Paragon Banking Group PLC
2020 Annual Report and Accounts
CAUTIONARY STATEMENT Sections of this Annual Report, including but not limited to the Directors’ Report, the Strategic Report and the Directors’ Remuneration Report may
contain forward-looking statements with respect to certain of the plans and current goals and expectations relating to the future financial condition, business performance and
results of the Group. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as ‘anticipate’, ‘estimate’, ‘expect’,
‘intend’, ‘will’, ‘project’, ‘plan’, ‘believe’, ‘target’ and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. These
have been made by the directors in good faith using information available up to the date on which they approved this report and the Group undertakes no obligation to update these
forward-looking statements other than in accordance with its legal or regulatory obligations (including under the Market Abuse Regulation, UK Listing Rules and the Disclosure
Guidance and Transparency Rules of the Financial Conduct Authority).
By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of the Group and
depend upon circumstances that may or may not occur in the future that could cause actual results or events to differ materially from those expressed or implied by the forward-
looking statements. There are a number of factors that could cause actual future financial conditions, business performance, results or developments to differ materially from the
plans, goals and expectations expressed or implied by these forward-looking statements and forecasts. As a result, you are cautioned not to place reliance on such forward-looking
statements as a prediction of actual results or otherwise.
These factors include, but are not limited to: material impacts related to foreign exchange fluctuations; macro-economic activity; the impact of outbreaks, epidemics or pandemics,
such as the Covid-19 pandemic and ongoing challenges and uncertainties posed by the Covid-19 pandemic for businesses and governments around the world; potential changes in
future dividend policy; changes in government policy and regulation (including the monetary, interest rate and other policies of central banks and other regulatory authorities in the
principal markets in which the Group operates and the consequences thereof (including, without limitation, actions taken as a result of the Covid-19 outbreak); actions by the Group’s
competitors; the UK’s exit from the EU which may result in a prolonged period of uncertainty, unstable economic conditions and market volatility, including currency fluctuations;
general changes in government policy that may significantly influence investor decisions; and other risks inherent to the industries in which the Group operates.
Nothing in this Annual Report should be construed as a profit forecast.
PARAGON IS A SPECIALIST
BANKING GROUP
We help individuals and small
businesses across the UK prosper
and grow with a range of savings
and specialist lending products.
Contents
Financial Highlights
Results in brief
P5
Financial Highlights
Strategic Report
The business and its
performance in the year
P8
A1.
Chair of the Board's
introduction
P10
A2. Business model
and strategy
P28
A3. Chief Executive’s review
P31
P53
P56
A4. Review of the year
A5. Future prospects
A6. Citizenship and
sustainability
P67
A7.
Approval of
Strategic Report
The Accounts
The financial statements of the Group
P164 D1. Financial statements
P171 D2. Notes to the accounts
Appendices to
the Annual Report
Additional financial information
P288 E1.
Appendices to the
Annual Report
Useful information
Additional information for
shareholders and other users
P294 F1. Glossary
P296 F2. Shareholder information
P298 F3. Other public reporting
P299 F4. Contacts
Corporate Governance
How the business is controlled
and how risk is managed
P70
B1.
Chair's statement on
corporate governance
P72
B2. Corporate Governance
Statement
P74
B3. Board of Directors and
Senior Management
P80
B4. Governance Framework
P95
B5. Nomination Committee
P98
B6. Audit Committee
P106 B7.
Remuneration
Committee
P134 B8. Risk management
P145 B9. Directors’ report
P148 B10. Statement of directors’
responsibilities
Independent
Auditor’s Report
On the financial statements
P152 C1.
Independent auditor’s
report to the members
of Paragon Banking
Group PLC
Five year performance summary
Underlying profit before taxation
Profit before taxation
Profit after taxation
Total loans to customers
Shareholders’ funds
Return on tangible equity
Earnings per share
- basic
- diluted
Dividend per ordinary share
2016
£m
143.8
143.2
116.0
10,737.5
969.5
2016
12.9%
40.5p
39.7p
13.5p
2017
£m
145.2
144.8
117.2
11,124.1
1,009.4
2017
13.4%
43.1p
41.9p
15.7p
2018
£m
156.5
181.5
145.8
12,127.8
1,095.9
2018
16.1%
55.9p
54.2p
19.4p
2019
£m
164.4
159.0
127.4
12,186.1
1,108.4
2019
14.1%
49.4p
48.2p
21.2p
2020
£m
120.0
118.4
91.3
12,631.4
1,156.0
2020
9.7%
36.0p
35.6p
14.4p
The exclusions from underlying results relate principally to acquisitions in prior periods and significant asset sales in the period and the
preceding period, which do not form part of the day-to-day activities of the Group and which have impacted on the reported results for
the year. The calculation of return on tangible equity is shown in note 54. The derivation of underlying profit before taxation and other
underlying measures is described in Appendix A.
Page 4
Financial highlights
Underlying profit before tax
£120.0 million 27.0% lower (2019: £164.4 million)
Profit before tax
£118.4 million 25.5% lower (2019: £159.0 million)
Underlying basic earnings per share
36.5 pence 28.7% lower (2019: 51.2 pence)
Basic earnings per share
36.0 pence 27.1% lower (2019: 49.4 pence)
Dividend per share
14.4 pence 32.1% lower (2019: 21.2 pence)
Capital - CET1 ratio
14.3% Remains strong (2019: 13.7%)
Total loans to customers
£12.6 billion 3.7% higher (2019: £12.2 billion)
Retail deposits
£7.9 billion 22.9% higher (2019: £6.4 billion)
Underlying return on tangible equity
9.8% (2019: 14.6%)
Return on tangible equity
9.7% (2019: 14.1%)
Page 5
14.0percent13.512.914.69.8201620172018201920202015105016.1percent13.412.914.19.720162017201820192020201510505.3£ billion3.61.96.47.9201620172018201920201086420156.5£ million145.2143.8164.4120.02016201720182019202020015010050048.2pence43.340.751.236.520162017201820192020604020019.4pence15.713.521.214.420162017201820192020251520105012.1£ billion11.110.712.212.62016201720182019202015105013.8percent15.915.913.714.320162017201820192020251520105055.9pence43.140.549.436.0201620172018201920206040200181.5144.8143.2159.0118.420162017201820192020200150100500£ million During 2020, Paragon formed its
first Equality, Diversity and Inclusion
Network to support all employees and
encourage a diverse range of talent.
A. Strategic Report
The business and its performance in the year
P8
A1. Chair of the Board's introduction
The year in summary
P10
A2. Business model and strategy
An overview of what the Group does and the significant risks to which it is exposed
P28
A3. Chief Executive’s review
Strategic summary of the Group’s performance and position
P31
A4. Review of the year
The financial and operational performance of the Group in the year
P53
A5. Future prospects
How the Group is placed looking forward
P56
A6. Citizenship and sustainability
The Group’s impact on its employees, the environment and the community,
including non-financial reporting
P67
A7. Approval of Strategic Report
Approval of the Strategic Report
The response to
the pandemic has
demonstrated
the strength
of the Group’s
proposition...
Fiona Clutterbuck
Chair of the Board
A1. Chair of the Board's introduction
Dear Shareholder
I find myself introducing my third report and accounts as Chair at
the end of one of the most extraordinary years in the history of
the Group, and indeed in the history of the UK corporate sector
as a whole, and a year which demonstrated the fundamental
resilience of the Group. I am very proud of the way in which
the business responded to the Covid-19 pandemic, prioritising
supporting our customers, protecting our people, preserving our
capital and ensuring the ongoing future value of the business.
We have provided additional information in this report to
help you understand the impact of Covid-19 on the Group’s
operations and financial results. I hope you find this report
useful in understanding our business and the story of our year.
The business and its purpose
The business is managed through three lending divisions,
Mortgage Lending, including buy-to-let, Commercial Lending
and Idem Capital, with each division offering a range of specialist
lending propositions. These are principally funded through our
retail deposit base, supplemented with wholesale and central
bank borrowings.
During the year the divisions have continued to pursue the
strategic aims we have shared previously, and while the
pandemic has adversely affected advances in the short-term,
the growth of our development finance business has continued
strongly, while our core buy-to-let specialist landlord customer
base has remained robust.
The response to the pandemic has demonstrated the strength
of the Group’s proposition and, notwithstanding the continuing
economic uncertainties, we see significant opportunities for
further development and investment in the year to come.
I was particularly pleased with the ability of the business to
move over 90% of its people to homeworking within a week of
the lockdown on 23 March 2020. We supported our customers
through the provision of payment reliefs, maintaining service
Page 8
levels across all business areas, preserving the availability of new
lending, providing access to CBILS and BBLS and continuing to
offer attractively priced deposits. This was a great demonstration
of how we aim to fulfil our purpose – to support the ambitions of
the people and the businesses of the UK by delivering specialist
financial services.
We pride ourselves on our culture and I believe that the way
in which our colleagues responded to the crisis has further
highlighted how embedded that ethos is within the business
and its people. During the year PwC carried out a review of the
Group’s culture and noted:
“There is strong collaboration across the leadership team, and a
real sense of being part of a ‘family’. This alignment means that
the leadership work well together … and role model the desired
behaviours consistently.”
It is these behaviours which allowed the Group to respond so
effectively to the pandemic for the benefit of all our stakeholders.
The Group’s business model and purpose are described
more fully in Section A2
Results
The Group’s new lending in the year was £2.0 billion, reduced
from £2.5 billion in 2019 as a result of constrained volumes in the
second half. The savings deposit base grew to £7.9 billion from
£6.4 billion a year earlier at an improved funding cost and the
Bank of England TFSME programme was accessed.
Margins were impacted during the second half as a result
of the base rate cuts in March and the increase in expected
loss provisions by £40.0 million saw underlying profit before
tax reduce to £120.0 million from £164.4 million in 2019. Profit
before tax on the statutory basis fell by 25.5% to £118.4 million,
reflecting one off gains made in 2019.
Underlying earnings per share (‘EPS’) decreased to 36.5 pence
(2019: 51.1 pence) and statutory EPS fell to 36.0 pence
(2019: 49.4 pence). Underlying return on tangible equity was
9.8% (2019: 14.6%), 9.7% on the statutory basis (2019: 14.1%).
The Group’s capital base has remained strong, with high levels of
liquidity maintained through the year and regulatory Core Equity
Tier 1 (‘CET1’) ratio increasing to 14.3% (2019: 13.7%).
The financial results and operational performance are
reviewed in Section A3
I am delighted to welcome Alison Morris, who joined the Board in
the year and now chairs the Audit Committee and Peter Hill who
joined the Board after the year end. Following these changes, I
am pleased to say that female directors will comprise 37.5% of
the Board.
The Covid-19 crisis has impacted the Group in many ways
and required an increased time commitment from my board
colleagues. I would like to pay tribute to them for the level of
care, thought and commitment they brought to this task.
Corporate governance is discussed in Section B3
Stakeholders
We take our responsibility to all our stakeholder groups very
seriously and our response to Covid-19 during the year was
designed to protect the interests of customers, employees
and suppliers as well as preserving shareholder value. We
acknowledge our duties as a corporate citizen. We did not
access any government support schemes, no employees were
placed on furlough and no redundancies were made as a result
of the Covid-19 outbreak.
Climate change is one of the biggest challenges faced by the
world today and we are therefore cognisant of the growing
pressure from investors for more and better reporting
on companies’ responses to climate change and other
environmental issues and I hope you will find the additional
information we have provided helpful. This evidences the
Group’s response to climate change, which will continue to
develop over time.
I have been deeply impressed by the energy and commitment
shown by senior management, and, indeed, all of our colleagues,
in response to the pandemic which resulted in considerable
personal upheaval for many. A significant number needed to
balance childcare and home-schooling commitments whilst
working at home during the pandemic. I am pleased that the
Group was able to support employees, in some cases changing
working patterns or offering additional paid leave. I am very
grateful to all of the Group’s people for their hard work and
dedication throughout the period.
Social responsibility issues are discussed in Section A6
Risk
The Group continues to invest in developing and supporting its
risk management systems. A thorough review of principal risk
categories was adopted by the Board and climate change risk,
reputational risk and model risk were separately identified as
principal risks for the first time, reflecting their importance in the
Group’s future strategy.
A particular focus of risk management in the year was the
operational changes introduced in response to Covid-19. It was
a priority to ensure that there was no weakening of the risk
management arrangements as a consequence of employees
working from home and the resultant increase in cyber risk.
The Risk Management report is set out in Section B8
Shareholder returns
The actions taken to protect shareholder value and the strong
capital position of the Group underpin the payment of a final
dividend for the financial year. We decided not to pay an interim
dividend, due to the difficulty in determining the long-term
economic impact of the pandemic at that point in time, despite
the strength of our capital ratios. Following significant capital
stress testing the Board has concluded that a dividend for
the year of 14.4 pence per share can be declared, subject to
shareholder approval, giving a dividend cover of 2.5 times,
broadly in line with policy. We thank our shareholders for their
support in the year.
Governance
Conclusion
This was the first year where the Company was operating under
the 2018 edition of the UK Corporate Governance Code. We had
put systems in place before the beginning of the year and were
able to report our compliance with the new provisions.
As part of the new arrangements enhanced employee voice
provisions were instituted and I was pleased to attend our People
Forum during the year to hear directly from our colleagues. I was
also able to meet with shareholders and investor groups over the
year on governance matters and I continue to value their input;
their perspective helps us determine our priorities for the future.
We also present, for the first time in these accounts, a detailed
analysis of how the Board takes into account the impact of its
decisions on all stakeholders. I hope you will find this useful.
During the year, John Heron and Peter Hartill stepped down from
the Board and Finlay Williamson announced his intention to
step down in December 2020. All of them have made significant
contributions to the Group over the years and they leave with
the grateful thanks of their colleagues, my fellow directors and
myself. We will miss their wise counsel.
The Group has performed well through the Covid-19 crisis,
demonstrating its operational robustness and its ability to
respond rapidly to new developments, with new processes,
systems and ways of working. All of this enabled us to support
customers and business partners through this difficult time,
strengthening relationships for the future.
The underlying fundamentals of the Group’s business remain
sound and despite the short-term economic uncertainties which
remain as a result of Covid-19, I believe that the Group is well
placed for the future.
Fiona Clutterbuck
Chair of the Board
3 December 2020
Page 9
Strategic Report A2. Business model and strategy
Paragon at a glance
Paragon is a specialist banking group. We offer a range of savings
products and provide finance for landlords, small businesses and property
developers in the UK.
Listed on the London Stock Exchange, we are a FTSE 250 company,
headquartered in Solihull, employing just under 1,400 people.
Since gaining our banking licence in 2014, our new lending is funded
principally through an online personal savings operation. We have expanded
our operations in buy-to-let and extended into a wide range of commercial
lending markets, including asset and development finance. We also service a
range of consumer loan portfolios through our subsidiary, Idem Capital.
Our history
Paragon began life as a specialist residential mortgage lender in 1985. A pioneer in
buy-to-let lending, in 1995 we launched our first mortgage products for UK landlords in the
growing Private Rented Sector ('PRS') achieving a 10% share in the buy-to-let market
by 2006. After successfully navigating through the financial crisis in 2008, we returned to
new lending in 2010, and in 2014 we embarked on an ambitious transformation to diversify
our funding sources and enter new lending markets.
Paragon Bank was established in 2014 and over the next few years we began supporting
UK businesses in a wide range of sectors, including asset finance and property
development. Today we help more than 400,000 customers to achieve their ambitions.
We have 14
office locations
around the UK
Our values
We have a strong and unique culture underpinned by eight essential values, which we strive to exceed every day. These values
underpin how we operate, what we stand for and how we work together to achieve our goals. We believe that living our values helps us
succeed in fulfilling our purpose (see page 14).
Fairness
To work together to ensure fair
outcomes for all our customers
Professionalism
To maintain the highest standards
and deliver our products and
services with care and accuracy
Integrity
To be honest and open
in everything we do
Humour
To ensure we have fun
while achieving success!
Commitment
To drive the business forward with
determination and to do so with
effort and enthusiasm
Creativity
To identify and create new business
opportunities and apply creative and
effective solutions to problems
Teamwork
To work in harmony and
collectively towards the delivery of
our overall objective
Respect
To treat people as individuals
and listen to their views
Page 10
Our operations
Paragon’s operations are organised into three divisions and new lending
is funded largely by retail deposits. These divisions are supported by the
Group through the provision of capital and central services, including
loan servicing, marketing, information technology and legal support.
This operating model comprises local specialism with strong centralised
resources enabling economies of scale to be achieved and centres of
excellence to be developed.
Mortgage Lending
We provide mortgage finance for UK landlords to
support growth in the Private Rented Sector ('PRS'),
giving people choice and flexibility in housing tenure.
See pages 20 and 21
Commercial Lending
We support UK small businesses operating across
a range of sectors with finance to help them grow.
This includes finance for property developers, motor
finance and structured lending products for
non-bank lenders.
See pages 22 to 25
Idem Capital
We acquire and service UK loan portfolios from other
financial institutions.
Funding
Our principal source of funding for new lending
is our range of savings products offered to UK
savers. Other funding for lending is derived from the
efficient use of Bank of England funding schemes,
while securitisation continues to fund much of the
legacy book and is used tactically. Central funding is
provided through corporate and retail bonds.
See pages 18 and 19
Page 11
Strategic Report Our business model
What is a specialist bank?
As a specialist bank, we focus on lending to customers in markets typically underserved by
larger high street banks who require funding in specific areas. This approach requires us to be
experts in these areas, and we seek to know more than our competitors about our customers
and the markets in which we operate, the products and services we offer, and the risks we incur.
We see specialisation as what makes us different, as our competitive advantage, and it runs
through our business model and strategy.
What we do
A broad
funding base
We fund our assets using a variety
of sources, including retail deposits,
securitisation and bond issuance.
We take care to secure competitive
funding over an appropriate term
to underpin our assets, meet
working capital requirements
and maintain a strong
financial position.
A customer focussed
culture, based on eight
core values, and an
engaged, skilled and
diverse workforce
Generating
growing income
Paragon generates income from
interest and fees earned on our
mortgage, consumer and SME loan
assets. We also earn fees from
third parties for administering
similar loans on their behalf.
Page 12
Lending on
diversified loan
assets
We focus on building our asset base
by originating new loans, developing
new products, diversifying into
new markets and acquiring
loan portfolios.
How we add value
Our core strengths
Customer expertise
Cost control
Management expertise
We have a deep understanding of
our customers and their markets,
designing products to meet their needs
and continually striving to exceed their
expectations.
Distributing loan products principally
via third party brokers, collecting
savings deposits online and operating
mainly from a centralised location
means we run a cost efficient business.
600 million items of customer
data analysed each month
Underlying cost:income
ratio 43.0%
Risk management
Our people
We lend conservatively, based on
detailed credit assessments of
the customer and underlying loan
collateral, to minimise the risk of
non-payment and portfolio losses.
Cost of risk 0.39%
We are committed to helping all our
employees reach their potential and
recognise the importance of diversity,
thereby maintaining a skilled and
engaged workforce.
Gold Investors in People
accreditation
Technology
We are utilising technology to improve
productivity and access new markets,
and are well placed to take advantage
of digital changes to enter new
markets.
New online portal for landlord
customers launched in 2020
We have an experienced management
team with a through-the-cycle track
record.
Average length of service for the
executive management team is
15 years
Culture
Eight core values underpin the way we
do business and how we interact with
our customers and other stakeholders,
with a focus on treating customers
fairly.
91% of employees feel Paragon
has clear values1
Strong financial foundations
We efficiently utilise capital and debt
positions to maintain balance sheet
strength.
CET1 14.3%
1Investors in People
report, 2019
Value created
This approach enables us to create value for all our stakeholders.
Shareholders
Employees
Environment
Creating long-term shareholder
value through growing profits
and dividends.
14.4p dividend per share
See page 40
Customers
Providing tailored lending
products, expertise and working
with intermediaries to help
our customers achieve their
ambitions.
+61 Net promoter score for
savings account opening
See pages 19 and 21
Helping all our people develop
their career and reach their
potential.
Average training per
employee in 2020: 4.2 days
(CIPD average 2.8-3.3 days)
See page 59
Society
Helping the UK economy grow
and supporting the communities
in which we operate.
£100,000 charity donation
to tackle Covid-19 impact
See page 65
Continually reducing our
environmental impact and
designing products that support
positive environmental change.
100% of electricity used
by sites for which we are
responsible was from
renewable energy sources
in 2020
See page 63
Page 13
Strategic Report Our strategy
Helping our customers to achieve their ambitions is central to our success and this is what drives our purpose and our vision.
We have a clear strategy to help us achieve our goals and we have eight important values that underpin our culture and the
way we do business.
Our strategic framework
Our purpose
To support the ambitions of the people and businesses of the UK
by delivering specialist financial services
Our vision
To become the UK’s leading specialist bank by helping our customers achieve
their ambitions and be an organisation of which our employees are proud
Our strategy
To focus on specialist customers, delivering long-term sustainable growth and
shareholder returns through a low risk and robust model
Our strategic priorities
Five strategic priorities help us deliver our strategy (see page 15)
Our values
Eight values underpin our culture and the way we do business (see page 10)
Page 14
Our strategic priorities
Diversification
Specialisation
Growth
As a diversified bank, we have a
broad funding base and lend on
diversified loan assets. We are
continually developing our range
of savings and lending products,
in both existing and new markets,
to grow our business and help us
succeed in becoming the UK’s
leading specialist bank.
We operate in selective markets and
focus on being experts in these often
underserved areas. We lend to customers
operating in specific sectors where our
specialist knowledge and expertise can
help them develop their businesses.
We seek to build strong positions in our
chosen markets and work closely with our
customers to help them succeed.
To ensure we can deliver
long-term sustainable growth
for our shareholders and other
stakeholders, we are continually
seeking new opportunities.
Growth both organically and
through acquisition helps
develop the business to enable
long-term success.
Capital management
Sustainability
Strong levels of capital and liquidity provide
solid foundations for our business. We aim
to recycle capital to reinvest in the business
and provide increasing returns for our
shareholders.
Sustainability influences every aspect of our business. For Paragon,
sustainability means reducing the impact that our operations have on
the environment, ensuring we have a positive effect on our stakeholders
and communities, and delivering sustainable lending through the
products we offer and markets in which we operate.
We have identified a number of principal risks, arising from both the environment in which we operate and our
business model, which could impact our ability to achieve our strategic priorities.
Risks
Capital
Model
Climate change
Insufficient capital to operate
effectively and meet minimum
requirements.
Making incorrect decisions based on
the output of internal models.
Financial risks arising through
climate change impacting the Group
and our strategy.
Liquidity and funding
Insufficient financial resources to
enable us to meet our obligations as
they fall due.
Market
Changes in the net value of, or net
income arising from, our assets and
liabilities from adverse movements
in market prices.
Credit
Financial loss arising from a
borrower or counterparty failing to
meet their financial obligations.
Pension obligation
Our commitments under our
defined benefit pension scheme are
insufficient to meet our liabilities.
Reputational
Failing to meet the expectations and
standards of our stakeholders.
Strategic
Changes to business model or
environmental factors may lead
to an inappropriate or obsolete
strategy or strategic plan.
Conduct
Poor behaviours or decision making
leading to failure to achieve fair
outcomes for customers.
Operational
Resulting from inadequate or
failed internal procedures, people,
systems or external events.
These risks and their mitigants
are discussed in more detail in
Section B8.
Page 15
Strategic Report Our response to Covid-19
Paragon is a strong, resilient and diversified business and we were well placed to deal with the uncertainties that arose from
the Covid-19 pandemic. Our operational response was swift and, in March 2020, we were able to quickly shift our focus from
growth and diversification, to the implementation of well-developed contingency plans, reflecting our highly agile and flexible
infrastructure, technology and people.
Our through-the-cycle experience, robust credit approach, experienced workforce and resilient systems have enabled us to navigate
through the crisis and mitigate the impact on our business.
Our priorities during the outbreak of Covid-19 have been to support our customers and suppliers, protect our people, safeguard our
capital base and preserve the long-term value of our business.
Supporting our customers
and suppliers
The skills and experience of our specialist customer-facing
teams helped us to understand the impact of Covid-19 on
our customers and to support them with a range of payment
relief options and recovery assistance across our portfolios.
Customers representing 21% of loan balances
were given a payment deferral of some sort. Of
those, almost 95% had recovered sufficiently by
31 October 2020 and no longer need support
We introduced a programme of customer
engagement surveys and data collection to
ensure that optimal approaches to customers’
individual situations are identified
We continued to apply the skills and
experience of our in-house surveying team
throughout the period
The flexibility of our workforce meant we could
create pools of employees so that high volume
areas could be addressed, with resource being
moved around the Group
Page 16
We offered payment holidays to our mortgage
customers to help them provide security for
their tenants and we provided funding to our
SME customers by gaining accreditation to
the UK Government’s Coronavirus Business
Interruption Loans Scheme ('CBILS') and Bounce Back
Loans Scheme ('BBLS').
These measures required rapid developments in
IT systems and procedures delivered using agile
techniques and on an accelerated timescale. Our
systems were adapted to record such reliefs and
ensure they did not impact on our customers’ credit
agency records.
Protect our people
Our 1,400 people are central to the success of our business.
Keeping them safe has been our main priority and enabled us
to maintain operational stability throughout this period.
By 31 March 2020, more than 90% of our people were working
from home, supported by IT upgrades and expanded use
of technology across the business. We adopted a flexible
approach to working patterns and introduced policies
focussing on the morale and wellbeing of employees, providing
extensive communication and enhanced management.
Around 10% of our employees continued to travel to work to
deliver essential services to our customers which could not be
carried out from home. To keep them safe, we implemented
strict social distancing, together with additional measures to
promote good hygiene practices.
We introduced regular employee wellbeing surveys to help
us understand how our people were coping and to highlight
where extra support is needed. Our intranet site features a
host of wellbeing information and our internal wellbeing team
provides confidential support and advice to employees across
the Group.
0
employees have been placed
on furlough schemes and
no redundancies have been
necessary
60%
increase in communication
activity on our intranet
94%
of employees believe
Paragon has been
considerate of employee
wellbeing when making decisions
that affect the workforce and 84% of
employees are satisfied or very satisfied
with the support available1
Safeguard our capital base
Paragon entered this period with a strong capital base and
significant liquidity, and our capital position has since been
strengthened with liquidity access remaining good.
The volume of retail deposits in our savings operation
has continued to grow, enhanced by the launch of a flexible ISA
product, which proved successful in the spring 2020
ISA season.
No interim dividend was declared which helped retain
resources to support our customers and continue to deliver
growth, protecting our long-term financial position.
We completed our first fully retained securitisation, containing
£760 million of prime buy-to-let fixed rate mortgage assets.
We have strong levels of capital
and liquidity and are well placed
to develop our core businesses
as well as make the most of any
potential opportunities that may
arise in future...
Nigel Terrington,
Chief Executive
Preserving the long-term value of the business
Building a long-term sustainable business is central to our strategy, and we have continued to take steps to ensure we are in a strong
position to continue to grow lending volumes in our chosen markets when customer confidence returns.
Our historic credit focus and operational resilience
have enabled us to continue to lend across our
divisions and maintain functionality across all
customer-facing and support areas
We have instigated engagement programmes
with our customers and maintained operational
performance with minimal impact on customer
service
We have continued to invest in projects to make
improvements in our systems and technology
We have maintained our prudent approach to
lending, focus on risk and disciplined underwriting
An important part of our response to Covid-19 has been changes to our risk profile. See Section B8 for more details.
1Employee survey, June 2020
Page 17
Strategic Report In focus: Savings
There is no doubt we’ve seen a seismic shift in the savings market this year, which
has brought both challenges and opportunities. Our savings business has proved
nimble, adaptive and resilient to rapid market fluctuations, which has allowed us to
secure strong growth...
Michael Helsby, Strategic Development Director
Our principal source of funding for new lending is our
range of savings products offered to UK savers. The
savings arm entered its sixth year in 2020 and the total
volume of retail deposits has continued to grow and now
stands at £7.9 billion.
ISA innovation
In November 2019, Paragon became one of few
financial providers to offer a Lifetime ISA product,
helping to engage with a new demographic of savers
by predominantly appealing to 18-39 year old first
time buyers. We also launched Wallet and Flexible ISA
features across our portfolio during the year which
allow savers to split their yearly ISA allowance across a
range of ISAs held with Paragon.
45%
year-on-year increase in ISA
applications during March and April
Growth in ISA applications
29.65%
e
u
a
V
l
25.45%
e
m
u
o
V
l
1.47%
-1.81%
Paragon Bank
Total market
Source: CACI, January – September 2020
Products
We offer simple and straightforward products at competitive
rates. This ranges from fixed term products to easy access,
including notice and defined access products and ISAs.
The majority of deposits are sourced through our own website
and through aggregator platforms, however during the year we
expanded our services to be available through an increased
number of digital banks and wealth management platforms,
including Monzo, Revolut and Hargreaves Lansdown.
We also launched postal access across all of our fixed
rate products.
Page 18
5.3£ billion3.61.96.47.9201620172018201920201086420 Market
The UK household savings market is estimated at £1.29 trillion.
The Bank of England base rate declines triggered a reduction
in saving rates offered across the market, with rates sinking to
an historical low in the first months of the pandemic.
The climate of financial uncertainty brought on by the
pandemic also had a profound impact on household deposits
and created a divided picture in the UK savings market. Whilst
many households were at a financial disadvantage due to
Covid-19, others were able to supplement their savings, aided
by reduced opportunities for consumer spending.
As a result, deposits soared during the first few months of the
pandemic, although this then started to plateau as lockdown
measures started to lift.
Between March and June 2020, household
savings deposits increased by nearly
£43 billion, compared to an increase of
£18 billion in the same period in 20191
Customers
In order to monitor customer satisfaction and identify areas
for improvement, we regularly ask customers why they choose
to save with us. We survey our savers at two stages of the
customer journey: when they open a new account and at the
maturity of a product.
187,000
direct savings customers, an increase
of 14.3% on last year
£29,000
average deposit for
direct customers
Existing customers
85% of customers were satisfied with the customer
service they had received when their fixed rate product
matured. 90% of fixed rate product customers would
take out another savings account with Paragon in
the future.
+50 Net promoter score for customers
with maturing products3
We also display customer feedback sourced through
the independent service rating Feefo on our website.
Our average Feefo customer rating stands at 4.3/5,
which is based on more than 1,100 reviews during the
last 12 months.
New customers
+61 Net promoter score for savings
account opening2
75% of new customers reported being very satisfied
with the customer service that they received, with 86%
finding the account opening process easy or very easy.
Amongst new customers, 93% chose Paragon because
we offered the highest rate of interest, however
the FSCS guarantee, online access and the easy
application process were also cited as popular reasons.
Overall, 88% of new customers would consider taking
another savings account with Paragon.
Very quick and easy process to transfer my
ISA from another provider. Everything done
online which was important to me and the
whole thing was done and in my Paragon
account within a week. Excellent service -
very pleased
Customer feedback
1Source: Bank of England 2Net Promoter Score of +61 for new savings account opening process based on an online survey of 3,311 savings customers between 1 October 2019 and
30 September 2020 (total respondents to this survey were 3,438). 3Net promoter score +50 for maturity accounts where fixed rate period ended based on an online survey of
2,972 savings customers between 1 October 2019 and 30 September 2020 (total respondents to this survey were 3,044).
Page 19
Strategic Report In focus: Buy-to-let mortgages
With projected strong population and household formation growth across the UK, demand
for good quality privately rented homes will become more pronounced in the coming years.
Professional, larger-scale landlords have a greater propensity to invest in new property and
it will be these portfolio landlords who will deliver the majority of new stock in the sector.
Paragon’s focus on this landlord customer group means we are well placed to meet this future
demand, helping to provide homes for millions of people...
Richard Rowntree, Managing Director, Mortgages
3.1% share of all new buy-to-let
mortgages in the UK
77,000+ buy-to-let
loan accounts
£10.6 billion buy-to-let
loan assets
Housing tenure
The PRS makes up 20% of the English housing market1
20%
Private
renters
63%
Owner
occupiers
17%
Social
renters
We offer buy-to-let mortgage finance for landlords
operating in the UK’s Private Rented Sector ('PRS').
We were one of the first lenders to pioneer buy-to-let
lending and, since 1996, we have originated
£23.8 billion of buy-to-let accounts. During this time,
we have built an unrivalled level of expertise in the
market, becoming a leading authority on the sector
and a principal source of engagement for regulators
and government.
Our customer-focussed approach, combined with our
expertise in property valuation and risk assessment,
helps us support a wide range of customers,
especially landlords with large-scale property
portfolios, those investing in complex properties and
those operating through corporate structures.
Market
The UK’s PRS provides a vital social function,
delivering accommodation for people who want
the flexibility that renting provides, as well as those
who cannot afford to buy and need the security of a
stable home. Paragon supports socially responsible
investment in the PRS by promoting high standards
in accommodation, ensuring minimum energy
efficiency levels, supporting professionalism in the
landlord community, and working with industry and
government to improve the sector.
The UK’s PRS has more than doubled in size since
2000. Today, in England, it comprises 4.6 million
households, almost 20% of the total1. After
owner-occupation, renting in the PRS is the second
most common housing tenure in the UK. Economic,
social and demographic changes, together with the
flexibility that renting provides, have combined to
make renting in the PRS an increasingly popular
choice.
1MHCLG English Housing Survey 2018-2019
Page 20
Market trends
Market outlook
UK buy-to-let mortgage lending
totalled £42 billion in 2019,
including 72,000 loans for new
house purchase, providing much
needed new homes into the Private
Rented Sector1
Tenant demand has increased in
most UK regions strongly during
2020 – ARLA Propertymark data
shows that prospective tenants
rose to the highest on record during
the month of October 2020
Landlords have supported tenants
throughout the pandemic – nearly
half have put rent relief measures
in place2
Despite strong historic growth in the PRS, Knight Frank
forecasts further sectoral growth of 10% between 2020
and 2024
The number of households in England is expected to grow
from 23.2 million today to 24.8 million by 2028 and 26.3
million by 2038, with much of the increase attributable to
single person households, a group which has a greater
propensity to rent3
Professional landlords have a greater propensity to invest
in new homes – 26% of landlords with 6 or more properties
say they will acquire new PRS property compared to 6% of
those with one property2
The Build to Rent ('BTR') sector is growing, but not at scale
to satisfy forecast levels of tenant demand – 167,853 BTR
homes complete, in construction or planning phase at the
end of Q2 2020 according to the British Property Federation
Customers
We focus on specialist landlords with large portfolios - 59% of Paragon landlords own four or more properties and 36% list their
lettings business as their main occupation. Nearly three quarters (72%) have more than 10 years’ experience as a landlord, and many
have a long standing, valued relationship with Paragon4. In Q3 2020 a typical portfolio:
was worth around £2.4 million5
consisted of 15.3 properties valued
at an average of £154,000 each5
x15
generated an annual income
of £7,499 per property5
achieved a gross rental income
of £113,219 per annum5
Support during Covid-19
74% of Paragon landlords said they were happy
/very happy with the service they received6
The service I have received over the years has
been exemplary...
Landlord customer, February 20206
Even in this difficult time with businesses
locked down you performed really well and
made the whole process easy...
Landlord customer, April 20206
To help our landlord customers during Covid-19 we
introduced mortgage payment holidays and other
forms of relief. This enabled our customers to offer
security and support to their tenants. We have kept
in regular contact with our landlords throughout
the pandemic, conducting three sentiment surveys
between April and September. Well over half of landlord
customers (58%) rated Paragon’s response to the
coronavirus crisis as Excellent/Good compared with
other lenders’ responses. This figure increased to
77% amongst customers who arranged a mortgage
payment deferral4.
68%
of mortgage intermediaries
rated Paragon’s service
during the pandemic as
better than other lenders7
1UK Finance 2BVA-BDRC Landlord panel Q2 2020 3ONS 4Landlord sentiment surveys April, May, September 2020 combined base 872 5BVA-BDRC Landlord panel Q4 2019 - Q3 2020
6Customer satisfaction survey feedback from 924 landlord customers 1 October 2019 – 30 September 2020 7Telephone survey of 392 intermediaries April – September 2020
Page 21
Strategic Report In focus: SME lending
We have been working closely with all of our customers to support them through
this period and have remained open for business. As well as joining the UK
Government’s lending schemes, we are staying in close contact with our customers
to discuss how the pandemic is affecting them and what support they need...
John Phillipou, Managing Director, SME lending
Paragon entered the SME finance market in
2015 with the acquisition of Five Arrows Leasing
Group and we have continued to expand our
offering to small businesses over the last five
years with the acquisition of the asset finance
broker Premier Asset Finance in 2016 and
Iceberg in 2018.
We provide a range of finance solutions for
SMEs covering a wide array of sectors, including
agriculture, aviation, construction, business
equipment, manufacturing, vehicle, technology and
electric vehicles. Our expert SME lending teams
have deep and specialist knowledge, not only in
finance but also in the asset categories within
which they operate.
We offer a range of finance types to fund assets
including hire purchase, finance leases, operating
leases and commercial loans. We also offer
refinancing solutions.
Market
The SME lending market is broad, and Paragon is
focussed on specific asset classes.
The general economic conditions within the UK
influence activity in these markets and other key
drivers include:
•
•
The rate of new work in commercial industries
such as construction
Government regulations and trading
restrictions, particularly for sectors such
as agriculture
• Advances in technology and SME growth
•
Environmental concerns and the drive towards
fuel efficiency
Page 22
£ billion2010200920112012201320142015201620172018201920204035302520151050UK asset finance originationsSource: FLAEquipmentCarsOtherPlant & MachineryCommercial Vehicles Market trends
Market outlook
The asset finance market declined by 11% in
September 2020 compared with the same
month in 20191
The plant and machinery finance sector saw a
fall in new business of 19% in the 12 months to
September 2020, compared to the same period
in 20191
The car finance sector reported growth in new
business of 3% in September 2020 compared
with the same month in 2019. Over the same
period, the commercial vehicle finance and
business equipment sectors reported falls in
new business of 2% and 4% respectively1
In the motor finance market, the number of
new car registrations is expected to grow by
28.3% in 20211
New customs regulations and changes to
tariffs following the Brexit transition period
are expected to impact supply chains for both
the construction and agriculture sectors, in
addition to the wider UK economy
One million new electric vehicles ('EVs') are
forecast to be sold in the UK by 2025 and 11
million by 2040 with consumers increasingly
likely to purchase EVs over conventional
vehicles2
Customers
To help our business customers during Covid-19, we gained
accreditation to offer government-backed Coronavirus
Business Interruption Loans and Bounce Back Loans.
AdCo UK
Switching to
manufacturing
hand gel as a
result of Covid-19
£25.9 million
Total CBILS and BBLS lending
37% of customers offered
additional support
including flexibility with payment arrangements (typically in the
form of an interest-only period) and access to BBLS and CBILS
The support has enabled AdCo to help those
in need and the funding has also assisted
us in sustaining staffing levels without the
need for furloughing. It’s always a pleasure
to work with the Paragon team. They are
efficient, friendly and knowledgeable and
they provide the right support for their
client’s needs...
Stuart Climpson, Director at AdCo UK Ltd
Broker research drives new digital solution
During 2020, we undertook research with our brokers to
gain a clear understanding of their current end-to-end
digital experience and their future expectations, in order to
subsequently improve the experience for the end customer.
Milton Farms
Renewables
(AD generator)
The results highlighted a desire for simplicity, accuracy and
speed across the digital journey, in addition to the need for
lenders to offer an end-to-end digital solution.
As a result of this research, Paragon is in the process of
developing a digital solution that is based on the needs of both
brokers and SME business owners. This continued insight
enables us to be forward-looking and innovative, developing
new ways to best support our customers.
1FLA, November 2020 2Accenture, 2019
Over the years we have built up a
friendship with Paragon, who provide
us not only with competitive rates but
sound professional advice, all under a
relaxed atmosphere. Paragon is able to
respond at short notice which gives us
flexibility in the marketplace...
Edward Morris, Milton Farms
Page 23
Strategic Report In focus: Development finance
Throughout the difficult period during the height of coronavirus, Paragon’s
development finance team honoured all of the facilities we approved pre-lockdown
as well as continuing to support new and existing projects throughout. As a result,
we have seen some excellent opportunities across the last three months...
Robert Orr, Managing Director of Development Finance
Our development finance business provides competitive
and flexible financing solutions targeted at experienced
SME property developers. We started to offer finance
to property developers in 2016 and the acquisition of
Titlestone in 2018 accelerated progress in this area.
We support developers with a successful track record who are
delivering an attractive product, correctly priced in the right
locations. Our highly experienced team is based in London, as
well as in locations across the Midlands, the North West and
the North, offering tailored funding solutions to our clients.
Products
We focus on residential development loans, accounting for
98% of business written in 2020, and support experienced
developers involved in multi-unit residential, new build,
conversion or refurbishment projects. We provide loans up to
£30 million and we lend up to 65% of the gross development
value ('GDV').
We also provide:
£4.8 million average
facility
Bridging finance
Pre-planning finance
Access to short-term funding
when securing the acquisition
is the priority
Working with developers
to help fund sites that have
not yet gained full planning
permission
Student accommodation
development finance
Helping experienced
developers build quality
student accommodation with
good letting potential
Marketing period loans
Funding for the marketing
period once a development
reaches completion
Page 24
Market
The UK property market and rate of housebuilding drive the
opportunities for development finance. The general economic
conditions within the UK influence activity in the residential
development sector, alongside interest rates, lifestyle choices,
government targets for new homes and help to buy schemes.
Customers
75% of sites remained open during lockdown
and all sites fully open by mid-June
Only 15.6%
of the portfolio needed additional
support at the peak of the pandemic
(September 2020: 0%)
Market trends
Demand for new homes in the UK continues to
grow due to population expansion and forecast
household formation. The UK Government has
set a target of 300,000 new homes per year,
yet housebuilding activity currently falls below
that - 178,300 homes were completed in 2019,
with 151,750 started
To accelerate the number of new homes
being constructed, the UK Government
has launched proposed planning reforms,
including automatic planning permission on
land designated for growth. Nearly half of SME
housing developers cited planning issues as
restricting their ability to build new homes
Consumer demand is driving the growth
of three and four bedroom homes, which
accounted for three in every four homes
completed in England in the past year. The
proportion of completed flats fell to its lowest
level for 20 years at 15%
Covid-19 impacted developers’ ability to
operate during the second quarter of the
calendar year. Between March and June almost
40,000 fewer homes were built in England and
Wales as a result of Covid-19
37% of SME developers are concerned about
the impact of restricted mortgage availability
and what this will mean for prospective
househunters (Federation of Master Builders
Housebuilder survey)
£15.5m funding for The General, Bristol
The Paragon team listened to our
requirements and were able to quickly
structure a great deal that matched our
operational needs...
£3.5m funding for Brick House, Romford
The project was made much easier by
Paragon’s great Relationship Manager,
who thoroughly understood our needs
as developers and was able to provide
excellent support throughout all stages
of the development as it progressed.
Paragon is a trusted partner...
Tim Sargeant, owner of City and Country
Daren Burney, Managing Director of Burney Essex Ltd
Page 25
Strategic ReportNumber of dwellings2003 - 20042004 - 20052005 - 20062006 - 20072007 - 20082008 - 20092009 - 20102010 - 20112011 - 20122012 - 20132013 - 20142014 - 20152015 - 20162016 - 20172017 - 20182018 - 20192019 - 2020350,000300,000250,000200,000150,000100,00050,0000New homes completedEngandGovernment targetSource: MHCLG - House building: permanent dwellings completed Sustainability
Sustainability is central to our long-term success. It influences every aspect of our business, from the markets we enter
and the products we offer, to the support we give our customers and the culture that we cultivate at Paragon. We have a
responsibility to use our influence and our resources wisely and we work diligently to support the communities in which we
operate and the environment upon which we all depend.
Helping customers
We want our customers to be confident that we will always consider
their needs and act fairly and responsibly in our dealings with them. We
are committed to ensuring good outcomes and fair treatment for all
customers across the Group.
7/10 landlords rated Paragon’s Covid-19 support as good
or excellent. See page 21.
We expanded our Insight team to augment our customer
understanding. Not only do we measure customer satisfaction,
we also work to identify what customers value most so that
we can further improve our products and service.
Offering the right support to vulnerable customers is
essential and we work hard to identify and support those who
need extra care, particularly during Covid-19.
Working better
Working better means building a strong and inclusive team with shared values and a commitment to helping our customers achieve
their ambitions. We gauge success using a range of metrics and continuously challenge ourselves towards higher achievement.
The Investors in People framework helps
us assess how well we lead and support our
people. Gold accreditation and Champion
status highlight our success.
Our wide-ranging development programme
helps employees grow their capability and
achieve their potential.
Employees enjoy comprehensive wellbeing
support to boost physical, emotional and
financial wellbeing.
We are a signatory to HM Treasury’s Women in
Finance Charter, part of an external mentoring
programme, led by the 30% Club and delivered
by Women Ahead, and work with The Women’s
Association to increase the visibility of women
in the workplace.
Our newly formed Equality, Diversity and
Inclusivity Network is designed to support
all employees and champion ideas to make
Paragon an even more inclusive workplace.
Page 26
Caring for the environment
We support the UK’s ambition to reduce greenhouse gas
emissions to net zero by 2050. We are taking steps to quantify
and manage climate-related financial risks associated with
our lending and to develop products which will support our
strategic aim for sustainable finance.
Working together, we
now have an urgent need
to measure and protect
against the impact of
irreversible climate
change...
Richard Woodman
Chief Financial Officer
Lending sustainably
Operational impact
Climate change and risk
Promoting sustainable finance
100% renewable energy used at owned sites
This year, the Board adopted
climate change as a principal risk,
ensuring we consider climate issues,
alongside capital and liquidity, when
making decisions and planning for
the future.
SFS, who provide vehicle leasing
for local authorities, hosted a Low
Carbon Emissions Awareness Day to
highlight the crucial considerations and
challenges for clients in delivering low
emission vehicle projects.
Key performance indicators highlight our
success in reducing Paragon’s operational
impact on the environment. Our Green Charter,
environment policy, risk management and
procurement approach provide a framework for
continuous improvement.
Supporting communities
We aim to be an energetic and valuable contributor to the communities in which we operate, and we are actively involved in a
wide range of volunteering and charity partnerships.
Employee volunteer scheme
Charity of the year
Covid-19
Employees are encouraged to take
an annual volunteer day to help
at one of a range of community
projects focussed on reducing
poverty and improving education.
Employees selected Macmillan Cancer
Support as their charity partnership for
2020, raising in excess of £30,000 through
events including Move for Macmillan and
Paragon’s Biggest Coffee Morning.
In May, Paragon made a £100,000
donation to tackle the impact of
Covid-19, split between the NHS,
Solihull Change into Action, Age
UK and Macmillan.
Page 27
Strategic Report Nigel Terrington
Chief Executive Officer
Paragon’s business model has been built
upon strong financial and operational
resilience, through-the-cycle sustainability
and crucially, adaptability...
Page 28
A3. Chief Executive’s review
Introduction
Trading performance
2020 has been an eventful, challenging and unprecedented year.
It started with the run-in to the Brexit Withdrawal Agreement
and the general election. The strength of the economy in the
first few months of the year was brought to an abrupt halt with
the emergence of the Covid-19 pandemic and lockdown. The
consequences have been far-reaching for the economy, society
and the political landscape and it will change forever how we
work, how we live, how we buy and sell goods and services, and
how we interact.
Paragon’s business model has been built upon strong financial
and operational resilience, through-the-cycle sustainability
and crucially, adaptability. All these elements have been tested
this year. Whilst the year had started well at an operating level,
with strong new business volumes and good momentum, the
rapid onset of the crisis meant that our priorities had to be
dramatically changed. The new focus was on protecting our
people, supporting our customers, protecting our suppliers,
preserving our capital and protecting the longer term franchise
of the business.
Whilst our business model has been tested across much
of 2020, I am pleased to say it has stood up to these tests.
Paragon’s focus will remain on reinforcing the fundamentals of
our business, whilst looking for the opportunities that this new
world order will invariably create.
Response to Covid-19
The business reacted swiftly to the onset of Covid-19. Within four
days of the national lockdown, over 90% of our employees were
working from home. Our technology has been resilient, and we
maintained all our product and service offerings throughout,
including during both lockdowns.
Customer support was central to our activities across all
business lines. Temporary payment reliefs were provided to
mortgage, consumer and SME lending customers impacted
by Covid-19, the vast majority of whom have returned to full
payment as the year progressed, with 97% of the customers
granted payment reliefs fully up to date at 30 September 2020.
We also participated in the UK Government’s business lending
schemes.
Paragon has always maintained a strong focus on prudential
strength. Capital ratios have been robust throughout and by the
year end, CET1 stood at 14.3%, up from 13.7% a year earlier, after
allowing for a full-year dividend at policy levels. Liquidity levels
have been strong, benefitting from increasing diversification of
our funding sources and a prudent approach to maintaining high
cash levels.
Paragon’s prudent lending approach has also resulted in
exemplary portfolio strength and measures were taken to
protect against the economic consequences of the pandemic
with a tighter lending risk appetite. The Group’s portfolio is credit
defensive, with 99% of the book secured and only 4% of the
mortgage portfolio having a loan-to-value ratio greater than 80%.
New lending activities were disrupted during lockdown,
particularly in mortgage lending where the housing market was
effectively closed. Most of the impact was felt in the second half
of the year, with new lending down approximately 20% on the
first half. However, with improved levels of customer retention
the loan book expanded by 3.7% year-on-year, and lending
volumes remained robust despite the challenges presented by
Covid-19.
In mortgage lending, a strong first half was tempered by the
impact of lockdown, when the housing market was effectively
closed for a two-month period. Landlord demand rebounded
quickly in the summer months once the housing market
reopened, with pent-up acquisition opportunities and the
introduction of the Stamp Duty holiday contributing to a
replenished pipeline.
Development finance benefitted from approximately 80% of
sites remaining open through the lockdown and the long-term
nature of the product, with phased lending commitments.
However, SME lending felt a greater impact as customers sought
to defer investment decisions or chose instead to draw under
one of the UK Government’s funding initiatives.
This disruption to lending has now largely played through the
business, notwithstanding the effects of a second wave and
a further lockdown. At the same time, we are tracking the
emergence of the expected credit losses which we have already
provided for. The pipelines across the key business lines have
rebuilt to pre-Covid-19 levels and, in some cases, are close to
record levels. This momentum bodes well for the coming year.
In March the Bank of England reduced base rates to just 10bp.
For the Group this resulted in the repricing of assets ahead of
liabilities generating a short-term impact to Net Interest Margin
(‘NIM’) in the second half. This had substantially unwound by
the year end and we expect the structural upward trajectory in
margins witnessed in recent years to resume going forward.
Financial performance
The Group reported an operating profit of £120.0 million for
the full-year, 30% below 2019, largely driven by the IFRS 9
impairment charge which rose by over 500% year-on-year to
£48.3 million, and was taken in anticipation of the expected
impacts of Covid-19. Given the extensive government support
to the UK economy, which has now been extended for a further
period, much of this impairment charge is unlikely to crystallise
in the form of customer defaults and write offs in the near term.
Nevertheless, our approach has been conservative, applying
post-model adjustments to modelled expected loss outputs.
These were based on our close understanding of the customer
base and reflected the Group’s economic forecasts, anticipating
the potential impact on our loan portfolio of the inevitable real
economic consequences of the pandemic. Notwithstanding this
impact on profitability, the Group still delivered an underlying
return on tangible equity of 9.8% (9.7% on a statutory basis).
The huge uncertainty in the early stages of the pandemic
meant that the Board took the decision at the time of the
half-year results not to pay a dividend. The Group’s resilient
performance, strong capital ratios and our assessment of the
book under stress gives us sufficient confidence to declare a
full-year dividend of 14.4 pence per share in line with the policy of
maintaining dividend cover of 2.5 times.
Page 29
Strategic Report Business model developments
Our operating capability was thoroughly tested this year and
has proven its resilience and adaptability. The efficient switch
to home working enabled many of our customers to receive
high levels of support across the depths of the lockdown
period through the provision of forbearance and participation
in government-sponsored initiatives. The experiences of 2020
will have a far-reaching impact on banking generally and on how
customer engagement is undertaken in the future.
Despite the challenging environment, we delivered a number of
customer and introducer-facing systems across the year. Whilst
there have been some delays to the roll-out of the change road
map this year it is likely we will see an acceleration of the new
technology plans as digitalisation and greater workforce location
flexibility emerge.
Paragon is a data-focussed business. This background,
together with strong credit-focussed governance structures,
has supported our application for IRB accreditation. IRB would
allow internal credit models, specific to the Group, to be used
to determine capital requirements. The greater use of such
models within the Group’s decision-making and capital analysis
will further enhance our risk management over time. The IRB
application process can be a lengthy one and for Paragon it has
begun with its buy-to-let mortgage portfolio, with a subsequent
roll-out to the Group’s other lending portfolios scheduled over
the next few years.
The Group's savings platform has seen material growth during
the year, at much improved pricing with stock rates falling from
1.81% at 30 September 2019 to 1.34% at 30 September 2020.
Strong direct inflows have been supplemented by closer ties
with third-party platforms providing further diversification to
our funding strategy. We expect to build on this strategy by
increasing the number of third-party relationships and further
extensions of our product range.
Alongside retail savings we have continued to broaden our
wholesale funding facilities, having accessed securitisation
markets, expanded warehouse capacity and increased central
bank funding through access to the Bank of England’s TFSME
scheme.
Diversification is as important for our liabilities as it is in our
assets. Warehouse and securitisation funding now represents
27.4% of total liabilities compared to 95.6% in 2014.
People
The performance of our people has been exceptional during this
challenging year. Supported by our technology team, the move to
home working was delivered efficiently and quickly, with minimal
business interruption.
Each of our operating businesses remained open for new
business and to support customers throughout the year. The
material increase in customer contact to put appropriate
arrangements in place was delivered effectively and swiftly,
demonstrating the adaptability of our people and processes.
A key priority of our strategic response to Covid-19 was the
protection of our long-term franchise – I firmly believe the
incredible performance of our various teams has enhanced this
position across 2020.
The flexibility of our employee base also facilitated a rotation of
certain roles from front-end underwriting to a more customer
service focussed position. There has been greater flexibility
applied to working patterns and a material focus on enhanced
communications, morale and wellbeing. When surveyed, 94% of
our employees believed the Group had been considerate of their
wellbeing when making decisions affecting the workforce and
84% of our people were either satisfied or very satisfied with the
support available for them.
Paragon has not used the Coronavirus Job Interruption
(furlough) scheme, nor has it made any redundancies since the
onset of Covid-19.
Sustainability
2020 was a fundamentally important year in the recognition
of the significance of some of the non-financial aspects of
our business. We have always ensured that a wide range of
stakeholders’ interests are considered and, where appropriate,
factored into strategy and policy. We are now explaining
more fully about what we do across a range of stakeholder
communications.
Paragon recognises that sustainable development can only
be delivered through an increased awareness of such impacts
across the business, embedded in its culture and values. The
Board is fully engaged with this project and during the year
made a clear statement of its commitment by promoting climate
change to a principal risk within the governance framework,
ensuring that environmental sustainability is placed at the core
of our business model.
Outlook
We have delivered on the objectives we set at the start of the
pandemic to protect our people, support our customers and
business partners, preserve capital and protect the longer term
franchise of the business. As a consequence, we are a stronger
business today than before the crisis.
Our business model has proven its resilience both financially and
operationally. Capital ratios and liquidity are strong, the balance
sheet is credit defensive and the franchises have been enhanced
during this difficult period.
Covid-19 has cast a long and dark shadow on the people and
businesses of the UK, but we are well placed to manage the
uncertainty that will run into 2021 and beyond. We remain
committed to supporting our customers, helping them navigate
through this period and achieve their ambitions, and believe we
are in a strong position to capitalise on the opportunities which
will inevitably emerge as the UK recovers from this pandemic.
Nigel Terrington
Chief Executive Officer
3 December 2020
Page 30
A4. Review of the year
A4.1 Lending
The Group’s operations are organised into three divisions, based
on product type, origination and servicing capabilities. This
organisational and management structure has been in place
throughout the year.
New business advances and investments in the year, together
with the year end loan balances, by division, are summarised
below:
Advances
in the year
Net loan balances
at the year end
2020
£m
2019
£m
2020
£m
2019
£m
Mortgage Lending
1,259.7
1,568.6
10,819.5
10,344.1
Commercial Lending
790.8
968.0
1,514.8
1,452.1
Idem Capital
-
-
297.1
389.9
2,050.5
2,536.6
12,631.4
12,186.1
The Group’s loan book increased by 3.7% in the year, despite
the restrictions in lending activity caused by the Covid-19 crisis
which depressed new business volumes across the business in
the second half of the financial year.
A4.1.1 Mortgage Lending
The Group’s Mortgage Lending division offers buy-to-let first
charge and owner-occupied first and second charge mortgages
on residential property in the UK. In all its offerings, the Group
targets niche markets where its focus on detailed case-by-case
underwriting and its robust and informed approach to property
risk differentiate it from mass market and other specialist lenders.
Its core products are buy-to-let residential property mortgages,
targeted at specialist landlords (those who have four or more
properties and / or operate through corporate structures).
Housing and mortgage market
During March 2020 the UK housing market began to be
impacted by the Covid-19 crisis, with the increased levels of
economic uncertainty impacting on house purchase decisions.
Government responses on lockdown and social distancing also
placed practical limitations on the operation of the housing
market. RICS reported in its April 2020 Residential Market
Survey that levels of activity in the housing market were the
weakest since the inception of the survey in 1999.
To help mitigate the impact of the national lockdown on
homeowners and landlords, the UK Government introduced
mortgage relief schemes, covering both owner-occupied and
buy-to-let mortgages of residential property which lenders in the
sector then had to put in place. These enabled customers to take
payment holidays without this impacting on their credit history
or score. These holidays were initially for three months, but
subsequently extended to six months if required.
In November 2020, after the end of the year, the payment
holiday regime was extended further to address the new wave of
Covid-19 restrictions. Many of the Group’s landlord customers
will have been able to provide rent relief to their tenants as a
result of these arrangements.
Activity in the mortgage market recovered in the final quarter of
the financial year, following the end of the UK lockdown, which
allowed physical valuations of properties to resume and house
moves to take place.
For most of the first half of the financial year the prospects for
the UK housing market had appeared relatively positive, with
economic uncertainty reduced by the UK general election
in December 2019. This led to increasing transaction levels
and upward pressure on house prices following a period of
stagnation in the market. Market conditions for mortgage
customers had remained benign, with low interest rates, arrears
and possession levels.
This pattern is clearly shown in the Bank of England’s data on
mortgage approvals. The total approvals for the year ended
30 September 2020 of £242.3 billion reduced by 7.8%
(2019: £262.9 billion), with most of the reduction attributable
to the quarter ended June 2020 when mortgage approvals,
at £34.8 billion, were half of the £69.5 billion recorded in the
corresponding quarter of 2019.
House prices began to increase after the election, with the
Nationwide Building Society reporting an average increase of
2.0% in the first six months of the financial year. The expected
downward pressure on house prices following the onset of
Covid-19 did not emerge. Rather than withdraw from the market,
homeowners looked to improve their housing position, resulting
in a structural shift in demand buoyed by the stamp duty holiday
introduced by the UK Government. As a result, house prices
increased by 5.0% over the financial year, benefitting the Group’s
security values. As the impact of the pandemic continues to
emerge, significant uncertainty on the near and medium-term
outlook will remain.
Page 31
Strategic Report£ billionOct ‘18Nov ‘18Dec ‘18Jan ‘19Feb ‘19Mar ‘19Apr ‘19May ‘19Jun ‘19Jul ‘19Aug ‘19Sep ‘19Oct ‘19Nov ‘19Dec ‘19Jan ‘20Feb ‘20Mar ‘20Apr ‘20May ‘20Jun ‘20Jul ‘20Aug ‘20Sep ‘2030,00020,00025,00015,00010,0005,0000Mortgage approvals (Bank of England) (£billion)1 October 2018 – 30 September 2020 The Private Rented Sector (‘PRS’) and the buy-to-let
mortgage market
Specialist landlords form the largest part of the Group’s target
market. These are landlords with four or more rental properties
who generally run their portfolio as a business and have a
high level of personal day-to-day involvement. This approach
has meant these specialist landlords have been better placed
to address the challenges than other classes of mortgage
customer.
The Group is amongst a small number of specialist lenders
addressing this sector, which is underserved by many of the
larger lenders. Non-bank lenders had a significant position in this
market before the Covid-19 outbreak, but their funding issues
have led to a restriction of the supply of credit from this source,
providing opportunities for the Group.
Total mortgage originations in the Group reduced by 19.7% in
the year. The major factor driving the reduction was the Covid-19
lockdown, and its impact on market activity over the summer
months.
Buy-to-let
Specialist buy-to-let lending activity fell 14.9% when compared
to 2019, principally as a result of the restricted market in the
summer months, whereas non-specialist, or simple, buy-to-let
lending fell by 47.8% as the Group tightened its focus on the
specialist market. The new business pipeline, the loans passing
through the underwriting process, was £868.1 million at the year
end (2019: £911.7 million), showing business returning to more
normal levels heading into the new financial year.
Buy-to-let lending reflected the performance of the larger
mortgage finance sector, with new advances of £38.2 billion in the
year ended 30 September 2020 reported by UK Finance (‘UKF’),
compared to £41.8 billion in the same period in the previous year,
a reduction of 8.6%, principally attributable to the performance in
the June quarter. Refinancing of existing borrowings continued to
represent the bulk of this activity, with 72.8% of new advances by
value representing remortgages (2019: 71.3%).
The Group sources the majority of its new buy-to-let lending
through specialist intermediaries and it continues to invest to
ensure the service offered to them is excellent. All the Group’s
significant intermediaries were able to stay in operation through
the Covid-19 crisis. During the year the Group’s regular surveys
of its intermediaries showed 91% were satisfied with the ease of
obtaining a response from the Group (2019: 84%), delivering a
net promoter score at offer stage of +56 (2019: +60).
Whilst Covid-19 restrictions meant that on-site property
valuations could not be conducted during April and May 2020,
restricting new business activity, the Group developed an
enhanced desktop valuation process and introduced products
with stricter than normal loan-to-value limits. These changes
allowed lending to continue through the lockdown period,
particularly in the larger remortgage market, ahead of the phased
reintroduction of physical valuations in late May.
In common with other lenders in the market, the Group tightened
policy on properties which it could accept as security, especially
in the student lettings and complex property space. Market
limitations on propositions have remained in place, to a greater
or lesser extent, post lockdown, with the level of supply into the
buy-to-let market such that lenders can be selective.
The lettings market remained stable through the early part of
the period, with RICS reporting continuing supply issues and
increasing tenant demand towards the end of the year, leading
to an expectation of rent increases. The Covid-19 impact saw a
short-term downward pressure on supply, demand and rents,
but in its September survey RICS expected a generally upward
trend for rents and there is some evidence that restricted
volumes in the residential mortgage market have kept potential
first time buyers in the rented sector.
Lending activity
The Group’s new lending activity in the segment during the year
is set out below.
2020
£m
2019
£m
1,119.0
1,315.1
86.4
165.4
1,205.4
1,480.5
0.3
54.0
11.9
72.0
1,259.7
1,564.4
-
4.2
1,259.7
1,568.6
Originated assets
Specialist buy-to-let
Non-specialist buy-to-let
Total buy-to-let
Owner-occupied
Second charge
Acquired assets
Page 32
This result was achieved against the background of Covid-19,
highlighting the value placed by the intermediary community on
the Group’s offering and on their relationship with the business.
This relationship was enhanced by the Group’s response to
the Covid-19 crisis, with a survey of intermediaries finding that
around 70% believed that its response was better than that of
other lenders. Anecdotal evidence suggests that response times
for brokers have generally been better than for other lenders in
the market due to the proportion of the Group’s employees who
were able to remain active through the crisis.
The business is aware of the potential for climate change to
impact on the mortgage business and seeks to mitigate risk
through careful consideration of the properties on which it will
lend. Since 2018 all properties accepted as security must have
a minimum Energy Performance Certificate rating of E at the
time of offer. The Group had EPC records for 85% of its mortgage
book at 30 September 2020 with 98.1% of these covered by
certificates of grade E and higher (on a scale of A to G). Such
action by lenders will also lead to improvements in the housing
stock in the PRS.
The Group also monitors the physical risks from climate change
on its property exposure. As part of the underwriting process
a property’s flood risk is considered and less than 2.2% of our
properties were situated within a medium or high flood risk zone
(2019: 2.5%).
The business is also working with the Green Finance Institute
to develop products which would encourage energy and carbon
efficiency for the future.
Other lending
The division’s other first and second charge mortgage lending
has been carefully managed to ensure that only lending with
appropriate risks and returns is undertaken.
Lending in the Group’s second charge mortgage operation
was in line with plan in the first half-year, however it was scaled
back in the second half in response to Covid-19. Within the
second charge mortgage market the Group targets only higher
credit quality customers, rather than the lower-rated borrowers
generally associated with this sector. This limits potential lending
in this field but should provide more resilience in adverse
economic conditions, as proved to be the case in the pandemic.
The Group continues to limit its exposure to first charge
residential lending to owner-occupiers, given the pressure
on market yields and a limited demand for products where
its specialist approach adds value. The opportunities for the
Group in this area principally relate to lending to the existing
professional landlord customer base.
Performance
The outstanding loan balances in the segment are set out below,
analysed by business line.
30 September
2020
30 September
2019
£m
£m
Post-2010 assets
First charge buy-to-let
6,202.5
5,427.7
First charge owner-occupied
Second charge
51.2
182.6
68.3
171.6
6,436.3
5,667.6
The Group is also confident that its robust approach to valuation
and the loan-to-value coverage in its buy-to-let book, at 65.8%
(2019: 67.4%) provides it with significant security in the face of
the present economic stress. The levels of interest cover and
stressed affordability in the portfolio suggest that its customers
are also well placed to manage Covid-19 impacts on their
businesses in the longer term.
Second charge arrears increased to 0.62% from 0.38% in the
year, reflecting the increased seasoning and size of the portfolio.
There were no arrears on post-2010 residential lending.
The Group’s receiver of rent process for buy-to-let assets helps
to reduce the level of losses by giving direct access to the rental
flows from the underlying properties, while allowing tenants to
stay in their homes. The Group’s receiver of rent team worked
with tenants through the Covid-19 lockdown to manage the
rent position in a responsible manner. At the year end 623
properties were managed by a receiver on the customer’s behalf,
a reduction of 8.8% since 2019 (2019: 683 properties). Almost
all these cases currently relate to pre-2010 lending, with cases
being resolved on a long-term basis to ensure the best outcome
for the Group, landlord and tenants.
Legacy assets
Outlook
First charge buy-to-let
4,381.3
4,674.2
First charge owner-occupied
1.9
2.3
10,819.5
10,344.1
At 30 September 2020, the Group’s total net mortgage balance
was 4.6% higher than at the start of the financial year, despite
the impact of Covid-19 on advances and provisions. The balance
on the post-2010 buy-to-let portfolio grew by 14.3% and it now
represents 57.3% of the total (2019: 52.5%).
The annualised redemption rate on buy-to-let mortgage assets,
at 6.6% (2019: 8.6%), has continued to reduce, driven partly by
the slowing of the market due to Covid-19, partly as a result of
continuing initiatives to encourage existing customers to remain
with the Group and partly as a result of the increasing average
length of fixed rate periods over recent years.
Arrears on the buy-to-let book decreased in the year to 0.15%
(2019: 0.18%), although some arrears will inevitably have been
suppressed by payment holidays. Arrears on post-2010 lending
were at 0.03% (2019: 0.03%). These arrears remain very low
compared to the national buy-to-let market, with UKF reporting
arrears of 0.52% across the buy-to-let sector at 30 September
2020 (2019: 0.42%).
While just over 20% of the Group’s buy-to-let customers took
payment holidays when offered, less than 5% remained on
payment holiday at the year end, with further reductions being
seen in October and November. Customer surveys indicated
the motivation for taking these holidays was, in many cases,
precautionary, to ensure they were well positioned to deal
with potential future tenant payment issues. The majority of
respondents were also confident in their ability to resume
payments after the end of the payment holiday period.
This strong performance reflects the Group’s focus on the credit
quality and financial capability of its customers, underpinned by
a detailed and thorough assessment of the value and suitability
of the property as security.
While the impact of Covid-19 means that the short-term macro-
economic outlook for the Group and its landlord customers
is difficult, the Group remains optimistic about its longer term
prospects. The vast majority of customers remain committed to
the PRS and their positive experiences of the Group through this
period will have enhanced business relationships.
The funding of the PRS is vital to the housing infrastructure of
the nation and that will ensure that the demand for the Group’s
products and services remains into the future.
A4.1.2 Commercial Lending
The Group’s Commercial Lending division brings together
various streams of predominantly asset-backed lending to, or
through, commercial organisations and has been a major focus
of growth over recent years.
The proposition is delivered through four key business lines;
•
•
•
SME lending, providing leasing for business assets and
unsecured cash flow lending for professional services firms,
amongst other products
Development finance, funding smaller, mostly residential,
property development projects
Structured lending, providing finance for niche non-bank
lenders
• Motor finance, focussed on specialist parts of the sector
In each of its markets the division’s competitors are small banks
and non-bank lenders. They are markets in which the largest
lenders have little presence, creating a credit availability issue
for customers and significant opportunities for the Group.
The division relies heavily on specialist teams to address the
separate business lines, either sourced externally or developed
internally.
The Group’s strategy in this wider market is to target niches
(either product types or customer groups) where its skill sets can
be best applied, and its capital effectively deployed to optimise
the relationship between growth, risk and return.
Page 33
Strategic Report Given the nature of the assets financed, in the second half of
the year Covid-19 resulted in a material number of customers
requesting some form of payment relief and new advances being
sharply reduced. However, the SME sector has been the focus of
government support programmes and the Group was authorised
to provide loans under the CBILS and BBLS initiatives, making
advances under these programmes from June onwards.
As part of its strategy for the division the Group continues to
enhance its operational functionality in this area, developing
technological solutions both to enhance customer service
and to assist in the procuration processes, enabling potential
customers, or the brokers they use, to access appropriate
finance.
The common themes of these diverse business lines are a
deep understanding of their respective markets and customer
needs, together with expertise in the valuation of any security,
collections and asset recovery. In common with the rest of the
Group, the division’s focus is on the maintenance of strong
credit standards and it does not pursue business volumes at the
expense of margins.
Work is ongoing to review the division’s exposure to climate
change risk. In development finance, the focus has been on
determining the environmental impact of projects and the
energy efficiency of the properties being constructed, whereas
in motor finance the assessment has been on the fuel types
and emissions of financed vehicles. Within SME lending,
work is in progress to classify the sectors in which each of our
clients operate with respect to their respective climate change
sensitivities, while the potential for green financing solutions is
being investigated.
Lending activity
During the first half of the year new business levels were strong
across all business lines in the division. The Group’s focus on
widening the customer base and improving yields delivered both
increased loan books and strong credit performance.
The onset of Covid-19 in March 2020 had a significant impact
on volumes in the second half-year. The impact on customers’
businesses, and the levels of uncertainty for those not directly
impacted, reduced the appetite for new finance, while the
practical issues of sourcing and delivering new assets in a
lockdown situation also had an impact on the leasing business.
The Commercial Lending segment saw an 18.3% reduction
in new advances compared to the previous year. While
development finance continued to grow, though less strongly
than planned (by 6.2%) activity in other areas was more
materially reduced. The new lending activity in the segment
during the year is set out below.
Development finance
SME lending
Structured lending
Motor finance
2020
£m
385.3
288.0
7.6
109.9
790.8
2019
£m
362.9
406.5
49.7
148.9
968.0
The impact of this new business has been to increase the
Group’s overall Commercial Lending exposure by 4.3% in the
year to £1,514.8 million (2019: £1,452.1 million).
SME lending
The SME lending business performed well through the first
five months of the financial year, with the Group’s customers
regaining some level of confidence after the political
uncertainties of 2019 and becoming more willing to enter
into capital commitments. Advance levels in this period were
strengthening and yields were being maintained.
The Covid-19 outbreak reduced new business activity from
March, both as a result of customer unwillingness to enter into
new commitments and, in the leasing business, as a result of
the practical difficulties of sourcing and delivering large pieces
of equipment, some internationally, in a global lockdown.
Customers’ access to other, cheaper funding sources through
government sponsored relief schemes also reduced the scope
for new business.
As a result of these impacts, new asset finance leasing volumes
reduced by 42.5% compared to the comparative period in
2019, to £166.1 million (2019: £288.7 million). Investment in
operating leases has also continued with £12.9 million of assets
acquired in the period (2019: £11.6 million). Short-term lending
to professional services firms, reduced significantly, by 32.9%
to £79.1 million (2019: £117.8 million) as Covid-19 related tax
deferrals from March meant that customers did not require to
draw down in order to satisfy their liabilities. As a result, across
all products, SME lending decreased by 29.2% to £288.0 million
(2019: £406.5 million).
The Covid-19 crisis saw around 46% of the SME lending
business’s customers applying for some form of payment relief.
Relief in this market is normally given as an interest only period,
where the customer continues to make payments. The financial
issue for many of the customers, particularly in sectors such
as construction, was the inability to generate income from the
financed assets during the lockdown period, creating a
cash shortfall.
In line with the approach taken on the mortgage book, extended
payment holidays were offered to SME Lending customers, but
these were taken up by a substantially smaller number than
the initial three month reliefs and at the year end only 2.1% of
accounts remained on a payment holiday.
The long-term impact of Covid-19 on customers is difficult to
predict at this stage, particularly given that many may have
received short-term relief in the form of CBILS or BBLS loans
from their relationship banks, although feedback from the
enhanced customer contact programme is encouraging.
The Group received authorisation to participate in the
government-sponsored British Business Bank CBILS and
BBLS schemes, providing funding to SMEs under a government
guarantee. The Group has used this facility primarily to support
its existing customers, completing £25.9 million of loans in the
year, and anticipates making further advances, both to new and
existing customers into the new financial year. The Group is
working to support industry initiatives to establish a common
collections framework for CBILS and BBLS, providing certainty to
customers and hopes this can be established in the near future.
The Group has continued to focus on improving its operational
procedures in this area, to deliver better customer service and
enhance margins, focussing on people and processes and
on improving the handling and use of data in the business to
provide better targeting and analysis and to enhance customer
experience. These developments continued to progress through
the Covid-19 period, although they were delayed by the demands
of the systems and process upgrades required for payment
reliefs, CBILS and BBLS. The Group expects these investments
to impact positively on efficiency and agility going forwards.
Lending activity into the new financial year will be dependent
on the uncertain impact of the ongoing Covid-19 situation, with
volumes likely to remain depressed in the short-term. The priority
of the business will be to support its customer base through the
crisis while working to enhance the proposition for the future.
Page 34
Development finance
Motor finance
Activity levels in the Group’s target market were healthy in the
first half of the financial year, with increased enquiry levels
and higher levels of new commitments, and prospects looking
promising up to the end of February. At that point the onset
of the Covid-19 pandemic impacted the market, with levels of
lending in March being more subdued. However, demand in the
second half of the year rebounded, to some extent, following
the easing of the lockdown and this is reflected in longer term
sentiment amongst the Group’s customers which is less negative
than might be expected.
New projects continued to commence throughout the second
half of the year, while completed developments resulted in
repayment of facilities. The Group remained active in the
market throughout the year and this continuity of service was
appreciated by our customers over the period.
The Group’s target customer is a small-to-medium sized
developer of UK residential property. The typical types of
projects funded have an average development value of
approximately £7 million and are generally focussed on the more
liquid parts of the residential market, avoiding developments
with high unit values. While the business has been concentrated
in the Home Counties, with 67.0% of balances at 30 September
2020 located in London and the South East, the Group’s
strategic objective is to lend more widely across the UK and this
focus continued through the year. Central London property hot
spots have been generally avoided.
The Group engages monitoring surveyors to review progress and
costs on a regular basis through the build phase of each project,
and these activities have generally continued through the
Covid-19 period. The maximum level of closed sites during the
crisis was 22%, but these were generally quickly reopened. 73%
of sites remained active throughout the lockdown period. Many
projects have been subject to some level of delay, principally
due to access, labour or supply issues, but overall, the level of
resilience in the customer base has been impressive.
While uncertainties around Covid-19 remain, prospects for the
new financial year appear promising. Undrawn amounts on live
facilities at 30 September 2020 of £380.9 million are expected to
flow through to advances during the coming year, while the post-
offer pipeline of £171.5 million is likely to be drawn down over a
longer period, though the timing may be affected by ongoing
Covid-19 restrictions. The Group is investing in the business,
increasing resources to allow a greater variety of propositions
and routes to market to be explored.
The underlying basis of the development finance proposition
remains attractive, with positive market sentiment heading into
the new financial year. The need for new housing will remain into
the future and smaller developers have only a limited number
of funding sources, which have reduced further through the
Covid-19 crisis, with some non-bank lenders previously active
in the sector suffering from limited lending capacity. The Group
believes the business is well placed to support its developer
customers during and after the pandemic.
Structured lending
The structured lending exposure has grown in the period by
7.7%, mostly as a result of additional drawings on extant facilities
in the first half-year, although new facilities of £8.0 million came
on stream during the year. These loans generally fund non-bank
lenders, of various kinds, and as such facilities are carefully
constructed to provide a buffer for the Group in the event of
default in the ultimate customer population, with first loss cover
of at least 20% in all cases. The impact of Covid-19 on each of
the exposures varies with the nature of the underlying assets
and the Group’s experienced account managers have carefully
monitored each of the facilities, maintaining a high level of
contact with the counterparties.
The Group’s strategy for motor finance is to target its offerings
on those specialist propositions not typically addressed by
mass-market lenders. After a positive first six months of the
year, where completions increased while maintaining yield levels,
business was sharply reduced in the second half due to the
substantially reduced levels of activity seen in the automotive
market throughout the Covid-19 crisis.
Performance
The outstanding loan balances in the segment are set out below,
analysed by business line.
Asset leasing
Professions finance
CBILS and BBLS
Invoice finance
Unsecured business lending
Total SME lending
Development finance
Structured lending
Motor finance
30 September
2020
30 September
2019
£m
478.0
22.3
25.2
13.5
15.0
554.0
609.0
94.9
256.9
£m
492.2
46.2
-
18.5
19.3
576.2
506.5
88.1
281.3
1,514.8
1,452.1
Credit quality in the development finance book has been good,
and the overall performance of the projects has been in line with
expectation allowing for the impact of Covid-19 on the timing of
some projects. These accounts are monitored on a case-by-case
basis by the Credit Risk function. At 30 September 2020 very few
cases had been classified by the monitoring process as being
likely to result in a loss, with a number of the problem cases
acquired with the business resolved in the year.
While no Covid-19 specific credit concerns have been
identified on individual development finance accounts, the
Group recognises the potential impact of increased economic
uncertainty, including the impact of the end of Stamp Duty
relief on the property market, and execution risk on its portfolio.
The average loan to gross development value for the portfolio
at the year end, a measure of security cover, was 63.1% (2019:
64.8%), which gives the Group a substantial buffer if any project
encounters problems.
Credit performance on the division’s finance leasing portfolios
remains stable, with arrears in asset leasing at 1.75% and motor
finance at 1.76% (2019: 0.43% and 1.27% respectively). However,
these measures may be distorted by the effect of payment
holidays.
Take up of payment reliefs in SME lending was substantial, with
3,526 accounts given relief, representing almost half of the book,
although only 326 of these required an extension. 2,899 (16.2%)
of the Group’s motor finance accounts were granted a payment
holiday, with only 419 (2.3%) requiring an extension.
Performance in the structured lending operation has been in
line with expectations with satisfactory pricing and no serious
concerns with the operation of any of the loan facilities.
Page 35
Strategic Report Outlook
Performance
In the short-term the focus for growth in Commercial Lending will
be in development finance, where the fundamentals of product,
demand and service remain strong despite Covid-19. In the other
business lines the priority will be on the careful management
of the books and supporting customers through the ongoing
crisis. The underlying long-term prospects for the division remain
positive and the Group continues to invest in developing its
activities for the future.
A4.1.3 Idem Capital
The Idem Capital segment contains the Group’s acquired loan
portfolios, together with its pre-2010 legacy consumer accounts.
These include mostly second charge and unsecured consumer
loans.
The division’s strategic focus is on specialist loan portfolios
which can augment the organic origination activities of the
Group. In these portfolios, it can enhance value through
leveraging the Group’s originations and collections expertise,
together with its access to a variety of retail and wholesale
funding. It recognises that this model is essentially opportunistic
and that the flow of such opportunities to the market may
be sporadic. It carefully considers the capital requirements
for any potential acquisition, particularly where asset types
offered require relatively large amounts of capital to be held. It
also considers the potential for conduct risk issues to arise in
portfolios which may contain more vulnerable customers. Many
of Idem Capital’s customers have been under financial stress
in the past and its processes aim to generate fair outcomes for
all customers, recognising any vulnerabilities. In the present
Covid-19 situation, that objective has an even greater focus.
Overall Idem Capital’s success rests on understanding assets,
strong analytics, advanced servicing capabilities and the efficient
use of funding. All these attributes are vital in its management of
the impact of Covid-19 on its customer base.
New business
While the UK loan portfolio purchase market remained active
in the period up to the Covid-19 outbreak, and the Group
participated in the majority of significant tender processes, there
were few opportunities which were particularly appealing, either
because of pricing, the nature of the assets or the capital which
might have been required. Opportunities were even more limited
in the post-Covid-19 environment, although some level of activity
did remain in the market.
The Group only pursues transactions where its wider capabilities
in administration and funding can provide a real benefit to the
project and where the projected return is attractive in comparison
to the other opportunities for the deployment of its capital.
During the period, no portfolio acquisitions were completed
(2019: none) although, as noted above, the division undertook a
limited number of reviews of opportunities that were ultimately
not progressed.
The main focus of the business in the year was the careful
management of its existing books and ensuring that appropriate
processes and systems are in place to address the Covid-19
outbreak with customers, many of whom were already identified
as vulnerable.
The value of the loan balances in the segment are set out below,
analysed by business line.
Second charge mortgage loans
Unsecured consumer loans
Motor finance
30 September
2020
30 September
2019
£m
171.9
109.7
15.5
297.1
£m
217.6
134.7
37.6
389.9
The reduction in balances is a result of collections from the
brought forward loan portfolios, with receipts remaining relatively
strong, despite the impact of Covid-19. The accounting balance
was also reduced by £3.7 million at the half-year to allow for
potential reductions in future cashflows due to Covid-19.
120 month Estimated Remaining Collections (‘ERC’) on acquired
consumer assets fell to £313.7 million at 30 September 2020
(2019: £366.4 million) for the same reasons.
Collections from customers have, however, held up well in the
year, despite the negative economic impacts of Covid-19, with
instalment receipts remaining stable despite a temporary downturn
in March. Whilst the division’s second charge assets are over 10
years seasoned, offering resilience to any potential downturn, the
unsecured assets are less seasoned, and their performance will
continue to be carefully monitored over the coming year.
Arrears on the segment’s secured lending business have risen
slightly to 18.8% (2019: 17.2%). These arrears levels remain higher
than the average for the sector, but this reflects the seasoning
of the balances, while the upward trend reflects the redemption
of performing accounts. This book contains a significant number
of accounts which are currently making full monthly payments
but had missed payments at some point in the past, inflating
the arrears rate. Average arrears for secured lending of 8.4% at
30 September 2020 were reported by the Finance and Leasing
Association ('FLA') (2019: 8.7%).
Approximately 15.5% of the divisions secured accounts were
granted initial payment holidays with 6.5% being granted
extensions.
None of the live Idem Capital loan portfolios were regarded as
materially underperforming at the year end, with strong overall
cash generation, considering the impact of Covid-19. The Group
monitors actual cash receipts from acquired portfolios against
those forecast in the evaluation which informed the purchase
price. Up to 30 September 2020 such collections were 109.8% of
those forecast to that point (2019: 109.8%). The impact of Covid-19
on the long-term cash forecasts has not been significant.
Operational improvements have continued to be made in
systems, processes and employment patterns which are
expected to generate operational efficiencies and improve both
customer service and customer experience in future periods.
Outlook
The Idem Capital loan book continues to provide strong
cash flows and the Group’s priority is to effectively manage
this collection process while investigating potential portfolio
investments which match its risk and reward requirements.
Page 36
The overall UK economic outlook has remained uncertain over
the whole year, with the political instability of autumn 2019
followed in turn by the December general election and the
Covid-19 crisis, while uncertainty over the final terms of any
Brexit settlement continued through the year. All these factors
affected market sentiment, generating considerable volatility.
In response, the Group maintained a conservative stance on
liquidity throughout the year. £1,701.1 million of cash was available
for liquidity and other purposes at the end of the period
(2019: £872.1 million). The Group’s contingent liquidity policy will
be kept under review as the ultimate outcome of the Covid-19
crisis becomes clearer and longer term trends become more
evident.
The Group’s funding has become increasingly diversified in the
years following the authorisation of Paragon Bank in 2014. This
is illustrated by the chart below which shows, for each of the
financial year ends since 2013, the outstanding funding balance
by type.
In the short-to-medium term, the Group’s principal source
of funding will remain retail deposits, which have performed
well throughout the Covid-19 crisis to date. These will be
supplemented by participation in TFSME, the Bank of England
scheme to support lending into the UK economy, especially to
SMEs. New public securitisations in the near-term are unlikely,
with offerings in the short-term likely to be designed to create
securities to support other borrowings.
LIBOR, which had been the principal sterling reference rate
used by the Group, is due to be withdrawn by the end of 2021,
with regulators confirming their commitment to this deadline,
despite the Covid 19 crisis. All Group debt issuance since 2019
has been priced with reference to SONIA, the Sterling Overnight
Index Average and, during the year, SONIA became the Group’s
principal reference rate for hedging operations.
However, much of the Group’s outstanding debt issuance is
priced by reference to LIBOR and other IBOR rates and the Group
is actively participating in industry initiatives to determine the
optimal treatment of such securities on the withdrawal of these
rates. The Group also has a significant LIBOR-linked asset base,
mostly relating to legacy mortgage assets, where it is participating
in a Bank of England ‘Tough Legacy Task Force’ addressing the
impact of transition on such products. This aims to ensure fair and
consistent outcomes for customers with such exposures.
A4.2 Funding
The Group’s funding strategy, built on diversification and
sustainability, was both enhanced and tested in the period. New
initiatives widened the footprint of the retail deposit operation,
new forms of liquidity funding were introduced, and additional
central bank funding schemes accessed.
This variety of funding options ensures that pricing and
availability issues in any individual funding market can be
mitigated, while, at the same time, maintaining the flexibility to
fund strategic developments. In particular, it protects the Group
from the effects of incidents such as the Covid-19 crisis. This
saw capital market pricing seriously disrupted while emergency
funding from the UK authorities was channelled principally
through central bank lending to the UK banking sector.
Throughout the period the Group raised the majority of its
new funding through the retail deposit market, where volumes
proved robust throughout the Covid-19 crisis, as consumers'
appetite for saving increased, either through economic anxiety
or through reduced opportunities to spend. The Group’s retail
deposit balance grew by 22.9% in the year to £7,856.6 million
(2019: £6,391.9 million), representing 55.8% of balance sheet
funding.
The Group’s funding at 30 September 2020 is summarised as
follows:
2020
£m
2019
£m
2018
£m
Retail deposit balances
7,856.6
6,391.9
5,296.6
Securitised and
warehouse funding
Central bank facilities
Tier 2 and retail bonds
Total on balance
sheet funding
Off balance sheet
central bank facilities
Other off balance
sheet liquidity facilities
3,928.3
5,206.9
6,490.3
1,854.4
446.6
994.4
446.1
1,024.4
445.4
14,085.9
13,039.3
13,256.7
-
109.0
108.7
150.0
-
-
14,235.9
13,148.3
13,365.4
Funding by type (£m)
30 September 2013 – 2020
Page 37
Strategic Report£ million2016201520142013201720182019202016,00014,00012,00010,0008,0006,0004,0002,0000Funding by type (£m)30 September 2013 – 2020SecuritisationRetail depositsBondsCentral Bank The average initial term of fixed rate deposits was 27 months
(2018: 28 months). Market savings rates in the year have fallen
substantially, with the Bank of England quoting average interest
rates at 30 September 2020 for new 2-year fixed rate deposits
at 0.48% (2019: 1.41%) and for instant access balances at 0.07%
(2019: 0.42%). Some market disruption was created in the
second half-year by the short-term pricing strategy adopted by
NS&I, but the strength of the market meant that the Group was
able to source its funding requirements throughout the period.
The core route to market for the deposit proposition is through
its online presence, with traffic driven by strong repeat business
flows, organic searches, a presence on price comparison
websites and recommendations from industry savings experts.
The Group also offers postal products, which tend to appeal to a
different demographic to the online offering.
Growth in the deposit balance was enhanced by the launch of a
flexible ISA product, which proved successful in the spring 2020
ISA season. Other enhancements to the product range are also
being developed.
Offerings through third-party channels, including investment
platforms and savings marketplaces operated by digital banks
for their customers, provide access to further demographics
and enhance the Group’s ability to manage deposit inflows. The
Group currently has four such relationships and is investing in
people and systems to further develop this part of the business.
In customer feedback 88% of those opening a savings account
with the Group in the year who provided data, stated that they
would ‘probably’ or ‘definitely’ take a second product (2019: 89%).
The net promoter score in the same survey was +61 (2019: +65).
When customers with maturing savings balances in the year
were surveyed, 90% stated that they would ‘probably’ or
‘definitely’ consider taking out a replacement product with the
Group (2019: 91%) with a net promoter score at maturity of +50,
similar to the +53 recorded for the 2019 financial year.
Customers were also surveyed on the savings business’s
response to the Covid-19 crisis. 65% of the respondents felt
that the Group’s clarity of communications with customers had
been good, while 99% of respondents said its response to the
crisis was at least as good as other providers, including 17% who
considered it to be better.
Given the benefits to customer and deposit retention of
maintaining high service standards, these results give the Group
great confidence in its market position. This is supported by
continued success in industry awards. During the year, Paragon
Bank won the ‘Best Monthly Interest Provider’ award in the 2020
Moneynet awards, the third year in a row it had received this
accolade, and was named ‘Best Multi-Channel Savings Provider’
at the 2020 Savings Champion Awards.
The Group’s outsourced deposit administration platform
continues to perform well, and its service levels have not been
significantly impacted by Covid-19 during the year. It provides a
cost-effective, stable and scalable solution in the medium-to-
long-term, and the Group has invested in its systems to manage
the relationship.
Overall, the savings proposition provides the Group with a
stable funding platform, with a focus on term funding to manage
interest rate risk and the ability to limit product availability to
short periods of time, giving the funding channel flexibility and
manageability. The operation will continue to expand the scope
of its products, address wider demographics and explore new
channels to market. The Group’s broad product offering and
the FSCS guarantee are likely to reduce the potential for any
Covid-19 related economic downturn to impact liquidity and the
Group’s profiling of its target customers suggests they may be
more resilient than average in such circumstances.
A4.2.1 Retail funding
Retail deposits provide the Group with a reliable, cost effective
and scalable source of funding, and continued to remain so
in the face of market disruption resulting from Covid-19. The
Group offers customers a range of deposit options, offering
competitive rates and value for money. This, combined with a
strong customer service ethic and the protection provided to
depositors by the Financial Services Compensation Scheme
(‘FSCS’), supports the Group in meeting its funding and
margin requirements.
The volume of retail deposits has continued to grow during
the period reaching £7,856.6 million at the year end, 22.9%
higher than a year earlier (2019: £6,391.9 million). This has
been achieved with a reduced funding cost, reflecting the
improvements made to the Group’s capacity and capability.
The Group’s share of the overall UK savings market remains
minimal, with household savings balances reported by the
Bank of England increasing by 5.5% in the year to £1,287.9 billion
(2019: £1,220.4 billion), although these deposits remain
overwhelmingly with clearing banks and building societies.
The growth of the retail funding balance since the authorisation
of Paragon Bank as a deposit taker in 2014 is shown below.
At 30 September 2020 the proportion of easy access deposits,
which are repayable on demand, was 30.0% of the total deposit
base, a little higher than its level at the beginning of the year
(30 September 2019: 27.8%), and represented £2,359.6 million
of the balance (2019: £1,778.0 million). This percentage is
considered to be low compared to the rest of the banking sector
and can be expected to rise going forward.
Savings accounts at the financial year end are analysed below.
Average
interest rate
Proportion
of deposits
2020
2019
2020
2019
%
1.69%
0.72%
1.34%
%
2.02%
1.43%
%
63.3%
36.7%
%
65.0%
35.0%
1.81%
100.0%
100.0%
Fixed rate deposits
Variable rate deposits
All balances
Page 38
£ million20152016201720182019202010,0009,0008,0007,0006,0005,0004,0003,0002,0001,0000Retail deposits (£m)At 30 September 2015 - 2020 A4.2.2 Wholesale funding
The Group’s wholesale funding comprises securitisation funding,
warehouse debt and retail and corporate bonds. It has been one
of the principal issuers of residential mortgage backed securities
(‘RMBS’) in the UK over many years. The Group’s Long-Term
Issuer Default Rating was affirmed at BBB by Fitch in the period,
albeit with a negative outlook, which was applied to all the major
UK banks as a result of the Covid-19 crisis.
Following the UK general election in December 2019 the
performance of the capital markets strengthened during the
early part of 2020, with increasing transaction volumes and
improving margins for issuers. Demand in the markets remained
high through the latter part of the year, however, the impact of
Covid-19 and the availability of alternative funding sources made
the markets unattractive for new public issuance.
Five mature securitisation transactions were refinanced during
the year. These included three funding pre-2010 mortgages
and two recent transactions which had reached their expected
maturity dates and were paid down in accordance with market
expectations. Notice was also given that two further legacy
securitisations would be paid down after the year end. This will
leave only two legacy transactions outstanding on the Group’s
balance sheet.
On 30 April 2020 the Group completed a fully retained
securitisation transaction, Paragon Mortgages (No. 27) PLC,
resulting in the issue of £735.8 million of rated notes to group
companies. After the year end a further such transaction,
Paragon Mortgages (No. 28) PLC issued £703.1 million of notes
to group companies on 9 November 2020. These notes will be
used as collateral in other funding transactions including central
bank schemes.
A further funding option is provided by wholesale warehouse
funding, which provides standby capability, particularly in the
event of market disruption elsewhere, where funds need to be
deployed rapidly or as an alternative to retail deposit funding for
liquidity purposes. The Group’s £200.0 million facility with Bank
of America Merrill Lynch was renewed in October 2019 and again
in September 2020, when the commitment was increased to
£400.0 million and the interest rate increased to LIBOR
plus 1.05%.
During the period the Group also entered into a long / short repo
transaction with a major UK bank. This provides £150.0 million
of additional liquidity, based on retained securitisation notes,
but does not appear on the Group’s balance sheet, due to its
contractual terms. This is the first such transaction the Group
has undertaken, representing a further enhancement to its
funding flexibility.
A4.2.3 Central bank facilities
During the year the Group has increased its use of central bank
funding as the Bank of England channelled funds into the UK
economy through the banking sector in order to support SMEs
through the Covid-19 crisis.
The Group has been approved to participate in the SME Term
Funding scheme (‘TFSME’) and had drawn £910.0 million by
30 September 2020. This scheme provides access to funding
appropriate for the Group’s operations with a four year term with
interest payable at the bank base rate, using either mortgage
assets or mortgage securities as collateral. This makes these
borrowings readily accessible and cost effective for the Group.
Drawings under the Term Funding Scheme (‘TFS’) remain in
place and provide £944.4 million of the Group’s funding
(2019: £944.4 million). These begin to fall due for repayment
during the next financial year, with repayments allowed for in the
Group’s capital planning.
The Group also utilised the Indexed Long Term Repo scheme
(‘ILTR’) for six-month borrowings, although no borrowings
remained outstanding at the year end (2019: £50.0 million), and
the Contingent Term Repo Facility (‘CTRF’) during the year. The
Group’s off balance sheet exposure under the Funding for Lending
Scheme (‘FLS’) was settled in the year (2019: £109.0 million).
The Group has also pre-positioned mortgage loans and certain
other assets with the Bank of England to act as collateral for
future drawings on central bank funding lines, including the
TFSME, if and when required, providing access to liquidity or
funding of up to £684.0 million.
The Group will continue to access these facilities in future as
part of its funding strategy, in accordance with the objectives of
these schemes, where such borrowings are appropriate and
cost effective.
A4.2.4 Funding outlook
The Group’s diversified funding position, with strong wholesale
and retail franchises gives it a strong position in the face of
economic uncertainties. This reduces its exposure to issues
affecting any particular funding source and allows it the flexibility
to raise funds in accordance with its own market assessments,
rather than being forced into sub-optimal transactions for
short-term reasons. This base delivers a robust and adaptable
position going forward, supporting the Group’s overall business
strategy and aspirations.
Further information on all the above borrowings is given in notes
28 to 33.
A4.3 Capital
The Group’s capital policy aims to provide appropriate returns
to shareholders, whilst maintaining prudent levels of capital to
support its strategic objectives and protect the business and its
customers in future years. The maintenance of strong regulatory
capital and liquidity positions to safeguard its depositors is also
a principal strategic objective, supported by detailed capital
planning and stress testing procedures.
For regulatory purposes the Group’s capital comprises
shareholders’ equity and tier 2 bonds. It has no outstanding
AT1 issuance, but has the capacity to issue such securities,
if considered appropriate, under an authority granted by
shareholders at the 2020 AGM, which will be proposed for
renewal at the forthcoming meeting.
Page 39
Strategic Report A4.3.1 Dividends and distribution policy
The directors have considered the distributable reserves of the
Company and concluded that such a dividend is appropriate.
The Group’s stated distribution policy over recent years has
been to distribute 40% of consolidated earnings to shareholders
in ordinary circumstances, achieving a dividend cover ratio of
approximately 2.5 times.
In normal years this would be achieved by the payment of an
interim dividend following the announcement of the half-year
results with a final dividend after the year end making up the
balance. However, at the time of the half-year announcement
the decision was taken, given the extreme levels of economic
uncertainty due to Covid-19, to defer any discussion of dividend
levels until after the end of the financial year and consequently
no interim dividend was declared (2019: 7.0 pence).
Following the year end the Board considered the
appropriateness of declaring a dividend for the year on the
basis of the annual results and capital resources; customer
and economic experience through the first six months of the
Covid-19 crisis; updated business, capital and liquidity forecasts
and stress tests; and the most recent economic forecasts. It
also considered the most recent regulatory comments and views
expressed by shareholder groups.
In determining the level of dividend for the year, the Board
has considered the dividend policy, together with the Group’s
strategy, capital requirements, principal risks, the level of
available retained earnings in the Company, its cash resources
and the objective of enhancing shareholder value.
The dividend policy is underpinned by the principle of enhancing
shareholder returns on a sustainable basis and the Board is
proposing, subject to approval at the Annual General Meeting on
24 February 2021, a dividend for the year of 14.4 pence for 2020
(2019: final dividend of 14.2p per share, total dividend of 21.2p
per share). This dividend would be in line with the stated policy,
giving a dividend cover of 2.50 times (2019: 2.33 times), with
the reduction in amount from the previous year corresponding
largely to the reduction in group earnings.
The progress of the dividend for the year is shown in the
chart below.
The Board also affirmed the existing dividend policy going
forward, subject to an assessment of prevailing conditions at
the time, but noted that, due to paying the full 2020 dividend as
a final dividend, any interim dividend declared for 2021 would
not necessarily bear the normal relation to the preceding final
distribution.
A4.3.2 Regulatory capital
The Group is subject to supervision by the Prudential Regulation
Authority ('PRA') on a consolidated basis, as a group containing
an authorised bank. As part of this supervision, the regulator
will issue an individual capital requirement setting an amount of
regulatory capital, defined under the international Basel III rules,
currently implemented through the EU Capital Requirements
Regulation and Directive regime (‘CRD IV’). This capital, which
includes elements determined based on the Group’s total
risk exposure together with fixed elements, is held in order
to safeguard depositors in the event of severe losses being
incurred by the Group.
As a matter of strategy, the Group maintains strong capital and
leverage ratios, its principal capital measures being set out below.
It was granted transitional relief on the adoption of IFRS 9, with
the impact on capital of additional impairments being phased
in over a five-year period, with only 15.0% of the effect being
recognised in this, the second year (2019: 5.0%). However, firms
are also required to disclose capital measures as if the relief has
not been given (referred to as the ‘fully loaded’ basis).
Page 40
Pence201620152014201320172018201920202520151050Dividend for the year (pence)In respect of the years 2013 - 2020 During the year, as part of a package of measures to mitigate the
economic impacts of Covid-19, regulators increased the scope
of this IFRS 9 relief to additionally defer impairment provisions
made in the current year. This has widened the gap between the
basic and fully loaded bases.
Basic
Fully loaded
2020
£m
2019
£m
2020
£m
2019
£m
CET1 capital
991.2
922.0
948.9
900.8
Total Regulatory
Capital (‘TRC’)
Pillar 1 + 2A capital
requirement
1,141.2
1,072.0
1,098.9
1,050.8
749.6
742.9
745.3
741.8
As a result of the Covid-19 situation, the Basel Committee on
Banking Supervision has deferred the implementation date of
its revisions to the Basel III framework which were to take effect
on 1 January 2022 to 1 January 2023, subject to those revisions
being enacted in the relevant jurisdiction (expected to be CRD VI
/ CRR III in the EU framework). This means that changes which
would have potentially increased the Group’s Total Risk Exposure
(‘TRE’) calculated under the standardised approach will be
delayed.
The first stage of the Group’s application for the accreditation
of its Internal Ratings Based (‘IRB’) approach to credit risk for
capital adequacy purposes was submitted to the PRA in March
2020. This phase of the application covers the Group’s
buy-to-let mortgage assets and considerable work has taken
place to reach this stage. Models have been built and tested,
governance frameworks enhanced, and IRB outputs are now
being regularly considered internally. Work on this project has
continued to progress throughout the second half of the year.
The Group’s CET1 capital comprises its equity shareholders’
funds, adjusted as required by the CRD IV rules. TRC, in addition,
includes tier 2 capital representing the Tier 2 Bonds.
The Group’s trading performance, including the deferral of
bonuses, has led to the increase in capital shown above, with the
basic measure, discounting IFRS 9 impairment charges, growing
faster than the fully loaded measure. However, the amount of
headroom over the Pillar 1 + 2A requirement, even on the fully
loaded basis which allows for IFRS 9 provisioning, is significant.
Available capital must also cover the CRD IV buffers, the
Counter-Cyclical (‘CCyB’) and Capital Conservation (‘CCoB’)
buffers. These apply to all firms and are based on a percentage
of total risk exposure. While the CCoB remained at 2.5%, its long-
term rate, throughout the year, the CCyB was cut from 1.0% to
zero during the period as a regulatory response to the pandemic.
However, it was also announced that the long-term normal rate
of the CCyB in the UK would be 2.0%. CET1 capital required to
cover these buffers therefore reduced to £173.7 million at the
year end on the regulatory basis (2019: £235.3 million). Further
buffers may be set by the PRA on a firm-by-firm basis but may
not be disclosed.
The Total Capital Requirement for the Group (Pillar 1 and Pillar
2A) must be met with at least 56% Common Equity Tier 1 ('CET1')
capital, and can include no more than 44% Additional Tier 1
(‘AT1’) capital and no more than 25% Tier 2 capital. Other capital
requirements, including the CRD IV buffers, must be satisfied
with CET1 capital.
The Group’s capital ratios are set out below.
CET1 ratio
Total capital ratio
UK leverage ratio
Basic
Fully loaded
2020
14.3%
16.4%
7.1%
2019
13.7%
15.9%
6.7%
2020
13.7%
15.9%
6.8%
2019
13.4%
15.7%
6.6%
Capital ratios have strengthened on the fully loaded basis, even
allowing for the payment of the proposed dividend, and are
considerably stronger on the basic regulatory basis due to the
reliefs described above.
A4.3.3 Liquidity
The Group’s operational capital and funding requirements are
also influenced by the Group’s policy to hold sufficient liquidity
in the business to meet its cash requirements in the short and
long-term, as well as to provide a buffer under stress. There is
also a regulatory requirement to hold liquidity in Paragon Bank.
The Board regularly reviews liquidity risk appetite and closely
monitors a number of key internal and external measures. The
most significant of these, which are calculated for the Paragon
Bank regulatory group on a basis which is standardised across
the banking industry, are the Liquidity Coverage Ratio (‘LCR’)
and Net Stable Funding Ratio (‘NSFR’).
The monthly average LCR for the year was 173.7% compared
to 143.7% during 2019, reflecting the steps taken to enhance
liquidity in response to the Covid-19 situation. The year end
NSFR stood at 114.7%, in line with the 115.0% reported at
30 September 2019.
A4.3.4 Capital outlook
The maintenance of strong capital and liquidity positions has
been a central part of the Group’s strategic thinking over many
years, leaving it well placed to deal with stresses. Actions taken
during the year, including the passing of the interim dividend
and the deferral of senior management bonuses in shares, have
maintained the strength of that position.
While the short-term regulatory capital reliefs put in place by
regulators in response to Covid-19 are welcome, the Group
considers itself to be well capitalised, even on a fully loaded
basis.
This position is built upon strong businesses, careful
management and a flexible funding base. Regular reviews of
capital requirements by the Board form part of the planning and
strategic development process, considering the level and form of
capital demanded by current business, regulatory and economic
conditions and future developments as well as the Group’s
strategic objectives.
This is designed to deliver a future capital position which
is prudent and sustainable, even under stress, protecting
the viability of the Group’s business, for the benefit of all its
stakeholders.
Page 41
Strategic Report A4.4 Financial results
The impacts from Covid-19 and the associated policy response
have been included in the reported outcomes for 2020. These
impacts include slower customer demand in the second half, a
material reduction in interest rates which had an initially adverse
effect on net interest margins and higher expected levels of loan
impairments. Under IFRS 9, impairments are charged on an
expected loss basis.
A4.4.1 Consolidated results
Underlying operating profit for 2020 was 27.0% below 2019’s
level at £120.0 million (2019: £164.4 million) (Appendix A). On a
statutory basis profit was reduced by 25.5% to £118.4 million
(2019: £159.0 million). The single largest contributor to this
reduction came from the charge for loan impairments, which
was 503.8% higher than in 2019.
Consolidated results
For the year ended 30 September 2020
Interest receivable
2020
£m
491.7
2019
£m
505.7
Interest payable and similar charges
(213.6)
(227.3)
Net interest income
Net leasing income
Gain on derecognition of financial assets
Other income
Total operating income
Operating expenses
Provisions for losses
Fair value net (losses) / gains
Operating profit being profit on ordinary
activities before taxation
Tax charge on profit on ordinary activities
Profit on ordinary activities after taxation
Dividend – rate per share for the year
Basic earnings per share
Diluted earnings per share
278.1
278.4
3.0
-
14.0
295.1
3.8
9.7
15.4
307.3
(126.8)
(125.2)
(48.3)
120.0
(1.6)
(8.0)
174.1
(15.1)
118.4
159.0
(27.1)
91.3
(31.6)
127.4
2020
14.4p
36.0p
35.6p
2019
21.2p
49.4p
48.2p
Income
Net interest income was broadly unchanged when compared to
2019 at £278.1 million (2019: £278.4 million). Within this figure,
average loan balances rose by 2.2% and the Group’s net interest
margin (‘NIM’) fell by 5 basis points to 224 basis points.
The reduction in base rates to just 10 basis points generated
a short-term reduction in the Group’s NIM, with the reduction
applying to both the investment rate earned on the Group’s
cash investments and also to variable rate loans, where the full
reduction in rates was passed on to customers. Funding deposit
costs have also reduced in the second half, but initially at a
slower pace. After reporting 229 basis points of NIM at the first
six months of the year, margins reduced for much of the second
half but had recovered most of the lost ground by the year end.
With slower levels of new business growth in 2020, the effect
of the amortisation of the Idem Capital portfolio had a greater
effect on the mix of yields in the loan book and hence on
reported net interest margins. The Idem-specific net interest
margin fell to 7.60% for 2020 (2019: 11.94%), reflecting a
combination of continued reductions in the loan book, changes
in the mix of products and lower future cash flow expectations.
The largest element of this cash flow re-estimate was a result of
a detailed review on the basis of the Covid-19 economic outlook,
where £3.7 million was written off, reversing income taken in
previous years.
Net interest margin for the Group excluding Idem increased from
1.92% in 2019 to 2.09% in 2020. This reflects structural change
in the loan book, with new buy-to-let and commercial loans
carrying higher margins than the legacy buy-to-let portfolio. The
scale of change in this ratio (+17 basis points) was lower than the
+39 basis points reported for 2019 as a result of the base rate
changes reported above.
The progression of the Group’s NIM, including and excluding the
Idem Capital division, over the past five years is set out below.
Year ended 30 September
2020
2019
2018
2017
2016
Total
Excluding
Idem Capital
Basis points
Basis points
224
229
219
213
215
209
192
153
141
139
Other operating income was £17.0 million for the six months,
compared with £19.2 million reported in 2019. This reduction
reflected lower account fee income, which is attributable to the
changing profile of the portfolio, and reduced levels of broking
income in the year.
Costs
Operating expenses were 1.3% above their 2019 level at
£126.8 million (2019: £125.2 million). The Group had been
anticipating a higher rate of increase than this, but Covid-19
served to delay the implementation of certain projects, with
these costs now expected to be incurred during 2021 and 2022.
The cost base for the year does, however, reflect the Group’s
continued investment in IT infrastructure and operational
resilience, an approach which has helped support its response
to the Covid-19 pandemic. An updated broker portal for the
Mortgage Lending division and new treasury systems came
on stream during the early part of the year and developments
continued, even during the lockdown period, with enhancements
to the SME lending customer experience a particular focus.
Page 42
adjusting for the lagging effect government policy has had,
and potentially continues to have, on observable impairment.
Careful consideration was also given to the extent to which
the Group’s base models, derived on the basis of historic data,
can accurately predict behaviour in these unprecedented
circumstances.
The impairment calculations generate £62.0 million of the
£81.8 million total balance sheet provision, with the balancing
£19.8 million being post model adjustments (‘PMAs’) based on
management’s judgement of the effects of lagging and
payment reliefs.
Payment holidays
Over £2.6 billion of customer balances were granted Covid-19
payment reliefs at some point during the year, with some of
these holidays extended beyond the year end.
The table below shows how this position developed throughout
2020, including October 2020’s results, which gives the most
up-to-date view on the flows.
While staff numbers remained stable and all employees
remained on full pay throughout the Covid-19 crisis, savings
arose from lower senior management cash bonuses and
share-based remuneration charges. The accounting effect of
the deferral in shares of 100% of the executive bonuses and large
proportions of other senior management bonuses is to remove
these costs from the 2020 cost base, instead spreading them
over future periods.
The Group outsources its savings deposit administration, the
costs of which relate to the size and activity levels of the savings
portfolio rather than being linked to general cost inflation. As
the Group refocuses its funding model to have a greater retail
deposit weighting, operating costs will therefore tend to grow at
rates above the general inflation rate. Savings related overheads
grew by £1.6 million in the year.
The progress of the Group’s cost income ratio over the last five
year is set out below.
Year ended 30 September
2020
2019
2018
2017
2016
Underlying
Statutory
%
43.0
42.1
40.6
40.5
37.9
%
43.0
40.7
37.8
40.5
37.9
Impairment provisions
Impairment charges totalled £48.3 million for 2020 compared to
£8.0 million during 2019. The major factors driving this increase
were the impact of Covid-19 on expected customer behaviour
and the impact of lower projected asset values in the event of
default. Up to the point of the impact of Covid-19 on the UK
in March, the Group’s provision data was largely positive, with
charges remaining in line with expectations. However, from
the half-year onwards the Group factored the potential impact
of Covid-19 into its consideration of expected credit losses.
While IFRS 9 is intended to provide for expected future losses,
the unprecedented and unexpected nature of the Covid-19
crisis resulted in a sharp increase in provisions to reflect the
fundamental change in economic outlook.
In addition to applying a more severe suite of economic
projections to the Group’s IFRS 9 impairment models, the
year end analysis also takes explicit account of payment
holidays granted to customers during the year, together with
Relief in force
Relief expired
Redeemed
Total
Month End
March
April
May
June
July
August
September
October
Initial
£m
658.2
2,306.9
2,414.7
1,767.6
245.7
94.4
46.1
24.1
Extension
Initial
Extension
£m
-
-
7.3
190.6
619.4
688.0
506.0
111.5
£m
0.2
2.4
130.3
642.9
1,752.6
1,825.3
1,843.7
1,844.8
£m
-
-
-
1.3
9.6
23.2
230.2
638.7
£m
0.3
0.6
1.4
3.3
9.2
21.8
33.3
49.1
£m
658.7
2,309.9
2,553.7
2,605.7
2,636.5
2,652.7
2,659.3
2,668.2
Page 43
Strategic Report31 Mar30 Apr31 May30 Jun31 Jul31 Aug30 Sep31 Oct3,000.02,500.02,000.01,000.0500.00.0Payment holidaysRedeemedHoliday Expired - ExtensionHoliday Expired - InitialHoliday In Force - InitialHoliday In Force - Extension Balance
Proportion
% with arrears deterioration
% with arrears improvement
Currently business as usual
Between relief
and BAU
Current relief
No relief
Single relief
only
£ billion
£ billion
Extended
relief
£ billion
Extended
Original
£ billion
£ billion
£ billion
10.20
79.5%
0.9%
3.0%
1.84
14.4%
1.5%
1.1%
0.62
4.8%
6.8%
7.8%
0.03
0.2%
10.0%
1.5%
0.11
0.9%
2.8%
3.5%
0.03
0.2%
1.7%
2.8%
Payment holiday status (2 November 2020)
The position at 31 October 2020 is summarised in the table
above, which analyses the values of accounts by payment relief
status and which also highlights, for each of those groups, the
relative change between the October 2020 arrears position
and the 29 February 2020, pre-Covid-19 position. Cases where
the payment holiday has ended, but no payment is yet due are
shown separately.
Whilst almost 95% (by value) of accounts which had been
granted relief have since returned to a fully paying status, there
has been materially more arrears volatility amongst those loans
where extensions were granted, both worsening and improving.
This generally increased level of volatility for the portfolio has
resulted in management increasing the probability of default for
this population above the levels suggested by the underlying
models, but this increase is only considered significant in respect
of accounts that have taken a payment holiday extension. Such
accounts have been transferred from Stage 1 to Stage 2 for
impairment purposes.
Multiple economic scenario summary and outputs
The Group creates four macro-economic scenarios to underpin
its IFRS 9 impairment modelling, and business forecasting.
These comprise a base case position, an upside, a downside
and a severe case. Covid-19 has had a material impact on the
most recent iteration of these forecasts when compared to the
Group’s 2019 economic outlook for the same periods. The
year-on-year differences in a selection of the variables defining
these scenarios are set out below on a weighted average basis.
The forecast economic assumptions within each scenario, and
the weightings applied are set out in more detail in note 19 to
the accounts.
Scenarios used at 30 September 2019
GDP (indexed to Sep 2019)
House prices (indexed to Sep 2019)
Unemployment rate (absolute value)
Scenarios used at 30 September 2020
GDP (indexed to Sep 2019)
House prices (indexed to Sep 2019)
Unemployment rate (absolute value)
Change
GDP (indexed to Sep 2019)
House Prices (indexed to Sep 2019)
Unemployment rate (absolute value)
Page 44
2019
100.0
100.0
3.8%
2019
100.0
100.0
3.8%
Weighted scenario outcome at
2021
102.8
103.0
4.6%
2022
106.4
106.8
4.5%
Weighted scenario outcome at
2021
99.5
97.6
7.0%
2022
102.3
96.0
5.8%
Weighted scenario change
2021
(3.3)
(5.4)
+2.4%
2022
(4.1)
(10.8)
+1.3%
2020
101.0
100.9
4.5%
2020
94.5
105.0
4.8%
2020
(6.5)
4.1
+0.3%
2023
108.3
111.4
4.4%
2023
104.6
102.0
5.1%
2023
(3.7)
(12.9)
+1.0%
2024
110.3
116.2
4.2%
2024
108.3
106.1
4.4%
2024
(4.0)
(14.2)
+0.9%
These economic assumptions are principal inputs to the Group’s
IFRS 9 models. The probability of default profiles arising from
the models have, in turn, been re-phased to reflect the impacts
of policy reactions to Covid-19, essentially incorporating a
lag in the profile. Intervention by the UK Government has
suppressed enforcement action by lenders, while recorded
arrears performance and market credit data is currently not fully
representative of underlying credit quality due to the payment
relief rules.
The lag applied by the Group ensures that the consequences
of the GDP reduction experienced since the half-year are still
adequately reflected in the model output, where, thus far, the
impairments that would normally be expected to arise from such
changes are yet to emerge.
Impairment cover ratios and trends
The combination of harsher economic forecasts and the
approach to assessing payment reliefs have led to materially
higher provisions and cover ratios, as set out below.
30 Sep 2019
31 Mar 2020
30 Sep 2020
Calculated provision
Overlay
PMAs
(for payment relief and lagged effects)
Total
Cover ratio
£m
41.9
-
-
41.9
0.34%
£m
42.7
24.0
-
66.7
0.53%
£m
62.0
-
19.8
81.8
0.64%
Fair value movements
The material reductions in both spot and forward rates during
2020 have resulted in a fair value charge of £1.6 million for the
year arising from the Group’s hedging activities. This compares
to a charge of £15.1 million during 2019. The fair value movements
reflect non-cash items and revert to zero over the lives of the
instruments involved.
Tax
The effective tax rate applied to the Group’s profits in 2020
has increased from 19.9% in 2019 to 22.9% during 2020. While
the standard tax rate applying to the Group remained at 19.0%,
the proportion of Group profits arising in Paragon Bank and
consequently attracting the banking surcharge, increased. This
caused the surcharge amount to increase by £1.9m, equivalent
to an increase of 190 basis points on the tax rate.
The reduction in UK corporation tax rates to 17.0% which had
been previously legislated for, and hence accounted for, was
reversed in the year, with the impact of this on the Group’s
deferred tax balances affecting the year’s charge.
The Group remained up-to-date with all payments of national
and local taxes throughout the Covid-19 period.
Results
As noted above, there were no one-off gains or losses included
in the 2020 result, whereas 2019 benefitted from a £9.7 million
gain on the disposal of the Group’s residual interest in one of its
legacy securitisations. Profit before tax for the year was 25.5%
lower than 2019’s outturn at £118.4 million (2019: £159.0 million).
Basic earnings per share for 2020 were 36.0 pence
(2019: 49.4 pence) and the diluted measure was 35.6 pence per
share (2019: 48.2 pence), reflecting the fall in profit.
This result increased equity to £1,156.0 million (2019: £1,108.6
million), representing a tangible net asset value of £3.90 per
share (2019: £3.71 per share) and a net asset value on the
statutory basis of £4.57 per share (2019: £4.39 per share)
(Appendix D).
A4.4.2 Assets and liabilities
Summary balance sheet
30 September 2020
2020
£m
2019
£m
2018
£m
Investment in customer loans
Mortgage Lending
10,819.5
10,344.1
10,449.5
Commercial Lending
1,514.8
1,452.1
1,131.3
Idem Capital
297.1
389.9
519.8
12,631.4
12,186.1
12,100.6
Derivative financial assets
463.3
592.4
855.7
Cash
Intangible assets
Other assets
Total assets
Equity
1,925.0
1,225.4
1,310.6
170.1
315.7
171.1
220.5
169.3
51.7
15,505.5
14,395.5
14,487.9
1,156.0
1,108.6
1,073.5
Retail deposits
7,856.6
6,391.9
5,296.6
Other borrowings
6,229.7
6,648.4
7,961.2
Derivative financial assets
Pension deficit
Other liabilities
132.4
20.4
110.4
80.5
34.5
131.6
4.7
19.5
132.4
Total equity and liabilities
15,505.5
14,395.5
14,487.9
The Group’s loan portfolio grew by 3.7% during 2020, with growth
in each of its Mortgage Lending and Commercial Lending
divisions and continued amortisation of balances in Idem
Capital. More detail on these movements is given in section
A4.1. This increase, together with the Group’s liquidity and capital
policy, determines its funding requirements and hence the level
of its liabilities.
Funding structure and cash resources
The Group’s funding increased by 8.0% during the year in
response to the growth of the business and a cautious outlook
on funding and liquidity. The proportion represented by retail
deposits increased to 55.8% in accordance with the Group’s
long-term funding strategy (2019: 49.0%). The cautious approach
to liquidity and capital resulted in the increased cash balance,
which increased by £699.6 million in the period. Movements in
funding balances are discussed in more detail in section A4.2.
Page 45
Strategic Report
Derivatives
A4.4.3 Segmental results
Movements in derivative financial assets principally relate to
the retirement of certain of the Group’s currency denominated
floating rate notes and their related hedging instruments in the
period. These swaps decreased by £137.4 million over the year.
These movements do not impact the Group’s results.
Derivative assets and liabilities used for interest rate hedging
increased by £6.6 million and £51.5 million respectively, as a
result of interest rate movements. These were largely offset by
a £45.5 million increase in the hedging adjustment on loans to
customers, included in sundry assets above, and a £4.5 million
increase in the adjustment on retail deposits, included in
sundry liabilities.
Pension obligations
The IAS 19 valuation of the Group’s defined benefit pension
scheme deficit reduced by £14.1 million in the period, less than
the £20.0 million additional cash contribution made by the Group
in the year. Market implied gilt yields, which are used to value
future liabilities, reduced by less in the year than bond yields,
which are used to estimate the discount rates applied to them,
and hence the discounted value of the liability increased. The
deficit at 30 September 2020 stood at £20.4 million
(2019: £34.5 million).
While the valuation under IAS 19 is that which is required to be
disclosed in the accounts, pension trustees generally use the
technical provisions basis as provided in the Pensions Act 2004
to measure scheme liabilities. On this basis, the deficit at
30 September 2020 was estimated at £9.7 million, a reduction
of £19.5 million in the period (2019: £29.2 million), representing a
93.9% funding level (2019: 80.0%).
Other assets and liabilities
Sundry assets have increased since 30 September 2019 by
£95.2 million. This increase was driven principally by movements
in swap rates which generated the £45.5 million movement in
fair value hedging referred to above and required a £31.3 million
increase in CSA collateral deposits as a result of the increased
value of derivative liabilities. Other movements included the
inclusion of a tax current debtor of £5.7 million, with payments
on account in the year being greater than the calculated tax
payable; an increase of £3.7 million in mandatory CRD deposits
at the Bank of England, which are calculated based on the size of
the Group’s deposit base; and the recognition of £7.0 million of
right-of-use assets on the adoption of IFRS 16 (note 61).
Within sundry liabilities, which reduced by £21.2 million, the
absence of a current tax liability (2019: £15.2 million), as referred
to above, and a reduction in accrued investment interest
receivable as a result of reduced interest rates, are offset by the
lease liability recognised on transition to IFRS 16.
The underlying operating profits of the three segments
described in the Lending Review in section A4.1 are detailed fully
in note 2 and are summarised below.
Segmental profit
Mortgage Lending
Commercial Lending
Idem Capital
Gains on disposals
Unallocated central costs and
other one-off items
2020
£m
2019
£m
154.3
167.9
45.9
19.6
219.8
-
43.8
48.0
259.7
9.7
(99.8)
(95.3)
120.0
174.1
The Group’s central administration and funding costs, principally
the costs of service areas, establishment costs and bond
interest have not been allocated.
Mortgage Lending
The Mortgage Lending division has maintained a strong position
in its market throughout the year, increasing its average net
loan balance by 1.8%, despite the impact of Covid-19 through
the second half of the year. Average NIM improved by 9 basis
points over the year as a result of business initiatives and the
replacement of legacy assets with higher yielding accounts. This
generated a 6.9% increase in net interest. However, the impact of
the virus on loss expectations generated impairment charges for
the year of £25.8 million (2019: £1.0 million), increasing the cost
of risk to 0.24% (2019: 0.01%).
The impact of this increased provision saw segmental profit
decrease by 8.1% to £154.3 million, from the previous year
(2019: £167.9 million).
Commercial Lending
Segmental profit in Commercial Lending was £45.9 million in
the period (2019: £43.8 million), an increase of 4.8% even after
allowing for the impact of Covid-19 on provisions. This resulted
from the 14.8% growth in average loan balances, year-on-
year, principally attributable to the strength of growth in the
development finance business.
Coupled with a strategic focus on yield which saw NIM in the
segment increased by 50 basis points in the year, this growth
generated a rise of 21.1% in total operating income in the
segment. With the cost base broadly similar to the previous
period, the increase in operating income was offset by the
£14.5 million increase in provision arising from the worsening
economic outlook reflected in the Group’s IFRS 9 impairment
scenarios.
Idem Capital
The result for the Idem Capital division continues to be driven
by the rate of portfolio run-off, with no new deals completed in
the year. The average loan balance reduced by 24.5% in the year
while average NIM continued to reduce with high-yielding assets
paying down more rapidly than lower yielding secured balances.
Page 46
Unsecured consumer assets in the division are valued based on
future expected cash flows. The reforecast of these balances in
the light of Covid-19 generated a write-down of expected interest
of £3.7 million, which has also impacted NIM in the segment.
However actual performance in the last six months of the year
has been encouraging.
This, together with the Covid-19 provisioning on the secured
assets, impacted on segment profit, which fell to £19.6 million
(2019: £48.0 million).
A4.5 Operations
The major factor impacting the Group’s operational capabilities
in the year was the Covid-19 pandemic, which affected all
business areas. The achievement of the Group’s objectives
is heavily reliant on its people, business partners, suppliers,
systems and governance structures, with a single framework
covering all locations and operations. This framework has been
successfully reconfigured in response to Covid-19.
The development of the Group’s operations has continued
despite the virus. Both before the outbreak of Covid-19 and
during the pandemic, the Group has continued to invest in
its infrastructure, particularly in customer and broker facing
systems. The Group’s planned change programme progressed
throughout the year with minimal impact from the pandemic,
delivering new technology and operational enhancements which
will generate efficiencies and improve customer experiences.
A4.5.1 Covid-19 response
The Group’s operational response to Covid-19 has focussed
on enabling its businesses to continue operating as normally
as possible whilst supporting its customers and protecting
employees and other stakeholders. Operating in a key economic
sector, it recognised the need for service levels to be preserved
as far as possible and the difficulties in achieving that. The Group
is proud of what has been achieved and is confident that it has
in place the operational infrastructure to deliver the levels of
customer service and employee safety required both during and
after the pandemic.
The Group’s operational functions faced three major challenges
as a result of the Covid-19 situation:
•
•
•
To develop processes and IT systems to deliver appropriate
financial reliefs to customers, in line with the structures set
out by the UK Government
To enable working from home to be widely available amongst
the workforce while preserving the Group’s culture and
retaining a strong compliance and cyber-security framework
To develop the systems and procedures to offer the CBILS
and BBLS products introduced across the financial services
industry to support its customers
The UK Government announced the initial package of Covid-19
reliefs that it expected lenders to grant on 17 March 2020 and
the Group was able to develop and put in place the necessary
processes and systems before the first large batch of payments
fell due on 31 March, 14 days later. This involved a significant
amount of work by operational and IT staff to ensure that not
only were the appropriate reliefs given, but also that they were
given in a way that would not adversely impact customers’ credit
records. Systems have continued to develop as reliefs have been
extended and amended through the second half of the year.
Prior to the announcement of the UK lockdown the Group was
already planning for that eventuality, with groups of employees
trialling working from home while on-site social distancing was
enhanced. Following the announcement, a programme was
quickly put in place to convert as many people as possible to
working from home, including customer service and contact
centre employees. This involved both the transfer of significant
amounts of IT equipment to employees’ homes and also
changes to the Group’s networks and systems. These changes
were required to enable remote working, while still retaining
appropriate controls over data and system security as well as
the levels of monitoring required by regulators, particularly in a
contact centre environment.
The operation saw the conversion of around 1,000 previously
office-based employees to home working. This involved
the provision of desktop computers, screens and related IT
equipment at 425 homes, an additional 50 users being provided
with laptop computers, and additional equipment being provided
to many other employees already equipped for home working.
By 31 March 2020, the Group had enabled 90% of employees
to work from home on a sustained basis whilst maintaining
service levels for all its customers. Almost all the Group’s
offices have been temporarily closed with employees identified
as critical being retained in a handful of premises, mostly in
roles which require the employees’ physical presence, such as
those maintaining council waste disposal vehicles funded by
the Commercial Lending division. Other than these workshop
personnel, almost all remaining on-site employees are based in
the head office in Solihull.
At the year end most employees were still working from home
and while plans had been made to bring some people back to
the Group’s offices, those plans were put on hold following the
worsening of the Covid-19 situation in the autumn, with a large
scale return to office working not expected before March 2021
at the earliest. The Group has not placed any employee on a
furlough scheme, nor made any employee redundant following
the Covid-19 outbreak, and has no current intention of doing so.
This approach has allowed the Group to provide operational
capacity to support its customers, who may themselves be
suffering from the effects of the Covid-19 crisis. Data relating to
both the period of transition and the period since, with customer-
facing employees mostly working from home, demonstrated no
significant increase in complaint levels.
The protection of the health and wellbeing of the Group’s
employees has been a principal objective of its Covid-19
response. Increased hygiene products and more frequent
cleaning routines were introduced across the Group’s offices
from February. Throughout March a coordinated approach
was implemented to identify and protect the Group’s most
vulnerable employees, as defined by the UK Government, and
these people were immediately sent home and subsequently, as
described above, provided with the necessary IT infrastructure
to work from home effectively. Social distancing, in line with UK
government guidance was implemented across all open offices
during March and this remains in place.
Ensuring regular engagement with employees working from
home during the crisis has been an area of focus. Regular
briefings by the CEO and senior team, delivered online,
have spearheaded a coordinated and regular programme
of communications for all employees, as well as specific
communications for line managers. Additional learning
opportunities have been provided to managers and employees
addressing physical and emotional wellbeing with a focus on
working from home effectively and managing teams remotely.
Further support is provided by the Group’s team of emotional
wellbeing volunteers, set up in 2018, and all identified and trained
with the assistance of the charity Mind.
Page 47
Strategic Report In addition, quarterly engagement pulse surveys have
monitored employees’ overall physical and mental wellbeing,
enabling the Group to respond quickly to any emerging needs.
Fortnightly meetings with the Group’s elected People Forum
representatives, attended by senior management, as well as two
members of the Board on one occasion during the pandemic,
have provided a further source of feedback to ensure employees
have been considered throughout the Group’s response to the
pandemic.
All activity is in line with the advice of the UK Government.
In addition, an ongoing programme of development activity
has taken place through the second half of this year. This is
delivered through both learning and virtual group sessions and
covers such topics as: effective use of Office 365 applications,
including Microsoft Teams; the importance of communication;
how to motivate and engage people; and delivering effective
performance management whilst working remotely.
Overall, the Group is satisfied with its operational performance
during the first six months of the Covid-19 crisis, which has
justified its investment in contingency planning and operational
resilience over recent years. It is proud of the response to the
crisis by its people throughout the operation, without whom this
could not have been achieved.
A4.5.2 Management and people
The Group employs just under 1,400 people, with the majority of
employees being based at its Solihull head office. The Group is
proud of its strong culture; our employees and leadership live by
our values and we believe that this is one of our differentiators
that makes us a great place to work.
During the period the Group commissioned an independent
review of its culture from PwC which concluded that “there is
a strong working relationship across the leadership team and
consistent alignment on the firm’s values and desired behaviours
as it pertains to good customer outcomes”.
Governance and management
The Group’s business continuity governance processes were
invoked once it became clear that the Covid-19 pandemic was
likely to impact the UK. In addition to the governance provided
by senior management, the Board increased its oversight with
an additional series of director updates, issued by the Chair
of the Board and the CEO, specifically discussing the impact
of Covid-19 on the Group and its market. Ad hoc meetings of
the Board and committees have also taken place. Board and
committee meetings have been held remotely since March
2020. The impact of the pandemic on the Group’s stakeholders,
including its customers and employees, and the Group’s
response to it have been thoroughly communicated to the Board
and discussed at board meetings.
Since 1 October 2019 the Company has been subject to the
2018 UK Corporate Governance Code (the ‘Code’). This includes
significant changes from the 2016 edition of the Code and work was
undertaken during the year ended 30 September 2019 to ensure
compliance with the Code. The enhancements made to the Group’s
governance arrangements in response to the Code are discussed
further in section B of this annual report. The Company has
complied with the principles of the Code during the year.
In January 2020 the Group and the Board offered their thanks
and best wishes on his retirement to John Heron who was the
Group’s longest serving employee and Managing Director -
Mortgages. John had been an executive director since 2003 and
was instrumental in establishing and building both the Group’s
buy-to-let mortgage offering and the buy-to-let sector as a
distinct part of the UK mortgage market.
Page 48
Peter Hartill reached nine years’ service on the Board in February
2020, and it had previously been announced that he intended
to step down from the Board at that point. However, the
Board announced in December 2019 that it considered Peter’s
independence, skills and experience allowed him to continue to
make a very effective contribution as a non-executive director,
Senior Independent Director and Audit Committee Chair and
that it had therefore asked him to postpone his resignation.
This was in order to ensure that the Board would not have to
compromise on either the quality of candidate or a suitable
transition period in finding a replacement for him.
In March 2020 Alison Morris was appointed to the Board and
succeeded Peter as Chair of the Audit Committee, chairing
her first meeting in September 2020. Alison is a chartered
accountant and recently retired as a partner in PwC's Financial
Services Assurance Practice. She joined PwC in 1982 and spent
her entire career with the organisation in a range of internal and
external audit roles across the Asset and Wealth Management
practice and Banking and Capital Markets business unit.
A thorough handover from Peter to Alison took place over
the summer and Peter stepped down from the Board on 30
September 2020. Peter retires from the Board with the thanks of
the Chair and the Board for his commitment to the Group and his
professionalism and dedication in the role of Audit Committee
Chair and, latterly, Senior Independent Director.
Hugo Tudor replaced Peter as Senior Independent Director
on 23 July 2020 and and continues to chair the Remuneration
Committee.
Following the year end, the Group announced the appointment
of Peter Hill as a non-executive director, following a robust
search and selection process. Peter was CEO of Leeds Building
Society from 2011 until his retirement in 2019 and is currently a
non-executive director of Pure Retirement Limited and chairman
of its risk committee. He is also Chair of Mortgage Brain and
brings with him a wealth of experience in financial services and a
proven track record in risk oversight, gained during his executive
and non-executive career.
Peter will become Chair of the Risk and Compliance Committee
with effect from 31 December 2020 to allow for a managed
and orderly transition from the current committee chair, Finlay
Williamson, who has announced his intention to step down from
the Board on 31 December 2020.
Finlay was appointed to the Board in 2017 and is Chair of the
Risk and Compliance Committee and a member of the Audit
Committee. Finlay will also be stepping down at the same time
from the Board of Paragon Bank PLC, to which he was appointed
in 2015. He leaves with the Board’s thanks for the contribution
he has made to embedding the Group’s Risk Management
Framework. He has brought humour, great experience and
energy to his role and his input will be missed.
Following these changes, women will comprise 37.5% of the
Board.
People and development
The Group continues to focus on maintaining an efficient and
effective workforce, increasing employee numbers by 1.4% over
the year. It maintains its accreditation from the UK Living Wage
Foundation and minimum pay continues to meet the levels set
by the Foundation.
Retention of employees continues to remain high, with the
attrition rate of 10.4% continuing to track below the national
average of 21.7%. These high levels of retention are further
bolstered by 24.7% of employees achieving over 5 years’ service,
13.3% achieving over 20 years with the Group and 4.5% achieving
over 30 years’ service.
Retaining this level of skill and knowledge within the Group
has helped to navigate the challenges that remote working
has presented during the Covid-19 pandemic and enabled
operational challenges to be met, with employees redeployed
to meet operational needs. The Group believes that these levels
of retention are driven by a culture of continuing to provide
employees with opportunities for personal development and
career progression; 25% of the Group’s vacancies during the year
were filled internally.
The Group has continued to recruit and develop the best talent
over the year; adapting how this is achieved through the Covid-19
pandemic. Most of the Group’s employees were moved to work
from home in the space of a week; new hires were virtually
onboarded; and the provision of day-to-day training moved
online. The Group has seen its employees pull together and
demonstrate their resilience over the course of the year, with
some employees temporarily moving into new roles to ensure
operational needs are met and customer service standards
maintained.
This year it has been more important than ever to continue
to promote wellbeing and the Group’s Wellbeing Network has
organised numerous initiatives to support our people’s mental
and physical health.
The Group’s senior leadership development programme has
continued during the year. This is aimed at developing those
identified as successors for the executive management team
and their direct reports. During this year four members of
this programme have secured promotions within the Group.
Additionally, the Group continued its participation in the Women
Ahead 30% Club cross-company mentoring scheme.
The Group has also continued to take on new apprentices during
the period with 46 apprentices currently in place across various
business functions. The Group’s intern opportunities also
continued to be successful, with interns undertaking placements
in Finance and Treasury during the year and recruitment taking
place over the summer despite the pandemic.
The Group rolled out its ‘Leadership Blueprint’ in October 2019.
This personal development initiative is designed to build the
capability of line managers and drive consistency in the way
the Group manages its people. It focuses on developing the
behaviours of line managers and leaders and measuring the
impact that these improvements have on business outcomes.
The Group also focussed on the provision of professional
qualifications training during the period, with an additional 37
employees commencing their Certificate in Mortgage Advice
and Practice during the period, and other employees being
supported in qualifications relevant to their specialism.
During the year the Group also complied with the FCA
requirement for the Senior Managers and Certification Regime
(‘SMCR’) to be extended to all regulated legal entities. People
performing Senior Management Functions ('SMFs’) for its solo
regulated businesses (Paragon Finance PLC, Mortgage Trust
Services PLC, The Business Mortgage Company Services
Limited, Premier Asset Finance Limited, Paragon Technology
Finance Limited and Paragon Commercial Finance Limited) have
been identified and approved by the FCA.
Alison Morris, non-executive director, became the Group’s
Whistleblowing Champion this year and all members of the
Whistleblowing Committee received training from Protect on
how to develop robust whistleblowing arrangements and achieve
a culture where employees feel able to raise concerns.
Equality and diversity
The Group continued to make progress with its Equality,
Diversity and Inclusion strategy during the year. In January 2020
the Group enhanced its maternity provision, to 18 weeks leave at
full pay from 6 weeks at 90%, to support the retention and career
progression of female employees. The Group has continued its
participation in the ‘Women Ahead 30% Club’ cross-company
mentoring scheme, providing ten trained mentors to support
female mentees from other companies, whilst nominating
ten female mentees from the Group’s workforce to receive
external mentoring support at the same time. This is an annual
programme and feedback from both mentors and mentees has
been very positive. It is the Group’s second year of involvement.
The Group has been a signatory of the Women in Finance
Charter, sponsored by HM Treasury, since 2016. The Charter’s
objectives reflect the Group’s own aspirations for gender
diversity and the Group published its first set of internal targets
under the Charter in January 2017.
The Group submitted its latest progress report at
30 September 2020; unfortunately, the proportion of female
senior managers fell to 33.9% during the period (2019: 35.9%).
This reduction is primarily due to reporting line changes within
the senior management population and plans are in place to
ensure that the Group can achieve its 35% target by the
January 2022 deadline.
Page 49
Strategic Report2016201420152013201220172018201920201,6001,4001,2001,0008006004002000Employee numbersAt 30 September and average for the yearYear endAverage At the time of setting its Women in Finance target, the Group set
additional targets which it is making excellent progress towards.
In particular:
•
•
•
•
•
50.1% of employees receiving management development /
leadership training are female (compared to 42.7% in 2019)
24.3% of the workforce are on flexible working contracts
(compared to 35.8% in 2019)
82% of flexible working available is on a part-time basis
(compared to 65.9% in 2019)
The Group continues to monitor external developments and
is confident that the practices and plans that are in place are
aligned to best practice and reflect the recommendations made
by the Hampton Alexander review.
The Group calculated its gender pay gap at April 2020. This
calculation shows that median female pay in the Group was
36.9% less than the median male pay (2019: 33.9%). This is
broadly in line with the results reported by other financial
services companies and the 35.9% gap for the sector reported by
the Office of National Statistics in their Annual Survey of Hours
and Earnings (‘ASHE’) published in October 2020. Analysis of
the gender pay gap data indicates that the Group’s gap arose
principally as a result of the distribution of roles between the
genders, highlighting the importance of the Women in Finance
initiative in addressing these issues.
The Group has begun to increase its focus on other diversity
strands during the period; rolling out new recruitment technology
to reduce the likelihood of unconscious bias in the early stages
of candidate selection.
The Group is also in the process of rolling out an Equality,
Diversity and Inclusion Network, an employee resource group
which consists of people who are passionate about supporting
the Group’s target of becoming more inclusive for all employees.
Richard Rowntree, Managing Director-Mortgages is the
executive sponsor for the network and progress will be reported
to the Nomination Committee.
A4.5.3 Environment and social
Climate change
During April 2019 the PRA published a Policy Statement noting
that climate change, and society’s response to it, present
financial risks which are relevant to its objectives. Furthermore,
the PRA released a 'Dear CEO' letter in July 2020 emphasising
their expectations for firms to have fully embedded their
approaches to managing climate related financial risks by the
end of 2021.
The Group is developing an enhanced approach to identifying
and managing the potential impacts of climate change in its
business in order to meet these requirements.
In order to provide the appropriate governance, the Board has
been engaged in the process for developing and accepting
climate change as a principal risk. The Group has established
a project and working group reporting to the Executive Risk
Committee which is chaired by the CEO. The working group
contains personnel from across the business to manage the
broad scope of climate change. The working group’s remit
includes but is not limited to:
Ensuring the financial risks from climate change are managed
effectively following its allocation as a principal risk
Developing a clear understanding of how our current
products impact the UK’s progression to net zero by 2050
Embedding climate change risk within established risk types
such as operational risk and credit risk to ensure a consistent
approach is taken across the business
The Group is also cooperating with several industry initiatives
on climate change, including projects led by the Green Finance
Institute to investigate how financing solutions can support
increasing energy efficiency in the UK property sector.
Operationally the Group has taken the decision to move away
from diesel vehicles in its company fleet in favour of electric or
hybrid vehicles which will reduce greenhouse gas emissions as
new cars join the fleet. The Group has also relaunched its
cycle-to-work scheme.
More detail on the Group’s response to climate change is
included in section A6.4.
Charitable activity
As part of its response to Covid-19, and its ongoing commitment
to the communities in which it operates, the Group has donated
£100,000 to charities supporting people impacted by the
pandemic. These included organisations supporting NHS staff,
homeless people and elderly people. It has also recognised
the difficulties faced by the employee charity committee in
fundraising, with so many of the Group’s people working off site,
and pledged to double the amount raised by staff in the ‘Move for
Macmillan’ challenge. This initiative both supported this year’s
company charity and promoted exercise and wellbeing amongst
people working from home.
A4.5.4 Risk
The effective management of risk remains crucial to the
achievement of the Group’s strategic objectives. It operates a
risk governance framework designed around a formal three lines
of defence model (business areas, risk and compliance function
and internal audit) supervised at board level.
During the year the focus of the Group’s risk management has
inevitably been heavily focussed on managing the impacts of
Covid-19. The Group has responded effectively to the changes in
risk profile arising from the impact of the pandemic.
The Group’s risk management framework has provided a robust
mechanism to ensure that new risks are promptly identified,
assessed, managed and appropriately overseen from a risk
governance perspective. As the pandemic unfolded a dedicated
Risk Working Group (‘RWG’) reporting to the Crisis Management
Team, was established to oversee all significant process and
lending changes resulting from Covid-19, providing independent
challenge and oversight, and ensured that all risk aspects were
fully considered.
In particular, the RWG and the independent risk function have
provided assurance over the following:
•
•
New risks arising from the provision of CBILS and BBLS
lending including process changes and underwriting
decisions
Changes to technology and infrastructure required to
facilitate mass home working especially in the many
customer-facing roles where this practice was new
Keeping up-to-date with emerging best practice across the
financial services industry
•
Revised credit policies and decisioning to reflect the
challenges in applying existing lending criteria
•
•
Page 50
•
Implementation of payment holidays in accordance with
regulatory initiatives together with other payment reliefs
across all product lines
•
Planning for a Covid-19 safe return to office-based working
and the implications for the longer term workplace strategy
In addition to the challenges of Covid-19, the Group has
continued to evolve and embed its risk management framework
and in particular has focussed on:
•
•
•
•
•
•
•
Anticipating the level of change in product design, funding
and operations which will be required in preparation for the
withdrawal of LIBOR in 2021
Embedding operational resilience capabilities which have
also been critical in handling the Covid-19 situation. This
has included refinement of critical business services and
tolerances and ensuring these considerations are embedded
as part of day-to-day operations
Addressing the impact of climate change on managing
financial risks
Developing advanced models and the overarching model risk
framework to enhance credit risk management and support
the Group’s IRB application process
Evolution and embedding of the Group’s approach to
managing the risks and oversight of its outsourced
relationships and important suppliers
Enhancing stress testing procedures to ensure the
robustness of capital and liquidity positions
Ensuring effective cyber-security controls and a robust data
protection approach
The Group continues to review its exposure to emerging
developments in the Brexit process once the transition period
ends on 31 December 2020, given the remaining potential of no
deal being agreed for the terms of exit. While the Group does
not have operations outside the UK it has continued to review
the capital, liquidity and operational implications of the stresses
which might be caused by the process. The Board has monitored
the position throughout the year and the Group considers itself
well placed to address the challenges. However, the position
remains uncertain and will continue to be subject to detailed
monitoring given the imminent deadline.
The principal challenges in the risk environment faced by the
Group during the year and moving forward into 2021 include:
•
•
•
Management of those risks arising from changes introduced
in response to Covid-19. As payment reliefs end and the wider
economic impacts of the crisis are felt, there will be a need
to ensure appropriate treatment of ongoing arrears and the
ongoing position of affected customers. Key to this will be
ensuring that the treatment of customers is fair and conduct
principles remain at the forefront of all interactions
Management of the transition from LIBOR to alternative
benchmark rates given the commitment by the regulators to
the transfer being fully completed by 31 December 2021
Whilst Covid-19 has underlined the need to ensure the Group
is fully resilient, the unprecedented crisis has identified a
number of industry-wide issues which will need to be built into
the resilience frameworks going forward. Further clarification
on the broader industry approach is expected with the
publication of a consultation paper in late 2020. The Group
is committed to strengthening its operational resilience as a
core priority in 2021
Further details regarding the governance model, together with
the principal risks and uncertainties faced by the Group, the
ways in which they are managed and mitigated and the extent to
which these have changed in the year are detailed within Section
B8 of this annual report.
A4.5.5 Regulation
The Bank is authorised by the PRA and regulated by the PRA
and the FCA. The Group is subject to consolidated supervision
by the PRA and a number of its subsidiaries are authorised
and regulated by the FCA. As a result, current and projected
regulatory changes continue to pose a significant risk for the
Group.
Since March 2020, the impact of Covid-19 has largely driven
regulatory priorities and the Group continues to respond
effectively to these ongoing challenges. Overall, the Covid-19
response has included reviewing the Group’s arrangements to
address an evolving situation, whilst maintaining clear focus
on customers, staff and the marketplace. Across all product
areas the Group continues to provide support and service to its
customers.
In response to the economic shock from Covid-19, regulators
have sought to alleviate some of the pressures on the banking
sector. These regulatory responses include:
•
•
•
‘Quick Fix’ amendments to the CRR discussed in the capital
section, A4.3, alleviating the short-term impact of Covid-19
on regulatory capital. These have been reviewed, and where
relevant, incorporated into capital and corporate planning
Guidance from accounting and financial services regulators
on the application of IFRS 9 in the Covid-19 environment,
including the treatment of payment reliefs and the need to
pay regard to the impact of government support measures.
These are discussed in Section A4.4.
Guidance on payment deferrals by the FCA for mortgages,
unsecured consumer credit and motor finance to enable
customers suffering Covid-19 related financial difficulties
to be supported without impact on their credit files. The
Group has applied the guidance in full and has worked with
customers to ensure they are supported throughout the
deferral period, and affordable repayment arrangements are
put in place following any such relief
In addition to requirements introduced in response to Covid-19,
the following developments currently in progress are particularly
relevant to the Group:
•
•
Both the PRA and FCA have been active in ensuring an
orderly transition from LIBOR to alternative benchmark
measures, both in terms of the impact on financial markets
and the impact on customers. A project has been established
to oversee the Group’s LIBOR transition plan to ensure the
regulatory deadlines and requirements are met
Due to Covid-19 the consultation period for proposed PRA
and FCA operational resilience requirements was extended
to 1 October 2020, with final rules expected to be published
in early 2021. The FCA has also requested that firms comply
with the EBA Guidelines on ICT and security risk, particularly
focusing on business continuity. The business has reviewed
the guidelines and confirmed its proportionate adherence
to the requirements. A gap analysis of the Operational
Resilience Consultation Paper has been completed, and a
plan to ensure compliance within appropriate timeframes is
in place
Page 51
Strategic Report •
•
•
•
•
The FCA published updated guidance on vulnerable
customers this year, and HM Treasury has continued work
on its proposed Breathing Space scheme. The Group has
amended processes and updated procedures to reflect these
changes, and to take account of temporary guidance for
those experiencing financial difficulties linked to Covid-19
Certain regulations applying in the financial services sector only
affect entities over a certain size, which the Group might meet
within its current planning horizon. The Group considers whether
and when these regulations might apply to it in light of the growth
implicit in its business plans and puts appropriate arrangements
in place to ensure it would be able to comply at that point.
The Group, along with the rest of the UK corporate sector,
continues to lack clear visibility on potential regulatory changes
that may be introduced following the end of the Brexit transition
period on 31 December 2020. HM Treasury has extended the
temporary transitional powers for the regulators until
31 March 2022. Regulatory obligations for firms will generally
remain the same for that period.
The governance and risk management framework within the
Group continues to be developed to ensure that the impacts
of all new regulatory requirements are clearly understood and
mitigated as far as possible. Regular reports on key regulatory
developments are received at both executive and board risk
committees.
Overall, the Group considers that it is well placed to address all
the regulatory changes to which it is presently exposed.
The FCA has further developed its messaging on culture
during 2019/20, broadening its focus from ‘Tone at the Top’, to
a wider view of culture across firms. The FCA has cautioned
firms against measuring culture too narrowly. Culture
remains a key focus for the Board, senior management and
throughout the business
The PRA published a Policy Statement in July 2020 confirming
its expectations of firms when managing the key prudential
risks associated with asset encumbrance, specifically in the
contexts of managing liquidity and funding risks, recovery
planning and resolution. The Group has reviewed the Policy
Statement and considers itself to be in a good position to
meet these expectations and related PRA rules
The PRA has confirmed that it expects firms to have fully
embedded their approaches to managing climate-related
financial risks by the end of 2021. To help firms understand
the risks and opportunities that arise from climate change,
and to provide support on how to integrate these risks
into strategy and decision-making processes, the Climate
Financial Risk Forum Guide was published in June 2020. The
Group continues to develop its strategy in respect of climate
change, in line with this guidance, to ensure it is
well-positioned to address these emerging challenges
The PRA is undertaking a consultation on proposed
amendments to the Capital Requirements Directive
('CRD V'). CRD V builds on the existing CRD IV, introducing
further measures covering capital, remuneration and
governance. It also introduces a number of EU-specific
measures designed to further harmonise micro and
macroprudential supervision and to introduce greater
proportionality in prudential requirements. Whilst the Group
awaits the outcome of this consultation, it believes it will be
well placed to meet the final requirements
Page 52
A5. Future prospects
The Code requires the directors to consider and report on the
future prospects of the Group. In particular, it requires that they:
•
•
Explain how they have assessed the prospects of the
Group and whether, on this basis, they have a reasonable
expectation that the Group will be able to continue in
operation (the ‘viability statement’)
State whether they consider it is appropriate for the Group
to adopt the going concern basis of accounting in the
preparation of the financial statements presented in
Section D (the ‘going concern statement’)
In addition, Listing Rule LR9.8.6 R(3) requires the directors to
make these statements and to prepare the viability statement
in accordance with the ‘Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting’
published by the Financial Reporting Council (‘FRC’) in
September 2014.
The business activities of the Group, its current operations and
those factors likely to affect its future results and development,
together with a description of its financial position and funding
position, are described in the Chairman’s Statement in Section
A1, Chief Executive’s review in Section A3 and review of the
business in Section A4. The principal risks and uncertainties
affecting the Group, and the steps taken to mitigate these risks
are described in Section B8.5.
Section B8 of this annual report describes the Group’s risk
management system and the three lines of defence model which
it is based upon.
Note 54 to the accounts includes an analysis of the Group’s
working and regulatory capital position and policies, while notes
55 to 58 include a detailed description of its funding structures,
its use of financial instruments, its financial risk management
objectives and policies and its exposure to credit, interest rate
and liquidity risk. Critical accounting judgements and estimates
affecting the results and financial position disclosed in this
annual report are discussed in notes 63 and 64.
Financial forecasts
The Group has a formalised process of budgeting, reporting and
review. The Group’s planning procedures forecast its profitability,
capital position, funding requirement and cash flows. Detailed
annual plans are produced for two-year periods with longer term
forecasts covering a five-year period, which include detailed
income forecasts. These plans provide information to the
directors which is used to ensure the adequacy of resources
available for the Group to meet its business objectives, both on a
short-term and strategic basis.
The Group makes extensive use of stress testing in compiling
and reviewing its forecasts. This stress testing approach was
reviewed in detail during the year as part of the annual Internal
Capital Adequacy Assessment Process (‘ICAAP’) cycle, where
testing considered the impact of a number of severe scenarios.
Current economic and market conditions are reflected at the
start of the plan with consideration given to how these will
evolve over the plan period and affect the business model. The
plan is compiled by consolidating separate income forecasts
for each business segment and securitisation vehicle to form
the top-level projection for the Group. This allows full visibility of
the basis of compilation and enables detailed variance analysis
to identify anomalies or unrealistic movements. Cost forecasts
and new business volumes are agreed with the heads of the
various business areas to ensure that targets are realistic and
operationally viable.
In compiling the most recent forecast, for the period
commencing 1 October 2020, particular attention was paid to the
potential consequences of Covid-19 on the Group’s operations,
customers, funding and prospects, both in the short and longer
term. This included consideration of a number of different
scenarios with impacts of varying duration and severity. In
common with the Group’s approach to IFRS 9, the economics
used in the forecasting process were updated in October in
light of the continuing development of the Covid-19 crisis, based
on updated external projections. Future business activity was
reforecast reflecting the potential impacts of the pandemic on
markets and products.
The forecast was based on the best available information at
the time of its approval, but the uncertainties surrounding the
potential ongoing impact of Covid-19 and the nature, duration
and effectiveness of government and regulatory measures to
address it, mean that accurate forecasting is a more complex
task than in normal circumstances. Therefore, further scenario
modelling was undertaken to evaluate the impact of adverse
stresses of the forecast variables with the greatest impact.
The key stresses modelled in detail to evaluate the forecast
were:
•
•
•
•
•
An increase of 10% in buy-to-let volumes. This examined the
impact of volumes on profitability and illustrated the extent to
which capital resources and liquidity would be stretched due
to the higher cash and capital requirements
Higher funding costs – 20bps higher cost on all new savings
deposits throughout. This scenario illustrates the impact of
a significant margin squeeze on profitability and whether this
would cause significant impacts on any capital, liquidity or
encumbrance ratios
An increase in impairment due to more Covid-19 disruption.
This scenario models a significant short-term profitability
stress and the consequent stress on capital
A 10% reduction in development finance volumes.
Development finance is the highest yielding product and this
scenario illustrates the effect of product mix on contribution
and other ratios
A stress combining higher funding costs and more Covid-19
disruption, without reducing lending. Although it is not
deemed likely that such a scenario would materialise,
since severe stresses almost always result in lower lending
volumes, the output from this stress provides a benchmark
for a plausible worst-case position that impacts all aspects of
business performance and ratios, in particular, capital
These stresses did not take account of management actions
which might mitigate the impact of the adverse assumptions
used. They were designed to demonstrate how such stresses
would affect the Group’s financing, capital and liquidity positions
and highlight any areas which might impact the Group’s going
concern and viability assessments. Under all these scenarios,
the Group had the ability to meet its obligations over the forecast
horizon and maintain a surplus over its regulatory requirements
for both capital and liquidity through normal balance sheet
management activities.
Page 53
Strategic Report At the year end the directors reviewed their on-going risk
management activities and the most recent risk information
available to confirm the position of the Group at the balance
sheet date.
The directors concluded that those activities, taken together,
constituted a robust assessment of all of the principal risks
facing the Group, including those that would threaten its
business model, future performance, solvency or liquidity.
These principal risks are set out in Section B8.5 of the Risk
Management Report.
Availability of funding and liquidity
The Group’s retail deposits of £7,856.6 million (note 28), raised
through Paragon Bank, are repayable within five years, with 71.9%
of this balance (£5,650.2 million) payable within twelve months
of the balance sheet date. The liquidity exposure represented
by these deposits is closely monitored; a process supervised
by the Asset and Liability Committee. The Group is required to
hold liquid assets in Paragon Bank to mitigate this liquidity risk.
At 30 September 2020 Paragon Bank held £1,637.1 million of
balance sheet assets for liquidity purposes, in the form of central
bank deposits (note 15). A further £150.0 million of liquidity was
provided by an off balance sheet swap arrangement (note 57),
bringing the total to £1,787.1 million.
Paragon Bank manages its liquidity in line with the Board’s risk
appetite and the requirements of the PRA, which are formally
documented in the Board’s approved ILAAP. The Bank maintains
a liquidity framework that includes a short to medium term cash
flow requirement analysis, a longer term funding plan and access
to the Bank of England’s liquidity insurance facilities, where
pre-positioned assets would support drawings of
£684.0 million. Holdings of the Group’s own externally rated
mortgage backed loan notes can also be used to access
the Bank of England’s liquidity facilities or other funding
arrangements. At 30 September 2020 the Group had
£1,063.5 million of such notes available for use, of which
£872.9 million were rated AAA.
The Group’s securitisation funding structures, described in
note 57, ensure that a significant proportion of its originated
loan portfolio is match-funded, although this was reduced in
the period by the retirement of five securitisation transactions.
Repayment of the securitisation borrowings is restricted to
funds generated by the underlying assets and there is limited
recourse to the Group’s general funds. Recent and current loan
originations are financed through retail deposits and may be
refinanced through securitisation where this is appropriate and
cost-effective. While the Group has not accessed the public
securitisation market in the year, the market has remained active
throughout the Covid-19 crisis and remains a potential funding
source.
The earliest maturity of any of the Group’s working capital debt
is in December 2020, when the first of the Group’s retail bond
issues, of £60.0 million matures. The Group’s TFS borrowings
also start to mature in the coming financial year, with
£700.0 million falling due within twelve months.
The Group’s access to debt is enhanced by its corporate BBB
rating, affirmed by Fitch Ratings in March 2020, and its status
as an issuer is evidenced by the BB+ rating of its £150.0 million
Tier 2 bond. It has regularly accessed the capital markets for
warehouse funding and corporate and retail bonds over recent
years and continues to be able to access these markets.
The Group’s cash analysis, which includes the impact of these
repayments, continues to show a strong cash position, even
after allowing scope for significant discretionary payments, and
its securitisation investments produce substantial cash flows.
A further, more material impairment stress was modelled, based
on the Group’s severe macroeconomic scenario. This, together
with the outputs from the other stresses described, presents
the Board with enough information to assess the Group’s ability
to continue on a going concern basis and ensure that there are
enough management actions within their control to mitigate any
plausible and foreseeable failure scenario.
The Group started the Covid-19 period with a strong capital
surplus and has also built up a significant liquidity buffer during
the second half of the year, as described below, to ensure that
any significant outflows of deposits and / or reduced inflows
from customer receipts can be managed. Overall, the forecasts,
even under reasonable further levels of stress show the Group
retaining sufficient equity, capital, cash and liquidity throughout
the forecast period to satisfy its regulatory and operational
requirements.
Risk assessment
During the year the Board discussed, reviewed and approved the
amended principal risks identified for the Group. This process
included debate and challenge regarding the most material areas
for focus on an ongoing basis and resulted in the addition of
principal risks in relation to strategic risk, climate change risk,
reputational risk and model risk.
Each of these principal risks is considered on an ongoing basis
at each Executive Risk Committee meeting and each meeting of
the board-level Risk and Compliance Committee.
The work of the Risk and Compliance Committee, of which all
directors are members or attendees included:
•
•
•
•
Consideration of new or emerging risks and regulatory
developments
Consideration and challenge of management’s rating of the
various risk categories to which the Group is exposed
Consideration of the Group’s compliance with the
risk appetites set by the Board and the continuing
appropriateness of these risk appetites
Consideration of the root causes and impact of material
risk events and the adequacy of actions undertaken by
management to address them
In addition, the directors held ‘deep dive’ sessions into key areas
of risk focus; including the potential for (and impact of) negative
interest rates, possible risk arising from a change of government,
LIBOR transition, introduction of CBILS and BBLS and Covid-19
payment reliefs. The results of these exercises were fed back
into the Group’s risk management process.
Throughout the second half of the year, the directors received
regular analysis and management information illustrating
the impacts of Covid-19 on the Group and its risk profile.
They considered this information, taking into consideration
regulatory impacts, conduct risks in dealing with customer
vulnerabilities arising from the pandemic, customer credit and
the changes in the Group’s operational processes. The results
of these considerations fed into the Group’s forecasting and risk
assessment.
The potential impact of negative interest on the Group’s
operations and margins was a particular area of risk focus in
the year. The directors also continued to monitor the potential
impact of the UK Brexit process as the situation developed
through the year.
In addition, the directors specifically considered the impact
on risk and viability through review and approval of key risk
assessments for the Group, including the ICAAP, Internal
Liquidity Adequacy Assessment Process (‘ILAAP’) and its
Recovery Plan (‘RP’).
Page 54
As described in note 54 the Group’s capital base is subject to
consolidated supervision by the PRA. Its capital at
30 September 2020 was in excess of regulatory requirements
and its forecasts indicate this will continue to be the case.
On this basis, the directors have a reasonable expectation that
the Group will be able to continue in operation and meet its
liabilities as they fall due over the three-year period commencing
on 1 October 2020.
Viability statement
In considering making the viability statement the directors
considered the three-year period commencing on 1 October 2020.
This aligns with the horizons used in the Group’s analysis of risk
and includes the two years covered by the detailed group forecast,
together with one year of the less detailed forecasting period.
The directors considered:
•
•
•
•
•
•
The Group’s financial and business position at the year end,
described in Sections A3 and A4
The Group’s forecasts, and the assumptions on which they
were based
The Group’s prospective access to future funding, both
wholesale and retail
Stress testing carried out as part of the Group’s ICAAP and
forecasting processes
The activities of the Group’s risk management process
throughout the period
Risk monitoring activities carried out by the Risk and
Compliance Committee
•
Internal Audit reports in the year
Having considered all the factors described above the directors
believe that the Group is well placed to manage its business
risks, including solvency and liquidity risks, successfully.
While this statement is given in respect of the three-year period
specified above, the directors have no reason to believe that the
Group will not be viable over the longer term. However, given
the inherent uncertainties involved in forecasting over longer
periods, the shorter period has been adopted.
Going concern statement
Accounting standards require the directors to assess the
Group’s ability to continue to adopt the going concern basis
of accounting. In performing this assessment, the directors
consider all available information about the future, the possible
outcomes of events and changes in conditions and the
realistically possible responses to such events and conditions
that would be available to them, having regard to the ‘Guidance
on Risk Management, Internal Control and Related Financial and
Business Reporting’ published by the FRC in September 2014.
In order to assess the appropriateness of the going concern
basis the directors considered the Group’s financial position,
the cash flow requirements laid out in its forecasts, its access
to funding, the assumptions underlying the forecasts and the
potential risks affecting them.
After performing this assessment, the directors concluded that it
was appropriate for them to continue to adopt the going concern
basis in preparing the Annual Report and Accounts.
Page 55
Strategic Report A6. Citizenship and sustainability
The Group believes that the long-term interests of shareholders,
employees, customers and other stakeholders are best served
by acting in a socially responsible manner and aims to ensure
that a high standard of corporate governance and corporate
responsibility is maintained in all areas of its business and
operations.
Putting customers’ interests at the heart of the business is
therefore integral to the achievement of that objective, and the
Group’s culture. We want our customers to be confident that we
will always consider their needs and act fairly and responsibly
in our dealings with them. We strive to ensure that all our
customers can be confident that:
• Products and services are designed to meet their needs
•
Our employees are appropriately skilled and experienced to
provide the services they require
• The information given to them will be clear and jargon free
• Products will perform as they are led to expect
•
•
•
•
They will not face unreasonable post-sale barriers to change a
product, switch provider, submit a claim or make a complaint
All complaints will be listened to and claims assessed
carefully, fairly and promptly
Where applicable, they will be made aware of how they can
refer their complaint to the FOS
If they are vulnerable and / or in financial difficulties, we
will provide a high level of support and make sure they are
signposted to sources of independent advice
•
They will be made aware of the FSCS and the protection this
provides for them
The desire to achieve positive outcomes for our customers is an
important commercial differentiator which has helped the Group
build strong relationships over many years. This is supported by
a focus in employee training programmes on areas which impact
on customer outcomes, such as the correct approach to working
with vulnerable customers. This pro-active approach accords
with the FCA’s Principles for Business, particularly with regard
to ensuring good customer outcomes, preventing customer
harm and ensuring that all communications are clear, fair and not
misleading. We ensure that we know how well we are performing
in respect of these requirements, regularly adjusting what we do
to deliver better customer solutions.
The Board and executive management are committed to
maintaining and developing this culture across all the
Group’s businesses.
Complaints
There will be occasions where the Group does not get things
right, and as a consequence this will give customers cause to
complain. The effective resolution of complaints is a key focus,
with all business areas following the FCA’s Dispute Resolution
Sourcebook (‘DISP’) to ensure consistent and fair customer
outcomes.
A6.1 Non-Financial
Information Statement
The Group includes information on certain environmental, social
and governance matters in its strategic report in accordance
with sections 414CA and 414CB of the Companies Act 2006.
In addition to the description of the Group’s business model,
discussed in Section A2, the Group’s remaining disclosures are
included in this Section A6. This includes a discussion of the
Group’s risk, policies, outcomes and key performance indicators
with respect to each of the areas set out in the Act, as follows:
Area
(a) Environmental matters
(b) Employees
(c) Social matters
(d) Respect for human rights
Reference
Section A6.4
Section A6.3
Section A6.5
Section A6.6
(e) Anti-corruption and anti-bribery matters
Section A6.7
This section also includes the information on the directors
engagement with employees required by schedule 7.11(1)(b)
of the Act (in Section A6.3) and the information on business
relationships required by schedule 7.11B(1) of the Act
(in Section A6.7).
A6.2 Customers
The Group’s strategic objective is to be a prudent, risk focussed,
specialist bank with a closely controlled, cost efficient operating
model which places the delivery of fair customer outcomes at
its core.
Page 56
Handling
Employment conditions
The Group aims to resolve complaints at the first point
of contact, where possible, but acknowledges that some
complaints will require further specialist investigation and time
to resolve. Where this is the case, regular contact is maintained
with the customer to keep them informed of the progress of
their complaint. The Group has also established contacts within
previous service providers to ensure any relevant complaint is
resolved at the earliest possible opportunity.
Where applicable, ‘Alternative Dispute Resolution’ information is
provided to customers to allow them to appeal to independent
parties if they are not satisfied with our response. These include
the FOS, and the FLA. Where customers feel the need to appeal,
the Group co-operates fully and promptly with any settlements
and awards made by these parties.
Monitoring
The Group has established complaint reporting forums in all
business areas, to enable the effective discussion of complaint
volumes, trends and Root Cause Analysis. This ensures that
all business lines effectively resolve customer complaints,
and learn from the issues raised to address the causes of
those complaints. The effectiveness of this activity is regularly
assessed through independent first line outcomes testing to
ensure ongoing agent competence in the identification and
resolution of complaints ensuring the delivery of fair customer
outcomes. The reporting of this activity flows to the Customer
and Conduct Committee (‘CCC’), ensuring complaint visibility
goes right to the top of the organisation.
The number of complaint cases reported to FOS in the six
months ended 31 December 2019 was 83, with an uphold rate of
48.2%. The number of cases reported in the six months ended
30 June 2020, including the first three full months of the Covid-19
crisis, was 40 with an uphold rate of 41.3%, below the FOS
disclosure threshold.
Metrics on customer complaints are an important management
information measure for the Board and form part of the
determination of management bonuses and the vesting
conditions for the share-based remuneration described in the
Directors' Remuneration Report (Section B7).
A6.3 People
The Group employs just under 1,400 people with a variety of
expertise and experience to ensure it is best placed to serve its
customers and achieve its strategic priorities. The Group prides
itself on its culture and how employees demonstrate its values
every day. PwC’s review of the Group’s culture noted that:
“There is strong collaboration across the leadership team, and
a real sense of being part of a ‘family’. This alignment means
that the leadership work well together, particularly when there
are challenges/issues to resolve, and role model the desired
behaviours consistently.”
During the period employees have benefited from the
introduction of new HR technology, with a digital self-service
platform introduced in February 2020. This has improved the
employee experience by creating process efficiencies such as
online appraisals and also through new functionality, such as
online expenses, introduced in April 2020.
All of the Group’s employees are based in the UK and it is
committed to upholding all aspects of employment law. The
Group believes that its strategic objectives are best served by
building a stable, permanent skill base and therefore minimises
its use of short-term and temporary staff.
At 30 September 2020, employees on temporary or short-term
contracts accounted for 1.5% of the workforce (2019: 2.1%) and
no use was made of zero-hours contracts. The Group’s annual
employee turnover for the year was 10.4% (2019: 11.5%).
Flexible working is actively encouraged across all areas, to
promote a work-life balance for individuals and to ensure that the
Group retains the skills and experience of its people. The Group
monitors working practices to ensure that it complies with the
Working Time Regulations to ensure no one is forced to work
more than a 48 hour week over an average 17 week period. This
includes the monitoring of any second jobs.
Flexible working arrangements are in place for 24.3% of our
employees, with 82% of these working part time. The Covid-19
pandemic has meant the Group has had to rethink what flexible
working arrangements are available, both on a formal and
informal basis.
A significant number of employees have needed to juggle
childcare and home schooling commitments whilst working
at home during the pandemic, and the Group has supported
employees to change working hours or patterns, and in some
circumstances also offered paid leave, to allow our employees
to fulfil these commitments. This has meant that a far higher
percentage of employees than reported have been able to work
informally on a flexible basis, to some degree.
No employees were put on furlough or made redundant as a
result of Covid-19 and no use was made of the UK Government’s
Coronavirus Job Retention Scheme. Where any employee was
requested to ‘shield’ due to vulnerability and was unable to work
from home, they did so on full pay.
The Group generally only employs persons over the age of
18, except in connection with apprenticeship or other training
arrangements.
Remuneration packages across the business are compliant with
the UK’s national minimum wage rates. In addition, the Group
has been accredited as a Living Wage employer since June 2016,
by the Living Wage Foundation. The independent Living Wage
Foundation sets an hourly rate, the ‘real Living Wage’, calculated
according to the cost of living in the UK which is updated
annually. This is a higher rate than the government’s National
Living Wage. Accredited employers such as the Group must not
only pay this rate to their own employees, but also ensure that
any contractors used undertake to do so.
The Group has decided that, despite the impact of Covid-19, the
increase in the real Living Wage announced by the Living Wage
Foundation in November 2020 will be passed on to employees.
The Group runs a Worksave defined contribution pension
scheme in line with UK legal requirements. During the year the
Group increased its maximum contribution for each employee
to 10% of salary, for those employees making a maximum
contribution of 6%. It was gratifying that this both incentivised
employees already in the scheme to increase their contributions
and led to a greater uptake of the scheme as a whole, increasing
the levels of saving for retirement amongst the workforce.
When responding to changes in its business, the Group always
seeks to minimise the requirement for compulsory redundancy,
retraining and redeploying employees wherever possible.
The Human Resources department actively works alongside
the Group’s management to recruit, develop and retain capable
people.
Page 57
Strategic Report Equality and diversity
The Group is committed to creating a culture where employees
feel able to ‘bring their whole self to work’. Creating an inclusive
environment where this is possible will contribute to the success
of the business but most importantly, it is quite simply the right
thing to do.
The progress that has been made on gender diversity over
recent years continued in this period, and additionally the focus
has widened to consider how we can do more to attract, develop
and retain employees from other under-represented groups.
As well as eLearning for all employees, the Group continues
to combat unconscious bias through the use of recruitment
technology that was introduced in 2019. The new recruitment
technology anonymises applications before hiring managers
see them, and therefore ensures applications from under-
represented groups are given full and fair consideration.
The Group launched its Equality, Diversity and Inclusion (‘EDI’)
Network in October 2020. The network is made up of employees
from across the Group, selected through a formal application
process, and aims to make the Group a more inclusive place to
work. The progress on the initiatives the EDI Network undertakes
will be reported to the Nomination Committee, as the board
committee responsible for diversity issues.
The Women in Finance Charter, which is sponsored by
HM Treasury, is an initiative amongst financial services
companies in the UK, aimed at promoting equality of opportunity
in the workplace. The CFO is the project sponsor and progress
against the Charter requirements is monitored by the executive
management.
In January 2017 the Group’s first set of internal targets under
the charter was published on its website. They include a target
of 35% female representation in senior management roles by
January 2022, increasing from 26% at the time the targets were
set. All of the Group’s diversity targets are published within the
'Sustainability' section of the Group’s website, together with
annual progress updates.
The definition of senior management used in the Group’s
‘Women in Finance’ targets is the same as that used by the
Hampton-Alexander Review. The proportion of female senior
managers on this basis at 30 September 2020 was 33.9%
(2019: 35.9%), unfortunately not maintaining our target position.
This is largely due to changes to organisational structures that
impact the classification of senior management. The Group is
confident that it will meet its target over the coming year.
During the year the Group continued to monitor the levels of
women taking up training opportunities, with particular initiatives
focussed on female talent, as described below.
The Group has set a target level of minority ethnic employees
holding 10% of management grade positions, increasing from
the current 2.2% (2019: 1.8%). Continued progress will be a key
focus for the EDI Network and its support is an important step
towards this.
The Group has also extended the availability of maternity pay,
so that employees now generally receive 18 weeks leave at full
pay, rather than six weeks at 90% pay. It is hoped that this will
help in the retention and career progression of women in the
organisation.
The Group’s aim is that its employees should be able to work
in an environment free from discrimination, harassment and
bullying, and that employees, job applicants, customers,
retailers, business introducers and suppliers should be treated
fairly regardless of:
•
Race, colour, nationality (including citizenship), ethnic or
national origins
• Gender, sexual orientation, marital or family status
• Religious or political beliefs or affiliations
• Disability, impairment or age
• Real or suspected infection with HIV/AIDS
• Membership of a trade union
and that they should not be disadvantaged by unjust or unfair
conditions or requirements. The Group is committed to provide
all employees with access to the same training, development
and job opportunities.
Every effort is made to retrain and support employees who suffer
from disabilities during their employment, including the provision
of flexible working to assist their return to work. Ensuring that
opportunities and progression within the Group are available to
people with disabilities is an important part of its inclusivity and
diversity strategy and will form a strand of the work of the
EDI Network.
Women in Finance
The Group understands the significance and value of building
strong and diverse teams, with leaders from all backgrounds.
Gender diversity is an important element of the Group’s people
strategy and the Women in Finance Charter was signed in 2016.
Gender Pay
As required by legislation, the Group has calculated its gender
pay gap as at April 2020. The results will be published on the
government website and on the Group’s own website and are
summarised below.
Median gender pay gap
Mean gender pay gap
Median bonus pay gap
Mean bonus pay gap
April
2020
36.9%
40.7%
2.5%
82.6%
April
2019
33.9%
41.3%
1.2%
76.9%
The median pay gap is broadly in line with the 35.9% median
pay gap in the financial services sector reported by the Office
of National Statistics (‘ONS’) in their Annual Survey of Hours
and Earnings published in October 2020. The mean pay gap
is somewhat higher than the 28.8% mean pay gap reported
by the ONS, but this is attributable to the Group’s limited
representation of females in senior roles.
While the gender pay gap has increased year-on-year, the
Group’s initial analysis of the most recent figures indicates
that this is principally driven by a small number of senior
appointments, which, despite gender-balanced candidate pools
being considered, have been filled by men. The Group remains
committed to increasing the representation of women in its senior
roles, which will reduce the gender pay gap in the longer term.
88.0% of male employees and 90.3% of female employees
received a bonus (2019: 88.0.% and 90.1%), as defined by
legislation, which includes payments under the Group’s profit
related pay scheme. The difference between the mean and
median bonuses reflects the impact of a very small number of
bonus payments to executive directors and other very senior staff.
Page 58
The Group analyses gender pay gap data on an ongoing basis
as part of the Women in Finance initiative, to identify potential
issues and determine what action might be required. However,
work during the year, reviewing groups of directly comparable
positions, did not suggest evidence of systematic gender bias or
unequal pay practices.
The Group welcomes the interest in this issue generated by
the public reporting of gender pay but would favour a review
of the detail of the legislation in the light of experience to
date to ensure all disclosures required are comparable and
understandable.
Composition of the workforce
During the year the workforce has grown by 2.1% to 1,391 people
(2019: 1,362). Information on the composition of the workforce at
the year end is summarised below:
Employees
Number
Percentage
2020
2020
2019
2019
Females Males Females Males
735
656
711
651
52.8% 47.2% 52.2% 47.8%
Management grade employees
Health and wellbeing
The welfare of the Group’s employees has never been so
important and throughout the year it has been monitored
regularly using employee surveys. The Group’s Wellbeing
network has been extremely active during the period, activities
they have undertaken include; running internal communications
campaigns on ways to adjust to remote working; launching a new
wellbeing app that provides access to a wide range of resources;
arranging virtual fitness classes for employees; and holding
introductory wellbeing meetings with all employees who joined
the Group during the pandemic.
An employee engagement survey had been planned for June
2020; in light of Covid-19 this was replaced by shorter, regular
pulse checks (three took place between April and September)
and a full employee engagement survey is now planned for
early 2021. The latest employee check-in survey was completed
by over 70% of employees and results indicated that 85% of
employees were happy with communications from their line
managers, and 86% were happy with communications from the
Chief Executive, Nigel Terrington.
This sentiment is echoed by the Group’s People Forum, who had
the opportunity to speak to non-executive directors and provide
feedback on how the Group has managed during the Covid-19
pandemic. The People Forum has been a valuable channel of
engagement with employees during the year and has contributed
to changes such as changing the supplier of our recognition
awards and supported the introduction of new HR systems.
119
190
115
210
38.5% 61.5% 35.4% 64.6%
Training and development
Number
Percentage
Senior managers
Number
Percentage
Directors
Number
Percentage
6
33
7
30
15.4% 84.6% 18.9% 81.1%
3
6
2
7
33.3% 66.7% 22.2% 77.8%
Of these employees, ethnic minority employees comprised
13.2% of the workforce (2019: 13.4%) and 1.8% of management
grade employees (2019: 1.8%).
The definition of ‘senior manager’ used in the table above is
that required by the Companies Act 2006 (Strategic Report and
Directors Report) Regulations 2013 which differs from that used
by the Hampton-Alexander Review.
Composition of the workforce is reviewed on an annual basis
and employee satisfaction with equality of opportunity is
monitored as part of the regular employee surveys. Human
Resources policies are reviewed regularly to ensure that they
are non-discriminatory and promote equality of opportunity.
In particular, recruitment, selection, promotion, training and
development policies and practices are monitored to ensure
that all employees have the opportunity to learn and develop
according to their abilities.
In June 2020 the Group conducted its fourth annual diversity
survey to obtain anonymous feedback from employees on their
age, gender, ethnicity, sexual orientation, religious beliefs and
disability. A response rate of 72% was received (2019: 67%) and, as
expected, the survey illustrated that our workforce continues to be
diverse. The results of the 2019 survey informed action plans that
have been executed over this period. We also continue to monitor
recruitment data relating to the provision of equal opportunities.
Even throughout the Covid-19 pandemic, the Group has
remained focussed on providing opportunities to develop
all employees and on average, employees received 4.2 days
training in the year (2019: 6.9 days). This continues to place the
Group significantly higher than the average figure quoted by the
Chartered Institute of Personnel and Development (‘CIPD’) of
between 2.8 and 3.3 days for the private sector. This included
online training undertaken by all employees on various matters
including regulatory requirements.
The Group created a new team focussed solely on technology-
related training in 2019 and the benefits of this have been
immeasurable during the Covid-19 crisis. The team were
established to support the Group’s digital agenda and drive for
greater innovation, but throughout the pandemic they have been
pivotal in supporting employees to adapt to remote working and
maximise the use of the newly upgraded Microsoft Office suite of
products. The learning and development team have also created
virtual induction programmes for new joiners and adapted how
customer facing employees are provided with the right training
and support for their roles whilst working remotely.
Another area of focus for the Group’s learning and development
team during the period has been ensuring employees
understand how to support the Group’s most vulnerable
customers. A bespoke training course has been created and
all customer facing employees are expected to undertake this
annually. The Group’s operational training team has also ensured
that all employees who have been seconded to meet increased
volumes of customer queries throughout the pandemic were
appropriately trained and inducted into their new roles.
All employees receive an appraisal at least annually; this year
99.3% of employees used the Group’s new HR technology to log
their performance review. The annual performance management
and talent management processes not only support individual
performance and personal development, but also help
the Group to effectively manage rising talent and fulfil its
succession planning objectives. The Group’s Senior Leadership
Development programme is one initiative that has supported the
delivery against succession plans over the past year, with four
members of the programme being promoted internally, including
one promotion to the Executive Management team.
Page 59
Strategic Report The Group has continued to focus on developing female talent
during the year to support our Women in Finance Charter
targets. Over 50% of employees receiving management
development or leadership training are female compared to
42.7% in 2019, and the Group continues to be a member of the
Women Ahead 30% Club cross-company mentoring scheme.
Feedback from both mentors and mentees on the programme
has been overwhelmingly positive and the third cohort of
employees on the programme started this year.
The Group has continued to draw down on Apprenticeship
Levy funds to support its development objectives and the
internal Management Academy was certified with the Chartered
Management Institute (‘CMI’) to facilitate this. The Group
currently has 46 apprentices (3.3% of employees) registered
under the levy scheme, utilising 41% of its levy pot in the past
12 months. These apprenticeships cover a range of specialist and
operational roles including IT, finance, underwriting, and first line
management. Whilst a higher take-up would be desirable, the
requirement for apprentices to spend 20% of their time out of
the business makes identifying suitable roles challenging.
There are currently 120 people completing professional
qualifications across the Group, including 54 employees
undertaking their CeMap mortgage qualification. Of these, 64%
are female compared to 40% in 2019, contributing towards the
Women in Finance agenda.
Recruitment
Headcount has continued to grow over the period, and whilst
recruitment volumes reduced due to the pandemic, roles which
were deemed critical, such as customer-facing positions and
those needed to comply with regulatory requirements, continued
to be offered. Over 50 new hires have been successfully
onboarded remotely since March. New HR technology has also
made the experience of joining the Group more efficient and a
more engaging experience.
The Group also runs a successful ‘refer a friend’ scheme
whereby employees receive a referral fee if an individual they
refer for a role passes probation. This year 18 individuals were
successfully recruited through this scheme (2019: 55), the
reduction a function of the overall reduction in numbers of
recruits.
Employees’ involvement
The directors recognise the benefit of keeping employees
informed of the progress of the business. The Group operates
a People Forum, which meets regularly and is attended by
employee representatives from each area of the business.
The Forum exists primarily to facilitate communication and
dissemination of information throughout the Group and provides
a means by which employees can be consulted and provide
feedback on matters affecting them.
During the period the Forum has been designated as the primary
channel through which the Board receives information on the
views of the workforce, either by attendance at the meetings or
through the People Director who attends all Forum meetings
and reports to ExCo and the Nomination Committee on matters
raised.
During the period non-executive directors have attended several
People Forum meetings and discussed topics such as pay,
reward and the impact that the Covid-19 pandemic has had on
the workforce and the business.
Executive directors provide biannual updates on business
progress to the entire workforce, either in person or through
recorded messages, with the frequency of such communications
increased during the Covid-19 crisis.
To involve employees in the Group’s performance, the Company
operates a Sharesave share option scheme and a profit sharing
scheme, both of which enable eligible employees to benefit from
the performance of the business. In 2020 72% of employees
signed up to take part in the most recent offer under the
Sharesave scheme.
To reward employees for their contribution during the Covid-19
crisis, a one-off grant of shares worth £1,000, deferred for three
years is to be made to all employees below senior management
level. This will increase the extent to which employees can
benefit from the Group’s performance.
Health and Safety
Through to year end the Group has remained compliant
with all applicable health and safety legal requirements and
implemented best practice management standards across its
businesses. This is combined with a commitment to providing
a healthy and safe working environment for all employees,
contractors and visitors to its premises, and those impacted by
its operations in public areas.
While the Group’s primary source of health and safety related
risk remains with the vehicle maintenance operations of
Specialist Fleet Services Limited (‘SFS’) the significant focus for
the vast majority of this year has been on mitigating the risk to
our employees from Covid-19.
We began monitoring the epidemic in China in January 2020 and
initiated an enhancement programme regarding all aspects of
hygiene across all the Group’s sites. On escalation to a pandemic
and in line with the Government advice in March, we succeeded
in transitioning 82.69% of our employees to home working prior
to the 23 March lockdown, with the number rising over 90%
shortly thereafter.
Where employees were transferred to working from home
(‘WFH’), workstation assessments have been carried out at
critical intervals to ascertain that they have a healthy and safe
environment with access to appropriate equipment.
For those who remained in the office, a Covid-19 secure
configuration of premises was introduced to facilitate an
increase in physical distancing. Building works at premises under
direct control were only permitted where they were deemed as
necessary to meet statutory requirements or were business
critical. Risk assessments, procedures and documentation were
reviewed to consider Covid-19 measures, and an e-learning
module created and made available to all employees to provide
awareness regarding the Covid-19 secure measures.
The offices that remained open continue to comply with all
health and safety rules, with the number of fire marshals, first
aiders and other qualified personnel continuing to be sufficient,
this is regularly monitored based on the number of occupants.
All temporarily vacated premises are monitored under current
contractual arrangements to ensure they remain fit for
occupation when the time arises.
Throughout the pandemic employee engagement has been
a key factor. Field teams have carried out risk assessments,
equipment has been issued for employee safety and enhanced
processes have been implemented to permit public facing
appointments as and when appropriate. Ongoing consultations
are taking place as government guidance develops.
Employees are provided with appropriate levels of information,
instruction, training and supervision, to empower them to
take ownership of their responsibility for a healthy and safe
environment and are encouraged to report any concerns in line
with the Group’s stated health and safety objectives, whether in
the office or home based.
Page 60
The Group has a dedicated health and safety manager who
reports, ultimately, to the Chief Operating Officer, the executive
committee member responsible. Health and safety incidents are
classified as operational risk incidents for the purposes of the
Group’s risk management system and monitored through the
operational risk management system and the Operational Risk
Committee (‘ORC’).
The Group (excluding SFS) remains certified to ISO45001:2018
and its Occupational Health and Safety Management System
('OHSMS') is audited for compliance bi-annually by a UKAS
accredited auditor.
SFS has its own health and safety manager and OHSMS.
Incidents are investigated locally with access to Group resources
as required. The operation is currently certificated to BS:18001
and intends to migrate to ISO45001:2018 during its next
compliance audit cycle.
During the year, only 11 incidents were reported (2019: 19), all of a
minor nature with no lost time. SFS have reported one incident,
due to lost time, under the Reporting of Incidents, Disease and
Dangerous Occurrences Regulations 2013 (‘RIDDOR’) (2019: 0)
Health and safety performance continues to be good with the
number of accidents and incidents remaining at a low level.
During the financial year ended 30 September 2020 there were
no prosecutions or any enforcement action from visits by the
authorities for non-compliance in respect of health and safety
matters.
A6.4 Environmental impact
The Group’s environmental impacts can be considered under
two headings, its operational (or internal) impacts and the impact
of its lending activities – the external or downstream impacts.
Until recently the focus of the Group’s environmental policies
has been on its own activities, which are described further below,
but it is clearly true that the use to which customers put the
funds which are advanced to them will also have an impact.
External Impact
Climate change is one of the biggest challenges faced by the
world today. The UK Government confirmed its goal of net zero
carbon by 2050 in November 2020 and the Group, and the rest
of the financial services industry have a vital role to play in that
project.
Alongside the widespread societal concerns, financial regulators
have also increased their focus on climate change. The PRA has
published a Policy Statement, setting out its expectations of the
type of strategic approach it expects firms to adopt in managing
the financial risks of climate change. The Group is in the process
of completing a plan of work which adheres to the requirements
set out. This plan also reflects subsequent statements by the
PRA and will continue to be updated as the regulators develop
their thinking.
Impacts of climate change
The use to which customers put the funds advanced to them by
the Group gives rise to two related issues:
•
•
Climate change and other environmental factors may, of
themselves, increase financial risks. As an example, increased
flooding risk might have an adverse impact on security asset
valuations. These are the physical risks of climate change
Regulatory and governmental pressure might be brought
to bear on lenders, amongst other businesses, to reduce
the environmental impacts of their product chains. Such
regulation might impact on the ability to realise security or to
continue business lines. These are the transitional risks
The Group uses these classifications to categorise the financial
risks of climate change and is working to further embed the
consideration of both forms of risk across all its lending. Risks in
each of these categories may impact over the short (one to five
year), medium (five to ten year) or long (over ten year) term.
The Group already considers these types of issues in its
underwriting and credit risk processes to some extent. Examples
of how the Mortgage Lending business manages its exposure to
climate change effects, and seeks to promote environmentally
positive behaviour by customers, are given in section A4.1.1.
Governance
During the year the Board has designated climate change as a
principal risk within the Group’s Risk Management Framework.
This means information and measures on climate change
risks are considered at board level and the Group’s responses
considered within the Board’s overall strategy. The CFO has
been designated as the director responsible for climate change
matters.
A climate change working group has been established, working
under the oversight of ERC. The working group reports to ERC
and to the Board on a regular basis. The working group aims
to embed Climate Change Risk into the Group’s operational
culture, recognising the potential impact on current and future
business activities.
Risk management
Due to the nature of climate change and its wider consequences,
climate change risk can impact across many of the Group’s
business areas. Work is underway to embed the consideration
of climate change risk across the relevant risk sub-committees,
initially focussing on the Credit and Operational Risk
Committees.
Assessment of current environmental risks and forward-looking
climate change risks are already factored into the Group’s
business. When assessing the appropriateness of a property as
security on a buy-to-let mortgage, factors such as the energy
performance certificate (‘EPC’) rating of the property, flood risk,
risk of coastal erosion and ground stability are considered. It is
essential for the Group to ensure that a property is, and remains,
insurable.
As part of the climate change agenda, the Group intends to
make enhanced use of the environmental data currently held
on the mortgage book, and to expand on currently available
information. Work is taking place to enable the collection of
increased and more detailed environmental data as part of
the valuation process. The Group can then use its core data
analytics skills in developing the tools necessary to run longer
term climate related scenarios, which run beyond normal
planning horizons and consider various policy and
environmental developments.
Page 61
Strategic Report Similar activity is planned to ensure any other lending subsets
which might be particularly exposed to physical or transitional
climate change risk can be identified and monitored.
Quantifying our climate exposure
During the year the Group has made progress in assessing the
potential financial impact of climate change on its buy-to-let
mortgage book. This has been initially focussed on the physical
risk posed by flooding. Analysis used granular postcode level
data and indicated that only a small proportion of security
properties were located within medium or high-risk zones.
The initial focus in the assessment of transitional risk has been
on the energy efficiency of mortgaged properties, measured by
their EPC grades. The UK Government has announced initiatives
to improve energy efficiency and it is likely that policies based on
EPC levels will be used to help the UK’s transition and reduce its
property stock’s emissions, with a potentially adverse impact on
the valuation of properties not meeting required standards.
The table below summarises the highlights of the preliminary
climate risk assessment work performed to date across our
mortgage lending exposure in England and Wales.
Indicator Measure
2020 Coverage
EPC
Grading A to C
Grading A to E
37.7%
98.1%
85.0%
85.0%
Flood risk High risk properties
0.4%
99.0%
High or medium risk
properties
2.2%
99.0%
Flood risk above is based on exposure to flooding from rivers
and seas only. In the underwriting process flood risk from other
sources is also considered. Work is ongoing to incorporate these
additional risks into the Group’s risk metrics.
In the Group’s SME Lending business, limited company
customers have been broadly analysed by SIC codes to identify
those operating in high carbon intensive industries. The results
are set out below:
Indicator Measure
2020 Coverage
Sector
Water, sewerage and
waste
Extractive industries
Power generation
Total carbon intensive
industries
3.54%
100%
1.75%
0.01%
100%
100%
5.30%
100%
Measures addressing other risk elements including those in other
business streams, eg classifications of business assets and motor
vehicles financed by environmental impacts, and classification
of development finance projects by environmental rating, are
under development. These will be aligned to the UK’s new Green
Taxonomy recently announced at the Green Horizon Summit.
Future developments
In addition to the work currently in progress and described
above, the Group’s climate change strategy also includes:
•
•
•
•
•
Developing climate change scenario analysis and embedding
this in stress testing programmes, leveraging off Bank of
England scenarios
Further embedding climate change risk management across
the business
Enhancement of the business’ understanding of the climate
change impact of the Group’s lending
Continued engagement with external climate change
initiatives. This includes involvement in industry initiatives,
particularly through the Green Finance Institute
Development of formal climate related risk appetites and
a full suite of Key Risk Indicators and Key Performance
Indicators
The Group will also be expected to report its climate change
exposures in accordance with the recommendations of the
Taskforce on Climate-related Financial Disclosure (‘TCFD’)
which are being introduced into UK listing requirements from the
financial year ending 30 September 2022. This reporting will be
developed alongside the other initiatives.
Operational Impact
The Group is mainly engaged in mortgage, consumer and
commercial finance and therefore the overall environmental
impact of its operations is considered to be low.
SFS leases refuse collection vehicles to local authorities
throughout the UK. SFS undertake additional aftersales
activities that include servicing, maintenance and breakdown
support, hence has the most significant potential environmental
impacts.
The main environmental impacts of the Group’s other operations
are limited to universal environmental issues such as resource
use, procurement in offices and business travel.
Policy
The Group complies with all applicable laws and regulations
relating to the environment. The Group’s environmental
commitment is included within the Health, Safety and
Environmental policy that is approved by the CEO and the
People Director. Its environmental commitments are expressed
in its Green Charter which is approved by the CEO and kept
under regular review.
Groupwide recycling and awareness campaigns are also run
to reduce various forms of waste such as food, consumables
or energy.
Risk management
The environmental risk inherent in the Group’s operations is
managed by the Group Property function and is within the remit
of the Chief Operating Officer. It is monitored within the Group’s
operational risk management framework by the second line
Operational Risk function and the ORC.
Energy data is collated by Group Property, the division
responsible for managing the Group’s premises. Consumption
figures for all locations occupied, whether directly owned or
tenanted, are actively monitored. This is reported upwards to
board level.
Page 62
SFS operates from several workshops around the UK and
has exposure to several waste streams (oils, vehicle parts etc)
that come from its workshop activities. These are effectively
managed under an environmental management system that
is certificated to an International Standard – ISO14001:2015. A
dedicated health and safety manager has direct responsibility for
environmental issues at all SFS sites.
The Group complies with the Energy Savings and Opportunities
Scheme (‘ESOS’). This is a UK Government initiative, under an
EU Directive, and requires the Group to identify and reduce its
energy consumption. The Group submitted its ESOS compliance
notification to the Environment Agency in December 2019.
Supply chain and procurement
The principal suppliers of the Group comprise its outsourced
savings administrator, legal and professional services providers,
building lessors and IT service providers. They therefore are
exposed to similar operational environmental risks to those of
the Group.
The Group remains committed to identifying, targeting
and addressing inefficiencies within its supply chain. The
procurement function is currently working with key suppliers
to identify solutions to continue to reduce the environmental
impacts of our business activities, whether direct or indirectly.
All pre-printed stationery items used by the Group are from
renewable sources certified by FSC.
84.0% (2019: 80.3%) of the purchased electricity in the year was
obtained from sources certified as renewable by the Office of
Gas and Electricity Markets (‘OFGEM’).
Across the year ending 30 September 2020, the Group
increased the percentage of its total stationery and consumables
expenditure going towards green products to 55.3% from 32.0%
achieved in the previous period.
Environmental initiatives
All the general waste produced at the Group’s principal sites was
disposed through an approved waste contractor using Waste to
Energy initiatives, resulting in no waste being disposed at landfill.
During a refurbishment of the external welfare area at the
Group’s head office building, bird boxes were installed within the
treescapes to encourage wildlife to coexist with our employees.
Further initiatives are under development to include beehives,
and to roll out this initiative to other sites under the Group’s
direct control. Areas of land will be given over to wild space to
encourage plant and animal species and improve biodiversity.
The Group’s other environmental initiatives in the period include:
•
•
•
•
Reducing the product range of office consumables to steer
employees towards selecting more environmentally friendly
products
Moving to fortnightly stationery deliveries thereby reducing
the carbon footprint of procurement activities
Undertaking refurbishment work to the washroom facilities
at the head office building employing touchless energy and
resource saving technology. All construction wastes were
segregated and disposed of responsibly by the contractor
Modernising the key components of the Heating, Ventilation
and Air Conditioning (‘HVAC’) systems at the head office site,
reducing the Global Warming Potential (‘GWP’) of chiller plant
used during the summer months.
The financial year ending 30 September 2021 will see objectives
being established against current energy performance to further
reduce consumption through energy initiatives, new plant and
technology.
Performance indicators
The environmental key performance indicators for the Group,
determined having regard to the Reporting Guidelines published
by the Department of Business, Energy and Industrial Strategy
(‘BEIS’) and the Department for Environment, Food and Rural
Affairs (‘DEFRA’) in March 2019, are set out below.
The Group does not consider it has significant environmental
impacts under the headings ‘Resource Efficiency and Materials’,
‘Emissions to Land, Air and Water’ or ‘Biodiversity and
Ecosystem Services’ set out in the Guidelines, due to the nature
of its business activities.
This information is presented for the twelve months ended
30 September in each year and includes all entities included
in the Group’s financial statements. Information for acquired
entities is included from the acquisition date. Normalised data
is based on adjusted total operating income of £295.1 million
(2019: £297.6 million excluding the £9.7 million gain on
derecognition).
Greenhouse gas (‘GHG’) emissions
Scope 1 (Direct emissions)
Combustion of fuel:
Operation of gas heating boilers
Petrol and diesel used by company cars
Operation of facilities:
Air conditioning systems
Scope 2 (Energy indirect emissions)
Directly purchased electricity
Total scope 1 and 2
Normalised tonnes - scope 1 and 2 CO2
per £m income
Scope 3 (Other indirect emissions)
Fuel and energy related activities not
included in scope 1 or 2
Water consumption
Waste generated in operations
Total scope 3
Total scopes 1, 2 and 3
Normalised tonnes scope 1,2 and 3 CO2
per £m income
2020
Tonnes
CO2
2019
Tonnes
CO2
452
402
33
887
697
1,584
5.4
325
12
61
398
1,982
6.7
519
679
24
1,222
995
2,217
7.5
542
14
88
644
2,861
9.6
CO2 equivalent values above are calculated based on the
BEIS / DEFRA guidelines published in June 2020. These
guidelines showed a significant increase in the conversion factor
for the Group’s landfill waste, increasing from 99.8 kg CO2 per
tonne in the 2019 conversion tables to 458.2 kg CO2 per tonne in
the new edition. Given the magnitude of this change, the amount
stated for ‘waste generated in operations’ for 2019 above has
been restated using the 2020 conversion factor.
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Strategic Report
The amounts shown above for total scope 1 and scope 2
emissions are those required to be reported under the
Companies Act (Directors Report) and Limited Liability
Partnerships (Energy and Carbon Report) Regulations 2018.
Other scope 3 emissions not reported above are not considered
to be significant.
The reduction in emissions in the year is principally driven by the
Covid-19 crisis. The majority of emissions included above relate
to the provision of heat, light and power to the Group’s premises.
Several office buildings were closed for long periods and the
social distancing rules meant that the scope for business travel,
for meetings, property surveys and other normal parts of the
business process was sharply reduced for a significant part of
the year.
Emissions attributable to employees working from home are not
included within the scope of the regulations, at present.
It is unlikely that this performance would be repeated in a normal
operating environment.
The Group has not been involved in any prosecutions, accidents
or similar non-compliances in respect of environmental matters,
nor incurred any fines in respect of such matters.
Power usage
The Group uses mains electricity and natural gas from the UK
grid to provide heat, light and power to its office buildings. It
also uses fuel in company vehicles, which is included in Scope
1 above and through business travel of employees, which is
included in Scope 3. The amount of power used in the year
ended 30 September 2020 is shown below.
2020
MWh
2019
MWh
2018
MWh
Renewable electricity
2,509.3
3,123.5
Other electricity
478.2
768.1
Electricity
Natural gas
Motor fuel
Normalised MWh
per £m income
2,987.5
3,891.6
4,107.5
2,450.9
2,817.1
3,547.6
1,900.3
3,099.9
2,913.9
7,338.7
9,808.6
10,569.0
24.9
33.0
38.6
Consumption levels have reduced significantly in the year,
principally as a result of the closure of some of the Group’s
buildings for long periods, and the reduced utilisation of others.
Gas and electricity usage are based on consumption recorded
on purchase invoices. Vehicle fuel usage is based upon expense
claims and recorded mileage. Renewable energy is supplied
through the grid with OFGEM accreditation received from the
suppliers. No separate conversion factor is stated by BEIS /
DEFRA for electricity from renewables and therefore the Group
receives no benefit for this in the GHG emissions table above.
office occupancy offset by additional consumption generated by
Covid-19 cleaning and hygiene guidance.
A water saving initiative remains in place which is intended
to reduce long-term year-on-year water usage across the
sites where the Group has full responsibility for the
premises occupied.
Waste
SFS are the Group’s primary waste producers. Their vehicle
servicing activities generate a variety of different waste streams
– including various grades of oil, and a range of metals and
plastics. These wastes are managed responsibly in accordance
with an ISO14001:2015 certificated management system. Waste
streams generated by SFS are disposed of in accordance with
the waste hierarchy before being consigned to approved waste
transfer stations under contract and Waste Transfer Notes
obtained.
The Group’s waste output outside SFS consists of a mixture
of general office waste types which includes principally paper
and cardboard with some wood, plastic and metals. The Group
provides facilities in its offices for recycling paper, cardboard,
newspapers, glass, plastics and aluminium and steel cans.
Batteries and printer and photocopier cartridges are collected
and sent for recycling. The largest part of the Group’s recycled
outputs relates to waste paper.
All the Group’s waste is either recycled, used in waste to energy
initiatives or sent to landfill. Amounts of waste generated in the
year ended 30 September 2020 together with the methods of
disposal are shown below.
Recycled
Waste to Energy Initiatives
Landfill
Normalised tonnes
per £m income
2020
2019
2018
Tonnes
Tonnes
Tonnes
61
29
131
221
122
-
187
309
202
-
154
356
0.75
1.04
1.30
Waste generation data is based upon volumes reported on
disposal invoices.
The reduction in waste generation is principally a result of lower
occupancy of the Group’s premises, with the amount of recycled
paper generated being substantially reduced.
The Group’s long-term strategy is to increase the proportion
of waste which is either recycled or used in Waste to Energy
initiatives.
Water usage
A6.5 Social and community
The Group’s water usage is limited to the consumption of piped
water in the UK and no water is extracted directly. Water usage in
the year ended 30 September 2020 was 11,950m3 (2019: 13,010m3),
based upon consumption recorded on purchase invoices, a
normalised amount of 40.5m3 per £m income (2019: 43.7m3
per £m income). The reduction in usage is a result of reduced
The Group’s activities are based wholly within the United
Kingdom. It operates within the legal and regulatory framework
of the UK, acknowledging the importance of corporate
responsibility and citizenship in its relationships with its
customers, the wider community and other stakeholders.
Page 64
Where possible, it uses its lending relationships to promote good
practice. In particular, its buy-to-let mortgage division demands
minimum standards from landlords in the properties it funds.
This form of intervention should drive up standards in the private
rented sector.
Industry initiatives
The Group is active within trade organisations in the UK, helping
to formulate public policy and sharing experience on best
practice to drive forward better financial provision. The Group
has been particularly active in initiatives to enable the private
rented sector to more effectively serve the UK housing market.
Membership of bodies such as UK Finance and the FLA enables
the Group to be part of shaping the future of financial services
provision to the benefit of the whole community. This year this
has been enhanced by work done by the Mortgage Lending
business with the Green Finance Institute on the potential
for greening the buy-to-let mortgage market. In particular the
business worked with the Coalition for Energy Efficient Buildings
formed by the Institute.
The Group contributes to registered charities providing debt
advice to support its vulnerable customers. Contributions of
£1,110,000 (2019: £1,522,000) were made by the Group during the
year to the work of the Foundation for Credit Counselling which
operates the StepChange Debt Charity.
Supporting the community
The Group actively supports charity initiatives, focussing on
organisations serving the communities in which it operates.
Contributions made in the year totalled £157,800 (2019: £24,200).
Contributions were increased as part of the Group’s response
to Covid-19, with donations including; £50,000 to NHS charities
to help frontline staff needing accommodation and food while
caring for patients during the Covid-19 pandemic and to provide
iPads to enable patients in isolation to keep in contact with their
family and friends; a £20,000 donation to Change into Action
which provides support to homeless people; and £10,000 to Age
UK to support elderly people who are isolated and alone during
the pandemic.
Other charities which benefitted from the Group’s charitable
donations include several local schools, sports clubs, hospitals
and hospices, the Downs Syndrome Association, Get Set Girls,
Great Ormond Street Hospital and Lupus UK, amongst others.
Before activities were stopped due to the pandemic, employees
continued to make a difference to the local community in many
ways, achieving 23.5 volunteering days. Activities have included:
•
Volunteering at SIFA Fireside, a specialist centre in the centre
of Birmingham dedicated to supporting homeless people in
Birmingham
• Supporting literacy in local primary schools
•
Volunteering at a ‘Ready for Work’ initiative run by Business in
the Community that supports getting homeless people back
into the workplace
The Group is in the process of identifying ways to continue
volunteering activities remotely, such as career mentoring
opportunities.
At Christmas 2019, food parcels were collected amongst the
employees for Christians Against Poverty, with 134 food parcels
delivered to 80 families.
The Group also supports Paragon’s Charity Committee,
consisting of volunteer employees, which organises a variety of
fundraising activities throughout the year. In the calendar year
2019, £28,700 was raised for Dementia UK, while in the first nine
months of 2020, £26,500 has been raised for Macmillan through
events such as Paragon’s Biggest Coffee Morning, Move for
Macmillan and employees taking part in sponsored events. Given
the restrictions imposed on office-based fund-raising activities
by working from home, this is an impressive achievement by the
Committee and the Group’s people.
Each year all employees are given the opportunity to nominate
a charity and a vote is carried out amongst the employees to
select the charity or charities to benefit from the following year’s
fundraising activities.
Taxation policy and payments
Materially all of the Group’s taxable income arises in the UK and
therefore it has no presence in jurisdictions considered to enable
tax base erosion and profit shifting.
The Group’s tax strategy is to comply with all relevant tax
obligations whilst cooperating fully with the tax authorities.
The Group recognises that in generating profits which can be
distributed to shareholders it benefits from resources provided
by government and the payment of tax is a contribution towards
the cost of those resources. The Group will only undertake tax
planning that supports commercial activities and, in the UK
context, is not contrary to the intention of Parliament.
As a group containing a bank, the Group is subject to The Code
of Practice on Taxation for Banks (the ‘Bank Tax Code’) published
by Her Majesty’s Revenue and Customs (‘HMRC’) in March
2013. The Group has previously confirmed to HMRC that it was
unconditionally committed to complying with the Bank Tax Code,
and formally re-approved the Group’s tax governance policies
and the tax strategy outlined above.
During each financial year the Group publishes a tax strategy
document for that year on its website, in accordance with the
Finance Act 2016. This document addresses the following
matters:
•
•
•
The approach of the Group to risk management and
governance arrangements in relation to UK taxation
The attitude of the Group towards tax planning (so far as
affecting UK taxation)
The level of risk in relation to UK taxation that the Group is
prepared to accept
•
The approach of the Group towards its dealings with HMRC
The fourth such statement was published during the year and
can be found in the investor relations section of the Group’s
website.
The published strategy is owned by the Board collectively in
accordance with HMRC’s published expectations. The CFO
has been designated as the Senior Accounting Officer for tax
purposes and, as such, reviews compliance with the Group’s
policies each year.
The Group has an open and positive relationship with HMRC,
meeting with their representatives on a regular basis, and is
committed to full disclosure and transparency in all matters.
Page 65
Strategic Report The Group is resident and operates in the UK and its tax
payments to the UK authorities include not only corporation tax
but also substantial payroll taxes. The amounts of the Group’s
cash payments to UK national and local tax authorities in the
year, including Pay As You Earn (‘PAYE’) and National Insurance
(‘NI’) contributions deducted from employee wages and salaries
were as follows:
Corporation tax
PAYE and NI
VAT
Stamp duty
Total national taxation
Business rates
2020
2019
£m
46.1
32.8
2.7
-
81.6
1.4
83.0
£m
39.4
27.3
2.1
0.1
68.9
1.4
70.3
The Group supports the objective of the Modern Slavery
Act 2015, in raising awareness of modern slavery and human
trafficking. The Group’s annual Modern Slavery Statement is
published on its website and also reflected in relevant policies.
The Group is committed to ensuring that there is no modern
slavery or human trafficking in its supply chains or in any part
of the business and to acting ethically and with integrity in all
business relationships. It actively engages with suppliers to
ensure that compliance with Modern Slavery legislation
is achieved.
The statement describing the Group’s policies for achieving
this can be found on the Group’s website:
www.paragonbankinggroup.co.uk.
The Group undertakes extensive monitoring of the
implementation of all of its policies and has not been made
aware of any incident in which the organisation’s activities have
resulted in an abuse of human rights or a breach of Modern
Slavery legislation. No fines or prosecutions in respect of
non-compliance have been incurred.
In response to the Covid-19 crisis the UK Government permitted
companies to defer VAT payments due between 20 March
2020 and 30 June 2020. The Group did not take advantage of
this concession and paid its liabilities in accordance with the
statutory provisions.
A6.7 Business practices
A6.6 Human rights
The Group respects all human rights and in conducting its
business regards those rights relating to non-discrimination, fair
treatment and respect for privacy to be the most relevant and to
have the greatest potential impact on its key stakeholder groups
of customers, employees and suppliers.
The Group’s commitment to supporting its people’s employment
rights is described in section A6.3.
The Group operates exclusively in the UK and, as such, is subject
to the European Convention on Human Rights and the UK
Human Rights Act 1998.
The Board and the CEO have overall responsibility for ensuring
that all areas within the Group uphold and promote respect for
human rights. The Group seeks to anticipate, prevent and mitigate
any potential negative human rights impacts as well as enhance
positive impacts through its policies and procedures and, in
particular, through its policies regarding employment, equality and
diversity, treating customers fairly, and information security.
The Group’s policies seek to ensure that employees comply with
the relevant legislation and regulations in place in the UK and
to promote good practice. The Group’s policies are formulated
and kept up-to-date by the relevant business areas, authorised
in accordance with the Group’s governance procedures and are
communicated to all employees.
The Group’s compliance with human rights regulation falls within
its overall compliance regime, and any breaches or potential
breaches would be investigated and addressed through the
Group’s risk management framework.
Business partners
The Group’s business model relies on maintaining good
relationships with its principal business partners, primarily
financial intermediaries, such as mortgage brokers, and
purchase ledger suppliers including those for establishment
costs and professional services.
The Group is committed to the fair treatment of all suppliers. In
return, we expect suppliers to help to deliver a high standard of
service to our customers and act responsibly.
The Group introduced a Supplier Code of Conduct during
the year, which sets out our overall approach to supplier
engagement and corporate responsibility and, importantly, the
standards of behaviour that we expect from our suppliers.
It includes the minimum standards we expect from suppliers and
our conduct commitments and expectations around bribery and
corruption, data protection and modern slavery. It also includes
important information concerning our employment practices,
health and safety, community and environmental matters.
The Group is a signatory to the UK’s Prompt Payment Code,
administered by the Chartered Institute of Credit Management
and as such commits to paying invoices within 60 days, unless
there is good reason for non-payment, and aims to make
payment within 30 days where correct procedures are followed.
Anti-corruption
The Group carries out its business fairly, honestly and openly.
It has a comprehensive anti-bribery and corruption policy,
endorsed by the directors, covering all employees and operated
throughout the Group. It will not make or accept bribes, nor will
it condone the offering or receiving of bribes on its behalf. The
Group will always avoid doing business with those who do not
accept its values and who may harm its reputation.
Page 66
The Group has not been involved in any incidents resulting
in prosecutions, fines, or penalties or in similar incidents of
non-compliance in respect of bribery, corruption or other illegal
business practices (2019: none).
Anti-money laundering
As a financial services entity, the Group also has procedures in
place to ensure it cannot be used to facilitate money laundering,
sanctions abuse or other forms of financial crime. Employees
receive regular annual training in these areas, with their
understanding being tested and levels of completion reported to
regulators. The Group’s money laundering reporting officer is the
Head of Financial Crime.
All business heads are responsible for having the appropriate
controls in place to ensure that employees adhere to the
anti-bribery and corruption policies and procedures and other
policies relating to business practices at all times. This is
monitored as part of the Group’s risk management process and
reviewed, as appropriate by the Internal Audit function.
Whistleblowing
A whistleblowing hotline, run by an independent third party,
Protect, is available to staff who have concerns over any aspects
of the Group’s business practices. This is described further in
Section B4.5.
The Group carries out an annual risk assessment as required
by the Bribery Act 2010 and continues to conclude that it is not
a company with a high risk of bribery. The Group conducts all of
its business within the UK and its only significant outsourcing
arrangement relates to the administration of its savings
operations by the outsourcing arm of a major UK building
society. The UK is not considered a jurisdiction with a high
incidence of corrupt practices, ranking twelfth safest in the
Corruption Perceptions Index for 2019, out of 198 countries.
However, the Group takes its responsibilities seriously and
will not tolerate bribery in any form on any scale and as such,
its policies and procedures are kept under regular review.
The Group will self-report any serious incidence of bribery or
corruption that is identified.
The Group’s policies cover the conduct of its business, the
Group’s interaction with suppliers and contractors and the
giving or receiving of gifts and corporate hospitality. It prohibits
facilitation payments. Before new suppliers are approved, the
Group’s procedure requires that they must be assessed against
the requirements of the anti-bribery and corruption policy. The
policy is updated and a risk assessment conducted on an
annual basis.
All employees are required to read the Group’s anti-bribery
and corruption policy and undertake annual on-line training to
assess their understanding. The anti-bribery culture forms part
of the induction course for all new employees and is reinforced
at subsequent training sessions. Any employee found to be in
breach of these policies will be subject to disciplinary action.
No such disciplinary action has taken place in the year ended
30 September 2020.
The CRO, in conjunction with the Head of Financial Crime, who
are both part of the ‘second line’ Risk and Compliance function,
are responsible for ensuring the Bribery Act risk assessment and
resulting policies and procedures are in place and reviewed on a
regular basis. They are also responsible for ensuring any changes
in the law are noted and applied to the Group’s policies and
procedures, where appropriate. In the last year there have been
no material changes in legislation or guidance in the UK.
A7. Approval of Strategic Report
Section A of this Annual Report comprises a Strategic Report
for the Group. The information on how the directors have
discharged their duties under s172 of the Companies Act 2006
included in Section B4.3 of the corporate governance report is
also included in this strategic report by reference.
This Strategic Report has been drawn up and presented in
accordance with, and in reliance upon, applicable English
company law, in particular Chapter 4A of the Companies Act
2006, and the liabilities of the directors in connection with
this report shall be subject to the limitations and restrictions
provided by such law.
It should be noted that the Strategic Report has been prepared
for the Group as a whole, and therefore gives greater emphasis
to those matters which are significant to the Company and its
subsidiaries when viewed as a whole.
Approved by the Board of Directors and signed on behalf of
the Board.
Marius van Niekerk
Company Secretary
3 December 2020
Page 67
Strategic Report Paragon has joined up with The
Women’s Association to increase the
visibility of women in the workplace.
B. Corporate Governance
How the Group is run and how risk is managed
P70
B1. Chair of the Board’s statement
An overview of governance in the year
P72
B2. The Code
How the Company complied with the Code in the year
P74
B3. Board and senior management
The directors and the operation of the Board during the year
P80
B4. Governance framework
The system of governance, committee structure and how the Board fulfils its duties
P95
B5. Nomination Committee
Policies and procedures on governance, board appointments and diversity
P98
B6. Audit Committee
How the Group controls its external and internal audit processes and its financial reporting systems
P106
B7. Remuneration
Policies and procedures determining how directors are remunerated
P134
B8. Risk management
How the Group identifies and manages risk in its businesses
P145
B9. Directors’ report
Other information about the structure of the Company required by legislation
P148
B10. Directors’ responsibilities
Statement of the responsibilities of the directors in relation to the preparation of the financial statements
We recognise that a
robust governance
structure and
effective risk
management
framework are
integral to delivering
sustainable growth
and shareholder
returns...
Fiona Clutterbuck
Chair of the Board
Page 70
B1. Chair's
statement
on corporate
governance
Dear Shareholder
I am delighted to introduce the Company’s corporate
governance report, in what will be our first year reporting in
compliance with the 2018 UK Corporate Governance Code
('the Code’). The Code was applicable to the Company with
effect from 1 October 2019 and presented the Board with
an opportunity to review and restructure our governance
framework, which you can read about in Section B4. As a
board we recognise that a robust governance structure and
effective risk management framework are integral to delivering
sustainable growth and shareholder returns. An overview of
our activities as a board and a summary of the key financial,
operational and strategic matters considered throughout the
financial year is set out in Section B3.3.
Stakeholder engagement
This year the Board has specifically reviewed its duty to promote
the success of the Group and the Company, whilst considering
the broader implications for stakeholders. You can find out
more about how our approach enables us to create value for all
stakeholders in Section A2 of our Strategic Report.
Board effectiveness
During 2019 the Board undertook its triennial externally
facilitated board evaluation, carried out by Independent Board
Evaluation. As a result, the Board developed a comprehensive
action plan based on the outputs which included:
•
Enhanced training for non-executive directors (Section B4.4)
•
•
•
Enhanced use of non-executive directors’ skills matrix in the
recruitment process– further detail on this can be found in
Section B4.4.
Six-monthly training sessions delivered to the Board based on
strategic priorities and market developments (Section B4.4)
Greater visibility of non-financial issues (ie customer,
employee and competition)
•
Improved succession planning (Section B4).
•
Several deep dives from the business, with greater access to
senior management (see Section B3.3 for more detail)
Excellent progress was made in relation to all of these actions
over the past year and we have recently completed our own
annual internally-led assessment to ensure that we, as a board,
continue to operate responsibly and effectively. Further detail
on the 2020 evaluation actions and outputs can be found in
section B4.4.
As mentioned above, Alison Morris joined the Board in March
2020, subsequently becoming Audit Committee Chair. Alison
is a highly experienced audit specialist and her skills, expertise
and capabilities are of great benefit to the Group. Peter Hill was
appointed to the Board on 27 October 2020. He was previously
CEO of Leeds Building Society from 2011 until his retirement
in 2019, and brings with him a wealth of experience in financial
services and a proven track record in risk oversight, gained
during his executive and non-executive career.
The Group’s AGM will be held on 24 February 2021 and I look
forward to welcoming shareholders, subject to any restrictions
which might still be in place as a result of the Covid-19 situation.
Fiona Clutterbuck
Chair of the Board
3 December 2020
I am particularly proud of our People Forum, which is currently
made up of 22 employee members across six different locations
who represent their colleagues from all business areas on a
range of topics and concerns that are raised by employees
during the year. The People Director updates the Nomination
Committee on the outcome of these meetings and has
developed a comprehensive action plan to ensure that the key
themes captured are fed back into the Board’s decision-making
process and that these decisions are subsequently reported to
all employees, via the People Forum.
Hugo Tudor and I attended a meeting of the People Forum in
November 2019 where we focussed on executive remuneration
and pay and reward more generally. In addition, Hugo and
Graeme Yorston attended the People Forum in September 2020,
where the progress made over the past year was reviewed, with
a particular focus on the measures taken to manage the impact
of Covid-19 on employees. The People Forum representatives
commented that they appreciated this engagement and were
pleased to hear from members of the Board and have the
opportunity to provide direct feedback.
I have had the opportunity during the year, with some of my
non-executive colleagues, to meet with representatives of the
PRA. I found this a valuable opportunity to understand how the
regulator views the Group and their priorities as a significant
stakeholder in our business.
Our Remuneration Policy and Remuneration Report were
approved at the AGM in February 2020, but each had a
‘significant vote’ against. We have continued to engage with
shareholders to address their concerns and further details of this
are given in the Directors’ Remuneration Report in Section B7.1.
Culture
Our purpose, to support the ambitions of the people and
businesses of the UK by delivering specialist financial services,
is underpinned by our culture and values (which are set out in
Section A2). During the year, as part of the 2019/20 Compliance
Monitoring Plan, an external review focussed on assessing
culture within the Group was conducted. I am delighted that
this review highlighted the strong collaborative culture within
Paragon, which was cited by many employees as their principal
reason for staying with the Group. It is a clear differentiator from
an employee engagement perspective and one the Group is
looking to enhance further.
The review also highlighted areas we can continue to develop
such as: more frequent employee engagement surveys, improved
alignment of acquired businesses and a further promotion of our
values. I am pleased to report that these activities are already
well underway and, with as many as 90% of our employees
working remotely during the Covid-19 lockdown, we have made a
step change in utilising technology to encourage more frequent
‘check-ins’ via Microsoft Teams and promote increased levels of
virtual learning. There has also been a strong focus on employee
well-being throughout this challenging period.
Diversity and Inclusion
I made it very clear last year that one of my personal goals was to
ensure that both the Board and Group are diverse and reflective
of the communities in which we are based. I can confirm that the
Board has met its target of at least a third female representation
on the Board, in line with the Hampton-Alexander Review,
following the appointment of Alison Morris to the Board in
March 2020. This year also saw the launch of the Paragon
Equality, Diversity and Inclusion network. The employee
committee which will run the network was appointed following
a two-stage interview process in August. Both the volume and
quality of applications were very impressive. The network was
formally launched to all employees in October 2020.
Page 71
Corporate Governance B2. Corporate Governance Statement
The Board is committed to the principles of corporate governance contained in the UK Corporate Governance Code issued by the
FRC in July 2018 (‘the Code’) and which is publicly available at www.frc.org.uk. Throughout the year ended 30 September 2020, the
Company complied with the principles and provisions of the Code.
During the year under review, the Company adopted the ‘comply and explain’ approach under Provision 10 of the Code to extend a
director’s tenure to more than nine years for succession planning purposes and to ensure the appointment of a suitable replacement
non-executive director, as set out below. In February 2020, Peter Hartill’s length of service reached nine years. However, the Board
and Nomination Committee considered Peter’s re-appointment beyond nine years, and agreed that, due to his independence, skills
and experience, Peter continued to make an effective contribution as a non-executive director and therefore agreed to extend Peter’s
tenure until a suitable replacement could be found and an appropriate hand-over had taken place. Peter stepped down from the
Board with effect from 30 September 2020 following a successful handover of his duties as Chair of the Audit Committee to
Alison Morris, who joined the Board in the year.
The Group’s 2020 annual report is the first to be produced since our adoption of the new Code and the table below indicates the
relevant sections of this report which describe how the Code’s Principles have been applied.
Section 1: Board Leadership and Company Purpose
Section
A. The Company is led by an effective and entrepreneurial board, who promote the long-term sustainable success
of the Company, generating shareholder value and contributing to wider society.
B. The Company’s purpose, values and strategy, which aligns with its culture, has been established and is
promoted by the Board.
C. The Board ensures that necessary resources are in place for the Company to meet its objectives and measure
performance and has established a framework of effective controls which enables risk to be assessed and
managed
D. The Board ensures effective engagement with stakeholders and encourages their participation.
E. The Board ensures that workforce policies and practices are consistent with the Company’s values and support
its long-term sustainable success. The workforce should be able to raise any matters of concern.
Section 2: Division of Responsibilities
F. The Chair is objective and leads the Board effectively, facilitating constructive relations and effective
contribution from non-executive directors.
G. The Board includes an appropriate combination of executive and non-executive directors, with a clear division of
responsibilities.
H. Non-executive directors have sufficient time to meet their board responsibilities.
I.
The Board, supported by the Company Secretary, has the policies, processes, information, time and resources
required to function effectively and efficiently.
Section 3: Composition, Succession and Evaluation
J.
Appointments to the Board are subject to a formal, rigorous and transparent procedure, and an effective
succession plan is in place for the Board and senior management. Appointments and succession plans are
based on merit and objective criteria and promote diversity.
K. There is an appropriate mix of skills, experience and knowledge. Tenure and membership of the Board and its
committees are regularly reviewed.
L. As part of an annual evaluation the Board, and each individual director, considers composition, diversity and
effectiveness.
B3
B1
B8
B4.3
B4.3
Section
B4.1
B4.1
B4.1
B4.1
Section
B5
B4.4
B4.4
Page 72
Section 4: Audit, Risk and Internal Control
Section
M. The policies and procedures, established by the Board, ensure the independence and effectiveness of
internal and external audit functions. The Board has satisfied itself of the integrity of financial and narrative
statements.
B6
N. The Board presents a fair, balanced and understandable assessment of the Company’s position and prospects.
B6
O. The Board has established procedures to manage risk, oversee the internal control framework, and determine
the principal risks the Company is willing to take in order to achieve its long-term strategic objectives.
B8
Section 5: Remuneration
P. Remuneration policies and practices support strategy and promote long-term sustainable success. Executive
remuneration is aligned to the Company’s purpose, values and clearly linked to successful delivery of long-term
strategy.
Q. A formal and transparent procedure has been established to develop policy and determine director and senior
management remuneration.
R. Directors should exercise independent judgement and discretion over remuneration outcomes, taking account
of company and individual performance, and wider circumstances
Section
B7
B7
B7
Page 73
Corporate Governance B3. Board of Directors and Senior
Management
B3.1 The Board of Directors
Members of the board of directors at the date of approval of the annual report are set out below.
1.
4.
7.
Page 74
3.
6.
9.
2.
5.
8.
1.
Fiona J Clutterbuck
Chair of the Board (Age 62)
2.
Nigel S Terrington
Chief Executive (Age 60)
Appointed to the Board as an independent non-executive director in
2012 and became Chair of the Board in May 2018
Appointed to the Board as Treasury Director in 1990, Finance Director
in 1992 and became Chief Executive in 1995
Experience
Experience and expertise*
Fiona Clutterbuck has many years of corporate finance experience at
leading UK and international investment banks, specialising in financial
institutions.
During her career she has held the positions of Head of Strategy,
Corporate Development and Communications at Phoenix Group,
Managing Director and Head of Financial Institutions Advisory at ABN
AMRO Investment Bank, Managing Director and Global Co-Head of
Financial Institutions Group at HSBC Investment Bank and was a
director at Hill Samuel Bank Limited.
Specific areas of expertise*
•
Long-term understanding of the Group, its markets and
its people
• Strong and broad listed plc experience
• Strategic analysis skills
• Detailed knowledge of the executive remuneration market
Committee membership
Chair: Nomination Committee
Member: Risk and Compliance and Remuneration Committees
Current external appointments
Non-executive director of Sampo PLC (Finnish listed financial services
company) and a member of its audit committee
Non-executive director and senior independent director of M&G plc
Non-executive director of Hargreaves Lansdown PLC and its audit
committee chair (to 08/10/2020)
Nigel Terrington’s early career began in investment banking, which
included working for UBS where he ran its Financial Institutions Group.
He joined the Group in 1987, becoming Treasurer shortly thereafter,
before being appointed as Finance Director and then Chief Executive.
He has been Chair of the Council of Mortgage Lenders (‘CML’), Chair
of the Intermediary Mortgage Lenders Association (‘IMLA’), Chair of
the FLA Consumer Finance Division, a member of the Mortgage Board
of UKF and a Board member of the FLA.
Nigel is an associate of the Chartered Institute of Bankers. In 2017, he
received an Honorary Doctorate from Birmingham City University for
services to the finance industry.
Overall, Nigel has expertise gained from long-term, through-the-
cycle, strategic and detailed understanding of the Group, its markets,
its operations and its people. He saw the Group through both the
1992 and 2007 financial crises and has led the diversification of the
Group from a monoline buy-to-let lender to its current broadly-based
specialist banking group.
Current external appointments:
Board member of UKF
Chairman of UKF’s Specialist Banks Advisory Committee
Member of HM Treasury’s Home Finance Forum
Member of Bank of England’s Residential Property Forum
3.
Richard J Woodman
Chief Financial Officer (Age 55)
4. Hugo R Tudor
Non-executive director (Age 57)
Appointed to the Board as Director of Corporate Development in 2012
and became Chief Financial Officer in June 2014
Non-executive director since 2014 and became Senior Independent
Director in July 2020
Experience and expertise*
Richard Woodman joined the Group in 1989 and has held various
senior strategic and financial roles, including Director of Business
Analysis and Planning and Managing Director of Idem Capital.
He has taken a lead role in the Group’s strategic development and, in
particular, in the loan portfolio acquisition programme through Idem
Capital and the Group’s M&A programme.
He is a member of the Chartered Institute of Management
Accountants.
Broadly, Richard has expertise gained from long-term, through-the-
cycle, knowledge and understanding of the Group, its markets and its
operations, in particular its financial management controls, liquidity,
stress testing and capital management.
Current external appointments:
None
Appointed in 2014 – six years served
Skills and experience
Hugo Tudor spent 26 years in the fund management industry, originally
with Schroders and most recently with BlackRock, covering a wide
range of UK equities. He is a Chartered Financial Analyst and a
Chartered Accountant.
Specific areas of expertise*
•
•
Detailed knowledge of the investor perspective
A strong understanding of the executive remuneration market
Committee membership
Chair: Remuneration Committee
Member: Audit, Nomination (from 24/09/20) and Risk and
Compliance Committees
Current external appointments
Director: Damus Capital Limited
Director: Vitec Global Limited, Vitec Air Systems Limited and Vitec
Aspida Limited
*All directors have broad knowledge of all areas of the Group’s business but the ‘areas of expertise’ highlight specific areas in relation to an individual’s contribution to the Group’s
long-term sustainable success
John A Heron resigned from the Board on 6 January 2020 and Peter J N Hartill resigned from the Board on 30 September 2020.
Page 75
Corporate Governance 5. Alison C M Morris
Non-executive director (Age 61)
Appointed in 2020 – one year served
Skills and experience
Alison is a chartered accountant and was a partner in PwC's financial
services audit practice until the end of 2019.
She joined PwC in 1982 and spent her career with the organisation in
a range of internal and external audit roles across asset and wealth
management, as well as banking and capital markets.
She has led audit projects for a range of banking clients, as well as
other companies across the FTSE 100 and FTSE 250, and has held
a number of leadership roles within PwC including sitting on the
executive management team which led their audit practice.
Specific areas of expertise*
•
•
Recent and relevant experience of the financial services sector
Detailed and specialist knowledge of accounting and auditing
practice as well as of the audit market and accounting regulations
Committee membership
Chair: Audit Committee (from 24/09/20, member since appointment)
Member: Remuneration Committee, Risk and Compliance Committee
Current external appointments
Non-executive director of Vanquis Bank Limited, part of the Provident
Financial Group PLC
Non-executive director of M&G Group Limited, part of the
M&G plc group
6.
Finlay F Williamson
Non-executive director (Age 60)
Appointed in 2017 – three years served
Not seeking re-election at 2021 AGM†
Skills and experience
Finlay Williamson was Finance Director of Virgin Money between 2009
and 2014, where he was responsible for supporting the design and
delivery of the company’s growth strategy, including the assessment
of potential markets, the development of key propositions and the
pursuit of non-organic opportunities.
Prior to joining Virgin Money, Finlay had a long career at Royal Bank of
Scotland (‘RBS’), where he held a number of senior finance roles, latterly
as Finance Director for RBS’s Manufacturing and Retail Direct divisions.
He was appointed to the Board of Paragon Bank PLC in February 2015
and was Chair of its Risk and Compliance Committee from that date.
Finlay is a Chartered Accountant and a fellow of the Chartered
Institute of Bankers in Scotland.
Specific areas of expertise*
•
•
In depth knowledge and experience of financial services sector,
accounting and risk operations
Detailed experience of overseeing the development of risk
management in the Group
Committee membership
Chair: Risk and Compliance Committee
Member: Audit Committee
Current external appointments
Non-executive director of Hampden & Co PLC
7.
Barbara A Ridpath
Non-executive director (Age 64)
8.
Graeme H Yorston
Non-executive director (Age 63)
9.
Peter A Hill
Non-executive director (Age 59)
Appointed in 2017 – three years served
Appointed in 2017 – three years served
Skills and experience
Skills and experience
Barbara Ridpath has worked in finance for
most of her career, in New York, London and
Paris at the Federal Reserve Bank of New
York, Standard & Poor’s and JPMorgan.
She was instrumental in the development
of UK mortgage securitisation in the late
1980s and went on to lead the Standard &
Poor’s Ratings Group in Europe, the Middle
East and Africa.
Specific areas of expertise*
•
Strong knowledge of the operation of
and implementation of operational risk
management systems
•
Detailed knowledge of the securitisation
market
Committee membership
Member: Audit, Nomination and Risk and
Compliance Committees
Current external appointments
Non-executive director of ORX in
Switzerland, a trade association for
operational risk professionals and a
director of ORX UK Limited
Chair of the Ethical Investment Advisory
Group of the Church of England
Member of the International Advisory
Council of the Institute of Business
Ethics (‘IBE’)
Page 76
Graeme Yorston was Group Chief Executive
of Principality Building Society, the 6th
largest mutual in the UK. He has over 43
years’ experience in financial services
having carried out a number of senior roles
in Abbey National (now Santander).
Graeme has served on the CBI Council
for Wales, the Board of Business in
the Community in Wales and was HRH
Ambassador for BITC in Wales for two years.
He was awarded Director of the Year in
Wales by the Institute of Directors in 2016.
Graeme is a Fellow of The Chartered
Institute of Banking, holds an MBA from
Warwick Business School and was awarded
an Honorary Doctorate in Business
Administration by Cardiff Metropolitan
University in 2017.
Specific areas of expertise*
•
•
Strong retail banking sector knowledge
and experience
Detailed experience of overseeing
IT systems
Committee membership
Member: Nomination, Remuneration and
Risk and Compliance Committees
Current external appointments
None
Appointed in 2020 – After the end of the
financial year
Skills and experience
Peter Hill was the CEO of Leeds Building
Society from 2011 until his retirement
in 2019. Peter was also chairman of the
Council of Mortgage Lenders for three
years and a main board member of
UK Finance.
Specific areas of expertise*
•
•
Specialist retail banking and mortgage
lending expertise
Detailed knowledge of the financial
services sector
Committee membership
Member: Risk and Compliance Committee
Current external appointments
Non-executive director of Pure
Retirement Group Limited and Pure
Retirement Limited
Chair of Mortgage Brain Holdings Limited
Director of Leeds Rugby Foundation
†Finlay Williamson has announced his intention to
step down from the Board on 31 December 2020.
B3.2 Executive Committee
The members of the Group’s Executive Committee ('ExCo') are set out below, with their tenure in their current role.
Nigel Terrington
Richard J Woodman
Richard Rowntree
Chief Executive Officer (‘CEO’)
Since 1995
Chief Financial Officer (‘CFO’)
Since 2014
Managing Director - Mortgages
Since 2020
Dave Newcombe
Michael Helsby
Pam Rowland
Managing Director – Commercial Lending
Since 2019
Strategic Development Director
Since 2018
Chief Operating Officer (‘COO’)
Since 2014
Peter Shorthouse
Deborah Bateman
Treasury and Structured Finance Director
Since 2010
External Relations Director
Since 2009
Anne Barnett
People Director
Since 2009
Marius van Niekerk
Ben Whibley
General Counsel and Company Secretary
Since 2019
Chief Risk Officer (‘CRO’)
Since 2019
All members sit on both the
Performance Executive Committee
and the Executive Risk Committee.
Page 77
Corporate Governance B3.3 The Board’s activities in the year
Matters considered by the Board
During the year, the Board undertook a range of activities, in addition to its regular discussions of performance and strategy. The more
significant of these included:
•
Considering the impact of Covid-19, Brexit, and other macro-economic uncertainties on the Group
•
Appointment of a new Audit Committee Chair and SID, and other changes to the structure of its committees
•
Governance regulation changes reflecting the Code and the Companies (Miscellaneous Reporting) Regulations 2018 (‘C(MR)R’)
In addition, it regularly receives and reviews reports on matters prior to meetings, such as strategic matters, business performance
and results in each of the Group’s business areas. The Board also receives updates on legal and governance matters, treasury and
funding, the work of the Board’s committees and investor relations and shareholder feedback.
Significant other matters discussed are set out below by theme:
Topic
Covid-19
Upon the outbreak of the pandemic in March 2020, additional board meetings were arranged, and the Board
received regular, additional updates from the Chair and ExCo.
Presentations focussed on: strategy; governance; the macro environment, market uncertainties; available
government initiatives; new lending activity; deposit strategy and activity; operational response and its impact
on stakeholders; people response; communication (external and internal); risk management; and the Group’s
commercial status and approach.
A significant focus in these discussions was the level of engagement with, and support being provided to, the
Group’s customers.
Approval of the decision to apply for CBILS funding.
Commencement of lending under BBLS was approved.
Corporate governance
Approved a restructure of the Group’s executive committee governance structure. More detail on the restructure
can be found in section B4.
Approved a new Corporate Governance Policy Framework. More detail on the framework can be found in
section B4.
Following the 2020 AGM at which the resolutions for the Directors Remuneration Policy and Report received the
support of 71.02% and 74.33% of shareholders respectively, and therefore are considered under the Code to have
received a significant vote against, the Board received regular updates from the Remuneration Committee Chair on
the key actions taken by the Remuneration Committee that reflected on the feedback from shareholders in respect
of the resolutions put to the AGM.
Approved the Group’s updated purpose.
Received and participated in a culture deep dive review.
Received a presentation on customer insights from the External Relations Director. The session was an opportunity
for enhanced discussion on customer, employee and competition issues.
Business strategy
A major investment bank provided a market update on the financial services sector.
Deep dive reviews into the mortgage and consumer finance operations were provided to the Board by the
managing directors of the businesses. This was a further opportunity for the Board to meet key management
individuals beyond strategy sessions, thereby enhancing engagement with senior management.
Corporate update: The Board received quarterly updates on key project plans.
Meeting
Mar 2020
Apr 2020
May 2020
Jan 2020
Feb 2020
Feb 2020 /
Ongoing
Apr 2020
Jul 2020
Jul 2020
Feb 2020
Apr 2020
Jun 2020
Page 78
Topic
Risk and regulation
Received training on, and approved, the ICAAP and Recovery Plan.
Approved the submission of IRB Module 1 to the regulator. The Board noted good progress has been made with IRB
implementation across the Group.
Received further training on IRB.
Meeting
Mar 2020
Mar 2020
Jun 2020
Completed a cyber security questionnaire (provided by, and required to be submitted to, the PRA every four years).
May 2020
Considered and approved the Group’s principal risks.
The General Counsel and Company Secretary provided the Board with a legal and regulatory training session which
covered topics such as MAR and section 172 duties.
The CRO reported on a deep dive on a review of the Group’s product lifecycle.
Aug 2020
Sep 2020
Sep 2020
The way in which the Board discharged its duty to consider the interests of all stakeholders in these discussions is discussed in
section B4.3.
Board and committee attendance
The attendance of individual directors at the regular meetings of the Board and its main committees in the year is set out below, with
the number of meetings each was eligible to attend shown in parentheses. Directors who are unable to attend meetings still receive
the relevant papers and any comments from them are reported to the meeting in question via the Chair. Directors have attended
a number of ad hoc meetings, workshops and training sessions during the year and have contributed to discussions outside of the
meeting calendar.
Director
Fiona J Clutterbuck
Nigel S Terrington
Richard J Woodman
John A Heron
Peter J N Hartill
Alison C M Morris
Hugo R Tudor
Barbara A Ridpath
Finlay F Williamson
Graeme H Yorston
Board
12 (12)
12 (12)
12 (12)
3 (3)
12 (12)
8 (8)
12 (12)
12 (12)
12 (12)
12 (12)
Audit
Committee
Risk and Compliance
Committee
Remuneration
Committee
-
-
-
-
5 (5)
4 (4)
5 (5)
5 (5)
5 (5)
-
4 (4)
-
-
-
4 (4)
2 (2)
4 (4)
4 (4)
4 (4)
4 (4)
5 (5)
-
-
-
4 (5)
3 (3)
5 (5)
-
-
5 (5)
Nomination
Committee
5 (5)
-
-
-
5 (5)
-
0 (0)
5 (5)
-
5 (5)
Directors also attended an annual two-day strategy event, held online, to enable more detailed discussion of the Group’s position
and future development. This event has been a regular fixture in the Group’s governance calendar for a number of years, which is also
attended by the Group’s executive management.
In addition to the formal meetings shown in the table above, the Board held regular, ad hoc meetings during the height of the Covid-19
pandemic to consider various matters, including:
•
Operational, strategic and financial performance, in particular the liquidity, funding and capital position of the Group, in each of the
Group’s business areas
• The impact on shareholders, stakeholders and customers
• The impact on employees, working arrangements and the discussion of employee survey results and relevant actions
• The Group’s application for authorisation under the CBILS and BBLS initiatives
•
The decision to not declare an interim dividend for the year at the time of the half-year results announcement (discussed further in
section A4.3.1)
Page 79
Corporate Governance
B4. Governance Framework
This section describes how Corporate Governance operates within the Group, setting out
B4.1
Board and committee structure – the forums through which corporate governance operates and how they relate to
each other
B4.2
Elements of the governance framework – how the framework operates
B4.3
Board and stakeholders – how the Board discharges its duty to promote the success of the Group having regard to
stakeholder interests
B4.4
Board evaluation and development – how the Board ensures the framework is, and will remain, fit for purpose
B4.5 Whistleblowing – how concerns may be raised and the action that is taken
B4.1 Board and committee structures
Board leadership, group purpose and the Corporate Governance Policy Framework
The Board of Directors is responsible for promoting the long-term, sustainable success of the Group, generating value for
shareholders and contributing to wider society. It establishes the Group’s overall purpose, values and strategy and ensures that
these and the Group’s culture are aligned. The Board is also responsible for delivery of these within a robust corporate governance
framework. Purpose, values and strategy are described in Section A2 and the corporate governance framework is described in the
following pages.
The Board of the Company and its subsidiaries are supported by the Group Corporate Governance Policy Framework (‘the
Framework’). The Framework provides key components of how the Board and its committees govern the business of the Company.
Application of the Framework is within the context of other requirements, such as applicable laws, the regulatory regime for deposit
taking banks, the Listing Rules, the Articles of Association of the Company and the Disclosure Guidance and Transparency Rules. On
appointment, directors are briefed on their duties and responsibilities as a director of a listed company.
Board and committees structure and membership
The board operates through a number of sub-committees covering a range of matters, set out below
Paragon Banking Group PLC Board
Paragon Bank PLC Board
Nomination
Committee
Remuneration
Committee
Audit
Committee
Disclosure
Committee
Risk and Compliance
Committee
Paragon CEO
Model Risk
Committee
Executive
Performance Committee
(ExCo Performance)
Executive
Risk Committee
(ERC)
Transaction
Committee
Credit
Committee
Operational Risk
Committee
Asset & Liability
Committee
Customer and
Conduct Committee
Model Review
Group
Sanctioning
Committee
Pricing
Committee
Capital
Committee
Liquidity
Committee
Performance
oversight
Risk
oversight
Paragon Board
Paragon Board Committee
Executive Committee
Executive Sub-Committee
Risk and Compliance Sub-Committee
Sub-Committee
Legal Ownership
Delegated Authority
Page 80
Summarised information on each of the board committees is set out below.
Committee
Chair
Minimum number of meetings
Further information
*P J N Hartill until June 2020.
Audit
Remuneration
Risk and Compliance
Nomination
A C M Morris*
H R Tudor
F F Williamson
F J Clutterbuck
4
3
4
2
Section B6
Section B7
Section B8
Section B5
Members
Independent
non-executive
Audit
Remuneration
F J Clutterbuck
Until 10 May 2018*
No
Yes
Risk and
Compliance
Yes
P J N Hartill
H R Tudor
B A Ridpath
F F Williamson
G H Yorston
A C M Morris
Yes
Yes
Yes
Yes
Yes
Yes
Until
30 September 2020
Until
30 September 2020
Until
30 September 2020
Yes
Yes
Yes
No
Yes
No
No
Yes
Yes
Yes
Yes
Yes
From 26 March 2020
From 26 March 2020
From 26 March 2020
Nomination
Yes
Until
30 September 2020
From
24 September 2020
Yes
No
Yes
No
*Fiona Clutterbuck was considered as independent on appointment as Chair of the Board of Directors on 10 May 2018.
In addition to the memberships above, Hugo Tudor represents the non-executive directors on the Model Risk Committee.
Finlay Williamson will be stepping down from the Board on 31 December 2020.
In addition to the regular committee structures, the Board has established a Disclosure Committee, which assists in the design,
implementation and evaluation of disclosure controls and procedures. It also monitors compliance with the Company’s disclosure
controls, considers the requirements for announcements and overall determines the disclosure treatment of material market
information. The Committee’s members are the CEO, CFO and the External Relations Director, of which any two can form a quorum.
Executive committee structures
During the financial year, the Board reviewed the Group’s broader committee structure, processes and procedures in order to
enhance the wider governance framework and to further align it with the new edition of the Code. As a result, the responsibilities
of the existing Executive Committee were divided between the Executive Performance Committee (‘Performance ExCo’) and the
Executive Risk Committee (‘ERC’).
The ERC was established to support the CEO with further embedding the Group’s risk management framework, monitoring
adherence to risk appetite statements and identifying, assessing and controlling the principal risks within the Group and reporting the
same to the Board.
The Performance ExCo continues to provide support to the CEO in the day-to-day running and management of the Group and, where
appropriate, items discussed at the Performance ExCo are escalated to the Board for further discussion and decision.
Paragon CEO
Sub-committees
The Transaction Committee, which reports directly to the Performance ExCo, consists of the CEO, the CFO, the Director of Treasury
and Structured Finance and the CRO, any two of which can form a quorum, but that quorum should include either the CEO or CFO.
The Committee meets to consider potential acquisitions or disposals of loan assets by the Idem Capital business, where these are
not large enough to require consideration at the Board, and also to approve, within delegated limits, wholesale term and/or revolving
credit facilities proposed by the Group’s Structured Lending operation.
Four executive sub-committees, with membership consisting of executive directors and appropriate senior employees, report to the
ERC. All of these committees are described further in the Risk Management Section B8.
All sub-committees which report to either the ERC or Performance ExCo continue to be reviewed to determine whether further
enhancements can be introduced, whilst maintaining rigorous oversight and control. All sub-committees operate within defined terms
of reference and sufficient resources are made available to them to undertake their duties.
Page 81
Board and committees structure and membership
The board operates through a number of sub-committees covering a range of matters, set out below
Paragon Banking Group PLC Board
Paragon Bank PLC Board
Nomination
Committee
Remuneration
Committee
Audit
Committee
Disclosure
Committee
Risk and Compliance
Committee
Executive
Performance Committee
(ExCo Performance)
Executive
Risk Committee
(ERC)
Model Risk
Committee
Transaction
Committee
Credit
Committee
Operational Risk
Asset & Liability
Customer and
Model Review
Committee
Committee
Conduct Committee
Group
Sanctioning
Committee
Pricing
Committee
Capital
Committee
Liquidity
Committee
Performance
oversight
Risk
oversight
Paragon Board
Paragon Board Committee
Executive Committee
Executive Sub-Committee
Risk and Compliance Sub-Committee
Sub-Committee
Legal Ownership
Delegated Authority
Corporate Governance B4.2 Elements of the Governance Framework
Culture
The Group is proud of its supportive culture, which has been noted as part of its Gold Investors in People accreditation (see
Section A6.3.).
During the financial year, a review of the Group’s culture was undertaken by PwC, which forms part of the Group’s Compliance
Monitoring Plan, a risk-based programme to review business activity in line with regulatory requirements, which is reviewed by the
Board annually. The culture review outlined key themes such as staff communications, performance management processes and
reward and the culture framework. Proposed actions to facilitate continuous improvement of the Group’s culture were considered by
the Risk and Compliance Committee and any necessary actions were considered by the Board. The first annual review of the Group’s
culture was also considered at the two-day strategy event in July 2020.
The welfare, development and engagement of employees is central to the Group’s culture. There is a robust Wellbeing Strategy in
place with an Emotional Wellbeing Team who are fully supported and invested in by keeping their knowledge current. The Group is
a member of ‘This is Me’, which is a campaign supported by the Lord Mayor of London’s Appeal to provide employers with the tools
to change cultures relating to mental health. A central focus of the Group’s Covid-19 response was the protection and support of its
people. Additional welfare measures were introduced, which are described in Section A4.5.1. During the year a number of workshops
have been held on increasing education in areas such as the menopause, health and well-being, nutrition and weight management.
See also Section A6.3 for more information on how the Group invests in its people.
To encourage employee participation within our communities, employees have a paid annual volunteer day to use at a charity of their
choice. Further detail on other charitable activities can be found at A6.5.
Matters Reserved for the Board
The schedule of matters reserved for the Board is reviewed annually and details key matters for which the Board is responsible. Whilst
a number of matters are reserved for the Board, the Board delegates certain responsibilities and authorities to the CEO and Board
committees.
Division of Responsibilities between the Chair, CEO and Senior Independent Director
There is a clear division of responsibilities at the top of the Company between the running of the Board and the executive
responsibility for the day-to-day running of the business of the Group. The Chair leads the Board and is responsible for its
effectiveness and promoting, thereby, the high standard of corporate governance to which the Company subscribes. The CEO leads
the day-to-day executive management of the business, reporting to the Board through the Chair.
The respective responsibilities of the Chair, the CEO and the SID are set out in the division of responsibilities statement, which is
reviewed by the Board annually.
The Chair’s other business commitments are set out in the biographical details Section B3.1.
Role of independent non-executive directors
Throughout the year the independent non-executive directors have formed the majority of the Board and consequently there has
been a strong non-executive representation on the Board, including the SID, providing effective balance and challenge. In addition
to the general legal and regulatory responsibilities of all directors, non-executive directors’ more specific responsibilities include
providing independent oversight and determining appropriate levels of remuneration for executive directors.
All non-executive directors are appointed for fixed terms, must ensure they have sufficient time available to discharge their
responsibilities and regularly update their knowledge and familiarity with the Group’s business. The Chair was considered independent
on appointment in 2018, having originally been appointed as a non-executive director in 2012. The non-executive directors meet with
the Chair, from time to time, without the presence of the executive directors.
At the AGM, the Chair will confirm to shareholders, when proposing the re-election of any non-executive director, that, following formal
performance evaluation, the individual’s performance continues to be effective and demonstrates commitment to the role. The letters
of appointment of the non-executive directors will be available for inspection at the AGM.
Role of the Senior Independent Director
Hugo Tudor was appointed as the SID on 23 July 2020. The SID provides a sounding board for the Chair and serves as an intermediary
for the other directors when necessary. The SID is available to shareholders if they have concerns for which contact through the
normal channels has failed to resolve or for which such contact is inappropriate. The SID also leads the appraisal of the Chair’s
performance at least annually with the non-executive directors.
Page 82
Conflicts of interest
The Board has agreed a policy for managing conflicts and a process to identify and authorise any conflicts that might arise in relation
to significant shareholdings and/or third parties. At each meeting of the Board and its committees, actual or potential conflicts of
interest in respect of any director are reviewed. A conflicts register is also maintained by the Company Secretary.
The Board recognises the benefits that can flow from non-executive directors holding other appointments but requires them to seek
the agreement of the Chair before entering into any commitments that might affect the time they can devote to the Group.
Company Secretary
All directors have access to the advice and services of the Company Secretary, who is responsible for ensuring that board procedures
are complied with. Both the appointment and removal of the Company Secretary are matters reserved for the Board. Marius van
Niekerk was appointed as Company Secretary on 24 June 2020.
Subsidiary governance
A number of the corporate entities within the Group are regulated either by the PRA and / or the FCA. The Company has oversight of
these entities as part of its overall responsibility for the management of the Group and ensures that the Group’s values and standards
in regulated spheres are met.
Composition and succession
Composition and succession for the Board and senior management are considered within the Nomination Committee’s report (see
Section B5).
Board evaluation and training
The Board, individual directors and the Board’s main committees are reviewed annually, with triennial externally facilitated reviews as
required by the Code. Details of how the effectiveness of the Board and its Committees is evaluated are given in Section B4.4. The
non-executive directors have received training during the year on various topics relevant to the Group. Further detail on the training
undertaken is set out in Section B4.4.
Audit, risk and internal control
Information on how the Group has applied the provisions of the Code relating to audit, risk and internal control is set out in
Section B6.
The directors’ responsibility for the financial statements is described in Section B10.
Remuneration
Information on how the Group has applied the provisions of the Code relating to remuneration is set out in the Directors’
Remuneration Report in Section B7.
Whistleblowing
The Group maintains a whistleblowing process to enable employees or other stakeholders to raise concerns anonymously.
Information on whistleblowing is provided in Section B4.5.
Further information
Documentation referred to in the Corporate Governance section is available on the Group’s website
(www.paragonbankinggroup.co.uk). These include:
• Matters Reserved for the Board
•
Division of responsibilities between the Chair, CEO and Senior Independent Director
•
Terms of Reference – Audit, Disclosure, Nomination, Remuneration and Risk and Compliance Committees
• Group Corporate Governance Policy Framework
•
Internal Audit Charter
Page 83
Corporate Governance B4.3 Board and Stakeholders
Board and stakeholders
While good corporate governance is important to the Board, so is maintaining a reputation for high standards of business conduct
in all of the Group’s operations, and management of conduct risk is a key part of the risk management framework. Section A6 sets
out information on corporate responsibility, including the Group’s people policies and engagement with employees, involvement in
industry initiatives, support for the community and environmental, social and conduct impacts.
The Board, in its deliberations and decision-making processes, takes into account the views of the Group’s stakeholders and, where
applicable, considers the impact of those decisions on the communities and environment within which the Group operates. The Board
is mindful of its duty to act in good faith and to promote the success of the Group for the benefit of its shareholders and with regard to
the interests of all of its stakeholders.
The Board is kept updated on all material issues by the executive directors and receives regular updates from ExCo members, other
senior managers and external advisers. Members of the Board also engage directly with employees, shareholders and regulators.
The Board confirms that, for the year ended 30 September 2020, it has acted to promote the success of the Group for the benefit of
its members as a whole and continues to have due regard to the following matters laid out in S172 (1) of the Companies
Act 2006:
a. The likely consequences of any decision in the long-term;
b. The interests of the Company’s employees;
c. The need to foster the Company’s business relationships with suppliers, customers and others;
d. The impact of the Company’s operations on the community and the environment;
e. The desirability of the Company maintaining a reputation for high standards of business conduct; and
f. The need to act fairly as between members of the Company.
From 2020, companies have been required to describe in the Annual Report how the directors have had regard to the matters set out
above when performing their duties.
Page 84
The table below sets out how the Board and senior management take the above factors into account when engaging with the Group’s
key stakeholders and how this is aligned to the Group’s strategic priorities.
Shareholders
Creating long-term shareholder value through growing profits and dividends (s172 a)
How we engage and / or monitor
•
•
•
Our ongoing Investor Relations Programme, where over fifty meetings were held with
shareholders
The Director of External Relations updates each meeting of the Executive Committee on
shareholder movements and shareholder interaction
Capital
management
The Chair and Chair of the Remuneration Committee have had a number of meetings with
individual shareholders and shareholder advisory groups
Outcome
Growth
•
•
The summary of shareholder feedback provided to the Board helps to align the Group’s
strategy with the interests of shareholders
Shareholder feedback was taken into account when drafting and implementing the
Remuneration Policy
• All resolutions approved by our shareholders at the AGM in February 2020
Diversification
• Follow up meetings with shareholders following views expressed in the AGM process
• Final dividend of 14.4 pence per share
Further information on the Group’s investor relations activities is given below. Discussions with
investors on remuneration matters are discussed in the Remuneration Report (Section B7).
Specialisation
Page 85
Corporate Governance Customers
Supporting the ambitions of the people and businesses of the UK by delivering specialist financial services (s172 c)
How we engage and / or monitor
• Regular customer satisfaction surveys on key product lines are reported to the Board
• Focussed analysis on key customer groups
• Deep dive presentation on Customer Insights from the Director of External Relations
•
Customer metrics were introduced as a key element of the Performance Share Plan (‘PSP’)
from 2020
Outcome
• Customer support designated as a strategic priority in the Group’s Covid-19 response
• Customer feedback on key product lines, as measured by NPS, has remained strong
• Web portal updated to reflect specific customer feedback
•
Greater understanding of our customers and their priorities refines product offerings,
documentation and processes
• Roadmap to improve our savings maturity process is underway
Further information on the Group’s relationship with its customers is set out in Section A6.2.
Specialisation
Sustainability
Diversification
Page 86
Employees
Helping all of our people to develop their career and reach their potential (s172 b)
How we engage and / or monitor
• Regular employee Pulse Surveys and employee check-ins conducted
•
The People Director updates the Board and the Executive Committee on employee feedback
from surveys and from the People Forum, as well as other metrics
Sustainability
• The Board received a deep dive presentation on culture from the People Director
• Members of the Board attend the People Forum at least twice a year
•
•
Executive Committee members with responsibility for gender diversity and wider diversity
have been designated and regularly report progress on these matters
Nomination Committee receives six-monthly succession planning updates from the People
Director
• People metrics were introduced as a key element of the PSP from 2020
Outcome
• Enhanced support for employees impacted by Covid-19 put in place
•
•
•
The feedback from employee surveys enables the Board to support and understand
employees.
Tailored career development programmes embedded across the Group for apprentices
through to high potential senior leaders
Internal appointment of two Executive Committee appointments; CRO and Managing
Director – Commercial Lending
•
Increased communication to employees regarding culture and values
• Enhanced maternity provision and pension contributions in the year
• Creation of the Equality, Diversity and Inclusion network
Further information on the involvement of the Group’s people and the impact of policies on
them, including steps taken to support them during Covid-19, can be found in Section A6.3.
Page 87
Corporate Governance Regulators
Engaging transparently and openly with regulators to ensure we comply with current legislation and maintain the
Company’s reputation for high standards of business conduct (s172 c, e)
How we engage and / or monitor
•
Regular engagement with the PRA, throughout the year on key regulatory matters, including
the IRB implementation
• Direct contact between the Chair and non-executive directors and regulators
Capital
management
•
•
•
The Executive Committee and Board are kept updated on all interaction with the FCA
and PRA
SMCR is embedded across the Group, with conduct measures monitored monthly, overseen
by ERC
Dialogue maintained with HMRC, with the CFO designated as Senior Accounting Officer,
directly responsible for the Group’s tax policies
Sustainability
• The risk element of the PSP includes an assessment of any material regulatory breaches
Outcome
• The Board approved the submission of IRB Module 1 to the PRA in March 2020
•
All changes to the Board and Senior Management Functions are approved by the PRA
and FCA
Further information on the Group’s tax policies is set out in Section A6.5.
Society and community
Helping the UK economy grow and supporting the communities in which we operate (s172 d)
How we engage and / or monitor
•
Members of the senior team are active in industry bodies, gaining insight into thinking about
how the sector impacts communities and public policy
• Executive Committee members actively support community activities within the business
Sustainability
•
Employees support a nominated charity each year via payroll donations and fund-raising
efforts
Outcome
•
•
During the first nine months of 2020 our employees raised over £25,000 for this year’s
nominated charity, Macmillan Cancer Support
The Board approved the donation of £100,000 across four different organisations supporting
people impacted by Covid-19
Further information on the Group’s community involvement is set out in Section A6.5.
Page 88
Environment and climate change
Reducing our environmental impact and designing products that support positive environmental change (s172 d)
How we engage and / or monitor
•
The Board took part in an Insight session on climate change in the context of financial
services.
• Reporting to the Board on potential risks and business impacts from climate change
Sustainability
•
The CFO has been designated as the responsible director for climate change exposures and
reports to the Board
• The Group complies with all applicable laws and regulations relating to the environment
Outcome
• Climate Change has been designated as a principal risk for the Group in the year
•
The Board established new objectives against current energy performance to further reduce
consumption
Further information on the Group’s management of climate change risk and its environment
policies is set out in Section A6.4.
Business partners and suppliers
Commitment to the fair treatment of all business partners. In return, we expect our partners to help us deliver a high
standard of service to our customers and act responsibly (s172 c)
How we engage and / or monitor
•
Key business partner relationships, including intermediaries and suppliers are identified,
actively monitored and reported to the Board and Executive Committee
Sustainability
Outcome
•
•
This year the Group published a new Supplier Code of Conduct which sets out our overall
approach to supplier engagement and corporate responsibility
Our suppliers understand the minimum standards we expect from them and our
commitments and expectations around bribery and corruption, data protection and modern
slavery
• Ongoing engagement with our key suppliers ensuring operational resilience and reduced risk
The Group’s management of business partner relationships is discussed further in Section A6.7.
Page 89
Corporate Governance Shareholders
The Board encourages communication with the Company’s institutional and private investors. All shareholders have at least twenty
working days’ notice of the AGM at which the directors and committee chairs are available for questions. The AGM is normally
held in London during business hours and provides an opportunity for directors to report to investors on the Group’s activities,
to answer their questions and receive their views. At all general meetings shareholders have an opportunity to vote separately on
each resolution and all proxy votes lodged are counted and the balances for, against and directed to be withheld in respect of each
resolution are announced.
The 2021 AGM, scheduled for February, may be affected by Covid-19 restrictions on gatherings. The Group will make appropriate
arrangements to comply with any such restrictions but remains mindful of the importance of ensuring that shareholders have
sufficient opportunity to express their views to the Board.
The Chair, CEO and CFO have a full programme of meetings with institutional investors during the year. During the year ended
30 September 2020 meetings were held with investors from the UK, Europe and North America.
The Chair, the Chair of the Remuneration Committee and the People Director have had a number of meetings with shareholders and
shareholder advisory groups covering governance and remuneration matters (as set out in the Remuneration Report).
From time to time other presentations are made to institutional investors and analysts to enable them to gain a greater understanding
of important aspects of the Group’s business.
Investors’ comments from all of these interactions are communicated to the Board, enabling the Board to develop an understanding
of major shareholders’ views of the Group, and take those views into account when determining strategy.
The SID is also made aware of views expressed by shareholders to other members of the Board, via the Company’s brokers or through
the Investor Relations team. Meetings between the SID and shareholders can be arranged via the Company Secretary.
The Director of External Relations updates each meeting of the executive committee on shareholder movements and
shareholder interaction.
Page 90
B4.4 Board evaluation and development
Board evaluation
The effectiveness of the Board, individual directors and the Board’s main committees is reviewed annually, with this year’s review
being internally facilitated as permitted by the Code. The Board also monitored progress on the recommendations from the external
review carried out in 2019. The next external evaluation will be conducted by the end of 2022.
2019 External evaluation findings – Progress report
Following last year’s externally facilitated evaluation, significant progress has been made on addressing actions arising out of the
evaluation. Progress highlights are set out in the table below:
Recommendation / action
Progress update
Board
Board composition and induction
Certain skills gaps to be filled through
future appointments with an emphasis on
public company experience.
Alison Morris was appointed to the Board as a non-executive director in
March 2020, with Peter Hill appointed a non-executive director following the
year end.
Skills matrix to be updated and regularly
reviewed by Nomination Committee, with
enhanced training on bespoke topics for
non-executive directors.
Updated skills matrices completed by individual Board members and revised
to reflect requirements for future non-executive director appointments. Results
were then calibrated by the Chair and CEO in conjunction with the Company
Secretary and People Director to inform specific training needs and future skills
required for the appropriate Board composition. A Board training plan was also
agreed and implemented.
Ongoing training was provided to the Board based on strategic priorities and
market developments. The Board also received deep dives from the business,
which provided greater access to senior management. See Board activities
section B3.3 for more details.
Succession planning
Succession plans to be enhanced with
an emphasis on recruiting for public
company experience and training internal
candidates.
A long-serving executive team requires
enhanced succession planning with
the depth and range of executive team
experience to be enhanced.
The Board will identify opportunities
to meet high-potential individuals
throughout the business as part of its
greater focus on succession planning.
Succession plans were enhanced.
ExCo members and high potential senior individuals across the organisation
were, and continue to be, given increased access to the Board. Additionally,
the Covid-19 updates to the Board that commenced in March 2020, included
updates from ExCo members on the pertinent points as regards the impact of
Covid-19 on their respective business areas, and the steps undertaken to ensure
operational resilience and risk mitigation.
The Nomination Committee agreed a proposal to further document a
Board succession plan for the CEO and CFO roles as well as tracking the
non-executive director development required to cover committee chair
responsibilities. Broader succession plans for ExCo, their direct reports and key
senior management roles are reviewed by the Nomination Committee on an
ongoing basis.
Page 91
Corporate Governance Recommendation / action
Progress update
Board
Agendas, papers and presentations
Maximising efficiency through condensing
presentations, challenging the need for
extraneous detail and ensuring all papers
are distributed well in advance
of meetings.
Revised templates to be used to ensure
a standard approach to presentations
with an appropriate limit on length.
Enhanced metrics for non-financial issues
to be produced, particularly in relation
to customers and employees. Work has
commenced on revising presentation
methods and styles and will continue
during the year.
Board and Committee interaction
Enhanced committee reporting to be
implemented. Greater challenge in
all meetings to be encouraged, with
sufficient time allocated for each topic
as appropriate.
Nomination Committee
Succession planning
Longer term succession planning for the
executive directors to be a key focus for
the year ahead.
This will be incorporated, in detail, into
the Committee’s annual timetable.
A new board paper template was agreed and implemented. The template
requires authors to focus their presentation on key areas eg authors are asked
to consider the impact of their proposals through a Section 172 (director’s
duties) lens.
The length and composition of papers is monitored on an ongoing basis and
feedback given to ensure they continue to be appropriate.
A new customer insights section has been incorporated into the CEO report
to the Board, together with enhanced data collated through customer surveys.
Customer NPS data has also been enhanced.
Additional People Forum governance and engagement was implemented,
and the outputs included in the People Director’s updates to the Nomination
Committee, as appropriate. ExCo updates to the Board during the pandemic
focussed on customer and employee engagement, in particular.
Phase 1 of the corporate governance restructure was finalised during the year,
which saw the establishment of the ERC. Phase 2 of the restructure will focus
on the committees that sit below the Performance ExCo and ERC, to ensure
continued enhancements to reporting.
An enhanced focus on Section 172 considerations in the new board paper
template and agendas encourages improved reporting via the committees to
the Board.
Together with improved reporting, more structured agenda planning and better
allocation of timings for items continues to facilitate enhanced challenge and
sufficient time for more pertinent and pressing matters to be discussed.
See succession planning section above.
Page 92
Recommendation / action
Progress update
Risk and Compliance Committee
Committee papers and segregation
Tighter procedure around committee
papers and discipline around the
separation between the committee and
main board should be adopted.
Work has commenced to revise
presentation methods and styles as
noted above, and this will be particularly
emphasised for the Risk and Compliance
Committee.
Following Phase 1 of the governance restructure implemented during the year,
the former executive risk sub-committees now report directly to the ERC rather
than RCC. An outcome of the restructure is clear delegation and reporting lines,
with defined separation between board and executive governance, ensuring a
clear division of responsibilities.
Additionally, this allows for appropriate information flows up the delegation line,
with a progressive decrease in detail / volume of information as appropriate eg
ERC assesses more detailed business risks than RCC, which focusses on more
strategic risks to the Group.
The revised governance structure will complement the proposed new
Enterprise-wide Risk Management Framework, which is in the process of being
designed and rolled out, with all risks appropriately mapped to the relevant /
most appropriate sub-committees.
Finally, the ERC reviews and approves all papers (subject to any delegated
authority) that are recommended to RCC and / or Board for formal approval.
2020 internal evaluation
The output of the 2019 external board evaluation was referred to in determining questions for this year’s evaluation which, again,
considered the performance of the Board, its committees, and all individual directors, including the Chair. In constructing the
questions, the following sources were also considered: i) the 2018 internal evaluation; ii) the Code; and iii) FRC guidance.
The Board evaluation considered composition, the balance of skills, experience, independence, knowledge and diversity, how the
Board works together and other points pertinent to its effectiveness. More detailed findings from the board evaluation included the
following, against which progress will be reported next year.
Issue
Board
IT and digital experience
The need for more IT and digital
experience was a suggestion raised by
some Board members.
Skills matrices
More formality and reference to skills
matrix required for future non-executive
director appointments.
Senior management contact
More contact with the senior executives
who are running the businesses is
desired.
Mentoring by non-executives
Recommendation / action
A discussion should take place around how this will be achieved, and the Board
is already considering options available to it.
The importance of the skills matrix in determining candidates in the future
should be emphasised.
Once a settled business rhythm resumes, the Board should arrange to receive
presentations from all ExCo members, which should be regularly scheduled into
the Board diary. This was the intention for the current financial year but logistical
challenges associated with Covid-19 at times prevented it.
Non-executive director mentoring of high
potential individuals was suggested.
The suggestion that non-executive directors could mentor high potential
individuals should be considered.
Page 93
Corporate Governance Separately, ongoing individual development opportunities
will be provided, as required, during the forthcoming financial
year. A training schedule is maintained by the Group’s Human
Resources department in conjunction with the Company
Secretary.
The non-executive directors have received presentations during
the year on various aspects of the Group’s activities to support
their on-going business awareness and development. The Board
has dedicated a number of days during the year to training and
will undertake additional training as required by the Group’s
strategy and operational needs.
Topics for board training sessions are recommended by the
Board, and provide for a balance of technical, governance and
professional development. All directors completed a variety of
regular training modules that are mandatory for all employees.
Further business insight / awareness sessions and deep dives
on particular areas are held regularly to enable non-executive
directors to continue to contribute effectively at board meetings
on account of their enhanced understanding of key topics.
B4.5 Whistleblowing
The Group has an established procedure whereby employees
can make disclosures regarding malpractice within the Group
on a confidential basis, in accordance with the Public Interest
Disclosure Act 1998 (‘PIDA’). The policy also makes provision
to ensure that no employee making such a disclosure suffers
any detriment by doing so. A whistleblowing service is operated
for the Group, at arm’s length, by a third-party charity, Protect.
This process was supervised by the Board during the year, in
accordance with Code requirements, and any amendments to
the policy required the approval of the Chair.
There is a right of appeal, currently to the Chair of the Board,
where the employee is dissatisfied with the outcome.
To ensure that the policy is embedded in the operations of the
Group all employees received training on the requirements of
PIDA and the Group’s policy during the year and were tested to
ensure their understanding. There were also internal publicity
campaigns promoting the whistleblowing procedures.
During the year ended 30 September 2020, a small number of
whistleblowing incidents were investigated. Each matter was fully
reviewed by the Whistleblowing Committee and subsequently
considered by the Board. The investigation found that none of
the incidents were material in nature. Whilst actions did arise
following the investigations, these were minor.
Individual director evaluations considered whether each
director continued to contribute effectively and demonstrated
commitment to the role eg through devoting sufficient time to
their Board duties. The evaluation also reviewed whether the
Board and committees continued to have the requisite expertise
to properly discharge their duties.
A review of the performance of the executive directors took
place at the Remuneration Committee meeting in September
2020 that considered remuneration packages for 2020/21.
The performance evaluation of the Chair of the Board was
carried out by the non-executive directors led by the SID (in the
Chair’s absence).
The Chair of the Board appraised the performance of the
non-executive directors during August 2020, meeting with
each non-executive director on a one-to-one basis to evaluate
their performance and agree development areas. These
conversations also provided an opportunity for the Chair to
obtain individual non-executive directors’ views on board
effectiveness. Results of these discussions were distributed to
the Board, who considered the results and a schedule of follow
up matters / actions at its meeting in October 2020. An action
plan was reviewed and agreed for implementation during the
next financial year, which will be refined and monitored during
the period.
At the Annual General Meeting the Chair will confirm to
shareholders, when proposing the re-election of any non-
executive director, that, following formal performance evaluation,
the individual’s performance continues to be effective
and demonstrates commitment to the role. The letters of
appointment of the non-executive directors will be available for
inspection at the Annual General Meeting.
Induction
All directors receive an induction training schedule tailored
to their individual requirements upon joining the Board. The
induction, which is designed and arranged by the People
Director, in consultation with the Chair and Company Secretary,
includes meetings with existing directors, senior management
and other key personnel, to assist new directors in increasing
their knowledge of the Group’s operations, management and
governance structures, as well as key issues for the Group.
During the year Alison Morris has had meetings with senior
employees in the Finance and Internal Audit areas to brief her
on the work of those areas and the particular issues within
those areas most relevant to her position as Chair of the Audit
Committee. This process was facilitated and supported by
Peter Hartill, the outgoing Chair of the Committee, as part of
the handover process and has continued throughout the year
end process.
Development
Further to the 2019 board evaluation, a skills matrix was
produced for completion by each board member, the aim
of which was to identify the key areas for ongoing board
development and to assess the necessary skills and experience
when considering future board succession planning. The output
from the skills matrix was reviewed by the Board and individuals
were given a further opportunity to update their self-assessment
scores in order to ensure consistency of approach.
Following this, a number of topics have been agreed for board
development over the coming year, in order to retain a diverse
balance of skills and increase coverage in key areas to support
oversight and delivery of the corporate plan.
Page 94
B5. Nomination Committee
B5.1 Introduction by the Chair
Dear Shareholder
The Nomination Committee is the channel used by the Board
to consider certain governance matters and sustainability issues. These are vital
issues for the Board and the Group and this has seen the Committee’s workload
increase rapidly over recent years, with additional formal duties taken on under the
new Code.
During the year the Committee has overseen the appointment of a new Audit
Committee Chair and Senior Independent Director. It also supervised the initial stages
of the process to appoint a new Chair of the Risk and Compliance Committee, which
was finalised after the year end.
These roles are central to the governance of the Group and the primary aims of the
Committee in recruiting for them were to ensure that the person appointed has the
requisite skills and knowledge for the role, benchmarked against the board skills
matrix; that there was a strong cultural fit with the Group; and that an orderly handover
process would be achieved. When determining the outcome for each of these
appointments, consideration was also given to the diversity of the Board as a whole.
These appointments further strengthen the diversity of the Board as well as provide it
with the skills it requires to oversee the future strategic development of the business.
The Committee’s remit also covers people-related sustainability issues, with the
introduction of employee voice arrangements and the Group’s EDI network in
the period being particularly noteworthy. I look forward with anticipation to the
contribution these initiatives will make to the Group’s strategy and culture in
the future.
Overall, I believe the Committee has enjoyed a year of positive achievement and fully
satisfied its remit from the Board.
Fiona Clutterbuck
Chair of the Board and the Nomination Committee
3 December 2020
B5.2 Operation of the
Committee
The Nomination Committee is chaired by the Chair of the Board
and includes four independent non-executive directors. The
Committee’s role is to ensure that there is a formal, rigorous
and transparent procedure for the appointment of new
directors to the Boards of the Company and of Paragon Bank
PLC; to lead the process for board appointments and make
recommendations to the Board. Ultimate responsibility for any
appointment remains with the Board. Its role also includes:
Keeping under review the structure, size and composition
of the Board (including its skills, experience, independence,
knowledge and diversity) and making any recommendations
it deems necessary to ensure that it is effective and able
to operate in the best interests of shareholders and other
stakeholders
Considering re-appointment of directors, re-election of
directors and the independence of non-executive directors
Ensuring that plans are in place for orderly succession
to positions on the Board and senior management and
overseeing the development of a diverse pipeline for
succession to the Board and senior management roles
•
•
•
•
The Committee also conducted a search for a new Risk and
Compliance Committee Chair to replace Finlay Williamson
who will step down from the Board on 31 December 2020. As
part of the overall board succession plan and following the
Board triennial external evaluation in July 2019, the Committee
identified that the Board would benefit from recruiting an
experienced non-executive director who would also bring senior
executive experience with a strong customer, operational and
technology focus.
In October 2020, following a number of interviews and after
receiving regulatory approval, the Group announced that
Peter Hill was appointed to the Board with immediate effect and
will become Risk and Compliance Committee Chair effective
from 31 December 2020 following a period of transition and
handover. Peter brings with him a wealth of experience in
financial services and a proven track record in risk oversight,
gained during his executive and non-executive career. Peter’s
experience and other appointments are set out in the board
profiles in Section B3.1.
As it has done for a number of years the Committee considered
the re-appointment of the serving directors and recommended
to the Board that resolutions for their re-appointment should be
proposed at the AGM.
Executive appointments
Overseeing the Group’s initiatives on management of
diversity, with a particular focus on its participation in external
programmes, such as the Women in Finance Charter and
reporting such as gender pay reporting
The Committee oversaw appointments to the Executive
Committee during the period and ensured that the search and
selection processes were robust and that the candidates had
demonstrably relevant skills and experience.
•
Monitoring workforce engagement and seeking employee
feedback on behalf of the Board
The membership of the Committee and the record of their
attendance at meetings is given in Section B3.3.
B5.3 Matters considered
by the Committee during
the year
Board appointments
During the year, following a rigorous external search the
Committee appointed a new Audit Committee Chair, Alison
Morris, to succeed Peter Hartill who retired in September 2020.
Alison followed a structured induction and handover both prior
to starting her role and in the first few months and this will
continue throughout her first year of appointment.
Hugo Tudor, an independent non-executive director, was
appointed as Senior Independent Director (‘SID’) in July 2020,
due to Peter Hartill’s planned retirement. The Committee
undertook a review of both internal and external candidates for
this role and determined that Hugo’s experience and knowledge
was the best fit for this appointment. This determination was
based on a series of external discussions with potential external
candidates and a ‘role play’ scenario whereby Hugo deputised
for the Chair at a Board meeting, as if the Chair was unavailable,
this being a role that might potentially fall to the SID in certain
circumstances.
Page 96
Dave Newcombe was appointed as Managing Director -
Commercial Lending in October 2019. He has been a member of
the Executive Committee since 2015, having held a number of
senior positions across the Group throughout his 32 year career.
Marius Van Niekerk joined the Group and the Executive
Committee in October 2019 as General Counsel and Company
Secretary. He brings extensive board, regulatory and legal
experience to the Group.
Richard Rowntree joined the Group and Executive Committee
in January 2020, succeeding John Heron as Managing Director
– Mortgages. Richard was previously the Managing Director of
Mortgages for Bank of Ireland and he has almost three decades
of retail banking leadership experience across five major
UK banks.
Ben Whibley was appointed as CRO and member of the
Executive Committee in April 2020, following Malcolm Hayes’
departure. Ben joined the Group in 2015 and was previously
CRO of Paragon Bank PLC and Deputy CRO of the Group. Ben’s
appointment to the role of CRO illustrates the effectiveness
of the Group’s succession planning and senior leadership
development programme.
Succession planning
Succession plans for the Board were reviewed during the
financial year. The tenure of non-executive directors is monitored
by the Committee. Emergency cover is in place for the executive
directors and their direct reports.
The Human Resources department has a wider succession
development plan for senior management roles across the
Group, prioritising those positions likely to require recruitment
within the next five years. The Committee has received reports
during the year on the Group’s senior leadership development
programme and will continue to monitor this on a regular basis.
Further information can be found in Section A6.3.
During the year the Committee reviewed the Group’s gender pay
report and supporting analysis. It closely monitored changes
since the previous report and considered the underlying
challenges with the reporting rules in the management structure
and in the nature of strategic developments in the Group that
make balancing gender pay difficult, as it is for other financial
services firms. This will continue to be a focus for the Committee.
As is clear from the existence of the Women in Finance
initiative, obtaining full diversification of gender in the financial
services sector is particularly challenging. Similar issues apply
to advancing diversity of ethnicity in the sector. The targets
adopted reflect the Board’s commitment to ensuring that
diversity considerations throughout the Group are wider than
gender. The Committee regularly reviews the Group’s Equality,
Diversity and Inclusion Policy to ensure good practice is
achieved and that policies are compliant with the 2018 Code
requirements.
The Group’s diversity policies were updated during the year and
are described in Section A6.3. Information on the composition
of the workforce, including the gender balance of those in senior
management and their direct reports is given in Section A6.3 and
the Group’s gender pay gap statistics are also discussed in
that section.
Workforce engagement
The Committee has received regular updates on workforce
engagement and board members have engaged directly with the
workforce throughout the year through both formal and informal
channels. The Group has run regular employee surveys during
the year in response to the Covid-19 pandemic and the People
Director provides updates on the results of these to
the executive.
Additionally, non-executive directors have attended People
Forum meetings to discuss topics including executive pay and
reward, pay and reward for the wider workforce and how the
Group has managed the impact from Covid-19 from customer
and employee perspectives. These meetings provide employees
with an opportunity to ask questions of board members and
provide direct feedback. These meetings will continue to be a
regular feature of the board calendar.
Risk mitigation for the loss of senior employees will continue to
include the ongoing development of employees, as well as work
to further validate potential candidates for senior positions.
Development work on potential candidates occurs with those
employees remaining in their current roles, as this training is
undertaken so to minimise business impact while ensuring that
candidates are enabled to undertake a more senior role in
due course.
The Group’s preference, where possible, is that internal
candidates are developed and supported to undertake senior
roles as this assists in the ongoing maintenance of its strong
culture and values. It also acknowledges the benefits which
can arise from the hire of strong external candidates to add
experience and bring a fresh perspective to strategic thinking. In
addition, the senior leadership development programme is also
focussing on increasing the diversity of the Group’s talent pool in
support of the overall approach to equality and diversity.
Board skills matrix
The Committee considered a revised skills matrix at its
September 2019 meeting initially following the outputs from
the Strategy Event in June 2019. This was further reviewed and
updated by the Committee in February 2020 and subsequently
approved by the Board.
The matrix reflects the strategy of the Group becoming
a technology-enabled specialist bank and includes skills
consideration on such matters as demonstrating sound
knowledge of the UK retail banking sector; understanding capital
requirements and liquidity models; insight into the application of
technology in a financial services environment; customer insight
and understanding the specialist lending sector.
The board skills matrix is reviewed annually by the Committee
and forms the basis for future succession plan requirements.
Diversity
The Group recognises the importance of diversity, including
gender diversity, at all levels of the organisation. The Group
strongly values diversity on the Board, not only of gender, but
also of experience and background, recognising the contribution
such diversity can make towards achieving the appropriate
balance of skills and knowledge which an effective board of
directors requires. The Board is proud to have achieved 33%
female representation at Board and senior management level, in
alignment with the Hampton-Alexander Review targets.
The Board has always believed, and continues to believe, in
appointing the best person to any role regardless of gender or
other points of diversity and this belief is reflected and operates
across all appointments made by the Group. However, the Board
recognises that measurement and publication of targets can
assist in driving forward change and developing a talent pipeline
in a sector where gender diversity has been difficult to achieve.
For this reason, the Group signed up to HM Treasury’s Women
in Finance Charter initiative during 2016 and agreed targets in
respect of gender and ethnic diversity amongst the Group’s
senior management.
The Group’s target is to achieve 35% female representation
at senior management level, using the Hampton-Alexander
measure, by January 2022. By the end of September 2020 33.9%
of senior roles had female incumbents. The Group is committed
to ensuring it meets its targets by 2022 and is endeavouring to
make progress towards this target. The recently formed Equality,
Diversity and Inclusion Network is an important initiative to help
the Group achieve this target, and the network will regularly
update the Committee on its work.
Page 97
Corporate Governance Our responsibility
is to ensure
that financial
information
published by the
Group properly
presents its
activities to all
stakeholders...
Alison Morris,
Chair of the Audit Committee
Page 98
B6. Audit
Committee
B6.1 Statement by the Chair
of the Audit Committee
Dear Shareholder
This is my first report to you as Chair of the Group’s Audit
Committee and it marks a year in which the challenges faced
by the business, both in its accounting and its financial control
systems, have been some of the most complex in recent years.
While these challenges have been shared by much of the UK
corporate sector, that does not lessen their impact, nor the
calls on the Committee to ensure that these have been properly
addressed by the business on behalf of all of the stakeholders.
As a committee, our responsibility is to ensure that financial
information published by the Group properly presents its
activities to all stakeholders and other interested parties in a
way that is transparent, useful and understandable, as well as
overseeing the effective delivery of both external and internal
audit services. The impact of the Covid-19 pandemic in the
year has increased the complexity of making any accounting
judgement based on future expectations as well as necessitating
changes in working practices around the Group which internal
audit have had to evaluate.
From an accounting standpoint the issue which engaged
the largest part of the Committee’s attention was the level
of impairment provision appropriate for the Group’s loan
assets under IFRS 9 and the way this is presented in this
annual report. The crisis highlighted the inherent weakness of
the model-based approaches used throughout the financial
services industry in situations outside the range of previously
observed data, however good the modelling. The longer term
effects of government and regulatory relief for loan customers
are uncertain, while the short-term effects distort many of
the measures generally used to monitor credit quality, such
as arrears levels and credit scores. Overall, the lasting impact
of Covid-19 on the UK economy and therefore on the future
financial health of the consumers and SMEs who are the Group’s
principal customers is impossible to predict accurately.
All of these factors have meant that management judgement has
had a more significant role than usual in the determination of
appropriate levels of provision, and the Committee has taken its
role to examine and challenge those judgements very seriously,
including the insertion of an extra meeting during the early part
of the crisis.
The Committee has also carefully considered the impact of the
crisis on the carrying value of goodwill assets and on the going
concern status of the Group, noting that the capital disciplines
which it is subject to under banking regulation have left it better
placed than businesses in other industries to address this issue.
The changes in working practices and systems necessitated by
Covid-19, such as the rapid transfer to home working and the
introduction of CBILS and BBLS, meant that I was involved in
a rapid reprioritisation of the work of internal audit to ensure
that sufficient new controls had been properly devised and
implemented to deal with these changes and protect the risk
environment. The Committee was pleased with internal audit’s
findings on these areas. I am happy to be able to confirm that the
Group was not forced to divert internal audit resource to other
areas as a result of Covid-19, as many other UK companies have
done, according to the Chartered Institute of Internal Auditors
('CIIA').
All of these issues required the detailed engagement of the
Committee and I would like to thank my colleagues for their input
and their level of engagement on these matters.
In the coming financial year ending 30 September 2021 the
Committee’s main priorities will include:
•
•
•
•
Monitor the continuing developments of the IFRS 9 response
to Covid-19 as economic outcomes become clearer, customer
behaviour starts to manifest itself and regulators provide
further guidance
Continued monitoring of the Group’s wider IFRS 9 impairment
processes in the light of best practice developments and
actual outturns
Considering ongoing developments in the regulatory
environments surrounding accounting, reporting and
auditing and ensuring the Group is well positioned to respond
appropriately
Ensuring that the Group’s control processes evolve alongside
developments in the business, whether generated through
Covid-19 or otherwise
•
Commencing the annual process of formal review of the need
for an audit tender
Finally I would like to thank Peter Hartill, my predecessor as
Chair of the Committee, on behalf of myself and the rest of the
Committee for his contribution to the Group over nine very
eventful years, and for the support he has given me during the
transition period. We wish him all the best for the future.
I commend this report to shareholders and ask you to support
the resolutions concerning the reappointment of KPMG LLP
(‘KPMG’) as auditors and their remuneration at the AGM in
February 2021.
Alison Morris
Chair of the Audit Committee
3 December 2020
Page 99
Corporate Governance B6.2 Operations of the
Committee
The Audit Committee currently comprises four independent
non-executive directors of the Company whose relevant
experience is set out in Section B3. In addition, Peter Hartill
was a member of the Committee until his resignation from the
Board on 30 September 2020 and Alison Morris joined the
Committee on 26 March 2020. Alison Morris succeeded Peter
Hartill as Chairman of the Committee, chairing her first meeting
in September 2020, the overlap of their terms on the Committee
facilitating a smooth handover.
The terms of reference of the Committee include all matters
indicated by Disclosure and Transparency Rule DTR 7.1 and the
Code. These terms of reference were most recently updated in
September 2020 and are available on the Group’s website. The
Committee’s key responsibilities include:
• Monitoring the integrity of the Group’s financial reporting
•
•
•
Reviewing the Group’s risk management and internal financial
control systems
Monitoring and reviewing the effectiveness of the Group’s
internal audit function
Monitoring the relationship between the Group and the
external auditor
It also provides a forum through which the Group’s external and
internal audit functions report to the non-executive directors.
The Internal Audit Director reports to the Chair of the
Committee. She attends all meetings of the Committee and also
reports regularly to the Risk and Compliance Committee.
The Committee considers that, as a whole, it possesses the
competence relevant to the sector in which the Group operates
which the Code requires. Alison Morris and Peter Hartill have
competence in accounting and auditing while other committee
members have experience in various aspects of the financial
services industry.
The Committee meets at least four times a year and has an
agenda linked to events in the Group’s financial calendar.
Meetings generally take place before the half-year and year
end reporting dates in March and September and before the
approval of results in May and November. The Committee
normally invites the Chair of the Board, the executive directors,
Chief Risk Officer, Group Financial Controller, Internal Audit
Director and a partner and other representatives from the
external auditor to attend meetings of the Committee, although
it reserves the right to request any of these individuals to
withdraw.
For part of each meeting the Committee meets separately with
representatives of the external auditor and with the Internal
Audit Director without any other persons present.
During the year ended 30 September 2020, the Committee
met five times, the additional meeting being added to consider
Covid-19 related accounting issues in more depth. Its principal
activities were as follows:
•
•
The review of the annual and half-yearly financial statements
to ensure these properly present the Group’s activities in
accordance with accounting standards, law, regulations and
market practice
The consideration of the appropriateness and application of
the Group’s accounting policies for the recognition of interest
income and loan impairment amongst other significant
accounting issues
Page 100
•
•
•
The review of other financial information published by the
Group, such as Pillar III disclosures required by banking
regulations
Review of the terms of reference of the Committee and
approval of revised terms
Consideration of the Group’s readiness to address other
forthcoming accounting changes which will affect it
The Committee approves and monitors progress against
the Group’s Internal Audit Plan. It assesses the adequacy of
resources available to the internal audit function and it receives
reports of internal audit reviews conducted across the Group.
From time to time, when there have been major changes in the
Group’s accounting policies or audit arrangements in progress,
the Chair of the Committee at the time has held meetings with
shareholders. Future meetings with investors to discuss such
matters will be organised if and when required.
Details of the Committee members’ attendance at meetings
and the Board’s evaluation of the Committee’s effectiveness are
given in Section B3.3.
B6.3 Significant issues
addressed by the Committee
in relation to the Financial
Statements
The Committee considers whether the accounting policies
adopted by the Group are suitable and whether significant
estimates and judgements made by the management are
appropriate. In evaluating the Group’s financial statements for
the year ended 30 September 2020 the Committee considered
particularly:
•
•
•
•
•
•
The levels of impairment provision against loan assets and,
in particular, the economic impact of the Covid-19 pandemic
on both customer credit and the operation of provisioning
methodologies
The calculation of interest income under the Effective
Interest Rate (‘EIR’) method for both internally originated and
purchased loan assets and the Group’s borrowings
The requirement for any impairment provision against the
purchased goodwill carried in the Group’s balance sheet
The valuation of the deficit in the Group’s defined benefit
pension scheme
The viability statement which the Group is required to make
under the Code
The Group’s capital and funding position and the Group
forecasts for future periods and their impact on the going
concern assessment for the Group
In each case the Committee considered whether these matters
were clearly and sufficiently disclosed in the accounts with
appropriate sensitivities shown for all significant estimates.
The Committee also considered whether this Annual Report,
taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess
the Group’s performance, business model and strategy.
In each of these areas the Committee was provided with papers prepared by management and reviewed by the external auditor
discussing the position shown in the accounts, the underlying market conditions and assumptions and the methodology adopted
for any calculations. The papers also detailed any changes in approach from previous periods. These were reviewed in detail and
discussed with the relevant group employees and the results of this work were considered, together with the results of testing by the
external auditor. There were no material or significant disagreements between the management and the external auditor.
Particular matters which the Committee focussed on in each of these areas were:
Matter
Particular areas of focus
Loan impairment
IFRS 9 requires that companies provide for expected future credit losses on any financial asset held on
the balance sheet on the amortised cost basis.
As a forward-looking measure, the determination of such provisions is heavily dependent on the use of
judgement and estimation techniques to evaluate the likelihood of loss on accounts and the potential
amount of any loss, should one occur.
In the current economic environment dominated by Covid-19 this consideration of future credit losses
is particularly complex.
In order to satisfy itself that the process applied by the Group resulted in an appropriate level of
provisioning in accordance with IFRS 9, the Committee considered particularly:
• The methods used to estimate probabilities of loss and potential losses
• The assumptions used as inputs in these calculations
• The economic projections used in deriving future loss expectation
•
•
•
The definitions of significant increase in credit risk, credit impairment and default for expected
credit loss (‘ECL’) purposes
The appropriateness of the calculated provisions in the light of government interventions in the UK
lending market and the economy more generally
The appropriateness of adjustments made to calculated amounts to compensate for factors not
fully addressed in the modelling
To substantiate these decisions, the Committee considered actual results in the year compared
to those predicted by the impairment methodology and the continuing relevance of historical
information used in the process based on present economic conditions, lending and account
administration practices.
In respect of the impact of Covid-19, the Committee considered particularly the extent to which
modelled approaches based on past history may not be relevant in current economic conditions and
the implications for impairment calculations of Covid-19 reliefs.
A particular focus continued to be given to the Group’s receiver of rent portfolios and the level to
which their ultimate loss levels accorded with expectations. The Committee also reviewed the
appropriateness and adequacy of additional provisions made for particular cases and other factors not
allowed for in the impairment process.
Further information on these estimates can be found in note 64a to the accounts, the impairment
charge for the year and the movements in provision for impairment are shown in note 19.
The Group’s exposure to credit risk is discussed in note 56.
Page 101
Corporate Governance Matter
Particular areas of focus
Interest income
and expense
recognition
As required by IFRS 9, the Group recognises income from loan balances on an EIR basis, which is
intended to produce a constant yield throughout the behavioural life of the loan, taking account of
such matters as costs of procuration, and initially fixed or discounted interest rates. The calculation
therefore rests on assumptions about the future behaviour of the Group’s customers. A similar
approach is taken to assessing interest on borrowings, where redemption profiles and anticipated
refinancing dates influence expense recognition.
The Committee assessed the appropriateness of the assumptions made, considering performance of
the portfolios against expectations and the impact of changes in product specifications, together with
the replacement of certain spreadsheet models with more sophisticated loan-level modelling.
Redemption profiles used in the modelling of mortgage books and the availability of alternative
offerings in the market were areas of particular focus.
For acquired assets which were considered credit impaired on purchase, where valuations are based
on expected cash flows, the potential economic impacts of Covid-19 on customer behaviour were
carefully considered.
Further information on these estimates can be found in note 64b to the accounts, and the interest
income and expense recognised on this basis is shown in notes 4 and 5.
Goodwill
impairment
The Group is required to assess, at least at the end of the year, whether the carrying value of the
acquired goodwill balance in its accounts, which is not subject to amortisation under IFRS, remains
appropriate or whether any impairment has occurred. This includes both newly acquired goodwill and
goodwill arising from previous acquisitions. Due to the impact of Covid-19 this was also considered in
full at the half-year.
In considering whether any impairment of goodwill had occurred the Committee considered particularly
the Group’s forecasts for the cash flows to be generated by the acquired businesses and their
reasonableness in the light of current trading performance and the Group’s strategy for these operations.
The potential impairment of goodwill is discussed in notes 64c and 26.
Defined benefit
pension
obligations
The deficit on the Group’s defined benefit pension plan is valued in accordance with IAS 19, which
requires an actuarial valuation of the plan liabilities. Such a valuation is based on assumptions including
market interest rates, inflation and mortality rates in the Plan.
In order to satisfy itself as to the appropriateness of these assumptions, the Committee considered
their derivation and the market data underlying them. These were compared to market benchmarks
and advice from the Group’s actuarial advisers. The Committee also considered benchmarking data
provided by the external auditor.
Further information on the Plan deficit, the basis of valuation and the assumptions underlying it
can be found in note 53 to the accounts, along with an analysis of sensitivities to the more
significant assumptions
Viability statement
The Board is required by the Code and the Listing Rules to make a viability statement in the Annual
Report. The Committee has been asked to express an opinion to the Board as to whether this
statement could properly be made.
The Committee considered aspects of the work of the Board and its various committees which
addressed the Group’s business model, risk profile, access to funds and future strategy. They also
considered guidance issued by the FRC and stress testing which had been carried out in the year,
particularly focussing on the impact of Covid-19 both on the Group’s business and the levels of
potential variability in the forecasting.
A fuller discussion of the directors’ consideration of the viability statement is set out in Section A5.
Page 102
Matter
Particular areas of focus
Going concern
The Board is required by the Code and the Listing Rules to make a going concern statement in the
Annual Report. The Committee has been asked to express an opinion to the Board as to whether this
statement could properly be made.
The Committee considered the Group’s detailed forecasts and the implicit cash and capital
requirements. The Committee discussed availability of funding, potential stress events and the impact
of the economic environment, including the uncertainties created by the impact of Covid-19 on the UK
economy generally and the Group’s operations in particular.
A fuller discussion of the directors’ consideration of the going concern statement is set out in
Section A5.
Internal control
and risk
management
The Board is required to make statements in the Annual Report and Accounts relating to the Group’s
systems of internal controls and risk management.
The Committee considered an evaluation prepared by the Risk function, together with the findings
of internal audit reports in the year and its own engagement with the management information of the
Group and the executive directors. On the basis of these activities the Committee concluded that it
could advise the Board that the statements were appropriate.
The Board statements on internal control and risk management are set out in Section B10.
Fair, balanced and
understandable
The Board is required by the Code to state whether, in its view, the Annual Report is fair, balanced and
understandable. The Committee has been asked to express an opinion to the Board as to whether this
statement could properly be made.
The Committee considered the draft Annual Report for the financial year, as a whole, satisfying itself
that the process for the preparation and review of its various sections, was appropriate. The Committee
especially focussed on areas where disclosure requirements had changed or where new activities or
considerations were to be reported on.
For the current financial year this included particularly the presentation of the impact of Covid-19 on the
Group’s business and results.
Based on this exercise, and the Committee’s own understanding of the business in the year, it
determined whether the Annual Report, overall, portrayed the Group’s activities, position and
results properly.
The Committee was able to reach satisfactory conclusions on all of these areas and therefore resolved to commend the Annual
Report to the Board for approval, and to advise the Board that it can conclude that the Annual Report is fair, balanced and
understandable.
Earlier in the year the Committee had considered each of these areas, where applicable, in the same manner in concluding that it
could commend the Group’s half-yearly financial report for the six months ended 31 March 2020 to the Board for approval.
The Committee's consideration of the financial statements for the year ended 30 September 2019, which took place in the year under
review, is discussed in the Audit Committee report for that year.
The CRR requires that a firm’s Pillar III report is subject to the same review processes as its annual report and accounts. The
Committee therefore reviewed the Group’s Pillar III report, considering whether it included all material matters required by the CRR
and its supporting requirements, and whether it formed a fair representation of these matters.
Page 103
Corporate Governance B6.4 External Auditor
The Committee is responsible for assessing the effectiveness
of the external audit process, for monitoring the independence
and objectivity of the external auditor and for making
recommendations to the Board in relation to the appointment
and remuneration of external auditors. The Committee is also
responsible for developing and implementing the Group’s policy
on the provision of non-audit services by the external auditor,
which was reviewed in the year.
Audit tendering
The Statutory Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive Tender Processes
and Audit Committee Responsibilities) Order 2014 (the ‘Order’)
requires that only the Committee can agree the fees and terms
of service of the external auditors, initiate and supervise a
tendering process or recommend the appointment of an external
auditor to the Board following a tender process. The Group has
complied with the requirements of the Order during the year.
KPMG were appointed as auditors, following a competitive tender
process, with effect from the year ended 30 September 2016 at
the Annual General Meeting in February 2016. The financial year
ended 30 September 2020 is the fifth reported on by KPMG.
Simon Clark has served as engagement partner since the year
ended 30 September 2018. He has been involved in the audit
assignment since KPMG’s appointment.
The Group is therefore not subject to a legal requirement to
undertake an audit tender until ten years have elapsed. After the
completion of the fifth audit which was not subject to a formal
tender process (the year ending 30 September 2021), and in
each subsequent year thereafter, the Committee is required
to report to shareholders its conclusions on whether a further
tender is in the Group’s interest at that time. The Committee will
be conducting a formal review in line with this requirement in the
coming financial year and will report its findings to shareholders
in next year’s Audit Committee Report.
Other than the legal requirements of the Order and the general
constraints imposed by the current structure of the UK audit
market, the Committee has not identified any factors which
might restrict its choice of external auditor.
Audit effectiveness
The Committee has considered the effectiveness of the external
audit for the year ended 30 September 2020 and the Group’s
relationship with the external auditor, KPMG, on an on-going
basis, and has conducted a formal review of the effectiveness of
the annual audit before commending this Annual Report to the
Board. This review consisted of the following steps:
•
•
•
A list of relevant questions was considered by senior
management who submitted their responses in writing to the
Committee in advance of the meeting convened to consider
the Annual Report
The Committee members considered their experience of the
audit process in advance of that meeting
At the meeting the Committee discussed the results of the
exercise with the senior financial management of the Group,
without the external auditor present
•
The Committee then addressed the evaluation, as
appropriate, with the external auditors
The Committee was able to conclude, on the basis of this
exercise and its experience over the year, that the external
audit process remained effective and that the auditor was
independent and objective, up to the signing date of this report.
A further review will be carried out following the completion of
audit procedures on all Group companies and reported on in
next year’s Annual Report.
The effectiveness review addressing the conduct of the 2019
audit, undertaken at the time of approval of the Group’s 2019
consolidated accounts, was updated once the external audit
process for all Group companies had been completed. This
affirmed the original conclusion, that the external audit was
independent and objective and that the audit process was
effective for that financial year.
In conjunction with the effectiveness review, before
recommending the re-appointment of the external auditor,
the Committee must consider whether they are able to
provide the required service to the appropriate standard and
are independent of the Group. To this end, the Committee
considered whether KPMG’s understanding of the Group’s
business, their access to appropriate financial services and
regulatory specialists within their firm, both locally and nationally,
and their understanding of the sectors in which the Group
operates were appropriate to the Group’s needs.
As part of this exercise the Committee also considered the
transparency report presented by the external auditor and the
FRC’s most recent audit inspection review on KPMG, published
in July 2020. The Committee noted particularly the FRC's
concerns regarding KPMG’s auditing of banks and discussed
these findings and the steps being taken by the firm to address
them with the audit partner and other representatives.
As a result of these exercises the Committee concluded that it
would recommend to the Board that a resolution to reappoint
KPMG as external auditor for the year ending 30 September 2021
should be proposed at the forthcoming AGM.
Independence policy
Both the Committee and the external auditor have safeguards
in place to avoid any compromise of the independence and
objectivity of the external auditor. The Committee considers
the independence of the external auditor annually and the
Group has a formal policy setting out measures to ensure that
independence is preserved. The policy is designed to ensure
that neither the nature of the service to be provided nor the level
of reliance placed on the services could impact the objectivity
of the external auditor’s opinion on the Group’s financial
statements.
In September 2020 the policy was revised to be consistent with
the FRC Ethical Standard for auditors. The current policy limits
the use of its external auditor to supply non-audit services to
those services where the use of the external auditor is expected
or mandated by legislation or regulation. The Committee must
approve any engagement of the external auditor for non-audit
work, except where the fee involved is clearly trivial. The policy
also sets out rules for the employment of former employees of
the external auditor and procedures for monitoring such persons
within the organisation.
The Committee reviews, on a regular basis, the levels of fees
paid to all major accounting firms and the nature of any ongoing
relationships with the Group to identify any matters which might
impact on those firms’ ability to tender for the group audit at any
future date.
Page 104
Fees paid to the external auditor
Fees paid to the external auditor are shown in note 10 to the
accounts. No services other than services required to be
provided by external auditors by legislation or regulation, such
as the review of half-yearly financial information and profit
verification for regulatory purposes, were provided by KPMG.
Audit fees of Group entities for the year have increased by 8.6%
to £1,468,000 (2019: £1,352,000). This was a result of an increase
in scope in certain areas and inflation in professional services
fees more generally.
The EU Audit Regulation (which is directly applicable in the UK
for the time being) contains a 70% cap on non-audit fees for
services provided to EEA Public Interest Entities (‘PIEs’). For
this purpose, non-audit services includes audit-related services
other than those services required by EU or national law such as
reporting on interim financial information and regulatory profit
confirmations, which are required by non-statutory regulations.
The calculation applies for the first year commencing after
June 2019 which means that this restriction applies from the
current financial year.
Non-audit fees paid to the auditor for the year ended
30 September 2020, should be no more than 70% of the average
of the audit fees for 2017, 2018 and 2019, £929,000. Fees were
paid to KPMG, the Group’s external auditor, such for non-audit
services during the year were £168,000 (2019: £112,000), well
within the cap. All of these fees were for audit related services.
The Group actively considers other providers for the type of
non-audit services typically provided by accounting firms. It
maintains on-going relationships relating to tax, remuneration
and regulatory advice with firms other than the external auditor’s
firm and considers discrete projects on a case-by-case basis.
The Group has engaged with a number of firms, including
some outside the ‘big four’ largest audit firms in considering
appointments for assignments during the year, assessing each
firm’s appropriateness for the particular assignment before an
appointment was made. Fees paid to audit firms (excluding VAT),
excluding the Group audit and related fees can be analysed as
shown below:
Auditors – KPMG
Other big four firms
Other firms
2020
£000
-
2019
£000
-
3,043
2,393
-
6
3,043
2,399
the adequacy of Group’s responses to them. The Committee also
ensures that the internal audit function has adequate standing
and is free from management or other restrictions which may
impair its independence.
The roles and responsibilities of Internal Audit are set out in the
Internal Audit Charter which is reviewed and approved by the
Committee on an annual basis. A copy of the Charter is available
on the Group’s website.
Operations
During the year, the Committee considered and approved the
annual internal audit plan, which is based on an assessment
of the key risks faced by the Group. Progress in respect of the
plan is monitored throughout the year. With the approval of the
Committee, the audit plan may be revised during the year, based
on the ongoing assessment of the key risks or in response to
the requirements of the Group. In 2020, the plan was subject
to several revisions in response to Covid-19, with internal audit
reviews added to the Plan to confirm the ongoing operation of
key controls during this period.
The Internal Audit Director provides the Committee with regular
assessments of the skills required to conduct the Plan and
whether the internal audit budget is sufficient to recruit and
retain staff, or to procure other resources, with relevant expertise
and experience. The Committee assesses, on an ongoing basis,
whether the internal audit function has sufficient and appropriate
skilled resources to complete the plan and, on an annual basis,
formally confirms that it is satisfied that these resources are
appropriate.
During the year, several technical and specialist reviews
have been co-sourced under an agreement with a third-party
accounting firm on a subject matter expertise basis where it
was deemed by the Internal Audit Director that such skills would
complement and develop those of the internal team.
The Internal Audit Director met regularly throughout the
year with the Chair of the Committee to discuss progress
against plan, outstanding agreed actions, and departmental
resourcing. Since the appointment of Alison Morris as Chair of
the Committee, these meetings have formed part of the Chair’s
overall induction plan. Ahead of finalisation of the audit plan for
the year ending 30 September 2021, the Chair of the Committee
met with the Internal Audit Director to discuss audit planning
priorities, key business risks and assess current resourcing.
All internal audit reports are circulated to the Board. Significant
findings of internal audit reports and management’s responses
are discussed at meetings of the Committee throughout the
year. Overdue actions graded medium or above are reviewed and
challenged at both the Committee and the Risk and Compliance
Committee.
The Group maintains relationships with all of the major
accounting firms and considers a variety of providers for this
type of assignment.
Effectiveness
B6.5 Internal Audit
The Committee is responsible for considering and approving the
remit of the internal audit function, approving the internal audit
plan, and ensuring it has adequate resources and appropriate
access to information to enable it to perform its function
effectively and in accordance with the relevant professional
standards. It also receives the functions reports and evaluates
The Committee assesses the effectiveness of the internal audit
function by reference to standards published by the Chartered
Institute of Internal Auditors. In 2020, the Committee considered
the output of an internal quality assessment prepared on this
basis and concluded that the function was satisfactory.
An external quality assessment (‘EQA’) was last commissioned in
2018 to benchmark internal audit activities against best practice
and peers. As a matter of policy, the Committee intends to
commission an EQA at least every five years.
Page 105
Corporate Governance Paragon’s overall
performance has
demonstrated
its fundamental
resilience during
this challenging
year...
Hugo Tudor,
Chair of the Remuneration Committee
Page 106
B7. Remuneration
Committee
This report covers the activities of the Remuneration Committee for the
year ended 30 September 2020 and sets out the remuneration details
for the executive and non-executive directors of the Company. It has
been prepared in accordance with Schedule 8 of The Large and
Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008, as amended, and the principles of the Code.
This report consists of the Statement by the Chair of the Committee
(B7.1) and the Annual Report on Remuneration (B7.2). The policy
summary tables extracted from the detailed Remuneration Policy are
reproduced for reference as Section B7.3.
The full Remuneration Policy is set out in the Annual Report and
Accounts for the year ended 30 September 2019, a copy of which can be
found at www.paragonbankinggroup.co.uk.
B7.1 Statement by the
Chair of the Remuneration
Committee
Dear Shareholder
Group’s remuneration philosophy
The philosophy underpinning Paragon’s Remuneration Policy
seeks to recognise fairly the contributions of all employees.
This philosophy remains unchanged and continues to
apply throughout the organisation, with oversight from the
Remuneration Committee. The aim, for executive directors and
senior management, is to ensure that their rewards are aligned
with the interests of shareholders and other stakeholders. This is
achieved through both the Group’s short and long-term strategic
objectives, whilst the policy also meets the core objectives of
motivating and retaining employees.
In addition to shareholder and investor groups, as Chair of the
Committee, I engage with employees specifically on executive
remuneration and also on wider pay policy. These discussions
are mainly focussed through the Group’s People Forum and
are helpful in providing constructive feedback for Committee
members as well as giving the opportunity for me to explain the
rationale for Committee decisions to the wider workforce.
Exemplary leadership throughout the pandemic has been shown
by the senior management team and it has been apparent that
the longevity of the executive directors and other members of
the senior team has underpinned Paragon’s strong resilience
and response to the crisis.
Introduction of the 2020 Remuneration Policy
The 2020 policy was approved by shareholders at the Company’s
AGM in February 2020. The new Remuneration Policy was
designed to meet the developing regulatory and governance
landscape and reflected feedback from extensive stakeholder
interaction during 2019.
At the AGM both the remuneration report and the policy
achieved well in excess of the required voting levels for the
resolutions to be approved. However, as more than 20% of the
votes cast were against each resolution further interaction with
shareholders was undertaken. Following this engagement, and
in direct response to shareholder feedback, the Committee
announced to the Stock Exchange in August 2020 that instead of
the originally scheduled introduction date of 1 October 2019, the
policy changes to salaries and pensions, and the introduction of
role-based allowances, would instead be introduced from
14 February 2020 (being the day after AGM approval). In addition,
the Committee also disclosed further detail around the use of
customer metrics within the 2020 PSP awards. The Committee
welcomed the engagement with shareholders and proxy advisors
regarding the introduction of the new policy and carefully
considered the feedback that was provided. I would like to
thank all who engaged with us for their interest and constructive
contributions.
Business performance
Paragon’s overall performance has demonstrated its
fundamental resilience during this challenging year. Of particular
note, was the ability of the business to switch to home working
very quickly, with over 90% of employees working from home
effectively within two weeks of the lockdown on 23 March,
maintaining customer focus and support throughout the
pandemic. This was evidenced through the provision of payment
holidays, maintaining the availability of new lending throughout,
giving our customers efficient and effective access to CBILS and
BBLS and continuing to offer attractively priced deposits to our
savings customers.
Paragon’s capital base is robust and the IRB application, phase
one of which was submitted this year, is intended to strengthen
longer term risk management capabilities and in turn capital
efficiency. Liquidity has been healthy with the average LCR
significantly above the levels envisaged in the business planning
and scenario analysis conducted by the Group at the start of
the year.
Investing for the future has continued to be a high priority during
this unusual year with digital systems development, for example
in customer portals, and an increase in savings market capacity
achieved alongside the delivery of CBILS and BBLS. These were
realised together with the delivery of module 1 of the Group’s IRB
application to the regulator.
As with every organisation there has been an impact on the
Group’s financial performance from Covid-19 and the full details
of this are discussed in the Strategic Report. In terms of the
direct relationship of performance to remuneration this can
be seen in the balanced scorecard outcome for the executive
directors shown later in the report (Section B7.2).
Variable pay earned in the year
To further enhance alignment between shareholders and the
executive directors during the current uncertain environment,
the Committee determined that the entire value of the executive
directors 2020 bonuses would be satisfied in shares deferred
for three years under the terms of the existing Deferred Share
Bonus Plan (‘DSBP’) with no cash bonus being paid.
Normally, there has been a deferral for executive directors of
25% of the bonus amount in excess of £50,000, under this plan.
We have also enhanced the deferral provisions for other senior
managers. Members of the Group’s Executive Committee have
had 50% of their cash bonuses deferred under the DSBP. Other
members of the senior management team, whose award is in
excess of £30,000, will have 25% of the award deferred. These
changes to deferral patterns increase interests in shares and
therefore the alignment between the experience of executive
directors, senior managers and other employees with our
shareholders.
In light of the resilient performance of Paragon in this challenging
climate, the executive directors will receive a total bonus of
66.1% of maximum bonus opportunity for the year (which was
derived on the basis shown in Section B7.2). The Committee
determined that the formulaic outcomes under the bonus
framework were fair and appropriate in light of the very strong
non-financial performance and exemplary leadership shown
over the period, therefore it was decided that no discretion be
applied to outcomes. This represents a 34% reduction in total
bonuses when compared to 2019 and, as noted above, has no
cash element.
In reaching this decision, the Committee took into account the
shareholder and employee experience during 2020. Executive
director bonuses were reduced in line with profitability and
aligned with the wider workforce bonus outcome. In addition to
this, the Committee noted that the Group did not join the UK
Government’s furlough scheme, has not made any redundancies
due to the pandemic and further, any employee who was
requested to ‘shield’ because of their vulnerability did so on full
pay. The Committee noted the share price performance of the
Group which performed well compared to its peers across the
period. Whilst the Group did not pay an interim dividend, it has
agreed that a final dividend of 14.4 pence per share will be paid,
subject to shareholder approval. Consequently, the dividend
level paid in respect of 2020 will be 32.1% lower than that paid in
respect of 2019 and this decline is reflected in the 34% decrease
in the executive directors’ bonus outturn year on year.
Long-term incentive awards under the Paragon Performance
Share Plan (‘PSP’) which were granted in December 2017 are
due to mature in December 2020. These awards are subject
to performance conditions, with the TSR, representing 50% of
the award, vesting in full due to Paragon’s strong share price
performance relative to peers over the three-year period, and the
risk condition, representing 25% of the award, vesting at 88%.
However, the EPS element, representing the remaining 25% of
the award, did not vest, resulting in an expected overall vesting
percentage of 72%.
Page 107
Corporate Governance Additionally, the Group agreed that all employees below
executive committee level and their senior direct reports will
receive a grant of £1,000 (gross) of shares. This grant, to over
95% of employees, is intended to be a one-off award to thank our
people for all their hard work in support of the business and our
customers in this difficult and unusual year. More details on this
award are provided later in the report.
The profit related pay scheme (‘PRP’), which the Group has
operated for a number of years for all employees below a senior
level, will continue. Eligible employees will receive the PRP
payment in December 2020 as usual.
As part of Paragon’s established commitment to fairness and
respect, fair pay for all employees has long been a central tenet
of the Group, which is a Living Wage employer. Further, the
Committee has reviewed and taken into account remuneration
elsewhere in the Group as part of its deliberations on senior
management remuneration for a number of years. However, over
the next year the fair pay agenda will increasingly form a focus of
the Committee’s work. The CEO pay ratio analysis together with
the additional disclosures required this year (see Section B7.2)
alongside the outcomes they show will be used to inform those
discussions. Considerations on how to reduce identified gaps
will be a priority for the Committee in the upcoming years.
Changes proposed for the year ending 30 September 2021
No salary increases for executive directors are proposed in the
forthcoming year.
In respect of the PSP awards that will be granted in December
2020 the EPS targets have been updated to reflect the current
macro-economic climate whilst maintaining an appropriate level
of stretch in the target. There are no other changes envisaged for
the financial year ending 30 September 2021 but the Committee
will continue to monitor the ongoing impact of Covid-19 on the
business and how this might impact on remuneration.
Conclusion
This report reflects continued engagement with shareholders
and provides the Group with a regulatory compliant and
competitive remuneration structure and I commend it to
shareholders and ask you to support the resolutions to approve
the Company’s Directors’ Remuneration Report and to increase
the bonus cap to twice fixed pay at the AGM in 2021.
Hugo Tudor
Chair of the Remuneration Committee
3 December 2020
The PSP awards for the year beginning 1 October 2019 that would
usually have been granted in December 2019 were deferred
until after the AGM in 2020. This enabled the awards granted
to executive directors to be made in accordance with the new
Remuneration Policy, including increasing the time before which
awards may be exercised from three to five years. Due to this
deferment and the impact of Covid-19 the awards were granted
to both the executive directors and other senior managers
within the Group in July 2020. The conditions of these awards
incorporate discretion for the Committee to make adjustments
in respect of any ‘windfall’ gains that may arise on these awards
given the lower share price position at the award date. The
operation of any ‘windfall’ gain adjustment would not only apply
to the executive directors but to all employees receiving an
award in July 2020.
Regulatory regime
When the 2020 Remuneration Policy was drafted it was expected
that during the lifetime of the policy the Group would become
subject to increased levels of remuneration regulation as a larger
financial services firm (known as a Level 2 CRD IV firm). The
updated policy rebalanced pay to ensure compliance with the
variable pay cap in readiness for becoming a Level 2 firm and to
give shareholders full visibility of the necessary remuneration
changes ahead.
CRD V, which is due to be implemented in December 2020, is
expected to accelerate the applicability of Level 2 remuneration
requirements to the Group. Consequently, it is likely that the
Level 2 remuneration rules will apply to the Group in respect of
the pay awarded for its financial year ending 30 September 2022.
In anticipation of this, and as mentioned in last year’s report, the
Company is putting to the AGM a resolution to apply a ratio of
the variable to fixed components of remuneration for executive
directors and Group material risk takers that does not exceed
twice fixed pay. No further changes need to be made to the current
Directors’ Remuneration Policy to comply with the regulations.
Maximum bonus levels therefore would be able to remain at 150%
of salary and PSP awards at 180% of salary for executive directors,
as approved under the new policy, once the Group becomes a
Level 2 firm.
The proposed cap, which is in line with the policies adopted by
many other financial institutions, enables the Group to maintain
its competitive flexibility to attract and retain key staff members
with the necessary skills and experience to deliver the Group’s
strategy and to continue to generate value for shareholders.
Furthermore, the passing of this resolution will not have any
effect on the Group’s ability to maintain a sound capital base.
As the Committee designed the Remuneration Policy so that it
was compliant with the requirements applicable to a
Level 2 CRD IV firm, the changes which will be applied to the
Group through CRD V are already structured into the policy and
consequently, no changes to the Directors’ Remuneration Policy
are proposed to be brought to shareholders for their approval at
the 2021 AGM.
All employee rewards
The Group decided, in light of the impact of Covid-19, that there
would generally be no salary rises for the 2021 financial year,
other than the increases in the Real Living Wage recommended
by the Living Wage Foundation. The Committee agreed this in
respect of the executive directors and other employees for which
it is responsible, including SMCR employees and material risk
takers. No employee within the Committee’s direct remit had
their salary increased and overall less than 2% of employees
received a pay rise.
Page 108
B7.2 Annual Report on Remuneration
Contents:
The annual remuneration report includes:
• Remuneration summary (B7.2)
• The Remuneration Committee, key responsibilities and advisers (B7.2.1)
• Directors’ remuneration for the year ended 30 September 2020 (B7.2.2)
• Application of remuneration policy for the year ending 30 September 2021 (B7.2.3)
• Other information (B7.2.4)
• Policy summary (B7.3)
Remuneration summary
The information provided in this section is not subject to audit
Aligning our pay principles to our strategy during the year ended 30 September 2020:
The success factors on
which the Group’s strategic
priorities are based
Translation into reward principles and structure
Credit quality
Risk measures and future value of new business
Risk assessment
Bonus
Performance share plan
Margins
Liquidity
Future value of new business and financial performance EPS growth and relative TSR
Risk measure and financial performance
Sustainable earnings
Financial performance
EPS growth, relative TSR and
risk assessment
Relative TSR, EPS and risk
assessment
Capital strength and efficiency Risk measures
Relative TSR and risk assessment
Cost control
Profit measures and personal objectives
EPS growth
A customer-focussed culture Personal objectives
Customer metrics adopted from
July 2020 grant
These success factors deliver enhancement of shareholder value and align with the Group’s reward structure
Page 109
Corporate Governance
How our pay principles aligned to the Code during the year ended 30 September 2020:
Principle
Application
Example
Clarity
The executive director and Group
remuneration policies are clearly
communicated to directors and all employees
The Remuneration Report in this document is
available to all employees as is the group-wide
internal remuneration policy
Details on the application of the Directors’
Remuneration Policy, including incentive outcomes
for the current year as well as proposed performance
measures and targets for future years, are clearly
set out in this report. The internal policy details the
available remuneration structures which are aligned
across the Group and consist of salary; pension;
variable cash bonuses; share schemes and benefits
Discussion on executive remuneration and how it
aligns to the workforce forms part of the regular
People Forum discussions with the Committee Chair
The links between awards and delivery of strategy
and performance are shown in the table above
Performance conditions require a minimum level
of performance to be achieved before any payout
under variable pay schemes is considered
See Section B7.3 for the summary policy
and the full policy in the Annual Report and Accounts
2019
Demonstration of the Group’s values underpins our
variable incentive frameworks, in addition 25% of
PSP awards for executive directors and other senior
managers are assessed against Customer and
People metrics.
Paragon has paid the Living Wage Foundation rate
for a number of years as part of its commitment to
workforce equality and is committed to reducing its
gender pay gap
The risk conditions in the annual and long-term
incentives are tested annually by the Committee.
The Committee has discretion to override formulaic
outcomes
Both annual bonus and PSP outcomes are subject
to malus and clawback provisions
The Remuneration Committee Chair and Chair
of the Board regularly consult with our major
shareholders as part of our commitment to a
transparent and open relationship
Simplicity
Straightforward remuneration structures
apply to all levels of the Group’s employees
Proportionality
Predictability
Alignment to
culture
Risk
The Committee has sought to ensure that the
Directors’ Remuneration Policy and outcomes
under the Policy are easy to understand for
both participants and shareholders
Bonus awards reflect annual performance
and PSP awards reflect performance over the
longer term with performance measures and
targets clearly linked to strategy
The Committee also has the discretion
to override formulaic outturns to ensure
outcomes do not reward poor performance
Minimum, target and maximum levels of award
for executive directors are shown in this report
within the summary of our Remuneration
Policy
Paragon’s strong culture is reflected
throughout its pay structures through
consideration of the demonstration of the
Group’s values when determining incentive
outcomes for all employees as well as
through its commitment to the Living Wage
Foundation and Equality, Diversity and
Inclusion policies
The Remuneration Policy is fully aligned with
our pay principles
The pay arrangements for executive directors
are consistent with and promote effective risk
management
Risk conditions are included within variable
remuneration arrangements to align with
regulatory expectations and shareholder
interests. The Committee is mindful of
conflicts of interest arising in the operation of
the Remuneration Policy and has measures
in place to address this such as no individual
being present when decisions are made on
their own remuneration
All members of the Remuneration Committee
are also members of the Risk Committee,
ensuring that risk is appropriately taken into
account when determining remuneration
policy and outturns
Page 110
B7.2.1 The Remuneration Committee, key responsibilities and advisers
The information provided in this section is not subject to audit
The Committee’s membership is detailed in Section B4.1.
The Committee currently comprises three independent non-executive directors of the Company and the Chair of the Board whose
relevant experience is set out in Section B3.1. In addition, Peter Hartill was a member of the Committee until his resignation from the
Board on 30 September 2020 and Alison Morris joined the Committee on 26 March 2020.
None of the Committee members has any personal financial interest (other than as a shareholder) or conflict of interest arising from
cross-directorships or day-to-day involvement in running the business.
Key responsibilities
The Committee:
•
•
•
•
Decides the Company’s policy on executive remuneration, including pension rights and compensation payments of the executive
directors
Sets the remuneration for each of the executive directors, the Chair of the Board, the Company Secretary, all Senior Managers and
Certification Regime (‘SMCR’) personnel and Material Risk Takers (‘MRTs’) under the rules of the PRA/FCA including the Internal
Audit Director and the CRO
Reviews workplace remuneration and related policies and the alignment of incentives and rewards with culture; and when setting
the policy for executive director remuneration, takes into account those matters
Considers the Group Remuneration Policy for all employees and reviews and approves the Group’s schedule of MRTs, under
financial services regulatory remuneration rules
Attendees
The CEO, People Director, CRO, Company Secretary, Director of External Relations, other non-executive directors (including the
Chair of the Risk and Compliance Committee) and external remuneration advisors attend by invitation.
Advisors
During the year, the Committee considered advice from:
•
Deloitte LLP (‘Deloitte’) who were appointed as the Committee’s independent advisor in February 2016 following a review process.
Deloitte is a member of the Remuneration Consultants Group and as such voluntarily operates under its Code of Conduct in
relation to executive remuneration in the UK. This supports the Committee’s view that all advice received during the year was
objective and independent.
The total fees paid to Deloitte for advice to the Committee during the year amounted to £140,340 (including VAT). Deloitte provided
other professional services to the Group during the year including share scheme and tax advice, regulatory support, customer
contact support, securitisation and co-sourced internal audit services.
The Committee is comfortable that the Deloitte engagement partner and team providing remuneration advice to the Committee
do not have any connections with the Group or any individual director that may impair their independence and objectivity.
•
The CEO, the Chair of the Risk and Compliance Committee, the People Director, the CRO and the Director of External Relations in
determining remuneration for the year for executive directors and senior management
Statement of voting at Annual General Meeting
The table below sets out actual voting in respect of the resolutions to approve the Annual Report on Remuneration and the
Remuneration Policy at the Company’s AGM on 13 February 2020.
Resolution
Votes for
% for
Votes against
% against
Total votes cast
Votes withheld
Annual Report on Remuneration
Remuneration Policy
150,343,775
157,352,402
71.02%
74.33%
61,340,110
54,331,483
28.98%
25.67%
211,683,885
211,683,885
3,082
3,082
Due to the ‘significant’ vote (more than 20%) against both the policy and the report, in accordance with the Code, the Company
engaged further with its shareholders and announced the outcome of that follow up action to the Stock Exchange in August 2020.
Page 111
Corporate Governance
These outcomes included provision of further information regarding the customer metrics that will be utilised for the long-term
incentive plan and they are detailed later in Section B7.2. Additionally, changes to executive directors’ salaries and pensions together
with the introduction of role-based allowances which were originally scheduled to take effect from 1 October 2019 were introduced on
14 February 2020, the day after their approval at the AGM.
B7.2.2 Directors’ remuneration for the year ended 30 September 2020
The information provided in this section has been audited.
Single total figure of remuneration for executive directors
Year ended 30 September 2020
N S Terrington
R J Woodman
£000
£000
J A Heron1
£000
Fixed remuneration
Salaries and fees
Allowances and benefits2
Role based allowance3
Pension allowance
Total fixed remuneration
Variable remuneration
Cash bonus
Deferred bonus
Dividend on vested deferred bonus4
Share awards5
Total variable remuneration
Total
563
26
88
160
837
-
594
-
584
1,178
2,015
354
12
56
101
523
-
374
43
368
785
1,308
Year ended 30 September 2019
N S Terrington
R J Woodman
£000
£000
Fixed remuneration
Salaries and fees
Allowances and benefits2
Role based allowance3
Pension allowance
Total fixed remuneration
Variable remuneration
Cash bonus
Deferred bonus
Dividend on vested deferred bonus4
Share awards5
Total variable remuneration
Total
503
25
-
226
754
687
212
-
1,348
2,247
3,001
317
12
-
143
472
437
129
-
849
1,415
1,887
69
10
-
31
110
-
-
-
216
216
326
J A Heron1
£000
268
27
-
121
416
372
107
25
719
1,223
1,639
Total
£000
986
48
144
292
1,470
-
968
43
1,168
2,179
3,649
Total
£000
1,088
64
-
490
1,642
1,496
448
25
2,916
4,885
6,527
1 J A Heron retired from the Board on 6 January 2020 and the remuneration shown above is in respect of his service to that date. He received no additional
remuneration for cessation of office.
2 ‘Allowances and benefits’ includes private health cover, fuel benefit and company car provision or company car allowance (£10,000 to £12,000). It also includes
reimbursement from the Company in respect of certain travel costs incurred in connection with the performance of executive director duties. The Group has been
advised that the reimbursement of some of these costs constitutes a taxable benefit in kind. The Group has agreed to provide an allowance to these directors to
cover the tax liability. The amounts included represent the payments HMRC treats as taxable together with an allowance to cover the tax.
Page 112
3 ‘Role based allowance’ was introduced following the AGM in 2020. The fixed pay allowance will be paid quarterly in shares and released over five years in equal
tranches. The allowance is £140,000 per annum for N S Terrington and £90,000 per annum for R J Woodman. The RBA is not subject to performance conditions.
4 Dividend on vested bonus is the accrued dividends to the date of exercise paid on deferred bonuses which were exercised during the year. Under the policy,
dividends will accrue to the point of vesting on deferred share awards made in respect of the year ended 30 September 2016 and thereafter.
5 The PSP value for the year ended 30 September 2020 has been determined using the average closing share price for the three months ended 30 September
2020 as an estimate. The actual value of the awards will not be finalised until the closing share price is known when the awards vest in December 2020 post the
Preliminary Results announcement.
The share awards value for the year ended 30 September 2019 has been restated to reflect the market value of the shares under the PSP that vested on 1 December
2019 as at that date.
Pension allowance and pension accruals
Nigel Terrington, Richard Woodman and John Heron were members of the Paragon Pension Plan (‘the Plan’), the Group’s defined
benefit pension plan, until 30 September 2016. Following which time, they took a cash equivalent transfer of benefits in the Plan,
receiving a lump sum value on a no gain, no loss basis and have no further entitlement. They ceased pension accrual in return for
a cash supplement calculated, as a percentage of salary, to equate to the cost of the Group’s contributions towards future service
benefits had each individual stayed within the Plan for their future service accrual. This supplement was fixed at 45% of base salary
during 2017 so that the Group would have known costs associated with pension provision. This fixed percentage was a lower amount
than the actual contractual entitlement based on the most recent figures presented by the Group’s actuaries.
From 14 February 2020, for Nigel Terrington and Richard Woodman, a reduction to 20% of base salary was made as part of the new
Remuneration Policy approved at the 2020 AGM (John Heron had retired as a director on 6 January 2020). This change further aligned
executive directors’ pension contribution with the average contribution of the wider workforce. No compensation was paid or payable
to the executive directors in respect of this change. Contributions in respect of pension provision for each of the directors are shown
as ‘pension allowance’ in the single total figure of remuneration table. Newly appointed executive directors will receive a pension
contribution of 10%.
A small number of former members of the Plan receive a cash supplement of 45% of salary for having left the Plan. About 10% of
employees are still accruing benefits in the Plan. Those employees contribute 5% of salary and there is an employer contribution,
which at the start of the year was 32% of salary, and which increased to 43.8% in July 2020. The majority, in terms of numbers, of the
workforce are members of the defined contribution scheme where the maximum employer contribution is 10% of salary (subject to an
employee contribution level of 6% of salary). When the Group’s contribution rose to 10% in January 2020 approximately half of eligible
employees increased their contribution to 6% to receive the additional matching funds.
Consequently, the Committee considers that the executive directors’ pension contribution is aligned to the workforce average
contribution as well as reflecting other employees whose service to the Group is of equivalent longevity and were members of
the Plan. There is, therefore, at this point in time, no intention to adjust the contribution level further. The next review of pension
arrangements will take place in 2022 as part of the three year policy review.
Page 113
Corporate Governance Annual bonus
The annual bonus for the year ended 30 September 2020 was based on performance against business, financial and risk measures
and personal strategic objectives (as detailed below) which resulted in a bonus of 66.1% of maximum opportunity for each of the
executive directors:
Balanced scorecard assessment
Performance for the year and the resulting award levels in respect of the business element were as follows:
Measure
Weighting
Threshold
Target
Maximum
Actual
Outcome
Financial performance
Underlying profit
Underlying RoTE
Underlying NIM progression
Cost: income ratio
CET1
30%
40%
30%
10%
10%
10%
£163.8m
£167.8m
£172.8m
£120.0m
13.7%
+2bp
44%
13.0%
13.9%
+6bp
43.2%
13.7%
14.3%
+11bp
42.4%
14.4%
9.8%
-5bp
43.0%
14.3%
Future value and strategy
30% Qualitative assessment by the Remuneration Committee of:
Development activities
25%
Increased savings market capacity
BBLS/CBILS delivery
Digital systems development for intermediaries and customers, providing
online platforms for existing mortgage operations
and for new products which delivered an improved
customer experience and processing efficiencies
Pipeline
Buy-to-let pipeline is strong, at £868.1m, with embedded
returns materially stronger
25%
Development finance post-offer pipeline now £171.5m
IRB module 1 completed
New business volumes lower but inception
margins and credit quality increased
Embedded value
25%
Retention levels materially stronger across the Group
including for buy-to-let at 93.4% (up from 91.4% in 2019)
Liability management
25%
Savings margin enhancements which will drive future
NIM benefits together with strong savings
outperformance driving value in 2021 and beyond
Funding cost reduced
Effective management of direct / platform mix
Increased contingent funding
Completion of a fully-retained securitisation during
the year and accessing TFSME funding
Prudent LCRs – offset to P&L in the Covid-stressed environment
Enhanced treasury management systems
Risk
20% Qualitative assessment by the Remuneration Committee of:
Enhanced stress testing, delivered ICAAP, ILAAP, RP with strong PRA
engagement. Excellent operational resilience clearly demonstrated. Applied
tighter risk appetite across new lending including lower LTVs
Personal performance
20% Individual targets for each of the CEO and CFO detailed below:
For each director
4.7%
0.0%
0.0%
0.0%
6.2%
9.3%
15.5%
23.4%
18.0%
18.0%
18.5%
23.5%
78.0%
18.0%
90.0%
20.0%
100%
Page 114
Individual targets
Actual performance
N S Terrington
Continue to focus the Group’s presence as a
leading UK specialist lender
Strong buy-to-let pipeline at year end
£868.1 million
Expand the addressable savings market
Continuing technology development to digitise
the business for our customers, with faster
decision making and improved cost efficiencies
Specialist landlord finance (92.8%) of new
business
Savings expansion with margin enhancements
of 47bps
Additional platform relationships established
Digital implementations to deliver business and
customer benefits; intermediary portal phase
2, mortgage servicing portal, CBILS portal,
implemented use of Clarity data
Further develop the Group’s risk management
framework, including operational resilience
Established prudential risk team and increased
specialist operational risk resource
Continue to build a succession plan pipeline for
Executive Committee roles
R J Woodman
Optimise the Group’s funding costs to support
lending activities
Deliver Module 1 of IRB together with ICAAP,
ILAAP and Recovery Plan submissions to the
regulator
Oversee the Group’s transition away from LIBOR
in terms of project governance, conduct risk
oversight and treasury management
Understand and assess the financial risks from
climate change that affect the firm and oversee
these risks within the firm’s overall business
strategy and risk appetite
Ensure actions progress to support the Group’s
diversity targets
Launched the Executive Risk Committee to
increase first line oversight of principal risks
Four internal appointments to senior roles
(50% male, 50% female) from the internal
succession planning pool of high performers,
including appointment of the CRO
Strong management of the reforecast in
response to Covid-19, to ensure the Group
remained prudent in both capital and liquidity
terms with excellent liability performance
Module 1 IRB delivered to original timescale and
Module 2 well progressed
Capital reporting enhanced and IRB shadow
metrics embedded
Enhanced stress-testing capabilities generated
through the IRB project
Project sponsor establishing a project team
covering lending, treasury, operational risk and
conduct functions with key milestones delivered
to plan including regulatory updates, website,
product and system developments
Climate change adopted as a principal risk by
the Board
Project team established covering governance,
data, disclosure, scenario testing and products. A
plan and a charter have been developed for each
work stream with a lead manager appointed to
oversee progress
50% of senior appointments were female
Equality, Diversity and Inclusion Network
launched
Page 115
Corporate Governance Annual bonus outcome
The resulting bonuses for the year ended 30 September 2020 were as follows:
Executive
director
Financial
performance
Future value
and strategy
Risk
Personal
performance
Total
Total
Cash
N S Terrington
R J Woodman
4.7%
4.7%
23.4%
23.4%
18.0%
18.0%
20.0%
20.0%
66.1%
66.1%
£000
594
374
£000
-
-
Share
value
£000
594
374
The Committee determined that the formulaic outcomes under the bonus framework were fair and appropriate in light of the very
strong non-financial performance and exemplary leadership shown over the period, therefore it was decided that no discretion should
be applied to outcomes.
In reaching this decision, the Committee took into account the shareholder and employee experience during 2020. The reduction
in executive director bonuses was commensurate with the shareholder experience in terms of dividend performance and was also
aligned with the wider workforce bonus outcome.
No cash bonus will be paid to the executive directors for 2020, instead 100% of amounts awarded will be deferred into nil cost options
under the Deferred Share Bonus Plan (‘DSBP’) which can be exercised after three years. No further performance conditions apply to
the deferred shares; details on the applicability of malus and clawback provisions to these awards are provided in the Remuneration
Policy in the Annual Report and Accounts 2019.
Paragon Performance Share Plan
Awards vesting in respect of the year ended 30 September 2020
Awards granted in December 2017 under the Group’s PSP are subject to performance conditions measured over the three financial
years ended 30 September 2020.
Performance
condition
Relative TSR
EPS growth
Risk
Total as a % of maximum award
Total as a % of salary at grant
Weighting
Threshold vesting for
25% of maximum award
Maximum
vesting
50%
25%
25%
Median
performance
Upper quartile
performance
RPI plus 3% p.a.
RPI plus 7% p.a.
Below threshold
n/a
n/a
88%
Actual
performance
Upper quartile
performance
Vesting
outcome
100%
0%
88%
72%
144%
There is straight-line vesting between the threshold and maximum for the TSR and EPS conditions and no reward below threshold
performance. The risk metric measures the Group’s performance against six equally weighted risk categories – material regulatory
breaches, customer service, management of liquidity and capital risk, credit losses against risk appetite, management of conduct
risk and material risk events over the performance period. The performance of the Group against these metrics was independently
assessed by the Committee, supported by the Chair of the Risk and Compliance Committee and the Group’s Chief Risk Officer, and
the outcome reflects the strong level of performance over this period.
Performance in all risk areas discussed and reviewed by the Committee was strong throughout the performance period, in particular
the Committee noted that during the period:
• There had been no material regulatory breaches
• The capital base was robust and regulatory compliant
• Complaints, the main measure for customer service, were within risk appetite for the majority of the period
• Operational risk outcomes were reflective of the Group’s exemplary resilience shown in the pandemic
Vesting was also subject to the Committee’s determination, in respect of the financial underpin, whether the level of vesting reflected
the overall financial performance of the Group and it was concluded that the vesting level was appropriate.
Page 116
The vesting percentage has been reviewed by the Committee and details of the shares which will vest in December 2020, following the
announcement of the Preliminary Results, are set out below.
Total shares granted
Vesting outcome
Total shares awarded
Share price1
PSP value2 3
N S Terrington
R J Woodman
J A Heron⁴
205,192
129,227
109,401
72%
72%
72%
147,738
93,043
54,547
£
3.439
3.439
3.439
£000
584
368
216
1The PSP value has been estimated using the average closing share price for the three months ended 30 September 2020. The actual value of the awards will not be known until
the awards vest in December 2020, as it will be based on closing share price at that date.
2In accordance with the rules of the PSP, participants are entitled on exercise to additional value equal to the dividends that would have been paid on vested shares in respect of
dividend record dates between the grant date and vesting date. Accordingly, the share award values also include £0.5160 per vested share in respect of such dividends.
3As part of the December 2017 PSP award, each executive director was granted a tax-qualifying option under the Company Share Option Plan (‘CSOP’) over 6,279 shares (which
will vest at 4,186 shares) at a per share exercise price of £4.7776. The CSOP option is subject to similar performance conditions to the main PSP award. If a CSOP option is
exercised at a gain, the number of shares the director will receive under the PSP will be reduced by the same value, to ensure that the total pre-tax benefit is not increased by the
grant of the CSOP options. Therefore, the value of each award, in aggregate, is equivalent to that of a PSP award and the CSOP options may be disregarded in determining
the value.
4J A Heron’s PSP 2017 is shown pro-rated to his retirement date of 6 January 2020.
Impact of the share price on vesting awards in 2020 and 2019
The final vesting value in 2020 reflected a 28% decline in the share price between grant and vesting and in 2019 a 35% increase on the
same basis. The Committee did not apply discretion on vesting outcomes for either award.
Number of
shares granted
205,192
129,227
109,401
443,820
Number of
shares granted
262,114
165,074
139,753
566,941
Grant
basis
£
4.7614
4.7614
4.7614
Grant
basis
£
3.6188
3.6188
3.6188
2017 PSP awards
N S Terrington
R J Woodman
J A Heron2
Total
2016 PSP awards
N S Terrington
R J Woodman
J A Heron
Total
Vesting
outcome
Vested
shares
Share price at
30 September 20201
Impact of share price
appreciation/depreciation
72%
72%
72%
147,738
93,043
54,547
3.439
3.439
3.439
£
(195,369)
(123,040)
(72,133)
(390,542)
Vesting
outcome
Vested
shares
Share price at
1 December 20193
Impact of share price
appreciation/depreciation
95.44%
95.44%
95.44%
250,161
157,546
133,380
4.876
4.876
4.876
£
314,502
198,066
167,685
680,253
1The PSP value has been estimated using the average closing share price for the three months ended 30 September 2020. The actual value of the awards will not be known until
the awards vest in December 2020, as it will be based on closing share price at that date.
2The vested shares for J A Heron’s PSP awards 2017 shown above have been calculated at the pro-rata amount.
3The share awards value for the year ended 30 September 2019 have been valued based on the market value on the date of vesting being 1 December 2019.
Awards granted during the year ended 30 September 2020
On 6 July 2020 the following awards were granted under the PSP with a face value of 180% of salary.
Executive director
N S Terrington
R J Woodman
Salary
£000
599
377
Percentage grant
Face value of grant
Share price1
Number of shares
180%
180%
£000
1,078
678
£
3.4496
3.4496
312,429
196,763
1Based on the average closing mid-market price of the Company’s shares on each of the five dealing days following the announcement of the Company’s results for the half-year
ended 31 March 2020, being the price used to determine the number of shares in accordance with the Directors’ Remuneration Policy.
Page 117
Corporate Governance The PSP awards granted in July 2020 are subject to the following performance conditions, with a performance period of three
years, from 1 October 2019, ending on 30 September 2022. The executive directors’ awards, which are tested over the three-year
performance period, will vest after five years, following the end of a two year holding period.
Performance
measure
Relative TSR
Basic EPS
Risk
Customer
People
Weighting
Threshold vesting for
25% of maximum award
Maximum
vesting
25%
25%
25%
Median performance
Upper quartile performance
60 pence
67 pence or more
50% weighting on an assessment from the Chief Risk Officer of the six
key elements of the Group’s risk appetite: regulatory breaches, customer
service, conduct, operational, capital and liquidity and credit losses
50% weighting on a strategic risk assessment to reflect the management of
risk with regard to the delivery of the Group’s medium-term strategy
12.5%
Consideration will be given to (i) customer insight feedback on key product
lines, (ii) customer complaints relative to risk appetite levels and (iii) average
overturn rate for customer complaints relative to the FOS’s reported rates
12.5%
Consideration will be given to (i) employee engagement,
(ii) voluntary attrition compared to industry averages and
(iii) gender diversity of senior management
There is straight-line vesting between threshold and maximum and no reward for below threshold performance. In addition, prior to
any awards vesting, the Committee must be satisfied that the individual performance and underlying financial performance of the
Group are satisfactory given the level of vesting.
Application of ‘windfall’ gains
The Committee may reduce the extent to which an award would vest if any value in the award at the date on which the performance
conditions are assessed is deemed to be a ‘windfall gain’ by the Committee as a result of the number of the shares subject to the
award having been determined by reference to the average share price over the five dealing days following the announcement of the
interim results. The Committee will consider such items as the share price used for determining the grant and subsequent share price
performance over the performance period, the degree of vesting, dividend equivalents and the broader macro-economic climate in
which the Group has operated to determine whether or not an adjustment to the vesting level should be made.
Relative TSR measure
The comparator group for the purposes of the relative TSR condition is:
Amigo Holdings PLC
Arrow Global Group PLC
Barclays PLC
Close Brothers Group PLC
Funding Circle Holdings PLC
Lloyds Banking Group PLC
Metro Bank PLC
NatWest Group PLC
(formerly Royal Bank of Scotland Group PLC)
OSB Group PLC
Provident Financial PLC
Secure Trust Bank PLC
S&U PLC
Virgin Money UK PLC
This group is unchanged from the previous year, other than reflecting the acquisition of Charter Court Financial Services PLC by
OneSavings Bank during the period. OSB Group PLC replaced One Savings Bank as parent company of that group under a scheme of
arrangement on 30 November 2020.
Page 118
Payments to past directors
J A Heron retired from the Board on 6 January 2020. No payment was made for loss of office. He remains entitled, under the usual
‘good leaver’ provisions to awards received under the PSP and DSBP when a director. In respect of the PSP these will vest, subject
to performance on a pro-rata basis (from the date of grant to the date of cessation of employment) at the end of the relevant vesting
period and for the DSBP these will vest in full once the vesting period has elapsed. Both PSP and DSBP remain subject to malus and
clawback provisions.
Payments for loss of office
No payments for loss of office were made during the year ended 30 September 2020.
Chair of the Board and non-executive director fees
Year ended 30 September 2020
Year ended 30 September 2019
Fees
£000
255
87
44
65
87
85
65
688
Benefits
£000
14
-
-
-
-
-
-
14
Total
£000
269
87
44
65
87
85
65
702
Fees
£000
255
95
-
65
85
85
65
650
Benefits
£000
14
-
-
-
-
-
-
14
Total
£000
269
95
-
65
85
85
65
664
Chair of the Board
F J Clutterbuck
Non-executive directors
P J N Hartill1
A C M Morris2
B A Ridpath
H R Tudor3
F F Williamson
G H Yorston
Total
1P J N Hartill resigned from the Board on 30 September 2020, ceased to be Audit Committee Chair on 10 June 2020 and Senior Independent Director on 23 July 2020
2A C M Morris was appointed to the Board on 26 March 2020
3H R Tudor became Senior Independent Director on 23 July 2020
Page 119
Corporate Governance Directors’ share interests
The interests of the executive directors in the shares of the Company at 30 September 2020 (including those held by their connected
persons) were:
Unvested awards subject to performance conditions
PSP2 3
Unvested awards not subject to performance conditions
N S Terrington
R J Woodman
Number
Number
J A Heron1
Number
539,585
339,822
121,117
DSBP
Sharesave
Role based allowance4
Total unvested awards
Vested but unexercised awards
PSP5
DSBP
Total vested but unexercised awards
Shares beneficially held
Total interest in shares
Awards exercised in the year6
PSP
DSBP
Sharesave
136,772
12,026
12,987
701,370
289,828
212,725
502,553
801,269
2,005,192
400,000
-
-
83,076
12,026
8,348
443,272
250,589
26,742
277,331
241,051
961,654
279,672
63,482
-
Total awards exercised in the year
400,000
343,154
67,080
-
-
188,197
187,927
17,849
205,776
274,723
668,696
-
-
-
-
1 J A Heron retired from the Board on 6 January 2020, the table reflects his interests as at that date, excepting that for the purposes of consistency with N S Terrington
and R J Woodman his December 2017 PSP award is shown on the same basis (as detailed in note 3 below) and at an amount pro-rated to his leave date.
2 As part of the December 2017 PSP award, each executive director was granted a tax-qualifying option under the Company Share Option Plan (‘CSOP’) over 6,279
shares (which will vest at 4,186 shares) at a per share exercise price of £4.7776. The CSOP option is subject to similar performance conditions to the main PSP
award. If a CSOP option is exercised at a gain, the number of shares the director will receive under the PSP will be reduced by the same value, to ensure that the
total pre-tax benefit is not increased by the grant of the CSOP options. Therefore, the value of each award, in aggregate, is equivalent to that of a PSP award and the
CSOP options may be disregarded in determining the value.
3 For the purposes of the table above the awards granted in December 2017 to Nigel Terrington and Richard Woodman are assumed to be vested but unexercised in
respect of the percentage which it is estimated will vest (72%) and to have lapsed in respect of the balance.
4 The role based allowance awards include those purchased on 1 October 2020 as these awards relate to the quarterly payment to September 2020.
5 The PSP awards exercised by Nigel Terrington were exercised on 21 February 2020, when the share price was £5.1729. The aggregate amount received, pre-tax and
national insurance, was £2,069,160.
6 The PSP and DSBP awards exercised by Richard Woodman were exercised on 3 December 2019, when the share price was £4.8047. The aggregate amount
received, pre-tax and national insurance, was £1,648,752.
The interests of the Chair of the Board and the non-executive directors at 30 September 2020, which consist entirely of ordinary
shares, beneficially held, were as follows:
F J Clutterbuck
A C M Morris
B A Ridpath
H R Tudor
F F Williamson
G H Yorston
2020
8,372
4,000
4,358
70,000
3,000
7,517
As at 2 December 2020, the last practicable date prior to approving this Report, the Company has not been advised of any changes to
the interests of the directors and their connected persons as set out in the tables above.
Page 120
Peter Hartill who resigned from the Board on 30 September 2020 was interested in 7,000 ordinary shares as at the date of his
retirement. Peter Hill was appointed to the Board on 27 October 2020 and at that date and at 2 December 2020 held 2,459 ordinary
shares in the Company.
Share ownership guidelines
Executive directors are encouraged to hold a minimum number of shares in the Company with a value of 200% of their salary, usually
calculated at 31 December each year. The shares which count towards the aggregate shares held by each director for the purposes of
this calculation are:
1. Unexercised but vested share awards
2. Share awards with no performance conditions attached such as the DSBP and RBA and share awards with performance
conditions no longer attached such as PSP awards once the performance conditions have been tested
3. Shares purchased with own funds where those shares are unconnected to a share award exercise
4. Other beneficially owned shares such as exercised and retained share awards and shares held in the name of spouses etc
The valuation is calculated on a net of income tax and national insurance basis where relevant
The chart below compares the executive directors’ holdings at 30 September 2020 to those required by the guidelines, expressed
in value terms as a percentage of salary. The 30 September 2020 salary has been used this year due to the increase in salary, noted
above, which occurred following the 2020 AGM.
At 30 September 2020, the holdings of executive directors were in accordance with guideline levels.
Post-employment shareholding requirement
With effect from the approval of the Remuneration Policy in February 2020 the Committee has adopted a post-cessation shareholding
requirement. This requires that for two years following cessation of employment, based on his immediately pre-cessation salary, an
executive director must retain such of his ‘relevant’ shares as have a value (as at cessation) equal to the shareholding guideline, or
(if lower) the number of shares actually held at the date of departure.
‘Relevant’ shares are shares acquired under items 1 and 2 above. They may also include shares noted under item 4 above if such
shares were originally derived from a share exercise. It does not include shares acquired under item 3 above.
Page 121
Corporate Governance0%800%700%600%500%400%300%200%100%Salary TargetR J WoodmanN S TerringtonDirectors’ shareholding guidelines30 September 2020200%427%679% B7.2.3 Application of remuneration policy for the year ending 30 September 2021
The information provided in this section of the Directors’ Remuneration Report is not subject to audit.
Overview
The Committee has, for a number of years, considered as part of its regular review of executive director remuneration the wider
external market and consulted with stakeholders on the structure of remuneration packages on a regular basis. Further, it will review
during the year the pay ratios analysis undertaken as part of the year end processes and consider executive director remuneration
and the fair pay agenda in the light of this analysis.
Executive directors
Base salary
The salaries of the executive directors were changed, in line with the newly adopted Remuneration Policy, on 14 February 2020.
It was agreed by the Remuneration Committee that there would be no increase in base salary for the year ending 30 September 2021
for the executive directors.
Nil increases were also agreed for most other employees across the Group except where a pre-existing contractual agreement was in
place, or, where a person’s role had substantially changed or their responsibilities significantly increased (increases were awarded to
less than 2% of employees).
Salary with effect from
1 October 2020
14 February 2020
1 October 2019
£
598,754
377,087
£
598,754
377,087
£
503,150
316,875
N S Terrington
R J Woodman
Allowances and benefits and pension contributions
No change from the stated policy.
Annual bonus
The annual bonus structure and maximum opportunity remain unchanged. As noted earlier in this report deferral for the year ended
30 September 2020 will be 100% in comparison to prior years where deferral has been 25% of amounts over £50,000. This change has
been agreed for the 2020 bonuses only, but the Committee has always had the right to require higher levels of deferral and in addition
the executive director may elect to defer a greater proportion and therefore higher deferral may operate in future.
In line with the policy, the Committee has determined that for 2021 performance will be assessed against a balanced scorecard of
measures consisting of: financial performance (30%) including core profit, RoTE and cost to income ratio targets, together with a
range of other metrics derived from the Group’s financial plans; future value and strategic development (30%); risk management
(20%); and personal performance (20%). The Committee added an additional measure to its financial performance target this year
to reflect the Group’s performance in the strategically and regulatory important area of capital (addition of CET1 measure) and will
review financial performance metrics to ensure they each reflect the ongoing priorities of the Group. The two core measures of
underlying profit and underlying RoTE comprise 70% of the financial performance award, but the Committee will annually determine
the appropriate secondary measures by reference to the strategic focus for the year. For example, in a strong position in the business
cycle, loan growth and margins may carry the most weight, whereas in more challenging times capital and liquidity strength may have
greater importance. In all cases, the measures chosen will relate back to the board-approved Corporate Plan. For 2021 the secondary
measures will continue to be underlying NIM progression, cost:income ratio and CET1.
The Committee has chosen not to disclose, in advance, the targets which apply to these measures as it considers them to be
commercially sensitive. Retrospective disclosure of the targets and performance against them will be set out in next year’s Annual
Report on Remuneration except to the extent that any measure/target remains commercially sensitive.
Page 122
PSP awards
Award levels for executive directors are 180% of base salary. The performance conditions (in respect of TSR, risk and customer and
people metrics), targets, individual performance and Group underlying performance requirements are as summarised above for the
awards granted in the year ended 30 September 2020. The TSR grouping remains the same. However, the EPS targets have been
updated to reflect the current macro-economic climate whilst maintaining an appropriate level of stretch in the target. The EPS
performance metric will be as follows:
Performance
measure
Basic EPS
Weighting
25%
Threshold vesting for
25% of maximum award
58.0p
Maximum
vesting
66.0p or more
There is straight-line vesting between threshold and maximum and no reward for below threshold performance. In addition, prior to
any awards vesting, the Committee must be satisfied that the individual performance and underlying financial performance of the
Group are satisfactory given the level of vesting.
Chair of the Board’s and non-executive directors’ fees
Chair of the Board’s fee
Base fee for non-executive directors
Additional fee for Senior Independent Director
Additional fee for chairs of committees1
Fee with effect from
1 October 2020
1 October 2019
£000
255
65
10
20
£000
255
65
10
20
1The additional fee for chairing a committee is currently payable to the Chairs of the Remuneration, Audit, and Risk and Compliance Committees but not the Nomination
Committee, and would be payable for the chairing of such additional committees as might be authorised by the Board.
B7.2.4 Other information
The information provided in this section of the Directors’ Remuneration Report is not subject to audit.
Pay alignment across the Group
Groupwide remuneration philosophy
Paragon’s groupwide philosophy on remuneration is to reward all of its employees fairly for their contribution, whilst ensuring they are
motivated to always deliver the best outcomes for its customers. The Group’s approach to remuneration reflects its culture, vision
and values and supports its purpose whilst being aligned to the long-term interests of the Group and helping to deliver fair customer
outcomes.
All employee views and the Committee
The People Forum considers the relationship between executive remuneration and pay and reward across the Group on a regular
basis. Discussions with the Chair of the Committee on executive remuneration and remuneration across the wider workforce have
taken place twice in the year ended 30 September 2020 and will be a regular part of the Forum’s calendar in future years as well.
Additionally, employees have the opportunity to make comments on any aspects of the Group’s activities through surveys and the
views of employees are taken into account by Human Resources. One of the duties of the People Director is to brief the Board on
employee views and, as a regular invitee to Committee meetings, this also helps to ensure that decisions are made with appropriate
insight to employees’ views.
Page 123
Corporate Governance
Alignment of all employee remuneration with stakeholders’ interests
Living Wage Foundation
For a number of years the Group has been accredited by the Living Wage Foundation which means that it pays the Living Wage to all
employees, and ensures that contractors' staff employed at Paragon sites such as cleaners and security personnel also receive it.
Deferred Share Bonus Plan
In 2020, in recognition of the efforts by the Group’s employees during the pandemic and the need to manage costs carefully with a
group-wide salary freeze, a one-off award of £1,000 (gross) of shares to all staff (below executive committee and their senior direct
reports) will be made utilising the DSBP scheme. The awards will be granted in December 2020 to all eligible employees, which will be
all staff employed on 3 December 2020, subject to minimum performance. The awards will have a three year vesting period and will
be delivered at the end of that period, excepting ‘good leavers’ whose awards will vest on leaving. As the population for the award will
include a few employees subject to CRD IV, malus and clawback provisions will be applicable.
This award is in addition to the usual cash-based profit related pay distribution of 1% of group profits, which has been paid for many
years and forms a part of the Group’s culture of ensuring a strong connection between the outcomes of the business and employees.
Employees below director and head of function level are eligible to participate in this scheme, which pays out a flat sum to all
eligible staff.
The DSBP will also be utilised to defer an increased number of senior management bonuses; for members of the Executive
Committee 50% of their bonus above £30,000 will be deferred and for most other senior managers it will be 25% of their award above
£30,000. For this pool of employees, the DSBP will operate as it does for the executive directors.
Directors and senior management participate in the annual bonus scheme, which is designed to incentivise them to achieve specific
predetermined goals, reward individual performance and encourage retention through deferral of a proportion of the bonus. All
employees whose performance has been exceptional are eligible for a discretionary bonus.
Discussions regarding both the group-wide salary freeze and the utilisation of the DSBP for the all employee and wider senior
management pool grants took place at Committee meetings alongside discussions on executive director pay arrangements.
Sharesave
Paragon’s sharesave scheme has operated for many years and encourages employees to become shareholders in the Group through
this tax efficient mechanism. Take up over the five years up to and including 2020 has averaged at about 50% of eligible employees,
but this year take up was just over 60% of eligible employees. The total take up across all schemes currently operating, at the point of
grant of the 2020 sharesave was 72% of eligible employees reflecting the continued and ongoing alignment between employees and
shareholders and employee commitment to the growth of the Group.
Relative importance of spend on pay
Set out below is a summary of the Group’s levels of expenditure on pay and other significant cash outflows.
Wages and salaries
Dividend paid
Loan advances and investment in portfolios
Corporation tax paid
Note
50
41
42
2020
£m
64.0
35.9
2,050.5
46.1
2019
£m
62.6
54.0
2,536.6
39.4
Change
£m
1.4
(18.1)
(486.1)
6.7
Loan advances and investment in portfolios is shown above as this is the principal application of cash used to generate income for the
Group. Corporation tax is contributed out of profit to the UK Government.
Comparison of annual change in directors’ pay with the average employee
The following table shows the percentage change in the salary, benefits and bonuses of each of the directors between 2019 and 2020
compared to the percentage change in the average of each of those components of pay for an employee. The increases in salary
reflect the salary review implemented in October 2019 for most employees but which for the executive directors, was as noted in the
Chair’s letter, effective from 14 February 2020.
The changes to fees for P J N Hartill and H R Tudor reflect P J N Hartill’s departure from the Board during the year and H R Tudor’s
appointment as Senior Independent Director. The table illustrates a decrease of 100% in the cash bonus for the current executive
directors as a result of the decision taken by the Remuneration Committee to defer the entire value of their respective annual
bonuses for the year ended 30 September 2020.
Page 124
The table also reflects changes in the employee population since 30 September 2019.
The table will build over the next five years and consequently the data, will in due course, provide more detailed information to the
Committee regarding pay averages across the Group.
Salaries and fees1
Allowances and benefits2
Cash bonus
N S Terrington
R J Woodman
J A Heron
F J Clutterbuck
P J N Hartill
A C M Morris
B A Ridpath
H R Tudor
F F Williamson
G H Yorston
Average employee
%
11.9
11.7
(74.3)
-
(8.4)
-
-
2.3
-
-
8.5
%
4.0
-
(63.0)
-
-
-
-
-
-
-
%
(100.0)
(100.0)
(100.0)
-
-
-
-
-
-
-
19.2
(35.2)
1‘Salary and fees’ are calculated using the ‘Salaries and fees’ data provided in the single figure table for executive directors above and in the ‘Chair of the Board’s and non-executive
directors’ fees’ table also above. It does not include ‘Pension allowance’ or the ‘Role based allowance’ (‘RBA’). Whilst the ‘Pension allowance’ and RBA are fixed pay, and are
detailed as such in the single figure table for the executive directors, they are not included in this table to enable a more direct comparison with the average employee information.
2‘Allowances and benefits’ are calculated using the data provided in the single figure table above for ‘Allowances and benefits’ and in the ‘Chair of the Board’s and non-executive
directors’ fees’ table also above.
CEO pay comparatives over 10 years
The following table shows the total remuneration, as included in the single figure table, and the amount vesting under short-term and
long-term incentives as a percentage of the maximum that could have been achieved, in respect of the CEO, Nigel Terrington, over the
past ten years.
Single figure of
total remuneration
Annual bonus earned
against maximum opportunity
Long-term incentive vesting outcome
against maximum opportunity
£000
2,015
3,001
2,426
2,305
1,956
2,546
3,113
2,655
2,565
2,382
%
66.1
89.4
90.0
90.0
75.0
100.0
100.0
85.0
87.5
87.5
%
72.00
95.44
72.47
63.51
50.00
100.00
100.00
100.00
100.00
58.60 and 85.10
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
CEO pay ratio
The table below sets out the CEO pay ratio compared to the 25th, median and 75th percentile employee within the Group. The
Group used Option A as defined in The Companies (Miscellaneous Reporting) Regulations 2018, as this calculation methodology
was considered to be the most accurate method. The 25th, median and 75th percentile pay ratios were calculated using the full-time
equivalent remuneration (prepared in the same manner as those for the single figure table) for all UK employees during the financial
year. Certain employees participate in discretionary bonus schemes and long-term incentive schemes.
Year
2020
2019
Method
25th percentile pay ratio
Median pay ratio
75th percentile pay ratio
Option A
Option A
81:1
125:1
59:1
95:1
34:1
55:1
Page 125
Corporate Governance
25th percentile
pay ratio
Median
pay ratio
75th percentile
pay ratio
25th percentile
pay ratio
Median
pay ratio
75th percentile
pay ratio
Base salary
Total remuneration
£23,000
£25,000
2020
£28,000
£34,000
£36,000
£58,000
£21,000
£24,000
2019
£29,000
£32,000
£53,000
£54,000
Base salaries and total remuneration shown above are the details relating to the relevant identified employees in each year.
Change in CEO pay ratios
As with the information included in the ‘Comparison of annual change in directors’ pay with the average employee’ the ratio appears
significantly reduced for the year ended 30 September 2020, as a result of the decision taken by the Remuneration Committee to
defer the entire value of the executive directors’ bonuses for the year ended 30 September 2020. Shareholders should not presume
that the significant differentials shown in the ratios will be repeated in future years.
Gender pay
Details of the Group’s gender pay gap analysis are shown in Section A6.3. Gender pay review and reporting are overseen by the
Nomination Committee as part of its responsibilities in respect of diversity.
Performance graph and table
The following graph shows the Company’s TSR performance compared with the performance of the FTSE All Share General
Financial sector index. This graph shows the value, by 30 September 2020, of £100 invested in Paragon Banking Group PLC on
30 September 2010, compared with £100 invested in the FTSE General Financial sector index. The General Financial sector has been
selected for this comparison because it is the sub-sector index that contains the Company’s shares.
Page 126
Value (£)20162015201420132012201120102017201820192020450.00400.00350.00300.00250.00200.00150.00100.0050.000.00Ten Year Return Index for the FTSE All Share General Financial Sector as at 30 September 2020ParagonFTSE All Share General Financial Sector Notice periods and terms of engagement
The Chair and executive directors hold one year rolling contracts in line with current market practice and the Committee reviews the
terms of these contracts regularly. The current service contracts for the executive directors are dated as follows:
Director
Contract date
N S Terrington
1 September 1990 (as amended 7 January 1993, 16 February 1993, 30 October 2001 and 10 March 2010)
R J Woodman
8 February 1996 (amended 10 March 2010)
All new executive directors will have service contracts that are terminable by the Company on a maximum of twelve months’ notice.
Chair and non-executive director appointments are for three years unless terminated earlier by, and at the discretion of, the director
or the Company. The required notice period is one year for the Chair and three months for the non-executive directors.
Current terms of engagement for the Chair and non-executive directors apply for the following periods:
Director
Period of engagement
F J Clutterbuck
10 May 2018 to 9 May 2021
P A Hill
27 October 2020 to 26 October 2023
A C M Morris
26 March 2020 to 25 March 2023
B A Ridpath
20 September 2020 to 19 September 2023
H R Tudor
24 November 2020 to 23 November 2023
F F Williamson*
20 September 2020 to 19 September 2023
G H Yorston
20 September 2020 to 19 September 2023
*F F Williamson will step down from the Board on 31 December 2020.
Page 127
Corporate Governance B7.3 Policy Summary
The information provided in this part of the Directors’ Remuneration Report is not subject to audit.
Introduction
This part of the Directors’ Remuneration Report sets out the Directors’ Remuneration Policy that was adopted at the AGM in 2020.
However, this is a summary only, included here for ease of reading the Annual Report on Remuneration, and these pages do not
constitute a Policy Statement in accordance with the Regulations. From 1 October 2021, Paragon is expected to be subject to
CRD V and therefore a number of the changes noted in the Remuneration Policy will come into effect. For the full Policy Report,
including information relating to the impact of becoming a Level 2 bank, please refer to the Annual Report and Accounts for the year
ended 30 September 2019 available at www.paragonbankinggroup.co.uk.
Changes to the executive directors’ salaries and pensions together with the introduction of role-based allowances were originally
scheduled to take effect from 1 October 2019. Following shareholder engagement these changes were introduced on the day after
their approval at the 2020 AGM. This engagement also led to greater clarity regarding the customer metrics used in the July 2020 PSP
awards being published to the Stock Market as detailed in Section B7.2 above. There have been no other changes to the policy put to
the AGM in 2020.
Elements of the remuneration policy for executive directors
The executive directors receive a combination of fixed and performance-related elements of remuneration. Fixed remuneration
consists of salary, benefits, pension scheme contributions or alternative retirement benefit provision and a role-based allowance.
Performance-related remuneration consists of participation in the annual bonus plan (including deferral) and the award of shares
under the PSP. The performance-related elements of remuneration are intended to represent an appropriate proportion of executive
directors’ potential total remuneration.
Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
Base salary
To provide a competitive,
fixed cash component
that reflects the scope of
individual responsibilities
and recognises sustained
individual performance in
the role.
Benefits
To provide market levels of
benefits on a cost-effective
basis.
Page 128
Whilst no formal
performance conditions
apply, an individual’s
performance in role is
taken into account in
determining any
salary increase.
While there is no maximum
salary, if the Committee is
satisfied with the individual’s
performance, increases will
normally broadly follow those
awarded for the rest of the
organisation, in percentage of
salary terms.
Increases above the level
awarded for the rest of the
organisation may be awarded
in appropriate circumstances.
Remunerate fairly for
individual performance,
having regard to the
importance of motivation.
Base salaries are typically
reviewed annually, taking
into account a number of
factors including (but not
limited to) the value of the
individual, the scope of
their role, their skills and
experience and
their performance.
The Committee also takes
into account pay and
conditions of employees
in the Group as a whole,
business performance and
prevailing market conditions.
Private health cover for
the executive and their
family, life insurance cover
of up to seven times’ salary
and company car or cash
alternative.
Private health care benefits
are provided through third
party providers and therefore
the cost to the company and
the value to the director may
vary from year to year.
None.
Other benefits may be
offered from time to
time taking into account
individual circumstances.
Whilst no absolute maximum
level of benefits has been
set, the level of benefits
provided is determined
taking into account individual
circumstances, overall cost
to the business and
market practice.
Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
Retirement benefits
To provide competitive
post-retirement benefits.
Fixed role-based allowance
To maintain a competitive
remuneration package with an
appropriate balance of fixed
and variable remuneration,
with delivery in shares for
shareholder alignment.
Maximum 20% of salary for
incumbent executive directors
and 10% of salary for newly
recruited executive directors.
None.
None.
The fixed role-based
allowances are determined
based on the role, skills and
responsibility of each individual
and taking into account market
competitiveness of total
remuneration.
The maximum role-based
allowance is £140,000 p.a. for
the CEO and £90,000 p.a. for
the CFO. Any other executive
director (including those
appointed during the period
for which this policy applies)
may be eligible for a role-based
allowance of up to 25%
of salary.
Executive directors
receive an annual
contribution to the
Company defined
contribution pension
scheme or a cash
supplement in lieu
of contribution (or a
combination thereof).
Annual allowance paid
quarterly or at any
other frequency that
the Committee deems
appropriate following
approval at the 2020
AGM, on the basis that
the after tax value is
delivered in shares
which are released to
the executive director on
a pro-rata basis over a
five year period (or such
other period as may
be determined by the
Committee from time
to time).
The role-based
allowance is
non-pensionable and is
not taken into account
for annual bonus and
PSP purposes.
The Committee retains
the discretion to amend
the retention period
and/or pay the fixed
role-based allowance in
cash if required to do so
to meet any regulatory
requirements.
Page 129
Corporate Governance Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
Annual bonus
To incentivise executives
to achieve specific,
predetermined goals that drive
delivery of the Company’s
operational objectives.
To reward individual
performance.
To encourage retention and
alignment with shareholders’
interests through deferral of a
proportion of bonus, awarded
in shares.
Maximum annual bonus
potential is 150% of salary in
respect of any given financial
year.
For target performance, a
bonus of 50% of maximum
potential will be awarded,
with additional amounts
being awarded for exceptional
performance.
If a bonus is based on a
strategic measure or personal
objective, the Committee
will determine the extent of
vesting between 0% and 100%
based on its assessment of the
extent to which the measure or
objective has been achieved.
For performance below
threshold, no bonus is payable.
The performance targets
are set by the Committee
at the start of the year with
input, as appropriate, from
the Chair of the Board and
Chief Executive.
Performance measures
and their weightings are
reviewed annually to
maintain appropriateness
and relevance.
Performance is assessed
against a range of
measures, with at least
50% relating to financial
metrics and any balance
reflecting non-financial
measures (including risk)
and/or achievement of
key personal and strategic
measures.
Each executive director’s
annual bonus is based
on a mix of financial
and non-financial
performance measures
measured over one year.
The annual bonus is
non-pensionable. Malus
and clawback apply to
the annual bonus as
described in the full
Remuneration Policy in
the Annual Report and
Accounts 2019.
A portion of the annual
bonus may be deferred
and/or may be paid in
shares, dependent on
the regulatory status
of the bank and at
the discretion of the
Committee. Awards
under the DSBP can
take the form of a
nil-cost option with
a ten-year life, a
conditional award of
shares or an award of
forfeitable shares. The
use of this deferral is
described below.
Implementation as a Level 2 bank:
After the Group becomes a Level 2 bank for regulatory purposes, the PSP will be the primary vehicle for meeting the deferral
requirements under the PRA remuneration requirements, although the Committee retains the right to defer such portion of an annual
bonus award and over such deferral period as it determines to ensure that regulatory requirements are met.
50% of the bonus earned will be paid in cash, and 50% will be paid in shares. Any shares delivered will normally be immediately
vested and may take the form of shares which must be retained for at least 12 months, or a right to acquire shares at the end of the
holding period. In the former scenario, the executive director may sell shares to cover the tax liability arising on the award. In the
latter scenario, the award may include the right to receive a dividend equivalent in respect of dividend record dates over the holding
period. Where an award is subject to a deferral period and does not benefit from dividends or dividend equivalents to meet regulatory
requirements, the number of shares to be awarded may be determined using a share price discounted for the expected dividend yield.
Page 130
Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
Paragon Performance Share Plan (‘PSP’)
To incentivise executives to
achieve enhanced returns for
shareholders.
To encourage long-term
retention of key executives.
To align the interests of
executives and shareholders.
An annual award of
shares subject to
continued service and
performance conditions
assessed over a
three-year performance
period.
The performance
conditions used are
reviewed on an annual
basis to ensure they
remain appropriate.
Awards are structured
as nil cost options
with a ten-year life, a
conditional award of
shares or an award of
forfeitable shares.
Implementation of
the vesting rules is
described below the
table.
Malus and clawback
apply to the PSP as
described in the full
Remuneration Policy in
the Annual Report and
Accounts 2019.
Maximum award is 180%
of salary in respect of any
financial year.
25% of the awards will vest
for threshold performance,
with full vesting taking place
for equalling or exceeding the
maximum performance target.
In determining the number of
shares subject to an award,
the market value of a share
shall, unless the Committee
determines otherwise, be
assumed to be the average
share price for the five days
following the announcement of
the Company’s results for the
previous financial year.
Where awards do not receive
dividends or dividend
equivalents to meet regulatory
requirements, the number of
shares to be awarded may be
determined using a share price
discounted for the expected
dividend yield.
The Committee will
take into consideration
prior performance when
assessing the value of the
PSP grant.
Forward-looking
performance is measured
against a long-term
scorecard of challenging
performance measures
that reflect the Company’s
strategic priorities.
Performance conditions
may include financial
measures (eg adjusted
EPS and/or relative
TSR), and non-financial
measures which may
include risk-based,
people and/or customer
measures.
Performance measures
and their weightings,
where multiple measures
are used, are reviewed
annually to maintain
appropriateness and
relevance.
Implementation as a Level 2 bank:
When the Group becomes a Level 2 bank for regulatory purposes, at the end of the performance period, the performance outcome
will be used to assess the percentage of the awards that will vest. These shares will then normally vest in five equal tranches, with the
first vesting on or around the third anniversary of the grant date and the last instalment vesting on or around the seventh anniversary
of the grant date, in accordance with the PRA remuneration rules.
Each vested tranche will be subject to an additional one year holding period, taking the form of shares which must be retained for at
least the holding period, or a right to acquire shares at the end of the holding period. In the former scenario, the executive director
may sell shares to cover the tax liability arising on award. In the latter scenario, the award may include the right to receive a dividend
equivalent in respect of dividend record dates over the holding period.
Page 131
Corporate Governance Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
Sharesave Plan
To provide all employees with
the opportunity to become
shareholders on similar terms.
Periodic invitations are made
to participate in the Company’s
Sharesave Plan.
HMRC monthly savings
limits apply.
None.
A savings contract over three or
five years with the funds used
on maturity either to purchase
shares by exercising options or
returned to the participant.
The option is granted at a
discount to the share price at
the time of grant of up to 20%.
The Sharesave Plan provides
tax benefits in the UK subject
to satisfying certain HMRC
requirements and is operated
on an ‘all employee’ basis.
Elements of the remuneration policy for the Chair and non-executive directors
The Chair receives a fee, a company car or cash alternative and is eligible for private health cover on an individual or family basis in the
same way as the executive directors. Non-executive directors are remunerated solely by fees. Neither the Chair nor the non-executive
directors are eligible to participate in any of the Company’s fixed role-based allowance, incentive or pension schemes and they are not
entitled to receive compensation for early termination of their terms of engagement.
Benefits may also be provided to non-executive directors related to the performance of their duties (for example, travel and
subsistence).
Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
Salary and fees
To ensure that the Group
can attract and retain the
appropriate number and mix
of non-executive directors
with the correct experience to
provide balance, oversight
and challenge.
None.
Non-executive director fees
are reviewed on a periodic
basis and are subject to
the Articles of Association.
The Chair’s fee is set by the
Committee, whilst the
non-executive directors’
fees are determined by
the Board.
The Board will exercise
judgement in determining
the extent to which
non-executive directors’
fees are altered in line with
market practice, given the
requirement to attract and
retain the appropriate skills
and given the expected
time commitments.
Non-executive directors are
paid an annual base fee with
additional fees for additional
roles (for example, Senior
Independent Director or
chair of a board committee)
Non-executive directors
may be eligible to receive
benefits such as travel and
other reasonable expenses.
The Board will review fees
periodically to assess
whether they remain
competitive and appropriate
in light of changes in roles,
responsibilities and/or
time commitment of the
non-executive directors.
Increases above those
awarded for the rest of the
organisation may be made to
reflect the periodic nature of
any review.
The Articles of Association
of the Company contain
a maximum level of fees
that can be paid annually
to non-executive directors
(currently £2,000,000). This
is reviewed by the Board
from time to time.
Where benefits are provided
to non-executive directors,
they will be provided at
a level considered to
be appropriate, taking
into account individual
circumstances.
Page 132
B7.4 Approval of Director’s Remuneration Report
The information provided in this part of the Directors’ Remuneration Report is not subject to audit.
This Directors’ Remuneration Report, Section B7 of the Annual Report and Accounts, including the Statement by the Chair of the
Committee, the Annual Report on Remuneration and the Policy Summary, has been prepared in accordance with Schedule 8 to the
Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 as amended and has been approved by
the Board of Directors.
Signed on behalf of the Board of Directors.
Hugo Tudor
Chair of the Remuneration Committee
3 December 2020
Page 133
Corporate Governance I am pleased
to confirm that
in the last year
the Committee
has again, in my
view, met its key
objectives and
carried out its role
effectively...
B8 . Risk
management
B8.1 Statement by the Chair
of the Risk and Compliance
Committee
Finlay Williamson,
Chair of the Risk and Compliance Committee
Dear Shareholder
I am pleased to write to you again as Chair of the Risk and
Compliance Committee to explain how we, as a committee, have
discharged our responsibilities in the last year. I will be stepping
down as Chair of the Committee at the end of 2020 and my final
year has seen the impact of Covid-19 posing unique challenges
to the Group’s risk framework.
Our primary responsibility continues to be the maintenance of
oversight of the effectiveness of the Group’s risk management
framework and of the Group’s systems and controls for
compliance with its statutory and regulatory obligations. The
Committee also oversees the risk culture within the Group
ensuring it is supportive of the overall risk appetite set by the
Board and adequately embedded in the Group’s operations.
The Committee structure has been further enhanced during
2020 with the new monthly Executive Risk Committee. The
addition of this layer of governance is crucial in ensuring that
the RCC maintains its focus on the key material and strategic
risk issues that the Group faces. This will enable the RCC to
spend more time pro-actively identifying and assessing new and
emerging risks.
Following the retirement of the Group’s Chief Risk Officer (‘CRO’)
Malcolm Hayes at the end of 2019, the Group is pleased to
announce the appointment of Ben Whibley as his successor.
Page 134
Ben has been with the Group for 6 years, previously holding the
position of Deputy CRO. Prior to this Ben was CRO for Paragon
Bank PLC. The Committee and I would like to wish him well in
his new role and look forward to working closely with Ben as the
Group continues to enhance its risk management capabilities.
Given the inevitable challenges of Covid-19 and the impact on
the risk profile, much of the Committee’s agenda since March
has focussed on the new and emerging risks from the pandemic
and the resultant regulatory, economic and people-related
impacts. In particular, the Committee has regularly reviewed:
•
•
•
The impacts of the revised working arrangements for
employees given the UK Government’s announcement of a
full lockdown in March 2020
The implementation of payment holidays and other
forbearance strategies ensuring customer treatment remains
at the forefront of our considerations
Increased risks and additional mitigation required due to
restricted ability to carry out onsite property surveys and the
limitations on the completeness of credit bureau data
•
The issuance of CBILS and BBLS including the associated
credit risk, financial crime and processing risks
The Committee continues to monitor the implications of these
changes together with any further regulatory requirements
that are being issued to manage customer and prudential risks
arising from Covid-19.
Despite the heavy focus on Covid-19 and the heightened risks
thereof, the Committee has continued to balance the need to
provide close oversight of the developing situation in respect of
the pandemic with standing agenda items. This has also included
non-Covid-19 specific risks which still require in-depth focus in
the normal course of business.
During the coming year, the Committee’s priorities will include:
Ongoing oversight of the Group’s response to Covid-19 and
any further government or regulatory measures that are
implemented
Continuing to review the potential impacts on the Group of
the consequences of UK’s decision to withdraw from the EU
as the transition period ends in December 2020 and the basis
of the future relationship becomes clearer
Monitoring the progress of the Group in managing exposures
to LIBOR as the primary sterling interest rate benchmark as
this is phased out
Overall, I am pleased to confirm that in the last year the
Committee has again, in my view, met its key objectives and
carried out its role effectively.
As I look to the year ahead there remain significant challenges
which the Group will continue to face. It is clear that the
economic, political and regulatory environment is highly
dependent on the trajectory of the pandemic which remains
uncertain. However, I have been impressed with the way that
the Group has and continues to respond. The Group responded
efficiently, effectively and considerately to the challenge of
mobilising the workforce from home in the face of lockdown
and in maintaining levels of service across all products. Whilst
payment holiday requests were a relatively low percentage
across the whole portfolio, the revised processes and associated
risks were managed promptly despite the short timeframes
within which these were implemented.
The Group also faces added non-Covid-19 specific challenges
within the operating environment that could materially impact
on the Group’s risk profile. These include the transition away
from LIBOR which is being overseen through a comprehensive
programme to manage the associated risks. However, there are
a number of dependencies which will need to continue to be
monitored closely to ensure successful delivery.
In addition, the ongoing level of uncertainty surrounding the
basis of the UK’s status post-2020 following its departure from
the EU remains high, with the future of its trading relationships
remaining extremely unclear. Whilst I remain confident that the
Group has the skills and experience to manage the risks it is
likely to encounter in the year ahead, we remain vigilant of the
need to reinforce these should circumstances change materially.
As I indicated earlier, this is the last time I shall be writing to
you as Chair of Paragon’s Risk Committee, as I will be stepping
down from the Board at the end of the year. Peter Hill, who was
appointed to the Board in October, will take over as Chair of the
Committee on my departure, following a handover period.
Looking back over my time with the Group, firstly with Paragon
Bank in its earliest years, and then on the main board, the level
of progress in the Group’s risk infrastructure is striking, I am
proud of what has been achieved and of the team we have put
together. I would like to thank my fellow directors and the Group’s
risk function for their support over my tenure as Chair of the
Committee, and to extend to them and to Peter, my best wishes
for the future.
Finlay Williamson
Chair of the Risk and Compliance Committee
Continued oversight of the Group’s project to implement an
IRB approach for credit risk
3 December 2020
Reviewing the Group’s progress in enhancing its
enterprise-wide risk management framework including
ensuring risk appetite remains consistent with delivery of
the Group’s strategic objectives and proposing any required
changes in risk appetite to the Board
Overseeing the Group’s progress on responding to the
increasing challenges posed by climate change and
addressing any impact this may have on the Group’s
risk profile
Continuing its focus on ensuring that customers receive fair
outcomes, including monitoring the treatment of vulnerable
customers, and ensuring that the management of conduct
risk remains a key priority for the Group
Overseeing a review of the Group’s culture and any actions
identified by it
Undertaking deep dives in relation to specific risk categories
and business areas on both a rolling and ad hoc basis
Page 135
•
•
•
•
•
•
•
•
•
Corporate Governance B8.2 Risk governance
The Group’s approach to governance and the committee
structures are described in Section B4. This covers revisions
during the year including the implementation of a new Executive
Risk Committee (‘ERC’). The Committee structure and lines of
oversight in place at the year end are set out below.
Risk and Compliance Committee
The Risk and Compliance Committee assists the Board in
fulfilling its responsibilities for risk management. It comprises the
independent non-executive directors and the Chair of the Board.
The terms of reference, which were reviewed and approved by
the Board in October 2020, include all matters indicated by the
2018 Code.
The Committee’s responsibilities include reviewing:
• Recommendations and matters for escalation from the ERC
The Committee provides ultimate oversight and challenge to
the Group’s enterprise-wide risk management arrangements
which are managed through the ERC. It also retains oversight
responsibility for model risk within the Group. The Risk and
Compliance Committee delegates day-to-day oversight for
model risk to the Model Risk Committee (‘MRC’).
The Risk and Compliance Committee meets at least four times
a year and normally invites the executive directors, CRO, Chief
Operating Officer and Internal Audit Director to attend its
meetings. However, it reserves the right to request any of these
individuals to withdraw or to request the attendance of any other
Group employee.
The Committee meets with the CRO at least once a year, without
the presence of executive management, to discuss their remit
and any issues arising from it.
The Committee also has the opportunity to meet with the
Internal Audit Director and / or the external auditor without the
presence of executive management to discuss any matters that
any of these parties believe should be discussed privately.
Standing items covered in each meeting of the Committee have
included:
•
•
•
•
The effectiveness of the Group’s risk management framework
and the extent to which risks inherent in the Group’s business
activities and strategic objectives are controlled within the
risk appetite established by the Board
The effectiveness of the Group’s systems and controls for
compliance with statutory and regulatory obligations, as well
as its obligations under significant contracts
The appropriateness of the Group’s risk culture, to ensure it
supports the Group’s stated risk appetite
The effectiveness of the Group in addressing issues requiring
remedial attention to ensure actions are completed in a
timely manner and minimise the potential for risk appetite
thresholds to be exceeded
•
•
•
•
Reviews of the principal risks facing the Group including a
comprehensive refresh of the risks during 2020
Consideration of new or emerging risks and regulatory
developments and their impact on the Group
Consideration and challenge of management’s rating of the
various risk categories to which the Group is exposed
Consideration of the root causes and impact of material
risk events and the adequacy of actions undertaken by
management to address them
Risk and
Compliance
Committee
Chief
Executive
Officer
Model Risk
Committee
(‘MRC')
Executive Risk
Committee
(‘ERC’)
Asset and Liability
Committee
(‘ALCO')
Credit
Committee
Customer and
Conduct Committee
(‘CCC')
Operational Risk
Committee
(‘ORC')
Page 136
In addition, during the last year, the Committee:
•
•
•
•
•
•
•
•
•
•
•
Reviewed the Group’s risk appetite to ensure it remained
consistent with the delivery of the Group’s strategic
objectives, proposing any required changes to the Board
Continued to monitor progress in respect of the Group’s
application for regulatory approval to enhance credit risk
management by implementing an IRB approach
Monitored and reviewed the potential impacts on the Group
of the Brexit process, given the continuing uncertainty around
the terms on which the UK might leave the EU
Conducted deep dive reviews into targeted risk areas, such
as the potential impact on the Group of negative interest
rates
Considered regular focussed reviews of key risk areas
including credit risk, capital risk, liquidity and market
risk, conduct risk and across the different categories of
operational risk
Continued to monitor the progress of the Group in addressing
its approach to operational resilience following the issuance
of the regulatory consultation paper in December 2019. This
has included significant focus on the Group’s third party
provided services
Reviewed, challenged and approved the Management
Responsibilities Map
Reviewed, challenged and approved the terms of reference of
each of the executive risk committees
Reviewed, challenged and approved the Compliance
Monitoring Plan (‘the Compliance Plan’) and subsequent
updates to the Compliance Plan
Reviewed, challenged and approved the Money Laundering
Reporting Officer’s annual report
Considered and challenged reports in relation to ICAAP,
ILAAP and Recovery Plan recommending approval to
the Board
•
•
•
•
Periodically reviewing the effectiveness of the Group’s internal
control and risk systems including the Group’s material
outsourced arrangements and risks associated therewith,
particularly where they might impact customers
Ensuring compliance with relevant PRA and FCA regulations
(excluding the SMCR, which is overseen by the Executive
Committee)
Reviewing the process and outcome of the Group’s ICAAP,
ILAAP, Recovery Plan and Resolution Pack together with
recommendations to the Risk and Compliance Committee
and Board for approval
Considering the implications of any proposed legislative or
regulatory changes that may be material to the Group’s risk
appetite, risk exposure, risk management and regulatory
compliance
The ERC is supported by an Asset and Liability Committee,
Customer and Conduct Committee, Credit Committee,
and Operational Risk Committee. Each of these executive
committees operates within terms of reference formally
approved by the ERC. Their primary functions are described
below.
Asset and Liability Committee (‘ALCO’)
ALCO comprises heads of relevant functions and is chaired by
the Chief Financial Officer.
The principal purpose of ALCO is to monitor and review the
financial risk management of the Group’s balance sheet. As such,
it is responsible for overseeing all aspects of market risk, liquidity
risk and capital management as well as the treasury control
framework. ALCO operates within clearly delegated authorities,
monitoring exposures and providing recommendations on
actions required. It also monitors performance against appetite
on an on-going basis and makes recommendations for revisions
to risk appetites through ERC to the Risk and Compliance
Committee.
• Challenged and approved various key risk policies
Customer and Conduct Committee (‘CCC’)
Executive Risk Committee (‘ERC’)
ERC was established during the year to assist the CEO in
designing and embedding the Group’s risk management
framework, monitoring adherence to risk appetite statements
and identifying, assessing and controlling the principal risks
within the Group. It includes all Executive Committee members
and reports to the CEO. The ERC monitors the interaction and
integration of the Group’s business objectives, strategy and
business plans with the Group’s risk appetite and risk strategy
and escalates breaches and significant matters to the Risk and
Compliance Committee, recommending changes as appropriate.
Key areas of focus for the ERC include:
•
•
•
Developing and, at least annually, reviewing the
appropriateness and effectiveness of the overall risk
management framework to manage and mitigate risk
Reviewing the Group’s approach to controlling each principal
risk and its capability to identify and manage such risks
Reviewing emerging risks as they arise, including
consideration of their potential impact on the Group’s
business objectives, strategy and business plans, as well as
risk choices, appetite and thresholds
The CCC comprises heads of relevant functions and is chaired
by the Chief Risk Officer.
The CCC is responsible for overseeing the Group’s conduct
risk and compliance arrangements. The Committee considers
conduct risk information such as details of conduct breaches;
systems and procedures for delivering fair outcomes to
customers; the product governance framework; monitoring
reports; and employee incentive schemes. It also considers
product reviews from a customer perspective. With respect
to compliance, the CCC is responsible for overseeing the
maintenance of effective systems and controls to meet conduct-
related regulatory obligations. It is also responsible for reviewing
the quality, adequacy, resources, scope and nature of the work
of the Compliance function, including the annual Compliance
Monitoring Plan.
Credit Committee
The Credit Committee comprises senior managers from the risk,
finance and collections functions and is chaired by the Credit
Risk Director.
Page 137
Risk and
Compliance
Committee
Chief
Executive
Officer
Model Risk
Committee
(‘MRC')
Executive Risk
Committee
(‘ERC’)
Asset and Liability
Committee
(‘ALCO')
Credit
Committee
Customer and
Conduct Committee
Operational Risk
Committee
(‘CCC')
(‘ORC')
Corporate Governance The Credit Committee approves credit risk policies in respect of
customer exposures and defines risk grading and underwriting
criteria for the Group. It also provides guidance and makes
recommendations in order to implement the Group’s strategic
plans for credit. The committee oversees the management of
the credit portfolios, the post-origination risk management
processes and the management of past due or impaired credit
accounts. It also monitors performance against appetite on an
on-going basis and makes recommendations for revisions to the
credit risk appetites through ERC to the Risk and Compliance
Committee. The Committee also operates the Group’s most
senior lending mandate.
•
•
•
The fair treatment of customers and the delivery of fair
outcomes, particularly for those customers considered to
be vulnerable, is central to the Group’s risk management
approach
Robust risk management remains at the heart of all decision-
making and is conducted within an open and transparent
environment
The Group only carries out business where the potential risk
to itself and its customers has been considered together with
the potential reward and where the residual risk exposure
remains within its defined risk appetite
Operational Risk Committee (‘ORC’)
The ORC comprises heads of relevant functions and is chaired
by the Operational Risk Director.
The ORC is responsible for overseeing the Group’s operational
risk and resilience arrangements, including those systems and
controls intended to counter the risk that the Group might be
used to further financial crime. The Committee remit includes
risks arising from personnel, technology, and environmental
matters within the business. The Committee considers key
operational risk information such as key risk indicators, themes
within risk registers, emerging risks, loss events, control
failures, and operational resilience measures. It also monitors
performance against appetite on an on-going basis.
Model Risk Committee (‘MRC’)
The MRC reports directly to the Risk and Compliance
Committee and comprises senior managers from Risk, Finance
and the main business areas, it is chaired by the CRO and
attended by Hugo Tudor, a non-executive director. The role of
the MRC is to review and make recommendations on all material
aspects of the rating and estimation processes in relation to key
credit and finance models. The MRC also acts as the ‘Designated
Committee’ for IRB purposes, approving all material aspects of
IRB rating systems.
B8.3 Risk Management
Culture
•
The Group has a risk management framework which ensures
that risks are owned and managed in a consistent way
B8.4 Risk Management
framework
Introduction
The Group’s risk management framework is designed to enable
management to identify and focus attention on the risks most
significant to its objectives and to provide an early warning of
events that put those objectives at risk. The framework and
the associated governance arrangements are designed to
ensure there that there is clear organisational structure with
distinct, transparent and consistent lines of responsibility in the
facilitation of risk management.
Effective risk management is core to the execution of the
Group’s strategy. A key priority for the Group is to ensure that the
framework continues to evolve to reflect the changing landscape
and emerging threats necessitating ongoing investment and
enhancement in the enterprise-wide risk management system.
The Group continues to ensure that the tools for effective risk
identification, assessment and monitoring are appropriate and
embedded at all levels across the Group. Significant work has
been undertaken over the past twelve months, and is ongoing,
to develop the framework to support the Group’s strategic
aspirations. This includes refinement of core risk processes and
language and strengthening the committee structure to support
effective challenge and escalation.
The Board is committed to maintaining a strong risk culture as a
fundamental element of the Group’s corporate culture. This risk
culture promotes effective risk management that is consistent
and commensurate with the nature, complexity and risk profile
of the business.
The importance of risk management is embedded at all levels
of the business and all staff are expected to understand and
have accountability for the risks they take. Appropriate risk
management is core to the Group’s performance management
process. The Group’s risk culture has been central in ensuring
historically low levels of credit and operational losses and the
absence of any material conduct issues affecting customers.
The Group’s strong risk culture is embedded through various
practices which support and protect the Group’s wider strategic
goals and remain essential to protecting the Group’s customers,
shareholders, creditors and its reputation. These include:
Risk management framework
The risk management framework is intended to provide a
structured and disciplined approach to the management of risk
within agreed appetites thereby supporting the achievement of
the Group’s strategic objectives. The key objectives of the risk
management framework are to:
•
•
•
Determine a defined strategy in the Group’s attitude to risk
including outlining the approach taken in respect of setting
qualitative statements and quantitative metrics to measure
the Group’s tolerance and appetite for risk
Establish a consistent risk taxonomy which describes the
principal risk categories and the more granular aspects of
each of these categories
Promote an appropriate risk culture across the Group
ensuring risk is considered as part of key strategic and
business decision making
Page 138
Risk appetite framework
The risk appetite framework outlines the Group’s approach to
setting and monitoring risk appetite. The framework stipulates
the approach to setting risk appetite, reporting and escalation
obligations and the frequency of review. The framework is
subject to annual board approval.
In determining the Group’s risk appetite, the following principles
are integral:
• Alignment to principal risks
• Alignment to strategic objectives
• Appropriateness of calibration to drive timely action
• Ongoing monitoring of the risk profile
The Group has developed a tiered approach to setting and
monitoring of risk appetite. A set of board-owned (Level 1)
metrics has been established. These are monitored on an
ongoing basis and any threshold breaches in respect of these
are immediately escalated to the Board. Executive committees
are responsible for reviewing more extensive (Level 2) metrics.
Any breaches of Level 2 metrics are escalated to the ERC who
determine whether these are sufficiently material to be reported
to the Board.
As part of the evolution of the enterprise-wide risk management
framework, work is in progress to ensure that the risk appetite
framework continues to mature. Ongoing development is being
undertaken to ensure:
•
•
•
All the revised principal risks have qualitative and quantitative
appetites
There are appropriate Level 1 and 2 appetites monitored on
an ongoing basis
Calibration of appetite is appropriate and will drive timely
management action
•
•
•
•
•
Establish standards for the consistent identification,
measurement, monitoring, management and reporting of risk
exposure and loss experience
Promote risk management and the proactive reduction of
the frequency and severity of risk events, driving control
improvements where necessary
Facilitate adherence to regulatory requirements, including
threshold conditions, capital standards and to support the
regulatory requirements associated with the ICAAP, ILAAP
and the Recovery Plan
Provide senior management and relevant committees with
risk reporting that is relevant and appropriate, enabling timely
action to be taken in response to the information included
within these reports
Determine a suite of risk policies which align to the principal
risks and identify the key controls to measure and manage
these risks
Three lines of defence model
The Group employs a ‘three lines of defence model’ to delineate
responsibilities in the management of risk ensuring adequate
segregation in the oversight and assurance of risk as follows:
•
The first line of defence, comprising executive directors,
together with managers and employees in operational and
support areas. The first line has day-to-day responsibility for:
o Risk identification, assessment and measurement
o Control and ongoing monitoring of operations
o
Escalation and reporting of risk issues in line with stated
appetite
Risk Champions are appointed within all business areas to
support the embedding of an effective risk culture across
the Group.
•
The second line of defence is provided by the Risk function
headed by the CRO, who reports directly to the CEO. The
function is overseen by the Risk and Compliance Committee
and its supporting executive committees. Risk and
Compliance provide support and independent challenge on
all risk related issues specifically:
o
Developing and maintaining the risk management
framework covering all areas of the Group
o
Developing and maintaining risk policies within that
framework, ensuring these are consistent with the Board’s
risk appetite
o
Ensuring that risks generated by the business are
measured, monitored, controlled and reported on a
timely basis
o
Maintaining open and constructive engagement with the
regulatory authorities
•
The third line of defence is provided by the Internal Audit
function which is responsible for reviewing the effectiveness
of the first and second lines of defence. This function is
overseen by the Audit Committee. Internal Audit provides
independent assurance on:
o First and second lines of defence
o The appropriateness and effectiveness of internal controls
o Effectiveness of policy implementation
Page 139
Corporate Governance
B8.5 Principal risks and mitigations
The Group is exposed to a number of principal risks and uncertainties that arise from the operation of its business model and
strategy. A summary of those risks and uncertainties which could prevent the achievement of the Group’s strategic objectives, how
the Group seeks to mitigate those risks and the change in the perceived level of each risk in the last financial year are described
below. These risks are discussed in more granular detail in the Group’s Pillar III report, published on the Group website.
This analysis represents the Group’s gross risk position as presented to, and discussed by, the Risk and Compliance Committee as
part of its ongoing monitoring of the Group’s risk profile.
The risks are set out in accordance with the Group’s amended classification of its principal risks, approved by the Board in the year.
Therefore, the headings shown differ from those presented in previous annual reports. In particular, reputational risk, model risk and
climate change risk are separately identified as principal risks for the first time.
The changes in the perceived level of each risk in the last financial year are indicated using the symbols shown below:
Risk increasing
Risk decreasing
Risk stable
Capital Risk
Description
Mitigation
Change
The Group faces the risk
of insufficient capital to
operate effectively including
meeting minimum regulatory
requirements, operating
within Board approved risk
appetite and supporting the
Group’s strategic goals.
In addition, the changes
made in the Basel III capital
regime by the BCBS
regarding minimum capital
requirements, which will now
impact from 1 January 2023
could have an impact on the
capital position of the Group.
A robust process exists over Pillar 1 reporting with a
comprehensive annual ICAAP assessment including all
material capital risks.
An internal capital buffer is maintained in excess of
minimum regulatory requirements to protect against
unexpected losses or risk-weighted asset growth.
The Group took a strategic decision in 2016 to seek
the necessary regulatory approval to implement an
IRB (‘Internal Ratings Based’) approach for credit
risk. The first stage of the Group’s application for the
accreditation of its IRB approach to credit risk for capital
adequacy purposes was submitted to the PRA in March
2020. Models have been built and tested, governance
frameworks enhanced, and IRB outputs are now being
regularly considered internally.
Outside of the impact of
Covid-19, which resulted in the
delay of the BCBS changes by
12 months (to 2023) and policy
amendments to the Pillar
2A regime there has been
little impact on the overall
capital risk framework and the
Group’s assessment of the
likely impact of these changes.
Liquidity and Funding Risk
Description
Mitigation
The Group is exposed to the
risk that it has insufficient
funds to meet its obligations
as they fall due.
The Group maintains a diversified range of both retail
and wholesale medium and long-term funding sources to
cover future business requirements and liquidity to cover
shorter term funding needs.
Retail deposit taking is central
to the Group’s funding plans
and therefore changes in
market conditions could
impact the ability of the
business to maintain the level
of funding required to sustain
normal business activity.
Internally, comprehensive treasury policies are in place
to ensure sufficient liquid assets are maintained and that
all financial obligations can be met as they fall due, even
under stressed conditions.
The Group has a dedicated Treasury function which is
responsible for the day-to-day management of its overall
liquidity and wholesale funding arrangements. The Board,
through the delegated authority provided to the ALCO,
sets limits as to the level, composition and maturity of
liquidity resources.
Change
The Group remains well
placed to access funding
from a wide range of sources
to meet its future funding
requirements. During the
year, the Group completed a
fully retained securitisation
which boosted its contingent
funding options and also
obtained access to the
TFSME which remains open
for drawings until April 2021.
Page 140
Market Risk
Description
Mitigation
Change
The Group is exposed to the
risk that changes in interest
rates at which it lends and
those at which it borrows
may adversely affect its
net interest income and
profitability. In addition, its
financial performance may
be affected by fluctuations in
the exchange rates between
currencies.
This risk is managed within Board approved risk appetite
limits with comprehensive treasury polices in place to
ensure that the risk posed by changes and mismatches
in interest or exchange rates are effectively managed.
Day-to-day management of interest rate risk within
Board approved limits is the responsibility of Treasury
with control and oversight provided by ALCO.
The Group seeks to match the maturity profile of assets
and liabilities and uses financial instruments, such as
interest rate swaps, to hedge the exposure arising from
repricing gaps.
The Group’s market risk
profile, relative to its balance
sheet, has remained broadly
similar and therefore
associated risk levels remain
generally stable compared to
previous periods. However,
with LIBOR expected to
cease to exist before the
end of December 2021, the
Group will need to transition
LIBOR referenced assets and
liabilities to alternative risk-
free rates, and this process is
expected to increase interest
rate risk over the next 12
months.
A LIBOR Transition steering
committee has been
established to oversee the
transition and the Group is
working with several industry
and regulatory bodies as part
of the process.
Credit Risk
Description
Mitigation
Change
Credit risk elements which
could expose the Group to the
risk of unexpected material
losses include:
•
•
•
Customer risks through
failure to screen potential
borrowers, and manage
repayments
Concentration risk in
credit portfolios through
an uneven distribution of
exposures of borrowers,
asset classes, sectors or
geographies
Reduction in value of
collateral owned by the
Group, or secured against
debt owed to it
•
Wholesale counterparty
risk
• Outsourcer default risk
The Group has a robust limit framework supported by
comprehensive policies in place that set out detailed
criteria which must be met before loans are approved.
Exceptions to credit policies require approval by the
Credit Risk function, operating under a mandate from the
Credit Committee.
The Group uses a range of sources to inform
expectations of key external factors such as interest rate
movements and house price inflation which are in turn
used to guide policy and underwriting.
The Group also continues to exploit opportunities to
diversify the range of its activities and income streams,
consistent with its strategic objective of operating as a
prudent, risk focussed specialist lender.
The majority of the Group’s loans by value continue to be
secured against residential property in England and Wales
at conservative loan-to-value levels. The primary collateral
therefore benefits from the features of UK property which
forms part of a highly mature, liquid, sustainable market
demonstrated over many decades of operation.
Exposure to wholesale counterparty credit risk is limited
to counterparties that meet specific credit rating criteria
per the Group’s comprehensive treasury policies.
Exposure to approved counterparties is monitored
daily by senior management within the Group’s Treasury
function with all exposure managed within ALCO
approved limits.
Ongoing monitoring of the credit rating and financial
performance of all outsourced relationships and critical
suppliers is undertaken.
At the onset of the Covid-19
pandemic, the Group
immediately tightened credit
criteria for new lending to
preserve credit standards
and reflect immediate lending
uncertainty.
The Group’s credit discipline
remains firm, but in view of the
wider economic conditions,
additional provision for credit
losses has been allocated
in line with a prudent,
forward-looking view of loan
performance.
Page 141
Corporate Governance Model Risk
Description
Mitigation
Change
Models are used across the
Group to inform financial
decision making and
hence it is imperative that
the environment in which
the models are designed,
implemented and operate is
subject to appropriate rigour.
As the use of internally developed models has increased
across the Group, a robust framework and governance
has been developed to manage the associated risks.
This includes the MRC which oversees the development,
implementation and ongoing monitoring of models
across the Group.
The Model Governance Framework provides a structured
and disciplined approach to the management of model
risk. This includes clear development, implementation
and ongoing oversight principles together with the
requirements for independent validation based on model
materiality criteria.
It is recognised that the
increasing use of internally
developed models will drive
a commensurate risk to the
Group. However, given the
strength of the framework and
oversight processes, model
risk remains within appetite
and the outlook remains
stable.
Pension Obligation Risk
Description
Mitigation
Change
The Group’s commitments
under its defined benefit
scheme expose it to the risk
that the assets of the scheme
may be insufficient to meet its
liabilities.
The Group conducts regular asset-liability reviews in
conjunction with the Trustee to determine the optimal
long-term asset allocation with regards to the structure
of liabilities within the Plan.
The Plan is subject to triennial formal valuation by the
Plan actuary. The valuation process as at 31 March 2019
was completed in the year, including the agreement of a
recovery plan between the Trustee and the Group which
will aim to clear the deficit in the Plan. As part of that
agreement a £20.0 million additional contribution was
made in the year.
Despite short-term
fluctuations caused by market
instability in interest rates
and asset prices, the Group
considers the underlying
long-term funding position
for the Plan to be robust and
sustainable. The additional
contribution made in the year
has reduced the scope for
further commitments.
Reputational Risk
Description
Mitigation
Change
Maintenance of a strong
reputation across all lines
of business and operational
activities is core to the
Group’s philosophy.
Detrimental reputational
impacts may result from
crystallisation of other
principal risks, but also
through failure to safeguard
the integrity of the brand
or failing to meet external
expectations in conducting
business practices.
The reputational impacts of any changes to strategy,
pricing, or processes are explicitly considered in the
decision-making process and are reviewed by the
Director of External Relations.
The Group has an experienced External Relations
function who manage all Group communications and
ensure that the reputational profile of the Group remains
protected at all times.
All material risk events are reviewed for reputational
impact and mitigating actions are initiated as
appropriate.
The Group continues to
manage its reputation
effectively in all its dealings.
Whilst it is mindful that the
threat to reputation can
emanate from many sources,
the Group remains well-
placed to respond quickly and
efficiently to any reputational
issue.
Page 142
Strategic Risk
Description
Mitigation
Change
The Group’s strategy as a
specialist lender is key to
its operating model and
business planning. However,
there is a risk that changes
to the business model or
macroeconomic, geopolitical,
regulatory, competitive or
other factors may impact
delivery of strategic
objectives.
The Group closely monitors economic developments
in the UK and overseas, with support from leading
independent macro-economic and other advisors.
Stress testing is performed to assess its expected
performance under a range of operating conditions. This
provides the Board with an informed understanding and
appreciation of the Group’s capacity to withstand shocks
of varying severities.
The Group continues to exploit opportunities to diversify
the range of its activities and income streams, consistent
with its strategic objective of operating as a prudent, risk
focussed lender.
UK economic performance
remains highly uncertain. The
medium and longer- term
impacts of Covid-19 are still
to be determined. Whilst
the Group has continued
to remain resilient in the
immediate crisis, the potential
for future waves of the
pandemic and associated
lockdowns still present a
significant risk.
In addition, there is still a lack
of clarity as to the basis of
the UK’s withdrawal from and
future relationship with the
EU. The continuing high levels
of uncertainty have resulted in
an increase in the overall risk
assessment.
Climate Risk
Description
Mitigation
Change
The Group considers the
impact of climate change
either directly on the Group or
indirectly through its third-
party relationships.
This includes the transitional
risk to its strategy and profile
through moving to a low
carbon environment and
any physical risks arising
from changes to the natural
environment.
The Group proactively manages physical risk and has
specific underwriting policies aimed at mitigation, for
example, risks associated with flooding and coastal
erosion.
The potential for transition risk is monitored within the
different business lines, with external events prompting
consideration of amendments to credit policy and
underwriting criteria.
The tightening of efficiency standards for domestic
properties has the potential to impact the buy-to-let
market and the energy performance of property stock.
The Credit Committee has considered the EPC data to
provide an insight into the energy efficiency of properties
on which the Group lends.
Longer term strategic planning will also be informed by
the ongoing analysis.
During the year the CFO has
been assigned the SMF with
responsibility for climate
change and has taken the
lead in developing Paragon’s
understanding of the issue.
The Board has adopted
climate change as a new
principal risk. A working
group reporting to ERC has
been established to consider
the plan of work required to
embed the management of
climate related risks within the
Group.
Page 143
Corporate Governance Conduct Risk
Description
Mitigation
Change
The commitment to delivering
fair customer outcomes is
at the heart of the Group’s
culture.
Conduct risk arises where the
culture and behaviours fail to
promote the customer’s best
interests resulting in unfair
outcomes for the customer.
The Group has a formal Conduct Risk Management
framework, which includes detailed policies addressing
the fair treatment of customers. At the centre of these
is the Conduct Risk Policy. This sets out the Group’s
overarching approach to the management of conduct
risk.
The management of conduct risk within the Group is
tailored to the specific product and customer type
concerned including dedicated quality and control teams
which validate process adherence and the delivery of fair
treatment for customers and appropriate management
of vulnerable customers.
All employees are required to undertake conduct risk
related training.
The Group’s approach to employee remuneration means
that very few staff are included in financial incentive
schemes. All schemes are required to be approved by the
CCC before implementation and then reviewed by the
CCC at least annually.
Given the unprecedented
challenges of Covid-19 and
the need to respond quickly
to changing circumstances,
there is a heightened risk that
customer outcomes have
not been fully considered or
unintended consequences
may arise.
Operational Risk
Description
Mitigation
Change
Operational Risk arises
across the Group through the
possible inadequacy or failure
of internal processes, people
and systems or from external
events.
Operational risk is
inherently diverse in
nature. All the Group’s
activities create various
forms of operational risk
which need to be managed
through a strong control
and oversight structure.
Exposure to operational risk
is exacerbated through any
periods of transformation
and / or stress.
The Group has enhanced its operational risk
framework over the last 18 months to ensure that it is
comprehensive and enables timely and accurate analysis
of operational risk exposures and drives accountability
and remedial actions where issues are identified.
Management of operational risk is enabled through a
comprehensive framework of policies which are designed
to ensure that all key operational risks are managed
consistently across the business. This includes risk
areas such as Change Management, Procurement, Data
Protection, Financial Crime and People.
The Group is committed to ensuring it remains resilient
particularly in respect of IT capability. Significant
investment has been undertaken to ensure it is well-
protected in the face of the evolution of cyber threats.
The Group relies on third party providers for a number
of key services including in the provision of its savings
offering and in respect of critical IT services. The robust
oversight of third parties is seen as critical to overall
resilience.
Continued investment in people has been undertaken to
ensure that risk exposures are minimised. This includes
management of key dependency risk through effective
succession planning, recruitment, development and
retention strategies.
Inevitably with the Covid-19
pandemic there have been
increased challenges in
managing the business
operations. The impacts of
new working arrangements,
rapid redeployment of
people to support additional
processes such as payment
holidays and the need to
manage the IT challenges
arising as a consequence,
increase the risk that process
failings may occur.
Whilst the Group has
successfully navigated
the transition to operating
effectively in the pandemic
environment, given the
ongoing uncertainties and
economic outlook, the
potential for operational risk
issues remains heightened.
Page 144
B9. Directors’ report
The directors of Paragon Banking Group PLC (registered
number 2336032) submit their Report prepared in accordance
with Schedule 7 to the Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations 2008 (‘Schedule 7’),
which also includes additional disclosures made in accordance
with the listing and disclosure rules of the FCA.
The Articles may only be amended by special resolution of the
Company’s shareholders in a general meeting and were last
amended in 2018. The Company’s Articles set out the powers of
the directors and rules governing the appointment and removal
of directors. The Articles can be viewed at the Group’s website at
www.paragonbankinggroup.co.uk.
Certain information required by these requirements is included
in other sections of this Annual Report and incorporated in this
Directors Report by reference. These items are discussed in
detail at the end of this report.
Directors
The names of the directors of the company at the date of this
report, together with biographical details, are given in Section
B3.1. All the directors listed in that section were directors of the
company throughout the year, apart from Alison Morris, who was
appointed as a director on 26 March 2020, and Peter Hill, who
was appointed as a director on 27 October 2020, after the year
end. In addition, Peter Hartill retired on 30 September 2020.
Finlay Williamson has announced his intention to step down from
the Board on 31 December 2020.
Directors’ interests
The directors’ interests in the shares of the Company are
disclosed in the Directors’ Remuneration Report in Section B7.
There have been no changes in the directors’ interests in the
share capital of the Company since 30 September 2020.
Other than as outlined in the Directors’ Remuneration Report in
Section B7, the directors had no interests in securities issued by
the Company. The directors have no interests in the shares or
debentures of the Company’s subsidiary companies.
A director has a statutory duty to avoid a situation in which he or
she has, or can have, an interest that conflicts or possibly may
conflict with the interests of the Company. A director will not be
in breach of that duty if the relevant matter has been authorised
in accordance with the Articles of Association of the Company
('the Articles’) by the other directors. The Articles include the
relevant authorisation for directors to approve such conflicts.
None of the directors had, either during or at the end of the year,
any material interest in any contract of significance with the
Company or its subsidiaries. Further details on the directors’
remuneration and service contracts / appointment letters can be
found in the Directors’ Remuneration Report in Section B7.
Directors’ powers and appointment of directors
The appointment and replacement of the Company’s directors
is governed by the Articles, the Code, the Companies Act 2006
and related legislation, and the individual service contracts
and terms of appointment of the directors. The powers of the
directors, and their service contracts and terms of appointment,
are described in the Corporate Governance section, Section B4.
The Company is proposing to amend its Articles with the
principal changes primarily to reflect best market practice and
changes in light of the Code. A resolution to adopt the amended
Articles is to be proposed at the forthcoming AGM, with
explanatory notes on the proposed changes to be found in the
Notice of AGM circulated with this Annual Report.
Under Article 85 of the Articles, certain directors are required
to submit themselves for reappointment. In accordance with
the Code, however, the Board has decided that it is appropriate
for all directors to submit themselves for reappointment on
an annual basis. Accordingly, all current directors, other than
Finlay Williamson, who has announced his intention to step
down from the Board on 31 December 2020, will retire and seek
reappointment at the AGM.
Annual retirement of directors will be required by the amended
Articles to be proposed at the forthcoming AGM.
None of the directors have a service contract with the Company
requiring more than 12 months’ notice of termination to be given.
Directors’ indemnity and insurance
Under Article 161 of the Articles, the Company has qualifying third
party indemnity provisions for the benefit of its directors, for the
purposes of section 234 of the Companies Act 2006, which were
in place throughout the year and which remain in force at the
date of this report, in the form of directors’ and officers’ liability
insurance. The directors’ and officers’ liability insurance covers
directors of all of the Company’s subsidiary entities.
Share capital and distributions
Share capital
Details of the issued share capital of the Company, together with
details of movements in its issued share capital in the year, are
given in note 38 to the accounts. The Company has one class
of ordinary shares which carries no right to fixed income. Each
ordinary share carries the right to one vote at general meetings
of the Company. The rights and obligations attaching to ordinary
shares are set out in the Articles.
There are no specific restrictions on the size of a member’s
holding or on the transfer of shares. Both of these matters are
governed by the general provisions of the Articles and prevailing
legislation. The directors are not aware of any agreements
between holders of the Company’s shares in respect of voting
rights or which might result in restrictions on the transfer of
securities.
Details of employee share schemes are set out in note 52 to
the accounts. Votes attaching to shares held by the Group’s
employee benefit trust are not exercised at general meetings of
the Company.
Page 145
Corporate Governance The Company presently has the authority to issue ordinary
shares up to a value of £85.3 million and to make market
purchases of up to 25.6 million £1 ordinary shares. These
authorities expire at the conclusion of the forthcoming AGM
on 24 February 2021 and resolutions will be put to that meeting
proposing that they be renewed.
Purchase of own shares
The existing authority under section 724 of the
Companies Act 2006, referred to above, given to the company
at the AGM on 13 February 2020 enables it to purchase treasury
shares (a Company’s own shares purchased by it to be held in
treasury) of up to 10% of its issued share capital.
This authority will expire at the conclusion of the next AGM,
and the Board considers it would be appropriate to renew this
authority. It therefore intends to seek shareholder approval to
purchase Treasury Shares of up to 10% of its issued share capital
at the forthcoming AGM in line with current investor sentiment.
Details of the resolution renewing the authority will be included
in the Notice of AGM. Shares held as treasury shares can in
the future be cancelled, re-sold or used to provide shares for
employee share schemes.
The number of treasury shares held at 30 September 2020
was 5,218,702 (2019: 5,218,702), representing 2.03% of the
issued share capital excluding treasury shares (2019: 2.04%).
The maximum holding of treasury shares during the year was
5,218,702 (2019: 21,769,034). The highest proportion of issued
share capital excluding treasury shares held during the year was
2.04% (2019: 8.37%).
Significant agreements
A change of control of the company, following a takeover bid,
may cause a number of agreements to which the company is
a party to take effect, alter or terminate. These include certain
insurance policies and employee share plans.
The Company does not have any agreements with any director
or employee that would provide compensation for loss of office
or employment resulting from a takeover of the Company, except
that provisions of the Company’s share based remuneration
arrangements may cause outstanding awards and options to
vest and become exercisable on a change of control, subject,
where applicable, to the satisfaction of any performance
conditions at that time and pro-rating of awards.
Research and Development
During the year, the Group undertook certain projects to develop
its IT capabilities which met the definition of research and
development set out in the guidelines issued by the Department
of Business Innovation and Skills in 2010. Claims in respect
of these activities were made in the Group’s tax returns. The
amounts involved were modest in the context of the Group
accounts.
Political expenditure
During the year ended 30 September 2020 no political donations
were made by any Group company (2019: £nil).
Dividends
Auditors
The directors have taken all reasonable steps to make
themselves and the Company’s auditors, KPMG LLP (‘KPMG’),
aware of any information needed in preparing the audit of the
Annual Report and Financial Statements for the year, and, as
far as each of the directors is aware, there is no relevant audit
information of which the auditors are unaware. This confirmation
is given and should be interpreted in accordance with the
provisions of section 418 of the Companies Act 2006.
The directors, having considered the requirements for rotation
of auditors, the length of service of KPMG and the conduct of
the audit concluded there was no present need to retender the
audit. Therefore, a resolution for the reappointment of KPMG,
who have expressed their willingness to continue in office, as the
auditors of the Company is to be proposed at the forthcoming
AGM, as well as a resolution to give the directors the authority to
determine the auditors’ remuneration.
The full text of the relevant resolutions is set out in the Notice of
AGM accompanying this Annual Report. The evaluation process
is described more fully in the Audit Committee Section B6.
The directors recommend a final dividend of 14.4p per share
(2019: 14.2p per share) which would give a total dividend for
the year of 14.4p per share (2019: 21.2p per share). No interim
dividend was paid during the year (an interim dividend of 7.0p per
share was paid in 2019).
Major shareholdings
Notifications of the following major voting interests in the
Company’s ordinary share capital, notifiable in accordance with
Chapter 5 of the FCA’s Disclosure and Transparency Rules, had
been received by the Company as at 30 September 2020.
Shareholder
Dimensional Fund Advisers LP
Franklin Templeton Fund Management
Liontrust Investment Partners LLP
M&G PLC
Norges Bank
Royal London Asset Management
% Held Notification
date
5.0%
5.0%
5.1%
6.6%
5.0%
7.0%
09/08/19
21/02/19
21/09/20
22/10/19
27/03/20
19/09/19
The percentages quoted above were calculated by reference to
the Company’s issued share capital at the date the holding was
disclosed.
On 12 October 2020, Norges Bank notified the Company that
it had reduced its interest to 5.0%. On 13 November 2020, J O
Hambro Capital Management Limited notified the Company that
it had increased its interest to 5.0%. As at 2 December 2020, no
further changes had been notified to the Company.
Page 146
Annual General Meeting
The Annual General Meeting of the Company will take place on
24 February 2021 in London. A notice convening the AGM and
outlining the resolutions to be proposed at the AGM is being
circulated to shareholders with this Annual Report and Accounts.
At the present time, there remains uncertainty as to the impact
that Covid-19 will have on the Company’s AGM in 2021. The
Board’s current expectation is that government guidance may
allow shareholders to attend the meeting in person. If this is not
the case the Group will put in place alternative arrangements
to allow shareholders to communicate their views, within the
paraments set out by the UK Government.
More information is set out in the Notice of AGM and further
updates will be provided in due course, if necessary.
Listing Rule LR9.8.4
There are no matters which the Company is required to
report under Listing Rule LR9.8.4, other than certain matters
concerning its employee share ownership trust (note 40).
The Paragon Banking Group PLC Employee Trust is an
independent trust which holds shares for the benefit of
employees and former employees of the Group in order to satisfy
awards under employee share plans. The Company funds the
trust from time to time, to enable it to acquire shares to satisfy
these awards. During the year, the trust made market purchases
of 1.5 million ordinary shares. As the shares included in these
arrangements are held on the consolidated balance sheet, this
has no effect on the amounts reported by the Group.
The trustee will only vote on those shares in accordance with
the instructions given to the trustee and in accordance with the
terms of the trust deed. The trustee has waived the trust’s right
to dividends on all shares held within the trust.
Details of the shares held by the trust are set out in note 40 and
details of the share-based remuneration arrangements are given
in note 52.
Information presented in other sections
Certain information required to be included in a directors’ report
by Schedule 7 can be found in the other sections of the Annual
Report, as described below. All of the information presented in
these sections is incorporated by reference into this Directors’
Report and is deemed to form part of this report. Readers are
also referred to the cautionary statement on page 2.
•
•
•
•
•
Information concerning employment practices, employee
engagement, the Group’s approach to diversity, the
employment of disabled persons and the involvement of
employees in the business, is given in Section A6.3 – ‘People’
Information on the Group’s business relationships and
how the directors have had regard to the need to foster
these relationships with suppliers, customers and other
stakeholders, and the effect of that regard, including on the
principal decisions taken by the Group during the financial
year (which is crucial to the long-term sustainability of the
business), can be found in Section B4.3 of the Corporate
Governance Report and in Section A6 of the Strategic Report
Disclosures concerning greenhouse gas emissions are given
in Section A6.4 – ‘Environmental Issues’
Disclosures concerning events taking place after the balance
sheet date are set out in note 29 to the accounts.
Disclosures concerning the Group’s ability to continue to
adopt the going concern basis of accounting and the Group’s
viability statement are given in Section A5.
Rule DTR7.2.1 of the Disclosure Guidance and Transparency
Rules requires the Group’s disclosures on Corporate
Governance to be included in the Directors’ Report. This
information is presented in Sections B2, B3, B4, B5, B6, B7 and
B8 and the information in these sections is incorporated by
reference into this Directors’ Report and is deemed to form part
of this report.
Rule DTR4.1.5 of the Disclosure Guidance and Transparency
Rules requires that the annual report of a listed company
contains a management report containing certain prescribed
information. This Directors’ Report, including the other sections
of the Annual Report incorporated by reference, comprises a
management report for the Group for the year ended
30 September 2020, for the purposes of the Disclosure
Guidance and Transparency Rules.
This section B9 of this Annual Report, together with the other
sections of the Annual Report incorporated by reference,
comprise a directors’ report for the Company which has been
drawn up and presented in accordance with, and in reliance
upon, applicable English company law and the liabilities of the
directors in connection with this report shall be subject to the
limitations and restrictions provided by such law.
Approved by the Board of Directors and signed on behalf of
the Board.
•
•
•
•
The Group’s business activities, together with commentary on
the likely future developments in the business of the Group
(including the factors likely to affect future development
and performance) and its summarised financial position is
included in the Strategic Report (Section A)
Marius van Niekerk
Company Secretary
3 December 2020
A description of the Group’s financial risk management
objectives and policies, including hedging policies, and its
exposure to risks (including price/credit/liquidity/cash flow
risk) arising from its use of financial instruments are set out in
note 55 to the accounts and related notes
Information concerning directors’ contractual arrangements
and entitlements under share-based remuneration
arrangements is given in Section B7, the Directors’
Remuneration Report
An explanation of the Board’s activities in relation to
assessing and monitoring how the company has aligned with
its stated purpose and culture can be found in Sections B1
and B3.3
Page 147
Corporate Governance B10. Statement of directors'
responsibilities
in respect of financial statements
The directors are responsible for preparing this Annual Report,
including the consolidated and company financial statements in
accordance with applicable law and regulations.
Company law requires the directors to prepare consolidated
financial statements for the Group and separate financial
statements for the Company in respect of each financial year.
In respect of the financial statements for the year ended
30 September 2020, that law includes the Companies Act 2006
(‘the Act’) and Article 4 of the IAS Regulation. That law requires
the directors to prepare the consolidated financial statements in
accordance with IFRS as adopted by the EU and they have also
elected to prepare the financial statements of the Company in
accordance with IFRS as adopted by the EU.
International Accounting Standard 1 – ‘Presentation of Financial
Statements’ requires that financial statements present fairly
for each financial year the Company’s financial position,
financial performance and cash flows. This requires the faithful
representation of the effects of transactions, other events and
conditions in accordance with the definitions and recognition
criteria for assets, liabilities, income and expenses set out in the
International Accounting Standards Board’s (‘IASB’) ‘Framework
for the Preparation and Presentation of Financial Statements’. In
virtually all circumstances, a fair presentation will be achieved by
compliance with all applicable IFRS.
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 Group and Company and
the Group’s profit or loss for the year. In preparing each of the
consolidated and company financial statements the directors
are also required to:
•
•
•
•
•
•
•
Select suitable accounting policies and apply them
consistently
Make judgements and estimates that are reasonable, relevant
and reliable
State whether the consolidated financial statements have
been prepared in accordance with IFRS as adopted by the
EU and whether the company financial statements have been
prepared in accordance with the Act
Assess the ability of the Group and the Company to continue
as a going concern, disclosing, as applicable, matters related
to going concern
Use the going concern basis of accounting unless they intend
to liquidate the Company and / or the Group or to cease
operation or they have no realistic alternative to doing so
Present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information
Provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users
to understand the impact of particular transactions, other
events and conditions on the entity’s financial position and
financial performance
The directors are responsible for keeping adequate accounting
records for the Company that are sufficient to record and explain
its transactions, disclose with reasonable accuracy at any time
its financial position and enable them to ensure that its financial
statements comply with the requirements of the Act.
They are responsible for the implementation of such internal
control processes as they deem necessary to enable the
preparation of financial statements which are free from material
misstatements, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to
them to safeguard the assets of the Group and to prevent and
detect fraud and other irregularities. Under applicable law and
regulations, the directors are also responsible for the preparation
of a strategic report, directors’ report, directors’ remuneration
report and corporate governance statement which comply with
that law and those regulations.
The directors are responsible for the maintenance and
integrity of the corporate and financial information included
on the Company’s website (www.paragonbankinggroup.
co.uk). Legislation in the UK governing the preparation and
dissemination of financial statements differs from legislation in
other jurisdictions.
Confirmation by the Board of Directors
Each of the current directors confirms that, to the best of their
knowledge:
•
•
•
The financial statements, prepared in accordance with IFRS
as adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company
and of the Group taken as a whole
The Directors’ Report, including those other sections of
the Annual Report incorporated by reference, comprises
a management report for the purposes of the Disclosure
Guidance and Transparency Rules, and includes a fair review
of the development and performance of the business and the
consolidated position of the Group taken as a whole, together
with a description of the principal risks and uncertainties that
it faces
The Annual Report (including the consolidated and company
financial statements), taken as a whole, is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Group’s performance, business
model and strategy.
Approved by the Board of Directors and signed on behalf of
the Board.
Marius van Niekerk
Company Secretary
3 December 2020
Page 148
Page 149
Corporate Governance We have implemented a comprehensive
wellbeing programme for our people, providing a
range of support for mental and physical health.
C. Independent
Auditor’s Report
Report by the independent auditor of the Company, KPMG LLP,
on the financial statements
P152
C1. Independent Auditor’s Report to the members of Paragon Banking Group PLC
Report by the independent auditor of the Company, KPMG LLP, on the financial statements
C1. Independent auditor’s report
To the members of Paragon Banking Group PLC
1. Our opinion is unmodified
Basis for opinion
We have audited the financial statements of Paragon
Banking Group PLC ('the Company') for the year ended
30 September 2020 which comprise the:
• Consolidated Statement of Profit or Loss
• Consolidated Statement of Comprehensive Income
• Consolidated and Company Balance Sheets
• Consolidated and Company Cash Flow Statements
•
Consolidated and Company Statements of Changes in Equity
•
Related notes, including the accounting policies in note 62,
other than the disclosures labelled as unaudited in note 54.
In our opinion:
•
•
•
•
the financial statements give a true and fair view of the
state of the Group’s and of the Parent Company’s affairs as
at 30 September 2020 and of the Group’s profit for the year
then ended;
the Group financial statements have been properly prepared
in accordance with International Financial Reporting
Standards as adopted by the European Union (IFRSs as
adopted by the EU);
the Parent Company financial statements have been properly
prepared in accordance with IFRSs as adopted by the EU
and as applied in accordance with the provisions of the
Companies Act 2006; and
the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and, as
regards the Group financial statements, Article 4 of the
IAS Regulation.
We conducted our audit in accordance with International
Standards on Auditing (UK) ('ISAs (UK)') and applicable law.
Our responsibilities are described below. We have fulfilled our
ethical responsibilities under, and are independent of the group
in accordance with, UK ethical requirements including the FRC
Ethical Standard. We believe that the audit evidence we have
obtained is a sufficient and appropriate basis for our opinion.
Our audit opinion is consistent with our report to the audit
committee.
We were first appointed as auditor by the shareholders on
9 February 2016. The period of total uninterrupted engagement
is for the five financial years ended 30 September 2020. We
have fulfilled our ethical responsibilities under, and we remain
independent of the Group in accordance with, UK ethical
requirements including the FRC Ethical Standard as applied to
listed public interest entities. No non-audit services prohibited
by that standard were provided.
2. Key audit matters: our assessment
of risks of material misstatement
Key audit matters are those matters that, in our professional
judgment, were of most significance in the audit of the financial
statements and include the most significant assessed risks of
material misstatement (whether or not due to fraud) identified by
us, 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. We summarise
below the key audit matters, in decreasing order of audit
significance, in arriving at our audit opinion above, together
with our key audit procedures to address those matters and,
as required for public interest entities, our results from those
procedures. These matters were addressed, and our results are
based on procedures undertaken, in the context of, and solely
for the purpose of, our audit of the financial statements as a
whole, and in forming our opinion thereon, and consequently
are incidental to that opinion, and we do not provide a separate
opinion on these matters.
Page 152
Key audit matter
Our response
Impairment allowances on loans to customers
Our audit procedures included:
Risk vs 2019
• Test of details: Key aspects of our testing involved:
(£81.8 million; 2019: £41.9 million)
Refer to the Audit Committee Report, accounting policy
note and note 19 (financial disclosures).
Subjective estimate
The measurement of expected credit losses (‘ECL’)
involves significant judgements and estimates. There
is increased risk of material misstatement of ECL in
the current year due to the increased judgement and
estimation uncertainty as a result of Covid-19. The key
areas where we identified greater levels of management
judgement and therefore increased levels of audit focus in
the Group’s estimation of ECL are:
Economic scenarios – IFRS 9 requires the Group to
measure ECL on a forward-looking basis reflecting a range
of future economic conditions. Significant management
judgement is applied to determining the economic
scenarios used, particularly in the context of Covid-19,
and the probability weightings assigned to each economic
scenario.
Qualitative adjustments – Adjustments to the
model-driven ECL results are raised by management
to address issues relating to model responsiveness or
emerging trends relating to Covid-19. They represent
approximately 24.2% of the ECL. Such adjustments
are inherently uncertain and significant management
judgement is involved in estimating these amounts.
Significant Increase in Credit Risk (‘SICR’) – The criteria
selected to identify a significant increase in credit risk is a
key area of judgement within the Group’s ECL calculation
as these criteria determine whether a 12 month or lifetime
provision is recorded. Increased judgement exists in the
current year relating to the treatment of those customers
who were granted one or more Covid-19 payment reliefs.
Model estimations – Inherently judgmental modelling
is used to estimate ECLs which involves determining
Probabilities of Default (‘PD’), Loss Given Default (‘LGD’),
and Exposures at Default (‘EAD’). The LGD models used in
the portfolios are the key drivers of the Group’s ECL results
and are therefore the most significant judgmental aspect of
the Group’s ECL modelling approach.
The effect of these matters is that, as part of our risk
assessment, we determined that the impairment of loans
to customers has a high degree of estimation uncertainty,
with a potential range of reasonable outcomes greater than
our materiality for the financial statements as a whole, and
possibly many times that amount. The financial statements
disclose the sensitivities estimated by the Group (note 19).
-
We tested the key inputs and assumptions impacting
the Group’s overall ECL calculation to assess
their reasonableness. This included performing
sensitivity analysis to understand the significance
of certain assumptions; benchmarking procedures
to compare the Group’s key assumptions to
comparable peer group organisations; and assessing
the key assumptions against the Group’s historical
experience; and
-
We performed recalculations of the ECL measured
on each of Paragon’s loan portfolios.
Our economic scenario expertise: We involved our
own economic specialists to assist us in assessing
the appropriateness of the Group’s methodology for
determining the economic scenarios used and the
probability weightings applied to them. We assessed
the overall reasonableness of the economic forecasts
by comparing the Group’s forecasts to our own
modelled forecasts. As part of this work we assessed
the reasonableness of the Group’s considerations of the
economic uncertainty relating to Covid-19.
Qualitative adjustments: For each of the adjustments
to the model-driven ECL results we assessed the
reasonableness of the adjustments by challenging, the
key assumption being the probability of default floors,
inspecting the calculation methodology and tracing a
sample of data used back to source data.
SICR: We assessed the ongoing predictability of the
SICR criteria and independently recalculated the loans’
stage for 100% of Paragon’s loans and receivables.
In addition, we assessed the reasonableness of
management’s treatment of Covid-19 payment relief
customers from a SICR perspective.
Our financial risk modelling expertise: We involved
our own financial risk modelling specialists in evaluating
certain IFRS 9 models. We used our knowledge of
the Group and our experience of the industry that
the Group operates in to independently assess the
appropriateness of the Group’s IFRS 9 models and key
components.
Assessing transparency: We evaluated whether
the disclosures appropriately reflect and address the
uncertainty which exists when determining the Group’s
overall ECL. As a part of this, we assessed the sensitivity
analysis that is disclosed. In addition, we challenged
whether the disclosure of the key judgments and
assumptions made, including in respect of Covid-19,
was sufficiently clear.
•
•
•
•
•
Disclosure quality
The disclosures regarding the Group’s application of
IFRS 9 are key to explaining the key judgements and
material inputs to the IFRS 9 ECL results.
Our results
The results of our testing were satisfactory, and we
considered the ECL charge, provision recognised and the
related disclosures to be acceptable (2019: acceptable).
Page 153
Auditor's Report
Key audit matter
Our response
Interest receivable on loan accounts
Our procedures included:
Risk vs 2019
Originated assets:
(£440.4 million; 2019: £449.3 million)
Refer to the Audit Committee Report, accounting policy
note and note 4 (financial disclosures).
Subjective estimate
The recognition of interest receivable on loan accounts
under the effective interest rate ('EIR') method requires
the directors to apply judgement, with the most critical
estimate being the loans’ expected behavioural life for
originated assets and estimated remaining collections
('ERCs') for acquired loan portfolios. The subjectivity in
respect of these assumptions has increased further at the
current year end as a result of the uncertainties arising
from Covid-19.
Originated assets:
The expected life assumptions utilise repayment profiles
which represent how customers are expected to pay.
These profiles extend significantly into the future which
creates a high degree of estimation uncertainty and
subjects the judgement to future market changes. The
Group makes its expected life assumptions based on its
forecasting process which incorporates both historical
experience and judgmental overlays by management.
The cohorts of loans and advances which require the most
judgement are buy-to-let products which were originated
by the Group post-2010.
Acquired loan portfolios:
For the Group’s acquired debt portfolio, the risk is that
estimated future cash collections are not reflected by
actual cash receipts. Given the nature of the Group’s debt
portfolios, estimation of future cash collections requires
significant judgement to make assumptions about the
value, probability and timing of expected future cash flows
for each type of asset class within a portfolio.
The effect of these matters is that, as part of our risk
assessment, we determined that interest receivable on
loan accounts has a high degree of estimation uncertainty,
with a potential range of reasonable outcomes greater than
our materiality for the financial statements as a whole, and
possibly many times that amount. The financial statements
disclose the sensitivities estimated by the Group (note 64).
•
•
Historical comparison: We critically assessed
the Group’s analysis and key assumptions over the
repayment profiles by comparing them to the Group’s
historical trends and actual portfolio behaviour. This
included considering the impact of uncertainties arising
from Covid-19 in the current behavioural life forecasts;
Our sector experience: We critically assessed key
assumptions behind the expected behavioural lives
against our own knowledge of industry experience
and trends, and challenged the appropriateness of the
level of segmentation applied to the loan portfolios
by management when determining the expected
behavioural lives; and
•
Sensitivity analysis: We performed sensitivity analysis
over the repayment profiles by applying alternative
profiles based upon the above procedures.
Acquired loan portfolios:
•
•
•
•
Historical comparison: We critically assessed the
Group’s cash flow forecasts by comparing them to
current and past performance of the Group’s portfolios,
including recent cash collections;
Tests of details: We vouched historical cash collections
data to supporting evidence to critically assess the
completeness and accuracy of the collections data used
in determining the expected future cash collections of
individual portfolios;
Independent reperformance: We independently
reperformed management’s calculation of its estimated
future cash collections to assess the accuracy of the
forecasts generated; and
Sensitivity analysis: We have performed sensitivity
analysis over the forecast cash flows by applying
alternative profiles based upon the above procedures.
Originated assets and acquired loan portfolios:
•
Assessing transparency: We evaluated whether
the disclosures appropriately reflect and address
the uncertainty which exists when determining the
Group’s EIR adjustments and interest receivable. As a
part of this, we assessed the sensitivity analysis that
is disclosed. In addition, we challenged whether the
disclosure of the critical estimates and assumptions
made, including in respect of Covid-19, was sufficiently
clear;
Our results
We found the resulting estimate of interest receivable on
loan accounts and the related disclosures to be acceptable
(2019: acceptable).
Page 154
Key audit matter
Our response
Recoverability of goodwill
Our procedures included:
Risk vs 2019
(£164.4 million; 2019: £164.4 million)
Refer to the Audit Committee Report, accounting policy
note and note 26 (financial disclosures).
Forecast-based valuation:
The carrying amount of goodwill is significant to the
financial statements and at risk of irrecoverability due to
changes in market factors since acquisition. The estimated
recoverable amount is subjective due to the inherent
uncertainty involved in forecasting future cash flows
and deriving an appropriate discount rate to reflect the
time value of money. The subjectivity in respect of these
forecasts has increased further at the current year end as a
result of the uncertainties arising from Covid-19.
In calculating the recoverable amount, the directors make
assumptions over key inputs, being forecast future cash
flows and the discount rate.
The effect of these matters is that, as part of our risk
assessment, we determined that the recoverable amount
has a high degree of estimation uncertainty, with a
potential range of reasonable outcomes greater than our
materiality for the financial statements as a whole, and
possibly many times that amount. The financial statements
(note 26) disclose the sensitivity estimated by the Group.
•
•
•
•
•
Historical comparisons: We compared the Group’s
previous forecasting with actual results to assess
forecasting accuracy;
Benchmarking assumptions: We compared the
Group’s assumptions to externally derived data in
relation to key inputs such as discount rates, and
challenged management on the forecast business
performance. This included considering the impact
of uncertainties arising from Covid-19 in the current
forecasts;
Our valuations expertise: We engaged our own
valuations specialists to assess the reasonableness
of the valuation approach adopted (and its implied
valuation results derived) by management to estimate
the recoverable amount of the CGUs to which goodwill
is allocated. This was done with inference to a series of
sensitivity analyses which we performed to challenge
the key assumptions, including discount rates, applied
in estimating the recoverable amount. We used our
knowledge of the Group and our experience of the
industry that the Group operates in to independently
assess the appropriateness of the key assumptions.
Sensitivity analysis: We performed breakeven
analysis and applied alternative scenarios based on the
assumptions noted above;
Assessing transparency: We evaluated whether
the disclosures appropriately reflect and address
the uncertainty which exists when determining the
estimated recoverable amount. As a part of this, we
assessed the sensitivity analysis that is disclosed. In
addition, we challenged whether the disclosure of the
key judgments and assumptions made, including in
respect of Covid-19, was sufficiently clear.
Our results
We found the resulting carrying amount of goodwill and the
related disclosures to be acceptable (2019: acceptable).
Page 155
Auditor's Report Key audit matter
Valuation of the defined benefit pension
scheme obligation
Risk vs 2019
(£154.9 million, 2019: £147.3 million)
Refer to the Audit Committee Report, accounting policy
note and note 53 (financial disclosures).
Subjective estimate
The Group operates a defined benefit pension scheme
which has been closed to new members for several years.
At year end, the Group holds a net defined benefit pension
scheme liability on the statement of financial position,
which includes gross pension obligations.
Small changes in the assumptions and estimates used to
value the Group’s pension obligation (before deducting
scheme assets) would have a significant effect on the
Group’s net defined benefit obligation
The effect of these matters is that, as part of our risk
assessment, we determined that the valuation of the
defined benefit pension scheme obligation has a high
degree of estimation uncertainty, with a potential range of
reasonable outcomes greater than our materiality for the
financial statements as a whole. The financial statements
disclose the sensitivity estimated by the Group (note 53).
Our response
Our procedures included:
•
•
•
Evaluation of actuary: We evaluated the competence,
independence and objectivity of the Group’s actuary
in assessing the directors’ reliance upon their expert
valuation services.
Benchmarking assumptions: We critically assessed,
using our own actuarial specialists, the key assumptions
applied, such as the discount rate, inflation rate and
mortality/life expectancy against externally derived data
and internal experience.
Assessing transparency: We assessed the adequacy
of the Group’s disclosures in respect of the sensitivity
of the obligation to the actuarial assumptions and the
increased estimation uncertainty in respect of Covid-19.
Our results
We found the valuation of the defined benefit scheme
obligation and the related disclosures to be acceptable
(2019: acceptable).
Page 156
Key audit matter
Our response
Going concern including the impact of Covid-19
Our audit procedures included:
New risk in 2020
Refer to the Chief Executive’s Review and accounting
policy note 60 (financial disclosures).
Disclosure quality
The financial statements explain how the Directors have
formed a judgement that it is appropriate to adopt the
going concern basis of preparation for the Group and
Company.
That judgement is based on an evaluation of the inherent
risks to the Group and Company’s business model and how
those risks might affect the Group and Company’s financial
resources or ability to continue operation over a period
of at least a year from the date of approval of the financial
statements.
The risk most likely to affect the Group and Company’s
available financial resources over the period is an increase
in the level of expected credit losses measured against
loans to customers due to the impact of Covid-19. This
impact could lead to insufficient regulatory capital levels
over the course of the next 12 months. There are also less
predictable but realistic impacts, such as the impact of
Covid-19 on liquidity and operational resilience.
The risk for our audit was whether or not those risks were
such that they amounted to a material uncertainty that may
have cast significant doubt on the ability to continue as a
going concern. Had they been such, then that fact would
have been required to have been disclosed.
•
•
•
•
Our sector experience: We considered the directors’
assessment of Covid-19 related sources of risk for the
Company’s business and financial resources compared
with our own understanding of the risks. We assessed
the directors’ plan to take action to mitigate the risks;
Sensitivity analysis: We assessed the stressed
scenarios used by the Company in forecasting
profitability, capital and liquidity taking account of
possible adverse effects that could arise from these
risks individually and collectively;
Challenge of assumptions: We assessed the
Company’s forecast profitability, and the Company’s
capital and liquidity models to identify key assumptions.
We challenged the reasonableness of assumptions
underpinning the Company’s forecasts; and
Assessing transparency: We critically assessed the
completeness and accuracy of the matters covered
in the going concern disclosure within the financial
statements using our knowledge of the relevant
facts and circumstances developed during our audit
work, considering the economic outlook, key areas of
estimation uncertainty, including in particular the level
of expected credit losses for loans to customers and
mitigating actions available to the Company to respond
to these risks.
Our results
We found the going concern disclosure without any
material uncertainty to be acceptable.
Page 157
Auditor's Report Key audit matter
Recoverability of Parent Company’s investment
in subsidiaries
Risk vs 2019
(£1,030.1 million; 2019: £940.7million)
Refer to the accounting policy note and note 27
(financial disclosures).
Low risk, high value
The carrying amount of the Parent Company’s investments
in subsidiaries represents 90.0% (2019: 88.3%) of the
Parent Company’s total assets.
Their recoverability is not at a high risk of significant
misstatement or subject to significant judgement.
However, due to their materiality in the context of the
Parent Company financial statements, this is the area that
had the greatest effect on our overall Parent Company
audit.
Our response
Our procedures included:
•
Tests of detail: We compared the carrying amount of
100% of investments with the relevant subsidiaries’
draft balance sheet to identify whether their net assets,
being an approximation of their minimum recoverable
amount, were in excess of their carrying amount and
assessing whether those subsidiaries have historically
been profit-making.
Our results
We found the resulting carrying amount of the investments
in subsidiaries to be acceptable (2019: acceptable).
Page 158
3. Our application of materiality and
an overview of the scope of our audit
5. We have nothing to report on the
other information in the Annual Report
Materiality for the Group financial statements as a whole was
set at £6.5million (2019: £7.6million), determined with reference
to a benchmark of the Group’s profit before tax from continuing
operations, normalised by averaging over the last three years
due to the impact of Covid-19 on the financial performance in the
period to 30 September 2020, of which it represents 4.4%. The
averaging of the benchmark as a result of the impact of Covid-19
reflected a revision to our initial materiality set for planning
purposes, which was based on current year forecast profit
before tax.
Materiality for the Parent Company financial statements as a
whole was set at £3.9million (2019: £3.5million), determined with
reference to a benchmark of net assets, of which it represents
0.6% (2019: 0.6%).
We agreed to report to the Audit Committee any corrected or
uncorrected identified misstatements exceeding £0.33million,
in addition to other identified misstatements that warranted
reporting on qualitative grounds.
Of the Group's 2 (2019: 1) reporting components, we subjected
2 (2019: 1) to full scope audits for group purposes. The
components within the scope of our work accounted for 100.0%
(2019: 100.0%) of total Group revenue, 100.0% (2019: 100.0%) of
Group profit before tax, and 100.0% (2019: 100.0%) of Group total
assets. The work on the 2 components was performed by the
Group team.
4. We have nothing to report on
going concern
The directors have prepared the financial statements on the
going concern basis as they do not intend to liquidate the
Company or the Group or to cease their operations, and as they
have concluded that the Company’s and the Group’s financial
position means that this is realistic. They have also concluded
that there are no material uncertainties that could have cast
significant doubt over their ability to continue as a going concern
for at least a year from the date of approval of the financial
statements (“the going concern period”).
Our responsibility is to conclude on the appropriateness of the
directors’ conclusions and, had there been a material uncertainty
related to going concern, to make reference to that in this
audit report. However, as we cannot predict all future events or
conditions and as subsequent events may result in outcomes
that are inconsistent with judgements that were reasonable at
the time they were made, the absence of reference to a material
uncertainty in this auditor's report is not a guarantee that the
Group and the Company will continue in operation.
We identified going concern as a key audit matter (see section 2
of this report). Based on the work described in our response to
that key audit matter, we are required to report to you if we have
anything material to add or draw attention to in relation to the
directors’ statement in note 62 of the financial statements on the
use of the going concern basis of accounting with no material
uncertainties that may cast significant doubt over the Group
and Company’s use of that basis for a period of at least twelve
months from the date of the approval of the financial statements.
We have nothing to report in these respects.
The directors are responsible for the other information
presented in the Annual Report together with the financial
statements. Our opinion on the financial statements does not
cover the other information and, accordingly, we do not express
an audit opinion or, except as explicitly stated below, any form of
assurance conclusion thereon.
Our responsibility is to read the other information and, in
doing so, consider whether, based on our financial statements
audit work, the information therein is materially misstated
or inconsistent with the financial statements or our audit
knowledge. Based solely on that work we have not identified
material misstatements in the other information.
Strategic Report and Directors’ Report
Based solely on our work on the other information:
•
•
•
we have not identified material misstatements in the
Strategic Report and the Directors’ Report;
in our opinion the information given in those reports for the
financial year is consistent with the financial statements; and
in our opinion those reports have been prepared in
accordance with the Companies Act 2006.
Directors’ remuneration report
In our opinion the part of the Directors’ Remuneration Report to
be audited has been properly prepared in accordance with the
Companies Act 2006.
Disclosures of emerging and principal risks and
longer term viability
Based on the knowledge we acquired during our financial
statements audit, we have nothing material to add or draw
attention to in relation to:
•
•
•
the directors’ confirmation within ‘Future Prospects’ section,
that they have carried out a robust assessment of the
principal risks facing the Group, including those that would
threaten its business model, future performance, solvency
and liquidity;
the Principal Risks disclosures describing these risks and
explaining how they are being managed and mitigated; and
the directors’ explanation in the Viability Statement of how
they have assessed the prospects of the Group, over what
period they have done so and why they considered that
period to be appropriate, and their statement as to whether
they have a reasonable expectation that the Group will be
able to continue in operation and meet its liabilities as they
fall due over the period of their assessment, including any
related disclosures drawing attention to any necessary
qualifications or assumptions.
Under the Listing Rules we are required to review the Viability
Statement. We have nothing to report in this respect.
Page 159
Auditor's Report Our work is limited to assessing these matters in the context
of only the knowledge acquired during our financial statements
audit. As we cannot predict all future events or conditions and as
subsequent events may result in outcomes that are inconsistent
with judgments that were reasonable at the time they were
made, the absence of anything to report on these statements
is not a guarantee as to the Group’s and Company’s longer
term viability.
Corporate governance disclosures
We are required to report to you if:
•
we have identified material inconsistencies between the
knowledge we acquired during our financial statements
audit and the directors’ statement that they consider that
the annual report and financial statements taken as a whole
is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group’s
position and performance, business model and strategy; or
•
the section of the annual report describing the work of the
Audit Committee does not appropriately address matters
communicated by us to the Audit Committee
We are required to report to you if the Corporate Governance
Statement does not properly disclose a departure from the
eleven provisions of the UK Corporate Governance Code
specified by the Listing Rules for our review.
We have nothing to report in these respects.
6. We have nothing to report on the
other matters on which we are required
to report by exception
Under the Companies Act 2006, we are required to report to you
if, in our opinion:
•
•
•
•
adequate accounting records have not been kept by the
Parent Company, or returns adequate for our audit have not
been received from branches not visited by us; or
the Parent Company financial statements and the part of
the Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns; or
certain disclosures of directors’ remuneration specified by
law are not made; or
we have not received all the information and explanations we
require for our audit.
We have nothing to report in these respects.
7. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out in Section B10,
the directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and
fair view; 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; assessing
the Group and Parent Company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going
concern; and using the going concern basis of accounting unless
they either intend to liquidate the Group or the Parent Company
or to cease operations, or have no realistic alternative but to
do so.
Auditor’s responsibilities
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 other
irregularities (see below), or error, and to issue our opinion in
an auditor’s report. Reasonable assurance is a high level of
assurance, but does not guarantee that an audit conducted
in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from
fraud, other irregularities or error and are considered material if,
individually or in aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis
of the financial statements.
A fuller description of our responsibilities is provided on the
FRC’s website at www.frc.org.uk/auditorsresponsibilities.
Irregularities – ability to detect
We identified areas of laws and regulations that could
reasonably be expected to have a material effect on the financial
statements from our general commercial and sector experience,
through discussion with the Directors and other management
(as required by auditing standards), and from inspection
of the Group’s regulatory correspondence and discussed
with the Directors and other management the policies and
procedures regarding compliance with laws and regulations. We
communicated identified laws and regulations throughout our
team and remained alert to any indications of non-compliance
throughout the audit.
The potential effect of these laws and regulations on the financial
statements varies considerably.
Firstly, the Group is subject to laws and regulations that directly
affect the financial statements including financial reporting
legislation (including related companies legislation, distributable
profits legislation and taxation legislation) and we assessed the
extent of compliance with these laws and regulations as part of
our procedures on the related financial statement items.
Secondly, the Group is subject to many other laws and
regulations where the consequences of non-compliance could
have a material effect on amounts or disclosures in the financial
statements, for instance through the imposition of fines or
litigation or the loss of the Group’s license to operate. We
identified the following areas as those most likely to have such
an effect: regulatory capital and liquidity and certain aspects
of company legislation recognising the financial and regulated
nature of the Group’s activities and its legal form. Auditing
standards limit the required audit procedures to identify
non-compliance with these laws and regulations to enquiry of the
directors and other management and inspection of regulatory
and legal correspondence, if any.
Page 160
Through these procedures, we became aware of actual or
suspected non-compliance and considered the effect as part
of our procedures on the related financial statement items.
The identified actual or suspected non-compliance was not
sufficiently significant to our audit to result in our response being
identified as a key audit matter.
Owing to the inherent limitations of an audit, there is an
unavoidable risk that we may not have detected some material
misstatements in the financial statements, even though we have
properly planned and performed our audit in accordance with
auditing standards. For example, the further removed
non-compliance with laws and regulations (irregularities) is from
the events and transactions reflected in the financial statements,
the less likely the inherently limited procedures required by
auditing standards would identify it. In addition, as with any audit,
there remained a higher risk of non-detection of irregularities,
as these may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal controls. We are
not responsible for preventing non-compliance and cannot be
expected to detect non-compliance with all laws and regulations.
8. The purpose of our audit work and to
whom we owe our responsibilities
This report is made solely to the Company’s members, as a
body, in accordance with Chapter 3 of Part 16 of the Companies
Act 2006. Our audit work has been undertaken so that we might
state to the Company’s members those matters we are required
to state to them in an auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company and
the Company’s members, as a body, for our audit work, for this
report, or for the opinions we have formed.
Simon Clark (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
One Snowhill
Snow Hill Queensway Birmingham
B4 6GH
3 December 2020
Page 161
Auditor's Report We have a structured approach to learning and
development and employees received an average
of 4.2 days virtual training in 2020.
D. The Accounts
Showing the financial position, results and cash flows of the Group and the
Company prepared in accordance with IFRS and UK law
P164
D1. Primary Financial Statements
P164
P165
P166
P167
P168
P168
P169
P170
P171
P171
P232
P243
P267
D1.1 Consolidated statement of profit or loss
D1.2 Consolidated statement of comprehensive income
D1.3 Consolidated balance sheet
D1.4 Company balance sheet
D1.5 Consolidated cash flow statement
D1.6 Company cash flow statement
D1.7 Consolidated statement of changes in equity
D1.8 Company statement of changes in equity
D2. Notes to the Accounts
D2.1 Analysis
D2.2 Employment costs
D2.3 Capital and financial risk
D2.4 Basis of preparation
D1. Primary Financial Statements
D1.1 Consolidated statement of profit or loss
For the year ended 30 September 2020
Note
2020
£m
19.2
(16.2)
3.0
-
14.0
Interest receivable
Interest payable and similar charges
Net interest income
Other leasing income
Related costs
Net leasing income
Gain on derecognition of financial assets
Other income
Other operating income
Total operating income
Operating expenses
Provisions for losses
Operating profit before fair value items
Fair value net (losses)
Operating profit being profit on ordinary activities before taxation
Tax charge on profit on ordinary activities
Profit on ordinary activities after taxation for the financial year
Earnings per share
- basic
- diluted
4
5
6
6
7
8
9
19
11
12
Note
14
14
The results for the current and preceding years relate entirely to continuing operations.
2020
£m
491.7
(213.6)
278.1
17.0
295.1
(126.8)
(48.3)
120.0
(1.6)
118.4
(27.1)
91.3
2020
36.0p
35.6p
2019
£m
18.3
(14.5)
3.8
9.7
15.4
2019
£m
505.7
(227.3)
278.4
28.9
307.3
(125.2)
(8.0)
174.1
(15.1)
159.0
(31.6)
127.4
2019
49.4p
48.2p
Page 164
D1.2 Consolidated statement of comprehensive income
For the year ended 30 September 2020
Note
2020
£m
2020
£m
91.3
Profit for the year
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Actuarial (loss) on pension scheme
Tax thereon
Items that may be reclassified subsequently to profit or loss
Cash flow hedge gains taken to equity
Tax thereon
Reclassification on derecognition
Tax thereon
Other comprehensive income for the year net of tax
Total comprehensive income for the year
53
20
7
(7.4)
2.1
(0.6)
0.1
-
-
2019
£m
127.4
2019
£m
(16.5)
2.4
(5.3)
(14.1)
0.5
(0.1)
(0.9)
0.2
(0.5)
(5.8)
85.5
(0.3)
(14.4)
113.0
Page 165
The Accounts D1.3 Consolidated balance sheet
For the year ended 30 September 2020
Assets
Cash – central banks
Cash – retail banks
Loans to customers
Derivative financial assets
Sundry assets
Current tax assets
Deferred tax assets
Property, plant and equipment
Intangible assets
Total assets
Liabilities
Short-term bank borrowings
Retail deposits
Derivative financial liabilities
Asset backed loan notes
Secured bank borrowings
Retail bond issuance
Corporate bond issuance
Central bank facilities
Sundry liabilities
Current tax liabilities
Deferred tax liabilities
Retirement benefit obligations
Total liabilities
Called up share capital
Reserves
Own shares
Total equity
Note
15
15
16
20
21
22
23
24
25
28
20
29
30
31
32
33
34
22
23
53
38
39
40
2020
IFRS 9
£m
1,637.1
287.9
12,741.1
463.3
128.0
5.7
6.2
66.1
170.1
15,505.5
0.4
7,867.0
132.4
3,270.5
657.8
296.8
149.8
1,854.4
100.0
-
-
20.4
14,349.5
2019
IFRS 9
£m
816.4
409.0
2018
IFRS 9
£m
895.9
414.7
2018
IAS 39
£m
895.9
414.7
12,250.3
12,076.5
12,103.7
592.4
92.8
-
6.2
57.3
171.1
14,395.5
1.0
6,395.8
80.5
4,419.4
787.5
296.5
149.6
994.4
112.7
15.2
-
34.5
855.7
19.0
-
-
56.8
169.3
855.7
19.0
-
-
56.8
169.3
14,487.9
14,515.1
1.1
5,292.4
4.7
5,554.7
935.6
296.1
149.3
1,024.4
114.4
21.4
0.8
19.5
1.1
5,292.4
4.7
5,554.7
935.6
296.1
149.3
1,024.4
114.4
21.4
5.6
19.5
13,287.1
13,414.4
13,419.2
261.8
932.0
(37.8)
261.6
887.3
(40.5)
1,156.0
1,108.4
281.6
895.9
(104.0)
1,073.5
281.6
918.3
(104.0)
1,095.9
Total liabilities and equity
15,505.5
14,395.5
14,487.9
14,515.1
Approved by the Board of Directors on 3 December 2020.
Signed of behalf of the Board of Directors
N S Terrington
Chief Executive
R J Woodman
Chief Financial Officer
Page 166
D1.4 Company balance sheet
For the year ended 30 September 2020
Assets
Cash – retail banks
Sundry assets
Current tax assets
Property, plant and equipment
Investment in subsidiary undertakings
Total assets
Liabilities
Retail bond issuance
Corporate bond issuance
Sundry liabilities
Deferred tax liabilities
Total liabilities
Called up share capital
Reserves
Own shares
Total equity
Approved by the Board of Directors on 3 December 2020.
Signed of behalf of the Board of Directors
N S Terrington
Chief Executive
R J Woodman
Chief Financial Officer
Note
15
21
22
24
27
31
32
34
23
38
39
40
2020
IFRS 9
£m
12.6
84.6
-
17.4
1,030.1
1,144.7
296.8
149.8
43.1
1.8
491.5
261.8
414.4
(23.0)
653.2
2019
IFRS 9
£m
14.1
107.3
2.8
-
940.7
1,064.9
296.5
149.6
27.4
1.6
475.1
261.6
351.2
(23.0)
589.8
2018
IAS 39
£m
24.9
217.0
-
-
984.4
1,226.3
296.1
149.3
128.5
1.8
575.7
281.6
460.8
(91.8)
650.6
1,144.7
1,064.9
1,226.3
Page 167
The Accounts
D1.5 Consolidated cash flow statement
For the year ended 30 September 2020
Net cash generated by operating activities
Net cash (utilised) / generated by investing activities
Net cash (utilised) by financing activities
Net increase / (decrease) in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
Represented by balances within:
Cash
Short-term bank borrowings
D1.6 Company cash flow statement
For the year ended 30 September 2020
Net cash generated by operating activities
Net cash (utilised) by investing activities
Net cash (utilised) by financing activities
Net (decrease) in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
Represented by balances within:
Cash
Short-term bank borrowings
Note
42
43
44
15
Note
42
43
44
15
2020
£m
1,028.7
(2.8)
(325.7)
700.2
1,224.4
1,924.6
1,925.0
(0.4)
1,924.6
2020
£m
129.8
(94.7)
(36.6)
(1.5)
14.1
12.6
12.6
-
12.6
2019
£m
397.9
8.3
(491.3)
(85.1)
1,309.5
1,224.4
1,225.4
(1.0)
1,224.4
2019
£m
170.9
(105.1)
(76.6)
(10.8)
24.9
14.1
14.1
-
14.1
Page 168
D1.7 Consolidated statement of changes in equity
For the year ended 30 September 2020
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
Cash flow
hedging
reserve
£m
£m
£m
£m
£m
Profit
and loss
account
£m
Own
shares
Total
equity
£m
£m
Transactions arising from
Profit for the year
Other comprehensive income
Total comprehensive income
Transactions with owners
Dividends paid (note 41)
Shares cancelled
Own shares purchased
-
-
-
-
-
-
-
-
-
-
-
-
Exercise of share awards
0.2
0.4
Charge for share based
remuneration (note 50)
Tax on share based remuneration
Net movement in equity in
the year
Opening equity
Closing equity
-
-
0.2
261.6
261.8
-
-
0.4
68.3
68.7
For the year ended 30 September 2019
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
50.3
50.3
(70.2)
(70.2)
-
(0.5)
(0.5)
-
-
-
-
-
-
(0.5)
3.0
2.5
91.3
(5.3)
86.0
(35.9)
-
-
(7.7)
2.7
(0.3)
44.8
835.9
880.7
-
-
-
-
-
(5.2)
7.9
-
-
2.7
(40.5)
(37.8)
91.3
(5.8)
85.5
(35.9)
-
(5.2)
0.8
2.7
(0.3)
47.6
1,108.4
1,156.0
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
Cash flow
hedging
reserve
£m
£m
£m
£m
£m
Profit
and loss
account
£m
Own
shares
Total
equity
£m
£m
Transactions arising from
Profit for the year
Other comprehensive income
Total comprehensive income
Transactions with owners
Dividends paid (note 41)
-
-
-
-
Shares cancelled
(21.6)
-
1.6
-
-
Own shares purchased
Exercise of share awards
Charge for share based
remuneration (note 50)
Tax on share based remuneration
Net movement in equity in
the year
Opening equity
As previously reported
Change of accounting
policy (note 61)
As restated
Closing equity
-
-
-
-
-
-
2.5
-
-
-
-
-
-
21.6
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(0.3)
(0.3)
-
-
-
-
-
-
127.4
(14.1)
113.3
(54.0)
(95.5)
-
(2.5)
5.9
0.4
-
-
-
-
95.5
(34.3)
2.3
-
-
127.4
(14.4)
113.0
(54.0)
-
(34.3)
3.9
5.9
0.4
(0.3)
(32.4)
63.5
34.9
(20.0)
2.5
21.6
281.6
-
281.6
261.6
65.8
-
65.8
68.3
28.7
-
28.7
50.3
(70.2)
-
(70.2)
(70.2)
3.3
-
3.3
3.0
890.7
(104.0)
1,095.9
(22.4)
868.3
835.9
-
(22.4)
(104.0)
(40.5)
1,073.5
1,108.4
Page 169
The Accounts D1.8 Company statement of changes in equity
For the year ended 30 September 2020
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
£m
£m
£m
£m
Profit
and loss
account
£m
Own
shares
Total
equity
£m
£m
Transactions arising from
Profit for the year
Other comprehensive income
Total comprehensive income
Transactions with owners
Dividends paid (note 41)
Shares cancelled
Own shares purchased
Exercise of share awards
Charge for share based
remuneration (note 50)
Net movement in equity in
the year
Opening equity
Closing equity
-
-
-
-
-
-
0.2
-
0.2
261.6
261.8
-
-
-
-
-
-
0.4
-
0.4
68.3
68.7
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
50.3
50.3
(23.7)
(23.7)
For the year ended 30 September 2019
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
£m
£m
£m
£m
-
-
-
-
(21.6)
-
1.6
-
(20.0)
281.6
261.6
-
-
-
-
-
-
2.5
-
2.5
65.8
68.3
-
-
-
-
21.6
-
-
-
21.6
28.7
50.3
-
-
-
-
-
-
-
-
-
(23.7)
(23.7)
Transactions arising from
Profit for the year
Other comprehensive income
Total comprehensive income
Transactions with owners
Dividends paid (note 41)
Shares cancelled
Own shares purchased
Exercise of share awards
Charge for share based
remuneration (note 50)
Net movement in equity in
the year
Opening equity
Closing equity
96.0
-
96.0
(35.9)
-
-
-
2.7
62.8
256.3
319.1
Profit
and loss
account
£m
9.9
-
9.9
(54.0)
(95.5)
-
-
5.9
(133.7)
390.0
256.3
-
-
-
-
-
-
-
-
-
(23.0)
(23.0)
Own
shares
£m
-
-
-
-
95.5
(26.7)
-
-
68.8
(91.8)
(23.0)
96.0
-
96.0
(35.9)
-
-
0.6
2.7
63.4
589.8
653.2
Total
equity
£m
9.9
-
9.9
(54.0)
-
(26.7)
4.1
5.9
(60.8)
650.6
589.8
Page 170
D2. Notes to the Accounts
For the year ended 30 September 2020
1. General information
Paragon Banking Group PLC is a company domiciled in the United Kingdom and incorporated in England and Wales under the
Companies Act 2006 with company number 2336032. The address of the registered office is 51 Homer Road, Solihull, West Midlands,
B91 3QJ. The nature of the Group’s operations and its principal activities are set out in the Strategic Report in Section A2.
These financial statements are presented in pounds sterling, which is the currency of the economic environment in which the
Group operates.
The remaining notes to the accounts are organised into four sections:
• Analysis – providing further analysis and information on the amounts shown in the primary financial statements
•
•
•
Employment costs – providing information on employee and key management remuneration arrangements including share
schemes and pension arrangements
Capital and Financial Risk – providing information on the Group’s management of operational and regulatory capital and its
principal financial risks
Basis of preparation – providing details of the Group’s accounting policies and of how they have been applied in the preparation of
the financial statements
D2.1 Notes to the Accounts - Analysis
For the year ended 30 September 2020
The notes set out below give more detailed analysis of the balances shown in the primary financial statements and further
information on how they relate to the operations, results and financial position of the Group and the Company.
2. Segmental information
The Group analyses its operations, both for internal management reporting and external financial reporting, on the basis of the
markets from which its assets are generated. The segments used are described below:
• Mortgage Lending, including the Group’s buy-to-let, and owner-occupied first and second charge lending and related activities
•
•
Commercial Lending, including the Group’s equipment leasing activities, development finance, structured lending and other
offerings targeted towards SME customers, together with its motor finance business
Idem Capital, including loan assets acquired from third parties and legacy assets which share certain credit characteristics
with them
Dedicated financing and administration costs of each of these businesses are allocated to the segment. Shared central costs are not
allocated between segments, nor is income from central cash balances or the carrying costs of unallocated savings balances.
Gains on derecognition of financial assets have not been allocated to segment results.
Loans to customers and operating lease assets are allocated to segments as are dedicated securitisation funding arrangements and
their related cross-currency basis swaps and cash balances.
Retail deposits and their related costs are allocated to the segments based on the utilisation of those deposits. Retail deposits raised
in advance of lending are not allocated.
Other assets and liabilities are not allocated between segments.
All of the Group’s operations are conducted in the UK, all revenues arise from external customers and there are no inter-segment
revenues. No customer contributes more than 10% of the revenue of the Group.
Page 171
The Accounts Financial information about these business segments, prepared on the same basis as used in the consolidated accounts of the
Group, is shown below.
Year ended 30 September 2020
Interest receivable
Interest payable
Net interest income
Other operating income
Total operating income
Direct costs
Provisions for losses
Year ended 30 September 2019
Interest receivable
Interest payable
Net interest income
Other operating income
Total operating income
Direct costs
Provisions for losses
Mortgage
Lending
Commercial
Lending
Idem
Capital
Unallocated
items
Total
Segments
£m
344.9
(154.9)
190.0
6.5
196.5
(16.4)
(25.8)
154.3
£m
112.9
(30.8)
82.1
9.9
92.0
(24.4)
(21.7)
45.9
£m
30.4
(4.3)
26.1
0.6
26.7
(6.3)
(0.8)
19.6
£m
3.5
(23.6)
(20.1)
-
(20.1)
(79.7)
-
(99.8)
£m
491.7
(213.6)
278.1
17.0
295.1
(126.8)
(48.3)
120.0
Mortgage
Lending
Commercial
Lending
Idem
Capital
Unallocated
items
Total
Segments
£m
342.1
(164.3)
177.8
6.8
184.6
(15.7)
(1.0)
167.9
£m
95.7
(30.7)
65.0
11.0
76.0
(25.0)
(7.2)
43.8
£m
61.3
(7.0)
54.3
1.4
55.7
(7.9)
0.2
48.0
£m
6.6
(25.3)
(18.7)
9.7
(9.0)
(76.6)
-
(85.6)
2020
£m
120.0
(1.6)
118.4
£m
505.7
(227.3)
278.4
28.9
307.3
(125.2)
(8.0)
174.1
2019
£m
174.1
(15.1)
159.0
The segmental profits disclosed above reconcile to the group results as shown below.
Results shown above
Fair value items
Operating profit
Page 172
The assets and liabilities attributable to each of the segments at 30 September 2020, 30 September 2019 and 1 October 2018 on the
basis described above were:
30 September 2020
Segment assets
Loans to customers
Operating lease assets
Cross-currency basis swaps
Securitisation cash
Segment liabilities
Allocated deposits
Securitisation funding
30 September 2019
Segment assets
Loans to customers
Operating lease assets
Cross-currency basis swaps
Securitisation cash
Segment liabilities
Allocated deposits
Securitisation funding
1 October 2018
Segment assets
Loans to customers
Operating lease assets
Cross-currency basis swaps
Securitisation cash
Segment liabilities
Allocated deposits
Securitisation funding
Note
16
24
20
15
Note
16
24
20
15
Note
16
24
15
Mortgage
Lending
£m
Commercial
Lending
£m
Idem
Capital
£m
Total
Segments
£m
10,819.5
-
445.3
223.4
1,514.8
39.5
-
-
297.1
12,631.4
-
-
-
39.5
445.3
223.4
11,488.2
1,554.3
297.1
13,339.6
7,692.2
3,928.3
11,620.5
1,882.2
-
1,882.2
Mortgage
Lending
£m
Commercial
Lending
£m
236.1
-
236.1
Idem
Capital
£m
9,810.5
3,928.3
13,738.8
Total
Segments
£m
10,344.1
-
582.7
353.1
1,452.1
36.3
-
-
389.9
12,186.1
-
-
-
36.3
582.7
353.1
11,279.9
1,488.4
389.9
13,158.2
5,367.2
5,206.9
10,574.1
1,822.5
-
1,822.5
Mortgage
Lending
£m
Commercial
Lending
£m
10,449.5
-
829.7
319.0
1,131.3
35.4
-
-
11,598.2
1,166.7
4,702.4
6,457.2
11,159.6
1,443.5
-
1,443.5
303.1
-
303.1
Idem
Capital
£m
7,492.8
5,206.9
12,699.7
Total
Segments
£m
519.8
12,100.6
-
-
19.8
539.6
411.0
33.1
444.1
35.4
829.7
338.8
13,304.5
6,556.9
6,490.3
13,047.2
An analysis of the Group’s financial assets by type and segment is shown in note 16. All of the assets shown above were located in
the UK.
The additions to non-current assets, excluding financial assets, in the year which are included in segmental assets above are
investments of £12.9m (2019: £11.6m) in assets held for leasing under operating leases, included in the Commercial Lending segment.
Page 173
The Accounts
No other fixed asset additions were allocated to segments.
The segmental assets and liabilities may be reconciled to the consolidated balance sheet as shown below.
2020
£m
2019
£m
13,339.6
13,158.2
1,701.6
18.0
26.6
170.1
249.6
872.3
9.7
21.0
171.1
163.2
15,505.5
14,395.5
2020
£m
2019
£m
13,738.8
12,699.7
(1,953.9)
132.4
2,301.4
-
20.4
110.4
(1,100.9)
80.5
1,441.5
15.2
34.5
116.6
14,349.5
13,287.1
2020
£m
491.7
19.2
-
14.0
524.9
351.4
139.0
31.0
521.4
3.5
524.9
2019
£m
505.7
18.3
9.7
15.4
549.1
348.9
121.2
62.7
532.8
16.3
549.1
Note
4
6
7
8
Total segment assets
Unallocated assets
Central cash and investments
Unallocated derivatives
Operational property, plant and equipment
Intangible assets
Other
Total assets
Total segment liabilities
Unallocated liabilities
Unallocated retail deposits
Derivative financial instruments
Central borrowings
Tax liabilities
Retirement benefit obligations
Other
Total liabilities
3. Revenue
Interest receivable
Operating lease income
Gain on derecognition of financial assets
Other income
Total revenue
Arising from:
Mortgage Lending
Commercial Lending
Idem Capital
Total revenue from segments
Unallocated revenue
Total revenue
Page 174
4.
Interest receivable
Interest receivable in respect of
Loan accounts
Finance leases
Invoice finance income
Interest on loans to customers
Other interest receivable
Total interest on financial assets
The above interest arises from:
Financial assets held at amortised cost
Finance leases
5.
Interest payable and similar charges
On retail deposits
On asset backed loan notes
On bank loans and overdrafts
On corporate bonds
On retail bonds
On central bank facilities
Total interest on financial liabilities
On pension scheme deficit
Discounting on contingent consideration
Discounting on lease liabilities
Other finance costs
Note
53
35
2020
£m
440.4
44.3
2.4
487.1
4.6
491.7
2020
£m
447.4
44.3
491.7
2020
£m
129.7
42.2
5.4
10.9
18.5
4.5
211.2
0.4
0.4
0.2
1.4
2019
£m
449.3
44.5
3.1
496.9
8.8
505.7
2019
£m
461.2
44.5
505.7
2019
£m
114.2
63.4
9.6
10.9
18.6
8.0
224.7
0.5
0.5
-
1.6
All interest payable on financial liabilities relates to financial liabilities held at amortised cost.
213.6
227.3
Page 175
The Accounts 6. Net operating lease income
Income
Operating lease rentals
Maintenance income
Total operating lease income
Costs
Depreciation of lease assets
Maintenance salaries
Other maintenance costs
Total operating lease costs
Net operating lease income
Note
24
50
2020
£m
14.5
4.7
19.2
(8.3)
(2.1)
(5.8)
(16.2)
3.0
2019
£m
14.0
4.3
18.3
(7.6)
(1.9)
(5.0)
(14.5)
3.8
7. Gain on derecognition of financial assets
During the year ended 30 September 2019, on 26 June 2019, the Group disposed of its residual interest in the Paragon Mortgages
(No. 12) PLC (‘PM12’) securitisation transaction for a cash payment, in order to optimise capital usage. This participation, which
exposed the Group to materially all of the credit risk in the securitised assets and entitled it to any net yield from these assets, was
determined to give the Group control of the entity, as defined by IFRS 10. On disposal of the participation, this control ceased and
hence the assets and the related external funding were derecognised.
Loans to customers of £695.8m and borrowings of £784.1m were derecognised on the completion of this transaction and a gain of
£9.7m was recognised in profit.
The cash flow hedge in the securitisation vehicle, ceased to be recognised in the Group at the point of the transaction and
consequently an amount of £0.9m, less related tax of £0.2m, was recycled to profit and loss, and is included in other comprehensive
income for the year ended 30 September 2019.
Information on the Group’s continuing involvement with the PM12 transaction is given in note 46.
8. Other income
Loan account fee income
Broker commissions
Third party servicing
Other income
All loan account fee income arises from financial assets held at amortised cost.
2020
£m
5.7
1.7
5.0
1.6
14.0
2019
£m
7.2
2.2
5.0
1.0
15.4
Page 176
9. Operating expenses
Employment costs
Auditor remuneration
Amortisation of intangible assets
Depreciation of operational assets
Operating lease rentals payable
Other administrative costs
Note
50
10
25
24
47
2020
£m
77.6
2.0
2.0
3.5
-
41.7
126.8
2019
£m
79.3
1.8
2.4
1.5
2.9
37.3
125.2
Operating lease rentals in 2019 included amounts no longer recognised immediately under IFRS 16 (note 36).
10. Auditor remuneration
The analysis of fees payable to the Company’s auditors (KPMG LLP) and their associates, excluding irrecoverable VAT, required by the
Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 is set out below. This analysis
includes amounts charged to the profit and loss account or included within the issue costs of debt in respect of fees paid to the Group
auditors and their associates.
Audit fee of the company
Other services
Audit of subsidiary undertakings pursuant to legislation
Total audit fees
Audit related assurance services
Interim review
Other
Total fees
Irrecoverable VAT
Total cost to the Group (note 9)
2020
£000
478
990
1,468
133
35
1,636
327
1,963
2019
£000
462
890
1,352
90
22
1,464
293
1,757
Fees paid to the auditors and their associates for non-audit services to the Company are not disclosed because the consolidated
accounts of the Group are required to disclose such fees on a consolidated basis.
Page 177
The Accounts
11. Fair value net (losses) / gains
Ineffectiveness of fair value hedges (note 20)
Portfolio hedges of interest rate risk
Deposit hedge
Loan hedge
Ineffectiveness of cash flow hedges
Other hedging movements
Net (losses) / gains on other derivatives
2020
£m
0.2
0.1
0.3
-
(2.9)
1.0
(1.6)
2019
£m
(0.2)
(6.3)
(6.5)
-
(5.8)
(2.8)
(15.1)
The fair value net (loss) / gain represents the accounting volatility on derivative instruments which are matching risk exposure on
an economic basis generated by the requirements of IAS 39. Some accounting volatility arises on these items due to accounting
ineffectiveness on designated hedges, or because hedge accounting has not been adopted or is not achievable on certain items.
The losses and gains are primarily due to timing differences in income recognition between the derivative instruments and the
economically hedged assets and liabilities. Such differences will reverse over time and have no impact on the cash flows of the Group.
12. Tax charge on profit on ordinary activities
(a) Analysis of charge in the year
Current tax
UK Corporation Tax on profits of the period
Adjustment in respect of prior periods
Total current tax
Deferred tax
Tax charge on profit on ordinary activities
2020
£m
25.5
0.5
26.0
1.1
27.1
2019
£m
36.3
(2.4)
33.9
(2.3)
31.6
The standard rate of corporation tax in the UK applicable to the Group in the period was 19.0% (2019: 19.0%), based on currently
enacted legislation. During the period, legislation was substantively enacted, reversing the reduction in the tax rate to 17.0% which
had been due to come into effect from April 2020. Consequently, temporary differences which had been expected to reverse at a tax
rate of 18.0% in the current year, or 17.0% in subsequent years, have either reversed or are expected to reverse at a rate of 19.0%. The
impact of this change has been accounted for in the year.
The Bank Corporation Tax Surcharge subjects any taxable profits arising in the Group’s banking subsidiary, Paragon Bank PLC
(and no other Group entity), to an additional 8.0% of tax to the extent these profits exceed £25.0m. The effect of the surcharge shown
in note (c) below.
Page 178
(b) Deferred tax charge / (credit) for the year
The deferred tax charge / (credit) in the income statement comprises the following temporary differences:
Accelerated tax depreciation
Retirement benefit obligations
Impairment and other provisions
Utilisation of tax losses
Other timing differences
Deferred tax charge / (credit) for the year
Prior period adjustment
Deferred tax charge / (credit) (note 23)
2020
2019
£m
(0.4)
1.2
(1.2)
(0.9)
2.8
1.5
(0.4)
1.1
£m
0.2
0.3
(2.1)
(0.2)
(1.9)
(3.7)
1.4
(2.3)
The expected impact on deferred tax balances of the withdrawal of the reduction in the rate of Corporation Tax to 17.0% described
above was accounted for in the year, the effect of the expected change having been accounted for when originally enacted.
(c) Factors affecting tax charge for the year
Accounting standards require companies to explain the difference between the effective rate of tax in the accounts and the
‘applicable rate’, generally the domestic rate of tax levied on corporate income in the jurisdiction in which the entity operates.
The Group operates wholly in the UK and all but a nominal amount of the Group’s income arises in UK resident companies.
Consequently, it is appropriate to use the prevailing UK corporation tax rate as the comparator to the effective tax rate. As noted in (a)
above, the UK corporation tax rate applicable to the Group for the year was 19.0% (2019: 19.0%).
The impact of the Banking Surcharge is shown as a difference between tax at this rate and the actual tax charge in the table below.
Profit on ordinary activities before taxation
Profit on ordinary activities multiplied by the UK standard rate of corporation tax
Effects of:
Permanent differences
Recurring disallowable expenditure and similar items
Mismatch in timing differences
Change in rate of taxation on deferred tax assets and liabilities
Bank Corporation Tax Surcharge
Tax losses created with no corresponding deferred tax asset recognised
Prior year charge / (credit)
Tax charge for the year
2020
£m
118.4
22.5
0.1
0.2
0.1
4.0
-
0.2
27.1
2019
£m
159.0
30.2
0.4
0.3
(0.6)
2.1
0.1
(0.9)
31.6
The timing difference mismatch arises because tax relief for share based payments is given on a different basis from that on which the
accounting charge for the provision of these awards is recognised under IFRS 2.
(d) Factors affecting future tax charges
Whilst practically all of the Group’s profit is subject to UK corporation tax, the relationship of its future effective tax rate to the standard
rate of UK corporation tax is expected to be primarily driven by the proportion of its taxable profit subject to the Bank Surcharge.
The Group includes various asset leasing businesses within its Commercial Lending division. Whilst such businesses do not, in
general, have significant permanent differences, the taxable profits in a given accounting period are usually significantly different from
the accounting profits due to temporary differences. Consequently, the operation will have no material impact on the effective tax
rate, but may have on the Group’s tax payments.
At the balance sheet date there were no material tax uncertainties and no significant open matters with the UK tax authorities. The
Group has no material exposure to any other tax jurisdiction.
As a wholly UK based business the Group does not expect to be significantly impacted by the OECD project on Base Erosion and
Profit Shifting (‘BEPS’).
Page 179
The Accounts
13. Profit attributable to members of Paragon Banking Group PLC
The Company’s profit after tax for the financial year amounted to £96.0m (2019: £9.9m). A separate income statement has not been
prepared for the Company under the provisions of Section 408 of the Companies Act 2006.
The Company has no other items of comprehensive income for the years ended 30 September 2020 or 30 September 2019.
14. Earnings per share
Earnings per ordinary share is calculated as follows:
Profit for the year (£m)
Basic weighted average number of ordinary shares ranking for dividend during the year (million)
Dilutive effect of the weighted average number of share options and incentive plans in issue during the year (million)
Diluted weighted average number of ordinary shares ranking for dividend during the year (million)
Earnings per ordinary share
- basic
- diluted
2020
91.3
253.6
2.5
256.1
2019
127.4
257.6
6.7
264.3
36.0p
35.6p
49.4p
48.2p
15. Cash and cash equivalents
‘Cash and Cash Equivalents’ includes current bank balances, money market placements and fixed rate sterling term deposits with
London banks, and balances with the Bank of England. It is analysed as set out below.
Deposits with the Bank of England
Balances with central banks
Deposits with other banks
Money Market Fund investments
Balances with other banks
Cash and cash equivalents
2020
£m
1,637.1
1,637.1
287.9
-
287.9
1,925.0
2019
£m
816.4
816.4
409.0
-
409.0
1,225.4
2018
£m
895.9
895.9
393.1
21.6
414.7
1,310.6
Not all of the Group’s cash is immediately available for its general purposes, including liquidity management. Cash received in
respect of loan assets funded through warehouse facilities and securitisations is not immediately available, due to the terms of those
arrangements.
Cash held by the Trustee of the Group’s employee share ownership plan (‘ESOP’) may only be used to invest in the shares of the
Company, pursuant to the aims of that plan.
The total consolidated ‘Cash and Cash Equivalents’ balance may be analysed as shown below:
Available cash
Securitisation cash
ESOP cash
2020
£m
1,701.1
223.4
0.5
1,925.0
2019
£m
872.1
353.1
0.2
2018
£m
962.9
338.8
8.9
1,225.4
1,310.6
The ‘Cash and Cash Equivalents’ amount of £12.6m (2019: £14.1m; 2018: £24.9m) shown in the Company balance sheet is not subject
to restrictions. This amount includes £nil of Money Market Fund investments (2019: £nil; 2018: £150.0m).
Cash and cash equivalents are classified as Stage 1 exposures (see note 19) for the purposes of impairment provisioning. The
probabilities of default have been assessed to be so low as to require no significant impairment provision.
Page 180
16. Loans to customers
Loan accounts
Finance lease receivables
Loans to customers
Fair value adjustments from portfolio hedging
Note
17
18
20
2020
IFRS 9
£m
11,907.0
724.4
12,631.4
109.7
12,741.1
2019
IFRS 9
£m
11,394.3
791.8
12,186.1
64.2
12,250.3
2018
IFRS 9
£m
11,381.5
719.1
12,100.6
(24.1)
12,076.5
The Group’s loans to customers at 30 September 2020, analysed between the segments described in note 2 are as follows:
2018
IAS 39
£m
11,407.4
720.4
12,127.8
(24.1)
12,103.7
Total
£m
10,636.9
464.2
272.4
478.0
609.0
170.9
Mortgage
Lending
£m
10,636.9
182.6
-
-
-
-
Commercial
Lending
£m
-
-
256.9
478.0
609.0
170.9
Idem
Capital
£m
-
281.6
15.5
-
-
-
10,819.5
1,514.8
297.1
12,631.4
Mortgage
Lending
£m
10,172.5
171.6
-
-
-
-
Commercial
Lending
£m
-
-
281.3
492.2
506.5
172.1
Idem
Capital
£m
-
352.3
37.6
-
-
-
Total
£m
10,172.5
523.9
318.9
492.2
506.5
172.1
10,344.1
1,452.1
389.9
12,186.1
Mortgage
Lending
£m
10,308.3
141.2
-
-
-
-
Commercial
Lending
£m
-
-
256.4
402.3
352.9
119.7
Idem
Capital
£m
-
447.0
72.8
-
-
-
Total
£m
10,308.3
588.2
329.2
402.3
352.9
119.7
10,449.5
1,131.3
519.8
12,100.6
Page 181
At 30 September 2020
First mortgages
Consumer loans
Motor finance
Asset finance
Development finance
Other commercial loans
Loans to customers
At 30 September 2019
First mortgages
Consumer loans
Motor finance
Asset finance
Development finance
Other commercial loans
Loans to customers
At 1 October 2018
First mortgages
Consumer loans
Motor finance
Asset finance
Development finance
Other commercial loans
Loans to customers
The Accounts The Group’s purchased loan portfolios are analysed below.
First mortgage loans
Consumer loans
Motor finance loans
2020
£m
15.0
220.3
15.5
250.8
2019
£m
15.7
275.4
37.6
328.7
Information on the Estimated Remaining Collections (‘ERCs’), the undiscounted forecast collectible amounts, for first mortgages and
consumer loans is given in note 56. All other loans above are internally generated or arise from acquired operations.
17. Loan accounts
Loan accounts at 30 September 2020, 30 September 2019, 1 October 2018 and 30 September 2018, which are all denominated and
payable in sterling, were:
First mortgage loans
Second charge mortgage loans
Other unsecured consumer loans
Development finance loans
Other secured commercial lending
Other commercial loans
2020
IFRS 9
£m
2019
IFRS 9
£m
2018
IFRS 9
£m
2018
IAS 39
£m
10,636.9
10,172.5
10,308.3
10,332.2
354.5
109.7
609.0
134.4
62.5
389.2
134.7
506.5
125.9
65.5
414.4
173.8
352.9
72.8
59.3
415.9
173.7
352.8
72.9
59.9
11,907.0
11,394.3
11,381.5
11,407.4
First mortgages are secured on residential property within the UK; second charge mortgage loans enjoy second charges on
residential property.
Other secured commercial lending includes structured lending, aviation mortgages and invoice finance.
Other commercial loans includes principally professions finance, discounted receivables and other short-term commercial balances.
Page 182
The amounts of the loan assets above pledged as collateral under the central bank facilities described in note 33 or under the
securitisation and warehouse funding arrangements described in notes 29 and 30 are shown below. These include notes retained by
the Group described in note 57. The table also shows assets prepositioned with the Bank of England for use in future drawings.
30 September 2020
In respect of:
Asset backed loan notes
Warehouse facilities
Central bank facilities
Total pledged as collateral
Prepositioned with Bank of England
Other assets not pledged as collateral
30 September 2019
In respect of:
Asset backed loan notes
Warehouse facilities
Central bank facilities
Total pledged as collateral
Prepositioned with Bank of England
Other assets not pledged as collateral
1 October 2018
In respect of:
Asset backed loan notes
Warehouse facilities
Central bank facilities
Total pledged as collateral
Prepositioned with Bank of England
Other assets not pledged as collateral
First Mortgages
Consumer Finance
£m
£m
Other
£m
4,106.5
881.9
2,875.3
7,863.6
1,072.3
1,701.0
10,636.9
4,338.3
948.1
1,734.4
7,020.8
1,873.7
1,278.0
10,172.5
5,037.8
1,023.8
1,670.1
7,731.7
1,171.0
1,405.6
10,308.3
-
-
-
-
-
464.2
464.2
-
-
-
-
-
523.9
523.9
40.4
-
-
40.4
-
547.8
588.2
-
-
-
-
-
805.9
805.9
-
-
-
-
-
697.9
697.9
-
-
-
-
-
485.0
485.0
18. Finance lease receivables
The Group’s finance leases can be analysed as shown below.
Motor finance
Asset finance
Carrying value
2020
IFRS 9
£m
272.4
452.0
724.4
2019
IFRS 9
£m
318.9
472.9
791.8
2018
IFRS 9
£m
329.2
389.9
719.1
Total
£m
4,106.5
881.9
2,875.3
7,863.6
1,072.3
2,971.1
11,907.0
4,338.3
948.1
1,734.4
7,020.8
1,873.7
2,499.8
11,394.3
5,078.2
1,023.8
1,670.1
7,772.1
1,171.0
2,438.4
11,381.5
2018
IAS 39
£m
329.4
391.0
720.4
With effect from 1 October 2019, the Group’s finance leases have been accounted for in accordance with IFRS 16 (note 61). Balance
shown in preceding periods are accounted for in accordance with IAS 17, however both standards require the same accounting
treatment.
Page 183
The Accounts
The minimum lease payments due under these loan agreements are:
Amounts receivable
Within one year
Within one to two years
Within two to three years
Within three to four years
Within four to five years
After five years
Less: future finance income
Present value
2020
IFRS 9
£m
269.5
221.5
163.6
104.1
43.2
41.6
843.5
(103.4)
740.1
2019
IFRS 9
£m
292.9
256.8
177.2
101.6
31.1
40.2
899.8
(101.4)
798.4
The present values of those payments, net of provisions for impairment, carried in the accounts are:
Amounts receivable
Within one year
Within two to five years
After five years
Present value
Allowance for uncollectible amounts
Carrying value
2020
IFRS 9
£m
236.5
467.1
36.5
740.1
(15.7)
724.4
2019
IFRS 9
£m
255.8
506.6
36.0
798.4
(6.6)
791.8
2018
IFRS 9
£m
258.5
239.9
165.6
94.9
29.0
30.9
818.8
(95.2)
723.6
2018
IFRS 9
£m
225.5
470.8
27.3
723.6
(4.5)
719.1
2018
IAS 39
£m
259.5
240.3
165.8
95.0
29.1
30.9
820.6
(95.2)
725.4
2018
IAS 39
£m
226.4
471.7
27.3
725.4
(5.0)
720.4
None of the Group’s finance lease receivables were pledged as collateral for liabilities at 30 September 2020 or 30 September 2019.
19. Impairment provisions on loans to customers
This note sets out information on the Group’s impairment provisioning under IFRS 9 for the loans to customers balances set out in
note 16, including both finance leases, accounted for under IFRS 16, and loans held at amortised cost, accounted for under IFRS 9, as
both groups of assets are subject to the IFRS 9 impairment requirements.
The disclosures are set out under the following headings:
(a) Basis of provision
(b)
Impairments by stage and division
(c) Movements in impairment provision in the period
(d)
Impairments charged to income
(e) Economic inputs to provision calculations
(f) Sensitivity analysis
(a) Basis of provision
IFRS 9 requires that impairment is evaluated on an expected credit loss (‘ECL’) basis. ECLs are based on an assessment of the
probability of default (‘PD’) and loss given default (‘LGD’), discounted to give a net present value. The estimation of ECL should be
unbiased and probability weighted, considering all reasonable and supportable information, including forward looking economic
assumptions and a range of possible outcomes. The provision may be based on either twelve month or lifetime ECL, dependent on
whether an account has experienced a significant increase in credit risk (‘SICR’).
Page 184
Calculation of expected credit loss (‘ECL’)
For the majority of the Group’s loan assets, the ECL is generated using statistical models applied to account data to generate PD and
LGD components.
PD on both a twelve month and lifetime basis is estimated based on statistical models for the Group’s most significant asset classes.
The PD calculation is a function of current asset performance, customer information and future economic assumptions. The structure
of the models was derived through analysis of correlation in historic data, which identified which current and historical customer
attributes and external economic variables were predictive of future loss. PD measures are calculated for the full contractual lives
of loans with the models deriving probabilities that, at a given future date, a loan will be in default, performing or closed. The Group
utilised all reasonably available information in its possession for this exercise.
LGD for each account is derived by calculating a value for exposure at the point of default (which will include consideration of future
interest, account charges and receipts) and reducing this for security values, net of likely costs of recovery. These calculations allow
for the Group’s potential case management activities. This evaluation includes the potential impact of economic conditions at the time
of any future default or enforcement. The derivation of the significant assumptions used in these calculations is discussed below.
In certain asset classes a fully modelled approach is not possible. This is generally where there are few assets in the class, where
there is insufficient historical data on which to base an analysis or where certain measures, such as days past due are not useful
(eg where the loan agreement does not require regular payments of pre-determined amounts). In these cases, which represent a
small proportion of the total portfolio, alternative approaches are adopted. These rely on internal credit monitoring practices and
professional credit judgement.
Notwithstanding the mechanical procedures discussed above, the Group will always consider whether the process generates
sufficient provision for particular loans, especially large exposures, and will provide additional amounts as appropriate.
In extreme or unprecedented economic conditions, such as the Covid-19 pandemic, it is likely that mechanical models will be less
predictive of outcomes as the historical data used for modelling will be insufficiently representative of present conditions. In these
circumstances, management carefully review all outputs to ensure provision is adequate.
At 30 September 2020 the effects of the material reductions in GDP since the onset of the Covid 19 crisis had not yet been evidenced
in customer credit performance and defaults, due to the lagging effect of government policy interventions. Where customers were
given payment reliefs, arrears and adverse credit indicators were not recorded by the Group or other lenders, meaning that both
internal credit metrics and external credit bureau data might not accurately reflect the customer’s credit position leading to modelled
PDs being underestimated.
While forecast economics assume the current economic situation, the future, generally upward, trends also tend to reduce PDs,
in a way that may not be justifiable where an underlying credit issue on an account has not emerged, which may result in default as
government support initiatives unwind.
In reviewing the subsequent payment patterns of accounts that have been granted Covid-19 reliefs, it is evident that there is higher
payment volatility (both in terms of account improvement and deterioration) so whilst credit risk is increased, it is not significant in
scale in all cases. The Group has reflected this position by applying PD floors to its payment holiday population in the main portfolios
at Stage 1, and moved accounts with payment holiday extensions to Stage 2, again with floors reflecting extrapolations of recent
cohort experience to reflect the more adverse economic conditions forecast within the Group’s macroeconomic scenarios and to
allow for the potential under-recognition of losses caused by these effects.
Significant Increase in Credit Risk (‘SICR’)
Under IFRS 9, SICR is not defined solely by account performance, but on the basis of the customer’s overall credit position, and this
evaluation should include consideration of external data. The Group’s aim is to define SICR to correspond, as closely as possible,
to that population of accounts which are subject to enhanced administrative and monitoring procedures operationally. The Group
assesses SICR in its modelled portfolios primarily on the basis of the relative difference in an account’s lifetime PD between
origination and the reporting date. The levels of difference required to qualify as an SICR may differ between portfolios and will
depend, to some extent, on the level of risk originally perceived and are monitored on an ongoing basis to ensure that this calibrates
with actual experience.
It should be noted that the use of the current PD, which includes external factors such as credit bureau data, means that all relevant
information in the Group’s hands concerning the customers’ present credit position is included in the evaluation, as well as the impact
of future economic expectations.
For non-modelled portfolios, the SICR assessment is based on the credit monitoring position of the account in question and for all
portfolios a number of qualitative indicators which provide evidence of SICR have been considered.
In determining whether an account has an SICR in the Covid-19 environment the granting of Covid-19 reliefs, including payment
holidays and similar arrangements, may mean that an SICR may exist without this being reflected in either arrears performance or
credit bureau data. The Group has accepted the advice of UK regulatory bodies that the grant of initial Covid-19 relief does not, of
itself, indicate an SICR, but has carefully considered internal credit and customer data to determine whether there might be any
accounts with SICR not otherwise identified by the process.
For customers with extended payment reliefs in place, the account has been placed in Stage 2, regardless of other indicators, as
a result of the analysis described above. This aligns the Group’s approach to regulatory guidance which suggested that while initial
payment reliefs should not automatically be taken as an indication of an SICR, an extension to such a relief was more likely to be so.
Page 185
The Accounts In all cases accounts which are more than one month in arrears, where this is a meaningful measure, are considered to have an SICR.
However, in certain loan portfolios, regular monthly payments of pre-set amounts are not required and hence this criterion cannot
be used.
The Group uses arrears multiples as a proxy for days past due, as this measure is commonly used in its arrears reporting. A loan will
generally be one month in arrears from the point it is one day past due until it is thirty days past due.
Definitions of default
As the IFRS 9 definition of ECL is based on PD, default must be defined for this purpose. The Group’s definitions of default for
its various portfolios are aligned to its internal operational procedures and the regulatory definitions of default used internally. In
particular the Group’s receiver of rent cases are defined as defaulted for modelling purposes as the behaviour of the case after that
point is significantly influenced by internal management decisions.
IFRS 9 provides a rebuttable presumption that an account is in default when it is ninety days overdue and this was used as the basis of
the Group’s definition. A combination of qualitative and quantitative measures were used in developing the definitions. These include
account management activities and internal statuses.
Credit Impaired loans
IFRS 9 defines a credit impaired account as one where an account has suffered one or more event which has had a detrimental effect
on future cash flows. It is thus a backward-looking definition, rather than one based on future expectations.
Credit impaired assets are identified either through quantitative measures or by operational status. Designations of accounts
for regulatory capital purposes are also taken into account. Assets may also be assigned to Stage 3 if they are identified as credit
impaired as a result of management review processes.
All loans which are in the process of enforcement, from the point where this becomes the administration strategy, are classified as
credit impaired.
Loans are retained in Stage 3 for three months after the point where they cease to exhibit the characteristics of default. After this
point, they may move to Stage 2 or Stage 1 depending on whether an SICR trigger remains.
All default cases are considered to be credit impaired, including all receiver of rent cases and all cases with at least one payment more
than ninety days overdue, even where such cases are being managed in the expectation of realising all of the carrying balance. In
order to provide better information for users, additional analysis of credit impaired accounts has been presented below distinguishing
between receiver of rent accounts, accounts subject to realisation / enforcement procedures and long-term managed accounts, all of
which are treated as credit impaired.
(b)
Impairments by stage
IFRS 9 calculations and related disclosures require loan assets to be divided into three stages, with accounts which were credit
impaired on initial recognition representing a fourth class.
The three classes comprise: those where there has been no SICR since advance or acquisition (Stage 1); those where there has been
an SICR (Stage 2); and loans which are impaired (Stage 3).
•
•
On initial recognition, and for assets where there has not been an SICR, provisions will be made in respect of losses resulting from
the level of credit default events expected in the twelve months following the balance sheet date
Where a loan has experienced an SICR, whether or not the loan is considered to be credit impaired, provisions will be made based
on the ECLs over the full life of the loan
• For credit impaired assets, provisions will also be made on the basis of lifetime ECLs.
For assets which were ‘Purchased or Originated as Credit Impaired’ (‘POCI’) accounts (ie considered as credit impaired at the point
of first recognition), such as certain of the Group’s acquired assets in Idem Capital, the carrying valuation is based on expected cash
flows discounted by the EIR determined at the point of acquisition.
Page 186
An analysis of the Group’s loan portfolios between the stages defined above is set out below.
Stage 1
£m
Stage 2*
£m
Stage 3*
£m
30 September 2020
Gross loan book
Mortgage Lending
Commercial Lending
Idem Capital
Total
Impairment provision
Mortgage Lending
Commercial Lending
Idem Capital
Total
Net loan book
Mortgage Lending
Commercial Lending
Idem Capital
Total
Coverage ratio
Mortgage Lending
Commercial Lending
Idem Capital
Total
9,822.6
1,384.2
122.9
11,329.7
(5.0)
(17.0)
(0.2)
(22.2)
9,817.6
1,367.2
122.7
11,307.5
0.05%
1.23%
0.16%
0.20%
903.2
132.3
9.9
1,045.4
(12.6)
(3.0)
(0.2)
(15.8)
890.6
129.3
9.7
1,029.6
1.40%
2.27%
2.02%
1.51%
127.0
20.2
28.9
176.1
(30.7)
(8.2)
(4.5)
(43.4)
96.3
12.0
24.4
132.7
24.17%
40.59%
15.57%
24.65%
POCI
£m
15.0
6.7
140.3
162.0
-
(0.4)
-
(0.4)
15.0
6.3
140.3
161.6
-
5.97%
-
0.25%
Total
£m
10,867.8
1,543.4
302.0
12,713.2
(48.3)
(28.6)
(4.9)
(81.8)
10,819.5
1,514.8
297.1
12,631.4
0.44%
1.85%
1.62%
0.64%
Page 187
The Accounts 30 September 2019
Gross loan book
Mortgage Lending
Commercial Lending
Idem Capital
Total
Impairment provision
Mortgage Lending
Commercial Lending
Idem Capital
Total
Net loan book
Mortgage Lending
Commercial Lending
Idem Capital
Total
Coverage ratio
Mortgage Lending
Commercial Lending
Idem Capital
Total
Stage 1
£m
Stage 2*
£m
Stage 3*
£m
9,847.7
1,376.7
158.2
11,382.6
(0.4)
(5.4)
(0.2)
(6.0)
9,847.3
1,371.3
158.0
11,376.6
-
0.39%
0.13%
0.05%
378.2
64.6
15.7
458.5
(2.0)
(1.3)
(0.4)
(3.7)
376.2
63.3
15.3
454.8
0.53%
2.01%
2.55%
0.81%
129.3
8.2
30.4
167.9
(24.4)
(4.0)
(3.8)
(32.2)
104.9
4.2
26.6
135.7
18.87%
48.78%
12.50%
19.18%
* Stage 2 and 3 balances are analysed in more detail below.
Finance leases included above, analysed by staging, were:
30 September 2020
Gross loan book
Impairment provision
Net loan book
Coverage Ratio
30 September 2019
Gross loan book
Impairment provision
Net loan book
Coverage Ratio
Stage 1
£m
Stage 2
£m
Stage 3
£m
676.6
(9.3)
667.3
1.37%
734.2
(3.2)
731.0
0.44%
33.6
(0.9)
32.7
14.4
(5.5)
8.9
2.68%
38.19%
21.0
(0.7)
20.3
5.7
(2.7)
3.0
3.33%
47.37%
POCI
£m
15.7
13.3
190.0
219.0
-
-
-
-
15.7
13.3
190.0
219.0
-
-
-
-
POCI
£m
15.5
-
15.5
-
37.5
-
37.5
-
Total
£m
10,370.9
1,462.8
394.3
12,228.0
(26.8)
(10.7)
(4.4)
(41.9)
10,344.1
1,452.1
389.9
12,186.1
0.26%
0.73%
1.12%
0.34%
Total
£m
740.1
(15.7)
724.4
2.12%
798.4
(6.6)
791.8
0.83%
In terms of the Group’s credit management processes, Stage 1 cases will fall within the appropriate customer servicing functions and
Stage 2 cases will be subject to account management arrangements. Stage 3 cases will include both those subject to recovery or
similar processes and those which, though being managed on a long-term basis, are included with defaulted accounts for regulatory
purposes. However, these broad categorisations may vary between different product types.
POCI balances included in the Commercial Lending segment arise principally from acquired businesses, where those assets were
identified as credit impaired at the point of acquisition when the acquired portfolios as a whole were evaluated. Additional provision
arising on these assets post-acquisition is shown as ‘Impairment Provision’ above.
Page 188
Idem Capital loans include acquired consumer and motor finance loans together with legacy (originated pre-2010) second charge
mortgage and unsecured consumer loans. Legacy assets and acquired loans which were performing on acquisition are included in the
staging analysis above.
Acquired portfolios within the Mortgage Lending and Idem Capital segments which were largely non-performing at acquisition, and
which were purchased at a deep discount to face value are shown as POCI assets above. Although no provision is shown above for
such assets, the effect of the discount on purchase is included in the gross value ensuring that the carrying value is substantially less
than the current balances due from customers and the level of cover is considerable.
Analysis of Stage 2 loans
The table below analyses the accounts in Stage 2 between those not more than one month in arrears where an SICR has nonetheless
been identified from other information and accounts more than one month in arrears, which are automatically deemed to have an
SICR.
Levels of Stage 2 assets have been increased significantly as a result of the Covid-19 outbreak. This is seen in an increased level of
assets where an SICR has been identified in the absence of arrears on the account, particularly through the evaluation of the potential
significance of extended payment holidays. In Mortgage Lending and Idem Capital the level of Stage 2 arrears accounts has fallen,
due to regulatory interventions preventing arrears being recorded.
Coverage levels have increased in both Mortgage Lending and Commercial Lending, as a consequence of the harsher economic
assumptions applied in 2020 and the PD floors applied to accounts with payment holiday extensions. Reduced expectations of
security values have also increased provision requirements. Impacts on the highly seasoned Idem Capital books have been less and
the levels of such assets in Stage 2 remain relatively small.
30 September 2020
Gross loan book
Mortgage Lending
Commercial Lending
Idem Capital
Total
Impairment provision
Mortgage Lending
Commercial Lending
Idem Capital
Total
Net loan book
Mortgage Lending
Commercial Lending
Idem Capital
Total
Coverage ratio
Mortgage Lending
Commercial Lending
Idem Capital
Total
< 1 month
arrears
> 1 <= 3 months
arrears
£m
£m
879.9
113.2
4.8
997.9
(12.0)
(2.5)
(0.1)
(14.6)
867.9
110.7
4.7
983.3
1.36%
2.21%
2.08%
1.46%
23.3
19.1
5.1
47.5
(0.6)
(0.5)
(0.1)
(1.2)
22.7
18.6
5.0
46.3
2.58%
2.62%
1.96%
2.53%
Total
£m
903.2
132.3
9.9
1,045.4
(12.6)
(3.0)
(0.2)
(15.8)
890.6
129.3
9.7
1,029.6
1.40%
2.27%
2.02%
1.51%
Page 189
The Accounts < 1 month
arrears
> 1 <= 3 months
arrears
£m
£m
336.3
57.2
7.7
401.2
(1.3)
(1.0)
(0.2)
(2.5)
335.0
56.2
7.5
398.7
0.39%
1.75%
2.60%
0.62%
41.9
7.4
8.0
57.3
(0.7)
(0.3)
(0.2)
(1.2)
41.2
7.1
7.8
56.1
1.67%
4.05%
2.50%
2.09%
Total
£m
378.2
64.6
15.7
458.5
(2.0)
(1.3)
(0.4)
(3.7)
376.2
63.3
15.3
454.8
0.53%
2.01%
2.55%
0.81%
30 September 2019
Gross loan book
Mortgage Lending
Commercial Lending
Idem Capital
Total
Impairment provision
Mortgage Lending
Commercial Lending
Idem Capital
Total
Net loan book
Mortgage Lending
Commercial Lending
Idem Capital
Total
Coverage ratio
Mortgage Lending
Commercial Lending
Idem Capital
Total
Page 190
Analysis of Stage 3 loans
The table below analyses the accounts in Stage 3 between accounts in the process of enforcement or where full recovery is
considered unlikely (‘Realisations’ in the table), loans being managed on a long-term basis where full recovery is possible but which
are considered in default for regulatory purposes and buy-to-let mortgages where a receiver of rent (‘RoR’) has been appointed by the
Group to manage the property on the customer’s behalf. RoR accounts in Stage 3 may be fully up-to-date with full recovery possible.
These accounts are included in Stage 3 as they are classified as defaulted for regulatory purposes.
Accounts which no longer meet default criteria but which are being retained in Stage 3 for a probationary period are included with the
> 3 month arrears accounts below.
The impact of Covid-19 on the Group’s Stage 3 loans can be seen mostly in the level of > 3 month arrears accounts shown below,
both in terms of increased numbers and in higher provision coverage. The impact is proportionally less in Idem Capital where there is
a significant balance of second charge loans which are long-term arrears balances, the customer making regular payments, but not
reducing arrears. Government and regulatory policy intervention have reduced the likelihood of new enforcement actions, particularly
on consumer portfolios.
In Mortgage Lending the overall level of Stage 3 balances has continued to reduce, despite Covid-19, as the managed work-out of
legacy receiver of rent cases continued in the period. Coverage for Stage 3 RoR managed and realisations cases has increased over
the year as a result of a less positive outlook for property sale values. The coverage ratio for Commercial Lending is subject to large
fluctuations, as the number and absolute value of Stage 3 cases are relatively low and hence the specific details of individual cases
will influence the ratio.
30 September 2020
Gross loan book
Mortgage Lending
Commercial Lending
Idem Capital
Total
Impairment provision
Mortgage Lending
Commercial Lending
Idem Capital
Total
Net loan book
Mortgage Lending
Commercial Lending
Idem Capital
Total
Coverage ratio
Mortgage Lending
Commercial Lending
Idem Capital
Total
> 3 month arrears
RoR managed
Realisations
£m
£m
£m
19.4
11.4
24.3
55.1
(1.7)
(4.2)
(2.8)
(8.7)
17.7
7.2
21.5
46.4
86.7
-
-
86.7
(20.8)
-
-
(20.8)
65.9
-
-
65.9
20.9
8.8
4.6
34.3
(8.2)
(4.0)
(1.7)
(13.9)
12.7
4.8
2.9
20.4
Total
£m
127.0
20.2
28.9
176.1
(30.7)
(8.2)
(4.5)
(43.4)
96.3
12.0
24.4
132.7
8.76%
36.84%
11.52%
15.79%
23.99%
-
-
23.99%
39.23%
45.45%
36.96%
40.52%
24.17%
40.59%
15.57%
24.65%
Page 191
The Accounts > 3 month arrears
RoR managed
Realisations
£m
£m
£m
30 September 2019
Gross loan book
Mortgage Lending
Commercial Lending
Idem Capital
Total
Impairment provision
Mortgage Lending
Commercial Lending
Idem Capital
Total
Net loan book
Mortgage Lending
Commercial Lending
Idem Capital
Total
Coverage ratio
Mortgage Lending
Commercial Lending
Idem Capital
Total
8.3
1.7
26.0
36.0
(0.4)
(0.5)
(1.9)
(2.8)
7.9
1.2
24.1
33.2
4.82%
29.41%
7.31%
7.78%
106.3
-
-
106.3
(19.3)
-
-
(19.3)
87.0
-
-
87.0
18.16%
-
-
18.16%
Total
£m
129.3
8.2
30.4
167.9
(24.4)
(4.0)
(3.8)
(32.2)
104.9
4.2
26.6
135.7
14.7
6.5
4.4
25.6
(4.7)
(3.5)
(1.9)
(10.1)
10.0
3.0
2.5
15.5
31.97%
53.85%
43.18%
39.45%
18.87%
48.78%
12.50%
19.18%
The security values available to reduce exposure at default in the calculation shown above for Stage 3 accounts are set out below.
The estimated value of the security represents, for each account, the lesser of the valuation estimate and the exposure at default
in the Central scenario. Security values are based on the most recent valuation of the relevant asset held by the Group, indexed or
depreciated as appropriate.
First mortgages
Second mortgages
Asset finance
Motor finance
2020
£m
71.9
17.3
6.7
1.5
97.4
2019
£m
65.7
14.0
2.2
1.0
82.9
The RoR managed accounts are being managed to ensure the optimal resolution for landlords, tenants and lenders and this long-term,
stable situation underpinned their treatment as not impaired under IAS 39, but the existence of the RoR arrangement causes the
accounts to be treated as defaulted for regulatory purposes. The Group’s RoR arrangements are described in more detail below.
Idem Capital balances with over three months arrears comprise principally second charge mortgage accounts originated over ten
years ago which have been over three months in arrears for some time. These accounts are generally making regular payments
and have significant levels of equity in the underlying property which reduces the required provision to the value shown above. It
is expected that a high proportion of these accounts will eventually redeem naturally, either on the sale of the property or by the
satisfaction of the amount due through instalment payments.
Page 192
Buy-to-let receiver of rent cases (Stage 3)
Where a buy-to-let mortgage customer in England or Wales falls into arrears on their account the Group has the power to appoint a
receiver of rent under the Law of Property Act. The receiver will then manage the property on behalf of the customer, collecting rents
and remitting them to make payments on the account. While the receiver has the power to sell the property, in many cases they will
operate it as a buy-to-let on at least a short to medium term basis, potentially longer, depending on the individual circumstances of
the case. This causes less disruption to the tenants and may result in the mortgage account returning to performing status and the
property being handed back to the customer.
The following table analyses the number and gross carrying value of RoR managed accounts shown above by the date of the receivers’
appointment, illustrating this position.
Managed accounts
Appointment date
2010 and earlier
2011 to 2013
2014 to 2016
2016 and later
Total managed accounts
Accounts in the process of realisation
30 September 2020
30 September 2019
No.
369
72
29
46
516
104
620
£m
62.4
12.4
4.2
7.7
86.7
19.7
106.4
No.
402
86
31
84
603
80
683
£m
70.5
17.3
4.5
14.0
106.3
11.9
118.2
Receiver of rent accounts in the process of realisation at the period end are included under that heading in the Stage 3 tables above.
In addition to the cases analysed above, 3 POCI mortgage accounts also had a receiver of rent appointed (2019: 3), making a total
of 623.
(c) Movements in impairment provision by stage
The movements in the impairment provision calculated under IFRS 9, analysed by business segments, are set out below.
At 30 September 2019
Provided in period (note 19(d))
Amounts written off
Assets derecognised
At 30 September 2020
At transition – 1 October 2018
Provided in period (note 19(d))
Amounts written off
Assets derecognised
At 30 September 2019
Mortgage
Lending
Commercial
Lending
Idem
Capital
£m
26.8
25.8
(4.3)
-
48.3
36.1
1.2
(6.5)
(4.0)
26.8
£m
10.7
22.7
(4.8)
-
28.6
6.6
7.2
(3.1)
-
10.7
£m
4.4
1.3
(0.8)
-
4.9
11.5
0.3
(7.4)
-
4.4
Total
£m
41.9
49.8
(9.9)
-
81.8
54.2
8.7
(17.0)
(4.0)
41.9
Accounts are considered to be written off for accounting purposes if a balance remains once standard enforcement processes have
been completed, subject to any amount retained in respect of expected salvage receipts. This has no effect on the net carrying value,
only on the amounts reported as gross loan balances and accumulated impairment provisions.
At 30 September 2020, enforceable contractual balances of £5.5m (2019: £9.0m) were outstanding on non-POCI assets written off in
the period. This excludes those accounts where a full and final settlement was agreed and those where the contractual terms do not
permit any further action. Enforceable balances are kept under review for operational purposes, but no amounts are recognised in
respect of such accounts unless further cash is received or there is a strong expectation that it will be.
Page 193
The Accounts A more detailed analysis of these movements by IFRS 9 stage on a consolidated basis for the year ended 30 September 2020 and
30 September 2019 is set out below.
Loss allowance at 30 September 2019
New assets originated or purchased
Changes in loss allowance
Transfer to Stage 1
Transfer to Stage 2
Transfer to Stage 3
Changes due to credit risk
Write offs
Assets derecognised
Loss allowance at 30 September 2020
Loss allowance at 1 October 2018
New assets originated or purchased
Changes in loss allowance
Transfer to Stage 1
Transfer to Stage 2
Transfer to Stage 3
Changes due to credit risk
Write offs
Assets derecognised
Loss allowance at 30 September 2019
Stage 1
Stage 2
Stage 3
£m
6.0
10.2
0.9
(1.2)
(0.5)
6.8
-
-
22.2
4.9
4.4
0.5
(0.3)
(0.5)
(2.9)
-
(0.1)
6.0
£m
3.7
-
(0.7)
1.3
(0.4)
11.9
-
-
15.8
2.6
-
(0.5)
0.4
(0.4)
3.3
-
(1.7)
3.7
£m
32.2
-
(0.2)
(0.1)
0.9
20.5
(9.9)
-
43.4
46.7
-
-
(0.1)
0.9
3.9
(17.0)
(2.2)
32.2
POCI
£m
-
-
-
-
-
0.4
-
-
0.4
-
-
-
-
-
-
-
-
-
Total
41.9
10.2
-
-
-
39.6
(9.9)
-
81.8
54.2
4.4
-
-
-
4.3
(17.0)
(4.0)
41.9
The principal factor generating the increase in the loss allowance in the period is the impact of the Covid-19 crisis, which has led to
increased loss expectations across all of the Group’s portfolios, primarily as a result of the forecast deterioration in key economic
variables and their impact on the Group’s customers. The broad availability of payment holidays has also been reflected, with floors
applied for both payment holiday accounts and payment holiday extensions.
These increases in expected losses have also led to increased numbers of accounts having an SICR identified and therefore being
transferred from Stage 1 to Stage 2. The transfers to Stage 2 in 2020 include £576.3m of balances with extended payment reliefs
which were identified as having an SICR for this reason only.
Overall the impact of the PD floors and the transfer of additional accounts to the life-time ECL provisioning required by Stage 2 has
increased the total provision by £19.8m from the £62.0m which would have been indicated had only the Group’s standard SICR tests
been used.
In the year ended 30 September 2019, the principal factors generating the reduction in the loss allowance were the derecognition
of the PM12 assets, shown above as ‘assets derecognised’, a major account review exercise relating to unsecured legacy assets,
resulting in the cessation of collection on a large number of accounts and a write off of £5.8m, and realisations on RoR cases where
provisions of £7.3m were utilised.
Page 194
The movements in the Loans to Customers balances in respect of which these loss allowances have been made are set out below.
Balance at 30 September 2019
New assets originated or purchased
Changes in staging
Transfer to Stage 1
Transfer to Stage 2
Transfer to Stage 3
Redemptions and repayments
Goodwill adjustment
Assets derecognised
Write offs
Other changes
Balance at 30 September 2020
Loss allowance
Carrying value
Balance at 1 October 2018
New assets originated or purchased
Changes in staging
Transfer to Stage 1
Transfer to Stage 2
Transfer to Stage 3
Redemptions and repayments
Goodwill adjustment
Assets derecognised
Write offs
Other changes
Balance at 30 September 2019
Loss allowance
Carrying value
Stage 1
£m
11,382.6
2,071.4
202.3
(846.2)
(42.6)
(1,488.3)
-
-
-
50.5
11,329.7
(22.2)
11,307.5
11,274.1
2,443.2
100.8
(240.0)
(27.1)
(1,586.1)
-
(636.8)
-
54.5
11,382.6
(6.0)
11,376.6
Stage 2
Stage 3
£m
458.5
-
(200.1)
849.2
(20.5)
(54.1)
-
-
-
12.4
1,045.4
(15.8)
1,029.6
397.8
-
(97.5)
243.4
(18.6)
(30.0)
-
(39.4)
-
2.8
458.5
(3.7)
454.8
£m
167.9
-
(2.2)
(3.0)
63.1
(42.0)
-
-
(9.9)
2.2
176.1
(43.4)
132.7
188.2
-
(3.3)
(3.4)
45.7
(29.6)
-
(14.1)
(17.0)
1.4
167.9
(32.2)
135.7
POCI
£m
219.0
-
-
-
-
Total
£m
12,228.0
2,071.4
-
-
-
(78.1)
(1,662.5)
-
-
-
21.1
162.0
(0.4)
161.6
294.7
4.1
-
-
-
(110.1)
(2.7)
(14.7)
-
47.7
219.0
-
219.0
-
-
(9.9)
86.2
12,713.2
(81.8)
12,631.4
12,154.8
2,447.3
-
-
-
-
(1,755.8)
(2.7)
(705.0)
(17.0)
106.4
12,228.0
(41.9)
12,186.1
Other changes includes interest and similar charges.
Page 195
The Accounts
(d)
Impairments charged to income
The amounts charged to the profit and loss account in the period are analysed as follows.
Mortgage
Lending
Commercial
Lending
30 September 2020
Provided in period
Recovery of written off amounts
Of which
Loan accounts
Finance leases
30 September 2019
Provided in period
Recovery of written off amounts
Of which
Loan accounts
Finance leases
(e) Economic impacts
£m
25.8
-
25.8
25.8
-
25.8
1.2
(0.2)
1.0
1.0
-
1.0
£m
22.7
(1.0)
21.7
9.5
12.2
21.7
7.2
-
7.2
2.8
4.4
7.2
Idem
Capital
£m
1.3
(0.5)
0.8
0.8
-
0.8
0.3
(0.5)
(0.2)
(0.2)
-
(0.2)
Total
£m
49.8
(1.5)
48.3
36.1
12.2
48.3
8.7
(0.7)
8.0
3.6
4.4
8.0
Impairment provision under IFRS 9 is calculated on a forward-looking ECL basis, based on expected economic conditions in multiple
internally coherent scenarios. The Group uses four distinct economic scenarios chosen to represent the range of possible outcomes
and allow for the impact of economic asymmetry in the calculations. Each scenario comprises a number of economic parameters
and while models for different portfolios may not use all of the variables, the set, as a whole, is defined for the Group and must be
consistent.
As the Group does not have an internal economics function, in developing its economic scenarios it considers analysis from reputable
external sources to form a general market consensus which informs its central scenario. These sources include forecasts produced
by the Office of Budget Responsibility (‘OBR’) and the PRA as well as private sector economic research bodies.
The four economic scenarios comprise a base case, which will normally carry the highest scenario weighting, an upside case, a
downside and a severe downside, the latter typically being benchmarked to be at least as severe as scenarios provided by the Bank
of England for stress testing purposes. For the 2020 year end, each of the Group’s scenarios represents a differing level of impact
of the pandemic on the economy and different timings of recovery. They have been reviewed against emerging economic data and
updated external forecasts reflecting the most recent information available, including the impact of the UK’s second lockdown. The
approach utilises data and forecasts from both economic advisers and from public sources, such as Bank of England statements and
projections.
Page 196
The overall shape of the scenarios adopted, and the change in the forecasts year-on- ear is illustrated by the forecasts of annual GDP
growth rates set out in the charts below.
The fundamental rebasing of the Group’s scenarios in the year, resulting from the impact of the Covid-19 pandemic, means that it is
not useful to discuss detailed changes in the scenarios year-on-year.
The Group revised its weightings at the time of the half-year accounts. Whilst the base case represents the highest individually
weighted scenario at 40%, the combined downside and severe downside cases carry a combined 50% weighting, reflecting the scale
of uncertainty and potentially adverse economic impact from Covid-19.
It should be noted that ‘Severe Downside’ in the Covid-19 scenarios is based on a potential outcome and is less severe than that
used at 30 September 2019 which was based on the PRA ‘once in 200-year’ stress test. Therefore, the 2020 scenario carries a higher
probability.
The weightings attached to each scenario are set out below:
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
2020
40%
10%
35%
15%
100%
2019
40%
20%
35%
5%
100%
Page 197
The AccountsGDP growth rate (%)2018/2019 FY2019/2020 FYReporting dateEnd of forecast period used for scenario modelling2020/2021 FY2021/2022 FY2022/2023 FY2023/2024 FY2024/2025 FY25.0%20.0%15.0%10.0%5.0%0.0%-5.0%-10.0%-15.0%-20.0%-25.0%Historical and forecast GDP quarterly year-on-year growth rates - As at 30 September 2020BaseSevere downsideUpsideDownsideGDP growth rate (%)2017/2018 FY2018/2019 FYReporting dateEnd of forecast period used for scenario modelling2019/2020 FY2020/2021 FY2021/2022 FY2022/2023 FY2023/2024 FY25.0%20.0%15.0%10.0%5.0%0.0%-5.0%-10.0%-15.0%-20.0%-25.0%Historical and forecast GDP quarterly year-on-year growth rates - As at 30 September 2019BaseSevere downsideUpsideDownside The economic variables comprising each scenario, and their projected average rates of increase (or decrease) in each of the first five
years of the forecast period are set out below.
30 September 2020
Gross Domestic Product (‘GDP’) (year-on-year change)
2021
4.9%
6.0%
2.1%
0.2%
2021
(0.8)%
1.3%
(3.5)%
(11.8)%
2021
0.1%
0.1%
0.1%
0.0%
2021
0.9%
1.2%
0.7%
(0.1)%
2021
7.1%
6.3%
8.2%
8.5%
2021
3.6%
4.7%
1.8%
(0.9)%
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
House Price Index (‘HPI’) (year-on-year change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Bank Base Rate (‘BBR’) (rate)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Consumer Price Inflation (‘CPI’) (rate)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Unemployment (rate)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Secured lending (annual change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Page 198
2022
5.7%
5.4%
9.3%
9.5%
2022
0.3%
1.3%
(7.0)%
(13.8)%
2022
0.1%
0.4%
0.1%
(0.2)%
2022
1.7%
2.1%
1.3%
0.7%
2022
5.3%
4.8%
6.5%
7.8%
2022
3.7%
4.5%
2.3%
0.2%
2023
2.2%
2.4%
2.9%
2.2%
2023
4.0%
3.0%
(0.1)%
(5.3)%
2023
0.4%
0.7%
0.1%
0.1%
2023
2.2%
2.1%
1.8%
1.5%
2023
5.0%
4.6%
5.7%
7.0%
2023
3.8%
4.2%
3.2%
2.3%
2024
1.5%
1.5%
1.3%
1.4%
2024
4.0%
3.3%
3.8%
1.5%
2024
0.8%
0.9%
0.3%
0.2%
2024
2.1%
2.2%
2.1%
2.0%
2024
5.0%
4.5%
5.0%
6.3%
2024
3.9%
4.1%
3.7%
3.4%
2025
1.4%
1.5%
1.5%
1.3%
2025
3.8%
3.8%
3.8%
3.8%
2025
0.8%
1.0%
0.8%
0.6%
2025
2.1%
2.1%
2.0%
2.0%
2025
4.4%
4.1%
4.8%
5.5%
2025
3.9%
4.0%
3.8%
3.7%
Consumer credit (annual change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
30 September 2019
2021
6.0%
8.7%
1.8%
(4.6)%
Gross Domestic Product (‘GDP’) (year-on-year change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
House Price Index (‘HPI’) (year-on-year change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Bank Base Rate (‘BBR’) (rate)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Consumer Price Inflation (‘CPI’) (rate)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Unemployment (rate)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
2020
1.3%
2.2%
(0.1)%
(2.1)%
2020
1.3%
2.9%
(1.3)%
(5.2)%
2020
0.8%
1.0%
0.5%
0.0%
2020
2.1%
2.0%
2.3%
2.5%
2020
4.9%
3.6%
4.9%
6.4%
2022
6.1%
8.2%
2.8%
(2.3)%
2021
1.7%
2.5%
0.4%
(1.6)%
2021
2.9%
7.4%
(4.4)%
(15.4)%
2021
0.8%
1.5%
0.5%
0.0%
2021
2.1%
1.5%
3.1%
4.6%
2021
4.0%
3.5%
6.1%
9.2%
2023
6.1%
7.3%
4.3%
1.6%
2022
1.8%
2.0%
1.6%
1.2%
2022
4.0%
8.6%
(3.4)%
(14.4)%
2022
0.8%
2.0%
0.5%
0.0%
2022
2.1%
1.6%
2.9%
4.1%
2022
3.9%
3.5%
5.9%
8.8%
2024
6.3%
6.9%
5.4%
4.0%
2023
1.5%
1.5%
1.3%
1.4%
2023
4.2%
4.6%
3.6%
2.7%
2023
0.8%
2.4%
0.5%
0.0%
2023
2.1%
2.0%
2.1%
2.2%
2023
3.9%
3.5%
5.6%
8.2%
2025
6.3%
6.7%
5.7%
4.8%
2024
1.9%
2.1%
1.5%
1.0%
2024
4.3%
4.0%
4.8%
5.5%
2024
0.8%
2.5%
0.5%
0.0%
2024
2.1%
2.2%
2.1%
2.1%
2024
3.8%
3.5%
5.3%
7.5%
Page 199
The Accounts Secured lending (annual change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Consumer credit (annual change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
2020
3.3%
3.6%
2.8%
1.9%
2020
6.0%
6.9%
4.8%
(2.9)%
2021
3.6%
4.7%
1.8%
(0.9)%
2021
6.0%
8.7%
1.8%
(4.6)%
2022
3.7%
4.5%
2.3%
0.2%
2022
6.1%
8.2%
2.8%
(2.3)%
2023
3.8%
4.2%
3.2%
2.3%
2023
6.1%
7.3%
4.3%
1.6%
2024
3.9%
4.0%
3.7%
3.4%
2024
6.3%
6.9%
5.4%
4.0%
After the end of the initial five year period, the final rate or rate of change (as appropriate) is assumed to continue into the future in
each scenario.
To illustrate the levels of non-linearity in the various scenarios, the maximum and minimum quarterly levels for each variable over the
five year period are set out below.
Central scenario
Upside scenario
Downside scenario
Severe scenario
Max
%
18.0
5.0
0.8
2.4
7.6
3.9
6.3
Min
%
(7.6)
(4.0)
0.1
0.6
4.0
3.5
6.0
Max
%
Min
%
Max
%
18.8
(5.9)
17.8
4.0
1.0
2.3
7.0
4.8
8.8
0.0
0.1
0.7
4.0
4.0
6.7
4.0
1.0
2.3
9.0
3.8
5.7
Min
%
(15.1)
(10.0)
0.1
0.2
4.5
1.7
1.5
Max
%
20.5
4.0
0.8
2.3
9.0
3.7
4.8
Min
%
(17.9)
(20.0)
(0.4)
(0.3)
5.3
(1.2)
(5.2)
Central scenario
Upside scenario
Downside scenario
Severe scenario
Max
%
1.9
4.3
0.8
2.2
4.1
3.9
6.3
Min
%
1.2
0.7
0.8
2.0
3.8
3.2
6.0
Max
%
3.1
9.7
2.5
2.2
3.9
4.8
8.8
Min
%
1.2
0.9
0.8
1.4
3.5
3.3
6.2
Max
%
1.6
4.9
0.5
3.2
6.1
3.8
6.0
Min
%
(1.0)
(4.7)
0.5
2.0
4.2
1.7
1.5
Max
%
1.3
5.7
0.0
4.9
9.2
3.7
5.9
Min
%
(4.7)
(17.8)
0.0
2.0
4.5
(1.2)
(5.2)
30 September 2020
Economic driver
GDP
HPI
BBR
CPI
Unemployment
Secured lending
Consumer credit
30 September 2019
Economic driver
GDP
HPI
BBR
CPI
Unemployment
Secured lending
Consumer credit
Page 200
The asymmetry in the models is demonstrated by comparing the calculated impairment provision with that which would have been
produced using the Central scenario alone, 100% weighted.
Calculated provision
100% weighted central scenario
Effect of multiple economic scenarios
(f) Sensitivity
2020
£m
81.8
67.4
14.4
2019
£m
41.9
37.7
4.2
The calculation of impairment provision under IFRS 9 is subject to a variety of uncertainties arising from assumptions, forecasts and
expectations about future events and conditions. To illustrate the impact of these uncertainties, sensitivity calculations have been
performed for some of the most significant.
Economic conditions
To illustrate the potential impact of differing future economic scenarios on the total impairment, the provision which would be
calculated if each of the economic scenarios were 100% weighted would be:
Scenarios
Central
Upside
Downside
Severe downside
2020
Provision
Difference
£m
67.4
58.0
82.4
134.3
£m
(14.4)
(23.8)
0.6
52.5
The weighted average of these 100% weighted provisions need not equal the weighted average ECL due to the impact of the differing
PDs on staging. However due to the significant impact of post model stage adjustments, the effect on the PD SICR test of 100%
weighting has not been taken into account above.
Significant increase in credit risk
The most important driver of SICR is relative PD. If all PDs across the Group’s principal buy-to-let mortgage book were increased by
10%, loans with a gross value of £53.3m would transfer from Stage 1 to Stage 2 (2019: £25.8m), and the total provision would increase
by £1.6m from the combined effects of higher PDs on expected losses and the impact of providing for expected lifetime losses, rather
than 12-month losses on the additional Stage 2 cases (2019: £0.6m).
Value of security
The principal assumptions impacting on loss given default are the estimated security values. If the rate of growth in house prices
assumed by the model after the forecast minimum were halved, ignoring any PD effects, then the provision for the Group’s first and
second mortgage assets under the central scenario would increase by £5.9m.
At 30 September 2019, if the rate of growth in house prices assumed by the model were halved, ignoring any PD effects, then the
provision for the Group’s first and second mortgage assets under the central scenario would increase by £5.5m.
As the house price index is not predicted to increase consistently from 30 September 2020, the sensitivity calculation at
30 September 2019 cannot be repeated exactly.
Receiver of rent
The majority of receiver of rent cases, which are included in Stage 3, are managed long-term and therefore their assumed realisation
date has an important impact on the provision calculation. If the assumed rate of realisations was increased by 20%, the impairment
provision in the central scenario would increase by £0.8m (2019: £0.7m).
Page 201
The Accounts 20. Derivative financial instruments and hedge accounting
Introduction
The Group uses derivative financial instruments such as interest rate swaps for risk management purposes only. Each such derivative
contract is entered into for economic hedging purposes to manage a particular identified risk (as described in notes 56 to 59) and any
gains or losses arising are incidental to this objective. No trading in derivative financial instruments is undertaken.
Hedge accounting is applied where appropriate, though some derivatives, while forming part of an economic hedge relationship, do
not qualify for this accounting treatment under the IAS 39 rules, particularly where the hedged risk relates to an off balance sheet
item. In other cases, hedge accounting has not been adopted either because natural accounting offsets are expected or because
complying with the IAS 39 hedge accounting rules would be particularly onerous.
The Group’s hedging arrangements can be analysed between:
•
Fair value hedges of portfolio interest rate risk, which are used to manage the interest rate risk inherent in fixed rate lending and
deposit taking.
• Cash flow hedges, which are used to manage the foreign exchange and interest rate risk inherent in its currency borrowings.
An economic hedge of interest rate risk in fixed rate lending will also address pipeline exposures, where future lending at a given fixed
rate is anticipated. However, such arrangements do not qualify as hedges for accounting purposes.
In addition, the Group utilises currency derivatives to hedge its exposure on the small amount of its lending denominated in foreign
currencies.
The analysis below splits derivatives between those accounted for within portfolio fair value hedges, or as cash flow hedges and those
which, despite representing an economic hedge, are not accounted for as hedges. There were no individual interest rate risk hedging
arrangements in place either in the year ended 30 September 2020 or the preceding year.
Derivatives in hedge accounting relationships
Fair value hedges
Interest rate swaps
Fixed to floating
Floating to fixed
Cash flow hedges
Cross-currency basis swaps
Dollar-sterling
Euro-sterling
Total derivatives in hedge accounting relationships
Other derivatives
Interest rate swaps
Currency futures
Total recognised derivative assets/(liabilities)
2020
Assets
£m
2020
Liabilities
£m
2019
Assets
£m
2019
Liabilities
£m
-
14.4
14.4
213.2
232.1
445.3
459.7
3.4
0.2
463.3
(130.0)
-
(130.0)
-
-
-
(130.0)
(2.4)
-
(132.4)
0.2
7.6
7.8
274.6
308.1
582.7
590.5
1.9
-
592.4
(78.3)
(0.2)
(78.5)
-
-
-
(78.5)
(2.0)
-
(80.5)
The credit risk inherent in the derivative financial assets shown above is discussed in note 56.
Page 202
(a) Fair value hedges
Background and hedging objectives
The Group’s fair value hedges of portfolios of interest rate risk (‘macro hedges’) arise from its management of the interest rate risk
inherent in its fixed rate lending and deposit taking activities. These activities would expose the Group to movement in market interest
rates if not hedged.
This position arises naturally where fixed rate loans are funded with floating or variable rate borrowings, as in the Group’s
securitisation transactions, but may also arise where retail deposit funding is used. Where possible the Group takes advantage of
natural hedging between fixed rate assets and deposits, but it is unlikely that a precise match for value and tenor of the instruments
could be achieved leaving unmatched items on both sides. This is referred to as repricing or duration risk and is controlled within
limits under the Group’s interest rate risk management process, described in note 58. In order to manage these exposures, they are
hedged with financial derivatives and form part of the Group’s portfolio hedging arrangements. Duration risk is monitored regularly to
ensure mismatches or gaps remain within limits set by policy.
Responsibility to direct and oversee structural interest rate risk management has been delegated by the Board to the Executive
Risk Committee (‘ERC’) and by ERC to the Assets and Liabilities Committee (‘ALCO’). A hedging strategy is developed for each fixed
product considering behavioural characteristics, such as whether a customer is likely to prepay before contractual maturity. This is
reviewed from time to time with any changes agreed with ALCO.
In order to manage potential exposure to changes in interest rates between the point at which fixed rate products are priced and
the advance date, it may be necessary to undertake hedging of assets in the pipeline. Interest rate swaps used to hedge pipeline
loan exposures, which are not yet recognised on the balance sheet, can cause unmatched fair value costs or credits to arise until
both sides of the hedge can be recognised within the interest rate portfolio hedging arrangement, generally a few months after the
inception of the derivative contract.
In managing interest rate exposure, Treasury may use interest rate swaps, forward rate agreements, swaptions or interest rate caps
and floors. However, interest rate swaps are the most generally used instruments.
This policy creates two macro hedges:
•
•
The ‘loan hedge’ matching fixed rate buy-to-let mortgage assets, or other fixed rate assets, with interest rate swaps to convert the
interest receivable to a floating rate; and
The ‘deposit hedge’ matching fixed rate deposits with interest rate swaps which operates in the opposite direction, converting the
fixed rate interest payable to floating rate amounts.
The Group is in the process of changing the principal sterling reference rate used in its interest rate risk management framework from
LIBOR to SONIA and all new interest rate swap agreements since 1 February 2020 have referenced SONIA.
This means that each of these macro hedges can be divided into two sections, one referencing LIBOR and one SONIA. Through the
year, as assets and deposits matured and were replaced by new business, the LIBOR-linked element of the hedges reduced, and the
SONIA-linked element increased.
All new interest rate hedging arrangements for fixed rate assets or liabilities are executed with SONIA as a reference rate. In addition,
hedging related to fixed rate assets funded in the most recent securitisation transactions, PM 26 and PM 27, where the funding rate is
SONIA-linked, was also undertaken with reference to SONIA.
During the year the Group also began hedging interest rate risk on fixed rate CBILS and BBLS exposures using SONIA-linked basis
guarantee swaps, which are included in the loan hedge.
There remains a back book of swaps referencing three-month LIBOR, which is currently running off as the instruments reach maturity.
Certain of these swaps have a maturity after December 2021, when LIBOR is expected to become unavailable and the Group is closely
following emerging market practice for the treatment of such contracts. The International Swaps and Derivative Association (‘ISDA’),
the trade organisation for derivatives, have released a protocol which incorporates fallback provisions to facilitate transition to SONIA
when LIBOR ceases or if it is deemed unrepresentative by the FCA. The Group expects to adhere to transition in accordance with the
protocol by December 2020.
The designation of the two macro hedges is updated, on a month by month basis, using software which compares the overall
tenor, value and rate positions to match the expected fair value movement of the swaps with the expected interest rate risk related
movement in the fair value of the relevant assets or liabilities over the designation period as closely as possible. The software applies
regression analysis techniques to the potential impact of changes in expected interest rates over the designation period to maximise
expected hedge effectiveness on a prospective basis. The value of the portfolio of loans or deposits selected is then designated,
as a monetary amount of interest rate risk, as the hedged item, while the portfolio of swaps selected are designated as the hedging
instruments.
Any swaps not selected in this process are disclosed as derivatives not in hedging relationships.
At the end of each designation period the Group will assess the effectiveness of each hedge retrospectively, based on fair value
movements (relating to interest rate risk components only) which have occurred in the period. Movements are compared to
pre-determined test thresholds using regression techniques to determine whether the hedge was effective in the period.
Page 203
The Accounts Ineffectiveness
The Group has identified the following possible sources of hedge ineffectiveness in its portfolio hedges of interest rate risk:
•
•
The maturity profile of the hedging instruments may not exactly match that of the hedged items, particularly where hedged items
settle early.
The use of derivatives as a hedge of interest rate risk additionally exposes the Group to the derivative counterparties’ credit risk,
which is not matched in the hedged item. This risk is minimised by transacting only with high quality counterparties and through
collateralisation arrangements (as described in note 56).
• The use of different discounting curves in measuring fair value changes in the hedged items and hedging instruments.
• Difference in the timing of interest payments on the hedged items and settlements on the hedging instruments.
These sources of ineffectiveness are minimised by the portfolio matching process, which seeks to match the terms of the items as
closely as possible.
In addition to the hedging ineffectiveness described above, group profit will also be affected by the fair value movements of interest
rate swap agreements which were entered into as part of the Group’s interest rate risk hedging strategy but failed to find a match in
the hedging portfolio.
Hedging Instruments
The hedging portfolios at 30 September 2020 and 30 September 2019 consist of a large number of sterling denominated swaps. In
addition, at 30 September 2020 there were a small number of balance guarantee swaps (‘BGS’) in place. Settlement on all swaps is
generally quarterly (monthly for BGS) where:
• One payment is calculated based on a fixed rate of interest and the nominal value of the swap.
•
An opposite payment is calculated based on the same nominal value but using a floating interest rate set at a fixed margin over a
reference rate, LIBOR or SONIA.
On the BGS the nominal value of the swap is linked to the principal value of a pool of assets and reduces in line with redemptions and
repayments until maturity. Other interest rate swaps have a fixed nominal value throughout their lives.
The Group pays fixed rate and receives floating when hedging exposures from fixed rate assets (in the loan hedge). Conversely, the
Group pays floating rate and receives fixed rate when hedging fixed rate deposits, in the deposit hedge.
The principal terms of the hedging instruments are set out below, analysed between the two directions of the swap.
Average fixed notional interest rate
Average notional margin over LIBOR
Average notional margin over SONIA
Notional principal value
LIBOR swaps
SONIA BGS
Other SONIA swaps
Maturing
Within one year
Between one and two years
Between two and five years
More than five years
Fair value
2020
2019
Deposit Hedge
Loan Hedge
Deposit Hedge
Loan Hedge
0.42%
0.91%
0.83%
1.04%
-
-
£m
1,147.5
-
1,043.0
2,190.5
1,287.5
669.0
234.0
-
2,190.5
14.3
-
-
£m
3,968.8
25.2
1,317.3
5,311.3
531.5
1,012.1
3,731.0
36.7
5,311.3
(129.9)
-
-
£m
1,619.0
-
-
1,619.0
805.5
449.5
364.0
-
1,619.0
7.5
-
-
£m
4,304.5
-
486.8
4,791.3
465.4
595.2
3,554.7
176.0
4,791.3
(78.2)
The value included above for BGS are analysed by their contractual maturity dates although, due to the terms of the instruments, it is
likely that the balance outstanding will reduce more quickly.
The increased levels of hedging shown above arise from the growth in both the loan and deposit books. The changes in fair value are a
result of moves in market implied interest rates compared to the rates on the fixed legs of the swaps.
Page 204
Accounting impacts
Movements affecting the portfolio fair value hedges during the year are set out below.
Hedging instruments
Interest rate swaps
Included in derivative financial assets
Included in derivative financial liabilities
Notional principal value
Change in fair value used in calculating hedge ineffectiveness
2020
2019
Deposit Hedge
Loan Hedge
Deposit Hedge
Loan Hedge
£m
£m
£m
£m
14.3
-
14.3
2,190.5
6.6
-
(129.9)
(129.9)
5,311.3
(48.1)
7.6
(0.1)
7.5
1,619.0
7.9
0.2
(78.4)
(78.2)
4,791.3
(98.5)
2020
2019
Deposit Hedge
Loan Hedge
Deposit Hedge
Loan Hedge
Hedged items
Fixed rate deposits
Monetary amount of risk relating to Retail Deposits
2,083.9
-
1,473.7
Fixed rate loans
£m
£m
£m
£m
-
Monetary amount of risk relating to Loans to Customers
-
5,353.4
-
4,834.8
Accumulated amount of fair value hedge adjustments included on
balance sheet (notes 16 and 28)*
Of which: amounts related to discontinued hedging relationships
being amortised
Change in fair value used in recognising hedge ineffectiveness
(10.4)
-
(6.4)
109.7
(11.6)
48.2
(3.9)
-
(8.1)
64.2
(8.8)
92.2
Hedge ineffectiveness recognised
Included in fair value (losses) / gains in the profit and loss account
0.2
0.1
(0.2)
(6.3)
* Under the IAS 39 rules relating to fair value hedge accounting for portfolios of interest rate risk, the change in the fair value of the hedged items attributable to the hedged risk is
shown as ‘fair value adjustments from portfolio hedging’ next to the carrying value of the hedged assets or liabilities in the appropriate note.
(b) Cash flow hedging
Background and hedging objectives
The Group has entered into cross-currency basis swap agreements which form part of its securitisation arrangements, providing an
economic hedge against financial risks inherent in the deal structures, as described below. Such relationships have been designated
as cash flow hedges for accounting purposes.
In any securitisation where asset backed floating rate notes (‘FRNs’) are issued in currency (US dollars or euros), a currency and
interest rate mismatch between assets and liabilities would exist, exposing the securitisation and the Group to both foreign exchange
and interest basis risk.
This would preclude such a deal from attaining a AAA rating for its senior debt. To address that issue, in each deal a bespoke cross-
currency basis swap was written, with the swap being an asset or liability of the relevant SPV company.
The effect of these swaps is to translate the required currency payments, both principal and interest to sterling payments, based on
a fixed rate of exchange. They also translate the reference rate of interest on the notes from a dollar LIBOR or EURIBOR basis to a
sterling LIBOR basis. This effectively eliminates the foreign exchange and interest rate basis risks with respect to these instruments.
In order to achieve a AAA rating for the deal, the swaps must themselves be capable of this level of rating. Therefore, the deal
conditions specify that only high quality counterparties may be used, and that where there is deterioration in credit quality of the
counterparty, collateral must be posted. The collateral requirement is supervised by the independent third-party rating agencies.
Page 205
The Accounts These arrangements will be affected by the withdrawal or amendment of IBOR rates (sterling LIBOR, US dollar LIBOR and EURIBOR).
While sterling LIBOR is to be retired any changes to other rates may not be parallel or take place at the same time. The Group expects
a common solution to be developed across securitisation issuers in conjunction with other market participants and expects this to be
implemented in the coming financial year.
Hedging instruments
Under these swap agreements
•
•
•
•
The Group will make quarterly payments of principal and floating rate interest in sterling and receive equivalent amounts of
principal and floating rate interest, in currency (either US dollars or euros), translated at an exchange rate fixed on inception
Settlement of both the cross-currency basis swaps and the notes to which they relate takes place on the same date. The Group
makes a single payment in sterling to the swap provider who will make the corresponding swap payment in currency to the external
principal paying agent. The principal paying agent will use these funds immediately to make the payments required on the currency
notes
The nominal amount of the swaps is adjusted automatically, quarter by quarter, such that it always amortises in line with the
quarterly payments of principal made on the currency notes (a ‘balance guarantee’ feature)
Floating rate interest on the sterling (pay) leg of the swaps is set with reference to three-month sterling LIBOR, with floating rate
interest on the currency (receive) legs set by reference to equivalent currency rates
• The payment and repricing dates are the same (to the day) for the swaps as for their underlying notes
• The swaps must remain in place for as long as the notes are outstanding
The principal terms of the hedging instruments (the cross-currency basis swaps) are summarised below.
Average fixed exchange rate
Average margin over LIBOR on interest payable
Average margin over US dollar LIBOR / EURIBOR on interest receivable
Notional principal value (£m)
Fair value (£m)
Average remaining term (years)
2020
Swap currency
2019
Swap currency
USD
2.0
0.23%
0.19%
397.0
213.2
20
EUR
1.5
0.48%
0.54%
687.5
232.1
21
USD
2.0
0.24%
0.19%
447.5
274.6
21
EUR
1.5
0.49%
0.52%
1,007.4
308.1
22
Although the average remaining contractual term is as shown above, the link between the notional principal of the swaps and the
balance outstanding on the notes means that the life may, in practice, be much shorter.
The absolute value of these swaps is relatively large as the majority of the instruments date from before the 2008 credit crisis, when
a major dislocation in rates occurred, creating significant market value in the instruments. However, economically, this is offset by the
corresponding increase in the carrying value of the currency denominated notes. Legacy assets, those with inception dates in 2008 or
earlier, account for £445.3m of the cross-currency basis swap balance at 30 September 2020 (2019: £582.1m), with post-2010 assets
representing £nil (2019: £0.6m).
The decrease in notional principal related to note repayments in the period, with no new currency-denominated notes issued in
the year.
Sources of potential ineffectiveness
All cross-currency basis swap agreements have been designated as cash flow hedges in line with their economic effect and the critical
terms, such as interest and exchange rates, pricing dates and principal balances of the designated hedging instruments exactly
match those of the hedged currency denominated FRNs. This results in a critical terms match for IAS 39 purposes and hence no
ineffectiveness could arise from sources other than credit risk.
In respect of credit risk, the hedging instruments may be partially collateralised, depending on the rating of the counterparties
from time to time. Additional collateral is conditionally available, as described in note 56, under the terms of the instruments. This
generates a small potential credit valuation adjustment associated with the derivative asset representing the credit risk of the
receivable future cash flows that make up the derivative fair value. However, IAS 39 requires that Other Comprehensive Income
(‘OCI’) is adjusted by the lower of the cumulative gain or loss on the derivative or the hedged item (as proxied by a hypothetical
derivative). As the derivative bears credit risk of the counterparty (for the uncollateralised portion) it has a lower fair value than the
hypothetical derivative. The result is that the full fair value of the derivative is taken to OCI as it is the lower of the two amounts and no
ineffectiveness arises.
Page 206
Accounting impacts
Movements affecting the cash flow hedge relationships in the year are set out below.
Hedging Instruments
Cross-currency basis swaps
Included in derivative financial assets
Included in derivative financial liabilities
Notional principal value
Change in fair value used in calculating hedge ineffectiveness
Hedged Items
Floating rate notes
Included in Asset Backed Loan Notes
Changes in fair value used in calculating hedge ineffectiveness
Cash flow hedging reserve before tax
2020
Swap currency
2019
Swap currency
USD
£m
213.2
-
213.2
397.0
(29.5)
397.0
(29.5)
0.7
EUR
£m
232.1
-
232.1
687.5
(42.6)
687.5
(42.6)
2.3
USD
£m
274.6
-
274.6
447.5
71.3
447.5
71.3
0.8
EUR
£m
308.1
-
308.1
1,007.4
(21.2)
1,007.4
(21.2)
2.8
The table below summarises the amounts which have affected total comprehensive income as a result of the cash flow hedges
described above.
Change of value in hedging instrument recognised in cash flow hedge reserve
US dollar swaps
Euro swaps
Amount reclassified from cash flow hedge reserve to profit, recognised as foreign exchange differences and
interest on asset backed loan notes, both included within interest payable
US dollar swaps
Euro swaps
Net amount recognised in Other Comprehensive Income before tax
2020
£m
(29.5)
(42.6)
(72.1)
(29.0)
(42.5)
(71.5)
(0.6)
2019
£m
71.3
(21.2)
50.1
71.1
(21.5)
49.6
0.5
All amounts reclassified to profit in the financial year have been transferred because the hedged item has affected profit or loss. In the
year ended 30 September 2019 amounts were additionally reclassified to profit on the derecognition of the PM12 FRNs (note 7).
Page 207
The Accounts
(c) Derivatives not in a hedge accounting relationship
The Group’s other derivatives comprise:
•
•
Interest rate swaps which are economically part of the Group’s portfolio hedging arrangements but failed to find a match in the
hedge designation, including swaps hedging interest rate risk on the new lending pipeline
Currency futures, economically hedging exposures on lending denominated in currency, where hedge accounting has not been
adopted due to the size of the exposure
The principal terms of these derivatives are set out below.
Interest rate swaps
2020
2019
Pay fixed
Pay floating
Pay fixed
Pay floating
0.28%
0.23%
0.75%
0.77%
-
-
£m
145.7
422.0
567.7
128.1
60.6
182.0
197.0
567.7
3.4
-
-
£m
237.0
698.0
935.0
715.0
47.0
173.0
-
935.0
(2.4)
-
-
£m
315.4
-
315.4
68.4
43.5
92.5
111.0
315.4
1.9
-
-
£m
554.0
8.0
562.0
424.0
95.0
43.0
-
562.0
(2.0)
2020
2019
1.27
1.22
£m
14.1
14.1
-
-
14.1
0.2
£m
5.7
5.7
-
-
5.7
-
Average fixed notional interest rate
Average notional margin over LIBOR
Average notional margin over SONIA
Notional principal value
LIBOR swaps
SONIA BGS
Maturing
Within one year
Between one and two years
Between two and five years
More than five years
Fair value
Currency futures
US dollar futures
Average future exchange rate
Notional principal value
Maturing
Within one year
Between one and two years
Between two and five years
Fair value
Page 208
21. Sundry assets
(a) The Group
Current assets
Accrued interest income
Trade receivables
CSA assets
CRDs
Sovereign receivables
Other receivables
Sundry financial assets
Prepayments
Other tax
Note
65
2020
£m
0.1
3.2
103.5
15.1
0.2
3.2
125.3
2.7
-
128.0
2019
£m
0.4
3.6
72.2
11.4
-
2.7
90.3
2.1
0.4
92.8
2018
£m
0.6
2.2
3.8
6.2
-
2.5
15.3
2.6
1.1
19.0
Cash ratio deposits (‘CRDs’) are non-interest-bearing deposits lodged with the Bank of England, based on the value of the Bank’s
eligible liabilities. These are required to comply with regulatory rules.
Credit Support Annex (‘CSA’) assets are deposits placed with highly rated banks to act as security for the Group’s derivative financial
liabilities.
Neither of these balances is accessible by the Group at the balance sheet date. Therefore, they are included in sundry assets rather
than cash balances.
Sovereign receivables includes amounts receivable from the UK Government under the CBILS and BBLS schemes.
CRDs, CSA assets, sovereign receivables and accrued interest are considered to be Stage 1 assets for IFRS 9 impairment purposes.
The probabilities of default of the obligor institutions (the UK Government, Bank of England and major banks) have been assessed
and are considered to be so low as to require no significant impairment provision.
(b) The Company
Current assets
Amounts owed by Group companies
Accrued interest income
2020
£m
84.0
0.6
84.6
2019
£m
106.6
0.7
107.3
2018
£m
216.3
0.7
217.0
The amounts owed to the Company by other Group entities are considered to be Stage 1 balances for IFRS 9 impairment purposes.
The probability of default of the subsidiaries has been assessed in the context of the Group’s overall funding and asset position, and is
considered to be so low as to require no significant impairment provision.
22. Current tax assets / liabilities
Current tax in the Group and the Company represents UK corporation tax owed or recoverable.
Page 209
The Accounts 23. Deferred tax
(a) The Group
The movements in the net deferred tax asset / (liability) are as follows:
Opening net asset / (liability)
As previously reported
Change of accounting policy
Restated
Derecognition
Acquisitions
Income statement (charge)/credit
Credit to equity
Closing net asset / (liability)
Note
61
7
12
The net deferred tax asset for which provision has been made is analysed as follows:
Accelerated tax depreciation
Retirement benefit obligations
Temporary differences on loans to customers
Tax losses
Other timing differences
Net deferred tax asset / (liability)
2020
£m
6.2
-
6.2
-
-
(1.1)
1.1
6.2
2019
£m
(5.6)
5.0
(0.6)
1.8
0.5
2.3
2.2
6.2
2020
2019
£m
2.9
6.7
(3.8)
1.3
(0.9)
6.2
£m
2.3
5.9
(5.3)
0.4
2.9
6.2
2018
£m
(4.8)
-
(4.8)
-
(0.3)
1.2
(1.7)
(5.6)
2018
£m
4.1
3.7
(14.0)
0.2
0.4
(5.6)
As stated in note 12, legislation in the year has reversed the expected reduction in the standard rate of UK tax to 17.0% which had
already been accounted for. This change has been reflected in the deferred tax balance. The temporary differences shown above
have been provided at the rate prevailing when the Group anticipates these temporary differences to reverse. In the event that the
temporary differences actually reverse in different periods a credit or charge will arise in a future period to reflect the difference. The
timing of reversal of temporary differences will be affected by both matters within the Group’s control (eg the timing and nature of the
refinancing of certain portfolios) and matters outside the Group’s control (eg the level of redemptions of finance leases).
If temporary differences reverse within Paragon Bank PLC in a period in which it is subject to the banking surcharge, then the impact
of the reversal will be at an effective tax rate that includes the banking surcharge to some extent.
In addition to the temporary differences, the Group has tax losses of £2.3m (2019: £2.3m) in entities whose current taxable profits are
insufficient to support the recognition of a deferred tax asset.
(b) The Company
The movements in the net deferred tax liability are as follows:
Opening net liability
Income statement charge / (credit)
Closing net liability
2020
£m
1.6
0.2
1.8
2019
£m
1.8
(0.2)
1.6
2018
£m
1.8
-
1.8
Page 210
The net deferred tax liability for which provision has been made is analysed as follows:
Other timing differences
Net deferred tax liability
24. Property, plant and equipment
(a) The Group
Cost
At 30 September 2018
Additions
Disposals
At 30 September 2019
Adoption of IFRS 16 (note 61)
Additions
Disposals
At 30 September 2020
Accumulated depreciation
At 30 September 2018
Charge for the year
On disposals
At 30 September 2019
Charge for the year
On disposals
At 30 September 2020
Net book value
At 30 September 2020
At 30 September 2019
At 30 September 2018
2020
£m
1.8
1.8
2019
£m
1.6
1.6
Land and
buildings
Plant and
machinery
£m
22.8
-
-
22.8
6.0
0.7
-
29.5
3.6
0.5
-
4.1
1.8
-
5.9
23.6
18.7
19.2
£m
10.7
1.1
(1.2)
10.6
1.0
1.5
(0.6)
12.5
8.5
1.0
(1.2)
8.3
1.7
(0.5)
9.5
3.0
2.3
2.2
Leased
assets
£m
46.4
11.6
(5.3)
52.7
-
12.9
(7.5)
58.1
11.0
7.6
(2.2)
16.4
8.3
(6.1)
18.6
39.5
36.3
35.4
2018
£m
1.8
1.8
Total
£m
79.9
12.7
(6.5)
86.1
7.0
15.1
(8.1)
100.1
23.1
9.1
(3.4)
28.8
11.8
(6.6)
34.0
66.1
57.3
56.8
Land and buildings and plant and machinery shown above are used within the Group’s business. Leased assets includes £27.0m in
respect of assets leased under operating leases (2019: £25.6m) and £12.5m of assets available for hire (2019: £10.7m).
Page 211
The Accounts The carrying values of right of use of assets, in respect of leases where the Group is the lessee, included in property, plant and
equipment are set out below.
Land and
buildings
Plant and
machinery
Total
Cost
At 30 September 2019
Adoption of IFRS 16 (note 61)
Additions
Disposals
At 30 September 2020
Accumulated depreciation
At 30 September 2019
Charge for the year
On disposals
At 30 September 2020
Net book value
At 30 September 2020
At 30 September 2019
£m
-
6.0
-
6.0
-
1.4
-
1.4
4.6
-
£m
-
1.0
0.3
(0.1)
1.2
-
0.6
(0.1)
0.5
0.7
-
£m
-
7.0
0.3
(0.1)
7.2
-
2.0
(0.1)
1.9
5.3
-
During the year ended 30 September 2018, the Group entered into a transaction with the Paragon Pension Plan, effectively granting a
first charge over its freehold head office building as security for its agreed contributions under the recovery plan. The carrying value of
the assets subject to this charge was £17.7m (2019: £18.0m).
(b) The Company
The property, plant and equipment balance of the Company represents a right of use asset in respect of a building leased from a
fellow Group entity. The carrying value of this asset is set out below.
Cost
At 30 September 2019
Adoption of IFRS 16 (note 61)
Additions
Disposals
At 30 September 2020
Accumulated depreciation
At 30 September 2019
Charge for the year
On disposals
At 30 September 2020
Net book value
At 30 September 2020
At 30 September 2019
Page 212
Land and
buildings
£m
-
18.8
-
-
18.8
-
1.4
-
1.4
17.4
-
25. Intangible assets
Cost
At 30 September 2018
Acquisitions
Additions
At 30 September 2019
Acquisitions
Additions
At 30 September 2020
Accumulated amortisation and impairment
At 30 September 2018
Amortisation charge for the year
At 30 September 2019
Amortisation charge for the year
At 30 September 2020
Net book value
At 30 September 2020
At 30 September 2019
At 30 September 2018
Goodwill
(note 26)
£m
168.2
2.2
-
170.4
-
-
170.4
6.0
-
6.0
-
6.0
164.4
164.4
162.2
Computer
software
Other intangible
assets
£m
9.4
-
2.0
11.4
-
1.0
12.4
7.3
1.7
9.0
1.2
10.2
2.2
2.4
2.1
£m
10.6
-
-
10.6
-
-
10.6
5.6
0.7
6.3
0.8
7.1
3.5
4.3
5.0
Total
£m
188.2
2.2
2.0
192.4
-
1.0
193.4
18.9
2.4
21.3
2.0
23.3
170.1
171.1
169.3
Other intangible assets comprise brands and the benefit of business networks recognised on the acquisition of businesses.
Movements in goodwill in the year ended 30 September 2019 relate to the finalisation of the acquisition accounting for Titlestone
described in the accounts for that year.
26. Goodwill
The goodwill carried in the accounts is attributable to three cash generating units (‘CGU’s), which have not changed in the year. The
balance is as analysed below:
CGU
SME lending
Development finance
TBMC
(a) SME lending
2020
£m
113.0
49.8
1.6
164.4
2019
£m
113.0
49.8
1.6
164.4
The goodwill carried in the accounts relating to the SME lending (formerly asset finance) CGU was recognised on acquisitions in the
years ended 30 September 2016 and 30 September 2018.
An impairment review undertaken at 30 September 2020 indicated that no write down was required.
The recoverable amount of the SME lending CGU used in this impairment testing is determined on a value in use basis using
pre-tax cash flow projections based on financial budgets approved by the Board covering a five-year period. These forecasts reflect
the potential ongoing impact of Covid-19 on the business, with overall average growth increased to include the recovery from the
Covid-19 low point.
Page 213
The Accounts
The key assumptions underlying the value in use calculation for the SME lending CGU are:
•
Level of business activity, based on management expectations. The forecast assumes a compound annual growth rate (‘CAGR’)
for new business over the five-year period of 19.7%, compared with 12.0% used in the calculation at 30 September 2019. Cash flows
beyond the five-year budget are extrapolated using a constant growth rate of 1.5% (2019: 1.9%) which does not exceed the
long-term average growth rates for the markets in which the business is active
Management have concluded that the levels of activity assumed for the purpose of this forecast are reasonable, based on past
experience and the current economic environment
•
Discount rate, which is based on third party estimates of the implied industry cost of capital. The pre-tax discount rate applied to
the cash flow projection is 15.0% (2019: 13.2%)
As an illustration of the sensitivity of this impairment test to movements in the key assumptions, the Group has calculated that a
10.0% reduction in profit levels coupled with a 100 basis point increase in the pre-tax discount rate would eliminate the headroom in
the projection.
In the testing carried out at 30 September 2019, a 24.0% reduction in profit levels coupled with a 370 basis point increase in the pre-
tax discount rate would have that effect.
(b) Development finance
The goodwill carried in the accounts relating to the development finance CGU was first recognised on a business acquisition in the
year ended 30 September 2018.
An impairment review undertaken at 30 September 2020 indicated that no write down was required.
The recoverable amount of the development finance CGU used in this impairment testing is determined on a value in use basis using
pre-tax cash flow projections based on financial budgets approved by the Board covering a five-year period. These forecasts include
the potential ongoing impact of Covid-19 on the business.
The key assumptions underlying the value in use calculation for the development finance cash generating unit are:
•
Level of business activity, based on management expectations. The forecast assumes a CAGR for new commitments over the five-
year period of 16.9%, compared with 18.3% used in the calculation at 30 September 2019. Cash flows beyond the five-year budget
are extrapolated using a constant growth rate of 1.5% (2019: 1.9%) which does not exceed the long-term average growth rate for the
UK economy
Management have concluded that the levels of activity assumed for the purpose of this forecast are reasonable, based on past
experience and the current economic environment
•
Discount rate, which is based on third party estimates of the implied industry cost of capital. The pre-tax discount rate applied to
the cash flow projection is 14.2% (2019: 13.2%)
Management believes any reasonably possible change in the key assumptions above would not cause the recoverable amount of
the development finance CGU to fall below the balance sheet carrying value. This was also the case in the testing carried out at
30 September 2019.
(c) TBMC
The goodwill carried in the accounts relating to the TBMC cash generating unit was recognised on an acquisition in December 2008
and impaired by £6.0m in 2009.
An impairment review was undertaken at 30 September 2020 which indicated no further impairment. The recoverable amount of
the TBMC CGU used in this impairment testing is determined on a value in use basis using pre-tax cash flow projections based on
financial budgets approved by the Board covering a five year period. The pre-tax discount rate applied to the cash flow projection
is 4.41% (2018: 4.74%) and cash flows beyond the five year budget are extrapolated using a 1.6% (2019: 1.6%) growth rate, being the
average long-term growth rate in the UK economy over a twenty year period.
The key assumptions underlying the value in use calculation for the TBMC business are:
•
•
Level of business activity, based on management expectations. Management have concluded that the levels of activity assumed
for the purpose of this forecast are reasonable, based on past experience and the current economic environment
Discount rate, which is based on market rates of interest plus a margin appropriate to the risk profile of the TBMC business as an
investment.
The directors believe that no reasonably possible change in any of the key assumptions above would cause the recoverable value of
the CGU to fall below its balance sheet carrying value. This was also the case at 30 September 2019.
Page 214
27. Investment in subsidiary undertakings
At 30 September 2018
Investments in subsidiaries
Capital distributions
Loans advanced
Loans repaid
Provision movements
At 30 September 2019
Investments in subsidiaries
Capital distributions
Loans advanced
Loans repaid
Provision movements
At 30 September 2020
Shares in group
companies
Loans to group
companies
Loans to ESOP
Trusts
£m
770.7
-
(130.0)
-
-
(0.2)
640.5
-
(15.6)
-
-
14.7
639.6
£m
200.0
-
-
100.0
-
-
300.0
-
-
90.0
-
-
390.0
£m
13.7
-
-
5.1
-
(18.6)
0.2
-
-
4.7
-
(4.4)
0.5
Total
£m
984.4
-
(130.0)
105.1
-
(18.8)
940.7
-
(15.6)
94.7
-
10.3
1,030.1
Investments in subsidiaries represent transactions between the Company and various of its subsidiaries.
During the years ended 30 September 2020 and 30 September 2019, the Group carried out capital reductions in various non-trading
subsidiaries. Dividends were paid, or capital was distributed to the parent and the investments above were written off as a result of the
reduction in these entities’ net assets.
During the year ended 30 September 2020 the Company received £113.9m in dividend income from its subsidiaries (2019: £44.3m)
and £18.2m of interest on loans to Group companies (2019: £15.1m).
The Company’s subsidiaries, and the nature of its interest in them, are shown in note 66.
28. Retail deposits
The Group’s retail deposits, held by Paragon Bank PLC, were received from customers in the UK and are denominated in sterling.
The deposits comprise principally term deposits, and notice and easy access accounts. The method of interest calculation on these
deposits is analysed as follows:
Fixed rate
Variable rates
2020
£m
4,975.9
2,880.7
7,856.6
2019
£m
4,154.4
2,237.5
6,391.9
The weighted average interest rate on retail deposits at 30 September 2020, analysed by charging method, was:
Fixed rate
Variable rates
All deposits
2020
%
1.69
0.72
1.34
2019
%
2.02
1.43
1.81
2018
£m
3,643.1
1,653.5
5,296.6
2018
%
1.94
1.36
1.76
Page 215
The Accounts The contractual maturity of these deposits is analysed below.
Amounts repayable
In less than three months
In more than three months, but not more than one year
In more than one year, but not more than two years
In more than two years, but not more than five years
Total term deposits
Repayable on demand
Fair value adjustments for portfolio hedging (note 20)
2020
£m
565.0
2,725.6
1,541.6
664.8
5,497.0
2,359.6
7,856.6
10.4
7,867.0
2019
£m
466.6
2,088.4
1,158.0
900.9
4,613.9
1,778.0
6,391.9
3.9
6,395.8
2018
£m
256.8
2,024.7
1,010.6
655.3
3,947.4
1,349.2
5,296.6
(4.2)
5,292.4
29. Asset backed loan notes
The Group’s asset backed loan notes (‘Notes’) are rated and publicly listed and are secured on portfolios comprising variable and fixed
rate mortgages. The maturity date of the Notes matches the maturity date of the underlying assets. The Notes can be prepaid in part
from time to time, but such prepayments are limited to the net capital received from borrowers in respect of the underlying assets.
There is no requirement for the Group to make good any shortfall on the Notes out of general funds. It is likely that a substantial
proportion of the Notes will be repaid within five years.
The Group also has an option to repay all of the Notes on any issue at an earlier date (the ‘call date’), at their outstanding principal
amount.
Interest is payable at a fixed margin above;
•
•
The London Interbank Offered Rate (‘LIBOR’) on notes denominated in sterling, other than notes issued by Paragon Mortgages
(No. 26) PLC and Paragon Mortgages (No. 27) PLC
The compounded Sterling Overnight Interbank Average Rate (‘SONIA’) on notes denominated in sterling issued by
Paragon Mortgages (No. 26) PLC and Paragon Mortgages (No. 27) PLC
• The Euro Interbank Offered Rate (‘EURIBOR’) on notes denominated in euros
• The London Interbank Offered Rate (‘US dollar LIBOR’) on notes denominated in US dollars
The IBOR rates, LIBOR, EURIBOR and US dollar LIBOR are intended to be withdrawn and replacement rates will be substituted for
the note issues affected in line with market practice.
All payments in respect of the Notes are required to be made in the currency in which they are denominated.
The Group publishes detailed information on the performance of all of its note issues on the Bond Investor Reporting section of its
website at www.paragonbankinggroup.co.uk. A more detailed description of the securitisation structure under which these Notes are
issued is given in note 57.
On 30 April 2020, a Group company, Paragon Mortgages (No. 27) PLC, issued £735.8m of sterling mortgage backed floating rate
notes, analysed below, at par.
Class
A
B
C
D
Fitch
rating
AAA
AA
A
BBB
Moody's
rating
Aaa
Aa1
Aa3
Baa1
Interest margin above
compounded SONIA
Principal value
£m
1.1%
1.5%
1.8%
2.1%
648.3
41.9
22.8
22.8
735.8
All of the above notes were retained by the Group.
Page 216
Notes in issue at 30 September 2020 and 30 September 2019, net of any held by the Group, were:
Issuer
Maturity date
Call date
Principal
outstanding
Average
interest margin
Sterling notes
Interest based on LIBOR
Paragon Mortgages (No. 9) PLC
Paragon Mortgages (No. 10) PLC
Paragon Mortgages (No. 11) PLC
Paragon Mortgages (No. 13) PLC
Paragon Mortgages (No. 14) PLC
Paragon Mortgages (No. 15) PLC
Paragon Mortgages (No. 23) PLC
Paragon Mortgages (No. 24) PLC
Paragon Mortgages (No. 25) PLC
First Flexible No. 6 PLC
Interest based on SONIA
Paragon Mortgages (No. 26) PLC
Paragon Mortgages (No. 27) PLC†
US dollar notes
Paragon Mortgages (No. 9) PLC
Paragon Mortgages (No. 13) PLC
Paragon Mortgages (No. 14) PLC
Paragon Mortgages (No. 15) PLC
First Flexible No. 6 PLC
Euro notes
Paragon Mortgages (No. 9) PLC
Paragon Mortgages (No. 10) PLC
Paragon Mortgages (No. 11) PLC
Paragon Mortgages (No. 13) PLC
Paragon Mortgages (No. 14) PLC
Paragon Mortgages (No. 15) PLC
Paragon Mortgages (No. 23) PLC
Paragon Mortgages (No. 24) PLC
First Flexible No. 6 PLC
15/05/41
15/06/41
15/10/41
15/01/39
15/09/39
15/12/39
15/01/43
15/07/43
15/05/50
01/12/35
15/05/09
15/12/09
15/04/10
15/10/10
15/03/11
15/06/11
15/10/19
15/04/20
15/05/23
01/03/08
15/05/45
15/04/47
15/08/24
15/10/25
15/05/41
15/01/39
15/09/39
15/12/39
01/12/35
15/05/41
15/06/41
15/10/41
15/01/39
15/09/39
15/12/39
15/01/43
15/07/43
01/12/35
15/05/09
15/10/10
15/03/11
15/06/11
01/03/08
15/05/09
15/12/09
15/04/10
15/10/10
15/03/11
15/06/11
15/10/19
15/04/20
01/03/08
2020
£m
-
-
221.1
416.4
390.0
108.5
-
-
379.4
-
231.3
-
$m
-
134.6
150.7
502.1
-
€m
-
-
182.4
268.3
317.0
244.0
-
-
-
2019
£m
95.2
155.7
237.7
443.7
423.8
117.7
34.5
45.7
423.6
47.7
364.3
-
$m
15.5
143.4
166.1
552.9
7.5
€m
147.7
247.0
196.1
285.9
326.4
248.9
2.2
0.6
26.8
2020
%
-
-
0.15
0.27
0.23
0.30
-
-
0.72
-
1.05
-
-
%
0.18
0.20
0.19
-
-
-
%
0.54
0.42
0.48
0.73
-
-
-
† All notes issued by Paragon Mortgages (No. 27) were retained by the Group (see note 57)
The details of the assets backing these securities are given in note 17.
During the year, the Group redeemed all of the outstanding notes of the following securitisations at par:
• Paragon Mortgages (No. 9) PLC on 18 February 2020
• Paragon Mortgages (No. 10) PLC on 15 September 2020
• Paragon Mortgages (No. 23) PLC on 15 October 2019
• Paragon Mortgages (No. 24) PLC on 15 April 2020
• First Flexible No. 6 PLC on 1 September 2020
The underlying assets were subsequently funded by other Group companies.
2019
%
0.38
0.52
0.15
0.27
0.23
0.30
1.84
2.85
0.72
1.27
1.05
-
%
0.36
0.18
0.20
0.19
0.56
%
0.56
0.39
0.54
0.42
0.48
0.72
0.70
1.10
1.05
Page 217
The Accounts On 23 September 2020, notice was given of the Group’s intention to redeem all of the outstanding notes of Paragon Mortgages
(No. 11) PLC at par, and this took place on 15 October 2020, after the year end.
On 23 November 2020, after the end of the year, the Group gave notice of its intention to redeem all of the outstanding notes of
Paragon Mortgages (No. 15) PLC at par. This was expected to take place on 15 December 2020.
On 11 November 2020, after the end of the year, a Group company, Paragon Mortgages (No. 28) PLC, issued £703.1m of rated sterling
mortgage backed floating rate notes, analysed below, at par.
Class
A
B
C
D
Fitch
rating
AAA
AA
A
BBB-
Moody's
rating
Aaa
Aa1
Aa3
Baa1
Interest margin above
compounded SONIA
Principal value
£m
0.95%
1.35%
1.65%
1.95%
623.8
39.7
21.6
18.0
703.1
All of the above notes were retained by the Group.
On 26 June 2019, the Group disposed of its beneficial interest in the Paragon Mortgages (No. 12) PLC securitisation as described in
note 7. At that point, the FRN liabilities were derecognised by the Group, although the notes remain in issue. The Group’s continuing
involvement in the transaction is described in note 46.
30. Bank borrowings
New first mortgage loans may be financed by a secured bank loan, referred to as a ‘warehouse facility’. These facilities are drawn
on the completion of a mortgage and repayment of the facilities is restricted to the principal cash received in respect of the funded
mortgage. Loans originated in warehouse facilities are refinanced in the mortgage backed securitisation market when conditions
are appropriate or through internal sales to access retail funding. More information on this process is given in note 57 and details of
assets held within the warehouse facilities are given in note 17. Details of the Group’s bank borrowings are set out below.
i) Paragon Second Funding
ii) Paragon Seventh Funding
Principal
value
£m
657.8
-
657.8
2020
Maximum
available
facility
£m
657.8
400.0
1,057.8
Carrying
value
Principal
value
£m
657.8
-
657.8
£m
787.5
-
787.5
2019
Maximum
available
facility
£m
787.5
200.0
987.5
Carrying
value
£m
787.5
-
787.5
i)
The Paragon Second Funding warehouse was available for further drawings until 29 February 2008 at which point it converted
automatically to a term loan and no further drawings were allowed. This loan is a sterling facility provided to Paragon Second
Funding Limited by a consortium of banks and is secured on all the assets of Paragon Second Funding Limited, Paragon Car
Finance (1) Limited and Paragon Personal Finance (1) Limited. Its final repayment date is 28 February 2050, but it is likely that
substantial repayments will be made within the next five years. Interest on this loan is payable monthly in sterling at 0.675% above
LIBOR (2019: 0.675% above LIBOR).
ii) On 14 November 2018, a £200.0m warehouse funding facility was agreed between Paragon Seventh Funding Limited and Bank
of America Merrill Lynch. The facility is secured over all of the assets of Paragon Seventh Funding Limited, with a 12 month
commitment period. This was renewed for 12 months on 24 October 2019 and was increased to £400.0m and renewed for a further
18 months on 25 September 2020. Interest was payable at 0.95% over three month LIBOR up to 25 September 2020 and 1.05%
over three month LIBOR thereafter. The renewal also included terms on which the reference rate would be transitioned to SONIA
during the commitment period.
The weighted average margin above LIBOR on bank borrowings at 30 September 2020 was 0.675% (2019: 0.675%).
Page 218
31. Retail bonds
On 11 February 2013 the Company inaugurated a £1,000.0m Euro Medium Term Note Programme under which it may issue retail
bonds, or other notes, within a twelve-month period. The prospectus has been updated from time to time, most recently renewing the
programme for a further twelve-month period on 15 July 2016, but may be further extended in the future.
The terms of issue for each tranche of notes are separately determined. These bonds are listed on the London Stock Exchange and
have a fixed term, but are callable at the option of the Company. A summary of the retail bonds outstanding under this programme,
shown with their principal values, is set out below.
Maturity date
Interest terms
Issue price
Currency
5 December 2020
30 January 2022
28 August 2024
6.000% p.a. fixed
6.125% p.a. fixed
6.000% p.a. fixed
par
par
par
GBP
GBP
GBP
2020
£m
60.0
125.0
112.5
297.5
2019
£m
60.0
125.0
112.5
297.5
The notes are unsubordinated unsecured liabilities of the Company and the amount included in the accounts of the Group and the
Company in respect of these bonds is £296.8m (2019: £296.5m), of which £60.0m falls due within one year (2019: £nil).
32. Corporate bonds
On 9 September 2016 the Company issued £150.0m of 7.25% Fixed Rate Reset Callable Subordinated Tier 2 Notes due 2026 at par
to provide long-term capital for the Group. These bonds bear interest at a fixed rate of 7.25% per annum until 9 September 2021, after
which interest will be payable at a fixed rate which is 6.731% over the sterling 5-year mid-market swap rate at that time. These bonds
are unsecured and subordinated to any other creditors of the Company. At 30 September 2018 the Notes were rated BBB- by Fitch
and, during the year, the Notes were downgraded to BB+ following the application of updated bank rating criteria.
The carrying value of these bonds in the accounts of the Group and the Company at 30 September 2020 was £149.8m
(2019: £149.6m).
33. Central bank facilities
During the year, the Group has utilised facilities provided by the Bank of England including through its Sterling Monetary Framework.
These facilities enable either funding or off-balance sheet liquidity to be provided to Paragon Bank on the security of designated pools
of the Bank’s first mortgage assets and / or for the retained Notes described in note 57, with the amount available based on the value
of the security given, subject, where appropriate, to a haircut.
Drawings under the Indexed Long Term Repo Scheme (‘ILTR’) have a maturity of six months and a rate of interest set in an auction
process. While no drawings under the ILTR were outstanding at 30 September 2020, the scheme was regularly accessed during the
year. At 30 September 2019 the average rate of interest on the Group’s ILTR drawings was 0.90%.
Drawings under the original Term Funding Scheme (‘TFS’) have a maturity of four years and bear interest at bank base rate. The
average remaining maturity of the Group’s drawings is 9 months (2019: 22 months). As these drawings are provided at rates below
those available commercially, by a government agency, they are accounted for under IAS 20. The TFS is no longer available for
new drawings.
Drawings under the Term Funding Scheme for SMEs (‘TFSME’) have a maturity of four years and bear interest at bank base rate. The
average remaining maturity of the Group’s drawings is 46 months.
During the year, the Group also accessed the Contingent Term Repo Facility (‘CTRF’), which was a temporary short-term facility for
collateralised drawings introduced by the Bank of England in response to the Covid-19 pandemic.
Drawings under the FLS were used to provide off balance sheet liquidity and formed part of the Bank’s HQLA. Fees were charged
under the FLS at 0.25% of the market value of the liquidity drawn and the facility expired in June 2020.
Page 219
The Accounts The amounts drawn under these facilities are set out below.
TFSME
TFS
ILTR
On balance sheet funding
FLS
Total central bank facilities
2020
£m
910.0
944.4
-
1,854.4
-
1,854.4
2019
£m
-
944.4
50.0
994.4
109.0
1,103.4
TFS includes £700.0m falling due within one year (2019: £nil).
Further first mortgage assets of the Bank have been pre-positioned with the Bank of England for future use in such schemes and
eligible retained Notes can also be used to support this funding (note 57). The mortgage assets pledged in support of these drawings
are set out in note 17.
The balances arising from the TFSME and TFS carried in the Group accounts are shown below.
TFSME at IAS 20 carrying value
Deferred government assistance
TFS at IAS 20 carrying value
Deferred government assistance
2020
£m
874.1
35.9
937.5
6.9
2020
£m
910.0
944.4
1,854.4
2019
£m
-
-
930.5
13.9
2019
£m
-
944.4
944.4
Page 220
34. Sundry liabilities
(a) The Group
Current liabilities
Accrued interest
Trade creditors
CSA liabilities (note 56)
Other accruals
Sundry financial liabilities at amortised cost
Contingent consideration (note 35)
Sundry financial liabilities
Lease payables (note 36)
Deferred income
Conduct (note 37)
Other taxation and social security
Non-current liabilities
Accrued interest
Other accruals
Sundry financial liabilities at amortised cost
Contingent consideration (note 35)
Sundry financial liabilities
Lease payables (note 36)
Deferred income
Total sundry financial liabilities at amortised cost
Total sundry financial liabilities at fair value
Total other sundry liabilities
Total sundry liabilities
(b) The Company
Current liabilities
Amounts owed to Group companies
Accrued interest
Sundry financial assets at amortised cost
Lease payables (note 36)
Non-current liabilities
Lease payables (note 36)
Total sundry liabilities
2020
£m
29.2
1.6
-
29.5
60.3
3.2
63.5
1.5
1.0
-
3.3
69.3
14.3
-
14.3
10.3
24.6
4.1
2.0
30.7
74.6
13.5
11.9
100.0
2020
£m
22.7
2.9
25.6
1.2
26.8
16.3
43.1
2019
£m
37.4
0.9
-
29.7
68.0
2.2
70.2
-
1.3
-
2.4
73.9
14.9
0.2
15.1
21.5
36.6
-
2.2
38.8
83.1
23.7
5.9
112.7
2019
£m
23.8
3.6
27.4
-
27.4
-
27.4
2018
£m
27.5
2.7
10.3
29.7
70.2
-
70.2
-
0.9
-
2.5
73.6
12.4
0.2
12.6
25.7
38.3
-
2.5
40.8
82.8
25.7
5.9
114.4
2018
£m
125.7
2.8
128.5
-
128.5
-
128.5
Page 221
The Accounts 35. Contingent consideration
The contingent consideration represents consideration payable in respect of corporate acquisitions which is dependent on the
performance of the acquired businesses. Movements in the balance are set out below.
At 1 October 2019
Payments
Revaluation
Unwind of discounting (note 5)
At 30 September 2020 (note 34)
2020
£m
23.7
(4.4)
(6.2)
0.4
13.5
The write down is a result of the reconsideration of future business volumes following the impact of Covid-19.
36. Lease payables
The Group’s lease liabilities arise under the leasing arrangements described in note 47. Related right of use assets are shown in
note 24.
Leasing liabilities falling due:
In more than five years
In more than two but less than five years
In more than one year but less than two years
In more than one year (note 34)
In less than one year (note 34)
The Group
The Company
2020
£m
0.6
2.4
1.1
4.1
1.5
5.6
2019
£m
-
-
-
-
-
-
2020
£m
11.0
4.0
1.3
16.3
1.2
17.5
2019
£m
25.7
(2.5)
-
0.5
23.7
2019
£m
-
-
-
-
-
-
37. Conduct
The Group, as a participant in the financial services industry is exposed to a high level of regulatory supervision, which could in the
event of conduct failures expose it to financial liabilities. The Group maintains a strong compliance and conduct culture supervised by
the second line compliance function, to mitigate the risk, although it is impossible to eliminate it entirely.
Over recent years, in common with other financial services firms, the Group has followed guidance issued by the FCA in respect of
redress to customers in respect of the misselling of payment protection insurance (‘PPI’), though the sums involved have not
been material.
The regulatory environment continues to develop, through regulatory policies, legislative rules and court rulings, and while the Group’s
assessment is that it currently has no further potential liability for conduct issues, this is based on our current interpretation of
requirements and hence further liabilities may arise as these develop over time.
Page 222
38. Called-up share capital
The share capital of the Company consists of a single class of £1 ordinary shares.
Movements in the issued share capital in the year were:
Ordinary shares
At 1 October 2019
Shares issued
Shares cancelled
At 30 September 2020
2020
Number
2019
Number
261,573,351
281,596,936
204,621
1,606,849
-
(21,630,434)
261,777,972
261,573,351
During the year, the Company issued 204,621 shares (2019: 1,606,849) to satisfy options granted under Sharesave schemes for a
consideration of £585,315 (2019: £4,075,843).
On 31 July 2019, 21,630,434 shares held in treasury were cancelled by the Company.
39. Reserves
(a) The Group
Share premium account
Capital redemption reserve
Merger reserve
Cash flow hedging reserve (note 20)
Profit and loss account
(b) The Company
Share premium account
Capital redemption reserve
Merger reserve
Profit and loss account
2020
IFRS 9
£m
68.7
50.3
(70.2)
2.5
880.7
932.0
2020
IFRS 9
£m
68.7
50.3
(23.7)
319.1
414.4
2019
IFRS 9
£m
68.3
50.3
(70.2)
3.0
835.9
887.3
2019
IFRS 9
£m
68.3
50.3
(23.7)
256.3
351.2
2018
IFRS 9
£m
65.8
28.7
(70.2)
3.3
868.3
895.9
2018
IFRS 9
£m
65.8
28.7
(23.7)
390.0
460.8
2018
IAS 39
£m
65.8
28.7
(70.2)
3.3
890.7
918.3
2018
IAS 39
£m
65.8
28.7
(23.7)
390.0
460.8
The merger reserve arose, due to the provisions of UK company law at the time, on a group restructuring on 12 May 1989 when the
Company became the parent entity of the Group.
Page 223
The Accounts 40. Own shares
Treasury shares
At 1 October 2019
Shares purchased
Shares cancelled
At 30 September 2020
ESOP shares
At 1 October 2019
Shares purchased
Options exercised
At 30 September 2020
Balance at 30 September 2020
Balance at 1 October 2019
The Group
The Company
2020
£m
23.0
-
-
23.0
17.5
5.2
(7.9)
14.8
37.8
40.5
2019
£m
91.8
26.7
(95.5)
23.0
12.2
7.6
(2.3)
17.5
40.5
104.0
2020
£m
23.0
-
-
23.0
-
-
-
-
23.0
23.0
2019
£m
91.8
26.7
(95.5)
23.0
-
-
-
-
23.0
91.8
At 30 September 2020 the number of the Company’s own shares held in treasury was 5,218,702 (2019: 5,218,702). These shares had a
nominal value of £5,218,702 (2019: £5,218,702). These shares do not qualify for dividends.
The Employee Share Ownership Plan (‘ESOP’) shares are held in trust for the benefit of employees exercising their options under
the Company’s share option schemes and awards under the Paragon Performance Share Plan and Deferred Share Bonus Plan. The
trustees’ costs are included in the operating expenses of the Group.
At 30 September 2020, the trust held 3,636,218 ordinary shares (2019: 3,912,516) with a nominal value of £3,636,218
(2019: £3,912,516) and a market value of £12,108,606 (2019: £18,873,977). Options, or other share-based awards, were outstanding
against all of these shares at 30 September 2020 (2019: all). The dividends on all of these shares have been waived (2019: all).
41. Equity dividend
Amounts recognised as distributions to equity shareholders in the Group and the Company in the period:
Equity dividends on ordinary shares
Final dividend for the previous year
Interim dividend for the current year
Amounts paid and proposed in respect of the year:
Interim dividend for the current year
Proposed final dividend for the current year
2020
Per share
2019
Per share
14.2p
-
14.2p
13.9p
7.0p
20.9p
2020
Per share
2019
Per share
-
14.4p
14.4p
7.0p
14.2p
21.2p
2020
£m
35.9
-
35.9
2020
£m
-
36.4
36.4
2019
£m
35.9
18.1
54.0
2019
£m
18.1
35.8
53.9
The proposed final dividend for the year ended 30 September 2020 will be paid on 26 February 2021, subject to approval at the Annual
General Meeting, with a record date of 29 January 2021. The dividend will be recognised in the accounts when it is paid.
Page 224
42. Net cash flow from operating activities
(a) The Group
Profit before tax
Non-cash items included in profit and other adjustments:
Depreciation of operating property, plant and equipment
Profit on disposal of operating property, plant and equipment
Amortisation of intangible assets
Foreign exchange movement on borrowings
Other non-cash movements on borrowings
Impairment losses on loans to customers
Charge for share based remuneration
Gain on derecognition
Derecognition of cash flow hedge
Net (increase) / decrease in operating assets:
Assets held for leasing
Loans to customers
Derivative financial instruments
Fair value of portfolio hedges
Other receivables
Net increase / (decrease) in operating liabilities:
Retail deposits
Derivative financial instruments
Fair value of portfolio hedges
Other liabilities
Cash generated by operations
Income taxes (paid)
2020
£m
118.4
3.5
-
2.0
2019
£m
159.0
1.5
-
2.4
(136.8)
(124.8)
1.5
48.3
2.7
-
-
(3.2)
(493.6)
129.1
(45.5)
(35.6)
3.6
8.0
5.9
(9.7)
(0.9)
(0.9)
(792.0)
169.7
(88.3)
(73.8)
1,464.7
1,095.3
51.9
6.5
(39.1)
1,074.8
(46.1)
1,028.7
75.8
8.1
(1.6)
437.3
(39.4)
397.9
Cash flows relating to plant and equipment held for leasing under operating leases are classified as operating cash flows.
Page 225
The Accounts
(b) The Company
Profit before tax
Non-cash items included in profit and other adjustments:
Depreciation on property, plant and equipment
Non-cash movements on borrowings
Impairment provision / (release) on investments in subsidiaries
Charge for share based remuneration
Net decrease in operating assets:
Other receivables
Net (decrease) in operating liabilities:
Other liabilities
Cash generated by operations
Income taxes received
43. Net cash flow from investing activities
Proceeds from sales of operating property, plant and equipment
Purchases of operating property, plant and equipment
Purchases of intangible assets
Movement in loans to subsidiary undertakings
Residual disposal (note 7)
Investment in subsidiary undertakings
Net cash (utilised) / generated by investing activities
44. Net cash flow from financing activities
Shares issued (note 38)
Dividends paid (note 41)
Issue of asset backed floating rate notes
Repayment of asset backed floating rate notes
Movement on central bank facilities
Movement on other bank facilities
Capital element of lease payments
Purchase of shares (note 40)
Sale of shares
Net cash (utilised) by financing activities
Page 226
2020
£m
93.7
1.4
0.5
5.3
2.7
2019
£m
6.5
-
0.7
148.8
5.9
22.7
109.7
(1.8)
124.5
5.3
129.8
(101.1)
170.5
0.4
170.9
The Group
The Company
2019
£m
-
(1.1)
(2.0)
-
11.4
-
8.3
2020
£m
-
-
-
2019
£m
-
-
-
(94.7)
(105.1)
-
-
-
-
(94.7)
(105.1)
The Group
The Company
2019
£m
3.9
(54.0)
362.5
(591.1)
(30.0)
(148.3)
-
(34.3)
-
(491.3)
2020
£m
0.6
(35.9)
-
-
-
-
(1.3)
-
-
(36.6)
2019
£m
4.1
(54.0)
-
-
-
-
-
(26.7)
-
(76.6)
2020
£m
0.1
(1.9)
(1.0)
-
-
-
(2.8)
2020
£m
0.6
(35.9)
-
(1,013.3)
860.0
(130.1)
(2.0)
(5.2)
0.2
(325.7)
45. Reconciliation of net debt
(a) The Group
Cash flows
Non-cash movements
Opening
debt
£m
Debt
issued
£m
Other
Recognition/
Derecognition
£m
£m
Foreign
exchange
£m
30 September 2020
Asset backed loan notes
4,419.4
Bank borrowings
Corporate bonds
Retail bonds
Central bank borrowings
Lease liabilities
Bank overdrafts
Gross debt
Cash
Net debt
30 September 2019
787.5
149.6
296.5
994.4
-
1.0
6,648.4
(1,225.4)
5,423.0
-
-
-
-
-
-
-
-
-
-
Asset backed loan notes
5,554.7
362.5
Bank borrowings
Corporate bonds
Retail bonds
935.6
149.3
296.1
Central bank borrowings
1,024.4
Lease liabilities
Bank overdrafts
Gross debt
Cash
Net debt
-
1.1
7,961.2
(1,310.6)
6,650.6
-
-
-
-
-
-
362.5
(362.5)
-
(1,013.3)
(130.1)
-
-
860.0
(2.0)
(0.6)
(286.0)
(699.6)
(985.6)
(591.1)
(148.3)
-
-
(30.0)
-
(0.1)
(769.5)
447.7
(321.8)
-
-
-
-
-
7.3
-
7.3
-
7.3
(136.8)
-
-
-
-
-
-
(136.8)
-
(136.8)
(784.1)
(124.8)
-
-
-
-
-
-
-
-
-
-
-
-
(784.1)
(124.8)
-
-
(784.1)
(124.8)
Other
£m
1.2
0.4
0.2
0.3
-
0.3
-
2.4
-
2.4
2.2
0.2
0.3
0.4
-
-
-
3.1
-
3.1
Closing
debt
£m
3,270.5
657.8
149.8
296.8
1,854.4
5.6
0.4
6,235.3
(1,925.0)
4,310.3
4,419.4
787.5
149.6
296.5
994.4
-
1.0
6,648.4
(1,225.4)
5,423.0
Non-cash movements arising from recognition in the year ended 30 September 2020 include include amounts recognised on
transition to IFRS 16.
Non-cash movements arising from recognition/derecognition in the year ended 30 September 2019 include the derecognition of
PM12 asset backed loan notes on the derecognition of that securitisation (note 7).
Other non-cash changes shown above represent EIR adjustments relating to the spreading of initial costs of the facilities concerned
and the inception of new lease assets.
Page 227
The Accounts (b) The Company
30 September 2020
Corporate bonds
Retail bonds
Lease liabilities
Gross debt
Cash
Net debt
30 September 2019
Corporate bonds
Retail bonds
Lease liabilities
Gross debt
Cash
Net debt
Cash flows
Non-cash movements
Opening
debt
£m
Debt
issued
£m
149.6
296.5
-
446.1
(14.1)
432.0
149.3
296.1
-
445.4
(24.9)
420.5
-
-
-
-
-
-
-
-
-
-
-
-
Other
Recognition
£m
-
-
(1.3)
(1.3)
1.5
0.2
-
-
-
-
10.8
10.8
£m
-
-
18.8
18.8
-
18.8
-
-
-
-
-
-
Foreign
exchange
£m
-
-
-
-
-
-
-
-
-
-
-
-
Other
£m
0.2
0.3
-
0.5
-
0.5
0.3
0.4
-
0.7
-
0.7
Closing
debt
£m
149.8
296.8
17.5
464.1
(12.6)
451.5
149.6
296.5
-
446.1
(14.1)
432.0
Other non-cash changes shown above represent EIR adjustments relating to the spreading of initial costs of the bonds. Recognition
includes amounts recognised on transition to IFRS 16.
46. Unconsolidated structured entities
Following the Group’s disposal of its residual interest in the Paragon Mortgages (No. 12) PLC securitisation (note 7) in June 2019, it
ceased to consolidate the assets and liabilities of the entity. The external securitisation borrowings remain in place with their terms
unchanged and the Group continues to act as administrator, for which it charges a fee. It has no other exposure to the profitability of
the deal, no exposure to credit risk, other than on the recoverability of its quarterly fee, and no obligation to make further contribution
to the entity.
Fee income from servicing arrangements of £1.9m is included in third party servicing fees (note 8) (2019: £0.5m) and £0.3m is included
in other debtors in respect of unpaid fees at the year end (2019: £0.3m). Outstanding collection monies due to the structured entity of
£0.4m are included in other creditors at 30 September 2020 (2019: £0.4m).
47. Leasing arrangements
(a) As Lessor
The Group, through its motor finance and asset finance businesses, leases assets under both finance and operating leases. In respect
of certain of these assets, the Group also provides maintenance services to the lessee.
Accounting for these balances from 1 October 2019 is governed by IFRS 16, while in previous periods IAS 17 applied, however the
change in standards has not had a significant impact on the amounts presented (note 61).
Disclosures in respect of these balances are set out in these financial statements as follows
Disclosure
Investment in finance leases
Finance income on net investment in finance leases
Assets leased under operating leases
Operating lease income
Page 228
Note
18
4
24
6
The undisclosed future minimum lease payments receivable by the Group under operating lease arrangements may be analysed
as follows:
Amounts falling due:
Within one year
Within one to two years
Within two to three years
Within three to four years
Within four to five years
After more than five years
(b) As Lessee
2020
£m
12.4
6.8
4.3
2.9
1.7
1.3
29.4
2019
£m
7.1
6.7
3.3
1.8
0.9
0.5
20.3
The Group’s use of leases as a lessee relates to the rental of office buildings and company cars. Under IFRS 16 these have been
accounted for as right of use assets and corresponding lease liabilities.
The average term of the current building leases from inception or acquisition is 9 years (2019: 7 years) with rents subject to review
every five years, while the average term of the vehicle leases is 3 years (2019: 3 years).
The Company’s use of leases as lessee is limited to the rental of an office building from a subsidiary entity. The lease term from
inception is 15 years.
Disclosures relating to these leases are set out in these financial statements as follows.
Disclosure
Depreciation on right of use assets
Interest expense on lease liabilities
Expense relating to short-term leases
Additions to right of use assets
Carrying amount of right of use assets
Maturity analysis of lease liabilities
Note
24
5
8
24
24
57
There was no subleasing of any right of use asset and the total cash flows relating to leasing as a lessee were £2.2m.
Disclosures made in respect of IAS 17 requirements for 2019 are set out below.
Minimum lease payments under operating leases recognised in operating expenses for the year
Office buildings
Motor vehicles
Office equipment
The Group
The Company
2019
£m
1.9
0.9
0.1
2.9
2019
£m
-
-
-
-
Page 229
The Accounts At 30 September 2019 the Group had outstanding commitments for future minimum lease payments under non-cancellable operating
leases, which fell due as follows:
Amounts falling due:
Within one year
Between two and five years
After more than five years
The Group
The Company
2019
£m
3.2
5.8
1.7
10.7
2019
£m
-
-
-
-
48. Related party transactions
(a) The Group
During the year, certain of the non-executive directors of the Group were beneficially interested in savings deposits made with
Paragon Bank, on the same terms as were available to members of the public. Deposits of £301,000 were outstanding at the year end
(2019: none), and the maximum amount outstanding during the year was £500,000 (2019: £250,000).
Mr A K Fletcher, a non-executive director of the Company until 31 December 2018, is a director of Paragon Pension Plan Trustees
Limited, which acts as the corporate trustee of the Plan. In respect of this appointment he was paid £4,000 in the year ended
30 September 2019 by Paragon Finance PLC, the sponsoring company of the Plan up to the date of his resignation as a director of
the Company.
The Plan is a related party of the Group. Transactions with the Plan are described in note 53.
The Group had no other transactions with related parties other than the key management compensation disclosed in note 51.
(b) The Company
During the year, the parent company entered into transactions with its subsidiaries, which are related parties. Management services
were provided to the Company by one of its subsidiaries and the Company granted awards to employees of subsidiary undertakings
under the share based payment arrangements described in note 52.
Details of the Company’s investments in subsidiaries and the income derived from them are shown in notes 27 and 66.
Outstanding current account balances with subsidiaries are shown in notes 21 and 34.
During the year the Company incurred interest costs of £1.0m in respect of borrowings from its subsidiaries (2019: £1.6m).
The Company leased an office building from a subsidiary entity (note 47). Finance charges recognised in respect of this lease
were £0.5m.
Page 230
49. Country-by-country reporting
The Capital Requirements (Country-by-Country Reporting) Regulations 2013 came into effect on 1 January 2014 and place certain
reporting obligations on financial institutions that are within the scope of CRD IV. The objective of the country-by-country reporting
requirements is to provide increased transparency regarding the source of the financial institution’s income and the locations of its
operations.
Paragon Banking Group PLC is a UK registered entity. Details of its subsidiaries are given in note 66 and the activities of the Group are
described in Section A2.1.
The activities of the Group, described as required by the Regulations for the year ended 30 September 2020 were:
Year ended 30 September 2020
Total operating income
Profit before tax
Corporation tax paid
Public subsidies received
Average number of full time equivalent employees
Year ended 30 September 2019
Total operating income
Profit before tax
Corporation tax paid
Public subsidies received
Average number of full time equivalent employees
The Group’s participation in Bank of England funding schemes is set out in note 33.
United Kingdom
£m
295.1
118.4
46.1
-
1,285
United Kingdom
£m
307.3
159.0
39.4
-
1,269
Page 231
The Accounts D2.2 Notes to the Accounts - Employment costs
For the year ended 30 September 2020
The notes set out below give information on the Group’s employment costs, including the disclosures on share based payments
and pension schemes required by accounting standards.
50. Employees
The average number of persons (including directors) employed by the Group during the year was 1,385 (2019: 1,365). The number of
employees at the end of the year was 1,392 (2019: 1,368).
Costs incurred during the year in respect of these employees were:
Share based remuneration
Other wages and salaries
Total wages and salaries
National Insurance on share based remuneration
Other social security costs
Total social security costs
Defined benefit pension cost
Other pension costs
Total pension costs
Total employment costs
Of which
Included in operating expenses (note 9)
Included in maintenance costs (note 6)
2019
£m
5.9
62.6
1.0
7.7
1.9
2.1
2020
£m
2.7
64.0
(0.1)
8.0
2.0
3.1
2020
£m
66.7
7.9
5.1
79.7
77.6
2.1
79.7
2019
£m
68.5
8.7
4.0
81.2
79.3
1.9
81.2
Details of the pension schemes operated by the Group are given in note 53.
The Company has no employees. Details of the directors’ remuneration are given in note 51.
Page 232
51. Key management remuneration
The remuneration of the directors, who are the key management personnel of the Group and the Company, is set out below in
aggregate in accordance with IAS 24 – ‘Related Party Transactions’. Further information about the remuneration of individual directors
is provided in the Annual Report on Remuneration in Section B7.2.2.
Salaries and fees
Cash amount of bonus
Social security costs
Short-term employee benefits
Post-employment benefits
IFRS 2 cost in respect of directors
National Insurance thereon
Share based payment
2020
£m
1.9
-
0.5
0.7
(0.1)
2020
£m
2.4
0.3
0.6
3.3
2019
£m
1.8
1.5
0.5
2.1
0.4
2019
£m
3.8
0.5
2.5
6.8
Post-employment benefits shown above are shown as ‘pension allowance’ in Section B7.2.2. Costs in respect of share awards shown
in the Annual Report on Remuneration are determined on a different basis to the IFRS 2 charge shown above.
The negative charge in respect of National Insurance accrued on share based payments in 2020 is principally a result of reduced
vesting estimates.
Social security costs paid in respect of directors are required to be included in this note by IAS 24, but do not fall within the scope of
the disclosures in the Directors’ Remuneration Report.
52. Share based remuneration
During the year, the Group had various share based payment arrangements with employees. They are accounted for by the Group and
the Company as shown below.
The effect of the share based payment arrangements on the Group’s profit is shown in note 50.
Further details of share based payment arrangements are given in the Annual Report on Remuneration in Section B7.2.2.
A summary of the number of share awards outstanding under each scheme at 30 September 2020 and at 30 September 2019 is set
out below.
(a) Sharesave Plan
(b) Performance Share Plan
(c) Company Share Option Plan
(d) Deferred Bonus Plan
(e) Restricted Stock Units
2020
Number
4,134,577
4,842,196
444,771
819,265
265,672
2019
Number
2,558,569
4,762,886
730,816
774,046
134,827
10,506,481
8,961,144
Page 233
The Accounts (a) Sharesave plan
The Group operates an All Employee Share Option (‘Sharesave’) plan. Grants under this scheme vest, in the normal course, after the
completion of the appropriate service period and subject to a savings requirement.
A reconciliation of movements in the number and weighted average exercise price of Sharesave options over £1 ordinary shares
during the year ended 30 September 2020 and the year ended 30 September 2019 is shown below.
Options outstanding
At 1 October 2019
Granted in the year
Exercised or surrendered in the year
Lapsed during the year
At 30 September 2020
Options exercisable
2020
2020
2019
2019
Number Weighted average
exercise price
Number Weighted average
exercise price
p
338.06
278.56
348.35
351.68
295.40
341.85
3,265,788
1,147,016
(1,606,849)
(247,386)
2,558,569
119,846
p
281.60
360.16
253.65
361.53
338.06
249.44
2,558,569
2,748,494
(940,709)
(231,777)
4,134,577
345,756
The weighted average remaining contractual life of options outstanding at 30 September 2020 was 36.8 months (2019: 26.1 months).
The weighted average market price at exercise for share options exercised in the year was 441.06p (2019: 400.88p).
Options are outstanding under the Sharesave plans to purchase ordinary shares as follows:
Grant date
11/06/2015
20/06/2016
20/06/2016
28/07/2017
28/07/2017
31/07/2018
31/07/2018
30/07/2019
30/07/2019
27/07/2020
27/07/2020
Period exercisable
Exercise price
Number
Number
01/08/2020 to 01/02/2021
01/08/2019 to 01/02/2020
01/08/2021 to 01/02/2022
01/09/2020 to 01/03/2021
01/09/2022 to 01/03/2023
01/09/2021 to 01/03/2022
01/09/2023 to 01/03/2024
01/09/2022 to 01/03/2023
01/09/2024 to 01/03/2025
01/09/2023 to 01/03/2024
01/09/2025 to 01/03/2026
345.68p
249.44p
249.44p
341.76p
341.76p
408.80p
408.80p
360.16p
360.16p
278.56p
278.56p
2020
8,242
-
432,210
337,514
22,726
169,359
21,124
411,334
6,574
2,187,502
537,992
4,134,577
2019
9,977
119,846
439,425
493,841
44,667
278,873
38,581
1,049,338
84,021
-
-
2,558,569
An option holder has the legal right to a payment holiday of up to twelve months without forfeiting their rights. In such cases the
exercise period would be deferred for an equivalent period of time and therefore options might be exercised later than the date
shown above.
In the event of the death or redundancy of the employee options may be exercised early and the exercise period may also start or end
later than stated above (options may be exercised up to twelve months after the decease of the holder).
Page 234
The fair value of options granted is determined using a trinomial model. Details of the awards over £1 ordinary shares made in the year
ended 30 September 2020 and the year ended 30 September 2019, are shown below.
Grant date
Number of awards granted
Market price at date of grant
Contractual life (years)
Fair value per share at date of grant (£)
Inputs to valuation model
Expected volatility
Expected life at grant date (years)
Risk-free interest rate
Expected annual dividend yield
Expected annual departures
27/07/20
2,210,502
343.2p
3.5
0.62
27/07/20
537,992
343.2p
5.5
0.55
30/07/19
1,058,831
422.0p
3.5
0.51
30/07/19
88,185
422.0p
5.5
0.53
34.24%
3.45
(0.13)%
4.34%
5.00%
32.98%
5.45
(0.11)%
4.34%
5.00%
22.58%
26.44%
3.48
0.36%
4.95%
5.00%
5.47
0.40%
4.95%
5.00%
The expected volatility of the share price used in determining the fair value for the three-year schemes is based on the annualised
standard deviation of daily changes in price over the three years preceding the grant date. The five-year schemes use share price data
for the preceding five years.
(b) Paragon Performance Share Plan (‘PSP’)
Awards under this plan comprise a right to acquire ordinary shares in the Company for nil or nominal payment and normally vest in the
third financial year after the date of grant, to the extent that the applicable performance criteria have been satisfied, if the holder is still
employed by the Group.
Awards vest on the date on which the Remuneration Committee determines the extent to which the performance conditions have
been satisfied. For employees, other than the executive directors, awards may be exercised from the vesting date to the day before
the tenth anniversary of the grant date. Executive directors’ awards made in 2020 are exercisable from the time of the Group’s fifth
results announcement after the date of the grant to the day before the tenth anniversary of the grant date. Where performance
conditions are not met in full, awards lapse at this point. Awards will also lapse on cessation of employment, other than in ‘good leaver’
circumstances. Clawback provisions apply to awards granted under the PSP as detailed in the remuneration policy.
The conditional entitlements outstanding under this scheme at 30 September 2020 and 30 September 2019 were:
Grant date
04/01/2010
17/12/2010
21/12/2011
28/02/2013
10/12/2013
18/12/2014
22/12/2015
01/12/2016
08/12/2017
14/12/2018
06/07/2020
06/07/2020
* Estimated date
Period exercisable
Number
Number
04/01/2013 to 03/01/2020†
17/12/2013 to 16/12/2020†
21/12/2014 to 20/12/2021†
28/02/2016 to 27/02/2023†
10/12/2016 to 09/12/2023†
18/12/2017 to 17/12/2024†
22/12/2018 to 21/12/2025†
01/12/2019 to 30/11/2026β
08/12/2020 to 07/12/2027β
14/12/2018 to 13/12/2028ψ
07/12/2022* to 05/07/2030φ
07/12/2024* to 05/07/2030φ
2020
-
9,925
5,093
5,443
6,210
6,277
16,887
462,076
1,155,740
1,479,563
1,185,790
509,192
4,842,196
2019
18,702
12,424
15,335
6,981
76,614
233,550
411,800
1,339,409
1,161,803
1,486,268
-
-
4,762,866
† These awards, which were conditional on the achievement of performance-based criteria, vested before the start of the financial year. Any reduction in entitlements resulting
from the application of those criteria is reflected in the numbers above.
β These awards are (or were) subject to performance criteria, assessed over a period of three financial years, starting with the year of grant.
•
50% to a Total Shareholder Return (‘TSR’) test based on a ranking of the Company’s TSR against those of a comparator group of UK listed financial services companies,
determined at the date of grant. This tranche vests in full for upper quartile performance, 25% vests for median performance and vesting between those points is
determined on a straight line basis
Page 235
The Accounts
•
25% to an EPS test. This tranche vests in full if EPS increases by at least 7% more than the retail price index (‘RPI’) over the test period, 25% vests if this increase is at least
3% more than the RPI and vesting between those points is determined on a straight line basis
•
25% to a risk test. The risk test is based on an internal scorecard of the Group’s performance against its principal risk metrics
At the point of exercise, the gross number of awards vesting will be reduced so that the gain to the recipient from the PSP and the CSOP described below, evaluated at that point,
is equal to the gain from the gross PSP vesting.
ψ These awards are subject to performance criteria, similar to those described at β above, except that:
•
The EPS condition is measured against an absolute target. Full vesting occurs if EPS for the third year of the test period is at least 68p, 25% vesting if EPS in this year is
60p and vesting between those points on a straight line basis
φ These awards are subject to performance criteria, similar to those described at β above, except that:
• The TSR condition related to 25% of the grant, not 50%
•
•
•
•
•
The EPS condition is measured against an absolute target. Full vesting occurs if EPS for the third year of the test period is at least 67p, 25% vesting if EPS in this year is
60p and vesting between those points on a straight line basis
The risk condition comprises two components. 50% of the risk element is based on an assessment by the Chief Risk Officer of the six key measures of the Group’s risk
appetite: regulatory breaches; customer service performance; conduct; operational risk incidents; capital and liquidity; and credit losses. The remaining 50% is based on a
strategic risk assessment reflecting the management of risk as it impacts on the delivery of the Group’s medium term strategy
12.5% of the grant is determined based on a customer service test assessed by the Chair of the Risk and Compliance Committee. The customer service test is based
on the performance of the Group against its most significant customer service metrics including insight feedback on key product lines and complaint levels. 50% of this
tranche will vest for on-target performance
12.5% of the grant is determined based on a people test. The people test is based on the performance of the Group against its most significant employment metrics
including employee engagement, voluntary attrition and gender diversity levels. 50% of this tranche will vest for on-target performance
Due to the volatility of the share price at the time of grant, the Remuneration Committee may adjust the vesting levels at the vesting date if it believes that the use of this
share price has created a potential windfall gain
• No CSOP grants were made in conjunction with this award, therefore no adjustment on vesting will take place
For each of the risk, customer and people tests set out above, the Remuneration Committee will determine the extent to which
this condition has been met, between 0% and 100%, and vesting for the relevant tranche will occur at that level, subject to a 25%
threshold, below which no awards in the tranche will vest.
On exercise, holders of awards granted in February 2013 and thereafter receive a payment equivalent to the dividends accruing on the
vested shares during the vesting period.
The fair value of awards granted under the PSP is determined using a Monte Carlo simulation model, to take account of the effect of
the market based condition. Details of the awards over £1 ordinary shares made in the year ended 30 September 2020 and the year
ended 30 September 2019 are shown below:
Grant date
Number of awards granted
Market price at date of grant
Contractual life (years)
Fair value per share at date of grant
Inputs to valuation model
Expected volatility
Expected life (years)
Risk-free interest rate
06/07/20
1,694,982
360.60p
2.4
301.32p
33.93%
2.4
(0.06)%
14/12/18
1,493,230
401.00p
3.0
307.32p
28.86%
3.0
1.20%
For all of the above grants no departures are expected. The expected volatility is based on the annualised standard deviation of daily
changes in price over the three years preceding the grant date.
The effect of the CSOPs is not allowed for in the IFRS 2 market values of the 2016, 2017 and 2018 grants.
Page 236
(c) Company Share Option Plan (‘CSOP’)
The PSP includes a tax advantaged element under which CSOP options can be granted. The CSOPs may be exercised alongside
their accompanying PSPs based upon the exercise price that was set at the grant date. Each member of staff may be granted up to a
maximum total value of £30,000 of tax benefitted options. No new CSOP awards were made in the year ended 30 September 2020.
A reconciliation of movements in the number and weighted average exercise price of CSOP options over £1 ordinary shares during the
year ended 30 September 2020 and the year ended 30 September 2019 is shown below.
Options outstanding
At 1 October 2019
Granted in the year
Exercised or surrendered in the year
Lapsed during the year
At 30 September 2020
Options exercisable
2020
2020
2019
2019
Number Weighted average
exercise price
Number Weighted average
exercise price
p
398.19
-
361.88
372.15
419.97
361.88
549,061
191,543
-
(9,788)
730,816
-
p
399.16
396.04
-
410.72
398.19
-
730,816
-
(218,008)
(68,037)
444,771
93,974
The weighted average remaining contractual life of options outstanding at 30 September 2020 was 89.5 months (2019: 96.5 months).
The weighted average market prices at exercise for share options exercised in the year was 365.62p.
The conditional entitlements outstanding under this scheme at 30 September 2020 and 30 September 2019 were:
Grant date
01/12/2016
08/12/2017
14/12/2018
Period exercisable
Exercise price
01/12/2019 to 30/11/2026β
08/12/2020 to 07/12/2027β
14/12/2021 to 13/12/2028β
361.88p
477.76p
396.04p
Number
2020
93,974
169,502
181,295
444,771
Number
2019
370,445
174,049
186,322
730,816
β 66.7% of these awards are (or were) subject to a TSR test and 33.3% are subject to an EPS test. These tests operate in the same manner and with the same conditions as those
for the PSP grant of the same date.
To the extent that the CSOP awards vest, the vesting of the PSP award granted at the same time will be abated on exercise so that the
overall gain to the grantee is the same as would be received on the related PSP award had the CSOP not been in place.
No separate fair value has been attributed to the CSOP options for IFRS 2 purposes as the IFRS 2 market values for the CSOP and
PSP combined will equate to that calculated for the PSP without allowing for the CSOP. The benefit from the CSOP is in relation to the
employees’ tax position, which does not affect the IFRS 2 charge.
(d) Deferred Bonus awards
Awards under these plans comprise a right to acquire ordinary shares in the Company for nil or nominal payment. The conditional
entitlements outstanding under these plans at 30 September 2020 and 30 September 2019 were:
Grant date
10/12/2013
18/12/2014
22/12/2015
01/12/2016
08/12/2017
14/12/2018
12/12/2019
Period exercisable
Number
Number
10/12/2016 to 09/12/2023
18/12/2017 to 17/12/2024
22/12/2018 to 21/12/2025
01/12/2019 to 30/11/2026
08/12/2020 to 07/12/2027
14/12/2021 to 13/12/2028
12/12/2022 to 11/12/2029
2020
55,302
52,888
60,042
105,318
102,516
334,498
108,701
819,265
2019
55,302
79,853
96,559
105,318
102,516
334,498
-
774,046
Page 237
The Accounts The Deferred Bonus shares can be exercised from the third anniversary of the award date until the day before the tenth anniversary of
the date of grant.
The Deferred Bonus shares granted in December 2016 and thereafter accrue dividends only over the vesting period, unlike earlier
grants which accrued dividends until the point of exercise. The fair value of Deferred Bonus awards issued in the year was determined
using a Black-Scholes Merton model. Details of the awards over £1 ordinary shares made in the year ended 30 September 2020 and
the year ended 30 September 2019 are shown below.
Grant date
Number of awards granted
Market price at date of grant
Fair value per share at date of grant
(e) Restricted Stock Units (‘RSUs’)
12/12/19
14/12/18
108,701
489.20p
489.20p
334,498
401.00p
401.00p
Since 2016, the Company has permitted certain employees to elect to receive RSU awards instead of PSP awards. For RSU awards
to vest, the grantee’s personal performance must be satisfactory during the financial year preceding the vesting date. In addition, a
risk based performance condition, assessed against the Group’s risk management metrics and, additionally from 2020, against its
strategic management of risk for the medium term, considered over the vesting period, must also be met. The level to which this
condition is met will be determined by the Remuneration Committee and vesting levels scaled back as appropriate.
The conditional entitlements outstanding under this scheme at 30 September 2020 and 30 September 2019 were:
Grant date
01/12/2016
08/12/2017
14/12/2018
06/07/2020
* Estimated date
Period exercisable
Number
Number
01/12/2019 to 30/11/2026
08/12/2020 to 07/12/2027
14/12/2021 to 13/12/2028
06/12/2022* to 05/07/2030
2020
-
22,672
52,040
190,960
265,672
2019
60,115
22,672
52,040
-
134,827
The fair value of RSU awards issued in the year was determined using a Black-Scholes Merton model. Details of the awards over £1
ordinary shares made in the year ended 30 September 2020 and the year ended 30 September 2019 are shown below.
Grant date
Number of awards granted
Market price at date of grant
Contractual life (years)
Fair value per share at date of grant
For all of these grants no departures are expected.
53. Retirement benefit obligations
(a) Defined benefit plan - description
06/07/20
190,690
360.60p
2.4
360.60p
14/12/18
52,040
401.00p
3.0
401.00p
The Group operates a funded defined benefit pension scheme in the UK (the ‘Plan’). The Plan assets are held in a separate fund,
administered by a corporate trustee, to meet long-term pension liabilities to past and present employees. The Trustee of the Plan is
required by law to act in the best interests of the Plan’s beneficiaries and is responsible for the investment policy adopted in respect
of the Plan’s assets. The appointment of directors to the Trustee is determined by the Plan’s trust documentation. The Group has a
policy that one third of all directors of the Trustee should be nominated by active and pensioner members of the Plan.
Employees who are members of the Plan are entitled to receive a pension of 1/60 of their final basic annual salary for every year of
eligible service (to a maximum of 2/3). Dependants of members of the Plan are eligible for a dependant’s pension and the payment of
a lump sum in the event of death in service.
Page 238
The principal actuarial risks to which the Plan is exposed are:
•
•
•
Investment risk – The present value of the defined benefit liabilities is calculated using a discount rate set by reference to
high quality corporate bond yields. If plan assets underperform corporate bonds, this will increase the deficit. The strategic
allocation of assets under the Plan is currently weighted towards equity assets and diversified growth funds as its liability profile is
relatively immature, and it is expected that these asset classes will, over the long-term, outperform gilts and corporate bonds. In
consultation with the Company, the Trustee keeps the allocation of the Plan’s investments under review to manage this risk on a
long-term basis.
Interest risk – A fall in corporate bond yields would reduce the discount rate used in valuing the Plan liabilities and increase the
value of the Plan liabilities. The Plan assets would also be expected to increase, to the extent that bond assets are held, but this
would not be expected to fully match the increase in liabilities, given the weighting towards equity assets and diversified growth
funds noted above.
Inflation risk – Pensions in payment are increased annually in line with the Retail Price Index (‘RPI’) or the Consumer Price
Index (‘CPI’) for Guaranteed Minimum Pensions built up since 1988. Pensions built up since 5 April 2006 are capped at 2.5% and
pensions built up before 6 April 2006 are capped at 5%. For employees who have left the Company but have deferred pensions,
these also revalue over the period to retirement predominantly in line with RPI. Therefore, an increase in inflation would also
increase the value of the pension liabilities. The Plan assets would also be expected to increase, to the extent that they are linked
to inflation, but this may not fully match the increase in liabilities.
•
Longevity risk – The value of the Plan deficit is calculated by reference to the best estimate of the mortality rate among Plan
members both during and after employment. An increase in the life expectancy of the members would increase the deficit in
the Plan.
•
Salary risk – The valuation of the Plan assumes a level of future salary increases based on a premium over the expected rate of
inflation. Should the salaries of plan members increase at a higher rate, then the deficit will be higher.
The risks relating to death in service payments are insured with an external insurance company.
As a result of the Plan having been closed to new entrants since February 2002, the service cost as a percentage of pensionable
salaries is expected to increase as the average age of active members rises over time. However, the membership is expected to
reduce so that the service cost in monetary terms will gradually reduce.
The most recent full actuarial valuation of the Plan’s liabilities, obtained by the Trustee, was carried out at 31 March 2019, by Aon
Hewitt, the Plan’s independent actuary. This showed that the value of the Plan’s liabilities on a buy-out basis in accordance with
section 224 of the Pensions Act 2004, the level of assets which would be required to buy insurance policies for benefits earned to
the valuation date, was £203.6m, with a shortfall against the assets of £85.0m (2016: £118.4m). The deficit on the Technical Basis, the
basis agreed by the Trustee as being appropriate to meet member benefits, assuming the plan continues as a going concern, was
£18.2m (2016: £18.0m). This valuation was agreed with the Trustee during the period and forms the basis of the IAS 19 valuation.
Following the agreement of the 2019 actuarial valuation in the period, the Trustee put in place a revised recovery plan. On current
forecasts the Trustee’s recovery plan would to meet the statutory funding objective by 31 July 2025. The revised recovery plan
continues to include a Pension Funding Partnership (‘PFP’) arrangement effectively granting the Plan a first charge over the Group’s
head office building as security for payments under the plan (note 24). No amount is included in the Plan assets in respect of the
building, which remains within the Group’s Property, Plant and Equipment balance (note 24) but this arrangement provides the Plan
with additional security in a stress event.
(b) Defined benefit plan – financial impact
For accounting purposes, the valuation at 31 March 2019 was updated to 30 September 2020 in accordance with the requirements of
IAS 19 (revised) by Mercer, the Group’s independent consulting actuary.
The major categories of assets in the Plan at 30 September 2020, 30 September 2019 and 30 September 2018 and their fair
values were:
Cash and cash equivalents
Equity instruments
Debt instruments
Real estate funds
Total fair value of Plan assets
Present value of Plan liabilities
(Deficit) in the Plan
2020
£m
28.6
60.7
34.9
10.3
134.5
(154.9)
(20.4)
2019
£m
7.1
60.7
34.2
10.8
112.8
(147.3)
(34.5)
2018
£m
0.6
61.8
28.4
10.7
101.5
(121.0)
(19.5)
At 30 September 2020 the Plan assets were invested in a diversified portfolio that consisted primarily of equity and debt investments.
The majority of the equities held by the Plan are in developed markets.
Page 239
The Accounts During October 2018, the High Court made a ruling in the Lloyds Banking Group Pension Scheme GMP ('Guaranteed Minimum
Pension') equalisation case, which effectively directs defined benefit pension schemes to change their rules to equalise the benefits
of male and female members for the effects of GMPs for employees who were, at one time, contracted out of state schemes. The
Court did not specify a single method which schemes should employ and hence the impact of this on the Plan will not be certain until
the Trustee has determined which method should be adopted and detailed calculations have been performed to evaluate the impact,
as the impact on members will vary from person to person.
The estimated effect of this ruling was accounted for in the accounts of the Group for the year ended 30 September 2019 as a ‘past
service cost’. However, this estimate is based on one permissible method, method C2, and therefore the actual amount may vary due
to the method which the Trustee chooses to apply, which is yet to be finalised, idiosyncratic impacts on individual members and the
development of a wider legal and accounting consensus on the proper interpretation of the courts’ requirements as further cases
are determined.
The movement in the fair value of the Plan assets during the year was as follows:
2019
£m
101.5
3.0
4.6
0.2
(2.4)
(0.7)
6.6
112.8
2019
£m
121.0
1.6
0.3
3.5
0.2
(2.4)
(1.4)
24.5
-
147.3
At 1 October 2019
Interest on Plan assets
Cash flows
Contributions by the Group
Contributions by Plan members
Benefits paid
Administration expenses paid
Remeasurement gain
Return on Plan assets (excluding amounts included in interest)
At 30 September 2020
2020
£m
112.8
2.3
24.5
0.2
(2.9)
(0.6)
(1.8)
134.5
Contributions by the Group in the year ended 30 September 2020 included a one-off £20.0m payment made as part of the new
recovery plan agreed between the Group and the Trustee in the year.
The actual return on Plan assets in the year ended 30 September 2020 was £0.5m (2019: £9.6m).
The movement in the present value of the Plan liabilities during the year was as follows:
2020
£m
147.3
2.0
-
2.7
0.2
(2.9)
1.2
6.0
(1.6)
154.9
At 1 October 2019
Current service cost
Past service cost
Funding cost
Cash flows
Contributions by Plan members
Benefits paid
Remeasurement loss / (gain)
Arising from demographic assumptions
Arising from financial assumptions
Arising from experience adjustments
At 30 September 2020
Page 240
The liabilities of the Plan are measured by discounting the best estimate of future cash flows to be paid out by the Plan using the
Projected Unit method. This amount is reflected in the liability in the balance sheet. The Projected Unit method is an accrued benefits
valuation method in which the Plan liabilities are calculated based on service up until the valuation date allowing for future salary
growth until the date of retirement, withdrawal or death, as appropriate. The future service rate is then calculated as the contribution
rate required to fund the service accruing over the next year again allowing for future salary growth. The major weighted average
assumptions used by the actuary were (in nominal terms):
30 September 2020
30 September 2019
30 September 2018
In determining net pension cost for the year
Discount rate
Rate of compensation increase
Rate of price inflation
Rate of increase of pensions
In determining benefit obligations
Discount rate
Rate of compensation increase
Rate of price inflation
Rate of increase of pensions
Further life expectancy at age 60
Male member aged 60
Female member aged 60
Male member aged 40
Female member aged 40
1.85%
3.20%
2.70%
2.65%
1.75%
2.95%
2.95%
2.85%
28
29
30
31
2.95%
3.60%
3.10%
2.95%
1.85%
3.20%
2.70%
2.65%
28
29
30
31
2.70%
3.60%
3.10%
2.90%
2.95%
3.60%
3.10%
2.95%
28
29
30
31
The amounts charged in the consolidated income statement in respect of the Plan are:
Note
2020
2019
Current service cost
Past service cost
Total service cost
Administration expenses
Included within operating expenses
Funding cost of Plan liabilities
Interest on Plan assets
Net interest expense
Components of defined benefit costs recognised in profit or loss
50
5
The amounts recognised in the consolidated statement of comprehensive income in respect of the Plan are:
Return on Plan assets (excluding amounts included in interest)
Actuarial gains/(losses)
Arising from demographic assumptions
Arising from financial assumptions
Arising from experience adjustments
Total actuarial (loss)
Tax thereon
Net actuarial (loss)
£m
2.0
-
2.0
0.6
2.6
2.7
(2.3)
0.4
3.0
2020
£m
(1.8)
(1.2)
(6.0)
1.6
(7.4)
2.1
(5.3)
£m
1.6
0.3
1.9
0.7
2.6
3.5
(3.0)
0.5
3.1
2019
£m
6.6
1.4
(24.5)
-
(16.5)
2.4
(14.1)
Page 241
The Accounts
Of the remeasurement movements reflected above:
• The return on plan assets represents worse than expected investment performance
•
•
•
The change in demographic assumptions reflects the adoption of new mortality assumptions, using the most recent version of the
tables adopted by the Trustee in the triennial valuation, which predict marginally higher life expectancy among members than the
previous versions reversing the trend of recent years
The change in financial assumptions reflects principally the impact of market-implied inflation expectations on discount rates,
where reduced gilt and bond yields in the year have led to a lower rate
The inflation assumptions used over the year have changed to the reflect the latest information, including market pricing and the
UK Government’s RPI consultation, and the extent to which the Plan’s assets hedge inflation
• the experience adjustments arise on the adoption of the 2019 Plan valuation as the basis of the IAS 19 valuation in the year
(c) Defined benefit plan – future cash flows
The sensitivity of the valuation of the defined benefit obligation to the principal assumptions disclosed above at 30 September 2020,
calculating the obligation on the same basis as used in determining the IAS 19 value, is as follows:
Assumption
Discount rate
Rate of inflation*
Rate of salary growth
Rates of mortality
* maintaining a 0.0% assumption for real salary growth
Increase in assumption
Impact on scheme liabilities
0.1% p.a.
0.1% p.a.
0.1% p.a.
1 year of life expectancy
(2.1)%
2.1%
0.3%
3.0%
The sensitivity analysis presented above may not be representative of an actual future change in the defined benefit obligation as it
is unlikely that changes in assumptions would occur in isolation as some of the assumptions will be correlated. There has been no
change in the method of preparing the analysis from that adopted in previous years.
In conjunction with the Trustee, the Group has continued to conduct asset-liability reviews of the Plan. These studies are used to
assist the Trustee and the Group to determine the optimal long-term asset allocation with regard to the structure of liabilities within
the Plan. The results of the studies are used to assist the Trustee in managing the volatility in the underlying investment performance
and risk of a significant increase in the scheme deficit by providing information used to determine the investment strategy of the Plan.
There have been no changes in the processes by which the Plan manages its risks from previous periods.
The current target asset allocations for the year ending 30 September 2021 are 60% growth assets (primarily equities), 30% bonds and
10% real estate.
The rate of employee contributions to the Plan is 5.0% of pensionable salaries. Following the finalisation of the March 2019 valuation,
the agreed rate of employer contributions increased to 43.8% from 32.0% with effect from 1 July 2020. Additional contributions of
£2.5m per annum for deficit reduction, including amounts payable under the PFP, and £0.4m per annum in respect of costs, each
payable monthly, were also agreed. An additional contribution of £20.0m was made by the Group in June 2020.
The present best estimate of the contributions to be made to the Plan by the Group in the year ending 30 September 2021 is £4.4m.
The average durations of the benefit obligations in the Plan at the year end are shown in the table below:
Category of member
Active members
Deferred pensioners
Current pensioners
All members
2020
Years
24
23
15
22
2019
Years
25
24
16
24
(d) Defined contribution arrangements
The Group sponsors a defined contribution (Worksave) pension scheme, open to all employees who are not members of the Plan.
The Group successfully completed the auto-enrolment process mandated by the UK Government in November 2013, using this
scheme. During the year the Group increased its contribution to the scheme for those employees making the maximum 6%
contribution to 10% of salary from 6%, generating an increase in the amounts being saved by employees.
The Group also sponsors a number of other defined contribution pension plans relating to acquired entities and makes contributions
to these schemes in respect of employees.
Page 242
The assets of these schemes are not Group assets and are held separately from those of the Group, under the control of independent
trustees. Contributions made by the Group to these schemes in the year ended 30 September 2020, which represent the total cost
charged against income, were £3.1m (2019: £2.1m) (note 50).
D2.3 Notes to the Accounts - Capital and financial risk
For the year ended 30 September 2020
The notes below describe the processes and measurements which the Group and the Company use to manage their capital
position and their exposure to financial risks including credit, liquidity, interest rate and foreign exchange risk. It should be
noted that certain capital measures, which are presented to illustrate the Group’s position, are not subject to audit. Where
this is the case, the relevant disclosures are marked as such.
54. Capital management
The Group’s objectives in managing capital are:
• To ensure that the Group has sufficient capital to meet its operational requirements and strategic objectives
•
To safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns to shareholders and
benefits for other stakeholders
• To provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
• To ensure that sufficient regulatory capital is available to meet any externally imposed requirements
The Group’s response to the Covid-19 situation has been planned and executed with the protection of its capital base and its long-
term viability as key strategic priorities.
The Group sets its target amount of capital in proportion to risk, availability, regulatory requirements and cost. The Group manages
the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the
underlying assets, having particular regard to the relative costs and availability of debt and equity finance at any given time. In order
to maintain or adjust the capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to
shareholders, issue new shares, issue or redeem other capital instruments, such as retail or corporate bonds, or sell assets to
reduce debt.
The Group is subject to regulatory capital rules imposed by the PRA on a consolidated basis as a group containing an authorised
bank. This is discussed further below.
(a) Dividend policy
The Company is committed to a long-term sustainable dividend policy. Ordinarily, dividends will increase in line with earnings,
subject to the requirements of the business and the availability of cash resources. The Board reviews the policy at least twice a year
in advance of announcing its results, taking into account the Group’s strategy, capital requirements, principal risks and the objective
of enhancing shareholder value. In determining the level of dividend for any year, the Board expects to follow the dividend policy,
but will also take into account the level of available retained earnings in the Company, its cash resources and the cash and capital
requirements inherent in its business plans.
The distributable reserves of the Company comprise its profit and loss account balance (note 39) and, other than the regulatory
requirement to retain an appropriate level of capital in Paragon Bank PLC, there are no restrictions preventing profits elsewhere in the
Group from being distributed to the parent.
Since the year ended 30 September 2018, the Company has adopted a policy of paying out approximately 40% of its basic earnings
per share as dividend (a dividend cover ratio of around 2.5 times), in the absence of any idiosyncratic factors which might make such a
dividend inappropriate. This policy is reviewed by the Board at least annually. The Company considers it has access to sufficient cash
resources to pay dividends at this level and that its distributable reserves are abundant for this purpose.
At the time of approving the half yearly report, the Board considered the exceptional level of uncertainty in the UK and global
economy, together with the public statements of government and regulatory bodies and emerging market practice and concluded
that, while the capital position and liquidity position of the Company remained strong, it would not be advisable to declare an interim
dividend for the year.
Page 243
The Accounts The appropriate level of dividend for the full-year was considered in light of economic and regulatory developments in the second half
of the year. In particular the levels of provision in the Group’s loan portfolios and the potential for further provision under stress were
considered by the Board, along with the capital requirements of the Group both under the base case medium term forecast and under
stress, discounting the effects of the current temporary reduction in regulatory buffers in response to Covid-19. On the basis of the
analysis the Board concluded that a dividend payment for the year of around 40% of earnings, in line with policy, could be made.
The dividend cover for the year, which is subject to approval at the forthcoming AGM is set out below.
Earnings per share (p)
Proposed dividend per share in respect of the year (p)
Dividend cover (times)
Note
14
41
2020
£m
36.0
14.4
2.50
2019
£m
49.4
21.2
2.33
For the purposes of dividend policy, the Group defines dividend cover based on basic earnings per share, adjusted where considered
appropriate, and dividend per share. This is the most common measure used by financial analysts.
The most recent policy review, in November 2020, also confirmed the existing dividend policy would continue to apply for future
periods, subject to the impact of any future events, and the Board will consider the appropriateness and scale of any interim dividend
in the context of the Group’s results and the operating and economic environment at the time.
(b) Return on tangible equity (‘RoTE’)
RoTE is a measure of an entity’s profitability used by investors. RoTE is defined by the Group by comparing the profit after tax for the
year, adjusted for amortisation charged on intangible assets, to the average of the opening and closing equity positions, excluding
intangible assets and goodwill.
It effectively reflects a return on equity as if all intangible assets are eliminated immediately against reserves. As this is similar to the
approach used for the capital of financial institutions it is widely used in the sector.
The Group’s consolidated RoTE for the year ended 30 September 2020 is derived as follows:
Note
25
25
25
2020
£m
91.3
2.0
93.3
1,108.4
(171.1)
937.3
1,156.0
(170.1)
985.9
961.6
2019
£m
127.4
2.4
129.8
1,073.5
(169.3)
904.2
1,108.4
(171.1)
937.3
920.7
9.7%
14.1%
Profit for the year after tax
Amortisation of intangible assets
Adjusted profit
Divided by
Opening equity
Opening intangible assets
Opening tangible equity
Closing equity
Closing intangible assets
Closing tangible equity
Average tangible equity
Return on Tangible Equity
This table is not subject to audit
Page 244
(c) Regulatory capital
The Group is subject to supervision by the PRA on a consolidated basis, as a group containing an authorised bank. As part of this
supervision the regulator will issue an individual capital requirement setting an amount of regulatory capital, which the Group
is required to hold in order to safeguard depositors from loss in the event of severe losses being incurred by the Group. This
comprises variable elements based on its total risk exposure and also fixed elements. This requirement is set in accordance with the
international Basel III rules, issued by the Basel Committee on Banking Supervision (‘BCBS’) and currently implemented in UK law by
EU Regulation 575/2013, referred to as the Capital Requirements Regulation (‘CRR’).
The Group’s regulatory capital is monitored by the Board, its Risk and Compliance Committee and the Asset and Liability Committee,
who ensure that appropriate action is taken to ensure compliance with the regulator’s requirements. The future regulatory capital
requirement is also considered as part of the Group’s forecasting and strategic planning process.
The Group has elected to take advantage of the IFRS 9 transitional arrangements set out in Article 473a of the CRR, which allow the
capital impact of expected credit losses to be phased in over a five-year period. The phase-in factors applying to transition adjustments
will allow for a 95% add back to CET1 capital and Risk Weighted Assets (‘RWA’) in the financial year ended 30 September 2019, reducing
to 85%, 70%, 50% and 25% for the financial years ending in 2020 to 2023, with full recognition of the impact on CET1 capital in the 2024
financial year.
As part of the regulatory response to Covid-19, Article 473a was revised to extend the transitional arrangements for Stage 1 and Stage 2
impairment provisions created in the financial year ended 30 September 2020 and the financial year ending 30 September 2021, while
maintaining the transitional arrangements for impairment provisions created before the current period. In order to increase institutions
lending capacity in the short-term, the EU has determined that these additional provisions should be phased into capital over the
financial years ending 30 September 2022 to 30 September 2024, rather than recognising the reduction in capital immediately.
These responses also allow, under paragraph 7a of the Article, the impact of transitional adjustments to be weighted at 100%
in calculating RWA. The Group has taken advantage of this derogation and hence the IFRS 9 adjustment to RWA is equal to the
adjustment to capital at 30 September 2020.
Where these reliefs are taken, firms are also required to disclose their capital positions calculated as if the relief were not available
(the ‘fully loaded’ basis).
The tables below demonstrate that at 30 September 2020 the Group’s regulatory capital of £1,141.2m (2019: £1,072.0m) exceeded the
amounts required by the regulator, including £749.6m (2019: £742.9m) in respect of Pillar 1 and Pillar 2a capital (unaudited), which is
comprised of fixed and variable elements.
The total regulatory capital at 30 September 2020 on the fully loaded basis of £1,098.9m was in excess of the Pillar 1 and 2a
requirement of £745.3m (2019: £741.8m) on the same basis (amounts not subject to audit).
The CRR also requires firms to hold additional capital buffers, including a Capital Conservation Buffer of 2.5% of risk weighted assets
(at 30 September 2020) (2019: 2.5%) and a Counter-Cyclical Buffer (‘CCyB’), currently 0.0% of risk weighted assets (2019: 1.0%). The
reduction in the CCyB in the year was a response to the Covid-19 pandemic and the long-term rate in a standard risk environment is
expected to be 2.0%. Firm specific buffers may also be required.
The Group’s regulatory capital differs from its equity as certain adjustments are required by the regulator. A reconciliation of the
Group’s equity to its regulatory capital determined in accordance with CRD IV at 30 September 2020 is set out below.
Total equity
Deductions
Proposed final dividend
IFRS 9 transitional relief
Intangible assets
Prudent valuation adjustments
Common Equity Tier 1 (‘CET1’) capital
Other tier 1 capital
Total Tier 1 capital
Corporate bond
Total Tier 2 capital
Note
41
*
25
§
32
Regulatory basis
Fully loaded basis
2020
£m
1,156.0
(36.4)
42.3
(170.1)
(0.6)
991.2
-
991.2
150.0
150.0
2019
£m
1,108.4
(35.8)
21.2
(171.1)
(0.7)
922.0
-
922.0
150.0
150.0
2020
£m
1,156.0
(36.4)
-
(170.1)
(0.6)
948.9
-
948.9
150.0
150.0
2019
£m
1,108.4
(35.8)
-
(171.1)
(0.7)
900.8
-
900.8
150.0
150.0
Total regulatory capital (‘TRC’)
1,141.2
1,072.0
1,098.9
1,050.8
* Firms are permitted to phase in the impact of IFRS 9 transition over a five-year period.
§ For capital purposes, assets and liabilities held at fair value, such as the Group’s derivatives, are required to be valued on a more conservative basis than the market value basis
set out in IFRS 13. This difference is represented by the prudent valuation adjustment above, calculated using the ‘Simplified Approach’ set out in the CRR.
Page 245
The Accounts The total risk exposure amount calculated under the CRD IV framework against which this capital is held, and the proportion of these
assets it represents, are calculated as shown below.
Credit risk
Balance sheet assets
Off balance sheet
IFRS 9 transitional relief
Total credit risk
Operational risk
Market risk
Other
Total risk exposure amount (‘TRE’)
Solvency ratios
CET1
TRC
This table is not subject to audit
Regulatory basis
Fully loaded basis
2020
£m
6,171.7
104.1
42.3
6,318.1
544.3
-
85.7
6,948.1
%
14.3
16.4
2019
£m
5,997.2
85.5
10.5
6,093.2
516.6
-
114.0
6,723.8
%
13.7
15.9
2020
£m
6,171.7
104.1
-
6,275.8
544.3
-
85.7
6,905.8
%
13.7
15.9
2019
£m
5,997.2
85.5
-
6,082.7
516.6
-
114.0
6,713.3
%
13.4
15.7
The CRD IV risk weightings for credit risk exposures are currently calculated using the Standardised Approach. The Basic Indicator
Approach is used for operational risk.
The table below shows the calculation of the UK leverage ratio, based on the consolidated balance sheet assets adjusted as shown.
The PRA has proposed a minimum UK leverage ratio of 3.25% for UK firms.
Note
20
15
21
25
20
2020
£m
15,505.5
(463.3)
(1,637.1)
(15.1)
-
13,390.0
(170.1)
13,219.9
463.3
92.3
555.6
949.1
(773.8)
175.3
991.2
13,950.8
42.3
13,993.1
7.1%
2019
£m
14,395.5
(592.4)
(816.4)
(11.4)
(0.2)
12,975.1
(171.1)
12,804.0
592.4
120.0
712.4
903.4
(739.2)
164.2
922.0
13,680.6
25.8
13,706.4
6.7%
Total balance sheet assets
Less: Derivative assets
Central bank deposits
CRDs
Accrued interest on sovereign exposures
On-balance sheet items
Less: Intangible assets
Total on balance sheet exposures
Derivative assets
Potential future exposure on derivatives
Total derivative exposures
Post offer pipeline at gross notional amount
Adjustment to convert to credit equivalent amounts
Off balance sheet items
Tier 1 capital
Total leverage exposure before IFRS 9 relief
IFRS 9 relief
Total leverage exposure
UK leverage ratio
This table is not subject to audit
Page 246
The fully loaded leverage ratio is calculated as follows
Fully loaded Tier 1 capital
Total leverage exposure before IFRS 9 relief
Fully loaded UK leverage exposure
This table is not subject to audit
2020
£m
948.9
13,950.8
6.8%
2019
£m
900.8
13,680.6
6.6%
The UK leverage ratio is prescribed by the PRA and differs from the leverage ratio defined by Basel and the CRR due to the exclusion
of central bank balances from exposures.
The regulatory capital disclosures in these financial statements relate only to the consolidated position for the Group. Individual
entities within the Group are also subject to supervision on a standalone basis. All such entities complied with the requirements to
which they were subject during the year.
55. Financial risk management
The principal risks arising from the Group’s exposure to financial instruments are credit risk, liquidity risk and market risk (particularly,
interest rate risk and currency risk). These risks are discussed in notes 56 to 59 respectively.
The Board has a Risk and Compliance Committee, consisting of the Chair of the Board and the non-executive directors which is
responsible for providing oversight and challenge to the Group’s risk management arrangements. Executive responsibility for the
oversight and operation of the Group’s risk management framework is delegated to the Executive Risk Committee (‘ERC’). ERC
discharges its duties through a number of sub-committees and escalates issues of concern to the Risk and Compliance Committee
where appropriate.
The Credit Committee and ALCO are sub-committees of the ERC which monitor performance against the risk appetites set by the
Board and make recommendations for changes in risk appetite where appropriate. They also review and, where authorised to do so,
agree or amend policies for managing each of these risks, which are summarised in the relevant note. The Corporate Governance
Statement in Section B3 (which is not subject to audit) provides further detail on the operations of these committees.
The financial risk management policies have remained unchanged throughout the year and since the year end. The position discussed
in notes 56 to 59 is materially similar to that existing throughout the year.
56. Credit risk
The assets of the Group and the Company which are subject to credit risk are set out below:
Financial assets at amortised cost
Loans to customers
Trade receivables
Amounts owed by Group companies
Cash
CSA assets
CRDs
Accrued interest income
Financial assets at fair value
Derivative financial assets
Maximum exposure to credit risk
The Group
The Company
Note
2020
£m
2019
£m
16
21
21
15
21
21
21
20
12,631.4
12,186.1
3.2
-
1,925.0
103.5
15.1
0.1
3.6
-
1,225.4
72.2
11.4
0.4
14,678.3
13,499.1
463.3
15,141.6
592.4
14,091.5
2020
£m
-
-
84.0
12.6
-
-
0.6
97.2
-
97.2
2019
£m
-
-
106.6
14.1
-
-
0.7
121.4
-
121.4
Page 247
The Accounts While this maximum exposure represents the potential loss which might have to be accounted for by the Group, the terms on which
a significant proportion of the Group’s loan assets are funded, described under Liquidity Risk in note 57, limit the amount of principal
repayments on the Group’s securitised and warehouse borrowings in cases of capital losses on assets, considerably reducing the
effective shareholder value at risk.
All financial assets at amortised cost are subject to the requirements of IFRS 9 relating to impairment.
Further information on the Group’s exposure to credit risk by asset type, including the credit quality of assets and any potential
concentrations of credit risk, is set out below for:
• Loans to customers
• Cash balances (including CSA assets, CRDs and accrued interest)
• Trade receivables
• Derivative financial assets
Loans to customers
The Group’s credit risk is primarily attributable to its loans to customers and its business objectives rely on maintaining a high-quality
customer base and place strong emphasis on good credit management, both at the time of acquiring or underwriting a new loan,
where strict lending criteria are applied, and throughout the loan’s life.
Primary responsibility for the management of credit risk relating to lending activities across the Group lies with the Credit Committee.
The Credit Committee is made up of senior employees, drawn from financial and risk functions independent of the underwriting
process. It is chaired by the Credit Risk Director. Its key responsibilities include setting and reviewing credit policy, controlling
applicant quality, tracking account performance against targets, agreeing product criteria and lending guidelines and monitoring
performance and trends.
The Group’s underwriting philosophy is based on a combination of sophisticated individual credit assessment and the automated
efficiencies of a scored decision making process. Information on each applicant is combined with data taken from a credit reference
bureau to provide a complete credit picture of the applicant and the borrowing requested. Key information is validated through a
combination of documentation and statistical data which collectively provides evidence of the applicant’s ability and willingness to pay
the amount contracted under the loan agreement. In assessing credit risk, even where the Group would have security on a proposed
loan, an applicant’s ability and propensity to repay the loan remain the principal factors in the decision to lend.
In considering whether to acquire pools of loan assets, the Group will undertake a due diligence exercise on the underlying loan
accounts. Such assets are generally not fully performing and are offered at a discount to their current balance. The Group’s
procedures may include inspection of original loan documents, verification of security and the examination of the credit status
of borrowers. Current and historic cash flow data will also be examined. The objective of the exercise is to establish, to a level of
confidence similar to that provided by the underwriting process, that the assets will generate sufficient cash flows to recover the
Group’s investment and generate an appropriate return without exposing the Group to material operational or conduct risks.
This section sets out information relevant to assessing the credit risk inherent in the Group’s loans to customers balances. It is set out
in the following subsections:
• Types of lending and related security
• Overall credit grading
• Credit characteristics of particular portfolios
• Arrears performance
• Acquired assets
Page 248
Types of lending
The Group’s balance sheet loan assets at 30 September 2020 are analysed as follows:
Buy-to-let mortgages
Owner-occupied mortgages
Total first charge residential mortgages
Second charge mortgage loans
Loans secured on residential property
Development finance
Loans secured on property
Asset finance loans
Motor finance loans
Aircraft mortgages
Structured lending
Invoice finance
Total secured loans
Professions finance
CBILS and BBLS
Other unsecured commercial loans
Unsecured consumer loans
Total loans to customers
2020
£m
10,583.8
53.1
10,636.9
354.5
10,991.4
609.0
11,600.4
452.0
272.4
26.0
94.9
13.5
2020
%
83.8%
0.4%
84.2%
2.8%
87.0%
4.8%
91.8%
3.6%
2.2%
0.2%
0.7%
0.1%
2019
£m
10,101.9
70.6
10,172.5
389.2
10,561.7
506.5
11,068.2
472.9
318.9
19.3
88.1
18.5
12,459.2
98.6%
11,985.9
22.3
25.2
15.0
109.7
12,631.4
0.2%
0.2%
0.1%
0.9%
46.2
-
19.3
134.7
2019
%
82.9%
0.6%
83.5%
3.2%
86.7%
4.1%
90.8%
3.9%
2.6%
0.2%
0.7%
0.1%
98.3%
0.4%
-
0.2%
1.1%
100.0%
12,186.1
100.0%
First and second charge mortgages are secured by charges over residential properties in England and Wales, or similar Scottish or
Northern Irish securities.
Development finance loans are secured by a first charge (or similar Scottish security) over the development property and various
charges over the build.
Asset finance loans and motor finance loans are effectively secured by the financed asset, while aircraft mortgages are secured by a
charge on the aircraft funded.
Structured lending and invoice finance balances are effectively secured over the assets of the customer, with security enhanced by
maintaining balances at a level less than the total amount of the security (the advance percentage).
Professions finance are generally short-term unsecured loans made to firms of lawyers and accountants for working capital purposes.
Loans made under the Coronavirus Business Interruption Loan Scheme (‘CBILS’) and the Bounce Back Loan Scheme (‘BBLS’) have
the benefit of a guarantee underwritten by the UK Government.
Other unsecured consumer loans include unsecured loans either advanced by Group companies or acquired from their originators at
a discount.
There are no significant concentrations of credit risk to individual counterparties due to the large number of customers included in
the portfolios. All lending is to customers within the UK. The total gross carrying value of the Group’s loans to customers due from
customers with total portfolio exposures over £10.0m is analysed below by product type.
Buy-to-let mortgages
Development finance
Structured lending
Asset finance
The threshold of £10.0m is used internally for monitoring large exposures.
2020
£m
154.3
240.0
72.7
-
467.0
2019
£m
149.7
212.7
78.8
-
441.2
Page 249
The Accounts
Credit grading
An analysis of the Group’s loans to customers by absolute level of credit risk at 30 September 2020 is set out below. The analysed
amount represents gross carrying amount.
30 September 2020
Very low risk
Low risk
Moderate risk
High risk
Very high risk
Not graded
Total gross carrying amount
Impairment
Total loans to customers
30 September 2019
Very low risk
Low risk
Moderate risk
High risk
Very high risk
Not graded
Total gross carrying amount
Impairment
Total loans to customers
Stage 1
£m
8,771.2
1,229.2
742.2
285.2
48.3
253.6
11,329.7
(22.2)
11,307.5
8,693.9
1,267.2
781.9
353.2
86.0
200.4
11,382.6
(6.0)
11,376.6
Stage 2
£m
453.3
120.9
184.7
143.9
67.9
74.7
1,045.4
(15.8)
1,029.6
92.8
77.5
75.0
153.0
47.0
13.2
458.5
(3.7)
454.8
Stage 3
£m
20.8
10.7
12.1
50.7
49.9
31.9
176.1
(43.4)
132.7
26.5
6.7
9.3
67.9
44.0
13.5
167.9
(32.2)
135.7
POCI
£m
45.9
21.7
32.8
32.0
22.9
6.7
162.0
(0.4)
161.6
49.4
26.5
45.2
48.5
38.7
10.7
219.0
-
219.0
Total
£m
9,291.2
1,382.5
971.8
511.8
189.0
366.9
12,713.2
(81.8)
12,631.4
8,862.6
1,377.9
911.4
622.6
215.7
237.8
12,228.0
(41.9)
12,186.1
Gradings above are based on credit scorecards or internally assigned risk ratings as appropriate for the individual asset class. These
measures are calibrated across product types and used internally to monitor the Group’s overall credit risk profile against its risk
appetite.
These gradings represent current credit quality on an absolute basis and this may result in assets in higher IFRS 9 stages with low risk
grades, especially where a case qualifies through breaching, for example, an arrears threshold but is making regular payments. This
will apply especially to Stage 3 cases reported in note 19, other than those shown as ‘realisations’.
Examples of these cases include fully up-to-date receiver of rent cases, customers who may be up to date on accounts with other
lenders and accounts where the default on the Group’s loan has yet to impact on external credit score.
A small proportion of the loan book (2020: 2.9%, 2019: 1.9%) is classed as ‘not graded’ above. This rating relates to loans that have
been fully underwritten at origination but where the customer falls outside the automated assessment techniques used post-
completion. This disclosure is expected to be developed further in future.
Page 250
Credit characteristics by portfolio
Loans secured on residential property
First mortgage loans have a contractual term of up to thirty years and second charge mortgage loans up to twenty five years. In all
cases the borrower is entitled to settle the loan at any point and in most cases early settlement does take place. All borrowers on
these accounts are required to make monthly payments.
An analysis of the indexed loan to value ratio (‘LTV’) for those loan accounts secured on residential property by value at
30 September 2020 is set out below. LTVs for second charge mortgages are calculated allowing for the interest of the first charge
holder, based on the most recent first charge amount held by the Group, while for acquired accounts the effect of any discount on
purchase is allowed for.
First charge mortgages
Second charge mortgages
Loan to value ratio
Less than 70%
70% to 80%
80% to 90%
90% to 100%
Over 100%
Average LTV ratio
Of which:
Buy-to-let
Owner-occupied
2020
%
59.9
35.9
2.3
0.4
1.5
100.0
65.7
65.8
49.2
2019
%
54.3
36.2
7.2
0.6
1.7
100.0
67.3
67.4
53.2
2020
%
74.5
16.7
5.2
1.2
2.4
100.0
62.2
2019
%
66.5
18.5
8.9
2.7
3.4
100.0
65.7
The regionally indexed LTVs shown above are affected by changes in house prices, with the Nationwide house price index, for the UK
as a whole, registering an annual increase of 5.0% in the year ended 30 September 2020 (2019: 0.2%).
The geographical distribution of the Group’s residential mortgage assets by gross carrying value is set out below.
East Anglia
East Midlands
Greater London
North
North West
South East
South West
West Midlands
Yorkshire and Humberside
Total England
Northern Ireland
Scotland
Wales
First charge
Second charge
2020
2019
2020
2019
%
3.2
5.4
18.7
3.2
10.4
31.6
8.7
5.4
8.4
95.0
0.1
1.7
3.2
%
3.2
5.3
18.9
3.3
10.1
31.9
8.9
5.1
8.6
95.3
0.1
1.4
3.2
%
3.3
6.1
8.2
3.9
7.4
39.5
8.0
7.3
5.9
89.6
1.7
5.2
3.5
%
3.3
6.3
7.8
4.2
8.0
37.7
7.9
7.6
6.2
89.0
1.9
5.6
3.5
100.0
100.0
100.0
100.0
Page 251
The Accounts Development finance
Development finance loans have an average term of 21 months (2019: 20 months). Settlement of principal and accrued interest
takes place once the development is sold or refinanced following its completion and the customer is not normally required to make
payments during the term of the loan. The loans are secured by a legal charge over the site and/or property together with other
charges and warranties related to the build.
As customers are not required to make payments during the life of the loan, arrears and past due measures cannot be used to
monitor credit risk. Instead, cases are monitored on an individual basis by management and Credit Risk. The average loan to gross
development value (‘LTGDV’) ratio for the portfolio at year end, a measure of security cover, is analysed below.
LTGDV
50% or less
50% to 60%
60% to 65%
65% to 70%
70% to 75%
Over 75%
2020
2020
By value
By number
%
7.6
22.4
34.0
31.3
2.8
1.9
%
4.8
13.2
41.0
36.1
4.0
0.9
2019
By value
%
8.5
18.2
31.6
32.3
6.8
2.6
2019
By number
%
3.4
15.5
39.1
32.4
8.2
1.4
100.0
100.0
100.0
100.0
The average LTGDV cover at the year end was 63.1% (2019: 64.8%).
LTGDV is calculated by comparing the current expected end of term exposure with the latest estimate of the value of the completed
development based on surveyors’ reports. The Covid-19 pandemic had yet to have a significant impact on expected valuations by the
year end.
At 30 September 2020, the development finance portfolio comprised 229 accounts (2019: 207) with a total carrying value of £609.0m
(2019: £506.5m). Of these accounts only 7 were included in Stage 2 at 30 September 2020 (2019: 6), with 1 account classified as
Stage 3 (2019: none). In addition, 1 account acquired in the Titlestone purchase had been classified as POCI (2019: 3). An allowance for
these losses was made in the IFRS 3 fair value calculation.
The geographical distribution of the Group’s development finance loans by gross carrying value is set out below.
2020
2019
%
5.1
5.5
8.2
1.8
0.4
58.8
14.0
4.0
1.1
98.9
-
1.1
-
%
3.1
2.9
12.1
1.0
0.1
56.8
13.9
7.2
1.5
98.6
-
1.4
-
100.0
100.0
East Anglia
East Midlands
Greater London
North
North West
South East
South West
West Midlands
Yorkshire and Humberside
Total England
Northern Ireland
Scotland
Wales
Page 252
Asset finance and Motor finance
Asset and motor finance lending includes finance lease and hire purchase arrangements, which are accounted for as finance leases
under IFRS 16 (2019: IAS 17). The average contractual life of the asset finance loans was 52 months (2019: 56 months) while that of the
motor finance loans was 60 months (2019: 57 months), but it is likely that a significant proportion of customers will choose to settle
their obligations early.
Asset finance customers are generally small or medium sized businesses. The nature of the assets underlying the Group’s asset
finance lending by gross carrying value is set out below.
Commercial vehicles
Construction plant
Technology
Manufacturing
Print and paper
Refuse disposal vehicles
Other vehicles
Agriculture
Other
2020
%
32.0
33.7
6.9
6.7
3.7
4.8
3.6
2.9
5.7
2019
%
30.3
34.8
7.8
6.1
4.8
5.2
3.0
2.7
5.3
100.0
100.0
Motor finance loans are secured over cars, motorhomes and light commercial vehicles and represent exposure to consumers and
small businesses.
Structured lending
The Group’s structured lending division provides revolving loan facilities to support non-bank lending businesses. Loans are made to a
Special Purpose Vehicle (‘SPV’) company controlled by the customer and effectively secured on the loans made by the SPV. Exposure
is limited to a percentage of the underlying assets, providing a buffer against credit loss.
Summary details of the structured lending portfolio are set out below.
Number of transactions
Total facilities (£m)
Carrying value (£m)
2020
8
139.0
94.9
2019
8
135.0
88.1
The maximum advance under these facilities was 80% of the underlying assets.
These accounts do not have a requirement to make regular payments, operating on a revolving basis. The performance of each loan is
monitored monthly on a case by case basis by the Group’s Credit Risk function, assessing compliance with covenants relating to both
the customer and the performance and composition of the asset pool. These assessments, which are reported to Credit Committee,
are used to inform the assessment of expected credit loss under IFRS 9.
At 30 September 2020, 4 of these facilities were identified as Stage 2 (2019: none) with the remainder in Stage 1.
Page 253
The Accounts CBILS and BBLS
Loans under these schemes, which were launched in the year as a response to the impact of Covid-19 on UK SMEs, have the benefit
of guarantees underwritten by the UK Government.
The Group offers term loans and asset finance loans under the CBIL scheme. Interest and fees are paid by the UK Government for the
first twelve months and the government guarantee caps the lender’s losses at up to 80% of the outstanding balance.
Loans under the BBL scheme are six year term loans at a standard 2.5% per annum interest rate. The UK Government pays the
interest on the loan for the first twelve months and provides lenders with a guarantee covering the whole outstanding balance.
The Group’s outstanding CBILS and BBLS loans at 30 September 2020 were:
CBILS
Term loans
Asset finance
Total CBILS
BBLS
2020
£m
20.6
1.0
21.6
3.6
25.2
2019
£m
-
-
-
-
-
At 30 September 2020, all of these accounts were considered to be performing accounts.
Unsecured consumer loans
Almost all of the Group’s unsecured consumer loan assets are part of purchased debt portfolios where the consideration paid
will have been based on the credit quality and performance of the loans at the point of the transaction. Collections on purchased
accounts remain in excess of those implicit in the purchase prices.
Page 254
Arrears performance
The number of accounts in arrears by asset class, based on the most commonly quoted definition of arrears for the type of asset, at
30 September 2020 and 30 September 2019, compared to the industry averages at those dates published by UK Finance (‘UKF’) and
the FLA, was:
2020
%
2019
%
First mortgages
Accounts more than three months in arrears
Buy-to-let accounts including receiver of rent cases
Buy-to-let accounts excluding receiver of rent cases
Owner-occupied accounts
UKF data for mortgage accounts more than three months in arrears
Buy-to-let accounts including receiver of rent cases
Buy-to-let accounts excluding receiver of rent cases
Owner-occupied accounts
All mortgages
Second charge mortgage loans
Accounts more than 2 months in arrears
All accounts
Post-2010 originations
Legacy cases (Pre-2010 originations)
Purchased assets
FLA data for secured loans
Motor finance loans
Accounts more than 2 months in arrears
All accounts
Originated cases
Purchased assets
FLA data for point of sale hire purchase
Asset finance loans
Accounts more than 2 months in arrears
FLA data for business lease / hire purchase loans
* Not published
0.15
0.10
3.72
0.52
0.50
0.90
0.82
14.77
0.62
21.17
17.85
8.40
4.58
1.76
13.10
*
1.75
1.70
0.18
0.07
2.44
0.42
0.37
0.81
0.73
14.08
0.38
19.85
16.05
8.70
5.25
1.27
12.13
2.70
0.43
1.10
No published industry data for asset classes comparable to the Group’s other books has been identified. Where revised data at
30 September 2019 has been published by the FLA or UKF, the comparative industry figures above have been amended.
Arrears information is not given for development finance, structured lending or invoice finance activities as the structure of the
products means that such a measure is not relevant.
It should be noted that, where customers have been allowed to defer payments as part of Covid 19 reliefs, these deferrals are not
included in arrears measures above.
The Group calculates its headline arrears measure for buy-to-let mortgages, shown above, based on the numbers of accounts three
months or more in arrears, including purchased Idem Capital assets, but excluding those cases in possession and receiver of rent
cases designated for sale. This is consistent with the methodology used by UKF in compiling its statistics for the buy-to-let mortgage
market as a whole.
The number of accounts in arrears will naturally be higher for legacy books, such as the Group’s legacy second charge mortgages and
residential first mortgages than for comparable active ones, as performing accounts pay off their balances, leaving arrears accounts
representing a greater proportion of the total.
The figures shown above for secured loans incorporate purchased portfolios which generally include a high proportion of cases in
arrears at the time of purchase and where this level of performance is allowed for in the discount to current balance represented by
the purchase price. However, this will lead to higher than average reported arrears.
Page 255
The Accounts
Acquired assets
Almost all of the Group’s unsecured consumer loan assets are part of purchased debt portfolios where the consideration paid will
have been based on the credit quality and performance of the loans at the point of the transaction. No additional loans to customers
treated as POCI were acquired in the year ended 30 September 2020. The total amount of undiscounted ECL at initial recognition on
POCI loans to customers initially recognised during the year ended 30 September 2019 was minimal due to the level of purchases.
Collections on purchased accounts have been comfortably in excess of those implicit in the purchase prices.
In the debt purchase industry, Estimated Remaining Collections (‘ERCs’) is commonly used as a measure of the value of a portfolio.
This is defined as the sum of the undiscounted cash flows expected to be received over a specified future period. In the Group’s view,
this measure may be suitable for heavily discounted, unsecured, distressed portfolios (which will be treated as POCI under IFRS 9),
but is less applicable for the types of portfolio in which the Group has invested, where cash flows are higher on acquisition, loans may
be secured on property and customers may not be in default. In such cases, the IFRS 9 amortised cost balance, at which these assets
are carried in the Group balance sheet, provides a better indication of value.
However, to aid comparability, the 84 and 120 month ERC values for the Group’s purchased consumer loan assets, are set out below.
These are derived using the same models and assumptions used in the EIR calculations. ERCs are set out both for all purchased
consumer portfolios and for those classified as POCI under IFRS 9.
All purchased consumer assets
Carrying value
84 month ERC
120 month ERC
POCI assets only
Carrying value
84 month ERC
120 month ERC
2020
£m
235.3
277.8
313.7
139.8
176.9
203.7
2019
£m
291.1
342.3
387.5
168.3
214.1
246.0
2018
£m
364.2
434.9
489.6
204.4
269.9
306.2
Amounts shown above are disclosed as loans to customers (note 16). They include first mortgages, second charge mortgage loans
and unsecured consumer loans.
Cash balances
The credit risk inherent in the cash positions of the Group and the Company is controlled by ALCO, which determines with which
institutions deposits may be placed with.
For cash deposits within the Group’s securitisation structures, the scheme documents will set out criteria for allowable investments,
including rating thresholds, which are monitored by the external trustees of each transaction.
The Group’s cash balances are held in sterling at the Bank of England and at highly rated banks in current and call accounts. Cash is
also invested in UK government securities and as short fixed term money market deposits. The Group has a Wholesale Credit Risk
Policy including limits on large exposures to mitigate any concentration risk in respect of its investments.
Page 256
The carrying value of the Group’s and the Company’s cash balances analysed by their long-term credit rating as determined by Fitch is
set out below.
The Group
Cash with central banks rated:
AA
AA-
Cash with retail banks rated:
AA-
A+
A-
Total exposure
The Company
Cash with retail banks rated:
A+
A-
2020
£m
-
1,637.1
1,637.1
112.0
175.9
-
287.9
1,925.0
12.6
-
12.6
2019
£m
816.4
-
816.4
230.5
173.5
5.0
409.0
1,225.4
9.1
5.0
14.1
The reduction in the rating on central bank deposits is a result of the downgrade of the UK’s sovereign rating in the year.
CRDs share the central bank rating noted above while CSA assets, placed with retail banks, have similar ratings to those shown above.
Credit risk on all of these balances, and any interest accrued thereon, is considered to be minimal. These balances are considered as
Stage 1 for IFRS 9 impairment purposes with a probability of default such that any provision required would be immaterial.
Trade debtors
The Group’s trade debtors balance represents principally amounts outstanding on unpaid operating lease obligations in the asset
finance business, where similar acceptance criteria to those used for finance lease cases apply.
Financial assets at fair value
The Group’s financial assets held at fair value comprise solely derivate financial instruments used for hedging purposes (note 20).
In order to control credit risk relating to counterparties to the Group’s derivative financial instruments, ALCO determines which
counterparties the Group will deal with, establishes limits for each counterparty and monitors compliance with those limits. Such
counterparties are typically highly rated banks and, for all derivative positions held within the Group’s securitisation structures, must
comply with criteria set out in the financing arrangements, which are monitored externally.
Where a derivative counterparty to the Group’s cross-currency basis swaps fails to meet the required criteria, they are obliged
under the terms of the instruments to provide a cash collateral deposit. These cash collateral deposits are held in escrow and not
recognised as assets of the Group so do not form part of the Group’s cash position.
The Group uses the International Swaps and Derivatives Association (‘ISDA’) Master Agreement for documenting certain derivative
activity. For certain counterparties a Credit Support Annex (‘CSA’) has been executed in conjunction with the ISDA Master Agreement.
Under a CSA, collateral is passed between counterparties to mitigate the market contingent counterparty risk inherent in the
outstanding positions. Collateral pledged to such counterparties by the Group is shown in note 21, while collateral pledged to the
Group is shown in note 34.
Since June 2019, the Group has been centrally clearing eligible derivatives with a Central Clearing Counterparty (‘CCP’) which
removes credit risk between bilateral counterparties and ensures timely settlement and / or porting of derivative contracts in the
event of the failure of a counterparty.
Page 257
The Accounts
The Group’s exposure to credit risk in respect of the counterparties to its derivative financial assets, analysed by their long-term credit
rating as determined by Fitch is set out below.
Carrying value of derivative financial assets
Counterparties rated
AA
AA-
A+
A
A-
Gross exposure (note 20)
Collateral amounts posted
Cross-currency basis swap arrangements
CSA collateral amounts (note 34)
Total collateral
Net exposure
2020
£m
-
97.8
364.2
1.3
-
463.3
-
-
-
463.3
2019
£m
7.3
155.6
388.8
5.5
35.2
592.4
64.1
-
64.1
528.3
57. Liquidity risk
Liquidity risk is the risk that the Group might be unable meet its liabilities as they fall due.
The Group’s principal source of liquidity risk is from its retail deposit funding. Deposit balances raised are typically used to support
lending activities where maturity is over a longer period than that of the deposits. This maturity transformation exposes the Group to
liquidity risk.
Further liquidity risk arises:
•
•
In the medium term from the Group’s corporate and retail bonds which are used to support its general operations and from its
participation in central bank funding schemes;
From the Group’s derivatives portfolio which gives rise to liquidity risk due to the collateral requirements to cover adverse changes
in valuation; and
• From the Group’s participation in the SPVs where sufficient funding must be available.
Liquidity is also required to provide capital support for new loans and working capital for the Group.
Where assets are funded by non-recourse arrangements, through the securitisation process, liquidity risk is effectively eliminated.
As an authorised deposit taker, the liquidity position of Paragon Bank PLC, the Group’s banking subsidiary, is also managed on a
stand-alone basis.
Page 258
Set out below is a summary of the contractual cash flows expected to arise from the Group’s financial and leasing liabilities, based on
the earliest date at which repayment can be demanded.
30 September 2020
Retail deposits
Borrowings
Total non-derivative liabilities
Derivative liabilities
30 September 2019
Retail deposits
Borrowings
Total non-derivative liabilities
Derivative liabilities
Amounts payable
In one year
or less, or on
demand
In more than
one year, but
not more than
two years
In more than
two years but
not more than
five years
£m
£m
£m
5,740.0
792.9
6,532.9
5.1
6,538.0
4,418.0
89.9
4,507.9
(0.1)
4,507.8
1,608.2
398.7
2,066.3
5.2
2,071.5
1,210.1
794.6
2,004.7
2.9
2,007.6
704.5
1,079.0
1,783.5
1.8
1,785.3
982.4
551.8
1,534.2
1.8
1,536.0
In more than
five years
£m
-
161.5
161.5
-
161.5
-
171.8
171.8
-
171.8
Total
£m
8,052.7
2,431.5
10,484.2
12.1
10,496.3
6,610.5
1,608.1
8,218.6
4.6
8,223.2
Non-recourse balances are payable only to the extent that funds are available, as described further below, and do not expose the
Group to any material liquidity risk. They are therefore not included in the table above.
As the amounts set out above include all expected future cash flows, including principal and interest, they will not agree to amortised
cost or fair value amounts reported in the balance sheet.
Further information on the liquidity exposure arising from the Group’s retail deposits, securitisation and other borrowings is set
out below.
The liquidity exposures of the Company arise only from its borrowings, and are set out below.
The overall responsibility for the management of liquidity risk rests with ALCO which makes recommendations for the Group’s liquidity
policy for board approval. ALCO monitors liquidity risk metrics within limits set by the Board or regulators and uses detailed cash flow
projections to ensure that an adequate level of liquidity is available at all times.
The Group’s and the Bank’s liquidity position is managed on a day to day basis by the treasury function, under the supervision
of ALCO.
Page 259
The Accounts
Retail deposits
The Group’s retail funding strategy is focussed on building a stable mix of deposit products. A high proportion of balances, 97.3%
(2019: 97.8%), are protected by the Financial Services Compensation Scheme (‘FSCS’) which mitigates against the possibility of a
retail run.
The cash outflows, including principal and estimated interest contractually required by the Group’s retail deposit balances, analysed
by the earliest date at which repayment can be demanded are set out below:
Payable on demand
Payable in less than three months
Payable in less than one year but more than three months
Payable in less than one year or on demand
Payable in one to two years
Payable in two to five years
2020
£m
2,363.8
598.3
2,777.9
5,740.0
1,608.2
704.5
8,052.7
2019
£m
1,783.9
482.7
2,151.4
4,418.0
1,210.1
982.4
6,610.5
In order to reduce the liquidity risk inherent in the Group’s retail deposit balances, the PRA requires that the Bank, like other regulated
banks, maintains a buffer of liquid assets to ensure it has sufficient available funds at all times to protect against unforeseen
circumstances. The amount of this buffer is calculated using Individual Liquidity Guidance (‘ILG’) set by the PRA based on the Internal
Liquidity Adequacy Assessment Process (‘ILAAP’) undertaken by the Bank. The ILAAP determines the liquid resources that must
be maintained in the Bank to meet its Overall Liquidity Adequacy Requirement (‘OLAR’) and to ensure that it can meet its liabilities
as they fall due. It is based on an analysis of its business as usual forecast cash requirements but also considers their predicted
behaviour in stressed conditions.
At 30 September 2020 the liquidity buffer comprised the following on and off balance sheet assets. All of these assets are held within
the Bank and are readily realisable.
Balances with central banks
Total on balance sheet liquidity
FLS drawings
Long/ short repo transaction
Note
33
2020
£m
1,386.9
1,386.9
-
150.0
1,536.9
2019
£m
646.4
646.4
109.0
-
755.4
Balances with central banks above exclude group cash balances placed on deposit at the Bank of England through Paragon Bank.
Paragon Bank manages its Liquidity Coverage Ratio (‘LCR’), the level of its High Quality Liquid Assets (‘HQLA’) relative to its
short-term forecast net cash outflows. A minimum level of LCR, the Liquidity Coverage Requirement, is set through regulation for all
regulated financial institutions. As at 30 September 2020, the Bank’s LCR was comfortably above the required minimum regulatory
standard. The Bank also monitors its Net Stable Funding Ratio (‘NSFR’) which measures the stability of the funding profile in relation
to the composition of its assets and off balance sheet activities.
Liquidity is not regulated at Group level.
Page 260
Borrowings
Set out below is the contractual maturity profile of the Group’s and the Company’s borrowings at 30 September 2020 and 30
September 2019 based on their carrying values. These are analysed between non-recourse (securitisation) and other funding, with the
liquidity position arising principally from the other funding.
The Group
30 September 2020
Secured bank borrowings
Asset backed loan notes
Total non-recourse funding
Bank overdrafts
Retail bonds
Corporate bond
Central bank facilities
Lease liabilities
30 September 2019
Secured bank borrowings
Asset backed loan notes
Total non-recourse funding
Bank overdrafts
Retail bonds
Corporate bond
Central bank facilities
Lease liabilities
The Company
30 September 2020
Retail bonds
Corporate bond
Lease liabilities
30 September 2019
Retail bonds
Corporate Bond
Lease liabilities
In one year
or less, or on
demand
Financial liabilities falling due:
In more than
one year, but
not more than
two years
In more than
two years but
not more than
five years
In more than
five years
Total
£m
£m
£m
£m
£m
-
-
-
0.4
60.0
-
700.0
1.5
761.9
-
-
-
1.0
-
-
50.0
-
51.0
-
-
-
-
124.8
-
244.4
1.1
370.3
-
-
-
-
59.9
-
700.0
-
759.9
-
-
-
-
112.0
-
910.0
2.4
657.8
3,207.5
3,928.3
-
-
149.8
-
0.6
1,024.4
4,078.7
-
-
-
-
236.6
-
244.4
-
481.0
787.5
4,419.4
5,206.9
-
-
149.6
-
-
657.8
3,207.5
3,928.3
0.4
296.8
149.8
1,854.4
5.6
6,235.3
787.5
4,419.4
5,206.9
1.0
296.5
149.6
994.4
-
5,356.5
6,648.4
In one year
or less, or on
demand
Financial liabilities falling due:
In more than
one year, but
not more than
two years
In more than
two years but
not more than
five years
In more than
five years
£m
60.0
-
1.2
61.2
-
-
-
-
£m
124.8
-
1.3
126.1
59.9
-
-
59.9
£m
112.0
-
4.0
116.0
236.6
-
-
236.6
£m
-
149.8
11.0
160.8
-
149.6
-
149.6
Total
£m
296.8
149.8
17.5
464.1
296.5
149.6
-
446.1
IFRS 7 requires the disclosure of future contractual cash flows (including interest) on these borrowings, and these are described and
set out on the following pages.
Page 261
The Accounts
Non-recourse funding
The Group has historically used securitisation as a principal source of funding, but currently only accesses this market on a strategic
basis. In a securitisation an SPV company within the Group will issue asset backed loan notes (‘Notes’) secured on a pool of mortgage
or other loan assets beneficially owned by the SPV in a public offer. The Notes have a maturity date later than the final repayment date
for any asset in the pool, typically over thirty years from the issue date. The noteholders are entitled to receive repayment of the Note
principal from principal funds generated by the loan assets from time to time, but their right to the repayment of principal is limited to
the cash available in the SPV. Similarly, payment of accrued interest to the noteholders is limited to cash generated within the SPV.
There is no requirement for any Group company other than the issuing SPV to make principal or interest payments in respect of the
Notes. This matching of the maturities of the assets and the related funding substantially reduces the Group’s exposure to liquidity
risk. Details of Notes in issue are given in note 29 and the assets backing the Notes are shown in note 17.
In each case the Group provides funding to the SPV at inception, subordinated to the Notes, which means that the primary credit risk
on the pool assets is retained within the Group. The Group receives the residual income generated by the assets. These factors
mean that the risks and rewards of ownership of the assets remain with the Group, and hence the loans remain on the Group’s
balance sheet.
Cash received from time to time in each SPV is held until the next interest payment date when, following payment of principal, interest
and the associated costs of the SPV, the remaining balances become available to the Group. Cash balances are also held within each
SPV to provide credit enhancement for the particular securitisation, allowing interest and principal payments to be made even if some
of the loans default.
To provide further credit enhancement in certain SPVs, specific economic trigger events exist which cause additional cash to be
retained in the SPV rather than being transferred to the Group. While the Group can, if it chooses, contribute additional cash to
cover these requirements, it is under no obligation to do so. No such events occurred in the year ended 30 September 2020 or the
year ended 30 September 2019. Whether any such events in any of the Group’s other SPVs arise in the future will depend on the
performance of the general economy and its impact on mortgage and loan arrears in each SPV. However, if all of the remaining trigger
events occurred, a total of £25.0m of additional cash would be retained in the SPV companies (2019: £55.8m). The cash balances of
the SPV companies are included within the restricted cash balances disclosed in note 15 as ‘securitisation cash’.
Newly originated mortgage loans may be initially funded by a revolving loan facility or ‘warehouse’ from the point of their origination
until their inclusion in a securitisation transaction or other refinancing. A warehouse may also be used to hold acquired loans or to
refinance Group loans on a short-term basis. A warehouse company functions in a similar way to an SPV, except that funds are drawn
down as advances are made or loans are sold in, repaid when loans are securitised or refinanced by an internal asset sale and may
subsequently be redrawn up to the end of a commitment period. The Group’s Paragon Second Funding facility was initiated as a
warehouse, but is no longer available for new drawings.
Repayment of the principal amount of the facilities is not required unless amounts are realised from the secured assets either through
repayment, securitisation or asset sales, even after the end of the period. There is no further recourse to other assets of the Group in
respect of either interest or principal on the borrowings. The Group has increased its available warehouse facilities in the period.
As with the SPVs, the Group provides subordinated funding to active warehouse companies and restricted cash balances are held
within them. Contributions to the subordinated funding are made each time a drawing on the facility concerned is made. These
amounts provide credit enhancement to the warehouse and cover certain fees. This funding is repaid when assets are securitised or
refinanced by an internal asset sale. There were no active warehouse companies at 30 September 2020 or 30 September 2019, but
undrawn facilities of £400.0m were available at the year end (2019: £200.0m).
Further details of the warehouse facilities are given in note 30 and details of the loan assets within the warehouses are given in note 17.
The final repayment date for all of the securitisation borrowings and the Paragon Second Funding warehouse borrowing is more than
five years from the balance sheet date, the earliest falling due in 2039 and the latest in 2050.
The equivalent sterling principal amount outstanding at 30 September 2020 under the SPV and warehouse arrangements, allowing
for the effect of the cross-currency basis swaps, described under currency risk (note 59), which are net settled with the loan payments,
was £3,489.1m (2019: £4,706.1m). The total sterling amount payable under these arrangements, were these principal amounts to
remain outstanding until the final repayment date, would be £4,423.0m (2019: £6,276.6m). As the principal will, as discussed above,
reduce as customers repay or redeem their accounts, the cash flow will be far less than this amount in practice.
Corporate debt
In February 2013, the Company initiated a Euro Medium Term Note issuance programme, with a maximum issuance of £1,000.0m. The
Company had the ability to issue further notes under the programme and has issued three fixed rate bonds for a total of £297.5m, with
interest rates ranging from 6.000% to 6.125% and maturities ranging from December 2020 to August 2024, the most recent issue of
£112.5m being made in August 2015. This programme offers the Group opportunities to raise further working capital if needed.
The Group also issued £150.0 of tier 2 debt in September 2016 with an optional call date in September 2021 and a final maturity of
September 2026.
The Group’s ability to issue debt is supported by its credit rating issued by Fitch which was increased to BBB from BBB- in the year
ended 30 September 2018 and confirmed in March 2019. Fitch’s published outlook for the rating was, however, revised to negative in
March 2020, due to the agency’s expectation of weaker UK growth in 2020 as a result of Covid-19, in common with the ratings of other
UK banks.
Of the Group’s corporate and retail bond issuance, £60.0m falls due for payment in the next twelve months.
Page 262
Central bank facilities
The Group has accessed term facilities under the central bank schemes described in note 33. The Group has prepositioned further
assets with the Bank of England which can be used to release more funds for liquidity or other purposes. At 30 September 2020 the
amount of drawings available in respect of prepositioned assets was £684.0m (2019: £1,095.0m).
Additional Liquidity
The Group holds certain of its own listed, externally rated, asset backed securities which may be used as security to access credit
facilities, including those offered by the Bank of England. The principal value of these notes is analysed by credit grade and utilisation
status below.
Rating
AAA
AA+ / AA / AA-
A+ / A / A-
BBB+ / BBB / BBB-
Utilised
£m
367.8
3.4
3.6
3.4
378.2
2020
Available
£m
643.6
64.2
51.8
64.2
823.8
Total
£m
1,011.4
67.6
55.4
67.6
1,202.0
Utilised
£m
57.5
1.2
2.5
18.5
79.7
2019
Available
£m
341.2
24.6
30.1
43.4
439.3
Total
£m
398.7
25.8
32.6
61.9
519.0
As these notes are held internally, they are not included in balance sheet liabilities. Mortgage assets backing these securities remain
on the Group’s balance sheet and are included in amounts pledged as collateral in note 17.
Utilised notes includes those which the Group is obliged to hold under regulations governing securitisation issuance.
The available AAA notes would give access to £502.5m (2019: £276.0m) if used to secure drawings on Bank of England facilities.
Additional notes issued after the year end (note 29) provide access to further liquidity.
During the year, the Group entered in to a back-to-back long / short repo transaction with a UK bank. This provides £150.0m of
liquidity, utilising £178.5m of the loan notes shown above, but does not appear on the Group’s balance sheet.
Page 263
The Accounts Contractual cash flows
The total undiscounted amounts, inclusive of estimated interest, which would be payable in respect of the non-securitisation
borrowings of the Group and the Company, should those balances remain outstanding until the contracted repayment date, or the
earliest date on which repayment can be required, are set out below.
a) The Group
30 September 2020
Payable in:
Less than one year
One to two years
Two to five years
Over five years
30 September 2019
Payable in:
Less than one year
One to two years
Two to five years
Over five years
a) The Company
30 September 2020
Payable in:
Less than one year
One to two years
Two to five years
Over five years
30 September 2019
Payable in:
Less than one year
One to two years
Two to five years
Over five years
Contingent
consideration
£m
Corporate
bonds
£m
Retail
bonds
£m
Central bank
facilities
Lease
liabilities
£m
3.2
5.0
5.8
-
14.0
5.7
6.2
12.7
-
24.6
10.9
10.9
32.6
160.9
215.3
10.9
10.9
32.6
171.8
226.2
Corporate
bonds
£m
10.9
10.9
32.6
160.9
215.3
10.9
10.9
32.6
171.8
226.2
75.3
135.6
126.0
-
336.9
18.0
75.3
261.6
-
354.9
Retail
bonds
£m
75.3
135.6
126.0
-
336.9
18.0
75.3
261.6
-
354.9
701.9
245.4
912.0
-
1,859.3
55.3
702.2
244.9
-
1,002.4
1.6
1.2
2.6
0.6
6.0
-
-
-
-
-
Lease
liabilities
£m
1.7
1.7
5.0
12.0
20.4
-
-
-
-
-
Total
£m
792.9
398.1
1,079.0
161.5
2,431.5
89.9
794.6
551.8
171.8
1,608.1
Total
£m
87.9
148.2
163.6
172.9
572.6
28.9
86.2
294.2
171.8
581.1
Amounts payable in respect of the ‘other accruals’ and ‘trade creditors’ shown in note 34 fall due within one year. The cash flows
described above will include those for interest on borrowings accrued at 30 September 2020 disclosed in note 34.
Page 264
The cash flows which are expected to arise from derivative contracts in place at the year end, estimating future floating rate payments
and receipts on the basis of the yield curve at the balance sheet date are as follows:
On derivative liabilities
Payable in less than one year
Payable in one to two years
Payable in two to five years
Payable in over five years
On derivative assets
Payable in less than one year
Payable in one to two years
Payable in two to five years
Payable in over five years
2020
2019
Total cash
outflow / (inflow)
Total cash
outflow / (inflow)
£m
5.1
5.2
1.8
-
12.1
(38.1)
(43.4)
(45.7)
(0.1)
(127.3)
(115.2)
£m
(0.1)
2.9
1.8
-
4.6
(14.0)
(20.8)
(42.0)
(0.5)
(77.3)
(72.7)
58. Interest rate risk
Interest rate risk is the current or prospective risk to capital or earnings arising from adverse movements in interest rates. The Group’s
exposure to this risk is a natural consequence of its lending, deposit taking and other borrowing activities, as some of its financial
assets and liabilities bear interest at rates which float with various market rates while others are fixed, either for a term or for their
whole lives. Such risk is referred to as Interest Rate Risk in the Banking Book (‘IRRBB’). The Group does not seek to generate income
from taking interest rate risk and aims to minimise exposures that occur as a natural consequence of carrying out its normal
business activities.
The principal market-set interest rate used by the Group has historically been LIBOR, which has been used to set rates for certain
loan assets and borrowings. However, the Group has continued to move towards the use of alternative reference rates during the
year, with new wholesale debt and interest rate swaps referencing SONIA in response to the expected withdrawal of LIBOR from late
2021. This process is expected to continue in the new financial year.
The Group’s risk management framework for IRRBB continues to evolve in line with updates in regulatory guidance on methods
expected to be used by banks measuring, managing, monitoring and controlling such risks. The Group will continue to develop these
processes as interpretation of these standards becomes clearer as they become more widely implemented.
IRRBB is managed through board approved risk appetite limits and policies. The Group seeks to match the structure of assets and
liabilities naturally where possible or by using appropriate financial instruments, such as interest rate swaps. Day to day management
of interest rate risk is the responsibility of the Group’s Treasury function, with control and oversight provided by ALCO.
IRRBB exposures
Risk exposure in the Group’s operations might occur through:
•
•
Duration or re-pricing risk. The risk created when interest rates on assets, liabilities and off-balance sheet items reprice at different
times causing them to move by different amounts
Basis risk. The risk arising where assets and liabilities re-price with reference to different reference interest rates, for example
rates set by the Group and market rates, such as Bank of England base rate, SONIA and LIBOR. Relative changes in the difference
between the reference rates over time may impact earnings
•
Optionality or prepayment risk. The risk that settlement of asset and liability balances at different times from those forecast due to
economic conditions or customer behaviour may create a mismatch in future periods
Due to the maturity transformation inherent in the Group’s business model it is also exposed to the risk that the relationship between
the rates affecting the shorter term funding balance and the rates affecting the longer term lending balance will have altered when the
funding has to be refinanced.
Page 265
The Accounts The Group measures these risks through a combination of economic value and earnings-based measures considering prepayment risk:
•
Economic Value (‘EV’) – a range of parallel and non-parallel interest rate stresses are applied to assess the change in market value
from assets, liabilities and off balance sheet items re-pricing at different times
• Net Interest Income (‘NII’) - impact on earnings from a range of interest rate stresses
Interest rate benchmarks such as LIBOR have been subject to increasing global regulatory scrutiny. In July 2017 the FCA announced
that it was its intention that by the end of 2021 it would no longer compel banks to make submissions to the LIBOR setting process.
As a result of this, LIBOR is expected to be discontinued. The Bank of England’s Working Group on Sterling Risk-Free Interest Rates
has recommended SONIA as its replacement. However, there remains significant uncertainty as to how the transition from LIBOR and
other Interbank Offered Rates to alternative benchmarks will be managed across the banking industry.
LIBOR is used in setting interest rates on significant amounts of the Group’s loan assets and borrowings and an internal working
group exists to identify the impact on the business and ensure an orderly transition from LIBOR to other reference rates across all
classes of financial instrument.
The current balances of the Group’s loans to customers where the interest rate or the reversionary interest rate is set by reference to
IBOR are set out below.
First mortgages
Development finance facilities
Second charge mortgages
Structured lending
Aviation mortgages
2020
£m
3,750.0
234.6
61.4
94.9
24.1
2019
£m
4,079.0
101.6
-
88.1
17.2
4,165.0
4,285.9
The second charge mortgages shown above were moved to LIBOR as a temporary measure following the withdrawal of the Finance
House Base Rate in the year.
All structured lending agreements include fallback language to manage the transition from LIBOR.
Borrowings where interest rates are based on LIBOR and other IBOR rates are shown in notes 29 and 30. Derivative financial assets
and liabilities where cash flows are based on IBOR rates are shown in note 20, where the Group’s transition planning activities are also
discussed.
The Group’s use of financial derivatives for hedging interest rate risk is discussed further in note 20.
Interest rate sensitivity
To provide a broad indication of the Group’s exposure to interest rate movements, the notional impact of a 1.0% change in UK interest
rates on the equity of the Group at 30 September 2020, and the notional annualised impact of such a change on the operating profit
of the Group, based on the year end balance sheet have been calculated.
As a simplification this calculation assumes that all relevant UK interest rates move by the same amount in parallel and that all
repricing takes place at the balance sheet date.
On this basis, a 1.0% increase in UK interest rates would reduce the Group’s equity at 30 September 2020 by £0.9m (2019: £1.1m) and
increase profit before tax by £19.8m (2019: increase by £10.1m).
This calculation allows only for the direct effects of any change in UK interest rates. In practice, such a change might have wider
economic consequences which would themselves potentially affect the Group’s business and results.
Although certain of the Group’s borrowings have interest rates dependent on US Dollar and Euro LIBOR rates, the effect of the
cross-currency basis swaps is such that the Group’s results have no material exposure to movements in these rates. The effects
of independent 1.0% increases in US dollar or euro interest rates would be to increase the Group’s equity by £0.3m (2019: £0.4m) and
£0.9m (2019: £1.1m) respectively, however, in reality these movements would be mitigated by movements in UK interest rates and
exchange rates.
It should be noted that these sensitivities are illustrative only, and much simplified from those used to manage IRRBB in practice.
The Company
All the borrowings of the Company have fixed interest rates. Its assets and liabilities with other group companies bear interest at
floating rates based on LIBOR which reset within three months of the balance sheet date; all other balances in the Company balance
sheet are non-interest bearing. The interest charging rates on the Company’s financial assets and liabilities with other group entities
will be transitioned away from LIBOR as part of the overall group project.
Page 266
59. Currency risk
The Group has little appetite for material amounts of exposure to foreign currency movements and applies a hedging strategy for any
material open positions through the use of spot or forward contracts or derivatives.
All of the Group’s significant assets and liabilities are denominated in sterling with the exception of the asset backed loan notes
denominated in US dollars and euros, which are described in note 29. Although IFRS 9 requires that they be accounted for as currency
liabilities and valued at their spot rates, a condition of the issue of these notes was that bespoke interest rate and currency swaps
(‘cross-currency basis swaps’) were put in place for the duration of the borrowing, having the effect of converting the liability to a
LIBOR-linked floating rate sterling borrowing eliminating currency risk for these exposures. The amount of this effective borrowing, ie
the amount of the currency borrowing translated at the exchange rate on inception, is referred to as the ‘equivalent sterling principal’.
The equivalent sterling principal amounts of notes in issue under the arrangements described above, and their carrying values at
30 September 2020 and 30 September 2019 are set out below:
US dollar notes
Euro notes
2020
2020
2019
Equivalent
sterling principal
Carrying
value
Equivalent
sterling principal
£m
397.0
687.5
£m
609.6
917.8
1,084.5
1,527.4
£m
447.5
1,007.4
1,454.9
2019
Carrying
value
£m
721.6
1,314.1
2,035.7
The asset finance business has a limited amount of lending denominated in US dollars and may contract to purchase assets for
leasing in currency. These balances are hedged by the purchase of currency derivatives and/or appropriate currency balances.
As a result of these arrangements the Group has no material exposure to foreign currency risk, and no sensitivity analysis is presented
for currency risk.
The Group’s use of financial derivatives to manage currency risk is described further in note 20.
None of the assets or liabilities of the Company are denominated in foreign currencies.
D2.4 Notes to the Accounts - Basis of preparation
For the year ended 30 September 2020
The notes set out below describe the accounting basis on which the Group and the Company prepare their accounts, the
particular accounting policies adopted by the Group and the principal judgements and estimates which were required in the
preparation of the financial statements.
They also include other information describing how the accounts have been prepared required by legislation and
accounting standards.
60. Basis of preparation
The financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by
the EU. In the financial years reported upon this means that, in the Group’s circumstances, the financial statements accord also with
International Financial Reporting Standards as approved by the International Accounting Standards Board.
The particular accounting policies adopted have been set out in note 62 and the critical accounting judgements and estimates which
have been required in preparing these financial statements are described in notes 63 and 64 respectively.
The Group has historically chosen to present an additional comparative balance sheet. The Group adopted IFRS 9 in its 2019 financial
statements and, as required by that standard, did not restate its 2018 comparative information. In the financial statements for the
year ended 30 September 2019, the Group presented an IFRS 9 transition date balance sheet as at the first day of that financial year,
1 October 2018. In the current year, as the Group presents three years of balance sheet information it has continued to present the
IFRS 9 transition date balance sheet as an additional comparative.
Page 267
The Accounts Adoption of new and revised reporting standards
In the preparation of these financial statements, the following accounting standards are being applied for the first time.
•
IFRS 16 – ‘Leases’
• 2019 amendments to IAS 39 – ‘Interest Rate Benchmark Reform’ and consequential amendments to IFRS 7
The effect on the Group’s and the Company’s accounting of the adoption of these standards is discussed in note 61.
Impact of UK departure from the EU
Under the International Accounting Standards and European Public Limited Liability Company (Amendment etc.) (EU Exit)
Regulations 2019, despite the UK’s exit from the EU on 31 January 2020, the EU endorsed IFRS regime remains applicable to the
Group until its first financial year commencing after the conclusion of the UK’s Transition Period, currently expected to end on
31 December 2020.
Therefore, while EU endorsed IFRS applies to these financial statements and will apply to the financial statements for the year
ending 30 September 2021, those for the year ending 30 September 2022 will instead be prepared under ‘UK-adopted international
accounting standards’. It is anticipated that ‘UK-adopted international accounting standards’ will be equivalent to IFRS as adopted by
the EU at the point of transition and that there would be no amendments required in the Group’s accounting as a result of that change.
Comparability of information
IFRS 16 does not require that the balance sheet information at 30 September 2018 and 30 September 2019 and the profit and loss
information for the years ended on these dates is restated on the adoption of the Standard. The information presented for those
periods in these financial statements is derived in accordance with IAS 17 - ‘Leases’ (‘IAS 17’), and therefore may not be directly
comparable with the balance sheet at 30 September 2020 and the profit and loss account for the year then ended which are prepared
under IFRS 16.
Similarly, on the introduction of IFRS 9 in the year ended 30 September 2019, restatement of the position at 30 September 2018 was
not required, with transition effectively taking place on 1 October 2018. In order to aid users of the accounts additional comparative
balance sheet amounts at 1 October 2018, immediately following transition, have been provided where relevant. These are marked as
2018 IFRS 9. There were no significant impacts from the introduction of IFRS 9 in the Company’s accounting.
Standards not yet adopted
In August 2020 the IASB issued a further amendment to IAS 39 ‘Interest Rate Benchmark Reform – Phase 2’. This amendment sets
out accounting requirements for the treatment of IBOR-linked financial assets and liabilities under the amortised cost method and
IBOR related hedge accounting when a firm replaces the IBOR linkage in the underlying instruments with a replacement benchmark.
It is therefore potentially applicable to the Group’s LIBOR-linked loan assets and those FRN liabilities where interest is charged on
the basis of LIBOR or other IBOR rates (note 29). It also affects the Group’s LIBOR (and other IBOR) referenced derivative assets and
liabilities (note 20) and the hedging relationships which they form part of.
The intention of the standard is that, where the transition is effectively a like for like replacement, no windfall gain or loss should occur
on transition, and hedging relationships should be able to continue.
This amendment is effective from the Group’s financial year ending 30 September 2022 but will be available for early adoption once
endorsed by the EU. The Group expects to implement the provisions of the amendment when it transitions its IBOR linked assets and
liabilities, subject to appropriate endorsement. The impact of the amendment will depend upon the IBOR-related assets liabilities and
hedging relationships at the point at which transition occurs.
Other standards and interpretations in issue but not effective do not address matters relevant to the Group’s accounting and
reporting.
61. Changes in accounting standards
a)
IFRS 16 – ‘Leases’
The Group is required to adopt IFRS 16, which replaces IAS 17, the standard currently governing the accounting for operating
and finance leases, in preparing its financial statements for the year ended 30 September 2020. It has transitioned to the new
standard with effect from 1 October 2019, in accordance with the transitional provisions set out in the standard, using the modified
retrospective approach. The standard addresses accounting by lessees and lessors which are considered separately below.
Page 268
Lessor accounting
The provisions for lessor accounting under IFRS 16 are little changed from those in IAS 17 and so the accounting for the Group’s
finance lease receivables, shown in note 18 is not materially changed.
Lessee accounting
Accounting by lessees is changed significantly under IFRS 16, with a right of use asset recognised on the balance sheet for all leases,
representing the economic benefit of controlling the underlying asset over the term of the lease. This includes leases previously
treated as operating leases and not recognised on the balance sheet under IAS 17. The right of use asset on initial recognition is based
on the discounted value of future minimum lease payments. It is recognised within fixed assets and depreciated over the term of
the lease.
A corresponding liability arises representing the present value of future lease commitments and this is recognised within other
liabilities. This balance is reduced over the life of the lease by lease payments made and the unwinding of the initial discount is
recognised in interest expense.
Under IAS 17, the Group disclosed arrangements to lease office buildings, equipment and motor vehicles as operating leases and
these have been restated in accordance with IFRS 16. Additionally, the Group has undertaken an exercise to identify potential lease
agreements arising from service contracts. No such arrangements were identified. The Group had no involvement as a lessee in
finance leases, as defined by IAS 17.
The Group has made use of practical expedients within IFRS 16 when performing its transition accounting. These include the right to
exclude contracts that have not previously been classified as leases before the implementation date, and the ability to exclude leases
of low value and those with a short-term.
At transition, on 1 October 2019, the Group recognised a right of use asset of £7.0m and a corresponding liability of £7.3m, in
accordance with the provisions of IFRS 16 paragraph C5(b), referred to as the modified retrospective approach. Under this approach,
there is no impact on equity on transition.
The difference between the asset and liability on recognition represents amounts prepaid or accrued in respect of lease rentals in the
Group’s balance sheet at 30 September 2019.
The leasing activities of the Company are limited to the lease of an office building from a subsidiary entity. At transition the Company
recognised a right of use asset of £18.8m and a corresponding liability of £18.8m in accordance with the modified approach. There was
no impact on the Company’s equity at transition.
The discount rate used to derive the right of use asset was 2.5% based on a 5-year corporate bond yield, while the minimum lease
payments used were materially similar to those disclosed as operating lease commitments at 30 September 2019 in note 51 to the
annual accounts for the year then ended, except that irrecoverable VAT was excluded.
There was no immediate tax impact from transition and the Group’s regulatory capital is unaffected. Under IFRS 16, the amount
charged to profit and loss represents depreciation on the ROU asset and a finance charge on the liability instead of rents or similar
charges. While this is a change of classification, the overall effect on profit is insignificant. There is no impact on reported cash flows,
nor on earnings per share.
IFRS 16 does not require the restatement of comparative information and therefore all balance sheets and results for periods on or
before 30 September 2019 are presented in accordance with IAS 17.
b)
IAS 39 amendments ‘Interest Rate Benchmark Reform’
This amendment was issued by the IASB to address the impact of uncertainties arising from IBOR reform (including the withdrawal of
LIBOR) on hedge accounting. The Standard excludes the effect of such uncertainties from the evaluation of hedging relationships for
accounting purposes and allows the continuation of IBOR-based hedging relationships despite these uncertainties, all other things
being equal.
This amendment is applicable for periods beginning on or after 1 January 2020, but early application is permitted. The Group has
elected to early apply this amendment retrospectively in these financial statements. As the amendment allows the continuation of
existing arrangements, its adoption has no impact on reported amounts.
c) Accounting changes at 1 October 2018
The accounting changes affecting equity at 1 October 2018 relate to the adoption of IFRS 9 – ‘Financial Instruments’ and
IFRS 15 – ‘Revenue’ and are described in detail in note 62 to the accounts for the year ended 30 September 2019.
Page 269
The Accounts 62. Accounting policies
The particular policies applied by the Group in preparing these financial statements in accordance with the EU endorsed IFRS regime
are described below.
As comparative financial information relating to the year ended 30 September 2019 and earlier periods has not been restated for
IFRS 16, as permitted by that standard, the accounting policies applied differ to those used in the accounts for the year ended
30 September 2020. Where this is significant both policies are shown.
(a) Accounting convention
The financial statements have been prepared under the historical cost convention, except as required in the valuation of certain
financial instruments which are carried at fair value.
(b) Basis of consolidation
The consolidated financial statements deal with the accounts of the Company and its subsidiaries made up to 30 September 2020.
Subsidiaries comprise all those entities over which the Group has control, as defined by IFRS 10 – ‘Consolidated Financial Statements’.
In addition to legal subsidiaries, where the Company owns shares in the entity, directly or indirectly, in accordance with IFRS 10,
companies owned by charitable trusts into which loans originated by group companies were sold as part of its warehouse and
securitisation funding arrangements, where the Group enjoys the benefits of ownership and which, therefore, it is considered to
control, are treated as subsidiaries.
Similarly, trusts set up to hold shares in conjunction with the Group’s employee share ownership arrangements are also treated
as subsidiaries.
A full list of the Group’s subsidiaries is set out in note 66, together with further information on the basis on which they are considered
to be controlled by the Company. The results of businesses acquired are dealt with in the consolidated accounts from the date
of acquisition.
(c) Going concern
The consolidated financial statements have been prepared on the going concern basis.
Accounting standards require the directors to assess the Group’s ability to continue to adopt the going concern basis of accounting.
In performing this assessment, the directors consider all available information about the future, the possible outcomes of events
and changes in conditions and the realistically possible responses to such events and conditions that would be available to them,
having regard to the ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’ published by the
Financial Reporting Council in September 2014.
Particular focus is given to the Group’s financial forecasts to ensure the adequacy of resources available for the Group to meet its
business objectives on both a short-term and strategic basis.
In compiling the most recent forecast, for the period commencing 1 October 2020, particular attention was paid to the potential
consequences of Covid-19 on the Group’s operations, customers, funding and prospects, both in the short and longer term. This
included consideration of a number of different scenarios with impacts of varying duration and severity. In common with the Group’s
approach to IFRS 9, the economics used in the forecasting process were updated in October in light of the continuing development of
the Covid-19 crisis, based on updated external projections. Future business activity was reforecast reflecting the potential impacts of
the pandemic on markets and products.
The forecast was based on the best available information at the time of its approval, but the uncertainties surrounding the potential
ongoing impact of Covid-19 and the nature, duration and effectiveness of government and regulatory measures to address it, mean
that accurate forecasting is a more complex task than in normal circumstances. Therefore, further scenario modelling was undertaken
to evaluate the impact of adverse stresses of the forecast variables with the greatest impact.
The key stresses modelled in detail to evaluate the forecast were:
•
•
•
•
An increase of 10% in buy-to-let volumes. This examined the impact of volumes on profitability and illustrated the extent to which
capital resources and liquidity would be stretched due to the higher cash and capital requirements
Higher funding costs – 20bps higher cost on all new savings deposits throughout. This scenario illustrates the impact of
a significant margin squeeze on profitability and whether this would cause significant impacts on any capital, liquidity or
encumbrance ratios
An increase in impairment due to more Covid-19 disruption. This scenario models a significant short-term profitability stress and
the consequent stress on capital
A 10% reduction in development finance volumes. Development finance is the highest yielding product and this scenario illustrates
the effect of product mix on contribution and other ratios
Page 270
•
A stress combining higher funding costs and more Covid-19 disruption, without reducing lending. Although it is not deemed likely
that such a scenario would materialise, since severe stresses almost always result in lower lending volumes, the output from this
stress provides a benchmark for a plausible worst-case position that impacts all aspects of business performance and ratios, in
particular, capital
These stresses did not take account of management actions which might mitigate the impact of the adverse assumptions used. They
were designed to demonstrate how such stresses would affect the Group’s financing, capital and liquidity positions and highlight any
areas which might impact the Group’s going concern and viability assessments. Under all these scenarios, the Group had the ability
to meet its obligations over the forecast horizon and maintain a surplus over its regulatory requirements for both capital and liquidity
through normal balance sheet management activities.
A further, more material impairment stress was modelled, based on the Group’s severe macroeconomic scenario. This, together with
the outputs from the other stresses described, presents the Board with enough information to assess the Group’s ability to continue
on a going concern basis and ensure that there are enough management actions within their control to mitigate any plausible and
foreseeable failure scenario.
The Group started the Covid-19 period with a strong capital surplus and has also built up a significant liquidity buffer during the
second half of the year, as described below, to ensure that any significant outflows of deposits and / or reduced inflows from customer
receipts can be managed. Overall, the forecasts, even under reasonable further levels of stress show the Group retaining sufficient
equity, capital, cash and liquidity throughout the forecast period to satisfy its regulatory and operational requirements.
The availability of funding and liquidity is a key consideration, including retail deposit, wholesale funding, central bank and other
contingent liquidity options.
The Group’s retail deposits of £7,856.6 million (note 28), raised through Paragon Bank, are repayable within five years, with 71.9% of
this balance (£5,650.2 million) payable within twelve months of the balance sheet date. The liquidity exposure represented by these
deposits is closely monitored; a process supervised by the Asset and Liability Committee. The Group is required to hold liquid assets
in Paragon Bank to mitigate this liquidity risk. At 30 September 2020 Paragon Bank held £1,637.1 million of balance sheet assets for
liquidity purposes, in the form of central bank deposits (note 15). A further £150.0 million of liquidity was provided by an off balance
sheet swap arrangement (note 57), bringing the total to £1,787.1 million.
Paragon Bank manages its liquidity in line with the Board’s risk appetite and the requirements of the PRA, which are formally
documented in the Board’s approved ILAAP. The Bank maintains a liquidity framework that includes a short to medium term cash flow
requirement analysis, a longer term funding plan and access to the Bank of England’s liquidity insurance facilities, where
pre-positioned assets would support drawings of £684.0 million. Holdings of the Group’s own externally rated mortgage backed loan
notes can also be used to access the Bank of England’s liquidity facilities or other funding arrangements. At 30 September 2020 the
Group had £1,063.5 million of such notes available for use, of which £872.9 million were rated AAA.
The Group’s securitisation funding structures, described in note 57, ensure that a significant proportion of its originated loan portfolio
is match-funded, although this was reduced in the period by the retirement of five securitisation transactions. Repayment of the
securitisation borrowings is restricted to funds generated by the underlying assets and there is limited recourse to the Group’s
general funds. Recent and current loan originations are financed through retail deposits and may be refinanced through securitisation
where this is appropriate and cost-effective. While the Group has not accessed the public securitisation market in the year, the market
has remained active throughout the Covid-19 crisis and remains a potential funding source.
The earliest maturity of any of the Group’s working capital debt is in December 2020, when the first of the Group’s retail bond issues,
of £60.0 million matures. The Group’s TFS borrowings also start to mature in the coming financial year, with £700.0 million falling due
within twelve months.
The Group’s access to debt is enhanced by its corporate BBB rating, affirmed by Fitch Ratings in March 2020, and its status as an
issuer is evidenced by the BB+ rating of its £150.0 million Tier 2 bond. It has regularly accessed the capital markets for warehouse
funding and corporate and retail bonds over recent years and continues to be able to access these markets.
The Group’s cash analysis, which includes the impact of these repayments, continues to show a strong cash position, even after
allowing scope for significant discretionary payments, and its securitisation investments produce substantial cash flows.
As described in note 54 the Group’s capital base is subject to consolidated supervision by the PRA. Its capital at 30 September 2020
was in excess of regulatory requirements and its forecasts indicate this will continue to be the case.
After performing this assessment, the directors concluded that it was appropriate for them to continue to adopt the going concern
basis in preparing the Annual Report and Accounts.
(d) Acquisitions and goodwill
Goodwill arising from the purchase of subsidiary undertakings, representing the excess of the fair value of the purchase consideration
over the fair values of acquired assets, including intangible assets, is held on the balance sheet and reviewed annually to determine
whether any impairment has occurred.
As permitted by IFRS 1, the Group has elected not to apply IFRS 3 – ‘Business Combinations’ to combinations taking place before its
transition date to IFRS (1 October 2004). Therefore any goodwill which was written off to reserves under UK GAAP will not be charged
or credited to the profit and loss account on any future disposal of the business to which it relates.
Contingent consideration arising on acquisitions is first recognised in the accounts at its fair value at the acquisition date and
subsequently revalued at each accounting date until it falls due for payment or the final amount is otherwise determined.
Page 271
The Accounts (e) Cash and cash equivalents
Balances shown as cash and cash equivalents in the balance sheet comprise demand deposits and short-term deposits with banks
with initial maturities of not more than 90 days.
(f)
Leases
Year ended 30 September 2020 under IFRS 16
For leases where the group is the lessee a right of use asset is recognised in property, plant and equipment on the inception of the
lease based on the discounted value of the minimum lease payments at inception. A lease liability of the same amount is recognised
at inception, with the unwinding of the discount included in the interest payable.
Leases where the Group is lessor are accounted for as operating or finance leases in accordance with IFRS 16 – ‘Leases’. A finance
lease is one which transfers substantially all of the risks and rewards of the ownership of the asset concerned. Any other lease is an
operating lease.
Finance lease receivables are accounted for as loans to customers, with impairment provisions determined in accordance with IFRS 9.
Rental income and costs on operating leases are charged or credited to the profit and loss account on a straight-line basis over the
lease term. The associated assets are included within property, plant and equipment.
Year ended 30 September 2019 under IAS 17
Leases are accounted for as operating or finance leases in accordance with IAS 17 – ‘Leases’. A finance lease is deemed to be one
which transfers substantially all of the risks and rewards of the ownership of the asset concerned. Any other lease is an operating
lease.
Rental income and costs under operating leases are credited or charged to the profit and loss account on a straight line basis over the
period of the leases.
(g)
Loans to customers
Loans to customers includes assets accounted for as financial assets and finance leases. The Group assesses the classification and
measurement of a financial asset based on the contractual cash flow characteristics of the asset and its business model for managing
the asset. The Group has concluded that its business model for its customer loan assets is of the type defined as ‘Held to collect’ by
IFRS 9 and the contractual terms of the asset should give rise to cash flows that are solely payments of principal and interest (‘SPPI’).
Such loans are therefore accounted for on the amortised cost basis.
Loans advanced are valued at inception at the initial advance amount, which is the fair value at that time, inclusive of procuration fees
paid to brokers or other business providers and less initial fees paid by the customer. Loans acquired from third parties are initially
valued at the purchase consideration paid or payable. Thereafter, all loans to customers are valued at this initial amount less the
cumulative amortisation calculated using the EIR method. The loan balances are then reduced where necessary by an impairment
provision.
The EIR method spreads the expected net income arising from a loan over its expected life. The EIR is that rate of interest which, at
inception, exactly discounts the future cash payments and receipts arising from the loan to the initial carrying amount.
Where financial assets are credit-impaired at initial recognition the EIR is calculated on the basis of expected future cash receipts
allowing for the effect of credit risk. In other cases, the expected contractual cash flows are used.
(h) Finance lease receivables
Finance lease receivables are included within ‘Loans to Customers’ at the total amount receivable less interest not yet accrued,
unamortised commissions and provision for impairment.
Income from finance lease contracts is governed by IFRS 16 – ‘Leases’ and accounted for on the actuarial basis.
(i)
Impairment of loans to customers
The carrying values of all loans to customers, whether accounted for under IFRS 9 or IFRS 16, are reduced by an impairment provision
based on their expected credit loss (‘ECL’), determined in accordance with IFRS 9. These estimates are reviewed throughout the year
and at each balance sheet date.
With the exception of POCI financial assets (which are discussed separately below), all assets are assessed to determine whether
there has been a significant increase in credit risk (‘SICR’) since the point of first recognition (origination or acquisition). Assets are
also reviewed to identify any which are ‘Credit Impaired’. SICR and credit impairment are identified on the basis of pre-determined
metrics including qualitative and quantitative factors relevant to each portfolio, with a management review to ensure appropriate
allocation.
Page 272
Assets which have not experienced an SICR are referred to as ‘Stage 1’ accounts, assets which have experienced an SICR but are not
credit impaired are referred to as ‘Stage 2’ accounts, while credit impaired assets are referred to as ‘Stage 3’ accounts.
An impairment allowance is provided on an account by account basis:
•
•
For Stage 1, at an amount equal to 12-month ECL, ie the total ECL that results from those default events that are possible within 12
months of the reporting date, weighted by the probability of those events occurring; or
For Stage 2 and 3 accounts, at an amount equal to lifetime ECL, ie the total ECL that results from any future default events,
weighted by the probability of those events occurring.
In establishing an ECL allowance, the Group assesses its probability of default, loss given default and exposure at default for each
reporting period, discounted to give a net present value. The estimates used in these assessments must be unbiased and take into
account reasonable and supportable information including forward-looking economic inputs.
Within its buy-to-let portfolio the Group utilises a receiver of rent process, whereby the receiver stands between the landlord and
tenant and will determine an appropriate strategy for dealing with any delinquency. This strategy may involve the immediate sale
of any underlying security or the short or long-term letting of the property to cover arrears and principal shortfalls. Such cases are
automatically considered to have an SICR, but where a letting strategy is adopted by the receiver and a tenant is in place, arrears may
be reduced or cleared. Properties in receivership are eventually either returned to their landlord owners or sold.
For loan portfolios acquired at a discount, the discounts take account of future expected impairments and such assets are treated
as POCI. For these assets, the Group recognises all changes in future cash flows arising from changes in credit quality since initial
recognition as a loss allowance with any changes recognised in profit or loss.
For financial accounting purposes, provisions for impairments of loans to customers are held in an impairment allowance account from
the point at which they are first recognised. These balances are released to offset against the gross value of the loan when it is written
off for accounting purposes. This occurs when standard enforcement processes have been completed, subject to any amount retained
in respect of expected salvage receipts. Any further gains from post-write off salvage activity are reported as impairment gains.
(j) Amounts owed by or to group companies
In the accounts of the Company, balances owed by or to other group companies are carried at the current amount outstanding less any
provision. Where balances owing between group companies fall within the definition of either financial assets or financial liabilities given
in IAS 32 – ‘Financial Instruments: Presentation’ they are classified as assets or liabilities at amortised cost, as defined by IFRS 9.
(k) Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation.
Assets held for letting under operating leases are depreciated in equal annual instalments to their estimated residual value over the
life of the related lease. Vehicles held for short-term hire are depreciated in equal annual instalments to their estimated residual value
over their expected useful life. This depreciation is deducted in arriving at net lease income and is shown in note 6.
The assets’ residual values and useful lives are reviewed by management and adjusted, if appropriate, at each balance sheet date.
Depreciation on operating assets is provided on cost in equal annual instalments over the lives of the assets. Land is not depreciated.
The rates of depreciation are as follows:
Freehold premises
Short leasehold premises
Computer hardware
Furniture, fixtures and office equipment
Company motor vehicles
2% per annum
over the term of the lease
25% per annum
15% per annum
25% per annum
Depreciation on right of use assets recognised in accordance with IFRS 16 is provided on a straight line basis over the term of the lease.
(l)
Intangible assets
Intangible assets comprise purchased computer software and other intangible assets acquired in business combinations.
Purchased computer software is capitalised where it has a sufficiently enduring nature and is stated at cost less accumulated
amortisation. Amortisation is provided in equal instalments at a rate of 25% per annum.
Other intangible assets acquired in business combinations include brands and business networks and are capitalised in accordance
with the requirements of IFRS 3 – ‘Business Combinations’. Such assets are stated at attributed cost less accumulated amortisation.
Amortisation is provided in equal instalments at a rate determined at the point of acquisition.
(m)
Investments in subsidiaries
The Company’s investments in subsidiary undertakings are valued at cost less provision for impairment.
Page 273
The Accounts (n) Own shares
Shares in Paragon Banking Group PLC held in treasury or by the trustee of the Group’s employee share ownership plan are shown on
the balance sheet as a deduction in arriving at total equity. Own shares are stated at cost.
(o) Retail deposits
Retail deposits are carried in the balance sheet on the amortised cost basis. The initial fair value recognised represents the cash
amount received from the customer.
Interest payable to the customer is expensed to the income statement as interest payable over the deposit term on an EIR basis.
(p) Borrowings
Borrowings are carried in the balance sheet on the amortised cost basis. The initial value recognised includes the principal amount
received less any discount on issue or costs of issuance.
Interest and all other costs of the funding are expensed to the income statement as interest payable over the term of the borrowing
on an EIR basis.
(q) Central bank facilities
Where central bank facilities are provided at a below market rate of interest, and therefore fall within the definition of government
assistance as defined by IAS 20 – ‘Accounting for Government Grants and Disclosure of Government Assistance’, the liability is initially
recognised at the value of its expected cash flows discounted at a market rate of interest for a comparable commercial borrowing.
Interest is recognised on this liability on an EIR basis, using the imputed market rate to determine the EIR.
The remaining amount of the advance is recognised as deferred government assistance and released to the profit and loss account
through interest payable over the periods during which the arrangement affects profit.
(r) Derivative financial instruments
All derivative financial instruments are carried in the balance sheet at fair value, as assets where the value is positive or as liabilities
where the value is negative. Fair value is based on market prices, where a market exists. If there is no active market, fair value is
calculated using present value models which incorporate assumptions based on market conditions and are consistent with accepted
economic methodologies for pricing financial instruments. Changes in the fair value of derivatives are recognised in the income
statement, except where such amounts are permitted to be taken to equity as part of the accounting for a cash flow hedge.
(s) Hedging
IFRS 9 paragraph 7.2.21 permits an entity to elect, as a matter of accounting policy, to continue to apply the hedge accounting
requirements of IAS 39 in place of those set out in Chapter 6 of IFRS 9. The Group has made this election and the accounting policy
below has been determined in accordance with IAS 39.
For all hedges, the Group documents the relationship between the hedging instruments and the hedged items at inception, as well
as its risk management strategy and objectives for undertaking the transaction. The Group also documents its assessment, both at
hedge inception and on an ongoing basis, of whether the hedging arrangements put in place are considered to be ‘highly effective’ as
defined by IAS 39.
For a fair value hedge, as long as the hedging relationship is deemed ‘highly effective’ and meets the hedging requirements of IAS
39, any gain or loss on the hedging instrument recognised in income can be offset against the fair value loss or gain arising from the
hedged item for the hedged risk. For macro hedges (hedges of interest rate risk for a portfolio of loan assets or retail deposit liabilities)
this fair value adjustment is disclosed in the balance sheet alongside the hedged item, for other hedges the adjustment is made to the
carrying value of the hedged asset or liability. Only the net ineffectiveness of the hedge is charged or credited to income. Where a fair
value hedge relationship is terminated, or deemed ineffective, the fair value adjustment is amortised over the remaining term of the
underlying item.
Where a derivative is used to hedge the variability of cash flows of an asset or liability, it may be designated as a cash flow hedge so
long as this relationship meets the hedging requirements of IAS 39. For such an instrument the effective portion of the change in
the fair value of the derivative is taken initially to equity, with the ineffective part taken to profit or loss. The amount taken to equity
is released to the income statement at the same time as the hedged item affects the income statement. Where a cash flow hedge
relationship is terminated, or deemed ineffective, the amount taken to equity will remain there until the hedged transaction occurs, or
is no longer expected to take place.
Page 274
(t) Taxation
The charge for taxation represents the expected UK corporation tax (including the Bank Corporation Tax Surcharge where applicable)
and other income taxes arising from the Group’s profit for the year. This consists of the current tax which will be shown in tax returns
for the year and tax deferred because of temporary differences. This in general, represents the tax impact of items recorded in the
current year but which will impact tax returns for periods other than the one in which they are included in the financial statements.
The Group will hold a provision for any uncertain tax positions at the balance sheet date based on a global assessment of the
expected amount that will ultimately be payable.
Tax relating to items taken directly to equity is also taken directly to equity.
(u) Deferred taxation
Deferred taxation is provided in full on temporary differences that result in an obligation at the balance sheet date to pay more tax, or
a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Deferred
tax assets are recognised to the extent that it is regarded as probable that they will be recovered. As required by IAS 12 – ‘Income
Taxes’, deferred tax assets and liabilities are not discounted to take account of the expected timing of realisation.
(v) Retirement benefit obligations
The expected cost of providing pensions within the funded defined benefit scheme, determined on the basis of annual valuations by
professionally qualified actuaries using the projected unit method, is charged to the income statement. Actuarial gains and losses are
recognised in full in the period in which they occur and do not form part of the result for the period, being recognised in the Statement
of Comprehensive Income.
The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation, as
reduced by the fair value of scheme assets at the balance sheet date.
The expected financing cost of the deficit, as estimated at the beginning of the period is recognised in the result for the period within
interest payable. Any variances against the estimated amount in the year form part of the actuarial gain or loss.
The charge to the income statement for providing pensions under defined contribution pension schemes is equal to the contributions
payable to such schemes for the year.
(w) Revenue
The revenue of the Group comprises interest receivable and similar charges, operating lease income and other income. The
accounting policy for the recognition of each element of revenue is described separately within these accounting policies.
(x) Other income
Other income, which is accounted for in accordance with IFRS 15, includes:
•
Event-based administration fees charged to borrowers (other than the initial fees included in amortised cost), which are credited
when the related service is performed
• Fees charged to third parties for account administration services, which are credited as those services are performed
•
•
•
Commissions receivable on the sale of insurances, as agent of the third-party insurer, which are taken to profit at the point at which
the Group becomes unconditionally entitled to the income
Maintenance income charged as part of the Group’s contract hire arrangements which is recognised as the services are provided.
Costs of these services are deducted in other income
Broker fees receivable on the arrangement of loans funded by third parties, on an agency basis, which are taken to profit at the
point of completion of the related loan
(y) Share based payments
In accordance with IFRS 2 – ‘Share-based Payments’, the fair value at the date of grant of awards to be made in respect of options and
shares granted under the terms of the Group’s various share based employee incentive arrangements is charged to the profit and loss
account over the period between the date of grant and the vesting date.
National Insurance on share based payments is accrued over the vesting period, based on the share price at the balance sheet date.
Where the allowable cost of share based awards for tax purposes is greater than the cost determined in accordance with IFRS 2, the
tax effect of the excess is taken to reserves.
Page 275
The Accounts (z) Dividends
In accordance with IAS 10 – ‘Events after the balance sheet date’, dividends payable on ordinary shares are recognised in equity once
they are appropriately authorised and are no longer at the discretion of the Company. Dividends declared after the balance sheet
date, but before the authorisation of the financial statements remain within shareholders’ funds.
However, such dividends are deducted from regulatory capital from the point at which they are announced, and capital disclosures are
prepared on this basis.
(aa) Foreign currency
Foreign currency transactions, assets and liabilities are accounted for in accordance with IAS 21 – ‘The Effects of Changes in Foreign
Exchange Rates’. The functional currency of the Company and all of the other entities in the Group is the pound sterling. Transactions
which are not denominated in sterling are translated into sterling at the spot rate of exchange on the date of transaction. Monetary
assets and liabilities which are not denominated in sterling are translated at the closing rate on the balance sheet date.
Gains and losses on retranslation are included in interest payable or interest receivable depending on whether the underlying
instrument is an asset or a liability, except where deferred in equity in accordance with the cash flow hedging provisions of IAS 39.
(bb) Segmental reporting
The accounting policies of the segments are the same as those described above for the Group as a whole. Interest payable by each
segment includes directly attributable funding and the allocated cost of retail deposit funds utilised. Costs attributed to each segment
represent the direct costs incurred by the segment operations.
63. Critical accounting judgements
The most significant judgements which the directors have made in the application of the accounting policies set out in note 62 relate to:
(a) Significant Increase in Credit Risk (‘SICR’)
Under IFRS 9, the directors are required to assess where a credit obligation has suffered a Significant Increase in Credit Risk (‘SICR’).
The directors’ assessment is based primarily on changes in the calculated probability of default, but also includes consideration of
other qualitative indicators and the adoption of the backstop assumption in the Standard that all cases which are more than 30 days
overdue have an SICR, for account types where days overdue is an appropriate measure.
If additional accounts were determined to have an SICR, these balances would attract additional impairment provision and the overall
provision charge would be higher.
In determining whether an account has an SICR in the Covid-19 environment the granting of Covid-19 reliefs, including payment
holidays and similar arrangements, may mean that an SICR may exist without this being reflected in either arrears performance or
credit bureau data. The Group has accepted the advice of UK regulatory bodies that the grant of Covid-19 relief does not, of itself,
indicate an SICR, but has carefully considered internal credit and customer data to determine whether there might be any accounts
with SICR not otherwise identified by the process.
Where accounts have received secondary periods of relief beyond the initial three month period, this has generally been considered
to be strongly indicative of underlying problems and such accounts have been identified as having an SICR. Furthermore,
adjustments to correct probabilities of default in models will also have a consequent result of identifying more SICRs.
More information on the definition of SICR adopted is given in note 19.
(b) Definition of default
In applying the impairment provisions of IFRS 9, the directors have used models to derive the probabilities of default. In order to
derive and apply such models, it is required to define ‘default’ for this purpose. The Group’s definition of default is aligned to its
internal operational procedures. IFRS 9 provides a rebuttable presumption of default when an account is 90 days overdue and this
was used as the starting point for this exercise. Other factors include account management activities such as appointment of a
receiver or enforcement procedures.
A combination of qualitative and quantitative measures was considered in developing the definition of default.
If a different definition of default had been adopted the expected loss amounts derived might differ from those shown in the accounts.
More information on the Group’s definition of default adopted is given in note 19.
Page 276
(c) Classification of financial assets
The classification of financial assets under IFRS 9 is based on two factors:
• The company’s ‘business model’ – how the it intends to generate cash and profit from the assets; and
• The nature of the contractual cash flows inherent in the assets
Financial assets are classified as held at amortised cost, at fair value through other comprehensive income, or at fair value through
profit and loss.
For an asset to be held at amortised cost, the cash flows received from it must comprise solely payments of principal and interest
(‘SPPI’). In effect, this restricts this classification to ‘normal’ lending activities, excluding arrangements where the lender may have a
contingent return or profit share from the activities funded. The Group has considered its products and concluded that, as standard
lending products, they fall within the SPPI criteria.
This is because all of the Group’s lending arrangements involve the advancing of amounts to customers, either as loans or finance
lease products and the receipt of repayments of principal and charges, where those charges are calculated based on the amount
loaned. There are no ‘success fee’ or other compensation arrangements not linked to the loan principal.
The use of amortised cost accounting is also restricted to assets which a company holds within a business model whose object is to
collect cash flows arising from them, rather than seek to profit by disposing of them (a ‘Held to Collect’ model). The Group’s strategy
is to hold loan assets until they are repaid or written off. Loan disposals are rare, and the Group does not manage its assets in order to
generate profits on sale. On this basis, it has categorised its business model as Held to Collect.
Therefore, the Group has classified its customer loan assets as carried at amortised cost.
64. Critical accounting estimates
Certain of the balances reported in the financial statements are based wholly or in part on estimates or assumptions made by the
directors. There is, therefore, a potential risk that they may be subject to change in future periods. The most significant of these are:
(a)
Impairment losses on loans to customers
Impairment losses on loans are calculated based on statistical models, applied to the present status, performance and management
strategy for the loans concerned which are used to determine each loan’s PD and LGD.
Internal information used will include number of months arrears, qualitative information, such as possession by a first charge holder
on a second charge mortgage or where a buy-to-let case is under the control of a receiver of rent, the receiver’s present and likely
future strategy for the property (eg keeping current tenants in place, refurbish and relet, immediate sale etc).
External information used includes customer specific data, such as credit bureau information as well as more general economic data.
Key internal assumptions in the models relate to estimates of future cash flows from customers’ accounts, their timing and, for
secured accounts, the expected proceeds from the realisation of the property or other charged assets. These cash flows will include
payments received from the customer, and, for buy-to-let cases where a receiver of rent is appointed, rental receipts from tenants,
after allowing for void periods and running costs. These key assumptions are based on observed data from historical patterns and are
updated regularly based on new data as it becomes available.
In addition, the directors consider how appropriate past trends and patterns might be in the current economic situation and make any
adjustments they believe are necessary to reflect current and expected conditions.
All of this information may be impacted by Covid-19, its economic effect on customers and the forms of the reliefs given to ameliorate
that impact. These may both change the underlying data and impact on the derivation of metrics normally used to monitor credit
performance.
The accuracy of the impairment calculations would therefore be affected by unexpected changes to the economic situation, variances
between the models used and the actual results, or assumptions which differ from the actual outcomes. In particular, if the impact
of economic factors such as employment levels on customers is worse than is implicit in the model then the number of accounts
requiring provision might be greater than suggested by the model, while falls in house prices, over and above any assumed by
the model might increase the provision required in respect of accounts currently provided. Similarly, if the account management
approach assumed in the modelling cannot be adopted the provision required may be different.
In order to provide forward looking economic inputs to the modelling of the ECL, the Group must derive a set of scenarios which
are internally coherent. The Group addresses these requirements using four distinct economic scenarios chosen to represent the
range of possible outcomes. These scenarios at 30 September 2020 have been derived specifically in light of the Covid-19 situation,
modelling a variety of possible outcomes. It should be noted, however, that there is currently little agreement between economists on
the longer term prospects for the UK and there is unlikely to be so until the country’s path out of lockdown becomes clearer.
Page 277
The Accounts The variables are used for two purposes in the IFRS 9 calculations:
•
•
They are applied as inputs in the models which generate PD values, where those found by statistical analysis to have the most
predictive value are used
They are used as part of the calculation where the variable has a direct impact on the expected loss calculation, such as the house
price index
The economic variables will also inform assumptions about the Group’s approach to account management given a particular scenario.
In addition to uncertainty created by the economic scenarios, the Group recognises that the present situation lies outside the range
of situations considered when it originally derived its IFRS 9 approach to impairment. It therefore considered, for each class of
asset, whether any adjustment to the normal approach was required to ensure sufficient provision was created and also reviewed
other available data, both from account performance and customer feedback to form a view of the underlying reasons for observed
customer behaviours and of their future intentions and prospects.
The position after considering all these matters is set out in note 19, together with further information on the Group’s approach and
sensitivity analysis. The Covid-19 economic scenarios described above and their impact on the overall provision are also set out in
that note.
(b) Effective interest rates
In order to determine the EIR applicable to loans and borrowings an estimate must be made of the expected life of each asset or
liability and hence the cash flows relating thereto, including those relating to early redemption charges. For purchased loan accounts
this will involve estimating the likely future credit performance of the accounts at the time of acquisition. These estimates are based
on historical data and reviewed regularly. For purchased accounts historical data obtained from the vendor will be examined. The
accuracy of the EIR applied would therefore be compromised by any differences between actual repayment profiles and those
predicted, which in turn would depend directly or indirectly (in the case of borrowings) on customer behaviour.
In the case of purchased loan accounts, the assessment of future cash flows is significantly complicated by the uncertain impacts
of Covid-19. The likely future cash flows have been assessed by the management on the basis of available performance data and
customer contacts. The amount of income recognised to date at 30 September 2020 has been revised to allow for reduced future
collections based on these assessments.
No evidence has so far been identified which would require the adjustment of EIR income for other products as a result of Covid-19.
To illustrate the potential variability of the estimate, the amortised cost values were recalculated by changing one factor in the EIR
calculation and keeping all others at their current levels. This exercise indicated that:
•
•
•
A reduction of the assumed average lives of loans secured on residential property by three months would reduce balance sheet
assets by £11.2m (2019: £7.2m), while an increase of the assumed asset lives of such assets by three months would increase
balance sheet assets by £10.3m (2019: £6.0m)
An increase of 50% in the number of five year fixed rate buy-to-let loan assets assumed to redeem before the end of the fixed rate
period, generating additional early redemption charges would increase balance sheet assets by £7.3m (2019: £4.2m)
A reduction (or increase) in estimated cash flows from purchased loan assets of 5% would reduce (or increase) balance sheet
assets by £9.4m (2019: £12.5m)
As any of these changes would, in reality, be accompanied by movements in other factors, actual outcomes may differ from
these estimates.
(c)
Impairment of goodwill
The carrying value of goodwill recognised on acquisitions is verified by use of an impairment test based on the projected cash flows
for the CGU, based on management forecasts and other assumptions described in note 26, including a discount factor.
The accuracy of this impairment calculation would therefore be compromised by any differences between these forecasts and the
levels of business activity that the CGU is able to achieve in practice. The impact of Covid-19 means that there is a greater risk of
inaccuracy in compiling these forecasts. This test will also be affected by the accuracy of the discount factor used.
The sensitivity of the impairment test to reasonably possible movements in these assumptions is discussed in note 26.
(d) Retirement benefits
The present value of the retirement benefit obligation is derived from an actuarial calculation which rests on a number of assumptions
relating to inflation, long-term return on investments and mortality. These are listed in note 53. Where actual conditions differ from
those assumed the ultimate value of the obligation would be different.
Information on the sensitivity of the valuation to the various assumptions is given in note 53.
Page 278
65. Financial assets and financial liabilities
The Group’s financial assets and financial liabilities are valued on one of two bases, defined by IFRS 9:
• Financial assets and liabilities carried at fair value through profit and loss (‘FVTPL’)
• Financial assets and liabilities carried at amortised cost
IFRS 7 – ‘Financial Instruments: Disclosures’ requires that where assets are measured at fair value these measurements should be
classified using the fair value hierarchy set out in IFRS 13 – ‘Fair Value Measurement’. This hierarchy reflects the inputs used and
defines three levels:
• Level 1 measurements are unadjusted market prices
• Level 2 measurements are derived from directly or indirectly observable data, such as market prices or rates
• Level 3 measurements rely on significant inputs which are not derived from observable data
As quoted prices are not available for level 2 and 3 measurements, the valuation is derived from cash flow models based, where
possible, on independently sourced parameters. The accuracy of the calculation would therefore be affected by unexpected market
movements or other variances in the operation of the models or the assumptions used.
The Group had no financial assets or liabilities in the year ended 30 September 2020 or the year ended 30 September 2019 carried at
fair value and valued using level 3 measurements, other than contingent consideration amounts (note 35).
The Group has not reclassified any of its measurements during the year.
The methods by which fair value is established for each class of financial assets and liabilities are set out below.
(a) Assets and liabilities carried at fair value
The following table summarises the Group’s financial assets and liabilities which are carried at fair value.
Financial assets
Derivative financial assets
Financial liabilities
Derivative financial liabilities
Contingent consideration
Note
20
20
35
2020
£m
463.3
463.3
132.4
13.5
145.9
2019
£m
592.4
592.4
80.5
23.7
104.2
All of these financial assets and financial liabilities are required to be carried at fair value by IFRS 9.
The Company has no financial assets or liabilities carried at fair value.
Derivative financial assets and liabilities
Derivative financial instruments are stated at their fair values in the accounts. The Group uses a number of techniques to determine
the fair values of its derivative assets and liabilities, for which observable prices in active markets are not available. These are
principally present value calculations based on estimated future cash flows arising from the instruments, discounted using a risk
adjusted interest rate.
The principal inputs to these valuation models are LIBOR and SONIA benchmark interest rates for the currencies in which the
instruments are denominated, being sterling, euros and US dollars. The cross-currency basis swaps have a notional principal related
to the outstanding currency borrowings and therefore the estimated rate of repayment of these notes also affects the valuation of the
swaps. However, variability in this input does not have a significant impact on the valuation, compared to other inputs.
In order to determine the fair values, the management applies valuation adjustments to observed data where that data would not
fully reflect the attributes of the instrument being valued, such as particular contractual features or the identity of the counterparty.
The management reviews the models used on an ongoing basis to ensure that the valuations produced are reasonable and reflect all
relevant factors. These valuations are based on market information and they are therefore classified as level 2 measurements. Details
of these assets are given in note 20.
Page 279
The Accounts Contingent consideration
The value of the contingent consideration balances shown in note 35 are required to be stated at fair value in the accounts. These
amounts are valued based on the expected outcomes of the performance tests set out in the respective sale and purchase
agreements, discounted as appropriate. The most significant inputs to these valuations are the Group’s forecasts on future activity
relating to business generated by operational units acquired, business derived as a result of the vendor’s contacts or other goodwill
and any other new business flows which are or might be attributable to the acquisition agreement, which are drawn from the overall
Group forecasting model. As such, these are classified as unobservable inputs and the valuations classified as level 3 measurements.
(b) Assets and liabilities carried at amortised cost
The fair values for financial assets and financial liabilities held at amortised cost, determined in accordance with the methodologies
set out below are summarised below.
The Group
Financial assets
Cash
Loans to customers
Sundry financial assets
Financial liabilities
Short-term bank borrowings
Asset backed loan notes
Secured bank borrowings
Retail deposits
Corporate and retail bonds
Other financial liabilities
The Company
Financial assets
Cash
Loans to group companies
Sundry financial assets
Financial liabilities
Corporate and retail bonds
Amounts owed to group companies
Other financial liabilities
Note
2020
2020
2019
2019
Carrying amount
Fair value
Carrying amount
Fair value
£m
£m
£m
£m
15
16
21
28
34
1,925.0
12,631.4
125.3
14,681.7
0.4
3,270.5
657.8
7,856.6
446.6
74.6
1,925.0
12,856.1
125.3
14,906.4
0.4
3,270.5
657.8
7,900.6
455.7
74.6
1,225.4
12,186.1
90.3
13,501.8
1.0
4,419.4
787.5
6,391.9
446.1
83.1
1,225.4
12,370.1
90.3
13,685.8
1.0
4,419.4
787.5
6,408.9
474.9
83.1
12,306.5
12,359.6
12,129.0
12,174.8
Note
2020
2020
2019
2019
Carrying amount
Fair value
Carrying amount
Fair value
£m
£m
£m
£m
15
21
21
34
34
12.6
84.0
0.6
97.2
446.6
22.7
2.9
472.2
12.6
84.0
0.6
97.2
455.7
22.7
2.9
481.3
14.1
106.6
0.7
121.4
446.1
23.8
3.6
473.5
14.1
106.6
0.7
121.4
474.9
23.8
3.6
502.3
The fair values of retail deposits and corporate and retail bonds shown above will include amounts for the related accrued interest.
Page 280
Cash, bank loans and securitisation borrowings
The fair values of cash and cash equivalents, bank loans and overdrafts and asset backed loan notes, which are carried at amortised
cost are considered to be not materially different from their book values. In arriving at that conclusion market inputs have been
considered but because all the assets mature within three months of the year end and the interest rates charged on financial liabilities
reset to market rates on a quarterly basis, little difference arises. This also applies to the parent company’s loans to its subsidiaries.
While the Group’s asset backed loan notes are listed, the quoted prices for an individual note may not be indicative of the fair value of
the issue as a whole, due to the specialised nature of the market in such instruments and the limited number of investors participating
in it.
As these valuation exercises are not wholly market based, they are considered to be level 2 measurements.
Loans to customers
To assess the likely fair value of the Group’s loan assets in the absence of a liquid market, the directors have considered the estimated
cash flows expected to arise from the Group’s investments in its loans to customers based on a mixture of market based inputs, such
as rates and pricing and non-market based inputs such as redemption rates. Given the mixture of observable and non-observable
inputs these are considered to be level 3 measurements.
Corporate debt
The Group’s retail and corporate bonds are listed on the London Stock Exchange and there is presently a reasonably liquid market
in the instruments. It is therefore appropriate to consider that the market price of these borrowings constitutes a fair value. As this
valuation is based on a market price, it is considered to be a level 1 measurement.
Retail deposits
To assess the likely fair value of the Group’s retail deposit liabilities, the directors have considered the estimated cash flows expected
to arise based on a mixture of market based inputs, such as rates and pricing and non-market based inputs such as withdrawal rates.
Given the mixture of observable and non-observable inputs, these are considered to be level 3 measurements.
Sundry assets and liabilities
Fair values of financial assets and liabilities disclosed as sundry assets and sundry liabilities are not considered to be materially
different to their carrying values.
These assets and liabilities are of relatively low value and may be settled at their carrying value at the balance sheet date or
shortly thereafter.
Page 281
The Accounts 66. Details of subsidiary undertakings
Subsidiary undertakings of the Group at 30 September 2020, where the share capital is held within the Group are shown below. The
holdings shown are those held within the Group. The shareholdings of the Company in the direct subsidiaries listed below are the
same as those held by the Group, except that:
•
for the shareholdings marked * the Company holds only 74% of the share capital
In these cases, the remainder is held by other group companies.
The issued share capital of all subsidiaries consists of ordinary share capital, except those companies marked § which have additional
preference share capital held within the Group.
Company
Holding
Principal activity
Direct subsidiaries of Paragon Banking Group PLC
Paragon Car Finance Limited
Idem Capital Holdings Limited
Moorgate Servicing Limited
Paragon Bank PLC
The Business Mortgage Company Limited
Paragon Mortgages (No. 9) PLC
Paragon Mortgages (No. 10) PLC
Paragon Mortgages (No. 11) PLC
Paragon Mortgages (No. 12) PLC
Paragon Mortgages (No. 13) PLC
Paragon Mortgages (No. 14) PLC
Paragon Mortgages (No. 15) PLC
Colonial Finance (UK) Limited
Earlswood Finance Limited
First Flexible (No. 7) PLC
Herbert (1) PLC
Herbert (2) PLC
Herbert (4) PLC
Herbert (5) PLC
Herbert (6) PLC
Herbert (7) PLC
Herbert (8) PLC
Herbert (9) PLC
Herbert (10) PLC
Paragon Car Finance (1) Limited
Paragon Dealer Finance Limited
Paragon Fourth Funding Limited
Paragon Loan Finance (No. 1) Limited
Paragon Loan Finance (No. 2) Limited
Paragon Mortgages (No. 5) PLC
Paragon Pension Investments GP Limited
Paragon Pension Plan Trustees Limited
Paragon Personal Finance (1) Limited
Paragon Secured Finance (No. 1) PLC
Paragon Third Funding Limited
Paragon Vehicle Contracts Limited
Plymouth Funding Limited
Paragon Loan Finance (No. 3) Limited
Page 282
100%
100%
100%
100%
100%
100% *
100% *
100% *
100% *
100% *
100% *
100% *
Vehicle finance
Intermediate holding company
Intermediate holding company
Deposit taking, residential mortgages and loan and vehicle finance
Mortgage broker
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
100%
100%
Non-trading
Non-trading
100% *
Non-trading
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100% §
100% §
100%
100%
100%
100%
100%
100%
100%
100%
100%
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Company
Holding
Principal activity
Direct subsidiaries of Paragon Banking Group PLC
Townend Farm (Easington) Management Company Limited
Universal Credit Limited
Yorkshire Freeholds Limited
Yorkshire Leaseholds Limited
Direct and indirect subsidiaries of Paragon Bank PLC
Paragon Finance PLC
Mortgage Trust Limited
Paragon Mortgages Limited
Paragon Mortgages (2010) Limited
First Flexible No. 6 PLC
Mortgage Trust Services PLC
Paragon Second Funding Limited
Paragon Asset Finance Limited
Paragon Business Finance PLC
Paragon Commercial Finance Limited
100%
100%
100%
100%
100%
100%
100%
100%
Non-trading
Non-trading
Non-trading
Non-trading
Residential mortgages and asset administration
Residential mortgages
Residential mortgages
Residential mortgages
100% §
Residential mortgages
100%
100%
100%
100%
80%
Residential mortgages and asset administration
Residential mortgages and loan and vehicle finance
Holding company and portfolio administration
Asset finance
Asset finance
Paragon Development Finance Limited
96.39%
Development Finance
Paragon Development Finance Services Limited
Paragon Technology Finance Limited
Premier Asset Finance Limited
PBAF Acquisitions Limited
Specialist Fleet Services Limited
City Business Finance Limited
Collett Transport Services Limited
Fineline Holdings Limited
Fineline Media Finance Limited
Homer Management Limited
Lease Portfolio Management Limited
Paragon Options PLC
State Securities Holdings Limited
State Security Limited
Direct and indirect subsidiaries of Idem Capital Holdings Limited
Moorgate Loan Servicing Limited
Idem (No. 3) Limited
Idem Capital Securities Limited
Paragon Personal Finance Limited
Other indirect subsidiary undertakings
Redbrick Survey and Valuation Limited
Buy to Let Direct Limited
Moorgate Asset Administration Limited
TBMC Group Limited
The Business Mortgage Company Services Limited
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Development Finance
Asset finance
Asset finance broker
Residential mortgages and loan finance
Asset finance and contract hire
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Asset administration
Asset investment
Asset investment
Consumer loan finance
Surveyors and property consulting
Non-trading
Non-trading
Non-trading
Non-trading
Page 283
The Accounts The financial year end of all of the Group’s subsidiary companies is 30 September. They are all registered in England and Wales and
operate in the UK except Paragon Pension Investments GP Limited, which is registered in Scotland and operates in the UK.
20% of the equity of Paragon Commercial Finance Limited is subject to a call option agreed as part of the acquisition of the company
by PAF. No material minority interest attaches to this holding. 3.61% of the nominal value of the share capital of Paragon Development
Finance Limited relates to shares subjects to put and call options issued pursuant to long-term incentive plans. No material minority
interest attaches to this holding.
As part of the Group’s financing arrangements certain mortgage and consumer loans originated by Paragon Mortgages (2010) Limited
and Mortgage Trust Limited or acquired by Idem Capital Securities Limited have been sold to special purpose entity companies,
which had raised non-recourse finance to fund these purchases. The shares of these companies are ultimately beneficially owned
through independent trusts, but they are considered to be controlled by the Group, as defined by IFRS 10, due to the Group’s
exposures to the variable returns from the assets of each entity and its ability to direct their activities, within the constraints imposed
by the lending documents. Hence, they are considered to be subsidiaries of the Group.
The principal companies party to these arrangements at 30 September 2020 comprise:
Principal activity
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Company
Paragon Seventh Funding Limited
Paragon Mortgages (No. 23) Holdings Limited
Paragon Mortgages (No. 23) PLC
Paragon Mortgages (No. 24) Holdings Limited
Paragon Mortgages (No. 24) PLC
Paragon Mortgages (No. 25) Holdings Limited
Paragon Mortgages (No. 25) PLC
Paragon Mortgages (No. 26) Holdings Limited
Paragon Mortgages (No. 26) PLC
Paragon Mortgages (No. 27) Holdings Limited
Paragon Mortgages (No. 27) PLC
Paragon Mortgages (No. 28) Holdings Limited
Paragon Mortgages (No. 28) PLC
Arianty Holdings Limited
Arianty No. 1 PLC
First Flexible No. 5 PLC
Paragon Fifth Funding Limited
Paragon Sixth Funding Limited
Paragon Mortgages (No. 18) Holdings Limited
Paragon Mortgages (No. 18) PLC
Paragon Mortgages (No. 19) Holdings Limited
Paragon Mortgages (No. 19) PLC
Paragon Mortgages (No. 20) Holdings Limited
Paragon Mortgages (No. 20) PLC
Paragon Mortgages (No. 21) Holdings Limited
Paragon Mortgages (No. 21) PLC
Paragon Mortgages (No. 22) Holdings Limited
Paragon Mortgages (No. 22) PLC
Page 284
All of these companies are registered and operate in the UK.
Earlswood Finance (No. 3) Limited, a company limited by guarantee, is registered in England and Wales and operates in the UK. It is
included in the consolidation as it is ultimately controlled by the parent company.
The Group accounts include the results of two Jersey companies, which are ultimately beneficially owned by a charitable trust, but
are considered to be controlled by the Group, using the definition contained in IFRS 10 - ‘Consolidated Financial Statements’. These
companies, Idem Jersey (No. 1) Limited and Idem Jersey (No. 2) Limited are registered in the Bailiwick of Jersey and operate in the UK.
The share capital of Idem Jersey (No. 1) Limited is divided into A shares and B shares. All of the 600 B shares are held by Group
companies, 100 by the parent company and 500 by other Group companies.
The Paragon Pension Partnership LP is a limited partnership established under Scots law, in which control is vested in members
which are Group companies. It is therefore considered to be a subsidiary entity. The outside member is the Group’s Pension Plan and
the Plan’s rights to income from the partnership are set out in the partnership agreement. Therefore, no minority interest arises. The
partnership is registered in Scotland and operates in the UK.
The registered office of each of the entities listed in this note is the same as that of the Company (note 1), except that:
•
The registered office of The Business Mortgage Company Limited, Buy to Let Direct Limited, TBMC Group Limited, and The
Business Mortgage Company Services Limited is Greenmeadow House, 2 Village Way, Greenmeadow Springs Business Park, Cardiff,
CF15 7NE
•
The registered office of State Security Limited is Burlington House, Botleigh Grange Office Campus, Grange Drive, Hedge End,
Southampton, SO30 2AF
• The registered office of the Scottish entities is Citypoint, 65 Haymarket Terrace, Edinburgh, EH12 5HD
• The registered office of the Jersey companies is IFC 5, St Helier, Jersey, JE1 1ST
All of the entities listed above are included in the consolidated accounts of the Group.
Homeloans (No. 7) LLP and Homeloans (No. 8) LLP are limited liability partnerships, established under English law, in which all of the
members are Group companies. They are currently in liquidation. Both are registered in England and Wales and operate in the UK.
Page 285
The Accounts Our chosen charity of the year for 2020 was
Macmillan Cancer Support and employees set
themselves an ambitious target to raise £30,000
through a variety of fundraising activities
E. Appendices to the
Annual Report
Additional financial information supporting amounts shown in the Strategic
Report (Section A), but not forming part of the statutory accounts
P288
E1. Appendices to the Annual Report
E1. Appendices to the Annual Report
For the year ended 30 September 2020
A. Underlying results
The Group reports underlying profit excluding fair value accounting adjustments arising from its hedging arrangements and certain
one-off items of income and costs relating to asset sales and acquisitions.
The fair value adjustments arise principally as a result of market interest rate movements, outside the Group’s control. They are profit
neutral over time and are not included in operating profit for management reporting purposes. They are also disregarded by many
external analysts.
The transactions relating to the asset disposals and acquisitions do not form part of the day-to-day activities of the Group and,
therefore, their removal provides greater clarity on the Group’s operational performance.
This definition of ‘underlying’ has been chosen following consideration of the needs of investors and analysts following the Group’s
shares, and because management feel it better represents the underlying economic performance of the Group’s business.
Profit on ordinary activities before tax
Less: Gain on disposal of financial assets
Add back: Fair value adjustments
Underlying profit
2020
£m
118.4
-
1.6
120.0
2019
£m
159.0
(9.7)
15.1
164.4
Underlying basic earnings per share, calculated on the basis of underlying profit, charged at the overall effective tax rate, is derived as
follows.
2020
£m
120.0
(27.5)
92.5
253.6
36.5p
2020
£m
92.5
2.0
94.5
961.6
9.8%
2019
£m
164.4
(32.7)
131.7
257.6
51.1p
2019
£m
131.7
2.4
134.1
920.7
14.6%
Underlying profit
Tax at effective rate (note 12)
Underlying earnings
Basic weighted average number of shares (note 14)
Underlying earnings per share
Underlying return on tangible equity is derived using underlying earnings calculated on the same basis.
Underlying earnings
Amortisation of intangible assets (note 9)
Adjusted underlying earnings
Average tangible equity (note 54(b))
Underlying RoTE
Page 288
B. Income statement ratios
Net interest margin (‘NIM’) and cost of risk (impairment charge as a percentage of average loan balance) for the Group are calculated
as follows:
Year ended 30 September 2020
Opening loans to customers
Closing loans to customers
Average loans to customers
Net interest
NIM
Impairment provision
Cost of risk
Year ended 30 September 2019
Opening loans to customers
Closing loans to customers
Average loans to customers
Net interest
NIM
Impairment provision
Cost of risk
Not all interest is allocated to segments (note 2).
Note
Mortgage
Lending
Commercial
Lending
16
16
19
Note
16
16
19
£m
10,344.1
10,819.5
10,581.8
190.0
1.80%
25.8
0.24%
Mortgage
Lending
£m
10,449.5
10,344.1
10,396.8
177.8
1.71%
1.0
0.01%
£m
1,452.1
1,514.8
1,483.4
82.1
5.53%
21.7
1.46%
Commercial
Lending
£m
1,131.3
1,452.1
1,291.8
65.0
5.03%
7.2
0.56%
Idem
Capital
£m
389.9
297.1
343.5
26.1
7.60%
0.8
0.23%
Idem
Capital
£m
519.8
389.9
454.8
54.3
11.94%
(0.2)
(0.04)%
Total
£m
12,186.1
12,631.4
12,408.7
278.1
2.24%
48.3
0.39%
Total
£m
12,100.6
12,186.1
12,143.4
278.4
2.29%
8.0
0.07%
Page 289
Appendices Note
9
2020
£m
126.8
295.1
43.0%
2020
£m
126.8
126.8
295.1
-
295.1
43.0%
2019
£m
125.2
307.3
40.7%
2019
£m
125.2
125.2
307.3
(9.7)
297.6
42.1%
Note
2020
1,156.0
2019
1,108.4
38
40
40
54
261.8
(5.2)
(3.6)
253.0
£4.57
985.9
£3.90
261.6
(5.2)
(3.9)
252.5
£4.39
937.3
£3.71
C. Cost:income ratio
Cost:income ratio is derived as follows:
Cost – operating expenses
Total operating income
Cost / Income
Underlying cost:income ratio is derived as follows:
Cost – as above
Adjusted cost
Income – as above
Gain on disposal of financial asset
Adjusted income
Underlying cost:income ratio
D. Net asset value
Total equity (£m)
Outstanding issued shares (m)
Treasury shares (m)
Shares held by ESOP schemes (m)
Net asset value per £1 ordinary share
Tangible equity (£m)
Tangible net asset value per £1 ordinary share
Page 290
Page 291
Appendices F. Useful information
Information which may be helpful to shareholders and other users of the
Annual Report and Accounts
P294
F1. Glossary
A summary of abbreviations used in the Annual Report and Accounts
P296
F2. Shareholder information
Information about dividends, meetings and managing shareholdings
P298
F3. Other Public Reporting
Current and future public reporting information for the Group
P299
F4. Contacts
Names and addresses of the Group’s advisers
F1. Glossary
AGM
ALCO
ASHE
AT1
BBLS
BBR
BCBS
BEIS
BEPS
BGS
CAGR
CBI
CBILS
CCC
CCoB
CCP
CCyB
CEO
CET1
CFO
CGU
CIIA
CIPD
CMI
CML
C(MR)R
CO2
COO
Compliance
Plan
CPI
CRD IV
CRDs
CRO
CRR
CSA
CSOP
CTRF
DEFRA
Deloitte
DISP
Annual General Meeting
Asset and Liability Committee
Annual Survey of House and Earnings
Additional Tier 1
Bounce Back Loan Scheme
Bank Base Rate
Basel Committee on Banking Supervision
Department for Business, Energy and
Industrial Strategy
Base Erosion and Profit Shifting
Balance Guarantee Swaps
Compound Annual Growth Rate
Confederation of British Industry
Coronavirus Business Interruption Loan Scheme
Customer and Conduct Committee
Capital Conservation Buffer
Central Counterparty
Counter-Cyclical Buffer
Chief Executive Officer
Core Equity Tier 1
Chief Financial Officer
Cash Generating Unit
Chartered Institute of Internal Auditors
Chartered Institute of Personnel Development
Chartered Management Institute
Council of Mortgage Lenders
Companies (Miscellaneous Reporting)
Regulations 2018
Carbon Dioxide
Chief Operating Officer
Compliance Monitoring Plan
Consumer Price Index
The current EU Capital Requirements
Regulation and Directive Regime
Cash Ratio Deposits
Chief Risk Officer
Capital Requirements Regulation – EU
Regulation 575/2013
Credit Support Annex
Company Share Option Plan
Contingent Term Repo Facility
Department for Environment, Food
and Rural Affairs
Deloitte LLP
FCA’s Dispute Resolution: Complaints
Sourcebook
DSBP
Deferred Share Bonus Plan
Disclosure and Transparency Rule
European Banking Authority
Expected Credit Loss
Equality, Diversity and Inclusion
Effective Interest Rate
DTR
EBA
ECL
EDI
EIR
Page 294
EPC
EPS
EQA
ERC
ESG
ESOP
ESOS
EU
EUR
Energy Performance Certificate
Earnings per Share
External Quality Assessment
Estimated Remaining Collections
Environmental, Social and Governance
Employee Share Ownership Plan
Energy Savings and Opportunities Scheme
European Union
Euro
EURIBOR
Euro Interbank Offered Rate
EV
ExCo
FCA
FLA
FLS
FOS
FRC
FRN
FSC
FSCS
FVTPL
GDP
GHG
GMP
HA
HMRC
HPI
HQLA
HR
IAS
IASB
IBE
IBOR
ICAAP
IFRS
IIP
ILAAP
ILG
ILTR
IMLA
IRB
IRRBB
ISA
ISDA
Economic Value
Executive Performance Committee
Financial Conduct Authority
Finance and Leasing Association
Funding for Lending Scheme
Financial Ombudsman Service
Financial Reporting Council
Floating Rate Note
Forest Stewardship Council
Financial Services Compensation Scheme
Fair Value Through Profit and Loss
Gross Domestic Product
Greenhouse Gases
Guaranteed Minimum Pension
Hampton-Alexander
Her Majesty’s Revenue and Customs
House Price Index
High Quality Liquid Assets
Human Resources
International Accounting Standard(s)
International Accounting Standards Board
Institute of Business Ethics
Interbank Offered Rates
Internal Capital Adequacy Assessment Process
International Financial Reporting Standard(s)
Investors in People
Internal Liquidity Adequacy Assessment Process
Individual Liquidity Guidance
Indexed Long Term Repo Scheme
Intermediary Mortgage Lenders Association
Internal Ratings Based
Interest Rate Risk in the Banking Book
Individual Savings Account
International Swaps and Derivatives Association
ISO14001:2015 International Organization for Standardization
14001:2015, ‘Environmental Management
Systems’
ISO45001:2018 International Organization for Standardization
45001:2018, ‘Management Systems of
Occupational Health and Safety’
KPMG
LCR
KPMG LLP, the Group’s auditor
Liquidity Coverage Ratio
LGD
LIBOR
Ltd
LTGDV
LTIP
LTV
M&A
MRC
MRT
MWh
NHS
NI
NII
NIM
Notes
NPS
NSFR
OBR
OCI
OFGEM
OHSMS
OLAR
ONS
ORC
PAF
PAYE
PD
PFP
PIDA
PIEs
PLC
PMA
PM12
PM26
POCI
PPI
PRA
Loss Given Default
London Interbank Offered Rate
Limited (company)
Loan to Gross Development Value
Long-term Incentive Plan
Loan to Value
Mergers and Acquisitions
Model Risk Committee
Material Risk Taker
Mega-Watt Hours
National Health Service
National Insurance
Net Interest Income
Net Interest Margin
Asset backed loan notes
Net Promoter Score
Net Stable Funding Ratio
Office of Budget Responsibility
Other Comprehensive Income
Office of Gas and Electricity Markets
Occupational Health and Safety
Management System
Overall Liquidity Adequacy Requirement
Office for National Statistics
Operational Risk Committee
Paragon Asset Finance
Pay As You Earn
Probability of Default
Pension Funding Partnership
Public Interest Disclosure Act 1998
Public Interest Entities
Public Limited Company
Post-model Adjustments
Paragon Mortgages (No.12) PLC
Paragon Mortgages (No.26) PLC
Purchased or Originated Credit Impaired (assets)
Payment Protection Insurance
Prudential Regulation Authority
(of the Bank of England)
Premier
Premier Asset Finance Limited
PRP
PRS
PSP
PwC
RBA
RBS
RCC
RICS
RIDDOR
RMBS
RoR
Profit Related Pay
Private Rented Sector
Performance Share Plan
PricewaterhouseCoopers
Role Based Allowance
Royal Bank of Scotland
Risk and Compliance Committee
Royal Institution of Chartered Surveyors
Reporting of Incidents, Disease and Dangerous
Occurrences Regulation 2013
Residential Mortgage Backed Securities
Receiver of Rent
RoTE
ROU
RPI
RP
RSUs
RWA
RWG
SA
Return on Tangible Equity
Right of Use
Retail Price Index
Recovery Plan
Restricted Stock Units
Risk Weighted Assets
Risk Working Group
Standardised Approach
Schedule 7
Schedule 7 to the Large and Medium-sized
Companies and Groups (Accounts and Reports)
Regulations 2008
SFS
SICR
SID
Specialist Fleet Services
Significant Increase in Credit Risk
Senior Independent Director
Sharesave
All Employee Share Option scheme
SME
SMF
SMCR
SONIA
SPPI
SPV
Small and / or Medium-sized Enterprise(s)
Senior Management Function
Senior Managers and Certification Regime
Sterling Overnight Interbank Average Rate
Solely Payments of Principal and Interest
Special Purpose Vehicle
The 2018 Code UK Corporate Governance Code (2018 version)
TBMC
TFS
TFSME
The Act
The Business Mortgage Company
Term Funding Scheme
Term Funding Scheme for SMEs
The Companies Act 2006
The Articles
The Articles of Association of the Company
The Bank
Paragon Bank PLC
The Company
Paragon Banking Group PLC
The Group
The Order
The Company and all of its subsidiary
undertakings
The Statutory Audit Services for Large
Companies Market Investigation (Mandatory
Use of Competitive Tender Processes and Audit
Committee Responsibilities) Order 2014
The Plan
The Paragon Pension Plan
TRC
TRE
TPF
TSR
UK
UKF
Total Regulatory Capital
Total Risk Exposure
Titlestone Property Finance Limited
Total Shareholder Return
United Kingdom
UK Finance
UK GAAP
UK Generally Accepted Accounting Practice
US
USD
United States of America
US Dollar
US Dollar LIBOR The London Interbank Offered Rate on
balances denominated in US dollars
VAT
WEEE
WFH
Value Added Tax
Waste Electrical and Electronic Equipment
Working from Home
Page 295
Useful Info F2. Shareholder information
Want more information or help?
The Company’s share register is maintained by our Registrars, Computershare, who you should contact directly if you have
questions about your shareholding or wish to update your address details.
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Telephone: 0370 707 1244*
and outside the UK +44 (0)370 707 1244
Online: www.investorcentre.co.uk
*Calls are charged at the standard geographic rate and will vary by provider. Calls outside the UK will be charged at the applicable international rate.
Lines are open 8:30am to 5:30pm, Monday to Friday, excluding UK public holidays.
Electronic communications
You can view and manage your shareholding online by registering with Computershare’s Investor Centre Service. To register:
• Visit www.investorcentre.co.uk
• Go to ‘Manage my shareholdings’
• Register using your Shareholder Reference Number and your postcode
We actively encourage our shareholders to receive communications via email and view documents electronically on our website,
including our Annual Report and Accounts, as this has significant environmental and cost benefits. Should you wish to receive
electronic documents please contact Computershare by telephone or online.
Website
You can find further useful information on our website, www.paragonbankinggroup.co.uk, including:
• Regular updates about our business
• Comprehensive share price information
• Financial results and reports
• Historic dividend dates and amounts
Page 296
Financial calendar
January 2021
Trading update
June 2021
Half-year results
Dividend calendar
July 2021
Trading update
December 2021
Full-year results
28 January 2021
1 July 2021
Ex-dividend date for 2020 final dividend
Ex-dividend date for 2021 interim dividend
29 January 2021
2 July 2021
Record date for 2020 final dividend
Record date for 2021 interim dividend
26 February 2021
23 July 2021
Payment date for 2020 final dividend
Payment date for 2021 interim dividend
Annual General Meeting
24 February 2021
Shareholder fraud warning
Shareholders are advised to be very wary of any suspicious or unsolicited advice or offers, whether over the telephone, through the
post or by email. If you receive any such unsolicited communication, please check the company or person contacting you is properly
authorised by the Financial Conduct Authority (‘FCA’) before getting involved. You can check at www.fca.org.uk/consumers/
protect-yourself and can report calls from unauthorised firms to the FCA by calling 0800 111 6768.
Duplicate documents and communications
If you receive more than one copy of shareholder documents, it is likely that you have multiple accounts on the share register,
perhaps with a slightly different name or address. To combine your shareholdings, please contact Computershare and provide your
Shareholder Reference Number.
Page 297
Useful Info F3. Other Public Reporting
In addition to its annual financial reporting the Group has published, or will publish, the following documents in respect of the year
ended 30 September 2020, as required by legislation or regulation, relating to the Group or its constituent entities.
• Pillar III disclosures required by Part 8 of the CRR
• Tax Strategy Statement
• Modern Slavery Statement
• Gender pay gap information
These documents are made available on the Group’s website at www.paragonbankinggroup.co.uk.
All of these statements are required to be published annually. In addition, for the year ended 30 September 2020, the Group has had
to publish bi-annual statements on supplier payments under the Reporting on Payment Practices and Performance Regulations 2017.
It also made its fourth report against its Women in Finance charter commitments in September 2020.
All of this reporting will be continued in the financial year ending 30 September 2021.
Page 298
F4. Contacts
Registered and head office
London office
51 Homer Road
Solihull
West Midlands B91 3QJ
Telephone: 0121 712 2323
Tower 42 Level 12
25 Old Broad Street
London EC2N 1HQ
Telephone: 020 7786 8474
Investor Relations
investor.relations@paragonbank.co.uk
Company Secretariat
company.secretary@paragonbank.co.uk
Internet
www.paragonbankinggroup.co.uk
Auditor
Solicitors
Registrars
Brokers
KPMG LLP
One Snowhill
Snow Hill Queensway
Birmingham B4 6GH
Slaughter and May
One Bunhill Row
London EC1Y 8YY
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Telephone: 0370 707 1244
Jefferies International Limited
100 Bishopsgate
London EC2N 4JL
Peel Hunt LLP
Moor House
120 London Wall
London EC2Y 5ET
UBS Limited
5 Broadgate
London EC2M 2QS
Remuneration consultants
Consulting actuaries
Deloitte LLP
Four Brindleyplace
Birmingham B1 2HZ
Mercer Limited
Four Brindleyplace
Birmingham B1 2JQ
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GRP0003-001 (01/2021)
PARAGON BANKING GROUP PLC
51 Homer Road, Solihull, West Midlands B91 3QJ
Telephone: 0345 849 4000
www.paragonbankinggroup.co.uk
Registered No. 2336032