a significant proportion of the classroom training to webinars to offer a blended learning approach in response to the Group’s business needs and reduce intrusiveness on day to day business. The Talent Development proposition is now smarter and more focused. In addition to this, Group employees completed 62,319 eLearning modules. By fostering an inclusive culture, LSL is committed to diversity and equal pay, and recognises that many of its employees do not progress at the same rate. Therefore LSL has identified some of the main barriers to progression and has developed a plan to support minority groups. This includes the running of training programmes which include both unconscious bias and assertiveness training. Estate Agency Residential Sales, Lettings and Asset Management The Estate Agency Division’s branches adhere to the Codes of Practice issued by industry professional and regulatory bodies, including the TPO and/or ARLA Propertymark. Membership of these bodies is in addition to observing compliance with relevant legislation, such as Data Protection legislation, the Consumer Protection regulations, the Consumer Rights Act 2015, guidance material published by relevant regulators, including the Competition and Markets Authority (CMA) (and its predecessor the Office of Fair Trading (OFT)), the National Trading Standards Agency/TSI, HMRC and codes published by other relevant bodies, including the ASA. LSL has also on behalf of all its Estate Agency businesses entered into a primary authority agreement with York Trading Standards Office. 38 c115055_LSL.indb 38 22/03/2019 19:03 39 LSL from time to time also enters into direct dialogue with the regulators and consumer groups. During 2018 LSL has been monitoring and responding to the wide range of consultations published by the Government as part of its review of the housing market which commenced at the start of 2017 and continued during 2018. The Estate Agency Division has dedicated risk and compliance teams and is subject to oversight by the Estate Agency Management Committee. Financial Services In relation to LSL’s Financial Services business (with effect from the 31st January 2019), PRIMIS is the trading name of First Complete, Advance Mortgage Funding and Personal Touch Financial Services, and all three companies are directly authorised by the FCA in relation to the arrangement of mortgage and non-investment insurance products. Your Move, Reeds Rains, First2Protect, Mortgages First, Insurance First Brokers, Embrace Financial Services along with the LSLi subsidiaries are all appointed representatives of First Complete. Linear Financial Solutions is an appointed representative of Advance Mortgage Funding for mortgage and non-investment insurance brokerage and also an appointed representative of Openwork for investment business. In 2018, LSL acquired RSC New Homes which is an appointed representative of First Complete and Personal Touch Financial Services. LSL’s Financial Services businesses are also members of the Association of Mortgage Intermediaries (AMI) which is an industry representative and trade body and the Financial Services businesses are subject to the Financial Ombudsman Service and contribute to the funding of the Financial Services Compensation Scheme through regulatory fees and charges. First Complete acts as principal for most of the Estate Agency businesses within LSL’s Estate Agency Division and Embrace Financial Services, enabling their employed financial advisers to offer Financial Services to customers of the branch networks. Advance Mortgage Funding (previously trading as Pink Home Loans) and Personal Touch Financial Services both also operate intermediary networks, providing products and services to financial services intermediaries. The Financial Services businesses have dedicated compliance teams and the Financial Services activities are subject to the oversight of the Financial Services Risk Committee and Financial Services Management Committee. The Financial Services companies are also responsible for the training and compliance arrangements of the majority of Financial Services business conducted by Group companies and the Financial Services businesses place strong emphasis on the quality of service provided to customers and as part of the compliance arrangements and have in place arrangements to capture and monitor customer feedback and outcomes. All employees involved in the Financial Services businesses receive appropriate and relevant training. In particular, all Financial Services advisers complete a specially designed training programme which is supplemented by effective supervision, regular monitoring and regular refresher training sessions. Surveying and Valuation Services There are a total of 91 trainees in the Surveying and Valuation Services Division, 39 of whom have achieved AssocRICS qualifications. There are 52 still working towards the competency levels (including ten apprentices) who are on schedule to qualify during 2019/2020. In addition there are 22 AssocRICS qualified surveyors being sponsored through the Assessment of Professional Competency (APC) programme, and an additional seven who have successfully completed, resulting in the MRICS status. All surveyors are regulated by RICS and Continuing Professional Development (CPD) is a commitment by members to continually update their skills and knowledge in order to remain professionally competent. All RICS professionals must undertake and record online a minimum of 20 hours of CPD activity each calendar year. This is supported by the Group and undertaken through a variety of methods ranging from distance learning, online modules through the Learning Management System, classroom based training and regional conferences. Training During 2018, the Group’s training expenditure was: Division Estate Agency and Related Services Surveying and Valuation Services Total Expenditure¹ Note: 1 This includes in-house training costs of £1,582,119 (2017: £1,155,184) Expenditure 2018 £ Expenditure 2017 £ 1,573,491 763,182 2,336,673 1,221,496 426,556 1,648,052 Health, safety and welfare LSL places great importance on the health, safety and welfare of its employees. Regular training is supported by policies, together with Group standards and procedures, which aim to identify and remove any hazardous areas, reduce material risks of fire and accidents or injuries to employees and visitors and, in conjunction with its HR policies, manage workplace stress levels. To this end, LSL makes every reasonable effort to provide safe and healthy working conditions in all offices and branches. Similarly, it is the duty of all employees to exercise responsibility and to do everything to prevent injury to themselves and to others. c115055_LSL.indb 39 39 22/03/2019 19:03 38 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Corporate Social Responsibility Separate health and safety policies exist which employees are required to observe and the Group Chief Financial Officer has overall responsibility for this. Compliance with legislation and Group policies is audited by the Group’s Risk and Internal Audit team with regular reporting to the Board, which includes indicators such as accident numbers. Environmental issues LSL recognises that the environment has an intrinsic value, which is central to quality of life and underpins economic development. As part of this understanding, LSL has assessed the main areas in which it is able to effect the largest reductions in the Group’s overall environmental impact. The Group’s Environmental Policy is contained within the CSR Policy, which the Group Chief Financial Officer has overall responsibility for. Compliance with aspects of the CSR Policy is audited by the Group’s Risk and Internal Audit team with regular reporting to the Board. Energy efficiency strategy (including ESOS and greenhouse gas emissions reporting) In complying with ESOS Regulations 2014 and Article 8 of the EU Energy Efficiency Directive, LSL appointed a Lead Assessor to undertake a number of energy audits, the results of which were submitted to the Environment Agency in December 2015. The aim of ESOS is to aid organisations in their identification of energy efficient savings to support and increase good energy management and it is part of the Government’s climate change initiative. LSL continued to meet the ESOS qualifying criteria and is required to complete the qualifying number of energy audits and notify the Environment Agency of ESOS compliance by 5th December 2019 (the previous audit being completed in 2015). LSL will appoint a lead ESOS Assessor to manage the 2019 audit. During 2018 the Group continued to proactively review and manage recommendations from the 2015 ESOS audit across branch premises and head office locations, implementing changes to key areas as listed below, on acquisition of new premises and via the branch refresh programmes. During 2019, LSL’s energy initiatives will take into account the implementation of the Estate Agency: ways of working programme. • Energy Monitoring – The programme of smart meter installation is on-going (and included as a standard requirement where supply is tendered) providing greater accuracy on billing data and usage. Electricity to the Marsh & Parsons premises estate will all be supplied via smart meter by the end of the first quarter of 2019. • Lighting – The upgrade to low consumption fittings and LED lighting continues across the Group’s branch premises and head office sites, with LED lighting installed throughout branches included in the Reeds Rains and Your Move 2018 refresh programmes, customer facing and back office areas. Elsewhere in the Group there were also several key location premises acquisitions at Halifax, Kettering and Solihull where LED lighting was installed. • Heating, Ventilation and Air Conditioning – The practice of maintaining systems in accordance with manufacturer recommendations continues in order to ensure efficiency of the system, and where new premises are acquired the effectiveness of any existing installation is verified to ensure compliance with ESOS recommendations and standards. • Water – Following deregulation of the water sector, the Estate Agency branch networks will put their premises portfolios out to tender during 2019. • Transport – In accordance with Group strategy emission levels (including zero emission vehicles) has been a key consideration in the vehicle options made available to employees choosing to take a fleet vehicle, with continued availability of vehicles regularly reviewed particularly where manufacturers are continuing to report their emissions data. The trial of telematic devices is also on-going, particularly within Marsh & Parsons, as suppliers extend the range and scope of technical and driver data available to employers to assess driving practices and fuel consumption. Greenhouse gas emissions This section of this Report has been prepared in accordance with LSL’s regulatory obligation to report greenhouse gas emissions pursuant to section 7 of The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. During the 2017/18 reporting period, the Group emitted a total of 6,330 tCO2e from fuel combustion and operation of facilities (Scope 1 direct), and electricity purchased for the Group’s own use (Scope 2 indirect). This is equal to 20 tCO2e per £m of revenue or 1.27 tCO2e per full time equivalent employee. The table below shows LSL’s tCO2e emissions for the period 1st October – 30th September for the years 2014 to 2018. (tCO2e) Combustion of fuel and operation of facilities (Scope 1) Electricity, heat, steam and cooling purchased for our own use (Scope 2) Total Scope 1 and 2 tCO2e per full time equivalent employee tCO2e per £m revenue 2017/18 2016/17 2015/16 2014/15 3,705 2,625 6,330 1.27 20 3,959 2,721 6,680 1.47 22 4,046 3,553 7,599 1.69 24 4,325 4,236 8,561 1.89 29 40 c115055_LSL.indb 40 22/03/2019 19:03 41 As the table demonstrates, since 2014 LSL’s absolute emissions have decreased by 34%. This reduction has principally been due to the Group’s programme of continual branch refurbishment across the Estate Agency businesses to improve efficiency and modernise fittings, as well as the reduction in average FTE employees across the Group over this period; the disposal of a number of sites; and the decrease in the UK electricity CO2e GHG conversion factors linked to the reduction in coal powered electrical generation. Greenhouse gas reporting methodology The Group quantifies and reports on its organisational greenhouse gas emissions according to Defra’s Environmental Reporting Guidelines and has utilised the UK Government 2018 GHG Conversion Factors for Company Reporting in order to calculate CO2 equivalent emissions from corresponding activity data. LSL has also utilised data required for compliance with the CRC Energy Efficiency Scheme and ESOS. Greenhouse gas reporting boundaries and limitations The emission sources included within this Report fall within the consolidated Financial Statement. LSL does not have responsibility for any emission sources that are not included within the consolidated Financial Statement. LSL has not to date calculated the Group’s fugitive refrigerants from air-conditioning equipment as these are considered to be de minimis, however, LSL may look to quantify and report on emissions from this source in future years. The Greenhouse gas sources that constitute LSL’s operational boundary for the 2017/2018 reporting period are: • Scope 1: Natural gas combustion within boilers and road fuel combustion within vehicles; and • Scope 2: Purchased electricity consumption for our own use. Greenhouse gas reporting assumptions and estimations In some cases, missing data has been estimated using either extrapolation of available data from the reporting period or data from 2016/2017 as a proxy. Social and community interests (including human rights, ethical issues and prevention of modern slavery) LSL’s social and community interests (which includes the promotion of human rights, ethical issues and prevention of modern slavery) objective is to establish a common and coherent approach among Group businesses and to support investment in the communities in which they operate. Group companies are sensitive to local communities’ cultural, social and economic needs. LSL is committed to acting responsibly wherever it operates and to engaging with stakeholders to manage the social, economic and environmental impact of all Group activities. LSL’s business has a direct impact on the local communities in which it operates and the Board recognises that good relations with local communities are fundamental to LSL’s sustained success. Working in partnership with communities over a sustained period of time is the most effective way to achieve objectives and lasting change. LSL supports its businesses in achieving these objectives by encouraging Group businesses to: 1. make donations both to local and national charities; 2. support and organise fundraising events including supporting charities and local community initiatives selected by Group companies; and 3. support employees in their personal fundraising ambitions. Further details of some specific charitable initiatives are set out below in this section of this Report. LSL’s approach to the promotion of human rights and ethical issues is contained within the Group’s HR policies, which includes the Group’s Combined Ethics Policy (CEP), which is one of the policies that is presented to the Board for annual review and approval. The Combined Ethics Policy covers: a. anti-slavery and human trafficking; b. anti-corruption and bribery (including hospitality); c. conflicts; d. fraud; e. tax evasion; and f. whistleblowing. 40 c115055_LSL.indb 41 41 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Corporate Social Responsibility All Group employees are made aware of the CEP, the Audit & Risk Committee and the Risk and Internal Audit team will audit awareness and compliance, with the findings reported to the Board. Modern slavery LSL and its group of companies are all committed to conducting their businesses in a socially responsible way. LSL businesses seek to carry out their operations in accordance with appropriate ethical standards and to be honest and fair in their relationships with customers and suppliers. As part of this, LSL and its subsidiary companies have in place arrangements which seek to safeguard against modern slavery and human trafficking occurring within their businesses or any of their supply chains. During 2018, LSL continued to implement arrangements to ensure compliance with the Modern Slavery Act 2015 including publishing its Modern Slavery Statement (Statement) for the financial year ending 2017 which was published in June 2018 (see lslps.co.uk/modern- slavery). LSL also has a dedicated LSL anti-slavery and human trafficking policy which works in combination with LSL’s established whistleblowing policy. The published Statement sets out the steps taken by Your Move, Reeds Rains, LSLi and e.surv and it was signed for and on behalf of the Board by Adam Castleton (Group Chief Financial Officer and a director of each of these companies). Anti-corruption and bribery The Group has in place arrangements to ensure compliance with the Bribery Act 2010 and its arrangements are risk-based. The Group reviewed anti-corruption and bribery risks in the development of its policies and procedures which are reviewed periodically. Payment practices reform Your Move, Reeds Rains and e.surv made their first payment practices reports in 2018 which are available on the Government’s website for report submissions (check-payment-practices.service.gov.uk/). Tax evasion and strategy The Criminal Finances Act 2017 brought into effect two new criminal offences for companies of failing to prevent the facilitation of tax evasion, both in the UK and overseas. The new offences were effective from 30th September 2017. In response to the new legislation, the Group established a working party with the initial aim of raising internal awareness and identifying the Group’s existing risks and controls in respect of these new offences. In 2018 the Board approved a tax evasion policy for the Group which will be subject to annual review and approval by the Board as part of the CEP. Also, the Group reviewed its tax strategy 2018 and this is available on the LSL website (lslps.co.uk/investor-relations/corporate- governance/tax-strategy). Thomas Morris raised £3,000 for Emmaus homeless charity Reeds Rains supported Cash for Kids Marsh & Parsons supported Brook Green Day 42 c115055_LSL.indb 42 22/03/2019 19:03 43 Charitable donations Workplace giving LSL has implemented the ‘Charitable Giving’ initiative and all Group employees have been invited to participate. The initiative was launched in October 2010 and in 2018 LSL employees raised over £10,864. The scheme donates to a range of charities and 77 employees participated in the scheme. LSL makes it possible for employees to make regular donations via the payroll system to a charity or charities of their choice on a tax free basis. The tax free element means that the charity benefits by receiving a higher amount. Further information can be found at: charitablegiving.co.uk/payroll/payroll-giving.htm Estate Agency LSL’s Estate Agency Division encourages and promotes employees’ individual fundraising activities in the local communities of all the brands. Employees have raised money for a wide range of causes in 2018, from national and international organisations such as: Macmillan Cancer Support, the Alzheimer’s Society, UK Sepsis Trust, British Heart Foundation, Homelessness Prevention, Movember Foundation and Children in Need to very local causes such as Katherine House Hospice in Stafford, Yorkshire Air Ambulance and gathering donations for foodbanks in Clevendon. In addition to this, Reeds Rains was the headline sponsor of Bauer Radio’s Cash for Kids Superhero Day in 2018 across eight radio stations in the North of England and Reeds Rains employees raised over £30,000 for the charity during the event. Financial Services PRIMIS employees participated in a range of local activities, including a team climbing Snowdon, to raise money for mental health and housing related charities. Surveying and Valuation Services For the third year running, the Surveying and Valuation Services Division’s corporate charity was Coming Home. Coming Home is a national charity that provides specially adapted housing and support for ex-service personnel. Support was also provided to a number of different charities (national and local) based on individual employee requests, including but not limited to: Beatson Cancer Charity, Burton Latimer Cricket Club, Children’s Hospice South West, Circus Starr, Compassion UK, Cransley Hospice, Gafael Llaw, Guide Dogs for the Blind Association, Kids Cancer Charity, Little Pepper Café, Rowcroft Hospice, Save the Children, Save the Courthouse/Openhouse, Sleep in the Park, The Highland Cattle Society, and Trinity Hospice. 42 c115055_LSL.indb 43 43 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview The Board Kumsal Bayazit Besson — Non Executive Director Kumsal was appointed as an independent Non Executive Director on 1st September 2015 and was during 2018 also a member of LSL’s Nominations, Remuneration and Audit & Risk Committees. Kumsal has significant experience in strategy, technology, operations and sales and marketing, particularly in the professional information solutions sector. This includes her current appointment as Chief Executive Officer of Elsevier which is part of the RELX Group plc. Prior to this she was Regional President, Europe at Reed Exhibitions which is also part of the RELX Group plc. Kumsal has previously held a number of executive technology and digital strategic roles including appointments as Chief Strategy Officer for RELX Group plc, as the Executive Vice President of Global Strategy and Business Development for LexisNexis (part of RELX Group plc); and as a consultant for Bain & Co in New York, Johannesburg, Sydney, San Francisco and Los Angeles. Kumsal holds an MBA from Harvard Business School and a BA in Economics from the University of California at Berkeley. Kumsal will retire from the Board and its Committees with effect from the 2019 AGM in order to focus on her new role as Chief Executive Officer of Elsevier. Helen Buck — Executive Director – Estate Agency Helen was appointed as Executive Director – Estate Agency on 2nd February 2017 and has overall responsibility for the performance, strategy and development of LSL’s Estate Agency Division. Prior to this role Helen had, since December 2011, served as an independent Non Executive Director and was also a member of LSL’s Nominations and Remuneration Committees. Helen was previously Chief Operating Officer at Palmer & Harvey. Prior to this she was part of the Sainsbury’s management team from 2005 to 2015, including five years as a member of the Operating Board. Helen has extensive expertise in strategy, marketing, commercial and operations. Before joining Sainsbury’s, Helen held a number of senior positions at Marks & Spencer, Woolworths and Safeway and was a senior manager at McKinsey & Co. Adam Castleton — Executive Director, Group Chief Financial Officer Adam was appointed as Group Chief Financial Officer on 2nd November 2015. Adam has a breadth of financial skills and experience in the retail and services sectors. Adam joined LSL from French Connection Group PLC where he was the Group Finance Director. He previously held leadership roles at a number of market leading companies including O2 UK, eBay and The Walt Disney Company. Adam has over 25 years’ experience in finance, having started his career with Price Waterhouse where he qualified as a Chartered Accountant in 1989. Ian Crabb — Executive Director, Group Chief Executive Officer Ian was appointed Group Chief Executive Officer on 9th September 2013 and has primary responsibility for the performance, strategy and development of LSL. Ian’s previous experience included seven years as CEO of Quadriga Worldwide, Europe’s market leader in digital IP communication and entertainment services for hotels, where he was responsible for expanding the business into 50 countries. Earlier, Ian was a member of the Industrial Advisory Board at Permira Advisers LLP and worked on major transactions including the €640m buy-out of Hogg Robinson. Prior to this he was Chief Executive of IKON Office Solutions UK/Europe, the document management and office products provider, for six years; delivering significant growth both organically and through several acquisitions. Ian holds a BA from Oxford University and an MBA from Harvard Business School. Simon Embley — Non Executive Director and Chairman Simon was appointed Non Executive Chairman on 1st January 2015, having previously held the positions of Deputy Chairman and Group Chief Executive Officer. He became the Group Chief Executive Officer of LSL at the time of the management buy-out of e.surv and Your Move from Aviva (formerly Norwich Union Life) in 2004. Prior to the management buy-out, Simon was responsible for the strategic direction of these companies, and subsequent to the management buy-out, Simon oversaw and was responsible for the turnaround of the initial Group. Simon’s other directorships are limited to a small estate management company, Road to Health (a healthcare provider) and he is also Non Executive Chairman at Global Property Ventures (which distributes a tenant deposit replacement product). 44 c115055_LSL.indb 44 22/03/2019 19:03 45 Darrell Evans – Non Executive Director Darrell was appointed as an independent Non Executive Director on 28th February 2019 and is also a member of LSL’s Nominations, Remuneration and Audit & Risk Committees. Darrell joined LSL with significant experience in financial services and he is currently the Chief Commercial Officer at the Co-Operative Bank plc. Darrell spent the first part of his career at Royal Bank of Scotland plc, where he was Managing Director, Mortgages, Loans and Retail Telephony in the retail banking division responsible for all aspects of the Group’s mortgage proposition. Prior to that he was Product Director for the RBS retail bank. Darrell has also held senior executive roles at Direct Line Insurance Group plc, Virgin Money plc and The Consulting Consortium where he was CEO. Bill Shannon — Non Executive Director, Deputy Chairman, Senior Independent Director, and Chairman of the Remuneration Committee and Nominations Committee Bill was appointed as an independent Non Executive Director and the Chairman of the Remuneration Committee on 7th January 2014 and on 1st January 2015, he took on the roles of Deputy Chairman, Senior Independent Director and Chairman of the Nominations Committee. He is also a member of LSL’s Audit & Risk Committee. Bill has significant PLC board experience in strategy, operations, finance and governance in the consumer, financial services, residential and commercial property sectors. He is currently Non Executive Chairman of St Modwen Properties plc, Non Executive Chairman of Johnson Service Group plc and Council Member at the University of Southampton. He was previously at Whitbread Group plc from 1974 and between 1994 and 2004, he was the Divisional Managing Director. He has also served as Non Executive Chairman of Aegon UK plc and Non Executive Director of Rank Group plc, Barratt Developments plc, and Matalan plc. David Stewart — Non Executive Director and Chairman of the Audit & Risk Committee David joined the Board on 1st May 2015, and is Chairman of the Audit & Risk Committee and a member of the Remuneration and Nominations Committees. David has significant experience in finance, strategy, operations, risk and compliance with a particular expertise in financial services. He is currently Non Executive Chairman of the Enra Group and also sits as a Non Executive Director on the boards of M&S Bank, HSBC Private Bank (UK) Limited and Brooks Macdonald Group plc. Previously, he was Chief Executive of the Coventry Building Society (2006-2014), having earlier served as Finance Director and Operations Director. Prior to joining the Coventry, David spent ten years at DBS Management plc, holding a number of board positions including Group Chief Executive, Group Managing Director and Group Finance Director. David qualified as a Chartered Accountant with Peat Marwick (KPMG) and is a graduate of Warwick University. Sapna B FitzGerald — General Counsel and Company Secretary Sapna is a solicitor (qualified in 1998) and has been in the role of General Counsel and Company Secretary at LSL since 2004. Prior to the management buy-out of Your Move and e.surv, Sapna was a member of Aviva Life Legal Services and had since 2001 formed part of the team that supported Your Move and e.surv Chartered Surveyors. 44 The Strategic Report (including the Strategy, the Business Model, the Business Reviews, the Financial Review, the Principal Risks and Uncertainties, the Corporate Social Responsibility Report and the Board) is approved by and signed on behalf of the Board of Directors Ian Crabb Group Chief Executive Officer 5th March 2019 Adam Castleton Group Chief Financial Officer 5th March 2019 c115055_LSL.indb 45 45 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Report of the Directors and Corporate Governance Reports In this section 47 48 53 65 78 Statement of Directors’ responsibilities in relation to the Group Financial Statements Report of the Directors Corporate Governance Report Audit & Risk Committee Report Directors’ Remuneration Report 46 c115055_LSL.indb 46 22/03/2019 19:03 47 Statement of Directors’ Responsibilities in Relation to the Group Financial Statements The Directors are responsible for preparing the Annual Report and the Group Financial Statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (IFRS) as adopted by the EU. Under company law the Directors must not approve the Group Financial Statements unless they are satisfied that they present fairly the financial position of the Group and the financial performance and cash-flows of the Group for that period. In preparing the Group Financial Statements, the Directors are required to: • Select suitable accounting policies in accordance with IAS 8 ‘Accounting Policies, Change in Accounting Estimates and Errors’ and then apply them consistently. • Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information. • Provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, and other events and conditions on the Group’s financial position and financial performance. • State that the Group has complied with IFRS, subject to any material departures disclosed and explained in the Group Financial Statements. • Make judgements and accounting estimates that are reasonable and prudent. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group Financial Statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are also responsible for preparing the Strategic Report, the Report of the Directors, the Directors‘ Remuneration Report, the Audit & Risk Committee Report and the Corporate Governance Report in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure and Transparency Rules. 46 c115055_LSL.indb 47 47 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Report of the Directors Business review and development The Strategic Report (including the Chairman’s Statement and the Group Chief Executive’s Report) sets out a review of the business including details of LSL’s performance, developments (including future developments) and strategy. Annual general meeting LSL’s AGM will be held at its London offices: 1 Sun Street, London EC2A 2EP on 30th April 2019 starting at 3.30pm. The Notice of Meeting convening the AGM is in a separate circular to be sent to Shareholders with this Report. The Notice of Meeting also includes a commentary on the business of the AGM and notes to help Shareholders to attend, speak and/or vote at the AGM. Financial results The Strategic Report and Financial Statements set out the results of LSL. Dividend The Board continues to support LSL’s previously communicated dividend policy, to apply a dividend pay-out ratio of between 30% to 40% of Group Underlying Operating Profit after interest and tax. The Board has reviewed this policy while considering the risks and capital management decisions facing the Group. Adjusted Basic Earnings Per Share for 2018 was 27.2 pence, a decrease of 4% on the prior year (2017: 28.3 pence). The Board has a positive view of the future prospects for the business whilst also being mindful of the uncertain economic and political landscape which has an impact on consumer sentiment. The proposed dividend payment is at the upper end of the range of the stated policy and a final dividend of 6.9 pence per Share (2017: 7.3 pence per Share) will be proposed to Shareholders at the forthcoming AGM, giving a total dividend for 2018 of 10.9 pence per Share (2017: 11.3 pence per Share). The ex-dividend date for the final dividend is 21st March 2019 with a record date of 22nd March 2019 and a payment date of 7th May 2019. The last date for election is 5th April 2019. Shareholders have the opportunity to elect to reinvest their cash dividend and purchase existing Shares in LSL through a dividend reinvestment plan. Employees LSL recognises that its employees are a valuable asset and the Group’s businesses are committed to providing working environments in which employees are supported in their professional and personal development. By creating such an environment, the Group believes that this results in the retention and recruitment of the right people to work at every level throughout the Group. An essential part of this strategy is to encourage and promote effective communication with all employees, which also ensures that LSL, in its decision making, takes into account its employees views. The Group has an equal opportunities policy so that all job applicants are treated fairly and without favour or prejudice throughout selection, recruitment, training, development and promotion. Further details of how LSL engages with its employees are contained in the CSR statement, included in this Report. The CSR statement also summarises the Group’s policy in relation to disabled employees. The Corporate Governance Report details the steps that the Group is also taking to implement workforce engagement arrangements to ensure compliance with the 2018 Code and the associated FRC Guidance on Board Effectiveness. Financial instruments The Strategic Report sets out LSL’s strategies and objectives relating to treasury and risk management. Details of the financial instruments are set out in Note 31 to the Financial Statements. The Greenhouse Gas Emissions (Directors’ Reports) Regulations 2013 and Part 7 of The Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013 In accordance with Part 7 of The Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013, each year LSL reports on targets and KPIs approved by the Board within the Report of the Directors. The 2018 results are included within the CSR statement of this Report. Directors Details of the Directors as at 5th March 2019 are on pages 44 and 45 of this Report. Kumsal Bayazit Besson will retire from the Board with effect from the 2019 AGM. Full details of the Directors’ service contracts, letters of appointment and interests in LSL Shares are also detailed within the Directors’ Remuneration Report. Re-election and election All the Directors will each retire at the AGM and, being eligible intend to stand for re-election save that Kumsal Bayazit Besson will not stand for re-election. 48 c115055_LSL.indb 48 22/03/2019 19:03 49 LSL’s articles provide that the Board may appoint an individual to act as a Director, but anyone so appointed will retire from office at the next AGM and seek election. All of the Directors (who were elected at the 2018 AGM) will stand for re-election at the 2019 AGM (with the exception of Kumsal Bayazit Besson). Darrell Evans who has been appointed after the 2018 AGM will stand for election. Shareholders may by ordinary resolution elect or re-elect any individual as a Director. In addition, by an amendment to the Nominations Committee’s Terms of Reference, LSL has confirmed its commitment to annual elections of its Directors. Accordingly all of the Directors will stand for re-election at the AGM with the exception of Kumsal Bayazit Besson. The biographical details for all the Directors are set out on pages 44 and 45 of this Report. During the 2018 Board and Committees annual evaluation and effectiveness review, the performance of the Directors, who are all standing for re-election, was specifically evaluated and the Board confirmed that it values the experience and commitment to the business demonstrated by each of these individuals. Directors’ interests The interests of the current Directors in LSL are contained within the Directors’ Remuneration Report included in this Report. During the period between 31st December 2018 and the date of this Report, there were no changes in the Directors’ interests other than the purchases of Shares by Ian Crabb (220 Shares), Adam Castleton (220 Shares) and Helen Buck (220 Shares) as participants of LSL’s SIP/BAYE scheme. These Shares were purchased by the Trust at the prevailing market rate. The Board has during the year observed and maintained arrangements for the management and recording of conflicts in line with its policy. This includes the observance of an anti-bribery and hospitality policy to ensure compliance with section 176 of the Companies Act 2006. Further, during the year, no Director was materially interested in any contract that is or was significant to the business of the Group or any subsidiary undertaking. Directors’ service contracts Details of the Executive Directors’ service agreements and the current Non Executive Directors’ letters of appointment (including any extensions to appointments) are set out in the Directors’ Remuneration Report and are available for inspection at the Registered Office during normal business hours and at each AGM. Auditor Ernst & Young LLP, the external auditor of the Group has advised of its willingness to continue in office and a resolution to re-appoint them to this role and the authority for their remuneration to be determined by the Directors will be proposed at the 2019 AGM. Details of LSL’s policy designed to safeguard the independence and objectivity of the external auditors is included in the Audit & Risk Committee Report together with details of how the Audit & Risk Committee undertakes this assessment. Share capital LSL 0.2 pence Ordinary Shares are listed on the London Stock Exchange and are the only class of shares in issue. Rights and obligations attached to Shares Each issued Share has the same rights attached to it as every other issued Share. The rights of each Shareholder include: the right to vote at general meetings, to appoint a proxy or proxies, to receive dividends and to receive circulars from LSL. Details of Share capital are set out in Note 26 to the Financial Statements. There have been no changes to the Share capital during 2018. LSL will seek Shareholder approval for the renewal of authority for the Directors to allot unissued Ordinary Shares and for the power to disapply statutory pre-emption rights at the 2019 AGM. LSL obtained Shareholder approval to disapply pre-emption rights at the 2018 AGM. Full details of the deadline for exercising voting rights in respect of the resolutions to be considered at the 2019 AGM are set out in the Notice of Meeting. Employee Share schemes LSL has two Employee Benefit Trusts. The first was established in 2006 prior to LSL’s flotation on the London Stock Exchange and LSL appointed Link Market Services Trusts (formerly Capita Trustees Limited) (Trustees) to operate the LSL Property Services plc Employee Share Scheme (Trust). The Trustees of this Trust operate both the LSL Property Services plc Employee Share Incentive Plan (Buy As You Earn or BAYE) and the Save As You Earn (SAYE) Plans. The Trust is able to acquire and to hold Shares to satisfy options or awards granted under any discretionary share option scheme or long-term incentive arrangement operated by LSL. Details of the Shares acquired by the Trust are set out in Note 13 to the Financial Statements. The Trustees have waived the right to any dividend payment in respect of each Share held by them in 2018 and to all future payments. The second Employee Benefit Trust was established in November 2011 (the 2011 EBT), as part of the acquisition of Marsh & Parsons. The 2011 EBT does not currently hold any LSL Shares and will be closed during 2019. 48 c115055_LSL.indb 49 49 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Report of the Directors Viability statement In accordance with provision C.2.2 of 2016 Code, the Directors confirm that they have a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, for the next three years. This assessment was considered against the Group’s expected financial position, existing banking facilities and potential management actions. As with previous years, a three year viability period, ending 31st December 2021, has been selected which corresponds to the Board’s three year planning horizon. In light of the further FRC guidance issued, the appropriateness of this period was reassessed and is still considered appropriate given this aligns with the Group’s planning and budget cycle and is supported by the Group’s funding arrangements, which expire in May 2022. The Directors’ assessment has been made with reference to the Group’s current position and prospects, the current three year strategy and the Group’s Principal Risks and Uncertainties and how these are managed as detailed in pages 27 to 34 of the Strategic Report. The strategic plan has been stress tested using sensitivity analysis which reflects plausible but severe combinations of the principal risks of the business, primarily through reducing revenues and cash-flows. The process by which LSL developed its viability statement is set out on pages 27 and 28 of the Principal Risks and Uncertainties section of this Report. Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out in the Business Review sections of the Strategic Report. The financial position of the Group, its cash-flows, liquidity position and the Group’s policy for treasury and risk management are described in the Financial Review sections of the Strategic Report. Details of the Group’s borrowing facilities are set out in Note 23 to the Financial Statements. Note 31 to the Financial Statements describes the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. A description of the Group’s principal risks and uncertainties and arrangements to manage these risks are detailed within the Strategic Report on pages 27 to 34. As explained in Note 31 to the Financial Statements, the Group meets its day to day working capital requirements through cash generated from operations as well as utilising its RCF, which was renewed in January 2018. The Group currently has a £100m facility which is committed for a period up to May 2022. As stated in Note 31 to the Financial Statements as at 31st December 2018 the Group had available £65.5m of undrawn committed borrowing facilities in respect of which all precedent conditions had been met. The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the terms of its current facility. The Directors have considered the future profitability of the Group, forecast of future cash-flows, banking covenants, liquidity of investments and joint ventures and the ability of the Group to re-finance any loans due to mature in the next 12 months (including the Group’s facility which is due to mature in May 2022) where necessary. Further the Directors considered the key judgements, assumptions and estimates underpinning the review. After making enquiries, the Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing this Report. Disclosure of information to the auditor Having made enquiries of fellow Directors and of the external auditor, each of the Directors who have been directors in 2018, confirms that: • To the best of his/her knowledge and belief, there is no information (as defined in the Companies Act 2006) relevant to the preparation of this Report of which the external auditors are unaware. • He/she has taken all the steps a Director might reasonably be expected to have taken to be aware of relevant audit information and to establish that the external auditors are aware of that information. Directors’ qualifying third party indemnity provisions LSL had qualifying third party indemnity provisions for the benefit of the Directors in force from the start of the financial period to the date of this Report, subject to the conditions set out in the Companies Act 2006. LSL has put in place ‘Directors & Officers Liability’ insurance and indemnities to cover for this liability. Additional information for Shareholders The following provides the additional information required for Shareholders as a result of the implementation of the Takeovers Directive into UK Law. 50 c115055_LSL.indb 50 22/03/2019 19:03 51 Share capital At 31st December 2018, LSL’s issued Share capital comprised 104,158,950 0.2 pence Ordinary Shares. The authorised Share capital is 500,000,000 Ordinary Shares of 0.2 pence each. Ordinary Shares On a show of hands at a general meeting of LSL every holder of Ordinary Shares present in person and entitled to vote shall have one vote and on a poll, every member present in person or by proxy and entitled to vote shall have one vote for every Ordinary Share held. The Notice of Meeting which accompanies this Report specifies deadlines for appointing a proxy in relation to resolutions to be passed at a general meeting. Where the Chairman of the AGM is appointed as proxy, such proxy votes are counted and the numbers for, against or withheld in relation to each resolution are announced at the AGM and published on LSL’s website after the meeting (lslps.co.uk). There are no restrictions on the transfer of Ordinary Shares in LSL other than: • Certain restrictions which may from time to time apply under applicable laws and regulations (for example, insider trading laws and market requirements relating to closed periods). • Pursuant to the Listing Rules of the FCA/UKLA and LSL’s Share Dealing Policy, whereby certain employees of LSL require the approval of LSL to deal in LSL’s securities. LSL’s Articles of Association may only be amended by way of a special resolution at a general meeting of the Shareholders. LSL has the authority under section 701 of the Companies Act 2006 to make market purchases of the Ordinary Shares of the Group on such terms and in such manner that the Directors determine. The maximum Shares to buy back is capped at 10% of the Ordinary Share capital of the Group being 10,415,895 Ordinary Shares. Company Share schemes As at 31st December 2018, the Trust held 1.44% (2017: 1.45%) of the issued Share capital of LSL in trust for the benefit of employees of the Group and their dependents. The voting rights in relation to these Shares are exercised by the Trustees. Significant agreements – change of control Subsidiaries of LSL are party to agreements which take effect, alter or terminate upon a change of control of the subsidiary company following a takeover bid. The majority of the income derived through the provision of Surveying and Valuation Services and the Asset Management income streams are driven by specific contracts. Any termination of such contracts on the change of control of the relevant subsidiary company will have a significant impact on the revenue of those income streams. The Group is party to a number of banking agreements which upon a change of control of the Group are terminable by the bank and all outstanding amounts become immediately due and payable. Compensation for loss of office – change of control There are no agreements between LSL and its Directors or employees providing for compensation for loss of office or employment (whether through resignation, purported redundancy or otherwise) that occurs because of a takeover bid. Post balance sheet events On 5th February 2019 LSL announced an Estate Agency Strategy: ways of working programme update and work has now commenced on the reshaping of the Your Move and Reeds Rains branch networks. As disclosed on 5th February 2019, LSL expects to incur an exceptional P&L charge of approximately £14m in 2019 and £1m in 2020, with cash costs amounting to approximately £12m over the three years from 2019 to 2021 including approximately £9m cash costs in 2019. Directors’ responsibility statement Each of the Directors who were appointed to the Board in 2018 confirms that to the best of their knowledge: • The Financial Statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair review of the assets, liabilities, financial position and results of LSL and its subsidiaries included in the consolidation taken as a whole; the Strategic Report (including the Strategy, the Business Model, the Business Reviews, the Financial Review, the Principal Risks and Uncertainties, Corporate Social Responsibility Report and The Board) and the Directors’ Report (including the Corporate Governance Reports) include a fair review of the development and performance of the business and the position of LSL and its subsidiaries included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. • The Report (including the Financial Statements), taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess LSL’s performance, business model and strategy. 50 c115055_LSL.indb 51 51 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Report of the Directors Substantial shareholdings As at 31st December 2018 and as at 4th March 2019, the Shareholders set out below have notified LSL of their interest under DTR 5: Institutional Shareholders: Institution Harris L.P Nature of shareholding Beneficial Brandes Investment Partners L.P Beneficial Setanta Asset Management Ltd Kinney Asset Management, LLC FMR, LLC Russell Investments Group, Ltd Beneficial Beneficial Beneficial Beneficial Franklin Templeton Institutional, LLC Beneficial Number of Ordinary Shares 10,316,680 10,263,763 9,296,137 7,298,513 6,969,606 6,625,024 5,224,560 31st December 2018 4th March 2019 % of Ordinary Shares Number of Ordinary Shares % of Ordinary Shares 9.90 9.85 8.93 7.01 6.69 6.36 5.02 10,316,680 10,263,763 9,296,137 7,298,513 6,969,606 6,625,024 5,224,560 9.90 9.85 8.93 7.01 6.69 6.36 5.02 Individual Shareholders (excluding Directors): David Newnes Registered 3,479,910 3.34 3,479,910 3.34 The Report of the Directors has been approved by and is signed on behalf of the Board of Directors Sapna B FitzGerald Company Secretary 5th March 2019 52 c115055_LSL.indb 52 22/03/2019 19:03 53 Corporate Governance Report UK Corporate Governance Code (April 2016) (2016 Code) and the UK Corporate Governance Code (July 2018) (2018 Code) The Board continues to be committed to the highest standards of corporate governance and the Directors recognise the value and importance of meeting the principles of good corporate governance as set out in both the 2016 and 2018 versions of the Code together with the associated FRC Guidance on Board Effectiveness. This part of this Report describes how the Board and its Committees have complied with the 2016 version of the Code during 2018 and the corporate governance arrangements that LSL is putting in place for 2019, which will include the implementation of arrangements in accordance with the 2018 version of the Code which applies to the 2019 financial year and against which LSL will report in its Annual Report and Accounts 2019. This Report assesses LSL’s compliance against the 2016 Code and during 2018, LSL complied with the relevant provisions of the Code in all respects. The Code is available on the FRC’s website (frc.org.uk). Corporate governance reviews During 2018 the Board continued to implement improvements to its governance arrangements to prepare for implementation of the 2018 version of the Code and to reflect best practice introduced by the joint guidance issued by the Investment Association and ICSA in relation to stakeholder engagement, in addition to the guidance issued by the GC100 on directors’ duties under section 172 of the Companies Act 2006. Also in 2018, LSL continued to progress the Group’s culture, values and ethics review and following the publication of the 2018 Code and associated Guidance, the Board with the support of the Executive Committee commenced work to articulate LSL’s purpose, culture and values and to ensure its alignment to strategy and risk. LSL also continued to progress work already started on stakeholder engagement alongside identifying actions to be taken in 2019 with regard to the 2018 Code provisions. LSL is also reviewing its subsidiary governance arrangements taking into account the guidance contained in The Wates Corporate Governance Principles for Large Private Companies (Wates Principles) which was published in December 2018 following a period of consultation and which applies to the 2019 financial year. During 2019 the Group will implement arrangements to ensure that relevant subsidiaries put in place arrangements to comply with the Wates Principles. The Board and the Audit & Risk Committee have monitored reports on corporate governance failings and the resulting reviews of audit firms and their regulator to ensure that the Group’s governance, internal controls and risk management arrangements remain in line with best practice and are appropriate. The Board continues to take account of the impacts of decisions on stakeholders and LSL is currently reviewing the options relating to the Board’s engagement with the workforce to identify the most effective arrangements for workforce engagement which will best support the Group and its diverse range of businesses. LSL is also monitoring the review of the FRC which the Government initiated in 2018, noting in particular Sir John Kingman’s recommendation that the FRC be replaced with an independent statutory regulator (the Audit, Reporting and Governance Authority), accountable to Parliament, with a new mandate, mission, leadership and powers. The Board During 2018, the Board consisted of seven members: three independent Non Executive Directors, three Executive Directors plus the Chairman, whose details are all set out below. Director Name Position(s) Kumsal Bayazit Besson (retiring at AGM) Independent Non Executive Director – member of the Nominations Committee, Remuneration Committee and Audit & Risk Committee Helen Buck Adam Castleton Ian Crabb Simon Embley Bill Shannon David Stewart Darrell Evans Executive Director – Estate Agency Executive Director – Group Chief Financial Officer Executive Director – Group Chief Executive Officer Non Executive Director – Chairman Independent Non Executive Director – Deputy Chairman, Senior Independent Director, Chairman of the Remuneration Committee, Chairman of the Nominations Committee and a member of the Audit & Risk Committee Independent Non Executive Director – member of the Nominations Committee, Remuneration Committee, and Chairman of the Audit & Risk Committee Independent Non Executive Director – member of the Nominations Committee, Remuneration Committee and Audit & Risk Committee 52 c115055_LSL.indb 53 53 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Corporate Governance Report On 28th February 2019, Darrell Evans was appointed to the Board as an independent Non Executive Director and to each of the Nominations, Remuneration and Audit & Risk Committees. In line with the provisions of the 2016 and 2018 Code, all the Directors will retire from the Board at the AGM and stand for re-election, save that, as announced on 29th January 2019, Kumsal Bayazit Besson will retire and will not stand for re-election. Accordingly, subject to Shareholder approval at the AGM, following the AGM (in compliance with the 2016 and the 2018 Code), the Board will consist of three independent Non Executive Directors, three Executive Directors and the Chairman. All the Directors are listed with their biographies in The Board at pages 44 and 45 of this Report. Board changes and director search There were no Board changes in 2018. In January 2019, LSL announced that Kumsal Bayazit Besson will retire from the Board at the 2019 AGM. During 2018 the Nominations Committee, assisted by executive search agency Russell Reynolds Associates, conducted a search for a new independent non executive director to join the Board and its Committees. Russell Reynolds Associates is considered to be independent of, and does not have any connection with, LSL. This search resulted in the appointment of Darrell Evans to the Board and its Committees on 28th February 2019. The search for an additional director focused on individuals with skills and expertise in technology and innovation together with experience of operating in the financial services sector and resulted in the appointment of Darrell Evans to the Board with effect from 28th February 2019. Details of all of the Directors are included in The Board section of this Report. Board composition During 2018 the Non Executive Directors (excluding the Chairman) were determined to be independent in accordance with B.1.1 of the Code and the Board composition continued to comply with B.1.2 of the Code, namely that half of the Board (excluding the Chairman) comprised independent Non Executive Directors. The current Non Executive Directors together have a range of experiences which are described in more detail overleaf in the Nominations Committee section of this Corporate Governance Report. All the Non Executive Directors (excluding the Chairman) are considered by the Directors (and for the purposes of the 2016 and 2018 Code) to be independent of management and free of any relationship which could materially interfere with the exercise of their independent judgement. In relation to the requirements of the 2018 Code, the Chairman does not meet the 2018 Code’s independence test on appointment because he was previously the Group Chief Executive Officer of LSL. Further, Simon Embley has been in the role of Chairman since 2014 and prior to this was Deputy Chairman. He was first appointed to the Board in 2004 when the buy-out of Your Move and e.surv was completed. LSL listed on the London Stock Exchange in 2006. Simon Embley was Group Chief Executive Officer from 2004 to 2014 when he moved into the role of Deputy Chairman before taking on the role of Chairman in 2015. Accordingly, Simon Embley’s total term as a Director of LSL exceeds the 2018 Code’s provision which states that terms should be limited to nine years. The changes in Simon Embley’s role during his term and his position on the Board reflects the Board’s desire to retain his knowledge and experience of the residential property market and benefit from his track record in delivering Shareholder value. Prior to his appointment as Chairman, LSL consulted with significant Shareholders and their feedback was taken into account. Roles of the Chairman, Deputy Chairman and Senior Independent Director, and Group Chief Executive Officer There is a clear division of responsibilities between LSL’s Chairman, Deputy Chairman and Senior Independent Director and Group Chief Executive Officer and these are documented, approved by the Board and available on the LSL website. Chairman: The role of Chairman is pivotal in creating the conditions for overall Board and individual Director effectiveness, setting clear expectations concerning the style and tone of Board discussions, ensuring the Board has effective decision making processes and that it applies sufficient challenge to major proposals. It is up to the Chairman to make certain that all Directors are aware of their responsibilities and to hold meetings with the Non Executive Directors without the Executive Directors present in order to facilitate a full and frank airing of views. LSL’s Chairman is responsible for leadership of the Board and ensuring its effectiveness in all aspects of its role. The Chairman sets the Board’s agenda, ensuring that the Board’s discussions are focused on key issues including: strategy, performance, value creation, culture, key stakeholders and accountability, and ensuring that issues relevant to these areas are reserved for Board decision. The Chairman shapes the culture of the Boardroom by promoting a culture of openness and debate by encouraging all Directors to engage in Board and Committee meetings by drawing on their skills, experience and knowledge. He also fosters relationships based on trust, mutual respect and open communication between the Non Executive and Executive Directors. 54 c115055_LSL.indb 54 22/03/2019 19:03 55 The Chairman also ensures that the Directors receive accurate, timely and clear information and he ensures that the Board has effective communications with all of LSL’s key stakeholders: including its Shareholders, employees, customers and regulators. As noted elsewhere in this Report, the Board is considering options relating to the Board’s engagement with the workforce to identify the most effective arrangements for workforce engagement which will best support the Group and its diverse range of businesses. The Chairman will also ensure that the Directors continually update their skills and the knowledge and familiarity with LSL required to fulfil their role (both as a member of the Board and its Committees). The Chairman provides support and advice to the Group Chief Executive Officer (while respecting Executive responsibility) and also provides guidance and mentoring to new directors (as appropriate). The Chairman leads the annual Board and Committee evaluation exercise, with support from the Deputy Chairman and Senior Independent Director, and Company Secretary ensures that the Board and its Committees acts on its results. The Chairman will also periodically consider the undertaking of an externally facilitated exercise. For further details regarding the annual evaluation arrangements, see XX below. Group Chief Executive Officer: The Group Chief Executive Officer’s key responsibility is the running of the business and his delegated powers are set by the Board. As the most senior Executive Director, the Group Chief Executive Officer is responsible for proposing Company strategy and for delivering the strategy as agreed by the Board. He also has primary responsibility for setting an example to the Group’s workforce, for communicating to them the expectations in respect of the Company’s culture, and for ensuring that the operation of policies and practices drive appropriate behaviour. The Group Chief Executive Officer supports the Chairman in ensuring that the appropriate standards of governance permeate through all parts of the organisation and he ensures that the Board is aware of views gathered from meetings between Management and the workforce. As noted elsewhere in this Report, the Board is considering further how best to facilitate further workforce engagement. The Group Chief Executive Officer ensures the Board is aware of the views of Management on business issues in order to improve the standard of discussion in the Boardroom and, prior to a final decision on an issue, explain in a balanced way any divergence of view. The Group Chief Executive Officer is also responsible for ensuring that Management fulfils its obligation to provide Directors with: • accurate, timely and clear information in a form and of a quality and comprehensiveness that will enable it to discharge its duties; • the necessary resources for developing and updating their knowledge and capabilities; and • appropriate knowledge of the Group, including access to company operations and members of the workforce. Deputy Chairman and Senior Independent Director: LSL’s Deputy Chairman and Senior Independent Director acts as a sounding board for the Chairman, providing support for the Chairman in the delivery of his objectives, and leads the annual evaluation of the Chairman on behalf of the other Directors. The Deputy Chairman and Senior Independent Director is also available to meet with Shareholders if they should wish. The Deputy Chairman and Senior Independent Director works closely with the Chairman, the Group Chief Executive Officer and the other Directors to resolve significant issues; and the Board has a clear understanding of his role and responsibilities. The Deputy Chairman and Senior Independent Director will also take responsibility for ensuring an orderly succession process and the evaluation of the Chairman each year (see below for details of the annual evaluation exercise). All role profiles are available on the LSL website. Chairman’s other appointments In addition to his role as Chairman, Simon Embley’s other board appointments comprise a small estate management company, Road to Health Group Limited (a healthcare provider) and he is also Non Executive Chairman of Global Property Ventures Limited (trading as Zero Deposit, which distributes a tenant deposit replacement product). Board, Committees and Directors evaluation During the year the Directors continuously monitor and review their performance, and are encouraged to provide feedback on the effectiveness of the Board and its Committees. Further, in accordance with the requirements of the Code, the Directors undertake a formal and rigorous annual evaluation of the performance of the Board with the assistance of the Company Secretary. The process includes an evaluation of the Board, its Committees and of individual Directors. The Chairman leads the annual evaluation exercise, with support from the Deputy Chairman and Senior Independent Director (as appropriate). The Deputy Chairman and Senior Independent Director leads the evaluation of the Chairman. LSL’s evaluation exercise is bespoke in its formulation and delivery; and whilst the 2018 exercise did not involve an externally facilitated evaluation, the Chairman monitors the need for an externally facilitated evaluation on an on-going basis. 54 c115055_LSL.indb 55 55 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Corporate Governance Report The exercise considers: the balance of skills, experience, independence and knowledge of the Group on the Board; its diversity (including gender); how the Board works together as a unit; and other factors relevant to its effectiveness. In addition this year, the exercise considered the suitability of the evaluation process. The exercise seeks to ensure that the Directors remain individually and collectively effective and the Chairman, with the support of the Company Secretary, ensures that the Board acts on the results of the evaluation by recognising its strengths and addressing its weaknesses and, where appropriate, reviewing its composition. Individual Director evaluations consider each person’s contribution to demonstrate that each Director continues to contribute effectively and to demonstrate their commitment to the role (including commitment of time for Board and Committee meetings and any other duties). The evaluation exercise forms a useful part of the Board’s succession planning as it provides an opportunity to review skills, assess composition and agree plans for filling any gaps in skills and diversity. As part of the 2018 annual evaluation exercise, the Directors considered and determined that they are satisfied that the balance of Executive and Non Executive Directors on the Board is appropriate and that no individual or group dominates the Board’s decisions. Implementation of 2017 evaluation recommendations: The actions agreed during the 2017 evaluation process were completed in 2018 and the findings arising from the exercise contributed to succession planning in 2018, including the recruitment of a new independent Non Executive Director. 2018 evaluation exercise: The evaluation process conducted during 2018 involved discussions between each Director and the Chairman, meetings of the Board and discussions between the Non Executive Directors. As in previous years the Non Executive Directors have also evaluated the Chairman’s performance, after taking into account the views of the Executive Directors. No significant issues requiring action arose from the 2018 evaluations and the outcomes of the exercise were reported to, and discussed by, the Board. The outcomes will be fed back into the Board’s work on composition, the design of induction and development programmes, and other relevant areas. The appraisal confirmed that the Board and its Committees were discharging their responsibilities effectively and produced a number of recommendations to further improve the effectiveness of the Board. As a result of the 2018 exercise, during 2019 the Board will undertake the following: a. continue to develop succession planning arrangements for Executives, Senior Managers and Non Executive Directors; b. recruit an additional independent non executive director with skills and expertise to enhance existing Board and Committee composition (including diversity) and to support Group business and markets developments. Also identify and address any barriers to non executive director recruitment; and c. building on 2018 improvements, continue to review and revise meeting arrangements and the provision of information to the Board and its Committees to ensure that the Board/Committees prioritise supporting the Group’s strategy. 2019 evaluation exercise: During the 2019 exercise, which is intended to be conducted in line with the provisions of the 2018 Code, the Board will consider ways in which the Directors can formally include feedback from key stakeholders, including the workforce and LSL’s auditor as part of the annual evaluation exercise, in addition to considering whether the exercise should be externally facilitated. Diversity (including gender) LSL continues to recognise the benefits of diversity on the Board (including relevant professional skills, experience, gender and race). The 2018 Code provides that diversity in the Boardroom can have a positive effect on decision making and recommends that the Board decide on which aspects of diversity are important to the Company in the context of its business and needs. In terms of gender diversity, during 2018 the Board included two female Directors, Helen Buck (Executive Director – Estate Agency) and Kumsal Bayazit Besson (independent Non Executive Director). In 2019, following the retirement of Kumsal Bayazit Besson, the Board will include one female Director (Helen Buck). The Board also considers diversity of aspects in addition to gender and considers that its composition includes a wide range of skills and expertise that are relevant to the Group’s businesses and needs. Diversity of personal attributes is also important and is taken into account in the recruitment of new Directors. See also the Corporate Social Responsibility section of this Report for details of the number of women within the senior Management teams. During 2018 the LSL Board composition included expertise, skills and experience in strategy, technology, estate agency, surveying and valuation services, financial services, the residential housing sector, commercial property, retail and marketing, operations, business services, entrepreneurial private and public companies, finance, consumer and employee matters, and corporate governance. In 2019, the Board will be further enhanced by the financial services experience and skills of Darrell Evans, a new Non Executive Director. LSL has not adopted a formal diversity policy in relation to the Board’s composition and whilst the Directors remain of the view that the setting of diversity related targets (e.g. number of female directors) in relation to Director appointments is not necessary, the Board continues with the support of the Nominations Committee to appoint on merit. Both the Chairman of the Board and the Chairman of the Nominations Committee ensure that all searches for directors and senior managers (including those undertaken in 2018 and being 56 c115055_LSL.indb 56 22/03/2019 19:03 57 undertaken in 2019) continue to take into account the benefits of diversity, including professional skills, experience, gender, social and ethnic backgrounds. LSL believes that diversity on the Board, within the senior management teams and the general Group workforce has a positive impact on the Group’s performance and the Board will during 2019 continue to review its position with regard to the adoption of a formal diversity policy in relation to the Board’s composition. For further information on how the Nominations Committee ensures the promotion of diversity within the Group, see below (Nominations Committee section). Directors’ service agreement and letters of appointment Copies of the Executive Directors’ service agreements and of the Non Executive Directors’ letters of appointment are available for inspection at the Registered Office during normal business hours and at each AGM. Further details of Director service agreements and Non Executive Director letters of appointment are contained in the Directors’ Remuneration Report. Director support (including the role of the Company Secretary) All Directors have access to independent professional advice at LSL’s expense, where they judge it necessary to discharge their responsibilities and for the performance of their duties. This is in addition to the access every Director has to the Company Secretary and to the Group HR Director and their teams. The Company Secretary is responsible for ensuring that Board procedures are complied with, advising the Board on all governance matters, supporting the Chairman of the Board and each of the Committees, and helping the Board and its Committees to function efficiently. She reports to the Chairman and the Deputy Chairman and Senior Independent Director on all governance matters and to Executive Directors in relation to other executive management responsibilities. LSL’s Company Secretary’s responsibilities include ensuring information flows efficiently within the Board and its Committees and between senior Management and the Non Executive Directors. The Company Secretary also works alongside the Group HR Director, facilitating Board inductions, arranging Board training and assisting with professional development as required. The Company Secretary and Group HR Director organise and arrange for the provision of resources to develop and update the Directors’ knowledge and capabilities. Training is delivered in a manner that is appropriate to the particular Director, and that aims to enhance that Director’s effectiveness as a part of the Board or its Committees in line with the results of the Board evaluation process. Assisting the Chairman in establishing the policies and processes the Board needs in order to function properly is a core part of the Company Secretary’s role. During 2019, the Chairman and the Company Secretary will review whether the Board and LSL’s governance processes (e.g. Board and Committee evaluation) are fit for purpose, and consider any improvements or initiatives that could strengthen the governance of the Group (including in line with the 2018 Code). The Company Secretary’s effectiveness is enhanced by building relationships of mutual trust with the Chairman, the Deputy Chairman and Senior Independent Director and each of the Non Executive Directors, while maintaining the confidence of Executive Director colleagues. As the 2018 Code recognises, the role of Company Secretary is in a unique position between the Executive and the Board, and is well placed to take responsibility for concerns raised by the workforce about conduct, financial improprieties or other matters. Director induction and training Each newly appointed Director receives a comprehensive, tailored induction on a range of topics, including, as appropriate, the responsibilities of a director of a public listed company and the LSL businesses. Thereafter, LSL with the support of the Company Secretary and the Group HR Director, provides the necessary resources for developing this understanding and knowledge. Further, the Chairman annually reviews and agrees any training and development needs with each of the Directors and any training needs are also discussed as part of the annual evaluation exercise. During 2018, LSL completed a review of its induction and training arrangements to take into account the requirements of the 2018 Code, and specifically to ensure that LSL’s approach to stakeholder engagement was included in the induction programme for new Directors. The updated induction arrangements are being used in the induction of Darrell Evans as a new independent Non Executive Director. The Company Secretary and Group HR Director ensure that the Director induction and training arrangements are reviewed regularly with updates provided to the Board. During 2018, the Board also received a training session on the new 2018 Code and the directors’ duties under section 172 of the Companies Act 2006 which was delivered by Pinsent Masons LLP. Board and Committee meetings During 2018 the Board held seven scheduled meetings (including a strategy meeting). Each of the Directors was able to allocate sufficient time to LSL to discharge their responsibilities effectively, as shown by the attendance of each of the Directors at all seven Board meetings. The attendance of each Director at Board and Committee meetings is set out in this Report. 56 c115055_LSL.indb 57 57 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Corporate Governance Report During 2019 the Board is scheduled to meet eight times (including a strategy meeting). Additional meetings may be held as required. During 2018 the Non Executive Directors collectively met four times without the Executive Directors being present and it is the intention that the Non Executive Directors will meet six times during 2019. These meetings are scheduled to take place before or after a Board or Committee meeting. In addition, the Non Executive Directors are scheduled to meet at least once in the year without the Chairman being present. 2018 Board and Committee attendance: Board Member Simon Embley Bill Shannon Position Chairman Deputy Chairman and Senior Independent Director Kumsal Bayazit Besson Independent Non Executive Director Ian Crabb Group Chief Executive Officer Adam Castleton Group Chief Financial Officer Helen Buck David Stewart Executive Director – Estate Agency Independent Non Executive Director Board Meetings (including a strategy meeting) Audit & Risk Committee Remuneration Committee Nominations Committee 7 7 7 7 7 7 7 - 3 3 - - - 3 - 3 3 - - - 3 - 2 2 - - - 2 Director elections LSL’s Articles of Association stipulate that all the Directors appointed since the previous AGM and one third of the remaining Directors, including any Director who has not been elected or re-elected at either of the two preceding AGMs, are required to retire and seek election/ re-election (as appropriate). Notwithstanding this since 2012 LSL has chosen to adopt annual elections for all Directors, in accordance with best practice (including under the 2016 and 2018 Code) and by an amendment to the Nominations Committee Terms of Reference. Accordingly, all the Directors will stand for re-election/election at the forthcoming AGM (other than Kumsal Bayazit Besson who is not standing for re-election). Board role and responsibilities The Board is primarily responsible for the overall management of the Group and for decisions on Group strategy, including approval of the Group’s strategy, its annual business plans and budgets, the interim and full year financial statements and reports, any dividend proposals, the accounting policies, any major capital projects, any investments and disposals, its succession plans and the monitoring of financial performance against budget and forecast and the formulation of the Group’s risk appetite framework, including the identification, assessment and monitoring of LSL’s principal risks and uncertainties. In accordance with best practice, LSL has adopted a policy of Matters Reserved for the Board which is reviewed at least annually by the Board. The Board has adopted principles of good boardroom practice which set out procedures on how Directors are given accurate, timely and clear information and how they can seek and obtain the information or advice necessary for them to discharge their duties. These arrangements are monitored by the Chairman and the Company Secretary and reviewed annually by the Directors as part of the Board’s evaluation process (which is explained above). Governance There is also a programme of regular reviews by the Board of LSL’s performance and developing best practice in matters such as employment, health and safety, environmental, and social and community interests (including human rights and ethical issues). Stakeholder engagement – section 172 Companies Act 2006 During 2018, and building on the work that it had started in 2017, the Board implemented enhancements to its arrangements relating to stakeholder engagement and also implemented new reporting arrangements alongside these measures to ensure compliance with the Directors duties as set out in section 172 of the Companies Act 2006. In reviewing its new reporting arrangements, the Board took into account the actions arising from the 2017 Board evaluation exercise in addition to guidance published by the GC100 in October 2018. Specifically, papers submitted to the Board for a decision identify if any stakeholders are impacted by the decision and, if so, how. LSL has also updated its Board and Committee terms of reference to include reference to section 172. 58 c115055_LSL.indb 58 22/03/2019 19:03 59 LSL intends to consider the implementation of further measures during 2019 to support the Directors compliance with section 172 and LSL’s reporting to be included within the strategic report of the Annual Report and Accounts 2019 (the new reporting requirements apply from financial year 2019). Stakeholder engagement – workforce engagement The Board is considering the options contained in the 2018 Code in relation to workforce engagement to identify the arrangements which would best support LSL’s business model and workforce. This includes a review of existing workforce engagement arrangements which are in place across the Group (for example employee forums and the employee annual survey). Purpose, culture and values The Board also continued its review of the Group’s purpose, culture, values and ethics in addition to commencing work on the articulation and definition of LSL’s purpose and how it relates to the Group’s corporate strategy. During 2019 the Board will define LSL’s purpose and then identify actions to deliver it, underpinned by the values and behaviours that shape its culture and the way it conducts business. The Board will also consider how it can monitor and assess LSL’s culture. The definition of LSL’s purpose will assist the Group in its articulation of LSL’s business model, and development of strategy, operating practices and its approach to risk. It will also support LSL engagement with key stakeholders, including Shareholders, the workforce, customers and the wider communities in which the Group’s businesses operate. The Remuneration Policy will be assessed to ensure alignment with LSL’s purpose, culture, values and ethics. In addition, the 2018 annual employee survey included additional questions relating to culture which were presented to the Board as part of an annual Group HR presentation and the results were independently reviewed by Risk and Internal Audit. Management actions identified as a result of the survey are being implemented with monitoring by the Executive Committee. Corporate Social Responsibility (CSR) LSL believes that CSR is necessary to support responsible business decisions that consider the broad impact of corporate actions on people, communities, and the environment. Accordingly, the Board takes account of the significance of environmental, social and governance matters (ESG) when making decisions and has during 2018 been monitoring and considering what lessons can be learnt from corporate failures of other companies. Further details of LSL’s CSR objectives can be found in the CSR Statement included in this Report. New regulations During 2018, the Board closely monitored the Group’s EU General Data Protection Regulation and Data Protection Act 2018 implementation project and also received regular updates on arrangements relating to Reporting on Payment Practices Regulations 2017, the Modern Slavery Act 2015, The Bribery Act 2010, The Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 and the Criminal Finances Act 2017. The Board has also been monitoring developments in relation to laws and regulations which impact LSL’s Estate Agency and Financial Services businesses and further details relating to these are included in the Business Review – Estate Agency section of this Report. Director conflicts of interest Under the Companies Act 2006, a director must avoid a situation where he/she has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the company’s interest. The Companies Act 2006 allows directors of public companies to authorise conflicts and potential conflicts where appropriate and where the articles of association contain a provision to this effect, as LSL’s Articles of Association do. Accordingly, the Board has adopted procedures for the Directors to report any potential or actual conflict to the Board for their authorisation where appropriate. Each Director is aware of the requirement to seek the approval of the Board for any new conflict situations, as they may arise. The process of reviewing conflicts disclosed, and authorisations given, is repeated both annually and following the appointment of any new Director. Any conflicts, or potential conflicts, considered by the Board and any authorisations given are recorded in the Board minutes and in a register of Director’s conflicts which is maintained by the Company Secretary. Board Committees The Board has delegated specific responsibilities to three standing Committees of the Board: a. Nominations Committee; b. Remuneration Committee; and c. Audit & Risk Committee. In addition the Board has established a Disclosure Committee to ensure compliance with the Market Abuse Regulation. The membership of these Committees and a summary of their main duties under their Terms of Reference are set out below. The full Terms of Reference may be viewed on LSL’s website (lslps.co.uk). During 2018, the Board reviewed the Terms of Reference for each of the Committees and updated each to ensure compliance with the new 2018 Code and the FRC Guidance on Board Effectiveness. 58 c115055_LSL.indb 59 59 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Corporate Governance Report It is also the intention that Bill Shannon, as Chairman of the Nominations Committee and Remuneration Committee and David Stewart, as Chairman of the Audit & Risk Committee, will both attend the 2019 AGM to answer any questions. Nominations Committee During 2018, Bill Shannon was the Chairman of the Nominations Committee and its other members were Kumsal Bayazit Besson and David Stewart. With effect from LSL’s AGM, Kumsal Bayazit Besson will retire from the Nominations Committee. Darrell Evans was appointed to the Nominations Committee with effect from 28th February 2019. Director searches In relation to the recruitment of a new independent non executive director, the Nominations Committee has been assisted in its search by Russell Reynolds Associates. During 2018, the Nominations Committee considered at length a number of aspects regarding the Board’s composition and continued a search which commenced in the second half of 2017, for the recruitment of an additional independent non executive director with technology and innovation expertise and experience in the financial services sector. The search in 2018 recognised the growing importance of LSL’s Financial Services businesses. Following this search the Board appointed Darrell Evans as a new independent Non Executive Director with effect from 28th February 2019. Russell Reynolds Associates is considered to be independent of, and does not have any connection with, LSL. Roles and responsibilities of the Nominations Committee The Nominations Committee has been established by the Board to lead the process for appointments to the Board and to ensure plans are in place for orderly succession to both the Board and senior Management positions. The Nominations Committee has oversight of LSL’s succession arrangements and in discharging its roles and responsibilities it considers and has regard to the requirements of the Listing Rules and Disclosure Guidance and Transparency Rules together with guidance issued by the FRC (including the Code). The duties of the Nominations Committee are governed by its Terms of Reference, which were reviewed in 2018 to ensure continued compliance with the 2016 Code and updated with effect from 1st January 2019 to ensure compliance with the 2018 Code. During 2018 and with effect from 1st January 2019 the Nominations Committee’s roles and responsibilities include the following: a. taking into account LSL’s strategy and the Board’s knowledge and understanding of the Group’s key stakeholders, regularly reviewing the structure, size and composition (including skills, knowledge and experience) required of the Board and its Committees; and making recommendations to the Board with regard to any changes; b. recommending appointments after the evaluation of the balance of skills, experience, independence and knowledge on the Board, taking into account diversity (including gender and race). The Nominations Committee will also prepare a description of the role and capabilities required for a particular appointment; c. giving full consideration to succession planning in the course of its work, taking into account the challenges and opportunities facing LSL, and what skills and expertise are therefore needed on the Board in the future. The Nominations Committee will also satisfy itself that plans are in place for orderly succession for appointments to the Board and to senior Management, so as to maintain an appropriate balance of skills and experience within the Group and on the Board, to ensure progressive refreshing of the Board; d. recommend to the Board as a whole, the selection and appointment of new Executive and Non Executive Directors in accordance with the Code; ensuring that any search is conducted, and appointments are made, on merit, against objective criteria, with due regard for (i) the benefits of diversity, including gender and race; and (ii) the Group’s key stakeholders; e. reporting on the nomination of all new Board appointments and undertaking an annual performance evaluation to ensure that all members of the Board have devoted sufficient time to LSL to discharge their duties effectively; f. keeping under review the leadership needs of the Group at varying levels with a view to ensuring the continued ability to compete effectively in LSL’s marketplaces; g. ensuring that on appointment to the Board, Non Executive Directors receive a formal letter of appointment which sets out clearly what is expected of them in terms of time commitment, committee service and involvement outside Board meetings; h. ensure that prior to the appointment of the Chairman, a job description is prepared which includes an assessment of the time commitment expected for the role, recognising the need for availability in the event of a crisis; and i. as part of the process for nominating candidates for any appointments, obtain details of and review any interests that the candidate may have which conflict or may conflict with the interests of LSL. The Nominations Committee makes recommendations to the Board as set out in its Terms of Reference. In 2018 recommendations to the Board included the following matters: a. succession plans for both Executive Directors and Non Executive Directors (in particular, for key roles of the Chairman and the Group Chief Executive Officer); 60 c115055_LSL.indb 60 22/03/2019 19:03 61 b. recommended the extension of appointment terms for David Stewart and Kumsal Bayazit Besson; c. reviewed the 2018 Code and related Guidance on Board Effectiveness; and d. reporting on its activities each year within LSL’s Annual Report and Accounts. The Nominations Committee will also monitor the terms of each Director and ensure that each year the Board, along with the Chairman, completes a formal and rigorous evaluation of the Board, its Committees and its Directors. For details of the 2018 evaluation exercise, see above (Board, Committees and Directors evaluation). What the Nominations Committee did in 2018 The Nominations Committee met twice in 2018 and the Group Chief Executive Officer, the Chairman, the Group HR Director and the Company Secretary were all invited to attend all or parts of these meetings and to assist the Nominations Committee in its deliberations during this period. During the year, as part of it discussions, the Nominations Committee considered the following matters: a. Board composition, including gender, race and professional skills diversity of the Board and its Committees as a whole; b. Non Executive Director skills, expertise and experience together with succession planning arrangements taking into consideration the term of each Non Executive Director; c. Executive Committee performance together with Executive Committee and senior Management succession planning arrangements; d. a review of the governance arrangements within the Estate Agency and Financial Services management teams, including considering the renewal of the appointment of the non executive member to the Financial Services Management Committee and changes to the Financial Services management structure following the acquisition of Personal Touch Financial Services; e. a review of the 2018 Code and the associated 2018 FRC Guidance on Board Effectiveness including discussing how LSL can implement the new workforce engagement arrangements during 2019; f. a review of the Nominations Committee’s performance and its terms of reference to ensure continued compliance with the 2016 Code and to prepare for the 2018 Code. This review also considered related FRC guidance and resulted in updates to the Terms of Reference with effect from 1st January 2019; and g. the Nominations Committee continued a search for the recruitment of an additional independent Non Executive Director which commenced in 2017 and resulted in the appointment of Darrell Evans on 28th February 2019. LSL was assisted by executive search agency Russell Reynolds Associates in its selection. As part of its discussions in 2018 the Nominations Committee considered FRC guidance and other publications relevant to the roles and responsibilities of the Nominations Committee. Governance In carrying out its duties, the Nominations Committee takes into account both the requirements of the Listing Rules (together with requirements issued by the FCA), the Code and related guidance issued by the FRC and other relevant bodies (e.g. ICSA), together with the requirements of the Board. During 2018, the Nominations Committee continued to monitor reviews and reforms of corporate governance and during its discussions it considered the 2018 Code and the 2018 Guidance on Board Effectiveness, including considering LSL’s purpose, culture and values and how the Group can implement the new workforce engagement requirements. Board composition and diversity Whilst LSL does not have in place a formal policy on diversity, it has during 2018 and will continue during 2019 to ensure that LSL’s recruitment and succession planning practices continue to identify and consider a diverse pool of candidates to improve diversity over time. During 2019, with support from the Group HR Director and the Company Secretary, the Nominations Committee will consider the setting and meeting of diversity objectives and strategies for the Group as a whole, and monitor the impact of any diversity initiatives. For further details regarding LSL’s approach to diversity, see above (Diversity). Gender pay reporting LSL published its gender pay reports for all LSL Group companies with more than 250 employees in April 2018 and further reporting will be published in April 2019. The reports are available to view at gender-pay-gap.service.gov.uk. For details of gender reporting in relation to the Board, the senior Management Team and Group employees, see the CSR statement included in this Report. 60 c115055_LSL.indb 61 61 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Corporate Governance Report Remuneration Committee During 2018, the Remuneration Committee was chaired by Bill Shannon and its other members were Kumsal Bayazit Besson and David Stewart. With effect from LSL’s AGM, Kumsal Bayazit Besson will retire from the Remuneration Committee. Darrell Evans was appointed to the Remuneration Committee with effect from 28th February 2019. The Remuneration Committee met four times during the year and the Group Chief Executive Officer, the Chairman, the Group HR Director and the Company Secretary were each invited to attend all or part of these meetings and assist the Remuneration Committee in its deliberations during this period. Role and responsibilities of the Remuneration Committee The Remuneration Committee has delegated responsibility for determining the policy for Executive Director remuneration and setting remuneration for the Chairman, the Executive Directors and Senior Management (the definition of Senior Management for this purpose will be determined by the Board). With effect from 1st January 2019, the Remuneration Committee will also review workforce remuneration and the alignment of incentives and rewards with LSL’s culture, taking these into account when setting the policy for Executive Director remuneration. The Remuneration Committee does not consider remuneration of the Non Executive Directors as this is a matter for the Board. The duties of the Remuneration Committee are governed by its Terms of Reference, which were reviewed in 2018 to ensure continued compliance with the 2016 Code and updated with effect from 1st January 2019 to ensure compliance with the 2018 Code. During 2018 and with effect from 1st January 2019, the Remuneration Committee’s role and responsibilities include the following: • review the design of schemes of performance related remuneration which include discretion to override formulaic outcomes and provisions to enable recovery or the withholding of payments where it is appropriate to do so; • ensure that only basic pay is pensionable and to review pension contribution arrangements (or payments in lieu) for the Executive Directors to monitor alignment with those available to the workforce; • review of share incentive plan arrangements for approval by the Board and Shareholders; and • promote long-term shareholdings by the Executive Directors to support alignment with Shareholder interests. The Directors’ Remuneration Report provides details of how the Remuneration Committee discharged its duties during 2018 and this can be found from pages 78 to 80 of this Report. The Terms of Reference of the Remuneration Committee are available from the Company Secretary or LSL’s website (lslps.co.uk). What the Remuneration Committee did in 2018 During 2018, the Remuneration Committee met three times and considered the following matters: a. reviewed the levels of remuneration of the Executive Directors and the Chairman (this included consultations with significant Shareholders in relation to revisions to the Group Chief Executive Officer’s base pay); b. continued to implement and apply LSL’s Remuneration Policy; c. reviewed a proposal to amend the Group’s BAYE/SIP plans to include the grant of matching shares; d. reviewed the Group’s Executive Directors’ and senior Management bonus arrangements for 2018 and 2019 (including reviewing and setting Executive Director NFMs); e. reviewed and approved LTIP awards for the Executive Directors and senior Management; f. reviewed the Executive Directors shareholding guidelines and Executive Director shareholdings; g. reviewed the Remuneration Committee’s performance and its Terms of Reference to ensure continued compliance with the 2016 Code and updated the Terms of Reference to ensure compliance with the 2018 Code and related FRC guidance; h. as part of the annual Board and Committee evaluation exercise, the Remuneration Committee evaluated its composition and performance; and i. reviewed the introduction of new remuneration reporting requirements. As part of its discussions in 2018 the Remuneration Committee considered FRC guidance and other publications relevant to the roles and responsibilities of the Remuneration Committee, including feedback from shareholder groups. Details of any remuneration consultants engaged by the Remuneration Committee during the year are set out in the Directors’ Remuneration Report. None of the current or 2018 Remuneration Committee members, have any personal financial interest (other than as Shareholders), any conflicts of interest arising from cross directorship, or any day to day involvement in running the business. 62 c115055_LSL.indb 62 22/03/2019 19:03 63 The Remuneration Committee recognises and manages conflicts of interest when receiving views from the Executive Directors or Senior Managers about any proposals. The Remuneration Committee makes recommendations to the Board and no Director is permitted to participate in any discussion about their remuneration. The Remuneration Committee may, in exercising its discretion in relation to the remuneration of Executive Directors and Senior Managers, take into account LSL’s performance on governance (including regulatory compliance) and CSR related issues. Further, it ensures that the incentive schemes put in place do not raise any ESG issues by inadvertently motivating irresponsible behaviour. 2019 remuneration In relation to Executive Director remuneration for 2019, see the Directors’ Remuneration Report included in this Report. Audit & Risk Committee During 2018, the Audit & Risk Committee was chaired by David Stewart and its other members were Bill Shannon and Kumsal Bayazit Besson. At the LSL AGM, Kumsal Bayazit Besson will retire from the Audit & Risk Committee. Darrell Evans was appointed to the Audit & Risk Committee with effect from 28th February 2019. During the 2018 Board and Committee evaluation process the Board also confirmed that the Audit & Risk Committee as a whole has competence relevant to the sectors in which LSL operates and that it includes at least one member who has recent and relevant financial experience. The Audit & Risk Committee met on three occasions in 2018. LSL’s Head of Risk and Internal Audit, the external auditor, the Chairman, the Executive Directors, the Group Financial Controller and the Company Secretary were invited to attend all or parts of these meetings to assist the Audit & Risk Committee in its deliberations. The Audit & Risk Committee met with the Head of Risk and Internal Audit and the external auditor, without the Executive Directors being present, three times during 2018. Further details of the duties and responsibilities of the Audit & Risk Committee are shown on pages 65 to 77 of this Report together with details of how it discharged its duties during 2018. Whistleblowing, fraud and anti-bribery arrangements During 2018 the Audit & Risk Committee was responsible for: a. reviewing the arrangements by which employees may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters with the objective of ensuring that arrangements are in place for proportionate and independent investigation of such matters and appropriate follow-up action; and b. reviewing LSL’s procedures for detecting fraud and the prevention of bribery and corruption. The Audit & Risk Committee’s objective is to ensure that arrangements are in place for the proportionate and independent investigation of such matters and that appropriate follow-up action is taken. With effect from 1st January 2019 by way of an amendment to the Audit & Risk Committee’s terms of reference and an update to LSL’s Matters Reserved for the Board Policy, the Board will provide direct oversight of LSL’s whistleblowing arrangements alongside fraud and anti-bribery controls. This change was introduced to reflect the requirements of the 2018 Code (Principle E). The Audit & Risk Committee will continue to receive reports on any matters which relate to LSL’s internal controls and risk management arrangements including those relating to any incidents of fraud or bribery. Shareholder relations LSL places a great deal of importance on communication with its stakeholders and is committed to establishing constructive relationships with investors and potential investors in order to assist it in developing an understanding of the views of its Shareholders. LSL maintains a dialogue with institutional Shareholders through regular meetings with such Shareholders to discuss strategy, performance and governance matters and to obtain investor feedback. The views of the Shareholders expressed during these meetings are reported to the Board or its Committees (as appropriate). In addition presentations will be arranged from time to time for Shareholders and analysts, including after the publication of the interim and full year results. In relation to the Directors’ remuneration arrangements for 2019, the Remuneration Committee Chairman supported by the Group HR Director consulted with significant Shareholders. For further details of this consultation, see the Directors’ Remuneration Report included in this Report. The Group Chief Executive Officer and Group Chief Financial Officer will also engage with Shareholders following strategic announcements. Throughout the year, a number of steps are taken to ensure that all Directors understand the views of significant Shareholders, including feedback received from the corporate advisers and Executive Directors and the distribution of analysts’ reports to the Board. The 2018 Code requires chairs of company boards to seek regular engagement with major Shareholders in order to understand their views on governance and performance against strategy. Each year all of the Non Executive Directors, including Simon Embley (Chairman) and Bill Shannon (Deputy Chairman and Senior Independent Director), are offered the opportunity to attend meetings with all Shareholders as they require. If any Shareholder or Shareholder representative groups would like to discuss any issues or concerns with the Non Executive 62 c115055_LSL.indb 63 63 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Corporate Governance Report Directors, they can be contacted through the Company Secretary’s office (see Shareholder Information at page 192 of this Report for details). With regard to individual Shareholders, the Board considers that the main forum for communication is at the AGM and all of the Directors will be available at the 2019 AGM to meet with Shareholders. LSL is also monitoring the FRC and the FCA review of shareholder engagement including revisions to the UK Stewardship Code which was launched in January 2019. Details of specific Shareholder consultation exercises undertaken in 2018 are set out below: 2018 AGM Vote (Resolution 18 – General Meeting Notice Period) At the 2018 AGM, whilst Shareholders approved all of the resolutions presented to the meeting the Chairman received a letter from the Investment Association regarding resolution 18 which authorised LSL to hold a general meeting on not less than 14 days’ notice. The result of the voting for this resolution is included in the Investment Association’s Public Register (theinvestmentassociation.org/publicregister.html) and a copy of LSL’s response can be found on the LSL website (lslps.co.uk). A total of 88,993,417 proxy votes were received at the 2018 AGM to all of the resolutions presented for Shareholder approval, which represents 85.44% of LSL’s issued share capital. For resolution 18, 23.16% of the votes received were against the resolution. In response to the vote LSL conducted a Shareholder consultation in order to understand Shareholder concerns on this matter. Following this consultation, LSL notes that, notwithstanding that this resolution is customarily proposed (and passed) at the AGMs of most listed companies, certain Shareholders typically vote against shortening a general meeting notice period as a general principle. The Board has considered this feedback but remains of the view that the flexibility afforded by this ability to reduce the notice period is important, and therefore intends to seek approval for the resolution at the 2019 AGM. Remuneration Consultation During 2018 LSL consulted with significant Shareholders in relation to an increase in the base pay for the Group Chief Executive Officer and in relation to an amendment to the performance targets for the upcoming LTIP award in 2019. Further details of this consultation are contained in the Directors’ Remuneration Report. Remuneration Policy Consultation 2019 During 2019, LSL will continue to engage with significant Shareholders and their representative bodies, as appropriate, in respect of any proposed changes to the Remuneration Policy and on the implementation of the Remuneration Policy. Shareholder information All of LSL’s announcements are published on the LSL website (lslps.co.uk), together with copies of presentations and financial reports. Share Dealing Code and Disclosure Committee LSL has in place a Share Dealing Policy and Share Dealing Code to ensure LSL’s compliance with the EU’s Market Abuse Regulation (MAR). This Share Dealing Policy and Share Dealing Code applies to the Directors, other persons discharging managerial responsibilities and relevant employees of LSL. The Board has also established and delegated responsibilities to a Disclosure Committee which oversees LSL’s compliance with the disclosure and control of inside information obligations as set out in the UKLA’s Listing Rules, Disclosure Guidance and Transparency Rules and MAR. Notwithstanding the delegation to the Disclosure Committee, the Board remains responsible for LSL’s compliance with all regulatory disclosure obligations and the Disclosure Committee refers matters to the Board as it sees fits, and the Board will consider any matter referred to it. Takeover Directive The Group has addressed the matters required by the Takeover Directive which was implemented in the UK in accordance with statutory provisions in Part 28 of the Companies Act 2006 in the Report of the Directors. Please refer to the Report of the Directors for further details. The Corporate Governance Report is approved by and signed on behalf of the Board of Directors Sapna B FitzGerald Company Secretary 5th March 2019 64 c115055_LSL.indb 64 22/03/2019 19:03 65 Audit & Risk Committee Report Dear Shareholder I am pleased to report on the activities of the Audit & Risk Committee during 2018. The Audit & Risk Committee, on behalf of the Board, has taken steps to ensure that the Annual Report and Accounts 2018, when taken as a whole, is fair, balanced and understandable. In this report, we have detailed how the Audit & Risk Committee has discharged its responsibilities during 2018, including details of monitoring enhancements to LSL’s compliance arrangements and supporting the on-going development of the risk framework across LSL’s subsidiaries. I would like to thank members of the Audit & Risk Committee for their support in 2018 and the active role each member played in understanding the Group and the risks and challenges it faces. I especially wish to thank Kumsal Bayazit Besson who is retiring from the Board and its Committees at the forthcoming AGM and I wish to welcome Darrell Evans who was appointed to the Board and its Committees on 28th February 2019. I will be available at the 2019 AGM along with my fellow Directors to answer Shareholder questions relating to the Audit & Risk Committee and how this Committee discharged its roles and responsibilities during 2018. David Stewart Chairman of the Audit & Risk Committee 5th March 2019 LSL’s Audit & Risk Committee During 2018, David Stewart was the Chairman of the Audit & Risk Committee, its other members were Bill Shannon and Kumsal Bayazit Besson. With effect from LSL’s AGM, Kumsal Bayazit Besson will retire from the Audit & Risk Committee. Darrell Evans was appointed to the Audit & Risk Committee with effect from 28th February 2019. All members of the Audit & Risk Committee during 2018 and 2019 are independent Non Executive Directors as defined by the 2016 Code and the 2018 Code. David Stewart was appointed Chairman of the Audit & Risk Committee in April 2016, the Board and Nominations Committee having determined that he has the requisite recent and relevant financial experience as is required by the 2016 Code and the 2018 Code. During the 2018 annual Board and Committees evaluation exercise, the Board confirmed that the Audit & Risk Committee as a whole has the competence relevant to the sectors in which LSL operates and that it includes at least one member who has recent and relevant financial experience. Further during the year, in reviewing the composition of the Board and its Committees, the Nominations Committee has evaluated the range of skills, experience, knowledge and professional qualifications of the Audit & Risk Committee to ensure LSL’s continued compliance with the 2016 Code and the 2018 Code. Details of the members of the Audit & Risk Committee are detailed in the Corporate Governance Report and in the Director profiles included in The Board section of this Report. Roles and responsibilities of the Audit & Risk Committee The Audit & Risk Committee has been established by the Board and is responsible for discharging governance responsibilities in respect of audit, risk and internal control. The main roles and responsibilities of the Audit & Risk Committee are detailed below. In discharging its roles and responsibilities, the Audit & Risk Committee considers the requirements of the Listing Rules and Disclosure and Transparency Rules (together with any other requirements issued by the FCA), the Code together with guidance issued by the FRC (including the Guidance on Audit Committees and the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting), together with any requirements of the Board. The Audit & Risk Committee met three times during the year and the Group Chief Executive Officer, the Chairman, the Group Chief Financial Officer, the Group Financial Controller, the Head of Risk and Internal Audit and the Company Secretary were each invited to attend all or parts of these meetings and assist the Audit & Risk Committee in its deliberations during this period. 64 c115055_LSL.indb 65 65 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Audit & Risk Committee Report During 2018, the Audit & Risk Committee established a programme of work to ensure that each of its roles and responsibilities was covered adequately during the year. The duties of the Audit & Risk Committee are detailed in its terms of reference, which were reviewed and updated with effect from 1st January 2019 to reflect the requirements of the 2018 Code. The main role and responsibilities of the Audit & Risk Committee include: • monitoring the integrity of LSL’s financial statements and any formal announcements relating to LSL’s financial performance, and reviewing significant financial reporting issues and judgements contained in them; • providing advice (where requested by the Board) on whether the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable, and provides the information necessary for Shareholders to assess LSL’s position and performance, business model and strategy. In addition, the Audit & Risk Committee will assist the Directors in their statements to be included in the Annual Report and Accounts. To assist the Directors, the Audit & Risk Committee’s review will assess whether other information presented in the Annual Report and Accounts is consistent with the financial statements; • reviewing LSL’s internal financial controls and internal control and risk management systems; • monitoring and reviewing the effectiveness of LSL’s Risk and Internal Audit Team; • conducting the external auditor tender process and making recommendations to the Board, about the appointment, re-appointment and removal of the external auditor, and approving the remuneration and terms of engagement of the external auditor; • reviewing and monitoring the external auditor’s independence and objectivity; • reviewing the effectiveness of the external audit process, taking into consideration relevant UK professional and regulatory requirements; • developing and implementing LSL’s policy on the engagement of the external auditor to supply non-audit services (which is contained within the Auditor Independence Policy); • ensuring that there is prior approval of non-audit services, considering the impact this may have on independence, taking into account the relevant regulations and ethical guidance in this regard, and reporting to the Board on any improvement or action required; and • reporting to the Board on how it has discharged its responsibilities. Detailed below is further information on how the Audit & Risk Committee discharges its roles and responsibilities: 1. Internal controls and risk management In relation to LSL’s internal controls and risk management arrangements, the Audit & Risk Committee will: a. ensure that the Group’s accounting and financial policies and controls, are proper, effective and adequate; b. ensure that internal and external auditing processes are properly co-ordinated and work effectively; c. monitor the integrity of LSL’s financial statements and any formal announcements relating to its financial performance, reviewing significant financial reporting issues and judgements contained in them; d. review the Group’s risk management and internal control systems, which includes the overall risk management framework (which have been established to identify, assess, manage and monitor risks) and all material controls (including financial, operational and compliance controls); e. on behalf of the Board, provide oversight of LSL’s risk management and internal controls systems (including reviewing LSL’s capability to identify and manage new risk types) and in relation to the same, receive reports from the Management Team on material breaches of risk limits and the adequacy of proposed actions; and the effectiveness of the systems and the conclusions of any testing carried out by the Risk and Internal Audit Team or the external auditors; f. consider the level of assurance the Audit & Risk Committee is getting on the risk management and internal control systems, including financial controls, and whether there is enough to help the Board in satisfying itself that they are operating effectively; g. advise the Board on LSL’s overall risk appetite, tolerance and strategy, taking account of the current and prospective macroeconomic and financial environment and drawing on financial stability assessments such as those published by relevant industry and regulatory authorities including the Bank of England, the FCA and other authoritative sources that may be relevant for LSL’s risk policies; h. oversee and advise the Board on the current risk exposures of LSL and risk management strategy; i. monitor LSL’s risk management and internal control systems and, at least annually, carry out a review to enable LSL to report on that review in the Annual Report and Accounts. The monitoring and review will cover all material controls, including financial, operational and compliance controls; and j. review and approve the Group Risk Framework Policy, including a regular assessment and update of the Group risk appetite statement. This latter process involves frequent re-assessment by the Audit & Risk Committee of the Group’s principal risks and uncertainties, underpinned by defined metrics which articulate the status and tolerance levels for key business risks. The framework ensures sufficient focus is placed on threats to Group objectives, with responsive action plans put in place for areas considered outside 66 c115055_LSL.indb 66 22/03/2019 19:03 67 risk appetite. The process is underpinned by the capture of outputs from risk appetite measures maintained at subsidiary level, regular review of risk status by the Executive Committee and independent challenge of results by the Risk and Internal Audit function, prior to the tabling of overall conclusions for discussion at the Audit & Risk Committee. 2. Reporting to the Board The Audit & Risk Committee reports to the Board on how it has discharged its responsibilities, including: a. the significant issues that it considered in relation to the financial statements and how these were addressed; b. its assessment of the effectiveness of the external audit process and its recommendation on the appointment/re-appointment of the external auditor; and c. reporting on any other issues on which the Board has requested the Audit & Risk Committee’s opinion. In doing so the Audit & Risk Committee identifies any matters in respect of which it considers that action or improvement is needed, whether the subject of a specific request by the Board or not, and make recommendations as to the steps to be taken. 3. External auditor In relation to the external auditor, the Audit & Risk Committee is responsible for overseeing LSL’s relationship with the external auditor and its roles and responsibilities in relation to the external auditor include: a. to have primary responsibility for making annual recommendations to the Board on the appointment, re-appointment or removal of the external auditor, and to approve the remuneration and terms of engagement of the external auditor at the start of each audit; b. to satisfy itself that the audit fee is appropriate and that an effective, high quality audit can be conducted for such a fee; c. to be responsible for the selection procedure for the appointment of the external auditor (including ensuring that all tendering firms have such access as is necessary to information and individuals during the tendering process); d. to meet with the external auditors before the start of each annual audit to consider the nature and scope of the audit and post-audit at the reporting stage. The Audit & Risk Committee will ensure that appropriate plans are in place for the audit and will consider whether the overall audit plan (including planned levels of materiality and proposed resources to execute the plan) appears consistent with the scope of the audit engagement (having regard to the seniority, expertise and experience of the audit team); e. review with the external auditor the findings of their work and their report including a review of major issues, risks relating to audit quality, accounting and audit judgements, interactions with Senior Management and any errors; f. to annually assess, and report to the Board on, the effectiveness of the audit process, taking into account qualification, expertise, ethical standards (including compliance with the same), resources, and independence of the external auditor. The assessment will also consider mind-set, culture, skills, character and knowledge, quality control and judgements, including the robustness and perceptiveness of the external auditor in handling key judgements, responding to questions from the Audit & Risk Committee, and in any commentary on LSL’s systems of internal control. The Audit & Risk Committee will also consider all aspects of the audit service provided by the firm including their internal quality control procedures and consideration of the firm’s annual transparency reports; g. in the event of a resignation by the external auditor, to investigate the issues giving rise to such resignation and consider whether any action is required; h. to evaluate the risks to the quality and effectiveness of the financial reporting process, especially in light of the external auditor’s communications with the Audit & Risk Committee; i. to develop and implement LSL’s policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance, and to report to the Board in relation to the same (including identifying any matters in respect of which it considers that action or improvement is required and making recommendations on the steps to be taken); j. to review and monitor the Management Team’s responsiveness to the external auditor’s findings and recommendations and review the audit representation letters (giving particular consideration to matters where any representation is requested that relate to non-standard issues). The Audit & Risk Committee will consider whether the information provided is complete and appropriate based on its own knowledge; k. to meet the Board formally at least twice a year to discuss matters such as the Annual Report and Accounts, the relationship with the external auditors and any other matters included within its duties and responsibilities; l. to keep under review the nature and extent of non-audit services provided by the external auditor, taking into account LSL’s Auditor Independence Policy and to review at least annually for recommendation to the Board, LSL’s Auditor Independence Policy; and m. to meet with the external auditors without the presence of the Executive Directors at least once a year. 66 c115055_LSL.indb 67 67 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Audit & Risk Committee Report 4. Annual Report and Accounts Each year, the Audit & Risk Committee prepares a report to Shareholders for inclusion in LSL’s Annual Report and Accounts. For details of how the Audit & Risk Committee discharged its obligations in relation to this Report, see below. The information required for inclusion in the Annual Report and Accounts is contained within the Corporate Governance Report and this Audit & Risk Committee Report. 5. Financial reporting The Audit & Risk Committee reviews and reports to the Board on significant financial reporting issues and judgements made in connection with the preparation of LSL’s financial statements (having regard to matters communicated to it by the external auditor) including the annual and half yearly statements, and where requested by the Board, and interim reports, preliminary results announcements, summary financial statements, significant financial returns to any regulators (as specified by the Board) and any financial information contained in other documents prior to their submission to the Board, with a particular focus on: a. significant accounting policies and practices and any changes to them; b. the appropriateness of LSL’s accounting policies, estimates and judgements (taking into account the external auditor’s view on the financial statements) ; c. the clarity and completeness of disclosures in the financial statements and consider whether the disclosures are set properly in context; d. major judgemental areas; e. any significant adjustments arising from the audit; f. the appropriateness of the adoption of the going concern basis of accounting and identification of any material uncertainties to the Group’s ability to continue to do so for a period of at least 12 months from the date of approval of the financial statements; g. compliance with accounting standards; h. the extent to which the financial statements are affected by any unusual transactions; and i. compliance with legal and regulatory requirements (including FCA and LSE requirements). 6. Risk and Internal Audit The Risk and Internal Audit Team provides objective assurance and advice on risk and control. In relation to LSL’s Risk and Internal Audit Team, the Audit & Risk Committee will: a. review and approve the role and mandate of the Risk and Internal Audit Team (ensuring that the function has unrestricted scope, the necessary resources and access to information to enable it to fulfil its mandate, and is equipped to perform in accordance with relevant professional standards); b. approve the internal audit plan and annually review and approve the Risk and Internal Audit Team’s terms of reference to ensure that it is appropriate to the needs of the Group. The internal audit plan should be aligned to the key risks of the business. The Audit & Risk Committee will pay particular attention to the areas in which risk, compliance, finance, internal audit and external audit functions may be aligned or overlapping and oversee these relationships to ensure they are coordinated and operating effectively to avoid duplication; c. ensure that there is open communication between the Group’s different functions and that Risk and Internal Audit evaluates the effectiveness of LSL’s risk, compliance and finance functions as part of the internal audit plan; d. monitor and review the effectiveness of LSL’s Risk and Internal Audit Team and activities, including approving the appointment and termination of the Group’s Head of Risk and Internal Audit. The Risk and Internal Audit team also has access to the Audit & Risk Committee Chairman and LSL’s Chairman; e. undertake a review of the effectiveness of the Risk and Internal Audit Team and confirm to the Board that it is satisfied that the quality, experience and expertise of the function is appropriate for the Group. The matters which will be taken into account in the review are detailed in the Audit & Risk Committee’s terms of reference and the Audit & Risk Committee reserves the right to instruct an independent, third party review of the internal audit effectiveness and appropriateness of processes; and f. receive and consider the major findings of the Risk and Internal Audit Team together with reports on the actions Senior Management has taken to implement the recommendations of the Risk and Internal Audit Team and whether these properly support the effective working of the internal audit function. 7. Whistleblowing, fraud and anti-bribery arrangements During 2018 the Audit & Risk Committee: a. reviewed the arrangements by which employees may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters with the objective of ensuring that arrangements are in place for proportionate and independent investigation of such matters and appropriate follow-up action; and 68 c115055_LSL.indb 68 22/03/2019 19:03 69 b. reviewed LSL’s procedures for detecting fraud and the prevention of bribery and corruption. The Audit & Risk Committee’s objective is to ensure that arrangements are in place for the proportionate and independent investigation of such matters and that appropriate follow-up action is taken. With effect from the 1st January 2019 and in line with the 2018 Code and Guidance on Board Effectiveness, oversight and monitoring of whistleblowing, fraud and anti-bribery arrangements is undertaken by the Board. The Audit & Risk Committee will continue to receive reports relating to these matters as appropriate in its oversight of the Group’s internal controls. For further details in relation to LSL’s arrangements see the Corporate Governance Report of this Report. Anti-corruption and bribery The Group has in place arrangements to ensure compliance with the Bribery Act 2010 and its arrangements are based on the results of a bribery risk assessment. What the Audit & Risk Committee did in 2018 The Audit & Risk Committee met three times in 2018. Amongst other matters, during these meetings the Audit & Risk Committee discharged its roles and responsibilities in the following ways: 1. Internal controls and risk management Group matters a. considered the review of material business risks, including reviewing internal control processes used to identify and monitor principal risks and uncertainties. An update of the Group’s principal risks and uncertainties was presented at each meeting. During the year the Audit & Risk Committee supported the Board in its robust assessment of LSL’s principal risks and uncertainties and the continued application of the Group’s risk appetite terms of reference, framework, and statement, including the further development of subsidiary risk appetite measures; b. evaluated areas for the continued development of the Group’s financial control structures, including improvements to Group Finance KPI reporting (particularly in relation to Lettings and Financial Services); implementation of IFRS changes; additional oversight of LSL’s joint ventures; working capital controls; formalising the presentation and approach to financial modelling for investment appraisals; and enhancing support for Divisional finance teams in relation to reporting and financial statements together with tax matters; c. reviewed arrangements of the Group’s oversight routines in relation to LSL’s investments, associates and join ventures; d. monitored the Group’s implementation of the new General Data Protection Regulation which became effective in May 2018 in addition to reviewing the Group’s data, IT and information security governance and controls arrangements. This included receiving reports from the Information Security and Governance Committee (ISGC) and reviewing the effectiveness of the ISGC; e. undertook a detailed assessment of the Group’s IT infrastructure capabilities and arrangements against LSL’s risk appetite metrics; f. reviewed the Group’s Board and Executive Committee governance arrangements including new arrangements relating to the Financial Services businesses following the acquisition of Personal Touch Financial Services in January 2018. The review included ensuring that all committees have in place terms of references; and g. evaluated the risk framework in operation at subsidiary level via the use of a questionnaire exercise to provide assurance on the maturity of the underlying risk assessment and to identify any areas for improvement. Surveying and Valuations Services Division h. continued to develop the systems and controls in place with regard to valuations carried out by the Surveying and Valuation Services Division, including the transfer and integration of the Lloyds Bank plc surveyors and back-office employees within the established valuation controls framework and associated IT systems. Estate Agency Division i. in relation to compliance matters within the Estate Agency Division, the Audit & Risk Committee received reports from both the Financial Services Chief Risk Officer and the Estate Agency Risk and Governance Director in relation to the second-line risk based assurance cycle priorities; and j. the minutes of the Financial Services Management Committee (FSMC) and the Financial Services Risk Committee (FSRC) were submitted for information and during the year amendments were made to the terms of reference of each committee to remove overlapping responsibilities. As a result, the FSRC reports into the Audit & Risk Committee while the FSMC reports into the Board. 68 c115055_LSL.indb 69 69 22/03/2019 19:03 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Audit & Risk Committee Report 2. External auditor a. reviewed the external auditor’s terms of engagement and considered the quality, effectiveness and independence of the external auditor and the external audit. The results of this review were taken into account in recommending the re-appointment of Ernst & Young as external auditor at the 2019 AGM; and b. reviewed the auditor’s effectiveness, independence and objectivity. In making its assessment of the effectiveness of the external audit, the Audit & Risk Committee reviewed the external audit findings and the Management Team’s responses to these findings. Discussions were also held with the Risk and Internal Audit Team and the Management Team with regard to the effectiveness of the external audit process. 3. Financial reporting (including Annual Report and Accounts 2017) a. reviewed the annual financial results and the preliminary results announcement for 2017 released in March 2018 and the interim results for 2018 released in July 2018, including evaluating the going concern and viability statements; b. received and considered, as part of the review of the annual financial statements and interim results reports from the external auditor in respect of their review of the annual financial statements and interim results, the audit plan for the year and the results of the annual audit; c. the external audit reports included the scope of the interim review and annual audit, the approach to be adopted by the external auditor to address and conclude upon key estimates and other key audit areas, the basis on which the auditor assesses materiality, the terms of engagement for the external auditor and an on-going assessment of the impact of future accounting developments on the Group; and d. oversaw the continued development of the Group’s viability statement taking into account the Group’s three-year plan and the principal risks and uncertainties impacting the Group. 4. Risk and Internal Audit a. considered the effectiveness and independence of the internal audit arrangements and agreed the annual Risk and Internal Audit plan. Consideration included compliance with both internal standards and external regulatory requirements, plus engagement with external consultants on specialist areas as appropriate. This exercise included a review of linkages to the Group’s principal risks and uncertainties and the results of a benchmarking exercise versus best practice professional guidelines; and b. received and considered regular reports from the Risk and Internal Audit Team with regard to the control environment of the Group and evaluated the resourcing, role and independence of the Risk and Internal Audit Team. 5. Governance (including whistleblowing arrangements and tax strategy) a. reviewed the effectiveness of the Group’s whistleblowing and fraud policy arrangements, including logs to track actions associated with any fraud related suspicions or incidents; b. reviewed the Audit & Risk Committee’s composition and confirmed that as a whole it has the competence relevant to the sectors in which LSL operates and that at least one member of the Audit & Risk Committee has recent and relevant financial experience to ensure that it is able to fulfill its responsibilities effectively; c. reviewed the Audit & Risk Committee’s terms of reference and the Group’s Auditor Independence Policy to ensure compliance with the 2018 Code and Guidance on Board Effectiveness, in addition to carrying out an annual review of the Audit & Risk Committee’s performance; and d. reviewed and approved the Group’s tax strategy for recommendation to the Board for adoption. Annual Report and Accounts 2018 The Audit & Risk Committee has considered this Report, including the Financial Statements in the context of fairness, balance and understandability. This included a review of LSL’s fair value assessment of its equity assets which is detailed in the significant issues in financial reporting 2018 summary below. Following its evaluation, the Audit & Risk Committee has reported to the Board that the Annual Report and Accounts 2018 when taken as a whole is fair, balanced and understandable and provides the information necessary for Shareholders to assess LSL’s position and the Group’s business performance, model and strategy. The Audit & Risk Committee also ensured that the Report provides an explanation of the basis on which LSL generates or preserves value over the longer term (the business model) and the strategy for delivering the objectives of LSL. The Audit & Risk Committee’s assessment of this Report was on the basis that: a. the description of the business is consistent with the Audit & Risk Committee’s own understanding; b. the risks reflect the issues that concerned the Audit & Risk Committee; c. appropriate weight has been given to the ‘good and bad’ news; 70 c115055_LSL.indb 70 22/03/2019 19:03 71 d. the discussion of performance properly reflects the ‘story’ of the year; and e. that there is a clear and well-articulated link between all areas of disclosure. The review also considered the Group’s CSR Statement (including the environmental disclosures). Significant issues considered in relation to the Financial Statements During the year the Audit & Risk Committee, the Management Team and the Head of Risk and Internal Audit together with the external auditor, considered and concluded on what the significant risks and issues were in relation to the Financial Statements and how these would be addressed. Areas of particular focus during the year have been: Significant issues in financial reporting for 2018 How the Audit & Risk Committee addressed these issues Provision for PI Costs relating to valuation services Misstatements that occur in relation to the PI Costs provision would affect the PI Costs provision balance sheet account as well as exceptional costs and administrative costs accounts. This is an area of significant judgement and estimation and provides scope for Management bias. The Group has historically experienced a high level of claims relating to the 2004 to 2008 high risk lending period, and valuations work undertaken during this period continues to result in claims being made against the Group, albeit at a significantly reduced level. There is a risk that the provision for these claims is significantly different as a result of variations from key assumptions, in particular the incidence of claims, the propensity for claims to result in financial loss and the resultant loss per claim. During 2018, the Management Team continued to undertake detailed reviews on a case-by-case basis of all notifications and claims relating to this period, in addition to any developments arising from cases received in previous years. The review has also included an assessment of the claims and notifications on a selective case-by-case basis by specialist external legal counsel. Given the materiality of the PI Costs provision, the Board receives details of these reviews at each meeting, including the status of existing claims and the number and nature of any new claims. In addition to this, the Audit & Risk Committee reviewed the accounting policies relating to the PI Costs provisions to ensure that they were consistent on a fair and reasonable basis. The Audit & Risk Committee received reports from the Risk and Internal Audit Team following the completion of its reviews of underlying PI claims records during the year. Revenue recognition (including lapse provision) There is potential for material misstatement within revenue, particularly in relation to revenue being overstated at the year- end due to cut-off errors. Misstatements that occur in relation to revenue recognition would affect the revenue accounts and also potentially the lapse provision. Revenue recognition is an area of judgement and a misstatement could be material to the Group although the nature of the revenue recognised in the Group is not considered complex. Revenue is recognised when control of a good or service transfers to the customer. The Management Team applies judgement in determining when this control is passed to a customer, i.e. at a point in time (e.g. Financial Services, Residential Exchange, Surveying and Valuation services) or over time (e.g. management services). The Group sells a number of different products and services and operates in multiple locations throughout the UK. Certain Financial Services businesses sell pure protection products which are cancellable without a notice period, and if cancelled within a set period require that a portion of the commission earned must be repaid. The lapse provision is recognised as a reduction in revenue and includes estimation uncertainty. As such it is possible that Management bias could be used to influence the amount of revenue that is reported. The lapse provision is reviewed as part of the Audit & Risk Committee meetings. The businesses acquired in 2018 may have previously followed different accounting policies to the Group. This is also a factor in the risk assessment. LSL’s Risk and Internal Audit Team performed financial control audits as part of their assurance plan across all key subsidiaries which includes focus on the revenue cycle, with findings reported to the Audit & Risk Committee. Balance sheet reviews, which included carrying amounts driven by the revenue cycle, are also conducted by the Group Finance function. 70 c115055_LSL.indb 71 71 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Audit & Risk Committee Report Significant issues in financial reporting for 2018 Acquisition accounting (including contingent and deferred consideration liabilities) How the Audit & Risk Committee addressed these issues Misstatements that occur in relation to this risk would affect the deferred and contingent consideration provisions. The Audit & Risk Committee has reviewed the treatment of earn-out and other contingent consideration. The Group is acquisitive, and these acquisitions frequently include earn-out arrangements in respect of key management as well as bespoke purchase contracts. There is a risk that the valuation of contingent consideration liabilities is not performed in accordance with accounting standards. These balances are calculated with reference to specific management judgements. These include expected exit date and future cash-flows which have a degree of estimation uncertainty. Impairment/inappropriate valuation of goodwill and intangible assets and financial assets Misstatements that occur in relation to impairment of financial assets and intangibles would affect goodwill, intangibles balance sheet accounts and impairment expense accounts. On an annual basis, the Management Team undertake reviews of goodwill to determine whether impairment is required. The Management Team will assess the net assets, current profitability, discount factor and value in use of each cash generating unit in order to do this. There is a level of estimation uncertainty inherent in the impairment review, including the Group forecasts used and the discount rate applied. The Management Team provided the Audit & Risk Committee with a paper supporting the review of goodwill to assess whether any impairment is required. Based on the work performed, the Audit & Risk Committee was able to conclude that no impairment was necessary to the goodwill or intangible assets as at 31st December 2018. Further information is provided in the Notes to the Financial Statements. Other Financial Statement matters considered by the Audit & Risk Committee Client monies with regard to the Lettings businesses Financial assets How the Audit & Risk Committee addressed these matters The Group holds client monies in its Lettings businesses. Neither the client monies, nor the matching liabilities to such clients are included in the Group balance sheet, as the Group is not entitled to the benefit from the use of the amounts held in these accounts. The Group does have a responsibility to ensure that the money held in the client accounts is accounted for accurately and, if required, the Group would make good any shortfall. The client accounts are reconciled at regular intervals (including daily exercises for the larger businesses). Finance teams provide oversight of the integrity of client account operations and the Risk and Internal Audit Team perform regular client account audits, the findings of which are reported to the Audit & Risk Committee. The Group holds minority shareholdings in VEM, eProp Services plc, NBC Property Master, Global Property Ventures and Yopa. The Group disposed of warrants for shares in ZPG plc in 2018. The Audit & Risk Committee has considered the fair value of these holdings for inclusion in the Group’s balance sheet. The Audit & Risk Committee spent considerable time discussing the appropriate valuation to be placed on Yopa. As a relatively new and untraded company, which in accordance with its business plan is currently loss making and will remain so for the foreseeable future, this is a highly judgemental area. In determining the fair value of the equity asset and the amount of impairment required, the Audit & Risk Committee gave consideration to a number of factors, including an estimate of valuation prepared by Management as well as indications of an intention to invest from a number of third parties. The assessment (as detailed in Notes 2 and 17 to the Group Financial Statements was carried out by Management using level three techniques in accordance with IFRS 13. Following which, the Audit & Risk Committee accepted Management’s recommendation that the asset be reduced in value from £20m to £7.8m (as disclosed in Note 17 to the Group Financial Statements), a reduction of 61%. The fair value impairment of £12.2m has been recognised through the Statement of Other Comprehensive Income. It should be noted that the valuation remains highly judgemental and subjective in nature, and that a further impairment is possible, should Yopa fail to meet its revised business plan, or if current fund raising plans do not proceed as expected. Accordingly, it will be kept under close review. 72 c115055_LSL.indb 72 22/03/2019 19:04 73 Other Financial Statement matters considered by the Audit & Risk Committee How the Audit & Risk Committee addressed these matters Treatment of exceptional items The Group has historically categorised a number of items as exceptional, which are excluded from the underlying profit measure included in the Financial Statements. Exceptional items are an area of focus for the FRC who considered these in their thematic reviews of alternative performance measures published in November 2017. The classification of items presented as exceptional has an impact on KPIs within the Financial Statements, such as underlying operating profit. The Audit & Risk Committee has, in line with FRC guidance, continued to review the Group’s accounting policy with regard to the classification of items as exceptional and ensured that Management’s assessment of the exceptional costs and gains reported in the Financial Statements are in line with Group policy, namely they are material in size and nature and are non–recurring. In 2018, costs in relation to three matters have been disclosed as exceptional, these being the non-recurring transition and integration costs for the contract to supply surveying and valuation services to Lloyds Bank plc, the non-recurring and material exceptional costs relating to the planned restructuring costs incurred following the acquisition of Personal Touch Financial Services as well as the branch/centre closures. After careful consideration, the Audit & Risk Committee agreed that these items were material and non-recurring in nature and that it was appropriate to categorise them as exceptional within the 2018 Financial Statements. In 2018 the Group acquired new businesses and Management undertook an exercise to measure the consideration, and the fair value of the assets which were acquired, including separately identifiable intangible assets. New IFRS standards specifically IFRS 15: Revenue from Contracts with Customers and IFRS 9: Financial Instruments were adopted as of 1st January 2018 and were fully considered by the Audit & Risk Committee. In addition, the planned implementation and impact on the Financial Statements of IFRS 16: Leases which will be adopted as at 1st January 2019 has been fully considered by the Committee. The Management Team has primary responsibility to prevent and detect fraud. The Management Team has put in place and has oversight of a culture of ethical behaviour and a strong control environment that both deters and prevents fraud. There are also whistleblowing arrangements to enable staff to, in confidence, raise concerns about possible improprieties in matters of financial reporting, or other matters, with the objective of ensuring that arrangements are in place for proportionate and independent investigation of such matters, and appropriate follow up action. The Management Team submitted regular reports and updates to the Audit & Risk Committee on the Group’s fraud prevention and whistleblowing arrangements, including details of any instances of any actual or suspected fraud related circumstances. The Management Team prepared detailed papers for consideration by the Audit & Risk Committee on the ability of the Group to continue as a going concern. This considered the likely future profitability of the Group, a forecast of future cash-flows, the impact of banking covenants, liquidity of investments and joint ventures and the ability of the Group to re-finance any loans (the Group’s facility is due to mature in May 2022) where necessary. The key judgements, assumptions and estimates underpinning this review were discussed and considered. Following the review, the Audit & Risk Committee was able to conclude that the adoption of the going concern principle was justified for the foreseeable future. The Management Team also provided the Audit & Risk Committee with a paper on the financial viability of the Group, which was determined over a three year period, using assumptions consistent with the period of the Group’s strategic plan. This paper included a review of the principal risks and uncertainties, and considered which of these risks might threaten the Group’s viability. It also considered and modelled a number of severe but plausible scenarios. The scenario modelling included a significant downturn in the residential property market, a data breach and the potential change to regulations, and also took into account the Group’s ability to re-finance its facility, which is due to mature in May 2022. The key judgements, assumptions and modelling underpinning the review were discussed and considered. Following the review, the Audit & Risk Committee was able to approve the statement and recommend its adoption by the Board. Acquisition accounting including identification of intangible assets acquired in business combinations New accounting policies Misstatement due to fraud and error Going concern Viability statement Taxation The Audit & Risk Committee has received reports from the Management Team on the tax provisions recorded in the Financial Statements and assessed the appropriateness of the balances held. LSL’s tax strategy, which was first published in 2017 and updated in 2018, has also been reviewed by the Audit & Risk Committee. 72 c115055_LSL.indb 73 73 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Audit & Risk Committee Report Auditor appointment Taking into consideration the audit effectiveness review (described above in the External Auditor section), the Audit & Risk Committee, acting on behalf of the Board, has concluded that Ernst & Young is effective, independent and objective, and based on this conclusion, the Board has resolved to recommend to Shareholders the re-appointment of Ernst & Young as external auditor at the 2019 AGM and to seek authority for the Directors to agree the external auditor’s remuneration. Auditor Independence Policy To guard against the objectivity and independence of the external auditor being compromised, the Audit & Risk Committee has adopted a policy under which any non-audit related services provided by the external auditor must be approved by the Audit & Risk Committee or be within a pre-approved category and a pre-approved fee limit (this is contained in the Auditor Independence Policy). The Audit & Risk Committee is kept regularly informed of the fees paid to the auditor in all capacities. The Auditor Independence Policy, which takes into account relevant ethical guidance regarding the provision of non-audit services by external audit firms, was reviewed during 2018. During 2018 this policy complied with the 2016 Code and the FRC’s Guidance on Audit Committees and was reviewed to ensure compliance with the 2018 Code. The Auditor Independence Policy, which was in place during 2018 provided that the following categories of fee need pre-approval from the Audit & Risk Committee: a. any fee for specific non-audit services which exceed £25,000; and b. any fee which has a contingent element. In addition, the policy provided that the total annual fees for non-audit work allocated to the external auditor shall not exceed the average audit fee paid during the preceding three years (consecutive). The Auditor Independence Policy stipulates restrictions and procedures in relation to the potential allocation of non-audit work to the auditor. These include categories of work which may and may not be allocated to the auditor, subject to certain provisions as to materiality, nature of and competency to perform work. A copy of the Auditor Independence Policy is available from the Company Secretary and LSL’s website (lslps.co.uk). Auditor fees The split between audit and non-audit fees for 2018 appears at Note 9 to the Financial Statements. Non-audit fees of £9,000 (2017: £8,000) were incurred in the year. Audit fees of £352,000 (2017: £275,600) were incurred in the year. This is in line with the provisions of the Auditor Independence Policy. The non-audit fees related to other assurance services. Internal controls The Board has overall responsibility for LSL’s system of internal controls and for reviewing its effectiveness. The system of internal controls is subject to on-going evaluation and is regularly reviewed. It was developed in 2016 and 2017 to ensure compliance with the guidance set out in the September 2014 FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting and has been reviewed more recently to ensure compliance with the 2018 Code and FRC Guidance on Board Effectiveness. The arrangements in place for 2018 sought to identify, evaluate and manage significant risks faced by LSL, including assessments by the Board and the Executive Committee of risk appetite levels and measures to define levels of existing risk in relation to this appetite. Identification of appetite tolerance levels has proven to be a valuable framework to support key business decisions during the course of the financial year. For areas considered outside tolerance, remedial steps are identified to bring risk areas within appetite. The system aims to manage, rather than eliminate, the risk of failure to achieve business objectives and can provide only reasonable, and not absolute, assurance against material misstatement or loss. During 2017, the framework was extended to the main subsidiary businesses which now maintain their own appetite measures which continue to be a focus of development for the Group, demonstrating increasing levels of maturity in 2018. Internal control facilitates the effectiveness and efficiency of LSL’s operations, helps to ensure the reliability of internal and external reporting and assists compliance with laws and regulations. The internal controls are also in place to safeguard both Shareholder investment and LSL’s assets. In order to discharge this responsibility, the Board has established the procedures necessary to apply both the Code and relevant FRC guidance, including a Group risk framework policy, clear operating procedures, distinct lines of responsibility and delegated authorities. LSL’s risk management and internal control procedures and framework has continually evolved since LSL was listed on the London Stock Exchange and is regularly reviewed by the Board and the Audit & Risk Committee and continues to be in place up to the date of this Report. Further details of LSL’s risk management arrangements are contained in the Principal Risk and Uncertainties section of this Report. LSL’s risk management and internal control framework is made up of the following parts: a. ownership of the risk management and internal controls framework by the Board, including a risk framework policy, supported by the Group Chief Financial Officer, the Company Secretary, the Head of Risk and Internal Audit and the Group Financial Controller; 74 c115055_LSL.indb 74 22/03/2019 19:04 75 b. a network of risk owners in each of LSL’s businesses with specific responsibilities relating to risk management and internal controls, including maintenance of detailed risk analyses; c. the documentation and monitoring of risks are recorded and managed through risk appetite measures which are prepared in accordance with defined Group criteria, and undergo regular reviews and scrutiny by subsidiary boards, divisional governance committees and the Head of Risk and Internal Audit; d. the Executive Committee, Board and Audit & Risk Committee routinely identifies, reviews, and evaluates the principal risks and uncertainties which may impact the Group as part of the planning and reporting cycle to ensure that such risks are identified, monitored and mitigated, in addition to carrying out specific risk assessments as part of its decision making processes; e. the development and application of LSL’s risk appetite statement and associated framework (for further details on steps taken during the year, please see the Principal Risks and Uncertainties section of this Report); and f. reporting by the Chairman of the Audit & Risk Committee to the Board on any matters which have arisen from the Audit & Risk Committee’s review of the way in which LSL’s risk management and internal control framework has been applied together with any breakdowns in, or exceptions to, these procedures. LSL has in place a mature Group-wide risk appetite statement and risk framework which will continue to evolve in line with best practice during 2019 with a particular focus on subsidiary risk management arrangements. The risk framework includes the following: a. risk framework policy; b. determination of risk appetite and management or mitigation of risks in line with risk appetite tolerances, at both Group and subsidiary levels; c. assessment of prospects and viability; d. review of the effectiveness of the risk management and internal control systems; and e. going concern confirmation (for LSL’s going concern disclosure please refer to the Report of the Directors in this Report). Further details of LSL’s assessment and evaluation of principal risks and uncertainties together with details of key mitigation initiatives are set out in the Principal Risks and Uncertainties section of this Report. The Group also has in place internal control and risk management systems in relation to LSL’s financial reporting procedures and the process for preparation of consolidated accounts. These systems include policies and procedures to facilitate the maintenance of records that accurately and fairly reflect transactions, provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with IFRS or UK Generally Accepted Accounting Principles, as appropriate, and that require reported data to be reviewed and reconciled. LSL operates a ‘three lines of defence’ structure (see diagram below) to facilitate effective oversight of Group operations. The risk framework includes delegated authority levels and functional reporting lines and accountability. LSL also operates a budgeting and financial reporting system to compare actual performance to latest forecast, budget and to the previous year on a monthly basis. In addition, the Executive Directors receive daily information on sales activity and weekly information on key result areas. All capital expenditure and other purchases are subject to appropriate authorisation procedures, with centralisation of several payment functions. 74 c115055_LSL.indb 75 75 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Audit & Risk Committee Report FIRST LINE OF DEFENCE SECOND LINE OF DEFENCE THIRD LINE OF DEFENCE Customer services/complaints Three lines of defence diagram In addition, LSL has established the FSMC and the FSRC which are both executive committees with roles and responsibilities relating to the management of LSL’s FCA regulated Financial Services businesses. Equivalent governance bodies also exist for the Group’s information security arrangements (Information Security and Governance Committee (ISGC)) and other business operations, for example, the Estate Agency Management Committee and Surveying Valuation Controls Board. The Audit & Risk Committee and/or the Board receives regular reports from the ISGC, FSMC and FSRC along with updates from the Group’s Executive Committee, whose focus also includes the monitoring of key performance indicators in relation to LSL’s customers (Including consumers and key lender clients). During 2018 the Executive Directors have regularly identified, evaluated and managed the principal risks and uncertainties which could adversely affect LSL’s business, operating results and financial condition. The effectiveness of the internal control system and risk management process is kept under review by the Audit & Risk Committee and has been reviewed by the Board during 2018 as part of an annual review which considered the effectiveness of the risk management arrangements and internal control systems. This review covered all material controls, including financial, operational and compliance controls. In addition, LSL’s Risk and Internal Audit Team regularly submits reports to the Audit & Risk Committee and this, together with the internal controls system and risk management process in place within LSL, allows the Board to monitor financial and operational performance and compliance with controls on a continuing basis and to identify and respond to business risks as they arise. During the year the Audit & Risk Committee influenced improvements to the control environment, in particular: steps to enhance the Estate Agency Compliance team (by the appointment of the Estate Agency Risk and Governance Director); restructure the Financial Services Compliance team (following on from the acquisition of Personal Touch Financial Services into the Group); improvements to IT infrastructure capability; enhanced oversight of the Group’s investment, associates and joint ventures; and identification of improvements arising from the subsidiary risk questionnaire exercise. 76 c115055_LSL.indb 76 22/03/2019 19:04 77 LSL Board/Audit & Risk Committee/Nominations Committee/Remuneration CommitteeExecutive Committee and other governance Committees e.g. Estate Agency Management Committee,Financial Services Management/Risk Committee,Surveying board and sub-committees, Information Security and Governance Committee Functions that own and manage riskBusiness Management – Estate Agency, Surveying, Financial ServicesFunctions that oversee riske.surv Risk and Audit TeamFS Compliance TeamEA Compliance Team EA Admin Hubs (quality/ compliance teams) LSL Group FinanceCorporate Compliance/ Quality teamsExternal ConsultantsFunctions that provide independent assuranceLSL Risk and Internal Audit External AuditCompany Secretariat/LSL Legal The Audit & Risk Committee recognises the importance of the effectiveness of second-line functions and invites relevant personnel to present on how thematic risk areas are managed. Furthermore, a formal assessment of the Risk and Internal Audit Team, including linkages with Group risk areas, has renewed focus on ensuring the independence of this function and delivery of the audit cycle continues to be prioritised. The principal risks and uncertainties facing LSL together with details of key mitigation initiatives are set out in the Principal Risks and Uncertainties section of this Report. The Audit & Risk Committee Report is approved by and signed on behalf of the Board of Directors David Stewart Chairman of the Audit & Risk Committee 5th March 2019 76 c115055_LSL.indb 77 77 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Directors’ Remuneration Report Annual Statement Dear Shareholder This Directors’ Remuneration Report is divided into the following three sections: • Annual Statement: summarising remuneration for and explaining major decisions made during 2018 as well as explaining the operation of the Policy for 2019; • Directors’ Remuneration Policy (Policy): summarising the Policy which was approved by Shareholders at the 2017 AGM; and • Annual Report on Remuneration: setting out details of the remuneration earned by the Directors in the year ended 31st December 2018 and how the Policy will be implemented during 2019. The Policy was approved by 99.78% of Shareholders who submitted proxy votes at the 2017 AGM. The Remuneration Committee considers that the Policy continues to support the Group’s strategy and therefore no changes are proposed for 2019. The Policy is subject to triennial approval and will therefore be submitted for Shareholder approval at the 2020 AGM. The Annual Statement and Annual Report on Remuneration are subject to an annual Shareholder advisory vote at the 2019 AGM. Summary of LSL’s performance in the year and incentive payments to Executive Directors The Group’s financial performance during 2018 has been strong, especially taking into account the difficult market conditions and continued national and global political uncertainty as well as the issues surrounding Brexit. Additionally the Group has during the year benefitted from the completion of a number of strategic self-help initiatives including: e.surv securing the Lloyds Bank plc group surveying and valuations services contract, the acquisition of two mortgage brokers; Personal Touch Financial Services and of RSC New Homes and the strategic investment in and partnership created with a digital mortgage marketplace business, Mortgage Gym. The bonus scheme in 2018 was based 80% on LSL’s financial performance and 20% on individually agreed non-financial measures and the bonus scheme was subject to a cap of 100% of basic salary. The 2018 annual bonus awards for the Executive Directors reflect good performance against the financial performance targets as well as the successful delivery of the above mentioned strategic initiatives. Based on LSL’s financial and operational performance in 2018, the Executive Directors earned an annual bonus award of between 31.4% and 62.7% of basic salary in respect of the financial performance element of the bonus scheme reflecting strong operational performance in the financial year and 13.8% and 17.1% of basic salary for performance against their individual non-financial measures. These non-financial measures have been important in driving forward and delivering strategic initiatives during the year. Ian Crabb’s (Group Chief Executive Officer) and Adam Castleton’s (Group Chief Financial Officer) 2016 LTIP awards will not vest in 2019. This is because, despite LSL’s financial and operational performance in 2018, neither the challenging EPS performance target nor the TSR target (both measured over three years to 31st December 2018) have been met. Further details of performance against the targets set for the annual bonus and LTIP awards are set out in the Annual Report on Remuneration. Summary of key decisions in the year During the second half of 2018 the Remuneration Committee has carefully considered the appropriate implementation of the Policy in 2019 and has made two specific decisions that we have consulted with our Shareholders about and that I would like to take some time to explain the background to. 1. Group Chief Executive Officer’s basic salary increase: The Remuneration Committee has reviewed the Group Chief Executive Officer‘s basic salary and awarded an increase of 9% with effect from 1st January 2019. This increases his basic salary from £412,000 to £449,000 per annum. In increasing the Group Chief Executive Officer’s basic salary the Remuneration Committee has taken into account his personal performance as well as that of the Group and the increased complexity of the role. The Group Chief Executive Officer has led and delivered significant developments in our businesses (which I refer to above) not only during 2018 but over several years and these have resulted in a strengthening and diversity of the Group’s business providing us with a platform for continued growth. Further, not only has the Group Chief Executive Officer delivered a strong platform for growth his leadership of the Management Team has also delivered strong financial results over the last year, outperforming a number of our competitors. The Remuneration Committee wished to acknowledge this very strong performance both on a personal and Group level as well as the increased complexity of the role. The Remuneration Committee is also comfortable that the resulting basic salary is also aligned closer to LSL’s industry peers. In arriving at the decision, the Remuneration Committee reviewed the impact on both variable pay opportunity and the overall total remuneration package and is comfortable that the resultant overall remuneration package is positioned appropriately. We have 78 c115055_LSL.indb 78 22/03/2019 19:04 79 consulted with our largest Shareholders who have broadly confirmed their support for the increase in light of the increased complexity of the role. I also want to reassure our Shareholders that the Remuneration Committee is not considering any further increases to the Group Chief Executive Office above the workforce average for the remainder of this and the next Policy period unless there are exceptional circumstances. Additionally the Remuneration Committee has also confirmed that the basic pay increases for LSL’s two other Executive Directors will be increased by 1.5% in 2019, in line with the average for our non-commission based workforce. 2. Changes to EPS target range for 2019 LTIP awards: The Remuneration Committee’s aim is to set an EPS target range for LTIP awards that are both realistic and achievable for threshold vesting while providing stretching targets for maximum vesting that significantly exceed Shareholders’ expectations. Despite delivering growth in a challenging market, LSL’s LTIP awards did not vest in 2017 and 2018 and will not vest in 2019 due to the challenging performance conditions not being satisfied. Therefore all awards have either lapsed or will lapse. The targets that were set were very ambitious and the Committee considers that, with hindsight, a zero pay out for all three awards is a harsh outcome for Management. There is no desire to change the past targets. However, we must reflect this recent experience in considering our approach going forwards. The adjusted and market aligned target range for the 2019 awards will help to ensure that in future the awards are motivational, whilst ensuring that vesting is aligned with the delivery of Shareholder value. Taking this into account, together with market expectations for the upcoming three year performance period, the Remuneration Committee has reviewed the EPS growth range and set this at 5% to 12% CAGR for the 2019 LTIP awards. The Remuneration Committee has consulted with our largest Shareholders and taken on board their feedback in setting this range, which the Remuneration Committee considers remains challenging. The Remuneration Committee has considered and concluded that no other changes are required in relation to the implementation of the Policy in 2019, which results in the following decisions: a. basic salaries for our two other Executive Directors will increase by 1.5% with effect from 1st January 2019. This increase is in line with the average for our non-commission based workforce; b. the annual bonus continues to work well and will remain capped at 100% of salary for all three Executive Directors. The measures for the annual bonus will remain the same as in 2018, being Group Underlying Operating Profit (80% of the award) and individually agreed non-financial measures (20% of the award); c. the grant value of the LTIP awards will remain unchanged from 2018 at 125% of salary for all three Executive Directors; and d. the mix of performance measures for the LTIP awards to be made in 2019 will also remain the same as in 2018, being adjusted EPS (70% of the award), with the adjusted range as explained above, and relative TSR (30% of the award). The relative TSR group is consistent with the comparison group used in 2018, and comprises companies that operate in similar business and sectors to LSL and as such it reflects the relative performance of LSL to its peers. Non Executive Director fees During 2018 the Remuneration Committee also reviewed the annual fee of the LSL Chairman, and the LSL Board (excluding the Non Executive Directors) reviewed the fees of the Non Executive Directors. The fee levels for these roles had not been reviewed or increased for a number of years and increases have been approved effective from 1st September 2018 taking into account the time commitment and responsibilities of each of the Non Executive Directors (including the Chairman). All employee plans LSL operates a number of all employee share plans, as detailed within our Remuneration Policy on page 84. The Remuneration Committee reviewed the various share plans during the year and approved a change that provides employees acquiring Shares under the all employee SIP/BAYE plan to free matching shares. Effective from July 2018 one matching share has been awarded for every five partnership Shares purchased within the SIP/BAYE plan. The Remuneration Committee is keen to encourage Group employees to share in the Group’s success through the holding of Shares and is supportive of changes that will promote employee participation in the Group’s employee share plans. The Remuneration Committee is also pleased to report that since the introduction of matching shares there has been an increased level of participation in the scheme across the Group. Corporate Governance and Reporting Regulations During 2018 the Remuneration Committee reviewed and discussed how it will implement the changes required by the 2018 Code, related guidance on Board Effectiveness and The Companies (Miscellaneous Reporting) Regulations 2018 (2018 Regulations). 78 c115055_LSL.indb 79 79 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Directors’ Remuneration Report 2018 Regulations Whilst the 2018 Regulations do not apply to LSL until 1st January 2019 and will therefore require inclusion in our 2019 Remuneration Report, the Remuneration Committee has chosen to adopt certain disclosure earlier by inclusion in this Report, including the Group Chief Executive Officer’s pay ratio. 2018 Code I also wish to take this opportunity to explain our progress toward compliance with the new UK Corporate Governance Code (2018): • The Remuneration Committee’s terms of reference has been updated with effect from 1st January 2019 to update its role and responsibilities which includes setting the remuneration of the Executive Directors and of the senior Management Teams (including the Company Secretary). As a result, the Remuneration Committee’s remit as at 31st December 2018, included all LSL Executive Directors and 20 additional senior Management roles; • The Remuneration Committee has historically reviewed and approved any significant changes in elements of LSL’s pay policy for employees in the Group, (for example changes in employee pension arrangements and any grants made under the LSL share plans). In line with the 2018 Code the Remuneration Committee has updated its terms of reference with effect from 1st January 2019, to ensure it now also has formal oversight of the Group’s workforce remuneration and related employee policies; • Matters such as clarity, simplicity, risk, predictability, proportionality and culture already form part of the Remuneration Committee’s considerations and will in future be specifically included as part of its formal review and decision making process; • LSL already has in place a two year post vesting holding period for all our LTIP awards to Executive Directors and will during 2019 consider the operation of an annual bonus deferral as part of the Policy review in addition to a review of post-employment shareholding requirements. The Remuneration Committee believes that the LTIP post-vesting holding period already provides some post-employment alignment; • The Remuneration Committee has kept up to date with new and updated remuneration guidance from investors and proxy voting agencies and considered the impact of this on the operation of the Policy. The Remuneration Committee has engaged this year with investors regarding the specific matters I mention above and will do so again in 2019 as we review the Policy and prepare for the Policy to be submitted to a binding Shareholder vote at the 2020 AGM; and • LSL already has in place clawback and malus provisions and these will be reviewed and if necessary updated further during 2019 to ensure compliance with the 2018 Code. As set out in our Corporate Governance Report compliance with the 2018 Code in respect of workforce engagement is being considered and this will take into account existing arrangements in addition to the introduction of new measures to ensure compliance with the 2018 Code during 2019. The Remuneration Committee will also be considering in the coming months with support from the Group’s HR team, how to most effectively engage with Group employees to explain the alignment of our Executive Directors’ remuneration to the wider Group policies. More information regarding this will be provided in Annual Report and Accounts 2019. In line with the new 2018 Regulations, I confirm that no discretion has been exercised by the Remuneration Committee during 2018 and that LSL’s remuneration arrangements remain in line with the Policy approved by Shareholders at the 2017 AGM. Conclusion The Remuneration Committee believes that LSL’s remuneration arrangements for the Executive Directors and senior Management are aligned to LSL’s strategic goals and incorporate the Group’s key performance indicators. Further, the Committee is comfortable that the remuneration outcomes for 2018 are aligned to performance and the Remuneration Committee believes that the Policy continues to promote the long-term success of LSL and incentivises the delivery of strong yet sustainable financial results with the creation of Shareholder value. Accordingly the Remuneration Committee trusts that Shareholders will support the resolution to approve LSL’s remuneration arrangements at the 2019 AGM. In the event that Shareholders have any questions or observations then I will be pleased to hear from you directly and will be available at the 2019 AGM or I can be contacted via the Company Secretary’s office (please see details in Shareholder Information on page 192). Bill Shannon Chairman of the Remuneration Committee 5th March 2019 80 c115055_LSL.indb 80 22/03/2019 19:04 81 Directors’ Remuneration Policy (Policy) Introduction and overview When setting the Executive Directors’ and senior Managers’ remuneration, the Remuneration Committee seeks to ensure that all individuals are provided with appropriate profit based incentives and an element of pay relating to non-financial performance measures, in order to encourage enhanced performance, and to ensure that individuals are, in a fair and responsible manner, rewarded for their contributions to the success of the Group. LSL’s policy is to provide remuneration packages which are designed to attract, motivate and retain Executive Directors of the calibre necessary to maintain and improve the Group’s profitability and to reward them for enhancing Shareholder value and return. In doing this, LSL aims to provide a market competitive (but not excessive) package of pay and benefits. LSL’s general remuneration policy is to set basic salaries around mid-market levels and set performance pay levels which are at the upper quartile of market practice and to apply stretching goals that accord with LSL’s general policy of seeking to make bonuses self-financing wherever possible. Remuneration packages will also reflect individual responsibilities and contain incentives to deliver LSL’s strategic objectives. Consideration of Shareholder views Each year the Remuneration Committee considers Shareholder feedback received in relation to LSL’s Annual Report and Accounts, including the Directors’ Remuneration Report, at a meeting following publication of the Annual Report and Accounts and the completion of the AGM. This feedback, plus any additional feedback received during any meetings or consultations with Shareholders from time to time, is then considered as part of LSL’s review of the Policy and its annual implementation review. In addition, the Remuneration Committee engages directly with significant Shareholders and their representative bodies in respect of any proposed changes to the Policy and, as appropriate, changes to the implementation of the Policy. Details of votes cast for and against the resolution to approve the previous year’s Directors’ Remuneration Report and any matters discussed with Shareholders during the year are set out in the Annual Report on Remuneration. For further details of the way in which LSL communicates with its Shareholders, please see the Shareholder Relations section of the Corporate Governance Report of this Report. Consideration of employment conditions elsewhere in the Group The Remuneration Committee considers the general basic salary increase for the broader UK employee population when determining any annual basic salary increases for the Executive Directors and senior Managers and is cognisant of the Group’s overall employment arrangements when reviewing and implementing the Policy. Policy detail by remuneration element Element of remuneration arrangements Basic salary How this component supports LSL strategies Operation Maximum Performance metrics and period • Reflects the value of the individual and their role. • Reflects skills and experience over time. • Provides an appropriate level of basic fixed income avoiding excessive risk arising from over reliance on variable income. • Reviewed annually, normally • There is no prescribed • Not applicable. effective 1st January. • Takes periodic comparison against companies with similar characteristics and sector comparators. maximum annual basic salary increase. • The Remuneration Committee is guided by the general increase for the broader employee population but may decide to award a lower increase for Executive Directors or indeed exceed this to recognise, for example, an increase in the scale, scope or responsibility of the role and/ or to take account of relevant market movements. • Current basic salary levels are set out in the Annual Report on Remuneration. 80 c115055_LSL.indb 81 81 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Directors’ Remuneration Report Element of remuneration arrangements Annual bonus How this component supports LSL strategies Operation Maximum Performance metrics and period • Incentivises annual delivery of financial and strategic goals. • Maximum bonus only payable for achieving demanding targets. • Targets reviewed annually. • Maximum opportunity: • Performance - Group Chief Executive Officer capped at 125% of basic salary*; and - Other Executive Directors capped 100% of basic salary. * Maximum opportunity will not be increased above 100% of basic salary without significant Shareholder consultation. period of one year. • Performance metrics: - A maximum of 30% of the award will be determined by non- financial measures and a minimum of 70% by financial measures; and - Not more than 20% of the financial measures will pay out at threshold. • Bonus level is determined by the Remuneration Committee after the end of the relevant financial year, subject to performance against targets set at the start of the relevant financial year. • The Remuneration Committee has the discretion to adjust the annual bonus payment due if the Remuneration Committee considers it is not reflective of the underlying performance of LSL. • Where the Group Chief Executive Officer’s maximum bonus opportunity is increased above 100% of basic salary, a portion of the annual bonus will be deferred in Shares, with the balance being paid in cash. • Not pensionable. • Bonus awards are subject to clawback and malus applicable for six years from payment of the bonus or vesting of deferred bonus in circumstances of: material misstatement of financial results, error, inaccurate or misleading information in determining a performance condition or any other matter determining the vesting of an award, breach of relevant regulations, an act or omission during vesting period to the significant detriment of customers, or an act or omission leading to gross misconduct. Recovery can be made through scaling back of existing awards, reduction of future awards including under the LTIP and requesting repayment as cash sum. 82 c115055_LSL.indb 82 22/03/2019 19:04 83 Element of remuneration arrangements LTIP awards (approved by Shareholders at the 2017 AGM) How this component supports LSL strategies Operation Maximum Performance metrics and period • Normal maximum limit of 125% of basic salary with grants of up to 200% of basic salary being made in exceptional circumstances.* * Award value will not be increased above 100% of basic salary without significant Shareholder consultation. Note: Award levels increased to 125% of salary for 2018 awards and subsequent years following significant Shareholder consultation which was completed during 2017 (see 2017 Annual Report on Remuneration). • Performance period: normally three years. • As and when LTIP awards are made in excess of 100% of basic salary then two year post vesting holding periods will apply to those awards in their entirety. • At least 30% of the award will be determined by TSR performance with the remainder by other financial metrics. • 25% vests at threshold for all parts of the LTIP. • Aligned to key performance • Awards of nil-cost or indicators of the Group that drive the strategies and performance of the businesses. conditional Shares are made annually with vesting dependent on the achievement of performance conditions over the subsequent three years. • The Remuneration Committee reviews the quantum of awards annually and monitors the continuing suitability of the performance measures. • The Remuneration Committee will have the discretion to adjust the LTIP vesting outcome if it considers that it is not reflective of the underlying performance of LSL. • Discretion for the Remuneration Committee to provide for dividend equivalents to accrue from the date of award to the vesting date or, if applicable, to the end of any post vesting holding period. • LTIP awards are subject to clawback and malus applicable for six years from vesting in circumstances of: material misstatement of financial results, error, inaccurate or misleading information in determining a performance condition or any other matter determining the vesting of an award, breach of relevant regulations, act or omission during vesting period to the significant detriment of customers, act or omission leading to gross misconduct. Recovery can be made through scaling back of existing awards, reduction of future awards including under the annual bonus and deferred annual bonus plan and requesting repayment as cash sum. 82 c115055_LSL.indb 83 83 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Directors’ Remuneration Report Element of remuneration arrangements All-employee share schemes: SAYE, SIP/ BAYE and CSOP Executive Share ownership guidelines How this component supports LSL strategies Operation Maximum Performance metrics and period • Encourages long-term shareholding in LSL. • Invitations made by the • As per HMRC limits. None. Remuneration Committee under the approved SAYE, SIP/BAYE and CSOP. • To provide alignment • Executive Directors are • Minimum of 150% of basic None. between Executive Directors and Shareholders. salary – no maximum. required to build and maintain a minimum shareholding equivalent to 150% of basic salary over a period of five years from the date of appointment through the retention of vested share award and/or through open market purchases. Executive Directors are expected to retain all vested long-term incentive awards (subject to any sales necessary to meet tax liability on vesting or exercise) until the guideline is met. Benefits • Provides insured benefits to support the Executive Directors and their family during periods of ill health, accident or death. • Includes car allowance, life • At cost. None. assurance and private medical insurance. Other benefits may be provided where appropriate. • Access to car allowance to • Any reasonable business facilitate travel. related expenses (including tax thereon) can be reimbursed if determined to be a taxable benefit. Pension • Provides modest retirement • Defined contribution. • Executives are offered a None. benefits. • Opportunity for Executive Directors to contribute to their own retirement plan. • HMRC approved arrangement. pension in accordance with auto enrolment minimums. The Remuneration Committee may use its discretion on the appointment of a new Executive Director to recommend a 5% match of basic salary. Chairman and Non Executive Directors • To provide fees reflecting time commitments and responsibilities of each role, in line with those provided by similarly sized companies. • Cash fee paid on a monthly • There is no prescribed None. basis. • Fees are normally reviewed from time to time. • Any reasonable business related expenses can be reimbursed (including tax thereon if determined to be a taxable benefit). maximum annual fee increase, although there is a total fee cap of £750,000 which is contained in LSL’s Articles of Association. • Decisions on fee levels are guided by the general increase for the broader employee population, scale, scope or responsibility of the role and/ or to take account of relevant market movements. Current fee levels are set out in the Annual Report on Remuneration. 84 c115055_LSL.indb 84 22/03/2019 19:04 85 Notes to the Remuneration Policy summary: 1. A description of how LSL will operate the Policy in the year ahead is detailed in the Annual Report on Remuneration. 2. The following differences exist between LSL’s Policy for the remuneration of Executive Directors and senior Managers as set out in the table and its approach to the payment of LSL employees generally: a. a lower level of maximum annual bonus (or no bonus) opportunity may apply to employees; b. participation in the LTIP scheme is limited to the Executive Directors and certain selected Senior Managers. All employees are eligible to participate in LSL’s employee share schemes: save as you earn (SAYE), share incentive plan/buy as you earn (SIP/BAYE); and company share ownership plan (CSOP) upon invitation; c. benefits (including benefits in kind and salary sacrifice arrangements) that are offered to other employees generally comprise of paid holidays and voluntary benefits such as childcare vouchers, a health cash plan, life assurance and, for more senior employees, private medical insurance; and d. LSL offers a stakeholder pension scheme with employee and employer contributions for new members calculated at a level which is compliant with automatic enrolment minimums (increasing over time as required by legislation) and based on a band of qualifying earnings which may vary month by month as variable pay fluctuates. Senior employees are offered the opportunity to join the enhanced scheme after one years’ service; this enables a 5% match of basic salary. The Remuneration Committee may use its discretion to recommend a 5% match of basic salary on appointment and where the individual has reached his/her annual or life time allowances a cash equivalent may be offered. In general, the above listed differences arise from the development of remuneration arrangements that are market competitive for the various categories of individuals, together with the fact that remuneration of the Executive Directors and senior Managers typically has a greater emphasis on performance-related pay. 3. The choice of the performance metrics applicable to the annual bonus scheme reflect the Remuneration Committee’s belief that any incentive compensation should be appropriately challenging and tied to both the delivery of profit and non-financial measures. 4. The TSR and adjusted EPS performance conditions applicable to the LTIP were selected by the Remuneration Committee on the basis that they reward the delivery of long-term returns to Shareholders and the Group’s financial growth, and they are consistent with LSL’s objective of delivering superior levels of long-term value to Shareholders. The TSR performance condition is monitored on the Remuneration Committee’s behalf by an independent advisor whilst LSL’s EPS growth is derived from the audited Financial Statements. 5. The Remuneration Committee operates the LTIP scheme in accordance with the plan rules, the Listing Rules of the UKLA, and the Remuneration Committee terms of reference which are consistent with market practice; this retains discretion over a number of areas relating to the operation and administration of the LTIP scheme. The Remuneration Committee has the discretion under the plan rules, in certain circumstances, to grant and/or settle an award in cash. In practice this will only be used in exceptional circumstances. 6. The LTIP awards vest after three years and for grants made in 2018 and subsequent years a two year post vesting holding period applies. 7. The employee share schemes (SAYE, SIP/BAYE and CSOP) do not include any performance conditions. 8. For the avoidance of doubt, in approving the Policy, authority is given to LSL to honour any commitments entered into with current or former Executive Directors (such as the payment of a pension, payment of last year’s annual bonus or the vesting/exercise of share awards granted in the past) that have been disclosed in this and previous Directors’ Remuneration Reports. Details of any payments to former Directors will be set out in the Annual Report on Remuneration as they arise. 84 c115055_LSL.indb 85 85 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Directors’ Remuneration Report Reward scenarios (illustration of application of remuneration policy for financial year 2019) The chart below shows how the composition of each of the remuneration packages, as applicable for each of the Executive Directors holding office, varies at different levels of performance under the Policy set out above; both as a percentage of total remuneration opportunity and as a total value. In line with the new Reporting Regulations the graph also includes an indication of the maximum remuneration under a scenario of 50% share price appreciation over the three year performance period of the LTIP award: s ’ 0 0 0 £ 2,000 1,750 1,500 1,250 1,000 750 500 250 0 £1,777 47% £1,497 37% 30% 25% £992 28% 23% £486 £1,191 48% £1,002 38% £661 29% 23% £320 30% 25% £326 £673 29% 23% £1,214 48% £1,021 38% 30% 25% 100% 49% 33% 27% 100% 48% 32% 27% 100% 48% 32% 27% Below Target Target Maximum Maximum with 50% share price appreciation Below Target Target Maximum Maximum with 50% share price appreciation Below Target Target Maximum Maximum with 50% share price appreciation Group Chief Executive Officer Group Chief Financial Officer Executive Director – Estate Agency Notes to the reward scenarios: 1. The ‘below target’ performance scenario comprises the fixed elements of remuneration only, including: a. basic salary is as applicable from 1st January 2019, or on appointment; b. pension is as per the Policy; and c. estimated benefits use the value reported for the previous financial year. 2. The target level of bonus is assumed to be 50% of the maximum bonus opportunity (100% of basic salary), and the on-target level of LTIP vesting is assumed to be 50% of the face value, assuming a normal grant level (125% of basic salary). These values are included in addition to the components/values of minimum remuneration. 3. The maximum remuneration assumes full bonus pay-out (100% of basic salary) and the full face value of the LTIP (125% of basic salary), in addition to fixed components of remuneration. 4. No share price growth has been factored into the calculations in the Threshold, Target and Maximum calculations. 5. 50% share price growth over the three year performance period of the LTIP award has been used for the “Maximum with 50% share price appreciation” scenario. 6. The assumptions noted for ‘on-target’ performance in the graph above are provided for illustration purposes only. Approach to recruitment and promotions The remuneration package for a new Executive Director appointment will be set in accordance with the terms of LSL’s prevailing approved Policy at the time of appointment and take into account the profession, skills and experience of the individual, the market rate for a candidate of that profession, skills and experience and the importance of securing the relevant individual into the role. Basic salary will be provided at such a level as required to attract the most appropriate candidate and may be set initially at a below mid-market level on the basis that it may progress towards the mid-market level once skills, expertise and performance has been proven and sustained. The annual bonus potential will be limited to 125% of basic salary for the Group Chief Executive Officer and 100% of basic 86 c115055_LSL.indb 86 22/03/2019 19:04 87 salary for other Executive Directors and grants under the LTIP will be limited to 125% of basic salary or 200% of basic salary in exceptional circumstances. Depending on the timing of the appointment, the Remuneration Committee may deem it appropriate to set different annual bonus performance metrics to the existing Executive Directors for the first performance year of appointment. Further, in exceptional circumstances the Remuneration Committee may offer additional cash and/or share-based elements to replace deferred or incentive pay forfeited by an individual leaving a previous employer. It will seek to ensure, where possible, that these awards are consistent with any awards forfeited in terms of vesting periods, expected value and performance conditions. For an internal candidate being appointed as an Executive Director, any variable pay element awarded in respect of the prior role may be allowed to pay-out according to its terms. In addition, any other on-going remuneration obligations existing prior to appointment may continue, provided that they are put to Shareholders for approval at the earliest opportunity. For external and internal candidate appointments, the Remuneration Committee may agree that the Group will meet certain relocation and/ or incidental expenses as appropriate. In exceptional circumstances the Remuneration Committee may also agree, on the recruitment of a new Executive Director, a notice period in excess of nine months with the intention to reduce this to nine months over a specified period. Service contracts for Executive Directors The service contracts for each of the Executive Directors in place at the date of this Report are not fixed term and are terminable by either LSL or the Executive Director as detailed below: Director Commencement of service contract Notice period (from Executive Director/LSL) Ian Crabb Group Chief Executive Officer Adam Castleton Group Chief Financial Officer 9th September 2013 2nd November 2015 Helen Buck Executive Director – Estate Agency 2nd February 2017 Nine months Nine months Nine months At the Remuneration Committee’s recommendation and at the Board’s discretion, early termination of an Executive Director’s service contract can be undertaken by way of payment of basic salary and benefits in lieu of the required notice period. A summary of the main contractual terms surrounding termination are set out below: Provision Notice period Detailed terms Nine months. Termination payment Payment in lieu of notice based on basic salary, fixed benefits and pension. Remuneration entitlements A bonus may be payable (pro-rated where relevant) and outstanding share awards may vest (see below). Change of control No Executive Director’s service contract contains additional provisions in respect of change of control. At the Remuneration Committee’s recommendation and at the Board’s discretion, early termination of a service contract can be undertaken by way of payment of nine months’ basic salary and benefits. The Remuneration Committee may pay reasonable outplacement and legal fees where appropriate, and may pay any statutory entitlements or settle or compromise claims in connection with a termination of employment, where considered in the best interests of LSL. Subject to the performance conditions being met, an annual bonus may be payable with respect to the period of the financial year served, although it will be pro-rated for time and paid at the normal payment date. Any share-based entitlements granted to an Executive Director under LSL’s share plans will be determined based on the relevant share plan rules. However, in certain prescribed circumstances under the LTIP scheme rules, such as death, injury, disability, redundancy, retirement or cessation by reason of the employing company/business ceasing to be a member of the Group, or other circumstances at the discretion of the Remuneration Committee, a “good leaver” status may be applied. 86 c115055_LSL.indb 87 87 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Directors’ Remuneration Report In exceptional circumstances for good leavers, all or part of unvested LTIP awards may vest at the date of cessation of employment. In all other circumstances the awards for good leavers will vest at the original specified vesting date. Awards to Executive Directors, who are not good leavers, lapse immediately on cessation. In exercising its discretion to the extent to which and when, an award shall vest the Remuneration Committee will, under the LTIP rules, take into account: a. the progress made towards meeting the performance conditions; b. the extent to which it considers the performance condition would have been satisfied by the end of the vesting period; c. the proportion of the vesting period elapsed; and d. any other factors which it considers to be relevant. Subject to Board approval and any conditions stipulated by the Board, Executive Directors may accept appropriate outside commercial non executive director appointments provided that the aggregate commitment is compatible with their duties as an LSL Executive Director. Non Executive Directors LSL’s policy is to appoint Non Executive Directors with a breadth of qualifications, skills and experience relevant to LSL’s businesses and strategy. Appointments are made by the Board upon the recommendations and advice of the Nominations Committee. For further details on the role and responsibilities of the Nominations Committee and how it discharged its duties in 2018, see the Corporate Governance Report included in this Report. Non Executive Directors, including the Chairman, have letters of appointment which set out their duties and responsibilities. The Non Executive Directors, including the Chairman are not eligible to participate in incentive arrangements or receive pension provision. The following table shows details of the terms of appointment of LSL’s Non Executive Directors. Further details relating to the Non Executive Directors appointments can be found in the Corporate Governance Report included in this Report. Director Date original term commenced Date current term commenced Expiry date of current term Kumsal Bayazit Besson¹ Independent Non Executive Director Simon Embley Chairman Darrell Evans² Independent Non Executive Director Bill Shannon Deputy Chairman and Senior Independent Director David Stewart Independent Non Executive Director 1st September 2015 1st September 2018 30th April 2019 1st January 2015 1st January 2018 31st December 2020 28th February 2019 - 27th February 2022 7th January 2014 7th January 2017 6th January 2020 1st May 2015 1st May 2018 30th April 2021 Notes: 1 LSL announced on 29th January 2019 that Kumsal Bayazit Besson is retiring from the Board and its Committees with effect from the 2019 AGM. 2 Darrell Evans was appointed to the Board and its Committees, including the Remuneration Committee for a term of three years with effect from 28th February 2019. Annual Report on Remuneration Implementation of the Policy for the year ending 31st December 2019 This section of the Directors’ Remuneration Report sets out how the Policy will be implemented for the financial year ending 31st December 2019. Basic salary The Remuneration Committee has reviewed the Group Chief Executive Officer‘s basic salary and has awarded an increase of 9% with effect from 1st January 2019 and this increases his basic salary from £412,000 to £449,000 per annum. In increasing the basic salary the Remuneration Committee has sought to recognise the following: • the extremely strong personal performance of the Group Chief Executive Officer and the strengthening of the business during the last two years with the delivery of key strategic initiatives, including securing the Lloyds Bank plc group surveying and valuation 88 c115055_LSL.indb 88 22/03/2019 19:04 89 services contract, completing the acquisition of two mortgage brokers; Personal Touch Financial Services and RSC New Homes, and the delivery of key strategic investment in a digital mortgage marketplace business Mortgage Gym, which provides longer term growth opportunities and diversity of business going forward in a potentially volatile marketplace; • the increased complexity of the business and responsibility of the Group Chief Executive Officer, as a result of the initiatives and acquisitions/investments referenced above; and • the consistent performance of the Group over the last three years in challenging and difficult market conditions while outperforming a number of key competitors and industry peers. The resulting basic salary is considered competitive against LSL’s key specific industry peers and recognises the Group Chief Executive Officer’s and the Group’s strong performance, in addition to the increased complexity of the role. The increased basic salary was subject to consultation with LSL’s largest Shareholders who broadly confirmed their support. The Remuneration Committee does not anticipate at this time making any further basic salary increases for the Group Chief Executive Officer in excess of the workforce average for the remainder of this and the next Policy period unless there are exceptional circumstances. The 2019 basic salary increases for the two other Executive Directors are in line with the average increase of non-commission earning Group employees, which is also in line with LSL’s implementation of the Policy in previous years. Basic salary levels as at 1st January 2019 for the Executive Directors are set out below: Director Role Ian Crabb Group Chief Executive Officer Adam Castleton Group Chief Financial Officer 2019 (£) 449,000 303,000 Helen Buck Executive Director - Estate Agency 309,000 % increase from 1st January 2019 9.0% 1.5% 1.5% 2018 (£) 412,000 298,500 304,500 Annual bonus for 2019 The Remuneration Committee will operate an annual bonus scheme for Executive Directors during 2019 that is broadly similar to that operated in 2018. The maximum bonus continues to be capped at 100% of basic salary. There will be a sliding scale of performance targets based on LSL’s budgeted Group Underlying Operating Profit (after the payment of bonuses) for 80% of the potential with the remaining 20% of the potential based on challenging non-financial performance measures. The non-financial measures for the 2019 bonus scheme will include objectives based on the Executive Directors’ delivery of key strategic initiatives in each of LSL’s three business segments; Estate Agency, Financial Services, Surveying and Valuation Services. Full disclosure of these targets will be provided in the Annual Report and Accounts 2019. The Remuneration Committee is satisfied that these are challenging and demanding, reflect LSL’s on-going business expectations and have a clear link to LSL’s strategy. The Group Underlying Operating Profit targets require LSL’s performance to be significantly better than budget for full pay-out. Long-Term Incentive Plan (LTIP) 2019 awards The award levels and performance conditions for the forthcoming LTIP awards remain unchanged from 2018 and will also remain subject to EPS growth targets for 70% of the award and relative TSR for the remaining 30%. The Remuneration Committee has reviewed the EPS growth range set for 2018 and is lowering this from the 2018 range of 7.5% to 13% CAGR to 5% to 12% CAGR for the 2019 LTIP awards. LSL has consulted with its significant Shareholders and taken on board their feedback in setting this new range, which the Remuneration Committee has determined is appropriate and challenging for the reasons set out below. The Remuneration Committee’s aim is to set an EPS target range that is realistic and achievable for threshold vesting while providing stretching targets for maximum vesting that significantly exceed analysts’ expectations. Despite delivering growth in a challenging market, LSL’s LTIP awards did not vest in 2017 and 2018 and will not vest in 2019 due to the challenging performance conditions not being satisfied. Therefore all awards have either lapsed or will lapse. The targets that were set were very ambitious and the Remuneration Committee considers that, with hindsight, a zero pay-out for all three awards was determined to be a harsh outcome for Management. The adjusted and market aligned target range for the 2019 awards will help to ensure that the awards are motivational, whilst still ensuring that vesting is only achieved for delivering Shareholder value. 88 c115055_LSL.indb 89 89 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Directors’ Remuneration Report Awards to be granted in 2019 to the Executive Directors will therefore be made over Shares with a value at the date of grant of 125% of basic salary. Performance will be measured over a period of three financial years commencing 1st January 2019 as follows: 1. 25% of the EPS part of the award will vest for adjusted basic EPS CAGR 5% increasing pro-rata to full vesting of this part of the award for adjusted basic EPS CAGR of 12% over the performance period; and 2. 25% of the TSR part of the award will vest if LSL’s TSR is equal to the TSR of the median peer group company increasing pro- rata to full vesting of this part of the award for upper quartile performance or above, as measured against the constituents of the comparator group (as listed below). For any of the TSR part of the award to vest, the Remuneration Committee must also be satisfied that there has been an improvement in LSL’s underlying financial performance. Additionally the awards will be subject to a two year post vesting holding period, following the three year vesting period. TSR comparator group The peer group comprises the following 21 companies that are operating in similar or related sectors and is the same as that applied to the 2018 awards except for ZPG plc (now ZPG Limited) which delisted during 2018: • • • • • • • • • • • • • • • • • • • • • Barratt Developments plc Bellway plc Belvoir Lettings plc Bovis Homes Group plc Countryside Properties plc Countrywide plc Crest Nicholson Holdings plc Foxtons Group plc Grainger plc Howden Joinery Group plc Hunters Property plc M Winkworth plc McCarthy & Stone plc Mortgage Advice Bureau (Holdings) plc Paragon Banking Group plc Purplebricks Group plc Redrow plc Rightmove plc St Modwen Properties plc The Property Franchise Group plc Travis Perkins plc Benefits Taxable benefits for the Executive Directors will continue to include a car allowance, life assurance and private medical insurance. Benefits in kind are not pensionable and are not taken into account when determining basic salary for performance-related remuneration. Pension LSL operates a money purchase pension scheme which provides employer contributions equal to 5% of basic salary for senior professional and management level roles joining the business and all other employees are offered a pension in line with auto enrolment minimums. A relatively small proportion of LSL’s current workforce received higher pension contributions as part of their previous employment terms and these have been protected upon transfer into the Group. LSL’s Executive Directors are entitled to pension contributions in line with the management population, with Ian Crabb, Group Chief Executive Officer electing to participate in the scheme and receiving 5% contributions since he was appointed in September 2013. Since April 2018, as approved by the LSL Remuneration Committee, this pension contribution has been paid partly as a cash allowance and taxed appropriately to the extent that the Group Chief Executive Officer has reached his annual pension allowance. Adam Castleton, Group Chief Financial Officer and Helen Buck, Executive Director - Estate Agency have elected not to join the pension scheme and received no additional compensation in lieu of this. 90 c115055_LSL.indb 90 22/03/2019 19:04 91 Non Executive Directors A summary of annual fees for the Non Executive Directors is as follows: Director Kumsal Bayazit Besson Independent Non Executive Director Simon Embley Chairman Darrell Evans Independent Non Executive Director Bill Shannon Deputy Chairman and Senior Independent Director David Stewart Independent Non Executive Director Note 1 2 3 4 From 1st September 2018 (£) To 31st August 2018 (£) 44,000 137,500 44,000 78,000 50,000 40,000 130,000 70,000 45,000 As set out in the Remuneration Committee Chairman’s Annual Statement, the Remuneration Committee in respect of the Chairman and the Board excluding the Non Executive Directors, in respect of the Non Executive Directors, reviewed fee levels during 2018. The fee levels for these roles had not been reviewed or increased for a number of years and were increased with effect from 1st September 2018 taking into account the time commitment, experience and responsibility of the roles as well as fee levels in comparable companies. Notes to summary of fees for the Non Executive Directors: 1. Kumsal Bayazit Besson is retiring from the Board and its Committees with effect from the 2019 AGM. 2. Darrell Evans was appointed to the Board and its Committees on 28th February 2019 and his fee is paid for his role as a Non Executive Director. 3. Bill Shannon’s fee is paid for his role as a Non Executive Director (£44,000) and his additional responsibilities as Deputy Chairman and Senior Independent Director (£22,000), Chairman of the Nominations Committee (£6,000) and Chairman of the Remuneration Committee (£6,000). 4. David Stewart’s fee is paid for his role as a Non Executive Director (£44,000) and his additional responsibility as Chairman of the Audit & Risk Committee (£6,000). 90 c115055_LSL.indb 91 91 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Directors’ Remuneration Report Directors’ remuneration payable in 2018 - audited information Directors’ remuneration The remuneration of the Directors for 2018 was as follows: Notes Chairman Simon Embley 1 2 1 Executive Directors Helen Buck Adam Castleton Ian Crabb Adrian Gill Non Executive Directors Kumsal Bayazit Besson Helen Buck Bill Shannon David Stewart Total 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Basic salary or fees (£) 132,500 130,000 304,500 273,846 298,500 294,000 412,000 406,000 - 3,288 41,333 40,000 - 15,833 72,667 70,000 46,667 45,000 Benefits3 (£) - - 16,526 15,132 16,754 16,701 15,000 15,000 - 541 - - - - - - - - - - 137,550 220,550 234,905 279,300 328,962 393,820 - - - - - - - - - - 1,308,167 1,277,967 48,280 47,374 701,417 893,670 Annual bonus4 (£) Share awards5 (£) Pension contributions6 (£) Total (£) - - - - - - - - - - - - - - - - - - - - - - - - - - 18,667 20,300 - - - - - - - - - - 132,500 130,000 458,576 509,528 550,159 590,001 774,629 835,120 - 3,829 41,333 40,000 - 15,833 72,667 70,000 46,667 45,000 18,667 2,076,531 20,300 2,239,311 Notes to Directors’ remuneration table: 1. Helen Buck was appointed to the Board as an Executive Director on 2nd February 2017, prior to this date she was a Non Executive Director. Helen Buck’s remuneration includes £12,500 in respect of additional responsibilities prior to Helen’s appointment as an Executive Director. 2. Adrian Gill stepped down from the Board on 4th January 2017. The payments received by Adrian in 2017 related to basic salary and benefits for the period from 1st January 2017 to 4th January 2017. 3. Benefits comprise private medical cover and company car or car allowance. 4. LSL’s performance in 2018 results in the Executive Directors earning an annual bonus of between 45.2% and 79.8% of their basic salary in relation to the financial and non-financial performance element of the scheme. See page 93 for further details. LSL’s performance in 2017 resulted in the Executive Directors at the time, earning an annual bonus of between 80.2% and 97% of their basic salary. 5. The Adjusted EPS and TSR performance conditions for the 2016 LTIP have not been met and there is therefore no vesting of these awards. 6. Ian Crabb receives a 5% of basic salary pension contribution paid partly as a cash allowance to the extent he has reached his annual pension allowance. 92 c115055_LSL.indb 92 22/03/2019 19:04 93 Annual bonus Annual bonus payments 2018 – audited information Set out in the table below is a summary of the Executive Directors’ bonus scheme for 2018: Financial performance measures Group Underlying Operating Profit Scale from threshold (12.5% to 100%) Estate Agency Underlying Operating Profit Scale from threshold (12.5% to 100%) Director Weighting Threshold Maximum Achievement Weighting Threshold Maximum Achievement Ian Crabb 80% £32.844m £37.128m £35.896m Adam Castleton Helen Buck 80% £32.844m £37.128m 40% £32.844m £37.128m (Resulting in 62.7% of salary payable to Ian Crabb and Adam Castleton, and 31.4% of salary for Helen Buck.) Specific to Helen Buck only 40% £12.920m £16.720m £12.40m 31.4% (0% achievement) Total payment under financial element % of basic salary 62.7% 62.7% As a result of strategic decisions made by the Board early in 2018 the Remuneration Committee reweighted the different elements of Helen Buck’s annual bonus for 2018 to reflect her increased focus on Group priorities including a key strategic project that would deliver value for the Group. This has resulted in a larger proportion of the bonus being weighted to Group metrics, compared to 2017. The Group Operating Profit range for 2018 is very similar to that set for 2017 reflecting the continuation of extremely difficult and volatile market conditions particularly in the Estate Agency business. LSL’s Underlying Operating Profit for 2018 is lower than 2017 but nevertheless is viewed as an extremely strong performance in the circumstances and against market expectations. The Estate Agency Underlying Operating Profit range was lower than that set for 2017 reflecting the specific market challenges for this part of our business and again is seen as equally challenging to that set for 2017. Given the difficult market conditions the Remuneration Committee is comfortable that not only was the 2018 target range as challenging as that set for 2017 but that the bonuses earned for 2018 are reflective of the overall performance of the Group. On this basis the Remuneration Committee was comfortable that discretion was not required to adjust the formula-driven outturn. Non-financial measures/strategic goals Detailed below is a summary of the non-financial measures which were in place for Ian Crabb (Group Chief Executive Officer), Adam Castleton (Group Chief Financial Officer) and Helen Buck (Executive Director – Estate Agency) in respect of their 2018 annual bonus. The Remuneration Committee applies its judgement to determine the extent of any pay-out where goals are partially achieved during the year. 92 c115055_LSL.indb 93 93 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Directors’ Remuneration Report Total payment under the non-financial element % of basic salary 17.1% Executive Director Ian Crabb Group Chief Executive Officer Weighting Specific measures Achievement 20% for metric a. 5% for each remaining metric. Group measures a. Define and gain support for Group strategy from the Board and Shareholders, measured through Share price performance and analyst ratings. b. Deliver appropriate customer outcomes measured through file reviews of product sales. c. Effective management of regulatory risk by ensuring appropriate governance structures are put in place, new projects are implemented and risks are identified and managed. Estate Agency measures d. Maintaining Estate Agency market share without major impact on fees. e. Operational initiatives to structure the business segment appropriately for 2019. f. Delivery of infrastructure projects to support the required estate agency business structure in 2019. g. Maintaining Financial Services market share in Estate Agency core businesses. h. Delivery of planned lettings books acquisition programme. i. Delivery of enhanced Net Promoter Score. Surveying measures j. Broadly maintain market share in the Surveying business. k. Surveying Strategic Execution measured through the success of winning new business. l. Surveying business operational performance measured through surveyor productivity gains and surveyor retention. m. Surveying Innovation measured through the success of e.surv desktop (remote valuation) product. n. Preparation for major surveying contact renewals in 2019. Financial Services measures o. Deliver planned operational and financial benefits of acquisition of Personal Touch Financial Services. p. Implementation of operational change within Financial Services business. q. Identification of investment and collaboration opportunities in innovative technology solutions within Financial Services. These measures were assessed by the Remuneration Committee against criteria agreed at the beginning of the financial year. The 2018 assessment by the Remuneration Committee determined that the majority of these measures were achieved in full (measures; a, b, c, f, i, j, k, n, o, p and q) with a small number being achieved in part or not achieved in the timescales required (measures; d, e, h, g, l and m). This resulted in 85.5% of the measures being achieved. 94 c115055_LSL.indb 94 22/03/2019 19:04 95 Executive Director Weighting Specific measures Adam Castleton 20% for metric a. Group Chief Financial Officer 5% for metric b, c, d and h. 10% for metric e, f and j. 15% for metric g and i. Group measures a. Define and gain support for Group strategy from the Board and Shareholders, measured through Share price performance and analyst ratings. b. Deliver appropriate customer outcomes measured through file reviews of product sales. c. Effective management of regulatory risk by ensuring appropriate governance structures are put in place, new projects are implemented and risks are identified and managed. d. Internal Audit findings to be in-line with expected performance as measured by the Audit & Risk Committee. Estate Agency measures e. Operational initiatives to structure the business segment appropriately for 2019. f. Delivery of infrastructure projects to support the required Estate Agency business structure in 2019. g. Delivery of planned lettings books acquisition programme. h. Delivery of enhanced Net Promoter Score. Surveying measures i. Surveying Strategic Execution measured through the success of winning new business. Financial Services measures j. Implementation of operational change within Financial Services business. Total payment under the non-financial element % of basic salary 15.95% Achievement These measures were assessed by the Remuneration Committee against criteria agreed at the beginning of the financial year. The 2018 assessment by the Remuneration Committee determined that the majority of these measures were achieved in full (measures; a, b, c, f, h, i and j) with a small number being achieved in part or not achieved in the timescales required (measures; d, e and g). This resulted in 79.75% of the measures being achieved. 94 c115055_LSL.indb 95 95 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Directors’ Remuneration Report Total payment under the non-financial element % of basic salary 13.8% Executive Director Helen Buck Executive Director – Estate Agency Weighting Specific measures Achievement 20% for metric a. 5% for metric b, c and i. 10% for metric d and g. 15% for metric e, f and h. Group measures a. Define and gain support for Group strategy from the Board and Shareholders, measured through Share price performance and analyst ratings. b. Deliver appropriate customer outcomes measured through file reviews of product sales. c. Effective management of regulatory risk by ensuring appropriate governance structures are put in place, new projects are implemented and risks are identified and managed. Estate Agency measures d. Maintaining Estate Agency market share without major impact on fees. e. Operational initiatives to structure the business segment appropriately for 2019. f. Delivery of infrastructure projects to support the required Estate Agency business structure in 2019. g. Maintaining Financial Services market share in the Estate Agency core businesses. h. Delivery of planned lettings books acquisition programme. i. Delivery of enhanced Net Promoter Score. These measures were assessed by the Remuneration Committee against criteria agreed at the beginning of the financial year. The 2018 assessment by the Remuneration Committee determined that the majority of these measures were achieved in full (measures; a, b, c, f and i) with a small number being achieved in part or not achieved in the timescales required (measures; d, e, h and g). This resulted in 69.00% of the measures being achieved. The Remuneration Committee is satisfied that these non-financial measures were challenging and demanding, reflective of LSL’s on-going business expectations and have a clear link to LSL’s strategies. The financial performance element of the scheme requires LSL’s performance to be significantly better than budget for full pay-out. 96 c115055_LSL.indb 96 22/03/2019 19:04 97 Share awards vesting Details of LTIP awards vesting in relation to the period ending 31st December 2018 are as follows: 2016 LTIP awards (nil cost options) Executive Director Date of grant (three year vesting) 31st March 2016 Number of Shares under award Face value at grant date1 (100% of salary) 140,105 £400,000 31st March 2016 101,576 £289,999 Ian Crabb Group Chief Executive Officer Adam Castleton Group Chief Financial Officer Earnings per Share (EPS) target TSR target Actual adjusted EPS growth (70% of the award)2 Actual relative TSR (30% of the award)2 Expected vesting % in 2019 Expected total vesting value 0.0% £0.0 -4.91% p.a Position 118 out of 182 0.0% £0.0 25% of EPS part vesting for adjusted EPS growth of 7.5% p.a. increasing in a straight line to 100% vesting for adjusted EPS growth of 17.5% p.a. 35% of TSR part vesting for median ranking increasing to 100% vesting for upper quartile or above ranking Notes to 2016 LTIP awards: 1. Based on the number of Shares granted multiplied by the three day average Share price (285.5 pence) immediately prior to the grant date. 2. Three year performance period ending 31st December 2018. Share awards granted during 2018 Details of LTIP (nil cost option) awards granted in 2018 are as follows: Executive Director Date of grant (three year vesting) Number of Shares under award Face value at grant date1 (125% of basic salary) Percentage of award vesting at threshold performance Maximum percentage of face value that could vest Adjusted EPS growth (70% of the award) 29th March 2018 29th March 2018 234,624 £515,000 169,988 £373,124 29th March 2018 173,405 £380,624 Ian Crabb Group Chief Executive Officer Adam Castleton Group Chief Financial Officer Helen Buck Executive Director – Estate Agency 25% 100% Threshold vesting: 7.5% p.a. growth. Maximum vesting: 13.0% p.a. growth. Straight line vesting in between. Performance period Three years to 31st December 2020. Relative TSR (30% of the award) against bespoke group of 22 companies 2 Threshold vesting: median TSR. Maximum vesting: upper quartile TSR. Straight line vesting in between. Notes to 2018 LTIP awards: 1. Face value is calculated using the three day average share price (219.5 pence) prior to the grant date. 2. TSR peer group is detailed in the section on implementation of Policy for 2019 with the removal of ZPG plc which has since delisted. 3. The 2018 LTIP awards made to the Company’s Executive Directors; Ian Crabb, Adam Castleton and Helen Buck, are subject to a two year post-vesting holding period. 96 c115055_LSL.indb 97 97 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Directors’ Remuneration Report External appointments None of the Executive Directors hold any other non executive directorships of any other companies other than to represent the majority or minority interests of the Group. Payments to past directors No payments have been made to past directors. Payments for loss of office No payments have been made to directors for loss of office. Outstanding Share awards Options granted to Executive and Non Executive Directors to acquire Ordinary Shares in LSL are as follows: Director Award type Date of grant Share price on grant (pence) Exercise price (pence) As at 1st January 2018 Awards granted during year Awards lapsed during year Awards exercised during year Awards vested during year As at 31st December 2018 Exercise period CSOP 11th June 2010 240.00 240.00 12,500 Ian Crabb Group Chief Executive Officer Simon Embley Chairman Adam Castleton Group Chief Financial Officer Helen Buck Executive Director – Estate Agency LTIP LTIP LTIP LTIP SAYE LTIP SAYE JSOP LTIP LTIP LTIP LTIP SAYE LTIP SAYE LTIP SAYE LTIP SAYE 23rd September 2013 479.00 Nil 49,228 16th April 2015 364.00 Nil 101,648 31st March 2016 285.50 Nil 140,105 30th March 2017 209.50 Nil 193,794 1st June 2017 232.75 215.00 2,511 - - - - - 29th March 2018 219.50 Nil 1st June 2018 249.00 245.00 - - 234,624 1,469 1st June 2010 271.00 280.00 83,928 2nd April 2012 275.00 Nil 58,333 1st December 2015 306.00 Nil 94,771 31st March 2016 285.50 Nil 101,576 30th March 2017 209.50 Nil 140,334 1st June 2017 232.75 215.00 2,511 29th March 2018 219.50 Nil 1st June 2018 249.00 245.00 - - 169,988 1,469 30th March 2017 209.50 Nil 143,198 1st June 2017 232.75 215.00 2,511 - - 29th March 2018 219.50 Nil 1st June 2018 249.00 245.00 - - 173,405 1,469 - 101,648 - - - - - - - - 94,771 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 49,228* 23rd September 2016 to 23rd September 2023 0 16th April 2018 to 16th April 2025 140,105 193,794 31st March 2019 to 31st March 2026 30th March 2020 to 30th March 2027 2,511 1st June 2020 to 30th November 2020 234,624 29th March 2021 to 29th March 2028 1,469 1st June 2021 to 30th November 2021 83,928* 12,500* 58,333* 1st June 2013 to 1st June 2020 11th June 2013 to 11th June 2020 2nd April 2015 to 2nd April 2022 0 1st December 2018 to 1st December 2025 101,576 140,334 31st March 2019 to 31st March 2026 30th March 2020 to 30th March 2027 2,511 1st June 2020 to 30th November 2020 169,988 29th March 2021 to 29th March 2028 1,469 1st June 2021 to 30th November 2021 143,198 30th March 2020 to 30th March 2027 2,511 1st June 2020 to 30th November 2020 173,405 29th March 2021 to 29th March 2028 1,469 1st June 2021 to 30th November 2021 - - - - - - - * These awards have vested and are currently within the exercise period. 98 c115055_LSL.indb 98 22/03/2019 19:04 99 Notes to outstanding share awards: 1. All of the above are scheme interests. Details of long-term incentive awards granted in 2018 are presented in a separate paragraph while details of previous outstanding awards are presented in the previous year’s Directors’ Remuneration Report and are included in Note 13 to the Financial Statements. 2. The Ordinary Share mid-market price ranged from 215.5 pence to 295 pence and averaged 262.67 pence during 2018. The Share price on 31st December 2018 was 219.5 pence compared to 278.00 pence on 2nd January 2018. 3. Simon Embley’s share awards have been pro-rated to reflect his change of role to Non Executive Chairman on 1st January 2015. 4. The LTIP awards granted to the Executive Directors in 2018 are subject to the two year post vesting holding period. Directors’ interests in Shares The interests of the Directors who served on the Board during the year are set out in the table below: Director Kumsal Bayazit Besson Non Executive Director Helen Buck2 Executive Director – Estate Agency Adam Castleton3 Group Chief Financial Officer Ian Crabb4 Group Chief Executive Officer Simon Embley Chairman Bill Shannon Deputy Chairman and Senior Independent Director David Stewart Non Executive Director Shareholdings (Number of Shares) Share Awards (Number of Shares) 31st December 2018 31st December 2017 Unvested (Number of Shares) Vested but unexercised (Number of Shares) - - - 1,156 371 320,583 2,107 1,285 415,878 - - - Total (Number of Shares) Shareholding guideline 31st December 2018 (% of basic salary) Executive Director Shareholding1 (% of basic salary) - 1,156 2,107 - 150 150 N/A 0.8 1.5 59,659 58,774 572,503 49,228 108,887 150 58.0 6,777,291 6,101,367 24,248 23,274 - - - - - 154,761 6,932,052 - - 24,248 - - - - N/A N/A N/A Notes on Directors’ interest in Shares: 1. Under the Policy, Executive Directors are required to build and maintain a shareholding equivalent to 150% of annual basic salary over a period of five years from appointment through the retention of vested share awards and/or through open market purchases. The shareholding is calculated based on Shares owned and vested unexercised awards at 31st December 2018, share price at 31st December 2018 of 219.5 pence per Share and the Executive Director’s basic salary at 31st December 2018. The Remuneration Committee notes that neither Adam Castleton nor Helen Buck have reached the fifth anniversary of their appointment and that Ian Crabb has been with LSL for five years and has not reached his shareholding guideline. The Remuneration Committee also notes that since Ian Crabb was appointed as Group Chief Executive Officer in 2013 only one of the three LTIP awards granted has vested and then only in part. There has therefore been very limited opportunity for Ian Crabb to acquire Shares from incentive award vesting. In December 2017 Ian Crabb acquired Shares in the open market with his own funds and has committed to make a further voluntary purchase of LSL Shares using 33.3% of his net of tax 2018 bonus. The Remuneration Committee will review the share ownership guidelines as part of the Policy review in 2019 together with the remuneration mechanisms for acquiring Shares. 2. Helen Buck was appointed as Executive Director – Estate Agency on 2nd February 2017 and she has purchased Shares as a participant in LSL’s SIP/BAYE since 4th July 2017. The Shares specified in the table were purchased by the Trust at the prevailing market value. 3. Adam Castleton was appointed to the Board on 2nd November 2015 and he has purchased Shares as a participant in LSL’s SIP/BAYE since 1st June 2016. The Shares specified in the table were purchased by the Trust at the prevailing market value. 4. Ian Crabb was appointed to the Board on 9th September 2013 and he has purchased Shares as a participant in LSL’s SIP/BAYE since 1st November 2013. The Shares were purchased by the Trust at the prevailing market value. Ian Crabb has also purchased Shares in the market towards his shareholding guideline and will make further purchases during the course of 2019 using 33.3% of his net of tax 2018 bonus. 98 c115055_LSL.indb 99 99 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Directors’ Remuneration Report All of the interests detailed above are beneficial. Apart from the interests disclosed above no Directors held interests at any time in the year in the Share capital of any other LSL company. There have been no changes in the interests of any Director between 1st January 2019 and the date of this Report other than the purchases of Shares by Ian Crabb (220 Shares), Adam Castleton (220 Shares) and Helen Buck (220 Shares) as participants of LSL’s SIP/BAYE scheme. These Shares were purchased by the Trust at the prevailing market rate. No Director has or has had any interest, direct or indirect, in any transaction, contract or arrangement (excluding service agreements), which is or was unusual in its nature or conditions or significant to the business of the Group during the current or immediately preceding financial year. Performance graph and table The following graph shows the value, up to the 31st December 2018, of £100 invested in LSL compared with the value of £100 invested in both the FTSE Small Cap (excluding investment trusts) Index and the FTSE 250 (excluding investment trusts) Index on 31st December 2008. The FTSE 250 Index has been chosen for consistency with prior years and the FTSE Small Cap Index because LSL is a constituent of the FTSE Small Cap Index. During the period LSL has outperformed both indices. Total Shareholder return Source: Thomson Reuters Datastream £ e u a V l 800 700 600 500 400 300 200 100 0 Dec-08 Dec-08 Dec-08 Dec-09 Dec-09 Dec-09 Dec-10 Dec-10 Dec-10 Dec-11 Dec-11 Dec-11 Dec-12 Dec-12 Dec-12 Dec-13 Dec-13 Dec-13 Dec-14 Dec-14 Dec-14 Dec-15 Dec-15 Dec-15 Dec-16 Dec-16 Dec-16 Dec-17 Dec-17 Dec-17 Dec-18 Dec-18 Dec-18 LSL Property Services plc FTSE 250 Index (excluding investment trusts) FTSE Small Cap Index (excluding investment trusts) Group Chief Executive Officer’s total remuneration The total remuneration figures for the role of Group Chief Executive Officer during each of the last ten financial years are shown in the table below. The total remuneration figure includes the annual bonus based on that year’s performance and share awards based on three year performance periods ending in/just after the relevant year. The annual bonus pay-out and share vesting level as a percentage of the maximum opportunity are also shown for each of these years. Simon Embley (to 9th September 2013) Ian Crabb (from 9th September 2013) Year ending in 2009 2010 2011 2012 2013 2013 2014 2015 2016 2017 2018 £373,754 £517,716 £308,747 £525,018 £500,8621 £119,522 £571,500 £852,869 £499,000 £835,120 £774,629 Total remuneration Annual bonus 100% 97.5% 9.6% LTIP vesting N/A N/A N/A 60% 55% 91.7% 0% N/A N/A 54% N/A 93.3% 16% 66.81% 0% 97% 0% 79.8% 0% 100 c115055_LSL.indb 100 22/03/2019 19:04 101 Notes to Group Chief Executive Officer’s total remuneration: 1. The total remuneration disclosed for the year ended 31st December 2013 is Simon Embley’s total remuneration as Group Chief Executive Officer to 9th September 2013 when he ceased being Group Chief Executive Officer and became Deputy Chairman on 9th September 2013, prior to becoming Non Executive Chairman on the 1st January 2015. Percentage change in Group Chief Executive Officer’s remuneration The table below shows the percentage change in the Group Chief Executive Officer’s salary, benefits and annual bonus between the financial years ending 31st December 2017 and 2018, compared to that of the total remuneration for all employees of the Group for each of these elements of pay. Basic salary change Benefits change Bonus change2 Group Chief Executive Officer +1.5% All employees1 +1.5% Average number of employees1 156 Nil Nil -16.5% -38.8% Notes on percentage change in Group Chief Executive Officer’s remuneration: 1. Refers to a subset of employees who received an annual bonus. 2. The bonus change for Ian Crabb represents a decrease from £393,820 (97% of salary) in 2017 to £328,962 (79.8% of salary) in 2018, reflecting the performance of the Group in both years. Group Chief Executive Officer to Employee Pay Ratio (The Companies (Miscellaneous Reporting) Regulations 2018) (2018 Reporting Regulations) In line with 2018 Reporting Regulations the table below discloses the ratio between LSL’s Group Chief Executive Officer’s remuneration and the wider LSL workforce in 2018. The Remuneration Committee recognises that whilst the new regulations do not apply to LSL’s reporting until 1st January 2019 (requiring reporting in the Annual Report and Accounts 2019), LSL has chosen early adoption with respect to this aspect of the 2018 Reporting Regulations, which is in line with the recommendations from a number of Shareholder representatives and proxy-voting bodies. Financial Year 2018 Method Option A 25th percentile pay ratio Median pay ratio 75th percentile pay ratio 42.4 : 1 30.3 : 1 18.2 : 1 Disclosure of employee data used to calculate the ratios; 25th percentile Total pay and benefits of employees £18,277 Basic salary of employees £15,269 Median £25,600 £19,368 75th percentile £42,590 £26,390 LSL has chosen Option A (which provides a comparison of the Group’s full time equivalent total remuneration for all UK employees against the LSL Group Chief Executive Officer for the 2018 financial year) as the most appropriate methodology to report the ratios, in line with the recommendation from the UK Governments Department for Business, Energy and Industrial Strategy and a number of Shareholder representatives and proxy-voting bodies. This is also considered the most statistically accurate methodology. The ratio above includes all UK based employees who were employed in any part of the LSL Group as at 31st December 2018. The employee remuneration data includes the full time equivalent data in respect of; basic pay, bonus, commission, taxable benefits, share- based remuneration and pension benefits, so as to provide a comparable figure to the LSL Group Chief Executive Officer’s single figure total remuneration which is reported in the Directors’ Remuneration table on page 92. In calculating the bonus and commission elements for employees LSL has used the bonus and commission paid to employees during 2018. In some instances employees receive bonus or commission payments in arrears, however due to a number of these elements (for example year end annual bonuses) not being finalised at the time of writing, this Report was written with these elements having not been reapportioned to the relevant financial year. In line with the legislation LSL discloses this variation in methodology; however it considers that this approach provides a similar outcome to if 2018 year-end bonuses had been included. As at 31st December 2018 LSL employed over 5,000 employees in a wide variety of different roles within its various businesses. The reward policies and practices for our employees follows those set for the Executive Directors, as detailed on page 81 of this Report. The Remuneration Committee also has responsibility for setting the remuneration of the senior Management Teams within the LSL Group and reviews and monitors the Group’s wider remuneration policies and practices. 100 c115055_LSL.indb 101 101 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Directors’ Remuneration Report The Remuneration Committee believes the remuneration and ratio presented above is representative of the Group Chief Executive Officer’s responsibilities and contribution to the Group. The Remuneration Committee will closely monitor any changes in the ratio during 2019 and will provide appropriate commentary on any change in the Annual Report and Accounts 2019. Relative importance of spend on pay The following table shows LSL’s actual spend on pay (for all employees) relative to dividends paid and profit earned: 2018 (£m) 2017 (£m) Change (%) Staff costs 1 Dividends (excluding any special dividend) Profit after tax Adjusted profit after tax 2 203.1 11.2 17.9 27.9 186.3 11.6 33.4 29.1 9.0 (3.5) (46.4) (4.1) 1 See Note 13 to the Financial Statements for calculation of staff costs. 2 See Note 10 to the Financial Statements. Statement of Shareholder voting The Directors’ Annual Statement and Report on Remuneration and for the financial year ending 31st December 2017 was presented to Shareholders at the 2018 AGM which was held on 26th April 2018. The voting outcomes were as follows: Votes cast in favour Votes cast against Total votes cast Total votes withheld Remuneration Committee Annual Statement and Annual Report on Directors’ Remuneration Policy, effective from Remuneration 88,954,098 18,097 88,972,195 21,220 99.98% 0.02% 100% - 1st January 2017 81,542,452 181,004 81,723,456 8,034 99.78% 0.22% 100% - Role and membership Details of the Remuneration Committee’s composition and responsibilities are set out in the Corporate Governance Report at page 62 of this Report. During 2018 the Remuneration Committee was chaired by Bill Shannon and its other members were Kumsal Bayazit Besson and David Stewart. Kumsal Bayazit Besson will retire from the Remuneration Committee at the 2019 AGM and Darrell Evans joined the Remuneration Committee on 28th February 2019. The terms of reference of the Remuneration Committee are available from the Company Secretary or LSL’s website. Committee’s advisers The Remuneration Committee took independent advice during the year from Korn Ferry on matters relating to Executive Director and senior Managers’ remuneration. No other services are provided to the Group by Korn Ferry. Korn Ferry were selected and appointed by the Remuneration Committee and provided advice to the Remuneration Committee in relation to the assessment of TSR performance for the LTIP and benchmarking of the Executive Director roles. Korn Ferry also provided advice to the Remuneration Committee in relation to the Shareholder consultation and the disclosures required in this Report. Their fees (which are based on an hourly rate) charged for 2018 were £25,235 (ex VAT). Korn Ferry are signatories to the Remuneration Consultants’ Code of Conduct and have confirmed to the Remuneration Committee that it adheres in all respects to the terms of this code. The Remuneration Committee considers their advice to be independent and objective. The Directors’ Remuneration Report is approved by and signed on behalf of the Board of Directors Bill Shannon Chairman of the Remuneration Committee 5th March 2019 102 c115055_LSL.indb 102 22/03/2019 19:04 103 Financial Statements In this section 104 Independent Auditor’s Report to the Members of LSL Property Services plc Group Income Statement 114 115 Group Statement of Comprehensive Income 116 Group Balance Sheet Group Statement of Cash-Flows 117 118 Group Statement of Changes in Equity 119 Notes to the Group Financial Statements 170 Statement of Directors’ Responsibilities in Relation to the Parent Company Financial Statements 171 Parent Company Balance Sheet 172 Parent Company Statement of Cash-Flows 173 Parent Company Statement of Changes in 174 Equity Notes to the Parent Company Financial Statements 102 c115055_LSL.indb 103 103 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Independent Auditor’s Report for the year ended 31st December 2018 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF LSL PROPERTY SERVICES PLC Opinion In our opinion: • LSL Property Services plc’s Group financial statements and parent company financial statements (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 31 December 2018 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the Group financial statements, Article 4 of the IAS Regulation. We have audited the financial statements of LSL Property Services plc, which comprise: Group Parent company Group Income Statement Parent company Balance Sheet as at 31 December 2018 Group Statement of Comprehensive Income Parent company Statement of Cash-Flows Group Balance Sheet as at 31 December 2018 Parent company Statement of Changes in Equity Group Statement of Cash-Flows Related notes 1 to 19 to the parent company financial statements including a summary of significant accounting policies Group Statement of Changes in Equity Related notes 1 to 36 to the Group 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 and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. We are independent of the Group and 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 set out on pages 27 to 34 that describe the principal risks and explain how they are being managed or mitigated; • the directors’ confirmation set out on page 29 in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; • the directors’ statement set out on page 50 in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; 104 104 c115055_LSL.indb 104 22/03/2019 19:04 105 105 • whether the directors’ statement in relation 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 set out on page 27 in the annual report as to how they have assessed the prospects of the entity, 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 entity 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. Overview of our audit approach Key audit matters • Inappropriate recognition of revenue (including valuation of lapse provision) • Inappropriate valuation of professional indemnity provision • Inappropriate valuation of goodwill • Inappropriate valuation of contingent consideration liabilities • Inappropriate valuation of equity investment in Yopa Property Ltd (‘Yopa’) Audit scope • We performed an audit of the complete financial information of seven components and audit procedures on specific balances for a further five components. • The components where we performed full or specific audit procedures accounted for 92% of profit before tax, 97% of revenue and 99% of total assets. Materiality • Overall Group materiality of £1.2m which represents 5% of profit before tax. 104 104 c115055_LSL.indb 105 105 105 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Independent Auditor’s Report continued. for the year ended 31st December 2018 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. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters. Key observations communicated to the Audit Committee Based on the work we performed, we did not identify any evidence of material misstatement in the revenue recognised in the year nor in the valuation of the provision for lapsed policies at 31 December 2018. Risk Our response to the risk Inappropriate recognition of revenue (including valuation of lapse provision). At each full scope audit location with material revenue streams: Refer to the Audit & Risk Committee Report (page 65); Accounting policies (page 127); and Note 3 of the Group financial statements. The Group has reported revenues of £324.6m (2017: £311.5m). We focused on revenue recognition because there could be bias or error in the timing of transactions. There is also judgement in the measurement of the value of commission income that will be clawed back. We identified the following specific risk of fraud and error in respect of improper revenue recognition given the nature of the Group’s services as follows: • Inappropriate cut-off of revenue at period end; • Inappropriate measurement of the reduction to revenue recorded for expected clawback of commissions on lapsed insurance policies. There is no change in risk profile in the current year. • We performed walkthroughs of each significant class of revenue transactions and assessed the design effectiveness of key controls; • We performed cut off testing on transactions above a testing threshold falling either side of the Balance Sheet date; • We performed other substantive, transactional testing and data analysis procedures to assess the recognition of revenue throughout the year. We performed testing over full populations of transactions using data analysis. Data analysis includes the assessment of the revenue transaction flow. At each full scope audit location that has a significant revenue stream (six components), we performed the audit procedures set out above which covered 87% of the Group’s revenue. We also performed the walkthrough and cut off testing procedures above, as specified procedures at two components which covered a further 10% of the Group’s revenue. For the lapse provision estimate we performed the following at each full scope and specific scope location: • We tested the underlying calculations for arithmetical accuracy; • We tested the integrity of the data which underpinned management’s assumptions; • We reviewed key contractual terms, confirming management’s assessment of the point of recognition of revenue; We also performed review procedures in seven locations which covered a further 3% of the Group’s revenue. This consisted of analytical procedures over material movements in the Income Statement and Balance Sheet 106 106 c115055_LSL.indb 106 22/03/2019 19:04 107 107 Key observations communicated to the Audit Committee Based on our procedures we believe that the estimate for Professional Indemnity liabilities is stated in accordance with IAS 37 and the estimate is within an acceptable range. We have concluded that the provision release of £2.2m recorded as an exceptional item is appropriate. Risk Valuation of professional indemnity provision Refer to the Audit & Risk Committee Report (page 65); Accounting policies (page 126); and Note 24 of the Group financial statements. We focused on this area due to the size of the balance of £12.4m (2017: £15.9m) and the sensitivity of the valuation to judgements and estimation made by management. In particular, the Group has historically experienced a high level of claims relating to survey valuation work performed during the 2004 to 2008 period, this work continues to result in claims being made against the Group. In the current year, a release of the provision has generated a £2.2m gain recognised in the Income Statement as an exceptional item. There is no change in risk profile in the current year Our response to the risk We performed the following procedures across one full scope and two specific scope locations providing full coverage of the professional indemnity provision: • We performed walkthroughs of each element of the provision and assessed the design effectiveness of key controls; • We re-performed management’s calculations, with reference to source documentation. This includes testing the completeness of the database used to track claims as well as the accuracy of the data included; • We compared these calculations to our expectations which are based on changes in the profile of claims and the settlements in the year, investigating and corroborating any variances above our testing threshold; • We corroborated to third party evidence, material assumptions in relation to the incidence of claims, the propensity for claims to result in financial loss and the resultant loss per claim used by management and verified that these were appropriate; • We considered the current level of claims and the historic profile of claims to corroborate management’s assumptions relating to how the level of claims will change over time, thereby assessing if the range of possible outcomes is within acceptable limits; • We traced a sample of payments for settled claims to bank statements and compared the post year end settlements against management’s estimates in order to assess management’s accuracy in estimating claim costs; • We inquired with legal counsel regarding material claims, to understand the current legal assessment of each case; • We reviewed the disclosures in respect of the nature and movements of the provision included within the Financial Statements for completeness and compliance with IAS 37. In addition, we reviewed the disclosure required by IAS 1 of the sensitivity of the carrying amount of the provision to changes in key estimates. 106 106 c115055_LSL.indb 107 107 107 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Key observations communicated to the Audit Committee Based on the results of our work, we agree with management’s conclusion that no impairment of goodwill is required at 31 December 2018. Because for one CGU, a reasonably possible change in assumptions would result in an impairment, disclosure of this sensitivity been made in Note 15 of the Group financial statements. We are satisfied that this is appropriate. Independent Auditor’s Report continued. for the year ended 31st December 2018 Risk Our response to the risk Inappropriate valuation of goodwill Refer to the Audit & Risk Committee Report (page 65); Accounting policies (page 123); and Note 15 of the Group financial statements. The carrying value of goodwill on the Group Balance Sheet is £159.7m (2017: £151.9m). The Director’s assessment of the ‘value in use’ of the Group’s Cash Generating Units (“CGUs”) involves judgement about the future performance of the business and the discount rates applied to future cash flow forecasts. We focused on this area in 2018 due to the increase in estimation uncertainty in forecasts given the present condition of the housing market. There is no change in the overall risk profile of this matter. We challenged management’s assumptions used in its models for assessing the recoverability of the carrying value of goodwill. We focused on the appropriateness of the CGU identification, the methodology applied to estimate the value in use, discount rates and forecast cash flows. Specifically: • We have assessed that the CGUs identified are the lowest level at which management monitors Goodwill; • We tested the methodology applied in the value in use calculation as compared to the requirements of IAS 36, Impairment of Assets, and the mathematical accuracy of management’s model; • We obtained an understanding of, and assessed the basis for, key underlying assumptions for the three year forecasts; • We confirmed that the cash flow forecasts used in the valuation are consistent with information presented to the Board and have evaluated the appropriateness of the use of these forecasts in light of the historical accuracy of management’s forecasts; • For the four CGUs with the largest Goodwill balances or the lowest headroom, we challenged management on its cash flow forecasts and the implied growth rates for 2019 and beyond by considering evidence available that supported or contradicted these assumptions; • The discount rates and long-term growth rates applied within the model were assessed by an EY business valuation specialist, including comparison to economic and industry forecasts where appropriate; • For all CGUs, we performed sensitivity analyses by stress testing key assumptions in the model with downside scenarios to understand the parameters that, should they arise, could lead to a different conclusion in respect of the carrying value of goodwill. We considered the appropriateness of the related disclosures provided in Note 15 of the Group financial statements. 108 108 c115055_LSL.indb 108 22/03/2019 19:04 109 109 Key observations communicated to the Audit Committee Based on the results of our work, we conclude that the contingent consideration liabilities are calculated appropriately. We conclude that the equity investment in Yopa has been appropriately valued at 31 December 2018 and that the £12.2m write down has been appropriately presented in Other Comprehensive Income. Risk Our response to the risk Inappropriate valuation of contingent consideration liabilities Refer to the Audit & Risk Committee Report (page 65); Accounting policies (page 123); and Note 23 of the Group financial statements. The Group Balance Sheet contains a £15.0m (2017: £9.1m) provision for contingent consideration that arose from acquisitions in previous periods. We have focused on this because it is subject to estimation uncertainty. There is no change in the risk profile of contingent consideration in the current year. We have performed the following procedures across four full scope locations that have contingent consideration balances that are above our testing threshold: • We have confirmed that the cash flow forecasts used in the measurement of the liability are consistent with information presented to the Board and have evaluated the appropriateness of the use of these forecasts in light of the historical accuracy of management’s forecasts; • We tested the methodology applied in the calculations and the mathematical accuracy of management’s model; • We traced a sample of settlement payments made in the year to bank statements, to confirm that the relevant earn out obligations had been extinguished; • We confirmed the appropriateness of the discount rate used in calculating the liability by considering the risks of the cash flows and management’s application of IFRS 13. Inappropriate valuation of the Group’s investment in Yopa Property Ltd (‘Yopa’) Refer to the Audit & Risk Committee Report (page 65); Accounting policies (page 126); and Note 17 of the Group financial statements. The Group holds a 14.7% equity stake in Yopa. This is measured at fair value, which is subject to estimation uncertainty. In order to assess the valuation of the investment as at 31 December 2018: • We obtained the management accounts and cash flow projections produced by Yopa; • We discussed the current financial performance of Yopa with LSL management including the status of fundraising activities; • We discussed the valuation methodology We focused on this because of the estimation uncertainty. adopted by management with EY business valuation specialists; In 2018, the Group wrote the asset down to £7.8m from £20.0m. In light of recent trading and general market conditions, this estimate contains a higher degree of subjectivity, therefore we have presented this as a key audit matter in 2018. • We considered the appropriateness of the related disclosures provided in Note 17 of the Group financial statements; These key audit matters are consistent with those identified in the prior year with the exception of the inappropriate valuation of the Group’s investment in Yopa which has been included in this report. This is because of the level of judgement required in assessing the impairment. 108 108 c115055_LSL.indb 109 109 109 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Independent Auditor’s Report continued. for the year ended 31st December 2018 An overview of the scope of our audit Tailoring the scope Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the Group and effectiveness of Group-wide controls, changes in the business environment and other factors such as recent Internal audit results when assessing the level of work to be performed at each entity. In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, of the 28 reporting components of the Group, we selected 20 components which represent the principal business units within the Group. Of the 20 components selected, we performed an audit of the complete financial information of seven components (“full scope components”) which were selected based on their size or risk characteristics. For a further five components (“specific scope components”), we performed audit procedures on specific accounts within that component that we considered had the potential for the greatest impact on the significant accounts in the financial statements either because of the size of these accounts or their risk profile. Of the remaining eight reporting components, audit procedures were undertaken as set out in Note 2 below to respond to any potential risks of material misstatement to the Group financial statements. The charts below illustrate the coverage obtained from the work performed by our audit teams. Reporting components Full scope Specific scope Full and specific scope coverage Remaining components Total Notes 2018 Number % Group profit before tax % Group revenue See note Number 7 5 12 8 20 69.8 21.6 91.4 8.6 100 86.7 10.0 96.7 3.3 100 1 2 6 5 11 7 18 2017 % Group adjusted profit before tax 70.6 17.3 87.9 12.1 100 % Group revenue 90 7 97 3 100 1. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant risks for the Group audit. 2. Of the remaining eight reporting components that together represent 8.6% of the group’s adjusted profit before tax, none are individually greater than 4% of the Group’s adjusted profit before tax. For these components, we performed other procedures, including analytical review and testing of consolidation journals and intercompany eliminations to respond to any potential risks of material misstatement to the Group financial statements. Changes from the prior year One component, acquired in 2016, has been designated as full scope in 2018 (2017: specific scope) on the basis that its contribution to Group profit before tax has now increased above the threshold which would warrant inclusion within the full scope category. Involvement with component teams All work performed for the purposes of the audit was undertaken by the Group audit team. The Senior Statutory Auditor visited all full scope component locations during the year. Our application of materiality We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion. Materiality The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures. We determined materiality for the Group to be £1.2 million (2017: £1.6 million), which is 5% (2017: 5%) of profit before tax (2017: profit before tax, excluding the gain on disposal of investment in GPEA). We believe that profit before tax provides us with the most relevant measure of recurring Group profitability. We determined materiality for the parent company to be £1.1 million (2017: £1.2 million), which is 1% (2017: 1%) of total equity. 110 110 c115055_LSL.indb 110 22/03/2019 19:04 111 111 Performance materiality The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance materiality was 50% (2017: 50%) of our planning materiality, namely £0.6m (2017: £0.8m). We have set performance materiality at this percentage to ensure that total uncorrected and undetected audit differences in all accounts did not exceed our materiality level of £1.2m (2016: £1.6m). Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was £0.1m to £0.4m (2017: £0.1m to £0.4m). Reporting threshold An amount below which identified misstatements are considered as being clearly trivial. We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £0.1m (2017: £0.1m), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion. Other information The other information comprises the information included in the annual report as set out on the Financial highlights pages and pages 2 to 103, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this 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 set out on page 51 – the statement given 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 set out on page 65 – 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 set out on page 53 – 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. 110 110 c115055_LSL.indb 111 111 111 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Independent Auditor’s Report continued. for the year ended 31st December 2018 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 • the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report 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 directors’ responsibilities statement set out on page 47, 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 and 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. Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud The objectives of our audit, in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. Our approach was as follows: • We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most significant frameworks which are directly relevant to specific assertions in the financial statements are those that relate to the reporting framework (IFRS, the Companies Act 2006 and UK Corporate Governance Code) and the relevant tax compliance regulations in the UK. • We understood how the Group is complying with those frameworks by making enquiries of management, Internal Audit, those responsible for legal and compliance procedures and the Company Secretary. We corroborated our enquiries through our review of board minutes and papers provided to the Audit & Risk Committee. 112 112 c115055_LSL.indb 112 22/03/2019 19:04 113 113 • We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur, by meeting with management from various parts of the business to understand where it considered there was a susceptibility to fraud. We also considered performance targets and their propensity to influence efforts made by management to manage earnings. We considered the programmes and controls that the Group has established to address risks identified, or that otherwise prevent, deter and detect fraud; and how senior management monitors those programmes and controls. Where the risk was considered to be higher, we performed audit procedures to address each identified fraud risk. These procedures included testing manual journals and were designed to provide reasonable assurance that the financial statements were free from fraud and error. Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our procedures involved journal entry testing, with a focus on manual consolidation journals, and journals indicating large or unusual transactions based on our understanding of the business; enquiries of Legal Counsel, Group management, Internal Audit, subsidiary Management at all full and specific scope components; and focused testing, as referred to in the key audit matters section above. In addition, we completed procedures to conclude on the compliance of the disclosures in the Annual Report and Accounts with the requirements of the relevant accounting standards, UK legislation and the UK Corporate Governance Code 2016. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Other matters we are required to address We were reappointed by the company on 26 April 2018 to audit the financial statements for the year ending 31 December 2018 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments is 18 years, covering the years ending 31 December 2001 to 31 December 2018. 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 the audit. The audit opinion is consistent with the additional report to the Audit Committee. Use of our report This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Mark Morritt (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor Leeds 5 March 2019 Notes: 1. The maintenance and integrity of the LSL Property Services plc web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site. 2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 112 112 c115055_LSL.indb 113 113 113 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Group Income Statement for the year ended 31st December 2018 Group Revenue Employee and subcontractor costs Establishment costs Depreciation on property, plant and equipment Other operating costs Total operating expenses Other operating income Gain on sale of property, plant and equipment Income from joint ventures and associates Group Underlying Operating Profit Share-based payments Amortisation of intangible assets Exceptional gains Exceptional costs Contingent consideration Group operating profit Finance costs Net financial costs Profit before tax Taxation charge Profit for the year Attributable to – Owners of the parent – Non-controlling interest Note 3 13 16 3 18 13 15 7 7 23 5 6 14 2018 £’000 2017 £’000 324,640 311,540 (203,095) (186,307) (20,614) (5,674) (60,211) (19,057) (5,216) (66,269) (289,594) (276,849) 557 34 259 555 668 1,583 35,896 37,497 (349) (5,301) 2,188 (5,234) (1,783) (47) (4,083) 9,337 – (654) 25,417 42,050 (2,333) (2,333) 23,084 (5,201) (1,952) (1,952) 40,098 (6,686) 17,883 33,412 17,883 33,414 – (2) Earnings per Share expressed in pence per Share: Basic Diluted 10 10 17.4 17.3 32.6 32.4 114 114 c115055_LSL.indb 114 22/03/2019 19:04 115 115 Group Statement of Comprehensive Income for the year ended 31st December 2018 Profit for the year Items not to be reclassified to profit and loss in subsequent periods: Revaluation of financial assets not recycled through income statement Items to be reclassified to profit and loss in subsequent periods: Reclassification adjustments for disposal of financial assets Income tax effect Revaluation of financial assets recycled through income statement Income tax effect Net other comprehensive (loss): Note 17 17 14 17 14 2018 £’000 2017 £’000 17,883 33,412 (12,200) (12,200) – – – – – (12,200) – – (5,593) 951 1,885 (320) (3,077) (3,077) Total other comprehensive (loss) for the year, net of tax (12,200) (3,077) Total comprehensive income for the year, net of tax Attributable to – Owners of the parent – Non-controlling interest 5,683 30,335 5,683 – 30,337 (2) 114 114 c115055_LSL.indb 115 115 115 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Group Balance Sheet as at 31st December 2018 Company no 05114014 Non-current assets Goodwill Other intangible assets Property, plant and equipment Financial assets Investments in joint ventures and associates Contract assets Total non-current assets Current assets Trade and other receivables Contract assets Cash and cash equivalents Total current assets Total assets Current liabilities Financial liabilities Trade and other payables Current tax liabilities Provisions for liabilities Total current liabilities Non-current liabilities Financial liabilities Deferred tax liability Provisions for liabilities Total non-current liabilities Total Liabilities Net assets Equity Share capital Share premium account Share-based payment reserve Shares held by EBT Fair value reserve Retained earnings Equity attributable to owners of parent Non-controlling interests Total equity Note 2018 £’000 2017 £’000 15 15 16 17 18 19 20 19 21 23 22 14 24 23 14 24 26 27 27 2,27 27 159,723 151,901 31,960 16,866 11,566 13,230 959 29,729 17,763 25,282 9,556 – 234,304 234,231 38,650 262 2,405 41,317 275,621 31,357 – – 31,357 265,588 (10,455) (63,980) (2,688) (6,616) (6,454) (53,418) (3,662) (2,850) (83,739) (66,384) (41,156) (2,189) (5,944) (49,289) (34,654) (2,698) (13,276) (50,628) (133,028) (117,012) 142,593 148,576 208 5,629 4,129 (5,261) (11,727) 149,615 142,593 – 208 5,629 3,802 (5,317) 494 143,578 148,394 182 142,593 148,576 The Financial Statements were approved by and signed on behalf of the Board by: Ian Crabb Group Chief Executive Officer 5th March 2019 Adam Castleton Group Chief Financial Officer 5th March 2019 116 116 c115055_LSL.indb 116 22/03/2019 19:04 117 117 Group Statement of Cash-Flows for the year ended 31st December 2018 Profit before tax Adjustments for: Exceptional operating items and contingent consideration Depreciation of tangible assets Amortisation of intangible assets Share-based payments (Profit) on disposal of fixed assets (Profit) from joint ventures Finance costs Dividend income/rebates received via non-cash consideration Realisation of non-cash consideration received for operating activities Operating cash-flows before movements in working capital Movements in working capital (Increase)/decrease in trade and other receivables (Decrease)/increase in trade and other payables Decrease in provisions Cash generated from operations Interest paid Income taxes paid Exceptional costs paid Net cash generated from operating activities Cash-flows used in investing activities Cash acquired on purchase of subsidiary undertaking Acquisitions of subsidiaries and other businesses Payment of contingent consideration Investment in joint ventures and associates Investment in financial assets Cash received on sale of financial assets Purchase of property, plant and equipment and intangible assets Proceeds from sale of property, plant and equipment Net cash (expended) on investing activities Cash-flows used in financing activities Drawdown of loans Refinance costs Repayment of loan notes Payment of deferred consideration Proceeds from exercise of share options Dividends paid Net cash expended in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the end of the year Note 7 16 15 13 8 18 6 29 29 18 17 17 15,16 16 12 23 11 2018 £’000 2017 £’000 23,084 40,098 4,829 5,674 5,301 349 (34) (259) 2,333 – 1,529 42,806 (3,815) (111) (3,608) (7,534) 35,272 (1,359) (6,875) (3,310) 23,728 6,944 (7,732) (1,392) (4,100) (13) – (5,877) 156 (7,640) 5,216 4,083 47 (668) (1,583) 1,952 (1,503) – 40,002 1,695 5,261 (5,440) 1,516 41,518 (1,268) (11,113) – 29,137 – – (2,175) – (20,315) 3,024 (5,489) 1,457 (12,014) (23,498) 4,521 (250) (2,000) – 20 (11,600) (9,309) 2,405 2,405 9,723 – – (4,790) – (10,572) (5,639) – – 117 117 c115055_LSL.indb 117 22/03/2019 19:04 116 116 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Group Statement of Changes in Equity for the year ended 31st December 2018 Year ended 31st December 2018 Share premium account £’000 Share- based payment reserve £’000 Share capital £’000 Shares held by EBT1 £’000 Fair value reserve £’000 Retained earnings £’000 Total equity £’000 Non- controlling interest £’000 Total £’000 At 1st January 2018 208 5,629 3,802 (5,317) 494 143,578 148,394 182 148,576 Adjustment on initial application of IFRS 15 Adjustment on initial application of IFRS 9 – – – – – – – – – (434) (434) (21) 21 – – – (434) – Revised opening balance 208 5,629 3,802 (5,317) 473 143,165 147,960 182 148,142 Other comprehensive income for the year Revaluation of financial assets Profit for the year Total comprehensive (loss)/income for the year Exercise of options Share-based payments Acquisition of minority interest Dividend payment – – – – – – – – – – – – – – – – – (22) 349 – – – – – 56 – – – (12,200) – (12,200) – 17,883 17,883 (12,200) 17,883 5,683 – – – – (15) – 182 19 349 182 (11,600) (11,600) At 31st December 2018 208 5,629 4,129 (5,261) (11,727) 149,615 142,593 – – – – – (182) (12,200) 17,883 5,683 19 349 – – (11,600) – 142,593 During the year ended 31st December 2018, the Trust acquired nil LSL Shares. During the period 15,966 share options were exercised relating to LSL’s various share option schemes resulting in the Shares being sold by the Trust. LSL received £20,000 on exercise of these options. 1 Treasury shares have been renamed to Shares held by EBT. Year ended 31st December 2017 Share premium account £’000 Share- based payment reserve £’000 Share capital £’000 Treasury shares £’000 Fair value reserve £’000 Retained earnings £’000 Total equity £’000 Non- controlling interests £’000 Total £’000 At 1st January 2017 208 5,629 4,303 (5,368) 3,571 120,239 128,582 184 128,766 Disposal of financial assets (net of tax) Revaluation of financial assets (net of tax) Other comprehensive income for the year Profit for the year Total comprehensive income for the year Exercise of options Share-based payments Dividend payment – – – – – – – – – – – – – – – – – – – – – (46) (455) – – – – – – 51 – – (4,642) 1,565 (3,077) – – – (4,642) 1,565 (3,077) – – – (4,642) 1,565 (3,077) – 33,414 33,414 (2) 33,412 (3,077) 33,414 30,337 (2) 30,335 – – – (5) 502 – 47 (10,572) (10,572) – – – – 47 (10,572) At 31st December 2017 208 5,629 3,802 (5,317) 494 143,578 148,394 182 148,576 During the year ended 31st December 2017, the Trust acquired nil LSL Shares. During the period 14,661 share options were exercised relating to LSL’s various share option schemes resulting in the Shares being sold by the Trust. LSL received nil on exercise of these options. 118118 c115055_LSL.indb 118 22/03/2019 19:04 Notes to the Group Financial Statements for the year ended 31st December 2018 1. Authorisation of Financial Statements and statement of compliance with IFRS The Group Financial Statements of LSL and its subsidiaries for the year ended 31st December 2018 were authorised for issue by the Board of Directors on 5th March 2019 and the balance sheet was signed on the Board’s behalf by Ian Crabb, Group Chief Executive Officer and Adam Castleton, Group Chief Financial Officer. LSL is a listed company, in London, incorporated and domiciled in England and the Group operates a network of estate agencies, surveying and valuation and other related businesses. The Group’s Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006. 2. Accounting policies Basis of preparation of financial information The consolidated Financial Statements of the Group have been prepared in accordance with the International FInancial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The Group Financial Statements have been prepared on a going concern basis and on a historical cost basis, except for certain debt and equity financial assets that have been measured at fair value. The accounting policies which follow set out those significant policies which apply in preparing the Financial Statements for the year ended 31st December 2018. The Group’s Financial Statements are presented in pound sterling and all values are rounded to the nearest thousand pounds (£’000) except when otherwise indicated. New standards and interpretations IFRS 15 Revenue from Contracts with Customers IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard introduces a five-step approach to the timing of revenue recognition based on performance obligations in customer contracts. The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The impact of applying IFRS 15 to the Group’s Financial Statement has been reviewed by revenue stream. In doing so, the Management Team have identified revenue relating to management services and rent collection has been affected by the timing difference on revenue recognition. Revenue from management services was previously recognised upfront and is now recognised over time. Rent collection services has now been identified as a separate performance obligation from management services and is recognised at a point in time (upon rental collection). Revenue arising from Residential Sales, Surveying and Valuation Services, Lettings, Asset Management and Financial Services is recognised on completion of the service being provided. Transition The Group has adopted IFRS 15 using the cumulative catch up method (without practical expedients), with the effect of initially applying this standard recognised at the date of initial application (i.e. 1st January 2018) for all contracts. Accordingly, the information presented for 2017 has not been restated – i.e. it is presented, as previously reported, under IAS 18, IAS 11 and related interpretations. c115055_LSL.indb 119 119 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 2. Accounting policies (continued) The following table summarises the impact, of transition to IFRS 15 on retained earnings and non-controlling interest at 1st January 2018. Retained earnings Management services Rent collection Deferred tax asset Impact at 1st January 2018 Impact of adopting IFRS 15 at 1st January 2018 £’000 388 146 (100) 434 The impact of adopting IFRS 15 on the Group’s Financial Statements as at 31st December 2018, is a deferral in revenue of £241,000. IFRS 9 Financial Instruments IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1st January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement, impairment and hedge accounting. IFRS 9 also replaces the “incurred loss” model in IAS 39 with the “expected credit loss” model that applies to trade and other receivables. i. Classification of financial assets As permitted by IFRS 9 the Group has chosen to not restate prior periods. The Group has made the irrevocable election to recognise the change in fair value of all investments other than ZPG Limited through OCI rather than profit and loss. This election was made because the gains or losses arising from the change in fair value of these investments are not directly linked to the trading of the Group. Changes in the fair value of ZPG Limited will be recognised through the profit and loss. For all other financial assets and liabilities held by the Group the measurement category has not changed under IFRS 9. Impairment of financial assets ii. The chosen method of recognising the expected credit loss across the Group is the simplified approach allowing a provision matrix to be used, which is based on the expected credit life of trade receivables and historic default rates. From applying this model there is no material impact to the consolidated Group Financial Statements, due to the short-term nature of Group’s trade receivables. Judgements and estimates The preparation of financial information in conformity with IFRS as adopted by the European Union, requires the Management Team to make judgements, estimates and assumptions that affect the application of policies and reporting amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. • Judgements Areas of judgement that have the most significant effect on the amounts recognised in the consolidated Financial Statements are: Intangible assets The recognition of intangible assets, both on acquisition and those internally generated, is an area of judgement. The Management Team seek to identify any assets that meet the criteria of an intangible asset, namely that it is separately identifiable, the Group has power over the asset and future economic benefits will be derived from the asset. Judgement was exercised to determine that customer relationships for RSC New Homes did not meet the criteria per IAS 38 for recognition of a separate intangible asset. 120 c115055_LSL.indb 120 22/03/2019 19:04 121 2. Accounting policies (continued) Valuation of financial assets The Group owns non-controlling interests in four unlisted entities Yopa, eProp Services, Vibrant Energy Matters and NBC Property Master, in addition to a convertible loan note which is held in Global Property Ventures. In accordance with the accounting standards, these investments are held at fair value and significant judgement is required in assessing this. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. The fair value of equity financial assets that are not traded in the open market are valued in accordance with Level 3 of the fair value hierarchy and the Management Team use all relevant and up to date information (including cash-flow forecasts and financial statements) to arrive at their judgement. Where appropriate a range of potential outcomes is considered in reaching a conclusion. Further details of the methodology used are disclosed in Note 17 to these Financial Statements. A sensitivity calculation which shows the impact of changes in assumption is shown in Note 31. Deferred tax The Group recognises deferred tax assets on all applicable temporary differences where it is probable that future taxable profits will be available for utilisation. This requires the Management Team to make judgements and assumptions regarding the amount of deferred tax that can be recognised based on the magnitude and likelihood of future taxable profits. Deferred tax liabilities are provided for in full. Exceptional items The Group recognises certain items as exceptional where, in the judgement of the Directors, they are required to be disclosed separately due to them being material in size and unusual in nature. This is reviewed in accordance to IAS 1. • Estimates The key assumptions affected by future uncertainty that have significant risks of causing material adjustment to the carrying value of assets and liabilities within the next financial year are: Professional Indemnity (PI) claims Details of the assumptions applied to PI claims areas are disclosed in Notes 7 and 24 to these Financial Statements. A sensitivity calculation which illustrates the impact of different assumptions on the required PI Costs provision is included in Note 24. Lapse Provision Certain subsidiaries sell life assurance products which are cancellable without a notice period, and if cancelled within a set period require that a portion of the commission earned must be repaid. The lapse provision is recognised as a reduction in revenue which is based on historic lapses which have occurred. Valuations in acquisitions The measurement of intangible assets other than goodwill on a business combination involves the estimation of future cash-flows and other inputs relevant to the valuation model being applied. Brands are valued using the royalty relief method. The internally generated software from the acquisition of Personal Touch Financial Services was valued using a discounted cash-flow model. Impairment of intangible assets The Group determines whether indefinite life intangible assets (including goodwill) are impaired on an annual basis and this requires an estimation of the value-in-use of the cash generating units to which the intangible assets are allocated. This involves estimation of future cash-flows and choosing a suitable discount rate (see Note 15 to the Group Financial Statements). Contingent consideration The Group has acquired a number of businesses over recent years. With regard to a number of these businesses, the Group has put and call options to purchase the remaining interest in these businesses at some point in the future. In accordance with the accounting standards, estimates have been made with regard to the future profitability of these acquisitions and a provision for the cost of acquiring these interests has been recognised. The provisions are disclosed in Note 23 to these Financial Statements. A sensitivity calculation which shows the impact of changes in assumption is shown in Note 31 to these Financial Statements. Income tax The Group will pay income taxes based on the tax computations of the subsidiary entities. While the outcome of these tax computations cannot be determined with certainty until the completion of subsidiary accounts, the Management Team’s estimates of income taxes are used to determine the tax charges and provisions carried by the Group. 120 c115055_LSL.indb 121 121 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 2. Accounting policies (continued) Basis of consolidation The consolidated Financial Statements comprise the Financial Statements of the Company and its subsidiaries as at 31st December 2018. Subsidiaries Subsidiaries are consolidated from the date of their acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date such control ceases. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Specifically, the Group controls an entity if, and only if, the Group has: • power over the entity (i.e. existing rights that give it the current ability to direct the relevant activities of the entity); • exposure, or rights, to variable returns from its involvement with the entity; and • the ability to use its power over the entity to affect its returns. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. Non-controlling interests: Non-controlling interests represent the equity in a subsidiary not attributable directly or indirectly to the Parent Company; and is presented within equity in the consolidated balance sheet, separately from equity attributable to owners of the parent. Losses within a subsidiary are attributed to the non-controlling interest even if it results in a deficit balance. Non-GAAP measures/Alternative Performance Measures (APM) In the analysis of the Group’s financial performance, LSL reports a number of APMs that are designed to assist with the understanding of the underlying performance of the Group. The Group seeks to present a measure of underlying performance which is not impacted by the inconsistency in profile of exceptional gains and exceptional costs, contingent consideration, amortisation of intangible assets and share- based payments. These measures are not defined under IFRS and, as a result, do not comply with Generally Accepted Accounting Practice (known as non-GAAP measures) and may not be directly comparable with other companies’ non-GAAP measures. They are not designed to be a substitute for any of the IFRS measures of performance. The principal APMs used within the consolidated Financial Statements and the location of the reconciliations to equivalent IFRS measures are: – Group Underlying Operating Profit (reconciled in Note 5 to these Financial Statements) – Adjusted basic EPS (reconciled in Note 10 to these Financial Statements) – Adjusted diluted EPS (reconciled in Note 10 to these Financial Statements) – Group Adjusted EBITDA (reconciled in Note 5 to these Financial Statements) The amortisation of intangible assets fluctuates due to irregular investments and unknown timing of acquisitions. These costs are not representative of the underlying costs of the business, and are therefore excluded from adjusted earnings. The Directors consider that these adjusted measures give a better and more consistent indication of the Group’s underlying performance; these measures form part of management’s internal financial review and are contained within the monthly management information reports reviewed by the Board. Interest in joint ventures and associates An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. The Group’s investment in its associates and joint ventures are accounted for using the equity method. Under the equity method, the investment in a joint venture or associate is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group’s share of net assets of the joint venture or associate since the acquisition date. Goodwill relating to the joint venture or associate is included in the carrying amount of the investment and is not tested for impairment individually. 122 c115055_LSL.indb 122 22/03/2019 19:04 123 2. Accounting policies (continued) The income statement reflects the Group’s share of the results of operations of the joint venture or associate. In addition, when there has been a change recognised directly in the equity of the joint venture or associate, the Group recognises its share of any changes, when applicable, in the Statement of Changes in Equity. Unrealised gains and losses resulting from transactions between the Group and the joint venture or associate are eliminated to the extent of the interest in the joint venture or associate. The aggregate of the Group’s share of profit or loss of a joint venture or associate is shown on the face of the income statement within Group operating profit, and represents profit or loss after tax and non-controlling interests in the subsidiaries of the joint venture or associate. The Financial Statements of the associate or joint venture are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its joint ventures or associates. At each reporting date, the Group determines whether there is objective evidence that the investment in the joint venture or associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the joint venture or associate and its carrying value. Upon loss of joint control and significant influence over the joint venture or associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the joint venture or associate upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss. Business combinations Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. The choice of measurement of non-controlling interest, either at fair value or at the proportionate share of the acquiree’s identifiable net assets, is determined on a transaction by transaction basis. Acquisition costs incurred are expensed and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions at the acquisition date. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IFRS 9 Financial Instruments, is measured at fair value with the changes in fair value recognised in the income statement in accordance with IFRS 9. Other contingent consideration that is not within the scope of IFRS 9 is measured at fair value at each reporting date with changes in fair value recognised in profit or loss. Where a put and call option is transacted over a non-controlling interest independently of a business combination, the present value of the exercise price of the put and call option is recorded as a liability with a debit to equity. Subsequent movements in the assessment of the exercise price are taken to profit and loss. If the put option lapses, the liability is derecognised with a corresponding adjustment to equity. If the aggregate of the acquisition date fair value of the consideration transferred and the amount recognised for the non-controlling interest (and where the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree) is lower than the fair value of the assets, liabilities and contingent liabilities and the fair value of any pre-existing interest held in the business acquired, the difference is recognised in the income statement. Intangible assets Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests and any previous interest held over the net identifiable assets acquired and liabilities assumed). After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Intangible assets acquired separately are measured on initial recognition at costs. The cost of intangible assets acquired in a business combination is their fair value at their date of initial recognition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. Internally generated intangibles, excluding capitalised development costs, are not capitalised and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred. 122 c115055_LSL.indb 123 123 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 2. Accounting policies (continued) Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the Income Statement when the asset is derecognised. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. Brand names are not amortised as the Directors are of the opinion that they each have an indefinite useful life. This is based on the expectation of the Directors that there is no foreseeable limit to the period over which each of the assets are expected to generate net cash inflows to the businesses and the Directors are confident that trademark registration renewals will be filed at the appropriate time and sufficient investment will be made in terms of marketing and communication to maintain the value inherent in the brands, without incurring significant cost. All brands recognised have been in existence for a number of years and are not considered to be at risk of obsolescence from technical, technological nor commercial change. Whilst operating in competitive markets they have demonstrated that they can continue to operate in the face of such competition and that there is expected to remain an underlying market demand for the services offered. The lives of these brands are not dependent on the useful lives of other assets of the entity. A summary of the policies applied to the Group’s intangible assets is, as follows: Customer contracts: Residential Sales customer contracts – three to ten years Surveying and Valuation Services customer contracts – between three and five years Lettings contracts Order book: Estate Agency pipeline Surveying and Valuation Services pipeline Estate Agency register Others: Franchise agreements In-house software – five years – three months – one week – 12 months – ten years – between three and five years Impairment Intangible assets with indefinite useful lives are not amortised but tested for impairment annually either individually or at the cash generating unit level. The useful life of such intangible assets is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis. The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash generating unit’s fair value less costs to sell and its value in use, and is determined for an individual asset unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash-flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses of continuing operations are recognised in the Income Statement in those expense categories consistent with the function of the impaired asset. For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the asset’s or cash generating unit’s recoverable amount. 124 c115055_LSL.indb 124 22/03/2019 19:04 125 2. Accounting policies (continued) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is provided to write off cost less the estimated residual value of property, plant and equipment by equal annual instalments over their estimated useful economic lives as follows: Office equipment, fixtures and fittings – over three to seven years Computer equipment Motor vehicles – over three to four years – over three to four years Leasehold improvements – over the shorter of the lease term or ten years Freehold and long leasehold property – over 50 years or the lease term whichever is shorter An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the Income Statement when the asset is derecognised. These assets’ residual values, useful lives and methods of depreciation are reviewed at each financial year end, and adjusted prospectively, if appropriate. Dividends Equity dividends are recognised when they become legally payable. In the case of interim dividends to Shareholders, this is when paid. In the case of final dividends, this is when approved by Shareholders at each AGM. Income taxes Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted by the balance sheet date. The Management Team periodically evaluates positions taken in the tax returns with respect to the situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Financial Statements, with the following exceptions: • where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; • in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and • deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting period and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are offset, only if a legally enforceable right exists to set off current tax assets against current tax liabilities, the deferred income taxes relate to the same taxation authority and that authority permits the Group to make a single net payment. Income tax is charged or credited directly to OCI or equity, if it relates to items that are charged or credited in the current or prior periods to OCI or equity respectively. Otherwise income tax is recognised in the Income Statement. 124 c115055_LSL.indb 125 125 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 2. Accounting policies (continued) Share-based payment transactions Equity-settled transactions The equity share option programmes allow Group employees to acquire LSL Shares. The fair value of the options granted is recognised as an employee expense with a corresponding increase in equity in the case of equity-settled schemes. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using the Black Scholes model, taking into account the terms and conditions (including market and non- vesting conditions) upon which the options were granted. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-market vested condition is satisfied, provided that all other performance and/or service conditions are satisfied. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per Share (further details are given in Note 10 to these Financial Statements). Shares held by EBT The Group has an employee share trust (ESOT) and an employee benefit trust (Trust) for the granting of LSL Shares to Executive Directors and selected senior employees. Shares in LSL held by the ESOT and the Trust are treated as treasury shares and presented in the balance sheet as a deduction from equity. No gain or loss is recognised in the Income Statement on the purchase, sale, issue or cancellation of the Group’s own equity instruments. The finance costs and administration costs relating to the ESOT and the Trusts are charged to the Income Statement. Dividends earned on shares held in the ESOT and the Trusts have been waived. The ESOT and Trust Shares are ignored for the purposes of calculating the Group’s EPS. Leases Group as a lessee Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases and rentals payable are charged in the Income Statement on a straight line basis over the lease term. Group as a lessor Assets leased out under operating leases are included in property, plant and equipment and depreciated over their estimated useful lives. Rental income, including the effect of lease incentives, is recognised on a straight line basis over the lease term. Pensions The Group operates a defined contribution pension scheme for employees of all Group companies. The assets of the scheme are invested and managed independently of the finances of the Group. The pension cost charge represents contributions payable in the year. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash-flows at a pre-tax rate that reflects current market assessments of the time value of money and, when appropriate, the risks specific to the liability. Financial instruments Financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. When financial assets are recognised initially, they are measured at fair value, being the transaction price plus, in the case of financial assets not at fair value through profit or loss, directly attributable transaction costs. Financial assets are derecognised when the Group no longer has the rights to cash-flows, the risks and rewards of ownership or control of the asset. Financial liabilities are derecognised when the obligation under the liability is discharged, cancelled or expires. The subsequent measurement of financial assets depends on their classification. 126 c115055_LSL.indb 126 22/03/2019 19:04 127 2. Accounting policies (continued) The Group’s accounting policy for each category of financial instruments is as follows: Financial assets designated at fair value through OCI (equity instruments) Upon initial recognition, the Group can elect to classify irrevocably its equity investments as equity instruments designated at fair value through OCI when they meet the definition of equity under ‘IAS 32 Financial Instruments: Presentation’ and are not held for trading. The classification is determined on an instrument-by-instrument basis. Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognised as other income in the statement of profit or loss when the right of payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI. Equity instruments designated at fair value through OCI are not subject to impairment assessment. Financial assets designated at fair value through profit and loss Gains and losses arising from the changes in the fair value of equity investments are recognised through the profit and loss. Cash and short-term deposits Cash and short-term deposits in the balance sheet and cash-flow statement comprise cash at bank and in hand and short-term deposits with an original maturity period of three months or less. Trade receivables Trade receivables do not carry any interest and are stated at their original invoiced value as reduced by appropriate allowances for estimated irrecoverable amounts. Trade receivables generally have four to seven day payment terms in the Estate Agency businesses and 30 days in the Surveying and Valuation Services business. IFRS 9 replaces the incurred loss model in IAS 39 with the expected credit loss model that applies to trade and receivables. The chosen method of recognising the expected credit loss across Group is the simplified approach allowing a provision matrix to be used, which is based on the expected life of trade receivables and historic default rates. The carrying amount of the receivable is reduced through use of an allowance account. Impaired debts are derecognised when they are assessed as uncollectable. Trade payables Trade payables do not carry any interest and are stated at their original invoice value. Interest-bearing loans and borrowings All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest- bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses arising on repurchase, settlement or otherwise cancellation of liabilities are recognised respectively in finance income and finance costs. Finance costs comprise interest payable on borrowings calculated at the effective interest rate method and recognised on an accruals basis. Borrowing costs are recognised as an expense when incurred. Revenue recognition From 1st January 2018 IFRS 15 replaced IAS 18 and IAS 11 which provided separate revenue recognition models for goods and services and for construction contracts. This standard is based on a single model that distinguishes between promises to a customer that is satisfied at a point in time and those that are satisfied over time. Revenue is recognised when control of a good or service transfers to a customer. The notion of control has replaced the notion of risks and rewards. The focus of IAS 18 and 11 was on risk and rewards with control (that is, managerial control) as an aspect of risk and rewards. IFRS 15 focuses on control although risk and rewards is still an indicator of control. 126 c115055_LSL.indb 127 127 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 2. Accounting policies (continued) Prior comparatives reported under IAS 18 Rendering of services Revenue from the exchange fees in the Residential Sales business is recognised by reference to the legal exchange date of the housing transaction. Revenue from the supply of Surveying and Valuation Services are recognised upon the completion of the professional survey or valuation by the surveyor. Revenue from Lettings, Asset Management and conveyancing services is recognised on completion of the service being provided. Financial Services income Revenue from mortgage procuration fees is recognised by reference to the completion date of the mortgage/re-mortgage on the housing transaction. Revenue from policy sales is recognised by reference to the date that the policy is accepted by the insurer. Interest income Revenue is recognised as interest accrues (using the effective interest method - that is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset). Rental income Rental income including the effect of lease incentives from sub-let properties is recognised on a straight line basis over the lease term. Dividends Revenue is recognised when the Group’s right to receive the payment is established. Current reported under IFRS 15 Rendering of services Revenue from the exchange fees in the Residential Sales business is recognised by reference to the legal exchange date of the housing transaction. Revenue from the supply of Surveying and Valuation Services are recognised upon the completion of the professional survey or valuation by the surveyor, and therefore at a point in time. Revenue from Lettings, Asset Management and conveyancing services is recognised on completion of the service being provided, and therefore at a point in time. Management services relating to Lettings and Asset Management are recognised over time using the time basis approach. The costs incurred from obtaining a contract and payable to the customer are capitalised and amortised into revenue over the contract term. Financial Services income Revenue from mortgage procuration fees is recognised by reference to the completion date of the mortgage/re-mortgage on the housing transaction. Revenue from policy sales is recognised at point in time by reference to the date that the policy is accepted by the insurer. The lapse provision is recognised as a reduction in revenue which is based on historic lapses which have occurred. Lapse provisions are recorded within trade and other payables. Interest income Revenue is recognised at a point in time as interest accrues (using the effective interest method - that is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset). Rental income Rental income including the effect of lease incentives from sub-let properties is recognised at a point in time on a straight line basis over the lease term. Dividends Revenue is recognised when the Group’s right to receive the payment is established. Trade receivables generally have four to seven day payment terms in the Estate Agency businesses and 30 days in the Surveying and Valuation Services business. Obligations for refunds are recognised within the lapse provision. Exceptional items An exceptional item is considered to be non-recurring and unusual in nature. These items are presented within their relevant income statement category, but highlighted separately on the face of the Income Statement. Items that management consider to fall into this category are also disclosed within a Note to the Financial Statements (see Note 7 to the Group Financial Statements). 128 c115055_LSL.indb 128 22/03/2019 19:04 129 2. Accounting policies (continued) Due to the nature and expected infrequency of these items, separate presentation helps provide a better indication of the Group’s underlying business performance. This allows Shareholders to understand better the elements of financial performance in the year, so as to facilitate comparison with prior periods and to assess better trends in financial performance. New standards and interpretations not applied IFRS 16 “Leases” was issued in January 2016 to replace IAS 17 “Leases” and has been endorsed by the EU. The standard is effective for accounting periods beginning on or after 1st January 2019 and will be adopted by the Group on 1st January 2019. IFRS 16 is expected to have an impact on the amounts recognised in the Group’s Financial Statements. On adoption of IFRS 16 the Group will recognise within the balance sheet a right of use asset and lease liability for all applicable leases. Within the Income Statement, rent expenses will be replaced by depreciation and interest expense. This will result in a decrease in operating expenses and an increase in finance costs. The standard will also impact a number of statutory measures such as operating profit and cash generated from operations, and APMs used by the Group. All of the Group’s leases are currently accounted for as operating leases (see Note 25), and the most significant leases, by value, are those for properties. The standard permits either a full retrospective or a modified retrospective approach for the adoption, LSL intends to adopt the standard using the modified retrospective approach which means that the cumulative impact of the adoption will be recognised in retained earnings as of 1st January 2019 and the comparatives will not be restated. LSL currently intends to apply the following practical expedients allowed under IFRS 16: • The right of use asset will be measured at an amount equal to the lease liability at adoption, and initial direct costs incurred when obtaining leases will be excluded from this measurement. • Lease items with low value will not be recognised as right-of-use assets or lease liabilities. Instead, such leases will be treated in a similar way to operating leases under IAS 17, with the lease expense recognised on a straight line basis, or other systematic basis, over the lease term. • Short-term leases will not be recognised as right-of-use assets or lease liabilities, and treated in a similar way to operating leases under IAS 17, with the lease expense recognised on a straight line basis, or other systematic basis, over the lease term. • A single discount rate will be applied to a portfolio of leases with similar characteristics. The Management Team are continuing to assess the impact of the accounting changes that will arise under IFRS 16. 128 c115055_LSL.indb 129 129 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 3. Revenue The nature and effect of initially applying IFRS 15 on the Group’s Financial Statements are disclosed in Note 2 to these Financial Statements. Disaggregation of revenue Set out below is the disaggregation of the Group’s revenue from contracts with customers: Timing of revenue recognition Services transferred at a point in time Services transferred over time Residential Sales exchange £’000 69,854 69,854 – Total revenue from contracts with customers 69,854 2018 Financial Services £’000 Asset Management £’000 87,427 87,427 – 87,427 5,463 3,906 1,557 5,463 Surveying and Valuation Services £’000 69,798 69,798 – Other £’000 Total £’000 15,522 324,640 15,522 287,203 – 37,437 69,798 15,522 324,640 Lettings £’000 76,576 40,696 35,880 76,576 Revenue from services Operating revenue Rental income Other operating income Total revenue Note: 2018 £’000 324,640 324,640 557 557 20171 £’000 311,540 311,540 555 555 325,197 312,095 1 The Group has initially applied IFRS 15 as at 1st January 2018. Under the transition methods chosen, comparative information is not restated. 4. Segment analysis of revenue and operating profit For management purposes, the Group is organised into business units based on their products and services and has two reportable segments as follows: • The Estate Agency and Related Services segment provides services related to the sale and letting of residential properties. It operates a network of high street branches. As part of this process, the Estate Agency Division also provides marketing and arranges conveyancing services. In addition, it provides repossession Asset Management services to a range of lenders. It also arranges mortgages for a number of lenders and arranges pure protection and general insurance policies for a panel of insurance companies via the Estate Agency branches, PRIMIS, Embrace Financial Services, First2Protect, Mortgages First, Insurance First Brokers, Linear Financial Services, Personal Touch Financial Services and RSC New Homes. The Financial Services revenue included within the Estate Agency Division includes two mortgage and insurance distribution networks providing products and services for sale via financial intermediaries. A significant proportion of the results of the Financial Services business are inextricably linked to the Estate Agency business. They have therefore been aggregated with those of the Estate Agency and Related Services segment. • The Surveying and Valuation Services segment provides a valuations and professional surveying service of residential properties to various lenders and individual customers. Each reportable segment has various products and services and the revenue from these products and services are disclosed on pages 19 to 23 under the Business Review section of the Strategic Report. The Management Team monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss which in certain respects, as explained in the table below, is measured differently from operating profit or loss in the Group Financial Statements. Head office costs, Group financing (including finance costs and finance incomes) and income taxes are managed on a Group basis and are not allocated to operating segments. 130 c115055_LSL.indb 130 22/03/2019 19:04 131 4. Segment analysis of revenue and operating profit (continued) Reportable segments The following table presents revenue and profit information regarding the Group’s reportable segments for the financial year ended 31st December 2018 and financial year ended 31st December 2017 respectively. To reflect the increased importance of LSL’s Financial Services businesses, the LSL Board has decided to update the Group segmental reporting effective from 1st January 2019. From 1st January 2019 LSL will report three segments: Estate Agency; Financial Services; and Surveying and Valuation Services. The Financial Services segment will incorporate all LSL’s Financial Services businesses. The Estate Agency segment will primarily incorporate the results from the Estate Agency branch networks (Your Move, Reeds Rains, LSLi and Marsh & Parsons) and Asset Management. The Surveying and Valuation Services segment is unchanged. Year ended 31st December 2018 Income Statement information Segmental revenue Segmental result: – before exceptional costs, contingent consideration, amortisation and share-based payments – after exceptional costs, contingent consideration, amortisation and share-based payments Finance costs Profit before tax Taxation Profit for the year Balance sheet information Segment assets – intangible Segment assets – other Total segment assets Total segment liabilities Net assets/(liabilities) Other segment items Capital expenditure including intangible assets Depreciation Amortisation of intangible assets Exceptional costs Exceptional gains Share of results of joint venture PI Costs provision Onerous leases provision Share-based payment Estate Agency and Related Services £’000 Surveying and Valuation Services £’000 Unallocated £’000 Total £’000 254,842 69,798 – 324,640 20,568 20,426 (5,098) 35,896 11,601 19,022 (5,206) 25,417 (2,333) 23,084 (5,201) 17,883 Estate Agency and Related Services £’000 Surveying and Valuation Services £’000 Unallocated £’000 Total £’000 179,512 68,443 247,955 (64,889) 183,066 4,738 (5,420) (4,897) (1,994) – 259 – (130) (294) 12,171 11,659 23,830 (27,828) (3,998) 1,282 (254) (404) (3,240) 2,188 – (12,430) – 53 – 3,836 3,836 (40,311) (36,475) – – – – – – – – (108) 191,683 83,938 275,621 (133,028) 142,593 6,020 (5,674) (5,301) (5,234) 2,188 259 (12,430) (130) (349) 130 Unallocated net liabilities comprise plant and equipment (£15,000), other assets (£3,822,000), accruals (£922,000), deferred and current tax liabilities (£4,890,000), RCF (£34,500,000). c115055_LSL.indb 131 131 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 4. Segment analysis of revenue and operating profit (continued) Year ended 31st December 2017 Income Statement information Segmental revenue Segmental result: – before exceptional costs, contingent consideration, amortisation and share-based payments – after exceptional costs, contingent consideration, amortisation and share-based payments Finance costs Profit before tax Taxation Profit for the year Balance sheet information Segment assets – intangible Segment assets – other Total segment assets Total segment liabilities Net assets/(liabilities) Other segment items Capital expenditure including intangible assets Depreciation Amortisation of intangible assets Share of results of joint venture PI Costs provision Onerous leases provision Share-based payment Estate Agency and Related Services £’000 Surveying and Valuation Services £’000 Unallocated £’000 Total £’000 247,410 64,130 – 311,540 26,942 18,877 (8,322) 37,497 22,124 22,466 (2,540) 42,050 (1,952) 40,098 (6,686) 33,412 Estate Agency and Related Services £’000 Surveying and Valuation Services £’000 Unallocated £’000 Total £’000 169,113 75,453 244,566 (49,851) 194,715 5,177 (5,036) (4,013) 1,583 – (210) (152) 12,517 7,305 19,822 (25,794) (5,972) 312 (180) (70) – (15,916) – (85) – 1,200 1,200 (41,367) (40,167) – – – – – – 190 181,630 83,958 265,588 (117,012) 148,576 5,489 (5,216) (4,083) 1,583 (15,916) (210) (47) Unallocated net liabilities comprise plant and equipment (£9,000), other assets (£1,191,000), accruals (£3,028,000), financial liabilities (£4,979,000), deferred and current tax liabilities (£6,360,000), RCF (£27,000,000). 132 c115055_LSL.indb 132 22/03/2019 19:04 133 5. APMs (Adjusted performance measures) In addition to the various performance measures defined under IFRS, the Group reports a number of alternative performance measures that are designed to assist with the understanding of the underlying performance of the Group. The Group seeks to present a measure of underlying performance which is not impacted by the inconsistency in profile of exceptional gains and exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments. Share-based payments are excluded from the underlying performance due to the fluctuations that can impact the charge, such as lapses and the level of annual grants. The four adjusted measures reported by the Group are: • Group Underlying Operating Profit • Adjusted basic EPS • Adjusted diluted EPS • Group Adjusted EBITDA The amortisation of intangible assets is not representative of the underlying costs of the business, and is therefore excluded from adjusted earnings. The Directors consider that these adjusted measures shown above give a better and more consistent indication of the Group’s underlying performance. These measures form part of the Management Team’s internal financial review and are contained within the monthly management information reports reviewed by the Board. The calculations of adjusted basic and adjusted diluted EPS are given in Note 10 to the condensed consolidated Group Financial Statements and a reconciliation of Group Underlying Operating Profit is shown below: Group operating profit Share-based payments Amortisation of intangible assets Exceptional gains Exceptional costs Contingent consideration charge Group Underlying Operating Profit Depreciation on property, plant and equipment Group Adjusted EBITDA 6. Finance costs Interest on RCF Unwinding of discount on professional indemnity provision Unwinding of discount on deferred consideration Unwinding of discount on contingent consideration Note 4 7 7 23 16 2018 £’000 2017 £’000 25,417 42,050 349 5,301 (2,188) 5,234 1,783 35,896 5,674 41,570 2018 £’000 1,359 42 116 816 47 4,083 (9,337) – 654 37,497 5,216 42,713 2017 £’000 1,268 200 – 484 2,333 1,952 132 c115055_LSL.indb 133 133 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 7. Exceptional items Exceptional costs: Transition costs relating to surveying contracts Branch/centre closure and restructuring costs including redundancy costs Exceptional gains: Gain on disposal of financial assets Exceptional gain in relation to historic PI costs 2018 £’000 3,241 1,993 5,234 2017 £’000 – – – – (2,188) (2,188) (5,593) (3,744) (9,337) Exceptional costs There were £5.2m of exceptional costs in the year (2017: nil), the majority of which were in relation to initial non-recurring transition and integration costs for the contract to supply surveying and valuation services to Lloyds Bank plc (£3.2m). In the Estate Agency Division there were £2.0m (2017: nil) of non-recurring and material exceptional costs relating to the planned restructuring costs incurred following the acquisition of Personal Touch Financial Services as well as branch/centre closures. Provision for professional indemnity (PI) claims and insurance claim notification In 2018 the Group continued to make positive progress in settling historic PI claims and there has been a release of £2.2m. 8. Profit before tax Profit before tax is stated after charging: Auditor’s remuneration (see Note 9 to the Group Financial Statements) Operating lease rentals: Land and buildings Plant and machinery (Gain) on sale of property, plant and equipment and financial assets 9. Auditor’s remuneration The remuneration of the auditors is further analysed as follows: Audit of the Financial Statements Audit of subsidiaries Audit of the Financial Statements of the prior period Total audit Audit related assurance services (interim results review fee) Other assurance services Tax advisory services 2018 £’000 379 11,391 4,404 (34) 2017 £’000 346 10,855 4,277 (668) 2018 £’000 55 297 – 352 18 9 – 379 2017 £’000 49 227 45 321 17 8 – 346 134 c115055_LSL.indb 134 22/03/2019 19:04 135 10. Earnings per Share (EPS) Basic EPS amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the Parent Company by the weighted average number of Ordinary Shares outstanding during the year. Diluted EPS amounts are calculated by dividing the net profit attributable to ordinary equity holders of the Parent Company by the weighted average number of Ordinary Shares outstanding during the year plus the weighted average number of Ordinary Shares that would be issued on the conversion of all the dilutive potential Ordinary Shares into Ordinary Shares. Profit after tax £’000 Weighted average number of Shares 2018 Per Share amount Pence Profit after tax £’000 Weighted average number of Shares 2017 Per Share amount Pence Basic EPS 17,883 102,653,447 17.4 33,414 102,640,363 Effect of dilutive share options 839,935 635,058 Diluted EPS 17,883 103,493,382 17.3 33,414 103,275,421 32.6 32.4 There have been no other transactions involving Ordinary Shares or potential Ordinary Shares between the reporting date and the date of completion of these Financial Statements. The Directors consider that the adjusted earnings shown below give a better and more consistent indication of the Group’s underlying performance: Group operating profit before contingent consideration, exceptional items, share-based payments and amortisation (excluding non-controlling interest): Net finance costs (excluding exceptional and contingent consideration items) Normalised taxation Adjusted profit after tax1 before exceptional items, share-based payments and amortisation 2018 £’000 2017 £’000 35,896 (1,401) (6,554) 27,941 37,497 (1,468) (6,936) 29,093 Adjusted basic and diluted EPS Adjusted basic EPS Effect of dilutive share options Adjusted diluted EPS Note Adjusted profit after tax1 £’000 Weighted average number of Shares 2018 Per Share amount Pence Adjusted profit after tax1 £’000 Weighted average number of Shares 2017 Per Share amount Pence 27,941 102,653,447 27.2 29,093 102,640,363 839,935 635,058 27,941 103,493,382 27.0 29,093 103,275,421 28.3 28.2 1 This represents adjusted profit after tax attributable to equity holders of the parent. The normalised tax rate in 2018 is 19% (2017: 19.25%). 11. Dividends paid and proposed Declared and paid during the year: Equity dividends on Ordinary Shares: 2016 Final: 6.3 pence per Share 2017 Interim: 4.0 pence per Share 2017 Final: 7.3 pence per Share 2018 Interim: 4.0 pence per Share 2018 £’000 2017 £’000 6,466 4,106 10,572 7,493 4,107 11,600 Dividends on Ordinary Shares proposed (not recognised as a liability as at 31st December): Equity dividends on Ordinary Shares: Dividend: 6.9 pence per Share (2017: 7.3 pence per Share) 7,083 7,493 134 c115055_LSL.indb 135 135 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 12. Cash-flow from financing activities Long-term liabilities Short-term liabilities At 1st January 2018 £’000 27,000 3,050 30,050 Cash–flow £’000 7,500 (2,979) 4,521 Acquisitions £’000 Foreign exchange £’000 – 1,887 1,887 – – – At 31st December 2018 £’000 34,500 2,073 36,573 Unwind £’000 – 115 115 Long-term liabilities The bank loan totalling £34.5m (2017: £27.0m) is secured via cross guarantees issued from all of the Group’s subsidiaries excluding the following subsidiaries: Lending Solutions Limited, Homefast Property Services, Linear (Linear Mortgage Network and Linear Financial Services), Templeton LPA, Barnwoods, Chancellors Associates, Group First, Personal Touch Financial Services and RSC New Homes (see Note 23 to the Group Financial Statements). Short-term liabilities The overdraft totalling £nil (2017: £3.0m) is secured via cross guarantees issued from all of the Group’s subsidiaries excluding the following subsidiaries: Homefast Property Services, Linear (Linear Mortgage Network and Linear Financial Services), Templeton LPA and Chancellors Associates (see Note 23 to the Group Financial Statements). Short-term liabilities as includes deferred consideration (see Note 23 to the Group Financial Statements). 13. Directors and employees Remuneration of Directors Directors’ remuneration (short-term benefits)1 Contributions to money purchase pensions schemes (post-employment benefits) Share-based payments charge on current incentive schemes Note: 1 Included within this amount is accrued bonuses of £723,000 (2017: £852,000). 2018 £’000 2,057 19 449 2,547 2017 £’000 2,177 20 298 2,495 The number of Directors who were members of Group money purchase pension schemes during the year totalled 1 (2017: 1). During the year the Directors exercised nil CSOP options (2017: nil), nil JSOP options (2017: nil), and nil SAYE options (2017: nil). Employee numbers and costs The Group employs staff in its branches and head offices. Aggregate payroll costs of these employees were: Wages and salaries Social security costs Pension costs Total employee costs Subcontractor costs Total employee and subcontractor costs1 Share-based payment expense (see below) Note: 2018 £’000 2017 £’000 178,407 163,692 18,490 4,398 17,043 2,411 201,295 183,146 1,800 3,161 203,095 186,307 349 47 1 The total employee and subcontractor costs exclude employees redundancy costs of £0.7m (2017: £nil), which have been shown under Exceptional costs (see Note 7 to the Group Financial Statements). 136 c115055_LSL.indb 136 22/03/2019 19:04 137 13. Directors and employees (continued) The monthly FTE staff numbers (including Directors) during the year averaged 4,763 (2017: 4,515). Estate Agency and Related Services Surveying and Valuation Services 2018 4,039 724 4,763 2017 3,909 606 4,515 Share-based payments The Remuneration Policy on pages 81 to 85 of the Directors’ Remuneration Report details the policies in relation to share-based payments, which includes details on the Remuneration Committee’s discretion to adjust the LTIP vesting outcomes if it considers that it is not reflective of the underlying performance of LSL. Long-term incentive plan The Group operates a LTIP (an equity-settled share-based remuneration scheme) for certain employees. Under the LTIP, the options vest if the individual remains an employee of the Group after a three year period, unless the individual has left under certain ‘good leaver’ terms in which case the options may vest earlier and providing the performance conditions are met. LTIP 2018 vesting conditions 30% of the options vest based on the TSR of LSL as compared to a comparator group of 22 companies in similar or related sectors over the three year performance period: • if the Group is in the top 25% percentile, all of these options will vest; • if the Group is at the median, 25% will vest; • straight line vesting between median and top 25% percentile; and • below the median, no options vest. 70% of the options are based on the adjusted EPS performance over the three financial years starting with the financial year in which the LTIP award is granted: • if growth is equal to or over (≥) 13.0 p.a. – 100% vest; • if growth is 7.5% p.a. – 25% vest; • straight line vesting between 7.5% p.a. and 13.0% p.a.; and • if growth is below 7.5% p.a. – no options vest. LTIP 2017 vesting conditions 30% of the options vest based on the TSR of LSL as compared to a comparator group of 23 companies in similar or related sectors over the three year performance period: • if the Group is in the top 25% percentile, all of these options will vest; • if the Group is at the median, 25% will vest; • straight line vesting between median and top 25% percentile; and • below the median, no options vest. 70% of the options are based on the adjusted EPS performance over the three financial years starting with the financial year in which the LTIP award is granted: • if growth is equal to or over (≥) 12.5% p.a. – 100% vest; • if growth is 7.5% p.a. – 25% vest; • straight line vesting between 7.5% p.a. and 12.5% p.a.; and • if growth is below 7.5% p.a. – no options vest. 136 c115055_LSL.indb 137 137 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 13. Directors and employees (continued) LTIP 2016 vesting conditions The LTIP 2016 awards will not vest in 2019 as neither the EPS performance target nor the TSR target (both measured over three years to 31st December 2018) have been met. Outstanding at 1st January Granted during the year Exercised during the year Lapsed during the year Outstanding at 31st December 2018 2017 Weighted average exercise price £ – – – – – Number 1,528,435 995,378 (6,262) (592,897) 1,924,654 Weighted average exercise price £ – – – – – Number 1,568,744 810,016 (14,661) (835,664) 1,528,435 There were 119,260 options exercisable at the end of the year (2017: 129,020). The weighted average remaining contractual life is 1.69 years (2017: 1.67 years). The weighted average fair value of options granted during the year was £2.18 (2017: £1.81). The weighted average share price of options at the date of their exercise was £2.81 (2017: £2.15). Joint share ownership plan (JSOP) Awards under the JSOP participate in increases in the value of Shares in the Company above the share price at the date of grant. Awards comprise of an interest in jointly owned Shares (i.e. Ordinary Shares held in co-ownership with the Trust) and a stock appreciation right. A key feature of the JSOP is that individuals are required to purchase their interest in the jointly owned Shares and have thereby put their personal capital at risk. There were 129,464 options (2017: 129,464) exercisable at the end of the year which relate to the 2010 scheme which vested in 2013. Given that the scheme has vested, the weighted average remaining contractual life is nil (2017: nil), participants can exercise their options up until 2020 and have therefore two years (2017: three years) remaining until their option lapses. No options were exercised or lapsed during the year (2017: nil). Company stock option plan (CSOP) The Group operates a CSOP (an equity-settled share-based remuneration scheme) for certain employees. Under the CSOP, the options vest if the individual remains an employee of the Group after a three year period, unless the individual has left under certain ‘good leaver’ terms in which case the options may vest earlier. Outstanding at 1st January Granted during the year Exercised during the year Lapsed during the year Outstanding at 31st December 2018 2017 Weighted average exercise price £ Weighted average exercise price £ Number Number 3.67 1,268,718 3.60 1,396,424 – 2.07 2.72 2.29 – (7,751) (94,641) 1,166,326 – – 2.84 3.67 – – (127,706) 1,268,718 There were 883,357 options exercisable at the end of the year (2017: 758,106). The average market value at the date of exercise was £2.85 (2017: £nil). The weighted average fair value of options granted during the year was £nil (2017: £nil). The weighted average remaining contractual life is 0.06 years (2017: 0.34 years). 138 c115055_LSL.indb 138 22/03/2019 19:04 139 13. Directors and employees (continued) SAYE (save-as-you-earn) scheme The Group has offered options under the SAYE scheme in each of 2011 to 2014, 2016 to 2018 years. All these offers were open to all qualifying employees and provide for an exercise price equal to the daily average market price on the date of grant. The options will vest if the employee remains in service for the full duration of the option scheme (three years). There are no cash settlement alternatives. Outstanding at 1st January Granted during the year Exercised Lapsed during the year due to employees withdrawal Outstanding at 31st December 2018 2017 Weighted average exercise price £ 2.35 2.45 2.15 2.40 2.39 Number 792,705 466,415 (1,953) (190,048) 1,067,119 Weighted average exercise price £ 3.17 2.15 – 3.54 2.35 Number 669,696 498,893 – (375,884) 792,705 The weighted average fair value of options granted during the year was £1.28 (2017: £1.05) and the weighted average remaining contractual life was 1.40 years (2017: 1.84 years). The average market value at the date of exercise was £2.46 (2017: £nil). There were nil (2017: 907) options exercisable at the end of the year. BAYE (buy-as-you-earn) scheme The matching shares element of the SIP/BAYE was introduced and provides participants with one matching share for every five partnership shares purchased. The matching shares are allocated from Ordinary Shares held by the Trust for the benefit of SIP/BAYE participants. The maximum saving under the scheme would be automatically capped at £150 per month (as per HMRC limits). Outstanding at 1st January Granted during the year Exercised Lapsed during the year due to employees withdrawal Outstanding at 31st December There were nil options exercisable at the end of the year. Equity-settled transactions The assumptions used in the estimation of the fair value of equity settled options were as follows: Option pricing model used Weighted average Share price at grant date (£) Exercise price (£) Expected life of options (years) Expected volatility (%) Expected dividend yield (%) Risk free interest rate (%) 2018 Weighted average exercise price £ – 2.5 – – 2.5 Number – 78,000 – – 78,000 LTIP 2018 Black Scholes 2.50 – 3 100 4.53 1.11 138 c115055_LSL.indb 139 139 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 13. Directors and employees (continued) Option pricing model used Weighted average Share price at grant date (£) Exercise price (£) Expected life of options (years) Expected volatility (%) Expected dividend yield (%) Risk free interest rate (%) The total cost recognised for equity settled transactions is as follows: Share-based payment expensed during the year A charge of £107,000 (2017: credit £224,000) relates to employees of the Company. LTIP 2017 CSOP 2017 Black Scholes Black Scholes 2.10 – 3 100 4.93 0.56 2018 £’000 349 2.09 2.15 3 100 4.93 0.56 2017 £’000 47 The volatility assumption, measured at the standard deviation of expected share price returns, is based on statistical analysis of historical share price. The dividend yield assumption is based on the fact that the Shares awarded are not eligible to receive dividends until the end of the vesting period. 14. Taxation (a) Tax on profit on ordinary activities The major components of income tax charge in the Group Income Statements are: UK corporation tax – current year – adjustment in respect of prior years Deferred tax: Origination and reversal of temporary differences Adjustment in respect of prior year Total deferred tax (credit) Total tax charge in the Income Statement 2018 £’000 5,931 (205) 5,726 (322) (203) (525) 2017 £’000 7,537 (345) 7,192 (442) (64) (506) 5,201 6,686 The UK corporation tax rate reduced to 20% with effect from 1st April 2015 and 19% with effect from 1st April 2017. A future UK corporation tax of 17% has been enacted and is effective from 1st April 2020, and this is the rate at which deferred tax has been provided (2017: 17%). Corporation tax is recognised at the headline UK corporation tax rate of 19% (2017: 19.25%). The effective rate of tax for the year was 22.5% (2017: 16.7%). The effective tax rate for 2018 is higher than the headline UK tax rate for a number of reasons, but the most significant are non-deductible costs in relation to contingent consideration and the depreciation of assets which do not qualify for capital allowances. Deferred tax credited directly to other comprehensive income is £0.0m (2017: £0.6m). Income tax credited directly to the share-based payment reserve is £0.0m (2017: £0.0m). 140 c115055_LSL.indb 140 22/03/2019 19:04 141 14. Taxation (continued) (b) Factors affecting tax charge for the year The tax assessed in the profit and loss account is higher (2017: lower) than the standard UK corporation tax rate, because of the following factors: Profit on ordinary activities before tax Tax calculated at UK standard rate of corporation tax rate of 19% (2017: 19.25%) Non-deductible expenditure/(non-taxable income) from joint ventures and associates Other income not taxable Other disallowable expenses Impact of movement in contingent consideration charged/(credited) to the Income Statement Capital gains (lower than)/in excess of accounting profit Share-based payment relief Impact of rate change on deferred tax Prior period adjustment – current tax Prior period adjustment – deferred tax Total taxation charge 2018 £’000 23,084 4,386 56 – 550 494 – 73 50 (205) (203) 5,201 2017 £’000 40,098 7,719 (153) (369) 627 251 (1,053) 15 58 (345) (64) 6,686 The major component of the disallowable expenditure is a permanent disallowance of depreciation on assets which do not qualify for capital allowances. This is a recurring adjustment and the tax impact in the year is £421,000. Another significant adjustment is the impact of deferred and contingent consideration, which is a non-deductible expense within the Income Statement. The tax impact of this movement in deferred and contingent consideration is £494,000. (c) Factors that may affect future tax charges (unrecognised) Unrecognised deferred tax asset relating to: Losses 2018 £’000 2,906 2,906 2017 £’000 3,083 3,083 The deferred tax assets may be recoverable in the future and this is dependent on subsidiary companies generating taxable profits sufficient to allow the utilisation of these amounts. These deferred tax assets cannot be offset against profits elsewhere in the Group as they relate to losses brought forward which can only be offset against taxable profits arising from the same trade in which the losses arose. There is no time limit for utilisation of the above tax losses and other temporary differences. (d) Deferred tax An analysis of the movements in deferred tax is as follows: Net deferred tax liability at 1st January Adjustment on initial application of IFRS 15 Deferred tax liability recognised directly in other comprehensive income Deferred tax (credit) in Income Statement for the year (Note 14a to these Financial Statements) Deferred tax on disposals Deferred tax liability arising on acquisitions and business combinations 2018 £’000 2,698 (101) 20 (525) – 97 2017 £’000 3,801 – 354 (506) (951) – Net deferred tax liability at 31st December 2,189 2,698 140 c115055_LSL.indb 141 141 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 14. Taxation (continued) Analysed as: Accelerated capital allowances Deferred tax liability on separately identifiable intangible assets on business combinations Deferred tax on financial assets Deferred tax on share options Other short-term temporary differences Trading losses recognised Deferred tax credit/(expense) in Income Statement relates to the following: Intangible assets recognised on business combinations Accelerated capital allowance Deferred tax on share options Other temporary differences Trading losses recognised 2018 £’000 (1,426) 4,364 97 (153) (175) (518) 2017 £’000 (960) 3,865 101 (182) (126) – 2,189 2,698 2018 £’000 531 205 (10) (78) (123) 525 2017 £’000 403 332 58 (287) – 506 At the end of either year there was no unrecognised deferred tax liability for taxes that would be payable on the unremitted earnings of the Group’s subsidiaries. 15. Intangible assets Goodwill Cost At 1st January Arising on acquisitions during the year At 31st December 2018 £’000 2017 £’000 151,901 151,901 7,822 – 159,723 151,901 142 c115055_LSL.indb 142 22/03/2019 19:04 143 15. Intangible assets (continued) Carrying amount of goodwill by cash generating unit (CGU) Estate Agency and Related Services companies Marsh & Parsons Your Move Group First Reeds Rains LSLi RSC New Homes Advance Mortgage Funding First Complete Personal Touch Financial Services Templeton LPA Others Surveying and Valuation Services company e.surv Total 2018 £’000 2017 £’000 40,307 41,897 13,913 16,763 22,512 7,128 2,604 3,998 348 336 348 40,307 41,636 13,913 16,678 22,512 – 2,604 3,998 – 336 348 150,154 142,332 9,569 9,569 9,569 9,569 159,723 151,901 Impairment of goodwill and other intangibles with indefinite useful lives The carrying amount of goodwill by cash generating unit is given above. The carrying amount of brand by operating unit is as follows: Estate Agency and Related Services companies Marsh & Parsons Your Move Group First Reeds Rains LSLi Advance Mortgage Funding RSC New Homes Surveying and Valuation Services company e.surv Total 2018 £’000 2017 £’000 11,724 11,724 2,510 396 1,241 1,675 180 43 2,510 396 1,241 1,675 180 – 17,769 17,726 1,305 1,305 19,074 1,305 1,305 19,031 Goodwill acquired through business combinations and brands has been allocated for impairment testing purposes to statutory companies or Groups of statutory companies which are managed as one cash generating unit as follows: • Estate Agency and Related Services companies • Marsh & Parsons. • Your Move (including its share of cash-flows from LSL Corporate Client Department). • Group First. 142 c115055_LSL.indb 143 143 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 15. Intangible assets (continued) • Reeds Rains. • LSLi, which includes Intercounty, Frosts, JNP, Goodfellows, Davis Tate, Lauristons, Lawlors, Hawes & Co and Thomas Morris. • Advance Mortgage Funding which includes BDS. • Templeton LPA. • St Trinity. • First Complete. • RSC New Homes. • Personal Touch Financial Services. • Surveying and Valuation Services company • e.surv. Estate Agency and Related Services companies The recoverable amount of the Estate Agency and Related Services companies has been determined based on a value-in-use calculation using cash-flow projections based on financial budgets approved by the Board and in the three year plan. The discount rate applied to cash-flow projections is 9.8% (2017: 10.3%) and cash-flows beyond the three year plan are extrapolated using a 1.8% growth rate (2017: 1.5%). Surveying and Valuation Services company The recoverable amount of the Surveying and Valuation Services company is also determined on a value-in-use basis using cash-flow projections based on financial budgets approved by the Board and in the three year plan. The discount rate applied to the cash-flow projections is 9.8% (2017: 10.3%). The growth rate used to extrapolate the cash-flows of the Surveying and Valuation Services company beyond the three year plan is 1.8% (2017: 1.5%). Key assumptions used in value-in-use calculations The calculation of value-in-use for each of the Estate Agency and Related Services, and Surveying and Valuation Services companies is most sensitive to the following assumptions: • Discount rates. • Performance in the market. Discount rates reflect the Management Team’s estimate of the post-tax Weighted Average Cost of Capital (WACC) of the Group and this is grossed up to arrive at a pre-tax discount rate (using a tax rate of 17.0%) of 9.8%; external advice has been sought for certain elements of the source data. This is the benchmark used by the Management Team to assess operating performance and to evaluate future acquisition proposals. Performance in the market reflects how the Management Team believes the business will perform over the three year period and is used to calculate the value-in-use of the CGUs. There has been no impairment in respect of the carrying amount of goodwill or brand (an indefinite useful life asset) held on the balance sheet. Sensitivity to changes in assumptions The Management Team has undertaken sensitivity analysis to determine the effect of changes in assumptions on the 2018 impairment reviews. The key assumptions driving the carrying values are the discount rate applied to the cash-flow forecasts and the long-term growth rate applied. Marsh & Parsons has limited headroom (£2.4m) and in this instance a reasonable possible change in either of these assumptions could lead to impairment. A reduction in the long-term growth rate from 1.8% to 1.4%, or an increase to the discount factor applied from 9.84% to 10.20% would lead to an impairment. However, given the conservative cash-flows used in this impairment assessment and the moderate growth rate of 1.8% (market range of 1.4% to 3.3%) as well as the resilient performance of the CGU in a challenging market place during 2018 the Management Team is confident in the conclusion that no impairment is required as at 31st December 2018. 144 c115055_LSL.indb 144 22/03/2019 19:04 145 15. Intangible assets (continued) Other intangible assets As at 31st December 2018 Cost At 1st January 2018 Additions Arising on acquisition during the year At 31st December 2018 Aggregate amortisation and impairment At 1st January 2018 Charge for the year At 31st December 2018 Carrying amount At 31st December 2018 As at 31st December 2017 Cost At 1st January 2017 Additions Arising on acquisition during the year Disposals At 31st December 2017 Aggregate amortisation and impairment At 1st January 2017 Charge for the year Disposals At 31st December 2017 Carrying amount At 31st December 2017 Note: 1 Other relates to in-house software and Estate Agency franchise agreements. Brand names £’000 Lettings contracts £’000 19,222 15,954 – 43 19,265 191 – 191 – 1,817 17,771 9,090 2,628 11,718 Order book £’000 – – 228 228 – 228 228 Other1 £’000 Total £’000 8,379 1,139 4,305 13,823 4,545 2,445 6,990 43,555 1,139 6,393 51,087 13,826 5,301 19,127 19,074 6,053 – 6,833 31,960 Brand names £’000 Lettings contracts £’000 19,222 15,954 – – – – – – Other1 £’000 7,816 563 – – Total £’000 42,992 563 – – 19,222 15,954 8,379 43,555 191 – – 191 6,242 2,848 – 9,090 3,310 1,235 – 4,545 9,743 4,083 – 13,826 19,031 6,864 3,834 29,729 144 c115055_LSL.indb 145 145 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 15. Intangible assets (continued) The brand value relates to the following: • Your Move, a network of residential sales and lettings agencies and e.surv, a surveying and valuation company which were both acquired by the Group in 2004; • Reeds Rains, a network of residential sales and lettings agencies which was acquired in October 2005; • Intercounty, a network of residential sales and lettings agencies which was acquired in February 2007; • Frosts, a network of residential sales and lettings agencies which was acquired in July 2007; • JNP, a network of residential sales and lettings agencies which was acquired in September 2007; • Goodfellows, a network of residential sales and lettings agencies which was acquired in May 2010; • Advance Mortgage Funding and BDS intermediary networks which were acquired in December 2010; • Marsh & Parsons, a network of residential sales and lettings agencies which was acquired in November 2011; • Davis Tate, a network of residential sales and lettings agencies which was acquired in February 2012; • Lauristons, a network of residential sales and lettings agencies which was acquired in July 2012; • Walker Fraser Steele, a surveying business which was acquired in June 2013; • Lawlors, a network of residential sales and lettings agencies which was acquired in September 2013; • Hawes & Co, a network of residential sales and lettings agencies which was acquired in March 2014; • Thomas Morris, a network of residential sales and lettings agencies which was acquired in February 2015; • Group First, a financial services group which was acquired in 2016; and • RSC New Homes, a financial services company which was acquired in 2018. The businesses are run as separate reporting units within the Group. There have been no fundamental changes to the manner in which the businesses have been run since their acquisition and therefore the results of the businesses are considered to be derived from the brand names nationally. 146 c115055_LSL.indb 146 22/03/2019 19:04 147 16. Property, plant and equipment As at 31st December 2018 Cost At 1st January 2018 Additions Acquisitions during the year Disposals At 31st December 2018 Depreciation and impairment At 1st January 2018 Charge for the year Accelerated depreciation Disposals At 31st December 2018 Carrying amount At 31st December 2018 Freehold land and buildings £’000 Leasehold improvements £’000 Motor vehicles £’000 Fixtures, fittings and computer equipment £’000 2,497 8,325 – – (130) 2,367 311 47 – – 358 714 23 (64) 8,998 3,340 911 – (64) 4,187 96 – – (81) 15 70 – – (56) 14 Total £’000 38,359 4,932 161 (426) 27,441 4,218 138 (151) 31,646 43,026 16,875 4,716 109 (99) 20,596 5,674 109 (219) 21,601 26,160 2,009 4,811 1 10,045 16,866 In 2018 assets with a book value of £207,000 were disposed in the year. This includes a leasehold property with a book value totalling £130,000 which was sold for net proceeds of £168,000 resulting in a profit on disposal of £38,000. As at 31st December 2017 Cost At 1st January 2017 Additions Disposals At 31st December 2017 Depreciation and impairment At 1st January 2017 Charge for the year Disposals At 31st December 2017 Carrying amount At 31st December 2017 Freehold land and buildings £’000 Leasehold improvements £’000 Motor vehicles £’000 Fixtures, fittings and computer equipment £’000 2,497 – – 2,497 300 11 – 311 9,196 493 (1,364) 8,325 3,094 820 (574) 3,340 2,186 4,985 96 – – 96 63 7 – 70 26 27,774 4,433 (4,766) 27,441 17,264 4,378 (4,767) 16,875 10,566 17,763 Total £’000 39,563 4,926 (6,130) 38,359 20,721 5,216 (5,341) 20,596 In 2017 assets with a book value of £789,000 were disposed in the year. This includes leasehold property with a book value totalling £772,000 which was sold for net proceeds of £1,440,000 resulting in a profit on disposal of £668,000. During 2017 the Management Team reviewed fully depreciated fixtures, fittings and computer equipment and judged that these should be derecognised. 146 c115055_LSL.indb 147 147 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 17. Financial assets Equity financial assets Unquoted shares at fair value Quoted shares at fair value Opening balance Additions Disposals Fair value adjustment recorded through Income Statement Fair value adjustment recorded through OCI Closing balance 2018 £’000 11,566 – 11,566 25,282 13 (2,266) 737 (12,200) 11,566 2017 £’000 23,753 1,529 25,282 4,603 24,534 (5,740) – 1,885 25,282 The financial assets include unlisted equity instruments which are carried at fair value. Fair value is judgemental given the assumptions required and have been valued using a level 3 valuation techniques (see Note 31 to the Group Financial Statements). ZPG Limited (ZPG) Financial assets include warrants in ZPG. These warrants have been issued pursuant to terms agreed with ZPG relating to the provision of portal services to LSL’s Estate Agency businesses. The Directors consider the best estimate of the fair value of LSL’s warrants to be the share price and therefore valued using level 2 valuation techniques. In June 2018, the warrants were revalued to £2,266,000, recognising a gain of £737,000. These warrants were fully disposed in October 2018. In line with IFRS 9 (see Note 2 to the Group Financial Statements) the Group made the election to recognise the gain or loss in changes to the fair value of ZPG through the profit and loss. For this transition the modified retrospective approach was chosen, and therefore the current reserve balance relating to ZPG (£21,000) was transferred into the opening retained earnings balance. Vibrant Energy Matters Limited (VEM) The carrying value of the Group’s investment in VEM at 31st December 2018 has been assessed as £722,000 (31st December 2017: £722,000). NBC Property Master Limited In June 2018, LSL subscribed for a further 1,230 ordinary shares in NBC Property Master Limited for a consideration of £13,000. The carrying value of the Group’s investment at 31st December 2018 has been assessed as £78,000 (31st December 2017: £65,000). Global Property Ventures Limited The carrying value of the Group’s investment in Global Property Ventures Limited at 31st December 2018 has been assessed as £250,000 (31st December 2017: £250,000). eProp Services plc The carrying value of the Group’s investment in eProp Services plc at 31st December 2018 has been assessed as £2,716,000 (31st December 2017: £2,716,000). Yopa Property Limited (Yopa) The carrying value of the Group’s investment in Yopa at 31st December 2018 has been assessed as £7,800,000 (31st December 2017: £20,000,000). The fair value of the Group’s investment in Yopa has been assessed by using level 3 valuation techniques. This has led to the recognition of a fair value impairment of £12,200,000 which has been recognised in the Statement of Other Comprehensive Income. 148 c115055_LSL.indb 148 22/03/2019 19:04 149 18. Investments in joint ventures and associates Investment in joint ventures and associates Investment in joint ventures Opening balance Equity accounted profit Closing balance 2018 £’000 13,230 9,556 101 9,657 2017 £’000 9,556 8,762 794 9,556 Along with two other entities, the Group holds an equal share of 33.33% (2017: 33.33%) interest in TM Group, a joint venture whose principal activity is to provide searches. The principal place of business of TM Group is the United Kingdom. The Group also has a 50% (2017: 50%) interest in LMS, a joint venture whose principal activity is to provide conveyancing panel management services. The principal place of business of LMS is the United Kingdom. The share of the assets, liabilities, income and expenses of the joint ventures at 31st December and for the years ended are as follows: Share of the joint ventures’ balance sheets: Non-current assets Current assets Current liabilities Share of net assets Share of the joint ventures’ results: Revenue Operating expenses Operating profit Finance income Profit before tax Taxation Profit after tax Shareholder service charge Income from joint ventures Non-current assets include £5,008,000 (2017: £5,008,000) in respect of goodwill arising on the acquisition of shares in LMS. The shareholder service charge received was from TM Group. Investment in associate Opening balance Acquisitions Equity accounted loss Closing balance 2018 £’000 2017 £’000 9,031 4,584 (3,958) 9,657 7,098 5,968 (3,510) 9,556 2018 £’000 2017 £’000 30,194 (30,077) 35,549 (34,572) 117 8 125 (24) 101 685 786 977 7 984 (190) 794 789 1,583 2018 £’000 3,573 – 4,100 (527) 3,573 148 c115055_LSL.indb 149 149 22/03/2019 19:04 In July 2018 the Group acquired 33.85% holding in Mortgage Gym, a digital mortgage business, for cash consideration of £4,000,000, a further investment of £100,000 was made in September 2018 increasing LSL’s holding to 34.69%. Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 18. Investments in joint ventures and associates (continued) The share of the assets, liabilities, income and expenses of the associate at 31st December and for the years then ended are as follows: Share of the associates’ balance sheets: Non-current assets Current assets Current liabilities Share of net assets Share of the associates’ results: Revenue Operating expenses Operating (loss) (Loss) before tax Taxation (Loss) after tax (Loss) from associate 19. Contract assets Non-current contract asset Current contract asset 2018 £’000 3,186 523 (136) 3,573 2018 £’000 27 (678) (651) (651) 124 (527) (527) 2018 £’000 959 262 1,221 In accordance with IFRS 15 £1.2m of costs relating to the reimbursement of costs associated with the award of material surveying contract with Lloyds Bank plc has been recognised as a contract asset. This reimbursement will be amortised over the term of the contract. The amount of amortisation recognised in the Income Statement in 2018 is £90,000. 20. Trade and other receivables Current Trade receivables Prepayments Other debtors 2018 £’000 2017 £’000 24,123 13,852 675 38,650 19,029 11,604 724 31,357 Trade receivables are non-interest-bearing and are generally on 4-30 day terms depending on the services to which they relate. As at 31st December 2018, trade receivables with a nominal value of £3,020,000 (2017: £2,166,000) were impaired and fully provided for. 150 c115055_LSL.indb 150 22/03/2019 19:04 151 20. Trade and other receivables (continued) Set out below is the movement in the allowance for expected credit losses of trade receivables: At 1st January Provision for expected credit losses Amounts written off At 31st December 2018 £’000 2,166 1,161 (307) 3,020 2017 £’000 2,546 468 (848) 2,166 The chosen method of recognising the expected credit loss across the Group is the simplified approach allowing a provision matrix to be used, which is based on the expected life of trade receivables, historic default rates and forward looking information. The provision for expected credit losses has increased following the acquisition of Personal Touch Financial Services and RSC New Homes (see Note 29 to the Group Financial Statements). As at 31st December, an analysis of trade receivables by credit risk rating grades is as follows: The expected credit loss rate applied ranges from 1% (Neither past due nor impaired) to 42% (> 120 days). Total £’000 Neither past due nor impaired £’000 24,123 14,750 <30 days £’000 5,837 30–60 days £’000 1,825 60 – 90 Days £’000 752 90 – 120 days £’000 481 > 120 days £’000 478 Total £’000 Neither past due nor impaired £’000 19,029 12,770 Past due but not impaired 0–90 days £’000 5,959 >90 days £’000 300 2018 20171 Note: 1 The Group has initially applied IFRS 9 as at 1st January 2018 and has not restated comparatives. 21. Cash and cash equivalents Cash and cash equivalents Cash at bank earns interest at floating rates based on daily bank overnight deposit rates. 22. Trade and other payables Current Trade payables Other taxes and social security payable Other payables Accruals Terms and conditions of the above financial liabilities: • Trade payables are non-interest-bearing and are normally settled on between 30 and 60 day terms. • Other payables are mainly non-interest-bearing and have an average term of three months. 2018 £’000 2,405 2017 £’000 – 2018 £’000 2017 £’000 12,819 12,193 1,512 37,456 63,890 6,009 10,364 686 36,359 53,418 150 c115055_LSL.indb 151 151 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 23. Financial liabilities Current Overdraft 2% unsecured loan notes Deferred consideration Contingent consideration Non-current Bank loans – RCF 2% unsecured loan notes Deferred consideration Contingent consideration 2018 £’000 – – 1,999 8,457 10,455 2017 £’000 2,978 2,000 71 1,405 6,454 34,500 27,000 – 75 6,581 41,156 – – 7,654 34,654 Bank loans – RCF and overdraft A £100.0m loan facility which was due to expire in May 2020 was extended in January 2018 and now expires in May 2022. Loan refinance costs were incurred in June 2013 which have been capitalised and are being amortised over the life of the original loan facility. The bank loan totalling £34.5m (2017: £27.0m) and overdraft totalling £nil (2017: £3.0m) are secured via cross guarantees issued from all of the Group’s subsidiaries excluding the following subsidiaries, Lending Solutions Limited, Homefast Property Services, Linear (Linear Mortgage Network and Linear Financial Services), Templeton LPA, Barnwoods, Chancellors Associates, Group First, Personal Touch Financial Services, and RSC New Homes. The utilisation of the RCF may vary each month as long as this does not exceed the maximum £100.0m facility (2017: £100.0m). The Group’s overdraft is also secured on the same facility, and the combined overdraft and RCF cannot exceed £100.0m (2017: £100.0m). The banking facility is repayable when funds permit on or by May 2022. Interest and fees payable on the RCF amounted to £1.4m (2017: £1.3m). The interest rate applicable to the facility is LIBOR plus a margin rate; the margin rate is linked to the leverage ratio of the Group and the margin rate is reviewed at six monthly intervals. 12% and 2% unsecured loan notes A variation of the 2011 loan notes, issued as part satisfaction of the consideration of Marsh & Parsons, was agreed on the retirement of Peter Rollings in March 2016. The total principal amount of the 2011 Loan Note was paid but at a reduced rate of interest of 2%. The first instalment was paid in July 2016, with the final payment of £2m being paid in March 2018. Deferred consideration liability Deferred consideration RSC New Homes Personal Touch Financial Services LSLi Charge on contingent consideration Charge on contingent consideration 2018 £’000 9 1,990 75 2,074 2018 £’000 1,783 2017 £’000 – – 71 71 2017 £’000 654 152 c115055_LSL.indb 152 22/03/2019 19:04 153 23. Financial liabilities (continued) The exceptional contingent consideration charge recognised in the year relates to both new and previous acquisitions, primarily a charge of £53,000 in LSLi, charge of £1,805,000 in Mortgage First, charge of £2,000 in LMS, and credit of £79,000 in RSC New Homes (2017: a charge of £282,000 in LSLi and £372,000 in Mortgage First). LSLi contingent consideration LMS Group First RSC New Homes Other Opening balance Cash paid Acquisition Amounts recorded through Income Statement Closing balance 2018 £’000 488 – 9,476 4,751 323 15,038 9,059 (1,392) 4,773 2,598 15,038 2017 £’000 1,710 1 7,098 – 250 9,059 10,096 (2,175) – 1,138 9,059 £488,000 (2017: £1,710,000) of contingent consideration relates to payments to third parties in relation to the acquisition of LSLi and certain of its subsidiaries between 2012 and 2016. This is typically payable between three and five years after the acquisition dates depending on the profitability of those subsidiaries in the relevant years. £9,476,000 of contingent consideration relates to Group First (2017: £7,098,000). The additional consideration will be calculated on an earnings multiple of between five and six times EBITA (plus excess cash in the business) and has been capped at a maximum of £25.0m. £4,751,000 of contingent consideration relates to RSC New Homes. The additional consideration will be calculated on an earnings multiple of between five and six times EBITA (plus excess cash in the business) and has been capped at a maximum of £7,500,000. During 2018 £1,392,000 (2017: £6,965,000) of deferred and contingent consideration was paid to third parties. The table below shows the allocation of the contingent consideration balance and income charge between the various categories: Remuneration Put options over non-controlling interests Arrangement under IFRS 3 Closing balance Contingent consideration profit and loss impact in the period relating to amounts accounted for as: Remuneration Put options over non-controlling interests Arrangement under IFRS 3 Unwinding of discount on contingent consideration Debit/(credit) 2018 £’000 – – 15,038 15,038 – 2 1,781 815 2,598 2017 £’000 – 1 9,058 9,059 13 – 641 484 1,138 152 c115055_LSL.indb 153 153 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 24. Provisions for liabilities Balance at 1st January Amount utilised Amount released Unwinding of discount Reallocated from accruals Provided in financial year Balance at 31st December Current Non-current Professional indemnity claim provision £’000 2018 Onerous leases £’000 15,916 (1,985) (2,187) 43 – 643 12,430 6,525 5,905 12,430 210 (85) (55) – – 60 130 91 39 130 Professional indemnity claim provision £’000 20,686 (3,342) (2,714) 200 290 796 15,916 2,740 13,176 15,916 Total £’000 16,126 (2,070) (2,242) 43 – 703 12,560 6,616 5,944 12,560 2017 Onerous leases £’000 678 (263) (229) – – 24 210 110 100 210 Total £’000 21,364 (3,605) (2,943) 200 290 820 16,126 2,850 13,276 16,126 PI Costs (professional indemnity claims) provision The PI Costs provision is to cover the costs of claims relating to valuation services for clients which are not covered by PI insurance. The PI Costs provision includes amounts for claims already received from clients, claims yet to be received and any other amounts which may be payable as a result of legal disputes associated with provision of valuation services. The provision is the Directors’ best estimate of the likely outcome of such claims, taking account of the incidence of such claims and the size of the loss that may be borne by the claimant, after taking account of actions that can be taken to mitigate losses. The PI Costs provision will be utilised as individual claims are settled and the settlement amount may vary from the amount provided depending on the outcome of each claim. It is not possible to estimate the timing of payment of all claims and therefore a significant proportion of the provision has been classified as non-current. As at 31st December 2018 the total provision for PI Costs was £12.4m. The Directors have considered the sensitivity analysis on the key risks and uncertainties discussed above. Cost per claim A substantial element of the PI Costs provision relates to specific claims where disputes are on-going. These specific cases have been separately assessed and specific provisions have been made. The average cost per claim has been used to calculate the IBNR. Should the costs to settle and resolve these claims and future claims increase by 10%, an additional £0.9m would be required. Rate of claim The IBNR assumes that the rate of claim for the high risk lending period in particular reduces over time. Should the rate of reduction be lower than anticipated and the duration extend, further costs may arise. An increase of 30% in notifications in excess of that assumed in the IBNR calculations would increase the required provision by £0.2m. Notifications The Group has received a number of notifications which have not deteriorated into claims or loss. Should the rate of deterioration increase by 50%, an additional provision of less than £0.1m would be required. 154 c115055_LSL.indb 154 22/03/2019 19:04 155 25. Obligations under leases Operating leases The Group had annual commitments in respect of non-cancellable operating leases for which no provision has been made in these Financial Statements (other than the onerous lease provision as disclosed in Note 23 to these Financial Statements). Future minimum rentals payable under these operating leases are as follows: No later than one year After one year but not more than five years After five years Land and building £’000 8,484 17,934 6,005 32,423 2018 Plant and machinery £’000 2,858 4,627 – 7,485 Total £’000 11,342 22,561 6,005 39,908 Land and building £’000 8,267 18,443 8,337 35,047 2017 Plant and machinery £’000 2,635 2,184 – 4,819 Total £’000 10,902 20,627 8,337 39,866 The Group had annual commited revenue in respect of non-cancellable operating leases for which no accrual has been made in these Financial Statements. Future minimum rentals receivable under non-cancellable operating leases are as follows: No later than one year After one year but not more than five years After five years 26. Share capital Authorised: Ordinary Shares of 0.2 pence each Issued and fully paid: At 1st January and 31st December 27. Reserves 2018 Land and buildings £’000 321 250 15 586 2017 Land and buildings £’000 351 505 248 1,104 2018 2017 Shares £’000 Shares £’000 500,000,000 1,000 500,000,000 1,000 104,158,950 208 104,158,950 208 Share premium The amount subscribed for share capital in excess of nominal value less any costs attributable to the issue of new Shares. Share-based payment reserve The share-based payment reserve is used to record the value of equity-settled share-based payment provided to the employees, as part of their remuneration. Note 13 gives further details of these plans. Shares held by EBT Treasury shares represent the cost of LSL Shares purchased in the market and held by the Trust to satisfy future exercise of options under the Group’s employee share options schemes. At 31st December 2018 the Trust held 1,495,189 (2017: 1,511,155) LSL Shares at an average cost of £3.51 (2017: £3.51). The market value of the LSL Shares at 31st December 2018 was £3,281,940 (2017: £4,227,456). The nominal value of each Share is 0.2 pence. Fair value reserve The fair value reserve is used to record the changes in fair value of equity financial assets that the Group has elected to recognise through OCI. Note 17 to these Financial Statements gives further details of the movement in the current year. 154 c115055_LSL.indb 155 155 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 28. Pension costs and commitments The Group operates defined contribution pension schemes for certain Executive Directors and certain employees. The assets of the schemes are held separately from those of the Group in independently administered funds. Total contributions to the defined contribution schemes in the year were £4,398,000 (2017: £2,411,000). There was an outstanding amount of £784,180 in respect of pensions as at 31st December 2018 (2017: £388,000). 29. Acquisitions during the year Year ended 31st December 2018 The Group acquired the following businesses during the year. • Lettings books During the period the Group acquired six lettings books for a total consideration of £1,853,000. The fair value of the identifiable assets and liabilities of these businesses as at the date of acquisition have been provisionally determined as below: Intangible Assets Deferred tax liabilities Total identifiable net liabilities acquired Purchase consideration Goodwill Purchase consideration discharged by: Cash Contingent consideration Analysis of cash-flow on acquisition Transaction costs (included in cash-flows from operating activities) Net cash acquired with the subsidiaries and other businesses Purchase consideration discharged in cash (included in cash-flows from investing activities) Net cash outflow on acquisition Fair value recognised on acquisition £’000 1,817 (309) 1,508 1,853 345 £’000 1,670 183 1,853 £’000 – – 345 345 • Personal Touch Financial Services In January 2018, the Group acquired the entire issued share capital of Personal Touch Financial Services and its subsidiary company, Personal Touch Administration Services from Personal Touch Holdings Limited. Personal Touch Financial Services is a financial services business specialising in the provision of mortgage and other financial services products via its network of intermediaries. Personal Touch Financial Services is authorised by the FCA with 200 appointed representative firms and 474 advisers at 31st December 2018. 156 c115055_LSL.indb 156 22/03/2019 19:04 157 29. Acquisitions during the year (continued) The consideration for the initial investment was £5.4m with £3.6m paid on completion and a present value deferred consideration of £1.8m in January 2019. The purchase price allocations for the acquisition made has now been finalised, with no changes made to the provisional purchase price allocations as disclosed below: Intangible assets Property, plant and equipment Trade and other receivables Cash and cash equivalents Deferred tax asset Trade and other payables Deferred tax liability Total identifiable net assets acquired Purchase consideration Goodwill Purchase consideration discharged by: Cash Present value deferred consideration Analysis of cash-flow on acquisition Transaction costs (included in cash-flows from operating activities) Net cash acquired with the subsidiaries and other businesses Purchase consideration discharged in cash (included in cash-flows from investing activities) Net cash outflow on acquisition Fair value recognised on acquisition £’000 4,305 121 3,617 6,795 921 (10,010) (657) 5,092 5,440 348 £’000 3,562 1,878 5,440 £’000 518 (6,795) 3,562 (2,715) As defined in IFRS 3 the Group has recognised, separately from goodwill, the identifiable intangible assets acquired in the business combination. The assets identified include the in-house developed software Toolbox. From the date of acquisition, Personal Touch Financial Services has contributed £8.7m of revenue and £1.0m to the profit before tax from the continuing operations of the Group. If the acquisition had taken place at the beginning of the year, revenue from continuing operations would have been £9.5m and the profit from continuing operations for the year would have been £0.2m. • RSC New Homes In March 2018, the Group, through a wholly owned subsidiary, acquired a 60% interest in RSC New Homes, who provide mortgage and protection brokerage services to the purchases of new homes. The consideration for the initial investment was £5.3m cash, with £2.5m paid on completion and the remaining subject to put and call options which are exercisable between 2022 and 2023. The contingent consideration is the Management Team’s best estimation of the probable discounted pay-out (using a rate of 6.5%), based upon current forecasts over the earn out period. Due to the nature of the payment terms, the contingent consideration is considered to be a capital payment for accounting purposes. 156 c115055_LSL.indb 157 157 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 29. Acquisitions during the year (continued) The purchase price allocations for the acquisition made has now been finalised, with goodwill increasing by £0.2m. Intangible assets Property, plant and equipment Trade and other receivables Cash and cash equivalents Trade and other payables Current tax liability Deferred tax liability Total identifiable net assets acquired Purchase consideration Goodwill Purchase consideration discharged by: Cash Present value deferred consideration Contingent consideration Analysis of cash-flow on acquisition Transaction costs (included in cash-flows from operating activities) Net cash acquired with the subsidiaries and other businesses Purchase consideration discharged in cash (included in cash-flows from investing activities) Net cash outflow on acquisition Fair value recognised on acquisition £’000 271 40 403 149 (619) (200) (46) (2) 7,126 7,128 £’000 2,500 9 4,617 7,126 £’000 29 (149) 2,500 2,380 As defined in IFRS 3 the Group has recognised, separately from goodwill, the identifiable intangible assets acquired in the business combination. The assets identified include the RSC New Homes brand and the pipeline of work acquired. As disclosed to the market on acquisition, there are strong customer relationships between RSC New Homes and key house builders, however, these relationships do not qualify as an intangible asset given they do not fulfil either the separability criterion or the contractual-legal criterion. This has been fully explored by the Management Team who are confident that given that no economic benefit passes between the two parties in this relationship (the housebuilder and RSC New Homes) there is no asset that can be “separated or divided” and “sold, transferred, licensed, rented or exchanged”. From the date of acquisition, RSC New Homes has contributed £3.4m of revenue and £0.6m to the net profit before tax from the continuing operations of the Group. If the acquisition had taken place at the beginning of the year, revenue from continuing operations would have been £4.3m and the profit from continuing operations for the year would have been £0.5m. The goodwill represents expected synergies and intangible assets that do not qualify for separate recognition. The maximum undiscounted contingent consideration sum payable is capped at £7.5m. Year ended 31st December 2017 The Group made no acquisitions in 2017. 158 c115055_LSL.indb 158 22/03/2019 19:04 159 30. Client monies As at 31st December 2018, monies held by subsidiaries in separate bank accounts on behalf of clients amounted to £108,599,000 (2017: £104,641,000). Neither this amount, nor the matching liabilities to the clients concerned are included in the Group balance sheet. 31. Financial instruments – risk management The Group’s principal financial instruments comprise bank loans and other loans. The main purpose of these financial instruments is to raise finance for the Group’s operations and to fund acquisitions. The Group has various financial assets and liabilities such as trade receivables, cash and short-term deposits and trade payables, which arise directly from its operations. The Group is exposed through its operations to the following financial risks: • cash-flow interest rate risk; • liquidity risk; and • credit risk. Policy for managing these risks is set up by the Board following recommendations from the Group Chief Financial Officer. Certain risks are managed centrally, while others are managed locally following communications from the centre. The policy for each of the above risks is described in more detail below. Cash-flow interest rate risk The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long-term debt obligations with floating interest rates. The majority of external Group borrowings are variable interest based and this policy is managed centrally. The subsidiaries are not permitted to borrow from external sources directly without approval from the Group Finance team. The following table demonstrates the sensitivity to a reasonably possible change in interest rates on loans and borrowings. With all other variables held constant, the Group’s profit before tax is affected through the impact on floating rate borrowings as follows. There is no material impact on the Group’s equity. 2018 2017 Increase/ decrease in basis point Effect on profit before tax £’000 +100 –100 +100 –100 (345) 345 (270) 270 Liquidity risk The Group aims to mitigate liquidity risk by managing cash generation by its operations, dividend policy and acquisition strategy. Acquisitions are carefully selected with authorisation limits operating up to Board level and cash payback periods applied as part of the investment appraisal process. In this way the Group aims to maintain a good credit rating to facilitate fundraising. The Group is also very cash generative as demonstrated by the cash from operations. The Group has net current liabilities due to the operating model where debtors are collected earlier than payments to creditors, allowing the cash to be used elsewhere in the business such as to reduce the amount drawn down on the RCF and to make acquisitions. However, the requirement to pay creditors is managed through future cash generation and, if required, from the RCF. The Group monitors its risk of a shortage of funds using a recurring liquidity planning tool and daily cash-flow reporting. This includes consideration of the maturity of both its financial investments and financial assets (e.g. accounts receivable, and other financial assets) and projected cash-flows from operations. The Group’s objective is to maintain a balance between continuity of funding and flexibility for potential acquisitions through the use of its banking facilities. Cash at the bank earns interest at floating rates based on daily bank overnight deposit rates. Short-term deposits are made for varying periods of between one day and three days depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. The fair value of cash and cash equivalents is £2.4m (2017: £nil). At 31st December 2018, the Group had available £65.5m of undrawn committed borrowing facilities in respect of which all conditions precedent had been met (2017: £73.0m). 158 c115055_LSL.indb 159 159 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 31. Financial instruments – risk management (continued) The table below summarises the maturity profile of the Group’s financial liabilities at 31st December 2018 based on contractual undiscounted payments: Year ended 31st December 2018 Interest-bearing loans and borrowings (including overdraft) Trade payables Other payables Contingent consideration Deferred consideration Year ended 31st December 2017 Interest-bearing loans and borrowings (including overdraft) Trade payables Other payables Contingent consideration Deferred consideration On demand £’000 – – – – – – On demand £’000 2,979 – – – – Less than 3 months £’000 252 12,259 36,452 8,195 2,009 59,167 Less than 3 months £’000 2,184 6,009 36,905 662 – 2,979 45,760 3 to 12 months £’000 1 to 5 years £’000 > 5 years £’000 Total £’000 770 36,968 – – 388 – 1,158 – – 8,346 80 45,394 – – – – – – 37,990 12,259 36,452 16,929 2,089 105,719 3 to 12 months £’000 1 to 5 years £’000 > 5 years £’000 Total £’000 548 27,582 – – 742 – 1,290 – – 9,646 71 37,299 – – – – – – 33,293 6,009 36,905 11,050 71 87,328 The liquidity risk of each Group entity is managed centrally by the Group Treasury function. The Group’s cash requirement is monitored closely. All surplus cash is held centrally to offset against the Group’s borrowings and reduce the interest payable. The type of cash instrument used and its maturity date will depend on the Group’s forecast cash requirements. The Group has a RCF with a syndicate of major banking corporations to manage longer term borrowing requirements. Capital management The primary objective of the Group’s capital management is to ensure that it maintains appropriate capital structure to support its business objectives, including any regulatory requirements, and maximise Shareholder value. Capital includes share capital and other equity attributable to the equity holders of the parent. In the medium to long-term, the Group will strive to maintain a reasonable leverage (i.e. balance between debt and equity) to help achieve the Group’s business objectives of growth (through acquisitions and organic growth) and meet its dividend policy. In the short-term, the Group does not have a set leverage ratio to be achieved but the Directors monitor the ratio of net debt to operating profit to ensure that the debt funding is not excessively high. Certain loan notes issued on acquisition of Marsh & Parsons (which were repaid during 2018) are excluded from this ratio as they are unsecured and are not used in the calculation of the Group’s banking covenant. 160 c115055_LSL.indb 160 22/03/2019 19:04 161 31. Financial instruments – risk management (continued) The Group has a current ratio of Net Bank Debt (excluding loan notes) to EBITDA of 0.8 (2017: 0.7), based on Net Bank Debt (excluding loan notes) of £32.1m (2017: £30.0m) and operating profit before exceptional costs, amortisation and share-based payment charge of £35.9m (2017: £37.5m). The business is cash generative with a low capital expenditure requirement. The Group remains committed to its stated dividend policy of 30% to 40% of Group Underlying Operating Profit after interest and tax. The Board has reviewed the policy in line the risks and capital management decisions facing the Group. Net Bank Debt is defined as follows: Interest-bearing loans and borrowings (including loan notes, overdraft, contingent and deferred consideration) Less: 2% unsecured loan notes Less: cash and short-term deposits Less: deferred and contingent consideration Net Bank Debt (excluding loan notes) 2018 £’000 2017 £’000 51,612 – (2,405) (17,112) (32,095) 41,108 (2,000) – (9,129) (29,979) Credit risk There are no significant concentrations of credit risk within the Group. The Group is exposed to a credit risk in respect of revenue transactions (i.e. turnover from customers). It is Group policy, implemented locally, to obtain appropriate details of new customers before entering into contracts. The majority of the Estate Agency customers use the Group’s services as part of a house sale transaction and consequently the debt is paid from the proceeds realised from the sale of the house by the vendor’s solicitor before the balance of funds is transferred to the vendor. This minimises the risk of the debt not being collected. The majority of the Surveying customers and those of the Asset Management business are large financial institutions and as such the credit risk is not expected to be significant. The maximum credit risk exposure relating to financial assets is represented by the carrying value as at the balance sheet date. Financial instruments are grouped on a subsidiary basis to apply the expected credit loss model. The chosen method of recognising the expected credit loss across the Group is the simplified approach allowing a provision matrix to be used, which is based on the expected credit life of trade receivables, historic default rates and forward looking information. Trade receivable balances are written off when the probability of recovery is assessed as being remote. Interest rate risk profile of financial assets and liabilities LSL’s treasury policy is described above. The disclosures below exclude short-term receivables and payables which are primarily of a trading nature and expected to be settled within normal commercial terms. The interest rate profile of the financial assets and liabilities of the Group as at 31st December 2018 are as follows: Floating rate Overdraft RCF Within 1 year £’000 1–2 years £’000 – – – – 2–3 years £’000 – – 3–4 years £’000 – Total £’000 – (34,500) (34,500) The effective interest rate and the actual interest rate charged on the loans in 2018 are as follows: RCF Effective rate Actual rate 3.1% 2.0% The effective interest rate on the RCF during the year is higher than the actual rate due to commitment fees payable on undrawn amounts. 160 c115055_LSL.indb 161 161 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 31. Financial instruments – risk management (continued) The interest rate profile of the financial assets and liabilities of the Group as at 31st December 2017 are as follows: Fixed rate RCF Interest-bearing loans Floating rate Overdraft RCF Within 1 year £’000 1–2 years £’000 – (2,000) (2,979) – – – – – 2–3 years £’000 – – – – 3–4 years £’000 – – – (27,000) Total £’000 – (2,000) (2,979) (27,000) The effective interest rate and the actual interest rate charged on the loans in 2017 are as follows: RCF 2% unsecured loan notes Effective rate Actual rate 4.1% 2.0% 1.5% 2.0% The effective interest rate on the RCF during the year is higher than the actual rate due to commitment fees payable on undrawn amounts. Fair values of financial assets and financial liabilities There are no differences between the carrying amounts and fair values of all of the Group’s financial instruments that are carried in the Financial Statements. Fair value hierarchy The Group uses the following hierarchy for determining and disclosing the fair value of the financial instruments by valuation technique: • Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; • Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and • Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. The following table provides the fair value measurement hierarchy of the Group’s assets and liabilities. 2018 Assets measured at fair value Financial assets Liabilities measured at fair value Contingent consideration 2017 Assets measured at fair value Financial assets Liabilities measured at fair value Contingent consideration £’000 11,566 15,038 £’000 25,282 9,059 Level 1 £’000 Level 2 £’000 Level 3 £’000 – – – – 11,566 15,038 Level 1 £’000 Level 2 £’000 Level 3 £’000 – – 1,529 23,753 – 9,059 162 c115055_LSL.indb 162 22/03/2019 19:04 163 31. Financial instruments – risk management (continued) The fair value of equity financial assets that are not traded in the open market (£3.8m) are valued using Level 3 techniques in accordance with the fair value hierarchy and the Management Team use all relevant and up to date information (including cash-flow forecasts and financial statements) to arrive at their judgement. Where appropriate a range of potential outcomes is considered in reaching a conclusion. If this was to drop by 10%, the implied valuation is likely to also drop by around 10%, £1.2m. The contingent consideration relates to amounts payable in the future on acquisitions. The amounts payable are based on the amounts agreed in the contracts and based on the future profitability of each entity acquired. In valuing each provision, estimates have been made as to when the options are likely to be exercised and the future profitability of the entity at this date. Further details of these provisions are shown in Note 23. If the future profitability of the entities was to decline by 10%, the size of the contingent consideration would decrease by approximately £0.8m. 32. Analysis of Net Bank Debt (excluding loan notes) Interest-bearing loans and borrowings – Current – Non-current Less: unsecured loan notes Less: cash and short-term deposits Less: deferred and contingent consideration Net Bank Debt at the end of the year 33. Related party transactions 2018 £’000 2017 £’000 10,456 41,156 51,612 – (2,405) (17,112) 32,095 6,454 34,654 41,108 (2,000) – (9,129) 29,979 As disclosed in Note 18 to these Financial Statements LSL has two joint ventures (LMS and TM Group) and an associate (Mortgage Gym). Transactions with LMS and its subsidiaries Sales Transactions with TM Group and its subsidiaries Sales Purchases Year end creditor balance Transactions with Mortgage Gym Purchases Year end creditor balance Transactions with Global Property Ventures Purchases 162 c115055_LSL.indb 163 2018 £’000 3 2018 £’000 1,510 (204) – 2017 £’000 30 2017 £’000 1,430 (42) (9) 2018 £’000 (20) (67) 2018 £’000 11 163 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 34. Capital commitments Capital expenditure contracted for but not provided 35. Subsidiary and joint venture companies 2018 £’000 67 2017 £’000 32 The Group owns directly or indirectly the following issued and fully paid ordinary and preference share capital of its subsidiary undertakings, all of which are incorporated in Great Britain, with the exception of Albany Insurance Company (Guernsey) Limited, which is incorporated in Guernsey, and whose operations are conducted mainly in the United Kingdom. The results for all of the subsidiaries have been consolidated within these Financial Statements: Name of subsidiary company Registered office address Lending Solutions Holdings Limited 1 Lending Solutions Limited Energy-Assessors.com Ltd^ 1 2 LSL holding Direct Indirect Direct Estate Agency and Related Services – Asset Management LSL Corporate Client Services Limited St Trinity Limited Templeton LPA Limited 1 1 1 Direct Direct Estate Agency and Related Services – Residential Sales and Lettings LSL shareholder LSL Property Services plc Lending Solutions Holdings Limited LSL Property Services plc LSL Property Services plc LSL Property Services plc Proportion of nominal value of shares held Nature of business 100% Holding Company 100% Non Trading 100% Non Trading 100% Asset Management 100% Asset Management Appleton Estates and Property Management Limited Bawtry Lettings and Sales Limited Beldhamland Limited Brown North East Lettings Ltd Charterhouse Management (UK) Limited David Frost Estate Agents Limited Davis Tate Ltd EA Student Lettings Ltd 2 2 3 2 2 2 2 2 Indirect First Complete Limited 100% Asset Management Indirect Indirect Indirect Indirect Indirect Indirect Davis Tate Ltd 100% Non Trading your–move. co.uk Limited Marsh & Parsons Limited your–move. co.uk Limited your–move. co.uk Limited 100% Non Trading 100% Non Trading 100% Non Trading 100% Non Trading Vitalhandy Enterprises Limited 100% Residential Sales and Lettings Indirect LSLi Limited 100% Residential Sales, Lettings and Holding Company Indirect Eastside Property Developments Ltd 2 Indirect Elliott & Freeth Limited Fourlet (York) Limited Front Door Property Management Ltd 2 2 2 Indirect Indirect Indirect 164 c115055_LSL.indb 164 your–move. co.uk Limited your–move. co.uk Limited Davis Tate Ltd Reeds Rains Limited ICIEA Limited 100% Non Trading 100% Non Trading 100% 100% 100% Non Trading Non Trading Non Trading 22/03/2019 19:04 165 35. Subsidiary and joint venture companies (continued) Name of subsidiary company GFEA Limited Registered office address 2 LSL holding Indirect LSL shareholder LSLi Limited Proportion of nominal value of shares held 100% Nature of business Residential Sales and Lettings and Holding Company Guardian Property Lettings Limited 2 Hawes & Co Limited 2 Hawes & Co (Thames Ditton) Limited 2 Headway Property Management Limited Holloways Residential Ltd Home and Student Link Limited 2 2 2 Indirect Indirect Indirect Indirect Indirect Indirect Homefast Property Services Limited 2 Indirect Reeds Rains Limited 100% Non Trading LSLi Limited 93% Residential Sales, Lettings and Holding Company Hawes & Co Limited Reeds Rains Limited 100% 100% Non Trading Non Trading your–move. co.uk Limited your–move. co.uk Limited Lending Solutions Holdings Limited 100% Non Trading 100% Non Trading 77.5% Non Trading ICIEA Limited Inter County Lettings Limited IQ Property (Hull) Limited JNP Estate Agents Limited JNP Estate Agents (Princes Risborough) Limited JNP (Residential Lettings) Limited JNP (Surveyors) Limited Kent Property Solutions Limited 2 2 2 2 2 2 2 2 LSL Land & New Homes Limited^^ 2 Indirect Lauristons Limited Lawlors Property Services Limited Lets Move Property Limited LSLi Limited 2 2 2 1 Indirect Indirect Indirect Direct Indirect LSLi Limited 100% Residential Sales, Lettings and Holding Company Indirect Indirect ICIEA Limited Reeds Rains Limited 100% 100% Non Trading Non Trading Indirect LSLi Limited 100% Residential Sales, Lettings and Holding Company Indirect Indirect Indirect Indirect JNP Estate Agents Limited JNP Estate Agents Limited LSLi Limited your–move. co.uk Limited your–move. co.uk Limited LSLi Limited 100% Non Trading 100% Non Trading 100% 100% Non Trading Non Trading 100% Residential Sales 100% Residential Sales, Lettings and Holding Company Residential Sales and Lettings LSLi Limited 100% your–move. co.uk Limited LSL Property Services plc 100% Non Trading 100% Residential Sales, Lettings, Financial Services and Holding Company 164 c115055_LSL.indb 165 165 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 35. Subsidiary and joint venture companies (continued) Name of subsidiary company Registered office address Marsh & Parsons Limited 3 LSL holding Indirect Marsh & Parsons (Holdings) Limited 2 Direct Marshcroft Properties Limited New Daffodil Limited New Let Limited Paul Graham Lettings & Management Ltd Philip Green Lettings Limited PHP Lettings Scotland Limited Prestons Lettings Ltd Reeds Rains Limited Reeds Rains Cleckheaton Limited Thomas Morris Limited Vanstons (Barnes) Limited Vanstons Commercial Limited Vanstons Lettings Limited Vanstons Limited Vitalhandy Enterprises Limited Warners Letting Agency Limited Woollens of Wimbledon Limited Yates Lettings Limited your-move.co.uk Limited 3 2 2 2 2 4 2 2 2 1 3 3 3 3 2 2 2 2 1 Indirect Direct Indirect Indirect Indirect Indirect Indirect Direct Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect LSL shareholder Marsh & Parsons (Holdings) Limited LSL Property Services plc Marsh & Parsons Limited LSL Property Services plc your–move. co.uk Limited GFEA Limited JNP Estate Agents Limited your–move. co.uk Limited Proportion of nominal value of shares held 100% Nature of business Residential Sales, Lettings and Holding Company 100% Holding Company 100% Non Trading 100% Non Trading 100% Non Trading 100% Non Trading 100% Non Trading 100% Non Trading Reeds Rains Limited 100% Non Trading LSL Property Services plc 100% Residential Sales, Lettings, Financial Services and Holding Company Reeds Rains Limited 100% Non Trading LSLi Limited 93.33% Residential Sales and Lettings Marsh & Parsons Limited Marsh & Parsons Limited Marsh & Parsons Limited Marsh & Parsons Limited 100% Non Trading 100% Non Trading 100% Non Trading 100% Non Trading LSLi Limited 100% Holding Company ICIEA Limited Lauristons Limited Davis Tate Ltd Lending Solutions Holdings Limited 100% 100% 100% 100% Non Trading Non Trading Non Trading Residential Sales, Lettings, Financial Services and Holding Company 166 c115055_LSL.indb 166 22/03/2019 19:04 167 35. Subsidiary and joint venture companies (continued) Name of subsidiary company Registered office address Zenith Properties Limited 2 LSL holding Indirect LSL shareholder ICIEA Limited Proportion of nominal value of shares held Nature of business 100% Non Trading Estate Agency and Related Services – Financial Services Advance Mortgage Funding Limited 1 Direct BDS Mortgage Group Limited 1 Indirect Embrace Financial Services Ltd^^^ 2 Direct First Complete Limited First2Protect Limited Group First Ltd Insurance First Brokers Ltd Linear Financial Services Limited Linear Financial Services Holdings Limited Linear Mortgage Network Holdings Limited Linear Mortgage Network Limited Mortgages First Ltd Personal Touch Administration Services Limited^^^^ Personal Touch Financial Services Limited^^^^ Reeds Rains Financial Services Limited RSC New Homes Limited^^^^^ 1 2 2 2 2 2 2 2 2 2 2 2 2 LSL Property Services plc Advance Mortgage Funding Limited LSL Property Services plc 100% Financial Services 100% Financial Services 100% Financial Services Lending Solutions Holdings Limited 100% Financial Services and Holding Company your–move. co.uk Limited your–move. co.uk Limited 100% Financial Services 65% Holding Company Group First Ltd 100% Financial Services Linear Financial Services Holdings Limited 100% Non Trading First Complete Limited 100% Holding Company First Complete Limited 100% Holding Company Linear Mortgage Network Holdings Limited 100% Financial Services Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Group First Ltd 100% Financial Services Indirect Direct Indirect Indirect Personal Touch Financial Services Limited LSL Property Services plc 100% Financial Services 100% Financial Services Reeds Rains Limited 100% Financial Services your–move. co.uk Limited 60% Financial Services 166 c115055_LSL.indb 167 167 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Group Financial Statements continued. for the year ended 31st December 2018 35. Subsidiary and joint venture companies (continued) Name of subsidiary company Registered office address LSL holding LSL shareholder Proportion of nominal value of shares held Nature of business Surveying and Valuation Services Albany Insurance Company (Guernsey) Limited Barnwoods Limited Chancellors Associates Limited e.surv Limited 9 2 5 5 Direct Direct Indirect Direct Joint Ventures and Associates Cybele Solutions Holdings Limited# 7 Direct Cybele Solutions Limited# Mortgage Gym Limited# TM Group (UK) Limited# Registered office address: 7 10 8 Indirect Direct Direct LSL Property Services plc LSL Property Services plc e.surv Limited LSL Property Services plc LSL Property Services plc Cybele Solutions Holdings Limited LSL Property Services plc LSL Property Services plc 100% Captive Insurer 100% Non Trading 100% 100% Chartered Surveyors Chartered Surveyors 50% 50% 34.69% 33.33% Joint Venture – Holding Company Joint Venture – Conveyancing panel manager Associate – Financial Services Joint Venture – Property Searches 1. Newcastle House, Albany Court, Newcastle Business Park, Newcastle upon Tyne, NE4 7YB 2. 2nd Floor, Gateway 2, Holgate Park Drive, York, YO26 4GB 3. 80 Hammersmith Road, London, W14 8UD 4. 25 North Bridge Street, Bathgate, West Lothian, EH48 4PJ 5. Lahnstein House, Gold Street, Kettering, Northamptonshire, NN16 8AP 6. Unit 2 Guards Avenue, The Village, Caterham on The Hill, Surrey, CR3 5XL 7. Bickerton House, Lloyd Drive, Ellesmere Port, Cheshire, CH65 9HQ 8. 1200 Delta Business Park, Swindon, Wiltshire, England, SN5 7XZ 9. The Albany, South Esplanade, St Peters Port, Guernsey, GY1 4NF 10. Fourth Floor Abbots House, Abbey Street, Reading, Berkshire, RG1 3BD Notes: ^ energy-assessors.com Limited on 14th January 2019 was re-named RSC Protect Limited and its shares were transferred from being held directly by LSL Property Services plc to indirectly by RSC New Homes. Since 24th January 2019 its nature of business is ‘Financial Services’. ^^ LSL Land & New Homes was until 25th April 2018 named Repartir Limited and its shares were held directly by LSL Property Services plc until 9th April 2018. Its nature of business was ‘Non Trading’ until 30th April 2018. ^^^ Embrace Financial Services Ltd was until 10th September 2018 named LSL-One Limited and its nature of business was ‘Non Trading’ until 30th October 2018. ^^^^Personal Touch Financial Services and Personal Touch Administration Services Limited joined the Group on 30th January 2018. ^^^^^RSC New Homes joined the Group 28th March 2018. # Joint Ventures and Associates. 168 c115055_LSL.indb 168 22/03/2019 19:04 169 36. Post Balance Sheet events On 5th February 2019 LSL announced an Estate Agency Strategy: ways of working programme update and work has now commenced on the reshaping of the Your Move and Reeds Rains branch networks. As disclosed on 5th February 2019, LSL expects to incur an exceptional P&L charge of approximately £14m in 2019 and £1m in 2020, with cash costs amounting to approximately £12m over the three years from 2019 to 2021 including approximately £9m cash costs in 2019. 168 c115055_LSL.indb 169 169 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Statement of Directors’ Responsibilities in Relation to the Parent Company Financial Statements The Directors are responsible for preparing the Annual Report and the Parent Company Financial Statements (together with the Annual Report and Accounts) in accordance with applicable United Kingdom law and those International Financial Reporting Standards (IFRS) as adopted by the European Union. Under company law the Directors must not approve the Company Financial Statements unless they are satisfied that they present fairly the financial position of the Company and the financial performance and cash-flows of the Company for that period. In preparing the Company Financial Statements, the Directors are required to: • select suitable accounting policies in accordance with IAS 8 ‘Accounting Policies, Change in Accounting Estimates and Errors’ and then apply them consistently; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company’s financial position and financial performance; • state that the Company has complied with IFRS, subject to any material departures disclosed and explained in the Financial Statements; and • make judgements and accounting estimates that are reasonable and prudent. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and 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 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 170 c115055_LSL.indb 170 22/03/2019 19:04 171 Parent Company Balance Sheet as at 31st December 2018 Non-current assets Other intangible assets Property, plant and equipment Investment in subsidiaries Financial assets Investment in joint ventures and associates Deferred tax asset Current assets Trade and other receivables Total assets Current liabilities Trade and other payables Financial liabilities Non-current liabilities Financial liabilities Deferred tax liability Total liabilities Net assets Equity Share capital Share premium account Share-based payment reserve LSL Shares held by the EBT Fair value reserve Retained earnings Total equity The profit after tax for the year, attributable to the company, was £6.5m (2017: £14.7m). The Financial Statements were approved by and signed on behalf of the Board by: Ian Crabb Group Chief Executive Officer 5th March 2019 Adam Castleton Group Chief Financial Officer 5th March 2019 Note 3 4 5 6 7 11 8 9 10 10 11 12 13 13 13 13 14 2018 £’000 7 14 187,807 10,766 11,335 120 2017 £’000 7 8 182,144 24,495 7,235 112 210,049 214,001 46,450 256,499 50,893 264,894 (105,204) (103,058) (18,552) (19,672) (123,756) (122,730) (34,500) (27,001) – (4) (34,500) (27,005) (158,256) (149,735) 98,243 115,159 208 5,629 4,129 (5,261) (12,200) 105,738 98,243 208 5,629 3,802 (5,317) 21 110,816 115,159 170 c115055_LSL.indb 171 171 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Parent Company Statement of Cash-Flows for the year ended 31st December 2018 Parent operating profit before tax and interest Adjustments for: Exceptional gain on sale of financial assets Depreciation of tangible assets Share-based payments Finance costs Dividend income/rebates received via non-cash consideration Realisation of non-cash consideration received for operating activities Operating cash-flows before movements in working capital Movements in working capital Decrease in trade and other receivables (Decrease)/increase in trade and other payables Cash generated from operations Interest paid Income taxes paid Net cash generated from operating activities Cash-flows used in investing activities Acquisitions of subsidiaries and other businesses Investment in joint ventures and associates Investment in financial assets Proceeds from sale of financial instruments Dividends received from subsidiaries Purchases of property, plant and equipment Net cash generated/(expended) on investing activities Cash-flows used in financing activities Proceeds from borrowings Repayment of overdraft Proceeds from exercise of share options Dividends paid to equity holders of the parent Net cash (expended)/generated in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the end of the year Note 10 4 8 9 6 2 2018 £’000 5,462 (1) 1 105 1,627 2017 £’000 12,946 (2,049) 1 (189) 1,101 (10,000) (19,503) 1,529 (1,277) – (7,693) 20,414 (5,799) 14,615 13,338 (1,494) (6,985) 4,859 (3,562) (4,100) – – 10,000 (7) 24,102 5,628 29,730 22,037 (1,101) (10,517) 10,419 – – (23,941) 3,024 6,000 (7) 2,331 (14,924) 7,500 (3,110) 20 (11,600) (7,190) – – 10,500 4,577 – (10,572) 4,505 – – 172 c115055_LSL.indb 172 22/03/2019 19:04 173 Parent Company Statement of Changes in Equity for the year ended 31st December 2018 For the year ended 31st December 2018 As at 1st January 2018 Adjustment on initial application of IFRS 9 Other comprehensive income for the year Revaluation of financial assets Profit for the year Total comprehensive income for the year Exercise of options Share-based payment transactions Dividends Issued capital £’000 208 Share premium £’000 5,629 Share-based payment reserve £’000 Shares held by EBT1 £’000 Fair value reserve £’000 Retained earnings £’000 Total £’000 3,802 (5,317) 21 110,816 115,159 – – – – – – – – – – – – – – – – – – – – – (22) 349 – – – – – – 56 – – (21) (21) (12,200) – (12,221) – – – 21 21 – 6,516 6,537 (15) – – – (12,200) 6,516 (5,684) 19 349 (11,600) (11,600) As at 31st December 2018 208 5,629 4,129 (5,261) (12,200) 105,738 98,243 During the year ended 31st December 2018, the Trust acquired nil LSL Shares. During the period 15,966 share options were exercised relating to LSL’s various share option schemes resulting in the Shares being sold by the Trust. LSL received £20,000 on exercise of these options. Note: 1 Treasury shares have been renamed to Shares held by EBT. For the year ended 31st December 2017 As at 1st January 2017 Disposal of financial asset (net of tax) Revaluation of financial asset (net of tax) Other comprehensive income for the year Profit for the year Total comprehensive income for the year Investment in treasury shares Exercise of options Share-based payment transactions Dividends Issued capital £’000 208 Share premium £’000 5,629 Share-based payment reserve £’000 Treasury shares £’000 Fair value reserve £’000 Retained earnings £’000 Total £’000 4,303 (5,368) – 106,174 110,946 – – – – – – – – – – – – – – – – – – – – – – – – (46) (455) – – – – – – – 51 – – (1,701) 1,722 21 – 21 – – – – – – – 14,717 14,717 – (5) 502 (1,701) 1,722 21 14,717 14,738 – – 47 (10,572) (10,572) As at 31st December 2017 208 5,629 3,802 (5,317) 21 110,816 115,159 During the year ended 31st December 2017, the Trust acquired nil LSL Shares. During the period 14,661 share options were exercised relating to LSL’s various share option schemes resulting in the Shares being sold by the Trust. LSL received nil on exercise of these options. 172 c115055_LSL.indb 173 173 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Notes to the Parent Company Financial Statements for the year ended 31st December 2018 1. Accounting policies Basis of preparation The Financial Statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The Company Financial Statements have been prepared on a going concern basis and on a historical cost basis, except for, certain debt and financial assets that have been measured at fair value. The accounting policies which follow set out those significant policies which apply in preparing the Financial Statements for the year ended 31st December 2018. The Company’s Financial Statements are presented in pound sterling and all values are rounded to the nearest thousand pounds (£’000) except when otherwise indicated. Summary of significant accounting policies New standards and interpretations IFRS 9 Financial Instruments IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1st January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement, impairment and hedge accounting. IFRS 9 also replaces the “incurred loss” model in IAS 39 with the “expected credit loss” model that applies to trade and other receivables. i. Classification of financial assets As permitted by IFRS 9 the Company has chosen to not restate prior periods. The Company has made the irrevocable election to recognise the change in fair value of all investments other than ZPG Limited through OCI rather than profit and loss. This election was made because the gains or losses arising from the change in fair value of these investments are not directly linked to the trading of the Company. Changes in the fair value of ZPG Limited will be recognised through the profit and loss. For all other financial assets and liabilities held by the Group the measurement category has not changed under IFRS 9. ii. Impairment of financial assets The adoption of IFRS 9 has no material impact to the Company. The Company’s receivables are intra-group receivables and have minimal expected credit losses. Judgements and estimates The preparation of financial information in conformity with IFRS as adopted by the European Union requires the Management Team to make judgements, estimates and assumptions that affect the application of policies and reporting amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Judgements Areas of judgement that have the most significant effect on the amounts recognised in the consolidated financial statements are: Valuation of financial assets The Company owns non–controlling interests in a number of listed and unlisted entities. In accordance with the accounting standards, these investments are held at fair value and judgement and assumptions are required in assessing this. Deferred tax The Company recognises deferred tax assets on all applicable temporary differences where it is probable that future taxable profits will be available for utilisation. This requires the Management Team to make judgements and assumptions regarding the amount of deferred tax that can be recognised based on the magnitude and likelihood of future taxable profits. Deferred tax liabilities are provided for in full. 174 c115055_LSL.indb 174 22/03/2019 19:04 175 1. Accounting policies (continued) Estimates There are no key assumptions affected by future uncertainty that have significant risks of causing material adjustment to the carrying value of assets and liabilities within the next financial year. Investments in subsidiaries Investments are shown at cost less provision for impairment. The cost of an investment is measured as the aggregate of the consideration transferred, measured at acquisition date fair value. Any contingent consideration will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration are recognised through profit and loss. Investments are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that its carrying value may be impaired. Investments in joint ventures and associates An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. Investments in joint ventures and associates are accounted for at cost less any provision for impairment. Investments are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that its carrying value may be impaired. The cost of an investment is measured as the aggregate of the consideration transferred, measured at acquisition date fair value. Any contingent consideration will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration are recognised in profit and loss. Income taxes Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted by the balance sheet date. The Management Team periodically evaluates positions taken in the tax returns with respect to the situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Financial Statements, with the following exceptions: • where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; • in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and • deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting period and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are offset, only if a legally enforceable right exists to set off current tax assets against current tax liabilities, the deferred income taxes relate to the same taxation authority and that authority permits the Group to make a single net payment. Income tax is charged or credited directly to other comprehensive income or equity, if it relates to items that are charged or credited in the current or prior periods to other comprehensive income or equity respectively. Otherwise income tax is recognised in the Income Statement. 174 c115055_LSL.indb 175 175 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview 1. Accounting policies (continued) Pensions The Company operates a defined contribution pension scheme for employees of the Company. The assets of the scheme are invested and managed independently of the finances of the Company. The pension cost charge represents contributions payable in the year. Share-based payment transactions Equity-settled transactions The Group equity share option programmes allow Company employees to acquire LSL Shares. The fair value of the options granted is recognised as an employee expense with a corresponding increase in equity in the case of equity-settled schemes. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using the Black Scholes model, taking into account the terms and conditions (including market and non-vesting conditions) upon which the options were granted. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions where vesting is conditional upon a market or non-vesting condition, which is treated as vesting irrespective of whether or not the market or non-market vested condition, is satisfied, provided that all other performance and/or service conditions are satisfied. Employee Benefit Trust The Company has an employee share trust (ESOT) and an employee benefit trust (Trust) for the granting of LSL Shares to Executive Directors and selected senior employees. Shares in LSL held by the ESOT and the Trust are treated as treasury shares and presented in the Balance Sheet as a deduction from equity. No gain or loss is recognised in the Income Statement on the purchase, sale, issue or cancellation of the Group’s own equity instruments. The finance costs and administration costs relating to the ESOT and the Trusts are charged to the Income Statement. Dividends earned on shares held in the ESOT and the Trusts have been waived. The ESOT and Trust Shares are ignored for the purposes of calculating the Group’s EPS. Financial instruments Financial assets and financial liabilities are recognised in the Company’s Balance Sheet when the Company becomes a party to the contractual provisions of the instrument. When financial assets are recognised initially, they are measured at fair value, being the transaction price plus, in the case of financial assets not at fair value through profit or loss, directly attributable transaction costs. Financial assets are derecognised when the Company no longer has the rights to cash-flows, the risks and rewards of ownership or control of the asset. Financial liabilities are derecognised when the obligation under the liability is discharged, cancelled or expires. All regular way purchases and sales of financial assets are recognised on the trade date, being the date that the Company commits to purchase or sell the asset. Regular way transactions require delivery of assets within the timeframe generally established by regulation or convention in the market place. The subsequent measurement of financial assets depends on their classification. The Company’s accounting policy for each category of financial instruments is as follows: Financial assets designated at fair value through OCI (equity instruments) Upon initial recognition, the Company can elect to classify irrevocably its equity investments as equity instruments designated at fair value through OCI when they meet the definition of equity under IAS 32 Financial Instruments: Presentation and are not held for trading. The classification is determined on an instrument-by-instrument basis. Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognised as other income in the statement of profit or loss when the right of payment has been established, except when the Company benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI. Equity instruments designated at fair value through OCI are not subject to impairment assessment. Financial assets designated at fair value through profit and loss Gains and losses arising from the changes in the fair value are recognised through the profit and loss. The Company’s accounting policy for each category of financial instruments is as follows: Interest-bearing loans and borrowings All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest- bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses arising on repurchase, settlement or otherwise cancellation of liabilities are recognised respectively in investment income and finance costs. 176 c115055_LSL.indb 176 22/03/2019 19:04 177 Notes to the Parent Company Financial Statements continued.for the year ended 31st December 2018 1. Accounting policies (continued) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is provided to write off cost less the estimated residual value of property, plant and equipment by equal annual instalments over their estimated useful economic lives as follows: Office equipment, fixtures and fittings Computer equipment Leasehold improvements – – – over three to seven years over three to four years over the shorter of the lease term or ten years An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the Income Statement when the asset is derecognised. These assets’ residual values, useful lives and methods of depreciation are reviewed at each financial year end, and adjusted prospectively, if appropriate. 2. Cash-flow from financing activities Long-term liabilities Short-term liabilities At 1st January 2018 £’000 27,000 19,672 46,672 Cash-flow £’000 7,500 (3,110) 4,390 Acquisitions £’000 Foreign exchange £’000 – 1,878 1,878 – – – Unwind £’000 – 111 111 At 31st December 2018 £’000 34,500 18,551 53,051 Short-term liabilities In 2018 bank overdraft was £16.6m (2017: £19.7m) and 2018 there were liabilities of £2.0m (2017: £nil) of deferred consideration (see Note 10 to these Financial Statements). Long-term liabilities In 2018 bank loan was £34.5m (2017: £27.0m) (see Note 10 to these Financial Statements). 3. Intangible assets Cost At 1st January 2018 Additions As at 31st December 2018 Impairment At 1st January 2018 Amortisation As at 31st December 2018 Net book value As at 31st December 2018 As at 31st December 2017 Software £’000 Total £’000 7 – 7 – – – 7 7 7 – 7 – – – 7 7 176 c115055_LSL.indb 177 177 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview 4. Property, plant and equipment As at 31st December 2018 Cost At 1st January 2018 Additions At 31st December 2018 Depreciation At 1st January 2018 Charge for the year At 31st December 2018 Carrying amount At 31st December 2018 At 1st January 2018 As at 31st December 2017 Cost At 1st January 2017 Additions At 31st December 2017 Depreciation At 1st January 2017 Charge for the year At 31st December 2017 Carrying amount At 31st December 2017 At 1st January 2017 Leasehold improvements £’000 Fixtures, fittings and computer equipment £’000 74 – 74 67 – 67 7 7 107 7 114 106 1 107 7 1 Leasehold improvements £’000 Fixtures, fittings and computer equipment £’000 74 – 74 66 1 67 7 8 106 1 107 106 – 106 1 – Total £’000 181 7 188 173 1 174 14 8 Total £’000 180 1 181 172 1 173 8 8 178 c115055_LSL.indb 178 22/03/2019 19:04 179 Notes to the Parent Company Financial Statements continued.for the year ended 31st December 2018 5. Investment in subsidiaries Details of the subsidiaries held directly and indirectly by the Company are shown in Note 35 to the Group Financial Statements. At 1st January Additions Adjustments for share-based payment At 31st December 2018 £’000 2017 £’000 182,144 181,908 5,419 244 – 236 187,807 182,144 In 2018 there was an increase of £244,000 (2017: increase of £236,000) on investment in subsidiaries for share-based payment, representing the financial effects of awards by the Company of options over its equity shares to employees of subsidiary undertakings. The total contribution to date is £7,605,000 (2017: £7,361,000). 6. Financial assets At cost At 1st January Additions Disposals Fair value adjustment recorded through OCI Revaluation uplift At 31st December 2018 £’000 24,495 – (2,266) (12,200) 737 10,766 2017 £’000 – 28,160 (5,740) – 2,075 24,495 ZPG Limited (ZPG) Financial assets include warrants in ZPG. These warrants have been issued pursuant to terms agreed with ZPG relating to the provision of portal services to LSL’s Estate Agency businesses. The Directors consider the best estimate of the fair value of LSL’s warrants to be the share price and therefore valued using level 2 valuation techniques. In June 2018, the warrants were revalued to £2,266,000 recognising a gain of £737,000. These warrants were disposed of in October 2018. In line with IFRS 9 (see Note 2 to these Financial Statements) the Group made the election to recognise the gain or loss in changes to the fair value of ZPG through the profit and loss. For this transition the modified retrospective approach was chosen, and therefore the opening reserve balance relating to ZPG (£21,000) was transferred into the opening retained earnings balance. Yopa Property Limited (YOPA) The carrying value of the Group’s investment in Yopa at 31st December 2018 has been assessed as £7,800,000 (31st December 2017: £20,000,000). The fair value of the Group’s investment in Yopa has been assessed by using level 3 techniques. This has led to the recognition of a fair value impairment of £12,200,000 which has been recognised in the Statement of Other Comprehensive Income. GPEA Limited (GPEA) GPEA was acquired for a book value of £3.7m. Subsequent to this acquisition LSL sold its entire holding of shares in GPEA. The investment was disposed of for £5.7m (£3.0m cash and £2.7m shares in eProp Services plc) in July 2017. 7. Investment in joint ventures and associates At cost At 1st January Additions At 31st December 2018 £’000 7,235 4,100 11,335 2017 £’000 7,235 – 7,235 The Company has a 50% interest in LMS, a joint venture whose principal activity is to provide conveyancing panel management services. In July 2018 the Company acquired a 33.85% holding in Mortgage Gym Limited, a digital mortgage business, for cash consideration of £4,000,000, a further investment of £100,000 was made in September 2018 increasing LSL’s holding to 34.69%. 178 c115055_LSL.indb 179 179 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview 8. Trade and other receivables Group relief receivable Prepayments Amounts owed by Group undertakings 9. Trade and other payables Trade payables Other taxes and social security payable Accruals Amounts owed to Group undertakings 10. Financial liabilities Current Deferred consideration Contingent consideration Bank overdraft Non-current Deferred consideration Contingent consideration Bank loans – RCF 2018 £’000 13,067 1,077 32,306 46,450 2018 £’000 166 (83) 2,126 102,995 105,204 2018 £’000 1,990 – 16,562 18,552 – – 34,500 34,500 2017 £’000 34,756 544 15,593 50,893 2017 £’000 – – 3,527 99,531 103,058 2017 £’000 – – 19,672 19,672 – 1 27,000 27,001 Contingent consideration During 2018 £1,000 (2017: £nil) of contingent consideration was paid to third parties. Bank loans – RCF and overdraft The Company’s bank loan totals £34.5m (2017: £27.0m) and the Company’s overdraft totals £16.6m (2017: £19.7m). The bank loan is secured via a cross guarantee issued from all of the Group’s subsidiaries excluding the following subsidiaries, Lending Solutions Limited, Homefast Property Services, Linear (Linear Mortgage Network and Linear Financial Services), Templeton LPA, Advance Mortgage Funding, Barnwoods, Chancellors Associates, Group First, Personal Touch Financial Services and RSC New Homes. The utilisation of the RCF may vary each month as long as this does not exceed the maximum £100.0m facility (2017: £100.0m). The Group’s overdraft is also secured on the same facility, and the combined overdraft and RCF cannot exceed £100.0m (2017: £100.0m). The banking facility is repayable when funds permit on or by May 2022. The interest rate applicable to the facility is LIBOR plus a margin rate. The margin rate is linked to the leverage ratio of the Group and the margin rate is reviewed at six monthly intervals. 180 c115055_LSL.indb 180 22/03/2019 19:04 181 Notes to the Parent Company Financial Statements continued.for the year ended 31st December 2018 11. Deferred tax Deferred tax asset at 1st January Deferred tax credit/(charge) in profit and loss account for the year Deferred tax credit/(charge) to other comprehensive income Deferred tax asset at 31st December Deferred tax liability Deferred tax liability at 1st January Deferred tax (charge)/credit to other comprehensive income Deferred tax on disposals Deferred tax asset/(liability) at 31st December 2018 £’000 112 11 (3) 120 2018 £’000 4 – (4) – 2017 £’000 105 (5) 12 112 2017 £’000 – 4 – 4 At 2018 a deferred tax asset is recognised in relation to timing differences on fixed assets of £4,000 and share-based payments of £116,000. No deferred tax liability is recognised in respect of equity financial assets. At 2017 a deferred tax asset was recognised in relation to timing differences on fixed assets of £6,000 and share-based payments of £106,000. A deferred tax liability of £4,000 was recognised in respect of financial assets measured at fair value. The 2015 summer budget announced that the headline rate of corporation tax in the UK would be further reduced from the current rate of 20% to 19% effective from 1st April 2017, and further reduced to 18%, effective from 1st April 2020. The budget of March 2016 announced that from 1st April 2020, the proposed UK corporation tax will be lowered further still to 17%. For the full year ended 31st December 2018, current tax is measured at a headline rate of 19.00% (2017:19.25%). Following the substantive enactment of the Finance Bill 2016 in September 2016, the corporation tax rate of 17.0% was confirmed. Accordingly, this is the rate at which deferred tax has been provided (2017: 17.0%). 12. Called up share capital Authorised: 2018 Shares £’000 2017 Shares £’000 Ordinary Shares of 0.2 pence each 500,000,000 1,000 500,000,000 1,000 Issued and fully paid: At 1st January and 31st December 13. Reserves 104,158,950 208 104,158,950 208 For a description of the reserves refer to Note 27 to the Group Financial Statements. Share premium The amount subscribed for share capital in excess of nominal value less any costs attributable to the issue of new Shares. Share-based payment reserve This represents the amount provided in the year in respect of share awards. The Company has operated long-term incentive plans (including JSOP and CSOP) and a number of SAYE schemes for the employees in the Company and the Group. See Note 13 to the Group Financial Statements for details of the LTIP, JSOP, CSOP, SIP/BAYE and the SAYE schemes. The effect of share-based payment transactions on the Company’s profit for the period was a charge of £107,000 (2017: charge of £189,000). Fair value reserve The fair value reserve is used to record the changes in fair value of equity financial assets. 180 c115055_LSL.indb 181 181 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview 14. Company profit/loss for the financial year after tax The Company has not presented its own profit and loss account as permitted by section 408 of the Companies Act 2006. The profit after tax for the year was £6.5m (2017: £14.7m). Remuneration paid to Directors of the Company is disclosed in Note 13 to the Group Financial Statements. The Company paid £131,375 (2017: £184,775) to its auditors in respect of the audit of the Financial Statements of the Company. Fees paid to the external auditors and their associates for non-audit services to the Company itself are not disclosed in the individual accounts of the Company because Group financial statements are prepared which are required to disclose such fees on a consolidated basis. These are disclosed in Note 9 to the Group Financial Statements. 15. Pensions costs and commitments Total contributions to the defined contribution schemes in the year were £40,505 (2017: £43,826). There were nil outstanding amounts in respect of pensions as at 31st December 2018 (2017: £nil). The Parent Company headcount at 31st December 2018 was nil (2017: nil). This is due to employment contracts being drawn up within the subsidiaries and not within the Parent Company itself. 16. Capital commitments The Company had no capital commitments as at 31st December 2018 (2017: none). 17. Related party transactions During the year the transactions entered into by the Company are as follows: Wholly owned subsidiaries 2018 2017 Non-wholly owned subsidiaries 2018 2017 Sales to related parties £’000 Purchases from related parties £’000 Amounts owed by related parties £’000 Amounts owed to related parties £’000 – – – – 32,129 29,162 102,311 112,839 Sales to related parties £’000 Purchases from related parties £’000 Amounts owed by related parties £’000 Amounts owed to related parties £’000 – – – – 64 40 571 194 In July 2017 the Group entered into a convertible loan note and introducer agreement with Global Property Ventures Limited of which Simon Embley is chairman. 18. Financial instruments – risk management The Company’s principal financial instruments comprise bank loans and other loans. The main purpose of these financial instruments is to raise finance for the Company’s operations and to fund acquisitions. The Company has various financial assets and liabilities such as trade receivables, cash and short-term deposits and trade payables, which arise directly from its operations. It is the Company’s policy that trading in derivatives shall not be undertaken. The Group may, from time to time and as necessary, enter into interest rate swaps for risk management purposes but did not hold any such swaps during either the current or prior year. The Company is exposed through its operations to the following financial risks: • cash-flow interest rate risk; • liquidity risk; and • credit risk. 182 c115055_LSL.indb 182 22/03/2019 19:04 183 Notes to the Parent Company Financial Statements continued.for the year ended 31st December 2018 18. Financial instruments – risk management (continued) Policy for managing these risks is set up by the Board following recommendations from the Group Chief Financial Officer. The policy for each of the above risks is described in more detail below. Cash-flow interest rate risk The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s long-term debt obligations with floating interest rates. The majority of external Company borrowings are variable interest based and this policy is managed centrally. The following table demonstrates the sensitivity to a reasonably possible change in interest rates on loans and borrowings. With all other variables held constant, the Company’s profit before tax is affected through the impact on floating rate borrowings as follows. There is no material impact on the Company’s equity. 2018 2017 Increase/ decrease in basis point Effect on profit before tax £’000 +100 -100 +100 -100 (345) 345 (270) 270 Liquidity risk The Company aims to mitigate liquidity risk by managing cash generation by its operations, dividend policy and acquisition strategy. Acquisitions are carefully selected with authorisation limits operating up to Group Board level and cash payback periods applied as part of the investment appraisal process. The Company monitors its risk to a shortage of funds using a recurring liquidity planning tool and daily cash-flow reporting. This includes consideration of the maturity of both its financial investments and financial assets (e.g. accounts receivable, and other financial assets) and projected cash-flows from operations. The Company’s objective is to maintain a balance between continuity of funding and flexibility for potential acquisitions through the use of its banking facilities. The table below summarises the maturity profile of the Company’s financial liabilities at 31st December 2018 based on contractual undiscounted payments: Year ended 31st December 2018 Interest-bearing loans and borrowings (including overdraft) Trade and other payables Contingent consideration Deferred consideration Year ended 31st December 2017 Interest-bearing loans and borrowings (including overdraft) Trade payables Contingent consideration Deferred Consideration On demand £’000 16,562 – – – Less than 3 months £’000 3 to 12 months £’000 1 to 5 years £’000 > 5 years £’000 Total £’000 252 103,078 – 1,990 770 36,968 – – – – – – 16,562 105,320 770 36,968 – – – – – 54,552 103,078 – 1,990 159,620 3 to 12 months £’000 1 to 5 years £’000 > 5 years £’000 Total £’000 On demand £’000 19,779 – – – Less than 3 months £’000 174 99,531 – – 548 27,582 – – – – 1 – – – – – – 48,083 99,531 1 – 147,615 183 22/03/2019 19:04 182 c115055_LSL.indb 183 19,779 99,705 548 27,583 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview 18. Financial instruments – risk management (continued) The liquidity risk of the Company entity is managed centrally by the Group Treasury function. The Company’s cash requirement is monitored closely. The Company has a RCF with a syndicate of major banking corporations to manage longer term borrowing requirements. Capital management The primary objective of the Company’s capital management is to ensure that it maintains appropriate capital structure to support its business objectives, including any regulatory requirements, and maximise Shareholder value. Capital includes share capital and other equity attributable to the equity holders of the parent. In the medium to long-term, the Company will strive to maintain a reasonable leverage (i.e. balance between debt and equity) to help achieve the Company’s business objectives of growth (through acquisitions and organic growth) and dividend policy. In the short-term, the Company does not have a set leverage ratio to be achieved but the Directors monitor the ratio of net debt to operating profit to ensure that the debt funding is not excessively high. Credit risk There are no significant concentrations of credit risk within the Company. Interest rate risk profile of financial assets and liabilities Treasury policy is described in the note above. The interest rate profile of the financial assets and liabilities of the Group as at 31st December 2018 are as follows: Fixed rate RCF Floating rate RCF Within 1 year £’000 1-2 years £’000 – – – – 2-3 years £’000 – – 3-4 years £’000 – Total £’000 – (51,062) (51,062) The effective interest rate and the actual interest rate charged on the loans in 2018 are as follows: RCF Effective rate Actual rate 4.1% 2.0% The effective interest rate on the RCF during the year is higher than the actual rate due to commitment fees payable on undrawn amounts. The interest rate profile of the financial assets and liabilities of the Group as at 31st December 2017 are as follows: Fixed rate RCF Floating rate RCF Within 1 year £’000 1-2 years £’000 – – – – 2-3 years £’000 – – 3-4 years £’000 – Total £’000 – (46,772) (46,772) The effective interest rate and the actual interest rate charged on the loans in 2017 are as follows: RCF Effective rate Actual rate 4.1% 1.5% The effective interest rate on the RCF during the year is higher than the actual rate due to commitment fees payable on undrawn amounts. Fair values of financial assets and financial liabilities The fair values for the majority of the financial instruments have been calculated by discounting the expected future cash-flows at interest rates prevailing for a comparable maturity period for each instrument. There are no material differences between the book value and fair value for any of the Company’s financial instruments. 184 c115055_LSL.indb 184 22/03/2019 19:04 185 Notes to the Parent Company Financial Statements continued.for the year ended 31st December 2018 18. Financial instruments – risk management (continued) Fair value hierarchy The Group uses the following hierarchy for determining and disclosing the fair value of the financial instruments by valuation technique: • Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; • Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and • Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. The following table provides the fair value measurement hierarchy of the Group’s assets and liabilities. 2018 Assets measured at fair value Financial assets Liabilities measured at fair value Contingent consideration Deferred consideration 2017 Assets measured at fair value Financial assets Liabilities measured at fair value Contingent consideration Deferred consideration £’000 10,766 – 1,990 £’000 24,495 1 – Level 1 £’000 Level 2 £’000 Level 3 £’000 – – – – – – Level 1 £’000 Level 2 £’000 10,766 – 1,990 Level 3 £’000 – – – 1,529 22,966 – – 1 – The fair value of equity financial assets that are not traded in the open market (£2.966m) are using level 3 techniques in accordance with the fair value hierarchy and the Management Team use all relevant and up to date information (including cash-flow forecasts and financial statements) to arrive at their judgement. Where appropriate a range of potential outcomes is considered in reaching a conclusion. 19. Post Balance Sheet events On 5th February 2019 LSL announced an Estate Agency Strategy: ways of working programme update and work has now commenced on the reshaping of the Your Move and Reeds Rains branch networks. As disclosed on 5th February 2019, LSL expects to incur an exceptional P&L charge of approximately £14m in 2019 and £1m in 2020, with cash costs amounting to approximately £12m over the three years from 2019 to 2021 including approximately £9m cash costs in 2019. 184 c115055_LSL.indb 185 185 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Other Information In this section 187 Definitions 192 Shareholder Information 186 c115055_LSL.indb 186 22/03/2019 19:04 187 Definitions “2011 EBT” employee benefit trust established in November 2011 as part of the acquisition of Marsh & Parsons. “Adjusted Basic Earnings Per Share” or “Adjusted Basic EPS” is defined at Note 10 to the Group Financial Statements. “Adjusted EBITDA” is Group Underlying Operating Profit (Note 5 to the Group Financial Statements) plus depreciation on property, plant and equipment. “AGM” Annual General Meeting. “Advance Mortgage Funding” Advance Mortgage Funding Limited. “Albany” refers to Albany Insurance Company (Guernsey) Limited. “AMI” Association of Mortgage Intermediaries. “ARLA” or “ARLA Propertymark” Association of Residential Lettings Agents. “ASA” Advertising Standards Authority. “Asset Management” refers to LSL’s repossessions, asset management and property management services for multi-property landlords. “Audit & Risk Committee” LSL’s Audit & Risk Committee. “Auditor Independence Policy” LSL policy relating to non-audit services provided by the external auditor. ”Barclays” Barclays Bank PLC. “Basic Earnings Per Share” or “EPS” is defined at Note 10 to the Group Financial Statements. “Board” / “Board of Directors” the board of Directors of LSL. “BAYE” ‘buy as you earn’ (also referred to as SIP). “BDS” BDS Mortgage Group Limited. “CAGR” compound annual growth rate. “CMA” Competition and Markets Authority. “Committees” refers to LSL’s Nominations Committee, the Audit & Risk Committee and the Remuneration Committee. “Company” and “Parent Company” refers to LSL Property Services plc. “Companies Act” Companies Act 2006. “Chancellors Associates” trading name of Chancellors Associates Limited. “Chairman” Simon Embley. “Chairman of the Audit & Risk Committee” David Stewart. “Chairman of the Remuneration Committee” Bill Shannon. “Code” UK Code of Corporate Governance published by the Financial Reporting Council (FRC) (April 2016 edition) or July 2018 edition. “Company Secretary” Sapna B FitzGerald. “CCAS” Consumer Codes Approval Scheme. “CSOP” company share ownership plan. “CSR” corporate social responsibility. “Davis Tate” trading name of Davis Tate Limited. “Deputy Chairman” refers to Bill Shannon. “Director” an Executive Director or Non Executive Director of LSL. “DPO” Data Protection Officer. “EBITDA” earnings, before interest, taxes, depreciation and amortisation. 186 c115055_LSL.indb 187 187 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Definitions continued. “Elsevier” Elsevier Limited. “Embrace Financial Services” Embrace Financial Services Limited. “EPC” energy performance certificate. “EPS” earnings per Share. “Ernst & Young” Ernst & Young LLP. “ESG” environmental, social and governance. “ESOS” energy savings opportunity scheme. “ESOT” LSL’s employee share trust. “Estate Agency Division” or “Estate Agency” or “EA” in relation to the financial year commencing 1st January 2018, includes LSL’s Residential Sales, Lettings, Financial Services and Asset Management businesses. In relation to the financial year commencing 1st January 2019 includes LSL’s Residential Sales, Lettings and Asset Management businesses. “Estate Agency and Related Services” refers to LSL’s Estate Agency Division. “e.surv” or “e.surv Chartered Surveyors” trading names of e.surv Limited. “eProp” eProp Services plc. “Executive Committee” refers to the Executive Committee of the Group, which includes the Executive Directors. “Executive Director(s)” refers to Ian Crabb, Adam Castleton and Helen Buck. “EU” European Union. “FCA” Financial Conduct Authority. “Financial Services” or “FS” refers to LSL’s financial services (including mortgage, non-investment insurance brokerage services and the operation of LSL’s intermediary networks). “First Complete” trading name of First Complete Limited. “Financial Statements” financial statements contained in this Report. “FRC” Financial Reporting Council. “Frosts” trading name of David Frost Estate Agents Limited. “FSCS” Financial Services Compensation Scheme. “FSMA” Financial Services and Markets Act 2000. “GDPR” General Data Protection Regulation. “Global Property Ventures” or “GPV” Global Property Ventures Limited. “Group First” or “GFL” Group First Limited. “Group” LSL Property Services plc and its subsidiaries. “Group Chief Executive Officer” Ian Crabb. “Group Chief Financial Officer” Adam Castleton. “Group Revenue” total revenue for the LSL Group. “Growth Shares” the C class of ordinary shares (each £0.001) in Marsh & Parsons (Holdings) Limited. “Goodfellows” trading name of GFEA Limited. “GPEA” trading name of GPEA Limited. “Hawes” or “Hawes & Co” trading name of Hawes & Co Limited. 188 c115055_LSL.indb 188 22/03/2019 19:04 189 “HMRC” Her Majesty’s Revenue and Customs. “Homefast” Homefast Property Services Limited. “Home Report” a report which includes a single survey, energy report and property questionnaire and which must accompany all residential property marketing in Scotland. “IBNR” incurred but not reported. “ICSA” ICSA: The Governance Institute. “IFRS” International Financial Reporting Standards. “Insurance First Brokers” Insurance First Brokers Ltd. “Intercounty” trading name of ICIEA Limited. “IPO” initial public offering. “JNP” trading name of JNP Estate Agents Limited. “JSOP” joint share ownership plan. “Korn Ferry” trading name of Korn Ferry Hay Group Limited. “KPI” key performance indicators. “Land & New Homes” LSL Land & New Homes Ltd. “Lauristons” trading name of Lauristons Limited. “Lawlors” trading name of Lawlors Property Services Limited. “Legal Marketing Services”, “LMS”, “LMS Direct Conveyancing” or “Cybele” all refer to LMS Direct Conveyancing Limited and Cybele Solutions Holdings Limited. “Lending Solutions” Lending Solutions Holdings Limited. “Lettings” refers to LSL’s Residential Property Lettings and property management services. “LexisNexis” part of the RELX Group plc. “Linear” and “Linear Financial Solutions” are trading names of Linear Mortgage Network Limited. “Lloyds Banking Group” Lloyd Bank plc group of companies. “LPA” the Law of Property Act 1925. “LSE” London Stock Exchange. “LSLi” LSLi Limited and its subsidiary companies (during 2018 these included JNP, Intercounty, Frosts, Goodfellows, Davis Tate, Lauristons, Lawlors, Hawes & Co and Thomas Morris). “LSL”, “Group” and “Parent Company” refers to LSL Property Services plc and its subsidiaries. “LSL Corporate Client Department” trading name of LSL Corporate Client Services Limited. “LTIP” long-term incentive plan. “Management Team” senior management teams within the Group including the Executive Directors. “MAR” the Market Abuse Regulation. “Marsh & Parsons” trading name of Marsh & Parsons Limited. “Mortgages First” Mortgages First Ltd. “Mortgage Gym” Mortgage Gym Limited. “NAEA” or “NAEA Propertymark” National Association of Estate Agents. 188 c115055_LSL.indb 189 189 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Definitions continued. “NALS” National Association of Lettings Agents. “NBC Property Master” NBC Property Master Limited. “Net Bank Debt” see Note 32 to the Group Financial Statements. “Non Executive Director” refers to Kumsal Bayazit Besson, Bill Shannon, David Stewart and Simon Embley. Darrell Evans was appointed a Non Executive Director on 28th February 2019. “Notice of Meeting” the circular made available to Shareholders setting out details of the AGM. “Note” refers to Notes to the Group Financial Statements. “OCI” refers to other comprehensive income. “Openwork” trading name of Openwork Limited. “Ordinary Shares” or “Shares” 0.2 pence ordinary shares in LSL. “Palmer and Harvey” trading name of Palmer & Harvey McLane Limited. “PDMRs” Persons Discharging Managerial Responsibility as defined in Article 3(1) (25) of the Market Abuse Regulation. “Personal Touch Financial Services” or “PTFS” trading name of Personal Touch Financial Services Limited. “Personal Touch Administration Services” or “PTAS” trading name of Personal Touch Administrations Services Limited. “PI” professional indemnity. “PI Costs” costs relating to on-going and expected future PI claims relating to Surveying and Valuation Services. “Pink Home Loans” or “Pink” are previous trading names for Advance Mortgage Funding Limited and BDS Mortgage Group Limited. “PRIMIS Mortgage Network” or “PRIMIS” a trading name of Advance Mortgage Funding Limited, First Complete Limited and as of 31st January 2019 Personal Touch Financial Services Limited. “RCF” revolving credit facility. “Reed Exhibitions” part of RELX Group plc. “Reeds Rains” trading name of Reeds Rains Limited. “Reeds Rains Financial Services” trading name of Reeds Rains Financial Services Limited. “Registered Office” Newcastle House, Albany Court, Newcastle Business Park, Newcastle upon Tyne, NE4 7YB. “Report” LSL’s Annual Report and Accounts 2018. “Residential Sales” refers to LSL’s services for residential property sales. “RICS” Royal Institution of Chartered Surveyors. “RSC New Homes” or “RSC” RSC New Homes Limited. “Russell Reynolds Associates” Russell Reynolds Associates Limited. “Sainsbury’s” Sainsbury’s Supermarkets Limited. “SAYE” save-as-you-earn. “Senior Independent Non Executive Director” Bill Shannon. “Shareholders” shareholders of LSL. “SIP” share incentive plan (also referred to as BAYE). “St Trinity Asset Management” trading name of St Trinity Limited. “Surveying Division” or “Surveying” includes LSL’s Surveying and Valuation Services businesses. “Surveying and Valuation Services” or “Surveying Services” refers to LSL’s Surveying Division. 190 c115055_LSL.indb 190 22/03/2019 19:04 191 “Templeton” trading name of Templeton LPA Limited. “Thomas Morris” trading name of Thomas Morris Limited. “The Mortgage Alliance” or “TMA” are trading names of First Complete Limited’s mortgage club. “TM Group” TM Group Limited. “TPO” The Property Ombudsman. “TPOS” The Property Ombudsman Scheme. “Trust” or “Employee Benefit Trust” LSL Property Services plc Employee Benefit Trust. “Trustees” Link Market Services Trustees Limited. “TSI” Trading Standards Institute. “TSR” total shareholder return. “UKLA” UK Listing Authority. “Underlying Operating Margin” operating profit before exceptional costs, contingent consideration, amortisation and share-based payments shown as a percentage of turnover. “Underlying Operating Profit/Loss” before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments. “VEM” or “Vibrant Energy Matters” Vibrant Energy Matters Limited. “Walker Fraser Steele” a trading name of e.surv Limited. “Yopa” Yopa Property Limited. “Your Move” trading name of your-move.co.uk Limited. “Zero Deposit Scheme” or “ZDS” trading names of Global Property Ventures Limited. “Zoopla” or “ZPG” ZPG Limited (previously ZPG plc). 190 c115055_LSL.indb 191 191 22/03/2019 19:04 Other InformationFinancial Statements Strategic ReportDirectors’ Report and Corporate Governance ReportsOverview Shareholder Information Company details LSL Property Services plc Registered in England (company number 5114014) LEI Number 213800T4VM5VR3C7S706 Registered office Newcastle House, Albany Court, Newcastle Business Park, Newcastle upon Tyne, NE4 7YB Head office 1-3 Sun Street, London, EC2A 2EP Telephone: 0203 215 1015 Facsimile: 0207 920 9443 Email: investorrelations@lslps.co.uk Website: lslps.co.uk Company Secretary’s office 2nd Floor, Gateway 2, Holgate Park Drive, York, YO26 4GB Telephone: 01904 698852 Share listing LSL Property Services plc 0.2 pence Ordinary Shares are listed on the London Stock Exchange under ISIN GB00BIG5HX72 Registrar Link Asset Services, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU Telephone: 0871 664 0300 Calls cost 12 pence per minute plus your phone company’s access charge. Calls outside the UK will be charged at the applicable international rate. Lines are open between 9.00am to 5.30pm, Monday to Friday excluding public holidays in England and Wales. Website: linksharedeal.com Email: enquiries@linkgroup.co.uk If you move, please do not forget to let the registrar know your new address. Provisional calendar of events Preliminary results released AGM proxy form deadline AGM 5th March 2019 3.30 pm 26th April 2019 3.30 pm 30th April 2019 The AGM will be held at LSL’s offices at 1-3 Sun Street, London, EC2A 2EP. The Notice of Meeting details the proposed resolutions. In accordance with its Articles of Association, LSL publishes Shareholder information, including notice of AGMs and the Annual Report and Accounts on its website, lslps.co.uk. Reducing the number of communications sent by post not only results in cost savings to LSL, it also reduces the impact that unnecessary printing and distribution of reports has on the environment. LSL’s Articles of Association enable all communications between Shareholders and LSL to be made in electronic form (as permitted by the Companies Act 2006). Documents will be supplied via LSL’s website to Shareholders who have not requested a hard copy, or provided an email address to which documents of information may be sent. Where a Shareholder has consented to receive information via the website, a letter will be sent to the Shareholder on release of any information directing them to the website. If a Shareholder wishes to continue to receive hard copy documents they should contact Link Asset Services (details above). Forward looking statements By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances and are subject to assumptions that are beyond the control of LSL including, amongst other things, UK domestic and global economic and business conditions, market related risks such as fluctuations in interest rates, inflation, deflation, the impact of competition, changes in customer preferences, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities and the impact of tax or other legislation and other regulations in the UK. As a result LSL’s actual future condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward looking statements. Nothing in this Report is intended to or should be construed as a profit forecast. Information about the management of the Principal Risks and Uncertainties facing LSL is set out within the Strategic Report on pages 27 to 34. 192 c115055_LSL.indb 192 22/03/2019 19:04 c115055_LSL.indb 6 22/03/2019 19:02 lslps.co.uk Registered in England (Company number 5114014) Registered office: Newcastle House Albany Court Newcastle Business Park Newcastle upon Tyne NE4 7YB Tel: 020 3215 1015 Fax: 020 7920 9443 Email: investorrelations@lslps.co.uk L S L P r o p e r t y S e r v i l c e s p c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 8 c115055_LSL.indb 1 22/03/2019 19:02