Non-Standard Finance Plc
Annual Report 2016

Plain-text annual report

N o n - S t a n d a r d F i n a n c e p l c A n n u a l r e p o r t a n d a c c o u n t s 2 0 1 6 A non-standard day Non-Standard Finance plc Annual report and accounts 2016 Our approach at Non-Standard Finance is anything but standard – in branch-based lending and home credit, a key part of our underwriting process is that we meet our customers face-to- face. Whilst we don’t get it right all of the time and there is always room for improvement, our model has proven its ability to deliver positive customer outcomes and attractive risk- adjusted returns. Strategic report Highlights At a glance Chairman’s statement Market opportunity Business model Group Chief Executive’s Report Strategy & key performance indicators Principal risks 2016 Financial review Culture and stakeholder management 1 2 4 6 8 12 15 24 26 36 Business model in action Everyday Loans 10 Governance Board of Directors Governance report Audit Committee report Nomination Committee report Risk Committee report Directors’ remuneration report Directors’ report Financial statements Independent auditor’s report Financial statements Notes to the financial statements Additional information Company information 40 42 47 49 50 51 66 70 77 82 103 Chairman’s statement 04 Business model in action Trusttwo 34 Business model in action Loans at Home 22 Non-Standard Finance plc Annual report and accounts 2016Overview Highlights 2016 “We have become a significant player in the non-standard finance market in the UK, serving 137,000 customers through a network of almost 90 locations.” John van Kuffeler Founder and Group Chief Executive Operational highlights Financial highlights • Acquisition of Everyday Loans, including Trusttwo, completed on 13 April 2016 • Full FCA permissions for Everyday Loans, including Trusttwo, received on 20 June 2016 • Strong growth across all three business divisions • Combined loan book (before fair value adjustments) of c.£165m at 31 December 2016 Visit our website for further information www.nonstandardfinance.com Reported results Revenue Pro forma results1 Revenue £72.8m 2015: £9.2m £94.7m 2015: n/a Operating loss Operating profit £(5.2)m £18.7m 2015: loss of £(10.0)m 2015: n/a Basic and fully diluted loss per share Basic and diluted earnings per share (2.60)p 3.37p 2015: loss per share of (21.25)p 2015: n/a Dividend per share Dividend per share 1.20p 1.20p 2015: nil 2015: nil 1. Assuming Everyday Loans (including Trusttwo) was acquired on 1 January 2016 and adjusted to exclude fair value adjustments, amortisation of acquired intangibles and exceptional items. There are no comparative pro forma figures for 2015 as on completion of the acquisition of Loans at Home on 4 August 2015, the Group adopted a more timely approach to recognising impairment. The Group has concluded that any benefit derived from restating the results of Loans at Home from 1 January to 3 August 2015 to reflect this more prudent approach would be more than outweighed by the cost of producing such results. 1 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Overview At a glance “ Every adult should have access to credit they can afford to repay – we seek to help consumers that are either unable or unwilling to borrow from mainstream financial institutions.” John van Kuffeler Founder and Group Chief Executive Who we are Formed in 2014, Non-Standard Finance has become a leading provider of unsecured credit to UK adults. Listed on the Main Market of the London Stock Exchange, we have almost 90 locations servicing 137,000 customers to whom we have outstanding loans of approximately £165m in aggregate1. Our sizeable infrastructure is supported by 537 full-time staff and 785 self-employed agents. Listed Locations  88 Customers Loan book1 137,000 165m Staff Agents 537 785 Everyday Loans branch (41) Loans at Home office (47) Our business divisions Branch-based lending Home credit Guaranteed loans The UK’s largest branch- based provider of unsecured loans to sub-prime borrowers. The UK’s third largest provider of unsecured, home- collected credit. A fast-growing player in an expanding market. Loan book1 £122.4m Loan book1 £33.4m Loan book1 £8.8m See p.10 See p.22 See p.34 1. Before fair value adjustments. 2 Non-Standard Finance plc Annual report and accounts 2016Why we are different Customer touchpoints In branch-based lending and home credit we aim to meet all of our customers face-to-face before we lend to them. Whilst expensive to execute versus some other business models, we believe that this tried-and-tested approach is what separates us from many of our peers and enables us to lend to consumers that many other institutions will not. In guaranteed loans, we are able to operate a purely remote model as the presence of a prime, or near-prime guarantor means that a face-to-face meeting is not required to complete our underwriting process. The interface between our people and our customers is critical to us making good lending decisions, delivering positive customer outcomes and collecting the monies we are owed. Put another way, the quality of our customer relationships and how we manage them are key drivers of our long-term success. As a Group, we are focused on ensuring that each customer touchpoint is optimised through our processes and procedures, the systems and infrastructure we deploy to support them, the training and reward structures of our representatives and our overall cultural approach. Each of these elements combine to determine how we behave as a business. For more details about our culture see p.36 e c a f - o t - e c a F t c a s n a r t d n a r e f e R In branch • Pre-screened customers are met for up to 45 minutes • Two-person approach to review of applications • Branch manager makes final lending decision In home • Over 80,000 customer visits each week • Agent is invited into the home, having received a ‘request to call’ • Pre-screening tells agent parameters for possible loan • Agent explains the process before making a separate visit to make the loan • Income and expenditure review completed in the home, final decision made by agent 41 branches +14% 785 agents +25% Customers By web By phone e t o m e R • Convenient for the customer; cost-effective for the operator • Customers respond to direct advertising or apply via web search • Customer details captured online to allow initial screening process • Application will usually be processed face-to-face (in branch or in the customer’s home) • Convenient for the customer; cost-effective for the operator • Customers may respond to direct advertising or via web • Branch-based lending – operator directs them to nearest branch, driving branch traffic; or may, in a limited number of cases, process application by phone • Home credit – operator arranges agent visit by phone but transaction is completed face-to-face • Guarantor loans – application process is completed over the phone e t o m e R e c a f - o t - e c a F t c a s n a r t d n a r e f e R 3 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016 Overview Chairman’s statement Charles Gregson Non-Executive Chairman The past year has seen us transform Non-Standard Finance from what was just an idea in 2014, to a substantial listed enterprise with a combined loan book of c.£165m (before fair value adjustments), almost 90 locations across the UK, 137,000 customers, over 500 full-time staff and 785 self-employed agents. Phase one of our plan is now complete and we have the building blocks in place to support further growth in each of our three business divisions. 2016 results The Group’s performance in 2016 was broadly in line with our expectations driven by a strong performance from Everyday Loans which represents 75% of the Group’s combined loan book. As noted in the Chief Executive’s review on pages 12 to 14, whilst the reported results include just eight months from Everyday Loans and Trusttwo, the underlying performance of the Group as a whole, as illustrated by the normalised pro forma results1, is significantly better. Reported revenues1 were £72.8m (2015: £9.2m) and the Group produced an operating loss of £5.2m (2015: operating loss of £10.0m). This resulted in a reported loss per share of 2.60p (2015: loss per share of 21.25p). Strategy As set out in our Strategic Report, we remain focused on serving the needs of consumers who are unable or unwilling to borrow from mainstream institutions. Everything we have seen to date has confirmed that the size of this opportunity remains large – we remain on course to achieve our target of 20% loan book growth across the Group as a whole and a 20% return on assets in each of our operating businesses in the medium- term. Having executed the strategy we set out in our initial prospectus back in 2015, our strategy has evolved and is now focused on the following three elements: • Being a leader in our chosen markets; • Investing in our core assets; and • Acting responsibly. Each of these is explained in more detail in the Strategic report on pages 15 to 21. Culture The Group has only been in its current form since April 2016 and so our culture, or ‘the way we do things around here’, is continuing to evolve and is heavily influenced by regulation, the Board and also the embedded values and behaviours within each of our operating companies. Whilst a thorough due- diligence process meant that the Board was confident that the culture within each business was broadly consistent, in December 2016 it instituted a formal process to confirm what the Group’s culture is, what it should be and to ensure there are effective means to influence it in each of our business areas, not just because a regulator says we should, but because it makes good business sense. 1. Assuming Everyday Loans (including Trusttwo) was acquired on 1 January 2016. 4 Non-Standard Finance plc Annual report and accounts 2016earnings. If approved at the AGM, the final dividend would be paid to those shareholders on the Company’s share register on 19 May 2017, with payment being made on 20 June 2017. Outlook During the past year we acquired approximately 80% of the current Group while the balance of our business was undergoing a period of significant change and adjustment. Having successfully embedded Everyday Loans and Trusttwo and with a clear focus on existing customers at Loans at Home, we are now well placed for the year ahead. We have a highly experienced management team, a strong balance sheet and a clear plan to deliver significant revenue and profit growth in each of our three operating divisions over the medium-term. We are optimistic about the Group’s prospects in 2017 and believe that the outlook remains bright. Charles Gregson Non-Executive Chairman 31 March 2017 Whilst this exercise is not yet complete, based upon some early results, the following values and behaviours are emerging as being common across all three businesses: • Doing the right thing: we recognise our collective responsibility for delivering great outcomes for our customers. We don’t cut corners and always seek the path that is right before the path that is easy. • Shared purpose: we have clear strategic and operational goals and expect all of our representatives to understand and share in that vision. • Integrity: we respect colleagues and other key stakeholders and do what we say we will do. • Teamwork: our businesses are complex and involve many different elements that each represent an important part of our overall business process. By working together we are likely to solve problems more effectively than trying to do things on our own. • Communication: we listen, are well-informed and believe it’s our duty to speak up when we disagree, or believe something is not right; we celebrate success and don’t blame others when something goes wrong, always learning from our mistakes. • Entrepreneurial: we use our initiative and are prepared to try new things so we can perform better and be the best we can be. Certain areas of our business represent potential ‘hot spots’ through the existence of possible conflicts such as incentives that may encourage poor behaviour in order to meet certain performance targets. Managing such conflict is part of the day-to-day management of each of our businesses. Whilst we don’t profess to get everything right all of the time, our systems and controls are designed to promote a culture that supports each of our desired behaviours, helping to ensure that we minimise the risk of any material impact on our overall operating and financial performance. However, as a Board we don't take this for granted. During 2016, each of the Directors spent time at a number of our locations across the country, meeting and spending time with staff and self-employed agents, providing valuable insights into the day-to- day operations of our business. In future reports, we will provide updates on our cultural approach, how we measure and influence it and highlight any areas of potential risk. Board I would like to thank Robin Ashton, who stepped down from the Board in October 2016, for his valuable contribution. As one of the co-founders of the Group, Robin played a vitally important role in helping us through the Group’s initial development phase and in building the substantial enterprise that we are today. In December 2016 we announced some changes to the Board in order to achieve a more conventional management structure. Having previously been Executive Chairman, on 19 December 2016 the Group’s founder, John van Kuffeler became Chief Executive Officer and I became Non-Executive Chairman. Long-Term Incentive (‘LTI’) Having consulted extensively with some of our largest shareholders, we plan to seek shareholder approval for a carefully structured LTI for members of the Group’s senior management team to be approved at the Annual General Meeting (‘AGM’) to be held on 9 May 2017. Developed in conjunction with our advisers, the new plan means that the interests of senior management are fully aligned with those of our shareholders. Full details of the new LTI and a new Sharesave scheme for all employees that we also plan to introduce are set out in the AGM notice. Final dividend Having declared a maiden half-year dividend of 0.30p per share in August 2016, the Board is pleased to recommend a final dividend of 0.90p per share (2015: nil), making a total of 1.20p for the year as a whole. If approved by shareholders, this final dividend would represent a meaningful step towards our goal of reaching a payout ratio equal to 50% of normalised post-tax 5 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Overview Market opportunity There is significant demand for non-standard finance in the UK. Changes to the UK’s non-standard consumer finance sector have created a significant opportunity to build a substantial, well-capitalised enterprise, focused on addressing the needs of millions of adults in this large and poorly-served market. There is a mis-match in the supply of and demand for credit by borrowers who are either on low incomes, are credit impaired or have a low credit score. On the demand side, over 10 million consumers are either unwilling or unable to borrow from mainstream financial institutions.1 Several factors have contributed to a shortfall in the supply of non-standard consumer finance in the UK: there was a marked reduction in the total amount of credit available to sub-prime borrowers following the financial crisis; there are high barriers to entry in the form of strict regulatory requirements and the need for a robust compliance infrastructure; the specialist nature of the non-standard market means that there is a limited pool of managerial talent; and operators need clear access to long-term and low-cost funding to support future growth. This mis-match has created a significant opportunity for Non-Standard Finance plc. The supply of non-standard finance in the UK 1 £bn 15 12 9 6 3 0 2008 2009 2010 2011 2012 2013 2014 ■ Inactive secured ■ Logbook loans ■ Branch-based lenders ■ Pawnbroking ■ Guaranteed loans ■ Payday loans ■ Home collected credit ■ Car finance ■ Rent to buy ■ Credit unions ■ Store cards ■ Mail order credit ■ Point of sale loans ■ Sub-prime credit cards 6 Proportion of the UK’s working population that is under-served 1 3 = c.10m1 People Customer characteristics Low paid Low credit status Credit impaired 1% 16% of total workforce paid minimum wage and below2 of total workforce self-employed3 912,000 Consumer County Court Judgments4 2.3m Recently arrived migrants5 1. L.E.K. Consulting – Executive Insights Volume XVIII, Issue 10, 15 April 2016; ONS: UK Labour Market, February 2017. 2. ONS: Low pay in the UK: April 2016. 3. ONS: Self-employed. 4. Registry Trust Limited press release, 1 February 2017. 5. Number of immigrants to the UK, June 2012–June 2016 – ONS: overview of the UK Population, December 2016. Non-Standard Finance plc Annual report and accounts 2016The UK consumer credit market can be split into three different segments: 1. Large amounts, over a longer-term which tend to be at lower annual percentage rates ('APRs') 2. Small amounts, over the short-term at lower APRs 3. Small amounts over the short-term at higher APRs Our three divisions are seeking to address different areas of the market: 1. Branch-based lending 2. Home credit 3. Guaranteed loans Loan Amount £10,000 £1,000 £500 Loan Amount £10,000 £1,000 £500 1. Large amount, longer-term 2. Low cost, short-term 3. High cost, short-term 30% 50% 75% 100% 200% 1000% APR% 1. Branch-based lending 3. Guaranteed loans Payday lending cap 2. Home credit 30% 50% 75% 100% 200% 1,000% APR% Whilst we operate in competitive markets, we believe our businesses are well-positioned. We are well-placed with leading positions in branch-based lending and home credit and have a scalable presence in guaranteed loans. #1 in branch-based lending #3 in home credit Positioned to become #2 in guaranteed loans 7 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Strategic report Business model Our purpose: What sets us apart: To help those who need credit but are either unwilling or unable to borrow from mainstream institutions. Building a personal relationship with our customers is key and enables us to deliver positive customer outcomes and attractive returns for shareholders. High-quality and experienced management NSF is led by a highly experienced Board and operational management teams with many years of experience and a proven track record of creating value for shareholders. See governance section on p.39 Infrastructure and scale We invest in extensive agent and branch networks to enable regular face-to-face contact with our customers. We also develop user-friendly technology platforms which improve our customer service and collection capabilities. Our infrastructure is highly scalable. Rigorous compliance and risk management We have developed a robust risk management framework and established a Risk Committee which oversees risk assessment and advises the Board on the Company’s overall risk appetite, tolerance and strategy. See principal risks section on p.24 A culture focused on delivering positive customer outcomes Having assembled three different businesses in a short period of time, our culture as a group is continuing to evolve. However, ‘providing a helping, but firm hand to our customers’ is an ethos that runs deep through each of our operating companies. We are entrepreneurial and are not afraid to try new things. We don't blame others and learning from our mistakes is how we improve, driving better outcomes for customers and greater long-term returns for our shareholders. See culture and stakeholder management section on p.36 Access to long-term, low-cost funding NSF has a clear financing strategy in place, utilising a combination of debt and equity funding to help grow our businesses and enabling them to generate strong cash flow over the medium-term. See governance section on p.39 8 Non-Standard Finance plc Annual report and accounts 2016What we do: Source long-term capital Develop focused, tailored and affordable loan products Attract customers Lend responsibly • Identify suitable customers • Assess credit via external and internal scorecard • Understand customer needs • Assess affordability (income and expenditure) • Tailor product to suit their needs • Ensure customer understands e c a f - o t - e c a F t c a s n a r t d n a r e f e R In branch In home e t o m e R By web By phone e c a f - o t - e c a F t c a s n a r t d n a r e f e R e t o m e R Collect responsibly • Encourage timely payment • Show forbearance if and when required • Identify vulnerability • Suggest sources of support if in difficulty Risks • Conduct • Regulation • Credit • Liquidity • Competition • Business strategy and operations • Reputation Reinvest in the business Reward providers of capital • Debt • Equity Costs • Network costs • Interest • Taxes • Losses/impairments How we create value: Customers Feefo rating1 4.8/5 Net promoter scores2 98% FOS complaints3 0.02% Shareholders Loan book growth Everyday Loans Return on assets Everyday Loans 17.1% Loans at Home 6.7% Trusttwo 8.5% Number of branches/ offices 88 18.0% Loans at Home 19.3% Trusttwo 18.9% Payout ratio4 36% People Total training days5 2,107 Communities Number of staff 537 Number of self-employed agents 785 1. www.Feefo.com is a third-party customer review site. It invites customers at Everyday Loans and Trusttwo to review our performance. The rating shown is the aggregation of all scores received for Everyday Loans with a maximum score of 5. The same score for Trusttwo was 4.7 out of 5. 2. Percentage of customers that were ‘very satisfied’ or ‘quite satisfied’ with overall services at Loans at Home – last survey based on 896 responses (April to December 2016). 3. Number of upheld cases at the Financial Ombudsman Service as a percentage of number of loans written in 2016. 4. Based upon 2016 pro forma normalised earnings per share of 3.37p and a total dividend per share of 1.20p. 5. Total for Everyday Loans, Loans at Home (staff and agents) and Trusttwo in 2016. 9 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016 Strategic report Business model in action Customer touchpoint: branch-based A non-standard day for Govind “ Everyday Loans genuinely wants to help people who aren’t in the best position financially. It treats customers as individuals and not as statistics.” Govind Everyday Loans, Bourne End, Buckinghamshire 10 Non-Standard Finance plc Annual report and accounts 2016Building relationships I have just started my career at Everyday Loans as a customer account manager. I previously worked in personal banking and insurance. I moved to Everyday Loans because I wanted to work with a smaller and more personable team where I can make a difference. The best part about my job is building relationships with the clients and helping them through the lending process. Everyday Loans is an expanding company with a clear career path so in time I’m hoping to become a branch manager. Bourne End, Buckinghamshire 11 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Strategic report Group Chief Executive’s Report John van Kuffeler Group Chief Executive Results The past year has been transformational for the Group with the completion of the acquisition of Everyday Loans and Trusttwo, new bank facilities in place and a carefully planned programme of investment in all three businesses. Against this background, I am pleased to report normalised revenue of £81.1m (2015: £14.7m) and normalised operating profit of £13.8m (2015: loss of £0.5m)1. Reported revenue after fair value adjustments was £72.6m (2015: £9.2m) and reported loss before interest and tax was £5.8m (2015: loss of £16.2m). The Group’s reported results include just over eight months’ performance from Everyday Loans and Trusttwo which were acquired in April 2016 and that together represent approximately 80% of the Group’s net loan book (before fair value adjustments). The reported results are also significantly affected by temporary additional commission paid to newly signed-up agents at Loans at Home, fair value adjustments and the amortisation of acquired intangibles. To provide investors with a more representative picture of the Group’s underlying performance, we have also produced pro forma normalised numbers, as if Everyday Loans and Trusttwo had been acquired at the start of the year and before the impact of fair value adjustments, the amortisation of acquired intangibles and exceptional items. There are no comparable pro forma numbers for 2015 as the Group believes that any benefit derived from restating the results of Loans at Home from 1 January to 3 August 2015 would be more than outweighed by the cost of producing such results. Pro forma normalised revenues and operating profit were £94.7m and £18.7m respectively, and pro forma normalised earnings per share was 3.37p (reported loss per share was 2.60p). I am pleased that the Board is recommending an inaugural final dividend of 0.9p, making a total of 1.2p for the year. The size of our combined net loan book across all businesses as at 31 December 2016 was £164.6m before any fair value adjustment (2015: £28.0m) and £180.4m after fair value adjustments (2015: £28.4m) representing a 489% increase from 31 December 2015, of which a 368% increase relates to the acquisition of Everyday Loans. Everyday Loans The acquisition of Everyday Loans completed on 13 April 2016. Since then, the business has performed strongly with reported operating profit of £6.8m (2015: n/a), reported normalised operating profit of £14.8m (2015: n/a) and pro forma normalised operating profit of £19.4m (2015: n/a). We have expanded the branch network, with five new branches opened since completion, as well as broadened the product offering to include loans at higher APRs. We also adjusted the pricing of certain products in accordance with a new and refined credit scorecard resulting in an increased yield on new business volumes from an average of 52% at the time of acquisition to 57% in December 2016. Loans at Home I am pleased to report loan book growth of 19% at Loans at Home in 2016, a year of transformation for the business, including a new management team and investment in a programme of significant growth. 1. Adjusted to exclude fair value adjustments, amortisation of acquired intangibles and exceptional items. 12 Non-Standard Finance plc Annual report and accounts 2016 This included the recruitment of 25% more agents; a significant upgrade to the regulatory and compliance functions; the roll-out of new technology; and the testing of a number of alternate growth strategies. Reported operating profit was £1.4m and reported normalised operating profit was £1.9m, both of which are after deducting temporary additional agent commissions of £1.8m that were paid to newly recruited agents while they establish a critical mass of customers (for the period 4 August 2015 to 31 December 2015: operating profit of £2.1m). While our programme of investment held back Loans at Home’s profit performance in 2016, we have taken a number of steps to ensure that we are well-placed to deliver a significant increase in profitability in 2017. Trusttwo Following its acquisition and recognising its strong growth potential, we established Trusttwo as a separate entity with its own management team and profit and loss responsibility. This had an immediate and positive impact on performance and Trusttwo delivered reported and reported normalised operating profit of £0.5m (2015: n/a) and, on a pro forma basis, an operating profit of £0.7m (2015: n/a). Strategy Having executed the strategy as set out at the time of the Group’s Initial Public Offering in 2015, we have revised the Group strategy and this is set out in more detail on pages 15 to 21 of the Strategic report. Financing During the year the Group drew down on its new debt facilities and has recently extended these so that they total £115m of committed facilities, with an option to increase this to £140m, with the banks’ consent. The facilities, which are both for a three-year term, expire in June 2019 and March 2020 respectively and the Group is actively reviewing a variety of financing options that could underpin the Group’s long-term growth plans. As at 31 December 2016 the Group had gross borrowings of £87.3m and cash at bank of £5.2m. Regulation Everyday Loans, including Trusttwo, received full authorisation from the Financial Conduct Authority ('FCA') on 20 June 2016. Why are APRs so high? This is the question we get asked most often. To answer it, we need to explain what happens to the revenue we generate. 100 The figures shown here are illustrative and are for NSF Group as a whole, based upon the 2016 pro forma normalised results. Whilst each of our three businesses has different dynamics, we have sought to provide an NSF overview as follows. Revenue Having sourced sufficient low-cost funding to provide loans to our customers, the interest income we receive represents the Group’s revenue. This is then used to meet all of the Group’s obligations as well as to reward the providers of capital and invest in future growth. Impairments Lending to customers with low or impaired credit ratings is a risky business and a significant proportion of revenue is lost through the impairment of loans that don’t get repaid. Higher risk customers require higher impairments that in turn tend to result in higher APRs. People costs Staff and self-employed agent costs are significant as we have established large networks through which we engage with our customers in branch, or in their home. In home credit, temporary support payments to newly arrived agents are key to allowing them the time to build up a sufficient number of customers in order to earn the level of income they require through our commission structure. Other admin costs Property, IT and other infrastructure and support-related costs are significant for branch-based lending and home credit, requiring higher APRs. Business models with lower infrastructure costs, tend to attract lower APRs. The size of loans being offered is also a factor in driving APRs – smaller loans tend to attract higher APRs as many of the costs of delivery are the same, irrespective of the size of loan issued. Cost of funds and taxes Whilst we have sourced significant equity capital, a large part of our loan book is funded by debt facilities from third-party banks. As a relatively small UK business, we pay tax at the marginal rate, leaving a balance to reward shareholders through dividend payments and/or by reinvesting funds to deliver future growth. 80 60 40 20 0 100% 27% Impairments 36% People costs ) s t n e m y a p e r l a t i p a c s u p e m o c n l i t s e r e t n i ( e u n e v e R 17% Other admin costs 6% Cost of funds 3% 11% Taxes Profit for shareholders and/or reinvestment 13 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016 Strategic report Group Chief Executive’s Report continued Along with its major competitors, Loans at Home is currently operating under an interim consumer credit permission from the FCA, having submitted its application for full authorisation in June 2015. Whilst we remain in close contact with the FCA, we have received no indication on when we might receive full authorisation but believe that approval is likely to be given at the same time as the other major listed home credit providers. As part of its scheduled review of changes made to the regulation of high-cost, short-term credit, the FCA has extended its review to include other forms of high-cost credit, including home credit and guaranteed loans. We welcome this review and have submitted our own views to the FCA that we hope will provide stakeholders with a better understanding of both the benefits as well as the risks involved in serving this large and important segment of the UK’s non-standard finance market. We believe that the FCA’s approach and framework for the regulation of consumer credit are working well and while there is always room for improvement, we believe the current regime has the controls needed to maintain high standards and minimise the risk of customer detriment as a result of poor conduct. A summary of some of the recent regulatory developments that may have a bearing on the Group’s businesses is set out below. Final dividend Having declared a half year dividend of 0.3p per share (2015: nil), the Board is delighted to recommend a maiden final dividend of 0.9p per share (2015: nil) making a total dividend for the year of 1.2p per share (2015: nil). This represents a pay-out ratio of 36% based on pro forma normalised earnings. The dividend policy objective is to pay-out a dividend equal to 50% of normalised annual post-tax earnings. If approved by shareholders at the forthcoming Annual General Meeting on 9 May 2017, the final dividend of 0.9p per share (2015: nil) will be payable on 20 June 2017 to those shareholders on the register of shareholders on 19 May 2017 (the ‘Record Date’). Current trading and outlook We have made a good start to the year with each of our business divisions performing well. We are continuing our programme of investment in 2017 across each of our three businesses. At Everyday Loans we plan to open up to 12 new branches in the current year as well as continue to invest in new product development. As our largest business, we continue to believe that its market position, proven infrastructure and business model will deliver substantial revenue and profit growth. We continue to see significant potential at Loans at Home and having made a considerable investment in 2016, we plan to maximise profit performance in 2017. At Trusttwo, with the management and requisite infrastructure now in place we plan to drive increased volumes through a series of fully-integrated marketing campaigns using third-party brokers and direct marketing initiatives. We are also starting to see the benefit of leveraging our branch network as a unique and additional source of customer traffic. Despite macroeconomic uncertainties and the effects of inflation starting to come through, we believe that our customers are well-placed to manage as they have benefited from an improvement in their incomes in the last few years and, compared to the more financially-stretched prime and near-prime borrowers, have had relatively limited access to credit. We have a strong balance sheet with excellent positions in our chosen segments and are therefore well-placed to take advantage of the considerable opportunities that exist in all three business areas. We remain optimistic about the Group’s prospects. John van Kuffeler Group Chief Executive 31 March 2017 Regulatory overview Each of the Group’s main operating subsidiaries is regulated by the FCA. During 2016 there were a number of regulatory developments that may have a bearing on the Group’s activities and business operations in the future. Some of the more pertinent developments are summarised below. • On 26 May 2016 the FCA responded to the Competition and Markets Authority (‘CMA’) recommendations on high-cost, short-term credit (‘HCSTC’) and stated that it would make only minor changes to its suggested rules in this area. The new rules came into force on 1 December 2016. • On 30 June 2016 new rules on dispute resolution came into force extending the length of time that firms have to handle complaints from “next business day” to the close of business three days after the date of receipt. All complaints must be reported within three business days. • On 25 October 2016 the FCA announced a consultation on proposed guidance setting out its proposed interpretation of the law in relation to guarantor loans. This guidance was finalised on 19 January 2017 and the FCA has confirmed that there is no requirement for a statutory default notice to be issued where payment is requested of (not demanded), or volunteered by a guarantor and continuous payment authority (‘CPA’) can be used against the guarantor provided notice is given sufficiently in advance (five working days is suggested) to afford them the opportunity to object/cancel the CPA. • On 29 November 2016, the FCA issued a call for input to inform further work on high-cost credit, including a review of the HCSTC price cap. Non-Standard Finance plc has submitted its views to the FCA. • The FCA published its thematic review on early arrears management in unsecured lending in December 2016. Its findings were that many firms are improving the way they deal with customers in early arrears. However, in some areas consumer credit firms still need to improve their practices. • Also in December 2016 the FCA launched a consultation on the future funding of the Financial Services Compensation Scheme (‘FSCS’) and has also launched a consultation on a number of specific changes to its scheme rules. One proposal is that the FSCS should be extended to cover UK-based debt management firms and that this should be funded by a levy on consumer credit firms. According to the FCA and assuming an annual requirement of £45m, this would equate to a levy of 0.22% of annual income on all consumer credit firms. As at 31 March 2016 the FCA had authorised 30,309 consumer credit firms and a further 3,544 Interim Permissions were still awaiting to complete the process. In home credit, over 386 firms had been authorised as at 31 March 2016. 14 Non-Standard Finance plc Annual report and accounts 2016Strategic report Strategy The Group has become the UK’s largest branch-based provider of unsecured credit, the third largest provider of home-collected credit and has an established platform in guaranteed loans. Our strategy is focused on three elements: Being a leader in each of our chosen segments of the UK’s non-standard finance market. Investing in our core assets: our distribution networks, people, technology and brands. Acting responsibly. 1 2 3 The following pages summarise each of these three elements and provide KPIs that we use to monitor our performance. Where KPIs are not yet in place, the 2016 measure and medium-term target are shown as "n/a". 15 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Strategic report Strategy “ We want to be the best at what we do in delivering great customer outcomes and long-term returns for shareholders.” John van Kuffeler Founder and Group Chief Executive 1 www.Feefo.com – an online customer feedback engine. 16 1 Being a leader in each of our chosen segments of the non-standard finance market. Whilst we continue to monitor developments across a number of sub-segments of the UK’s non-standard finance market, our current focus is on the following segments: • Branch-based, unsecured lending; • Home credit; and • Guaranteed loans. Being a leader means different things to different people. For us this is not just about scale, although scale is important and we believe it is a key driver of long- term success. At Non-Standard Finance, leadership means being the best at what we do – not just from a customer’s perspective, but also from that of our employees, our regulator and each of our key stakeholders. The nature of each of our businesses, where many new customers are referred by existing customers or are themselves repeat customers, means that great service is a not an option – it is a prerequisite for long-term success. Get that right and scale, revenues and profits will naturally follow. Our view of what good lending looks like is not new, it is the same as it was hundreds of years ago. For our chosen customer segments, we believe it requires that we: • know our customer really well; • tailor our products to suit their needs; • don’t provide them with things they don’t want; and • if they get into difficulty, work with them so that together a satisfactory solution can be achieved for both borrower and lender. To do this successfully, we need the requisite infrastructure and culture at all levels of our business. For more details on our culture and the steps we are taking to nurture and protect it, see Culture and Stakeholder Management on pages 36 to 38. Our approach to being a leader in each of our three business segments is summarised below: • Branch-based lending – Everyday Loans is already a market leader in terms of its scale and we believe that the quality and breadth of product offered are unrivalled. Whilst our customer satisfaction, as measured by Feefo1 is at 4.8 (out of 5), we are not complacent – our reputation has been hard won over the past decade, but could easily be lost and so we remain dedicated to protecting as well as promoting our franchise through a continued programme of investment. • Home credit – Loans at Home is ranked third in the market by numbers of customers and self-employed agents. Upgrading our compliance procedures and systems, including our move to using hand-held technology, are all part of our plan to become best-in class. Other areas of investment include continuing to improve the quality of our self-employed agent network through regular training, appropriate incentives and high quality management information to help improve performance. • Guaranteed loans – Trusttwo is one of a number of ‘tier two’ players in terms of scale. Having launched in 2014 it has already grown fast to accumulate a loan book of £8.8m. However, we want to grow much bigger and we plan to do it quickly. Our goal is to become the clear number two behind the market leader, an objective we think is eminently achievable over the next few years. Our platform is highly scaleable and we have access to the Everyday Loans branch network that acts as an additional source of new customers. Non-Standard Finance plc Annual report and accounts 2016Strategic report Key performance indicators KPI measure Rationale Medium-term target 2016 KPI1 No. of active customers Evidence that our reach and quality of service is driving customer volumes. Customer satisfaction A lead indicator of future business volumes given our numbers of repeat customers and customer referrals. Everyday Loans 50,000 Loans at Home 95,000 Trusttwo 10,000 Everyday Loans2 >4.5/5 Loans at Home3 >95% Trusttwo2 >4.5/5 Everyday Loans 39,600 Loans at Home 93,600 Trusttwo 3,300 Everyday Loans2 4.8/5 Loans at Home3 98% Trusttwo2 4.7/5 Annual loan book growth By growing our loan book we can invest in reaching more customers and deliver attractive returns to shareholders. Everyday Loans Everyday Loans 20% 18% Loans at Home Loans at Home Risk adjusted margin4 Each of our three businesses has very different dynamics. This measure takes into account the different revenue models as well as the different rates of impairment. 20% Trusttwo 20% 19% Trusttwo 19% Everyday Loans Everyday Loans 35% Loans at Home 95% Trusttwo 30% 35.3% Loans at Home 97.3% Trusttwo 31.9% Return on assets5 Measured as pro forma normalised operating profit before exceptional items as a percentage of average loan book, this shows we are allocating capital properly and delivering the returns required by our shareholders. Whilst not yet at our target, we remain focused on achieving this in the medium-term. Everyday Loans Everyday Loans 20% 17.1% Loans at Home Loans at Home 20% Trusttwo 20% 6.7% Trusttwo 8.5% 1. There are no comparative pro forma figures for 2016. (See ‘Context for results in the 2016 Financial review on page 27). 2. www.Feefo.com is a third-party customer review site that invites our customers to review our performance. The rating shown is the aggregation of all scores received and is out of a maximum score of 5. 3. % of respondents to a customer survey that said they were very satisfied or quite satisfied. 2016 KPI relates to period April–December 2016 based on 896 responses. 4. Revenue less impairment as a percentage of average loan book, excluding fair value adjustments (12-month average). 5. Pro forma normalised operating profit as a percentage of average loan book excluding fair value adjustments (12-month average). 17 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Strategic report Strategy “ Future profits will, in part, be driven by our ability to both sustain and grow our already sizeable pool of tangible and intangible assets through a carefully managed programme of investment.” Nick Teunon Co-founder and Chief Financial Officer 18 2 Investing in our core assets: our distribution networks, people, technology and brands. The nature of our business means that, other than the loans we make to customers, our core assets tend to be intangible in nature and include things such as distribution networks, our people, our technology and our brands. • Distribution networks – As face-to- face contact is at the heart of our lending process (and also collections, in the case of home credit), ensuring that we maximise our customer reach is a key success factor. Being close to our customers and potential customers can make a difference to our operating performance. We already have almost 90 locations across the UK but believe there is scope to increase this significantly over the next few years, particularly at Everyday Loans. • People – As set out on page 3, the interaction between our own representatives and our customers is at the heart of our business model. We seek to attract and retain a high-quality workforce by investing in training and having a highly-targeted incentive plan that rewards both financial results and behaviours that drive long-term value and positive customer outcomes. We seek to know more than our peers and are prepared to use that intelligence to our advantage: either by being first, or perhaps by being last and learning from the mistakes of others. We aim to encourage and reward the right behaviour by all our representatives. • Technology – Whilst the business model in both branch-based lending and home credit is founded upon face-to-face contact, technology plays a significant role in enabling these businesses to operate effectively. Data management is key, both for managing and monitoring customer performance but also by helping us optimise our business through highly granular management information. In Everyday Loans we made a substantial investment in 2016 when we migrated our entire systems infrastructure to a new supplier. At Loans at Home we began to roll-out the first of our mobile applications for agents to use in the field and also began moving to a cloud-based systems architecture, that will drive operational efficiencies and reduce costs. As a remote lending platform, Trusttwo is wholly reliant on our systems infrastructure and having established a stand-alone management team, we have begun the transformation of our online presence with a new website and customer journey that will be launched during the first half of 2017. • Brands and marketing – The significant developments in technology have shifted the way that consumers research and buy a variety of different products, including financial services. We plan to attract an increasing number of applicants through digital channels, requiring a multi-channel approach to marketing and brand support. Currently, we are working with third parties to help us develop these channels. Depending upon their progress, we may decide to bring such expertise in-house at some point in the future. Non-Standard Finance plc Annual report and accounts 2016Strategic report Key performance indicators KPI measure Rationale Medium-term target 2016 KPI1 Number of Everyday Loans branches By increasing our geographic coverage we can be closer to customers, making it easier for them to come and meet with us. Everyday Loans 55-60 Everyday Loans 41 % of agents that are within 30 minutes travel time of their customers We want agents to be close to their customers, making it easier to see them regularly. Loans at Home >90% Loans at Home 93% People turnover We aim to keep this within industry norms by offering competitive financial rewards and creating environments where people enjoy their work. % of loans booked in the year to new customers4 We need to continue to attract new customers as well as look after existing ones if we are to succeed. Everyday Loans Everyday Loans 15% 15% Loans at Home2 Loans at Home2 <5% Trusttwo3 15% Everyday Loans 65-70% Loans at Home 15-20% Trusttwo 65-70% 4% Trusttwo3 6% Everyday Loans 67% Loans at Home 24% Trusttwo 80% 1. There are no comparable pro forma figures for 2015 (see 'Context for results' in the 2016 Financial review on page 27). 2. Average monthly turnover of self-employed agents. 3. Average from July 2016. 4. Proportion of loans booked in a year to new or previous borrowers (i.e. excluding existing borrowers). 19 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Strategic report Strategy 3 Acting responsibly. “ By placing responsibility at the heart of our business strategy, we are determined to manage and carefully contain both existing and future risks that may arise from our own actions, or the actions of others.” Heather McGregor Non-Executive Director and Chair of the Risk Committee The digital age provides instant access to sometimes distant, disparate and multiple interest groups so that in a corporate sense, there is 'no hiding place' should a company fail in its duties to key stakeholders. You will read many times in this annual report that delivering positive outcomes for our customers lies at the heart of our business. However, it is clear that if we fall short in other areas then our ability to achieve this primary goal may well be impeded. We seek to consider how our behaviour and conduct might impact each stakeholder group whether they be customers, staff, self-employed agents, suppliers, our environment or the communities where we have a physical presence. In addition to key customer metrics that are captured as part of our performance measurement, we have identified the following KPIs to help us monitor our behaviour as a business. For more information about our cultural approach, please see pages 36 to 38. Generations of value creation can be lost in a single incident if a company fails to do the right thing, irreparably damaging the company’s reputation with a significant impact on customers, suppliers and other stakeholders. But the power of modern communications can also be used to promote good news – stories of success and achievement that can reinforce the reputations of organisations that are making a genuine contribution to society and not just producing a return for their owners. The history and values of our operating companies, together with the experience of our Board and senior management team, have resulted in a clear recognition that how we behave as a business is instrumental in both safeguarding the value already created, and also in propagating the creation of value in the future. As a result, we are focused on fostering a culture that strikes an appropriate balance of interests for each of our key stakeholders. 20 Non-Standard Finance plc Annual report and accounts 2016Strategic report Key performance indicators KPI measure Rationale Medium-term target 2016 KPI1 Impairment as a % of revenue2 Lending is easy, lending profitably is more difficult – this measure helps to tell us that we have the balance right between growth and short-term profitability. Grow too quickly or lend when you shouldn’t and impairment will increase to unacceptable levels. Number of FOS complaints upheld as a % of total number of loans made Whilst focused on delivering great customer outcomes, we don’t get everything right all of the time. This measure shines a light on areas of our service to customers that need to improve. % workforce engaged in pro bono activity across the Group In 2017 we plan to introduce a Group-wide charity policy including a provision for staff to give up to eight hours each year to one of the Group’s chosen charities or an approved activity that the employee is keen to support. Everyday Loans 20-25% Loans at Home 30-35% Trusttwo 13-17% Everyday Loans 20.0% Loans at Home 36.3% Trusttwo 14.8% Everyday Loans Everyday Loans <1% 0.1% Loans at Home Loans at Home <1% Trusttwo <1% 10-15% in the previous 12 months 0.0% Trusttwo 0.0% n/a Staff engagement surveys With over 500 staff and their importance in delivering a great service, engagement is critical and without it we will not succeed. During 2017 we will be conducting surveys across each of our businesses in order to establish a baseline from which we can set a realistic medium-term target. Charitable giving In 2017 the Group plans to adopt a formal charity policy that will provide financial support for debt-related as well as other charities. 1. There are no comparable pro forma figures for 2015 (see 'Context for results' in the 2016 Financial review on page 27). 2. Pro forma normalised impairments as a percentage of pro forma normalised revenue. 21 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Strategic report Business model in action Customer touchpoint: in home A non-standard day for Sam “We’ve got the right governance in place to support our customers.” Sam Loans at Home, Leeds, Yorkshire 22 Non-Standard Finance plc Annual report and accounts 2016Providing an invaluable service I’ve got over 15 years’ management experience of working within all three lines of defence in the financial services sector (front-line operations, quality assurance and internal audit). I really enjoy identifying risks and ensuring the right controls are in place to manage and monitor them. It’s good to know my work is helping the Company and everyone who works here. I feel like I’m always improving something and learning something new. Leeds, Yorkshire 23 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Strategic report Principal risks The scale and complexity of the Group’s business mean that there are potential risks and uncertainties that could have a material impact on the Group’s performance and that could cause actual results to differ materially from both expected and historic results. The table below and overleaf highlights each of the principal risks identified by the Board, what we are doing to manage them, whether the risk has increased, decreased or stayed the same over the past year and where there has been a change, a brief explanation as to why the change has occurred. For further information on our approach to risk, please see the Risk Committee report on page 50. Risk/definition Mitigation Change in 2016 Explanation Conduct Inappropriate or sub-standard behaviour by the Group’s representatives. • Extensive training • Monitoring of customer complaints • Balanced incentive programme • Clear policies and procedures, including whistleblowing • Diligent application of ‘Three Lines of Defence’: – policies, procedures and quality assurance in customer-facing roles; – compliance and conduct assurance; and – internal audit. There continues to be a high level of media and political interest in the behaviour of consumer credit firms, coupled with a series of thematic reviews by the FCA that may have a direct or indirect impact on the Group’s businesses. However, the Group has already improved its policies and procedures and invested heavily in ensuring it maintains the highest standards of compliance. Regulation All licensed firms are subject to a rigorous licensing process as well as strict ongoing supervision by the FCA. Non-compliance can result in fines or loss of approvals to operate. Key regulatory developments in 2016 are summarised on page 14. • Active engagement with the FCA as well as industry peers • Diligent monitoring/assessment of all regulations both in-house as well as through external advisers • An active regulatory affairs programme identifying and addressing the concerns of key stakeholders Credit Any marked increase in the rates of impairments or defaults by the Group’s customers could impact the performance of the Group. • Detailed weekly and monthly management information on historic and expected future credit performance • Continuous process of review and refinement of the each business’s credit scorecard and lending criteria • Regular credit committee reviews of policies and outcomes The regulatory framework is always subject to change. While Everyday Loans (including Trusttwo) has received its full licence from the FCA, together with other leading home credit firms, Loans at Home is operating under an interim consumer credit permission from the FCA. A continuous process of investment ensures we meet all of our regulatory obligations. Higher levels of impairment may indicate a need for some fine-tuning of certain policies and procedures during periods of strong growth. Decreased Increased Unchanged 24 Non-Standard Finance plc Annual report and accounts 2016Risk/definition Mitigation Change in 2016 Explanation Business strategy A failure to execute and integrate acquisitions (including technology), or to execute the Group’s strategy as planned, may increase the risk of financial loss. • Detailed due diligence is completed on all acquisitions with advice from specialists on legal, financial and regulatory aspects • Detailed weekly and monthly management information on operating performance • Careful monitoring of market dynamics, competitor behaviour and performance • Annual review of all aspects of the Group’s strategy Operational Key areas of risk for the Group include: • IT failure • fraud • changes in the self-employed status of home credit agents • threats to agent safety • failure to recruit and retain key staff • IT policies are in place to mitigate risk including disaster recovery plans • Policies and procedures are in place to identify, investigate and report fraud • Careful monitoring with our advisers of the tax status of home credit agents • Agents receive regular training about personal safety and any incident is carefully monitored to inform policy and procedures • underperformance by key staff • A series of recruitment, retention and incentive programmes are already in place • Members of the NSF Board sit on and attend all board meetings of the operating subsidiaries Liquidity The Group may not be able to meet its financial obligations because it: • is unable to borrow to fund lending by its operating businesses • has failed to renew / replace existing debt facilities as they become payable • cannot fund growth and further acquisitions Reputational Lending money at high rates of interest means that consumer finance can attract a higher level of media and political scrutiny than certain other business sectors. Whilst the Group is committed to meeting all of its regulatory obligations, including the delivery of positive customer outcomes, its reputation may become tarnished by the activities of other businesses or the practices of others. This in turn could have an impact on the Group’s operational or financial performance. • The Group’s short-term loans to customers provide a natural hedge against medium-term borrowings • The Group’s debt facilities are sourced from a number of different providers • The facilities are at different maturities • Cash and covenant forecasting is conducted on a monthly basis as part of the regular management reporting exercise • As a PLC listed on the main market of the London Stock Exchange, the Group is highly transparent with full disclosure regarding its business and financial performance • The Group conducts an active regulatory affairs programme to ensure that all stakeholders, not just the providers of capital, have an accurate picture of what the Group is trying to achieve, our ethos, culture and business strategy • Whilst a relatively new company we have embarked upon a Group-wide exercise to ensure that ‘what we say is what we do’ and that our processes and procedures are consistent with our desired culture, values and behaviours (see Culture and stakeholder management on pages 36 to 38) Everyday Loans (including Trusttwo) was acquired on 13 April 2016 and represented 80% of the Group's total loan book in 2016 (before fair value adjustments). It has performed as expected since being acquired. We plan to open more branches in 2017 and have already secured a number of sites. No other acquisitions were made in 2016. Loans at Home represented 20% of the Group's total loan book in 2016 and while it delivered strong growth, it did so at higher than expected cost. The Group's 2017 plan for Loans at Home is focused on reducing volatility and increasing profit. Everyday Loans successfully migrated all of its technology onto a new platform during 2016, reducing substantially the risk of IT failure. The media has speculated that the employment status of self-employed workers for a number of UK business models may change. While agent-related incidents are rare, we are never complacent and continue to ensure that agents follow procedures to ensure they remain safe. The Group is recruiting the people that it needs to execute its plans and while there is a degree of turnover, it is within the expected levels of tolerance. The majority of the Group’s bank facilities are in place until March 2020. With a loan book of c.£165m (before fair value adjustments), at 31 December 2016, the Group is exploring an array of other financing options. As we have introduced more stakeholders to our business (Members of Parliament, debt-related charities, regulators, journalists, think-tanks, investors, debt-providers and others), we have made clear that not all consumer finance companies are the same – we explain why we are different and why we believe that makes us stand out from the crowd. However, we remain vigilant, always ensuring that our reputation is both nurtured and protected. Decreased Increased Unchanged 25 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016 Strategic report 2016 Financial review Nick Teunon Chief Financial Officer Group reported results The reported Group results for the year ended 31 December 2016 include a full period of Loans at Home which was acquired on 4 August 2015 and approximately eight months’ performance from Everyday Loans (including Trusttwo) which was acquired on 13 April 2016. The prior year reported figure included approximately five months’ performance from Loans at Home. Year ended 31 December 2016 £'000 Revenue Impairments Admin expenses Temporary additional commission2 Operating profit (loss) Exceptional items Profit (loss) before interest and tax Finance cost Profit (loss) before tax Taxation Profit (loss) after tax Earnings (loss) per share3 Dividend per share Period ended 31 December 2015 £’000 Revenue Impairments Admin expenses Temporary additional commission2 Operating loss Exceptional items Loss before interest and tax Finance income Loss before tax Taxation Profit (loss) after tax Earnings (loss) per share3 Dividend per share Fair value adjustments, amortisation of acquired intangibles (8,342) – (10,714) – (19,056) (626) (19,682) – (19,682) 3,622 (16,060) Fair value adjustments, amortisation of acquired intangibles and exceptional items (5,456) – (4,030) – (9,486) (6,135) (15,621) – (15,621) 1,751 (13,870) Normalised1 81,099 (23,201) (42,303) (1,771) 13,824 – 13,824 (3,484) 10,340 (2,278) 8,062 2.62p 1.20p Normalised1 14,657 (3,858) (11,340) – (541) – (541) 70 (471) 1,271 800 1.30p nil Reported 72,757 (23,201) (53,017) (1,771) (5,232) (626) (5,858) (3,484) (9,342) 1,344 (7,998) (2.60)p 1.20p Reported 9,201 (3,858) (15,370) – (10,027) (6,135) (16,162) 70 (16,092) 3,022 (13,070) (21.25)p nil 1. Adjusted to exclude fair value adjustments, amortisation of acquired intangibles and 2. When a new home credit agent agrees to provide lending and collection services to exceptional items. 26 the Group, we may decide to offer a limited period of additional commission whilst the agent builds up a critical mass of active loan customers. 3. Basic and diluted earnings (loss) per share based on the weighted average number of shares in issue of 307,315,588 (2015: 61,502,789). Non-Standard Finance plc Annual report and accounts 2016Context for results • The Group listed on 19 February 2015 and acquired Loans at Home on 4 August 2015 and Everyday Loans, including Trusttwo, on 13 April 2016. • The 2016 reported results include a full-year contribution from Loans at Home, a full year of central costs and just over eight months of trading from Everyday Loans, including Trusttwo. • The 2015 reported results include the trading of Loans at Home for approximately five months and the central costs of the business since incorporation on 8 July 2014. • Reported results include fair value adjustments, amortisation of acquired intangibles and exceptional items relating to the acquisitions. Normalised results are presented to demonstrate Group performance before these items. • The Group also presents 2016 pro forma normalised results in order to show the results of the Group as if it had acquired Everyday Loans, including Trusttwo, on 1 January 2016. • There are no comparative pro forma figures for 2015 as on completion of the acquisition of Loans at Home on 4 August 2015, the Group adopted a more timely approach to recognising impairment. The Group has concluded that any benefit derived from restating the results of Loans at Home from 1 January to 3 August 2015 to reflect this more prudent approach would be more than outweighed by the cost of producing such results. Normalised revenue was £81.1m (2015: £14.7m) reflecting a full period of Loans at Home and approximately eight months’ of Everyday Loans whilst the prior year included just five months’ of Loans at Home. This fed through into a normalised operating profit of £13.8m (2015: loss of £0.5m), which has been reduced by temporary additional commission paid to newly signed-up agents of £1.8m (2015: £nil). Normalised operating profit is then adjusted by fair value adjustments and amortisation of acquired intangibles totalling £19.1m (2015: £9.5m). As a result, the reported operating loss was £5.2m (2015: loss of £10.0m). Exceptional costs of £0.6m (2015: £6.1m) and finance costs of £3.5m (2015: finance income of £0.1m) resulted in a reported loss before tax of £9.3m (2015: loss of £16.1m). A tax credit of £1.3m (2015: £3.0m) meant that the loss after tax was £8.0m (2015: £13.1m) equating to a reported loss per share of 2.60p (2015: loss per share of 21.25p). In addition to reported figures, we have provided pro forma figures to illustrate what revenues, profits and other key performance metrics would have been had Everyday Loans, including Trusttwo, been acquired at the beginning of 2016. We have therefore analysed performance both before and after temporary additional commission paid to newly signed-up agents at Loans at Home, fair value adjustments, the amortisation of acquired intangibles and exceptional items. There are no directly comparable pro forma figures for 2015 as the Company listed in February 2015 as a cash shell and had no revenue in the first seven months of 2015. Summary – Group pro forma results Year ended 31 Dec 16 Pro forma normalised4 Revenue Impairments Revenue less impairments Admin expenses Temporary additional commission Operating profit Finance cost Profit before tax Taxation Profit after tax Pro forma normalised earnings per share Dividend per share Everyday Loans £'000 50,088 (10,034) 40,054 (20,631) Loans at Home £'000 42,170 (15,313) 26,857 (23,229) – (1,771) 19,423 (4,720) 14,703 (2,941) 11,762 1,857 (323) 1,534 (54) 1,480 Trusttwo £000 2,416 (358) 2,058 (1,402) – 656 (316) 340 (68) 272 Central costs £000 – – – (3,257) NSF plc Pro forma normalised £000 94,674 (25,705) 68,969 (48,519) – (1,771) (3,257) (264) (3,521) 374 18,679 (5,623) 13,056 (2,688) (3,147) 10,368 3.37p 1.20p 4. Assuming Everyday Loans (including Trusttwo) was acquired on 1 January 2016 and adjusted to exclude fair value adjustments, amortisation of acquired intangibles and exceptional items. Note there are no comparative figures for 2015 (see Context for Results above). A more detailed review of each of the operating businesses is outlined below showing results on a pro forma as well as a reported basis. 27 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Strategic report 2016 Financial review continued Divisional overview loan amounts ranging from £1,000 to £15,000 and length of loan ranging from one year to five years, we believe that Everyday Loans is able to serve an unrivalled breadth of UK customers. Another key differentiator from many competitors is that while the vast majority of customers make their initial contact remotely, either direct or through brokers, we always seek to meet the customer face-to-face in one of our branches so that we can complete our underwriting process. We believe that whilst expensive to deliver, our branch-based approach creates a more bespoke and thorough lending experience which benefits our customers as well as the business by enabling us to make better lending decisions. Having received the full FCA permissions in June 2016, we embarked on a planned programme of investment across the business with a clear focus on: • extending our customer reach; • broadening our product range; and • ensuring we remain fully compliant with our regulatory obligations. Specific achievements included: expanding the branch network with five new openings during the year; extending the customer offering with the launch of a new self-employed product; we successfully migrated our back-office technology to a new platform without incident; we began working with a number of new brokers and lead generators that are already proving to be very successful and have continued to invest in staff training and compliance to ensure that we remain at the vanguard of our industry. We continue to believe that the branch-based approach provides Everyday Loans with a significant advantage over other more remote lenders in being able to properly assess both affordability and propensity to pay and so whilst customers with lower credit scores do carry more risk, at higher APRs the risk-adjusted return remains commercially attractive. Reported results Normalised revenue was £37.1m (2015: n/a) and reflected the inclusion of Everyday Loans from 13 April 2016. Fair value adjustments of £7.9m (2015: n/a) were due to the fair value unwind of the acquired loan portfolio and resulted in reported revenue of £29.2m (2015: n/a). Impairments were £7.6m (2015: n/a) while administrative expenses were £14.7m (2015: n/a) resulting in total normalised operating profit of £14.8m (2015: n/a) and reported operating profit of £6.8m (2015: n/a). Being close to our customers is one factor that influences our ability to convert leads into underwritten loans and since completing the acquisition in April 2016 we have continued to invest in expanding our branch network. Whilst many applications represent duplicates or are rejected because data has been entered incorrectly, from over 860,000 applications processed in 2016, we completed 26,535 loans with an average loan size of £3,842. Branch-based lending Size of loans £1,000–£15,000 Duration 1-5 years Range of APR 24.2%–299% (representative APR – 79.4%) Average gross annual income of customers c.£30,000 Lending process 1. Customer applies online or via a broker 2. Initial credit score removes duplicate applications and applicants that fail to meet lending criteria 3. Customer then contacted by the branch to confirm details and if satisfactory is invited into the branch for an in-depth interview 4. Interview includes detailed income and expenditure assessment Collections process 1. Customer pays electronically, preferably by direct debit 2. If payment missed then branch is responsible for follow-up 3. If customer circumstances change, central function can defer or reschedule payments 4. Once arrears reach 180 days, the debt is fully written-off Everyday Loans Everyday Loans remains the largest branch-based lender in the UK’s non-standard finance sector with 41 branches. By tailoring customers’ requirements through a broad range of loan products, Everyday Loans is able to meet the needs of a large number of customers. Having announced the proposed acquisition of Everyday Loans on 4 December 2015, the transaction completed on 13 April 2016, following receipt of the requisite approval from the FCA. At 31 December 2016, Everyday Loans had over 39,600 active customers across the UK and has delivered strong growth in all key financial metrics since acquisition in April 2016. With loans carrying APRs ranging from 24% to 299%, 28 Non-Standard Finance plc Annual report and accounts 2016Year ended 31 December Revenue Impairments Revenue less impairments Admin expenses Operating profit Finance cost Profit before tax Taxation Profit after tax 5. Reported figures, adjusted to exclude fair value adjustments. Pro forma results Pro forma normalised revenue (12 months of Everyday Loans) was £50.1m driven by further growth in the loan book that as at 31 December 2016 had reached £122.4m, thanks to continued strong demand for the Group’s products as well as the benefit of an increase in yield from a combination of new pricing as well as a shift in the product mix. Impairments increased slightly from the half year to 20.0% of revenue reflecting the strong loan book growth and increased volumes from customers with lower credit scores (although this was more than offset by an increase in yield on new business volumes that increased from 51.9% in March 2016 to 56.9% in December 2016). Administrative expenses were £20.6m resulting in pro forma normalised operating profit of £19.4m. Year ended 31 December Revenue Impairments Revenue less impairments Admin expenses Operating profit Finance cost Profit before tax Taxation Profit after tax Key Performance Indicators7 Number of branches Period end customer numbers (000) Period end loan book (£m)8 Average loan book (£m)9 Revenue yield (%)10 Risk adjusted margin (%)11 Impairments/revenue (%) Operating profit margin (%) Return on asset (%)12 2016 Pro forma Normalised6 £000 50,088 (10,034) 40,054 (20,631) 19,423 (4,720) 14,703 (2,941) 11,762 41 39.6 122.4 113.4 44.2 35.3 20.0 38.8 17.1 2016 Normalised5 £000 2016 Fair value adjustments £000 37,080 (7,645) 29,435 (14,671) 14,764 (2,699) 12,065 (2,540) (7,916) – (7,916) – (7,916) – (7,916) 1,504 2016 Reported £000 29,164 (7,645) 21,519 (14,671) 6,848 (2,699) 4,149 (1,036) 9,525 (6,412) 3,113 2015 Reported £000 – – – – – – – – Plans for 2017 We remain focused on expanding our branch network and continuing to broaden our product range. Having opened five new branches since April 2016, we are keeping up the momentum in 2017 with ten new branches already underway and plans for a further two new branches that are also expected to open by the year end. Whilst this increased investment is expected to reduce operating profit by approximately £1m in the current year, it will underpin strong earnings growth in future years as the new branches reach maturity in terms of customers and loan book. In terms of product development, our new ‘selfy’ loan has been designed to reach the large and growing proportion of the workforce that are now self-employed and which, due to the variability of their income, are often excluded by other lenders. Whilst encouraged by some early success, we are continuing to test the appeal and viability of the product before deciding to commit further resources to it. Separately, we submitted an application to the FCA for a high-cost, short-term credit licence in December 2016 and if successful, plan to offer shorter-term loans to our customers through the branch network. Currently, our shortest term loan is for 24 months and we believe that a number of potential customers would prefer to borrow over a shorter period. This extension to our product range will complement our existing offering and improve our service to customers. 6. Assuming Everyday Loans was acquired on 1 January 2016 and adjusted to exclude fair value adjustments. 7. Key performance indicators have been provided using pro forma normalised data only as reported data only includes performance metrics from the date of acquisition. 8. Excluding fair value adjustments. 9. Excluding fair value adjustments based on a 12-month average. 10. Revenue as a percentage of average loan book excluding fair value adjustments (12-month average). 11. Revenue less impairments as a percentage of average loan book excluding fair value adjustments (12-month average). 12. Operating profit as a percentage of average loan book excluding fair value adjustments (12-month average). 29 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Strategic report 2016 Financial review continued Divisional overview we simplified the management structure; increased our focus on the performance of recently joined agents; deployed a more sophisticated scorecard; and consolidated a number of sub-scale agencies. These measures improved the quality of the loan book and the rate of impairment began to decline. Total customer numbers consequently came down in the second half and new loans written improved in terms of quality, albeit on lower volumes. Having assembled the new management team and instituted the transformation of Loans at Home, Mark Bardsley stepped down as CEO of Loans at Home in January 2017 and David Thompson, a seasoned home credit executive who had already been running the Loans at Home network, has stepped into the role. . Reported results Normalised revenue was £42.2m (2015: £14.7m), reflecting the inclusion of Loans at Home for a full period. Reported revenue was £0.4m lower due to the unwinding of the fair value adjustment made to the loan book at completion in 2015 (2015: a charge of £5.5m). Normalised operating profit of £1.8m (for the period 4 August 2015 to 31 December 2015: £2.1m) was after deducting administration costs of £23.2m which included £7.9m of agent collection commissions and temporary additional agent commission of £1.8m (2015: £nil). Temporary additional agent commission was higher than expected following our decision to focus on adding higher quality customers that meant it took longer for a number of newly appointed agents to reach critical mass with their rounds and so temporary commissions were extended for a further period. Reported operating profit was £1.4m (2015: operating loss of £3.9m) reflecting the cost of temporary additional commission paid to agents and the fair value adjustment to revenue outlined above. The first part of our technology investment is now complete: our new handheld collections application (app) has been rolled-out across the entire network and has been warmly welcomed by all agents. This automation has significantly reduced the complexity of administering the collections process and is also providing accurate management information in a fraction of the time and at lower cost. Home Credit Size of loans £100–£1,000 Duration 24–75 weeks Range of APR 164%–733% (representative APR – 433.4%) Average gross annual income of customers c.£14,500 Lending process 1. Customer submits initial details to allow initial credit scoring and decision in principle 2. Agent receives a ‘request to call’ 3. Agent visits the customer at home to conduct full income and expenditure 4. Agent returns at a later date to finalize and make the loan Collections process 1. Agent calls each week or every two weeks to collect due payments 2. c.20% of payments are made on card (Continuous Payment Authority) 3. Loans start to be impaired if 2 out of 13 payments are missed 4. Once arrears reaches 180-days, the debt is fully written-off Loans at Home Loans at Home is the third largest home credit business in the UK with almost 94,000 customers and a net loan book (before fair value adjustments) at 31 December 2016 of £33.4m, an increase of 19% over the prior year (2015: £28.0m). Strong growth in the number of self-employed agents drove faster than expected growth in customer numbers that in turn prompted a spike in impairments in the first half of 2016. Having tested a number of alternate growth strategies, we implemented the following measures to reduce impairments and improve operating performance: 30 Non-Standard Finance plc Annual report and accounts 2016Year ended 31 December Revenue Impairments Revenue less impairments Admin expenses Temporary additional commission Exceptional items Operating profit/(loss) Finance cost Profit/(loss) before tax Taxation Profit/(loss) after tax Key Performance Indicators14 Period end agent numbers Period end number of offices Period end customer numbers (000) Period end loan book (£m) Average loan book (£m) Revenue yield (%) Risk-adjusted margin (%) Impairments/revenue (%) Operating profit margin (%) Return on asset13 2016 Fair value adjustments £000 (426) – (426) – – – (426) – (426) 81 (345) 2016 Reported £000 41,744 (15,313) 26,431 (23,229) (1,771) – 1,431 (323) 1,108 27 1,135 2016 Normalised13 £000 42,170 (15,313) 26,857 (23,229) (1,771) – 1,857 (323) 1,534 (54) 1,480 785 47 93.6 33.4 27.6 152.8 97.3 36.3 4.4 6.7 2015 Reported £000 9,201 (3,858) 5,343 (8,656) – (593) (3,906) – (3,906) 1,271 (2,635) 2015 Normalised £000 2015 Fair value adjustments £000 (5,456) – (5,456) – – (593) (6,049) – (6,049) – (6,049) 14,657 (3,858) 10,799 (8,656) – – 2,143 – 2,143 1,271 3,414 630 41 92.0 28.0 n/a n/a n/a 26.3 14.6 n/a 13. Normalised to exclude fair value adjustments and exceptional items. 14. All definitions are as per above. Certain Key Performance Indicators for 2015 are shown as not applicable as Loans at Home was acquired on 4 August 2015 and reported data therefore includes less than a full year’s performance. Note there are no comparative figures for 2015 (see 'Context for Results' on page 27) Plans for 2017 Our focus for 2017 is to consolidate the changes already made, complete the roll-out and then embed our new technology as planned so that we can focus the business on what it does best: lending and collecting responsibly to deliver excellent customer outcomes. We are continuing to invest in our people with improved training programmes for both staff and self-employed agents and we hope to become the home credit firm that is recognised as being the preferred place to work. Whilst we continue to be opportunistic and selective regarding the hiring of experienced agents, particularly now that our largest competitor is substantially reducing the scale of its agent network, we expect temporary agent commission costs to fall in the current year. We will continue to improve the quality of our customer base and aim to reduce further the level of impairments as a percentage of revenue and whilst this may result in more moderate loan book growth in the current year versus 2016, our objective will be to deliver healthy revenue and profit growth. 31 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Strategic report 2016 Financial review continued Divisional overview Reported results As at 31 December 2016 the business had a net loan book of £8.8m delivering reported revenue of £1.8m (2015: n/a) and operating profit of £0.5m (2015: n/a) reflecting the performance in the eight-month period since acquisition. Year ended 31 December Revenue Impairments Revenue less impairments Admin expenses Operating profit Finance cost Profit before tax Taxation Profit after tax 2016 Reported £000 1,849 (243) 1,606 (1,146) 460 (198) 262 (58) 204 2015 Reported £000 – – – – – – – Pro forma results On a pro forma basis, Trusttwo generated pro forma revenue of £2.4m (2015: n/a) and pro forma operating profit of £0.7m (2015: n/a). Administration costs almost doubled in the second half versus the first half as we invested in building the infrastructure (people, systems and processes) to be able to grow revenues substantially in 2017 once all elements of our customer experience are working as planned. Year ended 31 December Revenue Impairments Revenue less impairments Admin expenses Operating profit Finance cost Profit before tax Taxation Profit after tax Key Performance Indicators16 Period end customer numbers (000) Period end loan book (£m) Average loan book (£m) Revenue yield (%) Risk adjusted margin (%) Impairments/revenue (%) Adjusted operating profit margin (%) Return on asset (%) 2016 Pro forma15 £000 2,416 (358) 2,058 (1,402) 656 (316) 340 (68) 272 3.3 8.8 7.7 31.9 26.7 14.8 27.2 8.5 15. Assuming Trusttwo was acquired on 1 January 2016. 16. Key performance indicators have been provided using pro forma normalised data only as reported data only includes performance metrics from the date of acquisition. All definitions are as per above. Guaranteed Loans Size of loans £1,000–£7,500 Duration 12–60 months Range of APR 43.8%–48.9% (representative APR – 43.8%) Average annual income of customers c.£24,800 Lending process 1. Customer submits application online 2. Customer sends link to preferred guarantor 3. Guarantor completes their details online 4. Credit check on applicant and guarantor 5. If successful, both guarantor and applicant are contacted to undertake affordability and ID review 6. If successful, guarantor asked to sign agreement electronically 7. Applicant signs their agreement electronically 8. Funds transferred to guarantor Trusttwo Whilst a relatively new segment of the unsecured credit market, the value of outstanding unsecured guaranteed loans in the UK has grown rapidly and is estimated to have reached approximately £350m in 2015. We believe that there is a significant opportunity for Trusttwo to become the clear number two player behind the market leader and during 2016 we laid the foundations to realise the full potential of this exciting business model. Following its acquisition in April 2016, we established Trusttwo as a stand-alone business and hired a Managing Director who has full profit and loss responsibility. Having obtained its full FCA permissions in June 2016, we established a robust infrastructure through the recruitment of more staff and the redesign of a number of core processes. This doubled conversion rates so that the business now represents a viable and attractive alternative for financial brokers that are keen to offer customers an alternative solution to the market leader. Whilst this required meaningful investment, we began to see solid month-on-month revenue and expect this to increase further once our infrastructure is fully in place. 32 Non-Standard Finance plc Annual report and accounts 2016Everyday Loans was £10.7m (2015: £4.0m) reflecting a full period of amortisation for Loans at Home and eight months for Everyday Loans. An exceptional item charge of £0.6m was incurred in the year and related to stamp duty paid at completion on the acquisition of Everyday Loans (2015: £5.5m). The charge in the prior year related to acquisition-related expenses. Finance costs of £0.3m (2015: finance income of £0.1m) were also incurred in the first half and related to the non-utilisation fee on the Everyday Loans bank facility prior to the drawdown at completion. Approved by and signed on behalf of the Board of Directors Nick Teunon Chief Financial Officer 31 March 2017 Plans for 2017 Trusttwo will soon be launching a much improved website that we expect will attract more customers as well as improve conversion rates further. The new site will also expand our existing product parameters thereby increasing our appeal to potential customers that are looking to tailor any offer to best suit their needs. The launch will be accompanied by a fully- integrated marketing campaign across all key channels including online, social as well as through referrals from the Everyday Loans branch network. So far we have been pleased with the positive response from staff in the branches and hope to make further progress on increasing the number of referrals and conversion rates during 2017. Financial brokers represent a significant opportunity for Trusttwo and we have been leveraging Everyday Loans’ excellent relationships as well as building new ones with additional brokers and lead generators for whom the Trusttwo proposition is more attractive. With our infrastructure and funding in place, we believe that there is a substantial opportunity for Trusttwo to become the clear number two in the UK’s guaranteed loans market. Central costs Year ended 31 December Revenue Admin expenses Exceptional items Operating loss Finance cost Loss before tax Taxation Loss after tax 2016 Amortisation of acquired intangibles £000 2016 Normalised17 £000 – (3,257) – (3,257) (264) (3,521) 374 – (10,714) (626) (11,340) – (11,340) 2,037 2016 Reported £000 – (13,971) (626) (14,597) (264) (14,861) 2,411 (3,147) (9,303) (12,450) 17. Adjusted to exclude the amortisation of acquired intangibles related to the acquisition of Loans at Home and Everyday Loans and exceptional items. Year ended 31 December Revenue Admin expenses Exceptional items Operating loss Net finance income Loss before tax Taxation Loss after tax 2015 Amortisation of acquired intangibles £000 2015 Normalised19 £000 – (2,684) - (2,684) 70 (2,614) - (2,614) – (4,030) (5,542) (9,572) – (9,572) 1,751 2015 Reported £000 – (6,714) (5,542) (12,256) 70 (12,186) 1,751 (7,821) (10,435) 19. Adjusted to exclude the amortisation of acquired intangibles related to the acquisition of Loans at Home and Everyday Loans and exceptional items. Normalised administrative expenses, including head office costs and other expenses associated with the running of the plc (before the amortisation of acquired intangibles and exceptional items) were £3.3m (2015: £2.7m). The amortisation of intangible assets acquired as part of the acquisition of Loans at Home and 33 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Non-Standard Finance plc Annual report and accounts 2016 Strategic report Business model in action Customer touchpoint: by phone A non-standard day for Tom “Love the job, great job satisfaction when I’m able to help a customer in need.” Tom Trusttwo, Bourne End, Buckinghamshire 34 Friendly, open and transparent culture I joined Trusttwo in 2015 as a customer service agent, after working in a high street bank. I’ve found the environment and team culture to be very supportive, and I’m confident that I’ll develop my career here. I love the Trusttwo brand. It feels good to provide a service to young people trying to build a robust credit record. Bourne End, Buckinghamshire 35 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Strategic report Culture and stakeholder management NSF is a relatively young company but has chosen to adopt a business approach that is more akin to that of a much larger, long-established business. Our approach Our approach to culture and stakeholder management has been forged by the considerable experience of the Group’s founders and senior management team. Together, they view such an approach as being a prerequisite for long-term success and one that is consistent with our strategy to be a leader in each of our chosen markets (see Strategy on page 16). It is clear from our business model (see page 3) that the interface with our customers is a key part of our overall process. As a result, “providing a helping, but firm hand” is an ethos that we hold dear. We believe that by sustaining the values and behaviours that support it, we will remain on-track to deliver our medium-term goal for the Group of 20% annual loan book growth and a return of 20% on assets in each of our operating businesses. The acquisitions of both Everyday Loans (including Trusttwo) and Loans at Home were made after extensive legal, financial and operational due diligence, a process that also provided valuable guidance on the cultural values and behaviours that were embedded within each organisation. As a result, the Board was comfortable that each of the acquired businesses was guided by similar principles of business ethics. Rather than seek to impose a ‘target culture’ or set of values, the Group has first sought to confirm the existing culture within each of its operating subsidiaries before then assessing where, if at all, there are any inconsistencies or gaps with its overall objectives and business approach. For regulated financial services firms, the FCA has provided some broad guidance on the cultural approach that it expects licenced firms to adopt. 36 FCA guidance on cultural approach: • develop strong, clear leadership and controls; • identify key risks in their strategies, business models and cultures that may prevent the delivery of positive market and consumer outcomes; • identify appropriate steps to mitigate such risks through appropriate systems and controls, including appropriate ways of using whistleblowing intelligence; • align strategies, business models, systems and controls with core values that ensure positive outcomes (market and customer); • ensure employee behaviours fall within a prescribed risk appetite using appropriate incentives; • develop a culture that supports the long-term interests of the firm, its customers and the long-term integrity of the markets in which the firm operates; and • demonstrate that the principles of good conduct towards customers and markets are embedded throughout their business and that these are working to deliver such outcomes and market behaviour. As a result, FCA-regulated firms have to be focused not just on the delivery of attractive risk-adjusted returns, but they also need to be mindful of the way in which they do so. However, such an approach is not limited to FCA-regulated firms. The media is littered with corporate scandals that only serve to highlight how, in the digital age, the speed with which malpractice and/or ‘poor’ corporate behaviour is broadcast around the world, with a significant impact upon customers, staff, shareholders and a broad range of other stakeholders. All business leaders are being forced to recognise that it is not good enough just to be seen as a ‘good corporate actor’. Executives are required to ensure that principles of corporate responsibility and business ethics are ingrained within their firm’s DNA – from the most junior representative to senior executives in the Boardroom. As well as the FCA, the issue of culture has also been championed by the Financial Reporting Council (‘FRC’) that during 2016 published a 62-page report on its findings entitled “Corporate Culture and the Role of Boards”. Against this background, the Board was clear that it needed clarity on what our culture is, what it should be and has developed the means to influence it in each of our business areas, not just because the FCA or the FRC says we should, but because it makes good business sense. We define culture as the “way we do things around here” and are determined that the actions of our leaders, staff, self- employed agents or anyone authorised to represent one or more of our businesses, reflect our desired values and behaviours. Progress so far In December 2016 we launched a process to verify the cultural practices in each area of our business, ensuring that how we behave is consistent with our strategy and business model but also to confirm that such behaviour is in-line with our appetite for risk. This process was also tasked with identifying ways in which we can both foster and measure desired Non-Standard Finance plc Annual report and accounts 2016values and behaviours, accepting that these measures may differ slightly depending upon which part of the business you are looking at. Whilst not yet complete, we have conducted a series of workshops across each of our operating businesses involving staff and contractors with different levels of experience, tenure and in different locations so as to ensure we capture as representative a sample as possible. Each workshop was tasked with identifying the values and behaviours that would be required for a regulated firm to succeed as well as assessing where each business was relative to that target and, if gaps exist, determining how best we could move towards the desired target. They were also asked to identify any aspect of our business operations that was particularly helpful in promoting such desired values and behaviours, as well as any that acted as a barrier or might encourage bad behaviour. The final leg of the process is to identify means by which we can then influence values and behaviour in each part of our business. Culture – preliminary findings Whilst this exercise is not yet complete, based upon the early results received to-date, we are starting to identify the following key values and behaviours that are common across all three businesses: • Doing the right thing: we recognise our collective responsibility for delivering great outcomes for our customers. We don’t cut corners and always seek the path that is right before the path that is easy. • Communication: we listen, are well-informed and believe it’s our duty to speak up when we disagree, or believe something is not right; we celebrate success and don’t blame others when something goes wrong, always learning from our mistakes. • Entrepreneurial: we use our initiative and are prepared to try new things so we can perform better and be the best we can be. • Shared purpose: we have clear strategic and operational goals and expect all of our representatives to understand and share in that vision. • Integrity: we expect our people to respect colleagues and other key stakeholders and to do what we say we will do. • Teamwork: our businesses are complex and involve many different elements that each represent an important part of our overall business process. By working together we are likely to solve problems more effectively than trying to do things on our own. Our cultural approach 1. Asse values/ across ea b s s c e h u r r a e v i o n t b c h e r g r g a a v v e t e t i o u r s i o u r s e t e r m i n d t a d t a 5. D desire desire e e values/ b values/ b h h 4 . t h a t g o o d / b a d I d e n h i n d t i e f r y / b p t e r h i h o n a v m g s i o o u t e r s c 3. Establish m e t i to monitor c u l t u r a l performa n c e r u u s i r s n e s s s y a w y f ti n e / s e u l a v e c n e u fl r u o i v a h e b 2. Id to in 37 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016 Strategic report Culture and stakeholder management continued “ We define culture as 'the way we do things around here' and are determined that our actions reflect our desired behaviours and values.” Charles Gregson Non-Executive Chairman Certain areas of our business represent potential ‘hot spots’ through the existence of possible conflicts such as incentives, that may encourage poor behaviour in order to meet certain performance targets. Managing such conflicts are part of the day-to-day management of each of our businesses. Whilst we don’t profess to get everything right all of the time, the systems and controls we have in place and our determination to promote a culture that supports each of our desired behaviours helps to ensure that we meet all of our regulatory obligations and minimise the risk of any material impact on our overall operating and financial performance. This approach also helps us to address the needs of our key stakeholders including customers, employees and contractors, regulators, the communities where we work and the providers of capital. Customers As well as adhering to the extensive requirements of the FCA, putting our customers at the centre of everything we do lies within all of our policies and procedures, our training programmes, our incentive arrangements and the way we run our business. However, we recognise that it is ‘deeds not words’ that count and so we regularly survey our customers to tell us how we are performing. We also monitor and take very seriously all complaints we receive in order that we can improve our service. Employees and self-employed agents Investing in our people lies at the heart of our business strategy. As a relatively new Group we have sought to ensure that there is a proper induction process as well as the required level of training for all new joiners so that they can begin to make a contribution as soon as possible. We have also invested in training for existing staff and self-employed agents. Online training programmes such as our remote Learning Management System 38 (‘LMS’) at Loans at Home provide us with a perfect audit trail for each participant of which modules have been completed and the achievement level attained. As well as providing competitive compensation arrangements for both staff and self-employed agents, we have also announced our intention to put in place a save-as-you-earn scheme for all Group employees during 2017. This scheme will enable staff to buy shares in Non-Standard Finance plc in a tax-efficient way. The following table sets out the breakdown by gender of the Directors and senior managers of the Company as well as the total number of employees: Number of Company Directors Number of senior managers (excluding Executive Directors), Directors of subsidiary businesses and heads of function Total number of employees Male Female Total 4 1 5 14 3 11 267 270 537 Regulators Whilst relatively small when compared with many other regulated firms, each of our regulated businesses maintains a regular dialogue with the FCA as part of both its licensing and also its on-going supervision processes. In addition, Non-Standard Finance plc has kept the FCA fully-informed regarding the Group’s broader strategic plans and has also submitted its views when invited to do so as part of the FCA’s ongoing series of Thematic Reviews. Communities and charity As the vast majority of our business is conducted face-to-face, we recognise the importance of becoming a valued member of the towns and cities where we have a presence. With over 500 staff, 785 self-employed agents and 137,000 customers that we serve through a network of almost 90 offices across the UK, we are deeply ingrained within the fabric of a number of local communities. One initiative that we hope to launch during 2017 is a pro bono scheme to enable our staff to give up to eight hours of their time during office hours for good causes, in and around the towns where they live and work. Whilst a relatively small gesture, we hope that our staff will embrace the chance to provide a helping hand if and when they can. The Group also plans to implement a charity policy in 2017 so that in addition to the pro bono initiative above, we can also provide financial support not just in local communities but also nationwide. Whilst this is likely to be a modest sum in 2017, we hope to be able to increase this in future years. Providers of capital The Company keeps shareholders and lending banks informed of business developments via its annual report, full-year and half-year results as well as periodic trading update announcements. All other price sensitive information is publicly disclosed via a regulatory news service. All these items of information are also available on the Company’s corporate website, www.nonstandardfinance.com. The website also contains other information about the Group and its business. Throughout the year the Group Chief Executive, Chief Financial Officer, and Director of IR and Communications meet with shareholders on request or via organised investor roadshows supported by the Company’s brokers as well as by attending and presenting at industry and investor conferences. The Chairman and other Non-Executive Directors may also meet with investors, as required. Non-Standard Finance plc Annual report and accounts 2016Governance Board of Directors Governance report Audit Committee report Nomination Committee report Risk Committee report Directors’ remuneration report Directors’ report 40 42 47 49 50 51 66 39 Financial statementsStrategic reportGovernanceGovernance Board of Directors John van Kuffeler 68 Group Chief Executive Nick Teunon 51 Chief Financial Officer Miles Cresswell-Turner 54 Executive Director Appointed 8 July 2014 Committees None Appointed 8 August 2014 Committees None Appointed 10 December 2014 Committees None Profile John was Chief Executive and then Chairman of Provident Financial plc for a combined total of 22 years until December 2013. He was Chairman of Marlin Financial Group Limited, the consumer debt purchasing company, for four years until its sale in February 2014 and was also Chairman of Hyperion Insurance Group Limited for five years until December 2013. John was previously Chief Executive of Brown Shipley Holdings PLC which included Medens Trust Limited, a consumer car finance company, and was Chairman of the credit committee of Brown Shipley Holdings PLC’s main banking subsidiary, Brown, Shipley & Co. Limited. Profile Nick was Chief Financial Officer of Marlin Financial Group Limited, the consumer debt purchasing company, from August 2013 until June 2014. Prior to that, Nick spent five years as Chief Financial Officer of FTSE International, joining from the Press Association, where he was Group Finance & Strategy Director for seven years. At both FTSE International and the Press Association, Nick was responsible for all mergers and acquisitions activity and related debt funding, in addition to leading the finance function. Profile Prior to becoming Executive Director, full-time, at NSF on 1 January 2016, Miles was a partner in Duke Street LLP who specialised in the finance sector and who led on the acquisitions by Duke Street LLP of Marlin Financial Group Limited and UKWM Limited. Before becoming a partner at Duke Street LLP, Miles was a partner at Palamon Capital Partners LLP from 1998 to 2008, where he led the investment in Towry Law plc. Prior to Palamon Capital Partners LLP, Miles spent seven years as a director in the Leveraged Finance Department of HSBC Investment Bank. External appointments Non-Executive Chairman of Paratus AMC Limited External appointments None External appointments None 40 Non-Standard Finance plc Annual report and accounts 2016 Charles Gregson 69 Non-Executive Chairman Heather McGregor 55 Independent Non-Executive Director Appointed 10 December 2014 Appointed 10 December 2014 Committees Audit Committee (Chair from 31 October 2016) Nomination Committee (Chair) Remuneration Committee (Chair) Risk Committee Committees Audit Committee Nomination Committee Remuneration Committee Risk Committee (Chair) Profile Charles is a highly experienced executive having previously held a number of senior positions in finance: previously he was Non-Executive Chairman of ICAP plc from 1988 to 2016, when it became Nex Group plc and he became Chairman; Non-Executive Chairman of Wagon Finance Group Limited, from 1996 to 2006; Non-Executive Director and Deputy Chairman of Provident Financial plc from 1998 to 2007; and Non- Executive Director of International Personal Finance Plc from 2007 to 2010. Charles is a former Chairman of CPP Group Plc and of St James's Place Plc. Charles was Executive Director of United Business Media Plc (formerly MAI Plc) from 1985 to 2003 and Global CEO and Chairman of PR Newswire from 2003 to 2009. As part of his responsibilities at United Business Media Plc, Charles built Harlow Meyer Savage from a small money broking business into the international business of Garban PLC, a listed company with offices in 25 countries, which later merged with ICAP plc. Profile Professor Heather McGregor CBE began her early career in financial communications and investor relations before joining ABN Amro as a sell-side analyst. She then spent eight years with the bank, working in London, Hong Kong, Singapore and Tokyo, before joining Taylor Bennett in 2000. She has an MBA from the London Business School and a PhD from the University of Hong Kong. Heather was the founder of the Taylor Bennett Foundation, which works to promote diversity in the communications industry, and is a founding member of the steering committee of the 30% Club, which is working to raise the representation of women at senior levels within the UK’s publicly quoted companies. She is also an experienced writer and broadcaster in the national media. In 2017 she was appointed to the Honours Committee for the Economy. External appointments Non-Executive Chairman of Nex Group plc Non-Executive Director, Senior Independent Director and Chair of the Remuneration Committee of Caledonia Investments Plc External appointments Executive Dean of Edinburgh Business School, the graduate school of business of Heriot-Watt University Chairwoman of the executive search firm Taylor Bennett Non-Executive Director of International Game Technology PLC 41 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceThere were some changes to the composition of the Board during 2016. Robin Ashton stepped down from the Board in October 2016 and to ensure that our Board operates in-line with the Code the Board agreed that the roles of Chairman and Chief Executive should be separated. In December 2016 I was appointed as Chairman and John van Kuffeler was appointed to the role of Group Chief Executive. Since the Company was listed in February 2015, there has been a strong commitment from the Board to develop the corporate governance within the Company despite there being no requirement to ultimately comply with the Code. Towards the end of 2016, a first Board evaluation was undertaken focusing on a self-evaluation of the Board performance and objectives. The results were reviewed and interpreted by an independent party to draw out themes and recommendations for the Board to consider. As a result a roadmap of actions has been developed to assist the Board in its journey towards a mature governance structure. The Remuneration Committee recognises that the Company’s acquisitive nature means that it must ensure it retains existing management and be able to attract key future hires that are capable of managing a business of the scale that we believe the Group is capable of reaching within the next few years. It is therefore important to be able to attract and retain the right talent whilst recognising that our existing incentive arrangements are limited. Having undertaken a review of our remuneration policy with our advisers, we are preparing to adopt a new policy, details of which are set out in the Directors’ remuneration report on pages 51 to 65. The future We aim to embed the corporate governance principles within our corporate policies, which in turn will strengthen the corporate governance framework and ensure consistency throughout the Group. The Board will continue to ensure that governance processes are documented and implemented and, where appropriate, continually improved. In line with the Corporate Governance Code, one of the aims for the Board is to finalise the appointment of an additional independent Non-Executive Director to the Board. We anticipate that this will be achieved during the first half of 2017. Charles Gregson Non-Executive Chairman 31 March 2017 Governance Governance report for the year ended 31 December 2016 Dear Shareholder, Introduction I am pleased to present our 2016 Corporate Governance report for the Company which incorporates reports from the Audit, Nominations, Remuneration and Risk Committees on pages 47 to 65. The Board is committed to applying the highest standards of corporate governance and although the Company does not have a premium listing on the Main Market of the London Stock Exchange, the Board has chosen to seek to comply with the UK Corporate Governance Code (‘the Code’) where practically possible throughout the year to 31 December 2016. A copy of the Code is available from the Financial Reporting Council’s website: www.frc.org.uk. As the Company has not admitted any shares to the premium listing on the London Stock Exchange it is not required to comply with the Code and/or any other legislation that applies to premium- listed, quoted companies. Where there is non-compliance it is included in the Audit Committee report on page 47, the Nominations Committee report on page 49, the Risk Committee report on page 50, and the Directors’ remuneration report on page 51. For the Company’s shareholders, our main aim is to deliver significant growth and the development of a strong governance framework is key to that achievement. The Board is responsible for and committed to maintaining and developing such procedures as are required to ensure that good standards of corporate governance operate across all levels of the Group, including each of its operating subsidiaries. 2016 saw the completion of the Group’s second major acquisition, one that involved a substantial financing exercise including both debt and equity. Having broadened the operational base substantially, the Board has extended its governance framework so as to ensure that the Group’s values and behaviours are reflected in each of its businesses and that these tie back to the Group's business strategy. Highlights of the financial year During 2016, we successfully completed the acquisition of Everyday Loans (including Trust two) and continued to actively engage with our investors by holding a well-attended investor day in November 2016. The investor day received positive and encouraging feedback and we intend to conduct more investor days in the future. 42 Non-Standard Finance plc Annual report and accounts 2016The Board Statement of compliance with the Code During the financial year ended 31 December 2016, the Company has not complied with all of the provisions of the Code. Given that only one Director is considered to be independent, the Company did not meet requirements B.1.2, B.2.1, C.3.1 and D.2.1 of the Code. The Board considered these provisions to not be appropriate due to the size and nature of the Company and the fact that the Board is actively engaged to appoint a second Independent Director. The Board has not appointed a Senior Independent Director, and therefore does not comply with provision A.4.1 of the Code. This provision is not considered to be appropriate due to the relatively small size of the Board and the fact that currently the Board only includes one independent Non-Executive Director. Contrary to provision B.6.1, A.4.2 and B.6.3 of the Code, although a performance evaluation of the Board and its Committees was undertaken, an appraisal of the Chairman’s performance was not undertaken as there is only one other Non-Executive Director. In addition, during 2016 the Chairman and Non-Executive Directors did not meet without the Executive Directors present. Board operation The Chairman and the Chief Executive roles are fulfilled by separate individuals and their roles are set out in writing and agreed by the Board. The Chairman, Charles Gregson, is responsible for the leadership of the Board and the day-to-day executive responsibility is undertaken by John van Kuffeler, assisted by the Group’s Board of Directors. The Board is responsible for the long-term success of the Company in relation to its strategy, operations and values and for establishing financial soundness for the Group alongside a strong corporate governance structure and practices that support an effective decision-making process. The Board sets annual objectives as well as the overall strategic direction of the Company. These objectives are reviewed regularly at Board meetings and are implemented through approval and regular assessment of the Company’s strategy and business plan. At each Board meeting the Board discusses the financial, operational, strategic and governance issues that affect the Group. Board composition and structure The Board comprised six Directors through the year until 31 October 2016 when Robin Ashton stepped-down as a Director. For the rest of the financial year, the Board comprised five Directors, all of whom have served throughout the financial year, including: • Non-Executive Chairman • Group Chief Executive • 2 Executive Directors • 1 Independent Non-Executive Director Independence In accordance with section B.1.1 of the Code the Board determines Heather McGregor to be an Independent Non- Executive Director. The Board’s assessment is based on the fact that Heather McGregor receives no additional benefits from the Group, has not previously held an executive role within the Group and has served less than nine years on the Board. The Board believes that there are no current or past matters which are likely to affect Heather McGregor’s independent judgement and character. The Board does not consider Charles Gregson to be independent as he is a holder of Founder Shares. More details on the Founder Shares are set out in the Directors’ remuneration report on pages 51 to 65. The Board determines that Charles Gregson would be an Independent Director in the event that he did not hold Founder Shares. Following the resignation of Robin Ashton, the Board has considered the balance between the Independent and Non-Independent Directors. As the Company is currently non-compliant with section B.1.2 of the Code, the Nomination Committee continues to consider the composition of the Board on an ongoing basis and is actively engaged in seeking the appointment of an additional Non-Executive Director and the Board continues to consider appointments to this position. The Board anticipates an appointment of an additional Non-Executive Director to be made during 2017. The Board and its Committees are considered to have an appropriate balance of skills, experience, independence and knowledge of the Company to enable them to discharge their respective duties and responsibilities effectively. The Directors have a wide range of backgrounds and extensive knowledge of a variety of sectors: Accountancy Banking/lending Home credit Insurance Law Media Private equity Equity research Executive search Education Specific key decisions have been reserved for the Board which are outlined in its terms of reference. However, to assist the Board in carrying out its function, the Board delegates certain functions to the four committees on its behalf, so it can operate efficiently and give the right level of attention and consideration to relevant matters. The Company has four different committees as outlined below: Board of Directors Audit Committee Nomination Committee Remuneration Committee Risk Committee 43 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Governance Governance report continued The composition and role of each committee is detailed in their respective reports that follow. The Audit Committee report is on page 47, Nomination Committee report on page 49, the Risk Committee report on page 50, and the Directors’ remuneration report on page 51. The terms of reference for each committee can be observed at the Company’s registered office address and also on the Company’s website: www.nonstandardfinance.com. Role of Executive Directors The Executive Directors are responsible for all matters affecting the performance of the Group and for the implementation of strategy, policies, budgets and the financial performance of the Group. The Executive Directors provide specialist knowledge and experience to the Board and successfully lead and manage the risk and finance functions across the Group. The Company does not comply with provisions of the Code in relation to the composition of the Audit, Remuneration or Nomination Committee. The Board considered these provisions to not be appropriate due to the size and nature of the Company. Internal control and risk management systems The Board is responsible for the overall system of internal controls and risk management for the Group and for reviewing their effectiveness on an annual basis. The Company’s internal controls are designed to manage rather than eliminate the risk of failure in pursuit of the Group’s overall business objectives. The risk management framework is embedded within our management and governance processes and can be adjusted, if and when required, in response to a material change in circumstances. The Board discharges or intends to discharge its duties in this area through: • the review of financial performance including budgets, KPIs, forecasts and covenants on a monthly basis; • the receipt of regular reports which provide an assessment of key risks and controls and how effectively they are working; • scheduling annual Board reviews of strategy including reviews of the material risks and uncertainties facing the business; • the receipt of reports from senior management on the risk and control culture within the Group; • the presence of a clear organisational structure with defined hierarchy and clear delegation of authority; and • ensuring there are documented policies and procedures in place. Through the Risk Committee, the Board reviews the risk management framework, the key risks facing the business and how they have changed since the previous review (see pages 24 to 25). The Finance Department is responsible for preparing the Group financial statements and ensuring that accounting policies are in accordance with International Financial Reporting Standards. All financial information published by the Group is subject to the approval of the Audit Committee The Board, with advice from the Risk and Audit Committees, is satisfied that a system of internal controls and risk management is in place which enables the Company to identify, evaluate and manage key risks. Directors Each of the Directors is committed to their respective roles and has sufficient time to fulfil their duties and obligations to the Company. The Non-Executive Directors’ other significant commitments were disclosed to the Board before their appointment. Chairman The Chairman is responsible for the proper function of the Company’s Board of Directors who oversee the strategic direction of the Group. He sets the Board meeting agendas with the Company Secretary, to ensure that the Board devotes its attention to the right matters, and facilitates and encourages active engagement and appropriate challenge by all Directors. 44 Role of Non-Executive Directors The Non-Executive Directors are responsible for providing constructive challenge and help develop proposals put forward by the Executive Directors on strategy and other matters affecting the Group’s operational and financial performance. They provide an external focus to the Board’s discussions and continually review the performance of the Executive Directors and the wider senior management team. The Board has adopted a procedure for the appointment of new Directors by appointing a Nomination Committee to lead the process of appointment and to make recommendations to the Board. Non-Executive Directors have been appointed for fixed periods of three years, subject to confirmation by shareholders. Their letters of appointment may be inspected at the Company’s registered office or can be obtained on request from the Company Secretary. The Board has not appointed a Senior Independent Director, as this provision is not considered to be appropriate due to the relatively small size of the Board and the fact that the Board only includes one independent Non-Executive Director. The Non-Executive Directors are available to shareholders if they have any concerns, which contact through the normal channels of Chairman or other Executive Directors has failed to resolve or for which such contact is inappropriate. The appointment of a Senior Independent Director will be reviewed annually and should the Board find it necessary an appointment will be made. Company Secretary The role of Company Secretary is fulfilled by the Chief Financial Officer who acts as secretary to the Board and to its Committees. The Company Secretary is supported by the Assistant Company Secretary. The Board is aware that if a conflict were to arise, the Assistant Company Secretary is available to the Board and its Committees for advice on matters relating to corporate governance. The Company Secretary ensures that all Directors have full and timely access to all relevant information to ensure that the Board is able to make informed decisions. He is responsible for ensuring that correct Board procedures are followed and for advising on governance matters and ensuring that there is a good flow of information within the Board and its Committees and between senior management and the Non-Executive Directors. The Company Secretary supports the Chairman in setting the agenda for each Board meeting. The appointment and removal of the Company Secretary is a matter for the Board as a whole. Board diversity The Company recognises the importance of diversity both at Board level and throughout the whole organisation. The Board remains committed to increasing diversity. Consequently, diversity is taken into account during each recruitment and appointment process and the Company is determined to attract outstanding candidates with diverse backgrounds, skills, ideas and culture. Non-Standard Finance plc Annual report and accounts 2016As a result, the Board plans to participate in The Future Boards Scheme, an initiative launched by The 30% Club UK, the UK Government and Board Apprentice giving senior women a unique opportunity to get board experience to progress their careers to the next level. The Group believes the scheme has the potential to significantly grow the talent pipeline of women executives by giving women 12 months’ experience on one of the Group’s subsidiary boards. Election and re-election of Directors In accordance with the Company’s Articles of Association and the Code, the Directors are required to submit themselves for re-election annually at the Annual General Meeting. Each Director will offer themselves for re-election at the next Annual General Meeting taking place at 11.00am on 9 May 2017. • approval of the Group’s risk management and control framework and the appointment/re-appointment of the Group’s external auditor (following recommendations from the Audit Committee); • approval of internal regulations and policies; • the Group’s finance, banking and capital structure arrangements; • the Company’s dividend policy; and • shareholder circulars, convening of meetings and stock exchange announcements. In addition, the Board has adopted formal authorisation limits which set out the levels of authority for the Executive Directors and employees below Board level to follow when managing the Group’s business on a daily basis. Induction and professional development The Company has a policy in place to ensure that all new Board appointments receive a full, formal induction tailored to the needs and experience of the new Director. They are also provided with opportunities to meet major shareholders. Activities covered during 2016 During 2016 the Board had 11 scheduled meetings in London to review current trading and operational performance of the business as well as to consider the following items of business: Month Business matters discussed As there were no new appointments to the Board during 2016, there were no new inductions made. Adhering to the requirements of the Code, the Chairman during 2016 regularly reviewed and agreed with each Director their training and development needs, taking into account their individual qualifications and experience. The Directors have full access to a regular supply of financial, operational, strategic and regulatory information to help them discharge their responsibilities and keep themselves fully informed of developments at the Company and each of its operating subsidiaries. Independent advice All Directors have access to independent professional advice at the Company’s expense and the Board and its Committees are provided with sufficient resources to undertake their duties. Matters reserved for the Board The Board’s full responsibilities are set out in the matters reserved for the Board and its powers and duties are set out in the Company’s Articles of Association and the relevant regulations applicable to the Company as a public listed company registered in England and Wales. The Board is primarily responsible for: • the overall leadership of the Group and setting core values and standards; • determining the strategic direction of the Group, including the approval of the Group’s strategic aims and objectives; • approval of the annual operating and capital expenditure budgets and any material changes to them; • oversight of the Group’s operations; • reviewing the Group’s performance in light of the Group’s strategic aims, objectives, business plans and budgets and ensuring that any necessary corrective action is taken; • approval of the Group’s annual and half-year results; • ensuring adequate succession planning for the Board and senior management; • determining the Company’s remuneration policy; • approving major capital projects, acquisitions and divestment; • promoting good governance and seeking to ensure that the Company meets its responsibilities towards all stakeholders; January February March April May June July • Review and approval of the 2016 Group budget • Review and approval of the 2015 Annual Accounts • Review and approval of the 2015 Group results announcement • Approval of the divisional LTI schemes • Approval of the executive director’s 2016 bonus plan • Completion of the acquisition of Everyday Loans Group • Directors’ strategy day(s) • Review of the Loans at Home and Everyday Loans Group debt funding facilities • Review and approval of the 2016 half-year accounts September • Review of the Group’s funding strategy • Review of analyst consensus and 2016 Company forecast October • Resignation of Robin Ashton as a Non-Executive Director November December • Consideration of the appointment of a Non-Executive Director to the Board • Consideration of a potential acquisition target • Review and approval of the 2017 Group budget Matters to be covered in 2017 • Review of the long-term vision and strategic direction of the Group • Review of the financial performance of the Group • Analysing the Group structure and management performance • Group projections • Review of Group funding • Potential acquisitions • Undertaking an annual review of the Group strategy • Approval of the Groups’ interim and annual results. • Approve the appointment of an additional Non-Executive Director Board and committee meetings All Directors are required to attend Board meetings as well as committee meetings for which they hold membership alongside an additional two-day, off-site strategy meeting to review and agree the Group’s three-year business and financial strategy. 45 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Governance Governance report continued The strategy meeting in 2016 was attended by the Directors, Company Secretary, senior management (where appropriate) and the divisional Chief Executives. The agenda for the strategy day included: • a facilitated discussion of the Group’s future financial and funding strategy; • a presentation and consideration of the business strategy of each of the Group’s three divisions; • review and discussion of the non-standard finance consumer market in which the Group operates; and • a presentation on the investor relations, public affairs and communications plans for the Group. All Directors receive Board papers and minutes for all the meetings, which are circulated approximately one week in advance of scheduled meetings. All Directors have access to the Company Secretary and independent professional advice at the Company’s expense, as and when required. A table reflecting the Directors’ attendance at Board meetings is shown below. Conflicts of interests Directors have a statutory duty to avoid situations in which they have, or may have interests that conflict with those of the Company, unless that conflict is first authorised by the Directors. The Companies Act 2006 and the Company’s Articles of Association require the Board to consider any potential conflicts of interest. The Board considers and, if appropriate, authorises each Director’s reported actual and potential conflict of interest, taking into consideration what is in the best interests of the Company and whether the Director’s ability to act in accordance with his or her wider duties is, or may be affected. All potential conflicts approved by the Board are recorded in a Conflicts of Interest Register, which is reviewed by the Board at least quarterly to ensure that the procedure is working effectively. Relations with shareholders The Company keeps shareholders informed of all material business developments via its public disclosures including its annual report, its half-yearly financial statements and periodic trading update announcements. In addition, other price- sensitive information is disclosed via a regulatory news service. All these items are available from the Company’s corporate website: www.nonstandardfinance.com. The website also contains other information about the Group and its business. The Group Chief Executive and Chief Financial Officer ensure that the views of shareholders are communicated to the Board and that the Company’s governance and strategy are discussed with major shareholders. The Board aims to foster close relations with its investors and sell-side analysts through a regular and comprehensive programme of investor relations activity. Throughout the year, the Chairman, Group Chief Executive, Chief Financial Officer and Director of Investor Relations and Communications meet with shareholders on request or via organised investor roadshows supported by the Group’s brokers, as well as by attending and presenting at industry and investor conferences. During 2016 there were over 90 such meetings. Annual General Meeting Shareholders are invited to attend the Company’s Annual General Meeting (‘AGM’), where Board members and the Board’s advisers are available to answer any shareholder questions. The 2017 Annual General Meeting of the Company is to be held at Bell Pottinger, 330 High Holborn, London, WC1V 7LU at 11.00am on 9 May 2017. The Notice of Meeting, contained in a separate letter from the Chairman, includes a commentary on the business to be transacted at the General Meeting. Nick Teunon Chief Financial Officer and Company Secretary 31 March 2017 Attendance and total number of meetings to which the Director was entitled to attend Explanation 11/11 11/11 10/11 Diary conflict required a change to the original date scheduled 11/11 10/11 Diary conflict required a change to the original date scheduled 9/9 Robin Ashton was only eligible to attend nine board meetings Attendance at meetings Director John van Kuffeler Nick Teunon Miles Cresswell-Turner Charles Gregson Heather McGregor Robin Ashton (resigned 31 October 2016) 46 Non-Standard Finance plc Annual report and accounts 2016Governance Audit Committee report for the period ended 31 December 2016 Membership The Audit Committee (the ‘Committee’) currently consists solely of Non-Executive Directors, one of whom is independent. The provisions of the Code require that the Audit Committee comprises Independent Non-Executive Directors. Given that only one Director is considered to be independent, the Company did not meet the requirements of the Code in this regard. The Nomination Committee continues to consider the appointment of an additional Non-Executive Director and the Board continues to consider appointments to this position. Following the resignation of Robin Ashton from the Board on 31 October 2016, Charles Gregson has been appointed as the Chairman of the Committee. The names of the Directors and their biographical details are set out on pages 40 to 41. Role and responsibilities The key objective of the Committee is to provide assurance to the Board as to the effectiveness of the Company’s internal controls and the integrity of its financial records and externally published results. In doing so, the Committee operates within its terms of reference. The primary functions of the Committee include: • monitoring the integrity of the financial statements including the annual and half-yearly reports of the Group and any other formal announcements relating to the Company’s financial performance and reviewing significant financial reporting judgements contained in them before these are submitted to the Board for final approval; • making recommendations to the Board concerning any proposed, new or amendment to an existing accounting policy; • advising the Board on whether the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable; • meeting with the external auditor post-audit at the reporting stage to discuss the audit, including any problems and/or reservations arising from the audit and any matters that the auditor may wish to discuss (in the absence of NSF management, where appropriate); • reviewing the adequacy and effectiveness of the Company’s internal audit review function and internal financial controls; • ensuring appropriate co-ordination between the internal audit function and the external auditor; • reviewing: (i) the adequacy and security of the Company’s arrangements for its employees and contractors to raise concerns about possible wrongdoing in financial reporting or other matters; (ii) the Company’s procedures for detecting fraud; and (iii) the Company’s systems and controls for the prevention of bribery; • making recommendations to the Board in relation to the appointment, re-appointment and removal of the Company’s external auditor, providing recommendations on their remuneration and approving the terms of engagement of the external auditor; • overseeing the relationship with the external auditor and assessing the external auditor’s independence and objectivity and the effectiveness of the audit process; and • developing and implementing policy on the engagement of the external auditor to supply non-audit services. Meetings and attendance The Committee met on nine occasions during the year. Attendance and total number of meetings that the Director was entitled to attend Charles Gregson (Chairman) Heather McGregor Robin Ashton (resigned 31 October 2016) 7/9 8/9 8/8 The Directors above without Robin Ashton met on two occasions for a discussion with the external auditor without executive management present. Committee meetings are attended by the joint Chief Financial Officer/Company Secretary. The external auditor is invited to attend meetings of the Committee and other non-members are sometimes invited to attend all or part of any meeting as and when appropriate and necessary. Significant issues and areas of judgement considered by the Committee Throughout 2016 the Committee determined that the following areas of the financial statements were of significant interest. 1. Impairment of goodwill: Management performed a goodwill impairment assessment as at 30 June 2016 and 31 December 2016 by determining the recoverable amount, based on a fair value less costs to sell of each of the cash generating units, and comparing these to the respective net asset values and carrying values of goodwill. The Committee challenged the appropriateness of management’s key assumptions and was satisfied with the conclusion that no impairment of goodwill was required. Further detail in respect of management judgements and estimates, along with the respective sensitivity of the headroom to those judgements and estimates is set out in notes 2 and 13 to the financial statements. 2. Impairment of customer receivables: The assessment of provisions for impairment losses against customer receivables requires management to make significant judgements. The Committee regularly challenges the appropriateness of management’s judgements and assumptions underlying the impairment provision calculations and concluded that the provisions held against the loan book are reasonable. Further detail in respect of the assumptions is set out in note 2 to the financial statements. 3. Acquisition accounting and intangibles: On 13 April 2016, the Group completed the acquisition of the Everyday Loans Group. IFRS 3 Business Combinations requires assets and liabilities acquired to be recognised initially at their fair values. Intangible assets must also be recognised at fair value if they are separable or arise from other contractual rights. The Committee challenged management’s identification and valuation of assets on acquisition and found the methodology used to be appropriate. Further detail in respect of management judgements and assumptions is set out in notes 2, 13, 14 and 24 to the financial statements. 47 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Governance Audit Committee report continued for the period ended 31 December 2016 4. Review of the half-year results: • Review of impairment of goodwill, intangibles and customer receivables valuation. • Review of acquisition accounting. • Review of interim results. • Review and approval of the going concern paper which confirmed it was appropriate to prepare the interim results for the six months ended 30 June 2016 on a going concern basis. • Review of the report on the interim review from the external auditor. • Review of the interim results announcement. • Discussion with the external auditor without any Executive Director or employee being present. 5. Review of the Annual Report and Financial Statements: • Review of impairment of goodwill, intangibles and customer receivables valuation carried out by management. • Review of the calculation of goodwill and intangibles assets on the acquisition of the Everyday Loans Group. • Review and approval of the going concern paper which confirmed it was appropriate to prepare the Annual Report and Financial Statements for the year ended 31 December 2015 on a going concern basis. • Review of full-year results and the form and content of the draft Annual Report and Financial Statements. • Discussion with the external auditor without any Executive Director or employee being present. • Review of the preliminary results for the year ended 31 December 2015. • Review of the statement on internal controls. 6. Internal audit function: The internal audit function which is provided by a third-party regularly reports on internal audit activities to the Committee. A review of the internal audit activity is approved by the Committee. The internal audit activities encompass all divisions within the Group and therefore provide a consistent and balanced overview of the Group to the Committee. The Committee met with management separately, to give management the opportunity to raise issues with the internal audit function directly to the Committee. 7. Non-financial audit fees paid to the external auditor for the year: A review of the non-financial audit fees is undertaken by the Committee and an analysis of the non-audit fees paid to the external auditor for the provision of non-audit services is provided on page 88 of the Annual Report. The Committee also reviews the performance of the auditor taking into consideration the services and advice provided to the Company and the fees charged for these services. Details of the auditor’s total fees for the year can be found on page 88. On the basis of the auditor’s performance, the Committee considers Deloitte’s selection to be in the best interests of the Company and has recommended to the Board that Deloitte should be proposed for reappointment at the forthcoming Annual General Meeting. The Committee has considered the independence of Deloitte and the level of non-audit fees and believes that the independence and objectivity of the external auditor are safeguarded and remain strong. The Committee will continue to review the qualification, expertise, resources and independence of the external auditor and the effectiveness of the audit process during the current financial year. Non-audit work The Committee monitors the level of non-audit work carried out by the external auditor and seeks assurances from the auditor that it maintains suitable policies and processes ensuring independence, and monitors compliance with the relevant regulatory requirements on an annual basis. During 2016 the level of non-audit fees amounted to £44,000 (2015: £1.76m). The non-audit work carried out during the year related to tax and VAT (2015: tax, due diligence and corporate finance). The fees paid to the external auditor are set out in note 5 on page 88. The fees for non-audit work carried out by the auditor in 2016 represents 13% (2015: 748%) of audit fees. The Company during 2016 had a formal non-audit work policy in place. In line with the non-audit policy, the Committee has challenged the appointment of the external auditor for non- audit work during the period and expects it to clearly demonstrate its independence on an ongoing basis through its work and at Committee meetings. Internal audit The Committee appointed KPMG, one of the UK’s leading accounting firms as Internal Auditor to the Group during 2016. The Internal Audit function is managed by KPMG. The Internal Auditor reports directly to the Committee which ensures the independence and effectiveness of the Internal Auditor. The Internal Auditor provides regular reports to the Audit Committee as well as the Risk Committee and to the Board as a whole. These issues were discussed with management and the external auditor to ensure that the required level of disclosure is provided and that the appropriate level of rigour has been applied where any judgement may be exercised. Charles Gregson Chairman of the Audit Committee 31 March 2017 External audit The Company’s auditor is Deloitte LLP, which has been in office since 22 October 2014. As noted above, the Committee is responsible for assessing the efficacy of the external auditor, for monitoring the independence and objectivity of the external auditor, for considering the reappointment of the external auditor and for making recommendations to the Board. 48 Non-Standard Finance plc Annual report and accounts 2016 Governance Nomination Committee report for the period ended 31 December 2016 The principal purpose of the Nomination Committee (the ‘Committee’) is to monitor the balance of skills, knowledge, experience and diversity on the Board and recommend any changes to the composition of the Board. This report gives more detailed information on how the Committee performed its duties. Membership The provisions of the Code require that the Nomination Committee comprises of Independent Non-Executive Directors only. As only one Director is considered to be independent, the Company did not meet the requirements of the Code in this regard. However, given the make-up of the Group and its current stage of development, the Board considers that despite not meeting this requirement, the Nomination Committee can fulfil its role effectively in its current form. Following the resignation of Robin Ashton, the Committee continues to consider the appointment of an additional Independent Non-Executive Director. Following the appointment of John van Kuffeler as Group Chief Executive on 19 December 2016, Mr van Kuffeler stepped down as Chairman and as a member of the Committee. Charles Gregson has been appointed as Chairman of the Committee. Meetings and attendance Charles Gregson (Chairman) Heather McGregor John van Kuffeler (stepped down from the Committee on 19 December 2016) Robin Ashton (resigned 31 October 2016) Attendance and total number of meetings that the Director was entitled to attend 2/2 2/2 2/2 1/1 The joint Chief Financial Officer/Company Secretary attends all Nomination Committee meetings. The biographies of the members are set out on pages 40 to 41. Role and responsibilities The Nomination Committee assists the Board in discharging its responsibilities relating to the composition and make-up of the Board and any other committees of the Board. To fulfil that role, the Committee’s primary functions include: • following an evaluation of the balance of skills, experience, independence and knowledge of the Board, identifying and nominating candidates who are assessed as having sufficient time to devote to their responsibilities to fill Board vacancies and making appropriate recommendations to the Board for the appointment of Directors; • reviewing the structure, size and composition of the Board and making recommendations to the Board with regard to any proposed changes; • reviewing and considering the performance and effectiveness of the Committee through the results of the Board evaluation process; and • considering and formulating succession planning for Directors and senior executives. Principal activities of the Committee during 2016: • Reviewing the composition of the Board and the balance of Executive and Non-Executive Directors; • Reviewing the succession plans for the Board and the senior management within the Group; • Commencing the new selection process for a new Independent Non-Executive Director; and • Reviewing the Board’s training programme to ensure that the Directors have all the requisite skills to discharge their duties on the Board. Diversity The Company and each of its operating companies seek to engage, train and promote employees on the basis of their capabilities, qualifications and experience. Discrimination or pressure to discriminate by any of the Group’s employees, contractors or customers in respect of age, sex, sexual orientation, race, ethnic origin, marital status or civil partnership, nationality, disabilities, political or religious beliefs is strictly forbidden. The Group seeks to pursue diversity, including gender diversity, throughout the business, and while the Board endorses the aspirations of the Davies Review on Women on Boards, the Board is not committing to any specific targets. Our Board currently has one female Director and the Committee will give due consideration to Board balance and diversity when recommending new appointments to the Board. The Board will also ensure that its own development in this area is consistent with its strategic objectives and enhances its overall effectiveness. Board induction All Directors are required to undertake a formal and rigorous induction to the Group upon joining the Board. As no appointments were made to the Board during 2016 no inductions were carried out during the year. Training Throughout the year, Directors participate in an on-going programme of training and professional development. The internal training includes topical issues that are relevant to the regulatory environment surrounding the Group. Board evaluation During the year the Board completed its first internal evaluation process. The results of the evaluation will be reviewed by the Committee and any actions then implemented during 2017. Areas of focus in 2017 The main area of focus for the Committee in 2017 is to recommend the appointment of a suitable candidate to fill the vacancy of a Non-Executive Director following the resignation of Robin Ashton in October 2016. The Committee will also oversee the recruitment of a permanent Chief Executive Officer for Loans at Home, following the announcement of the departure of the previous CEO in January 2017. The Committee will also continue to fulfil its general responsibilities, with particular emphasis on compliance with the UK Corporate Governance Code and succession planning. Charles Gregson Chairman of the Nomination Committee 31 March 2017 49 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Governance Risk Committee report for the year ended 31 December 2016 The principal purpose of the Risk Committee (the ‘Committee’) is to assist the Board in its oversight of risk within the Company with particular focus on risk appetite, risk profile and the effectiveness of the Company’s internal controls and risk management systems. Membership and attendance The Committee consists of the Non-Executive Directors of the Company. The joint Chief Financial Officer/Company Secretary regularly attends Committee meetings. Other relevant parties are also invited to attend Committee meetings, as appropriate. The Directors’ attendance at the meetings during 2016 is recorded in the table below: Attendance and total number of meetings that the Director was entitled to attend Heather McGregor (Chairman) Charles Gregson Robin Ashton (resigned 31 October 2016) 4/4 4/4 3/3 Cross-membership between each of the Board’s committees ensures that all material risks and related issues are appropriately identified, communicated and taken into account in the decisions of each committee and that of the Board. The Committee met four times during the year. In addition, the Committee Chair attended meetings with both the Executive Directors and management at Everyday Loans and Loans at Home and also participated in customer visits with Loans at Home agents to further assess the Company’s risks. Role and responsibilities The Board has delegated the oversight of risk management to the Committee, although it retains overall accountability for the Company’s risk profile. The Committee’s primary functions include: • the assessment of material risks and the Company’s overall risk management framework. The Committee takes account of the current and prospective macroeconomic, financial and regulatory environment in order to advise the Board in respect of the most appropriate configuration of the Company’s overall risk appetite, tolerance and strategy. In doing so, the Committee considers the Company’s ability to identify and manage new risk types, reviews any material breaches of risk limits and reviews the effectiveness of the Company’s internal controls and risk management systems; • responsibility for overseeing and challenging stress and scenario testing, the provision of advice in relation to risk and for the formulation of the Company’s risk policies; and • working closely with the Audit Committee in order to fully review the effectiveness of the Company’s risk management and internal control systems. Activities during the period The Committee performed a comprehensive review of the Company’s risk management and internal control systems, including all material, financial, operational and compliance controls, identifying the key risks affecting the Company. These are set out on pages 24 to 25. A key theme for the Committee has been to ensure that appropriate risk management strategies are continuously monitored and are implemented effectively. The Committee worked on the development of the Company’s risk management capabilities by creating an effective enterprise risk management framework and by undertaking regular and detailed analysis of the key risks faced by the business. During the year to 31 December 2016 the Committee focused on the following: • detailed review of the lending and collections carried out by the internal auditors with the findings reported to the committee; • review of liquidity and credit risk; • identification of Group risks with action plans put in place to mitigate the risks; • review of the risk appetite status across the Group; and • review of cyber security across the Group. Viability statement In accordance with the 2014 FRC Corporate Governance Code, the Directors confirm that they have a reasonable expectation that the Group will continue to operate and meet its liabilities as they fall due for the next three years. The Directors’ assessment has been made with reference to the Group’s current position, strategy, as laid out in the Strategic report (see pages 15 to 21) and the Group’s principal risks and uncertainties and how these are managed (see pages 24 to 25). In particular, noting the ability of the Group to reduce lending at the point of peak seasonal demand and the Company’s intention to raise additional debt funding to support lending ambitions. The strategy and associated principal risks underpin the Group’s three-year plan and scenario testing, which the Directors review at least biannually. The review of the three-year plan is strengthened by regular updates from the divisional management teams. The three-year plan is built on a divisional basis using a bottom up approach. The plan makes certain assumptions about future economic conditions, the regulatory environment, divisional performance and growth and the ability to refinance existing debt facilities as they fall due. This plan is then stress tested considering downside scenarios. These scenarios consider financial and regulatory downsides. The financial downside scenario uses the 2008/9 financial crisis as its basis and therefore reflects a number of principal risks of the business. The regulatory downside scenario is based on fundamental changes in the business model as a result of regulatory change. Following the assessment, the Directors also considered it appropriate to prepare the financial statements on the going concern basis, as set out on page 68. Areas of focus in 2017 The Committee intends to continue to improve and embed the Company’s risk management framework during 2017. Key tasks include: • further review and enhancement of the Group Risk management framework; • review of liquidity and credit risks; and • development of a risk register across the Group. 50 Heather McGregor Chairman of the Risk Committee 31 March 2017 Non-Standard Finance plc Annual report and accounts 2016Governance Directors’ remuneration report for the year ended 31 December 2016 This report has been prepared in compliance with The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the ‘Regulations’) as well as the Companies Act 2006. This report is set out in the following key sections: Part A: Annual Statement Part B: Our remuneration at a glance Part C: Directors’ Remuneration Policy 1. Executive Director remuneration policy 2. Illustrations of application of remuneration policy 3. Approach to recruitment and promotions 4. Executive Director service contracts and payment for loss of office 5. Consideration of employee remuneration and shareholders 6. Non-Executive Director remuneration policy and letters of appointment Part D: Annual Report on Remuneration 1. Single figure remuneration table: Executive Directors 2. Implementation of remuneration policy for the Executive Directors for 2017 3. Consideration by the Committee of matters relating to Directors’ remuneration for 2016 and 2017 4. Group Chief Executive and employee pay 5. Single figure remuneration table: Non-Executive Directors 6. Directors’ shareholding and share interests 7. Shareholder voting Part A: Annual Statement Dear Shareholder I am pleased to present to you our Directors’ remuneration Report for Non-Standard Finance plc (‘NSF’). In my letter last year I set out the background to the establishment of the Remuneration Committee (the ‘Committee’) and its work since the IPO. Our 2015-16 review of market remuneration showed that salaries and bonuses for Executive Directors were positioned in the lower quartile when compared to financial companies of a similar size. As we grow further, we expect that the position of the Group’s Executive Directors will fall further behind those of the peer group. Nevertheless, the executive team and the Committee together were keen to take a prudent approach that focused first and foremost on delivering value to shareholders and this continues to be the case. With this in mind, we adopted a policy that minimises our fixed costs as far as possible whilst providing sufficient incentive opportunity to drive and deliver our strategy. We have been considering the incentive opportunity and whether it aligns management remuneration and incentives sufficiently with shareholder returns over the long-term. Our new Directors’ Remuneration Policy As noted above, the incentive arrangements for the founding Executive Directors include a salary and bonus to reflect the size and stage in the Company’s development plus the Founder Share scheme for founding Executive Directors. The Founder Share scheme is subject to share price performance, although the conditions can be measured at any time after the first anniversary of the acquisition of Loans at Home and it does not provide a lock-in for participants as share price performance is the only condition of vesting. New joiners are not able to be issued with new shares under the Founder Share scheme. The Committee has kept the Founder Share scheme and its part in rewarding and retaining key executives under review. As a result of this review, the Committee and I concluded that a new long term incentive (‘LTI’) policy was required as there was no mechanism to retain current executives and no way to allow new senior joiners to directly participate in the scheme. Having consulted with some of our larger shareholders beforehand, we therefore propose to introduce a value creation plan for the existing Executive Directors and new senior joiners which would align key executives’ interests with those of shareholders and which would not deliver any return to these executives before investors achieve a reasonable return. Under the proposed plan, participants would share in a pool of 15% of the growth in value (market capitalisation) of the Company above a share price hurdle of £1.10, being 29% above the price at which the majority of the Group’s shares were issued and 10% above the highest price at which investors subscribed for shares. It also represents a premium of approximately 100% to the current share price. Performance would be tested against this hurdle after four years starting from 1 January 2017 (i.e. 31 December 2020), though payment would be deferred until the end of the fifth year (i.e. 31 December 2021). Awards held by participants that cease employment during the four year performance period will either lapse or be restricted in value depending on the reason for employment ceasing. The Committee will have an overriding discretion to limit the amount payable under the awards or claw back awards that have been made if it considers that the Group’s results have been achieved in an inappropriate manner. The pool in which participants will share will be diluted and adjusted for any new issue of shares. Depending on the amount of equity that needs to be raised this could fall significantly. There will be a cap on the maximum number of shares issued by the Company under the LTI such that, together with any shares issued under the Founder Share scheme, no more than 5% can be issued in any 10 year period and that, together with all other share incentive plans offered by the Company, no more than 10% can be issued in any 10 year period. Any awards earned in excess of this will be satisfied through market purchase of shares by the Company. We consider that this new plan provides a testing, but real and valued opportunity for current and new management, and will act as a strong retention mechanism for key talent over the long-term. 51 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Governance Directors’ remuneration report continued Shareholder approval for this new part of the policy will be sought at the AGM to be held at 11.00am BST on 9 May 2017. Approval will also be sought for an all employee sharesave plan the ‘Sharesave Plan’, in which the Executive Directors are also eligible to participate. As the LTI was not included in the Directors’ Remuneration Policy approved at the 2016 AGM, we are proposing a new Directors’ Remuneration Policy at the 2017 AGM. The terms of the new Policy will be the same as the current Policy approved at the 2016 AGM apart from the inclusion of the LTI, further details of which are set out below. Part D: Format of this report and matters to be approved at our AGM in May 2017 The remainder of this report is split out into the following three sections: Part B: Part C: Our remuneration at a glance (page 53). Our new Directors’ Remuneration Policy (pages 54 to 61). Annual Report on Remuneration providing details of the payments made to Directors in 2016, as well as other statutory disclosures (pages 61 to 65) and which complies with the requirements of the Listing Rules of the UK Listing Authority and the UK 2014 Corporate Governance Code. Business context and Committee decisions on remuneration As you will have read earlier in this Annual Report, the Company has made significant progress in 2016. Having completed two acquisitions, the Group is now a significant player in the UK’s non-standard finance market with a combined loan book of approximately £165m (before fair value adjustments), a network of almost 90 offices, over 500 staff and a network of 785 self-employed agents. The Group also began paying dividends with a half-year dividend of approximately £1.0m paid in October 2016 and a final recommended dividend of approximately £2.9m that if approved, will be paid in June 2017. At our 2017 AGM, resolutions to approve the new Directors’ Remuneration and the Annual Report on Remuneration and this letter will be put to shareholders. I ask for your support on both resolutions. The Committee and I are keen to hear and actively take note of your views as shareholders on our remuneration strategy. On behalf of the Remuneration Committee and Board Whilst much was achieved during the year, no bonuses were paid to the Executive Directors as the financial performance targets that were set at the start of the year were not met. Charles Gregson Chairman of the Remuneration Committee 31 March 2017 In line with the bonus targets agreed with the Executive Directors under their contracts of employment, we intend to set the on-target bonus opportunity for the 2017 financial year at 75% of base salary and to set the maximum bonus opportunity at 100% for 110% achievement of target. Threshold vesting at 25% of base salary will be set at 90% of target. Straight-line vesting will apply between these points. The bonus will be subject to performance against a combination of financial and non-financial targets, split as to 70% financial and 30% non-financial. For the 2017 financial year, the financial target will be budgeted profit before tax and the non-financial targets will include conduct-based measures which seek to reward the delivery of good customer outcomes through appropriate affordability assessments and appropriate treatment of vulnerable customers together with appropriate collections, arrears and forbearance practices. A value creation plan has been introduced at Everyday Loans (including Trusttwo) so that their key employees can participate in the growth in value of the Company. Participants in the plan will share in the growth in value of Everyday Loans (including Trusttwo) above a compound annual growth rate of 12% over three years and the plan thereby encourages participants to deliver growth as early as possible. Vested awards will be satisfied in shares in the Company, or cash at the Company’s choice. 52 Non-Standard Finance plc Annual report and accounts 2016Part B: Our remuneration at a glance Ahead of the detailed Directors’ Remuneration Policy and the Annual Report on Remuneration, we have below summarised how key elements of the remuneration policy will be implemented for 2017 and the key decisions taken by the Committee in relation to base pay and incentives for the Executives in respect of 2016. 2017 Executive Director remuneration policy Base Salary Annual Bonus Maximum: On-target: Threshold: John van Kuffeler £ 287,500 100% of salary 75% of salary 25% of salary Nick Teunon £ 230,000 100% of salary 75% of salary 25% of salary Miles Cresswell-Turner £ 230,000 100% of salary 75% of salary 25% of salary Operation for 2017 • Performance measures are weighted as to 70% financial (profit before tax) and 30% non-financial (including conduct-based measures which seek to reward the delivery of good customer outcomes through appropriate affordability assessments and appropriate treatment of vulnerable customers together with appropriate collections, arrears and forbearance practices). • Threshold vesting will be set at 90% of target with on-target vesting at 100% and maximum vesting at 110%, with vesting on a sliding scale between these points. • Bonus is payable in cash following the end of the financial year. Malus and clawback provisions will apply under the Annual Bonus at the discretion of the Committee in appropriate circumstances, such as a participant’s material underperformance, material misstatement of the accounts, gross misconduct and fraud, regulatory and similar failures or other reason as determined by the Committee. John van Kuffeler Nick Teunon Miles Cresswell-Turner 37.5% 5.625% 25.0% 3.75% 25.0% 3.75% Malus and clawback LTI % of growth pool allocated to participants: % of growth in value above £1.10: Operation for 2017 • Participants will receive awards, which they will hold during the performance period ending on 31 December 2020. Restrictions on the awards will apply during the performance period. • The value total attributable to the awards will be 15% of the growth in value (market capitalisation) of the Company above a share price hurdle of £1.10 measured at the end of the performance period. • At the end of the performance period, depending on structure, participants’ awards will vest and, in the case of options, become exercisable. If the award, or any part of it, was over shares in a subsidiary of the Company, participants can, shortly after the end of the performance period, exchange their awards for shares in the Company. Regardless of form of award, participants must hold shares received in the Company for a further year before being able to sell them. Malus and clawback provisions will apply under the LTI at the discretion of the Committee in appropriate circumstances, such as a participant’s material underperformance, material misstatement of the accounts, gross misconduct and fraud, regulatory and similar failures or other reason as determined by the Committee. Malus and clawback Pension John van Kuffeler 10% of salary Nick Teunon 10% of salary Miles Cresswell-Turner 10% of salary Shareholding requirement 100% of salary over 5 years 100% of salary over 5 years 100% of salary over 5 years 2016 year-end decisions made John van Kuffeler Nick Teunon Miles Cresswell-Turner 2017 salary review No increase from 1 January 2017 11% increase to £230,000 from 1 January 2017 No increase from 1 January 2017 2016 bonus outcome No bonuses were paid as performance targets were not met Value % of salary/maximum £ NIL NIL £ NIL NIL £ NIL NIL 53 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016  Governance Directors’ remuneration report continued Part C: Directors’ Remuneration Policy This section of the report contains details of the Directors’ Remuneration Policy that will govern the Company’s future remuneration payments. The policy is intended to apply for three years from the approval of the policy. The policy described in this part is subject to approval by shareholders at the Company’s AGM on 9 May 2017. The policy will be displayed on the Company’s website, in the Investors section, immediately after the 2017 AGM. The Directors’ Remuneration Policy contains one change from the policy that was approved at the 2016 AGM. This change is the introduction of an LTI for the Executive Directors and senior management. The Committee has established the policy on the remuneration of the Executive Directors and the Chairman. The Board has established the policy on the remuneration of the other Non-Executive Directors. 1. Executive Director remuneration policy Remuneration strategy The Company’s remuneration strategy is to provide a remuneration framework based on the following principles: 1 Attract, motivate and retain Executive and senior management in order to deliver the Company’s strategic goals and business outputs 2 Encourage and support a culture that delivers good customer outcomes and which adheres to FCA best practice 3 Reward delivery of the Company’s business plan and key strategic goals 4 Adhere to the principles of good corporate governance and appropriate risk management 5 Align employees’ interests with the interests of shareholders and other external stakeholders and encourage widespread equity ownership across the Group We believe that the current and proposed remuneration structure will continue to support and motivate our Executive Directors in furthering the Company’s long-term strategic objectives including the creation of sustainable shareholder returns. Furthermore, the Committee is satisfied that the composition and structure of the remuneration package is appropriate and does not incentivise undue risk-taking or reward underperformance. The table below sets out the key elements of the policy for Executive Directors: Remuneration policy table Element, purpose and link to strategy Operation Base salary To provide competitive fixed remuneration that will attract and retain key employees and reflect their experience and position in the Group. Salaries are reviewed annually, and any changes normally take effect from 1 January. When determining the salary of the Executives the Committee takes into consideration: • the levels of base salary for similar positions with comparable status, responsibility and skills, in organisations of broadly similar size and complexity; • the performance of the individual Executive Director; • the individual Executive Director’s experience and responsibilities; • pay and conditions throughout the Group, including the level of salary increases awarded to other employees; • the level of incentive compensation provided to the Executives under the Annual Bonus. 54 Maximum opportunity Performance measures and assessment Annual percentage increases are generally consistent with the range awarded across the Group. A broad assessment of individual and business performance is used as part of the salary review. No recovery provisions apply. Percentage increases in salary above this level may be made in certain circumstances, such as a change in responsibility or a significant increase in the role’s scale or the Group’s size and complexity. The salaries payable to the Executive Directors from 1 January 2017 are disclosed on page 62. Non-Standard Finance plc Annual report and accounts 2016Element, purpose and link to strategy Operation Maximum opportunity Performance measures and assessment Benefits To provide competitive benefits and to attract and retain high calibre employees. Reviewed periodically to ensure benefits remain market competitive. Benefits currently include: • Company car for John van Kuffeler. • Life, private medical and income protection insurance. • Other minor benefits as provided from time to time. Benefit values vary year-on-year depending on premiums and the maximum potential value is the cost of the provision of these benefits. No recovery provisions apply. Pension To provide a competitive Company contribution that enables effective retirement planning. Pension is provided by way of a contribution to a personal pension scheme or cash allowance in lieu of pension benefits. The maximum contribution to a personal pension scheme or cash in lieu is equal to 10% of base salary. No performance or recovery provisions apply. Maximum awards under the Annual Bonus are equal to 100% of salary. On-target bonus: 75% of salary. Threshold bonus: 25% of salary. Annual Bonus Incentivises achievement of annual objectives which support the Group’s short-term performance goals and protects longer- term interests of the Group. Bonus awards are granted annually following the signing of the Annual Report and Accounts, usually in March of the year following the reporting period in question. Performance period is one financial year, with pay-out determined by the Committee following the year end, based on achievement against a range of financial and non-financial targets. Malus and clawback provisions apply at the discretion of the Committee where the Committee considers such action is reasonable and appropriate, such as a participant’s material underperformance, material brand or reputational damage, material misstatement of the accounts, gross misconduct and fraud, regulatory and similar failures or other reason as determined by the Committee. Performance targets will be set annually by the Committee based on a range of interdependent financial and non-financial measures. Financial targets govern the majority of bonus payments, which may include those related to profit before tax. Non-financial measures will include conduct- based measures which ensure delivery of good customer outcomes through appropriate affordability assessments and appropriate treatment of vulnerable customers together with appropriate collections, arrears and forbearance practices. The Committee has the discretion to adjust targets or performance measures for any exceptional events that may occur during the year. As well as determining the measures and targets, the Committee will also determine the weighting of the various measures to ensure that they support the business strategy and objectives for the relevant year. 55 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Governance Directors’ remuneration report continued Operation Maximum opportunity Performance measures and assessment Participants will receive awards which may be structured as awards or options over Ordinary Shares in the Company which may then be exchanged for Ordinary Shares in the Company shortly after the end of the performance period on 31 December 2020. In each case, participants will then be required to hold such shares in the Company for a period of one year. Prior to the IPO the Executive Directors, Charles Gregson and Robin Ashton, were awarded Founder Shares in Non-Standard Finance Subsidiary Limited. Under the terms of these shares the holders of the Founder Shares have the option to require the Company to purchase some or all of their Founder Shares. The purchase price for the exercise of this option may be paid by the Company in Ordinary Shares or as a cash equivalent at the Company’s option. The number of Ordinary Shares required to settle all such awards, together with any Ordinary Shares issued in connection with the Founder Shares (see below) will be subject to a cap on the maximum dilution possible of 5% in 10 years. There will also be a further cap so that, together with all other share incentive plans offered by the Company, the maximum dilution possible will not be greater than 10% in 10 years. Any awards earned in excess of either cap will be satisfied through market purchase of shares by the Company. The number of Ordinary Shares required to settle all such options is the number of shares that would have represented 5% of the Ordinary Shares of the Company on (or immediately after) Admission if such Ordinary Shares had been issued at the time of Admission. The total value of awards at 31 December 2020 will be determined by the growth in the value of the Company to 31 December 2020 above £1.10. If the average share price of the Company is greater than £1.10, the value of the awards in total will equate to 15% of the excess growth in value, based on market capitalisation, of the Company above £1.10. A. the Group must make acquisitions with a combined value of at least £50 million; and B. within five years of the Group’s first acquisition, shareholders must receive a 25% increase in total shareholder value or 8.5% CAGR (measured on the basis of exceeding such price for 20 trading days out of 30 successive trading days). Eligible employees may participate in the Sharesave Plan and/or Share Incentive Plan and/ or Company Share Option Plan or country equivalent. Maximum participation levels for all staff, including Executive Directors, are set by relevant UK legislation or other relevant legislation. Not applicable. Executive Directors will be entitled to participate on those same terms. The Executive Directors are required to build or maintain (as relevant) a minimum shareholding in the Company over a five-year period. Shares included in this calculation are those held beneficially by the Executive Director and their spouse/life partner. The shareholding requirement is 100% of salary for Executive Directors. Not applicable. Element, purpose and link to strategy LTI LTI for Executive Directors and senior management. Founder Shares awarded to Executive Directors on IPO. All-employee incentives Encourage all employees to become shareholders and thereby align their interests with shareholders. Shareholding guidelines To ensure that Executive Directors’ interests are aligned with those of shareholders over a longer-time horizon. 56 Non-Standard Finance plc Annual report and accounts 2016Performance measures and targets The table below sets out the rationale for performance measures chosen in respect of the Annual Bonus: Element Performance measures Rationale How targets are set Annual Bonus A range of financial and non- financial performance measures. Aligns opportunity with both financial and personal targets. LTI Share price of the Company Aligns interests with those of shareholders and will not deliver a return to participants before investors achieve a return above the prices at which the Company raised equity. The performance targets are determined annually by the Committee taking into account market conditions and forecasts. The performance target has been set at share price of £1.10 at 31 December 2020. Discretion with the Directors’ Remuneration Policy The Committee has discretion in several areas of policy as set out in this report. The Committee may also exercise operational and administrative discretions under relevant plan rules approved by shareholders as set out in those rules. In addition, the Committee has the discretion to amend policy with regard to minor or administrative matters where it would be, in the opinion of the Committee, disproportionate to seek or await shareholder approval. Changes from the last approved Remuneration Policy The LTI has been added to since the last approved Remuneration Policy to provide a lock-in for the Executive Directors, which is not provided by the Founder Shares. In addition, the LTI is open to new joiners whereas additional Founder Shares are not available to be issued to such individuals. 57 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Governance Directors’ remuneration report continued 2. Illustrations of application of remuneration policy The charts below seek to demonstrate how pay varies with performance for the Executive Directors based on the stated remuneration policy. The charts show an estimate of the remuneration that could be received by Executives Directors under the policy set out in this report. Each of the bars is broken down to show how the total under each scenario is made up of fixed elements of remuneration, the annual bonus and the long-term incentive. The charts indicate that a significant proportion of both target and maximum pay is performance related. John van Kuffeler (£000) Nick Teunon (£000) Miles Cresswell-Turner (£000) 900 800 700 600 500 400 300 200 100 0 241 30% 19% 288 288 121 216 216 35% 35% 288 288 20% 72 72 288 288 288 288 288 288 100% 80% 46% 35% Minimum Threshold On-Target Maximum Base Salary Annual Bonus LTP 900 800 700 600 500 400 300 200 100 0 900 800 700 161 288 288 26% 600 216 216 80 173 288 288 230 16% 230 36% 37% 288 288 230 288 288 230 20% 58 288 288 230 100% 80% 48% 37% Minimum Threshold On-Target Maximum Base Salary Annual Bonus LTI 500 400 300 200 100 0 161 288 288 26% 216 216 80 173 288 288 230 16% 230 36% 37% 288 288 230 288 288 230 20% 58 288 288 230 100% 80% 48% 37% Minimum Threshold On-Target Maximum Base Salary Annual Bonus LTI Assumptions used in determining the level of pay-out under given scenarios are as follows: Element Minimum Threshold On-Target Maximum Fixed elements Base salary at 1 January 2017 Estimated value of benefits provided under the policy Pension – 10% of salary Annual Bonus LTI Nil Nil 25% of maximum 75% of maximum 100% of salary Nil 100% of the IFRS2 value of the award 200% of the IFRS2 value of the award Awards made under the LTI will be on a one-off basis. The on-target value displayed in the charts represents the expected IFRS2 value of the award. The maximum value displayed represents twice the expected IFRS2 value. The IFRS2 value is considered to be a suitable basis for estimating the potential pay-outs of the LTI awards at the date of the award. 58 Non-Standard Finance plc Annual report and accounts 20163. Approach to recruitment and promotions The Company will pay total remuneration for new Executive Directors that enables the Company to attract appropriately skilled and experienced individuals, but is not, in the opinion of the Committee, excessive. The remuneration package for any new recruit would be assessed following the same principles as for the Executive Directors, as set out in the remuneration policy table. For a new Executive Director who is an internal appointment, the Company may also continue to honour contractual commitments made prior to the internal appointment even if those commitments are otherwise inconsistent with the policy in force when the commitments are satisfied. Any relevant incentive plan participation may either continue on its original terms or the performance targets and/or measures may be amended to reflect the individual’s new role, as the Committee considers appropriate. The table below summarises our key policies with respect to recruitment remuneration: Element Policy description Base salary and benefits Pension • The salary level will be set taking into account a number of factors, including market factors, the individual’s experience and responsibilities and other pay structures within the Company and will be consistent with the salary policy for existing Executive Directors. • Benefits may be provided in line with the Company's benefits policy as set out in the remuneration policy table. • An Executive Director will be able to receive either a contribution to a personal pension scheme or cash allowance in lieu of pension benefits in line with the Company's policy as set out in the remuneration policy table. Annual Bonus • An Executive Director will be eligible to participate in the Annual Bonus as set out in the remuneration policy table. • Awards may be granted up to the maximum opportunity allowable in the remuneration policy table at the Committee’s discretion. Long-term incentives • An Executive Director may participate in the LTI, to the extent that awards are available, as set out in the remuneration policy table. Maximum variable remuneration Share buy-outs/replacement awards • The maximum annual variable remuneration that an Executive Director can receive may be up to 100% of salary (i.e. Annual Bonus). • The Company may, where appropriate, compensate a new Executive Director for variable remuneration that has been forfeited as a result of accepting the appointment with the Company. Where the Company compensates a new Executive Director in this way, it will seek to do so under the terms of the Company’s existing variable remuneration arrangements, but may compensate on terms that are more bespoke than the existing arrangements where the Committee considers that to be appropriate. • In such instances, the Company will disclose a full explanation of the detail and rationale for such recruitment-related compensation. In making such awards the Committee will seek to take into account the nature (including whether awards are cash or share-based), vesting period and performance measures and/or conditions for any remuneration forfeited by the individual when leaving a previous employer. Where such awards had outstanding performance or service conditions (which are not significantly completed) the Company will generally impose equivalent conditions. • The value of the buy-out awards will broadly be the equivalent of, or less than, the expected value of the award being bought out. Relocation policies • In instances where the new Executive is relocated from one work location to another, the Company will provide compensation to reflect the cost of relocation for the Executive in cases where they are expected to spend significant time away from their home location in accordance with its normal relocation package for employees. • The level of the relocation package will be assessed on a case-by-case basis but will take into consideration any cost of living differences; housing allowance; and schooling in accordance with the Company’s normal relocation package for employees. • The Company may, where appropriate, compensate a new Executive Director for legal costs incurred as a result of termination of previous employment in order to accept the appointment with the Company. Legal fees 59 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Governance Directors’ remuneration report continued 4. Executive Director service contracts and payment for loss of office Service contracts When setting notice periods, the Committee has regard to market practice and corporate governance best practice. Executive Directors’ service agreements can be terminated by not less than 12 months’ prior written notice given by the Executive or by the employer. The table below summarises the service contracts and letters of appointment for our Executive Directors. John van Kuffeler Nick Teunon Miles Cresswell-Turner Date of contract 19 February 2015 19 February 2015 1 January 2016 Notice period 12 months (Executive and Company) All service contracts are available for viewing at the Company’s registered office and at the AGM. The Executive Directors are permitted to sit as a Non-Executive Director on the Board of another company with the Company’s written consent. Payments for loss of office When determining any loss of office payment for a departing Director the Committee will always seek to minimise cost to the Company while complying with the contractual terms and seeking to reflect the circumstances in place at the time. The Committee reserves the right to make additional payments where such payments are made in good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation); or by way of settlement or compromise of any claim arising in connection with the termination of an Executive Director’s office or employment. The table below sets out, for each element of total remuneration, the Company’s policy on payment for loss of office in respect of Executive Directors and any discretion available: Element Approach Base salary 12 months under contract Annual Bonus None payable Founder Shares No forfeiture Discretion None Pro-rata bonus may be awarded dependent on reasons for leaving None LTI None payable if loss of office is because of resignation or gross misconduct or if the departing employee is not considered to be a good leaver. Pro-rata award of shares may be awarded dependent on the reasons for leaving Otherwise, pro-rata award of shares payable at the end of the performance period and subject to the deferral period. 5. Consideration of employee remuneration and shareholders Consideration of shareholder views The Remuneration Committee takes the views of shareholders seriously and these views are taken into account in setting remuneration policy and practice. Shareholder views are considered when evaluating and setting remuneration strategy and the Committee commits to consulting with key shareholders prior to any significant changes to its remuneration policy. All-employee remuneration In setting the remuneration policy for Directors, the pay and conditions of other employees of NSF are taken into account, including any base salary increases awarded. The Committee is provided with data on the remuneration structure for management level tiers below the Executive Directors, and uses this information to ensure consistency of approach throughout the Company. Formal consultation on the remuneration of Executive Directors is not undertaken with employees. The remuneration policy described above applies specifically to Executive Directors of the Company. The Committee believes that the structure of management and employee reward should be linked to the Company’s strategy and performance. The table below illustrates how the remuneration framework operates below the Executive Directors: Level as at 31 December 2016 Senior management Heads of divisions and/or functions Other employees 60 Employee numbers Fixed remuneration Annual bonus Long-Term Incentives All employee share plans Shareholding guidelines 14 18 505 √ √ √ √ √ √ √ √ √ √ Non-Standard Finance plc Annual report and accounts 20166. Non-Executive Director remuneration policy and letters of appointment Remuneration policy table The Board as a whole is responsible for setting the remuneration of the Non-Executive Directors. The table below sets out the key elements of the policy for Non-Executive Directors: Purpose Operation Maximum opportunity Performance measures and assessment Fees Core element of remuneration, set at a level sufficient to attract and retain individuals with appropriate knowledge and experience in organisations of broadly similar size and complexity. n/a Current fees are set out in the Annual Report on Remuneration on pages 64 to 65. Fee levels are sufficient to attract individuals with appropriate knowledge and experience. Non-Executive Directors are paid a base fee. In exceptional circumstances, fees may also be paid for additional time spent on the Company’s business outside of the normal duties. Reviewed annually with any changes generally effective from 1 January. Any increases in fees will be determined based on time commitment and take into consideration level of responsibility and fees paid in other companies of comparable size and complexity. Increases in fees will be in line with the median fee levels of comparable companies. Non-Executive Directors do not receive any variable remuneration element or receive any other benefits. Letters of appointment The Non-Executive Directors do not have service contracts but are appointed under letters of appointment. Appointments are reviewed three yearly and new appointments are made following recommendation by the Nomination Committee. Charles Gregson Robin Ashton Heather McGregor Date of appointment 19 February 2015 19 February 2015 19 February 2015 No compensation is payable in the event of early termination apart from the notice period. All letters of appointment are available for viewing at the Company’s registered office and at the AGM. Robin Ashton resigned on 31 October 2016. No compensation was paid in respect of the early termination of his appointment. Part D: Annual Report on Remuneration This Annual Report on Remuneration contains details of how the Company’s Remuneration Policy for Directors was implemented during the financial year ended 31 December 2016. This report has been prepared in accordance with the provisions of the Companies Act 2006 and the Regulations. An advisory resolution to approve this report and the annual statement will be put to shareholders at the AGM on 9 May 2017. 1. Single figure remuneration table: Executive Directors – audited The remuneration of Executive Directors, showing the breakdown between components with comparative figures for the prior financial year is shown below. Figures provided have been calculated in accordance with the Regulations. Base Salary £000 Taxable Benefits £000 Bonus £000 Long-Term Incentives £000 Pension £000 Other £000 Total £000 John van Kuffeler John van Kuffeler Nick Teunon Nick Teunon 2016 2015 2016 2015 Miles Cresswell-Turner 2016 Miles Cresswell-Turner 2015 288 215 207 155 230 101 34 21 11 9 12 – – 215 – 155 – 101 – – – – – – 29 22 21 15 20 9 – – – – – – Notes 1. Taxable Benefits comprise a car in the case of John van Kuffeler and life, medical and income protection insurance in the case of John van Kuffeler, Nick Teunon and Miles Cresswell-Turner – the values of which have been included in the Taxable Benefits column. 2. The Executive Directors are entitled to receive a contribution to a personal pension scheme or cash in lieu – the value of which has been included in the Pension column. 351 473 239 334 262 211 61 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Governance Directors’ remuneration report continued Annual Bonus outcomes for the period ended 31 December 2016 – audited The Remuneration Committee considered that the performance targets for the Annual Bonus were not met and therefore no bonuses were paid to the Executive Directors. Payments to past Directors or for loss of office – audited During the year there were no payments to past Directors and no payments for loss of office. 2. Implementation of remuneration policy for the Executive Directors for 2017 Base salary In setting salary levels for the 2017 financial year for the Executive Directors, the Committee considered a number of factors, including individual performance and experience, pay and conditions for employees across the Company, the general performance of the Company, pay levels in other comparable companies, other elements of remuneration and the economic environment. The salaries for 2017 and the relative increases are set out below. Base salary £000 John van Kuffeler Nick Teunon Miles Cresswell-Turner 2017 £288 £230 £230 2016 % change £288 £207 £230 0% 11% 0% Notes 1. The increase in Nick Teunon’s base salary in 2017 was made to align his remuneration with the levels of pay of the other Executive Directors. Following this alignment of Mr Teunon’s salary, any future increases in his salary will be in line with those applying to the other Executive Directors and will generally be consistent with any increases across the Group. There were no other increases made for Executive Directors. Pension and benefits The maximum contribution to a personal pension scheme or cash in lieu is equal to 10% of base salary for all Executive Directors. None of the Executive Directors had prospective rights under a defined benefit pension scheme. Benefits will be provided to the Executive Directors in line with the Directors’ Remuneration Policy. Annual bonus Consistent with the Directors’ Remuneration Policy the maximum and target bonus potentials for 2017 are: John van Kuffeler Nick Teunon Miles Cresswell-Turner Maximum bonus % of salary On-target bonus % of maximum Threshold bonus % of maximum 100% 100% 100% 75% 75% 75% 25% 25% 25% For the 2017 financial year, performance measures include financial measures based on budgeted profit before tax and non- financial measures including conduct-based measures which ensure delivery of good customer outcomes through appropriate affordability assessments and appropriate treatment of vulnerable customers together with appropriate collections, arrears and forbearance practices. Financial and non-financial measures are split 70% financial and 30% non-financial. Threshold vesting will be set at 90% of target with on-target vesting at 100% and maximum vesting at 110%, with vesting on a sliding scale between these points. The Board is of the opinion that the precise performance targets for the Annual Bonus are commercially sensitive and that it would be detrimental to the interests of the Company to disclose them before the start of the financial year. Actual targets, performance achieved and awards made will be published at the end of the performance period so shareholders can fully assess the basis for any pay-outs. LTI awards The following awards are to be made under the LTI. John van Kuffeler Nick Teunon Miles Cresswell-Turner Total 62 % of growth pool allocated to participants % of the growth in value 37.5% 5.625% 25% 25% 3.75% 3.75% 87.5% 13.125% Non-Standard Finance plc Annual report and accounts 20163. Consideration by the Committee of matters relating to the Directors’ remuneration for 2016 and 2017 The Committee complies with the UK Corporate Governance Code. The Committee makes recommendations to the Board, within agreed terms of reference, on remuneration for the Executive Directors and has oversight of remuneration arrangements for senior management. The Committee’s full terms of reference are available on the Company’s website at www.nonstandardfinance.com. Members of the Committee during 2016 Independent January 2016 February February 2016 2016 June 2016 Attendance Charles Gregson Robin Ashton Heather McGregor Note 1. Robin Ashton resigned from the Board on 31 October 2016. No No Yes √ √ √ √ √ x √ √ √ √ √ √ 100% 100% 75% All Committee members attended all Remuneration Committee meetings that took place while they were members of the Committee, save that Heather McGregor missed one meeting in February 2016 due to a diary conflict. None of the Committee members has any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business. The Group Chief Executive and the Chief Financial Officer attend meetings at the invitation of the Committee, but are not present when their own remuneration is being discussed. The Committee received external advice in 2016 from PwC during the year. PwC were appointed in May 2015 as advisers after a tender process. PwC are considered by the Committee to be objective and independent. PwC are members of the Remuneration Consultants Group and, as such, voluntarily operate under the code of conduct in relation to executive remuneration consulting in the UK. The Committee reviewed the nature of all the services provided during the year by PwC and was satisfied that no conflict of interest exists or existed in the provision of these services. The total fees paid to PwC in respect of services to the Committee during the year were £38,900. Fees were determined based on the scope and nature of the projects undertaken for the Committee. PwC also provides valuation advice and assistance with implementation of the Group’s long-term incentive arrangements. During the financial year, there were four Committee meetings. The matters covered at each meeting are covered in the table below: January 2016 February 2016 • Review of governance and benchmarking in respect of Executive Director remuneration • Review of LTI for Loans at Home and Everyday Loans • Executive Directors’ bonuses for 2016 • Review of LTI for Loans at Home and Everyday Loans February 2016 June 2016 • Further discussion re. Executive Directors’ bonuses for 2016 • Further review of LTI for Loans at Home and Everyday Loans • Review of decisions on Executive Director remuneration 4. Group Chief Executive and employee pay The Committee believes that the current Executive Directors’ Remuneration Policy and the supporting reward structure provide clear alignment with the Company’s performance. The Committee believes it is appropriate to monitor the Company’s performance against the FTSE All Share Index – Financial Services as this Index provides a measure of a sufficiently broad equity market against which the company considers that it is suitable to compare itself. 63 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Governance Directors’ remuneration report continued The chart below illustrates our Total Shareholder Return performance against the FTSE All Share Index – Financial Services since the date of the IPO in February 2015 to 31 December 2016. Total Shareholder Return 120 100 80 60 40 20 0 0 2/2 015 0 3/2 015 0 4 /2 015 0 5/2 015 0 6/2 015 0 7/2 015 0 8/2 015 0 9/2 015 10 /2 015 11/2 015 12/2 015 01/2 016 0 2/2 016 0 3/2 016 0 4 /2 016 0 5/2 016 0 6/2 016 0 7/2 016 0 8/2 016 0 9/2 016 10 /2 016 11/2 016 12/2 016 NSF FTSE All Share Index – Financial Services Despite having fulfilled most of the strategic objectives set out at the time of the Group’s Initial Public Offering, the Group’s shares have underperformed the FTSE All Share Financial Services Index during the period. Possible reasons for this underperformance include: limited research coverage by sell-side analysts; softer than expected financial performance by Loans at Home; and concerns over future market and regulatory conditions in the UK consumer finance segment. Group Chief Executive Single figure of total remuneration (£000) Bonus pay-out (% maximum) Long-term incentive vesting rates (% maximum) 2016 351 0% n/a 2015 473 100% n/a Percentage change in the Chief Executive Officer’s remuneration The table below compares the percentage increase in the Group Chief Executive’s pay on an annual basis with the wider employee population. The Company considers the Group’s employees excluding the Executive Directors, to be an appropriate comparator group. % change from 2015 to 2016 Group Chief Executive Employee pay Base salary Benefits Annual bonus 15% 2.25% 19% 0% -100% See note Note 1. While there was no change to bonus payments at Everyday Loans (including Trusttwo), no annual bonus payments were made at Loans at Home in 2016. Relative importance of spend on pay The table below shows the overall spend on pay for all the Group’s employees compared with returns distributed to shareholders. Significant distributions Employee spend Distributions to shareholders Employee pay 2016 £17.8m £0.9m 2015 % change £4.5m – 296 – Note 1. Employee spend for 2016 includes pay for the employees of Everyday Loans following the acquisition in April 2016. 5. Single figure remuneration table: Non-Executive Directors – audited The remuneration of Non-Executive Directors showing the breakdown between components, with comparative figures for the prior year, is shown below. Figures provided have been calculated in accordance with the Regulations. 64 Non-Standard Finance plc Annual report and accounts 2016Charles Gregson Charles Gregson Robin Ashton Robin Ashton Heather McGregor Heather McGregor Note 1. Robin Ashton resigned from the Board on 31 October 2016. Fees to be provided in 2017 to the Non-Executive Directors The following table sets out the annual fee rates for the Non-Executive Directors: Chairman’s fee Charles Gregson Independent Non-Executive Director fee Heather McGregor 2016 2015 2016 2015 2016 2015 Fees £000 Benefits/other £000 Total £000 50 50 42 43 75 68 2017 50 75 – – – – – – 50 50 42 43 75 68 2016 % change 50 75 0 0 6. Directors’ shareholding and share interests Shareholding and other interests at 31 December 2016 – audited Directors’ share interests and, where applicable, achievement of shareholding requirements are set out below. In order that their interests are aligned with those of shareholders, Executive Directors are expected to build up and maintain (as relevant) a personal shareholding equal to 100% of their base salary in the Company. Shareholding at 31 December 2016 Interests in Founder Shares John van Kuffeler Nick Teunon Miles Cresswell-Turner Charles Gregson Heather McGregor Total Number of beneficially owned shares 2,114,474 55,921 490,132 256,083 61,465 2,978,075 % of salary held Shareholding requirement met Subject to conditions Vested but unexercised Total at 28 February 2017 423% 14% 123% Yes No Yes 30 25 25 10 – 90 – – – – – – 30 25 25 10 – 90 Notes 1. Beneficial interests include shares held directly or indirectly by connected persons. 2. Shareholding requirement calculation is based on the share price at the end of the year (£0.575 at 31 December 2016) and base salaries at 1 January 2017. 3. Robin Ashton has retained 4 of his Founder Shares. 10 of his Founder shares were transferred to Nick Teunon and 6 of the Founder Shares were transferred to a senior employee. Dilution The Company funds its share incentives through a combination of new issue and market purchased shares. The Company monitors the levels of share grants and the impact of these on the ongoing requirement for shares. In accordance with guidelines set out by the Investment Association (‘IA’) the Company can issue a maximum of 10% of its issued share capital in a rolling ten-year period to employees under all its share plans. Non-Executive positions held by Executive Directors John van Kuffeler retained fees of £40,000 during the year from his Non-Executive position at Paratus AMC Limited. 7. Shareholding voting The table below shows the binding vote approving the previous Directors’ Remuneration Policy and the advisory vote to approve the 2015 Annual Report on Remuneration at the AGM on 30 March 2016. Directors’ Remuneration Policy 2015 Annual Report on Remuneration By order of the Board Charles Gregson Chairman of the Remuneration Committee 31 March 2017 Votes for % Votes against % Votes withheld 206,163,020 96.09 8,393,636 214,300,608 99.88 256,048 3.91 0.12 500 500 65 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Governance Directors’ report Introduction In accordance with section 415 of the Companies Act 2006, the Directors present their report together with the financial statements for the year ended 31 December 2016. Both the Strategic report on pages 1 to 38 and the Directors’ report have been prepared and presented in accordance with, the Companies Act 2006 together with the UK Listing Authority’s Disclosure and Transparency Rules (‘DTRs’) and the Listing Rules (‘LRs’). The liabilities of the Directors in connection with both the Strategic Report and the Directors’ report shall be subject to the limitations and provided by such law. Other information as to be disclosed in the Directors’ report is expressly outlined in this section. There are no restrictions on the transfer of Ordinary Shares or on the exercise of voting rights attached to them, which are governed by the Company’s Articles of Association and relevant English law. The Directors are not aware of any agreements between holders of the Company’s shares that may result in restrictions on the transfer of securities or in voting rights. The Company has not acquired its own shares during the financial year. Further details on the Company’s share capital can be found in note 22 to the financial statements. Principal activities and review of the business The Company is the UK holding company of a Group providing unsecured credit to UK adults. The Company is incorporated and domiciled in England and Wales and is quoted on the Main Market of the London Stock Exchange. Substantial shareholdings The Company has been notified in accordance with the Disclosure and Transparency Rules DTR-5 that as at 28 February 2017 (the latest practicable date before the publication of the report) the following investors have a substantial interest in the issued Ordinary Share capital: The Strategic report which can be found on pages 1 to 38 of the Annual Report which, amongst other things, provides a more detailed review of business strategy and business model together with commentary on the business performance during the year and outlook for the future. Information relating to the principal financial and operating risks facing the business are set out on pages 24 to 25 of the Strategic report. Invesco Asset Management Woodford Investment Management Marathon Asset Management LLP Secure Trust Bank Quilter Cheviot Asset Management 26.69% 23.70% 10.93% 7.42% 4.02% Trading results and dividends The Group’s consolidated loss after taxation for the financial year was £7,998,000 (2015: loss of £13,070,000). The Directors’ beneficial interest in the allotted shares of the Company as at 31 December 2016 are outlined below: An interim dividend of 0.3p per share was paid to shareholders in August 2016 and a further final dividend of 0.9p has been recommended by the Board, payable to shareholders on the share register on 19 May 2017. If approved, the final dividend would be paid on 20 June 2017. Future business developments Information on the Company and its subsidiaries’ future developments can be found in both the Chairman’s Statement on pages 4 to 5 and the Chief Executive’s review on pages 12 to 14. Share Capital As at 31 December 2016 the share capital of the Company consisted of 317,049,682 Ordinary Shares of £0.05 each and 100 Founder Shares. The Company’s issued Ordinary Share capital ranks pari passu in all respects and carries the right to receive all dividends and distributions declared, made or paid on or in respect of the Ordinary Shares. Founder Shares grant each holder the option, subject to the satisfaction of both the significant acquisition condition and the performance condition (which can be satisfied, under certain circumstances, if a Founder is removed from the Board), to require the Company to purchase some or all of their Founder Shares. Further details on the Founder Shares can be found in note 28 to the financial statements. There are currently no redeemable non-voting preference shares of the Company in issue. Director John van Kuffeler Nick Teunon Miles Cresswell-Turner Charles Gregson Heather McGregor Number of Ordinary Shares held 2,114,474 55,921 490,132 256,083 61,465 As granted by shareholders at the 2016 AGM, the Directors currently have the power to issue and buy-back the Company shares. The Board is seeking to renew these powers at the forthcoming 2017 AGM. Articles of Association The Articles of Association set out the basic management and administrative structure of the Company. The Articles regulate the internal affairs of the Company and cover matters including those relating to Board and shareholder meetings, powers and duties of Directors and the transfer of shares. The Articles may only be amended by a special resolution at a general meeting of the shareholders. A copy of the Articles of Association can be requested from the Company Secretary and are also available for inspection at Companies House. 66 Non-Standard Finance plc Annual report and accounts 2016Directors: Charles Gregson Non-Executive Chairman John van Kuffeler Group Chief Executive Nick Teunon Chief Financial Officer Miles Cresswell-Turner Executive Director Heather McGregor Non-Executive Director Robin Ashton Non-Executive Director (resigned 31 October 2016) The Directors and their profiles are detailed on pages 40 to 41. All of these Directors above served in office throughout the year under review and up to the signing of the Annual Report with the exception of Robin Ashton who stood down from the Board on 31 October 2016. In accordance with the Articles of Association and the UK Corporate Governance Code, each Director will offer themselves for re-election at the forthcoming Annual General Meeting. During the year, no Director had a material interest in any contract of significance to which the Company or any subsidiary undertaking was a party. Powers of the Directors Subject to the Articles of Association, English law and any direction granted by special resolutions, the business of the Company is managed by the Board. Directors’ indemnities The Company’s Articles of Association permit it to indemnify the Directors of the Company (or of any associated company) in accordance with section 234 of the Companies Act 2006. In accordance to the Company’s Articles of Association, qualifying third-party indemnities, under which the Company has agreed to indemnify Directors, were in place during the financial year and at the date of approval of the Financial Statements in accordance to the maximum limit as imposed by the law. The Company may indemnify Directors of all costs, losses, and liabilities which they may incur in or about the execution or as a result of the execution of their duties to the Company or any company associated (as defined in section 256 of the Companies Act 2006) with the Company. The Company has in place Directors’ and Officers’ Liability insurance which provides appropriate cover for any legal action brought against its Directors. Employees The skills, motivation and energy of our workforce are key drivers for our success. The organisation structures of each of our operating businesses ensure that all staff are aware of our corporate goals and are clear on how their roles help NSF to succeed. We seek to ensure that all employees and potential employees receive equal treatment (including access to employment and training) regardless of their age, disability, gender reassignment, marital or civil partner status, pregnancy and maternity, race, nationality, ethnic or national origin, religion or belief, sex or sexual orientation. This policy includes those who might become disabled during their period of employment by the Group. As part of our commitment to treating customers fairly, delivering excellent service and lending responsibly, it is the Group’s policy to have in place appropriate processes to offer career and job development opportunities to all employees. Separately, each of our self-employed agents are required to receive regular, ongoing training to ensure that we are responsive to each customer’s individual needs. The training programme includes: new starter training, agent monitoring, call monitoring, written training, online training, informal feedback from branch managers and colleague assessment programmes. The Company is committed to adopting employment practices which follow best practice and intends to set-up an employee share scheme which will provide an opportunity for employees to share in the Company’s future success. It is anticipated that the share scheme will be introduced during 2017. It is expected that additional programmes aimed at enhancing employee engagement further will be developed as the Group expands. Related party transactions In accordance with IAS 24, no related party transactions took place during 2016. Post balance sheet events The Everyday Loans debt facility has been extended so that the Group now has £115m of total committed facilities compared with £95m at 31 December 2016. Environmental factors The Board continually considers the Company’s impact on the environment and has concluded that at present due to the small size of the Company and the nature of its business, it has a minimal impact. The Board anticipates that as the Company grows in size, the Board will measure and report annually on any material environmental impact in its Annual Report. Charitable and political donations The Group made no political or charitable donations in the year ended 31 December 2016. Health and safety Health and safety standards and benchmarks have been established in the Company and its divisions and its compliance is monitored regularly by the Board. Anti-bribery and corruption In accordance with the Bribery Act 2010, the Group has policies in place to comply with the requirements of the Bribery Act 2010. Annual General Meeting The Annual General Meeting of the Company is to be held at Bell Pottinger, 330 High Holborn, London, WC1V 7LU at 11.00am on 9 May 2017. The Notice of Meeting, contained in a separate letter from the Chairman includes a commentary on the business to be conducted at the General Meeting. 67 Financial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016 Governance Directors’ report continued Disclosure of information under Listing Rule 9.8.4R For the purposes of LR 9.8.4R, the information required to be disclosed can be found in the following sections of the Annual Report and financial statements. Listing Rule requirement A statement of the amount of interest capitalised during the period under reviews and details of any related tax relief. Information required in relation to the publication of unaudited financial information. Details of any long-term incentive schemes. Details of any arrangements under which a Director has waived emoluments, or agreed to waive any future emoluments, from the Company. Details of any non-pre-emptive issues of equity for cash. Details of any non-pre-emptive issues of equity for cash by any unlisted major subsidiary undertaking. Details of parent participation in a placing by a listed subsidiary. Details of any contract of significance in which a Director is or was materially interested. Details of any contract of significance between the Company (or one of its subsidiaries) and a controlling shareholder. Details of any provision of services by a controlling shareholder. Details of waiver of dividends or future dividends by a shareholder. Board statements in respect of relationship agreement with the controlling shareholder. Location in Annual Report Not applicable Not applicable Directors’ remuneration report, pages 51 to 68 Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Auditors Deloitte LLP, the external auditor for the Company was appointed in 2014 and a resolution proposing their re-appointment will be proposed at the forthcoming AGM. Directors’ statement as to disclosure of information to auditors Each Director at the date of approval of the Annual Report confirms that so far as each Director is aware, there is no relevant audit information of which the Company’s auditor is unaware. Each Director has taken all the steps that she/he ought to have taken as a Director in order to make her/himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with section 418 of the Companies Act 2006. Going concern statement The Directors have carried out a robust assessment of the principal risks facing the Company, including those that could threaten its business model, future performance, solvency or liquidity. Further information about those risks, how they have changed during 2016 and how they are being managed or mitigated can be found in the Strategic report on pages 24 to 25 and also in the Risk Committee Report on page 50. On this basis, the Directors consider it appropriate to adopt the going concern basis in preparing the Company’s financial statements. The Directors will continue to monitor the Company’s risk management and internal control systems. Financial Instruments Details of the financial risk management objectives and policies of the Group and the exposure of the Group to market, interest rate, credit, capital management and liquidity risk are included on page 101 of the financial statements. Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations. Each of the Directors confirms that, to the best of their knowledge: • the financial statements, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and • the Strategic report includes a fair review of the development or performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties. Each of the Directors also confirms that they consider the Annual Report and Financial Statements 2016, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. The Annual Report and Financial Statements 2016 will be published on the Group’s website in addition to the normal paper version. The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Approved by the Board on 31 March 2017 and signed by the order of the Board. Nick Teunon Chief Financial Officer and Company Secretary 31 March 2017 68 Non-Standard Finance plc Annual report and accounts 2016Financial statements 77 70 Independent auditor’s report Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity and cash flows 79 Company statement of financial position 80 Company statement of changes in equity and cash flows Notes to the financial statements 81 82 78 69 Financial statementsStrategic reportGovernanceFinancial statements Independent auditor's report Opinion on financial statements of Non-Standard Finance plc In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 December 2016 and of the Group’s loss for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; • the Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. The financial statements that we have audited comprise: • the Consolidated statement of comprehensive income; • the Consolidated and Company statements of financial position; • the Consolidated and Company cash flow statements; • the Consolidated and Company statements of changes in equity; and • the related notes 1 to 30. The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. Summary of our audit approach Key risks Materiality Scoping The key risks that we identified in the current year were: • carrying value of goodwill; • provision for impairment losses against loans and receivables to customers; • acquisition accounting; and • revenue recognition. The materiality that we used in the current year was £480,000 which was determined on the basis of 5% of profit before tax before fair value adjustments of £8.3m and amortisation of acquired intangible assets of £10.7m. Our group audit scope focused on the parent company and each of the trading subsidiaries forming the group’s four reportable segments which account for 100% of the group’s losses before tax. Whilst consistent with prior year, the current year scope includes the Everyday Loans and Trusttwo segments acquired during the year. All entities within the group are audited by the same engagement team. Significant changes in our approach Our audit approach for the current year focuses an additional risk of material misstatement, being the carrying value of goodwill arising on business combinations. 70 Non-Standard Finance plc Annual report and accounts 2016Going concern and the Directors’ assessment of the principal risks that would threaten the solvency or liquidity of the Group We are required to state whether we have anything material to add or draw attention to in relation to: • the Directors’ confirmation on page 68 that they have carried out a robust We confirm that we have nothing material to add or draw attention to in respect of these matters. assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; • the disclosures on pages 24 to 25 that describe those risks and explain how they are being managed or mitigated; • the Directors’ statement in note 1 to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group’s ability to continue to do so over a period of at least 12 months from the date of approval of the financial statements; and • the Directors’ explanation on page 50 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Independence We are required to comply with the Financial Reporting Council’s Ethical Standards for Auditors and confirm that we are independent of the Group and we have fulfilled our other ethical responsibilities in accordance with those standards. We agreed with the Directors’ adoption of the going concern basis of accounting and we did not identify any such material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern. We confirm that we are independent of the Group and we have fulfilled our other ethical responsibilities in accordance with those standards. We also confirm we have not provided any of the prohibited non-audit services referred to in those standards. Our assessment of risks of material misstatement The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. The risks we report on are consistent with the prior period, with the additional new risks relating to the carrying value of goodwill and the acquisition accounting in relation to Everyday Loans Group (2015: Loans at Home). Carrying value of goodwill Risk description The acquisitions of Everyday Loans Group and Loans at Home have led to the recognition of £132.1m of goodwill in the Consolidated statement of financial position. IAS 36 Impairment of Assets requires that goodwill acquired in a business combination should be tested for impairment annually and whenever there is an indication that the cash generating unit ('CGU') to which the goodwill is allocated may be impaired. Management performed a goodwill impairment assessment as at 31 December 2016 by determining the recoverable amount, based on a fair value less costs to sell of each of the cash generating units, and comparing these to the respective net asset values and carrying values of goodwill. Management determined that no impairment of goodwill was required. The critical judgements and estimates involved in management’s impairment assessment are: • the allocation of all of the goodwill arising on the acquisition of Everyday Loans Group to Everyday Loans (no goodwill allocated to Trusttwo); • the use of a Group-wide weighted average cost of capital to discount forecast future cash flows; • the forecast profit after tax for the 2019 year end; and • the calculation and application of an appropriate price/earnings ('P/E') multiple to the forecast 2019 profit after tax. Further detail in respect of management judgements and estimates, along with the respective sensitivity of the headroom to those judgements and estimates is set out within the Audit Committee report on pages 47 to 48 and notes 2 and 13 to the financial statements. 71 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceFinancial statements Independent auditor's report continued How the scope of our audit responded to the risk We challenged the appropriateness of management’s key assumptions used in the impairment assessment. Our challenge considered the appropriateness of the methodology for compliance with IAS 36. Additionally, we performed a sensitivity analysis for each of the key judgements and estimates to assess the impact on the recoverable amount of each CGU, with our audit work focussing on the most sensitive. In relation to the allocation of all of the goodwill arising on the acquisition of Everyday Loans Group to Everyday Loans (no goodwill allocated to Trusttwo) we challenged management’s judgement, including considering alternative allocation methods and compliance with IAS 36. In relation to the discount rate used, we: • used our valuation specialists to assess the methodology used by management to determine their discount rate; • used our valuation specialists to calculate a range of possible discount rates for the Group; and • considered the appropriateness of using a different discount rate for this assessment of impairment of goodwill to that used at acquisition. In relation to forecast earnings we: • challenged the likely achievability of management’s assumptions; • reviewed the consistency of those assumptions with management’s assessment of viability and going concern; and • considered the historical quality of forecasting. In relation to the P/E multiple we challenged the P/E multiple using our valuation specialists to calculate a range of other multiples that could have been applied. Key observations We found management’s methodology for the goodwill impairment assessment to be compliant with IAS 36. All assumptions, including the discount rate, the P/E multiple and the forecast earnings, adopted by management are within an acceptable range. The carrying value of goodwill allocated to the Loans at Home CGU is highly sensitive to the discount rate, future forecast earnings and the P/E multiple applied to those earnings as disclosed in note 13 to the financial statements. Provision for impairment losses against loans and receivables to customers Risk description The gross carrying value of the Group’s loans to customers is £204.8m. Against this, management have booked an impairment provision of £24.4m. The assessment of provisions for impairment losses against customer receivables requires management to make significant judgements. Different assumptions can have a material impact on the impairment provision. The key assumptions in calculating the impairment provision are: • the determination of loss events and the quantum and timing of future cash flows. • the use of historical cash collection performance to determine expected future cash flows; reassessed annually by reference to recent experience, seasonality and future expectations to determine their ongoing accuracy. Further detail in respect of the assumptions is set out in note 2 to the financial statements. How the scope of our audit responded to the risk We challenged the appropriateness of management’s assumptions underlying the impairment provision calculations. This involved assessing the assumptions related to the timing and quantum of cash flows for appropriateness in comparison to current and forecast external market and economic data as well as historical experience. We considered the appropriateness of impairment triggers by comparing the Group’s loss event definition to entity specific experience of asset performance, as well as benchmarking to other businesses with similar asset classes. Where applicable, our IT specialists tested the SAS scripts and data flows from source systems to spreadsheet-based models to test the models’ completeness and accuracy. Sensitivity analyses were also performed in relation to the key assumptions in order to assess the potential for management bias. 72 Non-Standard Finance plc Annual report and accounts 2016Key observations The provision models across the Group were found to be working as intended and the underlying assumptions to be reasonable. We found that the collections expectations used are materially consistent with recent performance and budgeted collections. The impairment provisions held against the loan book are reasonable in line with current collections performance. Acquisition accounting Risk description How the scope of our audit responded to the risk In April 2016, the group acquired the Everyday Loans Group for £235 million. IFRS 3 Business Combinations requires assets and liabilities acquired to be recognised initially at their fair values. Intangible assets must also be recognised at fair value if they are separable or arise from other contractual rights. The identification of intangible assets and determination of fair values requires the exercise of significant judgement. Our work in this respect was focused on the following key areas: • the approach adopted to identify intangible assets; • the recognition of £14.0m of intangible assets in relation to customer lists, broker relationships, technology and brands; • the £23.7m adjustment to recognise the acquired loan book at fair value; • the discount rate used to calculate the net present value of the loan book and intangibles acquired; and • the recognition of £91.9m of goodwill, being the excess of the fair value of the consideration over the fair value of the acquired assets and liabilities. Further detail in respect of management judgements and assumptions is set out within the Audit Committee report on pages 47 to 48 and notes 1, 2, 13, 14 and 24 to the financial statements. We challenged management’s identification and valuation of intangible assets on acquisition against the requirements of IFRS 3. In relation to the completeness of the intangible assets identified and consequent goodwill, we: • challenged the intangible assets identified by management in comparison to those we would normally expect; • used our valuation specialists to challenge the methodology and assumptions used by management to value the intangible assets; • used our valuation specialists to assess the methodology used by management to determine their discount rate; • used our valuation specialists to independently calculate a range of discount rates for the Group; and • recalculated the remaining goodwill (refer to Carrying value of goodwill risk above). Key observations We found management’s methodology for the recognition and valuation of intangibles arising from the acquisition to be appropriate. Revenue recognition Risk description Revenue recognised in the period amounted to £72.8m. Management calculates revenue on an Effective Interest Rate ('EIR') basis for the purpose of determining revenue recognition in accordance with the requirements of IAS 39 Financial Instruments. The EIR method spreads directly attributable revenues and costs over the behavioural life of the loan. These models are heavily reliant on the quality of the underlying data flowing into the models. The key judgement in Loans at Home revenue recognition is the period over which forecast cash flows are modelled to determine the EIR. Changes to this assumption could significantly affect the revenue recognised in any given period. As part of the acquisition of Everyday Loans, a fair value uplift of the net loan book totalling £23.7 million has been recognised, which will be unwound over the behavioural life of the acquired net loan book. The key judgement in the unwind is the behavioural life of the acquired net loan book. Changes to this assumption could significantly affect the revenue recognised in the period. Further detail in respect of the assumptions is set out within the notes 1, 2 and 3 to the financial statements. 73 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceFinancial statements Independent auditor's report continued How the scope of our audit responded to the risk We considered the appropriateness of the methodology for compliance with IAS 39 and challenged management’s assumptions in respect of cash flow estimates, focusing on the timing and level of early settlements which directly impact estimated behavioural lives, as well as the completeness of other directly attributable costs. We independently recalculated the effective interest rates for Loans at Home’s main products and compared these to the EIRs applied in the revenue models noting they were reasonable in line with most recent experience. We assessed the behaviour life and post-acquisition performance of the Everyday Loans loan book to consider whether there is any indication of impairment for which an incremental fair value unwind would be required. Key observations We found the models to be working as intended and the underlying assumptions to be reasonable. 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. Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group materiality £480,000 (2015: £800,000) Basis for determining materiality Rationale for the benchmark applied We used 5% of profit before tax before fair value adjustments and amortisation of acquired intangible assets as described in the financial statements. For the period ended 31 December 2015, we determined materiality as 1% of total equity. Profit based measures are the financial measures most relevant to users of the financial statements. We considered that the most relevant basis for materiality to be the profits earned from continuing business operations and have therefore excluded the fair value adjustments and amortisation of acquired intangible assets arising on acquisitions as described in the financial statements. The use of 5% is to align materiality used to that of comparable listed companies. The change to a profit based measure reflects the inclusion of operating subsidiaries for the whole of the current year. This is in comparison with the equity based measure used in the prior period which reflected the Group’s first period of operation including the acquisition of its first operating subsidiary in August 2015. Adjusted PBT £9.7m £480,000 Group materiality £240,000 to £380,000 Component materiality range Adjusted PBT Group materiality £4,000 Reporting threshold 74 Non-Standard Finance plc Annual report and accounts 2016 We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £4,000 (2015: £9,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. Based on that assessment, our Group audit scope focused on the parent company and each of the principal trading subsidiaries within the Group’s four reportable segments which account for 100% of the Group’s losses before tax. We have audited all subsidiaries using a materiality range of £240,000 to £380,000. Whilst consistent with prior year, the current year scope includes the Everyday Loans and Trusttwo segments acquired during the year. All entities within the Group have the same engagement partner. Opinion on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; • 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. In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic report and the Directors’ report. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors’ remuneration have not been made or the part of the Directors’ remuneration report to be audited is not in agreement with the accounting records and returns. Our duty to read other information in the Annual Report Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the Annual Report is: • materially inconsistent with the information in the audited financial statements; or • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or • otherwise misleading. In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the Directors’ statement that they consider the Annual Report is fair, balanced and understandable and whether the Annual Report appropriately discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed. Other matters Corporate governance statement Although not required to do so, the Directors have voluntarily chosen to make a corporate governance statement detailing the extent of their compliance with the UK Corporate Governance Code. We reviewed the part of the corporate governance statement relating to the Company’s compliance with certain provisions of the UK Corporate Governance Code. We have nothing to report in respect of these matters. We have nothing to report arising from these matters. We confirm that we have not identified any such inconsistencies or misleading statements. We have nothing to report arising from our review. 75 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceFinancial statements Independent auditor's report continued Respective responsibilities of Directors and auditor 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. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews. 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. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Mark Rhys, FCA (Senior statutory auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom 31 March 2017 76 Non-Standard Finance plc Annual report and accounts 2016Financial statements Consolidated statement of comprehensive income For the year ended 31 December 2016 Revenue Impairment/cost of sales Administrative expenses Operating profit/(loss) Exceptional items Profit/(loss) on ordinary activities before interest and tax Finance cost Profit/(loss) on ordinary activities before tax Tax on profit/(loss) on ordinary activities Profit/(loss) for the year Total comprehensive loss for the year Loss attributable to: – Owners of the parent – Non-controlling interests Loss per share Basic and diluted Note 3 4 1 9 11 Before fair value adjustments, amortisation of acquired intangibles and exceptional items £’000 Fair value adjustments, amortisation of acquired intangibles and exceptional items £’000 Year ended 31 December 2016 £’000 81,099 (23,201) (44,074) 13,824 – 13,824 (3,484) 10,340 (2,278) (8,342) – (10,714) (19,056) (626) (19,682) – (19,682) 3,622 8,062 (16,060) 72,757 (23,201) (54,788) (5,232) (626) (5,858) (3,484) (9,342) 1,344 (7,998) (7,998) (7,998) – Year ended 31 December 2016 Pence (2.60) Note 10 There are no recognised gains or losses other than disclosed above and there have been no discontinued activities in the year. For the period ended 31 December 2015 Revenue Impairment/cost of sales Administrative expenses Operating loss Exceptional items Loss on ordinary activities before interest and tax Finance income Loss on ordinary activities before tax Tax on loss on ordinary activities Profit/(loss) for the period Total comprehensive loss for the period Loss attributable to: – Owners of the parent – Non-controlling interests Loss per share Basic and diluted Note 3 4 1 9 11 Before fair value adjustments, amortisation of acquired intangibles and exceptional items £’000 Fair value adjustments, amortisation of acquired intangibles and exceptional items £’000 Period from incorporation to 31 December 2015 £’000 14,657 (3,858) (11,340) (541) – (541) 70 (471) 1,271 800 (5,456) – (4,030) (9,486) (6,135) (15,621) – (15,621) 1,751 (13,870) 9,201 (3,858) (15,370) (10,027) (6,135) (16,162) 70 (16,092) 3,022 (13,070) (13,070) (13,070) – Period from incorporation to 31 December 2015 Pence (21.25) Note 10 There are no recognised gains or losses other than disclosed above and there have been no discontinued activities in the period. 77 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceFinancial statements Consolidated statement of financial position as at 31 December 2016 ASSETS Non-current assets Goodwill Intangible assets Property, plant and equipment Current assets Inventories Amounts receivable from customers Trade and other receivables Cash and cash equivalents Total assets LIABILITIES AND EQUITY Current liabilities Trade and other payables Total current liabilities Non-current liabilities Deferred tax liability Bank loans Total non-current liabilities Equity Share capital Share premium Retained loss Non-controlling interests Total equity Total equity and liabilities These financial statements were approved by the Board of Directors on 31 March 2017. Signed on behalf of the Board of Directors. John van Kuffeler Group Chief Executive Nick Teunon Chief Financial Officer 31 December 2016 £’000 31 December 2015 £’000 Note 13 14 15 18 18 19 20 21 20 22 23 132,070 17,412 5,459 154,941 – 180,413 9,709 5,215 195,337 350,278 8,005 8,005 5,890 87,300 93,190 15,852 254,995 (22,019) 248,828 255 249,083 350,278 40,176 14,119 1,718 56,013 3 28,412 10,275 7,320 46,010 102,023 13,803 13,803 3,057 – 3,057 5,264 92,714 (13,070) 84,908 255 85,163 102,023 78 Non-Standard Finance plc Annual report and accounts 2016Financial statements Consolidated statement of changes in equity for the year ended 31 December 2016 At incorporation Total comprehensive loss for the period Transactions with owners, recorded directly in equity: Issue of shares At 31 December 2015 Total comprehensive loss for the year Transactions with owners, recorded directly in equity: Dividends paid Issue of shares At 31 December 2016 Note 22 12 22 Share premium £’000 Retained loss £’000 Non-controlling interest £’000 – – – (13,070) Share capital £’000 – – 5,264 5,264 – 92,714 92,714 – – (13,070) (7,998) (951) – – 10,588 15,852 – 162,281 254,995 Total £’000 – (13,070) 98,233 85,163 (7,998) (951) 172,869 – – 255 255 – – – Consolidated statement of cash flows for the year ended 31 December 2016 Net cash used in operating activities Cash flows from investing activities Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Acquisition of subsidiary Net cash used in investing activities Cash flows from financing activities Finance (cost)/income Debt raising Dividends paid Proceeds from issue of share capital Net cash from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year (22,019) 255 249,083 Year ended 31 December 2016 £’000 Period from incorporation to 31 December 2015 £’000 (23,541) (9,532) (4,327) 813 (230,784) (234,298) (3,484) 87,300 (951) 172,869 255,734 (2,105) 7,320 5,215 (341) – (81,111) (81,452) 70 – – 98,234 98,304 7,320 – 7,320 Note 25 24 19 79 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceFinancial statements Company statement of financial position for the year ended 31 December 2016 ASSETS Non-current assets Property, plant and equipment Investments Current assets Trade and other receivables Cash and cash equivalents Total assets LIABILITIES AND EQUITY Current liabilities Trade and other payables Total liabilities Equity attributable to the owners Share capital Share premium Retained profit/(loss) Total equity Total equity and liabilities 31 December 2016 £’000 31 December 2015 £’000 Note 15 16 18 19 20 22 23 193 212,223 212,416 62,089 378 62,467 274,883 55 – 55 96,710 4,965 101,675 101,730 1,595 1,595 11,121 11,121 15,852 254,995 2,441 273,288 274,883 5,264 92,714 (7,369) 90,609 101,730 The retained profit for the financial year reported in the financial statements for the Company was £10,761,000 (2015: loss of £7,369,000). These financial statements were approved by the Board of Directors on 31 March 2017. Signed on behalf of the Board of Directors. John van Kuffeler Group Chief Executive Chief Financial Officer Nick Teunon Company number – 09122252 80 Non-Standard Finance plc Annual report and accounts 2016Financial statements Company statement of changes in equity for the year ended 31 December 2016 At incorporation Total comprehensive loss for the period Transactions with owners, recorded directly in equity: Issue of shares At 31 December 2015 Total comprehensive income for the year Transactions with owners, recorded directly in equity: Dividends paid Issue of shares At 31 December 2016 Note 22 12 22 Share capital £’000 – – 5,264 5,264 – – Share premium £’000 – – 92,714 92,714 – – Retained profit/(loss) £’000 – (7,369) – (7,369) 10,761 Total £’000 – (7,369) 97,978 90,609 10,761 10,588 15,852 162,281 254,995 (951) – (951) 172,869 2,441 273,288 In accordance with the exemption allowed by section 408 of the Companies Act 2006, the Company has not presented its own statement of comprehensive income. Company statement of cash flows for the year ended 31 December 2016 Net cash used in operating activities Cash flows from investing activities Purchase of property, plant and equipment Acquisition of subsidiary Net cash used in investing activities Cash flows from financing activities Finance income Dividend income Proceeds from issue of share capital Net cash from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Year ended 31 December 2016 £’000 Period from incorporation to 31 December 2015 £’000 (16,492) (93,805) Note 25 (177) (173,951) (174,128) 615 12,549 172,869 186,033 (4,587) 4,965 378 (64) – (64) 856 – 97,978 98,834 4,965 – 4,965 19 81 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceFinancial statements Notes to the financial statements for the year ended 31 December 2016 General information Non-Standard Finance plc is a public limited company incorporated and domiciled in the United Kingdom. The address of the registered office is 5th Floor, 6 St Andrew Street, London EC4A 3AE. 1. Accounting policies Basis of preparation The consolidated and Company financial statements have been prepared in accordance with IFRS as adopted by the European Union and, as regards the parent company financial statements, applied in accordance with the provisions of the Companies Act 2006. The financial statements have been prepared under the historical cost convention. Basis of consolidation The Group financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) prepared to 31 December. Control is achieved where the Company is exposed to, or has the rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration the existence and effect of potential voting rights that currently are exercisable or convertible. The results of subsidiaries acquired during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-Group transactions and balances and any unrealised gains and losses arising from intra-Group transactions are eliminated in preparing the consolidated financial statements. The Company has taken advantage of the exemption under section 408 of the Companies Act 2006 from publishing its individual statement of comprehensive income and related notes. Going concern In adopting the going concern assumption in preparing the financial statements, the Directors have considered the activities of its principal subsidiaries, as set out in the Strategic report, as well as the Group’s principal risks and uncertainties as set out in the Corporate governance report. The Board of Directors has considered the Group’s latest financial projection from the most recent budget, including: • funding levels and headroom against committed borrowing facilities; • cash flow and liquidity requirements; and • forecast compliance against banking covenants. Based on these forecasts and projections, the Board is satisfied that the Group has adequate resources to continue to operate for the foreseeable future. For this reason, the Group has adopted the going concern basis in preparing the financial statements. Changes in accounting policies and disclosures New and amended Standards and Interpretations issued but not effective for the financial year ending 31 December 2016 At the date of authorisation of these financial statements, the following new and amended Standards and Interpretations are in issue but not yet mandatorily effective and are expected to have a material effect on the financial statements of the Group when they are adopted: IFRS 9 Financial Instruments IFRS 9 addresses the classification, measurement and recognition of financial assets and financial liabilities and replaces IAS 39 ‘Financial Instruments: Recognition and measurement’. The standard primarily impacts the classification and measurement of financial assets and liabilities and introduces the ‘expected loss’ model for the measurement of the impairment of financial assets so it is no longer necessary for a credit event to have occurred before a credit loss is recognised. The Group is currently assessing the impact of IFRS 9 on the loan book and associated level of provisioning. It is expected that the adoption of IFRS 9 will increase the level of provisioning. The Group will adopt the standard in line with the mandatory effective date of 1 January 2018, subject to endorsement by the EU. IFRS 16 Leases IFRS 16 replaces IAS 17 Leases and provides a single lease accounting model for the identification and treatment of lease arrangements in the financial statements of both lessees and lessors. The standard distinguishes between services and leases on the basis of whether there is the right to control the use of an identified asset for a period of time. The standard requires that upon commencement of a lease a lessee recognises a lease liability, being present value of the lease payments, and a right-of-use asset which is measured at the amount of the lease liability plus any initial direct costs incurred. The Group is in the process of assessing the impact of the standard and will adopt it from the expected effective date of 1 January 2019, subject to endorsement by the EU. 82 Non-Standard Finance plc Annual report and accounts 2016The effect of all other new and amended Standards and Interpretations which are in issue but not yet mandatorily effective is not expected to be material. Management will continue to assess the impact of new and amended Standards and Interpretations on an ongoing basis. Business combinations and goodwill Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Goodwill is an intangible asset and is measured as the excess of the fair value of the consideration over the fair value of the acquired identifiable assets, liabilities and contingent liabilities at the date of acquisition. Goodwill is allocated to cash-generating units (‘CGUs’) for the purposes of impairment testing. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose. Goodwill is tested annually for impairment and is carried at cost less accumulated impairment losses. Impairment is tested by comparing the carrying value of the asset to the discounted expected future cash flows from the relevant CGU. Expected future cash flows are derived from the Group’s latest budget projections and the discount rate based on the Group’s Weighted Average Cost of Capital (‘WACC’) at the balance sheet date. Revenue recognition Interest income is recognised in the statement of comprehensive income for all loans and receivables measured at amortised cost using the effective interest rate method (‘EIR’). The EIR is calculated using estimated cash flows, being contractual payments adjusted for the impact of customers repaying early but excluding the anticipated impact of customers paying late or not at all. Under IAS 39 interest income on loan products continues to accrue at the EIR on all impaired capital balances throughout the life of the agreement irrespective of the terms of the loan and whether the customer is actually being charged arrears interest. This is referred to as the gross up adjustment to revenue and is offset by a corresponding gross up adjustment to the loan loss provisioning charge to reflect the fact that this additional revenue is not collectable. Fair value of acquired loan book The fair value of the acquired loan portfolio of Loans at Home and Everyday Loans on acquisition has been estimated by discounting expected future cash flows at a rate of 20%. The WACC used by the Group for Loans at Home was 15% at acquisition and for Everyday Loans (including Trusttwo) was 10% at acquisition which included an additional market risk premium for the specific loan assets. The difference between fair value and carrying value of the loan portfolio on acquisition will be unwound to revenue in the statement of comprehensive income on an effective interest rate basis over the expected life of the acquired loans. The Board of Directors will assess the fair value adjustment, using the same assumptions, the remaining cash flows from the loans that were in place at the time of acquisition, at each future accounting date. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision- maker as required by IFRS 8 ‘Operating Segments’. The chief operating decision-maker responsible for allocating resources and assessing performance of the operating segments has been identified as the Board of Directors. The accounting policies of the reportable segments are consistent with the accounting policies of the Group as a whole. Segment profit represents the profit earned by each segment. This is the measure of profit that is reported to the Board of Directors for the purpose of resource allocation and the assessment of segment performance. When assessing segment performance and considering the allocation of resources, the Board of Directors reviews information about segment assets and liabilities. For this purpose, all assets and liabilities are allocated to reportable segments with the exception of intangible assets and current and deferred tax assets and liabilities. Exceptional items Exceptional items are items that are unusual because of their size, nature or incidence and which the Directors consider should be disclosed separately to enable a full understanding of the Group’s results. The Group’s exceptional items are costs associated with the acquisitions. Taxation The tax expense represents the sum of the tax currently payable and any deferred tax. The current tax charge is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the year end date. 83 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceFinancial statements Notes to the financial statements continued for the year ended 31 December 2016 1. Accounting policies continued Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited to comprehensive income, except when it relates to items charged or credited directly to other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle on a net basis. Intangible assets Intangible assets include intangibles in respect of the customer list and agent relationships at Loans at Home (formerly Loansathome4u) and acquisition intangibles in respect of the customer list, broker relationships and credit decisioning technology at Everyday Loans together with the Everyday Loans and Trusttwo brands. The fair value of the customer list of Loans at Home and Everyday Loans on acquisition has been estimated by calculating the Net Present Value ('NPV') of the discounted cash flows from each new re-loan provided to this, discrete set of known customers. The Board of Directors will re-calculate the NPV at each future accounting date using the same assumptions, limited to the original known customer lists. The fair value of Loans at Home’s agent relationships on acquisition has been estimated by valuing the cost to set up a similar network of trained agents. The fair value of Everyday Loans’ broker relationships on acquisition has been estimated by calculating the NPV of the discounted cash flows from the cost avoided each year due to having the broker relationships in place on new loan volumes written by existing brokers. The Board of Directors will re-calculate the NPV at each future accounting date using the same assumptions, limited to the then existing brokers. The fair value of Everyday Loans’ credit decisioning technology on acquisition has been estimated by assessing the likely commercial level of royalties that would be payable to a third party were the technology licensed rather than owned, calculated as a percentage of forecast revenues and discounted to the date of the transaction. The Board of Directors will assess the technology for impairment using the same methodology at each future accounting date. The fair value of Loans at Home’s brand (which at acquisition was Loansathome4u), Everyday Loans and Trusttwo’s brands on acquisition has been estimated by assessing the likely commercial level of royalties that would be payable to a third party were the brand licensed rather than owned, calculated as a percentage of forecast revenues and discounted to the date of the transaction. Due to rebranding, the Loansathome4u brand to Loans at Home, the intangible asset was written off during the year. The Board of Directors will assess the brands for impairment using the same methodology at each future accounting date. Amortisation is charged to the statement of comprehensive income, unless otherwise agreed, over their estimated useful lives as follows: Customer lists Agent network Broker relationships Credit decisioning technology Brand Between 5 and 7 years 20% reducing balance 2 to 3 years 4 years Between 1 and 5 years The useful economic life and amortisation method of intangible assets are reviewed at least at each balance sheet date. Impairment of intangible assets is only reviewed where circumstances indicate that the carrying value of an asset may not be fully recoverable. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any recognised impairment loss. 84 Non-Standard Finance plc Annual report and accounts 2016Depreciation is provided on the cost of valuation of property, plant and equipment in order to write such cost or valuation over the expected useful lives as follows; Freehold buildings Leasehold improvements Computer and other equipment Fixtures and fittings Motor vehicles Software 2% straight line shorter of life of lease or 7 years 20% to 33% straight line 10% straight line or 20% reducing balance 25% reducing balance 3 to 5 years Project costs relate to capitalised IT expenditure in relation to developing software. They are not depreciated. Freehold land is not depreciated. Leases Rental costs under operating leases are charged to the statement of comprehensive income on a straight-line basis over the term of the lease. Inventories Inventories are stated at the lower of cost and net realisable value. Share based payments The cost of share based employee compensation arrangements, whereby employees receive remuneration in the form of shares or share options, is recognised as an employee benefit expense in the statement of comprehensive income. The expense to be apportioned over the vesting period of the benefit is determined by reference to the fair value at the date of grant. The total expense of the grant is adjusted subsequently to reflect the expected quantity of shares or share options achieving the vesting period. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Financial instruments Financial assets and financial liabilities are recognised in the statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Financial assets Trade and other receivables are measured on initial recognition at fair value, and are subsequently measured at amortised cost using the EIR method. Amounts receivable from customers Customer receivables originated by the Group are initially recognised at the amount loaned to the customer plus directly attributable costs. Subsequently, receivables are increased by revenue and reduced by cash collections and any deduction for impairment. The Directors assess on an ongoing basis whether there is objective evidence that customer receivables are impaired at each balance sheet date. Recognition of incurred losses An impairment loss is calculated by reference to arrears stages and is measured as the difference between the carrying value of the loans and the present value of estimated future cash flows discounted at the original effective interest rate. The assumptions for estimating future cash flows are based upon observed historical data and updated as management considers appropriate to reflect current and future conditions. All assumptions are reviewed regularly to take account of differences between previously estimated cash flows on impaired debt and the eventual losses. For Loans at Home, objective evidence of impairment is based on the payment performance of loans in the previous 13 weeks as this is considered to be the most appropriate indicator of credit quality. Loans are deemed to be impaired when between two to four contractual weekly payments (depending on length of relationship with the customer) have been missed in the previous 13-week period. For Everyday Loans, the criteria that the Company uses to determine that there is objective evidence of impairment loss include, but are not limited to, the following: • delinquency in contractual payments of principal or interest; • cash flow difficulties experienced by the borrower; and • initiation of bankruptcy proceedings. 85 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceFinancial statements Notes to the financial statements continued for the year ended 31 December 2016 1. Accounting policies continued Cash and cash equivalents comprise cash at bank Financial liabilities and equity Financial liabilities and equity instruments issued by the Group are classified in accordance with the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. Other financial liabilities are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the EIR method. EIR method The EIR method is a method of calculating the amortised cost of a financial asset or liability and allocating interest income or expense over the relevant period. The EIR is the rate that exactly discounts estimated future cash flows through the expected life of the financial asset or liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. 2. Critical accounting judgements and key sources of estimation uncertainty The preparation of financial statements in conformity with generally accepted accounting practice requires management to make estimates and judgements that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the year-end date and the reported amounts of revenues and expenses during the reporting period. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimated are revised and in any future periods affected. Critical accounting judgements: Determination of Cash Generating Units ('CGUs') For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (CGUs). The Board of Directors considers Everyday Loans and Loans at Home as two CGUs. No goodwill was attributable to Trusttwo upon acquisition of Everyday Loans and therefore Trusttwo is not considered a CGU. Key sources of estimation uncertainty Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the fair value less cost to sell of the CGUs to which goodwill has been allocated. The fair value calculation requires the Group to estimate the future cash flows expected to arise from the CGU and apply a suitable discount rate in order to calculate the present value. The assessment of impairment of goodwill reflects a number of key estimates, each of which can have a material effect on the carrying value of the asset. These include: • cash flow forecasts which have been extracted from the budget, which involves inherent uncertainty, particularly in respect of gross loan values, collections performance and the cost base of the business. • estimates made on the disposal costs of the business. • the Weighted Average Cost of Capital ('WACC') applied to determine the net present value (‘NPV’) of future cash flows. The nature and inherent uncertainty relating to the above judgements and estimates means that the forecast cash flows may be materially different from actual cash flows. A material future reduction in forecast surplus cash flows would necessitate a full impairment review and the possibility of a material impairment charge in future years. The Group has produced a three-year forecast to 31 December 2019 and applied three valuation approaches to establish the recoverable amount of the CGU. These were: 1. A price/total net asset value (‘TNAV’) multiple based on the return on TNAV of the business, with the multiple calculated by using a regression analysis for comparable speciality finance company valuations over the last two years. 2. A price/earnings multiple based on the forecast earnings growth of the business in the following two years, with the multiple calculated by using a regression analysis for comparable speciality finance company valuations over the last two years. 3. A ten-year average price/earnings multiple for comparable speciality finance companies. Under IAS 36 we have compared the carrying value of goodwill to the recoverable amount which is the higher of value of use or fair value less costs to sell. The lowest of the valuations was used by the Group to compare with the CGU’s carrying value. This has not resulted in any impairment of the carrying value at 31 December 2016 as the CGUs’ recoverable amounts exceed their carrying values. Refer to note 13 for the sensitivities around the carrying value of the goodwill. 86 Non-Standard Finance plc Annual report and accounts 2016Amounts receivable from customers The Group reviews its portfolio of loans and receivables for impairment at each balance sheet date. For the purposes of assessing the impairment of customer loans and receivables, customers are categorised into arrears stages as this is considered to be the most reliable indication of payment performance. The Group makes assumptions to determine whether objective evidence indicates that there has been an adverse effect on expected future cash flows. Once a loan is deemed to be impaired, judgement is required to determine the quantum and timing of cash flows that will be recovered, which are discounted to present value based on the EIR of the loan. Customer accounts in Loans at Home are deemed to be impaired when two to four contractual weekly payments (depending on length of relationship with the customer) have been missed in the previous 13 weeks. In the weekly home credit business, receivables are deemed to be impaired when the cumulative amount of two or more contractual weekly payments have been missed in the previous 13 weeks, since only at this point do the expected future cash flows from loans deteriorate significantly. Customer accounts in Everyday Loans are impaired with reference to arrears stages and are measured as the difference between the carrying value of the loans and the present value of estimated future cash flows discounted at the original effective interest rate. The assumptions for estimating future cash flows are based upon observed historical data and updated as management considers appropriate to reflect current and future conditions. All assumptions are reviewed regularly to take account of differences between previously estimated cash flows on impaired debt and the eventual losses. Intangible assets – customer list Loans at Home’s and Everyday Loans' customer lists have been allocated a fair value on acquisition as the existing customer bases are an important influence on the future prospects of the business. The customer lists have been valued by calculating the NPV of the discounted cash flows from each new loan sold to this discrete set of known customers. The methodology is in line with the Group’s existing valuation model used for budgeting purposes. The calculation of the customer lists reflects a number of key estimates, which have a material effect on the carrying value of the assets. These include: • cash flow forecasts which have been extracted from the budget produced by Everyday Loans and Loans at Home, which involve inherent uncertainty, particularly in respect of gross loan values, collections performance and the cost base of the business; • estimates made on the propensity to re-loan to the customer base; and • the WACC applied to determine the NPV of each new re-loan. The nature and inherent uncertainty relating to the above judgements and estimates mean that the forecast cash flows may be materially different from actual cash flows. A material future reduction in forecast surplus cash flows would necessitate a full impairment review and the possibility of a material impairment charge in future years. 3. Revenue Revenue is recognised by applying the EIR to the carrying value of a loan. The EIR is calculated at inception and represents the rate which exactly discounts the future contractual cash receipts from a loan to the amount of cash advanced under the loan, plus directly attributable issue costs. In addition, the EIR takes account of customers repaying early. Year ended 31 December 2016 £’000 Period from incorporation to 31 December 2015 £’000 Interest income Fair value unwind on acquired loan portfolio Total revenue 4. Operating profit/(loss) for the period is stated after charging/(crediting) Depreciation of property, plant and equipment Amortisation of intangible assets (note 14) Staff costs (note 8) Rentals under operating leases (Profit)/loss on sale of property, plant and equipment Rentals received under operating leases 81,099 (8,342) 72,757 14,657 (5,456) 9,201 Year ended 31 December 2016 £’000 Period from incorporation to 31 December 2015 £’000 690 10,714 20,345 1,110 (363) (28) 198 4,030 5,076 136 51 (53) 87 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceFinancial statements Notes to the financial statements continued for the year ended 31 December 2016 5. Auditors’ remuneration Audit services Fees payable to the Company’s auditor for the audit of the Group annual financial statements Fees payable to the Company’s auditor and their associates for other services to the Group Other services pursuant to legislation Other services Other services relating to taxation Services relating to corporate finance transactions Other services Year ended 31 December 2016 £’000 Period from incorporation to 31 December 2015 £’000 70 215 50 335 44 – – 44 100 110 25 235 27 1,705 26 1,758 Details of the Group’s policy on the use of the auditor for non-audit services are set out in the Audit committee report on page 48. 6. Segment information Management has determined the operating segments by considering the financial and operational information that is reported internally to the chief operating decision-maker, the Board of Directors, by management. For management purposes, the Group is currently organised into four operating segments: Everyday Loans (branch-based lending), Loans at Home (home credit), Trusttwo (guarantor lending) and Central (head office activities). The Group’s operations are all located in the United Kingdom and all revenue is attributable to customers in the United Kingdom. Everyday Loans £’000 Loans at Home £’000 Trusttwo1 £’000 Central £’000 Year ended 31 December 2016 Interest income Fair value unwind on acquired loan portfolio Total revenue Operating profit/(loss) before amortisation Amortisation of intangible assets Operating profit/(loss) before exceptional items Exceptional items Finance cost Profit/(loss) before taxation Taxation Profit/(loss) for the year 37,080 (7,916) 29,164 6,848 – 6,848 – (2,699) 4,149 (1,036) 3,113 Total assets Total liabilities Net assets Capital expenditure Depreciation of plant, property and equipment Amortisation of intangible assets Everyday Loans £’000 Loans at Home £’000 136,362 (98,589) 37,773 1,764 226 – 40,258 (14,239) 26,019 2,386 425 – 42,170 (426) 41,744 1,431 – 1,431 – (323) 1,108 27 1,135 Trusttwo1 £’000 8,783 – 8,783 – – – 2016 Total £’000 81,099 (8,342) 72,757 5,482 (10,714) (5,232) (626) (3,484) (9,342) 1,344 (7,998) 1,849 – 1,849 460 – 460 – (198) 262 (58) 204 – – – (3,257) (10,714) (13,971) (626) (264) (14,861) 2,411 (12,450) Central £’000 274,883 (1,595) Consolidation adjustments2 £’000 (108,964) 12,184 2016 Total £’000 351,322 (102,239) 273,288 (96,780) 249,083 177 39 10,714 – – – 4,327 690 10,714 1. Trusttwo is supported by the infrastructure of Everyday Loans and only the net loan book and profit and loss is reported to the Board separately and has therefore been disclosed above. 2. Consolidation adjustments include the acquisition intangibles of £17.4m (2015: £14.1m), goodwill of £132.1m (2015: £40.2m), deferred tax liability of £6.8m (2015: £3.1m), fair value of loan book of £15.8m (2015: £0.4m) and the elimination of intra-Group balances. All inter-segment transactions are transacted on an arm’s length basis. The results of each segment have been prepared using accounting policies consistent with those of the Group as a whole. 88 Non-Standard Finance plc Annual report and accounts 2016Period ended 31 December 2015 Interest income Fair value unwind on acquired loan portfolio Total revenue Operating loss before amortisation Amortisation of intangible assets Operating loss before exceptional items Transaction costs Redundancy costs Finance cost Finance income Loss before taxation Taxation Loss for the period Total assets Total liabilities Net assets Capital expenditure Depreciation of plant, property and equipment Amortisation of intangible assets 7. Directors’ remuneration Short-term employee benefits Post-employment benefits Everyday Loans £’000 Loans at Home £’000 Trusttwo £’000 Central £’000 – – – – – – – – – – – – – 14,657 (5,456) 9,201 (3,313) – (3,313) – (593) – – (3,906) 1,271 (2,635) – – – – – – – – – – – – – – – – (2,684) (4,030) (6,714) (5,542) – (3) 73 (12,186) 1,751 2015 Total £’000 14,657 (5,456) 9,201 (5,997) (4,030) (10,027) (5,542) (593) (3) 73 (16,092) 3,022 (10,435) (13,070) Everyday Loans £’000 Loans at Home £’000 Trusttwo £’000 – – – – – – 34,492 (3,735) 30,757 295 189 – – – – – – – Central £’000 101,730 (11,121) 90,609 64 9 4,030 Consolidation adjustments £’000 (34,199) (2,004) (36,203) – – – 2015 Total £’000 102,023 (16,860) 85,163 359 198 4,030 Year ended 31 December 2016 £’000 Period from incorporation to 31 December 2015 £’000 949 70 1,152 46 Short-term employee benefits comprise salary/fees, bonus and benefits earned in the year. Post-employment benefits represent contributions by the Group in respect of money purchase pension schemes. 8. Employee information a) The average monthly number of employees (including Executive Directors and excluding Loans at Home’s self-employed agents) employed by the Group was as follows: Year ended 31 December 2016 Number Period from incorporation to 31 December 2015 Number Everyday Loans staff Loans at Home staff Central staff b) Employment costs Wages and salaries Social security costs Pension costs 217 271 9 497 – 296 7 303 Year ended 31 December 2016 £’000 Period from incorporation to 31 December 2015 £’000 17,824 1,866 597 20,287 4,530 456 90 5,076 89 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceFinancial statements Notes to the financial statements continued for the year ended 31 December 2016 9. Finance costs and finance income Bank charges and interest payable Bank interest receivable Finance (cost)/income 10. Loss per share Retained loss attributable to Ordinary Shareholders (£’000) Weighted average number of Ordinary Shares at year/period ended 31 December Basic and diluted loss per share (pence) Year ended 31 December 2016 £’000 Period from incorporation to 31 December 2015 £’000 (3,541) 57 (3,484) (3) 73 70 Year ended 31 December 2016 Period from incorporation to 31 December 2015 (7,998) 307,315,588 (2.60p) (13,070) 61,502,789 (21.25p) The loss per share was calculated on the basis of net loss attributable to Ordinary Shareholders divided by the weighted average number of Ordinary Shares. The basic and diluted loss per share is the same, as the exercise of share options would reduce the loss per share and is anti-dilutive. Weighted average number of potential Ordinary Shares that are not currently dilutive (note 22) 5,539 5,539 Year ended 31 December 2016 £’000 Period from incorporation to 31 December 2015 £’000 11. Taxation Current tax charge/(credit) In respect of the current year Total current tax charge/(credit) Deferred tax credit Total tax credit Year ended 31 December 2016 £’000 Period from incorporation to 31 December 2015 £’000 2,103 2,103 (3,447) (1,344) (1,251) (1,251) (1,771) (3,022) The difference between the total tax expense shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax is as follows: Year ended 31 December 2016 £’000 Period from incorporation to 31 December 2015 £’000 Loss before taxation Tax on loss on ordinary activities at standard rate of UK corporation tax of 20%: Effects of: Fixed asset differences Expenses not allowable for taxation Chargeable gains/losses Adjustment to tax charge in respect of previous periods Adjustment to tax charge in respect of previous periods – deferred tax Deferred tax rate change Changes in unrecognised deferred tax Capital allowances in excess of depreciation Current tax rate change Timing difference Tax adjustments arising on date of acquisition Total tax credit (9,342) (16,092) (1,868) (3,218) (103) 132 99 72 (80) 254 151 – – – – (1,344) – 1,214 – – – – 441 1 (53) (21) (1,386) (3,022) 90 Non-Standard Finance plc Annual report and accounts 2016Exceptional items are included within ‘expenses not allowable for taxation’ due the nature of the transactions, being in relation to the acquisitions of Loans at Home and Everyday Loans (including Trusttwo). At 31 December 2016 exceptional items totalled £626,000 (2015: £5,542,000). Reductions in the UK corporation tax rate from 20% to 19% (effective from 1 April 2017) were substantively enacted on 26 October 2015. A further reduction in the rate from 19% to 17% (effective from 1 April 2020) was substantively enacted on 6 September 2016. This will reduce the Company's future current tax charge accordingly. The deferred tax liability at 31 December 2016 has been calculated based on the rate of 19% substantively enacted at the balance sheet date. 12. Dividends The Directors have recommended a final dividend in respect of the year ended 31 December 2016 of 0.9 pence per share (30 June 2016: 0.3 pence and 2015: nil) which will amount to an estimated dividend payment of £2,853,000. This dividend is not reflected in the balance sheet as it is recommended to be paid after the balance sheet date. 13. Goodwill Cost and net book amount At incorporation Acquisition of subsidiary (Loans at Home) At 31 December 2015 Acquisition of subsidiary (Everyday Loans) At 31 December 2016 £’000 – 40,176 40,176 91,894 132,070 The goodwill recognised represents the difference between the purchase consideration and the net assets acquired (including intangible assets recognised upon acquisition). The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. The assessment of impairment of goodwill reflects a number of key estimates, each of which can have a material effect on the carrying value of the asset. These include: • cash flow forecasts which have been extracted from the budget, which involves inherent uncertainty, particularly in respect of gross loan values, collections performance and the cost base of the business; • the price earnings multiple applied to the cash flow forecasts; • estimates made on the disposal costs of the business; and • the WACC applied to determine the NPV of future cash flows. The recoverable amount has been determined based on a fair value less cost to sell calculation. That calculation uses cash flow projections based on financial budgets approved by management covering a three year period to 31 December 2019, disposal costs have been estimated at 2% and a discount rate (WACC) of 12% used for the Group. The Directors have estimated the discount rate using post-tax rates that reflect current market assessments of the time value of money and the risks specific to the market. None of the goodwill is tax deductible. Loans at Home goodwill impairment assessment: Considering the key estimates above, the Group has identified that the following movements may necessitate an impairment charge to the carrying value of goodwill: • a 3% reduction in forecast 2019 earnings; • a 3% reduction in the price earnings multiple; • an increase in the disposal costs to 5.5%; and/or • an increase in the WACC to 14%. Everyday Loans goodwill impairment assessment: It would require a movement of greater than 20% in all of the judgements and estimates to give rise to a potential impairment charge to the carrying value of goodwill recognised on the Everyday Loans acquisition. At 31 December 2016 the fair value less cost to sell of the goodwill was in excess of its carrying amount by £36.1m at Everyday Loans (2015: n/a) and £2.3m at Loans at Home (2015: £51.2m) when applying the lowest valuation as specified in the accounting policies. 91 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceFinancial statements Notes to the financial statements continued for the year ended 31 December 2016 14. Intangible assets – Group Cost At 1 January 2016 Additions through acquisition At 31 December 2016 Amortisation At 1 January 2016 Charge for the year At 31 December 2016 Net book value At 31 December 2016 At 31 December 2015 Customer list £’000 Agent network £’000 Brand £’000 Broker relationship £’000 Technology £’000 Total £’000 17,312 2,050 19,362 3,869 7,856 11,725 7,637 13,443 540 – 540 99 257 356 184 441 297 1,497 1,794 62 435 497 1,297 235 – 4,233 4,233 – 1,129 1,129 3,104 – – 6,227 6,227 – 1,038 1,038 5,189 – 18,149 14,007 32,156 4,030 10,714 14,744 17,412 14,119 15. Property, plant and equipment – Group Freehold land and buildings £’000 Leasehold improvements £’000 Fixtures and fittings £’000 Motor vehicles £’000 Computer equipment £’000 Project costs £’000 Software £’000 Total £’000 Cost At 1 January 2016 Additions through acquisition Additions Disposals At 31 December 2016 Depreciation At 1 January 2016 Charge for the year Disposals At 31 December 2016 Net book value At 31 December 2016 At 31 December 2015 194 – – (94) 100 2 5 – 7 – 1,468 383 (3) 1,848 – 1,273 (2) 1,270 93 192 578 – Property, plant and equipment – Company 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 At 31 December 2015 92 – 715 1,346 (150) 1,911 – 800 (50) 751 – – 1,797 – 1,797 – 2,116 303 (259) 1,916 4,557 4,326 (743) 2,160 10,056 – – – – – 2,085 (243) 1,842 198 4,694 (295) 4,597 409 258 387 – 1,313 – 110 (237) 1,054 1,186 145 280 – 425 51 251 – 302 752 358 761 1,168 1,161 1,797 – – 318 – 5,459 1,718 Leasehold improvements £’000 Fixtures and fittings £’000 Motor vehicles £’000 – 110 110 – 15 15 95 – 9 67 76 – 11 11 65 9 55 – 55 9 13 22 33 46 Total £’000 64 177 241 9 39 48 193 55 Non-Standard Finance plc Annual report and accounts 201616. Investment in subsidiaries Details of the Group’s subsidiaries, which are all included in the consolidated financial statements of the Group, are as follows: Name of company SD Taylor Limited (trading as Loans at Home) Principal place of business and country of incorporation Nature of business % voting rights and shares held Royal House, Princes Gate, Provision of consumer credit 100% of Ordinary Shares Homer Road, Solihull, West Midlands, England, B91 3QQ, United Kingdom Everyday Loans Holdings Limited Secure Trust House, Boston Holding company 100% of Ordinary Shares Drive, Bourne End, Buckinghamshire, SL8 5YS, United Kingdom Everyday Loans Limited As above Provision and servicing of secured and unsecured personal instalment loans 100% of Ordinary Shares Everyday Lending Limited As above Provision of unsecured 100% of Ordinary Shares personal instalment loans Non-Standard Finance Subsidiary 5th Floor, 6 St Andrew Street, Dormant 100% of Ordinary Shares Limited London, EC4A 3AE, United Kingdom Non-Standard Finance Subsidiary II Limited Non-Standard Finance Subsidiary III Limited As above As above Holding company 100% of Ordinary Shares Holding company 100% of Ordinary Shares 17. Inventories – Group Finished goods 18. Amounts receivable from customers – Group Credit receivables Loan loss provision Amounts receivable from customers As at 31 December 2016 £’000 As at 31 December 2015 £’000 – 3 2016 £’000 204,775 (24,362) 180,413 2015 £’000 30,335 (1,923) 28,412 The movement on the loan loss provision for the period relates to the provision at Loans at Home for the year and Everyday Loans since the date of acquisition. The amounts receivable from customers were recognised at fair value (net loan book value) at the date of acquisition (see note 24 for detail). 93 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceFinancial statements Notes to the financial statements continued for the year ended 31 December 2016 18. Amounts receivable from customers – Group continued Analysis of overdue receivables from customers Not past due or impaired Past due but not impaired Impaired Loans at Home1 past due not impaired: One week overdue Two weeks overdue Three or four weeks overdue 1. Loans at Home makes weekly collections. Everyday Loans2 past due not impaired: Up to one month overdue 2. Everyday Loans makes monthly collections. There is no comparable information for Everyday Loans as it was acquired on 13 April 2016. Analysis on movement on loan loss provision At incorporation Charge for the period Unwind of discount At 31 December 2015 Charge for the year Unwind of discount At 31 December 2016 2016 £’000 152,464 21,599 6,350 180,413 6,278 2,129 1,879 10,286 2015 £’000 13,538 7,819 7,055 28,412 4,571 1,696 1,552 7,819 11,313 11,313 – – £’000 – 3,896 (1,973) 1,923 24,928 (2,489) 24,362 The average EIR used during the year ended 31 December 2016 for Loans at Home was 316% (2015: 328%) and for Everyday Loans was 45.0% (2015: n/a). Financial instruments The table below sets out the carrying value of the Company’s financial assets and liabilities in accordance with the categories of financial instruments set out in IAS 39 as at 31 December 2016. Assets and liabilities outside the scope of IAS 39 are shown within non-financial assets/liabilities: Group At 31 December Assets Cash and cash equivalents Loans and advances to customers Other assets Total assets Liabilities Bank borrowing Current tax liability Deferred tax liability Other liabilities Total liabilities 94 Loans and receivables £000 Amortised cost £000 Non-financial assets/ liabilities £000 5,215 180,413 – 185,625 – – – – – – 9,709 10,753 2016 Total £000 5,215 180,413 9,709 195,337 2015 Total £000 7,320 28,412 10,278 46,010 – – – – – (87,300) – – – – (1,292) (5,890) (6,713) (87,300) (1,292) (5,890) (6,713) (87,300) (13,895) (101,195) – – (3,057) (13,803) (16,860) Non-Standard Finance plc Annual report and accounts 2016 Financial instruments continued Company At 31 December Assets Cash and cash equivalents Other assets Total assets Liabilities Other liabilities Total liabilities Trade and other receivables – Group Other debtors Corporation tax Prepayments Trade and other receivables – Company Other debtors Amounts due from subsidiaries Prepayments Loans and receivables £000 Amortised cost £000 Non-financial assets/liabilities £000 2016 Total £000 2015 Total £000 378 – 378 – – – – – – – – 62,089 62,089 378 62,089 62,467 4,965 96,710 101,675 (1,595) (1,595) (1,595) (1,595) (11,121) (11,121) 2016 £’000 211 – 9,498 9,709 2016 £’000 686 61,135 268 62,089 2015 £’000 8,176 1,600 499 10,275 2015 £’000 8,176 88,493 41 96,710 Included within other debtors at 31 December 2015 was £8,162,000 of listing and debt expenses relating to the acquisition of Everyday Loans. Following the equity raise in January 2016, the listing expenses have been expensed to the share premium account and the debt raising expenses were recognised against the debt raised. There are no amounts included in trade and other receivables which are past due but not impaired. 19. Cash and cash equivalents – Group Cash at bank and in hand Cash and cash equivalents – Company Cash at bank and in hand 2016 £’000 5,215 2016 £’000 378 2015 £’000 7,320 2015 £’000 4,965 The Directors consider that the carrying amount of these assets is a reasonable approximation of their fair value. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings. 95 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernance Financial statements Notes to the financial statements continued for the year ended 31 December 2016 20. Trade and other payables – Group Trade creditors Other creditors Accruals and deferred income Trade and other payables – Company Trade creditors Other creditors Amounts due to subsidiaries Accruals and deferred income 2016 £’000 917 1,436 5,652 8,005 2016 £’000 18 75 1,255 247 1,595 2015 £’000 4,180 7,407 2,216 13,803 2015 £’000 3,875 6,238 255 753 11,121 Included within other creditors at 31 December 2015 was £6,194,000 of listing and debt raising expenses relating to the acquisition of Everyday Loans. Listing expenses were paid in January 2016 when the equity was raised and debt raising expenses were paid upon completion of the acquisition of Everyday Loans. The carrying value of trade and other payables is not materially different to the fair value. Other payables due in more than one year – Group Bank loans due in more than one year 2016 £’000 87,300 87,300 2015 £’000 – – The Group entered into two banking facility arrangements during the year, one for Loans at Home and one for the Everyday Loans group. As at 31 December 2016 the Everyday Loans' banking facility was £77.3m (2015: n/a) and Loans at Home's was £10.0m (2015: £nil). Both banking facilities have a three year term, the Everyday Loans' facility was extended post balance sheet and is due to expire in March 2020 and the Loans at Home facility in June 2019. The carrying values other payables due in more than one year is not materially different to the fair value. 21. Deferred tax liability At incorporation Recognition of intangible assets at acquisition Current period credit At 31 December 2015 Recognition of intangible assets at acquisition Recognition of fair value adjustments on amounts receivable at acquisition Adjustment for changes in deferred tax rate Recognition of deferred tax asset at acquisition Current year credit At 31 December 2016 £’000 – (4,828) 1,771 (3,057) (2,801) (4,750) 685 586 3,447 (5,890) 96 Non-Standard Finance plc Annual report and accounts 201621. Deferred tax liability continued The deferred tax liability was recognised on the intangible assets upon acquisition of Loans at Home and of Everyday Loans (refer to note 24). The intangible assets will be amortised in future periods for which tax deductions will not be available. The deferred tax liability is attributable to temporary timing differences arising in respect of: Accelerated tax depreciation Recognition of intangible assets Recognition of fair value adjustments on amounts receivable at acquisition Capital gains Other short term timing differences Other losses and deductions Property revaluation Net Deferred tax liability 2016 £’000 163 (3,308) (3,008) (20) 258 24 – (5,890) 2015 £’000 (115) (2,909) – – (10) – (23) (3,057) For the year ended 31 December 2016 the Company has unused tax losses of £154,000 (2015: £1,822,000) available for offset against future profits. However, due to the uncertainty over the likelihood of future profits at the Company level, the deferred asset has not been recognised on the Company or consolidated statement of financial position. 22. Share capital and share premium On incorporation, 8 July 2014, the issued share capital of the Company was £1 consisting of one Ordinary Share, fully paid up. On 5 November 2014, the ordinary share of £1 was subdivided into 20 Ordinary Shares of £0.05 each. On 2 December 2014, the share capital was increased by the issuance of 999,980 Ordinary Shares of £0.05 each at par to John van Kuffeler in settlement of a liability of £49,999. On 4 February 2015 the share capital was further increased by the issuance of 1,960,527 Ordinary Shares of £0.05 each at a premium of £0.33 each to John van Kuffeler, Nick Teunon, Miles Cresswell-Turner, Robin Ashton and Charles Gregson. On 19 February 2015, the share capital was further increased by the flotation of the Company and issuance of 102,323,918 Ordinary Shares of £0.05 each at a premium of £0.95 each. On 7 January 2016, the share capital was increased by the issuance of 188,235,825 Ordinary Shares of £0.05 each at a premium of £0.80 each. Upon completion of the acquisition of the Everyday Loans Group from Secure Trust Bank plc on 13 April 2016, the share capital was further increased by the issuance of 23,529,412 Ordinary Shares of £0.05 each at a premium of £0.80 each to Secure Trust Bank plc. All shares in issue are ordinary ‘A’ shares consisting of £0.05 per share. All shares are fully paid up. The Company’s share capital is denominated in Sterling. The Ordinary Shares rank in full for all dividends or other distributions, made or paid on the ordinary share capital of the Company. Share movements Balance at date of incorporation Shares issued during the period Balance at 31 December 2015 Shares issued during the period Balance at 31 December 2016 Number – 105,284,445 105,284,445 211,765,237 317,049,682 23. Reserves Details of the movements in reserves are set out in the statement of changes in equity. A description of each reserve is set out below. Share premium The share premium account is used to record the aggregate amount or value of premiums paid when the Company’s shares are issued at a premium. Transaction costs of £7,131,000 (2015: £5,140,000) directly relating to raising finance have been deducted from share premium in the year. 97 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceFinancial statements Notes to the financial statements continued for the year ended 31 December 2016 Balance at date of incorporation Premium arising on issue of Ordinary Shares Issue costs Balance at 31 December 2015 Premium arising on issue of Ordinary Shares Issue costs Balance at 31 December 2016 Total £’000 – 97,854 (5,140) 92,714 169,412 (7,131) 254,995 24. Acquisition of subsidiary Everyday Loans On 13 April 2016, the Group obtained control of the Everyday Loans Holdings Limited group, which consists of Everyday Loans Holdings Limited, Everyday Loans Limited and Everyday Lending Limited. The Group obtained control through the purchase of 100% of the share capital. The Everyday Loans group acquisition satisfies two of Non-Standard Finance plc’s target sectors, branch-based unsecured lending and guaranteed loans (Trusttwo). The fair values of the identifiable assets and liabilities of Everyday Loans as at the acquisition date were as follows: Intangible assets1 Property plant and equipment Amounts receivable from customers2 Trade receivables Cash and cash equivalents Trade and other payables Corporation tax liability Deferred tax liabilities3 Goodwill Total consideration Satisfied by: Cash and shares Net cash outflow arising on acquisition: Cash consideration Share consideration Cash and cash equivalents acquired Corporation tax credit Other acquired asset Amounts recognised at acquisition date £’000 – 563 115,563 4,259 1,807 (7,342) (1,949) – Fair value adjustments £’000 14,006 – 23,749 – – – – (7,551) Total £’000 14,006 563 139,312 4,259 1,807 (7,342) (1,949) (7,551) 112,901 30,204 143,105 91,895 235,000 235,000 215,000 20,000 (1,807) (1,864) (545) 230,784 1. £2,050,000 has been attributed to the fair value of Everyday Loans’ customer list; £4,233,000 to the broker relationships; £1,447,000 to the Everyday Loans brand and £49,000 to the Trusttwo brand; and £6,227,000 to technology (refer to note 14). 2. An adjustment to receivables of £23,749,000 has been made to reflect the fair value of the receivables book at the acquisition date (refer to note 18). 3. Deferred tax liability £7,551,000 recognised on the intangibles and the fair value adjustment of the receivable book at acquisition (refer to note 21). Everyday Loans (including Trusttwo) contributed £38,929,000 to the Group’s revenue and £12,327,000 profit before tax (before fair value adjustments) to the Group’s operating profit for the period from the date of acquisition to the year ended 31 December 2016. The goodwill of £91.9m represents the benefit of the Group’s synergies available from the acquisition in respect of collections and distribution channels. 98 Non-Standard Finance plc Annual report and accounts 201624. Acquisition of subsidiary continued Loans at Home On 4 August 2015, the Group obtained control of SD Taylor Limited, trading as Loans at Home (formerly Loansathome4u) through the purchase of 100% of the share capital. A detailed conversion of Loans at Home’s financial statements, to align accounting policies, has been completed post-acquisition which reduced Loans at Home’s net assets on acquisition by £5,956,000, principally in respect of higher impairment provisions due to the impact of a more conservative approach to recognising impairment. The fair values of the identifiable assets and liabilities of Loans at Home as at the acquisition date were as follows: Intangible assets1 Property, plant and equipment Inventories Amounts receivable from customers2 Trade receivables Cash and cash equivalents Trade and other payables3 Deferred tax liabilities4 Goodwill Total consideration Satisfied by: Cash Net cash outflow arising on acquisition: Cash consideration Cash and cash equivalents acquired Amounts recognised at acquisition date £’000 – 1,627 9 22,591 277 1,296 (2,040) (22) Fair value adjustments £’000 18,149 – – 5,882 – – (732) (4,806) Total £’000 18,149 1,627 9 28,473 277 1,296 (2,772) (4,828) 23,738 18,493 42,231 40,176 82,407 82,407 82,407 (1,296) 81,111 1. £17,312,000 has been attributed to the fair value of Loans at Home’s customer list, £540,000 to the agent network and £297,000 to the brand (refer to note 14). 2. An adjustment to receivables of £5,882,000 has been made to reflect the fair value of the receivables book at the acquisition date (refer to note 18). 3. An adjustment of £732,000 to accruals for a recognised dilapidations provision on the properties owned by Loans at Home. 4. Deferred tax liability £4,806,000 recognised on the intangibles and the fair value adjustment of the receivable book at acquisition (refer to note 21). The goodwill of £40.2m represents the benefit of the Group’s synergies available from the acquisition in respect of collections and distribution channels. The fair value measurement of acquired assets is based upon financial forecasts, which are categorised as level 3 within the IFRS 13 fair value hierarchy. 25. Net cash used in operating activities – Group Operating loss Taxation paid Depreciation Amortisation of intangible assets Fair value unwind on acquired loan book (Profit)/loss on disposal of property, plant and equipment Decrease in inventories Increase in amounts receivable from customers Increase in receivables (Decrease)/increase in payables Cash used in operating activities Year ended 31 December 2016 £’000 Period from incorporation to 31 December 2015 £’000 (5,858) (1,341) 690 10,714 8,342 (363) 3 (21,039) (7,737) (6,952) (23,541) (16,162) (350) 198 4,030 5,456 51 6 (5,394) (15,217) 17,850 (9,532) 99 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceFinancial statements Notes to the financial statements continued for the year ended 31 December 2016 Net cash used in operating activities – Company Operating loss Depreciation Increase in receivables (Decrease)/increase in payables Cash used in operating activities Year ended 31 December 2016 £’000 Period from incorporation to 31 December 2015 £’000 (3,883) 39 (3,123) (9,526) (16,492) (8,225) 9 (96,710) 11,121 (93,805) 26. Operating lease commitments – Group At 31 December 2016, the outstanding commitments under non-cancellable operating leases which fall due are as follows: Within one year In the second to fifth years inclusive After five years Year ended 31 December 2016 £’000 Period from incorporation to 31 December 2015 £’000 1,158 2,419 263 3,839 25 517 – 542 27. Related party transactions There have been no related party transactions in the year ended 31 December 2016 (2015: nil). 28. Share based payments Equity settled share option scheme The Founders have committed £255,000 of capital in NSF Subsidiary Limited in the form of 100 Founder Shares. The Founder Shares grant each holder the option, subject to the satisfaction of both the significant acquisition condition and the performance condition (which can be satisfied, under certain circumstances, if a Founder is removed from the Board), to require the Company to purchase some or all of their Founder Shares. The conditions which must be met in order for the participants to receive any future pay-out can be summarised as follows: • the Company must achieve an admission to the London Stock Exchange; • the Company must make an acquisition of at least £50 million within two years of the admission date; • the Ordinary Shares must achieve an internal rate of return of 8.5% per annum from the market capitalisation at the admission date; and • the Company’s market capitalisation must increase by 25% from the market capitalisation at the admission date. The last two conditions must both be met for a period of 20 out of 30 consecutive days, during the same 30-day period within five years of an acquisition. The purchase price for the exercise of this option may be paid by the Company in Ordinary Shares or as a cash equivalent at the Company’s option. The number of Ordinary Shares required to settle all such options is the number of shares that would have represented 5% of the Ordinary Shares of the Company on (or immediately after) listing if such Ordinary Shares had been issued at the time of listing. The equivalent cash value is calculated on exercise of the option as the estimated total price of the Ordinary Shares that would have been issued if the option had been settled in Ordinary Shares rather than cash, based on the mean of the closing middle market quotations for an Ordinary Share on the London Stock Exchange over the 30 business days prior to the exercise of the option. The fair value of the share options was assessed to be £255,000 and therefore the Company recognised total expenses of £nil relating to this share option scheme in the year ended 31 December 2016 (2015: £nil). No shares were issue to the Directors during the year ended 31 December 2016. 40,750 shares were issued to two Directors during the period to 31 December 2015; these were issued on 19 February 2015 in lieu of cash for their first year’s Director Fees. An expense of £40,750 was recognised in the period, reflecting the fair value of the services provided. 100 Non-Standard Finance plc Annual report and accounts 201629. Financial instruments – Group The Group’s operations expose it to a variety of financial risks including credit risk, liquidity risk and interest rate risk. The Directors have delegated the responsibility of monitoring financial risk management to the Risk Committee. The Group’s objectives are to maintain a well-spread customer base of carefully controlled quality by applying strong emphasis on good credit management, both through strict lending criteria at the time of underwriting a new credit facility and continuously monitoring the collection process. The average effective interest rate on financial assets of the Group at 31 December 2016 was estimated to be 99% (2015: 328%). The average effective interest rate on financial liabilities of the Group at 31 December 2016 was estimated to be 4% (2015: 4%). Market risk Market risk is the risk of loss due to adverse market movements caused by active trading positions taken in interest rates, foreign exchange markets, bonds and equities. The Group does not undertake position taking or trading books of this type and therefore market risk is not a concern. Interest rate risk The Group has an exposure to interest rate risk arising on changes in interest rates and therefore seeks to limit this exposure. This is, in the main, achieved by fixed interest rates on committed debt facilities. A 2% movement in the interest rate applied to cash balances during 2016 would not have had a material impact on the Group’s result for the year. Credit risk The Group’s credit risk inherent in amounts receivable from customers is reviewed under impairment as per note 18. This risk is minimised by the use of credit scoring techniques which are designed to ensure the Group lends only to those customers who we believe can afford the repayments. It should be noted that the credit risk at the individual customer level is managed by strict adherence to credit control rules which are regularly reviewed. No individual customer contributed more than 10% of the revenue for the Group. Trade and other receivables and cash at bank are not considered to have a material credit risk as all material balances are due from highly rated banking counterparties. Capital risk management The Board of Directors assess the capital needs of the Group on an ongoing basis and approve all capital transactions. The Group’s objective in respect of capital risk management is to maintain a conservative ‘gearing ratio’ level with respect to market conditions, whilst taking account of business growth opportunities in a capital efficient manner. Liquidity risk This is the risk that the Group has insufficient resources to fund its existing business and its future plans for growth. The short-term nature of the Group’s business means that the majority of amounts receivable from customers is receivable within 24 months. The risk of not having sufficient liquidity resources is therefore low. The Group has in place sufficient committed debt facilities to cover this 24-month period. Further, the aim is to ensure that there is no over-reliance on a single or small group of lenders. The Group monitors its levels of working capital to ensure that it can meet its debt repayments as they fall due. 30. Subsequent events The committed debt facilities at 31 December 2016 totalled £95m. This has been extended to £115m of committed facilities since the year ended 31 December 2016. 101 Non-Standard Finance plc Annual report and accounts 2016Financial statementsStrategic reportGovernanceAdditional information Company information 103 102 Additional information Company information Company details Registered office and contact details 5th Floor 6 St Andrew Street London EC4A 3AE Website: www.nonstandardfinance.com Company number 09122252 Independent auditor Deloitte LLP Hill House 1 Little New Street London EC4A 3TR Advisers Brokers J.P. Morgan Cazenove Floor 29 25 Bank Street Canary Wharf London E14 5JP Peel Hunt Moor House 120 London Wall London EC2Y 5ET Solicitors Slaughter and May One Bunhill Row London EC1Y 8YY Walker Morris LLP Kings Court 12 King St Leeds LS1 2HL Macfarlanes LLP 20 Cursitor Street London EC4A 1LT Financial communications Bell Pottinger Holborn Gate 330 High Holborn London WC1V 7QD 103 Financial statementsStrategic reportGovernanceFinancial statementsStrategic reportGovernance Non-Standard Finance plc Annual report and accounts 2016Notes 104 Non-Standard Finance plc Annual report and accounts 2016www.nonstandardfinance.com 

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