Culture driven
lending
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Non-Standard Finance plc
Annual Report & Accounts 2019
Why we are here
To help UK
consumers meet
their financial
needs
Corporate Governance
60 Chairman’s introduction
62 Board of Directors
64
82
Corporate governance report
(including governance
at a glance)
Nomination & Governance
Committee report
85
Audit Committee report
93 Risk Committee report
94
114 Directors’ report
Directors’ remuneration report
Independent auditor’s report
Financial Statements
119
129 Financial statements
Notes to the financial
134
statements
Additional Information
180 Appendix
184 Company information
2019 overview
Overview
2
4 NSF Group at a glance
6
Chairman’s statement
Group Chief Executive’s report
Strategic Report
8 Market review
10 Business model
12
18 Our strategy and KPIs
24 Principal risks
28 2019 financial review
32
Divisional review:
Branch-based lending
Divisional review:
Guarantor loans
Divisional review:
Home credit
Stakeholder management and
our commitment to Section 172
36
40
46
What we do
When lending direct,
we aim to meet all our
customers face-to-face
Whilst more expensive to operate than other models,
it often means we can lend when others can’t (or won’t)
Read our 2019 financial review
on pages 28 to 45
How we do it
Entrepreneurial leadership P.33
Doing the right thing P.72
Our values and
culture are focused on
the delivery of good
customer outcomes
Integrity P.37
Shared purpose through
teamwork P.57
Clear communication P.41
Read our case studies to learn
more about our values
Who benefits?
01
By lending responsibly
we can benefit each of
our key stakeholders
Customers We believe every adult
should have access to credit
they can afford to repay
Employees and
self-employed agents
We aim to ensure that our workforce
is well-trained, professional and
highly motivated to succeed
Regulators
Maintaining good relations with
regulators ensures we can address
issues before they become
a potential concern
Partners and suppliers We draw on the expertise of
Providers of funding
others to help us meet our objectives,
maintaining their support and trust is
key to our long-term success
By focusing on long-term returns we
can secure the capital we need to
fund future loan book growth and
associated investment
Communities, charity
and environment
Our position in local communities
and the contributions we make are
important for all of our stakeholders
Read more about our approach to
stakeholders on pages 46 to 59
02
2019 overview
A leading provider of
unsecured credit
£360.2m
Net loan book1
200,000+
Customers
140
Locations
940+
Staff
890+
Self-employed agencies
£309.0m
Net debt2
Formed in 2014, we now
have national coverage
with 140 offices.
Everyday Loans (74)
Loans at Home (64)
Guarantor loans (1)
NSF (1)
1 A reconciliation of the calculation of combined net loan book is set out on page 31.
2 Gross borrowings less cash at bank at 31 December 2019.
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While 2019 was a further year of expansion,
COVID-19 is creating uncertainty in all
areas of the UK economy. We aim to continue
to support our customers, staff and self-employed
agents during this difficult time.
Financial summary
Operational highlights
Reported results
Normalised results1
• Total loan book2 grew by 18%
Combined loan book
Combined loan book
£361.6m
+16% (2018 restated: £310.7m)
£360.2m
+18% (2018 restated: £306.4m)
Revenue
Revenue
£180.8m
+14% (2018: £158.8m)
£183.7m
+10% (2018: £166.5m)
(Loss) before tax
Profit before tax
£(76.0)m
(3,113)% (2018 restated: £(2.4)m)
£14.7m
+5% (2018 restated: £14.0m)
Basic and fully diluted
loss per share
(24.45)p
(3,204)% (2018 restated: (0.74)p)
Basic and fully diluted
earnings per share
3.67p
+5% (2018 restated: 3.50p)
Dividend per share
0.70p
(73)% (2018: 2.60p)
Dividend per share
0.70p
(73)% (2018: 2.60p)
• Branch-based lending: eight
new branches opened and
125 new staff added
• Guarantor loans: consolidation of
operations into a single location
• Home credit: focus on quality
customers with marked reduction
in impairment
Visit our website for further information
www.nsfgroupplc.com
1 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 30.
2 For a reconciliation of net loan book growth see table
in the 2019 financial review on page 31.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 04
NSF Group at a glance
Relationships
are key
We understand our customers’ needs:
we don’t look to sell them things they don’t want; and if they get
into difficulty, we try and find a solution that works for all.
Our culture and values
Whilst still a relatively young
company, the Group has
nevertheless adopted a cultural
approach that is more akin to
that of a much larger and
long-established business.
1.
Assess current
values/behaviours
across each
business
Our
approach
2.
Identify ways to
influence values/
behaviours
5.
Determine desired
target values/
behaviours
4.
Identify things
that hinder/promote
good/bad behaviour
3.
Establish metrics
to monitor cultural
performance
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Our key values include:
1. Integrity
We expect our people to respect
colleagues and other key
stakeholders and to do what we
say we will do (see page 37).
2. 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 (see page 57).
3. Doing the right thing
We recognise our collective
responsibility for delivering great
outcomes – not just for our
customers but also our other
stakeholders (see page 72).
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
(see page 41).
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
(see page 33).
05
Customer touch points
Online
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.
Face-to-face
In branch-based lending and
home credit, meeting the customer
face-to-face is an important part
of our underwriting process and
helps build trusted relationships.
By phone
Applicants also contact us by phone to
confirm their details and start the loan
application process as well as to tell us
if they are having problems.
Our divisions
Branch-based
lending
Guarantor
loans
Home
credit
First established in 2006, we are the UK’s
largest branch-based provider of
unsecured loans to sub-prime borrowers
Serving UK customers since 2014,
we are the clear number two in what
has been a fast-growing UK market
We are the UK’s third largest provider
of unsecured home credit with a large
network of self-employed agencies
18%
loan book growth1
30%
growth in customer numbers1
896
agencies
Our KPIs
Net loan book2
Normalised revenue2
Normalised operating profit2
2019
2018
2017
214.8
105.5
39.9
182.7
82.7
41.0
2019
2018
2017
93.0
29.8
60.8
79.6
21.7
65.2
2019
2018
2017
29.7
8.8
9.1
26.3
7.5
6.7
146.4
51.3
40.2
60.9
8.1
50.7
22.7
2.7
3.1
Branch-based lending
Guarantor loans
Home credit
Branch-based lending
Guarantor loans
Home credit
Branch-based lending
Guarantor loans
Home credit
In the year ended 31 December 2019.
1
2 See glossary of APMs and KPIs in the Appendix. 2018 has been restated to reflect a prior year adjustment (see note 1
to the financial statements). A reconciliation of the calculation of combined net loan book is set out on page 31.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information
06
Chairman’s statement
Culture driven
lending
2019 and the first half of 2020 has proven
to be a challenging period for the Group.
The coronavirus (‘COVID-19’) outbreak that
started to impact the UK economy in
earnest during March 2020 has tested and
is continuing to test our business as well as
each of our cultural pillars upon which our
corporate ethos has been built. Whilst
significant uncertainty remains, I and the
rest of the Board are extremely proud of the
way in which as a business we have
tackled the many challenges that have
emerged since the crisis began. The fact
that our people have continued to perform
to the very high standards set, sometimes in
very difficult circumstances, is perhaps the
most powerful evidence of how the
strength of our culture is continuing to drive
our business.
2019 results
Reported revenues were £180.8m (2018:
£158.8m) while operating profit was £32.1m
(2018 restated: £18.7m). Higher interest
costs and the impact of exceptional
charges that included aborted bid costs,
goodwill impairment and restructuring
costs resulted in a statutory loss per share
of 24.45 pence (2018 restated: statutory loss
per share of 0.74 pence). As explained in
the 2019 financial review, the decline in
market multiples in the non-standard sector
over the past 18 months meant that the
goodwill assets of each division had to be
impaired, incurring an exceptional
non-cash charge in the year of £65.8m
(2018: £nil).
On a normalised basis1, operating profit
increased by 20% to £42.2m (2018 restated:
£35.1m), profit before tax increased by 5%
to £14.7m (2018 restated: £14.0m) and
earnings per share increased to 3.67 pence
(2018 restated: 3.50 pence).
Funding
In March 2020 we increased our committed
debt facilities with the addition of a new
£200m six-year securitisation facility.
Having access to a broad range of
long-term funding is key for any credit
business, especially during periods of
macroeconomic uncertainty when a lack
of funding can prevent opportunities
from being maximised. As at 31 May 2020
the Group had cash of £60m and whilst
£15m of the securitisation facility has been
drawn, the impact of COVID-19 on the loan
book has prompted a breach of certain
performance covenants, preventing further
drawdown on the new facility. However,
negotiations with the lender have been
positive and temporary relief until 29 June
2020 has been provided whilst a more
permanent agreement is reached. Until
such agreement is concluded there exists
material uncertainty over the ability of
the Group to draw down further on the
facility. In the event that no agreement
is reached or the temporary relief is not
extended then the Group has sufficient
cash resources to repay the amount drawn
under the new facility in full. The Board is
in discussions with its lenders regarding
possible covenant waivers, whilst at the
same time evaluating all funding options,
which may include the issue of equity, in
order to ensure the Group has a strong
and liquid balance sheet. Combined, it
is hoped that these actions will unlock
access to the facility and help to reduce
20%
increase in normalised operating profit
1 See glossary of APMs and KPIs in the Appendix.
The strength of
our culture is a
key business
driver.
Charles Gregson
Non-Executive Chairman
Despite having grown our customer
base and loan book in 2019, the scale
of the reported pre-tax loss in the year
was disappointing. It masked a solid
operational performance, one that
has been driven in large part by our
determination to foster the right culture
throughout all areas of our business.
Whist our £1.3bn offer for Provident Financial
plc (‘Provident’) was ultimately unsuccessful,
the opportunity to combine NSF with
Provident was one that we continue to
believe made real commercial sense. Again,
our cultural approach ensured that despite
the inevitable distractions from such an
initiative, we continued to deliver
operationally, executing our internal plans.
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The Board has already taken a number of
steps to safeguard the future viability of the
Group including a number of measures to
reduce costs and save cash including staff
reductions and the furloughing of over 120
employees, the deferral of payments to the
UK tax authorities and the cancellation
of all Executive Director bonuses linked to
financial performance in respect of 2020.
As at 31 May 2020 the Group had net cash
of £60.3m with gross borrowings across its
facilities of £345.0m. As lending volumes
have been significantly reduced and even
with an increase in impairment, the Group
is expected to generate positive cash flow
and has a large outstanding loan book.
Each of these factors, together with several
other cost reduction options that are
available, mean that the Board expects
that the Group can continue to meet
its ongoing obligations as planned.
Outlook
The challenges from COVID-19 on the
current trading environment cannot
be understated and the significant
prevailing uncertainty means that we have
withdrawn all forward-looking guidance
until further notice. However, as explained
in the Group Chief Executive’s review,
whilst in the short term it is expected that
the Group will experience a reduction
in income from lending activities, an
increase in expected credit losses due to
the pandemic and an associated reduction
in the carrying value of goodwill, the
Group is continuing to generate cash and
manage its financial position carefully.
Further ahead, and based on the Board’s
considerable experience of managing
similar businesses through previous
recessions, we also believe that the current
environment could create a significant
opportunity for non-standard lenders such
as NSF. The Board is therefore exploring
with its advisers the most appropriate
funding structure, which may include the
issue of equity, in order to strengthen the
Group’s balance sheet, unlock access to
additional low-cost funding and help to
ensure that the Group is well-placed to
take advantage of any such opportunity.
Charles Gregson
Non-Executive Chairman
25 June 2020
overall funding costs as well as provide
additional finance for future growth.
Our strategy remains unchanged
We remain committed to meeting the
needs and helping those consumers who
are either unable or unwilling to borrow
from mainstream lenders. This is a large
market, comprising between 20-25% of
all UK adults or approximately ten million
people. We believe that each of our
business divisions, whilst different in terms
of customer base, product and channel,
shares the potential to generate substantial
value through a combination of loan book
growth and a high return on assets.
Our business strategy to help meet these
objectives comprises three elements:
• Being a leader in our chosen markets;
• Investing in our core assets; and
• Acting responsibly.
Further details on each of these elements
can be found on pages 18 to 23.
Deeds not words
Throughout this Annual Report you will
find a series of case studies, describing
how our people are translating the
values and behaviours that define our
corporate culture into their day-to-day
lives for the benefit of our stakeholders.
From the very outset, the Board and I
have been focused on ensuring that we
are not just ‘talking the talk’ and that our
policies, procedures and management
philosophy are being implemented by
all of our people for the benefit of our
customers, staff, self-employed agents
and all of our key stakeholders. Whilst
we believe that an attractive return on
assets, high levels of customer satisfaction,
low levels of customer complaints and
staff turnover, high numbers of training
days and positive employee feedback
all point towards us delivering for each
of our key stakeholder groups, we are
not complacent and continue to strive to
do more. We have long recognised that
building and then sustaining a positive
culture requires significant effort from
all of our people, every day, every week
and every month and it never stops. It
requires careful monitoring, management
and development. As a Board we are
incredibly proud of what our people
tell us it feels like to be part of an NSF
Group company and how that is being
translated into operational and financial
performance. Further details on how
our actions are benefiting some of our
key stakeholders is enshrined within our
Section 172 statement and associated
disclosures that form a key part of this
Annual Report (see pages 46 to 59).
Regulation
As each of our businesses is fully authorised
by the FCA, we continue to engage
regularly with our regulator both at an
operational as well as a strategic level to
ensure we remain well-informed of any
concerns or possible changes to prevailing
rules and guidance.
During 2019 the FCA conducted a multi-
firm review in the guarantor lending
sector and has asked firms to make some
operational changes to the lending
process that includes providing some
additional information to guarantors prior
to any loan being made. These changes
are not expected to have any material
impact on the attractions of guarantor
loans relative to other non-standard
products and so are not expected to
have a significant impact on the Group.
2019 also saw the introduction of the Senior
Managers and Certification Regime (‘SMCR’)
that we adopted in all three of our business
divisions on time and without incident.
For further details on key regulatory
developments, please visit our website:
www.nsfgroupplc.com.
Final dividend
The Group declared a half-year dividend of
0.7p per share in August 2019 (2018: 0.6p).
As announced on 26 March 2020, the Board
is not recommending or paying a final cash
dividend in respect of the year ended
31 December 2019.
The significant decline in market multiples
across the sector has required an
impairment to the goodwill asset values
of all three divisions. Whilst non-cash in
nature, together with the amortisation of
acquired intangibles (also non-cash in
nature) and other exceptional items, these
charges have meant that the Company
no longer has any distributable reserves.
To address this, the Board is committed
to completing a process, subject to
shareholder and Court approval, to
create sufficient distributable reserves
so that, as soon as circumstances allow,
the Company can resume the payment
of cash dividends to shareholders.
Material uncertainty
Given the prevailing macroeconomic
uncertainty regarding COVID-19 and its
potential impact on the Group’s future
performance that in certain downside
scenarios could cause a further breach
of borrowing covenants, I wish to draw
your attention to the fact that the Audit
Committee report for the year ended
31 December 2019 makes reference to
a material uncertainty related to going
concern (see page 87) and viability
(see page 90), as does the independent
auditor’s report (see page 119).
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 08
Market review
Opportunities
for growth
1 Strong demand
2 Limited supply
c.20-25% of UK adults are either unwilling
or unable to borrow from mainstream
financial institutions1
16%
Proportion of
total jobs that
are deemed to
be low paid2
Customers are
low paid or on
variable income
15%
of the UK workforce
is self-employed3
c.1.1m
Customers have
low credit status/
are credit impaired
County Court
Judgments
per annum4
14m
people use an
unarranged
overdraft each year5
1 UK 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. For example, median hourly
earnings for all employees in 2019 was £13.27,
therefore low-pay employees were anyone earning
below two-thirds of £13.27, which is £8.85. High-pay
employees were those earning anything above 1.5
times £13.27, which was £19.91. This was the lowest
proportion of low-paid employee jobs by hourly pay
since the series began in 1997 – ONS Low and high
pay in the UK: 2019, 29 October 2019.
3 The number of self-employed people in the UK in
October 2019 was 4.96 million (15.1% of all people in
work) – ONS Labour Force Survey, 12 November 2019.
4 Registry Trust Limited – 12-month volume to December
2019 for England and Wales.
5 FCA – CP18/42 High-Cost Credit Review: Overdrafts
Strong growth in consumer credit in the
UK in recent years has been driven by
prime customers, not those with lower
credit scores1. Whilst the market is highly
fragmented, there is a limited number of
national providers of non-standard credit
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;
• 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 recent outbreak of COVID-19 also
prompted a significant reduction in the
availability of credit in 2020 as lenders
were forced to reassess their lending
criteria in the face of a rapid economic
slowdown.
1 www.fca.org.uk/insight/whos-driving-consumer-
credit-growth.
The supply of non-standard finance in the UK
£bn
16
14
12
10
8
6
4
2
0
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
consultation paper and policy statement,
December 2018.
Source: L.E.K. Consulting – Executive Insights Volume XX, issue 39 and Company estimates. It has not been possible to
obtain comparable data for 2018 or 2019.
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3 Previously favourable conditions are expected
to have been severely impacted by COVID-19
Macroeconomic
Unemployment rate %
Employment rates in 2019 were high at
76.5% while unemployment was low
at 3.8%1
Real weekly incomes, including
bonuses, increased by 1.4% in 20191
Inflation (consumer price index including
owner occupiers’ housing costs) was low
at 1.4% in December 20192
Long-term impact of the COVID-19
outbreak remains uncertain but is
expected to have a major impact on
the UK economy in 2020
Brexit creates additional 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 national firms
Many mainstream lenders left the
market post-2008 together with a
number of high-cost lenders in 2019
Technology evolution may mean that
new business models emerge
Regulation
Strict regulatory framework ensures
a level playing field for all operators
The FCA recently introduced some
operational changes in home credit3
and guarantor loans4 that are not
expected to have a material impact on
our business
Continuous evolution of the regulations
including increased forbearance for
COVID-19
12
10
8
6
4
2
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Real annual growth in total pay %
People
Men
Women
8
6
4
2
0
-2
-4
-6
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2019
2020
Source: ONS – Labour market overview:
February 2020, released 18 February 2020.
Regular pay (real)
Regular pay (nominal)
1 ONS – Labour market overview: February 2020, released 18 February 2020.
2 ONS – Consumer price inflation, UK: December 2019, released 15 January 2020.
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.
4 The FCA has suggested certain operational changes that include, inter alia, enhancing the level of information provided to a guarantor prior to any loan being made.
4 NSF is well-positioned
Branch-based
lending
#1
In the market
75,400
customers
Guarantor
loans
#2
In the market
Home
credit
#3
In the market
32,600
customers
92,400
customers
High risk-adjusted margins
and
committed long-term debt funding
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 10
Business model
Providing
affordable credit
Why we are different
Access to
long-term funding
The Group uses equity
and significant long-term
debt facilities to help fund
future growth
What we do
Understand our
customers’ financial and
personal circumstances
+
Develop affordable products that
meet the needs of our customers
Stakeholder benefits
How we
create value
Through our business model
we seek to deliver benefits for
each of our key stakeholders.
Examples of our outcomes are
set out here:
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Culture
Providing customers with
‘a helping, but firm hand’ is an
approach that is embedded
deeply within each of our
businesses
Infrastructure
All three of our
businesses are well-invested
and highly scalable
Lend responsibly
Phone
Face-to-
face
Online
Collect responsibly
Customers
FOS complaints1
0.05%
(2018: 0.01%)
Our people
Total training days2
5,402
(2018: 4,460)
1 Number of upheld cases at the Financial Ombudsman Service (‘FOS’) as a percentage of 200,400
customers as at 31 December 2019 (2018: 180,100 customers): Everyday Loans: 46 cases (2018: 20 cases);
TrustTwo and George Banco: 22 cases (2018: 4 cases); Loans at Home: 24 cases (2018: 8 cases).
Why we are different
What we do
Stakeholder benefits
11
To be an industry leader in each of our chosen sub-sectors,
we need to deliver high levels of customer satisfaction and
have a low number of complaints. This requires that we
design loan products that meet customers’ needs; deliver
them in a way that best suits the customer; and ensure
they are clearly understood.
Compliance and
risk management
Managing risk is a key
area of focus. We don’t cut
corners and know when
something is not right
Management
Attracting and retaining
the best talent is key for our
long-term success
Manage risks
Conduct
Regulation
Credit
Strategy
Operations
Reputation
Cyber
COVID-19
Funding and liquidity
Deploy capital and funding
Invest in assets
Reward providers:
– Debt
– Equity
Manage costs
Shareholders
Return on assets3
(Branch-based lending)
Return on assets3
(Guarantor loans)
14.8%
(2018: 15.8%)
9.3%
(2018: 11.2%)
Return on assets3
(Home credit)
25.1%
(2018: 17.7%)
Communities
Total
workforce4
1,837
(2018: 1,760)
2 Total for Everyday Loans: 2,946 (2018: 1,620); Guarantor Loans Division: 465 (2018: 399); and Loans at Home (staff and agents): 1,992 (2018: 2,441).
3 See glossary of APMs and KPIs in the Appendix. 2018 metrics have been restated following a prior year adjustment (see note 1 to the financial statements).
4 NSF plc: 11 (2018: 11), Everyday Loans: 476 (2018: 406), Guarantor Loans Division: 141 (2018: 115); and Loans at Home (staff and agents): 1,209 (2018: 1,228).
Corporate GovernanceStrategic ReportAdditional InformationFinancial StatementsOverview
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Group Chief Executive’s report
Serving the
underserved
Our purpose is to provide affordable credit to those
who are unable or unwilling to borrow from
mainstream lenders.
Summary of 2019 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
2019
£000
183,657
180,784
42,165
32,066
14,707
(75,976)
11,446
(76,308)
2018
restated
£000
166,502
158,824
35,101
18,742
13,994
(2,365)
10,944
(2,307)
Normalised earnings per share2
Reported (loss) per share
3.67p
(24.45)p
3.50p
(0.74)p
%
change
+10%
+14%
+20%
+71%
+5%
-3,113%
+5%
-3,208%
+5%
-3,204%
Full-year dividend per share
0.70p
2.60p
-73%
When providing credit, we seek to deliver
positive outcomes for key stakeholders,
including customers, investors, employees,
partners and the communities in which
we live and work.
Context for results
The 2019 and 2018 reported results include
fair value adjustments and amortisation
of acquired intangibles. A prior year
adjustment has been made to the opening
2018 balance sheet to reflect an increase in
loan loss provisions following the transition
to IFRS 9 and the 2018 results have been
restated to reflect this change. The 2019
reported results also include exceptional
items relating to the costs arising from the
firm offer to acquire Provident Financial plc,
goodwill impairment of £65.8m (2018: £nil)
relating to all three business divisions and
costs related to restructuring. Normalised
results are presented to demonstrate Group
performance before these items.
1 See glossary of alternative performance measures
and key performance indicators in the Appendix.
2 Basic and diluted earnings (loss) per share is
calculated as normalised profit after tax of £11.4m
divided by the weighted average number of shares in
issue of 312,126,220 (2018: 312,713,410).
NSF has become
a leading player
in the sector
John van Kuffeler
Group Chief Executive
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A summary of the exceptional items is
shown in the following table (further details
regarding the exceptional items are set
out in note 8 to the financial statements).
Year ended 31 December
Impairment of goodwill asset
(non-cash) – branch-based
lending
Impairment of goodwill asset
(non-cash) – guarantor loans
Impairment of goodwill asset
(non-cash) – home credit
Offer-related fees
Restructuring costs
Total
2019
£000
(44,788)
(8,597)
(12,452)
(12,827)
(1,920)
(80,584)
Unlike many other consumer credit
businesses, when lending direct i.e.
without a guarantor, we aim to meet our
customers face-to-face. This provides us
with an additional level of underwriting
that is not available to remote-only lending
models and is only made possible through
meeting the customer personally. The
customer relationship is therefore at the
heart of both branch-based lending and
home credit, and even in guarantor loans
we make a point of speaking at length
to both borrower and guarantor in 100%
of cases, ensuring that we understand
their needs and can identify which of our
products and services might suit them
best. The strength of this relationship
also helps us to better manage the rate
of impairment and ensure that customers
in financial difficulty are given due
forbearance in a way that works for them.
Whilst COVID-19 has required that
we accept and adapt to new ways of
working to ensure the health and safety
of our customers, staff and self-employed
agents, we remain committed to our
business model. Despite the current
challenges that have reduced lending
volumes, impacted collections and
created material uncertainties for the
Group, we remain confident that our
model can continue to meet the needs
of our customers, whilst also generating
profitable growth over the long term.
2019 full-year results
In 2019 both branch-based lending and
guarantor loans delivered solid loan book
growth and this translated into good
growth in normalised operating profit.
Despite being in a mature market, our
home credit business also delivered strong
growth in operating profit thanks to the
shift to a shorter-term loan book and
careful management of impairment and
operating costs.
The key operational and strategic
highlights during the year included:
Branch-based lending:
• net loan book1 up 18% to £214.8m
• impairment lower at 22.2% of revenue1
• eight new branches opened taking
the total to 73
• 17% increase in the number of staff
to 476
• over 2.5 million loan applications
processed, up 52%
• 75,400 active customers, up 23%
Guarantor loans:
• net loan book1 up 28% to £105.5m
• impairment increased to 26.8% of
revenue1
• consolidation of the division’s operations
from two sites into one
• over 520,000 loan applications
processed, up 16%
• 32,600 active customers, up 30%
Home credit:
• net loan book1 down 3% to £39.9m
• impairment down from 32.6% to 27.0%
of revenue1
• Significant technology-driven
enhancements were delivered during
the year:
– new customer portal
– automated income verification
– card readers for agents enabling
‘chip and pin’ on the doorstep
– bespoke scorecard for our most
experienced and best performing
agents
On a like-for-like basis, the combined net
loan book at 31 December 2019 increased
by 18% to £360.2m before fair value
adjustments (2018 restated: £306.4m) and
was up by 16% to £361.6m (2018 restated:
£310.7m) after fair value adjustments.
A summary of the other key performance
indicators for each of our businesses for
2019 is shown below.
In the 12 months to 31 December 2019 the
Group grew normalised revenue before
fair value adjustments by 10% to £183.7m
(2018: £166.5m) and normalised operating
profit by 20% to £42.2m (2018 restated:
£35.1m). As a result of higher interest
charges, normalised earnings per share
increased by 5% to 3.67 pence (2018
restated: 3.50 pence).
The Group’s 2019 and 2018 reported, or
statutory results are significantly affected
by fair value adjustments, the amortisation
of acquired intangibles associated with
the acquisitions of Everyday Loans and
George Banco, the adoption of IFRS 9 and
exceptional items. On a statutory basis,
reported revenue, which is after fair value
adjustments, was £180.8m (2018: £158.8m)
while the impact of £80.6m of exceptional
items (2018: £nil) and £7.2m amortisation
and write-off of acquired intangibles (2018:
£8.7m) meant that the Group reported
a loss before interest and tax of £48.5m
(2018 restated: profit before interest and
tax of £18.7m) and the reported loss before
tax was £76.0m (2018 restated: £2.4m).
Key performance indicators1
Year ended 31 December 2019
Branch-based
lending
Guarantor loans
Home credit
Loan book growth
Revenue yield
Risk adjusted margin
Impairments/revenue
Impairments/average net loan book
Cost:income ratio
Operating profit margin
Return on assets
17.6%
46.4%
36.1%
22.2%
10.3%
45.4%
31.9%
14.8%
27.7%
31.7%
23.2%
26.8%
8.5%
43.2%
29.4%
9.3%
(2.7)%
167.5%
122.2%
27.0%
45.2%
58.0%
15.0%
25.1%
Key performance indicators1
Year ended 31 December 2018
Branch-based
lending
Guarantor loans
Home credit
Loan book growth
Revenue yield
Risk adjusted margin
Impairments/revenue
Impairments/average net loan book
Cost:income ratio
Operating profit margin
Return on assets
24.7%
47.8%
37.0%
22.7%
10.8%
45.9%
33.0%
15.8%
61.0%
32.5%
25.8%
20.5%
6.6%
45.9%
34.5%
11.2%
2.1%
171.5%
115.6%
32.6%
55.9%
57.1%
10.3%
17.7%
1 See glossary of APMs and KPIs in the Appendix. 2018 KPIs have been restated for the prior year adjustment to loan
loss provisions.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview
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Group Chief Executive’s report continued
Branch-based lending
We opened in eight new locations in 2019
and so at the end of 2019 had a total of 73
branches open across the UK, supported
by a total of 365 front-line staff. Demand
remained strong and lead volumes
increased by 52% versus the prior year
resulting in a 36% increase in the number
of qualifying new borrower applications
that were passed through to our branches.
The benefit of new branches and staff,
together with the improving performance
of previously opened branches was
partially offset by higher costs and so
the division delivered a 13% increase in
normalised operating profit to £29.7m
(2018 restated: £26.3m). However, higher
interest costs and the sharp decline in stock
market valuations in the sector during the
second half of 2019 required a reduction
in the carrying value of goodwill on the
balance sheet by £44.8m to £47.1m. This
non-cash charge has been treated as
an exceptional item in the Consolidated
Statement of Comprehensive Income
(see note 8 to the financial statements).
Guarantor loans
The demand for guarantor loans remained
strong in 2019. The presence of a guarantor
means that many non-standard borrowers
are able to access credit that might not
otherwise be available to them and at a
much lower rate than if they were to try
and borrow on their own. During 2019, we
accelerated the plan to consolidate our
guarantor loans operations into a single
established site in Trowbridge, Wiltshire.
Having moved the collections function
earlier in the year, we commenced the
transfer of the remaining operations
during the fourth quarter of 2019, some
nine months ahead of our original plan.
While this did cause some temporary
disruption and held back profit margins,
normalised operating profit was up 17%
to £8.8m (2018 restated: £7.5m). While the
loan book grew by 28%, this did come
with an increase in the rate of impairment
which remains a key area of focus for
management. Despite the increase in
normalised operating profit, higher interest
costs and the sharp decline in stock market
valuations in the sector also impacted
guarantor loans during the second half of
2019 requiring a reduction in the carrying
value of goodwill on the balance sheet by
£8.6m to £nil as well as a write-off of £2.0m
of remaining acquired intangibles. These
non-cash charges have been treated as
exceptional items in the Consolidated
Statement of Comprehensive Income
(see note 8 to the financial statements).
Home credit
Loans at Home delivered another solid
performance in 2019. We continued to
reduce the proportion of customers on
long-term loans and remain focused on
improving the quality of our customer base.
Whilst this resulted in a small decline in
the number of customers and the net loan
book versus the prior year, there was also
a significant improvement in the rate of
impairment as a percentage of revenue.
This, together with the benefit of a more
streamlined management structure
since the beginning of 2019 meant that
normalised operating profit increased by
36% to £9.1m (2018: £6.7m). As noted at
the time of the half year results, despite
this strong performance, the decline in
valuations of most listed companies in
the non-standard sector since the end of
2018 meant that we reduced the carrying
value of the Loans at Home goodwill
asset on the balance sheet by £12.5m. This
non-cash charge has been treated as
an exceptional item in the consolidated
statement of comprehensive income (see
note 8 to the financial statements).
Offer to acquire Provident Financial plc
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’). Despite receiving acceptances
representing approximately 54% of
Provident, certain other conditions were
not met and the Offer lapsed on 5 June
2019. The Group incurred advisory fees
totalling £12.8m in connection with the
Offer and these have been included in
the 2019 results within exceptional items
(see note 8 to the financial statements).
Funding
As at 31 December 2019 the Group had
cash at bank of £14.2m (2018: £13.9m) and
gross borrowings of £323.2m (2018:
£272.8m).
On 11 March 2020 the Group announced
that it had entered into a new six-year
£200m securitisation facility provided by
Ares Management Corporation (NYSE:
ARES). The new facility was put in place to
repay £120m from the more expensive term
loan facility with the remainder available
for growth at the Group’s branch-based
and Guarantor Loans Divisions subject to
compliance with financial covenants.
The Board notes that a material
uncertainty exists relating to going concern
primarily due to COVID-19. Following a
series of measures announced on 26 March
2020 and having subsequently drawn
down £15.0m from the new securitisation
facility, as at 31 May 2020 the Group had
increased cash at bank to £60.3m and
had total gross borrowings of £345.0m.
Whilst the impact of COVID-19 on the loan
book has prompted a breach of certain
performance covenants, preventing
further drawdown on the new facility,
negotiations with the lender have been
positive and temporary relief has been
provided until 29 June 2020 whilst a more
permanent agreement is reached. Until
such agreement is concluded there exists
material uncertainty over the ability of the
Group to draw down further on the facility.
In the event that no agreement is reached
or the temporary relief is not extended then
the Group has sufficient cash resources to
repay the amount drawn under the new
facility in full. The Board is in discussions
with its lenders regarding possible future
covenant waivers, whilst at the same
time evaluating all funding options,
which may include the issue of equity, in
order to ensure the Group has a strong
and liquid balance sheet. Combined, it
is hoped that these actions will unlock
access to the facility and help to reduce
overall funding costs as well as provide
additional finance for future growth.
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Regulation
The Group has continued to participate
in a number of ongoing thematic reviews
being conducted by the FCA including
responsible lending, repeat lending and
vulnerable customers. The FCA has also
continued to progress its multi-firm review
of the guarantor loans sector and the
Group has received feedback regarding
the information provided to guarantors at
the point of lending which the industry is
now working on embedding into existing
lending processes.
Complaint handling is another area of
focus and whilst the number of complaints
raised with the Financial Ombudsman
Service (‘FOS’) increased in 2019, it remains
low in absolute terms and is monitored
closely as part of the Group’s risk
management framework.
On 2 April 2020, the FCA announced a
series of measures as part of a coordinated
effort to support borrowers affected by the
outbreak of COVID-19. Of particular note
was the proposal that consumer lending
firms offer those borrowers in difficulty, or
that might reasonably expect to be in
difficulty at some point in the future, a
‘payment freeze’ of up to three months,
during which they would not be required to
make any payments on their outstanding
loan but during which interest could
continue to be charged. On 19 June 2020,
the FCA announced that the option of a
payment freeze for borrowers experiencing
difficulty due to COVID-19 would be
extended to 31 October 2020. Forbearance
is already a key feature of our business
model and, together with the rest of the
industry, we have been working with the
FCA, HM Treasury and FOS to ensure that
such a payment freeze is implemented
effectively and reaches those borrowers
that need help.
We continue to monitor all regulatory
developments closely and aim to anticipate
any proposed changes to the regulatory
regime that may affect one or more of our
businesses so that we can be well-
prepared to implement them if required, or
if we believe they will improve the
experience of our customers.
A summary of the more pertinent regulatory
developments during 2019 and into 2020
are available on the Group’s website:
www.nsfgroupplc.com.
COVID-19, current trading, outlook and
final dividend
On 26 March 2020 the Group announced
a series of steps to safeguard the health
and safety of our customers, our staff and
self-employed agents. The steps taken
were also designed to mitigate, as far as
possible, the impact of COVID-19 on our
operational and financial performance
and to avoid putting our business at risk.
They included a number of measures to
reduce costs and save cash such as a
reduction in staff numbers, the furloughing
of over 120 employees, the deferral of
payments to the UK tax authorities and
the cancellation of all Executive Director
bonuses linked to financial performance
in respect of 2020.
Each of the Group’s three divisions is
continuing to trade in an unprecedented
business environment and since late March
2020 lending volumes have reduced
significantly with the result that as at the
start of June 2020 the combined net loan
book had reduced by around 9% since the
year end. Having revised our scorecards
and adjusted our lending process in all
three divisions, we have slowly restarted
lending and whilst encouraged by the
volume of applications received, we remain
cautious. While overall basic collections
(before settlements) in April and May 2020
averaged 86% of the level in January and
February 2020, this was better than might
have been expected and the business
as a whole generated positive cash flow
after all expenses of approximately £7.4m
in April 2020 and £17.2m in May 2020.
The full impact of COVID-19 on the Group’s
future financial performance is highly
uncertain and will be heavily influenced
by a number of factors including the
severity and duration of the pandemic as
well as the way in which both government
and consumers respond. The Group
is working through the implications of
the COVID-19 payment freeze for IFRS 9
provisioning and will continue to monitor
the performance of customers as their
payment freeze ends. The short-term
impact has been a reduction in income
from lending activities, together with
an increase in expected credit losses,
although collections are holding up well
and based on conversations held to-date
we believe that the majority of home credit
customers that have asked for a temporary
payment freeze will return to making their
regular payments in due course. The
Guarantor Loans Division has a higher
percentage of COVID-affected customers
than the other two businesses which is
leading to higher levels of delinquency.
Looking ahead and based on the
experience of previous economic
downturns, we also expect that any
tightening of credit by mainstream
lenders will result in increased levels of
demand for non-standard finance in the
future and from better quality applicants.
Subject to funding, this could represent
a significant opportunity for the Group
with its established infrastructure and
strong market position in branch-based
lending, guarantor loans and home credit.
Having written down the goodwill assets of
all three divisions in 2019, the Group notes
that the further decline in market multiples
due to COVID-19 is likely to result in further
goodwill impairment post 31 December
2019. The Group has identified that on the
basis of actual earnings for the year ended
31 December 2019, a further 1% drop in
price earnings multiples would result in
c.£0.8m of additional impairment of
goodwill at the branch-based lending
division, and reduce the level of existing
headroom in relation to the carrying value
of the home credit goodwill asset by £0.6m.
As at 31 December 2019, total goodwill in
relation to the Guarantor Loans Division
had been fully written-off.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 16
Group Chief Executive’s report continued
Given the difficulty in predicting the
balance of these uncertainties, we have
withdrawn all previous market guidance
and medium-term targets until further
notice but plan to provide further updates
as and when appropriate.
The Group declared a half-year dividend
of 0.7p per share in August 2019 (2018:
0.6p). As announced on 26 March 2020,
the Board is not recommending or paying
a final cash dividend in respect of the
year ended 31 December 2019. Whilst
the goodwill impairment outlined above
is non-cash in nature, together with the
amortisation of acquired intangibles
(also non-cash in nature), the prior
year adjustment and other exceptional
items, the Company no longer has any
distributable reserves. To address this,
the Board is committed to completing
a process, subject to shareholder and
Court approval, to create sufficient
distributable reserves so that the
Company is able to resume the payment
of cash dividends to shareholders as
soon as it is appropriate to do so.
Going concern statement
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 and Viability Statement.
As a result of the impact of COVID-19,
the Group has at the date of signing
the accounts, breached its portfolio
performance covenants in relation to the
securitisation facility, thereby preventing
the Group from drawing down further
from this facility. However, recognising that
such a breach is as a result of COVID-19
which is beyond the Group’s control, Ares
has granted a temporary waiver for this
breach covering the period up to 29 June
2020 so as to allow time for a more
permanent solution to be agreed. In the
event that no agreement can be reached
or extended then the Group has sufficient
cash resources to repay the amount drawn
under the securitisation facility in full.
As set out on pages 87 to 88, as part
of its going concern assessment, the
Directors reviewed both the Group’s
access to liquidity and its future balance
sheet solvency. For liquidity, the Group
produced two scenarios: (i) a most likely
(or ‘base case’) scenario which involves
restricted lending across the Group in
order to mitigate the risk of covenant
breaches; and (ii) a downside scenario
which applies stresses in relation to the
key risks identified in the base case.
write-off all remaining goodwill on the
balance sheet as at 31 December 2019, the
Group and Company remained solvent.
The Directors noted that a material
uncertainty exists regarding the impact
of COVID-19 on the assumptions made
and subsequent outcomes as well as
the ultimate impact on covenants both
under both the base case and downside
scenarios which may cast significant
doubt on the Group and Company’s
ability to continue as a going concern.
Under the base case, we have assumed
the waiver granted by Ares is extended
and no repayment of currently drawn
amounts is made. Whilst the headroom
which exists in the financial covenants
remains very tight, the Group does not
expect to breach any further covenants
in the next 12 months and therefore would
not require further covenant waivers from
its lenders in order to remain viable. The
Group has considered a stress to the base
case where it is required to repay the £15m
currently drawn under the securitisation
facility. Under this stressed scenario the
Group still does not expect to breach any
further covenants over the next 12 months.
Under the downside scenario, the Group
would be expected to breach certain
covenants during the next 12 months and
would therefore require waivers from its
lenders in order to remain viable. The
Group additionally ran a liquidity reverse
stress test on the base case to identify the
level expected collections would have to
fall by to cause the Group to deplete all
cash reserves. This assumes no further
lending and a corresponding fall in
collections with no change to operating
expenses. The result of this showed that
collections would have to fall by a further
65% from expected forecast levels in
the base case for the Group to become
illiquid, assuming no access to further
funding. Such a reduction in collections,
based on evidence to date was thought
by the Directors to be an unlikely event.
With regards to balance sheet solvency
of the Group, the Directors note that
under both scenarios, the Group and
Company remained in a net asset position
and upon adding a further stress to
The Directors felt that the range of
assumptions made in both the base
case and downside scenario were such
that given the uncertainties around
the full general and idiosyncratic
impact of COVID-19, there remained a
material level of uncertainty around the
impact on the Group’s ability to meet
its covenants and if they weren’t met,
the likelihood of a further waiver being
granted by the lenders as well as the full
impact on the Group’s balance sheet.
The Directors acknowledge the
considerable challenges presented
by the outbreak of COVID-19 and the
material uncertainty created for the
going concern status of the Group and
Company. However, following a number
of steps taken by the Group (reduced
lending volume across all three divisions, a
reduction in staff numbers, the furloughing
of a number of staff and the deferral
of payments to the UK tax authorities)
and despite the material uncertainty
associated with forecast assumptions,
purely as a consequence of COVID-19
as noted above, it is their reasonable
expectation that the Group and Company
will continue to operate and meet its
liabilities as they fall due for the next 12
months and therefore has adopted the
going concern basis of accounting.
Given the widespread government-led
support to businesses, the steps taken
by UK regulators as well as some market
data from analogous situations and
discussions held with each of the Group’s
lenders, should the Group find itself in
a position where it is faced with further
covenant breaches, the Directors have a
reasonable expectation that the Group’s
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financial performance, compliance with
existing financial covenants and whether
waivers will be granted by lenders (and
under what terms) in the event of a
further covenant breach. The Directors
will continue to monitor the Group and
Company’s risk management, access to
liquidity, balance sheet and internal control
systems as well as lending and collections.
Annual General Meeting
The AGM of the Company is scheduled
to take place on 30 June 2020. A separate
notice of meeting has already been
dispatched to shareholders and a copy
is available from the Group’s website:
www.nsfgroupplc.
As the 2019 audit has taken longer
to complete than expected and in
accordance with DTR 4.1.3R, the Company
has used the additional time granted
before publishing audited accounts, to
consider “all aspects of their business
and operations” and to ensure that the
forward looking elements of our Annual
Report adequately considered and took
into account the impact of the pandemic
insofar as possible upon the business.
Given the timescales, it has been
necessary to apply to Companies House
for an extension to the filing date of
the Group’s audited accounts. As the
anticipated date for completion of the
audited accounts did not allow a clear
21 days’ notice prior to the required AGM
date, the Company is required to hold
a separate general meeting to approve
our audited accounts. This will now take
place on 28 July 2020 and the notice
of meeting has been dispatched to
shareholders with the Annual Report.
John van Kuffeler
Group Chief Executive
25 June 2020
lenders will agree to waive potential
covenant breaches to an extent, albeit
at a higher cost. The Directors note that
current negotiations with lenders suggest
that whilst it is likely that waivers would
be given, at a cost, to cover reasonable
deviations from the base case scenario,
waivers which would be required to
fully cover the downside scenario are
beyond what is currently envisaged in the
negotiations. There is therefore a material
uncertainty regarding whether the Group
would be able to operate within the limits
set by its lenders in such a scenario. As
mentioned above, the Group notes that
as at the date of signing the accounts,
there has been a breach of portfolio
performance covenants in relation to the
securitisation facility, thereby preventing
the Group from drawing down further
from this facility. This has arisen as a result
of the impact of COVID-19. Recognising
the portfolio performance covenant
breach is as a result of factors beyond the
Group’s control, a temporary waiver has
been granted by its lender for this breach
covering up to 29 June 2020 to allow time
for permanent changes to the treatment
of COVID-19 flagged loans be agreed. As
set out above, management expect that
the waiver will be extended for a defined
period should negotiations not reach a
conclusion by 29 June 2020. In the event
that no agreement can be reached or
extended then the Group has sufficient
cash resources to repay the amount
drawn under the securitisation facility in
full. The Group is not currently in breach
of any other covenants associated with
the securitisation facility and is currently
not in breach of covenants associated
with the term loan and RCF facilities. The
assumption of lender support for covenant
breaches forms a significant judgement of
the Directors in the context of approving
the Group’s going concern status.
As highlighted above, whilst the Directors
believe the Group and Company will
remain a going concern, a material
uncertainty exists that may cast significant
doubt on the Group and Company’s
ability to continue as a going concern.
Such a material uncertainty includes the
impact of potential reduced levels of
collections and lending on the Group’s
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 18
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.
Overview
We have long believed that while
consumer tastes can change and new
products and channels can emerge, the
core elements of what good lending looks
like remain the same:
• know our customers really well;
• tailor our products to suit their needs;
• deliver great customer service; and
• if customers get into difficulty, work
with them to achieve a satisfactory
solution for both borrower and lender.
Each of our businesses is focused on
lending and collecting according to strict
protocols that have been founded and
developed over many years based on each
of these principles.
Progress and outlook
Having the right policies and procedures,
as well as a well-invested infrastructure,
are vital for any successful regulated
lending business. They will however, only
get you so far. Without the right people,
behaving the right way and with the
right values, no business can obtain or
sustain industry leadership. In 2019, as
well as improving and expanding our
infrastructure, we continued to invest in
the recruitment and training of high-quality
staff and self-employed agents. We also
invested in a series of initiatives to promote
our corporate values and behaviours
such as culture workshops, management
conferences and regular communication
via the Group’s intranet for which we were
recognised with an award for innovation.
Impact of COVID-19
Being a leader sometimes requires you
to take difficult short-term decision so
that you sustain your leadership position for
the long term. The COVID-19 pandemic
required that we implement a number
of operational and procedural changes
quickly in order to protect the health and
safety of our people and customers. It is a
testament to the strength of our culture
and the quality of our people that those
changes were made swiftly and without
incident in March 2020.
The long-term impact of the pandemic on
the Group’s business remains unknown and
so, as at the date of this Annual Report,
the Group has withdrawn forward-looking
guidance and medium-term targets for the
majority of our key performance indicators.
It is hoped that the Board will soon be able
to once again provide such guidance but
until then, such KPIs remain under review.
By being a leader,
we are better placed
to meet our objectives
for the benefit of
our key stakeholders”
John van Kuffeler
Group Chief Executive
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Everyday Loans was named Non-Mainstream
Loan Provider of the Year in the prestigious
Moneyfacts Consumer Awards 2020.
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 uk.trustpilot.com is a consumer review website
founded in Denmark in 2007 which hosts reviews of
businesses worldwide. Nearly one million new reviews
are posted each month. The rating shown is for
George Banco out of a maximum of 5 and is based on
2,952 reviews (2018: 4.8 out of 5 based on 2,289 reviews)
3 Percentage of respondents to a customer survey that
said they were very satisfied or quite satisfied. 2019 KPI
relates to the period from January to December 2019,
based on 800 responses. 2018 KPI relates to the period
from January to December 2018, based on 300
responses. 2017 KPI relates to the period from July to
December 2017, based on 299 responses.
4 Key performance indicators are on the basis that
IFRS 9 had been adopted from 1 January 2017. See
glossary of APMs and KPIs in the Appendix. 2018 KPIs
have been restated following a prior year adjustment
(see note 1 to the financial statements).
KPI measure
2019 KPI
Number of active customers
Branch-based lending
Evidence that our reach and quality of
service is driving customer volumes.
The decline in home credit since 2017 was
following a period of exceptional growth and
reflects the mature nature of the UK’s home
credit market.
2019
2018
2017
Guarantor loans
2019
2018
2017
Home credit
2019
2018
2017
Customer satisfaction
Branch-based lending1
A lead indicator of future business volumes
given our numbers of repeat customers and
customer referrals.
2019
2018
2017
Guarantor loans2
2019
2018
2017
Home credit3
2019
2018
2017
Annual loan book growth4
Branch-based lending
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.
Whilst the impact of COVID-19 remains
uncertain, we had already moderated our
targets in 2019 for all three business divisions
reflecting a more cautious macroeconomic
outlook.
2019
2018
2017
Guarantor loans
2019
2018
2017
Home credit
2019
2018
2017
(3)%
2%
Risk adjusted margin4
Branch-based lending
18%
44%
28%
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.
2019
2018
2017
Guarantor loans
2019
2018
2017
Home credit
2019
2018
2017
Return on assets4
Branch-based lending
This shows we are allocating capital
properly and on course to deliver the returns
required by our shareholders. The continued
investment in all three divisions and an
increase in provisioning in 2019 means we are
not yet at our target in branch-based lending
or guarantor loans.
Green Already achieving medium-term target
Amber On track to achieve medium-term target
Red
Not yet on track to meet medium-term target
2019
2018
2017
Guarantor loans
2019
2018
2017
Home credit
2019
2018
2017
(4.8)%
75,400
32,600
61,200
47,050
25,100
17,400
92,400
93,800
104,100
4.9/5
4.9/5
4.8/5
4.8/5
4.5/5
4.6/5
96%
98%
97%
25%
20%
61%
20%
36.1%
37.0%
34.6%
23.2%
25.8%
29.3%
122.2%
115.6%
111.4%
14.8%
15.8%
15.3%
9.3%
11.2%
17.7%
13.1%
25.1%
19
Medium-term
target
2019
status
Branch-based lending
Under review
(2018: 100,000)
Guarantor loans
Under review
(2018: 50,000)
Home credit
Under review
(2018: 120,000)
Branch-based lending1
> 4.5/5
(2018: 4.5/5)
Guarantor loans2
> 4.5/5
(2018: > 4.5/5)
Home credit3
> 95%
(2018: > 95%)
Branch-based lending
Under review
(2018: 20%)
Guarantor loans
Under review
(2018: 20%)
Home credit
Under review
(2018: 2%)
Branch-based lending
Under review
(2018: 35%)
Guarantor loans
Under review
(2018: 30%)
Home credit
Under review
(2018: 115%)
Branch-based lending
Under review
(2018: 20%)
Guarantor loans
Under review
(2018: 20%)
Home credit
Under review
(2018: 20%)
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 20
Our strategy and KPIs continued
Investing in
our core assets
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.
Overview
In 2019 we completed the following
investments:
• Branch-based lending – eight new
branches opened, staff expansion
and further IT investment including a
move to cloud-based infrastructure.
• Guarantor loans – staff expansion
and integration onto a single site
in Trowbridge.
• Home credit – significant improvements
to our infrastructure in support of our
self-employed agents, helping us to
deliver a better service to customers.
Progress and outlook
The eight new branches opened by
Everyday Loans in 2019, as well as the
expansion of a number of existing
branches, saw us add a net 70 new staff
during the year. In guarantor loans the
total number of staff increased by 26,
despite having consolidated our
operations into a single location in
Trowbridge that resulted in the loss of 23
roles in Bourne End. In home credit, we
introduced a number of additional features
to our handheld technology including
automated income verification, the ability
to take card payments on the doorstep and
an all new agent scorecard, recognising
the higher standards of underwriting by our
most experienced agents.
Impact of COVID-19
Each of our business divisions is well-
invested and therefore well-placed to take
advantage of any increase in demand for
our products and services. The outbreak
required that we develop new ways of
working and prompted a significant
investment in remote-working technology
and systems so that we can now operate
much more flexibly, to the benefit of our
staff and customers.
Whilst our immediate focus following the
outbreak was to conserve cash flow within
the Group, we have adjusted our
scorecards, revised our lending processes
and are determined to ensure that we can
take full advantage of any increase in
demand from applicants that are unable to
borrow from their high street bank or other
mainstream lenders.
The investment
made over the
past few years
ensures that each
of our divisions is
well-placed to
support a much
larger business
in the future.”
Jono Gillespie
Chief Financial Officer
100%
During December 2019, one of our
busiest months of the year in terms of
lending for home credit firms, our
digital applications enjoyed 100%
uptime.
Darlington was one of eight new
branches opened in 2019.
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Medium-term
target
2019
status
Branch-based lending
73
65
53
64
66
69
20%
20%
19%
42%
36%
37%
3%
3%
72%
73%
70%
77%
2%
64%
62%
21%
17%
26%
100-120
(2018: 100-120)
Home credit
65-70
(2018: 75-80)
Branch-based lending
20%
(2018: 15%)
Guarantor loans
20%
(2018: 20%)
Home credit1
<5%
(2018: <5%)
Branch-based lending
65-70%
(2018: 65-70%)
Guarantor loans
65-70%
(2018: 65-70%)
Home credit
15-20%
(2018: 15-20%)
KPI measure
Number of
branches/offices
By increasing our geographic coverage we
can be more accessible to customers. We
have reduced the target in home credit,
reflecting the mature nature of the market.
2019 KPI
Branch-based lending
2019
2018
2017
Home credit
2019
2018
2017
People turnover
Branch-based lending
We aim to keep this within industry
norms by offering competitive financial
rewards and creating environments where
people enjoy their work.
The relatively high rate in guarantor loans in
2019 reflects the pace of growth as well as the
consolidation of our operations into a single
location.
Percentage of the number
of loans issued to new customers2
We need to continue to attract new customers
as well as look after existing ones if we are to
succeed. New customers are most important
for our two fastest growing businesses:
branch-based lending and guarantor loans.
In home credit, the short-term nature of the
loans issued means that there is a much
greater proportion of lending to previous or
existing customers.
Whilst we have maintained the medium-term
target at previous levels, these are unlikely to
be achieved in 2020 following the impact of
COVID-19.
2019
2018
2017
Guarantor loans
2019
2018
2017
Home credit1
2019
2018
2017
Branch-based lending
2019
2018
2017
Guarantor loans
2019
2018
2017
Home credit
2019
2018
2017
1 Average monthly turnover of self-employed agents, excluding vacancies (monthly leavers as a percentage of total
number of agents).
2 Proportion of loans booked in a year to new borrowers (i.e. excluding existing or previous borrowers).
Green Already achieving medium-term target
Amber On track to achieve medium-term target
Red
Not yet on track to meet medium-term target
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 22
Our strategy and KPIs continued
Acting
responsibly
‘Doing the right thing’ is easy to say but harder to do.
Being responsible remains at the heart of our business values
and culture and we work hard to ensure that it is embedded
into all of our behaviours, policies and procedures.
Overview
Balancing the needs and objectives of
individual stakeholder groups including
customers, investors, employees, partners
and the communities where we work,
is the challenge faced by all stewards
of corporate enterprise. During 2019 we
continued to focus on those areas of
potential risk to determine whether or not
our working practices can be improved or
whether they can or should be changed.
NSF is a founding supporter of Loan Smart,
a charity established to help raise
awareness about the dangers of illegal
lending. In 2019, members of our staff
joined a number of community-based
events around the UK including those in
Darlington, Dunfermline and West Fife,
Gosport, North Tyneside, Poplar and
Limehouse and St Helens. We expect to
do more of the same in 2020. See more
at www.loansmart.org.uk.
Impact of COVID-19
As the COVID-19 outbreak was starting to
unfold during March 2020 and in advance
of the government restrictions coming into
force, we sent office-based staff home
and made arrangements for them to be
able to work remotely. We also advised
self-employed agents that they were not
to attend customers’ homes and that we
would make arrangements for customers to
be able to make regular payments through
alternative channels. This approach has
been well received by our staff, self-
employed agents and customers.
As noted elsewhere in this Annual Report,
given the difficulty in assessing the
longer-term impact of COVID-19 on a
number of our performance metrics,
several medium-term KPI targets overleaf
are currently under review.
Progress and outlook
One key area of focus for the Board has
been on the wellbeing of our people and
in particular on mental health. Everyday
Loans introduced a new ‘Healthy Minds’
hub on the Company intranet in August
2019 and 16 members of staff have been
trained to become mental health first
aiders to support staff across the branch-
based network. Loans at Home has also
begun a process to train 16 mental health
first aiders in conjunction with AXA PPP.
The training will give participants the
confidence to support someone who is
experiencing a mental health problem,
the skills to provide help on a first aid
basis, helping with suggesting ways to
prevent the mental health issue/problem
from becoming worse, guiding someone
towards the right support for them,
helping to reduce the stigma around
mental health and learning how to
develop psychological resilience.
By raising awareness internally, our staff
will also be better placed to identify and
support any of our customers that may be
facing similar challenges.
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We have long
recognised that
through regular
engagement and
being sensitive to
the needs of our key
stakeholders, we will
be better placed as a
business to meet our
long-term objectives.”
Heather McGregor
Chair, Risk Committee
A Loan Smart community event in Dunfermline,
Scotland where the local teams from Everyday Loans
and Loans at Home were joined by Douglas
Chapman MP to raise awareness about the dangers
of illegal lending.
23
22.2%
22.7%
21.5%
26.8%
20.5%
15.5%
27.0%
32.6%
37.6%
KPI measure
Impairment as a percentage
of revenue1
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.
2019 KPI
Branch-based lending
2019
2018
2017
Guarantor loans
2019
2018
2017
Home credit
Having increased the medium-term targets in
2019 to reflect a more uncertain outlook, these
are now under review following the outbreak
of COVID-19.
2019
2018
2017
Number of FOS complaints upheld
as a percentage of total number
of customers2
Branch-based lending
2019
2018
2017
0.02%
0.03%
0.06%
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. Whilst there was an increase
in 2019, the number of upheld complaints to
the Financial Ombudsman Service as a
proportion of the total customer base
remains low.
Guarantor loans
2019
2018
2017
0.02%
0.03%
Home credit
2019
2018
2017
0.03%
0.01%
0.01%
0.07%
Medium-term
target
2019
status
Branch-based lending
Under review
(2018: 20-22%)
Guarantor loans
Under review
(2018: 13-17%)
Home credit
Under review
(2018: 33-37%)
Branch-based lending
<1%
Guarantor loans
<1%
Home credit
<1%
Staff engagement surveys
Branch-based lending3
Branch-based lending3
We have over 940 staff that remain critical for
ensuring we deliver a great service for our
customers and benefits for our other
stakeholders. High levels of engagement and
commitment are critical to that endeavour
and without it we will fail.
2019
2018
2017
Guarantor loans3
2019
75%
71%
98%
75%
>70%
(2018: 98%)
Guarantor loans3
>70%
Home credit4
2019
2018
2017
83%
82%
89%
Home credit4
>75%
(2018: 82%)
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 2019 included Prostate
Cancer and Loan Smart.
1 Key performance indicators are on the basis that IFRS 9 had been adopted from 1 January 2017. See glossary of
APMs and KPIs in the Appendix. 2018 KPIs have been restated following a prior year adjustment (see note 1 to the
financial statements).
2 As at 31 December 2019.
3 Figure for 2019 is the overall percentage scored out of 100% based on 434 responses across Everyday Loans and
Guarantor Loans Division covering a range of measures rating ‘your company’ in June and July 2019. Prior year
surveys at Everyday Loans measured percentage of staff that scored at least 4 out of 5 in response to the question
‘I am satisfied working at Everyday Loans’ – leadership surveys in May 2018 and November 2017. There were no
comparable surveys for guarantor loans in 2018 or 2017.
4 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 2019 (2018: Q4 2018).
Green Already achieving medium-term target
Amber On track to achieve medium-term target
Red
Not yet on track to meet medium-term target
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 24
Principal risks
Managing risk is a
key element of our
business model
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 2019, we continued the process of embedding Xactium, the
Group-wide risk management system that was first deployed in
2018, into all areas of our business. As expected, the new system
has helped to improve our first line risk management activity and
has also provided executive management and the Board with
clear second line oversight across the Group (see definition
of the three lines of defence in section 1 of the table overleaf).
Whilst the process of fully integrating the system into all of our risk
management processes and procedures should be completed
during 2020, there has already been a marked improvement in
the quality and depth of risk management and reporting for all
three business divisions, as well as for the Group as a whole.
In 2020, the UK economy has been severely impacted by the
COVID-19 pandemic that has also affected the operations and
financial performance of all three of the Group’s divisions. As a
result, this has been added as a new key risk and although it was
added after the year end, it is judged to be a high risk for the Group.
The chart opposite provides an update to the current status of the
principal risk categories identified by the Board (i.e. those with
the highest residual risk ratings for the Group). The following table
provides further detail and seeks to identify 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.
For further information on our approach to risk, please see the Risk
Committee report on page 93.
Our principal risk categories
6
1
5.4
5.3
2
3
5.2
4
5.1
Very high
High
Medium
2019 assessment
2018 assessment
1 Conduct
2 Regulation
3 Credit
4 Business strategy
5.1 Business risk – operational
5.2 Business risk – reputational
5.3 Business risk – cyber
5.4 Business risk – coronavirus (COVID-19)1
6 Funding and liquidity
1 New principal risk.
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Mitigation
Change
in 2019
Explanation
Risk definition
1. Conduct
Inappropriate or sub-standard
behaviour by the Group’s
representatives resulting in poor
outcomes for customers
2. Regulation
All authorised firms are subject to a
rigorous approval process as well
as ongoing supervision by the FCA.
Non-compliance can result in fines
or loss of authorisation to operate.
A list of the key regulatory
developments over the past year is
available on the Group’s website:
www.nsfgroupplc.com.
• A strong culture, together with the right
‘tone from the top’ results in a business
committed to ‘doing the right thing’
and delivering the right outcomes
for customers
• Extensive training across all three divisions
with over 5,400 training days in 2019
• On an isolated basis, incidents can result in
customer detriment owing to human and/or
operational failures. Where such incidents
occur they are thoroughly investigated, and
the appropriate remedial actions are taken
to address any customer detriment and to
prevent recurrence
• Close and active monitoring of customer
complaints
• Clear policies and procedures, including
whistleblowing
• Carefully designed and balanced incentive
programmes with appropriate malus and
clawback provisions when required
standards are not met
• Diligent application of ‘three lines
of defence’:
1. policies, procedures and quality
assurance in customer-facing roles;
2. compliance and conduct assurance; and
3. internal audit.
• Open and active engagement with the
FCA as well as industry peers
• Diligent monitoring/assessment of all
regulatory change 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
3. Credit
Any marked increase in the rates
of impairment or defaults by the
Group’s customers could impact
the performance of the Group.
• Detailed weekly and monthly management
information on historic and expected future
credit performance
• Continuous process of review and
refinement of each business’s credit
scorecard and lending criteria
• Regular credit committee reviews of policies
and outcomes
Decreased
Increased
Unchanged
We continue to invest in our compliance and
regulatory oversight. During 2019 we added a total of
nine additional regulatory and compliance staff
across the Group and all three divisions now have a
Risk and Compliance Director in place, each of whom
reports to their respective CEO as well as the Group
Chief Risk Officer. This helps to ensure a consistent
approach in our management of key risks, including
conduct risk across the Group.
Following a detailed review of the compliance
functions in all three divisions, a number of
enhancements were implemented and verified by
KPMG as part of its role as internal auditor for the
Group.
While the number of upheld complaints at FOS
remains low at less than 0.1% of total customer
accounts in all three divisions, the number has
increased versus 2018. The Group is working with FOS
to ensure a consistent approach and also to improve
our service to customers.
Each of the Group’s business divisions is fully
authorised by the FCA and is committed to the
highest standards of regulatory conduct.
However, given the scale and complexity of
regulatory changes, we acknowledge that there
may be isolated instances in which our response
to new regulatory requirements may be subject to
interpretation risk.
Having now completed a multi-firm review in 2019,
the FCA has recommended some operational
changes in the guarantor loans sector including,
inter alia, a requirement to enhance the disclosures
given to guarantors at the point of lending. These
changes are not expected to have any material
impact on the Group.
The FCA continues to conduct a rolling programme
of research and thematic reviews to maintain its
oversight of various sectors of the non-standard
finance market and this work remains ongoing.
The FCA requirement to provide borrowers affected
by COVID-19 with an emergency payment freeze may
result in an increase in provisions and lower net book
values (see principal risks 5.4 and 6 below).
Whilst rates of impairment in home credit declined
during 2019, the levels of impairment in branch-based
lending and guarantor loans were impacted by an
increase in the number of rescheduled loans, a
change in focus on charge-off and an increase in the
macroeconomic risk weighting of a stressed scenario
(see note 2 to the Financial Statements) that then
required an increase in provisions.
While the impact of COVID-19 remains uncertain,
it is expected that credit risk will increase in 2020
as a result of a major slowdown in the UK economy.
However, the Group has high risk-adjusted margins
and is highly experienced in providing forbearance
to help customers get back on track.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 26
Principal risks continued
Risk definition
Mitigation
Change
in 2019
Explanation
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 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
5.1 Business risk (operational)
Key areas of operational risk for the
Group include:
• external factors resulting in
business failure or balance sheet
impairment
• IT failure
• integration of George Banco and
TrustTwo onto a single
technology platform
• fraud
• process failure and/or
human error
• restrictions on being able to
conduct business face-to-face
• 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
• The Group’s Risk Committee regularly
assesses the Group’s external risks that are
reported to the Board. The Board then
considers and develops strategies designed
to mitigate them
• IT policies are in place to mitigate risk
including disaster recovery plans
• Phase II of the technical integration
of TrustTwo and George Banco is expected
to complete during 2020
• 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
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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.
Further declines in stock market
multiples may impact the value of
goodwill assets on the Group’s
balance sheet.
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
financial performance.
• 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 and funding, have an accurate
picture of what the Group is trying to
achieve, our ethos, culture and business
strategy
• Whilst still 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 page 4)
Decreased
Increased
Unchanged
In 2019 the Group delivered good loan book growth
in two out of three businesses with all achieving high
risk-adjusted margins.
On 22 February 2019, the Company announced a firm
offer to acquire Provident Financial plc that lapsed on
5 June 2019. While the Group incurred £12.8m in
transaction-related costs that are included within
exceptional items within the Group’s full-year results
(see note 8 to the financial statements), there was no
material impact on the Group’s strategy or business
operations.
The Group has a number of significant institutional
shareholders. Whilst engagement to date indicates
that they remain supportive of the Group’s overall
strategy, this may change in the absence of a
recovery in the Group’s share price.
There is no plan to migrate any of the historic George
Banco loans to the new technology platform – these
will continue to be managed on the previous system
that will be decommissioned when all loans have
matured (expected within two years).
All three businesses have disaster recovery plans in
place and these have been reviewed during the
course of the year. While the impact of the COVID-19
outbreak on the Group’s business remains unclear,
contingency plans are in place to safeguard the
health and safety of staff and self-employed agents,
as well as mitigate any impact on business
performance. The shift to homeworking was smooth
and without incident and all three businesses are
now able to lend and collect remotely.
The government has conducted 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 customers, regulators,
suppliers, Members of Parliament, debt-related
charities, the media, think-tanks, investors and debt
providers (see Stakeholder management and our
commitment to Section 172 on pages 46 to 59).
Through this process of engagement, we aim to
demonstrate why we are different from other
consumer credit firms and why we believe that NSF
stands out from competitors. This has included
supporting Loan Smart, a charity focused on helping
consumers understand the dangers of illegal lending.
27
Risk definition
Mitigation
Change
in 2019
Explanation
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.
• 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
• Regular internal audit and external
third-party review of cyber security status
across all businesses
• Full disaster recovery plans have been
developed and are in place for all three
operating divisions
5.4 Business risk (COVID-19)
A large pandemic such as
COVID-19, coupled with restrictions
on face-to-face contact as imposed
by HM Government, may cause
significant disruption to the Group’s
operations and severely impact the
level of supply and demand for the
Group’s products. As a result, any
sustained period where such
measures are in place could result
in the Group suffering significant
financial loss.
6. Funding and liquidity
The Group may not be able to meet
its financial obligations because:
• it is unable to borrow to fund
lending by its operating
businesses
• it has failed to renew/replace
existing debt facilities as they
become payable
• it cannot fund growth and further
acquisitions
• declines in net book value may
impact the Group’s ability to
access existing debt facilities
• The Group has full business continuity plans
in place, including the ability to shift staff to
remote-working whilst still retaining full
access to all relevant systems and
technology
• All three business divisions are able to lend
and collect remotely, without the need for
face-to-face contact with customers
• HM Government has put a series of
measures in place to support the economy
and to help soften the impact on the
business community
• The Group has long-term funding in place
and is able to generate positive cash flow
by reducing significantly the level of lending
across the Group
• The Group’s short-term loans to customers
provide a natural hedge against medium-
term borrowings
• The Group increased its long-term debt
funding arrangements in March 2020 with a
new £200m six-year securitisation facility.
The new facility was put in place to repay a
proportion of the Group’s existing term loan
facility as well as to fund loan book growth,
is at a significantly lower cost than the
Group’s term loan facility
• At the end of 2019 the Group had in place
a £285m term loan facility which is not
repayable until August 2023 and is
supplemented by a £45m revolving
credit facility that is not repayable until
August 2022
• Cash and covenant forecasting
is conducted on a monthly basis as
part of the regular management
reporting exercise
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
Increased criminal activity together with the
increasing importance of data and data analytics
means that this risk has been identified separately
from operational risk.
Much of the Group’s technology infrastructure is now
cloud-based thereby delivering a number of
operational benefits including enhanced levels
of security.
COVID-19 began to impact the UK economy in
March 2020. Whilst in the short-term it is expected
that the Group will experience a reduction in income
from lending activities, together with an increase
in ECL due to the pandemic, the Group also believes
that there could be an increase in demand for its
products and services. As it remains unclear as to
when the situation may begin to normalise and how
the business might perform, COVID-19 remains a high
risk for the Group.
The FCA requirement to provide borrowers affected
by COVID-19 with an option of an emergency
payment freeze may result in a significant increase in
provisions and lower net book values.
Whilst the impact of COVID-19 on the loan book has
prompted a breach of certain performance
covenants, preventing further drawdown on the new
facility, negotiations with the lender have been
positive and temporary relief has been provided until
29 June 2020 whilst a more permanent agreement is
reached. Until such agreement is concluded there
exists material uncertainty over the ability of the
Group to draw down further on the facility. In the
event that no agreement is reached or the temporary
relief is not extended then the Group has sufficient
cash resources to repay the amount drawn under the
new facility in full. However, the Group is discussing
covenant waivers with its lenders and has already
taken a number of steps to generate positive cash
flow and conserve cash within the business.
If the FCA requirement to provide borrowers affected
by COVID-19 with an option of an emergency
payment freeze and/or poor business performance
results in a significant increase in provisions and
lower net book values, there is a risk that the
loan-to-value covenants for the Group’s debt facilities
may come under pressure leading to a risk that the
Group will be unable to access its facilities.
Decreased
Increased
Unchanged
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 28
2019 financial review
2019
full-year results
A solid underlying performance in 2019 was masked
by a large statutory loss due to exceptional items
A prior year adjustment of £4.0m was
made to the loan loss provision on the
Group’s balance sheet dating back to the
transition to IFRS 9 at the beginning of 2018
with a consequent reduction in net assets
by £3.5m after accounting for deferred
tax effects. Finance costs increased
to £27.5m (2018: £21.1m) reflecting the
loan book growth in both branch-
based lending and guarantor loans.
The net result was that the Group
reported a statutory loss before tax of
£76.0m (2018 restated: loss of £2.4m).
The tax charge of £0.3m (2018: £0.1m)
meant that the reported loss after tax was
£76.3m (2018 restated: £2.3m) equating
to a reported loss per share of 24.45p
(2018 restated: loss per share of 0.74p).
A detailed review of each of the
operating businesses’ normalised
results are set out overleaf.
Normalised revenue was up 10% to
£183.7m (2018: £166.5m) reflecting good
loan book growth in both branch-
based lending and guarantor loans.
The increase in reported revenue was
slightly higher at 14% to £180.8m (2018:
£158.8m) reflecting the reduced unwind
of the fair value adjustment made to the
George Banco loan book at the time of its
acquisition in August 2017. Modification and
derecognition losses increased by £1.4m in
aggregate versus the prior year reflecting
an increase in forbearance given to
customers in the form of either rescheduled
or deferred loans. An increase in provisions
at branch-based lending and guarantor
loans meant that overall impairment costs
increased by 3% to £45.1m (2018: £43.7m)
and administration costs increased by
8% to £95.8m (2018: £89.1m) leaving
normalised operating profit up by 20%
to £42.2m (2018 restated: £35.1m).
The Group incurred a number of
exceptional items during the year
including fees associated with the firm
offer to acquire Provident Financial plc
and restructuring costs that together
totalled £14.7m (2018: £nil). There was
also a non-cash impairment to the value
of goodwill for each of the Group’s
business divisions totalling £65.8m (2018:
£nil) following the significant decline in
values of listed companies in the non-
standard finance sector (see note 15).
Jono Gillespie
Group Chief Financial Officer
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Performance dashboard
Normalised revenue
by division
Normalised operating
profit by division
Normalised profit
before tax
by division
Group revenue
£183.7m
+10% (2018: £166.5m)
Branch-based lending
£93.0m (2018: £79.6)
Guarantor loans
£29.8m (2018: £21.7m)
Home credit
£60.8m (2018: £65.2m)
Group operating profit
£42.2m
+20% (2018: £35.1m)
Branch-based lending
£29.7m (2018: £26.3m)
Guarantor loans
£8.8m (2018: £7.5m)
Home credit
£9.1m (2018: £6.7m)
Central
£(5.4)m (2018: £(5.4)m)
Group profit before tax
£14.7m
+5% ((2018: £14.0m)
Branch-based lending
£12.3m (2018: £13.5m)
Guarantor loans
£1.4m (2018: £1.7m)
Home credit
£7.0m (2018: £4.3m)
Central
£(6.0)m (2018: £(5.4)m)
Corporate GovernanceStrategic ReportAdditional InformationFinancial StatementsOverview
30
2019 financial review continued
2019 Group results
Year ended 31 December 2019
Revenue
Other operating income
Modification loss
Derecognition loss
Impairments
Administration 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 share
Dividend per share
Year ended 31 December 2018
Revenue
Other operating income
Modification loss
Derecognition loss
Impairments
Administration expenses
Operating profit
Exceptional items
Profit before interest and tax
Finance cost
Profit/(loss) before tax
Taxation
Profit/(loss) after tax
Earnings/(loss) per share
Dividend per share
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
Fair value
adjustments,
amortisation of
acquired
intangibles and
exceptional items
£000
(2,873)
–
–
–
–
(7,226)
(10,099)
(80,584)
(90,683)
–
(90,683)
2,929
Reported
£000
180,784
954
(1,181)
(413)
(45,066)
(103,012)
32,066
(80,584)
(48,518)
(27,458)
(75,976)
(332)
(87,754)
(76,308)
(24.45)p
0.70p
Fair value
adjustments,
amortisation of
acquired
intangibles and
exceptional items
£000
(7,678)
–
–
–
–
(8,681)
(16,359)
–
(16,359)
–
(16,359)
3,108
(13,251)
Reported
£000
158,824
1,626
(78)
(129)
(43,738)
(97,763)
18,742
–
18,742
(21,107)
(2,365)
58
(2,307)
(0.74)p
2.60p
Normalised1
£000
183,657
954
(1,181)
(413)
(45,066)
(95,786)
42,165
–
42,165
(27,458)
14,707
(3,261)
11,446
3.67p
0.70p
Normalised1
£000
166,502
1,626
(78)
(129)
(43,738)
(89,082)
35,101
–
35,101
(21,107)
13,994
(3,050)
10,944
3.50p
2.60p
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Normalised divisional results
The table below provides an analysis of the ‘normalised’ results for the Group for the 12 month period to 31 December 2019. Management
believes that by removing the impact of exceptional items, amortisation of acquired intangibles and fair value adjustments, the normalised
results provide a clearer view of the underlying performance of the Group.
Year ended 31 December 2019
Normalised1
Revenue
Other operating income
Modification loss
Derecognition (loss)/gain
Impairments
Revenue less impairments
Administration expenses
Operating profit
Finance cost
Profit before tax
Taxation
Profit after tax
Normalised earnings per share
Dividend per share
Year ended 31 December 2018
Normalised1
Revenue
Other operating income
Modification loss
Derecognition loss
Impairments
Revenue less impairments
Administration expenses
Operating profit
Finance cost
Profit before tax
Taxation
Profit after tax
Normalised earnings per share
Dividend per share
Reconciliation of net loan book
Branch-based lending
Guarantor loans
Home credit
Total
Branch-based
lending
£000
Guarantor loans
£000
Home credit
£000
Central costs
£000
93,002
954
(951)
(482)
(20,635)
71,888
(42,235)
29,653
(17,355)
12,298
(2,815)
9,483
29,820
–
(230)
69
(7,996)
21,663
(12,895)
8,768
(7,338)
1,430
(113)
1,317
60,835
–
–
–
(16,435)
44,400
(35,298)
9,102
(2,116)
6,986
(1,474)
5,512
–
–
–
–
–
–
(5,358)
(5,358)
(649)
(6,007)
1,141
(4,866)
Branch-based
lending
£000
Guarantor loans
£000
Home credit
£000
Central costs
£000
79,579
1,397
(78)
(97)
(18,040)
62,761
(36,488)
26,273
(12,778)
13,495
(2,492)
11,003
21,748
229
–
(32)
(4,451)
17,494
(9,983)
7,511
(5,833)
1,678
(618)
1,060
65,175
–
–
–
(21,247)
43,928
(37,214)
6,714
(2,461)
4,253
(774)
3,479
–
–
–
–
–
–
(5,397)
(5,397)
(35)
(5,432)
834
(4,598)
2019
Normalised1
£m
2019
Fair value
adjustments
£m
214.8
105.5
39.9
360.2
–
1.4
–
1.4
2019
Reported
£m
214.8
106.9
39.9
361.6
2018
Normalised
Restated
£m
2018
Fair value
adjustments
£m
182.7
82.7
41.0
306.4
–
4.3
–
4.3
NSF plc
£000
183,657
954
(1,181)
(413)
(45,066)
137,951
(95,786)
42,165
(27,458)
14,707
(3,261)
11,446
3.67p
0.70p
NSF plc
£000
166,502
1,626
(78)
(129)
(43,738)
124,183
(89,082)
35,101
(21,107)
13,994
(3,050)
10,944
3.50p
2.60p
2018
Reported
Restated
£m
182.7
87.0
41.0
310.7
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 32
Divisional review
Branch-based
lending
Established over 13 years ago, Everyday Loans
is now the only significant branch-based
provider of unsecured loans in the UK’s
non-standard finance sector.
UK market1
c.£275m
2019 receivables outstanding
18%
Estimated compound annual
growth (‘CAGR’) 2014-2017
1%
Estimated share of the UK non-standard
consumer credit market in 2017
Our customers2
£29,520 p.a.
Average income
£3,265
Typical loan size
90.4%
Average APR
1 Based on data from L.E.K. Consulting, December 2018 and Company estimates.
2 Company data.
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Year ended 31 December
Revenue
Other operating income
Modification loss
Derecognition loss
Impairments
Revenue less impairments
Administration expenses
Operating profit
Exceptional items
2019
Normalised1
£000
93,002
954
(951)
(482)
(20,635)
71,888
(42,235)
29,653
–
Profit before interest and tax
Finance cost
29,653
(17,355)
Profit before tax
Taxation
Profit after tax
12,298
(2,815)
9,483
2019
Fair value
adjustments and
exceptional items
£000
–
–
–
–
–
–
–
–
(332)
(332)
–
(332)
63
2019
Reported
£000
93,002
954
(951)
(482)
(20,635)
71,888
(42,235)
29,653
(332)
29,321
(17,355)
11,966
(2,752)
(269)
9,214
2018
Fair value
adjustments and
exceptional items
£000
2018
Normalised1
£000
Year ended 31 December
Restated
Revenue
Other operating income
Modification loss
Derecognition loss
Impairments
Revenue less impairments
Administration expenses
Operating profit
Exceptional items
Profit before interest and tax
Finance cost
Profit before tax
Taxation
Profit after tax
79,579
1,397
(78)
(97)
(18,040)
62,761
(36,488)
26,273
–
26,273
(12,778)
13,495
(2,492)
11,003
2018
Reported
£000
75,621
1,397
(78)
(97)
(18,040)
58,803
(36,488)
22,315
–
22,315
(12,778)
9,537
(1,740)
(3,958)
–
–
–
–
(3,958)
–
(3,958)
–
(3,958)
–
(3,958)
752
(3,206)
7,797
1 See glossary of alternative performance measures and key performance indicators
in the Appendix.
33
Sometimes, not
issuing a loan is
the best outcome
for the customer.”
Sunjay Dada
Customer Account Manager – Everyday Loans
Entrepreneurial
leadership
Having joined our Wolverhampton branch in February
2018, Sunjay met with an applicant at the end of 2019
who was seeking a loan of £4,000.
When reviewing the applicant’s circumstances and
financial history, it became clear that they had recently
borrowed £1,500 from another lender and then
transferred the amount to a third party. His suspicions
raised, and after having established a good rapport
with the applicant, Sunjay discovered that the purpose
of the loan was in fact to invest in a bond that would,
they had been told, deliver a significant profit for the
borrower. After some investigation, Sunjay was in a
position to highlight why this might be a scam and why
despite being peddled by a friend of the applicant,
they should be very careful. Given his concerns about
the use of proceeds and how it may impact the
applicant’s overall creditworthiness, Sunjay refused
to issue the loan, even though it had already been
pre-approved. Displaying great leadership and taking
the decision not to lend was certainly the best outcome
for the customer and sometime later the applicant
returned to the branch to thank Sunjay personally for
helping him to avoid incurring unnecessary debt and
from being defrauded out of a significant sum by what
turned out to be a scam.
Corporate GovernanceStrategic ReportAdditional InformationFinancial StatementsOverview 34
Divisional review continued
We are committed
to our face-to-face
lending model.”
Steven White
CEO, Everyday Loans
Source of branch-based loans booked in 2019
%
Financial brokers
Direct and other
Renewals/former borrowers
51%
28%
21%
We added eight new branches to the network in 2019 taking the
total number to 73 and so have more than doubled the number of
branches since acquiring the business in April 2016. The key drivers
for growth remained network capacity, lead volume and quality,
network productivity and careful management of impairment.
A summary of our progress on each of these drivers is highlighted
below.
Network capacity – We added 125 new branch staff in 2019
and had a total of 365 front-line staff at the year-end (2018: 325).
With staff productivity broadly in-line with the previous year,
this increased capacity meant that we were able to increase the
number of customers by 23% to 75,400 (2018: 61,200) increasing
the net loan book by 18% to £214.8m (2018 restated: £182.7m).
Lead volumes and quality – With an increase in network capacity
it was important to deliver a steady flow of high quality leads and
our lead volumes increased by 52% from over 1.6 million in 2018
to just under 2.5 million in 2019. Financial brokers continued to
be the main source of leads (90% of the total) and completed
loans (51% of the total) with direct applications and renewals or
former customers making up the balance. The scale of this
increase meant that the total number of new borrower
applications to branch (or ‘ATBs’) increased by 36% to 497,050
(2018: 366,000).
Productivity – During 2019 we wrote 16% more loans than in 2018
reaching 52,130 in total (2018: 44,841) and the total value of loans
issued increased by 14% to £169.9m (2018: £149.5m).
Delinquency management – Throughout 2019 we maintained a
clear focus on delinquency management through a combination of
careful underwriting and methodical collections practice.
However, despite an increase in provisions due to an increase in
the number of rescheduled and deferred loans, a change of focus
on charge-off and an increased weighting of a downside
macroeconomic scenario, impairment as a percentage of average
net receivables reduced to 10.3% (2018 restated: 10.8%) and versus
normalised revenue it also reduced to 22.2% (2018 restated: 22.7%).
2019 results
Normalised revenue increased by 17% to £93.0m (2018: £79.6m) as
a record number of leads was translated into a record number of
both loans booked and new cash issued. As there was no fair value
adjustment to the loan book in 2019, reported revenue increased by
23% to £93.0m (2018: £75.6m). A higher modification loss of £1.0m
(2018 restated: £0.1m) and associated derecognition loss of £0.5m
(2018 restated: £0.1m) reflected an increase in the size of the loan
book and the number of rescheduled and deferred loans in the
period and was offset to a degree by other operating income of
£1.0m (2018: £1.4m) due to debt sales. The growth in the loan book
was a key driver behind the increase in impairments to £20.6m
(2018 restated: £18.0m).
Despite the additional costs of the eight new branches that opened
during the year, administration costs remained tightly controlled
and the division’s cost:income ratio fell slightly with the net result
that normalised operating profit increased by 13% to £29.7m (2018
restated: £26.3m). Now that the fair value adjustment to revenue
referred to above has been unwound, reported operating profit
increased by 31% to £29.7m (2018 restated: £22.3m).
One-off restructuring and redundancy costs of £0.3m (2018: £nil)
were incurred during the second half of the year and treated as an
exceptional item in the period.
Higher finance costs of £17.4m (2018 restated: £12.8m) reflected the
loan book growth and held back normalised profit before tax that
fell 9% to £12.3m (2018 restated: £13.5m). However, the absence of
any fair value adjustment to revenue meant that reported profit
before tax increased by 25% to £12.0m (2018: £9.5m).
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450
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350
300
250
200
150
100
50
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145
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COVID-19 actions and plans for 2020
The immediate focus has been to mitigate as far as possible the
impact of COVID-19 on our staff, customers and the business as a
whole. As the scale and depth of any future impact remains
uncertain, we have withdrawn all previous guidance and our
longer-term plans remain under review.
We shifted to a home-working model in late March 2020 and so
were then unable to meet applicants face-to-face in a branch – a
situation which, when combined with the challenges in assessing
the creditworthiness of applicants in the current environment,
reduced lending volumes significantly. Having spent April 2020
developing a revised scorecard and lending process to reflect the
latest market intelligence and guidelines for social distancing, our
branch network is now open and receiving a healthy volume of
leads through our normal channels. Whilst we remain cautious, we
have been encouraged by the volume of applications received
and are starting to increase lending volume.
Basic collections (before settlements) in April and May 2020
averaged at 94% of pre-lockdown levels which was better than
might have been expected and in absolute terms was ahead of
that achieved in the same period in 2019. With the lower levels of
lending, as at the start of June 2020 the net loan book had reduced
by around 7% since the year-end but the business generated net
cash in the period and there remains a healthy surplus over
administration costs.
We continue to believe that there is significant long-term potential
for the branch-based lending business. Having opened 37 new
branches since April 2016, we now have a national network and
therefore are well-placed to meet any increase in demand from
consumers that in the current environment are no long able to
borrow from their high street bank or mainstream lender. We also
believe that once the macroeconomic backdrop begins to
normalise and, subject to funding, there is a significant opportunity
to expand the network further over the next three to five years.
Key Performance Indicators
While there was a slight decrease in revenue yield to 46.4% (2018
restated: 47.8%) the growth in the loan book meant that revenue
increased. Whilst impairment as a percentage of revenue
reduced, the risk adjusted margin also decreased to 36.1% (2018
restated: 37.0%) due to the reduction in yield. Despite the addition
of eight new branches, administration expenses increased slightly
less than revenue and so the cost:income ratio reduced to 45.4%
(2018: 45.9%).
The net result was that normalised operating profit margin
reduced to 31.9% (2018 restated: 33.0%) which, in conjunction with
the growth in the loan book, meant that the return on asset was
also lower at 14.8% (2018 restated: 15.8%).
Year ended 31 December
Key Performance Indicators1
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 (%)
Cost:income ratio (%)
Return on asset (%)
2019
Normalised
2018
Normalised
Restated
73
75.4
214.8
200.4
46.4
36.1
22.2
10.3
45.4
14.8
65
61.2
182.7
166.4
47.8
37.0
22.7
10.8
45.9
15.8
1 See glossary of alternative performance measures and key performance indicators
in the Appendix.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 36
Divisional review continued
Guarantor
loans
Our Guarantor Loans Division made
solid progress in 2019, driven by strong
market demand and further investment.
2019
Fair value
adjustments and
exceptional items
£000
2019
Normalised1
£000
UK market
c.£1bn
Receivables outstanding1
37.5%
Estimated compound annual
growth (‘CAGR’) 2014-20172
4%
Estimated share of the UK non-standard
consumer credit market in 20172
Our customers3
£27,000 p.a.
Average income
£3,801
Typical loan size
48.0%
Average APR in 2019
1 Speech by Jonathan Davidson, Executive Director of Supervision,
FCA – 21 March 2019.
2 Based on data from L.E.K. Consulting, December 2018 and Company estimates.
3 Company data.
Year ended 31 December
Revenue
Other income
Modification loss
Derecognition gain
Impairments
Revenue less cost of sales
Administration 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
Restated
Revenue
Other income
Modification loss
Derecognition loss
Impairments
Revenue less cost of sales
Administration expenses
Operating profit
Exceptional items
Profit before interest and tax
Finance cost
Profit/(loss) before tax
Taxation
Profit/(loss) after tax
29,820
–
(230)
69
(7,996)
21,663
(12,895)
8,768
–
8,768
(7,338)
1,430
(113)
1,317
21,748
229
–
(32)
(4,451)
17,494
(9,983)
7,511
–
7,511
(5,833)
1,678
(618)
1,060
2019
Reported
£000
26,947
–
(230)
69
(7,996)
(2,873)
–
–
–
–
(2,873)
–
18,790
(12,895)
(2,873)
(737)
(3,610)
–
(3,610)
686
5,895
(737)
5,158
(7,338)
(2,180)
573
(2,924)
(1,607)
2018
Reported
£000
18,028
229
–
(32)
(4,451)
13,774
(9,983)
3,791
–
3,791
(5,833)
(2,042)
89
(3,720)
–
–
–
–
(3,720)
–
(3,720)
–
(3,720)
–
(3,720)
707
(3,013)
(1,953)
2018
Fair value
adjustments and
exceptional items
£000
2018
Normalised1
£000
1 See glossary of alternative performance measures and key performance indicators
in the Appendix.
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By looking at the bigger
picture it was clear that
the customer needed
our support.”
Julie Fishburn
Customer Resolution Manager – Everyday Loans
Integrity
Julie joined Everyday Loans in May 2015 and helps us
to address customer issues if something goes wrong
and cannot be resolved in branch.
In 2019, Julie was notified of a case where a loan had
defaulted after a customer had been unable to meet
their regular payments. The 56-year old customer had
come to our Croydon branch in September 2018 and
had wanted to borrow £4,000. Having been through
her situation thoroughly we offered her a loan of £2,100
which was accepted over 36 months. Having made
her first three monthly payments on time, her payment
for January 2019 bounced and she informed the branch
that she had been defrauded and that both the police
and FOS were now involved. The customer was also
being threatened by the perpetrator of the fraud,
placing her under significant stress. Julie liaised closely
with both the police and FOS to determine the facts of
the case that resulted in a prosecution of the fraudster
being made. It was clear to Julie that whilst we had
conducted ourselves properly throughout, the customer
was clearly vulnerable and therefore, reflecting our
focus on integrity, the appropriate outcome was for
the debt to be written-off and the customer’s credit
file restored.
The customer’s response on hearing of Julie’s decision
is repeated below:
“I want to thank you sincerely for the compassion [you]
showed towards me and the considerate outcome you
reached. I know it could not have been easy for you.
I want you to know that I did not and would not set out
to cause you difficulties in any way. I made a terrible
mistake and I thank you for helping to aid my healing
process.”
Corporate GovernanceStrategic ReportAdditional InformationFinancial StatementsOverview 38
Divisional review continued
Speaking to both
borrower and guarantor
is at the heart of our
lending process.”
Mark Burgess
CEO, Guarantor Loans Division
Source of branch-based loans booked in 2019
%
Broker
Top-ups
Organic
Price comparison websites
Everyday Loans online decline
Everyday Loans branch decline
Lead generator
58%
17%
5%
13%
3%
1%
4%
Our Guarantor Loans Division continued to grow strongly in 2019,
albeit with a higher rate of impairment. The growth was thanks to
high levels of demand from non-standard borrowers in the UK who
are attracted by the opportunity to access credit at a much lower
APR than if they were to try and borrow without the presence of a
guarantor. By making their repayments as planned, borrowers that
have historically had a thin or a poor credit file, are able to rebuild
or improve their credit score so that, in time, they can access more
mainstream credit.
With over 2.5m leads in 2019 (2018: 2.3m) of which 520,100 passed
through our scorecard to become qualifying applications (2018:
448,100), the volume of lending also increased, reaching £72m
(2018: £65m). We issued a record number of 19,458 loans (2018:
17,393 loans) implying a further improvement in conversion from
leads into loans. This strong performance was achieved against
a backdrop of a number of important operational developments:
Consolidation of all operations onto a single location – having
already consolidated the division’s collections activity into the
Trowbridge location during the first half of 2019, we followed this
with the accelerated transfer of the remaining lending and
administration activities in October 2019. While there was some
temporary operational disruption following these changes, we
expect to realise productivity improvements over the medium-term
from being in a single location.
New leadership – we were delighted to appoint Mark Burgess
as CEO in October 2019. Having joined the Group as Managing
Director of the division earlier in 2019, Mark has a wealth of
experience and was previously Central Operations Director of
the Consumer Credit Division at Provident and before that Chief
Operating Officer of 118118 Money. More recently we have also
made some senior appointments to strengthen the management
team in both finance and collections.
Channel mix – we remained focused on maintaining a strong
position in the important broker market whilst also seeking to
attract new customers. A robust performance by our TrustTwo
brand ensured that price comparison websites remained an
important channel for the division.
Complaint handling and vulnerable customers – we are proud
that the quality of our processes and the training we give our staff
means that while the total number of complaints we received from
customers increased in 2019, it remains low in absolute terms and
relative to our peers, as well as compared with a number of other
sectors. However, we are not complacent and through industry
associations are continuing to work with the regulator to ensure
that we can improve our service to customers as evidenced by our
investments in complaint handling and a dedicated team for
managing vulnerable customers.
The net loan book increased by 28% to reach £105.5m at
31 December 2019 (2018 restated: £82.7m) which is three times
the size of the combined loan book at the end of 2016.
2019 results
Loan book growth was the main driver behind a 37% increase in
normalised revenue to £29.8m (2018: £21.7m). A smaller fair value
adjustment to revenue of £2.9m (2018: £3.7m) meant that reported
revenue increased by 50% to £27.0m (2018: £18.0m).
During 2019 we increased the number of staff significantly as
we sought to continue to meet the high levels of demand for
our products. Whilst the consolidation of all of our operations
onto our dedicated site in Trowbridge in October resulted in the
departure of a number of staff from our office in Bourne End, we
ended 2019 with a total of 141 employees, an increase of 26 over
the prior year (2018: 115). As well as causing some operational
disruption, the collections performance was also impacted,
leading to an increase in the rate of impairment to 26.8% of
revenue (2018 restated: 20.5%) and this remains a key area of focus
for management. The increased number of staff versus the prior
year contributed to higher administration costs that rose to £12.9m
(2018: £10.0m). The net result was that while normalised operating
profit increased by 17% to £8.8m (2018 restated: £7.5m), the
normalised operating profit margin was down on the previous year.
Finance costs increased to £7.3m (2018: £5.8m) as a result of the
underlying loan book growth. The net result was that normalised
profit before tax was £1.4m (2018 restated: £1.7m). Restructuring
and redundancy costs associated with the consolidation of all the
division’s operations in Trowbridge meant that there was an
exceptional item of £0.7m (2018: £nil) which, together with a much
reduced fair value adjustment to revenue of £2.9m (2018: £3.7m),
meant that the reported loss before tax was £2.2m (2018 restated:
loss before tax of £2.0m).
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Percentage of total payments made by guarantors remains low
12
10
8
6
4
2
0
Jan 18 Apr 18 Jul 18 Oct 18 Jan 19 Apr 19 Jul 19 Oct 19
Jan 20
Percentage of total collections paid by guarantors
limit on new loans up to a maximum of £10,000, although in the
current environment it is clear that applicants are finding it much
more challenging to find a suitable guarantor. As a result, at the
start of June 2020 the net loan book had reduced by around 4%
since the year end although we are starting to increase lending
volume and this is building gradually, albeit from a low base.
Basic collections (before settlements) in April and May 2020
averaged approximately 83% of that achieved in January and
February 2020 and the absolute amount was ahead of the
collections made during the same period in 2019. The Guarantor
Loans Division has a higher percentage of COVID-affected
customers than the other two businesses which is leading to
higher levels of delinquency. As we are presently unable to initiate
recovery action against such customers or their guarantors, we
cannot say how long this situation may persist for. We have no
reason to believe COVID affected customers will not ultimately
pay either directly or via guarantors in a similar manner to our
other businesses. The proportion of payments being paid by
guarantors in April and May 2020 was broadly unchanged from
that prior to the restrictions coming into force, reflecting the fact
that no guarantors of borrowers in difficulty due to COVID-19
have been contacted for payment, in line with FCA guidance
and this has led to a higher level of delinquency. Given the strong
loan book growth prior to the restrictions and the uncertainties
surrounding the outcome of the pandemic, it is possible that
the level of loan loss provisions could increase in 2020. As with
branch-based lending, given the significant reduction in lending,
the business generated positive cash flow in April and May 2020.
We continue to believe that a guarantor loan is a highly
attractive mid-cost product for a borrower with an impaired
or thin credit file. By enabling them to borrow at a much lower
cost than if they were to borrow on their own, it also allows
them to rebuild their credit score over time so that if they remain
on-track, they can then access mainstream credit markets.
7.2%
of the value of all payments received
were made by guarantors in 2019
Key Performance Indicators
The relatively strong growth at the division’s TrustTwo brand
impacted revenue yield which together with the greater than
expected increase in impairment meant that the risk adjusted
margin reduced to 23.2% (2018 restated: 25.8%). The high rate of
loan book growth, coupled with the disruption alluded to above
meant that return on assets was lower than expected at 9.3%
(2018: 11.2%).
Year ended 31 December
Key Performance Indicators1
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 (%)
Cost:income ratio (%)
Return on assets (%)
2019
Normalised
2018
Normalised
Restated
32.6
105.5
94.1
31.7
23.2
26.8
8.5
43.2
9.3
25.1
82.7
67.0
32.5
25.8
20.5
6.6
45.9
11.2
1 See glossary of alternative performance measures and key performance indicators
in the Appendix.
COVID-19 actions and plans for 2020
As for branch-based lending, our immediate priority in 2020
has been to mitigate, as far as possible, the impact of COVID-19
on staff and customers whilst also safeguarding the future
potential of the business. As the scale and depth of any future
impact remains uncertain, we have withdrawn all previous
guidance and our longer-term plans remain under review.
We shifted to a home-working model during late March 2020
with staff being able to access all of their office-based systems
remotely including telephony, so that all customer-related calls
are recorded and management oversight remains robust. Given
the challenges in assessing the creditworthiness of applicants and
guarantors in the current environment, lending volumes reduced
significantly in April although we were able to keep credit flowing
for existing customers and key workers, albeit with a limit on new
loans of up to £2,000. Having revised our scorecards and put in
place appropriate social distancing protocols, we now have a
balance of staff working from home as well as a limited number
operating out of our offices in Trowbridge. We are receiving a high
number of leads from financial brokers and have increased the
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 40
Divisional review continued
Home
credit
Our home credit business continued to evolve
in 2019 with further improvements in our
technology and systems contributing to
a marked increase in profitability.
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
Our 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 Based on data from L.E.K. Consulting, December 2018 and Company estimates.
3 FCA: Sector Views 2017.
Year ended 31 December
Revenue
Impairments
Revenue less impairments
Administration expenses
Operating profit
Exceptional items
Profit before interest and tax
Finance cost
Profit before tax
Taxation
Profit after tax
2019
Normalised1
£000
60,835
(16,435)
44,400
(35,298)
9,102
–
9,102
(2,116)
6,986
(1,474)
5,512
2019
Fair value
adjustments and
exceptional items
£000
–
–
–
–
–
(221)
(221)
–
(221)
42
2019
Reported
£000
60,835
(16,435)
44,400
(35,298)
9,102
(221)
8,881
(2,116)
6,765
(1,432)
(179)
5,333
Year ended 31 December
Revenue
Impairments
Revenue less impairments
Administration 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
65,175
(21,247)
43,928
(37,214)
6,714
–
6,714
(2,461)
4,253
(774)
3,479
–
–
–
–
–
–
–
–
–
–
–
2018
Reported
£000
65,175
(21,247)
43,928
(37,214)
6,714
–
6,714
(2,461)
4,253
(774)
3,479
1 See glossary of alternative performance measures and key performance indicators
in the Appendix.
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Communication is a key
factor and I like the fact
that you can speak up if
something isn’t right.”
Mark Wood
Business Manager, Loans at Home
Clear
communications
Mark joined in July 2017 having worked in home credit
for over 20 years at a major competitor. Mark feels
that our culture and approach is very different from
other firms:
“Management allows you to get on with your job –
targets are challenging but there is a real desire to see
them achieved in the right way. At the heart of this is
the fact that they trust the relationship between the
customer, the agent and business manager.
Expectations are high but the business has really good
management information that means you focus on
the right things and at the right time to deliver great
outcomes for customers. Communication is a key factor
and I like the fact that you can speak up if something
isn’t right – senior management are really approachable
and they listen to what you have to say. Not only that,
they make things happen and the business is continuing
to deliver enhancements that allow me to do my job
more effectively.”
Corporate GovernanceStrategic ReportAdditional InformationFinancial StatementsOverview 42
Divisional review continued
Our agents and business
managers really look out
for their customers.”
Davie Thompson
CEO, Loans at Home
Whilst the market remains mature, our focus in 2019 was to
continue to rebalance the overall loan book with a reduction in
the proportion of loans issued with a term of more than one year,
ensuring a gradual rebalancing towards shorter-term loans. At the
same time, we also sought to continue to attract quality customers.
Taken together, the net result was that the net loan book declined
by 3% to £39.9m (2018: £41.0m) versus our previous medium-term
target of between minus 5% and plus 5% growth. However, our
focus on quality customers together with further improvements in
operational oversight helped to reduce the rate of impairment
further in 2019.
Whilst we have continued to attract a modest flow of experienced
agents and managers from competitors, the total number of
agencies at the year-end was flat at 896 (2018: 897). Having
reorganised the management and organisation structure in
January 2019, the new structure is much better suited to the scale
and growth profile of the business that we now expect and reflects
the significant investment made in technology and associated
infrastructure.
Whilst the agent to business manager ratio has been maintained
at 6:1, other operational efficiencies and lower impairment have
helped to increase the overall return on assets to 25.1% (2018:
17.7%) – see glossary on alternative performance measures in
the Appendix.
2019 results
The reduction in net loan book coupled with a slightly lower yield
meant that normalised and reported revenue reduced by 7% to
£60.8m (2018: £65.2m).
The absolute level of impairment reduced to £16.4m (2018: £21.2m)
due to the reduction and shortening of the loan book, our focus on
quality customers and thanks to our proven lending and collections
processes. As a result, the rate of impairment fell from 32.6% to
27.0% of normalised revenue which is well below our previously
announced medium-term target of 30%-33%. Our previous
investments in technology and associated infrastructure have
helped to facilitate a meaningful reduction in administration costs
and the total number of staff fell from 331 to 313 having rationalised
our infrastructure to better match the current scale and projected
growth of our business. The result was that normalised and
reported operating profit increased by 36% to £9.1m (2018: £6.7m).
Whilst administration costs fell versus the prior year, restructuring
and associated redundancy costs of £0.2m (2018: £nil) are
included as an exceptional item. The combination of a smaller
loan book and a strong increase in operating profit helped
increase cash flow generation and as a result finance costs fell to
£2.1m (2018: £2.5m). The net result was that normalised profit
before tax increased by 64% to £7.0m (2018: £4.3m).
Key Performance Indicators
Whilst the focus on quality customers and the transition to a shorter
loan book impacted revenue yield that fell slightly to 167.5% (2018:
171.5%), the benefit to impairment was even more significant.
Careful management of our cost base meant that operating profit
margins increased to 15.0% (2018: 10.3%) and the return on asset
increased from 17.7% to 25.1%.
Year ended 31 December
Key Performance Indicators1
2019
Normalised
2018
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 (%)
Cost to income ratio (%)
Return on asset (%)
896
64
92.4
39.9
36.3
167.5
122.2
27.0
45.2
58.0
25.1
897
66
93.8
41.0
38.0
171.5
115.6
32.6
55.9
57.1
17.7
1 For definitions see glossary of alternative performance measures in the Appendix.
COVID-19 actions and plans for 2020
As for the other two divisions, the immediate focus following the
outbreak of COVID-19 has been to protect the health and safety of
our staff, self-employed agents and customers whilst safeguarding
the future potential of the business. As the scale and depth of any
future impact remains uncertain, we have withdrawn all previous
guidance and our longer-term plans remain under review.
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Central costs and exceptional items
Year ended 31 December
Revenue
Administration expenses
Operating loss
Exceptional items
Loss before interest and tax
Finance cost
Loss before tax
Taxation
Loss after tax
2019
Normalised1
£000
–
(5,358)
(5,358)
–
(5,358)
(649)
(6,007)
1,141
(4,866)
2019
Amortisation of
acquired
intangibles and
exceptional items
£000
2019
Reported
£000
–
(7,226)
–
(12,584)
(7,226)
(79,293)
(12,584)
(79,293)
(86,519)
–
(91,877)
(649)
(86,519)
2,138
(92,526)
3,279
(84,381)
(89,247)
2018
Amortisation of
acquired
intangibles and
exceptional items
£000
2018
Normalised1
£000
Year ended 31 December
Revenue
Administration expenses
Operating loss
Exceptional items
Loss before interest and tax
Finance cost
Loss before tax
Taxation
Loss after tax
–
(5,397)
(5,397)
–
(5,397)
(35)
(5,432)
834
(4,598)
2018
Reported
£000
–
(14,078)
(14,078)
–
(14,078)
(35)
(14,113)
2,483
–
(8,681)
(8,681)
–
(8,681)
–
(8,681)
1,649
(7,032)
(11,630)
1 See glossary of alternative performance measures and key performance indicators
in the Appendix.
25.1%
Return on asset in 2019 (2018: 17.7%)
Following the change in government advice regarding social
distancing, we advised all self-employed agents to stop visiting
customers’ homes in late March 2020 and as a result, lending
volumes reduced significantly. This in turn has meant that the net
loan book at the start of June 2020 had reduced by around 32%
since the year-end. We launched a remote lending solution for
agents in late April 2020 so that they can continue to serve their
existing customers with whom they have an established relationship
and, subject to our usual affordability checks, can issue credit
directly into the customer’s bank account. Having piloted the
product successfully, this has now been rolled out across the
network although as an additional precaution given the current
uncertainty, we initially limited new loans issued to a maximum of
£500 and with a maximum term of 33 weeks.
Collections were also impacted by the steps taken above but we
have seen a significant increase in the use of our remote collections
channels with the result that basic collections performance (before
settlements) in April and May 2020 held up well averaging
approximately 76% of pre-crisis levels. Of those customers that have
had difficulty paying because of COVID-19, we estimate that
approximately half have been unable to pay because they can only
pay in cash and we expect that a significant proportion of such
customers will catch up on their payments as soon as the agent
returns to make collections physically.
Home credit remains an important source of credit for some of the
UK’s poorest households and we are determined to continue to
support our customers through this very challenging time. Whilst
the strong economic backdrop in recent years and the expansion
of credit generally has seen many traditional home credit
customers either reduce their levels of borrowing or migrate to
alternative sources of credit, we believe that as was the case
during the recessions of 1990-91 and again during the global
financial crisis, the tightening of credit generally may prompt a
number of former customers to return to home credit and we are
focused on ensuring that as a business we are well-placed to
respond appropriately, if and when that occurs.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 44
Divisional review continued
Central costs and exceptional items
Normalised administrative expenses were broadly unchanged at
£5.4m (2018: £5.4m). The amortisation of acquired intangible
assets includes the write-off of the remaining George Banco
intangible assets totalling £7.2m (2018: £8.7m).
In the year ended 31 December 2019 the Group incurred
exceptional costs totalling £80.6m (including VAT) (2018: £nil). The
key items within this total were: £12.8m of advisory fees and other
costs associated with the offer to acquire Provident Financial plc
on the terms set out in an offer document published on 9 March
2019, as well as the related proposal to demerge Loans at Home; a
£44.8m impairment loss on the Everyday Loans goodwill asset; a
£8.6m impairment loss on the George Banco goodwill; a £12.5m
impairment loss on the Loans at Home goodwill asset; and £1.9m
(2018: £nil) of restructuring and redundancy costs that took place
during the year. The impairment of goodwill in each business
division is a non-cash item and was driven primarily by the
reduction in stock market valuations and multiples across the
non-standard finance sector. Further details are set out in note 15
to the financial statements.
Prior year adjustment
The Group transitioned to IFRS 9 on 1 January 2018. IFRS 9
introduced a revised impairment model which requires entities to
recognise expected credit losses based on unbiased forward-
looking information and replaced 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. Through the review of the 2019 financial
statements by the Audit Committee and the new Group CFO, it
was determined that an error in the information used at the time of
calculation had resulted in an underestimation of the level of loan
loss provision required at 1 January 2018 by £3.2m and by a further
£0.8m as at 31 December 2018. A prior year adjustment to amounts
receivable from customers as at 31 December 2018 has therefore
been made by increasing the loan loss provision of both branch-
based lending and guarantor loans by £3.6m and £0.4m
respectively. The effect of this adjustment is set out in note 1 to the
financial statements.
IFRS 16
From 1 January 2019 the Group adopted a new accounting
standard: IFRS 16 Leases, replacing the previous standard, IAS 17
Leases. With a sizeable portfolio of leases in both branch-based
lending and home credit, the Group has incurred an additional
interest charge of £1.1m in the year to 31 December 2019, partly
offset by a reduction of £0.6m in administrative expenses. As at
1 January 2019, the impact of the adoption of IFRS 16 was a
decrease in net assets of £0.3m. Please refer to note 3 in the
financial statements for further details.
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, changes to the
interpretation of 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;
• Business risks:
– operational – the Group’s activities are large and complex
and so there are many areas of operational risk that include
technology failure, fraud, staff management and recruitment
risks, underperformance of key staff, the risk of human error,
taxation, health and safety as well as disaster recovery and
business continuity risks;
– reputational – a failure to manage one or more of the Group’s
principal risks 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;
– 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;
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• COVID-19 – A large pandemic such as COVID-19, coupled with
restrictions on face-to-face contact by HM Government, may
cause significant disruption to the Group’s operations and
severely impact the supply and level of demand for the Group’s
products. As a result, any sustained period where such measures
are in place could result in the Group suffering significant
financial loss; and
• Liquidity – the Group increased its total debt facilities in March
2020 with the addition of a new £200m securitisation facility and
while no repayments are due on any of its facilities until August
2022, 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. While the Group has £60.3m in cash and no need to
draw down further on the new facility to remain viable under the
Group’s base case, the impact of COVID-19 on the facility’s
financial covenants means that any further draw down would
not be possible without a suitable covenant waiver. Also, if the
FCA requirement to provide borrowers affected by COVID-19
with an emergency payment freeze and/or poor operational or
financial performance results in a significant increase in
provisions and lower net book values, there is a risk that the
loan-to-value covenants for the Group’s debt facilities may come
under pressure leading to a risk that the Group will be unable to
access its facilities.
On behalf of the Board of Directors
Jono Gillespie
Chief Financial Officer
25 June 2020
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 46
Stakeholder management and our commitment to Section 172
Long-term relationships
underpin all areas of our business
Our approach to stakeholder management
Discharging our responsibilities under Section 172
Throughout this and previous reports, we have described how our
business culture and overall approach to stakeholder management
underpin the achievement of our long-term objectives.
This approach has now been formalised as part of the revised
Corporate Governance Code (the ‘Code’) as well as in the
Companies (Miscellaneous Reporting) Regulations 2018 (‘MRR’) so
that there is now a requirement for certain companies to include a
separately identifiable so-called ‘Section 172 (1) Statement’ in the
Strategic Report explaining, inter alia, how directors have had
regard to the matters set out in Section 172 (1)(a)-(f).
To discharge our responsibilities under these requirements,
we have set out on the following pages a summary of each of
our key stakeholder groups, why they are important to us, how
we have engaged with them in 2019 and the key topics that have
been addressed. We have also provided some examples of where
decisions have been taken or where future actions were proposed
as a result of our engagement.
The Board considers that this section of the Annual Report
(pages 46 to 59) constitutes its disclosure against the
requirements of Section 172(1) of the Companies Act 2006.
Section 172 (1) of the Companies Act 2006
Duty to promote the success of the company
A director of a company must act in the way he/she considers,
in good faith, would be most likely to promote the success of the
company for the benefit of its members as a whole, and in doing
so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term;
(b) the interests of the company’s employees;
(c) the need to foster the company’s business relationships
with suppliers, customers and others;
(d) the impact of the company’s operations on the community
and the environment;
(e) the desirability of the company maintaining a reputation
for high standards of business conduct; and
What this means:
The Board is not just thinking about short-term needs and
also considers carefully the likely impact of its decisions on
the Group’s long-term prospects and value.
What this means:
Our staff and self-employed agents act as the interface
with our customers and so are key to long-term success.
What this means:
The Group draws upon the services and skills of a variety
of different suppliers and other stakeholders to provide a
quality service to its customers. Building and sustaining
these relationships is an important factor for the Group’s
long-term success.
What this means:
If the Company fails to respect how it affects communities,
it may face significant challenges to its business from
customers, regulators and government.
What this means:
A company’s reputation is hard won and easily lost –
maintaining high standards through a strong and positive
culture as well as good governance is vital for building
and sustaining long-term value.
(f) the need to act fairly as between members of
the company.
What this means:
The interests of all members are treated fairly.
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Providers of funding
Why they matter
Without sufficient capital and funding the Company
could not operate its business model or execute its stated
business strategy. Providers of both debt and equity are
key to the long-term success of the Company.
How we engage
The Board aims to build and maintain quality relationships
with key sources of funding through a programme of regular
engagement thereby ensuring that, should additional funding be
required at some point in the future, such providers will be well-
versed in the latest Company developments and better placed
to provide funds in a timely manner than if they were looking
at the Group for the first time. The Directors deploy a variety
of different channels including regular public disclosures such
as the 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 to
help funding providers, whether debt or equity, remain informed
about the Group’s latest performance, strategy and prospects.
In addition, throughout 2019, the Group Chief Executive, Chief
Financial Officer, and Director of Investor Relations and
Communications met with equity and debt investors on request as
well as during organised roadshows supported by the Company’s
advisers. There were over 80 such meetings and interactions
during 2019 and the Group also attended and presented at a
number of conferences. The Chairman and other Non-Executive
Directors also met with investors during 2019 without the
executive management present. The Group is currently covered
by six sell-side research analyst teams and aims to maintain
strong relationships with each of them as well as a number of
other analysts covering the non-standard finance sector.
The Group’s corporate website is a major source of information for analysts, investors
and other providers of funding: www.nsfgroupplc.com
Key topics
Outcomes and actions
The financial and operational performance of the Group
and each of its divisions remain the primary focus for this
stakeholder group. Other key topics include major strategic
developments and issues such as the firm offer to acquire
Provident Financial plc, changes to the regulatory environment,
corporate governance, risk management and capital structure.
The Board receives a regular update at each Board meeting
regarding key market developments over the previous month,
including any feedback received from both equity investors
as well as lenders to the Group. The Board also receives
copies of any third-party research that is published together
with an update to the consensus of analyst forecasts. Taking
these views into account is seen by the Board as an essential
part of the business management process at NSF.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 48
Stakeholder management and our commitment to Section 172 continued
Customers
Why they matter
Our customers lie at the heart of our business model
(see pages 10 to 11) and without them we have no business.
Should we fail to deliver great service or not
treat our customers fairly then we will struggle to meet
our long-term financial and strategic objectives.
How we engage
Monitoring and influencing the quality of our customers’
experience is key. Given the high proportion of our overall
customer base that we deal with face-to-face (accepting that
COVID-19 has required that we adapt our approach in 2020), we
are fortunate as we can often obtain immediate feedback on how
we are performing and how we might improve. Whilst important,
we don’t just rely on this single feedback loop but also track other
independently sourced intelligence via customer surveys as well
as online recommendation engines such as Trustpilot and Feefo1.
We also work hard to ensure that if something goes wrong,
our complaint handling processes deliver fair and appropriate
outcomes that stand up to scrutiny and challenge. Numbers of
complaints and root cause analysis are datapoints that we track
and monitor closely.
Feefo platinum award
Everyday Loans once again received platinum status on Feefo1
based on customer experience ratings over the past year.
Everyday Loans
Congratulations on your award.
Matt West, Chief Executive Officer.
1 www.feefo.com and www.uk.trustpilot.com are both third-party customer review sites.
Key topics
Outcomes and actions
We are always looking at ways to improve our service to customers
and so seek feedback on all areas of the customer journey
including product design, payment mechanisms, our lending,
collecting and complaint handling processes.
We aim to capture these learnings and once understood and
properly tested, we then seek to embed any consequent changes
into our policies and procedures; our training programmes; our
organisation structure; as well as our incentive arrangements.
We also monitor and investigate thoroughly any complaints we
receive so that we can learn from our mistakes and improve the
quality of our service (see ‘Our strategy and KPIs’ on page 23).
Each of these and other measures are captured within a bespoke
‘good customer outcomes dashboard’ that is being developed
internally and is reviewed regularly by the Group’s Risk Committee
(see the Risk Committee Report on page 93).
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If we really care about our customers, why do we
charge such high APRs?
NSF normalised Group revenue
In the context of customer engagement and the delivery of good
customer outcomes, this is a question that we are often asked.
To answer it properly, 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. Whilst
additional credit risk is one factor, for our highest APR products (in
home credit), it is also because loans tend to be for short periods of
less than one year and because they tend to be for small amounts.
Another factor is that the costs of delivering and collecting that
loan, mainly face-to-face, are relatively high – in other words,
while our business model (see pages 10 to 11) 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 an
expensive model to operate.
The chart opposite illustrates what happens to NSF Group
revenue, based upon the 2019 normalised results. Whilst each of
our three businesses has different dynamics, we have sought to
provide an NSF overview as follows:
Impairments and modification loss
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. There is also a loss of
revenue when loans are rescheduled or modified in order to help
any customers that may be experiencing financial difficulty. Higher
risk customers tend to result in higher impairments and so when
lending to such customers, lenders need 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 administration 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, but
only 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 or other distributions and
by reinvesting funds to deliver future growth.
100%
25%
Impairments and
modification losses
34%
People costs
%
0
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18%
Other administration costs
15%
Cost of funds
2%
6%
Taxes
Profit after tax
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview
50
Stakeholder management and our commitment to Section 172 continued
Employees and self-employed agents
Why they matter
As a relationship lender, our workforce (including
self-employed agents) is a key enabler in the execution
of our business strategy and in the deployment of our
business model.
How we engage
As well as providing a comprehensive induction process, all new
joiners also take part in extensive and tailored training modules so
that they can make a contribution as soon as possible after they join.
Even after they have been in their roles for a while, we aim to
continue to develop the talents of all of our staff and self-employed
agents through a programme of training modules. Online training
provides us with a clear audit trail for each participant, giving us
the confirmation that our people have the skills they need to perform
their roles effectively. While regular intranet communications
and engagement surveys provide updates on a raft of different
measures that are tracked over time, it is through regular site visits as
well as management conferences and workforce forums that staff
and self-employed agents have the opportunity to meet senior
members of the leadership team, including members of the NSF
Board, and can air any concerns or issues in person. For further
details regarding our workforce engagement see pages 74 to 77.
Everyday Loans hosted a series of culture workshops across the UK during 2019.
Key topics
Outcomes and actions
While our staff and self-employed agents appear to be generally
happy in their work (see results from our engagement surveys
on page 23), as for any business, there is always room for
improvement. Key topics raised include work/life balance,
opportunities for career progression, remuneration and benefits,
management processes as well as ideas to improve working
practices and profitability.
As a Group, we are focused on sustaining a positive business
culture and continue to promote our core values and behaviours
through a variety of different channels including the Group’s
intranet, regular training, workforce forums and performance
reviews.
With an increased awareness about the issues surrounding mental
health, during 2019 we started a process of training our staff on
this important topic as well as other aspects of wellbeing at work.
Everyday Loans now has an Employee Assistance Programme
(‘EAP’) that includes access to online and telephone support
including counselling, legal advice, health, money and family
advice for those that may need it. Separately, we have started to
introduce a number of ‘mental health first aiders’ across the Group
so that as well as having access to external sources of support,
we also have staff on the ground to offer face-to-face help. By
demonstrating that we care deeply about them, we aim to instil
in all of our people a similar sense of responsibility for all of the
Group’s 200,000 customers.
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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 2019 (hourly pay) and
bonus paid in the 12 months to 5 April 2019. The figures for 2019
are as follows (the comparative figures for 2018 are also included
for reference):
Pay and bonus – difference between males and females1
20192
Hourly pay gap
Bonus pay gap
20182
Hourly pay gap
Bonus pay gap
Mean
Median
19.19% 8.94%
28.20% 17.44%
Mean
Median
24.08% 12.50%
1.56%
13.99%
1 A positive percentage figure indicates that female employees typically 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 2019 and 2018 (hourly pay) and bonus paid in the 12 months to 5 April 2019
and 2018.
Proportion of males and females receiving a bonus payment
Male
Female
87.2% 78.5%
78.5% 66.9%
Dying to work
John van Kuffeler, Group Chief Executive signing the Dying to Work charter in 2018.
Having signed the TUC’s ‘Dying to Work’ Charter in 2018, we
had to put our commitment into practice in 2019 as one of our
employees became terminally ill and whilst they had offered to
step down from their role after a period away from the office, we
continued to pay them in full. Following their tragic death, we were
in regular contact with the family of the deceased and ensured
that the death in service benefits were paid out in full.
Seeing our commitments in action helps to build trust and
confidence in the workplace – key foundations for an engaged
and productive workforce. We are also committed to rewarding
our staff properly and ensuring we retain a good gender balance.
2019
2018
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:
April 2019
Number of Company Directors
Number of senior managers
(excluding Executive Directors),
Directors of subsidiary businesses
and heads of function
Total number of employees
April 2018
Number of Company Directors
Number of senior managers
(excluding Executive Directors),
Directors of subsidiary businesses
and heads of function
Total number of employees
Male
Female
Total
5
1
6
29
477
10
410
39
887
Male
Female
Total
5
1
6
29
473
13
390
42
863
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 52
Stakeholder management and our commitment to Section 172 continued
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 76% of senior roles were held by
men (2018: 71%) and 24% were held by women (2018: 29%) as
at the snapshot date).
As can be seen in the quartile graphs below, 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.
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. 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’ 2019 figures1 put the mean salary
gap at 33.3% for financial institution managers and directors.
Whilst pleased that we appear to have a smaller gap than the
industry more generally, we are committed to reducing this further
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.
1 ONS: Gender Pay Gap in the UK: 2019, 29 October 2019.
Gender mix by pay quartile (quartile 1 being the lowest and quartile 4 being the highest).
2019
Quartile 1
Quartile 2
2018
Quartile 1
Quartile 2
Male 43%
Female 57%
Quartile 3
Male 52%
Female 48%
Quartile 4
Male 39%
Female 61%
Quartile 3
Male 53%
Female 47%
Quartile 4
Male 58%
Female 42%
Male 66%
Female 34%
Male 62%
Female 38%
Male 65%
Female 35%
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Regulators
Why they matter
As a leading operator in the sector, maintaining a
positive relationship with regulators is key. Through our
engagement we aim to ensure they remain well-informed
about market dynamics, as well as how any existing or
proposed regulatory changes may impact consumers
and the workings of the non-standard finance market
more generally.
How we engage
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 and other regulatory bodies,
including HM Treasury, fully informed regarding the Group’s
broader strategic plans.
The Group had a number of engagements with the FCA during 2019, covering a broad
variety of topics including strategic and sector-wide developments, as well as more
operational matters as part of the regulator’s supervisory role.
Key topics
Outcomes and actions
We had several interactions with the FCA, as well as a number of
other regulators, including the Prudential Regulation Authority
(‘PRA’), both before launching our firm offer to acquire Provident
Financial plc and during the offer itself. A variety of issues were
raised and discussed with them including our detailed plans for the
enlarged Group and how they would not result in a deterioration
in quality of service for customers. Outside of the offer process, we
also responded to a number of data requests from the FCA that
continues to track the performance and dynamics of a number of
segments of the non-standard finance market.
Following the completion of a detailed and multi-firm review,
along with a number of other guarantor lending companies, the
Group received a letter from the FCA in November 2019 identifying
a series of recommendations and suggestions of ways in which
the quality of information provided to guarantors at the point of
lending might be improved. Drawing upon some draft guidance
that is being prepared by industry associations, the Group is
developing a series of steps to implement the FCA’s
recommendations.
In April 2020, the Group also contributed to the FCA’s consultation
on forbearance measures for borrowers affected by COVID-19,
both directly and through industry associations.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 54
Stakeholder management and our commitment to Section 172 continued
Partners and suppliers
Why they matter
While there are some instances where we can leverage
the scale of the Group to obtain better terms, the different
business models and customer demographics of each of
our divisions means that, for most suppliers, the relationship
is managed at a divisional rather than Group level. As a
result, whilst any failure in supply would be unlikely to have
a material effect on the Group as a whole, culturally we are
focused on ensuring we are professional at all times and
want to establish a reputation as being a reliable customer
with whom other firms can and want to do business.
How we engage
When taking on a new supplier we conduct detailed due diligence
on them to ensure that we understand not only the quality of their
products and services but also their policies, procedures and
working practices, making sure that they are consistent with our
own values and business approach. We also make sure that our
suppliers comply with the Modern Slavery Act 2015 and conduct a
credit check to ensure they remain financially robust. As well as
keeping suppliers informed of our business performance through
public disclosures, each division seeks to maintain strong
relationships through face-to-face meetings and regular contact by
phone. For a limited number of services such as insurance, we can
sometimes arrange supply on a Group-wide basis. Other key
suppliers include financial brokers, credit reference agencies and
providers of data storage.
14The Group works with 14 direct introducers (financial brokers
and lead generators) and all the major price comparison
websites for loans in order to attract new customers.
Key topics
Outcomes and actions
As well as ensuring that the quality of the services being supplied
meets the standards expected, through our engagement we also
monitor our payment terms with suppliers closely to ensure we pay
them within the constraints of the Prompt Payment Code.
If a supplier falls short of the standards we expect or if there is a
risk that continuing our relationship may compromise the Group’s
reputation or business prospects, then we will look to replace
them with a comparable alternative, having already identified
a number of these at the time of the original tender.
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Communities and charity
Why they matter
Much of our business is conducted face-to-face through
extensive national networks and so we recognise the
importance of becoming a valued member of the towns
and cities where we have a physical presence. With
over 940 staff, 890 self-employed agencies and 200,000
customers that we serve through 140 locations across
the UK, as a Group we are already deeply embedded
within the communities where our employees, customers,
suppliers, regulators and other key stakeholders are based.
How we engage
As well as being a stand-out employer and the provider of quality
services to our customers, we also aim to put something back into
local communities through physical as well as financial
contributions.
£53,220
was donated to various charities in 2019
A Loan Smart community event in Darlington in September 2019 was supported by NSF
and Loans at Home staff who were also joined by local MP Jenny Chapman to help
raise awareness about the dangers of illegal lending.
Key topics
Outcomes and actions
Whilst keen to support local communities and charities, the Group
has finite resources and so must try and strike an appropriate
balance between allocating available funds and the time of our
staff against the delivery of the Group’s other corporate objectives.
As well as supporting debt-related charities such as Loan Smart,
we also ask our staff which other charities they would wish to
support at the beginning of each year.
In 2019 the Group donated a total of £53,220 (2018: £84,082) to a
range of charities including Prostate Cancer UK and Loan Smart.
Separately, the Group once again supported CRXSS PLATFXRM,
an urban dance, music and arts festival in Central London
encompassing an impressive range of artistic partnerships.
As well as financial donations, our staff also took part in a number
of community-based events such as for Loan Smart, a charity
dedicated to raising awareness of the dangers of illegal lending.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 56
Stakeholder management and our commitment to Section 172 continued
Environment
Why it matters
Environmental issues are becoming an increasingly
important issue for many of our key stakeholders
including customers, staff and HM Government.
How we engage
Whilst we are a relatively small company compared with many
others, given the nature of our business we do not believe that we
have a material impact on the environment. That said, we have
grown quickly over the past few years and are keen to minimise
any impact that our activities might have. During 2019 it was
identified that the Group qualified for the Energy Savings
Opportunity Scheme (‘ESOS’), established by the Energy Savings
Opportunity Scheme Regulations 2014. A Group-wide project
commenced to ensure compliance with this energy assessment
and energy saving scheme. Having developed and implemented
a strategy to comply with the ESOS requirements, a third-party
review confirmed this in a report that has since been submitted to
the Environment Agency. Under the terms of the scheme a further
audit will be conducted in four years’ time.
-11%in kW hours of electricity used in 2019
Key topics
Outcomes and actions
We seek to monitor our utilisation of water and power as well as
our production of CO2.
An update on the estimated volume of CO2 production from car
mileage and volume of water and electricity used during 2019
together with comparisons with 2018 and 2017 across all three
business divisions is summarised below.
2019
2018
2017
kg of CO2
produced
kW hours of
electricity used1
m3 of
water used1
315,752
1,151,684
128,947
292,500
1,299,408
55,802
345,000
667,253
29,389
1 Where a location is subject to an all inclusive service charge, estimates of total
usage have been made based on the average usage of our divisional offices.
The increase in CO2 emissions was due to an increase in the
number of fleet vehicles at Loans at Home from 116 to 140 in 2019
while the modest reduction in electricity usage was due to a lower
number of Loans at Home offices that helped to offset the increase
in Everyday Loans branches. The increase in water usage reflected
the move to a new facility for the Guarantor Loans Division and
additional branches. During 2019 we began to also capture gas
usage and plan to include this in future annual reports.
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I can honestly say
Loans at Home is the best
company I have worked
for – great people and
a great company.”
Alison Nicholl
Test manager, IT & Architecture
Shared purpose
through teamwork
Having joined Loans at Home in May 2017 from
a major competitor where she had worked for
almost 11 years in a similar role, Alison has
become an invaluable member of the in-house
IT & Architecture team.
Introducing new technology to staff and a large
network of self-employed agents is never easy;
but through hard work, patience and clear
communications, Alison has helped to ensure that
there have been no major hiccups; building trust and
confidence between customer facing staff and agents
and the infrastructure and back-office teams. This has
been reflected in the number of nominations she
received during 2019 in recognition of her work rate,
her commitment and for being a real team player.
Corporate GovernanceStrategic ReportAdditional InformationFinancial StatementsOverview
58
Stakeholder management and our commitment to Section 172 continued
Throughout 2019 and into 2020 the Board
has discharged carefully its responsibility
of ensuring that the future prosperity of the
business is safeguarded, whilst taking into
account the impact of its decisions on key
stakeholders and the wider community.
Some examples of decisions taken and how
the views of stakeholders were considered
are summarised below.
Our
Section 172
responsibilities
in action
1
Offer to acquire
Provident Financial plc
The Group’s firm offer to acquire Provident,
although unsuccessful, was a major
strategic initiative in 2019. It required many
Board decisions to be taken and had the
potential to impact a large number of
stakeholders. In assessing the merits of
the offer, as well as conducting detailed
analysis of the commercial and financial
implications, the Board also took into
account the impact on other constituencies
and, where possible, consulted with the
relevant stakeholders before and after the
offer was announced.
Customers
The quality of service in home credit was
a key area of focus where the Board
believed a successful bid would deliver
improved outcomes for Provident’s
customers. Whilst unable to contact
Provident customers direct, the Board
sought to convey its plans and how they
would benefit customers through the many
press announcements and public
documents issued during the offer.
Shareholders
Despite the strong commercial and
financial logic of the offer, the relative
scale of NSF and Provident meant that
it was important to test that logic with
some of Provident’s largest shareholders,
shareholders that were also significant
holders of NSF shares. Having explained
our plans in advance (in full compliance
with takeover rules), and listened to
shareholders’ views, we amended certain
aspects of the offer before launch. We
continued to consult extensively with both
Provident and NSF shareholders through
a number of face-to face meetings,
conference calls and public documents
throughout the offer. Owners of over 99%
of the NSF shares voted at an extraordinary
general meeting held in March 2019 were
in favour of the offer.
While owners of 54% of Provident’s shares
accepted the offer, other conditions could
not be met in time and the offer lapsed on
5 June 2019.
Staff and self-employed agents
The Board had a clear vision of how
opportunities for staff development
and progression would work within the
enlarged Group. In particular, the Board
believed that the offer would help to
mitigate the ongoing loss of jobs within
Provident’s home credit operation, given
the challenges it had been facing.
As the offer involved the separation of
Loans at Home from the Group, ensuring
that such an exercise would not unduly
impact Loans at Home’s management,
staff and self-employed agents was also
considered carefully.
Regulators
Members of the Board consulted with
both the FCA as well as the PRA to make
them aware of our plans before launch
and also to allow them to identify any
particular concerns that they might have
well in advance. Regular communication
continued prior to the offer being
made and also following launch.
All communications with regulators
were reported back to the Board for
consideration and input as the
dialogue progressed.
Communities
Prior to and during the bid process, the
Board considered and engaged with
local MPs in the communities served by
both Provident and NSF and saw that the
enlarged Group would be better placed
to continue to support a number of key
community initiatives.
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Board decision to
roll out a series of
cultural initiatives
across the Group
As noted throughout this Annual Report
the Board believes that having a strong
and positive culture is essential for the
Group’s long-term success. During 2019
the Board agreed to the investment and
roll-out of an extensive programme of
culture workshops and training across
both the branch-based lending and
Guarantor Loans Divisions. While the
process for developing and nurturing the
Group’s culture is very much ‘work in
progress’, the Board is committed to doing
so and believes it will help us to make
better decisions for our key stakeholders.
Shareholders
A well run business with positive culture
tends to enjoy lower staff attrition and
good customer experiences. The Board
focused on the need to build strong
cultures in the Group’s newer acquisitions
and supported the decision to invest in a
tailored culture programme for branch-
based lending and guarantor loans. The
Board has witnessed a solid operational
performance by all three businesses over
the course of the year and anecdotal
evidence links some of this performance
back to this investment.
Employees
The cultural initiative was directly linked
back to the Group’s employees and
consideration of their wellbeing and
mental health as much as it was seen as
a driver of future financial performance.
The Board has supported the programme
along with other initiatives such as the
introduction of mental health first aiders
and receives regular updates on progress.
Customers
Having already embedded training
modules on how to identify and manage
vulnerable customers, in 2019 the training
of a number of mental health first aiders
within the Group brought additional
benefits. As well as providing support for
staff who need it, the increased awareness
of these important issues is enhancing the
ability of our staff to identify and help
customers with similar or related issues.
2
3
Consolidation of
guarantor loans
operations into a
single location
Having already shifted all collections
activity to Trowbridge earlier in the year,
the Board approved the consolidation of
all guarantor loans-related activity to a
single location in Trowbridge in October
2019. This decision was taken after
considering the impact on a number
of key stakeholders.
Shareholders
The move to a single location is expected
to help release a number of operational
benefits including greater consistency
across key processes, with teams now
located together, as well as lower costs by
not having to operate from two locations.
The Board was therefore able to determine
the financial benefits of the project and the
positive impact on shareholder returns.
Employees
By moving roles from Buckinghamshire
to Wiltshire, a number of staff would
be impacted. There was a period of
consultation following which a number of
staff left the Group and, where possible, a
number were retained and filled vacancies
in other areas of the business. Improved
team cohesion and job satisfaction
resulting from the move to a single location
was also considered within the project
review. The Board received regular monthly
updates during the project that is expected
to complete during 2020.
Customers
With greater consistency of processes
and procedures, the business is much
better placed to deliver good customer
outcomes on a consistent basis. By being in
the same location there has been a marked
improvement in communications both
between lending and collections teams
and by having the senior management
team all based in one location.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 60
Corporate Governance
Chairman’s introduction
Key developments
Our contested £1.3bn offer for Provident Financial plc was
supported by NSF shareholders and required a proportion
of the Board’s time during the first half of 2019, exposing
the Group to additional execution risk. Whilst the offer was
ultimately unsuccessful, we are pleased to report that the
potential disruption caused by the bid activity did not have a
material impact on the business operations of the Group.
In branch-based lending, the loan book grew by 18% and we
opened another eight new branches. We also launched a cultural
programme called ‘The Everyday Way’ that seeks to embed a
number of core values that together are focused on the delivery of
good customer outcomes and are consistent with the values and
behaviours of the Group. In guarantor loans, having completed
the infrastructure transition to a single loan management
platform, the business is finalising the shift to a common front-
end thereby ensuring a consistent customer experience across
both the George Banco and TrustTwo brands. During the
second half of 2019 we accelerated the consolidation of all of
our guarantor loans operations onto a single site in Trowbridge,
removing duplication and releasing a number of operational
efficiencies. None of these developments impeded loan book
growth that increased by 28% during the year. In home credit, we
continued to evolve our technology infrastructure, streamlining
the customer journey wherever possible whilst also embedding
new regulatory requirements. The proposal to demerge Loans
at Home as part of the offer for Provident highlighted both the
quality of our governance processes and the strong position
that Loans at Home now has in the home credit market.
With the combined loan book having grown by 18% to £360m in
2019, we took the opportunity in March 2020 to augment our funding
arrangements with a new £200m securitisation facility. The new
facility was put in place to repay £120m from the more expensive
term loan facility with the remainder available for growth at the
Group’s branch-based and guarantor loans divisions, subject to
compliance with financial covenants. As noted in the Group Chief
Executive’s report, the Audit Committee report and the independent
auditor’s report, having drawn £15.0m under the facility, the impact
of the prior year adjustment and COVID-19 on the loan book has
prompted a technical breach of certain covenants, preventing
further drawdown on the new facility. However, negotiations with
the lender have been positive and temporary relief has been
provided whilst a more permanent agreement is reached.
We continued to engage with investors through a comprehensive
programme of investor relations including one-on-one meetings,
conference calls, results presentations, a governance dinner
hosted in October 2019 and an investor day held in January 2020.
The Board hopes to build on the feedback received through
increased direct shareholder contact.
We continued to develop our corporate governance framework
and implemented the Group-wide framework approved at
the end of 2018. A number of improvements were made in 2019
including updates to the terms of reference of each committee
(for example the Nomination & Governance Committee now
considers governance and culture more specifically and the
development of the role of Heather McGregor as the Board
member with responsibility for engagement with the Group’s
workforce, as well as enhancements to the Remuneration Policy
(see page 94)) that also now reflect the recommendations set out
in the revised Corporate Governance Code guidance. Following
the external Board evaluation conducted in 2018 by Lintstock,
a specialist governance consultancy, the Company followed
the ‘three-year cycle’, with an internal review in 2019, building
on the feedback and matters raised by the external review.
Dear Shareholder,
I am pleased to present our 2019 corporate governance report for
the Company which incorporates reports from the Chairs of each
of the Nomination & Governance, Audit, Risk and Remuneration
Committees on pages 82 to 113.
As summarised in my Chairman’s statement on page 6, 2019
included some significant activity for the Group. Throughout the
year, the Board has remained committed to applying the highest
standards of corporate governance. Despite not having a premium
listing on the Main Market of the London Stock Exchange, the
Board has sought to comply with the UK Corporate Governance
Code and has taken steps to implement the Revised Code
published in July 2018 (together, the ‘Code’)1. The Board has also
taken note of the Financial Reporting Council’s Annual Review of
the UK Corporate Governance Code that was published on
I January 2020.
A revised governance framework was adopted by the Board at the
end of 2018 and was rolled out across the Group during 2019 so
that a clear process for evaluation of governance, with oversight of
the process at Board level is now in place.
The performance of the Board and its various committees are
explained in the following sections of this Annual Report. 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 61 below.
The scale and complexity of the Group requires that during the
development and execution of its business strategy, the interests of
a broad group of stakeholders are taken into account (see pages
46 to 59). Whilst the Board’s primary goal is to create long-term
value for the Company’s shareholders, there is also a clear focus
on ensuring that the way we operate our businesses reflects our
culture, values and model behaviours that have been shaped
to deliver good customer outcomes, underpinning the long-term
sustainability of our business.
1 A copy of the Code is available from the Financial Reporting Council’s website:
www.frc.org.uk.
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2019 saw a number of changes at Board level (see Governance at
a glance on page 64), with Miles Cresswell-Turner leaving the
Board in October 2019 and Nick Teunon announcing his planned
departure from the Board during 2020 (he left the Board on
30 April 2020). Niall Booker was also appointed as Senior
Independent Director in November 2019, more clearly defining the
role he had been performing to date. I’m pleased that the Board
remains a strong cohesive unit moving into 2020, with Jono
Gillespie joining the team formally as CFO from 1 April 2020,
bringing a wealth of experience gained in the non-standard sector
over the past 22 years.
The structure of the Remuneration Committee was enhanced
during 2019: underpinning her role as Non-Executive Director with
responsibility for employee engagement, Heather McGregor was
appointed as Chair of the Remuneration Committee in October
2019, replacing me, although I remain a member of the Committee.
The Group operates a SAYE Share Scheme and 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. The
Board acknowledges that the current share price means that
membership of the scheme is low and aims to address this in 2020.
The Group also established an Employee Benefit Trust during the
course of the year to facilitate the satisfaction of obligations under
the Group’s existing employee-related share incentive schemes.
The Board remains focused on enhancing workforce engagement
and embedding the strong cultural values of each business
through a combination of employee forums that now take place
across the Group, improved engagement surveys and the
deployment of tailored cultural programmes across all three
business divisions.
In 2020, the Board’s immediate focus following the COVID-19
outbreak has been to safeguard the health and safety of our
customers, our staff and self-employed agents. In developing our
plans to do so, we have also sought to mitigate, as far as possible,
the impact on our operational and financial performance and to
avoid putting our business at risk. As noted above, whilst the
impact of the prior year adjustment and COVID-19 on the loan
book has meant that there exists material uncertainty over Group’s
ability to draw down further on the new securitisation facility, the
Board is in discussions with its lenders regarding possible future
covenant waivers, whilst at the same time evaluating all funding
options, which may include the issue of further equity, in order to
ensure the Group has a strong and liquid balance sheet.
Combined, it is hoped that these actions will unlock access to the
facility and help to reduce overall funding costs as well as provide
additional finance for future growth.
We also plan to enhance our governance principles and processes
through a series of actions including: increased Board oversight of
the effectiveness and maturity of governance in each of the
Group’s core business operations; enhancing the role of Heather
McGregor as Non-Executive Director with responsibility for
engagement with the workforce; and ensuring that the
governance framework now in place is nurtured and maintained
whilst continuing to deliver benefits for all of our key stakeholder
groups. In a challenging macroeconomic environment,
maintaining strong governance and management controls
become even more important to protect, build and sustain
long-term value and the Board is determined that this remains the
case at NSF.
Charles Gregson
Non-Executive Chairman
25 June 2020
NSF is committed to high standards of corporate governance
Statement of compliance with the Code
As mentioned above, whilst the Company 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 implement and comply with
the revised Code throughout 2019, wherever possible and
appropriate to do so. 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.
Whilst the Board maintains that a high standard of governance
was achieved throughout 2019, 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.
Provision 9 – The Company does not comply with provision 9
of the Code, as the Board does not consider Charles Gregson
to be independent as a result of him being a holder of Founder
Shares. More details on the Founder Shares are set out in the
Directors’ Remuneration Report on pages 94 to 113. The Board
determines that Charles Gregson would be an independent
Non-Executive Director in the event he had not held
Founder Shares.
Provision 11 – Following the removal of Miles Cresswell-Turner
from the Board on 21 October 2019, the Company now complies
with provision 11 of the Code. Prior to 21 October 2019, the
Company did not comply with provision 11 as not more than half
the Board (with the exception of the Chair) were independent
Non-Executive Directors.
Provision 12 – The composition of the Board is considered
regularly, both formally through the annual Board evaluation
process (which in 2018 was conducted by Lintstock, a specialist
governance consultancy) and also more regularly through
discussion at the Nomination Committee. In light of the
continued expansion of the Group’s operations, the Board
decided to appoint Niall Booker as Senior Independent Director
in November 2019. Whilst not required under the rules for a
Standard Listed company, we have made clear our desire to
align more closely with the July 2018 Corporate Governance
Code wherever possible and appropriate to do so. This
appointment brought the Company in line with provision 12 of
the Code.
Provision 24 – The Company does not meet provision 24 of the
Code, due to the Chairman of the Board also being a member of
the Audit Committee. As outlined above, the Board considers
that the challenge and expertise brought to the Committee by
Charles Gregson makes it appropriate for him to remain a
member of the Audit Committee.
Provision 32 – The Company did not meet provision 32 of the
Code, due to the Chairman of the Board also being a member
and Chair of the Remuneration Committee. As explained
previously, it is recognised that, in accordance with the Code,
Charles Gregson was not independent on appointment
(provision 9). On 31 October 2019, Charles Gregson resigned as
Chairman of the Committee and Heather McGregor was
appointed Chair of the Remuneration Committee, thereby
bringing the Company closer to full compliance with provision
32. 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, the
Board has deemed it appropriate for Charles Gregson to remain
a member of the Remuneration Committee.
Compliance with the provisions of the Code will remain under
review as the Company’s strategy and Board structure develops.
The Company has implemented the new Code provisions over
the course of the year where possible, particularly with regard
to remuneration (provisions 36 and 38) and is committed to
complying and enhancing compliance with the requirements
of the new Code, where appropriate to do so, during 2020.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 62
Board of Directors
Meet the Board
of Directors
Skills and experience:
John has extensive sector experience from
his time at Provident Financial plc, Marlin
Financial and Medens Trust, and brings
a wealth of other valuable experience to
NSF including: dealing with regulation and
regulators, strategy, people development
and management, ensuring good customer
outcomes, IT development and migration,
banking operations, mergers and acquisitions,
capital and liquidity, and also managing
businesses through recessions and financial
crises.
Current external appointments:
Non-Executive Chairman of Paratus
AMC Limited.
Background and previous appointments:
Chief Executive and then Chairman of
Provident Financial plc (combined total of 23
years). Chairman of Marlin Financial Group
Limited, the consumer debt purchasing
company (four years). Chairman of Hyperion
Insurance Group Limited (five years). Prior to
these roles, John had also been Chief Executive
of Brown Shipley Holdings PLC which included
Medens Trust Limited, a consumer car finance
company; Chairman of the credit committee of
Brown Shipley Holdings PLC’s main banking
subsidiary, Brown, Shipley & Co. Limited;
Chairman of the J.P. Morgan Fleming
Technology Trust PLC and also Chairman
of the Finsbury Smaller Quoted Companies
Trust PLC.
Skills and experience:
Jono is a chartered management accountant,
and is a member of the Chartered Institute
of Management Accountants. He has held
senior financial and technology positions in
non-standard financial companies throughout
his career, and brings solid financial,
commercial, analytical and digital technology
experience across a range of non-standard
financial channels to the Board.
Current external appointments: None.
Background and previous appointments:
Chief Financial Officer of Loans at Home Ltd.
Change and Technology Director of the
Consumer Credit Division of Provident Financial
plc. Finance Director of the Consumer Credit
Division of Provident Financial plc. Various
Head of Function roles across finance,
performance analysis, business intelligence
and strategic marketing at Provident
Financial plc.
John de Blocq van Kuffeler, 71
Group Chief Executive
Appointed 8 July 2014
Committees D
Jono Gillespie, 47
Group Chief Financial Officer
Appointed 1 April 2020
Committees D
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Skills and experience:
Niall has spent 35 years in banking providing
him with a wide range of experience in both
consumer and wholesale products. His
sub-prime financial experience includes his
time at Household International (part of HSBC).
He also has vast experience of mergers and
acquisitions having looked to buy banks whilst
at HSBC and also from selling cards and auto
businesses in the USA. Dealing with regulation
and regulators has been an important
aspect of Niall’s career and he has extensive
experience of dealing with shareholders
during the sub-prime crisis in the US and
during the recapitalisation of the Cooperative
Bank in the UK.
Other relevant experience includes capital and
liquidity management, people development and
management, strategy, banking operations,
customer outcomes, and IT migration. Niall
has been a member of the College Council at
Glenalmond College since 2012 and became
Chairman of the Council in August 2017.
Current external appointments:
Chairman Glenalmond College Council.
Chairman of Monument Corporation PLC.
Background and previous appointments:
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. CEO of the
Cooperative Bank (three years) having been
tasked with rebuilding the capital base,
stabilising the operational infrastructure and
maintaining the franchise after the problems
the bank faced in 2013.
Director profiles can be found on the Group’s website:
http://www.nsfgroupplc.com/about-us/our-leadership
Niall Booker, 61
Senior Independent Non-Executive Director
Appointed 9 May 2017
Committees A / N / R / RC
Key to committees:
Audit Committee: A Nomination Committee: N
Risk Committee: RC Remuneration Committee: R
Disclosure Committee: D
Chair:
Charles Gregson, 72
Non-Executive Chairman
Appointed 10 December 2014
Committees A / N / R / RC
Professor Heather McGregor CBE, 58
Independent Non-Executive Director
Appointed 10 December 2014
Committees A / N / R / RC
Sarah Day, 48
Company Secretary
Appointed 27 November 2017
Committees D
63
Skills and experience:
Charles is a highly experienced executive having
previously held a number of senior positions in
finance. He has long experience of the sector
including extensive experience at Provident
Financial plc, Wagon Finance and International
Personal Finance plc.
Charles also has extensive experience of
the regulatory environment having worked
for companies such as ICAP/NEX, CPP and
St James’s Place Wealth Management, and
has more than 20 years’ experience as a
non-executive director and chairman of both
public and private companies.
Current external appointments:
None.
Background and previous appointments:
Non-Executive Chairman of NEX Group plc,
formerly ICAP plc (20 years). Non-Executive
Chairman of Wagon Finance Group Limited
(ten years). Non-Executive Director and Deputy
Chairman of Provident Financial plc (nine
years). Non-Executive Director of International
Personal Finance plc (three years). In addition,
Charles has been Chairman of CPP Group plc;
Chairman of St James’s Place plc; Executive
Director of United Business Media plc (formerly
MAI plc) (18 years); and Global CEO and
Chairman of PR Newswire (three years).
Skills and experience:
Heather’s expertise is in the financial services
sector and also in people, human resources,
diversity and inclusion. She has an MBA
from the London Business School, a PhD in
behavioural finance, and has experience of
investment banking.
She brings experience of serving on the plc
board of a much larger company that is in a
different but highly-regulated sector.
Heather is a founding member of the steering
committee of the 30% Club UK, 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, and is the
designated Non-Executive Director for
workforce engagement.
Skills and experience:
Sarah is a chartered accountant. Having
trained and qualified with PwC, she initially
gained experience of the non-standard
finance sector via the home credit industry
through involvement in external audit.
She established the UK Consumer Credit
Division Governance and Company Secretarial
function at Provident Financial plc, and joined
the NSF Group in August 2016 as Financial
Controller and Company Secretary of Loans
at Home. Sarah brings risk management
experience to the role and in addition to being
Company Secretary of NSF, oversees risk
reporting, governance and the Company
secretariat departments across the Group.
Skills and experience:
Nick is a chartered accountant. He has held
senior financial positions in a number of
sectors and has significant experience of
working with growing businesses and of
corporate transactions and fundraising.
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.
Current external appointments:
Executive Dean of Edinburgh Business School,
the business school of Heriot-Watt University.
Non-Executive Chairwoman, Taylor Bennett
Limited. Non-Executive Director and member
of the Audit Committee, International Game
Technology PLC. Heather is also a Member of
the Honours Committee for the Economy.
Background and previous appointments:
Heather began her early career in financial
communications and investor relations,
including as an employee of ABN AMRO’s
investment banking division. Owned and led
Taylor Bennett (17 years), an executive search
firm specialising in the communications
industry, and while there founded the Taylor
Bennett Foundation which provides career
access for minority ethnic graduates.
Current external appointments:
None.
Background and previous appointments:
Varied roles at Provident Financial plc
(17 years) initially working in the International
Division (now IPF) with responsibility for the
smooth establishment of finance functions
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.
Current external appointments:
None.
Background and previous appointments:
Chief Financial Officer of Marlin Financial
Group Limited, the consumer debt purchasing
company (just under one year). Chief Financial
Officer of FTSE International (five years). Group
Finance & Strategy Director of the Press
Association (seven years).
Nick Teunon, 54
Chief Financial Officer (until 31 March 2020)
Appointed 8 August 2014 (stepped down
from the Board on 30 April 2020)
Committees D
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 30 June 2020.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 64
Corporate governance report
Governance at a glance
Board skills and experience
John de Blocq van Kuffeler
Nick Teunon
Jono Gillespie
Charles Gregson
Heather McGregor
Niall Booker
Sector
Operational
Financial
Strategy
Risk
Information
technology
People and
general
management
Board composition and diversity
(based on those who were Board
members for the whole of 2019)
Gender of the Board
Tenure of Directors
Male
Female
Board time
4
1
2-3 years
3-6 years
Number of Board meetings in 2019
Number of Board meeting in 2018
Site visits (in addition to Board meetings)
(based on those who were Board
members for the whole of 2019)
1
4
26
12
9
Visits to
Everyday Loans
7
Visits to
Guarantor Loans
4
Visits to Loans
at Home
Board
activities 2019
See more details on P.70
Strategic
Financial
Internal controls and risk management
Governance and stakeholders
People and culture
18%
31%
8%
31%
12%
Board changes in the year
During the course of the year, the Board of Directors has continued
to develop. We now have a Senior Independent Director (‘SID’)
role, fulfilled by Niall Booker; and Heather McGregor has
expanded her remit as Director with responsibility for employee
engagement by taking on the role of Chair of the Remuneration
Committee.
In October 2019, the Board undertook a review of the Board
composition and Miles Cresswell-Turner left the Board on
21 October 2019.
In November 2019, Nick Teunon, Group CFO, announced his
intention to step down from the Board in 2020. Jono Gillespie
replaced Nick Teunon as Group CFO on 1 April 2020 and
Nick Teunon agreed to remain as an Executive Director until
30 April 2020.
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Leadership
65
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 2019
See pages 62 and 63
Matters reserved for the Board
The Board is primarily responsible for:
Meetings held in 2019:
26 (of which 11 were scheduled meetings and 15
related to the offer for Provident Financial plc).
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 regulations
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.
• 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.
Board and committee structure
Board of Directors
Certain responsibilities have been delegated to the Board’s five committees so as to assist the effective operation
of the Board and to ensure the right level of attention and consideration is given to all relevant matters.
Nomination &
Governance Committee
Audit
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
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.
Key objectives:
To ensure that the Board
and its committees
comprise individuals
with the requisite skills,
knowledge and
experience to ensure
they are effective in
discharging their
responsibilities and that
all governance
requirements are being
adequately addressed
by the Board.
The membership of the
Nomination & Governance
Committee and its report
is on page 82.
The membership of the
Audit Committee and its
report is on page 85.
The membership of the
Risk Committee and its
report is on page 93.
The membership of the
Remuneration Committee
and its report is on
page 94.
The membership of the
Disclosure Committee is
the Chief Executive, the
Chief Financial Officer
and the Company
Secretary.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 66
Corporate governance report continued
Leadership continued
Activities covered during 2019
During 2019 the Board had 11 scheduled meetings to review
current trading and operational performance of the business
as well as to consider the following five categories of business:
(i) strategic; (ii) financial; (iii) internal controls and risk
management; (iv) governance and stakeholder management;
and (v) people and culture. The Board also held 15 meetings,
some of which were called at short notice, to consider,
challenge and facilitate the bid for Provident. Attendance
at scheduled meetings was 100% for all Board members.
A summary of the topics covered and the frequency that they were
discussed during the course of 2019 is set out on page 70.
The composition and role of each committee is detailed in
their respective reports that follow (save that there is no report
from the Disclosure Committee that met once to review and
approve updated dealing and inside information disclosure
documentation). The terms of reference for each committee are
available from 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. The Chief Risk Officer is a member of the
Group’s Executive Committee and is also invited to attend all Board
meetings providing additional access for members of the Board.
Board and committee meetings
All Directors are required to attend Board meetings as well as
committee meetings for which they hold membership alongside an
annual two-day, off-site strategy meeting to review and agree the
Group’s three-year business and financial strategy.
The strategy meeting in 2019 was attended by each of the
Directors as well as senior management (where appropriate).
The agenda for the strategy meeting included:
• a facilitated discussion of the Group’s future financial and
funding strategy;
• a review of the execution risk of the bid for Provident which
was under way at the time;
• a presentation and consideration of the business strategy of
each of the Group’s three current divisions;
• consideration of the business strategy for each division in the
event that the bid for Provident was successful;
• 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 in the event that the bid
for Provident was successful.
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.
Board diversity
The Company recognises the importance of diversity both at Board
level and throughout the Group and 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.
The Future Boards Scheme is 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. Following last year’s report, our
internal candidate was appointed to the board of one of the
Company’s subsidiary undertakings and therefore is no longer
eligible for the scheme. Over the course of 2019, the Group has
appointed two women to Board positions within the Group and
two Company Secretaries, both of whom are women, thereby
increasing female representation at Board level.
Appointments
The Board has adopted a formal procedure for the appointment of
new Directors by appointing a Nomination & Governance
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.
In light of the continued expansion of the Group’s operations since
IPO, the Board determined that it was appropriate to appoint a
SID and in November 2019, Niall Booker was appointed as SID with
immediate effect. This appointment now means the Company
complies with provision 12 of the Code.
Board performance review
The Chairman met with each of the Directors on a one-to-one
basis to appraise their performance during the year. The Non-
Executive Directors also met with the Chairman to appraise his
performance and the Non-Executive Directors met to evaluate the
performance of the Executive Team.
Together, the Board evaluation and the Board performance review
have helped to facilitate the planning of ongoing training and
development needs of the Board for 2020 as well as supporting
the Board’s process for succession planning.
Meetings attended/Number of meetings eligible to attend
John de Blocq van Kuffeler
Nick Teunon
Miles Cresswell-Turner (until leaving the Board on 21 October 2019)
Charles Gregson
Heather McGregor
Niall Booker
Board
26/26
25/26
17/22
24/26
24/26
24/26
Nomination &
Governance
Committee
Audit
Committee
Risk
Committee
Remuneration
Committee
Disclosure
Committee
1/1
1/1
3/3
3/3
3/3
13/15
14/15
15/15
3/4
4/4
4/4
12/12
11/12
12/12
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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 the requisite resources
to undertake their duties effectively.
Conflicts of interest
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 at the beginning of
each meeting.
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 and 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 24 to 27).
The finance department is responsible for preparing the Group
financial statements and ensuring that accounting policies are in
accordance with International Financial Reporting Standards
(‘IFRSs’). 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.
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,
including focus on areas highlighted in the Audit Committee report
(pages 85 to 92) and are able to confirm that necessary actions
have been or are being taken to remedy any failings or
weaknesses identified.
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 24 to 27, the
Audit Committee report on pages 85 to 92 and the Risk Committee
report on page 93.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 68
Corporate governance report continued
Division of responsibilities
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, people,
culture and risk management.
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.
Role
Responsibilities
Board composition and structure
The Board comprised six Directors in 2019, all of whom have
served throughout the financial year, (with the exception of Miles
Cresswell-Turner, who served up until his departure from the Board
on 21 October 2019). Details of each member of the Board, their
respective representation and a description of the Board’s
activities are summarised in the following table:
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 oversees the
Group’s values and standards and is
responsible for nurturing and sustaining
a positive corporate culture.
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 as well as the
needs and desires of key stakeholders.
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.
The Chairman is responsible for:
• the leadership of the Board
• the effectiveness of the Board
• setting the Board’s agenda
• 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 in succession planning
• providing a sounding board for the Chairman
• acting as an intermediary for other Directors as and when necessary
• being available to shareholders and other Non-Executives Directors to
address any concerns or issues they feel have not been adequately dealt with
through the usual channels of communication
• meeting at least annually with the Non-Executives to review the Chairman’s
performance and carrying out succession planning for the Chairman’s role
• attending sufficient meetings with major shareholders to obtain a balanced
understanding of their issues and concerns
The Executive Directors are responsible for:
• providing the Board with specialist knowledge of the business and industry-
relevant experience
• all matters affecting the operating and financial performance of the Group
• 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
Non-Executive Chairman
Charles Gregson
Two independent
Non-Executive Directors
Niall Booker (SID)
Heather McGregor
In addition, the SID has
responsibility for:
Group Chief Executive
John van Kuffeler
Executive Directors
Miles Cresswell-Turner
(until 21 October 2019)
Nick Teunon
(until 30 April 2020)
Jono Gillespie
(from 1 April 2020)
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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 principle 10 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
94 to 113. The Board determines that Charles Gregson would be an
independent Non-Executive Director in the event that he did not
hold Founder Shares.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 70
Corporate governance report continued
Board activities in 2019
Strategic
(18%)
1
People
and culture
(12%)
5
4
Governance
and stakeholders
(31%)
2
Financial
(31%)
3
Internal
controls
and risk
management
(8%)
1. Strategic
• Activities leading up to and relating to the firm offer to acquire
4. Governance and stakeholder management
• Approval and oversight of all key decisions and documentation
Provident Financial plc
• Quarterly review of strategic initiatives
• Reorganisation of subsidiary undertakings (e.g. relocation of
Guarantor Loans Division to a single location)
• Annual strategic planning conference
• Review of the component parts of the Group in the context of
ensuring maximisation of shareholder value
• Consideration of strategic options for the Group
relating to the firm offer for Provident Financial plc
• Approval of Matters Reserved for the Board and Board Committee
Terms of Reference
• Approval of Division of Responsibilities for Chairman and CEO
• Approval of Group-wide Governance Framework
• Consideration of Board composition and resolution to remove
Miles Cresswell-Turner from the Board
• Remuneration decisions relating to Executive and Non-Executive
2. Financial
• Review and approval of subsidiary and Group budgets and
quarterly forecasts
• Ongoing review of business performance
• Review of funding options and approval of securitisation funding
agreement
• Approval of full-year and interim results
• Approval of share capital reduction
• Approval of rectification steps regarding relevant distributions
• Approval of interim and final dividends
3. Internal controls and risk management
• Monitoring and oversight of SMCR project implementation
• Approval of corporate policies
• Briefings regarding mitigation activity for regulatory risk
• Annual review of data protection officer report, health and safety
report and whistleblowing officer report
Directors
• Review of stakeholder engagement
5. People and culture
• Consideration of the impact of the strategic move to relocate the
Guarantor Loans Division to a single site
• Decision to widen the scope of the Nomination Committee to
encompass governance and culture
• Review of corporate culture within the subsidiaries of the Group
• Briefing regarding the external academic research carried out
regarding the role of women in the home credit market
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Matters for 2020
The Company Secretary plans the Board and Committee activity for the coming year in conjunction with the Chairman and the Chair of
each Board Committee. The plans for 2020 include the following topics:
Strategy
Financial
Internal control
and risk
management
Governance and
stakeholder
management
People and
culture
Review strategic initiatives
Ongoing review of COVID-19 impact
Review of the funding structures of the Group
Engage in a process to create distributable reserves
Review of the financial performance of the Group
Review of management performance and
division performance
Approval of budget, forecasts and projections
Approval of the Group’s half-year and full-year results
Approval of risk appetites, tolerances and exposure
Evaluation of corporate governance framework
Review of business continuity and crisis management
arrangements
Review of the Group’s corporate culture
Review of employee engagement reports from divisions
Review of stakeholder management
Investor relations
Analysis of competitor activity
Legal and regulatory horizon scanning
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, CEO pay ratio
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 anti-money laundering officer reports
Review of health and safety across the Group
Review of anti-bribery and corruption policy, gifts and
hospitality register, and conflicts of interest register
Oversight of SMCR compliance in divisions
Approval of division of responsibilities,
and Accountabilities, Delegations, Mandates,
& Responsibilities Register
Approval of resolutions and corresponding documentation
for AGM
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I had only met the
customer a few
hours before, but you
instinctively know
when someone is not
well and needs help.”
Lisa Moore
Business Manager – Loans at Home
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right thing
With over 20 years’ experience in the industry,
Lisa joined Loans at Home in 2014. In 2019 she was
returning with one of her agents to issue a loan to
a new customer that had been recommended by
a neighbour and had been seen earlier in the day
having requested an agent visit.
suddenly changed and she was unable to lift her arms.
As the lady’s husband was at work and suspecting a
stroke, Lisa didn’t hesitate and went into a different
gear, she called 999 immediately and explained what
was happening – “I had only met the customer a few
hours before but you instinctively know when someone
is not well and needs help.”
On returning to the front door, which was open when
they arrived, they could see that the customer was
on the floor and struggling to get to her feet. Having
helped her to a seat, the customer’s facial appearance
Fortunately, the ambulance arrived quickly and the
paramedics said: “You have been a real angel today
and saved that lady’s life”.
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Embedding a positive business culture
Our purpose is driven by the firm belief that
everyone should have access to credit they
can afford. We have therefore developed
a business model that seeks to provide
affordable credit to those who are unable
or unwilling to borrow from mainstream
lenders. Central to our model is a focus on
ensuring that we deliver our loan products
and services in the right way. This requires
us to nurture and maintain a positive
culture so that we can continue to deliver
positive outcomes for our customers as well
as broader benefits for our other key
stakeholders (see ‘Business Model’ on
pages 10 and 11 and ‘Stakeholder
management and our commitment to
Section 172’ on pages 46 to 59).
As a result, the Board has developed a
structure to ensure that the Group’s culture
and core behaviours are monitored closely
so that any issues are identified quickly
and, if needed, changes made. This is
achieved in a number of ways:
Regular evaluation of the governance
framework
Culture forms a key component of the
overall governance framework with each
business responsible for the development
of strong and positive cultures, drawing
upon some key values and behaviours that
have been identified as being key to our
long-term success:
• Doing the right thing
• Integrity
• Shared purpose delivered through
teamwork
• Clear communication
• Entrepreneurial leadership
Appropriate measures have been
developed within each business operation
to provide a ‘cultural thermometer’ that
includes a number of metrics assessing a
broad range of factors including good
customer outcomes, satisfaction and
engagement levels among both employees
and self-employed agents.
The assessment of the governance
framework (including culture) is then
reported to the respective subsidiary
boards with oversight of results at a
Group level.
Engagement outside of the Boardroom
The Board has always recognised the
value of experiencing our products and
services first-hand by conducting periodic
visits to our office locations and spending
time to meet staff and customers and to
hear about the hopes and challenges that
they face on a daily basis. Armed with this
insight, the Board is better placed to
translate regular management reports into
a deeper understanding of the dynamics,
challenges and opportunities for our business.
Whilst most Board meetings take place at
the Group’s head office in London, there
has been a conscious effort to try and host
some Board meetings at subsidiary venues,
thereby providing the Board with
additional perspective and the chance to
meet employees directly (see Governance
at a glance on page 64).
Reporting against a good customer
outcomes dashboard
The delivery of good customer outcomes
is a key objective for all FCA-regulated
consumer lending businesses. Whilst
each of our business divisions tracks a
large number of performance measures,
as a Group we have identified a subset
of these that are now being captured
to form a single good customer
outcomes dashboard, thereby enabling
executive management and the Board
as a whole to identify potential issues
before they become significant. This
tool is continuing to evolve and we
hope to provide further details on
progress in future Annual Reports.
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Corporate governance report continued
Engaging with our stakeholders
Providers of
funding
Customers
Environment
Communities
and charities
Key stakeholders
Engagement with key stakeholder groups
strengthens our relationships and
is an ongoing part of the management
of the Group.
Employees and
self-employed
agents
Regulators
Partners and
suppliers
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Stakeholder engagement
Engagement with key stakeholder groups strengthens our
relationships and is central to the achievement of the Group’s
strategic objectives. As noted on pages 46 to 59, our approach
to engagement draws upon a number of different processes
including employee surveys, a series of processes to assess
levels of customer satisfaction and ongoing conversations with
regulators, suppliers and shareholders.
From a governance perspective, the Board receives regular
updates on insights and feedback from stakeholders and the
Directors also make a point of engaging directly with some of our
stakeholders through face-to-face meetings, something which
provides them with a deeper understanding of our relationships
and their importance to the Group when making decisions. In
addition to regular, but less formal consideration of stakeholder
needs, the Board undertakes a formal review each year to ensure
it has a clear view of stakeholder wants and needs and to ensure
that our actions remain aligned with our overall purpose,
objectives and strategy.
Stakeholder name
Customers
Employees and self-employed agents
Regulators
How the Board is kept informed
Monitoring of good customer outcomes via a good customer outcomes dashboard gives
the Board a range of indicators to enable and focus discussion where and when
necessary.
Customer listening groups and online feedback also form part of the operational updates
provided regularly from operational subsidiary CEOs to the Board.
Employee forums ensure that ideas and views are heard with a direct line of communication
to the Board via Heather McGregor in her role as the Non-Executive Director with
responsibility for workforce engagement.
Engagement surveys are conducted annually in all three operational businesses.
Results and commentary are reviewed by the Board.
Online forums and blogs enable colleagues to ‘shout out’ and be recognised and rewarded
by their colleagues for examples of positive culture and where they have really lived the
Group’s targeted values and behaviours. Access to the intranet is available to Board
members.
Agent engagement surveys and listening group results are reported to the Board.
Regular updates are received by the Board regarding regulator contact and horizon
scanning of any proposed or actual regulatory change that may impact the business.
Board members are also directly involved in engagement with our regulators, as and
when required.
Regulatory affairs updates are provided to the Board on a regular basis including details
of management’s engagement with MPs, Members of the House of Lords, civil servants,
think tanks and relevant special interest groups.
Partners and suppliers
The Board is required to approve any significant financial commitment with key suppliers.
Communities and charities
Providers of funding
Environment
Risk management reporting into the Board also identifies any key supplier risks to the
business and how they may have changed or how they are expected to change in
the future.
The Board receives updates with regard to the various community-based activities and
charities supported by the Group.
The Board receives regular updates on the Group’s interactions with equity and debt
providers that take place through a number of formal processes such as the Annual
General Meeting, investor roadshows and results briefings, as well as through more
ad hoc interactions including one-on-one meetings, conference calls and presentations at
industry conferences.
By maintaining a positive relationship with a number of sell-side analysts, the Group also
ensures that there is a broad range of third-party research that is available and published
on the Company.
Direct contact between the Non-Executive Directors and shareholders ensures that
shareholder opinions are heard directly by the independent members of the Board.
The Board receives regular updates with regard to the Group’s environmental impact in
the form of updates from subsidiary boards.
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Corporate governance report continued
Workforce engagement
Given the important role played
by our workforce in driving our
business model (see pages 10
and 11) members of the Board
monitor and review the
results of annual staff and
self-employed agent surveys
closely (see below).
Board members make a point of visiting
office locations across the country of
each of our business divisions, giving
them a chance to hear first-hand about
the experience of our people that
interact with our customers every day.
HR Directors within each operation of
the Group are now required to provide
a regular update to the Board covering
the areas outlined below, in addition to a
general update on HR matters, employee
benefits and general wellbeing.
During 2018, the Board appointed Heather
McGregor as Non-Executive Director
with responsibility for engagement
with the workforce (Code provision 5).
During 2019, the Group’s approach to
workforce engagement has been further
enhanced with the introduction of a
series of employee forums. It is expected
that these will be fully operational
during 2020. A summary of the key
processes of engagement utilised by
the Board in 2019 is set out below:
1
Employee and self-
employed agent
engagement surveys
Conducted each year, surveys have been
running in all NSF operations for a number
of years and are seen by the workforce as
a key thermometer of engagement both in
terms of completion rate and scores. The
key results from the surveys conducted in
2019 show that colleagues have a strong
affinity with the company they work for,
that there is a general feeling of openness,
supportive management, with strong
values and principles and a clear focus on
‘doing the right thing’. As we did in 2018,
once the surveys are complete we then
play back the results and provide
management’s interpretation of the results,
together with a summary of actions taken
and to be taken. We always encourage
teams to discuss the results and to try and
come up with additional ideas for
improvement that management then
reviews and actions. Heather McGregor
reviews all freeform comments received to
ensure that there is a comprehensive
review and no material feedback is
overlooked and a summary is then
provided to the Board.
97%of employees agree that
Loans at Home is committed
to treating its customers fairly
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engagement
2
Employee forums
While such forums had been in place in
branch-based lending and guarantor
loans for a number of years, they were
launched in the home credit division
for the first time in November 2019.
Topics covered include culture, financial
performance, business improvements,
communications and consultation. It
is envisaged that Heather McGregor
will attend at least one forum for each
division over a rolling 12-month period.
77
3
Ad hoc events
In addition to surveys and forums,
members of the Board also attend
subsidiary management conferences and
culture development programmes while
subsidiary members of staff are invited
to attend NSF level stakeholder events
including Board meetings as well as
results presentations and investor days.
4
5
Site visits
Over the course of the year, members
of the Board have visited a number of
office locations of all three divisions –
a process that has provided a valuable
insight into the day-to-day running
of the business. As well as spending
time with staff members such as with
the collections team in our Guarantor
Loans Division, Board members have
also spent time mentoring key senior
members of the management team.
20site visits were conducted by Board
members during 2019 (in addition to
Board meetings)
Other initiatives
The Group operates an intranet-based
recognition scheme where senior
management is able to identify and
recognise staff that have produced great
work and/or have demonstrated that they
are working in a way that is consistent with
the Group’s target values and behaviours.
As the process is online, the recognition
is immediate and can also be ‘liked’ and
‘commented’ upon by fellow colleagues.
The wellbeing of our workforce is a key area
of focus and we have started to conduct
regular mood surveys to provide management
with a ‘temperature check’ on how the
organisation is feeling and to identify any
concerning trends. Complementing this effort
has been a series of mental health support
initiatives across the Group e.g. mental health
first aiders are now trained and in place at
both Everyday Loans and Loans at Home.
Finally, we have been hugely encouraged
by the enthusiasm of our people to put
something back into local communities.
In addition to supporting specific charity
events, we have also supported a number
of local events organised by Loan Smart,
a charity focused on raising awareness
about the dangers of illegal money lending
and which is supported by the Group.
…the Company has really
taken care of me”
Everyday Loans survey
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Employee forum
members’ Q&A
The Group is committed to communicating
regularly with colleagues across each division
and at all levels of seniority. During 2019, our
branch-based lending and home credit divisions
established an employee forum with
representatives from the respective branch
networks and Head Office locations.
Members of the forums were selected by their
peers to represent their views and act as a
conduit for feedback into the Boardroom.
Following the decision to consolidate our
guarantor loans activities onto a single site in
Trowbridge, 2020 will see the establishment of a
third forum for divisional staff to feedback their
views to the Board.
Q.
Why do you feel it’s important to have
an employee forum?
A.
Open lines of communication between
staff, management and other business
areas are crucial. Representatives can
obtain more information as it can often
be an easier environment than
approaching management directly.
Q.
How do you feel Heather McGregor’s
role as NED on the plc Board
with responsibility for employee
representation might align to the role
that the forum plays?
A.
Heather McGregor has advanced
knowledge within the finance industry
having worked in different countries
with different cultures, alongside being
the founder of the Taylor Bennett
Foundation which works to promote
diversity in the communications
industry, Heather is fully aligned to
the forum as her experiences in
communications can provide great
guidance and direction to those
running and being a part of the forum.
I feel personally
responsible to lead
by example…
…to really push
the new culture
for the better.”
Chris Pilley
Area Manager – Everyday Loans – with the
Company 13 years
Open lines of
communication
between staff,
management and
other business
areas are crucial.”
Adam Kaewchom-Farr
Collections Associate – Guarantor Loans
Division – with the Company ten months
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Q.
Why do you feel it’s important to have
an employee forum?
A.
Sometimes colleagues do not want to
bother their managers with something
they feel is trivial. However, sometimes
the ideas that people have, turn out
to be real winners. This gives everyone
the opportunity to be listened to and in
a fair environment.
Q.
What’s the best bit about your role on
the forum?
A.
Being able to share my passion for
the role with the entire team. To show
colleagues that when they speak, their
voice is heard.
Q.
Do your colleagues use you as a
‘sounding board’ to take matters to the
forum? How do you communicate what
takes place or what decisions have
been made at the forum? Who decides
the topics to be discussed at the forum?
A.
I have the ability to reach out to
everyone involved in my region –
including the Area Managers, Business
Managers as well as our self-employed
agents – all three are customer-facing
and can provide vital feedback. We
communicate via the Area Manager
team which will then filter down to
their respective teams. With the scope
of the whole Company it will be the
responsibility of the forum to create the
agenda and confirm that before the
next scheduled meeting.
Q.
How do you feel Heather McGregor’s
role as NED on the plc Board,
with responsibility for employee
representation at the Board, might
align to the role the forum plays?
A.
Heather McGregor’s role will be crucial
in implementing discussions and forum
agreed plans/ideas. Her profile and
experience in leading will give value
to the forum and provide it with same
independent advice.
I get to show
colleagues
that when they
speak, their voice
is heard.”
Karl Dunford
Senior Customer Sales Representative –
Guarantor Loans Division – with the
Company five years
Q.
Tell me a bit about the role you
play on the forum – what matters
are discussed at each meeting?
What topics if any, you’d like to
see discussed but haven’t been
covered as yet?
A.
I see my role in the forum is to be a voice
for both the network and our Executive
Committee so there is a free flow of
communication between the two. Also,
I feel personally responsible to lead by
example on the right thing to do within
the Company to really push the business
culture for the better. We will discuss
the direction of the Company in the
coming months. Branch level issues are
also covered i.e. staffing, systems, leads
etc, charitable suggestions, and
suggestions for out-of-work events
activities. Pretty much anything that
can change/evolve the Company for
the better.
Q.
Why do you feel it’s important to have
an employee forum?
A.
It’s important because it backs up the
cultural change that we are trying to
instil throughout the business, there are
a lot of staff that have been here for
many years who have seen similar
things like the forum come and go. Every
time a change is made, no matter how
small, it reinforces that everyone’s voice
is important and that the culture is
changing for the better. It won’t happen
overnight but the longer it goes on the
more people will believe and buy in.
Heather McGregor’s
role will be crucial
in implementing
discussions and
forum agreed
plans/ideas.”
Kyle Morgan
Area Manager – Loans at Home – with the
Company 18 months
Corporate GovernanceStrategic ReportFinancial StatementsAdditional InformationOverview 80
Corporate governance report continued
Board evaluation
The annual evaluation of the Board’s performance 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.
NSF operates a rolling approach to evaluation with an external
review being conducted every third year. In 2019, following
the three-year cycle, the evaluation was undertaken by the
in-house Company Secretarial team, building on the prior
year’s review that had been conducted by Lintstock and
focusing in particular on the recent changes in the Code.
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, human resource management, and priorities for change.
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. New appointees 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 2019 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 2019 included cyber risk and
the SMCR.
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.
Board evaluation results
Key findings
in 2018 and
objectives
for 2019
Increased engagement
between the Board and
colleagues within the
operational businesses.
Actions
taken
during
2019
The Board met at subsidiary
locations during 2019,
enabling Board members to
meet and hear directly from
more subsidiary staff. Board
members also visited branches
on a number of occasions
throughout the year (see page
64).
Key findings
in 2019
Enhancement of management
information at Board level
and increased focused on
developing communication
channels between Board
members and subsidiaries.
More targeted training for
Directors.
Training during the year
covered specific topics such
as SMCR.
Increased focus on identifying
talent within the businesses to
enable more coordinated
succession planning around
the Group.
Output from subsidiary
boards ‘talent spotting’ is
available to the Group CEO
which in turn helps to drive
more informed succession
planning.
Succession planning at
Group level has expanded to
encompass a wider range
of roles.
Continued focus on
succession planning and
talent development.
Ongoing focus on Director
reviews, induction and
training.
Wider external
feedback to
provide the Board
with a richer
context for
decision-making.
Horizon scanning
and external
market updates
are now included
as regular Board or
Risk Committee
updates.
Further
development of
monitoring and
reporting on
culture within
the Group.
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Information and support
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. 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. In
addition, over the course of the year, the Company contacted key
shareholders directly to consult on specific matters prior to their
execution, including the offer for Provident Financial plc.
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 Chairman and
Non-Executive Directors also hosted a shareholder event without
the Executive Directors present and to which all major
shareholders were invited.
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.
In November 2019, the Board appointed Niall Booker as Senior
Independent Director. It is the intention of the Board that Niall
will meet with key shareholders to listen and ensure clear lines
of communication are maintained directly with the Board.
Annual General Meeting
Whilst shareholders are always 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 COVID-19 outbreak has meant that shareholders
are advised, given concerns over health and safety, not to attend
the AGM this year and to submit their votes in advance by proxy
card so as to reduce the number of attendees in person.
The 2020 AGM of the Company is scheduled to be held 11.00 am
on 30 June 2020 and a notice of meeting has already been
dispatched to shareholders. A copy of the notice is also
available to download from the Company’s corporate
website: www.nsfgroupplc.com.
As the 2019 audit has taken longer to complete than expected
and in accordance with DTR 4.1.3R, the Company has used the
additional time granted before publishing audited accounts,
to consider “all aspects of their business and operations” and
to ensure that the forward looking elements of our Annual
Report adequately considered and took into account the impact
of the pandemic insofar as possible upon the business.
Given the timescales, it has been necessary to apply to Companies
House for an extension to the filing date of the Group’s audited
accounts. As the anticipated date for completion of the audited
accounts did not allow a clear 21 days’ notice prior to the required
AGM date, the Company is required to hold a separate general
meeting to approve our audited accounts. This will now take place
on 28 July 2020 and the notice of meeting has been dispatched
to shareholders with the Annual Report. A copy of the notice
is also available for download from the Company's website:
www.nsfgroupplc.com.
Sarah Day
Company Secretary
25 June 2020
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 82
Nomination & Governance Committee report
for the year ended 31 December 2019
Membership
and attendance
3 The Committee met on three
occasions during the year
ended 31 December 2019.
Director
Charles Gregson (Chairman)
Niall Booker
Heather McGregor
Attendance and
total number of
meetings that the
Director was
entitled to attend
3/3
3/3
3/3
The principal purpose of the Nomination & Governance Committee
(the ‘Committee’) is to monitor the balance of skills, knowledge,
experience and diversity on the Board and to recommend any
changes to the composition of the Board. During 2019, the remit of
the Nomination Committee was considered and extended to more
specifically encompass certain governance matters. For meetings
from January 2020, following approval of the revised Terms of
Reference in November 2019, the Committee’s remit now also
includes; oversight of the SMCR, environmental and social matters,
culture, ethics and conduct, and also customer experience. This
report gives more detailed information on how the Committee
carried out its duties in 2019.
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: myself,
Charles Gregson (Chairman), Niall Booker and Heather McGregor
each of whose biographical details are set out on pages 62 and 63.
Note that I did not chair the Committee when it was considering the
appointment of a successor to the chairmanship of the Company.
Meetings and attendance
The table above details the attendance record of Committee
members. The Chief Executive Officer, the Chief Financial
Officer and Company Secretary also attended Nomination
Committee meetings.
Role and responsibilities
During 2019, the Nomination Committee assisted 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 included:
• 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 the 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 ensure that Board vacancies were
filled in a reasonable timeframe 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 new terms of reference, that explain 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 2019:
• reviewing the composition of the Board and the balance of
Executive and Non-Executive Directors;
• reviewing the succession plans for the Board and the senior
management within the Group; and
• forward planning and consideration of Board requirements
in an enlarged Group if the offer for Provident Financial plc
was successful.
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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 to complete such preparation as is required for
such meetings).
Board composition
During 2019 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.
In October 2019, the Board determined that the role undertaken by
Miles Cresswell-Turner was no longer required and as a result,
Miles left the Board on 21 October 2019. At that point the Board
then comprised two Executive Directors and three Non-Executive
Directors. In November 2019, Nick Teunon (Group CFO) announced
his intention to leave the Board in the spring of 2020. Jono Gillespie,
previously the Deputy CFO, replaced Nick Teunon as Group CFO
on 1 April 2020 and was appointed to the Board on that date. Nick
Teunon remained an Executive Director until 30 April 2020.
Whilst not strictly a requirement for a Standard Listed Company,
given the Board’s desire to comply with the Code, as far as it is
practical and appropriate to do so, and given the continued
expansion of the Group’s operations since IPO, in November 2019
the Board determined that it was appropriate to appoint a SID and
so Niall Booker was appointed SID with immediate effect. This
appointment brought the Company in line with provision 12 of
the Code.
As outlined in the Chairman’s introduction, to enhance her role as
Non-Executive Director with responsibility for employee matters,
Heather McGregor became Chair of the Remuneration Committee
in October 2019.
The composition and membership of the Board remains under
regular review by the Nomination Committee.
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 2020
The main areas of focus for the Committee in 2020 include: an
ongoing evaluation of Board composition; succession planning;
a review of the Committee’s terms of reference; a Board
performance evaluation; and a review of Board effectiveness.
In addition, the revised terms of reference provide scope for the
Committee to also consider the prevailing culture of the business,
the customer journey of each business and how environmental
factors might affect the Group and its stakeholders.
Charles Gregson
Chair of the Nomination & Governance Committee
25 June 2020
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.
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.
NSF seeks where possible, to develop talent within the Group.
This has been borne out in 2019 by the appointment of a number
of senior positions from within the Group’s own talent pool
including: the appointment of Jono Gillespie to the plc Board as
Group CFO (effective 1 April 2020); the appointment of the CEO
of the Everyday Loans operation; and also the appointment
of the Everyday Loans and Loans at Home subsidiary CFO
roles from ‘home grown’ talent (see page 84). This approach is
underpinned by our desire to ensure that, where possible, those
appointed to senior or approved roles within our operations
have an in-depth knowledge of the Group’s business.
The Group is also focused on ensuring an appropriate level of
diversity, including gender diversity, exists 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. The Group Board currently has one female Director and
a female Company Secretary and the Committee will give due
consideration to Board balance and diversity when recommending
new appointments to the Board. During the course of the year, at
subsidiary level, there have been two female Board appointments
and two female Company Secretary appointments, thereby
changing the dynamics of our subsidiary Board composition
and also the representation of subsidiaries at Group Board
meetings. 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 if they
should 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
2019 included Directors’ duties and responsibilities, cyber risk, the
2018 revision of the Corporate Governance Code, and the SMCR.
Board evaluation and individual performance review
It is pleasing to report that all matters identified in the 2018 external
Board evaluation have been addressed. In 2019, the evaluation
was facilitated in-house and was based upon the approach from
both internal and external reviews in previous years.
The results of the 2019 evaluation were presented to the Board in
early 2020 and 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 future including the enhancement
of Board Management Information; continued activity re talent
identification and succession planning; Director training; and
further development of formal reporting on culture.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 84
Nomination & Governance Committee report continued
Wherever possible we
seek to leverage our
internal talent pool
As a business
we provide
opportunities to
learn and grow
and I will always
support my team
and others in the
business to do so.”
Francesca Herratt
Chief Financial Officer, Everyday Loans
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I joined Everyday Loans as Chief
Financial Officer in May 2019 from
the Group’s Parent Company, Non-
Standard Finance plc, where I held
the role of Group Chief Accountant for
3½ years. Previously, I held a finance
director role at an award-winning
employee engagement agency based
in London having held finance roles
in management consultancy firms
and media agencies before that.
Q.
What do you enjoy most about working
for the Group?
A.
The NSF Group create an environment
where we can be honest with ourselves
and each other. There is support
throughout the businesses at all levels
and the customer is at the centre of
everything we do.
Q.
Can you outline what skills you’ve
developed and grown whilst working
for NSF Group – what new experience
you’ve gained ?
A.
During my time at NSF, I oversaw the
financial management of all divisions –
including guarantor loans, home
credit and branch-based lending.
When I joined NSF, I had not previously
worked in the non-standard market
and therefore the role gave me the
opportunity to understand better
the diverse nature of the sector, the
regulatory environment and how by
lending responsibly we aim to deliver
positive outcomes for each of our key
stakeholders.
Q.
Given your background in the Group –
what skill set do you think you’ll bring
to your new role and what challenges
do you think you’ll face?
A.
The move across to Everyday Loans
enables me to play a more direct role
in the Group’s largest division. I can
now be more involved in the day-to-day
running of the business and its strategic
development. I’m responsible for driving
forward our financial strategy to ensure
that our targets can be met whilst, of
course, adhering to ever-changing
legislation and accounting standards.
Q.
What are you looking forward to
most in your new role?
A.
The team at Everyday Loans is diverse
and has vast sector experience. I am
thrilled to have the opportunity to
work with those who go the ‘extra mile’
to achieve high levels of performance
and good customer outcomes.
Q.
What can you ‘give back’ in terms
of developing future talent within
the Group?
A.
As a business we provide opportunities
to learn and grow and I will always
support my team and others in the
business to do so. I hope to inspire my
team and encourage them to speak
out with new ideas and challenge the
status quo. It is important to provide
opportunities for colleagues to not
only improve their own knowledge
and skills specific to their role, but also
to provide opportunities to understand
the wider business strategy and sector
in which we operate.
85
Audit Committee report
for the year ended 31 December 2019
Membership
and attendance
15 The Committee met on
15 occasions during the year
ended 31 December 2019.
Director
Niall Booker (Chairman)
Charles Gregson
Heather McGregor
Attendance and
total number of
meetings that the
Director was
entitled to attend
15/15
13/15
14/15
Membership
The Audit Committee (the ‘Committee’) comprises three Non-
Executive Directors, two of whom are independent. Provision
24 of the Code requires that the Audit Committee for smaller
companies comprises two independent Non-Executive Directors
and that the Chair of the Board should not be a member of the
Committee. The Company does not meet provision 24 of the
Code due to the Chairman of the Board also being a member
of the Audit Committee. However, due to his professionalism,
independence of character and judgement, together with his
experience, and taking into account the size and nature of the
Company, it is deemed appropriate for him to remain a member
of the Audit Committee. 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: myself – Niall Booker, Charles
Gregson and Heather McGregor each of whose biographical
details are set out on pages 62 and 63.
Meetings and attendance
The Committee met on 15 occasions during the year ended
31 December 2019, nine of which were scheduled meetings and six
additional meetings.
As Chair of the Committee, I meet 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. During
the offer for Provident, a number of additional Audit Committee
meetings were convened, sometimes at short notice. Attendance
at scheduled meetings was 96.3% for Committee members (one
scheduled meeting was not attended by Charles Gregson for
health reasons, whilst other non-attendance was for additional
meetings at short notice during the offer for Provident).
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 function 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 Chair, 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.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 86
Audit Committee report continued
for the year ended 31 December 2019
Significant issues and areas of judgement considered by
the Committee
Throughout 2019 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 2019
which resulted in £12.5m impairment to the goodwill asset for
Loans at Home. This was despite a strong operational
performance and was due to the significant decline in the
valuations of all of the listed companies in the non-standard sector
since the end of 2018.
As part of the full year audit, a further goodwill impairment
assessment as at 31 December 2019 was undertaken by
determining the recoverable amount of each cash generating unit
(‘CGU’). This recoverable amount was then compared to the
respective net asset values and carrying values of goodwill. The
Committee challenged the appropriateness of management’s key
assumptions, in particular, the price earnings (‘PE’) multiples
applied to forecast earnings, discount rates and terminal growth
rates applied, and the ability of the CGUs to achieve their forecast
earnings and cash flows. It was concluded that as at 31 December
2019, the fair value less cost to sell valuation method should use
independently sourced market multiples as at 31 December 2019
and that these should be applied to 2019 actual earnings to
determine the recoverable amount. As a result, whilst no further
impairment to the value of the goodwill asset for Loans at Home
beyond the £12.5m recognised at 30 June 2019 was required, an
impairment charge of £10.6m was required to be recognised in
relation to the value of the goodwill asset and the intangible assets
of the Guarantor Loans Division, and an impairment charge of
£44.8m was required to be recognised against the value of the
goodwill asset for Everyday Loans. Factors leading to these
impairments can be attributed to the significant decline in the
valuations of comparator companies since 31 December 2018 and
increased uncertainty in the macroeconomic and regulatory
environment. In the case of the Guarantor Loans Division, the fall in
the market value of the market leader in this space will also have
had an impact on market multiples applied to our business. As the
PE multiples applied and earnings used in the calculation of
recoverable amounts were not subject to estimation which would
typically arise from the use of forecasts, the Committee was
satisfied with the final goodwill impairment losses recognised.
Further detail is set out in notes 2 and 15 to the financial
statements.
2. IFRS 9 – macroeconomic weighting of a stressed scenario
The Committee has, over the course of the year, received regular
updates from management to ensure that the assessment of the
macro-economic environment was regularly reviewed and that the
accounting standard continued to be applied appropriately.
During the course of the year, the Committee determined that the
probability of a downside scenario had become more likely given the
external uncertainty caused by Brexit and the calling of a General
Election, which had, in the Committee’s opinion, resulted in a less
stable economic environment. As a result, the Committee agreed to
increase the risk weighting of a stressed scenario from a 0%
downside and 10% severe downside stress to a 30% downside and
15% severe downside stressed weighting. The result of this was an
increase in the level of provisioning for the loan books of both the
branch-based lending and guarantor loans divisions. There was no
increase in provisioning in home credit because it has a history of
high resilience to macroeconomic shocks.
3. Impairment of customer receivables
There is 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 ultimately concluded that the level of provisions
held against the Group’s loan book was reasonable. As described
below, a prior year adjustment arose from the Committee’s review
of loan coverage and the full review which followed by the newly
appointed CFO. Further detail regarding the assumptions used in
the impairment judgements is set out in note 2 to the financial
statements.
4. IFRS 9 – prior year adjustment
On transition from IAS 39 to IFRS 9 on 1 January 2018 and having
completed a detailed assessment of the probability of default
(‘PD’), Loss Given Default (‘LGD’) and Exposure at Default (‘ED’), the
Group increased its loan loss provision to take account of expected
credit losses in accordance with the new IFRS.
As part of the review of the 2019 financial statements, the
Committee challenged management regarding the level of
provision in the Group’s balance sheet. Upon further investigation,
management determined that there was an error in the data used
by the branch-based lending and guarantor loans divisions to
calculate their post model adjustments (‘PMA’) to the provision and
that this had led to a miscalculation of the provisions required since
transition to IFRS 9 on 1 January 2018. Management investigated the
data error and revised their PMA calculations and the Committee
concluded that prior year adjustments of £3.2m at 1 January 2018,
accumulating to £4.0m at 31 December 2018, were required to the
expected credit loss provisions to correct this error. The Committee
concluded that the investigation had identified the root cause of
the error and the control deficiencies which had led to this error.
The Committee acknowledged the remediation steps which had
taken place to correct the error in the 2019 financial statements and
were satisfied that the subsequent controls identified by
management would sufficiently mitigate the risk of this occurring
again. The Committee were comfortable that management were in
the process of implementing the required changes.
Other prior year adjustments which have been corrected in the 2019
financial year include the reclassification of software from property,
plant and equipment to intangibles, and the re-presentation of
Founder Shares prompted by their vesting in October 2019. Control
deficiencies have been identified in relation to these errors and
subsequent remediation steps have been put in place such as the
alignment of reporting of intangibles across the Group and a review
of the Founder Share position at the end of each financial year. The
Committee were therefore comfortable that the risk of these errors
occurring again have been sufficiently mitigated.
Further detail is set out in note 1 to the financial statements.
5. New debt facility
Following solid loan book growth during 2019 and in order to
reduce funding costs for the Group over time, NSF announced on
11 March 2020 that it had entered into a new six- year £200m
securitisation facility provided by Ares Management Corporation
(‘Ares’). In addition the Group has a £285m term loan facility
provided by a group of institutional investors and a £45m revolving
credit facility provided by Royal Bank of Scotland. The Committee
challenged management on the new securitisation facility and
received advice from Lazard & Co. Limited regarding its suitability
for the Group.
The Committee further noted that whilst £15m of the securitisation
facility has been drawn post year end, as detailed in the going
concern and viability sections which follow, the Group is currently
in breach of certain portfolio performance covenants as a result of
the impact of COVID-19 and whilst a temporary waiver has been
granted by Ares, the Group is currently prevented from drawing
down further from the facility. In addition, the combined impact of
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the prior year adjustment and COVID-19 on the net loan book
means that, there exists material uncertainty over whether the
Group will be able to comply with some of the terms in the new
securitisation facility. Without further explicit waivers from Ares in
the event of such non-compliance there is therefore a material
uncertainty as to whether the Group can access additional
funding should it be unable to comply with such terms.
6. IFRS 16
IFRS 16 is a new accounting standard that was adopted in 2019
and addresses the identification and treatment of lease
arrangements in the financial statements of both lessees and
lessors. The Committee had oversight of the change in accounting
adopted by the Group and confirmed its acceptance that the
treatment was consistent with the accounting policy.
7. Distributable Reserves
In April 2019 it was identified that on account of certain technical
infringements regarding historic distributions, in particular a
transaction between the Group and certain subsidiary entities
which had resulted in a circularity issue between the entities and
following an intercompany dividend of £11 million in June 2016,
none of the entity’s distributions to shareholders since incorporation
to 2018 were made out of distributable profits.
In light of this discovery, the Committee challenged both
management and the Group’s auditors regarding the procedures
performed over the £11m intercompany dividend paid in 2016 and
the Group’s distributable reserves. The Committee noted that
whilst the question on legality of dividends had been raised prior
to approval of any payment of dividends, there was a failure to
identify the circularity issues at the time of distribution and
therefore a deficiency in controls in relation to this. In order to
rectify the issues, the Group obtained the Court’s and members’
permission for capital reductions of: 5,070,234 ordinary shares that
were purportedly repurchased between 2017 and 2019; and £75
million of the amount standing to the credit of the share premium
account cancelled.
The Committee, having taken legal and accounting advice, felt
confident that the rectifying steps noted above and subsequent
controls put in place as detailed in the Group’s internal control
dividend policy, which has been implemented subsequent to the
event, were sufficient to significantly mitigate the risk of this
occurring again.
These controls included:
• Including in the Group’s: (a) annual financial statements; and (b)
its half-year results, a note setting out the quantum of reserves of
the Company which, as at the relevant accounts date, represent
realised profits for the purposes of the Companies Act 2006
(‘Act’). These statements will be, respectively, covered by the
audit or review opinion (as applicable) provided by NSF’s
retained auditor from time to time.
• Each future distribution made by NSF or one of its Group
companies, whether by way of dividend, share buyback or
otherwise, will be reviewed by external legal counsel and
external accounting advisers from time to time to ensure it is in
compliance with IFRS, the ICAEW technical guidance and the
Act and to confirm that the appropriate administrative actions
(such as the filing of relevant accounts with Companies House)
have been carried out in a prompt and fully compliant manner.
Any future corporate actions by NSF or other companies within
the NSF Group which may have an effect on its equity and/or
distributable reserves position will also be subject to external
review.
• Maintaining a rolling forecast of its distributable reserves
position and tracking of actual reserves as part of its ongoing
dividend planning activities, ensuring that any variances from
plan are managed within reasonable levels of tolerance and
highlighted to the NSF Board accordingly.
The Committee will continue to monitor the distributable reserves
position of the Group and effective operations of controls. As
noted elsewhere in this document, the statutory loss suffered by the
Group in 2019 will require a further restructuring of the Group’s
reserves in order for it to be in a position to make future
distributions, should it choose to do so.
8. Going concern basis of preparing the financial statements
Pre COVID-19, the Committee assessed the forecast levels of net
debt, headroom on existing borrowing facilities and compliance
with debt covenants. For the purposes of going concern, this
analysis covered the next 12 months and considered a range of
downside sensitivities, including the impact of a macroeconomic
downturn, increased regulatory risk and a reasonable worst case.
Following the outbreak of COVID-19 subsequent to the year end,
the Committee and Management agreed that further stress tests
should be undertaken to understand the impact of the pandemic.
As part of this analysis, the Group modelled a number of scenarios
to try to capture the extraordinary circumstances brought about by
the COVID-19 pandemic and concluded that there exists a
material uncertainty around the performance of the Group and its
ability to stay within its financial covenants, with both very much
influenced by a number of factors outside of the Group’s control
including the severity and duration of the pandemic, the way in
which both Government and consumers respond and, in the event
of a potential covenant breach, the granting of waivers by lenders
and any further conditions and costs associated with this.
As a result of the impact of COVID-19, the Group has at the date of
signing the accounts, breached its portfolio performance
covenants in relation to the securitisation facility, thereby
preventing the Group from drawing down further from this facility.
However recognising that such a breach is as a result of COVID-19
which is beyond the Group’s control, Ares has granted a temporary
waiver for this breach covering the period up to 29 June 2020 so as
to allow time for a more permanent solution to be agreed. In the
event that no agreement can be reached or extended then the
Group has sufficient cash resources to repay the amount drawn
under the securitisation facility in full.
As part of its going concern assessment, the Committee reviewed
both the Group’s access to liquidity and its future balance sheet
solvency. For liquidity, the Group produced two scenarios: (i) a
most likely (or ‘base case’) scenario which involves restricted
lending across the Group in order to mitigate the risk of covenant
breaches; and (ii) a downside scenario which applies stresses in
relation to the key risks identified in the base case.
Under the base case, we have assumed the waiver granted by
Ares is extended and no repayment of currently drawn amounts is
made. Whilst the headroom which exists in the financial covenants
remains very tight, the Group does not expect to breach any
further covenants in the next 12 months and therefore would not
require further covenant waivers from its lenders in order to remain
viable. The Group has considered a stress to the base case where
it is required to repay the £15m currently drawn under the
securitisation facility. Under this stressed scenario the Group still
does not expect to breach any further covenants over the next
12 months.
Under the downside scenario, the Group would be expected to
breach certain covenants during the next 12 months and would
therefore require waivers from its lenders in order to remain viable.
The Committee additionally ran a liquidity reverse stress test on the
base case to identify the level expected collections would have to
fall by to cause the Group to deplete all cash reserves. This
assumes no further lending and a corresponding fall in collections
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for the year ended 31 December 2019
with no change to operating expenses. The result of this showed
that collections would have to fall by a further 65% from expected
forecast levels in the base case for the Group to become illiquid,
assuming no access to further funding. Such a reduction in
collections, based on evidence to date was thought by the
Committee to be an unlikely event.
With regards to the balance sheet solvency of the Group, the
Committee noted that under both scenarios, the Group remained
in a net asset position. Upon adding a further stress to write-off all
remaining goodwill on the balance sheet as at 31 December 2019,
the Group remained solvent.
The Committee felt that the range of assumptions made in both the
base case and downside scenario were such that given the
uncertainties around the full general and idiosyncratic impact of
COVID-19, there remained a material level of uncertainty around
the impact on the Group’s ability to meet its covenants and if they
weren’t met, the likelihood of a further waiver being granted by the
lenders as well as the full impact on the Group’s balance sheet.
The Committee acknowledged the considerable challenges
presented by the outbreak of COVID-19 and the material
uncertainty created for the going concern status of the Group.
However, following a number of steps taken by the Board (reduced
lending volume across all three divisions, a reduction in staff
numbers, the furloughing of a number of staff and the deferral of
payments to the UK tax authorities) and despite the material
uncertainty associated with forecast assumptions, purely as a
consequence of COVID-19 as noted above, it is their reasonable
expectation that the Group will continue to operate and meet its
liabilities as they fall due for the next 12 months and therefore has
adopted the going concern basis of accounting.
Given the widespread government-led support to businesses, the
steps taken by UK regulators as well as some market data from
analogous situations and discussions held with each of the Group’s
lenders, should the Group find itself in a position where it is faced
with further covenant breaches, the Committee has a reasonable
expectation that the Group’s lenders will agree to waive potential
covenant breaches to an extent, albeit at a higher cost. The
Committee notes that current negotiations with lenders suggest
that whilst it is likely that waivers would be given, at a cost, to
cover reasonable deviations from the base case scenario, waivers
which would be required to fully cover the downside scenario are
beyond what is currently envisaged in the negotiations. There is
therefore a material uncertainty regarding whether the Group
would be able to operate within the limits set by its lenders in such
a scenario. As mentioned above, the Group notes that as at the
date of signing the accounts, there has been a breach of portfolio
performance covenants in relation to the securitisation facility,
thereby preventing us from drawing down further from this facility.
This has arisen as a result of the impact of COVID-19 on the loan
book of the Guarantor Loans Division. Recognising the portfolio
performance covenant breach is as a result of factors beyond the
Group’s control, a temporary waiver has been granted by Ares for
this breach covering up to 29 June 2020 to allow time for
permanent changes to the treatment of COVID-19 flagged loans
be agreed. As set out above, we expect that the waiver will be
extended for a defined period should negotiations not reach a
conclusion by 29 June 2020. In the event that no agreement can be
reached or extended then the Group has sufficient cash resources
to repay the amount drawn under the securitisation facility in full.
The Group is not currently in breach of any other covenants
associated with the securitisation facility and is currently not in
breach of covenants associated with the term loan and RCF
facilities. The assumption of lender support for covenant breaches
forms a significant judgement of the Committee in the context of
approving the Group’s going concern status.
As highlighted above, whilst the Directors believe the Group will
remain a going concern, a material uncertainty exists that may
cast significant doubt on the Group’s ability to continue as a going
concern. Such a material uncertainty includes the impact of
potential reduced levels of collections and lending on the Group’s
financial performance, compliance with existing financial
covenants and whether waivers will be granted by lenders (and
under what terms) in the event of a covenant breach. The Directors
will continue to monitor the Company’s risk management, access to
liquidity, balance sheet and internal control systems as well as
lending and collections.
The same conclusion has been made in relation to the statement
on longer-term viability as discussed on page 90 of this report.
9. Viability Statement
The Committee reviewed the time period over which the
assessment is made, along with the scenarios that were analysed,
the potential financial consequences and assumptions made in
the preparation of the statement. The Committee concluded that
the scenarios analysed were sufficiently severe but plausible and
the time period of the Viability Statement was appropriate, given
the alignment with the budgeting process.
10. Review of the 2019 half-year results
The review during the year included the following items:
• review of impairment of the goodwill asset and the related
calculation of the write-down of the carrying value of the
goodwill relating to Loans at Home;
• review of customer receivables valuation and revenue
recognition methodology including EIRs;
• review of the adoption of IFRS 16 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.
11. Review of the Annual Report and 2019 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 IFRS 9;
• reviewed the accounting treatment proposed regarding the
implementation of IFRS 16;
• 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 2019 on a
going concern basis, subject to the material uncertainty noted
above;
• 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
2019; and
• reviewed the statement on internal controls.
Further details on the role of internal audit are set out below.
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12. Internal audit function
The internal audit function, which is provided by a third party,
reports regularly 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 discussed the internal audit function informally
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.
Further details on the role of internal audit are set out below.
13. 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
in note 6 to the Financial Statements.
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.
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.
During the year, the Corporate Reporting Review team which
forms part of the Financial Reporting Council (FRC) conducted a
review of the Group’s 2018 Annual Report and Accounts. The
review conducted by the FRC was based solely on the Group’s
published report and accounts and does not provide any
assurance that the report and accounts are correct in all material
respects. This review was satisfactorily completed and in a letter
dated 17 December 2019, the FRC advised the Company that it had
no further requirements for information from the Company.
In addition, the Committee was made aware of the FRC’s Audit quality
review team’s intent to review the 2018 Deloitte audit of NSF. As part of
this process the Chairman of the Audit Committee spoke with the FRC.
Deloitte kept the Company up to date as the review progressed and
advised the Company in March 2020 that it had received the FRCs final
report and provided the Committee with sight of that report. The
Committee has been working with Deloitte and believes the 2019 audit
has responded to any issues raised with Deloitte in the FRC’s final
report. Based on this report, following detailed discussion with
management, and having evaluated the performance during the 2019
audit, the Audit Committee felt it was still appropriate to recommend
the appointment of Deloitte as the external auditor for consideration by
shareholders at the 2020 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 2019 the level of non-audit fees amounted to £1,800,000
(2018: £63,000). The non-audit work carried out during 2019
related to the review of interim financial information, review of
distribution calculations and associated disclosure and acting
in the capacity as reporting accountant in relation to the offer for
Provident. 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 2019 represent 313% (2018: 9%) of audit fees.
The Audit Committee reviewed its policy for the provision of
non-audit services by the external auditor (the ‘Policy’) as part of
the annual review of the Corporate Policy suite. In line with the
non-audit services policy, the Committee had challenged the
appointment of the external auditor for non-audit work during the
period to ensure independence. The Committee reviewed the level
of non-audit fees paid to the Audit firm and recognising the unique
circumstances of the Provident bid, the assurances around
segregation given at the time by the auditor and a change in
regulation which meant that such work could no longer be
undertaken by the auditor, it has not felt necessary to alter its policy
on non-audit fees, but continues to keep this under review. No
further changes were made to the Policy in 2019. Following recent
regulatory changes, the Committee does not anticipate appointing
the external auditor for any future non-audit work.
Internal audit
During 2019, KPMG, one of the UK’s leading accounting firms,
provided an outsourced internal audit function to the Group.
The internal audit function seeks to complete audits of the key
risks identified within the risk universe of the Group, with a focus
on customer outcomes and regulatory risk.
At each meeting during the year, the Audit Committee, along with
the Executive Management team focused on the progress made by
management in dealing with actions raised during internal audit
visits to ensure that the management responses were appropriate
and timely in nature.
In addition, the Audit Committee also monitored the quality of the
dialogue between internal audit and the Executive Committee in
reviewing internal audit findings and agreeing action plans with
appropriate levels of operational buy-in to deal with the points
raised.
When reviewing the internal audit plan for 2020, the Audit
Committee has considered the stage of maturity of the business
and has reached the conclusion that the most effective approach
to internal audit in 2020 will be to establish an in-house internal
audit team that will develop in-depth knowledge of the Group,
supported by externally sourced specialist personnel, where
necessary.
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for the year ended 31 December 2019
The internal auditor reports directly to the Audit Committee thereby
ensuring the independence and effectiveness of the internal auditor.
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
The Committee reviewed the viability assessments as described in
detail below. It felt the scenarios analysed and the financial
consequences and assumptions made in the preparation of the
financial models used for the viability assessment were plausible
and the three year time period used was appropriate. However as
noted in the Viability statement itself, the Committee felt the
viability was subject to the same material uncertainty noted above
in respect of Going Concern.
In accordance with the 2018 FRC Corporate Governance Code,
Directors are required to confirm that they have a reasonable
expectation that the Group will continue to operate and meet its
liabilities as they fall due for an extended period. The Committee
agrees with management that the extended period should be
three years. 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 8 to 59) and the Group’s principal
risks and uncertainties, including COVID-19, and how these are
managed (see pages 24 to 27).
The Group’s strategy and principal risks underpin the Group’s
three-year plan and scenario testing, which the Directors review
quarterly. The review of the three-year plan is augmented by
regular updates from the divisional management teams. The
Board reviews the Group’s strategy in depth annually or more
frequently if required.
The three-year plan is in line with the Group’s strategic planning
cycle and 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.
The Group has reviewed viability from both a liquidity and
solvency perspective and has modelled scenarios to try to
capture the extraordinary circumstances brought about by the
COVID-19 pandemic. The performance of the Group and its
ability to stay within its financial covenants is now very much
influenced by the possible impact of COVID-19. Whilst the base
case described in the following sections represents a realistic
outcome, COVID-19 has created a material uncertainty around
demand and collections which mean there remains a possibility
of covenant breaches within the next 12 months and as noted
above, in respect of going concern if provisions rise by a significant
amount and the remaining goodwill is written off, in the absence
of the raising of further capital, there will be a potential impact
on solvency. The Committee notes that whilst the Group has
entered into negotiations with its lenders for potential covenant
waivers, the range currently envisaged for these waivers doesn’t
fully cover the downside scenario and therefore there remains
material uncertainty as to the granting of these waivers, and
if granted, the terms on which such waivers are given.
COVID-19 scenarios
Given the recent COVID-19 pandemic, the possibility of
unprecedented operational disruption has heightened and we
have already seen an impact to lending and collections activity.
Whilst the full impact of COVID-19 on the Group’s future financial
performance remains materially uncertain and will be heavily
influenced by a number of factors including the severity and
duration of the pandemic as well as the way in which both
Government and consumers respond, the Group has sought to
produce both a base case scenario and downside scenario in
order to assess the possible impact on viability and going concern.
These scenarios include a number of assumptions which, were
they to be inaccurate, would create material uncertainty as to the
outcomes, such as when the Group’s divisions will be able to restart
lending, the level of demand for loans in the post lockdown
COVID-19 environment, the ability of customers to make
repayments, and the level of government relief available to both
the Group’s customers and its business (for example in regards to
furloughed staff and deferment of taxes). The scenarios also
consider the direct impact of COVID-19 on the Group’s operations,
for example as a result of a greater proportion of the workforce
working remotely, the implementation of social distancing
guidance, as well as the impact on key relationships with suppliers,
brokers (for the branch-based and guarantor lending divisions)
and agents (for the home credit division). The key scenarios
considered are detailed below.
1) COVID-19 base case scenario
Liquidity
The base case forecasts reflect an achievable business plan that
involves restricted lending across the Group in order to mitigate
the risk of covenant breaches. In this forecast, recent government
initiatives to support borrowers affected by the outbreak of
COVID-19, such as the FCAs ‘payment freeze’ of up to three-months,
have been considered in detail when assessing the impact on the
Group. This process is made easier by the fact that forbearance is
already a key feature of the Group’s business model.
We have also modelled:
• The potential for increased modification losses on modified
loans.
• A more severe macroeconomic impact of COVID-19 on
collections and have modelled the possibility of a higher severe
downside weighting in line with the sensitivities considered in
note 34 to the financial statements when determining ECL.
• Lending levels are assumed to be restricted
• The payment of dividends are not included over the forecast
period
• A lower cost base than forecast before COVID-19, which would
be achieved through increased efficiencies and cost saving
initiatives, reflecting a slower growth path of the Group.
• As noted in the Going Concern section, there exists a breach of
portfolio performance covenants for which the Group has been
granted a temporary waiver up to 29 June 2020 in order to allow
time for permanent changes to be agreed, The base case
therefore assumes that no repayment of the £15m drawn from
the Ares facility occurs and in addition no further drawdowns
from the securitisation facility are made.
Since the onset of COVID-19, the Group has already implemented
a number of initiatives in order to conserve cash in the business
during these uncertain times such as:
• a reduction in staff numbers;
• furloughing a number of branch-based lending staff;
• a 70% reduction in the bonus potential for Executive Directors
in 2020; and
• the deferral of payment of a number of HMRC related taxes for a
specified period.
The Group has considered the 19 June 2020 announcement by the
FCA proposing an extension of the option of a payment freeze for
borrowers experiencing difficulty due to COVID-19 to 31 October
2020. The Group has run sensitivities on the base case model in
order to assess the potential impact and have concluded that the
base case remains sufficiently resilient to these proposed changes.
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Under the base case, the headroom which exists in the financial
covenants remains very tight however given the Group would
operate under a restricted lending business plan, it does not
expect to further breach financial covenants in the next 12 months
and therefore would not require further financial covenant waivers
from its lenders in order to remain viable. Assuming covenant
compliance and profitability in 2021 and 2022, it may also have the
ability to refinance a proportion of its existing term loan facility as it
falls due. However as noted earlier, as the headroom is very tight
and the current securitisation facility is in breach of certain
portfolio performance covenants, there continues to exist a
material uncertainty in the assumptions and outcome of the base
case as a result of the impact of COVID-19 and therefore the
ultimate impact on covenants and the Group’s ability to access the
new securitisation facility, although initial negotiations with lenders
suggest waivers could be granted, at a cost, to cover reasonable
deviations from the base case. There is also a material uncertainty
around the timing of a return to profitability.
Solvency
Under the base case, the Group would remain solvent from a
balance sheet perspective. The Committee believes that
provisioning of a magnitude that wipes out remaining reserves
after all goodwill is written-off and assuming no further capital is
raised is an unlikely outcome.
As noted above, the Group may have to further restrict lending
activities and/or exercise further financial levers around costs in
order to maintain solvency. Due to the tight headroom on financial
covenants which exist under the base case and the uncertainty
around the full impact of COVID-19, the Group notes that the
movement in any one or a number of these assumptions creates a
material uncertainty in the liquidity and/or solvency position of the
Group.
Key risks to the assumptions made include:
• the possibility that the current performance of the loan book
deteriorates beyond current delinquency trends;
• a further negative shift in the macroeconomic environment;
• higher level of loans rescheduled and/or deferred over and
above that currently forecast;
• the inability to realise planned savings in operating expenses as
the business shifts to a recovery phase during 2020; and
• in the event of covenant breaches, the response of the lenders to
such breaches in terms of their willingness to waive such
breaches and if they agree to do so, the terms on which they
propose to grant such a waiver.
2) COVID-19 downside scenario
Liquidity
This scenario reflects stresses to the key risks described above.
Under this scenario:
• the macroeconomic impact of COVID-19 is worse than that
assumed under the base case;
• a more pessimistic severe downside weighting is adopted;
• collections fall dramatically;
• the Group experiences a c. 10% higher level of rescheduling;
• further deterioration in modification losses over and above that
recognised under the base case; and
• the possibility that anticipated savings in operating expenses in
2020 and 2021 are not realised as well as an inability to further
defer HMRC related taxes beyond three months.
Under this scenario, it is expected that the Group would breach
certain borrowing covenants during the next 12 months, would not
be able to access further funding over the period of breach and
would require waivers from its lenders in order to remain viable.
The waivers required under this scenario are beyond the range
currently envisaged in the negotiations with lenders. The scenario
also relies on a number of key assumptions including the Group’s
ability to:
• maintain collections at the rates forecast in the downside
scenario with no further deterioration;
• operate efficiently under the new social distancing guidelines;
and
• resume key relationships with brokers and existing customers
quickly and that the overall level of demand for loans is as
expected, which remains very difficult to predict.
Solvency
The Group would remain solvent from a balance sheet perspective
under this scenario with the caveats noted above for the base
case.
Assessment
Liquidity
Under the COVID-19 downside scenario, the Group would be
expected to breach certain borrowing covenants during the next
12 months and would therefore require waivers from its lenders in
order to access funding and remain viable.
The two scenarios outlined demonstrate that there remains
a material uncertainty around the impact of COVID-19 on
the Group. Whilst it is anticipated that the base case is the
most likely outcome, the Board notes that the inability to
predict the ongoing impact of COVID-19 means it is extremely
difficult at this time to completely rule out the possibility of
the downside scenario occurring. As a result, there remains a
possibility of covenant breaches within the next 12 months.
Given the widespread government-led support to businesses,
the steps taken by UK regulators as well as some market data
from analogous situations and discussions held with each of the
Group’s lenders, should the Group find itself in a position where
it is faced with further covenant breaches, the Committee has
a reasonable expectation that the Group’s lenders will agree to
waive potential covenant breaches under the base case scenario,
however these could be only up to certain limits and at a higher
cost. The Committee notes that, in the event that waivers are
granted by lenders, there is material uncertainty as to whether
the waivers will capture the extent of covenant breaches which
could be experienced by the Group should it find itself operating
under the downside scenario assumptions, and therefore
there is a material uncertainty regarding whether the Group
would be able to operate within the limits set by its lenders.
In addition, the Group notes that as at the date of signing the
accounts, there has been a breach of portfolio performance
covenants in relation to the securitisation facility, thereby
preventing the Group from drawing down further from this facility.
This has arisen as a result of the impact of COVID-19 on the loan
book of the Guarantor Loans Division. Recognising the portfolio
performance covenant breach is as a result of factors beyond the
Group’s control, a temporary waiver for this breach has been
granted by Ares up to 29 June 2020 in order to allow time for
permanent changes to the treatment of COVID-19 flagged loans to
be agreed. We expect that the waiver will be extended for a
defined period should negotiations not reach conclusion by
29 June 2020. In the event that no agreement can be reached or
extended then the Group has sufficient cash resources to repay the
amount drawn under the new facility in full. The Group is not
currently in breach of any other covenants associated with the
securitisation facility and is currently not in breach of covenants
associated with the term loan and RCF facilities.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 92
Audit Committee report continued
for the year ended 31 December 2019
During the course of the next three years, the Group will face
renewal or replacement of its existing debt facilities. The
Committee felt that as both the base and downside cases showed
profitability in 2021, subject in the case of the downside scenario, to
the lenders granting further waivers, it was likely, but not certain,
that the facilities would be renewed or replaced in 2022 and 2023.
The assumption of lender support for covenant breaches is a
significant judgement of the Directors in the context of approving
the Group’s prospects, going concern and viability, as is the
renewal of facilities.
Solvency
In regards to balance sheet solvency of the Group, the Committee
noted that under both scenarios, the Group remained in a net
asset position. Upon adding a further stress to write-off all
remaining goodwill on the balance sheet as at 31 December 2019,
the Group remained solvent.
Directors’ statement on viability
The Directors acknowledge the considerable challenges
presented by the outbreak of COVID-19 which has created a
material uncertainty around the going concern and viability status
of the Group. However, following a number of steps already taken
by the Board and despite the material uncertainty associated with
forecast assumptions, purely as a consequence of COVID-19, it is
their reasonable expectation that the Group will continue to
operate and meet its liabilities as they fall due for the next three
years both from a liquidity and solvency perspective.
In making their assessment, the Directors took account of the
Group’s current financial and operational positions and recent
trading activity and in particular, recent collections activity. They
noted the recent securitisation facility agreement announced on
11 March 2020, that provided a six-year £200m facility to fund the
operations of the business, but also considered the stricter
performance conditions inherent in that facility which could restrict
the Group’s ability to drawdown from the facility. The Directors
additionally considered the ‘reverse stress test’ conducted by the
Group which showed that assuming no further lending occurs
beyond April 2020, and additionally assuming current levels of
operating expenses and collections and no repayment of facilities
or access to further lending, collections would be required to fall
from current expected levels in the base case by over 65% to result
in an inability of the Group to fund operating expenses and interest
payments beyond the next 12 months. As an additional
consideration, the Directors noted that should the Group be
required to repay the £15m existing drawings under the
securitisation facility, under the base case, the Group would
remain liquid and is not expected to breach its covenants. With
regards to the balance sheet solvency of the Group, the Directors
noted that under both scenarios, the Group remained in a net
asset position and upon adding a further stress to write-off all
remaining goodwill on the balance sheet as at 31 December 2019,
the Group remained solvent with the caveats noted above in the
base case.
The Directors recognise that should the Group pursue a level of
growth significantly beyond the base case forecast, there would
be a potential need during 2021 to increase the Group’s debt
facilities in order to support additional loan book growth and fund
any increased lending post-COVID-19. The Directors also recognise
that the current term loan and RCF facilities are due to mature in
August 2023 and August 2022 respectively. However, they have
concluded for the reasons noted above, that it is reasonable to
assume that the Group’s existing debt facilities will either be
extended or replaced with similar facilities although they note that
such extension or replacement is by no means certain. In addition,
they discussed the potential financial and operational impacts of
the principal risks and material uncertainty and the likely
effectiveness of the current and available mitigating actions which
include government support available to the Group and its
customers, as well as the aforementioned ability of the Group to
reduce lending and raise additional debt funding using the
existing securitisation facility, either by remaining covenant
compliant or through waivers.
As explained above, whilst the Directors expect the Group to
remain in a viable liquidity and balance sheet position over the
next three years under the base case presented, they note that
there exists a material uncertainty around the impact of potential
reduced levels of collections and lending on the Group’s financial
performance and therefore liquidity and solvency, compliance
with existing financial covenants, and whether waivers will be
granted by lenders and under what terms in the event of a
covenant breach beyond the portfolio performance breach
already identified and for which a temporary waiver has been
granted. The terms on which waivers are granted and the ability of
the Group to remain within these terms is materially uncertain. As
these outcomes will remain highly dependent on the severity and
duration of the pandemic, as well as the extent and pace of any
recovery, the Board will continue to monitor the Group’s financial
position carefully over the coming weeks and months as a better
understanding of the impact of COVID-19 is developed. The Board
is in negotiations with lenders regarding covenant waivers, whilst
at the same time evaluating all funding options, which may include
the issue of further equity.
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.
As noted above, the Directors also considered it appropriate to
prepare the financial statements on the going concern basis, as
set out more fully on page 87 and with the material uncertainty set
out therein.
Niall Booker
Chairman of the Audit Committee
25 June 2020
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Risk Committee report
for the year ended 31 December 2019
Membership
and attendance
4 The Committee met on four
occasions during the year
ended 31 December 2019.
Director
Heather McGregor (Chairman)
Niall Booker
Charles Gregson
Attendance and
total number of
meetings that the
Director was
entitled to attend
4/4
4/4
3/4
The principal purpose of the Risk Committee (the ‘Committee’) is to
assist the Board in its oversight of risk within the Company, with
particular focus on risk appetite, risk profile and the effectiveness
of the Company’s internal controls and risk management systems.
Membership and attendance
The Committee consists of the Non-Executive Directors of the
Company. The Chief Financial Officer, Company Secretary and
Group Chief Risk Officer attended all Committee meetings. Other
relevant parties are also invited to attend Committee meetings,
as appropriate.
The Directors’ attendance at the meetings during 2019 is recorded
in the table above.
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 four
times during the year. In addition, as Committee Chair, I 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, regulatory
and political 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.
across the Group as a whole, taking into account materiality
thresholds that have already been approved by the Committee.
The Committee oversaw the risk management assessment that took
place as part of the offer for Provident and the preparation for the
wider risk universe that would have been realised had the offer
been successful. In Q1 2020, the Committee reviewed and
reassessed the Group’s risk appetite statements and target residual
ratings for each of the principal risks which, along with the
confirmed risk scoring matrices for 2020, were then included within
the risk management system. Since then, the COVID-19 outbreak has
prompted the addition of this as a new principal risk. A summary of
the Group’s principal risks are set out on pages 24 to 27.
The Committee has had oversight and contributed to the
development of increased horizon scanning activity, facilitating
a wider external facing discussion at the Committee in addition
to the consideration of those risks identified as being current.
During the year to 31 December 2019 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 embedding of the risk management system
and key reporting requirements;
• oversight of horizon scanning activity focusing on regulatory,
social, economic and technological areas;
• quarterly complaints reviews;
• oversight of half-yearly credit risk reporting; and
• a review of business continuity planning across the Group.
Areas of focus in 2020
The key risk facing the Group in 2020 is the COVID-19 pandemic
and the Committee is focused on supporting each of our business
divisions to safeguard the health and safety of our customers,
our staff and self-employed agents. In doing so, the Committee
has also sought to ensure that each business mitigates, as far
as possible, the impact of the pandemic on our operational and
financial performance so as to avoid putting the Group’s business
at risk. The Committee intends to continue to improve and enhance
the Company’s risk management framework and horizon scanning
activity during 2020. Key tasks include the implementation of
additional functionality within the risk management system,
enhancement of the Group risk management framework
and further development of the Group’s risk register.
Principal activities of the Committee during 2019
The Committee oversaw the continued embedding of the Group-
wide risk management system (called Xactium) which continues to
provide the Committee with a clear and consolidated view of risk
Heather McGregor
Chair of the Risk Committee
25 June 2020
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 94
Directors’ remuneration report
for the year ended 31 December 2019
Membership
and attendance
12 The Committee met on
12 occasions during the year
ended 31 December 2019.
Director
Heather McGregor (Chairman)
Niall Booker
Charles Gregson
Attendance and
total number of
meetings that the
Director was
entitled to attend
11/12
12/12
12/12
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
Dear Shareholder
I am pleased to present the Directors’ Remuneration Report for
NSF for 2019, my first as Chair of the Remuneration Committee
(the ‘Committee’).
Part A: Annual Statement
Part B: Our remuneration at a glance
Part C: Directors’ Remuneration Policy
1. Executive Director Remuneration Policy Summary Table
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
Implementation of Remuneration Policy for the Executive
2.
Directors for 2020
3. Consideration by the Committee of matters relating to the
Directors’ remuneration for 2019 and 2020
4. Group Chief Executive to employee pay ratio
5. Percentage change in Executive Director remuneration
6. Group Chief Executive to employee pay ratio
7. Single figure remuneration table: Non-Executive Directors
– audited
8. Directors’ shareholding and share interests
9. Shareholder voting
Business context and Committee decisions on remuneration
As noted in the Chairman’s statement on pages 6 and 7 and in the
Group Chief Executive’s report on pages 12 to 17, 2019 was an
eventful year for the Group. There were also a number of
important strategic developments that took place during the year
including the opening of a number of new branches, the
consolidation of our guarantor loans operations into a single
location and the proposed acquisition of Provident Financial plc.
As noted elsewhere in this Annual Report, each of the Company’s
three divisions performed well operationally and delivered solid
growth in normalised operating profit. However, the
macroeconomic uncertainty associated with the COVID-19
outbreak in 2020 has meant that the Board has already taken a
number of steps including a 70% reduction in the bonus potential
for Executive Directors in 2020, to help conserve cash within the
Group so that it is well-placed to return to normal as soon as
circumstances allow.
Although the Company is not presenting a new Remuneration Policy
for approval in 2020, the Committee chose to adopt several areas of
corporate governance best practice in light of the most recent
updates to the Code. The adoption of these areas of best practice
reflects the Committee’s commitment to adhere to a much higher
level of corporate governance than is required for a Company of our
size and with a Standard Listing. The Group’s major shareholders
were consulted as part of a process to determine which elements of
the Code would be adopted by the Committee. After having taken
their views into account, the following amendments have been
adopted by the Remuneration Committee:
• reduction in Executive pension contributions and commitment for
contributions for new hires to be in line with the wider workforce
as communicated to shareholders in October 2019;
• introduction of the ability for the Remuneration Committee to
override formulaic outcomes of incentive arrangements; and
• introduction of a post-cessation shareholding requirement for
Executive Directors as communicated to shareholders in
October 2019.
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Directorate Changes
Miles Cresswell-Turner stepped down from his role as CEO of Everyday Loans Group (‘ELG’) at the end of April 2019 and as an Executive
Director of Non-Standard Finance plc on 21 October 2019 and received a payment of £287,000 in lieu of his notice. Miles was deemed to
be ‘good leaver’ for purposes of his in-flight incentives and an agreement was reached in respect to his Founder Shares. Details of the
payments Miles received for his loss of office and his Founder Shares agreement are outlined in the section ‘Payments to past Directors or
for loss of office’ on page 108.
On 15 November 2019, it was announced that Nick Teunon, Group CFO would step down from the Board in 2020. On 30 March 2020 it
was announced that Jono Gillespie would replace Nick Teunon as Group CFO on 1 April 2020. Nick Teunon left the Board on 30 April
2020 and received his salary and benefits up to the date of his departure, but received no further payments.
Incentives performance and outcomes
2019 annual bonus outcomes
The 2019 annual bonus for John van Kuffeler and Nick Teunon was based on a combination of Group financial and Group non-financial
performance metrics. For 2019 the actual performance conditions and vesting are summarised below:
2019 annual bonus outturn
Weighting
(%)
Adjusted profit
Personal objectives
70%
30%
Actual
Actual:
£14.71m
n/a
Threshold
(25% payable)
Target
(75% payable)
Maximum
(100% payable)
Threshold:
£16.76m
Target:
£22.34m
Maximum:
£25.13m
n/a
n/a
n/a
Outcome
(% payable
of element)
CEO
Actual
£
CFO
Actual
£
0%
85%
Total
£0
£0
£84,941
£73,185
£84,941
£73,185
Miles Cresswell-Turner left the business in October 2019 but under the terms of his severance he was eligible to receive an annual bonus
that was prorated for time served during the year. Miles was CEO of Everyday Loans until 30 April 2019 and so his bonus was structured
differently to that for John and Nick. Whilst an element of Miles’ bonus was based on the Group financial and non-financial metrics, the
remainder was based on financial and non-financial metrics relating to Everyday Loans Group. The resulting outcome for Miles’ bonus
using this methodology was a different payout percentage to that for John and Nick and the Remuneration Committee felt that it did
not reflect the overall performance of the business during the year. Therefore, operating within the terms of its remit, the Remuneration
Committee utilised their authority to override formulaic outcomes and reduced Miles’ payout so that it was in line with that for John and
Nick. Miles’ total 2019 annual bonus was £58,949.
2019 LTIP outcomes
During the year, the vesting period for the Everyday Loans Group LTI elapsed. Performance was assessed at the end of the financial year
and there was no payout or vesting under the scheme.
Application of Remuneration Policy for 2020
Salary increases
Salaries for 2020 were set taking into account a number of considerations including the level of salary increases seen across the Company.
As a result, Executive Directors will receive a 2.5% increase to their base salaries for 2020.
Pension and benefits
The maximum contribution to a personal pension scheme or cash in lieu will continue to equal to 10% of base salary for all existing
Executive Directors. All benefits will be provided to the Executive Directors in line with the Directors’ Remuneration Policy. However,
following the adoption of a number of the provisions of the Code, new Executive Directors appointed to the Board will receive a
maximum contribution to a personal pension scheme or cash in lieu equal to 8% of base salary. As a result, Jono Gillespie who joined
the Board on 1 April 2020 will receive a contribution equal to 8% of base salary.
Annual bonus
Given the significant uncertainty regarding the ongoing COVID-19 pandemic and the desire to conserve cash within the Group, the Board has
decided to remove 70% of the annual bonus potential for Executive Directors in 2020. This is one of the actions our Board has implemented to
help mitigate the impact on our operational and financial performance and to avoid putting our business at risk.
Therefore for 2020, any annual bonus will carry a maximum potential of up to 30% of that prescribed under the Policy, subject to the
achievement of non-financial measures. The non-financial measures for the year will once again comprise a blend of conduct and
governance focused measures with a clear focus on the delivery of good customer outcomes. Additionally, this element of the bonus will
also be subject to the Remuneration Committee’s satisfaction regarding the Company’s financial performance against the changing
external environment. Therefore, the full 30% can only be achieved if all performance measures are satisfied and if the Remuneration
Committee judge financial performance to be satisfactory in the circumstances faced.
This will mean that there will have been no payout under the annual bonus based on financial results for two consecutive years (2019
and 2020). Please see the annual bonus implementation section on page 106 for details of the performance conditions attached.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 96
Directors’ remuneration report continued
for the year ended 31 December 2019
Looking forward to 2020
The Committee has already reduced the bonus potential in 2020 by removing the financial element of the annual bonus and it will
continue to take into account the potential for unintended consequences by ensuring any bonus paid for the achievement of non-
financial objectives remains appropriate in the context of the Company’s overall financial performance. The Committee’s overriding
objective is to ensure that the Policy is operated fairly for all stakeholders. Aside from the decision on annual bonus, the Committee is
intending to continue to operate the Policy in 2020 as it did in 2019; however, the Committee is mindful that it may need to exercise its
discretion to depart from formulaic outcomes given the uncertain macroeconomic environment.
Work will also begin work on a new Remuneration Policy which will need to be presented to shareholders for renewal at our AGM in 2021.
The terms of this policy are to be decided in context of both the Company strategy and the wider macroeconomic climate. One aspect
that the policy will likely include is the introduction of a new long-term incentive plan which will address the motivation and retention
risks from the potential lack of vesting of existing arrangements. Shareholders will be consulted on the Committee’s plans throughout this
process to ensure the new policy is fair to all stakeholders.
Wider workforce considerations
The Remuneration Committee always takes into account the levels and structure of the wider workforce remuneration as well as other
conditions when making decisions on executive pay. We believe that employees throughout the Company should be able to share in
the success of the Company and to help facilitate this, we continue to operate an all-employee Sharesave Plan ('SAYE') through which
employees can set aside a portion of their salary in exchange for shares at a discount to the prevailing market price.
Mindful of the fact that the recent share price performance means that the current SAYE entitles participants to purchase NSF shares at a
significant premium to the current share price, the Committee will consider whether an additional SAYE can be put in place for employees
that will prove more attractive than the current SAYE.
In 2020, the Company will continue to seek to improve our engagement with our employees by expanding our employee forum meetings
across the business. I am the Non-Executive Director designated to gather and report on employee views and will be attending some of
these meetings personally to hear first-hand the mood and experience of the Group’s employees.
Format of this report and matters to be approved at our Annual General Meeting in May 2020
The remainder of this report is split out into the following three sections:
Part B: Our remuneration at a glance (page 97).
Part C: Directors’ Remuneration Policy Summary (pages 98 to 106).
Part D: Annual Report on Remuneration providing details of the payments made to Directors in 2019, as well as other statutory
disclosures (pages 106 to 113) and which complies with the disclosure requirements of the Listing Rules of the UK Listing
Authority and the UK 2018 Corporate Governance Code.
At the General Meeting to approve our 2019 results, to be held on 28 July 2020, a resolution to approve the Annual Report on
Remuneration will be put to shareholders for approval. I ask for your support on the relevant resolution (number 2).
The Committee and I are keen to hear and actively take note of your views as shareholders on our approach to remuneration.
On behalf of the Remuneration Committee and Board.
Heather McGregor
Chairman of the Remuneration Committee
25 June 2020
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Part B: Our remuneration at a glance
We summarise below both the key decisions taken by the Committee in relation to base pay and incentives for the Executives in respect of
2019 and how key elements of the Remuneration Policy will be implemented for 2020.
Nick Teunon left the Company on 30 April 2020. Nick was paid his salary and benefits up to his departure date and will receive no further
payments. Jono Gillespie, the Company’s Deputy Chief Financial Officer was promoted to Group Chief Financial Officer on 1 April 2020.
Jono’s remuneration for 2020 is in line with our Remuneration Policy as outlined in this report. Jono’s annualised starting base salary is
£240,000 and he receives a pension contribution of 8%, in line with that of our wider workforce. Jono is also eligible to receive an annual
bonus prorated for his time served as Group CFO during the year.
2020 Executive Director Remuneration Policy
Base salary
Annual bonus
Maximum:
On-target:
Threshold:
John van Kuffeler
£341,500
100% of salary
75% of maximum
25% of maximum
Jono Gillespie
£240,000
100% of salary
75% of maximum
25% of maximum
Nick Teunon
£294,200
Nil
Nil
Nil
Operation for 2020
• Typically, performance measures are weighted as to 70% financial (normalised profit before tax) and 30%
non-financial (including both conduct-based measures and governance-based measures). Conduct-based
measures 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. Governance-based measures seek to reward the installing of strong governance
processes and behaviours such as the embedding of internal controls and compliance with the SMCR.
• However, given the uncertainty stemming from the COVID-19 pandemic and the need to conserve cash within
the Group, the Board has made the decision to remove the 70% of the annual bonus based on financial
performance measures. As such the maximum opportunity under the 2020 annual bonus will be 30% of base
salary with 100% of the bonus being subject to non-financial measures. The Remuneration Committee will
however still take the Company’s financial performance into account in determining any payout under the
remaining 30% of the bonus.
• Threshold vesting will be set at 25% of maximum, on-target vesting at 75% and maximum vesting at 100%, with
vesting on a sliding scale between these points.
• Bonus is payable in cash following the end of the financial year.
• Additional Remuneration Committee powers of discretion to adjust formulaic outcomes to reflect performance.
Malus and clawback 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
Shareholding
requirement
Post-cessation
shareholding
requirement
John van Kuffeler
10% of salary
Jono Gillespie
8% of salary
Nick Teunon
10% of salary
100% of salary over five years
100% of salary over five years
100% of salary over five years
100% of shareholding requirement for
one-year post-cessation, 50% of
shareholding requirement for two years
post-cessation. Shareholding
requirement only applies to share
awards granted under long-term
incentive plans from 2020 onwards
100% of shareholding requirement for
one-year post-cessation, 50% of
shareholding requirement for two years
post-cessation. Shareholding
requirement only applies to share
awards granted under long-term
incentive plans from 2020 onwards
n/a
2019 year-end decisions made:
2020 salary review
2019 bonus outcome
• Financial (maximum 70%)
• Non-financial (maximum 30%)
Value
Percentage of salary/maximum
John van Kuffeler
Nick Teunon
2.5% increase to £341,500 per
annum from 1 January 2020
2.5% increase to £294,200 per
annum from 1 January 2020
Financial: 0%
Non-financial: 25.5%
Total: 25.5%
Financial: 0%
Non-financial: 25.5%
Total: 25.5%
£84,941
£73,185
25.5% of salary
25.5% of salary
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 98
Directors’ remuneration report continued
for the year ended 31 December 2019
Part C: Directors’ Remuneration Policy Summary
This section of the report contains details of the Directors’ Remuneration Policy (the ‘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 and is displayed on the Company’s website, in the Investors section.
In 2019, following consultation with shareholders, the Remuneration Committee chose to adopt several elements of corporate
governance best practice early and ahead of the Policy renewal due in 2021. This has been done to ensure the Company’s alignment
with the latest UK Corporate Governance Code and, where possible and practical, to demonstrate the Committee’s commitment to good
governance. The elements that were adopted in 2019 are:
• commitment for Executive pension contributions for new hires to be in line with the wider workforce as communicated to shareholders
in October 2019;
• introduction of the ability for the Remuneration Committee to override formulaic outcomes of incentive arrangements; and
• introduction of a post-cessation shareholding requirement for Executive Directors as communicated to shareholders in October 2019.
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:
Maximum opportunity
Performance measures and assessment
Annual percentage increases are
generally consistent with the range
awarded across the Group.
A broad assessment of individual and
business performance is used as part of
the salary review.
No recovery provisions apply.
Percentage increases in salary
above this level may be made in
certain circumstances, such as a
change in responsibility or a
significant increase in the role’s scale
or the Group’s size and complexity.
The salaries payable to the Executive
Directors from 1 January 2020 are
disclosed on page 108.
Remuneration Policy summary table
Element, purpose
and link to strategy
Operation
Base salary
To provide
competitive fixed
remuneration
that will attract
and retain key
employees and
reflect their
experience and
position in
the Group.
Salaries are reviewed annually, and
any changes normally take effect
from 1 January. When determining
the salary of the Executives the
Committee takes into consideration:
• the levels of base salary for similar
positions with comparable status,
responsibility and skills, in
organisations of broadly similar
size and complexity;
• the performance of the individual
Executive Director;
• the individual Executive Director’s
experience and responsibilities;
• pay and conditions throughout the
Group, including the level of salary
increases awarded to other
employees; and
• the level of incentive
compensation provided to
the Executives under the
annual bonus.
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Element, purpose
and link to strategy
Operation
Maximum opportunity
Performance measures and assessment
Benefits
To provide
competitive
benefits and
to attract
and retain
high-calibre
employees.
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.
Reviewed periodically to ensure
benefits remain market competitive.
Benefits currently include:
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.
• Company car or for Company to
provide car benefit in lieu of salary
• 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.
Attainment of performance between
threshold and maximum levels will
vest on a straight-line basis between
these two points.
Bonus awards are granted annually,
usually following the signing of the
Annual Report and Accounts, in 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 reasons
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 (70%), which may
include those related to normalised
profit before tax. Non-financial
measures (30%) will include both
conduct-based measures and
governance-based measures.
Conduct-based measures include
ensuring delivery of good customer
outcomes through appropriate
affordability assessments and
appropriate treatment of vulnerable
customers together with appropriate
collections, arrears and forbearance
practices. Governance-based
measures aim to install robust
processes with respect to control and
compliance such as compliance with
certification regimes and embedding
monitoring of control processes.
The Committee has the discretion to
adjust targets or performance
measures for any exceptional events
that may occur during the year as well
as formulaic outcome of awards to
reflect actual performance of the
individual and the Company.
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.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 100
Directors’ remuneration report continued
for the year ended 31 December 2019
Element, purpose
and link to strategy
Non-Standard
Finance long-
term incentive
('LTI') for
Executive
Directors
and senior
management.
The LTI supports
the long-term
strategic
objectives of
the Group.
Founder Shares
awarded to
Executive
Directors on IPO1.
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 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 ten 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 ten years. Any awards earned in
excess of either cap will be satisfied
through market purchase of shares
by the Company.
The Non-Standard Finance LTI was a
one-off award and no further awards
will be made under this scheme.
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.
The Founder Shares award was a
one-off award and no further
awards will be made under this
scheme.
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 an initial market
capitalisation of the Company of
£1.10 per share.
Under the terms of the Founder Shares:
A. the Group must make acquisitions
with a combined value of at least
£50m; 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).
Under the terms of Founder Shares
deed of grant, the departure of Miles
Cresswell-Turner meant that the
performance condition of the award
was satisfied and triggered a vesting
of the Founder Shares awards.
After consultations with the Group’s
major shareholders and discussions
with the remaining Founder Share
participants, it was agreed that whilst
the award had vested it could not be
exercised until, either the Company’s
share price reaches £1.10 within a new
five-year performance period, or on a
change of control. Please see page 113
for more details.
1 Please note that the Founder Shares award is not considered remuneration but has been included in the policy table for completeness and for consistency with prior years.
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Element, purpose
and link to strategy
Operation
Maximum opportunity
Performance measures and assessment
101
Everyday Loans
Group LTI for
Miles Cresswell-
Turner and senior
management
of Everyday
Loans.
The Long-Term
Incentives
support the
long-term
strategic
objectives of
the Group.
All-employee
incentives
Encourage all
employees to
become
shareholders
and thereby
align their
interests with
shareholders.
Shareholding
guidelines
To ensure that
Executive
Directors’
interests are
aligned with
those of
shareholders over
a longer time
horizon.
Post-cessation
shareholding
To ensure
Executives
retain a level of
alignment with
shareholder
for the period
immediately
following their
cessation of
employment.
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.
The Everyday Loans group LTI was a
one-off award and no further
awards will be made under this
scheme.
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 was tested against the
hurdle at 31 December 2019 please
see page 106 for the performance
achieved.
For any vested options, 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.
Eligible employees may participate
in the Sharesave Plan and/or Share
Incentive Plan and/or Company
Share Option Plan or country
equivalent.
Executive Directors are entitled to
participate on those same terms.
Maximum participation levels for all
staff, including Executive Directors,
are set by relevant UK legislation or
other relevant legislation.
Not applicable.
The Executive Directors are required
to build or maintain (as relevant) a
minimum shareholding in the
Company over a five-year period.
The shareholding requirement
is 100% of salary for Executive
Directors.
Not applicable.
Shares included in this calculation
are those held beneficially by the
Executive Director and their spouse/
life partner.
For share awards granted from 2020
onwards for Executive Directors, a
minimum level of shares must be
retained following their cessation of
employment.
Executives will be required to hold:
Not applicable.
• 100% of the shareholding
requirement for the first year
post-cessation
• 50% of the shareholding
requirement for the second year
post-cessation.
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Directors’ remuneration report continued
for the year ended 31 December 2019
Discretion with the Directors’ Remuneration Policy
The Committee has expanded its powers of discretion to include the ability to adjust remuneration outcomes upwards or downwards to
ensure that they reflect the shareholder experience. This means that it now has the power to override formulaic incentive outcomes in
light of the overall performance of the Company.
The Committee also maintains its previous powers of discretion being the power to exercise operational and administrative discretion
under relevant plan rules approved by shareholders as set out in those rules and 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 in the coming year, 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 chart indicates that for John van Kuffeler a significant proportion of both target and maximum pay is performance-related. Please
note that Jono Gillespie does not participate in the NSF LTI. As Nick Teunon left the Board on 30 April 2020 and is no longer eligible to
receive further payments under the LTIP or bonus scheme, illustrations for Nick are not included.
John van Kuffeler (£000)
Jono Gillespie (£000)
1,400
1,200
1,000
800
600
400
200
£1,300
14%
28%
£997
24%
£791
15%
32%
34%
26%
£414
100%
52%52%
41%
32%
1,400
1,200
1,000
800
600
400
200
£451
40%
£511
47%
£511
47%
60%
53%
53%
£271
100%
0
Minimum
On target
Maximum
Fixed Annual bonus LTIP Share price growth
Maximum
(with 50%
share price
appreciation)
0
Minimum
On target
Maximum
Fixed Annual bonus LTIP Share price growth
Maximum
(with 50%
share price
appreciation)
Assumptions used in determining the level of payout under given scenarios are as follows:
Element
Minimum
Target
Maximum
Maximum including
50% share price increase
Fixed elements
Base salary at 1 January 2020
Estimated value of benefits provided
under the Policy Pension – 10% of salary
for John van Kuffeler, 8% for Jono Gillespie
Annual bonus
NSF LTI
Nil
Nil
75% of maximum
100% of salary
100% of salary
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
Awards made under the NSF LTI were 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. Whilst the Remuneration Policy allows for 100% of salary to be
awarded as bonus, it should be noted that the Remuneration Committee has exercised its discretion for 2020 and limited this potential
to 30%.
The IFRS 2 value is considered to be a suitable basis for estimating the potential payouts of the NSF LTI.
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3. Approach to recruitment and promotions
The Company will pay total remuneration for new Executive Directors to attract appropriately skilled and experienced individuals, but
that 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
• 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.
Pension
• 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.
Maximum variable remuneration
• The maximum annual variable remuneration that an Executive Director can receive may be up to
100% of salary (i.e. annual bonus).
Share buy-outs/replacement
awards
Relocation policies
• 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.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 104
Directors’ remuneration report continued
for the year ended 31 December 2019
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 current Executive Directors.
John van Kuffeler
Nick Teunon
Jono Gillespie
Date of contract
19 February 2015
19 February 2015
1 April 2020
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 the 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 Everyday
Loans 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.
Otherwise, pro rata award of shares payable at the end of
the performance period and subject to the deferral period.
Pro rata award of shares may be awarded dependent on
the reasons for leaving.
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.
During 2019, the Committee had an ongoing dialogue with shareholders across a wide variety of issues:
• During the prospective takeover of Provident, the Committee had regular contact with key shareholders including the discussion of a
proposed new Remuneration Policy as the Company would have obtained a premium listing on the London Stock Exchange and
would require full compliance with the UK Corporate Governance Code.
• The Committee approached shareholders to discuss the Founder Share Scheme and agree new terms for the vesting of awards for the
remaining participants, following the departure of Miles Cresswell-Turner. A revised approach was agreed.
• Towards the end of 2019, the Committee sent a shareholder letter outlining the proposed adjustments to the Remuneration Policy in
order to ensure alignment with the latest 2018 UK Corporate Governance Code. This consultation included possible changes to
alignment of Executive pensions to that of the wider workforce, implementation of a post-cessation shareholding requirement and the
extend of the Remuneration Committee’s powers of discretion with respect to incentives.
Over the course of the next year, the Committee intends to continue appropriate levels of communication with key investors in order to
facilitate more active shareholder engagement around remuneration-related issues. The outcome of these discussions will be reported in
the 2020 Directors’ Remuneration Report.
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Engaging with employees
NSF is committed to creating an inclusive working environment and to reward all employees throughout the organisation in a fair and
appropriate manner. In making decisions on executive pay, the Remuneration Committee considers wider workforce remuneration and
conditions. In June 2018, the FRC provided an updated version of the 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 made the
commitment to ensure that the approach to remuneration for all employees, including within subsidiary companies, will be considered
when reviewing the Remuneration Policy.
In 2018, the Board appointed Heather McGregor as the Non-Executive Director with responsibility for workforce engagement. During
2019, the approach for engagement with the workforce has been considered and drawn together, enhancing existing mechanisms, with
a view to full implementation during 2020. During 2019, the Company continued to operate its employee engagement surveys in
assessing the views of the Group’s workforce and the conditions to which they are subject. Heather had oversight of this survey and
summaries of the findings were shared with the Board and considered in the context of key decisions, including those on remuneration.
In 2020, it is planned that the existing employee forums for certain parts of the business will be expanded across the Company. These
quarterly forums will be attended periodically by Heather and cover all aspect of employee interests including culture, performance,
business improvements and communications. In addition, Heather will continue to perform site visits and attend additional meetings and
functions across all areas of the Company on an ad hoc basis, giving her valuable insight into the day-to-day running of the Company.
All-employee remuneration
As part of the Company’s commitments to reward all employees in a fair and appropriate manner, the Remuneration Committee makes
every effort to take into account wider employee pay in setting executive remuneration. This is achieved through information provided to
the Committee detailing the levels of remuneration throughout the Company. As a result of this process:
• salary increases for Executive Directors were set at 2.5% in the context of that agreed for the wider workforce, including at subsidiary
level, so as to ensure consistency across the Group
• a bonus scheme is now available to the majority of the Company’s employees
• the Group will continue to operate the Sharesave Plan
• the pension scheme arrangements for new Executive Directors have been brought in line with that of the wider workforce at 8%
of salary.
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 112.
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.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 106
Directors’ remuneration report continued
for the year ended 31 December 2019
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/
reappointment
30 April 2018
30 April 2018
9 May 2020
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 2019. Disclosures in this report have been prepared in accordance with the provisions of the
Companies Act 2006 and the Regulations.
As outlined in the corporate governance report (page 81), given the fact that the 2019 audit took longer to complete than expected, it has
been necessary to apply to Companies House for an extension to the filing date of the Group’s 2019 audited accounts. As the anticipated
date for completion of the audited accounts did not allow a clear 21 days’ notice prior to the required AGM date, the Company is
required to hold a separate general meeting to approve its 2019 audited accounts and this has been scheduled to take place at 8.30am
on 28 July 2020 at 2 St James’s Street, London, SW1A 1EF. Given the COVID-19 outbreak, shareholders are advised not to attend the
meeting and to submit their votes in advance by proxy card so as to reduce the number of attendees in person.
An advisory resolution to approve this report and the annual statement will be put to shareholders at the general meeting.
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
Nick Teunon
2019
2018
2019
2018
Miles Cresswell-Turner
20194
2018
Base salary
£000
Benefits
£000
Bonus
£000
Long-Term
Incentives
£000
Pension
£000
Other
£000
333
325
287
280
232
280
37
38
16
17
15
19
85
221
73
191
59
222
–
–
6
6
–
6
33
30
29
26
23
25
–
–
–
–
–
–
Total fixed
remuneration
£000
Total variable
remuneration
£000
403
393
332
323
270
324
85
221
79
197
59
228
Total
£000
488
614
411
520
329
552
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 Long-term incentives were the grant of options at a 20% discount under the SAYE plan.
4. Miles Cresswell-Turner stepped down as Executive Director on 21 October 2019, payments received regarding loss of office are noted on page 108.
Annual bonus outcomes for the period ended 31 December 2019 – audited
For 2019, the Executive Directors had a maximum annual bonus opportunity of 100% of salary based on the achievement of financial and
non-financial targets. The annual bonus table below provides information on the vesting outcomes and resulting bonus payments.
For Miles Cresswell-Turner, the Remuneration Committee exercised its discretion to reduce the formulaic outcome for his bonus to bring it
in line with that for the other Executive Directors. The Committee chose to exercise its discretion on this issue to ensure that the payout
reflected the overall performance of the Company during the year. Miles Cresswell-Turner’s bonus was also prorated for the time served
to his departure on 21 October 2019.
John van Kuffeler
Nick Teunon
Miles Cresswell-Turner
Payout (%
opportunity
for metric)
0.0%
85.0%
Weighting
70.0%
30.0%
Payout (%
maximum
bonus)
Payout (%
opportunity
for metric)
0.0%
25.5%
0.0%
85.0%
Weighting
70.0%
30.0%
Payout (%
maximum
bonus)
Payout (%
opportunity
for metric)
Weighting
Payout (%
maximum
bonus)
0.0%
25.5%
Remuneration Committee chose to
exercise discretion to adjust the
bonus payout to be in line with the
other Executive Directors
25.5%
25.5%
25.5%
Group financial
Group non-financial
ELG financial
ELG non-financial
Total bonus payout
(% maximum)
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The financial and non-financial targets for John van Kuffeler and Nick Teunon’s 2019 annual bonus and the extent to which they were met
are as follows:
The financial metric equates to 70% of the maximum potential bonus for John van Kuffeler and Nick Teunon. The target outcome for this
metric was £22.34m 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 £14.71m,
being 65.9% of target and below the 75% threshold for payment of the minimum 25% of the financial element of the bonus. Therefore,
there was no vesting under the Group financial element of the annual bonus award.
The non-financial element for John van Kuffeler and Nick Teunon was based on eight individual components representing 30% of
maximum bonus in total. These non-financial targets, which are described below, were met as follows:
Metric
For clear ‘Three lines of defence’ models to be operating appropriately across
the Group.
To support and enable clear focus upon compliance and control across all
divisions, demonstrated through the timely completion of KPMG Internal Audit
points and clear engagement with the 2019 audit programme, resulting in no
unsatisfactory audit reports during 2019
The embedding of monitoring of strong internal controls, assessed through
the engagement with and timely completion of Corporate Policy Attestation and
Senior Accounting Officer sign off requirements from operating entities.
For the Group to be fully compliant with the SMCR, with clear definition of roles
within the Group context.
Clear oversight of the delivery of good customer outcomes by each division
as measured by a good customer outcomes dashboard and the provision of trend
analysis (including oversight of customer complaints).
Progress with plans agreed to bring ‘out of appetite’ risks back within appetite.
Ending the year with all ‘critical’ or ‘high’ inherent risks at Group level either
appropriately risk accepted or within appetite.
For clear succession plans to be in place for each Executive Director and
senior management within each operating division and at plc level. These should
include internal development plans where necessary and external options being
assessed on a regular basis. These should be reviewed and approved by the
Nomination Committee.
To ensure that appropriate funding for the Group with improved cost of funding
compared to the current arrangement is in place, whilst achieving a minimum
cash/undrawn headroom of £25m as at 31 December 2019 after accommodating
a dividend payment policy of 50% of post-tax profit before fair value adjustments,
amortisation of acquired intangibles and exceptional items. This should include
the successful completion of the proposed securitisation project leveraging the
Everyday Loans and Guarantor Loans Division loan books.
Percentage of total
annual bonus
Vesting
(% of total annual
bonus award)
Vesting
(% of total annual
bonus award)
5%
60%
3%
4%
3%
3%
4%
4%
100%
4%
83%
100%
100%
75%
2.5%
3%
4%
3%
3%
100%
3%
4%
75%
3%
As a result, the non-financial element was met as to 25.5% of the maximum annual bonus opportunity (85% achievement of the maximum
for the non-financial element).
As such, the total payout for all Executive Directors was 25.5% of the total maximum annual bonus opportunity. The Remuneration Committee
has therefore determined that the bonuses awarded to the Executive Directors are £84,941 for John van Kuffeler, £73,185 for Nick Teunon
and £58,949 for Miles Cresswell-Turner. All bonuses are paid in cash. No part of the bonus will be subject to deferral.
Long-Term Incentive awards vesting in 2019
No awards under the NSF LTI or the Everyday Loans LTI vested in 2019.
Long-Term Incentive awards made in 2019
There were no awards under the LTI made in 2019. 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 98.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 108
Directors’ remuneration report continued
for the year ended 31 December 2019
Payments to past Directors or for loss of office – audited
In October 2019, Miles Cresswell-Turner stepped down from the Board and left the Company, he was designated a ‘good leaver’ by the
Committee for purposes of his incentives. During the year, Miles Cresswell-Turner received a payment of £287,000 in lieu of his basic
salary for a 12-month notice period. As a ‘good leaver’ Miles is entitled to a pro rata proportion of any annual bonus awarded and is also
eligible to remain in both the NSF and ELG LTI schemes as outlined in the Remuneration Policy.
In addition, 25 of Miles’ Founder Shares also vested on his cessation of employment. As part of his settlement agreement, seven of Miles’
Founder Shares were exercisable immediately with the remainder subject to a further performance condition of the Company’s share
price reaching £1.10 within a five-year period, or on a change of control. Miles therefore exercised the seven shares and received a
consideration of 387,740 Non-Standard Finance plc shares (approximate value £150,000).
The Board do not consider the Founder Shares to be remuneration.
2. Implementation of Remuneration Policy for the Executive Directors for 2020
In November 2019, it was announced that Nick Teunon would leave the Company in 2020. Nick left the Company on 30 April 2020 and
was eligible to receive his contractual entitlements up to the date of his departure. No additional payments have been, or will be made
in respect of 2020.
Base salary
In setting salary levels for the 2020 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
2020 and the relative increases are set out below. Jono Gillespie, the Company’s Deputy Chief Financial Officer was promoted to Group
Chief Financial Officer on 1 April 2020. Jono’s remuneration for 2020 will be in line with our Remuneration Policy as outlined in this report.
Jono’s annualised starting base salary is £240,000 and he receives a pension contribution of 8% of salary, in line with that of our wider
workforce. Jono is also eligible to receive benefits and an annual bonus prorated for his time served as Group CFO during the year.
John van Kuffeler
Jono Gillespie
Nick Teunon
Base salary £000
2020
£342
£240
£294
2019
£333
n/a
£287
% change
2.5%
n/a
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 existing Executive Directors.
As outlined previously, new appointments receive a pension contribution in line with the wider workforce at the time of appointment,
currently 8% of salary. 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
In light of the current uncertainty created by the COVID-19 crisis the Board believes it is important to conserve cash within the Group.
Therefore for 2020 the Executive Directors will receive no bonus in respect of the financial measures but are eligible to receive up to 30%
of the bonus potential that is based on non-financial measures. The non-financial measures for the year will once again comprise a
blend of conduct and governance focused measures. Conduct-based measures are designed to ensure delivery of good customer
outcomes through appropriate affordability assessments and appropriate treatment of vulnerable customers together with appropriate
collections, arrears and forbearance practices. Governance-based measures aim to install robust processes with respect to control and
compliance such as compliance with certification regimes and embedding monitoring of control processes.
The non-financial element of the bonus will also be subject to the Committee’s satisfaction of the Company’s financial performance
against the changing external environment. As such the full 30% can only be achieved if all performance measures are satisfied and the
Committee deems that the Group’s overall financial performance to be satisfactory in the circumstances faced.
The maximum and target bonus potentials for 2020 are:
John van Kuffeler
Jono Gillespie
Nick Teunon
Maximum
bonus % of
salary
On-target
bonus % of
maximum1
Threshold
bonus % of
maximum1
30%
30%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
1 Please note as the Board has chosen to remove the financial element of the 2020 annual bonus threshold and on-target levels are not applicable in 2020.
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.
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3. Consideration by the Committee of matters relating to the Directors’ remuneration for 2019 and 2020
The Committee seeks to comply with the Code as much as possible and, as explained in the corporate governance report, during the
year, the Chairman Charles Gregson stepped down as the Chair of the Remuneration Committee though he remains a member of the
Committee. 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 2019
Charles Gregson
Heather McGregor
Niall Booker
Independent
No
Yes
Yes
Meetings
attended
12/12
11/12
12/12
Attendance
100%
92%
100%
During the year, in addition to the five scheduled Committee meetings, there were seven additional Remuneration Committee meetings
as a result of the offer to acquire Provident. With the exception of one such additional meeting missed by Heather McGregor, all
Committee members attended all scheduled Remuneration Committee meetings. The Group Chief Executive and the Chief Financial
Officer attended meetings at the invitation of the Committee, but were not present when their own remuneration was being discussed.
The Committee received external advice in 2019 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 £82,500. 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 12 Committee meetings. The increased number of meetings was largely due to the offer to acquire
Provident, matters covered at these meetings are detailed below:
• Discussion and approval of remuneration for Executive Directors in 2020
• Approval of Executive Directors’ annual bonus performance measures and targets for 2020
• Discussion regarding impact of the offer to acquire Provident on all elements of remuneration, including Founder Shares
• Approval of 2018 Executive Directors’ annual bonus outcomes for 2018
• Review of progress of 2019 annual bonus performance
• Review of remuneration levels taking into consideration external market benchmarking for both Executive and Non-Executive Directors
• Treatment of awards and settlement for the departure of Miles Cresswell-Turner
• Treatment of Founder Shares in light of departure of Miles Cresswell-Turner
• Amendments to Founder Shares, including consultations with key stakeholders
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 110
Directors’ remuneration report continued
for the year ended 31 December 2019
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 2019.
Total Shareholder Return
180
160
140
120
100
80
60
40
20
0
0 2/2 015
0 8/2 015
0 2/2 016
0 8/2 016
0 2/2 017
0 8 2/2 017
0 2/2 018
0 8/2 018
0 2/2 019
0 8/2 019
12/2 019
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 competitors in 2017, 2018 and 2019; the lapsing of the Group’s offer to acquire Provident on 5 June 2019; 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)
2019
488
25.5%
n/a
2018
614
68.1%
n/a
2017
498
50.5%
n/a
2016
351
0%
n/a
2015
473
100%
n/a
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5. Percentage change in Director remuneration
The table below compares the percentage increase in the Directors’ pay on an annual basis with the wider employee population (for
those Directors in office at the year end). The Company considers the Group’s employees excluding the Executive Directors, to be an
appropriate comparator group. In line with corporate governance best practice, the Company now shows the changes in pay not only
for the Group Chief Executive but for all Directors. Additionally, starting this year we now also show historical changes in remuneration,
this disclosure will be built upon in future years to show the rolling changes over five years.
% change from 2018 to 2019
2019
2018
2019 %
Difference
2019
2018
2019 %
Difference
2019
2018
2019 %
Difference
Base salary
Benefits
Annual bonus
Group Chief Executive
(John van Kuffeler)
Group Chief Financial
Officer (Nick Teunon)
Non-Executive Chairman
(Charles Gregson)
Non-Executive Director
(Heather McGregor)
Non-Executive Director
(Niall Booker)
Average employee pay
333
287
125
75
75
30
325
2.5%
280
2.5%
125
75
75
29
0%
0%
0%
3.4%
37
16
–
–
–
7
38
17
–
–
–
7
-2.7%
-5.9%
–
–
–
0%
85
73
–
–
–
3
221
-61.5%
191
-61.8%
–
–
–
3
–
–
–
0%
6. Group Chief Executive to employee pay ratio
In line with the Director’s Remuneration Reporting regulations we also present the ratio of the Group Chief Executive’s pay against the
pay of an employee at the lower quartile, median and upper quartile of the Company’s UK employees.
There are three methodologies outlined in the regulations on how this ratio is calculated:
• Option A – calculate actual pay and benefits for all UK employees;
• Option B – leveraging gender pay gap reporting data (hourly pay metric); and
• Option C – other approach – to be defined and explained by the Company.
The Company has decided to use Option A as this would represent the most comprehensive approach and give the most accurate
statistics. The data for employee pay was taken as at 31 December 2019.
The current Group Chief Executive to employee pay ratio is as below. These ratios are relatively low in comparison to the sector in
which the Company operates and across wider listed companies. We note that the ratios for 2019 are low given the relatively low Annual
Bonus payout and that no vesting under any long-term incentives occurred during the year. As described in section 5, the Company is
committed to creating an inclusive working environment and to reward our employees throughout the organisation in a fair manner.
The Company therefore believes that the ratios are consistent with the pay, reward and progressions policies of the UK workforce taken
as a whole, This is the first year of reporting and we will continue to monitor the trends in the ratio over future years.
Financial year
2019 Group Chief Executive: employee pay
25th percentile
employee pay1
50th percentile
employee pay1
75th percentile
employee pay1
22:1
14:1
11:1
1 Total pay for 25th percentile employee is £22,000, 50th percentile employee is £34,000, and 75th percentile employee is £44,000.
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)
Note
Distributions to shareholders in 2019 includes £nil (2018: £2.1m) in share buybacks.
2019
2018
% change
£43.2m
£8.4m
£38.7m
£9.3m
11.6%
-9.7%
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 112
Directors’ remuneration report continued
for the year ended 31 December 2019
7. 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
Heather McGregor
Niall Booker
Fees
£000
125
125
75
75
75
75
Benefits/
other
£000
–
–
8
12
–
–
Total
£000
125
125
75
75
75
75
2019
2018
2019
2018
2019
2018
Non-Executive Directors are reimbursed travel and subsistence expenses that are incurred for business reasons. Any tax that arises on
these reimbursed expenses are paid by the Company.
Fees to be provided in 2020 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 Gregson1
Heather McGregor
Niall Booker
Note
1 Charles Gregson will receive 50% of his fee (post-tax) in NSF shares.
2020
125
75
75
2019
125
75
75
% change
–
–
–
8. Directors’ shareholding and share interests
Shareholding and other interests at 31 December 2019 – audited
Directors’ share interests and, where applicable, achievement of shareholding requirements are set out below. In order that their interests
are aligned with those of shareholders, Executive Directors are expected to build up and maintain (as relevant) a personal shareholding
equal to 100% of their base salary in the Company.
Shareholding at 31 Dec 2019
Interest in Founder Shares4
Number of
beneficially
owned shares1
% of salary
held
Shareholding
requirement
met2
Options held
subject to
service3
Total number
of shares/
options
Subject to
conditions
Vested but
unexercised
Total at
31 Dec 2019
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
2,114,474
127,980
1,221,520
372,677
138,700
426,700
4,402,051
132%
9%
91%
–
–
–
Yes
No
Yes
–
–
–
–
2,114,474
36,348
164,328
–
–
–
–
1,221,520
372,677
138,700
426,700
36,348 4,438,399
–
–
–
–
–
–
30
25
18
10
–
–
83
Shares subject to
performance
conditions5
Options subject to
performance
conditions5
Vested5
–
–
250
–
–
–
–
375
250
–
–
–
–
625
–
–
–
–
–
–
–
30
25
18
10
–
–
83
Total at
31 Dec
20195
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 (21.3p at 31 December 2019) and base salaries at 1 January 2020.
3 The options held subject to service were granted under the SAYE plan.
4 No scheme interests were awarded during the year (2018: 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 2021 and will be based on the growth in value of NSF above the share price hurdle of £1.10.
Charles Gregson continues to receive 50% of his quarterly Chairmanship fees in the form of NSF shares. Since 31 December 2019, Charles
received 37,685 shares under this arrangement on 3 January 2020 relating to his time served in 2019.
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Founder Shares
During the course of 2019, a change of control provision was triggered on the departure of Miles Cresswell-Turner and all Founder Shares
vested in full. However, following discussions with the award holders, management team and shareholders, it was agreed that the
Founder Shares would be subject to a further performance condition under which the Company’s share price must reach £1.10 within five
years before holders will exercise their option, or on a change of control.
However, as Miles Cresswell-Turner was departing the Company it was agreed that seven of his 25 Founder Shares (28% of his Founder
Shares) would not be subject to these new performance conditions and he exercised his option over these shares.
The consideration in exchange for Miles Cresswell-Turner exercising the options on these seven shares was 387,740 Non-Standard Finance plc
shares (value of approximately £150,000). The balance of his remaining 18 Founder Shares will be subject to the new performance condition.
Dilution
The Company funds its share incentives through a combination of new issue and market purchased shares. The Company monitors the levels
of share grants and the impact of these on the ongoing requirement for shares. In accordance with guidelines set out by the Investment
Association (‘IA’) the Company can issue a maximum of 10% of its issued share capital in a rolling ten-year period to employees under all its
share plans and can issue a maximum of 5% of its issued share capital in a rolling ten-year period under executive (discretionary) share plans.
Non-Executive positions held by Executive Directors
John van Kuffeler retained fees of £48,333 during the year from his Non-Executive position at Paratus AMC Limited.
9. Shareholding voting
The table below shows the binding vote approving the previous Directors’ Remuneration Policy and the advisory vote to approve the
2018 Annual Report on Remuneration at the AGM on 21 May 2019.
2018 Annual Report on Remuneration
272,471,946
97.01
8,400,778
2.99
0
Votes for
%
Votes against
%
Votes withheld
By order of the Board.
Heather McGregor
Chairman of the Remuneration Committee
25 June 2020
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 114
Directors’ report
for the year ended 31 December 2019
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 2019. Both the
Strategic Report on pages 8 to 59 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 8 to 59 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 24 to 27 of the Strategic Report.
Trading results and dividends
The Group’s consolidated loss after taxation for the financial year
was £76,308,000 (2018: £1,679,000).
An interim dividend of 0.7p per share was paid to shareholders on
17 October 2019. On 26 March 2020, the Board announced its
decision to not recommend or pay a final dividend in respect of the
year ended 31 December 2019.
Despite the increase in normalised operating profit, the significant
decline in market multiples across the sector has required an
impairment to the goodwill asset values of all three divisions.
Whilst non-cash in nature, together with the amortisation of
acquired intangibles (also non-cash in nature) and other
exceptional items, these charges have meant that the Company no
longer has any distributable reserves and so, for the time-being, is
unable to pay cash dividends. To address this, the Board is
committed to completing a process to create sufficient
distributable reserves so that, if appropriate, the Company can
resume the payment of cash dividends to shareholders.
Future business developments
Information on the Company and its subsidiaries’ future developments
can be found in the Chairman’s Statement on pages 6 and 7, the
Group Chief Executive’s report on pages 12 to 17 and the 2019 financial
review and divisional overview on pages 28 to 45.
Share capital
As at 31 December 2019 the share capital of the Company
consisted of 312,437,422 Ordinary Shares of £0.05 each (all of
which were in issue and no shares held in treasury) and 93
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.
In October 2019, Miles Cresswell-Turner was removed from the
Board and as a result, the Founder Shares in the Company vested.
While none of the other holders of Founder Shares exercised their
right, Miles Cresswell-Turner exercised his right that NSF purchase
seven of his Founder Shares for a consideration, in accordance
with their terms, of the issuance of 387,740 new NSF Ordinary
Shares. Miles and the other Founder Shareholders all agreed to
defer the exercise of the remaining Founder Shares, subject to
certain conditions and a vesting period, or on a change of control.
Further details on the Founder Shares can be found in note 29 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.
During 2019, the Company requested the reduction of the Company’s
share capital and the reduction of the amount standing to the
credit of the Company’s share premium account (the ‘Capital
Reductions’, as further described, respectively, in the notice of the
2019 AGM and in the Company’s notice of General Meeting (the
‘GM Notice’)).
The Capital Reductions were, respectively, approved by
shareholders of the Company on 21 May 2019 at the 2019 AGM
and on 8 July 2019 at the General Meeting of the Company.
The order of the High Court of Justice in England and Wales (the
‘Court’) and a statement of capital approved by the Court were
registered with the Registrar of Companies and, accordingly, the
Capital Reductions became effective on 31 July 2019.
As a result of the Capital Reductions: (i) 5,070,234 Ordinary Shares of
the Company that were purportedly repurchased by the Company
between 2017 and 2019 were cancelled; and (ii) £75,000,000 of the
amount standing to the credit of the Company’s share premium
account was cancelled.
Further details on the Company’s share capital can be found in
note 27 to the financial statements.
Substantial shareholdings
The Company has been notified in accordance with the Disclosure
and Transparency Rules DTR-5 that as at 29 May 2020 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 30 May to 24 June 2020 (being a date not
more than one month prior to the date of the Company’s Notice of
Annual General Meeting).
Alchemy Special Opportunities LLP
Aberforth Partners LLP
Marathon Asset Management LLP
N Utley
Hargreaves Lansdown Asset Management
Basswood Capital Management LLC
West Yorkshire Pension Fund
Quilter Cheviot Asset Management
Toscafund
29.95%
17.94%
11.08%
7.00%
4.95%
2.90%
2.68%
2.38%
2.21%
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In accordance with the Disclosure and Transparency Rules DTR-5
as at 31 December 2019 the following investors had a substantial
interest in the issued Ordinary Share capital.
The Directors and their profiles are detailed on pages 62 and 63.
All of these Directors above, with the exception of Miles Cresswell-
Turner served in office throughout the year under review.
Alchemy Special Opportunities LLP
Aberforth Partners LLP
Marathon Asset Management LLP
Woodford Investment Management
Societe Generale S.A.
Toscafund Asset Management LLP
West Yorkshire Pension Fund
Hargreaves Lansdown Asset Management
Quilter Cheviot Asset Management
29.95%
17.64%
11.26%
4.65%
3.36%
2.88%
2.68%
2.41%
2.04%
In accordance with the Articles of Association and the UK Corporate
Governance Code, each Director will offer themselves for re-election
at the forthcoming AGM. In addition, Jono Gillespie, who was
appointed as Chief Financial Officer on 1 April 2020 will also offer
himself for re-election at the AGM.
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.
The Directors’ beneficial interests in the allotted shares of the
Company as at 31 December 2019 are outlined below:
John van Kuffeler
Nick Teunon
Charles Gregson
Heather McGregor
Niall Booker
Number of
Ordinary
Shares held
2,114,474
127,980
372,677
138,700
426,700
As granted by shareholders at the 2019 AGM, the Directors currently
have the power to issue and buy back the Company’s shares. The
Board is seeking to renew these powers at the forthcoming 2020 AGM.
In accordance with the Group’s Remuneration Policy approved by
shareholders on 14 May 2018, over the course of the year, the
Company allocated funds for the immediate purchase of Ordinary
Shares by Mr Gregson to satisfy 50% of the post-tax fees due with
respect to his role as Chairman. This amounted to the purchase of
61,633 Ordinary Shares at a total cost of £25,444 (excluding dealing
costs). Funds to purchase shares in relation to the Chairman’s fees for
September-December 2019 were provided on the 3 January 2020 and
a further 37,585 shares were purchased at a cost of £8,494 (excluding
dealing costs). The remaining 50% of fees due has been paid in cash.
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 in office during 2019:
Charles Gregson
John van Kuffeler
Nick Teunon
Miles Cresswell-Turner
(until 21 October 2019)
Niall Booker
Heather McGregor
Non-Executive Chairman
Group Chief Executive
Chief Financial Officer
Executive Director
Senior Independent Director
Non-Executive Director
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.
During the course of 2019, the Group has invested significantly in
supporting the emotional and mental wellbeing of its workforce, with
various initiatives in each operating division, including the launch of
‘mental health first aiders’ in Everyday Loans and Loans at Home.
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 a 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 SAYE 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 over the coming years.
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview 116
Directors’ report continued
for the year ended 31 December 2019
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 31 in the notes to the financial statements.
Post-balance sheet events
Since 31 December 2019, there has been a global outbreak of
COVID-19 which continues to have a significant impact on
economies across the world. Each of the Group’s three divisions is
continuing to trade in an unprecedented business environment It is
expected that as a result of the pandemic, the Group will
experience a reduction in income from lending activities, together
with increased expected credit losses (‘ECL’). The Group considered
the impact of COVID-19 on the carrying value of assets and
liabilities in the Consolidated Statement of Financial Position. Whilst
the overall impact of COVID-19 cannot be reliably estimated at this
time, the Group assessed its key sensitivity was in relation to ECL
on amounts receivable from customers and goodwill impairment.
Considering the impact on goodwill of a further decline in market
multiples resulting from COVID-19, the Group notes that that this
could result in further goodwill impairment post 31 December 2019.
The Group has identified that on the basis of actual earnings for
the year ended 31 December 2019, a 1% drop in price earnings
multiples would result in c. £0.8m of additional impairment of
goodwill at the branch-based lending division, and a reduction in
the existing headroom in relation to the home credit division
goodwill by £0.6m. As at 31 December 2019, total goodwill in
relation to the guarantor loan division has been fully written-off.
The estimate of ECL at 31 December 2019 was based on
macroeconomic assumptions which did not include nor anticipate
the unprecedented impact of the COVID-19 pandemic. The ECL
sensitivity to reasonably possible changes in those assumptions
outside of COVID-19 is set out at note 2 to the financial statements.
Considering the impact on ECL as a result of COVID-19, it is
anticipated that this could result in increased ECL driven by customer
repayment behaviours as well as a more pessimistic macro-
economic weighting being applied to the provisioning model (in the
form of an increase to the severe downside weighting). As part of its
viability assessment, the Group assessed a number of
macroeconomic scenarios which reflect economic developments
since the reporting date. The Group recognises that whilst the
severity of the impact of COVID-19 on the economy is uncertain, it is
likely to result in disruption in the form of a recession and therefore
require an increase in the severe downside weightings on which ECL
is calculated. The sensitivity of the loan loss provision as at
31 December 2019 to a more pessimistic economic outlook resulting
from COVID-19 is detailed in note 2 to the financial statements.
On 11 March 2020, the Group announced that it had entered into
a new, six-year securitisation facility totalling £200m, of which
£15m has been drawn. The new facility was put in place to repay
£120m from the more expensive term loan facility provided by
alternative institutional investors with the remainder available
for growth at the Group’s branch-based and guarantor loans
divisions, subject to compliance with financial covenants.
For accounting purposes, the Group retains substantially all the
risks and rewards associated with ownership of assets transferred
into the securitisation vehicle and as the vehicle is controlled by the
Group, it will be consolidated into the Group financial statements
for the year ended 31 December 2020. This event does not impact
the 31 December 2019 financial statements. Whilst the impact of
the prior year adjustment and COVID-19 on the loan book has
prompted a performance breach of certain covenants, preventing
further drawdown on the new facility, negotiations with the lender
have been positive and temporary relief has been provided whilst
a more permanent agreement is reached. Until such agreement
is concluded there exists material uncertainty over the ability of
the Group to draw down further on the facility. The Board is in
discussions with its lenders regarding possible future covenant
waivers, whilst at the same time evaluating all funding options,
which may include the issue of further equity, in order to ensure the
Group has a strong and liquid balance sheet. Combined,
it is hoped that these actions will unlock access to the
facility and help to reduce overall funding costs as well
as provide additional finance for future growth.
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. However, as noted on page 56, the Group has now
captured certain environmental data and during the course of
2019 undertook the necessary assessment to comply with the ESOS,
the confirmation of our compliance has been notified to the
Environment Agency.
Charitable and political donations
The Group made charitable donations totalling £53,220 to a
variety of charities in the year ended 31 December 2019. These
included Prostate Cancer UK and Loan Smart.
The Group made no political donations in the year ended
31 December 2019.
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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Listing Rule requirement
Location in Annual Report
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.
Not applicable
Not applicable
Directors’ Remuneration Report,
pages 94 to 113
Details of any arrangements under which a Director has waived emoluments, or agreed to waive any
future emoluments, from the Company.
Not applicable
Details of any non-pre-emptive issues of equity for cash.
Not applicable
Details of any non-pre-emptive issues of equity for cash by any unlisted major subsidiary undertaking. Not applicable
Not applicable
Details of parent participation in a placing by a listed subsidiary.
Not applicable
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.
Not applicable
Not applicable
Not applicable
Not applicable
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.
Going concern statement
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
and Viability Statement.
Annual General Meeting
The AGM of the Company is scheduled to be held at 2 St James’ Street,
London, SW1A 1EF at 11.00 am on 30 June 2020. A separate notice of
meeting has already been despatched to shareholders and a copy is
available from the Group’s website: www.nsfgroupplc.
Further details can be found in the corporate governance report on
page 81.
As the 2019 audit has taken longer to complete than expected
and in accordance with DTR 4.1.3R, the Company has used the
additional time granted before publishing audited accounts,
to consider ‘all aspects of their business and operations’ and
to ensure that the forward-looking elements of our Annual
Report adequately considered and took into account the impact
of the pandemic insofar as possible upon the business.
Given the timescales, it has been necessary to apply to Companies
House for an extension to the filing date of the Group’s audited
accounts. As the anticipated date for completion of the audited
accounts did not allow a clear 21 days’ notice prior to the required
AGM date, the Company is required to hold a separate general
meeting to approve our audited accounts. This will now take place
on 28 July 2020 and the notice of meeting has been dispatched to
shareholders with the Annual Report.
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 separate general meeting to approve
the 2019 Annual Report and accounts referred to above.
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.
As a result of the impact of COVID-19, the Group has at the date of
signing the accounts, breached its portfolio performance covenants in
relation to the securitisation facility, thereby preventing the Group from
drawing down further from this facility. However recognising that such
a breach is as a result of COVID-19 which is beyond the Group’s
control, Ares has granted a temporary waiver for this breach covering
the period up to 29 June 2020 so as to allow time for a more
permanent solution to be agreed. In the event that no agreement can
be reached or extended then the Group has sufficient cash resources
to repay the amount drawn under the securitisation facility in full.
As set out on pages 87 to 88, as part of its going concern assessment,
the Directors reviewed both the Group’s access to liquidity and its
future balance sheet solvency. For liquidity, the Group produced two
scenarios: (i) a most likely (or ‘base case’) scenario which involves
restricted lending across the Group in order to mitigate the risk of
covenant breaches; and (ii) a downside scenario which applies
stresses in relation to the key risks identified in the base case.
The Directors felt that the range of assumptions made in both the base
case and downside scenario were such that given the uncertainties
around the full general and idiosyncratic impact of COVID-19, there
remained a material level of uncertainty around the impact on the
Group’s ability to meet its covenants and if they weren’t met, the
likelihood of a further waiver being granted by the lenders as well as
the full impact on the Group’s balance sheet.
The Directors acknowledge the considerable challenges presented by
the outbreak of COVID-19 and the material uncertainty created for the
going concern status of the Group and Company. However, following
a number of steps taken by the Group (reduced lending volume across
all three divisions, a reduction in staff numbers, the furloughing of a
number of staff and the deferral of payments to the UK tax authorities)
and despite the material uncertainty associated with forecast
assumptions, purely as a consequence of COVID-19 as noted above, it
is their reasonable expectation that the Group and Company will
continue to operate and meet its liabilities as they fall due for the next
12 months and therefore has adopted the going concern basis of
accounting
Corporate GovernanceFinancial StatementsAdditional InformationStrategic ReportOverview Each of the Directors confirms that, to the best of their knowledge:
• the financial statements, prepared in accordance with IFRSs 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 2019 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 2019 financial statements 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 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.
Approved by the Board on 25 June 2020 and signed by the order of
the Board.
Sarah Day
Company Secretary
25 June 2020
118
Directors’ report continued
for the year ended 31 December 2019
Whilst the Directors believe the Group and Company will remain a
going concern, a material uncertainty exists that may cast significant
doubt on the Group and Company’s ability to continue as a going
concern. Such a material uncertainty includes the impact of potential
reduced levels of collections and lending on the Group’s financial
performance, compliance with existing financial covenants and
whether waivers will be granted by lenders (and under what terms) in
the event of a further covenant breach. The Directors will continue to
monitor the Group and Company’s risk management, access to
liquidity, balance sheet 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 32 to the financial statements.
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual Report and
the financial statements in accordance with applicable law and
regulations.
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 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.
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Independent auditor’s report to the members of Non-Standard Finance plc
119
Report on the audit of the financial statements
1. 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 2019 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 statement of financial position;
the consolidated and Parent Company statements of changes in equity;
the consolidated and Parent Company statement of cash flows; and
the related notes 1 to 34.
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.
2. 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. The non-audit services
provided to the Group and Parent Company for the year are disclosed in note 6 to the financial statements. 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.
3. Material uncertainty relating to going concern
We draw attention to note 1 in the financial statements, regarding the Group’s ability to continue as a going concern. Operational
disruption within the Group caused by COVID-19, continues to place increased pressure on the ability of the Group to comply with certain
covenants and hence to operate within its existing debt facilities. Details of the Group’s borrowings as at year end are disclosed in note
25 and details of the new securitisation facility entered into post year end is disclosed in note 34.
As at the date of signing, the Group has breached its portfolio performance covenants in relation to the securitisation facility and
remains close to the gearing ratio covenant on the term facility. Although the Group has obtained a temporary waiver up to 29 June 2020,
it is not able to draw down further on the new facility. We understand that in the event that this waiver is not extended, the Directors
would be able to repay the amount drawn down under the facility.
For the going concern assessment, the Audit Committee has considered a base case scenario, which reflects a 12 month cash flow and
loan book forecast from the date of approval of the financial statements. Included in these forecasts are assumptions in respect of
customer behaviour and reduced lending volumes across all three divisions.
The Directors have identified that there are two key areas that lead to a material uncertainty over going concern:
• Uncertainty over the impact of the current lockdown and payment freeze on covenants; and
• Uncertainty over the environment post-lockdown, both in terms of specific demand for products and the economy in general.
The Group has considered sensitivities for what are believed to be reasonably possible adverse variations in performance and cash
flows, reflecting the ongoing volatility created by COVID-19, as well as the resulting impact of these changes on the Group’s debt
structure, facilities and related financial covenants.
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The Audit Committee has considered the mitigating actions against breaching covenants that are available to the Group, including:
• Seeking waivers from, or amendments to, the financial covenants contained in the Group’s existing financing arrangements with
lenders
• Other self-help measures including a reduced level of staff costs and the deferral of payments to the UK tax authorities.
Having reviewed the most recent projections and the sensitivity analysis and having carefully considered the material uncertainty and
the mitigating actions available, the Audit Committee have formed the judgement that it is appropriate to prepare the financial
statements on the going concern basis.
In response to this matter, we obtained and assessed management’s going concern forecasts and performed procedures including:
• Obtained an understanding of the relevant controls over the going concern assessment process;
• Evaluated the Directors’ plans for future actions in relation to the going concern assessment;
• Tested the clerical accuracy of the model used to prepare the going concern forecasts;
• Reviewed the cash flow forecast produced by management and challenged the underlying data and key assumptions by assessing
their consistency with budgets and external data;
• Considered financing facilities including nature of facilities, repayment terms and covenants;
• Reviewed management’s sensitivity analysis and the impact on covenant compliance in particular a downside scenario under which
no lending is expected during the next 12 months and the Directors’ proposed action in case of potential breaches; and
• Considered the appropriateness of the disclosures in the financial statements.
As stated in note 1, these events or conditions, along with the other matters as set forth in note 1 to the financial statements, indicate that
a material uncertainty exists that may cast significant doubt on the Group’s and the Company’s ability to continue as a going concern.
Our opinion is not modified in respect of this matter.
4. Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
• going concern (see material uncertainty relating to going concern section);
• carrying value of goodwill;
• provision for impairment losses against loans and receivables to customers; and
•
revenue recognition.
Materiality
The materiality we used for the Group financial statements was £791,000 which was determined based on 5.4% of
adjusted pre-tax profit. Adjusted pre-tax profit is before fair value adjustments of £2.9m, amortisation of acquired
intangible assets of £7.2m and exceptional items of £80.6m as described in the Consolidated Statement of
Comprehensive Income.
Scoping
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
Given the rapid spread of COVID-19 and the ongoing uncertainty surrounding its impact after the balance sheet
date, and due to the inherent management judgement in estimating the impact for the Group’s forecast
performance and cash flows, we have enhanced our risk assessment and focused a greater degree of audit
effort in assessing the going concern basis of preparation and the related material uncertainty. As a result we
have identified going concern as a new key audit matter.
5. Conclusions relating to going concern, 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:
•
•
•
the disclosures on pages 24 to 27 that describe the principal risks, procedures to identify
emerging risks, and an explanation of how these are being managed or mitigated;
the Directors’ confirmation on page 117 that they have carried out a robust assessment of
the principal and emerging risks facing the Group, including those that would threaten
its business model, future performance, solvency or liquidity; or
the Directors’ explanation on pages 90 to 92 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 going concern
and the prospects of the Group required by Listing Rule 9.8.6R(3) is materially inconsistent
with our knowledge obtained in the audit.
As set out in the material uncertainty
relating to going concern section, there is
uncertainty as to whether the Group can
comply with certain covenants and hence
operate within its existing debt facilities in
the going concern period.
There is also uncertainty beyond that
period, with the Group being required to
repay or refinance amounts due under its
financing arrangements when they come
due, which will be significant over the next
three to four years, as set out in note 25 in
the financial statements. The accessibility
to further refinancing is dependent on
future customer behaviour and lender
appetite, which are uncertain in the current
market as set out in the Directors’ viability
statement on pages 90 to 92.
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6. 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. In addition to the matter described in the material uncertainty relating to going
concern section, we have determined the matters described below to be the key audit matters to be communicated in our report.
6.1. Carrying value of goodwill
Key audit matter
description
The acquisitions of Loans at Home in 2015, Everyday Loans Group in 2016 and George Banco in 2017 led to the
recognition of £140.7m of goodwill in the Consolidated statement of financial position. There has been an
impairment of £65.8m in the year so the carrying value of goodwill as at 31 December 2019 is £74.8m. We note that
management has concluded that COVID-19 is a non-adjusting post balance sheet event and as a result, no
adjustments are required to the reported results of the Group, including the carrying value of goodwill.
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 branch-based lending and
guarantor loans CGUs, which had goodwill of £91.9m and £8.6m allocated respectively.
Management performed a goodwill impairment assessment as at 31 December 2019 by determining the
recoverable amount of these CGUs, based on fair value less cost to sell, and compared this to the carrying value of
the CGU. Based on the results of this assessment, management determined that goodwill was impaired by £44.8m
for branch-based lending and £8.6m for guarantor loans.
The key estimates involved in management’s impairment assessment are:
• The selection of an appropriate performance metric for the CGU
• The calculation and application of an appropriate market multiple to the performance metric to determine fair
value.
Further detail in respect of management judgements and assumptions is set out within the Audit Committee report
on pages 85 to 92, accounting policies and notes 2 and 15 to the financial statements.
We obtained an understanding of relevant controls relating to the impairment assessment of goodwill.
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.
In relation to the market multiple, we used our valuation experts to challenge the multiple by determining an
independent benchmark.
We independently calculated a fair value of the CGUs and compared this to management’s calculation of the
recoverable amount for branch-based lending and guarantor loans.
We also considered the timeline of the outbreak and impact of Covid-19 to verify that it should be treated as a
non-adjusting post balance event.
How the scope of our
audit responded to
the key audit matter
Key observations
We concluded that management’s valuation used in the impairment test and the recognition of an impairment
charge is appropriate.
The market multiples used by management were consistent with our independently sourced computations.
We concurred with management’s judgement that COVID-19 is a non-adjusting post balance sheet event.
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6.2. Provision for impairment losses against loans and receivables to customers
Key audit matter
description
The Group holds an IFRS 9 impairment provision of £49m against gross customer receivables of £411m (2018:
restated impairment provision of £44m against gross customer receivables of £355m). We note that management
has concluded that COVID-19 is a non-adjusting post balance sheet event and as a result, no adjustments are
required to the reported results of the Group, including the impairment provision against loans and receivables to
customers.
The Group’s expected credit loss (“ECL”) model is used to assess the carrying value of the asset for impairment
using 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.
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
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.
Through the review of the 2019 financial statements, management determined that there was an error in the data
used to calculate their post model adjustments (“PMA”) to the provision. The input data did not adequately
capture all relevant elements of the underlying loan population to calculate an accurate impairment provision.
This resulted in the underestimation of the provision required since transition to IFRS 9 on 1 January 2018 of £3.2
million, and a further £0.8 million as at 31 December 2018. Management investigated the data error and revised
their PMA calculations, to determine the prior year adjustments required to the expected credit loss provision.
Further detail of the prior year adjustments are set out in note 1 to the financial statements.
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 85 to 92, accounting policies and notes 2 and 20 to the financial statements.
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6.2 Provision for impairment losses against loans and receivables to customers continued
How the scope of our
audit responded to
the key audit matter
We obtained an understanding of relevant controls relating to the identification, valuation and recording of
impairment provisions. For each of the Group’s reportable segments we obtained an understanding of the IFRS 9
methodology and models and evaluated whether the methodology applied by management is compliant with
the requirements of IFRS 9.
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 and benchmarking against peers in the industry.
To test the completeness and accuracy of inputs into the models, on a sample basis we traced input data 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.
We utilised data analytics and modelling specialists to test scripts and coding used internally by management,
and where relevant their service provider, to validate the practical application of management’s IFRS 9
methodology. Our IT specialists further tested the IT control environment of management’s service provider.
We performed sensitivity analysis over the key assumptions of the models, especially those relating to
macroeconomic scenarios 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 completeness and accuracy of management’s PMAs, particularly those relating to macro-
economic factors, and 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”).
With regard to management’s PMA that resulted in a prior year adjustment, we performed the following
procedures:
• challenged the appropriateness of management’s calculation methodology and assumptions.
•
involved our analytics and modelling specialists to assess the calculation logic and with their support we
independently re-ran the revised coding.
• evaluated the completeness and accuracy of input data used in management’s calculation.
• assessed management’s proposal of treating the adjustment as the correction of a material prior period error
against the possibility of a change in estimate in accordance with IAS 8.
We also considered the timeline of the outbreak and impact of Covid-19 to verify that it should be treated as a
non-adjusting post balance event.
Key observations
We concluded that management’s provision is reasonably stated, and is supported by a methodology that is
consistently applied and compliant with IFRS 9.
The accounting treatment and disclosures of the prior period error were found to be appropriate.
We concurred with management’s judgement that COVID-19 is a non-adjusting post balance sheet event.
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6.3. Revenue recognition
Key audit matter
description
The Group’s main revenue stream is interest income of £181m (2018: £159m) 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.
• 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 85 to 92 accounting policies and note 4 to the financial statements.
How the scope of our
audit responded to
the key audit matter
We obtained an understanding of relevant 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 the period over which the EIR is modelled and
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.
We also tested management’s manual adjustments relating to revenue recognition, including whether
management’s approach to recognising revenue against the net balance for accounts in stage 3 in the next
reporting period is materially appropriate.
Key observations
We concluded that the revenue recognition models are compliant with the requirements of IFRS 9, the
assumptions underpinning the models were determined and applied appropriately, and the revenue recognised
is reasonably stated.
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7. Our application of materiality
7.1. 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
£791,000 (2018: £760,000)
£317,500 (2018: £262,000)
Basis for determining
materiality
Rationale for the
benchmark applied
We used 5.4% of adjusted pre-tax profit. Adjusted
pre-tax profit is before fair value adjustments of £2.9m,
amortisation of acquired intangible assets of £7.2m and
exceptional items of £80.6m as described in the
Consolidated Statement of Comprehensive Income.
For the year ended 31 December 2018, we used 5.4% of
restated, adjusted pre-tax profit, which was before fair
value adjustments of £7.7m, amortisation of acquired
intangible assets of £8.7m.
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, amortisation of acquired
intangible assets arising on acquisitions and
exceptional items as described in the financial
statements.
We used 4% of adjusted pre-tax profit. Adjusted pre-tax
profit is before exceptional items of £128.9m.
For the year ended 31 December 2018, we used 5% of
restated, pre-tax profit.
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 continuous business operations and
have therefore excluded the exceptional items as
described in the financial statements.
Adjusted profit before tax £15m
£791,000
Group materiality
£445,000 to
£318,000
Component materiality
range
Adjusted profit before tax
Group materiality
£40,000
Audit Committee
reporting threshold
7.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the financial statements as a whole. Performance materiality was set at 70% of
materiality for the 2019 audit (2018: 70%). In determining performance materiality, we considered the quality of the control environment
and that we were not able to take a controls reliance approach. However, we also considered the extensive work performed over the
period, errors and IFRS 9 and that much of this work was done to a lower component materiality and therefore concluded that the level
of performance materiality for the group was appropriate.
7.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £40,000 (2018: £38,000), 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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8. 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 £318,000 to £445,000 (2018: £380,000 to £608,000).
Based on our assessment of the Group’s control environment, and considering the control deficiencies highlighted in the Audit Committee
report on pages 85 to 92, we did not plan to take a controls reliance approach and therefore we did not test the operating effectiveness
of controls.
All entities within the Group have the same engagement partner and the scope is consistent with prior year.
9. 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.
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 specified for
review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the
UK Corporate Governance Code.
We have nothing to report in respect of these matters.
10. 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.
11. 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 and non-compliance with
laws and regulations 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.
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12. 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.
12.1. 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, we considered the following:
•
•
•
the nature of the industry and sector, control environment and business performance including the design of the Group’s remuneration
policies, key drivers for Directors’ remuneration, bonus levels and performance targets;
the Group’s own ongoing annual assessment of the risks that irregularities may occur either as a result of fraud or error that was most
recently approved by the Board on 22 April;
results of our enquiries of management, internal audit and the Audit Committee about their own identification and assessment of the
risks of irregularities;
• any matters we identified having obtained and reviewed the Group’s documentation of their 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 of fraud or non-compliance with laws and regulations;
– as set out in the Audit Committee report on pages 85 to 92 and note 33 to the financial statements, in April 2019 the Company
identified certain technical infringements regarding historic distributions made by the Company. To rectify the infringements, the
Company formalised their dividend policy and carried out two capital reductions in July 2019; and
•
the matters discussed among the audit engagement team and involving relevant internal specialists, including tax, impairment,
valuations, IT, data analytics and credit risk specialists regarding how and where fraud might occur in the financial statements and
any potential indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and
identified the greatest potential for fraud in the following areas: revenue recognition and provision for impairment losses against amounts
receivable to customers. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to
the risk of management override.
We also obtained an understanding of the legal and regulatory framework that the Group operates in, focusing on provisions of those
laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The
key laws and regulations we considered in this context included the UK Companies Act, Listing Rules and tax legislation.
In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but
compliance with which may be fundamental to the Group’s ability to operate or to avoid a material penalty. These included the
regulation set by the FCA.
12.2 Audit response to risks identified
As a result of performing the above, we identified revenue recognition and provision for impairment losses against amounts receivable to
customers as key audit matters related to the potential risk of fraud. 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 provisions of
relevant laws and regulations described as having a direct effect on the financial statements;
• 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
HMRC and the Financial Conduct Authority;
in response to the identified issue of non-compliance with laws and regulations relating to dividends, obtaining an understanding of
relevant controls relating to the approval of dividends and independently re-performing the year end calculation for distributable
reserves, agreeing inputs to supporting documentation; 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 remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 128
Independent auditor’s report continued
Report on other legal and regulatory requirements
13. 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 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.
14. Matters on which we are required to report by exception
14.1. 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.
14.2. 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.
15. Other matters
15.1 Auditor tenure
Following the recommendation of the Audit Committee, we were appointed by the Board of Directors on 22 October 2014 to audit the
financial statements for the year ending 31 December 2015 and subsequent financial periods. The period of total uninterrupted
engagement including previous renewals and reappointments of the firm is five years, covering the years ending 31 December 2015 to
31 December 2019.
15.2. 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).
16. 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
25 June 2020
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Consolidated statement of comprehensive income
for the year ended 31 December 2019
129
Revenue1
Other operating income
Modification loss
Derecognition 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
1 Revenue comprises interest income calculated using the EIR method, refer to note 1 in the notes to the financial statements for further detail.
Loss attributable to:
• Owners of the Parent
• Non-controlling interests
Loss per share
Basic and diluted
Note
12
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 2018
Before fair value
adjustments,
amortisation
of acquired
intangibles and
exceptional items
£000
Fair value
adjustments,
amortisation
of acquired
intangibles and
exceptional items
£000
183,657
954
(1,181)
(413)
(45,066)
(95,786)
42,165
–
42,165
(27,458)
14,707
(3,261)
(2,873)
–
–
–
–
(7,226)
(10,099)
(80,584)
(90,683)
–
(90,683)
2,929
Note
4
20
20
5
8
11
13
Year ended
31 Dec 2019
£000
180,784
954
(1,181)
(413)
(45,066)
(103,012)
32,066
(80,584)
(48,518)
(27,458)
(75,976)
(332)
11,446
(87,754)
(76,308)
(76,308)
(76,308)
–
Year ended
31 Dec 2019
Pence
(24.45)
Year ended
31 Dec 2018
Restated
£000
158,824
1,626
(78)
(129)
(43,738)
(97,763)
18,742
–
18,742
(21,107)
(2,365)
58
(2,307)
(2,307)
(2,307)
–
Year ended
31 Dec 2018
Pence
(0.74)
Note
12
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
(78)
(129)
(43,738)
(89,082)
35,101
–
35,101
(21,107)
13,994
(3,050)
10,944
(7,678)
–
–
–
–
(8,681)
(16,359)
–
(16,359)
–
(16,359)
3,108
(13,251)
Note
4
20
20
5
8
11
13
Revenue
Other operating income
Modification loss
Derecognition loss
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
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 130
Consolidated statement of financial position
as at 31 December 2019
ASSETS
Non-current assets
Goodwill
Intangible assets
Derivative asset
Deferred tax asset
Right-of-use asset
Property, plant and equipment
Amounts receivable from customers
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
Provisions
Lease liability
Total current liabilities
Non-current liabilities
Lease liability
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 2019
£000
31 Dec 20181
Restated
£000
1 Jan 20181
Restated
£000
15
16
24
26
18
17
20
20
22
23
25
25
25
25
26
25
27
28
29
74,832
8,572
1
1,677
10,560
6,556
185,269
287,467
176,379
2,643
14,192
193,214
480,681
26,909
1,466
1,830
30,205
9,275
–
317,590
326,865
15,621
180,019
2,152
(74,181)
123,611
–
123,611
480,681
140,668
14,477
241
230
–
6,677
198,631
140,668
21,706
–
–
–
4,933
129,647
360,924
296,955
112,027
3,967
13,894
129,888
490,812
16,445
589
–
17,034
–
–
266,322
266,322
15,852
254,995
(2,011)
(61,635)
207,201
255
207,456
490,812
120,289
1,551
10,954
132,794
429,749
9,102
1,251
–
10,353
–
2,193
199,316
201,509
15,852
254,995
(1,066)
(52,150)
217,631
255
217,886
429,749
1 31 December 2018 balance sheet intangibles totalling £1.05m which were previously presented as property, plant and equipment have been re-presented as part of intangible
assets, the 1 January 2018 balance sheet also been re-presented to reflect this classification and have been adjusted by £0.63m. Refer to note 16 for detail. 31 December 2018 and
1 January 2018 balance sheet amounts receivable from customers has been restated, refer to note 1 for further detail. Amounts have also been re-presented in order to
demonstrate the split between current and non-current amounts receivable from customers.
These financial statements were approved by the Board of Directors on 25 June 2020.
Signed on behalf of the Board of Directors.
John van Kuffeler
Group Chief Executive
Jono Gillespie
Chief Financial Officer
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Consolidated statement of changes in equity
for the year ended 31 December 2019
131
At 31 December 2017
IFRS 9 transition opening balance adjustment
As at 1 Jan 2018 opening balance
Prior year adjustment – amounts receivable
from customers
As at 1 Jan 2018 opening balance – as restated
Transactions with owners, recorded directly in equity:
Total comprehensive loss for the year
Dividends paid
Credit to equity for equity-settled share-based
payments
Purchase of own shares
At 31 December 2018 – as restated
Total comprehensive loss for the year
IFRS 16 transition opening balance adjustment
Transactions with owners, recorded directly
in equity:
Dividends paid
Capital reduction
Credit to equity for equity-settled share-based
payments
Transfer of share-based payments on vesting
of share awards
Issue of shares
Equity for Founder Shares1
Cancellation of shares
At 31 December 2019
Note
Share
capital
£000
15,852
–
15,852
Share
premium
£000
254,995
–
254,995
Other
reserves
£000
(1,066)
–
(1,066)
Retained
loss
£000
(36,793)
(12,718)
(49,511)
1
–
15,852
–
254,995
–
(1,066)
(2,639)
(52,150)
–
–
–
–
–
–
–
–
–
–
(2,307)
(7,177)
1,157
(2,102)
–
–
Non-
controlling
interest
£000
255
–
255
–
255
–
–
–
–
Total
£000
233,243
(12,718)
220,525
(2,639)
217,886
(2,307)
(7,177)
1,157
(2,102)
15,852
254,995
(2,011)
(61,635)
255
207,456
–
–
–
–
–
–
23
–
(254)
–
–
–
(75,000)
–
–
–
–
(76,308)
(295)
(8,425)
75,000
–
–
24
–
1,183
–
(734)
–
255
3,459
734
(47)
–
(3,205)
–
–
–
–
–
(76,308)
(295)
(8,425)
–
1,183
–
–
(255)
–
–
–
–
–
15,621
180,019
2,152
(74,181)
–
123,611
14
29
29
3
14
28
29
29
27
29
27
1
In the current year, £255,000 relating to Founder Shares has been re-presented as equity rather than non-controlling interest because it reflects other reserves for the Group.
Consolidated statement of cash flows
for the year ended 31 December 2019
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
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 2019
£000
Year ended
31 Dec 2018
£000
(15,927)
(34,763)
Note
30
(6,535)
62
(6,473)
(19,277)
50,400
(8,425)
–
22,698
298
13,894
14,192
(6,083)
180
(5,903)
(14,121)
67,006
(7,177)
(2,102)
43,606
2,940
10,954
13,894
14
29
23
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 132
Company statement of financial position
as at 31 December 2019
ASSETS
Non-current assets
Property, plant and equipment
Intangible assets
Right-of-use assets
Investments
Current assets
Trade and other receivables
Cash and cash equivalents
Total assets
LIABILITIES AND EQUITY
Current liabilities
Trade and other payables
Lease liability
Non-current liabilities
Lease liability
Total liabilities
Equity
Share capital
Share premium
Other reserves
Retained profit
Total equity
Total equity and liabilities
Note
31 Dec 2019
£000
31 Dec 20181
Restated
£000
1 Jan 20181
Restated
£000
17
16
18
19
22
23
25
25
25
27
28
29
51
75
162
95,686
95,974
60,357
194
60,551
95
85
–
213,255
213,435
61,729
393
62,122
142
16
–
212,591
212,749
60,984
320
61,304
156,525
275,557
274,053
13,047
161
43
13,251
15,621
180,019
2,139
(54,505)
143,274
156,525
4,786
–
–
4,786
15,852
254,995
(1,771)
1,695
270,771
275,557
1,309
–
–
1,309
15,852
254,995
(824)
2,721
272,743
274,053
1 The cost and accumulated amortisation of Company software were previously presented in the Property, Plant and Equipment note 17. The 31 December 2018 and 1 January 2018
comparatives have been adjusted so that the cost and accumulated amortisation of software are included in Intangible Assets. The 1 January 2018 and 31 December 2018
balances for Investments and Other reserves have been adjusted to include £255,000 relating to the Founder Shares that were issued in 2014. Please refer to note 29 for further
information on the Founder Shares. The 2018 comparatives have also been restated to reclassify £0.326m share based payment charges to investments. Because the impact on
the opening balance sheet is not material, this correcting adjustment has not been adjusted in the 1 January 2018 balance sheet.
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 loss for the financial year reported in the financial statements for the Company was £119.4m (2018: profit of £6.2m2).
2 The 2018 comparative has been restated from £5.8m to reflect SAYE share based payments relating to subsidiaries reclassified to investments.
These financial statements were approved by the Board of Directors on 25 June 2020.
Signed on behalf of the Board of Directors.
John van Kuffeler
Group Chief Executive
Jono Gillespie
Chief Financial Officer
Company number – 09122252
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Company statement of changes in equity
for the year ended 31 December 2019
133
At 31 December 2017
Prior year adjustment – Founder Shares
At 31 December 2017 – as restated1
Total comprehensive income for the year
– as restated2
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 2018 – as restated
Total comprehensive income for the year
Transactions with owners, recorded
directly in equity:
Dividends paid
Capital reduction
Credit to equity for equity-settled
share-based payments
Transfer of share-based payments on
vesting of share awards
Issue of shares
Cancellation of shares
IFRS 16 transition adjustment
At 31 December 2019
Note
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28
29
29
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27
3
Share
capital
£000
15,852
–
15,852
–
–
–
–
Share
premium
£000
254,995
–
254,995
–
–
–
–
15,852
254,995
–
–
–
–
–
23
(254)
–
–
–
(75,000)
–
–
24
–
–
15,621
180,019
Other
reserves
£000
(1,079)
255
(824)
–
–
1,155
(2,102)
(1,771)
–
–
–
1,185
(734)
3,459
–
2,139
Retained
profit
£000
2,721
–
2,721
Total
£000
272,489
255
272,743
6,152
6,152
(7,177)
(7,177)
–
–
1,155
(2,102)
1,695
270,771
(119,483)
(119,483)
(8,425)
75,000
(8,425)
–
–
1,185
–
(47)
(3,206)
(39)
(734)
–
–
(39)
(54,505)
143,274
1 The 1 January 2018 and 31 December 2018 balances for Other reserves have been adjusted to include £255,000 relating to the Founder Shares that were issued in 2014.
Please refer to note 29 for further information on the Founder Shares.
2 Refer to footnote 2 in regards to restated profit on page 130.
Company statement of cash flows
for the year ended 31 December 2019
Net cash used in operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Dividend income1
Net cash used in investing activities
Cash flows from financing activities
Finance cost
Dividends paid
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 2019
£000
Year ended
31 Dec 2018
£000
(5,108)
(754)
Note
30
(12)
13,500
13,488
(154)
(8,425)
–
(8,579)
(199)
393
194
(91)
10,200
10,109
(3)
(7,177)
(2,102)
(9,282)
73
320
393
14
29
23
1 Dividend income has been re-presented to recognise this as a cash inflow from investing activities. This was previously shown as a cash flow from financing activities in
the prior year.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 134
Notes to the financial statements
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 IFRSs 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 IFRS 16 Leases, and measurements
that have some similarities to fair value but are not fair value, such as value in use (‘VIU’) 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 2019. 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 and Viability Statement.
As a result of the impact of COVID-19, the Group has at the date of signing the accounts, breached its portfolio performance covenants
in relation to the securitisation facility, thereby preventing the Group from drawing down further from this facility. However recognising
that such a breach is as a result of COVID-19 which is beyond the Group’s control, Ares has granted a temporary waiver for this breach
covering the period up to 29 June 2020 so as to allow time for a more permanent solution to be agreed. In the event that no agreement
can be reached or extended then the Group has sufficient cash resources to repay the amount drawn under the securitisation facility in
full.
As set out on pages 87 to 88, as part of its going concern assessment, the Directors reviewed both the Group’s access to liquidity and its
future balance sheet solvency. For liquidity, the Group produced two scenarios: (i) a most likely (or ‘base case’) scenario which involves
restricted lending across the Group in order to mitigate the risk of covenant breaches; and (ii) a downside scenario which applies stresses
in relation to the key risks identified in the base case.
Under the base case, we have assumed the waiver granted by Ares is extended and no repayment of currently drawn amounts is made.
Whilst the headroom which exists in the financial covenants remains very tight, the Group does not expect to breach any further
covenants in the next 12 months and therefore would not require further covenant waivers from its lenders in order to remain viable. The
Group has considered a stress to the base case where it is required to repay the £15m currently drawn under the securitisation facility.
Under this stressed scenario the Group still does not expect to breach any further covenants over the next 12 months.
Under the downside scenario, the Group would be expected to breach certain covenants during the next 12 months and would therefore
require waivers from its lenders in order to remain viable. The Group additionally ran a liquidity reverse stress test on the base case to
identify the level expected collections would have to fall by to cause the Group to deplete all cash reserves. This assumes no further
lending and a corresponding fall in collections with no change to operating expenses. The result of this showed that collections would
have to fall by a further 65% from expected forecast levels in the base case for the Group to become illiquid, assuming no access to
further funding. Such a reduction in collections, based on evidence to date was thought by the Directors to be an unlikely event.
With regards to balance sheet solvency of the Group, the Directors note that under both scenarios, the Group and Company remained in
a net asset position and upon adding a further stress to write-off all remaining goodwill on the balance sheet as at 31 December 2019,
the Group and Company remained solvent. The Directors noted that a material uncertainty exists regarding the impact of COVID-19 on
the assumptions made and subsequent outcomes as well as the ultimate impact on covenants both under both the base case and
downside scenarios which may cast significant doubt on the Group and Company’s ability to continue as a going concern.
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The Directors felt that the range of assumptions made in both the base case and downside scenario were such that given the
uncertainties around the full general and idiosyncratic impact of COVID-19, there remained a material level of uncertainty around the
impact on the Group’s ability to meet its covenants and if they weren’t met, the likelihood of a further waiver being granted by the lenders
as well as the full impact on the Group’s balance sheet.
The Directors acknowledge the considerable challenges presented by the outbreak of COVID-19 and the material uncertainty created for
the going concern status of the Group and Company. However, following a number of steps taken by the Group (reduced lending volume
across all three divisions, a reduction in staff numbers, the furloughing of a number of staff and the deferral of payments to the UK tax
authorities) and despite the material uncertainty associated with forecast assumptions, purely as a consequence of COVID-19 as noted
above, it is their reasonable expectation that the Group and Company will continue to operate and meet its liabilities as they fall due for
the next 12 months and therefore has adopted the going concern basis of accounting.
Given the widespread government-led support to businesses, the steps taken by UK regulators as well as some market data from
analogous situations and discussions held with each of the Group’s lenders, should the Group find itself in a position where it is faced
with further covenant breaches, the Directors have a reasonable expectation that the Group’s lenders will agree to waive potential
covenant breaches to an extent, albeit at a higher cost. The Directors note that current negotiations with lenders suggest that whilst it is
likely that waivers would be given, at a cost, to cover reasonable deviations from the base case scenario, waivers which would be
required to fully cover the downside scenario are beyond what is currently envisaged in the negotiations. There is therefore a material
uncertainty regarding whether the Group would be able to operate within the limits set by its lenders in such a scenario. As mentioned
above, the Group notes that as at the date of signing the accounts, there has been a breach of portfolio performance covenants in
relation to the securitisation facility, thereby preventing the Group from drawing down further from this facility. This has arisen as a result
of the impact of COVID-19. Recognising the portfolio performance covenant breach is as a result of factors beyond the Group’s control, a
temporary waiver has been granted by its lender for this breach covering up to 29 June 2020 to allow time for permanent changes to the
treatment of COVID-19 flagged loans be agreed. As set out above, management expect that the waiver will be extended for a defined
period should negotiations not reach a conclusion by 29 June 2020. In the event that no agreement can be reached or extended then the
Group has sufficient cash resources to repay the amount drawn under the securitisation facility in full. The Group is not currently in
breach of any other covenants associated with the securitisation facility and is currently not in breach of covenants associated with the
term loan and RCF facilities. The assumption of lender support for covenant breaches forms a significant judgement of the Directors in
the context of approving the Group’s going concern status.
As highlighted above, whilst the Directors believe the Group and Company will remain a going concern, a material uncertainty exists
that may cast significant doubt on the Group and Company’s ability to continue as a going concern. Such a material uncertainty includes
the impact of potential reduced levels of collections and lending on the Group’s financial performance, compliance with existing
financial covenants and whether waivers will be granted by lenders (and under what terms) in the event of a further covenant breach.
The Directors will continue to monitor the Group and Company’s risk management, access to liquidity, balance sheet and internal control
systems as well as lending and collections.
Changes in accounting policies and disclosures
New and amended standards and interpretations issued but not effective for the financial year ending 31 December 2019
In the current year and in accordance with IFRSs requirements, certain new and revised standards and interpretations are in issue but not
yet effective. The Directors do not expect the adoption of these standards to have a significant effect on the financial statements of the
Company in future periods.
Management will continue to assess the impact of new and amended standards and interpretations on an ongoing basis.
New and amended standards and interpretations effective for the financial year ending 31 December 2019
IFRS 16 Leases
On 1 January 2019, the Group implemented IFRS 16 which 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. As permitted
by IFRS 16, comparative information for previous periods has not been restated. The impact on the Group’s financial position of applying IFRS
16 requirements is set out in note 3.
The Group is not a lessor and hence there has been no significant impact on the financial statements.
Prior year restatement
The Group transitioned to IFRS 9 on 1 January 2018. IFRS 9 introduced a revised impairment model which requires entities to recognise
expected credit losses based on unbiased forward-looking information and replaced 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.
Through the review of the 2019 financial statements, it was determined that an error in the data used to calculate the post model
adjustments had resulted in an underestimation of the level of loan loss provision required at 1 January 2018 by £3.2m. The input data did not
adequately capture all relevant elements of the underlying loan population required by the model to calculate an accurate impairment
provision. As a result, the level of loan loss provisions has remained below that required at the time of transition and thereafter with the
provision £4.0m lower than that required at 31 December 2018. A prior year adjustment to 31 December 2018 amounts receivable from
customers has therefore been made to the loan loss provision of both branch-based lending and guarantor loans of £3.6m and £0.4m
respectively. The effect of this adjustment on the Group is summarised below. In the restated statement of comprehensive income, the
portion of the derecognition gain/(loss) relating to substantial modifications during 2018 has been re-presented from modification loss to
derecognition gain/(loss), and the impact of the prior year adjustment on the derecognition gain/loss has also been reflected in the restated
amounts on the following page.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 136
Notes to the financial statements continued
1. Accounting policies continued
Impact on transition to IFRS 9 as at 1 January 2018:
Assets
Amounts receivable from customers
Liabilities
Deferred tax liability
Equity
Retained loss
Year ended 31 December 2018 impact:
Assets
Amounts receivable from customers
Liabilities
Deferred tax (liability)/asset
Trade and other payables1
Equity
Retained loss
1 Trade and other payables includes current tax liability.
Revenue
Other operating income
Modification loss
Derecognition loss
Impairments
Administration expenses
Operating profit
Exceptional items
Profit before interest and tax
Finance cost
Profit/(loss) before tax
Taxation
Profit/(loss) after tax
Earnings (loss) per share
Previous opening
Group balance
sheet 1 Jan 2018
£000
Adjustment to
branch-based
lending
£000
Adjustment to
guarantor loans
£000
Restated opening
balance sheet
1 Jan 2018
£000
253,116
(2,928)
(252)
249,936
(2,734)
498
43
(2,193)
(49,511)
(2,430)
(209)
(52,150)
Previous closing
Group balance
sheet 31 Dec 2018
£000
Branch-based
lending
£000
Guarantor loans
£000
Restated closing
balance sheet
31 Dec 2018
£000
314,613
(3,562)
(393)
310,658
(252)
(16,653)
407
182
75
26
230
(16,445)
(58,368)
(2,973)
(294)
(61,635)
Year end
31 Dec 2018
Reported
£000
Adjustment to
branch-based
lending
£000
Adjustment to
guarantor loans
£000
–
–
404
(97)
(941)
–
(633)
–
(633)
(633)
120
(513)
–
–
–
(32)
(109)
–
(142)
–
(142)
(142)
27
(115)
158,824
1,626
(482)
–
(42,688)
(97,763)
19,517
–
19,517
(21,107)
(1,590)
(89)
(1,679)
(0.54)p
Restated
Year end
31 Dec 2018
Reported
£000
158,824
1,626
(78)
(129)
(43,738)
(97,763)
18,742
–
18,742
(21,107)
(2,365)
58
(2,307)
(0.74)p
Alternative Performance Measures
The Group uses APMs to monitor the financial and operational performance of each of its business divisions and the Group as a whole.
The APMs are consistent with how the business is managed and therefore 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. The Group believes that
these APMs, which are not considered to be a substitute for or superior to IFRSs measures, provide stakeholders with additional helpful
information on the performance of the business. The APMs are consistent with how the business performance is planned and reported
within the internal management reporting to the Board. Some of these measures are also used for the purpose of setting remuneration
targets. 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 2019, APMs remain unchanged from the prior year. Refer to the Appendix for a glossary of
APMs and reconciliation to IFRSs reported numbers.
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The new accounting standard IFRS 16 Leases has been applied from 1 January 2019. The application of IFRS 16 has resulted in a decrease
in other operating expenses and an increase in depreciation and interest expense compared to the previous accounting standard IAS 17.
Refer to note 3 for further detail. The 2019 APMs include the impact of IFRS 16, whilst the 2018 APMs have not been restated for IFRS 16 as
the impact is not deemed material.
Revenue recognition
Interest income is recognised in the statement of comprehensive income for all amounts receivable from customers and is measured at
amortised cost using the EIR method. The EIR is the rate that exactly discounts estimated future cash payments or receipts through the
expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortised cost of a
financial liability. 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 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 ECL).
Other operating income
Other operating income relates to amounts received as a result of debt sales made. The debt sales made relate only to those amounts
receivable from customers which have fallen into arrears and have subsequently been charged off. Therefore as the Group makes every
effort to collect on receivables and has no intention of selling loans when originated, the Group’s business model remains consistent with
the definition of to hold and collect (further detail under Financial Assets).
Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker as
required by IFRS 8 Operating Segments. The chief operating decision-maker responsible for allocating resources and assessing
performance of the operating segments has been identified as the Board of Directors.
The accounting policies of the reportable segments are consistent with the accounting policies of the Group as a whole. Segment profit
represents the profit earned by each segment. This is the measure of profit that is reported to the Board of Directors for the purpose of
resource allocation and the assessment of segment performance.
When assessing segment performance and considering the allocation of resources, the Board of Directors reviews information about
segment assets and liabilities. For this purpose, all assets and liabilities are allocated to reportable segments with the exception of
intangible assets and current and deferred tax assets and liabilities.
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 is
unwound to revenue in the statement of comprehensive income on an EIR basis over the expected life of the acquired loans. At the end of
each period, the fair value of the acquired loan book is assessed under IFRS 9 as part of the Group’s assessment of ECL.
Agent Commission – home credit
Agents are paid commission on collections only and not what they lend to customers, this ensures loans are affordable at the point at
which loans are issued and collected. Affordability is reassessed each time an existing customer refinances and agents are paid a lower
commission rate on settled balances. Agents are also paid for recruiting new customers. Collecting commission is accounted for on a
cash basis in the month incurred, whilst new customer commission is deferred over the life of the loan.
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 incurred £80.6m of exceptional costs for the
year ended 31 December 2019 (2018: £nil). Refer to note 8 for further detail.
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.
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.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 138
Notes to the financial statements continued
1. Accounting policies continued
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 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 when an indicator of impairment exists, and is carried at cost less accumulated
impairment losses. Impairment is tested by comparing the carrying value of the CGU with the recoverable amount of the relevant CGU.
Expected future earnings and cash flows 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.
Cash generating units
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows
(‘CGUs’). In line with the operation segments reported by the Group, the Board consider home credit (Loans at Home), branch-based
lending (Everyday Loans) and guarantor loans (George Banco and TrustTwo) as three CGUs, as each operate as standalone divisions
and generate cash inflows that are largely independent of the cash inflows from other assets. The aggregation of George Banco and
TrustTwo into a single CGU is consistent with IAS 36 which permits such aggregation provided that the CGU to which goodwill is
allocated represents the lowest level within the entity at which goodwill is monitored for internal management purposes; and is not larger
than an operating segment, as defined by paragraph 5 of IFRS 8 Operating Segments, before aggregation.
No goodwill was attributable to TrustTwo upon acquisition of Everyday Loans.
Intangible assets
Intangible assets include acquired intangibles in respect of the customer list and credit decisioning technology at Everyday Loans, together
with the Everyday Loans and TrustTwo brands. Acquired intangibles in respect of the George Banco customer list, broker relationships, and
brand have been fully written-off in the current year as a result of the impairment assessment carried out at the Guarantors Loans Division
(refer to note 15). In addition, intangible assets include IT software development and computer software. The Board of Directors will assess
each of the Group’s remaining intangible assets for impairment at each future accounting date.
Amortisation is charged to the statement of comprehensive income, over their estimated useful lives as follows:
Customer lists
Broker relationships
Credit decisioning technology
Brand
Software
Between 3 and 7 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 their estimated useful lives 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
Shorter of life of lease or 7 years
20% to 33% straight-line
10% straight-line or 20% reducing balance
25% reducing balance
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Leases
From 1 January 2019, the Group adopted IFRS 16 Leases. Refer to note 3 for detailed accounting policies now in effect.
Investments
Investments in subsidiaries and associates are stated at cost less, where appropriate, provisions for impairment. In line with IAS 36, the
investments in subsidiaries and associates are assessed for indications of impairment at the end of each reporting period (and if any such
indication exists, the recoverable amount is estimated and compared to carrying value) and on an annual basis.
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’ (‘SPPI’). 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 SPPI 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.
Classification and measurement of financial assets depends on the results of the SPPI and the business model test. 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 considering all relevant evidence including how the performance of the assets is evaluated and their
performance measured and the risks that affect the performance of the assets and how these are managed. 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.
The Group has assessed its business models in order to determine the appropriate IFRS 9 classification for its financial assets. As part of
this assessment, the Group has recognised that it has no intentions of selling the assets which it originates. The financial assets in all three
business divisions are held to collect contractual cash flows while the performance of the asset is assessed by reference to various factors
such as collections performance and expected losses. In order to be accounted for at amortised cost, it is also necessary for individual
instruments to have contractual cash flows that are SPPI. As the Group’s financial assets meet both the hold to collect and SPPI criteria
they are held and subsequently measured at amortised cost.
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 is the rate
that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to
the gross carrying amount of a financial asset or to the amortised cost of a financial liability.
While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the Group has concluded that the ECL on
these items is nil and therefore no impairment loss adjustment is required.
Intercompany receivables which fall under the scope of IFRS 9 are assessed for ECL on an annual basis. This assessment involves an
analysis of the ability of the entity to repay amounts owed as at the end of the reporting period and includes the consideration of the
probability of default, loss given default and exposure at default. IFRS 9 requires ECL to always reflect both the possibility that a loss
occurs and the possibility that no loss occurs, even if the most likely outcome is no credit loss.
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. Intercompany loans have been assessed for impairment and the ECL are not material.
Amounts receivable from customers
Amounts receivable from customers originated by the Group are initially recognised at the amount loaned to the customer plus directly
attributable costs. Subsequently, amounts receivable from customers are increased by revenue and reduced by cash collections and any
deduction for loan loss provisions.
Recognition of expected credit losses
IFRS 9 introduces an impairment model which requires entities to recognise ECL based on unbiased forward-looking information.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 140
Notes to the financial statements continued
1. Accounting policies continued
The Group applies the ECL impairment model when determining the loan loss provisions to be applied to amounts receivable from
customers. This comprises three stages: (1) on initial recognition, a loan loss provision is recognised and maintained equal to 12 months of
ECL; (2) if credit risk increases significantly relative to initial recognition, the loan loss provision is increased to cover full lifetime ECL; and
(3) when a financial asset is considered credit-impaired, the loan loss provision continues to reflect lifetime ECL and interest revenue is
calculated based on the carrying amount of the asset, net of the loan loss provision, rather than its gross carrying amount. Loan loss
provisions are therefore calculated based on an unbiased probability-weighted outcome which takes into account historical
performance and considers the outlook for macroeconomic conditions. The Group reviews its portfolio of amounts receivable from
customers 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, both of which are detailed below.
Home credit
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 missed payments in the last 13 weeks. As IFRS 9 requires that
lenders provide for the 12-month ECL which represents the portion of lifetime ECL that is expected to result from default events on a
financial instrument that are possible within 12 months after the reporting date (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 loan loss
provisions at the point of issue and captures all loans which do not fall under stages 2 and 3.
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 initial recognition. 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. Loan loss provisions are thereby calculated by reference to their stage (criteria for
categorisation into stages is as described above) 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 EIR. A receivable can move from having a provision calculated on
a lifetime expected loss basis back to a 12-month expected losses basis (or vice versa) depending on the performance of the receivable
at the review date. 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 macroeconomic
adjustment. Due to the nature of the home credit industry and based on historical evidence, management has determined that the effect
of traditional macroeconomic downside indicators is minimal and therefore such an adjustment is currently not necessary. Management
will continue to monitor external macroeconomic trends and their impact and apply an adjustment should it become reasonable to do so.
Branch-based lending and guarantor loans
Customer accounts in the branch-based lending and the Guarantor Loans Divisions have been categorised into the three stages as
defined in IFRS 9 with reference to the following criteria:
• Loans in stage 1 which comprise all amounts receivable from customers which do not fall into stages 2 and 3.
• Loans in stage 2 which comprise those amounts receivable from customers which show a significant increase in credit risk since
origination, as determined by management to be the earlier of:
– 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).
This is derived by evaluating the impact of increased credit losses on risk adjusted margin by score band across the loan portfolio;
or
– the point at which a loan is 30 days past due (but less than 90 days past due); or.
–
loans which have been subject to curing treatment
• Loans in stage 3 which comprise amounts receivable from customers in default (in line with IFRS 9, the definition of default is over
90 days in arrears) as well as those accounts identified as insolvent.
The branch-based lending and the Guarantor Loans 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 EIR. The ECL
drivers of PD, EAD and LGD are modelled at a portfolio level which considers vintage, maturity, exogenous and other credit factors and
applied across all receivables at initial recognition. 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. The model used reflects a blended
outcome based on four macroeconomic scenarios of base, downside stress, severe downside stress and positive, with which specified
weightings are applied. Stress testing methodologies are also leveraged within forecasting economic scenarios for IFRS 9 purposes.
The macroeconomic variables which are modelled include Bank of England base rate (‘BoE’), 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.
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Alongside a review of the economic climate, management have considered a variety of weightings in the assessment of the
macroeconomic outlook. The weightings address the risk of non-linearity in the relationship between credit losses and economic
conditions, with provisions increasing more in unfavourable conditions (particularly severe conditions) than they reduce in favourable
conditions. The loan loss provision recognised is therefore the probability-weighted sum of the provisions calculated under a range of
economic scenarios. The Group has adopted the use of four main economic scenarios:
• Base (BoE Base): BoE 2019 stress testing base scenario
• Severe downside stress (BoE Stress): BoE 2019 stress testing annual cyclical scenario (‘ACS’) scenario
• Positive: constructed in-house, but based on PriceWaterhouseCoopers’ (‘PWC’) UK Economic Outlook, 2019
• Downside stress: constructed in-house, based on a review and impact of the financial crisis during 2008
The scenarios and the weightings are derived using external data together with management judgement, to determine scenarios which
span an appropriately wide range of plausible economic conditions.
The base scenario represents the most likely economic forecast. This scenario reflects a benign scenario where base rate and unemployment
remain low at around 4%, GDP and HPI grow steadily in line with past trends and CPI increases only gradually. At 31 December 2018 it was
assigned a probability weighting of 85% and at 31 December 2019 it was assigned a 50% probability weighting. The downside stress, severe
downside stress and positive economic scenarios are considered less likely to occur and have been given the following weightings:
Downside stress
Severe downside stress
Positive
31 Dec 2019
31 Dec 2018
30%
15%
5%
0%
10%
5%
The downside stress scenario constructed in-house reflects a slightly more severe position than what was seen during the 2008 financial
crisis. GDP and HPI fall substantially, CPI and unemployment increase. In 2008 base rate fell to 0.25% and stayed at that level for a
considerable time, in this scenario we have assumed base rate increases to >1% to simulate what may happen if the BoE had to raise
interest rates to curb inflation. Severe downside stress scenario is based upon the BoE’s own stress scenario. This represents for each
individual variable a severe downside with sharp falls in GDP and HPI combined with sharp increases in unemployment (>9%) CPI and
base rate (4%). The BoE provides base and stress scenario data but not a positive scenario, for our positive scenario we use PwC’s
Economic Outlook which is updated annually. For the positive scenario we use 3% for GDP, a low, stable base rate of interest and low
levels of unemployment.
A sensitivity of these scenarios and weightings has been performed at note 2.
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.
Home credit
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.
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.
Branch-based lending and guarantor loans
Within the branch-based lending and Guarantor Loans Divisions there are three ways a customer account can demonstrate significant
increase in credit risk (‘SICR’):
1. 30 days past due performance bucket (a rebuttable presumption under IFRS 9)
2. Current PD > residual origination lifetime PD × stage 2 threshold
3. All accounts subject to a curing treatment, including both reschedules and deferments
Along with the presumption that loans past 30 days due or loans subject to curing treatment represents a SICR, a quantitative assessment
is carried out. This quantitative assessment involves evaluating the impact of increased credit losses on risk adjusted margin (‘RAM’ being
revenue less impairment) by score band across the loan portfolio. A PD above the minimum level (deemed as the ‘stage 2 threshold’)
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. This staging test is run on a monthly basis by comparing probability of default at the reporting date to
the probability of default at origination based on updated bureau status of the customer and the delinquency status of each receivable.
Actual historical defaults modelled, along with the EMV factors (see below) are used to model an EMV PD. Decomposing performance
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 142
Notes to the financial statements continued
1. Accounting policies continued
data in this way is a standard tool in credit management. EMV stands for exogenous, maturity, vintage:
• Exogenous – effects that influence performance at a calendar date. These are typically external factors (such as macroeconomic
conditions) but may also be internally driven (e.g. changes to forbearance strategy).
• Maturity – effects that influence performance at a time on book. Credit accounts typically ‘mature’ according to a predictable schedule
from the time that they are originated. For instance, PD typically peaks one to two years from origination for unsecured products.
• Vintage – effects that relate to the period in which the accounts were originated. The most obvious driver of changes in performance
from this perspective is changes to credit strategy.
When applying the model, the three factors are combined to generate the overall prediction.
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 loan loss provisioning model, i.e. the loss allowance is measured as the lifetime ECL.
Curing policy
Loans in stage 3 which have not been cured represent those which have gone 90 days in arrears at one point in time. If a loan has ever
been 90 days in arrears, regardless of performance, the loan will remain in stage 3. The business has introduced a policy during 2019
to categorise these loans as performing or not performing based on their delinquency at the reporting date. For those deemed performing
for a full 12 months are deemed to have moved back to stage 1. Loans that have performed for more than six months but less than
12 months are deemed to have moved back to stage 2. Those loans which were deemed not performing at year end will remain in stage 3.
Definition of default
The definition of default is used in measuring the amount of ECL and in the determination of whether the loan loss provision is based on
12-month or lifetime ECL, as default is a component of PD which affects both the measurement of ECL 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; or
the borrower is insolvent or unlikely to pay its credit obligations to the Group in full.
When assessing if the borrower is unlikely to pay their 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.
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.
Branch-based lending and guarantor loans
Forbearance will be granted 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 occurred 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.
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 SPPI, 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 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 ECL) 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.
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When the contractual terms of a financial asset are modified and the modification does not result in derecognition, the Group determines
if the financial asset’s credit risk has increased significantly since initial recognition by comparing:
•
•
the remaining lifetime PD, estimated based on data at initial recognition and the original contractual terms; with
the remaining lifetime PD at the reporting date based on the modified terms.
For financial assets modified as part of the Group’s forbearance policy, where modification did not result in derecognition, the estimate of
PD reflects the Group’s ability to collect the modified cash flows taking into account the Group’s previous experience of similar
forbearance action, 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.
Where a modification does not lead to derecognition the Group calculates the modification gain/loss comparing the gross carrying amount
before and after the modification (excluding the ECL allowance). Then the Group measures ECL for the modified asset, where the expected
cash flows arising from the modified financial asset are included in calculating the expected cash shortfalls from the original asset.
Write-off policy
Branch-based lending and Guarantor Loans Division
For the purpose of accounting in the financial statements, loans are written-off when an account is greater than 180 days in arrears, at
which point interest is no longer accrued and any subsequent recoveries are credited to the statement of comprehensive income. Whilst
the customer account is written-off from our financial statements, it remains active whilst we explore any remaining methods of recovery.
Ongoing collections activity is managed both internally and via FCA regulated external debt collection companies. When a debt is sold
and the cash is received for the debt, the recoveries are credited to the income statement.
Home credit
For the purpose of accounting in the financial statements, a customer’s balance is fully written-off at the point the customer has gone
26 consecutive weeks without any payment. Before this point the balance is heavily provided for in line with IFRS 9. Whilst the customer
account is written-off from our financial statements, it remains active whilst we explore any remaining methods of recovery.
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 remeasured
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 EIR. 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.
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 ReportCorporate GovernanceFinancial StatementsAdditional Information 144
Notes to the financial statements continued
1. Accounting policies continued
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 SAYE schemes) 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 29 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 – Group
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:
Amounts receivable from customers – significant increase in 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 and therefore the Group makes assumptions to determine whether there are indicators that credit risk
has increased significantly which indicates that there has been an adverse effect on expected future cash flows. 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. As per note 1, for branch-based lending and guarantor loans, a PD above the minimum level (deemed as
the ‘stage 2 threshold’) 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. Management therefore consider the stage 2 threshold to be a critical accounting
judgement in the determination of ECL.
Given the short-term nature of lending in the home credit division, the difference between the 12-month ECL and lifetime losses is minimal;
therefore this judgement applies only to the branch-based and Guarantor Loans Divisions.
Key sources of estimation uncertainty:
Amounts receivable from customers
The Group assesses its portfolio of amounts receivable from customers for ECL 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 ECL policy:
Branch-based lending and guarantor loans
•
Incorporation of macroeconomic data: establishing the number and relative weightings of macroeconomic scenarios for each type of
product/market and determining the macroeconomic information relevant to each scenario. The Group incorporates macroeconomic
information into both its assessment of whether the credit risk of a financial asset has increased significantly since initial recognition and its
measurement of ECL. This is achieved by developing a number of potential economic scenarios and modelling ECL for each scenario. The
outputs from each scenario are combined using the estimated likelihood of each scenario occurring to derive a probability weighted ECL.
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. As per note 1, this is only applicable to
the branch-based lending and Guarantor Loans Divisions as due to the nature of the home credit industry and based on historical
evidence, management has determined that the effect of traditional macroeconomic downside indicators on home credit is minimal.
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Home credit
• 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.
Sensitivity analysis of amounts receivable from customers – key sources of estimation uncertainty:
Macroeconomic data
For branch-based lending and guarantor loans the Group has performed sensitivity analysis on the key macroeconomic variables. The
model used reflects a blended outcome based on four macroeconomic scenarios of base, downside severe stress, downside stress and
positive (refer to note 1 for further detail), with which specified weightings are applied. The macroeconomic scenarios are reviewed no
less than twice annually.
As summarised below, the outputs demonstrate the impact of changing the probability weightings of the scenarios adopted on the loan
loss provisioning figures. The first sensitivity is based on optimistic scenario weightings, the second sensitivity considered by management
is to be the most extreme scenario in the current economic environment. This is because it considers the impact of a 50% severe downside
stress weighting which assumes a stress impact on GDP, CPI, HPI, interest rates and unemployment variables worse than what was seen
during the 2008 financial crisis. These sensitivities do not take into account any impact of COVID-19, refer to subsequent events note 34 for
assessment of impact of COVID-19 on macroeconomic weightings.
Branch-based lending
Macroeconomic weightings
Current:
Base
Downside stress
Severe downside stress
Positive
Impact on ECL
Sensitivity of adjusting weightings
Optimistic:
Base
Downside stress
Severe downside stress
Positive
Impact on ECL
Pessimistic:
Base
Downside stress
Severe downside stress
Positive
Impact on ECL
Guarantor loans
Macroeconomic weightings
Current:
Base
Downside stress
Severe downside stress
Positive
Impact on ECL
Sensitivity of adjusting weightings
Optimistic:
Base
Downside stress
Severe downside stress
Positive
Impact on ECL
Pessimistic:
Base
Downside stress
Severe downside stress
Positive
Impact on ECL
Weighting
Impact on ECL
£000
50%
30%
15%
5%
85%
0%
10%
5%
50%
0%
50%
0%
n/a
1,277
(2,923)
Weighting
Impact on ECL
£000
50%
30%
15%
5%
85%
0%
10%
5%
50%
0%
50%
0%
n/a
(22)
(157)
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information
146
Notes to the financial statements continued
2. Critical accounting judgements and key sources of estimation uncertainty – Group continued
As per note 1 to the financial statements, due to the nature of the home credit industry and based on historical evidence, management
has determined that the effect of traditional macroeconomic downside indicators is minimal and therefore a macro economic adjustment
is currently not necessary.
Probability of default and loss given default
Home credit division
The home credit division policy for provisioning uses historical cash flow data to gain the best view of prospective collections
performance from receivables held on the balance sheet, which are discounted at the product’s EIR to value the receivables at balance
sheet date. As per note 1, this methodology encapsulates PD, EAD and LGD collectively. Furthermore, given the short-term nature of
lending in the home credit division, the difference between 12-month ECL and lifetime expected losses is minimal, Recent experience has
shown that a 5% increase or decrease in expected cash collections is possible in a 12-month horizon and if collections performance were
to vary by such an amount, the provision recognised would change by -/+ 7.6%, effectively changing the receivable valuation by 5%.
The suitability of the 5% sensitivity has been reviewed and considered appropriate given historical performance.
Impairment of goodwill
Determining whether goodwill is impaired requires an estimation of the recoverable amount to which goodwill has been allocated. The
recoverable amount is the higher of its VIU or its fair value less cost to sell.
The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. Whilst in
prior years the assessment of impairment of goodwill has reflected a number of key estimates such as forecast earnings, discount rates
applied and forecast market multiples used, in the current year the Group has utilised actual earnings and actual price earnings
multiples in order to determine recoverable amount of the CGUs. As a result, the key assumptions and inputs which have estimation
uncertainty in the current year are the use of historical earnings and historical multiples in determining recoverable amounts as the
Group cannot be certain that this is what a market participant would use to value the respective CGUs. Whilst not considered a key
source of estimation uncertainty, the Group notes that disposal costs have been assumed at 2% and that the impact of a change in rate
would be immaterial to recoverable amount calculated. Refer to note 15 for detailed goodwill analysis as at 31 December 2019.
As described above, the use of historical earnings and multiples to derive a valuation for the three CGUs represents a key source of
estimation uncertainty. A sensitivity analysis of the multiple shows that a 10% lower historical multiple would have resulted in an
additional £8.3m of impairment to the branch-based lending goodwill asset. As at 31 December 2019, the goodwill and intangible assets
related to the Guarantor Loans Division have been fully written-off. For home credit a 10% lower historical multiple would have reduced
headroom remaining between carrying value and recoverable amount in home credit by £5.9m as at 31 December 2019. A 10% higher
historical multiple used would have resulted in a £8.3m lower impairment being recognised on the branch-based lending goodwill asset
and £1.2m lower impairment recognised on the Guarantor Loans Division’s goodwill and intangible assets. The Group notes that the
onset of COVID-19, whilst a non-adjusting post-balance sheet event, could have a material impact on the impairment of goodwill
subsequent to 31 December 2019. Refer to subsequent events note 34 for further information.
Key sources of estimation uncertainty – Company
Impairment of investment in subsidiaries
Determining whether investment in subsidiaries is impaired requires an estimation of the recoverable amount. The recoverable amount of
the investment in subsidiaries was determined by reference to the recoverable amounts of all CGUs calculated as part of the goodwill
assessment, with the total recoverable amount calculated compared against the carrying amount of the Company’s investment. This
approach is considered reasonable since the Group structure means that the CGUs tested for impairment comprise the principal trading
subsidiaries of the Company.
The Group tests the investment in subsidiaries annually for impairment or more frequently if there are indications that it may be impaired.
The assessment of recoverable amount and subsequent impairment of investment in subsidiaries reflects the same approach as detailed
in the goodwill impairment assessment.
Applying the same sensitivities described for goodwill, our analysis shows that 10% lower historical multiple would have resulted in
additional £15.4m impairment to investment in the Company, whilst a 10% higher multiple use would have reduced the impairment
recognised by £15.4m.
3. Changes in accounting policies
In the current year, the Group, for the first time, has applied IFRS 16 Leases. The date of initial application of IFRS 16 for the Group was
1 January 2019.
IFRS 16 introduces new or amended requirements with respect to lease accounting. It introduces significant changes to the lessee
accounting by removing the distinction between operating and finance leases, requiring the recognition of a right-of-use asset and a
lease liability at commencement for all leases, except for short-term leases and leases of low-value assets. In contrast to lessee
accounting, the requirements for lessor accounting have remained largely unchanged.
The Group is not party to any leases where it acts as a lessor, but the Group does have a large number of material property and vehicle/
equipment leases.
Details of the Group’s accounting policies under IFRS 16 are set out below, followed by a description of the impact of adopting IFRS 16.
Significant judgements applied in the adoption of IFRS 16 included determining the lease term for those leases with termination or
extension options and determining an incremental borrowing rate where the rate implicit in a lease could not be readily determined.
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3.1 Accounting policies under IFRS 16 Leases
The Group assesses whether a contract is or contains a lease at inception of the contract. The Group recognises a right-of-use asset and
a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as
leases with a lease term of 12 months or less) and leases of low-value assets (less than £5,000). For these leases, the Group recognises the
lease payments as an operating expense (included within administrative expenses in the consolidated statement of comprehensive
income) on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in
which economic benefits from the leased assets are consumed.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date,
discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate.
Lease payments included in the measurement of the lease liability comprise:
• fixed lease payments (including in substance fixed payments), less any lease incentives;
• variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;
•
•
• payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.
the amount expected to be payable by the lessee under residual value guarantees;
the exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and
The lease liability is presented as a separate line in the consolidated statement of financial position. The lease liability is subsequently
measured by increasing the carrying amount to reflect interest on the lease liability (using the EIR method) and by reducing the carrying
amount to reflect the lease payments made.
The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:
•
•
the lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is
remeasured by discounting the revised lease payments using a revised discount rate.
the lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value,
in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the
lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used).
• a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is
remeasured by discounting the revised lease payments using a revised discount rate.
The Group did not make any such adjustments during the periods presented.
The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the
commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and
impairment losses.
Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or
restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured
under IAS 37. The costs are included in the related right-of-use asset, unless those costs are incurred to produce inventories. The Group
does not hold any inventories as at 31 December 2019.
Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers
ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the
related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of
the lease. The Group does not have any leases that include purchase options or transfer ownership of the underlying asset.
The right-of-use assets are presented as a separate line in the consolidated statement of financial position.
Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of-use
asset. The Group does not have any lease payments which fall under the definition of variable lease payments.
For short-term leases (lease term of 12 months or less) and leases of low-value assets (such as personal computers and office furniture),
the Group has used the practical expedient which allows the recognition of a lease expense on a straight-line basis as permitted by
IFRS 16. This expense is presented within administrative expenses in the consolidated statement of comprehensive income.
3.2 Approach to transition on 1 January 2019
The Group has applied IFRS 16 using the modified retrospective approach, without restatement of the comparative information. In
respect of those leases the Group previously treated as operating leases, the Group has elected to measure its right-of-use assets arising
from property leases using the approach set out in IFRS 16.C8(b)(i). Under IFRS 16.C8(b)(i), right-of-use assets are calculated as if the
Standard applied at lease commencement, but discounted using the borrowing rate at the date of initial application.
The classification of cash flows will also be affected as under IAS 17 operating lease payments are presented as operating cash flows;
whereas under IFRS 16, the lease payments will be split into a principal and interest portion which will be presented as financing and
operating cash flows respectively.
The Group’s weighted average incremental borrowing rate applied to lease liabilities as at 1 January 2019 was 9.5%.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 148
Notes to the financial statements continued
3. Changes in accounting policies continued
Practical expedients adopted on transition
The Group has made use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a
lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to be applied to those leases entered into
or modified before 1 January 2019. As part of the Group’s adoption of IFRS 16 and application of the modified retrospective approach to
transition, the Group also elected to use the following practical expedients:
• a single discount rate has been applied to portfolios of leases with reasonably similar characteristics;
•
right-of-use assets have been adjusted by the carrying amount of any onerous lease provisions at 31 December 2018 instead of
performing impairment reviews under IAS 36; and
• hindsight has been used in determining the lease term.
Impact on lessee accounting
Former operating leases
IFRS 16 changes how the Group accounts for leases previously classified as operating leases under IAS 17, which were off-balance sheet.
Applying IFRS 16, for all leases (except short-term and low-value leases – see 3.1), the Group now recognises right-of-use assets and lease
liabilities in the consolidated balance sheet, initially measured at the present value of the future lease payments as described in 3.1.
Lease incentives (e.g. rent free periods) are recognised as part of the measurement of the right-of-use assets and lease liabilities whereas
under IAS 17 they resulted in the recognition of a lease incentive liability, amortised as a reduction of rental expenses on a straight-line basis.
Under IFRS 16, right-of-use assets will be tested for impairment in accordance with IAS 36 Impairment of Assets. This replaces the
previous requirement to recognise a provision for onerous lease contracts.
Under IFRS 16 the Group recognises depreciation of right-of-use assets and interest on lease liabilities in the consolidated statement of
comprehensive income, whereas under IAS 17 operating leases previously gave rise to a straight-line expense in the administrative
expenses line within the consolidated statement of comprehensive income.
Under IFRS 16 the Group separates the total amount of cash paid for leases that are on balance sheet into a principal portion and
interest portion (presented within financing activities) in the consolidated cash flow statement. Under IAS 17 operating lease payments
were presented as operating cash outflows.
Former finance leases
The main differences between IFRS 16 and IAS 17 with respect to assets formerly held under a finance lease is the measurement of the
residual value guarantees provided by the lessee to the lessor. IFRS 16 requires that the Group recognises as part of its lease liability only
the amount expected to be payable under a residual value guarantee, rather than the maximum amount guaranteed as required by
IAS 17. This change did not have a material effect on the Group’s consolidated financial statements.
3.3 Financial impact
The application of IFRS 16 to leases previously classified as operating leases under IAS 17 resulted in the recognition of right-of-use assets
and lease liabilities. Any provisions for onerous lease contracts have been derecognised and operating lease incentives previously
recognised as liabilities have been derecognised and factored into the measurement of the right-to-use assets and lease liabilities.
The Group has chosen to use the table below to set out the adjustments recognised at the date of initial application of IFRS 16.
Condensed consolidated statement of financial position
Non-current assets
Right-of-use asset
Deferred tax asset
Total increase in assets
Current liabilities
Lease liability
Trade and other payables
Non-current liabilities
Lease liability
Total increase in liabilities
Equity
Retained loss
9
1
0
2
s
t
n
u
o
c
c
A
&
t
r
o
p
e
R
l
a
u
n
n
A
i
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l
p
e
c
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a
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F
d
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a
t
S
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n
o
N
31 Dec 2018
As restated
£000
IFRS 16
adjustment
£000
1 Jan 2019
Restated
£000
–
230
–
16,445
–
11,004
60
11,064
1,528
261
9,571
11,360
11,004
290
1,528
16,706
9,571
(61,635)
(295)
(61,930)
149
Of the total right-of-use assets of £11m recognised at 1 January 2019, £10.4m related to leases of property and £0.6m to leases of motor
vehicles. The table below presents a reconciliation from operating lease commitments disclosed at 31 December 2018 to lease liabilities
recognised at 1 January 2019.
Operating lease commitments disclosed under IAS 17 at 31 December 2018
Discounted using the lessee’s incremental borrowing rate of 9.5% as at the date of initial application
(Less): short-term leases recognised on a straight-line basis as expense
(Less): low-value leases recognised on a straight-line basis as expense
Add: adjustments as a result of a different treatment of extension and termination options
Lease liabilities recognised at 1 January 2019
£000
10,403
(1,591)
(77)
(76)
2,439
11,099
In terms of the consolidated statement of comprehensive income impact, the application of IFRS 16 resulted in a decrease in other
operating expenses and an increase in depreciation and interest expense compared to IAS 17. During the year ended 31 December 2019,
in relation to leases under IFRS 16 the Group recognised the following amounts in the consolidated statement of comprehensive income:
Depreciation on right-of-use asset
Interest expense on lease liabilities
Variable lease payments (not depending on index or rate)
Short-term lease expense
Low-value lease expense
£000
2,042
1,059
–
508
120
3,729
4. Revenue
Revenue is recognised by applying the EIR to the carrying value of a loan. The EIR is the rate that exactly discounts estimated future cash
payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset
or to the amortised cost of a financial liability.
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 17)
Depreciation of right-of-use asset (note 18)
Amortisation and impairment of intangible assets (note 16)
Staff costs excluding agent commission1 (note 10)
Rentals under operating leases
Profit on sale of property, plant and equipment
1 Agent commission for the year ended 31 December 2019 was £13.1m (2018: £14.7m). Refer note 1 for accounting policy.
6. Auditor’s 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
Services relating to corporate finance transactions
Other
Year ended
31 Dec 2019
£000
183,657
(2,873)
Year ended
31 Dec 2018
£000
166,502
(7,678)
180,784
158,824
Year ended
31 Dec 2019
£000
Year ended
31 Dec 2018
£000
1,827
2,042
9,090
50,975
742
(43)
1,519
–
9,913
46,218
3,119
(45)
Year ended
31 Dec 2019
£000
Year ended
31 Dec 2018
£000
228
553
–
781
75
1,602
123
1,800
82
399
–
481
63
–
–
63
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 150
Notes to the financial statements continued
6. Auditor’s remuneration continued
Other includes certain agreed-upon procedures carried out for the Directors which are an independent attest service performed for
the Board.
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 89.
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); guarantor loans (TrustTwo and George
Banco); home credit (Loans at Home); 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 2019
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
Branch-based
lending
£000
Guarantor
loans1
£000
Home
credit
£000
60,835
–
60,835
9,102
–
9,102
(221)
(2,116)
6,765
(1,432)
5,333
Central
£000
–
–
–
(5,358)
(7,226)
(12,584)
(79,293)
(649)
(92,527)
3,280
2019
Total
£000
183,657
(2,873)
180,784
39,292
(7,226)
32,066
(80,584)
(27,458)
(75,976)
(332)
(89,247)
(76,308)
29,820
(2,873)
26,947
5,895
–
5,895
(737)
(7,338)
(2,180)
574
(1,607)
93,002
–
93,002
29,653
–
29,653
(332)
(17,355)
11,966
(2,752)
9,214
Guarantor
loans1
£000
106,960
–
Total assets
Total liabilities
Net assets
Capital expenditure
Depreciation of plant, property
and equipment
Depreciation of right-of-use asset
Amortisation and impairment of
intangible assets
Branch-based
lending
£000
244,740
(302,987)
Home
credit
£000
Central
£000
Consolidation
adjustments3
£000
2019
Total
£000
51,931
(29,202)
633,760
(332,406)
(556,709)
307,525
480,681
(357,070)
(58,247)
106,960
22,729
301,355
(249,184)
123,611
2,754
1,428
1,240
400
–
–
–
–
2,164
356
673
1,442
12
43
129
38
–
–
–
7,211
4,929
1,827
2,042
9,090
9
1
0
2
s
t
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A
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R
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1 The 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 £80.6m exceptional items in 2019 (2018: nil). Refer note 8 for further details.
3 Consolidation adjustments include the acquisition intangibles of £1.3m (2018: £8.5m), goodwill of £75.8 m (2018: £140.7m), fair value of loan book of £1.4m (2018: £4.3m) and the
elimination of intra-Group balances.
Year ended 31 December 2018 as restated
Interest income
Fair value unwind on acquired loan portfolio
Total revenue
Operating profit/(loss) before amortisation
Amortisation of intangible assets
Operating profit/(loss) before exceptional items
Exceptional items
Finance cost
Profit/(loss) before taxation
Taxation
Profit/(loss) for the year
Branch-based
lending
£000
Guarantor
loans
£000
Home credit
£000
Central
£000
79,579
(3,958)
75,621
22,315
–
22,315
–
(12,778)
9,537
(1,740)
7,797
21,748
(3,720)
18,028
3,791
–
3,791
–
(5,833)
(2,042)
89
(1,953)
65,175
–
65,175
6,714
–
6,714
–
(2,461)
4,253
(774)
3,479
–
–
–
(5,397)
(8,681)
(14,078)
–
(35)
(14,113)
2,483
(11,630)
2018
Restated
Total
£000
166,502
(7,678)
158,824
27,423
(8,681)
18,742
–
(21,107)
(2,365)
58
(2,307)
151
Total assets
Total liabilities
Net assets
Capital expenditure
Depreciation of plant, property
and equipment
Amortisation of intangible assets
Branch-based
lending
£000
219,723
(250,894)
(31,171)
3,736
989
199
Guarantor
loans
£000
86,972
–
86,972
–
81
36
Home
credit
£000
Central
£000
Consolidation
adjustments
£000
2018
Restated
Total
£000
52,609
(65,527)
574,467
(270,071)
(442,959)
303,136
490,812
(283,356)
(12,918)
304,396
(139,823)
207,456
2,256
382
997
91
67
8,681
–
–
–
6,083
1,519
9,913
The results of each segment have been prepared using accounting policies consistent with those of the Group as a whole.
8. Exceptional items
During the year ended 31 December 2019, the Group incurred exceptional costs totalling £80.6m (including VAT) (2018: £nil). £12.8m of
these costs related to fees and other costs associated with the offer to acquire Provident Financial plc on the terms set out in an offer
document published on 9 March 2019, as well as the related proposal to demerge Loans at Home. The offer lapsed on 5 June 2019.
The significant decline in market multiples across the sector resulted in an impairment to the value of the goodwill assets of all three
divisions in the Group’s balance sheet. Whilst non-cash in nature, the impact is summarised as follows: £44.8m of the exceptional items
reflect the write-down of the value of goodwill associated with Everyday Loans; £8.6m of the exceptional items reflect the write-down of
the value of goodwill associated with guarantor loans; and £12.5m of the exceptional items reflect the write-down of the value of
goodwill associated with Loans at Home. Further details are set out in note 15.
The remaining £1.9m of exceptional costs relates to management restructuring which took place across the divisions over the year (Loans
at Home in January 2019 totalling £0.2m, branch-based lending and Guarantor Loans Division in November 2019 totalling £1.1m, and the
removal of a Director at central in October 2019 totalling £0.6m).
9. Directors’ remuneration
Short-term employee benefits
Post-employment benefits
Termination benefits
Year ended
31 Dec 2019
£000
Year ended
31 Dec 2018
£000
1,633
85
287
1,409
80
–
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.
Miles Cresswell-Turner stepped down from his role as CEO of Everyday Loans Group at the end of April 2019 and returned as an Executive
Director of Non-Standard Finance plc until 21 October 2019.
Refer to Directors’ Remuneration Report for more detail on remuneration.
10. 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
Share based payment charge
Social security costs
Pension costs
Year ended
31 Dec 2019
Number
Year ended
31 Dec 2018
Number
428
131
313
7
879
319
104
332
7
762
Year ended
31 Dec 2019
£000
Year ended
31 Dec 2018
£000
42,891
1,183
4,863
2,038
50,975
39,261
1,157
4,198
1,602
46,218
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 152
Notes to the financial statements continued
11. Finance cost
Bank charges and interest payable
Lease finance costs under IFRS 16
Bank interest receivable
Finance cost
12. 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 Dec 2019
£000
Year ended
31 Dec 2018
£000
(26,399)
(1,059)
–
(27,458)
(21,110)
–
3
(21,107)
Year ended
31 Dec 2019
Year ended
31 Dec
Restated
2018
(76,308)
312,126,220
(24.45)p
(2,307)
312,713,410
(0.74)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 2019, nil shares were held in treasury (2018: 5,000,000 Ordinary Shares of the Company that were
purportedly repurchased by the Company as at 31 December 2018 were cancelled on 30 July 2019).
Weighted average number of potential Ordinary Shares that are not currently dilutive
Year ended
31 Dec 2019
000s
Year ended
31 Dec 2018
000s
8,938
10,967
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 SAYE
schemes. The amount is based upon the number of shares that would be issued if 31 December 2019 was the end of the contingency period.
13. Taxation
Current tax charge
Current tax
Prior period adjustment to current tax
Total current tax charge
Deferred tax credit
Prior period adjustment to deferred tax
Total tax charge/(credit)
Year ended
31 Dec 2019
£000
Year ended
31 Dec 2018
Restated
£000
2,321
(916)
1,405
(1,178)
104
332
2,336
–
2,336
(2,395)
–
(58)
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% (2018: 19%):
Effects of:
Fixed asset differences
Expenses not allowable for taxation
Share-based payments
IFRS 16 adjustments
Research and development tax credit
Chargeable gains/losses
Prior year adjustments
Adjustment to tax charge in respect of previous periods
Adjustment to tax charge in respect of previous periods – deferred tax
Corporation tax rate change
Deferred tax rate change
Changes in unrecognised deferred tax
Total tax charge/(credit)
Year ended
31 Dec 2019
£000
(75,976)
(14,435)
Year ended
31 Dec 2018
Restated
£000
(2,365)
(449)
93
15,506
157
(51)
–
–
–
(916)
104
(43)
(82)
–
332
97
379
58
–
(7)
(42)
(32)
–
–
(69)
–
7
(58)
9
1
0
2
s
t
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u
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A
&
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p
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R
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a
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A
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153
Certain exceptional items and costs related to the offer to acquire Provident Financial plc (refer to note 8), impairment of goodwill, and
costs related to the Group’s SAYE and long-term incentive plans are included within ‘expenses not allowable for taxation’ due the nature
of the transactions. There were £80.6m exceptional items in 2019 (2018: nil). Long-term incentive plan items disallowed relates to set-up
costs and the fair value of the schemes at the date of grant totalling £0.8m (2018: £0.9m). Exceptional costs relating to the offer to acquire
Provident Financial plc which have been disallowed are £11.0m. A further £65.9m (2018: £nil) of charges relating to the write-down of the
value of goodwill associated with Loans at Home, Everyday Loans, and the Guarantor Loans Division, as well as the amortisation and
write-down of intangibles of the during the year have also been disallowed.
Finance Bill 2016 enacted provisions to reduce the main rate of UK corporation tax to 17% from 1 April 2020. However, in the March 2020
Budget it was announced that the reduction in the UK rate to 17% will now not occur and the Corporation Tax Rate will be held at 19%. As
substantive enactment is after the balance sheet date, deferred tax balances as at 31 December 2019 continue to be measured at a rate
of 17%.
14. Dividends
The Group declared a half-year dividend of 0.7p per share in August 2019 (2018: 0.6p). As announced on 26 March 2020, the Board will
not recommend or pay a final dividend in respect of the year ended 31 December 2019 (2018: 2 pence per share).
Whilst the goodwill impairment outlined above is non-cash in nature, together with the amortisation of acquired intangibles (also
non-cash in nature), the prior year adjustment and other exceptional items, these charges have meant that the Company no longer has
any distributable reserves. To address this, the Board is committed to completing a process, subject to shareholder and Court approval,
to create sufficient distributable reserves so that the Company can resume the payment of cash dividends to shareholders as soon as it is
appropriate to do so.
15. Goodwill – Group
Opening balance
Accumulated impairment
Closing balance
Year ended
31 Dec 2019
£000
140,668
(65,836)
74,832
Year ended
31 Dec 2018
£000
140,668
–
140,668
The goodwill recognised represents the difference between the purchase consideration paid and the value of net assets acquired
(including intangible assets recognised upon acquisition), less any accumulated impairment. Total goodwill as at 31 December 2019
comprised £27.7m (2018: £40.2m) related to the acquisition of Loans at Home, £47.1m (2018: £91.9m) related to the acquisition of Everyday
Loans, and £nil (2018: £8.6m) related to the acquisition of George Banco.
Under IFRS 13, ‘Fair Value Measurement’, the fair value used in the goodwill impairment assessment is classified as Level 3.
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 at the year end has utilised actual price earnings (‘PE’) multiples of comparable companies as at
31 December 2019 and applied these to actual earnings for the financial year ended 31 December 2019. Refer to note 2 for sensitivity
analysis of key sources of estimation uncertainty.
Determining whether goodwill is impaired requires an estimation of the recoverable amount of each CGU. The recoverable amount is the
higher of its fair value (’FV’) less cost to sell or its VIU. The approach taken for each is detailed below.
Fair value less cost to sell
The calculation to determine the FV less cost to sell for each CGU uses earnings as at 31 December 2019 multiplied by the 31 December
2019 PE multiples for comparable companies. Earnings represents profit after tax before FV adjustments, amortisation of intangibles and
exceptional items. Disposal costs have been estimated at 2%. As part of this assessment, we have applied PE multiples to 2019 profit after
tax in order to determine management’s best estimate of the FV to be attributed to each of the CGUs.
Value in use
The calculation to determine recoverable amount based on VIU uses the cash flows derived from earnings projections for the years
ended 31 December 2020, 2021 and 2022, together with a terminal value based on the cash flow forecast for 2022 at a perpetuity growth
rate. The resulting cash flow forecasts are then discounted at a discount rate appropriate to the CGU to produce a VIU to the Group.
Loans at Home goodwill assessment
In the 2018 Annual Report and Accounts, the Group had calculated the FV less costs to sell of Loans at Home to be in the range of
£64.0m to £67.0m (headroom of between £2m and £5m from the carrying value) as at 31 December 2018. A key estimate driving this result
was the 2019 forecast earnings where it was determined that a reduction of 3% to 8% would have necessitated an impairment to the
value of the goodwill asset.
During the six months ended 30 June 2019, the Group recognised a £12.5m impairment loss in the Loans at Home goodwill asset. The factors
leading to this impairment included the significant decline in peer group PE multiples since 31 December 2018, as well as uncertainties in the
economic, market and regulatory environment. This reduced the Loans at Home goodwill asset from £40.2m to £27.7m as at 30 June 2019. For
further detail refer to the Group’s 2019 half-year results, a copy of which is available on the Group’s website: www.nsfgroupplc.com.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 154
Notes to the financial statements continued
15. Goodwill – Group continued
Since the impairment assessment made at 30 June 2019, the Group has calculated the FV less cost to sell to be above the carrying value
of the CGU as at 31 December 2019. As noted earlier, this calculation applies PE multiples to actual earnings and therefore is not subject
to estimation uncertainty which would arise from the use of forecast earnings and discount rates. The Group notes however that a 14%
fall in the PE multiple applied to 2019 earnings would reduce headroom to £nil. As the FV less cost to sell calculation has resulted in a
recoverable amount in excess of the carrying value of the CGU, it was not considered necessary to carry out a VIU calculation. We have
concluded that based on our calculations, no further impairment to the Loans at Home goodwill asset is necessary beyond the £12.5m
that was recognised and disclosed in the Group’s results for the six months ended 30 June 2019.
Everyday Loans goodwill assessment
As at 31 December 2019, the Group performed a FV less cost to sell for the Everyday Loans CGU. The Group has calculated the FV less
costs to sell to be below the carrying value by £44.8m. Whilst subject to funding, Everyday Loans is forecasting meaningful growth in
future years, this change from the prior year is primarily due to the large decline in the PE multiple applied to the Everyday Loans
earnings, with PE multiples across the non-standard finance sector environment during the year ended 31 December 2019 as well as
uncertainties in the economic, market and regulatory environment as noted above. The Group notes that had the multiples remained at
the level they were as at 31 December 2018, there would have existed headroom of £6.7m as at 31 December 2019. In accordance with IAS
36, recoverable amount represents the higher of FV less cost to sell and VIU. Due to the growing nature of the Everyday Loans CGU,
whilst profit growth can be seen over the forecast period, this requires significant investment that in turn impacts cash flows. As a result,
management have determined FV to be higher than VIU.
Guarantor loans goodwill assessment
As at 31 December 2019, the Group performed an annual impairment assessment and calculated the FV less cost to sell and VIU
calculation for the guarantor loans CGU. The Group has calculated the FV less costs to sell to be below the carrying value by £10.6m.
This impairment has been recognised in the form of a £8.6m goodwill write-off and a £2.0m write-off to remaining intangible assets (refer
to note 16). This significant change from the prior year is due to a 44% decline in the PE multiple applied to the Guarantor Loans Division
earnings following the significant decline in the PE multiples of the Group’s largest competitor in the guarantor loans space and across
the non-standard finance sector generally during the year ended 31 December 2019, as well as uncertainties in the economic, market and
regulatory environment, as noted above.
In accordance with IAS 36, recoverable amount represents the higher of FV less cost to sell and VIU. As with the Everyday Loans CGU,
whilst the size of the guarantor loans CGU’s loan book and associated profitability is expected to grow strongly over the forecast period,
this requires investment with the result that cash flows during this period are expected to be depressed and management have
determined FV to be higher than VIU.
Refer to note 2 for sensitivities on key sources of estimation uncertainty. The Group notes that the onset of COVID-19, whilst a non-
adjusting post-balance sheet event, could have a material impact on the impairment of goodwill subsequent to 31 December 2019. Refer
to subsequent events note 34 for further information.
16. Intangible assets – Group
Cost
At 1 January 2019
Additions
At 31 December 2019
Amortisation
At 1 January 2019
Charge for the year
Impairment
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
Customer
lists
£000
Agent
network
£000
Brands
£000
Broker
relationships
£000
Technology
£000
LAH IT
software
development
£000
Software1
£000
Total
£000
21,924
–
21,924
19,559
1,339
647
540
–
540
540
–
–
2,005
–
2,005
1,235
370
–
9,151
–
9,151
5,837
1,949
1,365
6,227
–
6,227
4,152
1,557
–
6,279
2,129
3,316
1,056
49,442
3,185
8,408
4,372
52,627
1,372
1,426
–
2,270
437
–
34,965
7,078
2,012
21,545
540
1,605
9,151
5,709
2,798
2,707
44,055
379
2,365
–
–
400
770
–
518
5,610
1,665
8,572
3,314
2,075
4,907
1,046
14,477
1 The cost and accumulated amortisation of software (with the exception of LAH IT software development) were previously presented in the property, plant and equipment note 17.
The 2018 comparatives have been adjusted so that the cost and accumulated amortisation of software across the Group are included in intangible assets. The 1 January 2018
comparative for cost and accumulated amortisation of software reclassified from property, plant and equipment was £0.6m.
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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 2019:
Intangible asset
Everyday Loans’ acquired customer list
Everyday Loans’ credit-decisioning technology
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
Software
Intangibles assets – Company
Cost
At 1 January 2019
Additions
At 31 December 2019
Depreciation
At 1 January 2019
Charge for the year
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
Carrying value as
at 31 Dec 2019
Carrying value as
at 31 Dec 2018
£000
379
518
400
–
–
–
5,610
1,665
£000
835
2,075
699
1,530
70
3,314
4,907
1,048
Amortisation
period remaining
years and months
10 months
4 months
1 year 4 months
–
–
1 year
3 years
3 to 5 years
Software1
£000
103
12
115
18
22
40
75
85
Total
£000
103
12
115
18
22
40
75
85
1 The cost and accumulated amortisation of Company software were previously presented in the property, plant and equipment note 17. The 2018 comparatives have been
adjusted so that the cost and accumulated amortisation of software are included in intangible assets. The 1 January 2018 comparative for cost and accumulated amortisation
of software reclassified from property, plant and equipment was £0.016m.
17. Property, plant and equipment – Group
Cost
At 1 January 2019
Additions
Disposals
At 31 December 2019
Depreciation
At 1 January 2019
Charge for the year
Disposals
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
Leasehold
improvements
£000
Fixtures
and fittings
£000
Motor
vehicles
£000
Computer
equipment
£000
5,205
1,200
(207)
6,198
1,597
820
(207)
2,210
3,988
3,608
2,058
204
(120)
2,142
593
196
(119)
669
1,473
1,465
231
–
(150)
81
–
54
(112)
(58)
139
231
3,235
340
(640)
2,935
1,863
757
(640)
1,980
956
1,372
Total
£000
10,729
1,744
(1,117)
11,356
4,053
1,827
(1,078)
4,802
6,556
6,677
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 156
Notes to the financial statements continued
17. Property, plant and equipment – Group continued
Property, plant and equipment – Company
Cost
At 1 January 2019
Additions
Disposals
At 31 December 2019
Depreciation
At 1 January 2019
Charge for the year
Disposals
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
18. Right-of-use (‘ROU’) asset – Group
Cost
At 1 January 2019
Additions
Disposals
At 31 December 2019
Depreciation
At 1 January 2019
Charge for the year
Disposals
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
Right-of-use asset – Company
Cost
At 1 January 2019
Additions
Disposals
At 31 December 2019
Depreciation
At 1 January 2019
Charge for the year
Disposals
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
Leasehold
improvements
£000
Fixtures and
fittings
£000
Motor
vehicles
£000
110
–
–
110
59
22
–
81
29
51
82
–
(2)
80
43
16
(1)
58
22
39
55
–
–
55
50
5
–
55
–
5
ROU Buildings
£000
ROU Vehicles
£000
14,253
1,606
–
15,860
3,876
1,843
8
5,727
10,133
–
814
–
–
814
187
199
–
386
428
–
ROU Buildings
£000
647
–
–
647
356
129
–
485
162
–
Total
£000
247
–
(2)
245
152
43
(1)
194
51
95
Total
£000
15,067
1,606
–
16,673
4,063
2,042
8
6,113
10,560
–
Total
£000
647
–
–
647
356
129
–
485
162
–
Refer to note 3 for a summary of the current year impacts of IFRS 16 on the statement of comprehensive income. Total cash outflow for
leases for the year ended 31 December 2019 was £3.7m.
As described in note 3, the Group leases property and motor vehicles and the average lease term for property is ten years whilst for
vehicles is three years. The lease term for the Company ROU asset is five years. There are no future cash outflows to which the lessee is
potentially exposed that are not reflected in the measurement of lease liabilities.
The Group and Company’s ROU assets have been assessed for impairment under IAS 36. The carrying amount of the ROU assets
remains above the recoverable amount of ROU assets and no impairment has occurred in the year ended 31 December 2019.
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19. 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
Principal place of business
and country of incorporation
Nature of business
% voting rights and shares held
S.D. Taylor Limited (trading as
7 Turnberry Park Road, Gildersome,
Provision of consumer credit
100% of Ordinary Shares
Loans at Home)
Morley, Leeds, England, LS27 7LE,
United Kingdom
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
Holding company
100% of Ordinary Shares
Everyday Loans Limited
As above
Provision and servicing of secured
100% of Ordinary Shares
Everyday Lending Limited
As above
and unsecured personal
instalment loans
Provision of secured and
unsecured personal
instalment loans
100% of Ordinary Shares
Non-Standard Finance
Subsidiary Limited1
Non-Standard Finance
Subsidiary II Limited
Non-Standard Finance
Subsidiary III Limited
NSF Finco Limited
NSF Group Limited1
7 Turnberry Park Road, Gildersome,
Holding company
100% of Ordinary Shares
Morley, Leeds, England, LS27 7LE,
United Kingdom
As above
As above
As above
As above
Holding company
100% of Ordinary Shares
Holding company
100% of Ordinary Shares
Financing company
100% of Ordinary Shares
Dormant
100% of Ordinary Shares
George Banco Limited
Epsom Court 1st Floor, Epsom Road,
Provision and servicing
100% of Ordinary Shares
White Horse Business Park,
Trowbridge, England, BA14 0XF,
United Kingdom
of unsecured personal
instalment loans
George Banco.com Limited
As above
Provision of unsecured
100% of Ordinary Shares
personal instalment loans
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
31 December 2017
Restatement for Founder Shares
31 December 2017 – as restated1
Share-based payment charge
31 December 2018– as restated1
Impairment of investment in subsidiaries
Vesting of subsidiary share based payment schemes
Share-based payment charge
31 December 2019
£000
212,336
255
212,591
664
213,255
(117,525)
(734)
690
95,686
1 Refer footnotes 1 and 2 in the statement of financial position and statement of changes in equity for detail of restatements.
The Group tests the carrying value of its net investment in subsidiaries annually for impairment or more frequently if there are indications
that the investment might be impaired. Determining whether an investment is impaired requires an estimation of the recoverable amount
of each subsidiary. In line with IAS 36, the recoverable amount is the higher of its VIU or its FV less cost to sell.
In the nine months ended 30 September 2019, the Company recognised a £25m impairment loss in its investment in subsidiaries. Factors
leading to this impairment included the impairment in the Loans at Home goodwill by the Group totalling £12.5m in the six months ended
30 June 2019 which resulted from the significant decline in PE multiples since 31 December 2018, as well as increased sector-wide risks to
future cash flows and new originations which have arisen since 31 December 2018 in light of changes in the market and regulatory
environment over the year. This impairment loss was determined by reference to the recoverable amounts of all CGUs calculated as part
of the goodwill assessment, with the total recoverable amount compared against the carrying amount of the Company’s investment in
Non-Standard Finance Subsidiary Limited. This approach is considered reasonable since the Group structure means that the CGUs
tested for impairment comprise the principal trading subsidiaries of the Company.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 158
Notes to the financial statements continued
19. Investment in subsidiaries – Group continued
As at 31 December 2019, the Company recognised a further impairment loss in its investment in subsidiaries totalling £92.5m. This
impairment follows the £44.8m impairment to Everyday Loans goodwill and £8.6m impairment to the guarantor loans goodwill and
£2.0m write-off of intangible assets recognised in the current year. The impairment losses recognised continue to be as a result of the
significant declines in the PE multiples of comparator companies in the non-standard finance market and increased uncertainty in the
macroeconomic and regulatory environment seen since 31 December 2018. The £117.5m impairment of the Company’s investment has
been calculated as the difference between the recoverable amounts as calculated in line with methods described in note 15, and the
carrying value of the investments.
Refer to note 2 for sensitivities around key sources of estimation uncertainty. The Group notes that the onset of COVID-19, whilst a
non-adjusting post-balance sheet event, could have a material impact on the impairment of goodwill subsequent to 31 December 2019.
Refer to subsequent events note 34 for further information.
20. Amounts receivable from customers – Group
Gross carrying amount
Loan loss provision
Amounts receivable from customers
2019
£000
410,849
(49,201)
2018
Restated
£000
354,794
(44,135)
361,648
310,659
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.
Included within the gross carrying amount above are unamortised broker commissions, see table below:
Unamortised broker commissions
Total unamortised broker commissions
The FV of amounts receivable from customers are:
Branch-based lending
Guarantor loans
Home credit
2019
£000
14,311
14,311
2019
£000
322,852
127,095
60,668
2018
£000
11,182
11,182
2018
£000
274,291
112,157
67,717
Fair value of amounts receivable from customers
510,615
454,165
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 which defines FV measurements as those
derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data
(unobservable inputs).
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Due within one year
Due in more than one year
Amounts receivable from customers
Analysis of receivables from customers
31 December 2019
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
2019
£000
176,379
185,269
2018
Restated
£000
112,027
198,631
361,648
310,659
Stage 3
£000
8,651
3,488
14,375
Total
£000
231,631
112,930
66,288
26,514
410,849
3,592
1,468
13,425
18,485
5,059
2,021
949
8,029
16,848
5,969
26,384
49,201
214,783
106,961
39,904
361,648
Stage 1
£000
196,140
99,449
35,472
331,061
8,050
2,110
1,844
12,004
188,091
97,339
33,628
319,057
Stage 2
£000
26,839
9,993
16,442
53,274
5,205
2,391
11,115
18,712
21,633
7,601
5,327
34,562
31 December 2018 as restated
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
159
Stage 1
£000
173,396
78,136
38,692
Stage 2
£000
17,076
10,010
16,524
Stage 3
£000
6,271
2,058
12,631
Total
£000
196,744
90,204
67,846
290,224
43,609
20,960
354,794
7,432
921
3,523
11,876
165,964
77,215
35,169
278,348
3,560
1,643
11,355
16,558
13,517
8,366
5,169
27,052
3,091
668
11,942
15,701
3,180
1,390
688
5,258
14,083
3,232
26,820
44,135
182,661
86,971
41,026
310,659
Analysis on movement on loan loss provision
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 loan loss provisions 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 loan loss provisions related to assets that were written-off during
the period.
• Financial assets modified during the period.
The economic assumptions included in the Group’s IFRS 9 model scenarios for branch-based lending and Guarantor Loans Division have
been discussed in note 2.
The following tables explain the changes in the loan loss provision between the beginning and the end of the period:
For the year ended 31 December 2019
Branch-based lending
Loan loss provision
Loan loss provision as at 1 January 2019:
Changes in the loss provision attributable to:
New receivables originated or purchased
– Transfers from stage 1 to 2
– Transfers 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
Change in ECL resulting from repayment of loans
Other movements
Derecognition of modified loans
Loan loss provision as at 31 December 2019
Stage 1
£000
7,432
–
10,745
(4,257)
(2,887)
44
–
–
1
–
(77)
(2,899)
69
(121)
8,050
Stage 2
£000
3,560
–
–
4,257
–
(44)
(1,567)
9
–
–
405
(1,896)
8
473
Stage 3
£000
3,091
–
–
–
2,887
–
1,567
(9)
(1)
(3,841)
329
(456)
5
20
Total
£000
14,083
–
10,745
–
–
–
–
–
–
(3,841)
657
(5,250)
82
373
5,205
3,592
16,848
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 160
Notes to the financial statements continued
20. Amounts receivable from customers – Group continued
Guarantor loans
Loan loss provision
Loan loss provision as at 1 January 2019:
Changes in the loss provision attributable to:
New receivables originated or purchased
– Transfers from stage 1 to 2
– Transfers 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
Change in ECL resulting from repayment of loans
Other movements
Derecognition of modified loans
Loan loss provision as at 31 December 2019
Home credit
Loan loss provision
Loan loss provision as at 1 January 2019:
Changes in the loss provision attributable to:
New receivables originated or purchased
– Transfers from stage 1 to 2
– Transfers 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 change in credit risk
Stage 1
£000
921
–
3,131
(1,402)
(609)
223
–
–
1
–
(51)
(133)
–
29
2,110
Stage 1
£000
3,523
15,242
(8,289)
(14,110)
32
–
–
2
–
5,444
Stage 2
£000
1,643
–
–
1,402
–
(223)
(670)
6
–
–
615
(367)
–
(14)
Stage 3
£000
668
–
–
–
609
–
670
(6)
(1)
(921)
606
(93)
–
(64)
2,391
1,468
Stage 2
£000
11,355
143
8,289
–
(32)
(5,473)
5
–
–
(3,172)
Stage 3
£000
11,942
6
–
14,110
–
5,473
(5)
(2)
(16,871)
(1,228)
Total
£000
3,232
–
3,131
–
–
–
–
–
–
(921)
1,169
(593)
–
(49)
5,969
Total
£000
26,820
15,391
–
–
–
–
–
(16,871)
1,044
Loan loss provision as at 31 December 2019
1,844
11,115
13,425
26,384
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 2019:
Changes in the gross carrying amount attributable to:
New receivables originated or purchased
– Transfers from stage 1 to 2
– Transfers 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
Changes due to modification that did not result in derecognition
Net repayments of loans
Other movements
Derecognition of modified loans
Stage 1
£000
173,396
–
172,524
(29,982)
(14,743)
325
–
–
32
–
–
(106,854)
–
1,443
Stage 2
£000
17,076
–
–
29,982
–
(325)
(8,712)
76
–
–
(787)
(9,405)
–
(1,067)
Stage 3
£000
6,271
–
–
–
14,743
–
8,712
(76)
(32)
(19,159)
(163)
(150)
(35)
(1,460)
Total
£000
196,744
–
172,524
–
–
–
–
–
–
(19,159)
(950)
(116,409)
(35)
(1,085)
Gross carrying amount as at 31 December 2019
196,140
26,839
8,651
231,631
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i
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161
Guarantor loans
Gross carrying amount – amounts receivable from customers
Gross carrying amount as at 1 January 2019:
Changes in the gross carrying amount attributable to:
New receivables originated or purchased
– Transfers from stage 1 to 2
– Transfers 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
Changes due to modification that did not result in derecognition
Net repayments of loans
Other movements
Derecognition of modified loans
Gross carrying amount as at 31 December 2019:
Home credit
Gross carrying amount – amounts receivable from customers
Gross carrying amount as at 1 January 2019:
Changes in the gross carrying amount attributable to:
New receivables originated or purchased
– Transfers from stage 1 to 2
– Transfers 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 repayments of loans
Stage 1
£000
78,136
–
75,014
(9,331)
(4,580)
2,375
–
–
35
–
–
(39,846)
(2,331)
(23)
99,449
Stage 2
£000
10,010
–
–
9,331
–
(2,375)
(3,127)
25
–
–
(204)
(3,670)
(461)
464
9,993
Stage 1
£000
Stage 2
£000
38,692
16,524
77,408
(12,344)
(16,571)
263
–
–
14
–
(51,991)
387
12,344
–
(263)
(6,599)
10
–
–
(5,960)
Gross carrying amount as at 31 December 2019:
35,472
16,442
For the year ended 31 December 2018
Branch-based lending
Loan loss provision
Loan loss provision as at 1 January 2018:
Prior year adjustment1
Loan loss provision as at 1 January 2018 as restated
Changes in the loss provision attributable to:
New receivables originated or purchased
– Transfers from stage 1 to 2
– Transfers from stage 1 to 3
– Transfers from stage 2 to 1
– Transfers from stage 2 to 3
– Transfers from stage 3 to 22
– Transfers from stage 3 to 12
– Write-offs
Net remeasurement of ECL arising from transfer of stage
Net repayments of loans
Derecognition of modified loans
Other movements
Loan loss provision as at 31 December 2018 as restated:
Stage 1
£000
4,245
1,623
5,869
10,562
(3,675)
(2,953)
64
–
1
–
(113)
(2,463)
118
22
7,432
Stage 2
£000
2,211
1,309
3,520
–
3,675
–
(64)
(1,332)
5
–
–
564
(1,698)
(1,110)
–
3,560
Stage 3
£000
2,058
–
–
–
4,580
–
3,127
(25)
(35)
(5,213)
(27)
(318)
(91)
(568)
Total
£000
90,204
–
75,014
–
–
–
–
–
–
(5,213)
(231)
(43,834)
(2,883)
(127)
3,488
112,930
Stage 3
£000
12,631
17
–
16,571
–
6,599
(10)
(14)
(20,416)
(1,003)
14,375
Stage 3
£000
1,838
884
2,722
–
–
2,953
–
1,332
(5)
(1)
(2,676)
(13)
(374)
(887)
40
3,091
Total
£000
67,846
77,812
–
–
–
–
–
–
(20,416)
(58,954)
66,288
Total
£000
8,294
3,817
12,111
10,562
–
–
–
–
–
–
(2,676)
439
(4,535)
(1,880)
62
14,083
1 For detail on the prior year adjustment, refer to note 1.
2 The staging of the loan loss provision has been re-presented to reflect the formalisation of the curing policy during 2019 in order to more accurately reflect the staging of
performing loans which has been previously flagged as 90 days past due.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 162
Notes to the financial statements continued
20. Amounts receivable from customers – Group continued
Guarantor loans
Loan loss provision
Loan loss provision as at 1 January 2018:
Prior year adjustment1
Loan loss provision as at 1 January 2018 as restated
Changes in the loss provision attributable to:
New receivables originated or purchased
– Transfers from stage 1 to 2
– Transfers from stage 1 to 3
– Transfers from stage 2 to 1
– Transfers from stage 2 to 3
– Transfers from stage 3 to 22
– Transfers from stage 3 to 12
– Write-offs
Net re-measurement of ECL arising from transfer of stage
Net repayments of loans
Derecognition of modified loans
Other movements
Loan loss provision as at 31 December 2018 as restated:
Stage 1
£000
565
87
652
1,869
(997)
(500)
169
–
–
1
–
(127)
(174)
3
25
921
Stage 2
£000
891
146
1,037
–
997
–
(169)
(412)
12
–
–
376
(317)
56
64
1,643
Stage 3
£000
275
38
313
–
–
500
–
412
(12)
(1)
(521)
77
(48)
(78)
25
668
Total
£000
1,731
271
2,002
1,869
–
–
–
–
–
–
(521)
326
(539)
(19)
114
3,232
1 For detail on the prior year adjustment, refer to note 1.
2 The staging of the loan loss provision has been re-presented to reflect the formalisation of the curing policy during 2019 in order to more accurately reflect the staging of
performing loans which have been previously flagged as 90 days past due.
Home credit
Loan loss provision1
Loan loss provision as at 1 January 2018:
Changes in the loss provision attributable to:
New receivables originated or purchased
– Transfers from stage 1 to 2
– Transfers 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 change in credit risk
Loan loss provision as at 31 December 2018
Stage 1
£000
5,790
19,101
(9,846)
(16,974)
34
–
–
2
–
5,416
3,523
Stage 2
£000
7,812
202
9,846
–
(34)
(3,984)
5
–
–
(2,492)
11,355
Stage 3
£000
9,522
11
–
16,974
–
3,984
(5)
(2)
(17,551)
(991)
11,942
Total
£000
23,124
19,314
–
–
–
–
–
–
(17,551)
1,933
26,820
1 The 2018 staging movements of the loan loss provision has been re-presented to better categorise the flows of loans originating in the year.
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:
Prior year adjustment1
Gross carrying amount as at 1 January 2018 as restated
Changes in the gross carrying amount attributable to:
New receivables originated or purchased
– Transfers from stage 1 to 2
– Transfers from stage 1 to 3
– Transfers from stage 2 to 1
– Transfers from stage 2 to 3
– Transfers from stage 3 to 22
– Transfers from stage 3 to 12
– Write-offs
Net repayments of loans
Derecognition of modified loans
Gross carrying amount as at 31 December 2018 as restated:
Stage 1
£000
142,757
888
143,645
130,611
(23,363)
(10,756)
387
–
–
38
–
(74,234)
7,069
173,396
Stage 2
£000
14,054
14,054
–
23,363
–
(387)
(6,495)
44
–
–
(6,650)
(6,853)
17,076
Stage 3
£000
4,801
4,801
–
–
10,756
–
6,495
(44)
(38)
(13,358)
47
(2,389)
Total
£000
161,613
888
162,501
130,611
–
–
–
–
–
–
(13,358)
(80,837)
(2,173)
6,271
196,744
1 For detail on the prior year adjustment, refer to note 1.
2 The staging of the loan loss provision has been re-presented to reflect the formalisation of the curing policy during 2019 in order to more accurately reflect the staging of
performing loans which has been previously flagged as 90 days past due.
9
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2
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163
Guarantor loans
Gross carrying amount – amounts receivable from customers
Gross carrying amount as at 1 January 2018:
Prior year adjustment1
Gross carrying amount as at 1 January 2018 as restated
Changes in the gross carrying amount attributable to:
New receivables originated or purchased
– Transfers from stage 1 to 2
– Transfers from stage 1 to 3
– Transfers from stage 2 to 1
– Transfers from stage 2 to 3
– Transfers from stage 3 to 22
– Transfers from stage 3 to 12
– Write-offs
Net repayments of loans
Derecognition of modified loans
Gross carrying amount as at 31 December 2018 as restated:
Stage 1
£000
53,339
19
53,358
58,903
(9,693)
(2,514)
1,284
–
–
47
–
(23,434)
185
78,136
Stage 2
£000
6,799
–
6,799
–
9,693
–
(1,284)
(1,825)
87
–
–
(3,463)
3
10,010
Stage 3
£000
1,223
–
1,223
–
–
2,514
–
1,825
(87)
(47)
(2,970)
(159)
(240)
2,058
Total
£000
61,361
19
61,380
58,903
–
–
–
–
–
–
(2,970)
(27,057)
(52)
90,204
1 For detail on the prior year adjustment, refer to note 1.
2 The staging of the loan loss provision has been re-presented to reflect the formalisation of the curing policy during 2019 in order to more accurately reflect the staging of
performing loans which has been previously flagged as 90 days past due.
Home credit
Gross carrying amount – amounts receivable from customers1
Gross carrying amount as at 1 January 2018:
Changes in the gross carrying amount attributable to:
New receivables originated or purchased
– Transfers from stage 1 to 2
– Transfers 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 repayments of loans
Gross carrying amount as at 31 December 2018
Stage 1
£000
42,041
82,799
(14,272)
(20,046)
192
–
–
10
–
(52,032)
38,692
Stage 2
£000
11,200
366
14,272
–
(192)
(4,872)
9
–
–
(4,259)
16,524
Stage 3
£000
10,051
20
–
20,046
–
4,872
(9)
(10)
(21,412)
(928)
12,631
Total
£000
63,292
83,185
–
–
–
–
–
–
(21,412)
(57,219)
67,846
1 The 2018 staging movements of the gross carrying amount has been re-presented to better categorise the flows of loans originating in the year.
Modification of amounts receivable from customers
Financial assets of branch-based lending and guarantor loans with a loss allowance measured at an amount equal to lifetime ECL of
£2.2m (2018:£1.6m) were subject to non-substantial modification during the year, with a resulting loss of £1.2m (2018: £0.08m). The gross
carrying amount of financial assets for which the loss allowance has changed to a 12 month ECL during the year amounts to £0.08m
(2018: £0.03m).
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.
Branch-based lending
Financial assets (with loss allowance based on lifetime ECL) modified as at the balance sheet date
Gross carrying amount before modification
Loan loss provision before modification
Net amounts receivable before modification
Net derecognition gain/(loss)
Net amounts receivable after modification
Movement in derecognition loss in the year ended 31 December 2019 was £0.48m (2018: £0.098m).
2019
£000
40,622
(5,630)
34,992
(230)
2018
restated
£000
29,587
(4,789)
24,798
252
34,762
25,050
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 164
Notes to the financial statements continued
20. Amounts receivable from customers – Group continued
Guarantor loans
Financial assets (with loss allowance based on lifetime ECL) modified as at the balance sheet date
Gross carrying amount before modification
Loan loss provision before modification
Net amounts receivable before modification
Net derecognition gain
Net amounts receivable after modification
2019
£000
3,739
(940)
2,799
402
3,201
2018
restated
£000
3,304
(744)
2,560
333
2,893
Movement in derecognition gain in the year ended 31 December 2019 was £0.069m (2018: loss of £0.031m).
21. 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 2019. 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
Amounts receivable from customers
Current tax asset
Deferred tax asset
Trade and other receivables
Derivative assets
Goodwill
Intangible assets
Property, plant and equipment
Right-of-use assets
Total assets
Liabilities
Bank borrowing
Lease liability
Other liabilities
Total liabilities
FVTP&L
assets/
liabilities
£000
–
–
–
–
–
1
–
–
–
–
1
–
–
–
–
Amortised
cost
£000
14,192
361,648
460
–
2,183
–
–
–
–
–
Non-financial
assets/
liabilities
£000
–
–
–
1,677
–
–
74,832
8,572
6,556
10,560
2019
Total
£000
14,192
361,648
460
1,677
2,183
1
74,832
8,572
6,556
10,560
378,483
102,198
480,681
(317,590)
–
(28,375)
–
(11,105)
–
(317,590)
(11,105)
(28,375)
(345,965)
(11,105)
(357,070)
Reconciliation of liabilities arising from financing activities
Bank loans
Lease liabilities
2018
£000
Opening balance
sheet 1 Jan 2019
£000
Acquisitions
£000
Cash flows
£000
266,322
–
–
11,099
–
1,606
50,400
(1,600)
Reduction in
prepaid
debt fees
£000
868
–
2019
£000
317,590
11,105
9
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2
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A
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165
FVTP&L
assets/
liabilities
£000
–
–
–
–
241
–
–
–
–
241
–
–
–
–
–
Amortised
cost
£000
13,894
310,659
–
3,967
–
–
–
–
–
328,520
(266,322)
(675)
–
(16,359)
(283,356)
Non-financial
assets/
liabilities
£000
–
–
–
–
–
230
140,668
14,477
6,677
162,052
2018
restated
Total
£000
13,894
310,659
–
3,967
241
230
140,668
14,477
6,677
490,812
–
–
–
–
–
(266,322)
(675)
–
(16,359)
(283,356)
Amortised cost
£000
Non-financial
assets/
liabilities
£000
194
60,357
–
–
–
60,551
–
–
–
–
126
162
95,686
95,974
(13,251)
(13,251)
Amortised cost
£000
Non-financial
assets/
liabilities
£000
2019
Total
£000
194
60,357
126
162
95,686
156,525
(13,251)
(13,251)
2018
restated
Total
£000
393
61,729
180
213,255
275,557
–
–
180
213,255
213,435
393
61,729
–
–
62,122
–
–
(4,786)
(4,786)
(4,786)
(4,786)
At 31 December
Assets
Cash and cash equivalents
Loans and advances to customers
Current tax asset
Trade and other receivables
Derivative assets
Deferred tax asset
Goodwill
Intangible assets
Property, plant and equipment
Total assets
Liabilities
Bank borrowing
Current tax liability
Deferred tax liability
Other liabilities
Total liabilities
Company
At 31 December
Assets
Cash and cash equivalents
Trade and other receivables
Property, plant and equipment and intangibles
Right-of-use asset
Investments
Total assets
Liabilities
Other liabilities
Total liabilities
At 31 December
Assets
Cash and cash equivalents
Trade and other receivables
Property, plant and equipment and intangibles
Investments
Total assets
Liabilities
Other liabilities
Total liabilities
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 166
Notes to the financial statements continued
22. Trade and other receivables – Group
Other debtors
Corporation tax
Prepayments
Trade and other receivables – Company
Other debtors
Corporation tax
Amounts due from subsidiaries
Prepayments
2019
£000
437
460
1,746
2,643
2019
£000
243
857
59,135
121
60,357
2018
£000
406
–
3,561
3,967
2018
£000
238
2,234
59,135
122
61,729
Amounts due from subsidiaries are non-interest bearing and repayable on demand.
The carrying value of trade and receivables is not materially different to the FV. As per note 1 to the financial statements, intercompany
loans been assessed for impairment and the expected credit losses are not material.
23. Cash and cash equivalents – Group
Cash at bank and in hand
Cash and cash equivalents – Company
Cash at bank and in hand
2019
£000
14,192
2019
£000
194
2018
£000
13,894
2018
£000
393
The Directors consider that the carrying amount of these assets is a reasonable approximation of their FV. The credit risk on liquid funds is
limited because the counterparties are banks with high credit ratings.
24. Derivative asset
The Group holds a derivative asset in the form of an interest rate cap totalling £1,000 (2018: £241,000). The FV of the interest rate cap as
at 31 December 2019 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.
25. Trade and other payables and provisions – Group
9
1
0
2
s
t
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A
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Trade creditors
Other creditors
Current tax liability
Accruals and deferred income
Provisions (see detail below)
Trade and other payables – Company
Trade creditors
Other creditors
Amounts due to subsidiaries
Lease liability
Accruals
2019
£000
8,394
3,626
–
14,889
1,466
28,375
2019
£000
7,573
129
4,685
204
660
13,251
2018
restated
£000
486
1,718
675
13,566
589
17,034
2018
£000
101
106
3,755
–
824
4,786
Amounts owed to subsidiaries are non-interest bearing and repayable on demand. Refer to note 32 which details the Group’s
management of liquidity risk and note 31 which details related party transactions.
The carrying value of trade and other payables is not materially different to the FV.
167
Provisions – Group
Opening at 31 December 2017
Charge during the year
Utilised
Balance at 31 December 2018
Charge during the year
Utilised
Balance at 31 December 2019
Plevin
£000
Dilapidations
£000
Restructuring
£000
1,251
–
(1,020)
231
285
(423)
93
333
64
(39)
357
845
–
1,203
–
–
–
–
170
–
170
Total
£000
1,584
64
(1,059)
589
1,299
(423)
1,466
The Group provides for its best estimate of redress payable in respect of historical sales of payment protection insurance by considering
the likely future uphold rate for claims in the context of confirmed issues and historical experience. 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 FOS.
The deadline provided by the FCA for customers to make claims of 29 August 2019 has now passed.
Lease liability – Group
Current lease liabilities
Non-current lease liabilities
Total lease liability
Maturity analysis
Not later than one year
Later than one year and not later than five years
Later than five years
Total lease liability
Lease liability – Company
Current lease liabilities
Non-current lease liabilities
Total lease liability
Maturity analysis
Not later than one year
Later than one year and not later than five years
Later than five years
Total lease liability
Bank loans – Group
Due within one year
Due in more than one year
At 31 Dec 2019
£000
1,830
9,275
11,105
At 31 Dec 2019
£000
1,830
5,181
4,094
11,105
At 31 Dec 2019
£000
161
43
204
At 31 Dec 2019
£000
161
43
–
204
2019
£000
5,131
317,590
2018
£000
5,184
266,322
During 2018, the Group entered into arrangement for the provision of one financing facility 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 Group’s total debt facilities as at 31 December 2019 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 2019, £285.0m (2018:
£235.0m) was drawn under the term loan facilities and £38.2m (2018: £37.8m) was drawn under the revolving loan facility. The term loan
facility matures in August 2023 and the revolving loan facility matures in August 2022.
Maturity analysis of amounts due on external borrowings
Not later than one year
Later than one year and not later than five years
Later than five years
At 31 Dec 2019
£000
At 31 Dec 2018
£000
25,208
419,527
–
23,720
444,734
–
444,734
468,454
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information
168
Notes to the financial statements continued
25. Trade and other payables and provisions – Group continued
Amounts due on external borrowings excludes the amortisation of debt transaction costs and includes the interest and principal amounts
due in on maturity of the term loan and revolving facilities in future periods.
Borrowings are recognised initially at FV and subsequently at amortised cost. The carrying value of other payables due in more than one
year is not materially different to the FV. 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.
Contingent liabilities – Group
The Group recognises that there continues to be risks around claims management company activity in the non-standard lending sectors
and incurs the cost of settling complaints as part of its normal business as usual activity. The Group has estimated that if it is unsuccessful
in defending certain irresponsible lending complaints, the cost of settling such complaints is not material as at 31 December 2019. The
Group continues to robustly defend inappropriate or unsubstantiated claims and is working closely with the FOS in this regard. However,
it is possible that claims could increase in the future due to unforeseen circumstances such as COVID-19 and/or if FOS were to change its
policy with respect to how such claims are adjudicated.
26. Deferred tax asset/(liability)
At 31 December 2017
Adjust for changes in deferred tax rate
Charge relating to share-based payments
IFRS 9 transitional adjustment
At 1 January 2018
Prior year adjustment – IFRS 9 (refer note 1)
At 1 January 2018 – as restated
Current year credit
At 31 December 2018 – as restated
Current year credit
Prior period adjustment to deferred tax
Reallocation from corporation tax liability
At 31 December 2019
£000
(4,996)
70
3
2,189
(2,734)
541
(2,193)
2,423
230
1,124
(106)
429
1,677
A deferred tax liability was recognised on acquisition of Loans at Home, Everyday Loans (including TrustTwo) and George Banco in
relation to intangible assets on which no tax deduction will be claimed in future periods for amortisation.
The deferred tax asset is attributable to temporary timing differences arising in respect of:
Accelerated tax depreciation
Recognition of intangible assets
Recognition of FV 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 16 transitional adjustment
IFRS 9 transitional adjustment
Net deferred tax asset/(liability)
2019
£000
(271)
(919)
–
(30)
98
–
62
72
41
2,624
1,677
2018
Restated
£000
(140)
(1,619)
(819)
(35)
95
26
62
(4)
–
2,664
230
27. 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.
During the year, the Company cancelled 5,070,234 shares and issued 457,974 shares (2018: nil).
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Balance at 31 December 2018
Cancellation of shares
Issue of shares
Balance at 31 December 2019
169
Number
317,049,682
(5,070,234)
457,974
312,437,422
Non-Standard Finance plc sponsors the Non-Standard Finance plc 2019 Employee Benefit Trust (‘EBT’) which is a discretionary trust
established on 21 October 2019 for the benefit of the employees of the Group. The Company has appointed Estera Trust (Jersey) Limited to
act as trustee of the EBT. The trustee has waived the right to receive dividends on the shares it holds. As at 31 December 2019, the EBT
held nil (2018: nil) shares in the Company with a cost of £nil (2018: £nil) and a market value of £nil (2018: £nil). The shares have been
acquired by the EBT to meet obligations under the long term plans as disclosed in note 29.
28. 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 2018
Capital reduction
Issue of shares
Balance at 31 December 2019
Total
£000
254,995
(75,000)
24
180,019
29. 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 2019 was nil (2018: 5m Ordinary Shares of
the Company that were purportedly repurchased by the Company as at 31 December 2018 were cancelled on 30 July 2019). This equates
to 0% (2018: 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
Acquired in the year
Disposed of on exercised options
Balance at 31 December 2019
£000
1,357
2,102
–
3,459
–
(3,459)
–
Founder Shares scheme
The Founders have committed £255,000 of capital in the Group in the form of 100 Founder Shares in Non-Standard Finance Subsidiary Limited.
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 purchase price for exercise of this Founder Shares 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.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 170
Notes to the financial statements continued
29. Other reserves continued
The FV of the share options was assessed to be £255,000 and this has been recognised as equity in other reserves in the financial
statements.
During the course of 2019, a change of control provision was triggered on the departure of Miles Cresswell-Turner and the Founder
Shares vested in full. However, following discussions with the holders, management team and shareholders, it was agreed that the
Founder Shares would be subject to a further performance condition under which:
•
•
the Company’s share price must reach £1.10 within five years of 9 October 2019; or
there is a change of control.
As Miles Cresswell-Turner was departing the Company, it was agreed that seven of his 25 Founder Shares (28% of his Founder Shares) would
not be subject to these new performance conditions and he exercised his option over these Shares in exchange for 387,740 shares in Non-
Standard Finance plc on 21 October 2019. The balance of his remaining 18 Founder Shares will be subject to the new performance condition.
No shares were remaining to the Directors during the year ended 31 December 2019 (2018: nil).
Share-based payments
Equity-settled share option schemes
During the year ended 31 December 2019, 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 (SAYE scheme). As at
31 December 2019, the Loan at Home Long-Term Incentive Plan and Everyday Loans Group Long-Term Incentive Plan had both reached
the end of their vesting period, no options were exercised.
a) Movements in the period
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 Ordinary ‘C’ 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 2018
Options granted
Lapsed
Exercised
Outstanding at 31 December 2018 and 31 December 2019
Exercisable at 31 December 2018 and 31 December 2019
Awards in the form of Ordinary ‘C’ Shares:
Outstanding at 1 January 2018
Shares issued
Forfeited
Vested
Outstanding at 31 December 2018 and 31 December 2019
Vested at 31 December 2018 and 31 December 2019
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pool
allocated
Percentage of
growth above
£1.10
share price
Exercise
price
62.5%
–
–
–
62.5%
–
Number
375
–
–
–
375
–
9.4%
–
–
–
9.4%
–
–
–
–
–
–
–
Percentage of
growth above
£1.10
share price
Exercise
price
5.6%
–
–
–
5.6%
–
–
–
–
–
–
–
171
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 are entitled to a 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 31 December 2017 and 31 December 2018
Options granted
Lapsed
Exercised
Outstanding at 31 December 2019
Exercisable at 31 December 2019
Percentage of
pool
allocated
Percentage of
growth above
£130m
Exercise
price
100%
(100%)
–
–
–
5%
(5%)
–
–
–
–
–
–
–
–
–
As at 31 December 2019, the performance conditions attached to the Long-Term Incentive Plan were not met. Therefore the options have
lapsed as at the vesting date with no options exercised at the end of the period.
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 2018
Options granted
Lapsed
Exercised
Outstanding at 31 December 2018
Options granted
Lapsed
Exercised
Outstanding at 31 December 2019
Exercisable at 31 December 2019
Percentage of
pool
allocated
Percentage of
growth above
£267m
Exercise
price
85.1%
14.9%
–
–
100%
(100%)
–
–
–
4.3%
0.7%
–
–
5%
(5%)
–
–
–
–
–
–
–
–
–
–
–
–
–
As at 31 December 2019, the performance conditions attached to the Long-Term Incentive Plan were not met. Therefore the options have
lapsed as at the vesting date with no options exercised at the end of the period.
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 2018
Options granted
Lapsed
Exercised
Outstanding at 31 December 2018
Options granted
Lapsed
Exercised
Outstanding at 31 December 2019
Exercisable at 31 December 2019
Percentage of
pool
allocated
Percentage of
growth above
£80m
Exercise
price
100%
–
–
–
100%
–
–
–
100%
–
7.35%
–
–
–
7.35%
–
–
–
7.35%
–
–
–
–
–
–
–
–
–
–
–
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 172
Notes to the financial statements continued
29. Other reserves continued
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 Oct 2017
Granted on 14 May 2018
Exercise price
Exercise price
Exercise price
Outstanding at 1 January 2018
Options granted
Replaced
Lapsed
Exercised
Outstanding at 31 December 2018
Options granted
Lapsed
Exercised
Number
(£)
Number
(£)
Number
1,278,175
–
(454,324)
(216,395)
–
607,456
(343,862)
–
0.5606
–
–
–
–
0.5606
1,910,278
–
(728,998)
(345,071)
–
836,209
0.606
–
–
–
–
0.606
–
3,447,742
–
(358,747)
–
3,088,995
–
–
(463,283)
–
–
–
(1,895,072)
–
Outstanding at 31 December 2019
263,594
0.5606
372,926
0.606
1,193,923
Exercisable at 31 December 2019
–
–
–
–
–
(£)
–
0.495
–
–
–
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 FV of the plan is £1.61m spread over the vesting period and will be equity-settled. A charge of £0.483m (2018:
£0.549m) was recognised in the 2019 financial year. The following information is relevant in the determination of the FV:
Valuation method
Share price at grant date
Exercise price
Expected volatility
Expected life
Expected dividend yield
Risk-free interest rate
15 Sep 2017
19 Sep 2017
Black–Scholes Black–Scholes
£0.78
£1.10
25%
3.3 years
3.5%
0.32%
£0.75
£1.10
25%
3.3 years
3.5%
0.32%
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 FV of the awards made in December 2017 is £0.279m spread over the vesting period.
A charge of £0.134m (2018: £0.144m) was recognised in the 2019 financial year. The following information is relevant in the determination
of the FV:
Valuation method
Equity value at grant date
Exercise price
Expected volatility
Expected life
Expected dividend yield
Risk-free interest rate
20 Dec 2017
Monte Carlo
£82.5m
£0.00
30.9%
2.16 years
0%
0.51%
As at 31 December 2019, the performance conditions attached to the Long-Term Incentive Plan were not met. Therefore the options have
lapsed as at the vesting date with no options exercised at the end of the period.
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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 FV of the awards made in March/April 2017, December 2017 and May 2018 is £0.455m spread over the
vesting period. A charge of £0.153m (2018: £0.130m) was recognised in the 2019 financial year. The following information is relevant in the
determination of the FV:
Valuation method
Equity value at grant date
Exercise price
Expected volatility
Expected life
Expected dividend yield
Risk-free interest rate
6 Mar and
4 Apr 2017
4 Dec 2017 and
14 May 2018
Monte Carlo Monte Carlo
£182.1m
£0
34%
2.1 years
0%
0.48%
£182.1m
£0
25%
2.82 years
0%
0.14%
As at 31 December 2019, the performance conditions attached to the Long-Term Incentive Plan were not met. Therefore the options have
lapsed as at the vesting date with no options exercised at the end of the period.
Guarantor Loans Division Long-Term 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 FV of the awards made in April 2018 is £0.248m spread over the vesting period. A charge of
£0.092m (2018: £0.064m) was recognised in the 2019 financial year. The following information is relevant in the determination of the FV:
Valuation method
Equity value at grant date
Exercise price
Expected volatility
Expected life
Expected dividend yield
Risk-free interest rate
18 Apr 2018
Monte Carlo
£37.5m
£0
35%
2.7 years
0%
0.76%
Sharesave Plan
In 2017, the Non-Standard Finance plc Sharesave Plan was adopted. Under the Plan, options can be made with a three-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 FV of
the awards made in June 2017 is £0.213m spread over the vesting period. The FV 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 FV of the awards made in May 2018 which do not
qualify for modification treatment is £0.276m spread over the vesting period. The FV of those awards qualifying for modification
treatment is £0.061m spread over the vesting period. A charge of £0.309m (2018: £0.268m) was recognised in the year ended
31 December 2019.
The following information is relevant in the determination of the FV:
Valuation method
Share price at grant date
Exercise price
Expected volatility
Expected life
Expected dividend yield
Risk-free interest rate
7 Jun 2017
6 Oct 2017
14 May 2018
Black-Scholes
£0.7038
£0.5606
28.3%
3 years
1.71%
0.13%
Black-Scholes
£0.7700
£0.6060
29.9%
3 years
1.30%
0.51%
Black-Scholes
£0.6200
£0.4952
31.1%
3 years
3.55%
0.88%
There have been no new sharesave plans during the year ended 31 December 2019.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 174
Notes to the financial statements continued
30. Net cash used in operating activities – Group
Operating profit/(loss)
Taxation paid
Depreciation
Share-based payment charge
Amortisation of intangible assets
Intangible assets impairment loss
Goodwill impairment loss
Fair value unwind on acquired loan book
Profit on disposal of property, plant and equipment
Increase in amounts receivable from customers
Decrease/(increase) in derivative asset
Decrease/(increase) in receivables
(Decrease)/increase in payables and provisions
Cash used in operating activities
Net cash used in operating activities – Company
Operating loss
Depreciation
Share-based payment charge
Impairment of investment
Decrease in receivables
Increase in payables
Cash used in operating activities
Year ended
31 Dec 2019
£000
(48,518)
3,067
3,869
1,183
7,078
2,517
65,837
2,873
(16)
(54,367)
240
(399)
709
Year ended
31 Dec 2018
Restated
£000
18,742
(1,164)
1,772
1,157
9,661
–
7,678
(45)
(66,138)
(241)
(2,418)
(3,767)
(15,927)
(34,763)
Year ended
31 Dec 2019
£000
Year ended
31 Dec 2018
£000
(134,198)
195
494
117,526
2,614
8,262
(5,108)
(5,397)
69
818
280
3,476
(754)
31. 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 £13.5m from its subsidiary undertakings during the year (2018: £10.2m). The Group receives
charges from and makes charges to these related parties in relation to shared costs, staff costs and other costs incurred on their behalf.
As at 31 December 2019, the Company owed £0.16m to its subsidiary undertaking S.D. Taylor Limited in relation to employee costs for the
year ended 31 December 2019 (2018: £nil) and £0.07m to its subsidiary undertaking Everyday Loans Limited in relation to Group relief tax
charges. The Company also received £0.7m paid in advance from its subsidiary undertaking Everyday Loans Limited in relation to the
recharges described above. Intra-Group transactions between the Company and the fully consolidated subsidiaries or between fully
consolidated subsidiaries are eliminated on consolidation. Please refer to note 22 for the year-end amounts due from subsidiaries to the
Company and note 25 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 £5,000 to Loan Smart (2018: £45,000) and has a debtor balance of £85,500 as at 31 December
2019 for a loan to the charity (2018: £80,500). Amounts owed to Non-Standard Finance plc are non-interest bearing and repayable on
demand. Since 31 December 2020, Loan Smart has received donations totalling £85,500 and has therefore repaid its outstanding loan
balance to the Company.
Three Directors are members of the Non-Standard Finance plc Long-Term Incentive Plan as detailed in note 29. Further information
about the remuneration of individual Directors is provided in the audited part of the Directors’ Remuneration Report on pages 93 to 113.
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32. Financial risk management – 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 EIR on financial assets of the Group at 31 December 2019 was estimated to be 74% (2018: 80%).
The average EIR on financial liabilities of the Group at 31 December 2019 was estimated to be 9% (2018: 9%).
Market risk
Market risk is the risk that the FV or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market
risk comprises three types of risk – interest rate risk, currency risk and other prices risk.
The Group does not undertake position taking or trading books of this type. The Group’s exposure is primarily to the risk of changes in
interest rates.
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 EIR on financial liabilities.
The Group is exposed to movements in LIBOR rates on its external borrowings. A 1% movement in the interest rate applied to financial
liabilities during 2019 would not have had a material impact on the Group’s result for the year.
There is minimal interest rate risk on amounts receivable from customers as interest rates are fixed.
Credit risk
The Group’s credit risk inherent in amounts receivable from customers is reviewed as part of the impairment assessment process as per
note 20. 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’s assessment to determine whether credit risk has increased significantly since initial recognition is outlined in note 1 to the
financial statements.
The tables below present information in line with how credit risk is monitored and assessed by the Group by their respective credit
committees. Within our branch-based lending division, credit risk is monitored by the use of defined score bands ranging from A1-A9. The
Guarantor Loans Division by homeowner/non-homeowner status, and weeks past due within the home credit division. This analysis
assists management with identifying and monitoring credit risk within its customer base:
As at 31 December 2019
Branch-based lending
Year ended 31 December 2019
A1-A3
A4-A6
A7-A8+
Total gross receivables
Loan loss provision
At 31 December 2019
Stage 1
£000
142,939
42,919
10,282
196,140
(8,050)
188,091
Stage 2
£000
15,912
8,512
2,414
26,839
(5,205)
21,633
Stage 3
£000
Gross balance
£000
3,953
3,302
1,396
8,651
(3,592)
5,059
162,805
54,733
14,092
231,631
(16,848)
214,783
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 176
Notes to the financial statements continued
32. Financial risk management – Group continued
Guarantor loans1
Year ended 31 December 2019
Homeowner
Non-homeowner
Total gross receivables
Loan loss provision
At 31 December 2019
1 Guarantor loans excludes FV adjustments of £1.4m.
Home credit1
Year ended 31 December 2019
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
8-13 in the last 13 weeks missed
13 in the last 13 weeks missed
Total gross receivables
Loan loss provision
At 31 December 2019
1 Home credit make weekly collections.
As at 31 December 2018
Branch-based lending
Year ended 31 December 20181
A1-A3
A4-A6
A7-A8+
Total gross receivables
Loan loss provision
At 31 December 2018
Stage 1
£000
31,957
66,263
98,220
(2,110)
96,110
Stage 1
£000
28,256
7,216
–
–
–
35,472
(1,844)
33,628
Stage 1
£000
125,379
38,302
9,715
173,396
(7,432)
165,964
Stage 2
£000
2,487
7,352
9,839
(2,392)
7,447
Stage 2
£000
–
–
5,288
11,153
–
16,442
(11,115)
5,327
Stage 2
£000
9,671
5,619
1,786
17,076
(3,560)
13,517
Stage 3
£000
Gross balance
£000
615
2,819
3,435
(1,468)
1,967
35,060
76,434
111,493
(5,969)
105,523
Stage 3
£000
Gross balance
£000
–
–
27
913
13,434
14,375
(13,425)
949
28,256
7,216
5,315
12,066
13,434
66,288
(26,384)
39,904
Stage 3
£000
Gross balance
£000
2,566
2,551
1,154
6,271
(3,091)
3,180
137,617
46,472
12,655
196,744
(14,083)
182,662
1 2018 credit risk tables have been re-presented according to risk bands as it provides improved clarity of the risks present in the book
Guarantor loans1
Year ended 31 December 20182
Homeowner
Non-homeowner
Total gross receivables
Loan loss provision
At 31 December 2018
Stage 1
£000
22,629
51,911
74,540
(921)
73,619
Stage 2
£000
2,153
7,268
9,421
(1,643)
7,778
Stage 3
£000
Gross balance
£000
372
1,560
1,933
(668)
1,265
25,154
60,740
85,894
(3,232)
82,662
1 Guarantor loans excludes FV adjustments of £4.3m. 2018 credit risk tables have been re-presented according to homeowner status as it provides improved clarity of the risks
present in the book.
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Home credit
Year ended 31 December 2018
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
8-13 in the last 13 weeks missed
13 in the last 13 weeks missed
Total gross receivables
Loan loss provision
At 31 December 2018
Stage 1
£000
29,726
8,967
–
–
–
38,692
(3,523)
35,169
Stage 2
£000
–
–
5,848
10,676
–
16,524
(11,355)
5,169
Stage 3
£000
Gross balance
£000
–
–
22
643
11,963
12,631
(11,942)
688
29,726
8,967
5,870
11,319
11,963
67,846
(26,820)
41,026
No individual customer contributed more than 10% of the revenue for the Group. For all divisions, there does not exist a concentration of
credit risk as loans are to individual customers geographically spread across the UK. Individual loans are also small compared to the
total loan book.
Trade and other receivables owed by external parties and cash at bank are not considered to have a material credit risk as all material
balances are due from investment grade banking counterparties. Impairment of intercompany receivables is not material and has been
assessed at note 1.
Capital risk management
The Board of Directors assesses the capital needs of the Group on an ongoing basis and approves all capital transactions. The capital
structure of the Group consists of net debt (borrowings after deducting cash and bank balances) and equity of the Group (comprising
capital, reserves, retained earnings and non-controlling interests as disclosed in notes 26 to 28). 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 impact of COVID-19 on the loan-to-value covenants for the Group’s debt
facilities remains materially uncertain leading to a risk that the Group will be unable to access its facilities and this is reflected in the
Group’s going concern and Viability Statement on pages 87 and 90.
The Group monitors its levels of working capital to ensure that it can meet its debt repayments as they fall due.
Solvency risk
This is the risk that the Group’s balance sheet becomes insolvent. The assessment of this has been reflected in the Group’s going concern
and viability statement on pages 87 and 88.
33. Distributable reserves of the Parent Company
In April 2019 it was identified that on account of certain technical infringements regarding historic distributions, in particular a transaction
between the Group and certain subsidiary entities which had resulted in a circularity issue between the entities and following an
intercompany dividend of £11 million in June 2016, none of the entity’s distributions to shareholders since incorporation to 2018 were made
out of distributable profits. In order to rectify this issue, on 30 July 2019 the Company effected a capital reduction which consisted of: (i) a
cancellation of 5,070,234 ordinary shares in the Company that were purportedly purchased through the Company’s share buy-backs
made between 2017 and 2019 but which, as a result of certain infringements of the Companies Act 2006, were not validly purchased; and
(ii) the reduction of the amount of £75 million standing to the credit of the Company’s share premium account.
At 31 December 2019, the Company had no distributable reserves.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 178
Notes to the financial statements continued
34. Subsequent events
On 10 March 2020, the Group entered into a new, six-year securitisation facility totalling £200m, of which £15m has been drawn. The
Group notes that as at the date of signing, there has been a breach of portfolio performance covenants in relation to the securitisation
facility, thereby preventing us from drawing down further from this facility. This has arisen as a result of the impact of COVID-19 on the
Guarantor loan book. Recognising the portfolio performance breach is as a result of factors beyond our control, a temporary waiver has
been granted by Ares for this breach covering up to 29 June 2020 to allow time for permanent changes to be agreed. There have been
no other breaches in this facility. Compliance with financial covenants is considered in the Group’s going concern and viability statement
on pages 87 to 92. For accounting purposes, the Group retains substantially all the risks and rewards associated with ownership of assets
transferred into the securitisation vehicle and as the vehicle is controlled by the Group, it will be consolidated into the Group financial
statements for the year ended 31 December 2020. This event does not impact the 31 December 2019 financial statements.
Since 31 December 2019, there has been a global outbreak of COVID-19 which continues to have a significant impact on businesses
across the world. Each of the Group’s three divisions is continuing to trade in an unprecedented business environment. It is expected that
as a result of the pandemic, the Group will experience a reduction in income from lending activities, together with increased ECL.
The Group considered the impact of COVID-19 on the carrying value of assets and liabilities in the consolidated statement of financial
position. Whilst the overall impact of COVID-19 cannot be reliably estimated at this time, the Group assessed its key sensitivity was in
relation to ECL on amounts receivable from customers and goodwill impairment.
Considering the impact on goodwill of a further decline in market multiples resulting from COVID-19, the Group notes that this could result
in further goodwill impairment post 31 December 2019. The Group has identified that on the basis of actual earnings for the year ended
31 December 2019, a 1% drop in price earnings multiples would result in c.£0.8m of additional impairment of goodwill at the branch-
based lending division, and a reduction in the existing headroom in relation to the home credit division goodwill by £0.6m. As at
31 December 2019, total goodwill in relation to the Guarantor Loans Division has been fully written-off.
The estimate of ECL at 31 December 2019 was based on macroeconomic assumptions which did not include nor anticipate the
unprecedented impact of the COVID-19 pandemic. The ECL sensitivity to reasonably possible changes in those assumptions outside of
COVID-19 is set out at note 2. Considering the impact on ECL as a result of COVID-19, it is anticipated that this would result in increased
ECL driven by customer repayment behaviours as well as a more pessimistic macroeconomic weighting being applied to the provisioning
model (in the form of an increase to the severe downside weighting). As part of its viability assessment, the Group assessed a number of
macroeconomic scenarios which reflect economic developments since the reporting date. The Group recognises that whilst the severity
of the impact of COVID-19 on the economy is uncertain, it is likely to result in disruption in the form of a recession and therefore require an
increase in the severe downside weightings on which ECL is calculated. The sensitivity of the loan loss provision as at 31 December 2019
to a more pessimistic economic outlook resulting from COVID-19 is detailed as follows:
Home credit
As detailed in note 2, due to the nature of the home credit industry and based on historical evidence, management has determined that
the effect of traditional macroeconomic downside indicators is minimal.
Branch-based lending and Guarantor Loans Division
The Group has assessed its macroeconomic assumptions used at December 2019 against the current economic environment and revised
economic forecasts in light of COVID-19 related developments since the reporting date.
The Group recognises that the current weightings used in the year ended 31 December 2019 financial statements do not consider the
impact of recent economic changes arising from the effects of COVID-19 and therefore has sought to adjust its macroeconomic
weightings in order to reflect this in the form of an increase to the severe downside weighting. An illustration of the potential effect on ECL
as a result of a shift in weightings is shown below. The weightings assume a severe downside weighting which is more pessimistic than
our current weighting in order to recognise the new threat of COVID-19, but remain below the pessimistic sensitivity weightings disclosed
in note 2 due to the severity of the Bank of England stress ACS scenario which was even more negative that the BoE COVID-19 scenarios
(Bank of England May 2020 Monetary Policy Report scenario). The estimated impact of potential mitigations to the impact on ECL, such
as the support the Group is offering those customers who are experiencing financial difficulty and government support available to
consumers as a result of the pandemic, has not been subject to audit as the impact cannot be objectively verified. The impact has
however been considered in assessing the potential impact of COVID-19 on our macroeconomic weightings.
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Branch based lending:
Macroeconomic weightings
Current:
Base
Downside stress
Severe downside stress
Positive
Impact on ECL
Sensitivity of adjusting weightings
Increase in severe downside weighting:
Base
Downside stress
Severe downside stress
Positive
Impact on ECL
Pessimistic:
Base
Downside stress
Severe downside stress
Positive
Impact on ECL
Guarantor Loans Division
Macroeconomic weightings
Current:
Base
Downside stress
Severe downside stress
Positive
Impact on ECL
Sensitivity of adjusting weightings
Increase in severe downside weighting:
Base
Downside stress
Severe downside stress
Positive
Impact on ECL
Pessimistic:
Base
Downside stress
Severe downside stress
Positive
Impact on ECL
179
Weighting
Impact on ECL
£’000
50%
30%
15%
5%
50%
15%
30%
5%
50%
0%
50%
0%
n/a
(2,076)
(2,923)
Weighting
Impact on ECL
£’000
50%
30%
15%
5%
50%
15%
30%
5%
50%
0%
50%
0%
n/a
(39)
(157)
The final impact of COVID-19 on expected credit losses remains uncertain and could be significantly higher or lower than anticipated.
The Group notes that in particular, for the Guarantor Loan division, while the proportion of payments being paid by guarantors in April
and May 2020 was broadly unchanged from that prior to the restrictions coming into force, given the strong loan book growth prior to the
restrictions and the uncertainties surrounding the outcome of the pandemic, it is possible that the level of loan loss provisions could
increase in 2020. As the Group’s assessment of its status as a going concern detailed on page 87 relies upon the impact of a range of
assumptions which cannot be verified with certainty, a material uncertainty exists with regards to this.
As noted in the going concern and viability statement on pages 87 and 92, the impact of COVID-19 on the Group’s future profitability is
materially uncertain and therefore depending on the outcome, it may result in a future impairment of the deferred tax asset recognised
as at 31 December 2019 of up to £1.7m.
The impact of potential reduced collections and lending across all our divisions and a revised economic outlook has been considered in
the viability assessment and going concern assessment on pages 92 and 87. The Board will continue to monitor the Group’s financial
position carefully over the coming weeks and months as a better understanding of the impact of COVID-19 is developed.
The full impact of COVID-19 on the Group’s future financial performance therefore remains uncertain and will be heavily influenced by
a number of factors including the severity and duration of the pandemic as well as the way in which both government and consumers
respond, thereby preventing the Group from quantifying the potential impact on our 2020 revenues and impairment provisions.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information
180
Appendix
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 2018 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 2018.
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 refer note 8).
Impairments/revenue
Impairments as a percentage of normalised revenues
Impairments/average loan book
Impairments as a percentage of 12-month average net loan book, excluding fair value adjustments
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
Cost:income ratio
Normalised administrative expenses as a percentage of normalised revenue
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
Alternative Performance Measures reconciliation
1. Net debt
Borrowings
Cash at bank and in hand1
31 Dec 2019
£000
31 Dec 2018
£000
323,200
(13,997)
272,800
(13,350)
309,203
259,450
1 Cash at bank and in hand excludes cash held by Parent Company that sits outside of the security group.
This is deemed useful to show total borrowings if cash available at year end was used to repay borrowing facilities.
2. Normalised revenue
Branch-based lending
Guarantor loans
Home credit
Group
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
Reported revenue
Add back fair value adjustments
93,002
–
75,621
3,958
26,947
2,873
18,028
3,720
60,835
–
65,175
–
180,784
2,873
158,824
7,678
Normalised revenue
93,002
79,579
29,820
21,748
60,835
65,175
183,657
166,502
Fair value adjustments have been excluded due to them being non-business-as-usual transactions. They have resulted from the Group
making acquisitions and do not reflect the underlying performance of the business. Removing this item is deemed to give a fairer
representation of revenue within the financial year.
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3. Normalised operating profit
Branch-based lending
Guarantor loans
Home credit
Group
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
Reported operating profit
Add back fair value adjustments
Add back amortisation of intangibles
29,653
–
–
22,315
3,958
5,895
2,873
–
3,791
3,720
–
9,102
–
–
6,714
–
–
32,066
2,873
7,226
18,742
7,678
8,681
Normalised operating profit
29,653
26,273
8,768
7,511
9,102
6,714
42,165
35,101
Fair value adjustments have been excluded due to them being non-business-as-usual transactions. They have resulted from the Group
making acquisitions and do not reflect the underlying performance of the business. Removing this item is deemed to give a fairer
representation of revenue within the financial year.
4. Normalised profit before tax
Reported profit before tax
Add back fair value adjustments
Add back amortisation and write-off of intangibles
Add back exceptional items
Normalised profit before tax
31 Dec 2019
£000
(75,976)
2,873
7,226
80,584
14,707
31 Dec 2018
£000
(2,365)
7,678
8,681
–
13,994
Fair value adjustments, amortisation of intangibles, and exceptional items have been excluded due to them being non-business-as-usual
transactions. The fair value adjustments and amortisation of intangibles have resulted from the Group making acquisitions, whilst the
exceptional items are one-off and are not as a result of underlying business-as-usual transactions (refer to note 8 for further detail on
exceptional costs in the year) and therefore do not reflect the underlying performance of the business. Hence, removing these items is
deemed to give a fairer representation of the underlying profit performance within the financial year.
5. Normalised profit for the year
Reported loss for the year
Add back fair value adjustments
Add back amortisation of intangibles
Add back exceptional items
Adjustment for tax relating to above items
Normalised profit for the year
Weighted average shares
Normalised earnings per share (pence)
Group
31 Dec 2019
£000
(76,308)
2,873
7,226
80,584
(2,929)
11,446
31 Dec 2018
£000
(2,307)
7,678
8,681
-
(3,108)
10,944
312,126,220
312,713,410
3.67p
3.50p
As noted above, fair value adjustments, amortisation of intangibles and exceptional items have been excluded due to them being
non-business-as-usual transactions. The fair value adjustments and amortisation of intangibles have resulted from the Group making
acquisitions, whilst the exceptional items are one-off and are not as a result of underlying business-as-usual transactions (refer to note 8
for further detail on exceptional costs in the year) and therefore does not reflect the underlying performance of the business. Hence,
removing these items is deemed to give a fairer representation of the underlying earnings per share within the financial year.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 182
Appendix continued
6. Impairment as a percentage of revenue
Branch-based lending
Guarantor loans
Home credit
Group
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
Normalised revenue
Impairment
93,002
(20,635)
79,579
(18,040)
29,820
(7,996)
21,748
(4,451)
60,835
(16,435)
65,175
(21,247)
183,657
(45,066)
166,502
(43,738)
Impairment as a percentage revenue
22.2%
22.7%
26.8%
20.5%
27.0%
32.6%
24.5%
26.3%
Impairment as a percentage revenue is a key measure for the Group in monitoring risk within the business.
7. Impairment as a percentage loan book
Branch-based lending
Guarantor loans
Home credit
Group
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
Reported opening net loan book
Less fair value adjustments
Normalised opening net loan book
Reported closing net loan book
Less fair value adjustments
Normalised closing net loan book
182,661
182,661
214,783
–
214,783
150,390
(3,958)
146,432
86,971
(4,309)
82,662
59,378
(8,030)
51,349
182,661
–
182,661
106,961
(1,437)
105,524
Normalised opening net loan book
Normalised closing net loan book
Average net loan book
Impairment
182,661
214,783
200,421
(20,635)
146,432
182,661
166,421
(18,040)
82,662
105,524
94,093
(7,996)
41,026
41,026
39,904
–
39,904
40,168
310,659
(4,309)
40,168 306,350
249,936
(11,988)
237,948
41,026
–
41,026
361,648
(1,437)
360,211
310,659
(4,309)
306,350
41,026
39,904
36,324
(16,435)
40,168
41,026
37,997
(21,247)
306,350
360,211
330,838
(45,066)
237,948
306,350
271,423
(43,738)
86,971
(4,309)
82,662
51,349
82,662
67,005
(4,451)
Impairment as a percentage loan book
10.3%
10.8%
8.5%
6.6%
45.2%
55.9%
13.6%
16.1%
Impairment as a percentage loan book allows review of impairment level movements year on year.
8. Net loan book growth
Branch-based lending
Guarantor loans
Home credit
Group
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
Normalised opening net loan book
Normalised closing net loan book
182,661
214,783
146,432
182,661
82,662
105,524
51,349
82,662
41,026
39,904
40,168
41,026
306,350
360,211
237,948
306,350
Net loan book growth
17.6%
24.7%
27.7%
61.0%
(2.7%)
2.1%
17.6%
28.7%
9. Return on asset
Normalised operating profit
Average net loan book
Return on asset
Branch-based lending
Guarantor loans
Home credit
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
29,653
200,421
26,274
166,421
8,768
94,093
7,510
67,005
9,102
36,324
6,714
37,997
14.8%
15.8%
9.3%
11.2%
25.1%
17.7%
The return on asset measure is used internally to review the return on the Group’s primary key assets.
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10. Revenue yield
Normalised revenue
Average net loan book
Revenue yield percentage
Branch-based lending
Guarantor loans
Home credit
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
93,002
200,421
79,579
166,421
29,820
94,093
21,748
67,005
60,835
36,324
65,175
37,997
46.4%
47.8%
31.7%
32.5%
167.5%
171.5%
Revenue yield percentage is deemed useful in assessing the gross return on the Group’s loan book.
11. Risk adjusted margin
Normalised revenue
Impairments
Normalised risk adjusted revenue
Average net loan book
Risk adjusted margin percentage
Branch-based lending
Guarantor loans
Home credit
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
93,002
(20,635)
72,367
200,421
79,579
(18,040)
61,539
166,421
29,820
(7,996)
21,823
94,093
21,748
(4,451)
17,297
67,005
60,835
(16,435)
44,400
36,324
65,175
(21,247)
43,928
37,997
36.1%
37.0%
23.2%
25.8%
122.2%
115.6%
The Group defines normalised risk adjusted revenue as normalised revenue less impairments. Risk adjusted revenue is not a measurement
of performance under IFRSs, and you should not consider risk adjusted revenue as an alternative to profit before tax as a measure of the
Group’s operating performance, as a measure of the Group’s ability to meet its cash needs or as any other measure of performance
under IFRSs. The risk adjusted margin measure is used internally to review an adjusted return on the Group’s primary key assets.
12. Operating profit margin
Normalised operating profit
Normalised revenue
Branch-based lending
Guarantor loans
Home credit
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
29,653
93,002
26,274
79,579
8,768
29,820
7,510
21,748
9,102
60,835
6,714
65,175
Operating profit margin percentage
31.9%
33.0%
29.4%
34.5%
15.0%
10.3%
13. Cost to income ratio
Normalised revenue
Administration expense
Branch-based lending
Guarantor loans
Home credit
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
31 Dec 2019
£000
31 Dec 2018
£000
93,002
(42,235)
79,579
(36,488)
29,820
(12,895)
21,748
(9,983)
60,835
(35,298)
65,175
(37,214)
Operating profit margin percentage
45.4%
45.9%
43.2%
45.9%
58.0%
57.1%
This measure allows review of cost management.
OverviewStrategic ReportCorporate GovernanceFinancial StatementsAdditional Information 184
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
Advisers
Brokers
Panmure Gordon
One New Change
London
EC4M 9AF
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
www.nsfgroupplc.com
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