Nucleus Financial Group PLC
Annual Report 2019

Plain-text annual report

Creating value through greater alignment of adviser and customer interests Nucleus Financial Group plc Annual report and financial statements for the year ended 31 December 2019 Company registration number 05522098 2019 highlights 3.3% increase in the number of active advisers from 1,396 to 1,442 Assets under administration ¹ 16.3% increase £16.1bn £13.9bn 3.4% increase in customer numbers from 93,715 to 96,857 2018 2019 Average AUA ¹ Growth 7.5% £14.1bn £15.2bn 2018 2019 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. Annual report and financial statements 2019 Net revenue ¹ 4.8% increase £43.2m £45.2m 2018 2019 Covid-19 In light of the rapidly evolving situation regarding Covid-19 at the time of writing, we’ve highlighted key areas in this report where this is referenced. Chairman’s statement Chief executive’s report Chief financial officers report Directors’ report Notes to the consolidated financial statements 8 12 22 62 113 Profit for the year 25.2% increase £6.0m £4.8m Adjusted EBITDA¹ £7.9m (2018 £8.3m) 2018 2019 Full year dividend per share (p)* 5.0p 1.5p 2018 2019 *2019 final dividend suspended Earnings per share up 23.8% to 7.8p, from 6.3p in 2018 Contents Strategic report Chairman’s statement Chief executive’s report About Nucleus Section 172 report Chief financial officer’s report Principal risks and uncertainties 8 12 16 18 22 30 Governance Risk management framework Corporate governance statement Board of directors Audit committee report Risk committee report Nomination committee report Remuneration and HR committee report Directors’ report Directors’ responsibilities statement 38 40 42 49 51 53 54 62 66 Annual report and financial statements 2019 Financials Independent auditors’ report 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 Company statement of financial position Company statement of changes in equity Company statement of cash flows Notes to the company financial statements Company information Definitions and glossary 70 76 78 80 81 82 114 115 116 117 129 130 Strategic report Governance Financials Strategic report 6 Strategic reportGovernanceFinancialsAnnual report and financial statements 2019 Chairman’s statement Chief executive’s report About Nucleus Section 172 report Chief financial officer’s report Principal risks and uncertainties 8 12 16 18 22 30 7 Chairman’s statement Weathering the storm 2019 is likely to be remembered as one where many industries, not least our own, were temporarily stymied as geopolitical events ran their course during the prolonged political malaise ahead of the election. Our sector has, however, weathered many of these storms over the years and has once again proven itself to be resilient. 2020 has started with an altogether different challenge with the devastation currently being wrought across the globe by the Covid-19 pandemic. David considers the impact of the rapidly evolving situation on our business, our people and our users, in his CEO report. The need to save and invest for our future never goes away, it is only ever put to the side for a while. 8 Strategic reportGovernanceFinancialsAngus Samuels Chairman “ … it is pleasing to see continued growth across many of our key performance indicators including growth in assets, revenue and profit, as well as the number of customers and advisers using the platform.” This included material investment in enhancing the core platform proposition for advisers, a further platform upgrade, improvements in our customer service infrastructure and the successful completion of a further round of regulatory change. The business also entered into a number of strategic distribution relationships in the year, including a partnership with one major IFA consolidator, and is in active discussions with others. We expect these new relationships to enhance the resilience of net inflows and to present future growth opportunities. All of which makes our financial performance for last year the more gratifying, recording a 25.2 per cent increase in profit after tax of £6.0m on revenue of £51.5m, noting that 2018 included £1.7m of AIM admission costs. David and Stuart provide full detail of the key financial results in the reports that follow but it is pleasing to see continued growth across many of our key performance indicators (KPIs) including growth in assets, revenue and profit, as well as the number of customers and advisers using the platform. As anticipated in last year’s report, the completion of the restructuring of our outsourced operations at the end of 2018 allowed us to significantly accelerate our delivery of operating efficiencies and our product development over the year. 9 Annual report and financial statements 2019The board The board composition remained unchanged throughout the course of the financial year but did change in February 2020 with the departure of non-executive director, Jeremy Gibson. Jeremy joined the board in 2013 and was previously the chair of the audit and risk committees until July 2018. I would like to take this opportunity to thank Jeremy for his considerable and invaluable contribution over the course of the last six years and wish him all the very best for the future. Jeremy’s position as a non-executive director is filled by Alfio Tagliabue who has been the CEO of Sanlam Investments UK since 2016. Alfio’s previous roles include CFO at Sanlam UK and Ashcourt Rowan, and he has many years as a board level consultant to the asset and wealth management industries. I would like to extend a warm welcome to Alfio. “ Culture and values lie at the heart of any good business and our engagement with our people is key to this.” 10 Governance The business is subject to the Quoted Companies Alliance (QCA) corporate governance code and the board is committed to ensuring the highest level of compliance with this. With the recent change in board composition, I’m confident that the breadth of skills and the depth of experience we have on the board provide equal measures of support and appropriate challenge to the strategic direction of the company. The long-term success of the business is reliant on the strength of its corporate culture and the board continues to recognise the importance of good governance, and effective and resilient systems and controls in supporting the executive management in their development and delivery of the company’s strategy. Full details of the work of the board and its committees can be found in the corporate governance statement on page 40. Strategic reportGovernanceFinancialsAnnual report and financial statements 2019 Culture and people Culture and values lie at the heart of any good business and our engagement with our people is key to this. We’ve made positive strides in our people strategy this year with a strong focus on individual accountability ahead of the introduction of the Senior Managers and Certification Regime (SM&CR) on 9 December 2019. Given the challenging market conditions, I would like to thank the entire team at Nucleus for their commitment, focus and resilience throughout the year. Dividend In light of the exceptional and open- ended uncertainty caused by the Covid-19 pandemic and the rapidly changing environment, the board has decided, in the interests of prudence, not to recommend a dividend until there is more certainty around the term and impact on markets, investor confidence and revenue. Outlook Politics aside, the decisiveness of the general election and resolution of the Brexit withdrawal agreement have seeded encouraging signs of recovery in investor confidence, with Nucleus recording a 37.8 per cent increase in net inflows in the last quarter of the year compared to the previous quarter. The positive inflow momentum from Q4 continued into the first quarter of 2020 and there was limited impact on inflows as a result of the Covid-19 pandemic until the latter part of March when the typical step up in tax year end contributions eased off. However, the value of most asset classes fell considerably in March, and, as the significant uncertainty continues, it is too early to estimate the impact of the pandemic on Nucleus’ performance. Notwithstanding this uncertainty, the group has a robust capital structure and solvency position, high conversion rate of profit to cash, no borrowings and available liquidity. Against a backdrop of extraordinary political division and uncertainty in the UK for much of 2019, I’m pleased with the company’s financial performance over the past year. Underpinned by anticipated continuing sector growth, Nucleus’ broader and deeper skills set including technology capabilities, enhanced infrastructure, and recurring fee model, give the board confidence in the company’s ability to deliver its plans and to manage the competitive challenges that lie ahead. Angus Samuels Chairman 11 Chief executive’s report Building on our purpose It’s impossible to begin this report without making reference to the Covid-19 pandemic currently wreaking havoc across our planet. The extremely ‘live’ nature of this situation means that the non-historic aspects of this report are exposed to external events more than ever before. £16.1bn Assets under administration £1.9bn Gross inflows 12 Strategic reportGovernanceFinancialsDavid Ferguson Founder and chief executive I hope you will read the words that follow in that context but also in the knowledge that prior to the outbreak, we were feeling very positive about our prospects and what might be achievable in the coming years. I expect us to navigate this period successfully and for us to continue to deliver on those matters within our control. This should mean that as and when some sort of normality returns, we can return to the financial trajectory we had previously been working toward. These are early days but our Covid-19 response has been anchored around protecting the safety of our people, in maintaining service levels and in continuing to develop the business in accordance with our long-term objectives. We have ceased or limited certain activities (whether in line with government guidance or our values) but in general terms have placed the long- term success of the business ahead of short-term profitability. I strongly believe this approach is best aligned with the interests of our key stakeholders and will ensure we remain well-positioned to capture our share of the structural opportunity of the sector. For now (and returning to the traditional format of this report) I would like to remind you that Nucleus was founded to create value through greater alignment of adviser and customers interests, and we set out to achieve this by building the most technology- led platform in the UK. Despite the challenging sector headwinds, we made good progress during the course of 2019 and closed the year with a stronger than ever combination of online product capability and offline service. We continue to invest in the team that made this possible. Their efforts have positioned us well as the financial planning and wealth management markets continue to evolve. Commercial and regulatory pressures require all market participants to deliver value for money and we are excited about what we can achieve in the coming years. We were also pleased to win CoreData’s ‘best medium platform’ award for the eighth year in succession and to achieve five-star status in the Financial Adviser service awards. 13 Annual report and financial statements 2019Operational performance Financial performance and dividend Net revenue was up 4.8 per cent to £45.2m and we recorded an adjusted EBITDA of £7.9m (2018: £8.3m). Consistent with our expectations, this represents a slight short-term deterioration in operating margin over 2018 and reflects our continued investment to accelerate future growth. On a reported basis, we increased profit after tax and earnings per share by 25.2 per cent and 23.8 per cent respectively, noting that 2018 included £1.7m of AIM admission costs. Further details are contained in Stuart’s report but in light of the Covid-19 situation, the board has taken the prudent decision not to recommend a dividend until there is more certainty around the term and impact on markets, investor confidence and revenue. While this would typically be considered an unusual decision, we are in uncharted waters and I believe it to be the correct course of action at this stage. The decision to suspend payment of the 2019 final dividend will allow the group to preserve capital until there is greater clarity on the effect of Covid-19 and the board will continue to assess the situation and the appropriateness of paying a second interim dividend relating to the financial year ended 31 December 2019. Our people We’ve reshaped the organisation over the last two years, and this will continue as we direct more of our people costs toward our technology functions. Overall, we welcomed 64 new colleagues in 2019 and grew full-time equivalent headcount to 236 at the year-end, with over 70 per cent of these roles involved in product management, platform operations, or servicing our audience. Our strategy of balancing the agility, scalability and resilience of our product with high touch offline service requires us to continue to invest in these areas over time. People engagement has been strong throughout the year and the team feels well set to achieve our objectives for 2020 and beyond. We made positive progress in narrowing our gender pay gap, reducing this by 1.7 per cent while women in senior positions remained at 32 per cent. Kirsty Lynagh Chief people officer Although political and economic uncertainty, largely related to the UK’s exit from the EU, generated some headwinds, markets ultimately rose over the year and this, combined with net inflows, helped power us toward a 16.3 per cent increase in assets under administration (AUA) to £16.1bn. Overall gross inflows fell to £1.9bn (from £2.3bn in 2018), however, market share, on a like-for-like basis, remained steady at 3.8 per cent (retail advised platform market). We were also pleased to post four successive quarters of growth in gross inflows, along with continued growth in active advisers and customers, the latter two of which can be expected to contribute to future inflow growth. We enjoyed a notable uptick in inflows toward the end of the year and this trend has continued strongly into the start of this year. We experienced a heightened level of outflows, when a handful of firms that had been acquired moved some customers off the platform. More positively, we were successful in forging new relationships with a leading IFA consolidator and the biggest adviser support services firm (in the UK), and we are cultivating several other opportunities in this area. Our product development and operations had a great year with notable progress made on all fronts. We were able to introduce new capabilities such as a Junior Isa, new phased drawdown features, a new customer portal and many other platform enhancements, including improved trading functionality and meeting the new costs and charges disclosure requirements of Mifid II. We also improved the resilience of some of our platform operations and installed new telephony and CRM infrastructure which will help us maintain and improve service levels. These investments were all well received by advisers and customers and I’m really pleased to have achieved the level of change velocity we believe is necessary to support our growth ambitions. 14 Strategic reportGovernanceFinancials“ I’m very pleased to announce we plan to launch Nucleus IMX, a discretionary investment management proposition in 2020.” Strategic development We have greatly enjoyed the first full year of our direct relationship with Bravura and remain strongly of the view that our blend of in-house development and data services sitting on top of Bravura’s market-leading Sonata product is the right technology model for us. We have improved our flexibility in supporting alternative product and pricing structures for larger scale opportunities and, following the year end, have packaged this under the Nucleus Enterprise brand, with a view to driving further growth through this channel. Alongside our core platform product, we made good progress in developing a new approach to investment portfolio management, and I’m very pleased to announce that following confirmation of the relevant regulatory permissions in January 2020 we plan to launch Nucleus IMX, a discretionary investment management proposition, in the first half of 2020. We believe the combination of our data capabilities and the work we have done internally and in partnership with leading investment consultancy firm Hymans Robertson, will allow us to open up a meaningful new revenue stream while further aligning adviser and customer interests. Annual report and financial statements 2019 Outlook and Covid-19 Notwithstanding the impact of external factors, whether related to market sentiment, the political environment or the current coronavirus pandemic, I believe the business is well-positioned to deliver on our plans and capitalise on the structural growth themes relating to our sector. The recent period has seen us materially accelerate our product development efforts and coupled with strong operational performance and high touch offline service, we have started 2020 with a material improvement in inflows. These have been driven by increased demand from existing users and new demand from recently added adviser firms and we look forward to accelerating growth as we add further new firms through the year. The competitive landscape has adjusted slightly with some legacy companies exiting the market and some more tech- led entrants emerging. There is little doubt that an effective technology model is central to success in this market and we continue to believe that blending Bravura’s Sonata product with our in-house capabilities provides the right balance of agility, scalability and resilience to meet user expectations in the short term while also ensuring our business is durable over the long term. More widely, platforms can play a positive role in helping deliver improved value for money for customers and to this end we are particularly excited about Nucleus IMX which has been designed specifically to improve value for money in asset management and if successful should also bolster our overall revenue yield, attract new users and create other interesting product opportunities. We face a new challenge this year with the rapid change in the development of Covid-19, and it is entirely uncertain what impact this might have on businesses and the economy. The outlook is impossible to predict, but I can say that we remain open for business, and cash generative each day. Our highest priorities are the health and wellbeing of our people, users and customers and we are taking every possible action to adapt to the situation and ensure we continue to deliver our online product as normal, backed up by top quality offline support. Our platform is fully operational and all of our people are successfully working remotely with no impact on service. We are in continual dialogue with our users and our material service providers and I consider our operations to be resilient, recognising that our user experience remains reliant (as ever) on the performance of many of the interconnected parties that comprise the overall financial system. David Ferguson Founder and chief executive 15 About Nucleus Nucleus is an independent wrap platform that allows customers to hold all of their pensions, Isas and other investments in one secure place online. We were founded in 2006 and built in collaboration with financial advisers committed to altering the balance of power in the industry by putting the customer centre stage. We work with over 1,440 active financial advisers from more than 880 financial advice firms as at 31 December 2019. We are responsible for AUA of £16.1bn on behalf of more than 96,000 customers. The platform offers a range of custody, trading, payment, reporting, fee-handling, research and integration services across a variety of tax wrappers and around 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 1.4 million customer account transactions on average per month. We create value through greater alignment of adviser and customer interests. 16 Strategic reportGovernanceFinancialsOur purpose Our purpose has been clear and consistent since our inception and that is to create value through greater alignment of adviser and customer interests. Our values Our values are aligned to our purpose and provide the foundations that support, shape and unify the culture of our 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. Naturally, these values align with the principles of our regulator. Accountable We own solving problems and our customers, people, stakeholders and our regulator can rely on each of us to be disciplined and take responsibility. We collaborate, while delivering as individuals, overcome challenges and see things through on time. Being accountable means we are reliable; we trust each other to deliver and enjoy autonomy. Authentic We are all human, this gives us the opportunity to be ourselves, do our best work and deliver value for our customers. Being authentic is being honest, respectful, having ‘adult-to-adult’ relationships and not shying away from candid conversations. Energetic We are proactive, innovative and tenacious. It’s about driving our business forward and making a difference for our customers and our people. We balance our drive to change the future with being accountable for delivering every day. Inspiring We think big, act small and are humble. We’re always looking to make life better for our customers and our people. We’re relentlessly curious, always learning and developing, pushing boundaries and finding better ways, for ourselves and our customers. 17 Annual report and financial statements 2019Section 172 report Strategic decisions Our strategic decision making is driven by a desire to fulfil our purpose, aligned to our values, our policies and our overall attitude to risk. A key input to any strategic decision, is its impact on our stakeholders. In addition to the stakeholder specific outcomes set out on the next couple of pages, these case studies highlight how the board took its duties set out in s172(1) of the Companies Act 2006 into account during the course of 2019. 18 Strategic reportGovernanceFinancialsCase study one Case study two Propositional enhancements and core technology upgrade Culture and governance The board constituted the advisory board in 2018 and engages it directly to garner the input of its members. The advisory board is formed of a group of financial advisers and business owners from our user firms, and is tasked with collating the feedback from our platform development group, as well as representing our customers and engaging with management on various strategic issues from product development and regulatory change to the impacts of industry reviews. The chair of the advisory board reported quarterly to our board during 2019 and that feedback was considered in a number of strategic decisions. Building on the decision in 2018 to unbundle our outsourced technology and administration contract and enter into a direct technology relationship with Bravura, the board approved a decision to implement our first major upgrade under the new structure in Q2 2019, as well as a number of key releases. The roadmap for these propositional improvements was created taking into account significant input from our users, our suppliers and our customers’ needs. With the needs of our stakeholders in view, for example, costs were managed carefully and within budget ensuring no impairment in our ability to meet our dividend policy. The advisory board also provided valuable feedback to help us shape the proposition for IMX, our new approach to portfolio management, giving both a users’ perspective and feedback on the most important features for our customers. The new service builds on our strategic objectives to invest in our data assets and our technology team and create cost effective solutions for our users and customers. We believe these decisions will create long term value and unlock our ability to become a truly innovative digital platform. A strategic objective for 2019 was to review our conduct, values, policies and accountabilities frameworks, with a view to giving clarity to our people, our users and our regulator on how we are organised, our expected behaviours and our individual accountabilities. The board took a decision to invest in building a capability and accountability framework, (details of which can be found on page 45) to strengthen our existing systems and controls and align with our delivery of a key regulatory change to comply with the new SM&CR for solo-regulated firms. Culture and governance were key strategic objectives for Nucleus in 2019 and we were pleased that these were also key objectives for the FCA. We believe that building the foundations on which to scale will deliver long term value to all our stakeholders. Factors all directors must take into account: 1 2 3 4 5 6 the likely consequences of any decision in the long term, the interests of the company’s employees, the need to foster the company’s business relationships with suppliers, customers and others, the impact of the company’s operations on the community and the environment, the desirability of the company maintaining a reputation for high standards of business conduct, and the need to act fairly as between members of the company. 19 Annual report and financial statements 2019 Platform users What matters most How did we respond • Connection to customers’ • Delivered a major needs • Continuous technology and proposition developments • Dependable and consistent service standards • Cost-effective platform • Clear guidance and thought leadership How do we engage • User sessions • Platform development group • Practice development group • Advisory board • Dedicated account managers and business development team • Annual strategy event • Thought leadership platform upgrade and many propositional features on our user-led technology roadmap • Developed our new approach to portfolio management, permissions for which have been granted, and launch scheduled for 2020 • Changed our stockbroker with improved trade execution and pricing for customers • Introduced a new telephony infrastructure to improve our service standards • Built a cost and charges engine into Narrate, our reporting tool, to support users’ regulatory obligations • Developed our strategy to consider alternative product and pricing structures for larger scale opportunities Shareholders What matters most How did we respond • Compelling business • Reported quarterly on model and growth story performance • Stability, resilience and • Delivered against our dividend policy • Delivered against our people strategy to create the workforce for the future • Held more than 50 meetings with shareholders and potential shareholders during the year ability to scale • Reliable returns • Investing in our talent and succession How do we engage • Investors roadshows twice a year • 1-2-1s with institutional shareholders • AGM and regular disclosures Customers What matters most How did we respond • Transparency and • Launched Nucleus Go, our simplicity • Fair pricing • Quality of service • Security of assets How do we engage • Bi-annual investors in customers surveys • Face to face meetings or events • Dedicated client relations team • Clear communications new client portal • Launched a junior Isa to meet the needs of our target market • Changed our stockbroker with improved trade execution and pricing for customers • Created a customer insight team, supported by a suite of conduct and customer policies • Continued embedding our updated conduct framework to ensure all our people are focused on creating good customer outcomes As directors, we are obliged to fulfil our codified directors’ duties under section 172(1) (a)-(f) of the Companies Act 2006, and, in taking decisions, ensure that we promote the success of the company as a whole. We acknowledge that this involves both judgment and process. We have created a number of forums to facilitate and engage the views and expectations of our stakeholders and seek to ensure we can demonstrate how their views, as well as the long term consequences, are taken into account in our strategic decision making. We consider our key stakeholders to be our customers, our platform users, our people, our shareholders, our suppliers, our regulators, our community and wider society. We have captured what matters most to each group, how we engage with them and how we have responded to their needs as follows. 20 Strategic reportGovernanceFinancialsOur people What matters most How do we engage • Making a difference for our customers • Autonomy, coupled with clear expectations and boundaries • Having opportunities to grow and progress • Being fairly rewarded for their contributions • Knowing that their voice is heard • Feeling alignment between company and personal values • Regular surveys • Fortnightly all company briefing sessions and bi-annual strategy updates led by our CEO and his executive team • Culture champions in each team • Re-designed induction for all • Board member responsible for representing employee voice • ‘Ask me anything’ lunch with the executive team for new joiners How did we respond • Restatement of our company values • Focus on culture - creating a new framework for communicating and embedding • Diversity and inclusion initiatives, building on inclusive hiring practices and encouraging psychological safety and diversity of thought • Building leadership capability to support delivery and alignment between people and customer experience Our purpose Our purpose has been clear and consistent since our inception and that is to create value through greater alignment of adviser and customer interests. Regulators What matters most How did we respond • Provided feedback to the Platform Market Study • Implemented the SM&CR, designing our framework to meet the standards of an enhanced firm • Refreshed and rolled out our conduct risk framework, and work on embedding it for the benefit of our stakeholders. • Understanding and adopting the principles and rules of the FCA Handbook • Open and transparent communication • Demonstrating good conduct • Acting in our customers’ best interests How do we engage • Members of the UK platform development group • Direct communication via our compliance senior manager function holder • Consultations and policy statements Suppliers What matters most How did we respond • Attendance and input to the working group, formed of our core technology supplier’s clients. Its aim is to reduce costs and risk and improve outcomes through aligned strategies and regulatory initiatives • Identified relationship managers across all key suppliers • Reviewed effectiveness and embedding of our vendor management suite of policies • Trusted partnerships • Strong governance • Clear communications • Our input into their service delivery How do we engage • Regular service reviews • Clearly documented vendor management onboarding and maintenance policies and practices • Annual due diligence reviews • Collaborative engagement Community and wider society What matters most How did we respond • Actively supporting local • Our CEO is the chairman of Fintech Scotland, aimed at raising the profile and local investment in technology and financial services in the Scottish economy • Recruited a number of graduate coding and software engineers through our partnership with Codeclan • Set up a charity committee which supported initiatives raising over £50,000 for MND Scotland in 2019 communities • Engaging in charitable activities • Providing jobs and investment How do we engage • Support employment and apprenticeship schemes with graduate coding schemes • Support local STEM initiatives in schools and universities • Support a chosen charity each year and work collaboratively to reach meaningful targets • Host and attend meet-ups for Agile Scotland and other Fintechs 21 Annual report and financial statements 2019Chief financial officer’s report Positive Momentum 2019 was a year that was characterised by political and economic uncertainty and market volatility, but which ended on a more solid footing as the political environment stabilised. The removal of these key issues in the last quarter of the year led quickly to a return in investor confidence allowing us to post a fourth consecutive quarter of gross inflow growth. 22 Strategic reportGovernanceFinancialsAnnual report and financial statements 2019 Stuart Geard Chief financial officer “ …restructuring of our primary outsourcing relationships towards the end of the previous year, increased investment in online functionality and offline service…” This positive momentum continued into the start of 2020 and while it will undoubtedly be impacted by the uncertainty and disruption brought about by Covid-19, gives us increased confidence for when there is a return to stability. Returning to 2019, the difficult environment did have a negative impact on overall gross and net inflows in 2019, and by implication AUA and revenue and required us to carefully balance the need to respond to the challenging environmental conditions and our desire to continue investing in our business. As a result, Nucleus delivered a satisfactory financial performance in 2019, with its key financial metrics reflecting the impact of lower than expected net inflows and AUA, the restructuring of our primary outsourcing relationships towards the end of the previous year, increased investment in online functionality and offline service, and effective management of costs. We remain confident that our investment in new initiatives and the ongoing development of our service and proposition leave us well-placed to benefit from a recovery in markets and investor sentiment, and to take advantage of the longer-term sectoral opportunity. 23 Strategic report Governance Financials Financial key performance indicators Year ended December 2019 Year ended December 2018 Year ended December 2017 Year ended December 2016 Year ended December 2015 Group AUA¹ £'000 £'000 £'000 £'000 £'000 16,141,279 13,883,713 13,576,703 11,143,757 9,068,789 Gross inflows¹ 1,941,712 2,290,236 2,607,759 1,854,830 1,977,783 Net inflows¹ Revenue 509,444 1,193,502 1,668,237 970,263 1,229,625 51,517 49,405 45,462 37,483 Net revenue¹ 45,234 43,154 39,361 32,407 Adjusted EBITDA¹ Profit for the year after tax Dividend paid Adjusted EBITDA margin¹ 7,923 5,953 3,873 17.5% 8,304 4,756 3,933 19.2% 6,248 4,111 4,813 15.9% 5,141 3,387 nil 15.8% 16.5% 33,091 28,166 4,637 4,300 nil 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. 24 Financial review Group Opening AUA Inflows Outflows Net inflows Market movements Closing AUA Average AUA Group Revenue AUA related fees paid Net revenue Other income Total operating income Staff costs AUA related costs Other direct platform costs¹ Platform development costs Other costs¹ Adjusted EBITDA* Depreciation* Adjusted EBIT Interest income Interest expense* Adjusted profit before tax Other non-operating income AIM admission costs Share-based payments Statutory profit before tax Taxation Statutory profit after tax Adjusted profit after tax Basic and diluted EPS Adjusted EPS Blended revenue yield (bps)**¹ Adjusted EBITDA margin Year ended December 2019 Year ended December 2018 £m 13,884 1,941 (1,432) 509 1,748 16,141 15,180 £m 13,577 2,290 (1,097) 1,193 (886) 13,884 14,124 Restated¹ Year ended December 2019 Year ended December 2018 £'000 51,517 (6,283) 45,234 105 45,339 (14,590) (10,197) (3,389) (2,948) (6,292) 7,923 (667) 7,256 80 (2) 7,334 17 - (349) 7,002 (1,049) 5,953 5,941 7.8p 7.8p 29.8 17.5% £'000 49,405 (6,251) 43,154 - 43,154 (14,142) (11,131) (1,522) (1,682) (6,373) 8,304 (585) 7,719 11 (7) 7,723 22 (1,688) (404) 5,653 (897) 4,756 6,255 6.3p 8.2p 30.6 19.2% ¹ Platform-related mailing, bank charges, and errors and losses have been reclassified and restated from “other costs” to “other direct platform costs”. * Adjusted EBITDA excludes non-operating income, AIM admission costs and share-based payments and includes ROU asset depreciation and ROU lease liability interest. It 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. 25 Annual report and financial statements 2019Revenue Costs AUA increased by 16.3 per cent over the year, from £13.9bn at 31 December 2018 to £16.1bn at 31 December 2019, compared to a 14.2 per cent increase in the FTSE All-Share index over the same period. The £2.2bn increase in AUA comprised the impact of market movements of £1.7bn as markets recovered from their sharp decline in Q4 2018, as well as net inflows of £509m, which were lower than in the previous year. This reflected not only the impact of the difficult external environment on gross inflows, but also the impact of increased outflows attributable to the larger asset base and the withdrawal of assets by firms acquired by consolidators. Lower levels of net inflows was a sector-wide issue throughout the period as illustrated by Fundscape, who reported net sales across the platform market in Q3 2019 as being the lowest since Q4 2012, immediately before the Retail Distribution Review (Fundscape Platform Report Q319 Issue, November 2019). Net sales across the sector for the first three quarters of the year were down 39.0 per cent (on the same period in 2018). Average AUA, which increased by 7.5 per cent over the year from £14.1bn to £15.2bn, captures the impact of market volatility throughout the year, including the strong recovery in the first quarter of 2019 and the post-general election rise in December. As Nucleus’ revenue accrues on a daily basis, average AUA is a better indicator of top-line growth and compares to growth in net revenue for the year of 4.8 per cent (from £43.2m in 2018 to £45.2m in 2019). The lower rate of growth in net revenue resulted in a blended revenue yield in 2019 of 29.8 basis points (2018: 30.6 basis points), reflecting a number of factors, including the revision of Nucleus’ distribution agreement with Paradigm, improved terms for Paradigm customers from July 2019 and the introduction of improved terms for a small number of large adviser groups. Staff costs increased by 3.2 per cent from £14.1m in 2018 to £14.6m in 2019, a slightly lower than anticipated increase. Notwithstanding this, full-time equivalent headcount increased from 218 to 236 over the year, with a particular focus on recruitment in technology and customer servicing roles. The group has continued to deliver on its strategy of becoming the most technology enabled platform in the UK and this is evidenced by the increase in technology and change-related roles, increasing to 70 as at 31 December 2019 and representing 29.7 per cent of our total staff. As stated in previous communications, we expect the rate of increase in staff numbers to slow, with most additional recruitment continuing to be in technology-related roles. AUA related costs, comprising principally the fees paid to Genpact (for administration services) and Bravura (for the licence of Sonata) decreased from £11.1m in 2018 to £10.2m in 2019, at an average cost of 6.72 bps (2018 – 7.88 bps). As stated in our half-year results, this reflects the contractual provisions within the restructured agreements as well as, to a lesser extent, the impact of service credits and the tiering benefits within a significant component of these costs. Looking forward, but subject to AUA recovering to the level prior to the market fall in Q1 2020, the group is set to benefit from the significantly lower basis points-related charges relating to incremental AUA, albeit with a reducing level of ‘fixed discounts’ that formed part of the Genpact contract renegotiation. “ We are encouraged by what we have achieved in 2019 and the positive working relationship we have established with Bravura…” 26 Strategic reportGovernanceFinancialsThird party platform development expenditure for the year was £2.9m, in line with our stated objective of spending approximately £3m per year in this area. This comprised the costs of a further upgrade to the latest version of Sonata (which was completed in February 2019), development of considerable new functionality (made available to customers and advisers through two additional releases during the year or in the development pipeline for release in 2020) and investment in testing software and other tools. We are encouraged by what we have achieved in 2019 and the positive working relationship we have established with Bravura and will seek to allocate similar amounts of capital to platform development expenditure in future years. Other direct platform costs increased from £1.5m to £3.4m, primarily as a result of Nucleus becoming responsible for the cost of platform hosting from August 2019 and assuming the cost of platform-related printing and posting from May 2019 (following the restructure of our relationship with Genpact). This increase in costs is consistent with guidance given previously and represents an increase in the fixed cost base of the group (in exchange for a decrease in variable AUA related costs payable to Genpact). The balance of other direct platform costs relates to surround platform licence fees, bank charges and compensation costs. These costs, together with the platform- related printing and postage costs increased from £1.5m in 2018 to £2.3m in 2019, reflecting in part the responsibilities taken on from Genpact but also the larger size of the business and higher than expected compensation costs. Since taking over the service, printing and posting costs have largely been optimised through automation, and we will seek similar efficiencies concerning the hosting of the platform. In this respect, we completed a proof of concept in H2 2019 for moving all aspects of the hosting of the platform to the cloud and will determine the optimal timing of such a move (and consequently the realisation of related cost savings) in conjunction with other development priorities. Other costs decreased by £0.1m (or 1.3 per cent) from £6.4m in 2018. These costs, which include the costs of our larger Edinburgh head office premises (on an ‘all-in’ basis as opposed to an IFRS 16 Leases basis that is used for statutory reporting purposes), the incremental costs associated with being a quoted business, higher FSCS levies from April 2019 and the increased overhead costs attributable to the increased size of the business, benefited from the £0.4m settlement received from a previous service provider as well as positive variances on a number of overhead cost lines. Annual report and financial statements 2019 IFRS 16 impact With effect from 1 January 2019 the group implemented IFRS 16 Leases, the details and impact of which are set out in the changes in accounting policies note in the financial statements. To provide a consistent and comparable indication of financial performance, adjusted EBITDA has been determined on a basis consistent with that applied in the 2018 annual report and financial statements. The required adjustment relates to IFRS 16-derived right of use (ROU) asset depreciation and ROU liability interest, which are included within other costs in the financial review. Operating margin Our operating margin (as reflected by the adjusted EBITDA margin) decreased from 19.2 per cent in 2018 to 17.5 per cent in 2019, mainly as a result of the contractual changes referred to above and the significant increase in platform development expenditure over the prior year. Similarly, adjusted EBITDA decreased by 4.6 per cent from £8.3m to £7.9m, a result that we are satisfied with given the difficult trading environment and the considerable investment in the business. Profit before tax Statutory profit before tax increased by 23.9 per cent over the previous year, with the prior year results including £1.7m of costs relating to the company’s admission to the AIM market. Share-based payment expenses decreased by 13.6 per cent to £0.3m, despite the introduction of a new LTIP tranche in 2019, reflecting the impact of the challenging environment on the stretching performance criteria within the long term incentive schemes. Taxation The group’s effective tax rate of 15.0 per cent (2018: 15.9 per cent) incorporates the impact of expenses that are non-tax deductible of £0.1m (2018: £0.4m), more than offset by the impact of tax credit amounts of £0.3m (2018: £0.5m) in respect of qualifying research and development (R&D) expenditure relating to the prior 2 years. With the group no longer qualifying for the SME R&D scheme with effect from the beginning of 2018, an R&D tax credit in respect of 2018 has been recognised in 2019 under the RDEC scheme and accounted for as other income of £0.1m, which has then been subject to corporation tax at 19 per cent. 27 Dividend During the year, and consistent with our dividend policy, we paid a final dividend in respect of the 2018 financial year of £2.7m (or 3.6 pence per share) and an interim dividend in October of £1.1m (or 1.5 pence per share). This compares to dividends paid in the prior year of £4.0m, comprising pre- admission dividends in June and July 2018 totalling £2.9m, as well as an interim dividend in October 2018 of £1.1m (or 1.4 pence per share). As detailed in the following section on financial position, the directors are confident that the group’s capital structure, solvency position, high conversion rate of profit to cash, no borrowings and available liquidity can support the group through a period of material uncertainty. However, in light of the exceptional and open-ended uncertainty caused by the Covid-19 pandemic, the recent collapse in equity markets and the still rapidly changing environment, the board has decided, in the interests of prudence, not to recommend a final dividend for the year ended 31 December 2019. The decision to suspend payment of the 2019 final dividend will allow the group to preserve capital until there is greater clarity on the effect of Covid-19 on Nucleus, its users, its customers and the broader economy. The board will continue to assess the situation and the appropriateness of paying a second interim dividend relating to the financial year ended 31 December 2019. The dividend suspension thus affords Nucleus increased flexibility and protection at a time of unprecedented uncertainty. 2019 financial year £’000 Pence - 1,139 - 1,139 19.2% 1.5 - 1.5 2018 financial year £’000 2,870 1,063 2,734 Pence 1.4 3.6 3,797 5.0 60.7% Pre-admission dividend Interim dividend Final dividend* Combined dividend (post admission)* Pay-out ratio* Cash flow We continue to achieve a high conversion rate of operating profit to cash before payment of dividends. * 2019 suspended 28 Financial position Nucleus continues to be funded entirely by equity capital and has no borrowings, save for in respect of the lease of our Edinburgh headquarters, which is recognised as a lease liability under IFRS 16 Leases. The group has historically not recognised any intangible assets as the relevant expenditure did not meet the IFRS asset recognition criteria. This includes expenditure incurred internally or payable to third parties for the development of the platform. However, with the implementation of IFRS 16 we have recognised a right of use asset in respect of our head office premises lease, and we have also recognised, in accordance with IAS 38, an intangible asset relating to the development and licensing of Nucleus IMX which we plan to launch in H1 2020. All surplus capital not required for working capital purposes is held in cash and is governed by an embedded capital management policy. At the end of the financial year, the group had £18.5m of cash and cash equivalents, representing 94.0 per cent (2018 – 101.1 per cent) of the group’s net assets. The group also has access to a £5.0m uncommitted overdraft facility from RBS International that is undrawn and has not been accessed for the last three years. The group’s liquidity management is governed by an embedded liquidity management policy and framework. This requires the group’s liquidity requirements to be projected over the five-year planning period to ensure the group has sufficient cash (including predetermined buffer levels) to run the business at all times and it is able to withstand a number of defined severe but plausible shocks. As an IFPRU-regulated firm, Nucleus is required to maintain, at all times, financial resources and internal capital, including own funds and liquidity resources, that are adequate both as to amount and quality to ensure there is no significant risk that its liabilities cannot be met as they fall due. Strategic reportGovernanceFinancialsYear ended December 2019 Year ended December 2018 £’000 £’000 253 3,476 18,525 4,212 19,706 19.7% 11,424 - - 17,672 - 17,473 20.6% 10,537 While it is too early to estimate the impact of the Covid-19 pandemic on the group, the reaction to the uncertainty has reduced the value of most asset classes, which in turn has reduced the group’s AUA and could materially impact inflows, with the consequence of both being a negative effect on revenue. Advisers, customers and suppliers will also be affected by the pandemic, although the extent of such disruption is yet to be determined. Notwithstanding this considerable uncertainty, the group has a robust capital structure and solvency position, high conversion rate of profit to cash, no borrowings and available liquidity. We will consider and implement identified mitigating actions should these be required (including in respect of expense management and dividend payments) but will seek to not take actions that might constrain the strategic development of the business unless conditions deteriorate to the extent that this is required. 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 these financial statements. Stuart Geard Chief financial officer Group financial position Intangible assets Right of use lease assets Cash and cash equivalents Lease liabilities Net assets Capital adequacy ratio Excess capital – above 8% regulatory requirement In practice, Nucleus determines its minimum regulatory capital requirement as the highest of the formulaic pillar I fixed overhead requirement, its internal pillar II assessment of the amount of capital required to be held against a number of identified severe but plausible risks and the net cost of performing an orderly and responsible wind-down. In addition to its regulatory minimum capital requirement, Nucleus applies a buffer of 25 per cent in setting its internal minimum capital requirement and then aims to manage its capital within a target capital range above that. At the end of the financial year, the group had a pillar I statutory capital ratio of 19.7 per cent (amounting to £11.4m of capital in excess of the 8 per cent minimum regulatory capital requirement). The group’s capital requirements are reviewed on a quarterly basis and are also subject to periodic stress testing to evidence that its regulatory capital requirements can continue to be met in a range of stressed scenarios (including macro-economic shocks, company-specific shocks and a combination of simultaneous internal and external shocks). The output of the stress testing is subject to a set of mitigating actions, including in respect of staff recruitment and remuneration, platform development expenditure, discretionary expenditure, dividend payments and interim profit verification, applied as appropriate to each scenario. In all scenarios incorporating a significant shock to financial markets, the nature of Nucleus’ revenue (ongoing annuity- type revenue derived from asset classes that are not equally correlated to equity markets) acts as an inherent mitigant. Finally, the group’s capital position is subject to a number of approved ‘reverse stress tests’. These tests (which in 2019 included the collapse of financial markets as a result of a second global financial crisis but with central banks unwilling or unable to provide adequate support and stimulus) have a number of benefits, including identifying key vulnerabilities in the business that could cause it to fail, identifying external drivers that could result in a wind-down and the identification of early risk indicators and management actions. 29 Annual report and financial statements 2019Principal risks and uncertainties Controlling our risks 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 on the following pages, 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 which can be found on the company’s website https://nucleusfinancial.com/investors. 30 Strategic reportGovernanceFinancials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 customers (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 customers 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. “ 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.” 31 Andrew Smith Chief technology officer Culture risk Conduct risk is an intrinsic risk to our business as our behaviour and organisational structures have the ability to impact customer outcomes, market integrity and competition in our chosen markets. Our values are embedded in our business strategy and our internal systems and controls are focused on delivering our business plan while meeting our various culture and conduct expectations. Similarly, as a listed and regulated business, governance risk is intrinsic to our business model. We believe good governance provides assurance to our stakeholders that we are focused on what matters most, our conduct and customer outcomes. Annual report and financial statements 2019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 provide Nucleus with wrap administration services; • Bravura Solutions Limited, who provide Nucleus with platform technology services; • Scottish Friendly Assurance Society Limited and Sanlam Life & Pensions UK Limited, who provide the onshore bond tax wrappers on the platform; • RL360, who provides the offshore bond tax wrapper on the platform, and • Winterflood Securities Ltd (a division of Winterflood Business Services), who provide Nucleus with stockbroking services. “ We believe good governance provides assurance to our stakeholders that we are focused on what matters most, our conduct and customer outcomes.” 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). In addition, pricing pressure across the investment lifecycle is prevalent as competitors invest in new technologies and new blends of products and services to deliver value and compelling propositions for their customers and other stakeholders. 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. 32 Strategic reportGovernanceFinancialsAnnual report and financial statements 2019 Operational and regulatory risks 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, technology, and operational process and controls) with relevant examples of each below. Nicola Megaw Chief legal officer People • Failure to attract, train, motivate and retain core skills and knowledge in the group. • People-related errors in core processes. Operational process and controls • • Failure in core processes and controls (whether preventative or detective), either by the group 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. Operational resilience and 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. 33 Regulatory 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: a. 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). b. Impact of material new regulation and forthcoming regulatory change. New regulation in 2019 SM&CR came into effect for Nucleus on 9 December 2019. The FCA classes Nucleus as a core SM&CR firm. The four senior manager function (SMF) holders - Angus Samuels, David Ferguson, Stuart Geard and Yvonne Clough - are now individually accountable to the FCA and will be held responsible for failings within their documented areas of responsibility. The certification regime under SM&CR covers the remaining significant management function holders and staff (certification staff) who can cause ‘significant harm’ to the firm and/or its customers. The SMFs are responsible for supervising the certification staff and must certify on an annual basis that these individuals remain fit and proper. In November 2019, new customer information requirements came into effect for pensions. This included the introduction of “wake-up” packs, a single page summary - (given at age 50 and included with wake-up packs issued at defined intervals after age 50) and retirement risk warnings. 34 Forthcoming regulatory change Brexit took place on 31 January 2020. Statutory instruments took effect on that date to deliver transitional requirements until the final legislative changes are made. Most existing European financial services regulatory requirements will be grandfathered into UK legislation to allow a smooth transition. The FCA’s investment platforms market study from 2017 introduced changes relating to in-specie transfers between platforms from July 2020. The changes include requiring the facilitation of unit class conversions to enable in-specie transfers. The new prudential regime for investment firms, the Investment Firm Regime (IFR), comes into effect on 26 June 2021. This will replace the capital requirements directive and regulation (CRD IV and CRR) for small and medium-sized investment firms. We do not anticipate that the impact of the changes will be material to our risk profile. Strategic reportGovernanceFinancialsFinancial and liquidity risks Solvency (including access to capital) 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. The group also has 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 6 April 2020 and signed on its behalf by David Ferguson Director Stuart Geard Director The group is required to maintain and have available to it a sufficient level of capital as determined by the requirements applicable to an 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 London Stock Exchange (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. Barry Neilson Chief customer officer 35 Annual report and financial statements 2019Strategic report Governance Financials Governance 36 Annual report and financial statements 2019 Risk management framework Corporate governance statement Board of directors Audit committee report Risk committee report Nomination committee report Remuneration and HR committee report Directors’ report Directors’ responsibilities statement 38 40 42 49 51 53 54 62 66 37 Risk management framework Robust and scalable 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. Our framework is concerned with: • 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. • Demonstrating it is proportionate and effective in the governance and performance of risk management for an authorised and regulated investment 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 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. 38 Strategic reportGovernanceFinancialsAnnual report and financial statements 2019 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. The activities within each of the three lines are: 1 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 and embedding of systems and controls. 2 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 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. The risk committee receives regular reporting from the second line on business performance against risk appetites across the risk universe. 3 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, Cass handbook arrangements, and cyber frameworks. 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. 39 Corporate governance statement Support and encourage I am pleased to present our report on corporate governance. On behalf of the board, I acknowledge the importance of corporate governance and the board’s role in overseeing the business. This has certainly been the case again in 2019 as we have continued to embed our culture, conduct, policies and values throughout the year. 40 Strategic reportGovernanceFinancials“ At Nucleus we believe that our corporate governance arrangements should support and encourage effective risk management, diversity of thought and robust decision making.” During 2019 we tested and enhanced our governance arrangements with the introduction of the SM&CR, which promotes individual accountability across our business. Angus Samuels Chair 6 April 2020 In 2018 we adopted and implemented the Quoted Companies Alliance (QCA) Corporate Governance Code (the “QCA Code”) and we comply with all its principles, welcoming a code which is proportionate to a company of our size and complexity. We publish our annual statement of compliance with the QCA Code on our website (which was last updated in September 2019) and this can be found at https://nucleusfinancial. com/investors. At Nucleus we believe that our corporate governance arrangements should support and encourage effective risk management, diversity of thought and robust decision making. We believe there is huge value in delivering effective leadership and a corporate culture based on ethical values and behaviours. Our governance should 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. 41 Annual report and financial statements 2019Board of directors Angus Samuels (appointed July 2006, chair since March 2017) Margaret Hassall (appointed July 2018) Independent non-executive chair Independent non-executive director 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 Chairman 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 Sanlam UK Limited and Sanlam Life and Pensions UK Limited. 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 was a member of the risk and audit committees. She is also a non-executive director at Ascention Trust (Scotland) and ReAssure UK services limited. Jonathan Polin (appointed July 2016) Alfio Tagliabue (appointed February 2020) Non-independent non-executive director 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. Furthermore, Jonathan holds the position of non- executive director at Blackett Walker and Avidus Scott Lang. Alfio’s experience has spanned across the investment and wealth management sector, where he has held a number of CEO and CFO positions, as well as over 15 years’ experience as a board level consultant and advisor in financial services, investment management and other sectors. Alfio spent five years in his early career with Mars & Co, before moving to Man Group plc, Ashcourt Rowan plc, Sanlam UK and latterly Sanlam Investments Limited, where he has held the position of CEO since 2016. Chair of the remuneration and HR committee Chair of the nomination committee Remuneration and HR committee member Nomination committee member 42 Strategic reportGovernanceFinancialsTracy Dunley-Owen (appointed July 2018) John Levin (appointed April 2017) Independent non-executive director Senior independent director 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 and chair of the Audit Committee for Sun Life Assurance Company of Canada (UK) Limited and non-executive director of Simplyhealth Group Limited, Lifecheq (Pty) Limited and Women’s Investment Portfolio Holdings (Pty) Limited. 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. John is currently the chair of Rocketer Consulting Limited. John has also held the positions of non-executive director at Pedigree Livestock Insurance Limited, Car Care Plan (Holdings) Limited, Motor Insurance Company Limited and chair of Q-Cloud Services 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. Chair of the audit committee Audit committee member Chair of the risk committee Risk committee member 43 Annual report and financial statements 2019 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 sound systems of internal control and risk management. Meeting attendance Independent non-executive directors Board ¹ Audit committee ² Risk committee 3 Nomination committee 4 Remuneration and HR committee 5 Angus Samuels (chair) John Levin Margaret Hassall Tracy Dunley-Owen Non-independent non-executive directors Jeremy Gibson Jonathan Polin Executive directors David Ferguson Stuart Geard 12 11 12 11 12 10 12 12 7 5 n/a 7 7 n/a n/a n/a 4 3 n/a 4 4 n/a n/a n/a 4 3 4 5 3 5 n/a n/a n/a 3 n/a n/a n/a 4 n/a n/a ¹ The board met twelve times and held three board sub-committee meetings in 2019 ² The audit committee met seven times in 2019. ³ The risk committee met four times in 2019. 4 The nomination committee met four times in 2019. 5 The remuneration and HR committee met five times in 2019. 44 Strategic reportGovernanceFinancialsBoard constitution Our schedule of board reserved matters was adopted on our admission to AIM in 2018 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 Alfio Tagliabue 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. 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. Regular training across a range of topics is offered to our board in addition to the learning and development that each director undertakes individually. Annual report and financial statements 2019 John Levin was appointed as the senior independent director (SID) in May 2019. This followed a decision to create the role taking into account the size and scale of the company, its listed status and the implementation of SM&CR. The SID acts as a sounding board and key support to the chairman, and acts as an intermediary for other directors as required. The company secretary and the chief executive officer report directly to the chairman. 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. Board effectiveness 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 annually. During 2019, the board and each board executive management committee reviewed their effectiveness as part of a co-ordinated programme throughout the year. Building on the feedback from each review, the terms of reference for each committee were reviewed along with the business to be conducted at each meeting during the year. The board recognises that well-informed and high- quality decision making is a critical requirement for a board to be effective. During 2019, with the support of the company secretary, the board continued to build on the design and implementation of its procedures for decision making and information sharing. A new template was introduced for all reports to board and management committees which reduced volume and improved quality and consistency. The changes formed part of the overall review of our governance arrangements aligned to the SM&CR for solo-regulated firms which came into effect in December 2019, and which is designed to bring greater individual accountability across the senior team. A capability framework was also created, which acts as a responsibilities map for every discipline in the organisation, and aligns to our authorities framework and board reserved matters. These tools provide greater clarity and boundaries for our people and align to the ongoing work to create clear leadership outcomes, and in particular, to promote greater autonomy and agile working practices. 45 Board oversight of Nucleus’ risk management and control framework The board has overall responsibility for risk management and internal controls and is supported by the risk and audit committees. Details of our principal risks and uncertainties can be found on pages 30 to 35 and a summary of our risk management framework can be found on pages 38 to 39. Further details can be found in our Pillar 3 disclosure 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 group’s shareholders and stakeholders. It is intended that all directors will attend our AGM to be held on 20 May 2020 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 our s172 report which can be found on pages 18 to 21, and is also detailed in our statement of compliance with the QCA Code, which can be found at https://nucleusfinancial.com/ investors. On behalf of the board Angus Samuels Chair 6 April 2020 Director induction, training and re-election Nucleus invites each new director to receive a tailored induction including typical elements such as 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, our customers and key suppliers. The group is committed to supporting individual director development needs and has most recently arranged training on SM&CR, the conduct rules, cyber-crime, Icaap and the prudential regime as well as offering regular Cass training. Furthermore, all directors can take independent advice in support of their duties at the group’s expense and under the board policy for obtaining independent advice. Directors also have access to the advice and services of the company secretary. During the year, the non-executive directors sought independent advice on the implementation of SM&CR. The directors will each retire at the company’s AGM and put themselves forward for re-election for approval by shareholders. Culture and conduct Culture and conduct remained a focus during 2019. The group’s conduct and culture framework was re-stated, and work focused on ensuring that our culture and values remain embedded across the group, including inviting all of our people to go through our re-designed induction. The board intends to continue assessing and monitoring culture and conduct on an ongoing basis, and receives quarterly reporting to support this, built on qualitative and quantitative metrics. In addition, the group wide policy framework was restated, to align to our policies to our risk categories, bringing greater connection for our people between our values, our behaviours, our strategic objectives and our policies. We refined our conduct and customer suite of policies, and provided training and awareness sessions to all our people on conduct, customer outcomes and the relevant regulatory rules that apply. In Q4, we recorded an increase in our overall people engagement to 74 per cent. 46 Strategic reportGovernanceFinancialsOur board committees To assist and monitor The board has established four principal committees: Audit Risk Nomination 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. 47 Annual report and financial statements 2019Audit committee and risk committee reports I am pleased to present the audit committee and risk committee reports for the period ending 31 December 2019. Alfio Tagliabue was appointed on 25 February 2020 replacing Jeremy Gibson and I would like to take this opportunity to thank Jeremy for his work as a member of the committee during 2019. I look forward to welcoming Alfio as a member of both the audit and risk committees. Tracy Dunley-Owen Chair of the audit committee and risk committee 48 Strategic reportGovernanceFinancialsAudit committee report Committee responsibilities Composition and frequency of meetings 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 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, as well as significant financial and regulatory returns, 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. • The engagement of and monitoring of all work carried out by the auditors including any non- audit work. • Reviewing of quarterly reports such as the reports from the chief financial officer, chief technology officer, head of risk, head of compliance, the money laundering reporting officer, chief legal officer and Cass oversight function holder. The audit committee comprises Tracy Dunley- Owen (chair), Angus Samuels, John Levin and Alfio Tagliabue. Details of the number of meetings held within the reporting period and attended by members can be found in the table on page 44, in the corporate governance report. The company secretary acts as secretary to this committee. The board 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. Committee highlights • Reviewing and approving new accounting policies and changes to existing 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 group’s interim results announcement. • Reviewing the annual money laundering reporting officers report. • Reviewing the impact of the company’s final and interim dividend payments in May and October 2019. • Extending the relationship with our internal audit provider, Deloitte LLP (Deloitte) to include provision of cyber assurance. • Overseeing the delivery of the external statutory and Cass regulatory audit(s) by PricewaterhouseCoopers LLP (PwC) and engaging PwC for verification of profits. 49 Annual report and financial statements 2019• Agreeing the external audit plan, agreeing the audit fees and reviewing the effectiveness of the external audit. • Providing challenge and oversight of the group’s response to external and internal control findings and reviewing the independence of the second line of defence. • Reviewing the 2019 annual report and financial statements and receiving report from PwC relating to their audit. • Reviewing and recommending the financial statements of subsidiaries to the relevant board (Nucleus Financial Services Limited, Nucleus IFA Services Limited, Nucleus Trustee Company Limited, NFS (Nominees) Limited and Nucleus IMX Limited). • Reviewing the committee effectiveness and recommending changes to committee’s terms of reference. 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 group 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 of engagement partner during 2018. 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. Internal audit arrangements Deloitte was appointed as the group’s internal audit provider during 2018. Deloitte provides the group with a fully independent assurance programme which is informed by the group’s second line of defence assurance programmes and business requirements with reference to the committee approved internal audit charter. 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 6 April 2020 Seven audit committee meetings held in 2019 Four risk committee meetings held in 2019 50 Strategic reportGovernanceFinancialsRisk committee report Committee responsibilities Committee highlights 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 responsible for: • Conducting a detailed review of the risk universe, and recommending revised risk categories and re-statement of our corporate risks, as well as risk preferences and risk appetites, to the board for approval. • Reviewing and advising the board on the group’s current and future overall risk exposure, appetite and tolerance, and recommending any changes to the board. • Providing assurance to the board regarding the group risk management framework, and recommending any changes to the board. • Maximising the efficiency and effectiveness of • Engaging on the decision to appoint a chief risk officer, and the recruitment process. • Working to streamline reporting to the committee. • Reviewing and recommending board approval of the 2018 Icaap approach and methodology (including a change in the approach for credit risk provision). the group’s three lines of defence. • Reviewing the assessment of regulatory capital • Reviewing and recommending to the board the annual Icaap approach and methodology, and the quarterly reassessment of regulatory capital requirements. requirement quarterly. • Reviewing the Icaap approach and methodology in respect of the 2019 Icaap, this being also relevant for 2020. • Monitoring the effectiveness of the business risk • Providing assurance on the group’s risk management processes in the group. • Reviewing and approving corporate policies in accordance with the group policy framework. Composition and frequency of meetings The risk committee comprises Tracy Dunley-Owen (chair), Angus Samuels, John Levin and Alfio Tagliabue. Details of the number of meetings held within the reporting period and attended by members can be found in the table on page 44, in the corporate governance report. The company secretary acts as secretary to this committee. The board is satisfied that the committee is independent. management framework and development of key risk indicators. • Reviewing the group’s existing and forecasted risk profile. • Reviewing the corporate risk matrix including consideration of the principal risks and reviewing the risk watchlist. • Reviewing and recommending risk preferences to the board. • Reviewing and approving a redesigned framework for group policies, approving of a number of policies and recommending policy changes to the board, including in the conduct policy. • Conducting a deep dive on cyber risk. • Reviewing the committee’s effectiveness and recommending changes to committee’s terms of reference. On behalf of the risk committee Tracy Dunley-Owen Chair of the risk committee 6 April 2020 51 Annual report and financial statements 2019Nomination committee 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 2019. Margaret Hassall Chair of the nomination committee and remuneration and HR committee 52 Strategic reportGovernanceFinancialsNomination committee report Committee responsibilities Composition and frequency of meetings 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 responsible for: • Reviewing the structure, size and composition of the board and considering succession planning for directors and other senior executives, making recommendations to the board as appropriate. • Identifying and nominating new director appointments in line with board procedures, making recommendations on re-election of directors where they are retiring by rotation and re-appointment of non-executive directors where they have completed their term of office. • Recommending suitable candidates for the role of senior independent director (as and when required). • Evaluating director and management training needs. • Evaluating the target operating model and organisational design and making recommendations concerning any changes to the responsibilities or other associated changes to the organisational structure. • Reviewing performance appraisals and fitness and proprietary assessments for non-executive directors and senior managers annually. • Supporting the company’s role as a champion of diversity and inclusion and monitoring progress against the company’s diversity targets as well as recommending any changes to the diversity and inclusion policy to the board. 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 44, in the corporate governance report. The company secretary acts as secretary to this committee. The board is satisfied that the committee is independent. Committee highlights • Encouraging management in nurturing an inclusive, diverse and inspiring workplace. The group’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, management responsibilities map and organisation structure in preparation for the adoption of SM&CR in December 2019. • Reviewing board and executive succession planning. • Recommending the appointment of John Levin as senior independent director to the board. • Engaging on the creation of the role of chief risk officer, and the recruitment process to fill that role. • Recommending the appointment of a new director to the trustee board of a group subsidiary. • Reviewing the committee effectiveness, agreeing actions for improvements and recommending changes to committee’s terms of reference to the board. On behalf of the nomination committee Margaret Hassall Chair of the nomination committee 6 April 2020 53 Annual report and financial statements 2019Remuneration and HR committee report Committee responsibilities Committee highlights 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: • Approving grant of performance share plan awards and conditions. • Approving annual salary increases for executive directors, executive committee members and other employees. • Approving performance targets for the • Setting the overall remuneration policy for the executive directors and other senior employees. 2019 long-term incentive plan awards and associated performance conditions. • 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). • Approving performance targets for the executive directors’ and other senior leaders’ 2019 bonus scheme. • Approving executive directors’ and other senior • Reviewing the delivery of our people strategy. leaders’ 2019 bonus awards. Composition and frequency of meetings 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 44, in the corporate governance report. The company secretary acts as secretary to this committee. The board is satisfied that the committee is independent. No individual was involved in any committee 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 non-executive remuneration benchmarking. • Reviewing and recommending approval of the directors’ remuneration policy (effective from 14 November 2018) to the board. • Reviewing and approving, or recommending to the board (as required), changes to policies to implement the SM&CR. • Reviewing the group’s people strategy. • Considering and recommending to the board the nomination of the chair as an employee stakeholder representative point of contact. • Reviewing the committee effectiveness, agreeing actions for improvements, and recommending changes to committee’s terms of reference to the board. Shareholder engagement The group is committed to engaging with its shareholders and wider stakeholders and the purpose of the information presented is to provide an indication of how remuneration is approached at Nucleus and of director remuneration from 1 January 2019 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 2020. 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. 54 Strategic reportGovernanceFinancials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 2018 and was formally adopted by the committee on 14 November 2018. It was last reviewed and approved by the committee on 21 November 2019. While the policy below refers explicitly to executive directors only, it is also applicable to all other executive committee members and senior leaders. “ In 2019 the group performance measures were: profit, net inflows, project delivery, systems and controls and service.” 55 Annual report and financial statements 2019Executive director remuneration policy The various elements and strategic objectives associated with executive remuneration are: Base salary Annual bonus Element (purpose and link to strategy) Element (purpose and link to strategy) 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, • Group 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 Group and individual performance are considerations in setting base salaries. On-target bonuses are a maximum of 75 per cent of base salary. The maximum bonus opportunity is 200 per cent 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 group priorities. Measures include a blend of equally-weighted personal and group objectives. In 2019 the group performance measures were: profit, net inflows, project delivery, systems and controls and service. In 2019 the personal element was measured by assessing delivery against the business plan, conduct, leadership and progress towards diversity and inclusion objectives. 56 Strategic reportGovernanceFinancialsExecutive director remuneration policy Long term incentive plan (LTIP) Share incentive plan Element (purpose and link to strategy) Element (purpose and link to strategy) To drive sustained long-term performance that supports the creation of shareholder value. To align shareholder interests with those of our people and allow them to benefit from the long- term success of the group. Operation Annual awards of performance shares may be made to participants. The LTIP rules provide for annual awards of up to 150 per cent 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. Awards made under the LTIP will have a performance period of three years and a minimum vesting period of three years. 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 misstatement. Performance metrics Vesting of LTIP awards is subject to group performance and continued employment. The current LTIP performance measures and weightings are: 33 per cent EPS 33 per cent Net inflows 33 per cent 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. 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 Her Majesty’s Revenue and Customs (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. Performance metrics Not performance related. Four nomination committee meetings held in 2019 Five remuneration and HR committee meetings held in 2019 57 Annual report and financial statements 2019Executive director remuneration policy Pension Benefits Element (purpose and link to strategy) Element (purpose and link to strategy) 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 per cent of base salary contribution paid into the company’s group pension scheme or, as an alternative, a maximum of 8.5 per cent 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 four x base salary. Performance metrics Not performance related. 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 group’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. 58 Strategic reportGovernanceFinancialsConsideration of risk factors and risk appetite Balance between fixed and variable pay 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 group 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. 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. 59 Annual report and financial statements 2019Directors’ remuneration in 2019 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 2019 and the prior year: Basic salary / fees Taxable benefits Pension Annual bonus Growth shares £’000 £’000 £’000 £’000 £’000 LTIP/SIP £’000 Total £’000 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 Executive directors David Ferguson 1,2,6 297 281 Stuart Geard 1,2,6 249 245 Non-executive directors 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 39 35 39 35 35 83 - - 16 37 16 35 35 83 23 23 2 1 - - - - - - - - 1 1 - - - - - - - - 9 10 15 14 138 200 108 143 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,131 1,580 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 446 2,628 368 1,983 39 35 39 35 35 83 - - 16 37 16 35 35 83 23 23 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 ² Pension restricted for annual taper allowance ³ Non-executive director fee received in 2018 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 or board 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 27 share- based payments below. 60 Strategic reportGovernanceFinancialsSummary of share incentive plan awards The table below summarises individual executive director share scheme awards as at 31 December 2019. Scheme Grant date David Ferguson Stuart Geard LTIP 2018 LTIP 2019 SIP 26 July 2018 3 April 2019 243,441 199,786 1,204 164,180 134,738 - Total shares awarded 444,431 298,918 The performance conditions, valuation assumptions and other relevant award information are set out in note 27 share-based payments. Directors’ interest in shares The number of shares held by the directors as at 31 December 2019 is as follows: Director David Ferguson Stuart Geard Angus Samuels Shares beneficially owned ¹ Unvested LTIP options Non-entitled SIP shares 1,810,713 954,625 53,409 443,227 298,918 - 1,204 - - Total 2,255,144 1,253,543 53,409 Margaret Hassall Chair of the remuneration and HR committee 6 April 2020 ¹ Includes shares held by connected parties 61 Annual report and financial statements 2019Directors’ report A wrap platform The directors present their report and the audited consolidated financial statements for the year ended 31 December 2019. Nucleus Financial Group plc 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). 62 Strategic reportGovernanceFinancials“ The Nucleus wrap allows customers 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.” Introduction The company’s principal activity is that of a holding company. It also contracts services on behalf of the group, is the main employer of Nucleus staff and provides and charges management services to its subsidiaries. The group’s principal activity is that of a wrap platform service provider. The Nucleus wrap allows customers 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 FCA as an IFPRU limited licence investment firm. In addition, NFS has additional FCA and HMRC obligations relating 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 Cass rules. Having met, but subsequently ceased to meet the definition of a significant IFPRU firm within the reporting period, NFS and the group were required to comply with the rules and requirements applicable to a significant IFPRU firm for a period of twelve months from the date on which NFS ceased to be a significant IFPRU firm (February 2019). NIFAS is not regulated by the FCA and has ceased trading. The audited financial statements of the group, company and NFS, along with the group’s Pillar 3 disclosure, can be found on the company’s website https://nucleusfinancial.com/investors and they are also available on request from the company secretary. 63 Annual report and financial statements 2019Business review and strategic report 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 8 to 29. Within these parts of the strategic report we set out information relating to: • How we fulfil our duties under s172 of the Companies Act 2006, and in taking decisions, ensure that we promote the success of the company as a whole. • 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. • Information relating to likely future developments of the business. Details of risk management objectives and policies relating to financial instruments are set out in note 1 financial instruments and in the risk management framework above. Results and dividends The group’s profit for the year was £6.0m (2018: £4.8m). Revenue increased 4.3 per cent to £51.5m, (2018: 8.7 per cent to £49.4m), with operating profit up 25.8 per cent to £7.1m (2018: up 10.4 per cent to £5.6m). The full results are set out in the accompanying financial statements and notes. In light of the exceptional and open- ended uncertainty caused by the Covid-19 pandemic and the still rapidly changing environment, the board has decided, in the interests of prudence, not to recommend a dividend until there is more certainty around the term and impact on markets, investor confidence and revenue. 64 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. Directors The directors who served during the year and up to the date of signing the financial statements were: • T Dunley-Owen • D R Ferguson • S J Geard • J P Gibson (resigned 25 February 2020) • M Hassall • • • J Levin J C Polin J A Samuels (Chair) • A Tagliabue (appointed 25 February 2020) Company registration The company is a public company limited by shares and is registered with the registrar of companies for England and Wales with company number 05522098. Political donations No political donations were made by the group or the company during the year under review. Share capital structure There were no changes to the share capital structure during the year. Authority to purchase own shares The company’s articles of association grant the authority to make market purchases of its own shares. The directors confirm that, with the exception of matching shares relating to employee share schemes, the company has not purchased any of its own shares during the year. Strategic reportGovernanceFinancialsPost balance sheet events The Covid-19 pandemic, which first impacted the group, its users, its customers and the broader economy in the first quarter of 2020, is considered to be a non-adjusting post balance sheet event. From March 2020, NFS and the group were no longer required to meet the rules and requirements of a significant IFPRU firm as NFS last met the IFPRU definition of a significant firm in February 2019. There were no other subsequent events that required adjustment to or disclosure in the financial statements for the period from 31 December 2019 to the date upon which the financial statements 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, stressed for significant events that would have a material impact on the group and company’s profitability, liquidity, solvency and regulatory capital position. • Actual performance to date. • The current operating and trading environment, which has been severely impacted by Covid-19. • The current financial position, adequacy of liquidity and capital to meet operational and regulatory requirements (further details of which are set out on page 29 of the strategic report). • Known risks and uncertainties (including in respect of Covid-19) with consideration of the impact of these on the group and company’s solvency and liquidity position. • Known and expected changes in the regulatory environment impacting platform operators. 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 (FRC) 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 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 this report. The group and the company therefore continues to adopt the going concern basis in preparing its financial statements. 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 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 their reappointment will be proposed at the Annual General Meeting. This report was approved by the board on 6 April 2020 and signed on its behalf. David Ferguson Director 65 Annual report and financial statements 2019Directors’ responsibilities statement True and fair view 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. 66 Strategic reportGovernanceFinancials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. 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 and group’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 company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements and other information included in the directors' report may differ from legislation in other jurisdictions. David Ferguson Director 67 Annual report and financial statements 2019 Strategic report Governance Financials Financials 68 Annual report and financial statements 2019 Independent auditors' report 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 Company statement of financial position Company statement of changes in equity Company statement of cash flows Notes to the company financial statements 70 76 78 80 81 82 114 115 116 117 69 Independent auditors’ report to the members of Nucleus Financial Group Plc Report on the audit of the financial statements Opinion Basis for opinion 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 2019 and of the group’s profit and the group’s and the company’s cash flows for the year then ended 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. • Have been properly prepared in accordance with International 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. 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 statement of comprehensive income, the Consolidated and Company statements of financial position as at 31 December 2019; the Consolidated and Company statements of changes in equity, and the Consolidated and Company statements of cash flows for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies. 70 Strategic reportGovernanceFinancialsReport on the audit of the financial statements Our audit approach Overview Materiality Overall group materiality: £350,100 (2018: £282,650), based on 5% of profit before tax. Overall company materiality: £200,003 (2018: £212,499), based on 1% of total expenses. Audit scope Key audit matters The consolidated 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 consolidated financial statements. Revenue recognition (group). Impact of Covid-19. 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. 71 Annual report and financial statements 2019Report on the audit of the financial statements 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. The sole revenue stream of the group is fees charged to customers for the provision of platform services. This revenue stream is calculated based on fixed rates, applicable to each respective product, and the value of assets held on the platform each day. Revenue may be misstated due to errors in system calculations or manual processes, for example, arising from incorrect securities prices or values of assets under administration 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. Unauthorised changes to, or errors in, these inputs and calculations could lead to a misstatement of revenue. How our audit addressed the key audit matter We obtained an understanding of the revenue recognition policy applied by management and ensured it complied with the stated accounting policy. For the aggregate revenue balance, we performed substantive testing procedures taking the core assets under management information and the fee rates applied to customers and calculated an expectation of the revenue balance, by customer, on a daily basis. 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 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. In order to rely on the fee rates applied to client assets we; • Tested the fee rates applied to the value of customers’ assets to the underlying offer documents of Nucleus products and • Validated the accuracy of the products assigned to client assets via obtaining original application documents We compared our independent calculation to the amount reported and noted immaterial differences 72 Strategic reportGovernanceFinancialsReport on the audit of the financial statements Key audit matter Impact of Covid-19 Refer to page 8 Chairman’s statement, page 12 Chief executive’s report and page 22 Chief financial officer’s report. The group operates a wrap platform that administers financial products such as pensions, ISAs and investments on behalf of customers. The group primarily generates Revenue from contractual basis point rate cards applied to the daily valuation of assets under administration. Given the significant uncertainties and potential impacts on the group resulting from the COVID-19 outbreak, management have modelled scenarios of market stress as part of their going concern assessment. These scenarios consider the impacts on the value of assets under administration from a prolonged downturn in financial markets. Given that Revenue is primarily based on asset values this downturn could have an impact on the group’s profitability, liquidity and regulatory capital. As part of their consideration, management have identified a number of possible mitigating actions which could be taken for example, the suspension of dividend payments, their ability to utilise overdraft facilities and reduction of areas of discretionary spend. Following the consideration of these scenarios, the directors continue to believe that it is appropriate to adopt the going concern basis in preparing the financial statements and have made a number of disclosures explaining the factors they have considered. How our audit addressed the key audit matter We have obtained a copy of management’s going concern assessment and discussed the basis of preparation with management and the Audit Committee. We have agreed the cash flow model to the group’s strategic plan. We have obtained, understood and challenged management’s scenarios which have been extended to reflect the potential impact on financial markets of COVID-19 and considered management’s key assumptions for reasonableness. We have considered the reasonableness and achievability of the mitigating actions that management have identified. We have considered the adequacy of management’s disclosures in the financial statements and read relevant “other information” and checked consistency with the financial statements and our knowledge based on our audit. We believe that the disclosures made within the financial statements are appropriate. We determined that there were no key audit matters applicable to the company to communicate in our report. 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 per cent 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 based in Edinburgh. The 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. 73 Annual report and financial statements 2019Report on the audit of the financial statements 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: Group financial statements Company financial statements Overall materiality £350,100 (2018: £282,650). £200,003 (2018: £212,499). How we determined it 5% of profit before tax. 1% of total expenses. 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. Rationale for benchmark applied The consolidated Nucleus Financial Group plc group is a profit oriented group and therefore we are satisfied that the use of profit before tax is an appropriate 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. 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 £14,565 and £200,003. Certain components were audited to a statutory audit materiality that was also less than our overall group materiality. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £17,505 (Group audit) (2018: £14,133) and £10,000 (Company audit) (2018: £10,625) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons Reporting 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. 74 Strategic reportGovernanceFinancials Report on the audit of the financial statements Strategic Report and Directors’ Report Use of this 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 2019 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 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: Responsibilities of the directors for the financial statements • We have not received all the information and explanations we As explained more fully in the Directors’ Responsibilities Statement set out on page 66, 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. 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. Other voluntary reporting Directors’ remuneration The company voluntarily prepares a Directors’ Remuneration Report in accordance with the provisions of the Companies Act 2006. The directors requested that we audit the part of the Directors’ Remuneration Report specified by the Companies Act 2006 to be audited as if the company were a quoted company. In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006 Lindsay Gardiner (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Edinburgh 6 April 2020 75 Annual report and financial statements 2019Consolidated statement of comprehensive income Continuing operations Revenue Cost of sales* Gross profit Other operating income Administrative expenses* Operating profit Analysed as: Adjusted EBITDA Right of use lease liability interest in adjusted EBITDA Right of use depreciation included in adjusted EBITDA Depreciation Loss on disposal of fixed asset Other income Share based payments AIM admission costs Finance income Finance costs Note 3 4 8 8 2019 £’000 51,517 (22,817) 28,700 122 (21,718) 7,104 7,923 180 438 (1,102) (3) 17 (349) - 80 (182) Restated* 2018 £’000 49,405 (20,587) 28,818 22 (23,191) 5,649 8,304 - - (585) - 22 (404) (1,688) 11 (7) 76 Strategic reportGovernanceFinancialsConsolidated statement of comprehensive income Profit before income tax Income tax Profit for the financial year Items that may be subsequently reclassified to profit and loss Total comprehensive income attributable to equity holders Earnings per share (pence) Basic Diluted Note 5 10 12 12 2019 £’000 7,002 (1,049) 5,953 - 5,953 7.8 7.8 Restated* 2018 £’000 5,653 (897) 4,756 - 4,756 6.3 6.3 *Details of the 2018 cost of sales and administrative expenses restatement are set out in note 2. The notes on pages 82 to 113 form part of these financial statements. 77 Annual report and financial statements 201931 December 2019 £’000 31 December 2018 £’000 Note 13 14 15 26 16 17 18 23 24 24 24 24 253 3,476 1,698 107 5,534 10,530 107 - 18,525 29,162 34,696 76 53 465 (121) 19,233 19,706 - - 2,029 163 2,192 10,611 84 541 17,672 28,908 31,100 76 53 150 (30) 17,224 17,473 Consolidated statement of financial position Assets Non-current assets Intangible assets Right of use lease assets Property, plant and equipment Deferred tax Current assets Trade and other receivables Investments in securities Tax receivable Cash and cash equivalents Total assets Equity Shareholders’ equity Called up share capital Capital redemption reserve Share-based payment reserve Treasury shares Retained earnings Total equity 78 Strategic reportGovernanceFinancialsConsolidated statement of financial position 31 December 2019 £’000 31 December 2018 £’000 Note Liabilities Non-current liabilities Lease liabilities Financial liabilities Provisions Deferred tax Current liabilities Lease liabilities Financial liabilities Trade and other payables Tax payable Provisions Total liabilities Total equity and liabilities 20 21 28 26 20 21 19 28 3,737 - 99 22 3,858 475 - 9,606 357 694 11,132 14,990 34,696 The financial statements were approved and authorised for issue by the board and were signed on its behalf on 6 April 2020. Stuart Geard Director The notes on pages 82 to 113 form part of these financial statements. - 6 32 41 79 - 87 12,134 740 587 13,548 13,627 31,100 79 Annual report and financial statements 2019Consolidated statement of changes in equity Called up share capital £’000 Note Retained earnings £’000 Treasury shares £’000 Capital redemption reserve £’000 76 - 17,224 (71) - - - - 5,953 (3,873) - - (30) - - - (91) - 11 27 53 - - - - - Balance at 1 January 2019 IFRS 16 conversion Changes in equity Profit for the year Dividends paid Purchase of own shares Share-based payments charge (excl. NIC) Balance at 31 December 2019 76 19,233 (121) 53 Called up share capital £’000 Note 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 shares and deferred shares Profit for the year Dividends paid Purchase of own shares Gain on disposal of own shares Transfer on share conversion 11 Share-based payments charge 27 21 - 50 (50) 57 (2) - - - - - - Retained earnings £’000 13,475 39 (50) - (57) - 4,756 (3,933) - 94 2,900 - Treasury shares £’000 Capital redemption reserve £’000 - - - - - - - - (30) - - - 1 - - 50 - 2 - - - - - - Share- based payment reserve £’000 150 - - - - 315 465 Share- based payment reserve £’000 2,646 - - - - - - - - - (2,900) 404 Balance at 31 December 2018 76 17,224 (30) 53 150 The notes on pages 82 to 113 form part of these financial statements. Fair value reserve £’000 - - - - - - - Fair value reserve £’000 39 (39) - - - - - - - - - - - Total equity £’000 17,473 (71) 5,953 (3,873) (91) 315 19,706 Total equity £’000 16,182 - - - - - 4,756 (3,933) (30) 94 - 404 17,473 80 Strategic reportGovernanceFinancialsConsolidated statement of cash flows Cash flows from operating activities Cash inflows from operations Interest received Income tax paid Net cash inflow from operating activities Cash flows from investing activities Purchase of intangible fixed assets Purchase of tangible fixed assets Purchase/(sale) of investments Net cash outflow from investing activities Cash flows from financial activities Interest paid Dividends paid Purchase of Treasury shares Repayment of finance leases Lease payments - principal Exercise of options Net cash outflows from financing activities Increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effects of exchange rate changes Cash and cash equivalents at end of year The notes on pages 82 to 113 form part of these financial statements. Note 29 8 13 15 17 8 11 22 20 5 18 2019 £’000 6,790 80 (855) 6,015 (253) (348) (16) (617) (182) (3,873) (91) - (393) - (4,539) 859 2018 £’000 7,298 8 (1,822) 5,484 - (833) 10 (823) (2) (3,933) (30) (107) - 98 (3,974) 687 17,672 16,992 (6) (7) 18,525 17,672 81 Annual report and financial statements 2019Notes to the consolidated financial statements 1. Accounting policies Segmental reporting 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. Unless otherwise stated, the accounting policies set out below have been applied consistently in both years presented in these financial statements. 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, together with the results of modelled severe but plausible stress tests on both the liquidity and regulatory capital adequacy, and the current operating and trading environment, 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. Further information relevant to the directors’ assessment of going concern is set out in the directors’ report on page 65. 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. The operating profit to adjusted EBITDA reconciliation is presented within the Consolidated statement of comprehensive income. Non-Gaap measures are also defined in the definitions and glossary section of the financial statements. 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. Platform fees are calculated monthly using contractual basis point rate cards applied to the daily valuation of assets under administration on the platform. Performance obligations are satisfied as the wrap platform service is provided to customers over time. Accrued income represents fees that are collected in the following month. Interest income Interest received is recognised in the statement of comprehensive income as it is earned. Finance costs Interest expense is recognised in the statement of comprehensive income in the year to which it relates. 82 Strategic reportGovernanceFinancialsNotes to the consolidated financial statements Expense recognition Internally generated intangible assets 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. Foreign currency 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 statement of comprehensive income. Expenditure on internally generated brands, goodwill and the maintenance of intangible assets is expensed. Where development expenditure is incurred that satisfies the general asset recognition criteria and where there is the intention, feasibility and capability to complete the development, then this expenditure is capitalised. The cost of internally generated intangible assets includes directly attributable third party and internal staff costs. Impairment reviews are carried out where there are indicators of impairment. Amortisation of intangible assets Intangible assets with a limited useful life, once brought into use, are amortised using the straight-line method over the following period: Licenses 5 years Dividends Property, plant and equipment Dividends are recorded in the financial statements in the year in which they are approved by the shareholders. Interim dividends are recognised when paid. Goodwill Goodwill arises on consolidation and represents the excess of the purchase consideration for a business over the fair value of any identifiable assets and liabilities acquired. Goodwill is not amortised but is tested annually for impairment or more frequently where impairment indicators exist. Impairment losses are recorded in the consolidated statement of comprehensive income, and any recorded losses are not subsequently reversed Externally acquired intangible assets Intangible assets that are acquired from third parties are recognised on the balance sheet at cost and amortised over the expected useful life. The costs of externally acquired intangibles includes the purchase consideration and directly attributable costs of preparing the asset for its intended use. Impairment reviews are carried out where there are indicators of impairment. No impairment indicators were identified during the year. 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 statement of comprehensive income. Leases From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability. Assets and liabilities arising from a lease are initially measured on a present value basis. Right-of-use assets are depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. Short term and low value leases are expensed. Details of the assets can be found in note 14, and liabilities in note 20. 83 Annual report and financial statements 2019 Notes to the consolidated financial statements The fair value of services received by the group in exchange for the grant of equity instruments is recognised as an expense over their vesting period. The total amount to be expensed or recognised as an increase in the cost of investments 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 consolidated statement of comprehensive income or increase to the company’s investments 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 consolidated statement of comprehensive income or company statement of financial position, with a corresponding adjustment to equity. National insurance contribution (NIC) obligations arising from HMRC unapproved equity-settled schemes are treated as if they are cash-settled, regardless of the equity determination of the scheme itself. The company LTIP scheme is a HMRC unapproved equity-settled scheme. The NIC cost is recognised over the vesting period of the options and is measured with reference to the employers’ NIC rate applied to the number of options expected to vest, valued at the share price at the reporting date. Until the NIC obligation is settled it is remeasured at the end of each reporting period and at the date of settlement, with any changes in value being recognised in the statement of comprehensive income. 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 included within the consolidated financial statements of the group. Finance leases For the year ended 31 December 2018 where assets were financed by leasing agreements that give rights approximating to ownership, the assets were treated as if they had been purchased outright. The amount capitalised was 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 was depreciated over its useful life of three years on a straight-line basis. Depreciation on the relevant assets was charged to the statement of comprehensive income. Interest on the finance lease was recognised in the statement of comprehensive income using the effective interest method. Operating lease commitments For the year ended 31 December 2018 rentals under operating leases were charged to the statement of comprehensive income on a straight-line basis over the lease term. Incentives received to enter into an operating lease were credited to the statement of comprehensive income, to reduce the lease expense, on a straight-line basis over the period of the lease. 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. 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. 84 Strategic reportGovernanceFinancialsNotes to the consolidated financial statements 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 statement of comprehensive income 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. 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. 85 Annual report and financial statements 2019Notes to the consolidated financial statements 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’). 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 Standard Conceptual Framework - amendments to references to the conceptual framework in IFRS standards Effective from 1 January 2020 Amendments to IFRS 3: Business combinations – definition of a business 1 January 2020 Definition of materiality - amendments to IAS 1 and IAS 8 1 January 2020 The group measures financial instruments relating to platform holdings at fair value using Level 1. Interest rate benchmark reform - amendments to IFRS 9, IAS 39 and IFRS 7 1 January 2020 New standards effective for the first time in the 2019 financial statements Standard IFRS 16: Leases Effective from 1 January 2019 IFRIC 23 - Uncertainty over income tax 1 January 2019 Amendments to IFRS 9: Financial instruments - prepayment features with negative compensation 1 January 2019 IFRS 17: Insurance contracts 1 January 2023 The adoption of these standards is not expected to have a material impact on the group. 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: Amendments to IAS 28: Investments in associates - long-term interests in associates and joint ventures 1 January 2019 Income taxes Annual improvements 2015-2017 cycle 1 January 2019 Amendments to IAS 19: Employee benefits - plan amendments, curtailments or settlements 1 January 2019 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. IFRS 16 Leases Share-based payments The group adopted IFRS 16 Leases effective 1 January 2019. Details of the impact are set out in note 36 Changes in accounting policies. Other new and amended standards did not have any impact on the group’s accounting policies. Details of the assets can be found in note 14, and liabilities in note 20. Future standards, amendments to standards and interpretations not early-adopted in the 2019 financial statements New accounting standards and interpretations have been published that are not mandatory for adoption in the 2019 financial statements. 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 statement of comprehensive income, with a corresponding adjustment to equity. 86 Strategic reportGovernanceFinancialsNotes to the consolidated financial statements 2. Critical accounting judgements, key sources of estimation uncertainty, and restatements (continued) Provisions The group has recognised provisions in respect of client compensation, outsourced service, dilapidations and share incentive plans. Further detail on these provisions, the rationale behind their recognition and the timing of future cash flow is included in note 28. Restatement of costs of sales presentation in 2018 Platform related mailings, bank charges and errors and losses, which were previously disclosed in administrative expenses, have been reclassified to cost of sales to achieve better presentation. There is no impact on the reported profit or net assets of the group as a result of these restatements. Continuing operations Revenue Cost of sales Gross profit Other operating income Administrative expenses Operating profit Profit for the financial year 3. Revenue 2018 £’000 Adjustment £’000 49,405 (19,809) 29,596 22 (23,969) 5,649 4,756 - (778) (778) - 778 - - Restated 2018 £’000 49,405 (20,587) 28,818 22 (23,191) 5,649 4,756 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 (2018: all United Kingdom). 4. Other operating income Other operating income 2019 £’000 122 2018 £’000 22 Other operating income includes a £100k R&D tax credit in respect of 2018 that has been recognised in 2019 under the RDEC scheme. 87 Annual report and financial statements 2019 Notes to the consolidated financial statements 5. Profit before income tax The profit before income tax is stated after charging: Depreciation of tangible fixed assets Depreciation of right of use assets Interest on right of use assets Loss on disposal of fixed assets Unrealised (gain)/loss on investments Foreign exchange differences Movement in expected loss provision Operating lease rentals - (replaced re IFRS 16) Share based payment charge 6. Employees Wages and salaries Social security costs Other pension costs Share-based payment charge The average monthly number of employees during the year was as follows: Employees 7. Directors’ remuneration 2019 £’000 664 438 180 3 (7) 6 59 - 349 2019 £’000 12,191 1,402 997 349 2018 £’000 585 - - - 5 7 8 446 404 2018 £’000 11,812 1,424 906 404 14,939 14,546 2019 223 2018 203 Details of directors’ remuneration are set out in the remuneration and HR committee report on pages 54 to 61. 88 Strategic reportGovernanceFinancials Notes to the consolidated financial statements 8. Net finance (cost)/income Finance income: Bank interest receivable Other interest income Finance costs Lease interest Interest on finance leases Other interest paid Net finance (cost)/income 2019 £’000 70 10 80 2019 £’000 (180) - (2) (182) (102) 2018 £’000 10 1 11 2018 £’000 - (2) (5) (7) 4 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 asset audit services All other services 2019 £’000 182 175 30 387 2018 £’000 235 151 395 781 Other services in 2018 related to fees earned by PwC in their capacity as reporting accountants to the company’s admission to AIM and other corporate finance transactions. 89 Annual report and financial statements 2019 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 Effect of tax rate on opening balances Total expense in statement of comprehensive income Factors affecting the tax expense 2019 £’000 1,271 (260) 24 14 1,049 2018 £’000 1,435 (527) (11) - 897 The tax assessed for the year is lower (2018: lower) than the standard rate of corporation tax in the UK of 19.00 per cent (2018: 19.00 per cent). The differences are reconciled below: Profit before taxation 2019 £’000 7,002 2018 £’000 5,653 Profit before taxation multiplied by the standard rate of corporation tax in the UK of 19.00 per cent (2018: 19.00 per cent) 1,330 1,074 Effects of: Expenses not deductible for tax purposes Fixed asset differences Adjustments to tax charge in respect of prior period R&D claims Deferred tax not recognised Other differences 84 18 (258) (218) 93 1,049 412 5 (527) (70) 3 897 90 Strategic reportGovernanceFinancials Notes to the consolidated financial statements 11. Dividends £0.01 ordinary share dividends* (2018: 142p per share) £0.001 ordinary share dividends* 5.1p (2018: 1.4p per share) B ordinary share dividend (2018: 142p per share) G3 share dividends (2018: 243p per realised share) G3 share dividends (2018: 142p per realised share) G4 share dividends (2018: 243p per realised share) G4 share dividends (2018: 142p per realised share) *The Esot waived its right to receive dividends during the year. 12. Earnings per share 2019 £’000 - 3,873 - - - - - 2018 £’000 1,577 1,063 1,081 84 49 50 29 3,873 3,933 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 earnings per ordinary share (pence) Diluted earnings per ordinary share (pence) 2019 £’000 5,953 2018 £’000 4,756 2019 2018 75,862,105 75,932,243 71,255 345,932 1,821 16,209 76,279,292 75,949,568 2019 7.8 7.8 2018 6.3 6.3 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 23. 91 Annual report and financial statements 2019 Notes to the consolidated financial statements 13. Intangible assets Cost At 1 January 2019 Additions Write-offs At 31 December 2019 Amortisation At 1 January 2019 Charge for the year Impairments At 31 December 2019 Net book value At 31 December 2019 At 31 December 2018 Licences £’000 - 253 - 253 - - - - 253 - The costs capitalised during 2019 represents development expenditure in relation to ancillary platform services. The remaining contractual commitment in respect of the development expenditure amounts to £72,222 and is payable within 1 year. 92 Strategic reportGovernanceFinancialsNotes to the consolidated financial statements 14. Right of use lease assets Cost At 1 January 2019 Transition to IFRS 16 Additions Disposals At 31 December 2019 Depreciation At 1 January 2019 Transition to IFRS 16 Charge for the year Eliminated on disposals At 31 December 2019 Net book value At 31 December 2019 At 31 December 2018 Right of use asset Greenside Edinburgh £’000 Finance lease Office equipment £’000 - 3,901 - - 3,901 - - 438 - 438 3,463 - - 360 1 - 361 - 248 100 - 348 13 - Total £’000 - 4,261 1 - 4,262 - 248 538 - 786 3,476 - 93 Annual report and financial statements 2019 Notes to the consolidated financial statements 15. Property, plant and equipment Short-term leasehold property £’000 Fixtures and fittings £’000 Office equipment £’000 1,137 - 10 - 1,147 99 - 114 - 213 934 1,038 527 - 28 (4) 551 127 - 131 (1) 257 294 400 1,508 (360) 310 - 1,458 917 (248) 319 - 988 470 591 Short-term leasehold property £’000 Fixtures and fittings £’000 Office equipment £’000 837 300 - 1,137 7 92 - 99 1,038 830 357 170 - 527 34 93 - 127 400 323 1,303 364 (159) 1,508 676 400 (159) 917 591 627 Total £’000 3,172 (360) 348 (4) 3,156 1,143 (248) 564 (1) 1,458 1,698 2,029 Total £’000 2,497 834 (159) 3,172 717 585 (159) 1,143 2,029 1,780 Cost At 1 January 2019 Transition to IFRS 16 Additions Disposals At 31 December 2019 Depreciation At 1 January 2019 Transition to IFRS 16 Charge for the year Eliminated on disposals At 31 December 2019 Net book value At 31 December 2019 At 31 December 2018 Cost At 1 January 2018 Additions Disposals At 31 December 2018 Depreciation At 1 January 2018 Charge for the year Eliminated on disposals At 31 December 2018 Net book value At 31 December 2018 At 31 December 2017 94 Strategic reportGovernanceFinancials Notes to the consolidated financial statements 16. Trade and other receivables Current: Other debtors Amounts owed by HMRC Trade debtors Accrued income Prepayments 2019 £’000 1,201 1,929 444 5,243 1,713 10,530 2018 £’000 2,230 1,754 429 4,646 1,552 10,611 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 was £230,410 (2018: £176,784). 17. Investments in securities Valuation At 1 January Additions in year Disposals in year Unrealised gain/(loss) At 31 December 18. Cash and cash equivalents Cash at bank and in hand 2019 £’000 84 39 (23) 7 107 2019 £’000 18,525 2018 £’000 99 - (10) (5) 84 2018 £’000 17,672 During 2018, 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 2019. 95 Annual report and financial statements 2019 Notes to the consolidated financial statements 19. Trade and other payables Current: Trade creditors Social security and other taxes Other creditors Amounts owed to HMRC Accruals 20. Lease liabilities 2019 £’000 1,423 372 2,206 118 5,487 9,606 2019 £’000 3,737 475 > 5 years £’000 2018 £’000 3,674 380 1,816 240 6,024 12,134 2018 £’000 - - Total £’000 4,212 Non-current: Lease liabilities Current: Lease liabilities 2019 Lease liabilities 2018 Lease liabilities 1 year or less £’000 1 - 2 years £’000 2-5 years £’000 475 - 494 - 1,602 1,641 - - - Lease liabilities, which includes items previously classified as finance lease liabilities, increased by £4,513k as a result of adopting IFRS 16 Leases effective 1 January 2019. 96 Strategic reportGovernanceFinancials Notes to the consolidated financial statements 21. Financial liabilities Non-current: Finance leases Current: Finance leases 2019 Finance leases 2018 Finance leases 2019 £’000 - - 1 year or less £’000 1 - 2 years £’000 2-5 years £’000 - 87 - 6 - - 2018 £’000 6 87 Total £’000 - 93 Financial liabilities now classified as lease liabilities as a result of adopting IFRS 16 Leases effective 1 January 2019. 22. Finance leases Minimum lease payments under finance leases fall due as follows: 2019 £’000 2018 £’000 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 - - - - - - - - - 88 6 94 1 - 1 87 6 93 97 Annual report and financial statements 2019 Notes to the consolidated financial statements 23. Share capital Fully paid ordinary shares of £0.001 each: 76,473,360 (2018: 76,473,360) Employee benefits trusts hold a total of 611,255 shares (2018: 561,442). 2019 £’000 76 2018 £’000 76 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 fully paid shares in issue of 76,473,360. 24. 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 other share awards is recognised over their vesting period. Upon conversion the fair value of services received is transferred to retained earnings. Treasury shares Shares of Nucleus Financial Group plc that are held in the Employee benefits trust and SIP trust 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. 98 Strategic reportGovernanceFinancials Notes to the consolidated financial statements 25. 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 statement of comprehensive income. In adopting IFRS 9 all previously classified loans and receivables were re-classified 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. Financial assets at fair value through profit and loss £’000 Financial liabilities at amortised cost £’000 Financial assets at amortised cost £’000 107 - - 107 - - - - - - - 4,212 9,606 13,818 - 18,525 10,530 29,055 - - - 2019 Financial assets Investments in securities Cash and cash equivalents Trade and other receivables Total financial assets Non-financial assets Total assets Financial liabilities Lease liabilities Trade and other payables Total financial liabilities Non-financial liabilities Total liabilities Total £’000 107 18,525 10,530 29,162 5,534 34,696 4,212 9,606 13,818 1,172 14,990 99 Annual report and financial statements 2019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 25. Financial instruments (continued) Financial assets at fair value through profit and loss £’000 Financial liabilities at amortised cost £’000 Financial assets at amortised cost £’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 100 Strategic reportGovernanceFinancialsNotes to the consolidated financial statements 25. Financial instruments (continued) 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 statement of comprehensive income. 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: 2019 Investments in securities 2018 Investments in securities Credit risk Level 1 £’000 107 Level 1 £’000 84 Level 2 £’000 - Level 2 £’000 - Level 3 £’000 - Level 3 £’000 - Total £’000 107 Total £’000 84 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 2019 was £230,410 (2018: £176,674). 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. 101 Annual report and financial statements 2019 Notes to the consolidated financial statements 25. Financial instruments (continued) 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. 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. < 3 months £’000 3-12 months £’000 1-5 years £’000 >5 years £’000 18,525 - 10,085 28,610 - 107 445 552 - - - - - - - - < 3 months £’000 3-12 months £’000 1-5 years £’000 >5 years £’000 17,672 - 10,182 27,854 - 84 429 513 - - - - - - - - Total £’000 18,525 107 10,530 29,162 Total £’000 17,672 84 10,611 28,367 2019 Financial assets Cash and cash equivalents Investments Trade and other receivables 2018 Financial assets Cash and cash equivalents Investments Trade and other receivables 102 Strategic reportGovernanceFinancialsNotes to the consolidated financial statements 25. Financial instruments (continued) 2019 Financial liabilities Trade and other payables Lease liabilities 2018 Financial liabilities Trade and other payables Finance lease obligations < 3 months £’000 3-12 months £’000 1-5 years £’000 >5 years £’000 9,606 119 9,725 - 356 356 - 2,096 2,096 - 1,641 1,641 < 3 months £’000 3-12 months £’000 1-5 years £’000 >5 years £’000 11,966 87 12,053 168 - 168 - 6 6 - - - 26. Deferred tax The deferred tax asset is made up of the following balances: At 1 January 2018 (Charge)/credit to statement of comprehensive income At 31 December 2018 (Charge)/credit to statement of comprehensive income At 31 December 2019 Accelerated capital allowances £’000 Short term timing differences £’000 Losses and other deductions £’000 (5) 13 8 (1) 7 41 (24) 17 81 98 122 16 138 (136) 2 Total £’000 9,606 4,212 13,818 Total £’000 12,134 93 12,227 Total £’000 158 5 163 (56) 107 As a result of the uncertainty in the opinion of the directors regarding the timing and extend of future profit generation by the group, a deferred tax asset of £455,684 (2018: £286,290) has not been recognised. 103 Annual report and financial statements 2019 Notes to the consolidated financial statements 26. Deferred tax (continued) The deferred tax liability is made up of the following balances: Accelerated capital allowances £’000 Short term timing differences £’000 Losses and other deductions £’000 (46) 5 (41) 19 (22) - - - - - At 1 January 2018 (Charge)/credit to statement of comprehensive income At 31 December 2018 (Charge)/credit to statement of comprehensive income At 31 December 2019 27. Share-based payments Total cost of share-based payments: Long term incentive plan Employers NIC on long term incentive plan Share incentive plan Growth shares - - - - - 2019 £’000 290 34 25 - 349 Total £’000 (46) 5 (41) 19 (22) 2018 £’000 150 - 1 253 404 National insurance contribution (NIC) obligations arising from HMRC unapproved equity-settled schemes are treated as if they are cash- settled, regardless of the equity determination of the scheme itself. 104 Strategic reportGovernanceFinancials Notes to the consolidated financial statements 27. Share-based payments (continued) Long Term Incentive Plan (LTIP) 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 and details of movement in the LTIP are set out in the remuneration and HR committee report. 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 long-term incentive plan. 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. At 1 January 2018 Shares awarded during the year Lapsed during the year At 31 December 2018 Shares awarded during the year Lapsed during the year At 31 December 2019 Option pricing model Date granted Share price on grant date (p) Vesting period (years) Exercise price Expected volatility Risk-free rate Dividend yield Fair value per option at grant date Remaining vesting period (years) LTIP 2019 - - - - 827,090 (23,674) LTIP 2018 - 1,013,612 (68,865) 944,747 - (30,211) 803,416 914,536 LTIP 2019 TSR condition Monte Carlo 03/04/2019 LTIP 2019 Other conditions Black Scholes 03/04/2019 LTIP 2018 TSR condition Monte Carlo 26/07/2018 LTIP 2018 Other conditions Black Scholes 26/07/2018 176p 3 0p 40% 0.72% nil 89p 2.3 176p 3 0p 40% 0.72% nil 176p 2.3 183p 3 0p 34% 0.84% nil 85p 1.6 183p 3 0p 34% 0.84% nil 183p 1.6 Expected volatility was determined by comparing Nucleus to other companies that provide software services to the financial services sector as these were deemed to be the closest comparative with a long enough share history to give an indicative relative valuation and volatility measure. In estimating a volatility range for the company we have excluded companies that have an enterprise value greater than £500m, as we consider that they would not typically be reflective of the risks, size and growth profile of a company such as Nucleus. Expected volatility of the companies was determined by reference to their historical volatility over a period consistent with the vesting period of the options. 105 Annual report and financial statements 2019Notes to the consolidated financial statements 27. 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. SIP Brought forward at the beginning of the year Matching shares awarded Matching shares forfeited Outstanding matching shares at the end of the year Growth shares 2019 21,444 53,911 (1,088) 74,267 2018 - 21,444 - 21,444 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 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 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 23 Share capital. 106 Strategic reportGovernanceFinancialsNotes to the consolidated financial statements 28. Provisions Client compensation Outsourced service Dilapidations Share incentive plans Analysed as follows: Current Non-current At 1 January 2018 Provided during year Utilised during year Unused amounts reversed during year (Charge)/credit to statement of comprehensive income At 31 December 2018 Provided during year Utilised during year Unused amounts reversed during year (Charge)/credit to statement of comprehensive income At 31 December 2019 2019 £’000 2018 £’000 536 158 65 34 793 694 99 793 Share incentive plans £’000 Client compensation £’000 Outsourced service £’000 Dilapidations £’000 - - - - - - 34 - - - 34 98 435 (73) (31) - 429 389 (122) (160) - 536 204 612 (333) - (325) 158 - - - - 158 224 30 (222) - - 32 33 - - - 65 429 158 32 - 619 587 32 619 Total £’000 526 1,077 (628) (31) (325) 619 456 (122) (160) - 793 107 Annual report and financial statements 2019 Notes to the consolidated financial statements 28. Provisions (continued) Client compensation The group remediates customers 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 customer loss, distress and inconvenience for which customers should be compensated. Where actual trading losses are suffered by customers, these are calculated in accordance with Mifid II best execution rules to ensure customers 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 statement of comprehensive income and the majority of the outstanding issues are expected to be resolved in the first half of 2020. 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 statement of comprehensive income. Where these are uncertain or in dispute with the service provider, a provision is booked in recognition of the uncertainty regarding the outcome. Dilapidations The dilapidations provision relates to the group’s 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. Share incentive plans Provisions for share incentive plans relate to the LTIP which is a HMRC unapproved equity-settled scheme. The company is liable to pay employers’ NIC upon exercise of the options. The provision is calculated using the applicable employers’ NIC rate applied to the number of share awards expected to vest, valued at the share price at the reporting date. The provision is recognised over the vesting period of the shares awarded. 108 Strategic reportGovernanceFinancials Notes to the consolidated financial statements 29. Reconciliation of profit before income tax to cash generated from operations Profit before income tax Depreciation Loss on disposal of fixed assets Unrealised gain on investments Share based payments charge (excl. NIC) Bad debt provision Increase in trade and other receivables Decrease/(increase) in operational platform funding (Decrease)/increase in trade and other payables Increase in other provisions Interest paid Interest received Net exchange differences Cash inflows from operations 2019 £’000 7,002 1,102 3 (7) 315 59 (1,166) 1,187 (1,987) 174 182 (80) 6 2018 £’000 5,653 585 - - 404 8 (615) (257) 1,426 93 2 (8) 7 6,790 7,298 Operational platform prefunding includes prefunding of client pension tax relief and temporary funding required under the client money and client assets rules. 30. Reconciliation of liabilities arising from financing activities Finance lease liabilities Lease liabilities At 1 January 2018 £’000 Non-cash changes £’000 200 2 At 1 January 2019 £’000 Non-cash changes £’000 4,606 - Cash flows £’000 (109) Cash flows £’000 (394) At 31 December 2018 £’000 93 At 31 December 2019 £’000 4,212 Lease liabilities, which includes items previously classified as finance lease liabilities, increased by £4,513k as a result of adopting IFRS 16 Leases effective 1 January 2019. 109 Annual report and financial statements 2019 Notes to the consolidated financial statements 31. Operating leases The group’s future minimum lease payments under non-cancellable operating leases were as follows: Within one year Between one and five years In more than five years 2019 Total £’000 - - - - 2018 Phase 1 £’000 312 2,614 1,518 4,444 2018 Phase 2 £’000 72 602 350 1,024 2018 Total £’000 384 3,216 1,868 5,468 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. These agreements are no longer classified as operating leases following the adoption and implementation of IFRS 16 Leases in 2019, details of which are set out in note 36. 32. 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 which incurred a loss for the year of £3,385 and the Nucleus Financial Group plc Share Incentive Plan whose costs are borne by the group. 33. 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 £997,401 (2018: £906,115). Contributions totalling £90,009 (2018: £91,340) were payable to the fund at the balance sheet date. 34. 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, 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. 110 Strategic reportGovernanceFinancialsNotes to the consolidated financial statements 35. Related party transactions Entities with significant influence over the company Transactions with NIFAC and Sanlam were as follows: Sanlam Amounts owed to Sanlam in respect of board fees by NFG Amounts owed to Sanlam in respect of fees for the Onshore Bond by NFS Amounts charged by Sanlam to NFS in respect of the Onshore Bond Amounts owed to Sanlam to NFS in respect of tax collected from the Onshore Bond Dividend paid to Sanlam by NFG NIFAC Amounts owed to NFG Dividend paid to NIFAC by NFG 2019 £’000 84 79 459 23 2,036 2019 £’000 - - 2018 £’000 176 72 429 97 1,976 2018 £’000 42 632 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 per cent 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 Other related parties 2019 £’000 1,760 2018 £’000 706 During the year the company was charged £nil (2018: £390,000) for services provided by Craven Street Capital of which J A Samuels is a director. 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 Post-employment benefits relate to defined contribution pension scheme charges. 2019 £’000 1,736 61 229 2,026 2018 £’000 2,238 95 314 2,647 111 Annual report and financial statements 2019 Notes to the consolidated financial statements 36. Changes in accounting policies IFRS 16 Leases In adopting this standard, which became effective from 1 January 2019, the modified retrospective approach was used, resulting in the cumulative effect of application on 1 January 2019 being recognised through an adjustment to opening retained earnings. On adoption the group recognised lease liabilities in relation to previously classified operating property leases. The liability was measured at the present value of future lease payments, discounted using an estimated incremental borrowing rate of 4 per cent. The associated right- of-use asset was measured on a retrospective basis as if the new standard had always applied. There were no changes relating to the recognition of finance leases. Use was made 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. 31 December 2018 £’000 Effect of IFRS 16 £’000 1 January 2019 £’000 Assets Non-current assets Right of use lease assets Property, plant and equipment Deferred tax Current assets Total assets Total equity Liabilities Non-current liabilities Lease liabilities Financial liabilities Provisions Deferred tax Current liabilities Lease liabilities Financial liabilities Trade and other payables Tax payable Provisions Total liabilities Total equity and liabilities 112 - 2,029 163 2,192 28,908 31,100 17,473 - 6 32 41 79 - 87 12,134 740 587 13,548 13,627 31,100 4,013 (112) - 3,901 - 3,901 (71) 4,217 (6) - - 4,211 389 (87) (541) - - (239) 3,972 3,901 4,013 1,917 163 6,093 28,908 35,001 17,402 4,217 - 32 41 4,290 389 - 11,593 740 587 13,309 17,599 35,001 Strategic reportGovernanceFinancialsNotes to the consolidated financial statements 37. Events after the reporting period The Covid-19 pandemic, which first impacted the group, its users, its customers and the broader economy in the first quarter of 2020, is considered to be a non-adjusting post balance sheet event. Further information relevant to the directors’ assessment of going concern is set out in the directors’ report on page 65. From March 2020 NFS and the group were no longer required to meet the rules and requirements of a significant IFPRU firm as NFS last met the IFPRU definition for a significant firm in February 2019. There were no other subsequent events that required adjustment to or disclosure in the financial statements for the period from 31 December 2019 to the date upon which the financial statements were available to be issued. 113 Annual report and financial statements 2019Company statement of financial position Assets Non-current assets Right of use lease 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 Treasury shares Retained earnings Total equity Liabilities Non-current liabilities Lease liabilities Provisions Current liabilities Lease liabilities Trade and other payables Tax payable Total liabilities Total equity and liabilities 31 December 2019 £’000 31 December 2018 £’000 Note 4 5 6 12 7 8 19 19 19 19 19 10 11 10 9 3,463 934 7,645 107 12,149 3,174 1,007 4,181 16,330 76 53 465 (120) 8,632 9,106 3,737 99 3,836 475 2,883 30 3,388 7,224 16,330 - 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 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 £5,094,729 (2018: £562,727). Included in this amount is dividends received of £4,718,988 (2018: £2,335,065), 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 6 April 2020. S J Geard Director The notes on pages 117 to 128 form part of these financial statements. 114 Strategic reportGovernanceFinancialsCompany statement of changes in equity Balance at 1 January 2019 IFRS 16 conversion Changes in equity Other movements Profit for the year Dividend paid Purchase of own shares Share based payments charge Called up share capital £’000 76 Note - - - - - - Retained earnings £’000 7,481 (71) - 5,095 (3,873) - - Treasury shares £’000 (29) Capital redemption reserve £’000 Share-based payment reserve £’000 53 150 - - - - (91) - - - - - - - Total equity £’000 7,731 (71) - 5,095 (3,873) (91) 315 9,106 - - - - - 315 465 Balance at 31 December 2019 76 8,632 (120) 53 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 shares and deferred shares Profit for the year Dividend paid Purchase of own shares Transfer on share conversion Share based payments charge Called up share capital £’000 Note 21 50 (50) 57 (2) - - - - - Retained earnings £’000 8,058 (50) - (57) - 563 (3,933) - 2,900 - Balance at 31 December 2018 76 7,481 The notes on pages 117 to 128 form part of these financial statements. Treasury shares £’000 Capital redemption reserve £’000 Share-based payment reserve £’000 Total equity £’000 - - - - - - - (29) - - (29) 1 2,646 10,726 - 50 - 2 - - - - - - - - - - - - (2,900) 404 - - - - 563 (3,933) (29) - 404 53 150 7,731 115 Annual report and financial statements 2019 Company statement of cash flows Cash flows from operating activities (Cash outflows)/cash inflows from operations Income tax paid Net cash (outflow)/inflow from operations Cash flows from investing activities Purchase of tangible fixed assets Dividend received Interest received Net cash inflow from investing activities Cash flows from financial activities Interest paid Dividend paid Purchase of Treasury shares Lease payments - principal Net cash outflows from financing activities Decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Effects of exchange rate changes Cash and cash equivalents at end of year The notes on pages 117 to 128 form part of these financial statements. Note 14 5 10 2019 £’000 (1,014) (1) (1,015) (10) 4,719 - 4,709 (180) (3,873) (91) (301) (4,445) (751) 1,758 - 1,007 2018 £’000 149 (2) 147 (300) 2,335 2 2,037 - (3,933) (29) - (3,962) (1,778) 3,540 (4) 1,758 116 Strategic reportGovernanceFinancials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. New standards effective for the first time in the 2019 financial statements IFRS 16 Leases The company adopted IFRS 16 Leases effective 1 January 2019. Details of the impact are set out in note 22 Changes in accounting policies. 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 33 to the consolidated financial statements. Directors’ remuneration and compensation of key management personnel is disclosed in notes 7 and 35 to the consolidated financial statements. 117 Annual report and financial statements 2019Right of use asset Greenside Edinburgh £’000 - 3,901 - - 3,901 - - 438 - 438 3,463 - Notes to the company financial statements 4. Right of use lease assets Cost At 1 January 2019 Transition to IFRS 16 Additions Disposals At 31 December 2019 Depreciation At 1 January 2019 Transition to IFRS 16 Charge for the year Eliminated on disposals At 31 December 2019 Net book value At 31 December 2019 At 31 December 2018 118 Strategic reportGovernanceFinancialsNotes to the company financial statements 5. Property, plant and equipment Cost At 1 January 2019 Transition to IFRS 16 Additions Disposals At 31 December 2019 Depreciation At 1 January 2019 Transition to IFRS 16 Charge for the year Eliminated on disposals At 31 December 2019 Net book value At 31 December 2019 At 31 December 2018 Cost At 1 January 2018 Additions Disposals At 31 December 2018 Depreciation At 1 January 2018 Charge for the year Eliminated on disposals At 31 December 2018 Net book value At 31 December 2018 At 31 December 2017 Short-term leasehold property £’000 1,137 - 10 - 1,147 99 - 114 - 213 934 1,038 Short-term leasehold property £’000 837 300 - 1,137 7 92 - 99 1,038 830 119 Annual report and financial statements 2019 Notes to the company financial statements 6. Investment in subsidiary companies Cost 2019 £’000 2018 £’000 At 1 January and 31 December 7,645 7,645 Subsidiary undertakings The following are subsidiary undertakings of the company: Nucleus Financial Services Limited Registered office: Elder House, St Georges Business Park, 207 Brooklands Road, Weybridge, Surrey, England, KT13 0TS 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 Nucleus IFA Services Limited 2019 £’000 17,391 5,502 2018 £’000 16,607 6,020 Registered office: Greenside, 12 Blenheim Place, Edinburgh, Scotland, EH7 5JH 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 Aggregate capital and reserves Profit for the financial year 2019 £’000 726 78 2018 £’000 648 523 120 Strategic reportGovernanceFinancials Notes to the company financial statements 6. Investment in subsidiary companies (continued) Nucleus IMX Limited Registered office: Elder House, St Georges Business Park, 207 Brooklands Road, Weybridge, Surrey, England, KT13 0TS Class of shares: Ordinary Holding: 100% Principal activity: Non-trading subsidiary Aggregate capital and reserves Profit for the financial year 7. Trade and other receivables Amounts owed by group undertakings Other debtors Prepayments Amounts owed by group undertakings are unsecured, interest free and have agreed repayment terms. 8. Cash and cash equivalents Cash at bank and in hand 9. Trade and other payables Trade creditors Social security and other taxes Other creditors Accruals 2019 £ 1 - 2019 £’000 2,231 57 886 3,174 2019 £’000 1,007 2019 £’000 407 371 9 2,096 2,883 2018 £ 1 - 2018 £’000 706 116 560 1,382 2018 £’000 1,758 2018 £’000 367 380 6 3,470 4,223 121 Annual report and financial statements 2019 Notes to the company financial statements 2019 £’000 3,737 475 1 year or less £’000 1 - 2 years £’000 2-5 years £’000 > 5 years £’000 1,602 1,641 475 - 494 - 2018 £’000 - - Total £’000 4,212 - - - 2019 £’000 2018 £’000 65 34 99 - 99 99 32 - 32 - 32 32 10. Lease liabilities Non-current: Lease liabilities Current: Lease liabilities 2019 Lease liabilities 2018 Lease liabilities 11. Provisions Dilapidations Share incentive plans Analysed as follows: Current Non-current 122 Strategic reportGovernanceFinancials Notes to the company financial statements 11. Provisions (continued) At 1 January 2018 Provided during year Utilised during year At 31 December 2018 Provided during year Utilised during year At 31 December 2019 Share incentive plans Share incentive plans £’000 Dilapidations £’000 - - - - 34 - 34 224 30 (222) 32 33 - 65 Total £’000 224 30 (222) 32 67 - 99 Provisions for share incentive plans relate to the LTIP which is a HMRC unapproved equity-settled scheme. The company is liable to pay employers’ NIC upon exercise of the options. The provision is calculated using the applicable employers’ NIC rate applied to the number of share awards expected to vest, valued at the share price at the reporting date. The provision is recognised over the vesting period of the shares awarded. Dilapidations 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. 123 Annual report and financial statements 2019 Notes to the company financial statements 12. Deferred tax At 1 January 2018 (Charge)/credit to statement of comprehensive income At 31 December 2018 (Charge)/credit to statement of comprehensive income At 31 December 2019 Accelerated capital allowances £’000 Short term timing differences £’000 Losses and other deductions £’000 (5) 13 8 (1) 7 41 (24) 17 81 98 122 16 138 (136) 2 Total £’000 158 5 163 (56) 107 The total potential deferred tax asset arising in respect of unutilised tax losses and timing differences at 31 December 2019 is £562,305 (2018 £449,832). However, 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 £455,684 (2018: 286,290) has not been recognised. 13. Financial instruments 2019 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 124 Financial liabilities at amortised cost £’000 Financial assets at amortised cost £’000 - - - - 4,212 2,883 7,095 - 1,007 3,174 4,181 - - - Total £’000 - 1,007 3,174 4,181 12,149 16,330 4,212 2,883 7,095 129 7,224 Strategic reportGovernanceFinancials Notes to the company financial statements 13. Financial instruments (continued) 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 2019 Financial assets Cash and cash equivalents Trade and other receivables 2018 Financial assets Cash and cash equivalents Trade and other receivables Financial liabilities at amortised cost £’000 Financial assets at amortised cost £’000 - - - - - 4,223 4,223 - 1,758 1,382 3,140 - - - < 3 months £’000 3-12 months £’000 1-5 years £’000 >5 years £’000 1,007 3,173 4,180 - 1 1 - - - - - - < 3 months £’000 3-12 months £’000 1-5 years £’000 >5 years £’000 1,758 1,382 3,140 - - - - - - - - - Total £’000 - 1,758 1,382 3,140 8,990 12,130 - 4,223 4,223 32 4,255 Total £’000 1,007 3,174 4,181 Total £’000 1,758 1,382 3,140 125 Annual report and financial statements 2019Notes to the company financial statements 13. Financial instruments (continued) < 3 months £’000 3-12 months £’000 1-5 years £’000 >5 years £’000 2019 Financial liabilities Trade and other payables Lease liabilities 2018 Financial liabilities Trade and other payables Finance lease obligations 2,883 119 3,002 - 356 356 - 2,096 2,096 - 1,641 1,641 < 3 months £’000 3-12 months £’000 1-5 years £’000 >5 years £’000 4,055 - 4,055 168 - 168 - - - 14. Reconciliation of profit before tax to cash generated from operations Profit before income tax Depreciation Share based payments charge (excl. NIC) (Increase)/decrease in trade and other receivables (Decrease)/increase in trade and other payables Increase/(decrease) in other provisions Net exchange differences Interest paid Dividend received (Cash outflows)/cash inflows from operations 126 Total £’000 2,883 4,212 7,095 Total £’000 4,223 - 4,223 2018 £’000 558 92 404 1,273 347 (192) 4 - (2,337) 149 - - - 2019 £’000 5,182 552 315 (1,792) (799) 67 - 180 (4,719) (1,014) Strategic reportGovernanceFinancialsNotes to the company financial statements 15. Dividends Details of dividends paid are disclosed in note 11 to the consolidated financial statements. 16. Called up share capital Details of the share capital of the company are disclosed in note 23 to the consolidated financial statements. 17. Operating lease commitments Details of the company’s operating lease commitments are disclosed in note 31 to the consolidated financial statements. 18. Share-based payments For details of the company’s share schemes, including the valuation models used, refer to note 27 in the consolidated financial statements. 19. Reserves Details of the company’s reserves are disclosed in note 24 to the consolidated financial statements. 20. Related party transactions Details of related party transactions are disclosed in note 35 to the consolidated financial statements. 21. Controlling party Details of the ultimate controlling party are disclosed in note 34 to the consolidated financial statements. 127 Annual report and financial statements 2019Notes to the company financial statements 22. Changes in accounting policies IFRS 16 Leases In adopting this standard, which became effective from 1 January 2019, the modified retrospective approach was used, resulting in the cumulative effect of application on 1 January 2019 being recognised through an adjustment to opening retained earnings. On adoption the group recognised lease liabilities in relation to previously classified operating property leases. The liability was measured at the present value of future lease payments, discounted using an estimated incremental borrowing rate of 4 per cent. The associated right- of-use asset was measured on a retrospective basis as if the new standard had always applied. There were no changes relating to the recognition of finance leases. Use was made 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. 31 December 2018 £’000 Effect of IFRS 16 £’000 1 January 2019 £’000 - 1,038 7,645 163 8,846 3,140 11,986 7,731 - 32 32 - 4,223 4,223 4,255 11,986 3,901 - - - 3,901 - 3,901 (71) 4,211 - 4,211 302 (541) (239) 3,972 3,901 3,901 1,038 7,645 163 12,747 3,140 15,887 7,660 4,211 32 4,243 302 3,682 3,984 8,227 15,887 Assets Non-current assets Right of use lease assets Property, plant and equipment Investments Deferred tax Current assets Total assets Total equity Liabilities Non-current liabilities Lease liabilities Provisions Current liabilities Lease liabilities Trade and other payables Total liabilities Total equity and liabilities 128 Strategic reportGovernanceFinancialsCompany information Company information Directors T Dunley-Owen D R Ferguson S J Geard M G Hassall J A Levin J C Polin J A Samuels A Tagliabue (appointed 25 February 2020) Company secretary N C Megaw Registered number 05522098 Registered office Elder House St Georges Business Park 207 Brooklands Road Weybridge Surrey England KT13 0TS 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 Bank of Scotland plc PO Box 17235 Edinburgh EH11 1YH Lloyds Bank Plc Threadneedle Street Chelmsford Legg St Osc 1 Legg Street Chelmsford CM1 1JS The Royal Bank of Scotland International Limited Royal Bank Place 1 Glategny Esplanade St Peter Port Guernsey GY1 4BQ Investec Bank plc 30 Gresham Street London EC2V 7QP 129 Annual report and financial statements 2019 Definitions and glossary of technical terms Definitions and glossary of technical terms The following definitions apply throughout this document: 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 Adjusted Adjusted EBITDA 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 Adjusted EBITDA excludes non-operating income, AIM admission costs, share-based payments, loss on disposal of fixed assets and includes ROU asset depreciation and ROU lease liability interest Adjusted EBITDA margin Adjusted EBITDA expressed as a percentage of revenue Adjusted earnings per share (EPS) Value of adjusted profit after tax divided by weighted average number of shares AUA Average AUA Blended revenue yield (bps) Capital adequacy ratio Assets under administration The average AUA balance for the period is calculated as the average of the end of day AUA balances during the period Net revenue is divided by the average assets under administration. For interim periods the net revenue is annualised using the number of days in the period A capital adequacy measure calculated by dividing regulatory capital over risk weighted exposures Compound asset growth rate Average growth rate over a period of time expressed as an annualised percentage EBITDA Gross inflows Earnings Before Interest Tax Depreciation and Amortisation Value of cash and assets received onto the platform Industry-specific financial-performance measures Alternative performance measures that the directors believe help to inform the results and financial position of the group Net inflows Net revenue Outflows Value of Gross inflows less Outflows Net revenue comprises revenue earned on the platform less the direct fees that are payable to product providers of the platform Value of cash and assets leaving the platform 130 Definitions and glossary of technical terms Definitions and glossary of technical terms Glossary AIM Rules BPO Customers FCA GDPR IFRS IMX MiFID II NFS The rules published by London Stock Exchange entitled AIM Rules for Companies Business process outsourcing. The contracting of the operations and responsibilities of a specific business process to a third-party service provider. The customers of Nucleus, whose assets are managed by financial advisers through the platform The Financial Conduct Authority The General Data Protection Regulation (Regulation (EU) 2016/679) International Financial Reporting Standards as adopted by the European Union IMX is a discretionary investment management solution The EU Markets in Financial Instruments Directive (2014/65/EU) Nucleus Financial Services Limited Nucleus or the group The Company and its subsidiaries Priips Sanlam SM&CR The Packaged Retail and Insurance-based Investment Products Regulation Sanlam UK Limited Senior Managers and Certification Regime 131 Annual report and financial statements 2019Annual report and financial statements 2019 Notes 132 Annual report and financial statements 2019 Notes 133  0131 226 9800 legal@nucleusfinancial.com @nucleuswrap www.nucleusfinancial.com 0415.03Nucleus 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. 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