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Delivering great
outcomes for
customers,
investors,
employees,
partners &
communities
Non-Standard Finance plc Annual Report & Accounts 2018
When lending direct,
we aim to meet
all our customers
face-to-face. Whilst
more expensive
to operate than
other models,
it means we can
lend when others
can’t (or won’t).
P.20
Guarantor loans
We have over 25,000 customers
P.18
Branch-based lending
We opened 12 new branches in 2018
P.22
Home credit
We have a network of 897 agencies
across the UK
Key stakeholders
When lending direct,
Introducing our
we aim to meet all our
stakeholders
customers face-to-face.
Whilst more expensive
to operate than other
Customers
models, it means we can
lend when others can’t
Employees and
self-employed
(or won’t).
agents
We need access to a large pool of reliable,
well-paying customers with the right
characteristics and need for credit.
Customers are the number one driver
of value for the Group.
Given the importance of building strong
relationships with customers, having a
well-trained, motivated and professional
workforce is essential for long-term success.
How they affect our ability to create value
Contents
Overview
01 2018 overview
02 NSF at a glance
04 Chairman’s statement
Strategic Report
07 Market review
10 Our business model
12 Group Chief Executive’s report
18 Feature: Branch-based lending
20 Feature: Guarantor loans
22 Feature: Home credit
24 Our strategy and KPIs
30 Principal risks
33 2018 Financial Review
36 Divisional overview: Branch-based lending
39 Divisional overview: Guarantor loans
42 Divisional overview: Home credit
46 Corporate and social responsibility
Governance
50 Board of Directors
52 Governance report
60 Audit Committee report
63 Nomination Committee report
65 Risk Committee report
66 Directors’ remuneration report
83 Directors’ report
Regulators
Each of our divisions is fully authorised by the
FCA, a position we worked hard to achieve
and one that we do not take for granted.
Maintaining good relations with regulators
ensures we can address issues before they
become a potential concern.
Partners and
suppliers
The scale and complexity of our business means
that we utilise a number of products and services
provided by a variety of other organisations
including credit reference agencies, financial
brokers and technology providers.
Independent auditor’s report
Financial Statements
87
96 Financial statements
101 Notes to the financial statements
Additional Information
133 Glossary and definitions
134 Company information
Providers of
funding
Communities,
charity and
environment
The Group is funded with a balance of
long-term and short-term capital. Access to
additional capital is key for future loan book
growth and associated investment.
With over 860 staff, almost 900 self-employed
agencies and 130 office locations across the
UK, we are acutely aware of the importance
of our position in local communities that
provide an invaluable source of customers,
members of our workforce, partners and
suppliers. As a responsible company we also
look to support a discrete number of charities
through both financial donations as well as by
encouraging staff to donate their time to good
causes. We are mindful of how our operations
may affect the environment, even in a small
way and so record emissions and resource
usage to ensure these are properly controlled.
2018 overview
Serving over 180,000 customers through a network of over 130 locations,
we are a leading player in the UK non-standard finance sector.
01
Operational
highlights
Financial highlights1
Reported results
Normalised results2
• Conclusion of a
Combined loan book
Combined loan book
period of significant
investment and
structural change
• Total loan book2
grew by 29%
£314.6m
+24% (2017: £253.1m)
• Rate of impairment
declined to 25.6% of
normalised revenue2
2018
2017
2016
£314.6m
£253.1m
£180.4m
Revenue
£158.8m
+47% (2017: £107.8m)
£310.3m
+29% (2017: £241.2m)
2018
2017
2016
Revenue
£310.3m
£241.2m
£191.4m
£166.5m
+39% (2017: £119.8m)
• Branch-based
lending: 12 new
branches opened
and over 90 new
staff added
• Guarantor loans:
all loans now being
booked onto a single
loan management
platform
• Home credit:
technology-driven
efficiencies
supporting a more
streamlined
operating structure
• Additional £70m
of long-term
funding secured
in August 2018
2018
2017
2016
£158.8m
£107.8m
£72.8m
2018
2017
2016
£166.5m
£119.8m
£81.1m
Operating profit
Operating profit
£19.5m
+413% (2017: £3.8m)
£35.9m
+51% (2017: £23.7m)
2018
2017
2016
£3.8m
£(5.2)m
£19.5m
2018
2017
2016
£35.9m
£23.7m
£15.6m
Basic and fully diluted
loss per share
(0.54)p
+84% (2017: (3.26)p)
Basic and fully diluted
earnings per share
3.70p
+8% (2017: 3.44p)
(0.54)p
2018
2017
2016
(3.26)p
(2.60)p
2018
2017
2016
3.70p
3.44p
3.09p
Dividend per share
2.60p
+18% (2017: 2.20p)
Dividend per share
2.60p
+18% (2017: 2.20p )
2018
2017
2016
2.60p
2.20p
1.20p
2018
2017
2016
2.60p
2.20p
1.20p
Visit our website for further information: www.nsfgroupplc.com.
1 The Group’s net loan book and other key performance indicators for 2017 have been adjusted to reflect the position assuming IFRS 9 had
been adopted on 1 January 2017 (2016 has not been adjusted and is reported under IAS 39). The 2017 financial statements have not been
restated to reflect the adoption of IFRS 9 and so 2018 and 2017 financial results are not strictly comparable. For further information on the
introduction of IFRS 9, see page 44. A reconciliation of the calculation of combined net loan book is set out on page 35.
2 Before fair value adjustments, amortisation of acquired intangibles and exceptional items. See glossary of alternative performance
measures and key performance indicators in the Appendix. For a reconciliation of normalised results to reported results please see page 33.
OverviewStrategic ReportGovernanceFinancial Statements 02
NSF at a glance
A leading
provider of
unsecured
credit
£310.3m
Net loan book1
180,000+
Customers
130+
Locations
860+
Staff
890+
Self-employed agencies
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Formed in 2014, we now
have national coverage
with over 130 offices.
NSF (1)
Everyday Loans (65)
Loans at Home (66)
Guarantor loans (2)
£258.9m
Net debt2
1 Before fair value adjustments. A reconciliation of the
calculation of combined net loan book is set out on
page 35.
2 Gross borrowings less cash at bank.
03
Every adult should have access to credit
they can afford to repay – we help
consumers that are either unable or
unwilling to borrow from mainstream
financial institutions.
Branch-based lending
Customer touch points
Unlike most of our competitors, when lending direct we
aim to meet all our customers face-to-face. The quality
of our customer relationships and how we manage them
are key drivers of our long-term success.
Our first point of contact is often
online when a customer applies
for a loan either direct or via a
broker – here we capture their
details and start the loan
application process.
Online
In branch-based lending
and home credit, meeting
the customer face-to-face
is an important part of
our underwriting process.
Face-to-
face
Applicants also contact us by
phone when we seek to confirm
their details and start the loan
application process.
By phone
Everyday Loans
The UK’s largest branch-based
provider of unsecured loans
to sub-prime borrowers
Loan book1
£186.2m
+25% (2017: £149.4m)
See page 36
Guarantor loans
The Group is the clear number two
provider in a fast-growing UK market
Loan book1
£83.1m
+61% (2017: £51.6m)
See page 39
Home credit
The UK’s third largest provider of
unsecured home credit
Loan book1
£41.0m
+2% (2017: £40.2m)
See page 42
1 The Group’s net loan book (before fair value adjustments) and
other key performance indicators for 2017 have been adjusted
to reflect the position assuming IFRS 9 had been adopted
on 1 January 2017. See glossary of alternative performance
measures and key performance indicators in the Appendix.
A reconciliation of the calculation of combined net loan book
is set out on page 35.
OverviewStrategic ReportGovernanceFinancial Statements 04
Chairman’s statement
A further year of
good progress
The quality of our
business improved
and the overall rate
of impairment declined
while the Group’s loan
book grew strongly.
At the same time,
we increased our
committed debt
facilities to £330m.
1 See glossary of alternative
performance measures and
key performance indicators
in the Appendix.
2018 results
The Group’s overall operating profit performance
in 2018 was in line with our expectations, with
particularly encouraging performances by both
Everyday Loans and our Guarantor Loans Division
whose respective market segments continue
to grow strongly. Home credit also delivered a
good performance in 2018 in what is a mature
but profitable industry segment of the market.
Reported revenues were £158.8m (2017: £107.8m)
and the Group produced an operating profit of
£19.5m (2017: £3.8m). Higher interest costs and the
impact of exceptional charges resulted in a loss
per share of 0.54p (2017: statutory loss per share
of 3.26p).
On a normalised basis1, operating profit increased
by 51% to £35.9m (2017: £23.7m) and profit before
tax increased by 12% to £14.8m (2017: £13.2m).
Earnings per share increased by 8% to 3.70p
(2017: 3.44p) reflecting strong operating profit
growth in all three divisions, the full-year impact
of the acquisition of George Banco and the higher
funding costs of the Group’s new debt facilities.
Our strategy remains unchanged
We are dedicated to meeting the needs of those
consumers who are either unable or unwilling to
borrow from mainstream lenders. This is a significant
segment of the overall market and is estimated to
include c.10 million UK adults. Each of our three
business divisions offers a significant opportunity to
continue to create value through a combination of
loan book growth and a high return on assets.
Our business strategy is founded on three pillars:
• Being a leader in our chosen markets;
•
• Acting responsibly.
Investing in our core assets; and
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Having completed a major
period of investment and
structural change, the Group
made great strides in 2018 with
a strong performance by each
of our three business divisions.
Each of these is explained in more detail on
pages 24 to 29.
Offer to acquire Provident Financial plc
In keeping with the Group’s strategy, on
22 February 2019 the Company announced
a firm offer to acquire Provident Financial plc
(‘Provident’) by way of a reverse takeover offer
(the ‘Offer’) with each Provident shareholder
entitled to receive 8.88 new NSF Shares for
each Provident Share under the terms of the
offer, as well as the proposed demerger of
the Loans at Home Business (the ‘Demerger’).
NSF intends to capitalise on its operational
and commercial success by acquiring and
transforming Provident to unlock substantial value
for all shareholders of, and stakeholders in, both
Provident and NSF. The Offer, once complete is
expected to create a well-balanced group with
leading positions in some of the most attractive
segments of the non-standard finance sector.
NSF believes the transaction will reposition
and revitalise Provident’s businesses and their
respective product offerings within the non-
standard finance sector, enhancing their prospects
for profitable growth. Under the leadership of the
NSF Board and NSF’s strong management team,
the transaction also represents an opportunity
to unlock substantial value from an enlarged
customer base in a highly specialised sector.
Whilst Provident is one of the leading providers
of personal credit products to the non-
standard credit market in the UK, it has faced
a number of challenges in the recent past.
However, the NSF Board believes Provident
continues to have significant potential which,
under the right leadership and pursuing a
revised business strategy, can be unlocked
for the benefit of shareholders, employees
and customers of both NSF and Provident.
05
“ We remain confident
about the Group’s
full-year prospects
and look forward
with confidence
Charles Gregson
Non-Executive
Chairman
18%
Increase in total
dividend per share
Culture remains key
In last year’s Annual Report, I set out our corporate
values that were being embedded across the
Group as part of our ongoing appraisal and
reward framework. Through staff engagement
surveys in all three of our business divisions
we seek anonymous feedback on the degree
to which our staff are engaged, how they are
feeling and to ensure that our collective actions
and behaviours are reflecting our desired goals
and values. Increasing engagement is a key goal
for us and we remain committed to putting the
customer at the heart of everything we do. To
add to our cultural toolkit, we are developing
a ‘good customer outcomes dashboard’ that
monitors a series of key performance indicators
designed to highlight any areas of potential
risk and plan to introduce this during 2019.
Whilst effective reporting and controls can
help to mitigate operational risks from a poor
or inappropriate business culture, we believe
that there is no substitute for getting out of
the boardroom to see our operations and
meet staff in person. In addition to receiving
regular updates from each of the operational
management teams, I and my fellow Non-
Executive Directors also made a number of site
visits to the Group’s operations during 2018,
spending time with our staff, self-employed
agents and listening to calls with customers.
As well as providing a clear line of sight into how
decisions taken at the parent company board are
translated into operational outputs, these visits
reaffirmed our view that the Group continues to
have a strong culture, one that is fully-aligned
with delivering great customer outcomes,
providing attractive returns to our shareholders
and managing carefully our other key stakeholder
relationships. For further details on our approach
to corporate and social responsibility, including
stakeholder management, see pages 46 to 49.
Whilst The Financial Reporting Council’s revised
UK Corporate Governance Code applies only
to companies with a premium listing, as a Board
we are determined to adopt the highest standards
of corporate governance and transparency.
Therefore, whilst NSF is currently a standard listed
company, during 2019 we will seek to comply with
the revised Code, as and where it is practicable
to do so and will report on this basis in 2020. On
completion of the proposed acquisition of Provident,
the Board has indicated its commitment to begin
the process to transfer NSF’s current listing from
the standard listing to the premium listing segment
of the Official List of the London Stock Exchange.
As part of the transaction, NSF intends to complete
a demerger of its home credit business, Loans
at Home, to assist with the Competition and
Markets Authority (‘CMA’) competition approval
process and for Loans at Home to be admitted
to trading either on the Main Market (with a
standard listing) or on AIM. Although the timing
and structure of the Demerger remain subject
to further consideration, including by the CMA,
it is expected that the Demerger will take place
following completion, thereby allowing Provident
shareholders who participate in the transaction,
as well as existing NSF shareholders, to receive
shares in the newly listed Loans at Home. The
NSF Board considers that Loans at Home is, and
will continue to be, a viable, well-managed,
independent, standalone business. As the
Demerger remains subject to review by the
CMA, NSF has reserved the right to change its
strategic plans with respect to Loans at Home as
described in the Offer announcement, including
(without limitation) the timing of the Demerger.
As noted in notes 2 and 14 to the audited financial
statements, the carrying value of goodwill
generated on the acquisition of Loans at Home in
2015 was an area of particular focus for the 2018
audit and the Group has used current market
multiples and budgeted 2019 profits to estimate
the value of Loans at Home. This confirms that
Loans at Home continues to exceed the carrying
value of its tangible net assets and goodwill,
albeit by a significantly smaller margin than at
the end of 2017. As the market value of Loans at
Home at the point of the expected Demerger will
be a function of a broad range of factors at that
time, the value of Loans at Home as a separately
listed company may differ from that assessed at
31 December 2018 and that difference could result
in a lower or higher value for Loans at Home at
the point of Demerger. Any such movement which
results in a lower value for Loans at Home is not,
however, expected to outweigh the considerable
benefit of the Offer for the Enlarged Group’s
shareholders or undermine the accuracy of the
internal value calculation described above.
NSF has received irrevocable undertakings to
accept the Offer and letters of intent to accept
(or procure acceptance of) the Offer in respect
of, in aggregate, 49.4% of Provident’s issued
share capital.
The Offer is subject to a number of conditions that
include approval of the issuance of the New NSF
Shares by NSF shareholders, receipt of approvals
from the Financial Conduct Authority (‘FCA’), the
Prudential Regulatory Authority and the Central
Bank of Ireland, receipt of approval from the
CMA and other conditions and further terms.
Further details of the Offer can be found in the
Offer document published by the Company
on 9 March 2019 and which is available on the
Group’s website, www.nsfgroupplc.com.
OverviewStrategic ReportGovernanceFinancial Statements 06
Chairman’s statement continued
Regulation
Each of our businesses is fully authorised by the FCA
and we remain an enthusiastic supporter of their efforts
to ensure that consumers are protected from undue
harm, that there is effective competition between
operators and that the market operates effectively.
Having taken on responsibility for what is now over
58,000 firms, the FCA has strengthened the regulatory
framework as well as provided detailed research
into the dynamics and structure of several important
segments of the UK non-standard finance market.
Whilst all consumer credit firms were impacted to varying
degrees by the FCA’s thematic reviews, including those
on staff incentives1 and creditworthiness2 many of the
recommendations had already been addressed as part
of the authorisation and ongoing supervision process and
for NSF there was no material impact on any of our
business divisions. Whilst the FCA’s review of high-cost
credit3 resulted in some minor operational changes for
home credit operators, none of these are significant for
the Group.
We are now in the fifth year since the FCA assumed
regulatory responsibility for consumer credit and there
are many thousands of pages of FCA-related rules,
regulations and guidance in existence. Whilst the Senior
Managers and Certification Regime is due to come
into force during the second half of 2019, we are well
prepared for this and do not expect any other material
changes to the regulatory framework during the coming
year. For further details on key regulatory developments,
please visit our website: www.nsfgroupplc.com.
Final dividend
Having declared a half-year dividend of 0.60p per share
in August 2018, the Board is pleased to recommend a final
dividend of 2.00p per share (2017: 1.70p), making a total of
2.60p for the year as a whole (2017: 2.20p). If approved at
the Annual General Meeting (‘AGM’), the final dividend
would be paid to those shareholders on the Company’s
share register on 3 May 2019, with payment being made
on 7 June 2019.
Current trading and outlook
2019 has started well with loan book growth in line
with plan and impairment tightly controlled.
As evidenced by our recommended increase in the final
dividend, we remain confident about the Group’s full-year
prospects and look forward with confidence.
Charles Gregson
Non-Executive Chairman
14 March 2019
1 FCA – FG18/2 Staff incentives, remuneration and performance
management in consumer credit, March 2018.
2 FCA – PS18/19 Assessing creditworthiness in consumer credit
– Feedback on CP17/27 and final rules and guidance, July 2018.
3 FCA – CP18/43 High-Cost Credit Review, Feedback on CP18/12
with final rules and guidance and consultation on Buy Now Pay
Later offers, December 2018.
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Our values
1 Doing the right thing
We recognise our collective
responsibility for delivering great
outcomes – not just for our customers
but also our other stakeholders.
2 Integrity
We expect our people to respect
colleagues and other key stakeholders and
to do what we say we will do.
3 Shared purpose
delivered through
teamwork
We have clear strategic and operational
goals and expect all of our people to
understand and share in that vision.
4 Clear
communication
We listen carefully to those dealing directly
with our customers; we 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.
5 Entrepreneurial
leadership
We lead by example, using our initiative
and not just waiting to be told what to do;
knowledgeable and inquisitive, we are
prepared to try new things so we can
perform better and be the best we can be.
Market review
07
Opportunities
for growth
The business environment for non-standard
finance in the UK remains positive.
1
There is strong demand
c.10 million consumers
are either unwilling
or unable to borrow
from mainstream
financial institutions1
Customers are
low paid or on
variable income
Customers have low
credit status/are
credit impaired
18%
proportion of total
jobs that are deemed
to be low-paid2
c.1m
County Court
Judgments per annum4
15%
of the UK workforce is
self-employed3
14m
people use an
unarranged overdraft
each year5
1 U.K. Specialist Lending Market Trends and Outlook 2018, Executive Insights Volume XX, Issue 39 – L.E.K. Consulting.
2 Low pay is defined as the value that is two-thirds of median hourly earnings. In 2018, median weekly earnings for
full-time employees was £569 (2017: £550) and as a result 17.8% of all employee jobs are low-paid, when considered in
terms of hourly earnings. This is the lowest proportion of low-paid employee jobs by hourly pay since the series began
in 1997 – ONS: Annual Survey of Hours and Earnings, 25 October 2018.
3 The number of self-employed people in the UK in October 2018 was 4.77 million (14.7% of all people in work) – ONS UK
Labour market, December 2018.
4 Registry Trust Limited – 12-month volume to September 2018 for England and Wales.
5 FCA – CP18/42 High-Cost Credit Review: Overdrafts consultation paper and policy statement, December 2018.
OverviewStrategic ReportGovernanceFinancial Statements 08
Market review continued
2 There is limited supply
Strong growth in consumer credit in the UK in
recent years has been driven by prime customers,
not those with lower credit scores.1 Whilst the
market is highly fragmented, there is a limited
number of well-capitalised providers to supply
this large market.
Credit to non-standard customers was significantly
reduced following the financial crisis due to a
number of factors, including:
• withdrawal by many mainstream lenders from
the market (see ‘run-off unsecured portfolios‘
in chart);
• reduced supply of high-cost short-term
credit (‘HCSTC’) and rent-to-own following
FCA intervention;
• barriers to entry have increased including
strict regulatory requirements and the need
for a robust compliance infrastructure;
•
lending to this segment is highly specialised and
there is a limited pool of managerial talent; and
• many non-standard lenders struggle to
access long-term, low-cost funding to support
future growth.
The supply of non-standard finance in the UK
£bn
18
16
14
12
10
8
6
4
2
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
■ Run-off unsecured
portfolios
■ Mail order
■ Store cards
■ Credit unions
■ Other unsecured
products
■ Point of sale loans
■ Off-prime credit cards
1 www.fca.org.uk/insight/whos-driving-consumer-credit-growth.
Source: L.E.K. – Executive Insight Volume XX, issue 39 and Company estimates.
4 NSF is well-positioned
Top three position in
each business segment
High risk-adjusted margins1
Highly experienced
senior management team
Branch-based
lending
#1
Guarantor
loans
#2
2018
2017
2018
2017
Branch-based risk-adjusted margins %
36.7%
34.6%
Guarantor loans risk-adjusted margins %
25.8%
29.3%
95
years’
experience
62
years’
experience
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09
3 External drivers are mostly favourable
Macroeconomic
Record rates of employment/low unemployment1
Real weekly incomes, including bonuses,
increased by 1.2% in 20181
Having peaked at 4.5% per annum in 2011,
inflation (consumer price index including owner
occupiers’ housing costs) has reduced to 1.8%2
Brexit creates general uncertainty but is not
expected to affect most of our customers, all of
whom are UK-based
Competition
Highly fragmented with limited number of
large, profitable and well-capitalised firms
Many mainstream lenders left the market
post-2008
Technology evolution may mean that new
business models emerge
Regulation
Strict regulatory framework ensures a level
playing field for all operators
FCA has introduced some changes in home
credit that are not expected to have a material
impact on our business3
Continuous evolution of the regulatory framework
Unemployment rate %
14
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a
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0
0
0
2
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a
J
2
0
0
2
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a
J
4
0
0
2
n
a
J
6
0
0
2
n
a
J
8
0
0
2
n
a
J
0
1
0
2
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a
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2
1
0
2
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4
1
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2
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6
1
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Regular pay growth rate %
6
5
4
3
2
1
0
-1
-2
-3
1
0
0
2
r
a
M
2
0
0
2
r
a
M
3
0
0
2
r
a
M
4
0
0
2
r
a
M
5
0
0
2
r
a
M
6
0
0
2
r
a
M
7
0
0
2
r
a
M
8
0
0
2
r
a
M
9
0
0
2
r
a
M
0
1
0
2
r
a
M
1
1
0
2
r
a
M
2
1
0
2
r
a
M
3
1
0
2
r
a
M
4
1
0
2
r
a
M
5
1
0
2
r
a
M
6
1
0
2
r
a
M
7
1
0
2
r
a
M
8
1
0
2
r
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Regular pay (real)
Regular pay (nominal)
Source: ONS: UK Labour Market: 19 February 2019.
1 ONS – UK Labour Market: February 2019, 19 February 2018.
2 ONS – Consumer price inflation, UK: January 2019, released 13 February 2019.
3 FCA – CP18/43 High-Cost Credit Review, Feedback on CP18/12 with final rules and
guidance and consultation on Buy Now Pay Later offers, December 2018.
Top three position in all
three business segments
High risk-adjusted margins1
Highly experienced
senior management team
Home
credit
#3
2018
2017
Home credit risk-adjusted margins %
115.6%
111.4%
133
years’
experience
£330m of committed
long-term debt funding
1 See glossary of alternative performance measures and key performance indicators in
the Appendix.
OverviewStrategic ReportGovernanceFinancial Statements
10
Our business model
A relationship
driven model
Source
long-term
capital
Develop focused,
tailored and affordable
loan products
Attract
customers
Lend responsibly
1. Identify suitable customers
4. Assess affordability (income and
2. Assess credit via external
and internal scorecard
expenditure)
5. Tailor product to suit their needs
3. Understand customer needs
6. Ensure customer understands
By phone
Face-
to-face
Online
Collect responsibly
1. Encourage timely payment
3. Identify vulnerability
2. Show forbearance if and when required
4. Suggest sources of support if in difficulty
Manage risks and key stakeholders
• Conduct
• Regulation
• Credit
• Liquidity
• Competition
• Operations
• Reputation
• Business strategy
• Cyber risk
Reinvest in our
core assets
Reward providers
of funding
Manage
costs
• Networks
• People
• Technology
• Brands
• Debt
• Equity
• Network/infrastructure costs
• Interest
• Taxes
• Losses/Impairments
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Why we are different
How we create value
Culture
Providing our customers with ‘a helping, but firm hand’ is
an approach that is embedded deeply within each of our
businesses. Whilst we operate within a strict framework of
clear processes and procedures, we are entrepreneurial and
are not afraid to try new things if we think they will make a
positive difference. We listen carefully, learn fast and don’t
blame others when we make mistakes. Instead, we aim to
learn from them so that we can deliver better outcomes
for our customers and greater long-term returns for
our shareholders.
See Corporate and social responsibility section on page 46
Management
NSF is led by a highly experienced Board and senior
management team with extensive knowledge of the sector
and a proven track record of building businesses and
creating value for shareholders.
See Governance section on page 50
Infrastructure
Our large branch and agent networks mean we can meet
the vast majority of our customers face-to-face. However,
we have also invested in sophisticated technology platforms
that are improving our customer service and collection
capabilities. Whilst more expensive to operate than some
remote-only models, our networks are highly scalable and
tend to result in much lower rates of impairment than pure
remote models.
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 page 30
Access to
long-term
funding
The Group is financed through a combination of long-term
debt and equity to meet the growth plans of each of our
business divisions.
See Financial Review on page 33
Customers
Feefo rating1
4.9/5
(2017: 4.8/5)
Net promoter
scores2
98%
(2017: 97%)
Trust Pilot3
90%
(2017: 91%)
FOS complaints4
0.01%
(2017: 0.00%)
Shareholders
Loan book growth5
Branch-based
lending
25%
(2017: 21%)
Return on assets5
Branch-based
lending
15.8%
(2017: 15.3%)
Guarantor loans
Guarantor loans
11.3%
(2017: 13.1%)
Home credit
17.7%
(2017: (4.8)%)
Number of
branches/offices
134
(2017: 125)
61%
(2017: 34%)
Home credit
2%
(2017: 49%)
Payout ratio6
63%
(2017: 64%)
People
Total training days7
4,460
(2017: 3,217)
Communities
Number of
staff
863
(2017: 751)
Number of
self-employed
agencies
897
(2017: 1,005)
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, based on 3,867 reviews with a maximum score of 5. The same score for TrustTwo was 4.5 out of 5 based on 514 reviews (2017: 4.7/5).
2 Percentage of customers that were ‘very satisfied’ or ‘quite satisfied’ with overall services at Loans at Home – last survey based on 300 responses (January to December 2018)
(2017: 299 responses (January to December 2017)).
3 TrustPilot.com is an online review community website. Based on 2,290 reviews, 90% rated George Banco as ‘Excellent’ (2017: 91%).
4 Number of upheld cases at the Financial Ombudsman Service as a percentage of 278,468 loans written in 2018 (2017: 250,483 loans written): Everyday Loans: 20 cases
(2017: 3 cases); TrustTwo and George Banco: 4 cases (2017: 3 cases); Loans at Home: 8 cases (2017: 6 cases).
5 See glossary of alternative performance measures and key performance indicators in the Appendix.
6 Based upon 2018 normalised earnings per share before deferred consideration of 4.14p (2017: 3.44p) and a total dividend per share of 2.60p (2017: 2.20p). See glossary
of alternative performance measures and key performance indicators in the Appendix.
7 Total for Everyday Loans, Guarantor Loans Division and Loans at Home (staff and agents).
OverviewStrategic ReportGovernanceFinancial Statements
Group Chief Executive’s report
The Group has
continued to make
good progress
Having come to the end
of a period of significant
investment and structural
change, the Group is well-
positioned for further growth.
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“ Whilst less than
five years old, NSF
is firmly established
as a leading player
in three segments
of the UK’s
non-standard
finance sector
John van Kuffeler
Group Chief Executive
Summary of 2018 full-year results
Year to 31 December
Normalised revenue1
Reported revenue
Normalised operating profit1
Reported operating profit
Normalised profit before tax1
Reported (loss) before tax
Normalised profit after tax1
Reported (loss) after tax
Normalised earnings per share2
Reported (loss) per share
Full-year dividend per share
2018
£’000
166,502
158,824
35,876
19,517
14,769
(1,590)
11,572
(1,679)
3.70p
(0.54)p
2.60p
2017
£’000
119,756
107,771
23,684
3,802
13,203
(13,021)
10,890
(10,335)
3.44p
(3.26)p
2.20p
%
change
+39%
+47%
+51%
+413%
+12%
+88%
+6%
+84%
+8%
+84%
+18%
Context for results
• The 2018 and 2017 results are not strictly
The key operational and strategic milestones
achieved during the year included:
comparable as (i) George Banco was acquired
on 17 August 2017; and (ii) from 1 January 2018
the Group adopted IFRS 9, a new accounting
standard covering financial instruments that
replaces IAS 39: Financial Instruments:
Recognition and Measurement.
• As permitted by IFRS 9, comparative information
for 2017 has not been restated. Refer to notes
to the financial statements for the transitional
impact of IFRS 9.
• The 2018 and 2017 reported results include fair
value adjustments, amortisation of acquired
intangibles and exceptional items relating to
acquisitions. Normalised results are presented
to demonstrate Group performance before
these items.
• Normalised operating profit in 2018 has
been reduced by a £1.4m accounting charge
(2017: £nil) for deferred consideration payable
to vendors of George Banco that remained
as employees of the Group.
2018 full-year results
The Group has continued to make good progress.
Each of our chosen segments of the non-standard
finance sector are delivering in line with our
plans for loan book growth whilst impairment
remains under tight control. This result was
achieved despite continued investment in our
branch networks, our people and our technology
– a process that has been underway for the past
two and a half years. Having now completed
this phase of particularly intense investment in
the Group, we are well-placed to both achieve
our future growth plans and deliver sustained
earnings growth.
Branch-based lending:
• net loan book3 up 25% to £186.2m
•
•
• 99 new staff added
• over 1.6 million loan applications processed,
impairment stable at 21.5% of revenue1
12 new branches opened taking the total to 65
up 59%
• over 61,000 active customers, up 30%
Guarantor loans:
• net loan book3 up 61% to £83.1m
•
rate of impairment as a percentage of revenue1
well below the market leader
• over 758,000 loan applications processed,
up 66%
• move to a single loan management platform for
new loans completed on time and on budget
• added 31 new staff and moved to larger
premises in Trowbridge
• over 25,000 active customers, up 44%
Home credit:
• net loan book3 up 2% to £41.0m, after 49%
growth in 2017
impairment down from 37.6% to 32.6% of revenue1
•
• 93% of all new applications were processed
through the new lending app (2017: 25%)
increased efficiency through a number
of technology-led process improvements
• more streamlined management structure
•
in place from January 2019
Group:
• additional £70m of long-term funding now
•
in place
recommended final dividend of 2.00p per share
totalling 2.60p per share for the full year
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
2 Basic and diluted earnings (loss) per share based on the weighted average number of shares in issue of 312,713,410 (2017: 316,901,254).
3 For reconciliation of net loan book growth see table in Financial Review.
OverviewStrategic ReportGovernanceFinancial Statements 14
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29%
Loan book growth for
the Group as a whole.
On a like-for-like basis, the combined net loan book
at 31 December 2018 increased by 29% to £310.3m,
before fair value adjustments (2017: £241.2m) and to
£314.6m (2017: £253.1m) after fair value adjustments.
A summary of the other key performance indicators
for each of our businesses for 2018 is shown in the
table below.
(6)%
Reduction in
impairment from
27.1% to 25.6%.
A strong performance across all three divisions
helped to increase normalised revenue by 39% to
£166.5m (2017: £119.8m) whilst the sale of a small
non-performing loan portfolio generated other
operating income of £1.6m in the period (2017: £1.9m).
Despite the strong loan book growth, impairment
remained under tight control and was either within
or below our previous guidance. Despite higher
administration costs due to the opening of new
branches and a £1.4m accounting charge for
deferred consideration, normalised operating profit
increased by 51% to £35.9m (2017: £23.7m) reflecting
the operational gearing inherent within the business.
A full-year impact of the acquisition of George
Banco and associated debt refinancing in August
2017 meant that interest costs doubled to £21.1m
(2017: £10.5m). As a result of these higher charges,
mitigated somewhat by the benefit of share
buy-backs during the year, normalised earnings
per share increased by 8% to 3.70p (2017: 3.44p).
The Group’s 2018 and 2017 reported or statutory
results are significantly affected by the acquisition
of George Banco, fair value adjustments, the
amortisation of acquired intangibles associated
with the acquisitions of Everyday Loans, Loans at
Home and George Banco and the adoption of IFRS 9.
Reported revenue after fair value adjustments
increased by 47% to £158.8m (2017: £107.8m)
reflecting strong loan book growth and the
inclusion of George Banco for a full period.
Administration costs increased to £97.8m for the
reasons outlined above (2017: £77.1m) together with
a full period of intangibles amortisation associated
with the acquisition of George Banco. There were
no exceptional items incurred during 2018 (2017:
£6.3m), the prior year figure having been due to the
write-off of previously capitalised fees associated
with a prior period debt raising. The net result was
that the reported loss before tax was £1.6m (2017:
loss of £13.0m) and the reported loss per share was
0.54p (2017: loss per share of 3.26p).
IFRS 9 Key performance indicators1
Year ended 31 Dec 18
Loan book growth
Revenue yield
Risk adjusted margin
Impairments/revenue
Impairments/average net loan book
Operating profit margin
Return on assets
Branch-
based
lending
24.7%
46.8%
36.7%
21.5%
10.1%
33.8%
15.8%
Guarantor
loans
Home
credit
61.0%
32.2%
25.8%
20.0%
6.4%
35.2%
11.3%
2.0%
171.5%
115.6%
32.6%
55.9%
10.3%
17.7%
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
The strong performance on a normalised basis and
our confidence in the outlook means that the Board
is recommending a final dividend of 2.00p making
a total of 2.60p for the year (2017: 2.20p). This
represents an 18% increase versus last year.
Branch-based lending
As our largest business, the performance of Everyday
Loans is a key driver of the Group’s overall financial
results. The trajectory that we have seen over the
last couple of years continued during 2018 and the
business’s unrivalled position in the market delivered
record levels of revenue and operating profit. The
value of loans issued in the year increased by 28%
to £149.5m (2017: £117.1m). A slight shift in mix meant
that average revenue yields also increased to
46.8% (2017: 44.0%). However, this strong lending
performance was not at the expense of a reduction
in the quality of our collections, as evidenced by
stable impairment as a percentage of normalised
revenue of 21.5%. The net result was that normalised
operating profit (before fair value adjustments,
amortisation of acquired intangibles and exceptional
items) was up 19% to £27.0m (2017: £22.7m).
Our investment in a further 12 new branches and
associated infrastructure during the period was
a key driver behind this strong performance.
With 65 branches open at the year end, we
have almost doubled the size of the network
since acquiring the business in April 2016. Our
latest assessment of market demand is that we
now see scope for between 100–120 branches
and we plan to open somewhere between five
and 10 branches per annum each year for the
foreseeable future. It is expected that this more
modest rate of branch expansion will allow annual
growth to flow through into profit more quickly.
Guarantor loans
Following the acquisition of George Banco
in August 2017, our guarantor loans division
became our second largest and fastest growing
business. The market demand for guarantor loans
shows no signs of slowing down and despite
our continued investment in the integration of
systems and processes, our net loan book still
grew by 61% to reach £83.1m (2017: £51.6m).
Increases in both the quality and number of leads
reflected our focus on improving our customer
journey which is helping to increase our appeal
among financial brokers. The net result was
that normalised operating profit increased
more than two-fold to £7.7m (2017: £2.7m).
Despite having increased staff numbers
significantly in 2018, we were still able to
deliver productivity improvements, helping
to drive business volumes further. Now that
all loans are being written on a common loan
management platform, we are focused on
delivering additional enhancements to our
customer journey, improvements that should help
drive growth in 2019 whilst maintaining a tight
control on impairment.
Home credit
The benefits of the significant expansion that took
place in 2017 continued to flow through into the
2018 full-year profit performance. As predicted at
the time of the half year results in August 2018,
whilst year-on-year growth slowed in the second
half of 2018, the net loan book still reached £41.0m
at the year-end (2017: £40.2m), an increase of 2%
over the prior year. Our continued investment in
technology and systems underpinned our ability to
manage this growth effectively and also helped to
reduce impairment from 37.5% to 32.6% of
normalised revenue.
A small shift in business mix towards larger,
long-term loans meant that average revenue yield
fell slightly. However, we expect this shift to be
temporary and have already begun to shorten
the book with the result that yields should recover
during 2019 as we return to a more normalised
balance across each of our term products. The net
effect was that normalised operating profit was up
116% to £6.7m (2017: £3.1m).
Having enjoyed a period of exceptional growth
during 2017 and into 2018, we now expect our home
credit business to return to a more normalised,
single-digit rate of annual loan book growth
reflecting the underlying demand for home credit
and further migration of customers towards the
larger players, including Loans at Home. Whilst
we expect top-line growth to be modest going
forward, we remain comfortable with our internal
target of a long-term return on asset of at least
20% (before central costs).
Digital transformation
98%
Lending App usage
98% of our lending volume so far
in 2019 is going through our
online app.
Coventry is one of our
newest branches.
15
Strategy
Whilst less than five years old, NSF is already firmly
established as a leading player in three segments
of the UK’s non-standard finance sector with a
combined net loan book of £310.3m (before fair
value adjustments) and over 180,000 customers.
Our purpose and business strategy remain
unchanged. As a Group we aim to provide
affordable credit to the estimated 10 million
consumers1 that because of a poor or thin credit
rating, may be unable or unwilling to borrow from
more mainstream lenders. The reality is that many
such consumers have few other sources of finance
open to them and so we are meeting an important
need, extending the availability of credit to many
who might otherwise be financially excluded.
To fulfil this purpose, our business strategy has
three distinct elements2:
•
•
•
to be a leader in each of our chosen segments;
to invest in our core assets (networks, people,
technology and brands); and
to act responsibly.
Each element has required significant investment
over the past two and a half years, investment
that is already starting to help drive revenue and
operating profit in all three of our business divisions.
Each division has a top three position in its own
segment of the non-standard finance market, high
risk-adjusted margins and an ability to deliver
sustained and long-term returns for shareholders.
This goal is underpinned by our objective to build
strong, long-term relationships with our customers,
something that lies at the heart of our business
model (see page 10). Our preferred path to
achieving this when lending direct is to meet our
customers face-to-face, although we are also
happy to do so through remote channels, when
and if a guarantor is present.
Such an approach is seen by some as being
‘old-fashioned’ and/or ‘inefficient’. Certainly,
the infrastructure required in the form of national
networks and large numbers of well-trained
people means that our model is more expensive
to operate than pure online providers. However,
personal contact with our customers is an essential
part of our underwriting process, one that has
proven its ability to succeed whilst many digital
models continue to be plagued by unsustainable
rates of impairment and/or online fraud.
In executing our business strategy, 2018 saw us
conclude what has been a particularly intense
period of investment and structural change in the
Group, details of which are set out in each of the
divisional reports within the 2018 Financial Review
on pages 33 to 45. More normalised levels of
investment in the Group going forward mean that
we are well-placed to reap the rewards of our
investment to-date and to deliver sustained
earnings growth.
1 L.E.K. Consulting and Company estimates.
2 For further details regarding the Group’s business strategy
please visit www.nsfgroupplc.com.
OverviewStrategic ReportGovernanceFinancial Statements 16
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“ 2019 has started well
John van Kuffeler
Group Chief Executive
Funding
The Group secured a further £70m of additional
debt funding in August 2018 on similar terms to the
then existing arrangements. As a result, the Group
now has total committed debt facilities of £330m.
The facilities now comprise a £285m term loan
facility (the ‘Term Loan’), provided by a group
of institutional investors, led by Alcentra Limited.
The Term Loan, which is not repayable until August
2023, bears an interest rate of LIBOR plus 7.25%
per year with interest payable every six months.
In addition, the Group has a £45m revolving credit
facility provided by Royal Bank of Scotland at
an interest rate of LIBOR plus 3.5% per year.
As at 31 December 2018 the Group had cash at
bank of £13.9m (2017: £11.0m) and gross borrowings
of £272.8m (2017: £208.1m) leaving total headroom
on the Group’s debt facilities of £57.2m (2017: £51.9m).
We are exploring a range of possible long-term
debt financing options for the Group and will
provide further updates as and when appropriate.
Regulation
After an extensive investigation into the high-cost
credit market, including home credit, the regulator
published their final rules and guidance1 in
December 2018. The operational changes required
are not expected to have a material impact on our
home credit business and we expect all changes to
be fully embedded before the end of March 2019.
Through our FCA contacts during 2018 we believe
we have established a good working relationship
with the regulator at both an operational as well
as a strategic level.
We continue to monitor all regulatory
developments closely and where appropriate, will
participate fully in any related consultations or
debate. We are also ready to implement any
appropriate measures that can further improve the
delivery of great outcomes for our customers or
that may be deemed necessary. We remain on
track to implement the requirements of the
forthcoming Senior Managers and Certification
Regime when it comes into force during the second
half of 2019.
For further details regarding the latest regulatory
developments, please visit the Company’s
corporate website: www.nsfgroupplc.com.
Final dividend
Having declared a half-year dividend of 0.6p per
share in August 2018 (2017: 0.5p), the Board is
recommending a final dividend of 2.00p per share
(2017: 1.70p), making a total of 2.60p for the year as
a whole (2017: 2.20p).
If approved at the Company’s Annual General
Meeting on 1 May 2019, the final dividend would be
paid to those shareholders on the Company’s share
register on 3 May 2019 (the ‘Record Date’), with
payment being made on 7 June 2019.
Possible implications of Brexit
Employment in the UK remains at an all-time high
and real earnings growth is recovering, albeit
slowly, factors that bode well for our customer
base. Whilst macroeconomic and political
uncertainty surrounding the possible implications
of Brexit remain significant, we have not seen any
notable effect on our business to-date and past
recessions have demonstrated the contra-cyclical
character of the non-standard market.
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. 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.
Current trading and outlook
2019 has started well with loan book growth in line
with plan and impairment tightly controlled.
As evidenced by our recommended increase in
the final dividend, we remain positive about the
Group’s full-year prospects and look forward with
confidence.
John van Kuffeler
Group Chief Executive
14 March 2019
1 FCA – CP18/43 High-cost
Credit Review: Feedback on
CP18/12 with final rules and
guidance and consultation
on Buy Now Pay Later offers.
17
Our purpose is to provide
affordable credit to those
who are unable or
unwilling to borrow from
mainstream lenders.
As we do so, we seek to
deliver positive outcomes for
key stakeholders, including
customers, investors,
employees, partners and
the communities in which we
live and work.
OverviewStrategic ReportGovernanceFinancial Statements 18
Feature: Branch-based lending
Now there is a
new branch near
me, I was able
to sort things
face-to-face.
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“ Meeting our customers
face-to-face helps us
to improve our
assessment of a
customer’s ability
to repay and also
identify any potential
vulnerabilities
Miles Cresswell-Turner
CEO of Everyday Loans
Feature: Branch-based lending
19
Stakeholder outcomes
Highlights
Investors
Increased geographic
coverage has helped us
to process more leads
and issue more loans,
increasing both revenue
and profitability.
Customers
55% of all UK postcodes are
now within 45 minutes
driving time of one of our
branches, increasing our
reach and allowing us to
serve more customers.
+25%
Increase
in net loan book1
+30%
Increase
in customer
numbers to 61,200
Investors
To support the opening
of more branches we
have invested in effective
recruitment and training to
underpin the delivery of
strong loan book growth
whilst maintaining a tight
control on impairment.
Employees
As well as adding 99 new
staff, we also delivered
over 1,600 training days
(2017: 1,500) helping staff to
improve their performance
and career progression.
Investors
Operational efficiency has
increased with improved
conversion and record
levels of lending.
Employees
Average level of bonus-
related pay increased by
9.4% as a result of strong
performance against a
range of operational KPIs
throughout 2018.
0%
Impairment remained
stable at 21.5% of
normalised revenue2
(2017: 21.5%)
+17%
more new borrower
applications processed
by our branch network
9%
conversion of
pre-screened
applications into loans
booked (2017: 7%)
1 Before fair value adjustments.
2 See glossary of alternative performance measures and key
performance indicators in the Appendix.
OverviewStrategic ReportGovernanceFinancial Statements Being closer to our customers
makes it easier for them to come
and meet with us face-to-face,
a key element of our overall
lending process. Having more
branches also increases our
capacity to write loans and
collect them effectively.
Investing in
network capacity
Since April 2016, we have opened
29 new branches and added almost
200 new staff. We now believe that
there is sufficient demand to support
100 to 120 branches across the UK
and so plan to continue to expand
our network, albeit at a more
moderate pace of between five
and ten branches per annum.
Link to strategy
and business model
Investing in our core assets is a
central pillar of our business strategy
(see Our strategy and KPIs on
page 26). At the centre of our business
model (see page 10) is the fact that
when lending direct, we look to meet
our customers face-to-face.
As well as delivering attractive
returns for our shareholders, the
personal interaction with our staff is
something that our customers value
highly, as evidenced by our high rates
of customer satisfaction and low
numbers of complaints. Overleaf
we explain how investing in our
network capacity has benefited
our key stakeholders.
Feefo rating1
4.9/5
Statistic caption
1 www.feefo.com is a third-party customer
Giae seriam remodia comnis quid
fugitam, tem sedisqui utem quam.
review site. It invites customers at Everyday
Loans to review our performance. The rating
shown is the aggregation of all scores
received for Everyday Loans with a maximum
score of 5.
Investing in great outcomes
New branch
openings
Staff
recruitment
and training
Sharing best
practice
20
Feature: Guarantor loans
The staff were
really friendly, had
all of my details to
hand and really
put me at ease.
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21
Stakeholder outcomes
Highlights
Employees
With a common
infrastructure, our staff can
now both write and collect
loans for each of our
brands, creating greater
flexibility and injecting
additional capacity during
particularly busy periods.
Investors
As well as reducing costs,
the benefits of having a
single, robust platform also
include: scalability with
limited further investment;
real-time and improved
data analytics; better
customer retention; an
ability to launch additional
brands at low marginal
cost; and more efficient
deployment of staff.
Investors
Greater automation has
both increased capacity
and helped to maintain
high normalised operating
profit margins of 35.2% in
2018 (2017: 37.8%).
Partners
Increased capacity has
increased conversion which
is good news for our panel
of financial brokers that
were the source of 53% of
the new cash issued in 2018.
Investors
Sharing best practice has
delivered meaningful
improvements in a number
of key areas including
conversion, productivity and
delinquency management.
Regulators
A common set of processes
and procedures ensures a
greater consistency in
approach, making it much
easier to identify if
something is not working as
it should and then take the
necessary steps to correct it.
+61%
Increase
in net loan book1
+44%
Increase
in customer
numbers to 25,100
+73%
Increase
in lending volume to
£65.2m (2017: £37.6m)
+77%
Increase
in the number of
training days to 399
(2017: 226)
1 Before fair value adjustments.
OverviewStrategic ReportGovernanceFinancial Statements To take full advantage of the
strong demand for credit requires
investment in our products,
processes and systems. Our vision
is to develop a more tailored
approach, one that ensures
we continue to deliver great
outcomes for our customers whilst
at the same time increasing our
operational efficiency.
Secure and robust
technology
infrastructure
The presence of a guarantor means
that we are happy to lend remotely,
without first meeting the borrower
face-to-face. However, to do
so effectively requires a robust
and highly scalable technology
infrastructure, one that continues
to evolve as we improve our
customer journey.
The integration of George Banco
and TrustTwo onto a single loan
management platform was
completed during 2018 enabling
the final elements of our target
operating model to be finalised
and implemented during the first
half of 2019.
Link to strategy and
business model
Being a leader in our chosen markets
is a core pillar of our business strategy.
We are the clear number two in
guarantor loans and whilst smaller
than the market leader, we are
increasing our market share through
a continuous process of product,
systems and process innovation.
Overleaf we explain how investing
in our technology has helped us to
achieve this whilst benefiting our
key stakeholders.
+61%
Increase in the number
of loans booked in 2018.
Investing in great outcomes
Single loan
management
platform
Greater
automation
Training and
sharing of best
practice
22
Feature: Home credit
Everything is easier
now my agent does
everything through
her phone.
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23
Stakeholder outcomes
Highlights
Investors
Despite the capital
investment required, the
transformation of our
operations to digital has
helped to facilitate significant
growth in our net loan book
since 2016, reduced direct
operating costs and helped
to mitigate the risk of poor
customer outcomes.
Customers and
self-employed agents
Agents now have all of their
customers’ loan details at
their fingertips and can
quickly capture the details
required to issue new loans
as well as provide accurate
and up-to-date information
on their account.
+28%
Increase
in normalised revenue1
99%
of customers were
very satisfied or
quite satisfied2
Investors
By identifying outliers across
a series of KPIs, managers
are now able to focus on
the core drivers of value for
the business, helping to
drive improved operating
performance.
Customers
As well as financial
performance metrics,
agents’ and managers’
performance is also
monitored against a
range of good customer
outcomes metrics with poor
performance resulting in
the potential clawback
of rewards gained for
financial outperformance.
Regulators
As an FCA-regulated
business, ensuring data
security for our customers as
well as our regulators is key.
Investors
Cyber is a key risk for the
Group and is one we take
very seriously. During 2018
we completed the move of
all of Loans at Home’s key
digital infrastructure into the
Cloud with Microsoft Azure,
that provides the very
highest standards of
infrastructure security
and support.
+26%
Increase
in collections to
£125.9m (2017: £99.7m)
99.8%
uptime since the migration3
1 See glossary of alternative performance measures and key
performance indicators in the Appendix.
2 Tracker Research: Results to September 2018: All respondents
excluding refused (Jan, Feb & Mar 2018: 300) (April, May & June
2018: 299) (July, Aug & Sept 2018: 299).
3 Figure would have been 99.9% but for a nationwide outage
that impacted 25 million users on the O2 network in early
December 2018.
OverviewStrategic ReportGovernanceFinancial Statements Home credit has been a valued
source of credit for some of the
UK’s lowest income consumers
for over 130 years.
Transforming our
business through
technology
Advances in technology have
transformed our business model to
one where lending and collecting
can now be recorded in real-time
with benefits for customers, agents,
staff and investors whilst providing
greater regulatory oversight.
Link to strategy and
business model
Acting responsibly is the third pillar of
our business strategy. With a clear
audit trail of agent activity and by
automating several administrative
tasks, managers can spend more
time with agents and customers,
helping to improve our service and
mitigate conduct risk (see Principal
risks on page 30).
Overleaf we explain how our
investment in technology has
transformed our business and
benefits our key stakeholders.
93%
of new loans in 2018
were completed using
our digital lending
application process
(2017: 25%).
Investing in great outcomes
Digitising our
lending and
collections process
Real-time
management
information
Data security
and reliability
24
Our strategy and KPIs
Being a leader
in each of our
chosen segments
Our goal is to be the best at what we do
– not just from a customer’s perspective,
but also from that of our other key
stakeholders including employees,
our regulators and our communities.
“ We are focused
on being the best,
delivering great
outcomes for
customers and
long-term returns
for shareholders
John van Kuffeler
Group Chief Executive
While credit markets have continued to evolve
through changes in technology, regulation and
consumer demand, we believe that the core
elements of what good lending looks like have
not changed:
Everyday Loans received
a Gold Trusted Service
certificate in February
2018 from Feefo in
recognition of its high
rating by customers.
tailor our products to suit their needs;
• know our customers really well;
•
• deliver great customer service; and
•
if they get into difficulty, work with them
to achieve a satisfactory solution for both
borrower and lender.
This is to certify
Everyday Loans
Has achieved the high standard required for
Gold Trusted Service
Based on the genuine ratings of
their verified customers
Andrew Mabbutt
CEO, Feefo Holdings Ltd
February 2018
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Progress and outlook
Whilst robust procedures, policies and a well-
invested infrastructure are important for any
successful regulated lender, the importance of
our people in ensuring we achieve our goal to be
a leader in our chosen markets has meant that
we have also continued to invest in promoting
the right culture and ethos at all levels of our
business. This has included extensive training,
improved communications and a balanced
incentive structure that is heavily influenced by
the delivery of good customer outcomes. Each
of these initiatives mean we are well-positioned
to maintain our leadership positions in 2019.
1 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. For guarantor loans the score is for TrustTwo only.
2 % of respondents to a customer survey that said they were very satisfied or quite satisfied. 2018 KPI
relates to period January to December 2018 based on 300 responses. 2017 KPI relates to period July,
August, September, October, November, December 2017 based on 299 responses.
3 Key performance indicators are on the basis that IFRS 9 had been adopted from 1 January 2017. 2016
KPIs have not been restated and are presented under IAS 39. George Banco is included in 2018 and
2017 KPIs but not in 2016. See glossary of alternative performance measures and key performance
indicators in the Appendix.
KPI measure
Rationale
Medium-term target
2018 KPI
Status
25
Number of active
customers
Evidence that our reach and
quality of service is driving
customer volumes.
We have increased our target
for branch-based lending
and guarantor loans
reflecting the pace of growth
in recent years.
Branch-based lending
100,000
(2017: 60,000)
Branch-based lending
2018
61,200
2017
2016
47,050
39,600
Guarantor loans
50,000
(2017: 30,000)
Home credit
120,000
(2017: 120,000)
Guarantor loans
2018
2017
2016
3,300
25,100
17,400
Home credit
2018
2017
2016
Customer satisfaction
A lead indicator of future
business volumes given our
numbers of repeat customers
and customer referrals.
Branch-based lending1
>4.5/5
Branch-based lending
2018
2017
2016
Guarantor loans1
>4.5/5
(2017: >4.5/5)
Home credit2
>95%
(2017: >95%)
Branch-based lending
20%
(2017: 20%)
Guarantor loans
30%
(2017: 20%)
Home credit
2–5%
(2017: 20%)
Branch-based lending
35%
(2017: 35%)
Guarantor loans
30%
(2017: 30%)
Home credit
115%
(2017: 95%)
Annual loan book growth3 With a larger loan book we
can reach more customers
and deliver attractive returns
to shareholders. We don’t
want to grow too quickly as
this can lead to operational
challenges, impacting
performance.
Risk adjusted margin3
We have increased our
target for guarantor loans
and reduced it for home
credit, reflecting the outlook
for both segments.
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.
We have adjusted our
targets to reflect the
impact of IFRS 9 which has
particularly affected risk
adjusted margins in the
home credit business.
Return on assets3
Green
Amber
Red
Already achieving
medium-term target
On track to achieve
medium-term target
Not yet on track to meet
medium-term target
This shows we are allocating
capital properly and
delivering the returns
required by our shareholders.
Whilst the investment in
all three divisions in recent
years means we are not yet
at our target, we made solid
progress in 2018. The pace of
growth in the guarantor loans
loan book, particularly in the
second half, held back the KPI
for 2018 as a whole.
Branch-based lending
20%
(2017: 20%)
Guarantor loans
20%
(2017: 20%)
Home credit
20%
(2017: 20%)
93,800
104,100
93,600
4.9/5
4.8/5
4.8/5
4.5/5
4.6/5
4.7/5
98%
97%
98%
25%
61%
49%
36.7%
34.6%
35.1%
25.8%
29.3%
26.7%
115.6%
111.4%
97.3%
15.8%
15.3%
17.1%
Guarantor loans1
2018
2017
2016
Home credit2
2018
2017
2016
Branch-based lending
2018
2017
2016
21%
18%
Guarantor loans
2018
2017
2016
34%
19%
Home credit
2%
2018
2017
2016
19%
Branch-based lending
2018
2017
2016
Guarantor loans
2018
2017
2016
Home credit
2018
2017
2016
Branch-based lending
2018
2017
2016
Guarantor loans
2018
2017
2016
11.3%
13.1%
8.5%
Home credit
2018
2017
2016
(4.8)%
6.7%
17.7%
OverviewStrategic ReportGovernanceFinancial Statements 26
Our strategy and KPIs continued
Investing in
our core assets
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.
“ Having secured
leading positions
in each of our
three segments,
we expect the need
for significant
capital investment
to reduce, allowing
greater returns
to flow to our
shareholders
Nick Teunon
Chief Financial Officer
In 2018 we completed the final phase of significant
investment with expansion in all three divisions:
• Branch-based lending – 12 new branches opened
• Guarantor loans – integration onto a single
loan management platform, new office location
in Trowbridge
• Home credit – roll-out of handheld technology
complete and all key infrastructure now
cloud-based
Progress and outlook
In branch-based lending we opened a further
12 new Everyday Loans branches during the year
and added almost 100 new staff. In guarantor
loans we added 19 new staff, moved to a new
office in Trowbridge and integrated onto a single
loan management platform. In home credit, we
completed the migration of our systems into the
cloud and processed 93% of all loans issued
through our new digital lending app (with 98% of
all loans so far in 2019 being processed this way).
In 2019 we plan to continue to build on our strong
market positions through further investment, albeit
at a more modest rate than in 2018, 2017 and 2016.
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98%
of all new loans in
home credit so far in
2019 have been issued
using our lending app.
27
KPI measure
Rationale
Medium-term target
2018 KPI
Status
Number of
branches/offices
People turnover
% of the number of
loans booked in the year
to new customers2
By increasing our geographic
coverage we can be closer
to customers. Following a
detailed review of the market
we have increased our
medium-term target in
branch-based lending.
We aim to keep this within
industry norms by offering
competitive financial
rewards and creating
environments where people
enjoy their work. We have
increased our medium-term
targets in branch-based
lending and guarantor loans
to reflect the fact that we are
growing much faster than
previously expected.
We need to continue to
attract new customers as
well as look after existing
ones if we are to succeed.
The different dynamics of
our three divisions means
that new customers are most
important in branch-based
lending and guarantor loans.
Branch-based lending
100–120
(2017: 70–80)
Branch-based lending
2018
65
2017
2016
53
41
Home credit
75–80
(2017: 75–80)
Branch-based lending
20%
(2017: 15%)
Guarantor loans
20%
(2017: 15%)
Home credit1
<5%
(2017: <5%)
Branch-based lending
65–70%
(2017: 65–70%)
Guarantor loans
65–70%
(2017: 65–70%)
Home credit
15–20%
(2017: 15–20%)
Home credit
2018
2017
2016
66
69
47
Branch-based lending
2018
2017
2016
15%
Guarantor loans
2018
2017
2016
16%
Home credit1
2018
2017
2016
2%
Branch-based lending
2018
2017
2016
Guarantor loans
2018
2017
2016
n/a
Home credit
2018
17%
2017
2016
20%
19%
36%
37%
3%
3%
73%
70%
67%
64%
62%
26%
24%
1 Average monthly turnover of self-employed agents, excluding vacancies (monthly leavers as a % of
total number of agents).
2 Proportion of loans booked in a year to new or previous borrowers (i.e. excluding existing borrowers).
Already achieving medium-term target
Green
Amber On track to achieve medium-term target
Red
Not yet on track to meet medium-term target
OverviewStrategic ReportGovernanceFinancial Statements 28
Our strategy and KPIs continued
Acting
responsibly
‘Doing the right thing’ is one of our core
business values and runs throughout all
of our activities, policies and procedures.
“ Being aware of our
responsibilities to a
broad group of
stakeholders helps
to ensure that our
business model can
be both improved
and sustained
Heather McGregor
Chair, Risk Committee
Our focus on ‘doing the right thing’ applies
whenever we interact with our key stakeholders:
our customers, investors, employees, partners
and the communities where we work.
Our KPIs are designed to help us measure
our performance so that we can identify
areas of potential risk and determine
whether or not our working practices can
be improved or need to change.
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NSF is a founding supporter of Loan Smart, a charity established to
help consumers avoid loan sharks and offering guidance on where
to get debt-related advice. See more at www.loansmart.org.uk.
29
KPI measure
Rationale
Medium-term target
2018 KPI
Status
Impairment as a %
of revenue1
Number of FOS
complaints upheld as
a % of total number of
loans made
Lending is easy, but lending
responsibly and profitably is
more difficult – this measure
helps us balance loan book
growth and short-term
profitability. Grow too quickly,
or lend when you shouldn’t,
and impairment will increase
to unacceptable levels as
customers fall into arrears.
Note that 2017 targets were
set under IAS 39. The revised
targets reflect the adoption of
IFRS 9 (see Financial Review
on page 33).
Whilst focused on delivering
great customer outcomes,
we don’t get everything right
all of the time. Careful
monitoring of all complaints
shines a light on areas of
our service that need to
improve. That said, the
number of upheld complaints
remains low.
Staff engagement surveys With over 860 staff and their
PPI
importance in helping us
to deliver a great service,
engagement is critical and
without it we will not succeed.
Branch-based lending
20–22%
(2017: 20–25%)
Branch-based lending
2018
2017
2016
21.5%
21.5%
20.0%
20.0%
Guarantor loans
2018
2017
2016
15.5%
14.8%
Home credit
2018
2017
2016
32.6%
37.6%
36.3%
Guarantor loans
20–22%
(2017: 13–17%)
Home credit
33–37%
(2017: 30–35%)
Branch-based lending
Branch-based lending
<1%
2018
0.0%
2017
0.0%
Guarantor loans
<1%
Guarantor loans
2018
0.0%
2017
0.0%
Home credit
<1%
Home credit
0.0%
2018
2017
0.0%
Branch-based lending2
>70%
Branch-based lending
2018
98%
2017
71%
Whilst we have yet to conduct
a survey across the entire
guarantor loans division, we
intend to do so in 2019.
Home credit3
>75%
Home credit
2018
2017
82%
89%
Charitable
giving
In 2017 the Group adopted a formal charity policy to provide financial support for debt-related as well as other
charities. Our chosen charities in 2018 included: The Alzheimer’s Society, National Debtline (run by The Money
Advice Trust) and Loan Smart.
1 Key performance indicators are on the basis that IFRS 9 had been adopted from 1 January 2017. 2016
KPIs have not been restated and are presented under IAS 39. See glossary of alternative
performance measures and key performance indicators in the Appendix.
2 Percentage of staff that scored at least 4 out of 5 in response to the question ‘I am satisfied working
at Everyday Loans’ – leadership survey in May 2018 (2017: November 2017).
3 Percentage of respondents scoring 4 out of 5 or higher in response to the question ‘I enjoy coming to
work/I have fun at work’ – internal survey in October/November 2018 (2017: Q4 2017).
Already achieving medium-term target
Green
Amber On track to achieve medium-term target
Red
Not yet on track to meet medium-term target
OverviewStrategic ReportGovernanceFinancial Statements 30
Principal risks
A rigorous
approach to risk
management
Our principal risk categories
5.3
5.2
6
1
5.1
4
2
3
Very High
High
Medium
2018 assessment
2017 assessment
Business strategy
Conduct
Regulation
1
2
3 Credit
4
5.1 Business risk – operational
5.2 Business risk – reputational
5.3 Business risk – cyber
6
Liquidity
Note that Credit Risk is now deemed to be ‘low’
and Business Strategy Risk remains ‘low’ and so
they do not feature in the chart above.
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There are a number of potential risks that
could have a material impact on the Group’s
performance and that might cause actual
financial results to differ materially from both
expected and historic results.
During 2018, the Group implemented the core components of
Xactium, a Group-wide Risk Management System. The process of
embedding this system into each division has helped to reinforce
robust First Line risk management activity and is helping to
provide clear Second Line oversight across the Group. Adopting
a Group-wide approach also allows risks to be considered and
reported on a thematic basis at Group level whilst continuing to
ensure there is a clear audit trail through to the operational
detail. The new system is expected to become fully embedded
over the next 12–18 months and will also help to enhance the
quality and depth of risk reporting in future periods.
The chart opposite highlights each of the principal risk
categories identified by the Board via the new Risk Management
System (i.e. those with the highest residual risk ratings for the
Group). The following table goes into more detail and identifies
for each risk category (i) what we are doing to manage these
risks; (ii) whether each risk has increased, decreased or stayed
the same over the past year; and (iii) where there has been a
change, a brief explanation as to why the change has occurred.
Following the announcement of a firm offer for Provident
Financial plc on 22 February 2019, if the offer is successful, then
certain of the key risks identified in the following pages may
change or additional risks may be identified. Further details of
such risks are contained in the prospectus issued in connection
with the firm offer and which is available on the Group’s website,
www.nsfgroupplc.com.
For further information on our approach to risk, please see the
Risk Committee report on page 65.
Decreased
Increased
Unchanged
Risk/definition
Mitigation
Change
in 2018
Explanation
31
1. Conduct
Inappropriate or sub-standard
behaviour by the Group’s
representatives.
• A strong culture committed to ‘doing the right
thing’ and delivering great outcomes for
customers
• Extensive training
• Close and active monitoring of customer
complaints
• Balanced incentive programme
• Clear policies and procedures, including
whistleblowing
• Carefully designed incentive programmes with
appropriate malus and clawback provisions when
required standards are not met
• Diligent application of ‘Three Lines of Defence’:
– policies, procedures and quality assurance in
customer-facing roles;
– compliance and conduct assurance; and
– internal audit.
In Q4 2018 we appointed an internal candidate as
Group Risk Officer who is responsible for managing the
risk and compliance functions within each of our three
operating divisions. This helps to ensure a consistent
approach in our management of key risks, including
conduct risk.
In branch-based lending and guarantor loans
we have enhanced the assessment of customer
applications, thereby improving our overall sales
process. Governance and remuneration schemes have
also been reviewed and revised ensuring the business’s
success is built upon good customer outcomes.
In home credit, the business has continued to embrace
and implement technology solutions to ensure that
the whole customer journey can be supported digitally,
from application, to agent collections. The launch of
a customer portal in Q4 2018 now allows customers
to have direct access to their account information
online 24/7.
A review of remuneration schemes is currently taking
place, ensuring that good customer outcomes
continue to be at the heart of how we reward our
people and business assurance processes have been
further enhanced.
All of the Group’s business divisions are fully authorised
by the FCA.
Having now completed its in-depth review of high-cost
credit, the FCA has introduced some additional
operational requirements for regulated home credit
firms but these are not expected to have any material
impact on the Group.
• 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
• A continuous process of investment, quality
assurance and internal audit reviews ensures
we meet all of our regulatory obligations
2. 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.
A list of the key regulatory
developments over the past
year is available on the
Group’s website:
www.nsfgroupplc.com.
3. Credit
Any marked increase in the
rates of impairments or
defaults by the Group’s
customers could impact the
performance of the Group.
4. Business strategy
A risk that the Group’s strategy
fails to deliver the outcomes
expected. 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 weekly and monthly management
information on historic and expected future credit
performance
• Continuous process of review and refinement
of each business’s credit scorecard and
lending criteria
• Regular credit committee reviews of policies
and outcomes
The levels of impairment in all three business
divisions remained within (or below) our tolerance
levels during 2018.
Credit risk no longer features as a ‘top risk’ as the Group
now has controls in place to mitigate the residual risk
rating to within appetite which are now included within
the risk system score.
• Detailed due diligence is completed on all
acquisitions with advice from specialists on
legal, financial and regulatory aspects
• Detailed review of weekly and monthly
management information on operating
performance
• Careful monitoring of market dynamics,
competitor behaviour and performance
• The Board conducts an annual review of
all aspects of the Group’s strategy
The Group delivered strong loan book growth with high
risk-adjusted margins in 2018.
No acquisitions were made in 2018.
On 22 February 2019, the Company announced a firm
offer to acquire Provident Financial plc. The outcome
of the proposed acquisition is not yet known, however,
the Board believes that the transaction represents a
compelling strategic and financial opportunity to create
shareholder value. The execution risk of the transaction
has been assessed and has been considered in the
Directors’ assessment of going concern and viability.
OverviewStrategic ReportGovernanceFinancial Statements 32
Principal risks continued
Decreased
Increased
Unchanged
Risk/definition
Mitigation
Change
in 2018
Explanation
There is no plan to migrate any of the historic George
Banco loans to the new system – these will continue
to be managed on the previous system that will be
decommissioned when all loans have matured
(expected in three or four years).
Phase II of the integration of George Banco and TrustTwo
is now underway to align the customer journeys for both
brands – this is due to complete during 2019.
The Government has announced a series of
consultations into working practices in the UK including
one on employment status. As a result, the employment
status of self-employed workers for a number of UK
business models may be subject to change.
While agent-related incidents are rare, we continue to
ensure that agents follow carefully designed procedures
so they remain safe. A tight span of control helps to
provide appropriate oversight of all areas of our home
credit business.
The Group is able to recruit the people that it needs to
execute its plans and while there is a degree of staff
turnover, this is within accepted levels of tolerance.
We continue to engage actively with all of our key
stakeholders, including the FCA, Members of
Parliament, debt-related charities, other regulators,
journalists, think-tanks, investors and debt providers.
Through this process of engagement, we aim to
demonstrate that not all consumer finance companies
are the same – we explain why we are different and
why we believe that NSF stands out from competitors.
This has included supporting the launch of a new
charity: Loan Smart, that is focused on helping
consumers wise up to the dangers of illegal lending.
5.1 Business risk (operational)
Key areas of operational risk for
the Group include:
• IT policies are in place to mitigate risk
including disaster recovery plans
• IT failure
• integration of George Banco
and TrustTwo onto a single
technology platform
• fraud
• changes in the self-
employed status of home
credit agents
• threats to agent safety
• failure to recruit and retain
key staff
• underperformance by
key staff
• disaster recovery and
business continuity
• George Banco has been successfully launched
onto the Everyday Loans loan management
platform, with all new loans now being written
this way. This integration was completed on
schedule and on budget
• Policies, procedures and extensive training is 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
• A series of recruitment, retention and incentive
programmes are already in place
• Members of the NSF management team sit
on and attend all board meetings of the
operating subsidiaries
• Detailed business continuity plans have
been prepared and adopted by all three
business divisions
5.2 Business risk (reputational)
Whilst embodied within the
business risk category, damage
to the Group’s reputation is
identified separately as a key risk
for the Group.
• As a listed company 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 Corporate and Social
Responsibility on pages 46 to 49).
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.
5.3 Business risk (cyber)
The Group may suffer data loss
or be subject to an unauthorised
change that causes a security
issue, data or systems abuse,
cyber-attack or denial of service
to any of the Group’s systems.
6. Liquidity
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• The Group has dedicated internal teams,
supported by external providers that monitor
and assess such risks
• Divisional and Group Risk Committees oversee
cyber risks including monitoring and crisis
management plans in line with industry
best practice
• Internal audit and external third-party review
of cyber security status across all businesses
Increased criminal activity together with the increasing
importance of data and data analytics means that this
risk has been identified separately from operational risk.
Many recent examples of where such risks have become
reality, together with concerns raised by the FCA mean
that the Group now views such risks as being greater
than previously and as a result is continuing to invest
in ensuring our systems and data are protected.
The Group may not be able to
meet its financial obligations
because it:
• The Group’s short-term loans to customers
provide a natural hedge against medium-term
borrowings
• 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
• The Group increased its long-term debt
funding arrangements in September 2018
on similar terms as its previous facilities
• The £285m term loan facility is not repayable
until 2023 and is supplemented by a £45m
revolving credit facility
• Cash and covenant forecasting is conducted
on a monthly basis as part of the regular
management reporting exercise
With net debt1 of c.£259m and total debt facilities of
£330m at 31 December 2018, the Group has sufficient
headroom on its existing facilities to fund the Group’s
growth plans.
Given the high growth expected in both branch-based
lending and guarantor loans, the Group is likely to
commence a process to add further long-term funding
during the second half of 2019.
1 See glossary of alternative performance measures and key
performance indicators in the Appendix.
2018 Financial Review
33
A further year of
investment-led
growth
Nick Teunon
Chief Financial Officer
Context for 2018 Group results
• The 2018 and 2017 results are not strictly
comparable as (i) George Banco was acquired
on 17 August 2017; and (ii) from 1 January 2018
the Group adopted IFRS 9, a new accounting
standard covering financial instruments that
replaces IAS 39: Financial Instruments:
Recognition and Measurement.
“ Normalised
operating profit rose
by 51%
Nick Teunon
Chief Financial Officer
• As permitted by IFRS 9, comparative information
for 2017 has not been restated. Refer to notes to
the financial statements for the transitional
impact of IFRS 9.
• The 2018 and 2017 reported results include fair
value adjustments, amortisation of acquired
intangibles and exceptional items relating to
acquisitions. Normalised results are presented
to demonstrate Group performance before
these items.
• Normalised operating profit in 2018 has been
reduced by a £1.4m accounting charge (2017:
£nil) for deferred consideration payable to
vendors of George Banco that remained as
employees of the Group.
2018 financial summary
Year ended 31 December 2018
Revenue
Other operating income
Modification loss
Impairments
Admin expenses
Operating profit
Exceptional items
Profit (loss) before interest and tax
Finance cost
Profit (loss) before tax
Taxation
Profit (loss) after tax
Earnings (loss) per share1
Dividend per share
Normalised1
£’000
Fair value adjustments,
amortisation of acquired
intangibles and exceptional items
£’000
166,502
1,626
(482)
(42,688)
(89,082)
35,876
–
35,876
(21,107)
14,769
(3,197)
11,572
3.70p
2.60p
(7,678)
–
–
–
(8,681)
(16,359)
–
(16,359)
–
(16,359)
3,108
(13,251)
Reported
£’000
158,824
1,626
(482)
(42,688)
(97,763)
19,517
–
19,517
(21,107)
(1,590)
(89)
(1,679)
(0.54)p
2.60p
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
OverviewStrategic ReportGovernanceFinancial Statements 34
2018 Financial review continued
Year ended 31 December 2017
Revenue
Other operating income
Impairments
Admin expenses
Operating profit
Exceptional items
Profit (loss) before interest and tax
Finance cost
Profit (loss) before tax
Taxation
Profit (loss) after tax
Earnings (loss) per share2
Dividend per share
Normalised1
£’000
Fair value adjustments,
amortisation of acquired
intangibles and exceptional items
£’000
119,756
1,926
(28,795)
(69,203)
23,684
–
23,684
(10,481)
13,203
(2,313)
10,890
3.44p
2.20p
(11,985)
–
–
(7,897)
(19,882)
(6,342)
(26,224)
–
(26,224)
4,999
(21,225)
Reported
£’000
107,771
1,926
(28,795)
(77,100)
3,802
(6,342)
(2,540)
(10,481)
(13,021)
2,686
(10,335)
(3.26)p
2.20p
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
2 Basic and diluted earnings (loss) per share based on the weighted average number of shares in issue of 312,713,410 (2017: 316,901,254).
Normalised revenue was up 39% to £166.5m
(2017: £119.8m) reflecting strong loan book growth
and a full-year’s contribution from George Banco.
Despite the inclusion of a full-year fair value
adjustment to revenue for George Banco for the
first time, a reduced adjustment for both Everyday
Loans and Loans at Home in 2018 meant that
reported revenue increased by 47% to £158.8m
(2017: £107.8m). Whilst underlying growth and
associated infrastructure investment resulted in
a marked uplift in administration costs (that also
included an accounting charge of £1.4m for
deferred consideration associated with the
acquisition of George Banco), normalised operating
profit rose by 51% to £35.9m (2017: £23.7m). This
was driven by strong loan book growth and
careful management of both impairment and
administration costs. A full period of George
Banco meant that the reported operating
profit was up four-fold to £19.5m (2017: £3.8m).
There were no exceptional items incurred
during 2018 (2017: £6.3m), the prior year having
included the write-off of previously capitalised
fees incurred in connection with the Group’s
previous debt raising as well as M&A-related
costs. Finance costs increased significantly to
£21.1m (2017: £10.5m) due to increased levels
of borrowing and the higher borrowing cost
of the Group’s new debt arrangements.
The net result was that the Group reported a
much reduced reported loss before tax of £1.6m
(2017: loss of £13.0m). The tax charge of £0.1m
(2017: credit of £2.7m) meant that the Group
reported a loss after tax of £1.7m (2017: £10.3m)
equating to a reported loss per share of 0.54p
(2017: loss per share of 3.26p).
A detailed review of each of the operating
businesses’ normalised results are set out below.
Normalised divisional results
The table below provides an analysis of the
‘normalised’ results for the Group for the 12-month
period to 31 December 2018. Management believes
that by removing the impact of non-cash and
other accounting adjustments, the normalised
results provide a clearer view of the underlying
performance of the Group. Note that the 2017
results include four months’ contribution from
George Banco that was acquired on 17 August 2017
and have not been restated to reflect the adoption
of IFRS 9, a new accounting standard covering
financial instruments that replaces IAS 39: Financial
Instruments: Recognition and Measurement
(see note 3 to the Financial Statements).
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NSF plc
£’000
166,502
1,626
(482)
(42,688)
124,958
(89,082)
35,876
(21,107)
14,769
(3,197)
11,572
3.70p
2.60p
NSF plc
£’000
119,756
1,926
(28,795)
92,887
(69,203)
23,684
(10,481)
13,203
(2,313)
10,890
3.44p
2.20p
2017
Reported
£m
153.4
59.6
40.2
253.1
Year ended 31 December 2018
Normalised1
Revenue
Other operating income
Modification loss
Impairments
Revenue less impairments
Admin expenses
Operating profit
Finance cost
Profit before tax
Taxation
Profit after tax
Normalised earnings per share
Dividend per share
Year ended 31 December 2017
Normalised1
Revenue
Other operating income
Impairments
Revenue less impairments
Admin expenses
Operating profit
Finance cost
Profit before tax
Taxation
Profit after tax
Normalised earnings per share
Dividend per share
Branch-based
lending
£’000
Guarantor
loans
£’000
79,579
1,397
(482)
(17,099)
63,395
(36,488)
26,907
(12,778)
14,129
(2,612)
11,517
21,748
229
–
(4,342)
17,635
(9,983)
7,652
(5,833)
1,819
(645)
1,174
Branch-based
lending
£’000
Guarantor
loans
£’000
60,937
1,926
(11,654)
51,209
(28,555)
22,654
(7,051)
15,603
(3,146)
12,457
8,078
–
(1,365)
6,713
(3,965)
2,748
(2,029)
719
(130)
589
Home
credit
£’000
65,175
–
–
(21,247)
43,928
(37,214)
6,714
(2,461)
4,253
(774)
3,479
Home
credit
£’000
50,741
–
(15,776)
34,965
(31,863)
3,102
(1,299)
1,803
88
1,891
Central
costs
£’000
–
–
–
–
–
(5,397)
(5,397)
(35)
(5,432)
834
(4,598)
Central
costs
£’000
–
–
–
–
(4,820)
(4,820)
(102)
(4,922)
875
(4,047)
Reconciliation of net loan book under IFRS 9
Reconciliation of net loan book
under IFRS 9
Branch-based lending
Guarantor loans
Home credit
Total
2018
Normalised
£m
2018
Fair value
adjustments
£m
2018
Reported
£m
2017
Normalised
£m
186.2
83.1
41.0
310.3
–
4.3
–
4.3
186.2
87.4
41.0
314.6
149.4
51.6
40.2
241.2
2017
Fair value
adjustments
£m
4.0
8.0
–
12.0
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
OverviewStrategic ReportGovernanceFinancial Statements 36
2018 Divisional overview
Branch-
based
lending
Established over 12 years ago, Everyday
Loans is now the only significant branch-
based provider of unsecured loans in the
UK’s non-standard finance sector.
Since becoming part of NSF in 2016, the business has undergone
significant investment and structural change, including the rapid
expansion of its branch network and investment in the requisite
infrastructure to support a much larger and faster growing business.
The branch network has almost doubled under our ownership
with 65 branches across the UK at the end of 2018. This
increased capacity has helped to grow the active customer
base which rose by 30% in 2018 to 61,200 (2017: 47,000) as well
as the net loan book, up 25% to £186.2m (2017: £149.4m). Key
drivers for the business include network capacity, lead volume
and quality, network productivity and tight management of
impairment. A summary of our progress on each of these drivers
is highlighted below.
Network capacity – For a new branch to succeed we look for areas
of population with at least 70,000 adults matching our desired
customer type. In areas with sufficient lead volumes, an additional
branch or headcount means we can start to convert more
leads into loans. Whilst the up-front investment and associated
infrastructure costs mean that new branches typically take 11–12
months to break-even, within three to five years of opening we
would expect a mature branch to generate annual operating profit
of between £0.8m and £1.0m, before central costs. Our most
successful branch is already generating profits above this range,
providing a real-life example of what can and is being achieved.
As well as increasing our overall capacity, additional branches
can also help to increase conversion by reducing the distance that
customers have to travel to a branch and by reducing the time
taken by the network to respond to an application.
Lead volumes and quality – As well as increasing capacity with
more branches, we also sought to ensure a continued flow of
high-quality leads, that once through our initial screening criteria,
can be passed on to the branch network. Having processed over
one million leads in 2017, this increased to over 1.6 million in 2018,
an increase of 59%. The majority of this increase came from
a concerted effort to deepen our relationship with a discrete
number of financial brokers. While the scale of this increase
meant that there was a reduction in quality, the number of new
borrower applications sent to branch (‘ATBs’) increased by 17%
to 366,000 (2017: 313,700).
UK Market
Our customers2
£197m
2017 receivables
outstanding1
£29,580 p.a.
Average income
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Estimated compound
annual growth (‘CAGR’)
2014–20171
£3,335
Typical loan size
1%
Estimated share of the UK
non-standard consumer
credit market in 20171
90.4%
Average APR
1 L.E.K. Consulting, December 2018 and Company estimates.
2 Company data.
37
Productivity – Opening branches tends to reduce average
productivity in the short-term as a new branch tends to be
sub-scale in terms of numbers of customers and size of loan book
and also because new staff take time to match the performance
of their more experienced colleagues. We aim to minimise this
risk by recruiting new managers from within the network and
through a rigorous recruitment process for more junior staff
followed by an intensive induction and training programme –
the objective being that when a new staff member arrives
in the branch, they are able to write and process a new loan
application and can contribute from day one. During 2018
we wrote 37% more loans than in 2017 reaching 44,841 in total
(2017: 32,668), and achieved an improved conversion rate on
new borrower applications to branch of 9.0% (2017: 7.3%).
Delinquency management – With 12 years of customer data,
across a broad range of customer types, Everyday Loans has
developed a highly robust underwriting process, evidenced by
an impressive track record of managing impairment within a
tight range since the financial crisis. Having augmented our
collections tools and improved our overall contact strategy
during 2018, impairment as a percentage of average net
receivables increased slightly to 10.1% (2017: 9.5%) but remained
stable relative to normalised revenue at 21.5% (2017: 21.5%).
Whilst we continue to seek further improvements in impairment,
we are being careful to ensure that any reductions are not at the
expense of business volume, overall profitability or the delivery
of good customer outcomes.
2018 results
Normalised revenue increased by 31% to £79.6m (2017: £60.9m)
driven by the increased capacity and lead volumes outlined above
as well as by an improved performance from branches opened in
2016 and 2017. Fair value adjustments to revenue reduced to £4.0m
(2017: £11.9m) resulting in reported revenue of £75.6m (2017: £49.1m).
A change in the way that rescheduled loans are accounted for
resulted in a small increase to revenue, off-set by a modification
loss of £0.5m (2017: £nil). Other operating income of £1.4m
(2017: £1.9m) arose from the sale of a small, non-performing
loan portfolio. While increased business volumes meant that
the absolute level of impairments increased under IFRS 9 to £17.1m
(2017: £11.7m), on a like-for-like basis, the rate of impairment as
a percentage of normalised revenue was stable versus the prior
year and remains within our previous guidance of 20–22% –
see glossary of alternative performance measures and key
performance indicators in the Appendix.
Opening 12 new branches required significant investment,
in premises and associated infrastructure as well as on the
recruitment and training of new staff. This rate of expansion
was a drag on profit growth in 2018, something that should
not be repeated with our more modest plan for seven new
branches in 2019. The total number of full-time employees at the
year-end was 406 (2017: 307), an increase of 32%. As a result,
administrative expenses increased to £36.5m (2017: £28.6m)
equivalent to 46% of normalised revenue (2017: 44%). The net
impact of all of these movements was that normalised operating
profit increased by 19% to £27.0m (2017: £22.7m) while reduced
amortisation charges meant that reported operating profit
increased by 112% to £22.9m (2017: £10.8m). There were no
exceptional costs incurred in 2018 (2017: £5.3m) while the prior
year total related to the refinancing of the Everyday Loans bank
facilities and restructuring costs.
Higher finance costs of £12.8m (2017: £7.1m) were driven
by strong loan book growth and a full-year’s impact of the
increased average cost of the Group’s new debt arrangements
with the net result that normalised profit before tax decreased
by 10% to £14.1m (2017: £15.6m). The absence of any amortisation
of acquired intangibles meant that reported profit before tax
increased substantially to £10.2m (2017: loss of £1.6m).
2018
Fair value
adjustments
and
exceptional
items
£’000
(3,958)
–
–
–
(3,958)
–
(3,958)
–
(3,958)
–
(3,958)
752
2018
Normalised1
£’000
79,579
1,397
(482)
(17,099)
63,395
(36,488)
26,907
–
26,907
(12,778)
14,129
(2,612)
2018
Reported
£’000
75,621
1,397
(482)
(17,099)
59,437
(36,488)
22,949
–
22,949
(12,778)
10,171
(1,860)
11,517
(3,206)
8,311
2017
Fair value
adjustments,
amortisation
of acquired
intangibles
and
exceptional
items
£’000
(11,874)
–
(11,874)
–
(11,874)
(5,290)
(17,164)
–
(17,164)
3,274
2017
Normalised1
£’000
60,937
1,926
(11,654)
51,209
(28,555)
22,654
–
22,654
(7,051)
15,603
(3,146)
2017
Reported
£’000
49,063
1,926
(11,654)
39,335
(28,555)
10,780
(5,290)
5,490
(7,051)
(1,561)
128
12,457
(13,890)
(1,433)
Year ended 31 December
Revenue
Other operating income
Modification loss
Impairments
Revenue less impairments
Admin expenses
Operating profit
Exceptional items
Profit before interest and tax
Finance cost
Profit before tax
Taxation
Profit after tax
Year ended 31 December
Revenue
Other operating income
Impairments
Revenue less impairments
Admin expenses
Operating profit
Exceptional items
Profit before interest and tax
Finance cost
Profit before tax
Taxation
Profit after tax
1 See glossary of alternative performance measures and key performance indicators
in the Appendix.
IFRS 9 key performance indicators
With little change to the shape of the loan book, there was
only a slight change in revenue yield which increased to 46.8%
(2017: 44.0%) and so revenue growth was driven largely by loan
book growth. As noted above, despite strong growth in the loan
book and an influx of new staff, the strength of our underwriting
and collections processes meant that impairment remained
under tight control at 21.5% of revenue (2017: 21.5%), feeding
through into an increased risk adjusted margin of 36.7%
(2017: 34.6%).
OverviewStrategic ReportGovernanceFinancial Statements
38
2018 Divisional overview continued
“ Impairment
remained stable at
21.5% of normalised
revenue (2017: 21.5%)
Nick Teunon
Chief Financial Officer
The investment in 12 new branches together with associated costs
of recruitment, training and other costs meant that the normalised
operating profit margin was slightly lower at 33.8% (2017: 34.8%)
but the return on asset increased to 15.8% (2017: 15.3%).
Year ended 31 December
IFRS 9 Key Performance Indicators1
2018
Normalised
2017
Normalised
Lead management – we processed over 1.6 million leads in 2018,
an increase of 59% versus 2017. Thanks in part to our own efforts,
the broker channel provided the bulk of this increase and whilst
we believe that there is scope to grow broker volumes further,
we are also focused on continuing to grow volumes across other
channels whilst ensuring we maintain a tight control on the
quality and cost of customer acquisition.
Number of branches
Period end customer numbers (000)
Period end loan book (£m)
Average loan book (£m)
Revenue yield (%)
Risk adjusted margin (%)
Impairments/revenue (%)
Impairment/average loan book (%)
Operating profit margin (%)
Return on asset (%)
65
61.2
186.2
170.0
46.8
36.7
21.5
10.1
33.8
15.8
53
47.0
149.4
138.3
44.0
34.6
21.5
9.5
34.8
15.3
1 See glossary of alternative performance measures and key performance indicators
in the Appendix.
Plans for 2019
The fundamentals are positive with the demand for non-
standard credit continuing to be strong: there are very few
profitable direct competitors; there are no other branch-based
lenders seeking to reach our customers; and the Group has
access to significant long-term debt funding. Our plan for 2019
is to continue to drive loan book growth whilst retaining a tight
grip on impairment by executing the following initiatives:
Branch openings – we now see an opportunity to have
somewhere between 100 and 120 branches over the next five
years. Having opened 29 new branches since April 2016, we plan
to expand at a more modest rate than in the past thereby allowing
the benefit of annual growth to flow through to profits more
quickly. We expect to open somewhere between five and ten
branches each year for the foreseeable future and have identified
seven new branches to open during the first half of 2019.
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Productivity gains – our bespoke recruitment, induction and
training programmes have been invaluable in helping to
maintain productivity during a period of rapid expansion.
We will continue to seek productivity gains through additional
training and sharing of best practice, improved management
information and systems and by greater automation/
centralisation of certain administration tasks in the branches.
Having added 176 new staff since 2016, we will look to extract
further productivity gains from them in 2019 as their collective
performance improves with greater experience, bolstered by
additional training.
Delinquency management – further enhancements to our
contact strategy and the roll-out of a customer-led automated
payments system across the network should both help to
maintain our strong delinquency performance.
The Offer to acquire Provident, if successful, is expected
to provide significant opportunities for our branch-based
lending business. Further details can be found in the Offer
document published on 9 March 2019 and which is available
on the Group’s website, www.nsfgroupplc.com.
39
Guarantor
loans
Our guarantor loans division made
excellent progress in 2018, driven by
strong demand and an improved
operational performance.
UK Market
UK Customers
£658m
2017 receivables
outstanding1
£26,100 p.a.
Average net income2
37.5%
Estimated CAGR 2014–20171
£3,940
Typical loan size2
4%
Estimated share of the UK
non-standard consumer
credit market in 20171
1 L.E.K. Consulting, December 2018 and Company estimates.
2 FCA: High-Cost Credit Review Technical Annex 1.
The size of the UK guarantor loans market is continuing to
grow rapidly and L.E.K. Consulting estimates that the value
of outstanding net receivables at the end of 2017 had reached
£658m, a compound annual growth rate of 37.5% since 2014.
Whilst estimates for the size of the market in 2018 are not yet
available, taking the size of our own net loan book and that of
the market leader at the end of December 2018 would imply it
is now likely to be closer to £1bn.
Most customers apply online, often via a broker, or by phone.
However, unlike our other two divisions, the presence of a
guarantor means we are happy to lend to a customer without first
meeting them face-to-face. After having passed an initial credit
check, both borrower and guarantor are contacted by phone and
each is assessed for their creditworthiness and ability to afford
the loan. In addition, the guarantor’s role and responsibilities
are clearly explained and recorded. This is to ensure that while
the borrower is primarily responsible for making the repayments,
both the borrower and the guarantor (in the event of default)
are both clear about their obligations and are also capable
of repaying the loan. The presence of a suitable guarantor
means that, in most circumstances, an applicant with a thin
or impaired credit file is able to borrow at a much lower rate
of interest than if they had taken out the loan on their own.
Loan volumes increased by 71% to £65m (2017: £38m) whilst
the quality of leads improved with an increasing proportion
of leads passing through our internal scorecard (32% were
approved in principle versus 27% in 2017). This helped to improve
our conversion rate of applications into loans. Our continued
investment in training and systems were key factors in this effort
and conversion increased as a result with a record number
of 17,393 loans written for a total value of £65m during the
year (2017: 10,766 loans and £38m respectively). We continued
to maintain a healthy balance between new and existing
customers of approximately 64:36 (2017: 62:38) with the result
that customer numbers grew by 44% to 25,100 (2017: 17,400).
This was delivered whilst at the same time achieving a number
of operational milestones.
OverviewStrategic ReportGovernanceFinancial Statements 40
2018 Divisional overview continued
Move to a single loan management platform – all new loans for
both George Banco and TrustTwo are now being written onto
one platform, a complex but important step that has improved
the quality of management information and over time will result
in cost savings.
Development of a more tailored customer journey – with a single
loan management system in place we can now begin the final
step towards our target operating model: a seamless lending
and collecting process across both brands using a common
lending approach but tailored for different customer journeys
depending on a variety of factors such as channel, risk profile of
the applicant and guarantor and the size of the loan. This should
be in place during 2019.
Maintain a well-balanced channel mix – we have continued to
build on the Group’s existing relationships to help maintain a
strong presence in the important broker market whilst also
ensuring a healthy balance of leads and loans written through
other channels.
New premises in Trowbridge – George Banco moved to new
premises in Trowbridge in October 2018. The new office, which
was secured at a reduced cost from the previous location,
has provided additional capacity for further expansion.
Harmonised collections – having centralised our collections
expertise in Trowbridge during the fourth quarter of 2018
we now have a consistent approach across both brands
and hope that this may help as we strive to extract some
improvements in delinquency performance in 2019.
The result was that the net loan book increased by 61% to reach
£83.1m at 31 December 2018 (2017: £51.6m). This was well ahead
of our internal target of 20% annual loan book growth and
represents a total increase of over 90% since we acquired
George Banco in August 2017.
2018 results
The results for 2018 and 2017 are not strictly comparable as 2018
includes a full period of George Banco while the 2017 results
include four and a half months of George Banco which was
acquired on 17 August 2017. In addition, the 2017 results have not
been restated for the introduction of IFRS 9 which was adopted
from 1 January 2018.
Significant loan book growth, together with a full period’s
contribution from George Banco meant that normalised revenue
increased by 169% to £21.7m (2017: £8.1m). Reported revenue was
impacted by a marked increase in the fair value adjustment to
revenue reflecting a full period of the fair value unwind that
totalled £3.7m (2017: £0.1m).
A full period of George Banco expenses, including an
accounting charge for deferred consideration payable to
vendors who remained as employees of George Banco of £1.4m
(2017: £nil), the addition of 31 new staff and increased lending
volumes together meant that administration costs increased to
£10.0m (2017: £4.0m) with the result that normalised operating
profit increased to £7.7m (2017: £2.7m).
Higher finance costs of £5.8m (2017: £2.0m) were driven by strong
loan book growth and the impact for a full period of the terms
of the new debt arrangements that were put in place at the
time of the George Banco acquisition. The net result was that
normalised profit before tax reached £1.8m (2017: £0.7m). The
absence of any exceptional items (2017: £0.2m) meant that
reported loss before tax was £1.9m (2017: profit of £0.4m) as a
result of the £3.7m fair value unwind that reduced reported
revenue (2017: nil).
Year ended
31 December 2018
Revenue
Other income
Impairments
Revenue less cost
of sales
Admin expenses
Operating profit
Exceptional items
Profit before
interest and tax
Finance cost
Profit/(loss) before
tax
Taxation
Profit/(loss) after
tax
Year ended
31 December 2017
Revenue
Impairments
Revenue less
impairments
Admin expenses
Operating profit
Exceptional items
Profit before
interest and tax
Finance cost
Profit before tax
Taxation
Profit after tax
2018
Fair value
adjustments and
exceptional
items
£’000
2018
Normalised1
£’000
21,748
229
(4,342)
17,635
(9,983)
7,652
–
7,652
(5,833)
1,819
(645)
(3,720)
–
–
(3,720)
–
(3,720)
–
(3,720)
–
(3,720)
707
2018
Reported
£’000
18,028
229
(4,342)
13,915
(9,983)
3,932
–
3,932
(5,833)
(1,901)
62
1,174
(3,013)
(1,839)
2017
Fair value
adjustments and
exceptional
items
£’000
2017
Normalised1
£’000
8,078
(1,365)
6,713
(3,965)
2,748
–
2,748
(2,029)
719
(130)
589
(111)
–
(111)
–
(111)
(230)
(341)
–
(341)
65
(276)
2017
Reported
£’000
7,967
(1,365)
6,602
(3,965)
2,637
(230)
2,407
(2,029)
378
(65)
313
1 See glossary of alternative performance measures and key performance indicators
in the Appendix.
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IFRS 9 Key performance indicators
Even though George Banco was not acquired until 17 August
2017, the 2017 KPIs below have been adjusted to include George
Banco for a full 12 months. A shift in business mix resulted in a
small decrease in revenue yield and in risk adjusted margin that
reduced to 25.8% (2017: 29.3%). The strong rate of growth and
continued investment in the business resulted in a return on
assets of 11.3% which was down on the previous year but we
remain confident that our medium-term target of 20% can be
reached as the business continues to grow strongly.
Year ended 31 December
IFRS 9 Key Performance Indicators1
2018
Normalised
2017
Normalised
Period end customer numbers (000)
Period end loan book (£m)
Average loan book (£m)
Revenue yield (%)
Risk adjusted margin (%)
Impairment/revenue (%)
Impairment/average loan book (%)
Operating profit margin (%)
Return on assets (%)
25.1
83.1
67.6
32.2
25.8
20.0
6.4
35.2
11.3
17.4
51.6
42.4
34.7
29.3
15.5
5.4
37.8
13.1
1 See glossary of alternative performance measures and key performance indicators
in the Appendix.
The new front end will also provide a single, detailed view
of all KPIs across both brands, enabling the ability to fine-
tune all aspects of the customer journey in real-time.
Increase capacity – with space now available for up to
40 additional staff across both our locations in Trowbridge
and Bourne End, we plan to continue to increase headcount,
in line with business volumes.
Further productivity improvements – as well as increased
capacity from more staff, we also believe that there is scope
to drive additional volume as a result of further productivity
improvements from a variety of initiatives such as better use of
technology, increased training and sharing of best practice.
New products – we are exploring the opportunity for a more
flexible, risk-based pricing approach – one that will broaden
our product offering and increase the size of our potential
customer pool.
We have a strong position in the market, one that is growing
quickly. As we continue to build scale and take market share,
we remain on track to meet our target of 20% annual loan
book growth and a 20% return on assets.
Plans for 2019
The following initiatives are already underway for 2019:
Complete transition to target operating model – with a
single loan management platform in place we have begun
to implement a common booking interface for both brands.
This will, inter alia, enable any of our customer account
managers to be able to complete a loan transaction for
either of our two brands (or indeed additional brands should
we decide to introduce them) and from either of our two
locations, making it much easier to optimise staffing levels.
The Offer to acquire Provident, if successful, is expected to
provide significant opportunities for our guarantor loans business.
Further details can be found in the Offer document that was
published on 9 March 2019 and which is available on the Group’s
website, www.nsfgroupplc.com.
OverviewStrategic ReportGovernanceFinancial Statements 42
2018 Divisional overview continued
UK Market
£1.1bn
Receivables outstanding1
>400
Number of licensed firms1
1.6m
Consumers with
outstanding debt1
5%
Estimated share of the UK
non-standard consumer credit
market in 20172
UK Customers
£15,500 p.a.
Consumer median income1
£250–
£750
Typical loan size3
1 FCA: CP18/12 High-cost Credit Review: Consultation on rent-to-own,
home-collected credit, catalogue credit and store cards, and alternatives to
high-cost credit. Discussion on rent-to-own pricing, May 2018.
2 L.E.K. Consulting, December 2018 and Company estimates.
3 FCA: Sector Views 2017.
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Home
credit
The past two years have seen an
unprecedented period of structural change in
the home credit industry following a major
restructuring at the market leader in 2017, the
effects of which continued to resonate in 2018.
At the same time, we were transforming our business through
a significant investment in technology, one that has improved
both our lending and collections process as well as enhanced
the reliability and security of our IT infrastructure.
The financial impact of having recruited a large number of
highly experienced self-employed agents and management
staff in 2017 rolled through into 2018. We ended the year with
897 agencies (2017: 1,005), a decrease from the previous year,
reflecting a return to the natural rate of agent attrition and our
focus on removing agencies that were sub-scale. However,
as newly recruited agents sought to increase the size of their
individual loan portfolios, the size of the net loan book (before
fair value adjustments) at 31 December 2018 was £41.0m, up
2.0% versus the previous year (2017: £40.2m).
Our transition away from a purely paper-based lending and
collections-based process to one that can now be done entirely
using an agent’s mobile device is now complete such that 98% of
all loans are now processed using the lending app. During 2018
we enhanced the suite of applications that are helping to
improve productivity and enhance management control and
oversight. This included the automation of a series of previously
manual processes, freeing up managers to spend more time with
agents and focus on customer-related issues. We also developed
the Journey Management Performance Report (or ‘JMPR’) that
provides a range of real-time performance metrics on every
individual customer and for every agent, by location and region.
This new tool has become an invaluable aid for managers,
enabling them to identify any customer issues at a granular level
and then address them much more quickly.
As well as improving our operational procedures and
performance, we have also significantly de-risked our technology
infrastructure having migrated our previous data centre to
Microsoft Azure. This cloud-based solution has unlocked a series
of new capabilities for future technologies, reduced costs and
provided much greater protection for our data.
43
2018 results
Normalised revenue increased by 28% to £65.2m (2017: £50.7m)
and there was no adjustment for reported revenue as the unwind
of the fair value adjustment made to the carrying value of the
loan book at acquisition in 2015 is now complete.
Higher impairment of £21.2m (2017: £15.8m) reflected the move to
IFRS 9 but at 32.6% of normalised revenue was below our guided
range of 33–37%. Increased administration costs reflected the
full-year impact of the expansion undertaken in 2017 and the
average number of staff in 2018 was up 18% at 361 (2017: 305),
we ended the year with a total of 331 staff (2017: 350) as we
sought to right-size our infrastructure following a period of rapid
expansion. Normalised operating profit increased by 116% to
£6.7m (2017: £3.1m), benefiting from the significant reduction in
temporary additional commission that had been paid to newly
recruited agents during 2017 and despite the impact of IFRS 9.
There were no exceptional costs in the year, the figure for the
prior year arose from the refinancing of the Loans at Home bank
facility. The net result was that normalised profit before tax
increased by 138% to £4.3m (2017: £1.8m). Increased finance costs
of £2.5m (2017: £1.3m), reflected the growth in loan book and a
full-year impact of the increased cost of the Group’s long-term
debt arrangements that were put in place in August 2017.
2018
Fair value
adjustments
and
exceptional
items
£’000
–
–
–
–
–
–
–
–
–
–
–
2017
Fair value
adjustments
and
exceptional
items
£’000
–
–
–
–
–
(467)
(467)
–
(467)
91
(376)
2018
Normalised1
£’000
65,175
(21,247)
43,928
(37,214)
6,714
–
6,714
(2,461)
4,253
(774)
3,479
2017
Normalised1
£’000
50,741
(15,776)
34,965
(31,863)
3,102
–
3,102
(1,299)
1,803
88
1,891
2018
Reported
£’000
65,175
(21,247)
43,928
(37,214)
6,714
–
6,714
(2,461)
4,253
(774)
3,479
2017
Reported
£’000
50,741
(15,776)
34,965
(31,863)
3,102
(467)
2,635
(1,299)
1,336
179
1,515
Year ended 31 December 2018
Revenue
Impairments
Revenue less impairments
Admin expenses
Operating profit
Exceptional items
Profit before interest and tax
Finance cost
Profit before tax
Taxation
Profit after tax
Year ended 31 December 2017
Revenue
Impairments
Revenue less impairments
Admin expenses
Operating profit
Exceptional items
Profit before interest and tax
Finance cost
Profit before tax
Taxation
Profit after tax
1 See glossary of alternative performance measures and key performance indicators
in the Appendix.
IFRS 9 key performance indicators
The increased number of quality customers taking out larger,
longer-term loans meant that revenue yield reduced slightly to
171.5% (2017: 178.4%). However, the increased quality of our loan
book was reflected in the further reduction in impairment which fell
to 32.6% of revenue (2017: 37.6%), which was below our previously
guided range of 33–37%. Operating profit margins of 10.3%
benefited from the lower impairment and a marked reduction in
temporary additional commission paid to those agents recruited
in 2017. Return on asset was 17.7%, close to our 20% target.
Year ended 31 December
Key Performance Indicators1
2018
Normalised
2017
Normalised
Period end self-employed agencies
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 (%)
Impairment/average loan book (%)
Operating profit margin (%)
Return on asset (%)
897
66
93.8
41.0
38.0
171.5
115.6
32.6
55.9
10.3
17.7
1,005
69
104.1
40.2
27.4
178.4
111.4
37.6
67.0
(2.7)
(4.8)
1 For definitions see glossary of alternative performance measures in the Appendix.
Plans for 2019
After two years of exceptional expansion, 2019 will be focused
on rebalancing the loan book with a return to shorter term loans
and on increasing the percentage of quality customers, both of
which are expected to result in a more normalised rate of loan
book growth of 2–5% per annum.
The benefits of some of the technological improvements
mentioned above, coupled with a more modest rate of loan book
growth going forward, means we have been able to re-size the
management and organisation structure to better suit the scale
and growth profile of the business going forward.
The new structure, which was announced internally in January 2019
has kept the agent to business manager ratio at 6:1 and is expected
to increase operational efficiency and better align the fixed cost
base with future revenue growth.
Each of these initiatives should help us to continue to grow
profitability in 2019, albeit at a slower pace than in 2018, and we
remain on course to meet our target of a 20% return on assets
(see glossary on alternative performance measures in the
Appendix) in the medium-term.
On 22 February 2019 we announced a firm offer to acquire
Provident Financial plc including an intention to complete a
demerger of Loans at Home, to assist with the CMA competition
approval process and for Loans at Home to be admitted to
trading either on the Main Market (with a standard listing) or on
AIM. Although the timing and structure of the Demerger remain
subject to further consideration, including by the CMA, it is
expected that the Demerger would take place following
completion of the offer to acquire Provident. If successful, this
would mean that Provident shareholders who participate in the
Transaction, as well as existing NSF shareholders, would then
receive shares in the newly listed Loans at Home. As the Demerger
remains subject to review by the CMA, NSF has reserved the right
to change its strategic plans with respect to Loans at Home as
described in the Offer announcement, including (without
limitation) the timing of the Demerger. Further details can be
found in the Offer announcement issued on 22 February 2019
which is available on the Group’s website, www.nsfgroupplc.com.
OverviewStrategic ReportGovernanceFinancial Statements
44
2018 Divisional overview continued
Central costs
The increase in normalised administrative expenses to £5.4m
(2017: £4.8m), reflected, inter alia, increased costs associated
with a new 2018 Save as You Earn Scheme plus the full-year cost
of the 2017 scheme. The amortisation of acquired intangible
assets increased to £8.7m (2017: £7.9m) reflecting a reduced
charge for Everyday Loans and a full-year charge for George
Banco for the first time. The prior year exceptional item of £0.4m
comprised acquisition costs together with the write-off of the
remaining balance of capitalised fees referred to above.
2018
Amortisation
of acquired
intangibles
and
exceptional
items
£’000
–
(8,681)
(8,681)
–
(8,681)
–
(8,681)
1,649
2018
Normalised1
£’000
–
(5,397)
(5,397)
–
(5,397)
(35)
(5,432)
834
2018
Reported
£’000
–
(14,078)
(14,078)
–
(14,078)
(35)
(14,113)
2,483
2017
Amortisation
of acquired
intangibles
and
exceptional
items
£’000
–
(7,897)
(7,897)
(355)
(8,252)
–
(8,252)
1,569
2017
Normalised1
£’000
–
(4,820)
(4,820)
–
(4,820)
(102)
(4,922)
875
2017
Reported
£’000
–
(12,717)
(12,717)
(355)
(13,072)
(102)
(13,174)
2,444
(4,047)
(6,683)
(10,730)
Year ended 31 December
Revenue
Admin expenses
Operating loss
Exceptional items
Loss before interest and tax
Finance cost
Loss before tax
Taxation
Loss after tax
Year ended 31 December
Revenue
Admin expenses
Operating loss
Exceptional items
Loss before interest and tax
Finance cost
Loss before tax
Taxation
Loss after tax
1 See glossary of alternative performance measures and key performance indicators
in the Appendix.
(4,598)
(7,032)
(11,630)
IFRS 9 balance sheet
IFRS 9
The International Accounting Standard Board’s introduction of a
new accounting standard covering financial instruments became
effective for accounting periods beginning on or after 1 January
2018. This standard replaces IAS 39: Financial Instruments:
Recognition and Measurement.
The new standard requires that lenders (i) provide for the
Expected Credit Loss (‘ECL’) from performing assets over the
following year and (ii) provide for the ECL over the life of the asset
where that asset has seen a significant increase in credit risk.
As a result, whilst the underlying cash flows from the asset are
unchanged, IFRS 9 has the effect of bringing forward provisions
into earlier accounting periods. This resulted in a one-off
adjustment to receivables, deferred tax and reserves on adoption.
To assist analysts and investors, the 2017 full-year results included
a separate disclosure detailing an estimate of the expected
impact of IFRS 9 on the closing balance sheet for 2017 (and
therefore the opening balance sheet for 2018). The actual
audited figures for 2017 are slightly different from the previously
published estimates and a reconciliation between the two is
shown in the next table.
IFRS 9
estimated
2017
adjustment
£m
IFRS 9
audited
2017
adjustment
£m
IAS 392
£m
153.8
51.1
51.2
256.1
(14.7)
241.4
(1.7)
(0.9)
(10.6)
(13.2)
2.5
(10.7)
(4.4)
0.5
(11.1)
(15.0)
2.3
(12.7)
IFRS 9
2018
opening
balance
sheet
£m
149.4
51.6
40.2
241.2
(12.4)
228.8
Normalised net
loan book:1
– Branch-based
lending
– Guarantor loans
– Home credit
Total net loan book
Other
Net assets
1 See glossary of alternative performance measures and key performance indicators
in the Appendix.
2 The 2017 comparatives have been adjusted so that unamortised broker
commissions of £8.26m are included within net loan book.
The adoption of IFRS 9 resulted in a reduction in receivables of
£15.0m at 31 December 2017, which net of deferred tax, resulted
in a reduction in net assets of £12.7m. Whilst the particularly
strong loan book growth in home credit during 2017 meant that
it experienced the largest adjustment to the net loan book, net
assets and earnings, it is important to note that cash flow remains
unchanged and IFRS 9 only changes the timing of profits made
on a loan.
There has been no change to the Group’s underwriting process
and our scorecards are unaffected by the change in accounting.
The total cash flows from a loan are the same under both IAS 39
and IFRS 9 and the cash generation over the life of a loan
remains unchanged. The calculation of the Group’s debt
covenants are unaffected by IFRS 9, as they are based on
accounting standards in place at the time they were set.
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Principal risks
The principal risks facing the Group are:
• Conduct – risk of poor outcomes for our customers or other
key stakeholders as a result of the Group’s actions;
• Regulation – risk through changes to regulations or a failure
to comply with existing rules and regulations;
• Credit – risk of loss through poor underwriting or a diminution
in the credit quality of the Group’s customers;
• Business strategy – risk that the Group’s strategy fails to
deliver the outcomes expected;
– cyber – increased connectivity in the workplace coupled
with the increasing importance of data and data analytics
in operating and managing consumer finance businesses
means that this risk has been identified separately from
operational risk;
• Liquidity – whilst the Group is well-capitalised with £285m of
committed debt facilities until August 2023 and a revolving
credit facility for a further £45m, prevailing uncertainty in
global financial markets means that there is a risk that the
Group may be unable to secure sufficient finance in the future
to execute its long-term business strategy.
These risks may change if the Offer for Provident Financial plc
were to be successful.
• Business risks:
– operational – the Group’s activities are large and complex
On behalf of the Board of Directors.
and so there are many areas of operational risk that
include technology failure, fraud, staff management and
recruitment risks, underperformance of key staff, taxation,
health and safety as well as disaster recovery and business
continuity risks;
– reputational – a failure to manage one or more of the risks
above may damage the reputation of the Group or any of
its subsidiaries which in turn may materially impact the
future operational and/or financial performance of
the Group;
Nick Teunon
Chief Financial Officer
14 March 2019
OverviewStrategic ReportGovernanceFinancial Statements 46
Corporate and social responsibility
A business with
strong values
Whilst still a relatively young company,
NSF has nevertheless adopted
a cultural approach that is more
akin to that of a much larger
and long-established business.
Our cultural approach
1.
Assess current
values/behaviours
across each
business
5.
Determine desired
target values/
behaviours
2.
Identify ways to
influence values/
behaviour
4.
Identify things
that hinder/
promote good/
bad behaviour
3.
Establish metrics
to monitor
cultural
performance
Our approach
Our approach to corporate and social
responsibility is embodied within our business
culture and overall approach to stakeholder
management. Each of these dictate not just what
we do but also the way that we do it and have
been forged by the extensive experience of the
Group’s Board of Directors and senior management
team. Together, they share the view that
sustainability and operational resilience are vitally
important factors in driving long-term financial
returns and are wholly consistent with our strategy
to be a leader in each of our chosen markets
(see ‘Our strategy and KPIs’ on pages 24 to 29).
At the heart of our business model (see pages 10
to 11) is the strong relationship that we seek to
establish with our customers, one that is normally
established face-to-face, itself a process that
forms a key part of the lending process in two of
our three divisions. ‘Providing a helping, but firm
hand’ is a philosophy that is shared by each of
our businesses and will help us to achieve our
long-term financial goals.
However, we also recognise that the Group’s
ability to create long-term value can be affected,
positively as well as negatively by the way that
we manage a broader group of stakeholders.
Throughout this Annual Report you will read
examples of how our business strategy and
performance against that strategy have affected
key stakeholders and we intend to continue to
provide further updates in future reports.
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Why are our APRs so high?
In order to help answer this question, we need to explain what
happens to the revenue we generate. Compared to lenders that
are focused on serving only consumers with higher credit scores,
our APRs can seem high. For our highest APR products (in home
credit), this is often driven by the fact that loans tend to be for
short periods of less than one year and because they tend to be
for small amounts, while the costs of delivering and collecting
that loan face-to-face are relatively high – in other words, while
our business model (see page 10) is effective in reaching large
numbers of customers that are on low or variable incomes or that
have an impaired or thin credit history, it is expensive to operate.
The chart shown below illustrates what happens to NSF Group
revenue, based upon the 2018 normalised results. Whilst each of
our three businesses has different dynamics, we have sought to
provide an NSF overview as follows:
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 tend to result in higher impairments and so when
lending to such customers, lenders look to charge higher APRs.
People costs
Staff and self-employed agent costs are significant given the
scale of our face-to-face networks through which we engage
with our customers, either in a branch, or in their home.
Other admin costs
Property, IT, compliance and other infrastructure and support-
related costs are significant for branch-based lending and home
credit, requiring higher APRs in order to meet costs and deliver
an adequate financial return for investors. Business models with
lower infrastructure costs may be able to charge lower APRs if
they can also achieve low rates of impairment.
Cost of funds and taxes
Whilst we have sourced significant equity capital, the majority of
our loan book is funded by debt facilities provided by third-party
credit funds. After paying taxes due, the balance is used to
reward shareholders through dividend payments, share buy-
backs and by reinvesting funds to deliver future growth.
2018
100%
25%
Impairments
%
0
0
1
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v
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s
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34%
People costs
19%
13%
2%
7%
Other admin costs
Cost of funds
Taxes
Profit for shareholders
and/or reinvestment
Customers
Our focus is on delivering affordable credit to those
consumers that need it. As we do so, ensuring
great outcomes for our customers is a key objective
that is embodied within all of our policies and
procedures, our training programmes as well as
our incentive arrangements – it is the way we run
our business. We don’t just rely on our internal
processes to deliver and so regularly survey our
customers to find out how we are performing
and how we can improve. We also monitor
and investigate thoroughly any complaints we
receive so that we can learn from our mistakes.
(see ‘Our strategy and KPIs’ on pages 24 to 29).
Employees and self-employed agents
As a people business, we have continued to invest
in our workforce and this lies at the heart of our
business strategy. As well as a proper induction
process, we invest in extensive and tailored training
modules for all new joiners so that they can make
a contribution as soon as they start work. We also
invest in a regular programme of training for
existing staff and self-employed agents. Online
training programmes provide us with a perfect
audit trail for each participant, providing oversight
on which modules have been completed and the
achievement level attained.
As well as providing staff with a useful repository for
policies and procedures, our Group-wide intranet
has become a key communication channel for our
people and in February 2019 we were commended
by the Employee Share Ownership Plan Centre
for the way we disseminated information about
our new share save scheme across the Group.
However, candid and regular communication
must also be backed-up by the required level of
support as and when staff need it, particularly
at times of personal stress and difficulty. During
2018, we signed the TUC’s ‘Dying To Work’ Charter,
ensuring that any employee battling terminal illness
has adequate employment protection and has
their death in service benefits protected for the
loved ones they leave behind. By demonstrating
that we care deeply about our people we believe
we can instil a similar sense of responsibility in
each of them for all of our 180,000 customers.
John van Kuffeler signing the Dying to Work charter in 2018.
OverviewStrategic ReportGovernanceFinancial Statements
48
Corporate and social responsibility continued
Proportion of males
and females
receiving a bonus
payment
2018
78.5%
Male
66.9%
Female
Gender mix
As an equal opportunities employer, our workforce
has a healthy mix of gender. 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:
2018
Male
Female
Total
Number of Company
Directors
Number of senior managers
(excluding Executive
Directors), Directors of
subsidiary businesses and
heads of function
5
1
6
29
13
43
Total number of employees
473
390
863
Gender mix by pay quartile (quartile 1
being the lowest and quartile 4 being
the highest).
2018
Quartile 1
Quartile 2
Male
Female
Total
5
1
6
Male 39%
Female 61%
Quartile 3
Male 53%
Female 47%
Quartile 4
2017
2017
71.6%
Male
66.4%
Female
Number of Company
Directors
Number of senior managers
(excluding Executive
Directors), Directors of
subsidiary businesses and
heads of function
Total number of employees
406
345
36
12
48
751
Gender Pay
As we did in last year’s report, below we have
summarised our gender pay gap in accordance
with the UK Government regulations for gender
pay gap reporting. Our overall mean and median
gender pay and bonus gap reduced versus last year
based on a snapshot date of 5 April 2018 (hourly
pay) and bonus paid in the 12 months to 5 April 2018.
The figures for 2018 are as follows (the comparative
figures for 2017 are also included for reference):
Pay and Bonus – difference
between males and females1
Male 62%
Female 38%
Male 65%
Female 35%
2017
Quartile 1
Quartile 2
20182
Hourly pay gap
Bonus pay gap
20172
Hourly pay gap
Bonus pay gap
Mean
Median
24.08%
13.99%
12.50%
1.56%
Mean
Median
26.6%
35.6%
12.6%
(2.6%)
Male 39%
Female 61%
Quartile 3
Male 57%
Female 43%
Quartile 4
Why do we have a gap?
The calculation behind the gender pay gap is
not the same as equal pay. As with last year, the
underlying reason behind the gap is predominantly
due to the structure of our workforce where there is a
lower representation of women in senior leadership
roles within our business (approximately 71% of senior
roles were held by men (2017: 76%) and 29% were
held by women (2017: 24%) as at the snapshot date).
As can be seen in the quartile graphs opposite,
the gender mix shifts as we move towards the upper
(higher pay) quartiles indicating that our mean gaps
are significantly impacted by these imbalances. We
recognise that female representation is lower in the
upper quartiles and are committed to increasing the
number of women in these bands.
1 A positive percentage figure
indicates that typically
female employees have
lower pay or bonuses than
male employees.
2 Overall mean and median
gender pay and bonus gap
based on a snapshot date of
5 April 2018 and 2017 (hourly
pay) and bonus paid in the
12 months to 5 April 2018
and 2017.
Male 59%
Female 41%
Male 64%
Female 36%
Whilst we acknowledge we have a gender
pay gap, we’re clear on why it exists and
are focused on the steps we need to take to
close the gap.
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We are confident that we do not have any
processes or practices where people are being
paid differently due to their gender.
The gap in our mean figure relating to bonuses is
due to the same reasons that we have an hourly
gender pay gap: our senior workforce, which has
a different bonus structure from the rest of the
workforce, also has a greater proportion of male
employees. The equality of our pay structure is
reflected in our median pay and median bonus
figures which are not distorted by very large or
small pay and bonuses – this shows a much smaller
gap between males and females.
How are we addressing the gap?
The Office for National Statistics’ 2018 numbers3
put the mean salary gap at 33.4% for the financial
services industry. Whilst we understand our
gender profile is typical of many financial services
companies across the UK, we are committed
to addressing this through a series of actions
as follows:
•
•
improving our recruitment targeting to ensure
a diverse range of applicants are considered;
reviewing the structure of our workforce,
listening to our employees and improving our
policies around diversity;
• actively reviewing decisions around
performance, pay and bonuses;
• supporting employees through flexible working
and professional development;
• delivering tailored plans to promote gender
diversity across the Group; and
• supporting female progression into senior roles.
As well as providing competitive compensation
arrangements for both staff and self-employed
agents, we also have a Save As You Earn scheme
for all eligible Group employees. This scheme
enables staff to buy shares in Non-Standard
Finance plc in a tax-efficient way and thereby
participate in the future success of the Company.
Regulators
We maintain a regular dialogue with the FCA, both
as part of the ongoing supervision process as well
as at a more strategic level, through periodic face-
to-face meetings and by responding to relevant
FCA consultations, policy documents and research.
We also continue to keep the FCA fully informed
regarding the Group’s broader strategic plans.
Partners and suppliers
The differing nature of each of our three
divisions means that each manages its own
relationships with key partners and suppliers.
As well as keeping them informed of our business
performance through public disclosures, each
division maintains a strong relationship through
periodic conference calls and face-to-face
meetings. Whilst the focus is at divisional level,
in a limited number of cases we have been able to
make purchases of certain products and services
on a Group-wide basis such as insurance.
Providers of funding
The Company keeps shareholders, credit
funds 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.nsfgroupplc.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 equity and debt
investors on request or via organised investor
roadshows supported by the Company’s advisers,
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.
Communities, charity and the environment
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 860 staff,
890 self-employed agencies and over 180,000
customers that we serve through a network of over
130 offices across the UK, we are deeply ingrained
within the fabric of a number of local communities.
The Group made donations totalling £84,082 to a
range of charities in 2018 including The Alzheimer’s
Society, National Debtline (run by The Money
Advice Trust), Loan Smart, Cancer Research,
Dorothy House Hospice and JDRF (Juvenile
Diabetes Research Foundation). Separately, the
Group also sponsored CrXss PlatfXrm, an urban
dance, music and arts initiative encompassing an
impressive range of artistic partnerships (and
featuring over 50 artists that was held in central
London in August 2018).
Whilst we are a relatively small company
compared with many others, and given the nature
of our business, we do not believe that we have
a material impact on the environment. However,
we are growing fast and are keen to minimise
any impact that our activities might have. Having
started to capture and record data on CO2
production from car mileage as well as the volume
of water and electricity used during 2017 across all
three business divisions, an update is shown below.
2018
2017
Kg of CO2
produced
KW hours
used
M3 of
water used
292,500 1,299,408
55,802
345,000
667,253
29,389
The increase in electricity and water usage reflect
the expanded branch network as well as new
office locations for Everyday Loans and Guarantor
Loans Division.
3 ONS: Gender Pay Gap in the UK: 2018, 25 October 2018.
OverviewStrategic ReportGovernanceFinancial Statements
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Board of Directors
1.
1.
Meet the
Board
2.
5.
3.
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51
1. John de Blocq van Kuffeler, 70
Group Chief Executive
5. Charles Gregson, 71
Non-Executive Chairman
Appointed 8 July 2014
Committees None
Appointed 10 December 2014 Committees A/ N / R /RC
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.
He is also a former Chairman of the J.P. Morgan Fleming Technology
Trust PLC and the Finsbury Smaller Quoted Companies Trust PLC.
Profile
Charles is a highly experienced executive having previously held a
number of senior positions in finance. He was Non-Executive Chairman
of NEX Group plc, formerly ICAP plc from 1988 to 2 November 2018
when NEX was acquired by the CME Group. Charles was former
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; Non-Executive Director of International
Personal Finance plc from 2007 to 2010; Chairman of CPP Group plc;
and Chairman 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.
External appointments
Non-Executive Chairman of Paratus AMC Limited
2. Nick Teunon, 53
Chief Financial Officer
Appointed 8 August 2014
Committees None
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.
External appointments
None
3. Miles Cresswell-Turner, 56
Executive Director and CEO of Everyday Loans
Appointed 10 December 2014
Committees None
Profile
Before joining NSF, Miles was a partner in Duke Street LLP where he
specialised in the finance sector and 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. Miles was appointed Executive Chairman of Everyday
Loans in May 2017 and became Chief Executive of Everyday Loans in
September 2017.
External appointments
Levana Education Ltd
4. Niall Brooker, 60
Independent Non-Executive Director
Appointed 9 May 2017
Committees A /N/R/RC
Profile
Niall has spent 35 years in banking providing him with a wide range of
experience in both consumer and wholesale products. His previous roles
include being Group Managing Director and CEO of HSBC North America
where he worked through the issues in HSBC Finance Corporation and in
doing so worked closely with US regulators on these and other matters.
Most recently he was CEO of the Cooperative Bank from 2013 to December
2016 having been tasked with rebuilding the capital base, stabilising
the operational infrastructure and maintaining the franchise after the
problems the bank faced in 2013. Niall has been a member of the College
Council at Glenalmond College since 2012 and became Chairman of the
Council in August 2017.
External appointments
Chairman Glenalmond College Council
External appointments
Non-Executive Director, Senior Independent Director and Chair of the
Remuneration Committee of Caledonia Investments plc
6. Professor Heather McGregor CBE, 57
Independent Non-Executive Director
Appointed 10 December 2014
Committees A/N/R/ RC
Profile
Heather 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, an executive search
firm 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
Executive Dean of Edinburgh Business School, the graduate school of
business of Heriot-Watt University. Chairwoman of the executive search
firm Taylor Bennett and Non-Executive Director of International Game
Technology PLC
7. Sarah Day, 47
Company Secretary
Appointed 27 November 2017
Profile
Sarah qualified as a Chartered Accountant in 1999 having trained with
PwC and initially gained experience of the non-standard finance sector
via the home credit industry through involvement in external audit.
Sarah joined the Group in August 2016 as Company Secretary of the
Group’s Home Credit operation, ‘Loans at Home’, also taking on the role of
Financial Controller of the home credit operation.
Prior to joining NSF Group, Sarah worked at Provident Financial plc for 17
years, with varied roles initially working in the International Division (now
IPF) with responsibility for the smooth establishment of Finance within
overseas operations before moving to Provident UK in 2002. Her roles
within Provident covered all aspects of Finance on both the performance
and Financial Accounting sides of the function. More recently, Sarah was
responsible for UK Tax Compliance for Provident’s Consumer Credit
Business and more latterly established the UK Consumer Credit Division
Governance and Company Secretarial function.
Key to committees:
Audit Committee: A
Risk Committee: RC
Nomination Committee: N
Remuneration Committee: R
Chair:
Director profiles can be found on the Group’s website:
http://www.nsfgroupplc.com/about-us/our-leadership
OverviewStrategic ReportGovernanceFinancial Statements 52
Governance report
for the year ended 31 December 2018
that are now booking new loans onto a single loan management
platform. In home credit, having invested heavily in the scale of
our agent network and supporting infrastructure during 2017,
2018 was focused on embedding that investment and
transforming the quality and efficacy of our technology
infrastructure, both of which have now been achieved.
With further loan book growth across all three divisions during
2018, we took the opportunity to underpin our medium-term
growth plans with an additional £70m of debt funding, so that
the Group now has total committed facilities of £330m, £285m of
which is not due until 2023.
We continued to engage with investors through a comprehensive
programme of investor relations including one-on-one meetings,
conference calls, results presentations and an analyst visit to
Everyday Loans that took place in December 2018. The visit was
well-attended and we received positive and encouraging
feedback and will continue to hold similar events in the future.
Over the course of the year, we continued to develop our
corporate governance framework and formally adopted a
Group-wide approach in December 2018. Building on the Board
evaluations undertaken internally in 2016 and 2017, the Group
engaged Lintstock, an external Board evaluation specialist to
undertake an independent review of the performance of the
Group Board as well as conduct a data gathering exercise for
each of the Group’s subsidiary boards to enable in-house
conclusions and recommendations to be reached within each
subsidiary. This review included an ongoing assessment of both
the Group’s board structure and the dynamics of the boards of
each of the Group’s subsidiaries within the overall Group
governance structure. As part of this review, focus was given to
the potential impact of the revised Corporate Governance Code.
Having completed a review of the recommendations made, the
Board has updated its list of actions to be completed. Following
the implementation of a robust evaluation programme for each
of the Group-level policies and also the approval and launch of
a Group-wide Governance Framework in 2018, the Group will assess
and monitor both their maturity and effectiveness during 2019.
The Remuneration Committee remains focused on ensuring
that it has the capability to both retain and incentivise existing
management, as well as attract additional and complementary
talent that may be required to fulfil the Group’s long-term
strategic objectives. During the course of 2018, the Remuneration
Committee continued to monitor and evaluate the remuneration
schemes in place to ensure they remain appropriate.
The Group ‘Save As You Earn’ (‘SAYE’) Share Scheme continues to
prove attractive for all staff. The Board is committed to ensuring
that colleagues have the opportunity to hold even a small stake
in the ultimate parent of the firm where they work, thereby
ensuring that participating employees are able to benefit directly
from any future success of the Company. To reduce the impact of
dilution for existing shareholders, the Board initiated a limited
share buy-back programme during 2017 in order to satisfy any
future obligations under the Group’s SAYE and long-term
incentive share plans. This programme concluded in April 2018.
In 2019 we plan to continue to improve our governance principles
and processes through a series of actions including by:
embedding our governance frameworks and corporate policies;
monitoring our progress through the evaluation process outlined
above; adopting the revised Corporate Governance Code where
it makes sense to do so; and ensuring that the Group continues to
develop and grow whilst maintaining and enhancing the good
governance practices of which we are proud.
Chairman’s Introduction
Dear Shareholder,
I am pleased to present our 2018 Corporate Governance report
for the Company which incorporates reports from the Chairs
of each of the Audit, Nomination, Remuneration and Risk
Committees on pages 60 to 82.
The Board remains 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, throughout 2018 the Board sought to comply with
the requirements of the UK Corporate Governance Code 2016
(the ‘Code’)1 and in the coming year intends to adopt the
revised 2018 Code, where it is practical to do so. This has been
achieved within a carefully constructed Governance Framework,
incorporating the work and inter-relationship of the Board, its
various committees and senior management. This framework was
formally adopted at the end of 2018, building on what had already
been achieved and has been designed to ensure that good
standards of governance operate across all levels of the Group,
not just at the plc but also within each of its operating subsidiaries.
The performance of the Board and its various committees
are explained in the following sections of this Annual Report.
In each of the reports that follow, if a provision of the Code has
not been met, the details have been highlighted together with
an explanation under the heading: ‘Statement of compliance
with the Code’ on page 53 below.
Whilst the scale and complexity of the Group requires that in
executing its business strategy the interests of a broad group
of stakeholders are taken into account (see pages 46 to 49),
the Board’s primary focus is to create long-term value for the
Company’s shareholders in the form of sustainable capital
and dividend growth.
Following the acquisitions that were completed in 2015, 2016
and 2017, 2018 was a year of operational focus and the delivery
of strong operating profit growth in all three divisions.
Highlights of the financial year
During 2018, we opened a further 12 new Everyday Loans
branches as planned, taking the total number open at
31 December 2018 to 65, an 81% increase since we acquired
the business in April 2016. Whilst we plan to continue to open
new branches every year for the foreseeable future, this is now
likely to be at a more modest pace than in either 2017 or 2018.
In guarantor loans, we completed the detailed technical
integration of both of the George Banco and TrustTwo brands
1 A copy of the Code is available from the Financial Reporting Council’s website:
www.frc.org.uk.
Charles Gregson
Non-Executive Chairman
14 March 2019
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53
NSF is committed to high standards of corporate governance
Statement of compliance with the Code
As mentioned above, whilst Non-Standard Finance plc is
not required to comply with the Code, the Board has long-
recognised the value from following best practice corporate
governance guidance and therefore sought to comply with
the Code during the year ended 31 December 2018. The Code
can be found on the Financial Reporting Council’s website:
https://www.frc.org.uk/directors/corporate-governance-and-
stewardship/uk-corporate-governance-code. The Directors
consider that the Company has been in full compliance with
the principles of the Code.
Offer to acquire Provident Financial plc
In its announcement issued on 22 February 2019, the Board
confirmed its intention to apply to the FCA to transfer NSF’s
current listing on the Official List under the Listing Rules from
a standard listing to a premium listing as soon as possible
following completion of the acquisition of Provident Financial.
Leadership and effectiveness
The Company recognises the importance of a highly engaged
board, one that is: close to the operations of the business; able
to both support and challenge the executive team; and that is
well-equipped to oversee governance, financial controls and
risk management.
Whilst the Board maintains that a high standard of governance
was achieved throughout 2018, given the Company’s individual
circumstances and bearing in mind its size and complexity,
as well as the nature of the risks and challenges faced by
the Group, the Directors deemed that non-compliance with
some of the provisions of the Code was justified. These are
highlighted below.
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, and in accordance with Company policy,
subsequent appointments to other directorships are disclosed
in advance to the Board.
The Company does not comply with provision A.4.1 of the Code.
The Board assessed the risk of not appointing a Non-Executive
Director to the role of Senior Independent Director and resolved
that the formal role was not required due to the relatively small
size of the Board. The Company does not believe absence of the
role detracts from its ability to comply with principle A.4. 1. The
activity normally carried out by a Senior Independent Director is
shared between the independent Non-Executive Directors and
the Company Secretary.
The Company does not meet provision D.2.1 of the Code, due
to the Chairman of the Board also being the Chair of the
Remuneration Committee. As explained below, it is recognised
that, in accordance with the Code, Charles Gregson was not
independent on appointment (A.3.1 – see page 55). However,
due to his professionalism, independence in character and
judgement, together with his experience, and taking into account
the size and nature of the Company, it is deemed appropriate at
this point in time for him to remain Chairman of the Remuneration
Committee. The Directors do not consider the appointment
detrimental to compliance with principle D.2.
Compliance with the provisions will remain under review as the
Company strategy and Board structure develops.
The Company has noted the revisions made to the UK Corporate
Governance Code during 2018 and is committed to complying with
the requirements of the new Code, where appropriate, during 2019.
The Board will report its compliance, or otherwise, with the revised
version of the Code, in the 2019 Annual Report & Accounts.
OverviewStrategic ReportGovernanceFinancial Statements 54
Governance report continued
Board composition and structure
The Board comprised six Directors in 2018, all of whom have served throughout the financial year, including:
Role
Responsibilities
Non-Executive
Chairman
Charles Gregson
The Chairman is responsible for:
•
•
the leadership of the Board
the effectiveness of the Board
• setting the Board’s agenda
Two independent
Non-Executive
Directors
Niall Booker
Heather McGregor
• ensuring adequate time is available for discussion
• promoting a culture of openness and debate
• encouraging active engagement and appropriate challenge
by all Directors
• ensuring that Directors receive accurate, timely and clear
information
•
regularly reviewing and agreeing with the Directors their training
and development needs to enable them to fulfil their roles
The Non-Executive Directors along with the Non-Executive
Chairman have a responsibility for:
• providing an external focus to the Board’s discussions
• providing constructive challenge in light of wider experience
gained outside of the Company/industry
• helping to develop proposals put forward by the Executive
Directors on strategy and other matters affecting the Group’s
operational and financial performance
• upholding high standards of integrity and probity
• satisfying themselves on the integrity of financial information
and that financial controls and systems of risk management
are robust and defensible
•
taking into account the views of shareholders and other
stakeholders
• supporting the Chairman and Executive Directors in instilling the
appropriate culture, values and behaviours in the boardroom
and the Group as a whole
• continually reviewing the performance of the Executive Directors
and the wider senior management team
• determining appropriate levels of remuneration of Executive
Directors
• having a prime role in the appointment and removal of Executive
Directors, and of succession planning
• providing a sounding board for the Chairman
Group Chief
Executive
The Executive Directors are responsible for:
• providing the Board with specialist knowledge of the business
and industry-relevant experience
John van Kuffeler
• all matters affecting the operating and financial performance
of the Group
Two Executive
Directors
Miles Cresswell-Turner
Nick Teunon
•
•
•
the development and implementation of strategy, policies,
budgets and the financial performance of the Group
the development and direction of the Group’s culture,
recognising that a healthy corporate culture can both generate
and sustain long-term shareholder value
leading and managing the risk and finance functions across
the Group
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Description of activities
The roles of Chairman
and Group Chief Executive
are fulfilled by separate
individuals. Their roles are
set out in writing and agreed
by the Board. It is considered
that no one individual or small
group of individuals have
unfettered powers of decision.
The Board as a whole is
collectively responsible for
the long-term success of
the Company.
The Board sets the strategic
objectives as well as the
overall strategic direction of
the Company. It also sets the
Group’s values and standards.
These objectives facilitate
the implementation of
the strategy and provide
indicators through which
management performance
can be measured.
At Board meetings the
Directors discuss the financial,
operational, strategic,
cultural, resource, and
governance matters that
affect the Group.
The Directors recognise
the importance of being a
dynamic business with the
ability to respond to both
opportunities and threats,
thereby sustaining the
long-term viability of the
Group. The Company’s
strategy and business plan is
therefore reviewed regularly,
taking into account macro-
and micro-environmental
factors, shareholder, and other
key stakeholder needs.
All decision-making is in the
best interests of the Company
and is conducted within a
framework of prudent and
effective controls that enable
opportunities and risks to be
assessed and managed.
55
Group Company Secretary
The role of Company Secretary is fulfilled by Sarah Day.
Under the guidance of the Chairman, she ensures that all
Directors have full and timely access to relevant information
and that it is of a high standard to enable the Board to make
informed decisions.
The Company Secretary is also responsible for ensuring
that correct Board procedures are followed, for advising
on governance matters and for ensuring that there
is a good flow of information within the Board
and its Committees, as well as between senior
management and the Non-Executive Directors.
Other tasks include facilitating tailored inductions and
assisting with professional development of Board members,
each of whom have access to the advice and services of the
Company Secretary. The appointment and removal of the
Company Secretary is a matter for the Board as a whole.
Independence
In accordance with section B.1.1 of the Code, the Board
determines Niall Booker and Heather McGregor to be
independent Non-Executive Directors. The Board’s assessment
is based on the fact that Niall Booker and Heather McGregor
receive no additional benefits from the Group, have not
previously held an executive role within the Group and have
served less than nine years on the Board. The Board believes
that there are no current or past matters which are likely to affect
Niall Booker’s or 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 66 to 82. The Board determines that Charles
Gregson would be an independent Non-Executive Director in
the event that he did not hold Founder Shares.
Skills, experience and knowledge
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 relevant sectors:
• Accountancy
• Banking/lending/finance
• Home credit
•
Insurance
• Law
• Media
• Private equity
• Equity research
• Executive search
• Education
Board diversity
The Company recognises the importance of diversity both
at Board level and throughout the Group. 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.
In last year’s report we indicated our 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. During 2018 an internal
candidate was selected who has progressed through the initial
screening phases of the scheme and is currently being
considered for placements with external companies.
Appointments
The Board has adopted a formal 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. The two Non-Executive
Directors are available to shareholders if they have any
concerns, which contact through the normal channels of
Chairman or the Executive Directors has failed to resolve
or if such contact is inappropriate.
The appointment of a Senior Independent Director was reviewed
as part of the 2018 Board evaluation and will continue to be
considered annually.
Induction and professional development
The Company has a policy in place to ensure that all new Board
appointments receive a full, formal induction that is tailored to
the needs and experience of the new Director. They are also
provided with opportunities to meet major shareholders.
Directors are encouraged to spend time in each of the three
operating divisions and also to attend external seminars on
areas of relevance to their role and to devote an element of
their time to self-development through available training.
Adhering to the requirements of the Code, during 2018 the
Chairman reviewed and agreed with each Director their training
and development needs, taking into account their individual
qualifications and experience.
A training programme was devised during the year and
participants included those directors on subsidiary Boards
in addition to those on the Non-Standard Finance plc Board.
The joint sessions have proved to be a valuable addition in
helping to ensure that director obligations are understood
clearly across the Group. Topics covered during 2018 included
Directors’ duties and responsibilities, cyber risk, the 2018 revision
of the Corporate Governance Code, and the Senior Managers
and Certification Regime.
The Board receives regular detailed reports from senior
management on the performance of each of the Group’s
operating activities and other information as necessary in order
to manage the Group effectively. Regular updates are provided
on relevant legal, regulatory, strategic, operational, corporate
governance and financial reporting developments. Reports are
also supplied on a monthly basis covering macro-environmental
factors which supplement the horizon-scanning carried out by
the Directors themselves.
OverviewStrategic ReportGovernanceFinancial Statements 56
Governance report continued
Independent advice
All Directors have access to advice from professional advisers, at
the Company’s expense, as and when required, ensuring that the
Board and its committees are provided with sufficient resources
to undertake their duties.
On behalf of the Board, the Audit Committee and the Risk
Committee confirm that, through discharging their responsibilities
under their terms of reference as described, they have reviewed
the effectiveness of the Group’s system of internal controls and
are able to confirm that necessary actions have been or are
being taken to remedy any failings or weaknesses identified.
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. This duty is not infringed if the matter has
been authorised by the Board of 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
any 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. The Director
would subsequently refrain from voting on any matter that
represented an actual or potential conflict of interest.
The Company Secretary keeps a record of any actual or
potential conflict of interest declared by the Directors.
All potential conflicts approved by the Board are recorded in
a Conflicts of Interest Register, which is reviewed by the Board
regularly to ensure that the procedure is working effectively.
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 internal control 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 debt 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 business strategy,
including reviews of the material risks and uncertainties
facing the business;
•
•
the receipt of reports from senior management on the risk
and control framework as well as 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 may have changed since the previous review (see
pages 30 to 32). 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 Audit Committee and the Risk Committee receive regular
reports on compliance with Group policies and procedures.
The Board, with advice from the Risk and Audit Committees,
is satisfied that a robust system of internal controls and risk
management is in place which enables the Company to identify,
evaluate and manage key risks effectively.
Further details of the Group’s system of internal control and its
relationship to the corporate governance structure are contained
in the principal risks section of this report on pages 30 to 32, the
Audit Committee report on pages 60 to 62 and the Risk
Committee report on page 65.
Board Evaluation
The annual Board Evaluation gives the Directors the opportunity
to reflect on the effectiveness of the Board’s activities, the range
of discussions, the quality of decisions, and for each Director to
consider their own performance and contribution. The Board
recognises that it provides a powerful and valuable feedback
mechanism for improving board effectiveness.
During the course of the year the Board sought to address
actions from the 2017 Board Evaluation, with close monitoring
of progress in areas identified for further development. It was
pleasing to conclude that matters identified in previous years
had all been addressed.
In 2018 the evaluation was facilitated by an independent external
party, Lintstock Ltd (‘Lintstock’), for the first time. Lintstock was
considered suitable because of its strong reputation in this field
and its ability to provide a bespoke service.
The Directors were provided with a comprehensive questionnaire
covering board composition, stakeholder oversight, board
dynamics, management of meetings, board support, focus
of meetings, strategic and operational oversight, oversight of
subsidiaries, risk management and internal control, succession
planning and human resource management, and priorities for
change. This complemented and expanded upon the in-house
evaluations carried out in previous years. Lintstock provided
a report to the Board in early 2019 and concluded that the
key priorities for the coming year were to focus on increased
engagement between the Board and colleagues within the
operational businesses, talent identification and succession
planning, Director training and wider external feedback to
provide the Board with a richer context for decision-making.
Board Performance Review
The Chairman met with each of the Directors on a one-to-one
basis to appraise performance during the year. The Non-
Executive Directors also met with the Chairman to appraise
his performance.
Together, the Board Evaluation and the Board Performance
Review help to facilitate the planning of ongoing training
and development needs for 2019.
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 11:00 am on 1 May 2019.
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Summary of Board Committee structure and responsibilities
The Company’s corporate governance framework draws upon the work of the Board and five Board committees as outlined below:
Board of Directors
Membership at
31 December 2018
See page 51
Meetings held in
2018: 12
The Board’s full
responsibilities
are set out in the
matters reserved
for the Board. Its
powers and duties
are set out in the
Company’s Articles
of Association,
and the relevant
legislation and
regulation
applicable to the
Company as a
public listed
company registered
in England and
Wales.
The Company’s
Articles of
Association are
available from the
Companies House
website.
Certain
responsibilities have
been delegated to
the Board’s five
committees so to
assist the effective
operation of the
Board and to ensure
the right level of
attention and
consideration is
given to all relevant
matters.
Matters reserved for the Board
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;
• approval of the Group’s risk management and control framework and the appointment/reappointment
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.
Audit
Committee
Nomination
Committee
Risk
Committee
Remuneration
Committee
Disclosure
Committee
Key objectives:
To assist the Board
in discharging its
duties and
responsibilities for
financial reporting
and internal
financial control.
Key objectives:
To assist the Board
in ensuring that
the Board and its
Committees
comprise
individuals with
the requisite skills,
knowledge and
experience to
ensure they are
effective in
discharging their
responsibilities.
Key objectives:
To assist the Board
in fulfilling its
oversight
responsibilities
with regard to the
Group’s risk
appetite and
overall risk
management.
Key objectives:
Recommending to
the Board the
remuneration of
the Chairman,
Executive
Directors,
Company
Secretary and
senior
management.
Key objectives:
To assist the Board
in discharging its
duties and
responsibilities
with regard to
disclosures, and
disclosure controls
and procedures.
Meetings held in
2018: nine
Meetings held in
2018: two
Meetings held in
2018: three
Meetings held in
2018: five
Meetings held in
2018: Nil
The membership
of the Audit
Committee and
its report is on
page 60
The membership
of the Nomination
Committee and
its report is on
page 63
The membership
of the Risk
Committee and
its report is on
page 65
The membership
of the
Remuneration
Committee and
its report is on
page 66
The membership
of the Disclosure
Committee is the
Chief Executive,
the Chief Financial
Officer and the
Company
Secretary
OverviewStrategic ReportGovernanceFinancial Statements 58
Governance report continued
The composition and role of each committee is detailed in
their respective reports that follow. 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.nsfgroupplc.com.
The boards of each of the Company’s operating subsidiaries
report into the Non-Standard Finance plc Board. There is a
Group Chief Risk Officer who oversees all divisions, and in
conjunction with the Company Secretary, reports into the Risk
Committee regarding Group risk oversight.
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.
The strategy meeting in 2018 was attended by each of the
Directors as well as senior management (where appropriate).
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;
• a review and discussion of the non-standard finance
consumer market in which the Group operates;
• a review and discussion of the macroeconomic outlook for
the UK and possible impact on the Group’s businesses; and
• a presentation on the investor relations, public affairs and
communications plans for the Group.
All Directors receive Board papers, which are circulated
approximately one week in advance of scheduled meetings,
and minutes are taken of each meeting. A table reflecting the
Directors’ attendance at Board meetings is shown below.
Meetings and attendance
Director
John van Kuffeler
Nick Teunon
Miles Cresswell-Turner
Niall Booker
Charles Gregson
Heather McGregor
Attendance and
total number of
meetings to which
the Director was
entitled to attend
12/12
12/12
12/12
12/12
12/12
12/12
Activities covered during 2018
During 2018 the Board had 12 scheduled meetings to review
current trading and operational performance of the business
as well as to consider the following items of business:
Month
Business matters discussed
January
• Group structure
• Consideration of potential merger or acquisition
• Approval of 2018 budget
• Approval of recommendations within the Board
Evaluation report
• Approval of a Non-Executive Director to mentor
an operating subsidiary Board Director
•
Individuals and boards identified to participate
in the ‘Future Boards scheme’
• Review of possible acquisition
February
• Progress update regarding the Group’s
March
(two
meetings)
preparation for the implementation of General
Data Protection Regulations (‘GDPR’)
compliance
• Board briefing regarding the support and
planned launch of the ‘Loan Smart’ charity
• Review and approval of the 2017 Annual
Accounts
• Review and approval of the 2017 Group results
announcement
• Approval of final dividend to be proposed at the
2018 AGM
• Noted formation of NSF Group Limited
• Reappointment letters for Charles Gregson and
Heather McGregor
• Review and approval of Matters Reserved for
the Board
• Approval of Term of Reference of Remuneration
Committee and Disclosure Committee
April
• Approval of Term of Reference of Nomination
Committee
• Approval of revised budget (3+9 forecast)
• Approval of unaudited interim accounts for the
two months ended 28 February 2018
• Overview of Group insurance provision
May
• AGM
• Directors’ strategy day(s)
• Approval to grant share options under the NSF
‘Save as you earn scheme’ (‘SAYE’)
June
• Approval of Term of Reference of Audit
Committee
• Business continuity updates from divisions
• Approval of corporate policies
• Approval of modern slavery statement
• Agreement to sign the ‘Dying to Work’ charter
• Board consideration of succession planning
provision in place across the Group
July
• Health & safety reviews
• Approval of Term of Reference of Risk
Committee
• Approval of 6+6 forecast
• Approval of draft interim results statement and
delegation of authority to approve interim
accounts
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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.nsfgroupplc.com. The website also contains
other information about the Group and its business.
The Chairman is responsible for ensuring that appropriate
channels of communication are established between the
Executive Directors and shareholders, and ensures that the
views of shareholders are made known to the Board.
The Group Chief Executive and Chief Financial Officer
discuss the Company’s governance and strategy with major
shareholders, and listen to their views in order to help develop
a balanced understanding of any issues and/or concerns.
The Board aims to foster close relations with its investors and
sell-side analysts through a regular and comprehensive
programme of investor relations activity. All shareholders have
the opportunity to convey their views via the Director of Investor
Relations and Communications and/or can make enquiries by
email or telephone.
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.
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 2019 AGM of the Company is to be held at the offices
of Maitland/AMO, 13 King’s Boulevard, London, N1C 4BU
at 11.00 am on 1 May 2019.
The Notice of Meeting will be published on or around
8 April 2019 and will be available to download from the
Company’s corporate website: www.nsfgroupplc.com.
Sarah Day
Company Secretary
14 March 2019
Month
Business matters discussed
September
• Senior Management and Certification Regime
briefing
• Review of Board composition
• Review of strategic initiatives
• Update regarding gender pay gap reporting
October
•
IT security update
November
• Approval of change of registered office
• Approval of 9+3 forecast
• Corporate Responsibility Programme update
• Discussion regarding 2019 subsidiary budget
submissions and approval of Everyday Loans
Group budget assumptions
• Director training regarding revised Corporate
Governance Code (July 2018) and Director
responsibilities
December
• Approval of the Group-wide Governance
Framework and Evaluation process
• Quarterly review of strategic initiatives
• Business Continuity planning update
• Senior Manager and Certification Regime
(‘SMCR’) training and project outline
• Review of Conflicts of Interest register
• Review of Gifts and Hospitality register
Matters to be covered in 2019
• Review of the long-term vision and strategic direction of
the Group
• Review of the financial performance of the Group
• Analysis of the Group structure and management
performance
• Approval of budget, forecasts and projections
• Review of the Group’s debt funding arrangements
• Potential acquisitions
• Approval of the Group’s half-year and full-year results
• Evaluation of corporate governance framework
• Review of business continuity and crisis management
arrangements
• Review of the Group’s corporate culture
• Review of stakeholder management
• Review of information security, cyber security and data
protection
• Board evaluation, composition and succession planning
• Approval of bonus scheme
• Review of gender pay gap reporting, equality and diversity
across the Group
• Corporate social responsibility, environmental performance,
and community activities reporting
• Review of matters reserved for the Board and Board
Committee Terms of Reference
• Review of corporate policies
• Approval of modern slavery statement
• Review of health and safety across the Group
• Review of gifts and hospitality register, and conflicts of
interest register
• Consideration of senior manager and certification regime
requirements
•
Investor relations
OverviewStrategic ReportGovernanceFinancial Statements 60
Audit Committee report
for the year ended 31 December 2018
Membership
The Audit Committee (the ‘Committee’) comprises three Non-
Executive Directors, two of whom are independent. The provisions
of the Code (C3.1) require that the Audit Committee for smaller
companies comprises two independent Non-Executive Directors.
All three members of the Committee bring complementary
financial experience and diverse viewpoints, helping to ensure
robust challenge and debate at the Committee.
The members of the Committee are: Niall Booker (Chair), Charles
Gregson and Heather McGregor each of whose biographical
details are set out on page 51.
Meetings and attendance
The Committee met on nine occasions during the year ended
31 December 2018.
Director
Niall Booker (Chairman)
Charles Gregson
Heather McGregor
Attendance and
total number of
meetings that the
Director was
entitled to attend
9/9
9/9
9/9
The Chair of the Committee meets regularly for a discussion with
the external auditor without executive management present and
also with the internal auditor, when required.
Committee meetings are attended by both the Chief Financial
Officer and the Company Secretary. Both the external auditor
and internal auditor are 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.
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 which are also available on the Group’s corporate
website: www.nsfgroupplc.com. 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 such announcements before they
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 throughout the audit as well
as 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);
• making recommendations to the Board in relation to the
appointment, reappointment and removal of the Company’s
internal auditor, approving the role and mandate of the
internal auditor;
• agreeing the scope of the internal audit plan to ensure that it
is aligned to the key risks of the business and receive regular
reports on work carried out;
• ensuring the internal audit has unrestricted scope,
necessary resources and access to information to enable
it to fulfil its mandate in accordance with appropriate
professional standards;
• ensuring that the internal auditor has direct access to the
Board Chairman and to the Committee chairmen, providing
independence from the executive and accountability to
the Committee;
•
reviewing the adequacy and effectiveness of the Company’s
internal audit review function and internal financial controls;
• ensuring appropriate coordination 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, reappointment 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.
Significant issues and areas of judgement considered by the
Committee
Throughout 2018 the Committee determined that the following
aspects of the financial statements were of significant interest.
1. Impairment of goodwill
Management performed a review of goodwill as at 30 June 2018
and a full goodwill impairment assessment as at 31 December
2018 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 tangible net asset values and
carrying values of goodwill. The Committee challenged the
appropriateness of management’s key assumptions and 2019
forecast earnings. It was reported to the Committee that a
reduction in 2019 forecast earnings of between 3% and 8%
would necessitate an impairment charge. The Committee
recognised that this is significantly tighter than identified in
2017. Following sensitivities performed on the forecast earnings,
the Committee 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 14 to the financial statements.
2. IFRS 9
IFRS 9 is a new accounting standard that replaces the
provisions of IAS 39 relating to the recognition, classification
and measurement of financial assets and financial liabilities,
de-recognition of financial instruments, impairment of financial
assets and hedge accounting.
The adoption of IFRS 9 from 1 January 2018 resulted in changes in
accounting policies and adjustments to the amounts recognised
in the financial statements.
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The Committee has, over the course of the year, received regular
updates from management to ensure that each stage of the
implementation of the new accounting standard has been
subject to appropriate scrutiny and challenge. The Committee
has undertaken and will continue to undertake an ongoing
role specifically with regard to the regular assessment of the
macro-economic environment to ensure that this element is taken
into account and that the accounting standard continues to be
applied appropriately.
3. Impairment of customer receivables
The implementation of IFRS 9 has resulted in a revision to the
impairment methodology adopted by the Group. There is
however, an ongoing requirement for management to make
significant judgements in the assessment of any provisions for
impairment losses against customer receivables. 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.
4. Refinancing of the Group’s existing bank facilities
Following strong loan book growth at each of the Group’s
operating businesses during the latter part of 2017 and into 2018
and in order to support future growth in 2019, NSF announced
that it had renegotiated the current lending arrangements
and secured a further £60m term loan facility (the ‘Term Loan’),
provided by a group of institutional investors, led by Alcentra
Limited, bringing the Group’s total available term debt facility to
£285m. The revised loan is not repayable until 2023 and bears
an interest rate of LIBOR plus 725 basis points per year with
interest payable every six months. In addition, the Group also
secured a further £10m revolving credit facility provided by Royal
Bank of Scotland at an interest rate of LIBOR plus 350 basis
points per year. This brings the Group’s total revolving credit
facility to £45m. The Committee challenged management on
the new arrangements and received advice from Lazard & Co.
Limited regarding their suitability for the Group.
5. IFRS 16
In readiness for the adoption of IFRS 16 regarding the
identification and treatment of lease arrangements in the
financial statements of both lessees and lessors, the Committee
has had oversight of the proposed change in accounting to be
adopted by the Group and believes the changes to be
appropriate and in accordance with the new standard.
6. Review of the half-year results
The review during the year included the following items:
• review of impairment of goodwill, intangibles and customer
receivables valuation;
• review of the adoption of IFRS 9 and the related disclosure;
• review of half-year results;
• review and approval of the valuation of intangible assets
which confirmed it was appropriate that no impairment
review was required;
• review of the report on the interim review from the external
auditor;
• review of the half-year results announcement; and
• discussion with the external auditor without any Executive
Director or employee being present.
7. Review of the Annual Report and 2017 full year financial
statements
In conducting its review of the Annual Report and Accounts,
the Committee:
•
•
•
•
•
reviewed the impairment of goodwill, intangibles and
customer receivables valuation carried out by management;
reviewed the accounting treatment proposed regarding the
adoption of IFRS 9;
reviewed and approved the going concern paper which
confirmed it was appropriate to prepare the Annual Report
and financial statements for the year ended 31 December 2017
on a going concern basis;
reviewed and approved the viability statement and related
papers;
reviewed the full-year results and the form and content of the
draft Annual Report and financial statements;
• discussed with the external auditor without any Executive
Director or employee being present;
•
reviewed the preliminary results for the year ended
31 December 2017; and
•
reviewed the statement on internal controls.
8. 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. Members
of the Committee have informally discussed the internal audit
function with some senior members of management.
Internal Audit reviews conducted during the year included:
• updated reviews of the lending and collections processes;
•
•
remuneration scheme reviews;
information security reviews;
• key financial control reviews;
• corporate policies and biannual attestation process; and
•
risk and compliance review.
9. 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 62 of this Annual Report.
These issues were discussed with management and the external
auditor to ensure that the required level of disclosure was
provided and that the appropriate level of rigour had been
applied where any judgement may have been exercised.
External audit
The Company’s auditor is Deloitte LLP, who have conducted the
external audit 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.
OverviewStrategic ReportGovernanceFinancial Statements 62
Audit Committee report continued
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 in note 6 to the
financial statements.
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 2018 the level of non-audit fees amounted to £nil
(2017: £192,000). The non-audit work carried out during 2017
related to due diligence. The fees paid to the external auditor
are set out in note 6 to the financial statements. The fees for
non-audit work carried out by the auditor in 2018 represent nil%
(2017: 42%) of audit fees.
During 2018 the Company 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 demonstrate
clearly 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 Auditor now reports directly to the Audit Committee
thereby ensuring the independence and effectiveness of the
Internal Auditor. At the start of the year, following a review of the
roles and responsibilities of each of the Board’s committees, it
was decided to pass responsibility for the internal audit activity
to the Audit Committee (previously it had been managed by the
Risk Committee). This reflects the growing maturity of the Group,
where internal audit activity is progressing from ‘post-acquisition’
risk reviews to more focused internal audit controls reviews.
The Internal Auditor provides regular reports to the Audit
Committee and also to the Risk Committee, where appropriate,
as well as to the Board as a whole.
Viability statement
In accordance with the 2016 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 which is in line with the
Group’s strategic planning cycle. The Directors’ assessment has
been made with reference to the Group’s current position and
strategy, as laid out in the Strategic Report (see pages 7 to 49)
and the Group’s principal risks and uncertainties and how these
are managed (see pages 30 to 32). In making their assessment,
the Directors took account of the Group’s current financial and
operational positions. They noted the potential need to increase
the debt facilities to fund the operations of the business during
the latter stages of 2019 and have concluded that it is reasonable
to assume that the facilities will be extended or replaced with
similar facilities by this time. In addition, they discussed the
potential financial and operational impacts of the principal risks
and uncertainties and the likely effectiveness of the current and
available mitigating actions, in particular noting the ability of the
Group to reduce lending and its intention to raise additional debt
funding to support the Group’s lending ambitions,
The Group’s strategy and 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 possibility of an
economic downturn based on the review of performance
through the macroeconomic cycle as part of the IFRS 9
implementation and therefore reflects a number of principal risks
faced by the business. The detailed review draws on external
empirical evidence for reference and concluded that there
appears to be low sensitivity within the Group to macro-
economic factors. It is not possible to predict to what extent
Brexit will impact the businesses in the current strategic three-
year planning period but the Group anticipates interest rates
being held at or very near current rates to support the economy.
The regulatory downside scenario is based on a review by
management with regard to the impact of recent FCA changes
in regulation. Management does not consider the recent
changes to have a material impact on expected credit losses.
In addition, management considered a third scenario regarding
the absence of additional funding. The review concluded
that the financial performance of the Group would not suffer
in 2019 but would then show limited increases in profitability in
later years.
Reviews of internal controls across the Group are undertaken
by the Group’s Internal Audit function, providing comment
over the design and effectiveness of controls. Report findings
are regularly reported to the Audit Committee for monitoring
and assessment.
On 22 February 2019, the Company announced a firm offer to
acquire Provident Financial plc by way of a reverse takeover.
The proposed acquisition has not been included in the Directors’
assessment of future prospects as the outcome of the offer
remains uncertain. But, as set out in its announcement, a copy
of which is available on the Group’s website, the Board believes
that the Transaction represents a compelling strategic and
financial opportunity to create shareholder value.
Following the assessment, the Directors also considered it
appropriate to prepare the financial statements on the going
concern basis, as set out on page 16.
Niall Booker
Chairman of the Audit Committee
14 March 2019
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Nomination Committee report
for the year ended 31 December 2018
63
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
Aligning with the provisions of the Code, the Committee
comprises a majority of members who are deemed to be
independent Non-Executive Directors. The members of the
Committee are: Charles Gregson (Chair), Niall Booker and
Heather McGregor each of whose biographical details are
set out on page 50. Note that Charles Gregson would not
chair the Committee when it was considering the appointment
of a successor to the chairmanship of the Company.
The terms of reference, explaining in full the role of the
Committee and the authority delegated to it by the Board,
are available on the Group’s website: www.nsfgroupplc.com.
Principal activities of the Committee during 2018:
•
reviewing the composition of the Board and the balance
of Executive and Non-Executive Directors;
•
•
renewal of service agreements of Charles Gregson and
Heather McGregor; and
reviewing the succession plans for the Board and the senior
management within the Group.
Diversity
The search for Board candidates is conducted, and
appointments made, on merit, against clear objective criteria
and with due regard given to the benefits of diversity.
Meetings and attendance
Director
Charles Gregson (Chairman)
Niall Booker
Heather McGregor
Attendance and
total number of
meetings that the
Director was
entitled to attend
2/2
2/2
2/2
The Company and each of its operating subsidiaries 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 Chief Executive Officer, the Chief Financial Officer
and Company Secretary also attended all Nomination
Committee meetings.
Role and responsibilities
The Nomination Committee assists the Board in discharging
its responsibilities relating to the composition of the Board
and any other committees of the Board. To fulfil that role,
the Committee’s primary functions include:
• keeping under review the leadership needs of the
organisation, with a view to ensuring the continued ability
of the Group to compete effectively in the marketplace,
taking into account strategic issues and commercial changes
affecting the Company;
•
•
reviewing the structure, size and composition of the Board,
taking into account results of the Board Evaluation and
making recommendations to the Board with regard to any
proposed changes;
identifying and nominating candidates who are assessed
as having the skills, knowledge, experience, and
independence, as well as sufficient time to devote to
their responsibilities to fill Board vacancies, and making
appropriate recommendations to the Board for the
appointment of Directors;
• considering and formulating succession planning for
Directors and senior executives; and
•
reviewing and considering the performance and
effectiveness of the Committee through the results
of the Board Evaluation process.
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 and professional development
Upon joining the Board, all Directors are required to undertake a
formal and rigorous induction which is tailored to their individual
needs. As part of this process, Directors are required to make
themselves available to meet with major shareholders should
they request such a meeting.
A training schedule formed part of the Board planning for the
year and was addressed directly at Board level. Topics covered
during 2018 included Directors’ duties and responsibilities, cyber
risk, the 2018 revision of the Corporate Governance Code, and
the Senior Managers and Certification Regime.
Board evaluation and individual performance review
It is pleasing to report that matters identified in the 2017 Board
Evaluation have been addressed. In 2018, the evaluation was
facilitated by an independent external party company called
Lintstock Ltd.
OverviewStrategic ReportGovernanceFinancial Statements 64
Nomination Committee report continued
This third-party review complemented and expanded upon the
in-house evaluations carried out in previous years. Lintstock Ltd
reported their findings to the Board in early 2019 and the key
points from their review highlight the strength and expertise
of the Board and the advantage gained through having a
relatively small board, with strong communication channels.
The evaluation outlined a number of areas of focus for the Board
in 2019, which in summary are to focus on maintaining a high
level of engagement between the Board and colleagues within
the operational businesses, talent identification and succession
planning, Director training and wider external feedback to
provide the Board with a richer context for decision-making.
An evaluation of the performance of each of the Board members
revealed that each Director continues to contribute effectively
and is demonstrating due commitment to the role (including
the commitment of time to both attend Board and Committee
meetings and complete such preparation as is required for
such meetings).
Board composition
During 2018 the Committee reviewed the composition of the
Board, taking into account the balance of skills, experience,
independence and knowledge of the Company on the Board,
its diversity, including gender, how the Board works together
as a unit, and other factors relevant to its effectiveness. It was
deemed appropriate that the service agreements of Charles
Gregson and Heather McGregor were renewed for a further
three years, subject to annual re-election by members at
the AGM.
The terms and conditions of appointment of all Non-Executive
Directors are available for inspection at the forthcoming AGM,
and on request as per the Companies Act 2006.
Areas of focus in 2019
The main areas of focus for the Committee in 2019 include an
evaluation of Board composition, succession planning, review
of the Committee’s terms of reference, a Board performance
evaluation, and a review of Board effectiveness.
Charles Gregson
Chair of the Nomination Committee
14 March 2019
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Risk Committee report
for the year ended 31 December 2018
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. Both the Chief Financial Officer and Company
Secretary attended all Committee meetings. Other relevant
parties are also invited to attend Committee meetings,
as appropriate.
The Directors’ attendance at the meetings during 2018
is recorded in the table below:
Director
Heather McGregor (Chairman)
Niall Booker
Charles Gregson
Attendance and
total number of
meetings that the
Director was
entitled to attend
3/3
3/3
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 taken by each committee and the Board. The
Committee met three times during the year. In addition, the
Committee Chair attended meetings with the Executive Directors
and management at Everyday Loans, the Guarantor Loans
Division and Loans at Home.
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. As part of this
process, 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;
• 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 review
the effectiveness of the Company’s risk management and
internal control systems.
65
Principal activities of the Committee during 2018
The Committee oversaw the implementation of a Group-wide
risk management system which has provided the Committee with
a clear and consolidated view of risk across the Group as a
whole, taking into account materiality thresholds that have
already been approved by the Committee. The implementation
process for this new system required that the Committee review
and enhance the Company’s risk management and internal
control systems. This review included all material, financial,
operational and compliance controls, the identification of the
key risks affecting the Company and a re-assessment and
confirmation of the Group’s risk appetite statements and target
residual ratings for each of the principal risks. The principal risks
are set out on pages 30 to 32.
The Committee has also been focused on ensuring that
appropriate risk management strategies are implemented,
monitored and reported effectively within the overarching
Group-wide risk management framework. The Committee
enhanced and embedded an effective enterprise risk
management framework within the newly implemented risk
management system, thereby allowing regular and detailed
analysis of the principal risks faced by the business.
During the year to 31 December 2018 the Committee focused on
the following matters:
•
the ongoing review of and identification of Group risks with
action plans put in place to mitigate such risks;
• a review of the risk appetite status across the Group;
• oversight of the risk management system implementation and
key reporting requirements;
• oversight of internal audit matters until June 2018 when the
responsibility moved to the Audit Committee;
• quarterly complaints reviews;
• oversight of half-yearly credit risk reporting; and
• a review of business continuity planning across the Group.
Areas of focus in 2019
The Committee intends to continue to improve and embed the
Company’s risk management framework during 2019. Key tasks
include a further review and enhancement of the Group risk
management framework; further development of the Group’s risk
register; and further enhancements to the newly implemented
risk management system.
Heather McGregor
Chair of the Risk Committee
14 March 2019
OverviewStrategic ReportGovernanceFinancial Statements 66
Directors’ remuneration report
for the year ended 31 December 2018
The disclosures in this report have 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 – audited.
2. Implementation of Remuneration Policy for the Executive
Directors for 2019
3. Consideration by the Committee of matters relating to the
Directors’ remuneration for 2018 and 2019
4. Group Chief Executive and employee pay
5. Single figure remuneration table: Non-Executive Directors
– audited
6. Directors’ shareholding and share interests
7. Shareholder voting
Part A: Annual Statement
Business context and Committee decisions on remuneration
As described in the 2018 Financial Review and Divisional
overview on pages 33 to 45, the Group delivered against a
number of operational and financial objectives including annual
loan book growth of more than 20% in two out of three business
divisions for the second year in a row. The fact that this growth
was achieved whilst maintaining a tight control on impairment
was particularly encouraging and reflects the strength and skill
of the senior management team, as well as the effectiveness of
the Group’s risk management framework. The significant
investment made in supporting infrastructure during 2017
continued in 2018, underpinning the future achievement of the
Group’s objectives to generate strong growth and an attractive
return on assets, as well as maintaining each operating
business’s strong position in its respective market segment.
This continued investment in 2018, has resulted in sustained
growth for the Group, outperforming the FTSE All Share Index –
Financial Services, for the Group over the last year – the second
year in a row where we have outperformed our benchmark. We
consider this Index to be the most appropriate broad-based
equity market to benchmark the Group’s performance.
The business has developed rapidly and is now firmly established
within three significant sectors of the non-standard finance
market. Following the change in Remuneration Policy last
year to reflect the significant changes in Executive Director
responsibilities, the focus of the Remuneration Committee
during 2018 has been predominantly to ensure that the award
of Director bonuses has been measured against challenging
targets of both a financial and non-financial nature, with specific
focus on the delivery of initiatives supporting Good Customer
Outcomes within each operation.
Dear Shareholder
I am pleased to present to you our Directors’ Remuneration
Report for Non-Standard Finance plc (‘NSF’) for 2018. The NSF
Remuneration Policy was approved by shareholders at last year’s
AGM with a significant supporting vote of 95%. This year we have
focused on the implementation of this Policy and present the
outcomes in the Annual Report on Remuneration which will be
voted on by shareholders at our upcoming AGM on 1 May 2019.
This year has been another strong year of performance for the
Group with investment in infrastructure beginning to bear fruit as
and helping to drive strong loan book growth whilst maintaining
a tight control on impairment and the remuneration decisions
taken by the Committee during the year reflect this.
Annual bonus performance and outcomes
The Group financial target for 2018, which equated to 70%
of the maximum potential bonus, was £15.27m based on the
profit of the Group before certain adjustments including fair
value adjustments, certain IFRS 9 transitional related items,
amortisation of acquired intangibles, exceptional items and tax.
The actual profit on this basis was £15.06m, being 98.6% of
target and above the 90% threshold for payment of the minimum
25% of the financial element of the bonus. The next 50% of the
financial element accrued on a straight-line basis between
90% and 100% of target. Therefore, the financial element of the
bonus vested at 68.1% of the maximum financial element with
a payout of 47.6% of maximum bonus for John van Kuffeler
and Nick Teunon.
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NSF FTSE All Share Index – Financial Services
67
Looking forward to 2019
The Company is aware of the recent changes made to the
Corporate Governance Code (revised July 2018) (the ‘Code’)
and, given the Board’s desire to comply with the Code where
feasible, despite there being no requirement as a standard listed
company to comply, the Board is currently considering how best
to adopt the revised content where practicable, particularly
with reference to areas relating to remuneration. This review will
occur over the course of 2019 and the Committee will address the
outcomes in the Directors Remuneration Report next year.
Format of this report and matters to be approved at our Annual
General Meeting in May 2019
The remainder of this report is split out into the following three
sections:
Part B: Our remuneration at a glance (page 68).
Part C: Directors’ Remuneration Policy (pages 69 to 76).
Part D: Annual Report on Remuneration providing details of the
payments made to Directors in 2018, as well as other
statutory disclosures (pages 76 to 82) and which
complies with the disclosure requirements of the Listing
Rules of the UK Listing Authority and the UK 2016
Corporate Governance Code.
At our 2019 AGM, resolutions to approve the Annual Report
on Remuneration and this letter will be put to shareholders
for approval. I ask for your support on the 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.
Charles Gregson
Chairman of the Remuneration Committee
14 March 2019
The Group non-financial target for 2018 was based on six key
component targets equating to 30% of maximum potential
bonus. These components are detailed in Part D of the report.
I am pleased to say that 68.3% of the non-financial targets
vested with a payout of 20.5% of maximum bonus, reflecting
the importance the Directors place on ensuring that the Group
conducts its business in a compliant and responsible manner.
Following the approval of the revised Remuneration Policy
at the AGM in March 2018 with regard to the new role being
undertaken by Miles Cresswell-Turner at Everyday Loans Group
(‘ELG’) and the need to fairly reflect his contribution made in both
roles, the Remuneration Committee approved that his bonus
targets (of both financial and non-financial nature) would be
allocated between Group level and ELG targets with a one-
third/two-third apportionment.
The ELG financial target for 2018, which equates to 70% of the
maximum potential bonus related to ELG activity, was based
on the profit of ELG before fair value adjustments, interest,
exceptional items and tax. The actual profit on this basis was
£34.98m being 112% of target and above the 90% threshold for
payment of the minimum 25% of the financial element of the
bonus. The next 50% of the financial element accrued on a
straight-line basis between 90% and 100% of target. The final
25% accrued on a straight-line basis between 100% and 105%
of target. Therefore, the financial element of the bonus vested
at 100% of the maximum financial element of 70% with a payout
of 70% of maximum bonus.
The ELG non-financial target for 2018 with respect to Miles
Cresswell-Turner was based on six component targets equating
to 30% of maximum potential bonus related to ELG activity. These
components are detailed in Part D. 50% of the non-financial
targets vested with a payout of 15% of maximum bonus, reflecting
the importance the Director’s place in ensuring that the Group
conducts its business in a compliant and responsible manner.
The Remuneration Committee has therefore determined a bonus
payout of 68.1% of base salary for John Van Kuffeler and Nick
Teunon and at 79.4% of base salary for Miles Cresswell-Turner.
The bonus amounts awarded to the Executive Directors was
£221,300 for John van Kuffeler, £190,700 for Nick Teunon and
£222,200 for Miles Cresswell-Turner. The 2018 bonuses will be
paid in cash. No part of the bonus will be subject to deferral.
Further details of the annual bonus for 2018 can be found on
page 77.
Awards were also made, including to Executive Directors, under
the all-employee Sharesave Plan (‘SAYE’).
OverviewStrategic ReportGovernanceFinancial Statements 68
Directors’ remuneration report continued
Part B: Our remuneration at a glance
Ahead of the summary of the Remuneration Policy and the Annual Report on Remuneration, we have below summarised how key
elements of the Remuneration Policy will be implemented for 2019 and the key decisions taken by the Committee in relation to base
pay and incentives for the Executives in respect of 2018.
2019 Executive Director Remuneration Policy
Base salary
Annual bonus
Maximum:
On-target:
Threshold:
Operation for 2019
Malus and clawback
John van Kuffeler
£333,100
100% of salary
75% of salary
25% of salary
Nick Teunon
£287,000
100% of salary
75% of salary
25% of salary
Miles Cresswell-Turner
£287,000
100% of salary
75% of salary
25% of salary
• 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 25% of target with on-target vesting at 75% and maximum
vesting at 100%, with vesting on a sliding scale between these points.
• As Miles Cresswell-Turner is Chief Executive of ELG, one-third of his performance measures will
be based on Group targets and two-thirds will be based on performance measures for ELG.
The measures relating to ELG will carry the same weighting as for the Group measures,
i.e. 70% on the financial performance of ELG and 30% on non-financial targets for ELG.
• 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 such other reason as determined by the Committee.
Pension
John van Kuffeler
10% of salary
Nick Teunon
Miles Cresswell-Turner
10% of salary
10% of salary
Shareholding requirement
100% of salary over 5 years
100% of salary over 5 years
100% of salary over 5 years
2018 year-end decisions made:
2019 salary review
2018 bonus outcome
Value
John van Kuffeler
Nick Teunon
Miles Cresswell-Turner
2.5% increase to £333,100 per
annum from 1 January 2019
2.5% increase to £287,000 per
annum from 1 January 2019
2.5% increase to £287,000 per
annum from 1 January 2019
68.1%
£221,300
68.1%
£190,700
79.4%
£222,200
% of salary/maximum
68.1% of salary
68.1% of salary
79.4% of salary
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Part C: Directors’ Remuneration Policy Summary
This section of the report contains details of the Directors’ Remuneration Policy that governs 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 was
approved by shareholders at the Company’s AGM on 14 May 2018. The Policy is displayed on the Company’s website, in the
Investors section.
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 remuneration structure supports and motivates 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 Summary Table
Element, purpose and
link to strategy
Base salary
To provide competitive
fixed remuneration that
will attract and retain key
employees and reflect
their experience and
position in the Group.
Operation
Maximum opportunity
Performance measures and assessment
A broad assessment of individual
and business performance is used
as part of the salary review.
No recovery provisions apply.
Annual percentage increases
are generally consistent with
the range awarded across
the Group.
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 2019 are disclosed
on page 78.
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; and
the level of incentive
compensation provided to
the Executives under the
annual bonus.
•
OverviewStrategic ReportGovernanceFinancial Statements Directors’ remuneration report continued
Element, purpose and
link to strategy
Benefits
To provide competitive
benefits and to attract
and retain high-calibre
employees.
Pension
To provide a competitive
Company contribution
that enables effective
retirement planning.
Annual bonus
Incentivises achievement
of annual objectives
which support the
Group’s short-term
performance goals and
protects longer term
interests of the Group.
Operation
Maximum opportunity
Performance measures and assessment
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.
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.
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.
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 payout
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.
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Element, purpose and
link to strategy
Long-Term Incentive
Non-Standard Finance
LTI for Executive Directors
and senior management.
The Long-Term Incentives
support the long-term
strategic objectives of
the Group.
Founder Shares awarded
to Executive Directors
on IPO.
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, subscribed
£255,000 for 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 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
per share.
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 per share.
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 on IPO if such
Ordinary Shares had been
issued at the time of Admission.
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).
OverviewStrategic ReportGovernanceFinancial Statements Directors’ remuneration report continued
Element, purpose and
link to strategy
Everyday Loans Group
LTI for Miles Cresswell-
Turner and senior
management of ELG.
The Long-Term Incentives
support the long-term
strategic objectives of
the Group.
Operation
Maximum opportunity
Performance measures and assessment
In recognition of Mr Cresswell-
Turner becoming Chief Executive
of ELG, he will receive an award
under the ELG LTI which was
implemented in 2017.
The maximum value of the
award under the ELG LTI for
Mr Cresswell-Turner is
£900,000.
The structure of the award is a
nil-cost option over NSF shares.
Under the ELG LTI, participants
share in a pool of 5% of the equity
value above a hurdle equity value
of ELG of £267m. The pool is subject
to a cap of £6m. Mr Cresswell-
Turner will receive an allocation
of 15% of the pool, which will result
in a 0.75% share of the growth in
ELG’s equity value above £267m at
31 December 2019, subject to a cap
of £900,000.
Performance will be tested against
the hurdle at 31 December 2019,
though the ability to exercise the
option will be deferred for one
year. Shares acquired on the
exercise of the option will have
to be held for a further year.
Awards under the NSF LTI will vest
at the end of December 2020.
As Mr Cresswell-Turner holds an
award under the NSF LTI, which
was made during 2017, the total
value of shares received by
Mr Cresswell-Turner under the ELG
LTI and the NSF LTI at the end of
December 2020 will be restricted
to the greater of the value of the
shares receivable under the NSF
LTI and the value of the shares
receivable under the ELG LTI.
All-employee incentives
Encourage all employees
to become shareholders
and thereby align
their interests with
shareholders.
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 are entitled to
participate on those same terms.
Shareholding guidelines
To ensure that Executive
Directors’ interests are
aligned with those of
shareholders over a
longer time horizon.
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.
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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 discretion 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.
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)
1,200
1,000
800
600
400
200
1,200
363
35%
1,000
242
26%
1,200
1,000
121
17%
250
36%
333
37%
333
32%
83
20%
333
100%
333
80%
333
47%
333
37%
333
32%
800
600
400
200
241
30%
800
161
22%
241
30%
161
22%
80
14%
287
39%
287
35%
215
37%
600
400
72
20%
72
20%
80
14%
287
39%
287
35%
215
37%
287
100%
287
80%
287
49%
287
39%
287
35%
287
100%
287
80%
287
49%
287
39%
287
35%
200
0
Minimum
Threshold
Target Maximum Maximum
Base salary Annual bonus NSF LTI
inc 50%
share price
appreciation
0
Minimum
Threshold
Target Maximum Maximum
0
Minimum
Threshold
Target Maximum Maximum
Base salary Annual bonus NSF LTI
inc 50%
share price
appreciation
Base salary Annual bonus NSF LTI
inc 50%
share price
appreciation
Assumptions used in determining the level of payout under given scenarios are as follows:
Element
Minimum
Threshold
Target
Maximum
Maximum inc 50% share
price increase
Fixed elements
Base salary at 1 January 2019
Estimated value of benefits
provided under the Policy
Pension – 10% of salary
Annual bonus
NSF LTI
ELG LTI
Nil
Nil
Nil
25% of maximum 75% of maximum
100% of salary
100% of salary
Nil
Nil
100% of the IFRS 2
value of the award
200% of the IFRS 2
value of the award
300% of the IFRS 2
value of the award
As for NSF LTI
As for NSF LTI
As for NSF LTI
Awards made under the NSF LTI and ELG LTI will be on a one-off basis. The on-target value displayed in the charts represents the
expected IFRS 2 value of the NSF LTI award. The maximum value displayed represents twice the expected IFRS 2 value for the NSF LTI
and the maximum value with 50% share price increase is 300% the expected IFRS 2 value.
The IFRS 2 value is considered to be a suitable basis for estimating the potential payouts of the NSF LTI. The ELG LTI award for Miles
Cresswell-Turner underpins his NSF LTI award and therefore the on-target and maximum values of this award are effectively included
within the NSF LTI award for him.
OverviewStrategic ReportGovernanceFinancial Statements Directors’ remuneration report continued
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 NSF LTI, to the extent that awards are available,
as set out in the Remuneration Policy table.
Maximum variable
remuneration
Share buy-outs/replacement
awards
Relocation policies
• 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.
•
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.
Legal fees
• 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.
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4. Executive Director service contracts and payments 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.
Discretion
None.
Pro-rata bonus may be awarded dependent on
reasons for leaving.
Founder Shares
No forfeiture.
None.
NSF LTI
and ELG 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.
Over the course of the next year, the Committee intend to contact key investors in order to facilitate more active shareholder
engagement around remuneration related issues. The outcome of these discussions will be reported in the 2019 Directors’
Remuneration Report.
All-employee remuneration
NSF are committed to creating an inclusive working environment and to reward our employees throughout the organisation in a fair
manner. In making decisions on executive pay, the Remuneration Committee considers wider workforce remuneration and conditions.
In June 2018, the Financial Reporting Council (‘FRC’) provided an updated UK Corporate Governance Code, which included an
increased focus on the link between all employee remuneration and executive remuneration. In light of the changes to the code,
the Remuneration Committee has committed to ensure that the approach to remuneration for employees adopted within subsidiary
companies will be considered when reviewing the Remuneration Policy. The Board has also confirmed the role of Heather McGregor
as Non-Executive Director with responsibility for ensuring Board engagement with the workforce.
OverviewStrategic ReportGovernanceFinancial Statements Directors’ remuneration report continued
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
Not applicable.
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.
Expenses
To provide Non-Executive
Directors with travel and
subsistence expenses.
Fee levels are sufficient to attract
individuals with appropriate knowledge
and experience.
Current fees are set out
in the Annual Report on
Remuneration on page 81.
Non-Executive Directors are paid a
base fee in cash or shares in NSF. 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.
Non-Executive Directors do not receive
any variable remuneration element or
receive any other benefits.
Non-Executive Directors are reimbursed
for all reasonable travelling and
subsistence expenses (including any
relevant tax) incurred in carrying out
their duties.
Increases in fees will be in line
with the median fee levels of
comparable companies.
Not applicable.
Not applicable.
Letters of appointment
The Non-Executive Directors do not have service contracts but are appointed under letters of appointment. Appointments are
reviewed every three years and new appointments are made following recommendation by the Nomination Committee.
Charles Gregson
Heather McGregor
Niall Booker
Date of appointment
30 April 2018
30 April 2018
9 May 2017
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.
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 2018. Disclosures in this report have 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 1 May 2019.
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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.
John van Kuffeler
John van Kuffeler
Nick Teunon
Nick Teunon
Miles Cresswell-Turner
Miles Cresswell-Turner
2018
2017
2018
2017
2018
2017
Base
salary
£000
325
288
280
230
280
295
Benefits
£000
Bonus
£000
Long-Term
Incentives
£000
Pension
£000
Other
£000
38
36
17
13
19
15
221
145
191
116
222
124
–
–
6
4
6
4
30
29
26
23
25
21
–
–
–
–
–
–
Total
£000
614
498
520
386
552
459
Notes
1 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 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.
3 The base salary for Miles Cresswell-Turner included a temporary additional salary of £50,000 in 2017 paid in respect of the period when he was acting as Chief Executive of
ELG as well as continuing his responsibilities as an Executive Director. The additional salary was excluded in the determination of his bonus. There has been no additional
salary in 2018.
4 Long-term incentives were the grant of options at a 20% discount under the SAYE plan.
Annual bonus outcomes for the period ended 31 December 2018 – audited
For 2018 the Executive Directors had a maximum annual bonus opportunity of 100% of salary. For each Executive Director, the 2018
annual bonus determination was based on the achievement of the financial and non-financial targets. The annual bonus table
below provides information on the resulting bonus payment for each Executive Director.
John van Kuffeler
Nick Teunon
Miles Cresswell-Turner
Payout (%
opportunity
for metric)
68.0%
68.3%
–
–
Weighting
70.0%
30.0%
–
–
68.1%
Payout (%
maximum
bonus)
Payout (%
opportunity
for metric)
47.6%
20.5%
–
–
68.0%
68.3%
–
–
Weighting
70.0%
30.0%
–
–
68.1%
Payout (%
maximum
bonus)
Payout (%
opportunity
for metric)
47.6%
20.5%
–
–
68.0%
68.3%
100.0%
50.0%
Payout (%
maximum
bonus)
15.9%
6.8%
46.7%
10.0%
Weighting
23.3%
10.0%
46.7%
20.0%
79.4%
Group financial
Group non-financial
ELG financial
ELG non-financial
Total bonus payout
(% maximum)
The financial and non-financial targets for the 2018 annual bonus and the extent to which they were met are as follows:
The financial target, which equated to 70% of the maximum potential bonus, was £15.27m based on the profit of the Company before
certain adjustments including fair value adjustments, certain IFRS 9 transitional related items, amortisation of acquired intangibles,
exceptional items and tax. The actual profit on this basis was £15.06m, being 98.6% of target and above the 90% threshold for
payment of the minimum 25% of the financial element of the bonus. The next 43% of the financial element accrued on a straight-line
basis between 90% and 100% of target. Therefore, the financial element of the bonus vested at 68.1% of the maximum financial
element of 70% (47.6% of maximum bonus for John Van Kuffeler and Nick Teunon, and 15.9% for Miles Cresswell-Turner).
The non-financial element was based on six individual components representing 30% of maximum bonus in total. These non-financial
targets, which are described below, were met as follows:
1. For each of the trading entities within the Group, positive reports from KPMG (the Group’s outsourced internal audit provider) on
lending practices (including affordability assessment and policies for dealing with vulnerable customers). Met as to 60%.
2. For each of the trading entities within the Group, positive reports from KPMG on collections practices (including forbearance and
policies for dealing with vulnerable customers). Met as to 60%.
3. A minimum cash/undrawn headroom of £25m for the Company at 31 December 2018 with a dividend payment policy of 50% of
post-tax profit before fair value adjustments, amortisation of acquired intangibles and exceptional items. Met in full.
4. Delivery of good customer outcomes by each division as measured by a good customer outcomes dashboard to be approved by
the Board. Met as to 80%.
5. No material breaches of NSF’s Risk Appetite Policy. Met as to 60%.
6. Updated reports for each division and NSF plc on internal controls. Met as to 50%.
As a result, the non-financial element was met as to 68.3% (20.5% of maximum).
OverviewStrategic ReportGovernanceFinancial Statements
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Directors’ remuneration report continued
Miles Cresswell-Turner’s annual bonus was subject to additional financial and non-financial performance conditions in relation
to Everyday Loans Group. The financial target was £31.46m based on the profit of the Company before fair value adjustments,
interest, amortisation of acquired intangibles, exceptional items and tax. The actual profit on this basis was £34.98m, being 112%
of target and above the 90% threshold for payment of the minimum 25% of the financial element of the bonus. The next 50% of the
financial element accrued on a straight-line basis between 90% and 100% of target. The final 25% of the financial element was
accrued on a straight-line basis between 100% and 105% of target. Therefore, the financial element of the bonus vested at 100%
of the maximum financial element of 70%.
The non-financial element was based on six individual components representing 20% of maximum bonus in total. These non-financial
targets, which are described below, were met as follows:
1. Development of a concise customer outcomes dashboard, and attainment of required levels of outcome. Not met.
2. Continued progress on building a more integrated operating model across the branch network. Not met.
3. Successful opening of 12 new branches and recruitment, training and retention of the staff to run these. Met as to 100%.
4. Successful integration of George Banco and TrustTwo into the Guaranteed Loan Division, operating off a single platform for new
business and a clear plan for running off the back book. Not met.
5. Delivery of a clear plan to achieve 20% ROA for both ELL and GLD by 2020 with visible progress towards this target in 2018. Met as
to 100%.
6. Roll-out of the new affordability model across ELL and GLD by the end of Q3 2018. Met as to 100%.
As a result, the non-financial element was met as to 50% (15% of maximum).
The total award for Executive Directors of 68.1% of the maximum for John van Kuffeler and Nick Teunon and 79.4% of the maximum for
Miles Cresswell-Turner. The Remuneration Committee has therefore determined that the bonuses awarded to the Executive Directors
are £221,300 for John van Kuffeler, £190,700 for Nick Teunon and £222,200 for Miles Cresswell-Turner. The 2018 bonuses will be paid in
cash. No part of the bonus will be subject to deferral.
Long-Term Incentive awards vesting in 2018
No LTI awards vested in 2018.
Long-Term Incentive awards made in 2018
There were no awards under the LTI made in 2018. The Company has an ongoing LTI which commenced on 1 Jan 2017 and runs until
31 December 2020. This LTI scheme is outlined in the Remuneration Policy summary table on page 71.
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 2019
Base salary
In setting salary levels for the 2019 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 2019 and the relative increases are set out below.
John van Kuffeler
Nick Teunon
Miles Cresswell-Turner
Base salary £000
2019
£333
£287
£287
2018
% change
£325
£280
£280
2.5%
2.5%
2.5%
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 2019 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%
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For the 2019 financial year, performance measures include financial measures based on profit of the Company before fair value
adjustments, amortisation of acquired intangibles, exceptional items and tax. Non-financial measures 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. Financial and non-
financial measures are split 70% financial and 30% non-financial. Miles Cresswell-Turner’s performance measures will be based as to
one-third on Group performance and two-thirds on performance of ELG.
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 end 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 payouts.
Long-term incentive awards
No long-term incentive awards will be made during the year.
3. Consideration by the Committee of matters relating to the Directors’ remuneration for 2018 and 2019
The Committee seeks to comply with the UK Corporate Governance Code but does not meet requirement D.2.1 of the Code as the
Chairman of the Company is also the Chair of the Committee. The Committee and the Board of the Company do not consider this
provision to be appropriate given the size and nature of the Company. 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.nsfgroupplc.com.
Members of the Committee during 2018
Independent
January 2018
February 2018
March 2018
April 2018
December 2018
Attendance
Charles Gregson
Heather McGregor
Niall Booker
No
Yes
Yes
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
100%
100%
100%
All Committee members attended all Remuneration Committee meetings, unless otherwise stated, that took place while they were
members of the Committee. 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 2018 from PricewaterhouseCoopers (‘PwC’) during the year. PwC were appointed by the
Committee 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 £72,200. 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 SAYE and
long-term incentive arrangements.
During the financial year, there were five Committee meetings. The matters covered at each meeting are covered in the table below:
January 2018
February 2018
• Review of Executive Directors’ bonuses performance targets
• Review of Executive Directors’ bonuses performance targets
for 2018.
for 2018.
• Discussion of the remuneration for Executive Directors with
• Discussion of the remuneration for Executive Directors with
respect to 2018.
• Discussion of the approval of GLD LTI.
• Agreement of work plan for 2018.
respect to 2018.
• Consideration of Executive Director Bonuses for 2017.
March 2018
April 2018
• Consideration of Executive Director Bonuses for 2017 with
• Consideration and Approval of 2018 Executive Director
respect to Non-financial targets.
• Approval of the Terms of Reference.
non-financial elements of Bonus scheme.
• Consideration of succession planning.
December 2018
• Benchmarking of Non-Executive Director fees with respect to 2019.
• Benchmarking of the remuneration for Executive Directors with respect to 2019.
• Consideration of the impact of IFRS 9 on the Executive Director 2018 Bonus scheme.
OverviewStrategic ReportGovernanceFinancial Statements 80
Directors’ remuneration report continued
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 benchmark the Company’s performance.
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 2018.
Total Shareholder Return
140
120
100
80
60
40
20
0
0 2/2 015
0 4/2 015
0 6/2 015
0 8/2 015
10 /2 015
12/2 015
0 2/2 016
0 4/2 016
0 6/2 016
0 8/2 016
10 /2 016
12/2 016
0 2/2 017
0 4/2 017
0 6/2 017
0 8/2 017
10 /2 017
12/2 017
0 2/2 018
0 4/2 018
0 6/2 018
0 8/2 018
10 /2 018
12/2 018
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 liquidity in the Group’s shares; the Group’s scale relative to other potential investment opportunities; limited research
coverage by sell-side analysts; softer than expected financial performance by Loans at Home in 2016; severe underperformance by
the Group’s major quoted competitor in 2017 and 2018 and concerns over future market and regulatory conditions in the UK consumer
finance segment.
Group Chief Executive
Single figure of total remuneration (£000)
Bonus payout (% maximum)
Long-term incentive vesting rates (% maximum)
2018
2017
614
68.1%
n/a
498
50.5%
n/a
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 2017 to 2018
Group Chief Executive
Employee pay
Base
salary
13%
4.5%
Benefits
6%
1%
Annual
bonus
52.4%
5%
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 (including share buy-backs)
2018
2017
% change
£38.7m
£9.3m
£28.8m
£5.8m
34%
60%
Note
1 Employee spend for 2017 includes pay for the employees of George Banco following the acquisition in August 2017.
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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.
Charles Gregson
Charles Gregson
Heather McGregor
Heather McGregor
Niall Booker
Niall Booker
Fees
£000
125
50
75
75
75
50
Benefits/
other
£000
–
–
–
–
–
–
Total
£000
125
50
75
75
75
50
2018
2017
2018
2017
2018
2017
Non-Executive Directors are reimbursed travel and subsistence expenses that are incurred for business reasons. Any tax that arises on
these reimbursed expenses is paid by the Company.
Fees to be provided in 2019 to the Non-Executive Directors
The following table sets out the annual fee rates for the Non-Executive Directors:
Chairman’s fee
Independent Non-Executive Director fee
Charles Gregson
Heather McGregor
Niall Booker
Note
1 Charles Gregson will receive 50% of his fee (post tax) in NSF shares.
2019
125
75
75
2018
% change
125
75
75
0
0
0
6. Directors’ shareholding and share interests
Shareholding and other interests at 31 December 2018 – 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.
John van Kuffeler
Nick Teunon
Miles Cresswell-Turner
Charles Gregson
Heather McGregor
Niall Booker
Total
John van Kuffeler
Nick Teunon
Miles Cresswell-Turner
Charles Gregson
Heather McGregor
Niall Booker
Total
Shareholding at 31 December 2018
Interest in Founder Shares
Number of
beneficially
owned
shares
2,114,474
87,980
833,780
310,984
78,700
426,700
3,852,618
% of salary
held
Shareholding
requirement met
419%
20%
192%
–
–
–
Yes
No
Yes
–
–
–
Options held
subject to
service
Total
number of
shares/
options
–
2,114,474
36,349
124,329
36,349
870,129
–
–
–
310,984
78,700
426,700
72,698 3,925,316
Subject to
conditions
Vested but
unexercised
Total at
31 December
2018
30
25
25
10
–
–
90
–
–
–
–
–
–
–
30
25
25
10
–
–
90
Shares subject to
performance
conditions
Options subject to
performance
conditions
Vested
Total at
31 December
2018
–
–
250
–
–
–
250
375
250
–
–
–
–
625
–
–
–
–
–
–
–
375
250
250
–
–
–
875
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 (£0.66 at 31 December 2018) and base salaries at 1 January 2019.
3 The options held subject to service were granted under the SAYE plan.
4 No scheme interests were awarded during the year (2017: nil).
5
John van Kuffeler and Nick Teunon also hold nil-cost options over NSF shares under the NSF LTI. Miles Cresswell-Turner also holds shares in a subsidiary company under the
NSF LTI; these shares will be exchanged for NSF shares on vesting. In both cases, the number of NSF shares that these Executive Directors will eventually acquire (which
could be nil) will only be determined at the vesting date of 31 December 2020 and will be based on the growth in value of NSF above the share price hurdle of £1.10.
No changes took place in the interests of the Directors between 1 January 2019 and 12 March 2019.
OverviewStrategic ReportGovernanceFinancial Statements 82
Directors’ remuneration report continued
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 10-year period to
employees under all its share plans and can issue a maximum of 5% of its issued share capital in a rolling 10-year period under
executive (discretionary) share plans.
Non-Executive positions held by Executive Directors
John van Kuffeler retained fees of £60,000 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
2017 Annual Report on Remuneration at the AGM on 14 May 2018.
Directors’ Remuneration Policy
2017 Annual Report on Remuneration
244,276,844
246,822,877
95.41
96.41
11,742,238
9,196,705
4.59
3.59
500
0
Votes for
%
Votes against
%
Votes withheld
By order of the Board.
Charles Gregson
Chairman of the Remuneration Committee
14 March 2019
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Directors’ report
for the year ended 31 December 2018
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 2018. Both
the Strategic Report on pages 7 to 49 and this 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 provided by such
law. Other information required to be disclosed in the
Directors’ report is expressly outlined in this section.
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.
The Strategic Report, which can be found on pages 7 to 49 of
the Annual Report, 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 30 to 32 of the
Strategic Report.
Trading results and dividends
The Group’s consolidated loss after taxation for the financial year
was £1,679,000 (2017: loss of £10,335,000).
An interim dividend of 0.6p per share was paid to shareholders
on 17 October 2018 and a further final dividend of 2.00p has
been recommended by the Board, payable to shareholders on
the share register on 3 May 2019. If approved, the final dividend
would be paid on 7 June 2019.
Future business developments
Information on the Company and its subsidiaries’ future
developments can be found in the Chairman’s Statement on
pages 4 to 6, the Group Chief Executive’s report on pages 12 to 16
and the 2018 Financial Review and Divisional overview on pages
33 to 45.
Share capital
As at 31 December 2018 the share capital of the Company
consisted of 317,049,682 Ordinary Shares of £0.05 each
(312,049,682 of which were in issue and 5,000,000 shares held
in treasury) 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
(save that Ordinary Shares held in treasury are not eligible to
receive dividends or other distributions declared). 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 25
to the financial statements. There are currently no redeemable
non-voting preference shares of the Company in issue.
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 acquired 2,507,308 of its own shares during the
financial year ended 31 December 2018 (see further details below).
Further details on the Company’s share capital can be found in
note 23 to the financial statements.
Substantial shareholdings
The Company has been notified in accordance with the
Disclosure and Transparency Rules DTR-5 that as at 28 February
2019 the following investors have a substantial interest in the
issued Ordinary Share capital. The Company did not receive
any further notifications pursuant to DTR 5 in the period from
28 February 2019, to 8 March 2019 (being a date not more than
one month prior to the date of the Company’s Notice of Annual
General Meeting).
Invesco Asset Management
Woodford Investment Management
Marathon Asset Management LLP
Aberforth Partners LLP
Quilter Cheviot Asset Management
28.6%
25.7%
12.8%
12.8%
2.9%
In accordance with the Disclosure and Transparency Rules DTR-5
as at 31 December 2018 the following investors had a substantial
interest in the issued Ordinary Share capital.
Invesco Asset Management
Woodford Investment Management
Aberforth Partners LLP
Marathon Asset Management LLP
Toscafund Asset Management LLP
Quilter Cheviot Asset Management
28.7%
25.5%
12.8%
12.2%
3.0%
3.0%
The Directors’ beneficial interests in the allotted shares of the
Company as at 31 December 2018 are outlined below:
John van Kuffeler
Nick Teunon
Miles Cresswell-Turner
Niall Booker
Charles Gregson
Heather McGregor
Number of
Ordinary
Shares held
2,114,474
87,980
833,780
426,700
310,984
78,700
As granted by shareholders at the 2018 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 2019 AGM.
On 8 November 2017 the Group launched a share buy-back
programme to repurchase up to five million Ordinary Shares of
five pence in the Company (the ‘Programme’). The Programme
commenced on 8 November 2017 and ended on 1 May 2018
(the ‘Engagement Period’). Purchases continued during any
closed periods of the Company during the Engagement Period.
The aggregate purchase cost of shares purchased under the
Programme reached £3,426,349 (excluding costs) and amounted
to 5,000,000 shares all held in treasury.
In accordance with the Group’s Remuneration Policy approved
by shareholders on 14 May 2018, over the course of the year, the
Group purchased a total of 54,901 Ordinary Shares at a total cost
of £34,030 (excluding dealing costs) in order to satisfy 50% of
the post-tax fees due to Charles Gregson with respect to his role
as Chairman. The remaining 50% of fees due has been paid
in cash.
OverviewStrategic ReportGovernanceFinancial Statements 84
Directors’ report continued
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.
Directors:
Charles Gregson
John van Kuffeler
Nick Teunon
Miles Cresswell-Turner
Niall Booker
Heather McGregor
Non-Executive Chairman
Group Chief Executive
Chief Financial Officer
Executive Director
Non-Executive Director
Non-Executive Director
The Directors and their profiles are detailed on pages 50 to 51.
All of these Directors above served in office throughout the year
under review and up to the signing of the Annual Report.
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.
No indemnities were provided and no payments were made
during the year. There were no other qualifying indemnities
in place during the period.
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 and a Group-wide intranet help to 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.
On 19 October 2018, NSF signed the ‘Dying to Work Charter’ an
initiative providing employees of signatory companies with the
comfort of knowing that their company will support their choices
regarding work in the event of a terminal illness diagnosis.
“At Non-Standard Finance we strongly believe in supporting
our employees at times of personal stress and difficulty. This
demonstrates that we care deeply about our workforce and
through this creates a culture whereby our employees genuinely
care about our 180,000 customers. It is therefore a pleasure to
sign the ‘Dying To Work Charter.’”
John van Kuffeler, Group Chief Executive
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. We are an active
participant of the ‘Future Boards’ scheme and aim to comply with
the additional guidance in the revised Corporate Governance
Code where it is practical to do so.
The Company is committed to adopting employment practices
which follow best practice and has set-up an employee ‘Save
As You Earn’ Share Scheme which provides an opportunity
for employees to share in the Company’s future success. It is
expected that additional programmes aimed at enhancing
employee engagement further will be developed as the
Group expands.
Self-employed agents
The Group’s home credit division utilises a network of self-
employed agents, each of which 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.
Related party transactions
Refer to note 29 in the notes to the financial statements.
Post-balance sheet events
Since 31 December 2018 there have been no events that require
disclosure in or adjustment to the financial statements.
Environmental factors
The Board regularly reviews 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. As noted on page 49, the Group has started to
capture some environmental data and will provide further
updates in future reports.
Charitable and political donations
The Group made charitable donations totalling £84,082 to a
variety of charities in the year ended 31 December 2018. These
included The Alzheimer’s Society, The Money Advice Trust,
Loan Smart, Cancer Research and JDRF (Juvenile Diabetes
Research Foundation).
The Group made no political donations in the year ended
31 December 2018.
Health and safety
Health and safety standards and benchmarks have been
established in the Company and its divisions and compliance
against these standards 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.
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Modern Slavery
In accordance with the Modern Slavery Act 2015, the Group has policies and statements in place to comply with the requirements
of the Modern Slavery Act 2015. A copy of the Group’s Modern Slavery Statement is available on the Group’s website:
www.nsfgroupplc.com.
Annual General Meeting
The Annual General Meeting of the Company is to be held at Maitland/AMO, 13 King’s Boulevard, London, N1C 4BU at 11.00 am on
1 May 2019. 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.
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 66 to 82
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Auditor
Deloitte LLP, the external auditor for the Company,
was appointed in 2014 and a resolution proposing their
reappointment will be proposed at the forthcoming AGM.
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law
and regulations.
Directors’ statement as to disclosure of information to auditor
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 2018 and how they are being managed or
mitigated can be found in the Strategic Report on pages 7 to 49
and also in the Risk Committee Report on page 65. 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
in note 30 to the financial statements.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
(‘IFRSs’) as adopted by the European Union and Article 4 of the
IAS Regulation and have also chosen to prepare the Parent
Company financial statements under IFRSs as adopted by the EU.
Under company law the Directors must not approve the accounts
unless they are satisfied that they give a true and fair view of the
state of affairs of the Company and of the profit or loss of the
Company for that period. In preparing these financial statements,
International Accounting Standard 1 requires that Directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
• provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users
to understand the impact of particular transactions, other
events and conditions on the entity’s financial position and
financial performance; and
• make an assessment of the Company’s ability to continue
as a going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and enable them to ensure
that the financial statements comply with the Companies Act
2006. They are also responsible for safeguarding the assets of
the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
OverviewStrategic ReportGovernanceFinancial Statements
86
Directors’ report continued
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company’s website. Legislation in the United Kingdom governing
the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
Each of the Directors confirms that, to the best of their knowledge:
•
•
•
the financial statements, prepared in accordance with
International Financial Reporting Standards as adopted by
the European Union, 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;
the Strategic Report includes a fair review of the development
and 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 that they face; and
the Annual Report and financial statements, taken as a
whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the
Company’s position and performance, business model
and strategy.
The Annual Report and Financial Statements 2018 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 14 March 2019 and signed by the
order of the Board.
Sarah Day
Company Secretary
14 March 2019
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Independent auditor’s report
Report on the audit of the financial statements
Opinion
In our opinion:
•
•
•
•
the financial statements of Non-Standard Finance plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) give a true and fair
view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2018 and of the Group’s 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 Parent 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.
We have audited the financial statements which comprise:
•
•
•
•
•
the consolidated statement of comprehensive income;
the consolidated and Parent Company statements of financial position;
the consolidated and Parent Company statements of changes in equity;
the consolidated and Parent Company cash flow statements; and
the related notes 1 to 31.
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.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements
section of our report.
We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our
audit of the financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to
listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We
confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
• carrying value of goodwill;
• provision for impairment losses against loans and receivables to customers; and
•
revenue recognition.
Materiality
Scoping
The materiality that we used for the Group financial statements was £760,000, which was determined based on
5% of profit before tax, fair value adjustments of £7.7m and amortisation of acquired intangible assets of £8.7m.
Our Group audit scope focused on the Parent Company and each of the trading subsidiaries within the Group
which together account for 100% of the Group’s losses before tax and customer receivables balances.
Significant changes
in our approach
In the prior year, we identified a key audit matter arising from the acquisition accounting for George Banco.
There were no such acquisitions in the current year.
OverviewStrategic ReportGovernanceFinancial Statements 88
Independent auditor’s report continued
Conclusions relating to going concern, principal risks and viability statement
Going concern
We have reviewed 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 and Company’s ability to continue to do so over
a period of at least 12 months from the date of approval of the financial statements.
We confirm that we have
nothing material to
report, add or draw
attention to in respect
of these matters.
We considered as part of our risk assessment the nature of the Group, its business model and related
risks including where relevant the impact of Brexit, the requirements of the applicable financial reporting
framework and the system of internal control. We evaluated the Directors’ assessment of the Group’s
ability to continue as a going concern, including challenging the underlying data and key assumptions
used to make the assessment, and evaluated the Directors’ plans for future actions in relation to their
going concern assessment.
We are required to state whether we have anything material to add or draw attention to in relation to
that statement and report if the statement is materially inconsistent with our knowledge obtained in
the audit.
Principal risks and viability statement
Based solely on reading the Directors’ statements and considering whether they were consistent with the
knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation
of the Directors’ assessment of the Group’s and the Company’s ability to continue as a going concern,
we are required to state whether we have anything material to add or draw attention to in relation to:
We confirm that we have
nothing material to
report, add or draw
attention to in respect
of these matters.
•
•
•
the disclosures on pages 30 to 32 that describe the principal risks and explain how they are being
managed or mitigated;
the Directors’ confirmation on page 85 that they have carried out a robust assessment of the principal
risks facing the Group, including those that would threaten its business model, future performance,
solvency or liquidity; or
the Directors’ explanation on page 62 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.
We are also required to report whether the Directors’ statement relating to the prospects of the Group
is materially inconsistent with our knowledge obtained in the audit.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.
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Carrying value of goodwill
Key audit matter
description
The acquisitions of Everyday Loans Group, Loans at Home and George Banco have led to the recognition of
£140.7m of goodwill (2017: £140.7m) in the Consolidated statement of financial position.
Under IAS 36, impairment testing for goodwill should always be carried out in the context of a cash generating
unit (“CGU”) as goodwill does not generate cash flows independently of other assets.
When goodwill has been allocated to a CGU, IAS 36 requires that unit to be tested for impairment at least
annually and whenever there is an indication that the unit may be impaired.
From our risk assessment procedures, we focused our work on the valuation of the Loans at Home CGU
(£40.2m for both 2017 and 2018 year-end), given it is most sensitive to management’s inputs and assumptions.
Management performed a goodwill impairment assessment as at 31 December 2018 by determining the
recoverable amount of Loans at Home, based on fair value less cost to sell, and comparing this to the carrying
value of the CGU. Management determined that no impairment was required to the carrying value of goodwill.
The critical judgements and estimates involved in management’s impairment assessment are:
•
•
forecast profit after tax; and
the calculation and application of an appropriate market multiple to the forecasts
Further detail in respect of management judgements and assumptions is set out within the Audit Committee
report on pages 60 to 62 and notes 1, 2 and 14 to the financial statements.
How the scope of
our audit responded
to the key audit
matter
We assessed the controls relating to the Loans at Home goodwill impairment review. We challenged the
reasonableness of management’s key assumptions used in the impairment assessment and our challenge
considered the appropriateness of the methodology for compliance with IAS 36. Additionally, we independently
calculated a fair value of the CGU and performed a sensitivity analysis for each of the key assumptions to
assess the impact on the recoverable amount. We focused our audit procedures on the areas to which the
carrying value of goodwill is most sensitive.
In relation to management’s forecast earnings we:
• challenged the reliability of management’s forecasting based on historical data;
•
reviewed the consistency of management’s assumptions with their assessment of viability and going
concern, and considered recent performance to assess the validity of management’s estimates; and
• performed a sensitivity analysis over forecast and break-even growth rates to assess these for
reasonableness in light of historic performance.
In relation to the market multiple, we used our valuation experts to challenge the multiple by determining an
independent benchmark.
Key observations
We found management’s approach for the goodwill impairment assessment to be compliant with IAS 36.
We agree that the market multiple valuation methods are reasonable approaches for determining an equity
fair value.
The market multiple and the forecast earnings adopted by management are within the acceptable range that
we independently calculated. Applying management’s key assumptions gives a fair value estimate of between
£64m to £67m as at year-end for the Loans at Home CGU. Compared to the carrying value of £62m, this leaves
marginal headroom of between £2m to £5m. Accordingly, no impairment was recognised.
We noted that the carrying value of goodwill allocated to the CGU is highly sensitive to future forecast
earnings, as disclosed in note 14 to the financial statements.
OverviewStrategic ReportGovernanceFinancial Statements
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Independent auditor’s report continued
Provision for impairment losses against loans and receivables to customers
Key audit matter
description
The Group holds an IFRS 9 impairment provision of £45m against gross customer receivables of £360m
(2017: IAS 39 impairment provision of £24.5m against restated gross customer receivables of £292m).
From 1 January 2018, the Group has implemented IFRS 9, which has resulted in the Group applying an
expected credit loss (“ECL”) model to determine the provision for impairment losses against loans and
receivables to customers. In particular, for financial assets held at amortised cost, IFRS 9 requires the
carrying value of the asset to be assessed for impairment using unbiased forward-looking information.
The measurement of expected credit losses is complex and involves a number of judgements and estimation
on assumptions relating to customer default rates, historical collection rates, exposure at default, likely loss
given default, assessing significant increases in credit risk and future economic scenario modelling. These
assumptions are informed using historical behaviour and experience. They are also affected by management’s
consideration of the future economic environment including the potential effect of the withdrawal of the
United Kingdom from the European Union.
The Group has not restated comparative information, so the transitional impact to equity from the application
of IFRS 9 on 1 January 2018 was £13m (£11m including impact of a deferred tax liability).
The assessment of provisions for impairment losses requires management to make significant judgements in
respect of the three main business divisions:
Home credit
Management utilises historical collections curves which segment provisioning percentages by product,
duration and arrears to determine expected cash flows. From our risk assessment procedures, we focussed
on the reliability of collection curves used in the calculation including the completeness and accuracy of
associated data inputs.
Branch-based lending and guarantor loans
Under IFRS 9, these divisions use a parameter-based methodology for the expected credit loss calculation that
uses recent historical experience to determine Probability of Default (“PD”) and Loss Given Default (“LGD”)
percentages split by product type. Based on our risk assessment, we focused on the appropriateness of
modelling methodologies adopted and the timely identification of triggers to transition from 12-month to
lifetime losses.
Given the significant level of management judgement involved, we have determined that there is the potential
for fraud through the manipulation of this balance.
Further detail in respect of management judgements and assumptions is set out within the Audit Committee
report on pages 60 to 62 and notes 1, 2 and 18 to the financial statements.
We assessed the controls relating to the identification, valuation and recording of impairment provisions.
For each of the Group’s reportable segments we evaluated whether the methodology applied by management
is compliant with the new requirements of IFRS 9, effective from 1 January 2018.
We challenged the appropriateness of management’s assumptions underlying the impairment provision
calculations. This involved evaluating management’s conclusions regarding the use of forward-looking
information when assessing compliance with the standard, and benchmarking against peers in the industry.
As part of this work, we considered the potential impact of Brexit on the calculation of the provision.
To test the completeness and accuracy of inputs into the models, we traced to and from source
documentation. We also used our analytic tools to perform independent risk assessment tests and to identify
inconsistencies and exceptions in input and output data.
Where relevant, our IT specialists tested the IT control environment, scripts and coding used internally
by management, and their service provider, to validate the practical application of management’s
IFRS 9 methodology.
We performed sensitivity analysis over the key assumptions of the models to assess the potential for
management bias and we considered the strategy of the businesses to assess changes to risk appetite and
product mix and how these may influence impairment.
We reviewed the accuracy of management’s overlay provisions with reference to supporting calculations and
cash collections, and challenged the completeness through a review of industry updates and analysis of key
performance indicators (‘KPIs’).
How the scope of
our audit responded
to the key audit
matter
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Provision for impairment losses against loans and receivables to customers continued
Key observations
The provision models across the Group were found to be compliant with the requirements of IFRS 9. We
concluded that the assumptions underpinning the model were determined and applied appropriately.
Accordingly, the recognised impairment provision was reasonably stated.
In particular, we found that the expected cash collections used in the models are materially consistent with
recent performance and budgeted collections.
The impairment provisions held against the loan book are in line with current collections performance, and
management’s application of macroeconomic scenarios is reasonable for each of the different segments.
Revenue recognition
Key audit matter
description
The Group’s main revenue stream is interest income of £158m (2017: £108m) which should be recognised based
on the effective interest rate (’EIR’) method in accordance with IFRS 9.
The EIR method spreads directly attributable revenues and costs over the behavioural life of the loan.
The Group’s EIR models are heavily reliant on the quality of the underlying data flowing into the models.
The key judgements in determining revenue recognition include:
•
the period over which forecast cash flows are modelled to determine the EIR, as changes to this assumption
could significantly affect the revenue recognised in any given period.
• which elements are integral to loan contracts and therefore included in the EIR of the loan.
• manual adjustments to revenue that pose a significant risk of material misstatement.
• whether loans have been modified substantially and the impact thereof on interest recognition.
Based on our risk assessment, we focused our work for each of the business divisions as follows:
Home credit – the early redemption assumptions in the EIR calculation are supported by the behavioural life of
the underlying products.
Branch-based lending and guarantor loans – the treatment of broker commissions in the EIR calculation for
customer loans.
Given the significant level of management judgement involved, we have determined that there is a potential
risk of fraud through possible manipulation of the revenue balance.
Further detail in respect of management judgements and assumptions is set out within the Audit Committee
report on pages 60 to 62 and notes 1 and 4 to the financial statements.
How the scope of
our audit responded
to the key audit
matter
We assessed the controls relating to the recording of revenue, including manual adjustments. We considered
the appropriateness of the methodology for compliance with IFRS 9 and we challenged management’s
assumptions in respect of cash flow estimates by comparing to underlying data sources and benchmarks.
In particular, we focused on the timing and level of early settlements that directly impact estimated
behavioural lives.
Considering the contractual terms of the loans, we challenged whether all directly attributable costs and fees
were identified and appropriately included in the EIR calculation.
For a sample of loans, we independently recalculated the effective interest rates and compared these to the
EIRs applied in the revenue models. On a sample basis, we also assessed the treatment of broker commissions
upon substantial modification of loans.
Key observations
The revenue recognition models were found to be compliant with the requirements of IFRS 9, the assumptions
underpinning the models were determined and applied appropriately, and accordingly recognised revenue
was reasonable stated.
OverviewStrategic ReportGovernanceFinancial Statements
92
Independent auditor’s report continued
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 financial statements
Parent Company financial statements
Materiality
£760,000 (2017: £660,000)
£262,000 (2017: £219,000)
Basis for
determining
materiality
Rationale for the
benchmark applied
We used 5% of adjusted pre-tax profit. Adjusted
pre-tax profit is before fair value adjustments of
£7.7m, amortisation of acquired intangible assets
of £8.7m and exceptional items of £nil as described
in the Consolidated Statement of Comprehensive
Income.
For the year ended 31 December 2017, we used 5%
of pre-tax profit, before fair value adjustments of
£11.9m, amortisation of acquired intangible assets
of £7.9m, and exceptional items of £6.3m.
Profit based measures are the financial measures
most relevant to users of the financial statements.
We considered 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 to that of comparable
listed companies.
We used 5% of pre-tax profit.
For the year ended 31 December 2017, we used 5%
of pre-tax profit.
We considered the most relevant basis for materiality
to be the profits earned from continuous business
operations.
Adjusted profit before tax £15m
£760,000
Group materiality
£380,000 to
£608,000
Component materiality
range (excluding
the parent statutory
materiality)
Adjusted PBT
Group materiality
£38,000
Audit Committee
reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £38,000
(2017: £33,000), 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.
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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 misstatements 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 which together account for 100% of the Group’s
losses before tax and customer receivables balances. We have performed audit procedures over the Group consolidation and
consolidation adjustments and we have audited all the subsidiaries using a materiality range of £380,000 to £608,000. The scope is
consistent with prior year.
All entities within the Group have the same engagement partner.
Other information
The Directors are responsible for the other information. The other information comprises the information
included in the annual report other than the financial statements and our auditor’s report thereon.
We have nothing to
report in respect of
these matters.
Our opinion on the financial statements does not cover the other information and, except to the extent
otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to
determine whether there is a material misstatement in the financial statements or a material misstatement
of the other information. If, based on the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report that fact.
In this context, matters that we are specifically required to report to you as uncorrected material
misstatements of the other information include where we conclude that:
• Fair, balanced and understandable – the statement given by the Directors that they consider the
annual report and financial statements taken as a whole is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Group’s position and performance,
business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
• Audit Committee reporting – the section describing the work of the Audit Committee does not
appropriately address matters communicated by us to the Audit Committee; or
• Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the
Directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK
Corporate Governance Code containing provisions that would be specified for review by the auditor in
accordance with Listing Rule 9.8.10R(2) were the Company premium listed do not properly disclose a
departure from a relevant provision of the UK Corporate Governance Code.
Responsibilities of Directors
As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to
continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of
accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no
realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these
financial statements.
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set out below.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
OverviewStrategic ReportGovernanceFinancial Statements 94
Independent auditor’s report continued
Extent to which the audit was considered capable of detecting irregularities, including fraud
We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then design
and perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to
provide a basis for our opinion.
Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws
and regulations, our procedures included the following:
• enquiring of management, internal audit and the Audit Committee, including obtaining and reviewing supporting documentation,
concerning the Group’s policies and procedures relating to:
–
identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of
non-compliance;
– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
– the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations;
• discussing among the engagement team including significant component audit teams and involving relevant internal specialists,
including tax, valuations, IT and industry specialists regarding how and where fraud might occur in the financial statements and
any potential indicators of fraud. As part of this discussion, we identified potential for fraud in the following areas: revenue
recognition, loan loss provisioning and management override of controls; and
• obtaining an understanding of the legal and regulatory frameworks that the Group operates in, focusing on those laws and
regulations that had a direct effect on the financial statements. The key laws and regulations we considered in this context
included relevant provisions of the UK Companies Act, Listing Rules and tax legislation. We also considered those laws and
regulations that had a fundamental effect on the operations of the Group, such as FCA regulation.
Audit response to risks identified
As a result of performing the above, we identified revenue recognition and the provision for impairment losses against loans and
receivables to customers as key audit matters. The key audit matters section of our report explains the matters in more detail and also
describes the specific procedures we performed in response to those key audit matters.
In addition to the above, our procedures to respond to risks identified included the following:
• reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with relevant laws
and regulations discussed above;
• enquiring of management, the Audit Committee and external legal counsel concerning actual and potential litigation and claims;
• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material
misstatement due to fraud;
• reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence
•
with the Financial Conduct Authority and HMRC; and
in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and
evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including
internal specialists and significant component audit teams, and remained alert to any indications of fraud or non-compliance with
laws and regulations throughout the audit.
Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
•
•
the information given in the Strategic Report and the Directors’ report for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
the Strategic Report and the Directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and of the Parent Company and their environment obtained in the
course of the audit, we have not identified any material misstatements in the Strategic Report or the Directors’ report.
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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.
We have nothing to
report in respect of
these matters.
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.
We have nothing to
report in respect of
these matters.
Other matters
Auditor tenure
Following the recommendation of the Audit Committee, we were first appointed by the Board of Directors of Non-Standard Finance
plc on 22 October 2014 to audit the financial statements for the period ending 31 December 2015 and subsequent financial periods.
The period of total uninterrupted engagement including previous renewals and reappointments of the firm is four years, covering the
periods ending 31 December 2015 to 31 December 2018.
Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with
ISAs (UK).
Use of our report
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to
them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we
have formed.
Simon Stephens FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
14 March 2019
OverviewStrategic ReportGovernanceFinancial Statements 96
Consolidated statement of comprehensive income
for the year ended 31 December 2018
Revenue
Other operating income
Modification loss
Impairment
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
Before fair value
adjustments,
amortisation
of acquired
intangibles and
exceptional items
£’000
Fair value
adjustments,
amortisation
of acquired
intangibles and
exceptional items
£’000
166,502
1,626
(482)
(42,688)
(89,082)
35,876
–
35,876
(21,107)
14,769
(3,197)
11,572
(7,678)
–
–
–
(8,681)
(16,359)
–
(16,359)
–
(16,359)
3,108
(13,251)
Note
4
5
1,7
10
12
Year ended
31 Dec 2018
£’000
158,824
1,626
(482)
(42,688)
(97,763)
19,517
–
19,517
(21,107)
(1,590)
(89)
(1,679)
(1,679)
(1,679)
–
Year ended
31 Dec 2018
Pence
(0.54)
Note
11
There are no recognised gains or losses other than disclosed above and there have been no discontinued activities in the year.
For the year ended 31 December 2017
Revenue
Other operating income
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
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5
1,7
10
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Before fair value
adjustments,
amortisation
of acquired
intangibles and
exceptional items
£’000
Fair value
adjustments,
amortisation
of acquired
intangibles and
exceptional items
£’000
119,756
1,926
(28,795)
(69,203)
23,684
–
23,684
(10,481)
13,203
(2,313)
10,890
(11,985)
–
–
(7,897)
(19,882)
(6,342)
(26,224)
–
(26,224)
4,999
(21,225)
Note
11
Year ended
31 Dec 2017
£’000
107,771
1,926
(28,795)
(77,100)
3,802
(6,342)
(2,540)
(10,481)
(13,021)
2,686
(10,335)
(10,335)
(10,335)
–
Year ended
31 Dec 2017
Pence
(3.26)
Consolidated statement of financial position
as at 31 December 2018
97
ASSETS
Non-current assets
Goodwill
Intangible assets
Other assets
Property, plant and equipment
Current assets
Amounts receivable from customers
Trade and other receivables
Cash and cash equivalents
Total assets
LIABILITIES AND EQUITY
Current liabilities
Trade and other payables and provisions
Total current liabilities
Non-current liabilities
Deferred tax liability
Bank loans
Total non-current liabilities
Equity
Share capital
Share premium
Other reserves
Retained loss
Non-controlling interests
Total equity
Total equity and liabilities
Note
31 Dec 2018
£’000
31 Dec 20171
£’000
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15
20
16
18
18
19
21
22
21
23
24
25
140,668
13,431
241
7,723
162,063
314,614
3,967
13,894
332,475
494,538
17,242
17,242
252
266,322
266,574
15,852
254,995
(2,011)
(58,368)
210,468
255
210,723
494,538
140,668
21,077
–
5,562
167,307
268,096
1,551
10,954
280,601
447,908
10,353
10,353
4,996
199,316
204,312
15,852
254,995
(1,066)
(36,793)
232,988
255
233,243
447,908
1 2017 balance sheet has been adjusted to increase amounts receivable from customers by £8.3m with a corresponding decrease to prepayments for the classification of
unamortised broker commissions. Refer to note 18 for detail. Had the 2016 balance sheet also been adjusted to reflect this classification, amounts receivable from customers
and prepayments would have been adjusted by £4.1m. 2017 balance sheet intangibles of £3.9m previously presented as property, plant and equipment have been
re-presented as part of intangible assets, refer to note 15 for detail. Had the 2016 balance sheet also been re-presented to reflect this classification, intangibles and
property, plant and equipment would have been adjusted by £1.8m.
These financial statements were approved by the Board of Directors on 14 March 2019.
Signed on behalf of the Board of Directors.
John van Kuffeler
Group Chief Executive
Nick Teunon
Chief Financial Officer
OverviewStrategic ReportGovernanceFinancial Statements 98
Consolidated statement of changes in equity
for the year ended 31 December 2018
At 31 December 2016
Total comprehensive loss for the year
Transactions with owners, recorded directly in equity:
Dividends paid
Credit to equity for equity-settled share-based
payments
Purchase of own shares
At 31 December 2017
Total comprehensive loss for the year
IFRS 9 transition opening balance adjustment
Transactions with owners, recorded directly in
equity:
Dividends paid
Credit to equity for equity-settled share-based
payments
Purchase of own shares
Share
capital
£’000
15,852
–
Share
premium
£’000
254,995
–
–
–
–
–
–
–
Other
reserves
£’000
–
–
–
Retained
loss
£’000
(22,019)
(10,335)
(4,439)
291
(1,357)
–
–
Non-
controlling
interest
£’000
Total
£’000
255
–
249,083
(10,335)
–
–
–
(4,439)
291
(1,357)
15,852
254,995
(1,066)
(36,793)
255
233,243
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,679)
(12,718)
(7,177)
1,157
(2,102)
–
–
–
–
–
–
–
(1,679)
(12,718)
(7,177)
1,157
(2,102)
Note
13
25
25
3
13
25
25
At 31 December 2018
15,852
254,995
(2,011)
(58,368)
255
210,723
Consolidated statement of cash flows
for the year ended 31 December 2018
Net cash used in operating activities
Cash flows from investing activities
Purchase of property, plant and equipment and software intangibles
Proceeds from sale of property, plant and equipment
Acquisition of subsidiary
Net cash used in investing activities
Cash flows from financing activities
Finance cost
Debt raising
Dividends paid
Purchase of own shares
Net cash from financing activities
Net 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 Dec 2018
£’000
Year ended
31 Dec 2017
£’000
(34,763)
(37,000)
Note
27
(6,083)
180
–
(5,903)
(14,121)
67,006
(7,177)
(2,102)
43,606
2,940
10,954
13,894
(5,536)
605
(16,442)
(21,373)
(7,974)
77,882
(4,439)
(1,357)
64,112
5,739
5,215
10,954
26
13
25
19
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Company statement of financial position
as at 31 December 2018
99
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
Share capital
Share premium
Other reserves
Retained profit
Total equity
Total equity and liabilities
Note
31 Dec 2018
£’000
31 Dec 2017
£’000
16
17
18
19
21
23
24
25
180
212,674
212,854
61,729
393
62,122
158
212,336
212,494
60,984
320
61,304
274,976
273,798
4,786
4,786
1,309
1,309
15,852
254,995
(2,026)
1,369
270,190
274,976
15,852
254,995
(1,079)
2,721
272,489
273,798
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.
The profit for the financial year reported in the financial statements for the Company was £5,826,152 (2017: profit of £4,718,370).
These financial statements were approved by the Board of Directors on 14 March 2019.
Signed on behalf of the Board of Directors.
John van Kuffeler
Group Chief Executive
Nick Teunon
Chief Financial Officer
Company number – 09122252
OverviewStrategic ReportGovernanceFinancial Statements 100
Company statement of changes in equity
for the year ended 31 December 2018
At 31 December 2016
Total comprehensive income for the year
Transactions with owners, recorded directly in equity:
Dividends paid
Credit to equity for equity-settled share-based payments
Purchase of own shares
At 31 December 2017
Total comprehensive income for the year
Transactions with owners, recorded directly in equity:
Dividends paid
Credit to equity for equity-settled share-based payments
Purchase of own shares
Share
capital
£’000
15,852
–
Share
premium
£’000
254,995
–
Other
reserves
£’000
Retained
profit
£’000
Total
£’000
–
–
2,441
4,719
273,288
4,719
–
–
–
–
–
–
15,852
254,995
–
–
–
–
–
–
–
–
–
278
(1,357)
(1,079)
(4,439)
–
–
(4,439)
278
(1,357)
2,721
272,489
–
5,826
5,826
–
1,155
(2,102)
(7,177)
–
–
(7,177)
1,155
(2,102)
Note
13
25
25
13
25
25
At 31 December 2018
15,852
254,995
(2,026)
1,369
270,190
Company statement of cash flows
for the year ended 31 December 2018
Net cash used in operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Finance cost
Dividends paid
Dividend income
Purchase of own shares
Net cash from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year ended
31 Dec 2018
£’000
Year ended
31 Dec 2017
£’000
(754)
(3,093)
Note
27
(91)
(91)
(3)
(7,177)
10,200
(2,102)
918
73
320
393
(18)
(18)
(45)
(4,439)
8,894
(1,357)
3,053
(58)
378
320
13
25
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Notes to the financial statements
101
General information
Non-Standard Finance plc is a public limited company, limited by shares, incorporated and domiciled in the United Kingdom.
The address of the registered office is 7 Turnberry Park Road, Gildersome, Morley, Leeds, LS27 7LE.
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 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, except for the revaluation of certain financial
instruments that are measured at revalued amounts or fair values at the end of each reporting period, as explained in the accounting
policies below. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or
liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement
date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such
a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the
scope of IAS 17 Leases, and measurements that have some similarities to fair value but are not fair value, such as value in use in
IAS 36 Impairment of Assets.
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 Governance Report. The Board of Directors has considered the Group’s latest financial projections from the most recent
budget, including:
funding levels and headroom against committed borrowing facilities;
•
• cash flow and liquidity requirements; and
•
forecast compliance against debt 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 2018
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 the 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 reviewing all leasing arrangements over the last year in light of the new lease accounting rules in IFRS
16. The standard will primarily affect the accounting for the Group’s operating leases. The Group’s activities as a lessor are not
material and hence the Group does not expect any significant impact on the financial statements.
The Group will apply the standard from its mandatory adoption date of 1 January 2019. The Group intends to apply the simplified
transition approach and will not restate comparative amounts for the year prior to first adoption. Right-of-use assets for property
leases will be measured on transition as if the new rules had always been applied. All other right-of-use assets will be measured at
the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses).
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.
OverviewStrategic ReportGovernanceFinancial Statements 102
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1. Accounting policies continued
New and amended Standards and Interpretations effective for the financial year ending 31 December 2018
On 1 January 2018, the Group implemented IFRS 9 ‘Financial Instruments’ and IFRS 15 ‘Revenue from Contracts with Customers’.
As permitted by IFRS 9 and IFRS 15, comparative information for previous periods has not been restated. The impact on the Group’s
financial position of applying IFRS 9 requirements is set out in note 3. The impact of adopting IFRS 15 is not material.
On 1 January 2018, the Group reclassified unamortised broker commissions as directly attributable transaction costs related to the
acquisition of amounts receivable from customers. Historically, unamortised broker commissions were classed as prepayments,
effective 1 January 2018, unamortised broker commissions are included within amounts receivable from customers, refer to note 18.
Alternative Performance Measure
The Group uses Alternative Performance Measures (APMs) to monitor the financial and operational performance of each of its
business divisions and the Group as a whole. The APMs seek to adjust reported metrics for the impact of non-cash and other
accounting charges that make it difficult to see the underlying performance of the divisions and Group. These adjusted metrics are
described as ‘normalised’. Normalised figures are reported results before fair value adjustments, amortisation of acquired intangibles
and exceptional items. APMs are reviewed on an annual basis and any changes require Board approval. For the year ended
31 December 2018, APMs remain unchanged from the prior year.
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 (‘EIR’) method. The EIR is the rate that exactly discounts estimated future cash flows of financial instruments
through their expected life, or where appropriate, a shorter period, to the net carrying amount of the financial asset or liability. The EIR
is calculated using estimated cash flows, being contractual payments adjusted for the impact of customers repaying early and the
anticipated impact of customers paying late or not at all. Under IFRS 9, the EIR is applied to the gross carrying amount of non-credit
impaired customer receivables (i.e. at the amortised cost of the receivables before adjusting for any expected credit losses (‘ECL’)).
For credit-impaired amounts receivable from customers (those in stage 3), the interest income is calculated by applying the EIR to the
amortised cost of the receivable (i.e. the gross carrying amount less the allowance for expected credit losses). This differs from IAS 39
whereby the EIR was applied to the net customer receivable balance (gross carrying amount less loan loss provisions) for all customer
receivables. For details of interest income for the 12 months ended 31 December 2018 under IFRS 9, see note 3.
Other operating income
Other operating income relates to amounts received as a result of debt sales made.
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 review 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.
Fair value of acquired loan book
The fair value of the acquired loan portfolio of Loans at Home, Everyday Loans, and George Banco on acquisition has been
estimated by discounting expected future cash flows. The difference between the fair value and the 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,
to the remaining cash flows from the loans that were in place at the time of acquisition, at each future accounting date.
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 has not incurred any exceptional costs for the
year ended 31 December 2018 (2017: costs associated with acquisitions, refinancing and restructuring).
Finance costs
Finance costs comprise the interest expense on external borrowings which are recognised in the income statement in the period in
which they are incurred and the funding arrangement fees which were prepaid and are being amortised to the income statement
over the length of the funding arrangement. Finance costs also include any fair value movement on those derivative financial
instruments held for hedging purposes which do not qualify for hedge accounting under IFRS 9.
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.
Notes to the financial statements continued
103
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.
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 CGU with the discounted forecasted earnings from the relevant CGU. Expected future earnings
are derived from the Group’s latest budget projections and the discount rate based on the Group’s cost of equity at the balance
sheet date.
Intangible assets
Intangible assets include acquired intangibles in respect of the customer list and agent relationships at Loans at Home and acquired
intangibles in respect of the customer list, broker relationships and credit decisioning technology at Everyday Loans, together with the
Everyday Loans and TrustTwo brands. Intangible assets also include acquired intangibles in respect of the customer list, broker
relationships, and brand at George Banco. In addition, intangible assets include IT software development at Loans at Home.
The fair value of the customer lists of Loans at Home, Everyday Loans and George Banco on acquisition has been estimated by
calculating the Net Present Value (‘NPV’) of the discounted cash flows from each new loan to be provided to this discrete set of
known customers. The Board of Directors will test the assumptions for reasonableness at each future accounting date, 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 fair value of George Banco’s broker relationships on acquisition has been estimated by calculating the NPV of the
discounted cash flows from each new loan sold as a result of the strength of the broker relationship and reputation of George Banco,
limited to three years of loan origination from the date of acquisition. The Board of Directors will test the assumptions for
reasonableness at each future accounting date, 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 Everyday Loans, TrustTwo and George Banco 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. The Board of Directors will assess each of the Group’s
remaining brands for impairment using the same methodology at each future accounting date.
OverviewStrategic ReportGovernanceFinancial Statements 104
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1. Accounting policies continued
Amortisation is charged to the statement of comprehensive income, over their estimated useful lives as follows:
Customer lists
Agent network
Broker relationships
Credit decisioning technology
Brand
Software
Between 3 and 7 years
3 years
2 to 3 years
4 years
Between 1 and 5 years
3 to 5 years
Project costs associated with the development of computer software and website are capitalised where the software is a unique and
identifiable asset controlled by the Group and will generate future economic benefits. These assets are amortised on a 20% straight-
line basis over its estimated useful life once the development phase has been completed.
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.
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:
Leasehold improvements
Computer and other equipment
Fixtures and fittings
Motor vehicles
Software
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
Investments
Investments in subsidiaries and associates are stated at cost less, where appropriate, provisions for impairment.
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
Financial assets are measured on initial recognition at fair value. Under IFRS 9, the classification and subsequent measurement of
financial assets is principally determined by the entity’s business model and their contractual cash flow characteristics (whether
the cash flows represent ‘solely payments of principal and interest’). The standard sets out three types of business model:
• Hold to collect: the financial asset is held within a business model whose objective is to hold financial assets in order to collect
contractual cash flows and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding. These assets are accounted for at amortised cost.
• Hold to collect and sell: this model is similar to the hold to collect model, except that the entity may elect to sell some or all of
the assets before maturity as circumstances change. These assets are accounted for at fair value through other comprehensive
income (‘FVOCI’).
• Hold to sell: the entity originates or purchases an asset with the intention of disposing of it in the short or medium term to benefit
from capital appreciation. These assets are held at fair value through profit or loss (‘FVTPL’). An entity may also designate assets
at FVTPL upon initial recognition where it reduces an accounting mismatch. An entity may elect to measure certain holdings of
equity instruments at FVOCI, which would otherwise have been measured at FVTPL.
The Group has assessed its business models in order to determine the appropriate IFRS 9 classification for its financial assets. With
the exception of the Group’s interest rate cap derivative asset, financial assets in all three divisions are held to collect contractual
cash flows until the lending matures and therefore meet the criteria to remain at amortised cost. In order to be accounted for at
amortised cost, it is necessary for individual instruments to have contractual cash flows that are solely payments of principal and
interest. These financial assets meet this criteria and are therefore subsequently measured at amortised cost. The Group’s sole
derivative asset (interest rate cap) does not meet the hold to collect criteria and thus is measured at fair value.
Financial assets and liabilities measured at amortised cost are accounted for under the EIR method. This method of calculating the
amortised cost of a financial asset or liability involves allocating interest income or expense over the relevant period. The EIR rate 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 gross carrying amount on initial recognition.
The Group does not use hedge accounting.
Trade and other receivables
Trade and other receivables are measured on initial recognition at fair value, and are subsequently measured at amortised cost
using the EIR method.
Notes to the financial statements continued
105
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 expected credit losses (‘ECL’)
IFRS 9 introduces a revised impairment model which requires entities to recognise ECL based on unbiased forward-looking
information. This replaces the IAS 39 incurred loss model which only recognises impairment if there is objective evidence that a loss
has already been incurred and measures the loss at the most probable outcome.
From 1 January 2018, the Group applies the expected credit loss impairment model when determining the provisions to be applied to
amounts receivable from customers. This comprises three stages: (1) on initial recognition, a loss allowance is recognised and
maintained equal to 12 months of ECL; (2) if credit risk increases significantly relative to initial recognition, the loss allowance is
increased to cover full lifetime ECL; and (3) when a financial asset is considered credit-impaired, the loss allowance continues to
reflect lifetime ECL and interest revenue is calculated based on the carrying amount of the asset, net of the loss allowance, rather
than its gross carrying amount. Provisions are therefore calculated based on an unbiased probability-weighted outcome which takes
into account historic performance and considers the outlook for macro-economic conditions. The Group reviews its portfolio of loans
and receivables for impairment at each balance sheet date.
The Group applies the IFRS 9 staging methodology with reference to the arrears stage of the customer loans, reflecting the weekly
payment cycle in home credit (Loans at Home) and monthly payment cycles in branch-based lending (Everyday Loans) and the
guarantor loans division (comprising TrustTwo and George Banco). The Group recognises that the customer demographic and loans
provided by each entity are inherently different in nature and therefore the assumptions and the methodology used to calculate ECL
under IFRS 9 have been applied to reflect this and is detailed below.
All customer accounts in home credit are categorised into the three broad stages as defined in IFRS 9. Categorisation into these
stages has been made in accordance with their arrears stage which is based on equivalent missed payments in the last 13 weeks.
As the new standard requires that lenders provide for the ECL from performing assets over the following year (stage 1), although the
underlying cash flows from those loans which are currently performing in line with expectations are unchanged, this effectively results
in the recognition of expected losses at the point of issue and captures all loans which do not fall under stages 2 and 3. This contrasts
to IAS 39 where losses are only provided for when two to four contractual weekly payments (depending on length of relationship with
the customer) have been missed in the previous 13 weeks.
Under IFRS 9, ECL assessment is based upon forward-looking modelled probability of default (‘PD’), exposure at default (‘EAD’) and
loss given default (‘LGD’) parameters which are run at account level, and applied across all receivables from the point of origination/
booking. ECL in home credit is estimated by reference to future cash flows based upon observed historical data and updated as
management considers appropriate to reflect current and future conditions. Impairment losses are thereby calculated by reference to
their stage 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. This methodology encapsulates PD, EAD and LGD collectively. Given the
short-term nature of lending in the home credit division, the difference between 12-month ECL and lifetime expected losses is minimal.
IFRS 9 also requires the external environment to be considered as part of the calculation of ECL in the form of a macro-economic
adjustment. Due to the nature of the home credit industry and based on historical evidence, management has determined that the
effect of traditional macro-economic downside indicators is minimal and therefore such an adjustment is currently not necessary.
Management will continue to monitor external macro-economic trends and their impact and apply an adjustment should it become
reasonable to do so.
Customer accounts in the branch-based lending and the guarantor loan divisions have been categorised into the 3 stages as defined
in IFRS 9 with reference to the following criteria:
• Loans in stage 1 which comprise all customer receivables which do not fall into stages 2 and 3.
• Loans in stage 2 which comprise those which show a significant increase in credit risk since origination, as determined by
management to be:
– the point at which the credit status of a loan has deteriorated to such an extent that had the future performance been
expected, it would not have been written in the first place (or had the declined state been presented initially, it would not have
been written); or
loans over 30 days past due but less than 90 days past due.
–
• Loans in stage 3 which comprise accounts in default as well as those accounts identified as insolvent (in line with IFRS 9
regulations the definition of default is over 90 days in arrears).
The branch-based lending and the guarantor loan divisions use historical data and risk models to determine the PD, LGD and the
EAD. ECL are then predicted by multiplying these three forward-looking parameters and the result is discounted at the original
effective interest rate. The ECL drivers of PD, EAD and LGD are modelled at an account level which considers vintage, maturity,
exogenous and other credit factors and applied across all receivables from the points of origination/booking. The result is therefore
an unbiased probability-weighted estimation of credit losses as determined by evaluating a range of possible outcomes and
considering future economic conditions. When there is a non-linear relationship between forward-looking economic scenarios and
their associated credit losses, multiple scenarios are modelled to ensure an unbiased representative sample of the complete
distribution when determining the expected loss.
OverviewStrategic ReportGovernanceFinancial Statements 106
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1. Accounting policies continued
Stress testing methodologies are also leveraged within forecasting economic scenarios for IFRS 9 purposes. The macro-economic
variables which are modelled include Bank of England base rate, GDP, CPI, HPI and unemployment rate. Management adjustments
and other exceptions to model outputs are applied only if consistent with the objective of identifying significant increases in credit risk.
Definition of default
The definition of default is used in measuring the amount of ECL and in the determination of whether the loss allowance is based on
12-month or lifetime ECL, as default is a component of PD which affects both the measurement of ECLs and the identification of a
significant increase in credit risk.
The Group considers the following as constituting an event of default:
•
•
the borrower is past due more than 90 days on any material credit obligation to the Group; or
the borrower is unlikely to pay its credit obligations to the Group in full.
When assessing if the borrower is unlikely to pay its credit obligation, the Group takes into account both qualitative and quantitative
indicators. The Group uses a variety of sources of information to assess default which are either developed internally or obtained
from external sources.
Significant increase in credit risk
The Group monitors all financial assets that are subject to the impairment requirements to assess whether there has been a
significant increase in credit risk since initial recognition. If there has been a significant increase in credit risk, the Group will measure
the loss allowance based on lifetime rather than 12-month ECL.
In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Group compares
the risk of a default occurring on the financial instrument at the reporting date based on the remaining maturity of the instrument,
with the risk of a default occurring that was anticipated for the remaining maturity at the current reporting date when the financial
instrument was first recognised. In making this assessment, the Group considers both quantitative and qualitative information that is
reasonable and supportable, including historical experience and forward-looking information that is available.
Within the branch-based lending and guarantor loan divisions, along with the presumption that loans past 30 days due represents
a significant increase in credit risk, a quantitative assessment is carried out which involves determining the point at which expected
losses exceed the lowest level of risk that the Group is willing to accept at origination. An ECL above this minimum level provides
a very close approximation to the point at which the Group would not have written the loan and therefore represents a significant
increase in credit risk.
Within the home credit division, given the short-term nature of the loans, the quantitative assessment of a significant increase in credit
risk is determined with reference to the arrears stage of the loan and unexpired term of the loan. The arrears stage is calculated by
looking at the last 13 weeks’ actual payments compared to contracted payments as this is the single best predictor of future loan
performance. The unexpired term further helps in predicting future performance when coupled with arrears stages. The Group has
determined the arrears stages which represent a significant increase in credit risk and accordingly, the loans which result in the
recognition of lifetime ECL.
Multiple economic scenarios form the basis of determining the probability of default at initial recognition and at subsequent
reporting dates. Different economic scenarios will lead to a different probability of default. It is the weighting of these different
scenarios that forms the basis of a weighted average probability of default that is used to determine whether credit risk has
significantly increased.
Given that a significant increase in credit risk since initial recognition is a relative measure, a given change, in absolute terms, in the
PD will be more significant for a financial instrument with a lower initial PD than compared to a financial instrument with a higher PD.
As a back-stop when an asset becomes 30 days past due, the Group considers that a significant increase in credit risk has occurred
and the asset is in stage 2 of the impairment model, i.e. the loss allowance is measured as the lifetime ECL.
Modification of financial assets
A modification of a financial asset occurs when the contractual terms governing the cash flows of a financial asset are renegotiated
or otherwise modified between initial recognition and maturity of the financial asset. A modification affects the amount and/or timing
of the contractual cash flows either immediately or at a future date.
The Group will grant forbearance on a loan in cases where although the borrower made all reasonable efforts to pay under the
original contractual terms, there is a high risk of default or, default has already happened and the borrower is expected to be able to
meet the revised terms. The revised terms in most of the cases include an extension of the maturity of the loan, changes to the timing
of the cash flows of the loan (principal and interest repayment) or reduction in the amount of cash flows due (principal and interest
forgiveness). This is generally referred to as a rescheduled loan.
Notes to the financial statements continued
107
When a financial asset is modified the Group assesses whether this modification results in derecognition. In accordance with the
Group’s policy, a modification results in derecognition when it gives rise to substantially different terms. To determine if the modified
terms are substantially different from the original contractual terms the Group considers the following:
• Qualitative factors, such as contractual cash flows after modification are no longer solely payments of principal and interest,
change of counterparty, the extent of change in interest rates, and maturity. If these do not clearly indicate a substantial
modification, then;
• A quantitative assessment is performed to compare the present value of the remaining contractual cash flows under the original
terms with the contractual cash flows under the revised terms, both amounts discounted at the original effective interest.
If the contractual cash flows on a financial asset have been renegotiated or otherwise modified, but the financial asset is not
derecognised, the Group will assess whether there has been a significant increase in credit risk since initial recognition on the basis
of all reasonable and supportable information that is available without undue cost or effort. This includes historical and forward-
looking information and an assessment of the credit risk over the expected life of the financial asset, which includes information
about the circumstances that led to the modification. For these loans, the estimate of PD reflects the Group’s ability to collect the
modified cash flows taking into account the Group’s previous experience, as well as various behavioural indicators, including the
borrower’s payment performance against the modified contractual terms. If the credit risk remains significantly higher than what
was expected at initial recognition the loss allowance will continue to be measured at an amount equal to lifetime ECL.
For loans where modification has resulted in derecognition of the original financial asset, a new financial asset is recognised at fair
value upon reschedule (which reflects the new modified terms). The date of modification is treated as the date of initial recognition of
the new financial asset and originates in stage 1 (where ECL is measured at an amount equal to 12-month expected credit losses) until
the requirements for the recognition of lifetime ECL are met. The exception is where a financial asset is considered credit-impaired at
initial recognition.
Derivative financial assets
The Group uses an interest rate cap to manage the interest rate risk arising from the long-term borrowing held within the Group.
Derivatives are initially recognised at their fair value on the date a derivative contract is entered into and are subsequently re-measured
at each reporting date to their fair value. The Group measures fair value in accordance with IFRS 13, which defines fair value as the
price that would be received to sell the asset in an orderly transaction between market participants at the measurement date.
The Group does not apply hedge accounting and therefore movements in the fair value are recognised immediately within the
statement of comprehensive income.
Cash and cash equivalents
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.
Borrowings
Borrowings are recognised initially at fair value, being issue proceeds less any transaction costs incurred. Borrowings are
subsequently stated at amortised cost; any difference between proceeds less transaction costs and the redemption value is
recognised in the income statement over the expected life of the borrowings using the effective interest rate. Borrowings are
classified as current liabilities unless the Group or Company has an unconditional right to defer settlement of the liability for at
least 12 months after the balance sheet date.
Other financial liabilities
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.
Provisions
A provision is recognised when there is a present obligation as a result of a past event, it is probable that the obligation will be
settled and the amount can be estimated reliably.
Contingent liabilities are possible obligations arising from past events, whose existence will be confirmed only by uncertain future
events, or present obligations arising from past events which are either not probable or the amount of the obligation cannot be
reliably measured. Contingent liabilities are not recognised but disclosed unless their probability is remote.
Defined contribution pension schemes
The Group operates a defined contribution pension scheme. Contributions payable to the Group’s pension scheme are charged to
the income statement in the period to which they relate.
OverviewStrategic ReportGovernanceFinancial Statements 108
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1. Accounting policies continued
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.
Dividends
Dividend distributions to the Company’s shareholders are recognised in the Group and Company’s financial statements as follows:
• Final dividend: when approved by the Company’s shareholders at the Annual General Meeting; and
•
Interim dividend: when declared by the Company.
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.
Share-based payments
The Group has applied the requirements of IFRS 2 Share-based payments. The Group grants options under employee savings-
related share option schemes (typically referred to as Save As You Earn schemes (‘SAYE’)) and makes awards under the Long-Term
Incentive schemes. All of these schemes are equity-settled.
Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of
the equity-settled share-based payments is expensed in the consolidated statement of comprehensive income on a straight-line basis
over the vesting period, based on the Group’s estimate of shares that will eventually vest. The corresponding credit is made to a
share-based payment reserve within equity. The grant by the Company of options and awards over its equity instruments to the
employees of subsidiary undertakings is treated as an investment in the Company’s financial statements. At the end of the vesting
period, or upon exercise, lapse or forfeit (if earlier), this credit is transferred to retained earnings. Further information on the Group’s
schemes is provided in note 25 and in the Directors’ remuneration report.
Repurchase of share capital (own shares)
Where the Company or any member of the Group purchases the Company’s share capital, the consideration paid is deducted from
shareholders’ equity as treasury shares until they are sold or reissued. Where such shares are subsequently sold or reissued, any
consideration received is included in shareholders’ equity.
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 consider home credit (Loans at Home), branch-based lending (Everyday Loans) and guarantor
loans (George Banco and TrustTwo) as three CGUs. No goodwill was attributable to TrustTwo upon acquisition of Everyday Loans.
Business model assessment
Classification and measurement of financial assets depends on the results of the SPPI and the business model test (see financial
assets sections of note 1). The Group determines the business model at a level that reflects how groups of financial assets are
managed together to achieve a particular business objective. This assessment includes judgement reflecting all relevant evidence
including how the performance of the assets is evaluated and their performance measured, the risks that affect the performance
of the assets and how these are managed and how the managers of the assets are compensated. The Group continually monitors
whether the business model for which financial assets are held is appropriate and if it is not appropriate, whether there has been
a change in business model and so a prospective change to the classification of those assets.
Significant increase of credit risk
ECL are measured as an allowance equal to 12-month ECL for stage 1 assets, or lifetime ECL assets for stage 2 or stage 3 assets.
An asset moves to stage 2 when its credit risk has increased significantly since initial recognition. IFRS 9 does not define what
constitutes a significant increase in credit risk. In assessing whether the credit risk of an asset has significantly increased the
Group takes into account qualitative and quantitative reasonable and supportable forward-looking information. Refer to note 1
for more details.
Models and assumptions used
The Group uses various models and assumptions in estimating ECL. Judgement is applied in identifying the most appropriate model,
as well as for determining the assumptions used in these models, including assumptions that relate to key drivers of credit risk.
Notes to the financial statements continued
109
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 earnings expected to arise from the CGU and
discounted back using an agreed discount rate.
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:
• earnings forecasts which have been extracted from the CGU’s 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;
• market multiples used; and
•
the discount rate applied to future earnings.
The nature and inherent uncertainty relating to the above judgements and estimates means that the forecast earnings may be
materially different from actual earnings. A material reduction in forecast would necessitate a full impairment review and the
possibility of a material impairment charge in future years.
The Group has produced a one-year forecast to 31 December 2019 and applied four 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.
4 A price/earnings multiple for the next 12 months applied to the forecast earnings of the business.
IAS 36 requires comparison of the carrying value of goodwill to the recoverable amount which is the higher of ‘value in use’ or ‘fair
value less costs to sell’. Management has determined that the recoverable amount is higher under ‘fair value less costs to sell’ and
has compared the carrying value of goodwill to the recoverable amount using this method. The lowest of the fair value 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 2018 as the CGUs’ recoverable amounts exceed their carrying values. Refer to note 14 for the sensitivities around the
carrying value of the goodwill.
Amounts receivable from customers
The Group reviews its portfolio of loans and receivables for impairment at each balance sheet date. The following are key
estimations that the Directors have used in the process of applying the Group’s recognition of expected credit losses policy:
•
Incorporation of forward-looking data: Establishing the number and relative weightings of forward-looking scenarios for each
type of product/market and determining the forward-looking information relevant to each scenario. The Group incorporates
forward-looking information into both its assessment of whether the credit risk of a financial asset has increased significantly since
initial recognition and its measurement of expected credit loss. This is achieved by developing a number of potential economic
scenarios and modelling expected credit losses for each scenario. The outputs from each scenario are combined using the
estimated likelihood of each scenario occurring to derive a probability weighted expected credit loss. Therefore, when measuring
ECL the Group uses reasonable and supportable forward-looking information, which is based on assumptions for the future
movement of different economic drivers and how these drivers will affect each other.
• Probability of default: PD constitutes a key input in measuring ECL. PD is an estimate of the likelihood of default over a given time
horizon, the calculation of which includes historical data, assumptions and expectations of future conditions.
• Loss Given Default: LGD is an estimate of the loss arising on default. It is based on the difference between the contractual cash
flows due and those that the lender would expect to receive.
3. Changes in accounting policies
On 1 January 2018, the Group implemented IFRS 9 ‘Financial Instruments’ and IFRS 15 ‘Revenue from Contracts with Customers’.
As permitted by IFRS 9 and IFRS 15, comparative information for previous periods has not been restated. The impact on the Group’s
financial position of applying IFRS 9 requirements is set out below. The impact of adopting IFRS 15 is not material.
For accounting policies applied from 1 January 2018 in relation to revenue recognition and amounts receivable from customers, refer
to note 1.
3.1 Impact on the financial statements
IFRS 9 has been adopted without restating comparative information. The reclassifications and the adjustments arising from the new
impairment rules are therefore not reflected in the balance sheet as at 31 December 2017, but are recognised in the opening balance
sheet on 1 January 2018. As prior periods have not been restated, changes in impairment of financial assets in the comparative periods
remain in accordance with IAS 39 and are therefore not necessarily comparable to the loss provisions reported for the current period.
Implementation of IFRS 9 resulted in a £12.7 million reduction in the Group’s opening equity at 1 January 2018 net of £2.3 million related to
deferred tax impacts. There has been no change in the carrying amount of financial instruments on the basis of their measurement
categories. All adjustments have arisen solely due to a replacement of the IAS 39 incurred loss impairment approach with an ECL approach.
OverviewStrategic ReportGovernanceFinancial Statements 110
3. Changes in accounting policies continued
The following table shows the adjustments recognised for each individual line item affected by the application of IFRS 9 at 1 January
2018. The application of IFRS 9 had no impact on the consolidated cash flows of the Group.
Condensed consolidated statement of financial position
Current assets
Amounts receivable from customers
Non-current liabilities
Deferred tax liability
Equity
Retained loss
Note
18
22
31 December
2017
As originally
presented1
£’000
IFRS 9
adjustment
– Classification
and
measurement
£’000
IFRS 9
adjustment
– Expected credit
losses
£’000
1 January 2018
Restated
£’000
268,096
(4,996)
(36,793)
–
–
–
(14,980)
253,116
2,262
(2,734)
(12,718)
(49,511)
3.2 IFRS 9 Financial Instruments – Impact of adoption
IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial
liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting.
The adoption of IFRS 9 from 1 January 2018 resulted in changes in accounting policies and adjustments to the amounts recognised in
the financial statements. The new accounting policies are set out in note 1. In accordance with the transitional provisions in IFRS 9
(7.2.15), comparative figures have not been restated. The Group does not use hedge accounting.
The total impact on the Group’s retained loss as at 1 January 2018 and 1 January 2017 is as follows:
Closing retained loss 31 December – IAS 39
Increase in provision for amounts receivable from customers (3.2.1), (3.2.2)
Change in modification criteria (3.2.1), (3.2.2)
Increase in deferred tax assets relating to impairment provisions (3.2.1), (3.2.2)
Total adjustment to retained loss from adoption of IFRS 9 on 1 January 2018
Opening retained loss 1 January – IFRS 9
1 January 2018
£’000
1 January 2017
£’000
(36,793)
(14,039)
(941)
2,262
(12,718)
(49,511)
(22,019)
–
–
–
(22,019)
3.2.1 Classification and measurement
On 1 January 2018 (the date of initial application of IFRS 9), the Group’s management has assessed the financial instruments held by
the Group and determined whether reclassification was needed under IFRS 9. Financial assets and financial liabilities of the Group
comprise cash, loans and receivables, and bank borrowings. These are measured at amortised cost and there is no change in
classification from IAS 39 under IFRS 9. Refer to note 1 for further detail.
3.2.2 Impairment of financial assets
The Group’s amounts receivable from customers was subject to IFRS 9’s new expected credit loss model.
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When a financial asset is modified the Group assesses whether this modification results in derecognition. In accordance with the
Group’s policy, a modification results in derecognition when it gives rise to substantially different terms.
The impact of the change in modification criteria and impairment methodology on the Group’s retained earnings and equity is
disclosed in the table in note 3.2 above.
While cash and cash equivalents and intercompany loans are also subject to the impairment requirements of IFRS 9, the Group has
concluded that the expected credit loss on these items is nil and therefore no impairment loss adjustment is required.
3.2.3 Amounts receivable from customers
The amounts receivable from customers as at 31 December 2017 reconcile to the opening receivables balance on 1 January 2018
as follows:
Amounts receivable from customers
At 31 December 20171 – calculated under IAS 39
Amounts restated through opening retained earnings
Opening net receivables at 1 January 2018 – calculated under IFRS 9
Branch-based
lending
£’000
157,726
(4,408)
153,318
Guarantor
loans
£’000
59,135
494
59,630
Home
credit
£’000
51,235
(11,067)
40,168
Total
£’000
268,096
(14,980)
253,116
1 2017 comparatives have been adjusted so that unamortised broker commissions of £8.26m are included within the amounts receivable from customers.
The additional loss allowance recognised upon the initial application of IFRS 9 as disclosed above resulted entirely from a change in
the measurement attribute of the loss allowance relating to amounts receivable from customers.
Notes to the financial statements continued
111
To measure the expected credit losses, amounts receivable from customers have been grouped based on stages 1, 2 and 3.
A summary by stage as at 1 January 2018 was determined as follows:
1 January 2018
Gross carrying amount
Branch-based lending
Guarantor loans
Home credit
Loan loss provision
Branch-based lending
Guarantor loans
Home credit
Net amounts receivable
Branch-based lending
Guarantor loans
Home credit
Total net amounts receivable
Stage 1
£000
142,757
53,339
42,041
(4,245)
(565)
(5,790)
138,512
52,774
36,251
227,537
Stage 2
£000
14,054
6,799
11,200
(2,211)
(891)
(7,812)
11,843
5,908
3,388
21,140
Stage 3
£000
4,801
1,223
10,051
(1,838)
(276)
(9,522)
2,963
947
529
4,439
Total
£000
161,613
61,361
63,292
(8,294)
(1,731)
(23,124)
153,318
59,630
40,168
253,116
Reconciliation of estimate of IFRS 9 impairment provision as at 31 December 2017 to actuals as at 1 January 2018
At 31 December 2017 – estimated impact on net receivables from
transition to IFRS 9 (unaudited)
At 1 January 2018 – actual impact on net receivables from transition to
IFRS 9 (audited)
Difference between estimated and actual
(1,744)
(916)
(10,601)
(13,261)
(4,408)
2,663
494
(1,410)
(11,067)
(14,980)
466
1,719
Branch-based
lending
£’000
Guarantor
loans
£’000
Home
credit
£’000
Total
£’000
Interest income under IFRS 9 for the year ended 31 December 2018
Stage 1
Stage 2
Stage 3
Total interest income under IFRS 9
£’000
147,007
18,053
692
166,502
4. 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.
Interest income
Fair value unwind on acquired loan portfolio
Total revenue
5. Operating profit/(loss) for the year is stated after charging/(crediting):
Depreciation of property, plant and equipment (note 16)
Amortisation of intangible assets (note 15)
Staff costs (note 9)
Rentals under operating leases
Profit on sale of property, plant and equipment
Year ended
31 Dec 2018
£’000
166,502
(7,678)
158,824
Year ended
31 Dec 2017
£’000
119,756
(11,985)
107,771
Year ended
31 Dec 2018
£’000
Year ended
31 Dec 2017
£’000
1,772
9,661
45,061
3,119
(45)
1,497
7,897
32,899
1,926
(416)
OverviewStrategic ReportGovernanceFinancial Statements
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6. Auditors’ remuneration
Audit services
Fees payable to the Company’s auditor for the audit of the Parent’s annual financial statements
Fees payable to the Company’s auditor and their associates for the audit of the subsidiaries of the
Group
Other services pursuant to legislation
Other services
Audit related fees
Other services relating to taxation
Services relating to corporate finance transactions
Year ended
31 Dec 2018
£’000
Year ended
31 Dec 2017
£’000
82
399
–
481
63
–
–
63
80
329
–
409
51
–
192
243
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 62.
7. 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: Branch-based lending (Everyday Loans), Home credit (Loans at Home), Guarantor
loans (TrustTwo and George Banco) 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.
Year ended 31 December 2018
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 items2
Finance cost
Profit/(loss) before taxation
Taxation
Profit/(loss) for the year
Total assets
Total liabilities
Net assets
Capital expenditure
Depreciation of plant, property and
equipment
Amortisation of intangible assets
Branch-based
lending
£’000
223,285
(250,894)
(27,609)
3,736
1,188
–
Branch-based
lending
£’000
Home credit
£’000
Guarantor
loans1
£’000
Central
£’000
2018
Total
£’000
79,579
(3,958)
75,621
22,949
–
22,949
–
(12,778)
10,171
(1,860)
8,311
Home
credit
£’000
52,609
(65,527)
(12,918)
2,256
398
980
65,175
–
65,175
6,714
–
6,714
–
(2,461)
4,253
(774)
3,479
Guarantor
loans1
£’000
87,365
–
87,365
–
117
–
21,748
(3,720)
18,028
3,932
–
3,932
–
(5,833)
(1,901)
62
(1,839)
–
–
–
(5,397)
(8,681)
(14,078)
–
(35)
(14,113)
2,483
(11,630)
166,502
(7,678)
158,824
28,198
(8,681)
19,517
–
(21,107)
(1,590)
(89)
(1,679)
Central
£’000
574,467
(270,071)
Consolidation
adjustments3
£’000
2018
Total
£’000
(443,187)
302,676
494,538
(283,816)
304,395
(140,511)
210,723
91
69
8,681
–
–
–
6,083
1,772
9,661
1 Guarantor Loans Division includes George Banco and TrustTwo. TrustTwo is supported by the infrastructure of Everyday Loans but its results are reported to the Board
separately and has therefore been disclosed within the Guarantor Loans Division above.
2 There were no exceptional items for 2018 (2017: £4.5m related to the refinancing of the Group’s debt facilities, £1.0m related to merger and acquisition activities and £0.9m
related to restructuring).
3 Consolidation adjustments include the acquisition intangibles of £8.5m (2017: £17.2m), goodwill of £140.7m (2017: £140.7m), fair value of loan book of £4.3m (2017: £12.0m) and
the elimination of intra-Group balances.
Notes to the financial statements continued
113
2017
Total
£’000
119,756
(11,985)
107,771
11,699
(7,897)
3,802
(6,342)
(10,481)
(13,021)
2,686
Branch-based
lending
£’000
Home
credit
£’000
Guarantor
loans1
£’000
Central
£’000
Year ended 31 December 2017
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
(Loss)/profit before taxation
Taxation
(Loss)/profit for the year
Total assets
Total liabilities
Net assets
Capital expenditure
Depreciation of plant, property and
equipment
Amortisation of intangible assets
Branch-based
lending
£’000
181,962
(135,837)
46,125
2,474
617
–
60,937
(11,874)
49,063
10,780
–
10,780
(5,290)
(7,051)
(1,561)
128
(1,433)
Home
credit
£’000
62,736
(35,550)
27,186
3,012
798
–
50,741
–
50,741
3,102
–
3,102
(467)
(1,299)
1,336
179
1,515
8,078
(111)
7,967
2,637
–
2,637
(230)
(2,029)
378
(65)
313
–
–
–
(4,820)
(7,897)
(12,717)
(355)
(102)
(13,174)
2,444
(10,730)
(10,335)
Guarantor
loans1
£’000
50,819
(39,059)
Central
£’000
274,200
(1,615)
Consolidation
adjustments3
£’000
2017
Total
£’000
(121,809)
(2,604)
447,908
(214,665)
11,760
272,585
(124,413)
233,243
32
29
–
18
53
7,897
–
–
–
5,536
1,497
7,897
The results of each segment have been prepared using accounting policies consistent with those of the Group as a whole.
8. Directors’ remuneration
Short-term employee benefits
Post-employment benefits
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
1,409
80
1,442
73
Short-term employee benefits comprise salary, bonus and benefits earned in the year. Post-employment benefits represent
contributions by the Group in respect of money purchase pension schemes. Refer to Directors’ Remuneration Report for more detail
on remuneration.
9. Employee information
a) The average monthly number of staff (including Executive Directors but excluding Loans at Home’s network of self-employed
agents) employed by the Group was as follows:
Average number of employees (including Directors)
Branch-based lending staff
Guarantor loans staff
Home credit staff
Central staff
b) Employment costs
Wages and salaries
Social security costs
Pension costs
Year ended
31 December
2018
Number
Year ended
31 December
2017
Number
319
104
332
7
762
286
79
305
8
678
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
39,261
4,198
1,602
45,061
28,824
2,983
1,092
32,899
OverviewStrategic ReportGovernanceFinancial Statements 114
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10. Finance cost
Bank charges and interest payable
Bank interest receivable
Finance cost
11. Loss per share
Retained loss attributable to Ordinary Shareholders (£’000)
Weighted average number of Ordinary Shares at year ended 31 December
Basic and diluted loss per share (pence)
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
(21,110)
3
(21,107)
(10,481)
–
(10,481)
Year ended
31 December
2018
Year ended
31 December
2017
(1,679)
312,713,410
(10,335)
316,901,254
(0.54)p
(3.26)p
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 in issue. 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. At 31 December 2018, 5,000,000 shares were held in treasury (2017: 1,900,000).
Weighted average number of potential Ordinary Shares that are not currently dilutive
10,967
8,728
The weighted average number of potential Ordinary Shares that are not currently dilutive includes the Ordinary Shares that the
Company may potentially issue relating to its share option schemes and share awards under the Group’s long-term incentive plans
and Save As You Earn schemes. The amount is based upon the number of shares that would be issued if 31 December 2018 was the
end of the contingency period.
Year ended
31 December
2018
000’s
Year ended
31 December
2017
000’s
12. Taxation
Current tax charge
Corporation tax charge
Total current tax charge
Deferred tax credit
Total tax charge/(credit)
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
2,484
2,484
(2,395)
89
673
673
(3,359)
(2,686)
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:
Loss before taxation
Tax on loss on ordinary activities at standard rate of UK corporation tax of 19% (2017: 19.25%):
Effects of:
Fixed asset differences
Expenses not allowable for taxation
Share-based payments
Research and Development tax credit
Chargeable gains/losses
Prior year adjustments
Adjustment to tax charge in respect of previous periods1
Adjustment to tax charge in respect of previous periods – deferred tax
Corporation tax rate change
Deferred tax rate change
Changes in unrecognised deferred tax
Deferred tax not previously recognised
Total tax charge/(credit)
1
Includes £nil research and development claim relating to the year ended 31 December 2018 (2017: £0.5m).
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
(1,590)
(302)
(13,021)
(2,507)
97
379
58
(7)
(42)
(32)
–
–
(69)
–
7
–
89
(38)
199
11
–
33
–
(573)
176
–
60
(142)
95
(2,686)
Notes to the financial statements continued
115
Exceptional items and costs related to deferred consideration payments in George Banco, long-term incentive plans are included
within ‘expenses not allowable for taxation’ due the nature of the transactions. There were no exceptional items in 2018, exceptional
items disallowed in 2017 include costs in relation to the acquisition of George Banco totalling £0.6m. Long-term incentive plan items
disallowed relates to set-up costs and the fair value of the schemes at the date of grant totalling £0.9m (2017: £0.4m).
Reduction in the UK corporation tax 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 2018 has been
calculated based on the rate of 19% substantively enacted at the balance sheet date.
13. Dividends
A half-year dividend of 0.6 pence per share (2017: 0.5 pence per share) was paid in October 2018. The Directors have recommended
a final dividend in respect of the year ended 31 December 2018 of 2.0 pence per share (31 December 2017: 1.7 pence per share) which
will amount to an estimated dividend payment of £6.3m. This dividend is not reflected in the balance sheet as at 31 December 2018
as it is subject to shareholder approval.
14. Goodwill
Cost and net book amount
At 31 December 2016
Acquisition of subsidiary (George Banco) in 2017
At 31 December 2017 and at 31 December 2018
£’000
132,070
8,598
140,668
The goodwill recognised represents the difference between the purchase consideration and the net assets acquired (including
intangible assets recognised upon acquisition). Total goodwill as at 31 December 2018 comprises £40.2m related to the acquisition of
Loans at Home, £91.9m related to the acquisition of Everyday Loans, and £8.6m related to the acquisition of George Banco (refer to
note 26).
Under IFRS 13, ‘Fair Value Measurement’, the fair value used in the Goodwill impairment assessment is classified as Level 3, as the fair
value is determined using discounted future cash flows.
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:
• earnings 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 forecasts;
•
• estimates made on the disposal costs of the business; and
the discount rate applied to determine future earnings.
•
The recoverable amount has been determined based on a ‘fair value less cost-to-sell’ calculation. That calculation uses earnings
projections based on financial budgets approved by management covering a one-year period to 31 December 2019 (versus a
three-year period used in 2017), disposal costs have been estimated at 2% and a discount rate of 12% has been 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 assessment for impairment
The Group has calculated the FV less costs to sell to be in the range of £64m to £67m, a headroom of between £2m and £5m above
the carrying value. Considering the key judgements and estimates referred to above as well as the 2019 forecast earnings, the Group
has identified that a reduction in 2019 forecast earnings of between 3% and 8% would necessitate an impairment charge. This is
significantly tighter than identified in 2017. The financial budgets used in the 2017 earnings projections covered a three-year period
and it was calculated that a 61% reduction in 2020 forecast earnings would necessitate an impairment charge to the carrying value
of goodwill. Loans at Home’s 2019 forecast is based on lending and collections assumptions and management is aware that if the
business does not perform in line with these forecast assumptions then revenues and loan loss provisions will be affected which
would result in management needing to assess the goodwill at Loans at Home for impairment at this point. For example, if the
business was to fall 10% behind forecast earnings for 2019, management would need to consider an impairment charge of between
£1m and £5m depending on the FV less cost to sell valuation used in the range identified above. Further uncertainties have arisen in
2018 as a result of the introduction of IFRS 9 and the potential impact of Brexit, which have affected the current price earnings
multiples used in the calculations.
For Everyday Loans and Guarantor loans, considering the key estimates above, the Group has identified that it would require a
movement in all of the judgements and estimates and 2019 forecast earnings of greater than 15% for Everyday Loans and 50% for
Guarantor loans, to give rise to a potential impairment charge to the carrying value of goodwill recognised for these two CGUs.
OverviewStrategic ReportGovernanceFinancial Statements 15. Intangible assets – Group
Customer lists
£’000
Agent
network
£’000
Cost
At 1 January 2018
Additions
At 31 December 2018
Amortisation
At 1 January 2018
Charge for the year
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
21,924
–
21,924
15,773
3,786
19,559
2,365
6,151
540
–
540
419
121
540
–
121
Brands
£’000
2,005
–
2,005
831
404
1,235
770
1,174
Broker
relationships
£’000
Technology
£’000
LAH IT software
development1
£’000
9,151
–
9,151
3,024
2,813
5,837
3,314
6,127
6,227
–
6,227
2,595
1,557
4,152
2,075
3,632
4,265
2,014
6,279
392
980
1,372
4,907
3,871
Total
£’000
44,112
2,014
46,126
23,034
9,661
32,695
13,431
21,077
1 The cost and accumulated amortisation of Project Costs and Software were previously presented in the Property, Plant and Equipment note 16. The 2017 comparatives have
been adjusted so that the cost and accumulated amortisation of Project Costs and Software at Loans at Home are included in Intangible Assets. The 2016 comparative for
cost and accumulated amortisation of Project Costs and Software at Loans at Home was £1.80m.
IAS 38.122 requires the Group to disclose the carrying value and remaining amortisation period of individual acquired intangible assets,
the table below includes all material assets held by the Group as at 31 December 2018:
Intangible asset
Everyday Loans’s acquired customer list
Credit-decisioning technology at Everyday Loans
Everyday Loans and TrustTwo brands
George Banco’s acquired customer list
George Banco brand
George Banco’s broker relationship
Loans at Home IT software development
16. Property, plant and equipment – Group
Carrying value as at
31 December 2018
£’000
Amortisation period remaining
Years and months
835
2,075
699
1,530
70
3,314
4,907
1 year 11 months
1 year and 4 months
2 years and 4 months
2 years
8 months
1 year and 8 months
3 years
Cost
At 1 January 2018
Additions
Disposals
At 31 December 2018
Depreciation
At 1 January 2018
Charge for the year
Disposals
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
Leasehold
improvements
£’000
Fixtures
and fittings
£’000
Motor
vehicles
£’000
Computer
equipment
£’000
Software
£’000
Total
£’000
2,897
2,308
–
5,205
1,055
542
–
1,597
3,608
1,842
1,468
590
–
2,058
394
199
–
593
1,465
1,074
808
–
(577)
231
336
106
(442)
–
231
472
2,734
501
–
3,235
1,189
674
–
1,863
1,372
1,545
2,646
670
–
3,316
2,018
252
–
2,270
1,048
629
10,553
4,069
(577)
14,045
4,992
1,772
(442)
6,322
7,723
5,562
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Notes to the financial statements continued
117
Property, plant and equipment – Company
Cost
At 1 January 2018
Additions
At 31 December 2018
Depreciation
At 1 January 2018
Charge for the year
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
Leasehold
improvements
£’000
Fixtures and
fittings
£’000
Motor
vehicles
£’000
Software
£’000
110
–
110
37
22
59
51
73
77
5
82
27
16
43
39
50
55
–
55
36
14
50
5
19
17
86
103
1
17
18
85
16
Total
£’000
259
91
350
101
69
170
180
158
17. Investment in subsidiaries – Group
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
7 Turnberry Park Road, Gildersome,
Morley, Leeds, England, LS27 7LE
United Kingdom
Nature of business
% voting rights and shares held
Provision of consumer credit
100% of Ordinary Shares
Loans at Home Limited
As above
Dormant
100% of Ordinary Shares
Everyday Loans Holdings
Limited
Secure Trust House, Boston Drive,
Bourne End, Buckinghamshire,
SL8 5YS, United Kingdom
Everyday Loans Limited
As above
Everyday Lending Limited
As above
Non-Standard Finance
Subsidiary Limited1
Non-Standard Finance
Subsidiary II Limited
Non-Standard Finance
Subsidiary III Limited
NSF Finco Limited
NSF Group Limited1
George Banco Limited
7 Turnberry Park Road, Gildersome,
Morley, Leeds, England, LS27 7LE
United Kingdom
As above
As above
As above
As above
Holding company
100% of Ordinary Shares
Provision and servicing of
secured and unsecured
personal instalment loans
Provision of secured and
unsecured personal
instalment loans
100% of Ordinary Shares
100% of Ordinary Shares
Holding company
100% of Ordinary Shares
Holding company
100% of Ordinary Shares
Holding company
100% of Ordinary Shares
Financing company
100% of Ordinary Shares
Dormant
100% of Ordinary Shares
100% of Ordinary Shares
Epsom Court 1st Floor, Epsom Road,
White Horse Business Park,
Trowbridge, England, BA14 0XF
Provision and servicing
of unsecured personal
instalment loans
George Banco.com Limited
As above
Provision of unsecured
personal instalment loans
100% of Ordinary Shares
1 Held directly by the Company. NSF Group Limited has taken advantage of the exemption under section 394A of the Companies Act 2006 from preparing its individual accounts.
Investment in subsidiaries – Company
Investment in subsidiaries
Share-based payment adjustment
Total investment
2018
£’000
212,223
451
212,674
2017
£’000
212,223
113
212,336
OverviewStrategic ReportGovernanceFinancial Statements 18. Amounts receivable from customers – Group
Gross carrying amount
Loan loss provision
Amounts receivable from customers
2018
£’000
354,794
(40,180)
20171
£’000
292,576
(24,480)
314,614
268,096
1 Unamortised broker commissions (as directly attributable transaction costs related to the acquisition of amounts receivable from customers) were previously recorded within
prepayments. The 2017 comparatives have been adjusted so that unamortised broker commissions of £8.26m are included within amounts receivable from customers.
The 2016 comparative for unamortised broker commissions was £4.09m.
The movement on the loan loss provision for the period relates to the provision at Loans at Home, Everyday Loans, TrustTwo and
George Banco for the year. The amounts receivable from customers were recognised at fair value (net loan book value) at the date of
acquisition (see note 26 for detail).
Included within the gross carrying amount above are unamortised broker commissions, see table below:
Unamortised broker commissions
Total unamortised broker commissions
The fair value of amounts receivable from customers are:
Branch-based lending
Guarantor loans
Home credit
Fair value of amounts receivable from customers
2018
£’000
11,182
11,182
2018
£’000
274,291
112,157
67,717
454,165
2017
£’000
8,260
8,260
2017
£’000
178,976
60,614
64,575
304,165
Fair value has been derived by discounting expected future cash flows (net of collection costs) at the credit risk adjusted discount
rate at the balance sheet date. Under IFRS 13, ‘Fair Value Measurement’, receivables are classed as Level 3 as they are not traded on
an active market and the fair value is therefore determined through future cash flows.
Maturity of amounts receivable from customers:
Due within one year
Due in more than one year
Amounts receivable from customers
Analysis of receivables from customers
31 December 2018
Branch-based lending
Guarantor loans
Home credit
Gross carrying amount
Branch-based lending
Guarantor loans
Home credit
Loan loss provision
Branch-based lending
Guarantor loans
Home credit
Net amounts receivable
2018
£’000
113,066
201,547
314,614
Stage 3
£’000
6,353
2,192
12,631
21,176
2,463
613
11,942
15,018
3,890
1,579
688
6,158
2017
£’000
129,029
139,067
268,096
Total
£’000
196,744
90,204
67,846
354,794
10,521
2,839
26,820
40,180
186,223
87,365
41,026
314,614
Stage 1
£’000
173,359
78,089
38,692
Stage 2
£’000
17,032
9,922
16,524
290,139
43,479
5,393
814
3,523
9,730
167,966
77,275
35,169
2,665
1,412
11,355
15,432
14,367
8,510
5,169
280,409
28,047
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Notes to the financial statements continued
Analysis on movement on loan loss provision
At 31 December 2016
Provision on acquisition of George Banco
Charge for the year
Amounts written off during the year
Unwind of discount
At 31 December 2017
IFRS 9 – opening balance sheet adjustment
At 1 January 2018
119
£’000
24,362
4,252
28,795
(32,188)
(741)
24,480
8,670
33,150
The loan loss provision recognised in the period is impacted by a variety of factors, as described below:
• Transfers between stage 1 and stage 2 or 3 due to financial instruments experiencing significant increases (or decreases) of credit
risk or becoming credit-impaired in the period and the consequent ‘step up’ (or ‘step down’) between 12 months or lifetime ECL.
• Additional allowances for new financial instruments recognised during the period, as well as releases for financial instruments
•
de-recognised in the period.
Impact on the measurement of ECL due to changes in PDs, EADs and LGDs in the period, arising from regular refreshing of inputs
to models.
Impacts on the measurement of ECL due to changes made to models and assumptions.
•
• Discount unwind within ECL due to the passage of time, as ECL is measured on a present value basis.
• Financial assets de-recognised during the period and write-offs of allowances related to assets that were written off during
the period.
• Financial assets modified during the period.
The following tables explain the changes in the loan loss provision between the beginning and the end of the period due to these factors:
Branch-based lending
Loan loss provision
Loan loss provision as at 1 January 2018:
Changes in the loss provision attributable to:
– Transfer from stage 1 to 2
– Transfer from stage 1 to 3
– Transfers from stage 2 to 1
– Transfers from stage 2 to 3
– Write offs
Net re-measurement of ECL arising from transfer of stage
New receivables originated or purchased
Net repayments of loans
Derecognition of modified loans
Other movements
Loan loss provision as at 31 December 2018
Guarantor loans
Loan loss provision
Loan loss provision as at 1 January 2018:
Changes in the loss provision attributable to:
– Transfer from stage 1 to 2
– Transfer from stage 1 to 3
– Transfers from stage 2 to 1
– Transfers from stage 2 to 3
– Write offs
Net re-measurement of ECL arising from transfer of stage
New receivables originated or purchased
Net repayments of loans
Derecognition of modified loans
Other movements
Loan loss provision as at 31 December 2018
Stage 1
£’000
4,245
(477)
(311)
62
–
–
(57)
4,060
(2,144)
–
15
5,393
Stage 1
£’000
565
(61)
(22)
169
–
–
(156)
453
(160)
2
25
814
Stage 2
£’000
2,211
477
–
(62)
(1,183)
–
1,005
2,008
(1,319)
(464)
(8)
2,665
Stage 2
£’000
891
61
–
(169)
(409)
–
452
782
(298)
38
64
1,412
Stage 3
£’000
1,838
–
311
–
1,183
(2,676)
446
1,880
(215)
(337)
34
2,463
Stage 3
£’000
276
–
22
–
409
(521)
100
418
(43)
(74)
25
613
Total
£’000
8,294
–
–
–
–
(2,676)
1,394
7,948
(3,678)
(802)
41
10,521
Total
£’000
1,731
–
–
–
–
(521)
395
1,653
(501)
(32)
114
2,839
OverviewStrategic ReportGovernanceFinancial Statements 18. Amounts receivable from customers – Group continued
Home credit
Loan loss provision
Loan loss provision as at 1 January 2018:
Changes in the loss provision attributable to:
– Transfer from stage 1 to 2
– Transfer from stage 1 to 3
– Transfers from stage 2 to 1
– Transfers from stage 2 to 3
– Transfers from stage 3 to 2
– Transfers from stage 3 to 1
– Write offs
Net re-measurement of ECL arising from transfer of stage
New receivables originated or purchased
Net repayments of loans
Loan loss provision as at 31 December 2018
Stage 1
£’000
5,790
(9,846)
(8,471)
34
–
–
2
–
14,614
7,109
(5,709)
3,523
Stage 2
£’000
7,812
9,846
–
(34)
(3,984)
5
–
–
(708)
185
(1,767)
11,355
Stage 3
£’000
9,522
–
8,471
–
3,984
(5)
(2)
(9,047)
(623)
11
(369)
11,942
Total
£’000
23,124
–
–
–
–
–
–
(9,047)
13,283
7,305
(7,845)
26,820
The following table further explains changes in the gross carrying amount of amounts receivable from customers to help explain their
significance to the changes in the loss allowance for the same portfolios as discussed previously.
Branch-based lending
Gross carrying amount – amounts receivable from customers
Gross carrying amount as at 1 January 2018
Changes in the gross carrying amount attributable to:
– Transfer from stage 1 to 2
– Transfer from stage 1 to 3
– Transfers from stage 2 to 1
– Transfers from stage 2 to 3
– Transfers from stage 3 to 2
– Transfers from stage 3 to 1
– Write offs
New receivables originated or purchased
Net repayments of loans
Derecognition of modified loans
Gross carrying amount as at 31 December 2018
Guarantor loans
Gross carrying amount – amounts receivable from customers
Gross carrying amount as at 1 January 2018
Changes in the gross carrying amount attributable to:
– Transfer from stage 1 to 2
– Transfer from stage 1 to 3
– Transfers from stage 2 to 1
– Transfers from stage 2 to 3
– Transfers from stage 3 to 2
– Transfers from stage 3 to 1
– Write offs
New receivables originated or purchased
Net repayments of loans
Derecognition of modified loans
Gross carrying amount as at 31 December 2018
Stage 1
£’000
142,757
(13,408)
(7,811)
387
–
–
–
–
117,711
(74,234)
7,958
173,359
Stage 1
£’000
53,339
(3,848)
(1,727)
1,284
–
–
–
–
52,270
(24,434)
204
78,089
Stage 2
£’000
14,054
13,408
–
(387)
(6,495)
–
–
–
9,955
(6,650)
(6,853)
17,032
Stage 2
£’000
6,799
3,848
–
(1,284)
(1,825)
–
–
–
5,845
(3,463)
3
9,922
Stage 3
£’000
4,801
–
7,811
–
6,495
–
–
(13,358)
2,945
47
(2,389)
Total
£’000
161,613
–
–
–
–
–
–
(13,358)
130,611
(80,837)
(1,285)
6,353
196,744
Stage 3
£’000
1,223
–
1,727
–
1,825
–
–
(2,970)
787
(159)
(240)
2,192
Total
£’000
61,361
–
–
–
–
–
–
(2,970)
58,903
(27,057)
(33)
90,204
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Notes to the financial statements continued
121
Home credit
Gross carrying amount – amounts receivable from customers
Gross carrying amount as at 1 January 2018
Changes in the gross carrying amount attributable to:
– Transfer from stage 1 to 2
– Transfer from stage 1 to 3
– Transfers from stage 2 to 1
– Transfers from stage 2 to 3
– Transfers from stage 3 to 2
– Transfers from stage 3 to 1
– Write offs
New receivables originated or purchased
Net repayments of loans
Stage 1
£’000
42,041
(14,272)
(11,543)
192
–
–
10
–
64,245
(41,981)
Stage 2
£’000
11,200
14,272
–
(192)
(4,872)
9
–
–
366
(4,259)
Gross carrying amount as at 31 December 2018
38,692
16,524
Stage 3
£’000
10,051
–
11,543
–
4,872
(9)
(10)
(12,910)
20
(928)
12,631
Total
£’000
63,292
–
–
–
–
–
–
(12,910)
64,631
(47,167)
67,846
Net amounts receivable modification loss
As a result of the Group’s forbearance activities financial assets might be modified. The following tables refer to modified financial
assets where modification has resulted in derecognition.
Financial assets (with loss allowance based on lifetime ECL) modified during the period
Gross carrying amount before modification
Loan loss provision before modification
Net amounts receivable before modification
Net modification loss
Net amounts receivable after modification
2018
£’000
32,891
(4,350)
28,541
(404)
28,137
2017
£’000
23,681
(3,513)
20,168
(193)
19,975
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 IFRS 9 as at 31 December 2018. Assets and liabilities outside the scope of IFRS 9 are shown within
non-financial assets/liabilities:
Group
At 31 December
Assets
Cash and cash equivalents
Loans and advances to customers
Current tax asset
Trade and other receivables
Other assets
Goodwill
Intangible assets
Property, plant and equipment
Total assets
Liabilities
Bank borrowing
Current tax liability
Deferred tax liability
Other liabilities
Total liabilities
Loans and
receivables
£’000
13,894
314,614
–
–
–
–
–
–
328,508
–
–
–
–
–
–
–
–
–
241
–
–
–
241
–
–
–
–
–
Fair value
assets/
liabilities
£’000
Amortised cost
£’000
Non–financial
assets/
liabilities
£’000
2018
Total
£’000
13,894
314,614
–
3,967
241
140,668
13,431
7,723
–
–
–
3,967
–
140,668
13,431
7,723
–
–
–
–
–
–
–
–
–
165,789
494,538
(266,322)
–
–
(5,184)
–
(883)
(252)
(11,175)
(266,322)
(883)
(252)
(16,359)
(271,506)
(12,310)
(283,816)
(214,665)
2017
Total
£’000
10,954
259,836
455
9,356
140,668
21,077
5,562
447,908
(199,316)
–
(4,996)
(10,353)
OverviewStrategic ReportGovernanceFinancial Statements 122
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18. Amounts receivable from customers – Group continued
Company
At 31 December
Assets
Cash and cash equivalents
Trade and other receivables
Property, plant and equipment
Investments
Total assets
Liabilities
Other liabilities
Total liabilities
Trade and other receivables – Group
Other debtors
Corporation tax
Prepayments
Loans and
receivables
£’000
Non-financial
assets/
liabilities
£’000
393
61,607
–
–
–
122
180
212,674
2018
Total
£’000
393
61,729
180
212,674
2017
Total
£’000
320
60,984
158
212,336
62,000
212,976
274,976
273,798
–
–
(4,786)
(4,786)
(4,786)
(4,786)
(1,309)
(1,309)
2018
£’000
406
–
3,561
3,967
2017
£’000
81
455
1,015
1,551
Unamortised broker commissions were previously recorded within prepayments, following the change in presentation, unamortised
broker commissions are included within amounts receivable from customers, refer to the note above.
Trade and other receivables – Company
Other debtors
Corporation tax
Amounts due from subsidiaries
Prepayments
2018
£’000
238
2,234
59,135
122
61,729
2017
£’000
1,365
–
59,501
118
60,984
Amounts owed from Group undertakings are non-interest bearing and repayable on demand.
There are no amounts included in trade and other receivables which are past due but not impaired. The carrying value of trade and
receivables is not materially different to the fair value.
19. Cash and cash equivalents – Group
Cash at bank and in hand
Cash and cash equivalents – Company
Cash at bank and in hand
2018
£’000
13,894
2018
£’000
393
2017
£’000
10,954
2017
£’000
320
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.
20. Derivative asset
The Group holds a derivative asset in the form of an interest rate cap. The fair value of the interest rate cap as at 31 December 2018
has been calculated through discounting future cash flows, using appropriate market rates and yield curves.
Under IFRS 13, ‘Fair Value Measurement’, the interest rate cap is classed as Level 2 as it is not traded in an active market.
Notes to the financial statements continued
21. Trade and other payables and provisions – Group
Trade creditors
Other creditors
Current tax liability
Accruals and deferred income and provisions
Trade and other payables – Company
Trade creditors
Other creditors
Amounts due to subsidiaries
Accruals and deferred income
Amounts owed to Group undertakings are non-interest bearing and repayable on demand.
The carrying value of trade and other payables is not materially different to the fair value.
Provisions – Group
Opening at 31 December 2016
Charge during the year
Utilised
Balance at 31 December 2017
Charge during the year
Utilised
Balance at 31 December 2018
123
2018
£’000
486
1,718
883
14,155
17,242
2018
£’000
101
106
3,755
824
4,786
2017
£’000
139
1,526
–
8,688
10,353
2017
£’000
120
85
255
849
1,309
£’000
970
618
(337)
1,251
14
(1,020)
245
The Group provides for its best estimate of redress payable in respect of historical sales of PPI by considering the likely future uphold
rate for claims in the context of confirmed issues and historical experience. The likelihood of potential new claims is projected
forward to 29 August 2019, which is in line with the deadline provided by the FCA for customers to make claims. The accuracy of these
estimates would be affected were there to be a significant change in either the number of future claims or the incidence of claims
upheld by the Financial Ombudsman Service.
Bank loans – Group
Due within one year
Due in more than one year
2018
£’000
5,184
266,322
2017
£’000
2,507
199,316
The Group entered into arrangement for the provision of one financing facility during the year of £60m and an increase to the
revolving loan facility provided by The Royal Bank of Scotland plc of £10m. The Group entered into arrangement for the provision
of two financing facilities during 2017. The total as at 31 December 2018 is comprised of a £285m term loan provided by institutional
investors, and a £45m revolving loan facility provided by The Royal Bank of Scotland plc. As at 31 December 2018 £235.0m
(2017: £175.0m) was drawn under the term loan facilities and £37.8m (2017: £33.1m) was drawn under the revolving loan facility.
The term loan facility has a six-year term and the revolving loan facility has a five-year term.
Borrowings are recognised at amortised cost. The carrying value of other payables due in more than one year is not materially
different to the fair value. The facility arrangements have the benefit of (i) guarantees from, and fixed and floating security granted
by, the following entities: NSF Finco Limited, Non-Standard Finance Subsidiary II Limited, Non-Standard Finance Subsidiary III
Limited, S.D. Taylor Limited, Everyday Loans Holdings Limited, Everyday Loans Limited, Everyday Lending Limited, George Banco
Limited, George Banco.com Limited; and (ii) a charge over the shares in, and intercompany loans made to, NSF Finco Limited
granted by Non-Standard Finance Subsidiary Limited.
OverviewStrategic ReportGovernanceFinancial Statements 124
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22. Deferred tax liability
At 31 December 2016
Recognition of intangible assets at acquisition
Recognition of fair value adjustments on amounts receivable at acquisition
Adjust for changes in deferred tax rate
Charge relating to share-based payments
Recognition of deferred tax asset at acquisition
Current year credit
At 31 December 2017
Adjust for changes in deferred tax rate
Charge relating to share-based payments
IFRS 9 transitional adjustment
Current year credit
At 31 December 2018
£’000
(5,890)
(1,461)
(1,547)
31
13
530
3,328
(4,996)
70
3
2,182
2,489
(252)
The deferred tax liability was recognised on acquisition of Loans at Home, Everyday Loans (including TrustTwo) and George Banco
(refer to note 26) in relation to intangible assets on which no tax deduction will be claimed in future periods for amortisation.
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
Restatement of loan loss spreading
Other short-term timing differences
Recognition of deferred tax relating to share-based payments
Other losses and deductions
FRS 102 adoption
IFRS 9 transitional adjustment
Net deferred tax liability
2018
£’000
(140)
(1,619)
(819)
(35)
95
26
62
(4)
2,182
(252)
2017
£’000
(65)
(3,269)
(2,277)
–
219
22
374
–
–
(4,996)
23. Share capital
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 (save the Ordinary Shares held in treasury which do not rank for dividends or
other distributions).
Share movements
Balance at 31 December 2017 and 31 December 2018
Number
317,049,682
24. 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.
Balance at 31 December 2017 and 31 December 2018
Total
£’000
254,995
25. Other reserves
Treasury shares
The treasury shares reserve represents the cost of shares in the Group purchased in the market and held by the Group to satisfy
options under the Group’s share options schemes. The number of treasury shares held at 31 December 2018 was 5.0m (2017: 1.9m).
This equates to 2% of the weighted average number of ordinary shares in issue.
Balance at 1 January 2018
Acquired in the year
Disposed of on exercised options
Balance at 31 December 2018
£’000
1,357
2,102
–
3,459
Notes to the financial statements continued
125
Share-based payments
Equity-settled share option schemes
At 31 December 2018, the Group operated five share-based award schemes which are all equity-settled: founder shares scheme,
three long-term incentive schemes (the Non-Standard Finance plc Long-Term Incentive Plan, the Loans at Home Long-Term Incentive
Plan and the Everyday Loans Group Long-Term Incentive Plan) and the Sharesave Plan (‘Save As You Earn scheme’).
a) Movements in the period
Founder Shares 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 payout 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 2018 (2017: £nil).
No shares were issued to the Directors during the year ended 31 December 2018 (2017: nil).
Non-Standard Finance plc Long-Term Incentive Plan
In 2017, awards were made under the Non-Standard Finance plc Long-Term Incentive Plan. The awards were in the form of nil-cost
options and the issue of C Ordinary Shares in Non-Standard Finance Subsidiary Limited.
The vesting date for awards is 31 December 2020. On vesting, participants will share in a ‘pool’ equal to 15% of the growth in value,
based on market capitalisation, of the Company at 31 December 2020, above a share price of £1.10 per share.
In respect of awards made in the form of nil-cost options, on exercise a participant will receive shares in the Company equal in value
to their proportion of the pool at vesting. In respect of awards made in the form of shares in Non-Standard Finance Subsidiary
Limited, on vesting a participant can exchange these shares for shares in the Company equal in value to their proportion of the pool.
Awards in the form of nil-cost options:
Outstanding at 1 January 2017
Options granted
Lapsed
Exercised
Outstanding at 31 December 2017 and 31 December 2018
Exercisable at 31 December 2017 and 31 December 2018
Percentage of
pool
allocated
Percentage of
growth above
£1.10
share price
Exercise price
–
62.5%
–
–
62.5%
–
–
9.4%
–
–
9.4%
–
–
–
–
–
–
–
OverviewStrategic ReportGovernanceFinancial Statements 25. Other reserves continued
Awards in the form of C Ordinary Shares:
Outstanding at 1 January 2017
Shares issued
Forfeited
Vested
Outstanding at 31 December 2017 and 31 December 2018
Vested at 31 December 2017 and 31 December 2018
Percentage of
growth above
£1.10
share price
Exercise price
–
5.6%
–
–
5.6%
–
–
–
–
–
–
–
Number
–
375
–
–
375
–
Loans at Home Long-Term Incentive Plan
In 2017, awards were made under the Loans at Home Long-Term Incentive Plan. The awards were in the form of nil-cost options over
shares in the Company. On vesting, participants will share in a ‘pool’ equal to 5% of the growth in the equity value of Loans at Home
measured at 31 December 2019 above £130m. The pool is subject to an overall cap of £3m. On exercise of the nil-cost options, a
participant will receive shares in the Company equal in value to their proportion of the pool.
Outstanding at 1 January 2017
Options granted
Lapsed
Exercised
Outstanding at 31 December 2017 and 31 December 2018
Exercisable at 31 December 2017 and 31 December 2018
Percentage of
pool
allocated
Percentage of
growth above
£130m
Exercise price
–
100%
–
–
100%
–
–
5%
–
–
5%
–
–
–
–
–
–
–
Everyday Loans Group Long-Term Incentive Plan
In 2017, awards were made under the Everyday Loans Group Long-Term Incentive Plan. The awards were in the form of nil-cost
options over shares in the Company. The vesting date is 31 December 2019. On vesting, participants will share in a ‘pool’ equal to 5%
of the growth in equity value of the Everyday Loans Group measured at 31 December 2019 above £267m. The pool is subject to an
overall cap of £6m. On exercise of the nil-cost options, a participant will receive shares in the Company equal in value to their
proportion of the pool.
Outstanding at 1 January 2017
Options granted
Lapsed
Exercised
Outstanding at 31 December 2017
Options granted
Lapsed
Exercised
Outstanding at 31 December 2018
Exercisable at 31 December 2018
Percentage of
pool
allocated
Percentage of
growth above
£267m
Exercise price
–
117.8%
32.7%
–
85.1%
14.9%
–
–
100%
–
–
5.9%
1.6%
–
4.3%
0.7%
–
–
5.0%
–
–
–
–
–
–
–
–
–
–
–
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Notes to the financial statements continued
127
Guarantor Loans Division Long-Term Incentive Plan
During the year, awards were made under the Guarantor Loans Division long-Term Incentive Plan. The awards were in the form of
nil-cost options over shares in the Company. The vesting date is 31 December 2020. On vesting, participants will share in a ‘pool’
equal to 7.35% of the growth in equity value of the Guarantor Loans Division measured at 31 December 2020 above £80m. The pool is
subject to an overall cap of £2.5m. On exercise of the nil-cost options, a participant will receive shares in the Company equal in value
to their proportion of the pool.
Outstanding at 1 January 2017
Options granted
Lapsed
Exercised
Outstanding at 31 December 2017
Options granted
Lapsed
Exercised
Outstanding at 31 December 2018
Exercisable at 31 December 2018
Percentage of
pool
allocated
Percentage of
growth above
£80m
Exercise price
–
–
–
–
–
100%
–
–
100%
–
–
–
–
–
–
7.35%
–
–
7.35%
–
–
–
–
–
–
–
–
–
–
–
Save As You Earn scheme
Awards have been made to employees of the Group under a HMRC tax-advantaged Sharesave Plan. Under the Sharesave Plan,
options have been granted in three tranches with a three-year vesting period and with an exercise price set at a 20% discount to the
share price at the date of grant.
Granted on 7 June 2017
Granted on 6 October 2017
Granted on 14 May 2018
Number Exercise price (£)
Number Exercise price (£)
Number Exercise price (£)
Outstanding at 1 January 2017
Options granted
Lapsed
Exercised
–
1,307,711
(29,536)
–
–
0.5606
–
–
–
1,910,278
–
–
Outstanding at 31 December 2017
1,278,175
0.5606
1,910,278
Options granted
Replaced
Lapsed
Exercised
–
(454,324)
(216,395)
–
–
–
–
–
–
(728,998)
(345,071)
–
–
0.606
–
–
0.606
–
–
–
–
–
–
–
–
–
3,447,742
–
(358,747)
–
Outstanding at 31 December 2018
607,456
0.5606
836,209
0.606
3,088,995
Exercisable at 31 December 2018
–
–
–
–
–
–
–
–
–
–
0.495
–
–
–
0.495
–
b) Fair value of options granted
For the share-based awards granted during the year, the main assumptions in the valuations are as follows.
Non-Standard Finance plc Long-Term Incentive Plan
In 2017, the Non-Standard Finance plc Long-Term Incentive Plan was adopted. Under the Plan, awards can be made in the form of
shares in a subsidiary company or nil-cost options. Awards will vest on 31 December 2020 based on the growth of the Company
above a share price of £1.10. The fair value of the plan is £1.61m spread over the vesting period and will be equity-settled. A charge of
£0.549m (2017: £0.095m) was recognised in the 2018 financial year. The following information is relevant in the determination of the
fair value:
Valuation method
Share price at grant date
Exercise price
Expected volatility
Expected life
Expected dividend yield
Risk-free interest rate
15 September 2017
19 September 2017
Black-Scholes
£0.75
£1.10
25%
3.3 years
3.5%
0.32%
Black-Scholes
£0.78
£1.10
25%
3.3 years
3.5%
0.32%
OverviewStrategic ReportGovernanceFinancial Statements 25. Other reserves continued
Loans at Home Long-Term Incentive Plan
In 2017, the Loans at Home Long-Term Incentive Plan was adopted. Under the Plan, awards can be made in the form of nil-cost
options. Awards will vest on 31 December 2019 based on the growth in value of the Loans at Home Group at the vesting date above
£130m. The awards are subject to an overall cap of £3m. Awards will be delivered in the form of shares in Non-Standard Finance plc
and will be equity-settled. The fair value of the awards made in December 2017 is £0.279m spread over the vesting period.
A charge of £0.144m (2017: £0.004m) was recognised in the 2018 financial year. The following information is relevant in the
determination of the fair value:
Valuation method
Equity value at grant date
Exercise price
Expected volatility
Expected life
Expected dividend yield
Risk-free interest rate
20 December 2017
Monte Carlo
£82.5m
£0.00
30.9%
2.16 years
0%
0.51%
Everyday Loans Group Long-Term Incentive Plan
In 2017, the Everyday Loans Group Long-Term Incentive Plan was adopted. Under the Plan, awards can be made in the form of
nil-cost options. Awards will vest on 31 December 2019 based on the growth in value of the Everyday Loans Group at the vesting date
above £267m. The awards are subject to an overall cap of £6m. Awards will be delivered in the form of shares in Non-Standard
Finance plc and will be equity-settled The total fair value of the awards made in March/April 2017, 4 December 2017 and May 2018 is
£0.401m spread over the vesting period. A charge of £0.130m (2017: £0.109m) was recognised in the 2018 financial year. The following
information is relevant in the determination of the fair value:
Valuation method
Equity value at grant date
Exercise price
Expected volatility
Expected life
Expected dividend yield
Risk-free interest rate
6 March &
4 April 2017
4 December 2017 &
14 May 2018
Monte Carlo
£182.1m
£0.00
25%
2.82 years
0.0%
0.14%
Monte Carlo
£182.1m
£0.00
34%
2.1 years
0.0%
0.48%
Guarantor Loans Division Incentive Plan
During the year, the Guarantor Loans Division Long-Term Incentive Plan was adopted. Under the Plan, awards can be made in the
form of nil-cost options. Awards will vest on 31 December 2020 based on the growth in value of the Guarantor loans Division at the
vesting date above £80m. The awards are subject to an overall cap of £2.5m. Awards will be delivered in the form of shares in
Non-Standard Finance plc and will be equity-settled. The fair value of the awards made in April 2018 is £0.248m spread over the
vesting period. A charge of £0.064m (2017: £nil) was recognised in the 2018 financial year. The following information is relevant in the
determination of the fair value:
Valuation method
Equity value at grant date
Exercise price
Expected volatility
Expected life
Expected dividend yield
Risk-free interest rate
18 April 2018
Monte Carlo
£37.5m
£0.00
35%
2.7 years
0.0%
0.76%
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Notes to the financial statements continued
129
Sharesave Plan
In 2017, the Non-Standard Finance plc Sharesave Plan was adopted. Under the Plan, options can be made with a 3-year vesting
period and at an exercise price not more than a 20% discount to the share price at the date of grant and will be equity-settled. The
fair value of the awards made in June 2017 is £0.213m spread over the vesting period. The fair value of the awards made in October
2017 is £0.378m spread over the vesting period. The Company has applied modification accounting treatment in respect to the May
2018 awards which have been obtained by some participants at the same time as closing their 2017 awards. The fair value of the
awards made in May 2018 which do not qualify for modification treatment is £0.276m spread over the vesting period. The fair value of
those awards qualifying for modification treatment is £0.061m spread over the vesting period. A charge of £0.268m (2017: £0.070m)
was recognised in the year ended 31 December 2018. The following information is relevant in the determination of the fair value:
Valuation method
Share price at grant date
Exercise price
Expected volatility
Expected life
Expected dividend yield
Risk-free interest rate
7 June 2017
6 October 2017
14 May 2018
Black-Scholes Black-Scholes
£0.7700
£0.6060
29.9%
3 years
1.30%
0.51%
£0.7038
£0.5606
28.3%
3 years
1.71%
0.13%
Black-Scholes
£0.6200
£0.4952
31.1%
3 years
3.55%
0.88%
26. Acquisition of subsidiary
George Banco
On 17 August 2017, the Group obtained control of the George Banco Group, which consists of George Banco Limited, George
Banco.com Limited and GeorgeFinance.com Limited. The Group obtained control through the purchase of 100% of the share capital.
The acquisition of George Banco is in line with the Group’s strategy to be a leader in each of its chosen business segments.
The fair values of the identifiable assets and liabilities of George Banco 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
Loans and borrowings
Deferred tax liabilities3
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
Fair value
adjustments
£’000
–
125
28,829
50
2,137
(380)
(34,134)
–
(3,373)
7,691
–
8,141
–
–
–
–
(2,478)
13,354
Total
£’000
7,691
125
36,970
50
2,137
(380)
(34,134)
(2,478)
9,981
8,598
18,579
18,579
18,579
(2,137)
16,442
1 £2,561,791 has been attributed to the fair value of George Banco’s customer list, £4,917,977 to the broker relationships and £210,844 to the George Banco brand.
2 An adjustment to receivables of £8,141,189 has been made to reflect the fair value of the receivables book at the acquisition date.
3 Deferred tax liability of £2,477,875 has been recognised on the intangibles and the fair value adjustment of the receivable book at acquisition (refer to note 22).
George Banco contributed £4.5m to the Group’s revenue and £0.5m profit before tax (before fair value adjustments) for the period
from the date of acquisition to 31 December 2017. Reported revenue was £4.4m and profit before tax was £0.4m after fair value
adjustments for the period from the date of acquisition to 31 December 2017. Assuming George Banco was acquired on 1 January 2017,
reported revenue was £10.8m and profit before tax was £0.9m after fair value adjustments.
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.
OverviewStrategic ReportGovernanceFinancial Statements 130
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27. Net cash used in operating activities – Group
Operating profit/(loss)
Taxation paid
Depreciation
Share-based payment charge
Amortisation of intangible assets
Fair value unwind on acquired loan book
Profit on disposal of property, plant and equipment
Increase in amounts receivable from customers
Increase in other assets
Increase in receivables
(Decrease)/increase in payables
Cash used in operating activities
Net cash used in operating activities – Company
Operating loss
Depreciation
Share-based payment charge
Decrease in receivables
(Increase)/decrease in payables
Cash used in operating activities
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
19,517
(1,164)
1,772
1,157
9,661
7,678
(45)
(66,913)
(241)
(2,418)
(3,767)
(34,763)
(2,540)
(2,226)
1,497
291
7,897
11,985
(416)
(54,437)
–
(51)
1,000
(37,000)
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
(5,397)
69
818
280
3,476
(754)
(5,174)
53
165
2,149
(286)
(3,093)
28. Operating lease commitments – Group
At 31 December 2018, 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
2018
£’000
Year ended
31 December
2017
£’000
2,999
7,125
279
10,403
1,572
3,175
99
4,846
Operating leases consist mainly of branches and vehicles.
29. Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. The
Company received dividend income of £10.2m from its subsidiary undertakings during the year (2017: £8.9m). Also during the year,
Everyday Loans Limited repaid loans of £0.4m due to the Company. The Company borrowed £3.5m from Everyday Loans Limited.
Please refer to note 18 for the year-end amounts due from subsidiaries to the Company and note 21 for year-end amounts due to
subsidiaries from the Company. Two members of key management personnel (Executive Directors of Non-Standard Finance plc) are
Trustees of the charity Loan Smart, during the year the Company donated £45,000 to Loan Smart and has a debtor balance of
£80,500 as at 31 December 2018 for a loan to the charity (2017: £nil). Amounts owed to Non-Standard Finance plc are non-interest
bearing and repayable on demand.
Three Directors are members of the Non-Standard Finance plc Long-Term Incentive Plan as detailed in note 25. Further information
about the remuneration of individual Directors is provided in the audited part of the Directors’ remuneration report on 66 to 82.
30. 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 and quality-controlled customer base by applying strong emphasis
on good credit management, both through strict lending criteria at the time of underwriting and continuously monitoring the
collection process.
The average effective interest rate on financial assets of the Group at 31 December 2018 was estimated to be 80% (2017: 109%).
The average effective interest rate on financial liabilities of the Group at 31 December 2018 was estimated to be 9% (2017: 7%).
Notes to the financial statements continued
131
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. The Group monitors interest rates but has not
chosen to hedge this item given the much greater effective interest on financial assets as compared to the effective interest rate on
financial liabilities.
A 1% movement in the interest rate applied to financial liabilities during 2018 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.
The Group assesses the loan book on a days past due basis to consider whether credit risk has increased since initial recognition,
see tables below:
Branch-based lending1
Current
1 to 29 days past due
30 to 89 days past due
Over 90 days past due
Guarantor loans1
Current
1 to 29 days past due
30 to 89 days past due
Over 90 days past due
1 Branch-based and Guarantor loans make monthly collections.
Home credit2
Up to 1 in the last 13 weeks missed
1 to 4 in the last 13 weeks missed
4 to 8 in the last 13 weeks missed
8 to 12 in the last 13 weeks missed
13 in the last 13 weeks missed
2 Home credit make weekly collections.
2018
£’000
173,699
3,620
4,955
3,949
186,223
2018
£’000
79,738
4,090
2,144
1,378
87,365
2018
£’000
28,207
7,022
2,825
2,488
484
41,026
2017
£’000
143,724
2,692
3,981
2,921
153,318
2017
£’000
53,817
3,330
1,707
776
59,630
2017
£’000
29,019
7,232
1,974
1,515
428
40,168
The Group has performed sensitivity analysis on how ECL would change if key macro-economic assumptions changed in Branch-
based lending, Home credit and Guarantor loans.
For Branch-based lending and Guarantor loans the Group has performed sensitivity analysis on the key macro-economic variables
(GDP, CPI, HPI, unemployment). Management has considered three scenarios; base, stress and positive. The outputs demonstrated
that the probability weighting of these scenarios does not have a material impact on the loan loss provisioning figures.
Due to the nature of the Home credit industry and based on historical evidence, management has determined that the effect of
traditional macro-economic downside indicators is minimal and therefore this overlay is currently not necessary.
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.
OverviewStrategic ReportGovernanceFinancial Statements 30. Financial Instruments – Group continued
Capital risk management
The Board of Directors assesses the capital needs of the Group on an ongoing basis and approves all capital transactions. The
Group’s objective in respect of capital risk management is to maintain a conservative loan to value 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 Group’s
short-term loans to customers provide a natural hedge against medium-term borrowings. The Group has in place sufficient long-term
committed debt facilities which are sourced from a number of different providers. Cash and covenant forecasting is conducted
on a monthly basis as part of the regular management reporting exercise. The risk of not having sufficient liquidity resources is
therefore low.
The Group monitors its levels of working capital to ensure that it can meet its debt repayments as they fall due.
31. Subsequent events
Since 31 December 2018 the Company has announced a firm offer to acquire Provident Financial plc by way of a reverse takeover,
as well as the proposed demerger of Loans at Home. Currently, the financial impact of the proposed transaction cannot be
estimated. Since 31 December 2018 there have been no events that require adjustment to the financial statements.
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Appendix
133
Glossary of alternative performance measures and key performance indicators
The Group has developed a series of alternative performance measures that it uses to monitor the financial and operating
performance of each of its business divisions and the Group as a whole. These measures seek to adjust reported metrics for the
impact of non-cash and other accounting charges (including modification loss) that make it more difficult to see the true underlying
performance of the business. Note that all 2017 key performance indicators have been adjusted to reflect the position as if IFRS 9
(see note 3 to the financial statements) had been adopted as at 1 January 2017.
Alternative performance measure
Definition
Net debt
Gross borrowings less cash at bank
Normalised revenue
Normalised operating profit
Normalised profit before tax
Normalised earnings per share
Key performance indicator
Normalised figures are before fair value adjustments, amortisation of acquired intangibles and
exceptional items
Impairments/revenue
Impairments as a percentage of normalised revenues
Net loan book
Net loan book before fair value adjustments but after deducting any impairment due
Net loan book growth
Annual growth in the net loan book
Operating profit margin
Normalised operating profit as a percentage of normalised revenues
Return on asset
Normalised operating profit as a percentage of average loan book excluding fair value
adjustments
Revenue yield
Normalised revenue as a percentage of average loan book excluding fair value adjustments
Risk adjusted margin
Normalised revenue less impairments as a percentage of average loan book excluding fair value
adjustments
OverviewStrategic ReportGovernanceFinancial Statements 134
Company information
Company details
Registered office and contact details
7 Turnberry Park Road
Gildersome
Morley
Leeds
LS27 7LE
Website: www.nsfgroupplc.com
Company number
09122252
Independent auditor
Deloitte LLP
Hill House
1 Little New Street
London
EC4A 3TR
Advisors
Brokers
J.P. Morgan Cazenove
Floor 29
25 Bank Street
Canary Wharf
London
E14 5JP
Shore Capital
Bond Street House
14 Clifford Street
London
W15 4JU
Solicitors
Slaughter and May
One Bunhill Row
London
EC1Y 8YY
Walker Morris LLP
Kings Court
12 King St
Leeds
LS1 2HL
Financial communications
Maitland/AMO
13 King’s Boulevard
London
N1C 4BU
www.nsfgroupplc.com
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