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ANNUAL REPORT 2020
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
Group
Financial
Manx
PLC
(“Company” or “MFG”) is an AIM-listed
company
(LSE: MFX) which has
subsidiaries (together referred to as
“Group”) 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
MFG's
strategy is to grow organically and
through strategic acquisition to further
augment the range of services it offers.
customers.
Principal wholly owned subsidiaries:
Conister Bank Limited
Conister Finance & Leasing Ltd
Blue Star Business Solutions Limited
Edgewater Associates Limited
Manx FX Limited
Blue Star Business Solutions Limited
(“BBSL”) is a finance broker providing
asset finance and commercial loans in
the UK to the small and medium sized
enterprises market.
BBSL was acquired as part of the
Group’s strategy
its
distribution in the UK broker market.
increase
to
Conister Finance & Leasing Ltd
(“CFL”) is a subsidiary of the Bank. It
is a credit broker providing brokerage
of hire purchase and leasing finance
facilities in the UK.
CFL is regulated by the Financial
Conduct Authority in the UK and
registered as a designated business
by the Financial Services Authority in
the Isle of Man.
Conister Bank Limited (“Bank”) is a
licensed independent bank, regulated
by the Isle of Man Financial Services
Authority (“FSA”), the UK’s Financial
Conduct Authority and is a full member
of 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
the UK consumer and
Man and
business sectors.
Edgewater Associates Limited (“EAL”)
is the
largest firm of Independent
Financial Advisors (“IFA”) in the Isle of
Man and is regulated by the FSA.
Manx FX Limited provides access to
competitive foreign exchange and
international payment processing
facilities.
EAL provides a bespoke and personal
service to Isle of Man residents and to
the Group’s business and personal
customers and advises on assets in
excess of £361 million (2019: £324
million).
MFX target customers are corporates
and private clients who have a foreign
exchange and international payment
requirement via
foreign
exchange providers.
its UK
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
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43
STRATEGIC REPORT
CHAIRMAN’S STATEMENT
Dear Shareholders
Introduction
As reported in my Interim Statement, the Group was well
prepared for the economic downturn caused by Covid-19 and
Brexit. Our staff have risen magnificently to the challenge and
I would like to thank them for their teamwork, commitment and
focus on helping both their colleagues and our customers
through these difficult times.
During the year we successfully agreed our long-term VAT
dispute with the Isle of Man Customs & Excise regarding the
unfair recovery rate applied to the Company. We received full
recovery of our debtor.
Our banking subsidiary, Conister Bank Limited (the “Bank”),
quickly recognised the difficulties that Covid-19 would bring
and, consequently, announced it would set aside £10 million
to help Isle of Man businesses. Following this, when the Manx
government announced two business support schemes, the
Bank became the only lender on the Island to become
accredited for both – clearly demonstrating our commitment to
help. The Bank then became accredited through the British
Business Bank for the two UK government business support
schemes. All four schemes provide an 80 -100% government
guarantee against loss. These schemes together provided
much needed support to companies both on-and off-Island
and, via these guarantees, afforded a safe lending proposition
to the Bank.
In April 2020, the Company entered into a share buyback
agreement to purchase and cancel 16,966,158 ordinary
shares in the Company. The positive impact of this transaction
increased the Net Asset Value per share for all the remaining
shareholders by approximately 15%. Further, in December
2020, after an absence of 15 years, the Company announced
the return of a dividend scheme which will allow shareholders
to either increase their shareholding in the Company at no cost
or, alternatively, to take a cash dividend. The terms for the
2020 dividend will be announced at our forthcoming Annual
General Meeting.
Financial Performance
At the peak of the first UK lockdown, the Bank had negotiated
to help over 2,000
forbearance or payment holidays
customers. This figure was managed down to only 144 just
before the UK went into its third lockdown in December. Whilst
this demonstrated the underlying quality of the loan book, it
also necessitated an increase in provisions as we continued
to prudently manage the balance sheet. By year-end,
provisions stood at £3.95 million (2019: £1.90 million) with a
significant amount of the increase relating to one customer.
Consequently, our profit before tax decreased by £1.0 million
to £2.0 million (2019: £3.0 million), a figure ameliorated by
credits totalling £1.3 million relating to our recent acquisitions,
VAT recovery and treasury management, partially offsetting
some of the increase in provisions.
Despite the economic headwinds, lending at the Bank was a
record £167.2 million (2019: 158.8 million) and our total assets
increased by £15.1 million to £268.0 million (2019: £252.9
million), a growth of 6%. Also, this volatility created opportunity
for Manx FX Limited, our foreign exchange advisory business,
which recorded a record profit of £1.1 million (2019: £0.5
million) and is well positioned for a strong 2021.
Our operating expenses, excluding provisions and the VAT
credit, decreased by £0.2 million to £11.3 million (2019: £11.5
million), reflecting our improved cost control which was
achieved without compromising lending growth. In turn, our
operating income ratio, less provisions and VAT, improved by
0.5% to 69.1% (2019: 69.6%).
Our loyal Isle of Man depositors have underpinned our loan
book growth with deposits increasing by £8.4 million to £218.3
million (2019: £209.9 million) and our loan to deposit ratio
improved by 3% to 89% (2019: 86%) – a key measure in
demonstrating operational efficiency.
Following the Bank increasing its holding in Beer Swaps
Limited to 75%, we were able to recognize a £2.6 million
increase in our fixed assets.
Liabilities increased by £14.9 million to £245.5 million (2019:
£230.6 million) driven mostly by an £8.4 million increase in
deposits to support lending, and a £6.3 million increase in loan
notes. The latter figure relates to the share buy back and
cancellation, together with further loans providing incremental
regulatory capital to allow the Bank to continue to make
additional acquisitions and to increase lending to underpin
further growth.
this economic environment, our
Key objectives
In
focus
continues to be the protection of shareholder value. Thus,
following a recent review, our strategic concentration remains
to:
fundamental
Provide the highest quality service throughout our
operations to all customers, ensuring that their
treatment is both fair and appropriate;
Adopt a pro-active strategy of managing risk within a
structured compliant regime;
Concentrate on developing our core business by
considered acquisitions,
increasing prudential
lending and augmenting the range of financial
services we offer;
Continue the implementation of an enhanced and
scalable IT
infrastructure to better service the
operational requirements of a growing Group without
the requirement for a disproportionate increase in
headcount and other associated operational costs;
Continue to develop our Treasury management to
improve the return on the liabilities side of our
balance sheet; and
Manage our balance sheet to continue to exceed the
regulatory requirements for capital adequacy.
Strategic Report / Risk and Governance
Immediately following this statement, I detail our approach to
strategy, and our assessment of risk and our implementation
of compliance and governance. In particular, I set out our
perceived risks and how these are managed, together with a
review of our regulatory requirements and also how we meet
the obligations of the QCA Code. Rather than reiterate these
methodologies at this point, I would ask that you take the
opportunity to review these topics in conjunction with my
report.
Page | 4
STRATEGIC REPORT
CHAIRMAN’S STATEMENT
Conister Bank Limited
The Bank finally and successfully resolved its position with the
Isle of Man Customs and Excise (“C&E”) with regards to its
VAT recovery rate. This has taken 13 years and numerous
court cases for the claim, amounting to £1.3 million, to be
settled in our favour. I would like to thank our Executives for
their perseverance in this matter. Shortly after this claim was
resolved, a second claim of £0.6 million was made to C&E,
and I expect to be able to provide an update on its resolution
at the half-year.
Having positioned the business for growth in 2019, the 2020
strategy was impacted by the onset of Covid-19, even though
the Manx market quickly returned to a near-normal level after
the initial lockdown, with the Manx loan book growing by £8.4
million to £54.3 million (2019: £45.9 million). However, our UK
business was badly impacted by the three lockdowns which
eventually drove the economy into a sharp recession. We re-
positioned UK lending to the more prime sectors, exiting those
with a higher risk exposure and provided liquidity to markets
that had already demonstrated a level of resilience to the
recession. Whilst this move has reduced new business
lending, with a consequent £6.1 million decline of the UK loan
book to £35.7 million (2019: 41.8 million), the quality of the
loans now underwritten has improved considerably.
During the year, the Bank acquired a controlling interest in
Beer Swaps Limited (trading as Ninkasi), the largest lessor of
fermenting vessels to the UK brewing industry. This move
takes the Bank’s shareholding from 20% to 75%. The
investment is already outperforming our expectations and we
retain an option to acquire a further 15% in the coming months.
The Bank continues to attract deposits at historically low
market rates which will position it well against any inflationary
pressure and competition. With negative
interest rates
experienced in the UK Gilts primary market for the first time,
our treasury management strategy was to leave our liquidity of
£31.8 million (2019: £13.5 million)
in cash and cash
equivalents for the short-term. Over the next year, the Bank
intends to utilise this excess liquidity to sustain lending in our
preferred markets, with a particular focus on the Isle of Man
commercial market and the UK wholesale market.
I have discussed over the last few years the need to reduce
our dependence on overly expensive introducers and I am
pleased to report continued progress on this project with
commissions paid reducing by 36.3% to £3.6 million (2019:
£5.7 million).
Personnel expenses increased by £0.4 million as the Bank’s
headcount increased by seven as part of the Beer Swaps
Limited transaction. Overheads reduced by £0.2 million to
£2.9 million (2019: £3.1 million), reflecting various cost-saving
initiatives in the Bank’s response to the impact of the
pandemic. With our loan book growth, provisioning increased
in the year by £2.1 million to £4.0 million (2019: £1.9 million).
This increase in provisions reflected the deteriorating credit
conditions in the UK as the economic lockdowns impacted
Small and Medium-Sized Enterprises. Depreciation and
amortisation increased by £0.2 million to £0.5 million (2019:
£0.3 million), driven by continued
IT
implementation as discussed in the 2020 Interim Statement.
With other costs offsetting each other, the Bank’s cost base
increased by £2.5 million to £11.9 million (2019: £9.4 million).
investment
in
Bearing in mind the economic backdrop and our prudent
management of the balance sheet, I am pleased to report the
£0.7 million reduction in profit to £1.9 million (2019: £2.6
million) is less of a contraction than our peers.
to £260.2 million
Total assets, driven by loan book growth, increased by £14.4
million
(2019: £245.7 million), an
improvement of 5.9%. During the year, we continued to
expand the capital base of the Bank by increasing the issued
share capital by a further £4.8 million to £15.5 million (2019:
£10.8 million). Shareholder funds increased by £5.1 million to
£30.1 million (2019: £25.0 million), a growth of 20.1%. Thus,
the Bank finished the year in a stronger financial position than
the start.
Edgewater Associates Limited (“EAL”)
Our independent financial advisory business remains the
largest on the Isle of Man and had a difficult year with the
trading conditions negatively impacted by Covid-19. Meeting
clients became problematic and many sought to delay
investment decisions due to market turbulence. Whilst a UK
economic recovery is expected later in 2021, the Gross
Domestic Product fell steeply by 19% in the second quarter of
2020, which created market uncertainty around the potential
length of the UK recession. As a result, net income fell by £0.4
million in the year to £2.1 million (2019: £2.5 million).
Operating costs remained constant at £2.1 million, leading to
a small loss of £0.1 million (2019 profit: £0.2 million).
Notwithstanding
the result, assets under management
increased by 11.4% to £361 million (2019: 324 million) and
renewal income remained consistent at £1.1 million, indicating
positive customer satisfaction with portfolio management. The
growth in assets under management is also a strong indication
that the renewal income stream will increase in 2021.
Manx FX Limited (“MFX”)
Our
foreign exchange advisory business has had a
remarkable year. Whereas our IFA business suffered from
the
market volatility, MFX benefitted, demonstrating
importance in having a fully diversified financial services
group.
Turnover increased to £1.3 million (2019: £0.8 million) as
customers moved into safer, stable currencies such as Euros
and USD and hedged their future exposures. With its cost
income ratio improving significantly to 17.3% (2019: 39.4%),
profitability increased by 118.3% to £1.1 million (2019: £0.5
million)
The business continues to have a very liquid balance sheet
and declared an interim dividend of £0.6 million for the year
(2019: £1.1 million).
Beer Swaps Limited (“BSL”)
On 28 February 2020, the Bank acquired further shares in BSL
to increase its ordinary shareholding to 75% for a cash
consideration of £0.7 million. For the period under ownership,
BSL reported turnover of £0.6 million and a profit before tax of
£0.2 million with net assets of £0.2 million. BSL is the largest
tank lessor in the UK brewing market and is developing new
related products to offer both its existing UK customers and,
potentially, Europe.
Page | 5
STRATEGIC REPORT
CHAIRMAN’S STATEMENT
Blue Star Business Solutions Limited (“BBSL”)
In April 2019, the Group acquired 100% of the shares in BBSL
for a total expected cash consideration of £2.0 million. This UK
business complements the Bank as it contracts directly with
the end customer as opposed to through an intermediary and
specialises in markets in which the Bank has little exposure. It
is worth noting that despite BBSL operating within the same
negative trading environment, it originated £4.1 million of
advances to the Bank, generating £0.7 million of interest
income (2019: £0.6 million) and its introductions generating
little to no arrears. This business is a specialist in its market,
and this is reflected in the quality of the loans it introduces.
BBSL brokered a further £4.0 million of loans to other funders,
providing a second revenue stream for the business.
Outlook
The Isle of Man has successfully bounced back from
lockdowns, as shown by the less than expected uptake in the
government support schemes, our positive lending figures and
the encouraging recent government budget. As such, I expect
a continued improvement in the economy on Island which will,
in turn, create a positive environment for our lending and
wealth management businesses to operate within.
The early signs show a sustained recovery is within the UK
government’s grasp, assuming infection rates continue to
decrease and the well-managed roll-out of its vaccination
strategy continues. However, there will be numerous sectors
of the economy which will continue to require sustained
government support. The Bank has been monitoring sector
performance and will apply its liquidity to those sectors that
have proved more resilient to the pandemic and are aligned
with its longer-term growth strategy. The careful selection of
markets and the continued lending through the government
support schemes should create an excellent opportunity for
growing our loan book.
We continue to consider new sources of liquidity both on and
off Island. Indeed, the Bank launched a successful series of
notice accounts deposit products on Island in 2020 and it will
progress accessing new sources of liquidity in the UK in the
coming year to ensure it has a sustainable base in each
jurisdiction.
I believe that we have proved that our diversity continues to be
our strength. Our organic growth strategy for the Bank is well
developed and we will also take this time of turbulence to
consider further investments to gain footholds or to increase
our market share in identified strategic sectors. Our cash
reserves are considerable, and the Bank now enjoys the
highest prudential ratios held over the last 10 years. In short,
each of our operations is well poised to take advantage of any
economic upturn during 2021 and beyond.
Once again, I would like to thank my fellow Board members,
the Group’s executive team and staff for their continued
contribution to our ongoing business. I would also like to thank
our shareholders and customers for their continued support.
Jim Mellon
Executive Chairman
3 March 2021
Page | 6
STRATEGIC REPORT
BUSINESS MODEL AND STRATEGY
Conister Bank Limited (“Bank”)
The Bank’s Board of Directors (“Bank’s 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 Bank’s 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.
Having considered the above in light of the COVID-19
pandemic and Brexit, drawing on both internal and external
resources, the Bank continues to believe the credit markets it
operates will deliver growth with liquidity sourced from both its
Balance Sheet and the IOM’s substantial deposit base. This
growth will be achieved through the expansion of existing
products organically, including participating in IOM and UK
through
government business support schemes and
acquisition. This strategy can be analysed by the two
geographical areas the Bank operates within, namely the IOM
and the UK.
The Bank is proud of its heritage and remains heavily centric
in the IOM but recognised that as its UK loan book grows it
would need to create a UK presence to manage and grow this
aspect of its business.
Sourcing reliable funding underpins the Bank’s growth
objectives. The Bank’s strategy in this area is to secure a
diversified, low cost suite of liquidity alternatives for the Bank
to draw upon in order to support its lending strategy. The IOM
deposit market remains a key source of liquidity through the
fixed deposit products and new notice account products which
were launched in 2019. The Bank has penetrated less than
1% of the retail segment available and has not established a
meaningful presence in the £11 billion corporate and trust
service provider market segment. This provides an opportunity
to promote products other than fixed-term and notice accounts
to attract new deposits.
The Bank recognises it has an opportunity to increase its
market share as a result of the reduction in competition
experienced in this market and/or by increasing interest rates.
As such, the Bank believes that it has 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 £42.5 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 acquired BBSL in 2019 and
Beer Swaps Limited (“BSL”) in 2020, both established
businesses with the view of expanding its offering.
Edgewater Associates Limited (“EAL”)
EAL is the largest IFA firm in the IOM and is regulated by the
Isle of Man Financial Services Authority (“FSA”). Its strategic
objective is to:
Grow and service its client base;
Increase assets under advice; and
Grow and develop its 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, travel,
commercial and specialist.
In 2016 EAL embarked on an aggressive and successful
acquisition programme covering a two year period; at the
outset it had a client base of approximately 4,600 clients. After
four acquisitions and an active data cleansing review, EAL
now has an active client base of approximately 9,600, with
associated assets under advice of £361 million (2019: £324
million).
Whilst EAL will continue to grow and develop its standard
business model, it will always be open to new opportunities. It
remains nimble and ready to move with economic and
regulatory changes as they arise; its team remains up-to-date
against industry standards and trends. It retains an appetite
for growth either through additional acquisition opportunities
that may arise, or via organic growth from its existing clients
and business partners with whom
it has built strong
relationships.
Diversification opportunities are also encouraged and
pursued, as per its successful programme to grow or build
Employee Benefit Group Schemes. This incorporates staff
pensions (including pension freedom), protection, private
medical cover, and death in service.
To keep pace with its development it will continue to train
talented people to progress to rounded, professional advisers
who are able to fit into succession planning. To supplement
this, it also takes the opportunity to recruit quality experienced
advisers and para-planners who can further enhance its team.
Page | 7
STRATEGIC REPORT
BUSINESS MODEL AND STRATEGY
Manx FX Limited (“MFX”)
The strategic objectives of MFX are:
To be the first choice for international payments and
foreign exchange;
To maintain, develop and strengthen existing
relationships; and
To increase the number of referrals to their foreign
exchange business partners with a view of
onboarding new accounts.
MFX target customers are corporates and private clients who
have a
international payment
requirement via its UK foreign exchange providers.
foreign exchange and
The IOM offers a diversified range of industries and sectors.
For the next 12 months MFX will concentrate its efforts in
pursuing local new business opportunities.
MFX has the ability to negotiate upfront agreed foreign
exchange margins and applies price transparency which
underpins the professional relationship they provide. The
international payment fees offer competitive value, at reduced
rates compared with local high street banks.
Page | 8
RISK AND GOVERNANCE
RISK MANAGEMENT
Risk management overview
Effective risk management is crucial to MFG’s sustainability.
is ultimately
The MFG’s Board of Directors (“Board”)
accountable for 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.
Determining the Group’s risk tolerance and appetite through
enterprise risk management is a key element of MFG’s
corporate governance framework. 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.
A fundamental principle contained in the code, is for effective
risk management: MFG has in place a Risk Management
Framework (“RMF”) to support the implementation of some of
the principles of
the MFG Governance Framework at
subsidiary level. The RMF supports the Board and senior
management in fulfilling their respective duties in relation to
the sustainable operation of
risk
management system is supported by policies, processes and
activities relating to the taking, management and reporting of
risk.
the business. The
Management and accountability
The Audit, Risk and Compliance Committee (“ARCC”) is
operated at a Group level and currently comprises of three
experienced Non-executive Directors who are qualified
accountants. Only members of the ARCC have the right to
attend ARCC meetings to allow for independence. However,
other individuals representing Executive Management, Risk,
Compliance and Internal Audit are invited by the Chairman of
the ARCC 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.
All individuals are trained to 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.
RMF - 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 considers all the risks detailed under “Principal risks”
on page 12 and is reviewed annually, and as the operating
environment changes, it is constantly measured against stated
appetite to take appropriate action.
RMF - Risk identification, measurement and control
Having 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, and is reported to and
governed by:
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;
RMF
The following overview of the key governance components
that make up the MFG system of governance illustrates the
crucial role of the RMF:
Management Committees, including a review of roles
and responsibilities to ensure that all material risks
are captured and formally considered prior to
presentation to the ARCC and the Board;
RMF - Culture
The risk culture, which forms part of MFG’s overall culture,
encompasses the tone at the top of the organisation 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.
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 the Board, enabling
them to focus on overseeing and challenging the
RMF;
Page | 9
RISK AND GOVERNANCE
RISK MANAGEMENT
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;
RMF - Three lines of defence and key assurance functions
As part of its overall RMF, 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 governance and oversight is
allocated throughout the organisation according to the three
lines of defence principles.
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’s 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 line of defence
The first line of defence e.g. business management is primarily
accountable
risk origination and
management in accordance with risk policy and strategy. This
includes
implementing
responses.
identifying, assessing risks and
the day-to-day
for
Second line of defence
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 line of defence
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
RMF - MFG assurance functions
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 departmental 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 and ‘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 ARCC and Board.
MFG has developed 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.
RMF - Internal Capital Adequacy Assessment Process
(“ICAAP”)
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
ongoing 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
The Bank’s ICAAP process is as follows:
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
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.
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RISK AND GOVERNANCE
RISK MANAGEMENT
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
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;
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; and
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
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, the ARCC, Internal Audit and the External Auditor
prior to approval by the Bank’s 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 Bank’s Board by the 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 the Bank’s Board.
ICAAP Results
The Bank has completed its ICAAP testing for 2020 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.
Page | 11
RISK AND GOVERNANCE
RISK MANAGEMENT
Principal risks
As a result of the RMF, identified on pages 9 to 11, the Group
has exposure to the following key risks:
Strategic;
Credit risk including counterparty credit;
Operational risk including regulatory;
Conduct;
Liquidity;
Interest rate;
Regulatory; and
Reputation.
The Group has considered the above key risks that it faces
and the mitigating controls against those risks:
Strategic risk
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 mitigation
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 Boards
throughout the Group 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.
Credit risk including counterparty credit risk
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.
Controls and mitigation
Delegated authorities: The Group operates to a
schedule of delegated authorisation limits linked to
individual
underwriter’s
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.
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
indemnity. Comprehensive due
any buy-back
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
of
the
risk: To protect against
exposures where
build-up
unintentional
the
impact
could materially
deterioration
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
Instruments, provides an
IFRS 9
additional credit risk buffer.
– Financial
Operational risk including regulatory risks
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’s IT Steering Committee reviews and
monitors 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 and regulatory obligations in accordance
with their service-level agreement with the Group.
Page | 12
RISK AND GOVERNANCE
RISK MANAGEMENT
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.
Controls and mitigation
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
limits are
the
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
Executive Committee.
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.
Onboarding: 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.
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 mitigation
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
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 mitigation
Overall, the Group’s liquidity profile is resistant to stress as the
Group:
Has a positively 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.
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.
Controls and mitigation
Funding profile: Interest rate risk for the Group is not
deemed to be material currently due to the Group’s
positively 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
Page | 13
RISK AND GOVERNANCE
RISK MANAGEMENT
theoretically be able to change its lending rate to
match any corresponding change in its cost of funds.
risk is compounded due to the size of the Group, and the need
to maintain a manageable cost of compliance.
The Group attempts to efficiently match its deposit
taking to its funding requirements.
The maturity profile 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 banks’
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 any increase.
Regulatory risk
Regulatory risk is the risk of material breach of regulation.
The Group holds a Class 1 (1) Banking Licence in the IOM and
is accordingly regulated by the Financial Services Authority
(“FSA”). The Group also holds permissions with the UK’s
Financial Conduct Authority (“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
Controls and mitigation
The Group remains well placed to meet the regulatory
challenges that bring change to the macro environment.
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 the 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 the ARCC.
Reputation risk
Reputation 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 mitigation
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.
Page | 14
RISK AND GOVERNANCE
CORPORATE GOVERNANCE REPORT
Corporate governance report
The Board is committed to best practice in corporate
governance. Directors have agreed to comply with the
provisions of
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 the Group
complies with those principles.
QCA Principle 1: Establish a strategy and business model
which promote long-term value for shareholders
The immediate strategy and business operations of the Group
are set out in the Strategic Report.
The Group’s strategy and business model and amendments
thereto, are developed by the Chief Executive Officer (“CEO”)
and his senior management team, and approved by the Board.
The management team, led by the CEO, 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
businesses within
financial services sector, both
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
foreign currency and payment
general
services.
insurance; and
The Group’s investor relations activities encompass dialogue
with both institutional and private investors. From time to time,
MFG 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
social responsibilities and their implications for long-term
success
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 requirement 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.
employees,
suppliers,
Shareholders – where appropriate shareholder feedback
is discussed at the Board, with any actions agreed being
tracked to completion by the Company Secretary.
Shareholders have an opportunity to raise questions to
the Board, in person or via a nominee, at the Annual
General Meeting. In addition, the Group CEO meets with
and addresses shareholder concerns where appropriate;
Employees – the Group collates employee feedback on
an annual basis, engages employees via workshops,
with all outputs analysed and visibly addressed by the
Executives of the operational subsidiaries that form the
Group; with the aim being to build an engaged,
committed and enthusiastic workforce;
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.
Partners and Suppliers – the Executive and Management
regularly meet with our partners and suppliers to ensure
the needs of all parties are understood in order to
achieve continued excellent working relations;
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
needs and expectations
The Group, via the CEO, seeks to maintain a regular dialogue
with both existing and potential new Shareholders in order to
communicate the Group’s strategy and to understand the
needs and expectations of Shareholders.
Beyond the Annual General Meeting, the CEO 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.
Customers – are at the heart of all we do, the Group
operates with a shared vision and set of values. The
values instil a sense of how all staff form a part of the
customer journey. Feedback is encouraged at all points
of contact, it is proactively enacted upon as it aids the
identification of process and system enhancements; and
Environment - the Group takes due account of any
impact that its activities may have on the environment
and seeks to minimise this impact by demonstrating
leadership
in corporate citizenship. Our continued
dedication toward making a positive contribution to our
communities and offering a great place to work is
subsidiaries’
demonstrated
involvement in community events, charitable fundraising
and the provision of ongoing support. In doing so the
Group ensures continuous
the
management of our environmental impact, in line with
the principles and standards set out within the Group’s
Corporate Social Responsibility Policy.
the operational
improvement
via
in
Page | 15
RISK AND GOVERNANCE
CORPORATE GOVERNANCE REPORT
QCA Principal 4: Embed effective
risk management,
considering both opportunities and threats, throughout the
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 ARCC, and reviewed
by Internal Audit. 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, the effectiveness of these internal controls is
formally reviewed four times per year.
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.
The senior management team meets weekly to consider new
risks and opportunities presented to the Group, making
recommendations to the Board and / or the ARCC as
appropriate.
The Directors consider they provide all necessary information
to assess the Company’s position, performance, business
model and strategy.
QCA Principal 5: Maintain the board as a well-functioning,
balanced team led by the chair
The Board currently comprises four Non-executive Directors
and three Executive Directors.
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 19 and 20.
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 three Non-executive Directors, namely Alan Clarke
(Chairman of the ARCC), David Gibson and John Spellman,
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. The Group Finance Director is the only
Director who holds options over the Group’s shares. The
number and terms are found on page 26.
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: Ensure that between them the directors have
the necessary up-to-date experience, skills and capabilities
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 19 and 20.
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 issues and developments pertaining to the Group, its
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
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.
QCA Principal 7: Evaluate board performance based on clear
and relevant objectives, seeking continuous improvement
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 April 2020, with no substantive issues
arising.
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: Promote a corporate culture that is based on
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 senior management team 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.
Page | 16
RISK AND GOVERNANCE
CORPORATE GOVERNANCE REPORT
QCA Principal 9: Maintain governance structures and
processes that are fit for purpose and support good decision-
making by the board
The role 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 Governance Framework is reviewed to ensure it remains
fit for purpose on an annual basis and is approved by the
Board.
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.
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, the Remuneration
Committee and the Nomination Committee. The Terms of
Reference for each of these Committees are published on the
Group’s website www.mfg.im.
There is a clear separation of the roles of CEO and Executive
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
The CEO is responsible for managing the Group’s business
and operations within the parameters set by the Board.
Non-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 Nomination Committee with formally
delegated duties and responsibilities.
and
Group Audit, Risk and Compliance Committee (“ARCC”)
The ARCC meets at least six times each year and comprises
of three Non-executive Directors, currently Alan Clarke
(Chairman), David Gibson
John Spellman.
Representatives from Compliance and Risk, the Internal and
External Auditor and executive management attend by
invitation. Its role is to be responsible for reviewing the integrity
of the financial statements and the balance of information
disclosed in the accompanying 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.
Group Remuneration Committee (“REMCO”)
The REMCO 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, amongst other matters, 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 Chairman and CEO determine Non-
executive Director fees.
The Directors believe that the above disclosures constitute
sufficient disclosure to meet the QCA Code’s requirement for
a Remuneration Committee Report.
Group Nomination Committee (“NOMCO”)
The NOMCO 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 and re-election of existing Directors.
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.
Page | 17
RISK AND GOVERNANCE
CORPORATE GOVERNANCE REPORT
Prior to appointment, Non-executive Directors are required to
demonstrate that they are able to allocate sufficient time to
undertake their duties.
Re-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 Corporate Governance Manual 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.
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
Denham Eke
Douglas Grant
Alan Clarke
David Gibson
Gregory Bailey
John Spellman *
John Banks ~
Board ARCC REMCO NOMCO
1/2
1/2
2/2
2/2
2/2
2/2
1/1
1/1
-
-
-
10/10
10/10
-
-
-
-
-
-
7/7
7/7
-
5/5
-
4/6
6/6
6/6
6/6
6/6
5/6
5/5
2/2
~ John Banks resigned 14 April 2020
* John Spellman appointed 4 May 2020
QCA Principal 10: Communicate how the company is
governed and is performing by maintaining a dialogue with
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
This report was approved by the Board on 3 March 2021 and
signed on its behalf by:
Jim Mellon
Executive Chairman
3 March 2021
Page | 18
RISK AND GOVERNANCE
DIRECTORS, OFFICERS AND ADVISERS
Executive Directors
Jim Mellon (64)‡
Executive Chairman
Denham Eke (69) ‡
Chief Executive Officer
Douglas Grant (56) ‡
Group Finance Director
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
Appointed to the Board on 2 November 2007 and
appointed as Chief Executive on 12 February 2009.
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 finance
director of various UK and Isle of Man private
sector companies and has extensive capital
markets experience. He is a professionally
qualified banker with an executive MBA.
Appointment
Appointed to the Board on 14 January 2010. He
is also the Managing Director of Conister Bank
Limited.
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
companies, both quoted and unquoted, including
the chairmanship of Juvenescence Limited and
being a non-executive director of Agronomics
Limited. He, together with Burnbrae Group Limited,
of which he is the beneficial owner, holds a 18.83%
shareholding 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
Appointed to the Board on 2 November 2007 and
appointed as Executive Chairman on 12 February
2009.
Non-executive Directors
Alan Clarke (70)‡†* ≠
Non-executive Director
David Gibson (73) ‡†* ≠
Non-executive Director
Gregory Bailey (65) ‡
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.
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. He is also deputy
chairman of two property investment companies.
Appointment
Appointed to the Board on 12 February 2009. He is
Chairman of Conister Bank Limited.
Gregory Bailey, founded Palantir Group Inc
which made successful investments in bio-tech
company start-ups and financings, and is
currently CEO of Juvenescence Ltd, chairman
of Portage Biotech Inc, a CSE-traded drug
development company and non-executive
director
Biohaven
Pharmaceuticals Holding Company. Along with
comprehensive experience
finance and
healthcare, he has served on many public
company boards and brings to the Group an
extensive
corporate
governance.
involvement
of NYSE
traded
in
in
Appointment
Appointed to the Board on 7 February 2018.
Page | 19
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
John Spellman (54) ‡* ≠
Non-executive Director
Lesley Crossley (53)
Company Secretary
John Spellman is both a qualified accountant and banker.
He spent his early years in banking, fund management
and accountancy specialising in the various parts of the
offshore industry before being appointed managing
director of Clerical Medical Offshore. He transferred to
the UK as chief operating officer within Clerical Medical
Financial Services before being appointed managing
director of HBoS Financial Services. He has worked with
and created a number of successful businesses and has
wide experience liaising with government regulators. He
has held approved status with the Isle of Man FSA in
various roles and has acted as strategic advisor to the
Isle of Man government, specialising in finance and
foreign direct investment for over 10 years.
Appointment
Appointed to the Board on 4 May 2020.
Lesley Crossley is a Fellow of The Chartered
Institute of Secretaries and Administrators and an
Associate of the Chartered Insurance Institute. She
has over 30 years of wide-ranging experience in the
financial services industry both in the UK and the
Isle of Man and has held the position of Company
Secretary with a number of Isle of Man and
international companies.
Appointment
Appointed as Company Secretary on 2 September
2019.
John Banks resigned from the Board and his role as Non-executive Director and Member of the Nominations
Committee on 14 April 2020.
Advisers
Registered Office
Clarendon House
Victoria Street
Douglas
Isle of Man IM1 2LN
Registered Agent
CW Corporate Services Limited
Bank Chambers
15-19 Athol Street
Douglas
Isle of Man IM1 1LB
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
KPMG Audit LLC
Heritage Court
41 Athol Street
Douglas
Isle of Man IM1 1LA
Principal Bankers
National Westminster Bank plc
250 Bishopsgate
London EC2M 4AA
Consulting Actuaries
Boal & Co Ltd
Marquis House
Isle of Man Business Park
Douglas
Isle of Man IM2 2QZ
Nominated Advisor
and Broker
Beaumont Cornish
Building 3
Chiswick Park
566 Chiswick High Road
London W4 5YA
Registrar
Computershare Investor
Services (Jersey) Limited
13 Castle Street
St Helier
Jersey JE1 1ES
Presentation of Annual
Report and Accounts
Presented here are the
and
Annual
Manx
Accounts
Financial Group PLC.
Report
of
Company Information
The Annual and Interim
Reports, along with other
supplementary
information of interest to
Shareholders,
are
included on its website.
The address of
the
is www.mfg.im
website
which
investor
includes
relations information and
contact details.
Page | 20
RISK AND GOVERNANCE
AUDIT, RISK AND COMPLIANCE COMMITTEE
Dear Shareholders
I am pleased to set out below an account of the ARCC’s role
and activities during 2020 and up to the date of publication of
this Annual Report.
the Nomination Committee,
Membership
Members of the ARCC are appointed by the Board, on the
in
recommendation of
consultation with the Chairman of the Committee. The
Committee shall be 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
Appointed
Alan Clarke (Chairman) 2 February 2007
David Gibson
John Spellman
13 February 2009
4 May 2020
Number of
meetings
attended
7/7
7/7
5/5
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 the ARCC
but are excluded from the separate meetings held between the
ARCC and the External Auditor.
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:
Considered the annual financial statements with the
External Auditor, Executive Directors
and
management and reviewed the appropriateness of
significant judgements, estimates and accounting
policies;
Reviewed and recommended to the Board for
approval:
o Unaudited condensed interim results for the
period-ended 30 June 2020;
o Audited MFG PLC Group and subsidiary
annual financial statements for the year-
ended 31 December 2020; and
Discussed any significant and unusual accounting
matters including key audit matters identified by the
External Auditor.
External audit:
Monitored and assessed the independence of the
External Auditor based on reports received and
inquiries made into work performed;
Determined the nature and extent of non-audit
services performed by the External Auditor;
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 from the External Auditor on
the findings from their execution of the audit plan;
and
Satisfied itself as to the expertise experience and
independence of the engagement partner.
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.
Risk and compliance:
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;
Recommended a
revision of
the Risk and
Compliance policies for Board approval; and
Recommended a revision of the Internal Capital
Adequacy Assessment Process for Board approval.
Page | 21
RISK AND GOVERNANCE
AUDIT, RISK AND COMPLIANCE COMMITTEE
External Auditor’s independence
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 0.06 to 1 (2019: 0.87 to 1). Non audit services
related to transaction services and tax advisory 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.
External Auditor’s reappointment
The ARCC is responsible for recommending to the Board the
reappointment of the Group’s External Auditor which, in turn,
will make a recommendation to its Shareholders.
Key accounting matter
Loan impairment – wholesale funding and individual finance
agreements
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 the External
Auditor’s risk assessment, they determined that the impairment
provision has a high degree of estimation uncertainty, with a
potential range of reasonable outcomes greater than their
materiality for the financial statements as a whole, and possibly
many times that amount.
Impairment of goodwill and intangible assets
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 for the goodwill impairment test and in
performing a review for indicators of impairment for intangible
assets.
The effect of these matters is that, as part of the External
Auditor’s risk assessment, they have determined that the value
in use of goodwill has a high degree of estimation uncertainty,
with a potential range of reasonable outcomes greater than their
materiality for the financial statements as a whole.
It is noted that with good corporate governance, an audit
tender process should regularly be conducted. With this in
mind, the ARCC are considering whether an audit tender
process should commence for the year-ended 31 December
2021. This will allow sufficient time to run a comprehensive
and considered tender process subject to any delays related
to COVID-19.
The ARCC therefore recommend to the Board that its External
Auditor be reappointed for the year-ended 31 December 2021,
whilst it considers a tender process.
Firms outside the Big 4 would be invited to take part in this
process so long as they have sufficient resources and
expertise to merit their inclusion. There are no anticipated
conflicts of interest noted at this time and should any arise,
they will be mitigated appropriately.
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 2020 and how they were addressed are
detailed below:
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.
The ARCC reviewed reports from executive management on the
continued implementation of IFRS 9 and key changes to internal
the key
processes and controls. The ARCC reviewed
assumptions used by management such as Loss Given Default,
Loss Rates, Probability of Default on a quarterly basis.
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.
Page | 22
RISK AND GOVERNANCE
AUDIT, RISK AND COMPLIANCE COMMITTEE
ARCC response
The ARCC is satisfied that the going concern assessment over
the Group provides sufficient assurance over the recoverability
of the Company’s subordinated loans and investment in
subsidiaries.
Key accounting matter
Carrying value of Company’s subordinated
investment in subsidiaries
The carrying value of the Company’s subordinated loans to and
investment in subsidiaries represents 94% (2019: 97%) of the
Parent Company’s total assets.
loans and
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 MFG
financial statements, the External Auditor considered this to be
the area that had the greatest effect on their overall MFG audit.
The ARCC has complied with and discharged its responsibilities as set out in its Terms of Reference.
Alan Clarke
Chairman
3 March 2021
Page | 23
RISK AND GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
Dear Shareholders
On behalf of the Board, I am pleased to present the Directors’
Remuneration Report for the year ended 31 December 2020.
Membership
Members of the Remuneration Committee (“REMCO”) are
appointed by the Board, on the recommendation of the
Nomination Committee in consultation with the Chairman of
the Committee. The Committee shall be 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.
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
Appointed
Alan Clarke (Chairman) 13 February 2009
David Gibson
12 December 2010
Number of
meetings
attended
10/10
10/10
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 2020
During the year, the Committee considered the following:
Reviewed the overall pay of Executive Directors;
Reviewed
non-discretionary
overall
the
annual
performance related pay scheme for Group staff; and
Reviewed and approved all new Group staff appointments
with annual packages over £50,000.
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;
it reflects the Group’s culture and values; and
there is full transparency of the Group’s Remuneration
Policy.
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
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
the performance rating of each employee’s
determine
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
EAL’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.
Where
the Group operates contractually guaranteed
performance related pay, the contractual conditions must be
approved by the REMCO.
Page | 24
RISK AND GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
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.
Non-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 Director remuneration
The REMCO, comprising two Non-executive Directors, is
responsible for setting the remuneration of the Executive
Directors’ emoluments
Remuneration/
Fees
£
Performance
Related Pay
£
Executives
Jim Mellon
Denham Eke
Douglas Grant
Non-executives
Gregory Bailey
John Banks ~
Alan Clarke
David Gibson
John Spellman *
Aggregate
emoluments
43,750
43,750
211,325
298,825
-
6,250
45,000
85,000
26,667
162,917
-
-
50,000
50,000
-
-
-
-
-
-
Directors. Committee members do not take part in discussions
concerning their own remuneration. The basic Non-executive
Director fee is set by the Group Chairman and CEO. The
Chairman of the Committee reports at the Board meeting
following a Committee meeting.
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
£
-
-
21,103
21,103
-
-
-
-
-
-
2020
Total
£
43,750
43,750
282,428
369,928
-
6,250
45,000
85,000
26,667
162,917
2019
Total
£
25,000
25,000
279,309
329,309
12,500
25,000
45,000
69,167
-
151,667
461,742
50,000
21,103
532,845
480,976
~ John Banks resigned 14 April 2020
* John Spellman appointed 4 May 2020
Approval
This report was approved by the Board of Directors on 3 March 2021 and signed on its behalf by:
Alan Clarke
Chairman of the Remuneration Committee
3 March 2021
Page | 25
RISK AND GOVERNANCE
DIRECTORS’ REPORT
The Directors present their annual report and the audited
financial statements for the year ended 31 December 2020.
Principal regulated activities
The principal activities of 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.
CFL is authorised by the FCA to conduct brokerage services.
EAL is authorised by the FSA 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
The proposed transfers to and from reserves are as set out in
the Statement of Changes in Equity on page 40.
Going Concern
The Group has recognised a profit for the year after taxation of
£1,968,000 (2019: £2,673,000). As at the year ended 31
December 2020, the Bank had a total capital ratio of 19.1%
which exceeded the regulatory minimum requirement of 15.0%.
Based on these factors, management has a reasonable
expectation that the Group has and will have adequate
resources
the
foreseeable future.
in operational existence
to continue
for
Accordingly, the Directors continue to adopt the going concern
basis in preparing the financial statements.
Share capital
Particulars of the authorised and issued share capital of the
Company are set out in note 28 to the financial statements.
Significant shareholdings
The number of shares held and the percentage of the issued
shares which that number represented as at 2 March 2021 are:
% of
issued capital
Number
Jim Mellon1
Gregory Bailey2
Euroclear Nominees Limited3
Lynchwood Nominees Limited
Island Farms Limited
Rock (Nominees) Limited
Chase Nominees Limited
21,492,232
17,835,750
17,039,623
6,313,960
4,222,319
4,198,917
3,855,000
18.83
15.63
14.93
5.53
3.70
3.68
3.38
Directors and Directors’ share interests
Details of current Directors are set out on pages 19 and 20.
Jim Mellon1
Gregory Bailey2
David Gibson4
Douglas Grant
Alan Clarke
Number
02/03/21
21,492,232
17,835,750
1,721,433
505,821
52,149
Number
31/12/20
21,492,232
17,835,750
1,721,433
505,821
52,149
Number
31/12/19
21,492,232
17,835,750
1,721,433
505,821
52,149
1 Burnbrae Limited holds 19,164,250 Ordinary Shares. Burnbrae
Limited is 100% beneficially owned by Jim Mellon. Denham
Eke, CEO of MFG is also a director of Burnbrae Limited.
Pershing Nominees Limited holds 166,666 Ordinary Shares and
Vidacos Nominees Limited holds 1,468,666 Ordinary Shares in
trust for Jim Mellon and 692,650 Ordinary Shares are held in his
own name.
2 Vidacos Nominees Limited holds 17,835,750 Ordinary Shares
in trust for Gregory Bailey.
3 Euroclear Nominees Limited holds 17,039,623 Ordinary Shares
in trust for Aeternitas Imperium Privatstiftung.
4 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
02/03/21
700,000
Number
31/12/20
700,000
Number
31/12/19
1,042,466
* 342,466 options expired on 25 June 2020.
Directors’ liability insurance
The Group maintains insurance cover for Directors’ potential
liability.
Fixed and intangible assets
The movement in fixed and intangible assets during the year are
set out in notes 22 and 23 respectively to the financial
statements.
Staff
At 31 December 2020, there were 120 members of staff (2019:
127), of whom 11 were part-time (2019: 14).
Investment in subsidiaries
Investments in the Company’s subsidiaries are disclosed in
note 30 to the financial statements.
Auditor
KPMG Audit LLC, being eligible, has expressed its willingness
to continue in office.
The number of shares held by the current Directors is as follows:
Page | 26
ANNUAL FINANCIAL STATEMENTS
CONTENTS
Page
Page
Assurance
Statement of Directors’ Responsibilities
Independent Auditor’s Report
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
28
29
35
37
38
39
40
41
42
Notes to the consolidated and company financial statements
Basis of preparation
1.
2.
3.
4.
Reporting entity
Basis of accounting
Functional and presentation currency
Use of judgements and estimates
Financial risk review and fair value
5. Financial instruments – Classification
6.
7.
Financial instruments – Fair values
Financial risk review
Operating segments
Net interest income
Net fee and commission income
Personnel expenses
Performance for the year
8.
9.
10.
11.
12. Other expenses
Impairment on
13.
customers
loans and advances
to
14. Profit before tax payable
15.
Income tax expense
16. Earnings per share
Assets
17. Cash and cash equivalents
18. Debt securities
19. Financial assets
20. Loans and advances to customers
21. Trade and other receivables
22. Property, plant and equipment and right-of-
use assets
Intangible assets
23.
Liabilities and equity
24. Deposits from customers
25. Creditors and accrued charges
26. Loan notes
27. Pension liability
28. Called up share capital
Group composition
29. List of associates
30. List of subsidiaries
31. Acquisition of subsidiary
32. Goodwill
33.
Investment in Group undertakings
Other information
34. Related parties transactions
35. Leases
36. Subsequent events
37. Financial risk management
Accounting policies
38. Basis of measurement
39. Significant accounting policies
43
43
43
43
43
43
46
52
53
53
54
54
54
54
55
55
56
56
57
57
58
59
60
60
60
60
61
63
64
64
65
67
67
68
69
70
71
73
74
Page | 27
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
(“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:
financial statements,
select suitable accounting policies and then apply them
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 | 28
ANNUAL FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL
GROUP PLC
Our opinion is unmodified
We have audited the consolidated financial statements of Manx Financial Group PLC (the “Company”) and its subsidiaries (together,
the "Group"), for the year ended 31 December 2020 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 39.
In our opinion, the accompanying consolidated financial statements:
give a true and fair view of the state of the Group's and of the Company's affairs as at 31 December 2020 and of the Group's
and of the Company's profit for the year then ended;
have been properly prepared in accordance with International Financial Reporting Standards as adopted by the EU; and
have been properly 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 Company and Group
in accordance with, UK ethical requirements including FRC Ethical Standards, as applied to listed entities. We believe that the audit
evidence we have obtained is a sufficient and appropriate basis for our opinion.
Key audit matters: our assessment of the risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the consolidated 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 consolidated 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 were as follows. (These are unchanged from 2019 except for the key audit matter regarding VAT receivable,
which is not included in the current year as the receivable amount has been received following agreement with Isle of Man Customs &
Excise Division).
and
advances
Key audit matter
Loan
customers – wholesale funding
to
Loans
customers £32,509,000 (2019:
£40,491,000)
advances
and
to
Impairment
£1,226,000 (2019: £536,000)
Provision
Refer to the Audit, Risk and
Compliance
Committee
(“ARCC”) Report, note 4 (Use of
Judgements and Estimates -
Assumptions and Estimation
Uncertainties), note 7(A) (Credit
Risk), note 13 (Impairment on
Loans
to
Customers), note 20 (Loans and
Advances to Customers), note
37
Risk
Management – Credit risk) and
(Accounting
note
Policy
of
for
Financial Instruments).
and Advances
Impairment
(Financial
39(G)(vii)
(B)
to calculate
impairment using
The risk
Subjective estimate
The entity is required by the financial reporting
the
framework
expected credit loss model. Impairment is measured
on an instrument by instrument basis except where
instruments are grouped, for impairment to be
measured on a collective basis. Wholesale Funding
comprises Block Finance, Wholesale Funding
Agreements and Stocking Plans. These books
comprise individually significant loan balances and
are in the nature of a secured business loan. The
security is principally an underlying pool of loans.
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, including increased uncertainty from the
impact of COVID 19 on the economy with a potential
range of reasonable outcomes greater than our
materiality for the financial statements as a whole,
and possibly many times that amount.
Our response
Our audit procedures included:
Internal Controls:
Understanding
the
origination of wholesale funding loans, including
borrower due diligence.
in respect of
the controls
of
impairment process such as
Understanding the controls in respect of the Group’s
timely
loan
recognition
the
impairment
completeness and accuracy of reports used in the
loan impairment process and management review
processes over the calculation of expected credit
losses.
provisions,
the
Test of details:
We agreed the specific (instrument by instrument)
provisions included in the financial statements to
Group’s provisioning schedule and evaluated
whether this schedule was correctly extracted from
the loans and advances system, including the
arrears information.
We tested all specific (instrument by instrument)
included challenging Group’s
provisions. This
assessment of the specific provision, taking account
of such factors as: amount of arrears; financial
standing of the business – by inspecting latest
accounts; status of underlying security
– by
inspecting a sample of security documentation; and
likelihood of recovery of any personal guarantees –
by agreeing to the personal guarantee agreement
and assessing supporting evidence of the ability of
the guarantor to meet their obligations.
Page | 29
ANNUAL FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL
GROUP PLC
Key audit matter
The risk
and
advances
Loan
to
customers – individual finance
agreements
Loans
to
customers £160,634,000 (2019:
£138,879,000)
advances
and
Impairment
Provision
£5,895,000 (2019: £4,237,000)
Refer to the ARCC Report, note
4 (Use of Judgements and
Estimates - Assumptions and
Estimation Uncertainties), note
7(A) (Credit Risk), note 13
(Impairment on Loans and
Advances to Customers), note
20 (Loans and Advances to
Customers),
(B)
(Financial Risk Management –
Credit risk) and note 39(G)(vii)
for
(Accounting
Impairment
Financial
Instruments).
Policy
note
37
of
to calculate
impairment using
Subjective estimate
The entity is required by the financial reporting
framework
the
expected credit loss model. Impairment is measured
on an instrument by instrument basis except where
instruments are grouped, for impairment to be
measured on a collective basis. Individual finance
agreements include hire purchase finance leases
and unsecured loans to individuals and companies.
Any security is typically the specific assets financed.
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, including increased uncertainty from the
impact of COVID-19 on the economy with a potential
range of reasonable outcomes greater than our
materiality for the financial statements as a whole,
and possibly many times that amount.
Our response
Historical comparison:
We challenged the inputs used in models used to
measure
impairment on a collective basis by
comparison to default and recovery experience
across each of the loan finance categories.
Assessing disclosures:
Assessing the adequacy of the Group’s disclosures
about the degree of estimation uncertainty involved
at arriving at the provisions in accordance with the
relevant financial reporting framework and specific
circumstances of the Group.
Our audit procedures included:
Internal Controls:
Understanding
the
origination of individual finance loans, including
borrower due diligence.
in respect of
the controls
of
impairment process such as
Understanding controls in respect of the Group’s
timely
loan
recognition
the
impairment
completeness and accuracy of reports used in the
loan impairment process and management review
processes over the calculation of expected credit
losses.
provisions,
the
Use of KPMG Specialists:
We involved KPMG specialists to examine the
methodology of the Group’s expected credit loss
model and its compliance with the requirements of
accounting standards.
Test of details:
We agreed the specific (instrument by instrument)
provisions included in the financial statements to
Group’s provisioning schedule and evaluated
whether this schedule was correctly extracted from
the loans and advances system, including the
arrears information.
We tested a sample of specific (instrument by
instrument) provisions, weighted
towards those
against individually significant impaired loans. This
included challenging Group’s assessment of the
specific provision, taking into account such factors
as: the number of repayments in arrears; the known
whereabouts of the hirer/lessee 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
Historical comparison:
We challenged the inputs used in models to measure
impairment on a collective basis and considered
whether those inputs reflected default and recovery
experience across each of
finance
categories.
loan
the
Assessing disclosures:
Assessing the adequacy of the Group’s disclosures
about the degree of estimation uncertainty involved
at arriving at the provisions in accordance with the
relevant financial reporting framework and specific
circumstances of the Group.
Page | 30
ANNUAL FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL
GROUP PLC
Key audit matter
Impairment of goodwill and
intangible assets
Goodwill
£4,412,000 (2019: £3,734,000)
and Intangibles Assets
£2,286,000 (2019: £2,293,000).
The risk
Forecast based valuation
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 for
the goodwill impairment test and in performing a
review for indicators of impairment for intangible
assets.
in
Refer to the ARCC Report, note
4 (Use of Judgements and
Estimates - Assumptions and
Estimation Uncertainties), note
23 (Intangible Assets), note 33
(Investment
Group
Undertakings), 39(A) (Basis for
Consolidation of Subsidiaries
Financial
and
the Parent
Statements of
Company),
39(K)
(Intangible Assets and Goodwill)
and note 39(L) (Impairment of
Non-Financial Assets)
Separate
note
of
Recoverability
Parent
Company’s subordinated loans
to
in
subsidiaries
investment
and
loans
Subordinated
to
subsidiaries £7,728,000 (2019:
£7,778,000) and investment in
subsidiaries £22,597,000 (2019:
£17,822,000).
(Investment
Refer to the ARCC report, note
in Group
33
Undertakings)
note
and
39(A)(vi)
(Separate Financial
Statements of the Company).
Goodwill and intangible assets have arisen on the
Group’s acquisition of businesses including lenders,
independent financial advisers and finance brokers.
The effect of these matters is that, as part of our risk
assessment, we determined that the value in use of
goodwill has a high degree of estimation uncertainty,
including increased uncertainty from the impact of
COVID-19 on the economy with a potential range of
reasonable outcomes greater than our materiality for
the financial statements as a whole. The financial
statements
the sensitivity
estimated by the Group.
(note 32) disclose
(2019: 93%) of
Low risk, high value
The carrying value of
the Parent Company’s
subordinated loans to and investment in subsidiaries
represents 88%
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
financial
the context of
statements, this is considered to be the area that had
the greatest effect on our overall Parent Company
audit.
the Parent Company
Our response
Internal Controls:
Understanding the controls in respect of the Group’s
goodwill and intangibles assets impairment review
process such as the timely recognition of impairment
provisions and the completeness and accuracy of
reports used in the impairment review process.
Evaluating experts engaged by management:
We have evaluated the competence, capabilities and
objectivity of the management’s expert; obtained an
understanding of the work of that expert and
evaluated the appropriateness of that expert’s work
as audit evidence for the valuation of goodwill.
Use of KPMG Specialists:
We involved KPMG valuation specialists who have
in
tested reasonableness of
particular those relating to each cash generating
unit’s forecast revenue growth, profit margins and the
valuation method used.
the assumptions
Benchmarking assumptions: Comparing the group’s
assumptions to externally derived data in relation to
key inputs such as projected economic growth,
competition, cost inflation and discount rates.
Indictors of impairment for intangible assets:
Analysing latest financial data for the business
related to the relevant intangible asset to assess
whether there are any indicators of impairment, such
as losses being made or a downturn in sales.
Sensitivity analysis: Performing headroom analysis
on the assumptions noted above.
Assessing disclosures:
Assessing the adequacy of the Group’s disclosures
the
about
the sensitivity of
impairment assessment
in key
assumptions reflected in the risks inherent in the
valuation of goodwill and intangible assets.
Our audit procedures included:
the outcome of
to changes
Test of details:
Comparing the carrying amount of 100% of the
Parent Company’s loans to and investments in
subsidiaries with the relevant subsidiaries’ balance
sheet to identify whether their financial position
supported
the Parent
the carrying amount of
Company’s loans to and investments in those
subsidiaries, assessing whether those subsidiaries
have historically been profit-making and evaluating
budgeted forecasts in line with our knowledge of the
entity.
Our application of materiality and an overview of the scope of our audit
Materiality for the consolidated financial statements as a whole was set at £82,000 (2019: £150,000), determined with reference to a
benchmark of Group profit before tax (forecasted) of £2,044,000, of which it represents approximately 4% (2019: 5%).
Page | 31
ANNUAL FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL
GROUP PLC
Our application of materiality and an overview of the scope of our audit (continued)
Materiality for the Parent Company financial statements as a whole was set at £82,000 (2019: £150,000), determined with reference to
a benchmark of Parent Company total assets, but reduced to align with materiality for the Group financial statements.
In line with our audit methodology, our procedures on individual account balances and disclosures were performed to a lower threshold,
performance materiality, so as to reduce to an acceptable level the risk that individually immaterial misstatements in individual account
balances add up to a material amount across the financial statements as a whole. Performance materiality for the Group was set at 75%
(2019: 75%) of materiality for the financial statements as a whole, which equates to £61,000 (2019: £112,500). We applied this
percentage in our determination of performance materiality because we did not identify any factors indicating an elevated level of risk.
We reported to the Audit Committee any corrected or uncorrected identified misstatements exceeding £4,000 (2019: £7,500), in addition
to other identified misstatements that warranted reporting on qualitative grounds. Our audit of the Group was undertaken to the
materiality level specified above, which has informed our identification of significant risks of material misstatement and the associated
audit procedures performed in those areas as detailed above.
The group audit team audits all components of the group except one component – Beer Swaps Limited which represents 1.4% of the
Group’s total assets. Group reporting is received for this company, subject to a materiality level set by the group audit team.
Detailed audit instructions were sent to the auditors of the component. These instructions covered the significant audit areas that should
be covered by these audits (which included the relevant risks of material misstatement detailed above) and set out the information
required to be reported back to the group audit team.
Going concern
The Directors have prepared the consolidated financial statements on the going concern basis as they do not intend to liquidate the
Group or the Company or to cease their operations, and as they have concluded that the Group and the Company'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 consolidated financial statements (the
“going concern period").
In our evaluation of the Directors' conclusions, we considered the inherent risks to the Group and the Company's business model and
analysed how those risks might affect the Group and the Company's financial resources or ability to continue operations over the going
concern period. The risk that we considered most likely to affect the Group and the Company's financial resources or ability to continue
operations over this period was the recoverability of financial assets subject to credit risk as a result of economic downturn due to
outbreak of COVID19.
We considered whether this risk could plausibly affect the liquidity in the going concern period by comparing severe, but plausible
downside scenarios that could arise from this risk against the level of available financial resources indicated by the Company’s financial
forecasts.
We considered whether the going concern disclosure in the Directors’ Report gives a full and accurate description of the Directors'
assessment of going concern.
Our conclusions based on this work:
we consider that the Directors' use of the going concern basis of accounting in the preparation of the consolidated financial
statements is appropriate;
we have not identified, and concur with the Directors' assessment that there is not, a material uncertainty related to events or
conditions that, individually or collectively, may cast significant doubt on the Group and the Company's ability to continue as a
going concern for the going concern period; and
we found the going concern disclosure in the notes to the consolidated financial statements to be acceptable.
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 above conclusions are not a guarantee that the Group and the
Company will continue in operation.
Fraud and breaches of laws and regulations – ability to detect
Identifying and responding to risks of material misstatement due to fraud
To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or conditions that could indicate an incentive
or pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures included:
enquiring of management as to the Group and the Company’s policies and procedures to prevent and detect fraud as well as
enquiring whether management have knowledge of any actual, suspected or alleged fraud;
reading minutes of meetings of those charged with governance; and
using analytical procedures to identify any unusual or unexpected relationships.
Page | 32
ANNUAL FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL
GROUP PLC
Fraud and breaches of laws and regulations – ability to detect (continued)
As required by auditing standards, we perform procedures to address the risk of management override of controls, in particular the risk
that management may be in a position to make inappropriate accounting entries. On this audit we do not believe there is a fraud risk
related to revenue recognition because the Group and the Company’s revenue streams are simple in nature with respect to accounting
policy choice, and are easily verifiable to external data sources or agreements with little or no requirement for estimation from
management. We did not identify any additional fraud risks.
We performed procedures including:
Identifying journal entries and other adjustments to test based on risk criteria and comparing the identified entries to supporting
documentation; and
incorporating an element of unpredictability in our audit procedures.
Identifying and responding to risks of material misstatement due to non-compliance with laws and regulations
We identified areas of laws and regulations that could reasonably be expected to have a material effect on the consolidated financial
statements from our general commercial and sector experience and through discussion with management (as required by auditing
standards), and from inspection of the Company’s regulatory and legal correspondence and discussed with management the policies
and procedures regarding compliance with laws and regulations. As the Company is regulated, our assessment of risks involved gaining
an understanding of the control environment including the entity’s procedures for complying with regulatory requirements.
The Group and the Company are subject to laws and regulations that directly affect the consolidated financial statements including
financial reporting legislation and taxation legislation and we assessed the extent of compliance with these laws and regulations as part
of our procedures on the related financial statement items.
The Group and the Company are subject to other laws and regulations where the consequences of non-compliance could have a material
effect on amounts or disclosures in the consolidated financial statements, for instance through the imposition of fines or litigation or
impacts on the Group and of the Company’s ability to operate. We identified financial services regulation as being the area most likely
to have such an effect, recognising the regulated nature of the Group and the Company’s activities and its legal form. Auditing standards
limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of management and inspection
of regulatory and legal correspondence, if any. Therefore, if a breach of operational regulations is not disclosed to us or evident from
relevant correspondence, an audit will not detect that breach.
Context of the ability of the audit to detect fraud or breaches of law or regulation
Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements
in the consolidated financial statements, even though we have properly planned and performed our audit in accordance with auditing
standards. For example, the further removed non-compliance with laws and regulations is from the events and transactions reflected in
the consolidated financial statements, the less likely the inherently limited procedures required by auditing standards would identify it.
In addition, as with any audit, there remains a higher risk of non-detection of fraud, as this may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal controls. Our audit procedures are designed to detect material misstatement.
We are not responsible for preventing non-compliance or fraud and cannot be expected to detect non-compliance with all laws and
regulations.
Other information
The Directors are responsible for the other information. The other information comprises the information included in the annual report
but does not include the consolidated financial statements and our auditor's report thereon. Our opinion on the consolidated financial
statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained
in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a
material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Respective responsibilities
Directors' responsibilities
As explained more fully in their statement set out on page 28, the Directors are responsible for: the preparation of the consolidated
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 consolidated financial statements that are free from material misstatement, whether due to fraud or error;
assessing the Group and 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 Company or to cease operations,
or have no realistic alternative but to do so.
Page | 33
ANNUAL FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT, TO THE MEMBERS OF MANX FINANCIAL
GROUP PLC
Respective responsibilities (continued)
Auditor's responsibilities
Our objectives are to obtain reasonable assurance about whether the consolidated 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 accordance with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
The purpose of this report and restrictions on its use by persons other than the Company's members, as a body
This report is made solely to the Company’s members, as a body, in accordance with section 80(C) of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an
auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
KPMG Audit LLC
Chartered Accountants
Heritage Court
41 Athol Street
Douglas
Isle of Man
IM1 1LA
3 March 2021
Page | 34
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
Fee and commission income
Fee and commission expense
Depreciation on leasing assets
Net trading income
Other operating income
Gain / (loss) on financial instruments
Realised gains on debt securities
Revaluation on acquisition of subsidiary
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
Income tax expense
Profit for the year
9
10
10
22
19
18
31
11
12
13
22
23
29
21
14
15
2020
£000
20,692
(5,222)
2019
£000
22,320
(4,391)
15,470
17,929
3,865
(3,481)
(406)
3,796
(5,426)
(333)
15,448
15,966
200
259
261
237
388
(1)
179
-
16,405
16,532
(6,823)
(3,707)
(3,950)
(490)
(374)
54
906
2,021
(53)
1,968
(6,762)
(4,135)
(1,900)
(305)
(430)
124
(101)
3,023
(350)
2,673
Page | 35
ANNUAL FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME (CONTINUED)
For the year ended 31 December
Notes
Profit for the year
Other comprehensive income:
Items that will be reclassified to profit or loss
Unrealised (loss) / gains on debt securities
Items that will never be reclassified to profit or loss
Actuarial loss on defined benefit pension scheme taken to equity
2020
£000
1,968
2019
£000
2,673
18
27
(51)
51
(241)
(128)
Total comprehensive income for the period attributable to owners
1,676
2,596
Profit attributable to:
Owners of the Company
Non-controlling interests
Total comprehensive income attributable to:
Owners of the Company
Non-controlling interests
Earnings per share – Profit for the year
Basic earnings per share (pence)
Diluted earnings per share (pence)
Earnings per share – Total comprehensive income for the year
Basic earnings per share (pence)
Diluted earnings per share (pence)
The notes on pages 43 to 85 form part of these financial statements.
The Directors believe that all results derive from continuing activities.
1,935
33
1,968
1,643
33
1,676
1.65
1.37
1.41
1.19
2,673
-
2,673
2,596
-
2,596
2.04
1.66
1.98
1.62
16
16
16
16
Page | 36
ANNUAL FINANCIAL STATEMENTS
COMPANY STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME
For the year ended 31 December
Notes
Dividend income
Interest income
Operating income
Personnel expenses
Administration expenses
Depreciation expense
Profit before tax payable
Tax payable
Profit for the year
Total comprehensive income for the year
The notes on pages 43 to 85 form part of these financial statements.
The Directors believe that all results derive from continuing activities.
14
2020
£000
572
522
1,094
(74)
(122)
(101)
797
-
797
797
2019
£000
1,466
564
2,030
(146)
(100)
(101)
1,683
-
1,683
1,683
Page | 37
ANNUAL FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 31 December
Assets
Cash and cash equivalents
Debt securities
Trading asset
Loans and advances to customers
Trade and other receivables
Property, plant and equipment
Intangible assets
Investment in associates
Goodwill
Total assets
Liabilities
Deposits from customers
Creditors and accrued charges
Contingent consideration
Loan notes
Pension liability
Deferred tax liability
Total liabilities
Equity
Called up share capital
Profit and loss account
Non-controlling interest
Total equity
Total liabilities and equity
Notes
2020
£000
2019
£000
17
18
19
20
21
22
23
29
32
24
25
6(ii)
26
27
15
28
34,053
25,532
4
193,143
2,170
6,045
2,286
316
4,412
267,961
218,285
3,206
672
22,222
944
197
245,526
19,121
3,230
84
22,435
14,620
46,792
19
179,370
2,478
3,299
2,293
282
3,734
252,887
209,933
2,972
863
15,971
688
141
230,568
20,732
1,587
-
22,319
267,961
252,887
The financial statements were approved by the Board of Directors on 3 March 2021 and signed on its behalf by:
Jim Mellon
Executive Chairman
Denham Eke
Chief Executive Officer
Douglas Grant
Group Finance Director
The notes on pages 43 to 85 form part of these financial statements.
Page | 38
ANNUAL FINANCIAL STATEMENTS
COMPANY STATEMENT OF FINANCIAL POSITION
As at 31 December
Assets
Cash and cash equivalents
Trade and other receivables
Amounts due from Group undertakings
Property, plant and equipment
Intangible assets
Investment in subsidiaries
Subordinated loans
Total assets
Liabilities
Creditors and accrued charges
Amounts due to Group undertakings
Loan notes
Total liabilities
Equity
Called up share capital
Profit and loss account
Total equity
Total liabilities and equity
The notes on pages 43 to 85 form part of these financial statements.
Notes
17
21
33
22
30
33
25
33
26
28
2020
£000
1,378
309
1,935
354
7
22,597
7,728
34,308
501
2,297
22,222
25,020
19,121
(9,833)
9,288
34,308
2019
£000
119
231
1,016
450
7
17,822
7,778
27,423
575
775
15,971
17,321
20,732
(10,630)
10,102
27,423
Page | 39
ANNUAL FINANCIAL STATEMENTS
CONSOLIDATED AND COMPANY STATEMENTS OF CHANGES IN EQUITY
Attributable to owners of the Company
Group
Balance as at 1 January 2019
Profit for the year
Other comprehensive income
Transactions with owners
Balance as at 31 December 2019
20,732
Profit for the year
Other comprehensive income
Transactions with owners
Changes in ownership interests
Acquisition of
controlling interest
subsidiary with non-
-
-
(1,611)
-
Share
capital
£000
20,732
Profit and
loss account
£000
(1,009)
-
-
-
2,673
(77)
-
1,587
1,935
Total
£000
19,723
2,673
(77)
-
22,319
1,935
(292)
(292)
-
-
(1,611)
-
Non-
controlling
interests
£000
-
-
-
-
-
33
-
-
51
84
Balance as at 31 December 2020
19,121
3,230
22,351
Company
Balance as at 1 January 2019
Profit for the year
Transactions with owners
Balance as at 31 December 2019
Profit for the year
Transactions with owners
Changes in ownership interests
Balance as at 31 December 2020
The notes on pages 43 to 85 form part of these financial statements.
Total
equity
£000
19,723
2,673
(77)
-
22,319
1,968
(292)
(1,611)
51
22,435
Total
equity
£000
8,419
1,683
-
Share
Capital
£000
Profit and
loss
account
£000
20,732
(12,313)
-
-
1,683
-
20,732
(10,630)
10,102
-
797
797
(1,611)
19,121
-
(9,833)
(1,611)
9,288
Page | 40
ANNUAL FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December
RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS
Profit before tax
Adjustments for:
Depreciation
Amortisation and impairment of intangibles
Share of profit of equity accounted investees
Contingent consideration interest expense
Pension charge included in personnel expenses
Gain on financial instruments
Revaluation on acquisition of subsidiary
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 FLOW STATEMENT
Cash from operating activities
Cash (outflow) / inflow from operating activities
Income taxes paid
Net cash (outflow) / inflow from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Purchase of intangible assets
Sale of tangible fixed assets
Acquisition of subsidiary or associate, net of cash acquired
Sale / (purchase) of debt securities
Contingent consideration
Net cash inflow / (outflow) from investing activities
Cash flows from financing activities
Receipt of loan notes
Payment of lease liabilities (capital)
Decrease in borrowings from block creditors
Net cash inflow / (outflow) from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Included in cash flows are:
Interest received – cash amounts
Interest paid – cash amounts
The notes on pages 43 to 85 form part of these financial statements.
Notes
2020
£000
2019
£000
2,021
3,023
22
23
29
6(ii)
27
6(ii)
31
19
27
22
23
22
31
18
26
35
896
374
(54)
122
15
(253)
(237)
2,884
15
415
315
3,629
638
430
(124)
88
17
-
-
4,072
1
118
144
4,335
(16,023)
8,352
-
(4,042)
(31,092)
51,433
(41)
24,635
(4,042)
(172)
(4,214)
(1,187)
(231)
127
(648)
21,209
(59)
19,211
4,640
(204)
-
4,436
19,433
14,620
34,053
20,274
(5,053)
24,635
(379)
24,256
(1,634)
(132)
107
(1,337)
(16,207)
-
(19,203)
100
(148)
(138)
(186)
4,867
9,753
14,620
21,441
(4,251)
Page | 41
ANNUAL FINANCIAL STATEMENTS
COMPANY STATEMENT OF CASH FLOWS
For the year ended 31 December
RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS
Profit before tax
Adjustments for:
Depreciation
Dividend declared
Changes in:
Amounts due from group undertakings
Trade and other receivables
Creditors and accrued charges
Amounts due from / (to) Group undertakings
Cash inflow / (outflow) from operating activities
CASH FLOW STATEMENT
Cash from operating activities
Cash outflow from operating activities
Income taxes paid
Net cash inflow / (outflow) from operating activities
Cash flows from investing activities
Dividend received
Investment in subsidiaries
Purchase of property, plant and equipment
Purchase of intangible assets
Net cash outflow from investing activities
Cash flows from financing activities
Receipt of loan notes
Receipt of subordinated loan
Payment of finance lease liability
Net cash inflow from financing activities
Net increase / (decrease) in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
The notes on pages 43 to 85 form part of these financial statements.
Notes
2020
£000
2019
£000
797
1,683
22
30
26
101
(572)
326
(347)
(78)
17
1,522
1,440
1,440
-
1,440
-
(4,775)
(5)
-
(4,780)
4,640
50
(91)
4,599
1,259
119
1,378
101
(1,466)
318
-
(199)
98
(595)
(378)
(378)
-
(378)
450
(1,650)
-
(7)
(1,207)
100
(42)
58
(1,527)
1,646
119
Page | 42
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
1. Reporting entity
Manx Financial Group PLC (“Company”) is a company incorporated in the Isle of Man. The consolidated financial statements of the
Company for the year ended 31 December 2020 comprise the Company and its subsidiaries (“Group”).
2. Basis of accounting
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”), on a going concern basis as disclosed in the Directors’ Report.
3. 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. 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.
The extent to which COVID-19 impacts the Group’s business will depend on the effectiveness of government containment actions
and the effectiveness of government and central bank stimulus measures. As the economic environment remains uncertain, actual
results may differ from the estimates below.
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
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 21 – measurement of VAT receivable: key assumptions underlying carrying amount;
Note 27 – measurement of defined benefit obligations: key actuarial assumptions;
Note 23 and 32 – impairment test of intangible assets and goodwill: key assumptions underlying recoverable amounts;
Note 39(G)(vii) – measurement of Expected Credit Loss (“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; and
Note 6 – measurement of contingent consideration.
5. Financial instruments - Classification
For description of how the Group classifies financial assets and liabilities, see note 39(G)(ii).
The following table provides reconciliation between line items in the statement of financial position and categories of financial
instruments.
31 December 2020
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
Loan notes
Total financial liabilities
Mandatorily
at FVTPL
£000
Designated
as at FVTPL
£000
FVOCI –
debt
instruments
£000
FVOCI –
equity
instruments
£000
-
-
4
-
-
4
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
25,532
-
-
-
25,532
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Amortised
cost
£000
34,053
-
-
193,143
2,170
229,366
218,285
3,206
22,222
Total
carrying
amount
£000
34,053
25,532
4
193,143
2,170
254,902
218,285
3,206
22,222
243,713
243,713
Page | 43
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
5. Financial instruments - Classification (continued)
31 December 2019
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
Mandatorily
at FVTPL
£000
Designated
as at FVTPL
£000
FVOCI –
debt
instruments
£000
FVOCI –
equity
instruments
£000
Amortised
cost
£000
-
-
19
-
-
19
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
46,792
-
-
-
46,792
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
14,620
-
-
179,370
2,478
196,468
209,933
2,972
-
15,971
228,876
228,876
Total
carrying
amount
£000
14,620
46,792
19
179,370
2,478
243,279
209,933
2,972
-
15,971
6. Financial instruments – Fair values
For description of the Group’s fair value measurement accounting policy, see note 39(G)(vi).
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the
fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if
the carrying amount is a reasonable approximation of fair value.
31 December 2020
Financial assets measured at fair value
Debt securities
Trading assets
Financial assets not measured at fair value
Cash and cash equivalents
Loans and advances to customers
Trade and other receivables
Investment in associate
Financial liabilities measured at fair value
Contingent consideration
Financial liabilities not measured at fair value
Deposits from customers
Creditors and accrued charges
Loan notes
Carrying
amount
Total
£000
Fair value
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
25,532
4
25,536
25,532
4
25,536
34,053
193,143
2,170
316
229,682
672
672
218,285
3,206
22,222
243,713
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
25,532
4
25,536
-
-
-
-
-
672
672
672
672
-
-
-
-
-
-
-
-
Page | 44
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
6. Financial instruments – Fair values (continued)
31 December 2019
Financial assets measured at fair value
Debt securities
Trading assets
Financial assets not measured at fair value
Cash and cash equivalents
Loans and advances to customers
Trade and other receivables
Investment in associate
Financial liabilities measured at fair value
Contingent consideration
Financial liabilities not measured at fair value
Deposits from customers
Creditors and accrued charges
Block creditors
Loan notes
Measurement of fair values
i. Valuation techniques and significant unobservable inputs
Type
Valuation technique
Debt securities
Contingent consideration
Market comparison/discounted
cash flow: The fair value is
estimated considering a net
present value calculated using
discount rates derived from
quoted yields of securities with
similar maturity and credit
rating that are traded in active
markets.
Discounted cash flows: The
valuation model considers the
present value of the expected
future payments, discounted
using a risk-adjusted discount
rate.
Carrying
amount
Total
£000
Fair value
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
46,792
19
46,811
46,792
19
46,811
14,620
179,370
2,478
282
196,750
863
863
209,933
2,972
-
15,971
228,876
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
46,792
19
46,811
-
-
-
-
-
863
863
863
863
-
-
-
-
-
-
-
-
-
-
Significant
inputs
unobservable
Not applicable.
Inter-relationship
between
significant unobservable inputs
and fair value measurement
Not applicable.
Expected cash flows £790,869
(2019: £1,199,701)
Risk-adjusted discount
14% (2019: 16%)
rate
The estimated fair value would
increase (decrease) if:
-the expected cash flows were
higher (lower); or
-the risk-adjusted discount rate
were lower (higher).
Page | 45
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
6. Financial instruments – Fair values (continued)
ii. Level 3 recurring fair values
Reconciliation of Level 3 fair values
The following table shows a reconciliation from the opening balances to the closing balances for Level 3 fair values.
Balance at 1 January
Assumed in a business combination (see note 31)
Finance costs
Net change in fair value (unrealised)
Payment
Balance at 31 December
2020
£000
863
-
122
(253)
(131)
(60)
672
2019
£000
-
775
-
88
88
-
863
Sensitivity analysis
For the fair value of contingent consideration, reasonably possible changes at the reporting date to one of the significant unobservable
inputs, holding other inputs constant would have the following effects.
31 December 2020
Expected cash flows (10% movement)
Risk-adjusted discount rate (1% movement (100 bps))
Profit or loss
Increase
Decrease
(66)
7
66
(8)
7. Financial risk review
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 37.
A. Credit risk
For definition of credit risk and information on how credit risk is mitigated by the Group, see note 37.
i. Credit quality analysis
Loans and advances to customers
Explanation of the terms ‘Stage 1’, ‘Stage 2’ and ‘Stage 3’ is included in note 39(G)(vii).
An analysis of the credit risk on loans and advances to customers is as follows:
2020
2019
Stage 1
£000
Stage 2
£000
Stage 3
£000
Total
£000
Stage 1
£000
Stage 2
£000
Stage 3
£000
Total
£000
Grade A
Grade B
Grade C
Gross value
173,673
-
335
174,008
-
5,728
9
5,737
-
7,751
12,771
20,522
173,673
13,479
13,115
200,267
168,796
1,143
-
169,939
-
1,675
1,985
3,660
-
-
10,544
10,544
168,796
2,818
12,529
184,143
Allowance for impairment
Carrying value
(423)
173,585
(18)
5,719
(6,683)
13,839
(7,124)
193,143
(116)
169,823
(467)
3,193
(4,190)
6,354
(4,773)
179,370
Loans are graded A to C depending on the level of risk. Grade A relates to agreements with the lowest risk, Grade B with medium
risk and Grade C relates to agreements with the highest of risk.
Page | 46
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
7. Financial risk review (continued)
Risk management (continued)
A. Credit risk (continued)
i. Credit quality analysis (continued)
Loans and advances to customers (continued)
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
2020
2019
Stage 1
£000
Stage 2
£000
Stage 3
£000
Total
£000
Stage 1
£000
Stage 2
£000
Stage 3
£000
Total
£000
170,436
3,572
-
174,008
-
-
5,737
5,737
-
-
20,522
20,522
170,436
3,572
26,259
200,267
145,373
24,259
307
169,939
-
-
3,660
3,660
-
-
10,544
10,544
145,373
24,259
14,511
184,143
For Stage 3 loans and advances that are overdue for more than 30 days, the Bank holds collateral with a value of £13,362,468 (2019:
£8,706,600) representing security cover of 65% (2019: 60%).
Debt securities, cash and cash equivalents
The following table sets out the credit quality of liquid assets:
Government bonds and treasury bills
Rated A to A+
Floating rate notes
Rated A to A+
Cash and cash equivalents
Rated A to A+
2020
£000
2019
£000
24,431
44,690
1,101
2,102
34,053
59,585
14,620
61,412
The analysis has been based on Standard & Poor’s ratings.
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 2020, 34.0% of loans and
advances had an element of capital indemnification (2019: 25.5%).
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
See accounting policy in note 39(G)(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 – Financial Instruments: Recognition and Measurement.
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 Significant Increase in Credit Risk (“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.
The Group has granted payment holidays to customers with no prior arrears based on individual circumstances. These
customers are not able to incur further arrears as no payments are being called whilst they are on the payment holiday.
These customers have not been deemed to have a SICR unless the customer is under exceptional financial hardship due
to COVID-19.
Page | 47
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
7. Financial risk review (continued)
Risk management (continued)
A. Credit risk (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, individual voluntary
arrangements, abscond or disappearance, fraudulent activity or 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.
There have been no significant changes to ECL assumptions from the prior year.
iv. 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 no introducer that accounted for more than 20% of the
Bank’s total lending portfolio at the end of 31 December 2020 (2019: more than 20%).
B. Liquidity risk
For the definition of liquidity risk and information on how liquidity risk is manged by the Group, see note 37.
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 year
were as follows:
At 31 December
Average for the year
Maximum for the year
Minimum for the year
2020
27%
28%
32%
25%
2019
29%
23%
29%
19%
Page | 48
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
7. Financial risk review (continued)
Risk management (continued)
B. Liquidity risk (continued)
ii. Maturity analysis for financial liabilities and financial assets
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):
31 December 2020
Deposits
Other liabilities
Total liabilities
31 December 2019
Deposits
Other liabilities
Total liabilities
3,106
27
3,133
Sight-
8 days
£000
2,900
5,212
8,112
Sight-
8 days
£000
>8 days
- 1 month
£000
>1 month
- 3 months
£000
>3 months
- 6 months
£000
>6 months
- 1 year
£000
3,194
88
3,282
19,775
668
20,443
53,380
819
54,199
59,023
3,630
62,653
>1 year
- 3 years
£000
61,491
16,401
77,892
>3 years
- 5 years
£000
25,221
7,851
33,072
>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
5,127
-
5,127
19,670
4,765
24,435
40,315
16
40,331
43,792
7,281
51,073
77,746
1,274
22,397
1,444
79,020
23,841
Maturity of assets and liabilities at the reporting date:
31 December 2020
Assets
Cash
Debt securities
Loans and advances
Other assets
Total assets
Liabilities
Deposits
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
34,053
-
6,270
4
40,327
3,106
-
3,106
-
5,301
7,750
-
13,051
2,736
-
2,736
-
14,000
21,565
-
35,565
18,981
450
19,431
-
-
17,822
-
17,822
52,478
496
52,974
-
6,231
27,490
2,578
36,299
57,922
2,983
60,905
-
-
84,111
-
84,111
58,805
14,874
73,679
-
-
25,756
5,637
31,393
24,257
7,297
31,554
>5
years
£000
-
1,141
1,141
>5
years
£000
-
2,180
2,180
>5
years
£000
-
-
2,379
7,014
9,393
-
1,141
1,141
Total
£000
225,190
30,625
255,815
Total
£000
211,947
22,172
234,119
Total
£000
34,053
25,532
193,143
15,233
267,961
218,285
27,241
245,526
Page | 49
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
7. Financial risk review (continued)
Risk management (continued)
B. Liquidity risk (continued)
ii. Maturity analysis for financial liabilities and financial assets (continued)
Maturity of assets and liabilities at the reporting date (continued):
31 December 2019
Assets
Cash
Debt securities
Loans and advances
Other assets
Total assets
Liabilities
Deposits
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
14,620
-
12,564
19
27,203
2,889
5,250
8,139
-
5,795
2,017
-
7,812
5,060
-
5,060
-
15,748
12,652
-
28,400
19,411
4,710
24,121
-
17,751
14,977
-
32,728
39,867
-
39,867
-
-
32,615
-
32,615
43,574
7,245
50,819
-
7,498
77,077
-
84,575
76,953
900
77,853
-
-
27,461
-
27,461
22,179
350
22,529
-
-
7
12,086
12,093
-
2,180
2,180
iii. Liquidity reserves
The following table sets out the components of the Group’s liquidity reserves:
Balances with other banks
Unencumbered debt securities
Total liquidity reserves
2020
Carrying
amount
£000
34,053
25,532
59,585
2020
Fair
value
£000
34,053
25,532
59,585
2019
Carrying
amount
£000
14,620
46,792
61,412
Total
£000
14,620
46,792
179,370
12,105
252,887
209,933
20,635
230,568
2019
Fair
value
£000
14,620
46,792
61,412
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 37.
The following table sets out the allocation of assets and liabilities subject to market risk between trading and non-trading portfolios:
31 December 2020
Assets subject to market risk
Debt securities
Trading assets
Total
31 December 2019
Assets subject to market risk
Debt securities
Trading assets
Total
Carrying
amount
£000
25,532
4
25,536
Market risk measure
Trading
portfolios
£000
Non-trading
portfolios
£000
-
4
4
25,532
-
25,532
Market risk measure
Carrying
amount
£000
Trading
portfolios
£000
46,792
19
46,811
-
19
19
Non-
trading
portfolios
£000
46,792
-
46,792
Page | 50
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
7. Financial risk review (continued)
Risk management (continued)
C. Market risk (continued)
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 2020
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-
Interest
Bearing
£000
Total
£000
Assets
34,053
Cash & cash equivalents
Debt securities
5,301
Loans and advances to customers 14,020
-
Other assets
-
14,000
21,565
-
-
-
17,822
-
-
6,231
27,490
-
-
-
84,111
-
-
-
25,756
-
-
-
2,379
-
-
-
-
15,233
34,053
25,532
193,143
15,233
Total assets
53,374
35,565
17,822
33,721
84,111
25,756
2,379
15,233
267,961
Liabilities and equity
Deposits from customers
Other liabilities
Total equity
Total liabilities and equity
5,842
-
-
5,842
18,981
450
-
52,478
496
-
57,922
280
-
58,805
14,874
-
24,257
7,297
-
19,431
52,974
58,202
73,679
31,554
-
944
-
944
-
2,900
22,435
25,335
218,285
27,241
22,535
267,961
Interest rate sensitivity gap
47,532
16,134
(35,152)
(24,481)
10,432
(5,798)
1,435
(10,102)
Cumulative
47,532
63,666
28,514
4,033
14,465
8,667
10,102
-
31 December 2019
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-
Interest
Bearing
£000
-
-
Total
£000
Assets
14,620
Cash & cash equivalents
Debt securities
5,795
Loans and advances to customers 14,581
-
Other assets
-
15,748
12,652
-
-
17,751
14,977
-
-
-
32,615
-
-
7,498
77,077
-
-
-
27,461
-
Total assets
34,996
28,400
32,728
32,615
84,575
27,461
Liabilities and equity
Deposits from customers
Other liabilities
Total equity
Total liabilities and equity
7,949
586
-
8,535
19,411
4,710
-
39,867
1,188
-
43,574
1,200
-
76,953
1,268
-
22,179
7,882
-
24,121
41,055
44,774
78,221
30,061
Interest rate sensitivity gap
26,461
4,279
(8,327)
(12,159)
6,354
(2,600)
-
-
7
-
7
-
-
-
-
7
-
-
-
12,105
14,620
46,792
179,370
12,105
12,105
252,887
-
3,801
22,319
26,120
(14,015)
209,933
20,635
22,319
252,887
-
-
Cumulative
26,461
30,740
22,413
10,254
16,608
14,008
14,015
-
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 (2019: 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 2020
Sight-
1 month
>1month
-3months
>3months
- 6months
>6months
- 1 year
>1 year
- 3 years
>3 years
- 5 years
>5 years
Interest rate sensitivity gap £000 47,532
16,134
(35,152)
(24,481)
10,432
(5,798)
Weighting
£000
-
-
0.003
48
0.007
(246)
0.014
(343)
0.027
282
0.054
(313)
1,435
0.115
165
Non-
Interest
Bearing
(10,102)
-
-
Total
-
-
(407)
Page | 51
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
7. Financial risk review (continued)
Risk management (continued)
C. Market risk (continued)
i. Exposure to interest rate risk (continued)
31 December 2019
Sight-
1 month
>1month
-3months
>3months
- 6months
>6months
- 1 year
>1 year
- 3 years
>3 years
- 5 years
>5 years
Non-
Interest
Bearing
Interest rate sensitivity gap £000
26,461
Weighting
£000
0.000
-
4,279
0.003
13
(8,327)
(12,159)
6,354
(2,600)
7
(14,015)
0.007
(58)
0.014
(170)
0.027
0.054
0.115
0.000
172
(140)
1
-
(182)
Total
-
-
D. Capital Management
i. Regulatory capital
The lead regulator of the Group’s wholly owned subsidiary, the Bank, is the 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 and intercompany receivable.
Tier 2 capital, which includes qualifying subordinated liabilities and any excess of impairment over expected losses.
The 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 FCA in the UK for credit and brokerage related activities.
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.
8. 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 three (2019:
four) 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); EAL; and MFX.
For the year ended 31 December 2020
Net interest income
Fee and commission income
Operating income
Profit / (loss) before tax payable
Capital expenditure
Total assets
Total liabilities
Asset and
Personal
Finance
£000
15,470
430
13,206
1,316
1,138
260,155
230,001
Edgewater
Associates
£000
Manx FX
£000
Investing
Activities
£000
-
2,103
2,103
(94)
46
2,638
660
-
1,332
1,096
1,096
2
536
12
-
-
-
(297)
1
4,632
14,853
Total
£000
15,470
3,865
16,405
2,021
1,187
267,961
245,526
Page | 52
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
8. Operating segments (continued)
For the year ended 31 December 2019
Net interest income
Fee and commission income
Operating income / (loss)
Profit / (loss) before tax payable
Capital expenditure
Total assets
Total liabilities
9. Net interest income
Asset and
Personal
Finance
£000
17,929
439
13,518
2,944
1,744
249,449
220,685
Interest income
Loans and advances to customers
Total interest income calculated using the effective interest method
Operating lease income
Total interest income
Interest expense
Deposits from customers
Loan note interest
Lease liability
Contingent consideration: interest expense
Total interest expense
Net interest income
Manx
Incahoot
£000
Edgewater
Associates
£000
Manx
FX
£000
Investing
Activities
£000
-
(9)
(10)
(295)
-
14
14
-
2,529
2,529
219
14
2,292
1,022
-
837
828
502
-
321
321
Total
£000
17,929
3,796
16,865
-
-
-
(347)
3,023
8
1,766
811
8,526
252,887
230,568
2020
£000
19,484
19,484
1,208
20,692
(4,044)
(1,016)
(40)
(122)
(5,222)
2019
£000
21,824
21,824
496
22,320
(3,383)
(873)
(47)
(88)
(4,391)
15,470
17,929
10. Net fee and commission income
In the following table, fee and commission income from contracts with customers in the scope of IFRS 15 – Revenue from Contracts
with Customers 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
EAL: Independent financial advice income
MFX: Foreign exchange trading income
Asset and personal finance: Brokerage services income
Fee and commission income
Fee and commission expense
Net fee and commission income / (expense)
2020
£000
2,103
1,332
430
3,865
2019
£000
2,528
837
431
3,796
(3,481)
(5,426)
384
(1,630)
Page | 53
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
11. Personnel expenses
Staff gross salaries
Executive Directors’ remuneration
Non-executive Directors’ fees
Executive Directors’ pensions
Executive Directors’ performance related pay
Staff pension costs
National insurance and payroll taxes
Staff training and recruitment costs
12. Other expenses
Professional and legal fees
Marketing costs
IT costs
Establishment costs
Communication costs
Travel costs
Bank charges
Insurance
Irrecoverable VAT
Other costs
13. 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
The charge in respect of collective allowances for impairment comprises:
Collective impairment allowances made
Release of allowances previously made
Total (charge) / credit for collective allowances for impairment
Total charge for allowances for impairment
14. Profit before tax payable
The profit before tax payable for the year is stated after charging:
Auditor’s remuneration:
as Auditor current year
non-audit services
Pension cost defined benefit scheme
Operating lease rentals for property
2020
£000
(5,331)
(299)
(163)
(21)
(50)
(297)
(606)
(56)
(6,823)
2020
£000
(1,063)
(177)
(822)
(270)
(105)
(95)
(151)
(300)
(436)
(288)
(3,707)
2020
£000
(6,833)
3,039
(3,794)
2020
£000
(421)
265
(156)
2019
£000
(5,142)
(259)
(152)
(21)
(50)
(302)
(628)
(208)
(6,762)
2019
£000
(1,559)
(261)
(633)
(286)
(155)
(219)
(137)
(199)
(340)
(346)
(4,135)
2019
£000
(2,091)
64
(2,027)
2019
£000
(138)
265
127
(3,950)
(1,900)
Group
Company
2020
£000
(167)
(10)
(16)
(97)
2019
£000
(110)
(96)
(17)
(117)
2020
£000
-
-
-
-
2019
£000
-
-
-
-
Page | 54
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
15. Income tax expense
Current tax expense
Current year
Changes to estimates for prior years
Deferred tax expense
Origination and reversal of temporary differences
Utilisation of previously recognised tax losses
Changes to estimates for prior years
Tax expense
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
Timing difference in current year
Origination and reversal of temporary differences in deferred tax
Tax expense
2020
£000
2,021
(202)
28
-
65
56
(53)
(10.0%)
1.4%
0.0%
3.2%
2.8%
(2.6%)
2020
£000
3
-
3
(56)
-
-
(56)
(53)
(10.0)%
(0.8)%
(2.6)%
0.0 %
1.8 %
(11.6)%
2019
£000
(297)
(297)
(53)
-
-
(53)
(350)
2019
£000
3,023
(302)
(23)
(78)
-
53
(350)
The main rate of corporation tax in the Isle of Man is 0.0% (2019: 0.0%). However, the profits of the Group’s Isle of Man banking
activities are taxed at 10.0% (2019: 10.0%). The profits of the Group’s subsidiaries that are subject to UK corporation tax are taxed
at a rate of 19.0% (2019: 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 £197,000 liability (2019: £141,000 liability). This resulted in an expense of £56,000 (2019: £53,000) to the Consolidated
Income Statement.
16. Earnings per share
Profit for the year
Weighted average number of ordinary shares in issue (basic)
Basic earnings per share (pence)
Diluted earnings per share (pence)
Total comprehensive income for the year
Weighted average number of ordinary shares in issue (basic)
Basic earnings per share (pence)
Diluted earnings per share (pence)
2020
2019
£1,968,000
£2,673,000
118,964,270
1.65
1.37
131,096,235
2.04
1.66
£1,676,000
£2,596,000
118,964,270
1.41
1.19
131,096,235
1.98
1.62
The basic earnings per share calculation is based upon the profit for the year after taxation and the weighted average of the number
of shares in issue throughout the year.
Page | 55
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
16. Earnings per share (continued)
As at:
Reconciliation of weighted average number of ordinary shares in issue between
basic and diluted
2020
2019
Weighted average number of ordinary shares (basic)
Number of shares issued if all convertible loan notes were exchanged for equity
Dilutive element of share options if exercised
118,964,270
36,555,556
-
131,096,235
41,666,667
-
Weighted average number of ordinary shares (diluted)
155,519,826
172,762,902
Reconciliation of profit for the year between basic and diluted
Profit for the year (basic)
Interest expense saved if all convertible loan notes were exchanged for equity
Profit for the year (diluted)
£1,968,000
£166,250
£2,673,000
£196,150
£2,134,250
£2,869,150
The diluted earnings per share calculation assumes that all convertible loan notes and share options have been converted / exercised
at the beginning of the year where they are dilutive.
As at:
2020
2019
Reconciliation of total comprehensive income for the year between basic and diluted
Total comprehensive income for the year (basic)
Interest expense saved if all convertible loan notes were exchanged for equity
Total comprehensive income for the year (diluted)
17. Cash and cash equivalents
Cash at bank and in hand
Notice account balance (less than 95 days)
Fixed deposit (less than 90 days)
£1,676,000
£166,250
£2,596,000
£196,150
£1,842,250
£2,792,150
Group
Company
2020
£000
11,728
21,025
1,300
34,053
2019
£000
14,620
-
-
14,620
2020
£000
1,378
-
-
1,378
2019
£000
119
-
-
119
Cash at bank includes an amount of £120,000 (2019: £1,060,000) representing receipts which are in the course of transmission.
18. Debt securities
Financial assets at FVOCI:
UK Government Treasury Bills
Floating Rate Notes
Group
Company
2020
£000
24,431
1,101
25,532
2019
£000
44,690
2,102
46,792
2020
£000
-
-
-
2019
£000
-
-
-
UK Government Treasury Bills are stated at fair value and unrealised changes in the fair value are reflected in other comprehensive
income. There were realised gains of £261,000 (2019: £179,000) and unrealised losses of £51,000 (2019: unrealised gain of £51,000)
during the year.
Page | 56
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
19. Financial assets
Financial assets at FVOCI:
Gain on Contingent consideration (see note 6(ii))
Gain on equity instrument
Group
Company
2019
£000
2020
£000
-
(1)
(1)
-
-
-
2020
£000
253
6
259
2019
£000
-
-
-
The equity instrument represents an investment 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
Consolidated Income Statement. The investment made a net gain of £6,000 (2019: £1,000) during the year.
20. Loans and advances to customers
Group
HP balances
Finance lease balances
Unsecured personal loans
Vehicle stocking plans
Wholesale funding arrangements
Block discounting
Secured commercial loans
Secured personal loans
Government backed loans
Gross
Amount
£000
72,930
34,373
27,762
1,807
18,080
13,848
9,602
2,152
19,710
200,264
2020
Impairment
Allowance
£000
(1,779)
(3,241)
(364)
-
(808)
(418)
(511)
-
-
(7,121)
Carrying
Value
£000
71,151
31,132
27,398
1,807
17,272
13,430
9,091
2,152
19,710
193,143
Gross
Amount
£000
65,846
40,359
21,110
1,494
23,840
15,693
11,652
4,149
2019
Impairment
Allowance
£000
(1,537)
(2,125)
(199)
(36)
(300)
(200)
(376)
-
Carrying
Value
£000
64,309
38,234
20,911
1,458
23,540
15,493
11,276
4,149
184,143
(4,773)
179,370
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.
Specific allowance for impairment
Balance at 1 January
Specific allowance for impairment made
Release of allowances previously made
Write-offs
Balance at 31 December
Collective allowance for impairment
Balance at 1 January
Collective allowance for impairment made
Release of allowances previously made
Balance at 31 December
Total allowances for impairment
2020
£000
4,632
5,231
(1,519)
(1,520)
6,824
2020
£000
141
421
(265)
297
7,121
2019
£000
3,126
2,091
(64)
(521)
4,632
2019
£000
268
138
(265)
141
4,773
Advances on preferential terms are available to all Directors, management and staff. As at 31 December 2020 £629,345 (2019:
£490,641) 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.
Page | 57
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
20. Loans and advances to customers (continued)
At the end of the current financial year 6 loan exposures (2019: 5) exceeded 10.0% of the capital base of the Bank:
Exposure
Block discounting facility
Wholesale funding agreement
Outstanding
Balance
2020
£000
5,878
16,315
Outstanding
Balance
2019
£000
15,693
23,840
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
The investment in HP and finance lease receivables net of unearned income comprises:
Facility
limit
£000
8,250
17,482
2019
£000
51,865
71,124
122,989
2019
£000
44,787
61,418
106,205
2020
£000
52,028
71,348
123,376
2020
£000
45,250
62,053
107,303
Less than one year
Between one and five years
Net investment in HP and finance lease receivables
21. Trade and other receivables
Prepayments
VAT recoverable
Other debtors
Group
Company
2020
£000
482
586
1,102
2,170
2019
£000
385
835
1,258
2,478
2020
£000
53
256
-
309
2019
£000
44
187
-
231
The Bank, as the Group VAT registered entity, had 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. In 2019, the Bank had a VAT receivable of £835,000. During the year, the Bank recognised an
additional receivable and income of £372,000. This matter was resolved during the year and the Bank received full settlement.
After consultation with its professional advisors, the Bank made a notice of error correction (“NEC”) to the Isle of Man Government
Customs & Exercise Division in respect of a repayment for overpaid VAT to the amount of £534,000 exclusive of statutory interest.
The NEC relates to bad debt relief that was not claimed during the period from 1 April 1989 to 18 March 1997. The Bank has recognised
a receivable and income of £534,000 during the year.
Page | 58
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
22. Property, plant and equipment and right-of-use assets
Group
Cost
As at 1 January 2020
Acquisition of subsidiary
Additions
Disposals
As at 31 December 2020
Accumulated depreciation
As at 1 January 2020
Charge for year
Disposals
As at 31 December 2020
Carrying value at 31 December 2020
Carrying value at 31 December 2019
Leasehold
Improvements
£000
IT
Equipment
£000
Furniture and
Equipment
£000
Motor
Vehicles1
£000
Right-of-
use assets
£000
674
-
24
-
698
315
69
-
384
314
359
393
-
69
-
462
272
71
-
343
119
121
686
2,582
1,064
-
4,332
622
179
-
801
3,531
64
2,574
-
30
(127)
2,477
391
413
-
804
1,673
2,183
737
-
-
-
737
165
164
-
329
408
572
1Motor vehicles relate to operating leases with the Group as lessor.
Company
Cost
As at 1 January 2020
Additions
Disposals
As at 31 December 2020
Accumulated depreciation
As at 1 January 2020
Charge for year
Disposals
As at 31 December 2020
Carrying value at 31 December 2020
Carrying value at 31 December 2019
Leasehold
Improvements
£000
IT
Equipment
£000
Furniture and
Equipment
£000
Right-of
use-assets
£000
234
-
-
234
169
38
-
207
27
65
13
5
-
18
4
1
-
5
13
9
17
-
-
17
5
2
-
7
10
12
424
-
-
424
60
60
-
120
304
364
Total
£000
5,064
2,582
1,187
(127)
8,706
1,765
896
-
2,661
6,045
3,299
Total
£000
688
5
-
693
238
101
-
339
354
450
Page | 59
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
23. Intangible assets
Group
Cost
As at 1 January 2020
Acquisition of subsidiary (note 31)
Additions
Disposals
As at 31 December 2020
Accumulated amortisation
As at 1 January 2020
Charge for year / impairment
Disposals
As at 31 December 2020
Carrying value at 31 December 2020
Carrying value at 31 December 2019
24. Deposits from customers
Retail customers: term deposits
Corporate customers: term deposits
25. Creditors and accrued charges
Commission creditors
Other creditors and accruals
Lease liability
Taxation creditors
26. Loan notes
Related parties
J Mellon
Burnbrae Limited
Southern Rock Insurance Company Limited
Unrelated parties
Customer
Contracts
£000
Intellectual
Property Rights
£000
IT Software and
Website
Development
£000
539
134
76
-
749
443
80
-
523
226
96
2,163
2
155
-
2,320
1,584
188
-
1,772
548
579
Total
£000
4,622
136
231
-
4,989
2,329
374
-
2,703
2,286
2,293
2020
£000
209,235
9,050
218,285
2019
£000
203,241
6,692
209,933
2020
£000
1,748
822
503
133
3,206
2020
£000
1,750
3,200
2,097
7,047
15,175
22,222
Group
Company
2019
£000
1,044
893
707
328
2,972
2020
£000
-
83
418
-
501
Group
Company
2019
£000
1,750
1,200
460
3,410
12,561
15,971
2020
£000
1,750
3,200
2,097
7,047
15,175
22,222
2019
£000
-
66
509
-
575
2019
£000
1,750
1,200
460
3,410
12,561
15,971
1,920
-
-
-
1,920
302
106
-
408
1,512
1,618
Notes
JM
BL
SR
UP
JM – Two loans, one of £1,250,000 maturing on 26 February 2025, paying interest of 5.4% per annum, and one of £500,000 maturing
on 31 July 2022 paying interest of 5.0% per annum. Both loans are convertible at the rate of 7.5 pence and 9 pence respectively.
Page | 60
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
26. Loan notes (continued)
BL – Three loans, one of £1,200,000 maturing on 31 July 2022, paying interest of 5.0% per annum, and one of £1,000,000 maturing
25 February 2025, paying interest of 5.4% per annum, and one of £1,000,000 maturing 28 February 2025 paying interest of 6% per
annum. Jim Mellon is the beneficial owner of BL and Denham Eke is also a director. The £1,200,000 loan is convertible at a rate of
7.5 pence.
SR – One loan consisting of £2,097,085 maturing on 14 April 2025, paying interest of 6.5% per annum.
UP – Thirty-three loans consisting of an average £459,848 with an average interest payable of 5.8% (2019: 5.5%) per annum. The
earliest maturity date is 9 February 2021 and the latest maturity is 12 October 2025.
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.
27. Pension liability
The Conister Trust Pension and Life Assurance Scheme (“Scheme”) operated by the Bank 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
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
No adjustments have been made to the statement of financial position items as a result of the requirements of IFRIC 14 – IAS 19: The
Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, issued by IASB’s International Financial
Reporting Interpretations Committee.
Scheme amendments
There have not been any past service costs or settlements in the financial year ending 31 December 2020 (2019: none).
Page | 61
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
27. Pension liability (continued)
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 31 March 2020, which showed that the market value of the
Scheme’s assets was £1,432,000 representing 65.2% of the benefits that had accrued to members, after allowing for expected future
increases in earnings. As required by IAS 19: Employee Benefits, this valuation has been updated by the actuary as at 31 December
2020.
The amounts recognised in the Consolidated Statement of Financial Position are as follows:
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
Opening defined benefit obligations at 1 January
Benefits paid by the plan
Interest on obligations
Actuarial loss
Liability for defined benefit obligations at 31 December
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
Expense recognised in income statement
Interest on obligation
Expected return on plan assets
Total included in personnel costs
Actual return on plan assets
Actuarial loss recognised in other comprehensive income
Actuarial (loss) / gain on plan assets
Actuarial loss on defined benefit obligations
2020
£000
1,406
(2,350)
(944)
2020
£000
2,159
(76)
45
222
2,350
2020
£000
1,471
30
-
(19)
(76)
1,406
2020
£000
45
(30)
15
11
2020
£000
(19)
(222)
(241)
2019
£000
1,471
(2,159)
(688)
2019
£000
1,945
(69)
55
228
2,159
2019
£000
1,361
38
41
100
(69)
1,471
2019
£000
55
(38)
17
142
2019
£000
100
(228)
(128)
Page | 62
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
27. Pension liability (continued)
Plan assets consist of the following
Equity securities
Corporate bonds
Government bonds
Cash
Other
The actuarial assumptions used to calculate Scheme liabilities under 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
2020
%
47
19
29
2
3
100
2019
%
50
18
30
2
-
100
2020
%
2019
%
2018
%
-
2.9
2.1
5.0
1.8
3.0
-
3.0
2.1
5.0
2.9
3.1
-
3.0
2.1
5.0
2.6
3.1
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.
28. Called up share capital
Ordinary shares of no par value available for issue
At 31 December 2020
At 31 December 2019
Issued and fully paid: Ordinary shares of no par value
At 31 December 2020
At 31 December 2019
Number
200,200,000
200,200,000
£000
19,121
20,732
Number
114,130,077
131,096,235
On 9 April 2020, the Company and Southern Rock Insurance Company Limited (“SR”) entered into a share buyback agreement
(“SBA”), pursuant to which SR agreed to sell 16,966,158 Ordinary Shares for a consideration of £1,611,785. The consideration was
left outstanding as a loan agreement (See note 26). The Ordinary Shares acquired were cancelled, and the Company’s issued share
capital reduced to 114,130,077 Ordinary Shares effective 14 April 2020.
Prior to the SBA, SR had a loan of £460,000, made to the Company, which was due to be repaid or converted into Ordinary Shares
on or before 26 April 2020. Upon completion of the SBA, the Company and SR entered into an agreement varying the terms of the
convertible loan such that they became subject to the terms of the SBA which contains no ability to convert the amounts outstanding
into Ordinary Shares. The principal amount outstanding in respect of the convertible loan was increased by £25,300 to account for
the reduction of the interest rate in transition to the SBA.
There are three convertible loans totalling £2,950,000 (2019: four convertible loans totalling £3,410,000).
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, 707,534
(2019:1,050,000) remain outstanding. 342,466 options expired during the year.
Page | 63
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
28. Called up share capital (continued)
Performance and service conditions attached to share options that have not fully vested are as follows: The options granted on 23
June 2014 require a minimum of three years’ continuous employment service in order to exercise upon the vesting date.
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 at date of grant
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 (2019: £nil).
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 lease liability
Payment of lease liabilities
23 June
2014
£0.08
£0.14
£0.14
55.0%
3
0.5%
33.3%
25 June
2010
£0.03
£0.11
£0.11
47.0%
3
2.2%
0.0%
2020
£000
37,410
4,640
-
(204)
41,846
2019
£000
36,603
100
855
(148)
37,410
The 2019 closing balance is represented by £19,121,000 share capital (2019: £20,732,000), £22,222,000 of loan notes (2019:
£15,971,000) and £503,000 lease liability (2019: £707,000).
29. List of associates
Set out below is a list of associates of the Group:
The Business Lending Exchange (“BLX”)
Beer Swaps Limited (“BSL”) (See note 31)
Payitmonthly Ltd (“PIML”)
Group
2020
£000
190
-
126
316
Group
2019
£000
167
20
95
282
In 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 £23,000 (2019: £110,000).
In August 2018, 30% of the share capital of PIML was acquired for £90,000 consideration. The Group’s resulting share of the
associate’s total comprehensive income during the year was £31,000 (2019: £4,000).
In April 2018, 20% of the share capital of BSL was acquired for nil consideration. During the year, the Group obtained control of the
subsidiary. Prior to obtaining control, the share of the associate’s total comprehensive income during the year was £nil (2019: 10,000).
30. List of subsidiaries
Set out below is a list of subsidiaries of the Group:
Carrying value of investments
Conister Bank Limited
Edgewater Associates Limited
TranSend Holdings Limited
Bradburn Limited
Nature of
Business
31 December
2020
% Holding
Date of
Incorporation
Asset and Personal Finance
Wealth Management
Holding Company
Holding Company
100
100
100
100
05/12/1935
24/12/1996
05/11/2007
15/05/2009
All subsidiaries are incorporated in the Isle of Man.
Total
2020
£000
20,592
2,005
-
-
22,597
Total
2019
£000
15,817
2,005
-
-
17,822
Page | 64
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
31. Acquisition of subsidiary
Beer Swaps Limited (“BSL”)
On 28 February 2020, the Group (through the Bank) announced that it entered into an agreement to acquire 55% of the shares and
voting interests in BSL. As a result, the Group’s equity interest in BSL increased from 20% to 75%, thereby obtaining control of BSL.
BSL provides equipment finance and rental products to UK based craft and micro-breweries.
This acquisition strengthens the Group’s strategy of developing a network of niche loan brokers within the UK.
For the 10 months ended 31 December 2020, BSL contributed revenue of £620,285 and profit of £21,659 to the Group’s results. If
the acquisition had occurred on 1 January 2020, management estimates that the impact on consolidated fee income would have been
£790,891 and the impact on consolidated profit for the period would have been £21,982.
A. BSL - Consideration transferred
The following table summarises the acquisition date fair value of each major class of consideration transferred:
Cash
Settlement of pre-existing relationship
£’000
707
2,250
2,957
B. BSL - Settlement of pre-existing relationship
The Bank and BSL were parties to a wholesale loan agreement with the Bank as lender and BSL as borrower. This pre-existing
relationship was effectively terminated when the Bank acquired BSL.
C. BSL - Acquisition-related costs
The Group incurred acquisition-related costs of £30,000 relating to external legal fees and due diligence costs. These costs have
been included in ‘other costs’ in the consolidated statement of profit or loss and other comprehensive income.
D. BSL - Identifiable assets acquired, and liabilities assumed
The following table summarises the recognised amounts of assets acquired, and liabilities assumed at the date of acquisition:
Property, plant and equipment
Intangible assets – website
Intangible assets – customer related
Intangible assets – contract related
Cash and cash equivalents
Trade and other receivables
Creditors and accrued charges
Total identifiable net assets acquired
£’000
2,582
2
71
63
59
109
(299)
2,587
Page | 65
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
31. Acquisition of subsidiary (continued)
E. BSL – Measurement of fair values
The valuation techniques use for measuring the fair value of material assets acquired were as follows:
Assets acquired
Valuation technique
Property, plant and equipment
Intangible assets
Market comparison technique and cost technique: The valuation
model considers market prices for similar items when they are
available, and
the depreciated replacement cost when
appropriate. Depreciated replacement cost reflects adjustments
for physical deterioration as well as functional and economic
obsolescence.
Multi-period excess earnings method: The multi-period excess
earnings method considers the present value of net cash flows
expected to be generated by the customer relationships.
The trade and other receivables comprise gross contractual amounts due of £116,000, of which £nil was expected to be uncollectable
at the date of acquisition.
F. BSL - Goodwill
The goodwill arising from the acquisition has been recognised as follows:
Total consideration transferred
Non-controlling interest, based on their proportionate interest in the recognised amounts
of the assets and liabilities of BSL
Fair value of existing interest in BSL
Fair value of identifiable net assets
Goodwill
£’000
2,957
51
257
(2,587)
678
The remeasurement to fair value of the Bank’s existing 20% interest in BSL resulted in a gain of £237,000 (£257,000 less the £20,000
carrying amount of the equity accounted investee at the date of acquisition). This amount has been included separately in the
statement of profit or loss and other comprehensive income.
Blue Star Business Solutions Limited (“BBSL”)
On 16 April 2019, the Group (through BBL) acquired 100% of the shares and voting interest in BBSL, obtaining control of BBSL. The
Group agreed to pay the selling shareholders:
50% of net profits in BBSL for 3 years post completion; and
50% of the incremental net profit that the Group benefits from as a result of taking up BBSL loan proposals post completion
up until the third anniversary.
This is to be paid on each anniversary with a final payment in year 4 for the unrealised lending profit. The total consideration is to
have a cap of £4,000,000 in total. The contingent consideration is calculated by forecasting 3 years of net profits discounted using an
interest rate of 16.0% per annum. The range of contingent consideration payable is £nil - £2,500,000.
See note 6 for the fair value of the Contingent Consideration at 31 December 2020.
Page | 66
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
32. Goodwill
Cash generating unit
EAL
BBSL
BSL
ECF Asset Finance Limited (“ECF”)
Three Spires Insurance Services Limited (“Three Spires”)
Group
2020
£000
1,849
1,390
678
454
41
4,412
Group
2019
£000
1,849
1,390
-
454
41
3,734
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 EAL 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 11.0% 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 BBSL is based on forecasted 3 year
interest income calculated at an average yield of 8%, with a terminal value calculated using a 3.0% growth rate of net income and
then discounted using a 14.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of up to
20.0% on varying interest income growth rates.
The estimated recoverable amount in relation to the goodwill generated on the purchase of BSL is based on a 4 year sales forecast,
extrapolated to 14 years using a 1.5% annual increment, and then discounted using a 12% discount factor. The sensitivity of the
analysis was tested using additional discount factors of 11.0% and 20.0% on varying sales volumes. On the basis of the above reviews
no impairment to goodwill has been made in the current year.
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
11.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of 15.0% and 20.0% on varying
sales volumes.
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 EAL. Based on the above reviews no impairment to goodwill has been made in the current year.
33. Investment in Group undertakings
Amounts owed to Group undertakings
Amounts owed to Group undertakings are unsecured, interest-free and repayable on demand.
Subordinated loans
MFG has issued several subordinated loans as part of its equity funding into the Bank and EAL.
Creation
Maturity
Interest rate
% p.a.
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
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
Edgewater Associates Limited
28 February 2013
21 February 2017
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
2020
£000
500
500
500
400
1,000
1,000
1,100
450
2,000
-
150
128
7,728
* The subordinated loan due for repayment on 28 February 2019 continued beyond maturity and was settled in 2020.
2019
£000
500
500
500
400
1,000
1,000
1,100
450
2,000
50
150
128
7,778
Page | 67
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
34. Related party transactions
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 (CEO of MFG). Total deposits amounted to £432,213 (2019: £446,366), at normal commercial interest rates
in accordance with the standard rates offered by the Bank.
During the year, the Bank held cash on deposit on behalf of David Gibson (Non-executive Director of the Bank and MFG) of £50,282 (2019:
£nil).
Staff and commercial loans
Details of staff loans are given in note 20.
Commercial loans have been made to various companies connected to Jim Mellon and Denham Eke on normal commercial terms.
As at 31 December 2020, £23,742 of capital and interest was outstanding (2019: £62,746).
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. EAL provides services to the Group in arranging its insurance and defined contribution pension arrangements.
Loan advance to EAL
On 14 December 2016, a loan advance was made to EAL by the Bank in order to provide the finance required to acquire MBL. The
advance was for £700,000 at an interest rate of 8% per annum repayable over 6 years. A negative pledge was given by EAL to not
encumber any property or assets or enter into an arrangement to borrow any further monies. The balance as at 31 December 2020
was £273,568 (2019: £395,172).
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.
Due to subsequent facility increases, the loan facility available for draw down is £5,300,000 as at year-end, with £4,587,000 (2019:
£4,000,000) having been advanced to BLX.
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. During the year, the facility was increased to
£1,500,000. At 31 December 2020, £685,000 (2019: £1,424,000) had been advanced to PIML.
Investments
The Bank holds less than 1% equity in the share capital of an investment of which Jim Mellon is a Shareholder (note 19). Denham
Eke acts as co-chairman.
Page | 68
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
34. Related party transactions (continued)
Subordinated loans
The Company has advanced £7,450,000 (2019: £7,450,000) of subordinated loans to the Bank and £278,000 (2019: £328,000) to
EAL at 31 December 2020. See note 33 for more details.
Loan notes
See note 26 for a list of related party loan notes as at 31 December 2020 and 2019.
Key management remuneration including Executive Directors
Short-term employee benefits
2020
£000
1,120
2019
£000
927
35. Leases
A. Leases as lessee
The Group leases the head office building in the Isle of Man. The leases typically run for a period of 10 years with an option to renew
the lease after that date. Lease payments are renegotiated every 10 years to reflect market rentals.
The Group leases and office unit in the United Kingdom and IT equipment with contract terms of 2 to 3 years. These leases are short-
term and/or leases of low-value items. The Group has elected not to recognise right-of-use assets and lease liabilities for these leases.
Information about leases for which the Group is a lessee is presented below.
i. Right-of-use assets
Right-of-use assets related to leased properties that do not meet the definition of investment property are presented as property, plant
and equipment.
Group
Cost
As at 1 January 2020
Additions
Disposals
As at 31 December 2020
Accumulated depreciation
As at 1 January 2020
Charge for the year
Eliminated on disposals
As at 31 December 2020
Carrying value at 31 December 2020
Carrying value at 31 December 2019
ii. Amounts recognised in profit or loss
Interest on lease liabilities
Depreciation expense
Expenses relating to short-term leases and low-value assets
Land and
buildings
£000
Total
£000
737
-
-
737
165
164
-
329
408
572
2020
£000
40
164
97
737
-
-
737
165
164
-
329
408
572
2019
£000
47
165
117
Page | 69
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
35. Leases (continued)
iii. Amounts recognised in statement of cash flows
Total cash outflow for leases
iv. Non-cancellable operating lease rentals are payable in respect of property as follows:
Less than one year
Between one and five years
Over five years
Total operating lease rentals payable
36. Subsequent events
There were no subsequent events occurring after 31 December 2020.
2020
£000
244
2020
£000
84
-
-
84
2019
£000
195
2019
£000
100
-
-
100
Page | 70
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
37. Financial risk management
A. Introduction and overview
The Group has exposure to the following risks from financial instruments:
credit risk;
liquidity risk;
market risk; and
operational risk.
i. Risk management framework
The Board has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board has
established the ARCC, which is responsible for approving and monitoring Group risk management policies. The 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
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
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 gradings 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:
o
o
o
initial approval, regular validation and back-testing of the models used;
determining and monitoring significant increase in credit risk; and
incorporation of forward-looking information; and
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
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
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 | 71
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
37. Financial risk management (continued)
C. 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 occurring.
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
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
Overall authority for market risk is vested in the Assets and Liabilities Committee (“ALCO”) which 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 the ALCO) and for
the day-to-day review of their implementation.
Foreign exchange risk
The Bank is not subject to foreign exchange risks and its business is conducted in pounds sterling.
Equity risk
The Group has investment in associates of £308,000 (2019: £282,000) 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
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 | 72
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
37. Financial risk management (continued)
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
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:
Business continuity planning;
Requirements for appropriate segregation of duties, including the independent authorisation of transactions;
Requirements for the reconciliation and monitoring of transactions;
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;
Development of contingency plans;
Training and professional development;
Ethical and business standards;
Risk mitigation, including insurance where this is cost-effective.
Information technology and cyber risks; and
Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of
Internal Audit reviews are reported to the ARCC.
38. Basis of measurement
The financial statements are prepared on a historical cost basis, except for the following material items:
Items
Measurement basis
FVTPL – Trading asset
FVOCI – Debt securities
Net defined benefit liability
Fair value
Fair value
Fair value of plan assets less the present value of the
defined benefit obligation
Page | 73
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
39. Significant accounting policies
A number of new standards are effective from 1 January 2020 but they do not have a material effect on the Group’s financial
statements.
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.
Note description
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.
P.
Q.
Basis of consolidation of subsidiaries and separate financial statements of the Company
Interest in equity accounted investees
Interest
Fee and commission income
Leases
Income tax
Financial assets and financial liabilities
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
Share capital and reserves
Earnings per share (“EPS”)
Segmental reporting
No.
75
75
75
76
76
77
78
82
82
82
82
83
84
84
84
84
85
Page | 74
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
39. Significant accounting policies (continued)
A. Basis of consolidation of subsidiaries and separate financial statements of the Company
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
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 control 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. Non-controlling interests
NCI are measured initially at their proportionate share of the acquiree’s identifiable net assets at the date of acquisition.
Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.
iv. 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.
v. Transactions eliminated on consolidation
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.
vi. 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
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. Interest
Interest income and expense are recognised in profit or loss using the effective interest rate method.
i. 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 gross carrying amount of the financial asset or amortised cost of the financial liability. When calculating the effective interest rate
for financial assets, the Group estimates future cash flows considering all contractual terms of the financial instruments, 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.
ii. Amortised cost and gross carrying amount
The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured
on initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of
any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit loss
allowance.
Page | 75
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
39. Significant accounting policies (continued)
C. Interest (continued)
ii. Amortised cost and gross carrying amount (continued)
The gross carrying amount of a financial asset is the amortised cost of a financial asset before adjusting for any expected credit loss
allowance.
iii. Calculation of interest income and expense
In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the
asset is not credit-impaired) or to the amortised cost of the liability.
However, for financial assets that have become credit-impaired subsequent to initial recognition, interest income is calculated by
applying the effective interest rate to the amortised cost of the financial asset. If the asset is no longer credit-impaired, then the
calculation of interest income reverts to the gross basis.
D. Fee and commission income
The Group generates fee and commission income through provision of independent financial advice, insurance brokerage agency,
introducer of foreign exchange services and commissions from brokering business finance for small and medium sized enterprises.
Independent financial advice and insurance brokerage agency
Income represents commission arising on services and premiums relating to policies and other investment products committed during
the year, as well as renewal commissions having arisen on services and premiums relating to policies and other investment products
committed during the year and previous years and effective at the balance sheet date. Income is recognised on the date that policies
are submitted to product providers with an appropriate discount being applied for policies not completed. As a way to estimate what
is due at the year-end, a “not proceeded with” rate of 10.0% for pipeline life insurance products and 0.0% for non-life insurance
pipeline is assumed. Renewal commissions are estimated by taking the historical amount written pro-rata to 3 months.
Other
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 fee relates.
E. Leases
At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the
contract coveys the right to control the use of an identified asset for a period of time in exchange for consideration.
i. As a lessee
At commencement or on modification of a contract that contains a lease component, the Group allocates the consideration in the
contract to each lease component on the basis of its relative stand-alone prices. However, for the leases of property the Group has
elected not to separate non-lease components and as a result, accounts for the lease and non-lease components as a single lease
component.
The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially
measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the
commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or
to restore the underlying asset or the site on which it is located, less any lease incentives received.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the
lease term, unless the lease transfers ownership of the underlying asset to the Group by the end of the lease term or the cost of the
right-of-use asset reflects that the Group will exercise a purchase option. In that case the right-of-use asset will be depreciated over
the useful life of the underlying asset, which is determined on the same basis as those of property and equipment. In addition, the
right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date,
discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing
rate. Generally, the Group uses its incremental borrowing rate as the discount rate.
The Group determines its incremental borrowing rate by obtaining interest rates from various external financing sources and makes
certain adjustments to reflect the terms of the lease and the type of the asset leased.
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ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
39. Significant accounting policies (continued)
E. Leases (continued)
i. As a lessee (continued)
Lease payments included in the measurement of the lease liability comprise the following:
Fixed payments, including in-substance fixed payments;
Variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the
commencement date;
Amounts expected to be payable under a residual value guarantee; and
The exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional
renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a
lease unless the Group is reasonably certain not to terminate early.
The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future
lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be
payable under a residual value guarantee, if the Group changes its assessment of whether it will exercise a purchase, extension or
termination option or if there is a revised in-substance fixed lease payment.
When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use
asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.
The Group presents right-of-use assets that do not meet the definition of investment property in ‘property, plant and equipment’ and
lease liabilities in ‘loans and borrowings’ in the statement of financial position.
Short-term leases and leases of low-value assets
The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets and short-term leases,
including IT equipment. The Group recognises the lease payments associated with these leases as an expense on a straight-line
basis over the lease term.
ii. As a lessor
At inception or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to
each lease component on the basis of their relative stand-alone prices.
When the Group acts as a lessor, it determines at lease inception whether each lease is a finance or an operating lease.
To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and
rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an
operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of
the economic life of the asset.
Finance leases and HP contracts
When assets are subject to a finance lease or HP contract, the present 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
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 profit or loss and other
comprehensive income on a straight-line basis over the period of the lease.
F. 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 tax is not recognised for taxable temporary differences arising on the initial recognition
of goodwill and temporary differences related to investments in subsidiaries and associates to the extent that the Group is able to
control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future.
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.
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ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
39. Significant accounting policies (continued)
G. Financial assets and financial liabilities
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.
ii. Classification
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 solely payments of principal
and interest (“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
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
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
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
The Group classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost.
iii. Derecognition
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.
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ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
39. Significant accounting policies (continued)
G. Financial assets and financial liabilities (continued)
iii. Derecognition (continued)
Financial assets (continued)
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.
Financial liabilities
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire.
iv. Modifications of financial assets and financial liabilities
Financial assets
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
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 losses 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
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
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.
Page | 79
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
39. Significant accounting policies (continued)
G. Financial assets and financial liabilities (continued)
vi. Fair value measurement (continued)
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;
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
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 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; and
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, individual voluntary arragement,
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’.
Lifetime 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’.
Page | 80
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
39. Significant accounting policies (continued)
G. Financial assets and financial liabilities (continued)
vii. Impairment (continued)
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 2020 year-end, 36.6% had
such credit enhancements (2019: 37.9%); and
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.
ECL are probability-weighted estimates 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
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;
The disappearance of an active market for a security because of financial difficulties.
It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or
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; and
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
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; and
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.
Page | 81
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
40. Significant accounting policies (continued)
G. Financial assets and financial liabilities (continued)
vii. Impairment (continued)
Write-off
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.
H. 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.
I. Loans and advances
Loans and advances’ captions in the statement of financial position include:
Loans and advances measured at amortised cost (see 36 (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 receivables (see 36 (G)).
J. 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
Assets are depreciated or amortised on a straight-line basis, so as to write off the book value over their estimated useful lives. The
estimated 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
Plant and machinery
to expiration of the lease
4-5 years
2.5 years
4 -10 years
5 – 20 years
K. Intangible assets and goodwill
i. Goodwill
Goodwill that arises on the acquisition of subsidiaries is measured at cost less accumulated impairment losses.
Page | 82
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
39. Significant accounting policies (continued)
K. Intangible assets and goodwill (continued)
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
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.
The useful lives of intangibles are as follows:
Customer contracts and lists
Business intellectual property rights
Website development costs
Software
to expiration of the agreement
4 years - indefinite
indefinite
5 years
L. Impairment of non-financial assets
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 grouped 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.
Page | 83
ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
39. Significant accounting policies (continued)
M. 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.
N. Employee benefits
i. Long-term employee benefits
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
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 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.
O. Share capital and reserves
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.
P. Earnings per share (“EPS”)
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 MFG 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.
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ANNUAL FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020
39. Significant accounting policies (continued)
Q. 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.
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 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.
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ANNUAL FINANCIAL STATEMENTS
SHAREHOLDER NOTES
Page | 86
Clarendon House
Victoria Street
Douglas
Isle of Man
IM1 2LN
Tel: (01624) 694694
Fax: (01624) 624278
www.mfg.im