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2020
Emerging
from the
pandemic
Non-Standard Finance plc
Annual Report & Accounts 2020
Whilst 2020 was a
challenging year,
we have a clear plan
to return the Group
to profitability
Overview
01 Our purpose
02 2020 overview
04 NSF Group at a glance
06 Chairman’s statement
Strategic Report
08 Adapting to COVID-19
10 Advantages of face-to-face lending
12 Market review
14 Business model
15 Group Chief Executive’s report
20 Strategic framework
22 Risk management
23 Principal risks
27 2020 financial review
40 Stakeholder management and our commitment to Section 172
42 Engaging with our stakeholders
– Providers of funding
– Customers
– Regulators
– Partners and suppliers
– Employees and self-employed agents (including diversity and gender pay)
– Diversity and gender pay
– Environment
– Communities and charity
49 Our engagement in action
Corporate Governance
50 Chairman’s introduction
54 Board of Directors
56 Corporate governance report
(including governance at a glance)
69 Nomination & Governance
Committee report
71 Audit Committee report
80 Risk Committee report
81 Directors’ remuneration report
95 Directors’ report
Financial Statements
99
110 Financial statements
116 Notes to the financial statements
Independent auditor’s report
Additional Information
167 Appendix
171 Company information
Our purpose
Helping those excluded by mainstream
lenders to meet their financial needs
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What we do
We aim to meet customers face-to-face
Whilst expensive to operate, our approach often means we can lend when others can’t
(or won’t)
How we do it
Our values and culture are focused on the delivery of good customer outcomes
Who benefits
By lending responsibly we can benefit each of our key stakeholders:
Customers
Staff and self-
employed agents
Regulators
Partners and
suppliers
Providers of
funding
Communities, charity
and environment
We believe every adult should have access to credit they can
afford to repay
We aim to ensure that our workforce is well-trained, professional
and highly motivated to succeed
Maintaining good relations with regulators helps us to identify and
resolve issues, ensuring the delivery of good customer outcomes
We draw on the expertise of 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
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 40 to 49
Non-Standard Finance plc Annual Report & Accounts 2020 01
2020 overview
Despite the challenges of the past year,
NSF remains a leading provider of unsecured credit
c.870
Staff
c.895
Self-employed agencies
£258.2m
Net loan book1
166,000+
Customers
c.140
Locations
02
Formed in 2014, we now
have national coverage
with c.140 offices.
Everyday Loans (75)
Loans at Home (64)
NSF (1)
Guarantor loans (1)
1 A reconciliation of the calculation of combined net loan book is set out on page 29.
Having faced a number of challenges in 2020, we are seeking to
strengthen our balance sheet through a substantial capital raise
and pursue a path to recovery, one that will allow the Group to realise
its full potential.
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Financial summary
Reported results
Combined loan book
£258.2m
(29)% (2019: £361.6m)
Revenue
£162.7m
(10)% (2019: £180.8m)
Loss before tax
£(135.7)m
(79)% (2019 loss before tax: £(76.0)m)
Normalised results1
Combined loan book
£258.2m
(28)% (2019: £360.2m)
Revenue
£164.1m
(11)% (2019: £183.7m)
Loss before tax
£(35.2)m
(339)% (2019 profit before tax: £14.7m)
Basic and fully diluted (loss) per share
Basic and fully diluted (loss)/earnings per share
(43.39)p
(77)% (2019: (24.45)p)
Dividend per share
nil
(100)% (2019: 0.70p)
(11.25)p
(407)% (2019: 3.67p)
Dividend per share
nil
(100)% (2019: 0.70p)
Key developments during the year
• Total loan book2 reduced by 29%
• Over 38,700 customers affected by COVID-19 received forbearance from the Group
• Branch-based lending: rapid pivot to home working in April 2020; branches reopened in May 2020
• Home credit: shift to remote lending and collections post-lockdown
• Guarantor loans: redress programme expected to be finalised and executed in H2 2021; business now in
managed run-off
• Cash balances increased to £78.0 million (2019: £14.2 million)
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 27.
2 For a reconciliation of net loan book growth see table in the 2020 financial review on page 29.
Non-Standard Finance plc Annual Report & Accounts 2020 03
NSF Group at a glance
Relationships remain key
Our business approach
When lending to non-standard credit customers, we know that understanding our
customers’ needs is paramount: we don’t look to issue loans they can’t afford; and if
they get into difficulty, we try and find a solution that works for all.
Our culture and values
Having a positive business culture supported by clear values has allowed us to
continue to support our staff, self-employed agents and customers through what has
been an unprecedented shock for all areas of the UK economy.
1.
Assess current
values/behaviours
across each
business
Our
cultural
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
Our values
1. Integrity
We expect our people to respect colleagues and other key
stakeholders and to do what we say we will do.
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.
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.
3. Doing the right thing
We recognise our collective responsibility for delivering great
outcomes – not just for our customers but also our other stakeholders.
04
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.
Our 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 us to 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
First established in 2006, we
are the UK’s largest
branch-based provider of
unsecured loans to
sub-prime borrowers.
Home credit
We are the UK’s third largest
provider of unsecured home
credit with a large network
of self-employed agencies.
74
Locally-based branches1
897
Agencies1
Guarantor loans
Following a challenging
2020, the division is now in
run-off and with no new
lending, the loan book will
continue to decline until the
business is ultimately closed.
For more information
see pages 31-33
For more information
see pages 33-35
For more information
see pages 35-38
Our balance sheet1
£78m
Cash balances
£330m
Gross debt
£(11)m
Net liabilities
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Our KPIs
Net loan book2
£400m
£350m
£300m
£250m
£200m
£150m
£100m
£50m
£0m
105.5
39.9
82.7
41.0
214.8
182.7
59.8
26.9
171.5
51.3
40.2
146.4
2017
2018
2019
2020
Branch-based lending
Home credit
Guarantor loans
Normalised revenue2
£200m
£150m
£100m
£50m
£0m
29.8
60.8
21.7
65.2
30.5
43.8
79.6
93.0
89.8
8.1
50.7
60.9
2017
2018
2019
2020
Branch-based lending
Home credit
Guarantor loans
Number of customers
250,000
200,000
150,000
39.9
32,600
17,400
25,100
100,000
104,100
92,400
93,800
26,200
72,100
50,000
0
47,000
61,200
75,400
68,100
2017
2018
2019
2020
Branch-based Lending
Home credit
Guarantor loans
1 As at 31 December 2020.
2 See glossary of alternative performance measures and
KPIs in the Appendix. A reconciliation of the calculation
of combined net loan book is set out on page 29.
Non-Standard Finance plc Annual Report & Accounts 2020 05
Chairman’s statement
DESPITE THE ENORMOUS
CHALLENGES OvER THE
PAST YEAR, OUR PEOPLE
HAvE CONTINUED TO
DELIvER FOR OUR
CUSTOMERS.
CHARLES GREGSON
NON-EXECUTIVE CHAIRMAN
Introduction
The past year has been the Group’s most
testing period to date and whilst we are
committed to raising additional equity capital
which, if successful, will mean that the current
constraints on our ability to execute our
business strategy will be removed and the
prospects for the Group significantly improved,
this is dependent upon the Group concluding
its discussions with the Financial Conduct
Authority (‘FCA’) regarding its proposed
redress methodology for guarantor loans and
ensuring that there are no implications for the
Group’s other divisions.
If the capital raise is unsuccessful or takes
longer than expected to execute, based on
the Group’s downside case (see page 78),
it is expected that the Group would breach
certain borrowing covenants during the next
12 months and as a result would not be able
to access further funding over the period of
breach and would require waivers from its
lenders. In such circumstance, the Group may
fall under the control of its lenders and there
would be a possibility of the Group going
into insolvency.
As outlined in the Group CEO’s report, the
Board has concluded that shareholder
interests will be best served by collecting out
the existing loan book and ultimately closing
the Group’s Guarantor Loans Division.
I would like to thank all of my colleagues for
their enormous effort over the past year and to
Heather McGregor in particular for her
considerable support and dedication in going
above and beyond what was asked of her in
her various roles on the Board over the past
six years.
2020 results
The financial results for 2020 were
disappointing and the large pre-tax loss
reflected a weaker operating performance
as well as a number of non-operating items.
While the pandemic impacted revenues and
increased impairment as we provided
forbearance to a large number of customers
experiencing difficulty, we also had to
impair certain intangible assets and
goodwill on the Group’s balance sheet.
The results were also impacted by the
requirement to redress a number of
customers of the Group’s Guarantor Loans
Division, further details of which are set
out below.
Following the introduction of government
restrictions in late March 2020, all three of
our businesses pivoted to a home working
model. With little or no lending taking place
in April 2020 as we adapted to the new
business environment, combined with
robust, albeit lower levels of collections, our
cash balances began to build while the size
of the Group’s net loan book began to
decline. Whilst branch-based lending and
home credit staged a sustained recovery in
lending volumes through the summer of
2020, the findings from the FCA’s review into
guarantor loans meant that lending for that
division reduced back down to almost nil in
August 2020 where it remained, pending a
conclusion to the FCA’s review.
For these and the other reasons outlined in
the Group CEO’s report on pages 15 to 19,
Group revenue was down 10% to £162.7m
(2019: £180.8m) and the Group delivered an
operating loss of £24.5m (2019: operating
profit of £32.1m). The Group provided an
unprecedented level of support to customers
affected by COVID-19 and this contributed
to a marked increase in impairment and
loan loss provisions with a corresponding
impact on profits. Whilst reduced levels of
lending coupled with a robust collections
performance by all three divisions meant
that cash balances increased significantly,
an increase in average gross borrowing
meant that there was no corresponding
reduction in net interest costs.
On a normalised basis1, the Group produced
a loss before tax of £35.2m (2019 profit
before tax: £14.7m) and a loss per share of
11.25 pence (2019 earnings per share: 3.67
pence). Exceptional charges of £97.8m
included goodwill impairment, a provision
for customer redress, the write-off of
capitalised fees on the Group’s securitisation
facility and restructuring costs
that resulted in a statutory loss before tax of
£135.7m (2019 loss before tax: £76.0m) and a
statutory loss per share of 43.39 pence (2019:
statutory loss per share of 24.45 pence).
FCA multi-firm review into guarantor loans
On 3 August 2020 the Group announced that,
as part of a multi-firm review into the
guarantor loans sector, the FCA had a number
of concerns regarding certain aspects of the
operating procedures at the Group’s
Guarantor Loans Division. The Group
launched an immediate and in-depth review,
working closely with the FCA, to clarify the
scope and scale of its concerns and to
develop a possible redress methodology for
affected customers. Whilst this work
continued, lending by the Group’s Guarantor
Loans Division was reduced to almost nil
although collections continued on the
outstanding loan book.
Whilst discussions with the FCA regarding the
methodology of redress for affected customers
has not yet concluded, the Group has made a
£15.4m provision for redress in the 2020 full
year results which is broadly in-line with the
provision made at the time of our half year
results. The redress programme is now
expected to commence in the second half of
2021.
Separately, the Group has commissioned an
independent review of both its branch-based
lending and home credit businesses to ensure
that there are no implications for either division
as a result of the multi-firm review into
guarantor loans, or from recent decisions at
the Financial Ombudsman Service.
Capital raise, balance sheet and funding
In order to address high levels of gearing,
the impact of the pandemic and the FCA
requirement to redress certain customers of
the Group, the Group has made clear its
intention to raise in the region of £80m
additional equity capital (the ‘Capital Raise’)
and expects to announce the terms of such
an exercise during the third quarter of 2021.
If successful, the Capital Raise would
strengthen the Group’s balance sheet
significantly and whilst there would be no
need for access to further debt funding in
the short term given the significant cash
balances at the Group’s disposal, it is hoped
that in due course, the Group would be
better placed to broaden its source of debt
funding. Work is continuing on the Capital
Raise and the Board expects to be in a
position to make a further announcement
during the third quarter of 2021.
1 See glossary of alternative performance measures in the Appendix.
06
Lending support through COVID-19
Despite having grown our customer base and loan book every year since 2015,
the events of 2020 resulted in a large reported pre-tax loss which was disappointing.
It masked a solid operational performance given the circumstances and one that
was achieved in large part due to a strong and positive business culture.
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As noted above, the multi-firm review into
the guarantor lending sector resulted in the
Group having to develop a detailed redress
methodology for customers that may have
suffered harm. Whilst clear that our
interpretation of what processes were
required in guarantor loans fell short of the
regulator’s expectations, a positive working
relationship with the regulator has helped us
to improve our processes and overall
business approach.
Having noted an increased volume of
complaints across the sector as a whole,
together with an increased number of cases
and upheld decisions from the Financial
Ombudsman Service during 2020, we
commissioned an extensive review into the
possible implications for branch-based
lending and home credit. The Directors
recognise that, whilst the review work done
so far has not identified any systemic issues
requiring an increase in provision, there
remains a risk that the final outcome of these
reviews may result in the identification of
customers who may require redress, and the
cost of redress for the Group could be
materially higher than is currently provided
for in the financial statements.
Whilst these regulatory developments were
in addition to the already significant
changes that have been made to the
consumer credit regulatory framework in
recent years, the Board is hopeful that as
the economy recovers there will now be a
period of relative stability in terms of
regulatory change, thereby enabling firms
to rebuild and restore the flow of credit to
those that both need it and can afford it.
For further details on key regulatory
developments, please visit our website:
www.nsfgroupplc.com.
No final dividend
As a result of having to write-off goodwill
and other intangibles, together with trading
losses in 2020 and prior years, as at
31 December 2020 the Company no longer
had any distributable reserves and so was
unable to pay cash dividends. It is expected
that following the Capital Raise, the
Company will undertake a process to create
positive distributable reserves so that, when
and if appropriate, the Board can consider
the payment of cash dividends to
shareholders at some point in the future.
Outlook
Whilst the Group continues to face a
number of challenges, it is the Directors’
reasonable expectation that the Group and
Company can and will raise sufficient equity
and continue to operate and meet its
liabilities as they fall due for the next 12
months and therefore it has adopted the
going concern basis of accounting.
Following the Capital Raise, it is expected
that the Group will have a stronger balance
sheet, significant cash balances and an
opportunity to replace its long-term credit
facilities on reasonable terms, improving its
future growth prospects. Whilst the pace of
macroeconomic recovery remains unclear,
recent trading in both branch-based
lending and home credit has been
encouraging. Lead volumes are healthy and
there has been a steady recovery in lending
at attractive yields in both branch-based
lending and home credit. Collections
performance has also been robust as we
benefit from better quality applicants and
the improvements made to our lending and
underwriting processes during the
pandemic. As a result, rates of impairment
remain in line with expectations and are
notably better than the same period in 2020
when the UK economy was in the grip of the
early stages of the pandemic.
Looking forward and subject to funding, the
current business environment represents a
significant opportunity for NSF. During both
the 1991-95 and 2007-2010 recessions when
unemployment increased significantly,
mainstream lenders tightened their credit
criteria and the non-standard consumer
lending sector experienced a marked
increase in demand as the number of
consumers that were unable to access
mainstream credit increased. We believe
that a similar pattern is starting to emerge in
2021. While not yet at our full profit potential,
if we can execute a substantial capital raise
as planned, our view of the road ahead will
become clear and the long-term outlook for
the Group significantly improved.
Charles Gregson
Non-Executive Chairman
30 June 2021
Non-Standard Finance plc Annual Report & Accounts 2020 07
Business strategy We remain committed to meeting the needs and helping those consumers who are either unable or unwilling to borrow from mainstream lenders. 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. This is a large market and even before the pandemic it was estimated to comprise between 20-25% of all UK adults or approximately ten to twelve million people. We now believe that this number has increased, presenting a significant opportunity for the Group. Given its scale and market position, we believe that branch-based lending is particularly well-placed to benefit from an increasing proportion of mainstream credit customers being driven into the non-standard sector following a significant tightening of mainstream credit. Similarly, albeit on a smaller scale, our home credit business is also expected to benefit as a number of former home credit customers return to the sector and as the market consolidates to a smaller number of players. As noted above, our guarantor loans business is being placed into a managed run-off and will not write any new loans in the future.Whilst our ability to execute our business strategy is contingent on raising additional equity capital, as explained on page 78, despite the challenges faced, the Board remains confident of being able to execute the Capital Raise as planned.Further details on each of the three elements of our business strategy can be found on pages 20 to 21.RegulationAs each of our businesses is fully authorised by the FCA, we continue to engage regularly with the 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.In addition to the usual channels of forbearance that are a key feature of the Group’s business model and in response to the pandemic, the FCA required firms to offer customers an opportunity to pause repayments on their loans through an ‘Emergency Payment Freeze’. Initially set for up to three months, this was later extended for up to six months, resulting in an unprecedented level of forbearance being offered to customers. Adapting to COvID-19
The impact:
After a strong performance in January and February 2020, the pandemic really took
hold during March 2020 and with the first national lockdown on 23 March 2020, had an
immediate and, as described in the Group Chief Executive’s report (see pages 15 to 19)
and the 2020 financial review (see pages 27 to 39), significant impact on each of the
Group’s three business divisions.
Government/
regulatory
announcements
31 January 2020
First confirmed case of
COVID-19 in the UK
20 March 2020
Coronavirus Job
Retention Scheme
23 March – 4 July 2020
First UK national lockdown
9 – 24 April 2020
FCA issues initial guidance
on credit payment deferrals
with further areas of credit
covered on 24 April 2020
Jan 20
Feb 20
Mar 20
Apr 20
May 20
Jun 20
17 March 2020
Increased
commission rate on
remote collections for
self-employed agents
23 March 2020
All offices closed. Agents
told not to enter customer
homes. No new customer
recruitment
23 March 2020
•
160 Chromebooks distributed
to staff together with training
guides (200 more in April)
• Branches closed to the public
No lending
in April
7 May 2020
Revised lending policies
distributed to the network
11 May 2020
All branches reopen
with revised lending
policies. Phased return
to work by staff begins
6 April 2020
Revised lending
criteria in place
8 June 2020
Consultation begins
for 48 staff at risk of
redundancy
27 April 2020
Some offices reopen but with
limited staff. Limited cash
collections at request of
customer only
Branch-based lending
Home credit
Guarantor loans
08
Our response:
Each of our businesses adapted quickly with a series of operational changes designed
to minimise the impact of the pandemic on our service to customers. Whilst not
possible to include all of the steps taken, some of the key milestones at each business
are summarised in the graphic below, together with some of the steps taken by the
FCA and HM Government as the crisis unfolded.
I
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T
R
A
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E
G
C
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E
P
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T
1 – 15 July 2020
FCA announces
extension of credit
payment deferral
schemes
12 October 2020
Tiered system introduced across the UK
16 October – 2 December 2020
England, Scotland, Wales and Northern Ireland
implement stricter national restrictions at different times
31 October 2020
Coronavirus Job Retention
Scheme expected to end
30 September 2020
FCA issues new guidance on credit deferrals
in a move towards tailored support
30 July – 11 October 2020
Various lockdowns, mainly in the
midlands and the north
5 November 2020
Coronavirus Job Retention Scheme
extended to end of March 2021
Jul 20
Aug 20
Sep 20
Oct 20
Nov 20
Dec 20
Lending volumes increase steadily, despite tiered lockdowns
6 July 2020
48 staff made
redundant following
consultation
3 November 2020
Agents are asked not to
enter customers’ homes
following new restrictions
25 October 2020
15 out of 25 ‘at risk’ lending staff
made redundant. 10 are redeployed
in collections
3 August 2020
Reduced levels of new
lending pending
outcome of FCA review
15 September 2020
Staff return to head
office
Non-Standard Finance plc Annual Report & Accounts 2020 09
Advantages of face-to-face lending
Why the advantages of face-to-face lending far outweigh the costs
For the customer
Branch-based lending
Positives
Negatives (and mitigations)
• Opportunity to build a relationship
with a person who really understands
my needs
• Easier to understand all of the details
when meeting in person
• Local presence means that they
understand my situation better
• A private meeting means my
application remains confidential
• Less convenient than a pure online
journey (it can sometimes be easier
when you are guided through a
process in person rather than lengthy
online form-filling)
• Could be embarrassing if I don’t
understand or cannot produce
necessary documents or if I get
rejected (our staff are well-trained
and help applicants to feel
comfortable and avoid any
embarrassment)
For the lender
• Easier to build a relationship and
educate the customer about our
products and the services we offer
• Branded outlets help to stimulate
brand awareness
• Local branches have better
intelligence on local economic and
business-related issues
• Network is expensive to run and
manage (attractive returns can be
achieved when processes are
followed closely)
• Having a physical presence can
prompt adverse selection and an
increase in the number of applications
by poor quality applicants (having an
appointment-driven model minimises
this risk)
10
Meeting our customers drives better outcomes I
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For the customer
For the lender
Home credit
Positives
Negatives (and mitigations)
• Opportunity to build relationship
• Sometimes it is not desirable or
with a person who really understands
my needs
• Easier to understand when meeting
in person
• The weekly agent visit helps to keep
me on track and means I don’t have
to go anywhere to make a payment
• I can make payments in cash or by
card, or by using other payment
methods
• My agent is flexible on when they come
and visit and is happy to fit around me
• I can update my agent in person on
my latest situation and, if need be,
ask to miss one or two payments
before getting back on track in a few
weeks’ time
• Lending process is faster when done
face-to-face
• Easier to build a relationship and
educate the customer about our
products and the services we offer
• Ensures we have an up-to-date insight
into what is going on in the household
(income and outgoings), informing our
decisions on forbearance, if required,
or if further credit is requested
• Meeting customers face-to-face can
often lead to personal introductions
to potential new customers in the
same area
convenient to have someone come
to the house (the customer can easily
rearrange the visit time via phone)
• Could be embarrassing if I am unable
to make the payment (we and our
self-employed agents are highly
experienced and have a strong
forbearance culture that can help
minimise any embarrassment)
• I may feel awkward if I cannot
understand the loan application
process, cannot produce necessary
documents or if I get rejected for a
loan (agents are well-trained and help
applicants to feel comfortable and
avoid any embarrassment)
• Network is expensive to run and
manage (attractive returns can
be achieved when processes are
followed closely)
• Having lots of agents carrying cash
is a risk for the Group (agents receive
specialised training and we have
developed systems and protocols to
help minimise any associated risks
and agent incidents are rare)
• Performance can be affected
by adverse weather conditions
(we have a remote lending and
collections capability if a period
of bad weather is prolonged)
Non-Standard Finance plc Annual Report & Accounts 2020 11
Market review
1 There is a large
demand for non-
standard finance
Even before COvID-19, c.20-25% of UK
adults were either unwilling or unable to
borrow from mainstream financial
institutions1. Whilst the pandemic
prompted a sharp reduction in credit
issuance with significant net repayments by
consumers throughout 2020, this is
expected to reverse in 2021. At the same
time, the proportion of the population
unable to access mainstream credit is also
expected to have increased2.
15.1%
Customers are
low paid or on
variable income
Proportion of total jobs
that are deemed to be
low paid3
51.7%
Proportion of
employees in the
bottom decile of hourly
pay in 2020 that were
furloughed and
receiving reduced pay.
i.e. the lowest-paying
jobs were over five
times more likely than
other employees to be
furloughed with
reduced pay3
c.0.6m
County Court
Judgments per annum4
14.2m
People have low
financial resilience2
26%
Percentage of the
population with less
than £500 savings5
Customers have
low credit status/
are credit
impaired
12
2 Supply dynamics
Prior to the pandemic, strong historic
growth in consumer credit in the UK had
been driven by prime customers, not those
with lower credit scores6.
Whilst the market is highly fragmented,
there is a limited number of national
providers of non-standard credit to supply
this large market.
The outbreak of COVID-19 prompted a
significant reduction in credit issuance as
lenders were forced to reassess their lending
criteria and as consumers significantly
reduced their borrowings in the face of a
rapid economic slowdown. Certain lenders
have withdrawn from the market that is likely
to increase the mismatch of supply and
demand if a strong economic recovery is
mirrored by a strong return to credit growth.
The supply of consumer credit in the UK
A positive flow means that households are taking on more credit; a negative flow shows they are
repaying credit.
£ million
3,000
2,000
1,000
0
(1,000)
(2,000)
(3,000)
(4,000)
(5,000)
(6,000)
(7,000)
(8,000)
01/2015
01/2016
01/2017
01/2018
01/2019
01/2020
01/2021
Credit cards
Other loans (excluding student loans)
Source: Bank of England – https://www.bankofengland.co.uk/statistics/visual-summaries/household-credit
1 UK Specialist Lending Market Trends and Outlook 2019, Executive Insights Volume XX, Issue 39 – L.E.K. Consulting.
2 According to the FCA’s Financial Lives 2020 Survey: the impact of coronavirus: “Between March and October 2020, the
number of people with low financial resilience increased by 3.5 million from 10.7 million to 14.2 million. Those with low
financial resilience now account for a quarter (27%) of adults.” Also, “…roughly half of all adults who applied for a credit
or loan product were declined.”
3 Low pay is defined as the value that is two-thirds of median hourly earnings. For example, median hourly earnings for
all employees in 2020 was £13.68, therefore low-pay employees were anyone earning below £9.12. High-pay employees
were those earning anything above 1.5 times £13.68, which was £20.52. 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: 2020, 3 November 2020.
4 Registry Trust Limited – 12-month volume of CCJs issued against consumers to December 2020 for England and Wales.
5 “Nearly one in five adults have less than £100 savings, 13% have no savings at all and 26% have less than £500 put
away.” – The Times, 15 June 2021.
6 www.fca.org.uk/insight/whos-driving-consumer-credit-growth.
Drivers of recovery THE DEMAND FOR NON-STANDARD FINANCE
IS EXPECTED TO RECOvER IN 2021
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3 The UK economy was severely impacted in 2020
Macroeconomic
In 2020, UK GDP declined by 9.9%7
•
• Overall demand for unsecured lending
was unchanged in Q1 2021, but was
expected to increase in Q2 2021 with
demand for both credit card and other
unsecured lending expected to increase8
• Extensive government support meant
•
that employment rates in 2020 remained
robust at 75.0% (2019: 76.5%) although
unemployment increased to 5.1% (2019:
3.8%)9
Inflation (consumer price index including
owner occupiers’ housing costs) was low
at 0.9% in the year to January 202110
• This meant that in real terms, total pay
grew at a faster rate than inflation, at
positive 3.8%, and regular pay growth in
real terms was also positive, at 3.3%9
• Long-term impact of the pandemic
remains unclear and uncertainty over the
pace of recovery is expected to continue
to affect the UK economy in 2021 and
possibly 2022
• Brexit is not expected to have a material
effect on most of the Group’s customers,
all of whom are UK-based
Competition
• Highly fragmented with limited number
of large, national firms
• Many mainstream lenders left the market
post-2008 together with a number of
high-cost lenders in 2019. Regulatory
pressures and the fallout from the
pandemic are also expected to result in
changes to the competitive landscape
• Technology evolution may mean that
new business models emerge
• Certain segments are expected to
consolidate following regulatory
developments
Regulation
• Strict regulatory framework helps to
ensure a level playing field for all
operators
• Repeat lending is a key feature of the
home credit market and the FCA has
made clear that there is no limit on the
number of loans that can be issued
• Firms have provided significant
forbearance to customers experiencing
difficulty as a result of the pandemic
• Social distancing measures meant that
the Group had to adapt its face-to-face
approach in order to keep lending and
collecting
• An increase in customer complaints
driven by claims management
companies has seen an increase in
complaint handling costs for a number of
firms with the largest player in the
guarantor loans segment and the largest
player in the home credit segment having
announced that they may go into
administration
4
Focused on face-to-face lending, NSF’s branch-based lending and home
credit divisions have national networks to service their customers
Branch-based lending
#1
In the market
Home credit
#3
In the market
74
branches
64
offices
68,100
customers
72,100
customers
7 ONS – GDP Monthly estimate UK: December 2020, February 2021.
8 Bank of England – Credit Conditions Survey 2021 Q1, April 2021
9 ONS – Labour market overview: February 2020, released 18 February 2021.
10 ONS – Consumer price inflation, UK: January 2021, released 17 February 2021.
Non-Standard Finance plc Annual Report & Accounts 2020 13
Business model
Providing affordable credit to those excluded by mainstream providers
The pandemic placed a significant strain on the Group’s business model, impacting our ability to
deliver benefits for key stakeholders. But, despite the challenges faced, we remained focused on
delivering high levels of service to our customers – a service that they recognise and value.
Why we are different
Long-term
funding
The Group uses equity
and significant long-
term debt facilities to
help fund its business
Culture
Infrastructure
Providing customers with
‘a helping, but firm
hand’ is an approach
that is embedded
deeply within each of
our businesses
Branch-based lending
and home credit are
well-invested and highly
scalable
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
What we do
Seek to understand
our customers’
financial and personal
circumstances
+
Develop affordable
products that meet
the needs of our
customers
+
If things go wrong,
we work hard to put
them right
Lend responsibly
Phone
Online
Face-to-face
Collect responsibly
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
Stakeholder impact
How we create
value
Through our business
model we seek to deliver
benefits for each of our
key stakeholders.
Customers
High satisfaction
ratings1
4.9/5
(2019: 4.9/5)
Our people
Total training
days2
3,634
(2019: 5,402)
Communities
Shareholders
Total
workforce3
1,766
(2019: 1,837)
Loss
before tax4
£(6.3)m
(2019: Profit before tax of £14.7m)
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 for Everyday Loans over the past year and is out of a maximum score of 5.
2 Despite the challenges of the pandemic, training continued throughout 2020. The total number of training days for Everyday Loans: 1,183
(2019: 2,946); Loans at Home (staff and agents): 2,022 (2019: 1,992); and Guarantor Loans Division: 428 (2019: 465).
3 NSF plc: 11 (2019: 11), Everyday Loans: 467 (2019: 476), Loans at Home (staff and agents): 1,201 (2019: 1, 209); and Guarantor Loans Division:
87 (2019: 141).
4 Normalised (loss) profit before tax (see glossary of alternative performance measures and KPIs in the Appendix) – as set out in the Group
Chief Executive’s report, shareholder returns were severely impacted during 2020.
14
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Group Chief Executive’s report
Supporting our customers
Year to 31 December
Normalised revenue1
Reported revenue
Normalised operating profit1
Reported operating profit
Normalised profit before tax1
Reported (loss) before tax
Normalised profit after tax1
Reported (loss) after tax
Normalised earnings per share2
Reported (loss) per share
Full-year dividend per share
2020
£000
164,102
162,665
(6,316)
(24,452)
(35,152)
(135,721)
(35,152)
(135,557)
2019
£000
183,657
180,784
42,165
32,066
14,707
(75,976)
11,446
(76,308)
(11.25)p
(43.39)p
3.67p
(24.45)p
%
change
-11%
-10%
-115%
-176%
-339%
-79%
-407%
-78%
-407%
-77%
0.0p
0.7p
-100%
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
2 Basic and diluted (loss) earnings per share is calculated as normalised (loss) profit after tax of £(35.2)m (2019: £11.4m) divided by the weighted average number of shares in issue of
312,437,422 (2019: 312,126,220).
Context for results
The 2020 and 2019 reported results include fair value adjustments, the amortisation of acquired intangibles and the write-off of goodwill
assets. The 2020 results were severely impacted by the pandemic and also include exceptional items (see below) totalling £97.9m that relate to
a number of different items including goodwill impairment, provision for customer redress, the write-off of certain capitalised fees and costs
related to restructuring. Exceptional items in 2019 totalled £80.6m and included the costs arising from the lapsed offer to acquire Provident
Financial, goodwill impairment and restructuring in all three business divisions. Normalised results are presented to demonstrate Group
performance before these items.
Summary
The impact of the pandemic has been severe and has affected all areas of our business, requiring each of our divisions to adapt to a highly
dynamic and uncertain business and macroeconomic environment. Social distancing rules as well as a series of national and regional
lockdowns, in conjunction with the offer of unprecedented levels of forbearance for customers, placed significant strain on our business
model. In addition, the Group has been the subject of a number of regulatory issues that have, among other things, impacted performance
and required the payment of redress to certain of the Group’s customers, placing further strain on our business, operations and people.
However, despite such challenges, our staff and self-employed agents have been outstanding in their dedication to serving their customers
and ensuring that we were able to continue to operate through what has been a most difficult trading period.
Whilst the pandemic forced us to adapt our approach temporarily in both branch-based lending and home credit, we remain committed to
our traditional face-to-face lending models in both businesses and continue to believe that our approach can deliver superior outcomes for
customers and significant and sustainable benefits for our other key stakeholders over the medium term.
However, having completed a detailed review of the Group’s Guarantor Loans Division and its prospects, the Board has concluded that
shareholder interests will be best served by placing the division into a managed run-off and ultimately closing the business. Whilst hugely
disappointing, collecting out the loan book is the only rational conclusion given the combined impact of the pandemic, the FCA review into
guarantor loans and the expected increase in costs in order to meet revised FCA requirements that would necessarily impede any potential
recovery in profitability in the future.
Whilst disappointed to be announcing our exit from this segment, the Board remains focused on concluding its discussions with the FCA
regarding redress and completing the independent reviews of its other businesses so that it can then expedite the completion of a substantial
capital raise of around £80m (the ‘Capital Raise’) during the third quarter of 2021. The Capital Raise, if successful, would fund the payment of
redress and mean that the current constraints on our ability to execute our business strategy would be removed. At the same time, the outlook
for the Group would be significantly improved on the back of a strengthened balance sheet and with the prospect of a substantial growth
opportunity in both branch-based lending and home credit.
It remains the Directors’ reasonable expectation that the Group and Company will raise sufficient equity in the timeframe required and will
continue to operate and meet its liabilities as they fall due for the next 12 months and beyond. The Board has therefore concluded that, whilst
a material uncertainty remains, the business is viable and remains a going concern.
Non-Standard Finance plc Annual Report & Accounts 2020 15
Group Chief Executive’s report continued
However, should the Capital Raise be unsuccessful or take longer than expected to execute then it is expected that the Group would remain in
a net liability position from a balance sheet perspective, would breach certain borrowing covenants during the next 12 months and as a result
would not be able to access further funding over the period of breach and would require waivers from its lenders. In such circumstance, the
Group may fall under the control of its lenders and there would be a possibility of the Group going into insolvency.
2020 full year results
After an encouraging first two months’ trading in January and February 2020, the world was turned upside down as the pandemic gripped the
UK during March 2020. A summary of some of the key operational developments that took place during the year are highlighted below:
• Branch-based lending:
• net loan book3 down 20% to £171.5m
• pivot to home working in March 2020 with 360 Chromebooks formatted and despatched to staff at their homes
• 185 staff were furloughed as branches were temporarily closed during April 2020 (the number on furlough was quickly reduced to nil)
and 48 staff were made redundant
• no lending in April 2020, restarted in May 2020 but further impacted by regional and national lockdowns
• Home credit:
• net loan book3 down 32% to £26.9m
• commission rate on remote collections increased and all agents switched to remote collections within seven days of first lockdown
•
four staff were furloughed, no COVID-related redundancies
• rapid development and roll-out of remote lending process
•
‘Amazon-style’ collection protocol developed for customers unable to access remote channels
• Guarantor loans:
• net loan book3 down 43% to £59.8m
• minimal lending since August 2020 while collections remained robust
• eight staff were furloughed, 15 lending staff made redundant and a further 10 were redeployed into collections
• whilst redress methodology not yet finalised, a total charge of £15.4m has been made based on the Directors’ best estimate of the
expected costs
On a like-for-like basis, the combined net loan book at 31 December 2020 fell by 28% to £258.2m before fair value adjustments (2019: £360.2m)
and was down by 29% to £258.2m (2019: £361.6m) after fair value adjustments. A summary of the other key performance indicators for each of
our businesses for 2020 is shown below:
Key performance indicators3
Year ended 31 Dec 20
Loan book growth
Revenue yield
Risk adjusted margin
Impairments/revenue
Impairments/average net loan book
Cost: income ratio
Operating profit margin
Return on assets
Key performance indicators3
Year ended 31 Dec 19
Loan book growth
Revenue yield
Risk adjusted margin
Impairments/revenue
Impairments/average net loan book
Cost:income ratio
Operating profit margin
Return on assets
Branch-based lending
Home credit
Guarantor loans
(20.2)%
46.5%
30.2%
35.0%
16.3%
45.9%
14.9%
7.0%
(32.5)%
155.2%
118.0%
23.9%
37.2%
81.8%
(5.7)%
(8.9)%
(43.3)%
35.3%
7.1%
79.8%
28.2%
45.2%
(38.5)%
(13.6)%
Branch-based lending
Home credit
Guarantor loans
17.6%
46.4%
36.1%
22.2%
10.3%
45.4%
31.9%
14.8%
(2.7)%
167.5%
122.2%
27.0%
45.2%
58.0%
15.0%
25.1%
27.7%
31.7%
23.2%
26.8%
8.5%
43.2%
29.4%
9.3%
3 See glossary of alternative performance measures and key performance indicators in the Appendix.
The events of the past 18 months had a severe impact on each of our three business divisions and in the 12 months to 31 December 2020 the
Group’s normalised revenue before fair value adjustments fell by 11% to £164.1m (2019: £183.7m) and a normalised operating profit of £42.2m in
2019 was reduced to an operating loss in 2020 of £6.3m. A small increase in interest charges meant that the Group generated a normalised
loss per share of 11.25p (2019: normalised earnings per share of 3.67p).
16
The Group’s 2020 and 2019 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 and exceptional items. On a statutory basis, reported
revenue, which is after fair value adjustments, was £162.7m (2019: £180.8m) while total exceptional items of £97.8m (2019: £80.6m) and £1.3m
amortisation and write-off of acquired intangibles (2019: £7.2m) meant that the Group reported a loss before interest and tax of £106.9m (2019:
loss before interest and tax of £48.5m) and the reported loss before tax was £135.7m (2019: £76.0m).
A summary of the exceptional items, a number of which were included in the Group’s 2020 half year results, is shown below
(see note 7 to the financial statements).
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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
Advisory fees
Write-off of capitalised fees associated with the Group’s securitisation facility
Provision for customer redress
Restructuring costs
Total
2020
£000
(47,107)
–
(27,725)
(1,444)
(5,795)
(15,401)
(362)
2019
£000
(44,788)
(8,597)
(12,452)
(12,807)
–
–
(1,939)
(97,834)
(80,583)
Our focus on meeting the majority of our customers face-to-face means that we are heavily invested in large distribution networks for both our
branch-based lending and home credit divisions. Whilst such infrastructure is expensive to operate, personal contact with our customers
provides additional and invaluable insight for our underwriting process, insight that is not available to remote-only lending models and is only
made possible through meeting the customer personally. Building a strong relationship with our customers 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.
The imposition of national as well as local government restrictions on social distancing forced us to adapt to new ways of working in 2020,
particularly for our two face-to-face lending models: branch-based lending and home credit. Whilst the pandemic threw up many
challenges, each of which contributed to us reporting a significant pre-tax loss in 2020, we remain confident that the face-to-face lending
model can continue to meet the needs of our customers, whilst also generating profitable growth over the long term.
A summary of the performance of each division in 2020 is given below with further details in the 2020 financial review.
Branch-based lending
After a strong performance in the first two months of 2020, the decision to close all 74 branches, albeit temporarily, had a significant impact on
our branch-based lending business. New borrower lead volumes began to decline during March 2020 and whilst they started to recover in
May 2020, for the year as a whole, leads were down 28% versus 2019. With fewer leads and more stringent screening criteria for new
customers given the pandemic, total applications to branch (‘ATBs’) fell by 32% and the total number of loans booked fell by 36%. The net
result was a 55% reduction in normalised operating profit to £13.4m (2019: £29.7m). Higher interest costs, restructuring costs and the write-off
of set-up fees incurred in respect of the Group’s securitisation facility, resulted in a reported loss before tax of £11.2m (2019: profit before tax
of £12.0m).
Home credit
Being unable to visit customers at their homes, either to make collections or to issue loans, placed a significant threat to the livelihoods of our
self-employed agents and severely tested our core business model. However, we pivoted rapidly to remote-only collections and accelerated the
delivery of a remote lending process that was developed in-house and was operational within just a few weeks. Minimal lending in April 2020 was
followed by a steady recovery during the summer months but the usual seasonal peak in November and December was curtailed by regional and
then national lockdowns, as well as a lower than usual level of demand due to Christmas being a more low-key affair for many due to the pandemic.
As a result, there was a marked reduction in loan issuance for the year as a whole and while collections held up reasonably well, they were still down
26% versus the prior year. The net result was that the division delivered a normalised operating loss of £2.5m versus an operating profit of £9.1m in the
prior year. Strong cashflow in the year led to lower interest costs resulting in a reported pre-tax loss of £3.7m (2019: profit before tax of £6.8m).
Guarantor loans
Young adults were amongst the hardest hit in financial terms and were the most likely age group to have either lost their job or been
furloughed as a result of the pandemic4. As the vast majority of our borrowers are under the age of 40, the division’s performance was severely
impacted with a high proportion of customers seeking COVID-related forbearance, coupled with a marked increase in impairment. In
addition, concerns raised by the regulator regarding certain lending processes meant that lending effectively stopped in August 2020,
pending a review by the regulator and approval of a redress methodology for customers that may have suffered harm. Minimal lending and
an increase in impairments whilst collections continued meant that the loan book shrank rapidly and by the end of 2020 it was approximately
40% smaller than a year earlier. This contributed to a normalised operating loss of £11.7m in the period (2019: operating profit of £8.8m). Whilst
discussions with the FCA have not yet concluded, a provision for customer redress is included as an exceptional charge totalling £15.4m (see
note 7 to the financial statements) which is based on the Directors’ best estimate of the costs involved and is broadly in-line with that included
in the 2020 half year results. The net result was that the division reported a loss before tax of £36.0m (2019: £2.2m).
Impairment provisioning
Whilst the Group already carried a higher level of provision against outstanding loans than more mainstream lenders, the onset of the
pandemic, together with the outputs from an ongoing assessment of expected credit losses resulted in the Group increasing its coverage
ratios in all three divisions during 2020. As a result, as at 31 December 2020 on a combined basis, the coverage ratio increased to 19.5% (2019:
12.0%). Further details are set out in the 2020 financial review below.
4 Resolution Foundation analysis of YouGov, Adults between the age of 18-65 and the Coronavirus (COVID-19), January wave.
Non-Standard Finance plc Annual Report & Accounts 2020 17
Group Chief Executive’s report continued
Liquidity, funding and going concern
As at 31 December 2020 the Group had cash at bank of £78.0m (2019: £14.2m) and gross borrowings of £330.0m (2019: £323.2m). As at 31 May
2021, cash balances had increased to £101.4m while gross borrowings remained unchanged.
On 11 March 2020 the Group announced that it had entered into a new six-year £200m securitisation facility. Having drawn down £15.0m from the
new facility in April 2020, the onset of the pandemic subsequently prompted a breach of certain performance triggers in the facility agreement
which were then cured by the repayment of the drawn amount in full in August 2020. Whilst current cash balances mean that there is no need for
additional funding at the present time, the facility remains in place. However, in the absence of a capital raise, it is unlikely to be available for use
owing to the associated covenant requirements embedded within the facility agreement and as permission from the lenders to a drawdown on the
facility is unlikely to be granted. It is hoped that, following a successful capital raise, the facility will be available for future use, if so required.
The Group’s other facilities, namely a £285m term loan facility that matures in August 2023 and a £45m revolving credit facility maturing in August
2022, remain fully drawn. The Group is in discussions with its lenders regarding a possible extension to the term of its existing facilities. Any such
amendments to the existing facilities would be conditional on the completion of the Capital Raise.
The Directors acknowledge the considerable challenges presented over the last year and the material uncertainty which may cast significant doubt
on the ability of both the Group and the Company to continue to adopt the going concern basis of accounting. However, despite these challenges,
it is the Directors’ reasonable expectation that the Group and Company will raise sufficient equity in the timeframe required and will continue to
operate and meet its liabilities as they fall due for the next 12 months and beyond and therefore it has concluded the business is viable.
Should the Capital Raise be unsuccessful or take longer than expected to execute then it is expected that the Group would remain in a net liability
position from a balance sheet perspective, would breach certain borrowing covenants during the next 12 months and as a result would not be able
to access further funding over the period of breach and would require waivers from its lenders. In such circumstance, the Group may fall under the
control of its lenders and there is a possibility of the Group going into insolvency.
Regulation
During 2020, the FCA announced a series of measures as part of a coordinated effort to support borrowers affected by the outbreak of
COVID-19. These included an ‘Emergency Payment Freeze’ or ‘EPF’ of up to three months, during which affected borrowers would not be
required to make any payments on their outstanding loan but during which interest could continue to be charged. During 2020, the EPF
deadline was extended from 30 June 2020 to 31 October 2020 and then again to 31 March 2021 with the additional proviso that affected
borrowers could take advantage of an EPF for up to six months in aggregate.
Following completion of the FCA’s multi-firm review of the guarantor loans sector, on 3 August 2020 the Group announced that the FCA had
raised a number of concerns regarding certain procedures within the Group’s Guarantor Loans Division and that the Group had begun to
develop a redress methodology for affected customers. Whilst this work is not yet complete, the Group has made an exceptional charge
based on the Directors’ best estimate of the expected cost of redress totalling £15.4m (refer to note 24 of the financial statements). Whilst clear
that our interpretation of what processes were required in guarantor loans fell short of the regulator’s expectations, a positive working
relationship with the regulator has helped us to improve our processes and overall business approach. Whilst the current estimate represents
the Directors’ best estimate of the total cost of redress, based upon a detailed methodology and analyses developed in conjunction with its
advisers, the FCA has not yet approved the methodology proposed. Therefore, although the Directors believe their best estimate represents a
reasonably possible outcome, there is a risk of a less favourable outcome.
Complaint handling remains a key area of focus following a marked increase in the number of complaints received from claims management
companies (‘CMCs’) as well as from consumers direct. While the Group is focused on addressing all complaints in compliance with FCA rules
and has increased its resources in this area, it has also raised concerns with regulators regarding certain CMCs that appear to be lodging
large numbers of claims without proper authority from customers or by using customer data that has been obtained without proper
authorisation.
In the light of its proposed redress methodology in guarantor loans, the Group is also conducting an independent review of its lending
processes and procedures in both of its other divisions, taking account of recent decisions at the Financial Ombudsman Service. The Directors
recognise that, whilst the review work done so far has not identified any systemic issues requiring an increase in provision, there remains a risk
that the final outcome of these reviews may result in the identification of customers who may require redress, and the cost of redress for the
Group could be materially higher than is currently provided for in the financial statements.
The Group has continued to contribute, both directly and through trade associations, to a number of consultations including HM Treasury’s
Future Regulatory Framework Review and the Treasury Select Committee’s review of the Future of Financial Services.
A summary of the more pertinent regulatory developments during 2021 and into 2020 are available on the Group’s website:
www.nsfgroupplc.com.
1 Resolution Foundation analysis of YouGov, Adults between the age of 18-65 and the Coronavirus (COVID-19), January wave.
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Brexit
As an exclusively UK-focused lender, our exposure to changes in EU-orientated legislation is limited, but we nonetheless have been monitoring the
impact of Brexit and its potential effect on both our own business model and those of our commercial partners, such as Credit Reference Agencies
(‘CRAs’). The Credit Rating Agencies Regulations 2019 came into effect on 31 December 2020 and effectively ‘onshored’ previous EU legislation and
enshrined it into UK law without any material changes. Our CRA partners are shown on the FCA register with full permissions as required to carry on
regulated activities.
Whilst we do not trade with, or send data to businesses in the EU, some of our legal documents referenced the EU or at least EU regulation, some of
which has also been onshored in recent months. This has meant changes to some domestic legislation affecting us directly such as The Financial
Services and Economic and Monetary Policy (Consequential Amendments) (EU Exit) Regulations 2020, changing pre-contract consumer credit
information documentation as well as changes to The Data Protection Act 2018 and the associated changes to what is now the UK GDPR which sits
alongside it as per the Keeling Schedule. We have therefore taken the requisite steps to ensure that all of our legal and contractual agreements
reflect such changes ahead of the required deadlines.
EU/EEA citizens seeking to continue working in the UK after 30 June 2021 need to have applied for settled status under the EU Settlement Scheme.
Whilst the number of EU/EEA nationals directly employed by the Group is small, each of the Group’s regulated entities have reminded staff of these
requirements for them to apply for pre-settled or settled status. If the Group or one of its subsidiaries wishes to employ anyone from the EU/EEA who is
not eligible for EU settled status then the company concerned will have to apply to the Home Office to become eligible to sponsor applications.
Current trading and outlook, no final dividend
Since the start of 2021, the Group overall has traded better than expected, with both branch-based lending and home credit having
performed ahead of expectations on the back of increasing lending volumes and solid collections, whilst guarantor loans has now been
placed into run-off. The Group is trading ahead of budget, with a steady growth in monthly sales and historically low levels of impairment in
both branch-based lending and home credit whilst the number of complaints has reduced substantially.
Given the scale of losses in 2020 and prior years, as at 31 December 2020 the Company no longer had any distributable reserves and so is
unable to pay cash dividends. Assuming the Capital Raise is successful, the Company intends to create additional distributable reserves so
that, when and if appropriate, the Board can consider the payment of cash dividends to shareholders at some point in the future.
The outlook for the Group is entirely dependent upon concluding the discussions with the FCA, completing the reviews of its other two divisions
and on the completion of the Capital Raise in the third quarter of 2021. If successful, such a capital raise would strengthen the Group’s balance
sheet and significantly reduce the prospect of any future covenant breach. The Board believes that the Capital Raise is the best course of
action in order to safeguard the interests of shareholders and other stakeholders and to avoid insolvency.
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 well as the Group’s principal risks and uncertainties as set out in the Governance Report and Viability Statement within the
Group’s 2020 Annual Report.
The Directors acknowledge the considerable challenges presented over the last year and now facing the Group and the Company and
therefore the material uncertainty which may cast significant doubt on the ability of both the Group and the Company to continue to adopt the
going concern basis of accounting. However, despite these challenges, it is the Directors’ reasonable expectation that the Group and
Company can and will raise sufficient equity and continue to operate and meet its liabilities as they fall due for the next 12 months and
therefore it has adopted the going concern basis of accounting.
The assumption of shareholder support for additional equity, lender support for the extension of existing financing facilities, and the
satisfactory conclusion of regulatory and redress matters within or close to the assumptions made in the Group’s base case, form a significant
judgement of the Directors in the context of approving the Group’s going concern status (see note 1 to the financial statements).
The Directors will continue to monitor the Group and Company’s risk management, access to liquidity, balance sheet solvency and internal
control systems.
Annual General Meeting
The AGM of the Company is scheduled to take place on 30 June 2021. A separate notice of meeting has already been dispatched to
shareholders and a copy is available from the Group’s website: www.nsfgroupplc.com.
As the 2020 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 at 2.00pm on 16 August
2021 and the notice of meeting will be dispatched to shareholders with the Annual Report.
John van Kuffeler
Group Chief Executive
30 June 2021
Non-Standard Finance plc Annual Report & Accounts 2020 19
Strategic framework
Our business strategy has three elements, each of which remains central to our
long-term success:
Strategic priorities
01. Being a
leader in each
of our chosen
segments
We aim 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.
02. 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.
‘Doing the right thing’ is
easy to say but harder to
do, especially during a
pandemic.
Whilst impairment
increased in 2020, 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.
03. Acting
responsibly
20
2019-2020 performance
NET LOAN BOOK
£258.2m
£258.2
2020
2019
2018
£360.2m
£306.4m
TOTAL NUMBER OF CUSTOMERS
166,400
2020
166,400
2019
2018
200,400
180,100
NUMBER OF LOCATIONS
141
2020
2019
2018
SIZE OF WORKFORCE*
1,766
2020
2019
2018
*
Including self-employed agents.
141
140
134
1,766
1,837
1,760
IMPAIRMENT AS % REvENUE
40.4%
2020
2019
2018
24.5%
25.6%
40.4%
The Group continues to support a
range of charities including Loan Smart,
that is focused on raising awareness of
the dangers of illegal lending.
For more on our stakeholder engagement
see pages 40-49
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2019-2020 developments
2021-2022 objectives
• The pandemic tested every area of
our business including our systems,
procedures, people and culture
• Whilst total loan book declined,
previous investments in our people,
infrastructure and culture helped to
ensure that we maintained a strong
market position in both branch-based
lending and home credit
• We maintained high levels of contact
with staff and self-employed agents
through regular and informative
communications both in person and via
the Group’s intranet
• Wherever possible we continued to meet
customers face-to-face as this remains a
core part of our lending process in
branch-based lending and home credit
Branch-based lending
• Temporary shift to home working with
over three hundred devices configured
and distributed to our branch-based
staff
• Safety screens, personal protective
equipment and other appropriate
measures installed in branches and
head office
• Enhanced telephony installed across
the network
• Open banking pilot launched
• Approximately three days’ training
completed for every member of the
workforce
• Everyday Loans was named Non-
• Remain flexible and adapt to what is
Mainstream Loan Provider of the Year for
the second year running by Moneyfacts
Consumer Awards 2020
• A larger proportion of the guarantor
loans customer base was affected
financially by the pandemic
• The FCA’s multi-firm review in to
guarantor loans and the requirement
to pay customer redress meant that
lending reduced significantly and the
whole sector shrank in 2020
likely to be a highly dynamic
macroeconomic environment
• Position Everyday Loans as the number
one choice for applicants on average
incomes that are also credit impaired
• Position Loans at Home as the
preferred home credit provider for
self-employed agents, enabling the
Group to build market share as others
withdraw from the market
• Stabilise and then grow the loan books
of both branch-based lending and
home credit
• Wind down and collect out the
guarantor loans portfolio whilst
controlling costs
• Continue to invest in driving good
customer outcomes whilst supporting
our staff and self-employed agents
Home credit
• Development and launch of all new
remote lending tools and online
customer portal
Branch-based lending
• Grow loan book and continue to
evolve our creditworthiness
assessment processes
• Enhancements made to remote
• Develop more tailored lending process
collections process
• 24 remote learning modules completed,
over 2,000 training days in total –
approximately two days’ training per
member of the workforce (staff and
self-employed agents)
Guarantor loans
• 75 devices configured allowing seamless
homeworking for staff
• Enhanced lending and collections
training introduced for all staff
Branch-based lending
• Provided forbearance to over 14,900
• At 31 December 2020 the number of
customers1 still being affected was 200
customers that were adversely affected
by COVID-19
• At 31 December 2020 the number of
customers1 still being affected was 2,700
• Waived all interest during the period of
any emergency payment freeze as a
result of the pandemic customers
•
Improved branch assurance metrics
• Developed further enhancements to
creditworthiness assessments
• Staff engagement remained high despite
the pandemic
Home credit
• Provided forbearance to over 14,900
•
Increased commission rate on remote
collections for agents to help mitigate the
impact of the pandemic on their income
• Staff engagement remained high despite
the pandemic
•
Improved identification and capture of
customer vulnerabilities
Guarantor loans
• Provided forbearance to 8,900 customers
that were adversely affected by
COVID-19
• At 31 December 2020 the number of
customers1 still being affected was 3,500
• Development of customer redress
customers that were adversely affected
by COVID-19
methodology for customers where harm
was suspected
1 Excludes customers that had been cured or whose balances had been written-off.
Non-Standard Finance plc Annual Report & Accounts 2020 21
using open banking tools
• Continue to leverage technology to
drive operational efficiency
Home credit
• Seek to attract more self-employed
agents and grow active customer base
• Continue to evolve our technology to
support agents and customers
• Launch open banking pilot
Guarantor loans
• Focus on collections whilst continuing
to manage costs
Whilst branch-based lending and home
credit are very different, they share a
number of common objectives:
• Further enhance complaints handling
procedures and incorporate any
learnings from the independent
reviews of both businesses
• Develop a coherent assessment and
plan to help mitigate any
environmental impact
• Continue to support Loan Smart that
is focused on awareness- raising
events in locations where we have a
presence
• Continue to enhance our procedures
for identifying and servicing
vulnerable customers
Risk management
Managing risk is a key element
within our business model
The Group faces a number of potential risks that could
have a material impact on overall performance and
might cause financial results to differ materially
from both expected and historic results.
Our principal risk categories
Very high
High
Medium
2020 assessment
2019 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)
6 Funding and liquidity
6
1
5.4
5.3
2
3
5.2
4
5.1
The impact of the pandemic on the UK
economy generally, and on our business
specifically, brought a number of the Group’s
key risks into sharp focus during 2020. They
include the risk that: the costs of customer
redress are much higher than expected; the
Capital Raise is not successful, or takes longer
to execute than planned; the financial
performance of the Group is worse than
expected; and that as a result, the Group
breaches its loan covenants and the firm falls
under the control of its lenders.
Having embedded Xactium, the Group’s
integrated risk management system that was
first deployed in 2018, into all areas of our
business, we were better placed to anticipate
and manage key risks as the pandemic
unfolded. Whilst a number of the challenges
faced were new and unexpected, the
framework in place helped to improve our
first line risk management activity and also
helped to provide executive management
and the Board with clear second line
oversight across the Group during what was
a highly dynamic and unpredictable period
(see definition of the three lines of defence in
section 1 of the table overleaf).
As well as having a well-founded risk
management framework in place, the
dedication and hard work of all of our staff
were instrumental in helping the Group to
navigate what was a significant
macroeconomic shock.
The chart opposite illustrates the principal
risk categories identified by the Board (i.e.
those with the highest residual risk ratings for
the Group) and how they have changed over
the past year. The following pages provide
further detail and seek 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 80.
22
Principal risks
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, the payment of redress to
customers or loss of authorisation
to operate.
Decisions by the FOS may change
the way in which FCA rules are
interpreted, increasing the
likelihood that complaints may be
upheld and increasing the total
cost of redress to customers that
may have suffered harm.
A list of the key regulatory
developments over the past
year is available on the
Group’s website:
www.nsfgroupplc.com.
3. Credit
Any marked increase in the rates of
impairment or defaults by the
Group’s customers could impact
the performance of the Group.
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Mitigation
Change
in 2020
Explanation
• The Group has a strong culture, one that is owned at
Board level and is committed to ‘doing the right thing’
and delivering positive outcomes for customers
• But, occasionally human and/or operational failures
can result in customer detriment. Any such instances
are investigated and appropriate actions taken to
address them and to prevent recurrence
• Close and active monitoring of all customer
complaints with learnings fed back into our lending
and collections practices
• Whilst less than in 2019 due to the pandemic, we
continued to invest in developing our procedures
and systems, supported by extensive training with
over 3,600 training days completed in 2020
• Whilst less than in 2019 due to the pandemic, we
continued to invest in developing our procedures
and systems, supported by extensive training with
over 3,600 training days completed in 2020
• 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’:
– policies, procedures and quality assurance in
customer-facing roles;
– compliance and conduct assurance; and
– 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 seeks to ensure
we meet all of our regulatory obligations
• Review of all FOS decisions so that learnings can be
applied across each of our business divisions, as
appropriate
In guarantor loans, the Group engaged fully with the
FCA’s multi-firm review and developed a proposed
methodology for redress
•
• The Group has commissioned a detailed and
independent review of its lending, collecting and
complaints handling activities in both branch-based
lending and home credit. The Directors recognise
that, whilst the review work done so far has not
identified any systemic issues requiring an increase in
provision, there remains a risk that the final outcome
of these reviews may result in the identification of
customers who may require redress, and the cost of
redress for the Group could be materially higher than
is currently provided for in the financial statements.
•
• Detailed weekly and monthly management
information on historic and expected future
credit performance
In 2020 this was analysed separately for
COVID-flagged and non-COVID flagged
customers
In response to the pandemic, each business
adapted its lending criteria to the new business
environment
•
• Continuous process of review and refinement
of each business’s credit scorecard, credit
worthiness assessment process and lending
criteria
• Regular credit committee reviews of policies and
outcomes
Each of the Group’s divisions has a Risk and Compliance
Director that 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.
As part of its role in supporting the in-house internal auditor, KPMG
also conducts periodic reviews of the Group’s lending and collections
practices.
Despite this robust framework, the number of complaints received
increased significantly in 2020, in large part due to an uplift in
cases coming from solicitors and claims management companies
(a number of which have been reported to the regulator for breaches
of their obligations under the rules).
To address this, the Group increased significantly its resources
to manage such claims and is working with the FCA and the
Financial Ombudsman Service (‘FOS’) to ensure a consistent
approach and to improve our service to customers.
Following completion of a multi-firm review into the guarantor loans
sector, several firms, including the Group’s Guarantor Loans Division,
were required by the FCA to develop a redress methodology for
certain customers that may have suffered harm. Whilst discussions
with the FCA have not yet concluded, the Group has made an
exceptional charge of £15.4m in 2020 to cover the expected costs of
redress and expects to begin a process to execute the redress
programme in the second half of 2021. Whilst the current estimate
represents the Directors’ best estimate of the total cost of redress,
based upon a detailed methodology and analyses developed in
conjunction with its advisers, the FCA has not yet approved the
methodology proposed. Therefore, although the Directors believe
their best estimate represents a reasonably possible outcome; there
is a risk of a less favourable outcome.
Each of the Group’s business divisions is fully authorised by the
FCA and is committed to the highest standards of regulatory
conduct. Whilst clear that our interpretation of what processes
were required in guarantor loans fell short of the regulator’s
expectations, a positive working relationship with the regulator
has helped us to improve our processes and overall business
approach.
HM Treasury’s review of the future regulatory framework for
financial services together with the appointment of a new CEO
and other senior management changes at the FCA, as well as
the FOS, may signal that further regulatory change could be on
the horizon.
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 contributed to an
increase in provisions and lower net book values (see principal
risks 5.4 and 6 below).
The Group continues to monitor closely the nature and number
of complaints so that it can adjust its lending and collections
practices as well as its approach to complaint handling.
As expected, COVID-19 increased credit risk in 2020 and also
resulted in an increase in macroeconomic uncertainty. While
this combination prompted an increase in impairment and loan
loss provisioning in 2020, adjustments to our lending processes
and creditworthiness assessments, together with a continued
flow of quality applicants meant that the performance of
lending conducted since the start of the pandemic in both
branch-based lending and home credit has been better than
expected. There was very little lending in guarantor loans after
the end of July 2020 and the business is now in a managed
run-off.
Increased
Unchanged
Decreased
Non-Standard Finance plc Annual Report & Accounts 2020 23
Principal risks continued
Risk definition
Mitigation
Change
in 2020
Explanation
4. Business strategy
A risk that the Group’s strategy fails
to deliver the outcomes expected.
Changes to the regulatory or fiscal
framework and/or a failure to
execute and integrate acquisitions
(including technology), or to
execute the Group’s strategy as
planned, may increase the risk of
financial loss.
The events of 2020 impacted the
Group’s financial performance and
contributed to a significant strain
being placed on the Group’s
balance sheet. As a result, the
Guarantor Loans Division is in
run-off and there are material
uncertainties as the Group’s ability
to remain a going concern and
fund its strategy as planned.
• With support from the Group’s largest
shareholder, the Board is focused on
executing a substantial capital raise.
Such support remains subject to the outcome
of the Group’s engagement with its lenders,
Alchemy’s analysis of the FCA’s and the
Group’s regulatory reviews and greater
levels of certainty around redress and
claims, including in relation to the home
credit division
• The Board has significant and relevant
experience of the non-standard sector and
conducts an annual review of all aspects of
the Group’s strategy
• 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
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
•
• 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
large numbers of upheld
customer complaints
• 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
• The vast majority of the Group’s technology
has been successfully migrated into the cloud,
increasing reliability and security
IT policies are in place to mitigate risk
including disaster recovery plans
•
• 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
• The Group has enhanced its complaint
handling procedures and is able to flex its
resourcing in this area, if required
Whilst it is expected that the Capital Raise would strengthen the
Group’s balance sheet significantly, underpinning the future growth
plans of both branch-based lending and home credit, uncertainty
remains over whether the Capital Raise can be completed as
planned.
If the Capital Raise is successful then, as set out in the Group Chief
Executive’s report on pages 15 to 19, the Board believes that a major
opportunity exists as a result of, inter alia, a more cautious approach
taken by mainstream lenders, applicants that would have previously
qualified for mainstream credit, now have to seek credit from
alternative lenders such as those owned and controlled by the Group.
The decision to place the guarantor loan book into run-off means
that, going forward, the Group will be focused on two divisions:
branch-based lending and home credit.
Whilst engagement to date indicates that Alchemy Special
Opportunities LLP remains supportive of the Group’s overall strategy,
this may change in the absence of a marked recovery in the Group’s
operational, financial and regulatory performance as well as the
Group’s share price.
Having developed new technology and adapted working
arrangements in order to adapt to a revised working environment
during COVID-related restrictions, the Group has created a number
of opportunities to drive new revenue streams as well as reduce costs
and increase operational efficiency.
The use of electronic signature by branch-based lending applicants
increased significantly in 2020, facilitating lending without having to
meet face-to-face, improving the customer journey and accelerating
the completion of loan applications.
Digital payments in home credit also increased following
government restrictions on social distancing.
All three businesses have disaster recovery plans in place.
Contingency plans have proven to be effective during the pandemic
in helping to safeguard the health and safety of staff and
self-employed agents, as well as helping to mitigate the impact on
business performance. The shift to homeworking was smooth and
without incident and all three businesses are able to lend and collect
remotely.
There have been a number of court cases regarding the employment
status of certain workers and 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.
As noted above, whilst the number of complaints has increased, the
Group continues to monitor the nature and number of complaints,
including decisions at the Financial Ombudsman Service, so that it
can adjust its lending and collections practices as well as its
approach to complaint handling.
Decreased
Increased
Unchanged
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Explanation
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 40 to 49).
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.
The tightening of lending criteria by mainstream lenders during
the pandemic means that the Board expects that the pool of
consumers seeking access to non-standard credit is set to
increase.
In developing a redress methodology for guarantor loans, the
Group has sought to ensure that all those eligible for redress
will receive such amounts in full.
Whilst increased criminal activity together with the increasing
importance of data and data analytics means that this risk has
been identified separately from operational risk and is rated as
being high, the Group has taken a number of steps to help
mitigate any potential impact.
Risk definition
Mitigation
5.2 Business risk (reputational)
Lending money at high rates of
interest means that consumer finance
can attract a higher level of media
and political scrutiny than certain
other business sectors.
Whilst the Group is committed to
meeting all of its regulatory
obligations, including the delivery of
positive customer outcomes, its
reputation may become tarnished by
a failure to do so, or by failures or poor
business practices of other sector
firms. This in turn could have an
impact on the Group’s financial
performance.
An increased focus on environmental,
social and governance (‘ESG’)
matters and the need for additional
disclosures may incur additional costs
for the Group and may damage the
Group’s reputation if it fails to comply
with such requirements.
• As a listed company 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 debt and equity 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).
• The Group encourages all areas of the business
to minimise the use of natural resources and is
developing a strategy to meet the requirements of
the Taskforce on Climate-Related Financial
Disclosures (‘TCFD’) that are expected to come
into force in April 2022. As part of this exercise, the
Group is also considering the recommendations
of the Sustainable Accounting Standards Board
(‘SASB’).
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
• Much of the Group’s technology infrastructure
is now cloud-based thereby delivering a
number of operational benefits including
enhanced levels of security
• The Group is conducting an operational
resilience assessment in 2021 to identify any
areas of potential risk and recommend steps
to help improve resilience
Decreased
Increased
Unchanged
Non-Standard Finance plc Annual Report & Accounts 2020 25
Principal risks continued
Risk definition
Mitigation
5.4 Business risk (COvID-19)
Change
in 2020
Explanation
A large pandemic such as
COVID-19, coupled with
restrictions on face-to-face
contact as required by HM
Government during 2020 and 2021,
may cause significant disruption to
the Group’s operations and
severely impact the level of supply
and demand for the Group’s
products. Any sustained period
where such measures are in place
could result in the Group suffering
significant financial loss.
• 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
• Both branch-based lending and home credit are
now able to lend and collect remotely, without the
need for face-to-face contact with customers
• Having put in place the requisite protocols and
procedures to be able to operate during
government lockdowns and related restrictions,
the Group’s staff and self-employed agents are
well-versed in such procedures, helping to
minimise the risk of additional disruption
• During the pandemic, HM Government put a
series of measures in place to support the
economy and to help soften the impact on
consumers as well as the business community
• Enhanced creditworthiness assessments and
revised lending procedures have helped to
improve the quality of lending since the start of
the pandemic in March 2020
It is expected that a future capital raise, if
approved by shareholders, together with the
Group’s cash balances and long-term debt
funding, will help to mitigate any impact of
potential future waves of COVID-19 infection. If
required, the Group is able to generate positive
cash flow by reducing significantly the level of
lending across the Group
•
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 intends to complete a substantial
capital raise of around £80m, subject to
shareholder approval
• Excluding any proceeds from such capital
raise, as at 31 May 2021 the Group had cash
at bank of £101m and net debt of £229m
• As part of any such capital raise, the Group
also expects to extend the maturity of its
existing debt facilities
• Cash and covenant forecasting is conducted
on a monthly basis as part of the regular
management reporting exercise
• The Group’s short-term loans to customers
provide a natural hedge against medium-
term borrowings
COVID-19 began to impact the UK economy in March 2020.
Whilst government restrictions can impact lending and
collections activity together with an increase in expected credit
losses due to the pandemic, the Group also believes that such
conditions may prompt an increase in demand for its products
and services over the medium term.
However, 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
(‘EPF') contributed to a significant increase in provisions and
lower net book values. Whilst extended from an initial period of
three months to six months in 2020, the final deadline for opting
for such an EPF was 31 March 2021. Any reintroduction of EPF or
similar measures could impact the future financial performance
of the Group.
Whilst the Board is pursuing a capital raise to strengthen the
Group’s balance sheet and avoid any possible covenant
breach of its current debt facilities, there is no certainty it will
be successful.
If the Capital Raise is not successful and/or if there is a further
economic slowdown; or if the FCA requires lenders to provide
borrowers affected with additional levels of forbearance, over
and above that already embedded within the Group’s business
model; and/or if 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 no longer be viable and will become insolvent.
As a result, whilst the Directors expect that a substantial capital
raise will be completed in the required timeframe, a material
uncertainty exists regarding the Group’s ability to remain a
going concern.
Decreased
Increased
Unchanged
26
2020 financial review
IF THE CAPITAL RAISE IS SUCCESSFUL, WE WILL
BE WELL-PLACED TO MEET THE NEEDS OF AN
EXPANDING CUSTOMER BASE.
JONO GILLESPIE
GROUP CHIEF FINANCIAL OFFICER
I
S
T
R
A
T
E
G
C
R
E
P
O
R
T
Group results
Normalised revenue was down 11% to £164.1m
(2019: £183.7m) reflecting the significant
reduction in lending by all three divisions. The
reduction in reported revenue to £162.7m (2019:
£180.8m) reflected the continued reduction to
the unwind of the fair value adjustment made
to the George Banco loan book at the time of
its acquisition in August 2017. Increased
forbearance in the form of greater numbers of
rescheduled and deferred loans in both
branch-based lending and guarantor loans
meant that modification and derecognition
losses increased substantially versus 2019. The
impact of the pandemic on the Group’s
customers was significant and whilst there
were differences between the divisions, the
overall level of collections reduced, prompting
a marked increase in delinquency and loan
loss provisions so that overall impairment costs
increased by 47% to £66.3m (2019: £45.1m).
Despite a number of cost reduction measures
implemented by all three divisions, higher
complaints costs and advisory fees meant that
administration costs were slightly higher at
£96.4m (2019: £95.8m), resulting in a
normalised operating loss of £6.3m (2019:
normalised operating profit of £42.2m).
The Group incurred £97.8m of exceptional
items during the year (2019: £80.6m) of which
the most significant items were the non-cash
impairment to the remaining value of goodwill
attributable to the Group’s operating
subsidiaries totalling £74.8m (2019: £65.8m);
and a charge for redress to certain customers
of the Group’s Guarantor Loans Division
totalling £15.4m (2019: nil). Despite a large
increase in cash balances during the year, low
deposit rates and an increase in average
gross debt balances meant that net finance
costs increased slightly to £28.8m (2019:
£27.5m).
The net result was that the Group reported an
increased statutory loss before tax of £135.7m
(2019: loss of £76.0m). A small tax credit of
£0.2m (2019: tax charge of £0.3m) meant that
the reported loss after tax was £135.6m (2019:
£76.3m) and the reported loss per share was
43.39p (2019: loss per share of 24.45p.
Normalised figures are before fair value adjustments, the amortisation of acquired intangibles and exceptional items.
2020
Fair value adjustments, amortisation
of acquired intangibles and
exceptional items
£000
2020
Normalised1
£000
Year ended 31 December
Revenue
Other operating income
Modification loss
Derecognition loss
Impairments
Exceptional provision for customer redress
Administration expenses
Operating loss
Other exceptional items
Loss before interest and tax
Finance cost
Loss before tax
Taxation
Loss after tax
Loss per share
Dividend per share
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
164,102
1,154
(6,282)
(2,643)
(66,262)
–
(96,385)
(6,316)
–
(6,316)
(28,836)
(35,152)
–
(35,152)
(11.25)p
0.00p
2020
Reported
£000
162,665
1,154
(6,282)
(2,643)
(66,262)
(15,401)
(97,683)
(24,452)
(82,433)
(106,885)
(28,836)
(135,721)
164
(1,437)
–
–
–
–
(15,401)
(1,298)
(18,136)
(82,433)
(100,569)
–
(100,569)
164
(100,405)
(135,557)
(43.39)p
0.00p
Non-Standard Finance plc Annual Report & Accounts 2020 27
2020 financial review continued
Year ended 31 December
Revenue
Other operating income
Modification loss
Derecognition loss
Impairments
Exceptional provision for customer redress
Administration expenses
Operating profit/(loss)
Other 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
2019
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
2019
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
2019
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
Normalised divisional results
The table below provides an analysis of the ‘normalised’ results for the Group for the 12-month period to 31 December 2020. 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 Dec 2020 Normalised1
Revenue
Other operating income
Modification loss
Derecognition loss
Impairments
Revenue less impairments
Administration expenses
Operating profit/(loss)
Finance cost
Loss before tax
Taxation
Loss after tax
Normalised loss per share
Dividend per share
Branch-based
lending
£000
Home credit
£000
Guarantor loans
£000
Central costs
£000
89,788
1,125
(2,207)
(2,602)
(31,449)
54,655
(41,236)
13,419
(18,594)
(5,175)
–
(5,175)
43,834
18
–
–
(10,495)
33,357
(35,866)
(2,509)
(1,228)
(3,737)
–
(3,737)
30,480
–
(4,075)
(41)
(24,318)
2,046
(13,773)
(11,727)
(7,467)
(19,194)
–
(19,194)
–
11
–
–
–
11
(5,510)
(5,499)
(1,547)
(7,046)
–
(7,046)
NSF plc
£000
164,102
1,154
(6,282)
(2,643)
(66,262)
90,069
(96,385)
(6,316)
(28,836)
(35,152)
–
(35,152)
(11.25)p
0.00p
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
28
Year ended 31 Dec 2019 Normalised1
Revenue
Other operating income
Modification loss
Derecognition (loss)/gain
Impairments
Revenue less impairments
Administration expenses
Operating profit/(loss)
Finance cost
Profit/(loss) before tax
Taxation
Profit/(loss) after tax
Normalised earnings per share
Dividend per share
Reconciliation of net loan book
Branch-based lending
Home credit
Guarantor loans
Total
Branch-based
lending
£000
93,002
954
(951)
(482)
(20,635)
71,888
(42,235)
29,653
(17,355)
12,298
(2,815)
9,483
Home credit
£000
Guarantor loans
£000
Central costs
£000
60,835
–
–
–
(16,435)
44,400
(35,298)
9,102
(2,116)
6,986
(1,474)
5,512
29,820
–
(230)
69
(7,996)
21,663
(12,895)
8,768
(7,338)
1,430
(113)
1,317
–
–
–
–
–
–
(5,358)
(5,358)
(649)
(6,007)
1,141
(4,866)
2020
Normalised1
£m
2020
Fair value
adjustments
£m
2020
Reported
£m
2019
Normalised1
£m
2019
Fair value
adjustments
£m
171.5
26.9
59.8
258.2
–
–
–
–
171.5
26.9
59.8
258.2
214.8
39.9
105.5
360.2
–
–
1.4
1.4
I
S
T
R
A
T
E
G
C
R
E
P
O
R
T
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
2019
Reported
£m
214.8
39.9
106.9
361.6
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
Impairment provisioning
The Group’s coverage ratio increased from 12.0% at 31 December 2019 to 19.5% at 31 December 2020. This was due to a number of factors
including: the significant increase in credit risk across all divisions as a result of extensive forbearance offered to customers experiencing
financial difficulty due to COVID-19; an increase in subsequent missed repayments as customers came to the end of their Emergency Payment
Freeze (‘EPF’); and an increase in provisions following a detailed review and assessment of the Expected Credit Losses (‘ECL’) from active loan
balances not affected by COVID-19.
Branch-based lending
Home credit
Guarantor loans
Group
31 Dec 2020
31 Dec 2019
Increase
7.6%
49.9%
26.7%
19.5%
7.3%
39.8%
5.3%
12.0%
0.3%
10.1%
21.4%
7.5%
The coverage ratio in branch-based lending increased by 0.4% to 7.6%, reflecting a modest increase in underlying delinquency due to: the
impact of the pandemic; the output of a detailed review of the ECL from outstanding loan balances not affected by COVID-19; the impact of a
more severe macro-economic outlook; and a reduction in new lending that contributed to a 20% reduction in receivables.
While the absolute level of provision was broadly unchanged year on year, the coverage ratio in home credit increased by 10.1% to 49.9%
reflecting a significant increase in the proportion of customers moving into Stage 3. During 2020, home credit customers who would normally
have been written-off due to greater than 26 weeks’ consecutive missed payments remained on the book so as to allow the customer time to
pay following the introduction of the EPF. While such balances were fully provided for, they were still present in the year end gross carrying
value and therefore affected the overall coverage ratio. If such balances and the associated provision had been written-off at the year end,
then the overall coverage ratio in home credit would have been 45.2% which is still a significant increase from 2019.
Guarantor loans saw the largest increase in provisioning, moving from 5.3% in 2019 to 26.7% in 2020. This reflected the relatively high
proportion of customers that were impacted financially by COVID-19 and the fact that, under FCA rules and guidance, the Group was unable
to approach guarantors whilst a borrower had opted for an EPF. It was also driven by a significant reduction in new lending and the
consequent decline in the size of the outstanding loan book.
Non-Standard Finance plc Annual Report & Accounts 2020 29
2020 financial review continued
Coronavirus (COvID-19) pandemic impact on expected credit losses
The requirement to provide support in the form of an EPF for customers affected by the pandemic impacted the ECL recognised in the
branch-based lending and guarantor loans divisions for the year ended 31 December 2020. In order to quantify this, the Group has reviewed
the behaviour of customers who opted for an EPF and/or notified us as being affected by COVID-19 and have used this data to inform updates
to the Probability of Default (‘PD’), Loss Given Default (‘LGD’) and staging profile of those receivables that were affected. The Group
recognises that, in line with IASB guidance, the activation of an EPF by a customer is not automatically deemed a significant increase in credit
risk (‘SICR’).
Throughout 2020, the Group therefore made adjustments in order to reflect the higher PD, LGD and expected loss at default (‘EAD’) for that
proportion of branch-based lending and guarantor loans customers who were financially impacted by the pandemic. This process was also
informed by the Group’s detailed analysis of past repayment behaviours and expected repayments behaviour across the entire customer base.
In the branch-based lending division, a COVID-19 overlay was derived based on the recent collection performance on COVID-affected
accounts and whether any impact on collection performance was deemed to be temporary or permanent. An overlay adjustment increased
the provisions for accounts that were deemed to be permanently impacted and/or who were not making full payments. In guarantor loans,
the recent payment performance of customers affected by COVID-19 but no longer on an EPF was used to inform expected delinquency trends
of customers who had not yet resumed payment following an EPF. A provision overlay was then applied to those accounts to reflect expected
performance consistent with the recent performance behaviours observed.
Macro-economic considerations
The provisioning model for both branch-based lending and guarantor loans also includes consideration of future economic conditions and
scenarios. The macroeconomic variables which are modelled include Bank of England (‘BoE’) base rate, Gross Domestic Product (‘GDP’),
Consumer Price Inflation (‘CPI’), House Price Inflation (‘HPI’) and unemployment rate. As the weightings used for the year ended 31 December
2019 Annual Report and Accounts did not consider the impact of recent economic changes arising from the effects of COVID-19, for the year
ended 31 December 2020, the Group reflected the worsening macro-economic variables and also increased the downside weighting as
reflected in the table below.
Macroeconomic variables and scenarios
Base
Downside stress
Severe downside stress
Positive
31 Dec 2020
31 Dec 2019
50%
40%
0%
10%
50%
30%
15%
5%
As noted above, in addition to the change in weightings of the relevant scenarios, the macroeconomic forecasts for each of the variables have
also changed since 31 December 2019. In 2019, the Group used economic forecast data from the BoE Annual Cyclical Scenario. As the BoE did
not produce any new forecasts for 2020, the Group has instead used the Fiscal Sustainability Report published by the Office for Budget
Responsibility (‘OBR’) from November 2020 as the basis for its macroeconomic scenarios. For variables where the OBR report did not provide
sufficient information, the BoE 2019 scenarios, updated for actuals, have remained in use.
A summary of the peak and average for unemployment under each of the scenarios is detailed below.
For the year ended 31 Dec 2020
2021
Maximum (Peak) unemployment rate
Average unemployment rate
2022
Maximum (Peak) unemployment rate
Average unemployment rate
Positive
Base
Downside stress
5.1%
4.9%
4.6%
4.0%
7.5%
6.0%
7.3%
6.9%
9.3%
6.8%
11.0%
10.4%
As noted by other companies in the sector, due to the nature of the home credit industry and based on historical evidence, management has
determined that the impact of traditional macroeconomic downside indicators is minimal for the industry and therefore a macroeconomic
adjustment is currently not necessary for the home credit division. This was noted in the 2019 Annual Report and Accounts and still holds true
for the 2020 consolidated financial statements. There are therefore no adjustments required with respect to the macroeconomic data for this
division.
Further details regarding the Group’s approach to provisioning is set out in note 1 to the financial statements.
30
Divisional review
Branch-based lending
Year ended 31 December
Revenue
Other operating income
Modification loss
Derecognition loss
Impairments
Revenue less impairments
Administration expenses
Operating profit
Exceptional items
Profit/(loss) before interest and tax
Finance cost
Loss before tax
Taxation
Loss after tax
Year ended 31 December
Revenue
Other operating income
Modification loss
Derecognition loss
Impairments
Revenue less impairments
Administration expenses
Operating profit
Exceptional items
Profit/(loss) before interest and tax
Finance cost
Profit/(loss) before tax
Taxation
Profit/(loss) after tax
I
S
T
R
A
T
E
G
C
R
E
P
O
R
T
2020
Fair value
adjustments and
exceptional items
£000
2020
Normalised1
£000
89,788
1,125
(2,207)
(2,602)
(31,449)
54,655
(41,236)
13,419
–
13,419
(18,594)
(5,175)
–
(5,175)
–
–
–
–
–
–
–
–
(6,017)
(6,017)
–
(6,017)
–
(6,017)
2019
Fair value
adjustments and
exceptional items
£000
2019
Normalised1
£000
93,002
954
(951)
(482)
(20,635)
71,888
(42,235)
29,653
–
29,653
(17,355)
12,298
(2,815)
9,483
–
–
–
–
–
–
–
–
(332)
(332)
–
(332)
63
(269)
2020
Reported
£000
89,788
1,125
(2,207)
(2,602)
(31,449)
54,655
(41,236)
13,419
(6,017)
7,402
(18,594)
(11,192)
–
(11,192)
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)
9,214
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
The key performance drivers in branch-based lending, namely network capacity, lead volume and quality, network productivity and impairment
management were all impacted by the pandemic. A summary of how these factors were affected during 2020 is summarised below.
Network capacity – Having planned to open a number of new branches in 2020, the majority of these planned openings were put on hold once the
potential impact of the pandemic became apparent and with it the significant uncertainty regarding the outlook for the UK economy. As a result,
only one new branch was opened in 2020 taking the total number to 74. However, in anticipation of more branch openings and further growth in
2020, a planned increase in staffing was already underway when the pandemic struck with the result that the number of network staff peaked at 416
in May 2020, an increase of 50 since the start of 2020. However, given the impact of the national lockdown and a marked reduction in demand,
coupled with tightening of our own lending criteria, it was clear that there was excess capacity in the network and so the number of staff declined
from May 2020 through natural attrition as well as through a redundancy programme that reduced the number of network staff to 353 and the total
number of staff to 467 (2019: 474) by the year end.
Following the temporary closure of all branches, lending stopped in April 2020 before gradually rebuilding during the summer months only to
then slow down again in the winter of 2020 as further lockdowns were introduced. This prompted a reduction in the number of active
customers that fell by 10% to 68,100 (2019: 75,400) and the net loan book declined by 20% to £171.5m (2019: £214.8m).
Non-Standard Finance plc Annual Report & Accounts 2020 31
2020 financial review continued
Lead volumes and quality – As noted above, lead volumes fell sharply as the pandemic started to grip the UK, reducing from almost 2.5 million
in 2019 to less than 1.8 million in 2020 – a reduction of 28% with no leads processed in April 2020. This reduced the number of new borrower
applications to branch (‘ATBs’) that fell by 32% to 337,700 (2019: 497,050). Financial brokers, whilst severely impacted by the sharp reduction
in demand, still provided 94% of gross leads (2019: 90%) and 57% of completed loans (2019: 51%) with direct applications and renewals or
former customers making up the balance. The Group continues to draw upon the support from a broad number of financial brokers, thereby
mitigating any risk of being overly exposed to a single firm or small group of firms.
Productivity – with a significant reduction in leads and ATBs, coupled with a greater degree of caution regarding new lending, it was
expected that conversion rates would fall and the number of loans booked in 2020 fell to 33,499 in total (2019: 52,130) and the total value of
loans issued fell by 39% to £104.3m (2019: £169.9m).
Delinquency management – The pandemic prompted a number of specific, as well as more general challenges in managing levels of
delinquency. Whilst impairments did increase sharply, this was against a backdrop of unprecedented levels of forbearance being offered to
customers through an EPF, a mechanism that was originally available for periods of up to three months before being extended to periods of up
to six months. Since the start of the pandemic, out of a total of almost 15,000 customers that requested COVID-related forbearance, less than
1,200 remain COVID-flagged (or below 2% of outstanding accounts), 7,600 are resolved but still active, and approximately 6,200 have been
closed. The consequent increase in credit risk due to: the impact of the pandemic; increased forbearance offered to affected customers; and
the outcome of a detailed review into the expected cashflows from outstanding loans not affected by COVID, each contributed to an increase
in the rate of impairments from 10.3% to 16.3% of average net receivables and from 22.2% to 35.0% of normalised revenue. Whilst such rates of
impairment are high, they are below that experienced during the global financial crisis in 2008.
2020 results
Revenue fell by 3% to £89.8m (2019: £93.0m) driven by the reduction in net loan book and a small reduction in average yield due to increased
levels of rescheduling and loan deferrals. Whilst other income benefited from a debt sale in the period and temporary furlough support from
HM Government, the increased number of rescheduled and deferred loans prompted a £1.3m increase in modification losses and a £2.1m
increase in derecognition losses respectively. Higher rates of delinquency together with higher charge-off and an increase in loan loss
provisions increased impairments to £31.4m (2019: £20.6m).
In response to the reduction in revenue, a number of initiatives were deployed throughout the year to reduce costs such as the loss of 48 staff
and access, albeit for a limited period, to the Government furlough scheme, as well as cuts to marketing and travel expenses. Offsetting some
of these savings was an increase in complaint-related costs contributing to a slight increase in the division’s cost:income ratio from 45.4% to
45.9%. Taken together with the reduction in revenue, the increased cost of impairments and higher levels of forbearance meant that
normalised operating profit fell from £29.7m to £13.4m.
An exceptional charge of £6.0m related to the £5.8m write-off of capitalised fees associated with the Group’s securitisation facility (2019: nil)
and restructuring costs of £0.2m (2019: £0.3m).
Despite having generated cash during 2020, finance costs increased slightly from £17.4m to £18.6m with the result that the division produced a
normalised loss before tax of £5.2m (2019: profit before tax of £12.3m) and after the exceptional items, a reported loss before tax of £11.2m
(2019: profit before tax of £12.0m).
Key performance indicators
While there were increased numbers of rescheduled and deferred loans, revenue yield remained broadly unchanged at 46.5% (2019: 46.4%),
it was the 20% decline in the net loan book that drove the decline in revenue. As noted above, higher rates of delinquency, increased charge
off and a step-up in provisioning meant that impairment as a percentage of revenue increased sharply, impacting the risk adjusted margin
that fell from 36.1% to 30.2%.
The combination of each of these factors meant that normalised operating profit margin halved to 14.9% (2019: 31.9%) which also fed through
into a much reduced return on asset that fell to 7.0% (2019: 14.8%).
Year ended 31 December
Key Performance Indicators1
Number of branches
Period-end customer numbers (000)
Period-end loan book (£m)
Average loan book (£m)
Loan book growth (%)
Revenue yield (%)
Risk adjusted margin (%)
Impairments/revenue (%)
Impairment/average loan book (%)
Cost:income ratio (%)
Operating profit margin
Return on asset (%)
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
32
2020
Normalised
2019
Normalised
74
68.1
171.5
193.0
(20.2)%
46.5%
30.2%
35.0%
16.3%
45.9%
14.9%
7.0%
73.0
75.4
214.8
200.4
17.6%
46.4%
36.1%
22.2%
10.3%
45.4%
31.9%
14.8%
Emerging from the pandemic – actions and plans for 2021
Whilst uncertainty about the pace and trajectory of any recovery remains, subject to being able to complete the Capital Raise as planned, we
are optimistic about the opportunities for our branch-based lending business. Despite having been affected by regional and national
lockdowns that impacted lead volumes and our ability to write quality business, as the economy has started to reopen, we have begun to see
some encouraging signs with increasing numbers of quality applications that are feeding through into rising numbers of applications to
branch. Our highly experienced staff have embraced a number of enhancements to our lending procedures so that conversion has also been
improving and this bodes well as we seek to rebuild our loan book to previous levels. This process of improvement will continue in the second
half of 2021 and will include any learnings from the proposed redress methodology in guarantor loans and the independent review of our
processes and procedures, taking into account recent FOS decisions that commenced during the first half of 2021.
Our collections performance has also been positive and although a small number of our customers remain ‘COVID-flagged’, the vast majority of
those affected have either returned to full or part-payment, where the performance has been above our previous expectations. In addition, the
changes we have made to our lending processes are delivering good results which are helping to drive an encouraging delinquency performance.
Having effectively suspended the opening of new branches over the past 12 months, we remain cautious about further openings but also
believe that once the recovery starts to gather momentum, subject to funding, there is a major opportunity to take advantage of what we
believe could be a significant uptick in demand through further network expansion over the next few years.
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Home credit
Year ended 31 December
Revenue
Other income
Impairments
Revenue less impairments
Administration expenses
Operating loss
Exceptional items
Loss before interest and tax
Finance cost
Loss before tax
Taxation
Loss after tax
Year ended 31 December
Revenue
Other income
Impairments
Revenue less impairments
Administration expenses
Operating profit
Exceptional items
Profit before interest and tax
Finance cost
Profit before tax
Taxation
Profit after tax
2020
Fair value
adjustments and
exceptional items
£000
–
–
–
–
–
–
–
–
–
–
–
–
2019
Fair value
adjustments and
exceptional items
£000
–
–
–
–
–
–
(221)
(221)
–
(221)
42
(179)
2020
Normalised1
£000
43,834
18
(10,495)
33,357
(35,866)
(2,509)
–
(2,509)
(1,228)
(3,737)
–
(3,737)
2019
Normalised1
£000
60,835
–
(16,435)
44,400
(35,298)
9,102
–
9,102
(2,116)
6,986
(1,474)
5,512
2020
Reported
£000
43,834
18
(10,495)
33,357
(35,866)
(2,509)
–
(2,509)
(1,228)
(3,737)
–
(3,737)
2019
Reported
£000
60,835
–
(16,435)
44,400
(35,298)
9,102
(221)
8,881
(2,116)
6,765
(1,432)
5,333
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
Face-to-face lending lies at the heart of the home credit business model, and so the onset of the pandemic and the associated rules and
guidance around social distancing required a radical shift in our business approach so that we could continue to service our customers whilst
ensuring their safety and wellbeing, as well as that of our self-employed agents and staff. As a result, agents stopped visiting customers in
their homes in March 2020 and we pivoted to a remote-only model whilst restrictions remained in place.
Non-Standard Finance plc Annual Report & Accounts 2020 33
2020 financial review continued
Although we were able to encourage the vast majority of our customers to switch to one of our remote collections channels within just a few weeks,
the development of a robust remote lending capability took longer, with the result that lending reduced to almost nil in April 2020. For customers
unable or unwilling to switch to remote channels, we developed an ‘Amazon-style’ physical collections protocol so that such customers were still able
to stay on track with their repayments and were not forced into arrears simply because they were unable to make a remote payment.
In order to maintain our competitive position in the market we launched a new 52-week product to supplement our existing and most popular
46-week product. By spreading the cost over a further six weeks, we were able to reduce the APR and weekly rate, increasing its appeal
relative to other offerings in the market. We also launched a new 26-week and 34-week product during the year.
Remaining competitive is vital for sustaining our network of self-employed agencies that, despite the challenges faced during the pandemic,
remained broadly flat at 897 agencies at the end of December 2020 (2019: 896). Our decision to boost commission rates on remote collections
(in order to help support agents that saw their incomes reduce as collections and new lending also reduced), was particularly well-received
and certainly helped us to keep vacancies low and agent satisfaction levels high, even during some of the most challenging market conditions
seen in recent years.
However, with a slowdown in lending in March 2020, followed by minimal lending during April and May, despite a good recovery over the
summer months as the economy began to open up and face-to-face contact resumed, further lockdowns in the autumn and before Christmas
2020 meant that the usual seasonal uptick failed to materialise to the degree expected and the net loan book declined by 32% to £26.9m
(2019: £39.9m).
2020 results
The impact of a smaller net loan book was compounded by a reduction in yield that meant revenue fell by 28% to £43.8m (2019: £60.8m). The
reduction in new lending, coupled with a strong collections performance meant that impairment fell by 36% in absolute terms to £10.5m (2019:
£16.4m). Even with the drop in revenue, impairment as a percentage of revenue also fell to 23.9% (2019: 27.0%) which is the lowest it has been
since we acquired the business in 2015. This performance is a testament to the efforts made in recent years to improve both the quality of our
loan book and the capabilities of our agent network that have been enhanced through improved training, market-leading technology and
strong management.
An increase in bank charges with greater use of remote payment methods, higher complaint costs and professional fees, meant that
administration costs increased by 2% to £35.9m (2019: £35.3m) resulting in a £2.5m operating loss (2019: operating profit of £9.1m). Lower
finance costs of £1.2m (2019: £2.1m) reflected the strong cashflow during the year and with no exceptional costs the net result was a reported
loss before tax of £3.7m (2019: profit before tax of £6.8m).
Key performance indicators
Whilst revenue yield fell to 155.2% (2019: 167.5%), the impact on risk adjusted margin was mitigated by the significant improvement in
impairment. The drop in revenue meant that the cost:income ratio increased significantly to 81.8% (2019: 58.0%), impacting operating profit
margins and the return on asset.
2020
Normalised
2019
Normalised
897
64
72.1
26.9
28.2
(32.5)%
155.2%
118.0%
23.9%
37.2%
81.8%
(5.7)%
(8.9)%
896
64
92.4
39.9
36.3
(2.7)%
167.5%
122.2%
27.0%
45.2%
58.0%
15.0%
25.1%
Year ended 31 December
Key Performance Indicators1
Period-end self-employed agencies
Period-end number of offices
Period-end customer numbers (000)
Period-end loan book (£m)
Average loan book (£m)
Loan book growth (%)
Revenue yield (%)
Risk adjusted margin (%)
Impairments/revenue (%)
Impairment/average loan book (%)
Cost to income ratio (%)
Operating profit margin
Return on asset (%)
1 For definitions see glossary of alternative performance measures in the Appendix.
34
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Emerging from the pandemic – actions and plans for 2021
Meeting the customer and building a longstanding personal relationship with them through the regular weekly or bi-weekly visit to their home,
lies at the core of a successful home credit business and so, despite the many benefits of being able to operate remotely, we remain
committed to conducting our business face-to-face, whenever possible. Paying funds direct into the customer’s bank account will remain an
option for borrowers, as well as being able to make payments via our customer portal or other remote channels. We will continue to develop
our systems and tools and embed any learnings from the proposed redress methodology in guarantor loans and the independent review of
our processes and procedures, taking into account recent FOS decisions so as to improve the quality of our service and to support our
self-employed agents.
As the economy has started to open up, we have seen an increase in monthly lending volumes and have also started to see a return to growth
in customer numbers. Whilst we remain cautious about the pace of recovery, our focus on quality customers and the benefits of the changes
made to our lending process during the pandemic have contributed to a better than expected collections performance since the start of the
year that in turn has helped to sustain low rates of impairment relative to previous years.
As the economy has started to open up, we have seen an increase in monthly lending volumes and have also started to see a return to growth
in customer numbers. Whilst we remain cautious about the pace of recovery, our focus on quality customers and the benefits of the changes
made to our lending process during the pandemic have contributed to a better than expected collections performance since the start of the
year that in turn has helped to sustain low rates of impairment relative to previous years.
Home credit remains a vital source of credit for many of the UK’s lowest income households and we are determined to continue to support our
customers through this very challenging time. The news that Provident Personal Credit is to close its doors after 140 years of trading marks the
end of an era but also presents a significant opportunity for our home credit business. Whilst the completion of a substantial capital raise
remains the primary focus for the Group, drawing upon the experience gained in 2017 when we grew the home credit business significantly,
we believe that a similar opportunity now exists to expand organically and are examining a number of options to achieve this. In the
meantime, subject to funding, we are determined to rebuild the net loan book through the addition of quality customers and by remaining
focused on being the preferred choice for self-employed agents seeking to grow their business.
Guarantor loans
Year ended 31 December
Revenue
Other income
Modification loss
Derecognition loss
Impairments
Revenue less cost of sales
Exceptional provision for customer redress
Administration expenses
Operating loss
Other exceptional items
Loss before interest and tax
Finance cost
Loss before tax
Taxation
Loss after tax
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
2020
Fair value
adjustments and
exceptional items
£000
2020
Normalised1
£000
30,480
–
(4,075)
(41)
(24,318)
2,046
–
(13,773)
(11,727)
–
(11,727)
(7,467)
(19,194)
–
(19,194)
(1,437)
–
–
–
–
(1,437)
(15,401)
–
(16,838)
–
(16,838)
–
(16,838)
–
2020
Reported
£000
29,043
–
(4,075)
(41)
(24,318)
609
(15,401)
(13,773)
(28,565)
–
(28,565)
(7,467)
(36,032)
–
(16,838)
(36,032)
Non-Standard Finance plc Annual Report & Accounts 2020 35
2020 financial review continued
Guarantor loans continued
Year ended 31 December
Revenue
Other income
Modification loss
Derecognition gain
Impairments
Revenue less cost of sales
Exceptional provision for customer redress
Administration expenses
Operating profit/(loss)
Other exceptional items
Profit/(loss) before interest and tax
Finance cost
Profit/(loss) before tax
Taxation
Profit/(loss) after tax
2019
Fair value
adjustments and
exceptional items
£000
2019
Normalised1
£000
29,820
–
(230)
69
(7,996)
21,663
–
(12,895)
8,768
–
8,768
(7,338)
1,430
(113)
1,317
(2,873)
–
–
–
–
(2,873)
–
–
(2,873)
(737)
(3,610)
–
(3,610)
686
(2,924)
2019
Reported
£000
26,947
–
(230)
69
(7,996)
18,790
–
(12,895)
5,895
(737)
5,158
(7,338)
(2,180)
573
(1,607)
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
The Group’s Guarantor Loans Division faced a number of operational, financial and regulatory challenges in 2020. First, it is now clear that
young adults were among those worst hit financially by the pandemic. As the vast majority of our guarantor loans customers fall into this
demographic, the division was more severely impacted than the other two divisions. Second, following its multi-firm review into the guarantor
loans sector, the FCA raised a number of concerns and required that the Group develop a proposed redress methodology for affected
customers. This prompted a number of operational changes but also meant that our appetite for new lending was significantly curtailed until
the work on the redress methodology was completed.
Having seen healthy growth in the number of leads during the first two months of the year, things went into reverse during March 2020 as the
realities of the pandemic began to filter through into the wider economy. Our decision to introduce stricter lending criteria and a lack of leads
through broker channels meant that no loans were written in April and whilst there was a modest recovery in May, June and July, the
announcement in early August that the FCA had raised a number concerns about our approach meant that loan volumes fell back to close to
zero and stayed there for the rest of the year. As a result, the total number of loans written fell to 4,601 (2019: 19,458) and the value of loans
issued fell from £71.7m in 2019 to £16.4m. At the same time, the economic impact of the pandemic on young adults saw large numbers of
borrowers opt for COVID-related forbearance that at its peak reached over 7,000, or 25% of the then active customer base. As at 31 December
2020, this figure was 3,500, or 14% of the active total. With few loans being written, a small number of staff were furloughed and 15 staff were
made redundant. We also redeployed a number of former lending staff into collections where, given the volume of customers experiencing
difficulty, there was a need for greater resources. Being unable to collect from or contact either the borrower or the guarantor whilst a
borrower was ‘COVID-flagged’ meant that collections were much reduced and impairments increased sharply as the coverage ratio also
increased. As a result, the net loan book fell by 43% to reach £59.8m at 31 December 2020 (2019: £105.5m).
36
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2020 results
Despite the lack of lending and a rapidly shrinking loan book from March 2020, previous strong loan book growth and an increase in average
yield meant that normalised revenue increased slightly to £30.5m (2019: £29.8m). A smaller fair value adjustment to revenue of £1.4m (2019:
£2.9m) meant that reported revenue increased by 8% to £29.0m (2019: £27.0m).
The high numbers of COVID-flagged customers together with a weaker collections performance, contributed to sharp increase in impairments
that rose to £24.3m (2019: £8.0m), or 79.8% of revenue (2019: 26.8%) and 28.2% of average loan book (2019: 8.5%). As noted above there was a
marked increase in provision coverage from 5.3% in 2019 to 26.7% at the end of 2020 as a large number of loans moved from stage 1 into stage
2 and stage 3.
Whilst staff costs fell year-on-year, an increase in complaint handling costs and professional fees contributed to an overall increase in
administration costs to £13.8m (2019: £12.9m). The net result was that the business delivered a normalised operating loss of £11.7m
(2019: operating profit of £8.8m). Finance costs were slightly higher at £7.5m (2019: £7.3m) resulting in a normalised loss before tax of
£19.2m (2019: profit before tax of £1.4m). Exceptional items comprise a charge for customer redress of £15.4m that is broadly in line with that
included in the 2020 half year results. Whilst the current estimate represents the Directors’ best estimate of the total cost of redress, based
upon a detailed methodology and analyses developed in conjunction with the Group’s advisers, the final cost of redress remains uncertain
and is heightened by the fact that the FCA has not yet approved the methodology proposed. Therefore, although the Directors believe their
best estimate represents a reasonably possible outcome, there is a risk of a less favourable outcome (see note 24 to the financial statements
for more detail regarding the customer redress provisions). With a reduced fair value adjustment to revenue of £1.4m (2019: £2.9m), the net
result was that the reported loss before tax was £36.0m (2019: loss before tax of £2.2m).
Key performance indicators
The significant reduction in lending volume and the fact that a high proportion of the active customer base was affected by COVID-19
impacted most of the division’s KPIs in 2020. An increase in revenue yield was more than offset by the sharp increase in impairment to 79.8% of
revenue (2019: 26.8%) as large numbers of customers and/or guarantors struggled to keep up with their payments with the result that the risk
adjusted margin reduced from 23.2% to 7.1%. This fed through into a negative operating profit margin and a negative return on assets of
(13.6)% (2019: 9.3%).
Year ended 31 December
Key Performance Indicators1
Period-end customer numbers (000)
Period-end loan book (£m)
Average loan book (£m)
Loan book growth (%)
Revenue yield (%)
Risk adjusted margin (%)
Impairment/revenue (%)
Impairment/average loan book (%)
Cost:income ratio (%)
Operating profit margin (%)
Return on assets (%)
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
2020
Normalised
2019
Normalised
26.2
59.8
86.2
(43.3)%
35.3%
7.1%
79.8%
28.2%
45.2%
(38.5)%
(13.6)%
32.6
105.5
94.1
27.7%
31.7%
23.2%
26.8%
8.5%
43.2%
29.4%
9.3%
Non-Standard Finance plc Annual Report & Accounts 2020 37
2020 financial review continued
Planned wind-down of Guarantor Loans Division
As outlined in the Group Chief Executive’s review, the Board has concluded that shareholder interests will be best served by placing the
division into a managed run-off and ultimately closing the business. Whilst hugely disappointing, collecting out the loan book is the only
rational conclusion given the combined impact of the pandemic, the FCA review into guarantor loans and the expected increase in costs in
order to meet revised FCA requirements that would necessarily impede any potential recovery in profitability in the future (see note 34 to the
financial statements).
Central costs and exceptional items
Year ended 31 December
Revenue
Other income
Administration expenses
Operating loss
Exceptional items
Loss before interest and tax
Finance cost
Loss before tax
Taxation
Loss after tax
Year ended 31 December
Revenue
Other income
Administration expenses
Operating loss
Exceptional items
Loss before interest and tax
Finance cost
Loss before tax
Taxation
Loss after tax
2020
Normalised1
£000
2020
Amortisation of acquired
intangibles and exceptional items
£000
2020 Reported
£000
–
11
(5,510)
(5,499)
–
(5,499)
(1,547)
(7,046)
–
(7,046)
–
–
(1,298)
(1,298)
(76,416)
(77,714)
-
(77,714)
164
–
11
(6,808)
(6,797)
(76,416)
(83,213)
(1,547)
(84,760)
164
(77,550)
(84,596)
2019
Normalised1
£000
2019
Amortisation of acquired intangibles
and exceptional items
£000
2019 Reported
£000
–
–
(5,358)
(5,358)
–
(5,358)
(649)
(6,007)
1,141
(4,866)
–
–
(7,226)
(7,226)
(79,293)
(86,519)
–
(86,519)
2,138
(84,381)
–
–
(12,584)
(12,584)
(79,293)
(91,877)
(649)
(92,526)
3,279
(89,247)
1 See glossary of alternative performance measures and key performance indicators in the Appendix.
Normalised administrative expenses were broadly unchanged at £5.5m (2019: £5.4m). The amortisation of acquired intangible assets includes
the write-off of the remaining acquired intangible assets at the Group’s operating subsidiaries totalling £1.3m (2019: £7.2m).
As noted in the Group Chief Executive’s review, the Group incurred a number of exceptional costs totalling £97.8m (2019: £80.6m). The key
items within this total were: the impairment of the remaining goodwill assets relating to the Group’s operating subsidiaries totalling £74.8m
(2019: £65.8m); £1.6m of advisory fees (2019: £12.8m); the write-off of £5.8m of capitalised fees associated with the Group’s securitisation facility
(2019: nil); a charge for redress totalling £15.4m (2019: nil); and £0.2m (2019: £1.9m) 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 losses incurred during
the year, uncertainties in the regulatory environment and the reduction in stock market valuations and multiples across the non-standard
finance sector (see note 14 to the financial statements).
38
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Balance sheet
Despite having significant cash balances of £78.0m at 31 December 2020, as a result of the write-off of all of the remaining goodwill assets
associated with the Group’s operating subsidiaries, the exceptional provision for redress and the impact of the pandemic on the Group’s
operating performance in 2020, the Group’s balance sheet has moved into a negative net tangible assets position. A summary of the Group’s
balance sheet as at 31 December 2020 is shown below:
Year ended 31 December
Loan book
Fair value
Adjusted loan book
Cash
Trade receivables and other assets
Property, plant and equipment, intangibles and right of use assets
Payables and provisions
Lease liability
Debt
Tangible net (liabilities)/assets
Goodwill and acquired intangibles
Net (liabilities)/assets
2020
£000
258,201
–
258,201
77,956
3,630
24,593
(37,708)
(10,889)
(326,587)
(10,804)
–
(10,804)
2019
£000
359,647
2,000
361,647
14,192
4,321
25,688
(28,374)
(11,105)
(317,590)
48,779
74,832
123,611
The Group is focused on completing the Capital Raise that, if successful, is expected to, amongst other things, strengthen the Group’s balance
sheet and restore it to a positive net assets position. However, the Directors note that a material uncertainty exists regarding the successful
execution of a capital raise, current and future impacts of COVID-19 and the impact of potential levels of redress and claims across the Group,
each of which may cast significant doubt on both the Group’s and the Company’s ability to continue as a going concern.
Principal risks
The principal risks facing the Group are:
•
Liquidity, going concern and solvency – while as at 31 May 2021 the Group has c.£101m in cash, the Directors note that material
uncertainties exist regarding the successful execution of a capital raise, current and future impacts of COVID-19 and the impact of potential
levels of redress and claims across the Group. The range of assumptions and the likelihood of them all proving correct creates material
uncertainty and therefore the impact on liquidity and solvency under both the base case and downside scenarios may cast significant
doubt on both the Group’s and the Company’s ability to continue as a going concern. In such circumstance, the Group may fall under the
control of its lenders and there would be a possibility of the Group going into insolvency;
• Regulation – the Group faces significant operational and financial risk through changes to regulations, changes to the interpretation of
regulations or a failure to comply with existing rules and regulations. This risk may be impacted by the outcome of the ongoing reviews of
each of the Group’s divisions. Following a multi-firm review, the Group has developed a proposed methodology for redress to certain
guarantor loans customers and has made an exceptional charge £15.4m to cover the expected costs. Whilst the current estimate
represents the Directors’ best estimate of the total cost of redress, based upon a detailed methodology and analyses developed in
conjunction with its advisers, the FCA has not yet approved the methodology proposed. Therefore, although the Directors believe their best
estimate represents a reasonably possible outcome; there is a risk of a less favourable outcome;
•
Conduct – risk of poor outcomes for our customers or other key stakeholders as a result of the Group’s actions;
• 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, increasing
numbers of customer complaints, 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; and
• 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.
On behalf of the Board of Directors
Jono Gillespie
Group Chief Financial Officer
30 June 2021
Non-Standard Finance plc Annual Report & Accounts 2020 39
Stakeholder management and our commitment to Section 172
Our approach to
stakeholder engagement
The Group’s Board of Directors and senior management team share the view that
sustainability and operational resilience are vitally important factors in driving long-term
financial returns and are wholly consistent with our corporate strategy.
Underpinning these factors is a complex collection of relationships with key stakeholders, each of whom play an important role in helping us to
execute our strategy and realise our objectives. Whilst the onset of the pandemic meant that opportunities for face-to-face meetings with key
stakeholders were severely restricted in 2020, within the confines of government guidelines and our focus on ensuring that our customers, staff
and self-employed agents remained safe and well, we continued to engage with key stakeholders, many of whom were also severely
impacted by COVID-19.
Our approach to stakeholder management
Our overall approach to stakeholder management is underpinned by
a clear focus on maintaining a strong and positive business culture –
a vitally important factor behind 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) to (f).
Discharging our responsibilities under Section 172
To discharge our responsibilities under these requirements, on the
following pages we have provided a summary of each of our key
stakeholder groups, why they are important to us, how we have
engaged with them in 2020 and the key topics that have been
addressed.
We have also provided some examples on page 49 of where
decisions have been taken or where future actions were proposed
as a result of our engagement during 2020.
The Board considers that this section of the Annual Report (pages
40 to 49) constitutes its disclosure against the requirements of
Section 172(1) of the Companies Act 2006.
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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
(f) the need to act fairly as between members of the company.
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 a
variety of stakeholders including 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.
What this means:
The interests of all members are considered and
treated fairly.
Non-Standard Finance plc Annual Report & Accounts 2020 41
Engaging with our stakeholders
Providers
of funding
Customers
Why we engage
Why we engage
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.
Our customers lie at the heart of our business model (see page 14).
Should we fail to deliver great service or treat our customers unfairly,
we are unlikely to meet our long-term financial and strategic
objectives.
Key issues
Key issues
• The financial and operational performance of the Group and
• We aim to design and tailor our products to meet our customers’
each of its subsidiaries
needs at a price they can afford
• Capital structure and financial KPIs
• Ensuring we lend and collect responsibly and in compliance with
• Major strategic and regulatory developments
• Corporate governance
• Risk management
How we engage
• Debt providers receive regular management reports and engage
directly with the Group CFO and the wider finance team
• Regular public disclosures issued via a Regulatory News Service
• Other relevant information is available via
www.nsfgroupplc.com.
• Meetings with senior management both online and where
possible, face-to-face, presentations, site visits and investor days
• The Chairman and Non-Executive Directors are also available
for meetings
• The Group is covered by four equity research teams and aims to
maintain strong relationships with each of them as well as other
analysts covering the sector
Resulting actions and outcomes
• Regular publication of financial reports via RNS and the
Group’s website
• Board receives regular updates on key market developments,
including feedback received from both equity investors and
lenders to the Group
• Board receives copies of published research together with an
update to the consensus of equity analyst forecasts
• Taking these views into account is an essential part of the
business management process at NSF
latest FCA rules and guidance
• Having an effective complaint handling process
How we engage
• Face-to-face contact is a key part of the lending process in
branch-based lending and home credit, providing immediate
feedback on how we are performing and how we might improve
• We also engage extensively via telephone, email and web
• Third-party customer satisfaction surveys and online
recommendation engines1
• We also work hard to ensure that if something goes wrong, our
complaint handling processes deliver fair and appropriate
outcomes. Numbers of complaints and root cause analysis are
datapoints that we track and monitor closely
Resulting actions and outcomes
• Updated processes and systems embedding FCA guidance on
COVID-related forbearance
• Amended face-to-face lending processes to comply with
government guidelines
• Key learnings from assurance reviews are captured and once
understood and assessed, are embedded into our policies and
procedures; training; organisation structure; and incentive
arrangements
• All complaints are tracked, analysed and fed back into business
practice and the Group’s ‘good customer outcomes dashboard’.
Upheld decisions by the FOS are also taken into account (see
Principal risks on page 22)
• Everyday Loans received a number of awards in recognition of its
focus on consumers2.
1 For the second year running, Everyday Loans was awarded with the top accolade by
Feefo in 2020: the Platinum Trusted Service Award. This accolade is an independent
seal of excellence that recognises businesses for consistently delivering exceptional
experiences, as rated by customers. Feefo gives Platinum Trusted Service awards to
businesses that have achieved an average service rating of greater than 4.5 stars out of
5 for more than three consecutive years. As all reviews on the Feefo platform are
verified as genuine, this accreditation is a true reflection of Everyday Loans’
commitment to providing outstanding service to its customers. Separately, Everyday
Loans is also rated by TrustPilot; George Banco is also rated by TrustPilot while Loans at
Home commissions a quarterly customer survey conducted by an independent third
party. In the three months to December 2020, 86% of the 200 customers surveyed were
‘very satisfied’ with the service provided by Loans at Home (2019: 77% of 200 surveyed).
2 Everyday Loans received the Non-mainstream Loan Provider of the Year Award for the
second year running at the Moneyfacts Consumer Awards 2021. This award is based
primarily on reviews provided by our customers who are solicited directly by
MoneyFacts and asked to complete a survey questionnaire.
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Customers
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If we really care about our customers, why are our
APRs so high?
NSF normalised Group revenue1
Compared to lenders that are focused on only serving consumers
with good 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 loans,
mainly face-to-face, are relatively high – in other words, while our
business model (see page 14) 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 (2020 was
severely impacted by COVID-19 and so is not a representative
guide). The key deductions to revenue are:
Impairments, modification and derecognition losses
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, modified or derecognised
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 to compensate for this risk.
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. Compliance
and complaint handling are other significant costs for the Group.
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 can be used to
reward shareholders through dividend payments or other
distributions and/or by reinvesting funds to deliver future growth.
100%
25%
Impairments, modification
and derecognition losses
34%
People costs
%
0
0
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18%
Other administration costs
15%
Cost of funds
2%
6%
Taxes
Profit after tax
1 As 2020 results were severely impacted by a number of factors, the graphic above
is based on the normalised results for 2019 (see glossary of alternative performance
measures in the Appendix).
Non-Standard Finance plc Annual Report & Accounts 2020 43
Engaging with our stakeholders continued
Regulators
Partners and
suppliers
Why we engage
Why we engage
Maintaining a positive relationship with regulators is key. Through
our engagement we aim to ensure they remain well-informed about
our own performance as well as market dynamics and how any
existing or proposed regulatory changes may impact consumers and
the workings of the non-standard finance market more generally.
The different business models and customer demographics of each
of our divisions means that, for most suppliers, relationships are
managed at a divisional rather than Group level. 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.
Key issues
• Sustaining a positive business culture is a key driver of behaviour
Key issues
within firms
• Maintaining an effective procurement process
• Creditworthiness and affordability – ensuring that appropriate
and proportionate checks are conducted at the point of lending
• Ensuring that the quality of the services being supplied meets the
standards expected
• Vulnerable customers – ensuring their circumstances are taken
• Confirmation that suppliers are also fulfilling their broader
obligations of good business practice including issues such as
diversity, gender pay, modern slavery and anti-bribery and
corruption
• We monitor supplier payment terms to ensure we pay them within
the constraints of the Prompt Payment Code
How we engage
• We have clear procurement policies in each of our business
divisions with proper oversight over all material contracts
• Each division seeks to maintain strong relationships through
regular meetings and 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
Resulting actions and outcomes
•
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
into account throughout the customer lifecycle
• Claims management – proper handling of claims in a timely
manner with root cause analysis and noting recent FOS cases
How we engage
• We maintain a regular dialogue with the FCA, as part of its
ongoing supervision process
• We also engage at a more strategic level through periodic
face-to-face meetings and by responding to relevant
consultations, policy documents and research
• We continue to keep the FCA and other regulatory bodies,
including HM Treasury, fully informed regarding the Group’s
broader strategic plans
Resulting actions and outcomes
• Culture is monitored closely at both subsidiary and NSF Board
level through a series of measures that are monitored as part
of a continuous assessment process
• A ‘three lines of defence’ model is in place to identify and address
any potential regulatory risks
• Following the FCA’s review into guarantor loans we developed
a redress methodology for customers deemed to have suffered
harm to ensure that all affected customers receive their full
redress amount
• We also take note of other sector developments to ensure that
any read-across to our own business is assessed and any
adjustments to processes and procedures made
• We respond to periodic information requests from the FCA
that continues to track the performance and dynamics of the
non-standard finance market
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Employees and
self-employed agents
Over 89%
of Loans at Home staff believe that the
company is run on strong values and
principles, almost unchanged from a
year earlier
1,183 training
days
were delivered in 2020, at Everyday Loans,
equivalent to approximately three days per
member of staff
34% of staff
at Everyday Loans were happy with their
work-life balance, providing a clear signal
to management that there is a need to
review how things can be improved
Why we engage
As a relationship lender, our workforce (that includes self-employed agents in home
credit) is a key enabler in the execution of our business strategy and in the
deployment of our business model.
Key issues
• Despite the challenges of 2020, our staff and self-employed agents appear to be
generally happy in their work
• Areas for management focus include work/life balance, opportunities for career
progression, remuneration and benefits, management processes as well as ideas
to improve working practices and profitability
• Promotion of a positive business culture and our core values and behaviours
through a variety of different channels
How we engage
• Comprehensive induction process for new joiners
• Continuous programme of training and development for staff and self-employed
agents
• Online training modules provide a clear audit trail for each participant
• Regular intranet communications and engagement surveys
• Regular meetings by senior management online as well as face-to-face,
whenever possible
• Management conferences and workforce forums
Resulting actions and outcomes
• The pandemic prompted a shift to home working and reduced levels of personal
contact that drove a concerted effort to ensure staff and self-employed agents
remained connected to the business
• We furloughed a total of 185 staff in branch-based lending, 4 staff in home credit
and 8 staff in guarantor loans
• All furloughed staff continued to receive 100% of their salary
• When staff returned to offices additional safeguards were in place to ensure
a safe working environment
• A number of staff were made redundant and we managed such processes
sensitively
• Regular contact with all staff, including those on furlough and self-employed
agents to identify any mental health or other issues
• We increased the commission rate on remote collections in home credit to
mitigate the impact of less physical collections on agents’ income
For further details regarding our workforce
engagement see page 66
Non-Standard Finance plc Annual Report & Accounts 2020 45
Engaging with our stakeholders continued
Diversity and gender pay
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 2020
Number of Company Directors
Number of senior managers
(excluding Executive Directors),
directors of subsidiary
businesses and heads of
function
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
Male
Female
5
1
Total
6
28
506
15
433
Male
Female
5
1
29
477
10
410
43
939
Total
6
39
887
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 2020 (hourly pay) and bonus paid in the 12 months to
5 April 2020. The figures for 2020 are as follows (the comparative
figures for 2019 are also included for reference):
Pay and bonus – difference between males and females1
20202
Hourly pay gap
Bonus pay gap
20192
Hourly pay gap
Bonus pay gap
Mean
Median
15.24%
22.86%
7.67%
2.65%
Mean
Median
19.19%
28.20%
8.94%
17.44%
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 2020 and 2019 (hourly pay) and bonus paid in the 12 months to 5 April 2020 and
2019.
Proportion of males and females receiving a bonus payment
As noted in the 2020 financial review on pages 27 to 39, the planned
opening of a number of new branches in 2020 meant that the
associated increase in the number of staff was already underway
when the pandemic hit in March 2020.
2020
2019
Male
Female
73.9%
87.2%
64.2%
78.5%
Diversity
The Group has adopted an equality and diversity policy, promoting
the equality of opportunity for all employees, dignity at work
through eliminating occurrences of unlawful discrimination and
through the promotion of a harmonious working environment in
which all persons are treated with dignity and respect. Breaches of
the policy are regarded as misconduct, which could lead to
disciplinary proceedings. Each of the Group’s divisions started to
capture ethnic diversity during 2020 and will provide annual data in
future annual reports.
Why do we have a gender pay 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, although there has been a notable improvement versus last
year (approximately 67% of senior roles were held by men (2019: 76%)
and 33% were held by women (2019: 24%) 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.
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Gender mix by pay quartile (quartile 1 being the lowest and quartile 4 being the highest).
2020
2019
Quartile 1
Quartile 2
Quartile 1
Quartile 2
Male 43%
Female 57%
Quartile 3
Male 54%
Female 46%
Quartile 4
Male 43%
Female 57%
Quartile 3
Male 52%
Female 48%
Quartile 4
Male 56%
Female 44%
Male 63%
Female 37%
Male 58%
Female 42%
Male 66%
Female 34%
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’ 2020 figures1 put the mean salary
gap at 34.1% 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.
Whilst the current share price means that the Scheme is not currently
attractive for staff, if a capital raise is completed as planned then the
Board intends to put in place a replacement scheme for staff.
1 ONS: Gender Pay Gap in the UK: 2020, 3 November 2020.
Non-Standard Finance plc Annual Report & Accounts 2020 47
Engaging with our stakeholders continued
Environment
Communities
and charity
Why we engage
Why we engage
It is clear that environmental, social and governance (‘ESG’) issues
are becoming increasingly important for many of our key stakeholders
including customers, staff, investors and HM Government.
Key issues
•
Our impact on the environment as well as how the environment
can impact our business
• Use of energy and natural resources as well as CO2 emissions
• Supply chain, workforce management
• The Taskforce on Climate-related Financial Disclosures (‘TCFD’)
has recommended a series of disclosures expected to be required
from April 2022
How we engage
• Whilst we are a small company compared with many others and
given the nature of our business we do not believe that we have a
material impact on the environment. However, we are keen to
minimise any impact that our activities might have
• The Group qualified for the Energy Savings Opportunity Scheme
(‘ESOS’), established by the Energy Savings Opportunity Scheme
Regulations 2014.
• Having implemented a strategy to comply with the ESOS
requirements, since confirmed by a third-party review and
submitted to the Environment Agency, a further audit will be
conducted in three years’ time
Resulting actions and outcomes
• The pandemic meant that resource usage and mileage were
significantly reduced in 2020
• We are developing a strategy and plan to enhance our
assessment and disclosure of ESG targets and related issues so
that we will comply with future regulations and to help drive
better decisions and long-term performance
• An update on the estimated volume of CO2 production from car
mileage and volume of water and electricity used during 2020
together with comparisons with 2019 across all three business
divisions is summarised below
The majority of our business is conducted face-to-face through
extensive national networks. As a result, being a valued member of
the towns and cities where we have a physical presence is key. With
around 870 staff, 900 self-employed agencies and 166,000
customers that we serve from c.140 locations across the UK, we are
already embedded within the communities where our employees,
customers, suppliers, regulators and other key stakeholders are
based.
Key issues
• Providing credit to many that have perhaps been excluded by
mainstream providers can be an important lifeline and places a
significant responsibility on us to get things right
•
If we make poor lending decisions this can harm customers,
damage our reputation in the community and damage our
long-term business prospects
How we engage
• Our cultural focus of ‘doing the right thing’ is embodied by our
staff and self-employed agents
• As well as being a stand-out employer providing quality services
to our customers, we also aim to put something back into local
communities through both physical as well as financial
contributions
• We support debt-related charities such as Loan Smart and also
ask our staff which other charities they would wish to support at
the beginning of each year
Resulting actions and outcomes
•
In 2020 the Group donated a total of £132,260 (2019: £53,220) to
a range of charities including Loan Smart that seeks to help raise
awareness about the dangers of illegal lending
• As well as financial donations, our staff are able to take part in
community-based events although the pandemic meant that
most events were cancelled in 2020
2020
Total usage in 2020
Total reported revenue
Intensity metric (per £m of reported revenue)
2019
Total usage in 2019
Total reported revenue
Intensity metric (per £m of reported revenue)
CO2
production
260,030KG
£162.7m
1,599KG
CO2
production
315,752KG
£180.8m
1,747KG
Electricity
usage
1,112,632KWH
£162.7m
6,840KWH
Electricity
usage
1,151,684KWH
£180.8m
6,370KWH
Gas
usage
116,393KWH
£162.7m
716KWH
Gas
usage
264,091KWH
£180.8m
1,461KWH
Water
usage
8,595m3
£162.7m
53m3
Water
usage
74,982m3
£180.8m
415m3
48
Our engagement in action
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The onset of the pandemic prompted a large
number of Board decisions focused on
addressing issues affecting our key
stakeholders. Some examples are summarised
below.
Adapting to a world with COvID-19
We suspended all face-to-face agent/
manager meetings in home credit and
stopped agents from attending customers’
homes on 17 March 2020, five days before HM
Government’s announcement on 23 March
2020 that the UK would be entering a state of
national lockdown. In branch-based lending,
in anticipation of the potential shift to home
working, we procured and began to configure
over 350 Chromebooks in March 2020. As a
result, when we took the decision to close the
branch network ahead of the Government
announcement on 23 March 2020, we were
able to switch seamlessly to a home working
model so that staff were able to replicate our
service to customers, albeit remotely. Despite
the significant impact on our business, the
health and safety of both our workforce and
our customers was paramount and there was
a need to display clear leadership to instil
confidence at a time of major uncertainty.
How we effected change
The suspension of all face-to-face lending and
collecting was discussed at length
with each of the Divisional CEOs and key
members of the senior management team
who had been in touch with staff that had
in turn been speaking directly to customers.
Whilst we also assessed carefully all available
information published by HM Government on
the latest developments, the situation was
changing rapidly. Whilst an imperfect process,
it was important to make decisions quickly so
as to demonstrate positive leadership and
also to provide clarity on our chosen course for
all stakeholders. Customers, staff and
self-employed agents were very
understanding and reacted positively to the
steps taken.
Providers of funding
We have maintained a regular dialogue with
each of our lenders throughout the pandemic.
This has ensured they remain fully up to speed
with the latest developments and has helped
us to navigate many of the challenges of the
past year. One example was our decision,
following discussions with our lenders, to limit
the drawdown on a new securitisation facility
to just £15m, even though we could have
drawn more. As a result, when there was a
performance breach of one for the covenants
on that facility due to the pandemic, we were
able to rectify the breach through repayment
of the facility in full thereby avoiding an event
of default. Continuous dialogue also helped to
minimise costs and avoided the need for any
covenant waivers on the Group’s main debt
facility in 2020.
Customers
As a face-to-face lender, COVID-19 presented
a real challenge for both branch-based
lending and home credit. To minimise any
disruption to our service, remote lending
solutions needed to be refined quickly (in the
case of branch-based lending) and invented
from scratch (in the case of home credit).
Whilst there was minimal lending in April 2020,
lending did resume in earnest in May 2021.
While the collections process in branch-based
lending was broadly unaffected, the vast
majority of our home credit customers
switched to using one of our remote payment
solutions. But, listening to feedback from our
customers it was clear that a number of home
credit customers were unable or unwilling to
switch and so we arranged to conduct less
frequent ‘Amazon-style’ collections, thereby
ensuring that the customer remained on track
whilst minimising the risk of infection. All of
these changes were appreciated by our
customers who recognised the challenges
being faced and were reflected in the latest
external and independent customer survey
conducted in Q1 2021 that showed that 90% of
those surveyed were very satisfied with their
agent versus 88% in the same period in 2020.
Staff and self-employed agents
A number of staff were put on furlough but
were all spoken to individually and were
informed that while the Government would
effectively underwrite 80% of their salary, the
Group would make up the shortfall so that
overall, they would receive the same salary as
before. Once we reopened our Everyday
Loans branches in May, for any staff that still
had to use public transport and had no other
means of travel, we arranged private
transport to help minimise the risk of infection
whilst travelling to and from work. In home
credit, we increased the commission payable
to agents for remote collections to help
mitigate the impact of switching away from
our traditional face-to-face model on their
income. Despite the challenges from the
pandemic, our latest staff engagement
surveys show that engagement remains high
and there was an increased response rate of
81% (2019: 71%) from the Everyday Loans
branch network. Whilst some staff were also
made redundant, such processes were
handled sensitively in order to ensure a smooth
exit for those affected. Heather McGregor, as
the Board member responsible for workforce
engagement, attended a number of online
employee forums when a range of topics
including work-life balance, hours of work and
remuneration were all discussed.
Suppliers
The impact of the pandemic on financial
brokers, that represent the lion’s share of our
loan applications in branch-based lending,
was very significant. The sudden cessation of
lending across the sector and significant
reduction in applications from consumers
severely squeezed brokers’ cash flows and as
a Group we sought to mitigate this shock by
offering commercial arrangements to help
them get through a temporary hiatus as the
world adjusted to the new environment. We
received excellent feedback and believe that
our actions have further strengthened our
already strong and long-standing
broker relationships.
Regulators
Throughout the pandemic we have continued
to remain actively engaged with the FCA.
Whilst clear that our interpretation of what
processes were required in guarantor loans
fell short of the regulator’s expectations, a
positive working relationship with the regulator
has helped us to improve our processes and
overall business approach. Our proposed
redress methodology in guarantor loans,
whilst not yet approved by the FCA, aims to
ensure that all eligible customers will receive
their redress in full. In the light of its proposed
methodology, the Group is also conducting an
independent review of its lending processes
and procedures in both of its other divisions,
taking account of recent decisions at the
Financial Ombudsman Service. The FCA first
announced its proposed ‘payment holiday’ or
‘Emergency Payment Freeze’ support scheme
for borrowers affected by COVID-19 on 2 April
2020 that became effective on 9 April 2020.
Whilst the scheme allowed lenders to continue
to accrue interest, where appropriate, NSF
chose to waive all such interest with zero
charges as we believed that this would be in
the best interests of customers and from our
discussions with the regulator that such action
would be well received.
1 Loans at Home tracker research results to March 2021
– PCP Market Research Consultants, April 2021.
Non-Standard Finance plc Annual Report & Accounts 2020 49
How we considered some of our key stakeholders in 2020
Corporate Governance
THROUGHOUT THE YEAR, THE BOARD
HAS REMAINED COMMITTED TO
APPLYING THE HIGHEST STANDARDS
OF CORPORATE GOvERNANCE.
CHARLES GREGSON
CHAIRMAN
Dear Shareholder,
I am pleased to present our 2020 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 69 to 94.
As summarised in my Chairman’s statement on pages 6 to 7,
2020 presented a number of significant challenges for the Group.
Despite these, the Board remains committed to applying the
highest standards of corporate governance. Whilst the Group had
a standard listing on the Main Market of the London Stock
Exchange throughout 2020, the Board continued to comply with
the UK Corporate Governance Code wherever possible (even
though there was no obligation to do so) and has taken steps to
implement the Revised Code published in July 2018 (together, the
‘Code’)1. The Board also took note of the Financial Reporting
Council’s Annual Review of the Code that was published on
1 January 2020.
As explained throughout this Annual Report, the Board is
committed to raising additional equity capital through a
substantial capital raise as soon as practicable and which, if
successful, together with the current cash balances, will mean
that the current constraints on our ability to operate effectively and
execute our business strategy will be removed and the prospects
for the Group significantly improved.
However, material uncertainty exists regarding, inter alia, the
Group’s ability to complete a successful capital raise as planned.
The performance of the Board and its committees are explained
in the following sections of this Annual Report and for the
purposes of this report, are benchmarked against the UK
Corporate Governance Code. If a provision of the Code has not
been met, the details have been highlighted together with an
explanation under the heading: ‘Statement of compliance with the
Code’ on page 53 below.
1 A copy of the Code is available from the Financial Reporting Council’s website:
www.frc.org.uk.
50
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
40 to 49). 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.
Key developments
Without wishing to repeat the contents of my Chairman’s
statement or the Group Chief Executive’s report on pages 15 to 19,
the events over the past 18 months have severely impacted the
Group’s performance and required significant operational change
across many areas of the Group’s business. This prompted
increased levels of oversight and control in order to ensure that,
despite the challenges faced, a robust governance process
remained in place to ensure that the interests of all stakeholders
were appropriately considered in what was, and remains, a
challenging and fast moving environment.
In branch-based lending, the loan book fell by 20% as the
economy slowed and lending volumes reduced. During the initial
lockdown period we adjusted our lending criteria and staff
switched to a home-working model whilst our branches were
temporarily closed to protect the health and safety of our staff and
customers and also to allow additional safety measures to be
installed in each branch. Whilst a number of forbearance tools
are already embedded within our business model, the
introduction of an ‘Emergency Payment Freeze’ for consumers
affected by the pandemic, allowing them to suspend loan
repayments for a period of up to six months, was an additional
forbearance measure that also impacted performance. Since
reopening on 11 May 2020, our 74 branches remained open to
customers, providing much needed access to credit.
Chairman’s introduction C
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Many consumer credit firms, including those owned by the Group, experienced an increase in the number of complaints received during 2020. Many such claims were driven by complaint management companies (‘CMCs’), but also by customers direct. The Group reviews all such claims carefully and aims to respond promptly in accordance with FCA rules. Whilst the Group continues to defend its position vigorously against what has been an increasing number of spurious and/or vexatious claims, largely from CMCs, the Group has also included additional provisions in the year to 31 December 2020 to cover the expected cost of redress for current and future complaints. Underpinning our ability to navigate these developments and sustain the business though what has been an extremely challenging period has been the strong and positive business culture to which, as a Board and senior management team, we have been committed since NSF was first formed. Whilst face-to-face contact became more difficult, we embraced the latest technologies to remain connected with our people and to keep abreast of developments. This certainly helped to maintain high levels of staff engagement in 2020, an outcome that reflected all of the hard work of previous years and was supported by a concerted effort across the Group to ensure staff received regular calls from their managers to discuss any welfare-related or other issues and to ensure they remained firmly connected to the business. Having put in place a new £200m securitisation facility with an initial drawdown of £15m during April 2020, the onset of the pandemic resulted in the Group breaching certain performance triggers on the facility during the first half of 2020 and so the drawn amount was repaid on 26 August 2020, removing the outstanding breach. While the facility remains available for potential future use, current cash balances mean that there is no requirement for further borrowing at the present time. Accepting that the Board is committed to raising additional equity capital, it is pleasing to note that the Group has remained within its financial covenants on each of its other debt facilities since the start of the pandemic.The usual programme of investor relations was somewhat curtailed by the pandemic although the Group maintained contact with investors through online channels and hopes to return to increased direct shareholder contact in 2021.Following the external Board evaluation conducted in 2018 by Lintstock, a specialist governance consultancy and an internally conducted review in 2019, the Company followed the ‘three-year cycle’, with a further internal review in 2020, with a forward looking focus as the Group moves forward from a challenging year. It is anticipated that an external review will be conducted during 2021.2020 saw a number of changes at Board level (see Governance at a glance on page 56), with Nick Teunon departing from the Board on 30 April 2020. Jono Gillespie joined 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, both at Provident Financial plc where he held the position of Consumer Credit Division CFO and more latterly the role of CTO, and then as CFO at Loans at Home, where he was instrumental in implementing the technological transformation over the past few years. Toby Westcott joined the Board as a nominee director on 1 October 2020, galvanising the continued support by Alchemy Opportunities Fund IV L.P., the Group’s largest shareholder. Our home credit business underwent an even greater shift in some of its key operations. Building on the significant investment in technology over the past few years, we accelerated the introduction of a remote lending option for customers and promoted the rapid adoption of existing and new remote payment solutions, including a much-improved customer portal. The resilience of our technology allowed us to continue to operate effectively, with all of the usual management controls in place but with a marked reduction in physical face-to-face contact. This resulted in a significant reduction in lending volume whilst collections remained robust, prompting a decline in the size of the home credit loan book that fell by 32% year-on-year.Of all three divisions, it was the Guarantor Loans Division that was particularly hard hit as its core customer demographic of younger adults was the one that appeared to suffer the greatest economic impact from the pandemic. Having reduced lending significantly in April 2020, we began to rebuild volumes through June and July before being informed by the FCA, following completion of its multi-firm review into the guarantor loans sector, of a need to amend certain processes and procedures and to prepare a redress methodology for any customers that may have suffered harm. As a result, it was decided that lending should be kept to a bare minimum until the process had finally been concluded. Addressing the issues raised by the FCA was a significant workstream throughout the second half of 2020 and into 2021. Whilst discussions with the FCA have not yet concluded and the redress methodology is not yet finalised, an exceptional charge of £15.4m has been made based on the Directors’ best estimate of the expected costs. This figure is broadly in line with the provision made at the time of our half year results. In light of developments, having completed a detailed review of the Group’s Guarantor Loans Division and its prospects, the Board has concluded that shareholder interests will be best served by placing the division into a managed run-off and ultimately closing the business. Whilst hugely disappointing, collecting out the loan book is the only rational conclusion given the combined impact of the pandemic, the FCA review into guarantor loans and the expected increase in costs in order to meet revised FCA requirements that would necessarily impede any potential recovery in profitability in the future.Separately, the Group has commissioned an independent review of both its branch-based lending and home credit businesses. These reviews remain ongoing and include an assessment of whether the issues identified in guarantor loans have any implications for the divisions. These reviews also include an assessment of recent FOS decisions in order to determine whether there exists a subset of customers that may be eligible for redress on the basis of factors which may indicate instances of unaffordable lending. The Directors recognise that, whilst the review work done so far has not identified any systemic issues requiring an increase in provision, there remains a risk that the final outcome of these reviews may result in the identification of customers who may require redress, and the cost of redress for the Group could be materially higher than is currently provided for in the financial statements. The Board and Board Committee structure in place has been, and will continue to ensure rigorous oversight of this process.
Corporate Governance continued
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Toby is a member of the Audit, Risk, Remuneration and Nominations & Governance Committees. Heather McGregor announced her intended departure from the Board in 2020, indicating that she would not stand for re-election at the 2021 AGM having served on the Board since incorporation. I would like to thank Heather for her commitment and service to the Board, often going above and beyond her job description. As set out in the Nominations & Governance Committee report, the Board plans to seek to appoint a further Independent Non-Executive Director during 2021. Having been appointed as ‘Senior Independent Director’ (‘SID’) in 2019, Niall Booker has provided additional support to the Board acting as an additional point of contact for shareholders, where required. Whilst committed to ensuring that colleagues have the opportunity to hold even a small stake in the ultimate parent of the firm where they work, the Board acknowledges that the current share price means that membership of the Group’s sharesave scheme is low and having aimed to address this in 2020, it has not been possible to do so given the other challenges faced. The Group plans to address this matter in 2021 following the completion of a successful capital raise.Plans for 2021In 2021, the Board’s ongoing focus remains ensuring that the Group emerges from the pandemic and completes a successful capital raise so that it can strengthen its balance sheet and is in a position to capitalise on what we believe could be a significant market opportunity. Whilst completing the Capital Raise is the Board’s number one priority, as noted in each of the respective committee reports in this Annual Report, there are a number of specific objectives that each committee plans to achieve in 2021. These include, but are not limited to: the appointment of an independent Non-Executive Director; the appointment of a new external auditor; and the completion of an external Board evaluation.Charles GregsonNon-Executive Chairman30 June 2021 NSF is committed to high standards of corporate governance
Statement of compliance with the Code
During 2020, the Company sought to implement and comply with
the revised UK Corporate Governance Code, 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 2020, 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 4 – The Company did not fully comply with provision 4
of the Code, as the results of the AGM in 2020, whilst published,
did not include an explanation of the actions the Company
proposed to take regarding the vote of more than 20% cast
against the re-election of Charles Gregson as Chairman. The
Company did however, consult with key shareholders at the time.
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 81 to 94. The Board
determines that Charles Gregson would be an independent
Non-Executive Director in the event he had not held Founder
Shares.
Provision 11 – The Company does not comply with provision 11 of
the Code as both Charles Gregson and Toby Westcott are
deemed not to be independent. For the majority of 2020 and prior
to the appointment of Toby Westcott on 1 October 2020, the
Company complied with provision 11 as half the Board (excluding
the Chair) were independent Non-Executive Directors.
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Provision 17 – The Company does not fully comply with provision
17 of the Code as the Nomination & Governance Committee has
50% rather than a majority of independent Non-Executive
Directors. Prior to the appointment of Toby Westcott on 1 October
2020, the Company complied with provision 17 as a majority of the
Committee were independent Non-Executive Directors.
Provision 20 – The Company does not fully comply with provision
20 as open advertising has not generally been used for the
appointment of the Chair and Non-Executive Directors. Given the
specialist nature of the business, appointments have usually been
made through searches or, more latterly in the case of Toby
Westcott, as a result of dialogue with a key shareholder.
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. The financial experience of the Committee was
enhanced during the course of the year with the appointment of
Toby Westcott, who is a chartered accountant, to the Board.
Provision 32 – The Company did not meet provision 32 of the
Code, due to the Chairman of the Board also being a member 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). 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.
Non-Standard Finance plc Annual Report & Accounts 2020 53
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.
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.
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
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:
Independent Non-Executive Director of ED&F
Man (Capital Markets) Limited and Chair of
the Audit, Risk and Compliance Committee.
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.
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.
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 Bank Ltd.
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.
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 (six years).
John van Kuffeler, 72
Group Chief Executive
Appointed 8 July 2014
Committees D º
Jono Gillespie, 48
Group Chief Financial Officer
Appointed 1 April 2020
Committees D
Niall Booker, 62
Senior Independent Non-Executive Director
Appointed 9 May 2017
Committees A º / N / R / RC
Charles Gregson, 73
Non-Executive Chairman
Appointed 10 December 2014
Committees A / N º / R / RC
54
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, a CIMA Advanced
Diploma in Management Accounting 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:
Toby is a Partner at Alchemy, an investor in
debt and equity special situations across
Europe, where he has focused predominantly
on investing in the financial services sector.
He has a degree in Mathematics from the
University of Warwick and is a Chartered
Accountant.
Current external appointments:
Member/Partner of Alchemy Special
Opportunities LLP, and holds various other
positions and directorships relating to
Alchemy and its investments.
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.
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Current external appointments:
Executive Dean of Edinburgh Business School,
the business school of Heriot-Watt University.
Non-Executive Director and member of
the Audit Committee, International Game
Technology PLC. Non-Executive Director and
Chair of the Audit and Risk Committee, Lowell
Financial UK. 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, before
joining 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.
Background and previous appointments:
Toby joined Alchemy in 2008 from
Hawkpoint Partners where he specialised in
mergers and acquisitions in the financial
services sector, advising Alchemy on several
transactions. Prior to that Toby worked in the
corporate finance team at Grant Thornton.
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 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 (just under one year), the
consumer debt purchasing company. Chief
Financial Officer of FTSE International (five
years). Group Finance & Strategy Director of
the Press Association (seven years).
Professor Heather McGregor CBE, 59
Independent Non-Executive Director
Appointed 10 December 2014
Committees A / N / R º / RC º
Toby Westcott, 43
Nominee Non-Executive Director
Appointed 1 October 2020
Committees A / N / R / RC
Sarah Day, 49
Company Secretary
Appointed 27 November 2017
Committees D
Nick Teunon, 55
Chief Financial Officer (until 1 April 2020,
Executive Director 1 April 2020-30 April 2020)
Appointed 8 August 2014 (stepped down 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. With the exception of Heather McGregor, each current Director will offer
themselves for re-election at the next Annual General Meeting taking place at
11.00 am on 30 June 2021.
Key to committees:
Audit Committee: A
Nomination & Governance Committee: N
Risk Committee: RC
Remuneration Committee: R
Disclosure Committee: D
Chair: º
Director profiles can be found on the Group’s
website: http://www.nsfgroupplc.com/
about-us/our-leadership
Non-Standard Finance plc Annual Report & Accounts 2020 55
Corporate governance report
Board skills and experience
Sector
Operational
Financial
Strategy
Risk
Information
technology
People and
general
management
John van Kuffeler
Jono Gillespie
Niall Booker
Charles Gregson
Heather McGregor
Toby Westcott
Board time
Number of Board meetings in 2020
Number of Board meeting in 2019
25
26
‘Site’ visits (in addition to Board meetings) – due to COVID-19, no physical site
visits took place during 2020 following the first national lockdown
announcement on 23 March 2020. However, various meetings and forums
were attended virtually by a number of Directors and these are also included
within the figures below.
(based on those who were Board members for the whole of 2020)
5
visits to Everyday Loans
5
visits to Loans at Home
2
visits to Guarantor Loans
Board composition and diversity (based on those who were Board
members for the whole of 2020 and 2019)
Gender of the Board
Tenure of Directors
Male
Female
3
1
0-3 years
3-6 years
0
4
Board changes in the year
During the course of the year, the Board of Directors continued to develop with
the appointment of Jono Gillespie as CFO on 1 April 2020 and the appointment
of Toby Westcott as a Non-Executive Director on 1 October 2020. Nick Teunon
left the Board on 30 April 2020.
Heather McGregor confirmed her intention not to stand for re-election at the
Group’s AGM on 30 June 2021.
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Governance at a glance
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:
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Board of Directors
Membership at 31 December 2020
See pages 54 and 55
Meetings held in 2020:
25 (of which 11 were scheduled
meetings and 14 related to ad hoc
matters such as the response of the
business to the pandemic).
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.
Matters reserved for the Board
The Board is primarily responsible for:
•
the overall leadership of the Group, setting core values and standards and overseeing the
Group’s business culture;
• 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 including solvency and going
concern;
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
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 69.
Audit Committee
Risk 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.
Remuneration
Committee
Disclosure Committee
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.
The membership of the
Audit Committee and its
report is on page 71.
The membership of the
Risk Committee and its
report is on page 80.
The membership of the
Remuneration Committee
and its report is on
page 81.
The membership of the
Disclosure Committee is the
Chief Executive, the Chief
Financial Officer and the
Company Secretary.
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Leadership
Corporate governance report continued
Activities covered during 2020
During 2020 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 14 meetings, some of which were called at short notice, to
consider, challenge and facilitate the Group’s response to the pandemic, regulatory matters and matters relating to the raising of additional
equity capital. Attendance at scheduled meetings was 100% for all Board members.
A summary of the topics covered during the course of 2020 is set out on page 62.
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 six times to review and approve external announcements). The terms of reference for each committee are available from
the Company’s registered office address and also from 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. Due to the pandemic, the Board
decided to postpone the annual two-day, off-site strategy meeting to review and agree the Group’s three-year business and financial strategy.
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.
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 significant shareholding held by Alchemy Special Opportunities Fund IV L.P. that is a highly experienced investor in financial
services businesses, the Board determined that it was appropriate to appoint Toby Westcott as an additional Non-Executive Director. Toby
Westcott was appointed as a nominee director for Alchemy Special Opportunities Fund IV L.P. on 1 October 2020. Following Toby’s
appointment, the Board no longer complies with Provision 11 of the Code as there is not a majority of independent Non-Executive Directors
(excluding the Chair).
During 2020, Heather McGregor informed the Board of her intention to stand down from the Board at the 2021 AGM. The Nomination &
Governance Committee will seek to appoint an additional Independent Non-Executive Director in light of Heather’s upcoming departure and
hopes to do so before the end of 2021.
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 2021 as well as supporting the Board’s process for succession planning.
Meetings attended/Number of meetings eligible to attend
John van Kuffeler
Nick Teunon (until leaving the Board on
30 April 2020)
Jono Gillespie (from appointment on
1 April 2020)
Niall Booker
Charles Gregson
Heather McGregor
Toby Westcott (from appointment on
1 October 2020)
Board
25/25
7/8
17/17
25/25
25/25
24/25
4/4
Nomination &
Governance
Committee
Audit Committee
Risk Committee
Remuneration
Committee
Disclosure
Committee
6/6
3/3
3/3
2/2
2/2
2/2
1/1
14/14
14/14
14/14
4/4
4/4
4/4
4/4
1/1
7/7
7/7
7/7
2/2
Attendance at scheduled Board meetings was 100%, non-attendance from Nick Teunon and Heather McGregor was as a result of short
notice meetings.
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Independent advice
All Directors have access to advice from professional advisers, as and when required and at the Company’s expense, 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. With the
appointment of Toby Westcott to the Board in October 2020, in order to ensure that no conflicts of interest arise with respect to the
appointment of a nominee director, the Board has adopted specific guidance notes detailing how board matters which may cause a conflict
of interest should be addressed, which may include excluding the nominee director from the meeting for the duration of relevant agenda
items. All Board members declare their interests at the start of each Board meeting and also when agenda items which may give rise to
conflicts are about to be discussed.
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 and balance sheet position on a monthly basis;
•
the receipt of regular reports which provide an assessment of key risks and controls and how effectively they are working;
• annual Board review of the Group’s business strategy, including reviews of the material risks and uncertainties facing the business
(although there was no such review in 2020 due to the pandemic, it is anticipated that this will be reinstated during the second half
of 2021);
•
•
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;
• ensuring there are documented policies and procedures in place; and
•
in the second half of 2020, the Board also enlisted the support of Grant Thornton to facilitate management and monitoring of solvency risk.
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 22 to 26).
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 71 to 79) 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. In assessing the events of 2020, the Board does not
believe that the impact of the pandemic, or the increased number of claims generated by CMCs could have been foreseen and that they
therefore fell outside what the Group might reasonably have been expected to capture as part of its risk management process. However,
each of these factors is now part of our forward-looking risk assessment process and we have also adapted a number of our operating
processes and procedures accordingly.
Further details of the Group’s system of internal control and its relationship to the corporate governance structure are contained in the risk
management section of this report on pages 22 to 26, the Audit Committee report on pages 71 to 79 and the Risk Committee report on
page 80.
Non-Standard Finance plc Annual Report & Accounts 2020 59
Corporate governance report continued
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 seven Directors in 2020, four of whom have
served throughout the financial year (John van Kuffeler, Charles
Gregson, Niall Booker and Heather McGregor), Jono Gillespie joined
the Board on 1 April 2020 and Toby Westcott joined on 1 October
2020. Nick Teunon stood down from the Board on 30 April 2020.
Details of each member of the Board, their respective representation
and a description of the Board’s activities are summarised in the
following table:
Non-Executive
Chairman
Charles Gregson
Two independent
Non-Executive
Directors and One
Nominee Director
Niall Booker (SID)
Heather McGregor
Toby Westcott
(Nominee)
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 across 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
In addition,
the Senior
Independent
Director has
responsibility for:
• 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
• engaging 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
Group Chief
Executive
John van Kuffeler
Executive
Directors
Nick Teunon
(until 30 April 2020)
Jono Gillespie
(from 1 April 2020)
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Description of activities
The roles of Chairman and Group Chief
Executive are fulfilled by separate
individuals. Their roles are set out in
writing and agreed by the Board. It is
considered that no one individual or small
group of individuals have unfettered
powers of decision.
The Board as a whole is collectively
responsible for the long-term success of
the Company.
The Board sets the strategic objectives as
well as the overall strategic direction of the
Company. It also 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.
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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 81 to 94.
The Board determines that Charles Gregson would be an
independent Non-Executive Director in the event that had not
held Founder Shares. The Board also does not consider Toby
Westcott to be independent due to his connection to Alchemy
Special Opportunities Fund IV L.P. that has a shareholding in
the Group of 29.95%.
Non-Standard Finance plc Annual Report & Accounts 2020 61
Corporate governance report continued
Board activities in 2020
1. Strategic
• Review of strategic initiatives
• Consideration of the impact of the pandemic on the customer-
facing operating models of the business as well as staff and
self-employed agents
• Consideration of the process required for a capital reduction in
order to create additional distributable reserves
• Review of the component parts of the Group in the context of
ensuring shareholder value was maximised
• Consideration of strategic options for the Group
• Review of the proposed redress methodology for customers that
may have suffered harm
• Competitor analysis
• Customer redress
2. Financial
• Review and approval of subsidiary and Group budgets and
quarterly forecasts
• Implementation of business balanced scorecards to assist with
ongoing monitoring of business performance
• Review of distributable reserves forecast
• Review and renewal of securitisation facilities, review of covenant
compliance
4. Governance and stakeholder management
• Approval of Matters Reserved for the Board and Board Committee
Terms of Reference
• Approval of division of responsibilities for Chairman and Group CEO
• Approval of Accountabilities, Delegations & Mandates Register
• Approval of stakeholder management strategy and consideration
of stakeholders in decision-making
• Review of Corporate Governance Framework evaluation results
• Review of Board evaluation results
• Consideration of Board composition and succession planning
• Closure of the ELL LTIP scheme
• Regulatory updates
• Liaison with regulator (including trading performance, pandemic-
related updates and proposed redress methodology in guarantor
loans)
• Stakeholder engagement including updates on investor views
5. People and culture
• Appointment of Jono Gillespie and Toby Westcott to the Board
• Resignation of Nick Teunon from the Board
• Remuneration decisions relating to Non-Executive Directors
• Approval of Executive Director and senior management non-
financial bonus targets
• Consideration of the Group’s capital structure and the process
required to raise additional equity, review of solvency and going
concern in conjunction with Grant Thornton
• Approval of full-year and half-year results
• Oversight of corporate culture throughout the Group, particularly
given the impact of the pandemic and the transition to remote
working
• Consideration of the impact of the pandemic on the workforce, with
particular reference to mental well-being
• Review of senior management composition across the Group
• Consideration of replacement for Heather McGregor
3. Internal controls and risk management
• Approval of Group Risk Appetites and Risk Management Framework
• Monitoring and oversight of risks posed by the pandemic
• Approval of corporate policies
• Annual review of information security
• Oversight of health and safety
• Review of Money Laundering Reporting Officer reports
• Director & Officer Insurance renewal
• Oversight of business continuity arrangements and wind down
plans
• Oversight of the requisite processes for the identification and
treatment of vulnerable customers
• Oversight of ‘fit and proper’ assessment criteria for Senior
Management Functions and certified personnel in accordance
with SMCR
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Matters for 2021
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
Develop a process to create distributable reserves
Engage in a process to raise additional capital
Review of the financial performance of the Group
Review of management performance and divisional 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 the Board’s 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
Review of final redress methodology
Non-Standard Finance plc Annual Report & Accounts 2020 63
Corporate governance report continued
Our purpose of helping UK consumers to meet their financial needs is driven by the firm belief that everyone should have access to credit they
can afford. We have 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 great outcomes for our customers as well as broader benefits
for our other key stakeholders (see ‘Business model’ on page 14 and ‘Stakeholder management and our commitment to Section 172’ on pages
40 to 49).
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 Group’s overall governance framework with each business being responsible for the development of a
strong and positive culture, drawing upon some key values and behaviours that are common across the Group and that have been identified
as being key to our long-term success:
Integrity
• Doing the right thing
•
• Shared purpose delivered through teamwork
• Clear communication
• Entrepreneurial leadership
Whilst each division describes these behaviours slightly differently, each business has developed its own ‘cultural thermometer’ that includes a
number of metrics assessing a broad range of factors including good customer outcomes as well as satisfaction and engagement levels
among both employees and self-employed agents. Whilst each of these measures feeds into a good customer outcomes dashboard, we
recognise that ‘measuring culture’ is an inexact science and so we are careful not to focus on each metric alone but rather view each one in
the context of the whole.
The assessment of the governance framework (including culture) is then reported to the respective subsidiary boards with oversight of the
results at a Group level.
Engagement outside of the boardroom
The Board has long 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, where possible, customers to hear about the hopes and challenges that they face on a daily
basis. We believe such insight means that the Board will be better placed to infer a deeper understanding of the dynamics, challenges and
opportunities for our business than simply reviewing management reports alone. During 2020, face-to-face meetings with staff and customers
was more challenging given the restrictions on travel and personal contact. However, a limited number of visits did take place, where
restrictions allowed and activities such as employee forums also took place through extensive use of digital technology.
Whilst Board meetings would ordinarily take place at the Group’s head office in London, in recent years 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 56). Unfortunately, this was not possible in 2020 and all plc Board meetings from
March 2020 onwards were held via video conferencing. It is the intention of the Board to recommence holding some Board meetings at
subsidiary venues as soon as it is safe and appropriate to do so.
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 we continue to track a
large number of performance measures, as a Group we have also identified a subset of these (including complaints data) that are captured
at divisional level to form a single, good customer outcomes (‘GCO’) dashboard, thereby enabling executive management and the Board as a
whole to identify potential issues before they become significant. During 2020, the GCO dashboard became one of five key components within
an overall Groupwide Balanced Scorecard, providing the Board with a clear overview of the performance of each of the subsidiary
operations as well as at plc level. The balanced scorecard includes an assessment of financial performance, risk management, good
customer outcomes, people and culture and strategic developments.
Having been notified during the summer of 2020 that the FCA had some concerns regarding certain practices and procedures in the Group’s
Guarantor Loans Division (‘GLD’), this prompted a series of operational and policy changes within GLD as well as a number of improvements
to the monitoring process outlined above. The 2021 metrics now include progress regarding the GLD redress programme as well as monitoring
of complaints activity.
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Stakeholder engagement
The Board seeks and 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
How the Board is kept informed
Monitoring of good customer outcomes via a good customer outcomes dashboard gives the
Board a broad range of indicators to help enable and focus discussion where and when
necessary.
Customer listening groups and independent online feedback also form part of the operational
updates provided regularly from operational subsidiary CEOs to the Board.
Employees and self-employed agents
Employee forums ensure that ideas and views are heard with a direct line of communication to
the Board.
Regulators
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 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 relevant
details of 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.
Non-Standard Finance plc Annual Report & Accounts 2020 65
Corporate governance report continued
We recognise that our workforce is central to us
being able to drive our business model (see page
14). Members of the Board monitor and review
the results of annual staff and self-employed
agent surveys closely and also receive direct
feedback from employee forums (see below).
When possible (although COVID-related restrictions during 2020
made this more difficult), 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 customers on a daily basis. HR Directors
within each operation of the Group 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 2020, Heather McGregor as Non-Executive Director with
responsibility for workforce engagement (Code provision 5) attended
Employee Forums in each of the operational subsidiaries (which were
held online due to the pandemic). Heather was therefore abIe to
hear from employees directly and this was then fed back into Board
discussions, which this year was particularly focused on assessing
how each business was dealing with the pandemic.
1. Employee and self-employed agent engagement surveys
Annual 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 response rate and overall scores.
Despite the enormous challenges presented by the pandemic during
2020, the key results from the latest surveys show that colleagues
have continued to 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’. 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. A summary is then provided
to the Board.
95%
of our people feel encouraged to ‘do the right thing’
2. Employee forums
Due to the pandemic, employee forums moved online in 2020 and
have played an important role in maintaining contact between
management and staff, but also between staff, many of whom have
worked remotely, sometimes for extended periods. The shift online
enabled Heather McGregor to attend more forums than previously
planned. Topics covered included culture, financial performance,
business improvements, communications and consultation, with
significant focus on each business’ response to the pandemic.
66
As Heather McGregor is stepping down from the Board in 2021, it is
intended that Sarah Day, who will take on responsibility for workforce
engagement (Code Provision 5) will attend at least one forum for
each division over a rolling 12-month period.
3. Ad hoc events
To complement the feedback from surveys and forums, when
circumstances allow, 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. This helps to ensure a two-way flow
of communication between the parent and its subsidiaries and
enhances the level of understanding between the two.
4. Site visits
Prior to the pandemic, members of the Board 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. During
the pandemic, contact has been maintained via video calls with
senior management as well as online attendance at employee
forums as noted above.
12
site visits were conducted by Board members during 2020
(in addition to Board meetings).
5. Other initiatives
Through the use of an intranet-based recognition scheme, senior
managers are 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 remains a key area of focus,
particularly in the context of a global pandemic. In addition to
regular contact with staff by phone and online, we continued 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 the
presence of a number of trained mental health first aiders available
to support staff during the pandemic. These initiatives have proved
to be invaluable in providing support for staff either working from
home or on furlough.
During the course of the pandemic, each of the Group’s businesses
sought to support communities in tackling the pandemic where
possible; for example at Loans at Home, the Employee Forum
decided to award the cash from the monthly recognition programme
to support local charities including the NHS.
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.
Workforce engagement
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NSF operates a rolling approach to evaluation with an external review being conducted every third year. In 2020, following the three-year
cycle, the Board evaluation was undertaken by the Group’s in-house Company Secretarial team.
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 2020 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 2020 included operational resilience, accounting updates and ESG matters.
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 regular basis covering
macro-economic factors which supplement the horizon scanning carried out by the Directors themselves.
Board evaluation results
Key findings in 2019 and
objectives for 2020
Actions taken
during 2020
Key findings in 2020
Enhancement of
management information
at Board level and
increased focused
on developing
communication channels
between Board members
and subsidiaries.
Introduction of business
balanced scorecards
populated by CEOs from
the divisions, and now
also reported at a
consolidated Group level.
The Group CEO chairs all
three divisional boards
and NSF executives sit on
each board, which
facilitates greater
communication
throughout the Group.
Carry out more ‘deep
dives’ into key areas of
focus where decisions
need to be made on
challenging topics that
require great
consideration.
Continued focus on
succession planning and
talent development.
Ongoing focus on Director
reviews, induction and
training.
Further development of
monitoring and reporting
on culture within the
Group.
With the focus having
been on developing
internal talent, most
previously identified
‘successors’ are now in
new roles meaning that
whilst the current team
could address immediate
role requirements, the
focus of the plc was
turned to the longer term
and consideration of
external recruitment
possibilities.
Continued focus on
increased engagement
between the Board and
colleagues within the
operational businesses.
Continued focus on
succession planning and
talent development in the
subsidiaries.
Training during the year
covered topics such as
directors’ duties refresher
training provided by Grant
Thornton. Operational
Resilience, accounting
updates and ESG
reporting.
Reporting on culture as
well as customer
experience has been
enhanced and is
presented to the
Nomination & Governance
Committee on a regular
basis.
Continue to engage with,
and gain shareholder
views in respect of the
design stage of the
Remuneration Policy and
relevant incentive
schemes.
Continued work on the
Board’s awareness of the
organisation’s information
needs, to include more
in-depth reporting of
committee activity to the
Board, and greater
inclusion of remedial
action in reporting, with
clearer governance of
project/programme post
evaluation at Board level.
Non-Standard Finance plc Annual Report & Accounts 2020 67
Corporate governance report continued
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.
The Chairman is responsible for ensuring that appropriate channels
of communication are established between the Executive Directors
and shareholders, and ensures that the views of shareholders are
made known to the Board.
The Group Chief Executive and Chief Financial Officer discuss the
Company’s governance and strategy with major shareholders, and
listen to their views in order to help develop a balanced
understanding of any issues and/or concerns.
The Board aims to foster close relations with its investors and sell-side
analysts through a regular and comprehensive programme of
investor relations activity. All shareholders have the opportunity to
convey their views via the Director of Investor Relations and
Communications and/or can make enquiries by email or telephone.
At various points throughout the year, the Group Chief Executive,
Chief Financial Officer and Director of Investor Relations and
Communications met with shareholders, where possible in person or
online, on request, at the Group’s annual Investor Day or via
organised investor roadshows supported by the Group’s brokers.
In October 2020, the Board appointed Toby Westcott as a Nominee
Director, with the intention of maintaining a strong dialogue with
Alchemy, the Group’s largest shareholder.
Annual General Meeting
Whilst shareholders are normally 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, uncertainty over the status of government restrictions
relating to the pandemic has meant that for the 2021 AGM, the Board
is advising shareholders not to attend the AGM this year and to
submit their votes in advance by proxy card so as to minimise any
health and safety risks by reducing the number of attendees
in person.
The 2021 AGM of the Company is scheduled to be held at
11.00 am on 30 June 2021 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 impact of the pandemic is continuing to affect many areas of
the Group’s business and operations, 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 Group.
Given the timescales, it has therefore 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 at 2.00 pm on 16 August 2021 and the notice of that meeting
will be 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
30 June 2021
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Nomination & Governance Committee report
for the year ended 31 December 2020
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The Committee met on two occasions
during the year ended 31 December 2020.
Membership and attendance
Director
Charles Gregson (Chairman)
Niall Booker
Heather McGregor
Toby Westcott (from 1 October 2020)
Attendance and
total number of
meetings that the
Director was
entitled to attend
2/2
2/2
2/2
1/1
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. The Committee’s remit also
includes more general governance matters such as succession
planning, cultural matters, customer experience and the continued
oversight of the Senior Managers and Certification Regime (‘SMCR’).
With the pandemic, the Committee provided an invaluable forum for
updates regarding staff welfare and mental wellbeing during what
has been (and continues to be) a difficult time for many members of
the Group’s workforce.
Membership
Aligning with the provisions of the UK Corporate Governance Code
(the ‘Code’), until October 2020, the Committee comprised 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, Heather McGregor and
Toby Westcott, each of whose biographical details are set out on
pages 54 and 55. With the addition of Toby Westcott to the Board
(and each committee) in October 2020, the Committee ceased to
comprise of a majority of independent Non-Executive Directors and
therefore ceased to comply with The Code (Provision 11). However,
the Committee believes that Toby’s addition to the Committee has
broadened its experience, engendering a more complete discussion
around matters raised. 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 & Governance
Committee meetings.
Role and responsibilities
During 2020, 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;
•
reviewing and considering the performance and effectiveness of
the Committee through the results of the Board evaluation
process;
• supporting the Board in ensuring that the Group conducts and
develops its business responsibly and consistently in accordance
with the Company’s purpose, customer objectives, values and
corporate culture;
•
•
reviewing whether the culture of the organisation is evolving
appropriately to meet the changing expectations of key
stakeholders; and
identifying and highlighting areas where more effort may be
required and/or changes to decision-making processes.
The latest 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 2020:
•
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;
• oversight of the cultural development in each operational
subsidiary through regular updates from HR Directors;
• oversight of customer experience through regular updates from
subsidiary CEOs;
• oversight of the provisions in place with regard to vulnerable
customers specifically; and
• oversight of the roll out of SMCR processes in place around the
Group and also consultation regarding the appointment of
individuals with Senior Management Function (‘SMF')
responsibilities in operational subsidiaries.
Non-Standard Finance plc Annual Report & Accounts 2020 69
Nomination & Governance Committee report continued
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,
drawing on the unique experience gained from individuals working
in the non-standard financial services sector. This philosophy
continued in 2020 and into 2021 with the appointment of a new CFO
in branch-based lending who joined from a major competitor in
November 2020 and the promotion of Jon Wiggins, former Managing
Director of the branch network, to become CEO of branch-based
lending in March 2021. 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 and the wider sector. The promotion of Jono
Gillespie to the role of Group CFO in 2020, having joined Loans at
Home as CFO in 2016, also illustrates our commitment to developing
talent within the Group. Jono brings significant knowledge and
expertise of the non-standard finance sector from each of his roles
over the last 22 years prior to joining the NSF Group whilst at
Provident Financial plc.
The Group is also focused on ensuring that an appropriate level of
diversity, including gender diversity, exists throughout the business.
While the Board endorses the aspirations of the Davies Review on
Women on Boards and remains keen to increase diversity, the Board
is not committing to any specific targets. The Group Board currently
has one female Director (although Heather McGregor will be stepping
down from the Board at the 2021 AGM) and a female Company
Secretary and the Committee will give due consideration to Board
balance and diversity when recommending new appointments to the
Board. While our subsidiary Boards are predominantly male, there
are two female Board members and two female Company
Secretaries that help to ensure a variety of viewpoints are considered,
supporting robust debate and challenge. We continue to seek to
increase the level of diversity at subsidiary Board level, to ensure that
there is diverse representation 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
2020 included Directors’ duties and responsibilities, an update
regarding Operational Resilience, a general update regarding
corporate reporting (including S172 statements) and a review of the
impact of COVID-19 on financial reporting.
Board evaluation and individual performance review
It is pleasing to report that all matters identified in the 2019 external
Board evaluation have been addressed. In 2020, the evaluation was
facilitated in-house and was based upon the approach from both
internal and external reviews in previous years.
70
The results of the 2020 evaluation were presented to the Board in
early 2021. The results 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 such as the enhancement of
Board Management Information, including more ‘deep dives’ into key
areas; continued activity re talent identification and succession
planning and increased shareholder dialogue regarding
remuneration and incentives.
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 2020 the Committee continued to review 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 April 2020, as previously announced, Nick Teunon left the Board
and was replaced as CFO on 1 April 2020 by Jono Gillespie. Following
an extensive dialogue, the Company entered into a ‘Services
Agreement’ with Alchemy Special Opportunities LLP. to provide the
services of a nominee Director to the Board. Toby Westcott was
appointed to the Board in this role on 1 October 2020. At that point
the Board then comprised two Executive Directors and four Non-
Executive Directors.
The composition and membership of the Board remains under regular
review by the Nomination Committee. With the upcoming departure of
Heather McGregor from the Board, the Nomination Committee has
determined that the chairmanship of the Remuneration Committee will
be taken on by Toby Westcott and the chairmanship of the Risk
Committee will be taken on by me, Charles Gregson. The Board has
determined that the valuable dialogue and insight gained through
Heather’s attendance at Employee Forums should continue and that
following Heather’s departure the role of employee representation at
the Board along with role of Group Whistleblowing Champion will be
undertaken by Sarah Day.
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 2021
The main areas of focus for the Committee in 2021 include: an
ongoing evaluation of Board composition; succession planning
(including the appointment of a new Non-Executive Director);
a review of the Committee’s terms of reference; an external Board
performance evaluation; a review of Board effectiveness as well as
considering the prevailing culture of the business, the customer
journey of each business and how environmental factors might affect
the Group and its stakeholders. The Board will also consider the
potential negative impact of the pandemic upon the wellbeing of
employees.
Charles Gregson
Chair of the Nomination & Governance Committee
30 June 2021
Audit Committee report
for the year ended 31 December 2020
14
The Committee met on 14 occasions
during the year ended 31 December 2020.
Membership and attendance
Director
Niall Booker (Chairman)
Charles Gregson
Heather McGregor
Toby Westcott
Attendance and
total number of
meetings that the
Director was
entitled to attend
14/14
14/14
14/14
4/4
Membership
The Audit Committee (the ‘Committee’) comprises four Non-Executive
Directors (since October 2020), 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 four 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, Heather McGregor and Toby Westcott each of whose
biographical details are set out on pages 54 and 55.
Meetings and attendance
The Committee met on 14 occasions during the year ended
31 December 2020, nine of which were scheduled meetings and five
of which were 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 the Chief Financial Officer, the
Company Secretary and the Group Chief Risk Officer. 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. As a result of the challenges facing the Group as well as
the COVID-19 pandemic and the extended reporting timetable for
the 2019 year end recommended by the Government, a number of
additional Audit Committee meetings were convened, sometimes at
short notice. Attendance at scheduled meetings was 100% for
Committee members.
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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.
Non-Standard Finance plc Annual Report & Accounts 2020 71
Audit Committee report continued
Significant issues and areas of judgement considered by
the Committee
Throughout 2020 the Committee determined that the following
aspects of the financial statements were of significant interest:
1. Impairment of goodwill
Following the previous write down of goodwill at the end of 2019, a
further goodwill impairment assessment as at 30 June 2020 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, with the Committee considering and challenging the
appropriateness of management’s key assumptions. It was identified
at the time of the 2019 full year results, that there was a potential risk
of a further write down in the future. During the year the further
decline in the valuations of non-standard lenders, the uncertain
regulatory environment and the impact of COVID-19 on the
profitability of each of the Group’s divisions meant that at the 2020
half year review the Group wrote off all the remaining goodwill
assets on its balance sheet and this resulted in an exceptional
non-cash charge of £75.5m.
Further detail is set out in notes 2 and 14 to the financial statements.
2. 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. Further detail
regarding the assumptions used in the impairment judgements is set
out in note 2 to the financial statements.
2.1. IFRS 9 – macroeconomic scenarios and weighting
The Committee has 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
ongoing external uncertainty caused by both the COVID-19
pandemic and Brexit, which had, in the Committee’s opinion,
resulted in a less stable economic environment. As a result, having
increased the risk weighting of a stressed scenario at the time of the
2019 full year results, the Committee agreed to further increase the
risk weighting of a stressed scenario from a 30% downside and 15%
severe downside stress to a 20% downside and 30% severe
downside stressed weighting for the half year ended 30 June 2020.
As part of the year end macro-economic review of the branch-based
lending and guarantor loans divisions, the Group worsened the
underlying macro-economic variables used in its forecasts as well as
increased the downside weighting in order to account for the impact
of recent economic changes arising from the effects of COVID-19.
The Committee reviewed additional analyses which indicated that,
based on historical evidence, management had determined the
effect of traditional macroeconomic downside indicators to be
minimal and therefore, there would need to be a significant shift in
the weightings to have a material impact on the probability of
default for customers. As such, in addition to a change in
macroeconomic weightings, in order to account for the specific
forward looking macro-economic impact of COVID-19 on provisions,
the Group has additionally included a COVID-19 overlay to reflect
the increased risks associated with customers who have taken and/
72
or come off payment holidays. In light of above, the Committee
considered whether the weightings utilised at the half year remained
appropriate for the year end. It was concluded that following
additional challenge and scrutiny it was appropriate to amend the
macroeconomic weightings to 50% base, 40% downside and 10%
positive as at 31 December 2020.
There was no increase in provisioning in home credit due to the
change in risk weighting because it also has a history of very low,
or zero, correlation between macroeconomic factors and the
probability of default. This approach remains valid notwithstanding
the impact of COVID-19 and is unchanged from previous years for
home credit.
2.2. IFRS 9 – COVID-19 impact on provisioning
The COVID-19 pandemic presented unique challenges to
provisioning in 2020. During the year end review of provisions, it was
felt that the system used within the branch-based lending and
guarantor loans divisions to determine expected credit losses (‘ECL’)
was relatively inflexible in adapting to the behaviours of customers in
a COVID-19 impacted environment. As a result, a refinement to the
approach was adopted in the current year whereby the
determination of ECL was influenced by the PDs as derived from the
model, future cash flows based upon observed historical data,
updated as management considered appropriate to reflect current
and future conditions, as well as the consideration of the
performance of previously rescheduled loans. The Committee
recognises that judgement is applied to the determination of
provisions which includes whether past performance provides a
reasonable estimate of future losses. In the case of 2020, even more
reliance has been placed on judgement than previously given past
customer performance may not be indicative of future performance
as a result of the pandemic.
With regard to the impact of the implementation of the Government’s
‘Emergency Payment Freeze’ scheme (‘EPF’), the Committee
considered the assumptions made by management with regard to
the likelihood of the impact of such forbearance on a customer’s
ability to repay being temporary in nature in order to form a
judgement as to whether the COVID-19 overlay being applied by
management as part of the overall provisioning was appropriate.
The result of this was an increase in the level of overall provisioning
for the loan books in the branch-based lending and guarantor loans
businesses at year end, where the impact of EPFs for COVID-19
affected customers were not all assumed to be temporary. Due to
the short-term nature of home credit loans, and the return to regular
payment patterns for the vast majority of active customers, the
impact of EPFs on home credit customers at year end was immaterial
and therefore no overlays were made as at 31 December 2020.
3. Repayment of debt facility
In August 2020, following discussion at both the Audit Committee
and the Board, the Group determined that in the current economic
environment it was appropriate to repay the initial £15m tranche
drawn down on the Group’s securitisation facility.
The Committee considered that whilst a temporary waiver had been
agreed to cure the breach of certain portfolio performance triggers,
that the ongoing uncertainty resulting from the COVID-19 pandemic
meant that continued access to the facility was highly uncertain.
4. Capitalisation of fees on the securitisation facility
Over the course of the year, the Committee considered the
appropriate accounting treatment for the c.£6m fees associated with
the set-up of the Group’s securitisation facility. When the initial
tranche of the facility was repaid, the appropriateness of retaining
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the set-up fees as a capitalised asset on the Group’s balance sheet
was considered and it was determined that whilst there was a
possibility of accessing the facility in the future, that the fees should
remain on the balance sheet as the facility was ‘live’.
Towards the end of the year, the Committee revisited the subject and
determined that whilst it remained possible that the facility could be
accessed in the future, ‘control’ of the facility did not lie with
management and the facility therefore no longer met the definition
of an asset. As a result, it was considered appropriate to write-off the
remaining capitalised fees. This charge forms part of the exceptional
costs detailed within note 7 to the financial statements.
5. Going concern basis of preparing the financial statements
During the year, the Committee assessed the forecast levels of net
debt, headroom on existing borrowing facilities and compliance with
debt covenants. As part of its going concern assessment, the
Committee reviewed both the Group’s access to liquidity and its
future balance sheet solvency for the next 12 months. For liquidity, the
Group produced two scenarios: (i) the more likely (or ‘base case’)
scenario which includes a substantial equity injection in the second
half of 2021 in order to mitigate the risk of and/or cure covenant
breaches; and (ii) a downside scenario which applies stresses in
relation to the key risks identified in the base case and does not
include an equity raise. The Group concluded that a material
uncertainty continues to exist 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 not entirely within the
Group’s control including the successful execution of a capital raise,
current and future impacts of COVID-19 and the impact of potential
levels of redress across the Group as well as the outcome of the
independent reviews being performed at the branch-based lending
and home credit divisions.
Under the base case, additional equity funds in the second half of
2021 mean that the Group does not breach its covenants in the next 12
months and therefore would not require covenant waivers from its
lenders in order to remain viable. The base case assumes no breach
in covenant as at 30 June 2021 as on the basis of current forecasts the
Group does not expect to do so. However, the covenant headroom
remains tight and there remains a risk, due to unforeseen and as yet
unaccounted for matters, that the Group will breach its financial
covenants as at 30 June 2021. If this were to happen, then the Group
would maintain its strategy as described under the base case as
management would have time to cure this breach. However, this
would result in a requirement to either accelerate the capital raise or
request a temporary waiver from lenders, neither of which have been
considered in the base case. Therefore, if the Group finds itself in such
a scenario, whilst the Directors remain confident of the ability to raise
capital, they note the risks associated with executing on the base
case would be increased and consequently the likelihood of the
Group ending up in the downside scenario would also be increased.
Under the downside scenario, which assumes no additional equity in
2021, the Group would be expected to breach certain covenants
during the next 12 months and would therefore not be able to access
further funding over the period of breach. It is also therefore
assumed that the Group would require waivers from its lenders in
order to remain viable. The waivers required under this scenario are
beyond the range discussed in previous negotiations with lenders
and therefore, if the expected breach under this scenario occurs and
if waivers are not forthcoming, the Group may fall under the control
of its lenders and there is a possibility of the Group going into
insolvency.
The Committee additionally ran a liquidity reverse stress test on the
base case to identify the level that expected collections would have
to fall by so as to cause the Group to deplete all cash reserves.
This showed that, assuming no changes to lending levels and
operating expenses, collections would be required to fall by over
23% from current expected levels in the base case for the Group to
then be unable to fund operating expenses and interest payments
beyond the next 12 months. Based on evidence to date, such a
reduction in collections, with no mitigating actions, was thought by
the Committee to be an unlikely event, though the Committee also
recognised that access to such cash generated by the collections is
ring fenced by the lenders and therefore in the event of a breach of
covenants the ring fence is triggered and the cash would not to be
available to the Group or Company.
With regards to the balance sheet solvency of the Group, the
Committee noted that under the base case, whilst in a net liability
position as at 31 December 2020, the Group will move forwards in a
net asset position, however this is dependent on additional equity
proceeds being received. Under the downside scenario, the Group
would remain in a net liability position.
On the basis of the above analysis, the Directors note that a material
uncertainty exists regarding the successful execution of a capital
raise, current and future impacts of COVID-19 and the impact of
potential levels of redress and claims across the Group. The range of
assumptions and the likelihood of them all proving correct creates
material uncertainty on liquidity and solvency under both the base
case and downside scenarios.
In making their assessment, the Directors took account of the Group’s
current financial and operational positions, the status of
conversations with the regulator and advisors, as well as recent
trading activity and in particular, recent collections activity. They
noted the proposed equity raise to support the Group and in
particular the continued interest of the Group’s major shareholder
Alchemy in supporting a capital raise subject to the outcome of the
Group’s engagement with its lenders, Alchemy’s analysis of the FCA
and Group’s regulatory reviews, and greater levels of certainty
around redress and claims. In addition, they noted, contingent on a
successful capital raise having been completed, the informal support
of a proposed extension to the term of the Group’s existing facilities
by its lenders. The Directors also note the existence of the
securitisation facility, however they noted that this is currently
suspended and the ability to use this facility remains outside of the
Group’s control as it is subject to the consent of the lenders and the
satisfaction of standard covenants for a facility of this type. The
Directors recognise there exists a risk around covenant compliance
as at 30 June 2021 due to matters unforeseen in its current forecasts
and that should a breach eventuate, it would result in a requirement
to either accelerate the capital raise or request a temporary waiver
from the lenders.
The Directors acknowledge the considerable challenges presented
over the last year and now facing the Group and the Company and
therefore the material uncertainty which may cast significant doubt
on the ability of both the Group and the Company to continue to
adopt the going concern basis of accounting. However, despite
these challenges, it is the Directors’ reasonable expectation that the
Group and Company can and will raise sufficient equity and have
sufficient liquidity to continue to operate and meet its liabilities as
they fall due for the next 12 months and therefore it has adopted the
going concern basis of accounting.
The assumption of shareholder support for additional equity, lender
support for the extension of existing financing facilities, and the
satisfactory conclusion of regulatory and redress matters within or
close to the assumptions made in the base case, forms a significant
judgement of the Directors in the context of approving the Group’s
going concern status.
Non-Standard Finance plc Annual Report & Accounts 2020 73
Audit Committee report continued
The Directors will continue to monitor the Group and Company’s
risk management, response to claims and the redress programme,
access to liquidity, balance sheet solvency and internal
control systems.
The same conclusion has been made in relation to the statement on
longer-term viability as discussed on pages 78 and 79 of this report.
6. GLD Redress
The Group announced on 3 August 2020 that, following its multi-firm
review of the guarantor loans sector, the FCA had raised some
concerns regarding certain processes and procedures at the Group’s
Guarantor Loans Division and required that a programme of redress
be put in place for those customers deemed to have suffered harm
as a result.
Since that date, the Committee has undertaken an ongoing role to
review and consider the assumptions adopted by management in
determining the detailed redress methodology.
For the year ended 31 December 2020, the Group has recognised a
provision for customer redress of £15.4m comprising the sum of all
redress due to customers, which including penalty interest (‘gross
redress amount’) of £16.7m, and cost of implementation of £1.0m,
offset by existing impairment provisions of £2.3m, results in a net
amount of £15.4m. This represent management’s best estimate of the
costs of the redress programme as at 31 December 2020. However,
as the amount of redress payable increases over time due to the
penalty interest element, the full and final costs will increase. The
current best estimate of this cost as at 30 June 2021 is c.£1m higher
than as at 31 December 2020.
As at the date of signing the financial statements, the Group is
working closely with the FCA to reach a conclusion regarding the
redress methodology. The FCA has raised questions around the
Group’s assessment of whether or not the customer has suffered
harm (in instances where we have concluded that the affordability
assessment at the time of underwriting was not appropriate). Under
the Group’s proposed methodology there are a range of factors
which need to be met in order to conclude that a customer has
suffered either internal harm (problems paying the loan in question),
or external harm (problems external to the loan in question). The
current methodology requires multiple indicators to be present to
trigger redress, however, the Committee notes that should one of
these factors in isolation be taken as a definition of harm, then the
redress provision could be c.£10m higher than that currently provided
for in the financial statements. Furthermore until such time as the
redress approach has been agreed with the FCA, there remains
uncertainty around this estimate and therefore the ultimate cost
could be higher than this £10m sensitivity indicates. The ultimate
redress amount will also be subject to a manual case-by-case
review of customers who have incomplete electronic records that
may be affected. This could result in the ultimate payout being
higher than estimated under the currently proposed methodology.
7. Complaints provisions
As has been the case for a number of financial services firms over the
course of the year, the Group has experienced an increase in the
number of complaints received, primarily from Claims Management
Companies (‘CMCs’) and also from customers. Following discussion
at both the Audit Committee and the Board, the Group has
recognised an additional provision in relation to potential outflows to
customers related to past non-compliance with regulations relating
to affordability assessments. Judgement is applied to determine the
quantum of such provisions, including making assumptions
regarding the extent to which the complaints already received may
be upheld, average redress payments and related administrative
74
costs. As part of their assessment, the Committee also considered the
current status of the two independent reviews commissioned by the
Group in April 2021 of the lending and complaints handling activities
of the branch-based lending and home credit divisions. These
reviews remain ongoing and include an assessment of whether the
issues identified in guarantor loans have any implications for the
other divisions. The reviews also include an assessment of recent FOS
decisions in order to determine whether there exists a subset of
customers that may be eligible for redress on the basis of factors
which may indicate instances of unaffordable lending. As at the date
of these financial statements, the Committee recognise that whilst
the review work done so far has not identified any systemic issues
requiring an increase in provision, there remains a risk that the final
outcome of these reviews may result in the identification of customers
who may require redress, and the cost of redress for the Group could
be materially higher than is currently provided for in the financial
statements.
8. Review of the 2020 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, Everyday Loans and the
Guarantor Loans Division;
•
review of customer receivables valuation and revenue recognition
methodology including Effective Interest Rates (‘EIRs’);
•
review of half-year results;
• consultation with the external auditor regarding the approach
being taken regarding the announcement of unaudited interim
results;
•
review of the half-year results announcement; and
• discussion with the external auditor without any Executive Director
or employee being present.
9. Review of the Annual Report and 2020 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 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 2020 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 audited results for the year ended 31 December
2020; and
•
reviewed the statement on internal controls.
Further details on the role of internal audit are set out below.
10. Internal audit function
The internal audit function, which is now provided on a co-source
basis with an internally appointed Head of Internal Audit supported,
where necessary, 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.
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. The only non-audit services provided to the
Group in 2020 were for the half-year review and these meet the
Financial Reporting Council’s (‘FRC’) definition of audit related
services. These costs were incurred prior to the decision to publish
unaudited interim results.
Internal audit reviews conducted during the year included:
• updated reviews of lending and collections processes;
During 2020 the level of non-audit fees amounted to £0.22m
(2019: £1.8m).
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•
•
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.
11. 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 5 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 5 to the financial statements.
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. Having been the external auditor to the Group since 2014,
Deloitte notified the Company of their intent to stand down as
external auditor following the conclusion of the 2020 full year audit.
The Committee has completed a tender process to replace Deloitte
and the Board will propose a resolution to be voted on at the
forthcoming general meeting to be held on 16 August 2021 to appoint
PKF Littlejohn LLP (‘PKF’) as the Group’s new external auditor. PKF is a
global network of accountancy firms. The network’s 220 member
firms operate under the PKF brand in 150 countries across five regions
and encompasses over 20,000 professionals.
The fees paid to the external auditor are set out in note 5 to the
financial statements. The fees for non-audit work carried out by the
auditor in 2020 represent 22% (2019: 313%) 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.
Internal audit
During 2020, the Committee adopted a co-source internal audit
model, with the appointment of an in-house Head of Internal Audit
ensuring the development of in-depth knowledge within the third
line, supported by externally sourced specialist personnel where
necessary. KPMG, one of the UK’s leading accounting firms,
continued to provide the external resource to the Group to facilitate
the majority of the reviews undertaken during the course of the year
as the new model bedded in.
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.
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.
Non-Standard Finance plc Annual Report & Accounts 2020 75
Audit Committee report continued
12. 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 assessments were plausible
and the minimum three-year time period used was appropriate.
However as noted in the Viability Statement itself, the Committee felt
that viability was subject to the same material uncertainties 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 at
least 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 49) and the Group’s principal
risks and uncertainties, including COVID-19, the cost of redress,
regulatory change and the activities of ‘CMCs', and how these are
managed (see pages 22 to 26).
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 is built on a divisional basis using a bottom-up approach.
The plan makes certain assumptions about future economic
conditions, the regulatory environment, divisional performance and
growth and the ability to refinance existing debt facilities as they fall
due.
In adopting the going concern assumption in preparing the year-end
financial statements, the Directors have considered the activities of
its principal subsidiaries, as well as the Group’s principal risks and
uncertainties.
As part of its going concern and viability assessment, the Directors
reviewed both the Group’s access to liquidity and its future balance
sheet solvency. The Group produced two scenarios: (i) the more likely
(or ‘base case’) scenario; and (ii) the ‘downside’ scenario which
applies stresses in relation to the key risks identified in the base case.
(i) Base case scenario
Liquidity
The base case forecasts assume additional equity is raised during
2021 and reflects a business plan where the Group rebuilds its loan
book back up to historic levels and achieves further growth within its
branch-based lending and home credit divisions. It also assumes
that the Group’s Guarantor Loans Division is placed into a managed
run-off. In this model, any potential covenant breaches are cured by
the injection of capital into the Group. As at the date of this Annual
Report, the Group expects to raise equity funds in the region of £80m
before expenses with support from Alchemy, its largest shareholder,
and other investors, subject to the outcome of the Group’s
engagement with its lenders, Alchemy’s analysis of the FCA and
Group’s regulatory reviews and greater levels of certainty around
redress and claims, and therefore the Group has included this within
its base case.
In this forecast, we have taken into account:
•
the proportion of customers who have been impacted by
COVID-19 and are expected to return to normal payments, are
rescheduled and/or deferred, and those who will ultimately not
return to normal payments based on detailed analysis of past
and present customer behaviours;
•
recent Government guidance around social distancing and the
proposed roadmap out of lockdown;
• consideration of the macroeconomic impact on loan loss
provisions since the year end as a result of COVID-19;
• no dividends are assumed to be paid over the forecast period;
•
•
•
•
the requirement to pay HMRC-related taxes which were deferred
from May-August 2020 in line with the time-to-pay arrangement
agreed with HMRC;
the potential costs of obtaining extensions to existing RCF and
Term Loan facilities which currently mature in August 2022 and
August 2023 respectively;
the payouts required in relation to complaints across the Group;
the potential future costs of complaints and the provision for
customer redress made in the Group’s Guarantor Loans Division
and its associated costs (see note 24 to the financial statements).
Whilst the methodology for redress has not yet been agreed with
the FCA, the quantum of provision for redress represents the
Directors’ best estimate of the ultimate cost of the redress as at the
reporting date;
•
the independent reviews commissioned by the Group around the
lending and complaints handling activities of the branch-based
lending and home credit divisions.
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Solvency
Under the base case, after the capital raise, the Group would be in a
net asset position from a balance sheet perspective; this however is
dependent upon a number of factors including: the Group raising
additional capital and extension and/or refinancing of the Group’s
debt facilities as outlined above; the assumptions not varying
materially from the base case; and any mitigating actions which
could be implemented to offset any adverse movement from the
base case. In the absence of any capital raise, the Group is forecast
to remain in a net liability position from a balance sheet perspective
over the next 12 months and beyond. It is also likely to breach its
financial covenants and as a result, if waivers are not forthcoming,
the Group may fall under the control of its lenders. This is considered
further in the downside scenario.
Due to the uncertainties regarding the current and future impact of
COVID-19 on the macroeconomic environment and regulatory
uncertainties, the Group notes that 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 Group is unable to raise sufficient capital
within the time frame forecast;
•
•
the possibility that the current performance of the loan book
deteriorates beyond current expected delinquency trends and
that recovery of customer performance is not as anticipated;
further changes in the regulatory environment which negatively
impact the Group’s divisions;
• a further negative shift in the macroeconomic environment;
• higher than anticipated payouts required in relation to complaints
and the Guarantor Loans Division customer redress programme;
•
the outcome of the independent reviews at the branch-based
lending and home credit divisions resulting in the identification of
customers who may require redress materially beyond that
already provided for;
• costs relating to the managed run-off of the Guarantor Loans
Division; and
•
the Group is unable to agree acceptable terms with its lenders or
they do not roll over loans when due and refinance is not
available.
Under the base case, it is forecast that the Group will breach its
financial covenants within the next 12 months, however this breach
will be cured by the injection of new equity capital as outlined
above. The base case assumes no breach in covenant as at 30 June
2021 as on the basis of current forecasts the Group does not expect
to do so. However, the covenant headroom remains tight and there
remains a risk, due to unforeseen and as yet unaccounted for
matters, that the Group will breach as at 30 June 2021. If this were to
happen, then the Group would maintain its strategy as described
under the base case as management would have time to cure this
breach. However, this would result in a requirement to either
accelerate the capital raise or request a temporary waiver from
lenders, neither of which have been considered in the base case.
Therefore, if the Group finds itself in such a scenario, whilst the
Directors remain confident of the ability to raise capital, they note the
risks associated with executing on the base case would be increased
and consequently the likelihood of the Group ending up in the
downside scenario would also be increased.
There are material uncertainties regarding the assumptions and
outcome of the base case in the following areas:
•
the ultimate execution of the planned equity raise and support of
Alchemy and other investors for this;
•
•
•
•
•
•
•
•
the impact of the macroeconomic environment, including
COVID-19, on future trading performance, including the impact of
the vaccination programme, potential new strains of the virus and
the Government response to any changes in infection rates;
the subsequent performance of COVID-19 impacted customers
who have come off an emergency payment freeze;
the impact of the guarantor loans division run-off on customer
behaviour;
the full and final cost of the redress programme in guarantor
loans and any future complaint / redress costs across the Group;
the outcome of the independent reviews commissioned by the
Group around the lending and complaints handling activities of
the branch-based lending and home credit divisions, and any
associated cost of redress;
the actions of CMCs and results of FOS decisions made which
may increase the costs of complaints across the Group;
the nature of any agreement with the debt providers in case
covenants are breached; and
the expectation that debt maturing in August 2022 and August
2023 will be rolled over and/or refinanced.
As at 31 May 2021, the Group had a total cash balance of £101m
which, when combined with the Group’s ability to conserve cash
through a reduction in future lending, means the Group expects to
be able to fund operating expenses and interest payments for at
least the next three years, subject to the above assumptions not
being materially different from the base case.
Non-Standard Finance plc Annual Report & Accounts 2020 77
Audit Committee report continued
(ii) Downside scenario
Liquidity
This scenario assumes that no additional equity is raised in 2021 and
also reflects stresses to the key risks described above.
Under this scenario we have assumed:
•
the planned equity raise is not successful;
•
there are prolonged social restrictions and lockdowns across the
UK in response to COVID-19, therefore leading to lower lending
than expected;
• a higher proportion of customers are at risk of losing their jobs
therefore leading to even higher delinquency than expected
under the base case;
•
the ultimate cost of the guarantor loans customer redress
programme is higher than the provision which has been included
in the year end financial statements on the basis of amendments
to the external harm criteria of the Group’s proposed
methodology (refer to note 24 to the financial statements); and
• higher complaint levels than expected under the base case
across all divisions.
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. If waivers are not
forthcoming, the Group may fall under the control of its lenders and
there is a possibility of the Group going into insolvency.
As at 31 May 2021, the Group had a total cash balance of £101m
which, combined with the Group’s ability to conserve cash through
a reduction in lending, means that the Group expects to be able to
fund operating expenses and interest payments for at least the next
three years, provided that forbearance is received from its lenders in
the event of a covenant breach, existing loans are rolled over, and
subject to the above assumptions not being materially different from
the downside case.
Solvency
The Group would remain in a net liability position from a balance
sheet perspective if some or all of the downside stresses were to take
place without a significant injection of further equity.
Directors’ statement on viability
The Directors acknowledge the considerable challenges presented
by the outbreak of COVID-19, the financial performance of the
Group, customer redress, and the regulatory environment 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 uncertainties
associated with forecast assumptions, the support of Alchemy for
the proposed capital raise subject to the outcome of the Group’s
engagement with its lenders, Alchemy’s analysis of the FCA and
Group’s regulatory reviews and greater levels of certainty around
redress and claims, means that it is their reasonable expectation
that the Group will continue to operate and meet its liabilities as
they fall due over the viability period from both from a liquidity and
solvency perspective.
On the basis of the above analysis, the Directors note that a material
uncertainty exists regarding the successful execution of a capital
raise, the potential action of lenders, current and future impacts of
COVID-19 and the impact of potential levels of redress across the
Group. The impact of these factors on liquidity and solvency under
both the base case and downside scenarios therefore may cast
significant doubt on the Group’s and the Company’s ability to
continue as a going concern and remain viable.
In making their assessment, the Directors took account of the Group’s
current financial and operational positions, the status of
conversations with the regulator and advisors as well as its recent
trading activity and in particular, recent collections activity. They
noted the indications of support for a capital raise received from
investors to support the Group subject to the outcome of the
proposed GLD redress programme and independent reviews across
the Branch-based lending and Home Credit divisions, and in
addition the proposed extension to the term of the Group’s existing
facilities by its lenders, which would be conditional upon the
completion of a successful capital raise. The Directors also note the
existence of the securitisation facility, however they note that this is
currently suspended and the ability to use this facility remains outside
of the Group’s control as it is subject to the consent of the lenders and
the satisfaction of standard covenants for a facility of this type. The
Directors recognise there exists a risk around covenant compliance
due to unforeseen circumstances as at 30 June 2021 and that should
a breach eventuate, it would result in a requirement to either
accelerate the capital raise or request a temporary waiver from
the lenders.
The Directors additionally considered the ‘reverse stress test’
conducted by the Group which showed that, assuming no changes
to lending levels and operating expenses, collections would have to
fall by over 23% from current expected levels in the base case for the
Group to then be unable to fund operating expenses and interest
payments beyond the next 12 months. With regards to the balance
sheet solvency of the Group, the Directors noted that under the base
case scenario the Group returns to a net asset position and remains
there for the viability period, however this remains dependent on the
injection of additional capital into the Group.
78
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As the possible outcomes detailed above remain dependent on a
number of factors not directly within the Group’s control, 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 these various factors are developed. The Board recognises
the importance of the issuance of further equity in order to mitigate
the uncertainties noted above and to support the future growth
prospects of the Group.
The Directors acknowledge the considerable challenges presented
over the last year and the material uncertainty which may cast
significant doubt on the ability of both the Group and the Company
to continue to remain viable. However, despite these challenges, it is
the Directors’ reasonable expectation that the Group and Company
will raise sufficient equity in the timeframe required, obtain
extensions to the borrowing term on a reasonable basis from its
lenders, and continue to operate and meet its liabilities as they fall
due for the next 12 months and beyond and therefore it has
concluded the business is viable.
The assumption of shareholder support for additional equity, lender
support for the extension of existing financing facilities and the
satisfactory outcome of regulatory and redress matters and that the
ultimate conclusions on those matters are not materially different to
that envisaged under the base case, forms a significant judgement
of the Directors in the context of approving the Group’s going
concern status and viability.
The Directors will continue to monitor the Group and Company’s risk
management, access to liquidity, balance sheet solvency and
internal control systems.
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, assessment and where
necessary management action.
Niall Booker
Chairman of the Audit Committee
30 June 2021
Non-Standard Finance plc Annual Report & Accounts 2020 79
Risk Committee report
for the year ended 31 December 2020
4
The Committee met on four occasions
during the year ended 31 December 2020.
Membership and attendance
Director
Heather McGregor (Chairman)
Niall Booker
Charles Gregson
Toby Westcott
Attendance and
total number of
meetings that the
Director was
entitled to attend
4/4
4/4
4/4
1/1
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 2020 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.
80
Principal activities of the Committee during 2020
The main focus of the Committee during the first half of 2020 was
managing the challenges arising from the pandemic. These issues
remained key areas for the Committee throughout the second half of
2020 and were joined by, among other things, the request by the FCA
that the Group develop a proposed redress programme for certain of its
guarantor loans customers and a sector-wide increase in the number of
complaints, many of which were lodged by CMCs. Throughout the
period, the Group’s risk management system continued to provide the
Committee with a clear and consolidated view of risk across the Group
as a whole, taking into account materiality thresholds that had already
been approved by the Committee. During the first quarter of 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 Group’s risk management system. The
COVID-19 outbreak was added as a new principal risk during the first
half of 2020 as set out in the 2019 Annual Report. A summary of the
Group’s risk management approach and principal risks is set out on
pages 22 to 26.
The Committee has oversight of horizon scanning activity and has
contributed to the development of Group level horizon scanning
reporting. This has helped to facilitate a wider external facing
discussion regarding the consideration of those risks identified as
being current.
During the year to 31 December 2020 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;
• quarterly review of conduct risk dashboards;
• oversight of half-yearly credit risk reporting; and
• a review of business continuity planning across the Group.
Areas of focus in 2021
The key risks facing the Group in 2021 continue to be the impact of
the pandemic and the need for additional capital as redress due to
eligible customers is paid out. The impact of COVID-19 remains
significant and the Committee is committed to supporting each of
our business divisions to safeguard the health, safety and well-being
of our customers, staff and self-employed agents. Whilst the past
18-months have presented the Company with numerous challenges,
the resilience and perseverance of key staff around the Group means
that, assuming a capital raise is completed as planned, the current
business environment may provide significant opportunities for the
Group and the Committee will seek to ensure that key risks are
mitigated, where possible and opportunities seized within the
framework of risk appetites already established.
Heather McGregor
Chair of the Risk Committee
30 June 2021
Directors’ remuneration report
for the year ended 31 December 2020
7
The Committee met on seven occasions during
the year ended 31 December 2020.
Membership and attendance
Director
Heather McGregor (Chairman)
Niall Booker
Charles Gregson
Toby Westcott
Attendance and
total number of
meetings that the
Director was
entitled to attend
7/7
7/7
7/7
2/2
The disclosures in this report have been prepared
in compliance with Schedule 8 of The Large and
Medium-sized Companies and Groups (Accounts
and Reports) (Amendment) Regulations 2013, The
Companies (Miscellaneous Reporting)
Regulations 2018, The Companies (Directors’
Remuneration Policy and Directors’ Remuneration
Report) Regulations 2019 (the ‘Regulations’) as
well as the Companies Act 2006. This report is set
out in the following key sections:
Part A: Annual Statement
Part B: Annual Report on Remuneration
1. Single figure remuneration table: Executive Directors – audited
2. Implementation of Remuneration Policy for the Executive Directors
for 2021
3. Consideration by the Committee of matters relating to the
Directors’ remuneration for 2020
4. Group Chief Executive and employee pay
5. Percentage change in Director remuneration
6. CEO Pay Ratio
7. Consideration of employee remuneration and shareholders
8. Single figure remuneration table: Non-Executive Directors –
audited
9. Directors’ shareholding and share interests – audited
10. Shareholder voting
Part C: Directors’ Remuneration Policy
1. Executive Director Remuneration Policy
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Part A: Annual Statement
Dear Shareholder
I am pleased to present the Directors’ remuneration report for NSF
for 2020. This was my last year as Chair of the Remuneration
Committee (the ‘Committee’). I would like to thank the support of my
Board colleagues, shareholders and staff for their support over my
term. I hand over to Toby Westcott who takes on the position as
Chair after nine months serving as a Committee member. Whilst
this is not fully compliant with the 2018 Corporate Governance
Code, given Toby has not yet served a full year on the Committee,
as a Nominee Director, Toby brings a wealth of shareholder
experience to remuneration discussion, which will ensure robust
scrutiny and challenge, as well as support.
Business context
As noted in the Chairman’s statement on pages 6 and 7 and in the
Group Chief Executive’s report on pages 15 to 19, 2020 has been a
challenging year for the Group.
The financial results for 2020 are of course disappointing and the
large pre-tax loss reflected a weaker operating performance as
well as a number of non-operating items. While the pandemic
impacted revenues and increased impairment we provided
forbearance to a large number of customers experiencing difficulty.
We also had to impair certain intangible assets and goodwill on
the Group’s balance sheet.
The impact of the pandemic on the Group was significant, with a
rapid move to home working for many staff and the furlough of
some members of staff during the period, predominantly in the
Everyday Loans business where branches closed for a period
during the first lockdown. As outlined in the Strategic Report, the
pandemic has had a significant impact on the size of the loan book
and as a result, decisions were taken to reduce headcount in both
the branch-based lending business and the guarantor loans
business. The Company also reached a ‘Time to Pay’ arrangement
with HMRC with respect to the payment of payroll related taxes. At
the time of publication of this report, all payments to HMRC are up
to date and all furloughed staff have returned to work.
As outlined in the Chairman’s statement on pages (6 and 7) the
results were also impacted by the requirement to pay redress to a
number of customers of the Group’s Guarantor Loans Division
(‘GLD’). Lending in GLD was restricted for most of 2020 as a result of
both the pandemic and an in-depth review following the FCA
multi-firm review into the guarantor loans sector. Having completed
a detailed review of the Group’s Guarantor Loans Division and its
prospects, the Board has decided to place the division into a
managed run-off which is expected to conclude by the end of 2025.
Having had to write-off goodwill and other intangibles, together
with the trading losses in 2020 and prior years, as at 31 December
2020 the Company no longer had any distributable reserves and so
was unable to pay cash dividends. Following the planned capital
raise, the Company expects to put in place a process to create
positive distributable reserves so that, when and if appropriate, the
Board can consider the payment of cash dividends to shareholders
at some point in the future.
Directorate changes
As highlighted in the 2019 Remuneration Report, Jono Gillespie was
promoted to Group CFO from 1 April 2020. On appointment, Jono
Gillespie’s annualised starting base salary was set at £240,000 and
he received a pension contribution of 8% of salary in line with that
of our wider workforce. Jono Gillespie was also eligible to receive
Non-Standard Finance plc Annual Report & Accounts 2020 81
Directors’ remuneration report continued
for the year ended 31 December 2020
benefits and participated in the 2020 annual bonus with a
maximum annual bonus opportunity of 30% of salary prorated for
his time served as Group CFO during the year (although as
explained later in this report, no bonus was paid to the Executive
Directors in 2020). No award was granted to Jono Gillespie under
the Non-Standard Finance LTI scheme, the Everyday Loans Group
LTI and he did not receive or subscribe for any Founder Shares.
Nick Teunon stepped down as the Group CFO on 1 April 2020 and
left the Board on 30 April 2020. He received his salary and benefits
up to the date of his departure but received no further payments.
Remuneration decisions in the year
During the year, the Committee increased the salary of Jono
Gillespie, Group CFO. This was partly as a direct result of the onset
of the pandemic and partly due to the fact that following his
appointment in April 2020, Jono took on significant additional
responsibility, over and above that set out in his defined role and
responsibilities. In particular, he provided extensive support to the
finance function at Everyday Loans during the 2019 audit, including
a detailed review and reassessment of, among other things, the
process for determining the appropriate level of provision in the
Group’s balance sheet . He also took a leading role in overseeing
the design and development of a proposed redress programme at
GLD following concerns raised by the FCA regarding certain
processes and procedures at the division.
As a result, the Committee concluded that the role of the Group
CFO had in their view, expanded significantly from that undertaken
by the previous CFO. The Committee also concluded that whilst on
appointment Jono Gillespie had been awarded a remuneration
level lower than his predecessor, he had outperformed the
Committee’s expectations and it was therefore agreed that an
increase in salary to £270,000 per annum from 1 December 2020
(£240,000 at appointment on 1 April 2020) was warranted.
Given the significant uncertainty regarding the ongoing COVID-19
pandemic and the desire to conserve cash within the Group, the
Board withdrew 70% of the overall bonus potential for Executive
Directors, which related to financial performance in 2020. This was
one of the actions implemented by the Board to help mitigate the
impact on our operational and financial performance and to avoid
putting our business at risk.
As a result, for 2020, the annual bonus had a maximum potential of
30% of salary, subject to the achievement of non-financial
performance measures and the bonus remained subject to the
Committee’s satisfaction regarding the financial performance of the
business.
As detailed later in this report, when evaluating the achievement of
non-financial measures in 2020, the Committee exercised discretion
and determined that, given the unprecendented circumstances of
2020, it was not appropriate to award a bonus to Executive
Directors, especially as the Group had applied for, and accepted,
government support during the pandemic in the form of furlough
payments and the ‘time to pay scheme’ for PAYE tax payments and
also as the Group did not declare any dividend in the year.
31 December 2020 also marked the end of the 2017 Non-Standard
Finance Long Term Incentive (‘LTI’). Performance was assessed at
the end of the financial year and no award vested under the LTI.
Looking forward to 2021
Our current Remuneration Policy was approved at the Annual
General Meeting on 14 May 2018 with a vote in favour of 95.4%. As
a result, the Committee would ordinarily be seeking approval for a
new Remuneration Policy at this year’s AGM . However, given the
82
circumstances currently facing the Company and in light of the
planned Capital Raise, the Committee took account of feedback
received from shareholders suggesting that the Capital Raise
should be prioritised over consulting on a new Remuneration Policy
at the current time.
It is therefore the Committee’s intention to consult with shareholders
regarding a suitable Remuneration Policy following the successful
completion of the Capital Raise.
In line with our historic approach, it is expected that the
composition and structure of any future remuneration package will
retain an appropriate balance between delivery of strong results
whilst not incentivising undue risk-taking or rewarding under
performance.
To assist shareholders, we have therefore included a summary of
the current Remuneration Policy (to comply with Section 421(2A) of
the Companies Act 2006) and to help provide context for the
decisions made in respect of remuneration for 2020 and the
expected remuneration in 2021.
Implementation of the Remuneration Policy for 2021
Base salary
The Committee decided that the base salary for Mr John van
Kuffeler will remain unchanged at £341,500 for 2021. As highlighted
above, the Committee considered the salary for Jono Gillespie in
November 2020, and increased his annual salary to £270,000
effective from 1 December 2020 to reflect the expanded scope of
the role. No further base salary increases are proposed for Mr.
Gillespie for 2021 at this time.
Annual bonus
In the absence of a new Remuneration Policy, the Committee has
determined that an annual bonus opportunity for 2021 is
appropriate, with objectives clearly focused on delivery of the
strategic requirement to deliver the capital injection required within
the Group and then to utilise it fully to take advantage of the market
opportunities in addition to financial performance and conduct
related objectives. The Remuneration Committee has determined,
however, that as outlined in Part B of the report, whilst the current
Policy allows for 100% annual bonus payments for Executive
Directors, that for the current year a maximum potential of 50%
should be applied.
Long-term incentive plan
No long-term incentive will be in place ahead of adoption of a
new remuneration policy. However, based on historic feedback
from major shareholders together with more recent discussions,
it is expected that any future long-term incentive awards will reflect
a model designed to ensure that the interests of management are
closely aligned with those of shareholders.
This Annual Report on Remuneration will be put to shareholders
for approval at the General Meeting to be held at 2pm on 16 August
2021 when the Group’s 2020 Annual Report and Accounts will also
be considered and I ask for your support on the requisite
resolutions.
The Committee and I would welcome any feedback or comments
on this report or our Remuneration Policy in general.
On behalf of the Remuneration Committee and Board.
Heather McGregor
Chair of the Remuneration Committee
30 June 2021
Part B: 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 2020. Disclosures in this report have been prepared in accordance with the provisions of the Companies
Act 2006, Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, The
Companies (Miscellaneous Reporting) Regulations 2018, The Companies (Directors’ Remuneration Policy and Directors’ remuneration
report) Regulations 2019 and other related regulations. An advisory resolution to approve this report and the annual statement will be put
to shareholders at the Annual General Meeting to be held on 16 August 2021.
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.
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John van Kuffeler
(Group Chief Executive Officer)
Jono Gillespie
(Group Chief Financial Officer)
Nick Teunon
(Former Group Chief Financial Officer)
Base
salary
£000
342
333
183
–
98
287
Benefits
£000
Bonus
£000
Long-term
incentives
£000
Pension
£000
Other
£000
45
37
9
–
5
16
–
85
–
–
–
73
–
–
–
–
–
–
34
33
15
–
10
29
–
–
–
–
–
–
Total
£000
421
488
207
–
113
411
Board
2020
2019
2020
2019
2020
2019
Total
fixed
remuneration
£000
Total
variable
remuneration
£000
421
403
207
–
113
332
–
85
–
–
–
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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, Jono Gillespie and Nick Teunon – 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 Nick Teunon stepped down as the Group Chief Financial Officer on 1 April 2020 and left the Board on 30 April 2020.
4
Jono Gillespie was promoted to the role of Group Chief Financial Officer and joined the Board on 1 April 2020. His salary, benefits and pension represent the actual amounts paid in
respect of qualifying services as an Executive Director during the relevant financial year.
Annual bonus outcomes for the period ended 31 December 2020 – audited
For 2020 the Executive Directors had a maximum annual bonus opportunity of 30% of salary. For each Executive Director, the annual bonus
determination is based on the achievement of non-financial targets. The normal award level is 100% of salary, however the Board decided to
withdraw 70% of the 2020 bonus opportunity which was subject to financial performance in light of COVID-19. Therefore, the 2020 bonus
provided a maximum opportunity of 30% of salary on achievement of non-financial measures.
The Committee unanimously agreed that it was not appropriate to award bonuses with respect to 2020 to Executive Directors, especially as
the Group had applied for, and accepted government support during the pandemic in the form of furlough payments and the ‘time to pay
scheme’ for PAYE tax payments and also as no dividend had been declared or paid.
The Committee also noted that in the 2019 Annual Report it was clearly stated that whilst the non-financial objectives for 2020 were still
available to the Executive Directors (following the decision to remove the financial element), this element of the bonus would also be subject to
the Remuneration Committee’s satisfaction regarding the Company’s financial performance against the changing external environment. Given
the financial performance of the Group in 2020, it was agreed by the Committee that this hurdle had not been met and so no bonus relating to
non-financial objectives should be paid.
The Committee also determined that Nick Teunon would not receive any payments under the 2020 bonus award following his departure in
April 2020.
Non-Standard Finance plc Annual Report & Accounts 2020 83
Directors’ remuneration report continued
for the year ended 31 December 2020
Long-term incentive awards vesting in 2020 – audited
2017 NSF LTI
The one-off NSF LTI awards were made to John van Kuffeler and Nick Teunon in the form of nil-cost options in 2017. Under the NSF LTI, both
were awarded a right to share in a pool of 15% of the growth in value (based on market capitalisation) of the Company above a share
price hurdle of £1.10. Performance was measured against this hurdle after four years starting from 1 January 2017 to 31 December 2020,
though delivery of shares is deferred until the end of the fifth year (i.e. 31 December 2021). Nick Teunon left the Board on 30 April 2020 and
therefore forfeited awards under the NSF LTI.
2017 NSF LTI
John van Kuffeler
% of growth pool allocated to participants
% of growth in value above £1.10
Actual share price achieved
% of growth pool achieved
Number of shares vesting
Value of total shares vesting
37.5%
5.625%
3.17p
0%
0
£0
The performance hurdle was not achieved and therefore no award vested under the 2017 NSF LTI.
Long-term incentive awards made in 2020 – audited
No long-term incentive awards were made in the financial year ending 31 December 2020.
Payments for loss of office – audited
There were no payments for loss of office during the year.
On 30 April 2020, Nick Teunon stepped down from the Board (having stepped down as Group CFO on 1 April 2020). He received his
contractual entitlements up to the date of his departure as shown in the single figure table of remuneration. No additional payments have
been made in respect of 2020. Nick’s incentive awards in place at the time of his departure, which included the 2017 NSF LTI lapsed in full
upon his departure from the Group.
Payments to past Directors – audited
No payments to past Directors were made in the financial year ending 31 December 2020.
2. Implementation of Remuneration Policy for the Executive Directors for 2021
Base salary
In setting salary levels for the Executive Directors for the 2021 financial year, the Committee considered a number of factors, including the
impact of COVID-19, individual performance and experience, pay and conditions for employees across the Company, the general
performance of the Company, pay levels in other comparable companies and other elements of remuneration. In deciding the salary
increase for Jono Gillespie, the Committee considered the substantial expansion of his role and responsibilities during the year and the
value and commitment he brought to the Company, as detailed in the annual statement.
The salaries for 2021 and the relative increases are set out below.
John van Kuffeler
Jono Gillespie1
Base salary £000
2021
2020
% change
£341.5
£270.0
£341.5
£240.0
0%
12.5%
1
Jono Gillespie’s base salary for 2021 was effective from 1 December 2020 as outlined in Part A of this report.
Pension and benefits
The pension contribution to a personal pension scheme or cash in lieu is equal to 10% of base salary for John van Kuffeler and 8% of salary
for Jono Gillespie. 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 current Directors’ Remuneration Policy.
84
Annual bonus
Pending the outcome of a consultation with shareholders and subsequent approval of a new Remuneration Policy, the Committee has
determined that, consistent with the current Remuneration Policy, an Annual Bonus scheme is appropriate for Executive Directors and in
light of the current situation faced by the Company, has proposed that the maximum and target bonus potential for 2021 is as follows:
John van Kuffeler
Jono Gillespie
Maximum
bonus % of
salary
On-target
bonus % of
maximum
Threshold
bonus % of
maximum
50%
50%
37.5%
37.5%
12.5%
12.5%
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It is proposed that the composition and structure of any future remuneration package will retain an appropriate balance between delivery
of strong results whilst not incentivising undue risk-taking or rewarding under performance. Objectives will be clearly focused on delivery of
the strategic requirement to deliver the capital injection required within the Group and then to utilise it fully to take advantage of the
market opportunities in addition to financial performance and conduct related objectives.
Threshold vesting will be set at 25% of target with on-target vesting at 75% and maximum vesting at 100%, with vesting on a sliding scale
between these points.
The Board is of the opinion that the precise performance targets for the annual bonus are commercially sensitive and that it would be
detrimental to the interests of the Company to disclose them before the end of the financial year. Actual targets, performance achieved
and awards made will be published at the end of the performance period so shareholders can fully assess the basis for any payouts.
Long-term incentive awards
It is proposed that any long-term incentive awards will reflect an incentive structure that seeks to closely align management’s interests
with those of the Group’s shareholders. The precise nature of any long-term scheme will be determined following consultation with
key shareholders.
3. Consideration by the Committee of matters relating to the Directors’ remuneration for 2020
The Committee is responsible for making 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 2020
Independent
Meetings attended
Attendance
Heather McGregor
Niall Booker
Charles Gregson
Toby Westcott
Yes
Yes
No
No
7/7
7/7
7/7
2/2
100%
100%
100%
100%
All Committee members attended all Remuneration Committee meetings that they were eligible to attend. The Group Chief Executive and
the Chief Financial Officer also 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 2020 from PricewaterhouseCoopers (‘PwC’) during the year. PwC were appointed by the
Committee in May 2015 as advisers on remuneration matters after a formal 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 £31,350. 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 four scheduled and three additional Committee meetings. Matters covered at these meetings are
detailed below:
• Consideration of Executive Directors’ annual bonus performance measures for 2021
• Review and approval of 2020 Executive Directors’ and Senior Management annual bonus outcomes
• Review and approval of the vesting outcome for the 2017 NSF LTI
• Review of remuneration levels taking into consideration external market benchmarking for both Executive and Non-Executive Directors
• Review of Executive Director and Senior Management remuneration for 2021 with benchmarking to cross-Group activity and deliberations
• Departure arrangements for Nick Teunon
• Appointment arrangements for Jono Gillespie
• Remuneration review mid-year for Jono Gillespie
• Deliberation and cancellation of 2020 financial element of Executive Director bonus scheme
Non-Standard Finance plc Annual Report & Accounts 2020 85
Directors’ remuneration report continued
for the year ended 31 December 2020
4. Group Chief Executive and employee pay
The Committee believes that the current reward structure provides 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 2020.
Total Shareholder Return
140
120
100
80
60
40
20
0
02/2015
02/2016
02/2017
02/2018
02/2019
02/2020
12/2020
FTSE All Share Financials
Non-Standard Finance
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. COVID-19 had a significant impact on Company performance
and share price in 2020. Other possible reasons for this underperformance include: the in-depth review in GLD following the industry-wide
FCA review, limited liquidity in the Group’s shares; the Group’s scale relative to other potential investment opportunities; limited research
coverage by sell-side analysts; severe underperformance by two of the Group’s major quoted competitors; and concerns over future market
and regulatory conditions in the UK consumer finance segment.
Group Chief Executive – John van Kuffeler
Single figure of total remuneration (£000)
Bonus payout (% maximum)
Long-term incentive vesting rates (% maximum)
2020
421
0%
0%
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
5. Percentage change in Director remuneration
The table below compares the annual percentage increase in the Directors’ pay with that of all employees of the Company (excluding
Directors) on a full time equivalent basis. The table below will build up to include five years of history starting from 2019.
Group Chief Executive Officer (JvK)
Group Chief Financial Officer (JG)
Group Chief Financial Officer and Executive Director
(until 30 April 2020) (NT)
Non-Executive Chairman (CG)
Non-Executive Director (HM)
Non-Executive Director (NB)
Non-Executive Director (TW)
Average employee pay
Base Salary
Benefits
Annual Bonus
2020 %
Difference
2019 %
Difference
2020 %
Difference
2019 %
Difference
2020 %
Difference
2019 %
Difference
2.5%
n/a
2.5%
n/a
22%
n/a
-2.7%
n/a
-100%
-61.5%
n/a
n/a
2.5%
2.5%
2.7%
-5.9%
-100%
-61.8%
0%
0%
0%
n/a
0%
0%
0%
n/a
8.1%
3.4%
–
–
–
n/a
5.5%
–
–
–
n/a
0%
–
–
–
n/a
-33.1%
–
–
–
n/a
0%
No figures are included for both Jono Gillespie and Toby Westcott as they joined the Board in 2020 and therefore have no 2019
comparator figure.
86
6. CEO pay ratio
This year, in line with the Directors’ remuneration reporting regulations, we present the CEO’s pay against the pay of employees at the lower
quartile, median and upper quartile of the Company’s UK employees.
The Company has decided to continue to use Option A as this would represent the most comprehensive approach and give the most
accurate statistics. The salary, benefits and total pay for employees have been calculated on a full-time equivalent basis using the same
methodology as that for the single figure for the CEO. No element of pay was omitted. The data for employee pay was taken as at
31 December 2020.
The current Group Chief Executive (CEO) to employee pay ratio and comparisons with last year are as shown in the table below. These
ratios are relatively low in comparison to the sector in which the Company operates and across wider listed companies. The median pay
ratio has remained static compared to 2019, but we note that the ratios remain low given the relatively low annual bonus payout and no
vesting under any long-term incentives for two consecutive years. As described in section 7 of this report, the Company is committed to
creating an inclusive working environment and to rewarding our employees throughout the organisation in a fair manner.
The Company therefore believes that the ratios are consistent with the pay, reward and progression policies of the UK workforce taken as a
whole. We will continue to monitor the trends in the ratio over future years.
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CEO:Employee Pay
2019
2020
2020 base salary
2020 total pay and benefits
Method
25th percentile
employee pay
50th percentile
employee pay
75th percentile
employee pay
22:1
17:1
Option A
CEO pay
14:1
14:1
11:1
8:1
Employee pay
25th percentile
50th percentile
75th percentile
£342,000
£24,000
£421,000
£25,000
£27,000
£30,000
£50,000
£52,000
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)
2020
2019
% change
£42.0m
£43.2m
–
£8.4m
-3%
-100%
7. 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 arrangements.
During 2020, the Committee had an ongoing dialogue with key shareholders across a wide variety of issues, including regarding decisions
the Company made regarding COVID-19 and the impact this had on Director remuneration, such as cancellation of the financial element of
the 2020 Executive Director annual bonus, review of Director salary with regard to Jono Gillespie and whether or not it would be
appropriate to award any proportion of the non-financial element of the 2020 Executive Director annual bonus.
Over the course of the next year, the Committee intends to continue the high levels of communications 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 2021 Directors’ remuneration report.
Engaging with employees
NSF is committed to creating an inclusive working environment and to rewarding our employees in a fair manner. In making decisions on
executive pay, the Remuneration Committee considers wider workforce remuneration and conditions. In June 2018, the Financial Reporting
Council (‘FRC’) provided an update to the UK Corporate Governance Code (the ‘Code’) which included, inter alia, 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 Group’s overall Remuneration Policy.
Non-Standard Finance plc Annual Report & Accounts 2020 87
Directors’ remuneration report continued
for the year ended 31 December 2020
In 2018, the Board appointed Heather McGregor as the Non-Executive Director with responsibility for engagement with the Group’s
workforce. During 2020, despite the difficult working conditions resulting from the pandemic, Heather attended a number of employee
forums across the Group, participating in discussion in relation to all aspects of employee interests including culture, performance, business
improvements and communications and also taking part in Q&A sessions. Heather has provided updates to the plc Board following her
attendance at each forum. Heather has continued to have oversight of the employee surveys conducted throughout the Group (which
include questions regarding pay and conditions). Summaries of the findings were fed into Group Board meetings and considered in the
context of key decisions. In 2021, Heather continued to attend employee forums until stepping down from the Board on 30 June. Going
forward, these quarterly forums will be attended by Sarah Day (Group Company Secretary) and cover all aspects of employee interests
including culture, performance, business improvements and communications. In addition, Sarah will continue to perform site visits where it
is safe and compliant to do so and attend additional meetings and functions across all areas of the Company on an ad hoc basis so as to
obtain valuable insight into the day-to-day running of the Company.
All-employee remuneration
As part of the Company’s commitment to reward all employees in a fair manner, the Remuneration Committee makes every effort to take
into account wider employee pay in setting executive remuneration. This is achieved through information being provided to Remuneration
Committee meetings detailing the remuneration throughout the Company. The outcomes of these interactions include:
• salary increases for Executive Directors of 0% for 2021 have been set in the context of a similar increase for much of the wider workforce
including at subsidiary level, thereby ensuring consistency across the Group;
• a bonus scheme being available to the majority of the Company’s employees; and
• pension contribution level for new Executive Directors brought in line with that of the wider workforce which is currently 8% of salary.
8. 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.
Significant distributions
Charles Gregson
Heather McGregor
Niall Booker
Toby Westcott
Fees
£000
125
125
75
75
75
75
23
–
Benefits/
other
£000
–
–
1
–
–
–
–
–
Total
£000
125
125
76
75
75
75
23
–
2020
2019
2020
2019
2020
2019
2020
2019
Non-Executive Directors are reimbursed all reasonable travel and subsistence expenses that are incurred for business reasons. Any tax that
arises on these reimbursed expenses is paid by the Company.
Fees to be provided in 2021 to the Non-Executive Directors
The following table sets out the annual fee rates for the Non-Executive Directors for the period:
Significant distributions
Chairman’s fee
Independent Non-Executive Director fee
Nominee Non-Executive Director fee
Charles Gregson1
Heather McGregor2
Niall Booker
Toby Westcott3
2021
£000
125
75
75
90
2020
£000
125
75
75
90
% change
0%
0%
0%
0%
Note
1
Charles Gregson will receive his fee in line with the provisions under the Remuneration Policy. Currently he receives 50% of his fee (post tax) in NSF shares or the transfer of equivalent
value to facilitate the purchase of shares.
2 Heather McGregor will be standing down from the Board at the AGM on 30 June 2021; the actual level of fees paid to her in 2021 will therefore amount to half of this annualised value.
3 Toby Westcott as a Nominee Director and receives no direct remuneration from the Company. However, Alchemy Special Opportunities LLP were remunerated for the services provided
by Toby Westcott through a services agreement. This figure equates to a £75,000 fee plus VAT.
If the Capital Raise is successful, it is intended that Non-Executive Director fees will reduce to £50,000 per annum and the Chairman’s fee to
£75,000 per annum.
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9. Directors’ shareholding and share interests – audited
Shareholding and other interests at 31 December 2020 – audited
Directors’ share interests and, where applicable, achievement of shareholding requirements are set out below. In order that their interests
are aligned with those of shareholders, Executive Directors are expected to build up and maintain (as relevant) a personal shareholding
equal to 100% of their base salary in the Company.
John van Kuffeler
Jono Gillespie
Nick Teunon (at 30 April 2020)
Charles Gregson
Heather McGregor
Niall Booker
Toby Westcott1
Total
Number of
beneficially
held shares
2,114,474
140,000
127,980
1,041,629
145,441
576,700
0
4,146,224
Shareholding at 31 December 2020
Interest in Founder Shares
% of salary
held
Shareholding
requirement
met
Options held
subject to
service
Total
number of
shares/options
Subject to
conditions
Vested but
unexercised
Total at
31 December
2020
19.6%
1.6%
1.4%
–
–
–
–
No
No
No
–
–
–
–
–
–
–
–
–
–
–
–
2,114,474
140,000
127,980
1,041,629
145,441
576,700
0
4,146,224
–
–
–
–
–
–
–
–
30
–
25
10
–
–
–
65
30
–
25
10
–
–
–
65
1 As Toby is a Nominee Director, Alchemy Special Opportunities LLP are deemed to be a ‘connected person’. This shareholding reflects the shareholding of Toby Westcott, Alchemy
Special Opportunities LLP and other partners of the Alchemy Special Opportunities LLP.
Charles Gregson continues to receive 50% of his quarterly Chairmanship fees in the form of shares and received 144,420 additional shares
under this arrangement between 1 January 2021 and 29 June 2021.
None of the Directors exercised options in 2020 and as at 31 December 2020, no Director held shares or options that were subject to
performance conditions.
Aside from the above, no other changes took place in the interests of the Directors between 1 January 2021 and 29 June 2021.
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, the Company can issue a maximum of 10% of its issued share capital in a rolling 10-year period to employees under all its share
plans and can issue a maximum of 5% of its issued share capital in a rolling 10-year period under executive (discretionary) share plans.
Non-executive positions held by Executive Directors
John van Kuffeler retained fees of £50,000 during the year from his non-executive position at Paratus AMC Limited.
10. Shareholder voting
The table below shows the binding vote approving the previous Directors’ Remuneration Policy and the advisory vote to approve the 2020
Annual Report on Remuneration at the AGM on 28 July 2020.
2020 AGM vote on Annual Report on Remuneration
137,582,233
99.76
334,336
2018 AGM vote on Directors’ Remuneration Policy
244,276,844
95.41
11,742,238
0.24
4.59
23,194
500
Votes for
%
Votes against
% Votes withheld
Non-Standard Finance plc Annual Report & Accounts 2020 89
Directors’ remuneration report continued
for the year ended 31 December 2020
Part C: Directors’ Remuneration Policy
This existing Policy has been included in this report to comply with Section 421(2A) of the Companies Act 2006 and will be replaced by any
new remuneration policy approved by shareholders at a subsequent General Meeting.
The Remuneration Policy (‘Policy’) was approved by shareholders at the AGM on 14 May 2018 with a vote in favour of 95.4% from
shareholders. As outlined earlier, given the circumstances the Company faces at the current time and in light of an expected future capital
raise, the Committee does not propose a new Remuneration Policy at the current time. This will allow the Committee the opportunity to
consult with shareholders (including Alchemy Special Opportunities Fund IV L.P.) regarding a suitable Remuneration Policy following the
completion of any capital raise when it is expected that much of the uncertainty currently facing the Group will have been removed or
significantly reduced.
For ease of reference, the current Remuneration Policy table and our remuneration policy for the wider workforce section is included below.
The full Remuneration Policy can be found on our website at www.nsfgroupplc.com.
1. Executive Director Remuneration Policy
Remuneration Policy table for Executive Directors
Element, purpose and link to strategy
Operation
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. This could
include, but is not limited to, a
change in responsibility, a
significant increase in the role’s
scale or increase in the Group’s
size and complexity.
Where such changes do occur,
they will be fully disclosed and
explained to shareholders.
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.
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
considers factors such as:
•
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.
•
Benefits are reviewed periodically
to ensure they remain market
competitive.
Benefits currently include:
• (for John van Kuffeler only)
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.
Benefits
To provide competitive benefits
and to attract and retain
high-calibre employees.
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Element, purpose and link to strategy
Operation
Maximum opportunity
Performance measures and assessment
Pension
To provide a competitive
Company contribution that
enables effective retirement
planning.
Pension is provided by way of a
contribution to a personal
pension scheme or cash
allowance in lieu of pension
benefits.
The maximum contribution to a
personal pension scheme or cash
in lieu is equal to 10% of base
salary for current Executive
Directors.
No performance or recovery
provisions apply.
For new joiners who are either
externally recruited or promoted
from within the Company,
pension contributions will be set
in line with the wider workforce
(currently c.8%).
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 Max
levels will vest on a straight-line
basis between these two points.
Annual bonus
Incentivises achievement
of annual objectives which
support the Group’s short-term
performance goals and protects
longer-term interests of the
Group.
Bonus awards are granted
annually following the signing of
the Annual Report and Accounts,
usually in March of the year
following the reporting period in
question.
Performance period is one
financial year, with payout
determined by the Committee
following the year end, based on
achievement against a range of
financial and non-financial
targets.
Malus and clawback provisions
apply at the discretion of the
Committee where the Committee
considers such action is
reasonable and appropriate,
such as a participant’s material
underperformance, material
brand or reputational damage,
material misstatement of the
accounts, gross misconduct and
fraud, regulatory and similar
failures or other reason as
determined by the Committee.
Performance targets will be set
annually by the Committee based
on a range of interdependent
financial and non-financial
measures.
Financial targets govern the
majority of bonus payments
(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.
Non-Standard Finance plc Annual Report & Accounts 2020 91
Directors’ remuneration report continued
for the year ended 31 December 2020
1. Executive Director Remuneration Policy continued
Remuneration Policy table for Executive Directors continued
Element, purpose and link to strategy
Operation
Maximum opportunity
Performance measures and assessment
Long-term incentives
Non-Standard Finance long-term
incentive (‘LTI’) for Executive
Directors and senior
management.
The LTI supports the long-term
strategic objectives of the Group.
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.
Founder Shares awarded to
Executive Directors on IPO
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 of the 2019 Annual
Report for more details.
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Element, purpose and link to strategy
Operation
Maximum opportunity
Performance measures and assessment
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.
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
structure of the award is a nil-cost
option over NSF shares.
The maximum value of the award
under the ELG LTI for Mr
Cresswell-Turner is £900,000. The
Everyday Loans group LTI was a
one-off award and no further
awards will be made under this
scheme.
All-employee incentives
Encourage all employees to
become shareholders and thereby
align their interests with
shareholders.
Eligible employees may
participate in the Sharesave Plan
and/or Share Incentive Plan and/
or Company Share Option Plan or
country equivalent.
Maximum participation levels for
all staff, including Executive
Directors, are set by relevant UK
legislation or other relevant
legislation.
Executive Directors are entitled to
participate in those same
schemes.
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.
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.
Performance for the ELG LTI was
tested against the hurdle at 31
December 2019 and reported in
the 2019 Annual Report.
Performance for the NSF LTI was
tested against the hurdle at 31
December 2020 with details
reported on page 84 of the 2020
Annual Report.
Not applicable.
Non-Standard Finance plc Annual Report & Accounts 2020 93
Directors’ remuneration report continued
for the year ended 31 December 2020
1. Executive Director Remuneration Policy continued
Remuneration Policy table for Executive Directors continued
Element, purpose and link to strategy
Operation
Maximum opportunity
Performance measures and assessment
Shareholding guidelines
To ensure that Executive Directors’
interests are aligned with those of
shareholders over a longer time
horizon.
The Executive Directors are
required to build or maintain (as
relevant) a minimum
shareholding in the Company
over a five-year period.
Shares included in this calculation
are those held beneficially by the
Executive Director and their
spouse/life partner.
The shareholding requirement is
equal to 100% of salary for
Executive Directors.
Not applicable.
Post Cessation Shareholding
To ensure Executives retain a level
of alignment with shareholder for
the period immediately following
their cessation of employment.
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:
•
100% of the shareholding
requirement for the first year
post-cessation; and
Not applicable.
• 50% of the shareholding
requirement for the second
year post-cessation
Key differences in policy for Executive Directors and other employees in the Group
The remuneration principles that apply to Executive Directors are cascaded to employees as appropriate. The table below illustrates how
the different elements of the Executive Director Policy apply to other employees in the Group.
Elements of remuneration
Executive Directors
Senior management
Wider workforce
Notes
Available to all. Salary levels may differ
across grades or roles.
Available to all. Level of benefits offered may
differ across grades within the Group.
Pension contribution levels for new Executive
Directors and the wider workforce are
available currently up to 8% of salary. This is
up to a maximum of 10% of salary for existing
Executive Directors.
Available to the majority of employees in the
Group. Performance measures may however
differ across grades or teams.
The specific approach to LTIs is still being
determined, however it is expected that any
future arrangements are only applicable for
Executive Directors and selected members of
senior management due to the lack of
line-of-sight of performance measures by
more junior employees.
Any future SAYE would be available to all.
Salary
Benefits
Pension
Annual bonus
LTI
All employee share
plans
94
Directors’ report
for the year ended 31 December 2020
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 2020. Both the Strategic Report on
pages 8 to 49 and this Directors’ report have been prepared and
presented in accordance with the Companies Act 2006, together
with the UK Listing Authority’s Disclosure and Transparency Rules
(‘DTRs’) and the Listing Rules (‘LRs’). The liabilities of the Directors in
connection with both the Strategic Report and the Directors’ report
shall be subject to the limitations provided by such law. Other
information required to be disclosed in the Directors’ report is
expressly outlined in this section.
Principal activities and review of the business
The Company is the UK holding company of a Group providing
unsecured credit to UK adults. The Company is incorporated and
domiciled in England and Wales and is quoted on the Main Market
of the London Stock Exchange.
The Strategic Report, which can be found on pages 8 to 49 of the
Annual Report, provides a more detailed review of business strategy
and business model together with commentary on the business
performance during the year and outlook for the future. Information
relating to the principal financial and operating risks facing the
business are set out on pages 22 to 46 of the Strategic Report.
Trading results and dividends
The Group’s consolidated loss after taxation for the financial year
was £135,557,000 (2019: £76,308,000).
As the Company did not have any distributable reserves it was
therefore not in a position to declare a half year dividend or full year
dividend in 2020. Following completion of a capital raise, the Board
intends to complete a process in due course, with shareholder and
Court approval, to create sufficient distributable reserves so that the
Company would be able to resume the payment of cash dividends to
shareholders as soon as it was deemed appropriate to do so.
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 15 to 19 and the
2020 financial review and divisional overview on pages 27 to 39.
Share capital
As at 31 December 2020 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.
There are currently no redeemable non-voting preference shares of
the Company in issue.
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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.
Further details on the Company’s share capital can be found in note
26 to the financial statements.
Substantial shareholdings
The Company has been notified in accordance with the Disclosure and
Transparency Rules DTR-5 that as at 31 May 2021 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 31 May to 29 June 2021 (being a date not
more than one month prior to the date of the Company’s Notice of
Annual General Meeting).
Alchemy Special Opportunities Fund IV L.P.
Hargreaves Lansdown Asset Mgmt
Marathon Asset Management LLP
Utley N
Interactive Investor Services Limited
AJ Bell Securities
IG Markets Limited
29.95%
10.49%
8.88%
7.84%
4.19%
3.95%
3.21%
In accordance with the Disclosure and Transparency Rules DTR-5 as
at 31 December 2020 the following investors had a substantial
interest in the issued Ordinary Share capital.
Alchemy Special Opportunities Fund IV L.P.
Hargreaves Lansdown Asset Management
Marathon Asset Management LLP
Utley N
IG Markets Limited
Interactive Investor Services Limited
29.95%
12.20%
10.23%
7.96%
4.90%
3.93%
The Directors’ beneficial interests in the allotted shares of the
Company as at 31 December 2020 are outlined below:
John van Kuffeler
Jono Gillespie
Niall Booker
Charles Gregson
Heather McGregor
Toby Westcott
Number of
Ordinary Shares
held
2,114,474
140,000
576,700
1,041,629
145,441
–
Non-Standard Finance plc Annual Report & Accounts 2020 95
Directors’ report continued
As granted by shareholders at the 2020 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
2021 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
631,367 Ordinary Shares at a total cost of £34,140 (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
is also available for inspection at Companies House.
Directors in office during 2020:
Charles Gregson
John van Kuffeler
Non-Executive Chairman
Group Chief Executive
Nick Teunon (until 30 April 2020)
Chief Financial Officer
(Executive Director from
1-30 April 2020)
Jono Gillespie (from 1 April 2020)
Chief Financial Officer
Niall Booker
Senior Independent Director
Heather McGregor
Non-Executive Director
Toby Westcott (from 1 October 2020) Nominee Non-Executive
Director
The Directors and their profiles are detailed on pages 54 and 55. All
of the Directors above, with the exception of Nick Teunon, Jono
Gillespie and Toby Westcott, served in office throughout the year
under review.
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, with the exception of Heather McGregor,
who has indicated that she will not seek re-election.
During the year, no Director had a material interest in any contract of
significance to which the Company or any subsidiary undertaking
was a party.
Powers of the Directors
Subject to the Articles of Association, English law and any direction
granted by special resolutions, the business of the Company is
managed by the Board.
Directors’ indemnities
The Company’s Articles of Association permit it to indemnify the
Directors of the Company (or of any associated company) in
accordance with section 234 of the Companies Act 2006. No
indemnities were provided and no payments were made during
the year. There were no other qualifying indemnities in place
during the period.
The Company has in place Directors’ and Officers’ Liability insurance
which provides appropriate cover for any legal action brought
against its Directors.
Employees
The skills, motivation and energy of our workforce are key drivers for
our success. The organisation structures of each of our operating
businesses and a Group-wide intranet help to ensure that all staff
are aware of our corporate goals and are clear on how their roles
help NSF to succeed.
We seek to ensure that all employees and potential employees
receive equal treatment (including access to employment and
training) regardless of their age, disability, gender reassignment,
marital or civil partner status, pregnancy and maternity, race,
nationality, ethnic or national origin, religion or belief, sex or sexual
orientation. This policy includes those who might become disabled
during their period of employment by the Group.
During 2020, the Group invested significantly in supporting the
emotional and mental wellbeing of its workforce, with various
initiatives in each operating division, including the expansion of
‘mental health first aiders’ across the Group to support staff
regardless of whether they were in the office, working remotely or
on furlough.
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.
The Company is committed to adopting employment practices which
follow best practice and has an employee SAYE share scheme which
was put in place to provide employees with an opportunity 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.
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 they are in a position to respond 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.
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Post-balance sheet events
Branch-based lending and home credit division reviews
In April 2021 the Group commissioned a detailed and independent review of its lending, collecting and complaints handling activities within
the branch-based lending and home credit divisions. This review remains ongoing and includes an assessment of whether the issues identified
in guarantor loans have any implications for these divisions. The review also includes an assessment of recent FOS decisions in order to
determine whether there exists a subset of customers that may be eligible for redress on the basis of factors which may indicate instances of
unaffordable lending. These reviews have been considered as part of the Group’s year end provisioning; refer to note 24 for further detail.
Complaints received since year end
During the first quarter of 2021 the Group received a high level of complaints within its home credit division, primarily from CMCs. The Group
has therefore estimated the cost of those complaints which relate to loans issued up to 31 December 2020 and included this within its provision
(refer to note 24) as an adjusting subsequent event.
Taxation in the March 2021 Budget
In the 3 March 2021 Budget it was announced that the UK tax rate will increase to 25% from 1 April 2023. This will have a consequential effect
on the Group’s future tax charge. If this rate change had been substantively enacted at the current balance sheet date the unrecognised
deferred tax asset would have increased by £3.5m.
Guarantor Loans Division operational review
Having completed a detailed review of the Group’s Guarantor Loans Division and its prospects, the Board has decided to place the division
into a managed run-off which is expected to conclude by the end of 2025. Whilst a full detailed assessment of the cost implications is yet to be
carried out and this is a non-adjusting subsequent event, it is estimated that the recognition of a provision for redundancies would be
c.£0.52m. The Group recognises there is a risk around changes to customer behaviour following this decision, refer to note 2 for sensitivities on
loan loss provisions based on past-experience of how the parameters can potentially move.
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 48, the Group has now captured certain
environmental data and during the course of 2019 undertook the necessary assessment to comply with the ESOS, and the confirmation of our
compliance has been notified to the Environment Agency. In addition, the Group is developing a strategy to meet the requirements of the
Taskforce on Climate-Related Disclosures (‘TCFD’) that are expected to come into force in April 2022. As part of this exercise, the Group is also
considering the recommendations of the Sustainable Accounting Standards Board (‘SASB’).
Charitable and political donations
The Group made charitable donations totalling £0.13m including to Loan Smart (registered charity number 1176832).
The Group made no political donations in the year ended 31 December 2020.
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.
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. Not applicable
Not applicable
Information required in relation to the publication of unaudited financial information.
Directors’
Details of any long-term incentive schemes.
remuneration
report, pages 81
to 94
Not applicable
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
Details of parent participation in a placing by a listed subsidiary.
Details of any contract of significance in which a Director is or was materially interested.
Not applicable
Details of any contract of significance between the Company (or one of its subsidiaries) and a controlling shareholder. Not applicable
Not applicable
Details of any provision of services by a controlling shareholder.
Not applicable
Details of waiver of dividends or future dividends by a shareholder.
Not applicable
Board statements in respect of relationship agreement with the controlling shareholder.
Non-Standard Finance plc Annual Report & Accounts 2020 97
Directors’ report continued
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.
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual Report and
the financial statements in accordance with applicable law and
regulations.
Annual General Meeting
The AGM of the Company is scheduled to be held at 7 Turnberry Park
Road, Gildersome, Leeds LS27 7LE at 11.00 am on 30 June 2021.
A separate notice of meeting has already been despatched to
shareholders and a copy is available from the Group’s website:
www.nsfgroupplc.com.
Further details can be found in the corporate governance report on
page 68.
As the 2020 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
at 2:00pm on 16 August 2021 and the notice of meeting will be
dispatched to shareholders with the 2020 Annual Report.
Auditor
Deloitte LLP, the external auditor for the Company, was appointed in
2014. Deloitte notified the Company of their intent to stand down as
external auditor following the conclusion of the 2020 full year audit.
A full tender process was undertaken by the Audit Committee in 2021
and the Board will be proposing a resolution to appoint PKF
Littlejohn LLP as external auditors at the forthcoming Accounts
approval meeting to be held on 16 August 2021.
Directors’ statement as to disclosure of information to auditor
Each Director at the date of approval of the Annual Report confirms
that so far as each Director is aware, there is no relevant audit
information of which the Company’s auditor is unaware. Each
Director has taken all the steps that she/he ought to have taken as a
Director in order to make her/himself aware of any relevant audit
information and to establish that the Company’s auditor is aware of
that information. This confirmation is given and should be interpreted
in accordance with section 418 of the Companies Act 2006.
Going concern statement
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.
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 20
to the financial statements.
98
Company law requires the Directors to prepare financial statements
for each financial year. The consolidated and Company financial
statements have been prepared in accordance with international
accounting standards in conformity with the requirements of the
Companies Act 2006 and International Financial Reporting
Standards (‘IFRS Standards’) adopted pursuant to Regulation (EC)
No 1606/2002 as it applies to the European Union.
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.
Each of the Directors confirms that, to the best of their knowledge:
•
the Financial Statements, which have been prepared in accordance
with IASs in conformity with the requirements of the Companies Act
2006 and IFRSs as issued by the IASB, give a true and fair view of the
assets, liabilities, financial position and loss of the Group;
•
•
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 2020 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 2020 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 30 June 2021 and signed by the order of
the Board.
Sarah Day
Company Secretary
30 June 2021
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Independent auditor’s report
to the members of Non-Standard Finance plc
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 2020 and of the Group’s loss for the year then ended;
the Group financial statements have been properly prepared in accordance with international accounting standards in conformity with
the requirements of the Companies Act 2006 and International Financial Reporting Standards (‘IFRS’s’) as adopted by the European Union;
the Parent company financial statements have been properly prepared in accordance with international accounting standards in
conformity with the requirements of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
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 the preparation of the Group financial statements is applicable law and
international accounting standards in conformity with the requirements of the Companies Act 2006. The financial reporting framework that
has been applied in the preparation of the Parent company financial statements is applicable law and international accounting standards in
conformity with the requirements 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.
Non-Standard Finance plc Annual Report & Accounts 2020 99
Independent auditor’s report continued
to the members of Non-Standard Finance plc
3. Material uncertainty relating to going concern
We draw attention to note 1 in the financial statements, which indicates that the following factors have resulted in the recognition of a material
uncertainty over going concern:
•
the requirement for additional capital to be raised within the going concern period to secure the Group’s future covenant compliance,
solvency and liquidity position of the Group;
the impact of the GLD regulatory redress programme and customer complaints across the Group; and
•
• disruption within the Group caused by COVID-19, specifically taking into account the impact on collections and lending volumes.
The range of assumptions used by management and the likelihood of them all proving correct creates material uncertainty and therefore the
impact on liquidity and solvency under both the base case and downside scenarios (as described in note 1) may cast significant doubt on both
the Group’s and the Parent Company’s ability to continue as a going concern.
Details of the Group’s borrowings as at year end are disclosed in note 24. We note that the Group has not reported a breach in covenants up
to the date of approval of the financial statements, with formal covenant tests being performed at each quarter-end. Whilst the Group does
not project a breach of financial covenants as at the end of Q2 2021, the forecast headroom is limited and if further capital is not raised, the
forecasts indicate that the Group may be in breach of covenants by the end of Q3 2021. For the going concern assessment, management has
considered a base case scenario, which reflects a 12-month cashflow and loan book forecast from the date of approval of the financial
statements. It is important to note that the base case scenario includes plans to run off the GLD division and assumes an equity capital raise.
Included in these forecasts are assumptions in respect of lending volumes across all three divisions.
The Group has also prepared a downside scenario which considers sensitivites for what are believed to be reasonably possible adverse
variation in assumptions to assess the impact on liquidity and covenant compliance. These variations include; the ongoing uncertainty created
by regulatory issues such as redress and complaints, the plausibility of the equity raise and COVID-19 volatility. Under these scenarios there is a
risk that the Group may fall under the control of its lenders and there is a possibility of the Group going into insolvency.
Management has considered the mitigating actions against breaching covenants that are available to the Group, including:
• seeking resolution of the regulatory issues identified;
• progressing on steps required to raise equity capital as soon as possible;
• seeking waivers from, or amendments to, the financial covenants contained in the Group’s existing financing arrangements with lenders;
and
• other management actions include a reduced level of staff related costs and reduction in lending volumes.
Having assessed the most recent projections and the sensitivity analysis and having carefully considered the material uncertainty and the
mitigating actions available, management have formed the judgement that it is appropriate to prepare the financial statements on the going
concern basis.
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 Parent company’s ability to continue as a going concern.
Our opinion is not modified in respect of this matter.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of
the financial statements is appropriate.
Our evaluation of the Directors’ assessment of the Group’s and Parent company’s ability to continue to adopt the going concern basis of
accounting included the following procedures:
• given that the base case is predicated on a key assumption of a substantial equity raise in the second half of 2021, we assessed the
feasibility of the proposed equity raise by using internal equity and capital market specialists to assist in our challenge of management’s
plans. In addition we held discussions with the Group’s majority shareholder and reporting accountant;
• assessed and challenged the relevance and reliability of the underlying data and the assumptions on which the assessment is based –
including consistency with each other and related assumptions used in other areas;
• evaluated management’s latest covenant compliance forecasts up to the date of signing our audit opinion;
• considered the impact of the open regulatory matters on the base case;
• evaluated plans for future actions, with a focus on how the Group is managing relationships with existing lenders and stakeholders;
• considered and challenged whether any additional facts or information have become available since the date management made its
assessment;
• evaluated and challenged whether events or conditions give rise to a risk of management bias in the preparation of the financial
statements, specifically considering the plausibility of the equity raise, potential breach of covenants on the Term Loan facility and the
outcome of the skilled persons review into GLD;
• perform a stand-back assessment to consider all relevant audit evidence obtained, whether corroborative or contradictory, and any
indicators of possible management bias; and
• considered and challenged whether the disclosures are not just adequate in the context of the applicable accounting framework, but
whether they are appropriate.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
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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 related to going concern section);
• Provision for impairment losses against loans and receivables to customers;
• Revenue recognition; and
• Guarantor Loans Division (‘GLD’) redress provision.
Within this report, key audit matters are identified as follows:
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Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality
Scoping
The materiality that we used for the Group financial statements was £522,000 which was determined based on 0.2%
of Net Loan book. Net Loan book is the total loan book across the Group after IFRS 9 impairment.
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 the outstanding loan book balance.
Significant changes
in our approach
We have introduced a new key audit matter this year in relation to a customer redress provision at the Guarantor
Loans Division (‘GLD’), arising due to historic lending practices’ non-compliance with regulations.
The key driver behind this introduction is the level of judgement required to assess appropriateness of the inputs and
assumptions used in the provision methodology to estimate the customer redress provision.
We no longer identify the valuation of goodwill as a key audit matter. This is on the basis that goodwill was completely
written off by the Group as at 30 June 2020, as discussed in Note 14 to the financial statements.
We have revised our benchmark upon which materiality is determined in the current year due to the volatility of the
Group’s and Parent company’s results since the onset of the COVID-19 pandemic. Previously we used profit before tax
as the materiality benchmark, however we considered the Net loan book represents a more relevant measure used by
investors, regulators and other stakeholders when assessing the performance and longer-term prospects of the Group
as well as the importance of equity to the Group’s regulatory capital position.
5. 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 related to going concern
section above, we have determined the matters described below to be the key audit matters to be communicated in our report.
Non-Standard Finance plc Annual Report & Accounts 2020 101
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5. Key audit matters continued
5.1. Provision for impairment losses against loans and receivables to customers
Key audit matter
description
The Group holds an IFRS 9 impairment provision of £63m against gross customer receivables of £321m (2019:
impairment provision of £49m against gross customer receivables of £411m).
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 estimates on assumptions relating to customer default rates, historical collection rates, assessing
significant increases in credit risk and future economic scenario modelling. These assumptions are informed using
historical behaviour and experience.
COVID-19 continues to be a key risk affecting the impairment of customer receivables. To recognise the increased risk
of default associated with customers affected by COVID-19, management applied post model adjustments (‘PMAs’) to
their IFRS 9 ECL. Specifically, we identified a significant risk over management’s assumptions in the macroeconomic
scenarios, weightings and model overlays in light of COVID-19.
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 with segmental provisioning percentages by product, duration and
arrears to determine expected cash flows. From our risk assessment procedures, we focussed on the appropriateness
of collection curves used in the calculation including the completeness and accuracy of associated data inputs.
Branch-based lending and GLD
During 2020, management incorporated refinements to the methodologies employed to reduce the need for Post
Model Adjustments. The refined approach continues to utilise the staging output and criteria for the identification of
a Significant Increase in Credit Risk (“SICR”) based on the existing model methodology. Enhancements were made
across the remaining elements of the ECL calculation to mitigate the exacerbated effect of shortcomings in the existing
model in the current economic climate.
Based on our risk assessment, we focused on:
•
the appropriateness of modelling methodologies adopted, both internally and at management’s service provider
who hosts the existing model;
the selection and weighting of multiple economic scenarios;
the impact of those scenarios on loss expectations;
the use and quantification of management overlays; and
the timely identification of SICR triggers to transition from 12 month to lifetime losses.
•
•
•
•
Given the significant level of management judgement involved, we have determined that there is the potential for
fraud through the manipulation of this balance.
As noted in section 7.2 below, we have identified control deficiencies both in the IT control environment and manual
calculations used in the estimation of the ECL and therefore have not sought to rely on controls in this area.
Further detail in respect of management judgements and assumptions is set out within the Audit Committee report on
pages 71 to 79, accounting policies and notes 2 and 19 to the financial statements.
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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
and collection curves. This involved evaluating management’s conclusions regarding the selection and weighting of
multiple economic scenarios and benchmarking against peers in the industry. We engaged our economic specialists
in the audit work performed in this area.
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 identify and challenge outliers in both input and output
data.
We worked with data analytics and modelling specialists to test scripts and coding used internally by management for
both data extraction and impairment modelling and where relevant, coding used in the existing model hosted by
management’s service provider. These procedures were performed to validate the practical application of
management’s IFRS 9 methodology. Together with our IT specialists, we 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 COVID-19 and
macro-economic factors with reference to supporting calculations and cash collections and challenged the
completeness through benchmarking the level and type of PMAs to others in the industry.
We assessed management’s methodology applied for the identification of a Significant Increase In Credit Risk against
the requirements of IFRS 9 and tested the practical application in the model by engaging our modelling specialists to
review the code applied in the existing model. We further evaluated the effectiveness of the criteria applied for the
identification of a SICR by assessing whether the transfer between Stages was predominantly based on forward-
looking criteria, rather than backstops applied.
Key observations
We concluded that management’s judgement used in the provision calculation is reasonable and is supported by a
methodology that is consistently applied and compliant with IFRS 9.
Non-Standard Finance plc Annual Report & Accounts 2020 103
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5. Key audit matters continued
5.2. Revenue recognition
Key audit matter
description
The Group’s main revenue stream is interest income of £163m (2019: £181m) 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 the interest recognised 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 interest;
• whether loans have been modified substantially and the impact thereof on interest recognition, including manual
adjustments to interest; and
• appropriate application of net interest to loans in Stage 3.
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; and
• Branch-based lending and GLD – manual adjustments recorded in interest income.
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.
As noted in section 7.2 below, we have identified control deficiencies both in the IT control environment and manual
calculations used in the estimation of the ECL and therefore have not sought to rely on controls in this area.
Further detail in respect of management judgements and assumptions is set out within the Audit Committee report on
pages 71 to 79, accounting policies and note 2 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 interest, including manual adjustments.
We considered the appropriateness of the interest recognition methodology for compliance with IFRS 9. We also
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. This included the consideration of modifications on the interest income recorded.
We also tested management’s manual adjustments relating to interest recognition by recalculating the interest
adjustments made based on the modified terms of the loans, specifically in relation to loans that have been modified
in the period.
We assessed whether management’s approach to recognising interest 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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5.3. GLD Redress Provision
Key audit matter
description
The Group holds a provision of £15.4m (2019: £nil) provided for customer redress in relation to GLD. During the year, the
FCA had raised some concerns regarding certain processes and procedures relating to creditworthiness assessment
at GLD and required that a programme of redress be put in place for those customers deemed to have suffered harm
as a result. An independent skilled person was appointed by the FCA to review the proposed programme of redress.
As the FCA have not yet approved the methodology at the time of approval of the financial statements, the amount
provided is considered to be a key audit matter. Significant judgement is required to assess the level of provision in
relation to the methodology proposed, application of the methodology and the redress expected to be paid out. The
extent of disclosures around the key sources of estimation uncertainty and corresponding sensitivities has been a key
focus area, given the FCA has not yet approved the methodology proposed by the skilled person. We note that
discussions with the FCA and the skilled person are progressing. There is currently no definitive date by when they are
expected to conclude, although the directors expect this to happen in the third quarter of 2021.
Further detail in respect of management judgements and assumptions is set out within the Audit Committee report on
pages 71 to 79 accounting policies and note 2 to the financial statements.
How the scope of our
audit responded to
the key audit matter
We performed the following procedures for GLD:
• obtained an understanding of controls related to management’s redress methodology and calculation;
• assessed the completeness of management’s methodology against the findings raised by the FCA and review
performed by the skilled person;
• we held tripartite meetings with both the FCA and the skilled person to discuss the findings in the skilled person
•
report;
involved our market conduct specialists in our challenge of management’s valuation of the redress provision and
sensitivities disclosed;
• evaluated management’s disclosures for the redress provision, and how the risks and assumptions underpinning the
•
methodology are described in the key sources of estimation uncertainty; and
tested the methodology used to determine the provision, including involving our data specialists in reperforming
redress decisions in line with the communicated methodology and recalculated the provision.
Key observations
While we note the potential sensitivity of the GLD redress provision given that the FCA has not yet approved the
proposed methodology, we concluded that the provision of £15.3m is reasonably stated in line with the latest available
information.
Non-Standard Finance plc Annual Report & Accounts 2020 105
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6. Our application of materiality
6.1. 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:
Materiality
£522,000 (2019: £791,000)
Group financial statements
Parent company financial statements
£208,000 (2019: £317,500)
Basis for determining
materiality
We used 0.2% of the net loan book.
We used 4% of the administrative expenses of the
company as a materiality benchmark for the current year.
The net loan book is the gross loan book of the Group
net of IFRS 9 impairment provision.
For the year ended 31 December 2019, 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 2019, we used 6% of
administrative expenses, which equates to 4% of adjusted
pre-tax profit.
Rationale for the
benchmark applied
We have revised our benchmark upon which materiality is
determined in the current year due to the volatility of the
Group’s results since COVID-19 pandemic. We considered
that net loan book represents a more stable and relevant
measure used by investors, regulators and other
stakeholders when assessing the performance and
long-term prospects of the Group as well as the
importance of net loan book to the Group’s revenue.
We deemed that administrative expenses was the
appropriate benchmark for the Parent company as this is
not a trading subsidiary and operations involve acting as
the cost centre for the Group management team, including
payroll and head office expenses. On this basis we deem
administrative expenses the most appropriate benchmark
and have assessed the Parent company administrative
expenses as a percentage of the Group administrative
expenses to determine its relative size and arrive at an
appropriate percentage of Group materiality.
Net loan
book
£261m
Net Loan Book
Group materiality
Group materiality
£522k
Component
materiality range
£390k to £208k
Audit Committee
reporting threshold
£26k
6.2. 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.
Group financial statements
Parent company financial statements
65% (2019: 70%) of Group materiality
65% (2019: 70%) of Parent company materiality
In determining performance materiality, we considered the quality of the control environment and that we were not
able to take a controls reliance approach. Due to the history of errors identified in prior periods and control
deficiencies reported we reduced our performance materiality percentage to 65% of materiality.
Performance
materiality
Basis and rationale
for determining
performance
materiality
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6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £26,000 (2019: £40,000), 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.
7. An overview of the scope of our audit
7.1. Identification and scoping of components
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 divisions (Branch Based Lending, Guarantor Loans Division and Home Credit) within the Group which together
account for 100% (2019: 100%) of the Group’s losses before tax and customer receivables balances. We have performed audit procedures over
the Group consolidation and consolidation adjustments. We have audited all the subsidiaries using a materiality range of £208,000 to
£390,000 (2019: £318,000 to £445,000).
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Based on our assessment of the Group’s control environment, and considering the control deficiencies highlighted in the Audit Committee
report on pages 71 to 79, 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.
7.2. Our consideration of the control environment
The Group relies on the effectiveness of a number of IT systems and applications to ensure that financial transactions are recorded completely
and accurately. The main lending systems, ECL applications and associated manual calculations, and the general ledger systems are key to
the audit.
We engaged our IT specialists in the evaluation of the IT control environment across the Group and in particular in the lending businesses of
the Group, which included Management’s third-party provider for IFRS 9 ECL calculations. A number of IT deficiencies have been identified
across the relevant lending systems in scope of our testing as well as at Management’s third party provider.
In the course of auditing the ‘Provision for impairment losses against loans and receivables to customers’ and ‘revenue recognition’ per the key
audit matter above, we have identified errors in the calculations which constituted control deficiencies.
As a consequence of the above mentioned IT and manual control deficiencies identified, we have continued not to rely on controls for our
audit of the Group in line with prior year. Accordingly, the audit team extended the scope of audit procedures in response to the identified
control deficiencies.
The Audit Committee has performed their own assessment of the internal control environment, weaknesses and failings identified, as well as
actions taken or planned to be taken in this regard as outlined on page 59.
8. Other information
The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report
thereon. The Directors are responsible for the other information contained within the annual report. 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.
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 course of 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 this gives rise to a
material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
Non-Standard Finance plc Annual Report & Accounts 2020 107
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9. 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.
10. 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.
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.
11. Extent to which the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our
procedures are capable of detecting irregularities, including fraud is detailed below.
11.1 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; and
— the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations.
the matters discussed among the audit engagement team and involving relevant internal specialists, including tax, impairment, valuations,
IT, analytics and modelling, fraud, data, regulatory risk 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, GLD redress provision 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 Financial Conduct Authority and the Consumer Credit Act.
11.2 Audit response to risks identified
As a result of performing the above, we identified revenue recognition, provision for impairment losses against amounts receivable to
customers, GLD redress provision 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.
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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;
involving our fraud specialists to assist with design of audit procedures linked to fraud risk;
•
• 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; 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.
Report on other legal and regulatory requirements
12. 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.
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In our opinion, based on the work undertaken in the course of the audit:
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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.
13. Matters on which we are required to report by exception
13.1. 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.
13.2. 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.
14. Other matters we are required to address
14.1. 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 six years, covering the years ending 31 December 2015 to 31 December 2020.
14.2. 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).
15. 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
30 June 2021
Non-Standard Finance plc Annual Report & Accounts 2020 109
Consolidated statement of comprehensive income
for the year ended 31 December 2020
Revenue1
Other operating income
Modification loss
Derecognition loss
Impairment of financial assets2
Exceptional provision for customer redress
Administrative expenses
Operating loss
Other exceptional items
Loss on ordinary activities before interest and tax
Finance costs
Loss on ordinary activities before tax
Tax on loss on ordinary activities
Loss for the year
Total comprehensive loss for the year
Before fair value
adjustments,
amortisation
of acquired
intangibles and
exceptional items
£000
Fair value
adjustments,
amortisation
of acquired
intangibles and
exceptional items3
£000
164,102
1,154
(6,282)
(2,643)
(66,262)
–
(96,385)
(6,316)
–
(6,316)
(28,836)
(35,152)
(1,437)
–
–
–
–
(15,401)
(1,298)
(18,136)
(82,433)
(100,569)
–
(100,569)
164
Note
3
19
19
7
4
7
10
12
Year ended
31 Dec 2020
£000
162,665
1,154
(6,282)
(2,643)
(66,262)
(15,401)
(97,683)
(24,452)
(82,433)
(106,885)
(28,836)
(135,721)
164
(35,152)
(100,405)
(135,557)
(135,557)
1 Revenue comprises interest income calculated using the EIR method. Refer to note 1 in the notes to the financial statements for further detail.
2 Impairments comprise expected credit losses on amounts receivable from customers. Refer to notes 1 and 19 in the notes to the financial statements for further detail.
3 Refer to the appendix for detail of alternative performance measures used (‘APMs'). Refer to notes 7 and 15 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
(135,557)
–
Year ended
31 Dec 2020
Pence
(43.39)
Note
11
There are no recognised gains or losses other than disclosed above and there have been no discontinued activities in the year.
110
For the year ended 31 December 2019
Revenue1
Other operating income
Modification loss
Derecognition loss
Impairment of financial assets2
Administrative expenses
Operating profit/(loss)
Exceptional items
Profit/(loss) on ordinary activities before interest and tax
Finance costs
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
Note
3
19
19
4
7
10
12
Before fair value
adjustments,
amortisation
of acquired
intangibles and
exceptional items
£000
Fair value
adjustments,
amortisation
of acquired
intangibles and
exceptional items3
£000
183,657
954
(1,181)
(413)
(45,066)
(95,786)
42,165
–
42,165
(27,458)
14,707
(3,261)
11,446
(2,873)
–
–
–
–
(7,226)
(10,099)
(80,584)
(90,683)
–
(90,683)
2,929
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
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)
(87,754)
(76,308)
(76,308)
1 Revenue comprises interest income calculated using the EIR method, refer to note 1 in the notes to the financial statements for further detail.
2 Impairments comprise expected credit losses on amounts receivable from customers. Refer to notes 1 and 19 in the notes to the financial statements for further detail.
3 Refer to the appendix for detail of alternative performance measures. Refer to notes 7 and 15 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
(76,308)
–
Year ended
31 Dec 2019
Pence
(24.45)
Note
11
Non-Standard Finance plc Annual Report & Accounts 2020 111
Note
31 Dec 2020
£000
31 Dec 2019
£000
14
15
23
25
17
16
19
19
21
22
24
24
24
24
24
26
27
28
–
8,237
–
–
10,079
6,277
124,128
148,721
134,073
2,080
1,550
77,956
215,659
74,832
8,572
1
1,677
10,560
6,556
185,269
287,467
176,379
2,183
460
14,192
193,214
364,380
480,681
15,895
21,813
1,928
39,636
8,961
326,587
335,548
15,621
180,019
551
(206,995)
(10,804)
364,380
26,909
1,466
1,830
30,205
9,275
317,590
326,865
15,621
180,019
2,152
(74,181)
123,611
480,681
Consolidated statement of financial position
as at 31 December 2020
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
Corporation tax asset
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
Bank loans
Total non-current liabilities
Equity
Share capital
Share premium
Other reserves
Retained loss
Total equity
Total equity and liabilities
These financial statements were approved by the Board of Directors on 30 June 2021.
Signed on behalf of the Board of Directors.
John van Kuffeler
Group Chief Executive
Jono Gillespie
Group Chief Financial Officer
112
Consolidated statement of changes in equity
for the year ended 31 December 2020
At 31 December 2018
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
Total comprehensive loss for the year
Transactions with owners, recorded directly in equity:
Dividends paid
Credit to equity for equity-settled share-based payments
Transfer of share-based payments on vesting
of share awards
At 31 December 2020
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
Note
13
27
28
28
26
28
26
13
28
28
Share
capital
£000
15,852
–
–
Share
premium
£000
254,995
–
–
–
–
–
–
(75,000)
–
–
23
–
(254)
–
24
–
–
15,621
180,019
Other
reserves
£000
(2,011)
–
–
–
–
1,183
(734)
–
255
3,459
2,152
Retained
loss
£000
(61,635)
(76,308)
(295)
(8,425)
75,000
–
734
(47)
–
(3,205)
(74,181)
–
–
–
–
–
–
–
–
–
(135,557)
–
1,142
–
–
(2,743)
2,743
15,621
180,019
551
(206,995)
Non-
controlling
interest
£000
255
–
–
–
–
–
–
–
(255)
–
Total
£000
207,456
(76,308)
(295)
(8,425)
–
1,183
–
–
–
–
–
–
–
–
–
–
123,611
(135,557)
–
1,142
–
(10,804)
1
In the 2019 financial year, £255,000 relating to Founder Shares was 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 2020
Net cash from/(used in) operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Purchase of software intangibles
Proceeds from sale of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Finance cost
Repayment of principal portion of lease liabilities
Debt raising
Repayment of borrowings
Dividends paid
Net cash (used in)/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 2020
£000
Year ended
31 Dec 2019
£000
82,193
(16,986)*
(1,726)
(3,221)
16
(4,931)
(18,333)
(1,806)
21,641
(15,000)
–
(13,498)
63,764
14,192
77,956
(1,744)**
(3,185)**
62
(4,867)
(18,218)
(1,606)*
50,400
–
(8,425)
22,151
298
13,894
14,192
Note
29
16
15
13
22
* The repayment of the principal portion of lease liabilities has been re-presented to recognise this as a cash outflow from financing activities. This was previously shown as a cash
outflow from investing activities in the prior year. The interest portion of the repayment of the lease liability has been re-presented to recognise this as a cash outflow from operating
activities. This was previously shown as a cash outflow from financing activities in the prior year.
** There has also been enhanced disclosure in the purchase of property, plant and equipment and software intangibles. This has been separated into separate line items.
Non-Standard Finance plc Annual Report & Accounts 2020 113
Company statement of financial position
as at 31 December 2020
ASSETS
Non-current assets
Property, plant and equipment
Intangible assets
Deferred tax
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 2020
£000
31 Dec 2019
£000
16
15
25
17
18
21
22
24
24
24
26
27
28
13
52
–
32
–
97
32,157
553
32,710
32,807
4,988
43
–
5,031
15,621
180,019
551
(168,415)
27,776
32,807
51
75
–
162
95,686
95,974
60,357
194
60,551
156,525
13,047
161
43
13,251
15,621
180,019
2,139
(54,505)
143,274
156,525
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.
Total comprehensive loss for the financial year reported in the financial statements for the Company was £115.9m (2019: loss of £119.4m).
These financial statements were approved by the Board of Directors on 30 June 2021.
Signed on behalf of the Board of Directors.
John van Kuffeler
Group Chief Executive
Jono Gillespie
Group Chief Financial Officer
Company number – 09122252
114
Company statement of changes in equity
for the year ended 31 December 2020
At 31 December 2018
Total comprehensive loss 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
Total comprehensive loss for the year
Transactions with owners, recorded directly in equity:
Dividends paid
Credit to equity for equity-settled share-based payments
Transfer of share-based payments on vesting of share awards
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
Share
capital
£000
15,852
–
–
–
–
–
23
(254)
–
Share
premium
£000
254,995
–
–
(75,000)
–
–
24
–
–
Other
reserves
£000
Retained
profit
£000
Total
£000
(1,771)
–
1,695
(119,483)
270,771
(119,483)
–
–
1,185
(734)
3,459
–
(8,425)
75,000
–
–
(47)
(3,206)
(39)
(8,425)
–
1,185
(734)
–
–
(39)
15,621
180,019
2,139
(54,505)
143,274
–
–
–
–
–
–
–
–
–
(115,869)
(115,869)
–
371
(1,959)
–
–
1,959
–
371
–
Note
13
27
28
28
26
26
13
28
28
At 31 December 2020
15,621
180,019
551
(168,415)
27,776
Company statement of cash flows
for the year ended 31 December 2020
Net cash used in operating activities
Cash flows from investing activities
Purchase of software intangibles
Dividend income
Net cash from investing activities
Cash flows from financing activities
Finance cost
Cash flows from lease liabilities
Dividends paid
Net cash used in 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 2020
£000
Year ended
31 Dec 2019
£000
(11,420)
(5,135)*
–
11,950
11,950
(10)
(161)
–
(171)
359
194
553
(12)
13,500
13,488
(1)
(126)*
(8,425)
(8,552)
(199)
393
194
Note
29
15
13
22
* The repayment of the principal portion of lease liabilities has been re-presented to recognise this as a cash outflow from financing activities. This was previously shown as a cash
outflow from investing activities in the prior year. The interest portion of the repayment of the lease liability has been re-presented to recognise this as a cash outflow from operating
activities. This was previously shown as a cash outflow from financing activities in the prior year.
Non-Standard Finance plc Annual Report & Accounts 2020 115
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 international accounting standards in
conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (‘IFRS Standards’) adopted
pursuant to Regulation (EC) No 1606/2002 as it applies to the European Union.
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 2020. 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.
During the year, the Directors assessed the forecast levels of net debt, headroom on existing borrowing facilities and compliance with debt
covenants. As part of its going concern assessment, the Directors reviewed both the Group’s access to liquidity and its future balance sheet solvency
for the next 12 months from the date of approval of the financial statements. For liquidity, the Group produced two scenarios: (i) the more likely (or
‘base case’) scenario which includes a substantial equity injection in the second half of 2021 in order to mitigate the risk of and/or cure covenant
breaches; and (ii) a downside scenario which applies stresses in relation to the key risks identified in the base case and does not include an equity
raise. The Group concluded that a material uncertainty continues to exist 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 not entirely within the Group’s control including the successful execution
of a capital raise, current and future impacts of COVID-19 and the impact of potential levels of redress across the Group as well as the outcome of
the independent reviews being performed at the branch-based lending and home credit divisions.
Under the base case, additional equity funds in the second half of 2021 mean that the Group does not breach its covenants in the next 12 months and
therefore would not require covenant waivers from its lenders in order to remain viable. The base case assumes no breach in covenant as at 30 June
2021 as on the basis of current forecasts the Group does not expect to do so. However, the covenant headroom remains tight and there remains a risk
due to unforeseen and as yet unaccounted for matters that the Group will breach its financial covenants as at 30 June 2021. If this were to happen,
then the Group would maintain its strategy as described under the base case as management would have time to cure this breach. However, this
would result in a requirement to either accelerate the capital raise or request a temporary waiver from lenders, neither of which have been
considered in the base case. Therefore, if the Group finds itself in such a scenario, whilst the Directors remain confident of the ability to raise capital,
they note the risks associated with executing on the base case would be increased and consequently the likelihood of the Group ending up in the
downside scenario would also be increased.
Under the downside scenario, which assumes no additional equity in 2021, the Group would be expected to breach certain covenants during the
next 12 months and would therefore not be able to access further funding over the period of breach. It is also therefore assumed that the Group
would require waivers from its lenders in order to remain viable. The waivers required under this scenario are beyond the range discussed in previous
negotiations with lenders and therefore if the expected breach under this scenario occurs and if waivers are not forthcoming, the Group may fall
under the control of its lenders and there is a possibility of the Group going into insolvency.
116
The Directors additionally ran a liquidity reverse stress test on the base case to identify the level that expected collections would have to fall by so
as to cause the Group to deplete all cash reserves. This showed that, assuming no changes to lending levels and operating expenses, collections
would be required to fall by over 23% from current expected levels in the base case for the Group to then be unable to fund operating expenses
and interest payments beyond the next 12 months. Based on evidence to date, such a reduction in collections, with no mitigating actions, was
thought by the Directors to be an unlikely event, though the Directors also recognised access to such cash generated by the collections is ring
fenced by the lenders and therefore in the event of a breach of covenants, the ring fence is triggered and the cash would not to be available to
the Group or Company.
With regards to the balance sheet solvency of the Group, the Directors noted that under the base case, whilst in a net liability position as at
31 December 2020, the Group will move forwards in a net asset position, however this is dependent on additional equity proceeds being
received. Under the downside scenario, the Group would remain in a net liability position.
On the basis of the above analysis, the Directors note that a material uncertainty exists regarding the successful execution of a capital raise,
current and future impacts of COVID-19 and the impact of potential levels of redress and claims across the Group. The range of assumptions
and the likelihood of them all proving correct creates material uncertainty on liquidity and solvency under both the base case and downside
scenarios.
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
In making their assessment, the Directors took account of the Group’s current financial and operational positions, the status of conversations with
the regulator and advisors, as well as recent trading activity and in particular, recent collections activity. They noted the proposed equity raise to
support the Group and in particular the continued interest of the Group’s major shareholder Alchemy in supporting a capital raise subject to the
outcome of the Group’s engagement with its lenders, Alchemy’s analysis of the FCA and Group’s regulatory reviews, and greater levels of certainty
around redress and claims. In addition, they noted, contingent on a successful capital raise having been completed, the informal support of a
proposed extension to the term of the Group’s existing facilities by its lenders. The Directors also note the existence of the securitisation facility,
however they noted that this is currently suspended and the ability to use this facility remains outside of the Group’s control as it is subject to the
consent of the lenders and the satisfaction of standard covenants for a facility of this type. The Directors recognise there exists a risk around
covenant compliance as at 30 June 2021 due to matters unforeseen in its current forecasts and that should a breach occur, it would result in a
requirement to either accelerate the capital raise or request a temporary waiver from the lenders.
The Directors acknowledge the considerable challenges presented over the last year and now facing the Group and the Company and therefore
the material uncertainty which may cast significant doubt on the ability of both the Group and the Company to continue to adopt the going
concern basis of accounting. However, despite these challenges, it is the Directors’ reasonable expectation that the Group and Company can
and will raise sufficient equity and have sufficient liquidity to continue to operate and meet its liabilities as they fall due for the next 12 months and
therefore it has adopted the going concern basis of accounting.
The assumption of shareholder support for additional equity, lender support for the extension of existing financing facilities, and the
satisfactory conclusion of regulatory and redress matters within or close to the assumptions made in the base case, forms a significant
judgement of the Directors in the context of approving the Group’s going concern status.
The Directors will continue to monitor the Group and Company’s risk management, response to claims and the redress programme, access to
liquidity, balance sheet solvency and internal control systems.
The same conclusion has been made in relation to the statement on longer-term viability as discussed on pages 76 to 79 of this report.
Changes in accounting policies and disclosures
New and amended standards and interpretations issued but not effective for the financial year ending 31 December 2020
In the current year and in accordance with IFRS requirements, the following accounting standards have been issued by the IASB and/or are
not yet effective: IFRS 17 Insurance Contracts, amendments to IAS 1 Classification of Liabilities as Current or Non-current, amendments to IFRS 3
Reference to the Conceptual Framework, annual Improvements to IFRS Standards 2018-2020 Cycle – Amendments to IFRS 1 First-time Adoption
of International Financial Reporting Standards, IFRS 9 Financial Instruments, IFRS 16 Leases, and IAS 41 Agriculture. There are no new
standards not yet effective and not adopted by the Group from 1 January 2020 which are expected to have a material impact on the Group.
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.
Alternative Performance Measures
The Group uses Alternative Performance Measures (‘APMs') to monitor the financial and operational performance of each of its business
divisions and the Group as a whole. The APMs 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 the
Group. The Group believes that these APMs, which are not considered to be a substitute for or superior to IFRS 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 2020, APMs remain unchanged from the prior year. Refer to the Appendix for a glossary of
APMs and reconciliation to IFRS reported numbers.
Non-Standard Finance plc Annual Report & Accounts 2020 117
Notes to the financial statements continued
1. Accounting policies continued
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 effective interest rate (‘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 Expected Credit Losses (‘ECL’)). For credit-impaired amounts
receivable from customers (those in stage 3), the interest income is calculated by applying the EIR to the amortised cost of the receivable (i.e.
the gross carrying amount less the allowance for ECL).
Other operating income
Other operating income relates to amounts received as a result of debt sales made and government grants received in relation to the
Coronavirus Job Retention Scheme (‘CJRS’). 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 hold and collect (further detail under
Financial Assets). The accounting policy in relation to CJRS income is detailed below.
Coronavirus Job Retention Scheme (CJRS)
Under the CJRS, employers receive compensation from the government for part of the wages, associated National Insurance Contributions
(NIC) and employer pension contributions of employees who have been placed on furlough. The grant receipts have been measured at the
fair value of the assets receivable and have been recognised under the performance model.
Under the performance model, grants shall be recognised:
• when received, where the grant does not impose future performance-related conditions on the recipient; or
• when performance-related conditions are met, where the grant imposes such conditions on the recipient.
Under the CJRS grant, the Company deems all performance related conditions to have been met when the claim was submitted, therefore
income is recognised when received and no contingent liability has been recognised in the accounts for future liabilities in relation to this grant.
The amount received as part of the CJRS totalling £0.67m (2019: £nil) has been included within other operating income for the year ended
31 December 2020 (refer note 30 for further detail).
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 acquired 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 consolidated 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. During the
year ended 31 December 2020, the fair value of acquired loan book on acquisition has been fully amortised and impaired and the balance at
year end is £nil (2019: £1.4m).
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 £97.8m of exceptional costs for the year ended
31 December 2020 (2019: £80.6m). Refer to note 7 for further detail.
Finance costs
Finance costs comprise the interest expense on external borrowings which are recognised in the consolidated 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 the interest expense on lease liabilities, as well as any fair value movement on
derivative financial instruments held for hedging purposes which do not qualify for hedge accounting under IFRS 9.
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Taxation
The tax credit/expense represents the sum of the tax currently receivable/payable and any deferred tax.
The current tax credit/charge is based on the taxable loss for the year. Taxable loss differs from net loss 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 asset/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.
Deferred tax liabilities in the Company are recognised for taxable temporary differences arising on investments in subsidiaries, except where
the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the
foreseeable future.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred
tax is charged or credited to comprehensive income, except when it relates to items charged or credited directly to other comprehensive
income, in which case the deferred tax is also dealt with in other comprehensive income.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities
and when they relate to income taxes levied by the same taxation authority and the Group intends to settle on a net basis.
Business combinations and goodwill
Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is
transferred to the Group.
Goodwill is an intangible asset and is measured as the excess of the fair value of the consideration over the fair value of the acquired
identifiable assets, liabilities and contingent liabilities at the date of acquisition.
Goodwill is allocated to Cash Generating Units (‘CGUs’) for the purposes of impairment testing. The allocation is made to those CGUs or
groups of CGUs that are expected to benefit from the business combination in which the goodwill arose.
Goodwill is tested annually for impairment and 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 weighted average
cost of capital at the balance sheet date. All remaining goodwill has been fully written off in the current year (refer to note 14).
Discontinued operations
The Group considers a discontinued operation to be a component of the Group that either has been disposed of or is classified as held for sale.
The component must also represent either a separate major line of business or geographical area of operations, and must be part of a single
co-ordinated plan with regards to its disposal. If a component of the Group is to be abandoned, and it also meets the above criteria for a
discontinued operation, then its results and cash flows will be presented as a discontinued operation at the date on which it ceases to be used.
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.
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 Everyday Loans customer list, credit decisioning
technology, and brand have been fully amortised and impaired in the current year as a result of the impairment assessment carried out at the
Everyday Loans Division (refer to note 14). 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
Non-Standard Finance plc Annual Report & Accounts 2020 119
Notes to the financial statements continued
1. Accounting policies continued
Intangible assets continued
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. Project costs are stated at cost less accumulated
depreciation and any recognised impairment loss.
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 or valuation of property, plant and equipment in order to write off 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
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 for the Company 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.
120
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; refer to note 18 and 21 for further detail.
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.
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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 loss 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.
Coronavirus (COvID-19) pandemic impact on expected credit losses in the home credit division
During 2020 the Group made adjustments in order to reflect the lower collective PD, LGD and EAD for the proportion of home credit customers
who were financially impacted by the pandemic. This was informed by the Group’s detailed analysis of past repayment behaviours and
expected repayments behaviour across the entire home credit customer base. Due to the nature of home credit loans, being typically shorter
term, by 31 December 2020, the COVID-19 provision overlay had fully unwound to £nil and therefore whilst representing a change in policy as
a result of COVID-19 during the year, management have deemed the overlay as no longer being required at year end and therefore there is no
impact on amounts receivable from customer balances as at 31 December 2020.
Non-Standard Finance plc Annual Report & Accounts 2020 121
Notes to the financial statements continued
1. Accounting policies continued
Recognition of expected credit losses continued
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 at
origination, 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 forbearance.
• 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 ECL. Risk models are used in
order to determine the PD of customer receivables and the corresponding IFRS 9 stage categorisations. As with the home credit division, the
ECL assessment at the branch-based lending and guarantor loan divisions are run at account level and 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 and measured as the difference between the carrying value of the loans and
the present value of estimated future cash flows discounted using the EIR of the loan.
PD is modelled at a portfolio level which considers vintage, maturity, exogenous and other credit factors and is applied across all receivables
at initial recognition. In addition, the model includes consideration of future economic conditions and scenarios. 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 across the receivable base. The model used to determine PD therefore 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 (‘BoE’) base rate, Gross Domestic Product (‘GDP’), Consumer Price
Index (‘CPI’), House Price Index (‘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. The weightings applied to the macroeconomic variables
address the risk of non-linearity in the relationship between credit losses and economic conditions, with PDs increasing more in unfavourable
conditions (particularly severe conditions) than they reduce in favourable conditions. As loan loss provisions are derived by reference to their
IFRS 9 stage, the ECL recognised is directly impacted by the PD calculated under the range of economic scenarios. As the weightings used for
the year ended 31 December 2019 Annual Report and Accounts did not consider the impact of recent economic changes arising from the
effects of COVID-19, for the year ended 31 December 2020, the Group has worsened the macro-economic variables to account for this as well
as increased the downside weighting as reflected in the table below.
The Group’s customers are typically less sensitive to changes in economic conditions and are often better placed to manage a recession than
prime customers. The Group therefore recognises that whilst the severity of the impact of the COVID-19 pandemic on the economy remains
uncertain and risks to rising unemployment and falling GDP have heightened since 31 December 2019, based on historical evidence the effect
of traditional macroeconomic downside indicators is minimal and therefore, there would need to be a significant shift in the weightings to
have a material impact on the PDs of amounts receivable from customers. As such, in addition to a change in macroeconomic weightings, in
order to account for the specific forward looking macro-economic impact of COVID-19 on provisions, the Group has additionally included a
COVID-19 overlay to reflect the increased risks associated with customers who have taken and/or come off payment holidays.
Macroeconomic variables and scenarios
Base
Downside stress
Severe downside stress
Positive
31 Dec 2020
31 Dec 2019
50%
40%
0%
10%
50%
30%
15%
5%
As noted above, in addition to the change in weightings of the relevant scenarios, the macroeconomic forecasts for each of the variables have
also changed since 31 December 2019 in order to reflect the latest economic outlook which includes the effects of COVID-19. In 2019, the Group
used economic forecast data from the BoE Annual Cyclical Scenario. As the BoE did not produce any new forecasts for 2020, in the current
year, the Group has instead used the Fiscal Sustainability Report published by the Office for Budget Responsibility (‘OBR’) from November
2020 as the basis for its macroeconomic scenarios. For variables where the OBR report did not provide sufficient information, the BoE 2019
scenarios, updated for actuals, have remained in use.
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The macroeconomic variables which are modelled include the BoE base rate, GDP, CPI, HPI and the unemployment rate. A summary of the
peak and average for each of the variables under the scenarios are detailed below.
For the year ended 31 Dec 2020
2021
Maximum (Peak) unemployment rate
Maximum (Peak) GDP rate1
Maximum (Peak) Base rate
Maximum (Peak) HPI rate1
Maximum (Peak) CPI rate
2022
Maximum (Peak) unemployment rate
Maximum (Peak) GDP rate1
Maximum (Peak) Base rate
Maximum (Peak) HPI rate1
Maximum (Peak) CPI rate
2023
Maximum (Peak) unemployment rate
Maximum (Peak) GDP rate1
Maximum (Peak) Base rate
Maximum (Peak) HPI rate1
Maximum (Peak) CPI rate
For the year ended 31 Dec 2020
2021
Average unemployment rate
Average GDP rate1
Average Base rate
Average HPI rate1
Average CPI rate
2022
Average unemployment rate
Average GDP rate1
Average Base rate
Average HPI rate1
Average CPI rate
2023
Average unemployment rate
Average GDP rate1
Average Base rate
Average HPI rate1
Average CPI rate
1 Referenced against first month equalling 100bps.
Positive
Base
Downside Stress
5.1%
102
0.1%
104
110
4.6%
105
0.10%
108
112
4.0%
106
0.10%
113
113
7.5%
97
0.1%
101
110
7.3%
101
0.10%
102
111
6.2%
102
0.10%
107
113
9.3%
95
2.0%
100
113
11.0%
95
2.00%
87
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9.9%
98
2.00%
72
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Positive
Base
Downside Stress
4.9%
98.4
0.10%
102
110
4.0%
104
0.10%
106
111
4.0%
105
0.10%
111
112
6.0%
93.6
0.10%
97
109
6.9%
99
0.10%
97
111
5.7%
102
0.10%
105
112
6.8%
89.5
1.25%
94
111
10.4%
93
2.00%
80
116
8.8%
97
2.00%
68
120
Non-Standard Finance plc Annual Report & Accounts 2020 123
Notes to the financial statements continued
1. Accounting policies continued
Macroeconomic variables and scenarios continued
For the year ended 31 Dec 2019
2020
Maximum (Peak) unemployment rate
Maximum (Peak) GDP rate1
Maximum (Peak) Base rate
Maximum (Peak) HPI rate1
Maximum (Peak) CPI rate
2021
Maximum (Peak) unemployment rate
Maximum (Peak) GDP rate1
Maximum (Peak) Base rate
Maximum (Peak) HPI rate1
Maximum (Peak) CPI rate
2022
Maximum (Peak) unemployment rate
Maximum (Peak) GDP rate1
Maximum (Peak) Base rate
Maximum (Peak) HPI rate1
Maximum (Peak) CPI rate
For the year ended 31 Dec 2019
2020
Average unemployment rate
Average GDP rate1
Average Base rate
Average HPI rate1
Average CPI rate
2021
Average unemployment rate
Average GDP rate1
Average Base rate
Average HPI rate1
Average CPI rate
2022
Average unemployment rate
Average GDP rate1
Average Base rate
Average HPI rate1
Average CPI rate
1 Referenced against first month equalling 100bps.
Positive
Base
Downside Stress
Severe Stress
3.9%
103
0.8%
104
110
3.9%
106
0.75%
108
111
3.9%
109
0.75%
113
112
4.0%
101
0.9%
102
111
4.0%
103
1.03%
105
113
4.0%
105
1.13%
110
115
5.7%
100
0.9%
100
112
5.9%
98
1.03%
96
116
5.9%
100
1.13%
91
120
8.0%
100
4.0%
100
112
8.6%
96
4.00%
87
118
8.5%
97
4.00%
72
121
Positive
Base
Downside Stress
Severe Stress
3.9%
102
0.75%
102
109
3.9%
105
0.75%
106
111
3.9%
108
0.75%
111
112
4.0%
101
0.79%
101
110
4.0%
102
0.97%
104
112
3.9%
104
1.09%
107
114
4.9%
98
0.79%
98
110
5.9%
98
0.97%
93
114
5.7%
99
1.09%
90
118
6.0%
97
2.25%
94
110
8.5%
96
4.00%
80
115
8.3%
97
4.00%
68
120
The Group’s positive, base and stress scenarios are based on the OBR Economic and Fiscal Outlook (November 2020). The upside scenario
assumes the success in bringing the pandemic under control, enabling output to return to pre-pandemic levels late in 2021. The base case
assumes a slower return to pre-pandemic levels at the end of 2022. The downside scenario assumes that vaccines are ineffective and a more
substantial and lasting economic adjustment is required with economic activity only recovering to pre-pandemic levels at the end of 2024. In
the upside scenario output eventually returns to pre-virus levels but is left permanently affected by the pandemic in the base and downside
scenarios. For variables where the OBR report did not provide sufficient information (in the case of HPI CPI and Base rate for the positive and
stress scenarios, the BoE 2019 scenarios, updated for actuals, have remained in use.
124
Coronavirus (COvID-19) pandemic impact on expected credit losses in branch-based lending and guarantor loans division
The requirement to provide support in the form of an emergency payment freeze (‘EPF’) for customers affected by the pandemic has impacted
the ECL recognised in branch-based lending and the guarantor loans divisions for the year ended 31 December 2020. In order to quantify this,
the Group has reviewed the behaviour of customers who opted for an EPF and/or notified us as being affected by COVID-19 and have used
this data to inform updates to the PD, LGD and staging profile of those receivables that were affected. The Group recognises that, in line with
IASB guidance, the activation of an EPF by a customer is not automatically deemed a significant increase in credit risk. Further detail of the
adjustments made to recognise the impact of COVID-19 on ECL is provided in note 2 – Critical accounting judgements and key sources of
estimation uncertainties.
Significant increase in credit risk (‘SICR’)
The Group monitors all financial assets that are subject to the impairment requirements to assess whether there has been a SICR since initial
recognition. If there has been a SICR, the Group will measure the loss allowance based on lifetime rather than 12-month ECL.
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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 SICR 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 SICR 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 SICR 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 branch-based lending and the Guarantor Loans Division there are three ways a customer account can demonstrate 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 SICR. 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 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 loan products.
• Vintage – effects that relate to the period in which the accounts were originated. The most obvious driver of a change in performance from
this perspective is a change 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 SICR 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. In 2019, the business introduced a policy to categorise these
loans as performing or not performing based on their delinquency at the reporting date. For those loans that have performed 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.
Non-Standard Finance plc Annual Report & Accounts 2020 125
Notes to the financial statements continued
1. Accounting policies continued
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 Division
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 a 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.
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.
126
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.
Impact of Coronavirus (COvID-19) pandemic impact on branch-based lending and Guarantor Loans Division write-off policy
During 2020, the Guarantor Loans Division temporarily amended their write-off policy to allow customers with emergency payment freezes
additional time to recover their financial situation. Although these customer balances are greater than 180 days in arrears and have not been
written-off, they have been fully provided for. There was no change to the branch-based lending division in the current year.
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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.
Impact of Coronavirus (COvID-19) pandemic impact on home credit write-off policy
During 2020, the home credit division temporarily amended their write-off policy to allow customers with emergency payment freezes additional
time to recover their financial situation. Although these customer’s balances have not been written-off, they have been fully provided for.
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 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.
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.
Non-Standard Finance plc Annual Report & Accounts 2020 127
Notes to the financial statements continued
1. Accounting policies continued
Share-based payments continued
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 28 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.
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.
fixed lease payments (including in substance fixed payments), less any lease incentives;
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:
•
• 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); and
•
• 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.
Impairment of right-of-use assets is reviewed where circumstances indicate that the carrying value of an asset may not be fully recoverable.
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 2020.
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.
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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 estimates 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 for stage 2 assets 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 Division
Incorporation of macroeconomic/forward-looking overlays:
•
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 PD. This is achieved by developing a number of potential economic scenarios and modelling the PD for each scenario.
The outputs from each scenario are combined using the estimated likelihood of each scenario occurring to derive a probability weighted
PD which is then used to calculate ECL. Therefore, when measuring PD and 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 branch-based lending and the Guarantor Loans Division 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.
• COVID-19 overlay: During the year, the Group made adjustments in order to reflect the higher PD, LGD and EAD for the proportion of branch-
based lending and guarantor loan customers who were financially impacted by the pandemic. This was informed by the Group’s detailed
analysis of past repayment behaviours and expected repayments behaviour across the entire customer base. In branch-based lending, a
COVID-19 overlay was derived by consideration of the recent collection performance on COVID-19 affected accounts and whether any impact
on collection performance was deemed to be temporary or permanent. An overlay adjustment was therefore made to increase provisions for
accounts for which the impact was deemed permanent and/or who were not making full payments. For the Guarantor Loans Division, recent
payment performance of those customers who were impacted by COVID-19 but are no longer on an emergency payment freeze (‘EPF’)
were used to inform expected delinquency trends of customers who had not yet resumed payment following an EPF. A provision overlay
was then applied to reflect expected performance consistent with the recent performance behaviours observed.
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 over the life of the loan.
Sensitivity analysis of amounts receivable from customers – key sources of estimation uncertainty:
Branch-based lending and Guarantor Loans Division – COvID-19 overlay
The sensitivity of the COVID-19 overlay adjustment applied by branch-based lending and the Guarantor Loans Division are noted below. The
below sensitivities assume all other variables used in the calculation of expected credit losses (‘ECL') remains constant.
Branch-based lending
If no overlay is applied to 50% of COVID-19 impacted customer accounts who have missed payments and are deemed to be permanently
impacted, ECL would reduce by £0.9m.
If 50% of COVID-19 impacted customer accounts deemed as temporarily impacted and have missed payments, are permanently impacted,
ECL would increase by £1.2m.
Non-Standard Finance plc Annual Report & Accounts 2020 129
Notes to the financial statements continued
2. Critical accounting judgements and key sources of estimation uncertainty – Group continued
Guarantor Loans Division
If no overlay is applied to 50% of COVID-19 impacted customer accounts, ECL would reduce by £1.6m.
If 50% of COVID-19 impacted accounts were assumed to be written off and therefore fully provided for, ECL would increase by £3.7m.
Probability of default and loss given default
Branch-based lending
The calculation of ECL in branch-based lending uses historical data to forecast future cash flows, discounted at the receivable’s EIR. A
sensitivity run on collections performance shows that a 5% increase or decrease in expected cash collections would result in an £8.0m increase/
decrease in provisions. The suitability of the 5% sensitivity run has been reviewed and considered appropriate based on historical performance.
Guarantor Loans Division
The calculation of ECL in the Guarantor Loans Division uses historical data to forecast future cash flows, discounted at the receivable’s EIR. A
sensitivity run on collections performance shows that a 10% increase or decrease in expected cash collections would result in a £5m increase/
decrease in provisions. The suitability of the 10% sensitivity run has been reviewed and considered appropriate based on historical performance.
Home credit
The home credit 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. 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 -/+ £1.3m effectively changing the receivable
valuation by 5%. The suitability of the 5% sensitivity run has been reviewed and considered appropriate based on historical performance.
Provisions
Provision for customer complaints
Provisions for customer complaints are recognised when the Group has a present obligation (legal or constructive) as a result of a past event,
it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
Judgement is applied to determine whether the criteria for establishing and retaining a provision have been met. Provisions for customer
redress are in respect of complaints where the outcome has not yet been determined. Judgement is applied to determine the quantum of such
provisions, including making assumptions regarding the extent to which the complaints received may be upheld, average redress payments
and related administrative costs. Past experience is used as a predictor of future expectations with management applying overlays where
necessary depending on the nature and circumstances. The cost could differ from the Group’s estimates and the assumptions underpinning
them and could result in an increased provision being required. There is also uncertainty around the impact of proposed regulatory changes,
claims management companies and customer activity.
The key assumptions in these calculations which involve management judgement and estimation relate primarily to the projected costs of
existing complaints where it is considered likely that customer redress will be appropriate.
These key assumptions are:
• uphold rate percentage – the expected average uphold rate applied to existing complaint volumes where it is considered more likely than
not that customer redress will be appropriate;
• average redress cost – the estimated compensation, inclusive of balance adjustments and cash payments, for upheld complaints included
in the provision; and
• customer complaint volumes – the level of claims which would be due remediation in future based on recent experience of valid claims.
These assumptions remain subjective due to the uncertainty associated with future complaint volumes and the magnitude of redress which
may be required. Complaint volumes may include complaints under review by the Financial Ombudsman Service, cases received from claims
management companies or cases lodged directly by customers.
Branch-based lending
A 50% increase/decrease in customer complaints volumes would result in a £0.45m increase/decrease in provisions for the Group, a 50%
increase/decrease in average claim redress would result in a £0.45m increase/decrease in provisions for the Group, and a 50% increase/
decrease in upheld rate would result in a £0.45m increase/decrease in provisions for the Group.
Home credit
A 25% increase/decrease in customer complaints volumes would result in a £0.7m increase/decrease in provisions for the Group, a 25%
increase/decrease in average claim redress would result in a £0.7m increase/decrease in provisions for the Group, and a 25% increase/
decrease in upheld rate would result in a £0.7m increase decrease in provisions for the Group.
130
Guarantor Loans Division
Part of the provision included in the statement of financial position relates to a provision recognised for the proposed programme of redress for
customers of the Group’s Guarantor Loans Division totalling £15.4m (2019: £nil). The provision represents an accounting estimate of the
expected future outflows arising using information available as at the date of signing these financial statements. Identifying whether a present
obligation exists and estimating the probability, timing, nature and quantum of the redress payments that may arise from past events requires
judgements to be made on the specific facts and circumstances relating to individual customers. It is possible that the eventual outcome may
differ, perhaps materially, from the current estimate and this could impact the financial statements. This is due to the risks and inherent
uncertainties surrounding the assumptions used in the provision calculation. Whilst the current estimate represents the Directors’ best estimate
of the total cost of redress, based upon a detailed methodology and analyses developed in conjunction with its advisers, the uncertainty
surrounding the final cost of redress is heightened by the fact that the FCA has not yet approved the methodology proposed. Therefore,
although the Directors believe their best estimate represents a reasonably possible outcome; there is a risk of a less favourable outcome. Refer
to note 24 for more detail regarding the customer redress provisions.
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As at the date of signing these financial statements, the Group is working closely with the FCA to reach a conclusion regarding the redress
methodology. The FCA has raised questions around the Group’s assessment of whether or not the customer has suffered harm (in instances
where we have concluded that the affordability assessment at the time of underwriting was not appropriate). Under the Group’s proposed
methodology there are a range of factors which need to be met in order to conclude that a customer has suffered harm, including external
indicators that harm may have been incurred. The current methodology requires multiple indicators to be present to trigger redress, however,
should only one of these factors in isolation be taken as a definition of harm, then the redress provision could be c.£10m higher than that
currently provided for in the financial statements. Furthermore, until such time the redress approach has been agreed with the FCA, there
remains uncertainty around this estimate and therefore the ultimate cost could be higher than this £10m sensitivity indicates. The ultimate
redress amount will also be subject to a manual case-by-case review of customers who have incomplete electronic records that may be
affected. This could result in the ultimate payout being higher than estimated under the proposed methodology.
Other Key Matters
Whilst not considered a quantitively material key source of estimation uncertainty, the Group deems the following disclosures are material to
the users of the accounts:
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. These sensitivities take into account the impact of COVID-19 on underlying macroeconomic variables and 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
Weighting
Impact on ECL
£000
50%
40%
0%
10%
75%
10%
0%
15%
50%
50%
0%
0%
n/a
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Non-Standard Finance plc Annual Report & Accounts 2020 131
Notes to the financial statements continued
2. Critical accounting judgements and key sources of estimation uncertainty – Group continued
Other key matters continued
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%
40%
0%
10%
75%
10%
0%
15%
50%
50%
0%
0%
n/a
119
(203)
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 macroeconomic adjustment is
currently not necessary.
3. 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 portfolio1
Total revenue
Year ended
31 Dec 2020
£000
164,102
(1,437)
162,665
Year ended
31 Dec 2019
£000
183,657
(2,873)
180,784
1
In the year ended 31 December 2020, the fair value adjustment made to the acquired loan portfolio of the Guarantor Loans Division has been fully unwound.
4. Operating profit/(loss) for the year is stated after charging/(crediting):
Depreciation of property, plant and equipment (note 16)
Depreciation of right-of-use asset (note 17)
Amortisation and impairment of intangible assets (note 15)
Staff costs excluding agent commission1 (note 9)
Rentals under operating leases
Profit/(loss) on sale of property, plant and equipment
1 Agent commission for the year ended 31 December 2020 was £11.3m (2019: £13.1m). Refer to note 1 for accounting policy.
Year ended
31 Dec 2020
£000
Year ended
31 Dec 2019
£000
1,941
2,065
3,556
43,855
596
54
1,827
2,042
9,090
50,975
742
(43)
132
5. 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
Audit related fees
Services relating to corporate finance transactions
Other
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
Year ended
31 Dec 2020
£000
Year ended
31 Dec 2019
£000
296
694
990
220
–
–
220
228
553
781
75
1,602
123
1,800
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 71.
6. Segment information
Management has determined the operating segments by considering the financial and operational information that is reported internally to
the chief operating decision-maker, the Board of Directors, by management. For management purposes, the Group is currently organised into
four operating segments: 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 2020
Interest income
Fair value unwind on acquired loan portfolio
Total revenue
Exceptional provision for customer redress2
Operating profit/(loss) before amortisation
Amortisation of intangible assets
Operating profit/(loss) before exceptional items
Other exceptional items2
Finance cost
Loss before taxation
Taxation
Loss for the year
Total assets
Total liabilities
Net assets/(liabilities)
Capital expenditure
Depreciation of plant, property and equipment
Depreciation of right-of-use asset
Amortisation and impairment of intangible assets
Branch-based
lending
£000
220,702
(271,981)
(51,279)
4,070
1,643
1,321
571
Branch-based
lending
£000
89,788
–
89,788
–
13,419
–
13,419
(6,017)
(18,594)
(11,192)
–
(11,192)
Home
credit
£000
38,745
(19,021)
19,724
2,467
261
615
1,665
Home
credit
£000
43,834
–
43,834
–
(2,509)
–
(2,509)
–
(1,228)
(3,737)
–
(3,737)
Guarantor
loans1
£000
59,794
–
59,794
–
–
–
–
Guarantor
loans1
£000
30,480
(1,437)
29,043
(15,401)
(28,565)
–
(28,565)
–
(7,467)
(36,032)
–
(36,032)
Central
£000
391,597
(332,946)
Central
£000
–
–
–
–
(5,499)
(1,298)
(6,797)
(76,416)
(1,547)
(84,760)
164
2020
Total
£000
164,102
(1,437)
162,665
(15,401)
(23,154)
(1,298)
(24,452)
(82,433)
(28,836)
(135,721)
164
(84,596)
(135,557)
Consolidation
adjustments3
£000
2020
Total
£000
(346,458)
248,764
364,380
(375,184)
58,651
(97,694)
(10,804)
–
37
129
1,320
–
–
–
–
6,537
1,941
2,065
3,556
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 £97.9m other exceptional items in 2020 (2019: £80.6m). Refer to note 7 for further details.
3 Consolidation adjustments include the acquisition intangibles of £nil (2019: £1.3m), goodwill of £nil (2019: £75.8m), fair value of loan book of £nil (2019: £1.4m) and the elimination of
intra-Group balances.
Non-Standard Finance plc Annual Report & Accounts 2020 133
Notes to the financial statements continued
6. Segment information continued
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 items
Finance cost
Profit/(loss) before taxation
Taxation
Profit/(loss) for the year
Total assets
Total liabilities
Net assets
Capital expenditure
Depreciation of plant, property and equipment
Depreciation of right-of-use asset
Amortisation and impairment of
intangible assets
Branch-based
lending
£000
244,740
(302,987)
(58,247)
2,754
1,428
1,240
400
Branch-based
lending
£000
Home credit
£000
Guarantor
loans
£000
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)
29,820
(2,873)
26,947
5,895
–
5,895
(737)
(7,338)
(2,180)
574
(1,607)
(89,247)
(76,308)
Central
£000
Consolidation
adjustments
£000
2019
Total
£000
633,760
(332,406)
(556,709)
307,525
480,681
(357,070)
106,960
301,355
(249,184)
123,611
–
–
–
–
12
43
129
38
–
–
–
7,211
4,929
1,827
2,042
9,090
60,835
–
60,835
9,102
–
9,102
(221)
(2,116)
6,765
(1,432)
5,333
Guarantor
loans
£000
106,960
–
93,002
–
93,002
29,653
–
29,653
(332)
(17,355)
11,966
(2,752)
9,214
Home
credit
£000
51,931
(29,202)
22,729
2,164
356
673
1,442
The results of each segment have been prepared using accounting policies consistent with those of the Group as a whole.
7. Exceptional items
During the year ended 31 December 2020, the Group incurred exceptional costs totalling £97.8m (including VAT) (2019: £80.6m).
The emergence of the pandemic alongside the significant decline in market multiples across the sector resulted in a further impairment to the
value of the goodwill assets of two of the three divisions in the Group’s balance sheet in the current year. Whilst non-cash in nature, the impact
is summarised as follows: £47.1m reflects the write-down of the value of goodwill associated with Everyday Loans and £27.7m reflects the
write-down of the value of goodwill associated with Loans at Home. Further details pertaining to the write-down of the value of goodwill are
set out in note 14.
The Group announced on 3 August 2020 that following its multi-firm review of the guarantor loans sector, the FCA had raised some concerns
regarding certain processes and procedures at the Group’s Guarantor Loans Division and a programme of redress would be required. Whilst
discussions with the FCA have not yet concluded in regard to the Group’s proposed redress methodology, a charge of £15.4m has been
recognised as the Directors’ best estimate of the full and final costs of the redress programme.
During the first half of 2020, the Group put in place a new six-year securitisation facility, and drew down £15m in April 2020. The onset of the
COVID-19 pandemic resulted in the Group breaching certain performance triggers on the facility during the first half of 2020. As a result, the
amount previously drawn down was repaid on 26 August 2020, removing the outstanding breach. Whilst the facility remains available for
potential future use, given the uncertainty as at 31 December 2020 in regard to the Group’s ability to access the securitisation facility in the
future, the capitalised fees associated with the securitisation facility of £5.8m were fully written-off in 2020. The remaining £1.8m of exceptional
costs relate to advisory fees of £1.4m and restructuring costs at branch-based lending of £0.4m.
The impairment of goodwill and equity-related fees have been treated as non-deductible for tax purposes.
In the prior year, the Group incurred £80.6m of exceptional costs that comprised: £12.8m of costs related to fees and other costs associated
with the lapsed offer to acquire Provident Financial, as well as the related proposal to demerge Loans at Home; the write-down of the value
of goodwill associated with Everyday Loans of £44.8m; the write-down of the value of goodwill associated with the Group’s Guarantor Loans
Division of £8.6m; and the write-down of the value of goodwill associated with Loans at Home of £12.5m. A remaining £1.9m of exceptional
costs related to management restructuring which took place across the divisions in 2019 (Loans at Home: £0.2m, branch-based lending and
Guarantor Loans Division: £1.1m, and the removal of a Director at central: £0.6m).
134
8. Directors’ remuneration
Short-term employee benefits
Post-employment benefits
Termination benefits
Year ended
31 Dec 2020
£000
Year ended
31 Dec 2019
£000
937
59
–
1,633
85
287
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.
Nick Teunon resigned as Director in April 2020. Refer to the Directors’ remuneration report for more detail on remuneration.
9. Employee information
a) The average monthly number of staff (including Executive Directors but excluding Loans at Home’s network of self-employed agents)
employed by the Group was as follows:
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
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
10. Finance costs
Bank charges and interest payable
Lease finance costs under IFRS 16
Finance cost
11. Loss per share
Retained loss attributable to Ordinary Shareholders (£000)
Weighted average number of Ordinary Shares at year ended 31 December
Basic and diluted loss per share (pence)
Year ended
31 Dec 2020
Number
Year ended
31 Dec 2019
Number
499
122
305
9
935
Year ended
31 Dec 2020
£000
36,501
1,142
3,862
2,349
43,854
Year ended
31 Dec 2020
£000
(27,798)
(1,038)
(28,836)
428
131
313
7
879
Year ended
31 Dec 2019
£000
42,891
1,183
4,863
2,038
50,975
Year ended
31 Dec 2019
£000
(26,399)
(1,059)
(27,458)
Year ended
31 Dec 2020
Year ended
31 Dec 2019
(135,557)
312,437,422
(76,308)
312,126,220
(43.39)p
(24.45)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 2020, nil shares were held in treasury (2019: nil).
Weighted average number of potential Ordinary Shares that are not currently dilutive
Year ended
31 Dec 2020
000s
6,272
Year ended
31 Dec 2019
000s
8,938
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 2020 was the end of the contingency period.
Non-Standard Finance plc Annual Report & Accounts 2020 135
Notes to the financial statements continued
12. Taxation
As at the year end the Group has not recognised an increase in the deferred tax asset on its current year losses and has also reversed the
deferred tax asset recognised in the prior year, which combined results in a total £11.3m unrecognised deferred tax asset (2019: £1.7m deferred
tax asset recognised).
Current tax charge
Current tax
Prior period adjustment to current tax1
Total current tax charge
Deferred tax charge2
Prior period adjustment to deferred tax1
Total tax (credit)/charge
Year ended
31 Dec 2020
£000
Year ended
31 Dec 2019
£000
–
(1,841)
(1,841)
1,677
–
(164)
2,321
(916)
1,405
(1,178)
104
332
1 Prior period adjustments primarily represent the benefit of claiming deductions for the costs related to the guarantor loan redress provision for which no tax deduction was assumed in
the prior year (refer to note 24 for further detail).
2 Unrecognised deferred tax assets arising from tax losses in the year were £8.4m (2019: £nil).
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% (2019: 19%):
Effects of:
Fixed asset differences
Expenses not allowable for taxation
Share-based payments
IFRS 16 adjustments
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
Reversal of prior year deferred tax asset
Deferred tax assets not recognised on current year losses
Total tax (credit)/charge
Year ended
31 Dec 2020
£000
(135,721)
(25,787)
Year ended
31 Dec 2019
£000
(75,976)
(14,435)
100
17,222
44
(23)
–
(2,168)
–
–
79
2,021
8,348
(164)
93
15,506
157
(51)
–
(916)
104
(43)
(82)
–
–
332
The total unrecognised deferred tax asset as at 31 December 2020 is £10.4m (2019: £1.7m deferred tax assets recognised).
Certain exceptional items and costs related to the Group’s Save As You Earn (‘SAYE’) and long-term incentive plans are included within ‘expenses
not allowable for taxation’ due the nature of these transactions. These include the £75.5m (2019: £65.9m) write-down of the value of goodwill
associated with Loans at Home and Everyday Loans, as well as the write-down of the value of intangibles at Everyday Loans. Long-term
incentive plan items disallowed relates to set-up costs and the fair value of the schemes at the date of grant totalling £0.7m (2019: £0.8m).
The 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%. On the
3 March 2021 Budget it was announced that the UK tax rate will increase to 25% from 1 April 2023. This will have a consequential effect on the
Group’s future tax charge. Refer note 25 for a sensitivity on the impact on unrecognised deferred tax balances.
13. Dividends
As a result of the significant reported losses in 2019 and 2020, the Company does not have any distributable reserves and is therefore not in a
position to declare a final dividend. As part of any future capital raise, 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.
As reported in the 2020 Half Year Results to 30 June 2020, the Group did not declare a half-year dividend during the first half of 2020 (2019:
0.7p per share).
136
14. Goodwill – Group
Gross carrying amount
Accumulated impairment
Impairment charge
Net carrying amount
Year ended
31 Dec 2020
£000
140,668
(65,836)
(74,832)
–
Year ended
31 Dec 2019
£000
140,668
–
(65,836)
74,832
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
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 2020 was £nil (2019:
£74.8m, comprising £27.7m related to the acquisition of Loans at Home, £47.1m related to the acquisition of Everyday Loans, and £nil related to
the acquisition of George Banco).
Under IFRS 13, ‘Fair Value Measurement’, the fair value inputs used in the goodwill impairment assessment are classified as Level 3.
The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. Determining
whether goodwill is impaired requires an estimation of the recoverable amount of each Cash Generating Unit (‘CGU’). The recoverable
amount is the higher of its fair value (’FV’) less cost to sell or its Value in Use (‘VIU’). During the year an assessment of the impairment of
goodwill was performed and recognised in the half-year ended 30 June 2020 financial statements of the Group. This utilised actual price
earnings (‘PE’) multiples of comparable companies as at 30 June 2020 and applied these to forecast earnings for the 12-month period ended
31 December 2020. The approach which was taken for each is detailed below.
Fair value (‘FV’) less cost to sell
The calculation to determine the fair value less cost to sell for each CGU used forecasted earnings for the year ended 31 December 2020,
multiplied by the 30 June 2020 PE multiple for comparable companies. Earnings represent profit after tax before fair value adjustments,
amortisation of intangibles and exceptional items. Disposal costs were estimated at 2%. As part of this assessment, we applied PE multiples to
forecasted 2020 profit after tax in order to determine management’s best estimate of the fair value to be attributed to each of the CGUs.
Value in use
The calculation to determine recoverable amount based on VIU used 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 were then discounted at a discount rate appropriate to the CGU to produce a VIU to the Group.
Loans at Home goodwill assessment
In the 2019 Annual Report and Accounts, the Group concluded that no further impairments to the Loans at Home goodwill asset were
necessary beyond the £12.5m that was recognised and disclosed in the Group’s results for the six months ended 30 June 2019. In the six months
ended 30 June 2020, the Group utilised the actual 30 June 2020 PE multiple of comparable companies, along with 2020 forecast profit after
tax to determine recoverable amount. The result was a FV less cost to sell below the carrying value of the CGU as at 30 June 2020.
Management also ran a VIU calculation to determine recoverable value. Assuming a nil growth into perpetuity results in a VIU which, whilst
higher than the FV less cost to sell calculated for Loans at Home, remained below the carrying value of the LAH CGU. The impact of COVID-19
on the profitability of the CGU in the current year along with the significant decline in peer group PE multiples since 31 December 2019 (driven
by uncertainties in the economic, market and regulatory environment) has meant that on the basis of the analysis above, the Group concluded
to impair the entire goodwill asset attributable to the LAH CGU as at 30 June 2020 totalling £27.7m. This reduced the Loans at Home goodwill
asset to £nil as at 31 December 2020.
Everyday Loans goodwill assessment
As at 30 June 2020, the Group performed a FV less cost to sell for the Everyday Loans CGU using actual PE multiples as at 30 June 2020 and
2020 forecast profits. Given the unique circumstances of COVID-19 on 2020 performance, along with the significant decline in peer group PE
multiples since 31 December 2019 driven by uncertainties in the economic, market and regulatory environment, the Group calculated the FV
less costs to sell to be below the carrying value, therefore indicating an impairment to the remaining goodwill value held on the balance
sheet. A VIU base case forecast was used to ascertain whether or not the VIU of the CGU was greater or less than the FV less cost to sell.
Assuming a nil growth into perpetuity, the VIU of the CGU was below the FV less costs to sell, and therefore it was appropriate to impair the
entire goodwill asset attributable to the Everyday Loans CGU as at 30 June 2020 totalling £47.1m. This reduced the Everyday Loans goodwill
asset to £nil as at 31 December 2020.
Guarantor Loans goodwill assessment
During the second half of 2019, the value of goodwill for the Guarantor Loans CGU was written down to £nil. This was 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.
Non-Standard Finance plc Annual Report & Accounts 2020 137
Notes to the financial statements continued
15. Intangible assets – Group
Cost
At 1 January 2020
Additions
At 31 December 2020
Amortisation
At 1 January 2020
Charge for the year
Impairment1
At 31 December 2020
Net book value
At 31 December 2020
At 31 December 2019
Customer
lists
£000
Agent
network
£000
Brands
£000
Broker
relationships
£000
Technology
£000
LAH IT
software
development
£000
21,924
–
21,924
21,545
175
204
21,924
–
379
540
–
540
540
–
–
540
–
–
2,005
–
2,005
1,605
185
215
2,005
–
400
9,151
–
9,151
9,151
–
–
9,151
–
–
Software
£000
Total
£000
4,372
1,228
52,627
3,221
5,600
55,848
2,707
612
–
3,319
44,055
2,858
698
47,611
6,227
–
6,227
5,709
239
279
8,408
1,993
10,401
2,798
1,647
–
6,227
4,445
–
5,956
2,281
8,237
518
5,610
1,665
8,572
1
Impairment of acquisition intangibles have been assessed as part of the goodwill assessment carried out during the year, refer to note 14 for further detail.
Cost
At 1 January 2019
Additions
At 31 December 2019
Amortisation
At 1 January 2019
Charge for the year
Impairment1
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
Software
£000
Total
£000
21,924
–
21,924
19,559
1,339
647
21,545
379
2,365
540
–
540
540
–
–
2,005
–
2,005
1,235
370
–
540
1,605
–
–
400
770
9,151
–
9,151
5,837
1,949
1,365
9,151
6,227
–
6,227
4,152
1,557
–
5,709
6,279
2,129
8,408
1,372
1,426
–
3,316
1,056
4,372
2,270
437
–
49,442
3,185
52,627
34,965
7,078
2,012
2,798
2,707
44,055
–
518
5,610
1,665
8,572
3,314
2,075
4,907
1,046
14,477
1
Impairment of acquisition intangibles were assessed as part of the goodwill assessment in 2019, refer to note 14 for further detail.
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 2020:
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 relationships
Loans at Home IT software development
Software
Carrying value as
at 31 Dec 2020
£000
Carrying value as
at 31 Dec 2019
£000
Amortisation
period remaining
years and months
–
–
–
–
–
–
5,956
2,281
379
518
400
–
–
–
5,610
1,665
–
–
–
–
–
–
3 years
3 to 5 years
138
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
Intangible assets – Company
Software
£000
Total
£000
Cost
At 1 January 2020
Additions
At 31 December 2020
Depreciation
At 1 January 2020
Charge for the year
At 31 December 2020
Net book value
At 31 December 2020
At 31 December 2019
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
115
–
115
40
23
63
52
75
Software
£000
103
12
115
18
22
40
75
85
16. Property, plant and equipment – Group
Cost
At 1 January 2020
Additions
Disposals
At 31 December 2020
Depreciation
At 1 January 2020
Charge for the year
Disposals
At 31 December 2020
Net book value
At 31 December 2020
At 31 December 2019
Leasehold
improvements
£000
Fixtures
and fittings
£000
Motor
vehicles
£000
Computer
equipment
£000
6,198
815
(232)
6,781
2,210
938
(187)
2,960
3,821
3,988
2,142
173
–
2,315
669
185
–
854
1,461
1,473
81
–
(74)
7
(58)
33
(63)
(88)
94
139
2,935
739
(100)
3,574
1,980
785
(92)
2,673
901
956
115
–
115
40
23
63
52
75
Total
£000
103
12
115
18
22
40
75
85
Total
£000
11,356
1,727
(406)
12,677
4,801
1,941
(342)
6,400
6,277
6,556
Non-Standard Finance plc Annual Report & Accounts 2020 139
Notes to the financial statements continued
16. Property, plant and equipment – Group continued
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
Leasehold
improvements
£000
Fixtures and
fittings
£000
110
–
–
110
81
22
–
103
7
29
80
–
–
80
58
16
–
74
6
22
3,235
340
(640)
2,935
1,863
757
(640)
1,980
956
1,372
Motor
vehicles
£000
55
–
–
55
55
–
–
55
–
–
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
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
Property, plant and equipment – Company
Cost
At 1 January 2020
Additions
Disposals
At 31 December 2020
Depreciation
At 1 January 2020
Charge for the year
Disposals
At 31 December 2020
Net book value
At 31 December 2020
At 31 December 2019
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
140
Total
£000
10,729
1,744
(1,117)
11,356
4,053
1,827
(1,078)
4,802
6,556
6,677
Total
£000
245
–
–
245
194
38
–
232
13
51
Total
£000
247
–
(2)
245
152
43
(1)
194
51
95
17. Right-of-use (‘ROU’) asset – Group
Cost
At 1 January 2020
Additions
Disposals
At 31 December 2020
Depreciation
At 1 January 2020
Charge for the year
Disposals
At 31 December 2020
Net book value
At 31 December 2020
At 31 December 2019
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 (‘ROU’) asset – Company
Cost
At 1 January 2020
Additions
Disposals
At 31 December 2020
Depreciation
At 1 January 2020
Charge for the year
Disposals
At 31 December 2020
Net book value
At 31 December 2020
At 31 December 2019
ROU
Buildings
£000
15,860
1,589
(261)
17,188
5,727
1,866
(255)
7,338
9,850
10,133
ROU
Buildings
£000
14,253
1,606
–
15,860
3,876
1,843
8
5,727
10,133
–
ROU
Vehicles
£000
814
–
–
814
386
199
–
585
229
428
ROU
Vehicles
£000
814
–
–
814
187
199
–
386
428
–
ROU
Buildings
£000
647
–
–
647
485
130
–
615
32
162
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
Total
£000
16,674
1,589
(261)
18,002
6,113
2,065
(255)
7,923
10,079
10,560
Total
£000
15,067
1,606
–
16,673
4,063
2,042
8
6,113
10,560
–
Total
£000
647
–
–
647
485
130
–
615
32
162
Non-Standard Finance plc Annual Report & Accounts 2020 141
Notes to the financial statements continued
17. Right-of-use (‘ROU’) asset – Group continued
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
ROU
Buildings
£000
647
–
–
647
356
129
–
485
162
–
Total
£000
647
–
–
647
356
129
–
485
162
–
Total cash outflows for leases for the year ended 31 December 2020 was £2.8m (2019: £3.7m).
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 2020.
18. 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
S.D. Taylor Limited (trading as
Loans at Home)
7 Turnberry Park Road, Gildersome, Morley,
Leeds, England, LS27 7LE, United Kingdom
Nature of business
% voting rights and shares held
Provision of consumer credit
100% of Ordinary Shares
Loans at Home Limited
As above
Dormant
100% of Ordinary Shares
Everyday Loans Holdings
Limited
Secure Trust House, Boston Drive, Bourne
End, Buckinghamshire, SL8 5YS, United
Kingdom
Everyday Loans Limited
As above
Everyday Lending Limited
As above
Holding company
100% of Ordinary Shares
Provision and servicing of
secured and unsecured
personal instalment loans
Provision of secured and
unsecured personal
instalment loans
100% of Ordinary Shares
100% of Ordinary Shares
7 Turnberry Park Road, Gildersome, Morley,
Leeds, England, LS27 7LE, United Kingdom
Holding company
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
George Banco Limited
George Banco.com Limited
As above
As above
As above
As above
As above
Epsom Court 1st Floor, Epsom Road, White
Horse Business Park, Trowbridge, England,
BA14 0XF, United Kingdom
Holding company
100% of Ordinary Shares
Holding company
100% of Ordinary Shares
Financing company
100% of Ordinary Shares
Dormant
100% of Ordinary Shares
Holding company
100% of Ordinary Shares
Holds legal title to bank account
in its name on behalf of Everyday
Lending Limited
100% of Ordinary Shares
1 Held directly by the Company. NSF Group Limited has taken advantage of the exemption under section 394A of the Companies Act 2006 from preparing its individual accounts.
142
Investment in subsidiaries – Company
Gross investment in subsidiaries
Accumulated share-based payment
Accumulated impairment
Current year impairment charge
Current year share-based payment charge
Current year share-based payment vesting
Net investment carrying amount1
Year ended
31 Dec 2020
£000
Year ended
31 Dec 2019
£000
212,591
620
(117,525)
(95,972)
1,070
(784)
–
212,591
664
–
(117,525)
690
(734)
95,686
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
1 Whilst the investment balance has been written down to nil in the current year, in line with IAS 36, recoverable amount has been assessed against the combined total of the investment
balance and amounts due from subsidiaries which arose from the historical acquisitions of Loans at Home and Everyday Loans in 2015 and 2016 respectively. Refer to note 21 for details
regarding amounts due from subsidiaries.
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 value in use (‘VIU') or its fair value (‘FV') less cost to sell.
As at 31 December 2020, the Company recognised an impairment loss in its investment in subsidiaries totalling £96m (2019: £118m). This
impairment is consistent with the £47.1m impairment to Everyday Loans goodwill and £27.7m impairment to the Loans at Home goodwill and
£0.7m write-off of intangible assets recognised in the Group in the six months ended 30 June 2020 (refer to note 14).
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, increased uncertainty in the macroeconomic and regulatory environment and the significant impact of
COVID-19 on future profitability and cash flow forecasts since 31 December 2019.
The £96m impairment of the Company’s investment has been calculated as the difference between the recoverable amounts and the carrying
value of the investments and intercompany receivables on acquisition (refer to footnote 1 above). Recoverable amount has been calculated as
the higher of FV less cost to sell and value in use. The calculation to determine the FV less cost to sell for investments uses actual and forecast
earnings and carrying values as at 31 December 2020, 2021 and 2022 multiplied by the 31 December 2019 actual and 2021-2022 forecast PE
and PB multiples for comparable companies. Earnings represents profit after tax before fair value adjustments, amortisation of intangibles and
exceptional items. Disposal costs have been estimated at 2%. The value in use calculation uses cash flows derived from earnings projections
for the years ended 31 December 2021 to 2024, together with a terminal value based on the cash flow forecast for 2024 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. The
Directors have estimated the discount rate using post-tax rates that reflect current market assessments of the time value of money and the risks
specific to the market.
19. Amounts receivable from customers – Group
Gross carrying amount
Loan loss provision
Amounts receivable from customers
2020
£000
320,942
(62,741)
2019
£00
410,849
(49,201)
258,201
361,648
The movement on the loan loss provision for the period relates to the provision at the branch-based lending, guarantor loans and home credit
divisions 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 fair value of amounts receivable from customers are:
Branch-based lending
Home credit
Guarantor loans1
Fair value of amounts receivable from customers
2020
£000
9,231
9,231
2020
£000
284,911
44,006
105,100
434,017
2019
£00
14,311
14,311
2019
£00
322,852
60,668
127,095
510,615
1
Includes amounts receivable from customers which have been provided for as part of the guarantor loans redress programme, refer to note 24 for further detail.
Non-Standard Finance plc Annual Report & Accounts 2020 143
Notes to the financial statements continued
19. Amounts receivable from customers – Group continued
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 fair value 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).
Maturity of amounts receivable from customers:
Due within one year
Due in more than one year
Amounts receivable from customers
Analysis of receivables from customers
31 December 2020
Branch-based lending
Home credit
Guarantor loans
Gross carrying amount
Branch-based lending
Home credit
Guarantor loans
Loan loss provision
Branch-based lending
Home credit
Guarantor loans
Net amounts receivable
31 December 2019
Branch-based lending
Home credit
Guarantor loans
Gross carrying amount
Branch-based lending
Home credit
Guarantor loans
Loan loss provision
Branch-based lending
Home credit
Guarantor loans
Net amounts receivable
2020
£000
134,073
124,128
258,201
Stage 3
£000
5,772
17,883
21,147
44,802
(5,096)
(16,789)
(14,520)
Stage 1
£000
140,418
23,537
34,566
198,521
(6,011)
(1,876)
(1,366)
Stage 2
£000
39,472
12,316
25,831
77,619
(3,095)
(8,124)
(5,864)
(9,253)
(17,083)
(36,405)
134,408
21,661
33,200
189,268
Stage 1
£000
196,140
35,472
99,449
331,061
(8,050)
(1,844)
(2,110)
(12,004)
188,091
33,628
97,339
319,057
36,377
4,192
19,967
60,536
Stage 2
£000
26,839
16,442
9,993
53,274
(5,205)
(11,115)
(2,391)
(18,712)
21,633
5,327
7,601
34,562
676
1,094
6,627
8,397
Stage 3
£000
8,651
14,375
3,488
26,514
(3,592)
(13,425)
(1,468)
(18,485)
5,059
949
2,021
8,029
2019
£00
176,379
185,269
361,648
Total
£000
185,662
53,736
81,544
320,942
(14,202)
(26,789)
(21,750)
(62,741)
171,460
26,947
59,794
258,201
Total
£000
231,631
66,288
112,930
410,849
(16,848)
(26,384)
(5,969)
(49,201)
214,783
39,904
106,961
361,648
Analysis of 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 the Guarantor Loans Division have
been discussed in note 2.
144
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
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 2020
Branch-based lending
Loan loss provision
Loan loss provision as at 1 January 2020:
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 1
– Transfers from stage 3 to 2
– Write-offs
Net remeasurement of ECL arising from transfer of stage
Change in ECL resulting from repayment of loans
Loan loss provision as at 31 December 2020
Home credit
Loan loss provision
Loan loss provision as at 1 January 2020
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 remeasurement of ECL arising from change in credit risk
Loan loss provision as at 31 December 2020
Guarantor loans
Loan loss provision
Loan loss provision as at 1 January 2020
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 1
– Transfers from stage 3 to 2
– Write-offs
Net remeasurement of ECL arising from change in credit risk
Change in ECL resulting from repayment of loans
Loan loss provision as at 31 December 2020
Stage 1
£000
8,050
5,899
(481)
(1,996)
70
–
22
–
(2,961)
(46)
(2,547)
6,011
Stage 1
£000
1,844
8,077
(5,102)
(9,339)
54
–
–
3
–
6,339
1,876
Stage 1
£000
2,110
3,872
(2,290)
(2,297)
81
–
9
–
(108)
(17)
6
1,366
Stage 2
£000
5,205
–
481
–
(70)
(530)
–
24
(1,207)
2,031
(2,839)
3,095
Stage 2
£000
11,115
152
5,102
–
(54)
(5,374)
9
–
–
(2,826)
8,124
Stage 2
£000
2,392
–
2,290
–
(81)
(742)
–
11
(19)
2,976
(963)
Stage 3
£000
3,592
–
–
1,996
–
530
(22)
(24)
(9,025)
11,152
(3,103)
5,096
Stage 3
£000
13,425
4
–
9,339
–
5,374
(9)
(3)
(10,089)
(1,252)
16,789
Stage 3
£000
1,468
–
–
2,297
–
742
(9)
(11)
(1,919)
12,996
(1,044)
5,864
14,520
Total
£000
16,848
5,899
–
–
–
–
–
–
(13,193)
13,137
(8,489)
14,202
Total
£000
26,384
8,233
–
–
–
–
–
–
(10,089)
2,261
26,789
Total
£000
5,970
3,872
–
–
–
–
–
–
(2,046)
15,955
(2,001)
21,750
Non-Standard Finance plc Annual Report & Accounts 2020 145
Notes to the financial statements continued
19. Amounts receivable from customers – Group continued
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 2020
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 2020
Home credit
Gross carrying amount – amounts receivable from customers
Gross carrying amount as at 1 January 2020
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 2020
Guarantor loans
Gross carrying amount – amounts receivable from customers
Gross carrying amount as at 1 January 2020
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 2020
146
Stage 1
£000
196,140
86,448
(42,807)
(8,514)
19,898
–
–
6,201
(2,961)
(125)
(113,898)
–
36
140,418
Stage 1
£000
35,472
44,964
(8,045)
(10,514)
294
–
–
12
–
(38,646)
23,537
Stage 1
£000
99,449
14,334
(27,377)
(19,859)
1,746
–
–
793
(109)
(185)
(32,964)
(1,266)
4
34,566
Stage 3
£000
8,651
–
–
8,514
–
3,220
(2,169)
(6,201)
(37,703)
(919)
32,135
–
244
Total
£000
231,631
86,448
–
–
–
–
–
–
(41,871)
(2,287)
(87,390)
–
(868)
5,772
185,663
Stage 2
£000
26,839
–
42,807
–
(19,898)
(3,220)
2,169
–
(1,207)
(1,243)
(5,627)
–
(1,148)
39,472
Stage 2
£000
16,442
427
8,045
–
(294)
(6,201)
16
–
–
(6,119)
Stage 3
£000
14,375
12
–
10,514
–
6,201
(16)
(12)
(12,017)
(1,174)
12,316
17,883
Stage 2
£000
9,993
–
27,377
–
(1,746)
(3,202)
374
–
(20)
(768)
(6,668)
(127)
618
25,831
Stage 3
£000
3,488
–
–
19,859
–
3,202
(374)
(793)
(7,209)
(3,169)
6,074
(44)
113
21,147
Total
£000
66,288
45,403
–
–
–
–
–
–
(12,017)
(45,938)
53,736
Total
£000
112,930
14,334
–
–
–
–
–
–
(7,338)
(4,122)
(33,558)
(1,437)
735
81,544
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 remeasurement 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 remeasurement of ECL arising from change in credit risk
Loan loss provision as at 31 December 2019
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 remeasurement 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 1
£000
3,523
15,242
(8,289)
(14,110)
32
–
–
2
–
5,444
1,844
Stage 1
£000
921
3,131
(1,402)
(609)
223
–
–
1
–
(51)
(133)
–
29
2,110
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
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
Total
£000
14,083
10,745
–
–
–
–
–
–
(3,841)
657
(5,250)
82
373
5,205
3,592
16,848
Stage 2
£000
11,355
143
8,289
–
(32)
(5,473)
5
–
–
(3,172)
11,115
Stage 2
£000
1,643
–
1,402
–
(223)
(670)
6
–
–
615
(367)
–
(14)
2,391
Stage 3
£000
11,942
6
–
14,110
–
5,473
(5)
(2)
(16,871)
(1,228)
13,425
Stage 3
£000
668
–
–
609
–
670
(6)
(1)
(921)
606
(93)
–
(64)
Total
£000
26,820
15,391
–
–
–
–
–
–
(16,871)
1,044
26,384
Total
£000
3,232
3,131
–
–
–
–
–
–
(921)
1,169
(593)
–
(49)
1,468
5,969
Non-Standard Finance plc Annual Report & Accounts 2020 147
Notes to the financial statements continued
19. Amounts receivable from customers – Group continued
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)
Gross carrying amount as at 31 December 2019
196,140
26,839
Home credit
Gross carrying amount – amounts receivable from customer
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
Gross carrying amount as at 31 December 2019
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 21
– 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
148
Stage 1
£000
38,692
77,408
(12,344)
(16,571)
263
–
–
14
–
(51,991)
35,472
Stage 1
£000
78,136
–
75,014
(9,331)
(4,580)
2,375
–
–
35
–
–
(39,846)
(2,331)
(23)
99,449
Stage 2
£000
16,524
387
12,344
–
(263)
(6,599)
10
–
–
(5,960)
16,442
Stage 2
£000
10,010
–
–
9,331
–
(2,375)
(3,127)
25
–
–
(204)
(3,670)
(461)
464
9,993
Stage 3
£000
6,271
–
–
–
14,743
–
8,712
(76)
(32)
(19,159)
(163)
(150)
(35)
(1,460)
8,651
Stage 3
£000
12,631
17
–
16,571
–
6,599
(10)
(14)
(20,416)
(1,003)
14,375
Stage 3
£000
2,058
–
–
–
4,580
–
3,127
(25)
(35)
(5,213)
(27)
(318)
(91)
(568)
Total
£000
196,744
–
172,524
–
–
–
–
–
–
(19,159)
(950)
(116,409)
(35)
(1,085)
231,631
Total
£000
67,846
77,812
–
–
–
–
–
–
(20,416)
(58,954)
66,288
Total
£000
90,204
–
75,014
–
–
–
–
–
–
(5,213)
(231)
(43,834)
(2,883)
(127)
3,488
112,930
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 £10.1m
(2019: £2.2m) were subject to non-substantial modification during the year, with a resulting loss of £3.7m (2019: £1.2m). The gross carrying
amount of financial assets for which the loss allowance has changed to a 12-month ECL during the year amounts to £0.98m (2019: £0.08m).
Modification losses summary
Branch-based lending
Guarantor loans
Total modification losses for the year
2020
£000
(2,208)
(4,074)
(6,282)
2019
£000
(951)
(230)
(1,181)
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
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 2020 was £3.86m (2019: £0.48m).
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
Movement in derecognition gain in the year ended 31 December 2020 was £0.23m (2019: £0.07m).
Derecognition losses summary
Branch-based lending
Guarantor loans
Total derecognition losses for the year
2020
£000
44,936
(5,228)
39,708
(4,093)
35,615
2020
£000
3,285
(873)
2,412
270
2,682
2020
£000
(2,602)
(41)
(2,643)
2019
£000
40,622
(5,630)
34,992
(230)
34,762
2019
£000
3,739
(940)
2,799
402
3,201
2019
£000
(482)
69
(413)
Non-Standard Finance plc Annual Report & Accounts 2020 149
Notes to the financial statements continued
20. 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 2020. 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
Provisions
Other liabilities
Total liabilities
At 31 December
Assets
Cash and cash equivalents
Loans and advances to customers
Current tax asset1
Trade and other receivables1
Derivative assets
Deferred tax asset
Goodwill
Intangible assets
Right-of-use asset
Property, plant and equipment
Total assets
Liabilities
Bank borrowing
Current tax liability
Lease liability
Provisions1
Other liabilities1
Total liabilities
FVTP&L
assets/
liabilities
£000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
FVTP&L
assets/
liabilities
£000
–
–
–
–
1
–
–
–
–
–
1
–
–
–
–
–
–
Amortised
cost
£000
77,956
258,201
–
–
240
–
–
–
–
–
Non-financial
assets/
liabilities
£000
–
–
1,550
–
1,840
–
–
8,237
6,277
10,079
2020
Total
£000
77,956
258,201
1,550
–
2,080
–
–
8,237
6,277
10,079
336,397
27,983
364,380
326,587
10,889
–
6,060
–
–
21,813
9,835
326,587
10,889
21,813
15,895
343,536
31,648
375,184
Amortised
cost
£000
14,192
361,648
–
1,431
–
–
–
–
–
–
377,271
(317,590)
–
(11,105)
–
(12,020)
Non-financial
assets/
liabilities
£000
–
–
460
755
–
1,677
74,832
8,572
10,560
6,556
103,412
–
–
–
(1,466)
(14,889)
2019
Total
£000
14,192
361,648
460
2,183
1
1,677
74,832
8,572
10,560
6,556
480,681
(317,590)
–
(11,105)
(1,466)
(26,909)
(340,715)
(16,355)
(357,070)
1
In the prior financial years, current tax asset, trade and other receivables and other liabilities (including provisions) were incorrectly classified within the above note as instruments held
at amortised cost. These items have now been reclassified within the note as non-financial assets/liabilities in order to reflect the nature of these balances more accurately as being
outside the scope of IFRS 9. The amounts reclassified for the current tax asset, trade and other receivables and other liabilities in 2019 equate to £0.5m, £0.8m and £16.4m, respectively.
150
Company
At 31 December
Assets
Cash and cash equivalents
Trade and other receivables
Property, plant and equipment and intangibles
Right-of-use asset
Deferred tax
Investments
Total assets
Liabilities
Lease liability
Other liabilities
Total liabilities
At 31 December
Assets
Cash and cash equivalents
Trade and other receivables1
Property, plant and equipment and intangibles
Right-of-use asset
Investments
Total assets
Liabilities
Lease liability
Other liabilities
Total liabilities
Amortised
cost
£000
Non-financial
assets/
liabilities
£000
32,096
32,807
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
2020
Total
£000
553
32,157
65
32
–
–
(43)
(4,988)
(5,031)
2019
Total
£000
194
60,357
126
162
95,686
–
31,999
65
32
–
–
–
(4,602)
(4,602)
–
60,114
126
162
95,686
156,088
156,525
–
(5,474)
(5,474)
(204)
(13,047)
(13,251)
553
158
–
–
–
–
711
(43)
(386)
(429)
194
243
–
–
–
437
(204)
(7,573)
(7,777)
Amortised
cost
£000
Non-financial
assets/
liabilities
£000
1
In the previous financial years, trade and other receivables were incorrectly classified within the above note as instruments held at amortised cost. This item has now been reclassified
within the note as non-financial assets/liabilities in order to reflect the nature of the balance more accurately as being outside the scope of IFRS 9. The amount reclassified in 2019
equates to £60.1m.
21. Trade and other receivables – Group
Other debtors
Prepayments
Trade and other receivables – Company
Other debtors
Corporation tax
Amounts due from subsidiaries
Prepayments
2020
£000
240
1,840
2,080
2020
£000
158
–
31,852
147
32,157
2019
£000
437
1,746
2,183
2019
£000
243
857
59,135
121
60,357
Amounts due from subsidiaries are non-interest bearing and repayable on demand. In the current year, the Group recognised an impairment
of £27.3m to its amounts due from subsidiaries (2019: £nil). Refer to note 18 for further detail.
The carrying value of trade and receivables is not materially different to the fair value.
Non-Standard Finance plc Annual Report & Accounts 2020 151
Notes to the financial statements continued
22. Cash and cash equivalents – Group
Cash at bank and in hand
Cash and cash equivalents – Company
Cash at bank and in hand
2020
£000
77,956
2020
£000
553
2019
£000
14,192
2019
£000
194
The Directors consider that the carrying amount of these assets is a reasonable approximation of their fair value. The credit risk on liquid funds
is limited because the counterparties are banks with high credit ratings.
23. Derivative asset
The Group holds a derivative asset in the form of an interest rate cap totalling £nil (2019: £1,000). The fair value of the interest rate cap as at
31 December 2020 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.
24. Trade and other payables and provisions – Group
Trade creditors
Other creditors
Current tax liability
Accruals and deferred income
Trade and other payables – Company
Trade creditors
Other creditors
Corporation tax
Amounts due to subsidiaries
Lease liability
Accruals
2020
£000
614
5,446
–
9,835
15,895
2020
£000
386
468
59
3,821
43
254
5,031
2019
£000
8,394
3,626
–
14,889
26,909
2019
£000
7,573
129
–
4,685
204
660
13,251
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.
Provisions – Group
Opening at 31 December 2018
Charge during the year
Utilised
Balance at 31 December 2019
Charge during the year
Utilised
Balance at 31 December 2020
Plevin
£000
231
285
(423)
93
(44)
–
49
Complaints
£000
Dilapidations
£000
Redress
£000
Restructuring
£000
–
–
–
–
5,129
–
5,129
357
845
–
1,203
120
(1)
1,322
–
–
–
–
15,313
–
15,313
–
170
–
170
(170)
–
–
Total
£000
589
1,299
(423)
1,466
20,348
(1)
21,813
Provisions are recognised for present obligations arising as a consequence of past events where it is more likely than not that a transfer of
economic benefit will be necessary to settle the obligation, which can reliably be estimated. In the current year, the Group has recognised
additional provisions for complaints and redress costs (further detail below).
152
Branch-based lending
The Group has recognised a provision for complaints of £0.88m as at 31 December 2020 (2019: £nil) in relation to potential outflows to
customers related to past non-compliance with regulations relating to affordability assessments. Judgement is applied to determine the
quantum of such provisions, including making assumptions regarding the extent to which the complaints already received may be upheld,
average redress payments and related administrative costs. Refer to note 2 for sensitivity on this. As part of their assessment, the Directors also
considered an independent review commissioned by the Group in April 2021 of the lending and complaints handling activities of the division.
This review remains ongoing and includes an assessment of whether the issues identified in guarantor loans have any implications for the
branch-based lending division. The review also includes an assessment of recent FOS decisions in order to determine whether there exists a
subset of customers that may be eligible for redress on the basis of factors which may indicate instances of unaffordable lending As at the
date of these financial statements, the Directors recognise that whilst the review work done so far has not identified any systemic issues
requiring an increase in provision, there remains a risk that the final outcome of these reviews may result in the identification of customers who
may require redress, and the cost of redress for the Group could be materially higher than is currently provided for in the financial statements.
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
Home credit
The Group has recognised a provision for complaints of £3.4m as at 31 December 2020 (2019: £nil) in relation to potential outflows to customers
related to past non-compliance with regulations relating to affordability assessments. Judgement is applied to determine the quantum of such
provisions, including making assumptions regarding the extent to which the complaints already received may be upheld, average redress
payments and related administrative costs. Refer to note 2 for sensitivity on this. As with branch based lending, as part of their assessment, the
Directors also considered an independent review commissioned by the Group in April 2021 of the lending and complaints handling activities of
the home credit division. The scope of this review is in line with that detailed above for branch-based lending. As at the date of these financial
statements, the Directors recognise that whilst the review work done so far has not identified any systemic issues requiring an increase in
provision, there remains a risk that the final outcome of these reviews may result in the identification of customers who may require redress, and
the cost of redress for the Group could be materially higher than is currently provided for in the financial statements.
Redress programme for certain customers of the Guarantor Loans Division
The Group has recognised a provision for complaints of £0.82m as at 31 December 2020 (2019: £nil) in relation to potential outflows to customers
related to past non-compliance with regulations relating to affordability assessments. In addition, part of the provision included in the statement
of financial position relates to a provision recognised for the customer redress programme in the Group’s Guarantor Loans Division totalling
£15.3m (2019: £nil). The provision represents an accounting estimate of the expected future outflows arising using information available as at the
date of signing these financial statements. Identifying whether a present obligation exists and estimating the probability, timing, nature and
quantum of the redress payments that may arise from past events requires judgements to be made on the specific facts and circumstances
relating to the individual customers concerned. It is possible that the eventual outcome may differ materially from the current estimate and this
could impact the financial statements. This is due to the risks and inherent uncertainties surrounding the assumptions used in the provision
calculation.
The Group has included the exceptional provision of £15.3m as at 31 December 2020 based on the Directors’ best estimate of the full and final
costs of the programme using the proposed methodology. The estimate includes: the sum of all redress due to affected customers, including
penalty interest, of £16.7m, together with the cost of implementation of £1.0m, offset by existing impairment provisions of £2.4m, resulting in a
net provision amount of £15.3m. Whilst the current estimate represents the Directors’ best estimate of the total cost of redress, based upon a
detailed methodology and analyses developed in conjunction with its advisers, the FCA has not yet approved the methodology proposed.
Therefore, although the Directors believe their best estimate represents a reasonably possible outcome, there is a risk of a less favourable
outcome. Refer to note 2 for more detail regarding estimation uncertainty around the redress provision. It is anticipated that the redress will
start to be paid throughout 2021.
The Guarantor Loans Division continues to monitor its policies and processes and will continue to assess both the underlying assumptions in
the calculation and the adequacy of this provision periodically using actual experience and other relevant evidence to adjust the provision
where appropriate.
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
Unearned finance cost
Total lease liability
At
31 Dec 2020
£000
At
31 Dec 2019
£000
1,928
8,961
10,889
1,830
9,275
11,105
At
31 Dec 2020
£000
At
31 Dec 2019
£000
2,852
9,952
2,079
14,883
(3,994)
10,889
2,722
9,427
3,035
15,184
(4,079)
11,105
Non-Standard Finance plc Annual Report & Accounts 2020 153
Notes to the financial statements continued
24. Trade and other payables and provisions – Group continued
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
Unearned finance cost
Total lease liability
Bank loans – Group1
Due within one year
Due in more than one year
At
31 Dec 2020
£000
At
31 Dec 2019
£000
43
–
43
161
43
204
At
31 Dec 2020
£000
At
31 Dec 2019
£000
44
–
–
44
(1)
43
175
44
–
219
(15)
204
2020
£000
4,933
326,587
2019
£000
5,131
317,590
1 Amounts disclosed are net of capitalised transaction fees.
The Group’s total debt facilities as at 31 December 2020 comprised of a £285m term loan provided by institutional investors, a £45m revolving
loan facility provided by The Royal Bank of Scotland plc, and a £200m securitisation facility provided by Ares Management Corporation (2019:
£285m term loan and £45m revolving loan facility). As at 31 December 2020, £285.0m (2019: £285.0m) was drawn under the term loan facilities
and £45.0m (2019: £38.2m) was drawn under the revolving loan facility and £nil (2019: £nil) was drawn under the securitisation facility. The term
loan facility matures in August 2023, the revolving loan facility matures in August 2022 and the securitisation facility matures in March 2026.
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 2020
£000
23,063
388,907
–
411,970
At
31 Dec 2019
£000
25,208
419,527
–
444,734
Amounts due on external borrowings excludes the amortisation of debt transaction costs and includes the interest and principal amounts due
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
A contingent liability is a possible obligation depending on whether some uncertain future event occurs. During the normal course of business,
the Group is subject to regulatory reviews and challenges. All material matters arising from such reviews and challenges are assessed, with
the assistance of external professional advisors where appropriate, to determine the likelihood of the Group incurring a liability as a result. In
those instances, including future thematic reviews performed by the regulator in response to recent challenges noted in the industry, where it is
concluded that it is more likely than not that a payment will be made, a provision is established based on management’s best estimate of the
amount required to meet such liability at the relevant balance sheet date.
The Group recognises that there continue to be risks around CMC activity in the non-standard lending sectors and the Group continues to
incur the cost of settling complaints as part of its normal business activity. The Group has included a provision within its financial statements
for complaints where the outcome has not yet been determined (refer to provisions in note 24) and 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.
Should the final outcome of these complaints differ materially to management’s best estimates, the cost of resolving such complaints could be
higher than expected. It is however not possible to estimate any such increase reliably.
154
25. Deferred tax asset/(liability) – Group
At 31 December 2018
Current year credit
Prior period adjustment to deferred tax
Reallocation from corporation tax liability
At 31 December 2019
Prior period adjustment to deferred tax
Reversal of prior year deferred tax assets
At 31 December 2020
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
£000
230
1,124
(106)
429
1,677
–
(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 and carried forward losses arising in respect of:
Accelerated tax depreciation
Recognition of intangible assets
Recognition of FV adjustments on amounts receivable at acquisition
Carried forward losses
Restatement of loan loss spreading
Other short-term timing differences
Recognition of deferred tax relating to share-based payments
Unpaid employer pension contributions
Other losses and deductions
FRS 102 adoption
IFRS 16 transitional adjustment
IFRS 9 transitional adjustment
Unrecognised tax losses
Net deferred tax asset
2020
£000
(132)
–
–
7,295
(28)
251
–
32
–
39
12
2,615
(10,084)
–
2019
£000
(271)
(919)
–
–
(30)
98
–
–
62
72
41
2,624
–
1,677
The Group has not recognised a deferred tax asset during the financial year on its losses due to the uncertainty in the regulatory environment
and the potential future impact of COVID-19 on the macroeconomic environment. The Directors have taken a decision to reverse the deferred
tax asset recognised in previous years, which amounted to £1.7m after accounting for prior period adjustments. The Group reviews the
carrying amount of deferred tax assets at each balance sheet date and reduces it to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be recovered.
In the 3 March 2021 Budget, it was announced that the UK corporation tax rate will increase to 25% from 1 April 2023. This will have a
consequential effect on the Group’s future tax charge. If this rate change had been substantively enacted at the current balance sheet date
the unrecognised deferred tax asset would have increased by £3.5m.
Deferred tax asset/(liability) – Company
At 31 December 2018
Current year debit
At 31 December 2019
Current year credit1
At 31 December 2020
1 Unrecognised deferred tax assets arising from the tax losses in the current year were £0.8m (2019: £nil).
£000
–
–
–
–
–
Non-Standard Finance plc Annual Report & Accounts 2020 155
Notes to the financial statements continued
26. Share capital
All shares in issue are Ordinary ‘A’ Shares consisting of £0.05 per share. All 312,437,422 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 nil shares (2019: 5,070,234 shares) and issued nil shares (2019: 457,974 shares).
Share movements
Balance at 31 December 2019
Cancellation of shares
Issue of shares
Balance at 31 December 2020
Balance at 31 December 2018
Cancellation of shares
Issue of shares
Balance at 31 December 2019
Number
312,437,422
–
–
312,437,422
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 2020, the EBT held nil
(2019: nil) shares in the Company with a cost of £nil (2019: £nil) and a market value of £nil (2019: £nil).
27. 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 2019
Capital reduction
Issue of shares
Balance at 31 December 2020
Balance at 31 December 2018
Capital reduction
Issue of shares
Balance at 31 December 2019
Total
£000
180,019
–
–
180,019
Total
£000
254,995
(75,000)
24
180,019
28. 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 2020 was nil (2019: nil). This equates to 0% (2019: 0%)
of the weighted average number of Ordinary Shares in issue.
Balance at 1 January 2019
Acquired in the year
Disposed of on exercised options
Balance at 31 December 2019
Acquired in the year
Disposed of on exercised options
Balance at 31 December 2020
156
£000
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.
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.
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
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 are subject to the new performance condition.
No shares were remaining to the Directors during the year ended 31 December 2020 (2019: nil).
Share-based payments
Equity-settled share option schemes
During the year ended 31 December 2020, the Group operated three share-based award schemes which are all equity-settled: Founder
Shares scheme, two long-term incentive schemes (the Non-Standard Finance plc Long-Term Incentive Plan, the Guarantor Loans Long-Term
Incentive Plan (31 December 2019 plans lapsed: 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 2020, the Non-Standard Finance plc Long-Term Incentive Plan and
Guarantor Loans Long-Term Incentive Plan had both reached the end of their vesting period, no options were exercised. In addition two of the
Sharesave Plans (grant dates June 2017 and October 2017) had reached the end of their vesting periods and lapsed with no options 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 31 December 2018 and 31 December 2019
Options granted
Lapsed
Exercised
Outstanding at 31 December 2020
Exercisable at 31 December 2020
Percentage of
pool
allocated
Percentage of
growth above
£1.10
share price
62.5%
–
(62.5%)
–
–
–
9.4%
–
(9.4%)
–
–
–
Exercise
price
–
–
–
–
–
–
Non-Standard Finance plc Annual Report & Accounts 2020 157
Notes to the financial statements continued
28. Other reserves continued
Share-based payments continued
Awards in the form of Ordinary ‘C’ Shares:
Outstanding at 31 December 2018 and 31 December 2019
Shares issued
Lapsed
Vested
Outstanding at 31 December 2020
Exercisable at 31 December 2020
Percentage of
growth above
£1.10
share price
5.6%
–
(5.6%)
–
–
–
Number
375
–
(375)
–
–
–
Exercise
price
–
–
–
–
–
–
As at 31 December 2020, 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.
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 were 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 was subject to an overall cap of £3m. On exercise of the nil-cost options, a participant
would have received shares in the Company equal in value to their proportion of the pool.
Outstanding at 31 December 2018
Options granted
Lapsed
Exercised
Outstanding at 31 December 2019
Options granted
Lapsed
Exercised
Outstanding at 31 December 2020
Exercisable at 31 December 2020
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 was 31 December 2019. On vesting, participants would have shared 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 was subject to an overall cap of
£6m. On exercise of the nil-cost options, a participant would have received shares in the Company equal in value to their proportion of the pool.
Outstanding at 31 December 2018
Options granted
Lapsed
Exercised
Outstanding at 31 December 2019
Options granted
Lapsed
Exercised
Outstanding at 31 December 2020
Exercisable at 31 December 2020
Percentage of
pool
allocated
Percentage of
growth above
£267m
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.
158
Guarantor Loans Division Long-Term Incentive Plan
In 2018, 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 2019
Options granted
Lapsed
Exercised
Outstanding at 31 December 2019
Options granted
Lapsed
Exercised
Outstanding at 31 December 2020
Exercisable at 31 December 2020
Percentage of
pool
allocated
Percentage of
growth above
£80m
Exercise
price
100%
–
–
–
100%
–
(100%)
–
–
–
7.35%
–
–
–
7.35%
–
(7.35%)
–
–
–
–
–
–
–
–
–
–
–
–
–
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
As at 31 December 2020, 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.
Save As You Earn scheme
Awards have been made to employees of the Group under an 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
Outstanding at 1 January 2019
Options granted
Replaced
Lapsed
Exercised
Outstanding at 31 December 2019
Options granted
Lapsed
Exercised
Number
607,456
–
–
(343,862)
–
263,594
–
(263,594)
–
Exercise price
(£)
0.5606
–
–
–
–
0.5606
–
–
–
Number
836,209
–
–
(463,283)
–
372,926
–
(372,926)
–
Exercise price
(£)
0.606
–
–
–
–
0.606
–
–
–
Number
3,088,995
–
–
(1,895,072)
–
1,193,923
–
(743,511)
–
Outstanding at 31 December 2020
Exercisable at 31 December 2020
–
–
0.5606
–
–
–
0.606
450,412
–
–
Exercise price
(£)
0.495
–
–
–
–
0.495
–
–
–
0.495
–
There were no new sharesave plans in the year ended 31 December 2020. During the year, the sharesave schemes granted on 7 June 2017 and
6 October 2017 reached the end of their vesting period. As the share price was below the exercise price, the options lapsed with nil exercised
at the end of the period.
b) Fair value of options granted
For the share-based awards lapsed during the year, the main assumptions in the valuations were 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 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 (2019: £0.483m) was recognised in
the 2020 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%
Non-Standard Finance plc Annual Report & Accounts 2020 159
Notes to the financial statements continued
28. Other reserves continued
Share-based payments continued
As at 31 December 2020, 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.
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 £nil (2019: £0.134m) was recognised in the 2020 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.
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 £nil (2019: £0.153m) was recognised in the 2020 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
In 2018, 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 (2019: £0.092m) was
recognised in the 2020 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%
As at 31 December 2020, 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.
160
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 £0.24m (2019: £0.309m) was recognised in the year ended 31 December 2020.
The following information is relevant in the determination of the FV:
7 Jun 2017
6 Oct 2017
14 May 2018
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
Valuation method
Share price at grant date
Exercise price
Expected volatility
Expected life
Expected dividend yield
Risk-free interest rate
Black-Scholes Black-Scholes Black-Scholes
£0.6200
£0.4952
31.1%
3 years
3.55%
0.88%
£0.7038
£0.5606
28.3%
3 years
1.71%
0.13%
£0.7700
£0.6060
29.9%
3 years
1.30%
0.51%
There have been no new sharesave plans during the year ended 31 December 2020. Awards made on 7 June 2017 and 6 October 2017 have
lapsed during the current year with no options exercised at the end of the period.
29. Net cash generated/(used) in operating activities – Group
Operating loss
Taxation (refund)/paid
Interest portion of the repayment of lease liabilities
Depreciation
Share-based payment charge
Amortisation of intangible assets
Intangible assets impairment loss
Goodwill impairment loss
Fair value unwind on acquired loan book
Profit/(loss) on disposal of property, plant and equipment
Decrease/(increase) in amounts receivable from customers
Decrease in derivative asset
Decrease/(increase) in receivables
(Decrease)/increase in payables and provisions
Cash generated/(used) in operating activities
Year ended
31 Dec 2020
£000
(106,885)
(1,093)
(1,038)
4,006
1,142
3,556
1,298
74,832
1,437
54
100,713
1
852
3,318
82,193
Year ended
31 Dec 2019
£000
(48,518)
3,067
(1,059)*
3,869
1,183
7,078
2,517
65,837
2,873
(16)
(54,367)
240
(399)
709
(16,986)
* The interest portion of the repayment of the lease liability has been re-presented to recognise this as a cash outflow from operating activities. This was previously shown as a cash
outflow from financing activities in the prior year.
Reconciliation of liabilities arising from financing activities
The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes.
Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the cash flow statement
as cash flows from financing activities.
Group
Total borrowings (note 24)
Lease liabilities (note 24)
Total
Group
Total borrowings (note 24)
Lease liabilities (note 24)
Total
Cash changes
Financing cash
flows
£’000
6,800
–
6,800
Cash changes
Financing cash
flows
£’000
50,400
–
50,400
1 Jan 2020
£’000
317,590
11,105
328,695
1 Jan 2019
£’000
266,322
11,099
277,421
Non-cash changes
Lease payments
£’000
Amortised fees
£’000
Interest charge
£’000
–
(2,844)
(2,844)
2,197
–
2,197
–
1,038
1,038
Lease additions
and disposals
£’000
–
1,589
1,589
Non-cash changes
Lease payments
£’000
Amortised fees
£’000
Interest charge
£’000
–
(2,659)
(2,659)
868
–
868
–
1,059
1,059
Lease additions
and disposals
£’000
–
1,606
1,606
31 Dec 2020
£’000
326,587
10,889
337,476
31 Dec 2019
£’000
317,590
11,105
328,695
Non-Standard Finance plc Annual Report & Accounts 2020 161
Notes to the financial statements continued
29. Net cash generated/(used) in operating activities – Group continued
Net cash used in operating activities – Company
Operating loss
Interest portion of the repayment of lease liabilities
Depreciation
Share-based payment charge
Impairment of investment and intercompany receivables
Decrease in receivables
(Decrease)/increase in payables
Cash used in operating activities
Year ended
31 Dec 2020
£000
Year ended
31 Dec 2019
£000
(127,736)
(14)
190
371
122,848
979
(8,058)
(11,420)
(134,199)
(27)*
195
494
117,526
2,614
8,262
(5,135)
* The interest portion of the repayment of the lease liability has been re-presented to recognise this as a cash outflow from operating activities. This was previously shown as a cash
outflow from financing activities in the prior year.
Reconciliation of liabilities arising from financing activities
The table below details changes in the Company’s liabilities arising from financing activities, including both cash and non-cash changes.
Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the cash flow statement
as cash flows from financing activities.
Company
Lease liabilities (note 24)
Total
Company
Lease liabilities (note 24)
Total
Cash changes
Financing cash
flows
£’000
Lease payments
£’000
Amortised fees
£’000
Interest charge
£’000
Lease additions
and disposals
£’000
31 Dec 2020
£’000
Non-cash changes
–
–
(175)
(175)
–
–
14
14
–
–
43
43
Cash changes
Financing cash
flows
£’000
Lease payments
£’000
Amortised fees
£’000
Interest charge
£’000
Lease additions
and disposals
£’000
Non-cash changes
–
–
(153)
(153)
–
–
27
27
–
–
31 Dec 2019
£’000
204
204
1 Jan 2020
£’000
204
204
1 Jan 2019
£’000
330
330
30. Government grants and support
During the year ended 31 December 2020, the Company received grants totalling £0.7m under the Coronavirus Job Retention Scheme (‘CJRS’)
which has been presented within ‘other operating income’ in the statement of comprehensive income (refer to accounting policies note 2).
Coronavirus Job Retention Scheme
During March 2020, the Group implemented a series of steps designed to mitigate, as far as possible, the impact of COVID-19 on its business
operations. These measures included the furloughing of over 120 employees, and utilisation of government grants offered through the CJRS.
The original direction was signed by the Chancellor on 15 April 2020 and further directions were signed on 22 May 2020 and 25 June 2020. A
breakdown of these grants is provided below:
Salaries
National Insurance contributions
Pension contributions
Total CJRS grants received
Year ended
31 Dec 2020
£000
Year ended
31 Dec 2019
£000
632
11
26
669
–
–
–
–
Deferred payroll taxes
In addition to the steps taken above to mitigate the impact of COVID-19 on business operations, the Group deferred its payroll taxes due in the
months May to August during the 2020 financial year. The balance of amounts deferred equate to £2.2m including interest as at 31 December
2020. The current interest rate as published on HMRC’s website is 2.6% per annum as at 31 December 2020. The Group agreed a Time to Pay
Arrangement with HMRC during the year which completed in April 2021 and deferred amounts were fully settled.
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 £11.9m from its subsidiary undertakings during the year (2019: £13.5m). The Company 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 2020,
the Company owed £nil to its subsidiary undertaking S.D. Taylor Limited in relation to employee costs for the year ended 31 December 2020
(2019: £0.16m) and £0.07m to its subsidiary undertaking Everyday Loans Limited in relation to Group relief tax charges (2019: £0.07m). The
Company also received £nil paid in advance from its subsidiary undertaking Everyday Loans Limited in relation to the recharges described
above (2019: £0.7m). Intra-Group transactions between the Company and the fully consolidated subsidiaries or between fully consolidated
162
subsidiaries are eliminated on consolidation. Please refer to note 21 for the year-end amounts due from subsidiaries to the Company and note
24 for year-end amounts due to subsidiaries from the Company.
One member of key management personnel (Executive Director of Non-Standard Finance plc) is a Trustee of the charity Loan Smart as at
31 December 2020 (2019: two members). During the year, the Company donated £111,000 to Loan Smart (2019: £5,000). The Company has a
debtor balance of £nil as at 31 December 2020 (2019: £85,500). Any amounts owed to Non-Standard Finance plc are non-interest bearing and
repayable on demand.
One Director was a member of the Non-Standard Finance plc Long-Term Incentive Plan which has lapsed as at 31 December 2020 (as
detailed in note 28). Further information about the remuneration of individual Directors is provided in the audited part of the Directors’
remuneration report on pages 81 to 94.
In March 2020, the Group put in place a new six-year securitisation facility, of which £15m was drawn in April 2020. The nature of the facility
required the setup of a Special Purpose Vehicle (‘SPV’) NSF Funding 2020 Limited, which is consolidated into the Group in line with the
requirements of IFRS 10. Over the course of the year, the SPV transacted multiple times with Everyday Lending Limited (a subsidiary within the
Group) to facilitate the securitisation of loans. As these transactions took place between two or more subsidiaries, they are deemed to be
related party transactions, and have been eliminated on consolidation. In August 2020, the Group repaid the £15m (£10.5m net) previously
drawn on its £200m securitisation facility such that the amount currently drawn under this facility is £nil as at 31 December 2020 (2019: £nil).
In October 2020, the Group appointed Toby Westcott to the Board. Toby Westcott as a Nominee Director receives no direct remuneration from
the Company. However, Alchemy Special Opportunities LLP were remunerated for the services of Toby Westcott through a services
agreement. This figure equates to a £75,000 fee plus VAT per annum. Total fees paid in relation to these services totalled £18,750 (plus VAT) for
the year ended 31 December 2020 (2019: £nil).
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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 2020 was estimated to be 87.8% (2019: 74%).
The average EIR on financial liabilities of the Group at 31 December 2020 was estimated to be 9% (2019: 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.
Interest rate risk
The Group has an exposure to interest rate risk arising on changes in interest rates which leads to an increase in the Group’s cost of borrowing.
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 2020 would not have had a material impact on the Group’s result for the year.
There is minimal interest rate risk on financial assets including amounts receivable from customers as interest rates are fixed.
LIBOR reform
The Group has closely monitored the market and the output from the various industry working groups managing the transition to new
benchmark interest rates. This includes announcements made by IBOR regulators. Key benchmark interest rates and indices, such as the
London Interbank Offered Rate (‘LIBOR’), are being reformed in favour of risk-free rates such as the Sterling Overnight Index Average (‘SONIA’)
in the UK. LIBOR will be withdrawn at the end of 2021. The Group currently only has LIBOR linked liabilities relating to the Group’s term loan
and revolving credit facility which were fully drawn as at 31 December 2020, and its securitisation facility which remains undrawn as at year
end. There is no impact to the Group’s financial assets or fixed rate liabilities, which are all on administered rates. Discussions are underway
with lenders to ensure appropriate fall-back provisions are in place and to ensure a smooth transition by the end of 2021. LIBOR reform is
therefore not considered to have a material impact on the Group.
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 19.
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.
Non-Standard Finance plc Annual Report & Accounts 2020 163
Notes to the financial statements continued
32. Financial risk management – Group continued
Credit risk continued
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 following tables 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 where A1
represents the lowest credit risk, 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:
Stage 1
£000
106,937
27,836
5,645
140,418
(6,011)
134,407
Stage 1
£000
19,729
3,808
–
–
–
23,537
(1,876)
21,661
Stage 1
£000
4,742
29,824
34,566
(1,366)
33,200
Stage 1
£000
142,939
42,919
10,282
196,140
(8,050)
188,091
Stage 2
£000
25,570
11,440
2,462
39,472
(3,095)
36,377
Stage 2
£000
–
–
3,150
9,166
–
12,316
(8,124)
4,192
Stage 2
£000
2,788
23,043
25,831
(5,864)
19,967
Stage 2
£000
15,912
8,512
2,414
26,839
(5,205)
21,633
Stage 3
£000
Gross balance
£000
3,006
2,109
657
5,772
(5,096)
676
135,513
41,385
8,764
185,662
(14,202)
171,460
Stage 3
£000
Gross balance
£000
–
–
58
1,373
16,452
17,883
(16,789)
1,094
19,729
3,808
3,208
10,539
16,452
53,736
(26,789)
26,947
Stage 3
£000
Gross balance
£000
2,173
18,974
21,147
(14,520)
6,627
9,703
71,841
81,544
(21,750)
59,794
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
As at 31 December 2020
Branch-based lending
Year ended 31 December 2020
A1-A3
A4-A6
A7-A8+
Total gross receivables
Loan loss provision
At 31 December 2020
Home credit1
Year ended 31 December 2020
Up to 1 in the last 13 weeks missed
1 to 4 in the last 13 weeks missed
4 to 8 in the last 13 weeks missed
8 to 13 in the last 13 weeks missed
13 in the last 13 weeks missed
Total gross receivables
Loan loss provision
At 31 December 2020
1 Home credit make weekly collections.
Guarantor loans
Year ended 31 December 2020
Homeowner
Non-homeowner
Total gross receivables
Loan loss provision
At 31 December 2020
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
164
Home credit
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 to 13 in the last 13 weeks missed
13 in the last 13 weeks missed
Total gross receivables
Loan loss provision
At 31 December 2019
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.
Stage 1
£000
28,256
7,216
–
–
–
35,472
(1,844)
33,628
Stage 1
£000
31,957
66,263
98,220
(2,110)
96,110
Stage 2
£000
–
–
5,288
11,153
–
16,442
(11,115)
5,327
Stage 2
£000
2,487
7,352
9,839
(2,392)
7,447
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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
615
2,819
3,435
(1,468)
1,967
35,060
76,434
111,493
(5,969)
105,523
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 has been assessed alongside
investment impairment at note 18.
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 going concern position of the Group remains materially uncertain leading to a risk that the Group will
have insufficient liquidity to fund its future growth plans beyond the next 12 months and this is reflected in the Group’s going concern and
Viability Statement on pages 76 to 79.
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 76 to 79.
33. Distributable reserves of the Parent Company
In the prior year 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 £75m standing to the credit of the Company’s share premium account.
At 31 December 2020, the Company had no distributable reserves (2019: nil distributable reserves).
Non-Standard Finance plc Annual Report & Accounts 2020 165
Notes to the financial statements continued
34. Subsequent events
Branch-based lending and home credit division reviews
In April 2021 the Group commissioned a detailed and independent review of its lending and complaints handling activities within the
branch-based lending and home credit divisions. This review remains ongoing and includes an assessment of whether the issues identified in
guarantor loans have any implications for these divisions. The review also includes an assessment of recent FOS decisions in order to
determine whether there exists a subset of customers that may be eligible for redress on the basis of factors which may indicate instances of
unaffordable lending. These reviews have been considered as part of the Group’s year end provisioning; refer to note 24 for further detail.
Complaints received since year end
During the first quarter of 2021 the Group received a high level of complaints within its home credit division, primarily from CMCs. The Group
has therefore estimated the cost of those complaints which relate to loans issued up to 31 December 2020 and included this within its provision
(refer to note 24) as an adjusting subsequent event.
Taxation in the March 2021 Budget
In the 3 March 2021 Budget it was announced that the UK tax rate will increase to 25% from 1 April 2023. This is a non-adjusting event and will
have a consequential effect on the Group’s future tax charge. If this rate change had been substantively enacted at the current balance sheet
date the unrecognised deferred tax asset would have increased by £3.5m.
Guarantor Loans Division operational review
Having completed a detailed review of the Group’s Guarantor Loans Division and its prospects, the Board has decided to place the division
into a managed run-off which is expected to conclude by the end of 2025. Whilst a full detailed assessment of the cost implications is yet to be
carried out and this is a non-adjusting subsequent event, it is estimated that the recognition of a provision for redundancies would be
c.£0.52m. No material asset write-downs are expected to be required as a result of the decision taken. The Group recognises there is a risk
around changes to customer behaviour following this decision, refer to note 2 for sensitivities on loan loss provisions based on past-experience
of how the parameters can potentially move.
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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. These
APMs are not defined or specified under the requirements of International Financial Reporting Standards, however we believe these
APMs provide readers with important additional information on our business. To support this, we have included a reconciliation of the
APMs we use, how they are calculated and why we use them on the following pages.
Alternative performance measure
Definition
Net debt
Normalised revenue
Normalised operating profit
Normalised profit before tax
Normalised earnings per share
Key performance indicator
Gross borrowings less cash at bank
Normalised figures are before fair value adjustments, amortisation of acquired intangibles and
exceptional items (refer to note 7).
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
Return on asset
Revenue yield
Risk adjusted margin
Normalised administrative expenses as a percentage of normalised revenue
Normalised operating profit as a percentage of average loan book excluding fair value adjustments
Normalised revenue as a percentage of average loan book excluding fair value adjustments
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 2020
£000
330,000
(77,402)
252,552
31 Dec 2019
£000
323,200
(13,997)
309,203
1 Cash at bank and in hand excludes cash held by the 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
Home credit
Guarantor loans
Group
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
Reported revenue
Add back fair value adjustments
89,788
–
93,002
–
43,834
–
60,835
–
29,043
1,437
26,947
2,873
162,665
1,437
180,784
2,873
Normalised revenue
88,788
93,002
43,834
60,835
30,480
29,820
164,102
183,657
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.
Non-Standard Finance plc Annual Report & Accounts 2020 167
Appendix continued
3. Normalised operating profit/(loss)
Reported operating profit/(loss)
Add back fair value adjustments
Add back amortisation of intangibles
Add back exceptional provision for customer
Branch-based lending
Home credit
Guarantor loans
Group
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
13,419
–
–
29,653
–
–
(2,509)
–
–
9,102
–
–
(28,565)
1,437
–
5,895
2,873
–
(24,452)
1,437
1,298
32,066
2,873
7,226
redress
–
–
–
–
15,401
–
15,401
–
Normalised operating profit/(loss)
13,419
29,653
(2,509)
9,102
(11,727)
8,768
(6,316)
42,165
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/(loss) before tax
Reported loss before tax
Add back fair value adjustments
Add back amortisation and write-off of intangibles
Add back exceptional items
Normalised (loss)/profit before tax
31 Dec 2020
£000
31 Dec 2019
£000
(135,721)
1,437
1,298
97,834
(35,152)
(75,976)
2,873
7,226
80,584
14,707
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/(loss) 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/(loss) for the year
Weighted average shares
Normalised earnings/(loss) per share (pence)
Group
31 Dec 2020
£000
(135,557)
1,437
1,298
97,834
(164)
(35,152)
31 Dec 2019
£000
(76,308)
2,873
7,226
80,584
(2,929)
11,446
312,437,422
312,126,220
(11.25)p
3.67p
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 7 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.
6. Impairment as a percentage of revenue
Branch-based lending
Home credit
Guarantor loans
Group
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
Normalised revenue
Impairment
89,788
(31,449)
93,002
(20,635)
43,834
(10,495)
60,835
(16,435)
30,480
(24,318)
29,820
(7,996)
164,102
(66,262)
183,657
(45,066)
Impairment as a percentage revenue
35.0%
22.2%
23.9%
27.0%
79.8%
26.8%
40.4%
24.5%
Impairment as a percentage revenue is a key measure for the Group in monitoring risk within the business.
168
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7. Impairment as a percentage loan book
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
Normalised opening net loan book
Normalised closing net loan book
Average net loan book
Impairment
Branch-based lending
Home credit
Guarantor loans
Group
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
214,783
–
214,783
171,460
–
171,460
182,661
–
182,661
214,783
–
214,783
39,904
–
39,904
26,947
–
26,947
41,026
–
41,026
39,904
–
39,904
214,783
171,460
192,990
(31,449)
182,661
214,783
200,421
(20,635)
39,904
26,947
28,243
(10,495)
41,026
39,904
36,324
(16,435)
106,961
(1,437)
105,524
59,794
–
59,794
105,524
59,794
86,229
(24,318)
86,971
(4,309)
82,662
106,961
(1,437)
105,524
361,648
(1,437)
360,211
258,201
–
258,201
310,659
(4,309)
306,350
361,648
(1,437)
360,211
82,662
105,524
94,093
(7,996)
360,211
258,201
307,462
(66,262)
306,350
360,211
330,838
(45,066)
Impairment as a percentage loan book
16.3%
10.3%
37.2%
45.2%
28.2%
8.5%
21.6%
13.6%
Impairment as a percentage loan book allows review of impairment level movements year on year.
8. Net loan book growth
Branch-based lending
Home credit
Guarantor loans
Group
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
Normalised opening net loan book
Normalised closing net loan book
214,783
171,460
182,661
214,783
39,904
26,947
41,026
39,904
105,524
59,794
82,662
105,524
360,211
258,201
306,350
360,211
Net loan book growth
(20.2%)
17.6%
(32.5%)
(2.7%)
(43.3%)
27.7%
(28.3%)
17.6%
9. Return on asset
Normalised operating profit
Average net loan book
Return on asset
Branch-based lending
Home credit
Guarantor loans
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
13,419
192,990
29,653
200,421
(2,509)
28,243
9,102
36,324
(11,727)
86,229
8,768
94,093
7.0%
14.8%
(8.9%)
25.1%
(13.6%)
9.3%
The return on asset measure is used internally to review the return on the Group’s primary key assets.
10. Revenue yield
Normalised revenue
Average net loan book
Revenue yield percentage
Branch-based lending
Home credit
Guarantor loans
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
89,788
192,990
93,002
200,421
43,834
28,243
60,835
36,324
30,480
86,229
29,820
94,093
46.5%
46.4%
155.2%
167.5%
35.3%
31.7%
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
Home credit
Guarantor loans
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
89,788
(31,449)
58,339
192,990
93,002
(20,635)
72,367
200,421
43,834
(10,495)
33,339
28,243
60,835
(16,435)
44,400
36,324
30,480
(24,318)
6,162
86,229
29,820
(7,996)
21,823
94,093
30.2%
36.1%
118.0%
122.2%
7.1%
23.2%
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.
Non-Standard Finance plc Annual Report & Accounts 2020 169
Appendix continued
12. Operating profit margin
Normalised operating profit
Normalised revenue
Branch-based lending
Home credit
Guarantor loans
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
13,419
89,788
29,653
93,002
(2,509)
43,834
9,102
60,835
(11,727)
30,480
8,768
29,820
Operating profit margin percentage
14.9%
31.9%
(5.7%)
15.0%
(38.5%)
29.4%
13. Cost to income ratio
Normalised revenue
Administration expense
Branch-based lending
Home credit
Guarantor loans
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
31 Dec 2020
£000
31 Dec 2019
£000
89,788
(41,236)
93,002
(42,235)
43,834
(35,866)
60,835
(35,298)
30,480
(13,773)
29,820
(12,895)
Operating profit margin percentage
45.9%
45.4%
81.8%
58.0%
45.2%
43.2%
This measure allows review of cost management.
170
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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Non-Standard Finance plc Annual Report & Accounts 2020 171
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Non-Standard Finance plc
Cover address text
Cover address text
Cover address text
nsfgroupplc.com