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2023 Report_________________________________ ANNUAL REPORT 2018 Welcome to Manx Financial Group PLC Welcome to Manx Financial Group PLC Welcome to Manx Financial Group PLC Welcome to Manx Financial Group PLC Integrity through independence and service An independent banking group founded in 1935, domiciled in the Isle of Man Manx Financial Group PLC (“MFG”) is an AIM-listed company (LSE: MFX.L) which has subsidiaries engaged in a suite of financial services based in the Isle of Man and the UK. These companies offer financial services to both retail and commercial customers. MFG's strategy is to grow organically and through strategic acquisition to further augment the range of services it offers. Principal wholly owned subsidiaries: - • Conister Bank Limited • Edgewater Associates Limited • Manx FX Limited Conister Bank Limited (“the Bank”) is a licensed independent bank, regulated by the Financial Services Authority in the Isle of Man, the Financial Conduct Authority in the UK and is a full member of the MasterCard® network and the Isle of Man’s Association of Licensed Banks. The Bank provides a variety of financial products and services, including savings accounts, asset financing, personal loans, loans to small and medium sized enterprises, block discounting and other specialist secured credit facilities to the Isle of Man and the UK consumer and business sectors. Edgewater Associates Limited (“EWA”) is the largest independent financial adviser in the Isle of Man. EWA provides a bespoke and personal service to Isle of Man residents and the Group’s to business and personal customers and advises on assets in excess of £310 million. EWA specialises in the areas of wealth management, mortgages, general insurance, and retirement planning. Manx FX Limited was formed in 2014 and provides specialist solutions and access to competitive foreign exchange and international payment processing facilities. CONTENTS Chairman’s Statement Business Model and Strategy Risk Management Corporate Governance Report Directors, Officers and Advisers Audit, Risk and Compliance Committee Directors’ Remuneration Report Directors’ Report Annual Financial Statements’ Contents Statement of Directors’ Responsibilities Independent Auditor’s Report Consolidated Statement of Profit or Loss and Other Comprehensive Income Company Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Company Statement of Financial Position Consolidated and Company Statements of Changes in Equity Consolidated Statement of Cash Flows Company Statement of Cash Flows Notes to the Consolidated Financial Statements 01 04 06 12 16 18 21 23 24 25 26 30 31 32 33 34 35 36 37 STRATEGIC REPORT CHAIRMAN’S STATEMENT Shareholderssss Dear Shareholder Dear Shareholder Shareholder Dear Dear When I wrote to you in the Interim Results for 2018, I was confident that the full year would continue our growth in profitability. This has proved to be the case, but the effect of the two positive initiatives undertaken during the second half of the year has had a temporary impact on the Income Statement. The first being the investment in the UK by opening a new full-service UK Headquarters in Newbury, with a satellite branch in Manchester. These offices will source new business and manage our UK lending portfolio through our subsidiary Conister Finance and Leasing Limited, thus demonstrating our commitment to this increasingly important segment of our business. Secondly, the increasing economic uncertainty surrounding both the Isle of Man and the United Kingdom has reinforced your Board’s decision to adopt an the to provisioning under ultra-conservative approach requirements of International Financial Reporting Standard 9 (“IFRS 9”) by recognising an additional buffer to strengthen the Balance Sheet. I must emphasise that this action does not represent a realized cash outlay and is there, if ever required, solely to protect our future profitability. Indeed, the quality of our underwriting is such that our actual ratio of bad debts written off stands at an enviable 0.6% (2017: 0.5%). the As a consequence, our profit before tax is broadly similar to 2017 at £2.7 million (2017: £2.7 million). However, our total assets have increased by 13.8% to £196.9 million (2017: £173.0 million) and our total shareholder equity has increased by a corresponding 14.3% to £19.7 million (2017: £17.3 million). Whilst the latter figure is gratifying, I am deeply aware that as I write, our market capitalisation stands at only £11.5 million, being a discount of 42%. This discount is regrettable, especially when ranked against our peer group. Of our core businesses, Conister Bank has enjoyed excellent new business generation, offset by the run-off by mutual agreement of two discontinued lending streams, both nearly complete, but representing a decrease of £14.8 million during the year (2017: £12.7 million). Thus, the fall in interest income to £19.1 million (2017: 19.9 million) belies a total new lending of £102.1 million for 2018 (2017: £73.7 million). I discuss this further below, but suffice to say, this bodes well for the future by diversifying our risk profile. Manx FX Limited produced an encouraging profit before tax of £0.5 million (2017: £0.3 million) and Edgewater Associates Limited, although experiencing a market downturn during the last two months of 2018, produced a profit before tax of £0.3 million (2017: £0.7 million). overnance Corporate governance Corporate g overnance overnance Corporate g Corporate g It is important for shareholders to understand the emphasis both I and the Board place upon corporate governance. In May 2018, we adopted the Quoted Companies Alliance corporate governance code (“QCA”) with which we expect to be fully compliant in our reporting for the year-end statutory accounts. In essence, the code has ten principles to aid investors in their understanding of our Group and to help build and develop long term trust and maximise our relationship with shareholders. As Chairman, it is my responsibility to make a clear statement on corporate governance and the value we place upon this. Our full year accounts will provide a detailed explanation of how we observe the QCA, but meanwhile, I am keen for investors to understand our strategic objectives both in the near and longer term. Our key objectives for 2019 Our key objectives for 2019 Our key objectives for 2019 Our key objectives for 2019 Your Board’s fundamental objective remains that of increasing shareholder value, both in a prudent yet progressive manner. Thus, our strategic concentration continues to be: - Providing the highest quality service throughout our operations to all customers, ensuring that their treatment is both fair and appropriate; Adopting a pro-active strategy of managing risk, especially following the implementation of IFRS 9 in full. In doing so, we are committed to regularly review our loan book to allow for any credit impairment resulting from observing strict Expected Credit Loss criteria; Concentrating on developing our core businesses by increased prudential considered acquisitions, lending and augmenting the range of financial services we offer; Implementing an enhanced and scalable infrastructure to better service requirements of a growing Group without requirement headcount; IT the operational the in for a disproportionate increase Focusing on the liabilities side of our balance sheet by introducing a new treasury management function and structure; and Managing our balance sheet to exceed, as far as possible, the regulatory requirements for capital adequacy. We implemented the General Data Protection Regulation on 25 May 2018. Doing this required changes in policy, procedures and technology across the Group to manage how we process and secure data and protect the rights of individuals. Both our Internal Audit and Compliance teams have reviewed the process and will continue to be involved in making sure that the post implementation requirements continue to be met. We have also instituted an important new position, that of Head of Risk and Compliance, to enhance and monitor our control functions, ensuring that these meet the highest banking standards and are commensurate with the growth in our operations. Financial performance review Financial performance review Financial performance review Financial performance review Conister Bank Limited (the “Bank”) Conister Bank Limited (the “Bank”) Conister Bank Limited (the “Bank”) Conister Bank Limited (the “Bank”) Despite the shadow of economic uncertainty, all our lending targets for the year were exceeded. We have been able to make significant inroads into the UK commercial sector, while increasing our lending in the Isle of Man. As I reported above, net new lending increased by 38.4% to £102.1 million (2017: £73.7 million), driven by a 41.9% uplift in lending on the Isle of Man and a substantial increase in demand for our structured product range in the UK. Thus, the net loan book growth of 21.0% to £148.3 million (2017: £122.5 million) has been achieved with no deterioration in loan book quality as performing loans remained at 97.2%. In anticipation of this increase in UK demand, we have opened fully equipped new offices in Newbury and in Manchester. We are confident that we have invested in the most experienced teams available to develop this important market segment. Page | 1 STRATEGIC REPORT CHAIRMAN’S STATEMENT I have previously explained that improving our technology is of primary importance as we increase in scale. During 2018, we successfully installed a new deposit system, representing an investment of £1.0 million spread over five years. This has helped manage the growth of our deposit base by 11.4% to £158.5 million (2017: £142.3 million). One of our key efficiency measures, our Loan to Deposit Ratio, improved by 7.5% to 93.6% (2017: 86.1%) which reflects the improved use of our cash balances. We also continue to almost exactly match our loan terms to our deposit maturities. We note, however, that the average term of our loan book has marginally reduced, reflecting the uncertainty in the market in response to the current economic outlook. initiative has continued As I mentioned in my 2017 Chairman’s Report, we instituted a policy to eliminate any reliance upon UK introducers where we suffer a disproportionately adverse commission-sharing cost. This throughout 2018. Thus, commission expense decreased by 27.4% to £6.1 million (2017: £8.4 million). This movement resulted in net interest income increasing by 13.1% to £12.8 million (2017: £11.3 million) despite interest expense increasing by 8.9% to £3.5 million following the increase in deposit balances. As a result of these factors, trading income improved by 15.9% to £9.5 million (2017: £8.2 million) leading to a 16.3% increase in operating income £9.8 million (2017: £8.4 million). Although operating expenses decreased by £0.2 million to £6.0 million (2017: £6.2 million), this masks the investment we have made in new personnel, systems and controls, enhancing our skill set throughout the business. The increase in impairment provision, to which I have already referred, to £0.9 million (2017: £0.6 million) reflects a prudent buffer against a potentially adverse outcome following any conclusion of the current economic uncertainty. It is important to note that, despite our conservative approach to approving advances, this figure still only represents 2.0% of the enlarged gross loan book, with the total impairment provision in the Balance Sheet standing at £3.4 million (2017: £2.7 million). Other costs net to £0.2 million (2017: £0.0 million) as the gain last year from the write-off an intercompany payable has not been repeated. Thus, profit before tax improved by 26.0% to £2.2 million (2017: £1.7 million) leading to a 24.0% increase in post-tax profit contribution by the Bank to £2.0 million (2017: £1.6 million). Total assets, benefitting by a loan book growth of £25.6 million, part financed by the conversion of cash and debt securities of £5.7 million, showed a 13.0% increase to £190.1 million (2017: £168.7 million). As a consequence, shareholder equity improved by 25.0% to £21.1 million (2017: £16.9 million). Included in the Balance Sheet is a VAT debtor amounting to £1.1 million. This figure represents the VAT recovery relating to a claim under the revised Partial Exemption Special Method. Since the publication of our last financial statements, the Court of the European Union determined in favour of Volkswagen Financial Services Limited in a parallel dispute against HM Revenue & Customs. This is an extremely encouraging development and sets a precedent. Thus, discussions with the Isle of Man Government Customs and Excise Division have commenced regarding a full recovery of this debtor. During the year, as part of our drive to maximise new business, the Group financed the issue of £2.4 million of new ordinary shares by the Bank which, together with the increase in retained earnings, improved total Tier 1 capital by 23.0% to £19.8 million (2017: £16.1 million). This in turn improved total regulatory capital expressed as a percentage of total risk- weighted assets by 0.6% to 18.1% (2017: 17.5%), well above our notification threshold of 15.0%. Edgewater Associ ates Limited (“EWA”) Edgewater Associates Limited (“EWA”) ates Limited (“EWA”) ates Limited (“EWA”) Edgewater Associ Edgewater Associ Although fee income appears to have remained steady at £2.6 million (2017: £2.6 million), an unexpected change in UK legislation meant a temporary halt to our ability to service pension transfers to the Isle of Man during the second half of the year. Notwithstanding, all other fee-based services showed encouraging growth. As a result, we were required to make a final top-up payment of £0.1 million to the vendor of our recent acquisitions. This, coupled with the effect of a full year increase in administration costs, including investment in improved systems, to £2.3 million (2017: £1.8 million) caused the profit contribution to decline to £0.3 million (2017: £0.7 million). Total assets reduced by 2.0% to £3.1 million (2017: £3.2 million), reflecting a decrease in debtors. However, creditors also reduced, resulting in an improvement in net assets to £2.3 million (2017: £2.0 million). Shareholder equity increased by 12% to £2.3 million (2017: £2.0 million). continues The underlying business to experience considerable excess demand, but is limited by the difficulty of recruiting suitably qualified advisors. Notwithstanding, EWA remains the Isle of Man’s largest IFA. We remain encouraged by the opportunities available for this important part of the Group’s business and I am pleased to note that we have already seen a meaningful improvement in profitability from the beginning of 2019. Manx FX Limited (“MFX”) Manx FX Limited (“MFX”) Manx FX Limited (“MFX”) Manx FX Limited (“MFX”) This business is still very much in its infancy. Because of the low-cost structure, relatively small increases in income can generate unusually positive consequences. For example, the introduction of a hedging strategy for clients during the year doubled turnover to £0.8 million (2017: £0.4 million). While this level of income is not necessarily expected to be repeated in 2019, MFX continues to attract new clients, and now services an active Isle of Man customer base of 87 (2017: 58). This rapid growth means that we continue to develop and invest in an enhanced operational the necessary functions. As a consequence, our administration expenses have increased to £0.3 million (2017: £0.2 million), leading to a significant profit contribution from MFX of £0.5 million (2017: £0.3 million). in our control infrastructure to provide resilience Turning to the balance sheet, total assets increased to £0.6 million (2017: £0.2 million) and shareholder equity stands at £0.6 million (2017: £0.1 million). Page | 2 STRATEGIC REPORT CHAIRMAN’S STATEMENT Outlook Outlook Outlook Outlook The widely reported current economic uncertainties and potential changes in interest rates will have an impact on credit markets both in the Isle of Man and the UK. Notwithstanding, I believe that the Bank’s strategy of asset-backed lending to carefully selected sectors will allow us to continue to grow. We continue to develop new loan products to those entities with significant balance sheets which demonstrate both affordability and credit resilience. Thus far, we have experienced no downturn in demand in both the commercial and consumer marketplace in both jurisdictions and are more than able to maintain rigorous credit and risk control in our underwriting. In conjunction with this, the Bank continues to seek out suitable acquisitions for our strategy of consolidation, particularly in the UK. So far this year, we have acquired 20% of the issued share capital of Beer Swaps Limited, trading as Ninkasi Brewkit Rentals, a relatively new company financing brewery equipment, together with an option to acquire the remaining shares by April 2021. We have also acquired 30% of the issued share capital of PayItMonthly Limited which provides web-based finance solutions to retailers without the need for them to maintain an onerous compliance resource, allowing their customers the ability to spread repayments over one year, together with an option to acquire the remaining shares after August 2021. Although these initiatives are individually small in scale, they will be integrated to form our own specialist the synergies introducer network using available from central funding, systems, risk management and controls, augmented with dedicated staff capable of developing this important aspect of our portfolio. Now that the businesses have fully integrated, EWA has the real potential to grow financial advisory services, not only on the Isle of Man but also within the UK, especially as the need to finance a longer retirement becomes a necessity. We continue to review suitable acquisitions capable of increasing profitability. EWA not only has a strong new business pipeline, but approximately half of its income derives from renewals. Our only limitation to this growth is the recruitment of suitably qualified advisors. To counter this, we are concentrating on an internal program of staff development which is proving to be extremely successful. Jim MellonMellonMellonMellon Jim Jim Jim Executive Chairman 27 March 2019 MFX also has the potential for further growth and, conversely, has the capability of benefitting from any uncertainties in the financial environment as its clients seek the optimum solutions to manage foreign currency exposures. Only a relatively few Isle of Man businesses maintain in-house foreign exchange expertise and the MFX proposition has limited competition. In short, I believe that the Group as a whole is well placed to achieve continued expansion. Each of our principal operations are profitable and each has identified opportunities, yet unrealised. It is this which will allow us to meet our 2019 strategic priorities. Whilst our organic growth continues to be excellent, any significant growth will further acquisitions, strategic partnerships and the development of specialist products to meet the ever-changing market needs. Each solution we offer will be assessed in terms of risk profile and subsequent reward. Clearly, those opportunities that utilise technology to the full and fit well within our current operations are of the greatest interest. Meanwhile, we remain in an excellent position to report further success, both at the Interims and the year-end. require I, and the Board, recognise the need to address the question of shareholder return. As ever, the conflicting demands of utilizing shareholder equity as the regulatory platform to support growth versus the compounded cost of a dividend payment are difficult to reconcile. As an example, currently for every £1,000 paid as a dividend, the Group would forgo £6,000 worth of new business with its attendant yield. Added to which, as the Group utilises relatively expensive non- dilutive term loans to augment regulatory capital, we would effectively be undertaking additional borrowing to make payment. Notwithstanding, we are considering potential arrangements which will, we believe, be of benefit to shareholders but without reducing our potential to reach the scale whereby the Group becomes capable of self-generating regulatory capital. It is unlikely that we will be able to implement any scheme during 2019, but depending upon this year’s outcome, we may be in a better position to implement a scheme thereafter. Finally, and as always, I would like to thank our shareholders for your continued support, our customers and clients for their loyalty, and also our excellent staff for their outstanding efforts in continuing to develop the Group. Page | 3 STRATEGIC REPORT BUSINESS MODEL AND STRATEGY Conister Bank imited (the “Bank”) Conister Bank LLLLimited (the “Bank”) imited (the “Bank”) imited (the “Bank”) Conister Bank Conister Bank The Bank’s Board of Directors (the “Board”) has set strategic objectives, aligned to its strategic plan. These objectives provide the framework for setting risk appetite statements and tolerances for all material risks. The strategic objectives set are:- • Maintain capital adequacy; • Deliver stable earnings growth; • Secure stable and efficient access to funding and liquidity, and • Maintain stakeholder confidence. These strategic objectives provide the link between the Bank’s strategic planning and its risk management framework, using risk appetite statements, measures and tolerances to manage risk on a day-to-day basis and are reviewed annually and approved by the Board. Key in considering the Bank’s judgement of appetites is its assessment of its regulatory environment (both in the Isle of Man (“IOM”) and the United Kingdom (“UK”); the IOM deposit market; access to regulatory capital; the IOM and UK credit markets; the suitability of its product range; concentrations of advances and historic arrears. The aim is to deliver controlled growth, by providing adequate returns with strong credit profiles. In addition, the Bank has specifically assessed the impact of the Brexit on both sides of its Balance Sheet. Having considered the above, drawing on both internal and external resources, the Bank continues to believe the credit markets it operates within remains conducive to growth with liquidity sourced from both its balance sheet the IOM’s substantial deposit base. This growth will be achieved through the expansion of existing products organically and through acquisition. The Bank continues to explore opportunities with both new products and new markets. This strategy can be analysed by the two geographical areas the Bank operates within, namely the IOM and the UK. The Bank’s strategy for stable growth is underpinned by its existing mix of products, both for the IOM and UK markets. The Bank is proud of its heritage and remains heavily centric in the IOM but recognises that as its UK loan book grows it will need to create a UK presence to manage and grow this aspect of its business. As such, in 2018, the Bank opened offices in both Manchester and Newbury. The former is a base for the Bank’s small but growing UK direct sales team and the latter deals with all aspects of the Bank’s UK credit broker market. These are two markets in which the Bank wishes to increase its presence. Furthermore, growth is forecast from the Bank’s Structured Products and a team, led by an experienced banker, has been recruited to manage this product range based in the Newbury office. Sourcing reliable funding underpins the Bank’s growth objectives. Through the Bank’s Class 1 Isle of Man Deposit Taking licence it has access to £40.0 billion of deposits. The Bank currently restricts itself to the retail market, of which it has circa 1.0% market share, but the Bank recognises it has an opportunity to increase its market share through the reduction in competition experienced in this market and or by increasing interest rates. Also, the Bank is considering accessing other IOM deposit markets, for example, the corporate deposit market where its systems, processes and reputation may provide a competitive advantage over others. As such, the Bank believes that it is armed with sufficient reliable alternatives to be confident that it can raise the necessary deposits when required. The Bank’s acquisition strategy is to gain market share in markets it already operates within or to gain access to a desirable market through an existing reputable, profitable operator. Regarding the former, the Bank continues to enjoy a positive lending experience within the UK credit broker market and currently has circa £20.0 million of net loans outstanding. The strategy for growth is both organic (through improving customer service and increasing the number of brokers on its roster) and acquisitive. The Bank is currently in negotiation with an established credit broker with the view of acquiring its non-regulated business during 2019. Edgewater Associates Limited (“EAL”) Edgewater Associates Limited (“EAL”) Limited (“EAL”) Limited (“EAL”) Edgewater Associates Edgewater Associates Edgewater Associates Limited is the largest Independent Financial Advice firm in the Isle of Man and is regulated by the Isle of Man Financial Services Authority. Our strategic objective is to: Grow and service our client base; Increase assets under advice; and Grow and develop our staff complement. EAL is a generalist IFA practice with a diverse mix of clients requiring a broad range of products and services covering: First time buyers --- mortgages; Newly qualified professionals --- protection, savings, school fees; Established clients --- wealth management, retirement planning; and General insurance clients --- home, car, travel, commercial, specialist. In 2016 EAL embarked on an aggressive and successful acquisition programme covering a two year period; at the outset we had a client base of approximately 4,600 clients. After four acquisitions and an active data cleansing review, we now have an active client base of approximately 11,800, with associated assets under advice of £310 million ( up from £273 million in 2017 ). Whilst we will continue to grow and develop our standard business model, we will always be open to new opportunities. We remain nimble and ready to move with economic and regulatory changes as they arise; our team remains up to date against industry standards and trends. We retain an appetite for growth either through additional acquisition opportunities that may arise, or via organic growth from our existing client bank and business partners with whom we have built strong relationships. Diversification opportunities are also encouraged and pursued, as per our successful programme to grow / build Employee Benefit Group Schemes. This incorporates staff pensions (including pension freedom), protection, private medical cover, and death in service. Page | 4 STRATEGIC REPORT BUSINESS MODEL AND STRATEGY To keep pace with our development we continue to train talented young people to progress to rounded, professional advisers who are able to fit into succession planning. To supplement this, we also take the opportunity to recruit quality experienced advisers and para-planners who can further enhance our team. Manx Manx Manx Manx FX Limited (“MFX”) FX Limited (“MFX”) FX Limited (“MFX”) FX Limited (“MFX”) Established in 2014, MFX has specialist knowledge of currency operational requirements and has carefully selected the best UK partners to provide market foreign exchange and leading payment services. The strategic objectives of MFX are: To maintain and develop existing client relationship; To increase the number of referrals to our foreign exchange business partners with a view of on- boarding new clients; and To raise MFX’s profile and build a professional reputation on the Isle of Man (“IOM”). We believe the foreign exchange and international payment offering via our UK partners is second to none. With our upfront agreed foreign exchange margins the customer has complete pricing transparency. Our business partners have been carefully selected to ensure they are able to obtain the best possible pricing from the market. The international payments fees offer outstanding value, at hugely reduced fees compared to any local high street bank. At MFX, we realise that often our clients just need a facility to send urgent payments quickly and efficiently so we provide access to a FX and payments online system with straight through processing to make these tasks as effortless as possible. For the next 12 months, MFX will concentrate its efforts in the IOM. The IOM offers large potential having a diverse range of industries. A small but dedicated team know and understand the importance of offering excellent service and has pride and integrity when dealing with both existing clients and new prospects. Our professional reputation is important to our business and our colleagues attend local industry events which serves two purposes; to enforce and raise the profile of MFX and support IOM businesses. Maintaining a close working relationship with our UK partners is core to our business. Regular conference calls and quarterly face-to-face meetings are held to discuss new opportunities, changes to product offering, industry updates and just as importantly a chance to develop the personal working relationship. Page | 5 RISK AND GOVERNANCE RISK MANAGEMENT Risk Risk Risk Risk mmmmanagement verview anagement ooooverview verview verview anagement anagement Effective risk management is crucial to MFG’s sustainability. The Board the effective governance of risk management. The Board maintains its oversight and responsibilities in terms of the three lines of defence risk governance model set out below. is ultimately accountable for Determining the Group’s risk tolerance and appetite through enterprise risk management is a key element of MFG’s corporate governance framework. This framework has been enhanced during 2018 and sets out the governance principles, practices and guidance to facilitate effective and efficient management of the Group’s business. It is primarily designed to assist the Group in enhancing its corporate governance framework and intended to reinforce the key elements of widely accepted and long established Quoted Companies Alliance (“QCA”) corporate governance principles. its through (“ICAAP”)) A fundamental principle contained in the code, is for effective risk management: MFG has in place a Risk Management Framework and a Capital Management Framework Internal Capital Adequacy (undertaken Assessment Process the implementation of some of the principles of the MFG Governance Framework at subsidiary level. The Risk Management Framework was also significantly enhanced in 2018 and ensures that MFG conducts its business in the correct way and manages its financial resources responsibly to safeguard the interests of all its stakeholders. It further supports the Board and senior management in fulfilling their respective duties in relation to the sustainable operation of the business. The risk management system is supported by support to policies, processes and activities relating to the taking, management and reporting of risk. Management and accountability Management and accountability Management and accountability Management and accountability The Audit, Risk and Compliance Committee (“ARCC”) is operated at a group level and currently comprises of two experienced non-executive directors who are both qualified accountants. Only members of the ARCC have the right to attend ARCC meetings to allow for independence. However, other individuals representing Risk, Compliance and Internal Audit are always invited by the Chairman of the Committee to attend all or part of any meeting as and when appropriate. The main objectives of the ARCC are to review operations and ensure that they are conducted to the highest possible standards. This is accomplished by providing an independent objective assurance function specifically for, but not limited to: Internal Controls and Risk Management Systems; Whistleblowing and Fraud; Risk and Compliance; Internal Audit; and External Audit. It provides oversight of compliance with all legislation, regulation and applicable codes of practice in the jurisdictions that MFG conducts business; and reviews policies, procedures and processes to effectively identify, quantify and manage all material risks and to advise on best practice. GovGovGovGovernance framework ernance framework ernance framework ernance framework The following overview of the key governance components that make up the MFG system of governance illustrates the crucial role of risk management: Page | 6 RISK AND GOVERNANCE RISK MANAGEMENT Culture Culture Culture Culture The risk culture, which forms part of MFG’s overall culture, encompasses the tone at the top and a set of shared attitudes, values, behaviours and practices that characterise how individuals at MFG consider risk in their day-to-day business activities. Learnings are taken from previous incidents and ongoing assessment to ensure continuous improvement in the management of risk. All individuals understand the importance of effective risk management and ensure that risks associated with their role are appropriately understood, managed and reported. Individuals at all levels communicate risk related insights in a timely, transparent and honest manner. This culture is driven from the top by the Board and Executive Management through how they communicate, make decisions and motivate the business. Managers and leaders ensure that in all their actions and behaviours they continually reinforce the culture that the effective management of risk is critical to MFG’s success and that every individual plays a role in the management of risk. Appetite Appetite Appetite Appetite Risk appetites are currently only set at subsidiary level and set out the maximum amount of risk that it is prepared to accept in the pursuit of delivering on business objectives. The risk appetite covers all the risk types (e.g. strategic and business risk, market risk, credit risk, liquidity risk, operational risk, conduct risk and compliance & legal risk) and is reviewed annually and as the operating environment changes it is constantly measured against stated appetite take appropriate action. to Risk identification, measurement & control Risk identification, measurement & control Risk identification, measurement & control Risk identification, measurement & control Improving a robust understanding of the risks to which the business is exposed is crucial to ensure that all material risks are appropriately monitored, managed and reported on. Each individual within the Group in conjunction with their manager is responsible for understanding the risks associated with their role. An understanding of risk is developed through the identification, appropriate, measurement of risks to which the business is exposed. and where assessment These processes are performed as part of strategy setting, strategy execution and day-to-day operations and are referred to as risk and control assessments. The Risk team provides tools to aid managers and individuals in developing an understanding of risk within their respective business responsibilities. The risk and control assessment process of understanding risk and reviewing the adequacy and effectiveness of related controls and risk mitigation approaches is generally performed on a regular basis, at least annually, as part of a continuous risk management cycle. Three lines of efence and key assurance functions Three lines of ddddefence and key assurance functions efence and key assurance functions efence and key assurance functions Three lines of Three lines of As part of its overall governance framework, MFG has adopted best practice monitoring and control mechanisms by implementing the three lines of defence governance and combined assurance model. This means that responsibility for the governance and oversight is allocated throughout organisation according principles. to the ‘three lines of defence’ The three lines of defence governance model is regarded as international best practice for ensuring good governance (including governance within risk and capital management) across an organisation. The emphasis is placed on ownership, responsibility, independence, assurance, communication, oversight and transparency across MFG governance. The term ‘key assurance function’ refers to a properly authorised function, whether in the form of a person, unit or department, serving as a control or ‘checks and balances’ function from a governance perspective, and which carries out such activities. These functions typically are second and third line of defence functions. First efence ine of ddddefence First lllline of efence efence ine of ine of First First The first line of defence e.g. business management is primarily risk origination and accountable management in accordance with risk policy and strategy. This includes implementing responses. identifying, assessing risks and the day-to-day for efence ine of ddddefence Second lllline of Second efence efence ine of ine of Second Second The second line of defence is responsible for the development and maintenance of the frameworks and policies. The second line provides oversight of, and challenge to, the first line of defence and drives the implementation of the frameworks and policies. Third efence ine of ddddefence Third lllline of efence efence ine of ine of Third Third The third line of defence is the independent assurance function providing overall assurance the Board on governance, risk management, and internal controls. The third line of defence comprises of internal audit, external audit and other independent assurance providers. The third line of defence is completely independent from the management of the day-to-day business activities to MFG MFG MFG MFG aaaassurance unctions ssurance ffffunctions unctions unctions ssurance ssurance MFG has effective systems of risk management and internal control. The tasks, processes and obligations of the key assurance functions are transparent and clearly defined, with regular exchange of information between the functions. Each of the functions is structured to ensure that the function has the necessary authority, independence, resources, expertise and access to the Board and all relevant employees and information to exercise its authority. The minimum assurance functions within MFG include: Risk management function; Compliance function; and Internal Audit function. The head of each of these key functions possesses the necessary skills, experience and knowledge required for the specific positions they exercise, and meet all suitability or ‘fit and proper’ requirements. Written guidelines for these functions are in place, and compliance with them is assured on a regular basis. All of the key functions within MFG have a direct reporting line to the Board. Page | 7 RISK AND GOVERNANCE RISK MANAGEMENT MFG is developing a combined assurance model to effectively manage the organisation’s significant risks and material matters through a combination of the assurance service providers and functions described above. Risk st verview rategy & ooooverview Risk strategy & verview verview rategy & rategy & Risk st Risk st Risk Risk Risk Risk pppplanlanlanlan The Board has set strategic objectives, aligned to its strategic plan. These objectives provide the framework for setting risk appetite statements and tolerances for all material risks. The strategic objectives set are:- Maintain capital adequacy; Deliver stable earnings growth; Secure stable and efficient access to funding and liquidity, and Maintain stakeholder confidence. its These strategic objectives provide the link between the Group’s strategic planning and risk management framework, using risk appetite statements, measures and tolerances to manage risk on a day-to-day basis and are reviewed annually and approved by the Board. Key to considering its assessment of its regulatory environment (both in the IOM and the UK); the IOM deposit market; access to regulatory capital; the IOM and UK credit markets; the suitability of its product range; concentrations of advances and historic arrears. In addition, the Group has specifically considered the impact of a ‘hard’ Brexit on both sides of its Balance Sheet. judgement of appetites the Group’s is Strategic risk plans are developed at subsidiary level with the intent of improving the risk frameworks and embedding these into a developing risk culture for the Group. Key deliveries of the Risk Management Framework are split between ‘Risk infrastructure’ and ‘Risk management cycle’: The risk infrastructure is the establishment of a consistent foundation and approach to enterprise requirements and supporting components in managing risks. The cycle of risk management is adaptable and continuously progressing and responding to the changing internal and external environment. This work has resulted in: The redesign of Management Committee frameworks, including roles and responsibilities to ensure that all material risks are captured and formally considered prior to presentation to the ARCC and the Board; A reclassification of the policies within the policy framework to ensure that the relevant Management Committee is accountable for the policies that support their risk, and to reduce the workload for the ARCC and Board, enabling them to focus on overseeing and challenging the risk management framework; The development of more detailed Board approved risk appetite statements, and the design of an underlying risk appetite measures framework, to be owned and monitored by the relevant Management Committee; The design of a risk management framework which looks to adopt a common language across the lines of combined assurance model (and all defence), with a supporting risk catalogue and classification matrix; and A high level risk assessment to identify the top risks enabling work to progress in a risk focused manner on completing risk and control assessments, in order to build a key controls monitoring programme. Principal r isks Principal risks isksisks Principal r Principal r The Group has exposure to the following key risks: Strategic risk; Credit risk (including counterparty credit risk); Liquidity risk; Operational risk (including regulatory risk); Market risk (including interest rate risk); Concentration risk; and Reputation risk. The Group has considered the above key risks that it faces and the mitigating controls against those risks: Strategic rrrriskiskiskisk Strategic Strategic Strategic Strategic risk is the risk to the Group’s revenue as set within the budget and the medium term plans arising through sub optimal implementation of the strategic plan due to either internal or external factors faced by its subsidiaries. Controls and itigation Controls and mmmmitigation itigation itigation Controls and Controls and The Group controls and mitigates this risk via a number of measures: Subsidiaries generally commence formal planning process in September for the forthcoming year, to inform the budget submitted to the Group Boards for approval. In reality, the planning process is continuous and responsive to change in the internal and external environment. their Barriers to delivering the strategic plan, and changes to planned activity are captured in the various subsidiary ‘Managing Director’s Reports’ which are submitted to their respective Boards and then ultimately reported to the Group Board at each Board meeting. The reports will take account of input from the Group Executive Directors and current financial performance versus budget and seek to highlight strategic responses for the related subsidiary. Key strategic projects are managed under formal project governance with progress of key projects tracked, and communicated and discussed at regular project meetings. The impact of limited capital, liquidity, operational capacity and regulator restriction on the achievement of strategy is captured by the planning process, with exceptional items dealt with under the relevant risk category, where the impact on risk appetite and mitigating actions will be formally recorded. Page | 8 RISK AND GOVERNANCE RISK MANAGEMENT risk risk risk risk (including (including (including (including counterparty, counterparty, counterparty, counterparty, concentration, concentration, concentration, concentration, Credit Credit Credit Credit underwriting and credit migration risks) underwriting and credit migration risks) underwriting and credit migration risks) underwriting and credit migration risks) Credit risk is defined as the risk that counterparties fail to fulfil their contractual obligations. A material decline in credit quality, or the failure of a counterparty could result in higher levels of arrears and ultimately in increased provisions and write-offs, which impacts upon profitability, potentially eroding the capital position for the Group’s subsidiaries. itigation Controls and mmmmitigation Controls and itigation itigation Controls and Controls and individual Delegated authorities: The Group operates to a schedule of delegated authorisation limits linked to an and experience. This is bolstered by validations of all significant credit exposures over set limits and ongoing monitoring of credit positions of key suppliers and intermediary networks. underwriter’s knowledge Distribution strategy: The Group actively monitors and controls the credit risk of all business written to ensure that it is treating customers fairly and as a safeguard against the failure of any business relationship. Mitigation of counterparty credit risk is undertaken the maintenance, where appropriate, of cash reserves and loss pools to fund any buy-back indemnity. Comprehensive due diligence processes are also undertaken. through Monitoring of credit quality exposure: The Group monitors its credit risk exposures via an internal credit risk grading methodology that assigns each individual exposure with one of three credit grades based upon the probability of default at product and distribution channel level. This allows for better monitoring of credit quality and impairment of its current book as well as forecast and stress test on a more accurate basis. Concentration the risk: To protect against exposures where build-up unintentional deterioration the impact could materially sustainability and profitability, the Group seeks to maintain a diverse portfolio of products across a variety of geographical regions, customers, sectors and asset classes. This diversity protects the Group against any deterioration in a particular geographical region, the economic environment, commercial sector etc. Accounting standards: Finally, the introduction of IFRS 9, effective from 2018, necessitated the move to an expected loss provisioning methodology rather than an incurred loss. This will provide an additional credit risk buffer. of Operational risk (including conduct) Operational risk (including conduct) Operational risk (including conduct) Operational risk (including conduct) Operational risk is the risk of loss resulting from human error, inadequate or failed internal processes or controls, system failure, improper conduct, fraud or external events. The principal operational risks for the Group arise from the following areas: Resilience of the IT environment: The IT environment is under constant review to identify and implement efficiencies to enable increased customer service through the provision of additional services and products and to automate manual tasks wherever possible to minimise the potential for human error. The Group implemented an IT Steering Committee during 2017 to review and monitor current service standards, highlight any deficiencies and mitigate accordingly. There are a number of exception reports and scheduled tasks on a daily basis to ensure that any controls within systems are being reported on adequately. Third Party administration services: The key operational controls ensure that partners are fulfilling their legal, regulatory obligations in accordance with their service-level agreement with the Group. The Group has an outsourcing policy to ensure obligations are monitored and met. Internal reviews and audits are conducted on counterparties to ensure terms agreed are being adhered to. itigation Controls and mmmmitigation Controls and itigation itigation Controls and Controls and Adherence to internal limits and approval processes through: o Delegated authorities: The Group operates to a schedule of delegated credit authorisation limits and payment approval limits, linked to an individual’s knowledge and experience. o Segregation of Duties: There is appropriate segregation between those authorising transactions and those executing them, with four eyes principals in place where required. o Exception reporting reporting: Daily ensures that any regulatory and internal the limits are appropriate Management team. regularly by reviewed o New Business approval policy: All material new business is approved in line with a formally approved policy, with ultimate decision making resting with the applicable EXCO. Change control: The Group ensures that both changes to existing products and services and new products and services are delivered in a controlled manner with the appropriate checks and controls in place. A comprehensive on-boarding process in place for new outsourced partners in the UK. Due diligence checks: The operational risk from the Group’s third party administrators is mitigated by a comprehensive due diligence process which includes a take-on due diligence and a full review of the partner’s policies, procedures and financial stability. Key Operational Controls: Key controls are monitored through a combination of management oversight, Risk and Compliance monitoring and Internal Audit reviews. New Business Policy and Process – new business and material business change is outlined in a formal policy, which that a sequence of assessment and approval is followed. This will ensure that all relevant input is included and material risks considered. requires Exception reports: Exception reporting allows the Group to identify weaknesses in processes and controls which in turn allows for adequate training and the bolstering of systems and processes. Page | 9 RISK AND GOVERNANCE RISK MANAGEMENT Conduct risk Conduct risk Conduct risk Conduct risk The Group is exposed to conduct risk through its operations and interactions with consumers, either directly or through third parties (brokers, or counter-parties). The risk exposure is regulatory in nature for the Group’s UK based operations and consideration of any local jurisdiction guidance on good practice. Controls and m itigation Controls and mitigation itigation itigation Controls and m Controls and m The Group has an outsourcing policy to ensure that adherence to conduct and regulatory standards is contracted, and compliance with standards is appropriately monitored through the collection and assessment of relevant data, partner attestation, and onsite audits where appropriate. General conduct and particularly Treating Customers Fairly (“TCF”) principles are applied across the Group’s activities. Liquidity risk Liquidity risk Liquidity risk Liquidity risk Financial institutions are subject to liquidity risk as an inherent part of their business. Liquidity risk is the risk that the Group may not hold sufficient liquid funds meaning it would be unable to meet its contractual liabilities as they fall due. Liquidity risk arises where the Group, through its subsidiaries, has contractual credit obligations that can be placed under stress during illiquidity. The Group generally accesses wholesale funding markets or builds a core portfolio of liquid assets or buffers as additional sources of liquidity that can be utilised during such times. times of Controls and itigation Controls and mmmmitigation itigation itigation Controls and Controls and Overall the Group’s liquidity profile is resistant to stress as the Group: Has no contractual credit obligation. The Group has no absolute credit line obligations to its customers meaning that in times of liquidity stress, it is able to reduce its lending appetite accordingly; Has a matched funding profile and does not engage in maturity transformation which means that on a cumulative mismatch position the Group is forecast to be able to meet all liabilities as they fall due; Maintains an adequate liquidity buffer; and Has no exposure to the interbank lending market. The Group’s liquidity position is monitored on a daily basis against internal and external agreed limits. The Group also has a Liquidity Contingency Policy and Liquidity Contingency Committee should a liquidity crisis or potential liquidity disruption event occur. Reputation risk Reputation risk Reputation risk Reputation risk Reputational Risk is the risk of loss resulting from damages to the Group’s reputation, in lost revenue or increased costs; or destruction of shareholder value. Controls and itigation Controls and mmmmitigation itigation itigation Controls and Controls and The Group mitigates this risk by ensuring that its key risks are identified and managed, with an impact assessment of any potential or actual issues considering the impact to the Group’s reputation. The Group actively seeks to minimise the occurrence of events or issues which could give rise to loss or negative feedback, and actively manages the impact should issues occur. Interest rate risk Interest rate risk Interest rate risk Interest rate risk The principal potential interest rate risk that the Group is exposed to is the risk that the fixed interest rate and term profile of its deposit base differs materially from the fixed interest rate and term profile of its asset base, or basis and term structure risk. itigation Controls and mitigation Controls and m itigation itigation Controls and m Controls and m Funding profile: Interest rate risk for the Group is not deemed to be material currently due to the Group’s matched funding profile. In a rising interest rate environment due to the nature of the Group’s products and its matched funded profile, it should theoretically be able to increase its lending rate to match any corresponding rise in its cost of funds. The Group attempts to efficiently match its deposit taking to its funding requirements. The decay of the Group’s loan book through staged repayments means interest risk is difficult to hedge effectively so the Group does not currently hedge against this risk, and is therefore not exposed to any additional market interest rate risk in this respect. Funding cost: The Group would be exposed to potential risk if its cost of funds, which is linked to the cost of retail deposits, and ultimately the UK base rate, was to increase and it was unable, due to a competitive lending environment, to raise its lending rate correspondingly. The Group’s three year plan allows for an increase in its cost of funds, but the Group accepts that these assumptions may not reflect the timing of any interest rate rise or the quantum of the increase(s). Regulatory risk Regulatory risk Regulatory risk Regulatory risk Regulatory risk is the risk of material breach of regulation. The Group holds a Class 1 (1) Banking Licence and is accordingly regulated by the FSA. The Group also holds permissions with the FCA pertaining to regulated credit activities, and other specified regulated products and services in the UK. The risk of regulatory breach arises through a failure to identify, assess and apply applicable regulation; or a failure to adhere to the applicable regulation as applied. Monitoring and complying with the requirements of existing regulation across numerous regulatory bodies, along with the rapid pace and volume of regulatory change is a key risk. The risk is compounded due to the size of the Group, and the need to maintain a manageable cost of compliance. Controls and itigation Controls and mmmmitigation itigation itigation Controls and Controls and The Group remains well placed to meet the regulatory challenges that bring change to the macro environment. In order to strengthen the Risk and Compliance department, the ARCC and Board have increased the headcount in 2018 and have appointed an experienced Head of Risk and Compliance. Page | 10 RISK AND GOVERNANCE RISK MANAGEMENT Regulatory risks continue to be mitigated by themed and ad- hoc compliance monitoring reviews which are driven using a risk based approach to ensure resource is directed to areas of potential material risk. The monitoring plan is approve annually by ARCC. Monitoring reviews are supplemented by ongoing staff training and guidance. Wherever possible, legislative and regulatory requirements are built into relevant administration systems, with appropriate monitoring and exception reporting processes in place to monitor compliance. The Group maintains a watching brief on the regulatory environment and, as active members of a number of IOM and UK trade bodies, it receives additional regulatory updates and guidance on proposed legislative and regulatory issues. Upstream regulatory changes are tracked and assessed for impact by the Compliance Department and material items reported to ARCC. Internal Capital Adequacy Assessment Process Internal Capital Adequacy Assessment Process Internal Capital Adequacy Assessment Process Internal Capital Adequacy Assessment Process Overview Overview Overview Overview ICAAP is a key strategic and risk management tool for the Bank. It is a key component of the Bank’s planning process during the short and medium term. The Bank’s lead regulator, the FSA, requires the Bank to establish and maintain an internal adequacy assessment process which is appropriate to the nature and scale of its business and review that process annually and evidence that review. Methodology Methodology Methodology Methodology The Bank’s ICAAP process is as follows: Formulation of the Bank’s strategy and budget Formulation of the Bank’s strategy and budget Formulation of the Bank’s strategy and budget Formulation of the Bank’s strategy and budget Strategic plans are prepared annually for the forthcoming year, which will consider the Bank’s risk appetite, key market sectors to target, products to leverage/introduce, headcount, operational and capital investment required. Risk assessment Risk assessment Risk assessment Risk assessment The Executive Team will liaise with the Risk and Compliance department to determine the material risks in the Bank based on incidents and breaches, Internal Audit reports, Risk and Compliance report findings and issues raised at the Board and Committee meetings. Stress testing and reverse stress testing Stress testing and reverse stress testing Stress testing and reverse stress testing Stress testing and reverse stress testing The Finance department use Bank of England market assumptions for stress testing and stress the five-year forecasts to identify any capital deficiencies. Reverse stress testing is also used based on the assumption that the Bank ceases to trade, coupled with a run-off scenario to determine the capital distribution. Reverse stress testing is used to explore the vulnerabilities of the Bank’s strategy and plans to extreme adverse events that would cause the business to fail in order to facilitate contingency planning. Calculation of capital requirement and buffers Calculation of capital requirement and buffers Calculation of capital requirement and buffers Calculation of capital requirement and buffers Following the setting of strategy, risk assessment and stress tests, the Bank will then calculate its capital requirements by considering the following areas: Pillar I – The calculation is based on the minimum regulatory requirement under Pillar I of 10.0% of risk weighted assets for material risks; Pillar II – Assessment of any additional business risks not covered by the minimum Pillar I requirement, plus an assessment of Pillar II risks based upon the current material risk assessment and stress tests, to determine whether any additional capital buffers are deemed appropriate. An assessment of Pillar II and applicable capital add-ons have been assessed in Appendix 1; and Pillar III – Pillar III establishes measures to make better use of market discipline. Pillar III applies only at the top consolidated level of a banking group and is therefore generally not considered to be applicable to IOM incorporated banks as per FSA ICAAP guidance. Buffers – The Bank assesses its position to industry standard for regulatory buffers and calculates its position based on its overall exposures to different jurisdictions. Review, challenge and adoption of the ICAAP Review, challenge and adoption of the ICAAP Review, challenge and adoption of the ICAAP Review, challenge and adoption of the ICAAP The ICAAP is prepared by the Finance department in conjunction with the Risk and Compliance department, and reviewed by the Bank’s Executive Team, Risk Management Committee, ARCC, Internal Audit and the External Auditor prior to approval by the Board. It is used to measure and benchmark the Bank’s risk appetite and to forecast capital usage under both stressed and normal conditions. The ICAAP is challenged at all stages of the review process and presented to the Board by ARCC for approval prior to being submitted to the FSA. The ICAAP is regularly reviewed and updated throughout the year by management and referred to the ARCC and Board. ICAAP Results ICAAP Results ICAAP Results ICAAP Results The Bank has completed its ICAAP testing for 2018 in compliance with regulatory requirements. Despite the severity of the risk scenarios modelled, the Bank satisfied the capital and leverage requirements for the purpose of the stress test. The Bank did not require taking of any capital action as a result of the test. Page | 11 RISK AND GOVERNANCE CORPORATE GOVERNANCE REPORT to comply with Corporate eport overnance rrrreport Corporate ggggovernance eport eport overnance overnance Corporate Corporate The Manx Financial Group Board (the “Board”) is committed to best practice in corporate governance. Directors have agreed the Quoted Companies Alliance (“QCA”) Corporate Governance Code for Small and Mid-Size Quoted Companies to the extent which is appropriate to its nature and scale of operations. This report illustrates how Manx Financial Group PLC (the “Group”) complies with those principles. the provisions of QCA Principle 1: Establish a strategy and business model QCA Principle 1: Establish a strategy and business model QCA Principle 1: Establish a strategy and business model QCA Principle 1: Establish a strategy and business model value for shareholders which promote long----termtermtermterm value for shareholders which promote long value for shareholders value for shareholders which promote long which promote long The immediate strategy and business operations of the Group are set out in the Strategic Report on pages 4 and 5. The Group’s strategy and business model and amendments thereto, are developed by the Chief Executive Officer and his senior management team, and approved by the Board. The management team, led by the Chief Executive Officer, is responsible for implementing the strategy and managing the business at an operational level. The Group’s overall strategic objective is to capitalise on its unique position as owning the only independent Bank within the British Crown Dependencies by developing core financial services sector, both businesses within organically and by considered acquisitions. the The Group has a balanced portfolio of regulated and unregulated operations, all of which are managed on a risk- based and prudential approach. The principal activities include: deposit taking; lending to consumer and commercial markets in the IOM and the UK; the provision of dedicated financial advice, especially in the areas of pensions and general insurance; and foreign currency advisory. Ultimately, the Directors believe that this approach will deliver significant long-term value for Shareholders. The Group has adopted a portfolio approach to its strategic assets and is not dependent on one particular platform technology. The Directors believe that this approach helps to mitigate any concentration risk. The Group largely operates in an inherently heavily regulated sector and this is reflected in the emphasis on compliance and the provision of excellent customer service. In executing the Group’s strategy and operational plans, management will typically confront a range of day-to-day challenges associated with risks and uncertainties, and will seek to deploy the identified mitigation steps to manage these risks as they manifest themselves. QCA Principle 2: Seek to understand and meet shareholder QCA Principle 2: Seek to understand and meet shareholder shareholder shareholder QCA Principle 2: Seek to understand and meet QCA Principle 2: Seek to understand and meet needs and expectations needs and expectations needs and expectations needs and expectations The Group, via the Chief Executive Officer, seeks to maintain a regular dialogue with both existing and potential new Shareholders in order to communicate the Group’s strategy and progress and to understand the needs and expectations of Shareholders. Beyond the Annual General Meeting, the Chief Executive Officer and, where appropriate, other members of the senior management team will meet with investors and analysts to provide them with updates on the Group’s business and to obtain feedback regarding the market’s expectations of the Group. The Group’s investor relations activities encompass dialogue with both institutional and private investors. From time to time, the Company attends private investor events, providing an opportunity for those investors to meet with representatives from the Group in a more informal setting. QCA Principal 3: Take into account wider stakeholder and QCA Principal 3: Take into account wider stakeholder and QCA Principal 3: Take into account wider stakeholder and QCA Principal 3: Take into account wider stakeholder and social responsibilities and their implications for long term social responsibilities and their implications for long----term term term social responsibilities and their implications for long social responsibilities and their implications for long success success success success suppliers, employees, The Group is aware of its corporate social responsibilities and the need to maintain effective working relationships across a range of stakeholder groups. These include not only the Group’s regulatory partners, authorities, but also customers, be they depositors, borrowers or seeking financial advice. The Group’s operations and working methodologies take account of the need to balance the needs of all of these stakeholder groups while maintaining focus on the Board’s primary responsibility to promote the success of the Group for the benefit of its members as a whole. The Group endeavours to take account of feedback received to working from stakeholders, making amendments arrangements and operational plans where appropriate and where such amendments are consistent with the Group’s longer-term strategy. The Group takes due account of any impact that its activities may have on the environment and seeks to minimise this impact wherever possible. Through the various procedures and systems it operates, the Group ensures full compliance with regulatory, health and safety, and environmental legislation relevant to its activities. QCA Principal 4: Embed effective risk management, risk management, QCA Principal 4: Embed effective risk management, QCA Principal 4: Embed effective risk management, QCA Principal 4: Embed effective considering both opportunities and threats, throughout the considering both opportunities and threats, throughout the considering both opportunities and threats, throughout the considering both opportunities and threats, throughout the organisation organisation organisation organisation The Board is responsible for the systems of risk management and internal control and for reviewing their effectiveness by a series of committees, overseen by the Audit, Risk and Compliance Committee (“ARCC”), and reviewed by Internal Auditors. The internal controls are designed to manage rather than eliminate risk and provide reasonable but not absolute assurance against material misstatement or loss. Through the activities of the ARCC, which meets at least six times per year, is formally the effectiveness of these reviewed four times per year. internal controls A comprehensive budgeting process is completed once a year and is reviewed and approved by the Board. The Group’s results, compared with the budget, are reported to the Board on a monthly basis. The Group maintains appropriate insurance cover in respect of actions taken against the Directors because of their roles, as well as against material loss or claims against the Group. The insured values and type of cover are comprehensively reviewed on at least an annual basis. Page | 12 RISK AND GOVERNANCE CORPORATE GOVERNANCE REPORT The senior management team (“Executive Committee”) meets weekly to consider new risks and opportunities presented to the Group, making recommendations to the Board and/or ARCC as appropriate. QCA Principal 5: Maintain the board as a well functioning, QCA Principal 5: Maintain the board as a well---- functioning, functioning, functioning, QCA Principal 5: Maintain the board as a well QCA Principal 5: Maintain the board as a well team led by the chair balanced team led by the chair balanced team led by the chair team led by the chair balanced balanced various external advisers on a number of corporate governance matters. Directors’ service contracts or appointment letters make provision for a Director to seek personal advice in furtherance of his or her duties and responsibilities, normally via the Company Secretary. The Group’s Board currently comprises four Non-executive Directors and three Executive Directors. QCA Principal 7 Evaluate board performance based on clear QCA Principal 7:::: Evaluate board performance based on clear Evaluate board performance based on clear Evaluate board performance based on clear QCA Principal 7 QCA Principal 7 and relevant objectives, seeking continuous improvement and relevant objectives, seeking continuous improvement and relevant objectives, seeking continuous improvement and relevant objectives, seeking continuous improvement All of the Directors are subject to election by Shareholders at the first Annual General Meeting after their appointment to the Board and will continue to seek re-election at least once every three years. Directors’ biographies are set out on pages 16 and 17. The Board is responsible to the Shareholders for the proper management of the Group and meets at least four times a year to set the overall direction and strategy of the Group, to review operational and financial performance, and to advise on management appointments. All key operational and investment decisions are subject to Board approval. The Board considers itself to be sufficiently independent. The QCA Code suggests that a board should have at least two independent non-executive directors. The Board considers that two Non-executive Directors, namely Alan Clark (Chairman of ARCC) and David Gibson, are regarded as independent under the QCA Code’s guidance for determining such independence. Non-executive Directors receive their fees in the form of a basic cash emolument. Only the Chief Financial Officer holds options over the Group’s shares. The number and terms are found on page 23. The option grant concerned is not deemed to be significant, either for the individual executive Director or in aggregate. The current remuneration structure for the Board’s Non-executive Directors is deemed to be proportionate. QCA Principal 6 re that between them the directors have QCA Principal 6:::: EnsuEnsuEnsuEnsure that between them the directors have re that between them the directors have re that between them the directors have QCA Principal 6 QCA Principal 6 date experience, skills and capabilities the necessary up----totototo----date experience, skills and capabilities the necessary up date experience, skills and capabilities date experience, skills and capabilities the necessary up the necessary up The Board considers that all of the Non-executive Directors are of sufficient competence and calibre to add strength and objectivity to its activities, and bring considerable experience in regulatory, financial and operational development within the financial service sector in both the IOM and the UK. The Directors’ biographies are set out on pages 16 and 17. The Board regularly reviews the composition of the Board to ensure that it has the necessary breadth and depth of skills to support the ongoing development of the Group. The Chairman, in conjunction with the Company Secretary, ensures that the Directors’ knowledge is kept up to date on key its issues and developments pertaining to the Group, operational environment and to the Directors’ responsibilities as members of the Board. During the course of the year, Directors receive updates from the Company Secretary and The Board has an internal process for evaluation of its own performance, that of its committees and individual Directors, including the Chairman. This process is conducted annually and last took place in March 2018, with no substantive issues arising. Going forward, the Board intends to utilise the services of an independent third-party organisation to manage the future evaluation process, analyse the results and report back to the Board for subsequent follow-up. Evaluation criteria include Controls and Procedures, Strategic Aims, Entrepreneurial Leadership and Communications and Relationships. The Board may utilise the results of the evaluation process when considering the adequacy of the composition of the Board and for succession planning. QCA Principal 8 ote a corporate culture that is based on QCA Principal 8:::: PromPromPromPromote a corporate culture that is based on ote a corporate culture that is based on ote a corporate culture that is based on QCA Principal 8 QCA Principal 8 ethical values and behaviours ethical values and behaviours ethical values and behaviours ethical values and behaviours The Board seeks to maintain the highest standards of integrity and probity in the conduct of the Group’s operations. These values are enshrined in the written policies and working practices adopted by all employees in the Group. An open culture the Group, with regular communications to staff regarding progress and staff feedback regularly sought. The Executive Committee regularly monitors the Group’s cultural environment and seeks to address any concerns that may arise, escalating these to Board level as necessary. is encouraged within The Group is committed to providing a safe environment for its staff and all other parties for which the Group has a legal or moral responsibility in this area. This is enshrined in the Group’s health and safety policy. QCA Principal 9 Maintain governance structures and QCA Principal 9:::: Maintain governance structures and Maintain governance structures and Maintain governance structures and QCA Principal 9 QCA Principal 9 processes that are fit for purpose and support good decision processes that are fit for purpose and support good decision---- processes that are fit for purpose and support good decision processes that are fit for purpose and support good decision making by the board making by the board making by the board making by the board ole of the Board The The The The rrrrole of the Board ole of the Board ole of the Board The Board is collectively responsible for the long-term success of the organisation. Its principal function is to determine the strategy and policies of the Group within an effective control framework which enables risk to be assessed and managed. The Board ensures that the necessary financial and human resources are in place for the Group to meet its objectives and that business and management performances are reviewed. Furthermore, the Board ensures that the Group operates within its constitution, relevant legislation and regulation and that proper accounting records and effective systems of business control are established, maintained, documented and audited. Page | 13 RISK AND GOVERNANCE CORPORATE GOVERNANCE REPORT There are at least four formal Board meetings each year. All Board members have the benefit, at the Group’s expense, of liability insurance in respect of their responsibilities as Directors and have access to independent legal or other professional advice if required. The Board has a formal schedule of matters which are reserved for its consideration and it has established three committees to consider specific issues in greater detail, being the ARCC and Nomination Committee. The Terms of Reference for each of these Committees are published on the Group’s website. There is a clear separation of the roles of Chief Executive Officer and Executive Chairman. Chairman Chairman Chairman Chairman The Chairman is responsible for leading the Board, ensuring its effectiveness in all aspects of its role, promoting a culture of openness of debate and communicating with the Group’s members on behalf of the Board. The Chairman sets the direction of the Board and promotes a culture of openness and debate by facilitating the effective contribution of Non- executive Directors and ensuring constructive relations between Executive and Non-executive Directors. The Chairman also ensures that Directors receive accurate, timely and clear information. In doing so, this fosters a positive corporate governance culture throughout the Group. Chief Executive Officer Chief Executive Officer Chief Executive Officer Chief Executive Officer The Chief Executive Officer is responsible for managing the Group’s business and operations within the parameters set by the Board. NonNonNonNon----executive Directors executive Directors executive Directors executive Directors The Non-executive Directors are responsible for bringing independent judgement to the discussions held by the Board, using their breadth of experience and understanding of the business. Their key responsibilities are to constructively challenge and contribute to strategic proposals, and to monitor performance, resources, and standards of conduct, compliance and control, whilst providing support to executive management in developing the Group. The Board has established an ARCC, a Remuneration Committee and a Nominations Committee with formally delegated duties and responsibilities. Alan Clarke chairs both ARCC and the Remuneration Committee. information disclosed ARCC ARCC ARCCARCC ARCC meets at least six times each year and comprises two Nonexecutive Directors, currently Alan Clarke (Chairman) and David Gibson, Executive Directors. Representatives from Compliance and Risk along with the internal and external Auditor attend by invitation. Its role is to be responsible for reviewing the integrity of the financial statements and the the accompanying balance of Directors’ Report, to review the effectiveness of internal controls and risk management systems, to monitor and review the effectiveness of the internal audit function and to consider and recommend to the Board (for approval by the members) the appointment or re-appointment of the external auditor. The ARCC reviews and monitors the external auditor’s objectivity, competence, effectiveness and independence, ensuring that if it or its associates are invited to undertake non-audit work it will not compromise auditor objectivity and independence. in Remuneration Committee Remuneration Committee Remuneration Committee Remuneration Committee The Remuneration Committee meets at least twice a year and comprises of two Non-executive Directors, with the Executive Directors, Head of Human Resources and external advisers attending by invitation when appropriate. It is chaired by Alan Clarke, and is responsible for determining the remuneration of the Executive Directors, the Company Secretary and other members of the management. Committee members do not take part in discussions concerning their own remuneration. The Directors believe that the above disclosures constitute sufficient disclosure to meet the QCA Code’s requirement for a Remuneration Committee Report. However, a separate Remuneration Committee Report will be presented in the Group’s next audited Financial Statements. Nomination Committee Nomination Committee Nomination Committee Nomination Committee The Nomination Committee is comprised of the whole Board. It is chaired by the Chairman of the Board and is responsible for making recommendations to the Board on matters relating to the composition of the Board, including Executive and Non- executive Director succession planning, the appointment of new Directors throughout the Group and re-election of existing Directors. Appointments to the Board Appointments to the Board Appointments to the Board Appointments to the Board The principal purpose of the Nomination Committee is to undertake the assessment of the balance of skills, experience, independence and knowledge on the Board and subsidiary boards against the requirements of the business, with a view to determining whether any shortages exist. Having completed the assessment, the Committee makes recommendations to the board accordingly. Appointments to the Board are made on merit, with due regard to the benefits of diversity. Within this context, the paramount objective is the selection of the best candidate, irrespective of background, and it is the view of the Board that establishing quotas or targets for the diversity of the Board is not appropriate. All Group Director appointments must be approved by the Company’s Nominated Adviser, as required under the AIM Rules, before they are appointed to the Group Board. Prior to appointment, Non-executive Directors are required to demonstrate that they are able to allocate sufficient time to undertake their duties. ReReReRe----election election election election The Group’s Rules require that all Directors are submitted for election at the AGM following their first appointment to the Board and one third of the Directors are subject to retirement by rotation on an annual basis to refresh the Board, irrespective of performance. The Group will establish a separate Corporate Governance Committee. The Corporate Governance Memorandum also contains a schedule of matters specifically reserved for Board decision or approval and sets out the Company’s share dealing code and its public interest disclosure (“whistle-blowing”) policy and procedures. Page | 14 RISK AND GOVERNANCE CORPORATE GOVERNANCE REPORT Board and committee attendance Board and committee attendance Board and committee attendance Board and committee attendance The number of formal scheduled Board and committee meetings held and attended by Directors during the year was as follows: - Jim Mellon John Banks Denham Eke Alan Clarke David Gibson Douglas Grant Gregory Bailey* Board 3/6 3/6 6/6 6/6 6/6 6/6 3/6 ARCC - - - 8/8 8/8 - - REMCO - - - 4/4 4/4 - - * Gregory Bailey appointed to the Board on 7 February 2018 QCA Principal 10: Communicate how the company is QCA Principal 10: Communicate how the company is QCA Principal 10: Communicate how the company is QCA Principal 10: Communicate how the company is governed and is performing by maintaining a dialogue with governed and is performing by maintaining a dialogue with governed and is performing by maintaining a dialogue with governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders shareholders and other relevant stakeholders shareholders and other relevant stakeholders shareholders and other relevant stakeholders The Group places a high priority on regular communications with its various stakeholder groups and aims to ensure that all communications concerning the Group’s activities are clear, fair and accurate. The Group’s website is regularly updated and users can register to be alerted when announcements or details of presentations and events are posted onto the website. Notices of General Meetings of the Company can be found on: https://www.mfg.im/investor-centre/regulatory-news The results of voting on all resolutions in future general meetings will be posted to the Group’s website, including any actions to be taken as a result of resolutions for which votes against have been received from at least 20 per cent of independent Shareholders. Approval Approval Approval Approval This report was approved by the Board of Directors on 27 March 2019 and signed on its behalf by: - Jim Mellon Executive Chairman 27 March 2019 Page | 15 RISK AND GOVERNANCE DIRECTORS, OFFICERS AND ADVISERS Executive Directors Jim Mellon (62)‡ Executive Chairman Jim Mellon is a well-known and successful entrepreneur, author and economic commentator, starting his career in fund management and now including biopharma, property, mining and information technology amongst his many investments. He holds directorships in a number of publicly quoted companies, many of which are in the financial services sector. He is the beneficial owner of Burnbrae Group Limited which, in turn, indirectly holds approximately 16% of Manx Financial Group PLC. He is the founder, principal shareholder and chairman of the Regent Pacific Group, quoted on the Hong Kong Stock Exchange. Appointment Appointment Appointment Appointment Appointed to the Board on 2 November 2007 and appointed as Executive Chairman on 12 February 2009. Non-executive Directors Denham Eke (67) ‡ Chief Executive Officer Denham Eke is the Managing Director of Burnbrae Group Limited, a private international asset management company. He began his career in stockbroking with Sheppards & Chase before moving into corporate planning for Hogg Robinson plc, a major multinational insurance broker. He is a director of many years standing of both public and private companies financial involved services, property, mining, and manufacturing sectors. the in Appointment Appointment Appointment Appointment Appointed to the Board on 2 November 2007 and appointed as Chief Executive on 12 February 2009. Douglas Grant (54) ‡ Group Finance Director Douglas Grant has over 30 years’ experience working in finance, initially with Scottish Power, before moving to the industrial sector to work with ICI and then Allenwest. Prior to joining Manx Financial Group PLC, he was the group financial controller and later financial director of various UK and Isle of Man private sector companies and has extensive capital markets experience. Appointment Appointment Appointment Appointment Appointed to the Board on 14 January 2010. He is Managing Director of Conister Bank Limited. Alan Clarke (68)‡†* ≠ Non-executive Director David Gibson (71) ‡†* ≠ Non-executive Director John Banks (50) ‡ Non-executive Director Alan Clarke is a chartered accountant and former senior partner of Ernst & Young during which time he worked closely with HSBC offshore operations in both the Channel Islands and the Isle of Man. Currently, he specialises in corporate finance and strategic consultancy, advising a variety of both listed and private companies. He holds several non- executive directorships and is a past President of ICAEW Manchester. He is also a registered auditor, being the senior partner of Downham Mayer Clarke. Appointment Appointment Appointment Appointment Appointed to the Board on 2 November 2007. Chairman of the Audit, Risk and Compliance Committee and Chairman of the Remuneration Committee. David Gibson qualified as a certified accountant whilst holding posts with Shell-Mex and BP and CIBA-Geigy throughout the UK and abroad, before transferring into treasury management in senior positions with Turner and Newall and Westland Helicopters where he qualified as a corporate treasurer. He joined the Trustee Savings Bank of the Channel Islands as finance director, prior to becoming general manager finance at TSB Retail Bank where he gained his formal qualifications as a banker. Prior to retiring from executive life for family reasons, he was group finance director of Portman Building Society for 9 years. He is currently deputy chairman of commercial property investment companies Chellbrook Properties plc and Mountstephen Investments Limited. Appointment Appointment Appointment Appointment Appointed to the Board on 12 February 2009. He is Chairman of Conister Bank Limited. John Banks is a solicitor qualified in both England and Wales and Hong Kong. He has worked in private practice with Lovells, in both England and Hong Kong and as an in house counsel for Standard Chartered Bank in Hong Kong. He joined Group Direct Limited, later part of Brightside Group PLC as group legal counsel in 2006, where he worked on the group’s joined admission Southern Rock Insurance Company Limited and Eldon Insurance Services Limited in 2013 and is a director of both companies. trading on AIM. He to Appointment Appointment Appointment Appointment Appointed to the Board on 5 August 2014. Page | 16 RISK AND GOVERNANCE DIRECTORS, OFFICERS AND ADVISERS Non-executive Directors Company Secretary * Member of the Audit, Risk and Compliance Committee † Member of the Remuneration Committee ‡ Member of the Nominations Committee ≠ Independent Non-executive Director Gregory Bailey (63) ‡ Non-executive Director Rachel Bradley (33) Company Secretary Gregory Bailey, founded Palantir Group Inc which made successful investments in bio-tech company start-ups and financings, and is currently chairman of Portage Biotech Inc, a CSE-traded drug development company, and non-executive director of AIM-traded SalvaRx Group Plc. Along with comprehensive experience in finance and healthcare, he has served on many public company boards and brings to the Group an extensive involvement in corporate governance. Rachel Bradley qualified to the Bar of the Isle of Man in February 2012 and has a broad range of the regulatory and compliance experience financial services industry, both in the UK and Isle of Man. Prior to joining Manx Financial Group PLC, she worked in the United States of America for two years in the legal profession and prior to that, she worked with several local corporate services providers on the Isle of Man. in Appointment Appointment Appointment Appointment Appointed to the Board on 7 February 2018. Appointment Appointment Appointment Appointment Appointed as Company Secretary on 15 June 2018. Advisers Advisers Advisers Advisers Registered Office Registered Office Registered Office Registered Office Clarendon House Victoria Street Douglas Isle of Man IM1 2LN Registered Agent Registered Agent Registered Agent Registered Agent CW Corporate Services Limited Bank Chambers 15-19 Athol Street Douglas Isle of Man IM1 1LB Legal Advisers Legal Advisers Legal Advisers Legal Advisers As to Isle of Man law Long & Humphrey The Old Courthouse Athol Street Douglas Isle of Man IM1 1LD As to English law Hill Dickinson LLP The Broadgate Tower 20 Primrose Street London EC21 2EW Independent Auditor Independent Auditor Independent Auditor Independent Auditor KPMG Audit LLC Heritage Court 41 Athol Street Douglas Isle of Man IM99 1HN Principal Bank Principal Bankersersersers Principal Bank Principal Bank Royal Bank of Scotland 135 Bishopsgate London EC2M 3UR Consulting Actuaries Consulting Actuaries Consulting Actuaries Consulting Actuaries Boal & Co Ltd Marquis House Isle of Man Business Park Douglas Isle of Man IM2 2QZ Pension Fund Pension Fund Pension Fund Pension Fund Investment Manager Investment Manager Investment Manager Investment Manager Thomas Miller Investment (Isle of Man) Limited Level 2 Samuel Harris House 5-11 St George’s Street Douglas Isle of Man IM1 1AJ Nominated Advisor Nominated Advisor Nominated Advisor Nominated Advisor and Broker and Broker and Broker and Broker Beaumont Cornish Limited 10th Floor 30 Crown Place London EC2A 4EB Registrar Registrar Registrar Registrar Computershare Investor Services (Jersey) Limited Queensway House Hilgrove Street St Helier Jersey JE1 1ES Presentation of Annual Presentation of Annual Presentation of Annual Presentation of Annual Report and Accounts Report and Accounts Report and Accounts Report and Accounts Presented here are the and Annual Accounts Manx Financial Group PLC. Report of Company Information Company Information Company Information Company Information The Annual and Interim Reports, along with other supplementary information of interest to Shareholders, are included on our website. The address of the website is www.mfg.im investor includes which relations information and contact details. Page | 17 RISK AND GOVERNANCE AUDIT, RISK AND COMPLIANCE COMMITEE Dear Shareholderssss Dear Shareholder Shareholder Shareholder Dear Dear I am pleased to set out below an account of the ARCC’s role and activities during 2018 and up to the date of publication of this Annual Report. the Nomination Committee, Membership Membership Membership Membership Members of the ARCC are appointed by the Board, on the recommendation of in consultation with the Chairman of the Committee. The Committee is made up of at least 2 members. All members of the Committee shall be Non-executive Directors and at least one of whom shall have recent and relevant financial experience with a professional qualification from one of the professional accountancy bodies. The Chairman of the Board shall not be a member of the Committee. Appointments to the Committee shall be for a period of up to 3 years, which may be extended by the Board for a further 3- year period (or, in exceptional circumstances, two further 3 year periods), provided the Director remains independent. The Board may approve annual extensions to any Director who has served 3 consecutive terms. The Board shall appoint the Chairman of the Committee who shall be a Non-executive Director. In the absence of the Chairman of the Committee and/or an appointed deputy, the remaining members present shall elect one of themselves to chair the meeting. The Committee shall meet at least six times a year. Of these, two will be held to review the annual and interim financial statements. Outside of the formal meeting programme, the Chairman of the Committee will maintain a dialogue with key individuals involved in the Company’s governance. Members Members Members Members Appointed Appointed Appointed Appointed Alan Clarke (Chairman) 2 February 2007 David Gibson 13 February 2009 Number of Number of Number of Number of meetings meetings meetings meetings attended attended attended attended 8/8 8/8 Only members of the Committee have the right to attend Committee meetings. However other individuals may be invited by the Chairman of the Committee to attend all or part of any meeting as and when appropriate. The ARCC holds separate meetings with the Head of Internal Audit, Head of Risk and Compliance and our external auditor, KPMG Audit LLC. The Chairman of the Board, the executive directors and executive management are invitees to meetings of ARCC but are excluded from the separate meetings held between the ARCC and the external auditor. Execution of functions Execution of functions Execution of functions Execution of functions The ARCC has executed its duties and responsibilities during the year in accordance with its terms of reference as it relates to auditor independence, assisting the Board in its evaluation of our control environment and internal controls including information systems and accounting practices. Due to its adoption of the QCA Corporate Governance standard, the committee reassessed the adequacy of its terms of reference and its function bearing in mind the requirements of this standard. During the year under review, the Committee considered among other matters, the following: Financial reporting and annual financial statements: Financial reporting and annual financial statements: Financial reporting and annual financial statements: Financial reporting and annual financial statements: Considered the annual financial statements with the external and management and reviewed the appropriateness of significant judgements, estimates and accounting policies; auditor, Executive Directors Reviewed and recommended to the Board for approval: o Unaudited condensed interim results for the period ended 30 June 2018; o Audited MFG plc Group and subsidiary annual financial statements for the year- ended 31 December 2018; and Reviewed changes to impairment model due to adoption of IFRS 9 effective 1 January 2018; Discussed any significant and unusual accounting matters including key audit matters identified by the external auditor. External audit: External audit: External audit: External audit: Monitored and assessed the independence of the external auditors based on reports received, inquiries made into work performed; Determined the nature and extent of non-audit services performed by the external auditors; Reviewed and assessed the significance of non- audit fees compared to audit fees; Reviewed and agreed the external audit plan in advance for the year-end audit which set out the scope of audit, significant risks, areas of audit focus and audit timetable. Received a presentation of the external auditor for from execution of audit plan findings on discussion; and Satisfied itself as to the expertise experience and independence of the engagement partner. Internal audit Internal audit Internal audit Internal audit Reviewed and approved the internal audit plan; Reviewed Internal Audit’s findings including the design and operating effectiveness of the internal control environment and control activities; and Reviewed Internal Audit’s findings on the adequacy and reliability of management information. pliance Risk and compliance Risk and com pliance pliance Risk and com Risk and com Assessed the effectiveness of the Group Risk and Compliance function; Reviewed the Group Risk and Compliance department findings on the effectiveness of the Group’s regulatory controls; Recommend a revision of the Risk and Compliance policies for Board approval; and Recommend a revision of the Internal Capital Adequacy Assessment Process for Board approval. Page | 18 RISK AND GOVERNANCE AUDIT, RISK AND COMPLIANCE COMMITEE External auditor s independence External auditor’’’’s independence s independence s independence External auditor External auditor The external auditor, KPMG Audit LLC, has been the Group’s auditor since 2007. Consideration was given to the non-audit work performed by the external auditor. The ratio of non-audit fees to audit fees for the year was 0.08 to 1 (2017: 0.03 to 1). Non audit services related to tax adversary services. Services were performed by a separate team to the audit team to safeguard against the self-review threat to independence. The ARCC obtained assurance from the external auditor that internal governance processes within KPMG Audit LLC support and demonstrate its claim of independence. This assurance was provided through the receipt of an ISA 260 letter. The ARCC is satisfied with the independence of KPMG Audit LLC and is recommending that KPMG Audit LLCS be reappointed as the Group’s auditor at the 2018 Annual General Meeting. Key accounting matters Key accounting matters Key accounting matters Key accounting matters The ARCC considered key accounting matters in relation to the Group’s financial statements and disclosures. The primary areas in relation to 2018 and how they were addressed are detailed below: Key accounting matter Key accounting matter Key accounting matter Key accounting matter impairment Loan impairment Loan impairment impairment Loan Loan Impairments cover loans specifically identified as impaired and a collective impairment of all other loans for those impairments incurred but not yet specifically identified. ARCC response ARCC response ARCC response ARCC response The ARCC satisfied itself that the internal control environment and control activities are appropriately designed and implemented. This was supported by review of Internal and External audit reports and findings. Loan impairment provisions reflect estimates of the amount and timing of future recoveries which require an assessment of matters such as future economic conditions and the value of collateral. Estimates, by their nature, give rise to a higher risk of material misstatement due to error or fraud. The effect of these matters is that, as part of our risk assessment, we determined that the impairment provision has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. Impairment of goodwill and intangible assets Impairment of goodwill and intangible assets Impairment of goodwill and intangible assets Impairment of goodwill and intangible assets Goodwill and the estimated recoverable amount of these balances is subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows. intangible assets are significant and is significant and receivable exposure VAT receivable VAT receivable VAT receivable VAT receivable The VAT its recoverability rests on the outcome of discussions with the Isle of Man Government Customs and Excise Division (“IOM C&E”), which in turn will take into account the final assessment by UK Customs and Excise of the impact of the recent ruling by the Court of Justice of the European Union regarding the dispute between Volkswagen Financial Services (UK) Limited vs HM Revenue & Customs. The effect of these matters is that, as part of our risk assessment, we determined that the impact of the final assessment of the amount of VAT to be recovered has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The ARCC reviewed reports from executive management on the implementation of IFRS 9 and key changes to internal processes and controls. The ARCC reviewed the key assumptions used by management such as Loss given default, Loss rates, Probability of default on initial implementation at 30 June 2018 and at year ended 31 December 2018. The ARCC satisfied itself that the internal control environment and control activities are appropriately designed and implemented. This was supported by review of Internal and External audit reports and findings. The ARCC reviewed management’s assessment of Goodwill and intangible asset impairment and concluded that the recoverable amount is appropriate. The ARCC satisfied itself that the internal control environment and control activities are appropriately designed and implemented. This was supported by review of Internal and External audit reports and findings. The ARCC reviewed management’s assessment of VAT receivable impairment and concluded that the recoverable amount is appropriate.. Page | 19 RISK AND GOVERNANCE AUDIT, RISK AND COMPLIANCE COMMITEE Key accounting matter Key accounting matter Key accounting matter Key accounting matter Carrying value of Parent Company’s subordinated loans and Carrying value of Parent Company’s subordinated loans and Carrying value of Parent Company’s subordinated loans and Carrying value of Parent Company’s subordinated loans and investment in subsidiaries investment in subsidiaries investment in subsidiaries investment in subsidiaries The carrying value of the Parent Company’s subordinated loans to and investment in subsidiaries represents 93% (2017: 98%) of the Parent Company’s total assets. The assessment of carrying value is not at a high risk of significant misstatement or subject to significant judgement as the carrying value is supported by the audited net asset value of the subsidiaries. However, due to its materiality in the context of the Parent Company financial statements, this is considered to be the area that had the greatest effect on our overall Parent Company audit. ARCC response ARCC response ARCC response ARCC response The ARCC is satisfied that the going concern assessment over the Group provides sufficient assurance over the recoverability of the Parent Company’s subordinated loans and investment in subsidiaries. The ARCC has complied with and discharged its responsibilities as set out in its Terms of reference. Alan Clarke Chairman 27 March 2019 Page | 20 RISK AND GOVERNANCE DIRECTORS’ REMUNERATION REPORT Dear Shareholderssss Dear Shareholder Dear Shareholder Dear Shareholder it reflects our culture and values; and there is full transparency of the Group’s Remuneration On behalf of the Board, I am pleased to report the Directors’ Remuneration Report for the year ended 31 December 2018. Policy. Membership Membership Membership Membership Members of the Remuneration Committee are appointed by the Board, on the recommendation of the Nomination Committee the Committee. The Committee is made up of at least 2 members. All members of the Committee shall be Non-executive Directors. The Chairman of the Board shall not be a member of the Committee. in consultation with the Chairman of Appointments to the Committee shall be for a period of up to 3 years, which may be extended by the Board for a further 3- year period (or, in exceptional circumstances, two further 3 year periods), provided the Director remains independent. The Board may approve annual extensions to any Director who has served 3 consecutive terms. The Board shall appoint the Chairman of the Committee who shall be a Non-executive Director. In the absence of the Chairman of the Committee and/or an appointed deputy, the remaining members present shall elect one of themselves to chair the meeting. The Committee shall meet at least twice a year and at such other times as the Chairman of the Committee shall require. Membership Membership Membership Membership Appointed Appointed Appointed Appointed Alan Clarke (Chairman) 13 February 2009 David Gibson 12 December 2010 Number of Number of Number of Number of meetings meetings meetings meetings attended attended attended attended 4/4 4/4 Only members of the Committee have the right to attend Committee meetings. However, other individuals may be invited by the Chairman of the Committee to attend all or part of any meeting as and when appropriate. Areas of focus for 2018 Areas of focus for 2018 Areas of focus for 2018 Areas of focus for 2018 During the year, the Committee considered the following: • Reviewed the overall pay increase of Executive Directors; • Reviewed the overall non-discretionary annual performance related pay scheme for Group staff; and • Reviewed and approved all new staff appointments with packages over £50,000. Remuneration policy Remuneration policy Remuneration policy Remuneration policy The Group’s Remuneration Policy reflects the Group’s business strategy and objectives as well as sustained and long-term value creation for shareholders. In addition, the policy aims to be fair and provide equality of opportunity, ensuring that: the Group is able to attract, develop and retain high- performing and motivated employees in the competitive local IOM and wider UK markets; employees are offered a competitive remuneration package to encourage enhanced performance and are, in a fair and responsible manner, rewarded for their individual contribution to the success of the Group; In line with the Board’s approach, which reflects that adopted within other comparable organisations, the Group’s Remuneration Policy provides for the reward of Executive Directors through salaries and other benefits. Executive Directors’ Emoluments Executive Directors’ Emoluments Executive Directors’ Emoluments Executive Directors’ Emoluments The remuneration for Executive Directors reflects their It comprises basic salary, performance responsibilities. related variable pay when this is considered appropriate, and various benefits detailed below. Performance related payments are not pensionable and are not contracted. As with staff generally, whose salaries are subject to annual reviews, basic salaries payable to Executive Directors are reviewed each year with reference to jobs carrying similar responsibilities in comparable financial organisations, market conditions generally and local employment competition in view of the Group’s geographical position. The Group operates a non-contractual discretionary annual performance related pay scheme based on the trading performance of the Group and the individual employee’s performance assessed for the period under review in a manner which promotes sound risk management and does not promote excessive risk taking. The non-contractual discretionary annual performance related pay scheme may be paid in one year but that does not confer any entitlement in future years. to Performance assessments are conducted annually determine the performance rating of each employee’s achievements against a mix of targets set and agreed at the beginning of each year between the employee and their manager. No incentives are paid to employees or executives where the performance rating reflects below an agreed expected level for the role employed. The non-contractual discretionary annual performance related pay scheme may be disbursed as a cash payment through payroll, share based instruments (including share options) or a mixture of both. An element of deferment to align the interests of the employee to the longer term performance of the Group may also be included. the Advisor’s client base and EWA’s Financial Advisors are salaried and commission is calculated on a pre-agreed percentage over target which is set at between 2 to 3 times annual gross salary depending on the size of their historical performance. Each Financial Advisor is set objectives at the beginning of the year including a 100% pass in all compliance requirements. Where indemnified commission is paid and the underlying client policy lapses and the commission is clawed back then this is reviewed by an Executive Director in order to monitor trends and is then clawed back from the relevant Financial Advisor. Page | 21 RISK AND GOVERNANCE DIRECTORS’ REMUNERATION REPORT Where the Group operates contractually guaranteed performance related pay, the contractual conditions must be considered by the Remuneration Committee. Executive Directors’ Contractual Terms Executive Directors’ Contractual Terms Executive Directors’ Contractual Terms Executive Directors’ Contractual Terms In keeping with current recommended practice, the standard term for Executive Director appointments, which have a contractual notice period, is 6 months. NonNonNonNon----executive Directors’ Remuneration executive Directors’ Remuneration executive Directors’ Remuneration executive Directors’ Remuneration Non-executive Directors do not receive any benefits other than their fees and travelling expenses for which they are reimbursed. The level of fees payable to Non-executive Directors is assessed using benchmarks from a group of comparable financial organisations. The Procedure for Determining Remuneration emoluments Directors’ emoluments Directors’ emoluments emoluments Directors’ Directors’ Remuneration/ Fees £ Performance Related Pay £ Executives Executives Executives Executives Jim Mellon Denham Eke Douglas Grant Juan Kelly1 NonNonNonNon----executives executives executives executives Alan Clarke Gregory Bailey John Banks Neil Duggan2 David Gibson Aggregate emoluments 25,000 25,000 191,458 - 241,458 42,917 22,400 25,000 - 55,000 145,317 - - 50,000 - 50,000 - - - - - - The Remuneration Committee, comprising two Non-executive Directors, is responsible for setting the remuneration of the Executive Directors and is chaired by Alan Clarke. Committee members do not take part in discussions concerning their own remuneration. The basic Non-executive Director fee is set by the Group Chairman. The Chairman of the Committee reports at the Board meeting following a Committee meeting. Implementation report Implementation report Implementation report Implementation report It is the view of the Committee that Directors’ remuneration awarded across the Group for the year has been in accordance with the Group’s stated Remuneration Policy and, on behalf of the Committee I recommend that you endorse this Group report. An analysis of Directors’ emoluments is as follows: - Pension £ - - 19,146 - 19,146 - - - - - - 2018 2018 20182018 Total Total Total Total ££££ 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 260,604 260,604 260,604 260,604 ---- 310,604 310,604 310,604 310,604 42,917 42,917 42,917 42,917 22,400 22,400 22,400 22,400 25,000 25,000 25,000 25,000 ---- 55,000 55,000 55,000 55,000 145,317 145,317 145,317 145,317 2017 Total £ 25,000 25,000 222,986 47,718 320,704 43,000 - 25,000 20,000 47,500 135,500 374,375 50,000 19,146 443,521 443,521 443,521 443,521 456,204 1Juan Kelly resigned on 28 March 2017. 2 Neil Duggan retired on 30 June 2017. Approval Approval Approval Approval This report was approved by the Board of Directors on 27 March 2019 and signed on its behalf by: - Alan Clarke Alan Clarke Alan Clarke Alan Clarke Chairman of the Remuneration Committee 27 March 2019 Page | 22 RISK AND GOVERNANCE DIRECTORS’ REPORT The Directors present their annual report and the audited financial statements for the year ended 31 December 2018. Directors and Directors’ share interests Directors and Directors’ share interests Directors and Directors’ share interests Directors and Directors’ share interests Details of current Directors are set out on pages 16 and 17. Principal regulated activities Principal regulated activities Principal regulated activities Principal regulated activities The principal activities of Manx Financial Group PLC (the “Company” or “MFG”) and its subsidiaries (together referred to as the “Group”) are the provision of asset and personal finance, investing activities, Foreign Exchange brokerage services and wealth management. The Bank, a wholly owned subsidiary of the Company, holds a Class 1(1) deposit taking licence issued under Part 2 of the Isle of Man Financial Services Act 2008. Deposits made with the Bank are covered by the Isle of Man Depositors’ Compensation Scheme contained in the Banking Business (Compensation of Depositors) Regulations 1991. EWA is authorised by the Isle of Man Financial Services Authority under section 7 of the Financial Services Act 2008 to conduct investment business as a Class 2, sub-classes (3), (6) and (7) licence holder. Results and dividends Results and dividends Results and dividends Results and dividends The proposed transfers to and from reserves are as set out in the Statement of Changes in Equity on page 34. The Directors do not recommend the payment of a dividend (2017: nil). Share capital Share capital Share capital Share capital Particulars of the authorised and issued share capital of the Company are set out in note 31 to the financial statements. Significant shareholdings Significant shareholdings Significant shareholdings Significant shareholdings The number of shares held and the percentage of the issued shares which that number represented as at 26 March 2019 are: % of % of % of % of issued capital issued capital issued capital issued capital 29.10 16.39 13.60 7.44 3.22 3.02 Rene Nominees (IOM) Limited1 Jim Mellon2 Gregory Bailey3 Lynchwood Nominees Limited Island Farms Limited Rock (Nominees) Limited Number Number Number Number 38,153,158 21,492,232 17,835,750 9,752,879 4,222,319 3,955,663 1 Arron Banks, a former Director of the Group is beneficially interested in 38,153,158 Ordinary Shares. This holding includes 26,288,992 Ordinary Shares held by Rene Nominees (IOM) limited (“Rene”) in trust for Southern Rock Insurance Company Ltd (“SR”), 9,777,166 for ICS Risk Solutions Limited (“ICS”) and 2,087,000 for MW SIPP Trustees Ltd. John Banks, a Director of MFG is also a director of SR and ICS. 2 Burnbrae Limited holds 19,164,250 Ordinary Shares. Burnbrae Limited is beneficially owned by Jim Mellon. Denham Eke, CEO of MFG is also a director of Burnbrae Limited. Pershing Nominees Limited holds 968,666 Ordinary Shares, Vidacos Nominees holds 666,666 Ordinary Shares in trust for Jim Mellon and 692,650 Ordinary Shares are held in his own name. 3 Vidacos Nominees Limited holds 17,835,750 Ordinary Shares in trust for Gregory Bailey. The number of shares held by the current Directors is as follows: Jim Mellon4 Gregory Bailey5 John Banks6 David Gibson7 Douglas Grant Alan Clarke Number Number Number Number 26262626/0/0/0/03333/19/19/19/19 21,492,232 21,492,232 21,492,232 21,492,232 17,835,750 17,835,750 17,835,750 17,835,750 ---- 1,721,433 1,721,433 1,721,433 1,721,433 505,821 505,821 505,821 505,821 52,149 52,149 52,149 52,149 Number Number Number Number 31/12/18 31/12/18 31/12/18 31/12/18 21,492,232 21,492,232 21,492,232 21,492,232 17,835,750 17,835,750 17,835,750 17,835,750 ---- 1,721,433 1,721,433 1,721,433 1,721,433 505,821 505,821 505,821 505,821 52,149 52,149 52,149 52,149 Number 31/12/17 21,492,232 17,835,750 1,433,833 1,721,433 505,821 52,149 4 Burnbrae Limited holds 19,164,250 Ordinary Shares. Jim Mellon, Executive Chairman of Manx Financial Group PLC, is a Director of Burnbrae Limited. Burnbrae Limited is beneficially owned by Jim Mellon. Denham Eke, CEO of MFG, is also a director of Burnbrae Limited. Pershing Nominees Limited holds 968,666 Ordinary Shares and Vidacos Nominees holds 666,666 Ordinary Shares for the benefit of Jim Mellon. 5 Vidacos Nominees Limited holds 17,835,750 Ordinary Shares in trust for Gregory Bailey. 6 On the 19 June 2018, 1,443,833 of the Company’s ordinary shares were transferred and are now held by Rene in trust for ICS. Following the transfer, John Banks no longer has an interest in the issued ordinary share capital of the Company 7 Comprises 1,721,433 Ordinary Shares held by Interactive Investor Services Limited for the benefit of David Gibson. The number of share options held by the current Directors is as follows: Douglas Grant Number Number Number Number 26262626/0/0/0/03333/19/19/19/19 1,042,466 1,042,466 1,042,466 1,042,466 Number Number Number Number 31/12/18 31/12/18 31/12/18 31/12/18 1,042,466 1,042,466 1,042,466 1,042,466 Number 31/12/17 1,042,466 Directors’ liability insurance Directors’ liability insurance Directors’ liability insurance Directors’ liability insurance The Group maintains insurance cover for Directors’ potential liability. Fixed and intangible assets Fixed and intangible assets Fixed and intangible assets Fixed and intangible assets The movement in fixed and intangible assets during the year are set out in notes 24 and 25 respectively to the financial statements. StaffStaffStaffStaff At 31 December 2018, there were 113 members of staff (2017: 91), of whom 11 were part-time (2017: 13). in subsidiaries Investment in subsidiaries Investment in subsidiaries in subsidiaries Investment Investment Investments in the Company’s subsidiaries are disclosed in note 32 to the financial statements. Auditor Auditor Auditor Auditor KPMG Audit LLC, being eligible, has expressed its willingness to continue in office. Page | 23 ANNUAL FINANCIAL STATEMENTS CONTENTS Assurance Assurance Assurance Assurance Statement of Directors’ Responsibilities Independent Auditor’s Report Consolidated and company financial statements Consolidated and company financial statements Consolidated and company financial statements Consolidated and company financial statements Consolidated statement of profit or loss and other comprehensive income Company statement of profit or loss and other comprehensive income Consolidated statement of financial position Company statement of financial position Consolidated and company statement of changes in equity Consolidated statement of cash flows Company statement of cash flows Notes to the consolidated and company financial statements Notes to the consolidated and company financial statements Notes to the consolidated and company financial statements Notes to the consolidated and company financial statements Basis of preparation Basis of preparation Basis of preparation Basis of preparation 1. Reporting entity 2. Basis of accounting 3. Functional and presentation currency 4. Use of judgements and estimates 5. Change in accounting policies Financial risk review and fair value Financial risk review and fair value Financial risk review and fair value Financial risk review and fair value 6. Classification of financial assets and liabilities 7. Fair value of financial instruments 8. Financial risk review Performance for the year Performance for the year Performance for the year Performance for the year 9. Operating segments 10. Net interest income 11. Net fee and commission income 12. Terminal funding 13. Personnel expenses 14. Other expenses 15. Impairment on loans and advances to customers 16. Profit before tax payable 17. Income tax expense 18. Earnings per share Assets Assets Assets Assets 19. Cash and cash equivalents 20. Debt securities 21. Trading assets 22. Loans and advances to customers 23. Trade and other receivables 24. Property, plant and equipment 25. Intangible assets 24 25 29 30 31 32 33 34 35 36 36 36 36 36 38 39 40 47 48 48 49 49 49 49 50 50 51 52 52 52 52 53 54 55 Liabilities and equity Liabilities and equity Liabilities and equity Liabilities and equity 26. Deposits from customers 27. Creditors and accrued charges 28. Block creditors 29. Loan notes 30. Pension liability 31. Called up share capital Group composition Group composition Group composition Group composition 32. Investment in Group undertakings Other information Other information Other information Other information 33. Related parties transactions 34. Operating leases 35. Subsequent events 36. Financial risk management Accounting policies Accounting policies Accounting policies Accounting policies 37. Basis of measurement 38. Significant accounting policies 39. Standards issued but not yet adopted 56 56 56 56 57 59 60 62 63 63 63 67 67 77 Page | 24 ANNUAL FINANCIAL STATEMENTS STATEMENT OF DIRECTORS’ RESPONSIBILITIES responsible The Directors are for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Isle of Man Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the Isle of Man governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements in accordance with applicable law and regulations. The Directors are required to prepare Group and Parent Company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the EU (IFRSs as adopted by the EU), as applicable to an Isle of Man Company and applicable law and have elected to prepare the Parent Company financial statements on the same basis. The Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company the Directors are required to: - select suitable accounting policies and then apply them financial statements, consistently; make judgements and estimates that are reasonable, relevant and reliable; state whether they have been prepared in accordance with IFRSs as adopted by the EU; assess the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and use the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations or have no realistic alternative but to do so. Page | 25 ANNUAL FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL GROUP PLC 1 Our opinion is unmodified 1 Our opinion is unmodified 1 Our opinion is unmodified 1 Our opinion is unmodified We have audited the financial statements of Manx Financial Group PLC (“the Company”) for the year ended 31 December 2018 which comprise the Consolidated and Parent Company Statements of Profit or Loss and Other Comprehensive Income, the Consolidated and Parent Company Statements of Financial Position, the Consolidated and Parent Company Statements of Cash Flows and the Consolidated and Parent Company Statements of Changes in Equity, and the related notes, including the accounting policies in note 3. In our opinion the financial statements: give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2018 and of the Group’s and Parent Company’s profit for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU), as applicable to an Isle of Man Company; and have been prepared in accordance with the requirements of the Isle of Man 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 are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. 2 Key audit matters: our assessment of risks of material misstatement 2 Key audit matters: 2 Key audit matters: 2 Key audit matters: Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matters, in decreasing order of audit significance, are set out below. These are unchanged from 2017, with the exception of the inclusion this year of a key audit matter with respect to the carrying value of the Parent Company’s subordinated loans to and investment in subsidiaries. Key audit matter Key audit matter Key audit matter Key audit matter Loan impairment Loan impairment Loan impairment Loan impairment Loans to customers £148,278,000 (2017: £122,546,000) advances and Impairment £3,394,000 (2017: £2,687,000). Provision Refer to the Audit, Risk and Compliance Report (“ARCC”), note 4 (Use of Judgements and Estimates - Assumptions and Estimation Uncertainties), note 8(A) (Credit Risk), note 15 (Impairment on Loans and Advances to Customers), note 22 (Loans and Advances to Customers), (B) (Financial Risk Management – Credit risk) and note 38(I)(vii) for (Accounting Impairment Financial Instruments). Policy note 36 of The risk The risk The risk The risk Subjective estimate Subjective estimate Subjective estimate Subjective estimate Impairments cover loans specifically identified as impaired and a collective impairment of all other loans for those impairments incurred but not yet specifically identified. Loan impairment provisions reflect estimates of the amount and timing of future recoveries which require an assessment of matters such as future economic conditions and the value of collateral. Estimates, by their nature, give rise to a higher risk of material misstatement due to error or fraud. The effect of these matters is that, as part of our risk assessment, we determined that the impairment provision has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater the financial statements as a whole, and possibly many times that amount. than our materiality for Auditor’s response Auditor’s response response response Auditor’s Auditor’s Our procedures included: ---- Control design and operating effectiveness: Control design and operating effectiveness: Control design and operating effectiveness: Control design and operating effectiveness: Understanding and testing the controls in respect of the Group’s loan impairment process such as the timely recognition of impairment provisions, the completeness and accuracy of reports used in the loan impairment process and management review processes over the calculation of collective and specific provisions. in the Test of details: We agreed the specific provisions ---- Test of details: Test of details: Test of details: included to financial management’s provisioning schedule and vouched that this schedule was correctly extracted from the loans and advances system, including the arrears information. statements towards Test of details: We tested a sample of specific ---- Test of details: Test of details: Test of details: provisions, weighted those against individually significant impaired loans. This included the challenging management’s assessment of specific provision, taking into account such factors as: the number of repayments in arrears; the known whereabouts of the hirer/lessor and of the assets under finance; and the amounts received under scheduled agreed repayments under the original agreement are no longer being met. repayment plans, where in collective Historical comparison: We challenged the inputs ---- Historical comparison: Historical comparison: Historical comparison: impairment models and used considered whether those inputs reflected default and recovery experience across each of the loan finance categories. Assessing transparency: Assessing the adequacy ---- Assessing transparency: Assessing transparency: Assessing transparency: of the Group’s disclosures about the degree of estimation uncertainty involved at arriving at the provisions. Page | 26 ANNUAL FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL GROUP PLC (CONTINUED) 2 Key audit matters: our assessment of risks of material misstatement (continued) 2 Key audit matters: our assessment of risks of material misstatement (continued) 2 Key audit matters: our assessment of risks of material misstatement (continued) 2 Key audit matters: our assessment of risks of material misstatement (continued) Key audit matter Key audit matter Key audit matter Key audit matter Impairment of goodwill and Impairment of goodwill and Impairment of goodwill and Impairment of goodwill and intangible assets intangible assets intangible assets intangible assets The risk The risk The risk The risk based valuation Forecast----based valuation Forecast based valuation based valuation Forecast Forecast Goodwill £2,344,000 (2017: £2,344,000) and Intangibles Assets £1,952,000 (2017: £1,719,000). Goodwill and intangible assets are significant and the estimated recoverable amount of these balances is subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows. in Refer to the ARCC report, note 4 (Use of Judgements and Estimates -Assumptions and Estimation Uncertainties), note 25 (Intangible Assets), note 32 (Investment Group Undertakings), 38(A) (Basis for Consolidation of Subsidiaries Financial and the Parent Statements of Company), 38(M) (Goodwill and Intangibles) and note 38(N) (Impairment of Non- Financial Assets) Separate note Auditor’s response Auditor’s response response response Auditor’s Auditor’s Our procedures included: ---- Control design and operating effecti veness: Control design and operating effectiveness: veness: veness: Control design and operating effecti Control design and operating effecti Understanding and testing the controls in respect of the Group’s goodwill and intangibles assets impairment review process such as the timely recognition of the completeness and accuracy of reports used in the impairment review process. impairment provisions and the Benchmarking assumptions: Comparing ---- Benchmarking assumptions: Benchmarking assumptions: Benchmarking assumptions: forecasts and assumptions the in calculations of net present value used by the client for impairment testing to historical data, including the profit history of the businesses/groups of assets concerned. included the Sensitivity analysis: Assessing the reasonableness ---- Sensitivity analysis: Sensitivity analysis: Sensitivity analysis: of by sensitivity management, using higher discount rates, by considering whether the higher discount rates factored in sufficient downside risk. performed analysis VAT receivable VAT receivable VAT receivable VAT receivable Uncertainty over recoverability Uncertainty over recoverability Uncertainty over recoverability Uncertainty over recoverability VAT £1,049,000 (2017: £930,000). receivable exposure Refer to the ARCC report, note 4 (Use of Judgements and Estimates - Assumptions and Estimation Uncertainties) and note 23 (Trade and Other Receivables). The VAT receivable exposure is significant and its recoverability rests on the outcome of discussions with the Isle of Man Government Customs and Excise Division (“IOM C&E”), which in turn will take into account the final assessment by UK Customs and Excise of the impact of the recent CJEU ruling regarding the dispute between Volkswagen Financial Services (UK) Limited (“VWFS”) v HM Revenue & Customs. The effect of these matters is that, as part of our risk assessment, we determined that the impact of the final assessment of the amount of VAT to be recovered has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater the financial statements as a whole, and possibly many times that amount. than our materiality for ---- Assessing transparency: Assessing transparency: Assessing the adequacy Assessing transparency: Assessing transparency: of the Group’s disclosures about the degree of estimation uncertainty involved in performing the impairment assessments. Our procedures included: ---- Our tax expertise: Our tax expertise: Use of our own tax specialists to Our tax expertise: Our tax expertise: assist in our assessment of the latest position regarding both the VWFS case and discussions between the Group and IOM C&E and our knowledge and experience of the application of relevant tax legislation. ---- Test of details: Test of details: Use of our own tax specialist to Test of details: Test of details: assist in our testing of the calculations prepared by the Group based on the revised VAT recoverable calculation. ---- Assessing transparency: Assessing transparency: Assessing the adequacy Assessing transparency: Assessing transparency: of the Group’s disclosures about the degree of estimation uncertainty involved in assessing the recoverability of this balance. Page | 27 ANNUAL FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL GROUP PLC (CONTINUED) 2 Key audit matters: our assessment of risks of material misstatement (continued) 2 Key audit matters: our assessment of risks of material misstatement (continued) 2 Key audit matters: our assessment of risks of material misstatement (continued) 2 Key audit matters: our assessment of risks of material misstatement (continued) Key audit matter Key audit matter Key audit matter Key audit matter Carrying of Parent of Parent value Carrying value of Parent value Carrying of Parent value Carrying Company’s subordinated loans Company’s subordinated loans Company’s subordinated loans Company’s subordinated loans to in in to in to in to subsidiaries subsidiaries subsidiaries subsidiaries investment investment investment investment and and and and loans Subordinated to subsidiaries £7,778,000 (2017: £5,778,000) and investment in subsidiaries £16,172,000 (2017: £13,772,000) (Investment Refer to the ARCC report, note in Group 32 Undertakings) and note 38(A)(v) (Separate Financial Statements of the Company). The risk The risk The risk The risk High value High value High value High value Auditor’s response Auditor’s response response response Auditor’s Auditor’s Our procedures included: The carrying value of the Parent Company’s subordinated loans to and investment in subsidiaries represents 93.0% (2017: 98.0%) of the Parent Company’s total assets. The assessment of carrying value is not at a high risk of significant misstatement or subject to significant judgement as the carrying value is supported by the audited net asset value of the subsidiaries. However, due to its materiality in the context of financial statements, this is considered to be the area that had the greatest effect on our overall Parent Company audit. the Parent Company the loans Tests of detail: to and Tests of detail: Assessing Tests of detail: Tests of detail: investment in subsidiaries to identify, with reference to the subsidiaries’ accounts, whether each subsidiary has sufficient assets to repay the debt owed and support the investment. the carrying value of Assessing subsidiary audits: Assessing subsidiary audits: A full scope audit of the Assessing subsidiary audits: Assessing subsidiary audits: accounts of the subsidiaries by the group audit engagement team. 3 Our application of materiality and an overview of the scope of our 3 Our application of materiality and an overview of the scope of our 3 Our application of materiality and an overview of the scope of our 3 Our application of materiality and an overview of the scope of our audit audit audit audit Materiality for the Group and Parent Company financial statements as a whole was set at £130,000 (2017: £140,000), determined with reference to a benchmark of Group profit before tax, of which it represents approximately 5.0%. We agreed to report to the Audit, Risk and Compliance Committee any corrected or uncorrected identified misstatements exceeding £7,000 (2017: £7,000) for both the Group and Parent Company financial statements, in addition to other identified misstatements that warranted reporting on qualitative grounds. The Group’s subsidiaries were subjected to full scope statutory audit by the Group audit team and subject to a lower level of materiality based on their individual financial statements. 4 We have nothing to report on going concern 4 We have nothing to report on going concern 4 We have nothing to report on going concern 4 We have nothing to report on going concern The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or the Group or to cease their operations, and as they have concluded that the Company’s and the Group’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements (“the going concern period”). Our responsibility is to conclude on the appropriateness of the Directors’ conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor's report is not a guarantee that the group or the company will continue in operation. 4 We have nothing to report on going concern (continued) 4 We have nothing to report on going concern (continued) 4 We have nothing to report on going concern (continued) 4 We have nothing to report on going concern (continued) In our evaluation of the Directors’ conclusions, we considered the inherent risks to the Group’s and Company’s business model, and analysed how those risks might affect the Group’s and Parent Company’s financial resources or ability to continue operations over the going concern period. We evaluated those risks and concluded that they were not significant enough to require us to perform additional audit procedures. Based on this work, we are required to report to you if we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis for a period of at least a year from the date of approval of the financial statements. We have nothing to report in these respects, and we did not identify going concern as a key audit matter. 5 We have nothing to report on the other information in the Annual 5 We have nothing to report on the other information in the Annual 5 We have nothing to report on the other information in the Annual 5 We have nothing to report on the other information in the Annual Report Report Report Report The Directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Page | 28 ANNUAL FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL GROUP PLC (CONTINUED) 6 Respective responsibilities 6 Respective responsibilities 6 Respective responsibilities 6 Respective responsibilities Directors’ responsibilities Directors’ responsibilities Directors’ responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 25, the Directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; 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 they 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 Auditor’s responsibilities Auditor’s responsibilities Auditor’s responsibilities 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 our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in ISAs (UK) will always detect a material accordance with misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. 7 The purpose of our audit work and to whom we owe our 7 The purpose of our audit work and to whom we owe our 7 The purpose of our audit work and to whom we owe our 7 The purpose of our audit work and to whom we owe our responsibilities responsibilities responsibilities responsibilities This report is made solely to the Company’s members, as a body, in accordance with Section 80(c) of the Isle of Man 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. KPMG Audit LLC Chartered Accountants Heritage Court 41 Athol Street Douglas Isle of Man IM99 1HN 28 March 2019 Page | 29 ANNUAL FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 31 December Notes Interest income Interest expense Net interest income Net interest income Net interest income Net interest income Fee and commission income Fee and commission expense Net trading income Net trading income Net trading income Net trading income Other operating income Loss on trading assets Realised gains on debt securities Terminal funding Operating income Operating income Operating income Operating income Personnel expenses Other expenses Impairment on loans and advances to customers Depreciation Amortisation and impairment of intangibles Share of profit of equity accounted investees, net of tax VAT recovery Profit before tax payable Profit before tax payable Profit before tax payable Profit before tax payable Income tax expense Profit for the year Profit for the year Profit for the year Profit for the year Other comprehensive income: ---- Other comprehensive income: Other comprehensive income: Other comprehensive income: Items that will be reclassified to profit or loss Items that will be reclassified to profit or loss Items that will be reclassified to profit or loss Items that will be reclassified to profit or loss Unrealised gain/(losses) on debt securities Items that will never be reclassified to profit or loss Items that will never be reclassified to profit or loss reclassified to profit or loss reclassified to profit or loss Items that will never be Items that will never be Actuarial (losses)/gains on defined benefit pension scheme taken to equity Total comprehensive income for the period attributable to owners Total comprehensive income for the period attributable to owners Total comprehensive income for the period attributable to owners Total comprehensive income for the period attributable to owners Basic earnings per share (pence) Diluted earnings per share (pence) The notes on pages 37 to 78 form part of these financial statements. The Directors believe that all results derive from continuing activities. 10 11 11 21 20 12 13 14 15 24 25 32 23 16 17 20 30 18 18 2018 2018 20182018 £000 £000 £000£000 19,115 19,115 19,115 19,115 (3,547) (3,547) (3,547) (3,547) Restated (Note 5) 2017 £000 19,893 (3,256) 15,568 15,568 15,568 15,568 16,637 3,371 3,371 3,371 3,371 (6,109) (6,109) (6,109) (6,109) 3,115 (8,413) 12,830 12,830 12,830 12,830 11,339 131131131131 (4)(4)(4)(4) 135135135135 74747474 91 (21) 36 90 13,166 13,166 13,166 13,166 11,535 (5,703) (5,703) (5,703) (5,703) (3,4(3,4(3,4(3,465656565)))) (857 (857)))) (857(857 (184) (184) (184) (184) (396) (396) (396) (396) 30303030 119119119119 2,2,2,2,710710710710 (2(2(2(243434343)))) 2,467 2,467 2,467 2,467 44444444 (50) (50) (50) (50) 2,2,2,2,461461461461 1.881.881.881.88 1.541.541.541.54 (4,783) (3,152) (585) (134) (286) 38 65 2,698 (240) 2,458 (93) 30 2,395 2.17 1.70 Page | 30 ANNUAL FINANCIAL STATEMENTS COMPANY STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 31 December Notes Interest income Operating income Operating income Operating income Operating income Personnel expenses Administration expenses Depreciation expense Profit before tax payable Profit before tax payable Profit before tax payable Profit before tax payable Tax payable Profit for the year Profit for the year Profit for the year Profit for the year Total comprehensive income for the year Total comprehensive income for the year Total comprehensive income for the year Total comprehensive income for the year The notes on pages 37 to 78 form part of these financial statements. The Directors believe that all results derive from continuing activities. 16 2018 2018 20182018 £000 £000 £000£000 466466466466 466466466466 (177) (177) (177) (177) (132) (132) (132) (132) (41) (41) (41) (41) 116116116116 ---- 116116116116 116116116116 2017 £000 - - (22) (112) (40) (174) - (174) (174) Page | 31 ANNUAL FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December Notes Assets Assets Assets Assets Cash and cash equivalents Debt securities Trading asset Loans and advances to customers Trade and other receivables Property, plant and equipment Intangible assets Goodwill Investment in associate Total assets Total assets Total assets Total assets Liabilities Liabilities Liabilities Liabilities Deposits from customers Creditors and accrued charges Block creditors Loan notes Pension liability Deferred tax liability liabilities Total liabilities Total liabilities liabilities Total Total Equity Equity Equity Equity Called up share capital Profit and loss account Total equity Total equity Total equity Total equity Total liabilities and equity Total liabilities and equity Total liabilities and equity Total liabilities and equity 19 20 21 22 23 24 25 32 32 26 27 28 29 30 17 31 Restated (Note 5) 2017 £000 Restated (Note 5) 2016 £000 9,745 34,272 24 122,546 1,908 450 1,719 2,344 38 173,046 142,272 3,164 751 8,995 560 42 155,784 6,129 23,991 70 115,929 2,064 719 1,316 2,344 - 152,562 125,952 2,975 1,390 8,545 614 40 139,516 2018 2018 20182018 ££££000000000000 9,753 9,753 9,753 9,753 30,534 30,534 30,534 30,534 20202020 148,278787878 148,2 148,2 148,2 2,491 2,491 2,491 2,491 1,384 1,384 1,384 1,384 1,952 1,952 1,952 1,952 2,344 2,344 2,344 2,344 158158158158 196,914914914914 196, 196,196, 158,500 158,500 158,500 158,500 2,012,012,012,010000 138138138138 15,871 15,871 15,871 15,871 584584584584 88888888 177,191191191191 177, 177,177, 20,732 20,732 20,732 20,732 (1,0(1,0(1,0(1,009090909)))) 19,19,19,19,723723723723 20,732 (3,470) 17,262 18,933 (5,887) 13,046 196,914 196,914 196,914 196,914 173,046 152,562 The financial statements were approved by the Board of Directors on 27 March 2019 and signed on its behalf by: - Jim Mellon Jim Mellon Jim Mellon Jim Mellon Executive Chairman Denham Eke Denham Eke Denham Eke Denham Eke Chief Executive Officer Douglas Grant Douglas Grant Douglas Grant Douglas Grant Group Finance Director The notes on pages 37 to 78 form part of these financial statements. Page | 32 ANNUAL FINANCIAL STATEMENTS COMPANY STATEMENT OF FINANCIAL POSITION As at 31 December Notes Assets Assets Assets Assets Cash and cash equivalents Trade and other receivables Amounts due from Group undertakings Property, plant and equipment Investment in Group undertakings Subordinated loans Total assets Total assets Total assets Total assets Liabilities Liabilities Liabilities Liabilities Creditors and accrued charges Amounts due to Group undertakings Loan notes Total liabilities Total liabilities Total liabilities Total liabilities Equity Equity Equity Equity Called up share capital Profit and loss account Total equity Total equity Total equity Total equity Total liabilities and equity Total liabilities and equity Total liabilities and equity Total liabilities and equity 19 23 32 24 32 32 27 32 29 31 The notes on pages 37 to 78 form part of these financial statements. 2018 2018 20182018 ££££000000000000 1,646 1,646 1,646 1,646 32323232 ---- 126126126126 16,172 16,172 16,172 16,172 7,778 7,778 7,778 7,778 25,754 25,754 25,754 25,754 94949494 1,370 1,370 1,370 1,370 15,871 15,871 15,871 15,871 17,335 17,335 17,335 17,335 2017 £000 200 22 16 166 13,772 5,778 19,954 139 2,517 8,995 11,651 20,732 20,732 20,732 20,732 (12,313) (12,313) (12,313) (12,313) 8,419 8,419 8,419 8,419 25,754 25,754 25,754 25,754 20,732 (12,429) 8,303 19,954 Page | 33 ANNUAL FINANCIAL STATEMENTS CONSOLIDATED AND COMPANY STATEMENTS OF CHANGES IN EQUITY GroupGroupGroupGroup Balance as at 1 January 2017 (as originally stated) Balance as at 1 January 2017 (as originally stated) January 2017 (as originally stated) January 2017 (as originally stated) Balance as at 1 Balance as at 1 Retrospective impact on initial application of IFRS 9 (see note 5) Restated balance at 1 January 2017 Profit for the year (See note 8.A.(iv)) Other comprehensive income Transactions with owners: - Share-based payment expense (see notes 16 and 31) Shares issued Restated Balance as at 31 December 2017 Profit for the year Other comprehensive income Transactions with owners: - Share-based payment expense (see notes 16 and 31) Share Share Share Share capital capital capital capital ££££000000000000 18,933 - 18,933 - - - 1,799 20,732 - - - Profit and Profit and Profit and Profit and loss account loss account loss account loss account ££££000000000000 (5,763) (124) (5,887) 2,458 (63) 22 - (3,470) 2,467 (6) - Total Total Total Total equity equity equity equity £000 £000 £000£000 13,170 (124) 13,046 2,458 (63) 22 1,799 17,262 2,467 (6) - Balance as at 31 December 2018 Balance as at 31 December 2018 Balance as at 31 December 2018 Balance as at 31 December 2018 20,732 20,732 20,732 20,732 (1,0(1,0(1,0(1,009090909)))) 19,19,19,19,723723723723 Company Company Company Company Balance as at 1 January 2017 Loss for the year Transactions with owners: - Share-based payment expense (see notes 16 and 31) Shares issued Balance as at 31 December 2017 Profit for the year Transactions with owners: Transactions with owners: ---- Transactions with owners: Transactions with owners: Share-based payment expense (see notes 16 and 31) Share Share Share Share Capital Capital Capital Capital ££££000000000000 Profit and Profit and Profit and Profit and loss account loss account loss account loss account ££££000000000000 18,933 (12,277) - (174) - 1,799 20,732 - ---- 22 - (12,429) 116 ---- Total Total Total Total equity equity equity equity ££££000000000000 6,656 (174) 22 1,799 8,303 116 ---- Balance as at 31 December 2018 Balance as at 31 December 2018 Balance as at 31 December 2018 Balance as at 31 December 2018 20,732 20,732 20,732 20,732 (12,313) (12,313) (12,313) (12,313) 8,419 8,419 8,419 8,419 The notes on pages 37 to 78 form part of these financial statements. Page | 34 ANNUAL FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS Notes 2018 2018 20182018 £000 £000 £000£000 2017 £000 Profit before tax Adjustments for: Depreciation Amortisation and impairment of intangibles Realised gains on debt securities Share in net assets of associate Equity settled share-based payment transactions Changes in: Trading asset Trade and other receivables Creditors and accrued charges Net cash flow from trading activities Changes in: Loans and advances to customers Deposits from customers Pension contribution Cash (outflow)/inflow from operating activities Cash (outflow)/inflow from operating activities Cash (outflow)/inflow from operating activities Cash (outflow)/inflow from operating activities CASH FLOW STATEMENT CASH FLOW STATEMENT CASH FLOW STATEMENT CASH FLOW STATEMENT Cash from operating activities Cash from operating activities Cash from operating activities Cash from operating activities Cash (outflow)/inflow from operating activities Income taxes paid Net cash (outflow)/inflow from operating activities Net cash (outflow)/inflow from operating activities Net cash (outflow)/inflow from operating activities Net cash (outflow)/inflow from operating activities Cash flows from investing activities Cash flows from investing activities Cash flows from investing activities Cash flows from investing activities Purchase of property, plant and equipment Purchase of intangible assets Sale of tangible fixed assets Acquisition of associate Sales/(Purchase) of debt securities at FVOCI Purchase of debt securities at amortised cost Net cash inflow/(outflow) from investing activities Net cash inflow/(outflow) from investing activities Net cash inflow/(outflow) from investing activities Net cash inflow/(outflow) from investing activities Cash flows from financing activities Cash flows from financing activities Cash flows from financing activities Cash flows from financing activities Receipt of loan notes Increase in share capital (Decrease) in borrowings from block creditors Net cash inflow from financing activities Net cash inflow from financing activities Net cash inflow from financing activities Net cash inflow from financing activities Net increase in cash and cash equivalents Net increase in cash and cash equivalents Net increase in cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Cash and cash equivalents at 31 December Cash and cash equivalents at 31 December Cash and cash equivalents at 31 December Included in cash flows are: ---- Included in cash flows are: Included in cash flows are: Included in cash flows are: Interest received – cash amounts Interest paid – cash amounts The notes on pages 37 to 78 form part of these financial statements. 24 25 20 32 16, 31 21 30 24 25 32 20 20 29 28 2,2,2,2,710710710710 2,698 184184184184 396396396396 (135) (135) (135) (135) (30) (30) (30) (30) ---- 134 286 (36) (38) 22 3,3,3,3,125125125125 3,066 4444 (583) (583) (583) (583) (1,1(1,1(1,1(1,169696969)))) 1,31,31,31,377777777 (25,732323232)))) (25,7 (25,7 (25,7 16,228 16,228 16,228 16,228 (26) (26) (26) (26) (8,153) (8,153) (8,153) (8,153) (8,153) (8,153) (8,153) (8,153) (182) (182) (182) (182) (8,335) (8,335) (8,335) (8,335) (1,118) (1,118) (1,118) (1,118) (629) (629) (629) (629) ---- (90) (90) (90) (90) 3,917 3,917 3,917 3,917 ---- 2,080 2,080 2,080 2,080 6,876 6,876 6,876 6,876 ---- (613) (613) (613) (613) 6,263 6,263 6,263 6,263 8888 9,745 9,745 9,745 9,745 9,753 9,753 9,753 9,753 46 156 (21) 3,247 (6,617) 16,320 (24) 12,926 12,926 (28) 12,898 (122) (452) 20 - (4,806) (5,532) (10,892) 450 1,799 (639) 1,610 3,616 6,129 9,745 18,362 18,362 18,362 18,362 (3,434) (3,434) (3,434) (3,434) 19,109 (3,152) Page | 35 ANNUAL FINANCIAL STATEMENTS COMPANY STATEMENT OF CASH FLOWS For the year ended 31 December RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS Notes 2018 2018 20182018 £000 £000 £000£000 2017 £000 Profit before tax Adjustments for: - Depreciation - Share-based payment expense Changes in: Amounts due from group undertakings Trade and other receivables Creditors and accrued charges Amounts due to group undertakings Cash (outflow)/inflow from operating activities CASH FLOW STATEMENT CASH FLOW STATEMENT CASH FLOW STATEMENT CASH FLOW STATEMENT Cash from operating activities Cash from operating activities Cash from operating activities Cash from operating activities Cash (outflow)/inflow from operating activities Income taxes paid Net cash (outflow)/inflow from operating activities Net cash (outflow)/inflow from operating activities Net cash (outflow)/inflow from operating activities Net cash (outflow)/inflow from operating activities Cash flows from investing activities Cash flows from investing activities Cash flows from investing activities Cash flows from investing activities Increase in investment in group undertakings Issue of subordinated loans Net cash outflow from investing activities Net cash outflow from investing activities Net cash outflow from investing activities Net cash outflow from investing activities Cash flows from financing activities Cash flows from financing activities Cash flows from financing activities Cash flows from financing activities Receipt of loan notes Increase in share capital activities Net cash inflow from financing activities Net cash inflow from financing activities activities Net cash inflow from financing Net cash inflow from financing Net increase in cash and cash equivalents Net increase in cash and cash equivalents Net increase in cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Cash and cash equivalents at 31 December Cash and cash equivalents at 31 December Cash and cash equivalents at 31 December The notes on pages 37 to 78 form part of these financial statements. 24 32 32 32 29 116116116116 41414141 ---- 157157157157 16161616 (10) (10) (10) (10) (45) (45) (45) (45) (1,147) (1,147) (1,147) (1,147) (1,029) (1,029) (1,029) (1,029) (1,029) (1,029) (1,029) (1,029) ---- (1,029) (1,029) (1,029) (1,029) (2,400) (2,400) (2,400) (2,400) (2,000) (2,000) (2,000) (2,000) (4,400) (4,400) (4,400) (4,400) 6,875 6,875 6,875 6,875 ---- 6,875 6,875 6,875 6,875 1,446 1,446 1,446 1,446 200200200200 1,646 1,646 1,646 1,646 (174) 41 22 (111) 280 7 57 18 251 251 - 251 (1,700) (600) (2,300) 450 1,799 2,249 200 - 200 Page | 36 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 1.1.1.1. Reporting entity Reporting entity Reporting entity Reporting entity Manx Financial Group PLC is a company incorporated in the Isle of Man. The consolidated financial statements of Manx Financial Group PLC (the “Company”) for the year ended 31 December 2018 comprise the Company and its subsidiaries (the “Group”). 2.2.2.2. Basis of accounting Basis of accounting accounting accounting Basis of Basis of The consolidated and the separate financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and International Financial Reporting Interpretations Committee (“IFRIC”) interpretations applicable to companies reporting under IFRS, including International Accounting Standards (“IAS”). This is the first set of the Group’s annual financial statements in which IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers have been applied. Changes to significant accounting policies are described in Note 5. 3.3.3.3. Functional and presentation currency Functional and presentation currency Functional and presentation currency Functional and presentation currency These financial statements are presented in pounds sterling, which is the Group’s functional currency. All amounts have been rounded to the nearest thousand, unless otherwise indicated. All subsidiaries of the Group have pounds sterling as their functional currency. 4.4.4.4. Use of judgements and estimates Use of judgements and estimates Use of judgements and estimates Use of judgements and estimates The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Assumptions and estimation uncertainties Assumptions and estimation uncertainties Assumptions and estimation uncertainties Assumptions and estimation uncertainties Information about assumptions and estimation uncertainties at year-end that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year is included in the following notes:- Note 23 – measurement of VAT receivable: key assumptions underlying carrying amount; Note 30 – measurement of defined benefit obligations: key actuarial assumptions; Note 25 and 32 – impairment test of intangible assets and goodwill: key assumptions underlying recoverable amounts; and Note 38(I)(vii) – measurement of ECL allowance for loans and advances to customers and assessment of specific impairment allowances where loans are in default or arrears: key assumptions in determining the weighted-average loss rate. 5.5.5.5. Changes in accounting policies Changes in accounting policies Changes in accounting policies Changes in accounting policies A number of other new standards are also effective from 1 January 2018 but they do not have a material effect on the Group’s financial statements. Except for the changes below, the Group has consistently applied the accounting policies as set out in Note 38 to all periods presented in these financial statements. IFRS 9 Financial Instruments IFRS 9 Financial Instruments IFRS 9 Financial Instruments IFRS 9 Financial Instruments IFRS 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. The requirements of IFRS 9 represent a significant change from IAS 39. The new standard brings fundamental changes to the accounting for financial assets and to certain aspects of the accounting for financial liabilities. The key changes to the Group’s accounting policies resulting from the Group’s adoption of IFRS 9 are summarised below. The full impact of adopting the standard is set out in Note 6 and 8. Classification of financial assets and financial liabilities Classification of financial assets and financial liabilities Classification of financial assets and financial liabilities Classification of financial assets and financial liabilities IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). IFRS 9 classification is generally based on the business model in which a financial asset is manged and its contractual cash flows. The standard eliminates the previous IAS 39 categories of held-to-maturity, loans and receivables and available-for-sale. Page | 37 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 accounting policies (continued) Changes in accounting policies (continued) 5.5.5.5. Changes in accounting policies (continued) accounting policies (continued) Changes in Changes in Classification of financial assets and financial liabilities (continued) Classification of financial assets and financial liabilities (continued) Classification of financial assets and financial liabilities (continued) Classification of financial assets and financial liabilities (continued) IFRS 9 largely retains the existing requirements in IAS 39 for classification of financial liabilities. However, although under IAS 39 all fair value changes of liabilities designated under the fair value option were recognised in profit or loss, under IFRS 9 fair value changes are generally presented as follows: the amount of change in fair value that is attributable to changes in the credit risk of the liability is presented in Other Comprehensive Income (“OCI”); and the remaining amount of change in the fair value is presented in profit or loss. For an explanation of how the Group classifies financial assets and liabilities under IFRS 9, See Note 38(I)(ii). Impairment of financial assets Impairment of financial assets Impairment of financial assets Impairment of financial assets IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ model. Under IFRS 9, credit losses are recognised earlier than under IAS 39. For an explanation of how the Group applies the impairment requirements of IFRS 9, see Note 38(I)(vii). Transition Transition Transition Transition Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, For more information and details on the changes and implications resulting from the adoption of IFRS 9, see note 6 and 8(A)(iv). B. IFRS 15 Revenue from Contracts with Customers B. IFRS 15 Revenue from Contracts with Customers B. IFRS 15 Revenue from Contracts with Customers B. IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. The Group initially applied IFRS 15 on 1 January 2018 retrospectively in accordance with IAS 8 without any practical expedients. The timing or amount of the Group’s fee income from contracts with customers was not impacted by the adoption of IFRS 15. Page | 38 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 6. Classification of financial assets and financial liabilities 6. Classification of financial assets and financial liabilities 6. Classification of financial assets and financial liabilities 6. Classification of financial assets and financial liabilities For description of how the Group classifies financial assets and liabilities, see Note 38(I)(ii) The following table provides reconciliation between line items in the statement of financial position and categories of financial instruments. Mandatorily Mandatorily Mandatorily Mandatorily at FVTPL at FVTPL at FVTPL at FVTPL Designated Designated Designated Designated as at FVTPL as at FVTPL as at FVTPL as at FVTPL FVOCI –––– FVOCI FVOCI FVOCI ddddebt ebt ebt ebt instruments instruments instruments instruments FVOCI –––– FVOCI FVOCI FVOCI equity equity equity equity instruments instruments instruments instruments Amortised Amortised Amortised Amortised cost cost cost cost 31 December 2018 31 December 2018 31 December 2018 31 December 2018 Cash and cash equivalents Debt securities Trading assets Loans and advances to customers Trade and other receivables financial assets Total financial assets Total financial assets financial assets Total Total Deposits from customers Creditor and accrued charges Block creditors Loan notes liabilities Total financial liabilities Total financial liabilities liabilities Total financial Total financial 31 December 2017 Cash and cash equivalents Debt securities Trading assets Loans and advances to customers Trade and other receivables Total financial assets Deposits from customers Creditor and accrued charges Block creditors Loan notes Total financial liabilities - 20 - ---- 20202020 ---- - - - ---- - - - ---- ---- ---- - - - ---- 30,534 - - ---- 30,534 30,534 30,534 30,534 ---- - - - ---- - - - - ---- - - - - ---- Mandatorily at FVTPL Designated as at FVTPL - - 24 - - 24 - - - - - - - - - - - - - - - - FVOCI – debt instruments - 28,740 - - - 28,740 FVOCI – equity instruments - - - - - - - - - - - - - - - - Total Total Total Total carrying carrying carrying carrying amount amount amount amount 9,753 30,534 20 148,278 2,491 191,076767676 191,0 191,0 191,0 158,500 2,010 138 15,871 9,753 - - 148,278 2,491 160,522222222 160,5 160,5 160,5 158,500 2,010 138 15,871 176,519191919 176,5 176,5 176,5 176,519191919 176,5 176,5 176,5 Amortised cost 9,745 5,532 - 122,546 1,908 139,731 142,272 3,164 751 8,995 Total carrying amount 9,745 34,272 24 122,546 1,908 168,495 142,272 3,164 751 8,995 155,182 155,182 The following table shows the original measurement categories in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Group’s financial assets and liabilities at 1 January 2017. 1 January 2017 Cash and cash equivalents Trading assets Debt securities Debt securities – Certificates of Deposit Loans and advances to customers Trade and other receivables Original classification under IAS 39 Loans and receivables FVTPL Available-for-sale Amortised cost Amortised cost Loans and receivables New classification under IFRS 9 Amortised cost FVTPL (Mandatory) FVOCI Amortised cost Amortised cost Amortised cost Original carrying amount under IAS 39 6,129 New carrying amount under IFRS 9 6,129 70 23,991 - 116,053 2,064 70 23,991 - 115,929 2,064 Total financial assets 148,307 148,183 Page | 39 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 6. Classification of financial assets and financial liabilities (continued) 6. Classification of financial assets and financial liabilities (continued) 6. Classification of financial assets and financial liabilities (continued) 6. Classification of financial assets and financial liabilities (continued) 1 January 2017 Deposits from customers Creditor and accrued charges Block creditors Loan notes Total financial liabilities Original classification under IAS 39 Amortised cost Amortised cost Amortised cost Amortised cost New classification under IFRS 9 Amortised cost Amortised cost Amortised cost Amortised cost Original carrying amount under IAS 39 125,952 2,975 1,390 8,545 New carrying amount under IFRS 9 125,952 2,975 1,390 8,545 138,862 138,862 In applying IFRS 9 both in the current period and retrospectively in previous periods, there were no reclassifications in the measurement category. As a result, there has been no financial adjustment in transitioning to IFRS 9 with respect to adopting the revised measurement categories. 7. Fair value of financial instruments 7. Fair value of financial instruments 7. Fair value of financial instruments 7. Fair value of financial instruments For description of the Group’s fair value measurement accounting policy, see Note 38(I)(vi). The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the values recognised in the statement of financial position. 31 December 2018 31 December 2018 31 December 2018 31 December 2018 Debt securities Trading assets 31 December 2017 Investment securities Debt securities Trading assets Level 1 Level 1 Level 1 Level 1 ££££000000000000 Level 2 Level 2 Level 2 Level 2 ££££000000000000 Level 3 Level 3 Level 3 Level 3 ££££000000000000 Total Total Total Total ££££000000000000 30,534 30,534 30,534 30,534 20202020 30,554 30,554 30,554 30,554 ---- ---- ---- ---- ---- ---- Level 1 £000 Level 2 £000 Level 3 £000 28,740 24 28,764 - - - 5,532 - 5,532 30,534 30,534 30,534 30,534 20202020 30,554 30,554 30,554 30,554 Total £000 34,272 24 34,296 Financial instruments not measured at fair value Financial instruments not measured at fair value fair value fair value Financial instruments not measured at Financial instruments not measured at The following table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorised: - 31 December 2018 31 December 2018 31 December 2018 31 December 2018 Assets Assets Assets Assets Cash and cash equivalents Loans and advances to customers Investment in associate Trade and other receivables Liabilities Liabilities Liabilities Liabilities Deposits from customers Creditors and accrued charges Block creditors Loan notes Level 1 Level 1 Level 1 Level 1 ££££000000000000 Level 2 Level 2 Level 2 Level 2 ££££000000000000 Level 3 Level 3 Level 3 Level 3 ££££000000000000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 9,753 9,753 9,753 9,753 ---- ---- ---- 9,753 9,753 9,753 9,753 158,500 158,500 158,500 158,500 ---- ---- ---- 158,500 158,500 158,500 158,500 ---- 148,278787878 148,2 148,2 148,2 158158158158 2,491 2,491 2,491 2,491 150,927272727 150,9 150,9 150,9 ---- 2,012,012,012,010000 138138138138 15,871 15,871 15,871 15,871 18,018,018,018,019191919 Total fair Total fair Total fair Total fair values values values values ££££000000000000 9,753 9,753 9,753 9,753 148,278787878 148,2 148,2 148,2 158158158158 2,491 2,491 2,491 2,491 160,680808080 160,6 160,6 160,6 158,500 158,500 158,500 158,500 2,012,012,012,010000 138138138138 15,871 15,871 15,871 15,871 176,519191919 176,5 176,5 176,5 Total Total Total Total carrying carrying carrying carrying amount amount amount amount ££££000000000000 9,753 9,753 9,753 9,753 148,278787878 148,2 148,2 148,2 158158158158 2,491 2,491 2,491 2,491 160,680808080 160,6 160,6 160,6 158,500 158,500 158,500 158,500 2,012,012,012,010000 138138138138 15,871 15,871 15,871 15,871 176,519191919 176,5 176,5 176,5 Page | 40 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 7. Fair value of financial instruments (continued) 7. Fair value of financial instruments (continued) 7. Fair value of financial instruments (continued) 7. Fair value of financial instruments (continued) Financial instruments not measured at fair value (continued) Financial instruments not measured at fair value (continued) Financial instruments not measured at fair value (continued) Financial instruments not measured at fair value (continued) 31 December 2017 Assets Cash and cash equivalents Debt securities – certificates of deposit Loans and advances to customers Investment in associate Trade and other receivables Liabilities Deposits from customers Creditors and accrued charges Block creditors Loan notes Level 1 £000 Level 2 £000 Level 3 £000 - - - - - - - - - - - 9,745 - - - - 9,745 142,272 - - - 142,272 - 5,532 122,546 24 1,908 130,010 - 3,164 751 8,995 12,910 Total fair values £000 9,745 5,532 122,546 24 1,908 139,755 142,272 3,164 751 8,995 155,182 Total carrying amount £000 9,745 5,532 122,546 24 1,908 139,755 142,272 3,164 751 8,995 155,182 The fair value of loans and advances is estimated using valuation models, such as discounted cash flow techniques. Input into the valuation techniques includes expected lifetime credit losses, interest rates, prepayment rates. For collateral-dependent impaired loans, the fair value is measured based on the value of the underlying collateral. Input into the models may include data from third party brokers based on over the counter trading activity, and information obtained from other market participants, which includes observed primary and secondary transactions. 8. Financial risk review 8. Financial risk review 8. Financial risk review 8. Financial risk review Risk management Risk management Risk management Risk management This note presents information about the Group’s exposure to financial risks and the Group’s management of capital. For information on the Group’s financial risk management framework, see Note 36. A. Credit risk A. Credit risk A. Credit risk A. Credit risk For definition of credit risk and information on how credit risk is mitigated by the Group, see Note 36. i. Credit quality analysis i. Credit quality analysis i. Credit quality analysis i. Credit quality analysis Loans and advances to customers Loans and advances to customers Loans and advances to customers Loans and advances to customers Explanation of the terms ‘Stage 1’, ‘Stage 2’ and ‘Stage 3’ is included in Note 38 (I)(vii). An analysis of the credit risk on loans and advances to customers is as follows: - Grade A1 Grade B Grade C Gross value Allowance for impairment Carrying value Stage 1 £000 139,695 760 - 140,455 (125) 140,330 Stage 2 £000 Stage 3 £000 2018 2018 20182018 £000 £000 £000£000 139,695 139,695 139,695 139,695 6,153 6,153 6,153 6,153 5,824 5,824 5,824 5,824 2017 £000 118,373 3,090 3,770 - 85 4,078 4,163 151,672 151,672 151,672 151,672 125,233 (3,126) 1,037 (3,(3,(3,(3,394394394394)))) 148,278787878 148,2 148,2 148,2 (2,687) 122,546 - 5,308 1,746 7,054 (143) 6,911 1 Loans are graded A to C depending on the level of risk. Grade C relates to agreements with the highest of risk, Grade B with medium risk and Grade A relates to agreements with the lowest risk. Page | 41 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 8. Financial risk review (continued) 8. Financial risk review (continued) 8. Financial risk review (continued) 8. Financial risk review (continued) Risk management (continued) Risk management (continued) Risk management (continued) Risk management (continued) A. Credit risk (continued) A. Credit risk (continued) A. Credit risk (continued) A. Credit risk (continued) i. Credit quality analysis (continued) i. Credit quality analysis (continued) i. Credit quality analysis (continued) i. Credit quality analysis (continued) (continued) Loans and advances to customers (continued) Loans and advances to customers (continued) (continued) Loans and advances to customers Loans and advances to customers The following table sets out information about the overdue status of loans and advances to customers in Stage 1, 2 and 3. 31 December Current Overdue < 30 days Overdue > 30 days Stage 1 £000 137,196 2,499 760 140,455 Debt securities, Cash and cash equivalents Debt securities, Cash and cash equivalents Debt securities, Cash and cash equivalents Debt securities, Cash and cash equivalents The following table sets out the credit quality of liquid assets: 31 December Government bonds and treasury bills Government bonds and treasury bills Government bonds and treasury bills Government bonds and treasury bills Rated A to A+ Corporate bonds Corporate bonds Corporate bonds Corporate bonds Rated A to A+ Cash and cash equivalents Cash and cash equivalents equivalents equivalents Cash and cash Cash and cash Rated A to A+ Stage 2 £000 Stage 3 £000 - - 7,054 7,054 - - 4,163 2018 2018 20182018 £000 £000 £000£000 137,196 137,196 137,196 137,196 2,499 2,499 2,499 2,499 11,977777 11,97 11,97 11,97 2017 £000 115,267 3,106 6,860 4,163 151,672222 151,67 151,67 151,67 125,233 2018 2018 20182018 £000 £000 £000£000 2017 £000 30,534 30,534 30,534 30,534 28,740 ---- 5,532 9,754 9,754 9,754 9,754 9,745 40,288 40,288 40,288 40,288 44,017 The analysis has been based on Standard & Poor’s ratings. ii. Collateral and other credit enhancements ii. Collateral and other credit enhancements ii. Collateral and other credit enhancements ii. Collateral and other credit enhancements The Group holds collateral in the form of the underlying assets (typically private and commercial vehicles, plant and machinery) to loan arrangements as security for HP, finances leases, vehicle stocking plans, block discounting, wholesale funding arrangements, integrated wholesale funding arrangements and secured commercial loan balances, which are sub-categories of loans and advances to customers. In addition, the commission share schemes have an element of capital indemnified. During 2018, 37.9% of loans and advances fell into this category (2017: 41.7%). Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. At the time of granting credit within the sub-categories listed above, the loan balances due are secured over the underlying assets held as collateral. iii. Amounts arising from ECL iii. Amounts arising from ECL iii. Amounts arising from ECL iii. Amounts arising from ECL See accounting policy in Note 38(I)(vii) IFRS 9 significantly overhauled the requirements and methodology used to assess credit impairments by transitioning to a forward- looking approach based on an expected credit loss model. The new impairment model applies to financial assets measured at amortised cost, contract assets and debt investments at FVOCI, but not to investments in equity instruments. Under IFRS 9, credit losses are recognised earlier than under IAS 39. After a detailed review, the Group devised and implemented an impairment methodology in light of the IFRS 9 requirements outlined above noting the following: A SICR is always deemed to occur when the borrower is 30 days past due on its contractual payments. If the Group becomes aware ahead of this time of non-compliance or financial difficulties of the borrower, such as loss of employment, avoiding contact with the Group then a SICR has also deemed to occur. Page | 42 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 8. Financial risk review (continued) 8. Financial risk review (continued) 8. Financial risk review (continued) 8. Financial risk review (continued) Risk management (continued) Risk management (continued) Risk management (continued) Risk management (continued) A. Credit risk (continued) A. Credit risk (continued) A. Credit risk (continued) A. Credit risk (continued) iii. Amounts arising from ECL (continued) iii. Amounts arising from ECL (continued) iii. Amounts arising from ECL (continued) iii. Amounts arising from ECL (continued) A receivable is always deemed to be in default and credit-impaired when the borrower is 90 days past due on its contractual payments or earlier if the Group becomes aware of severe financial difficulties such as bankruptcy, IVA, abscond or disappearance, fraudulent activity and other similar events. The ECL was derived by reviewing the Group’s loss rate and loss given default over the past 8 years by product and geographical segment. The Group has assumed that the future economic conditions will broadly mirror the current environment and therefore the forecasted loss levels in the next 3 years will match the Group’s experience in recent years. For portfolios where the Group has never had a default in its history or has robust credit enhancements such as credit insurance or default indemnities for the entire portfolio, then no IFRS 9 provision is made. If the Group holds objective evidence through specifically assessing a credit-impaired receivable and believes it will go on to completely recover the debt due to the collateral held and cooperation with the borrower, then no IFRS 9 provision is made. iv. Reconciliation of the primary statements from IAS 39 to IFRS 9 iv. Reconciliation of the primary statements from IAS 39 to IFRS 9 iv. Reconciliation of the primary statements from IAS 39 to IFRS 9 iv. Reconciliation of the primary statements from IAS 39 to IFRS 9 As a result of the change to the Group’s accounting policy in regards to credit-impairments, it has restated the previous periods in accordance with IFRS 9. A reconciliation of the primary statements is as follows: Consolidated Income Statement Consolidated Income Statement Consolidated Income Statement Consolidated Income Statement 31 December 2017 Profit for the year Increase to provision for impairment on loan assets Restated profit for the year Reduction in basic earnings per share (pence) Reduction in diluted earnings per share (pence) Consolidated Statement of Other Comprehensive Income Consolidated Statement of Other Comprehensive Income Consolidated Statement of Other Comprehensive Income Consolidated Statement of Other Comprehensive Income 31 December 2017 Total comprehensive income for the year attributable to owners Increase to provision for impairment on loan assets Restated Total comprehensive income for the year attributable to owners Reduction in basic earnings per share (pence) Reduction in diluted earnings per share (pence) Impact of adopting IFRS 9 at 31 December £000 2,508 (50) 2,458 (0.04) (0.03) Impact of adopting IFRS 9 at 31 December £000 2,445 (50) 2,395 (0.04) (0.03) Page | 43 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 8. Financial risk review (continued) 8. Financial risk review (continued) 8. Financial risk review (continued) 8. Financial risk review (continued) Risk management (continued) Risk management (continued) Risk management (continued) Risk management (continued) A. Credit risk (continued) A. Credit risk (continued) A. Credit risk (continued) A. Credit risk (continued) iv. Reconciliation of the primary statements from IAS 39 to IFRS 9 (continued) iv. Reconciliation of the primary statements from IAS 39 to IFRS 9 (continued) iv. Reconciliation of the primary statements from IAS 39 to IFRS 9 (continued) iv. Reconciliation of the primary statements from IAS 39 to IFRS 9 (continued) Statement of Financial Position Consolidated Statement of Financial Position Consolidated Statement of Financial Position Statement of Financial Position Consolidated Consolidated Assets Loans and advances to customers Increase to provision for impairment on loan assets Restated loans and advances to customers Equity Profit and loss account Increase to provision for impairment on loan assets Restated profit and loss account Consolidated Statement of Cash Flows Consolidated Statement of Cash Flows Consolidated Statement of Cash Flows Consolidated Statement of Cash Flows Impact of adopting IFRS 9 at 31 December 2017 £000 Impact of adopting IFRS 9 at 31 December 2016 £000 122,720 (174) 122,546 (3,296) (174) (3,470) 116,053 (124) 115,929 (5,763) (124) (5,887) Total cash flows from operating, investing and financing activities remains unchanged due to the increase in impairments on loan assets being a non-cash item. Consolidated Statement of Changes in Equity Consolidated Statement of Changes in Equity Consolidated Statement of Changes in Equity Consolidated Statement of Changes in Equity For an analysis of the retrospective impact of IFRS 9, see the Consolidated Statement of Changes in Equity which analyses in each year the effect of adopting IFRS 9 for that year. v. Concentration of credit risk v. Concentration of credit risk v. Concentration of credit risk v. Concentration of credit risk Geographical Lending is restricted to individuals and entities with Isle of Man, UK or Channel Islands addresses. Segmental The Bank is exposed to credit risk with regard to customer loan accounts, comprising HP and finance lease balances, unsecured personal loans, secured commercial loans, block discounting, vehicle stocking plan loans and wholesale funding agreements. In addition, the Bank lends via significant introducers into the UK. There was one introducer that accounted for more than 20% of the Bank’s total lending portfolio at the end of 31 December 2018 (2017: one introducer). B. Liquidity risk B. Liquidity risk B. Liquidity risk B. Liquidity risk For the definition of liquidity risk and information on how liquidity risk is manged by the Group see Note 36. i. Exposure to liquidity risk i. Exposure to liquidity risk i. Exposure to liquidity risk i. Exposure to liquidity risk The key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers and short- term funding. For this purpose, ‘net liquid assets’ includes cash and cash equivalents and investment-grade debt securities for which there is an active and liquid market. Details of the reported Group ratio of net liquid assets to deposits from customers at the reporting date and during the reporting period were as follows: At 31 December Average for the period Maximum for the period Minimum for the period 2018 2018 20182018 25%25%25%25% 32%32%32%32% 40%40%40%40% 25%25%25%25% 2017 27% 26% 30% 23% Page | 44 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 8. Financial risk review (continued) 8. Financial risk review (continued) 8. Financial risk review (continued) 8. Financial risk review (continued) Risk management (continued) Risk management (continued) Risk management (continued) Risk management (continued) B. Liquidity risk (continued) B. Liquidity risk (continued) B. Liquidity risk (continued) B. Liquidity risk (continued) financial assets ii. Maturity analysis for financial liabilities and financial assets ii. Maturity analysis for financial liabilities and financial assets financial assets ii. Maturity analysis for financial liabilities and ii. Maturity analysis for financial liabilities and The table below shows the Group’s financial liabilities classified by their earliest possible contractual maturity, on an undiscounted basis including interest due at the end of the deposit term. Based on historical data, the Group’s expected actual cash flow from these items vary from this analysis due to the expected re-investment of maturing customer deposits. Residual contractual maturities of financial liabilities as at the reporting date (undiscounted) Residual contractual maturities of financial liabilities as at the reporting date (undiscounted) Residual contractual maturities of financial liabilities as at the reporting date (undiscounted) Residual contractual maturities of financial liabilities as at the reporting date (undiscounted) 31 December 2018 31 December 2018 31 December 2018 31 December 2018 ££££000000000000 Sight Sight---- SightSight 8 days 8 days 8 days 8 days >8 days >8 days >8 days >8 days ---- 1 month 1 month 1 month 1 month ££££000000000000 >1 month >1 month >1 month >1 month ---- 3 months 3 months 3 months 3 months ££££000000000000 >3 months >3 months >3 months >3 months ---- 6 months 6 months 6 months 6 months ££££000000000000 >6 months >6 months >6 months >6 months ---- 1 year 1 year 1 year 1 year ££££000000000000 >1 year >1 year >1 year >1 year ---- 3 years 3 years 3 years 3 years ££££000000000000 >3 years >3 years >3 years >3 years ---- 5 years 5 years 5 years 5 years ££££000000000000 >5 years >5 years >5 years >5 years ££££000000000000 Total Total Total Total ££££000000000000 Deposits from customers Other liabilities Total liabilities Total liabilities Total liabilities Total liabilities 31 December 2017 Deposits from customers Other liabilities Total liabilities 1,754 1,754 1,754 1,754 2,061 2,061 2,061 2,061 3,815 3,815 3,815 3,815 5,012 5,012 5,012 5,012 200200200200 5,212 5,212 5,212 5,212 14,397 14,397 14,397 14,397 230230230230 14,627 14,627 14,627 14,627 34,028 34,028 34,028 34,028 216216216216 34,244 34,244 34,244 34,244 35,032 35,032 35,032 35,032 928928928928 35,960 35,960 35,960 35,960 56,643 56,643 56,643 56,643 8,705 8,705 8,705 8,705 65,348 65,348 65,348 65,348 11,634 11,634 11,634 11,634 8,063 8,063 8,063 8,063 19,697 19,697 19,697 19,697 ---- 584584584584 584584584584 158,500 158,500 158,500 158,500 20,987 20,987 20,987 20,987 179,487 179,487 179,487 179,487 Sight- 8 days £000 >8 days - 1 month £000 >1 month - 3 months £000 >3 months - 6 months £000 >6 months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 Total £000 2,579 3,094 5,673 3,136 89 3,225 12,710 318 13,028 24,241 1,540 25,781 30,207 1,754 31,961 60,820 3,326 12,567 3,322 64,146 15,889 - 560 560 146,260 14,003 160,263 Maturity of assets and liabilities at the reporting date Maturity of assets and liabilities at the reporting date Maturity of assets and liabilities at the reporting date Maturity of assets and liabilities at the reporting date Sight Sight---- SightSight 8 days 8 days 8 days 8 days ££££000000000000 >8 days >8 days >8 days >8 days ---- 1 month 1 month 1 month 1 month ££££000000000000 >1 month >1 month >1 month >1 month ---- 3 months 3 months 3 months 3 months ££££000000000000 >3 months >3 months >3 months >3 months ---- 6 months 6 months 6 months 6 months ££££000000000000 >6 months >6 months >6 months >6 months ---- 1 year 1 year 1 year 1 year ££££000000000000 >1 year >1 year >1 year >1 year ---- 3 years 3 years 3 years 3 years ££££000000000000 >3 >3 >3 >3 years years years years ---- 5 years 5 years 5 years 5 years ££££000000000000 >5 years >5 years >5 years >5 years ££££000000000000 Total Total Total Total ££££000000000000 31 December 2018 31 December 2018 31 December 2018 31 December 2018 Assets Assets Assets Assets Cash & cash equivalents Debt securities Loans and advances to customers Other assets 9,753 9,753 9,753 9,753 ---- 5,273 5,273 5,273 5,273 20202020 ---- 17,995 17,995 17,995 17,995 1,047 1,047 1,047 1,047 225225225225 ---- 5,989 5,989 5,989 5,989 9,724 9,724 9,724 9,724 145145145145 ---- ---- 15,977 15,977 15,977 15,977 ---- 15,977 15,977 15,977 15,977 ---- ---- 35,246 35,246 35,246 35,246 ---- 35,246 35,246 35,246 35,246 ---- ---- 64,099 64,099 64,099 64,099 ---- 64,099 64,099 64,099 64,099 ---- 6,550 6,550 6,550 6,550 16,16,16,16,910910910910 ---- 23,423,423,423,460606060 ---- ---- 2222 7,959 7,959 7,959 7,959 7,961 7,961 7,961 7,961 9,753 9,753 9,753 9,753 30,534 30,534 30,534 30,534 148,278787878 148,2 148,2 148,2 8,349 8,349 8,349 8,349 196,914914914914 196, 196,196, Total assets Total assets Total assets Total assets 15,046 15,046 15,046 15,046 19,267 19,267 19,267 19,267 15,858 15,858 15,858 15,858 Liabilities Liabilities Liabilities Liabilities Deposits from customers Other liabilities Total liabilities Total liabilities Total liabilities Total liabilities 1,754 1,754 1,754 1,754 2,098 2,098 2,098 2,098 3,852 3,852 3,852 3,852 5,012 5,012 5,012 5,012 146146146146 5,158 5,158 5,158 5,158 14,397 14,397 14,397 14,397 92929292 14,489 14,489 14,489 14,489 34,028 34,028 34,028 34,028 ---- 34,028 34,028 34,028 34,028 35,032 35,032 35,032 35,032 500500500500 35,532 35,532 35,532 35,532 56,643 56,643 56,643 56,643 7,690 7,690 7,690 7,690 11,634 11,634 11,634 11,634 7,581 7,581 7,581 7,581 64,333 64,333 64,333 64,333 19,215 19,215 19,215 19,215 ---- 584584584584 583583583583 158,500 158,500 158,500 158,500 18,18,18,18,691691691691 177,191191191191 177, 177,177, Page | 45 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 8. Financial risk review (continued) 8. Financial risk review (continued) 8. Financial risk review (continued) 8. Financial risk review (continued) Risk management (continued) Risk management (continued) Risk management (continued) Risk management (continued) B. Liquidity risk (continued) B. Liquidity risk (continued) B. Liquidity risk (continued) B. Liquidity risk (continued) ii. Maturity analysis for financial liabilities and financial assets (continued) ii. Maturity analysis for financial liabilities and financial assets (continued) ii. Maturity analysis for financial liabilities and financial assets (continued) ii. Maturity analysis for financial liabilities and financial assets (continued) ilities at the reporting date (continued) Maturity of assets and liabilities at the reporting date (continued) Maturity of assets and liab ilities at the reporting date (continued) ilities at the reporting date (continued) Maturity of assets and liab Maturity of assets and liab 31 December 2017 Assets Cash & cash equivalents Debt securities Loans and advances to customers Other assets Total assets Liabilities Deposits from customers Other liabilities Total liabilities Sight- 8 days £000 >8 days - 1 month £000 >1 month - 3 months £000 >3 months- 6 months £000 >6 months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 Total £000 9,745 - 3,708 103 - 1,998 3,649 194 - 16,983 7,945 192 - 8,524 10,808 - - - - - - 6,767 - - 9,745 34,272 25,849 - 54,872 - 15,695 - 21 5,994 122,546 6,483 13,556 5,841 25,120 19,332 25,849 54,872 22,462 6,015 173,046 2,570 3,086 5,656 3,105 55 3,160 12,654 234 12,888 24,112 169 24,281 29,716 3,333 33,049 57,711 2,945 60,656 12,404 3,130 15,534 - 560 560 142,272 13,512 155,784 iii. Liquidity reserves iii. Liquidity reserves iii. Liquidity reserves iii. Liquidity reserves The following table sets out the components of the Group’s liquidity reserves. Balances with other banks Unencumbered debt securities issued by sovereigns Total liquidity reserves 2018 2018 20182018 Carrying Carrying Carrying Carrying amount amount amount amount £000 £000 £000£000 9,753 9,753 9,753 9,753 30,534 30,534 30,534 30,534 40,287 40,287 40,287 40,287 2018 2018 2018 2018 Fair Fair Fair Fair value value value value £000 £000 £000£000 9,753 9,753 9,753 9,753 30,534 30,534 30,534 30,534 40,287 40,287 40,287 40,287 2017 Carrying amount £000 9,745 34,272 44,017 2017 Fair value £000 9,745 34,272 44,017 C. Market risk C. Market risk C. Market risk C. Market risk For the definition of market risk and information on how the Group manages the market risks of trading and non-trading portfolios, see Note 36. The following table sets out the allocation of assets and liabilities subject to market risk between trading and non-trading portfolios. 31 December 2018 31 December 2018 31 December 2018 31 December 2018 Assets subject to market risk Assets subject to market risk Assets subject to market risk Assets subject to market risk Trading assets Debt securities Total Total Total Total 31 December 2017 Assets subject to market risk Assets subject to market risk Assets subject to market risk Assets subject to market risk Trading assets Debt securities Total Carrying Carrying Carrying Carrying amount amount amount amount £000 £000 £000£000 20202020 30,534 30,534 30,534 30,534 30,554 30,554 30,554 30,554 Carrying amount £000 24 34,272 34,296 Market risk measure Market risk measure Market risk measure Market risk measure Trading Trading Trading Trading portfolios portfolios portfolios portfolios £000 £000 £000£000 NonNonNonNon----trading trading trading trading portfolios portfolios portfolios portfolios £000 £000 £000£000 20202020 ---- 20202020 ---- 30,534 30,534 30,534 30,534 30,534 30,534 30,534 30,534 Market risk measure Trading portfolios £000 Non-trading portfolios £000 24 - 24 - 34,272 34,272 Page | 46 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 8. Financial risk review (continued) 8. Financial risk review (continued) 8. Financial risk review (continued) 8. Financial risk review (continued) Risk management (continued) Risk management (continued) Risk management (continued) Risk management (continued) C. Market risk (continued) C. Market risk (continued) C. Market risk (continued) C. Market risk (continued) trading portfolio i. Exposure to interest rate risk –––– NonNonNonNon----trading portfolio i. Exposure to interest rate risk trading portfolio trading portfolio i. Exposure to interest rate risk i. Exposure to interest rate risk The following tables present the interest rate mismatch position between assets and liabilities over the respective maturity dates. The maturity dates are presented on a worst-case basis, with assets being recorded at their latest maturity and deposits from customers at their earliest. 31 December 2018 31 December 2018 31 December 2018 31 December 2018 Sight---- Sight SightSight 1 month 1 month 1 month 1 month ££££000000000000 >1month >1month >1month >1month ---- 3months 3months 3months 3months ££££000000000000 >3months >3months >3months >3months ---- 6months 6months 6months 6months ££££000000000000 >6months >6months >6months >6months ---- 1 year 1 year 1 year 1 year ££££000000000000 >1 year >1 year >1 year >1 year ---- 3 years 3 years 3 years 3 years ££££000000000000 >3 years >3 years >3 years >3 years ---- 5 years 5 years 5 years 5 years ££££000000000000 >5 years >5 years >5 years >5 years ££££000000000000 Int. NonNonNonNon----Int. Int. Int. Bearing Bearing Bearing Bearing ££££000000000000 Total Total Total Total ££££000000000000 Assets Assets Assets Assets Cash & cash equivalents Debt securities Loans and advances to customers Other assets 9,753 9,753 9,753 9,753 17,995 17,995 17,995 17,995 6,319 6,319 6,319 6,319 245245245245 ---- 5,989 5,989 5,989 5,989 9,724 9,724 9,724 9,724 145145145145 ---- ---- 15,977 15,977 15,977 15,977 ---- ---- ---- 35,247 35,247 35,247 35,247 ---- ---- ---- 64,099 64,099 64,099 64,099 ---- ---- 6,550 6,550 6,550 6,550 16,16,16,16,910910910910 ---- Total assets Total assets Total assets Total assets 34,312 34,312 34,312 34,312 15,858 15,858 15,858 15,858 15,977 15,977 15,977 15,977 35,247 35,247 35,247 35,247 64,099 64,099 64,099 64,099 23,423,423,423,460606060 Liabilities and equity Liabilities and equity Liabilities and equity Liabilities and equity Deposits from customers Other liabilities Total equity Total liabilities and equity Total liabilities and equity Total liabilities and equity Total liabilities and equity Interest rate sensitivity gap Cumulative Cumulative Cumulative Cumulative 6,766 6,766 6,766 6,766 2,22,22,22,244444444 ---- 9,09,09,09,010101010 25,25,25,25,302302302302 25,25,25,25,302302302302 14,397 14,397 14,397 14,397 92929292 ---- 14,489 14,489 14,489 14,489 1,369 1,369 1,369 1,369 26,626,626,626,671717171 34,028 34,028 34,028 34,028 ---- ---- 34,028 34,028 34,028 34,028 (18,051 (18,051 (18,051 (18,051 )))) 35,032 35,032 35,032 35,032 500500500500 ---- 56,643 56,643 56,643 56,643 7,690 7,690 7,690 7,690 ---- 11,634 11,634 11,634 11,634 7,581 7,581 7,581 7,581 ---- 35,532 35,532 35,532 35,532 64,333 64,333 64,333 64,333 19,215 19,215 19,215 19,215 ---- ---- 2222 ---- 2222 ---- 584584584584 ---- 584584584584 ---- ---- ---- 7,959 7,959 7,959 7,959 9,753 9,753 9,753 9,753 30,534 30,534 30,534 30,534 148,278787878 148,2 148,2 148,2 8,349 8,349 8,349 8,349 7,959 7,959 7,959 7,959 196,914914914914 196, 196,196, ---- ---- 19,19,19,19,723723723723 19,656 19,656 19,656 19,656 158,500 158,500 158,500 158,500 18,691 18,691 18,691 18,691 19,19,19,19,723723723723 196,914914914914 196, 196,196, (285) (285) (285) (285) (234) (234) (234) (234) 4,24,24,24,245454545 (582) (582) (582) (582) (11,764764764764)))) (11, (11, (11, 8,8,8,8,620620620620 8,8,8,8,335335335335 8,8,8,8,101101101101 12,12,12,12,346346346346 11,711,711,711,764646464 ---- Sight- 1 month £000 >1month -3months £000 >3months - 6months £000 >6months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 Non-Int. Bearing £000 ---- ---- Total £000 31 December 2017 Assets Cash & cash equivalents Debt securities Loans and advances to customers Other assets Total assets Liabilities and equity Deposits from customers Other liabilities Total equity Total liabilities and equity Interest rate sensitivity gap Cumulative 5,675 3,141 - 8,816 10,580 10,580 9,745 1,998 7,356 297 - 16,983 7,945 192 - 8,524 10,808 - - - 25,849 - - - 54,872 - - 6,766 15,695 - 19,396 25,120 19,332 25,849 54,872 22,461 12,654 234 - 12,888 24,112 169 - 24,281 29,716 3,333 - 33,049 57,711 2,945 - 60,656 12,404 3,130 - 15,534 - - 22 - 22 - 560 - 560 - - - 5,994 9,745 34,427 122,547 6,483 5,994 173,046 - - 17,262 17,262 142,272 13,512 17,262 173,046 12,232 (4,949) (7,200) (5,784) 6,927 (538) (11,268) 22,812 17,863 10,663 4,879 11,806 11,268 - - - The Bank monitors the impact of changes in interest rates on interest rate mismatch positions using a method consistent with the FSA required reporting standard. The methodology applies weightings to the net interest rate sensitivity gap in order to quantify the impact of an adverse change in interest rates of 2.0% per annum (2017: 2.0%). The following tables set out the estimated total impact of such a change based on the mismatch at the reporting date: - 31 December 2018181818 31 December 20 31 December 20 31 December 20 Interest rate sensitivity gap Weighting £000 Sight Sight---- SightSight 1 month 1 month 1 month 1 month ££££000000000000 >1month >1month >1month >1month ----3months 3months 3months 3months ££££000000000000 >3months >3months >3months >3months ---- 6months 6months 6months 6months ££££000000000000 >6months >6months >6months >6months ---- 1 year 1 year 1 year 1 year ££££000000000000 >1 year >1 year >1 year >1 year ---- 3 years 3 years 3 years 3 years ££££000000000000 >3 years >3 years >3 years >3 years ---- 5 years 5 years 5 years 5 years ££££000000000000 >5 years >5 years >5 years >5 years ££££000000000000 NonNonNonNon----Int. Int. Int. Int. Bearing Bearing Bearing Bearing ££££000000000000 25,25,25,25,302302302302 0.000 0.000 0.000 0.000 ---- 1,369 1,369 1,369 1,369 (18,051) (18,051) (18,051) (18,051) 0.003 0.003 0.003 0.003 4444 0.007 0.007 0.007 0.007 (126) (126) (126) (126) (285) (285) (285) (285) 0.014 0.014 0.014 0.014 (4)(4)(4)(4) (234) (234) (234) (234) 0.027 0.027 0.027 0.027 (6)(6)(6)(6) 4,24,24,24,245454545 0.054 0.054 0.054 0.054 222222229999 (582) (582) (582) (582) (11,764764764764)))) (11, (11, (11, 0.115 0.115 0.115 0.115 (67) (67) (67) (67) 0.000 0.000 0.000 0.000 ---- Total Total Total Total ££££000000000000 ---- ---- 30303030 Page | 47 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 8. Financial risk review (continued) 8. Financial risk review (continued) 8. Financial risk review (continued) 8. Financial risk review (continued) Risk management (continued) Risk management (continued) Risk management (continued) Risk management (continued) C. Market risk (continued) C. Market risk (continued) C. Market risk (continued) C. Market risk (continued) trading portfolio (continued) i. Exposure to interest rate risk –––– NonNonNonNon----trading portfolio (continued) i. Exposure to interest rate risk trading portfolio (continued) trading portfolio (continued) i. Exposure to interest rate risk i. Exposure to interest rate risk 31 December 2017 Sight- 1 month £000 >1month -3months £000 >3months -6months £000 >6months - 1 year £000 >1 year - 3 years £000 >3 years - 5 years £000 >5 years £000 Non-Int. Bearing £000 Interest rate sensitivity gap 10,580 Weighting £000 0.000 - 12,232 0.003 37 (4,949) (7,200) (5,784) 0.007 (35) 0.014 (101) 0.027 (156) 6,927 0.054 374 (538) (11,268) 0.115 (62) 0.000 - Total £000 - - 57 D. Capital Management D. Capital Management D. Capital Management D. Capital Management i. Regulatory capital i. Regulatory capital i. Regulatory capital i. Regulatory capital The lead regulatory of the Group’s wholly owned subsidiary, Conister Bank Limited (‘Bank’), is the Isle of Man Financial Services Authority (‘FSA’). The FSA sets and monitors capital requirements for the Bank. The Bank’s regulatory capital consists of the following elements. Common Equity Tier 1 (CET1) capital, which includes ordinary share capital, retained earnings and reserves after adjustment for deductions for goodwill, intangible assets, intercompany receivable. Tier 2 capital, which includes qualifying subordinated liabilities and any excess of impairment over expected losses. The lead FSA’s approach to the measurement of capital adequacy is primarily based on monitoring the relationship of the capital resources requirement to available capital resources. The FSA sets individual capital guidance (ICG) for the Bank in excess of the minimum capital resources requirement. A key input to the ICG setting process is the Bank’s internal capital adequacy assessment process (ICAAP). The Bank is also regulated by the Financial Conduct Authority in the United Kingdom for credit and brokerage related activities. ii. Capital allocation ii. Capital allocation ii. Capital allocation ii. Capital allocation Management uses regulatory capital ratios to monitor its capital base. The allocation of capital between specific operations and activities is, to a large extent, driven by optimisation of the return achieved on the capital allocated. The amount of capital allocated to each operation or activity is based primarily on regulatory capital requirements. 9. Operating segments 9. Operating segments 9. Operating segments 9. Operating segments Segmental information is presented in respect of the Group’s business segments. The Directors consider that the Group currently operates in one geographic segment comprising of the Isle of Man, UK and Channel Islands. The primary format, business segments, is based on the Group’s management and internal reporting structure. The Directors consider that the Group operates in five (2017: five) product orientated segments in addition to its investing activities: Asset and Personal Finance (including provision of HP contracts, finance leases, personal loans, commercial loans, block discounting, vehicle stocking plans and wholesale funding agreements); Manx Incahoot; Conister Card Services; Edgewater Associates; and Manx FX. For the year ended 31 For the year ended 31 For the year ended 31 For the year ended 31 December 2018 December 2018 December 2018 December 2018 Net interest income Operating income /(loss) Profit / (loss) before tax Profit / (loss) before tax Profit / (loss) before tax Profit / (loss) before tax payable payable payable payable Capital expenditure Total assets Total assets Total assets Total assets Asset and Asset and Asset and Asset and Personal Personal Personal Personal Finance Finance Finance Finance ££££000000000000 15,568 9,306 2,22,22,22,267676767 1,589 190,923232323 190,9 190,9 190,9 Manx Manx Manx Manx Incahoot Incahoot Incahoot Incahoot ££££000000000000 Conister Conister Conister Conister CardCardCardCard Services Services Services Services ££££000000000000 Edgewater Edgewater Edgewater Edgewater Associates Associates Associates Associates ££££000000000000 Manx FX Manx FX Manx FX Manx FX ££££000000000000 Investing Investing Investing Investing Activities Activities Activities Activities ££££000000000000 - 12 (189) (189) (189) (189) 1 78787878 - - (3)(3)(3)(3) - ---- - 2,562 245245245245 150 3,153 3,153 3,153 3,153 - 493 490490490490 6 608608608608 Total Total Total Total £000 £000 £000£000 15,568 13,166 - - (100) (100) (100) (100) 2,2,2,2,710710710710 1 1,747 2,152 2,152 2,152 2,152 196,914914914914 196, 196,196, Page | 48 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 9. Operating segments (continued) 9. Operating segments (continued) 9. Operating segments (continued) 9. Operating segments (continued) For the year ended 31 December 2017 Asset and Personal Finance £000 Manx Incahoot £000 Conister Card Services £000 Edgewater Associates £000 Net interest income Operating income /(loss) Profit / (loss) before tax payable Capital expenditure Total assets 10. Net interest income 10. Net interest income 10. Net interest income 10. Net interest income 16,637 8,298 1,910 254 168,052 - 44 (293) 1 307 - (104) (104) - 18 - 2,625 742 319 2,252 Interest income Interest income Interest income Interest income Loans and advances to customers Total interest income calculated using the effective interest method Total interest income calculated using the effective interest method effective interest method effective interest method Total interest income calculated using the Total interest income calculated using the Other interest income Total interest income Total interest income Total interest income Total interest income Interest expense Interest expense Interest expense Interest expense Deposits from customers Subordinated liabilities Block funders interest expense Total interest expense Total interest expense interest expense Total Total Net interest income Net interest income Net interest income Net interest income 11. Net fee and commission income 11. Net fee and commission income 11. Net fee and commission income 11. Net fee and commission income Manx FX £000 - 447 249 - 181 Investin g Activitie s £000 Total £000 - - 16,637 11,310 (186) 2,318 - 574 2,236 173,046 2018 2018 20182018 £000 £000 £000£000 2017 £000 19,037 19,037 19,037 19,037 19,037 19,037 19,037 19,037 78787878 19,115 19,115 19,115 19,115 (2,744) (2,744) (2,744) (2,744) (773) (773) (773) (773) (30) (30) (30) (30) (3,547) (3,547) (3,547) (3,547) 19,839 19,839 54 19,893 (2,690) (495) (71) (3,256) 15,568 15,568 15,568 15,568 16,637 A. Disaggregation of fee and commission income A. Disaggregation of fee and commission income A. Disaggregation of fee and commission income A. Disaggregation of fee and commission income In the following table, fee and commission income from contracts with customers in the scope of IFRS 15 is disaggregated by major type of services. The table includes a reconciliation of the disaggregated fee and commission income with the Group’s reportable segments. Major service lines Major service lines Major service lines Major service lines Independent financial advice income FX trading income Fee and commission income Fee and commission income Fee and commission income Fee and commission income Fee and commission expense Net fee and commission expense Net fee and commission expense Net fee and commission expense Net fee and commission expense 2018 2018 20182018 £000 £000 £000£000 2,547 2,547 2,547 2,547 824824824824 3,371 3,371 3,371 3,371 2017 £000 2,625 490 3,115 (6,109) (6,109) (6,109) (6,109) (8,413) (2,738) (2,738) (2,738) (2,738) (5,298) Page | 49 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 12. Terminal funding 12. Terminal funding 12. Terminal funding 12. Terminal funding In September 2014, the Bank discontinued funding handheld payment devices (referred to as Terminal Funding) due to the volume of write offs. Ever since, the book is being run off whilst the Bank vigorously pursues historical write off. A decision was made by the Board during 2016 to cease funding and run-off the book upon the final repayment date of August 2019. Interest income Fee and commission expense Provision for impairment on loan assets 13. Personnel expenses 13. Personnel expenses 13. Personnel expenses 13. Personnel expenses Gross salaries Executive Directors’ remuneration Non-executive Directors’ fees Executive Directors’ pensions Executive Directors’ performance related pay Pension costs National insurance and payroll taxes Training and recruitment costs expenses 14. Other expenses 14. Other expenses expenses 14. Other 14. Other Professional and legal fees Marketing costs IT costs Establishment costs Communication costs Travel costs Bank charges Insurance Irrecoverable VAT Other costs 15. Impairment on loans and advances to customers 15. Impairment on loans and advances to customers 15. Impairment on loans and advances to customers 15. Impairment on loans and advances to customers The charge in respect of specific allowances for impairment comprises: - Specific impairment allowances made Reversal of allowances previously made Total charge for specific provision for impairment Total charge for specific provision for impairment Total charge for specific provision for impairment Total charge for specific provision for impairment 2018 2018 20182018 ££££000000000000 181181181181 (5)(5)(5)(5) (102) (102) (102) (102) 74747474 2018 2018 20182018 ££££000000000000 (4,233) (4,233) (4,233) (4,233) (241) (241) (241) (241) (145) (145) (145) (145) (19) (19) (19) (19) (50) (50) (50) (50) (259) (259) (259) (259) (527) (527) (527) (527) (229) (229) (229) (229) (5,703) (5,703) (5,703) (5,703) 2018 2018 20182018 ££££000000000000 (1,(1,(1,(1,067067067067)))) (237 (237)))) (237(237 (567) (567) (567) (567) (434) (434) (434) (434) (146 (146)))) (146(146 (174) (174) (174) (174) (119) (119) (119) (119) (141) (141) (141) (141) (303) (303) (303) (303) (277) (277) (277) (277) (3,465)))) (3,465 (3,465 (3,465 2018 2018 20182018 ££££000000000000 (1,2(1,2(1,2(1,246464646)))) 410410410410 (8(8(8(836363636)))) 2017 £000 377 (92) (195) 90 2017 £000 (3,479) (214) (185) (21) (36) (226) (432) (190) (4,783) 2017 £000 (848) (211) (528) (376) (137) (149) (142) (133) (180) (448) (3,152) 2017 £000 (1,295) 776 (519) Page | 50 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 (continued) 15. Impairment on loans and advances to customers (continued) 15. Impairment on loans and advances to customers (continued) (continued) 15. Impairment on loans and advances to customers 15. Impairment on loans and advances to customers The charge in respect of collective allowances for impairment comprises: - Collective impairment allowances made Release of allowances previously made Total charge for collective allowances for impairment Total charge for collective allowances for impairment Total charge for collective allowances for impairment Total charge for collective allowances for impairment Total charge for allowances for impairment Total charge for allowances for impairment Total charge for allowances for impairment Total charge for allowances for impairment 16. Profit before tax payable 16. Profit before tax payable 16. Profit before tax payable 16. Profit before tax payable The profit before tax payable for the year is stated after charging: - 2018 2018 20182018 ££££000000000000 (49) (49) (49) (49) 28282828 (21) (21) (21) (21) (8(8(8(857575757)))) Share options expense Auditor’s remuneration: - as Auditor current year non-audit services Pension cost defined benefit scheme Operating lease rentals for property 17. Income tax expense 17. Income tax expense 17. Income tax expense 17. Income tax expense Current tax expense Current tax expense Current tax expense Current tax expense Current year Changes to estimates for prior years Deferred tax expense Deferred tax expense Deferred tax expense Deferred tax expense Origination and reversal of temporary differences Utilisation of previously recognised tax losses Changes to estimates for prior years GroupGroupGroupGroup Company Company Company Company 2018 2018 20182018 ££££000000000000 ---- (108) (108) (108) (108) (7)(7)(7)(7) (17) (17) (17) (17) (251) (251) (251) (251) 2017 £000 (22) (90) (37) (17) (220) 2018 2018 20182018 ££££000000000000 ---- ---- ---- ---- ---- 2018 2018 20182018 ££££000000000000 (1(1(1(197979797)))) ---- (1(1(1(197979797)))) (46) (46) (46) (46) ---- ---- (46) (46) (46) (46) 2017 £000 (78) 12 (66) (585) 2017 £000 (22) - - - - 2017 £000 (226) (12) (238) (2) - - (2) Tax expense Tax expense Tax expense Tax expense (2(2(2(243434343)))) (240) Reconciliation of effective tax rate Reconciliation of effective tax rate Reconciliation of effective tax rate Reconciliation of effective tax rate Profit before tax Tax using the Bank’s domestic tax rate Effect of tax rates in foreign jurisdictions Non-deductible expenses Tax exempt income Timing difference in current year Origination and reversal of temporary differences in deferred tax Changes to estimates for prior years Tax expense Tax expense Tax expense Tax expense 2018 2018 20182018 ££££000000000000 2,2,2,2,710710710710 (2(2(2(271717171)))) ---- (33) (33) (33) (33) 8888 7777 46464646 ---- (2(2(2(243434343)))) (10.0)% (1.6)% (1.0)% 2.4% 1.8% (0.1)% (0.4)% (8.9)% 2017 £000 2,698 (270) (44) (28) 67 49 (2) (12) (240) (10.0)% (10.0)% (10.0)% (10.0)% 0.0 %0.0 %0.0 %0.0 % (1.(1.(1.(1.2222)%)%)%)% 0.3 %0.3 %0.3 %0.3 % 0.3 %0.3 %0.3 %0.3 % 1.7 %1.7 %1.7 %1.7 % 0.0 %0.0 %0.0 %0.0 % (9.0)%(9.0)%(9.0)%(9.0)% Page | 51 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 (continued) 17. Income tax expense (continued) 17. Income tax expense (continued) (continued) 17. Income tax expense 17. Income tax expense The main rate of corporation tax in the Isle of Man is 0.0% (2017: 0.0%). However the profits of the Group’s Isle of Man banking activities are taxed at 10.0% (2017: 10.0%). The profits of the Group’s subsidiaries that are subject to UK corporation tax are taxed at a rate of 19.0% (2017: 19.0%). The value of tax losses carried forward reduced to nil and there is now a timing difference related to accelerated capital allowances resulting in a £88,000 liability (2017: £42,000 liability). This resulted in an expense of £50,000 (2017: £2,000) to the consolidated income statement. 18. Earnings per share 18. Earnings per share 18. Earnings per share 18. Earnings per share A. Basic and diluted earnings per share A. Basic and diluted earnings per share A. Basic and diluted earnings per share A. Basic and diluted earnings per share The calculation of basic earnings per share has been based on the profit for the year and the weighted average number of ordinary shares outstanding. The calculation of diluted earnings per share has been based on the profit for the year and the weighted average number of ordinary shares outstanding after adjustment for the effects of all dilutive potential ordinary shares. Total comprehensive income for the year Total comprehensive income for the year Total comprehensive income for the year Total comprehensive income for the year Weighted average number of ordinary shares in issue Basic earnings per share (pence) Diluted earnings per share (pence) B. Reconciliation of earnings between basic and diluted earnings B. Reconciliation of earnings between basic and diluted earnings B. Reconciliation of earnings between basic and diluted earnings B. Reconciliation of earnings between basic and diluted earnings Total comprehensive income for the year Total comprehensive income for the year Total comprehensive income for the year Total comprehensive income for the year As per basic earnings per share – total comprehensive income Interest expense saved if all convertible loan notes were exchanged for equity (note 29) As per dilutive earnings per share 2018 2018 20182018 2017 ,000 £2,£2,£2,£2,461461461461,000 ,000,000 £2,395,000 131,096,235 131,096,235 131,096,235 131,096,235 1.81.81.81.88888 1.541.541.541.54 110,880,711 2.17 1.70 2018 2018 20182018 2017 £2,£2,£2,£2,461461461461,000 ,000 ,000,000 £196,150 £196,150 £196,150 £196,150 ,150 £2,£2,£2,£2,657657657657,150 ,150,150 £2,395,000 £196,150 £2,591,150 outstanding between basic and diluted C. Reconciliation of weighted average number of ordinary shares outstanding between basic and diluted C. Reconciliation of weighted average number of ordinary shares outstanding between basic and diluted outstanding between basic and diluted C. Reconciliation of weighted average number of ordinary shares C. Reconciliation of weighted average number of ordinary shares Reconciliation of weighted average number of ordinary shares in issue between basic and Reconciliation of weighted average number of ordinary shares in issue between basic and Reconciliation of weighted average number of ordinary shares in issue between basic and Reconciliation of weighted average number of ordinary shares in issue between basic and diluted earnings per share diluted earnings per share diluted earnings per share diluted earnings per share As per basic earnings per share Number of shares issued if all convertible loan notes were exchanged for equity (note 29) Dilutive element of share options if exercised (note 31) As per dilutive earnings per share 2018 2018 20182018 2017 131,096,235 131,096,235 131,096,235 131,096,235 41,666,667 41,666,667 41,666,667 41,666,667 10,366 10,366 10,366 10,366 110,880,711 41,666,667 - 172,773,268 172,773,268 172,773,268 172,773,268 152,547,378 Page | 52 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 19. Cash and cash equivalents 19. Cash and cash equivalents 19. Cash and cash equivalents 19. Cash and cash equivalents Cash at bank and in hand Group Company 2018 2018 20182018 ££££000000000000 9,753 9,753 9,753 9,753 9,753 9,753 9,753 9,753 2017 £000 9,745 9,745 2018 2018 20182018 ££££000000000000 1,646 1,646 1,646 1,646 1,646 1,646 1,646 1,646 2017 £000 200 200 Cash at bank includes an amount of £561,000 (2017: £63,000) representing receipts which are in the course of transmission. 20. Debt securities 20. Debt securities 20. Debt securities 20. Debt securities Financial assets at FVOCI: Financial assets at FVOCI: FVOCI: FVOCI: Financial assets at Financial assets at UK Government Treasury Bills Financial assets at amortised cost: Financial assets at amortised cost: Financial assets at amortised cost: Financial assets at amortised cost: UK Certificates of Deposit Group 2018 2018 20182018 ££££000000000000 2017 £000 Company 2018 2018 20182018 ££££000000000000 2017 £000 30,534 30,534 30,534 30,534 28,740 28,740 28,740 28,740 ---- 30,534 30,534 30,534 30,534 5,532 5,532 5,532 5,532 34,272 34,272 34,272 34,272 ---- ---- ---- - - - UK Government Treasury Bills are stated at fair value and unrealised changes in the fair value are reflected in other comprehensive income. There were £135,000 (2017: £36,000) realised gains and £44,000 unrealised gains (2017: unrealised losses £93,000) during the year. 21. Trading asset 21. Trading asset 21. Trading asset 21. Trading asset The investment represents shares in a UK quoted company, elected to be classified as a financial asset at fair value through profit or loss. The investment is stated at market value and is classified as a level 1 investment in the IFRS 13 fair value hierarchy. The cost of the shares was £471,000. The unrealised difference between cost and market value has been taken to the income statement. Dividend income of £355,000 (2017: £350,000) and £24,000 (2017: £24,000) of sale proceeds have been received from this investment since it was made. The investment made a net loss of £4,000 (2017: £21,000) during the year. 22. Loans and advances to customers 22. Loans and advances to customers 22. Loans and advances to customers 22. Loans and advances to customers GroupGroupGroupGroup HP balances Finance lease balances Unsecured personal loans Vehicle stocking plans Wholesale funding arrangements Block discounting Secured commercial loans Secured personal loans GrossGrossGrossGross Amount Amount Amount Amount ££££000000000000 59,038 59,038 59,038 59,038 27,238 27,238 27,238 27,238 14,806 14,806 14,806 14,806 1,486 1,486 1,486 1,486 22,944 22,944 22,944 22,944 17,316 17,316 17,316 17,316 1,967 1,967 1,967 1,967 6,877 6,877 6,877 6,877 151,672 151,672 151,672 151,672 2018 2018 20182018 Impairment Impairment Impairment Impairment Allowance Allowance Allowance Allowance ££££000000000000 (1,416) (1,416) (1,416) (1,416) (1,5(1,5(1,5(1,551515151)))) (382) (382) (382) (382) ---- ---- ---- (45) (45) (45) (45) ---- (3,(3,(3,(3,394394394394)))) Carrying Carrying Carrying Carrying Value Value ValueValue ££££000000000000 57,622 57,622 57,622 57,622 25,625,625,625,687878787 14,424 14,424 14,424 14,424 1,486 1,486 1,486 1,486 22,944 22,944 22,944 22,944 17,316 17,316 17,316 17,316 1,922 1,922 1,922 1,922 6,877 6,877 6,877 6,877 148,278787878 148,2 148,2 148,2 Gross Amount £000 59,909 20,088 10,521 1,613 5,830 13,523 659 13,090 125,233 2017 Impairment Allowance £000 (1,327) (1,101) (255) - - - (4) - (2,687) Carrying Value £000 58,582 18,987 10,266 1,613 5,830 13,523 655 13,090 122,546 Collateral is held in the form of underlying assets for HP, finance leases, vehicles stocking plans, block discounting, secured commercial and personal loans and wholesale funding arrangements. An estimate of the fair value of collateral on past due or impaired loans and advances is not disclosed as it would be impractical to do so. Specific allowance for impairment Specific allowance for impairment Specific allowance for impairment Specific allowance for impairment Balance at 1 January Specific allowance for impairment made Release of allowances previously made Write-offs Balance at 31 December Balance at 31 December Balance at 31 December Balance at 31 December 2018 2018 20182018 ££££000000000000 2,440 2,440 2,440 2,440 1,1,1,1,291291291291 (410) (410) (410) (410) (195) (195) (195) (195) 3,13,13,13,126262626 2017 £000 2,099 1,295 (776) (178) 2,440 Page | 53 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 (continued) 22. Loans and advances to customers (continued) 22. Loans and advances to customers (continued) (continued) 22. Loans and advances to customers 22. Loans and advances to customers Collective allowance for impairment Collective allowance for impairment Collective allowance for impairment Collective allowance for impairment Balance at 1 January Collective allowance for impairment made Release of allowances previously made Balance at 31 December Balance at 31 December Balance at 31 December Balance at 31 December impairment Total allowances for impairment Total allowances for impairment impairment Total allowances for Total allowances for 2018 2018 20182018 ££££000000000000 247247247247 49494949 (28) (28) (28) (28) 268268268268 3,3,3,3,394394394394 2017 £000 57 202 (12) 247 2,687 Advances on preferential terms are available to all Directors, management and staff. As at 31 December 2018 £389,005 (2017: £347,328) had been lent on this basis. In the Group’s ordinary course of business, advances may be made to Shareholders but all such advances are made on normal commercial terms. As detailed below, at the end of the current financial year 15 loan exposures (2017: 3) exceeded 10.0% of the capital base of the Bank: - Exposure Exposure Exposure Exposure Block discounting facility Wholesale funding agreement Outstanding Outstanding Outstanding Outstanding Balance Balance Balance Balance 2018 2018 20182018 £000 £000 £000£000 14,211 14,211 14,211 14,211 21,423 21,423 21,423 21,423 Outstanding Balance 2017 £000 9,487 - HP and finance lease receivables HP and finance lease receivables HP and finance lease receivables HP and finance lease receivables Loans and advances to customers include the following HP and finance lease receivables: - Less than one year Between one and five years Gross investment in HP and finance lease receivables Gross investment in HP and finance lease receivables Gross investment in HP and finance lease receivables Gross investment in HP and finance lease receivables The investment in HP and finance lease receivables net of unearned income comprises: - Facility Facility Facility Facility limit limit limit limit £000 £000 £000£000 23,500 23,500 23,500 23,500 24,500 24,500 24,500 24,500 2017 £000 36,227 60,576 96,803 2017 £000 29,317 50,680 79,997 2018 2018 20182018 ££££000000000000 42,532 42,532 42,532 42,532 60,184 60,184 60,184 60,184 102,716 102,716 102,716 102,716 2018 2018 20182018 ££££000000000000 37,508 37,508 37,508 37,508 49,289 49,289 49,289 49,289 86,797 86,797 86,797 86,797 Less than one year Between one and five years Net investment in HP and finance lease receivables 23. Trade and other receivables 23. Trade and other receivables 23. Trade and other receivables 23. Trade and other receivables Prepayments VAT recoverable Other debtors Group Company 2018 2018 20182018 ££££000000000000 382382382382 936936936936 1,173 1,173 1,173 1,173 2,491 2,491 2,491 2,491 2017 £000 285 817 806 1,908 2018 2018 20182018 ££££000000000000 32323232 ---- ---- 32323232 2017 £000 22 - - 22 Included in trade and other receivables is an amount of £936,000 (2017: £817,000) relating to a reclaim of VAT. The Bank, as the Group VAT registered entity, has for some time considered the VAT recovery rate being obtained by the business was neither fair nor reasonable, specifically regarding the attribution of part of the residual input tax relating to the HP business not being considered as a taxable supply. Queries have been raised with the Isle of Man Government Customs & Excise Division (“C&E”), and several reviews of the mechanics of the recovery process were undertaken by the Company’s professional advisors. Page | 54 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 23. Trade and other receivables (continued) 23. Trade and other receivables (continued) 23. Trade and other receivables (continued) 23. Trade and other receivables (continued) The decision of the First-Tier Tax Tribunal released 18 August 2011 in respect of Volkswagen Financial Services (UK) Limited (“VWFS”) v HM Revenue & Customs (TC01401) (“VWFS Decision”) added significant weight to the case put by the Bank and a request for a revised Partial Exemption Special Method was submitted in December 2011. The proposal put forward by the Bank was that the revised method would allocate 50.0% of costs in respect of HP transactions to a taxable supply and 50.0% to an exempt supply. In addition, a Voluntary Disclosure was made as a retrospective claim for input VAT under-claimed in the last 4 years. A secondary claim was also made to cover periods Q4 2012 to Q1 2016 for the value of £230,000 and an amount of £249,000 has been accrued to cover periods Q2 2016 to Q4 2018. In November 2012, it was announced that the HMRC Upper Tribunal had overturned the First-Tier Tribunal in relation to the VWFS Decision. VWFS has subsequently been given leave to appeal and this was scheduled to be heard in October 2013. However, this was delayed and the case was heard by the Court of Appeal on 17 April 2015 who overturned the Upper Tribunal’s decision ruling in favour of VWFS. HMRC have appealed this decision to the Supreme Court, which has referred the issue to the European Court of Justice. The Court of Justice of the European Union (“CJEU”) has published its determination concerning the Volkswagen Financial Services (UK) Limited (“VWFS”) vs HMRC case. The judgement addressed all specific questions referred and agreed with VWFS on all material points. Specifically, the judgment clarifies that a partial exemption method must reflect the taxable sale of the goods, even where general costs are commercially passed on as part of the exempt supplies of credit. We have approached Customs and Excise with a view of commencing conversations to finalise our historic claims, rolling up the claim to date and agreeing a new partial exempt method going forward. The Bank’s total exposure in relation to this matter increased to £1,049,000, comprising the debtor balance referred to above plus an additional £113,000 VAT reclaimed under the partial Exemption Special Method, in the period from Q4 2011 to Q3 2012 (from Q4 2012 the Bank reverted back to the previous method). On the basis of the discussions and correspondence which have taken place between the Bank and C&E, in addition to the VWFS case, the Directors are confident that the VAT claim referred to above will be secured. 24. Property, plant and equipment 24. Property, plant and equipment 24. Property, plant and equipment 24. Property, plant and equipment GroupGroupGroupGroup CostCostCostCost As at 1 January 2018 Additions Disposals As at 31 December 2018 As at 31 December 2018 As at 31 December 2018 As at 31 December 2018 Accumulated depreciation Accumulated depreciation depreciation depreciation Accumulated Accumulated As at 1 January 2018 Charge for year Disposals As at 31 December 2018 As at 31 December 2018 As at 31 December 2018 As at 31 December 2018 Carrying value at 31 December 2018 Carrying value at 31 December 2018 Carrying value at 31 December 2018 Carrying value at 31 December 2018 Carrying value at 31 December 2017 Leasehold Leasehold Leasehold Leasehold Improvements Improvements Improvements Improvements ££££000000000000 ITITITIT Equipment Equipment Equipment Equipment ££££000000000000 Furniture & Furniture & Furniture & Furniture & Equipment Equipment Equipment Equipment ££££000000000000 MotorMotorMotorMotor Vehicles1 Vehicles Vehicles Vehicles ££££000000000000 443 66 ---- 509509509509 189 60 - 249249249249 260260260260 254 294 41 ---- 335335335335 152 61 - 213213213213 122122122122 142 646 18 ---- 664664664664 599 13 - 612612612612 52525252 47 10 993 ---- 1,003 1,003 1,003 1,003 3 50 - 53535353 950950950950 7 Total Total Total Total ££££000000000000 1,393 1,118 ---- 2,511 2,511 2,511 2,511 943 184 - 1,127 1,127 1,127 1,127 1,384 1,384 1,384 1,384 450 1Motor vehicles relate to operating leases with the Group as lessor. Page | 55 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 (continued) 24. Property, plant and equipment (continued) 24. Property, plant and equipment (continued) (continued) 24. Property, plant and equipment 24. Property, plant and equipment Company Company Company Company CostCostCostCost As at 1 January 2018 Additions Disposals As at 31 December 2018 As at 31 December 2018 As at 31 December 2018 As at 31 December 2018 Accumulated depreciation Accumulated depreciation Accumulated depreciation Accumulated depreciation As at 1 January 2018 Charge for year Disposals As at 31 December 2018 As at 31 December 2018 As at 31 December 2018 As at 31 December 2018 Carrying value at 31 December 2018 Carrying value at 31 December 2018 Carrying value at 31 December 2018 Carrying value at 31 December 2018 Carrying value at 31 December 2017 25. Intangible assets 25. Intangible assets 25. Intangible assets 25. Intangible assets GroupGroupGroupGroup CostCostCostCost As at 1 January 2018 Additions Acquisition of MBL Disposals As at 31 December 2018 As at 31 December 2018 As at 31 December 2018 As at 31 December 2018 Accumulated amortisation Accumulated amortisation Accumulated amortisation Accumulated amortisation As at 1 January 2018 Charge for year / impairment (note 32) Disposals As at 31 December 2018 As at 31 December 2018 As at 31 December 2018 As at 31 December 2018 Carrying value at 31 December 2018 Carrying value at 31 December 2018 Carrying value at 31 December 2018 Carrying value at 31 December 2018 Carrying value at 31 December 2017 Leasehold Leasehold Leasehold Leasehold Improvements Improvements Improvements Improvements ££££000000000000 ITITITIT Equipment Equipment Equipment Equipment ££££000000000000 Furniture & Furniture & Furniture & Furniture & Equipment Equipment Equipment Equipment ££££000000000000 234 - - 234234234234 92 39 - 131131131131 103103103103 142 13 - - 13131313 2 1 - 3333 10101010 11 15 1 - 16161616 2 1 - 3333 13131313 13 Customer Customer Customer Customer Contracts & Lists Contracts & Lists Contracts & Lists Contracts & Lists ££££000000000000 Intellectual Intellectual Intellectual Intellectual Property Rights Property Rights Property Rights Property Rights ££££000000000000 IT Software and IT Software and IT Software and IT Software and Website Website Website Website Development Development Development Development ££££000000000000 1,284 - 133 - 1,417 1,417 1,417 1,417 130 65 - 195195195195 1,222 1,222 1,222 1,222 1,154 388 - - - 388388388388 162 150 - 312312312312 76767676 226 1,550 496 - - 2,046 2,046 2,046 2,046 1,211 181 - 1,392 1,392 1,392 1,392 654654654654 339 Total Total Total Total ££££000000000000 262 1 - 263263263263 96 41 - 137137137137 126126126126 166 Total Total Total Total ££££000000000000 3,222 496 133 - 3,851 3,851 3,851 3,851 1,503 396 - 1,899 1,899 1,899 1,899 1,952 1,952 1,952 1,952 1,719 On 23 December 2016, the Company acquired the majority of the Isle of Man’s IFA business held by Knox Financial Services Limited ("KFSL"). The initial acquisition included approximately 4,000 clients together with 6 members of staff. The basis of consideration was contingent, as it is determined by 4 times renewal income received in the first 12 months of ownership, reduced by any clawbacks in the same period. The final value could not fall below £800,000. The Company entered into a loan agreement with Conister Bank Limited (see note 32 for terms) and paid the non-refundable minimum of £800,000 and a further £200,000 into an escrow account until the final valuation was determined. When the value was finalised, any surplus or shortfall was settled. At acquisition, by reference to the renewal income received by KFSL in the 12 months prior to disposal, an estimate of £236,906 was assumed for income over the preceding 12 months, which would have generated a consideration sum of £947,624. Therefore, EWA accounted for this transaction by recognising an intangible asset of £947,624 and a receivable of £52,376 of the monies held in escrow. Subsequent to acquisition this estimate was updated to an estimated purchase price of £989,400 as at 31 December 2017. Consequently, the receivable from escrow was reduced to £10,600. The final consideration for the purchase was determined to be £1,101,000. As acquisition accounting was finalised prior to final settlement, the £111,600 additional cost was recognised as an expense in the profit and loss during 2018. The fair value of the assets acquired was considered to be of the same amount as the sum estimated to be paid and principally relates to customer contracts. The period over which these contracts are to be amortised is estimated to be 18.75 years given the average duration of EWA’s existing portfolio for renewal income. Page | 56 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 (continued) 25. Intangible assets (continued) 25. Intangible assets (continued) (continued) 25. Intangible assets 25. Intangible assets In tandem, both parties entered into an option agreement, exercisable within three months from the transaction date, for EWA to acquire the remainder of the vendor's IFA business which included approximately 150 clients. This option was exercised on 18 January 2017. The price of the acquisition was calculated by four times the renewal income received over the 12-month period subsequent to completion. The purchase price was estimated to be £198,300 with £75,000 paid upon exercise of the option. During the year, the final purchase consideration was determined to be £231,759. The Company made a final settlement of £156,760 during the year in addition to the £75,000 option price paid during the prior year. This has resulted in a valuation adjustment of £33,403. On 7 September 2018, the Company acquired a book of insurance and financial services clients from Westwinds Financial Services Limited for a final consideration of £100,000. 26. Deposits from customers 26. Deposits from customers 26. Deposits from customers 26. Deposits from customers Retail customers: term deposits Corporate customers: term deposits 27. Creditors and accrued charges 27. Creditors and accrued charges 27. Creditors and accrued charges 27. Creditors and accrued charges Commission creditors Other creditors and accruals Taxation creditors 28. Block creditors 28. Block creditors 28. Block creditors 28. Block creditors 2018 2018 20182018 ££££000000000000 153,735 153,735 153,735 153,735 4,765 4,765 4,765 4,765 158,500 158,500 158,500 158,500 2017 £000 137,399 4,873 142,272 Group Company 2018 2018 20182018 ££££000000000000 758758758758 897897897897 355355355355 2,012,012,012,010000 2017 £000 2,042 774 348 3,164 2018 2018 20182018 ££££000000000000 ---- 94949494 ---- 94949494 2018 2018 20182018 ££££000000000000 ---- 138138138138 138138138138 2017 £000 - 139 - 139 2017 £000 95 656 751 2017 £000 1,750 1,200 460 250 3,660 5,335 8,995 Drawdown 2 – repayable 25/07/2018, interest payable at 5.8%, secured on assets of MFL Drawdown 3 – repayable 08/03/2019, interest payable at 6.5%, secured on assets of MFL 29. Loan notes 29. Loan notes 29. Loan notes 29. Loan notes Related parties Related parties Related parties Related parties J Mellon Burnbrae Limited Southern Rock Insurance Company Limited Life Science Developments Limited Unrelated parties Unrelated parties Unrelated parties Unrelated parties Group Company NotesNotesNotesNotes JMJMJMJM BLBLBLBL SRSRSRSR LSLSLSLS UPUPUPUP 2018 2018 20182018 ££££000000000000 1,750 1,750 1,750 1,750 1,200 1,200 1,200 1,200 460460460460 ---- 3,410 3,410 3,410 3,410 12,461 12,461 12,461 12,461 15,871 15,871 15,871 15,871 2017 £000 1,750 1,200 460 250 3,660 5,335 8,995 2018 2018 20182018 ££££000000000000 1,750 1,750 1,750 1,750 1,200 1,200 1,200 1,200 460460460460 ---- 3,410 3,410 3,410 3,410 12,461 12,461 12,461 12,461 15,871 15,871 15,871 15,871 JMJMJMJM – Two loans, one of £500,000 maturing on 31 July 2022 with interest payable of 5.0% per annum, and one of £1,250,000 maturing on 26 February 2020, paying interest of 6.5% per annum. Both loans are convertible at the rate of 7.5 pence and 9 pence respectively. Page | 57 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 (continued) 29. Loan notes (continued) 29. Loan notes (continued) (continued) 29. Loan notes 29. Loan notes BLBLBLBL – One loan consisting of £1,200,000 maturing on 31 July 2022 with interest payable of 5.0% per annum. Jim Mellon is the beneficial owner of BL and Denham Eke is also a director. The loan is convertible at a rate of 7.5 pence. SRSRSRSR – One loan consisting of £460,000 maturing on 26 February 2020 with interest payable of 6.5% per annum. The loan is convertible at a rate of 9 pence. John Banks, a Non-executive Director, is also a director of SR and Arron Banks is a major shareholder of SR. LSLSLSLS – One loan of £nil (2017: £250,000) which matured on 3 January 2018 with interest payable of 5.0% per annum. Denham Eke is a director of LS. The loan was repaid on maturity. UPUPUPUP – Thirty-three loans consisting of an average £377,606 with a weighted average interest payable of 5.4% per annum. The earliest maturity date is 20 January 2019 and the latest maturity is 10 October 2023. With respect to the convertible loans, the interest rate applied was deemed by the Directors to be equivalent to the market rate at the time with no conversion option. 30. Pension liability 30. Pension liability 30. Pension liability 30. Pension liability The Conister Trust Pension and Life Assurance Scheme (“Scheme”) operated by the Company is a funded defined benefit arrangement which provides retirement benefits based on final pensionable salary. The Scheme is closed to new entrants and the last active member of the Scheme left pensionable service in 2011. The Scheme is approved in the Isle of Man by the Assessor of Income Tax under the Income Tax (Retirement Benefit Schemes) Act 1978 and must comply with the relevant legislation. In addition, it is registered as an authorised scheme with the FSA in the Isle of Man under the Retirement Benefits Scheme Act 2000. The Scheme is subject to regulation by the FSA but there is no minimum funding regime in the Isle of Man. The Scheme is governed by two corporate trustees, Conister Bank Limited and Boal & Co (Pensions) Limited. The trustees are responsible for the Scheme’s investment policy and for the exercise of discretionary powers in respect of the Scheme’s benefits. The rules of the Scheme state: - “Each Employer shall pay such sums in each Scheme Year as are estimated to be required to provide the benefits of the Scheme in respect of the Members in its employ”. Exposure to risk Exposure to risk Exposure to risk Exposure to risk The Company is exposed to the risk that additional contributions will be required in order to fund the Scheme as a result of poor experience. Some of the key factors that could lead to shortfalls are: - investment performance – the return achieved on the Scheme’s assets may be lower than expected; and mortality – members could live longer than foreseen. This would mean that benefits are paid for longer than expected, increasing the value of the related liabilities. In order to assess the sensitivity of the Scheme’s pension liability to these risks, sensitivity analyses have been carried out. Each sensitivity analysis is based on changing one of the assumptions used in the calculations, with no change in the other assumptions. The same method has been applied as was used to calculate the original pension liability and the results are presented in comparison to that liability. It should be noted that in practice it is unlikely that one assumption will change without a movement in the other assumptions; there may also be some correlation between some of these assumptions. It should also be noted that the value placed on the liabilities does not change on a straight line basis when one of the assumptions is changed. For example, a 2.0% change in an assumption will not necessarily produce twice the effect on the liabilities of a 1.0% change. No changes have been made to the method or to the assumptions stress-tested for these sensitivity analyses compared to the previous period. The investment strategy of the Scheme has been set with regard to the liability profile of the Scheme. However, there are no explicit asset-liability matching strategies in place. Restriction of assets Restriction of assets Restriction of assets Restriction of assets No adjustments have been made to the statement of financial position items as a result of the requirements of IFRIC 14 issued by IASB’s International Financial Reporting Interpretations Committee. Scheme amendments Scheme amendments Scheme amendments Scheme amendments There have not been any past service costs or settlements in the financial year ending 31 December 2018 (2017: none). Page | 58 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 30. Pension liability (continued) 30. Pension liability (continued) 30. Pension liability (continued) 30. Pension liability (continued) Funding policy Funding policy Funding policy Funding policy The funding method employed to calculate the value of previously accrued benefits is the Projected Unit Method. Following the cessation of accrual of benefits when the last active member left service in 2011, regular future service contributions to the Scheme are no longer required. However, additional contributions will still be required to cover any shortfalls that might arise following each funding valuation. The most recent triennial full actuarial valuation was carried out at 1 April 2016, which showed that the market value of the Scheme’s assets was £1,379,000 representing 80.7% of the benefits that had accrued to members, after allowing for expected future increases in earnings. As required by IAS 19 this valuation has been updated by the actuary as at 31 December 2018. The amounts recognised in the Consolidated Statement of Financial Position are as follows: - Total underfunding in funded plans recognised as a liability Total underfunding in funded plans recognised as a liability Total underfunding in funded plans recognised as a liability Total underfunding in funded plans recognised as a liability Fair value of plan assets Present value of funded obligations Movement in the liability for defined benefit obligations Movement in the liability for defined benefit obligations Movement in the liability for defined benefit obligations Movement in the liability for defined benefit obligations Opening defined benefit obligations at 1 January Benefits paid by the plan Interest on obligations Actuarial (gain)/loss Liability for defined benefit obligations at 31 December Liability for defined benefit obligations at 31 December Liability for defined benefit obligations at 31 December Liability for defined benefit obligations at 31 December Movement in plan assets Movement in plan assets Movement in plan assets Movement in plan assets Opening fair value of plan assets at 1 January Expected return on assets Contribution by employer Actuarial (loss)/gain Benefits paid Closing fair value of plan assets at 31 December Closing fair value of plan assets at 31 December Closing fair value of plan assets at 31 December Closing fair value of plan assets at 31 December Expense recognised in income statement Expense recognised in income statement Expense recognised in income statement Expense recognised in income statement Interest on obligation Expected return on plan assets Total included in personnel costs Total included in personnel costs Total included in personnel costs Total included in personnel costs Actual return on plan assets Actual return on plan assets Actual return on plan assets Actual return on plan assets Actuarial gain recognised in other comprehensive income Actuarial gain recognised in other comprehensive income Actuarial gain recognised in other comprehensive income Actuarial gain recognised in other comprehensive income Actuarial (loss)/gain on plan assets Actuarial gain/(loss) on defined benefit obligations 2018 2018 20182018 ££££000000000000 1,361 1,361 1,361 1,361 (1,945) (1,945) (1,945) (1,945) (584) (584) (584) (584) 2018 2018 20182018 ££££000000000000 2,029 2,029 2,029 2,029 (65) (65) (65) (65) 52525252 (71) (71) (71) (71) 1,945 1,945 1,945 1,945 2018 2018 20182018 ££££000000000000 1,469 1,469 1,469 1,469 37373737 41414141 (121) (121) (121) (121) (65) (65) (65) (65) 1,361 1,361 1,361 1,361 2018 2018 20182018 ££££000000000000 52525252 (37) (37) (37) (37) 15151515 (53) (53) (53) (53) 2018 2018 20182018 ££££000000000000 (121) (121) (121) (121) 71717171 50505050 2017 £000 1,469 (2,029) (560) 2017 £000 2,034 (68) 54 9 2,029 2017 £000 1,420 37 41 39 (68) 1,469 2017 £000 54 (37) 17 76 2017 £000 39 (9) 30 Page | 59 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 30. Pension liability (continued) 30. Pension liability (continued) 30. Pension liability (continued) 30. Pension liability (continued) Plan assets consist of the following Plan assets consist of the following Plan assets consist of the following Plan assets consist of the following Equity securities Corporate bonds Government bonds Cash Other The actuarial assumptions used to calculate Scheme liabilities under The actuarial assumptions used to calculate Scheme liabilities under The actuarial assumptions used to calculate Scheme liabilities under The actuarial assumptions used to calculate Scheme liabilities under IAS19 are as follows: ---- IAS19 are as follows: IAS19 are as follows: IAS19 are as follows: Rate of increase in pension in payment: - Service up to 5 April 1997 Service from 6 April 1997 to 13 September 2005 Service from 14 September 2005 Rate of increase in deferred pensions Discount rate applied to scheme liabilities Inflation 2018 2018 20182018 %%%% 45454545 19191919 28282828 4444 4444 100100100100 2017 % 48 18 25 5 4 100 2018 2018 20182018 %%%% 2017 % 2016 % ---- 3.03.03.03.0 2.12.12.12.1 5.05.05.05.0 2.62.62.62.6 3.13.13.13.1 - 3.0 2.1 5.0 2.6 3.1 - 3.1 2.1 5.0 2.7 3.2 The assumptions used by the actuary are best estimates chosen from a range of possible assumptions, which due to the timescale covered, may not necessarily be borne out in practice. 31. Called up share capital 31. Called up share capital 31. Called up share capital 31. Called up share capital available for issue Ordinary shares of no par value available for issue Ordinary shares of no par value available for issue available for issue Ordinary shares of no par value Ordinary shares of no par value At 31 December 2018 At 31 December 2018 At 31 December 2018 At 31 December 2018 At 31 December 2017 Ordinary shares of no par value Issued and fully paid: ---- Ordinary shares of no par value Issued and fully paid: Ordinary shares of no par value Ordinary shares of no par value Issued and fully paid: Issued and fully paid: At 31 December 2018 At 31 December 2018 At 31 December 2018 At 31 December 2018 At 31 December 2017 Number Number Number Number 200,200,000 200,200,000 200,200,000 200,200,000 200,200,000 ££££000000000000 20,732 20,732 20,732 20,732 20,732 Number Number Number Number 131,096,235 131,096,235 131,096,235 131,096,235 131,096,235 There are four convertible loans of £3,410,000 (2017: £3,410,000) with no remaining warrants to exercise at 31 December 2018 (2017: £nil). On 23 June 2014, 1,750,000 share options were issued to Executive Directors and senior management within the Group at an exercise price of 14 pence. The options vest over three years with a charge based on the fair value of 8 pence per option at the date of grant. The period of grant is for 10 years less 1 day ending 22 June 2024. Of the 1,750,000 share options issued, 1,050,000 (2017:1,050,000) remain outstanding; the balance lapsed during 2017. Performance and service conditions attached to share options that have not fully vested are as follows: - (a) The options granted on 25 June 2010 (1,056,000 options) will vest if the mid-market share price of £0.30 is achieved during the period of grant (10 years ending 25 June 2020); and (b) The options granted on 25 June 2010 and 23 June 2014 require a minimum of three years’ continuous employment service in order to exercise upon the vesting date. Page | 60 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 ued) (continued) 31. Called up share capital (contin 31. Called up share capital ued)ued) (contin (contin 31. Called up share capital 31. Called up share capital The fair value of services received in return for share options granted is based on the fair value of share options granted, measured using a binomial probability model with the following inputs for each award: - Fair value at date of grant Share price Exercise price Expected volatility Option life Risk-free interest rate (based on government bonds) Forfeiture rate The charge for the year for share options granted was £nil (2017: £22,000). Analysis of changes in financing during the year Analysis of changes in financing during the year Analysis of changes in financing during the year Analysis of changes in financing during the year Analysis of changes in financing during the year Analysis of changes in financing during the year Analysis of changes in financing during the year Analysis of changes in financing during the year Balance at 1 January Issue of loan notes Issue of shares 23 June 2014 £0.08 £0.14 £0.14 55.0% 3 0.5% 33.3% 2018 2018 20182018 ££££000000000000 29,727 29,727 29,727 29,727 6,876 6,876 6,876 6,876 ---- 36,603 36,603 36,603 36,603 25 June 2010 £0.03 £0.11 £0.11 47.0% 3 2.2% 0.0% 2017 £000 27,478 450 1,799 29,727 The 2018 closing balance is represented by £20,732,000 share capital (2017: £20,732,000) and £15,871,000 of loan notes (2017: £8,995,000). Investment in Group undertakings 32. 32. 32. 32. Investment in Group undertakings Investment in Group undertakings Investment in Group undertakings The Company has the following investments in subsidiaries incorporated in the Isle of Man: - Carrying value of investments Carrying value of investments Carrying value of investments Carrying value of investments Nature of Business 31 December 31 December 31 December 31 December 2017 2017 20172017 % Holding % Holding % Holding % Holding Date of Incorporation Conister Bank Limited Edgewater Associates Limited TransSend Holdings Limited Bradburn Limited Asset and Personal Finance Wealth Management Holding Company for Prepaid Card Division Holding Company 100100100100 100100100100 100100100100 100100100100 05/12/1935 24/12/1996 05/11/2007 15/05/2009 Amounts owed to and from Group undertakings are unsecured, interest-free and repayable on demand. Total Total Total Total 2018 2018 20182018 ££££000000000000 14,167 14,167 14,167 14,167 2,005 2,005 2,005 2,005 ---- ---- 16,172 16,172 16,172 16,172 Total 2017 £000 11,767 2,005 - - 13,772 Page | 61 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 (continued) 32. Investment in Group undertakings (continued) 32. Investment in Group undertakings (continued) (continued) 32. Investment in Group undertakings 32. Investment in Group undertakings Subordinated loans Subordinated loans Subordinated loans Subordinated loans MFG has issued several subordinated loans as part of its equity funding into the Bank and EWA. Company Company Company Company Creation Conister Bank Limited Conister Bank Limited Conister Bank Limited Conister Bank Limited 11 February 2014 27 May 2014 9 July 2014 17 September 2014 22 July 2013 25 October 2013 23 September 2016 14 June 2017 12 June 2018 Associates Limited Edgewater Associates Limited Edgewater Associates Limited Associates Limited Edgewater Edgewater 14 May 2012 28 February 2013 21 February 2017 14 May 2017 Goodwill Goodwill Goodwill Goodwill Maturity Interest rate 11 February 2024 27 May 2024 9 July 2024 17 September 2026 22 July 2033 22 October 2033 23 September 2036 14 June 2037 12 June 2038 14 May 2017 28 February 2018 21 February 2027 14 May 2027 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Edgewater Associates Limited (“EWA”) ECF Asset Finance PLC (“ECF”) Three Spires Insurance Services Limited (“Three Spires”) 2018 2018 20182018 ££££000000000000 500500500500 500500500500 500500500500 400400400400 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,100 1,100 1,100 1,100 450450450450 2,000 2,000 2,000 2,000 ---- 50505050 150150150150 128128128128 7,778 7,778 7,778 7,778 GroupGroupGroupGroup 2018 2018 20182018 ££££000000000000 1,849 1,849 1,849 1,849 454454454454 41414141 2,344 2,344 2,344 2,344 2017 £000 500 500 500 400 1,000 1,000 1,100 450 - - 50 150 128 5,778 Group 2017 £000 1,849 454 41 2,344 Goodwill impairment Goodwill impairment Goodwill impairment Goodwill impairment The goodwill is considered to have an indefinite life and is reviewed on an annual basis by comparing its estimated recoverable amount with its carrying value. The estimated recoverable amount in relation to the goodwill generated on the purchase of EWA is based on the forecasted 3 year cash flow projections, extrapolated to 10 years using a 2.0% annual increment, and then discounted using a 12.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of 15.0% and 20.0% on stable profit levels. The estimated recoverable amount in relation to the goodwill generated on the purchase of ECF is based on forecasted 3 year sales interest income calculated at 5.0% margin, extrapolated to 10 years using a 2.0% annual increment, and then discounted using a 12.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of 15.0% and 20.0% on varying sales volumes. There has been no change in the detailed method of measurement for EWA and ECF when compared to 2017. The goodwill generated on the purchase of Three Spires has been reviewed at the current year end and is considered adequate given its income streams referred to EWA. Based on the above reviews no impairment to goodwill has been made in the current year. Page | 62 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 32. Investment in Group undertakings (continued) 32. Investment in Group undertakings (continued) 32. Investment in Group undertakings (continued) 32. Investment in Group undertakings (continued) Acquisition of Incahoot Limited Acquisition of Incahoot Limited Acquisition of Incahoot Limited Acquisition of Incahoot Limited On 6 March 2015, the business of Incahoot Limited was acquired by Manx Incahoot Limited, a subsidiary of the Group. On 9 December 2016, a valuation was conducted by an independent firm of professional advisers on the intellectual property rights acquired for the purpose of including within these financial statements. The independent firm addressed the three levels of the IFRS fair value hierarchy and concluded that level 3 was most appropriate as the intellectual property rights acquired had no active markets (Level 1), or comparable assets against which to index prices (Level 2). Therefore, the report valued the intellectual property rights acquired based on internally generated data (Level 3) being: costs incurred to date and cash flow projections. The report averaged two valuation approaches, the replacement cost approach and the income approach using a discount factor of 42.5%, to arrive at a final valuation of £262,474. This created an impairment of £48,026. On 2 February 2018, the valuation was again updated which lead to a reduced valuation of £154,427. This created an additional impairment of £108,047. The Directors performed an internal impairment assessment and consider the recoverable amount of the intellectual property rights to be £76,000 at 31 December 2018. The recoverable amount at 31 December 2017 was considered to be £154,427 based on an external valuation. Investment in associates Investment in associates Investment in associates Investment in associates The Business Lending Exchange (“BLX”) Beer Swaps Limited (“BSL”) Pay It Monthly Ltd (“PIML”) GroupGroupGroupGroup 2018 2018 20182018 ££££000000000000 56565656 10101010 92929292 158158158158 Group 2017 £000 38 - - 38 On December 2017, 40.0% of the share capital of BLX was acquired for nil consideration. The Group’s share of the associate’s total comprehensive income during the year was £18,000. On April 2018, 20% of the share capital of BSL was acquired for nil consideration. The Group’s share of the associates total comprehensive income post acquisition and up to year-end was £10,000. On August 2018, 30% of the share capital of PIML was acquired for £90,000 consideration. The Group’s resulting share of the associates total comprehensive income post acquisition and up to year-end was £2,000. 33. Related party transactions 33. Related party transactions 33. Related party transactions 33. Related party transactions Cash deposits Cash deposits Cash deposits Cash deposits During the year, the Bank held cash on deposit on behalf of Jim Mellon (Executive Chairman of MFG) and companies related to Jim Mellon and Denham Eke (Chief Executive Officer of MFG). Total deposits amounted to £173,157 (2017: £40,000), at normal commercial interest rates in accordance with the standard rates offered by the Bank. Staff and commercial loans Staff and commercial loans Staff and commercial loans Staff and commercial loans Details of staff loans are given in note 22. Normal commercial loans have been made to various companies connected to Jim Mellon and Denham Eke. As at 31 December 2018, £113,000 of capital and interest was outstanding (2017: £299,000). Intercompany recharges Intercompany recharges Intercompany recharges Intercompany recharges Various intercompany recharges are made during the course of the year as a result of the Bank settling debts in other Group companies. EWA provides services to the Group in arranging its insurance and defined contribution pension arrangements. Loan advance to EWA Loan advance to EWA Loan advance to EWA Loan advance to EWA On 14 December 2016, a loan advance was made to EWA by the Bank in order to provide the finance required to acquire MBL (see note 25). The advance was for £700,000 at an interest rate of 8% repayable over 6 years. A negative pledge was given by EWA to not encumber any property or assets or enter into an arrangement to borrow any further monies. The balance as at 31 December 2018 was £508,000 (2017: £700,000). Page | 63 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 (continued) 33. Related party transactions (continued) 33. Related party transactions (continued) (continued) 33. Related party transactions 33. Related party transactions Loan advance to BLX Loan advance to BLX Loan advance to BLX Loan advance to BLX On 11 October 2017, a £4,000,000 loan facility was made available to BLX by the Bank in order to provide the finance required to expand its operations. The facility is for 12 months, followed by a 3 year amortisation period. Interest is charged at commercial rates. At 31 December 2018, £2,520,000 (2017: £550,000) had been advanced to BLX. Loan advance to BSL Loan advance to BSL Loan advance to BSL Loan advance to BSL On 27 April 2018, a £1,000,000 loan facility was made available to BSL by the Bank in order to provide the finance required to expand its operations. On 10 October 2018, this facility was increased to £1,500,000. The facility is for 12 months. Interest is charged at commercial rates. At 31 December 2018, £1,099,000 (2017: £nil) had been advanced to BSL. Loan advance to PIML Loan advance to PIML Loan advance to PIML Loan advance to PIML On 24 May 2018, a £500,000 loan facility was made available to PIML by the Bank in order to provide the finance required to expand its operations. The facility is for 12 months. Interest is charged at commercial rates. At 31 December 2018, £322,000 (2017: £nil) had been advanced to PIML. Post-year-end on 6 February 2019, the facility was increased to £1,000,000. Investments Investments Investments Investments The Bank holds less than 1% equity in the share capital of an investment of which Jim Mellon is a shareholder (note 21). Denham Eke acts as co-chairman. Subordinated loans Subordinated loans Subordinated loans Subordinated loans The Company has advanced £7,450,000 (2017: £5,450,000) of subordinated loans to the Bank and £328,000 (2017: £328,000) to EWA at 31 December 2018. Loan notes Loan notes Loan notes Loan notes See note 29 for a list of related party loan notes as at 31 December 2018 and 2017. Key management remuneration including Executive Directors Key management remuneration including Executive Directors Key management remuneration including Executive Directors Key management remuneration including Executive Directors Short-term employee benefits Operating leases 34. 34. 34. 34. Operating leases Operating leases Operating leases Non-cancellable lease rentals are payable in respect of property and motor vehicles as follows: - 2018 2018 20182018 ££££000000000000 297297297297 Less than one year Between one and five years Over five years 35. Subsequent events 35. Subsequent events 35. Subsequent events 35. Subsequent events 2018 2018 20182018 2017 Leasehold Leasehold Leasehold Leasehold Property Property Property Property ££££000000000000 214214214214 790790790790 162162162162 1,166 1,166 1,166 1,166 OtherOtherOtherOther ££££000000000000 ---- ---- ---- ---- Leasehold Property £000 178 738 276 1,192 2017 £000 300 Other £000 - - - - There were no significant subsequent events identified after 31 December 2018. management Financial risk management 36. 36. 36. 36. Financial risk management management Financial risk Financial risk A. Introduction and overview A. Introduction and overview A. Introduction and overview A. Introduction and overview The Group has exposure to the following risks from financial instruments: credit risk; liquidity risk; market risks; and operational risks. Page | 64 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 (continued) Financial risk management (continued) 36. 36. 36. 36. Financial risk management (continued) (continued) Financial risk management Financial risk management (continued) A. Introduction and overview (continued) A. Introduction and overview (continued) (continued) A. Introduction and overview A. Introduction and overview i. Risk management framework i. Risk management framework i. Risk management framework i. Risk management framework The Company’s Board have overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board of Directors have established the Group Audit, Risk and Compliance Committee (‘ARCC’), which is responsible for approving and monitoring Group risk management policies. ARCC is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the ARCC. The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, though its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. B. Credit risk B. Credit risk B. Credit risk B. Credit risk ‘Credit risk’ is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s loans and advances to customers and investment debt securities. Credit risk includes counterparty, concentration, underwriting and credit mitigation risks. Management of credit risk Management of credit risk Management of credit risk Management of credit risk The Bank’s Board of Directors created the Credit Committee which is responsible for managing credit risk, including the following: Formulating credit policies in consultation with business units, covering collateral requirements, credit assessments, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements. Establishing the authorisation structure for the approval and renewal of credit facilities. Authorisation limits are allocated to in line with credit policy. Reviewing and assessing credit risk: The Credit Committee assesses all credit exposures in excess of designated limits, before facilities are committed to customers. Renewals and reviews of facilities are subject to the same review process. Limiting concentrations of exposures to counterparties, geographies and industries, by issuer, credit rating band, market liquidity and country (for debt securities). Developing and maintaining risk grading’s to categorise exposures according to the degree of risk of default. The current risk grading consists of 3 grades reflecting varying degrees of risk of default. Developing and maintaining the Group’s process for measuring ECL: This includes processes for: initial approval, regular validation and back-testing of the models used; o o determining and monitoring significant increase in credit risk; and o incorporation of forward-looking information. Reviewing compliance with agreed exposure limits. Regular reports on the credit quality of portfolios are provided to the Credit Committee which may require corrective action to be taken. C. Liquidity risk C. Liquidity risk C. Liquidity risk C. Liquidity risk ‘Liquidity risk’ is the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises from mismatches in the timing and amounts of cash flows, which is inherent to the Group’s operations and investments. Management of liquidity risk Management of liquidity risk Management of liquidity risk Management of liquidity risk The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have enough liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The key elements of the Group’s liquidity strategy are as follows: Funding base: offering six-months to five-year fixed term deposit structure with no early redemption option. This means the Bank is not subject to optionality risk where customers redeem fixed rate products where there may be a better rate available within the market; Funding profile: the Bank has a matched funding profile and does not engage in maturity transformation which means that on a cumulative mismatch position the Bank is forecast to be able to meet all liabilities as they fall due; Page | 65 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 Financial risk management 36. 36. 36. 36. Financial risk management Financial risk management Financial risk management C. Liquidity risk (continued) C. Liquidity risk (continued) C. Liquidity risk (continued) C. Liquidity risk (continued) Management of liquidity risk (continued) Management of liquidity risk (continued) Management of liquidity risk (continued) Management of liquidity risk (continued) Monitoring maturity mismatches, behavioural characteristics of the Group’s financial assets and financial liabilities, and the extent to which the Group’s assets are encumbered and so not available as potential collateral for obtaining funding. Liquidity buffer: the Bank maintains a liquidity buffer of 10.0% of its deposit liabilities, with strict short-term mismatch limits of 0.0% for sight to three months and -5.0% for sight to six months. This ensures that the Bank is able to withstand any short-term liquidity shock; and Interbank market: the Bank has no exposure to the interbank lending market. The Bank has no reliance on liquidity via the wholesale markets. In turn, if market conditions meant access to the wholesale funding was constrained as per the 2008 credit crisis, this would have no foreseeable effect on the Bank. The Bank’s liquidity position is monitored daily against internal and external limits agreed with the FSA and according to the Bank’s Liquidity Policy. The Bank also has a Liquidity Contingency Policy and Liquidity Contingency Committee in the event of a liquidity crisis or potential liquidity disruption event occur. The Treasury department receives information from other business units regarding the liquidity profile of their financial assets and financial liabilities and details of other projected cash flows arising from projected future business. Treasury then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole. Regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. The scenarios are developed considering both Group-specific events and market-related events (e.g. prolonged market illiquidity). D. Market risk D. Market risk D. Market risk D. Market risk ‘Market risk’ is the risk that changes in market prices – e.g. interest rates, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing) will affect the Group’s income or value of its holdings of financial instruments. The objective of the Group’s market risk management is to manage and control market risk exposures within acceptable parameters to ensure the Group’s solvency while optimising the return on risk. Management of market risks Management of market risks Management of market risks Management of market risks Overall authority for market risk is vested in Assets and Liabilities Committee (“ALCO”) who sets up limits for each type of risk. Group finance is responsible for the development of risk management policies (subject to review and approval by ALCO) and for the day-to-day review of their implementation. Foreign exchange risk Foreign exchange risk Foreign exchange risk Foreign exchange risk The Bank is not subject to foreign exchange risks and its business is conducted in pounds sterling. Equity risk Equity risk Equity risk Equity risk The Group has investment in associates of £158,000 (2017: £38,000) which are carried at cost adjusted for the Group’s share of net asset value. The investment is audited annually and the Bank has access to these accounts. The Bank’s exposure to market risk is not considered significant given the low carrying amount of the investment. The Group’s investment in listed equities is not considered significant. Interest rate risk Interest rate risk Interest rate risk Interest rate risk The principal potential interest rate risk that the Bank is exposed to is the risk that the fixed interest rate and term profile of its deposit base differs materially from the fixed interest rate and term profile of its asset base, or basis and term structure risk. Additional interest rate risk may arise for banks where (a) customers are able to react to market sensitivity and redeem fixed rate products and (b) where a bank has taken out interest rate derivate hedges especially against longer term interest rate risk, where the hedge moves against the bank. Interest rate risk for the Bank is not deemed to be currently material due to the Bank’s matched funding profile. Any interest rate risk assumed by the Bank will arise from a reduction in interest rates, in a rising environment due to the nature of the Bank’s products and its matched funded profile. The Bank should be able to increase its lending rate to match any corresponding rise in its cost of funds, notwithstanding its inability to vary rates on its existing loan book. The Bank attempts to efficiently match its deposit taking to its funding requirements. Page | 66 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 Financial risk management 36. 36. 36. 36. Financial risk management Financial risk management Financial risk management E. Operational risk E. Operational risk E. Operational risk E. Operational risk ‘Operational risk’ is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group’s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks – e.g. those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Group’s operations. Management of operational risk Management of operational risk Management of operational risk Management of operational risk The Group’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group’s reputation with overall cost effectiveness and innovation. In all cases, Group policy requires compliance with all applicable legal and regulatory requirements. The Group has developed standards for the management of operational risk in the following areas: requirements for appropriate segregation of duties, including the independent authorisation of transactions; requirements for the reconciliation and monitoring of transactions; business continuity planning; compliance with regulatory and other legal requirements; documentation of controls and procedures; periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified; requirements for the reporting of operational losses and proposed remedial action; training and professional development; development of contingency plans; ethical and business standards; information technology and cyber risks; and risk mitigation, including insurance where this is cost-effective. Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with ARCC. Page | 67 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 37. Basis of measurement 37. Basis of measurement 37. Basis of measurement 37. Basis of measurement The financial statements are prepared on a historical cost basis, except for the following material items. Items Items Items Items Measurement basis Measurement basis Measurement basis Measurement basis Financial instruments at FVPL Financial assets at FVOCI Net defined benefit asset/liability 38. Significant accounting policies 38. Significant accounting policies 38. Significant accounting policies 38. Significant accounting policies Fair value Fair value Fair value of plan assets less the present value of the defined benefit obligation Except for the changes explained in Note 5, the Group has consistently applied the following accounting policies to all periods presented in these financial statements. Set out below is an index of the significant accounting policies, the details of which are available on the pages that follow. Ref.Ref.Ref.Ref. Note description Note description Note description Note description A. B. C. D. E. F. G. H. I. J. K. L. M. N. O. P. Q. R. S. Basis of consolidation of subsidiaries and separate financial statements of the Company Interest in equity accounted investees Foreign currency Interest Fee and commission income Programme costs Leases Income tax Financial assets and financial liabilities i. Recognition and initial measurement ii. Classification iii. Derecognition iv. Modifications of financial assets and financial liabilities v. Offsetting vi. Fair value measurement vii. Impairment Cash and cash equivalents Loans and advances Property, plant and equipment Intangibles assets and goodwill Impairment of non-financial assets Deposits, debt securities issued and subordinated liabilities Employee benefits i. Long-term employee benefits ii. Share-based compensation Share capital and reserves Earnings per share Segment reporting No.No.No.No. 69 69 69 69 70 70 70 70 70 71 71 72 72 72 73 75 75 75 75 76 76 77 77 77 77 77 77 Page | 68 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 (continued) 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) (continued) 38. Significant accounting policies 38. Significant accounting policies A. Basis of consolidation of subsidiaries and separate financial statements of the Company A. Basis of consolidation of subsidiaries and separate financial statements of the Company A. Basis of consolidation of subsidiaries and separate financial statements of the Company A. Basis of consolidation of subsidiaries and separate financial statements of the Company i. Business combinations i. Business combinations i. Business combinations i. Business combinations The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if they are related to issue of debt or equity securities. ii. Subsidiaries ii. Subsidiaries ii. Subsidiaries ii. Subsidiaries Subsidiaries are entities controlled by the Group. The Group ‘controls’ an entity if it is exposed to 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. The Group reassesses whether it has control if there are changes to one or more of the elements of control. This includes circumstances in which protective rights held (e.g. those resulting from a lending relationship) become substantive and lead to the Group having power over an investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. iii. Loss of control iii. Loss of control iii. Loss of control iii. Loss of control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related Non- Controlling Interest (“NCI”) and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. consolidation iv. Transactions eliminated on consolidation iv. Transactions eliminated on consolidation consolidation iv. Transactions eliminated on iv. Transactions eliminated on Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. v. Separate financial statements of the Company v. Separate financial statements of the Company v. Separate financial statements of the Company v. Separate financial statements of the Company In the separate financial statements of the Company, interests in subsidiaries, associates and joint ventures are accounted for at cost. B. Interests in equity accounted investees B. Interests in equity accounted investees B. Interests in equity accounted investees B. Interests in equity accounted investees The Group’s interests in equity accounted investees may comprise interests in associates and joint ventures. Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities. Interests in associates and joint ventures are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group’s share of the profit or loss and OCI of equity accounted investees, until the date on which significant influence or joint control ceases. C. Foreign currency C. Foreign currency C. Foreign currency C. Foreign currency Foreign currency assets and liabilities (applicable to the Conister Card Services division only) are translated at the rates of exchange ruling at the reporting date. Transactions during the year are recorded at rates of exchange in effect when the transaction occurs. The exchange movements are dealt with in the income statement. D. Interest D. Interest D. Interest D. Interest Interest income and expense are recognised in profit or loss using the effective interest rate method. Effective interest rate The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts of the financial instrument to the net carrying amount of the financial asset or financial liability. The discount period is the expected life or, where appropriate, a shorter period. The calculation includes all amounts receivable or payable by the Group that are an integral part of the overall return, including origination fees, loan incentives, broker fees payable, estimated early repayment charges, balloon payments and all other premiums and discounts. It also includes direct incremental transaction costs related to the acquisition or issue of the financial instrument. The calculation does not consider future credit losses. Page | 69 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) D. Interest (continued) D. Interest (continued) D. Interest (continued) D. Interest (continued) Effective interest rate (continued) Once a financial asset or a group of similar financial assets has been written down as a result of impairment, subsequent interest income continues to be recognised using the original effective interest rate applied to the reduced carrying value of the financial instrument. E. Fees and commission income E. Fees and commission income commission income commission income E. Fees and E. Fees and Fees and commission income other than that directly related to the loans is recognised over the period for which service has been provided or on completion of an act to which the fees relate. Income in respect of fiduciary deposit taking is recognised on an accruals basis. F. Programme costs F. Programme costs F. Programme costs F. Programme costs Programme costs are direct expenditure incurred in relation to prepaid card programmes. The costs are recognised over the period in which income is derived from operating the programmes. G. G. G. G. Leases Leases Leases Leases Leases in which the Group is a lessor Leases in which the Group is a lessor Leases in which the Group is a lessor Leases in which the Group is a lessor Finance leases and HP contracts Finance leases and HP contracts Finance leases and HP contracts Finance leases and HP contracts When assets are subject to a finance lease or HP contract, the present fair value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. HP and lease income is recognised over the term of the contract or lease reflecting a constant periodic rate of return on the net investment in the contract or lease. Initial direct costs, which may include commissions and legal fees directly attributable to negotiating and arranging the contract or lease, are included in the measurement of the net investment of the contract or lease at inception. Operating leases Operating leases Operating leases Operating leases Assets held for operating leases are presented on the Statement of Financial Position according to the nature of the asset. Lease income is recognised over the lease term on a straight-line basis. Leases in which the Group is a lessee Leases in which the Group is a lessee Leases in which the Group is a lessee Leases in which the Group is a lessee Operating leases Operating leases Operating leases Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. H. Income tax H. Income tax H. Income tax H. Income tax Current and deferred taxation Current taxation relates to the estimated corporation tax payable in the current financial year. Deferred taxation is provided in full, using the liability method, on timing differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred taxation is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred tax is realised. Deferred taxation assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. financial liabilities assets and financial liabilities I. Financial assets and I. Financial financial liabilities financial liabilities assets and assets and I. Financial I. Financial i. Recognition and initial measurement i. Recognition and initial measurement i. Recognition and initial measurement i. Recognition and initial measurement The Group initially recognises loans and advances, deposits, debt securities issued and subordinated liabilities on the date on which they are originated. All other financial instruments including regular-way purchases and sales of financial assets) are recognised on the trade date, which is the date on which the Group becomes party to the contractual provisions of the instrument. A financial asset or financial liability is measured initially at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue. Page | 70 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) I. Financial financial liabilities (continued) assets and financial liabilities (continued) I. Financial assets and financial liabilities (continued) financial liabilities (continued) assets and assets and I. Financial I. Financial ii. Classification ii. Classification ii. Classification ii. Classification Financial assets Financial assets Financial assets Financial assets On initial recognition, a financial asset is classified as measured at: amortised cost, FVOCI or FVTPL. A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL: the asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and the contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI. A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as FVTPL: the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and the contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI. On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by-investment basis. All other financial assets are classified as measured at FVTPL. In addition, on initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Business model assessment Business model assessment Business model assessment Business model assessment The group makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information provided to management. Assessment of whether contractual cash flows are solely payments of principal and interest Assessment of whether contractual cash flows are solely payments of principal and interest interest interest Assessment of whether contractual cash flows are solely payments of principal and Assessment of whether contractual cash flows are solely payments of principal and For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin. In assessing whether the contractual cash flows are SPPI, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. Reclassifications Reclassifications Reclassifications Reclassifications Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Group changes its business model for managing financial assets. Financial liabilities Financial liabilities Financial liabilities Financial liabilities The Group classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost. iii. Derecognition iii. Derecognition iii. Derecognition iii. Derecognition Financial assets Financial assets Financial assets Financial assets The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss. Page | 71 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) I. Financial financial liabilities (continued) assets and financial liabilities (continued) I. Financial assets and financial liabilities (continued) financial liabilities (continued) assets and assets and I. Financial I. Financial iii. Derecognition (continued) iii. Derecognition (continued) iii. Derecognition (continued) iii. Derecognition (continued) Financial liabilities Financial liabilities Financial liabilities Financial liabilities The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. iv. Modifications iv. Modifications iv. Modifications iv. Modifications Financi al assets Financial assets al assets al assets Financi Financi If the terms of a financial asset are modified, then the Group evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value plus any eligible transaction costs. If the cash flows are modified when the borrower is in financial difficulties, then the objective of the modification is usually to maximise recovery of the original contractual terms rather than to originate a new asset with substantially different terms. If the Group plans to modify a financial asset in a way that would result in forgiveness of cash flows, then it first considers whether a portion of the asset should be written off before the modification takes place. This approach impacts the result of the quantitative evaluation and means that the derecognition criteria are not usually met in such cases. If the modification of a financial asset measured at amortised cost or FVOCI does not result in derecognition of the financial asset, then the Group first recalculates the gross carrying amount of the financial asset using the original effective interest rate of the asset and recognises the resulting adjustment as a modification gain or loss in profit or loss. Any costs or fees incurred and fees received as part of the modification adjust the gross carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset. If such modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income calculated using the effective interest rate method. Financial liabilities Financial liabilities Financial liabilities Financial liabilities The Group derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability derecognised and consideration paid is recognised in profit or loss. Consideration paid includes non-financial assets transferred, if any, and the assumption of liabilities, including the new modified financial liability. If the modification of a financial liability is not accounted for as derecognition, then the amortised cost of the liability is recalculated by discounting the modified cash flows at the original effective interest rate and the resulting gain or loss I s recognised in profit or loss. Any costs and fee incurred are recognised as an adjustment of the carrying amount of the liability and amortised over the remaining term of the modified financial liability by re-computing the effective interest rate on the instrument. v. Offsetting v. Offsetting v. Offsetting v. Offsetting Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as in the Group’s trading activity. vi. Fair value measurement vi. Fair value measurement vi. Fair value measurement vi. Fair value measurement ‘Fair value’ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at the date. The fair value of a liability reflects its non-performance risk. The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements: - Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments; Page | 72 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 Significant accounting policies (continued) 38. 38. 38. 38. Significant accounting policies (continued) Significant accounting policies (continued) Significant accounting policies (continued) I. Financial financial liabilities (continued) assets and financial liabilities (continued) I. Financial assets and financial liabilities (continued) financial liabilities (continued) assets and assets and I. Financial I. Financial vi. Fair value measurement (continued) vi. Fair value measurement (continued) vi. Fair value measurement (continued) vi. Fair value measurement (continued) Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data; and Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Group determines fair values using other valuation techniques. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. vii. Impairment vii. Impairment vii. Impairment vii. Impairment A financial instrument that is not credit-impaired on initial recognition is classified in ‘Stage 1’ and has its credit risk continuously monitored by the Group. If a significant increase in credit risk (“SICR”) since initial recognition is identified, the financial instrument is moved to ‘Stage 2’ but is not yet deemed to be credit-impaired. An SICR is always deemed to occur when the borrower is 30 days past due on its contractual payments. If the Group becomes aware ahead of this time of non-compliance or financial difficulties of the borrower, such as loss of employment, avoiding contact with the Group then an SICR has also deemed to occur. A receivable is always deemed to be in default and credit-impaired when the borrower is 90 days past due on its contractual payments or earlier if the Group becomes aware of severe financial difficulties such as bankruptcy, IVA, abscond or disappearance, fraudulent activity and other similar events. If the financial instrument is credit-impaired, the financial instrument is then moved to ‘Stage 3’. Financial instruments in Stage 3 have their ECL measured based on expected credit losses on an undiscounted lifetime basis. The Group measures loss allowances at an amount equal to lifetime ECL, except for debt investment securities that are determined to have low credit risk at the reporting date for which they are measured as a 12-month ECL. Loss allowances for lease receivables are always measured at an amount equal to lifetime ECL. 12-month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Financial instruments for which a 12-month ECL is recognised are referred to as ‘Stage 1 financial instruments’. Life-time ECL are the ECL that result from all possible default events over the expected life of a financial instrument. Financial instruments for which a lifetime ECL is recognised but which are not credit-impaired are referred to as ‘Stage 2 financial instruments’. Measurement of ECL Measurement of ECL Measurement of ECL Measurement of ECL After a detailed review, the Group devised and implemented an impairment methodology in light of the IFRS 9 requirements outlined above noting the following: The ECL was derived by reviewing the Group’s loss rate and loss given default over the past 8 years by product and geographical segment. The Group has assumed that the future economic conditions will broadly mirror the current environment and therefore the forecasted loss levels in the next 3 years will match the Group’s experience in recent years. For portfolios where the Group has never had a default in its history or has robust credit enhancements such as credit insurance or default indemnities for the entire portfolio, then no IFRS 9 provision is made. At year-end, 37.9% had such credit enhancements (2017: 41.7%). If the Group holds objective evidence through specifically assessing a credit-impaired receivable and believes it will go on to completely recover the debt due to the collateral held and cooperation with the borrower, then no IFRS 9 provision is made Page | 73 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 (continued) 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) (continued) 38. Significant accounting policies 38. Significant accounting policies I. Financial financial liabilities (continued) assets and financial liabilities (continued) I. Financial assets and financial liabilities (continued) financial liabilities (continued) assets and assets and I. Financial I. Financial vii. Impairment (continued) vii. Impairment (continued) vii. Impairment (continued) vii. Impairment (continued) Measurement of ECL (continued) Measurement of ECL (continued) Measurement of ECL (continued) Measurement of ECL (continued) ECL are probability-weighted estimate of credit losses. They are measured as follows: financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive); financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows; and undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn down and the cash flows that the Group expects to receive. Credit impaired financial assets Credit----impaired financial assets impaired financial assets impaired financial assets Credit Credit At each reporting date, the Group assesses whether financial assets carried at amortised cost and debt financial assets carried at FVOCI, and finance lease receivables are credit-impaired (referred to as ‘Stage 3 financial assets’). A financial asset is ‘credit- impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that a financial asset is credit-impaired includes the following observable date: significant financial difficulty of the borrower or issuer; a breach of contract such as a default or past due event; the restructuring of a loan or advance by the Group on terms that the Group would not consider otherwise; it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or the disappearance of an active market for a security because of financial difficulties. A loan that has been renegotiated due to a deterioration in the borrower’s condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment. In addition, a retail loan that is overdue for 90 days or more is considered credit-impaired even when the regulatory definition of default is different. In making an assessment of whether an investment in sovereign debt is credit impaired, the Group considers the following factors: the market’s assessment of creditworthiness as reflected in the bond yields; the rating agencies’ assessments of creditworthiness; the country’s ability to access the capital markets for new debt issuance; the probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness; The international support mechanisms in place to provide the necessary support as ‘lender of last resort’ to that country, as well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This includes an assessment of the depth of those mechanisms and, irrespective of the political intent, whether there is the capacity to fulfil the required criteria. Presentation of allowance for ECL in the statement of financial position Presentation of allowance for ECL in the statement of financial position Presentation of allowance for ECL in the statement of financial position Presentation of allowance for ECL in the statement of financial position Loss allowances for ECL are presented in the statement of financial position as follows: financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets loan commitments: generally, as a provision; debt instruments measured at FVOCI: no loss allowance is recognised in the statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognised in the fair value reserve. WriteWriteWriteWrite----offoffoffoff Loans and debt securities are written off (either partially or in full) when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at the individual asset level. Recoveries of amounts previously written off are included in ‘impairment losses on financial instruments’ in the statement of profit or loss and OCI. Financial assets that are written off could still be subject to enforcement activities in order to comply with the Group’s procedures for recovery of amounts due. Page | 74 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) J. Cash and cash equivalents J. Cash and cash equivalents J. Cash and cash equivalents J. Cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents comprise cash and deposit balances with an original maturity date of three months or less. K. Loans and advances K. Loans and advances K. Loans and advances K. Loans and advances Loans and advances’ captions in the statement of financial position include: loans and advances measured at amortised cost (see 38 (I)). They are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortised cost using the effective interest method; and finance lease receivable (see 38 (G)). L. Property, plant and equipment L. Property, plant and equipment L. Property, plant and equipment L. Property, plant and equipment Items of property, plant and equipment are stated at historical cost less accumulated depreciation (see below). Historical cost includes expenditure that is directly attributable to the acquisition of the items. The assets’ residual values and useful economic lives are reviewed, and adjusted if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. When parts of an item of property, plant and equipment have different useful lives, those components are accounted for as separate items of property, plant and equipment. Depreciation and amortisation Depreciation and amortisation Depreciation and amortisation Depreciation and amortisation Assets are depreciated or amortised on a straight-line basis, so as to write off the book value over their estimated useful lives. The useful lives of property, plant and equipment and intangibles are as follows: - Property, plant and equipment Leasehold improvements IT equipment Motor vehicles Furniture and equipment M. Intangible assets and goodwill M. Intangible assets and goodwill M. Intangible assets and goodwill M. Intangible assets and goodwill i. Goodwill i. Goodwill i. Goodwill i. Goodwill to expiration of the lease 4-5 years 2.5 years 4 -10 years Goodwill that arises on the acquisition of subsidiaries is measured at cost less accumulated impairment losses. ii. Software ii. Software ii. Software ii. Software Software acquired by the Group is measured at cost less accumulated amortisation and any accumulated impairment losses. Expenditure on internally developed software is recognised as an asset when the Group is able to demonstrate: that the product is technically feasible, its intention and ability to complete the development and use the software in a manner that will generate future economic benefits, and that it can reliably measure the costs to complete the development. The capitalised costs of internally developed software include all costs directly attributable to developing the software and capitalised borrowing costs, and are amortised over its useful life. Internally developed software is stated at capitalised cost less accumulated amortisation and any accumulated impairment losses. Software is amortised on a straight-line basis in profit or loss over its estimated useful life, from the date on which it is available for use. Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. iii. Other iii. Other iii. Other iii. Other Intangible assets that are acquired by an entity and having finite useful lives are measured at cost less accumulated amortisation and any accumulated impairment losses. Intangible assets acquired as part of a business combination, with an indefinite useful live are measured at fair value. Intangible assets with indefinite useful lives are not amortised but instead are subject to impairment testing at least annually. Page | 75 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 olicies (continued) 38. Significant accounting policies (continued) 38. Significant accounting p olicies (continued) olicies (continued) 38. Significant accounting p 38. Significant accounting p M. Intangible assets and goodwill (continued) M. Intangible assets and goodwill (continued) M. Intangible assets and goodwill (continued) M. Intangible assets and goodwill (continued) iii. Other (continued) iii. Other (continued) iii. Other (continued) iii. Other (continued) The useful lives of intangibles are as follows: - Customer contracts and lists Business intellectual property rights Website development costs Software financial assets N. Impairment of non----financial assets N. Impairment of non financial assets financial assets N. Impairment of non N. Impairment of non to expiration of the agreement 4 years - indefinite indefinite 5 years At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. Goodwill is tested annually for impairment. For impairment testing, assets are group together into the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or Cash Generating Units (“CGUs”). Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination. The ‘recoverable amount’ of an asset or CGU is the greater of its value in use and its fair value less cost to sell. ‘Value in use’ is based on the estimated future cash flows, 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 or CGU. An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount. The Group’s corporate assets do not generate separate cash inflows and are used by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGUs to which the corporate assets are located. Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. O. Deposits, debt securities issued and subordinated liabilities O. Deposits, debt securities issued and subordinated liabilities O. Deposits, debt securities issued and subordinated liabilities O. Deposits, debt securities issued and subordinated liabilities Deposits, debt securities issued and subordinated liabilities are the Group’s sources of debt funding. The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. Deposits, debt securities issued and subordinated liabilities are initially measured at fair value minus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method. Fiduciary deposits received on behalf of clients by way of a fiduciary agreement are placed with external parties and are not recognised in the statement of financial position. The Group could receive funds for its prepaid card activities. These funds would be held in a fiduciary capacity for the sole purpose of making payments as and when card-holders utilise the credit on their cards and therefore would not be recognised in the statement of financial position. Page | 76 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) P. Employee benefits P. Employee benefits P. Employee benefits P. Employee benefits i. Long term employee benefits i. Long term employee benefits i. Long term employee benefits i. Long term employee benefits Pension obligations Pension obligations Pension obligations Pension obligations The Group has pension obligations arising from both defined benefit and defined contribution pension plans. A defined contribution pension plan is one under which the Group pays fixed contributions into a separate fund and has no legal or constructive obligations to pay further contributions. Defined benefit pension plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and remuneration. Under the defined benefit pension plan, in accordance with IAS 19 Employee benefits, the full service cost for the period, adjusted for any changes to the plan, is charged to the income statement. A charge equal to the expected increase in the present value of the plan liabilities, as a result of the plan liabilities being one year closer to settlement, and a credit reflecting the long-term expected return on assets based on the market value of the scheme assets at the beginning of the period, is included in the income statement. The statement of financial position records as an asset or liability as appropriate, the difference between the market value of the plan assets and the present value of the accrued plan liabilities. The difference between the expected return on assets and that achieved in the period, is recognised in the income statement in the year in which they arise. The defined benefit pension plan obligation is calculated by independent actuaries using the projected unit credit method and a discount rate based on the yield on high quality rated corporate bonds. The Group’s defined contribution pension obligations arise from contributions paid to a Group personal pension plan, an ex gratia pension plan, employee personal pension plans and employee co-operative insurance plans. For these pension plans, the amounts charged to the income statement represent the contributions payable during the year. ii. Share based compensation ii. Share----based compensation based compensation based compensation ii. Share ii. Share The Group maintains a share option programme which allows certain Group employees to acquire shares of the Group. The change in the fair value of options granted is recognised as an employee expense with a corresponding change in equity. The fair value of the options is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. At each reporting date, the Group revises its estimate of the number of options that are expected to vest and recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. The share option programme was originally set up for Group employees to subscribe for shares in Conister Trust Limited (now Conister Bank Limited). Since the Scheme of Arrangement, the shareholders of the Bank became shareholders of the Company. The share option programme is now operated by the Company. The fair value is estimated using a proprietary binomial probability model. The proceeds received, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium when the options are exercised. Q. Share capital and reserves Q. Share capital and reserves Q. Share capital and reserves Q. Share capital and reserves Share issue costs Share issue costs Share issue costs Share issue costs Incremental costs that are directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments. R. Earnings per share R. Earnings per share R. Earnings per share R. Earnings per share The Group presents basic and diluted EPS data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss that is attributable to ordinary shareholders of the Bank by the weighted-average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting profit or loss that is attributable to ordinary shareholders and the weighted-average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted employees. S. Segmental reporting S. Segmental reporting S. Segmental reporting S. Segmental reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. The Group’s primary format for segmental reporting is based on business segments. Page | 77 ANNUAL FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) 38. Significant accounting policies (continued) S. Segmental reporting (continued) S. Segmental reporting (continued) S. Segmental reporting (continued) S. Segmental reporting (continued) An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with any of the Group’s other components, whose operating results are regularly reviewed by the Group’s chief operating decision maker (CODM) to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results are reported to the Group’s CEO (being the CODM) include items that are directly attributable to a segment as well as those that can be allocated on a reasonable basis. 39. Standards issued but not yet effective 39. Standards issued but not yet effective 39. Standards issued but not yet effective 39. Standards issued but not yet effective A number of new standards are effective for annual periods beginning after 1 January 2018 and earlier application is permitted; however, the Group has not early adopted the new or amended standards in preparing these consolidated financial statements. Standards Standards Standards Standards IFRIC 23 Uncertainty over Income Tax Treatments (issued on 7 June 2017) Amendments to IFRS 9: Prepayment Features with Negative Compensation (issued on 12 October 2017) IFRS 16 Leases (issued on 13 January 2016) Effective date Effective date Effective date Effective date (accounting periods commencing on or after) 1 January 2019 1 January 2019 1 January 2019 Of those standards that are not yet effective, IFRS 16 is expected to have a material impact on the Group’s financial statements in the period of initial application. IFRS 16 Leases IFRS 16 Leases IFRS 16 Leases IFRS 16 Leases The Group is required to adopt IFRS 16 Leases from 1 January 2019. The Group has assessed the estimated impact that initial application of IFRS 16 will have on its consolidated financial statements, as described below. The actual impacts of adopting the standard on 1 January 2019 may change because: the Group has not finalised the testing and assessment of controls over its new IT systems; and the new accounting policies are subject to change until the Group presents its first financial statements that include the date of initial application. IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. These are recognition exemptions for short-term leases and leases of low-value items. Lessor accounting remains similar to the current standard – i.e. lessors continue to classify leases as finance or operating leases. IFRS 16 replaces existing leases guidance, including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. Leases in which the Group is a lessor No significant impact is expected for leases in which the Group is a lessor. Leases in which the Group is a lessee The group will recognise new assets and liabilities for its office premises and car parking sub-leases. As at 31 December 2018, the Group’s future minimum lease payments under non-cancellable operating leases amounted to £1,166,000 (2017: 1,192,000) on an undiscounted basis. (see note 34) Transition Transition Transition Transition The Group plans to apply IFRS 16 initially on 1 January 2019, using the modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 January 2019, with no restatement of comparative information. The Group plans to apply the practical expedient to grandfather the definition of a lease on transition. This means that it will apply IFRS 16 to all contracts entered into before 1 January 2019 and identified as leases in accordance with IAS 17 and IFRIC 4. Page | 78 ANNUAL FINANCIAL STATEMENTS SHAREHOLDER NOTES Page | 79 Clarendon House Victoria Street Douglas Isle of Man IM1 2LN Tel: (01624) 694694 Fax: (01624) 624278 www.mfg.im www.mfg.im www.mfg.im www.mfg.im Page | 80
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