Mortgage Advice Bureau (Holdings) plc Annual Report 2017 Introduction Mortgage Advice Bureau is one of the UK’s leading consumer intermediary brands and specialist appointed representative networks for mortgage intermediaries. MAB’s advisers specialise in providing mortgage advice to customers, as well as advice on protection and general insurance products. Providing customers with the right advice is at the heart of everything we do. Our strategy remains focused on securing further growth through technology, lead generation and specialisation which will increase our market share and the number of mortgage completions in all market conditions, enabling us to continue to deliver strong returns to our investors. We are just over a year into our three-year plan that is focused on building solutions for the future; this will ensure MAB is able to maintain and build upon its leading position in the intermediary sector. We continue to invest in our core business model with our plans for 2020 and beyond designed to secure sustainable long-term growth whilst continuing to deliver strong results in the meantime. Contents Strategic report Financial highlights Chairman’s statement Chief Executive’s review Financial review Financial performance and future developments Principal risks and uncertainties Governance Board of Directors Company information Directors’ report Corporate governance Directors’ remuneration report Directors’ responsibilities for the financial statements Independent auditor’s report Financial statements Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Company statement of financial position Company statement of changes in equity Notes to the Company statement of financial position 01. 02. 04. 10. 11. 14. 16. 17. 18. 20. 22. 25. 26. 30. 31. 32. 33. 34. 62. 63. 64. “I am delighted to report another set of excellent results. Strong growth in revenue, up 17% to £108.8m has translated into strong growth in adjusted EPS up 17% to 23.8p. Accordingly, the Board is pleased to propose the payment of an increased final dividend of 11.9p per share, making total proposed ordinary dividends for the year of 21.4p, up 17% on the prior year. “MAB continues to deliver on its strategy in all market conditions whilst maintaining a strong financial position. Our mortgage completions increased by 18.5% and our market share increased by 13%. Achievements across the business continue to be recognised by a number of industry awards, including being named Best Mortgage Broker at the 2018 Mortgage Strategy Awards. “MAB’s strategy is very clear, and appointing Ben Thompson clearly reflects the level of ambition we have. This will be our seventh key appointment since IPO, and the first new role on the Executive Board. “I am really looking forward to working closely with Ben to deliver our strategic objectives for the next five years and beyond. We will make a great team, and I have no doubt that we will be pushing the boundaries of what can be achieved even further than we do now.” Peter Brodnicki Chief Executive See review on page 04 For more information please visit our website www.mortgageadvicebureau.com/investor-relations Front Cover: Home movers, Derby Mortgage Advice Bureau Annual Report 2017 Strategic report Financial highlights Revenue £108.8m 2016: £92.8m Profit before exceptional gain and tax £14.5m 2016: £12.5m +17% +16% EPS before exceptional gain and tax 23.8 pence 2016: 20.3p pence +17% Proposed total ordinary dividends 21.4 pence per share +17% 2016: 18.3 pence per share Unrestricted bank balances £13.2m 2016: £10.8m 22% Buy-to-Let Investor, London 01. Mortgage Advice Bureau Annual Report 2017 Strategic report Chairman’s statement “We aim to continue to deliver growth in revenue and profits, and strong returns to our investors through our investments in technology and specialisation, our increase in market share and mortgage completions in all market conditions.” Katherine Innes Ker Chairman Dear Shareholder I am pleased to report that MAB has delivered a third full year of strong revenue and profit growth since IPO through a 13% growth in our market share to 4.6% (2016: 4.1%) and mortgage completions increasing by 18.5% to £11.9bn, in a flat housing market. £400bn £350bn £300bn £250bn £200bn £150bn 288 363 345 254 i g n d n e L e g a g t r o M s s o r G £100bn £50bn £0bn UK Finance Gross Mortgage Lending UK GAAP Group Pre-Exceptionals Pre-Tax Profit (2005-2011) IFRS Group Pre-Exceptionals Pre-Tax Profit (2012-2017) £16m £14m £12m £10m £8m £6m £4m £2m £0m G r o u p P r e - E x c e p t i o n a s P r e - T a x P r o fi t l 258 260 271 246 204 220 179 144 135 141 148 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: UK Finance and MAB accounts We continue to develop and invest in our technology solutions which are designed to enable our AR partners and advisers to compete at the highest level and to enable us to deliver what our customers increasingly expect. These developments will ease the process of obtaining the finance and protection necessary to complete arguably the most important purchase our customers make, and allow our advisers to continue to provide high quality advice throughout the life of the mortgage, which is the base of our plans for 2020 and beyond. People Core to the way we do business is our people, and their commitment to our high standards of customer service. I would like to thank them on behalf of the Board for their hard work and dedication, enabling MAB to deliver another year of strong growth and returns to shareholders. Reflective of this quality MAB received the ‘Best Mortgage Broker’ award at the Mortgage Strategy 2018 Awards. During the course of the year the management team was broadened with the creation and recruitment into two new roles of Proposition Director, Mortgages and Proposition Director, Protection. Board Appointments Since the year end I have been delighted to welcome Stephen Smith to the Board, as a Non-Executive Director. Stephen enjoyed a 23 year career with Legal and General Group Plc (“L&G”). As L&G’s Housing Director he was 02. responsible for digital projects in the mortgage and housing markets as well as their strategy in the insurance markets as they relate to mortgages and housing. Stephen will stand for election to the Board at the AGM in May. At the same time Richard Verdin will be standing down as a Non-Executive Director. Richard joined the board before the IPO in 2014 and we will miss his wise counsel, deep knowledge and experience of both the mortgage and insurance markets, and good humour. We wish him well as he continues his executive career. I am also delighted to welcome Ben Thompson1 as Managing Director of the Group with effect from 7 June 2018. His knowledge of and experience in our markets will add to the already high quality of the management team we have built at MAB. This is a new Board role within MAB that reflects the ambitions of the Group and the considerable opportunities that lie ahead. Ben was most recently Chief Executive Officer of ULS Technology plc, the provider of online B2B platforms for the UK conveyancing and financial intermediary markets. Prior to that he held senior positions at Legal & General Group Plc, where he ran their market-leading mortgage distribution business, as well as the banking division. 1 Subject to Regulatory Approval Mortgage Advice Bureau Annual Report 2017 Ordinary dividends Our dividend payout continues to be maintained at 90% whilst retaining a prudent excess over the regulatory capital required to be retained in the business. Our high cash conversion allows this return to shareholders whilst we continue to invest in growth, in our ARs, and in our technology. The Board is pleased to recommend the payment of a final dividend for the year of 11.9 pence per ordinary share. If approved, the final dividend will be paid on 22 May 2018 to shareholders on the register at the close of business on 27 April 2018. Outlook UK Finance’s estimate for gross mortgage lending in 2017 of £258bn implies market growth of 5% since 2016. UK Finance recently increased its estimate for gross mortgage lending in 2018 to £260bn, as well as publishing a first estimate for 2019 of £271bn. Gross mortgage lending is therefore expected to be relatively flat for 2018 and show a 4% increase for 2019. Adviser numbers have increased since the year end to 1,096 at 16 March 2018. We remain confident about our planned growth in adviser numbers in 2018 and beyond, both organically and from new ARs. We are confident that our strategy, driven by our customers and their changing expectations, will continue to drive growth in MAB’s market share year on year and deliver attractive returns to investors. The Board’s expectations for the year remain unchanged. Katherine Innes Ker Chairman 19 March 2018 First Time Buyer, London 03. Mortgage Advice Bureau Annual Report 2017 Strategic report Chief Executive’s review Introduction I am delighted to report another period of strong revenue and profit growth, with our market share increasing by 13% to 4.6% (2016: 4.1%) and our mortgage completions increasing by 18.5% to £11.9bn. Our fintech developments are progressing well and serve to enhance our high-quality business model. Our strategy remains focused on securing further growth through technology, lead generation and specialisation which will increase our market share and the number of mortgage completions in all market conditions, enabling us to continue to deliver strong returns to our investors. We are just over a year into our three-year plan that is focused on building solutions for the future; this will ensure MAB is able to maintain and build upon its leading position in the intermediary sector. We continue to invest in our core business model with our plans for 2020 and beyond designed to secure sustainable long-term growth whilst continuing to deliver strong results in the meantime. Peter Brodnicki Chief Executive Market environment Activity overall in the housing market has remained steady over the last year and was not noticeably affected by the general election in early June. The current house purchase market remains predominantly comprised of those moving home due to non-discretionary lifestyle factors, first time buyers and serious investors. The residential remortgage market has seen 14% growth by loan value on 2016, mostly ahead of the widely anticipated increase in the Bank of England base rate and with strong competition amongst lenders for new business. Despite increases in first time buyer transactions, housing transaction volumes overall have remained relatively flat as the number of amateur landlords has reduced. Mortgage transactions by both volume and value have increased by 4% and 5% respectively in 2017 driven by both remortgages and first time buyers. UK Finance predicts a relatively flat market for gross mortgage lending for 2018, with a 4% increase for 2019 as the Government continues to manage the UK’s exit from the EU. UK Finance also predict that housing transactions will remain flat over the next two years. Intermediary market share1 has remained broadly stable at just over 70%. MAB and its ARs growth is not directly reliant on increasing housing transactions, property prices, or intermediary market share as our continued year on year growth demonstrates. Intermediaries previously had limited access to the product switching market, where customers change products with their existing lender. However, the vast majority of lenders now provide intermediaries with full access to their switching products. The UK Finance industry data on gross mortgage lending currently excludes product switches with the same lender, but we expect UK Finance to confirm the size of the product switching market later on this year. Whilst it is still relatively early to assess the impact of this increased access to product switches, we expect product switches will typically deliver lower overall income per transaction compared to a remortgage, with this mostly offset by switches having a much lower dropout to completion. In addition, we expect product switches to deliver banked income in a shorter timeframe. Looking ahead, we expect client fees to become increasingly dependent upon the type and complexity of the mortgage transaction, as well as the delivery channel. This will lead to a broader spread of client fees on mortgage transactions, which, by their nature, are our lowest margin revenue stream. Recent RICS2 commentary on house prices suggests that on a national level, house prices have resumed a modest growth trajectory. However, the national figure conceals diverging trends across different parts of the UK, with London and, to a lesser extent, the South East, East Anglia and the North East experiencing pressure on prices, whereas house prices are quite firmly on an upward trend in other areas, including the North West, Northern Ireland and Wales. 04. 1 Excluding Buy-To-Let, where intermediaries have a higher market share, and product switches with the same lender. 2 Royal Institution of Chartered Surveyors. Mortgage Advice Bureau Annual Report 2017 We invested a further £0.2m in on-line conveyancing business, Sort Group Limited, towards the end of 2017, increasing our ownership from 33.25% to 43.25%. Every mortgage requires conveyancing and this further investment reflects the importance we place on technology in delivering a seamless and fully integrated end-to-end service for MAB’s customers across their entire purchase and remortgage processes. Our plans with Sort Group Limited include developing a far closer association between conveyancing and mortgages to provide a more seamless service for consumers as well as enhancing lead generation. Sort Group Limited has two main trading subsidiaries, Sort Limited and Sort Legal Limited. Whilst Sort Limited had a record year and continues to grow strongly, Sort Legal Limited is a major new initiative that brings ownership of legal services into Sort Group Limited, considerably increasing its distribution and capacity. As a result of this, Sort Limited results were offset by the start-up costs in Sort Legal Limited during 2017. Our joint venture in Australia, MAB Broker Services, is trading in line with our expectations. We continue to review progress and are in the early stages of implementation of a structure similar to our UK network partner initiative in Australia, having identified potential key partners. MAB continually looks for where the biggest growth sectors may be for intermediaries in the future. We believe that lending into retirement represents one of the clear growth opportunities and, as such, are in the early stages of building the foundations of solutions for this market; equity release being one of these solutions, a market which is currently dominated by specialist intermediaries. Delivering on our strategy n Fintech developments We continue developing our technology solutions which are at the centre of our plans to further enhance our unique business model. This will enable us to increase our market share and gross mortgage completions both by delivering what our customers will rightly start to expect and by enabling our AR partners and advisers to continue competing at the highest level. These fintech developments will play an ever-increasing role in customer acquisition and conversion, as well as retention, by allowing advisers to identify future engagement opportunities with their customers more accurately and efficiently. We are embracing fintech developments to enhance both face to face advice and our newer fast-growing and highly scalable telephony advice model. This will enable us to access a wider range of lead sources and provide greater choice to the consumer in how they research, receive advice and transact. As a result, we believe MAB’s proportion of telephone advice is likely to increase, complementing the face to face advice that remains highly valued by consumers. Both these channels will continue to be supported by increasingly streamlined digital processes. To allow us to capitalise fully upon our fintech developments we will consider investments in selected technology propositions where these can accelerate the development of our customer proposition and lead generation solutions. In addition, we expect our IT capital expenditure and IT costs to increase by a modest amount. n Driving income opportunities MAB is focused on securing long term sustainable growth and providing the best possible solutions and outcomes to its customers. Against the backdrop of a changing consumer landscape, we will look to increase the range of services offered to our customers by adopting new developments in technology and working closely with lenders. One of our key objectives is to maximise protection opportunities by achieving even higher levels and consistency of protection advice. To help facilitate this we were delighted to appoint Andy Walton to the new role of Proposition Director, Protection last year. Our plans for direct-to-consumer marketing are progressing well, and we expect to be in a controlled testing phase during Q2 2018. Whilst MAB will use a range of media to target as many channels as possible, we expect to see the degree of digital content grow in line with the increasingly digital solutions that will be brought to all stages of the client journey. 05. Mortgage Advice Bureau Annual Report 2017 Strategic report Chief Executive’s review continued n Summary Executive Board Appointments We are just over a year into our three-year plan that is focused on building solutions for the future; this will ensure MAB is able to maintain and build upon its leading position in the intermediary sector. We continue to invest in our core business model with our plans for 2020 and beyond designed to secure sustainable long-term growth whilst continuing to deliver strong results in the meantime. From a resource and technology perspective we have been focussed on being ready for GDPR for quite some time, and consider ourselves to be well positioned and prepared for GDPR. As technology allows us to have more consistent and targeted interaction with our customers and when artificial intelligence/machine learning allows us to identify how different consumer groups behave and the services they require, this will give us opportunities in the medium and long term to identify future new revenue sources and ensure continued and diversified growth. Having made a number of key strategic investments, MAB continues to consider further investments where there is a close alignment with our strategic objectives. Whilst our investments to date have been relatively modest in size, we will consider making larger investments to help accelerate the development of our customer proposition, lead generation and distribution. However, given our strong financial position and prospects for growth, we do not expect any such investment to adversely affect our payout ratio or the future growth in dividends. We are delighted to welcome Ben Thompson1 to the Board as Managing Director with effect from 7 June 2018. MAB’s strategy is very clear, and appointing Ben clearly reflects the level of ambition we have. This will be our seventh key appointment since IPO, and the first new role on the Executive Board. On Ben Thompson joining the Group, Peter Brodnicki will make a gift of 113,000 ordinary shares in the Group to Ben Thompson for nil consideration. On the same date, MAB will grant to Ben Thompson £370,000 of nominal cost options over ordinary shares of 0.1 pence each in the Group. These options will be granted under the Mortgage Advice Bureau Executive Share Option Plan. Feefo® Customer feedback is a core component in our strategy to ensure consumers receive a first class experience. In 2017 we partnered with the online review company Feefo, to give us feedback on the service our advisers provide. To date, we have received just under 2,000 reviews, achieving an average score of 4.8/5 and being accredited with the Gold Trusted Service award. 06. 1 Subject to Regulatory Approval Mortgage Advice Bureau Annual Report 2017 Our business model n Sector focus and specialisations MAB has developed bespoke support services for intermediary firms that operate in specialist sectors such as estate agency (including on-line), new build, buy-to-let, mortgage shops and telephone based mortgage advice. These specialist sectors are typically rich in generating new customers and sales, and offer intermediaries the greatest opportunity to grow their businesses. n Proprietary software Technology is an increasingly important differentiator in the intermediary sector, and unlike the vast majority of other networks, MAB has developed its technology in-house, providing the business with a major USP in terms of the customer and adviser experience. This is one of the reasons why advisers and intermediary firms decide to join MAB. MAB’s proprietary software MIDAS Pro, gives us the flexibility to deliver bespoke solutions in all our areas of specialisation, and is playing an increasingly important role in managing data to generate more leads, increasing adviser capacity/ efficiency, as well as cross sales, customer retention and repeat sales. The system enables MAB to respond quickly to changing consumer behaviour, most often driven by the convenience and simplicity of process that the latest technological advancements deliver. Significant upgrades have continued to take place during the last twelve months and will continue to be made as MAB embraces technology across every aspect of the business. In summary, our proprietary software enables us to be at the forefront in driving increasingly streamlined digital processes. This, combined with our existing expertise in face to face and telephony advice solutions, gives us a market leading position. MAB is directly authorised by the Financial Conduct Authority (“FCA”) and is one of the UK’s leading consumer mortgage brands and networks for mortgage intermediaries. MAB specialises in providing mortgage advice to customers, as well as advice on protection and general insurance products. MAB seeks to develop long term strategic relationships with its AR firms so that there is a close alignment of interests. Our proposition appeals most to multiple adviser firms with ambition to grow both their market share and business, with the MAB brand becoming an increasingly important USP that is adopted by a majority of our AR partners. Under the MAB model almost all the advisers are engaged directly by the ARs themselves. However, MAB carries out all the compliance supervision on behalf of the AR firms, ensuring greater control and helping to achieve consistently high standards of consumer outcomes. n Relationships The Group’s performance and value to our shareholders is influenced by other stakeholders, principally our employees, our ARs (and their advisers), our customers and our suppliers. Our approach to all these parties is founded on the principle of open and honest dialogue, based on a mutual understanding of needs and objectives. The Group has a long established broad geographic spread across the United Kingdom and expanded into Northern Ireland in 2015. Following completion of the disposal of MAB’s 49% stake in Capital Private Finance Limited during 2016, MAB anticipates that c.7% of the Group’s revenue is derived from the London market. Our relationship with our ARs is fundamental to the success of MAB, and is based on that of a strategic business partner, with both parties benefiting from any improvement in the ARs business performance. n Products available through the Group The Group’s network offers advice on over 12,000 residential and buy-to-let mortgage products from over 80 lenders, including those that are only available through mortgage intermediaries. The Group’s network also offers advice on a range of both protection and general insurance products, which are sourced from a panel of insurers. 07. Mortgage Advice Bureau Annual Report 2017 Strategic report Chief Executive’s review (continued) Business review of the year n Industry data and trends I am pleased to report further strong growth in revenue of 17% to £108.8m with profit before tax (and exceptional gain in 2016) rising by 16% to £14.5m. MAB’s gross mortgage lending increased by 18.5% to £11.9bn in 2017 (2016: £10.0bn) with the average number of Advisers increasing by 14%. MAB’s overall share of UK new mortgage lending increased by 13% to 4.6% (2016: 4.1%). Mortgage lending activity in 2017 grew by 5% to £258bn (2016: £246bn). UK Finance recently increased its estimate for gross mortgage lending for 2018 to £260bn, as well as publishing a first estimate for 2019 of £271bn; gross mortgage lending growth is therefore expected to be relatively flat for 2018 and show a 4% increase for 2019. We are confident that our strategy, driven by our customer’s future direction of travel, will continue to drive growth in our market share and mortgage completions year on year and deliver attractive returns to investors. UK property transactions by volume for 2017 were c.1% lower than in 2016. The spike in buy-to-let (“BTL”) transactions ahead of the stamp duty changes in April 2016 is evident in the graph below. Property transactions in the UK by volume s ’ 0 0 0 180 160 140 120 100 80 60 40 20 0 08. Jan 2016 Feb 2016 Mar 2016 Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 Sep 2016 Oct 2016 Nov 2016 Dec 2016 Jan 2017 Feb 2017 Mar 2017 Apr 2017 May 2017 Jun 2017 Jul 2017 Aug 2017 Sep 2017 Oct 2017 Nov 2017 Dec 2017 England Wales Scotland Northern Ireland Source: HM Revenue and Customs Mortgage Advice Bureau Annual Report 2017 UK property inflation of 4.8%1 and an increase in remortgage volumes of 11% and first time buyer transactions of 8% more than offset the slight reduction in UK property transactions and the 10% reduction in BTL transactions, leading to an increase in UK gross mortgage lending of 5% overall, as illustrated in the graph below. New mortgage lending by purpose of loan 30,000 25,000 20,000 m £ 15,000 10,000 5,000 0 Jan 2016 Feb 2016 Mar 2016 Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 Sep 2016 Oct 2016 Nov 2016 Dec 2016 Jan 2017 Feb 2017 Mar 2017 Apr 2017 May 2017 Jun 2017 Jul 2017 Aug 2017 Sep 2017 Oct 2017 Nov 2017 Dec 2017 Home-owner loans for house purchase BTL loans for re-mortgage Home-owner loans for remortgage Other, includes lifetime and further advances BTL loans for house purchase Source: UK Finance Regulated Mortgage Survey (excludes product transfers with the same lender), Bank of England, UK Finance BTL data (used for further analysis) UK gross mortgage lending in 2017 for home-owner purchases (including first time buyers) and remortgages grew by 9% and 14% respectively. UK gross mortgage lending in 2017 for BTL purchases and BTL remortgages reduced by 28% and 4% respectively. Just over 70% of UK mortgage transactions (excluding BTL, where intermediaries have a higher market share, and product switches with the same lender) were via an intermediary in 2017, which is broadly stable compared to 2016 and MAB expects intermediary market share to remain broadly stable going forward. 1 Land Registry House Price Index. 09. Mortgage Advice Bureau Annual Report 2017 Strategic report Financial review We measure the development, performance and position of our business against a number of key indicators: Revenue £108.8m Adjusted profit before tax Adjusted earnings per share £14.5m 23.8p £108.8m £14.5m £92.8m £12.5m 23.8p 20.3p £75.5m £56.6m £10.4m 17.2p £8.0m 12.7p 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 Total income from all revenue streams Strategy/objective Shareholder value and financial performance Profit before tax adjusted to add back exceptional or non-recurring items (none in 2015 or 2017) Strategy/objective Shareholder value and financial performance Total comprehensive income, attributable to equity holders of the Company, adjusted to add back non-recurring costs in 2014 and deduct exceptional gain in 2016, divided by the number of ordinary shares. Based on 50.5m shares to allow comparison in 2014. Strategy/objective Shareholder value and financial performance Gross profit margin Overheads % of revenue Adjusted profit before tax margin 23.8% 10.9% 13.4% 24.1% 24.2% 23.9% 23.8% 11.1% 11.6% 11.1% 10.9% 14.1% 13.8% 13.5% 13.4% 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 Gross profit generated as a proportion of revenue Group’s administrative expenses as a proportion of revenue Strategy/objective Managing gross margins Strategy/objective Operating efficiency Profit before tax, adjusted to add back non-recurring items in 2014 and deduct exceptional gain in 2016, as a proportion of revenue. Strategy/objective Shareholder value and financial performance Adviser numbers Capital adequacy (£m) Unrestricted cash balances 1,078 £9.5m £13.2m At 31.12.17 1,078 At 31.12.16 950 At 31.12.15 790 At 31.12.14 634 2014 2015 2016 2017 The average number of advisers in 2017 was 1,008 (2016: 888) Strategy/objective Increasing the scale of operations 10. £9.5m Excess Capital £7.8m Excess Capital £6.1m Excess Capital £3.2m Excess Capital £1.3m £1.7m £2.1m £2.5m FCA - 2013 FCA - 2014 FCA - 2015 FCA - 2016 Excess capital requirements over amounts required by the Financial Conduct Authority (FCA) Strategy/objective Financial stability £13.2m £10.8m £8.2m £5.3m 2014 2015 2016 2017 Bank balances available for use in operations Strategy/objective Financial stability Mortgage Advice Bureau Annual Report 2017 Strategic report Financial performance and future developments n Revenue Revenue increased by 17% to £108.8m (2016: £92.8m). A key driver of revenue is the average number of Advisers during the period. Our business model continues to attract forward thinking ARs who are seeking to expand and grow their own market share. Average adviser numbers increased by 14% to 1,008 (2016: 888) due to a combination of expansion by existing ARs and the recruitment of new ARs. The Group generates revenue from three core areas, summarised as follows: Income source 2017 £m Mortgage procuration fees 46.8 Protection and general insurance commission Client fees Other income Total 42.8 17.5 1.7 108.8 2016 £m 39.4 36.4 15.6 1.4 92.8 Increase 19% 18% 12% 22% 17% MAB’s revenue, in terms of proportion, is split as follows: Income source Mortgage procuration fees Protection and general insurance commission Client fees Other income Total 2017 43% 39% 16% 2% 2016 42% 39% 17% 2% 100% 100% All income sources continued to grow strongly with the average number of Advisers in the year increasing by 14%. We have seen an increase in average revenue per adviser of 3%, demonstrating the anticipated return to growth in productivity following the lull in activity in the housing and mortgage markets surrounding the EU referendum in 2016. With MAB’s gross mortgage completions increasing by 18.5% in 2017, mortgage procuration fees increased by 19%; and protection and general insurance commission grew by 18%. Client fees, which are not linked to the mortgage value, grew by 12%, reflecting an increase in remortgaging and product switching where fees are generally lower. Looking ahead, we expect to see a broader spread of client fees on mortgage transactions, which, by their nature, are our lowest margin revenue stream. n Gross profit margin Gross profit margin was broadly maintained at 23.8% (2016: 23.9%). The Group typically receives a slightly reduced margin as its existing ARs grow their revenue organically through increasing their Adviser numbers. In addition, larger new ARs typically join the Group on lower than average margins due to their existing scale, which therefore impacts upon the Group’s gross margin. Going forward, we expect to see some further erosion of gross profit margin due to the continued growth of our existing ARs and the addition of new larger ARs. n Overheads Overheads as a percentage of revenue were 10.9% (2016: 11.1%). This reduction in underlying overheads as a percentage of revenue demonstrates the scalable nature of the cost base. Certain costs, primarily those relating to compliance, which represent approximately 40% of our cost base, are closely correlated to the growth in the number of Advisers, due to the high standards we demand and the requirement to maintain regulatory spans of control. The remainder of MAB’s costs typically rise at a slower rate than revenue which will, in part, counter the expected erosion of gross margin as the business continues to grow. As a result of MAB’s IT plans, we expect our amortisation on IT capital expenditure and IT costs to increase by a modest amount. n Profit before tax and margin thereon Profit before tax rose by 16% to £14.5m (2016: £12.5m1) with the margin thereon being 13.4% (2016: 13.5%). n Net finance revenue Net finance revenues of £0.04m (2016: £0.07m) reflect continued low interest rates. n Taxation The effective rate of tax fell to 17.2% (2016: 18.4%), principally due to the tax deduction arising following the exercise of the first tranche of employee share options since IPO. Going forward we expect our effective tax rate to be marginally below the prevailing UK corporation tax rate subject to the continued availability of tax credits for MAB’s research and development expenditure on our continued development of MIDAS Pro, MAB’s proprietary software, and further tax deductions arising from the exercise of share options. n Earnings per share and dividend Adjusted earnings per share rose by 17% to 23.8 pence (2016: 20.3 pence1). The Board is pleased to propose a final dividend for the year ended 31 December 2017 of 11.9 pence per share (2016: 10.5 pence per share), amounting to a cash cost of £6.0m. Following payment of the dividend, the Group will continue to maintain significant surplus regulatory reserves. This proposed final dividend represents c. 90% of the Group’s post-tax profits for H2 2017 and reflects our ongoing intention to distribute excess capital. MAB requires c.10% of its profit after tax to fund increased regulatory capital and other regular capital expenditure. The record date for the final dividend is 27 April 2018 and the payment date is 22 May 2018. The ex-dividend date will be 26 April 2018. 1 Excludes the exceptional gain of £2.7m profit on disposal of 49% stake in Capital Private Finance Limited in 2016. 11. Mortgage Advice Bureau Annual Report 2017 Strategic report Financial performance and future developments (continued) n Cash flow and cash conversion The Group’s operations produce positive cash flow. This is reflected in the net cash inflow from operating activities of £14.5m (2016: £13.4m). Headline cash conversion1 was: Adjusted cash conversion2 was: 128% 120% 111% 109% The Group’s operations are capital light with our most significant ongoing capital investment being in computer equipment. Only £0.1m of capital expenditure on office and computer equipment was required during the period (2016: £0.3m). Group policy is not to provide company cars, and, other than on IT as indicated above, no significant capital expenditure is foreseen in the coming year. All development work on MIDAS Pro is treated as revenue expenditure. The Group had no bank borrowings at 31 December 2017 (2016: £nil) with unrestricted bank balances of £13.2m (31 December 2016: £10.8m). The Group has a regulatory capital requirement amounting to 2.5% of regulated revenue. At 31 December 2017 this regulatory capital requirement was £2.5m (31 December 2016: £2.1m), with the Group having a surplus of £9.5m. 2016 2017 2016 2017 1 Headline cash conversion is cash generated from operating activities adjusted for movements in non-trading items including loans to Appointed Representative firms (“ARs”) and loans to associates totalling £0.7m in 2017 (2016: £0.4m) as a percentage of operating profit. 2 Adjusted cash conversion is headline cash conversion adjusted for increases in restricted cash balances of £1.5m in 2017 (2016: £2.1m) and additional cash balances (2017: £nil; 2016: £nil) held due to the timing of the weekly AR commission payment in relation to the period end, as a percentage of operating profit. The following table demonstrates how cash generated from operations was applied: Unrestricted bank balances at the beginning of the year £10.8m Cash generated from operating activities excluding movements in restricted balances and dividends received from associates. £14.8m £0.5m Issue of shares £0.4m Dividends received from associates Dividends paid £10.7m Tax paid £2.2m Capital expenditure (including new website) £0.2m Investments in associates £0.2m The Group’s treasury strategy is to reduce risk by spreading deposits over a number of institutions rather than to seek marginal improvements in returns. £13.2m Unrestricted bank balances at the end of the year 12. Mortgage Advice Bureau Annual Report 2017 n Forward looking statements The strategic report is prepared for the members of MAB and should not be relied upon by any other party for any other purpose. Where the report contains forward- looking statements these are made by the Directors in good faith based on the information available to them at the time of their approval of this report. Consequently, such statements should be treated with caution due to the inherent uncertainties, including both economic and business risks underlying such forward looking statements and information. The Group undertakes no obligation to update these forward looking statements. Homemovers, Wirral 13. Mortgage Advice Bureau Annual Report 2017 Strategic report Principal risks and uncertainties There are a number of potential risks which could hinder the implementation of our strategy and have a material impact on our long term performance. These arise from internal or external events, acts or omissions which could pose a threat to the Group. The Group maintains a risk register, and this is reviewed by the Risk and Compliance Committee on a regular basis. The table below outlines the most significant risk factors for the business. The risk factors mentioned below do not purport to be exhaustive as there may be additional risks that materialise over time that the Group has not yet identified or deemed to have a potentially material adverse effect on the business: Risk category Risk description Mitigating factors/commentary Changing markets The Group operates in a highly competitive environment with competition from other intermediaries and direct lenders, and in an economic environment which may change as the UK Government manages the exit of the UK from the EU. The Group aims to be at the forefront of providing advice to consumers, leveraging its proprietary MIDAS Pro technology, by offering its customers the choice of how they want to research, receive advice and transact. Despite increases in first time buyer transactions, housing transaction volumes overall have remained relatively flat over the last year as the number of amateur landlords has reduced. Mortgage transactions by both volume and value have increased by 4% and 5% respectively in 2017 driven by both remortgages and first time buyers. UK Finance predicts a relatively flat market for gross mortgage lending for 2018, with a 4% increase for 2019 as the Government continues to manage the UK’s exit from the EU. UK Finance also predict that housing transactions will remain flat over the next two years. The Group aims to grow its market share and mortgage completions regardless of market conditions. Availability of mortgage lending The Group is exposed to a significant reduction in the availability of mortgage lending. MAB’s gross mortgage completions increased to £11.9bn in 2017. UK Finance forecast that gross mortgage lending will increase to £260bn in 2018 and £271bn in 2019, both years being considerably lower than the peak of £363bn in 2007. Regulatory compliance Failure to comply with regulatory requirements could result in reputational and financial damage, including withdrawal of authorisation by the Financial Conduct Authority. Whilst almost all advisers are employed or engaged by ARs (rather than by the Group directly), all compliance monitoring and supervision is undertaken by the Group’s own specialist compliance team. The quality of consumer outcomes is central to our compliance strategy. The Risk and Compliance Committee reviews the adequacy and effectiveness of the Group’s internal controls, compliance and risk management systems to ensure the Group is fulfilling its regulatory responsibilities. Infrastructure and IT systems The Group’s performance would be adversely impacted if the availability and security of the Group’s proprietary MIDAS system, and other IT infrastructure was compromised. There has been significant investment in recent years into the IT infrastructure. All the Group’s servers are hosted in a specialist data centre with appropriate security and systems resilience. A copy of the MIDAS database is also held at another location. 14. Mortgage Advice Bureau Annual Report 2017 Risk category Risk description Mitigating factors/commentary Appointed Representative (AR) model The Group has full regulatory responsibility for the actions of its network of ARs, who employ or engage the advisers. The Group has robust compliance procedures as set out in “Regulatory Compliance” on the opposite page. Whilst the Group has ultimate regulatory responsibility, the commercial liability (eg. complaint redress) is with the ARs. Concentration The Group could be exposed to a significant geographic concentration, or overexposure to particular ARs or suppliers. The Group has broad geographical coverage in the mainland UK, and widened this to Northern Ireland in 2015. A small proportion of the Group’s revenue relates to the London market. The Group has no significant exposure to any single AR. Typically ARs enter five year contracts with the Group, and the renewal dates for these contracts are fairly evenly spread between calendar years. The Group enjoys strong relationships with the insurers on its panel, as well as with the major lenders in the UK. Key personnel The Group could lose some key employees. Remuneration is regularly reviewed and there are share based incentive plans for all employees in which the majority of the Group’s employees participate. The Group has a very successful track record of retaining senior employees. Litigation and complaints The Group could be subject to litigation or complaints not covered by insurance. The Group has not been subject to any actual or threatened material litigation against it. Complaint levels are low compared to transactional volumes, and the redress from those complaints are borne by the ARs. PI insurance is in place as required by the FCA. Liquidity risk, including bank default One or more banks could fail. The Group has a highly cash generative business model so holds substantial amounts of cash on deposit with banks. The Group spreads its cash balances around a number of banking institutions. n Approval The strategic report in its entirety has been approved by the Board of Directors and signed on its behalf by: Peter Brodnicki Chief Executive 19 March 2018 15. Mortgage Advice Bureau Annual Report 2017 Governance Board of Directors The Board comprises three Executive and four Non-Executive Directors. A short biography of each Director is set out below: Katherine Innes Ker, Aged 57 Non-Executive Chairman Peter Brodnicki, Aged 55 Chief Executive Katherine has extensive executive and non-executive director experience. She is senior independent director of The Go- Ahead Group plc and Non Executive Director of Forterra plc and of Gigaclear plc. Her experience as a chairman includes The Television Corporation, Shed Media plc, Victoria Carpets plc and Sovereign Housing Association and she was deputy chairman of Marine Farms S.A. She has been a non-executive director of, amongst others, St Modwen Properties plc, Taylor Wimpey plc, Taylor Woodrow plc, Fibernet plc, Williams Lea plc, S&U plc and Gyrus Group plc. She is a member of the Management Board of the University of Oxford Institute of Human Rights, and an independent director of the Remuneration Committee, Balliol College, Oxford. Peter was one of the founders of MAB in 2000. He has over 30 years’ mortgage and financial services experience. Immediately prior to founding MAB, he was with Legal & General for five years where he held the position of Head of the Estate Agency Network, and also latterly as Recruitment Director. Peter’s experience prior to Legal & General includes sales and management roles at Albany Life, before which Peter was at John Charcol. Peter has received a number of industry awards in recent years, including Business Leader of the Year (three consecutive years), Mortgage Strategist of the Year (two consecutive years), and the Industry’s Most Influential Person. David Preece, Aged 57 Chief Operating Officer David joined MAB in 2004 as Operations Director. He has 40 years of mortgage and financial services experience, and qualified as an Associate of the Chartered Institute of Bankers. He had a 23 year career at NatWest, including a period as Senior Manager at NatWest Group Financial Control. He moved to a senior management role within the NatWest mortgage business where he spent six years, and during such time was promoted to Head of Mortgage Operations. David joined the Britannia Building Society in 2000 as Head of Membership Services, responsible for Britannia’s mortgage, savings and general insurance operations, and was appointed a director of a number of Britannia subsidiaries prior to his departure in late 2003. Lucy Tilley, Aged 46 Finance Director and Company Secretary Lucy joined MAB in May 2015 as Finance Director. She qualified as a Chartered Accountant in 1996 with KPMG. Prior to joining MAB, Lucy was most recently a director in the corporate broking team at Canaccord Genuity Limited and was part of the team that worked on MAB’s admission to AIM in November 2014. At Canaccord Genuity Limited she advised numerous quoted and unquoted companies predominantly in the financial services sector. Nathan Imlach, Aged 48 Senior Independent Non-Executive Director Richard Verdin, Aged 53 Independent Non-Executive Director Stephen Smith, Aged 60 Independent Non-Executive Director Nathan is Chief Financial Officer of AIM listed Mattioli Woods plc. He qualified as a Chartered Accountant with Ernst & Young, specialising in providing mergers and acquisitions advice to a broad range of quoted and unquoted clients in the UK and abroad. He is a Fellow of the Chartered Institute for Securities & Investment and holds the Corporate Finance qualification from the Institute of Chartered Accountants in England and Wales. Nathan is a director of Custodian Capital and Company Secretary to Custodian REIT plc. Nathan is also a trustee of Leicester Grammar School. 16. Richard is Managing Director of RGAx EMEA, the innovation accelerator for the global life & health reinsurer RGA. He has over 25 years’ experience in financial services, primarily in the life insurance sector. He has held senior management positions at Legal & General and spent six years as an executive director at Direct Life, one of the UK’s leading life insurance brokers. For five years until 2013, he was Protection Director at Aviva UK Life, where he was also latterly a non-executive director of Aviva’s life and pensions business in Ireland. Richard has previously been Chairman of the ABI Protection Committee and chaired the Sergeant Review HMT/ABI Simple Products Protection Working Group. Stephen Smith has worked in the financial services market for nearly 40 years and was most recently responsible for Legal & General’s award winning Mortgage Club, estate agency and surveying operations, before retiring at the end of 2017. He is a former deputy chairman of The Association of Mortgage Intermediaries and served on its board for 14 years. He is a Fellow of the Chartered Institute of Bankers and he holds a number of non-executive directorships with companies operating in the mortgage and surveying markets. Mortgage Advice Bureau Annual Report 2017 Governance Company information Company: Directors: Mortgage Advice Bureau (Holdings) plc Katherine Innes Ker Peter Brodnicki David Preece Lucy Tilley Nathan Imlach Richard Verdin Stephen Smith Non-Executive Chairman Chief Executive Chief Operating Officer Finance Director Senior Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Company secretary: Lucy Tilley Registered office: Capital House Pride Place Pride Park Derby DE24 8QR Registered number: 04131569 Nominated adviser and joint broker: Joint broker: Auditor: Solicitors: Principal bankers: Registrars: Zeus Capital Limited 82 Kings Street Manchester M2 4WQ Canaccord Genuity Limited 88 Wood Street London EC2V 7QR BDO LLP 55 Baker Street London W1U 7EU Norton Rose Fulbright LLP 3 More London Riverside London SE1 2AQ NatWest Bank plc Cumberland Place Nottingham NG1 7ZS Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA 17. Mortgage Advice Bureau Annual Report 2017 n Share capital Mortgage Advice Bureau (Holdings) plc is a public limited company incorporated in England and Wales and its shares are quoted on the AIM market of the London Stock Exchange plc. The Company’s issued share capital during the year and as at 31 December 2017 is shown in note 21. Save as agreed at the Annual General Meeting of the shareholders, the ordinary shares have pre-emption rights in respect of any future issues of ordinary shares to the extent conferred by section 561 of the Companies Act 2006. n Rule 9 of the City Code Under rule 9 of the City Code, where any person acquires an interest in shares which carry 30% or more of the voting rights that person is normally required to make a general offer to all remaining shareholders of the Company to acquire their shares. At 31 December 2017 Peter Brodnicki held 27.9% of the Share Capital. In addition, the Panel on Takeovers and Mergers (“the Panel”) considers two of the Executive Directors (Peter Brodnicki and David Preece) as persons acting in concert for the purposes of the City Code. At 31 December 2017 the Concert Party (as now constituted) held ordinary shares, in aggregate, representing 31.0% of the Share Capital. The Panel has waived the requirement for Peter Brodnicki and related parties to make a general offer to the shareholders of the Company. Except with the consent of the Panel none of the Concert Party (or their connected persons) will individually be able to acquire any additional interests in ordinary shares without triggering an obligation under Rule 9 of the City Code, other than the issue of shares to members of this Concert Party in relation to the options granted at IPO under the option scheme as disclosed in the Directors’ Remuneration Report on pages 22 to 24, and which has been approved by the Panel. Governance Directors’ report The Directors have pleasure in presenting their report together with the financial statements for the year ended 31 December 2017. For the purposes of this report, the expression “Company” means Mortgage Advice Bureau (Holdings) plc and the expression “Group” means the Company and its subsidiaries. n Results and business review The principal activity of the Group continues to be the provision of financial services, in particular the provision of mortgage advice and advice on protection and general insurance products. The principal activity of the Company is that of a non-trading holding company. The review of the business, operations, principal risks and outlook are included in the Strategic report on pages 01 to 15. The financial statements set out the results of the Group on pages 30 to 61. The Group has achieved further significant growth both in terms of revenues and underlying profitability. Group revenues increased by 17% to £108.8m. Profit before tax amounted to £14.5m, a rise of 16%1. Group profit for the year after taxation amounted to £12.0m, up 18%1 on the previous year. Income tax expense for the year was £2.5m an effective rate of 17.2% (2016: 18.4%1). n Dividends The Directors recommend a final dividend of 11.9 pence per share, totalling £6.0m. This represents a payout of 90% of H2 2017 profit after tax. This has not been included within the Group financial statements as no obligation existed at 31 December 2017. If approved, the final dividend will be paid on 22 May 2018 to ordinary shareholders whose names are on the register on 27 April 2018. Dividends paid during the year amounted to £10.7m and were in respect of the final dividend for the year ended 31 December 2016, the second special dividend following the disposal of MAB’s 49% stake in Capital Private Finance Limited and the interim dividend for the year ended 31 December 2017. n Going concern The Directors believe the Group is well placed to manage its business risks successfully. The Group’s forecasts and projections show that the Group should continue to be cash generative and is expected to continue to have no borrowing requirement. Accordingly, the Directors continue to adopt the going concern basis for the preparation of the financial statements. n Events after the reporting date There are no events after the reporting date. n Directors’ indemnity All Directors and Officers of the Company have the benefit of the indemnity provision contained in the Company’s Articles of Association and have received a deed of indemnity from the Company. The Group also purchased and maintained throughout the financial year Directors’ and Officers’ liability insurance in respect of itself and its Directors and Officers, although no cover exists in the event Directors or Officers are found to have acted fraudulently or dishonestly. 1 Comparative figures used in these calculations exclude the exceptional gain of £2.7m in 2016 on the disposal of Capital Private Finance Limited 18. Mortgage Advice Bureau Annual Report 2017 n Substantial shareholdings n Political donations At 31 December 2017, the Company had been notified of the following interests representing 3% or more of its issued share capital: The Group has made no political donations during the year (2016: £nil). Shareholder Number of ordinary Percentage holding shares 14,192,160 Peter Brodnicki Liontrust Investment Partners 9,211,644 JP Morgan Asset Management 4,993,965 3,701,250 Canaccord Genuity Group 2,855,509 Old Mutual Plc 2,517,508 Investec 2,264,922 Majedie 1,563,862 David Preece 27.94% 18.14% 9.83% 7.29% 5.62% 4.96% 4.46% 3.08% n Directors’ interests Directors’ emoluments, beneficial interests in the shares of the Company and their options to acquire shares are disclosed in the Directors’ Remuneration Report. During the period covered by this report, no Director had a material interest in a contract to which the Company or any of its subsidiaries was a party (other than their own service contract), requiring disclosure under the Companies Act 2006. There are procedures in place to deal with any Directors’ conflicts of interest arising under section 175 of the Companies Act 2006 and such procedures have operated effectively. n Related party transactions Details of related party transactions are given in note 24. n Employee involvement The Group continues to involve its staff in the future development of the business. Information is provided to employees through briefing sessions, the Group’s website and its intranet, “MAB Online”. The Group operates a Group Stakeholder Pension plan available to all employees and contributes to the pension schemes of Directors and employees. The Group operates an Enterprise Management Incentive scheme, Unapproved Incentive Plan and Share Incentive Plan, details of which are given in the Directors’ Remuneration Report and the financial statements. The Mortgage Advice Bureau (Holdings) plc Share Incentive Plan (“the SIP”) enables employees to buy shares in the Company at an effective discount to the Stock Exchange price by having an amount deducted from pre-tax salary each month. In addition, the Company grants participating employees matching shares. The Group is committed to the principle of equal opportunity in employment, regardless of a person’s race, creed, colour, nationality, gender, age, marital status, sexual orientation, religion or disability. Employment policies are fair, equitable and consistent with the skills and abilities of the employees and the needs of the business. n Environmental The Board believes in good environmental practices, such as the recycling of all waste from the Group’s premises and has light sensors installed within its premises. Since the acquisition of the freehold of Capital House, the Group’s head office, the Group has been improving the environmental impact of the building. However, due to the nature of its business generally, the Group does not have a significant environmental impact. n Annual General Meeting The Annual General Meeting (“AGM”) of the Company will be held on 16 May 2018. The Notice of Meeting is included with this document and contains further information on the ordinary business to be proposed at the meeting. n Principal risks and uncertainties The Directors’ view of the principal risks and uncertainties facing the business is summarised in the Strategic report on pages 14 and 15. A full review of financial risk management can be seen on pages 54 and 55. n Corporate governance A full review of Corporate governance appears on pages 20 and 21. n Auditors BDO LLP, who were appointed as auditors during 2014, have confirmed their willingness to continue in office as auditor in accordance with Section 489 of the Companies Act 2006. The Group is satisfied that BDO LLP are independent and there are adequate safeguards in place to safeguard their objectivity. A resolution to re-appoint BDO as the Company’s auditor will be proposed at the AGM on 16 May 2018. n Directors’ statement as to disclosure of information to the auditor All of the Directors who were members of the Board at the time of approving the Directors’ Report have taken all the steps they might reasonably be expected to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. To the best of each Director’s knowledge and belief, there is no relevant audit information of which the Company’s auditor is unaware. On behalf of the Board Lucy Tilley Finance Director 19 March 2018 19. Mortgage Advice Bureau Annual Report 2017 Governance Corporate governance n Introduction n Audit Committee The Board is committed to achieving high standards of corporate governance, integrity and business ethics. Under the AIM Rules the Group is not required to comply with the provisions of the new edition of UK Corporate Governance Code (formerly the Combined Code) issued by the Financial Reporting Council in September 2016 (“the Code”). The Code has not been applied in full, however, the Board has taken into consideration the Guidance for Smaller Quoted Companies on the Code produced by the Quoted Companies Alliance, and taken steps to apply the principles of the Code in so far as it can be applied practically, given the size of the Group and the nature of its operations. n Board composition and independence The Board of Directors currently comprises three Executive Directors and four independent Non-Executive Directors. Richard Verdin will retire from his role as an independent Non-Executive Director of the Group and member of the Audit, Remuneration, Nomination and Risk and Compliance Committees with effect from the conclusion of the Group’s Annual General Meeting to be held on 16 May 2018. Following Richard Verdin’s retirement, Stephen Smith will Chair the Risk and Compliance Committee. Their biographies on page 14 demonstrate a range of experience which is key to the success of the Group. The Non-Executive Directors are considered by the Board to be independent of management and free from any relationship which might materially interfere with the exercise of independent judgement. The Board does not consider the Non-Executive Directors’ shareholdings to impinge on their independence. The Non-Executive Directors provide a strong independent element to the Board and bring experience at a senior level of business operations and strategy. All Directors have access to the Company Secretary, Lucy Tilley, who is responsible for ensuring that Board procedures and applicable rules and regulations are observed. The Board meets regularly throughout the year as well as on an ad hoc basis, as required by time critical business needs. n Operation of the Board The Board is responsible to shareholders for the proper management of the Group and has a formal schedule of matters specifically reserved to it for decision. These include strategic planning, business acquisitions and disposals and authorisation of major capital expenditure, setting policies for the conduct of business and approval of budgets and financial statements. Other matters are delegated to management, supported by policies for reporting to the Board. The Company maintains appropriate insurance cover in respect of legal action against the Company’s Directors. n Board committees The Board has delegated authority to four committees. The Chairman of each committee provides a report of any meeting of that committee at the next Board meeting. The Chairman of each committee is present at the Annual General Meeting to answer questions from shareholders. 20. The Audit Committee comprises Nathan Imlach (Chairman), Katherine Innes Ker, Stephen Smith and Richard Verdin. Nathan Imlach is a Chartered Accountant. The Committee meets together with the Finance Director, Lucy Tilley, not less than twice a year. The Committee is responsible for ensuring the financial performance of the Group is properly reported on and monitored. The Committee considers the appointment of, and fees payable to, the external auditor and discusses with them the scope of the annual audit. The Committee also reviews the external auditor’s management letter and detailed presentations are made to the Committee by the Company’s auditor at least once a year. An analysis of fees payable to the external audit firm in respect of audit and non-audit services during the year is set out in note 5 to the financial statements. The Company is satisfied the external auditor remains independent in the discharge of their audit responsibilities. The Committee reviews the Interim Report and annual financial statements for compliance with accounting standards, statutory obligations and the requirements of the AIM Rules. The Committee also reviews the effectiveness of the internal controls of the Group. n Remuneration Committee Further information about the Committee and the Group’s remuneration policy is as set out on pages 22 to 24 in the Directors’ Remuneration Report. The members of the Remuneration Committee have no personal interest in the outcome of their decisions and seek to serve the interests of shareholders to ensure the continuing success of the Company. n Nominations Committee The Nominations Committee comprises Katherine Innes Ker (Chairman), Nathan Imlach, Stephen Smith, Richard Verdin and Peter Brodnicki. The Committee is responsible for reviewing the size, structure and composition of the Board, establishing appropriate succession plans for the Executive Directors and other Senior Executives in the Group and for the nomination of candidates to fill Board vacancies where required. The Committee works in close consultation with the Executive Directors, with its main priorities being Board structure and management succession. n Risk and Compliance Committee The Risk and Compliance Committee comprises Richard Verdin (Chairman), Nathan Imlach, Katherine Innes Ker, Stephen Smith and David Preece. Following Richard Verdin’s retirement, Stephen Smith will Chair the Risk and Compliance Committee. The Committee meets with the Group’s Compliance Director. The Committee’s principal terms of reference are to review the adequacy and effectiveness of the Group’s internal controls, compliance and risk management systems and to ensure the Group is fulfilling its regulatory responsibilities. Mortgage Advice Bureau Annual Report 2017 n Communications with shareholders The Board is committed to maintaining an ongoing dialogue with the Company’s shareholders. The principal methods of communication with private investors remain the Annual Report and financial statements, the Interim Report, the AGM and the Group’s website (www.mortgageadvicebureau.com/ investor-relations). It is intended that all Directors will attend each AGM and shareholders will be given the opportunity to ask questions at the AGM on 16 May 2018. In addition, the Chief Executive, Chief Operating Officer and Finance Director welcome dialogue with individual institutional shareholders to understand their views and feed these back to the Board. General presentations are also given to analysts and investors covering the annual and interim results. n Internal control and risk management The Board has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness. Such systems are designed to manage rather than eliminate risks and can only provide reasonable not absolute assurance against material misstatement or loss. The Directors believe that the Group has internal control procedures in place appropriate to the size and nature of the business. The Board routinely reviews the effectiveness of the system of internal control and risk management to ensure controls react to changes in the nature of the Group’s operations. There are two Board committees that review various risks; the Audit Committee and the Risk and Compliance Committee, further details of these committees are described on page 20. The Group maintains appropriate insurance cover and reviews the adequacy of the cover regularly, in conjunction with the Group’s insurance brokers. On behalf of the Board Lucy Tilley Finance Director 19 March 2018 21. Mortgage Advice Bureau Annual Report 2017 Governance Directors’ remuneration report n Remuneration Committee n Long term incentives The Remuneration Committee comprises Katherine Innes Ker (Chairman), Nathan Imlach, and Richard Verdin. It is responsible for determining and reviewing the Group’s policy on executive remuneration and other benefits and terms of employment, including performance related bonuses and share options. The Committee also administers the operation of the share option and share incentive schemes established by the Company, including the Appointed Representative option scheme. n Remuneration policy The policy of the Remuneration Committee is to set basic salaries at a level which is competitive with that of comparable businesses, with a substantial proportion of the overall remuneration package being linked to performance through participation in short term and long term incentive schemes. The objective of the overall remuneration package is to be sufficiently competitive to attract, retain and motivate high quality executives capable of achieving the Group’s objectives and thereby enhance shareholder value. During the year the Committee has taken advice from Aon Hewitt Limited (“Aon Hewitt”), a trading division of Aon plc. Aon Hewitt is a member of the Remuneration Consultants Group. Aon Hewitt provides guidance on remuneration and the share incentive plans, and does not provide any other services to the Group. n Salaries, fees and benefits Salaries for Executive Directors are determined by the Remuneration Committee and are reviewed annually, taking into account individual performance over the previous twelve months and external benchmark salary data. The Executive Directors also receive other customary benefits such as holidays, pension contributions, death in service insurance and sick pay. Fees for the Non-Executive Directors are determined by the Board, having regard to fees paid to non-executive directors in other UK quoted companies of a similar scale, the time commitment and responsibilities of the role. No options are held by the Non-Executive Directors. Individuals cannot vote on their own remuneration. n Short term incentive arrangements For the year ended 31 December 2017, the short term incentive arrangements for the Executive Directors’ comprised a bonus based on actual profit achieved compared to the highest previous profit achieved by the Group, a “high watermark scheme”. The maximum award as a percentage of salary under the scheme is 200% of basic salary for any individual Executive Director. The Group has adopted the Mortgage Advice Bureau Executive Option Plan to incentivise certain of its senior employees and directors. Where possible, and to the limits applied by the legislation, these schemes benefit from the tax advantages under an Enterprise Management Initiative (“EMI”) scheme. If they are not qualifying options (for example, because they exceed the statutory limit at the date of grant) then they will take effect as unapproved options which do not have the same tax advantages as an EMI scheme. On 19 April 2017, 624,599 options over ordinary shares of 0.1 pence each in the Company were granted to the Executive Directors and senior executives of MAB under the equity- settled Mortgage Advice Bureau Executive Share Option Plan, representing 1.2% of the current issued share capital. Exercise of these options is subject to the achievement of performance conditions based on total shareholder return and earnings per share criteria. Subject to achievement of the performance conditions, these options will be exercisable three years from the date of grant. The exercise price for these options is 430.83 pence, being equal to the average of the last three business days’ closing price for the ordinary shares of the Company prior to the date of grant. On 10 July 2017, 60,324 options over ordinary shares of 0.1 pence each in the Company were granted to two senior executives of MAB under the equity-settled Mortgage Advice Bureau Executive Share Option Plan, representing 0.1% of the current issued share capital. Exercise of these options is subject to the achievement of performance conditions based on total shareholder return and earnings per share criteria. Subject to achievement of the performance conditions, these options will be exercisable three years from the date of grant. The exercise price for these options is 414.42 pence, being equal to the average of the last three business days’ closing price for the ordinary shares of the Company prior to the date of grant. n Service contracts Executive Directors have contracts of employment that are subject to notice periods of twelve months for Peter Brodnicki, and six months for David Preece and Lucy Tilley. The Non-Executive Directors were appointed for an initial period of 36 months and are subject to a three month notice period. The remuneration of Non-Executive Directors takes the form of a base fee. 22. Mortgage Advice Bureau Annual Report 2017 n Directors’ emoluments and pension contributions Directors’ remuneration payable in respect of the year ended 31 December 2017 was as follows: Basic salary and fees £ Performance related short term incentives £ Director Pension contributions £ Benefits1 £ Total emoluments 2017 £ 2016 £ Katherine Innes Ker Peter Brodnicki2 David Preece2 Lucy Tilley Nathan Imlach Richard Verdin 71,500 352,000 173,800 205,000 37,000 32,000 – 246,738 219,322 82,246 – – – – – 20,500 – – – – – – – – 71,500 598,738 393,122 307,746 37,000 32,000 69,500 619,873 528,387 301,958 36,000 31,000 Notes: 1 The benefit package of each Executive Director includes the provision of life assurance under a Group scheme. 2 Received additional basic salary in lieu of pension contributions equivalent to 10% of basic salary since the lifetime allowance had been reached. n Directors’ interests in shares As at 31 December 2017, the interest of the Directors in the Ordinary shares of the Company were: Director Katherine Innes Ker Peter Brodnicki David Preece Lucy Tilley Nathan Imlach Richard Verdin Ordinary shares of 0.1p 12,382 14,192,160 1,563,862 15,914 26,407 22,211 Notes: Directors’ shareholdings include any shareholdings of trusts or family members deemed to be connected persons. Stephen Smith was appointed to the Board with effect from 24 January 2018. % 0.02 27.94 3.08 0.03 0.05 0.04 23. Mortgage Advice Bureau Annual Report 2017 Governance Directors’ remuneration report (continued) n Interest in options The Group operates the Mortgage Advice Bureau Executive Option Plan by which certain of the Executive Directors and other Senior Executives are able to subscribe for ordinary shares in the Company. All options were measured at fair value at the date of grant. The interests of the Directors were as follows: Director Peter Brodnicki (b) (c) (e) David Preece Lucy Tilley (a) (b) (c) (e) (a) (c) (d) (e) Exercise At 31 Dec 2016 No. price £ Granted Exercised during the year No. during the year No. Forfeited during the year No. At 31 Dec 2017 No. 1.60 3.5775 4.3083 325,000 173,305 – – – 148,550 81,250 – – 498,305 148,550 81,250 1.60 1.60 3.5775 4.3083 156,249 118,751 142,557 – – – – 73,346 39,062 29,687 – – 417,557 73,346 68,749 2.19 3.5775 3.5775 4.3083 75,342 82,459 23,759 – – – – 95,165 18,836 – – – 181,560 95,165 18,836 – – – – – – – – – – – – – – 243,750 173,305 148,550 565,605 117,187 89,064 142,557 73,346 422,154 56,506 82,459 23,759 95,165 257,889 Notes: (a) Approved Option scheme – first date exercisable is 31 March 2017, last date exercisable is 11 November 2022 or in the case of Lucy Tilley, 19 May 2023. (b) Unapproved Option scheme – first date exercisable is 31 March 2017, last date exercisable is 11 November 2022. (c) Unapproved Option scheme – first date exercisable is 04 May 2019, last date exercisable is 3 May 2024. (d) Approved Option scheme – first date exercisable is 04 May 2019, last date exercisable is 3 May 2024. (e) Unapproved Option scheme - first date exercisable is 19 April 2020, last date exercisable is 18 April 2025. Note 26 to the financial statements contains details of all options granted to directors and employees as at 31 December 2017. All of the share options were granted for nil consideration. The mid-market closing price of the Company’s ordinary shares at 31 December 2017 was 555 pence and the range during the financial year was 340 pence to 560 pence. None of the Directors had an interest in any contract of significance in relation to the business of the Company or its subsidiaries at any time during the financial year. On behalf of the Board Katherine Innes Ker Chairman of the Remuneration Committee 19 March 2018 24. Mortgage Advice Bureau Annual Report 2017 Governance Directors’ responsibilities for the financial statements The Directors are responsible for preparing the Directors’ report, strategic report and the financial statements in accordance with applicable law and regulations. UK company law requires the Directors to prepare Group and Company financial statements for each financial year. The Directors are required by the AIM Rules of the London Stock Exchange to prepare Group financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and have elected to prepare the Company financial statements in accordance with IFRS as adopted by the EU. Under company law 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 the Company and of the profit or loss of the Group for that period. In preparing each of the Group and Company financial statements, the Directors are required to: • Select suitable accounting policies and then apply them consistently; • Make judgements and estimates that are reasonable and prudent; • State whether they have been prepared in accordance with IFRSs adopted by the EU; and • Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for ensuring the annual report and the financial statements are made available on a website. The maintenance and integrity of the corporate and financial information included on the Group’s website is the responsibility of the Directors. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 25. Mortgage Advice Bureau Annual Report 2017 Governance Independent auditor’s report to the members of Mortgage Advice Bureau (Holdings) plc Opinion Basis for opinion We have audited the financial statements of Mortgage Advice Bureau (Holdings) plc (the “parent company”) and its subsidiaries (the ‘Group’) for the year ended 31 December 2017 which comprise the consolidated statement of comprehensive income, the consolidated statement of financial position and the company statement of financial position, the consolidated statement of changes in equity and the company statement of changes in equity, the consolidated statement of cash flows and the notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard in the United Kingdom and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice). In our opinion: • the financial statements give a true and fair view of the state of the Group’s and the parent company’s affairs as at 31 December 2017 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company’s financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusion relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: • the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or • the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 26. Mortgage Advice Bureau Annual Report 2017 Key audit matters Key audit matter description Audit response Revenue recognition (Note 3) Revenue comprises of commissions, client fees and other income. We responded to this risk by performing the following procedures: • We have checked the effectiveness of the reconciliation Clawback provision (Note 19) between revenue and cash banked. • We have checked on a sample basis that the third party reports have been properly accounted for in order to verify the completeness of revenue. • Using third party reports we have recalculated the majority of the mortgage related fees independently. • We have performed cut-off tests by verifying back to third party reports. No material misstatements were detected as a result of our testing. • We have reviewed the methodology applied by management in determining the clawback provision. • Lapse rates, recoveries and unearned indemnity commission values used in calculating the clawback provision have been agreed to system reports, third party data and historical data. • Where management applied judgements, we have performed a sensitivity analysis. No material misstatements were detected as a result of our testing. Revenue is processed in the operating system upon receipt of third party reports once transactions have been exchanged or completed and is then accounted for when it is matched with cash received in the bank on a monthly basis. Revenue recognition is considered to be a significant audit risk as it is a key driver of return to investors and there is a risk that there could be misstatement or omission of amounts recorded in the system. The clawback provision relates to the estimated value of repaying commission received up front on life assurance policies that may lapse in a period of up to four years following inception of the policies. The clawback provision is considered to be a significant audit risk due to the management judgement and estimation applied in calculating the provision. The provision is determined using a model which uses a number of factors including the total unearned commission at the point of calculation, the age profile of the commission received, the Group’s share of any clawback, likely future lapse rates, lapse rate history, and the success of the in-house team that focuses on preventing lapses and/ or generating new income at the point of a lapse. 27. Mortgage Advice Bureau Annual Report 2017 Governance Independent auditor’s report to the members of Mortgage Advice Bureau (Holdings) plc Our application of materiality Other information We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. Based on our professional judgement, we determined materiality for the Group to be £700,000 (2016: £790,000) which represents 5% of profit before tax. We have used profit before tax as a benchmark given the importance of profit as a measure for shareholders in assessing the performance of the Group. We have then set the performance materiality at 75% (2016:75%) due to few identified misstatements in the past. We determined materiality for the parent to be £192,000 (2016: £165,000) which represents 5% of net assets. We have used net assets as the parent acts as a holding company only. We have then set the performance materiality at 75% (2016:75%) due no identified misstatements in the past. We agreed with the audit committee that we would report to the committee all individual audit differences identified during the course of our audit in excess of £14,000 (2016: £16,000) for the Group and £4,000 (2016: £3,000) for the parent. We also agreed to report differences below these thresholds which, in our view, warranted reporting on qualitative grounds. An overview of the scope of our audit Our audit approach was scoped by obtaining an understanding of the Group’s activities, the key functions undertaken by the Board and the overall control environment. Based on this understanding we assessed those aspects of the Group’s transactions and balances which were most likely to give rise to a material misstatement at a Group level. The audit of the Group was conducted by BDO LLP directly at Group level as the Group’s accounting system records all transactions as a Group with each transaction marked with a company code to enable financial statements to be produced for each subsidiary when required. The audit of the parent company was conducted by BDO LLP after its financial statements were deconsolidated from the Group accounting system. The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. 28. Mortgage Advice Bureau Annual Report 2017 Responsibilities of directors As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Leigh Treacy Senior Statutory Auditor For and on behalf of BDO LLP, Statutory Auditor London 19 March 2018 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 29. Mortgage Advice Bureau Annual Report 2017 Financial statements Consolidated statement of comprehensive income for the year ended 31 December 2017 Revenue Cost of sales Gross profit Administrative expenses Share of profit of associates Operating profit Finance income Exceptional profit on disposal of asset held for sale Profit before tax Tax expense Note 3 4 13 7 13 8 2017 £’000 108,847 (82,945) 25,902 (11,909) 500 14,493 42 – 14,535 (2,494) 2016 £’000 92,848 (70,700) 22,148 (10,296) 611 12,463 73 2,690 15,226 (2,307) Profit for the year attributable to equity holders of parent company 12,041 12,919 Other comprehensive income Other comprehensive income to be reclassified to profit or loss in subsequent periods (net of tax): Net gain on asset held for sale Transfer to realised profit Net other comprehensive income to be reclassified to profit and loss in subsequent periods net of tax Other comprehensive income – – – – 2,152 (2,152) – – Total comprehensive income attributable to equity holders of parent company 12,041 12,919 Earnings per share attributable to the owners of the parent company Basic Diluted 9 9 23.8p 23.2p 25.6p 25.2p The notes on pages 34 to 61 form part of these financial statements. 30. Mortgage Advice Bureau Annual Report 2017 Financial statements Consolidated statement of financial position as at 31 December 2017 Assets Non-current assets Property, plant and equipment Goodwill Other intangible assets Investments Deferred tax asset Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Equity and liabilities Equity attributable to owners of the parent company Share capital Share premium Capital redemption reserve Share option reserve Retained earnings Total equity Liabilities Non-current liabilities Contingent consideration Provisions Deferred tax liability Total non-current liabilities Current liabilities Trade and other payables Corporation tax liability Total current liabilities Total liabilities Total equity and liabilities Note 11 12 12 13 20 15 16 21 13 19 20 17 2017 £’000 2,648 4,114 98 9 1,339 925 9,124 4,426 22,551 26,977 36,101 51 3,574 20 1,450 13,071 18,166 – 1,496 51 1,547 14,999 1,389 16,388 17,935 36,101 The notes on pages 34 to 61 form part of these financial statements. The financial statements were approved by the Board of Directors on 19 March 2018. P Brodnicki Director L Tilley Director 2016 £’000 2,720 4,114 1,008 72 7,923 3,256 18,711 21,967 29,890 51 3,042 20 380 11,680 15,173 50 1,219 40 1,309 12,405 1,003 13,408 14,717 29,890 31. Mortgage Advice Bureau Annual Report 2017 Financial statements Consolidated statement of changes in equity for the year ended 31 December 2017 Share capital £’000 Share premium £’000 Capital redemption reserve £’000 Share option reserve £’000 Retained earnings £’000 Balance at 1 January 2016 51 3,042 20 157 9,635 Total Equity £’000 12,905 Profit for the year Total comprehensive income Transactions with owners Share based payment transactions Dividends paid Transactions with owners Balance at 31 December 2016 and 1 January 2017 Profit for the year Total comprehensive income Transactions with owners Issue of shares Share based payment transactions – – – – Deferred tax asset recognised in equity – Reserve transfer Dividends paid Transactions with owners – – – Balance at 31 December 2017 51 – – – – – – – – – – – – – – – – – 12,919 12,919 12,919 12,919 223 – 223 – (10,874) (10,874) 223 (10,874) (10,651) 51 3,042 20 380 11,680 15,173 – – 532 – – – – 532 3,574 – – – – – – – – – – – 333 799 (62) 12,041 12,041 12,041 12,041 – – – 62 532 333 799 – – (10,712) (10,712) 1,070 (10,650) (9,048) 20 1,450 13,071 18,166 The notes on pages 34 to 61 form part of these financial statements 32. Mortgage Advice Bureau Annual Report 2017 Financial statements Consolidated statement of cash flows for the year ended 31 December 2017 Cash flows from operating activities Profit for the year before tax Adjustments for: Depreciation of property, plant and equipment Amortisation of intangibles Profit on disposal of asset held for sale Share based payments Share of profit from associates Dividends received from associates Finance income Changes in working capital Increase in trade and other receivables Increase in trade and other payables Increase in provisions Cash generated from operating activities Income taxes paid Net cash generated from operating activities Cash flows from investing activities Purchase of property, plant and equipment Purchase of intangibles Proceeds from sale of associate Acquisitions of associates and investments Deferred consideration on acquisition of associates Net cash used in investing activities Cash flows from financing activities Interest received Issue of shares Dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of the year The notes on pages 34 to 61 form part of these financial statements Note 2017 £’000 2016 £’000 14,535 15,226 11 12 13 13 7 11 12 13 13 7 21 10 201 14 – 333 (500) 353 (42) 193 18 (2,690) 223 (611) 567 (73) 14,894 12,853 (1,159) 2,594 277 16,606 (2,151) 14,455 (129) (103) – (184) (50) (466) 31 532 (10,712) (10,149) 3,840 18,711 22,551 (405) 2,886 301 15,635 (2,278) 13,357 (292) – 2,694 (203) – 2,199 73 – (10,874) (10,801) 4,755 13,956 18,711 33. Mortgage Advice Bureau Annual Report 2017 • IAS 7 Disclosure Initiative – Amendments to IAS 7. The amendments to IAS 7 Statement of Cash Flows are part of the IASB’s Disclosure Initiative and require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. On initial application of the amendment, entities are not required to provide comparative information for preceding periods. These amendments are effective for annual periods beginning on or after 1 January 2017, with early application permitted. Application of the amendments has had no impact on the Group. • IAS 12 Income Taxes Recognition of Deferred Tax Assets for Unrealised Losses – Amendments to IAS 12. The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference related to unrealised losses. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount. Entities are required to apply the amendments retrospectively. However, on initial application of the amendments, the change in the opening equity of the earliest comparative period may be recognised in the opening retained earnings (or in another component of equity, as appropriate), without allocating the change between opening retained earnings and other components of equity. Entities applying this relief must disclose that fact. These amendments are effective for annual periods beginning on or after 1 January 2017 with early application permitted. If an entity applies the amendments for an earlier period, it must disclose that fact. Application of the amendments has had no impact on the Group. • Annual Improvements Cycle – 2014-2016 Amendments to IFRS 12 – Disclosure of interest in other entities. The amendments clarify that the disclosure requirements in IFRS 12, other than those in paragraphs B10-B16, apply to an entity’s interest in a subsidiary, a joint venture or an associate (or a portion of its interest in a joint venture or an associate) that is classified (or included in a disposal Group that is classified) as held for sale. These amendments did not affect the Group’s financial statements. Financial statements Notes to the consolidated financial statements for the year ended 31 December 2017 1. Accounting policies n Basis of preparation The principal accounting policies adopted in the preparation of the consolidated financial statements are set out below. The policies have been consistently applied to all the years presented. The consolidated financial statements are presented in Great British Pounds, which is also the Group’s functional currency. All amounts are rounded to the relevant thousands, unless otherwise stated. These financial statements have been prepared under the historical cost convention and in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs) issued by the International Accounting Standards Board (IASB) as adopted by the European Union (EU) (EU “adopted IFRSs”) and with those parts of the Companies Act 2006 that are applicable to companies that prepare financial statements in accordance with IFRSs. The preparation of financial statements in compliance with adopted EU IFRS requires the use of certain critical accounting estimates. It also requires Group management to exercise judgement in applying the Group’s accounting policies. The areas where significant judgements and estimates have been made in preparing the financial statements and their effect are disclosed in note 2. The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report as set out earlier in this announcement. The financial position of the Group, its cash flows and liquidity position are described in these financial statements. The Group made an operating profit of £14.5m during 2017 (2016: £12.5 million) and had net current assets of £10.5m at 31 December 2017 (31 December 2016: £8.6m) and equity attributable to owners of the Group of £18.2m (31 December 2016: £15.2m). After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. n Changes in accounting policies New standards, interpretations and amendments effective for the year ended 31 December 2017 The following new standards, interpretations and amendments are effective for annual periods beginning on or after 1 January 2017 and have been applied in preparing these financial statements. None of these new standards or interpretations have a significant impact on the annual consolidated financial statements of the Group. 34. Mortgage Advice Bureau Annual Report 2017 1. Accounting policies (continued) New standards, interpretations and amendments not yet effective The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s financial statements are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective. • IFRS 9 Financial Instruments. The Group has identified that the adoption of IFRS 9, which replaces IAS 39 Financial Instruments: Recognition and Measurement from 1 January 2018, could impact its consolidated financial statements in one key area: The Group will need to apply an expected credit loss model when calculating impairment losses on its trade and other receivables and its cash and cash equivalents. This may result in increased impairment provisions and greater judgement due to the need to factor in forward looking information when estimating the appropriate amount of provisions. In applying IFRS 9 the Group must consider the probability of a default occurring over the contractual life of its trade receivables on initial recognition of those assets. Under the new model applied to all trade and other receivables, the amount of impairment losses as at 31 December 2017 is not material, resulting in an immaterial increase in the impairment provision as at 1 January 2018 under IFRS 9 compared to IAS 39. • IFRS 15 Revenue from Contracts with Customers. This was issued by the IASB on 28 May 2014 and applies to an entity’s first annual IFRS financial statements for a period beginning on or after 1 January 2018. It sets out the requirements for recognising revenue that apply to contracts with customers, except for those covered by standards on leases, insurance contracts and financial instruments. This standard is not expected to have any impact on the Group. • IFRS 2 Classification and Measurement of Share based Payment Transactions – Amendments to IFRS 2. The IASB issued amendments to IFRS 2 Share based Payment that address three main areas: the effects of vesting conditions on the measurement of cash-settled share based payment transaction; the classification of a share based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share based payment transaction changes its classification from cash- settled to equity-settled. On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. The amendments are effective for annual periods beginning on or after 1 January 2018, with early application permitted. These amendments are not expected to have any impact on the Group. • IFRS 16 Leases. IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on- balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases of ‘low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest expenses on the lease liability and the depreciation expense on the right-of-use asset. • Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g. a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. • Lessor accounting under IFRS 16 is substantially unchanged from today’s accounting under IAS 17. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases. • IFRS 16 also requires lessees and lessors to make more extensive disclosures than IAS 17. • IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs. • This standard is not expected to have any impact on the Group. • IFRIC Interpretation 23 – Uncertainty over income tax treatments. The interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 and does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The interpretation specifically addresses the following: • Whether an entity considers uncertain tax treatments separately • The assumptions an entity makes about the examination of tax treatments by taxation authorities • How an entity determines taxable profit (tax loss), tax basis, unused tax losses, unused tax credits and tax rates • How an entity considers changes in facts and circumstances. 35. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the consolidated financial statements (continued) for the year ended 31 December 2017 1. Accounting policies (continued) n Current versus non-current classification • An entity must determine whether to consider each uncertain tax treatment separately or together with one or more uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. The interpretation is effective for annual reporting periods beginning on or after 1 January 2019, but certain transition reliefs are available. The Group will apply this interpretation and it may affect its consolidated financial statements and the required disclosures. In addition, the Group may need to establish processes and procedures to obtain information that is necessary to apply the Interpretation on a timely basis. • IFRS 17 – Insurance contracts. IFRS 17, a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure was issued in May 2017. Once effective, IFRS 17 will replace IFRS 4. IFRS 17 applies to all types of insurance contracts, regardless of the type of entities that issue them, as well as to certain guarantees and financial instruments with discretionary participation features. The objective of IFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers. IFRS 17 is effective for reporting periods beginning on or after 1 January 2021, with comparative figures required. Early application is permitted, provided the entity also applies IFRS 9 and IFRS 15 on or before the date it first applies IFRS 17. This standard is not applicable to the Group. • Amendments to IFRS 10 and IAS 28: Sale or contribution of Assets between an Investor and its Associate or Joint Venture. The amendments address the conflict between IFRS 10, Consolidated Financial Statements and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture, is recognised in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognised only to the extent of unrelated investors’ interests in the associate or joint venture. The IASB has deferred the effective date of these amendments indefinitely, but an entity that early adopts the amendments must apply them prospectively. The Group will apply these amendments when they become effective. The Group presents assets and liabilities in the statement of financial position based on current/non-current classification. An asset is current when it is: • Expected to be realised or intended to be sold or consumed in the normal operating cycle • Held primarily for the purpose of trading • Expected to be realised within twelve months after the reporting date. All other assets are classified as non-current. Assets included in current assets which are expected to be realised within twelve months after the reporting date are measured at fair value which is their book value. Fair value for investments in unquoted equity shares is the net proceeds that would be received for the sale of the asset where this can be reasonably determined. n Basis of consolidation Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control. The consolidated financial statements present the results of the company and its subsidiaries (“the Group”) as if they formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full. The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquiree’s identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases. Entities that are not subsidiaries but where the Group has significant influence (i.e. the power to participate in the financial and operating policy decisions) are accounted for as associates. The results and assets and liabilities of the associates and joint venture are included in the consolidated accounts using the equity method of accounting. n Property, plant and equipment Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs. 36. Mortgage Advice Bureau Annual Report 2017 1. Accounting policies (continued) n Financial assets Depreciation is provided on all items of property, plant and equipment at rates calculated to write off the cost of each asset on a straight line basis over their expected useful lives, as follows: Freehold land Freehold buildings Fixtures and fittings Computer equipment not depreciated 36 years 20% 33% Gains and losses on disposal are determined by comparing the proceeds with the carrying amount and are recognised in the income statement. The Directors reassess the useful economic life of the assets annually. n Goodwill Goodwill represents the excess of a cost of a business combination over the Group’s interest in the fair value of identifiable assets under IFRS 3 Business Combinations. Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated statement of comprehensive income on the acquisition date. In the consolidated statement of financial position, the Group classifies its financial assets as loans, trade receivables and cash and cash equivalents. The classification depends on the purpose for which the financial assets were acquired. Loans and trade receivables are non-derivative financial assets with fixed or determinable payments which arise principally through the Group’s trading activities. These are recognised at original fair value less appropriate provision for impairment and subsequently measured at amortised cost. Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognised within cost of sales in the consolidated statement of comprehensive income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. Cash and cash equivalents include cash in hand and deposits held at call with banks with an original maturity of three months or less. n Other intangible assets n Trade and other payables Intangible assets other than goodwill acquired by the Group comprise licences and the website and are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the statement of comprehensive income within administrative expenses on a straight line basis over the period of the licence agreements. Assets are tested annually for impairment or more frequently if events or circumstances indicate potential impairment. Trade and other payables are recognised initially at fair value and subsequently carried at amortised cost. n Retirement benefits: Defined contribution schemes Contributions to defined contribution pension schemes are charged to the consolidated statement of comprehensive income in the year to which they relate. Amortisation, which is reviewed annually, is provided on licences at 16.7% per annum and the website at 33.3% per annum, calculated to write off the cost of the asset on a straight line basis over its expected useful life. n Impairment of non-financial assets Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of the asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest Group of assets to which it belongs for which there are separately identifiable cash flows, its cash generating units (‘CGUs’). Goodwill is allocated on initial recognition to each of the Group’s CGUs that are expected to benefit from the synergies of the combination giving rise to the goodwill. n Provisions A provision is recognised in the statement of financial position when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. 37. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the consolidated financial statements (continued) for the year ended 31 December 2017 1. Accounting policies (continued) 1. Accounting policies (continued) n Share capital n Taxation Income tax comprises current and deferred tax. Income tax is recognised in profit or loss other than if it relates to items recognised in other comprehensive income in which case it is recognised in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted by the statement of financial position date and any adjustment to tax payable in respect of previous years. Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the consolidated statement of financial position differs from its tax base, except for differences arising on investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future. Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised. The amount of the asset or liability is determined using tax rates that have been enacted or substantially enacted by the statement of financial position date and are expected to apply when the deferred tax liabilities or assets are settled or recovered. Deferred tax balances are not discounted. Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either: • the same taxable Group company, or • different company entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets and liabilities are expected to be settled or recovered. Financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial liability. The Company’s ordinary shares are classified as equity instruments. Incremental costs directly attributable to the issue of new shares are shown in share premium as a deduction from the proceeds. n Revenue Revenue comprises commissions, client fees and other income. Commissions and client fees are included at the gross amounts receivable by the Group in respect of all services provided. Commissions payable to trading partners in respect of their share of the commissions earned are included in cost of sales. Commissions and client fees earned are accounted for when received or guaranteed to be received, as until received it is not possible to be certain that the transaction will be completed. In the case of life commissions there is a possibility for a period after the inception of the policy that part of the commission earned may have to be repaid if the policy is cancelled during this period. A provision is made for the expected level of commissions repayable. Other income comprises income from ancillary services such as survey and conveyancing fees and is credited to the statement of comprehensive income partly on an accruals basis. n Leased assets Rentals under operating leases are charged on a straight line basis over the lease term, even if the payments are not made on such a basis. Benefits received and receivable as an incentive to sign an operating lease are similarly spread on a straight line basis over the lease term. n Finance income Finance income comprises interest receivable on cash at bank and interest recognised on loans to associates. Interest income is recognised in the statement of comprehensive income as it accrues. n Exceptional items As permitted by IAS 1 “Presentation and disclosure” – certain items are presented separately in the income statement as exceptional where, in the judgement of the Directors, they need to be disclosed by virtue of their nature, size or incidence in order to obtain a clear and consistent presentation of the Group’s underlying business performance. Examples of material and non-recurring items which may give rise to disclosure as exceptional items include asset impairments, costs associated with acquiring new businesses and profits on the disposal of investments. 38. Mortgage Advice Bureau Annual Report 2017 1. Accounting policies (continued) 2. Critical accounting estimates and judgements The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The Directors consider that the estimates and judgements that have the most significant effect on the carrying amounts of assets and liabilities within the financial statements are set out below. (a) Impairment of goodwill The Group is required to test, on an annual basis, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. Actual outcomes may vary. More information including carrying values is included in note 12. (b) Impairment of trade and other receivables Judgement is required when determining if there is any impairment to the trade and other receivable balances. Trade receivables are reviewed for impairment if they are past due and are not repaid within the terms of the contracts. Other receivables, which include loans, are reviewed for impairment when there are any indications that they may not be recoverable and that security held against the balance may be inadequate to fully cover the amount outstanding. A provision for impairment will be made if following review of the balances, the Group considers it unlikely that any balance will be recovered. More information is included in note 15. n Segment reporting An operating segment is a distinguishable segment of an entity that engages in business activities from which it may earn revenues and incur expenses and whose operating results are reviewed regularly by the entity’s chief operating decision maker (CODM). The Board reviews the Group’s operations and financial position as a whole and therefore considers that it has only one operating segment, being the provision of financial services operating solely within the UK. The information presented to the CODM directly reflects that presented in the financial statements and they review the performance of the Group by reference to the results of the operating segment against budget. Operating profit is the profit measure, as disclosed on the face of the combined income statement that is reviewed by the CODM. n Dividends Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when they are paid. In the case of final dividends, this is when they are approved by the shareholders. Where options are granted to persons other than employees, the statement of comprehensive income is charged with the fair value of the options at the date of the grant over the vesting period. n Share based payments Where equity-settled share options are awarded to employees, the fair value of the options at the date of grant is charged to the statement of comprehensive income over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Non-vesting conditions and market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied. Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the statement of comprehensive income over the remaining vesting period. 39. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the consolidated financial statements (continued) for the year ended 31 December 2017 (c) Clawback provision The provision relates to the estimated value of repaying commission received up front on life assurance policies that may lapse in a period of up to four years following inception. The provision is calculated using a model that has been developed over several years. The model uses a number of factors including the total unearned commission at the point of calculation, the age profile of the commission received, the Group’s proportion of any clawback, likely future lapse rates, and the success of the Group’s team that focuses on preventing lapses and/or generating new income at the point of a lapse. More information is included in note 19. (d) Freehold building The freehold building is depreciated over its useful life. The useful life is based on management’s estimate of the period that the asset will generate revenue and will be reviewed annually for continued appropriateness. The carrying value will be tested for impairment when there is an indication that the value of the asset might be impaired. When carrying out an impairment test this would be based on future cash flow forecasts and these forecasts would be based on management judgement. No such indication of impairment has been noted. (e) Deferred tax assets Deferred tax assets include temporary differences related to the issue and exercise of share options. Recognition of the deferred tax assets assigns an estimate of proportion of options likely to vest and assumes share options will have a positive value at the date of vesting, which is greater than the exercise price. The carrying amount of deferred tax assets at 31 December 2017 was £0.9m. 40. Mortgage Advice Bureau Annual Report 2017 3. Revenue The Group operates in one segment being that of the provision of financial services in the UK. Revenue is derived as follows: Mortgage related products Insurance and other protection products Other income 4. Cost of sales Costs of sales are as follows: Commissions paid Wages and salary costs Wages and salary costs Gross Employers’ National Insurance Defined contribution pension costs Other direct costs 5. Profit from operations Profit from operations is stated after charging the following: Depreciation of property, plant and equipment Amortisation of intangibles Auditors’ remuneration: Fees payable to the Group’s auditors for the audit of the Group’s financial statements Fees payable to the Group’s auditors for the audit of the Group’s subsidiary financial statements 2017 £’000 64,289 42,854 1,704 108,847 2017 £’000 81,265 1,680 82,945 2017 £’000 1,302 151 48 179 2016 £’000 55,011 36,444 1,393 92,848 2016 £’000 69,380 1,320 70,700 2016 £’000 1,015 115 35 155 1,680 1,320 2017 £’000 201 14 10 32 2016 £’000 193 18 10 27 Other administrative expenses are incurred in the ordinary course of the business and do not include any non-recurring items. Profits from associates are disclosed as part of the operating profit as this is the operational nature of the Group. 41. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the consolidated financial statements (continued) for the year ended 31 December 2017 6. Staff costs Staff costs, including executive and non-executive directors’ remuneration, were as follows: Wages and salaries Share based payments Social security costs Defined contribution pension costs The average number of people employed by the Group during the year was: Executive Directors Compliance Sales and marketing Operations Total 2017 £’000 7,271 670 739 188 2016 £’000 6,410 315 712 150 8,868 7,587 Number Number 3 59 43 52 157 3 52 40 46 141 Key management compensation Key management are those persons having authority and responsibility for planning, directing and controlling the activities of the Group. These are the directors of Mortgage Advice Bureau (Holdings) plc. Wages and salaries Share based payments Defined contribution pension costs 2017 £’000 1,420 145 21 1,586 2016 £’000 1,568 86 19 1,673 During the year retirement benefits were accruing to 1 director (2016: 1) in respect of defined contribution pension schemes. The total amount payable to the highest paid director in respect of emoluments was £598,738 (2016: £619,873). The value of the Group’s contributions paid to a defined contribution pension scheme in respect of the highest paid director amounted to £nil (2016: £nil). 7. Finance income Interest income Interest income accrued on loans to associates 42. 2017 £’000 31 11 42 2016 £’000 73 – 73 Mortgage Advice Bureau Annual Report 2017 8. Income tax Current tax expense UK corporation tax charge on profit for the year Total current tax Deferred tax expense Origination and reversal of timing differences Temporary difference on share based payments Adjustment to differed tax charge in respect of prior periods Effect of change in tax rate on opening liability Total deferred tax (see note 20) Total tax expense 2017 £’000 2,537 2,537 5 (71) 23 – (43) 2016 £’000 2,367 2,367 (58) – – (2) (60) 2,494 2,307 The reasons for the difference between the actual charge for the year and the standard rate of corporation tax in the United Kingdom of 19.25% (2016: 20%) applied to profit for the year is as follows: Profit for the year before tax Expected tax charge based on corporation tax rate Expenses not deductible for tax purposes amortisation and impairment Adjustment for non-taxable profit on sale of asset held for sale Research & Development allowances Tax on Share Options exercised Adjustment to deferred tax charge in respect of prior periods Profits from associates Effect of lower deferred tax rate Rate change on deferred tax liability Total tax expense 2017 £’000 14,535 2,798 56 – (135) (163) 23 (96) 11 – 2016 £’000 15,226 3,045 62 (538) (148) – – (122) 10 (2) 2,494 2,307 For the year ended 31 December 2017 the deferred tax, relating to unexercised share options recognised in equity was £799,387 (2016: £nil). Changes in the taxation rate Legislation to reduce the main rate of corporation tax to 19% from 1 April 2017 and to 17% from 1 April 2020 has been enacted and so the deferred tax balance has been calculated at 17% (2016: 17%). 43. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the consolidated financial statements (continued) for the year ended 31 December 2017 9. Earnings per share a) Earnings per share Basic earnings per share are calculated by dividing net profit for the year attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year. Basic earnings per share Profit for the year attributable to the owners of the parent 2017 £’000 12,041 2016 £’000 12,919 Weighted average number of shares in issue 50,697,207 50,461,600 Basic earnings per share (in pence per share) 23.8p 25.6p For diluted earnings per share, the weighted average number of ordinary shares in existence is adjusted to include potential ordinary shares arising from share options. Diluted earnings per share Profit for the year attributable to the owners of the parent 2017 £’000 12,041 2016 £’000 12,919 Weighted average number of shares in issue 51,948,051 51,238,503 Basic earnings per share (in pence per share) 23.2p 25.2p The share data used in the basic and diluted earnings per share computations are as follows: Weighted average number of ordinary shares Issued ordinary shares at start of period Effect of shares issued during period Basic weighted average number of shares Potential ordinary shares arising from options Diluted weighted average number of shares b) Adjusted earnings per share Profit for the year attributable to the owners of the parent Adjusted for the following items net of tax: Profit on disposal of asset held for sale Adjusted earnings net of tax 2017 2016 50,461,600 50,461,600 235,607 – 50,697,207 50,461,600 1,250,844 776,903 51,948,051 51,283,503 2017 £’000 12,041 – 12,041 2016 £’000 12,919 (2,690) 10,229 Weighted average number of shares in issue 50,697,207 50,461,600 Adjusted basic earnings per share (in pence per share) Adjusted diluted earnings per share (in pence per share) 23.8p 23.2p 20.3p 20.0p 44. Mortgage Advice Bureau Annual Report 2017 10. Dividends Dividends paid and declared during the year: Final dividend for 2016: 10.5p per share (2015: 9.5p) Special dividend: 1.1p per share (2016: 4.25p) Interim dividend for 2017: 9.5p per share (2016: 7.8p) Equity dividends on ordinary shares: Further special dividend: 1.1p per share Proposed for approval: Final dividend for 2017: 11.9p per share (2016: 10.5p) 2017 £’000 5,333 555 4,824 2016 £’000 4,794 2,145 3,935 10,712 10,874 – 555 6,044 6,044 5,298 5,853 The record date for the final dividend is 27 April 2018 and the payment date is 22 May 2018. The ex-dividend date will be 26 April 2018. 11. Property, plant and equipment Freehold land and building £’000 Fixtures & fittings £’000 Computer equipment £’000 Cost At 1 January 2017 Additions At 31 December 2017 Depreciation At 1 January 2017 Charge for the year At 31 December 2017 Net book value 2,461 – 2,461 67 55 122 At 31 December 2017 2,339 435 59 494 267 47 314 180 Total £’000 3,577 129 3,706 857 201 1,058 681 70 751 523 99 622 129 2,648 45. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the consolidated financial statements (continued) for the year ended 31 December 2017 11. Property, plant and equipment (continued) Freehold land and building £’000 2,409 52 2,461 13 54 67 Cost At 1 January 2016 Additions At 31 December 2016 Depreciation At 1 January 2016 Charge for the year At 31 December 2016 Net book value At 31 December 2016 2,394 12. Intangible assets Goodwill Cost As at 1 January and 31 December Accumulated impairment At 1 January At 31 December Net book value At 31 December Fixtures & fittings £’000 Computer equipment £’000 288 147 435 240 27 267 168 Total £’000 3,285 292 3,577 664 193 857 588 93 681 411 112 523 158 2,720 2017 £’000 2016 £’000 4,267 4,267 153 153 153 153 4,114 4,114 The goodwill relates to the acquisition of Talk Limited in 2012, and in particular its main operating subsidiary Mortgage Talk Limited. The goodwill is deemed to have an indefinite useful life. It is currently carried at cost and is reviewed annually for impairment. Under IAS 36, “Impairment of assets”, the Group is required to review and test its goodwill annually each year or in the event of a significant change in circumstances. The impairment review conducted at the end of 2017 concluded that there had been no impairment of goodwill. The Board considers that it has only one operating segment and therefore one cash generating unit so accordingly it is necessary to assess the impact of the acquisition of Mortgage Talk Limited to the Group. The value in use of Mortgage Talk Limited has therefore been estimated based on the improvements in net profits which that acquisition continues to bring to the Group. The forecast ongoing profits generated by the acquisition of Mortgage Talk Limited significantly exceed the value of goodwill and therefore no impairment of the goodwill is required. A discount rate of 10% has been applied to these calculations. Management has considered forecast profits over a three year period in determining the value in use. Management believes that any possible changes to any of the key assumptions applied in determining the value in use would not cause the carrying amount of goodwill to exceed the forecast ongoing profits. 46. Mortgage Advice Bureau Annual Report 2017 12. Intangible assets (continued) Licences and website Cost At 1 January 2017 Additions At 31 December 2017 Accumulated Amortisation At 1 January 2017 Charge for the year At 31 December 2017 Net book value At 31 December 2017 Cost At 1 January 2016 and 31 December 2016 Accumulated Amortisation At 1 January 2016 Charge for the year At 31 December 2016 Net book value At 31 December 2016 13. Investments in Associates and Joint Venture Investment in Associates and joint venture Other Investments At 31 December 2017 At 31 December 2016 Licences £’000 Website £’000 Total £’000 108 – 108 99 9 108 – – 103 103 – 5 5 98 Licences £’000 Website £’000 108 81 18 99 9 – – – – – 108 103 211 99 14 113 98 Total £’000 108 81 18 99 9 £’000 1,339 – 1,339 1,008 47. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the consolidated financial statements (continued) for the year ended 31 December 2017 13. Investments in Associates and Joint Venture (continued) Investment in Associates and Joint Venture The Group holds investments in associates and a joint venture, all of which are accounted for under the equity method, as follows: Company name CO2 Commercial Limited MAB Wealth Management Limited Freedom 365 Mortgage Solutions Limited Sort Group Limited Buildstore Limited Clear Mortgage Solutions Limited Vita Financial Limited MAB Broker Services Pty Limited Registered office Profile House, Stores Road, Derby DE21 4BD Capital House, Pride Place, Derby DE24 8QR Gresley House, Ten Pound Walk, Doncaster DN4 5HX Percentage of ordinary shares held 49 49 35 Burdsall House, London Road, Derby DE24 8UX 43.25 Nsb & Rc Lydiard Fields, Great Western Way, Swindon SN5 8UB 114 Centrum House, Dundas Street Edinburgh EH3 5DQ 1st Floor Tudor House, 16 Cathedral Road, Cardiff CF 11 9LJ Level 7, 68 Alfred Street Milsons Point, NSW 2061 25 25 20 45 Description Property surveyors Provision of financial services Provision of financial services Conveyancing services Provision of financial services Provision of financial services Provision of financial services Provision of financial services The reporting date for the Group’s associates, as listed in the table above, is 31 December and their country of incorporation is England and Wales. The reporting date for the Group’s joint venture, MAB Broker Services Pty Limited, is 30 June and its country of incorporation is Australia. The investment in associates and the joint venture at the reporting date is as follows: At 1 January Additions Disposals Share of profit Dividends received At 31 December 2017 £’000 1,008 184 – 500 (353) 1,339 2016 £’000 715 253 (4) 611 (567) 1,008 The Group was entitled to 49% of the results for Capital Private Finance Limited up to 30 June 2016. The Group is also entitled to 49% of the results of CO2 Commercial Limited, and MAB Wealth Management Limited by virtue of its 49% equity stakes. CO2 Commercial Limited is a dormant holding company, and trades through its wholly owned subsidiary, Pinnacle Surveyors (England & Wales) Limited. The Group is entitled to 45% of the results of MAB Broker Services Pty Limited by virtue of its 45% equity stake, 35% of the results of Freedom 365 Mortgage Solutions Limited by virtue of its 35% equity stake, 25% of the results of Buildstore Limited and Clear Mortgage Solutions Limited by virtue of its 25% equity stakes and 20% of the results of Vita Financial Limited by virtue of its 20% equity stake. On 20 November 2017, the Group acquired a further 10% equity stake in Sort Group Limited. At 31 December 2017 the Group was entitled to 43.25% of the results of Sort Group Limited by virtue of its 43.25% equity stake. Mortgage Advice Bureau Limited’s effective holding in Sort Limited and Sort Technology Limited at 31 December 2017 was 30%. Mortgage Advice Bureau Limited’s effective holding in Sort Limited at 31 December 2017 was 28%. The carrying value of the Group’s joint venture, MAB Broker Services Pty Limited, at 31 December 2017 is £nil (2016: £nil). In the period ended 30 June 2017, MAB Broker Services Pty Limited reported a loss of AUD0.5m. 48. Mortgage Advice Bureau Annual Report 2017 13. Investments in Associates and Joint Venture (continued) Acquisitions and disposals 2017 The Group acquired a further 10% interest in Sort Group Limited on 20 November 2017 at a cost of £183,817. 2016 During the year ended 31 December 2016, the Group acquired a 25% interest in Clear Mortgage Solutions Limited at a cost of £50,000 plus contingent consideration of up to £50,000 which was paid in full in 2017. Also during 2016 the Group acquired a 20% interest in Vita Financial Limited at a cost of £150,000, a 35% interest in Freedom 365 Mortgage Solutions Limited at a cost of £350 and a 45% interest in MAB Broker Services Pty Limited at a cost of £2,666 (AUD4,500). On 31 July 2016, the Group disposed of its 49% holding in Capital Private Finance Limited for sale proceeds of £2.7m which resulted in a net profit on sale of £2.69m. As the associates are private companies published share prices are not available. The aggregate amounts of certain financial information of the associates is summarised as follows: Non-current assets Cash balances Current assets Current liabilities Non-current liabilities and provisions Revenue Profit before taxation Total comprehensive income Profit attributable to Group Dividends received from associates Pinnacle Surveyors (England & Wales) Limited £’000 Buildstore Limited £’000 Sort Group Limited £’000 30 594 410 (579) (6) 64 444 744 (860) (60) 719 619 380 (632) (2) Others £’000 109 203 373 (173) (217) 2017 Total £’000 922 1,860 1,907 (2,244) (285) 3,901 3,532 3,198 3,803 14,434 971 785 385 353* 231 186 46 – 32 25 9 – 364 158 60 – 1,598 1,154 500 353 49. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the consolidated financial statements (continued) for the year ended 31 December 2017 13. Investments in Associates and Joint Venture (continued) Pinnacle Surveyors (England & Wales) Limited £’000 Buildstore Limited £’000 Sort Group Limited £’000 Non-current assets Cash balances Current assets Current liabilities Non-current liabilities and provisions Revenue Profit before taxation Total comprehensive income Profit attributable to Group Dividends received from associates 38 378 572 (592) (2) 3,723 1,020 816 400 357* 100 316 247 (587) (10) 808 631 80 (257) (2) Others £’000 146 412 266 (800) (142) 2016 Total £’000 1,092 1,737 1,165 (2,236) (156) 3,271 3,921 2,641 13,556 176 134 – – 455 337 41 – 148 25 170 210 1,799 1,312 611 567 * These dividends are received from CO2 Commercial Limited, the parent undertaking of Pinnacle Surveyors (England & Wales) Limited. All other information disclosed above relates to Pinnacle Surveyors (England & Wales) Limited. All associates prepare their financial statements in accordance with FRS 102 other than MAB Broker Services Pty Limited who prepare their financial statements in accordance with the Australian Accounting Standards. There would be no material difference to the accounts of any of the associates other than Sort Group Limited if these were prepared in accordance with IFRS. For Sort Group Limited amortisation of £86,981 (2016: £86,981) has been charged for the year on goodwill arising on consolidation, no amortisation would be charged under IFRS and goodwill instead be tested for impairment at the balance sheet date. Other investments Unlisted investment The unlisted investment represents a 0.05% shareholding in Twenty7tec Group Limited, a company that licenses certain mortgage sourcing software. The net book value of the investment at 31 December 2017 was £150 (2016: £150). 50. Mortgage Advice Bureau Annual Report 2017 14. Subsidiaries The subsidiaries of Mortgage Advice Bureau (Holdings) plc at the reporting date have been included in the consolidated financial statements. The subsidiaries are as follows: Percentage of ordinary shares held Company name Country of incorporation Mortgage Advice Bureau Limited England and Wales Mortgage Advice Bureau (Derby) Limited England and Wales Capital Protect Limited England and Wales Mortgage Talk Limited England and Wales Talk Limited England and Wales Mortgage Advice Bureau Australia (Holdings) Pty Limited Australia Mortgage Advice Bureau Pty Limited Australia MABWM Limited England and Wales Mortgage Advice Bureau (UK) Limited England and Wales MAB (Derby) Limited L&P 137 Limited England and Wales England and Wales Mortgage Talk (Partnership) Limited England and Wales Financial Talk Limited Survey Talk Limited L&P 134 Limited Loan Talk Limited MAB1 Limited England and Wales England and Wales England and Wales England and Wales England and Wales Nature of business Provision of financial services Provision of financial services Provision of financial services Provision of financial services Intermediate holding company Intermediate holding company Holding of intellectual property Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 The registered office for all of the subsidiaries of Mortgage Advice Bureau (Holdings) plc, as listed in the table above, is Capital House, Pride Place, Pride Park, Derby, DE24 8QR, United Kingdom, other than for the two subsidiaries incorporated in Australia for which the registered office is Norton Rose Fulbright, Level 18, 225 George Street, Sydney, NSW 2000, Australia. Acquisitions On 8 December 2016 the Group acquired a 100% interest in Mortgage Advice Bureau Australia (Holdings) Pty Limited which was a newly incorporated entity. Mortgage Advice Bureau Australia (Holdings) Pty Limited has a 100% equity stake in Mortgage Advice Bureau Pty Limited and also a 45% equity stake in MAB Broker Services Pty Limited. Mortgage Advice Bureau (Holdings) plc holds 100% of the ordinary share capital of Mortgage Advice Bureau Limited and Talk Limited. Mortgage Advice Bureau Limited holds 100% of the ordinary share capital of Mortgage Advice Bureau (Derby) Limited, Capital Protect Limited, MABWM Limited and Mortgage Advice Bureau Australia (Holdings) Pty Limited. Talk Limited holds 100% of the ordinary share capital of Mortgage Talk Limited, L&P 137 Limited, Mortgage Talk (Partnership) Limited, Financial Talk Limited and Survey Talk Limited. Mortgage Talk Limited holds 100% of the ordinary share capital of Loan Talk Limited. L&P 137 Limited holds 100% of the ordinary share capital of L&P 134 Limited. There are no restrictions regarding the utilisation of cash or other resources held by any subsidiary. 51. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the consolidated financial statements (continued) for the year ended 31 December 2017 15. Trade and other receivables Trade receivables not past due Trade receivables past due but not impaired Trade receivables past due but impaired Trade receivables Less provision for impairment of trade receivables Trade receivables – net Amounts due from associates Prepayments and accrued income 2017 £’000 1,144 13 273 1,430 (273) 1,157 719 2,550 4,426 2016 £’000 757 55 481 1,293 (481) 812 318 2,126 3,256 Trade and other receivables are all current and the book value is the same as their fair value. Trade receivables are reviewed for impairment if they are past due and are not repaid within the terms of the contracts. Trade receivables include advances granted to Appointed Representatives, which have contractual repayment terms. These advances are considered to be past due when there is a delinquency in interest or principal payments. Also included in trade receivables are amounts due from Appointed Representatives relating to commissions that are refundable to the Group when policy lapses or other reclaims exceed new business. As these balances have no credit terms, the Board of Directors consider these to be past due if they are not received within seven days. In the management of these balances, the Directors can recover them from subsequent new business entered into with the Appointed Representative or utilise payables that are owed to the same counterparties and included within payables as the Group has the legally enforceable right of set off in such circumstances. These payables are considered sufficient by the Directors to recover receivable balances should they default, and, accordingly, credit risk in this respect is minimal. In light of the above, the Directors do not consider that disclosure of an aging analysis of past due but not impaired receivables would provide useful additional information. The Group has not recognised a provision for impairment of these balances because there is no objective evidence that they are impaired. Further information on the credit quality of financial assets is set out in note 18. A summary of the movement in the provision for the impairment of receivables is as follows: At 1 January Impairment losses recognised Impairment provisions no longer required At 31 December 2017 £’000 481 – (208) 273 2016 £’000 459 25 (3) 481 The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivables mentioned above less collateral held as security. Details of security held are given in note 18. No other balances are past due or impaired. 52. Mortgage Advice Bureau Annual Report 2017 16. Cash and cash equivalents Unrestricted cash and bank balances Bank balances held in relation to retained commissions Cash and cash equivalents 2017 £’000 13,170 9,381 22,551 2016 £’000 10,811 7,900 18,711 Bank balances held in relation to retained commissions earned on an indemnity basis in relation to life policies are held to cover potential future lapses in Appointed Representatives’ commissions. Operationally the Group does not treat these balances as available funds. An equal and opposite liability is shown within Trade and other payables as set out in note 17. 17. Trade and other payables Appointed Representatives retained commission Other trade payables Trade payables Social security and other taxes Other payables Accruals 2017 £’000 9,381 3,526 2016 £’000 7,900 2,655 12,907 10,555 315 40 1,737 14,999 240 20 1,590 12,405 Should a life policy be cancelled within four years of inception, a proportion of the original commission will be clawed back by the insurance provider. The majority of any such repayment is payable by the Appointed Representative. It is the Group’s policy to retain a proportion of commission payable to the Appointed Representative to cover such potential future lapses; these sums remain a liability of the Group. This commission is held in a separate ring fenced bank account as described in note 16. As at 31 December 2017 and 31 December 2016, the book value of trade and other payables approximates their fair value given that they are short term in nature. Appointed Representatives retained commission is expected to be payable after more than one year. Other trade payables normally fall due within 30 to 60 days. 53. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the consolidated financial statements (continued) for the year ended 31 December 2017 18. Financial instruments – risk management The Group is exposed through its operations to the following financial risks: • Credit risk • Liquidity risk • Interest rate risk. In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. Principal financial instruments • Trade and other receivables • Cash and cash equivalents • Trade and other payables The Group does not issue or use financial instruments of a speculative nature. A summary of financial instruments held by category is provided below: Financial assets Cash and cash equivalents Trade and other receivables Total financial assets Financial liabilities Trade and other payables Total financial liabilities 2017 £’000 22,551 1,876 24,427 2017 £’000 14,684 14,684 2016 £’000 18,711 1,130 19,841 2016 £’000 12,165 12,165 General objectives, policies and processes The Board has overall responsibility for the determination of the Group’s risk management objectives and policies and designs and operates processes that ensure the effective implementation of the objectives and policies to the Group’s finance function. The Board sets guidelines to the finance team and monitors adherence to its guidelines on a monthly basis. The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. Further details regarding these policies are set out below. Credit risk Credit risk is the risk of financial loss to the Group if a trading partner or counterparty to a financial instrument fails to meet its contractual obligations. The Group is mainly exposed to credit risk from loans to its trading partners. It is Group policy to assess the credit risk of trading partners before advancing loans or other credit facilities. Assessment of credit risk utilises external credit rating agencies. Personal guarantees are generally obtained from the directors of its trading partners. Quantitative disclosures of the credit risk exposure in relation to financial assets are set out below. Further disclosures regarding trade and other receivables are given in note 15. 54. Mortgage Advice Bureau Annual Report 2017 18. Financial instruments – risk management (continued) Financial assets – maximum exposure Cash and cash equivalents Trade and other receivables Total financial assets 2017 £’000 22,551 1,876 24,427 2016 £’000 18,711 1,130 19,841 The carrying amounts stated above represent the Group’s maximum exposure to credit risk for trade and other receivables. An element of this risk is mitigated by collateral held by the Group for amounts due to them. Trade receivables consist of a large number of unrelated trading partners and therefore credit risk is limited. Due to the large volume of trading partners the Group does not consider that there is any significant credit risk as a result of the impact of external market factors on their trading partners. Additionally, within trade payables are amounts due to the same trading partners that are included in trade receivables; this collateral of £520,789 (2016: £509,169) significantly reduces the credit risk. The Group’s credit risk on cash and cash equivalents is limited because the Group places funds on deposit with several UK banks all of whom are A or BBB+ rated where applicable. Interest rate risks The Group’s interest rate risk arises from cash on deposit. The Group aims to maximise its return on cash on deposit whilst ensuring that cash is available to meet liabilities as they fall due. Current market deposit interest rates are minimal and therefore any fall in these rates is unlikely to have a significant impact on the results of the Group. Foreign exchange risk As the Group does not operate outside of the United Kingdom and has only one investment outside the UK, it is not exposed to any material foreign exchange risk. Liquidity risk Liquidity risk arises from the Group’s management of working capital. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The Group’s policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. The Group’s trade and other payables are repayable within one year from the reporting date, and the contractual undiscounted cash flow analysis for the Group’s trade and other payables is the same as their carrying value. The Board receives annual 12 month cash flow projections based on working capital modelling as well as information regarding cash balances monthly. At the end of the financial year, these projections indicated that the Group expected to have sufficient liquid resources to meet its obligations under all reasonably expected circumstances. Additionally the Group has financial resource requirements set by its regulator, the Financial Conduct Authority. The Board has set a policy to ensure that adequate capital is maintained to ensure that these externally set financial resource requirements are exceeded at all times. Quarterly reports are made to the Financial Conduct Authority and submission is authorised by the Finance Director, at which time capital adequacy is re-assessed. Capital management The Group monitors its capital which consists of all components of equity (i.e. share capital, share premium, capital redemption reserve, share option reserve and retained earnings). The Group’s objectives when maintaining capital are: • To safeguard the entity’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders. • To ensure that capital is maintained at all times to ensure that financial resource requirements set by its regulator, the Financial Conduct Authority, are exceeded at all times. • To ensure the Group has the cash available to develop the services provided by the Group to provide an adequate return to shareholders. 55. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the consolidated financial statements (continued) for the year ended 31 December 2017 19. Provisions Clawback provision At 1 January Charged to the statement of comprehensive income At 31 December 2017 £’000 1,219 277 1,496 2016 £’000 918 301 1,219 The provision relates to the estimated cost of repaying commission income received upfront on life assurance policies that may lapse in the four years following issue. Provisions are held in the financial statements of two of the Group’s subsidiaries: Mortgage Advice Bureau Limited and Mortgage Advice Bureau (Derby) Limited. The exact timing of any clawbacks is uncertain and the provision was based on the Directors’ best estimate, using industry data where available, of the probability of clawbacks to be made. 20. Deferred tax Deferred tax is calculated in full on temporary differences using a tax rate of 17% (2016: 17%). The reduction in the main rate of corporation tax as set out in note 8 has been applied to deferred tax balances which are expected to reverse in the future. The movement in deferred tax is shown below: Deferred tax asset/(liability) – opening balance Recognised in the statement of comprehensive income Deferred tax movement recognised in equity Deferred tax asset – closing balance The deferred tax balance is made up as follows: Accelerated capital allowances Share based payment Net deferred tax asset Reflected in the statement of financial position as follows: Deferred tax liability Deferred tax asset Deferred tax asset net 2017 £’000 32 43 799 874 2017 £’000 (51) 925 874 2017 £’000 (51) 925 874 2016 £’000 (28) 60 – 32 2016 £’000 (40) 72 32 2016 £’000 (40) 72 32 Deferred tax liabilities have arisen due to capital allowances which have been received ahead of the depreciation charged in the accounts. 56. Mortgage Advice Bureau Annual Report 2017 21. Share capital Issued and fully paid Ordinary shares of 0.1p each Total share capital 2017 £’000 51 51 2016 £’000 51 51 During the year 325,745 ordinary shares of £0.001 each were issued following exercise of the first tranche of options issued at the time of the Initial Public Offering of the Company at a premium of £531,980. See also note 26. 22. Reserves The Group’s policy is to maintain an appropriate capital base and comply with its externally imposed capital requirements whilst providing maximum shareholder value. The following describes the nature and purpose of each reserve within equity: Reserve Description and purpose Share premium Amount subscribed for share capital in excess of nominal value. Capital redemption reserve The capital redemption reserve represents the cancellation of part of the original share capital premium of the company at par value of any shares repurchased. Share option reserve The fair value of equity instruments granted by the Company in respect of share based payment transactions and deferred tax recognised in equity. Retained earnings All other net gains and losses and transactions with owners (e.g. dividends) not recognised elsewhere. There is no restriction on the distribution of retained earnings. 23. Retirement benefits The Group operates a defined contribution pension scheme for the benefit of its employees and also makes contributions to a self-invested personal pension (“SIPP”). The assets of the scheme and the SIPP are held separately from those of the Group in independently administered funds. The pension cost charge represents contributions payable by the Group to the SIPP and amounted to £188,279 (2016: £149,400). There were no contributions payable to the fund or the SIPP at the statement of financial position date (2016: £nil). 24. Related party transactions The following details provide the total amount of transactions that have been entered into with related parties during the year ended 31 December 2017 and 2016, as well as balances with related parties as at 31 December 2017 and 2016. At 31 December 2017 there was a loan outstanding from Buildstore Limited, an associated company, of £30,000 (2016: £65,000) included in trade and other receivables. During the period the Group paid commissions of £1,083,970 (2016: £1,499,513) to Buildstore Limited. During the year the Group received introducer commission from MAB Wealth Management Limited, an associated company, of £7,633 (2016: £9,345). There is no balance outstanding with MAB Wealth Management Limited at 31 December 2017 (2016: £nil). During the year the Group received introducer commission from Sort Limited, a subsidiary of an associated company, of £329,798 (2016: £181,105). A loan of £118,288 was made to Sort Group Limited, an associated company during the year (2016: £5,195). There was an amount of £18,288 outstanding with Sort Group Limited at 31 December 2017 (2016: £nil) included in trade and other receivables. During the year the Group paid commission to Clear Mortgage Solutions Limited, an associated company, of £2,484,296 (2016: £877,217). 57. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the consolidated financial statements (continued) for the year ended 31 December 2017 24. Related party transactions (continued) During the year the Group purchased services from Twenty7tec Group Limited, a company in which the Group holds an investment, of £25,200. During the year the Group paid commission to Freedom 365 Mortgage Solutions Limited, an associated company, of £567,849 (2016: £5,400). At 31 December 2017 there was a loan outstanding from Freedom 365 Mortgage Solutions Limited of £455,000 included in trade and other receivables (2016: £105,000). During the year the Group paid commission to Vita Financial Limited, an associated company, of £740,351 (2016: £208,445). At 31 December 2017 there was a loan outstanding from MAB Broker Services Pty Limited, an associated company, of £204,987 (AUD350,000) included in trade and other receivables (2016: £148,138, AUD250,000). The Group’s related party transactions in the year include the remuneration of the directors’ emoluments, pension entitlements and share based payments disclosed in note 6 of the financial statements. During the year the Group received dividends from associated companies as follows: CO2 Commercial Limited Capital Private Finance Limited Total 2017 £’000 353 – 353 2016 £’000 357 210 567 Capital Private Finance Limited was sold on 31 July 2016 and ceased to be an associated company from that date. 25. Ultimate controlling party There is no ultimate controlling party. 26. Share based payments Mortgage Advice Bureau Executive Share Option Plan The Group operates two equity-settled share based remuneration schemes for Executive Directors and certain senior management, one being an approved scheme, the other unapproved, but with similar terms. Half of the options are subject to a total shareholder return (TSR) performance condition and the remaining half are subject to an earnings per share (EPS) performance condition. The options in both schemes vest or have vested as follows: For options granted at IPO and on 20 May 2015 and outstanding at 1 January 2017: • 25% based on performance to 31 March 2017, exercisable between that date and 11 November 2022; • 25% based on performance to 31 March 2018, exercisable between that date and 11 November 2022; • 25% based on performance to 31 March 2018, exercisable between 31 March 2019 and 11 November 2022; • 25% based on performance to 31 March 2018, exercisable between 31 March 2020 and 11 November 2022. For options granted during 2016 and outstanding at 1 January 2017: • 100% based on performance to 31 March 2019, exercisable between that date and 3 May 2024. For options granted during the year: • 100% based on performance to 31 March 2020, exercisable between that date and 18 April 2025. 58. Mortgage Advice Bureau Annual Report 2017 26. Share based payments (continued) The number and weighted average exercise prices (WAEP) of, and movements in, share options during the year for the Mortgage Advice Bureau Executive Share Option Plan: Outstanding at 1 January Granted during the year Exercised Lapsed* Outstanding at 31 December * Due to retirement or leaving the Group. 2017 WAEP £ 2.32 4.31 2017 Number 2,171,822 624,599 (1.63) (325,745) – 2.98 (118,658) 2,352,018 2016 WAEP £ 1.63 3.58 – – 2016 Number 1,400,342 771,480 – – 2.32 2,171,822 On 19 April 2017, 624,599 options over ordinary shares of 0.1 pence each in the Company were granted to the Executive Directors and senior executives of MAB under the equity-settled Mortgage Advice Bureau Executive Share Option Plan (the “Options”). Exercise of the Options is subject to the achievement of performance conditions based on total shareholder return and earnings per share criteria. Subject to achievement of the performance conditions, the Options will be exercisable three years from the date of grant. The exercise price for the Options is 430.83 pence, being equal to the average of the last three business days’ closing price for the ordinary shares of the Company prior to the date of grant. On 10 July 2017, 60,324 options over ordinary shares of 0.1 pence each in the Company were granted to two senior executives of MAB under the equity-settled Mortgage Advice Bureau Executive Share Option Plan. Exercise of these options is subject to the achievement of performance conditions based on total shareholder return and earnings per share criteria. Subject to achievement of the performance conditions, these options will be exercisable three years from the date of grant. The exercise price for these options is 414.42 pence, being equal to the average of the last three business days’ closing price for the ordinary shares of the Company prior to the date of grant. Options exercised in April 2017 resulted in 325,745 ordinary shares being issued at an exercise price of £1.60 and £2.19. The price of the ordinary shares at the time of exercise was £4.24 per share. For the share options outstanding under the Mortgage Advice Bureau Executive Share Option Plan as at 31 December 2017, the weighted average remaining contractual life is 1.6 years (2016 2.0 years). The following information is relevant in the determination of the fair value of options granted during the year under the equity- settled share based remuneration scheme operated by the Group. Equity-settled Option pricing model – EPS Option pricing model – TSR Exercise price Expected volatility Expected dividend yield Risk free interest rate 2017 2016 Black-Scholes Black-Scholes Stochastic Stochastic £4.3083 £3.5775 30% 4.18% 0.15% 30% 4.0% 0.47% Expected volatility is a measure of an amount by which the share price is expected to fluctuate during a period. As the Company only listed in November 2014 there is insufficient historical data. We have therefore used a proxy volatility figure based on the median volatilities of dividend paying FTSE AIM 100 companies over each of the expected terms. Dividends paid on shares reduce the fair value of an award as a participant does not receive the dividend income on these shares. For the share options granted during the year the historic dividend yield has been used, calculated as dividends announced in the 12 months prior to grant (excluding special dividends) calculated as a percentage of the share price on the date of grant to give a dividend yield of 4.18%. 59. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the consolidated financial statements (continued) for the year ended 31 December 2017 26. Share based payments (continued) The Options offer participants the opportunity to benefit from increasing per share value without risking the current per share price. The risk-free rate used is the rate of interest obtainable from UK government securities as at the date of grant over the expected terms. The options granted this year have vesting periods of 3.0 years from the date of grant and the calculation of the share based payment is based on these vesting periods. MAB AR Option Plan The Group operates an equity-settled share plan, the AR Option Plan, to reward selected ARs of the Group. The AR Option Plan provides for options which have a nominal exercise price of 0.01 pence per Share (or, for any individual AR, not less than £1 on each occasion of exercise) to acquire ordinary shares subject to performance conditions. Certain criteria must be met in order for ARs to be eligible, including using the Mortgage Advice Bureau brand and being party to an AR Agreement which provides for an initial contract term of at least five years at the date of grant. The AR Options will normally become exercisable following the fifth anniversary of grant subject to the satisfaction of performance conditions based on financial and other targets, including quality of consumer outcomes, compliance standards and continued use of the Mortgage Advice Bureau brand. The number and weighted average exercise prices (WAEP) of, and movements in, share options during the year for the MAB AR Option Plan: Outstanding at 1 January Granted during the year Outstanding at 31 December 2017 WAEP £ 0.01p – 0.01p 2017 Number 255,000 – 255,000 2016 WAEP £ 0.01p – 0.01p 2016 Number 255,000 – 255,000 For the share options outstanding under the MAB AR Option Plan as at 31 December 2017, the weighted average remaining contractual life is 2.4 years (2016: 3.4 years). Expected volatility is a measure of an amount by which the share price is expected to fluctuate during a period. As the Company only listed in November 2014 there is insufficient historical data. We have therefore used a proxy volatility figure based on the medium volatilities, of dividend paying FTSE AIM 100 companies over each of the expected terms. Dividends paid on shares reduce the fair value of an award as a participant does not receive the dividend income on these shares. For the share options granted during 2015 the stub dividend in respect of the period from Admission to 31 December 2014 has been annualised and divided at the share price at date of grant to give a dividend yield of 7.1%. The options offer participants the opportunity to benefit from increasing per share value without risking the current per share price. The risk-free rate used is the rate of interest obtainable from UK government securities as at the date of the grant over the expected terms. The options granted in 2015 have a vesting period of 5 years from the date of grant and calculation of the share based payment is based on these vesting periods. 60. Mortgage Advice Bureau Annual Report 2017 26. Share based payments (continued) Share based remuneration expense The share based remuneration expense of £670,465 (2016: £315,223) includes the charge for the equity-settled schemes of £520,949 (2016: £221,717) and the matching element of the Group’s Share Incentive Plan for all employees of £37,200 (2016: £52,506). The Group did not enter into any share based payment transactions with parties other than employees during the current or previous period. 27. Contingent liabilities The Group had no contingent liabilities at 31 December 2017 or 31 December 2016. 28. Events after the reporting date There are no significant events to report after the reporting date. 61. Mortgage Advice Bureau Annual Report 2017 Financial statements Company statement of financial position as at 31 December 2017 Registered number 04131569 The following parent entity financial statements are prepared under FRS 102 and relate to the Company and not to the Group. The statement of accounting policies which have been applied to these accounts can be found on page 64. The Company is a non-trading holding company. As permitted by section 408 of the Companies Act 2006 the Company has elected not to present its own profit and loss account for the year. The Company reported a profit for the financial year of £10,712,547 (2016: £10,874,476). Note 2017 £’000 2016 £’000 Fixed assets Investments Current assets Debtors Net assets Capital and reserves Called up share capital Share premium account Capital redemption reserve Retained earnings 3 4 5 6 6 6 3,077 3,077 754 3,831 51 3,574 20 186 3,831 222 3,299 51 3,042 20 186 3,299 The notes on pages 64 to 67 form part of these financial statements. The financial statements were approved by the board of directors on 19 March 2018. P Brodnicki Director L Tilley Director 62. Mortgage Advice Bureau Annual Report 2017 Financial statements Company statement of changes in equity for the year ended 31 December 2017 Balance at 1 January 2016 51 3,042 20 186 Share capital £’000 Share premium £’000 Capital redemption reserve £’000 Retained earnings £’000 Total Equity £’000 3,299 Profit for the year Total comprehensive income Transactions with owners Dividends paid Transactions with owners Balance at 31 December 2016 and 1 January 2017 Profit for the year Total comprehensive income Transactions with owners Issues of shares Dividends paid Transactions with owners – – – – – – – – – – – – 10,874 10,874 10,874 10,874 (10,874) (10,874) (10,874) (10,874) 51 3,042 20 186 3,299 – – – – – – – 532 – 532 – – – – – 10,712 10,712 10,712 10,712 – 532 (10,712) (10,712) (10,712) (10,180) At 31 December 2017 51 3,574 20 186 3,831 63. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the Company statement of financial position as at 31 December 2017 1. Accounting policies n Basis of preparation The separate financial statements of the Company are presented as required by the Companies Act 2006 and have been prepared under the historical cost convention and in accordance with Financial Reporting Standard 102, the Financial Reporting Standard applicable in the United Kingdom and the Republic of Ireland. The principal accounting policies are summarised below. They have all been consistently applied to all years presented. The preparation of financial statements in accordance with FRS 102 requires the use of certain critical accounting estimates. It also requires management to exercise judgement in applying the Company’s accounting policies. Given the nature of the company’s business there are no critical accounting estimates or areas of judgement required in the preparation of the financial statements. n Cash flow statement The cash flows of the Company are included in the consolidated cash flow statement of Mortgage Advice Bureau (Holdings) plc which is included in this annual report. Consequently, the Company is exempt under the terms of FRS 102 from publishing a cash flow statement. n Going concern After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in the accounts. n Investments Investments in subsidiaries are held at historical cost less provision for impairment. The carrying values of investments are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. n Share capital Financial instruments issued by the Company are treated as equity only to the extent that they do not meet the definition of a financial liability. The Company’s ordinary shares are classified as equity instruments. Incremental costs directly attributable to the issue of new shares are shown in share premium as a deduction from proceeds. n Dividends Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when they are paid. In the case of final dividends, this is when they are approved by the shareholders. n Financial Instruments The Company makes little use of financial instruments other than intercompany balances and so its exposure to credit risk and cash flow risk is not material for the assessment of the assets, liabilities, financial position and profit of the Company. 2. Profit for the year During the year its only income was dividends receivable from its subsidiaries. Its only expenditure is in respect of dividends payable. The auditors’ remuneration for audit and other services is disclosed in note 5 to the consolidated financial statements. Remuneration for the audit of the Company financial statements is borne by a subsidiary entity. 64. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the Company statement of financial position (continued) as at 31 December 2017 3. Investments Cost At 1 January 2017 and 31 December 2017 Net book value At 31 December 2017 At 31 December 2016 The subsidiaries of Mortgage Advice Bureau (Holdings) plc at each reporting date are as follows: Company name Country of Incorporation Mortgage Advice Bureau Limited England and Wales Mortgage Advice Bureau (Derby) Limited England and Wales Capital Protect Limited England and Wales Mortgage Talk Limited England and Wales Talk Limited England and Wales Mortgage Advice Bureau Australia (Holdings) Pty Limited Australia Mortgage Advice Bureau Pty Limited Australia MABWM Limited England and Wales Mortgage Advice Bureau (UK) Limited England and Wales MAB (Derby) Limited L&P 137 Limited England and Wales England and Wales Mortgage Talk (Partnership) Limited England and Wales Financial Talk Limited Survey Talk Limited L&P 134 Limited Loan Talk Limited MAB1 Limited England and Wales England and Wales England and Wales England and Wales England and Wales Percentage of ordinary shares held 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Subsidiary undertakings £’000 3,077 3,077 3,077 Nature of business Provision of financial services Provision of financial services Provision of financial services Provision of financial services Intermediate holding company Intermediate holding company Holding of intellectual property Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant The registered office for all of the subsidiaries of Mortgage Advice Bureau (Holdings) plc, as listed in the table above, is Capital House, Pride Place, Pride Park, Derby, DE24 8QR, United Kingdom, other than for the two subsidiaries incorporated in Australia for which the registered office is Norton Rose Fulbright, Level 18, 225 George Street, Sydney, NSW 2000, Australia. 65. Mortgage Advice Bureau Annual Report 2017 Financial statements Notes to the Company statement of financial position (continued) as at 31 December 2017 3. Investments (continued) Acquisitions On 8 December 2016 the Group acquired a 100% interest in Mortgage Advice Bureau Australia (Holdings) Pty Limited which was a newly incorporated entity. Mortgage Advice Bureau Australia (Holdings) Pty Limited has a 100% equity stake in Mortgage Advice Bureau Pty Limited and also a 45% equity stake in MAB Broker Services Pty Limited. Mortgage Advice Bureau (Holdings) plc holds 100% of the ordinary share capital of Mortgage Advice Bureau Limited and Talk Limited. Mortgage Advice Bureau Limited holds 100% of the ordinary share capital of Mortgage Advice Bureau (Derby) Limited, Capital Protect Limited, MABWM Limited and Mortgage Advice Bureau Australia (Holdings) Pty Limited. Talk Limited holds 100% of the ordinary share capital of Mortgage Talk Limited, L&P 137 Limited, Mortgage Talk (Partnership) Limited, Financial Talk Limited and Survey Talk Limited. Mortgage Talk Limited holds 100% of the ordinary share capital of Loan Talk Limited. L&P 137 Limited holds 100% of the ordinary share capital of L&P 134 Limited. There are no restrictions regarding the utilisation of cash or other resources held by any subsidiary. 4. Debtors – amounts falling due within one year Amounts due from Group undertakings 2017 £’000 754 Amounts due from Group undertakings are unsecured, interest free and have no fixed repayment term. 5. Share capital Issued and fully paid Ordinary shares of 0.1p each Total share capital 2017 £’000 51 51 2016 £’000 222 2016 £’000 51 51 During the year 327,745 ordinary shares of £0.001 each were issued following exercise of the first tranche of options issued at the time of the Initial Public Offering of the Company at a premium of £531,980. See also note 26 to the financial statements for the Group. 6. Reserves The following describes the nature and purpose of each reserve within equity: Reserve Description and purpose Share premium Amount subscribed for share capital in excess of nominal value. Capital redemption reserve The capital redemption reserve represents the cancellation of part of the original share capital premium of the company at par value of any shares repurchased. Retained earnings All other net gains and losses and transactions with owners (e.g. dividends) not recognised elsewhere. There is no restriction on the distribution of retained earnings. 66. Mortgage Advice Bureau Annual Report 2017 7. Financial instruments and risk The only financial asset of the company is an amount due from other Group undertakings and therefore the Company is exposed to minimal financial risks. Details of the Group’s management of the financial risks to which it is exposed are set out in note 18 to the financial statements for the Group. 8. Related party transactions The Company has taken advantage of the exemption in s33.1A of FRS102, not to disclose transactions with Group companies which are 100% owned. 67. Mortgage Advice Bureau Annual Report 2017 Notes 68. Mortgage Advice Bureau Annual Report 2017 Mortgage Advice Bureau Annual Report 2017 Mortgage Advice Bureau (Holdings) plc Capital House Pride Place Derby DE24 8QR