Nucleus Financial Group plc Annual report and financial statements for the year ended 31 December 2018 Company registration number 05522098 2018 highlights Assets under administration ¹ 2.3% increase £13.6bn £13.9bn 2017 2018 6% increase in the number of active advisers from 1,317 to 1,396 7% increase in customer numbers from 87,556 to 93,715 Average AUA Growth 13.5% £12.4bn £14.1bn 2017 2018 ¹ Industry-specific financial performance measures. Included within this results announcement are alternative measures that the directors believe help to inform the results and financial position of the group. These are defined in the definitions and glossary of technical terms section. Group Highlights 1 Net revenue ¹ 9.6% increase £39.4m £43.2m 2017 2018 Profit for the year of £4.8m, up from £4.1m in 2017 Revenue for the year of £49.4m, up from £45.5m in 2017 Final dividend of 3.6p recommended Adjusted EBITDA ¹ Growth 32.9% £8.3m £6.2m 2017 2018 Contents Strategic report Chairman’s statement Chief executive’s report About Nucleus Chief financial officer’s report Principal risks and uncertainties Governance Risk management framework Corporate governance statement Board of directors Audit committee report Risk committee report Nomination committee report 4 6 10 12 18 22 24 26 31 33 35 Remuneration and HR committee report 36 Directors’ report Directors’ responsibilities statement 44 48 Contents 2 Contents 3 Financials Independent auditors’ report Consolidated income statement Consolidated statement of comprehensive Income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements 50 56 57 58 60 62 63 Company statement of financial position 95 Company statement of changes in equity 96 Company statement of cash flows 98 Notes to the company financial statements 99 Company information 110 Definitions and glossary of technical terms 111 Strategic report – Chairman’s statement Strategic report Chairman’s statement 2018 was a transformative year for us and marked the beginning of a new chapter following our admission to the AIM market of the London Stock Exchange (LSE). Our admission was well received by the market and it has been particularly pleasing to see such high quality institutions invest in the potential of the business. We also completed a restructuring of our outsourced operations in November and this is expected to accelerate our product development and the delivery of operating efficiencies over the coming years. Alongside these important strategic milestones, we have successfully navigated well-reported turbulent markets to deliver another strong set of results. The CEO and CFO reports that follow provide detail on the key financial results but it is gratifying to see growth across most of our key performance indicators (KPIs) including growth in assets, revenue, profit, customers, accounts and advisers using the platform. Inflows were the notable exception to this as we saw both gross and net inflows reduce across the year. This is widely recognised as a market- wide, near-term issue arising due to weak investor sentiment caused by the lack of clarity around Brexit and ongoing market volatility. 4 The board As a consequence of our admission to AIM, Nucleus IFA Company Limited, the vehicle through which financial advisers held shares in Nucleus, ceased to hold any interest in Nucleus and its representatives on the Nucleus board stepped down. I would like to thank and extend our best wishes to Mike Seddon and Stephen Tucker who each made significant contributions to our business and the board. Upon admission, we welcomed two new non- executive directors to the board, Margaret Hassall and Tracy Dunley-Owen. Margaret brings a broad range of experience including in manufacturing, utilities and financial services while Tracy brings over 15 years of financial services sector experience. Margaret and Tracy have already made a positive impact through their presence on the board and I look forward to their continued contribution as we help the business develop its market position. Governance The board has long recognised the importance of good governance and effective systems and controls in supporting the executive management to ensure the company’s strategy is delivered in an effective manner. The admission to AIM has seen the standard of governance and challenge raised further with the business adopting the Quoted Companies Alliance corporate governance code (QCA Code). Angus Samuels Chairman Strategic report – Chairman’s statement People While delivering on our two major strategic projects, we also made good progress on our people strategy, and this is testament to the quality and strength of everyone at Nucleus. The Nucleus team have enthusiastically embraced the challenges and changes required following our admission to AIM and on behalf of the board, I would like to thank the entire team for a tremendous effort throughout the year. Dividend Following the strong financial performance of the group, I am pleased to confirm the board is recommending, in line with the group’s dividend policy, a final dividend payment of 3.6p per share, amounting to a final dividend of £2.7m. This takes the full year dividend since admission to AIM to 5p per share. The final dividend will be paid on 21 June 2019 to ordinary shareholders on the register on 31 May 2019, with an ex-dividend date of 30 May 2019. The payment of the dividend is subject to shareholder approval at our AGM which will be held on 23 May 2019. Outlook We remain resolute in our belief that the advised platform market will enjoy very positive long-term prospects. Notwithstanding recent unsettled market conditions and politico-economic uncertainties, I am pleased with the group’s performance over the past year. I believe Nucleus today is in a stronger position than at any time in its relatively short history to take advantage of the significant opportunities we believe are still available in this exciting market. In conclusion, I am pleased to re-affirm the board’s ongoing confidence in the group’s ability to deliver its future plans. Angus Samuels Chairman 5 Strategic report – Chief executive’s report Strategic report Chief executive’s report We were pleased to end last year having successfully completed two substantial strategic projects. Our July admission to AIM allowed us to mature our capital structure in accordance with our ambitions, and subsequent adjustments to our technology and BPO model have helped position us to become one of the most scalable and technology-led independent platforms in our market. Despite the challenging market environment, we were pleased to add over 8,600 new customers, helping grow AUA to £13.9bn, increase net revenue to £43.2m and substantially grow adjusted EBITDA to £8.3m. We also welcomed 43 new firms and 172 new advisers as platform users and this group, together with existing advisers and customers, is expected to contribute positively to future inflows. In such a full year, we were delighted to gain recognition as platform of the year in the Schroders and Money Marketing awards and also to retain CoreData’s best medium-platform award for the seventh year in succession. 6 Strategic report – Chief executive’s report 43 new firms 8,600 new customers £43.2m net revenue 7 David Ferguson Founder and chief executive Strategic report – Chief executive’s report Market environment Several environmental themes combined to make 2018 a more challenging year than the prior year, although the advised platform market nevertheless grew 3 per cent to £364bn at the end of the year1. Markets experienced increased volatility in 2018, especially during the last quarter and valuations generally trended downward through the year (the FTSE All-Share Index declined by 13 per cent across 2018 and the FTSE 100 Index was similarly down 12.5 per cent), negatively impacting growth in AUA and inflows, which have some correlation to investor sentiment. Inflows were also affected by a reduction in the number and value of pension transfers. Despite a modest recovery in Q1 2019, the continued lack of clarity caused by Brexit and the ongoing impact on investor confidence is doing little to promote stability and these themes may continue throughout 2019. From a regulatory perspective, the introduction of Mifid II created some operational disruption to adviser businesses, leading to some capacity issues as new processes bed in. Over time, the enhanced transparency afforded by these new rules will encourage greater accountability and in time can be expected to deliver a more effective market for customers. In essence, fund managers are now subject to the same disclosure requirements as have been applied to financial advisers and platforms since the introduction of the retail distribution review (RDR) in 2013. In addition, the FCA published the final findings in respect of its Investment Platform Market Study on 14 March 2019. We welcome the findings and agree with its reiteration that the platform market is generally competitive. We are in full support of the proposed ban on exit fees and believe customers should be free to move between platforms without being exposed to financial or practical barriers. The study was borne from the asset management market study and we would expect the use of better analytics and improved transparency under Mifid II to apply further downward pressure on fund fees over time which will improve end-to-end value for money for clients. It is increasingly apparent that the advised platform market is polarised between those who see platforms as a distribution channel for in-house fund management and those seeking to make financial advisers more effective in the pursuit of better customer outcomes. We are firmly in the latter category. Platform pricing continued to drift downward in 2018, somewhat catalysed by special deals available from certain platforms aiming to drive in-house fund flows and those that have been through technology programmes that have caused disruption for advisers and their clients. It remains to be seen how durable such deals will prove in the light of new fee disclosures and (for the latter group) after operations have returned to a steady state. Product development In keeping with the rest of our sector, the early part of the year was focused on delivering new capabilities and operational changes in respect of Mifid II and GDPR regulations. We also made progress in delivering our new re-engineered client portal, an improved capital gains tool and further enhancements to our multiple award- winning reporting capabilities. Beyond these areas, our efforts were primarily aimed at improving operational efficiency and executing changes to our technology and BPO model, the latter resulting in us having a direct licence with Bravura for the provision of its Sonata technology for the first time. Sonata sits at the core of our technology infrastructure and we are particularly excited about what we can achieve under the terms of this new relationship structure. Following implementation of this new arrangement in Q4, we have already been successful in completing a Sonata upgrade and in adding a Junior Isa to our proposition. We have planned (and expect) to substantially accelerate our product development through 2019 and beyond with a view to becoming the most technology-enabled and ultimately scalable platform in our market. ¹ Source: Fundscape Platform report March 2019 8 “ The percentage of women in senior roles in the business improved from 18 per cent to 32 per cent over the year.” Our people We cannot be successful in the marketplace if we are not successful in the workplace and we continue to develop our structure to ensure our team has the breadth of capability and diversity of thought that will enable us to execute our business plan. In general, our hiring is directed toward raising standards and becoming increasingly technology-led so that we can operate within the cost constraints we expect the market to require. To that end we were pleased to welcome several new additions to the team and to see 18 per cent of our people promoted into more senior roles. In accordance with our commercial ambitions, we were also very proud of our work in promoting diversity and inclusion, including signing up for the Women in Finance charter. The percentage of women in senior roles in the business improved from 18 per cent to 32 per cent over the year. We also continue to encourage our adviser users to think more about culture as they expand their own operations. Strategic report – Chief executive’s report Outlook The commercial and regulatory agenda will increasingly be set by the pursuit of improved customer outcomes and we believe our long- embedded commitment to transparency alongside our strategy of targeting more modern and customer- aligned advisers will prove correct. The advised platform market is now forecast to grow to £581bn by the end of 2023 (representing 9.3 per cent compound annual growth over the next five years)1 and this structural trend is a key driver of our medium/long- term growth. Despite the well-publicised market headwinds, we view the outlook for better quality advisers and those that provide services to those advisers as positive. We similarly believe that platform pricing will continue to correlate to the utility value on offer and that while all components in the sector are set to experience price compression, the greatest focus will arise in asset management where transparency is a more contemporary concept. We expect the new disclosures resulting from Mifid II to generate substantial scrutiny on all-in fees and believe that advised platforms can play a positive role in creating meaningful cost efficiency for adviser users and their customers, whether delivered through improved practice management for advisers or more effective procurement of asset management for customers. Rather than act as distribution channels for expensive retail asset management, platforms have scope to use data insights and portfolio construction techniques to substantially improve accountability across the value chain, adding value in such a way that pricing pressure may become diluted. Successful execution of our product roadmap is vital to us accelerating growth and we believe our new technology and BPO model will allow us to achieve this while limiting unplanned costs which would negatively impact our financial outlook. The combination of Sonata and our in-house capabilities has been carefully designed to balance agility, scalability and resilience and we look forward to being able to demonstrate these characteristics over time. David Ferguson Founder and chief executive 9 Strategic report – About Nucleus Strategic report About Nucleus Nucleus is an independent wrap platform that allows clients to hold all of their pensions, Isas and other investments in one secure place online. We have one purpose, and that is to help advisers deliver better outcomes for their clients, our customers. We were founded in 2006 and built in collaboration with advisers committed to altering the balance of power in the industry by putting the client centre stage. We work with around 1,400 active adviser users and more than 870 financial adviser firms as at 31 December 2018. We are responsible for assets under administration (AUA) of £13.9bn on behalf of more than 93,000 customers. The platform offers a range of custody, trading, payment, reporting, fee- handling, research and integration services across a variety of tax wrappers and more than 5,000 asset choices including cash, OEICs, unit trusts, offshore funds, structured products and listed securities, including ETFs and investment trusts, and currently facilitates over 1.1 million client account transactions on average per month. 10 Strategic report – About Nucleus Our purpose Our purpose has been clear and consistent since our inception and that is to help advisers deliver better outcomes for their clients, our customers. Our values As an FCA regulated business, Nucleus operates within the eleven business principles of our regulator and its conduct regime. This regulatory underpin is supplemented by our values, which in aggregate provide the foundations that support our purpose and shape and unify the culture of the business. Together they are a core part of our identity and provide the framework for how we engage with our people, our users and our customers and how we drive value for our shareholders. Accountable Taking full ownership for solving problems and delivering a solution. Being accountable is being aware, responsible and delivering. Authentic Having confidence to be ourselves and not shying away from candid conversations. Being authentic is being respectful, honest and open. Energetic Driving our business forward and making a difference for our customers. Being energetic is being proactive, innovative and tenacious. Inspiring Pushing the boundaries and generating better ways of doing things. Being inspiring is being engaging, excellent and challenging. 11 Strategic report – Chief financial officer’s report Strategic report Chief financial officer’s report Despite the volatile and challenging market conditions, 2018 was a further year of solid financial performance with most of our key financial metrics continuing to display positive trends, including growth in AUA, revenue, adjusted EBITDA and profit after tax. In particular, the increase in net revenue of 9.6 per cent over the prior year was not matched by increases in expenditure, with the result that adjusted EBITDA increased to £8.3m and the adjusted EBITDA margin improved substantially to 19.2 per cent. 12 Stuart Geard Chief financial officer Strategic report – Chief financial officer’s report £14.1bn Average assets under administration £8.3m Adjusted EBITDA 19.2% Adjusted EBITDA margin 13 Strategic report – Chief financial officer’s report Andrew Smith Chief technology officer Financial key performance indicators Group AUA ¹ Gross inflows ¹ Net inflows ¹ Revenue ² Net revenue ¹ ³ Adjusted EBITDA ¹ Profit for the year* Dividend paid Adjusted EBITDA margin ¹ ² Year ended December 2018 Year ended December 2017 Year ended December 2016 Year ended December 2015 Year ended December 2014 £’000 £’000 £’000 £’000 £’000 13,883,713 13,576,703 11,143,757 9,068,789 7,807,690 2,290,236 2,607,759 1,854,830 1,977,783 1,944,335 1,193,502 1,668,237 970,263 1,229,625 1,441,099 49,405 43,154 8,304 4,756 3,933 19.2% 45,462 39,361 6,248 4,111 4,813 15.9% 37,483 32,407 5,141 3,387 nil 15.8% 33,091 28,166 4,637 4,300 nil 16.5% 27,572 22,925 3,089 2,472 nil 13.5% *2015 - 2018 reported on an IFRS basis; 2014 reported under FRS102 ¹ Industry-specific financial performance measures. Included within this results announcement are alternative measures that the directors believe help to inform the results and financial position of the group. ² Details of the 2017 revenue presentation restatement are set out in note 2. ³ The definition of net revenue has been revised to include product fees that were previously included within AUA related costs. 14 Financial review Group Opening AUA Inflows Outflows Net inflows Market movements Closing AUA Average AUA Group Revenue AUA related fees paid Net revenue ² Staff costs AUA related costs ² Other direct platform costs Platform development costs Other costs Adjusted EBITDA * Depreciation Adjusted EBIT Interest income Interest expense Adjusted profit before tax Other income AIM admission costs Share-based payments Statutory profit before tax Taxation Statutory profit after tax Adjusted profit after tax ¹ Basic and diluted EPS Blended revenue yield (bps)**1 Adjusted EBITDA margin Strategic report – Chief financial officer’s report Year ended 31 December 2018 Year ended 31 December 2017 £m 13,577 2,290 (1,097) 1,193 (886) 13,884 14,124 £m 11,144 2,608 (940) 1,668 765 13,577 12,441 Year ended 31 December 2018 Restated 2 Year ended 31 December 2017 £’000 49,405 (6,251) 43,154 (14,142) (11,131) (745) (1,682) (7,150) 8,304 (585) 7,719 11 (7) 7,723 22 (1,688) (404) 5,653 (897) 4,756 6,255 6.3p 30.6 19.2% £’000 45,462 (6,101) 39,361 (13,138) (10,224) (495) (2,773) (6,483) 6,248 (410) 5,838 9 (3) 5,844 36 - (756) 5,124 (1,013) 4,111 4,719 5.4p 31.6 15.9% ¹ Industry-specific financial performance measures. Included within this results announcement are alternative measures that the directors believe help to inform the results and financial position of the group. ² The definition of net revenue has been revised to include product fees that were previously included within AUA related costs *Adjusted EBITDA excludes non-operating income, AIM admission costs and share-based payments and is included within the strategic report as the directors believe this is a better representation of the underlying performance of the business **Blended revenue yield is calculated by dividing annualised revenue over Average AUA 15 Strategic report – Chief financial officer’s report Revenue AUA was naturally impacted by market volatility throughout the year, and in particular the sharp, market-wide decline in Q4, and this is evident in the muted 2.3 per cent increase in AUA for the year (2017: 21.8 per cent). Across 2018, the FTSE All-Share Index decreased by 13 per cent and the FTSE 100 Index decreased by 12.5 per cent. Despite market conditions and weak investor sentiment, particularly as the year progressed, gross inflows were £2.3bn (2017: £2.6bn) and net inflows were £1.2bn. Average AUA increased by £1.7bn, or 13.5 per cent (2017: 25.3 per cent) to £14.1bn. Net revenue increased by 9.6 per cent to £43.2m (2017: 21.5 per cent to £39.4m), at a slower growth rate than average AUA growth, reflecting the full effect of our July 2017 price cut and resulting in a blended revenue yield of 30.6 basis points (2017: 31.6 basis points) that was in line with our expectations. We expect pricing pressure to be a continuing trend in the platform industry in future years, but believe we are well positioned in terms of scale, our current and planned proposition, the quality of our customer base, and our selected technology and outsourced service providers to meet this challenge. 16 Costs Staff costs were £14.1m for the period (up 7.6 per cent). The number of full-time equivalent employees increased from 192 to 218 (an increase of 13.5 per cent), predominantly as a result of ongoing investment in our technology, change management, client servicing and operations teams. We expect to continue growing our staffing levels in 2019, but at a lower rate, with most of the recruitment occurring in the first half of the year. AUA related costs increased to £11.1m, up 8.9 per cent (against revenue growth of 9.6 per cent) over the prior year, at an average cost of 7.9 basis points (2017: 8.2 basis points), reflecting the tiering benefits within a significant component of these costs. Other direct platform costs relate to platform hosting and licencing costs and increased to £0.7m (2017: £0.5m). We continue to believe that the impact of the restructuring of the technology and BPO model will be broadly cost neutral in each year of our planning period, subject to market and net inflow levels returning to the levels forecast at the time of the restructuring. Within the overall cost base, we have planned for a material increase in other direct platform costs and, to a much lesser extent, platform development costs and other costs, offset by a reduction in AUA related costs, through a combination of fixed discounts and basis points- related rate card adjustments. Platform development costs of £1.7m were lower than the 2017 comparative cost of £2.8m. This difference is as a result of 2017 including the preparatory costs of a significant platform upgrade that was completed in October 2017 as well as the costs of a substantial amount of third-party developed software, while 2018 was characterised by increased internally-developed software expenditure (included in staff costs), as well as, particularly in the first half of the year, an increase in regulatory change (which was largely non-chargeable to Nucleus) and reduced external development expenditure while we renegotiated our agreements with Genpact and Bravura. We continue to plan for a significant increase in platform development expenditure over the level achieved in 2018, including through a programme of regular core platform software upgrades, optimising our use of Sonata and consistent levels of third-party development expenditure. Complemented by further increased investment in our internal software development capabilities, we believe that this expenditure will drive proposition, efficiency and resilience benefits and is a source of competitive advantage. Finally, other costs increased by £0.7m (10.3 per cent) to £7.2m (2017: £6.5m). The increase in these costs was largely as a result of the inclusion of the costs of our single location head office premises, the incremental costs incurred as a result of being quoted on AIM and increases in overhead costs attributable to the increasing size of the business. Our operating margin (as reflected by adjusted EBITDA margin) increased as a result of lower platform development spend and the operating leverage effect of our increased scale. Taxation The group’s effective tax rate of 15.9 per cent (2017: 19.8 per cent) reflects the impact of a number of one-off items, in particular a large proportion of AIM admission costs, that are non-tax deductible, offset by the impact of research and development related tax relief of £0.5m (2017: nil) that related to prior years but that was claimed in 2018. Dividend During the year we paid pre-admission dividends in June and July 2018 totalling £2.9m, as well as an interim dividend in October 2018 of £1.1m, which amounted to 1.4p per share. Our dividend policy is to pay both interim and final dividends at a combined pay-out ratio of between 60 and 70 per cent of the group’s profits after tax adjusted for exceptional items. In determining the 2018 pay-out ratio, the board has taken into consideration the benefit to earnings of the lower than anticipated platform development expenditure in the year, as well as the weak performance of markets in 2018, and have set the proposed pay-out ratio at the lower end of the range at 60.7 per cent. The final dividend therefore amounts to £2.7m (or 3.6p per share) and brings the full-year post- admission dividend in respect of the 2018 financial year to £3.8m (or 5.0p per share). A maiden dividend was made to shareholders in 2017 to take account of accumulated profits in the preceding years. Strategic report – Chief financial officer’s report Group financial position Cash and cash equivalents 31 December 2018 31 December 2017 £’000 £’000 17,672 16,992 Net assets 17,473 16,182 Capital adequacy ratio Capital adequacy ratio – underlying Excess capital – above 8% regulatory requirement 14.5% 15.3% 20.6% 21.7% 5,393 5,369 Financial position Nucleus continues to maintain a balance sheet that is free from goodwill and intangible assets and has no debt. Surplus capital is comfortably in excess of minimum regulatory capital requirements and, together with regard for the forecasted liquidity requirements of the group, is assessed as sufficient to support the ongoing operations of the business (under both normal and stressed conditions), allow the planned investment in the platform, and deliver returns to shareholders in line with our dividend policy guidance. The directors consider that the group has adequate resources to remain in operation for the foreseeable future and have therefore continued to adopt the going concern basis in preparing the annual financial statements. Stuart Geard Chief financial officer 17 Strategic report – Principal risks and uncertainties Strategic report Principal risks and uncertainties The following principal risks relate to the group’s business and the wider sector in which it operates. The risks and uncertainties described below are not intended to be exhaustive. Additional risks and uncertainties not presently known to the directors or that the directors currently deem to be immaterial could also have an adverse effect on the group’s business and financial performance. The group operates a risk management framework through which it systematically identifies actual and potential risk events and seeks to put in place appropriate policies and controls as safeguards. Our key risk categories as set out in our risk taxonomy are summarised below, and these are managed within the risk appetites set by the board on an annual basis. Additional information can be found in our Pillar 3 disclosure documents. 18 Strategic and business model risks Fluctuations in capital markets, and economic, political and market factors that are beyond the group’s control The group’s revenue and performance are directly linked to the value of AUA held on the platform, which in turn is linked to the level of inflows, outflows and the performance of the assets and asset classes into which customers have invested. A decline in capital market asset values may: (i) reduce the value of the AUA on the platform; (ii) prompt clients (in conjunction with their financial advisers) not to make further investments or to withdraw funds from the platform; and (iii) make it more difficult for financial advisers to attract new clients to advise through the platform. Economic, political and market factors can also affect the level of inflows and outflows and the performance of investment assets. For example, a general deterioration in the global economy, and the UK economy in particular, may have a negative impact on customers’ disposable income and assets, and the value of savings and investments on the platform. Competition The provision of advised platforms is competitive and Nucleus faces significant competition from a number of sources, including other intermediated platform providers, life insurance companies, asset and fund managers and direct to consumer investment platforms. While the group strives to remain competitive by continuing to develop its online and offline offering, the risk exists that it is unable to adapt to changing market pressures or customer demands, keep pace with technological change and platform functionality relative to its competitors or maintain its market share given the intensity of the competition. Competition may also increase in response to demand dynamics, further consolidation (including vertical integration) in the wider financial services sector, new entrants to the market or the introduction of new regulatory requirements (including those targeted at financial advisers or other market participants). Strategic report – Principal risks and uncertainties Relationship with financial advisers While Nucleus has been able to maintain strong, longstanding relationships with its adviser users, there can be no assurance that this will continue. The group could lose or impair relationships as a consequence of, among other things, operational failures, uncompetitive functionality or pricing, reputational damage, consolidation and vertical integration in the financial advice market or the closure of firms of financial advisers. The loss of, or deterioration in, the group’s relationships with its financial adviser base, particularly those responsible for directing significant inflows to the platform, could have a material adverse effect on AUA and revenues. Reliance on key suppliers Nucleus, like many other participants in the wrap platform market, operates a business model that outsources selected components of its operations and technology services, and enters into agreements with selected product providers to distribute and administer their products as part of the Nucleus wrap platform. As a result, the group has a reliance on its key suppliers and performance issues affecting these products and services may have an adverse impact on Nucleus’ strategy and business performance. The group’s key suppliers are: • Genpact WM UK Limited, who Nucleus outsources wrap administration services to; • Bravura Solutions Limited, who Nucleus outsources platform technology services to; • Scottish Friendly Assurance Society Limited and Sanlam Life & Pensions UK Limited, who provide the onshore bond tax wrappers on the platform, and RL360, who provides the offshore bond tax wrapper on the platform; and • Alliance Trust Savings Limited, who provides stockbroking services. 19 Strategic report – Principal risks and uncertainties Operational and regulatory risks Regulatory Operational The nature of the activities performed by the group is such that a degree of operational risk is unavoidable. Operational risk may have a number of consequences, including deficient service delivery, poor customer outcomes, an inability to scale effectively, reputational damage and financial loss. The group’s operational risks can be divided into three main categories (people, operational process and controls and technology) with relevant examples of each below: People • failure to attract, train, motivate and retain core skills and knowledge in the company; • people-related errors in core processes; Operational process and controls • failure in core processes and controls (whether preventative or detective), either by the company or by third parties; • failure in systems and controls in place to meet the requirements of taxation and other regulations in respect of the suitability of certain investments to be held within certain tax wrappers and accounts; Technology • failure of, or disruption to, the sophisticated technology and advanced information systems (including those of the group and its third-party service providers) upon which the group is dependent; • inability to respond to the need for technological change as a result of the failure to continue to improve new technologies, through lack of appropriate investment in new technologies or through such investment proving unsuccessful; • failure to maintain existing technologies or to invest appropriately in continuing improvements to those technologies; • vulnerability of the group’s networks and platform (and those of its third-party service providers) to security risks, cyber-attack or other leakage of sensitive or personal data; • vulnerability of the group’s networks and platform (and those of its third-party service providers) to security risks or cyber-attack leading to direct theft of monies or assets. Regulatory risk includes the risk of non-compliance with existing regulatory requirements as well as the risk relating to changes in government policy and applicable regulations: i. Impact of a material breach of existing regulatory requirements If Nucleus Financial Services Limited (NFS) or any other member of the group, and/or any of its key suppliers, were to commit a serious breach of any of the regulations that apply to it (not least the applicable regulatory regime relating to the group’s FCA authorisations and its FCA regulated activities), there could be both regulatory and financial consequences (including, without limitation, sanctions, fines, censures, loss of permissions and/or the cost of being required to take remedial action). ii. Impact of material new regulation and forthcoming regulatory change New regulation in 2018 The Priips regulation came into force in January 2018. This required standardised key information documents for packaged retail and insurance-based products with the aim of providing more clarity and comparability for investors. Mifid II came into force in January 2018. This is a broad-reaching directive and regulation that affects many areas of the group’s business. The main changes required by Nucleus were in respect of product governance, client reporting and transaction reporting. GDPR came into force in May 2018. The concept of accountability is at the heart of the GDPR rules and therefore requires companies to demonstrate they have analysed the GDPR’s requirements in relation to the processing of personal data and have implemented systems or programmes to achieve compliance. 20 Forthcoming regulatory change Brexit may be the largest regulatory change for 2019, but also the area of greatest uncertainty. The impact of Brexit depends on what deal, if any, is agreed, whether any transitional arrangements for financial services are put in place, and the relationship between the EU and the UK after the event. The Senior Managers and Certification Regime will be extended from December 2019 to all FCA solo-regulated firms, which will include Nucleus. Senior managers will be held responsible in the event of failings and will need to prove that they took all reasonable steps to prevent conduct breaches. Furthermore, the certification regime covers the remaining significant influence functions holders and staff who can cause ‘significant harm’ to the firm and/or its customers. It will be the responsibility of firms to self-supervise all certified roles and certify that the relevant individuals are fit and proper on an annual basis. In 2017 the EBA and EC published proposals for a new prudential capital framework, the Investment Firm Regime (IFR), for investment firms, which are expected to come into force in late 2020 or early 2021. Most investment firms are currently governed by the prudential capital framework for banking, as set out by Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR). This framework is ill- suited to most investment firms and the new proposals aim to address this and introduce specific regulations for the investment firms sector. The FCA has introduced new reporting requirements for pension providers. These ‘wake-up packs’ are required to be issued from November 2019, triggered by certain anniversaries and specific actions of pension holders. Strategic report – Principal risks and uncertainties Financial and liquidity risks Solvency (including access to capital) The group is required to maintain and have available to it a sufficient level of capital as determined by the requirements applicable to a Significant IFPRU 125k limited licence investment firm and a non-insured Sipp operator. The group may require access to additional capital for a number of reasons, including increased regulatory capital requirements, and there is no assurance that such additional capital will be available (or available on favourable terms). Nucleus is a public company and its entire issued share capital is admitted to trading on the AIM market of the LSE, which provides the group with access to capital markets if required. The group also operates a dividend policy, with the intention that it will pay regular dividends - however the ability of the group to pay dividends is dependent on a number of factors including, among other things, the results of its operations, its financial condition, anticipated cash requirements, regulatory capital requirements, future prospects and its profits available for distribution, and there can be no assurance that the group will pay dividends or, if a dividend is paid, of the amount that any dividend will be. Liquidity The group’s liquidity position is subject to a number of factors that may generate liquidity strain in the short or medium term. The group manages its liquidity risk through an ongoing evaluation of its working capital requirements against available cash balances and credit facilities. We also have a defined liquidity management framework that requires management to monitor and report on liquidity positions and potential risks to the audit committee and board on a quarterly basis. The strategic report was approved by the board of directors on 1 April 2019 and signed on its behalf by: David Ferguson Director Stuart Geard Director 21 Governance – Risk management framework Governance Risk management framework The board’s objective regarding risk management is to deliver the group’s strategy and business plan supported by a robust, scalable and enterprise wide governance, risk management and control framework. 22 Our framework is concerned with: • demonstrating that it is proportionate and effective in the governance and performance of risk management for a Significant IFPRU firm; • evidencing our business strategy and business planning process are aligned with the risk management framework; • demonstrating we manage our risk appetite tolerances and limits across agreed risk categories; • demonstrating that we meet all applicable regulatory principles and requirements on an ongoing basis and do so based on strong and effective risk management culture and structures; and • embedding a risk aware culture with risk management recognised as a management competence, critical to the delivery of our business strategy and performance targets. We use a clearly defined risk framework to effectively identify, assess, manage and report the group’s risks. The framework is set out in our risk management policy and is subject to annual review and challenge by the risk committee. In assigning risk management responsibilities, the group operates an approach to risk management that is commonly referred to as the ‘three lines of defence’ model. Governance – Risk management framework The activities within each of the three lines are: First line of defence Business lines have responsibility for identifying, assessing and managing their risks through a sound set of policies, processes and controls. Business lines are also responsible for the development and deployment of appropriate mitigating actions. Second line of defence The roles of the second line risk and compliance functions are to develop and maintain the group risk and compliance management policies and frameworks. Review of the effectiveness of the performance of the risk management practices performed by operational management is evidenced through effective assurance reporting to management and the audit committee. The second line also provides support and advice to the business risk owners in reporting risk related information within the group, including management information on risk and assurance matters to the audit and risk committees and the board. Third line of defence The group engaged Deloitte LLP as an appointed internal audit function to serve as its third line of defence on a fully outsourced basis. Through the model the group obtains independent assurance on the effectiveness of its control environment for material processes. Internal audit, through a risk- based approach, provides assurance to the audit committee and the board on how effectively risks are assessed and managed, and the effectiveness of the risk management framework. Findings arising from these audit processes are reported to the audit committee. The group also engages other third parties to provide independent assurance for the purposes of its Cass handbook arrangements, information security arrangements and statutory financial management obligations. 23 Governance – Corporate governance statement Governance Corporate governance statement Chair’s introduction to governance I am pleased to present our first corporate governance statement following our admission to AIM. It is my intention, and that of the board, to ensure our approach to corporate governance is embedded in our culture and values and is proportionate to a company of our size and complexity. At Nucleus we believe that our corporate governance arrangements should support and encourage effective risk management, diversity of thought and robust decision making. It should also support our strategy for growth, commitment to the creation of shareholder value in the long term and our desire to deliver good outcomes for our customers. Since our admission to AIM, the board has stated its intention to comply with the principles of the QCA Code to support and enhance the group’s existing governance framework. In line with the changes to AIM rule 26, we published our statement of compliance with the QCA Code in September 2018, which can be found at https://nucleusfinancial. com/investors. Angus Samuels Chair 1 April 2019 24 Governance – Corporate governance statement Our board The board of Nucleus consists of a team of executive and non-executive directors working together and using their knowledge and experience of UK financial services and platform businesses to drive Nucleus forward and achieve good outcomes for its customers. We believe our board possesses all the necessary attributes to effectively steer and challenge the executive team and assess the quality of management decision making. The board must also ensure the group’s obligations to its shareholders and wider stakeholders are understood and met. Our board is collectively responsible for setting out the strategy and vision of the group. It is also responsible for shaping and instilling company values, culture and standards, providing oversight of and challenge to management and for ensuring the maintenance of a sound system of internal control and risk management. In 2018 both our admission to AIM and the unbundling of our outsourced services led to an increase in the time commitment of the board in the year, with the board (or a board sub-committee) meeting 27¹ times. Meeting attendance Independent non-executive directors Board Audit committee2 Risk committee3 Nomination committee4 Remuneration and HR committee5 Angus Samuels (chair) John Levin6 Margaret Hassall7 Tracy Dunley-Owen8 Mike Seddon9 Stephen Tucker10 Non-independent non-executive directors Jeremy Gibson Jonathan Polin Executive directors David Ferguson Stuart Geard 24 23 8 8 13 16 24 19 23 24 5 2 n/a 2 3 n/a 5 n/a n/a n/a 4 2 n/a 2 n/a 2 4 n/a n/a n/a 5 2 2 n/a n/a 3 n/a 4 n/a n/a 9 4 5 n/a n/a 4 n/a 7 n/a n/a 1 The full board met 24 times and held 3 board sub-committees during 2018. ² The audit committee met 5 times and held 1 audit committee sub-committee meeting in 2018. ³ The risk committee met 4 times in 2018. 4 The nomination committee met 5 times in 2018. 5 The remuneration and HR committee met 9 times in 2018. 6 On 19 July 2018 John became a member of the audit, risk, nomination and remuneration and HR committees and attendance at those board committee meetings is recorded from that date to the end of 2018. 7 Margaret was appointed on 19 July 2018 and attendance at board and board committee meetings is recorded from that date to the end of 2018. 8 Tracy was appointed on 19 July 2018 and attendance at board and board committee meetings is recorded from that date to the end of 2018. 9 Mike resigned on 19 July 2018 and attendance at board and board committee meetings is recorded prior to that date. 10 Stephen resigned on 19 July 2018 and attendance at board and board committee meetings is recorded prior to that date. 25 Governance – Corporate governance statement Board of directors Angus Samuels Independent non-executive chair (appointed July 2006, chair since March 2017) Angus started his career as a stockbroker and became a partner in Fergusson Bros, Hall Stewart and co. (a leading South African stockbrokers). He has previously held a number of chief executive officer roles and currently serves as the Chair of UK-based financial services group the Punter Southall Group and corporate finance business Craven Street Capital Limited. He also holds a number of other non-executive directorship positions, including with Sanlam UK Limited and Sanlam Life and Pensions UK Limited. John Levin (appointed April 2017) Independent non-executive director John co-founded and is chair of the technology platform Certua and the Quanis Group of companies which provides business technology solutions for the insurance industry. John also co-founded Telecom Plus plc where he was a non-executive director from 1997 to 2006. John has held senior positions in several companies including chair of Amtrust Europe Limited and chief executive officer and non-executive director of IGI Group Limited. Furthermore, John is currently the chair of Car Care Plan (Holdings) Limited, Motors Insurance Company Limited and Rocketer Limited and sits on the board of Integrated Protection Solutions Limited. John has also held the positions of non-executive director at Pedigree Livestock Insurance Limited and chair of Q-Cloud Services Limited. Jeremy Gibson (appointed February 2013) Non-independent non-executive director Jeremy qualified as a chartered accountant in South Africa and has worked in a broad range of financial services organisations including, in the fields of stockbroking, investment banking, mortgage lending, advisory services and life and pensions in Bristol, London and Sydney. He joined Sanlam UK Limited in September 2012 where he is currently the Group chief financial officer. Jeremy was formerly chair of the Nucleus board audit and the risk committees from 2013 to July 2018. Margaret Hassall (appointed July 2018) Independent non-executive director Chair of Remuneration and HR committee and Nomination committee Margaret has experience of and has developed knowledge in various industry sectors including manufacturing, utilities and financial services. She has held a number of senior executive positions at Barclaycard plc, Bank of America Merrill Lynch Corporation and The Royal Bank of Scotland plc. and in addition to her executive roles, has also worked extensively as a consultant for Deloitte, Oracle Corporation and Wavestone Limited, and led the Financial Services consulting business for Charteris plc. Since 2016 Margaret has been an independent non-executive director at One Savings Bank plc, where she is a member of the risk and audit committees. She is also a non-executive director at Ascention Trust (Scotland). 26 Governance – Corporate governance statement Jonathan Polin (appointed July 2016) Non-independent non-executive director Jonathan began his financial services career with Prudential plc before taking up the position of Managing Director UK, European and Middle Eastern sales at what was formerly known as Aberdeen Asset Management plc. Prior to this Jonathan was a director at Ignis Asset Management Limited. Jonathan has also held the position of chief executive officer of wealth management firm, Ashcourt Rowan plc, before becoming the group chief executive officer of Sanlam UK Limited. Tracy Dunley-Owen (appointed July 2018) Independent non-executive director Chair of Audit committee and Risk committee Tracy possesses wide-ranging experience in financial services at senior level, specifically within the fields of audit and risk. She has held senior executive finance roles in addition to board, audit and risk committee responsibilities at various companies within the Old Mutual plc group, Guardian Financial Services group, a division of Swiss Reinsurance Company Limited and Celestial Financial Services Limited. Tracy is currently a non-executive director of Sun Life Assurance Company of Canada (UK) Limited, a non-executive director of Lifecheq (Pty) Limited and an independent non-executive director, member of the audit committee and chair of the remuneration committee for Women’s Investment Portfolio Holdings Limited. David Ferguson (co-founder and CEO since 2006) Chief executive officer Stuart Geard (appointed October 2012) Chief financial officer David was a trainee actuary prior to working at asset management firm Ivory & Sime Limited and what was then known as Scottish Life International Limited. David is currently a director of Abacus Financial Marketing Limited, chair of FinTech Scotland and a member of Her Majesty’s Treasury Fintech Envoy for Scotland. Stuart started his career with what is today PwC South Africa before moving to Sanlam Limited as a senior manager in corporate finance. He was head of finance and investments for what is now Sanlam Life and Pensions UK Limited prior to becoming finance director of Sanlam UK Limited. He also served as director at Sanlam Private Investments UK Limited and Sanlam Life and Pensions UK Limited and audit and risk committee chair of most of the Sanlam Group’s interests in the UK. 27 Governance – Corporate governance statement The board meets at least quarterly and, along with executive management, holds an annual strategy day to review potential strategic initiatives and alignment with our business and strategic planning activities. The company secretary and the chief executive officer report directly to the chair. The company secretary acts as an internal but impartial adviser to the board, specifically on governance matters, and provides support to the board by managing the agenda planning cycle and ensuring that the board receives quality information in a timely fashion. She also supports the chair in assessing training needs and arranging training for the board as required. Performance evaluation The Nucleus board and its committees are committed to periodic evaluation of their performance and effectiveness. This commitment is evidenced in our corporate governance framework as part of the board schedule of reserved matters and the terms of reference of each board committee. The board performance evaluation is led by the chair and supported by the company secretary. Individual performance reviews for each director are the responsibility of the chair and are carried out at least annually. There was no board or board committee performance evaluation process in 2018. This was due to the company’s admission to AIM and associated board commitment and in the knowledge that there were associated planned changes to the composition of the board and its committees. The board intends to evaluate its performance (and that of each committee) in 2019. Board effectiveness and constitution Our schedule of board reserved matters was adopted on admission and is reviewed regularly. It covers topics such as strategy and management, governance, financial reporting and controls, internal controls and remuneration. The schedule of reserved matters can be found at https:// nucleusfinancial.com/investors. There is a relationship agreement in place between the company and its majority shareholder, Sanlam UK Limited (Sanlam), the details of which were disclosed in the company’s Admission document which can be found at https://nucleusfinancial. com/investors. The relationship agreement contains a number of provisions designed to protect the interests of shareholders as a whole as well as to ensure that the company is able to carry on its business independently from Sanlam, and as a result supports independent, effective and transparent decision making by the board. The relationship agreement also specifies that at all times a majority of the board will be comprised of directors who are considered by the board to be unconnected and free from any business, employment or other relationship with the Sanlam Group. Pursuant to the relationship agreement, it has been agreed that Sanlam nominated directors do not qualify as independent directors and as such, Jonathan Polin and Jeremy Gibson are not considered independent non-executive directors of the company. The board commits to following the QCA Code which we believe will further support independent, effective and transparent decision making, enhance collective and individual performance and drive sustained performance. The board considers Angus Samuels, John Levin, Margaret Hassall and Tracy Dunley-Owen to be independent non-executive directors and as such, free of any relationship which could materially interfere with the exercise of their independent judgement. Further commentary around the independence of our directors can be found within the company’s statement of compliance with the QCA Code which can be found at https://nucleusfinancial.com/ investors. 28 “ The board commits to following the QCA Code which we believe will further support independent, effective and transparent decision making, enhance collective and individual performance and drive sustained performance.” Director induction, training and re-election Nucleus invites each new director to receive a tailored induction. During 2018 and continuing into 2019 Margaret Hassall and Tracy Dunley-Owen have each attended various briefings with members of the executive team and other people across the business. All our directors are also given the opportunity to meet with other stakeholders such as our platform users and key suppliers. The company is committed to supporting individual director development needs and has most recently arranged training on the GDPR, the AIM rules, conduct risk and the application of the Senior Manager and Certification Regime. Furthermore, all directors can take independent advice in support of their duties at the company’s expense and under the board policy for obtaining independent advice. Directors also have access to the advice and services of the company secretary. Given the adoption of new articles of association on the company’s admission to AIM, directors will be required to retire at the company’s inaugural AGM and put themselves forward for re-election for approval by shareholders. Governance – Corporate governance statement Board oversight of Nucleus’ risk management and control framework The board has overall responsibility for risk management and internal controls and is fully supported by the risk and audit committees. Details of our principal risks and uncertainties can be found on pages 18 to 21 and a summary of our risk management framework can be found on pages 22 to 23 of this report. Further details can be found in our Pillar 3 disclosures and statement of compliance with the QCA Code, both of which can be found at https://nucleusfinancial.com/investors. Communication with shareholders and stakeholders The board is committed to maintaining an ongoing dialogue with the company’s shareholders. Following the enhancement of our reporting in 2017 to comply with IFRS, this 2018 report is enhanced further in line with our adoption of the QCA Code. The company’s principal methods of communication with private investors remain the annual report and financial statements and company website but following the company’s admission to AIM, we now produce an interim report, hold investor and analyst presentations and will hold our inaugural AGM on 23 May 2019. Nucleus is also committed to releasing timely, accurate and complete information to the market. It is intended that all directors will attend the AGM and that shareholders will be given the opportunity to ask questions. Dialogue with shareholders and wider stakeholders is welcome. Our broader engagement with our stakeholders is set out in detail in our statement of compliance with the QCA Code, which can be found at https:// nucleusfinancial.com/investors. In particular, since admission we have appointed an advisory board of Nucleus users that meet quarterly with a view to sharing market insights and giving feedback on matters affecting their firms and their customers as well as feedback on their experience of Nucleus, including areas for focus. Feedback is reported quarterly to our board, and our senior management team engage regularly with the advisory board. On behalf of the board Angus Samuels, chair 1 April 2019 29 Governance – Corporate governance statement Our board committees The board has established four principal committees: audit, risk, nomination and remuneration and HR. Each committee operates under its own terms of reference to assist the board in its oversight and monitoring responsibilities for the group. Audit and risk committee reports I am pleased to present the audit and risk committee reports for the period ending 31 December 2018. I would like to take this opportunity to thank Jeremy Gibson for his work as chair of the audit and risk committees in the first part of the year, prior to me assuming the role of chair of these committees upon my appointment to the board. I look forward to working with Jeremy as an ongoing audit and risk committee member. Tracy Dunley-Owen, chair of the audit committee and risk committee (appointed 19 July 2018) 30 Governance – Corporate governance statement Audit committee report Committee responsibilities Composition and frequency of meetings Prior to the company’s admission to AIM, the audit committee comprised Jeremy Gibson (chair), Angus Samuels and former non-executive director, Mike Seddon. Following the company’s admission to AIM and for the remainder of the reporting period to the present, the audit committee comprises Tracy Dunley-Owen (chair), Angus Samuels, John Levin and Jeremy Gibson. Details of the number of meetings held within the reporting period and attended by members can be found in the table on page 25, in the corporate governance report. The company secretary acts as secretary to this committee. In nominating the new committee members, the board was and is satisfied that as well as demonstrating recent and relevant financial experience, the committee members possess extensive business experience, knowledge of financial markets and the UK platform market, knowledge of the risks and management practices inherent in these markets and knowledge of the applicable legal and regulatory landscape. The board also considers that the committee is independent. The audit committee terms of reference are available on the company’s website and can be found at https://nucleusfinancial.com/investors. In accordance with these terms of reference, the committee is ultimately responsible for: • Providing assurance regarding the integrity, quality and reliability of financial information used by the board, specifically regarding the annual reports and financial statements issued by the group • Reviewing and challenging the suitability, appropriate adoption and any proposed changes to accounting policies and practices for the group • Reviewing the impact of any proposed dividends • Maximising the efficiency and effectiveness of the group’s internal and external audit arrangements and three lines of defence • Providing assurance regarding group financial reporting, compliance, internal controls and ethical conduct • Engaging and monitoring any non-audit work carried out by the auditors • Reviewing of quarterly reports such as the reports from the chief financial officer, head of risk, head of compliance, chief legal officer, Cass oversight function holder and chief operating officer 31 Governance – Corporate governance statement Audit committee report Committee highlights • Reviewing and approving the accounting policies adopted by the group • Reviewing and approving areas of significant judgement and estimation including revenue recognition, provisions, share-based payments and income taxes • Reviewing the company’s enhanced 2017 annual report and financial statements under IFRS of engagement partner during the year. The committee has reviewed the relationship with the auditor and, having considered its effectiveness and independence, propose that PwC is re- appointed as external auditor at the company’s forthcoming AGM. The committee monitors any non-audit work carried out by the auditors. The committee is satisfied that the nature and value of non-audit work performed has not affected the independence of PwC. • Reviewing the company’s inaugural interim results announcement Internal audit arrangements Deloitte was appointed as the company’s internal audit provider during 2018. Prior to this, the company engaged Grant Thornton LLP as the fully outsourced internal audit provider for six years. Deloitte provides the company with a fully independent assurance programme which is informed by the company’s second line of defence assurance programmes and business requirements with reference to the committee approved internal audit charter. The company’s internal audit programme is also supplemented by additional reviews provided by specialist third party service providers in the areas of information security and Cass. The internal audit programme is reviewed, challenged and approved annually by the committee and is also reviewed quarterly by the committee to monitor progress and completeness. On behalf of the audit committee Tracy Dunley-Owen, chair of the audit committee 1 April 2019 • Reviewing the impact of the company’s interim dividend payments in May and October 2018 • Embedding the relationship with our new outsourced internal audit provider, Deloitte LLP (Deloitte) • Cementing our relationship with the company’s existing external statutory and Cass regulatory audit provider PricewaterhouseCoopers LLP (PwC) • Providing challenge and oversight of the company’s response to external and internal control findings • Reviewing the 2018 annual report and financial statements and receiving report from PwC relating to their audit External audit arrangements Subject to the approval of shareholders, the audit committee is responsible for approving the appointment of the external auditor and setting its remuneration. As reported in our company accounts to 31 December 2010, PwC was first appointed as our external auditor in 2010. Following the company’s admission to AIM in July 2018, the audit partner rotation rules for listed companies apply which resulted in a change 32 Governance – Corporate governance statement Risk committee report Committee responsibilities Composition and frequency of meetings The risk committee terms of reference are available on the company’s website and can be found at https://nucleusfinancial.com/investors. In accordance with these terms of reference, the committee is ultimately responsible for: • Providing assurance regarding the board’s approach to the group risk management framework • Advising the board on the group’s current and future overall risk exposure, appetite and tolerance Prior to the company’s admission to AIM, the risk committee comprised Jeremy Gibson (chair), Angus Samuels and former non- executive director, Stephen Tucker. Following the company’s admission to AIM and for the remainder of the reporting period to the present, the risk committee comprises Tracy Dunley-Owen (chair), Angus Samuels, John Levin and Jeremy Gibson. Details of the number of meetings held within the reporting period and attended by members can be found in the table on page 25, in the corporate governance report. The company secretary acts as secretary to this committee. • Maximising the efficiency and effectiveness of the company’s three lines of defence The board is satisfied that the committee is independent. • Reviewing ICAAP approach and methodology Committee highlights • Monitoring the effectiveness of the business risk management processes in the company • Reviewing and approving corporate policies in accordance with the group policy framework • Reviewing a number of quarterly reports from the head of risk and chief legal officer • Reviewing and recommending board approval of the 2017 ICAAP approach and methodology • Reviewing the Pillar 2 reassessment in respect of the 2018 ICAAP • Providing assurance on the company’s risk management framework and development of key risk indicators • Reviewing the company’s existing and forecasted risk profile • Reviewing and approving of a number of group policies On behalf of the risk committee Tracy Dunley-Owen, chair of the audit committee 1 April 2019 33 Governance – Corporate governance statement Nomination and remuneration and HR committee reports I am pleased to present the nomination and remuneration and HR committee reports for the period ending 31 December 2018. These are my first nomination and remuneration and HR committee reports as chair after taking over from Stephen Tucker in July 2018. I would like to thank Stephen for his work as chair and wish him well in his future endeavours. Margaret Hassall, chair of the nomination committee and remuneration and HR committee (appointed 19 July 2018) “ Our remuneration policy has been chosen to attract, motivate and retain high- performing people who can deliver our strategy and contribute fully to the future success of Nucleus.” 34 Governance – Corporate governance statement Nomination committee report Committee responsibilities Committee highlights The nomination committee terms of reference are available on the company’s website and can be found at https://nucleusfinancial.com/investors. In accordance with these terms of reference, the committee is ultimately responsible for: • Reviewing the structure, size and composition of the board and considering succession planning for directors and other senior executives • Identifying and nominating new director appointments in line with board procedures • Evaluating director and management training • Recruiting two new non-executive directors and the embedding of the company’s nominations policy by creating a more gender balanced board • Encouraging management in nurturing an inclusive, diverse and inspiring workplace. The company’s inclusion and diversity statement can be found on the company’s website at www. nucleusfinancial.com/about-us/inclusion-and- diversity • Reviewing the executive team structure needs and organisational structure • Reviewing board and executive succession planning • Supporting the company’s role as a champion of diversity and inclusion and progress against the company’s diversity targets Composition and frequency of meetings Prior to the company’s admission to AIM, the nomination committee comprised former non- executive director Stephen Tucker (chair), Angus Samuels and Jonathan Polin. Following the company’s admission to AIM and for the remainder of the reporting period to the present, the nomination committee comprises Margaret Hassall (chair), Angus Samuels, John Levin and Jonathan Polin. Details of the number of meetings held within the reporting period and attended by members can be found in the table on page 25, in the corporate governance report. The company secretary acts as secretary to this committee. The board is satisfied that the committee is independent. To assist the committee in its search for new non-executive directors, the committee sought external advice from Boyden Global Executive Search (Boyden). Boyden is not considered to have any connection with the company. Boyden created a short list of 16 candidates using pre-set criteria and following a second stage interview process, Margaret Hassall and Tracy Dunley- Owen were recommended to the committee and subsequently after consideration, recommended by the committee to the board for approval of their appointments. The company process for the appointment of non-executive directors was followed at all times. On behalf of the nomination committee Margaret Hassall, chair of the nomination committee 1 April 2019 35 Governance – Corporate governance statement Remuneration and HR committee report Committee responsibilities The remuneration and HR committee’s terms of reference are available on the company’s website and can be found at https:// nucleusfinancial.com/investors. In accordance with these terms of reference, the committee is ultimately responsible for: • Setting the overall remuneration policy for the executive directors and other senior employees • Within the terms of that policy, determining the terms and conditions of employment of those individuals and the level of their remuneration (including short-term and long-term incentives) • Reviewing the delivery of our people strategy Composition and frequency of meetings Prior to the company’s admission to AIM, the committee comprised previous non-executive director Stephen Tucker (chair), Angus Samuels and Jonathan Polin. Following the company’s admission to AIM and for the remainder of the reporting period to the present, the committee comprises Margaret Hassall (chair), Angus Samuels, John Levin and Jonathan Polin. Details of the number of meetings held within the reporting period and attended by members can be found in the table on page 25, in the corporate governance report. The company secretary acts as secretary to this committee. In nominating the new committee members, the board is satisfied that the committee is independent. No individual was involved in any discussion relating to his or her own remuneration. During the year, the committee sought internal support from the chief people officer, who attended committee meetings by invitation from the chair, to advise on specific questions raised by the committee and on matters relating to the performance and remuneration of senior managers. The chief people officer was not present for any discussions that related directly to her own remuneration. In addition, the committee sought external advice from Deloitte on executive remuneration benchmarking and on long term incentive plan design. Advice was sought from Shepherd and Wedderburn on the design and implementation of the performance share plan and share incentive plan. Committee highlights • Benchmarking executive director total remuneration and reviewing and recommending approval to the board of executive director remuneration arrangements • Approving annual salary increases for executive directors, executive committee members and other employees • Overseeing and recommending approval to the board of the satisfaction of the group’s growth share scheme • Reviewing and recommending approval to the board of the rules for the group’s long-term incentive plan • Reviewing and recommending approval to the board of the trust deed and rules for the group’s all-employee share incentive plan • Approving performance targets for the 2018 long-term incentive plan awards and associated performance conditions 36 Governance – Corporate governance statement Remuneration and HR committee report • Approving performance targets for the executive directors’ and other senior leaders’ 2018 bonus scheme • Approving executive directors’ and other senior leaders’ 2017 bonus awards • Reviewing and recommending approval of the directors’ remuneration policy (effective from 14 November 2018) to the board • Approving executive directors’ contracts of employment Shareholder engagement The group is committed to engaging with its shareholders and wider stakeholders and the purpose of the information presented below is to provide an indication of how remuneration is approached at Nucleus and of director remuneration from 1 January 2018 to the end of the reporting period. The majority of the information below on remuneration policy is presented on a voluntary basis. The committee wishes to oversee, assess and challenge where appropriate how our remuneration policy embeds and to review the extent of engagement with shareholders on our policy throughout the course of 2019. As an AIM-listed company, Nucleus is not required to seek shareholders’ approval of this report at the forthcoming AGM. However, the committee will keep this under review and may include such a resolution in future years. Remuneration at Nucleus Our remuneration policy has been chosen to attract, motivate and retain high-performing people who can deliver our strategy and contribute fully to the future success of Nucleus. With the support of the board, the committee intends to deliver a market-relevant reward proposition that creates alignment between our people and our shareholders and is driven by our appetite to: a) align the interests of our people and our shareholders, b) reward the right behaviours, reinforce the importance of good conduct and penalise misconduct or other misbehaviour and, c) promote confidence and trust by keeping our remuneration policy simple, clear and transparent. The group’s current executive directors’ remuneration policy was developed during the course of the year and was formally adopted by the committee on 14 November 2018. Prior to that date and save as was necessary to take account of the new incentive scheme structures that were adopted as part of the admission process, the committee continued to apply the group’s remuneration policies and practices that were in place prior to admission. While the policy below refers explicitly to executive directors only, it is also applicable to all other executive committee members and senior leaders. 37 Governance – Corporate governance statement Remuneration and HR committee report Executive director remuneration policy The various elements and strategic objectives associated with executive remuneration are: Base salary Purpose Annual bonus Purpose To reflect the market value and value of the role to Nucleus along with the individual’s performance and contribution. To reinforce and reward delivery of annual strategic business priorities thus delivering value to shareholders and being consistent with the delivery of the strategic plan. Operation The committee reviews base salaries with reference to: • the individual’s role, performance and experience • company performance and the external economic environment Operation Performance measured on an annual basis for each financial year. Performance measures reviewed prior to the start of the year to ensure they remain appropriate and align with the business strategy. Stretching targets are set. • salary levels for similar roles at relevant comparators; and At the end of the year the committee determines the extent to which these were achieved. • salary increases across the company Base salary is reviewed on an annual basis, with any increases taking effect from 1 January. The committee will seek to limit pay increases for executive directors, where there is no change in role, to those applied generally to our people across the company. However, where an executive director is relatively new in role the committee reserves flexibility to provide increases that are greater than those applied across the company to bring the individual’s salary into line with the market and reflect the gaining of experience. Performance metrics Company and individual performance are considerations in setting base salaries. On-target bonuses are a maximum of 75% of base salary. The maximum bonus opportunity is 200% of on-target. There is no minimum or guaranteed level of bonus. Awards are paid in cash, are discretionary and do not form part of the terms and conditions of employment. Deferral may be applied where the committee deems it necessary to do so. Performance metrics Performance measures are selected, and their respective weightings may vary from year to year, depending on the company priorities. Measures include a blend of equally-weighted personal and company objectives. In 2018 the company performance measures were: profit, net inflows, project delivery, systems and controls, service and people engagement. In 2018 the personal element was measured by assessing delivery against the business plan, leadership and progress towards diversity and inclusion objectives. 38 Governance – Corporate governance statement Remuneration and HR committee report Executive director remuneration policy LTIP Purpose Share incentive plan Purpose To drive sustained long-term performance that supports the creation of shareholder value. Operation Annual awards of performance shares may be made to participants. The LTIP rules provide for annual awards of up to 150% of base salary, save that this limit can be exceeded if the committee determines that exceptional circumstances exist in relation to one or more participants. Award levels and performance conditions are reviewed before each reward cycle to ensure they remain appropriate. To align shareholder interests with those of our people and allow them to benefit from the long- term success of the company. Operation Executive directors are invited to participate in this all-employee share plan on the same basis as all of our people. The Share Incentive Plan (SIP) provides for the purchase of shares, in line with HMRC participation level rules, on a monthly basis from gross pay and is also the vehicle used to allow for awards of free or matching shares. Awards made under the LTIP will have a performance period of three years and a minimum vesting period of three years. Performance metrics Not performance related. Dividend equivalents may accrue on LTIP awards and are paid on those shares which vest. Malus (of any unvested LTIP award) and clawback (of any vested LTIP award) may be applied where the committee deems it necessary to do so, including in the event of gross misconduct or a material mis-statement. Performance metrics Vesting of LTIP awards is subject to company performance and continued employment. The current LTIP performance measures and weightings are: • 33% EPS • 33% Net inflows • 33% Total shareholder return The committee may vary the terms of the performance conditions attaching to an outstanding award in exceptional circumstances, provided that the amended conditions are, in their opinion, neither materially easier nor more difficult to achieve than the original performance conditions as envisaged by the committee at the date of grant of that award. 39 Governance – Corporate governance statement Remuneration and HR committee report Executive director remuneration policy Pension Purpose Benefits Purpose To provide a market competitive pension. To provide market competitive benefits. Operation Operation Executive directors may participate in the company pension scheme or may receive a cash allowance in lieu of pension contribution. Salary is the only element of remuneration that is pensionable. A maximum of 10% of base salary contribution paid into the company’s group pension scheme or, as an alternative, a maximum of 8.5% of base salary cash allowance may be provided upon request. This is the same opportunity that is offered to all other employees. Performance metrics Not performance related. Benefits include private medical cover, life assurance and employee assistance programmes. 28 days standard annual holiday allowance plus 9 public holidays. Fully underwritten private medical insurance to executive directors and their dependents is provided. Death in service at 4 x base salary. Performance metrics Not performance related. 40 Further detail behind our policy: Performance measures The committee selects the short, medium and long-term performance measures to ensure an appropriate balance between short- medium and long-term strategic goals and aligning the interests of executive directors with shareholders as far as practicable. Measures and targets for both the bonus plan and LTIP are aligned to the strategic plan based on internal and external reference points and are set to be stretching but achievable with regard to the company’s strategic priorities and economic environment in a given year. These are approved by the board. The committee may apply discretion, in exceptional circumstances (for example, if there is a major corporate event), to amend or vary targets or the weighting of performance metrics or to substitute the metrics if these are no longer appropriate to ensure alignment with strategy and any risks within the business. The committee will consult with the group’s risk management and control functions to ensure changes are appropriate and do not inadvertently encourage irresponsible or inappropriate behaviour. Consideration of risk factors and risk appetite Malus and/or clawback may be applied where: there is evidence of colleague misbehaviour, misconduct, material error, where a colleague participated in conduct which resulted in losses for the company or they failed to meet appropriate standards; there is any material failure of risk management; if the financial results are restated; if the financial results for a given year do not support the level of variable remuneration awarded; or in any other circumstances where the committee consider adjustments should be made. The committee is supported in this by the board risk and audit committees and the Nucleus risk function. When determining the outcome of the performance measures, the committee will seek the advice of the board risk committee to ensure all relevant risk factors are identified and the bonus pool and/or individual awards may be adjusted accordingly. Governance – Corporate governance statement Balance between fixed and variable pay Total variable remuneration (bonus and LTIP) is limited by the rules of the LTIP, which limit the annual allocation of awards (unless in exceptional circumstances) to a maximum of 150 per cent of base salary for executive directors under the LTIP, and the rules of the management group bonus scheme, which define the target and maximum bonus rates. All of these parameters are within the authority of the committee, which is therefore able to ensure that an appropriate balance between fixed and variable pay is maintained. The existing LTIP award allocations and current and historic on-target bonus payments result in approximately a 2:1 ratio of variable pay to fixed pay (subject to the achievement of performance conditions), with the on-target LTIP award being at least half of the total variable pay award. Service contracts for executive directors The service agreements govern the performance of the executive directors’ duties for the company and other members of the group. The principal terms of the service agreements are summarised below. • The service agreements provide for 28 holidays per annum (plus public and bank holidays), and up to three months sick pay. • Executive directors are eligible to receive bonus and/or other discretionary incentive awards. These are at the committee’s discretion and the executive directors do not have a contractual right to receive such awards. • An executive director’s employment may be terminated by either party giving to the other not less than six months’ written notice. Under the terms of each service agreement, the company may elect to terminate an executive director’s employment by making a payment in lieu of notice equal to the base salary and benefits (but excluding bonus) for any unexpired portion of the notice period. • The company also has the discretion to place an executive director on garden leave during the notice period. It is entitled to dismiss an executive director without notice or compensation in specified circumstances, for example if the executive director commits a serious or persistent breach of any term of the service agreement. • The executive directors’ service agreements also contain six-month post-termination non-compete restrictions and 12 months’ post-termination non-solicitation and non-deal restrictions. 41 Governance – Corporate governance statement Directors remuneration in 2018 Audited single total figure of remuneration The table below sets out a single figure for the total remuneration received by each director for the year ended 31 December 2018 and the prior year: Basic salary / fees Taxable benefits Pension Annual bonus Growth shares LTIP/SIP £’000 £’000 £’000 £’000 £’000 £’000 Total £’000 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Executive directors David Ferguson 1,2,6 281 244 Stuart Geard 1,2,6 245 231 Non executive directors Paul Bradshaw 7 Tracy Dunley-Owen 3 Jeremy Gibson 4,5 Margaret Hassall 3 John Levin Jonathan Polin 5 Angus Samuels 5 Michael Seddon 4 Stephen Tucker 4,5 - 16 37 16 35 35 83 23 23 7 - 39 - 35 35 76 39 39 1 1 - - - - - - - - - 1 1 - - - - - - - - - 15 14 24 24 200 199 2,131 143 177 1,580 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 88 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,628 469 - 1,983 433 - - - - - - - - - 88 16 37 16 35 35 83 23 23 7 - 39 - 35 35 76 39 39 Non-executive director remuneration is determined by the board as a whole within the limits set out in the articles of association. Non-executives do not participate in performance-related bonus or share-based payment arrangements. ¹ basic salary includes 8.5 per cent pension cash allowance applied for the income tax year 2018/19 ² pension restricted for annual taper allowance in the income tax year 2018/19 ³ non-executive director fee pro-rated from appointment onto the board and sub committees post AIM listing 4 weighted average non-executive director fee received in 2018 reflecting stepping down from sub-committee chair post AIM admission 5 remuneration paid to third parties 6 The remuneration received by the executive directors in 2018 included the value, at their date of conversion into ordinary shares in Nucleus Financial Group Limited (being 26 January 2018) of the realised G ordinary shares in Nucleus Financial Group Limited held by them. The growth shares, being G1 and G2 ordinary shares, were issued to the executive directors as part of a previous long-term incentive plan operated by the group. Further details of the scheme are set out in note 24 share- based payments below. 7 At the start of 2017 Paul Bradshaw, the Nucleus founding chairman, passed away. Paul was entitled to participate in the 2012/2013 growth shares schemes, and upon realisation, these shares were allocated to the benefit of his estate. 42 Governance – Corporate governance statement Summary of share incentive plan awards The table below summarises individual executive director awards during the year. Director David Ferguson Total Stuart Geard Total Grant date Awarded during the year Lapsed during the year Vested during the year As at 31 December 2018 Award type LTIP SIP 26 July 2018 243,441 - 111 - - - - - - 243,441 111 243,552 164,810 164,810 LTIP 26 July 2018 164,810 The performance conditions, valuation assumptions and other relevant award information are set out in note 24 share- based payments below. Directors’ interest in shares The number of shares held by the directors as at 31 December 2018 is as follows: Director David Ferguson Stuart Geard Angus Samuels Shares beneficially owned1 Unvested LTIP options Non-entitled SIP shares 1,810,713 954,625 53,409 243,441 164,810 - 111 - - Total 2,054,265 1,119,435 53,409 Margaret Hassall Chair of the remuneration and HR committee 1 April 2019 1 Includes shares held by connected parties 43 Governance – Directors’ report Governance Directors’ report The directors present their report and the audited consolidated financial statements for the year ended 31 December 2018. Nucleus Financial Group plc (the Company) is the parent company of a group of companies comprising Nucleus Financial Group plc and its subsidiaries, Nucleus Financial Services Limited (NFS), and Nucleus IFA Services Limited (NIFAS) (the Group). 44 Governance – Directors’ report Introduction The company’s principal activity is that of a holding company. It is also contracts services on behalf of the group, is the main employer of Nucleus staff and provides and charges management services to its subsidiaries. to its activities as an operator of a self-invested personal pension scheme (a Sipp operator) and also those relating to the management of individual savings accounts (an Isa manager). NFS is authorised to hold and control client money as part of its activities and is therefore subject to the FCA’s client asset rules (CASS rules). The group’s principal activity is that of a wrap platform service provider. The Nucleus wrap allows clients to invest directly, or via various ‘tax wrappers’ into a broad range of asset types, including cash, unit trusts, OEICs, ETFs, investment trusts and other securities. NFS is authorised and regulated by the Financial Conduct Authority (FCA) and is classified as an IFPRU limited licence investment firm. Since June 2016 when it met the relevant threshold, NFS has been further classified as a Significant IFPRU firm. In addition, NFS has additional FCA and Her Majesty’s Revenue and Customs (HMRC) obligations relating NIFAS is not regulated by the FCA and is no longer operating. The audited financial statements of the group and NFS, along with the group’s Pillar 3 statement, can be found on the group’s website www. nucleusfinancial.com and they are also available on request from the company secretary. 45 Governance – Directors’ report Business review and strategic report Directors The strategic report includes a detailed business review that is set out in the chairman’s statement, chief executive’s report and chief financial officer’s report on pages 4 to 17 above. Within these parts of the strategic report we set out information relating to: • the development and performance of the business during the year; • the financial position of the group at the end of the year; • key performance indicators, both financial and non-financial, which are regularly assessed in relation to the development, performance, solvency and liquidity of the business; and The directors who served during the year were: • T Dunley-Owen (appointed 19 July 2018) • D R Ferguson • S J Geard • J P Gibson • M Hassall (appointed 19 July 2018) • J Levin • J C Polin • information relating to likely future developments • J A A Samuels (Chair) of the business. Details of risk management objectives and policies relating to financial instruments are set out in note 22 financial instruments and in the risk management framework above. Results and dividends The group’s profit for the year was £4.8m (2017: £4.1m). Revenue increased 8.7 per cent to £49.4m, (2017: 21 per cent to £45.5m), with operating profit up 10 per cent to £5.6m (2017: up 20 per cent to £5.1m). The full results are set out in the accompanying financial statements and notes. The directors have recommended a final dividend in relation to the year ended 31 December 2018 of 3.6p per share. Qualifying indemnity provisions As permitted by the company’s articles of association directors’ professional indemnity insurance has been provided to all directors and this arrangement was in place throughout the year. As part of the company’s admission to AIM customary indemnities were provided to certain directors during the year and remain in force. • M D Seddon (resigned 19 July 2018) • S J Tucker (resigned 19 July 2018) Political donations No political donations were made by the group or the company during the year under review. Share capital structure On 8 May 2018, the company issued 50,000 redeemable non-convertible preference shares at a nominal value of £1 per share. These were redeemed on 26 July 2018. On 6 July 2018, Nucleus Financial Group Limited was re-registered under the Companies Act 2006 as a public company under the name of Nucleus Financial Group plc. The company was admitted to AIM on 26 July 2018. In preparation for and as part of the administration process the capital structure of the company changed such that all other classes of shares converted into ordinary shares or were cancelled. The number of ordinary shares in issue was increased by way of a bonus issue and share split. No share capital was raised during the year. 46 Authority to purchase own shares On admittance to AIM, new company articles of association were adopted which granted the company authority to make market purchases of its own shares. The directors confirm that the company has not purchased any of its own shares during the year. Post balance sheet events There were no subsequent events that required adjustment to or disclosure in the financial statements for the period from 31 December 2018 to the date upon which the accounts were available to be issued. Going concern With regard to the assessment of the group and company’s ability to continue as a going concern, the directors evaluate this taking into account: • the latest business plan projections of the group and the company, stressed for significant events that would have a material impact on the group and the company’s profitability, liquidity, solvency and its regulatory capital position; • actual performance to date; • access to capital to meet operational and regulatory requirements; • known risks and uncertainties with consideration of the impact of these on the group’s solvency and liquidity position; • known and expected changes in the regulatory environment impacting on platform operators; and • the results of the group’s ICAAP which is formally reviewed and approved by the directors on an annual basis. Governance – Directors’ report The directors also consider their approach to assessing the group and the company’s ability to continue as a going concern with reference to guidance from the Financial Reporting Council and the recommendations from the Sharman Inquiry of 2012 which sought to identify lessons for companies and auditors addressing going concern and liquidity risks following the credit crisis. Having regard to these matters, the directors believe it is appropriate to prepare the financial statements on a going concern basis. Disclosures to the external auditor statement Each individual director confirms that as far as they are aware, there is no relevant audit information of which the company’s auditor is unaware, and that they have taken all the steps that ought to have been taken as a director in order to make themselves aware of any relevant audit information and to establish that the company’s auditor is aware of that information. Auditor The auditors, PricewaterhouseCoopers LLP, have indicated their willingness to be re-appointed and a resolution for reappointment will be proposed at the Annual General Meeting . This report was approved by the board on 1 April 2019 and signed on its behalf. David Ferguson Director 47 Governance – Directors’ responsibilities statement Governance Directors’ responsibilities statement The directors are responsible for preparing the Group Strategic Report, the Directors’ Report and the consolidated and company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). Under Company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and the group and of the profit or loss of the company and group for that period. 48 Governance – Directors’ responsibilities statement In preparing these financial statements, the directors are required to: • select suitable accounting policies for the group’s financial statements and then apply them consistently; • make judgments and accounting estimates that are reasonable and prudent; • state whether applicable IFRSs as adopted by the EU have been followed, subject to any material departures disclosed and explained in the financial statements; • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group will continue in business. 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 the group 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 the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements and other information included in Directors’ Report may differ from legislation in other jurisdictions. David Ferguson Director 49 Independent auditors’ report Independent auditors’ report to the members of Nucleus Financial Group plc Report on the audit of the financial statements Opinion Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. In our opinion, Nucleus Financial Group plc’s group financial statements and company financial statements (the “financial statements”): • give a true and fair view of the state of the group’s and of the company’s affairs as at 31 December 2018 and of the group’s profit and the group’s and the company’s cash flows for the year then ended; • have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the company’s financial statements, as applied in accordance with the provisions of the Companies Act 2006; and • have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements, included within the Annual report and financial statements (the “Annual Report”), which comprise: the consolidated and parent company statements of financial position as at 31 December 2018; the consolidated income statement and statement of comprehensive income, the consolidated and parent company statements of cash flows, and the consolidated and parent company statements of changes in equity for the year then ended, the accounting policies; and the notes to the financial statements. 50 Independent auditors’ report Report on the audit of the financial statements (continued) Our audit approach Overview Materiality Overall group materiality: £282,650 (2017: £259,523), based on 5% of profit before tax. Audit scope Overall company materiality: £214,349 (2017: £106,024), based on 1% of total expenses. The group financial statements comprise the consolidation of three individual components, each of which represents an individual legal entity within the group. We performed a full scope audit of the complete financial information of these three components, which together represent 100% of the group’s profit before tax. Specific audit procedures were also performed over consolidation adjustments required to aggregate the three individual components together to form the group financial statements. We performed a full scope audit of all material line items of the parent company. Key audit matters Revenue recognition (group). The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. 51 Independent auditors’ report Report on the audit of the financial statements (continued) Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the 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) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, 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. This is not a complete list of all risks identified by our audit. Key audit matter Revenue recognition Revenue is material to the group and is an important determinant of the group’s profitability. Revenue may be misstated due to errors in system calculations or manual processes, for example, arising from incorrect securities prices or levels of assets held used in these calculations and processes. Further, there are incentive schemes in place for Directors and staff which are in part a function of the group’s revenue performance. Where there are incentives based on performance, there is an inherent risk of fraud in revenue recognition as there is an inherent incentive to misstate revenue. How our audit addressed the key audit matter We obtained an understanding of the revenue recognition policy applied by management. For the aggregate revenue balance, we performed substantive testing procedures using the core assets under management information and the fee rates applied to customers and calculated an expectation of the revenue balance each month. In order to rely on the assets under administration data we; • Selected a sample of the underlying customer holdings of individual securities at various dates throughout the period and obtained independent confirmation of their holdings; The sole revenue stream of the group is fees charged to clients for the provision of a wrap platform service. This revenue stream is calculated based on fixed rates, applicable to each respective product, and the value of assets held on the wrap platform service each day. • Selected a further sample of securities and compared the price applied by management to those holdings to arrive at the assets under administration value to an independent third party price. Unauthorised changes to, or errors in, these inputs and calculations could lead to a misstatement of revenue. This testing provided sufficient evidence for us to determine that the assets under administration data was reliable for the purposes of performing our substantive testing. We tested the fee rates applied to the value of customers’ assets to the underlying legal agreements with the customer. We compared our independent expectations calculated to the amount reported and noted immaterial differences. As part of our testing we considered management’s restatement of revenue as set out in note 2. We consider this to be appropriate. We determined that there were no key audit matters applicable to the company to communicate in our report. 52 Independent auditors’ report Report on the audit of the financial statements (continued) How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate. The group is structured as one segment, comprising the consolidation of three individual components, each of which represents an individual legal entity within the group. All of these components were considered financially significant and we performed a full scope audit of their complete financial information. Together these components represent 100% of the group’s profit before tax. Specific audit procedures were also performed over consolidation adjustments required to aggregate the three individual components together to form the group financial statements. All of the audit work was performed by the group engagement team. The parent company is a holding company, as well as contracting services on behalf of the group and being the main employer. It does not trade outside of the group. The only material income it received during the year was income received from its subsidiaries. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was between £276,997 and £12,958. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £14,133 (Group audit) (2017: £12,967) and £10,717 (Company audit) (2017: £5,301) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. Conclusions relating to going concern ISAs (UK) require us to report to you when: • the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or • the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group’s and company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. We have nothing to report in respect of the above matters. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s and company’s ability to continue as a going concern. For example, the terms on which the United Kingdom may withdraw from the European Union, are not clear, and it is difficult to evaluate all of the potential implications on the group’s trade, customers, suppliers and the wider economy. Overall materiality How we determined it Rationale for benchmark applied Group financial statements £282,650 (2017: £259,523). 5% of profit before tax. Company financial statements £214,349 (2017: £106,024). 1% of total expenses. As the group is profit orientated, we have calculated materiality with reference to profit before tax, with this being a generally accepted auditing benchmark. As the company is not profit orientated, with its primary purpose being a holding and service company for the group, we have calculated materiality with reference total expenses, with this being a generally accepted auditing benchmark. 53 Independent auditors’ report Report on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on the responsibilities described above and our work undertaken in the course of the audit, ISAs (UK) require us also to report certain opinions and matters as described below. Strategic Report and Directors’ Report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report for the year ended 31 December 2018 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Directors’ Report. Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Directors’ responsibilities statement set out on page 48, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they 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 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 company or to cease operations, or have no realistic alternative but to do so. Auditors’ 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 auditors’ 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 auditors’ report. 54 Report on other information (continued) Use of this report This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other required reporting Companies Act 2006 exception reporting 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 company, or returns adequate for our audit have not been received from branches not visited by us; or • certain disclosures of directors’ remuneration specified by law are not made; or • the company financial statements are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Lindsay Gardiner (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Edinburgh 1 April 2019 Financials 55 Financials Consolidated income statement Continuing operations Revenue* Cost of sales* Gross profit Other operating income Administrative expenses Operating profit Finance income Finance costs Profit before income tax Income tax Profit for the financial year Profit attributable to: Owners of the parent Earnings per share (pence) Basic Diluted The accompanying notes form part of these financial statements. *Details of the 2017 revenue presentation restatement are set out in note 2. 56 2018 £’000 49,405 (19,809) Restated* 2017 £’000 45,462 (19,592) 29,596 25,870 22 (23,969) 5,649 11 (7) 5,653 (897) 4,756 36 (20,788) 5,118 9 (3) 5,124 (1,013) 4,111 4,756 4,111 6.3 6.3 5.4 5.4 Note 3 4 8 8 5 10 12 12 Consolidated statement of comprehensive income Profit for the financial year Items that may be subsequently reclassified to profit or loss Unrealised loss on investments Total comprehensive income for the financial year Total comprehensive income attributable to: Owners of the parent The accompanying notes form part of these financial statements. Note 15 2018 £’000 4,756 - 4,756 4,756 Financials 2017 £’000 4,111 (1) 4,110 4,110 57 Financials Consolidated statement of financial position Assets Non-current assets Property, plant and equipment Deferred tax Current assets Trade and other receivables Investments Tax receivable Cash and cash equivalents Total assets Equity Shareholders’ equity Called up share capital Capital redemption reserve Share-based payment reserve Fair value reserve Treasury shares Retained earnings Total equity 58 31 December 2018 £’000 31 December 2017 £’000 Note 13 23 14 15 16 20 21 21 21 21 21 2,029 163 2,192 10,611 84 541 17,672 28,908 31,100 76 53 150 - (30) 17,224 17,473 1,780 158 1,938 9,739 99 17 16,992 26,847 28,785 21 1 2,646 39 - 13,475 16,182 Consolidated statement of financial position Financials 31 December 2018 £’000 31 December 2017 £’000 Note Liabilities Non-current liabilities Financial liabilities Provisions Deferred tax Current liabilities Financial liabilities Trade and other payables Tax payable Provisions Total liabilities Total equity and liabilities 18 26 23 18 17 26 6 32 41 79 87 12,134 740 587 13,548 13,627 31,100 The financial statements were approved and authorised for issue by the board and were signed on its behalf on 1 April 2019. S J Geard Director The accompanying notes form part of these financial statements. 93 - 46 139 107 10,707 1,124 526 12,464 12,603 28,785 59 Financials Consolidated statement of changes in equity Called up share capital £’000 Retained earnings/ (accumulated losses) £’000 Share premium £’000 Treasury shares £’000 21 - 50 (50) 57 (2) - - - - - - 76 22 (1) - - - - - - 21 13,475 39 (50) - (57) - 4,756 (3,933) - 94 2,900 - 17,224 (1,548) (63) 15,747 41 (4,813) - 4,111 - 13,475 - - - - - - - - - - - - - 15,747 - (15,747) - - - - - - - - - - - - - - (30) - - - (30) - - - - - - - - Balance at 1 January 2018 Reclassify investments from FVOCI to FVPL Changes in equity Issue of preference shares Redemption of preference shares Issue of bonus shares and G share conversion Buy back and redemption of G and deferred shares Profit for the financial year Dividends paid Purchase of own shares Gain on disposal of own shares Transfer on share conversion Share-based payments charge Balance at 31 December 2018 Balance at 1 January 2017 Changes in equity Redemption of shares Transfer on capital reduction Transfer on exercise of options Dividends paid Unrealised loss on investments Profit for the financial year Share-based payments charge Balance at 31 December 2017 60 Consolidated statement of changes in equity Balance at 1 January 2018 Reclassify investments from FVOCI to FVPL Changes in equity Issue of preference shares Redemption of preference shares Issue of bonus shares and G share conversion Buy back and redemption of G and deferred shares Profit for the financial year Dividends paid Purchase of own shares Gain on disposal of own shares Transfer on share conversion Share-based payments charge Balance at 31 December 2018 Balance at 1 January 2017 Changes in equity Redemption of shares Transfer on capital reduction Transfer on exercise of options Dividends paid Unrealised loss on investments Profit for the financial year Share-based payments charge Balance at 31 December 2017 Capital redemption reserve £’000 Share-based payment reserve £’000 Fair value reserve £’000 1 - - 50 - 2 - - - - - - 53 - 1 - - - - - - 1 2,646 - - - - - - - - - (2,900) 404 150 1,931 - - (41) - - - 756 2,646 39 (39) - - - - - - - - - - - 40 - - - - (1) - - 39 The accompanying notes form part of these financial statements. Financials Total equity £’000 16,182 - - - - - 4,756 (3,933) (30) 94 - 404 17,473 16,192 (63) - - (4,813) (1) 4,111 756 16,182 61 Financials Consolidated statement of cash flows Cash flows from operating activities Cash inflow from operations Interest received Income tax paid Net cash inflow from operating activities Cash flows from investing activities Purchase of tangible fixed assets (Sale)/purchase of investments Net cash outflow from investing activities Cash flows from financing activities Interest paid Interest received Dividends paid Redemption of shares Purchase of Treasury shares Repayment of finance leases Exercise of options Net cash outflow from financing activities Increase in cash and cash equivalents Note 27 2018 £’000 7,298 8 (1,822) 5,484 (833) 10 (823) (2) - (3,933) - (30) (107) 98 (3,974) 687 2017 £’000 10,509 1 (940) 9,570 (1,373) (31) (1,404) (3) 8 (4,813) (63) - (139) - (5,010) 3,156 Cash and cash equivalents at beginning of year 16,992 13,839 Effects of exchange rate changes Cash and cash equivalents at end of year (7) (3) 17,672 16,992 The accompanying notes form part of these financial statements. 62 Financials Notes to the consolidated financial statements 1. Accounting policies Basis of preparation The financial statements comply with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and have been prepared on a going concern basis, under the historical cost convention as modified by the recognition of certain financial assets measured at fair value. The preparation of the financial statements in compliance with EU adopted IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgement in applying the group and company’s accounting policies. The areas where significant judgements and estimates have been made in the preparation of the financial statements are detailed in note 2. Basis of consolidation The consolidated financial statements comprise the financial statements of the company and all its subsidiary undertakings. Subsidiaries are entities controlled by the company. Control is achieved where the group has existing rights that give it the current ability to direct the relevant activities that affect the returns and exposure or rights to variable returns from the entity. Subsidiaries are included in the consolidated financial statements of the group from the date control of the subsidiary commences until the date that control ceases. Intragroup balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Uniform accounting policies have been applied across the group. Going concern After reviewing the group and the company’s forecasts and projections, the directors have a reasonable expectation that the group and the company has adequate resources to continue in operational existence for at least 12 months from the date of signing of the financial statements. The group and the company therefore continues to adopt the going concern basis in preparing its financial statements. Segmental reporting Operating segments are reported in a manner consistent with the internal reporting provided to the executive committee (the Chief Operating Decision Maker). The board tasks responsibility to the executive committee to assess the financial performance and the position of the group and make strategic decisions and allocate resources. Nucleus’ principal activities are the provision of wrap administration services and there is only one reporting and operating segment as defined under IFRS 8 Operating Segments. This is reviewed on a regular basis. It is considered appropriate that management review the performance of the group by reference to total results against budget. The main financial performance measures are assets under administration on the platform, gross and net inflows onto the platform, revenue, adjusted EBITDA, profit for the year, dividend paid, adjusted EBITDA margin, consolidated operating profit, consolidated profit after tax and consolidated net assets. These are disclosed in the chief financial officer’s report, where non GAAP financial performance measures are also identified and reconciled to GAAP measures. Revenue Revenue comprises fees earned by the group from the provision of a wrap platform service to UK financial advisers and their clients. Fees are recognised exclusive of Value Added Tax and net of large case discounts. They are recorded in the year to which they relate and can be reliably measured. Fees are calculated on a basis point rate applied on a daily basis to assets under administration on the platform. Performance obligations are satisfied as the wrap platform service is provided to customers. Accrued income represents fees that are collected in the following month. Interest income Interest received is recognised in the income statement as it is earned. Finance costs Interest expense is recognised in the income statement in the year to which it relates. Expense recognition Expenditure incurred by the group is recognised in the year to which it relates. Any expenses relating to a year that have not yet been invoiced are accrued and expenses paid but which relate to future years are classified as prepayments within the statement of financial position. 63 Financials Notes to the consolidated financial statements Foreign currency Finance leases The group and company’s functional and presentation currency is the Pound Sterling. Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. At each year end, foreign currency monetary items are translated using the closing rate. Foreign exchange gains and losses resulting from the settlement of transactions at year end exchange rates of monetary assets denominated in foreign currencies are recognised in income statement. Dividends Dividends are recorded in the financial statements in the year in which they are approved by the shareholders. Interim dividends are recognised when paid. Property, plant and equipment Tangible fixed assets are stated at historic cost less depreciation. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Impairment reviews are carried out where there are indicators of impairment. No impairment indicators were identified during year. Depreciation is charged so as to allocate the cost of the assets less their residual value over their estimated useful lives, using the straight-line method. The estimated useful lives range as follows: Fixtures and fittings Office equipment Short term leasehold property 4 years straight line 3 years straight line 10 years straight line Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in the income statement. Where assets are financed by leasing agreements that give rights approximating to ownership, the assets are treated as if they had been purchased outright. The amount capitalised is the lower of the fair value of the leased asset and the present value of the minimum lease payments. Office equipment acquired under finance leases is depreciated over its useful life of three years on a straight-line basis. Depreciation on the relevant assets is charged to the income statement. Interest on the finance lease is recognised in the income statement using the effective interest method. Cash and cash equivalents Cash and cash equivalents include cash in hand and deposits held at call with banks. Bank overdrafts are shown within current liabilities due less than one year. Cash equivalents are highly liquid investments that mature no more than three months from the date of acquisition and that are readily convertible to known amounts of cash with insignificant risk of change in value. Defined contribution pension scheme Nucleus Financial Group plc operates a defined contribution pension scheme. The pension charge represents the amounts payable by the group and the company to the scheme in respect of the year and contributions are recognised as an expense when they are due. Once the contributions have been paid, the group and the company have no further payment obligations. The assets of the scheme are held separately from those of Nucleus Financial Group plc in an independently administered fund. Operating lease commitments Rentals under operating leases are charged to the income statement on a straight-line basis over the lease term. Incentives received to enter into an operating lease are credited to the income statement, to reduce the lease expense, on a straight- line basis over the period of the lease. 64 Financials Notes to the consolidated financial statements Share-based payments The company operates a number of equity settled share-based payment compensation plans, under which the group receives services from directors and senior managers as consideration for equity instruments (options or shares) of the company. These are accounted for in accordance with IFRS 2 Share-based payments. The fair value of services received in exchange for the grant of equity instruments is recognised as an expense over their vesting period. The total amount to be expensed is determined by reference to the fair value of the equity instrument at the grant date and the number of options or shares expected to vest. Service conditions are included in the assumptions about the number of equity instruments expected to vest. The relevant charge to the income statement is recognised over the vesting period on a straight-line basis. At the end of each reporting period, the company revises its estimate of the number of equity instruments that are expected to vest to reflect latest expectations on the employee’s ability to achieve the specified performance criteria and actual or anticipated leavers from the scheme. The company recognises the impact of any revision to the prior year’s estimates in the income statement, with a corresponding adjustment to equity. Employee benefits trusts The company has established an Employee Share Ownership Trust (ESOT) and a Share Incentive Plan (SIP) trust for the purposes of satisfying awards under share-based incentive and all employees share ownership plans. Shares held by the trusts are recorded as treasury shares and deducted from equity until the shares are cancelled, reissued or disposed. The employee benefits trusts are now included within the consolidated financial statements of the group. Taxation Current taxes are based on the results shown in the financial statements and are calculated according to local tax rules, using tax rates enacted or substantially enacted by the statement of financial position date. Full provision is made for deferred tax assets and liabilities arising from all timing differences between the recognition of gains and losses in the financial statements and recognition in the tax computation. A net deferred tax asset is recognised only if it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Deferred tax assets and liabilities are calculated at the tax rates expected to be effective at the time the timing differences are expected to reverse, based on tax laws that have been enacted or substantively enacted by the statement of financial position date. Deferred tax assets and liabilities are not discounted as the impact of any discounting would be immaterial. Provisions for liabilities Provisions are made where an event has taken place that gives the group or the company a legal or constructive obligation that probably requires settlement by a transfer of economic benefit, and a reliable estimate can be made of the amount of the obligation. Provisions are charged as an expense to the income statement in the year that the group or the company becomes aware of the obligation and are measured at the best estimate at the statement of financial position date of the expenditure required to settle the obligation, taking into account relevant risks and uncertainties. When payments are eventually made, they are charged to the provision carried in the statement of financial position. Financial instruments Financial assets and financial liabilities are initially classified as measured at amortised cost, fair value through other comprehensive income, or fair value through profit and loss when the group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when the contractual rights to the cash flows expire, or the group no longer retains the significant risks or rewards of ownership of the financial asset. Financial liabilities are derecognised when the obligation is discharged, cancelled or expires. 65 Financials Notes to the consolidated financial statements Level 1 – Quoted prices in active markets Level 2 – Observable direct or indirect inputs other than Level 1 inputs Level 3 – Inputs that are not based on observable market data The group measures financial instruments relating to platform holdings at fair value using Level 1. New standards effective for the first time in the 2018 financial statements IFRS 2 Share-based payments IFRS 2 has been amended by Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2). These changes affect accounting for cash-settled share-based payment transactions, classification of share-based payment transactions with net settlement features and modifications of share-based payment transactions from cash-settled to equity-settled. As Nucleus does not operate any cash settled share-based payment schemes, the amendment to this standard has not impacted the group. IFRS 9 Financial instruments IFRS 9 replaced the classification and measurement models for financial instruments contained in IAS 39 Financial Instruments: Recognition and Measurement and is effective for accounting periods beginning on or after 1 January 2018. The main changes from IAS 39 include the following: • financial assets are to be classified and measured based on the business model for managing the financial and the cash flow characteristics of the financial asset, either at fair value or amortised cost • a financial asset or liability that would otherwise be at amortised cost may only be designated as at fair value through profit or loss if such a designation reduces an accounting mismatch Financial assets are classified dependent on the group’s business model for managing the financial and the cash flow characteristics of the asset. Financial liabilities are classified and measured at amortised cost except for trading liabilities, or where designated at original recognition to achieve more relevant presentation. The group classifies its financial assets and liabilities into the following categories: Financial assets at amortised cost The group’s financial assets at amortised cost comprise trade and other receivables. These represent debt instruments with fixed or determinable payments that represent principal or interest and where the intention is to hold to collect these contractual cash flows. They are initially recognised at fair value, included in current and non-current assets, depending on the nature of the transaction, and are subsequently measured at amortised cost using the effective interest method less any provision for impairment. Impairment of trade and other receivables In accordance with IFRS 9 an expected loss provisioning model is used to calculate an impairment provision. We have implemented the IFRS 9 simplified approach to measuring expected credit losses arising from trade and other receivables, being a lifetime expected credit loss. This is calculated based on an evaluation of our historic experience plus an adjustment based on our judgement of whether this historic experience is likely reflective of our view of the future at the balance sheet date. In the previous year the incurred loss model is used to calculate the impairment provision. Financial liabilities at amortised cost Financial liabilities at amortised cost comprise finance lease obligations and trade and other payables. They are classified as current and non-current liabilities depending on the nature of the transaction, are subsequently measured at amortised cost using the effective interest method. Financial assets at fair value through profit and loss The group has investments held on the platform for operational purposes. These are recognised and measured at fair value using the most recent available market price with gains and losses recognised immediately in the profit and loss. The fair value measurement of the group’s financial and non- financial assets and liabilities utilises market observable inputs and data as far as possible. Inputs used in determining fair value measurements are categorised into different levels based on how observable the inputs used in the valuation technique utilised are (the ‘fair value hierarchy’). 66 Financials Notes to the consolidated financial statements The impairment model in IFRS 9 is based on the premise of providing for expected losses. IFRS 9 requires that the same impairment model apply to all of the following: • financial assets measured at amortised cost • financial assets mandatorily measured at fair value through other comprehensive income • financial guarantee contracts to which IFRS 9 is applied • lease receivables within the scope of IFRS 17 Leases • contract assets within the scope of IFRS 15 Revenue from contracts with customers The adoption of this standard has not had a significant impact on the group. IFRS 15 Revenue from contracts with customers The standard provides a comprehensive new model for revenue recognition, addressing various issues such as identifying distinct performance obligations, accounting for contract modifications and accounting for the time value of money. The directors have reviewed this standard and are of the opinion that, given the simple revenue model and the absence of long- term contracts, the implementation of IFRS 15 does not have a significant impact on the financial performance of the group and no accounting policies have changed as a result of its implementation. Future standards, amendments to standards and interpretations not early-adopted in the 2018 financial statements IFRS 16 Leases The group will not be early adopting this standard which becomes effective from 1 January 2019. The group will be taking advantage of the practical expedient which allows the continuation of the existing assessment as to whether a contract contains a lease for all ongoing contracts entered into before 1 January 2019. The IFRS 16 definition of a lease will apply to all contracts entered into after 1 January 2019. The modified retrospective approach will be used, resulting in the cumulative effect of application on 1 January 2019 being recognised through an adjustment to opening retained earnings. A full assessment of the impact of the above has been performed, and whilst there is no change to the recognition of finance leases, there is a material change to the group’s assets and liabilities due to the requirement to bring the group’s operating leases on balance sheet. On 1 January 2019, this is expected to result in a £71,123 charge to retained earnings, an increase in the group’s intangible right of use assets of £3,900,842 and an increase in the group’s liabilities of £3,971,965. 67 Financials Notes to the consolidated financial statements 2. Critical accounting judgements, key sources of estimation uncertainty, and restatements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The critical accounting judgements and the key sources of estimation uncertainty are as follows: Income taxes The group is subject to income taxes. Judgement is required in determining the extent to which it is probable that taxable profits will be available in future against which deferred tax assets can be utilised. Based on forecasts, the group expects to materially recover its deferred tax assets within the next two years. Share-based payments The group assesses the fair value of shares under the LTIP scheme at the grant date using appropriate valuation models, depending upon the nature of the performance criteria. At the end of each reporting period, the company revises its estimate of the number of options and shares under the LTIP scheme that are expected to vest to reflect latest expectations on the group’s ability to achieve the specified performance criteria and actual or anticipated leavers from the schemes. For non-market related performance criteria, the company recognises the impact of any revision to the prior year’s estimates in the income statement, with a corresponding adjustment to equity. Provisions The group has recognised provisions in respect of client compensation, outsourced service and dilapidations. Further detail on these provisions, the rationale behind their recognition and the timing of future cash flow is included in note 26. Restatement of revenue presentation As part of our consideration of the impact of IFRS 15 we have also reviewed our principal and agency relationships relating to platform income. We consider that separate revenue and cost presentation will more accurately reflect the revenue and cash flows arising from the contracts with customers. There is no impact on the reported profit or net assets of the group as a result of this restatement. 2017 £’000 40,365 (14,495) 25,870 4,111 Adjustment 5,097 (5,097) - - Restated 2017 £’000 45,462 (19,592) 25,870 4,111 Continuing operations Revenue Cost of sales Gross profit Profit for the financial year 68 Financials Notes to the consolidated financial statements 3. Revenue Revenue comprises fees earned by the group from the provision of a wrap platform service to UK financial advisers and their clients. All revenue arose within the United Kingdom (2017: all United Kingdom). 4. Other operating income Other operating income 5. Profit before income tax The profit before income tax is stated after charging: Depreciation of tangible fixed assets Loss on disposal of fixed assets Foreign exchange differences Movement in expected loss provision Operating lease rentals Share-based payments charge 2018 £’000 22 2018 £’000 585 - 7 8 446 404 2017 £’000 36 2017 £’000 410 55 3 (287) 516 756 69 Financials Notes to the consolidated financial statements 6. Employees Wages and salaries Social security costs Other pension costs Cost of employee share schemes The average monthly number of employees during the year was as follows: Employees 2018 £’000 11,812 1,424 906 404 2017 £’000 11,005 1,335 798 756 14,546 13,894 2018 203 2017 180 70 Notes to the consolidated financial statements 7. Directors’ remuneration Details of directors’ remuneration are set out in the remuneration and HR committee report on pages 42 to 43. 8. Net finance income/(cost) Finance income: Bank interest receivable Other interest income Finance costs: Interest on finance leases Other interest paid Net finance income 2018 £’000 10 1 11 2018 £’000 (2) (5) (7) 4 Financials 2017 £’000 1 8 9 2017 £’000 (3) - (3) 6 71 Financials Notes to the consolidated financial statements 9. Auditors’ remuneration The group paid the following amounts to its auditors in respect of the audit of the financial statements and for other services provided to the group: Audit of the financial statements Client assets assurance report All other services 2018 £’000 235 151 395 781 2017 £’000 92 240 - 332 Other services relate to fees earned by PwC in their capacity as reporting accountants to the company’s admission to AIM and other corporate finance transactions. 72 Notes to the consolidated financial statements 10. Income tax Analysis of tax expense Current tax: Tax on profits for the year Adjustments in respect of prior periods Deferred tax: Origination and reversal of timing differences Tax expense in income statement Factors affecting the tax expense Financials 2017 £’000 1,124 (17) (94) 1,013 2018 £’000 1,435 (527) (11) 897 The tax assessed for the year is lower (2017: higher than) the standard rate of corporation tax in the UK of 19.00% (2017: 19.25 per cent). The differences are reconciled below: Profit before taxation Profit before taxation multiplied by the standard rate of corporation tax in the UK of 19.00 per cent (2017: 19.25 per cent) Effects of: Expenses not deductible for tax purposes Fixed asset differences Share schemes differences Adjustments to tax charge in respect of prior period Adjustments to tax charge in respect of prior period R&D claims Adjustments to deferred tax in respect of prior period Adjust closing deferred tax to average rate of 19.00% (2017: 19.25%) Adjust opening deferred tax to average rate of 19.00% (2017: 19.25%) Deferred tax not recognised Recognition of deferred tax asset Other differences Tax credits 2018 £’000 5,653 2017 £’000 5,124 1,074 986 412 5 - - (527) - - - (70) - 3 - 897 252 2 (42) (17) - 21 3 (3) (69) (122) - 2 1,013 73 Financials Notes to the consolidated financial statements 11. Dividends £0.01 ordinary share dividends* (142p 2017: 243p per share) £0.001 ordinary share dividends* (1.4p per share) B ordinary share dividend (142p 2017: 243p per share) G1 share dividend (243p per realised share) G2 share dividend (243p per realised share) G3 share dividends (243p per realised share) G3 share dividends (142p per realised share) G4 share dividends (243p per realised share) G4 share dividends (142p per realised share) *the Esot waived its right to receive dividends during the year. 12. Earnings per share 2018 £’000 1,577 1,063 1,081 - - 84 49 50 29 3,933 2017 £’000 2,399 - 1,851 338 225 - - - - 4,813 Earnings per share has been calculated by dividing the total profit for the year by the weighted average number of ordinary shares in issue during the year. Profit for the year Weighted average number of ordinary shares (basic) SIP scheme LTIP scheme Weighted average number of ordinary shares (diluted) Basic/diluted earnings per ordinary share (pence) 2018 £’000 4,756 2018 75,932,243 1,821 16,209 75,949,568 2018 6.3 2017 £’000 4,111 2017 75,984,439 - - 75,984,439 2017 5.4 The weighted average number of ordinary shares reflect the number of shares in issue following the listing of the Company on 26 July 2018. The share capital transactions that happened during the year are detailed in note 20. On 26 July 2018, the company granted long-term incentive awards in the form of nil-cost options over its ordinary shares to the executive directors and other persons discharging managerial responsibility under its newly established long-term incentive plan. The total number of shares over which the awards were granted was 1,013,612 of which 68,865 have lapsed. The vesting of each of the awards is subject to the satisfaction of performance conditions that have been set by the remuneration and HR committee. These conditions, which will be assessed over prescribed three-year periods, relate to the achievement of specific targets in relation to earnings per share, net inflow of assets under administration and total shareholder return. Vesting will also normally be dependent on the continued employment of the participant within the group. 74 Notes to the consolidated financial statements 13. Property, plant and equipment Cost At 1 January 2018 Additions Disposals At 31 December 2018 Depreciation At 1 January 2018 Charge for the year Eliminated on disposal At 31 December 2018 Net book value At 31 December 2018 Short-term leasehold property £’000 Fixtures and fittings £’000 Office equipment £’000 837 300 - 1,137 7 92 - 99 1,038 357 170 - 527 34 93 - 127 400 1,303 364 (159) 1,508 676 400 (159) 917 591 The net book value of office equipment includes £112,143 (2017: £232,113) in respect of assets held under finance leases. Cost At 1 January 2017 Additions Disposals At 31 December 2017 Depreciation At 1 January 2017 Charge for year Eliminated on disposal At 31 December 2017 Net book value At 31 December 2017 Short-term leasehold property £’000 Fixtures and fittings £’000 Office equipment £’000 27 837 (27) 837 19 11 (23) 7 830 229 303 (175) 357 159 36 (161) 34 323 1,343 468 (508) 1,303 783 363 (470) 676 627 Financials Total £’000 2,497 834 (159) 3,172 717 585 (159) 1,143 2,029 Total £’000 1,599 1,608 (710) 2,497 961 410 (654) 717 1,780 75 Financials Notes to the consolidated financial statements 14. Trade and other receivables Current: Other debtors Amounts owed by HMRC Trade debtors Accrued income Prepayments 2018 £’000 2,230 1,754 429 4,646 1,552 10,611 2017 £’000 2,156 1,831 481 4,507 764 9,739 Included within other debtors is a balance of cash prefunded on the wrap platform as required by our client terms and conditions. This fluctuates due to timing. The total loss allowance provided for trade and other receivables is £176,784 (2017: £168,788). 76 Notes to the consolidated financial statements 15. Current asset investments Valuation At 1 January Additions in year Disposals in year Unrealised loss At 31 December 16. Cash and cash equivalents Cash at bank and in hand Financials 2017 £’000 69 31 - (1) 99 2017 £’000 16,992 2018 £’000 99 - (10) (5) 84 2018 £’000 17,672 During the year, the company transferred its £5,000,000 uncommitted overdraft facility from The Royal Bank of Scotland plc to The Royal Bank of Scotland International Limited. The purpose of the overdraft is to support the company’s discretionary commitment to prefund tax relief on eligible pension contributions and other temporary funding required under the client money and client asset rules. Interest is charged on this facility at 3 per cent plus base rate up to an overdrawn amount of £5,000,000 and 5 per cent plus base rate on any amount over £5,000,000. The overdraft is secured by a fixed and floating charge over all the company’s assets. The overdraft was undrawn as at 31 December 2018. 17. Trade and other payables Current: Trade creditors Social security and other taxes Other creditors Amounts owed to HMRC Accruals 2018 £’000 3,674 380 1,816 240 6,024 2017 £’000 4,767 336 644 117 4,843 12,134 10,707 77 Financials Notes to the consolidated financial statements 18. Financial liabilities Non-current: Finance leases Current: Finance leases Terms and debt repayment schedule: 2018 Finance leases 2017 Finance leases 2018 £’000 6 87 1 year or less £’000 1-2 years £’000 2-5 years £’000 87 107 6 87 - 6 2017 £’000 93 107 Total £’000 93 200 78 Notes to the consolidated financial statements 19. Finance leases Minimum lease payments under finance leases fall due as follows: Gross obligations payable: Within one year Between one and five years Finance charges payable: Within one year Between one and five years Net obligations payable: Within one year Between one and five years 2018 £’000 88 6 94 1 - 1 87 6 93 Financials 2017 £’000 109 94 203 2 1 3 107 93 200 79 Financials Notes to the consolidated financial statements 20. Share capital Allotted, called up and fully paid Ordinary shares of £0.01 each: nil (2017: 998,723) B ordinary shares of £0.01 each: nil (2017: 761,028) G1 ordinary shares of £0.01 each: nil (2017: 173,074) G2 ordinary shares of £0.01 each: nil (2017: 104,430) G3 ordinary shares of £0.01 each: nil (2017: 40,727) G4 ordinary shares of £0.01 each: nil (2017: 25,676) Ordinary shares of £0.001 each: 76,473,360 (2017: nil) 2018 £’000 2017 £’000 - - - - - - 76 76 10 8 2 1 - - - 21 Employee benefits trusts hold a total of 561,442 shares (2017: 53,238) During January 2018, in line with the growth share scheme, 142,362 G1 and 95,404 G2 shares converted into 124,448 ordinary and 113,318 deferred shares. On 8 May 2018, the company issued 50,000 redeemable non-convertible preference shares at a nominal value of £1 per share. Each preference share carried a right to a fixed non-cumulative dividend of 0.01 per cent of its nominal value, payable annually in arrears, and did not carry any voting rights. These were redeemed on 26 July 2018. On 6 July 2018, Nucleus Financial Group Limited was re-registered under the Companies Act 2006 as a public company under the name of Nucleus Financial Group plc. The company listed on AIM on 26 July 2018 and this coincided with the following share capital transactions: On listing, 18,823 G3 shares and 8,812 G4 shares converted to ordinary shares and 21,905 G3 shares and 16,864 G4 shares converted to deferred shares. Following this there were no G3 and G4 shares remaining in issue. The company bought back 30,712 G1 shares, 9,026 G2 shares and 152,087 deferred shares for a consideration of £1. Following this there were no G1, G2 or deferred shares remaining in issue. The company then converted the remaining 761,028 B ordinary shares into ordinary shares and awarded a bonus issue of three new ordinary shares for each existing ordinary share. This resulted in the creation of 5,735,502 new ordinary shares, bringing the total ordinary shares in issue to 7,647,336. Subsequently, each ordinary share was then sub-divided into 10 new ordinary shares. This has given rise to a post-listing number of shares in issue of 76,473,360. 80 Financials Notes to the consolidated financial statements 21. Reserves Capital redemption reserve This is a non-distributable reserve into which amounts are transferred following the redemption or purchase of the company’s own shares. Share-based payment reserve The fair value of services received in exchange for the grant of options and growth shares is recognised over their vesting period. Upon conversion the fair value of services received is transferred to share premium. Fair value reserve Investments held on the platform for operational purposes are recognised and measured at fair value with gains and losses recognised in the fair value reserve. Treasury shares Shares of Nucleus Financial Group plc that are held in the Employee benefits trusts for the purposes of satisfying awards under share- based incentive and all employee share ownership plans. Retained earnings Retained earnings includes all current and prior year retained profits and losses. 22. Financial instruments The principal financial instruments, from which financial instrument risk arises, are as follows: • Trade and other receivables • Cash and cash equivalents • Investments in securities • Trade and other payables As explained in note 1, financial assets and liabilities have been classified into categories that determine their basis of measurement and, for items measured at fair value, whether changes in fair value are recognised in the income statement or statement of other comprehensive income. In adopting IFRS 9 all previously classified loans and receivables were reclassified as financial assets at amortised cost, with no change to measurement, and all financial assets previously classified at fair value through other comprehensive income were reclassified as financial assets at fair value through profit and loss, as this is the residual category under IFRS 9. The following tables show the carrying values of assets and liabilities for each of these categories. 81 Financials Notes to the consolidated financial statements 22. Financial instruments (continued) Financial assets at fair value through profit and loss Financial liabilities at amortised cost Financial assets at amortised cost £’000 £’000 £’000 84 - - 84 - - - - - - - 93 12,134 12,227 2018 Financial assets Investments in securities Cash and cash equivalents Trade and other receivables Total financial assets Non-financial assets Total assets Financial liabilities Finance lease obligations Trade and other payables Total financial liabilities Non-financial liabilities Total liabilities 82 Total £’000 84 17,672 10,611 - 17,672 10,611 28,283 28,367 - - - 2,733 31,100 93 12,134 12,227 1,400 13,627 Notes to the consolidated financial statements 22. Financial instruments (continued) Financial assets at fair value through other comprehensive income Financial liabilities at amortised cost Financial assets at amortised cost £’000 £’000 £’000 99 - - 99 - - - - - - - 200 10,707 10,907 - 16,992 9,739 26,731 - - - 2017 Financial assets Investments in securities Cash and cash equivalents Trade and other receivables Total financial assets Non-financial assets Total assets Financial liabilities Finance lease obligations Trade and other payables Total financial liabilities Non-financial liabilities Total liabilities Financials Total £’000 99 16,992 9,739 26,830 1,955 28,785 200 10,707 10,907 1,696 12,603 Financial instruments measured at fair value – fair value hierarchy The table below classifies financial assets that are categorised on the statement of financial position at fair value in a hierarchy that is based on significance of the inputs used in making the measurements. The levels of hierarchy are disclosed in note 1. Investments in securities are held for the benefit of platform functionality and are reported on a separate line in the statement of financial position. The assets are held at fair value with any gains or losses being taken to the income statement. 83 Financials Notes to the consolidated financial statements 22. Financial instruments (continued) The following tables show the group’s financial assets measured at fair value through profit and loss, classed according to the level of the fair value hierarchy. 2018 Investments in securities 2017 Investments in securities Credit risk Level 1 £’000 84 Level 1 £’000 99 Level 2 £’000 - Level 2 £’000 - Level 3 £’000 - Level 3 £’000 - Total £’000 84 Total £’000 99 The group holds the surplus of corporate cash balances over and above its working capital requirements on deposit with its corporate banking services providers, Royal Bank of Scotland plc, Bank of Scotland plc and Investec Bank plc. The group is therefore exposed to counterparty credit risk and a failure of any of these banks would impact the group’s resources and its ability to meet its solvency and liquidity requirements. Credit risk is managed within the risk appetites set by the board on an annual basis. The supply of wrap platform services to clients results in trade receivables which management considers to be of low risk. Other receivables are likewise considered to be low risk. Management do not consider that there is any concentration of risk within either trade or other receivables. Included in other receivables is a balance of cash prefunded on the wrap platform. Where these amounts are not received within normal operational timeframes, our experience is that the risk of non-recovery increases, and we provide to our expectation of most likely outcome. The provision as at 31 December 2018 was £176,674 (2017: £168,788). Liquidity risk The group’s liquidity position is subject to a range of factors that may generate liquidity strain in the short or medium term. The group manages its liquidity risk through an ongoing evaluation of its working capital requirements against available cash balances and credit facilities. Exposure to securities markets The group’s income is derived from a tiered basis point fee that is applied to client assets under administration. This income is exposed to the value of the underlying investment assets which can be affected by market movements. Although some of this risk is mitigated within components of the cost base, the group is ultimately exposed to volatility in its financial results because of market movements beyond its control. 84 Financials Notes to the consolidated financial statements 22. Financial instruments (continued) Operational risk The nature of the activities performed by the group is such that a degree of operational risk is unavoidable in relation to losses that could be incurred by the group or by others because of errors or omissions for which the group is ultimately liable. Particular operational risks for the group are considered to be: • People risks – we consider that the two most significant risks are the risk of failure to attract and retain core skills and knowledge in the company, and people-related errors in core processes; • Operational control failures in core processes – there is always a risk of failure in core processes, either directly by the company and/ or by third parties which would result in operational losses, poor client outcomes and reputational damage; and • Systems-related risks including cyber-attacks, data leakage and business continuity events. The following tables show an analysis of the financial assets and financial liabilities by remaining expected maturities. 2018 Financial assets < 3 months 3–12 months Cash and cash equivalents Investments Trade and other receivables £’000 17,672 - 10,182 27,854 £’000 - 84 429 513 2017 Financial assets < 3 months 3–12 months Cash and cash equivalents Investments Trade and other receivables £’000 16,992 - 9,069 26,061 £’000 - 99 670 769 1-5 years £’000 > 5 years £’000 - - - - - - - - 1-5 years £’000 > 5 years £’000 - - - - - - - - Total £’000 17,672 84 10,611 28,367 Total £’000 16,992 99 9,739 26,830 85 Financials Notes to the consolidated financial statements 22. Financial instruments (continued) 2018 Financial liabilities < 3 months 3–12 months Trade and other payables Finance lease obligations £’000 11,966 87 12,053 £’000 168 - 168 2017 Financial liabilities < 3 months 3–12 months Trade and other payables Finance lease obligations £’000 10,413 27 10,440 £’000 279 80 359 1-5 years £’000 > 5 years £’000 - 6 6 - - - 1-5 years £’000 > 5 years £’000 15 93 108 - - - Total £’000 12,134 93 12,227 Total £’000 10,707 200 10,907 86 Notes to the consolidated financial statements 23. Deferred tax The deferred tax asset is made up of the following balances: Accelerated capital allowances Short term timing differences Losses and other deductions £’000 £’000 £’000 At 1 January 2017 (Charge)/credit to income statement At 31 December 2017 (Charge)/credit to income statement At 31 December 2018 3 (8) (5) 13 8 47 (6) 41 (24) 17 - 122 122 16 138 Financials Total £’000 50 108 158 5 163 As a result of the uncertainty in the opinion of the directors regarding the timing and extent of future profit generation by the group, a deferred tax asset of £286,290 (2017: £118,824) has not been recognised. The deferred tax liability is made up of the following balances: At 1 January 2017 Charge to income statement At 31 December 2017 Credit to income statement At 31 December 2018 Accelerated capital allowances Short term timing differences Losses and other deductions £’000 £’000 £’000 (32) (14) (46) 5 (41) - - - - - - - - - - Total £’000 (32) (14) (46) 5 (41) 87 Financials Notes to the consolidated financial statements 24. Share-based payments Total cost of share-based payments: Long term incentive plan Share incentive plan Growth shares Long Term Incentive Plan (LTIP) 2018 £’000 150 1 253 404 2017 £’000 - - 756 756 The LTIP comprises conditional awards of nil cost options over ordinary shares to selected members of the senior management team (including the executive directors) and certain other employees, which vest on the achievement of specified performance targets and continuous employment over a certain period of time (the vesting period). The performance conditions are set out in the remuneration and HR committee report. LTIP Number 2018 1,013,612 (68,865) 944,747 LTIP 2018 TSR condition Monte Carlo 26/07/2018 LTIP 2018 EPS condition Black Scholes 26/07/2018 183p 0p 34% 3 0.84% Nil 85p 2.6 183p 0p 34% 3 0.84% Nil 183p 2.6 Granted Lapsed Outstanding options at the end of the year Option pricing model Date granted Share price on grant date (p) Exercise Price Expected volatility Vesting period (years) Risk-free rate Dividend yield Fair value per option at grant date Remaining vesting period (years) 88 Financials Notes to the consolidated financial statements 24. Share-based payments (continued) Share incentive plan (SIP) The SIP is an all-employee share ownership plan which has been designed to meet the requirements of Schedule 2 to the Income Tax (Earnings and Pensions) Act 2003 so that Ordinary Shares can be provided to UK employees under its terms in a tax-efficient manner. During the year employees were offered the opportunity to buy Ordinary Shares with a value of up to the lower of £1,800 and 10 per cent of the employee’s pre-tax salary, and the company agreed to match the number of shares so purchased. These matching shares are held on the employees’ behalf in the SIP trust, subject to a holding period of three years, and may be forfeited if the participant ceases employment within that period. Matching shares purchased Matching shares forfeited Outstanding matching shares at the end of the year 25. Growth shares SIP Number 2018 21,444 - 21,444 G1, G2, G3 and G4 Ordinary Shares were granted to directors and employees. Details of the rights and the conditions attached to these shares are included in note 1. The growth shares granted were valued as at the date of grant or entitlement using the Black Scholes model. The significant assumptions used are shown in the table below: Date granted Par value Realisable Shares realised 31/12/2018 Shares in issue 31/12/2018 Shares realised 31/12/2017 Shares in issue 31/12/2017 Price of the underlying share (£) Effective strike price of the G Ordinary share Expected volatility of the share price Risk free interest rate over the life of the G Ordinary share Dividend yield Fair value per G Ordinary share at grant date G1 shares 15/10/2012 £0.05 31/12/2017 - - 44,000 45,000 £28.22 £24.10 40% 0.79% Nil G1 shares 19/09/2013 £0.05 31/12/2017 - - 95,130 128,074 £28.43 £24.10 40% 1.47% Nil £11.82 £11.44 G2 shares 19/07/2013 £0.05 31/12/2017 - - 91,803 103,843 £28.43 £31.24 40% 1.08% Nil £8.91 G2 shares 14/03/2014 £0.05 31/12/2017 - - 563 587 £28.43 £31.24 25% 1.36% Nil £4.95 G3 shares 6/10/2015 £0.05 31/12/2019 - - - 40,727 £34.41 £34.41 25% 1.05% Nil £7.61 G4 shares 17/11/2016 £0.05 31/12/2020 - - - 25,676 £44.35 £44.35 28% 0.55% Nil £10.34 The volatility measured is based on historical volatility of similar listed entities between 2008 and 2015. Coinciding with the companies listing on AIM on 26 July 2018, the growth share scheme ceased to exist. Details of the conversion of growth shares into ordinary shares are set out in note 20 Share capital above. 89 Financials Notes to the consolidated financial statements 26. Provisions Client compensation Outsourced service Dilapidations Analysed as follows: Current Non-current 2018 £’000 429 158 32 619 587 32 619 At 1 January 2017 Unused amounts reversed during year Utilised during year Provided during year At 31 December 2017 Provided during year Utilised during year Unused amounts reversed during year Charge/(credit) to income statement At 31 December 2018 Client compensation Outsourced service Dilapidations £’000 85 (5) (28) 46 98 435 (73) (31) - 429 £’000 - - - 204 204 612 (333) - (325) 158 £’000 103 - - 121 224 30 (222) - - 32 2017 £’000 98 204 224 526 526 - 526 Total £’000 188 (5) (28) 371 526 1,077 (628) (31) (325) 619 90 Financials Notes to the consolidated financial statements 26. Provisions (continued) Client compensation The group remediates clients affected by errors on the platform and calculates any amounts due in line with guidance given by the Financial Ombudsman Service in respect of the type of client loss, distress and inconvenience for which clients should be compensated. Where actual trading losses are suffered by clients, these are calculated in accordance with Mifid II best execution rules to ensure clients are restored to the position they would have been in had the error or omission not been made. Amounts are provided and utilised against the administrative expenses line in the income statement and the majority of the outstanding issues are expected to be resolved in the first half of 2019. Outsourced service As part of the commercial agreement with its outsourced BPO service provider, should any key performance criteria not be met, the group is entitled to receive a discount on the wrap administration fees charged. Where these are agreed, they are deducted from the invoiced fee and the net expense is charged through the income statement. Where these are uncertain or in dispute with the service provider, a provision is booked in recognition of the uncertainty regarding the outcome. Dilapidations During the year, the group utilised the remainder of the dilapidations provision relating to the previous leasehold premises following completion of contractual restoration obligations. The current balance provides for dilapidations relating to the group’s new leasehold office premises at Greenside, Edinburgh. This is calculated using the Building Cost Information Service survey (part of the Royal Institution of Chartered Surveyors) of average settlement figures for offices, adjusted for inflation, and the square footage of the company’s leasehold premises. The provision has been classified as non-current due to the likelihood of its utilisation at the end of the lease in 2027. 27. Reconciliation of profit before income tax to cash generated from operations Profit before income tax Depreciation Loss on disposal of fixed assets Share-based payments charge Bad debt provision Increase in trade and other receivables (Increase)/decrease in operational platform prefunding Increase in trade and other payables Increase in other provisions Interest paid Interest received Net exchange differences 2018 £’000 5,653 585 - 404 8 (618) (257) 1,427 93 7 (11) 7 7,298 2017 £’000 5,124 410 55 756 (287) (351) 1,234 3,233 338 3 (9) 3 10,509 Operational platform prefunding includes prefunding of client pension tax relief and temporary funding required under the client money and client assets rules. 91 Financials Notes to the consolidated financial statements 28. Reconciliation of liabilities arising from financing activities At 1 January 2017 £’000 105 Non-cash changes £’000 234 At 1 January 2018 £’000 200 Non-cash changes £’000 2 Cash flows £’000 (139) Cash flows £’000 (109) At 31 December 2017 £’000 200 At 31 December 2018 £’000 93 Finance lease liabilities Finance lease liabilities 29. Operating leases The group’s future minimum lease payments under non-cancellable operating leases are as follows: Within one year Between one and five years In more than five years 2018 £’000 312 2,614 1,518 4,444 2017 £’000 38 1,880 2,564 4,482 During 2017, the company exercised its right to break the existing leases for its office premises at Thistle Street Lane and Hanover Street, Edinburgh. These leases terminated on 31 January 2018. On 28 November 2017, the company entered into a new lease for its office premises at Greenside, Edinburgh and this agreement contains an initial rent-free period of 18 months. The future minimum lease payments relate solely to this lease agreement. 30. Employee share ownership trust The two share ownership trusts that operate on behalf of the company and the employees are the NFG Limited Employee Benefit Trust 2010 and the Nucleus Financial Group plc Share Incentive Plan. 31. Pension commitments The group operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the group in an independently administered fund. The pension cost charge represents contributions payable by the group to the fund and amounted to £906,115 (2017: £797,500). Contributions totalling £91,340 (2017: £81,740) were payable to the fund at the balance sheet date. 32. Ultimate controlling party In the opinion of the Directors there is no ultimate controlling party. Sanlam UK Limited (Sanlam), a company incorporated in England and Wales, is a majority shareholder of the Company. The Company has entered into a Relationship Agreement with Sanlam and Shore Capital and Corporate Limited which governs the relationship between Sanlam and the Company, to ensure that the Company is able to carry on its business independently from Sanlam and in compliance with all applicable laws and regulations (including, inter alia, the AIM Rules). Sanlam has agreed that all transactions and relationships between the Sanlam Group and the Company shall be on an arms’ length basis and on normal commercial terms. 92 Notes to the consolidated financial statements 33. Related party transactions Entities with significant influence over the company Transactions with NIFAC and Sanlam were as follows: NIFAC Additional loans provided by NFG to NIFAC Subordinated loan facility cap Interest charged to NIFAC at 2.5% (2017: 2.5%) Interest charged to NIFAC at 3.0% (2017: 3.0%) Amounts owed to NFG Dividend paid to NIFAC by NFG Sanlam Amounts owed to Sanlam in respect of board fees Amounts owed to Sanlam in respect of fees for the Onshore Bond Amounts charged by Sanlam in respect of the Onshore Bond Amounts owed to Sanlam in respect of tax collected from the Onshore Bond Dividend paid to Sanlam by NFG 2018 £’000 - - - - 42 632 2018 £’000 176 72 429 97 1,976 Financials 2017 £’000 28 450 1 7 10 1,082 2017 £’000 89 65 369 83 2,427 On Nucleus’ admission to AIM, NIFAC realised part of its shareholding in Nucleus and distributed the net proceeds together with its residual shareholding interest to its underlying shareholders. NIFAC no longer holds shares in Nucleus. Subsidiaries NFG owns 100% of the share capital of NFS, NIFAS and IMX. There were no transactions with IMX and NIFAS. The transactions with NFS are as follows: NFS Amounts owed to NFG by NFS 2018 £’000 706 2017 £’000 2,025 93 Financials Notes to the consolidated financial statements 33. Related party transactions (continued) Other related parties During the year the company was charged £390,000 (2017: £150,000) for services provided by Craven Street Capital Limited of which J A A Samuels is a director. An amount of £nil (2017: £102,000) is accrued. Key management personnel Key management personnel are considered to be members of the executive committee and remuneration for the year is as follows: Short term employee benefits Post-employment benefits Share-based payments 2018 £’000 2,238 95 314 2,647 2017 £’000 1,518 106 473 2,097 During the year key management personnel received dividends totalling £358,821 (2017: £378,566). 34. Events after the reporting period There were no subsequent events that required adjustment to or disclosure in the financial statements for the period from 31 December 2018 to the date upon which the financial statements were available to be issued. 94 Financials Company statement of financial position Note 31 December 2018 £’000 31 December 2017 £’000 Assets Non-current assets Property, plant and equipment Investments Deferred tax Current assets Trade and other receivables Cash and cash equivalents Total assets Equity Shareholders’ equity Called up share capital Capital redemption reserve Share-based payment reserve Retained earnings Total equity Liabilities Non-current liabilities Provisions Current liabilities Trade and other payables Tax payable Provisions Total liabilities Total equity and liabilities 4 5 10 6 7 17 17 17 17 17 9 8 9 1,038 7,645 163 8,846 1,382 1,758 3,140 11,986 76 53 150 (29) 7,481 7,731 32 32 4,223 - - 4,223 4,255 11,986 830 7,645 158 8,633 2,655 3,540 6,195 14,828 21 1 2,646 - 8,058 10,726 - - 3,876 2 224 3,876 4,102 14,828 In accordance with section 408 of the Companies Act 2006, the company is exempt from the requirement to present its own income statement and a statement of comprehensive income. The company’s profit for the year was £562,727 (2017: £917,448). Included in this amount is dividends received of £2,335,065 (2017: £1,500,000), which are recognised when the right to receive payment is established. The company recognised no other income or expenses in either the current or prior year, other than the profit for each year. The financial statements were approved and authorised for issue by the board and were signed on its behalf on 1 April 2019. S J Geard Director The accompanying notes form part of these financial statements. 95 Financials Company statement of changes in equity Called up share capital £’000 Retained earnings/ (accumulated losses) £’000 Share premium £’000 Treasury shares £’000 21 50 (50) 57 (2) - - - - - 76 8,058 (50) - (57) - 563 (3,933) - 2,900 - 7,481 - - - - - - - - - - - - - - - - - - (29) - - (29) Called up share capital £’000 Retained earnings/ (accumulated losses) £’000 Share premium £’000 Treasury shares £’000 22 (1) - - - - - 21 (3,771) 15,747 (63) 15,747 41 (4,813) 917 - 8,058 - (15,747) - - - - - - - - - - - - - Balance at 1 January 2018 Changes in equity Issue of preference shares Redemption of preference shares Issue of bonus shares and G share conversion Buy back and redemption of G and deferred shares Profit for the financial year Dividends paid Purchase of own shares Transfer on share conversion Share-based payments charge Balance at 31 December 2018 Balance at 1 January 2017 Changes in equity Redemption of shares Transfer on capital reduction Transfer on exercise of options Dividends paid Profit for the financial year Share-based payments charge Balance at 31 December 2017 96 Financials Company statement of changes in equity Balance at 1 January 2018 Changes in equity Issue of preference shares Redemption of preference shares Issue of bonus shares and G share conversion Buy back and redemption of G and deferred shares Profit for the financial year Dividends paid Purchase of own shares Transfer on share conversion Share-based payments charge Balance at 31 December 2018 Balance at 1 January 2017 Changes in equity Redemption of shares Transfer on capital reduction Transfer on exercise of options Dividends paid Profit for the financial year Share-based payments charge Balance at 31 December 2017 The accompanying notes form part of these financial statements. Capital redemption reserve £’000 Share-based payment reserve £’000 Total equity £’000 1 - 50 - 2 - - - - - 53 2,646 10,726 - - - - - - - (2,900) 404 150 - - - - 563 (3,933) (29) - 404 7,731 Capital redemption reserve £’000 Share-based payment reserve £’000 Total equity £’000 - 1 - - - - - 1 1,931 13,929 - - (41) - - 756 2,646 (63) - - (4,813) 917 756 10,726 97 Financials Company statement of cash flows Cash flows from operating activities Cash inflow from operations Income tax paid Net cash inflow from operating activities Cash flows from investing activities Purchase of tangible fixed assets Dividend received Interest received Investments Net cash outflow from investing activities Cash flows from financing activities Interest received Dividend paid Share buyback Purchase of Treasury shares Net cash outflow from financing activities Decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of year The accompanying notes form part of these financial statements. 98 Note 12 2018 £’000 149 (2) 147 (300) 2,335 2 - 2,037 - (3,933) - (29) (3,962) (1,778) 3,540 (4) 1,758 2017 £’000 6,285 (6) 6,279 (837) 1,500 - (5,000) (4,337) 8 (4,813) (63) - (4,868) (2,926) 6,467 (1) 3,540 Financials Notes to the company financial statements 1. Accounting policies Nucleus Financial Group plc (the company) is a public limited company incorporated in the United Kingdom and registered in England and Wales. In accordance with Section 408 of the Companies Act 2006, the company is exempt from the requirement to produce its own income statement and statement of comprehensive income. The significant accounting policies applied in the preparation of these company financial statements are the same as those set out in note 1 to the consolidated financial statements with the addition of the following: Investments in subsidiaries Investments in subsidiaries are valued at cost less any provision for impairment. At each reporting date, the directors assess whether there is any indication that an asset may be impaired. If any such indication exists, the directors will estimate the recoverable amount of the asset. There was no impairment during the year. 2. Critical accounting judgements and key sources of estimation uncertainty Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The estimates and judgements applied in the preparation of these company financial statements are the same as those set out in note 2 to the consolidated financial statements. 3. Staff costs Staff costs paid by the company and the number of employees are detailed in note 6 to the consolidated financial statements. The company recharges an element of this cost to NFS. The company’s pension commitments are disclosed in note 31 to the consolidated financial statements. Directors’ remuneration and compensation of key management personnel is disclosed in notes 7 and 33 to the consolidated financial statements. 99 Financials Notes to the company financial statements 4. Property, plant and equipment Cost At 1 January 2018 Additions At 31 December 2018 Depreciation At 1 January 2018 Charge for the year At 31 December 2018 Net book value At 31 December 2018 Cost At 1 January 2017 Additions Disposals At 31 December 2017 Depreciation At 1 January 2017 Charge for year Eliminated on disposal At 31 December 2017 Net book value At 31 December 2017 100 Short-term leasehold property £’000 837 300 1,137 7 92 99 1,038 Short-term leasehold property £’000 27 837 (27) 837 19 11 (23) 7 830 Notes to the company financial statements 5. Investments Cost At 1 January 2018 and 31 December 2018 Net book value At 31 December 2018 At 31 December 2017 Financials Investment in subsidiary companies £’000 7,645 7,645 7,645 Subsidiary undertakings The following are subsidiary undertakings of the company: Nucleus Financial Services Limited Registered office: United Kingdom Class of shares: Ordinary Holding: 100% Principal activity: Provision of wrap administration services to selected financial advisers in the United Kingdom Aggregate capital and reserves Profit for the financial year 2018 £’000 16,607 6,020 2017 £’000 12,926 4,420 101 Financials Notes to the company financial statements 5. Investments (continued) Nucleus IFA services Limited Registered office: United Kingdom Class of shares: Ordinary Holding: 100% Principal activity: Provision of platform technology, sales, marketing and platform development services to NFS. Trade was transferred to NFS on 1 April 2017 2018 £’000 648 523 2018 £ 1 - 2017 £’000 125 274 2017 £ 1 - Aggregate capital and reserves Profit for the financial year Nucleus IMX Limited Registered office: United Kingdom Class of shares: Ordinary Holding: 100% Principal activity: Non-trading subsidiary Aggregate capital and reserves Profit for the financial year 102 Notes to the company financial statements 6. Trade and other receivables Amounts owed by group undertakings Other debtors Prepayments and accrued income Amounts owed by group undertakings are unsecured, interest free and have agreed repayments terms. 7. Cash and cash equivalents Cash at bank and in hand 8. Trade and other payables Trade creditors Social security and other taxes Other creditors Accruals 2018 £’000 706 116 560 1,382 2018 £’000 1,758 2018 £’000 367 380 6 3,470 4,223 Financials 2017 £’000 2,025 114 516 2,655 2017 £’000 3,540 2017 £’000 315 334 - 3,227 3,876 103 Financials Notes to the company financial statements 9. Provisions Dilapidations Analysed as follows: Current Non-current At 1 January 2017 Provided during year At 31 December 2017 Utilised during year Provided during year At 31 December 2018 Dilapidations 2018 £’000 32 - 32 32 2017 £’000 224 224 - 224 Dilapidations £’000 103 121 224 (222) 30 32 During the year, the company utilised the remainder of the dilapidations provision relating to the previous leasehold premises following completion of contractual restoration obligations. The current balance provides for dilapidations relating to the company’s new leasehold office premises at Greenside, Edinburgh. This is calculated using the Building Cost Information Service survey (part of the Royal Institution of Chartered Surveyors) of average settlement figures for offices, adjusted for inflation, and the square footage of the company’s leasehold premises. The provision has been classified as non-current due to the likelihood of its utilisation at the end of the lease in 2027. 104 Notes to the company financial statements 10. Deferred tax At 1 January 2017 (Charge)/credit to income statement At 31 December 2017 (Charge)/credit to income statement At 31 December 2018 Accelerated capital allowances £’000 Short term timing differences £’000 Losses and other deductions £’000 4 (9) (5) 13 8 32 9 41 (24) 17 - 122 122 16 138 Financials Total £’000 36 122 158 5 163 The total potential deferred tax asset arising in respect of unutilised tax losses and timing differences at 31 December 2018 is £449,832 (2017: £276,517). As a result of the uncertainty in the opinion of the directors regarding the timing and extent of future profit generation by the company, a deferred tax asset of £286,290 (2017: £118,824) has not been recognised. 11. Financial instruments 2018 Financial assets Cash and cash equivalents Trade and other receivables Total financial assets Non-financial assets Total assets Financial liabilities Trade and other payables Total financial liabilities Non-financial liabilities Total liabilities Financial liabilities at amortised cost £’000 Financial assets at amortised cost £’000 - - - 4,223 4,223 1,758 1,382 3,140 - - Total £’000 1,758 1,382 3,140 8,846 11,986 4,223 4,223 32 4,255 105 Financials Notes to the company financial statements 11. Financial instruments (continued) Financial liabilities at amortised cost £’000 Loans and receivables £’000 - - - 3,876 3,876 3,540 2,655 6,195 - - Total £’000 3,540 2,655 6,195 8,633 14,828 3,876 3,876 226 4,102 2017 Financial assets Cash and cash equivalents Trade and other receivables Total financial assets Non-financial assets Total assets Financial liabilities Trade and other payables Total financial liabilities Non-financial liabilities Total liabilities 106 Notes to the company financial statements 11. Financial instruments (continued) Financial assets maturity schedule: 2018 Financial assets Cash and cash equivalents Trade and other receivables < 3 months 3–12 months £’000 £’000 1-5 years £’000 > 5 years £’000 1,758 1,382 3,140 - - - - - - - - - 2017 < 3 months 3–12 months Financial assets Cash and cash equivalents Trade and other receivables £’000 3,540 2,602 6,142 £’000 - 53 53 Financial liabilities maturity schedule: 2018 < 3 months 3–12 months Financial liabilities Trade and other payables £’000 4,055 4,055 £’000 168 168 2017 < 3 months 3–12 months Financial liabilities Trade and other payables £’000 3,582 3,582 £’000 279 279 1-5 years £’000 > 5 years £’000 - - - - - - 1-5 years £’000 > 5 years £’000 - - - - 1-5 years £’000 > 5 years £’000 15 15 - - Financials Total £’000 1,758 1,382 3,140 Total £’000 3,540 2,655 6,195 Total £’000 4,223 4,223 Total £’000 3,876 3,876 107 Financials Notes to the company financial statements 12. Reconciliation of profit before tax to cash generated from operations Profit before income tax Depreciation Loss on disposal of fixed assets Share-based payments charge Decrease in trade and other receivables Increase in trade and other payables (Decrease)/increase in provisions Finance income Net exchange differences Preference share interest received Dividend received 2018 £’000 557 92 - 404 1,274 347 (192) - 4 (2) (2,335) 149 2017 £’000 797 11 4 756 4,723 1,380 121 (8) 1 - (1,500) 6,285 108 Financials Notes to the company financial statements 13. Dividends Details of dividends paid are disclosed in note 11 to the consolidated financial statements. 14. Called up share capital Details of the share capital of the company are disclosed in note 20 to the consolidated financial statements. 15. Operating lease commitments Details of the company’s operating lease commitments are disclosed in note 29 to the consolidated financial statements. 16. Share-based payments For details of the company’s share schemes, including the valuation models used, refer to notes 24 and 25 in the consolidated financial statements. 17. Reserves Details of the company’s reserves are disclosed in note 21 to the consolidated financial statements. 18. Related party transactions Details of related party transactions are disclosed in note 33 to the consolidated financial statements. 19. Controlling party Details of the ultimate controlling party are disclosed in note 32 to the consolidated financial statements. 109 Company information Company information Directors T Dunley-Owen D R Ferguson S J Geard J P Gibson M G Hassall J A Levin J C Polin J A A Samuels Company secretary N C Megaw Registered number 05522098 Registered office Elder House St Georges Business Park 207 Brooklands Road Weybridge Surrey England KT13 0TS 110 Independent auditors PricewaterhouseCoopers LLP Atria One 144 Morrison Street Edinburgh EH3 8EX Bankers The Royal Bank of Scotland Aldgate Union 7th Floor 10 Whitechapel High Street London E1 8DX The Royal Bank of Scotland International Limited Royal Bank Place 1 Glategny Esplanade St Peter Port Guernsey} GY1 4BQ Bank of Scotland plc PO Box 17235 Edinburgh EH11 1YH Investec Bank plc 30 Gresham Street London EC2V 7QP Lloyds Bank Plc Threadneedle Street Chelmsford Legg St Osc 1 Legg Street Chelmsford CM1 1JS Definitions and glossary of technical terms Definitions and glossary of technical terms Definitions of industry-specific financial performance measures Capital adequacy ratio-underlying Capital adequacy ratio that includes current year profits in the capital measure. The following definitions apply throughout this document: Compound asset growth rate Adjusted Denotes that a standard or defined financial performance measure is adjusted for non-recurring items, transactions that do not reflect the normal operating activities of the group and share based payments. Average growth rate over a period of time expressed as an annualised percentage. EBITDA Earnings Before Interest Tax, Depreciation and Amortisation. Adjusted EBITDA Gross inflows Adjusted EBITDA excludes non-operating income, AIM admission costs and share based payments. Value of cash and assets received onto the platform. Adjusted EBITDA margin Adjusted EBITDA expressed as a percentage of revenue. Industry-specific financial performance measures Alternative performance measures that the directors believe help to inform the results and financial position of the group. Adjusted earnings per share (EPS) Net inflows Value of adjusted profit after tax divided by weighted average number of shares. Value of Gross inflows less Outflows. Adjusted profit after tax The adjusted profit before tax less the adjusted profit before tax multiplied by the standard rate of corporation tax in the UK Outflows Value of cash and assets leaving the platform. AUA Assets under administration. Average AUA The average AUA balance for the period is calculated as the average of the end of day AUA balances during the period. Blended revenue yield (bps) Revenue is divided by the average assets under administration. For interim periods the revenue is annualised using the number of days in the period. Capital adequacy ratio A capital adequacy measure calculated by dividing regulatory capital over risk weighted exposures. 111 Definitions and glossary of technical terms Definitions and glossary of technical terms (continued) Glossary of technical terms AIM Rules The rules published by London Stock Exchange entitled AIM Rules for Companies. BPO Business process outsourcing. The contracting of the operations and responsibilities of a specific business process to a third-party service provider. Nucleus or the Group The Company and its subsidiaries. Priips The Packaged Retail and Insurance-based Investment Products Regulation. Sanlam Sanlam UK Limited. SMCR Customers Senior Managers and Certification Regime. The customers of Nucleus, whose assets are managed through the platform. Clients The customers of financial advisers, whose assets are managed through the platform. FCA The Financial Conduct Authority. GDPR The General Data Protection Regulation (Regulation (EU) 2016/679). IFRS International Financial Reporting Standards as adopted by the European Union. MiFID II The EU Markets in Financial Instruments Directive (2014/65/EU). NFS Nucleus Financial Services Limited. 112 0131 226 9800 legal@nucleusfinancial.com @nucleuswrap www.nucleusfinancial.com Nucleus Financial Group plc is registered in England and Wales with company number 05522098 and has its registered office at Elder House, St Georges Business Park, Brooklands Road, Weybridge, Surrey KT13 0TS. Please note that telephone calls may be recorded in order to monitor the quality of our customer service and for training purposes. 0415.02