ANNUAL REPORT
20
21
Paragon Banking Group PLC
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 but are
not the exclusive means of identifying such statements. 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 or revise these forward-looking statements for any reason other than in accordance with its legal or regulatory obligations
(including under the UK Market Abuse Regulation, UK Listing Rules and the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority (‘FCA’)).
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 also 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 pandemic and ongoing challenges and uncertainties posed by the Covid pandemic for businesses and governments around the world, including the duration,
spread and any recurrence of the Covid pandemic and the extent of the impact of the Covid pandemic on overall demand for the Group’s services and products; potential changes
in 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 pandemic); actions by the Group’s
competitors or counterparties; third party, fraud and reputational risks inherent in its operations; the UK’s exit from the EU; unstable economic conditions and market volatility,
including currency fluctuations; the risk of a global economic downturn; technological changes and risks to the security of IT and operational infrastructure, systems, data and
information resulting from increased threat of cyber and other attacks; general changes in government policy that may significantly influence investor decisions (including, without
limitation, actions taken in support of managing and mitigating climate change and in supporting the global transition to net zero carbon emissions); societal shifts in customer
financing and investment needs; and other risks inherent to the industries in which the Group operates.
Nothing in this Annual Report should be construed as a profit forecast.
Contents
Financial Highlights
Results in brief
Highlights
Financial highlights
Strategic Report
The business and its performance in the year
A1. Chair of the Board's introduction
A2. Business model and strategy
A3. Chief Executive’s review
A4. Review of the year
A5. Future prospects
A6. Citizenship and sustainability
A7.
Approval of Strategic Report
Corporate Governance
How the business is controlled and how risk is managed
B1. Chair's statement on corporate governance
B2. Corporate governance statement
B3. Board of Directors and senior management
B4. Governance framework
B5. Nomination Committee
B6. Audit Committee
B7. Remuneration Committee
B8. Risk management
B9. Directors’ report
B10.Statement of directors’ responsibilities
Independent Auditor’s Report
On the financial statements
Page 4
Page 5
Page 8
Page 10
Page 26
Page 29
Page 54
Page 57
Page 75
Page 78
Page 80
Page 82
Page 88
Page 102
Page 105
Page 114
Page 145
Page 157
Page 160
C1.
Independent auditor’s report to the members of Paragon Banking Group PLC
Page 164
The Accounts
The financial statements of the Group
D1. Primary financial statements
D2. Notes to the accounts
Appendices to the Annual Report
Additional financial information
Page 174
Page 181
E1.
Appendices to the Annual Report
Page 304
Useful information
Additional information for shareholders and other users
F1. Glossary
F2. Shareholder information
F3. Other public reporting
F4. Contacts
Page 310
Page 312
Page 314
Page 315
Highlights For the year ended 30 September 2021
BUY-TO-LET MORTGAGES
SAVINGS
Specialist landlords
generate over 95% of
new buy-to-let business
Savings deposits
pass £9 billion
COMMERCIAL LENDING
Commercial lending
customer base now
over 35,000 small and
medium sized businesses
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
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
2021
£m
194.2
213.7
164.5
13,402.7
1,241.9
2021
16.2%
65.2p
63.0p
26.1p
The exclusions from underlying results relate principally to acquisitions and significant asset sales in prior periods, 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 concerned. The underlying
basis also excludes fair value postings arising from hedging activities, but not qualifying for hedge accounting.
The calculation of return on tangible equity (‘RoTE’) is shown in note 53b. The derivation of underlying profit before taxation and other
underlying measures is described in Appendix A.
Page 4
Financial highlights
Underlying profit before tax
£194.2 million 61.8% higher (2020: £120.0 million)
Profit before tax
£213.7 million 80.5% higher (2020: £118.4 million)
£145.2m
£156.5m
£164.4m
£194.2m
£120.0m
£200m
£150m
£100m
£50m
£0m
£144.8m
£181.5m
£159.0m
£118.4m
£213.7m
£250m
£200m
£150m
£100m
£50m
£0m
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
Underlying basic earnings per share
59.3 pence 62.5% higher (2020: 36.5 pence)
Basic earnings per share
65.2 pence 81.1% higher (2020: 36.0 pence)
43.3p
48.2p
51.2p
59.3p
36.5p
80p
60p
40p
20p
0p
55.9p
49.4p
43.1p
36.0p
65.2p
80p
60p
40p
20p
0p
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
Dividend per share
26.1 pence 81.3% higher (2020: 14.4 pence)
Capital - CET1 ratio
15.4% Strengthened in the year (2020: 14.3%)
19.4p
21.2p
15.7p
14.4p
26.1p
30p
25p
20p
15p
10p
5p
0p
20%
15%
10%
5%
0%
15.9%
13.8%
13.7%
14.3%
15.4%
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
Total loans to customers
£13.4 billion 6.1% higher (2020: £12.6 billion)
Retail deposits
£9.3 billion 18.4% higher (2020: £7.9 billion)
£12.1b
£12.2b
£12.6b
£13.4b
£11.1b
£15b
£10b
£5b
£0b
£9.3b
£7.9b
£6.4b
£5.3b
£3.6b
£10b
£8b
£6b
£4b
£2b
£0b
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
Underlying return on tangible equity
14.7% (2020: 9.8%)
Return on tangible equity
16.2% (2020: 9.7%)
13.5%
14.0%
14.6%
14.7%
9.8%
20%
15%
10%
5%
0%
13.4%
16.1%
14.1%
16.2%
9.7%
20%
15%
10%
5%
0%
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
Page 5
EDI Network
Our Equality, Diversity and Inclusion Network,
formed in 2020, works together to support all
employees and champion ideas to make Paragon
an even more inclusive workplace.
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
P26
A3. Chief Executive’s review
Strategic summary of the Group’s performance and position
P29
A4. Review of the year
The financial and operational performance of the Group in the year
P54
A5. Future prospects
How the Group is placed looking forward
P57
A6. Citizenship and sustainability
The Group’s impact on its employees, the environment and the community,
including non-financial reporting
P75
A7. Approval of Strategic Report
Approval of the Strategic Report
A1. Chair of the
Board's introduction
We are able to enter the new
financial year with increased
strength and confidence...
Fiona Clutterbuck, Chair of the Board
Dear Shareholder
The year you will read about in this annual report was a
challenging one, but despite that, the Group delivered
exceptional results. The Covid pandemic continued to impact
the UK throughout the year, with considerable uncertainty
remaining as the year closed and we face the prospect of a
second winter with the virus. However, many of the worst fears
of twelve months ago for the progress of the pandemic failed to
materialise, and we are able to enter the new financial year with
increased strength and confidence.
In compiling this report, we have tried to explain both the
unfolding of the Group’s strategy, and the continuing impact
of the pandemic, in a way that enables you, and all our other
stakeholders to thoroughly understand our developing
business and its financial results for the year. I hope you find
it useful.
The business and its purpose
The Group’s purpose is to support the ambitions of the people
and businesses of the UK by delivering specialist financial
services. We do not seek to compete with mass market banks,
but instead focus on customers who will value an expert
approach, and who may otherwise be underserved by the
banking sector as a whole.
Our business is managed through three lending divisions,
Mortgage Lending, 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.
Despite the impact of the pandemic, all our businesses
continued to make progress on their strategic aims, developing
new products, systems and approaches. Our people delivered
these enhancements while coping with changes in working
practices throughout the year, as government advice changed.
Through the second half of the year new lending grew strongly
across the business and the performance of the loan book
remained robust, even as the impact of government support
began to recede.
The Group’s ability to provide support for our people,
customers and intermediaries throughout the pandemic
demonstrates the resilience of our proposition.
The Group’s business model and purpose are described
more fully in Section A2
Page 8
Results
The Group’s new lending in the year was £2.6 billion, a
significant increase from £2.0 billion in 2020 despite some
constraint on volumes in the first half of the year. The savings
deposit base continued to grow, reaching £9.3 billion, from
£7.9 billion at 30 September 2020, a green Tier-2 Bond was
issued, and the Bank of England TFSME programme continued
to be accessed.
The Group achieved its highest ever underlying profit in
the year, at £194.2 million, increased from £120.0 million in
the previous year, partly as a result of provisions unwinding
as the economic outlook became more positive. Profit
before tax on the statutory basis increased to £213.7 million
from £118.4 million, with the difference between the two
measures a result of the impact of interest rate fluctuations
on hedging instruments.
Underlying earnings per share (‘EPS’) increased to 59.3 pence
(2020: 36.5 pence) and statutory EPS increased to 65.2 pence
(2020: 36.0 pence). Underlying RoTE was 14.7% (2020: 9.8%),
16.2% on the statutory basis (2020: 9.7%), all reflecting the
growth in earnings year-on-year.
Regulatory capital has remained strong during the period, with
the year end Core Equity Tier 1 (‘CET1’) ratio reaching 15.4%
(2020: 14.3%) and the capital surplus also increasing as a result
of a positive capital review by the regulator. Group liquidity was
also maintained at a healthy level.
The financial results and operational performance are
reviewed in Section A3
Stakeholders
The Group takes its responsibility to all stakeholder groups
very seriously and we acknowledge our duties as a corporate
citizen. During the Covid pandemic our priorities have been to
protect the interests of customers, employees and suppliers
as well as preserving shareholder value.
I continue to be hugely impressed by the resilience of our
people in the face of the pandemic and I found it very helpful
to hear some of their stories first-hand at the Group’s People
Forum. I was therefore pleased that we could announce
enhanced holiday provision for all our employees during
the year.
Diversity continues to be a focus of our employment policies
and the additional impetus given to this agenda by the
establishment of the Equality, Diversity and Inclusion (‘EDI’)
Network in its first year of operation has been very welcome.
Towards the end of the year I was gratified to receive the
news that the Group has achieved its first phase targets
under the Women in Finance initiative, and continued to meet
the expectations of the FTSE Women Leaders project. I am
confident that these will form a solid basis for the Group’s
further development in this area.
The Group continued to progress its climate change agenda
across a number of fronts. Green products have been
developed in various parts of the business, data-gathering
and analysis has been enhanced and we have contributed
to various industry initiatives in the year. The Group became
a TCFD Supporter during the year and disclosures in this
annual report have been developed as we move towards the
introduction of TCFD into the UK Listing Rules.
The Group will also publish its first sustainability report, the
'Responsible Business Report' during December 2021.
Social responsibility and citizenship issues are discussed
in Section A6
Governance
The Group continues to operate under the UK Corporate
Governance Code, complying with its provisions in the year. As
I have now served on the Board for more the nine years, I will
be stepping down once a new Chair has been appointed, and
an appropriate handover has taken place.
I was pleased to welcome Peter Hill, the former Chief Executive
of the Leeds Building Society, to the Board during the year as
an independent non-executive director and Chair of the Risk
Committee. His long experience in the UK financial services
sector will be very valuable to us.
Finlay Williamson stepped down from the Board in December
2020, having overseen the development of the risk processes
of Paragon Bank, and later the Group, from the Bank’s earliest
days. I thank him for his contribution.
The ongoing Covid crisis has continued to put pressure on
Board members, both through increased workloads and also
from the impact of new working methods, and therefore I was
delighted to meet my colleagues in person for the first time in
many months towards the end of the year. I would like to thank
them all for their commitment over this difficult period.
Corporate governance is discussed in Section B3
Risk
The Group continues to focus on the strategic development
of its risk management processes, with the Enterprise Risk
Management Framework (‘ERMF’) a particular area of focus in
the year. The continuing evolution of working arrangements in
response to Covid, and the consequent adaptation of control
processes, made it a priority to ensure that risk management
within the Group was maintained.
The impact of new products and the Group’s participation in
government-backed lending schemes also saw new processes
and controls brought into the risk framework. The Group’s
management of risk remains strong and ready to face any
future challenges, whether from Covid or other factors.
The Risk Management report is set out in Section B8
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Shareholder returns
The Group is committed to maintaining the strength of
its capital base, whilst providing appropriate returns to
shareholders. The trading performance through the year
remained strong and the results of the latest regulatory
review endorsed the effectiveness of our capital management
processes and governance. During the year, following
significant capital stress testing, the Board was able to declare
an interim dividend at the half year, and announce a share
buy-back programme of up to £40.0 million at the same time.
Having reviewed the capital position at the year end, the Board
concluded that a final dividend for the year of 18.9 pence
per share can be declared, subject to shareholder approval,
bringing the total dividend for the year to 26.1 pence per share,
and giving a dividend cover of 2.5 times, broadly in line with
policy. It also authorised up to £50.0 million of share
buy-backs, in addition to the £2.2 million required to complete
the £40.0 million programme announced in June 2021. We
would like to thank our shareholders for their continuing
support during the year.
Conclusion
As I noted above, this is likely to be the last time I write to
you as Chair of the Board, and I find myself reflecting on the
changes I have seen since joining the Board in September
2012. In that period the Group has received its banking
licence, building a £9 billion deposit franchise from scratch;
new lending in the Group’s buy-to-let mortgage operation has
increased almost ten-fold; significant development finance and
SME lending operations have been established; and operating
profit more than doubled.
More recently, the Covid crisis has demonstrated the Group’s
operational robustness and its ability to respond rapidly to new
situations, developing new processes, systems and ways of
working. This is a tribute to the culture and spirit of the Group’s
people and the strength of the relationships on which the
business is based. In my view this is the best demonstration
of our ability to live the values of fairness, professionalism,
integrity, humour, commitment, creativity, teamwork and
respect, and of the positive results that these bring.
I would like to take this opportunity to thank my colleagues on
the Board, past and present, for their challenge and counsel.
I must also thank the Group’s managers and people both for
their support for me personally during my tenure, and for their
efforts on behalf of the business.
The underlying fundamentals of the Group’s business are
sound, our business plans and capital base are robust, and
despite the short-term economic uncertainties, I believe that
the Group is well placed to move forward.
I wish the Group all possible success for its future and hope
that my successor as Chair, whoever they may be, finds the
position as rewarding as I have.
Fiona Clutterbuck
Chair of the Board
7 December 2021
Page 9
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 almost 1,450 people.
Our operations are organised into three divisions and new lending is funded largely by retail deposits.
Our operations
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 18 and 19
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 facilities for
non-bank lenders.
See pages 20 to 23
Idem Capital
We acquire and service UK loan portfolios from other financial institutions.
Funding
Since gaining our banking licence in 2014, our principal source of funding for new lending has been
through 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 elements
of the book and is used tactically. Central funding is provided through corporate and retail bonds.
See pages 16 and 17
Page 10
Page 10
Headquarters
Solihull, West Midlands
Our purpose
Paragon’s purpose is to support the ambitions of the
people and businesses of the UK by delivering specialist
financial services.
This provides the foundation for everything we do and today
we are helping more than 400,000 customers to achieve
their ambitions.
We have helped the UK to develop a thriving private rented
sector over the last 25 years, supporting landlords up and
down the country to invest in and build valuable businesses
that deliver flexibility for those who choose to rent, homes for
students and for people who simply can’t afford to buy their
own home.
We are helping property developers turn unused sites into new
housing, addressing the continuing housing shortage in the
UK, and small and medium sized businesses deliver
post-pandemic recovery. We’re supporting savers to reach
personal goals – providing them with better returns to save
towards a holiday or a deposit for a house.
As a specialist bank, we focus on lending to customers who
require specialist products in markets typically underserved
by larger high street banks. 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 and as
our competitive advantage, and it runs through our business
model and strategy.
This strategy relies on the quality of our people. By living our
purpose, we can help them achieve their own ambitions to
grow and develop, to enjoy a successful career and to build
strong foundations for their own lives.
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Our values
We have a strong and unique culture underpinned by eight essential values, which we strive to live up to 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.
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 11
Page 11
Strategic Report
Our strategy
Our strategy is driven by our purpose and helps us achieve our vision
to become the UK’s leading technology-enabled specialist bank and an
organisation of which our employees are proud.
We focus on specialist customers and aim to deliver long-term
sustainable growth and shareholder returns through a low risk and
robust model. We have five clear strategic priorities that help us deliver
our strategy, underpinned by three strategic pillars.
Our strategic priorities
Growth
We are focused on growing
our lending in specialist
market segments where
customers are underserved
by the large high street banks.
Using our expert knowledge
and experience, we aim to
grow both organically and
by acquisition, in a low-risk
robust manner, that allows
us to balance our stakeholder
needs while moving
towards sustainable
long-term returns.
Diversification
We are continually developing our
range of savings and specialist
lending products, in both existing
and new markets, to grow our
business and to help us succeed
in becoming the UK’s leading
technology-enabled specialist
bank. We are also seeking to
reduce barriers to growth in UK
banking through our move toward
an Internal Ratings Based ('IRB')
approach to capital measurement
and a growing and increasingly
segmented funding strategy.
Our strategic pillars
A customer focused culture
Expert knowledge and experience, supported by
proprietary insight, data and analytics ensuring a deep
understanding of our specialist customers and markets.
A dedicated team
An experienced, skilled and engaged
workforce, and a unique culture
underpinned by eight values.
Principal risks
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.
We have an Enterprise Risk Management
Framework ('ERMF') in place to ensure that these
risks are monitored and managed in accordance
with the Group’s risk appetite. These risks and the
steps the Group takes to safeguard against them
are discussed in more detail in Section B8.
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.
Strategic
Changes to business model or
environmental factors may lead
to an inappropriate or obsolete
strategy or strategic plan.
Capital
Insufficient capital to operate
effectively and meet minimum
requirements.
Page 12
Our strategic pillars
Digitalisation
The transformation of our
technology is focused on
implementing sophisticated,
digitally-enabled, cloud-based
platforms that will allow
us to deliver outstanding
customer service, become
more efficient and support
decision making, whilst
retaining the flexible and
specialist capabilities that
our customers desire.
Advances in technology are
also helping us expand our
addressable market and reach
new customers directly and
through intermediaries
and partnerships.
Capital management
A strong and diverse balance
sheet is fundamental to the
Group's success and forms
one of our three strategic
pillars. Management of
capital is a critical lever
as we invest to grow our
business and people while
evolving our technology, risk,
governance and enterprise
frameworks with a goal of
delivering a sustainable
return on tangible equity
in excess of 15%.
Sustainability
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, doing the right
thing and delivering sustainable
lending through the products
we offer and markets in which
we operate, enabling our
customers to meet their own
targets. Strong environmental,
social and governance ('ESG')
qualities are embedded in the
Group's culture and values,
and influence every aspect
of our business.
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Strong financial foundations
Prudentially strong, with a low-risk approach
to lending, reducing volatility of earnings and
enhancing sustainability of dividends.
Model
Making incorrect decisions based on the
output of internal models.
Reputational
Failing to meet the expectations and
standards of our stakeholders.
Credit
Financial loss arising from a borrower or counterparty
failing to meet their financial obligations.
Climate change
Financial risks arising through climate change
impacting the Group and our strategy.
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.
Page 13
Our business model
Our business model is designed to allow us to add
value by focusing on meeting the specialist needs
of a broad range of customers, while positioning
ourselves to deliver returns for shareholders and
meet our broader obligations to society.
WHAT WE DO...
A broad funding base
We fund our assets using a variety
of sources and take care to
secure competitive funding over
an appropriate term to underpin
our assets, meet working capital
requirements and maintain a
strong financial position.
Retail
deposits
Securitisation
Bond
issuance
Central bank
funding
USING OUR CORE STRENGTHS...
Customer expertise
Risk management
We have a deep understanding
of our customers and their
markets, designing products
to meet their needs and
continually striving to exceed
their expectations.
650 million+
items of customer data
analysed each month
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.
Net release of
impairment provision
£4.7 million
Technology
Management expertise
We are utilising technology
to improve productivity and
access new markets, and are
well placed to take advantage
of digital changes to expand our
addressable customer base.
New asset
finance portal
for intermediaries
launched during 2021
to increase automation
and efficiency
We have an experienced
management team with
a through-the-cycle
track record.
Average length of
service for the executive
management team is
16 years
TO DELIVER VALUE TO ALL OUR STAKEHOLDERS...
Shareholders
Employees
Creating long-term
shareholder value through
growing profits and dividends.
See page 41
Dividend per share
26.1p
Helping all our people
develop their career and
reach their potential.
See page 62
Average training
per employee in 2021:
4.6 days
('CIPD' average 2.8 - 3.2 days)
Society
Helping the UK economy grow and supporting
the communities in which we operate.
See page 72
Charitable contributions
in 2021:
£39,600
Our section 172 statement can be found on pages 92 to 98.
Page 14
Lending on diversified loan assets
We focus on building our
asset base by originating
new loans, developing new
products and diversifying
into new markets.
Buy-to-let
mortgages
Residential
development loans
SME
lending
Motor
finance
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Cost control
Our people
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.
Underlying cost:
income ratio
41.7%
We are committed to helping
all our employees reach their
potential and recognise the
importance of development and
diversity in maintaining a skilled
and engaged workforce.
Gold Investors in
People accreditation
Culture
Strong financial foundations
Our 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.
96% of employees
agreed there is a clear
and consistent set of
values and behaviours
that underpin how we
operate1
We efficiently utilise capital
and debt positions to maintain
balance sheet strength.
CET1 ratio
15.4%
Customers
Providing tailored lending
products, expertise and
working with intermediaries to
help our customers achieve
their ambitions.
See pages 17 and 19
+58 Net promoter
score ('NPS') for
savings account
opening
Environment
Continually reducing our
environmental impact
and designing products
that support positive
environmental change.
See page 70
100% of electricity
used in 2021 at sites
for which we are
responsible was from
renewable sources.
1Paragon employee survey 2021
Page 15
In focus:
Savings
Throughout 2021, the pandemic continued to have a sizeable impact on the savings market. Despite household
deposits reaching record highs, switching levels reduced. Despite these market conditions, the savings
business grew the value of its deposits by 18% year-on-year, outpacing the overall market growth considerably.
This is a testament to our strong product proposition, our growing leadership within the ISA space, and our
adaptive response to a fast-changing market.
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 of
the business entered its seventh year in 2021 and the total
volume of retail deposits has continued to grow and now
stands at £9.3 billion, a 18.4% growth year-on-year.
The growth of Paragon’s savings deposits has consistently
outperformed industry average, shown through Bank of
England data.
From September 2020 to September 2021, Paragon deposits
grew by 18.4%. This compares to total growth of 10% over the
same period within the market.
Volume of retail deposits
£9.3 billion
£10b
£8b
£6b
£4b
£2b
£0b
£9.3b
£7.9b
£6.4b
£5.3b
£3.6b
2017
2018
2019
2020
2021
Paragon vs Rest of market monthly
stock growth (Source: Bank of England)
Products
6.3%
3.0%
2.9%
3.2%
3.3%
1.4%
1.2%
1.6%
1.2%
0.4%
0.4%
0.9%
0.6%
0.0%
1.0%
1.0%
1.6%
0.1%
1.0%
1.3%
0.3%
0.1%
0.4%
0.0%
0.5%
-0.4%
Sep
2020
Oct
2020
Nov
2020
Dec
2020
Jan
2021
Feb
2021
Mar
2021
Apr
2021
May
2021
Jun
2021
Jul
2021
Aug
2021
Sep
2021
Paragon
Rest of market
Paragon’s product offering remains simple – we offer
straightforward products at competitive rates. These range
from fixed term products to easy access, including notice and
defined access accounts and ISAs.
ISA leadership
Last year we launched Wallet and Flexible ISA features across
our portfolio to allow savers to split their yearly ISA allowance
across a range of ISAs held with Paragon. Through these
flexible features, we have carved out a point of difference that
targets proactive savers who benefit the most from the tax
efficiency of those products.
During 2021, our market share of ISA stock
increased by 11% in the twelve months to September
2021. This performance bucked the industry trend,
with Bank of England data showing that the cash ISA
market stalled in the past 12 months...
Distribution
Customers typically apply for our products through our own website after initially finding our products listed
on price comparison websites, mentioned by expert commentators or included in best buy tables.
In the last year, we have continued to work with deposit platforms, targeting those considered to provide
the best strategic fit, while also engaging with regulators to help shape the future of that business model.
We broadened our network of partners, offering savings products to Aviva customers through Aviva Save
and also successfully launched our pilot SME business savings proposition via a deposit platform as we
continue to extend our distribution and product range to support growth ambitions.
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
Page 16
Market
The UK household savings market is estimated at
£1.4 trillion. Paragon’s share of this market now
stands at 0.66%, a small increase of 0.04% from
last year.
The pandemic has created a mixed landscape for savings
providers. The climate of financial uncertainty brought on by the
pandemic had a profound impact on household deposits and
created a division amongst UK savers. Whilst many households
were at a financial disadvantage due to Covid, others were able
to supplement their savings, aided by reduced opportunities for
consumer spending.
As a result, deposits increased and have continued at higher
levels than the pre-pandemic average throughout 2021, however
the bulk of these savings continue to reside with the incumbent
current account providers. At the same time, switching levels
have been lower than previous years, due to increased inertia
amongst savers in a low-rate environment.
The fixed rate bond market has also reduced by 11% over the
course of the pandemic, while the value of Paragon’s fixed rate
bonds has grown by 10% in the last year. Paragon’s performance
once again belied the industry trend.
Customers
In order to monitor customer satisfaction and identify areas for improvement, we ask every new
customer why they choose to save with us. We also display customer feedback sourced through
the independent service ratings provider Feefo on our website. Our average Feefo customer
rating stands at 4.5/5, which is based on more than 1,300 reviews in the last year.
We survey our savers at three stages of the customer journey: when they open a new account,
at the maturity of a fixed rate product and if they close an account.
Existing customers
New customers
NPS +52 Net promoter score for customers
with maturing products
NPS +58 Net promoter score for
account opening
84% of customers were satisfied with the customer
service they received when their fixed rate product
matured and 89% would take out another savings
account with Paragon in the future.
Amongst customers that were leaving Paragon, 86%
found the process of withdrawing their funds easy or
very easy. 73% reported being very satisfied with the
customer service they received and 80% indicated
they would consider us in the future.
76% of new customers reported being very satisfied
with the customer service that they received, with
87% finding the account opening process easy or
very easy.
Amongst new customers, 89% chose Paragon
because we offered the highest rate of interest,
however the FSCS guarantee, online access and the
easy application process were also popular reasons.
88%
of new customers
would consider
taking another
savings account
with Paragon
87%
of new customers
find the
account opening
process easy
200,000+
direct savings customers
Net promoter score +52 for maturity accounts where fixed rate period ended based on an online survey of 3,408 savings
customers between 1 October 2020 and 30 September 2021 (total respondents to this survey were 3,541). Net Promoter Score
of +58 for new savings account opening process based on an online survey of 4,290 savings customers between 1 October
2020 and 30 September 2021 (total respondents to this survey were 4,457).
Customer feedback
No fuss, very efficient, in fact haven't had a better ISA opening
experience.... ever and I've opened quite a few. Thank you for
making it so easy...
Customer feedback
In focus:
Buy-to-let mortgages
The long-term trend of growing demand for privately rented homes has accelerated over the past year.
With the way we live so significantly impacted by the Covid pandemic, demand for buy-to-let mortgages
will be driven by fundamental changes to our society and Paragon will continue to support professional
landlords to make the investment needed to ensure housing supply meets demand.
Richard Rowntree, Managing Director, Mortgages
We offer buy-to-let mortgage finance for landlords
operating in the UK’s Private Rented Sector ('PRS').
Our expertise in property valuation and risk assessment means
we are trusted by a significant proportion of professional
landlords and are well placed to support those investing in
complex properties or operating through corporate structures.
Our prudent approach to underwriting and surveying expertise
means we play an active part in maintaining high standards in
accommodation and improving energy efficiency. Our business
proposition means we are naturally aligned to professional
landlords and we work to increase knowledge amongst this
community. Our position as a conduit between property
investors and regulators means we are a trusted voice in
conversations aimed at improving the sector.
70,000+
buy-to-let accounts
4.0%
share of all new
buy-to-let mortgages
in the UK
£11.4 billion
buy-to-let loan assets
25 years of buy-to-let
2021 saw the 25th anniversary of the official launch
of buy-to-let mortgages. Paragon was one of the
pioneers of buy-to-let lending and has played an
integral part in creating a finance product that has
helped transform the PRS since the 1990s. We have
an unrivalled level of expertise in the market and
have become a leading authority on the sector.
Paragon has helped a
wide range of landlords
to grow their businesses,
originating £25.4 billion
of buy-to-let mortgages
since 1996...
Supporting diverse property investment
Abdulkader Kadri is a full-time landlord with a portfolio consisting of eight properties. Six
of these properties are classed as houses in multiple occupation (HMOs) which he lets
to a mix of domestic and international students attending the University of East Anglia.
He thinks that buy-to-let remains a sound investment and plans to purchase more
buy-to-let properties over the next 12 months to diversify his portfolio.
With such high demand for property in the UK, investors need to think differently and the
possibility of converting commercial premises into residential properties is interesting.
I know that Paragon specialises in this type of mortgage, which is suited to the more
complex properties and larger portfolios; I’m currently renewing one of my mortgages
with them and would definitely consider Paragon in future as I grow my business...
Page 18
Market
The PRS is an essential component of the UK’s housing
market, providing affordable and stable homes for people that
cannot afford to buy or those that desire greater flexibility and
choose to rent.
These aspects, combined with a series of economic, social and
demographic changes, have driven considerable expansion of
the PRS since the turn of the millennium. The UK PRS is made
up of almost five million households today, accounting for just
under 20% of homes. This makes the PRS the second most
common housing tenure after owner-occupation.
Private rented sector:
4.4 million (18.7%)
Social rented sector:
4.0 million (16.7%)
Owner-occupiers:
15.4 million (64.6%)
(Source: MHCLG English Housing Survey 2019-20)
English
households
by tenure
Total lending for UK
buy-to-let mortgages
£45.1 billion
57%
of landlords reported
increased tenant demand
over the past three months
24.8 million
households in
the UK by 2028
Market trends
In the 12 months to 30 September 2021, UK buy-to-let mortgage lending totalled
£45.1 billion, an increase of 20% on 2020, including 112,000 loans for new house
purchase, nearly double the previous year (Source: UK Finance).
In the quarter ended 30 September 2021, an all-time high of 57% of landlords
reported increased tenant demand over the past three months. This marked a
continuation of the trend for rising tenant demand seen throughout 2021, following
the low of 14% recorded in the quarter ended 30 June 2020 (Source: BVA BDRC).
Market outlook
The latest data published by the Office for National Statistics (‘ONS’) in 2018
estimated that by 2021 there would be 23.6 million households in the UK. This is
expected to grow to 24.8 million by 2028 and 26.3 million by 2038.
The British Property Federation published figures in Q1 2021 highlighting a 21%
increase in the number of build-to-rent ('BTR') homes completed, under construction
or in planning compared to the same period in 2020. With this equating to 188,456
homes, it is expected that even with such substantial growth, BTR will supplement
buy-to-let over the coming years and both property types can coexist to help tackle
the UK’s housing shortage.
21%
increase in the number
of build-to-rent homes
completed, under
construction or in planning
Residential property is currently responsible for around a quarter of UK emissions
and the PRS will need to build on the progress it has made during the past decade to
become more sustainable. Although the proportion of PRS homes rated with Energy
Performance Certificate ('EPC') ratings of C or above is higher than the
owner-occupied market, Paragon and other lenders will need to support landlords
with finance to facilitate significant investment in enhancing the energy efficiency of
PRS stock.
Customers
We have extensive experience in serving the specialist section
of the buy-to-let mortgage market and have supported
landlords to grow large and diverse portfolios - 59% of
Paragon landlords own four or more properties and 72% are
experienced landlords with more than 10 years’ experience.
In Q3 2021, a typical landlord's portfolio:
consisted of 6.9 properties valued at
an average of £192,000 each1
x6
59%
of Paragon landlords own
four more more properties
achieved a gross rental income of
£57,000 per annum1
generated an annual income
of £8,300 per property1
was worth £1.3 million1
1(Source: Paragon/BVA BDRC Landlord panel Q3 2021)
Page 19
Strategic Report
In focus:
Development finance
Demand continues to significantly outstrip supply for housing and SME developers are delivering the type
of homes that people want to live in. Activity has accelerated since the market reopened last year and that
strength has continued throughout 2021. Looking forward, the energy performance of homes will grow in
prominence and that puts the new build sector in a strong place.
Robert Orr, Managing Director, Paragon Development Finance
Our development finance business provides competitive and flexible financing solutions targeted at SME property developers.
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 locations across the north of England, offering tailored funding solutions
to our clients.
Our team has increased by 200% since 2018 with the recruitment of experienced and driven individuals to enhance our
customer offering.
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,
UK Government targets for new homes and Help
to Buy schemes.
Market trends
The UK Government
has set a target of
300,000 new homes
per year
Demand for new homes in the UK continues to exceed supply, driven by
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 – 194,063 homes were completed in England
and Wales in the year ended March 2021.
Relaunched in April
2021 with 5% deposit
for first-time buyers
75-80%
lower carbon emissions
in new homes by 2025
To accelerate the number of new homes being constructed, the UK
Government announced the Planning Bill in the May 2021 Queen's Speech.
One of the Bill’s aims is to facilitate more housebuilding by smaller
developers. Thirty years ago smaller builders were responsible for around
40% of new homes built, but currently this figure is only 12%.
The Help-to-Buy scheme was relaunched by the UK Government in
April 2021 to help first-time buyers with a 5% deposit to buy a home.
Regional price caps have been introduced as part of the new phase of
the scheme so that buyers can only use the initiative to purchase a home
costing no more than 1.5 times the average first time buyer property price
in their region. The scheme runs until 2023.
As part of its response to the consultation on the Future Homes Standard,
the UK Government has set out plans to radically improve the energy
performance of new homes, with all homes to be highly energy efficient,
with low carbon heating and be zero carbon ready by 2025. These homes
are expected to produce 75-80% lower carbon emissions compared to
current levels.
Page 20
Products
We focus on residential development loans and support
experienced developers involved in multi-unit residential, new
build, conversion or refurbishment projects. We provide loans
ranging between £0.4 million and £35.0 million and we lend up
to 70% of the gross development value ('GDV'). To encourage
developers to build the most energy efficient properties, we
have launched a Green Homes initiative, offering a financial
incentive for developments constructing EPC A-rated homes.
N E W
Green Homes initiative
We provide loans
ranging between
£0.4 million
£35.0 million
We have launched a Green Homes
initiative, offering a financial incentive
to developments constructing
EPC A-rated homes.
Customers
Stephens + Stephens
Lend: £16.6 million
The Cornwall-based husband and wife company
Stephens+Stephens is developing 74 luxury apartments
on the site of the former Fistral Bay Hotel in Newquay.
Paragon’s funding has supported the acquisition of the
site and the development costs of the scheme.
We enjoy a strong relationship with the team at
Paragon; they understand our business and our
requirements and are able to act quickly and
efficiently...
Watford Riverwell (Family Housing) LLP
Lend: £25.5 million
Paragon provided a total gross facility of £25.5 million to
support the acquisition of land and the development of
85 new homes as part of the Watford Riverwell scheme,
the largest regeneration project in Watford transforming
more than 60 acres of land to the south of Watford
General Hospital and Watford Football Club.
Paragon has been a key partner, understanding
our requirements completely and showing
the expertise needed to progress the funding
efficiently and within a tight timeframe...
Customer feedback
Paragon is a company we have worked with over a number
of years. Their relationship driven approach fits perfectly
with us; they fully understand our business and what we are
trying to achieve...
In focus:
SME lending
Over the course of 2021, we have continued to support our customers and have remained open for business
throughout. We became one of the first new lenders to be accredited to offer the Recovery Loan Scheme and
have assisted thousands of customers and brokers with their post-pandemic recovery. We are now seeing
signs of recovery within the asset finance market and will continue to help businesses with their bespoke
funding needs as they plan for the future.
John Phillipou, Managing Director, SME lending
Paragon entered the SME finance market in 2015 and we have
continued to expand our offering to small businesses over the
last six years with the acquisition of the asset finance broker
Premier Asset Finance Limited 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, technology
and vehicles, including electric vehicles.
Market
The SME lending market is broad, and Paragon is focussed on
specific asset classes.
The general economic conditions within the UK which influence
activity in these markets and other key drivers include:
• Supply issues and manufacturing delays created by the pandemic
• The rate of new work in industries such as construction
• Government regulations and trading restrictions
• Advances in technology and SME growth
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.
Asset Finance New Business
(£ billion)
£40b
£30b
£20b
£10b
£0b
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Cars
Commercial Vehicles
Equipment
Plant & Machinery
Other
• Environmental concerns and the drive towards fuel efficiency
The chart above sets out new business volumes in the UK asset finance market as a whole, as
reported by the Finance and Leasing Association ('FLA').
90% of
asset finance
providers expect
new business
growth over the
next 12 months
Electric car sales
increased by
186%
Market trends
The total asset finance new business market grew by 6% in September 2021 compared with the same
month in 2020.
In the twelve months to September 2021, new business was 10% higher than in the same period in 2020.
The plant and machinery finance and business equipment finance sectors reported new business up in
September 2021 by 31% and 21% respectively, compared with the same month in 2020. By contrast, IT
equipment finance new business fell by 24% over the same period.
The FLA’s Q4 2021 industry outlook survey shows that 90% of asset finance providers expected new
business growth over the next twelve months.
In the nine months to September 2021, new business volumes in the new car market were 9% higher
than in the same period in 2020, while they were 11% higher for the same period in the used car market.
Electric passenger car sales increased by 186% in 2020 and today there are an estimated 300,000
electric vehicles on the road in the UK and 600,000 plug-in hybrids.
The growth of the electric vehicle market is expected to continue as the ban on new petrol and diesel
vehicle sales, due in 2030, approaches. By the end of 2021, it is estimated that one in ten new cars in the
UK will be electric[1] with a total of 260,000 electric car sales forecast for 2022.
[1] Data from the Society of Motor Manufacturers and Traders (SMMT)
Page 22
Supporting our customers
During the past 18 months, our lending lines have remained
open, and we have supported thousands of our customers and
brokers through the pandemic, helping those worst impacted
with forbearance while also supporting their recovery and
post-pandemic growth through our lending activity. 98% of
those customers are no longer in forbearance.
To support our business customers as they recover and
grow following the pandemic, we were accredited to the
government-backed Recovery Loan Scheme ('RLS'). We were
one of the first lenders to be accredited and will provide asset
finance funding of up to £2 million under the scheme.
£70.1 million
Total CBILS and BBLS lending
- including £44.2 million in the last financial year
£20.0 million
Total lending through RLS between
April 2021 and September 2021
Our business offering is multi-disciplined and complex so it's very important for us to work with funders who
understand our businsess model. As our business grows, it is key for our partners to have known our business
pre-Covid and understand our journey and growth plans for the future...
Del Bhanot, Director at KKB Group
N E W
Digital solution launched for introducers
During 2021 we launched a new asset finance portal initially for
intermediaries, to automate and speed up the client journey, with
increased accuracy, real time tracking and a simple three step
application process. This is part of a £10 million investment into
new IT infrastructure that is being delivered over the next three
years, to deliver a step change in capabilities and capacity.
£10 million investment into new IT infrastructure
that is being delivered over the next three years...
Customers
Alkmonton Dairy
Paragon provided Alkmonton Dairy Farm with the funding to invest in the
infrastructure to process and bottle milk from its farm and supply its local
community directly.
There is no doubt that starting a new business in the middle of a
pandemic was daunting, but I’m so glad we took the plunge! We’ve had
a great response from the local community. We know sustainability and
provenance are really important to our customers, and it’s great to be
able to offer them locally sourced produce...
The team at Paragon was really easy to deal with and took the time to understand our business and what we were
hoping to achieve, which made the process of securing funding really seamless...
Jo Harris, co-owner of Alkmonton Dairy
Page 23
Strategic Report
i
Sustainability
Sustainability is one of our key strategic priorities and influences every aspect of our business. We aim to use our
influence and resources wisely and understand our responsibilities towards society and the environment. We understand
that climate change is one of the greatest challenges facing society and take care to identify, manage and minimise our
impact on the environment.
Earlier this year we set up a Sustainability Committee to further embed sustainability considerations across Paragon as
well as to provide a platform for discussion and debate on emerging ESG issues.
We have published our inaugural sustainablility report, the Responsible Business
Report, which explains our progress on the main ESG issues for our business
and our stakeholders. We have divided our responsibilities into the following
areas and more detailed information on each of them can be found in the report,
available on our website.
Helping customers
Our customers are the lifeblood of our business and, as a specialist bank, we use our expertise to develop and structure products,
services, and support to meet their needs and help them achieve their ambitions. We are committed to delivering good customer
outcomes in line with our values and treating customers fairly throughout our business.
A dedicated customer
insight team augments our
customer understanding and
enables us to improve our
overall customer experience.
Our customer commitment is
underpinned by a wide range of
conduct policies and standards,
from product governance
to complaints handling and
distribution to remediation.
100%
employees completed
customer vulnerability
training during 2021.
4.5/5 Feefo review score
from savings customers.
Customer
satisfaction scores
88%
of savers would consider
taking another savings
account with Paragon
91%
of mortgage intermediaries
satisfied with the ease of
obtaining a query response
from Paragon during the
offer process
46%
year-on-year
reduction in emissions
since 2017
100% renewable
electricity at controlled sites
Operational footprint
We operate in mortgage, consumer, and commercial
finance markets and therefore the overall environmental
impact of our operations is low, however we are committed
to identifying, measuring, and managing how our actions
affect the environment and finding ways to reduce their
negative impact.
Building a strong team
We employ almost 1,450 people across the UK who work
together to help our customers achieve their ambitions.
To build a more sustainable future, we need a team with a
diverse mix of people and skills, where everyone feels
welcome and able to succeed.
We are exceptionally proud of our culture which underpins how
we do things at Paragon and helps us recruit and retain the best
people for our business. In our recent employee survey 95% of
employees agreed they are proud to tell people they work for
Paragon and 96% agreed there is a clear and consistent set of
values and behaviours that underpin how we operate.
87%
Employee engagement
(2017: 81%)
+24
Employee NPS
(2017: -3, Industry norm: +21)
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Contributing to our communities
Positively impacting society by giving back to the communities
in which we live and work has always been important at
Paragon. We aim to be an energetic and valuable contributor
to these communities and our commitment includes active
involvement in a range of community volunteering and
charity partnerships.
• Through our community volunteer scheme, every Paragon
employee is provided with a day each year to volunteer
for specific initiatives that help with education and
tackling poverty
• Each year, employees select a charity of the year and a
dedicated Charity Committee made up of employee
volunteers organise a variety of fundraising activities, which
also bring people together and support our values and
culture. In 2021, employees raised more than £30,000 for
Alzheimer’s Society
Employees raised more than
£30,000
for Alzheimer's Society
Lending sustainably
We support the UK’s ambition to
reduce greenhouse gas emissions to
net zero by 2050 and want to help our
customers meet their environmental
responsibilities and to understand the
impact of our lending on the climate.
We are taking steps to manage climate related financial risks associated with our
lending. During 2021, we:
• Issued our first green bond, the first UK bank to do so, raising £150 million of green
capital which has begun to be allocated to mortgages on properties with an EPC
rating of at least B
• Launched a range of green mortgage products, specifically for properties with
an EPC rating A to C, and motor finance products for electric vehicles
• Offered tailored finance for green assets to our SME customers and brokers to
support their sustainability plans and introduced a green homes initiative to
support housebuilders
Doing business responsibly
Being a responsible business and doing the right thing for our stakeholders is engrained in how
we do business at Paragon. We actively promote good practice on a range of important issues and
expect the same from our suppliers and other business partners.
• We are a signatory to the UK’s Prompt Payment Code (‘PPC’), administered by the Office of the
Small Business Commissioner, to ensure suppliers are treated fairly in respect of payment terms
and receive payment on time
• Our Supplier Code of Conduct sets out our overall approach to supplier engagement and the
standards of behaviour we expect from our suppliers, and we have robust processes and controls
in place to ensure all elements of our procurement cycle are managed responsibly
• We ensure our employees understand the different rules and regulations we must adhere to in
order to support our customers properly and operate fairly. A series of mandatory learning courses
were launched in 2021
Page 25
Nigel Terrington
Chief Executive Officer
The Group has delivered record profits
and an outstanding operational
performance reflecting the strength of its
franchise, the resilience of its operating
platform and the commitment and
professionalism of its people...
Page 26
A3. Chief Executive’s review
Introduction
Trading performance
The Group has delivered record profits and an outstanding
operational performance reflecting the strength of its
franchise, the resilience of its operating platform and the
commitment and professionalism of its people.
The Mortgage Lending and Commercial Lending divisions have
each outperformed expectations during 2021, delivering strong
new business flows, low arrears and finishing the period with
record pipelines.
The Group’s business model has been designed, using its
extensive through-the-cycle experience, to be resilient in its
operational performance and to maintain a strong balance
sheet. Having developed an effective working approach at the
onset of the crisis, the business was well placed to deal with
the changing Covid conditions, particularly over the winter
months, maintaining new business activities and paying close
attention to the needs of our customers, employees and
business partners as the situation developed.
This testing period brought out the best in our people and has
given us the opportunity to demonstrate the fundamentals of
the Group as we continue to generate improved returns and
strong growth rates.
Despite the operational challenges the lockdowns brought,
we have strengthened our franchise by building stronger
relationships with customers, intermediaries and other
business partners. Alongside this, we have delivered a number
of key technology developments during the year. We also
have an active change programme in progress, designed to
optimise customer journeys, operational efficiencies and
data and control needs across the business. The delivery of
these, together with accessing the capacity and efficiencies
they bring, will form a core part of our strategy in continuing to
drive strong growth in a prudent manner in the UK’s specialist
financial services markets.
Financial performance
The Group delivered a strong financial performance reflecting
the improvements in the UK economy and strong underlying
trading. A combination of strong loan growth, improving net
interest margins, tight cost control and a reversal of some of
the Covid-related impairments enabled underlying profits to
increase by 61.8% to £194.2 million.
Impairments for expected credit losses fell materially
from their 2020 level, ending 2021 with a £4.7 million
write-back compared to the £48.3 million charge in 2020
and an £8.0 million charge in 2019, before the imact of Covid.
Notwithstanding this impairment volatility, pre-provision profits
were up 12.6% on their 2020 level at £189.5 million. With the
credit for impairments in the year, and strong fair value gains
reflecting yield curve movements, overall reported profits
before tax were 80.5% higher than their 2020 equivalent at
£213.7 million.
Basic earnings per share were 65.2 pence on a statutory basis
and 59.3 pence on a underlying basis. We continue to operate
with a 40% dividend pay-out policy, which results in a dividend
for the year of 26.1 pence, reflecting the strong underlying
performance, impairment releases and fair value movements.
In Mortgage Lending, where we celebrated 25 years of serving
the Private Rented Sector (‘PRS’), we have continued to see
strong demand from professional landlords, who generated
97% of new buy-to-let completions in the year. Total
buy-to-let completions exceeded £1.6 billion in the year,
generating an 8% increase in balances to £11.4 billion. Strong
house price inflation and stable arrears have created a lower
impairment requirement year-on-year and the portfolio
remains conservatively leveraged with an average loan to value
(‘LTV’) of 61.2% and only 1.9% of the portfolio having an LTV
over 80%. The pipeline at the year end exceeded £1 billion,
boding well for continued strong flows into the new financial
year. With our half-year results we announced the cessation
of lending on second charge mortgages, with the business
being unattractive at our chosen risk appetite. All employees
were offered redeployment in the wider business, with only six
choosing the alternative of voluntary redundancy.
New business flows in Commercial Lending exceeded
£0.97 billion, up 22.9% on their 2020 levels and above their
2019 equivalent. The growth was strongest in development
finance, where new advances rose 32.5%, year-on-year,
reflecting the continued high demand for residential property
development in the UK and the Group’s investment in
expanding the relationship team. The development finance
year end pipeline was up 63.2% from its equivalent level in
2020. SME lending saw a 17.0% increase in origination flows,
but these remain below the pre-Covid equivalent given
sector-wide challenges and the broad take-up of
government-backed loans under the CBILS, BBLS and RLS
during the year. However, growth was strongest in the
longer-term, asset-secured part of the operation. The new
portal delivered during the year leaves the business well placed
to seize opportunities going forward as this sector recovers.
Motor Finance volumes were broadly flat year-on-year,
but this disguises a strong second-half recovery and strong
momentum being carried through to 2022. Finally, our
structured lending team has now refocused its attentions
from account management to business development, driving
portfolio growth and adding new facilities during the second
half of the year.
Capital and funding
The past year has seen a material change in our funding
structure, with our savings proposition delivering an 18.4%
growth in balances at attractive rates. System enhancements
during the year enabled increased levels of deposits to be
sourced from third party platforms, while the SME savings
market was accessed for the first time. During March 2021 we
became the first UK bank to successfully issue a Green Tier-2
Bond, at a coupon of almost 3% less than the bond it was
replacing. We have also refinanced the majority of our legacy
securitisation structures, substantially repaid borrowings
under the Bank of England Term Funding Scheme (‘TFS’) and
drawn further on the Term Funding Scheme with additional
incentives for SMEs (‘TFSME’). Overall, the Group’s cost of
funds has dropped by 39 basis points from its 2020 level.
Page 27
Strategic Report The refinancing of the legacy securitisations removed over
£400 million of derivative assets from the Group’s balance
sheet against which regulatory capital had previously been
carried, reducing capital requirements. The refinancing also
facilitated the transition of the bulk of the Group’s
LIBOR-linked loan exposures to a Term SONIA basis.
For all remaining LIBOR-linked assets an exit strategy
is in place and the Group’s remaining LIBOR-linked
liabilities were either transitioned during the financial year,
or a transition methodology has been agreed with the
relevant counterparties.
With the strong capital position at the half-year, the Group
declared an interim dividend in line with its guidance (being
one half of the previous year’s final dividend) and also
announced a share buyback of up to £40.0 million, with
£37.5 million (excluding costs) being utilised by the year end.
This programme will be completed in the early part of the new
financial year, and in December 2021 the Board authorised
a futher buy-back programme of up to £50.0 million,
acknowledging the Group's continuing capital strength.
We also benefitted from revised total capital requirements
following the regular supervisory review undertaken by the
PRA in late 2020. This saw our total capital requirement (‘TCR’)
fall from 10.8% to 8.9% and contributed to a continued strong
surplus over regulatory requirements at 30 September.
The Group submitted its buy-to-let Phase 2 IRB application
modules to the PRA during the year. The process remains
protracted, but we continue to receive constructive
engagement from the PRA. In addition to further phases of
the buy-to-let accreditation, our preparations to submit an
IRB application for our development finance business, which
represents the next stage in the IRB roadmap are
well advanced.
Business model developments
Key developments during the year include the completion and
roll-out of our Commercial Lending portal and the introduction
of auto-decisioning to SME lending. We have also developed
a new digital system for our surveyors, established a single
payment platform across our banking relationships and
implemented Mambu, a cloud-based core banking module,
for managing our portfolio of savings platform relationships.
Complementing these completed developments, our teams
are actively managing process improvements in our Mortgage
Lending division, embedding Mambu into development
finance, reviewing post-completion systems across the Group
and broadening the scope of our savings proposition to
support additional future capacity.
People
Our people have made a remarkable effort during the past
year, working flexibly to support the business and showing
great agility as the operating and working environment
has changed. Against this backdrop, the wellbeing of our
people has been a primary consideration for the Board and
has been demonstrated through numerous initiatives and
regular engagement to ensure that effective feedback and
communications were maintained throughout the year.
Our 2021 employee survey demonstrated exceptional levels
of engagement, with an engagement score of 87% and an
employee NPS of +24, where +21 is the industry norm.
95% of our people agreed that they are proud to say that they
work at Paragon.
Page 28
I am pleased to confirm that the Group has also met all its
diversity targets under the Women in Finance Charter, set
in 2017, while the Group’s EDI network, designed to ensure
Paragon is a fully inclusive employer, was launched in the
year. The new network has already contributed to a number
of Group initiatives in this area.
Having spent much of the year with a working-from-home
focus, the Group is now undertaking a series of hybrid working
pattern trials, designed to optimise the efficiency, control,
flexibility and wellbeing features of our longer-term
operating model.
Sustainability
Climate change and sustainability considerations have been
highlighted during 2021. Against a backdrop of creating the
appropriate focus and governance around the Group, we
launched the first green capital bond to be issued by a UK
bank in March 2021, to replace our existing Tier-2 bond. The
establishment of the Green Bond Framework and associated
deployment commitments reflect the importance of the
sustainability agenda within the Group.
A new Sustainability Committee was established in the
year. Products to promote more energy-efficient properties
have been launched in both the buy-to-let mortgage and
development finance areas. Our motor finance operation
began lending on electric vehicles after the year end, following
substantial preparatory work during the year. There has also
been material board engagement regarding the actions the
Group needs to take to support the UK’s path to net-zero
by 2050.
Internally the Group relocated its London operations to more
energy-efficient premises, reducing its carbon footprint while
affirming its commitment to office-based working and the City
as a physical venue for doing business.
The requirements of the Taskforce on Climate-related
Financial Disclosures (‘TCFD’) become binding on the Group
in 2022. Our disclosures for 2021 are materially enhanced and
substantially meet these standards, and we have signed up as
a TCFD supporter. Alongside the annual report and accounts
we are publishing our first separate sustainability report, the
Responsible Business Report, which will be accessible via the
Group’s website.
Outlook
Despite the challenging environment, Paragon leaves its 2021
financial year with strong lending pipelines, an increasingly
diversified funding structure and strong capital resources to
continue to take advantage of opportunities going forward,
both organic and potentially through further acquisitions, if
appropriate. We are accelerating our investment in technology,
enhancing our customer proposition while preserving the key
specialisms that are embedded within our operating model.
Careful consideration of impairment coverage levels leaves
us appropriately provisioned in the event of future
macro-economic volatility or idiosyncratic examples of
Covid-related scarring amongst our customers. With a CET1
ratio of 15.4% and good progress being made with our IRB
applications, our capital position remains strong, supporting
further growth and returns to stakeholders.
Nigel Terrington
Chief Executive Officer
7 December 2021
A4. Review of the year
This section reviews the activities of the Group in the year under these headings.
Business review
Funding
Capital
Financial results
Operations
Lending and performance
for each business line
Deposit taking and
other sources of finance
Regulatory capital, liquidity
and distributions
Results for the year
Systems, people,
sustainability and risk
A4.1
A4.2
A4.3
A4.4
A4.5
A4.1 Business review
Housing and mortgage market
The Group reports its results analysed between three
segments, 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
2021
£m
2020
£m
2021
£m
2020
£m
Mortgage Lending
1,630.0
1,259.7
11,608.7
10,819.5
Commercial Lending
971.5
790.8
1,568.8
1,514.8
Idem Capital
-
-
225.2
297.1
2,601.5
2,050.5
13,402.7
12,631.4
The Group’s total loan balance increased by 6.1% in the year
following a 3.7% increase in the preceding twelve months.
This highlights the Group’s ability to continue to pursue its
strategy despite the economic impacts of Covid through the
last eighteen months. Total advances increased 26.9% as the
economy bounced back from the pandemic and exceeded
the pre-pandemic levels of 2019, despite lockdowns and other
Covid-related restrictions continuing to impact during the year.
A4.1.1 Mortgage Lending
The Group’s Mortgage Lending division principally provides
buy-to-let mortgages secured on UK residential property to
specialist landlords. The buy-to-let mortgage sector celebrated
its 25th anniversary in the year and the Group was one of the
first lenders in this market. This gives the Group an unparalleled
understanding of this form of mortgage and the landlord
customer base it targets.
During the period the Group also offered loans to non-specialist
landlords and limited numbers of owner-occupied first and
second charge mortgages on residential property.
However, during the year it withdrew from the second charge
market entirely, to increase its buy-to-let focus.
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 both
mass market and other specialist lenders.
During the year the housing market in the UK continued to
be affected by the Covid pandemic and the associated relief
schemes including payment holidays, effective prohibitions
on some forms of enforcement action and the continuing
availability of stamp duty holidays, which were extended until
June 2021. While the period over which payment holidays
were available was extended, the maximum relief was capped
at six months and the immediate impact of such holidays
began to reduce as borrowers reached their maximum
allocation. Lockdowns and social distancing requirements at
various points in the year also put practical constraints on the
operation of the housing market.
Activity in the residential property market recovered in the
year, boosted by the stamp duty holiday. Transactions for the
year reported by HMRC, at 1,562,000, were 58.3% higher than
the 987,000 in the previous year. In their September 2021
Residential Market Survey, RICS noted positive activity levels
in the market and a stable outlook for property sales.
Despite the year beginning with a pessimistic outlook for
property prices from some forecasters, house prices saw
strong growth in the period, with the Nationwide House Price
Index recording a year-on-year increase of 10.0% to September
2021. RICS forecast continuing growth in the short to medium
term, with demand outstripping supply, however, Nationwide
amongst other forecasters, remain cautious as to the
medium-term outlook as reliefs unwind, and the Group
continues to position itself conservatively.
New mortgage lending in the market was strong in the year,
with the Bank of England reporting new approvals of
£317.3 billion in the year ended 30 September 2021, a 31.0%
increase on the £242.3 billion reported for the previous
financial year and a higher value than any year since 2007.
Particularly high volumes were seen in the months leading up
to June 2021, when stamp duty reliefs began to be withdrawn.
Quarterly UK mortgage approval data for the last three
financial years is set out below.
Quarterly mortgage approvals
(Bank of England)
£90,000m
£80,000m
£70,000m
£60,000m
£50,000m
£40,000m
£30,000m
£20,000m
£10,000m
£0m
Dec
2018
Mar
2019
Jun
2019
Sep
2019
Dec
2019
Mar
2020
Jun
2020
Sep
2020
Dec
2020
Mar
2021
Jun
2021
Sep
2021
Page 29
Strategic Report
At 30 September 2021 the UK Finance (‘UKF’) survey of
mortgage market arrears and possessions reported arrears
remaining at historically low levels, despite the phasing out
of Covid reliefs. Indeed, in a significant number of cases,
customers had been able to reduce arrears during the
pandemic. Possessions remained very low, with the majority
relating to cases already in serious difficulties before the
onset of Covid. Based on its research, UKF concluded that the
availability of payment holidays fulfilled the purpose of enabling
borrowers to stay out of arrears through the pandemic.
The Private Rented Sector (‘PRS’) and the buy-to-let
mortgage market
Specialist landlords form the largest part of the Group’s
target market. Such landlords typically let out four or more
properties, run their portfolio as a business and have a high
level of personal day-to-day involvement.
The Group considers that the experience of its customers,
their level of involvement and the diversification of their
income streams across properties make them less vulnerable
to cash flow shocks in the event of a downturn and better able
to cope when faced with an adverse economic situation. This
has proved to be the case in the Covid pandemic to date, with
customers engaging quickly to manage any risks they faced.
The Group is amongst a small number of specialist lenders
addressing this sector, which is underserved by many of the
larger lenders. Some constraint in supply was seen during the
pandemic, with certain non-bank lenders withdrawing from
the market, although by the end of the year most had
resumed activity.
New issuance of buy-to-let mortgages followed the trend
in the wider property and mortgage markets. New advances
reported by UKF, at £45.1 billion for the year ended
30 September 2021, were 14.8% higher than for the previous
year (2020: £39.3 billion). This included an 86.3% increase in
house purchase activity with an 8.4% reduction in remortgage
activity. Some of this increase was driven by an increase in the
number of amateur landlords, seeking investments offering
returns not available elsewhere, but the activity amongst
professionals was also strong.
In the lettings market RICS' September 2021 UK Residential
Market Survey reported rising tenant demand coupled with
a scarcity of new landlord instructions driving an increase in
rents. ARLA Propertymark, in its September 2021 PRS Report,
identified 75% of tenants as having experienced year-on-year
increases in rent (2020: 58%) while RICS members continue to
predict, on average, rent increases of 3% over the coming year.
This continuing demand will benefit affordability and cash flows
for the Group’s landlord customers.
Landlord confidence measures reached a five-year high in the
third quarter of the 2021 calendar year. Independent research
carried out for the Group reported that on all five measures of
confidence surveyed: rental yields, capital gains expectations,
the future of their own business, the prospects for the sector
as a whole and the UK financial markets more generally,
optimism was higher than at any time since 2016. Larger
landlords were particularly confident about prospects for their
businesses, with 56% feeling ‘good’ or ‘very good’.
The proportion of landlords in the survey reporting increasing
tenant demand had reached the highest level since the survey
began, with six out of ten landlords reporting rising tenant
demand, and 30% reporting significant increases. Only 2% of
landlords in the survey reported missing a mortgage payment,
and only one of the landlords surveyed anticipated missing one
in the next three to six months.
Page 30
Demand for HMO (‘house in multiple occupancy’) lets
remained strong. Despite concerns as to whether student
demand might be particularly affected by the effects of Covid,
this did not transpire in the year, with strong lettings even
where lectures were being delivered online.
The UKF analysis of arrears and possessions also provided
analysis of buy-to-let cases, showing a similar picture to the
wider mortgage market, with a significant uptake of payment
holidays serving to keep arrears and possessions low, even
after these reliefs had expired.
All these factors provide a strong indication of the current
strength of the buy-to-let mortgage market and the
opportunities for the Group going forward.
Mortgage Lending activity
The Group’s new mortgage lending activity during the year is
set out below.
Originated assets
Specialist buy-to-let
Non-specialist buy-to-let
Total buy-to-let
Owner-occupied
Second charge
2021
£m
2020
£m
1,562.2
1,119.0
52.2
86.4
1,614.4
1,205.4
1.5
14.1
0.3
54.0
1,630.0
1,259.7
Total mortgage originations in the Group increased by 29.4%,
following a 19.7% fall in the preceding year. Activity exceeded
the £1,564.4 million of new advances achieved in 2019, before
the Covid outbreak, demonstrating the impact of real growth,
rather than just a Covid bounce-back on the Group’s
mortgage business.
Buy-to-let
Advances continue to be focused on specialist buy-to-let,
the main focus of the division’s activity. New lending of these
products increased by 39.6% following the 14.9% fall in the
2020 financial year. The £1,562.2 million of completions
was also 22.8% higher than the result for 2019, prior to
the pandemic, demonstrating the strength of the
Group’s proposition.
Specialist buy-to-let comprised 95.8% of the division’s
advances, reflecting the sharpening of focus on this area.
Other mortgage lending remains modest in comparison, with
advances declining by 51.8%, in large part due to the Group’s
exit from the non-core second charge market during the year.
The new business pipeline, being the loans passing through
the underwriting process, stood at a record £1,008.1 million
at the year-end, 8.8% higher than a year earlier
(2020: £926.7 million), providing a strong platform for growth
into the 2022 financial year.
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. 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 (2020: 91%), delivering an NPS at offer stage of
+43 (2020: +56).
Two thirds (66%) of brokers dealing with the Group rated
its service as better than that provided by other lenders
(2020: 68%). Paragon Mortgages was also named as 'Best
Professional Buy-to-let Lender' at the 2021 Your Mortgage
awards – the ninth time it has won this title.
While the Group monitors EPC performance it is also
conscious of the need to avoid unintended consequences
by focussing lending on this. Although upgrading existing
properties is beneficial to overall emissions, the demolition
and replacement of properties may be less so.
During the period the business launched a long-term,
in-depth, end-to-end transformation programme to restructure
processes and enhance systems, increase the effectiveness
of the operation and upgrade the offering to both customers
and intermediaries. This represents a significant commitment
of time and resources to the future of the business, with
enhancements starting to come online from the 2022
financial year.
The Group also monitors the potential physical risks to security
values arising from climate change. This includes assessing a
property’s flood risk as part of the underwriting process.
At 30 September 2021, approximately 2.5% by number of
properties securing the Group’s buy-to-let mortgages in
England and Wales were considered to be at medium or high
risk of flooding from the sea or rivers, based on data from the
Environment Agency (2020: 2.2%).
The Group understands the potential for climate change
to impact its mortgage business and seeks to mitigate risk
through careful consideration of the properties on which it will
lend. It also continues to develop systems and refine data to
allow its overall position to be measured and the behaviour
of its security portfolio under climate-related stresses to be
better understood.
During the year the Group launched its first range of green
buy-to-let mortgages. These market-leading products have a
maximum 80% loan-to-value ratio and offer lower interest rates
for energy efficient properties with EPC ratings of C or higher.
While initially limited to certain property types, this lending was
extended to all properties within the Group’s lending criteria in
October 2021.
The UK Government has identified the provision of more
energy efficient housing as a prime objective in its response
to climate change, with EPC levels being set as one of the
principal benchmarks to be used. It has announced a target
of upgrading as many homes as possible in the PRS to an
EPC rating of C or higher. In order to achieve this, there is
an expectation that lenders will set minimum quality
thresholds, and advantage customers with more energy
efficient properties, as is the case with the Group’s green
mortgage products.
The Group has also designated EPC grades as a principal
metric for evaluating climate change risk in its mortgage book
and has continued to develop systems to analyse this data
and to ensure that it has reliable and up-to-date information
on as much of its book as possible, including legacy cases.
It is unfortunate that some public information sources are
not currently configured in a way which easily facilitates
in-life monitoring and analysis or allows customers in need
of support in improving their properties to be indentified.
The Group’s latest analysis identified EPC grades for
88.3% of its mortgage book by value at 30 September 2021
(2020: 85.1%). Of these 98.4% were graded E or higher
(2020: 98.1%) with 37.6% rated A, B or C (2020: 37.7%). The
year-on-year movements are principally a result of refining the
data, with 39.7% of new originations in the year having one of
the top three grades (94.2% coverage).
The Group's advances volumes on green buy-to-let lending,
which have increased by 27.7% in the year, are set out below.
EPC rated A or B
EPC rated C
EPC rated A to C
Coverage (England and Wales)
2021
£m
134.3
443.4
577.7
93%
2020
£m
112.7
339.8
452.5
94%
The Group continues to refine and develop its use of both
internal and external data to manage climate change
risk. However, it recognises the important part that the
development of reliable and easily accessible information
sources by the UK authorities must play in quantifying these
exposures. It would therefore welcome any initiatives by the
UK Government to enhance national reporting as part of its
own response to climate change.
The business is currently working with the Green Finance
Institute on a number of industry initiatives to develop
standards for mortgage products which would encourage
energy and carbon efficiency for the future, and this work
continues to inform the development of the Group’s own
buy-to-let product range. Given that RICS has highlighted
cost as one of the principal barriers to energy efficiency
improvements in residential property, the provision of financial
solutions will be key to the achievement of climate goals.
Further information on these metrics and the Group’s wider
climate change agenda is given in the Section A6.4.
Other lending
Other first and second charge mortgage lending is ancillary to
the Group's main buy-to-let focus and is carefully managed to
ensure that only lending with appropriate risks which provides
an acceptable return on capital is undertaken.
Lending in the Group’s second charge mortgage operation
was scaled back in summer 2020 in response to Covid, with
people transferred to provide support to other business
areas, and lending remaining low in the first half of the year.
The Group took this opportunity to review the long-term
strategic potential of second charge lending in light of its
capital requirements and the Group’s overall risk appetite
and announced its withdrawal from this market in May 2021.
Completions in the year were £14.1 million compared to
£54.0 million in 2020.
The Group’s exposure to first charge residential lending is
strictly limited, given the yields available in this market at
acceptable levels of risk, and a limited demand for products
where its specialist approach is cost-effective and adds value.
The opportunities for the Group in this area principally relate
to complex propositions, which will arise on an opportunistic
basis, including lending to the existing professional landlord
customer base.
Page 31
Strategic Report Performance
The outstanding loan balances in the segment are set out
below, analysed by business line.
2021
£m
2020
£m
Post-2010 assets
First charge buy-to-let
7,379.0
6,202.5
First charge owner-occupied
Second charge
Legacy assets
35.6
148.1
51.2
182.6
7,562.7
6,436.3
First charge buy-to-let
4,045.3
4,381.3
First charge owner-occupied
0.7
1.9
11,608.7
10,819.5
At 30 September 2021, the total net mortgage portfolio was
7.3% higher than at the start of the financial year, reflecting
strong lending and retention performance in spite of the
on-going impacts of Covid. The balance of post-2010
buy-to-let lending grew by 19.0% and it now represents 63.6%
of the division’s total loan assets (2020: 57.3%).
The annualised redemption rate on buy-to-let mortgage assets,
at 6.9% (2020: 6.6%), has continued at a low level, partly due
to the continued seasoning of five-year fixed rate loans, partly
to customers adopting a cautious approach to remortgaging
during Covid, but also as a result of the Group’s strategic
initiatives to retain customers whose mortgage accounts reach
the end of their fixed rate period.
The loan-to-value coverage in its buy-to-let book, at
61.2% (2020: 65.8%) represents significant security, enhanced
over the year by the generally rising levels of house prices.
Levels of interest cover and stressed affordability in the
portfolio remain substantial, leaving customers well placed to
develop their businesses going forward.
Second charge arrears increased to 1.18% from 0.62% in the
year, reflecting the increased seasoning and size of the portfolio
and the effect of payment holidays on the 2020 measure. Of the
live second charge accounts at the year end 470, representing
17.9% of the book by number, had been given payment holidays
during the pandemic, with 256 of those extended (9.8%). No
payment holidays remained in place at the year end.
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 was able
to manage tenant rental flows and occupancy levels through
the various pandemic restrictions in the year, to ensure good
outcomes for customers and their tenants. At the year end
553 properties were managed by a receiver on the customer’s
behalf, a reduction of 11.2% since 2020 (2020: 623 properties).
Almost all these cases currently relate to pre-2010 lending, with
cases being resolved on a long-term basis.
Outlook
The division’s operations were affected by Covid in the year,
however, the buy-to-let mortgage portfolio continued to grow,
with strong credit performance, despite the circumstances.
The year end pipeline was at record levels, signposting strong
completions into the new financial year. In the wider market,
transactions are increasing, tenant demand is strong and
rental projections are encouraging, with positive landlord and
broker sentiment.
Covid-related payment holidays were granted on 13,503 of the
Group’s buy-to-let accounts which were still live at the year
end, representing 19.9% of the book by number. 5,165 of these
holidays were extended (7.6%), but all of them had expired by
30 September 2021.
These combine to provide an outlook for the Mortgage Lending
business in which it should be able to accelerate out of the
pandemic and generate high quality assets and returns for the
Group, while contributing to the development and renewal of
the nation’s housing stock.
Arrears on the buy-to-let book increased in the year to
0.21% (2020: 0.15%), although part of the increase is attributable
to the suppression of arrears by payment holidays at the
previous year end. Arrears on post-2010 lending were at
0.09% (2020: 0.03%). Despite the small increases, these arrears
remain very low compared to the national buy-to-let market,
with UKF reporting arrears of 0.45% across the buy-to-let
sector at 30 September 2021 (2020: 0.52%).
While the principal credit metrics for the buy-to-let mortgage
portfolio have remained positive throughout the year, the
extent to which these have been influenced by UK Government
interventions, such as furlough payments and other income
support, underpinning tenant rental payments, funding from
government-backed loan schemes accessed by landlords
and the stamp duty holiday, cannot be established from data
available. We remain confident in our lending but, as these
initiatives begin to be withdrawn, the long-term prospects will
be subject to a higher than normal level of uncertainty.
The Group’s buy-to-let underwriting is focussed on the credit
quality and financial capability of its customers, underpinned
by a robust assessment of the available security. This approach
relies on a detailed and thorough assessment of the value
and suitability of the property as security and this approach to
valuation, including the use of a specialist in-house valuation
team, provides it with significant security in the face of
economic stress.
A4.1.2 Commercial Lending
The Group’s Commercial Lending division includes four key
specialist business streams lending to, or through, commercial
organisations, mostly on a secured basis. This division had
been a major source of growth within the Group before the
impact of Covid and remains a focus for growth going forward.
The four business lines address:
•
•
•
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
Each of these businesses is led by a managing director,
supported by a specialist team with a strong understanding
of their market. The principal competitors for each of the
business lines are small banks and non-bank lenders.
Page 32
The Group operates principally in markets where the largest
lenders have little presence, creating both a credit availability
issue for customers and significant opportunities for the Group.
The Group’s strategy for Commercial Lending is to target
niches (either product types or customer groups) where its
skill sets and customer service culture can be best applied,
and its capital effectively deployed to optimise the relationship
between growth, risk and return.
The SME sector has been the focus of government-mandated
support programmes throughout the pandemic including
payment reliefs from lenders, VAT deferral schemes and the
provision of loans under the Coronavirus Business Interruption
Loan Scheme ('CBILS'), Coronavirus Large Business
Interruption Loan Scheme (‘CLBILS’), Bounce Back Loan
Scheme ('BBLS') and Recovery Loan Scheme ('RLS'). These
reliefs have resulted in significant increases in cash balances
held in the sector, which makes long-term prospects more
difficult to gauge.
During the period the Group has continued to enhance
operational functionality in this area, developing technological
solutions and investing in systems, particularly focussing on
administration systems for SME lending and development
finance. These enhancements should provide benefits for both
customer service and in the procuration processes, enabling
potential customers or their brokers to access appropriate
finance solutions more easily and efficiently, while providing
the Group with the information needed to support increasingly
technologically advanced decision-making and the adoption of
an IRB capital model for this business.
The division continues to develop its approach to green
financing, where funding can be deployed in support of more
climate conscious business activities, such as supporting
local authorities in replacing refuse collection fleets with
greener vehicles. Work is also in progress to classify the
environmental impacts of lending in accordance with the UK’s
Green Taxonomy, although the Group's lending conncected to
‘brown’ industries (those with a high environmental impact) has
already been assessed as low.
Commercial Lending activity
The Commercial Lending segment saw a 22.9% increase in new
business during the year following the 18.3% reduction in 2020.
Development finance continued its growth trajectory while
SME lending also grew, particularly in its longer term asset
finance product lines. Motor finance operated at a reduced
level through the early part of the year, but returned strongly
to the market in the spring.
The new lending activity in the segment during the year is
set out below, analysed by principal business line. As the
structured lending business comprises revolving credit
facilities, the net movement in the period is shown.
Development finance
SME lending
Structured lending
Motor finance
2021
£m
510.4
336.9
24.0
100.2
971.5
2020
£m
385.3
288.0
7.6
109.9
790.8
The impact of this new business has been to increase the
Group’s overall Commercial Lending exposure by 3.6% in the
year to £1,568.8 million (2020: £1,514.8 million).
Development finance
The continuing growth of the Group's development finance
business saw it reach the milestone of £1.5 billion of total
lending over the last three years, with 13,000 new homes
financed in that time. Enhancements to the product range and
the expansion of the relationship team continued thoughout
the current year, which alongside an active market, helped drive
volumes higher.
The Group’s target customer is a small to medium-sized
developer of UK residential property. Projects currently in
progress have an average development value of £7.8 million
against which the Group has extended average facilities of
£5.0 million, giving a substantial level of security cover. These
projects are generally focussed on the more liquid parts of the
residential market (houses and smaller blocks of flats), avoiding
developments with high unit values.
The development finance business remained robust
throughout the period, although Covid-related restrictions and
supply chain issues meant that many projects progressed more
slowly than they might have done in normal times, especially
in the first half of the year. This, however created an element of
pent-up demand moving into the second half with advances,
pipeline and enquiries strengthening as the year progressed.
Market sentiment appears positive with developers generally
optimistic about the future, despite the short-term
supply issues.
While the business has been historically concentrated in the
English Home Counties, with 63.6% of balances at the year
end located in London and the South East (2020: 67.0%), the
Group’s strategic objective is to lend more widely across the
UK. Central London property hot-spots have generally been
avoided with approximately 4% of the balance located in
this area.
During the year the product range was expanded to include
finance for projects in the £0.4 million to £1.0 million range,
widening its potential market to include smaller, growing
developers as they expand their businesses as well as
expanding options for existing customers. It also reintroduced
lending of up to 70% of total development value, suspended in
response to the pandemic, for the highest quality propositions.
Together these will expand the range of projects the business is
able to consider.
Following the end of the year, the business launched a Green
Homes Initiative to promote the development of energy
efficient properties, by halving exit fees if EPC ratings of A
are achieved on 80% or more of units within a development,
incentivising developers to meet the demand for greener
properties and to support the UK’s net zero target.
The Group’s customers have remained resilient through the
Covid pandemic with delays minimised and completed projects
being taken to market. To safeguard its investments, the Group
engages independent monitoring surveyors to review progress
and costs on a regular basis through the build phase of
each project.
The volume of new proposals being received increased steadily
during the second half of the year, with the increased amounts
of undrawn approvals, at record levels at the year end, providing
a springboard for the beginning of the new financial year.
Undrawn amounts on live facilities at 30 September 2021 at
£500.4 million were 31.4% higher than at the previous year end
(2020: £380.9 million) while the post-offer pipeline of
£298.6 million was 74.1% higher (2020: £171.5 million).
During the year, the business invested in both people and
systems, while increasing its national and regional coverage
with the recruitment of experienced specialist relationship
directors and portfolio managers. These initiatives will
support the further growth and broadening of the business
going forward.
Page 33
Strategic Report
During the year £64.2 million was advanced under schemes
backed by a government guarantee (2020: £25.9 million), of
which £50.4 million was asset leasing business. The Group
continues to closely monitor the portfolio for any adverse
indications, particularly at the point at which customers, rather
than the Government, are expected to commence payments.
Short-term lending to professional services firms outside
the government supported schemes fell by 21.6% to
£62.0 million (2020: £79.1 million). Despite this fall in volumes,
this represents a recovery in the second half of the year
following twelve months of very low volumes during the
pandemic. This resulted from both the deferral of tax balances,
where customers had typically taken out short term loans
to spread the impact, and of the wide availability of cheap
CBILS and BBLS lending in the market. The second half of the
year saw the impact of these factors diminishing and lending
moving back towards pre-Covid levels with the underlying
requirement for finance remaining for the longer term.
The Group has continued to invest in system improvements
to create efficiency gains in this business throughout the year
despite the pandemic. Enhancements to the new lending
process were rolled out in April, offering improvements for
customers and brokers including the launch of a new finance
broker portal, providing enhanced functionality, in response to
extensive research amongst the broker community.
The finance broker portal, which provides significant benefits
in terms of process automation and response speed was
rolled out to a larger population following the year end and the
reengineering programme will continue into the new financial
year, enhancing controls, operational agility and the
customer experience.
With the FLA quarterly industry outlook survey showing
90% of providers expecting new business growth in the
next twelve months, growing confidence in the customer
base, a strengthening new business pipeline and system
developments, the Group is optimistic for the future
prospects for the business.
Structured lending
The Group’s structured lending exposure has seen an
increased level of activity in the year, with several new facilities
agreed, diversifying the business’ exposures, and the overall
balance increasing.
Structured lending facilities generally fund non-bank lenders
of various kinds providing the Group with increased product
diversification. The facilities are constructed to provide a buffer
for the Group in the event of default in the ultimate customer
population. The Group’s experienced account managers have
received regular reporting on the performance of the security
assets and they maintained a high level of contact with the
Group’s customers throughout the Covid crisis to safeguard
its position.
The Group has a number of well-progressed additional facilities
in the pipeline, with an expectation of more drawings in the
new financial year. These include new asset classes, spreading
the risk inherent in such lending. The Group continues to
actively seek new opportunities in this field, with a particular
interest in facilities linked to green initiatives.
The Group has also made progress on the development of
an IRB capital model for this business, which should reduce
the cost of capital in the longer term, as well as enhancing
capital discipline.
The performance of the development finance business through
the pandemic has demonstrated the attractiveness of the
proposition going forward. The demand for new housing in the
UK shows no sign of reducing and smaller developers, who
have historically struggled with credit availability, will be needed
if the country’s needs are to be met. Sentiment in the market
looks positive entering the new financial year and the Group’s
business model, its investment in systems and people and the
developments in its product range mean it is well-placed to
support the aspirations of its developer customers and to help
support housing provision across the UK.
SME lending
The SME lending business continued to perform well in the
face of Covid-related constraints throughout the financial
year, although certain business lines were particularly affected
by either reduced economic activity, logistical difficulties in
equipment sourcing, payment deferrals reducing the need for
finance or the availability of cost-effective CBILS and BBLS
funding. Lending strengthened considerably in the second half
of the year, with the growth in longer term asset backed lending
particularly encouraging for income.
Research carried out for the Group during the second half
of the year suggested that 92% of UK SMEs were confident
about their ability to bounce back from Covid, while 22% had
already seen their turnover return to pre-Covid levels. Cash
flow was identified as the principal issue for most SMEs, with
UK Government support accessed by the majority. Levels
of available cash remained the principal concern for SMEs
looking forward.
This confidence in the sector led to a 17.0% growth In the
Group’s SME lending advances in the year, although the
performance varied across product types. Generally all lines
reported a stronger second half, with the economy opening
up and business confidence beginning to increase.
In the division’s core asset leasing business volumes
increased by 19.3% to £198.2 million, excluding
government-backed balances (2020: £166.1 million), with
business levels strengthening towards the end of the period.
This reflects the performance of the asset finance market
in general, with the Finance and Leasing Association (‘FLA’)
reporting depressed volumes through the winter months
and business picking up through the summer. Investment
in operating leases has also continued with £13.0 million of
assets acquired in the period (2020: £12.9 million).
The Group continued to advance loans under the UK
Government-sponsored British Business Bank’s CBILS and
BBLS programmes to support SMEs potentially affected
by the Covid pandemic, until those schemes closed for new
applications in March 2021. The Group has been authorised to
take part in the follow-on RLS programme and began lending
under this scheme in the second half of the year. RLS loans
have the benefit of an 80% government guarantee (after
the proceeds of any business assets are applied for leasing
balances), but unlike CBILS lending, customers will be required
to meet interest payments from the outset of the loan.
The existing RLS scheme closes for new offers from 31
December 2021 and will be replaced by a scheme with a 70%
government guarantee. The Group expects to use these
schemes to provide support to SME customers until 30 June
2022, the currently expected end date of the schemes. The
Group’s lending in this area has been primarily focussed on its
existing customers, and the majority of both BBILS and RLS
lending has been on asset-secured products.
Page 34
Motor finance
The Group’s motor finance business is a focussed
operation targeting propositions which are not addressed by
mass-market lenders, including specialist makes and vehicle
types, such as light commercial vehicles, motorhomes
and caravans.
During the first part of the year the Group operated tighter
lending criteria and temporarily diverted resources from the
new business teams in the area to support the wider Group’s
customer servicing requirements through the pandemic,
including the provision of payment reliefs. In the second half
the Group relaunched its proposition with a renewed focus as
dealerships began to open and market activity increased.
Following the year end the operation extended its lending
criteria to include battery electric cars for the first time,
following consultation with dealers and brokers. This will
help to support the UK’s move away from petrol and diesel
powered vehicles.
The Group’s advances in the year reflect this operational
strategy, with £100.2 million of completions in the year, a
broadly similar level to the £109.9 million achieved in 2020.
However, this represents a significant post-Covid recovery
with £71.4 million of advances in the second half of the year,
compared to £28.8 million in the first half and £35.1 million
in the second half of 2020. This returns completions to the
level seen in the first half of 2020, before the outbreak when
advances of £74.8 million were made.
This Group’s performance follows the trajectory of the wider
motor finance market, with the FLA reporting falling volumes
until February 2021, before a recovery began to take hold
in March.
Performance
The outstanding loan balances in the segment are set out
below, analysed by business line.
Asset leasing
Professions finance
CBILS, BBLS and RLS
Invoice finance
Unsecured business lending
Total SME lending
Development finance
Structured lending
Motor finance
2021
£m
468.7
33.1
83.8
20.9
10.3
616.8
608.2
118.9
224.9
2020
£m
478.0
22.3
25.2
13.5
15.0
554.0
609.0
94.9
256.9
1,568.8
1,514.8
Credit quality in the development finance book has been good,
and the overall performance of the projects has been in line
with expectations, with the pandemic having no significant
impact on the disposal of completed developments. Accounts
are regularly monitored and graded on a case-by-case basis
by the Credit Risk function. At 30 September 2021 only one
account had been identified as at risk of loss, a long standing
legacy case. While the impact of Covid on development
finance projects has been limited to issues relating to the
progress of some projects, rather than credit concerns, the
Group recognises the potential impact of increased economic
uncertainty 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
61.7% (2020: 63.1%), which gives the Group a substantial buffer
if any project encounters problems. No new serious credit
issues arose during the financial year and a number of problem
cases identified in prior periods were resolved.
Credit performance in the division’s finance leasing portfolios
generally remains relatively stable, with arrears in asset leasing
at 0.27% and motor finance at 2.30% (2020: 1.75% and 1.76%
respectively), however there have been a small number of
cases where serious credit issues have been identified and the
sector is expected to display more volatile credit performance
as government support initiatives unwind.
Of the division’s live motor finance accounts at 30 September
2021, 1,507 cases (9.5%) had been granted payment holidays
during the course of the pandemic with 312 (2.0% of cases)
of those holidays extended. None of these payment holidays
remained in place at the year end.
In SME lending 2,570 of the live accounts at 30 September
2021 had been granted payment holidays with 316 of those
extended, of which 28 remained in place at the year end.
The majority of CBILS and BBLS lending remained in its initial
twelve-month period where interest payments were met by the
UK Government throughout the financial year. Payments from
customers began to fall due in the second half of the financial
year on a limited number of accounts in the first tranches of
lending, and the Group has appropriate systems, processes
and resource in place to deal with any issues as they arise.
Of the guaranteed portfolio, £5.0 million (2020: £4.6 million)
comprises fully guaranteed BBLS loans.
With the exception of a small number of irregularly submitted
applications, where claims have been submitted under the
guarantee scheme, the Group has yet to encounter any serious
credit issues with its CBILS and BBLS portfolios. Any emerging
payment behaviours will be kept under close scrutiny.
In the structured lending business, the Group carefully
monitors the performance of the underlying asset pool on
a monthly basis, to ensure its security remains adequate.
The Group relies on its data monitoring and verification
processes to ensure that these reviews are able to detect any
credit issues. Performance in the year has been in line with
expectations, with generally improved metrics across the book
and only one loan remaining in IFRS 9 Stage 2 at the year end.
Outlook
The Group’s Commercial Lending division has emerged from
Covid well placed for future growth. Work to develop products,
systems and services has been ongoing throughout the
pandemic and the year ended with increased pipelines and
building momentum.
With sentiment largely positive in the division’s customer
base, and new, green product ranges launched in the new year,
the Group is optimistic for its prospects in the Commercial
Lending space.
Page 35
Strategic Report
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 success rests on understanding
assets, strong analytics, advanced servicing capabilities and
the efficient use of funding.
When considering portfolios for acquisition the Group
currently focusses on specialist loan portfolios which might
augment its own organic origination activities. This model
is essentially opportunistic and the flow of appropriate
opportunities to the market is both limited and sporadic, even
in a normal economic environment.
The Group carefully considers the capital requirements for any
potential acquisition, particularly where the asset types offered
require relatively large amounts of regulatory capital to be held.
It also evaluates the potential for conduct risk issues to arise
in portfolios which may contain more vulnerable customers.
The Group will only pursue transactions where it considers that
its wider capabilities in specialist administration and funding
can provide a real benefit and where the projected return is
attractive in comparison to the other opportunities for the
deployment of its capital.
The Idem Capital back book includes consumer lending
portfolios where customers may have historically rescheduled
their debt repayments and its processes aim to generate fair
outcomes for all customers, recognising any vulnerabilities.
This aim has formed a principal focus in the Group’s response
to Covid in respect of such customers.
New business
Although the UK loan portfolio market remained active in
the period, the impact of Covid continued to depress activity
levels, and complicated the pricing and execution of potential
deals, discouraging vendors from coming to market.
Balances in the segment have continued to decline as
outstanding amounts are collected on existing portfolios,
with no additions in the period. Cash flows remained strong
across all books, despite the on-going effects of Covid on
consumers. This level of collections resulted in, the 120 month
Estimated Remaining Collections (‘ERC’), a measure of future
expected cash flows, on acquired consumer assets falling to
£245.2 million at 30 September 2021 (2020: £313.7 million).
Arrears on the segment’s secured lending business have risen
to 24.3% (2020: 18.8%). These arrears levels remain higher
than the average for the sector, but this reflects the seasoning
of the balances, while the continuing 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 8.6% at 30 September 2021 were reported by the
FLA (2019: 8.4%).
Of the division’s live secured lending accounts at
30 September 2021, 1,270 cases (14.1%) had been granted
payment holidays during the course of the pandemic with
578 (6.4% of cases) of those holidays extended. In the motor
finance portfolio 463 live cases (15.6%) had received a payment
holiday with 136 (4.6%) having been extended. No payment
holidays remained in place at the year end.
None of the live Idem Capital loan portfolios were regarded
as materially underperforming at the year end, with cash
generation continuing to hold up. The Group monitors actual
cash receipts from acquired portfolios against those forecast
in the pre-purchase evaluation of the portfolio. Up to
30 September 2021 these collections were 109.8% of those
forecast to that point (2020: 109.8%).
The Group continues to invest in systems and people to
ensure that Idem Capital customers receive an efficient and
effective service which delivers fair outcomes. Given the
nature of the books, particular attention is given to providing
training, and establishing processes to ensure that vulnerable
customers are identified, and their needs are addressed
During the period, no portfolio acquisitions were completed
(2020: none) although the division undertook a limited number
of reviews of opportunities that were ultimately not progressed.
Outlook
The Group’s strategy for the Idem Capital business is to
consider only those opportunities which would enhance its
overall positioning, provide attractive returns and represent
a productive use of capital. These will be essentially
opportunistic, and there is no volume target.
In the meantime, the division will continue to focus on its
commitment to providing appropriate outcomes for its existing
customers as it has done throughout the Covid pandemic and
ensuring any vulnerability issues are carefully addressed.
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 outbreak with customers, many of whom were already
identified as vulnerable or who had developed vulnerabilities
as a result of the ongoing pandemic.
Performance
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
2021
£m
133.6
87.2
4.3
225.2
2020
£m
171.9
109.7
15.5
297.1
Page 36
A4.2 Funding
The Group’s progress towards this goal is illustrated by the chart
below which shows, at each of the financial year ends since
2015, the outstanding funding balance by type.
The Group is principally funded by retail deposits but also
accesses a variety of other funding sources. This maintains an
adaptable and sustainable funding position as the business
and its operating environment develop. The Group is therefore
able to access cost-effective funding despite issues in any
particular funding market, as well as raising funding for
strategic initiatives on a timely basis.
Throughout the period the Group raised the majority of its
new funding through the retail deposit market, where demand
for deposit products has remained strong, with consumers
trending towards saving rather than spending in the year, either
through increased prudence or merely through the reduction
in ‘big-ticket’ spending opportunities caused by lockdowns and
other Covid-related measures. It has also continued to draw on
the Bank of England TFSME scheme to support its lending to
SME customers.
The Group’s funding at 30 September 2021 is summarised
as follows:
2021
£m
2020
£m
2019
£m
Retail deposit balances
9,300.4
7,856.6
6,391.9
Securitised and
warehouse funding
1,246.0
3,928.3
5,206.9
Central bank facilities
2,819.0
1,854.4
Tier 2 and retail bonds
386.1
446.6
994.4
446.1
Total on balance
sheet funding
Off balance sheet
central bank facilities
Other off balance
sheet liquidity facilities
13,751.5
14,085.9
13,039.3
-
-
109.0
150.0
150.0
-
13,901.5
14,235.9
13,148.3
The Group’s retail deposit balance grew by 18.4% in the year
to £9,300.4 million (2020: £7,856.6 million), representing over
two thirds (67.6%) of balance sheet funding (2020: 55.8%), with
wholesale borrowings continuing to reduce over the year.
At 30 September 2021 the proportion of easy access deposits,
which are repayable on demand, was 24.1% of total on-balance
sheet funding (2020: 16.8%). This increase is partly a result of
market sentiment with savers reluctant to commit funds to term
deposits in a low rate environment, and partly as a result of the
Group’s maturing liquidity policy. This percentage remains low
compared to the rest of the banking sector and can be expected
to rise going forward.
With the generally uncertain economic outlook, the Group
has maintained a cautious approach to liquidity in the period.
Some loosening of policy took place in the period in response
to the gradual opening up of the UK economy, but at the end
of the year the Group still had £1,236.5 million of cash available
for liquidity and other purposes (2020: £1,701.1 million). The
Group’s contingent liquidity policy will be kept under review
as the ultimate outcome of the Covid crisis becomes clearer
and longer-term trends become more evident, but the Group
intends to maintain a conservative approach.
The Group’s long-term funding strategy, following the granting
of its banking licence in 2014, has been to move to using retail
deposits as its primary funding source, using the debt markets
on an opportunistic basis for additional funding requirements.
Funding by type
(30 September 2015 - 2021)
£16,000m
£14,000m
£12,000m
£10,000m
£8,000m
£6,000m
£4,000m
£2,000m
£0m
2015
2016
2017
2018
2019
2020
2021
Securitisation
Bonds
Central Bank
Retail deposits
The Group’s response to the withdrawal of the London
Interbank Offered Rate (‘LIBOR’), due at the end of the
calendar year, is well progressed. While the London Interbank
Offered Rate (‘LIBOR’) had been the principal benchmark rate
used by the Group, a transition to other, risk-free rates, notably
rates linked to the Sterling Overnight Index Average (‘SONIA’),
has been ongoing for more than two years.
No new LIBOR-linked derivative contracts have been
entered into since February 2020 and remaining
LIBOR-linked derivatives will transition to SONIA in
accordance with the International Swaps and Derivatives
Association (‘ISDA’) protocol. Meanwhile, all the Group’s
LIBOR-linked borrowings have either been retired, transitioned
or have an agreed transition process in place.
A transition process for the Group’s principal LIBOR-linked
asset class, legacy buy-to-let mortgages, was communicated
to customers and completed in the second half of the year.
Other LIBOR-linked assets have either been transitioned, have
an agreed transition methodology or are expected to fall due
before the LIBOR transition date. Overall, the Group considers
that it is well placed to meet the withdrawal deadline of
31 December 2021.
Page 37
Strategic Report
A4.2.1 Retail funding
The Group considers the retail deposit market to be a reliable,
scalable and cost-effective source of funding, which has
remained fully functional throughout the Covid crisis. The
Group’s offering has been centred on sterling household
deposits, although it began to access the SME sterling deposit
market in the year.
A variety of products are offered, including term deposits, ISAs
and easy access accounts and the business accesses the
market through a variety of in-house and external channels.
The proposition is based on competitive rates and value for
money, combined with the Group’s strong customer service
ethic and the protection provided to depositors by the
Financial Services Compensation Scheme (‘FSCS’).
The retail deposit market in the UK is large, deep and well
developed. During the year UK household savings balances
reported by the Bank of England continued to increase with
balances at 30 September 2021 reaching £1,402.5 billion
(2020: £1,287.9 billion), an increase of 8.9% in the year. This
has resulted from increased saving by consumers during the
pandemic and has also depressed market interest rates. Some
of this increase may be reversed as the UK economy returns
to a more normal footing, but as a small participant the Group
is less likely to be affected by this than larger banks and
building societies.
The Group’s retail deposit franchise has continued to perform
strongly in the year with a reduced funding cost, reflecting
improvements in the business process, increased channels to
market and downward market pressures on rates.
The growth of the retail funding balance over recent years is
set out below.
Retail deposits
(At 30 September 2016 - 2021)
£10,000m
£9,000m
£8,000m
£7,000m
£6,000m
£5,000m
£4,000m
£3,000m
£2,000m
£1,000m
£0m
2016
2017
2018
2019
2020
2021
Savings accounts at the financial year end are analysed below.
Average
interest rate
Proportion
of deposits
2021
2020
2021
2020
%
Fixed rate deposits
1.25%
Variable rate deposits
0.42%
%
1.69%
0.72%
%
58.8%
41.2%
%
63.3%
36.7%
All balances
0.91%
1.34%
100.0%
100.0%
Page 38
The average initial term of fixed rate deposits was 26 months
(2020: 27 months). Market savings rates in the year have
remained at historically low levels, with the Bank of England
quoting average interest rates at 30 September 2021 for new
2-year fixed rate deposits at 0.46% (2020: 0.48%) and for
instant access balances at 0.10% (2020: 0.07%).
During the year the Group has grown its business both through
a focus on its in-house channel and through expanding
its offering across other third party platforms. Significant
infrastructure investment in the Group’s new Mambu platform
has enabled the number of external channels where the Group
has a presence to be expanded while embedding a strong
control environment, providing an effective and efficient
service and offering future digital optionality.
Offerings through these channels, which include investment
platforms and savings marketplaces operated by digital banks,
provide access to a different customer demographic to the
Group’s mainstream customers. This more diversified sourcing
offers enhanced opportunities to manage inflows and costs.
The Group has added three new relationships in the period,
including one with Aviva Savings, bringing the total to seven.
These channels now represent around 12% of the total deposit
base and the system investment in the year gives the Group
capacity to expand further in this area.
The Group regards the quality of its customer service as a vital
component of its savings market strategy and conducts insight
surveys throughout the customer journey. In this research 88%
of customers opening a savings account with the Group in the
year who provided data, stated that they would ‘probably’ or
‘definitely’ take a second product (2020: 88%). The NPS in the
same survey was +58, similar to that in the previous year
(2020: +61).
When customers with maturing savings balances in the year
were surveyed, 89% stated that they would ‘probably’ or
‘definitely’ consider taking out a replacement product with
the Group (2020: 90%) with an NPS at maturity of +52, slightly
increased from the 2020 financial year (2020: +50).
These positive responses demonstrate the quality of the
Group’s customer interaction operations, which support its
efforts to retain customers and deposits in the current active
and competitive market. This has been enhanced in the year
with additional functionality on the Group’s website, such
as automated password resets, introduced in response to
customer feedback.
This level of customer satisfaction is also demonstrated by
the Group’s continuing success in industry awards. During
the year awards won included ‘Best Internet Account Provider’
at the 2021 Moneyfacts Awards, ‘Best Cash ISA Provider’ at
the 2021 YourMoney awards, ‘ISA Provider of the Year’ at the
2020 MoneyAge awards, ‘Best Notice Savings Provider’ at
the 2021 Moneynet awards, ‘Best Easy Access Savings
Provider’ and ‘Best Easy Access Cash ISA Provider’ in the
MoneyComms 2021 Top Performers list and ‘Best Cash ISA
Provider’ in the 2021 Savings Champion Awards.
Both aspects of the Group’s savings infrastructure,
its outsourced deposit administration system and its
infrastructure supporting external savings platforms,
continue to provide a solid and scalable operating model for
the business. Service standards and customer satisfaction
have been maintained despite the effects of ongoing Covid
restrictions, and servicing resources have continued to
develop with the business.
The retail deposit funding stream provides a stable principal
funding base for the Group’s operations where volumes and
rates can be effectively and flexibly managed. The operation
will continue to develop on a strategic basis, expanding its
offerings, addressing wider demographics and expanding its
presence on third party platforms.
This increasing diversification and the FSCS guarantee are
likely to reduce the potential for liquidity impacts and the
Group’s profiling of its target customers suggests they may
be more resilient than average in the event of future
economic stresses.
A4.2.2 Central bank facilities
The Bank of England Term Funding scheme for SMEs
(‘TFSME’) continued to be available throughout the year to
support lenders in providing credit to SME customers through
the Covid pandemic. The Group has continued to draw on
these funds to support its lending, particularly in its SME
lending and development finance businesses.
During the year the Group’s drawings under TFSME increased
to £2,750.0 million (2020: £910.0 million). As TFSME provides
funding at or very close to base rate, it is a particularly
cost-effective form of borrowing for lenders which, like the
Group, wish to support their SME customers through the
economic uncertainties of the pandemic. Shortly after the year
end the Group repaid and redrew all of its TFSME borrowings,
extending the maturities.
Drawings under the Bank of England’s original Term Funding
Scheme (‘TFS’) which were due to mature in the current
financial year began to be retired early during the period,
improving the maturity profile of the Group’s borrowings.
At 30 September 2021 the remaining TFS borrowings provide
£69.0 million of the Group’s funding (2020: £944.4 million),
but will be repaid in the early part of the new financial year.
The Group retains access to other Bank of England funding
channels but did not utilise them in the year.
The Group expects to continue to make use of these facilities
going forward, in accordance with the objectives of the
schemes. Where using them is appropriate and cost-effective,
mortgage loans pre-positioned with the Bank of England are
available to act as collateral for future drawings, if and when
required. This provides access to potential liquidity or funding
of up to £1,424.2 million (2020: £684.0 million).
A4.2.3 Wholesale funding
The Group’s wholesale funding includes securitisation funding,
warehouse bank debt and retail and Tier 2 corporate bonds,
which are each accessed from time to time as appropriate.
The Group’s Long-Term Issuer Default Rating was affirmed at
BBB by Fitch in March 2021, with the outlook upgraded from
negative to stable, reversing the change which was applied to
all the major UK banks during 2020 as a result of the
Covid crisis.
During the year capital markets remained active, with activity
in most areas of funding. The securitisation markets remained
open, but with most volume driven by those lenders without
access to central bank facilities.
Wholesale pricing has been attractive for issuers, with strong
demand for new issuance. Against this backdrop the Group
issued a £150.0 million Tier-2 Green Bond in March 2021.
This was the first issuance certified under the Group’s Green
Bond Framework, approved in March 2021, which sets out how
the proceeds of the bond will be applied, and which is available
on the Group’s website at www.paragonbankinggroup.co.uk.
The new bond carries an interest rate of 4.375%, fixed for five
years, and will count in full towards tier 2 capital for a five year
period. It was rated BB+ by Fitch on issue. This interest rate
represents a considerable saving on the Group’s previous Tier
2 bond, issued in 2016, which bore interest at 7.25% per annum.
The majority of the Group’s £150.0 million 2016 Tier-2 Bond was
acquired by the Group in a tender process during March 2021.
The remainder was redeemed at the call date in
September 2021.
These bond transactions reduce overall funding costs and
place the Group’s tier 2 capital position on a longer-term
footing, as well as accessing the green bond market.
Historically the Group has been one of the principal issuers of
UK residential mortgage backed securities (‘RMBS’), however
its reliance on this funding source has been significantly
reduced over recent years, with the most recent issuance held
internally rather than issued in the market.
The Group’s four mature legacy securitisation transactions
were refinanced during the period. An agreement was
also reached in the period to transition the only other
LIBOR-linked deal, Paragon Mortgages (No. 25) PLC, from its
interest payment date in February 2022. These transactions
benefit the Group’s overall long-term funding position by
releasing cash collateral; removing LIBOR-linked liabilities
ahead of transition; crystallising derivative positions, thereby
reducing the Group’s TRE for capital purposes; and releasing
loan assets for use in creating eligible securities which can be
used to access TFSME and other forms of funding.
A fully-retained securitisation transaction, Paragon Mortgages
(No. 28) PLC was completed in the year. In this transaction
£703.1 million of rated notes were issued to group companies,
to be used as collateral in other funding transactions, such as
TFSME. This repeats the structure of Paragon Mortgages
(No. 27) PLC, issued in 2020.
The Group renegotiated its £400.0 million warehouse funding
facility during the period reducing the interest margin from
1.05% above LIBOR to 0.60% above LIBOR. This facility is
used to provide 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. After the year end this facility was extended to
£450.0 million and the interest rate was transitioned to 0.50%
over SONIA. These changes will make this funding more cost
effective and practical going forward.
The Group’s retail bond issued in 2013 was repaid at maturity
in December 2020. The Group also entered into sale and
repurchase transactions from time to time, to ensure it retains
access to this channel for liquidity purposes.
Overall, these initiatives reduced the Group’s dependency on
legacy securitisation debt, lowered funding costs, facilitated
LIBOR transition, and increased average remaining maturities
for its other borrowings. This demonstrates the adaptability
of the Group’s wholesale funding activities and the Group will
continue to access all these funding sources on a strategic and
opportunistic basis as appropriate.
A4.2.4 Funding outlook
The year has seen growth in the Group’s savings franchise,
while the tenor of its wholesale and central bank borrowings
has been extended, with the average cost of funding reduced
and the green finance market accessed for the first time.
This has been consistent with the Group’s funding strategy
developing and enhancing its access to funding sources while
maintaining its principal focus on the retail savings market.
The Group is well placed to maintain this diverse, robust and
adaptable strategy going forward, which will support the needs
of its developing business into the future.
Further information on all the above borrowings is given in
notes 26 to 31.
Page 39
Strategic Report A4.3 Capital
The Group’s principal capital measures, CET1 and Total
Regulatory Capital (‘TRC’), are set out below on both bases.
The Group’s capital policy is designed to provide appropriate
returns to shareholders, preserve the strength of its balance
sheet, maintain strong regulatory capital and liquidity positions
to safeguard its depositors and to ensure sufficient capital is
available to meet strategic objectives and opportunities going
forward. The safeguarding of this capital strength has been a
fundamental objective of the Group’s ongoing Covid response.
This enabled the Group to return to a more normal
approach to capital and distributions in the year ended
30 September 2021, with an interim dividend declared and
share buy-backs undertaken. The Group’s position was
also enhanced by a favourable result from the most recent
regulatory review of its capital position, which reduced its
requirement to hold regulatory capital.
For regulatory purposes the Group’s capital comprises
shareholders’ equity and its Tier-2 green bond. It has no
outstanding Additional Tier-1 (‘AT1’) issuance, but has the
capacity to issue such securities, if considered appropriate,
under an authority granted by shareholders at the 2021 Annual
General Meeting (‘AGM’), which will be proposed for renewal at
the 2022 meeting.
A4.3.1 Regulatory capital
The Group continued to maintain strong regulatory capital
ratios throughout the year, with capital balances having grown
as a result of its prudent approach to capital management
through the Covid pandemic. During the period the Prudential
Regulation Authority (‘PRA’) conducted a supervisory review of
the Group’s capital requirements, based on the Internal Capital
Adequacy Assessment Process (‘ICAAP’) analysis. The results
of this review were very positive, with the regulator significantly
reducing its capital requirement based on its assessment
of the Group’s risk exposures and management systems.
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 a Total
Capital Requirement (‘TCR’) 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’), which was transposed to the
PRA Rulebook as part of the Brexit arrangements.
The TCR includes elements determined based on the Group’s
total risk exposure together with fixed elements, and 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. It was granted transitional relief on
the adoption of IFRS 9, along with most other banks, with
additional relief granted in 2020 for the impact on capital of
provisions created in response to the Covid pandemic.
The PRA requires firms to disclose capital measures both on
the regulatory basis and as if these reliefs had not been given,
referred to as the ‘fully loaded’ basis.
Regulatory basis
Fully loaded basis
2021
£m
2020
£m
2021
£m
2020
£m
Capital
CET1 capital
1,055.8
991.2
1,026.1
948.9
Total Regulatory
Capital (‘TRC’)
Requirement
1,205.8
1,141.2
1,176.1
1,098.9
TCR
604.2
749.6
601.8
745.3
As the value of IFRS 9 reliefs will taper over time, the difference
between measures on the regulatory and fully loaded bases
will narrow and eventually converge.
The Group’s CET1 capital comprises its equity shareholders’
funds, adjusted as required by the CRD IV rules and can be
used for all capital purposes. TRC, in addition, includes tier-2
capital representing the Tier-2 Bonds. This tier-2 capital can
be used to meet up to 25% of the Group’s TCR. The increase
in capital over the year is a result of the positive trading
performance, which outweighed the impact of dividend
payments and share buy-backs in the period.
The TCR is specific to the Group and is set by the regulator,
based on its supervisory reviews. The reduction in TCR on both
the regulatory and fully loaded bases shown above has arisen
principally as a result of the successful outcome of the most
recent review process.
This saw the TCR on both bases reduced to 8.9% of TRE
from 10.8% of TRE at 30 September 2020, compared to the
minimum TCR allowed under the Basel III framework of 8.0%.
This represents a significant benefit to the Group’s capital
management and reflects the maturity of the Group’s systems
for the management of capital and risk.
CET1 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. The CCoB remained at 2.5%, its
long-term rate, throughout the year (2020: 2.5%), while
the UK CCyB remained at 0.0% (2020: 0.0%), having been
reduced from 1.0% during 2020 as a regulatory response to
the pandemic. However, it has been stated by the Financial
Policy Committee of the Bank of England that the long-term
standard rate of the CCyB will be 2.0% and this requirement
for additional capital in the future has been factored into the
Group’s capital planning.
CET1 capital required to cover CRD IV buffers therefore
reduced to £170.9 million at the year end on the regulatory
basis (2020: £173.7 million).
Further buffers may be set by the PRA on a firm-by-firm basis
but cannot be disclosed.
Page 40
The Group’s capital ratios, after allowing for the proposed
dividend for the year, are set out below.
A4.3.3 Dividends and
distribution policy
Basic
Fully loaded
2021
15.4%
17.6%
7.5%
2020
14.3%
16.4%
7.1%
2021
15.1%
17.3%
7.3%
2020
13.7%
15.9%
6.8%
CET1 ratio
Total capital ratio
UK leverage ratio
All of the Group’s capital ratios show strong improvement
over the period, despite the resumption of distributions to
shareholders. This reflects the trading profits, including a
reduction in Covid-based impairment provisions, a gain on the
pension scheme liability and reductions in risk weighted asset
values following the repackaging of legacy securitisations.
The Basel Committee on Banking Supervision (‘BCBS’) has
set the implementation date for its revisions to the Basel
III framework as 1 January 2023. This is, however, subject to
those revisions being enacted in the relevant jurisdiction.
Following the UK’s exit from the EU, these rules are expected
to be enacted for UK banks through the PRA Rulebook. The
PRA has also launched a more extensive consultation on its
approach to regulating non-systemically important banks
without international activities. The Group is monitoring these
developments and will respond through its capital planning
as appropriate.
The Group submitted the second stage of its application for
the accreditation of its IRB approach to buy-to-let credit risk
for capital adequacy purposes to the PRA in March 2021. The
project continues to progress to plan, and work continues
into the new financial year on both the buy-to-let portfolio and
development finance lending, which represents the next step
in the Group's IRB roadmap.
A4.3.2 Liquidity
It is Group policy to hold sufficient liquidity in the business to
meet 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. This policy has
a consequent effect on the Group’s operational capital and
funding requirements.
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 LCR measures short-term resilience and compares
available highly liquid assets to forecast short-term outflows,
calculated according to a prescribed formula, with a 30 day
horizon. The monthly average of the Bank’s LCR for the period
was 165.6% compared to 173.7% during the 2020 financial year.
The reduction is a liquidity policy response to the reduction
in Covid-related impacts to the business and in the
wider economy.
The NSFR is a longer-term measure of liquidity with a
one year horizon, supporting the management of balance
sheet maturities. At 30 September 2021 the Bank’s NSFR
stood at 119.6% (30 September 2020: 114.7%), reflecting the
strengthening of the overall funding and capital position over
the year.
The Group’s distribution policy over recent years has been
based on the objective of enhancing shareholder returns
on a sustainable basis, while protecting the capital base.
In order to achieve this, its stated policy has been to
distribute 40% of consolidated earnings to shareholders in
ordinary circumstances, achieving a dividend cover ratio
of approximately 2.5 times. It has also undertaken buy-
backs of shares in the market from time to time as part of
its management of overall capital, where these enhance
shareholder value.
The Group managed its capital cautiously through the
pandemic and accumulated a capital and cash surplus over
its requirements, including its regulatory requirements,
to the level that it was considered appropriate to resume
distributions to its shareholders, both in the form of dividends,
and in a share buy-back, addressing the needs of different
investor groups.
An interim dividend for the year of 7.2 pence per share
(2020: nil pence per share) was paid in July 2021 and the Board
is proposing, subject to approval at the AGM on 2 March 2022,
a final dividend for the year of 18.9 pence per share
(2020: 14.4 pence per share). This would give a total dividend
of 26.1 pence per share (2020: 14.4 pence per share). This
dividend would be in line with the stated policy, giving a
dividend cover of 2.50 times (2020: 2.50 times).
The 81.3% increase in total dividend from 2021 reflects the
increase in group earnings, including the impact of
Covid-related impairment provisions made in 2020 reversing
in the current year, which effectively deferred dividend to 2021.
The 2021 dividend is also inflated by the high level of fair value
gains in the year, which would not necessarily be repeated in
a future year. Care must therefore be taken in extrapolating
future dividend levels from the current year dividend alone.
The progress of the dividend for the year is shown in the
chart below.
Dividend for the year
(In respect of the years 2014 - 2021)
30p
25p
20p
15p
10p
5p
0p
2014
2015
2016
2017
2018
2019
2020
2021
The directors have considered the distributable reserves and
available resources of the Company and concluded that the
proposed dividend is appropriate.
Page 41
Strategic Report
In addition, the Board authorised a buy-back of up to
£40.0 million of shares in the market, initially to be held in
treasury. The Group has the authority to make such purchases
under a resolution approved by shareholders at the AGM in
February 2021. £37.5 million (excluding costs) was expended
during the year on the buy-back programme, and it is the
Board’s intention to complete the programme following the
announcement of the annual results.
As part of its review of the Group’s capital and dividend policy
following the completion of its annual results and the financial
forecasts for the coming period, the Board concluded that a
further buy-back programme of up to £50.0 million, initially to
be held in treasury, was appropriate, and this will commence
following the completion of the initial £40.0 million. In this
way, the Group seeks to balance the expectations of different
investor groups, while maintaining a strong capital position.
Any purchases made under these programme will be
announced through the Regulatory News Service (‘RNS’) of
the London Stock Exchange on the day of the transaction.
The Board has affirmed the existing dividend policy going
forward, subject to an assessment of prevailing conditions at
the time, but noted that, given the unusual factors affecting
the 2021 distribution, any interim dividend declared for
2022 would not necessarily bear the normal relation to the
preceding final distribution.
A4.3.4 Capital outlook
The Group’s current and forecast capital position is kept
under regular review, in light of the level and form of capital
demanded by current business, regulatory and economic
conditions, as well as the Group’s strategic objectives.
The capital and liquidity position of the Group had
strengthened through the year. The Group’s operations
increased the capital balance, the Tier-2 issuance has
been replaced at a lower cost and the positive result of the
regulatory review of the Group’s capital management systems
has resulted in a lowering of the minimum capital requirement.
The Group ends the year well capitalised, even after the
resumption of distributions to shareholders in the form of
dividends and buy-backs, and allowing for the return of CCyB
requirements and withdrawal of IFRS 9 reliefs in the longer
term. This position is both prudent and sustainable and helps
ensure the viability of the business for the benefit of
all stakeholders.
A4.4 Financial results
The Group’s trading performance before impairment charges
in the year ended 30 September 2021 highlights the level of
progress towards its strategic objectives, in spite of the impact
of the Covid pandemic on the UK economy and the necessary
steps taken to address this. Income and margins both
increased, generally in line with expectations.
As the UK economy began to open up towards the end of the
year, and the level of the effectiveness of the UK’s vaccination
programme became evident, the assumptions underlying the
Group’s impairment provisioning were revisited, resulting in a
release of provision. However the Group remains well provided
in the face of what remains an uncertain economic outlook.
Page 42
These factors leave the Group’s results significantly improved,
year-on-year, with underlying profit (Appendix A) for the year,
at £194.2 million, 61.8% higher than for the preceding twelve
months (2020: £120.0 million), with a provision release of
£4.7 million (2020: charge of £48.3 million), unwinding some
of the previous year’s Covid-related impacts. On the statutory
basis, which also includes the impact of fair value gains on
hedging, profit before tax increased 80.5% to £213.7 million,
the largest pre-tax profit the Group has ever recorded
(2020: £118.4 million).
Earnings per share increased by 81.1% to 65.2 pence
(2020: 36.0 pence) on the statutory basis, and by 62.5%
to 59.3 pence excluding the effect of the fair value gains
(2020: 36.5 pence) (Appendix A).
A4.4.1 Consolidated results
Consolidated results
For the year ended 30 September 2021
Interest receivable
2021
£m
484.2
2020
£m
491.7
Interest payable and similar charges
(173.7)
(213.6)
Net interest income
Net leasing income
Other income
Total operating income
Operating expenses
Provisions for losses
Fair value net gains / (losses)
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
310.5
278.1
3.5
10.9
3.0
14.0
324.9
295.1
(135.4)
(126.8)
4.7
194.2
19.5
213.7
(48.3)
120.0
(1.6)
118.4
(49.2)
(27.1)
164.5
91.3
2021
2020
26.1p
65.2p
63.0p
14.4p
36.0p
35.6p
Income
The Group’s total operating income in the year increased by
10.1% to £324.9 million (2020: £295.1 million). Net interest
income increased in the year by 11.7% to £310.5 million
(2020: £278.1 million). Part of this increase was a result of
growth in the average loan book in the year, 4.9% higher at
£13,017.0 million (2020: £12,408.7 million) (Appendix B), but
the business also generated a 15 basis point increase in net
interest margin (‘NIM’) for the year.
NIM in the year ended 30 September 2021 was 239 basis
points (2020: 224 basis points) (Appendix B). Each of the
Group’s segments showed improved NIM in the period as a
result of yield management activities in the business areas,
coupled with tighter funding costs.
Excluding the impact of the declining Idem Capital business,
NIM increased by 19 basis points, from 209 basis points in
2020, to 228 basis points in the current year.
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
2021
2020
2019
2018
2017
Total
Excluding
Idem Capital
Basis points
Basis points
239
224
229
219
213
228
209
192
153
141
Other operating income was £14.4 million for the year,
with the reduction from the £17.0 million reported in 2020
principally representing a reduction in income from
non-core servicing contracts.
Costs
The Group’s operating expenses for the year were
£135.4 million, increasing by 6.8% year-on-year
(2020: £126.8 million). The majority of the increase is
attributable to charges for share-based payments (including
related National Insurance (‘NI’) provision) which increased
by £8.7 million, following a low charge in 2020 when Covid
impacted on vesting expectations and depressed the Group’s
share price, on which the NI provision calculation is based.
The Group’s average number of employees increased to 1,426
for the period, an increase of 2.9% over 2020 (2020: 1,385),
generating an increase in non-share-based employment
costs of 3.0%.
Costs unrelated to employment reduced in the year. The
administration cost of the Group’s outsourced savings
deposits is determined by reference to the balance
outstanding and increased by £0.5 million in the year, as a
result of the 18.4% year-on-year growth in the Group’s savings
balance. These increases were offset by reductions in other
areas, including travel and accommodation and office running
costs, which reflect the direct impacts of the pandemic and of
the associated lockdowns through much of the year.
Despite the impact of Covid, the Group has continued to invest
in the development of systems to improve customer service
and operational efficiency. Significant improvements were
delivered to capabilities in the retail deposit business and new
functionality was introduced to the SME lending business.
Much of the Group’s IT systems and infrastructure
development is carried out by its experienced in-house
resource, and the Group has therefore tended to capitalise
less software than might be seen elsewhere in the sector,
with more costs being taken immediately to profit.
During the period £0.7 million of software was capitalised
(2020: £1.0 million).
The Group’s IRB project made further progress through the
period, with the second stage of the application for
buy-to-let submitted in March 2021. Costs for the year
include expenditure of around £1.3 million on this project,
relating to both internal resources and external advice.
The progress of the Group’s cost:income ratio over the last five
years is set out below.
Underlying
Idem
excluded
Statutory
%
%
%
41.7
43.0
42.1
40.6
40.5
42.8
44.9
48.5
54.2
55.6
41.7
43.0
40.7
37.8
40.5
Year ended 30 September
2021
2020
2019
2018
2017
Cost: income reduced in the year as a result of income rising
faster than costs, as described above.
The Group considers that the ongoing management of costs
is key to the achievement of its operational strategy and
seeks to enhance cost-effectiveness from efficiencies and
scale, with targeted investment in people and systems.
However, the costs of these investments, coupled with new
business initiatives and increasing regulatory expectations
mean that the achievement of a sustainably lower ratio is a
longer-term goal.
Impairment provisions
The Group’s Expected Credit Loss (‘ECL’) evaluation at the
year end has resulted in a net release of impairment provision
for the year of £4.7 million (2020: charge of £48.3 million). This
movement arises from a careful consideration of the factors
impacting the Group’s loan portfolio, including the progress
and impact of the Covid pandemic, both generally and on
particular customers, and requires a significant exercise
of judgment.
The progress of the impairment charge and cost of risk in
the three years since the introduction of IFRS 9 in 2019 is
set out below.
Year ended 30 September
2021
2020
2019
(Release) /
charge
£m
(4.7)
48.3
8.0
Cost of
risk
%
(0.04)
0.39
0.07
The high level of provisions in 2020 arose as the initial
impact of the Covid pandemic was recognised, attempting to
represent a weighted average expected loss based on many
plausible outcomes of significantly varying severity. This
exercise was skewed by the natural asymmetry of provision for
secured lending – increased stress will, on average, increase
loss more than decreased stress reduces it.
The ongoing development of the pandemic since
30 September 2020 has differed, to a greater or lesser degree,
from the scenarios advanced by commentators at the year
end, but has generally been more benign, particularly following
the rollout of the UK vaccination programme.
Page 43
Strategic Report
From the Group’s customer surveys and interactions with
its customers it is clear that while many customers may
have taken payment reliefs for precautionary reasons, these
accounts may have been able to perform due to external
support. Examples of this might include tenants of buy-to-let
landlords accessing furlough payments to meet rent demands
and SME customers using drawings under CBILS and BBLS
schemes to meet day-to-day payments. These reliefs would
still have an impact at the end of the financial year, but have
a limited time scale and the current level of performance
may not be fully representative of the true underlying
credit position.
As a result, management have maintained the approach
of critically assessing the outputs of business as usual
provisioning methodologies to ensure all elements of credit
quality in the portfolio are adequately addressed. This
approach has been taken throughout the Covid crisis and has
resulted in substantial overlays to model outputs.
Multiple economic scenarios and impacts
While there is somewhat more consensus on the likely
direction than at the previous year end, the setting of economic
scenarios for the purposes of IFRS 9 remains complex. The
broad thrust of economic data for the UK over the past six
months has been positive, but this has been in a period
where government interventions have continued and there is
continuing uncertainty over the direction the economy will take
once these begin to be withdrawn, with potentially radically
different medium term outcomes.
The approach to setting economic scenarios for IFRS 9
impairment at 30 September 2021 is broadly aligned to
that used at the half year. The Group has adopted a
two-part approach:
•
•
The three main scenarios, central, upside and downside,
were derived as they would be at a ‘normal’ year end with
the central scenario based on public forecasts and the
upside and downside scenarios more benign or severe
variants of this. This follows the general sentiment towards
the UK economy, assuming a continuation of the easing
of Covid restrictions and no significant impact from a new
wave of infections.
The severe scenario has been set to represent a potential
negative outturn, either for the economy, for the pandemic,
or for both. This is largely based on the Bank of England’s
stress testing scenarios, but with a less optimistic outlook
on house prices, the variable which has the most significant
impact on the value of the Group’s ECLs. This scenario
models a radically different future course for the UK, which
is plausible and potentially has a very different impact on
the Group’s customers.
The weightings applied to each scenario have been held at
those used at both 30 September 2020 and 31 March 2021,
in the light of the continuing economic uncertainty
described above.
The forecast economic assumptions within each scenario, and
the weightings applied, are set out in more detail in note 18.
To date, little of the provision established at the previous year
end has been utilised in writing off defaulted accounts, nor
have arrears or enforcement actions generally seen significant
increases. However, credit issues, some significant, have been
identified with a small number of customers and the Group
remains cautious on the future prospects of those loans for
which provision is being carried. Support schemes from the
UK Government, including furlough support to households
and businesses, remain in place and, as at 30 September 2021,
levels of CBILS and BBLS loans where customers have so far
been required to make repayments have been low. This means
that significant uncertainty as to the future behaviour of both
directly and indirectly supported customers still exists.
At 30 September 2021, therefore, the Group had to
consider whether sufficient hard evidence of both customer
performance and a sustainable improvement in UK
macro-economic conditions was available to justify a reduction
in provision levels, and whether factors existed that suggested
that its statistical impairment models might not be able to fully
interpret current economic conditions.
Payment holidays and outcomes
The Group offered payment relief to a significant number of
its customers during the initial period of the pandemic. Most
of these came to an end before the previous year end on
30 September 2020, but some continued into the current
financial year. By 30 September 2021, the number of the
Group’s customers remaining on these arrangements was
minimal, with the requirement to make monthly payment
arrangements back in place.
The post-relief behaviour in the Group’s principal class,
buy-to-let mortgages, at 31 October 2021 is summarised in the
table below. This highlights, separately for accounts which did
not receive payment holidays, those which received a single
three month relief and those which had extended relief, the
relative change between the October 2021 arrears position and
the 29 February 2020, pre-Covid position.
No
relief
£ billion
9.24
81.2%
Single
relief
only
£ billion
1.39
12.2%
Extended
relief
Total
£ billion
£ billion
0.74
6.6%
11.37
100.0%
0.3%
0.8%
5.2%
0.7%
0.4%
0.9%
7.1%
0.9%
Balance
Proportion
% with arrears
deterioration
% with arrears
improvement
Whilst the overwhelming majority 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 identifying
such accounts as, on the whole, riskier than average and
transferring accounts with extended payment holidays from
Stage 1 to Stage 2 for impairment purposes.
Performance across the books has been generally strong,
with arrears metrics and loss experience broadly in line with
pre-pandemic experience, while external credit measures,
such as credit bureau information have also remained positive.
However, due to government interventions and lender
forbearance across the sector, it is unclear whether these
measures are fully representative of underlying credit quality.
Page 44
To illustrate the impact of these scenarios, the impairment
provision at 30 September 2021 before post model
adjustments (‘PMA’s) has been recalculated, weighting each of
the central scenario and the severe scenario at 100%, with the
results shown below.
Provision
before PMAs
Cover ratio
£m
46.0
33.3
86.7
%
0.34%
0.25%
0.64%
Weighted average
Central scenario
Severe scenario
The level of provisions calculated by the Group’s models are
lower than might be expected, given the economic conditions.
The Group has therefore considered the extent to which this is
due to weaknesses in the modelling approach, and should be
corrected by PMAs.
Post-model adjustments
It is important to note that the impairment model focusses
principally on the impact of future economic changes on the
portfolio. Where accounts are currently only being kept from
defaulting by external short-term support measures they may
still default when these are removed, despite an improved
economic climate. The models may also fail to fully allow
for longer-term damage caused to particular industries or
customers’ businesses by the pandemic.
It is also clear that positive movements in economic indicators
such as house prices, unemployment and UK Gross Domestic
Product (‘GDP’), both in actual and forecast terms have had a
positive impact on the modelled outputs for cases benefitting
from support measures without any broader evidence of
improvement in the underlying credit quality of the customer
balances being available.
Therefore the Group applies PMAs, based on its experience
and its understanding of current customer positions, to allow
for the potential for losses in such cases not being identified by
the modelling approach.
In order to size the requirement for PMAs across the loan
book the Group has considered, on a portfolio-by-portfolio
basis the extent to which modelled provisions diverge from
long-run experience and the appropriateness of such
differences given the underlying economic environment at
the period end. All available external information on general
customer performance was analysed and the impact of the
potential take-up of government support and other reliefs
was assessed. The Group also considered whether there
were any issues of post-Covid scarring applying to any
particular industry.
Notwithstanding this data analysis, the Group considered
the potential for apparently well-performing accounts to
default, for the reasons set out above, applying the market
understanding and credit judgement of its experienced team.
The SME lending business was a particular area of focus, given
the prevalence of CBILS / BBLS funding in the customer base
and the identification of potential credit issues on certain
large exposures.
The PMAs generated by this process, analysed by division are
set out below.
Mortgage Lending
Commercial Lending
Idem Capital
2021
£m
8.9
10.2
0.3
19.4
2020
£m
14.0
5.8
-
19.8
These broader assessments were then allocated amongst
accounts, focussing on higher risk segments, or accounts
where sufficient data existed to identify any issues. Any
accounts identified as being at significant risk by the PMA
process were restaged appropriately.
The PMAs described above align the overall reported provision
with current loss expectations, given the inherent uncertainties
on a macro and micro level and based on the Group’s internal
monitoring of credit risk and customer contact metrics. The
Group maintains a cautious approach and will require evidence
as to customer behaviour once government interventions
are scaled back, before moving scenario weightings to more
normal levels and revising PMA methodologies so that actual
emergent behaviour is reflected.
Ratios and trends
The impact of the economic scenarios adopted, together
with PMAs adopted to address uncertainties over the future
performance of accounts, particularly those which may have
had payment relief or other government-backed support
during the pandemic, has resulted in the overall provision
amounts and coverage ratios set out below.
Calculated provision
PMAs
Total
Cover ratio
Mortgage Lending
Commercial Lending
Idem Capital
Total
2021
2020
2019
£m
46.0
19.4
65.4
0.30%
1.74%
1.27%
0.49%
£m
62.0
19.8
81.8
0.44%
1.85%
1.62%
0.64%
£m
41.9
-
41.9
0.26%
0.73%
1.12%
0.34%
These ratios demonstrate the movement in the Group’s overall
provisioning back towards more normal levels, without yet
reaching the 0.34% coverage ratio seen pre-pandemic at
30 September 2019. The extent to which coverage levels revert
to these levels will depend on future performance of the UK
economy and on the emergence of reliable evidence on the
underlying credit quality of the Group’s loan assets.
Page 45
Strategic Report
Fair value movements
A4.4.2 Assets and liabilities
The fair value movements reported in the profit and loss
account are a consequence of the impact of market
movements in spot and forward interest rates on valuations
of derivatives held as part of the Group’s hedging strategy.
While all these instruments are part of economic hedging
relationships, their accounting treatment can result in the
recognition of substantial gains or losses, especially in
periods of market fluctuation. However, the Group remains
appropriately hedged.
Movements in rates in 2021 led to a gain of £19.5 million being
recognised. While this is of far greater magnitude than the
£1.6 million charge recognised in the year ended
30 September 2020, it is comparable in size to the charge
of £15.1 million recognised during 2019. These fair value
movements reflect non-cash items and revert to zero over the
lives of the instruments involved. This, and the volatility of the
balance, leads the Group to consistently exclude this item from
its measures of underlying results.
Tax
The effective tax rate applied to the Group’s profits has
increased marginally from 22.9% in 2020 to 23.0% during 2021.
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 impact of the surcharge on the effective rate
to increase from 338 basis points to 454 basis points in the
current year, with other timing differences representing the
reconciling item to the actual charge.
The effective tax rates for both the current and preceding year
have been impacted by legislation for changes in future tax
rates enacted in each period, impacting on the carrying value
of the Group’s deferred tax assets and liabilities.
While the Group’s future profitability will be affected by the
increase in the basic rate of UK corporation tax to 25.0%
legislated for in the year, the proposed reduction in the bank
surcharge to 3.0% and the increase in the profit threshold at
which it applies to £100.0 million should reduce the divergence
of the Group’s effective rate of tax from the standard rate.
Results
Profit before tax for the year was 80.5% higher than in 2020 at
£213.7 million (2020: £118.4 million), representing the Group’s
highest ever annual profit. Profit after tax increased 80.2% to
£164.5 million (2020: £91.3 million).
Basic earnings per share for 2021 were 65.2 pence
(2020: 36.0 pence) and the diluted measure was 63.0 pence
per share (2020: 35.6 pence), driven by both the increase in
profit and share buy-backs in the year.
This result increased consolidated equity to £1,241.9 million
(2020: £1,156.0 million), representing a tangible net asset
value of £4.34 per share (2020: £3.90 per share) and a net
asset value on the statutory basis of £5.03 per share
(2020: £4.57 per share) (Appendix D).
Summary balance sheet
30 September 2021
2021
£m
2020
£m
2019
£m
Investment in
customer loans
Mortgage Lending
11,608.7
10,819.5
10,344.1
Commercial Lending
1,568.8
1,514.8
1,452.1
Idem Capital
225.2
297.1
389.9
Derivative financial assets
44.2
463.3
592.4
13,402.7
12,631.4
12,186.1
Cash
Intangible assets
Other assets
Total assets
1,360.1
1,925.0
1,225.4
170.5
159.5
170.1
315.7
171.1
220.5
15,137.0
15,505.5
14,395.5
Equity
1,241.9
1,156.0
1,108.6
Retail deposits
9,300.4
7,856.6
6,391.9
Other borrowings
4,451.4
6,229.7
6,648.4
Derivative financial liabilities
43.9
132.4
Pension deficit
Other liabilities
10.3
89.1
20.4
110.4
80.5
34.5
131.6
Total equity and liabilities
15,137.0
15,505.5
14,395.5
The Group’s loan portfolio grew by 6.1% during 2021, with
growth in both Mortgage Lending and Commercial Lending.
Balances in the Idem Capital division continued to pay down.
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 balance reduced by 2.0% during the
year, despite the growth in the business, in response to the
Group’s cautious relaxation of the liquidity strategy put in
place in response to the pandemic and the refinancing of its
legacy securitisation transactions. The proportion represented
by retail deposits increased to 67.6% in accordance with the
Group’s long-term funding strategy (2020: 55.8%). The Group’s
cash balance reduced by £564.9 million, partly due to a
£100.1 million reduction in cash held in securitisation vehicles,
following the collapse of schemes in the year, and partly due to
liquidity policy. Movements in funding balances are discussed
in more detail in Section A4.2.
Page 46
Derivatives
A4.4.3 Segmental results
The largest part of the movements in the derivative financial
asset balance reflects the retirement of the Group's remaining
currency denominated floating rate notes during the year
and the consequent settlement of their related hedging
instruments. The value of these swaps in the 2020 balance
sheet was £445.3 million. These movements do not impact the
Group’s results.
Derivative assets used for interest rate hedging increased
by £24.3 million, while derivative liabilities decreased by
£88.3 million, mostly as a result of volatility in the year in
market interest rate movements. These were largely offset by
a £104.2 million decrease in the hedging adjustment on loans
to customers, included in sundry assets above, and a
£13.4 million reduction in the adjustment on retail deposits,
included in sundry liabilities.
Pension obligations
The International Accounting Standard (‘IAS’) 19 valuation of
the Group’s defined benefit pension scheme deficit reduced
by £10.1 million in the period. The principal factor in this
reduction was the better than expected performance of the
scheme assets, as world markets began to recover from losses
suffered in the early stages of the pandemic. The deficit at
30 September 2021 stood at £10.3 million (2020: £20.4 million).
The Group’s pension arrangements were restructured in the
year to limit future exposure. However this has no impact on
obligations already accrued, or their valuation.
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 2021 was estimated at £1.0 million, a reduction
of £8.7 million in the period (2020: £9.7 million), representing a
99.4% funding level (2020: 93.9%).
Other assets and liabilities
Sundry assets have decreased by £156.2 million over the
year. This reduction arose principally as a result of hedging
transactions where movements in swap rates generated
the £104.2 million movement in fair value hedging referred
to above and generated a £66.9 million decrease in Credit
Support Annex (‘CSA’) collateral deposits as a result of the
increased value of derivative liabilities.
Other movements included the recognition of a current
tax liability, rather than last year’s asset of £5.7 million, with
payments on account in the year, based on the 2020 profit,
being less than the calculated tax payable; an increase of
£8.6 million in mandatory CRD deposits at the Bank of
England, which are calculated based on the size of the Group’s
deposit base; and a £4.3 million increase in property, plant
and equipment, mostly related to the recognition of a right of
use (‘ROU’) asset in respect of the lease on the Group’s new
London office.
Within sundry liabilities, which reduced by £21.3 million, the
reduction in the fair value adjustment of £13.4 million, as
referred to above, and an £11.8 million reduction in accrued
investment interest payable resulting from reduced interest
rates, are offset by the £1.4 million tax creditor.
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
Unallocated central costs and
other one-off items
2021
£m
2020
£m
213.8
154.3
75.7
17.1
45.9
19.6
306.6
219.8
(112.4)
(99.8)
194.2
120.0
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 continued to perform
strongly, with a strong lending performance, a reduction in
the proportion of older, lower yielding assets and the Group’s
tighter overall funding costs combining to deliver a 15 basis
point improvement in segmental NIM.
With the average mortgage book increasing by 6.0% in the
year, this delivered a 15.4% increase in net interest to
£219.2 million (2020: £190.0 million).
The Group’s mortgage accounts continued to perform well
in the year, generating a provision release of £5.9 million
(2020: charge of £25.8 million). Despite this release, coverage
levels remain in excess of pre-Covid levels, in response to the
uncertainties still prevalent in the UK economy.
Overall these factors drove a 38.6% increase in segment profit
for the year, to £213.8 million (2020: £154.3 million).
Commercial Lending
The contribution to profit of the Commercial Lending segment
for the year was £75.7 million, rising by 64.9% year-on-year
(2020: £45.9 million), with the improvement generated by
improved NIM and a reduced provision charge.
The average loan balance increased by 3.9% in the year,
but within this there were important mix changes, with the
average development finance balance increasing by 9.1% and
structured lending by 16.8%. Government-backed loans, where
margins are low, had increased to form 5.3% of the portfolio by
the year end.
The combination of these changes and tighter funding costs
across the Group saw divisional NIM increase from 5.53% to
6.13%, delivering a 15.1% increase in net interest for the year to
£94.5 million (2020: £82.1 million).
The impairment charge for the division reduced to £2.9 million
(2020: £21.7 million).
Page 47
Strategic Report
While the majority of accounts in the segment have continued
to perform satisfactorily, provisions have not yet been returned
to pre-Covid levels of cover, particularly in the SME lending
business. As discussed under ‘Impairment’ above, many SME
customers will potentially have been in receipt of CBILS and
BBLS funds or other government support for their business
operations. It is therefore too early to conclude that the current
positive performance is sustainable in the long-term as the
impact of these interventions fades. At the same time a limited
number of SME lending cases with serious credit issues have
already been identified and appropriately provided for.
Idem Capital
The acquired Idem Capital loan portfolios continued to run
off through the year, with no new transactions completed. As
a result the average loan balance fell by 24.0%, following the
trend of the previous year. Net interest decreased by 22.6%,
to £20.2 million (2020: £26.1 million), as a consequence of
this reduction.
While annualised NIM improved in the year to 7.74%
(2020: 7.60%), reversing the long-term decline in NIM in
this segment, this was principally a result of a Covid-related
interest adjustment in 2020 which depressed the margin
in that period. On an underlying basis NIM in the segment
continues to move down as higher margin portfolios pay off
more rapidly than lower margin secured assets.
The performance of the division’s portfolios in the year has
been satisfactory, with cash flows in line with expectations.
As a result of this and the improving economic outlook an
impairment provision write back of £1.7 million was recognised
(2020: charge of £0.8 million).
Overall, these factors restricted the decline in the segment
profit to 12.8%, with a contribution of £17.1 million to the Group
result (2020: £19.6 million).
A4.5 Operations
Throughout the pandemic, while the Group’s business
has inevitably been affected by the impact of the virus on
its people, customers and other stakeholders, and by the
changing official guidance and levels of restrictions imposed
in the UK, its priority has been to maintain business as usual,
as far as possible. This has largely been achieved and has
played a large part in both delivering the outstanding results
for the period and in ensuring the Group is well placed to take
advantage of the recovering economy.
It is still too early to say how the experiences of the pandemic
will impact both the Group’s business model and the way it
operates in the longer term, but, with most of the Group’s
people returning to its offices for at least part of the week by
the end of the year, the process of developing working models
for the future is well in hand.
A4.5.1 Operations
The Group employs almost 1,450 people, with the majority
normally based in its Solihull offices. However, from the onset
of the Covid pandemic approximately 90% of employees
worked from home.
As a result, the Group was able to continue to provide a full
service to customers, intermediaries and other business
partners throughout the various lockdowns, while at the same
time continuing to develop the business and address issues
arising from the pandemic, particularly in dealing with the
transition of customers from payment reliefs back to normal
payment profiles.
For the vast majority of employees, working from home
continued until September 2021 when hybrid working pilots
were introduced. New hires during the period predominantly
joined the Group working from home, with technology-enabled
induction and training plans providing them with the support
they needed to start their new roles. All employees are now
trialling flexible, hybrid ways of working.
The Group is proud that it has been able to continue to develop
the business through new systems, processes and products
despite the restrictions on contact, rather than simply mark
time until the pandemic is concluded.
Instead, the year has seen the Group complete or progress a
significant number of technological, operational and regulatory
projects. While long-term projects to provide better technology
for the development finance, SME lending and savings
operations continued in the period, other important projects
included enhancing the Group’s cyber-security, developing its
operational resilience capabilities, putting in place contingency
plans in case of negative interest rates and preparing for the
transition of LIBOR-linked customer accounts to alternative
reference rates. Overall, the year saw more projects delivered
than most recent comparable time periods.
The Group continues to envisage that its office hubs will
remain important to ensure that its culture and identity can
continue to grow, that collaboration is encouraged and that
its peoples’ sense of belonging is nurtured. To that end it
was pleased to sign a lease during the period on a new, more
energy efficient, central London base, bringing together its
City-based staff, replacing two existing locations, and providing
a venue to interface with stakeholders in the capital.
The Group has demonstrated agility and flexibility in how its
resources have been deployed throughout the pandemic,
with short-term secondments being introduced to support
operational volumes resulting from initiatives such as
payment holidays.
Throughout the pandemic the Group’s strategy has focussed
on customer outcomes, particularly for more vulnerable
customers and it was very pleasing that the Group’s Financial
Ombudsman Service (‘FOS’) complaints data shows no
significant increase in the period. The number of complaint
cases reported to FOS in the six months ended 30 June 2021,
the most recent reporting period, was 50 with an uphold rate
of 34.0% while the number for the six months ended
31 December 2020 was 60, with an uphold rate of 43.3%.
Overall, the Group is very pleased with the way that its people
and infrastructure have continued to respond to the challenges
posed by the pandemic.
Page 48
A4.5.2 Governance
A4.5.3 Management and people
Through most of the year the Group continued to operate
on a pandemic footing, with board and committee meetings
being held remotely. However in June 2021, at its annual offsite
strategy conference, the Board was able to meet in person for
the first time since March 2020 and resumed physical board
meetings in September 2021.
The impact of the pandemic on all the Group’s stakeholders
has continued to be an area of significant focus for the Board
and the Group’s ongoing response has been thoroughly
reviewed. The Group’s 2021 AGM was held in February on a
closed basis, in accordance with UK Government guidance
and the Board was disappointed that shareholders could
not be given the opportunity to attend in person. However,
arrangements were made to allow shareholders to view the
meeting online and they were encouraged to participate in the
meeting by completing and returning their proxy voting forms.
The Board is hopeful that the 2022 AGM, due to be held in
March, can be conducted on a more normal basis.
Throughout the year ended 30 September 2021, the Group
continued to comply with the principles and provisions of the
UK Corporate Governance Code (‘the Code’) and more detail
on the application of the Code principles by the Group is set
out in section B of this Annual Report and Accounts. The
Group adopted the 'comply and explain' approach under
Provision 19 of the Code to extend the Chair's tenure past
nine years for succession planning purposes and to ensure the
appointment of a suitable replacement Chair, as set out below.
Board of Directors
Fiona Clutterbuck's nine year term on the Board, came to an
end in September 2021 since she was first appointed in 2012.
However, the Board and Nomination Committee considered
Fiona’s re-appointment beyond nine years and agreed that,
in the interests of succession planning purposes and to
ensure a smooth transition of duties to Fiona’s successor,
her appointment be extended to September 2022. Fiona will
therefore stand for re-election at the Annual General Meeting
in March 2022. A search process, led by Hugo Tudor, the
Senior Independent Director is taking place and the results
will be communicated to stakeholders once the process
is complete.
As announced in the Group’s 2020 year end results
announcement, Finlay Williamson stepped down from the
Board on 31 December 2020. Peter Hill, who was appointed to
the Board on 27 October 2020, assumed the role of Risk and
Compliance Committee Chair from 31 December 2020.
Peter Hill was appointed to the Board following a robust search
and selection process. He was Chief Executive Officer of Leeds
Building Society, one of the UK’s largest building societies,
from 2011 until his retirement in 2019, having previously worked
in a number of senior management positions within the society.
Peter is currently a non-executive director of Pure Retirement
Limited and chair of its risk committee and is also chair of
the board at Mortgage Brain. He 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.
As at 30 September 2021, the Board has three female
directors, including the Chair of the Board, out of a total of
eight board members, forming 37.5% of the Board.
The Group employs almost 1,450 people and during the period
headcount has grown by 3.6% (2020: 1.4%), largely driven
by the creation of new roles in customer facing and risk and
compliance functions.
People and development
During the period the Group’s priority has continued to be
the wellbeing of employees and ensuring that they were
provided with adequate support as the pandemic continued.
The Group’s Wellbeing team has played an important role
in helping employees with their mental, physical, financial,
and emotional wellbeing over the year through numerous
initiatives. Wellbeing pulse surveys ensured that the Group
continually monitored and responded to how employees were
coping with the pandemic and feedback continued to reflect
that employees were pleased with the quality and frequency
of communications and how the Group was responding to the
ongoing situation.
No employees were placed on furlough or made redundant as
a result of Covid, and no use was made of the UK Government
Coronavirus Job Retention Scheme in the year.
The Group conducted an employee engagement survey in
June 2021, its first since December 2017; this produced a
very strong set of positive indicators, including an overall
engagement score of 87% (2017: 81%) and an employee net
promoter score of +24 (2017: -3, industry norm: +21).
Retention of employees continues to remain high, with the
attrition rate of 8.6% (2020: 10.4%) continuing to track below
the national average. These high levels of retention are further
bolstered by 57% of employees achieving over 5 years’ service,
13% achieving over 20 years with the Group and 5% achieving
over 30 years’ service.
Employees continued to show flexibility during the year with
many undertaking secondments to different areas of the
business to ensure that the Group continued to meet the
needs of its customers. Although the decision was made to
close the Second Charge Mortgage business in the year, all 26
affected employees were offered alternative roles, with only a
small number deciding to take voluntary redundancy.
The Group maintains its accreditation from the UK Living Wage
Foundation and minimum pay continues to meet the levels set
by the Foundation, while holiday entitlement for all employees
was enhanced during the year.
A new performance management approach was rolled-out,
removing the need for a formal annual appraisal and replacing
this with more frequent and timely conversations about
performance throughout the year. This not only supports
individual performance and personal development, but also
helps the Group to effectively manage rising talent and fulfil its
succession planning objectives.
The third cohort of the Group’s senior leadership development
programme launched this year with a further nine delegates.
The programme is aimed at developing those identified
as successors for the executive management team and
their direct reports. During this year two members of this
programme from previous cohorts secured promotions within
the Group. To support the Group’s wider training objectives, a
new learning management system, Learn Amp was launched
in February. This hosts internally designed content alongside
relevant subscription material to ensure there is a broad, yet
relevant range of learning available for all employees to access.
Page 49
Strategic Report Equality and diversity
Remuneration policy
The Group made significant progress on its equality, diversity
and inclusion (‘EDI’) strategy during the year. Richard
Rowntree, Managing Director - Mortgages, has taken on the
role of Executive Sponsor for EDI and sponsors the Group’s
EDI Network which was launched in October 2020. The
Network has had a tremendous impact in a short space of time
and has been involved in the launch of a number of training
offerings to all employees, including new EDI eLearning, a new
‘Inclusive Workplace’ course and an ‘Inclusive Leadership’
course for all managers.
The Network worked with Human Resources to run a diversity
data capture campaign in September 2021. 63% of employees
completed a diversity profile on the HR management system
and the collation of this data from employees provides the
Group with an enhanced ability to monitor and improve the
diversity of the workforce going forward.
The Group has made further important commitments to
improving the diversity of its workforce by signing up to
Business in the Community’s Race at Work Charter and
becoming accredited as a Disability Confident employer.
These commitments complement the pledge the Group
previously made to HM Treasury's, Women in Finance Charter
in 2016.
The Group is pleased to report that is has now achieved each
of its targets set under the Women in Finance Charter in 2017,
which focussed on female and ethnic minority representation
in the workforce and management. The Group is currently
considering the next phase of this initiative.
The PRA remuneration rules applicable to the Group changed
with effect from 1 October 2021, as the Group qualifies as
a Proportionality Level 2 (‘Level 2’) bank from that date,
bringing it within the scope of more onerous rules. This is a
result both of the reduction in the asset threshold defining a
Level 2 bank from £15 billion to £13 billion, announced by the
PRA in December 2020, and of the development of the rules
themselves in response to Capital Requirements
Directive V (‘CRD V’).
A full gap analysis was performed against the updated rules,
with affected employees being identified and remuneration
arrangements appropriately adjusted. The majority of the
significant changes required to remuneration policies were
prospectively approved at the 2020 AGM, with more minor
changes approved by the Remuneration Committee in
the period. Further information is given in the Directors’
Remuneration Report (Section B7) and in the Remuneration
Section of the Pillar 3 report for the year as appropriate.
The Group has also taken steps to assess the status of the
small number of off-payroll workers in the business and made
necessary changes to ensure the Group does not enter into
engagements with workers who are paid through personal
service companies and similar arrangements and fall within
IR35 status for tax purposes, avoiding the complexities of
such arrangements.
Details of progress against our targets can be found below.
A4.5.4 Sustainability
Measure
Target
Sep 2021
Status
Female representation in
senior management *
35%
38.7%
Achieved
Females in workforce
50%
52.5%
Achieved
Females as a percentage
of employees receiving
management career
development and
leadership training
Managers from an ethnic
minority background
Workforce on flexible
working
Flexible working on a part
time basis
50%
52.0%
Achieved
10%
13.4%
Achieved
10%
24.0%
Achieved
50%
73.6%
Achieved
*Senior management is defined using the FTSE Women Leaders definition, while
the ethnicity measure is based on those employees who self-identified.
To support its efforts to improve gender equality the Group
has continued to participate in the ‘Women Ahead 30% Club’
cross-company mentoring scheme. This programme has
proven popular with both mentors and mentees and a similar
scheme is being piloted for employees from ethnic minorities
over the coming year.
The Group welcomes the increasing interest in the diversity
and inclusion agenda from all its stakeholders and has
participated in the recent FCA Diversity and Inclusion survey.
Sustainability, including resilience in the face of climate change
risks, is core to the Group’s strategy: to focus on specialist
markets, delivering long-term sustainable growth and returns
through a low risk and robust business model. Sustainability
influences every aspect of the Group’s business and means:
•
•
•
Reducing the impact of the Group’s operations on the
environment
Ensuring that the Group has a positive effect on our
stakeholders and communities
Delivering sustainable lending through the design of
products offered and the choices of sectors in which
to operate
The Group publishes its 2021 Responsible Business Report, its
first sustainability report, in December 2021, providing more
detailed information on its sustainability initiatives.
Climate change
Climate change is designated as a principal risk within the
Group’s Risk Management Framework. Information and
measures on climate change risks are considered at board
level and the Group’s responses are considered within the
Board’s overall strategy. These risks fall into two main groups:
•
Physical risks (which arise from weather-related events)
•
Transitional risks (which come from the adoption of a
low-carbon economy)
The Group has an internal Climate Change Forum,
sponsored at executive level and containing representation
from across the business, to share information on initiatives
within business areas and to help develop the Group’s
overall response.
Page 50
During the year the first issuance was made under the
Group’s Green Bond Framework, which was published in the
year and which reflects the Group’s commitment to embed
sustainability throughout its strategy, operations, and product
offerings including funding and capital raising activities. This
was the first issue of a green capital instrument by a bank in
UK. The Sustainability Committee, established in the year
under the oversight of the Executive Committee, is responsible
for the Framework.
Developments in sustainable products and climate-related
exposures are discussed in the relevant business reviews and
within the Sustainability and Citizenship section (A6).
While the Group is not required to report on climate change
risk and exposures under the TCFD framework until its 2022
year end, it has signed up as a TCFD supporter, and the
disclosures made in respect of the year have been organised
using TCFD as a template.
Social engagement
Despite the difficulties for fund-raisers created by the
pandemic, the Group’s Charity Committee raised over £43,000
for Macmillan Cancer Support, the Group’s chosen charity for
the 2020 calendar year. For the 2021 calendar year the Group
is supporting the Alzheimer’s Society with £22,000 raised by
September 2021.
The Group has begun to restart its community and
volunteering initiatives as pandemic restrictions cease, with
employees looking forward to reengaging as soon as possible.
A4.5.5 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.
Inevitably the ongoing impacts of the pandemic have, and
continue to be, a priority for the Group and the longer-term
implications are still unclear. The Group continues to monitor
closely the economic impacts, changes to lending profiles,
business volumes and customer credit risk as the immediate
restrictions necessitated by the pandemic are released. It is
recognised that the wider pandemic is still a global challenge
and the possibility of further waves and subsequent lockdowns
may pose further issues during the coming months.
However, given the work done over the last 18 months the
Group feels it is well-placed to respond to any further
Covid-related disruption. 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.
The Group continues to focus on specific risk issues that have
arisen as a direct result of the pandemic. These include:
•
Ensuring a Covid-safe return to office-based working and
in the longer-term trialling more flexible and hybrid ways
of working which are core to the strategy of attracting and
retaining highly skilled employees, through a group-wide
pilot scheme
•
Continuing oversight of the impacts of government
schemes and initiatives implemented during the onset of
Covid which necessitated rapid deployment of resources
and innovation in processes. A small number of remaining
payment holidays continue to be managed and where
appropriate forbearance solutions necessitated through
Covid are tailored to individual customer circumstances
and aligned to regulatory guidance and expectation
• Continuing oversight of risks related to the provision of
government-backed lending schemes to support
businesses through Covid. Given the effective
implementation of process changes and underwriting
decisions the Group is positioned well to support any
further government lending programmes of this nature
Whilst Covid has clearly dominated the risk landscape since
early 2020, the Group has successfully continued to evolve
and embed its risk management framework. Good progress
has been made in further developing its ability to manage all
categories of risk through the maturing ERMF.
The evolution of the Group’s risk framework remains a core
priority and ongoing work is being undertaken to ensure it
remains effective and proportionate in line with the Group’s
strategic aspirations. Significant recruitment has been
undertaken during the year to bolster capability, external
benchmarking has been undertaken to validate work
undertaken and future plans and a detailed roadmap for
further development over the next 18 months has been
agreed. Good progress has already been made in line with
these commitments.
Despite the pervasive impact of the pandemic, the Group has
identified and focussed on a number of non-Covid related
strategic risk issues including:
• Strategy, operational and conduct-related risk implications
of the changes in product design, funding and operations
required to transition all LIBOR-linked customers to an
alternative rate following the withdrawal of LIBOR in
December 2021
• Further embedding operational resilience capabilities
which have proven to be critical in handling the Covid
situation. Importantly, lessons learned from the handling of
the pandemic have been incorporated into the operational
resilience framework together with continued refinement of
the overarching approach in line with regulatory expectation
• Addressing the impact of climate change on managing
financial risks and considering this as part of the wider ESG
agenda across the Group
•
Continuing to develop advanced models and embed
the overarching model risk framework to enhance
credit risk management and support the Group’s IRB
application process
• The impact of issues relating to defective cladding on
high-risk buildings where these form the security for
mortgage loans. Underwriting guidelines continue to be
reviewed to ensure these remain in line with emerging
best practice
• Enhancing stress testing procedures to ensure the
robustness of capital and liquidity positions
•
Ensuring effective cyber-security controls and a robust
data protection approach particularly as these evolve in
response to changing working practices
Page 51
Strategic Report
The Group continues to review its exposure to emerging
developments in the Brexit process as further clarity is
received as to future dealings with the EU. However, the end
of the transition period on 31 December 2020 caused no
immediate impact to the Group. Whilst 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. In particular,
it has continued to monitor the issues related to the supply
of essential goods which are causing shortages in a number
of sectors. Whilst the Group is not directly affected by these
issues at present the Board is keeping the situation under
ongoing review as supply issues in areas such as building
materials and IT equipment could impact the
Group’s operations.
The principal challenges in the risk environment faced by the
Group during the coming year and moving forward into 2023
and beyond include:
•
Management of risks arising from changes introduced
in response to Covid. With the ending of payment reliefs
and the wider economic impacts of the crisis beginning
to emerge, there will be a need to ensure appropriate
treatment of ongoing arrears and the 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
• Addressing an increasing level of regulatory compliance
standards, where the Group is committed to ensuring
it remains compliant in all areas of its business. Particular
focus in the Group is on ensuring that it meets regulatory
expectations in respect of its anti-money laundering
and wider financial crime control frameworks following the
publication of the Dear CEO letter in May 2021
• Risks associated with climate change remain an
ever-present challenge. The UK Government has 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 commitment. As global
strategies continue to be refined the Group is looking to
ensure both its operational impacts, and the impact of its
lending activities, explicitly consider climate change risk as
a core strategic driver
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
Paragon 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. The impact and pace of change
necessitated through the ongoing programme of revisions to
the Basel supervisory regime continue to pose a significant
risk for the Group. These together with other potential
regulatory changes to the business are closely monitored
through the comprehensive governance and control
structures in place.
Since March 2020, the impact of Covid has largely driven the
priorities of both UK and European regulators. The Group has
continued to respond effectively to these ongoing challenges
despite short consultation and implementation periods. All
regulatory publications have been considered by the Group,
any implications identified and required changes implemented
within an appropriate timeframe. Over the last few months the
Group has experienced data requests from the FCA on arrears
and forbearance increasing in both scale and frequency. The
Group continues to respond to these requests, and to focus
controls on the delivery of fair customer outcomes.
In addition to requirements introduced in response to Covid,
the following developments currently in progress have the
greatest potential impact on the Group:
•
The Bank of England published a Consultation Paper (‘CP’)
setting out proposed changes to the Minimum Requirement
for Own Funds and Eligible Liabilities ('MREL') on 22 July
2021. The CP builds on the Discussion Paper published in
December 2020 and factors in the responses it received
from impacted banks and building societies.
On 3 December 2021 the Bank of England published a
Statement of Policy based upon this consultation. Although
the Group is not currently subject to MREL requirements,
given its potential for growth it may be required to issue MREL
eligible instruments at some point in the future
•
The Bank of England MPC confirmed in February 2021
that negative interest rates still form part of its monetary
policy toolkit. In response, the PRA issued a ‘Dear CEO’
letter requesting firms initiate the implementation of
tactical solutions to process zero and negative rates by
August 2021. The Group has undertaken this analysis which
confirmed that it is well-placed to meet any operational
requirements should rates fall to zero or below
• The FCA issued its consultation on “A New Consumer
Duty” in May 2021. This seeks to set higher expectations for
the standard of care provided to customers and will result in
new rules relating to communications, products and
services, customer service and price and value. The Group
will continue to engage with UKF throughout the
consultation period to ensure adequate preparation prior to
the new rules coming into force
• The treatment of vulnerable customers continues to be
a strong focus for the FCA, with further guidance having
been finalised in February 2021. The Group continues to
take its responsibilities in this regard seriously. Significant
work continues to be undertaken to revise existing
procedures, controls and training provisions to meet
regulatory and industry expectations
Page 52
• The FCA, PRA and Bank of England published their final
rules and guidance on building operational resilience in
financial services on 29 March 2021. As expected, this
did not differ significantly from consultation papers and
considerable work had already been undertaken by the
Group to adhere to the draft proposals. Good progress
has been made against the roadmap and the Group is
well-positioned to meet the March 2022 policy
implementation deadline including setting of impact
tolerances, embedding a scenario testing approach
and undertaking a self- assessment against the
regulatory framework
• The Group continues to work towards embedding its
approach to managing climate-related financial risks by
the end of 2021 in line with the PRA expectations. A detailed
plan of work has been developed which reflects regulatory
and wider requirements and will continue to be refined
as new thinking emerges. Managing the impacts of climate
change is seen as a key strategic priority for the Group and
significant effort has been made during 2021 to incorporate
climate risk considerations within the Group’s ERMF. The
improved Governance which now includes the
Sustainability Committee alongside the existing executive
level risk committees ensures comprehensive
consideration across all aspects of the business and
ensures the Group is well-positioned to address the
emerging challenges
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 continues to monitor the impact of Brexit on its
operations, but the longer-term regulatory changes are still
unclear. With the extension of the temporary transitional
powers for the regulators until 31 March 2022 by HM Treasury,
regulatory obligations for firms generally remain the same.
The Bank of England has commenced the consultation
process for the incorporation of the prudential regulation
regime previously set out in European legislation into the
PRA Rulebook.
However, further clarity has yet to be provided as to how
the regulatory landscape may evolve post March 2022. It is
expected that the majority of requirements will be directly
transcribed although the PRA has indicated it is willing to
depart from EU text where this may enhance regulatory
oversight in the UK.
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.
Page 53
Strategic Report
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 53 to the accounts includes an analysis of the Group’s
working and regulatory capital position and policies, while
notes 54 to 57 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
62 and 63.
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 plans for the period commencing on 1 October 2021 have
been approved by the Board and have been compiled taking
into consideration the Group’s cash flow, dividend cover,
encumbrance, liquidity and capital requirements as well as
other key financial ratios throughout the period.
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
economic assumptions used are consistent with the economic
scenarios considered for determining impairment provisions.
Page 54
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.
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 ICAAP
cycle, where testing considered the impact of a number of
severe but plausible scenarios. During the planning process,
sensitivity analysis was carried out on a number of key
assumptions that underpin the forecast to evaluate the impact
of the Group’s principal risks.
The key stresses modelled in detail to evaluate the
forecast were:
Increased business volumes – An increase of 20% in
•
buy-to-let application 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 – 25bps higher cost on all new savings
deposits throughout. This scenario illustrated the impact
of a significant prolonged margin squeeze on profitability
and whether this would cause significant impacts on any
capital, liquidity or encumbrance ratios
• Lower development finance growth – 50% lower loan book
growth across the plan horizon coupled with a 50bp margin
reduction. This scenario replicated a significant increase in
competition within the sector, illustrating the impact of a
lower proportion of the high-yielding development finance
product in the Group’s long-term asset mix on contribution
to costs and other key ratios for the Group
• Higher buy-to-let redemptions – double redemption rates
on all cohorts for the first three months post-reversion.
With a significant volume of five-year fixes coming to an end
in 2022, this scenario highlighted the potential risk that is
inherent in the accounting difference between current and
amortised cost balances on such loans, and invited
discussion as to what mitigating action could be taken to
avoid such an impact
• High impairment – a stress that modelled the IFRS 9 year
end severe scenario across the plan horizon, simulating a
significant short-term capital and profitability shock with
prolonged house price deflation, but maintaining the same
lending levels as the base case. This scenario is derived
from, but more severe than, the stress testing scenario
published by the Bank of England in January 2021. 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.
As part of the ICAAP process the Group also assessed the
potential operational risks it could face. This was done through
the analysis of the impact and cost of a series of severe but
plausible scenarios. This analysis did not highlight any factors
which cast doubt on the Group’s ability to continue as a
going concern.
The outputs from these stresses present 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 begins the forecast period with a strong capital and
liquidity position, enabling the management of any significant
outflows of deposits and / or reduced inflows from customer
receipts. 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.
In addition, the directors held ‘deep dive’ sessions into key
areas of risk focus including operational resilience; the
ongoing assessment on the impact of cladding; climate
change; LIBOR transition: anti-money laundering; and the
potential impact of higher interest rates in the UK.
The output from these sessions was fed back into the
Group’s risk management process.
The directors also continued to monitor the potential
impact of the UK Brexit process as the economic and
regulatory implications of the UK’s exit from the EU
continue to crystallise.
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 Internal
Capital Adequacy Assessment Process ('ICAAP'), Internal
Liquidity Adequacy Assessment Process (‘ILAAP’) and its
Recovery Plan.
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.
Risk assessment
Availability of funding and liquidity
During the year the Board discussed, reviewed and approved
the principal risks identified for the Group. This process
included debate and challenge regarding the most material
areas for focus on an ongoing basis. No material changes
were proposed to the principal risks other than the removal
of pension obligation risk given the reducing deficit in the
pension scheme.
Each of these principal risks is considered on an ongoing basis
at each Executive Risk Committee (‘ERC’) 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
The Board has spent considerable time monitoring the
impacts of the pandemic including regular analysis and
management information illustrating the impacts of Covid on
the Group and its risk profile. They have continued to consider
specifically regulatory impacts, conduct risks in dealing with
customer vulnerabilities caused or exacerbated by Covid,
customer credit and the changes in the Group’s operational
processes. The results of these considerations have fed into
the Group’s forecasting and risk assessment.
In considering going concern and viability, the availability of
funding and liquidity is a key consideration. For the Group
this includes retail deposits, wholesale funding, central bank
lending and other contingent liquidity options.
The Group’s retail deposits of £9,300.4 million (note 26), raised
through Paragon Bank, are repayable within five years, with
77.6% of this balance (£7,212.9 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 2021 Paragon Bank held
£942.7 million of balance sheet assets for liquidity purposes,
in the form of central bank deposits (note 56). A further £150.0
million of liquidity was provided by an off balance sheet swap
arrangement (note 56), bringing the total to £1,092.7 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, updated annually.
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 £1,424.2 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 2021 the Group had £529.2 million of such notes
available for use, of which £287.0 million were rated AAA. The
available AAA notes would give access to £149.3 million if used
to support drawings on Bank of England facilities.
Page 55
Strategic Report
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 2021.
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. The guidance requires that this assessment covers a
period of at least twelve months from the date of approval of
the financial statements.
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.
The Group’s securitisation funding structures, described in
note 56, provide match funding for part of the asset base.
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 remains active
with strong levels of demand, and the Group maintains the
infrastructure required to access it.
The earliest maturity of any of the Group’s bond debt is the
£125.0 million retail bond, due January 2022. £69.0 million of
TFS debt was paid down after the year end and all other central
bank debt was refinanced and is not payable until 2025.
The Group’s access to debt is enhanced by its corporate BBB
rating, affirmed by Fitch Ratings in March 2021, and its status
as an issuer is evidenced by the BB+ rating of its £150.0 million
Tier 2 bond, issued in the year. 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 has access to the short-term repo
market for liquidity purposes which it uses from time to time,
including during the financial year ended 30 September 2021.
The Group’s cash analysis, which includes the impact of all
scheduled debt and deposit repayments, continues to show
a strong position, even after allowing scope for significant
discretionary payments and capital distributions.
As described in note 53 the Group’s capital base is subject
to consolidated supervision by the PRA. The most recent
review of the Group’s capital position and management
systems resulted in a reduction of the minimum capital level.
Its capital at 30 September 2021 was in excess of regulatory
requirements and its forecasts indicate this will continue to
be the case.
Viability statement
In considering making the viability statement the
directors considered the three-year period commencing on
1 October 2021. 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,
ILAAP 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.
Page 56
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.
Sustainability is central to the long-term success of the Group
and it is committed to its responsibilities as a good corporate
citizen. It aims to reduce the impact that its operations and its
customers have on the environment, have a positive effect
on all its stakeholders and support the communities in which
it operates.
The Group has incurred no such fines greater than
US$ 100.0 million in the year (2020: none). Information on
penalties and disciplinary incidents is given below in each
section, where relevant.
A6.2 Customers
Further information on the Group’s sustainability profile can
be found in the ‘Responsible Business Report: 2021’, its first
sustainability report, published in December 2021 and available
on the Group’s website at www.paragonbankinggroup.co.uk.
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.
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 five areas set out in
the Act. The matters specified in the Act are discussed in the
following sections.
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 Section 11 (1)(b) of
Schedule 7 to the Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations 2008 (‘Schedule
7’) (as amended) (in section A6.3) and the information on
business relationships with suppliers and customers
required by section 11B of that schedule (in section A6.7
and section A6.2).
Sustainability analysts frequently request detail of significant
fines or penalties incurred by companies for ESG related
incidents, or confirmation that there were no such incidents.
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. We
recognise that customers in vulnerable circumstances are
at greater risk of poor outcomes when dealing with their
finances and we have focused working groups and employee
training to deliver appropriate service and support for
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.
Page 57
Strategic Report
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.
Handling
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 Group’s complaint case data, reported to FOS, continues
to be low compared to the other firms in the sector.
Information for the most recent FOS reporting periods is
set out below.
Six months ended
30 June
2021
31 December
2020
30 June
2020
31 December
2019
A6.3 People
The Group employs almost 1,450 people, with the majority
based at its Head Office in Solihull. During the past year, the
Group has seen 3.6% growth in its headcount, predominately
driven by the creation of new roles in customer facing and
risk and compliance functions. This investment in resource
has helped the Group to serve its customers and achieve its
strategic priorities.
The Group is exceptionally proud of its culture, which is
underpinned by a strong set of company values and a
commitment to doing the right thing. This was shown in the
results of the 2021 employee engagement survey where an
87% engagement score was achieved. High scores were
achieved for culture, which was particularly pleasing, and the
employee advocacy score, measured by NPS was far higher
than international norms. This further supports the Group’s
Gold Investors in People status, which it will be seeking to
retain next year.
Employee survey
The Group conducted a full employee engagement survey
in June 2021 and 86% of employees shared their views. The
survey produced a very strong set of positive indicators,
including an overall engagement score of 87%; 10 percentage
points above the industry norm and 6 percentage points
greater than the Group’s last survey completed in December
2017. Results are analysed into six pillars, with the Group
scoring above the industry norm in each one. Results for five
of the six pillars also improved since the 2017 survey, with
‘employee voice’ seeing the biggest increase with a
16 percentage point improvement.
Questions relating to the Group’s culture were included,
focusing on risk, responsible business actions, customers and
inclusion. Overall culture score increased to 95% (2017: 92%).
Employee advocacy measured through an employee NPS was
at +24 (2017: -3, industry norm +21).
The survey followed a continued focus on monitoring
employee wellbeing during the pandemic via short pulse
surveys; six surveys were run between April 2020 and
April 2021 and results indicated that employees continued to
be happy with how the Group was managing the effects of the
pandemic. Results have informed targeted actions such
as promotion of wellbeing support available to employees,
and the trials of hybrid working which are underway across
the business.
Cases reported
50
60
40
Uphold rate
34.0%
43.3%
41.3%
83
48.2%
Employment conditions
This low level of complaints is particularly pleasing given the
impact of the Covid pandemic on customers through most of
the period shown above.
FOS data across the financial services industry is published on
the ombudsman’s website at www.financial-ombudsman.org.
uk. However, the Group’s complaint level has regularly been
below the threshold for publication.
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).
All 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 2021, employees on temporary or short-term
contracts accounted for 2.3% of the workforce (2020: 1.5%)
and no use was made of zero-hours contracts. The Group’s
annual employee turnover for the year was 8.7% (2020: 10.4%).
XPert HR report average voluntary turnover in the UK financial
services industry at 13.1%, demonstrating the strength of the
Group's performance.
Page 58
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.
Formal flexible working arrangements are in place for 24% of
our employees (2020: 24.3%), with 73.6% of these working
part-time (2020: 82%). The Group has continued to
accommodate flexible working arrangements both on a formal
and informal basis as the Covid pandemic continues.
Equality, diversity and inclusion
The Group is committed to eliminating discrimination and
promoting EDI amongst all its employees through its policies,
procedures and practices and through its professional dealings
with employees, customers and third parties.
Every employee is entitled to a working environment
that promotes dignity, equality and respect for all. The
Group will not tolerate any acts of unlawful or unfair
discrimination (including harassment) committed against
an employee, contractor, job applicant or visitor because of
a protected characteristic:
No employees were placed on furlough or made redundant as
a result of Covid and no use was made of the UK Government
Coronavirus Job Retention Scheme in the year.
• Sex
• Gender reassignment
The Group generally only employs persons over the age of
18, except in connection with apprenticeship or other training
arrangements.
• Marriage and civil partnership
• Pregnancy and maternity
During the period the Group took the decision to close its
Second Charge Mortgage business; the team of 26 employees
were all offered redeployment opportunities, in line with the
policy of avoiding redundancy wherever possible, however six
employees chose to leave the business.
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 UK
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. From 1 November 2021 the Group will pay
a minimum of £19,500 to all full-time employees, equivalent to
£10 per hour.
The Group runs a Worksave defined contribution pension
scheme in line with UK legal requirements. During the year the
default investment fund for this pension was changed to a fund
closer aligned to the Group’s ESG strategy; this change was
made in consultation with employees.
During the year the Group’s defined benefit pension
arrangements were restructured to protect the future of the
pension plan, preserve benefits already accrued and rebalance
the treatment of the scheme’s beneficiaries with those of the
wider workforce. A formal consultation with the active scheme
members took place and the changes, which are described in
more detail in Note 52 to the accounts, came into effect from
1 July 2021.
At 30 September 2021 the Group was making contributions
towards the retirement provision of 85% of its employees.
• Race (including ethnic origin, colour, nationality and
national origin)
• Disability
• Sexual orientation
• Religion and or belief
• Age
Discrimination on the basis of work pattern (part-time working,
fixed term contract, flexible working) which is unjustifiable will
also not be tolerated.
The Board believes the achievement of a balanced workforce
at all levels delivers the best culture, behaviours, customer
outcomes, profitability and productivity and therefore supports
Paragon’s success as a business.
During the year the Group has made significant progress on
its equlity, diversity and inclusion ('EDI') agenda. In October
2020 it launched its EDI Network; consisting of employees
from across the Group who are passionate about shaping the
Group’s EDI plans. The Network and all the Group’s other EDI
activities are sponsored at ExCo level by Richard Rowntree,
Managing Director – Mortgages, while the Nomination
Committee provides board level oversight on all inclusivity
matters affecting on the Group’s people.
The primary objectives of the EDI Network are:
• Raising awareness and understanding of what EDI in the
workplace means
• Providing feedback and advice to the Group’s
leadership on the issues affecting employees from
under-represented groups
During the year the Group also increased the minimum holiday
entitlement for its employees from 22 to 25 days per year for
full time employees, in line with its commitment to treating its
employees properly.
• Supporting the delivery of initiatives to improve EDI across
the Group
• Promoting Paragon as a diverse and inclusive place to work
Employee satisfaction relating to the equality of opportunity
was monitored in the recent employee engagement survey and
the Group continues to monitor recruitment data relating to
the provision of equal opportunities.
HR policies are reviewed regularly to ensure 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.
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Strategic Report
The EDI Network has driven several campaigns over its first
year and championed signing up to some external schemes.
Significant initiatives within the EDI agenda in the year include:
Signing up to the Race at Work Charter
The Race at Work Charter is an initiative run by Business in
the Community (‘BITC’). Signatories of the charter agree to
five commitments to ensure that ethnic minority employees
are represented at all levels in an organisation.
1. Appoint an Executive Sponsor for race
2. Capture ethnicity data and publicise progress
In addition, demographic questions were asked in the
employee engagement survey allowing the sentiment of
different groups of employees to be assessed. These two data
sets will shape the next phase of the Group’s EDI strategy.
Pride at Paragon
In June 2021 the Group celebrated ‘Pride at Paragon’ to
recognise its LGBTQ+ employees and in September 50
employees joined the Birmingham Pride Parade event.
3. Commit at Board level to zero tolerance of harassment
Inclusive workplace training
and bullying
4. Make clear that supporting equality in the workplace is
the responsibility of all leaders and managers
5. Take action that supports ethnic minority career
progression
The Group has a number of actions in progress to ensure
that its commitments under this scheme are being met.
Initiatives include involving EDI Network members in the
selection process for the Group’s development programmes,
challenging any unconscious bias observed; piloting a
mentoring programme for employees from ethnic minority
groups; and running Executive Listening Circles to give
employees in under-represented groups the opportunity to
share their views with leadership.
Becoming a Disability Confident employer
In April 2021 the Group achieved Level 1 ‘Disability Confident
Committed’ status under the UK Government’s Disability
Confident scheme. As well as continuing to provide paid
employment to people with disabilities, as a Disability
Confident Committed organisation, the Group has agreed to
the five Disability Confident core commitments:
•
It will ensure its recruitment process is inclusive
and accessible
•
It will communicate and promote vacancies
•
It will offer an interview to disabled people
A new ‘Inclusive workplace’ training course was launched
by the Group’s learning and development team in 2021,
designed and delivered in conjunction with the EDI Network.
All employees were invited to attend the course which builds
on themes such as unconscious bias, which are already
addressed in eLearning courses.
Women in Finance
The Women in Finance Charter, sponsored by HM Treasury, is
an initiative amongst financial services companies in the UK,
aimed at promoting equality of opportunity in the workplace.
The Managing Director - Mortgages is the project sponsor at
ExCo level and progress against the Charter requirements is
monitored by the executive management and at Board level.
In January 2017 the Group’s first set of internal targets under
the charter was published on its website. They included a
target of 35% female representation in senior management
roles by January 2022, increasing from 26% at the time the
targets were set. As at 30 September 2021 the Group had
achieved 38.7% female representation (2020: 33.9%). The
definition of senior management used in the Group’s ‘Women
in Finance’ targets is the same as that used by the FTSE
Women Leaders initiative (formerly known as the
Hampton-Alexander (‘HA’) Review).
By September 2021, the Group had achieved all its original
charter targets, ahead of schedule and it will be reviewing its
targets for the next phase of its Women in Finance initiative in
the early part of the new financial year.
•
It will anticipate and provide reasonable adjustments
as required
Gender pay
•
It will support any existing employee who acquires a
disability or long-term health condition, enabling them to
stay in work
The Group makes every effort 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.
Collecting diversity monitoring data
In September 2021 the Group launched a diversity profile in its
CoreHR system which asks employees to disclose information
about their gender identity, sexual orientation, ethnicity and
race, religion, socio-economic background, disabilities and
responsibilities outside of work. Over 60% of employees
completed their profile; this data now gives the Group a better
understanding of the composition of the workforce and will
help it to monitor whether all employees have the same access
to training, development, and job opportunities.
As required by legislation, the Group has calculated its gender
pay gap at April 2021. The results will be published on the UK
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
2021
36.6%
38.4%
3.4%
76.5%
April
2020
36.9%
40.7%
2.5%
82.6%
This year’s gender pay measures are similar to those for 2020,
as would be expected given the low staff turnover during
Covid, and remain larger than the Group would like. The Group
has continued to monitor these differences and found them to
be predominately due to the seniority and nature of roles that
men and women are undertaking in the organisation.
Page 60
The results are broadly in line with those for the financial
services sector reported by the Office of National Statistics in
their 2021 Annual Survey of Hours and Earnings (‘ASHE’) which
showed a median pay gap of 36.5% (2020: 35.9%) and a mean
pay gap of 33.2% (2020: 28.8%).
Employees in our lower pay quartiles are predominantly female
and typically include operational and processing roles.
These roles lend themselves particularly well to part-time
working arrangements.
Throughout the organisation females account for the majority
of part-time working arrangements and, due to the nature of the
gender pay gap calculation taking no account of hours worked
by employees in calculating averages, this further increases the
size of the gender pay gap.
The Group is proud that the vast majority (85%) of employees
are eligible for a bonus under the Group’s Profit Related
Pay (‘PRP’) scheme; these awards lead to the small median
bonus pay gap. 15% of employees are eligible for the Group’s
discretionary bonus scheme (31% of the scheme’s participants
are women), and 5% of employees are also eligible for share
based awards of which 27% of recipients are female. This
means that discretionary and share based bonus schemes are
disproportionately awarded to men, and the large mean bonus
gap is further driven by the bonuses awarded to the most senior
executives, the majority of whom are men.
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 carried out during the year, reviewing groups of directly
comparable positions, did not suggest evidence of systematic
gender bias or unequal pay practices.
Composition of the workforce
During the year the workforce has grown by 3.6% to 1,441
people (2020: 1,391). Information on the composition of the
workforce at the year end is summarised below:
Employees
Number
Percentage
2021
2021
2020
2020
Females Males Females Males
757
684
735
656
52.5% 47.5% 52.8% 47.2%
Management grade employees
Number
Percentage
136
198
119
190
40.7% 59.3% 38.5% 61.5%
Senior managers
Number
Percentage
Directors
Number
Percentage
8
34
6
33
19.0% 81.0% 15.4% 84.6%
3
5
3
6
37.5% 62.5% 33.3% 66.7%
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 FTSE Women Leaders Initiative.
Based on diversity profiles completed by employees during the
year, ethnic minority employees comprised:
• 17.2% of employees
• 13.4% of managers
• 4.7% of senior managers
This is based on the 58% of employees who declared their
ethnicity. For the purpose of this analysis, ethnic minority
employees comprise all those not identifying as ‘White British’.
As the figures for the current year were prepared on the basis
of employees self-identification, in line with best practice,
they may not be strictly comparable to those presented in
earlier years.
Health and wellbeing
The Group has continued to focus on supporting the wellbeing
of employees throughout the year and during the period
launched the Wellbeing Hub; a dedicated space on the
intranet, which provides employees with support on emotional,
physical, financial and social wellbeing issues. Through the
Wellbeing Hub employees are able to access services such as
free will writing, free exercise classes, support with budgeting
and debt management, signposting specialist support
services such as those who help with domestic violence or
bereavement, as well as numerous resources to help with a
wide range of wellbeing issues.
Training and development
Despite the challenges that the continuing pandemic has
placed on the business, the Group has continued to focus
on providing opportunities to develop all employees and on
average employees received 4.6 days training per person in
the year (2020: 4.2 days). This continues to significantly exceed
the average figure for the private sector of between 2.8 and
3.2 quoted by the CIPD. This number included online training
undertaken by all employees on various topics including
regulatory requirements.
A new learning management system, Learn Amp, was launched
in February this year. Learn Amp hosts relevant subscription
content alongside internally designed content to ensure
there is a broad, yet relevant range of learning available for
employees to access.
During the period a new performance management approach
was rolled-out, removing the need for a formal annual appraisal
and replacing this with more frequent and timely conversations
about performance throughout the year. This not only supports
individual performance and personal development, but also
helps the Group to effectively manage rising talent and fulfil its
succession planning objectives.
The Group’s senior leadership development programme
launched its third cohort in September, with a further nine
individuals undertaking bespoke development plans; two
individuals from previous cohorts have been promoted
internally. During the period the Group has launched a suite
of leadership modules ‘Leadership for the future’, bringing
together all layers of the Group’s management structure
to spread and share best practice through networking and
learning together. Members of the EDI Network have been
involved in the selection processes for candidates for some
of the Group’s talent programmes during the year, with the
intention of identifying any unconscious bias and helping to
ensure equal opportunities are afforded to all employees.
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Strategic Report
The Group has continued to focus on developing female
talent during the year to support its Women in Finance
Charter objectives. 52% of employees receiving management
development are female, and the Group continues to
support the cross-company Mission Gender Equity
mentoring programme.
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.
At 30 September 2021, 65% of the Group’s employees were
members of one or more Sharesave scheme.
In addition, during December 2020 each employee below
senior management level received a one off deferred award of
£1,000 of shares, valued at the December 2020 market price
which vest in December 2023, giving those employees a direct
interest in the performance of the Group’s shares.
Health and Safety
Throughout the year, 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.
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.
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 focus for the
vast majority of this year has been on the continuance of
Covid-related control measures in the face of rapidly changing
Government guidance.
Throughout the pandemic employee engagement has been
a key factor on health, safety and wellbeing. For much of the
year most of the Group’s people were working from home,
with several sites entirely closed. From June, planning began
for a phased return to the office in September under a hybrid
working model. Employees were engaged to determine if there
were any duplicate equipment needs to ensure they have a
healthy and safe environment both in the home and at the
office with access to appropriate equipment.
In the Group’s offices a Covid-secure environment was
maintained throughout the year in accordance with the latest
Government advice. Risk assessments, procedures and
documentation have been kept under review to consider Covid
measures and made available to all employees to provide
awareness regarding the current control measures as best
practice changed through the period.
The offices that remained open continued to comply with
all health and safety rules, with the number of fire marshals,
first aiders and other qualified personnel continuing to be
sufficient, and this continues to be regularly monitored based
on the number of occupants.
To ensure the health and safety of home-based employees,
a proactive contact programme was put in place to ensure
that employees were working in a safe and healthy manner
throughout the pandemic.
A programme to automate workstation assessments through
the use of software was launched in the year, Which will identify
those who need assistance more rapidly. Processes are also
being put in place to conduct visual inspections of electrical
equipment remotely, ensuring that the Group’s equipment in
people’s homes remains safe to use.
Apprenticeship Levy funds have been drawn down to support
the Group’s development objectives. These apprenticeships
cover a range of specialist and operational roles including
IT, audit, customer services and management. The number
of apprenticeships has dropped slightly during the pandemic,
with 37 apprentices (2.3% of employees) registered under
the levy scheme (2020: 46), although utilisation of levy funding
has increased slightly, to 42.6% of new levy funds in the past
twelve months (2020: 41%). Usage has increased due to the
inclusion of more managerial level apprenticeships which
draw down greater funds. The Group also supports employees
studying for professional qualifications outside
the apprenticeship programme.
Recruitment
Headcount has continued to grow over the period, and in the
last quarter of the year recruitment volumes have increased,
following the relaxation of lockdown restrictions. Over 156
new hires started during the period with the majority being
successfully onboarded remotely.
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 26 individuals were
successfully recruited through this scheme (2020: 18).
Employees’ involvement
The directors recognise the benefit of keeping employees
informed about 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.
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 reports to ExCo and the Nomination
Committee on matters raised. This satisfies the ‘Employee
Voice’ provisions of the UK Corporate Governance Code.
During the period non-executive directors have attended
several People Forum meetings and discussed topics including
executive and wider remuneration and the impact of the Covid
pandemic on the workforce and the business.
The Forum has remained a valuable channel of engagement
with employees over the year, despite the impact of the
pandemic, with both non-executive directors and ExCo
members attending meetings to discuss how the Group has
addressed the impacts of Covid and the development of its
hybrid working trials, amongst other topics.
The Forum also made a recommendation to grant employees
additional leave for Christmas Eve and New Year’s Eve, and this
recommendation was approved by the Board, effective from
2021. Additionally, the Forum was consulted on the decision to
increase the minimum annual holiday allowance in the year.
Executive directors also provide biannual updates on business
progress to the entire workforce which have been delivered
through video messages during the Covid pandemic. ExCo
members also use the Group’s intranet to deliver updates on
important initiatives within the business from time to time.
Page 62
Management and systems
The Group has a dedicated health and safety manager
who reports, ultimately, to the Chief Operating Officer, the
executive committee member responsible for health and
safety. Health and safety incidents are classified as
operational risk incidents for the purposes of the Group’s
risk management system and are 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 attained certification
to ISO45001:2018 in September 2021 and is audited for
compliance annually by a UKAS accredited auditor.
Resources within the health and safety function have been
kept under review in the year and were sufficient to ensure
that health and safety management has been maintained to
expected standards throughout the period.
Performance
During the year, the Group reported 8 incidents (2020: 11).
All were of a minor nature with no lost time. No incidents were
notifiable under the Reporting of Incidents, Disease
and Dangerous Occurrences Regulations 2013 (‘RIDDOR’)
(2020: 1).
Health and safety performance continues to be good with
the number of incidents remaining at a low level. During
the financial year ended 30 September 2021 there were no
prosecutions or any enforcement action from visits by the
authorities for non-compliance in respect of health and safety
matters (2020: None).
A6.4 Environmental 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 commitment.
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 with the policy statement.
This plan also reflects subsequent statements by the PRA
and will continue to be updated as the regulators develop
their thinking.
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, however, in the last year we have begun to assess
the use customers make of the funds loaned to them, with
an initial focus across mortgages. This includes developing
systems to assess and monitor the environmental impacts
associated with the Group’s financing activities.
Reporting on climate change
The Taskforce on Climate-related Financial Disclosures
(‘TCFD’) has published a framework setting out the main
themes which companies should cover in their reporting
on climate change. The use of this framework by UK listed
companies will be mandated through new Listing Rules,
which will apply to the Group from its year ending
30 September 2022.
These rules will require the Group to state whether it has
made disclosures consistent with the TCFD framework, where
consistency must be assessed based upon the level of its
exposure to climate-related risks and opportunities and the
scope and objectives of its climate-related strategy.
The Group has identified its response to climate change
as being key to its business strategy and designated it as a
principal risk. It therefore presents material relevant to the
TCFD objectives throughout its reporting. The table below sets
out where material relevant to each TCFD pillar may be found.
Page 63
Strategic Report Governance
Disclose the organisation’s governance around climate-related risks and opportunities
Section
a) Describe the board’s oversight
of climate-related risks and
opportunities
• The Board has designated climate change as a principal risk within
the Group’s ERMF, following this the focus has been on developing
their understanding of the issue through insight sessions and
discussions on climate change strategy
• The Terms of Reference of the Risk and Compliance
Committee have been updated to ensure appropriate oversight of
climate-related matters at a board level on a quarterly basis
Governance
− Board oversight
− Sustainability
Committee and
Climate change
working group
b) Describe management’s role in
• The CFO has been designated as the director responsible for
Governance
assessing and managing
climate-related risks and
opportunities
climate change matters
• Throughout the year the terms of reference of key executive risk
committees have been updated to incorporate climate change. The
newly established Sustainability Committee helps to ensure
appropriate escalation and awareness of climate related risks
across the business as well as escalation up to the Board
− Board oversight
− Embedding
climate change
within the
organisation’s
governance
structure
Strategy
Disclose the actual and potential impacts of climate-related risks and opportunities on the
organisation’s businesses, strategy, and financial planning where such information is material
Section
a) Describe the climate-related
risks and opportunities the
organisation has identified
over the short, medium, and
long term
• The Group has focused its assessment on the most material
segment of its balance sheet, buy-to-let mortgages. The initial
phase concentrated on the risks posed by flooding, and on
energy efficiency
• The UK has set a target to increase the proportion of more energy
efficient properties in the PRS. In support the Group has released a
series of green products aiming to support landlords in improving
the energy performance of their properties
b) Describe the impact of
climate-related risks and
opportunities on the
organisation’s businesses,
strategy, and financial planning
In the year the Group issued an inaugural green capital instrument
•
which outlines its commitment to embed climate change into
long-term strategy
• During the Group’s annual strategy session the Board received an
update on climate change and ESG. The session set out the
strategic framework for the Group focusing on the Group’s own
emissions, the climate impact of our financing activity, the delivery
of sustainable funding and financing initiatives and the building of
partnerships to support change
External
(downstream)
impact
−
Impacts of
climate change
Risk management
− Quantifying our
climate exposure
− Climate-related
opportunities
Governance
− Board oversight
Risk management
− Climate-related
opportunities
c) Describe the resilience of the
organisation’s strategy, taking
into consideration different
climate-related scenarios,
including a 2°C or
lower scenario
• Work is underway to review the Climate Biennial Exploratory
Scenario (‘CBES’) released in June 2021 and to outline the
implications that such scenarios have on the Group’s exposure
Risk management
− Use of scenario
analysis
Page 64
Risk management
Disclose how the organisation identifies, assesses, and manages climate-related risks
Section
a) Describe the organisation’s
processes for identifying and
assessing climate-related risks
• The Group's activity has focused on incorporating climate risk
Governance
considerations within the ERMF. The Governance framework now
includes the Sustainability Committee reporting to Performance
ExCo and ensuring comprehensive consideration across all aspects
of our business. This governance process allows for climate change
updates and monitoring to be escalated up to the Board and the
Risk and Compliance Committee as appropriate
− Embedding
climate change
within the
organisation’s
governance
structure
b) Describe the organisation’s
processes for managing
climate-related risks
• Underwriting processes consider climate risk factors. For
mortgages these include flood, subsidence, coastal erosion and
the EPC of the property. Further mitigation against the risk of loss
is provided through the requirement to have valid insurance
Risk management
− Quantifying our
climate exposure
• The Sustainability Committee monitors climate change metrics
that are relevant to the business model and the business response
to them. The relevant executive level risk committees, such as
the credit committee will also monitor relevant risks in their areas
of responsibility
c) Describe how processes for
identifying, assessing, and
managing climate-related risks
are integrated into the
organisation’s overall risk
management
• The governance structure has been updated to include the
Sustainability Committee. This governance process allows for
climate change updates and monitoring to be escalated as
appropriate
• The climate change risk policy is under development and will
ultimately be approved by the Risk and Compliance Committee.
The policy development will support the formalisation of climate
change risk governance within the ERMF
• The new governance structure and the development of the climate
change risk policy are clear stepping stones in the development of
risk appetite and further embedding of climate change risk into the
Governance
− Sustainability
Committee and
climate change
working group
Risk management
− Future
developments
Group’s ERMF
Metrics and Targets
Disclose the metrics and targets used to assess and manage relevant climate-related risks and
opportunities where such information is material
Section
a) Disclose the metrics used by
the organisation to assess
climate-related risks and
opportunities in line with its
strategy and risk management
process
• Across the Group’s mortgage portfolio energy efficiency, flood
Risk management
risk and ground instability have been qualitatively and quantitatively
reviewed during risk driver assessments
− Quantifying our
climate exposure
• Across SME lending SIC codes have been used to identify those
operating in high carbon intensive industries
• The Group continues to enhance the data, methodology and
disclosures in this area to ensure any exposure to physical or
transitional climate change risk can be identified and monitored
b) Disclose Scope 1, Scope 2, and,
if appropriate, Scope 3
greenhouse gas (GHG)
emissions, and the related risks
• The process for measuring the carbon emissions from the Group’s
operations continues to be enhanced. Disclosures have been
included for the Group’s operational emissions (Scope 1, 2 and 3)
Operational impact
− Performance
indicators
• The Group has disclosed the financed emissions associated with
its mortgage book for the first time. This demonstrates the
ongoing work for monitoring the climate-related impact of the
Group’s lending
Financed emissions
− Scope 3
mortgage
emissions
c) Describe the targets used by
the organisation to manage
climate-related risks and
opportunities and performance
In March 2021 Paragon Banking Group PLC issued a £150 million
•
Green Tier-2 Bond. The proceeds of the Green Bond are being
exclusively allocated to eligible green loans. The focus being green
residential real estate with an EPC rating of either A or B. The Green
Risk management
− Climate related
opportunities
against targets.
Bond Framework outlines the Group’s target for green financing
as well as its ambition to support its customers in achieving more
sustainable outcomes through the products offered
Page 65
Strategic Report
External (downstream) impact
The Group’s external, or downstream, impacts arise from the
use to which its customers put the funds loaned to them. Most
directly, for asset-backed lending it relates to the impacts of
the asset being financed and its use by the customer.
Impacts of climate change
The uses to which customers put the funds advanced to them
by the Group give rise to two related groups of risks:
• Physical risks - 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
• Transitional risks - 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
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-term (zero to five years), medium-term (five to ten years)
or long-term (over ten years).
The Group already considers these types of issues in its
underwriting and credit risk processes to some extent.
Examples of how the Group’s lending businesses manage
their exposure to climate change effects, and seek to promote
environmentally positive behaviour by customers, are given in
Section A4.1.
Governance
Board oversight
The Board has designated climate change as a principal risk
within the ERMF. 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 Chief Financial Officer (‘CFO’) has been
designated as the director responsible for climate change
matters.
The Board is engaged on a regular basis on sustainability and
climate-related matters receiving frequent sessions to build
their understanding on climate change and its associated risks
and opportunities.
• An insight session was held for the Board which focused on
education and awareness of climate change risk and the
session outlined the key considerations from a Paragon
perspective
• Further to this as part of a broader ESG presentation, a
comprehensive summary of climate change impacts was
presented at the Board strategy day. The focus was on
strategic alignment and the priorities and implications of
our loan portfolio allocation with consideration of net zero
pathway commitments
Page 66
Sustainability Committee and climate change
working group
During the year the Group established the Sustainability
Committee which reflects the commitment to embed
sustainability throughout the organisation. The Sustainability
Committee has a broad ESG perspective and reports to
Performance ExCo and the Board on a regular basis.
The climate change working group, working under the
oversight of the Sustainability Committee and Performance
ExCo, has:
• Delivered new green products to encourage our customers
to transition to a low carbon economy
•
Increased the availability of climate-related data across the
business through enhanced data collection at underwriting
• Developed financed emissions estimates across the
Group’s mortgage book using the Partnership for Carbon
Accounting Financials, as set out below
• Performed a climate change risk assessment across the
mortgage portfolio focusing on the key risk drivers across
both physical and transition risk
• Submitted responses to the CDP climate change
questionnaire, for the first time. The CDP is a not-for-profit
charity that runs the global disclosure system for investors,
companies, cities, states and regions to manage their
climate and environmental impacts
• Continued to engage with external climate change
initiatives. This includes involvement in industry initiatives,
particularly through the Green Finance Institute, the
FLA’s Green Finance Group and UK Finance’s Sustainability
Committee and ‘COP26 and Beyond’ roundtable
Embedding climate change within the organisation’s
governance structure
Throughout the last year, since designating climate change
as a principal risk, climate change continues to be further
embedded within the Group’s governance structure and
culture. During the year the terms of reference of key risk
committees have been updated to reflect their responsibilities
with respect to climate change.
Consequently, the wider impacts and transmission channels of
climate related risks can be identified and managed across the
Group. Through improved governance and increased climate
related reporting into the Sustainability Committee, and
other executive level committees, the process for identifying
and managing climate-related risks has been enhanced.
This ensures that the broad scope of climate change related
risks is escalated and managed by personnel across the
business. Examples of the topics discussed at executive level
committees throughout the year include:
• An EPC risk paper was presented to the Credit Committee,
an outcome of which has been for the Committee and
the credit team to review the implications of EPC on
loan performance
• An insight session was provided to ORC on the importance
of climate considerations with a further session held on
incorporating climate change into the RCSA process
• Climate change has been embedded throughout the
monthly reporting at Asset and Liability Committee (‘ALCO’)
through the monitoring of our green products and the wider
green product market
Risk management
Quantifying our climate exposure
Assessment of current environmental risks and
forward-looking climate change risks are 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 EPC rating of the property, flood risk, risk of coastal
erosion and ground stability are considered.
As part of the valuation report performed by surveyors, coastal
erosion, ground stability and flood risk are assessed based
on the surveyor’s expertise of the local area, historic events
and information from insurers. As part of the conservative
approach taken, these risks are assessed on a
property-by-property basis. Additionally it is essential for the
Group to ensure that a property is and remains insurable
providing cover from both subsidence and flood risk across
the mortgage book.
Since 2018 all properties accepted as a security must have
a minimum EPC rating of E at the time of offer unless valid
exemptions are in place. EPC data is likely to be of increasing
importance with regulations and government policy tightening
with the aim of decarbonising the building stock. The Group’s
data capture process has been enhanced to improve the
current understanding of the exposure but also for use in
longer term climate scenario analysis.
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.
Throughout the year the energy efficiency of completed
developments within the Group’s development finance
business has been assessed using EPC data. This information
has been used across the business to assess the quality of
the developments and to begin to review the climate change
impact that this lending might have.
Climate-related opportunities
Climate change related opportunities have been and continue
to be considered as part of the Group’s strategy and the
Group aims to support its customers in their transition to a low
carbon economy.
In March 2021 the Group became the first bank in the UK to
issue a green capital instrument. The proceeds of the bond are
being allocated exclusively to eligible green loans. This funding
structure is an indication of the Group’s commitment to place
sustainability and climate change at the heart of its
long-term strategy.
The Group’s lending businesses have released a series of
green products during the year and after the year end. These
have included
• Buy-to-let mortgage products aimed at supporting
landlords to improve the energy performance of their
properties and thereby increase the proportion of EPC A to
C rated properties in the PRS
• Development finance products promoting the
development of properties with high EPC ratings
• Motor finance products for electric vehicles
These are discussed in Section A4.1 in the reviews of the
relevant businesses.
During the year the Group has made progress in assessing
the potential financial impact of climate change on its
buy-to-let mortgage book. The primary focus has been on the
potential transitional risk related to the energy efficiency of
the properties financed and the physical risk relating to flood
risk and ground instability. The assessment included reviewing
both the climate change screening during the loan origination
process as well as assessing the total current portfolio
exposure to such risks.
Throughout the year deep dive sessions and workshops
were held with personnel across credit risk, property risk
and mortgages on flood risk and ground instability which
specifically considered the long-term impacts of climate
change. The analysis indicated that the current processes are
fit for purpose however they will continue to evolve as data
availability improves.
EPC levels and associated regulation have the potential to
impact our credit risk and the Credit Committee and our
credit team continue to analyse the linkage between EPC and
loan performance. Additionally the Sustainability Committee
actively monitors the energy performance of properties to
ensure that an excessive build up in concentration of less
efficient properties is avoided. This EPC risk assessment has
led to the launch of new ‘green’ products and enhancements to
the underwriting process in support of climate consideration.
The tables below summarise the principal risk metrics for the
Group's mortgage lending exposure in England and Wales.
Coverage levels are shown as a percentage of accounts with
properties in England or Wales, which represent 97.9% of the
portfolio. Work is ongoing to source comparable data for the
Group’s Scottish and Northern Irish exposures.
Indicator Measure
2021
Coverage
2020
Coverage
EPC
Flood risk
Grading
A to B
Grading
A to C
Grading
A to E
High risk
properties
High or
medium risk
properties
8.1%
88.3%
7.8%
87.7%
37.6%
88.3%
36.9%
87.7%
98.4%
88.3%
98.2%
87.7%
0.7%
100.0%
0.4%
99.0%
2.5%
100.0%
2.2%
99.0%
Flood risk 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.
Quantitative analysis for flood risk used localised postcode
level data and indicated that only a small proportion of security
properties were located within medium or high-risk zones.
The Group is yet to experience any loss from flood or
ground instability.
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Strategic Report
Green mortgage lending, for properties with EPC grades of
A to C increased by 27.7% in the year to £577.7 million
(2020: £452.5 million). For new buy-to-let mortgages in England
and Wales advanced during the year ended 30 September
2021, the distribution of EPC grades is shown below.
Indicator Measure
2021
Coverage
2020
Coverage
EPC
Grading
A to B
Grading
A to C
Grading
A to E
9.4%
93.0%
10.2%
94.0%
40.3%
93.0%
40.8%
94.0%
100.0%
93.0%
100.0%
94.0%
The Group’s completions continue to have a higher average
EPC grade than the total portfolio stock, shifting the overall
mix towards more energy efficient properties, a trend which will
be accelerated by the launch of green mortgage products in
the year. However, a focus by banks on green advances alone
will not deliver the desired changes in the housing stock, and
initiatives to decarbonise the existing stock will be needed.
Future developments
In addition to the work currently in progress described above,
the Group’s climate change programme includes:
• Further embedding climate change risk management
across the business
• Enhancement of the understanding of the climate change
impact of the Group’s lending within the business
• Development of the climate change risk policy which clearly
documents the Group’s approach to managing climate
change risk within the ERMF. The Policy helps document
how the understanding and management of climate risk is
distributed across the business whilst articulating clear
roles and responsibilities for managing and monitoring of
climate change risk across the business
• Development of formal climate related risk appetites
and a full suite of Key Risk Indicators and Key Performance
Indicators. These will then be further developed into
short-term and long-term climate related targets or
ambitions for the Group
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.
• Continued development of climate change scenario
analysis leveraging off the CBES and NGFS scenarios to
determine the resilience of the Group’s strategy under
different climate-related scenarios
Financed emissions
The Group supports the UK’s ambition for net zero by
2050 and has a climate ambition of reducing the emissions
associated with the mortgage book. This year, for the first time,
it has calculated the Scope 3 emissions associated with its
buy-to-let mortgage lending activities. With this data being
relatively new, the Group is in the process of identifying other
ways that it can support its customers whilst reducing the
impact that its lending has on the environment.
The Group plans to continue to develop its financed emission
disclosures over the next year scoping out methodologies
to increase the balance sheet coverage as well as emission
reductions. Whilst the Group has not yet set science-based
targets across its financed emissions, there are plans to
explore this further enabling the Group to track progress and
alignment with a net zero pathway.
Indicator
Sector
2021
Coverage
2020
Coverage
Sector
Water,
sewerage
and waste
Extractive
industries
Power
generation
Total
carbon
intensive
industries
4.53%
100%
3.54%
100%
2.35%
100%
1.75%
100%
0.01%
100%
0.01%
100%
6.89%
100%
5.30%
100%
This demonstrates that the Group’s SME lending customer
base is not disproportionately exposed to those industries
considered to have the highest environmental impacts.
Measures addressing other risk elements including those
in other business streams, for example, classifications of
business assets and motor vehicles financed by environmental
impacts, and classification of development finance projects
by environmental rating, are under development and
continue to evolve. Further work will also be undertaken to
narrow reporting metrics beyond SIC codes, given the breadth
of activities that can be included. These will be aligned to the
UK’s new Green Taxonomy due to be introduced during 2022.
Use of scenario analysis
As our understanding of climate risk develops climate change
scenario analysis is becoming of increasing importance.
Scenario analysis enables the identification of risks across
the short, medium and long term. The complex nature of
forward-looking scenarios and long-term scenarios beyond the
planning horizon brings about many challenges.
The process to review the implications for the Group of the
PRA Climate Biennial Exploratory Scenario (‘CBES’), released
in June 2021, is currently underway. The CBES is focused on
testing the financial resilience of firms across three scenarios
for government intervention on climate, referred to as ‘Early
policy action’, ‘Late policy action’ and ‘No additional policy
action’. These are aligned with the Network for Greening the
Financial System (‘NGFS’) scenarios which are seen as
good practice.
Page 68
Scope 3 Mortgage emissions
Financed emissions – considered as scope 3 emissions – are
the emissions that the Group’s customers produce due to the
financing provided. In line with PCAF standard the absolute
financed emissions have been calculated across the buy-to-let
mortgage portfolio. Under this approach a lender, such as the
Group, is considered to be responsible for a proportion of the
emissions based on an ‘attribution factor’.
For buy-to-let mortgages the annual emissions relating to the
finance property are attributed to the mortgage provider on a
loan-to-value basis.
PCAF scope 3 financed emissions
Scope 3 Annual buy-to-let mortgage emissions
2021
Balance of mortgage lending (£m)
11,312.7
Balance of mortgage lending with valid EPCs (£m)
9,775.2
Absolute Financed Emissions from properties with
valid EPCs (tonnes CO2)
Physical Emissions intensity of properties with valid
EPCs (kgCO2 per m2)
Economics Emissions intensity of properties with
valid EPCs (kgCO2 per £ income)
148,607
47.24
13,419
Notes on calculation methods
1. The financed emission attribution factor uses outstanding
balance and original valuation to calculate the (unindexed)
loan-to-value factor – this is aligned with the PCAF
guidelines.
Its environmental commitments are expressed in its Green
Charter which is approved by the CEO and kept under
regular review.
Group-wide recycling and awareness campaigns are also run
with employees 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.
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, 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. The next submission is due in 2023.
2. The data contained in the EPC has not been altered
or updated.
Supply chain and procurement
3. The data score calculated in accordance with the PCAF
guidelines was 3 as all the data above relates to properties
with available EPCs.
4. The calculation of physical emissions intensity used the
sum of attributed floor area using loan-to-values ratios.
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 undertakes 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 and includes these within its
legal compliance framework. The Group’s environmental
commitment is included within the Health, Safety and
Environmental policy that is approved by the CEO and the
People Director.
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 works with key suppliers to identify
solutions 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.
84.5% (2020: 84.0%) of the purchased electricity in the year
was obtained from sources certified as renewable by the Office
of Gas and Electricity Markets (‘OFGEM’).
Environmental initiatives
All the general waste produced at the Group’s principal sites,
outside SFS, was disposed through an approved waste
contractor using Waste to Energy initiatives, resulting in no
waste from these locations being disposed at landfill.
During the year the Group’s London operations were
centralised at a new location at Fenchurch Street in the City.
These new premises both reduce the Group's operational
footprint and increase energy efficiency. The new location is
a more modern, green building built to the latest BREEAM
standards. The Group benefits from clean energy created on
site by hydrogen fuel cells, and all waste is segregated on site
by the building’s facilities management team.
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Strategic Report
The Group’s other environmental initiatives in the
period include:
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 CO2e
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
CO2e per £m income
2021
Tonnes
CO2e
2020
Tonnes
CO2e
450
353
33
836
641
1,476
4.5
426
4
60
490
1,967
6.1
452
402
33
887
697
1,584
5.4
325
12
61
398
1,982
6.7
CO2 equivalent (‘CO2e’) values above are calculated based on
the BEIS / DEFRA guidelines published on 1 June 2021.
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 from operations not reported above
are not considered to be significant. All these emissions relate
to activities in the UK and its offshore area.
The reduction in emissions in the year is principally driven
by the continuing effects of Covid. 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, particularly during the winter months when
the UK was in lockdown. Social distancing rules continued
to mean that the scope for business travel, for meetings
and other normal parts of the business process was sharply
reduced, particularly in the first half 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 these levels would be maintained 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.
•
Installation of a new, more energy efficient heating plant
at the main SFS location, reducing the Group’s gas
consumption
• Continuing the programme of refurbishment work on
washroom facilities at the head office building employing
touchless energy and resource saving technology.
All construction wastes are segregated and disposed of
responsibly by the contractor
• Continuing to modernise 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 scope of initiatives in the period has been limited by the
impact of lockdowns and other restrictions on access to the
Group’s buildings for large parts of the period, particularly for
external contractors.
An independent assessment of the Group’s energy
performance, at the head office and its Leeds site, has been
commissioned and will take place in the early part of the new
financial year. The recommendations from this assessment
will form part of the Group’s resource planning and be used
as the basis for setting short, medium and long term goals
for reducing environmental impacts. These objectives will be
approved, and progress monitored, at board level.
Key short term objectives are:
• Alignment of the Group’s environmental management
systems to ISO14001:2015 prior to obtaining external
certification
• Set the baseline year to be used for the ongoing
measurement of the Group's environmental performance
going forward
• For leased buildings managed externally, liason with
landlords to encourage the procurement of energy from
renewable sources where possible, and generally
encourage initiatives to reduce the carbon footprint at
such locations
• Roll out training programmes to raise awareness of
environmental impacts amongst the Group’s people, with
focussed training for those with specific responsibilities in
the environmental management system
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 consolidated
in the Group’s financial statements. Normalised data is based
on total operating income of £324.9 million
(2020: £295.1 million).
Page 70
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 2021 is shown below.
2021
MWh
2020
MWh
2019
MWh
Renewable electricity
2,458.6
2,509.3
3,123.5
Other electricity
558.9
478.2
768.1
Electricity
Natural gas
Motor fuel
Normalised MWh
per £m income
3,017.5
2,987.5
3,891.6
2,454.9
2,450.9
2,817.1
1,551.7
1,900.3
3,099.9
7,024.1
7,338.7
9,808.6
21.6
24.9
33.0
Consumption levels have remained low in the year as the
pattern of Covid-related lockdowns and working from home,
which commenced in March 2020 continued through much of
the year. Some of the Group’s buildings were closed for long
periods, with the utilisation of others reduced.
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.
Water usage
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 2021 was
8,500m3 (2020: 11,950m3), based upon consumption recorded
on purchase invoices, a normalised amount of 26.1m3 per
£m income (2020: 40.5m3 per £m income). The reduction
in usage is a result of reduced office occupancy through
most of the year.
Waste
SFS is 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 2021 together with
the methods of disposal are shown below.
Recycled
Waste to Energy Initiatives
Landfill
Normalised tonnes
per £m income
2021
2020
2019
Tonnes
Tonnes
Tonnes
87
17
125
229
61
29
131
221
122
-
187
309
0.70
0.75
1.04
Waste generation data is based upon volumes reported on
disposal invoices.
Generation of waste in the Group’s buildings continues to
be depressed by the low levels of occupancy, coupled with a
concerted effort in several areas to reduce paper usage.
The Group’s long-term strategy is to increase the proportion
of waste which is either recycled or used in Waste to
Energy initiatives.
A6.5 Social and community
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, striving to go beyond what is
required in its relationships with its customers, the wider
community and other stakeholders.
The Group operates as a specialist lender and provides
funding for business propositions in the development finance
and SME lending markets which might struggle to attract
larger lenders, helping to support the SMEs which are crucial
to the UK economy.
Where possible, the Group uses its lending relationships to
promote good practice. The buy-to-let mortgage division
demands minimum standards from landlords in the properties
it funds, helping to drive up standards in the PRS. Looking
forward, the Group is developing products which will help to
drive action on climate change.
Industry initiatives
Through its activity within trade organisations in the UK,
the Group is helping to formulate public policy and share
experience on best practice to drive forward better financial
provision. The Group has been particularly active in initiatives
to enable the PRS to serve the UK housing market more
effectively. The Group also regularly engages directly with
Government to help inform departments on how market trends
are impacting landlords, their sentiment and behaviours.
The Group’s CEO is a member of both HM Treasury’s Home
Finance Forum and the Bank of England Residential Property
Forum which provide input to policy at the highest levels.
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Strategic Report
Given the restrictions which continued to be imposed on
office-based fund-raising activities by working from home,
this is an impressive achievement by the Committee and the
Group’s employees.
Taxation policy and payments
Materially all 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 co-operating 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 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.
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. In
2021, this has been enhanced through work by the Mortgage
Lending business with the Green Finance Institute on the
potential for providing green products to 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
£912,000 (2020: £1,110,000) were made by the Group during
the year to the work of the Foundation for Credit Counselling
which operates the StepChange Debt Charity. This ensures
that such customers are able to receive free, independent
advice on their finances from qualified counsellors.
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 £39,600.
(2020: £157,800).
Charities which benefitted from the Group’s charitable
donations include local schools, sports clubs, hospitals and
hospices, The Down's Syndrome Association, British Heart
Foundation, Rethink Mental Illness, Happy Days Children’s
Charity, Demelza Hospice Care for Children, and many others.
During Pride month the Group encouraged fundraising for
LGBTQ+ affiliated charities with one of the beneficiaries being
St Basil’s charity.
Due to the Covid pandemic face-to-face volunteering with SIFA
Fireside, local schools and ‘Ready to Work’ were unfortunately
put on hold. Employees continued to make a difference to the
local community, focusing on virtual volunteering and providing
mentoring for individuals who require careers support. This
achieved 49 volunteering days (2020: 23.5 days). The Group
is also in the process of resuming its normal volunteering
activities with early initiatives including:
• St Basil's charity – Yardley House, a residential housing unit
for young vulnerable adults. The unit, specifically for
mothers and babies, required support to refurbish its
communal garden area
• Stanville Primary School – previously a hospital building
which required extensive refurbishment. The school was
under pressure to save money, and with reduced staffing
due to the pandemic needed volunteers to assist with
creating a safe and interesting play area for its Early
Years section
At Christmas 2020, the annual donations of food and luxury
items by employees for Christians Against Poverty continued.
Even though this was impacted by the Covid lockdown with the
majority of employees continuing to work remotely, a total of
54 families received a parcel delivery.
The Group also supports Paragon’s Charity Committee,
consisting of volunteer employees, who organise a variety
of fundraising activities throughout the year. 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. In the calendar year 2020, £60,000 was
raised for Macmillan, while in the first nine months of 2021,
£22,000 has been raised for the Alzheimer’s Society through
online events, monthly raffles and employees taking part in
sponsored events including ‘Jog on or Step-up for Alzheimer’s’
and charity football.
Page 72
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
2021
2020
£m
48.3
29.1
3.8
0.2
81.4
1.3
82.7
£m
46.1
32.8
2.7
-
81.6
1.4
83.0
The Group supports the objective of the Modern Slavery Act
2015, in raising awareness of modern slavery and
human trafficking.
It 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. This commitment is reflected in the Group’s policies
and its Supplier Code of Conduct.
The Group publishes an annual Modern Slavery Statement,
describing policies for achieving this, which can be found on
the Group’s website: www.paragonbankinggroup.co.uk.
The Group undertakes extensive monitoring of the
implementation of all 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 with human rights legislation, including
Modern Slavery legislation, have been incurred in the
financial year (2020: none).
In response to the Covid 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
Business partners
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 UK Human Rights Act 1998 which incorporates the
European Convention on Human Rights into UK law. The Group
has systems in place to ensure that its policies and procedures
are compatible with all legal requirements applicable to it and to
identify any new or emerging requirements.
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 and
business partners 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 and, if
appropriate, its disciplinary procedures.
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 has a Supplier Code of Conduct, available on
its website, which sets out our overall approach to supplier
engagement and corporate responsibility and, importantly, the
standards of behaviour expected from suppliers.
The Code of Conduct also includes the Group’s conduct
commitments and its expectations of business partners in
relation to bribery and corruption, data protection and modern
slavery. It also contains important information concerning the
Group’s employment practices, approach to health and safety,
community matters and environmental policies.
When outsourcing activities, the Group retains responsibility
for those services and the associated risks. Significant work
has been focused on the most critical suppliers to meet
enhanced regulatory requirements under the European
Banking Authority’s Guidelines on outsourcing. These changes
strengthen the Group’s resilience across the supply chain.
The Group aims to pay all of its suppliers within 30 days
of receiving a valid invoice, where correct procedures are
followed and actively engages with suppliers where issues
arise. It is a signatory to the UK’s Prompt Payment Code
(‘PPC’), administered by the Office of the Small Business
Commissioner and as such commits to paying invoices
within 60 days, unless there is good reason for non-payment.
The PPC also aims to ensure all invoices from suppliers it
defines as small businesses, are paid within 30 days unless
under query.
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Strategic Report
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.
These procedures are kept under constant review to ensure
they remain robust and appropriate, and a further gap analysis
was carried out during the year in light of the FCA ‘Dear CEO’
letter on anti-money laundering frameworks sent to retail
banks in May 2021. Additional requirements identified are
being addressed as an immediate priority.
Employees receive regular annual training in these areas, with
their understanding being tested and levels of completion
reported to regulators. At 30 September 2021 the Group's
money laundering reporting officer was the CRO, pending the
appointment of a new Head of Financial Crime Risk, following
the departure of the previous role holder towards the end of
the financial year.
Management responsibility
The Group’s senior legal officer is the Group Counsel and
Company Secretary, who is a member of the Executive
Committee and attends meetings of the Board. The CRO has
overall responsibility for the risk and compliance functions.
He is also a member of the Executive Committee and reports
directly to the Risk and Compliance Committee of the Board
(see Section B8).
All business heads are responsible for having the appropriate
controls in place to ensure that employees adhere to the
Group’s anti-money laundering, and anti-bribery and
corruption policies and procedures, and other policies relating
to business practices. 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 employees who have concerns over
any aspects of the Group's business practices. The Group’s
principal regulators, the PRA and FCA, provide confidential
whistleblowing services to customers and external third
parties which are communicated to customers and publicised
on the Group’s and the regulators’ websites. Whistleblowing
arrangements are described further in Section B4.5.
The Group’s central administration company, Paragon Finance
PLC, reports its payment performance semi-annually under
the ‘Reporting on Payment Practices and Performance
Regulations 2017’. Following some disruption to process
caused by Covid restrictions in the first half of the year, data
for the six months ended 30 September 2021 showed invoices
paid in an average of 22 days and 95% of invoices paid within
60 days, on the basis set out in the regulations.
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.
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 eleventh safest in the
Corruption Perceptions Index for 2020 out of 180 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, its
interactions 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 which is incorporated in the Supplier Code of Conduct.
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 2021.
During the year the CRO, in conjunction with the Head of
Financial Crime, who are both part of the 'second line' Risk
and Compliance function, were responsible for ensuring
the Bribery Act risk assessment is properly completed and
that appropriate policies and procedures were in place and
reviewed on a regular basis. They were also responsible for
ensuring any changes in the law are identified and properly
reflected in 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. Following the year
end a new role of Head of Financial Crime Risk was created,
taking on the risk management aspects previously part of the
role of the Head of Financial Crime, enabling greater focus on
both the first and second line aspects of the role.
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 (2020: none).
Page 74
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
7 December 2021
Page 75
Strategic Report To celebrate International Women’s Day 2021,
female leaders from across the Group hosted a
series of drop-in sessions to share their experience
and offer encouragement to colleagues.
B. Corporate governance
How the Group is run and how risk is managed
P78
B1. Chair of the Board’s statement
An overview of governance in the year
P80
B2. Corporate Governance Statement
How the Company complied with the Code in the year
P82
B3. Board and senior management
The directors and the operation of the Board during the year
P88
B4. Governance framework
The system of governance, committee structure and how the Board fulfils its duties
P102
B5. Nomination Committee
Policies and procedures on governance, board appointments and diversity
P105
B6. Audit Committee
How the Group controls its external and internal audit processes and its financial
reporting systems
P114
B7. Remuneration
Policies and procedures determining how directors are remunerated
P145
B8. Risk management
How the Group identifies and manages risk in its businesses
P157
B9. Directors’ report
Other information about the structure of the Company required by legislation
P160
B10. Directors’ responsibilities
Statement of the responsibilities of the directors in relation to the preparation of the
financial statements
B1. Chair's statement on
corporate governance
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
Dear Shareholder
I am pleased to introduce this section of the annual report,
which describes the Group’s governance processes and how
the Board and its Committees addressed the important issues
facing the Group during the year.
The Group is committed to strong corporate governance as
a foundation for strategic success and takes its responsibilities
under the UK Corporate Governance Code (the ‘Code’)
very seriously. As a board we recognise that a robust
governance structure and effective risk management
framework are integral to delivering sustainable growth
and shareholder returns.
The Board noted with interest the BEIS proposals on
governance, auditing and reporting published in the year. Final
recommendations are due to be published in the coming year
and the Board expects to spend considerable time considering
these. It is my hope that the approach adopted by BEIS builds
on the best aspects of the current UK approach to governance,
developed over the thirty years since the Cadbury Committee
first met.
The Group enhanced the governance framework in the year,
with the establishment of a Sustainability Committee, which
reports to the Executive Committee and is able to form
a holistic view of sustainability issues across the Group’s
activities. An informal Non-Executive Technology and Change
Group was also created to provide direct insight for the
independent directors on these areas.
Stakeholder engagement
The Group has continued to develop its shareholder
engagement programmes during the year, despite our inability
to engage face-to-face, as a consequence of Covid.
The Group’s People Forum continues to meet regularly
and provides the Board with insight into the views of
the employees.
The People Director updates the Nomination Committee on
the outcome of these meetings and has 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 back to employees,
through the Forum and through wider communications.
I have been pleased to attend meetings of the Forum, as have
some of the Group’s non-executive directors. It was very useful
for us to receive direct feedback from employees on a number
of significant areas, including remuneration, employment
conditions, the Group’s response to Covid, and the hybrid
working arrangements now being adopted.
We also launched our first in-depth employee survey since the
onset of Covid during the year. This, pleasingly, demonstrated
a high level of engagement, with employees expressing
positive views about the Group’s culture and the quality of the
internal communications.
I, and my Board colleagues, have had the opportunity of
meeting with the representatives of various regulators in the
year. We value these interactions, and take the views of our
regulators very seriously in considering policy and strategy.
During the latter part of the year I met with representatives
of shareholders and proxy advisers, together with Hugo
Tudor, the Senior Independent Director and Chair of the
Remuneration Committee. These discussions covered the
Group’s approach to executive remuneration and also covered
other governance and broader sustainability issues. I find these
interactions to be both constructive and useful, and would
urge all of our principal shareholders to participate, if invited.
Purpose
During the year the Board reviewed and confirmed the
Group’s purpose: “To support the ambitions of the people
and businesses of the UK by delivering specialist financial
services”. This was followed up with a campaign intended
to emphasise to employees and business partners the
centrality of the purpose and the Group’s values to its
culture and strategy.
Page 78
Diversity and Inclusion
Board changes
The promotion of the Group’s diversity and inclusion agenda
has been a particular focus of my tenure as Chair. I was
pleased to see the impact the new EDI Network had in its
first year, and this bodes well for future progress in this area.
I was also delighted that the Group had met its
Hampton-Alexander (‘HA’) targets for board and senior
management diversity, and its wider diversity targets under
the Women in Finance initiative, set in 2016. I look forward
to the next phase of both projects.
Whilst I am proud of this progress, we will maintain our
vigilance to ensure that momentum is maintained and will
bear this in mind as the Board develops. In particular we are
aware of the value of ethnic and other diversities on boards
and of increased expectations around the Parker review, and
are considering how best to build these into our succession
planning.
Board effectiveness
The Board conducted an internal effectiveness review during
the year and continued to address development points that
arose from past effectiveness internal reviews. Planning for
the next triennial, externally facilitated, review of board and
committee effectiveness, due in 2022, is currently in progress.
Having completed nine years on the Board in September
2021, I will be stepping down as Chair once a suitable
candidate is appointed to replace me, and after an appropriate
handover period. The Board and Nomination Committee have
considered my reappointment beyond nine years and agreed
that, in the interests of succession planning, and to ensure a
smooth handover to my successor, my appointment should be
extended to September 2022. The search process for the new
Chair is well under way and we will update stakeholders once
an appointment is made.
Peter Hill was appointed to the Board on 27 October 2020,
becoming Chair of the Risk Committee on 31 December
2021 when the previous Committee Chair, Finlay Williamson,
stepped down from the Board. Peter 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,
gained during his executive and non-executive career, which
will be valuable to the Group going forward.
The Group’s next AGM will be held on 2 March 2022 in
London, and we look forward to welcoming shareholders,
hopefully without any of the Covid-related restrictions which
impacted on the 2021 AGM. However, if any such restrictions
are required, shareholders will be updated on revised
arrangements through the Group’s website.
Fiona Clutterbuck
Chair of the Board
7 December 2021
Page 79
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'). Throughout the year ended 30 September 2021, 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 19 of the Code to extend
the Chair of the Board’s tenure past nine years for succession planning purposes and to ensure the appointment of a suitable
replacement Chair, as set out below.
Fiona Clutterbuck’s nine-year term on the Board came to an end in September 2021 since she was first appointed in 2012 and she has
indicated her intention to step down as Chair once a suitable candidate is appointed, and after an appropriate handover period. The
Board and Nomination Committee considered Fiona’s position, including her other commitments, and agreed that, in the interests
of succession planning and to ensure a smooth transition of duties to Fiona’s successor, her appointment be extended beyond
nine years to September 2022. Fiona will therefore stand for re-election at the AGM in March 2022. The Board believes this limited
extension to be in the interests of the Company’s shareholders and the Group’s other stakeholders. Fiona will step down once a
new Chair has been appointed, and an appropriate handover has taken place. The search process, which is being led by Hugo Tudor,
the Senior Independent Director, is well underway and the outcome will be communicated to shareholders in due course. This is
discussed further in the report of the Nomination Committee in Section B5.
The table below signposts the relevant sections of this report, which provide supporting information about how the Code 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 align with its culture, have been established and are
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.
B3
B1
B8
B4.3
B4.3
Page 80
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. They provide constructive
challenge, strategic guidance, offer specialist advice and hold management to account.
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
Section
B4.1
B4.1
B4.1
B4.1
Section
J. Appointments to the Board are subject to a formal, rigorous and transparent procedure, and an effective
succession plan is in place for Board and senior management. Appointments and succession plans are based on
merit and objective criteria and promote diversity.
B5
K. There is an appropriate mix of skills, experience and knowledge. Tenure and membership of the Board and its
committees are regularly reviewed.
L. The annual board evaluation provides an opportunity for the directors to consider their collective and individual
effectiveness and decide where there are areas for improvement.
Section 4: Audit, Risk and Internal Control
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.
B4.4
B4.4
Section
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 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. No director is involved in deciding their own remuneration outcome.
R. The directors exercise independent judgement and discretion over remuneration outcomes, taking account of
company and individual performance and wider circumstances.
Section
B7
B7
B7
Page 81
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.
3.
6.
1.
4.
7.
2.
5.
8.
*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.
†In line with Code provision 10, Fiona’s nine-year term was extended to September 2022, following Nomination Committee and Board deliberation during the year, to facilitate
effective succession planning.
Finlay W Williamson stepped down from the Board on 31 December 2020.
Page 82
1.
Fiona J Clutterbuck
Chair of the Board (Age 63)
2.
Nigel S Terrington
Chief Executive (Age 61)
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, and became
Finance Director in 1992 and CEO in 1995
Experience
Experience
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 (a Finnish listed financial
services company) and a member of its audit committee
Non-executive director and interim chair of M&G plc. In
accordance with Code provision 15, the Board approved Fiona’s
appointment as interim chair of M&G plc in January 2021
Non-executive director of Investment Funds Direct Limited
3.
Richard J Woodman
Chief Financial Officer (Age 56)
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 is a member of the Board of UK Finance and is the Chairman
of UK Finance’s Specialist Bank Advisory Committee. Previously
he was the Chairman of the Council of Mortgage Lenders (‘CML’),
Chairman of the Intermediary Mortgage Lenders Association
(‘IMLA’), Chairman of the FLA Consumer Finance Division and a
Board member of the FLA.
Nigel is also currently a member of HM Treasury’s Home Finance
Forum and the Bank of England’s Residential Property Forum.
He is an associate of the Chartered Institute of Bankers and in
2017 received an Honorary Doctorate from Birmingham City
University for services to the finance industry.
Specific areas of expertise*
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.
Committee membership
Member: Disclosure Committee
Current external appointments:
Board member of UK Finance
Chairman of UK Finance’s Specialist Banks Advisory Committee
Member of HM Treasury’s Home Finance Forum
Member of Bank of England’s Residential Property Forum
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Appointed to the Board as Director of Corporate Development in
2012 and became CFO in June 2014
4.
Hugo R Tudor
Non-executive director (Age 58)
Experience
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 Mergers and Acquisitions
(‘M&A’) programme.
He is a member of the Chartered Institute of
Management Accountants.
Specific areas of expertise*
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.
Committee membership
Member: Disclosure Committee
Appointed in 2014 – seven years served.
Became Senior Independent Director in July 2020
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 and Risk and Compliance
Committees
Current external appointments:
Director of Woodman Portfolio Holdings Limited and Rose
Wine Limited.
Current external appointments
Director of Damus Capital Limited
Director of Porthcothan Property Limited
Director of Vitec Global Limited, Vitec Air Systems Limited and
Vitec Aspida Limited
Page 83
5.
Peter A Hill
Non-executive director (Age 60)
6.
Alison C M Morris
Non-executive director (Age 62)
Appointed in December 2020 – one year served
Appointed in 2020 – two years served
Experience
Experience
Peter Hill’s career in financial services has spanned over
40 years, including eight years as CEO of Leeds Building Society
between 2011 and 2019, where he previously held the role of
Operations Director.
He was chair of the CML for three years and was a member of the
Board of UK Finance.
Peter is a fellow of the Royal Society of Arts and an associate of
the Chartered Institute of Banking.
Specific areas of expertise*
• Specialist retail banking and mortgage lending expertise
• Detailed knowledge of the financial services sector
Committee membership
Chair: Risk and Compliance Committee
Member: Audit 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
7.
Graeme H Yorston
Non-executive director (Age 64)
Appointed in 2017 – four years served
Experience
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 Prince
Charles, 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
particularly in marketing, communications and
customer service
• Detailed experience of overseeing Business Change and
IT systems
Committee membership
Member: Nomination, Remuneration and Risk and Compliance
Committees
Current external appointments
None
Page 84
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
Member: Remuneration and Risk and Compliance Committees
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, M&G Investment
Management Limited and M&G Alternatives Investment
Management Limited, all part of the M&G plc group
8.
Barbara A Ridpath
Non-executive director (Age 65)
Appointed in 2017 – four years served
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 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’)
B3.2 Executive Committee
The members of the Group’s Executive Committee are set out below, with their tenure in their current role.
Nigel Terrington
Chief Executive Officer (‘CEO’)
Since 1995
Richard Woodman
Chief Financial Officer (‘CFO’)
Since 2014
Richard Rowntree
Managing Director - Mortgages
Since 2020
Dave Newcombe
Managing Director – Commercial Lending
Since 2019
Michael Helsby
Strategic Development Director
Since 2018
Pam Rowland
Chief Operating Officer (‘COO’)
Since 2014
Deborah Bateman
External Relations Director
Since 2009
Peter Shorthouse
Treasury and Structured Finance Director
Since 2010
Anne Barnett
People Director
Since 2009
Marius van Niekerk
General Counsel and Company Secretary
Since 2019
Ben Whibley
Chief Risk Officer ('CRO')
Since 2019
All members sit on both the Performance
Executive Committee and the
Executive Risk Committee. The Internal
Audit Director, Sarah Mayne, attends
both meetings as an observer.
Page 85
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.
These included:
• Considering the impact of Covid, Brexit, and other macro-economic uncertainties on the Group
• Reviewing the Group’s cyber security processes and operational resilience
• Assessing the impact of climate change on the Group and developing its ESG strategy
• Ensuring an effective transition away from LIBOR
In addition, the Board regularly receives and reviews reports prior to its meetings covering such matters as strategy, 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 its committees and investor relations and shareholder feedback.
Other significant matters overseen by the Board are set out below by theme:
Topic
Cyber security / operational resilience
Training / insight session on technology strategy and cyber security, presented by in-house experts.
Update on cyber security, which included an overview of the Group’s Security Operations Centre, new technologies
and defence mechanisms deployed, and cyber security awareness initiatives across the organisation amongst
other matters.
Meeting
Oct 2020
Mar 2021
Operational resilience training, which covered e.g. the regulatory perspective thereon, the Group’s operational
resilience framework, and steps the Group has taken and will take to enhance it, such as scenario tests and training.
May 2021
Corporate governance
Annual review of the Corporate Governance Policy Framework.
Succession planning for the Board and Group in conjunction with the Nomination Committee
Training on CRD V, which provided an overview of the key remuneration requirements under CRD V and the key
impacts on the Group’s remuneration policies and practices
Consideration of the annual whistleblowing report, which provided the Board with the assurance of the integrity of
the Whistleblowing Policy, independence of the process and details of disclosures and developing trends identified
during the reporting period.
Approval of the Modern Slavery Statement and Policy following an annual review.
Annual review of the Group’s purpose with confirmation that it remained relevant and was fit for purpose for the
next twelve months. In addition, the Board considered the Code requirement that the Group’s purpose should align
with its culture when making the assessment
Approval of the declaration of a final dividend of 14.4 pence per share in respect of the financial year ended
30 September 2020.
Approval of the declaration of an interim dividend of 7.2 pence per share and a buy-back programme of
£40.0 million of the Group’s ordinary shares in accordance with the approval granted at the 2021 AGM.
Business strategy
Feb 2021
Feb 2021,
Jul 2021,
Sep 2021
Mar 2021
Mar 2021
Mar 2021
Apr 2021
Nov 2020
Jun 2021
Training / insight session that explored the outlook for the UK economy and housing market. The session was
facilitated by an economic research consultancy.
Oct 2020
Approval of the corporate plan for the financial years ending 2021 to 2025. More detail on the Group’s strategy can
be found in section A3 and A4.
Nov 2020
A deep dive review into Commercial Lending operations was provided to the Board by the managing director of
the business. This was a further opportunity for the Board to meet a key management individual beyond strategy
sessions, thereby enhancing engagement with senior management.
An investment bank provided a market update on the financial services sector.
Jan 2021
Feb 2021
Page 86
Topic
Risk and regulation
Received training on the ILAAP.
Approved lending to the Group’s customers under the RLS.
Approved the LIBOR transition approach for buy-to-let customers.
Received training on pricing and cost of funds from in-house experts.
Approved the Group’s 2021 Recovery Plan.
Received further training on IRB, following the training received in June 2020.
Considered and approved revisions to the Group’s principal risk categories.
The General Counsel and Company Secretary and external counsel provided the Board with a legal and regulatory
training session, which covered topics such as UK MAR and directors’ duties.
ESG
Meeting
Oct 2020
Mar 2021
Mar 2021
May 2021
May 2021
July 2021
July 2021
July 2021
Received a presentation from members of the Group’s sustainability team on ESG.
Oct 2020
Received a presentation from members of the internal sustainability team and Ernst and Young on climate change.
Dec 2020
The People Director presented an update on employees to the Board, which outlined the employee experience and
impact leading up to, and during, the second period of national lockdown across England.
Dec 2020
Approved a proposal to refinance the Group’s Tier-2 Bond, which was subsequently issued as a green bond.
Proceeds from the bond will be allocated to buy-to-let lending of properties with an EPC rating of A or B.
Received an update on employee feedback via the Nomination Committee.
Received an update on the Group’s ‘Return to Office’ project.
Received a presentation on investor relations from the External Relations Director, which covered matters including
share price development, an overview of the Group’s share register and movements over the preceding twelve
months, and shareholder feedback following the half year results announcement.
Approved the Group’s updated Equality, Diversity and Inclusion Policy.
Jan 2021
Feb 2021
Mar 2021
Jul 2021
Sep 2021
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. Contributors to board papers are required to consider and highlight any potential principal stakeholder impacts of any
proposal as a matter of course.
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 / questions from them are reported to the meeting 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
Peter A Hill
Alison C M Morris
Hugo R Tudor
Barbara A Ridpath
Finlay F Williamson
Graeme H Yorston
Board
10 (10)
10 (10)
10 (10)
9 (9)
10 (10)
10 (10)
10 (10)
3 (3)
10 (10)
Audit
Committee
Risk and Compliance
Committee
Remuneration
Committee
-
-
-
3 (3)
5 (5)
5 (5)
5 (5)
2 (2)
-
4 (4)
-
-
3 (3)
4 (4)
4 (4)
4 (4)
1 (1)
4 (4)
6 (6)
-
-
-
6 (6)
6 (6)
-
-
6 (6)
Nomination
Committee
3 (3)
-
-
-
-
3 (3)
3 (3)
-
3 (3)
Directors also attended an annual two-day strategy event, 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.
Page 87
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 committee 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
Executive
Performance Committee
(Performance ExCo)
Executive
Risk Committee
(ERC)
Model Risk
Committee
Transaction
Committee
Sustainability
Committee
Credit
Committee
Operational Risk
Committee
Asset & Liability
Committee
Customer and
Conduct Committee
Model Review
Group
Sanctioning
Committee
Pricing
Committee
Capital
Committee
Liquidity Outlook
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 88
Summarised information on each of the board committees is set out below.
Committee
Chair
Minimum number of meetings
Further information
*F F Williamson until December 2020.
Audit
Remuneration
Risk and Compliance
Nomination
A C M Morris
4
H R Tudor
3
P A Hill*
F J Clutterbuck
4
2
Section B6
Section B7
Section B8
Section B5
Members
F J Clutterbuck
P A Hill
A C M Morris
H R Tudor
B A Ridpath
F F Williamson **
G H Yorston
Independent
non-executive
Until
10 May 2018*
Yes
Yes
Yes
Yes
Yes
Yes
Audit
Remuneration
No
From
25 February 2021
Yes
Yes
Yes
Until
31 December 2020
No
Yes
No
Yes
Yes
No
No
Yes
Risk and
Compliance
Yes
From
27 October 2020
Yes
Yes
Yes
Until
31 December 2020
Yes
Nomination
Yes
No
No
Yes
Yes
No
Yes
*Fiona Clutterbuck was considered as independent on appointment as Chair of the Board of Directors on 10 May 2018.
**Finlay Williamson resigned from the Board on 31 December 2020.
In addition to the memberships above, Hugo Tudor represents the non-executive directors on the Model Risk Committee (‘MRC’).
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.
An informal Non-Executive Director Technology and Change Group was set up during the year and met with senior managers from the
IT and Change functions on a quarterly basis (in March, May and August 2021) to increase the non-executive directors' understanding
of current issues and developments in these areas.
Executive committee structures
The Group’s executive management sit on two executive committees, the Performance ExCo and the ERC.
The Performance ExCo provides 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.
The ERC supports the CEO with monitoring adherence to risk appetite statements and identifying, assessing and controlling the
principal risks within the Group and reporting on these to the Board. ERC also supervises the evolution and further embedding of the
Group’s risk management framework.
Sub-committees
Performance ExCo sub-committees
The Sustainability Committee was established in September 2021 and reports directly to the Performance ExCo. Its members are the
External Relations Director, who chairs the committee, the Balance Sheet Risk Director, Director of Treasury and Structured Finance,
Managing Director – Commercial Lending, Managing Director – Mortgages, COO, Savings Director, People Director and Enterprise
Risk Director. The Committee’s purpose is to deliver a coordinated, transparent approach to ESG matters, including climate change,
considering strategy, commercial implications, disclosure, engagement and insight.
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, where these are not large enough to require
consideration at the Board.
Page 89
Corporate Governance ERC sub-committees
Four executive risk 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, are reviewed annually 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.
B4.2 Elements of the Governance Framework
Culture
The Group is proud of its culture, which has been noted as part of its Gold Investors in People accreditation (see Section A6.3). The
Board considered culture as part of the annual review of the Group's purpose, values and strategy in April 2021.
To assess and promote the Group’s culture, non-executive directors have attended People Forum meetings as part of the Board’s
commitment to engage directly with the workforce. Further detail can be found at B5.3. In addition, the Group has continued to
run regular employee surveys during the year as well as conducting a full employee engagement survey in June 2021 that included
specific questions on the Group’s culture. Results from these surveys, together with direct employee feedback, were reviewed by the
Nomination Committee on behalf of the Board and the high level of employee engagement aligned with the Group’s purpose, values
and strategy was noted.
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 of the Board, the CEO and the Senior Independent Director 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 Senior Independent Director, 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. Non-executive
directors attended People Forum meetings during the year, which provided an opportunity for engagement with the Group’s people.
More detail on these interactions can be found in section A4.6.3.
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 of the Board 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 of the Board 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.
Page 90
Role of the Senior Independent Director
Hugo Tudor has served as Senior Independent Director since 23 July 2020. The Senior Independent Director provides a sounding
board for the Chair and serves as an intermediary for the other directors when necessary. The Senior Independent Director is
available to shareholders if they have concerns which contact through the normal channels has failed to resolve or for which such
contact is inappropriate. The Senior Independent Director also leads the appraisal of the Chair of the Board’s performance at least
annually with the non-executive directors. Within this year’s review consideration was given to the Chair’s potential
over-commitment due to her other Board roles. It was concluded that given that her M&G chair role is an interim position, and
following positive confirmation from the other directors that no reduction in time commitment or performance had been identified,
the Chair’s performance remained at an exemplary level.
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, advising the Board on governance matters, supporting the Chair and helping the Board and its committees to
function efficiently. Both the appointment and removal of the Company Secretary are matters reserved for the Board.
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.
Page 91
Corporate Governance Further information
Documents referred to in the Corporate Governance section are 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
B4.3 Board and Stakeholders
Board and stakeholders
In addition to good corporate governance, maintaining a reputation for high standards of business conduct in all the Group’s
operations is a key priority for the Board, 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 affecting stakeholders 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, as further detailed below.
The Board confirms that, for the year ended 30 September 2021, 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.
Companies are required to describe in the Annual Report how the directors have had regard to the matters set out above when
performing their duties.
Page 92
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, how this is aligned to the Group’s strategic priorities and culture and why the stakeholders listed are significant for
the Group.
Shareholders
Creating long-term shareholder value through growing profits and dividends (s172 a, f)
Our strategy is to build a specialist bank for our customers, which delivers sustainable growth and shareholder returns
through a low risk and robust model.
How we engage and / or monitor
• The Group has an Investor Relations Programme, where nearly fifty meetings were held with
shareholders. In addition, the CEO and CFO hold regular meetings with analysts
• A comprehensive update on Investor Relations is included in the CEO’s report to each
Board meeting
Capital
management
• The Chair and SID / Chair of the Remuneration Committee held several meetings with
shareholder advisory groups
• The Board receives an in-depth update on Investor Relations, which includes investor
feedback, following the publication of the Company’s financial results
Growth
Outcome
• The data on shareholder feedback provided helps the Board align the Group’s strategy with
the interests of shareholders
• Shareholder feedback was taken into account when drafting and implementing the
Remuneration Policy
Diversification
• At the AGM in February 2021, all resolutions were approved by shareholders, with over 90% of
votes cast in favour of each resolution
• Articles of Association were updated at the 2021 AGM to provide more flexibility around
our AGM arrangements and allow virtual participation by shareholders in the event of further
restrictions on gatherings or travel
Specialisation
• A total dividend for the year of 26.1 pence per share is proposed, and a share buy-back
programme of £40.0 million was authorised in the year
Further information on how the Group seeks to engage with and consider the views of all shareholders is given below.
The Group’s approach to capital and distributions is set out in Section A4.3
Discussions with investors on remuneration matters are discussed in the Remuneration Report (Section B7)
Page 93
Corporate Governance
Customers
Supporting the ambitions of the people and businesses of the UK by delivering specialist financial services (s172 c)
Our customers are at the heart of our business and our eight core values underpin the way we interact with them every day.
Engagement with our customers enables us to maintain our deep understanding of them and the markets they operate in,
designing products to meet their needs and continually striving to exceed their expectations.
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 is undertaken
• The Board held a deep dive session on Customer Insights as part of its training agenda
• The Board considered and approved the transition from LIBOR to term SONIA for buy-to-let
customers, focussing on customer outcomes
• Customer metrics have been a key element of the Performance Share Plan (‘PSP’)
since 2020
Outcome
Specialisation
Sustainability
• Customer feedback on key product lines, as measured by NPS, has remained strong
• Successful transition from LIBOR for buy-to-let customers completed by July 2021, with a
rate promise to support a smooth transition and ensure our customers will not pay any more
than they would have done had their account remained on LIBOR for the remainder of 2021
Diversification
• Greater understanding of customers and their priorities is used to refine product offerings,
documentation and processes
• Launch of the Asset Finance Broker Portal, allowing for a more efficient, automated process
for customers
• Complaint levels remain low by industry standards
Further information on the Group’s relationship with its customers is set out in Section A6.2
Page 94
Employees
Helping all of our people to develop their career and reach their potential (s172 b)
By working together, we help our customers to achieve their ambitions and we need a wide range of skills and expertise to
succeed. Our shared values and focus on employee engagement provide the foundation for our success and help us to attract,
develop and retain talent.
Sustainability
How we engage and / or monitor
• Regular employee Pulse Surveys and employee check-ins conducted
• Full employee engagement survey conducted in June 2021 with 86% of
employees participating
• The People Director updates the Board and ExCo on employee feedback from surveys and
from the People Forum, as well as other metrics
• Non-executive directors attend the Group’s People Forum on a regular basis
• Designated ExCo members with responsibility for gender diversity and wider diversity
regularly report progress on these matters
• EDI network launched in October 2020
• The Nomination Committee receives six-monthly updates on succession planning and
feedback from the EDI network from the People Director
• People metrics have been a key element of the PSP since 2020
Outcome
• Employee survey results confirmed a very strong set of positive indicators, including an
overall engagement score of 87%
• Hybrid working trial launched in 2021 following the easing of lockdown restrictions and
incorporating employee feedback following an initial pilot
• Feedback from employee surveys enables the Board to support and understand
employees and their engagement
• Tailored career development programmes embedded across the Group for apprentices
through to high potential senior leaders
•
Increased communication to employees regarding culture, values and purpose
• Enhanced annual leave provisions for all employees in the year
Further information on the involvement of the Group’s people and the impact of policies on them, including steps taken to
support them during the pandemic, can be found in Section A6.3
Page 95
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)
One of our key values is to be honest and open in everything we do. Frequent and transparent communication with regulators
enables us to plan for regulatory change and maintain our high ethical standards.
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
• ExCo and the Board are kept updated on all interaction with the FCA and PRA
Capital
management
• SMCR is embedded across the Group, with conduct measures monitored monthly, overseen
by the 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
• Successful outcome to PRA review of capital and risk management processes in the year
• The Board approved the submission of IRB Module 2 to the PRA in February 2021
• 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)
We aim to be an energetic and valuable contributor to the communities in which we operate. Our commitment includes active
involvement in a range of community volunteering and charity partnerships.
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
• ExCo 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 2021 our employees raised nearly £22,000 for this year’s
nominated charity, the Alzheimer’s Society
• Employees were supported to take part in a range of volunteering activities
Further information on the Group’s community involvement is set out in Section A6.5
Page 96
Environment and climate change
Continually reducing our environmental impact and designing products that support positive environmental change
(s172 d)
We take care to identify, manage and minimise our impact on the environment, both in terms of the impact of our lending
products and our own operational impact.
How we engage and / or monitor
• The Group has an executive level Sustainability Committee which addresses all climate
related issues on a cross-group basis
• Climate change is designated a principal risk within the Group’s risk management framework
Sustainability
• The Board received a comprehensive presentation on climate change and is regularly
provided with a climate change summary
• The Board receives updates on the potential risks and strategic impacts of climate change
• The Group was part of the working group involved in establishing UK Finance’s Sustainable
Finance principles-based framework
• 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
• The Group was the first UK bank to issue green bonds. The proceeds of the green bond are
allocated to green loans, incentivising landlords to mitigate the impact of climate change
• London premises consolidated into a single, more energy-efficient location
• The Board established new objectives against current energy performance to further
reduce consumption
• An ESG team was established, and the executive level Sustainability Committee was created
during the year
• This year the Group will publish its first sustainability report in December 2021 and has a
dedicated Sustainability section on its website
Further information on the Group’s management of climate change risk and its environment policies is set out in Section A6.4
Page 97
Corporate Governance
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)
We believe that working well with our business partners and suppliers is central to our purpose and key to our
continued success.
How we engage and / or monitor
• Key business partner relationships, including intermediaries and suppliers are identified,
actively monitored and reported to ExCo and the Board
• Regular feedback surveys conducted amongst intermediaries with the results fed back to
ExCo and Board
Sustainability
• The Group has a Supplier Code of Conduct which sets out our overall approach to supplier
engagement and corporate responsibility
Outcome
•
Intermediary feedback key to designing new broker portals and other operational systems
• 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 is a signatory to the UK’s Prompt Payment Code, with ensuring prompt payment a
priority in the year
The Group’s management of business partner relationships is discussed further in Section A6.7
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 AGMs 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 2022 AGM will take place at 9am on 2 March 2022 at the offices of UBS AG London Branch, 5 Broadgate, London, EC2M 2QS. In
the event that Covid restrictions on gatherings or travel are imposed, the Group will make appropriate alternative arrangements to
comply with any such restrictions and provide arrangements that will allow shareholders to participate in the meeting.
The CEO and CFO have a full programme of meetings with institutional investors and during the year ended 30 September 2021,
meetings were held with investors from the UK, Europe and North America.
The Chair of the Board and the Senior Independent Director, who is also the Chair of the Remuneration Committee, held meetings
with shareholder advisory groups covering governance and remuneration matters (as set out in the Remuneration Report in B7).
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 Senior Independent Director 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 Senior Independent Director and shareholders can
be arranged via the Company Secretary.
The Director of External Relations updates each meeting of the Performance ExCo on changes in the Group’s shareholder base and
on shareholder interactions.
Page 98
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 internal
review carried out in 2020. The next external evaluation will be conducted by the end of 2022.
2020 internal evaluation findings – Progress report
Following last year’s internally facilitated evaluation, significant progress has been made on addressing actions arising out of the
evaluation. Progress highlights are set out in the table:
Recommendation / action
Progress update
Board
IT and digital experience
More IT and digital experience
and engagement.
An informal non-executive director Technology / Change Group was established,
with quarterly meetings held with relevant senior executives.
Skills matrices
Increased formality and reference to
the skills matrix required for future
non-executive director appointments.
Senior management contact
A more formal process and greater reference to the skills matrix has
been deployed.
More contact with the senior executives
who are running the businesses.
Updates from ExCo members and their direct reports are incorporated into the
Board forward planner and these persons regularly present to Board.
Mentoring by non-executives
Non-executive director mentoring of high
potential individuals was suggested.
It was agreed that this would not be pursued at this stage. The Board concluded
that external mentoring would be preferable to mentoring by non-executive
directors of the same organisation. High potential individuals will meet with
the Board as appropriate, and the non-executive directors will confirm with the
executive directors if there are particular individuals or areas of the business
they want to meet with.
2021 internal evaluation
The output of the 2020 internal 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 consideration was also given to the 2019 external evaluation, the Code and guidance from the FRC and other
relevant sources.
The Board evaluation considered its composition, the balance of skills, experience, independence, knowledge and diversity, how
the Board works together and other points pertinent to its effectiveness. The evaluation also included specific questions on Board
performance during the pandemic. More detailed findings from the Board evaluation included the following, against which progress
will be reported next year.
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Corporate Governance Issue
Board
Length of papers
Shorten papers, where possible.
Board skills
The need to address gaps in BAME
representation / ethnic diversity and
PLC experience.
Governance
The volume of committee meetings
should be reduced and / or authority
levels improved (taking the learnings from
the pandemic into account).
Risk
Recommendation / action
The General Counsel and Company Secretary would look at increasing the use
of the resources section of the board portal, where appropriate, and would liaise
with other presenters with a view to making their papers more concise.
Nomination Committee succession planning conversations actively consider
the need for BAME representation / ethnic diversity on the Board. The
Nomination Committee Chair will ensure focus is maintained on addressing this
gap. The General Counsel and Company Secretary will look to enhance the level
of PLC experience via additional board training.
It was agreed that no change should be made to the volume of board committee
meetings. It was also agreed that the action could be closed following approval
of a delegated authority proposal for the executive directors.
Wider horizon scanning to be undertaken.
The CRO and CEO will regularly bring emerging risk updates to the Risk and
Compliance Committee and Board for challenge.
Audit Committee
More finance team members to present
papers at Audit Committee meetings.
The Audit Committee Chair and the CFO will keep this under review and will
arrange for Audit Committee meeting attendance by finance team members
when appropriate.
More work on combined assurance
is required.
The Risk and Compliance Committee is monitoring progress on combined
assurance work following Risk and Compliance Committee, Audit Committee
and Board discussions on the matter.
Risk and Compliance Committee
Over time, greater delineation between
Risk and Compliance Committee
and Board should be achieved, after
which Risk and Compliance
Committee membership should
be reconsidered.
The Risk and Compliance Committee will continue to review its membership
and effectiveness annually.
Individual director evaluations considered whether each director continued to contribute effectively and demonstrated commitment
to their role, for example in 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 2021 that
considered remuneration packages for 2021/22.
Led by the Senior Independent Director, the performance of the Chair of the Board was evaluated by the non-executive directors
The Chair of the Board appraised the performance of the non-executive directors during August 2021, 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.
Page 100
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 2021. 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 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.
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 Peter Hill, who was appointed on 27 October 2020, has had meetings with senior employees in the Risk, Finance and
Internal Audit areas to brief him on the work of those areas and the particular issues within those areas most relevant to his position
as Chair of the Risk and Compliance Committee.
Development
Further to the 2020 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. Further detail on training undertaken by the Board during the year can be found in Section B3.3.
A number of topics have been agreed for board development over the coming year (including training on regulatory-focussed AML,
IRB, conduct risk, the Enterprise Risk Management Framework, and the new FCA Consumer Duty), in order to retain a diverse balance
of skills and increase coverage in key areas to support oversight and delivery of the corporate plan.
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, risk, management,
governance and professional development. All directors completed a variety of regular training modules that are mandatory for
Group employees.
Further business insight and awareness sessions and deep dives on particular areas are held regularly to provide
non-executive directors with the appropriate depth of knowledge to contribute effectively at board meetings on
key topics. In particular, during the year the Board received training on topics related to risk and sustainability.
More detail is available in Section B3.3.
B4.5 Whistleblowing
The Group has an established procedure whereby employees can make disclosures regarding potential wrongdoing 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.
If an employee is dissatisfied with the investigation, or any action taken as a result, they may request a confidential meeting with any
member of the Whistleblowing Committee to discuss the matter further. The Chair of the Audit Committee, a non-executive director,
is the Group’s designated whistleblowing champion.
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 2021, there were no instances of whistleblowing which resulted in a requirement for full
consideration by the Whistleblowing Committee or subsequent consideration by the Board.
In addition, the Group’s principal regulators, the PRA and FCA, operate whistleblowing services available to customers and other third
parties. Details of these services are provided to the Group’s customers and included on its websites.
Page 101
Corporate Governance B5. Nomination
Committee
The Group recognises the
importance of diversity, including
gender diversity, at all levels of
the organisation.
Fiona Clutterbuck, Chair of the Nomination Committee
B5.1 Introduction by the Chair
Dear Shareholder
The Nomination Committee is the forum used by the Board to
consider certain governance matters. These are vital issues for
the Board and the Group, and this has seen the Committee’s
workload increase significantly over recent years.
During the year the Committee has overseen the appointment
of a new Risk and Compliance Committee Chair. Peter Hill
was appointed to the Board on 27 October 2020 and became
Chair of the Risk and Compliance Committee with effect from
31 December 2020.
I have served as Chair of the Board and the Nomination
Committee since May 2018. However, given my tenure on the
Board reached nine years in September 2021 the Nomination
Committee, on behalf of the Board, has begun the process to
oversee the appointment of a new Chair.
The primary aims of the Committee in this process, which is
well progressed, are to ensure that the person appointed has
the requisite skills and knowledge for the role, benchmarked
against the board skills matrix; that there is a strong cultural
fit with the Group; and that an orderly handover process will
be achieved. Following the appointment of the candidate
best meeting these criteria, the Committee will consider the
subsequent steps it needs to take to address the experience,
skills and diversity of the board as a whole.
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The remit of the Committee also covers people-related
sustainability issues, with the launch of the Group’s Equality,
Diversity and Inclusion Network in the period and continued
employee voice arrangements being particularly noteworthy. I
look forward to the contribution these initiatives will continue
to make to the Group’s strategy and culture in the future.
The Committee supports the objectives of the Parker
Review and is mindful of the required timescale for FTSE 250
companies. The Committee will oversee a recruitment and
selection process during the forthcoming year to improve the
ethnic diversity of the Board, with the intention of meeting the
Parker Review requirements ahead of its 2024 deadline.
Overall, I believe the Committee has enjoyed a year of positive
achievement and fully satisfied its mandate from the Board.
Fiona Clutterbuck
Chair of the Board and the Nomination Committee
7 December 2021
B5.2 Operations of
the Committee
The Nomination Committee is chaired by the Chair of the
Board and includes three 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
• 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
• 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, the Committee appointed a new Risk and
Compliance Committee Chair, Peter Hill, to succeed Finlay
Williamson who stepped down from the Board at the end of
December 2020. Peter followed a structured induction and
handover both prior to starting his role and during his first year
of appointment. 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.
The Committee, on behalf of the Board, has commenced a
search to appoint a new Chair. This is expected to conclude
over the coming months and is in response to the existing
Chair reaching nine years’ tenure during September 2021.
The search process is being led by Hugo Tudor, Senior
Independent Director, with support from Anne Barnett, People
Director and is being undertaken in conjunction with Jamie
Risso-Gill from Per Ardua Associates. Per Ardua Associates do
not have any connection with the Group or any of its directors.
The Committee has reviewed and agreed a role profile and
a shortlist of candidates has been identified for a series of
interviews with members of the Board, including the CEO.
Once the Committee has made a recommendation to
the Board an application will be submitted to the PRA for
consideration and approval. PRA approval is required as the
role will hold a Senior Management Function under the Senior
Managers’ Certification Regime.
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.
Succession planning
Succession plans for the Board and the Executive Committee
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. Bespoke development plans are in
place for strong performers identified as having high potential
and their progress is overseen by the Committee.
Risk mitigation for the loss of senior employees continues
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 to minimise business impact while
ensuring that candidates are enabled to undertake a more
senior role in due course.
Page 103
More details of the activities delivered with the involvement of
the EDI Network in its first year, including the commitments
made by the Group under the Race at Work Charter and the
Disability Confident Employer Scheme are provided in
Section A6.3.
During the year the Committee reviewed the Group’s gender
pay report and supporting analysis. It carefully examined
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 closing the gender pay
gap difficult, as it is for other financial services firms. This will
continue to be a focus for the Committee.
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 continued to run regular employee surveys
during the year in response to the Covid pandemic and the
People Director provides updates on the results of these to the
Committee. In addition, the Group conducted a full employee
engagement survey in June 2021 and 86% of employees shared
their views. The results confirmed a very strong set of positive
indicators, including an overall engagement score of 87%; 10
percentage points above the industry norm and 6 percentage
points higher than the score achieved in the last survey,
completed in December 2017.
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 employees’ return to the office
to trial hybrid working from both 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.
The Group’s preference, where possible, is that internal
candidates are developed and supported to undertake more
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
October 2020 meeting following the outputs from the
Group’s virtual strategy event in July 2020. This was further
reviewed and updated by the Committee in February 2021 and
subsequently approved by the Board.
The matrix reflects the Group’s strategic aim of becoming a
technology-enabled specialist bank, and the skills considered
include matters such 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; and
customer insight and understanding the specialist
lending sector.
The board skills matrix is reviewed annually by the Committee
and forms the basis for continuing professional development
and 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 delighted to have
achieved 38.7% female representation at Board and senior
management level, exceeding the original Hampton-Alexander
Review targets and the Group is aligned to the ongoing
objectives of the FTSE Women Leaders Review, which will
build on Hampton-Alexander going forward.
When the Group signed up to HM Treasury’s Women in
Finance Charter initiative during 2016 its target was to achieve
35% female representation at senior management level by
January 2022, increasing from 26% at the time the targets
were set. The Group is proud to have met this target, and all
of its other Women in Finance targets, ahead of the deadline.
As well as the headline target for women in senior positions,
the Women in Finance commitments also included targets
on women and ethnic minorities in management roles more
widely, helping to build a platform for the next phase of the
initiative. The Board will review the targets for the next phase of
Women in Finance during the coming year.
The Committee is pleased that so many employees provided
diversity data for analysis during the year and is confident that
this information will enable a more analytical approach to the
Group’s diversities going forward. In October 2020 the Group
launched its Equality, Diversity, and Inclusion (‘EDI’) Network
and the Committee receives regular updates on its plans
and activities. The Committee has monitored the activities
of the EDI Network with interest throughout its first year, and
was pleased with the contribution it is already making to the
Group’s progress in this area.
Page 104
B6. Audit
Committee
The exercise of credit judgement
to determine appropriate levels
of provision is crucial and the
Committee has taken its role in
ensuring those judgements are
rigorously challenged
Alison Morris, Chair of the Audit Committee
B6.1 Statement by the Chair
of the Audit Committee
Dear Shareholder
Once again, I find myself writing to you at the end of
a challenging year for the Committee. The economic
uncertainties arising from the ongoing Covid pandemic
continue to impact on the accounting judgements the
Committee has to consider. Within the business, the changes
in working practices through the year and the corresponding
developments in internal control processes meant that the
Committee’s role in promoting the strength of the control
environment was vital.
As with much of the banking sector, the principal accounting
challenge for the Group in the period has been the estimation
of expected credit losses under IFRS 9. With models based
on historic data unlikely to perform well in the unprecedented
circumstances of the Covid pandemic, the exercise of credit
judgement to determine appropriate levels of provision is
crucial and the Committee has taken its role in ensuring that
those judgements are rigorously challenged very seriously.
This has also involved a focus on the Group’s economic and
business forecasting more widely, including the stress testing
of the Group’s business plans.
I and my fellow committee members considered much
detailed information on these areas and engaged with both
the Group’s financial and wider management and with the
external auditors in order to conclude that the approach
adopted was acceptable.
Adjustments to model outputs and additional overlays have
been required to deal with the levels of uncertainty engendered
by the current environment, and these have been a subject of
particular focus for my colleagues and me.
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While the current year’s accounting environment was
challenging, the Committee also had to address the ongoing
development of the regulatory landscape surrounding
reporting and governance. We considered the Group’s
responses to PRA reviews of accounting and disclosures on
elements of IFRS 9 impairment and monitored the progress
of the Group towards TCFD reporting, including the new
disclosures made in this annual report.
We also considered the potential impact of the proposals on
reporting and governance published by BEIS, and submitted
a response to the Department, highlighting our belief that any
reforms should prioritise audit quality and deliver real benefits
to stakeholders. We await the final proposals with interest.
The Group’s internal audit function continued to develop
during the year, responding both to the challenges of new
processes and ways of working and also to the continuing
development of the Group’s wider control framework. Change
assurance was embedded as a discipline within the function
and internal audit provided the Committee with assurance on
key strategic projects, such as LIBOR transition.
As this is the sixth year of the current KPMG LLP (‘KPMG’)
audit mandate, I was able to welcome a new engagement
partner, Simon Ryder, and ensure that the Committee’s
relationship with the auditors continued to operate
effectively. As required by regulation, the Committee
considered its intentions for the future tendering of the
audit mandate and concluded that there was no present
need to retender for any year earlier than that required by
law or independence requirements.
During the year I met with the team from the Financial
Reporting Council’s Audit Quality Review (‘AQR’) team, who
conducted a review of the KPMG audit of the Group’s 2020
financial statements during the year, as part of their normal
review cycle. I received the final report shortly before the date
of this report, and was pleased to note that no significant
issues were raised. All matters included in the report had
already been brought to the Committee’s attention and
discussed with KPMG. The Committee remains conscious of
the AQR’s reports on KPMG as a firm and in particular their
approach to banking audits. These have been discussed at
length with the KPMG team in the context of our own audit.
Page 105
In the coming financial year ending 30 September 2022, the
Committee’s main priorities will include:
• Continuing to monitor the potential impacts of Covid on
the Group’s ECL provisioning as the effects of government
interventions in the UK economy begin to diminish, and the
long-term impacts of the pandemic become clearer
• Considering the continuing need for and appropriate
level of post-model impairment provisioning adjustments
as economic and business conditions revert to a position
which can be dealt with more easily by the Group’s
impairment models
• Supervising the development of the Group’s IFRS 9
impairment approach in line with emerging best practice,
learnings from the pandemic and developments in the
Group’s businesses
• Analysing regulatory developments in accounting, reporting
and auditing, particularly the result of the BEIS
consultation, and ensuring the Group is properly positioned
to respond
• Ensuring that the Group’s control processes, and internal
audit capabilities, continue to evolve alongside
developments in the business
I would like to thank my colleagues on the Committee for their
application and diligence over the year in dealing with a very
full workload, and also the many people across the Group
who have helped to support us in this work and, in particular,
those who have helped me familiarise myself with the Group’s
operations and reporting in this, my first full year as Chair of
the Committee.
I commend this report to shareholders and ask you to support
the resolutions concerning the reappointment of KPMG as
auditors and their remuneration at the AGM in March 2022.
Alison Morris
Chair of the Audit Committee
7 December 2021
Page 106
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. Peter Hill joined the
Committee on 25 February 2021. In addition, Finlay Williamson
was a member of the Committee until stepping down from the
Board on 31 December 2020.
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 2021 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 has
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 December. The Committee
normally invites the Chair of the Board, the executive directors,
CRO, 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
if appropriate.
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 2021, the Committee met
four times. Its principal activities were:
• 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
• 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 and reporting changes which will
affect it
• Discussion of the AQR review of the Group’s external audit
for the year ended 30 September 2020, which was carried
out in the year
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, where there are major changes in the
Group’s accounting policies or audit arrangements in
progress, the Chair of the Committee will hold meetings with
shareholders.
Details of the Committee members’ attendance at meetings
and of 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 2021 the Committee
particularly considered:
• The levels of impairment provision against loan assets
under IFRS 9 and, particularly, the ongoing uncertainties
created by the economic impact of the Covid pandemic
on both customer credit and issues faced by mechanistic
provisioning methodologies in responding to these
unprecedented circumstances
• 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, based on the most recent forecasts for the
businesses concerned
• 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.
Page 107
Corporate Governance
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 future ECL’s on any financial asset held on the balance
sheet on the amortised cost basis.
Their forward-looking nature means that such provisions are heavily dependent on the use of
judgement and estimation techniques to evaluate the likelihood of loss on accounts and the potential
amount of that loss.
In the current Covid-impacted economic environment, this consideration of ECLs is particularly
complex, due to uncertainties over the impact of government interventions and the long-term effects
of the pandemic.
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, both mechanical
and judgemental
• The assumptions used as inputs in these calculations
• The economic projections used in deriving ECLs
• The definitions of significant increase in credit risk, credit impairment and default for ECL purposes
• The appropriateness of the calculated provisions in light of government interventions in the UK
lending market and the economy more generally
• The appropriateness of post-model adjustments made 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 the pandemic, the Committee considered 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 reliefs given to customers and other interventions by the
UK Government.
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.
Further information on these estimates can be found in note 63a to the accounts, the impairment
charge for the year and the movements in provision for impairment are shown in note 18.
The Group’s exposure to credit risk is discussed in note 55
Page 108
Matter
Particular areas of focus
Interest income
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.
The Committee assessed the appropriateness of the assumptions made, considering performance of
the portfolios against expectations and the impact of changes in product specifications.
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 carrying value is based
on expected cash flows, the potential further economic impacts of Covid on customer behaviour were
carefully considered.
Further information on these estimates can be found in note 63b 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 this was also considered in full
at the half year.
In considering whether any impairment of goodwill had occurred the Committee particularly considered
the Group’s forecasts for the future cash flows of the acquired businesses and their reasonableness in
light of current trading performance together with the Group’s strategy for these operations.
The potential impairment of goodwill is discussed in notes 63c and 25
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 52 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 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 109
Corporate Governance 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. It also considered internal stress testing procedures, including the ICAAP and ILAAP
outputs, prepared for regulatory purposes.
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 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.
The Board statements on internal control and risk management are set out in Section B8 and B9
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 on the
Group’s business and results, particularly the impact on ECL provisions.
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 2021 to the Board for approval.
The Committee’s consideration of the financial statements for the year ended 30 September 2020, which took place in the year under
review, is discussed in the Audit Committee report for that year.
The Capital Requirements Regulation (‘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 110
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.
AQR Review
During the year the FRC AQR team conducted a review of
KPMG’s audit of the Group’s financial statements for the year
ended 30 September 2020, with the Chair of the Committee
engaging with the AQR team as part of this process.
The Committee has been briefed by the KPMG team on
the progress of this review as it progressed, and the final
report was received shortly before the date of signing of
these accounts. The AQR raised no significant issues. The
Committee was satisfied by this outcome and noted that all the
matters raised by the AQR had already been communicated by
the external auditor. These points had been considered by the
Committee and discussed with the audit team, and therefore
no further action was thought to be required.
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 AGM in February 2016. The
financial year ended 30 September 2021 is the sixth reported
on by KPMG. This is the first year for which Simon Ryder has
served as engagement partner. Simon Clark, the previous
engagement partner, has stepped down from the engagement
in accordance with policy, having been involved with the
Group’s external audit for five years.
The Group is not subject to a legal requirement to undertake
an audit tender until ten years have elapsed. However as the
current financial year is the fifth for which the external audit
was not subject to a formal tender process, the Committee
is required to consider when it would be in the best interests
of the Group and its stakeholders for the next tender to take
place, and report its conclusions to shareholders.
Having considered the performance of the external auditors to
date, the potential impacts on the Group’s future requirements
for external audit services of strategic, legal and regulatory
developments, together with the resources required by any
tender process, the Committee concluded that currently, on
balance, it would not be beneficial to put the Group’s external
audit out to tender at an earlier date than required by law.
The Committee therefore currently intends to conduct a
tender process for external audit services for the year ending
30 September 2026 at a time that avoids any issues of
independence for potential bidders.
The Committee will keep this decision under review in light of
any changes in either strategic or regulatory requirements and
in conjunction with its ongoing monitoring of external audit
quality and will provide an update to shareholders annually in
the 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 2021 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 2020
audit, undertaken at the time of approval of the Group’s 2020
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, the
FRC’s AQR review of the Group’s 2020 external audit and the
regulator’s most recent audit inspection review on KPMG,
published in July 2021. 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
KPMG representatives.
Page 111
Corporate Governance
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 2022 should be proposed at the
forthcoming AGM.
Fees paid to KPMG, the Group’s external auditor, for non-audit
services, as defined by the Regulation, during the year were
£210,000 (2020: £168,000), well within the cap. All of these
fees were for services related to the Group’s audit, as
described above.
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
2021
£000
32
2,780
-
2020
£000
-
3,043
-
2,812
3,043
The Group maintains relationships with all of the major
accounting firms and considers a variety of providers for this
type of assignment.
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.
The current policy, which is consistent with the FRC Ethical
Standard for auditors, limits the use of the 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.
Fees paid to the external auditor
Fees paid to the external auditor are shown in note 9 to the
accounts. The ‘other services’ provided by KPMG include
only services required to be provided by external auditors by
legislation or regulation, including the review of half-yearly
financial information and profit verification for regulatory
purposes, and services expected to be provided by external
auditors on capital market transactions, including work on the
Group’s green bond prospectus.
Audit fees of Group entities for the year have increased by
23% to £1,817,000 (2020: £1,468,000). This was a result of an
increase in scope in certain areas and inflation in professional
services fees more generally, particularly for more specialist
resource.
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 include 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.
Non-audit fees paid to the auditor for the year ended
30 September 2021 should be no more than 70% of the
average of the audit fees for 2018, 2019 and 2020. As this
average was £1,327,000, the non-audit fee cap for the year
was £929,000.
Page 112
B6.5 Internal Audit
Effectiveness
The Committee assesses the effectiveness of the internal
audit function by reference to standards published by the
Chartered Institute of Internal Auditors. In 2021, 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.
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 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.
The function is led by an Internal Audit Director who reports
directly to, and has a close working relationship with, the Chair
of the Committee. She attends all meetings of Performance
ExCo and ERC as an observer.
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.
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. Ahead of finalisation of the audit plan for the year
ending 30 September 2022, 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.
Page 113
Corporate Governance B7. Remuneration
Committee
...reflective of very strong
performance outcomes in a
challenging year, enhancement of
the Group’s capital position and
the continuing development of the
Group within its markets…
Hugo Tudor, Chair of the Remuneration Committee
This report covers the activities of the Remuneration Committee for
the year ended 30 September 2021 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
The information provided in this section is not subject
to audit
Dear Shareholder
Business performance
Performance across the Group this year has been remarkable
with underlying profit increasing by 61.8% which takes Group
profits to a record level. Such an achievement is notable at
any time, but is particularly so given the ongoing pandemic.
Detailed analysis and commentary on performance can be
seen throughout this report and particularly in the Chair of the
Board’s and the Chief Executive’s reports in Sections A1 and
A3. The balanced scorecard assessment shown later in this
report records outstanding performance in all areas.
In addition to the strong financial performance achieved, the
Committee noted in particular the outcomes from the future
value and strategic development activities, including the
record level of the mortgage pipeline and the embedded value
generated from the mortgage book. I would also like to draw
your attention to the launch of the Tier-2 Green Bond in
March 2021 whereby Paragon became the first UK bank
to issue a subordinated instrument in the sustainable
finance space.
The proceeds of the bond are being allocated to green loans
incentivising landlords to mitigate the impact of
climate change.
Other green initiatives are being introduced in other lending
areas. Similarly of note is the depth of the development finance
pipeline which has increased by 74.1% from its 2020 level.
This outperformance across the Group is reflected in the
annual variable remuneration outcomes of the executive
directors and other employees. When considering variable
remuneration awards the Committee noted that the Group’s
capital position was robust with the CET1 ratio at 15.4% after
completing £37.8 million (including costs) of the £40.0 million
share buyback announced at the time of the interim results
and more detail on this is located in Section A4.3 of the
financial results. The Group’s approach to risk management
was also recognised during the year by a material reduction
in the PRA’s assessment of its capital requirement, with
the regulatory surplus rising to £410.1 million at
30 September 2021.
Variable pay earned in the year
Both executive directors are being awarded an annual bonus
of 96.1% of the total opportunity, which is reflective of the
delivery of very strong performance outcomes in a challenging
year, enhancement of the Group’s capital position and the
continuing development of the Group within its markets in the
current economic climate.
Page 114
The PSP granted in December 2018 vested at 97.0% of the
maximum award, similarly reflecting the strong performance
over the performance period. This included TSR performance
above the upper quartile of the peer group, resulting in full
vesting for this element of the award (50% weighting). The
Committee applied discretion to the EPS outcome, which
represented 25% of the metrics. When the target and stretch
levels were set, they assumed future reductions in UK
corporation tax rates, which were subsequently reversed by
the UK Government and also assumed that a lower proportion
of the Group’s taxable activity in 2021 would take place in
Paragon Bank PLC than actually occurred.
The transfer of assets to Paragon Bank contributed materially
to the capital surplus enhancement during the year, facilitating
the second half share buy-back but led to a higher proportion
of earnings arising in Paragon Bank which are subject to
the banking tax surcharge. The EPS outcome was
therefore adjusted.
The Committee determined that the management team
should not be penalised for taking actions that are clearly in
shareholders’ best interests and consequently the underlying
results should be adjusted to reflect these impacts. As a result
the overall vesting level was 97.0% rather than 90.45% which
would have been the vesting level if EPS on a reported basis
had been used.
Group’s remuneration philosophy
Our remuneration philosophy remains unchanged in seeking
to recognise fairly the contribution of all employees, and whilst
this report focuses on the executive directors, it can be seen
from the comparison of ‘Annual change in directors’ pay with
the average employee’ table that the variable remuneration for
all employees has increased this year, reflecting strong Group
performance. During the year, as noted in last year’s report, the
Committee undertook a review related to the fair pay agenda
which confirmed its view that the Group is a fair pay employer.
A fair pay section has been specifically included in the report
this year to provide additional context for shareholders.
Work of the Committee during the year
In 2021 no changes were made to the remuneration structures
of the executive directors or senior management. During
the current year the Committee has considered the gender
pay gap reporting together with the CEO pay ratio analysis
undertaken as part of the year end processes in 2020 and it
will continue to consider executive director remuneration and
the fair pay agenda in light of these analyses going forward.
These differentials will be regularly monitored and should
over time provide an additional benchmark for all employee
remuneration packages.
Over the year discussions have been held with proxy advisors
regarding remuneration matters. These meetings were
attended by myself, the Chair of the Board and the People
Director. I have also met with the People Forum to discuss
both executive and all employee remuneration. Both of
these interactions contributed to ensuring that the views
and reflections of stakeholders are incorporated into the
Committee’s processes and reflections.
Regulatory regime
As previously anticipated in the Policy, as of 1 October 2021
the Group passed the asset threshold to be identified as a
Level 2 bank under the remuneration regulations set by the
PRA and FCA. As a result, some changes will be made to the
remuneration arrangements of the executive directors, in
particular the length of deferral period will be extended and
there will be restrictions on the award of dividend equivalents;
however, these changes will apply from next year (the financial
year ending 30 September 2022 bonus and PSP).
In addition, over the course of this year the Committee has
reviewed the remuneration arrangements for below board
Material Risk Takers (‘MRTs’) to ensure these will meet the
regulatory requirements going forward, making amendments
as required.
Previously the Committee had primarily considered the impact
of becoming a Level 2 bank on the packages of the executive
directors. The Committee determined that a relatively small
number of remuneration packages for MRTs below executive
director level needed to be restructured, in the financial
year ending 30 September 2022, to reflect the impact of the
transition to Level 2. Embedding of the Level 2 requirements
will continue throughout the year and be monitored and
reviewed by the Committee on an ongoing basis.
Deferral of annual bonus, when in excess of £30,000, was
introduced in the last financial year to a wider grouping of
senior management than had previously been the case. This
requirement is being maintained for the majority of MRTs in
advance of needing to meet the regulatory requirement for
deferral at the financial year ending 30 September 2022.
Remuneration for the year ending 30 September 2022
There are no changes to the structure of remuneration for the
financial year ending 30 September 2022. Executive director
salaries have been increased by 5% from 1 October 2021 in line
with the wider workforce. Additionally, the total shareholder
return (‘TSR’) comparator group, within the PSP, has been
reviewed and amended to reflect changes in the financial
services sector with the EPS measure being updated, as is
usual, to reflect the current macro-economic environment.
Further to ensure transparency the customer element of the
risk metric has been removed as customer complaints are
reflected within the customer metric.
Work of the Committee in 2022
A new policy will be put to shareholders at the AGM in 2023
with detailed considerations of any changes to the current
policy being discussed by the Committee in the early part of
the calendar year 2022 and followed up with conversations
with shareholders and other stakeholders should those
proposed changes be of a substantive nature. As part of
that policy review the Committee will be considering how
the new Policy should reflect the developing ESG strategy
of the Group and reviewing the level of executive directors’
pension supplements to take account of changing shareholder
expectations in this area.
Conclusion
I hope that shareholders support how the Group has
implemented its remuneration philosophy across all
employees, including senior employees and the executive
directors, and that it reflects the record performance of the
business in the year ended 30 September 2021. I commend
this report to shareholders and ask you to support the
resolution to approve it which is being put to the AGM in
March 2022.
Hugo Tudor
Chair of the Remuneration Committee
7 December 2021
Page 115
Corporate Governance B7.2 Annual Report on Remuneration
Contents:
The annual remuneration report includes:
• The Remuneration Committee, key responsibilities and advisers (B7.2.1)
• Directors’ remuneration for the year ended 30 September 2021 (B7.2.2)
• Application of remuneration policy for the year ending 30 September 2022 (B7.2.3)
• Other information including Fair Pay (B7.2.4)
Remuneration summary
The information provided in this section of the Directors’ Remuneration Report is not subject to audit
Aligning remuneration to our strategy during the year ended 30 September 2021:
Strategic priorities and the
success factors on which these
priorities are based
Translation into remuneration structures
Strategic priority: success factor Bonus
Performance share plan
Capital management:
credit quality
Risk measures and future value of
new business
Risk assessment and EPS
Growth and specialisation:
margins
Future value of new business and financial
performance
EPS and relative TSR
Diversification and capital
management: liquidity
Sustainability:
sustainable earnings
Capital management and
sustainability: capital strength
and efficiency
Capital management and
sustainability: cost controls
Sustainability: a customer
and people focussed culture
Risk measures and financial performance
Financial performance
EPS, relative TSR and
risk assessment
Relative TSR, EPS and
risk assessment
Risk measures
Relative TSR and risk assessment
Profit measures and personal objectives
EPS
Personal objectives include ensuring
good customer outcomes and support for
Paragon’s customers
From the July 2020 grant customer and
people metrics were adopted
Customer metrics focus on the views of
customers across their Paragon lifecycle
People metrics focus on the
employee journey
Page 116
B7.2.1 The Remuneration Committee, key responsibilities and advisers
The information provided in this section of the Directors’ Remuneration Report is not subject to audit
Committee membership
The Committee during the whole of the year comprised three independent non-executive directors of the Company (being
Hugo Tudor, Chair of the Committee and Alison Morris and Graeme Yorston) and the Chair of the Board (Fiona Clutterbuck)
whose relevant experience is set out in Section B3.1.
Information on the number of Committee meetings held and the individual attendance of members is given in section B3.3.
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. 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.
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 and all MRTs under the
rules of the PRA/FCA which includes all members of the Executive Committee, the Internal Audit Director and CRO
• Review’s 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-wide Internal Remuneration Policy for all employees (excluding executive directors) and considers and
approves the identification of the Group’s MRTs under financial services regulatory remuneration rules
Attendees
The CEO, People Director, CRO, General Counsel and 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:
•
Independent advisors − Deloitte LLP (‘Deloitte’) until May 2021 and PricewaterhouseCoopers LLP (‘PwC’) from that date
• 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
Independent advisors: additional information
• Appointment process − both Deloitte and PwC were appointed by the Committee following review processes and are members
of the Remuneration Consultants Group and as such voluntarily operate 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
• Fees − the total fees paid to Deloitte for advice to the Committee during the year amounted to £54,660 (including VAT) on a time
and materials basis. 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 total fees paid to PwC for advice to the Committee during the year amounted to £61,920 (including VAT) on a part fixed fee and
part time and materials basis. PwC provided other professional services to the Group during the year including regulatory support
and support for the Group’s IRB application
• Connections to the Group − the Committee is satisfied that both the PwC team and formerly the Deloitte team providing
remuneration advice to the Committee does not, or in the case of Deloitte did not, have any connection with the Group, or any
individual director, that may impair its independence and/or objectivity
The Committee, when making this statement in reference to PwC, notes that Alison Morris (Chair of the Audit Committee) is a
former partner at PwC. Alison, who left PwC in 2019, declared her interest at the time of PwC’s appointment and did not participate
in the selection interviews leading up to their appointment. The Committee is satisfied that its appointment of PwC was made in an
independent and objective manner and that PwC’s independence and objectivity remains unimpaired
Page 117
Corporate Governance
Statement of voting at Annual General Meeting
The table below sets out actual voting in respect of the resolution to approve the Annual Report on Remuneration at the Company’s
AGM on 24 February 2021.
The table also details the outcome for the resolution to approve the Remuneration Policy at the AGM on 13 February 2020.
Information on the Committee’s response to this vote in 2020, which was deemed a significant vote against under the Code, can be
found in the Annual Report and Accounts 2020 page 107.
Resolution
Votes for
% for
Votes against
% against
Total votes cast
Votes withheld
Annual Report on Remuneration
Remuneration Policy
202,448,059
157,352,402
98.01%
74.33%
4,110,792
54,331,483
1.99%
25.67%
206,558,851
4,587,039
211,683,885
3,082
B7.2.2 Directors’ remuneration for the year ended 30 September 2021
The information provided in this section of the Directors’ Remuneration Report has been audited
Single total figure of remuneration for executive directors
Year ended 30 September 2021
N S Terrington
R J Woodman
£000
£000
J A Heron2
£000
Fixed remuneration
Salaries and fees
Allowances and benefits
Role based allowance
Pension allowance
Total fixed remuneration
Variable remuneration
Bonus
Dividend on vested deferred bonus
Share awards1
Total variable remuneration
Total
599
14
140
120
873
863
-
1,335
2,198
3,071
377
12
90
75
554
544
-
841
1,385
1,939
Year ended 30 September 2020
N S Terrington
R J Woodman
£000
£000
J A Heron2
£000
Fixed remuneration
Salaries and fees
Allowances and benefits
Role based allowance
Pension allowance
Total fixed remuneration
Variable remuneration
Bonus
Dividend on vested deferred bonus
Share awards1
Total variable remuneration
Total
Page 118
563
26
88
160
837
594
-
743
1,337
2,174
354
12
56
101
523
374
43
468
885
1,408
69
10
-
31
110
-
-
274
274
384
Total
£000
976
26
230
195
1,427
1,407
-
2,176
3,583
5,010
Total
£000
986
48
144
292
1,470
968
43
1,485
2,496
3,966
1 The PSP value for the year ended 30 September 2021 has been determined using the average closing share price for the three months ended 30 September 2021
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 2021 following the
Preliminary Results announcement.
The share awards value for the year ended 30 September 2020 has been restated to reflect the market value of the shares under the PSP that vested on
3 December 2020 as at that date.
2 J A Heron retired from the Board on 6 January 2020 and the remuneration shown in the 2020 table above is in respect of his service to that date. He received no
additional remuneration for cessation of office.
Additional information in respect of the constituents of the above noted single figure tables for executive directors is provided below
using the sections noted in the table as headings. The further information is included from the heading ‘Allowances and benefits’
immediately below until, but not including, ‘Chair of the Board and non-executive director fees’.
Allowances and benefits
Included within this total in the single figure tables are private health cover and a company car allowance (£10,000 to £12,000). Also
included is a reimbursement from the Company in respect of certain travel costs incurred in connection with the performance of
executive director duties which constitutes a taxable benefit in kind. The amounts included represent the travel payments HMRC
treats as taxable together with an allowance to cover the tax. The Group provides the amount required to cover the tax liability. This
amount will vary with the amount of travel undertaken by the executive director.
Role based allowance (‘RBA’)
This allowance was introduced following the AGM in 2020. The fixed pay allowance is paid quarterly in shares and released over five
years in equal tranches. The RBA is not subject to performance conditions.
Pension allowance
Both Nigel Terrington and Richard Woodman received a cash allowance in lieu of pension of 20% of salary. Newly appointed executive
directors will receive a maximum pension contribution of 10% of salary, which is the same maximum level as for the majority of the
workforce who are members of the Group’s defined contribution pension scheme.
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 who were members of the Paragon Pension Plan
(the ‘Plan’). The Plan was restructured during the year to enable de-escalation of the risks associated with a defined benefit plan
together with continuity of future accrual for employees and closer alignment of pension contributions across the Group. Employees
within the Plan have from August 2021 received an employer contribution of 25% of salary. A small number of former members of the
Plan receive a cash supplement of 45% of salary for having left the Plan.
The Committee reiterates its commitment made last year to reviewing the executive directors’ pension contributions as part of the
triennial policy review and will take into account the changing stakeholder landscape both internal and external when considering
this matter.
Bonus
Bonus opportunity during the year was, in line with policy, 150% of salary.
In respect of the annual bonus for the year ended 30 September 2021:
• A bonus of 96.1% of maximum opportunity was awarded to each of the executive directors
• Deferral will be 50% of amounts over £50,000 for three years and is subject to malus and clawback
How the bonus was determined and is split between cash and deferred shares is as shown below:
Executive
director
Financial
performance
Future value
and strategy
Risk
Personal
performance
Total
Total
Cash
N S Terrington
R J Woodman
30.0%
30.0%
28.6%
28.6%
17.5%
17.5%
20.0%
20.0%
96.1%
96.1%
£000
863
544
£000
456
297
Share
value
£000
407
247
The Committee determined that the formulaic outcomes under the bonus framework were fair and appropriate in light of the very
strong financial and non-financial performance and exemplary leadership shown over the period, therefore it was decided that no
discretion should be applied to outcomes.
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Corporate Governance
Outturn was based on performance measures as detailed in the assessment below:
Balanced scorecard assessment
Measure
Weighting
Threshold
Target
Maximum
Actual
Outcome
Financial performance
Operating profit
RoTE (underlying)
NIM progression
Cost: income ratio
CET1 (adjusted for buybacks)
30.0%
12.0%
9.0%
3.0%
3.0%
3.0%
£132.9m
£139.9m
£148.3m
£194.2m
9.9%
+0bp
45.2%
14.8%
10.9%
+3bp
44.4%
15.4%
12.1%
+7bp
43.5%
16.0%
14.7%
+14bp
41.7%
16.0%
Measure
Weighting How measured
Future value and strategy
30.0% Qualitative assessment by the Remuneration Committee of:
Development activities
7.5%
Digital systems launches and enhancements such as:
- Commercial Lending portal and auto decisioning
- Embedding Mambu operating platform for Savings
- Single payment platform
- Surveyors’ digital system
Pipeline
Embedded value
IRB phase 2 application was submitted to the regulator on time
Record levels for buy-to-let mortgages of £1.01 billion and development
finance of £298.6 million
Net loan book increases exceeding plan by 80% with stronger than planned
originations and enhanced retention while widening margins
7.5%
7.5%
Launch of the first UK Green Tier-2 Bond
Refinancing of Paragon Mortgages (Nos. 11, 13, 14 and 15) PLC
Liability management
7.5%
TFSME £1.84bn drawn as planned
Savings grew to £9.3 billion
Warehouse facility renegotiated
Risk
20.0% Qualitative assessment by the Remuneration Committee of:
Further embedding of the Group’s principal risk framework
Portfolio performance throughout the pandemic (evidenced through arrears
and losses) was strong
Group’s capital management framework was robust which led to reduced
regulatory requirements
Personal performance
20.0% Qualitative assessment by the Remuneration Committee of:
Individual targets as detailed below for each director:
30.0%
12.0%
9.0%
3.0%
3.0%
3.0%
Outcome
28.6%
6.8%
7.5%
6.8%
7.5%
17.5%
20.0%
100.0%
Page 120
Individual targets
Actual performance
Nigel Terrington
Strong leadership to deliver
the Group’s business plan and
financial performance, upholding
our values and always delivering
good customer outcomes
Record profit before tax of £213.7 million increased by 80.5%
from 2020
Savings expansion to £9.3 billion with margin enhancements
of 14bp
The Group regularly surveys its intermediaries and customers,
and levels of satisfaction were broadly maintained from 2020
despite the ongoing pandemic and with significant levels of
virtual working by employees. Surveys showed that:
• 91% of intermediaries were satisfied with the
ease of obtaining a response from the Group
(2020: 91%)
• 89% of savings customers would ‘probably’ or
‘definitely’ take a second product (2020: 90%)
Capital benefits from securitisation refinancing routed back to
shareholders through a PRA approved buyback
Continued proactive assessment of a number of potential
opportunities to diversify the Group’s strategy
Strong buy-to-let pipeline at year end £1.01 billion
Commercial Lending division originations up 22.9% and strong
year end pipeline in place in development finance
The technology roadmap for core systems has delivered
significant progress in the period including:
• Asset finance portal and auto decisioning launched
• Mambu embedded as a core operating system
supporting the savings platform relationships
• Single payment platform utilising cloud based
technology for Group payments was successfully
implemented to provide enhanced levels of
operational resilience
• Surveyors’ system enhanced and embedded
providing time and cost saving efficiencies
Onboarded Raisin (a digital savings platform), facilitating the
launch of products with Aviva, AJ Bell and Willis Owen
Expanded the Revolut offering to a broader range of customers
Launched SME deposit-taking
Underlying 14.7% achieved for the year, reported RoTE 16.2%
Significant progress made through investment in technology,
cyber security, change governance, business continuity planning,
supplier assurance and data governance to increase the Group’s
overall resilience
Operational resilience framework in place and aligned to
the ERMF
Review the Group’s strategy
in light of changing capital
availability and requirements
Continue to focus the Group’s
presence as a leading UK
specialist lender in its core
markets of buy-to-let,
development finance and
SME lending
Continue with technology
development to digitalise the
business for our customers, with
improved service delivery, faster
decision making and improved
cost efficiencies
Continue to develop the Group’s
savings strategy, expanding
the addressable market and
over time, utilising technology,
including open banking, to
broaden the customer reach
Focus on rebuilding profitability
measured by RoTE back towards
15% or above in the medium term
Further develop the Group’s
risk management framework to
continuously improve resilience,
deliver good customer outcomes
and embed the risk culture
Continue to build a succession
plan pipeline for Executive
Committee roles
Appointment of four senior roles, of which 75% were female,
reporting directly into ExCo members to support the senior
talent pipeline
Third cohort of high performers commenced the senior
leadership development programme
Page 121
Corporate Governance
Richard
Woodman
Individual targets
Actual performance
Strong leadership to deliver
the Group’s business plan and
financial performance, upholding
our values and always delivering
good customer outcomes
Ensure the Group’s funding
position and access to TFSME
allows it to support our customers
and provide credit to the economy
Prioritise and embed IRB to boost
the Group’s risk capability and
longer term capital efficiency
Maintain highly prudent capital,
liquidity and funding buffers
to allow the Group to support
its customers and other
stakeholders in stress
Further develop the Group’s
thinking on the impact from
climate change and embed the
management of climate related
risks within the Group’s strategic
plans and risk appetites
Oversee the Group’s transition
away from LIBOR and provide
monthly updates to the Board
in terms of project governance,
conduct risk oversight and
treasury management
Continue to provide oversight
and management of the investor
relations programme
Outperformance against all aspects of corporate plan; margins,
volumes, cost efficiency and credit performance
Full TFSME usage accessed (£2.75bn) following
successful securitisation refinancing and collateral
management programme
SME lending supported through CBILS, BBLS and RLS
Strong progress made on IRB with Phase 2 submitted to the PRA
Development finance slotting model embedded
Capital position enhanced through securitisation re-financing
programme and reductions in regulatory requirements from the
PRA following a detailed ICAAP process
Collateral management enhances liquidity options, and the
liquidity position has been managed at or above the target
operating range throughout the year
Capital benefits from securitisation refinancing routed back to
shareholders through a PRA approved buyback
Issued Tier-2 bond replacement as a green bond, with an
associated green bond framework demonstrating that
sustainability and climate change are at the top of the
Group’s agenda
Sustainability Committee established and launched in the year
All business lines have transitioned to non-LIBOR
alternatives or are well progressed to achieve this ahead of
the required deadline
The Group’s largest asset portfolio migrated to a term SONIA
basis in June / July and main liability elements resolved through
securitisation refinancing
Effective shareholder and analyst interactions held throughout
the year given the switch to virtual engagements
Interim reports and transparency of (in particular) the Group’s
impairment approach positively received
Dividend on vested deferred bonus
This section details the accrued dividends to the date of exercise paid on deferred bonuses which were exercised during the relevant
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.
Other information
In 2021 Sharesave awards vested for Nigel Terrington and Richard Woodman. The SAYE is an all-employee share plan with the option
price for the 2016 grant of £2.4944 per award. SAYE awards are not subject to tax or national insurance and the option price is funded
by monthly saving from salary. The option price is based on a 20% discount to market price at grant equating to a £7,000 benefit in
respect of this grant for each director. This has not been included in the above table, in order to ensure that year on year comparison
of the single figure table is consistent as SAYE exercises are not annual occurrences.
Page 122
Share awards: Paragon Performance Share Plan
Awards vesting in respect of the year ended 30 September 2021
Awards granted in December 2018 under the Group’s PSP are subject to performance conditions measured over the three financial
years ended 30 September 2021.
Performance
condition
Relative TSR
EPS
Risk
Total as a % of maximum award
Total as a % of salary at grant
Weighting
Threshold vesting for
25% of maximum award
Maximum
vesting
50.0%
25.0%
25.0%
Median
performance
(being: (10.8%))
Upper quartile
performance
(being: 24.8%)
60 pence
68 pence or more
n/a
n/a
Actual
performance
Upper quartile
performance
(being: 27%)
68.1 pence
(adjusted)
88%
Vesting
outcome
100.0%
100.0%
88.0%
97.0%
194.0%
There is straight-line vesting between the threshold and maximum for the TSR and EPS conditions and no reward below
threshold performance.
The target and stretch position for the EPS vesting condition were based upon anticipated reductions in corporation tax rates that
were in turn reversed by the Government. Further, to facilitate the refinancing of the legacy securitisations and deliver the associated
capital benefits, a higher proportion of Group earnings arose in Paragon Bank, attracting a higher tax surcharge.
The transfer of assets to Paragon Bank contributed materially to the capital surplus enhancement during the year, facilitating the
second half share buyback but led to a higher proportion of earnings arising in Paragon Bank which are subject to the banking
tax surcharge.
The Committee determined that the management team should not be penalised for taking actions that are clearly in shareholders’
best interests and consequently the underlying results should be adjusted to reflect these impacts. As a result the EPS element of the
grant vested at 100% rather than the 73.8% that would have arisen on a reported basis.
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 CRO, 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
• Credit performance has been strong across all portfolios
• Complaints, the main measure for customer service, were within risk appetite for the majority of the period with customer service
levels being maintained admirably during the pandemic
• Operational risk outcomes were reflective of the Group’s exemplary resilience shown in the pandemic and the improvements made
to the Group’s operational resilience framework over the period
Vesting was also subject to the Committee’s determination that individual performance and the underlying financial performance of
the Group were satisfactory given the level of vesting. In respect of both these points the Committee concluded that the vesting level
was appropriate for all participants.
Page 123
Corporate Governance
Details of the shares which will vest in December 2021, following the announcement of the Preliminary Results, are set out below.
The table also shows that the vesting value in 2021, determined as noted below, reflected a 24% increase in the share price between
grant and vesting.
Total shares granted
Grant
basis
Vesting
outcome
Vested shares
Share price1
PSP value2
Impact of share price
appreciation
2018 PSP awards
N S Terrington
R J Woodman
£
4.43
4.43
227,156
143,059
370,215
£
£000
£
97.0%
97.0%
220,341
138,767
5.4926
5.4926
1,335
841
234,129
147,451
381,580
1The PSP value has been estimated using the average closing share price for the three months ended 30 September 2021. The actual value of the awards will not be known until
the awards vest in December 2021, 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 £0.5670 per vested share in respect of such dividends.
Awards which vested in respect of the year ended 30 September 2020: impact of the share price on vested awards
The final vesting value of the awards which vested in respect of the 2017 PSP showed a 5% decline from date of grant. The Committee
did not apply discretion on the vesting outcome. This table has been restated from that shown in the 2020 Annual Report and
Accounts using the closing price on the date of vest. Previously the average closing share price for the three months ended
30 September 2020 had been used.
Total shares
granted
205,192
129,227
109,401
443,820
Grant
basis
£
4.7614
4.7614
4.7614
2017 PSP awards
N S Terrington
R J Woodman
J A Heron2
Total
Vesting
outcome
Vested
shares
Share price1
Impact of share price
depreciation3
72.0%
72.0%
72.0%
147,738
93,043
54,547
£
4.5140
4.5140
4.5140
£
(36,550)
(23,019)
(13,495)
(73,064)
1The PSP value has been restated based on the market value on the date of vesting being 3 December 2020.
2The vested shares for J A Heron’s 2017 PSP awards shown above have been calculated at the pro-rata amount.
3As part of the December 2017 PSP award, each executive director was granted a tax-qualifying option under the Company Share Option Plan (‘CSOP’) which vested 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 have been disregarded in determining the value.
Awards granted during the year ended 30 September 2021
On 11 December 2020 the following awards were granted, as nil-cost options, under the PSP with a face value of 180% of salary in line
with Policy.
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
679
£
4.554
4.554
236,661
149,046
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 year ended
30 September 2020, being the price used to determine the number of shares in accordance with the Directors’ Remuneration Policy.
Page 124
The PSP awards granted in December 2020 are subject to the following performance conditions, with a performance period of three
years, from 1 October 2020, ending on 30 September 2023. 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
25.0%
25.0%
25.0%
12.5%
12.5%
Median performance
Upper quartile performance
58 pence
66 pence or more
50% weighting on an assessment from the CRO 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
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
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.
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
OSB Group PLC
Provident Financial PLC
Secure Trust Bank PLC
S&U PLC
Virgin Money UK PLC
Page 125
Corporate Governance
Chair of the Board and non-executive director fees
Year ended 30 September 2021
Year ended 30 September 2020
Fees
£000
255
-
76
85
65
95
21
65
662
Benefits1
£000
14
-
-
-
-
-
-
-
Total
£000
269
-
76
85
65
95
21
65
Fees
£000
255
87
-
44
65
87
85
65
Benefits1
£000
14
-
-
-
-
-
-
-
Total
£000
269
87
-
44
65
87
85
65
14
676
688
14
702
Chair of the Board
F J Clutterbuck
Non-executive directors
P J N Hartill2
P A Hill3
A C M Morris4
B A Ridpath
H R Tudor5
F F Williamson
G H Yorston
Total
1F J Clutterbuck receives a company car allowance and is eligible for private health cover on an individual or family basis in the same way as the executive directors
2P 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
3P A Hill was appointed to the board on 27 October 2020
4A C M Morris was appointed to the Board on 26 March 2020
5H R Tudor became Senior Independent Director on 23 July 2020
Payments to past directors
J A Heron retired from the Board on 6 January 2020. He remains entitled, under the usual ‘good leaver’ provisions, to awards
received under the PSP and Deferred Share Bonus Plan (‘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 DBSP these will vest in full once the vesting period has elapsed. Both PSP and DSBP remain subject to malus and
clawback provisions.
Consequently, for the PSP grant that is due to vest in December 2021 (the 2018 grant) J A Heron will receive 41,589 shares (being his
original grant of 121,117 PSP awards vesting at 97.0% and pro-rated to his date of leaving).
Payments for loss of office
No payments for loss of office were made during the year ended 30 September 2021.
Page 126
Directors’ share interests
The interests of the executive directors in the shares of the Company at 30 September 2021 (including those held by their connected
persons) were:
Unvested awards subject to performance conditions
PSP
Unvested awards not subject to performance conditions
DSBP
Sharesave
Total unvested awards
Vested but unexercised awards
PSP1 2
DSBP
Total vested but unexercised awards
Shares beneficially held3
Total interest in shares
Awards exercised in the year
PSP
DSBP
Sharesave4
Total awards exercised in the year
N S Terrington
R J Woodman
Number
Number
549,090
345,809
225,078
4,245
778,413
510,169
254,780
764,949
139,658
4,245
489,712
389,356
52,259
441,615
841,816
2,385,178
271,408
1,202,735
-
-
12,026
12,026
-
-
12,026
12,026
Awards under the PSP and DSBP schemes noted above were granted in the form of nil cost options.
1 As part of the December 2017 PSP award, each executive director was granted a tax-qualifying option under the CSOP which vested at 4,186 shares at a per share
exercise price of £4.7776.
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. Determining the number of awards that will be exercised is dependent on the share price at date
of exercise and, as this is not certain until that date, the above table includes the 2017 award at the maximum number of PSP awards that could be exercised.
2 For the purposes of the table above the awards granted in December 2018, to Nigel Terrington and Richard Woodman are assumed to be vested but unexercised in
respect of the percentage which it is estimated will vest, 97.0%, and to have lapsed in respect of the balance.
3 Shares beneficially held include shares obtained under the RBA, being for Nigel Terrington 28,521 shares and for Richard Woodman 18,331 shares. These shares are
not subject to performance conditions but are subject to restrictions related to disposal.
4 The SAYE awards were exercised by Nigel Terrington on 30 September 2021 and Richard Woodman on 18 August 2021. The SAYE is an all-employee share plan and
the option price for the 2016 grant was £2.4944 per award. The closing share price on the date of exercise was £5.46 for Mr Terrington and £5.633 for Mr Woodman.
SAYE awards are not subject to tax or national insurance.
The interests of the Chair of the Board and the non-executive directors at 30 September 2021, which consist entirely of ordinary
shares, beneficially held, were as follows:
F J Clutterbuck
P A Hill
A C M Morris
B A Ridpath
H R Tudor
G H Yorston
2021
8,372
2,459
4,000
4,358
70,000
7,517
As at 3 December 2021, 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 127
Corporate Governance
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,
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 2021 to those required by the guidelines, expressed in
value terms as a percentage of salary.
Directors’ shareholding guidelines
30 September 2020
Salary Target
200%
R J Woodman
N S Terrington
427%
679%
0%
100%
200%
300%
400%
500%
600%
700%
800%
At 30 September 2021, 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 adopted a post-cessation shareholding
requirement. This requires that for two years following cessation of employment, based on their immediately pre-cessation salary, an
executive director must retain such of their ‘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.
No former directors are subject to these guidelines.
B7.2.3 Application of remuneration policy for the year ending 30 September 2022
The information provided in this section of the Directors’ Remuneration Report is not subject to audit.
Overview
Any changes to the application of the Remuneration Policy for the year ending 30 September 2022 are, as noted above, expected to
be limited.
Page 128
Executive directors
Base salary
The salaries of the executive directors were increased by 5%, in line with the wider workforce, from 1 October 2021.
N S Terrington
R J Woodman
Allowances and benefits and pension contributions
No change from the stated policy.
Salary with effect from
1 October 2021
1 October 2020
£
628,695
395,945
£
598,754
377,087
Annual bonus
In line with the policy, the bonus opportunity for the financial year 2022 will be 150% of salary.
The Committee has determined that performance will be assessed against a balanced scorecard of measures consisting of: financial
performance (30%) including core profit and RoTE, 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 two core measures of
underlying profit and underlying RoTE comprise 70% of the financial performance award, but the Committee annually determines the
appropriate secondary measures by reference to the strategic focus for the year. For 2022 the secondary measures will continue to be
underlying NIM progression, CET1 and cost:income ratio.
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.
Deferral requirements will reflect the regulatory requirements for a Level 2 bank in the year ending 30 September 2022 (as detailed in
the Policy Summary at the end of this report).
PSP awards
PSP award levels for executive directors are 180% of base salary. The performance conditions and weightings (in respect of TSR, EPS,
risk and customer and people metrics), individual performance and Group underlying performance requirements are as noted below.
Performance
measure
Relative TSR
Basic EPS
Risk
Customer
People
Weighting
Threshold vesting for
25% of maximum award
Maximum
vesting
25.0%
25.0%
25.0%
Median performance
Upper quartile performance
63.0 pence
72.0 pence or more
50% weighting on an assessment from the CRO of the five key elements of the
Group’s risk appetite: regulatory breaches, 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
Page 129
Corporate Governance
The TSR grouping has been updated to reflect changes in the Group’s listed peers and consists of the companies below.
Amigo Holdings PLC
Arbuthnot Banking Group PLC
Barclays PLC
Close Brothers Group PLC
Funding Circle Holdings PLC
LendInvest PLC
Lloyds Banking Group PLC
Metro Bank PLC
NatWest Group PLC
OSB Group PLC
Provident Financial PLC
Secure Trust Bank PLC
S&U PLC
Virgin Money UK PLC
The EPS metric has been updated to reflect the current macro-economic climate whilst maintaining an appropriate level of stretch
compared to the Group’s financial forecasts. The Group’s Covid response saw impairments inflate materially in 2020, with a correction
then seen in 2021. When considering the degree of stretch in the targets, the Committee considered them both in relation to the
internal targets and to a normalised figure for the year ended 30 September 2021 of 55.1p, based on the 2019 cost of risk, to take
account of the unusual pattern of impairments in the financial years ended 2020 and 2021. On this basis, the Committee was satisfied
that the targets represent a very strong performance if achieved and are therefore appropriately stretching.
The risk and customer metrics have been updated to ensure that customer complaints are only counted within the customer metric.
There is straight-line vesting between threshold and maximum for the TSR and EPS measures 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 and non-executive director fees
The Board reviewed and approved an increase to non-executive director base fees by £5,000 per annum, effective from
1 October 2021, to maintain alignment to the market. No other changes were made in respect of non-executive director or Chair of the
Board’s 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 2021
1 October 2020
£000
255
70
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.
Page 130
B7.2.4 Other information
The information provided in this section of the Directors' Remuneration Report is not subject to audit.
This section provides various items of information related to remuneration within the Group. This includes information that shows
the overall approach to all employee remuneration at the Group and how directors’ remuneration aligns and compares with other
employees and shareholders.
Fair pay
Fair pay: groupwide remuneration philosophy
Paragon is committed to rewarding 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.
This commitment to fair pay is reflected in Paragon’s:
• Support since 2016 for the minimum wage payable to all employees being that stated by the Living Wage Foundation
(which from 1 November 2021 will be £19,500 per annum)
• Payment of PRP to around 85% of the workforce
• Share schemes being available at both an all employee and senior management level which help to align employees’ interests
with shareholders
• Alignment between executive pay and that of other senior managers as well as other employees
• People Forum providing an additional arena for discussion and feedback on executive and all employee remuneration structures
Further information on the above points can be found in the remainder of this section. In addition, the commitment to fair pay is
reflected in Paragon’s commitment to various sustainability related matters which support and enhance fair pay and the remuneration
philosophy and are detailed in Section A6.
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Corporate Governance
Proportionality
Predictability
Alignment to
culture
How our pay principles aligned to the Code during the year ended 30 September 2021:
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
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
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
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 pay-out under variable pay schemes
is considered
Minimum, target and maximum levels of award
for executive directors are shown in this report
within the summary of our Remuneration Policy
See Section B7.3 for the summary policy
and the full policy in the 2019 Annual Report
and Accounts
Paragon’s strong culture is reflected throughout
its pay structures through consideration of the
demonstration of the Group’s values. This applies
when determining incentive outcomes for all
employees as well as through its commitments to
EDI policies and the Living Wage Foundation
The Remuneration Policy is fully aligned with our
pay principles
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 (see
the remainder of this Section B7.2.4 for more
details and Section A6)
Risk
The pay arrangements for executive directors
are consistent with and promote effective risk
management through alignment with the Group’s
risk appetite
The risk conditions in the annual and long term
incentives are tested annually by the Committee.
The Committee has discretion to override
formulaic outcomes
Risk conditions are included within
variable remuneration arrangements to
align with regulatory expectations and
shareholder interests
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 its outturns
Both annual bonus and PSP outcomes are
subject to malus and clawback provisions
Page 132
How the Committee considers the views of all employees
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 took
place during September 2021 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.
How all employee remuneration is aligned with stakeholders’ interests
Within the Policy Summary (Section B7.3) information is provided on how the remuneration packages for executive directors’ link
to strategy; how they operate; maximum opportunity and any performance conditions. Noted below is the equivalent information
for all employees in respect of base salary, benefits and retirement benefits. The purpose and link to strategy that is detailed for the
executive directors’ remuneration components is the same for all employees and is consequently not repeated here. Further the
following points should be noted:
• RBA – in the year ended 30 September 2021 RBA were only available to executive directors
• Sharesave – opportunities to participate in Sharesave are the same for all employees and therefore the information provided in
the executive director table equally applies to all employees. Paragon’s Sharesave scheme has operated for many years, usually
on an annual basis, and encourages employees to become shareholders in the Group through this tax efficient mechanism.
Take-up in currently outstanding SAYE grants is about 65% of eligible employees reflecting the continued and ongoing alignment
between employees and shareholders and employee commitment to the growth of the Group.
Operation
Base salary
Maximum opportunity
Performance conditions
Same as executive directors
(see Policy Summary
Section B7.3)
The Committee agrees the salaries of all MRTs salaries
for MRTs and all other employees are determined in line
with performance, culture, external market conditions
and retention factors.
Same as executive
directors (see Policy
Summary Section B7.3)
The Committee is made aware of the outcomes of salary
reviews across the Group before it determines those of
the executive directors and other MRTs.
As it has done for a number a years, the Living Wage
Foundation rate is the minimum that is paid to all
employees, as well as contractors’ staff employed at
Paragon sites such as cleaners and security personnel
who are not on a training rate of pay (for example
apprenticeships).
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Corporate Governance
Maximum opportunity
Performance conditions
Private healthcare is provided on the same basis as it
is for the executive directors and this is also the case
for other benefits (contractual and voluntary) that an
employee chooses to receive.
None
The maximum level of benefits for all employees is
determined on the same basis as the executive directors.
Maximum contribution for Paragon Worksave Pension
Plan is 10% of salary.
None
Maximum contribution to Paragon Pension Plan is 25%
of salary.
Maximum cash supplement contribution (where a former
member of the Paragon Pension Plan has left the Plan) is
45% of salary.
Operation
Benefits
Provision of market competitive
benefits (contractual and
voluntary) designed to promote
financial and emotional wellbeing
and which allows individuals
to tailor benefits to suit their
lifestyle. This includes the choice
of private healthcare on the same
basis as the executive directors
for senior employees.
A number of legacy
arrangements exist.
Retirement benefits
The majority of employees can
join the Paragon Worksave
Pension Plan, the Group’s defined
contribution pension plan. In this
plan employee contributions are
matched equally by percent by
the employer up to 6% of salary;
employee contributions from
6% upwards are matched by an
employer contribution of 10%
of salary.
A number of legacy arrangements
exist including the Paragon
Pension Plan.
In respect of Annual bonus and Paragon Performance Share Plan (‘PSP’) the comparison is made between the
executive directors and senior employees with the purpose and link to strategy being the same as for the executive
directors and so not repeated below:
Annual bonus
This operates for senior
management as it does for the
executive directors except that
malus and clawback and deferral*
apply to a small number of senior
management and MRTs only.
Maximum bonus potential varies across the Group
depending on role and experience and for a limited and
small number of roles maximum can be in excess of that
noted for the executive directors, however awards of
this level are rarely received. Bonus awards are usually
made to senior management but can be made in certain
circumstances to other employees.
Objectives which are
used to help determine
bonuses are set on
a regular basis for all
employees and reflect
the employee’s role and
seniority level.
*Deferral
All senior management (excluding the executive directors) will have 25% of their bonus above £30,000 deferred in 2021 in
advance of the regulatory deferral requirements resulting from Paragon Bank becoming a Level 2 firm (in 2020 Executive
Committee members excluding the executive directors had 50% of their bonus above £30,000 deferred and for most other
senior managers 25% of their award above £30,000 was deferred).
Paragon Performance Share Plan (‘PSP’)
Same as executive directors (see
Policy Summary Section B7.3)
The maximum award level (except in exceptional
circumstances) outside of the executive directors
is 100% of salary which is generally only granted to
members of the Executive Committee.
Same as executive
directors (see Policy
summary Section B7.3)
Page 134
Other variable pay opportunities
The Group provides other variable pay opportunities to certain groups of employees:
• Profit related pay – for many years a cash-based PRP distribution of 1% of group profits, has been paid 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 employees
• £1,000 share award – in December 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 was made to all
employees (below executive committee and their senior direct reports) utilising the DSBP scheme. The award was granted to all of
the Group’s people employed on 3 December 2020, subject to minimum performance. The award has 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 included a small number of employees who are MRTs, malus and clawback provisions will be applicable
• Discretionary bonus – all employees whose performance has exceeded expectations are eligible for a discretionary bonus
• Other – in addition to the above noted certain employees below management level are eligible for overtime pay. Further there are
a few financial incentive schemes, separate to the annual variable bonus noted above, which operate in certain operational areas
of the business from time to time. All such schemes are required to be approved by the People Director, CFO and Conduct and
Compliance Director before implementation and then reviewed at least annually
Remuneration comparisons
Comparison of annual change in directors’ pay with the average employee
The table below shows the percentage change in the salary, benefits and bonuses of each of the directors compared against the
percentage change in each of those components of pay for an average employee.
Salaries and fees
2021
Allowances and
benefits
Bonus
Salaries and fees
2020
Allowances and
benefits
N S Terrington
R J Woodman
J A Heron
F J Clutterbuck
P J N Hartill
P A Hill
A C M Morris
B A Ridpath
H R Tudor
F F Williamson
G H Yorston
Average employee
%
6.4
6.5
n/a
-
n/a
n/a
93.2
-
9.2
n/a
-
1.0
%
(46.2)
-
n/a
-
n/a
n/a
-
-
-
n/a
-
(5.9)
%
45.29
45.46
n/a
-
n/a
n/a
-
-
-
n/a
-
101.7
%
11.9
11.7
(74.3)
-
(8.4)
-
n/a
-
2.3
-
-
8.5
Bonus
%
(33.93)
(33.93)
(100.0)
-
-
-
n/a
-
-
-
-
%
4.0
-
(63.0)
-
-
-
n/a
-
-
-
-
19.2
(25.7)
Further information in respect of the constituents of the above noted comparison of annual change in directors’ pay with the
average employee table is provided below using the sections noted in the table as titles:
‘Salaries and fees’ – these 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 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
The above compares total amounts of salary paid during the year rather than the salary payable at the year end. Therefore, it
reflects that the salary review implemented in October 2019 was, for the executive directors unlike most employees, effective for
only part of 2020 (from 14 February 2020). There was no increase in their base salary for the salary review implemented in
October 2020 as was the case for most employees
•
‘Allowances and benefits’ – these are calculated using the data provided in the single figure table above for executive director's
and in the ‘Chair of the Board's and non-executive directos' fees’ table also above
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Corporate Governance
The significant changes shown in the ‘Allowances and benefits’ for N S Terrington is due to a decrease in travel and related
accommodation in 2021 due to Covid. As noted previously ‘Allowances and benefits’ include a reimbursement from the Company
in respect of certain travel costs incurred in connection with the performance of executive director duties which constitutes a
taxable benefit in kind. The amounts included represent the travel payments HMRC treats as taxable together with an allowance to
cover the tax. The Group provides the amount required to cover the tax liability.
The changes in the average employee section of the table for this item in cash terms are due to a decrease of less than £150
between 2021 and 2020.
• Not applicable (‘n/a’) – this is used where a director was not a director in the noted financial year or in the case of Peter Hill and
Alison Morris in the prior financial year and so a comparative is not appropriate or helpful
• Director changes – the changes shown to the fee levels for Alison Morris and Hugo Tudor are reflective of part year changes in
appointments. In Alison Morris’s case to the Board and in Hugo Tudor’s as Senior Independent Director
• Bonuses – the decline in bonus for employees and directors in 2020 is reflective of the initial stages of the Covid pandemic and
the increase in 2021 of the macro-economic changes since the early part of the pandemic
Overall, the comparisons shown in the table reflect the substantially different approach to remuneration and the resulting
outcomes to remuneration awards that occurred in 2020 arising from the early stages of the Covid pandemic when compared to
those taken / arising in prior years. A reversion to an approach equivalent to 2019 and also to strong award outcomes in 2021 mean
that 2019 is a closer equivalent to 2021 than 2020. It is difficult from the information to draw conclusions that would be expected to
remain valid in themselves in the upcoming years.
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
3,070
2,174
3,001
2,426
2,305
1,956
2,546
3,113
2,655
2,565
%
96.1
66.1
89.4
90.0
90.0
75.0
100.0
100.0
85.0
87.5
%
97.00
72.00
95.44
72.47
63.51
50.00
100.00
100.00
100.00
100.00
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
Page 136
Performance graph and table
Historically the Company’s TSR performance was considered relative to the FTSE All Share General Financial Sector index; however,
in light of this index having been discontinued, this has been replaced with the FTSE 250 index. This index has been selected as it is
the broad market index in which the Group’s shares are included.
The following graph shows the Company’s TSR performance compared with the performance of the FTSE 250 index. This graph
shows the value, by 30 September 2021, of £100 invested in Paragon Banking Group PLC on 30 September 2011, compared with £100
invested in the FTSE 250 index.
Ten-year return index for the FTSE 250
Ten years ended 30 September 2021
£550.00
£500.00
£450.00
£400.00
£350.00
£300.00
£250.00
£200.00
£150.00
£100.00
£50.00
£0
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
FTSE 250
Paragon
CEO pay ratio
The table below sets out the CEO pay ratio compared to the 25th, median and 75th percentile employee within the Group. In each
of the years reported 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. This option is calculated in accordance with the single
figure table methodology as at 30 September 2021.
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.
Remuneration decisions for all employees, including the executive directors, are made taking into account the Group’s
remuneration philosophy. The CEO pay ratio, as an outcome of those decisions, is therefore reflective of the Group’s reward and
progression policies.
Year
2021
2020
2019
Method
25th percentile pay ratio
Median pay ratio
75th percentile pay ratio
Option A
Option A
Option A
116:1
88:1
125:1
85:1
64:1
95:1
52:1
37:1
55:1
2021
2020
25th percentile pay
Median pay
75th percentile pay
25th percentile pay
Median pay
75th percentile pay
Base salary
Total remuneration
£22,000
£27,000
£33,000
£36,000
£53,000
£60,000
£23,000
£25,000
£28,000
£34,000
£36,000
£58,000
Base salaries and total remuneration shown above are the details relating to the relevant identified employees in each year.
Change in CEO pay ratios
The changes shown in CEO pay ratios between 2020 and 2021 are reflective of the substantially different approach to remuneration and
the resulting outcomes to remuneration awards that occurred in 2020 arising from the early stages of the Covid pandemic. As can be
seen from the year-on-year comparative table 2021 and 2019 are more aligned than 2020.
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Corporate Governance
Further, changes in the CEO pay ratio from year to year also reflect the difference in the remuneration package of the CEO relative to the
wider employee population. In particular, the higher variable opportunity which is not replicated across the wider employee population.
As a result, it is expected that the CEO pay ratio will be volatile from year to year, reflective of the bonus and PSP outcomes in any year.
Gender pay
Details of the Group’s gender pay gap analysis are shown in Section A6.3 Corporate Responsibility. Gender pay review and reporting
are overseen by the Nomination Committee as part of its responsibilities in respect of diversity.
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
Share buybacks
Loan advances and investment in portfolios
Corporation tax paid
Note
49
40
39
41
2021
£m
65.1
54.6
37.7
2,601.5
48.3
2020
£m
64.0
35.9
-
2,050.5
46.1
Change
£m
1.1
18.7
37.7
551.0
2.2
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.
Other information
Notice periods and terms of engagement
The 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
Original appointment date
Current letter of appointment end date
F J Clutterbuck
10 May 2018*
P A Hill
27 October 2020
A C M Morris
26 March 2020
B A Ridpath
20 September 2017
H R Tudor
24 November 2014
G H Yorston
20 September 2017
10 September 2022
26 October 2023
25 March 2023
19 September 2023
23 November 2023
19 September 2023
*F J Clutterbuck was originally appointed as a non-executive director on 12 September 2012.
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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 on
13 February 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 has become
a Level 2 bank and therefore a number of the changes noted in the Remuneration Policy will come into effect for the year ending
30 September 2022. 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. 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.
Whilst no formal
performance conditions
apply, an individual’s
performance in role is
taken into account
in determining any
salary increase.
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.
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.
Private health cover for the
executive and their family, life
insurance cover of
up to seven times’
salary and company car or
cash alternative.
Other benefits may be
offered from time to time
taking into account individual
circumstances.
None.
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.
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.
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Corporate Governance 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.
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).
None.
Maximum 20% of salary
for incumbent executive
directors and 10% of
salary for newly recruited
executive directors.
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
per annum for the CEO
and £90,000 per annum
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.
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.
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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.
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.
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.
Implementation as a Level 2 bank:
The Group became a Level 2 bank for regulatory purposes on 1 October 2021 and consequently, 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 141
Corporate Governance 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:
From 1 October 2021, when the Group becomes a Level 2 bank for regulatory purposes, at the end of a 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 142
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 £2.0 million).
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 143
Corporate Governance B7.4 Approval of Director’s Remuneration Report
The information provided in this section 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
7 December 2021
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B8. Risk
management
...the impact of Covid has
dominated the Committee’s agenda
and the future trajectory remains
uncertain, however I have been very
impressed with the way the Group
has and continues to deal with the
challenges it brings.
Peter Hill, Chair of the Risk and Compliance Comittee
B8.1 Statement by the Chair
of the Risk and Compliance
Committee
Dear Shareholder
I am pleased to write to you as Chair of the Risk and
Compliance Committee to explain how we, as a Committee,
have discharged our responsibilities in the last year. This is
my first report as Chair of the Committee, having taken over
the role as of 31 December 2020 during a period of significant
disruption to the UK economy and the Group’s operating
environment due to the Covid pandemic. Clearly the impact
of Covid has dominated the Committee’s agenda and the
future trajectory remains uncertain, however I have been very
impressed with the way the Group has and continues to deal
with the challenges it brings.
As we gradually move out of the pandemic and into new ways
of working, the Committee’s focus will undoubtedly shift to
broader risk issues. My priority as Chair of the Committee is to
ensure that we remain a forward-looking body and continue to
consider those emerging risks which may impact the strategy
or operating capability of the Group.
The ability of the Group to react in an agile and effective way
to Covid and to emerging risks more generally, has been
facilitated through the development of its risk management
capabilities. Significant work has been undertaken over the last
year to enhance the ERMF. The evolution of this framework to
ensure it is commensurate with the size and complexity of the
Group’s operations is a key strategic priority, and since I joined
the Committee, I have been pleased to see the good progress
that has been made. This has included the recruitment of
experienced risk resource and enhancements to the risk policy
framework. A strong ERMF is key to enabling the Committee
to effectively discharge its responsibilities and ensure that it is
able to focus on matters of greatest significance to the Group.
Intrinsic to risk management across the Group is the necessity
for a strong risk aware culture. Excellent progress has
been made in the maturity of risk across the Group and in
embedding risk considerations in day-to-day decision making.
Over the next year and beyond a priority for the Committee
is to oversee the further development of the risk culture,
ensuring it supports the Board’s overall risk strategy
and appetite, and becomes further embedded in the
Group’s operations.
The primary responsibility of the Committee continues
to be the maintenance of oversight of the effectiveness
of the Group’s risk management framework and of its
systems and controls for compliance with statutory and
regulatory obligations. This oversight is enabled through
strong and evolving governance structures. In particular, the
enhancements made during 2020 with the introduction of
the monthly ERC, have enabled the Committee to maintain
its focus on the key material and strategic risk issues that the
Group faces.
Given the challenges of Covid and their impact on the risk
profile, the Committee’s agenda during the last year has
continued to focus on the ongoing oversight of the regulatory,
economic and people-related impacts resulting directly
from the pandemic. In particular, the Committee has
regularly reviewed:
•
•
•
The ongoing impacts of working arrangements for
employees given the further UK lockdowns in November
2020 and January 2021
The roll-off of payment holidays and implementation of
other forbearance strategies, ensuring customer treatment
remains at the forefront of our considerations
The impact of UK Government relief programmes including
the issuance of CBILS, BBLS and RLS on the Group’s risk
profile, including the associated credit risk, financial crime
and processing risks
Page 145
The Committee continues to monitor the implications of
these changes together with developments in regulatory
requirements to manage customer and prudential risks arising
from Covid. It is encouraging to see how effectively these risks
have been managed by the Group. In particular, revisions to
credit policies made in response to the initial impact of Covid,
have resulted in minimal credit related losses to date, despite
the scale of the economic challenges involved.
• Consideration of potential impacts on the Group from
emerging supply chain issues which are affecting the
distribution of energy and other commodities across the
UK, particularly given the inherent inflationary pressures
that are beginning to manifest themselves
• Ongoing oversight of the Group’s response to the
‘Dear CEO’ letter on financial crime systems and controls
The Committee has continued to balance the need to provide
close oversight of the developing situation in respect of the
pandemic with non-pandemic specific risk issues including:
• Evaluating the challenges posed by Government proposals
to improve energy efficiency of both owner-occupied and
privately rented homes by mandating minimum EPC ratings
Monitoring the progress of the Group in managing
exposures to LIBOR as the primary sterling interest rate
benchmark as this is phased out, ensuring customer
outcomes remain a key priority
• Reviewing the Group’s progress in enhancing its ERMF,
including ensuring risk appetites remain consistent with the
delivery of its strategic objectives, and proposing any
required changes in risk appetite to the Board
Continued oversight of the Group’s project to implement
an IRB approach for credit risk including the submission of
Phase 2 of the buy-to-let application in March 2021
Overseeing the Group’s progress on responding to the
increasing challenges posed by climate change and
addressing any impacts this may have on its risk profile,
including the consideration of its lending and operational
strategy in light of wider global imperatives and initiatives
• 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
• Driving the embedding of the Group’s risk culture across
the Group, further enabling the Committee to focus on
high materiality matters and developing its horizon
scanning capability
Review of the Group’s ongoing approach to Operational
Resilience following the final guidance published by the
regulators at the end of March 2021
• Undertaking deep dives in relation to specific risk
categories and business areas on both a rolling and
ad hoc basis
•
•
•
•
•
I am confident that the Group has the skills and experience to
manage the risks it is likely to encounter in the year ahead, but
it is critical that the Group continues to anticipate any potential
impact and remains agile in the event circumstances change
materially capabilities that were ably demonstrated during
the pandemic.
In looking back over my first nine months, I would like to take
the opportunity to thank Finlay Williamson, the previous Chair
of the Committee, for his leadership over the previous three
years. During his tenure the Committee matured in terms
of both reporting and discussion, ensuring that it provides
effective oversight of the complex risk landscape within the
Group despite the backdrop of ever-changing regulation. I wish
Finlay all the best for the future. The transition in leadership
has been seamless and I would like to thank my fellow directors
and the Group’s Risk function for their support in this. I very
much look forward to working with them over the year to come,
as we look to the new challenges of a post-pandemic world.
Peter Hill
Chair of the Risk and Compliance Committee
7 December 2021
Assessment of the existing risk exposure posed by the
Group’s historic lending on buildings with potential cladding
issues and ensuring appropriate controls to mitigate
future exposure
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 new
ways of working that were introduced in the face of the UK
lockdown have proven to be sustainable and the flexibility and
innovation as a result have increased the Group’s resilience
and strengthened the risk mitigation capability. Control
frameworks that have been introduced as a result of initiatives
such as payment holidays and government reliefs have proven
effective with extremely low levels of operational events.
In addition, the Group will continue to monitor significant
non-Covid specific challenges within the operating
environment that could materially impact its risk profile. The
uncertainties that were prevalent following the UK’s departure
from the EU are still manifesting themselves. The nature of
these risks continues to evolve as has been seen in the recent
disruptions to supply across the likes of fuel, consumables and
other raw materials.
The Committee’s principal areas of focus for the financial year
ending 30 September 2022 will continue to form key agenda
items for the coming year. Other priorities for the Committee
will include:
• Ongoing oversight of the longer-term risk implications of
Covid, and any further Government or regulatory measures
that are implemented
• Continuing to review the potential impacts on the Group of
the consequences of the UK’s withdrawal from the EU and
any changes to the regulatory regime this may entail
Page 146
B8.2 Risk governance
The Group’s approach to governance and the committee
structures are described in Section B4. The risk committee
structure and lines of oversight in place throughout the year
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 and again in October
2021, after the end of the year, include all matters indicated by
the 2018 Code.
The Committee’s responsibilities include reviewing:
• Recommendations and matters for escalation from the ERC
• 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
• 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
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 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 aims to meet annually with the CRO, without
the presence of executive management, to discuss his remit
and any issues arising from it.
The Committee also has the power to requisition a meeting
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:
• Reviews of the principal risks facing the Group, which
included a comprehensive refresh of the risks during
the year
• 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
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Risk andComplianceCommitteeChiefExecutiveOfficerExecutive RiskCommittee(‘ERC’)Asset and LiabilityCommittee(‘ALCO')Customer andConduct Committee(‘CCC')CreditCommitteeOperational RiskCommittee(‘ORC')Model RiskCommittee(‘MRC')
In addition, during the last year, the Committee:
Key areas of focus for the ERC include:
• Reviewed the Group’s risk appetite to ensure it remained
• Developing and, at least annually, reviewing the
consistent with the delivery of the Group’s strategic
objectives, proposing any required changes to the Board
appropriateness and effectiveness of the overall risk
management framework to manage and mitigate risk
• Continued to monitor progress in respect of the Group’s
application for regulatory approval of its IRB approach to
credit risk management
• Reviewing the Group’s approach to controlling each
principal risk and its capability to identify and manage
such risks
• Monitored the Group’s progress on transitioning away from
LIBOR including project progress, risks and issues and
potential impacts on the fair treatment of customers
• 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
• Conducted deep dive reviews into targeted risk areas,
including the potential impact on the Group of negative
interest rates, rising inflation and the prospect of potential
interest rate rises
• Provided ongoing oversight of the Group’s exposure to
issues relating to properties with defective cladding and its
review of underwriting guidelines in relation to this risk
• Considered regular focussed reviews of key risk areas
including credit risk, capital risk, liquidity and market risk,
climate change 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 final rules in March 2021, including a
significant focus on services provided by third parties
• Reviewed, challenged and approved the Management
Responsibilities Map
• Reviewed, challenged and approved the terms of reference
of the MRC
• 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
• Challenged and approved various key risk policies
Executive Risk Committee (‘ERC’)
The purpose of the ERC is 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,
with the Internal Audit Director attending as an observer, 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.
risk choices, appetite and thresholds
• 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, which focus on specific aspects
of the Group’s risk profile. Each of these executive committees
operates within terms of reference formally approved by the
ERC. Their primary functions are described below.
The ERC retains direct responsibility for those principal risk
areas which impact across multiple aspects of the Group’s
operations, including climate change and strategic risk.
Asset and Liability Committee (‘ALCO’)
ALCO comprises heads of relevant functions and is chaired by
the Balance Sheet Risk Director.
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.
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B8.3 Risk management
culture
The Board is committed to establishing and 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 employees are expected to understand
and have accountability for the risks they take. Appropriate risk
management and the behaviours expected to deliver this, are
core to the Group’s performance management process.
The Group’s strong risk culture is embedded through various
practices which support and protect the Group’s wider
strategic goals and are essential to protecting the Group’s
customers, shareholders, creditors, and its reputation.
In particular:
• 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, conducted within an open and
transparent environment, remains at the heart of all
decision-making
• Business is carried out only where the potential risk to the
Group and its customers has been evaluated together with
the potential reward and where the residual risk exposure
remains within defined risk appetites
• The risk management framework ensures that risks are
owned and managed in a consistent way
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.
Customer and Conduct Committee (‘CCC’)
The CCC comprises heads of relevant functions and is chaired
by the Conduct and Compliance Director.
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 (such as in relation to customer vulnerability); the
product governance framework; and monitoring reports. 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.
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.
Operational Risk Committee (‘ORC’)
The ORC comprises heads of relevant functions and is chaired
by the Enterprise 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.
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Corporate Governance
• Provide senior management and relevant committees with
risk reporting that is relevant and appropriate, enabling
timely action to be taken in response
• Define risk policies which align to the Group’s 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 three lines of defence
Line 1
Line 2
Line 3
Risk management
processes within
operational areas
Risk and Compliance
function overseeing
the ERMF and
providing support
and challenge
Internal Audit
function assessing
effectiveness of
risk management
•
The first line of defence (‘Line 1’), comprising executive
directors, together with managers and employees in
operational and support areas. Line 1 has day-to-day
responsibility for:
o Risk identification, assessment, treatment, monitoring
and reporting
o Control and ongoing monitoring of operations
o
Escalation and reporting of risk issues against
stated appetites
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 (‘Line 2’) is provided by the
independent risk and compliance function. This division
is headed by the CRO, who is a member of the Group’s
Executive Committee. The function is overseen by the Risk
and Compliance Committee and its supporting executive
committees. Line 2 provides support and independent
challenge on all risk related issues specifically:
o Developing and maintaining the ERMF across the Group
o
Developing and maintaining supporting risk processes
within that framework, ensuring these are consistent
with the Board’s risk appetite
o Ensuring that risks identified by line 1 are measured,
monitored, controlled and reported on a timely basis
o
Maintaining open and constructive engagement with the
regulatory authorities
The CRO attends meetings of the Risk and Compliance
Committee and the Board to report directly to the directors
on risk issues and has a close working relationship with the
Chair of the Risk and Compliance Committee, an
independent non-executive director.
B8.4 Risk management
framework
Introduction
The Group’s enterprise risk management framework (‘ERMF’)
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
a 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. The Group continues to ensure that the
framework evolves to reflect the changing business, regulatory
and economic landscape and emerging threats. Therefore, the
Group is committed to ongoing investment and enhancement
in its enterprise-wide risk management system. Core to this
approach is ensuring that tools for effective risk identification,
assessment, treatment and monitoring are appropriate and
embedded at all levels of the Group’s businesses.
During the past twelve months further work has been
undertaken to develop the framework to support the
Group’s strategic aspirations, building on foundations laid
in the previous financial year. Central to this has been the
recruitment of experienced risk resource to further mature
the core risk processes, with a detailed ongoing programme
of work to support this, which will extend through the coming
financial year. Priority activities include further refinement
of risk appetites across all risk categories, a more
comprehensive and standardised risk policy framework, and
enhanced tools and techniques for assessing and embedding
risk culture, thereby ensuring improved alignment to
performance and reward.
Enterprise risk management framework
The ERMF 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 ERMF are to:
• Determine a defined strategy for the Group’s attitude
to risk, including outlining the approach taken to setting
qualitative statements and quantitative metrics to define
and assess the Group’s tolerance and appetite for risk
• Establish a consistent risk taxonomy, describing the
principal risk categories and the more granular aspects of
each of these categories
• Promote an appropriate risk culture across the Group,
ensuring that risk is considered as part of all key strategic
and business decision making
• Establish standards for the consistent identification,
measurement, monitoring, management and reporting of
risk exposure and loss experience
• Promote risk management techniques to proactively reduce
the frequency and severity of risk events, driving control
improvements where necessary
• Facilitate adherence to regulatory requirements, including
threshold conditions, capital standards and support the
regulatory requirements associated with the ICAAP, ILAAP
and the Recovery Plan
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•
The third line of defence (‘Line 3’) 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 and led
by the Internal Audit Director who reports directly to the
Audit Committee. Internal Audit provides independent
assurance on:
o Line 1 and Line 2 risk management activities
o The appropriateness and effectiveness of internal
controls
o Effectiveness of policy implementation
Further information on the work of the Internal Audit
function is given in the report of the Audit Committee
(Section B6).
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 appetites, reporting requirements
and escalation obligations and the frequency of review.
The framework is subject to annual board approval.
The following principles are integral in determining the
Group’s risk appetite:
• Alignment to principal risks
• Alignment to strategic objectives
• Appropriateness of calibration to drive timely action
• Facilitation of 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
which determines whether these are sufficiently material to be
reported to the Board.
Risk appetite is central to the effective implementation
and operation of the ERMF. The ongoing evolution of the
risk appetite framework and refinement of the Group’s risk
appetites for all principal risks is a priority activity in the further
maturing of the ERMF. Work has taken place in the year and
continues to be undertaken to ensure that:
• All principal risks have strategically aligned qualitative and
quantitative appetites
• There are appropriate Level 1 and 2 appetite metrics
monitored on an ongoing basis
• Calibration of appetite is appropriate and drives timely
management action
In particular, work is progressing to designate appropriate
Level 1 and Level 2 risk metrics and risk appetites for climate
change related risks across all areas of the business.
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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.
The principal risks remain consistent from the previous financial year, except that pension obligation risk is no longer deemed a
principal risk for the Group given the diminishing deficit, changes in the scheme to mitigate future risk and ongoing management of
the risk through the triennial valuation process, as described in Note 52. No further changes were proposed.
The changes in the perceived level of each risk during the last financial year are indicated using the symbols shown below:
Risk increasing
Risk decreasing
Risk stable
Capital Risk
Description
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.
The BCBS has set 1 January
2023 as the implementation
date for its revisions to the
Basel III framework, including
increases in risk weights
for residential real estate
exposures. There is therefore
a risk that the Group’s capital
requirements will be increased
to some extent.
Mitigation
Year-on-year change
A robust process exists over Pillar 1 capital reporting,
both internally and to the PRA, 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 submitted the second stage of its application
for the accreditation of its IRB approach to buy-to-let
credit risk for capital adequacy purposes to the PRA in
March 2021. The project continues to progress to plan,
and work will continue through the next financial year.
While there has been
little impact on the overall
capital risk framework in the
financial year and the Group’s
assessment of the likely
impact of these changes, the
progress made in the Group’s
balance sheet management,
its IRB development
programme and the positive
results of the most recent
PRA assessment of the
Group’s risk profile mean that
it is better placed to meet
these challenges than it was a
year ago.
Liquidity and Funding Risk
Description
Mitigation
Year-on-year change
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.
The Group remains well
placed to access funding
from a wide range of sources
to meet its future funding
requirements. During the
year a second fully retained
securitisation was completed,
boosting, contingent funding
options and the TFSME,
which remained open for
drawings until 31 October
2021, was accessed.
In addition, access to the
retail savings market has
broadened with new routes to
market and the launch of an
SME deposit product.
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Market Risk
Description
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.
Mitigation
Year-on-year change
This risk is managed within Board approved risk appetite
limits with comprehensive treasury policies 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 overall 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, the transition of
assets and liabilities from
LIBOR to alternative risk-
free rates is well progressed
with the majority of assets
and liabilities addressed, and
the programme expected
to be completed before the
December 2021 cut-off date.
This has removed a degree
of uncertainty in relation to
interest rate risk and so the
risk profile has reduced.
Credit Risk
Description
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
Mitigation
Year-on-year change
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 UK residential property at conservative
loan-to-value levels. The primary collateral therefore
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.
Prudent credit tightening and
pro-active customer contact
strategy throughout the Covid
pandemic, have combined
with the Group’s consistently
high lending standards to
ensure that customers have
maintained repayments and
that arrears and losses have
been minimised.
The Group has returned
to lending criteria that are
generally in line with that in
place pre-pandemic.
Performance levels, both
for the Group and the
financial services sector
more generally, coupled with
a more positive outlook for
the UK economy, including
steadily rising house prices,
and the progress of the Covid
pandemic, indicate that this
risk has reduced compared to
30 September 2020.
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Corporate Governance
Model Risk
Description
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.
Mitigation
Year-on-year change
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.
Reputational Risk
Description
Mitigation
Year-on-year change
Maintenance of a strong
reputation across all business
lines and operational activities
is core to the Group’s
philosophy.
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, and the Group will not
undertake any activity it considers might be damaging to
its reputation.
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 Group has an experienced External Relations
function which manages all Group communications
and ensures 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.
This has been particularly
important given the potential
impact of the Covid pandemic
over the year.
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.
Strategic Risk
Description
Mitigation
Year-on-year 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.
Prospects for UK economic
performance remains
unusually uncertain. The
medium and longer-term
impacts of Covid, together
with the implications of the
UK’s new trading relationships
post-Brexit, are still to be
determined.
Whilst the Group has
continued to remain resilient
throughout the pandemic,
and activity levels have been
strong, the potential for
future waves of the virus and
associated lockdowns still
present a risk.
Page 154
Climate Risk
Description
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
Mitigation
Year-on-year change
The Group proactively manages physical risk and has
specific underwriting policies aimed at the mitigation
of, 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 CFO has been designated as the Senior Manager
with responsibility for climate change and, during the
year, the Group set up the Sustainability Committee,
which supports ExCo in ensuring that the impacts of
climate change are considered comprehensively across
all aspects of the business.
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.
The Group has made progress
on its climate change agenda,
with activity focused on
incorporating climate risk
considerations within the
ERMF, while governance
has been enhanced with
the establishment of the
Sustainability Committee.
However the levels of
regulatory scrutiny and public
interest in this area have
increased significantly during
the period and therefore the
overall risk is considered to
have increased over the year.
Conduct Risk
Description
Mitigation
Year-on-year 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.
Despite the rapid
implementation of tailored
support to customers
impacted by Covid last year,
whilst some customers
continue to require further
support, the overarching
conduct risk profile has
remained broadly static.
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 employees are included in financial
incentive schemes. The incentive scheme framework
is reviewed by the CCC annually and individual schemes
require approval from the People Director, CFO
and Conduct and Compliance Director
before implementation.
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Corporate Governance Operational Risk
Description
Mitigation
Year-on-year 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 an established operational risk
framework which 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.
The Group successfully
navigated the transition to
operating effectively in the
pandemic environment.
Despite new working
arrangements, rapid
redeployment of people to
support additional processes
such as payment holidays
and the need to manage the
IT challenges, the control
environment remained robust
with no material increase in
risk events.
However, with regulatory
compliance standards
continuing to rise, the Group
is committed to ensuring that
it remains compliant in its
operational activities. There is
potential that as expectations
increase gaps may be
identified which will need
addressing to reduce inherent
operational risk exposures.
Page 156
B9. Directors’ report
The directors of Paragon Banking Group PLC
(registered number 2336032) submit their Report prepared
in accordance with Schedule 7, which also includes additional
disclosures made in accordance with the listing and disclosure
rules of the FCA.
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.
Under Article 83 of the Articles, all directors are required to
submit themselves for reappointment annually, in accordance
with the Code. Accordingly, all current directors will retire and
seek reappointment at the AGM.
None of the directors has a service contract with the Company
requiring more than 12 months’ notice of termination to
be given.
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 Peter Hill, who
was appointed as a director on 27 October 2020. In addition,
Finlay Williamson stepped 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 2021.
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 Articles may only be amended by special resolution of the
Company’s shareholders in a general meeting and were last
amended in 2021. 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.
Directors’ indemnity and insurance
Under Article 169 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 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 37 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 51 to
the accounts. Votes attaching to shares held by the Group’s
employee benefit trust are not exercised at general meetings
of the Company.
The Company presently has the authority to issue ordinary
shares up to a value of £85.5 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 2 March 2022 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 24 February 2021 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.
Page 157
Corporate Governance 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.
On 8 June 2021 the Group announced a share buy-back
programme of up to £40.0 million. The reasons for this
purchase were set out in Section 3.3 of the Half-Yearly Report
for the six months ended 31 March 2021. During the year
6,882,132 £1 ordinary shares (2020: nil) having an aggregate
nominal value of £6,882,132 (2020: £nil), were purchased under
this programme. Total consideration paid in the year was
£37.7 million, including costs (2020: £nil). The Group
anticipates that this programme will be completed following
the announcement of the results for the year.
The number of treasury shares held at 30 September 2021
was 12,100,834 (2020: 5,218,702), representing 4.83% of the
issued share capital excluding treasury shares (2020: 2.03%).
The holdings at 30 September 2021 and 30 September 2020
represented the maximum holdings in the years then ended.
The highest proportion of issued share capital excluding
treasury shares held during the year was 4.83% (2020: 2.04%).
On 24 November 2021, after the year end, all these treasury
shares were cancelled.
Dividends
The directors recommend a final dividend of 18.9 pence per
share (2020: 14.4 pence per share) which would give a total
dividend for the year of 26.1 pence per share (2020: 14.4 pence
per share). An interim dividend of 7.2 pence per share was paid
during the year (2020: nil pence per share).
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 2021.
Shareholder
M&G PLC
Royal London Asset Management
Liontrust Investment Partners LLP
Dimensional Funds Advisors LP
% Held Notification
date
6.6000
5.9980
5.0700
5.0020
22/10/19
16/06/21
21/09/20
21/07/21
Franklin Templeton Fund Management
5.0016
02/08/21
Pendal Group (formerly J O Hambro
Capital Management Limited)
4.9809
20/08/21
The percentages quoted above were calculated by reference
to the Company’s issued share capital at the date the holding
was disclosed.
On 17 November 2021 Janus Henderson Group PLC notified
the Company that it had increased its interest to 5.0000%.
As at 7 December 2021, no further changes had been notified
to the Company.
Page 158
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 any required
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 2021 no political
donations were made by any Group company (2020: £nil).
Auditors
The directors have taken all reasonable steps to make
themselves and the Company’s auditors, 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.
Annual General Meeting
The AGM of the Company will take place on 2 March 2022
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.
In the event that Covid restrictions on gatherings or travel
are imposed, the Group will make appropriate arrangements
to comply with any such restrictions while ensuring that
shareholders are able to participate in the meeting.
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 39).
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 0.8 million ordinary shares (2020: 1.5 million). 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 39
and details of the share-based remuneration arrangements are
given in note 51.
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.
• 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)
• 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 54 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
•
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 2021, 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.
Marius van Niekerk
Company Secretary
7 December 2021
Page 159
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.
• Assess the ability of the Group and the Company to
continue as a going concern, disclosing, as applicable,
matters related to going concern
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 2021, that law includes the Companies Act
2006 (‘the Companies Act’). That law requires the directors to
prepare the consolidated financial statements in accordance
with IFRS in conformity with the requirements of the
Companies Act and they have also elected to prepare the
financial statements of the Company on the same basis.
In addition the UK Disclosure and Transparency Rules (‘DTR’)
of the FCA requires that the consolidated financial statements
for the current year are prepared in accordance with IFRS
adopted pursuant to EU Regulation (EC) No 1606/2002
(the ‘IAS Regulation’) as it applies in the EU.
IAS 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 and company financial
statements have been prepared in accordance with IFRS in
conformity with the requirements of the Companies Act
• State whether the consolidated financial statements have
been prepared in accordance with IFRS as adopted by the
EU pursuant to the IAS Regulation
• 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
Companies 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.
Page 160
Confirmation by the Board of Directors
The Board of Directors currently comprises:
F S Clutterbuck
(Chair of the Board)
B A Ridpath
(Non-executive director)
N S Terrington
(CEO)
R J Woodman
(CFO)
G H Yorston
(Non-excutive director)
A C M Morris
(Non-executive director)
H R Tudor
(Senior Independant Director)
P A Hill
(Non-executive director)
Each of the directors named above confirms that, to the best
of their knowledge:
• The financial statements, prepared in accordance with
applicable accounting standards, 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 DTR, 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 position,
performance, business model and strategy
Approved by the Board of Directors as the persons
responsible within the Company.
Signed on behalf of the Board
Marius van Niekerk
Company Secretary
7 December 2021
Page 161
Corporate Governance
As part of our Pride at Paragon celebrations,
employees walked together at the 2021
Birmingham Pride Carnival Parade in
support of LGBTQ+ colleagues.
C. Independent Auditor's Report
Report by the independent auditor of the Company, KPMG LLP, on the
financial statements
P164
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 2021 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 61
other than the disclosures labelled as unaudited in note 53
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 2021 and of the Group’s profit for the year
then ended
• the Group financial statements have been properly
prepared in accordance with International Accounting
Standards in conformity with the requirements of the
Companies Act 2006
• the Parent Company financial statements have been
properly prepared in accordance with International
Accounting Standards in conformity with the requirements
of, and as applied in accordance with the provisions of, the
Companies Act 2006
• 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 to the extent applicable
We conducted our audit in accordance with International
Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law.
Our responsibilities are described below. 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 six financial years ended 30 September 2021. 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
judgement, 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 164
Key audit matter
Our response
Impairment allowances on loans to customers
Risk vs 2020:
(£60.9 million; 2020: £81.8 million)
Refer to the Audit Committee Report, accounting policy
note 61 and note 18 (financial disclosures).
We performed the following audit procedures rather
than seeking to rely on the Group’s controls because the
nature of the balance is such that we would expect to
obtain audit evidence primarily through the detailed
procedures described:
• Test of details: Key aspects of our testing involved:
Subjective estimate
The measurement of ECL involves significant judgements
and estimates. A heightened risk of material misstatement
of ECL arises in the current year due to the increased
judgement and estimation uncertainty as a result of
Covid. 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 determine the economic
scenarios used, particularly in the context of Covid,
and the probability weightings assigned to each
economic scenario.
Qualitative adjustments – Management’s adjustments
to the model-driven ECL results to address issues relating
to model responsiveness or emerging trends relating
to Covid. Such adjustments are inherently subjective
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 continues to
exist relating to the treatment of those customers who
were granted one or more Covid 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 18).
Disclosure quality
- 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 the Group’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.
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, 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 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 was sufficiently clear.
•
•
•
•
•
The disclosures regarding the Group’s application of
IFRS 9 are important in 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 (2020: acceptable).
Page 165
Auditor's Report
Key audit matter
Our response
Interest receivable on originated loan accounts
Risk vs 2020:
(£440.0 million; 2020: £440.4 million)
We performed the following audit procedures rather
than seeking to rely on the Group’s controls because
the nature of the balance is such that we would expect
to obtain audit evidence primarily through the detailed
procedures described:
Refer to the Audit Committee Report, accounting policy
note 61 and note 4 (financial disclosures).
Subjective estimate
The recognition of interest receivable on originated loan
accounts under the Effective Interest Rate (‘EIR’) method
requires management to apply judgement, with the most
critical estimate being the loans’ expected behavioural life
for 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 judgemental overlays by management.
The cohorts of loans and advances for which the expected
behavioural life is most significant are buy-to-let products
which were originated by the Group post-2010.
The effect of these matters is that, as part of our risk
assessment, we determined that interest receivable on
originated 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. The financial statements disclose the sensitivities
estimated by the Group (note 63).
We continue to perform procedures over the interest
receivable on acquired loan accounts. However, following
our assessment of the level of audit effort required in
this area, we have not assessed this as one of the most
significant risks in our current year audit and, therefore, it is
not separately identified in our report this year.
•
•
•
•
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 in the current behavioural life forecasts.
Our sector experience: We critically assessed
key assumptions behind the Group’s 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.
Sensitivity analysis: We performed sensitivity analysis
over the repayment profiles by applying alternative
profiles based upon the above procedures.
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 was sufficiently clear.
Our results
The results of our testing were satisfactory, and we found
the resulting estimate of interest receivable on originated
loan accounts and the related disclosures to be acceptable
(2020: acceptable).
Page 166
Key audit matter
Recoverability of goodwill
Risk vs 2020:
(£164.4 million; 2020: £164.4 million)
Refer to the Audit Committee Report, accounting policy
note 61 and note 24 (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.
In calculating the recoverable amount, management 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. The
financial statements (note 24) disclose the sensitivity
estimated by the Group.
Our response
We performed the following audit procedures rather
than seeking to rely on the Group’s controls because
the nature of the balance is such that we would expect
to obtain audit evidence primarily through the detailed
procedures described:
•
•
•
•
•
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 in the
current forecasts.
Our industry experience: 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, including the
discount rate and cashflow forecasts.
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 was
sufficiently clear.
Our results
The results of our testing were satisfactory, and we found
the resulting carrying amount of goodwill and the related
disclosures to be acceptable (2020: acceptable).
Page 167
Auditor's Report Key audit matter
Our response
Valuation of the defined benefit
pension scheme obligation
Risk vs 2020:
(£155.6 million, 2020: £154.9 million)
Refer to the Audit Committee Report, accounting policy
note 61 and note 52 (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 balance sheet, 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).
We performed the following audit procedures rather
than seeking to rely on the Group’s controls because
the nature of the balance is such that we would expect
to obtain audit evidence primarily through the detailed
procedures described:
•
•
Evaluation of actuary: We evaluated the competence,
independence and objectivity of the Group’s actuary
in assessing management’s 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.
Our results
The results of our testing were satisfactory, and we found
the valuation of the defined benefit scheme obligation and
the related disclosures to be acceptable
(2020: acceptable).
Key audit matter
Our response
Recoverability of Parent Company’s investment
in subsidiaries
Risk vs 2020:
(£978.5 million; 2020: £1,030.1 million)
Refer to the accounting policy note 61 and note 25
(financial disclosures).
Low risk, high value
The carrying amount of the Parent Company’s investments
in subsidiaries represents 90.0% (2020: 90.0%) 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.
We performed the following audit procedures rather
than seeking to rely on the Group’s controls because
the nature of the balance is such that we would expect
to obtain audit evidence primarily through the detailed
procedures described:
•
Tests of detail: We compared the carrying amount of
100% of investments with the relevant subsidiary 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
The results of our testing were satisfactory, and we found
the resulting carrying amount of the investments in
subsidiaries to be acceptable (2020: acceptable).
We continue to perform procedures over going concern. However, following the more favourable Covid macroeconomic outlook as
at 30 September 2021, we have not assessed this as one of the most significant risks in our current year audit and, therefore, it is not
separately identified in our report this year.
Page 168
3. Our application of materiality and
an overview of the scope of our audit
Materiality for the group financial statements as a whole
was set at £8.1 million (2020: £6.5 million), determined with
reference to a benchmark of group profit before tax, of which
it represents 3.7% (2020: 4.4%). In 2020 we normalised profit
before tax by averaging over three years due to the impact of
Covid on financial performance.
Materiality for the parent company financial statements as a
whole was set at £3.9 million (2020: £3.9 million), determined
with reference to a benchmark of current year net assets, of
which it represents 0.6% (2020: 0.6%).
In line with our audit methodology, our procedures on
individual account balances and disclosures were performed
to a lower threshold, performance materiality, so as to reduce
to an acceptable level the risk that individually immaterial
misstatements in individual account balances add up to a
material amount across the financial statements as a whole.
Performance materiality was set at 75% (2020: 75%) of
materiality for the financial statements as a whole, which
equates to £6.1 million (2020: £4.9 million) for the Group and
£2.9 million (2020: £2.9 million) for the parent company. We
applied this percentage in our determination of performance
materiality because we did not identify any factors indicating
an elevated level of risk.
We agreed to report to the Audit Committee any
corrected or uncorrected identified misstatements
exceeding £0.40 million (2020: £0.33 million), in addition
to other identified misstatements that warranted reporting
on qualitative grounds.
Of the Group’s two (2020: two) reporting components, we
subjected two (2020: two) to full scope audits for group
purposes. The components within the scope of our work
accounted for 100.0% (2020: 100.0%) of total group revenue,
100.0% (2020: 100.0%) of group profit before tax, and 100.0%
(2020: 100.0%) of group total assets. The work on the two
components was performed by the group team.
4. Going concern
The directors have prepared the financial statements on the
going concern basis as they do not intend to liquidate the
Group or the Company or to cease their operations, and as
they have concluded that the Group’s and the Company’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”).
We used our knowledge of the Group, its industry, and the
general economic environment to identify the inherent risks
to its business model and analysed how those risks might
affect the Group’s and Company’s financial resources or ability
to continue operations over the going concern period. The
risks that we considered most likely to adversely affect the
Group’s and Company’s available financial resources over this
period were:
• the availability of funding and liquidity in the event of a
market wide stress scenario including the impact in which
the global Covid pandemic continues to unfold; and
• the impact on regulatory capital requirements in the event
of an economic slowdown or recession.
We considered whether these risks could plausibly affect the
liquidity in the going concern period by comparing severe,
but plausible downside scenarios that could arise from these
risks individually and collectively against the level of available
financial resources indicated by the Group’s financial forecasts.
We considered whether the going concern disclosure in
note 64 to the financial statements gives a full and accurate
description of the directors’ assessment of going concern.
Our conclusions based on this work:
• we consider that the directors’ use of the going concern
basis of accounting in the preparation of the financial
statements is appropriate;
• we have not identified, and concur with the directors’
assessment that there is not, a material uncertainty related
to events or conditions that, individually or collectively, may
cast significant doubt on the Group’s or Company's ability to
continue as a going concern for the going concern period;
• we have nothing material to add or draw attention to
in relation to the directors’ statement in note 64 to 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 the going concern period, and we found the going
concern disclosure in note 64 to be acceptable; and
• the related statement under the Listing Rules set out on
page 57 is materially consistent with the financial
statements and our audit knowledge.
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 above conclusions are not a guarantee
that the Group or the Company will continue in operation.
5. Fraud and breaches of laws and
regulations - ability to detect
Identifying and responding to risks of material misstatement
due to fraud
To identify risks of material misstatement due to fraud (‘fraud
risks’) we assessed events or conditions that could indicate
an incentive or pressure to commit fraud or provide an
opportunity to commit fraud.
Our risk assessment procedures included:
• Enquiring of directors, Internal Audit and inspection of
policy documentation as to the Group and Parent
Company’s high-level policies and procedures to prevent
and detect fraud, including the Internal Audit function, and
the Group and Parent Company’s channel for
‘whistleblowing’, as well as whether they have knowledge of
any actual, suspected or alleged fraud.
Inspecting Board, Audit Committee and Risk
•
Committee minutes.
• Considering remuneration incentive schemes and
performance targets for management and directors.
• Using analytical procedures to identify any unusual or
unexpected relationships.
We communicated identified fraud risks throughout the audit
team and remained alert to any indications of fraud throughout
the audit.
Page 169
Auditor's Report
As required by auditing standards and taking into account
possible pressures to meet profit targets and our overall
knowledge of the control environment, we perform procedures
to address the risk of management override of controls, and
the risk of fraudulent revenue recognition, in particular the risk
that the EIR adjustment on interest income may be misstated
and the risk that group management may be in a position
to make inappropriate accounting entries and the risk of
bias in accounting estimates and judgements, including the
recoverablility of goodwill and loan loss provisioning.
We performed procedures including:
•
Identifying journal entries to test based on risk criteria
and comparing the identified entries to supporting
documentation
• Assessing significant accounting estimates for bias
Identifying and responding to risks of material misstatement
due to non-compliance with laws and regulations
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 and legal correspondence
and discussed with the directors and other management
the policies and procedures regarding compliance with laws
and regulations.
As the Group is regulated, our assessment of risks
involved gaining an understanding of the control
environment including the entity’s procedures for
complying with regulatory requirements.
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 licence to operate.
We identified the following areas as those most likely to have
such an effect: specific areas of regulatory capital and liquidity,
conduct, money laundering and financial crime and certain
aspects of company legislation recognising the financial and
regulated nature of the Group’s activities. 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. Therefore if a breach of operational
regulations is not disclosed to us or evident from relevant
correspondence, an audit will not detect that breach.
Context of the ability of the audit to detect fraud or breaches
of law or regulation
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
Page 170
non-compliance with laws and regulations 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 fraud, as these may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of
internal controls. Our audit procedures are designed to detect
material misstatement. We are not responsible for preventing
non-compliance or fraud and cannot be expected to detect
non-compliance with all laws and regulations.
6. We have nothing to report on the
other information in the Annual Report
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
•
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
We are required to perform procedures to identify whether
there is a material inconsistency between the directors’
disclosures in respect of emerging and principal risks and the
viability statement, and the financial statements and our audit
knowledge.
Based on those procedures, we have nothing material to add
or draw attention to in relation to:
• the directors’ confirmation within ’Future Prospects’
section (A5) that they have carried out a robust assessment
of the emerging and 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
how emerging risks are identified, and explaining how they
are being managed and mitigated
• 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.
We are also required to review the Viability Statement set out
on pages 54 to 56 under the Listing Rules. Based on the above
procedures, we have concluded that the above disclosures
are materially consistent with the financial statements and our
audit knowledge.
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 judgements 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 perform procedures to identify whether
there is a material inconsistency between the directors’
corporate governance disclosures and the financial
statements and our audit knowledge.
Based on those procedures, we have concluded that each
of the following is materially consistent with the financial
statements and our audit knowledge:
• 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
• the section of the annual report describing the work of the
Audit Committee, including the significant issues that
the Audit Committee considered in relation to the financial
statements, and how these issues were addressed
• the section of the annual report that describes the review
of the effectiveness of the Group’s risk management and
internal control systems
We are required to review the part of the Corporate
Governance Statement relating to the Group’s compliance
with the provisions of the UK Corporate Governance Code
specified by the Listing Rules for our review. We have nothing
to report in this respect.
7. 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.
8. 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 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 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.
9. 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 Ryder (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
66 Queen Square
Bristol
BS1 4BE
7 December 2021
Page 171
Auditor's Report
During Black History Month in October, we were
proud to exhibit work by artist Olivia Glasgow at our
Head Office in Solihull.
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
P174
D1. Primary Financial Statements
P174
P175
P176
P177
P178
P178
P179
P180
P181
P181
P245
P257
P283
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 movements in equity
D1.8 Company statement of movements 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 2021
Interest receivable
Interest payable and similar charges
Net interest income
Other leasing income
Related costs
Net operating lease income
Other income
Other operating income
Total operating income
Operating expenses
Provisions for losses
Operating profit before fair value items
Fair value net gains / (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
Note
2021
£m
20.4
(16.9)
3.5
10.9
4
5
6
6
7
8
18
10
11
Note
13
13
2021
£m
484.2
(173.7)
310.5
14.4
324.9
(135.4)
4.7
194.2
19.5
213.7
(49.2)
164.5
2021
65.2p
63.0p
2020
£m
19.2
(16.2)
3.0
14.0
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
The results for the current and preceding years relate entirely to continuing operations.
Page 174
D1.2 Consolidated statement of comprehensive income
For the year ended 30 September 2021
Profit for the year
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Actuarial gain / (loss) on pension scheme
Tax thereon
Items that may be reclassified subsequently to profit or loss
Cash flow hedge (losses) taken to equity
Tax thereon
Note
2021
£m
52
19
8.2
(0.9)
(3.0)
0.5
Other comprehensive income /
(expenditure) for the year net of tax
Total comprehensive income for the year
2020
£m
(7.4)
2.1
(0.6)
0.1
2021
£m
164.5
7.3
(2.5)
4.8
169.3
2020
£m
91.3
(5.3)
(0.5)
(5.8)
85.5
Page 175
The Accounts D1.3 Consolidated balance sheet
30 September 2021
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
Retirement benefit obligations
Total liabilities
Called up share capital
Reserves
Own shares
Total equity
Note
14
14
15
19
20
36
21
22
23
26
19
27
28
29
30
31
32
36
52
37
38
39
2021
£m
1,142.0
218.1
13,408.2
44.2
69.2
-
14.4
70.4
170.5
15,137.0
0.3
9,297.4
43.9
516.0
730.0
237.1
149.0
2,819.0
90.7
1.4
10.3
2020
£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
2019
£m
816.4
409.0
12,250.3
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
13,895.1
14,349.5
13,287.1
262.5
1,056.1
(76.7)
1,241.9
261.8
932.0
(37.8)
261.6
887.3
(40.5)
1,156.0
1,108.4
Total liabilities and equity
15,137.0
15,505.5
14,395.5
Approved by the Board of Directors on 7 December 2021.
Signed of behalf of the Board of Directors
N S Terrington
Chief Executive
R J Woodman
Chief Financial Officer
Page 176
D1.4 Company balance sheet
30 September 2021
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 7 December 2021.
Signed of behalf of the Board of Directors
N S Terrington
Chief Executive
R J Woodman
Chief Financial Officer
Note
14
20
36
22
25
29
30
32
21
37
38
39
2021
£m
19.6
73.1
-
16.0
978.5
1,087.2
237.1
149.0
41.9
1.8
429.8
262.5
455.6
(60.7)
657.4
2020
£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
£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
1,087.2
1,144.7
1,064.9
Page 177
The Accounts
D1.5 Consolidated cash flow statement
For the year ended 30 September 2021
Net cash generated by operating activities
Net cash (utilised) by investing activities
Net cash (utilised) by financing activities
Net (decrease) / increase 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 2021
Net cash generated by operating activities
Net cash (utilised) 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
Note
41
42
43
14
Note
41
42
43
14
2021
£m
878.1
(4.3)
(1,438.6)
(564.8)
1,924.6
1,359.8
1,360.1
(0.3)
1,359.8
2021
£m
115.9
47.3
(156.2)
7.0
12.6
19.6
19.6
-
19.6
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
Page 178
D1.7 Consolidated statement of movements in equity
For the year ended 30 September 2021
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 40)
Own shares purchased
-
-
-
-
-
-
-
-
-
-
Exercise of share awards
0.7
1.4
Charge for share based
remuneration (note 49)
Tax on share based remuneration
Net movement in equity in
the year
Opening equity
Closing equity
-
-
0.7
261.8
262.5
-
-
1.4
68.7
70.1
For the year ended 30 September 2020
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
50.3
50.3
(70.2)
(70.2)
-
(2.5)
(2.5)
-
-
-
-
-
164.5
7.3
171.8
(54.6)
-
(3.3)
8.9
2.4
(2.5)
2.5
-
125.2
880.7
1,005.9
-
-
-
-
(42.2)
3.3
-
-
(38.9)
(37.8)
(76.7)
164.5
4.8
169.3
(54.6)
(42.2)
2.1
8.9
2.4
85.9
1,156.0
1,241.9
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 40)
Own shares purchased
-
-
-
-
-
-
-
-
-
-
Exercise of share awards
0.2
0.4
Charge for share based
remuneration (note 49)
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
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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
Page 179
The Accounts D1.8 Company statement of movements in equity
For the year ended 30 September 2021
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 40)
Own shares purchased
Exercise of share awards
Charge for share based
remuneration (note 49)
Net movement in equity in
the year
Opening equity
Closing equity
-
-
-
-
-
0.7
-
0.7
261.8
262.5
-
-
-
-
-
1.4
-
1.4
68.7
70.1
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
50.3
50.3
(23.7)
(23.7)
85.5
-
85.5
(54.6)
-
-
8.9
39.8
319.1
358.9
-
-
-
-
(37.7)
-
-
(37.7)
(23.0)
(60.7)
85.5
-
85.5
(54.6)
(37.7)
2.1
8.9
4.2
653.2
657.4
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 40)
Own shares purchased
Exercise of share awards
Charge for share based
remuneration (note 49)
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)
96.0
-
96.0
(35.9)
-
-
2.7
62.8
256.3
319.1
-
-
-
-
-
-
-
-
(23.0)
(23.0)
96.0
-
96.0
(35.9)
-
0.6
2.7
63.4
589.8
653.2
Page 180
D2. Notes to the Accounts
For the year ended 30 September 2021
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 2021
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 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 181
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 2021
Interest receivable
Interest payable
Net interest income
Other operating income
Total operating income
Operating expenses
Provisions for losses
Year ended 30 September 2020
Interest receivable
Interest payable
Net interest income
Other operating income
Total operating income
Operating expenses
Provisions for losses
Mortgage
Lending
Commercial
Lending
Idem
Capital
Unallocated
items
Total
Segments
£m
345.8
(126.6)
219.2
6.1
225.3
(17.4)
5.9
213.8
£m
114.2
(19.7)
94.5
8.0
102.5
(23.9)
(2.9)
75.7
£m
22.7
(2.5)
20.2
0.3
20.5
(5.1)
1.7
17.1
£m
1.5
(24.9)
(23.4)
-
(23.4)
(89.0)
-
(112.4)
£m
484.2
(173.7)
310.5
14.4
324.9
(135.4)
4.7
194.2
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)
2021
£m
194.2
19.5
213.7
£m
491.7
(213.6)
278.1
17.0
295.1
(126.8)
(48.3)
120.0
2020
£m
120.0
(1.6)
118.4
The segmental profits disclosed above reconcile to the group results as shown below.
Results shown above
Fair value items
Operating profit
Page 182
The assets and liabilities attributable to each of the segments at 30 September 2021, 30 September 2020 and 30 September 2019 on
the basis described above were:
Note
15
22
19
14
Note
15
22
19
14
Note
15
22
14
30 September 2021
Segment assets
Loans to customers
Operating lease assets
Cross-currency basis swaps
Securitisation cash
Segment liabilities
Allocated deposits
Securitisation funding
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
Mortgage
Lending
£m
Commercial
Lending
£m
Idem
Capital
£m
Total
Segments
£m
11,608.7
-
-
123.3
11,732.0
10,759.0
1,246.0
12,005.0
1,568.8
39.3
-
-
225.2
13,402.7
-
-
-
39.3
-
123.3
1,608.1
225.2
13,565.3
1,896.9
-
1,896.9
188.5
-
188.5
Idem
Capital
£m
12,844.4
1,246.0
14,090.4
Total
Segments
£m
Mortgage
Lending
£m
Commercial
Lending
£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
303.1
-
303.1
7,492.8
5,206.9
12,699.7
An analysis of the Group’s financial assets by type and segment is shown in note 15. All 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 £13.0m (2020: £12.9m) in assets held for leasing under operating leases. These are included in the Commercial
Lending segment. No other fixed asset additions were allocated to segments.
Page 183
The Accounts
The segmental assets and liabilities may be reconciled to the consolidated balance sheet as shown below.
2021
£m
2020
£m
13,565.3
13,339.6
1,236.8
1,701.6
44.2
31.1
170.5
89.1
18.0
26.6
170.1
249.6
15,137.0
15,505.5
2021
£m
2020
£m
14,090.4
13,738.8
(3,544.0)
43.9
3,205.4
1.4
10.3
87.7
(1,953.9)
132.4
2,301.4
-
20.4
110.4
13,895.1
14,349.5
2021
£m
484.2
20.4
10.9
515.5
351.9
139.1
23.0
514.0
1.5
515.5
2020
£m
491.7
19.2
14.0
524.9
351.4
139.0
31.0
521.4
3.5
524.9
Note
4
6
7
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
Other income
Total revenue
Arising from:
Mortgage Lending
Commercial Lending
Idem Capital
Total revenue from segments
Unallocated revenue
Total revenue
Page 184
4.
Interest receivable
Interest receivable in respect of
Loans and receivables
Finance leases
Factoring 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
On repurchase agreements
Total interest on financial liabilities
On pension scheme deficit
Discounting on contingent consideration
Discounting on lease liabilities
Other finance costs
Note
52
33
2021
£m
440.0
40.4
2.3
482.7
1.5
484.2
2021
£m
443.8
40.4
484.2
2021
£m
120.5
17.9
6.6
9.3
15.4
2.2
0.1
172.0
0.3
0.3
0.2
0.9
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
All interest payable on financial liabilities relates to financial liabilities carried at amortised cost.
173.7
213.6
Page 185
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
7. 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.
8. Operating expenses
Employment costs
Auditor remuneration
Amortisation of intangible assets
Depreciation of operational assets
Other administrative costs
Note
22
49
Note
49
9
23
22
2021
£m
15.2
5.2
20.4
(8.9)
(2.3)
(5.7)
(16.9)
3.5
2021
£m
5.1
1.9
3.5
0.4
10.9
2021
£m
87.9
2.3
2.0
4.3
38.9
135.4
2020
£m
14.5
4.7
19.2
(8.3)
(2.1)
(5.8)
(16.2)
3.0
2020
£m
5.7
1.7
5.0
1.6
14.0
2020
£m
77.6
2.0
2.0
3.5
41.7
126.8
The Group incurred no costs in respect of short-term operating leases in the year (2020: none).
Page 186
9. 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.
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 8)
2021
£m
0.7
1.0
1.7
0.2
-
1.9
0.4
2.3
2020
£m
0.5
1.0
1.5
0.1
0.1
1.7
0.3
2.0
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.
10. Fair value net gains / (losses)
Ineffectiveness of fair value hedges (note 19)
Portfolio hedges of interest rate risk
Deposit hedge
Loan hedge
Ineffectiveness of cash flow hedges
Other hedging movements
Net gains / (losses) on other derivatives
2021
£m
(0.3)
6.6
6.3
-
9.9
3.3
19.5
2020
£m
0.2
0.1
0.3
-
(2.9)
1.0
(1.6)
The fair value net gain / (loss) represents the accounting volatility on derivative instruments which are matching risk exposures 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.
Page 187
The Accounts
11. 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
2021
£m
54.4
1.7
56.1
(6.9)
49.2
2020
£m
25.5
0.5
26.0
1.1
27.1
The standard rate of corporation tax in the UK applicable to the Group in the year was 19.0% (2020: 19.0%), based on currently enacted
legislation. During the year ended 30 September 2020, 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. The effects of the increases in the standard rate for the year ended
30 September 2020 from 18.0% to 19.0%, and the expected rate in subsequent years from 17.0% to 19.0% on deferred tax balances
were accounted for in the year ended 30 September 2020.
During the current financial year, the UK Government enacted legislation increasing the standard rate of corporation tax in the UK to
25.0% from April 2023. The impact of this change on deferred tax balances has been accounted for in these accounts.
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.
When the increase in UK corporation tax to 25% with effect from 1 April 2023 was announced, the UK Government also announced
that they would be undertaking a review of the Banking Surcharge. In October 2021 the UK Government announced its intention to
reduce the level of the Banking Surcharge from 8% to 3% and increase the threshold above which it applies from £25.0m to £100.0m
with effect from 1 April 2023. However this change had not been legislated for at the year end and hence temporary differences in
Paragon Bank PLC which are expected to reverse in the year ending 30 September 2023 and thereafter have been recognised on the
basis of a tax rate of up to 33%, notwithstanding the anticipated legislative changes.
(b) Deferred tax (credit) / charge for the year
The deferred tax (credit) / charge in the income statement comprises the following temporary differences:
Accelerated tax depreciation
Retirement benefit obligations
Loans and derivatives
Share based payments
Utilisation / (creation) of tax losses
Other timing differences
Deferred tax (credit) / charge for the year
Prior period adjustment
Deferred tax (credit) / charge (note 21)
2021
£m
(2.1)
1.3
(4.1)
(1.5)
0.9
(0.4)
(5.9)
(1.0)
(6.9)
2020
£m
(0.4)
1.2
1.4
0.5
(0.9)
(0.3)
1.5
(0.4)
1.1
Classifications of deferred tax movements have been reanalysed in the year to provide better information to users. The disclosure for
2020 shown above has been restated for comparison.
The expected impact on deferred tax balances of the increase in the rate of UK Corporation Tax to 25.0% from April 2023 is included in
the charge for the current year.
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 ended 30 September 2020, the effect of the expected change having been accounted for when
originally enacted.
Page 188
(c) Factors affecting tax charge for the year
Accounting standards require companies to explain the relationship between tax expense and accounting profit. This may be
demonstrated by reconciling the tax charge to the product of the accounting profit 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 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% (2020: 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
Prior year charge
Tax charge for the year
2021
£m
213.7
40.6
(1.1)
(0.3)
(0.5)
9.7
0.8
49.2
2020
£m
118.4
22.5
0.1
0.2
0.1
4.0
0.2
27.1
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.
Had the reduction in the Bank Surcharge referred to above been enacted at the same time as the other changes coming into force on
1 April 2023, the tax charge for the year would have been reduced by £0.5m, with a corresponding increase in the deferred tax asset.
(d) Factors affecting future tax charges
The impact of the increase in the standard rate of corporation tax in the UK means that the element of the Group’s profit not subject to
the Bank Surcharge will be taxed at a rate of 22% for the year ending 30 September 2023 and 25% thereafter. The Group’s overall future
effective tax rate will also be impacted by the future level of the Surcharge and by the proportion of its taxable profit subject to it, with
the proposed reduction in the surcharge and increase in the threshold at which it applies likely to narrow the differential between the
Group’s effective tax rate and the standard rate of corporation tax.
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. As taxable profits arising in 2022,2023 and 2024 will be taxed at 19%, 22%
and 25% respectively and new temporary differences will arise in those periods, there will be some volatility in the effective tax rate
over this period.
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’).
12. Profit attributable to members of Paragon Banking Group PLC
The Company’s profit after tax for the financial year amounted to £85.5m (2020: £96.0m). 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 2021 or 30 September 2020.
Page 189
The Accounts
13. 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
2021
164.5
252.3
8.9
261.2
2020
91.3
253.6
2.5
256.1
65.2p
63.0p
36.0p
35.6p
14. 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
Balances with other banks
Cash and cash equivalents
2021
£m
1,142.0
1,142.0
218.1
218.1
2020
£m
1,637.1
1,637.1
287.9
287.9
2019
£m
816.4
816.4
409.0
409.0
1,360.1
1,925.0
1,225.4
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
2021
£m
1,236.5
123.3
0.3
1,360.1
2020
£m
1,701.1
223.4
0.5
1,925.0
2019
£m
872.1
353.1
0.2
1,225.4
The ‘Cash and Cash Equivalents’ amount of £19.6m (2020: £12.6m, 2019: £14.1m) shown in the Company balance sheet is not subject
to restrictions.
Cash and cash equivalents are classified as Stage 1 exposures (see note 18) 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 190
15. Loans to customers
Loan accounts
Finance lease receivables
Loans to customers
Fair value adjustments from portfolio hedging
Note
16
17
19
2021
£m
12,682.4
720.3
13,402.7
5.5
13,408.2
2020
£m
11,907.0
724.4
12,631.4
109.7
12,741.1
The Group’s loans to customers at 30 September 2021, analysed between the segments described in note 2 are as follows:
2019
£m
11,394.3
791.8
12,186.1
64.2
12,250.3
Total
£m
11,460.6
369.0
229.2
468.7
608.2
267.0
Mortgage
Lending
£m
11,460.6
148.1
-
-
-
-
Commercial
Lending
£m
-
-
224.9
468.7
608.2
267.0
Idem
Capital
£m
-
220.9
4.3
-
-
-
11,608.7
1,568.8
225.2
13,402.7
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
-
-
-
Total
£m
10,636.9
464.2
272.4
478.0
609.0
170.9
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
Page 191
At 30 September 2021
First mortgages
Consumer loans
Motor finance
Asset finance
Development finance
Other commercial loans
Loans to customers
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
The Accounts The Group’s purchased loan portfolios are analysed below.
First mortgage loans
Consumer loans
Motor finance loans
2021
£m
13.4
171.8
4.3
189.5
2020
£m
15.0
220.3
15.5
250.8
Information on the Estimated Remaining Collections (‘ERCs’), the undiscounted forecast collectible amounts, for first mortgages and
consumer loans is given in note 55. All other loans above are internally generated or arise from acquired operations.
16. Loan accounts
Loan accounts at 30 September 2021, 30 September 2020 and 30 September 2019, 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
2021
£m
2020
£m
2019
£m
11,460.6
10,636.9
10,172.5
281.7
87.3
608.2
168.0
76.6
354.5
109.7
609.0
134.4
62.5
389.2
134.7
506.5
125.9
65.5
12,682.4
11,907.0
11,394.3
First mortgages are secured on residential property within the UK; second charge mortgage loans enjoy second charges on UK
residential property.
Other secured commercial lending includes structured lending, aviation mortgages and invoice finance.
Other commercial loans includes principally professions finance, discounted receivables, term loans issued under the RLS, CBILS
and BBLS schemes, and other short term commercial balances.
The amounts of the loan assets above pledged as collateral under the central bank facilities described in note 32 or under the
securitisation and warehouse funding arrangements described in notes 28 and 29 are shown below. These include notes retained by
the Group described in note 56. The table also shows assets prepositioned with the Bank of England for use in future drawings.
First Mortgages
Consumer Finance
£m
£m
2,414.5
1,041.1
2,901.0
6,356.6
3,190.1
1,913.9
11,460.6
-
-
-
-
-
369.0
369.0
Other
£m
-
-
-
-
-
852.8
852.8
Total
£m
2,414.5
1,041.1
2,901.0
6,356.6
3,190.1
3,135.7
12,682.4
30 September 2021
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
Page 192
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
First Mortgages
Consumer Finance
£m
£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
-
-
-
-
-
464.2
464.2
-
-
-
-
-
523.9
523.9
Other
£m
-
-
-
-
-
805.9
805.9
-
-
-
-
-
697.9
697.9
17. Finance lease receivables
The Group’s finance leases can be analysed as shown below.
Motor finance
Asset finance
RLS and CBILS
Carrying value
2021
£m
229.2
440.5
50.6
720.3
2020
£m
272.4
452.0
-
724.4
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
2019
£m
318.9
472.9
-
791.8
With effect from 1 October 2019, the Group’s finance leases have been accounted for in accordance with IFRS 16 (note 59).
Balances shown at 30 September 2019 are accounted for in accordance with IAS 17, however both standards require the same
accounting treatment.
Page 193
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
2021
£m
255.5
220.3
164.8
105.0
50.5
41.6
837.7
(96.3)
741.4
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
2021
£m
225.0
480.2
36.2
741.4
(21.1)
720.3
2020
£m
269.5
221.5
163.6
104.1
43.2
41.6
843.5
(103.4)
740.1
2020
£m
236.5
467.1
36.5
740.1
(15.7)
724.4
2019
£m
292.9
256.8
177.2
101.6
31.1
40.2
899.8
(101.4)
798.4
2019
£m
255.8
506.6
36.0
798.4
(6.6)
791.8
None of the Group’s finance lease receivables were pledged as collateral for liabilities at 30 September 2021 or 30 September 2020.
18. 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 15, 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 year
(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 194
The Group’s process for determining its provisions for impairments is summarised below. This includes:
i. The methods used for the calculation of ECL
ii. How it defines SICR
iii. How it defines default
iv. How it identifies which loans are credit impaired, as defined by IFRS 9
v. How the ECL estimation process is monitored and controlled
vi. How the Group develops and enhances the models it uses in the ECL estimation process
vii. How the Group uses post-model adjustments ('PMAs') to ensure all elements of credit risk are fully addressed
i) 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 (including
cases 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 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 2021 the impact of reduced economic activity in the UK from the Covid 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.
During the year the trend of economic performance has been generally upward, albeit from a low level, meaning that the principal
economic indicators are more positive than at 30 September 2020, though still more depressed than pre-Covid levels. The economic
forecasts indicate continued recovery, but this upward trend will reduce calculated probabilities of default, even where the absolute
levels of metrics remain low and where underlying credit issues on accounts have not emerged, which may result in rising defaults as
government support initiatives unwind.
These factors have led management to conclude that in the current economic conditions, the Group’s models do not fully represent
loss expectations, and PMA’s have been made to compensate for these weaknesses.
ii) 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 a 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.
Page 195
The Accounts 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 a SICR in the Covid environment the granting of Covid related reliefs, including payment
holidays and similar arrangements, may mean that a 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 relief did not, of itself,
indicate a 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.
When reviewing the subsequent payment patterns of accounts that have been granted Covid-related reliefs, it has been evident that
there is higher payment volatility (both in terms of account improvement and deterioration) in these cases, particularly in cases where
an extension to the payment holiday has been granted. This indicates an increased credit risk, though the impact is not significant in
scale in all cases. As a result of this analysis the accounts of customers who have been granted extended payment reliefs have been
placed in Stage 2, regardless of other indicators. This aligns the Group’s approach to regulatory guidance which suggested that while
initial payment reliefs should not automatically be taken as a indication of a SICR, an extension to such a relief was more likely to
be so.
The effect of this override is to transfer accounts with gross balances of £599.8m (2020: £576.3m) to Stage 2. The additional provision
on transfer is included within PMAs.
This overall approach remains consistent with that taken at 30 September 2020. In reviewing account performance during the current
year the Group has not yet identified any positive evidence which would cause it to begin to unwind this position. It will be reviewed
going forward as other government economic interventions are scaled back and the post-relief credit characteristics of such accounts
become more evident.
iii) 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 broadly 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 90 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.
iv) Credit Impaired loans
IFRS 9 defines a credit impaired account as one where an account has suffered one or more events which have 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 a 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 90 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 probationary accounts, receiver of rent accounts, accounts subject to realisation / enforcement procedures
and long term managed accounts, all of which are treated as credit impaired. While other indicators of default are in use, the
categories shown account for the overwhelming majority of Stage 3 cases.
v) Monitoring of ECL estimation processes
The Group’s ECL models are compiled on the basis of the analysis of relevant historical data. Before a model is adopted for use
its operations and outputs are examined to ensure that it is expected to be appropriately predictive and, if it is an updated model,
expected to be more predictive than any existing model. Before a new model is adopted the changes and impacts will be considered
by the CFO, alongside any advice from the Group’s independent model review functions.
The performance of all models is reviewed on an ongoing basis, by senior finance and risk management, including the CFO.
Monitoring packs comparing actual and predicted loss levels are produced at regular intervals, set on the basis of the materiality of
each model. The continuing appropriateness of model assumptions is also reviewed as part of this process.
Models are revisited on a regular basis to ensure that they continue to reflect the most recent data as the available information
increases over time.
Page 196
On a monthly basis all model outputs, model overlays and provisions calculated for non-modelled books are reviewed by senior
finance management including the CFO in conjunction with the latest credit risk operational and economic metrics to ensure that
the impairment provision by asset type remains appropriate. This exercise will be the subject of particular focus at year end and
the half year.
This information is summarised for the Audit Committee on a biannual basis, and they have regard to this data in forming their
conclusions on the appropriateness of provisioning levels.
vi) Model development
The models used by the Group are updated from time to time to allow for changes in the business, developments in best practice and
the availability of additional data with the passing of time. During the year ended 30 September 2021 a major update to the buy-to-let
PD model took place.
All revised models and model enhancements are carefully reviewed and tested before adoption, and are subject to a governance
process for their approval.
As a result of the reanalysis of updated historical data, the economic inputs identified as most predictive of future PD performance
were changed, with the UK unemployment rate being substituted for UK GDP in the model as the indicator of general UK economic
activity levels.
The impacts of the adoption of the new PD model on the calculated provision were not significant.
vii) Post Model Adjustments (‘PMA’s)
Where management has identified a requirement to amend the calculated provision as a result of either model deficiencies or
idiosyncratic behaviour in part of the portfolio, PMAs are applied to the modelled outputs so that the ECL recognised corresponds
to expert judgement, taking into account the widest possible range of current information, which might not be factored into the
modelling process.
In normal circumstances the Group’s objective is to develop its modelling to the point where the level of PMAs required is minimal, but
in economic conditions where previous relevant experience is limited or non-existent, as with Covid, some form of PMA is always likely
to be necessary.
The current model behaviour and the potential for unobserved credit issues have meant that the requirement for such adjustments
at 30 September 2021 was significant. Evidence considered by management included internal performance data, customer feedback,
evidence on the wider economy and quantitative and qualitative data and statements from industry, government and regulatory
bodies. These were combined to form a broad estimate of the level of provision required across the Group.
The total amounts of PMAs provided across the Group are set out below by segment.
Mortgage Lending
Commercial Lending
Idem Capital
2021
£m
8.9
11.2
0.3
20.4
2020
£m
14.0
5.8
-
19.8
Other than the behaviour of extended payment relief cases noted above, this analysis found no evidence of particular concentrations
of credit risk below portfolio level. Given this, and the high level nature of the PMA exercise, the PMAs have been allocated on a broad
brush basis to individual cases.
The Group will continue to monitor the requirement for these PMAs as the economic situation develops and the impact of
government interventions recedes.
Page 197
The Accounts (b)
Impairments by stage and division
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
a SICR (Stage 2); and loans which are impaired (Stage 3).
• On initial recognition, and for assets where there has not been a 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 a 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 (those 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.
POCI
£m
13.4
6.9
104.0
124.3
-
(0.2)
-
(0.2)
13.4
6.7
104.0
124.1
-
2.90%
-
0.16%
Total
£m
11,643.5
1,596.5
228.1
13,468.1
(34.8)
(27.7)
(2.9)
(65.4)
11,608.7
1,568.8
225.2
13,402.7
0.30%
1.74%
1.27%
0.49%
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
10,303.7
1,504.2
92.5
11,900.4
(1.7)
(12.9)
(0.4)
(15.0)
10,302.0
1,491.3
92.1
11,885.4
0.02%
0.86%
0.43%
0.13%
1,206.4
66.4
6.3
1,279.1
(10.2)
(1.0)
(0.1)
(11.3)
1,196.2
65.4
6.2
1,267.8
0.85%
1.51%
1.59%
0.88%
120.0
19.0
25.3
164.3
(22.9)
(13.6)
(2.4)
(38.9)
97.1
5.4
22.9
125.4
19.08%
71.58%
9.49%
23.68%
30 September 2021
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 2 and 3 balances are analysed in more detail below.
Page 198
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%
* Stage 2 and 3 balances are analysed in more detail below.
Finance leases included above, analysed by staging, were:
30 September 2021
Gross loan book
Impairment provision
Net loan book
Stage 1
£m
704.9
(7.9)
697.0
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%
Stage 2
£m
14.9
(0.5)
14.4
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%
Stage 3
£m
17.3
(12.7)
4.6
Coverage Ratio
1.12%
3.36%
73.41%
30 September 2020
Gross loan book
Impairment provision
Net loan book
676.6
(9.3)
667.3
33.6
(0.9)
32.7
14.4
(5.5)
8.9
Coverage Ratio
1.37%
2.68%
38.19%
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%
POCI
£m
4.3
-
4.3
-
15.5
-
15.5
-
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%
Total
£m
741.4
(21.1)
720.3
2.85%
740.1
(15.7)
724.4
2.12%
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 199
The Accounts 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.
Cases which have been greater than one month in arrears in the last three months, but which are not at the balance sheet date are
shown as ‘recent arrears’ in the tables below. These cases have been analysed separately for the first time in the current year.
In all cases accounts which are more than one month in arrears, where this is a meaningful measure, are considered to have a SICR.
However, in certain loan portfolios, regular monthly payments of pre-set amounts are not required and hence this criterion cannot
be used.
Levels of Stage 2 assets increased substantially during the early part of the Covid outbreak, and have been broadly stable over the
course of the year. The largest part of the Stage 2 balance at 30 September 2021 related to extended payment holiday accounts
transferred from Stage 1. These are shown in the < 1 month arrears column in the table below. As fewer extensions were granted after
30 September 2020, the rate of increase of such Stage 2 cases has been much reduced in the period.
Coverage levels in Stage 2 across the portfolios have reduced since 30 September 2020, with an improved economic outlook and
increasing security values. However, these remain higher than those seen pre-pandemic, due to the impact of PMAs, particularly on
‘<1 month arrears’ cases. Coverage ratios of ‘> 1 < = 3 months arrears’ cases have been varied due to the composition of the relatively
small balances, particularly in the Commercial Lending and Idem Capital divisions.
< 1 month
arrears
£m
1,184.8
61.1
2.9
1,248.8
(9.9)
(0.9)
-
(10.8)
1,174.9
60.2
2.9
1,238.0
0.84%
1.47%
-
0.86%
Recent
arrears
> 1 <= 3 months
arrears
£m
8.0
0.2
0.7
8.9
(0.1)
-
-
(0.1)
7.9
0.2
0.7
8.8
£m
13.6
5.1
2.7
21.4
(0.2)
(0.1)
(0.1)
(0.4)
13.4
5.0
2.6
21.0
1.25%
-
-
1.12%
1.47%
1.96%
3.70%
1.87%
Total
£m
1,206.4
66.4
6.3
1,279.1
(10.2)
(1.0)
(0.1)
(11.3)
1,196.2
65.4
6.2
1,267.8
0.85%
1.51%
1.59%
0.88%
30 September 2021
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 200
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
£m
Recent
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%
5.9
10.5
1.6
18.0
(0.2)
(0.1)
-
(0.3)
5.7
10.4
1.6
17.7
3.39%
0.95%
-
1.67%
17.4
8.6
3.5
29.5
(0.4)
(0.4)
(0.1)
(0.9)
17.0
8.2
3.4
28.6
2.30%
4.65%
2.86%
3.05%
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%
Analysis of Stage 3 loans
The table below analyses the accounts in Stage 3 between those:
•
In the process of sale or other enforcement procedures (‘Realisations’)
• Where a receiver of rent (‘RoR’) has been appointed by the Group to manage the property on the customers’ behalf
• Which are being managed on a long-term basis and where full recovery is possible, but which are considered to meet regulatory
default criteria at the balance sheet date (‘>3 month arrears’)
• Which no longer meet regulatory default criteria but which are being retained in Stage 3 for a probationary period (‘Probation’)
Where an account meets two of the criteria, it will be assigned to the category shown first in the list above.
In these disclosures probation accounts have been analysed separately for the first time, in order to provide better information
for users.
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.
The impact of Covid on the number and value of Stage 3 accounts has been limited so far. Payment reliefs have prevented arrears
being recorded and other enforcement activities have been limited by government intervention. This particularly impacts on cases
analysed as ‘realisations’.
The completion of payment relief periods has led to some increases in > 3 month arrears cases, particularly in the Mortgage
Lending business, while credit reviews have identified at risk cases in other areas. This increase is, however, offset by the continuing
realisations from the receiver of rent portfolio as long-term cases are managed out.
Coverage levels have generally reduced a little from 30 September 2020 as a result of increased security values, while remaining
substantially in excess of pre-Covid levels. The coverage ratio for Commercial Lending is subject to fluctuations as the number of
cases is relatively low and the ratio can be significantly influenced by individual larger cases.
Page 201
The Accounts Probation
> 3 month arrears
RoR managed
Realisations
£m
7.3
0.6
0.7
8.6
(0.3)
(0.1)
-
(0.4)
7.0
0.5
0.7
8.2
£m
£m
£m
20.7
11.4
21.3
53.4
(0.9)
(10.3)
(1.0)
(12.2)
19.8
1.1
20.3
41.2
80.9
-
-
80.9
(17.4)
-
-
(17.4)
63.5
-
-
63.5
11.1
7.0
3.3
21.4
(4.3)
(3.2)
(1.4)
(8.9)
6.8
3.8
1.9
12.5
Total
£m
120.0
19.0
25.3
164.3
(22.9)
(13.6)
(2.4)
(38.9)
97.1
5.4
22.9
125.4
4.11%
16.67%
-
4.65%
4.35%
90.35%
4.69%
22.85%
21.51%
-
-
21.51%
38.74%
45.71%
42.42%
41.59%
19.08%
71.58%
9.49%
23.68%
30 September 2021
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 202
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
Probation
> 3 month arrears
RoR managed
Realisations
£m
£m
£m
£m
6.5
3.2
1.0
10.7
(0.3)
(0.9)
-
(1.2)
6.2
2.3
1.0
9.5
12.9
11.2
24.3
48.4
(1.5)
(4.1)
(2.8)
(8.4)
11.4
7.1
21.5
40.0
86.7
-
-
86.7
(20.8)
-
-
(20.8)
65.9
-
-
65.9
20.9
5.8
3.6
30.3
(8.1)
(3.2)
(1.7)
(13.0)
12.8
2.6
1.9
17.3
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
4.62%
28.12%
-
11.21%
11.63%
36.61%
11.52%
17.36%
23.99%
-
-
23.99%
38.76%
55.17%
47.22%
42.90%
24.17%
40.59%
15.57%
24.65%
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
2021
£m
74.7
15.4
4.7
2.0
96.8
2020
£m
71.9
17.3
6.7
1.5
97.4
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 203
The Accounts 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 2021
30 September 2020
No.
333
56
24
86
499
54
553
£m
56.3
9.1
3.3
12.2
80.9
10.2
91.1
No.
369
72
29
46
516
104
620
£m
62.4
12.4
4.2
7.7
86.7
19.7
106.4
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, no POCI mortgage accounts also had a receiver of rent appointed (2020: 3), making a total of
553 (2020: 623).
(c) Movements in impairment provision in the year
The movements in the impairment provision calculated under IFRS 9, analysed by business segments, are set out below.
At 30 September 2020
(Released) / provided in period (note 18(d))
Amounts written off
At 30 September 2021
At 30 September 2019
Provided in period (note 18(d))
Amounts written off
At 30 September 2020
Mortgage
Lending
Commercial
Lending
Idem
Capital
£m
48.3
(5.9)
(7.6)
34.8
26.8
25.8
(4.3)
48.3
£m
28.6
4.0
(4.9)
27.7
10.7
22.7
(4.8)
28.6
£m
4.9
(1.2)
(0.8)
2.9
4.4
1.3
(0.8)
4.9
Total
£m
81.8
(3.1)
(13.3)
65.4
41.9
49.8
(9.9)
81.8
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 2021, enforceable contractual balances of £8.8m (2020: £5.5m) 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 204
A more detailed analysis of these movements by IFRS 9 stage on a consolidated basis for the year ended 30 September 2021 and
30 September 2020 is set out below.
These tables, and the matching tables analysing movements in gross balances, have been compiled by comparing opening and
closing balances on each account and analysing the movements between them.
Changes due to credit risk includes all changes in model parameters whether related to account performance, external credit data or
model assumptions, including economic scenarios and weightings.
There have been no changes in models creating significant movements in balances in the year.
Loss allowance at 30 September 2020
New assets originated or purchased
Changes in loss allowance
Transfer to Stage 1
Transfer to Stage 2
Transfer to Stage 3
Changes on stage transfer
Changes due to credit risk
Write offs
Loss allowance at 30 September 2021
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 on stage transfer
Changes due to credit risk
Write offs
Loss allowance at 30 September 2020
Stage 1
Stage 2
Stage 3
£m
22.2
8.1
4.7
(1.4)
(0.2)
(3.8)
(14.6)
-
15.0
6.0
10.2
0.9
(1.2)
(0.5)
(0.5)
7.3
-
22.2
£m
15.8
-
(2.6)
2.1
(0.7)
1.8
(5.1)
-
11.3
3.7
-
(0.7)
1.3
(0.4)
7.5
4.4
-
15.8
£m
43.4
-
(2.1)
(0.7)
0.9
3.1
7.6
(13.3)
38.9
32.2
-
(0.2)
(0.1)
0.9
6.2
14.3
(9.9)
43.4
POCI
£m
0.4
-
-
-
-
-
(0.2)
-
0.2
-
-
-
-
-
-
0.4
-
0.4
Total
£m
81.8
8.1
-
-
-
1.1
(12.3)
(13.3)
65.4
41.9
10.2
-
-
-
-
26.4
(9.9)
81.8
The principal movements in the impairment provision in the year were downwards, with a more benign economic outlook reducing
both the estimated likelihood of losses and the expected loss on defaulted cases as security values improved. However coverage
levels still remain in excess of those pre-Covid, with PMAs in place to compensate for the potential impact of credit issues not
apparent in the data.
While less accounts have been granted payment holiday extensions in the year than in the year ended 30 September 2020, this has
driven further transfers from Stage 1 to Stage 2. Transfers to Stage 3 reflect principally a small number of realisation cases and other
cases identified through credit review. Write offs largely relate to the realisation of already provided losses on cases being worked out
on a long-term basis.
In the year ended 30 September 2020 the principal factor generating the increase in the loss allowance in the period was the impact
of the Covid crisis, which 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 was
also reflected, with extended payment holiday accounts transferred to Stage 2 and PMAs made to allow for the potential delay in the
recognition of credit issues due to reliefs.
Page 205
The Accounts
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 2020
New assets originated or purchased
Changes in staging
Transfer to Stage 1
Transfer to Stage 2
Transfer to Stage 3
Redemptions and repayments
Write offs
Other changes
Balance at 30 September 2021
Loss allowance
Carrying value
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
Write offs
Other changes
Balance at 30 September 2020
Loss allowance
Carrying value
Stage 1
£m
11,329.7
2,419.4
158.5
(514.2)
(23.7)
(1,884.9)
-
415.6
11,900.4
(15.0)
11,885.4
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
Stage 2
£m
1,045.4
-
(149.5)
519.6
(21.6)
(158.6)
-
43.8
1,279.1
(11.3)
1,267.8
458.5
-
(200.1)
849.2
(20.5)
(54.1)
-
12.4
1,045.4
(15.8)
1,029.6
Stage 3
£m
176.1
-
(9.0)
(5.4)
45.3
(35.7)
(13.3)
6.3
164.3
(38.9)
125.4
167.9
-
(2.2)
(3.0)
63.1
(42.0)
(9.9)
2.2
176.1
(43.4)
132.7
POCI
£m
162.0
-
-
-
-
(53.1)
-
15.4
124.3
(0.2)
124.1
219.0
-
-
-
-
(78.1)
-
21.1
162.0
(0.4)
161.6
Total
£m
12,713.2
2,419.4
-
-
-
(2,132.3)
(13.3)
481.1
13,468.1
(65.4)
13,402.7
12,228.0
2,071.4
-
-
-
(1,662.5)
(9.9)
86.2
12,713.2
(81.8)
12,631.4
Other changes includes interest and similar charges.
Page 206
(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 2021
(Released) / provided in period
Recovery of written off amounts
Of which
Loan accounts
Finance leases
30 September 2020
Provided in period
Recovery of written off amounts
Of which
Loan accounts
Finance leases
£m
(5.9)
-
(5.9)
(5.9)
-
(5.9)
25.8
-
25.8
25.8
-
25.8
£m
4.0
(1.1)
2.9
(2.1)
5.0
2.9
22.7
(1.0)
21.7
9.5
12.2
21.7
Idem
Capital
£m
(1.2)
(0.5)
(1.7)
(1.7)
-
(1.7)
1.3
(0.5)
0.8
0.8
-
0.8
Total
£m
(3.1)
(1.6)
(4.7)
(9.7)
5.0
(4.7)
49.8
(1.5)
48.3
36.1
12.2
48.3
(e) Economic inputs to provision calculations
Impairment provision under IFRS 9 is calculated on a forward-looking ECL basis, based on expected economic conditions in
multiple internally coherent scenarios. While the provision calculation is intended to address all possible future economic outcomes,
the Group, in common with most other lenders, uses a small number of differing scenarios as representatives of this universe of
potential outturns.
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 data and forecasts
produced by the Office of Budget Responsibility (‘OBR’) and the PRA as well as private sector economic research bodies. The Group
also takes account of public statements from bodies such as the Bank of England and the UK Government to inform its final position.
The central scenario used for IFRS 9 impairment purposes is the same scenario which forms the basis of the Group’s business
planning and forecasting and will therefore generally carry the highest probability weighting. In its September 2021 forecasting cycle
(the ‘October forecast’), the Group has adopted a central economic scenario derived using a broadly equivalent approach to that used
in September 2020, with the starting point of the scenario updated to reflect the actual movements of economic variables in the year.
The general trend of the Group’s central forecast is consistent with the monetary forecast published by the Bank of England in
August 2021.
Compared to the central scenario adopted at 30 September 2020, the new central forecast is broadly similar across the five year
period, but more optimistic as to short term prospects. This 2021/2022 upgrade is a result of the opening position being better than
implied in the 2020 central scenario, progress made to date in combatting the pandemic in the UK, including the success of the
vaccination programme, and a more positive outlook from economists generally.
The upside and downside scenarios continue to be derived from the central scenario, as they have been in previous periods. However,
these scenarios are not as markedly different in shape as those used at September 2020 nor as widely divergent from the central
position, with a greater level of consensus as to the shape and timing of the post-Covid trajectory of the UK economy emerging
amongst analysts and commentators. It should be noted that the 2020 scenarios converged towards the latter part of the five-year
period, as Covid impacts receded. Therefore, a less divergent starting point for the 2021 scenarios is in line with this expectation.
The severe scenario has been derived from the stress testing scenarios published by the Bank of England, as in previous periods.
The stress testing scenario published in January 2021 was used in this iteration of the Group’s forecasts. This is a more severe
scenario than that published for 2020. The Bank of England scenario includes a house price projection based on a sharp decline and
a rapid bounce back, which would have a limited impact on expected losses. As house prices have a significant impact on the Group’s
modelling of losses, it was determined that the impact of a more protracted slump, would better represent a severe downturn and the
Bank of England scenario was adjusted accordingly.
Page 207
The Accounts The overall shape of the scenarios adopted, and the change in the forecasts year-on-year is illustrated by the forecasts of the UK’s
unemployment rate set out in the charts below. The unemployment rate has been presented as it is the principal indicator of general
economic activity used in modelling losses in the Group’s buy-to-let mortgage portfolio.
In the accounts for the year ended 30 September 2020, a chart of UK GDP was presented as that was the principal indicator of general
economic activity in the buy-to-let ECL model then in use (see above).
Historical and forecast unemployment rates (End point measure)
As at 30 September 2021 GDP growth rates (%)
14%
12%
10%
8%
6%
4%
2%
0%
Reporting
date
End of forecase period
used for senario modelling
2019/2020
FY
2020/2021
FY
2021/2022
FY
2022/2023
FY
2023/2024
FY
2024/2025
FY
Central
Upside
Downside
Severe
Historical and forecast unemployment rates (End point measure)
As at 30 September 2020 GDP growth rates (%)
14%
12%
10%
8%
6%
4%
2%
0%
Reporting
date
End of forecase period
used for senario modelling
2019/2020
FY
2020/2021
FY
2021/2022
FY
2022/2023
FY
2023/2024
FY
2024/2025
FY
Central
Upside
Downside
Severe
Following a review of the weightings of the different scenarios, set against the overall potential for variability in the future economic
outlook, the Group decided to maintain the scenario weightings used at 30 September 2020.
Page 208
The weightings attached to each scenario are set out below.
Central scenario
Upside scenario
Downside scenario
Severe scenario
2021
40%
10%
35%
15%
100%
2020
40%
10%
35%
15%
100%
The Group’s economic scenarios comprise seven variables based on standard publicly available metrics for the UK.
These variables are:
• Year-on-year change in Gross Domestic Product (‘GDP’) as measured by the Office of National Statistics (‘ONS’)
• Year-on-year change in the House Price Index (‘HPI’) as measured by the Nationwide Building Society
• Bank Base Rate (‘BBR’), as set by the Bank of England
• Consumer Price Inflation (‘CPI’) rate, as measured by the ONS
• Unemployment rate, as measured by the ONS
• Annual change in secured lending, as measured by the Bank of England ‘mortgage advances’ data series
• Annual change in consumer credit, as measured by the Bank of England ‘unsecured advances’ data series
Page 209
The Accounts The projected average annual values of each of these variables in each of the first five financial years of the forecast period are set
out below.
30 September 2021
Gross Domestic Product (‘GDP’) (year-on-year change)
2022
7.2%
8.6%
3.9%
(3.7)%
2022
0.7%
4.0%
(4.9)%
(10.9)%
2022
0.1%
0.1%
0.1%
-
2022
3.8%
3.0%
4.2%
0.9%
2022
5.4%
4.6%
5.8%
9.4%
2022
4.4%
5.3%
3.3%
1.5%
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 210
2023
2.0%
2.5%
3.4%
8.9%
2023
2.1%
3.9%
(5.9)%
(11.6)%
2023
0.1%
0.5%
0.1%
(0.1)%
2023
2.3%
2.1%
3.0%
0.4%
2023
5.1%
4.3%
5.5%
11.5%
2023
3.6%
4.8%
2.8%
(2.4)%
2024
1.3%
2.1%
2.1%
4.9%
2024
2.7%
4.5%
-
(7.9)%
2024
0.4%
0.9%
0.2%
-
2024
1.9%
2.0%
2.1%
0.9%
2024
4.7%
4.3%
5.1%
8.7%
2024
3.1%
4.3%
2.9%
(1.0)%
2025
1.6%
1.8%
1.9%
2.6%
2025
3.2%
4.7%
2.1%
(1.8)%
2025
0.7%
1.0%
0.3%
-
2025
2.0%
2.0%
2.0%
1.5%
2025
4.3%
4.0%
4.7%
5.8%
2025
3.2%
3.8%
3.6%
1.3%
2026
1.9%
1.9%
1.9%
2.0%
2026
3.0%
2.6%
2.1%
0.7%
2026
0.8%
1.0%
0.5%
0.1%
2026
2.0%
2.0%
2.0%
1.9%
2026
4.2%
3.8%
4.6%
4.9%
2026
3.3%
3.8%
3.9%
2.5%
Consumer credit (annual change)
Central scenario
Upside scenario
Downside scenario
Severe scenario
2022
2.6%
4.3%
2.3%
0.6%
30 September 2020
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
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%
2023
4.4%
6.5%
2.0%
5.1%
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%
2024
5.5%
7.3%
2.0%
1.2%
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%
2025
6.1%
8.0%
2.0%
1.7%
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%
2026
6.2%
8.3%
2.3%
4.0%
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%
Page 211
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
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%
4.1%
3.7%
3.4%
2024
6.3%
6.9%
5.4%
4.0%
2025
3.9%
4.0%
3.8%
3.7%
2025
6.3%
6.7%
5.7%
4.8%
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 commencing on the balance sheet date are set out below.
Central scenario
Upside scenario
Downside scenario
Severe scenario
Max
%
11.5
6.1
0.8
4.0
5.5
4.8
6.4
Min
%
1.1
(4.0)
0.1
1.8
4.1
3.0
0.4
Max
%
13.3
7.7
1.0
3.8
4.7
5.5
8.5
Min
%
1.6
0.6
0.1
1.8
3.8
3.5
1.9
Max
%
7.3
2.9
0.5
4.5
5.9
4.0
4.6
Min
%
0.9
(9.8)
0.1
1.8
4.5
2.5
(0.1)
Max
%
14.3
2.4
0.2
2.0
11.9
3.1
9.2
Min
%
(5.9)
(16.9)
(0.1)
0.2
4.8
(2.5)
(8.9)
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)
30 September 2021
Economic driver
GDP
HPI
BBR
CPI
Unemployment
Secured lending
Consumer credit
30 September 2020
Economic driver
GDP
HPI
BBR
CPI
Unemployment
Secured lending
Consumer credit
Page 212
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.
Provision using central scenario 100% weighted
Mortgage Lending
Commercial Lending
Idem Capital
Calculated impairment provision
Effect of multiple economic scenarios
(f) Sensitivity
2021
£m
24.6
26.0
2.1
52.7
65.4
12.7
2020
£m
37.2
26.7
3.5
67.4
81.8
14.4
The calculation of impairment provisions 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.
These sensitivities are intended as mathematical illustrations of the impacts of the various assumptions on the Group’s modelling.
They do not necessarily represent alternative potential impairment values as other factors might also need to be considered in
arriving at a final provision figure if circumstances differed from those at the balance sheet date.
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 are shown below.
Scenario
Central
Upside
Downside
Severe
2021
2020
Provision
Difference
Provision
Difference
£m
52.7
47.1
68.1
106.1
£m
(12.7)
(18.3)
2.7
40.7
£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 impact of post-model stage adjustments at 30 September 2020, the effect on the PD SICR test
of 100% weighting has not been taken into account in the calculations at that date
Scenario weightings
In order to illustrate the impact of scenario weightings on the outcomes, the impairment provision requirements were sensitised using
alternative weightings. The sensitivity is based on the weightings used at IFRS 9 transition on 1 October 2018. The use of the 2018
weighting is intended to represent a more settled outlook than has been evident at either of the two most recent year ends. PMAs are
assumed to remain constant
The weightings used, and the results of applying this sensitivity to the 30 September 2021 scenarios are set out below.
As reported
Sensitivity
Weighting
Impairment
Difference
Central
Upside
Downside
40%
40%
10%
30%
35%
25%
Severe
15%
5%
£m
65.4
57.6
£m
-
(7.8)
Page 213
The Accounts 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 £99.0m would transfer from Stage 1 to Stage 2 (2020: £53.3m), and the total provision would increase
by £1.1m 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 (2020: £1.6m).
Value of security
The principal assumptions impacting on LGD 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 £3.3m (2020: £5.9m).
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 £0.6m (2020: £0.8m).
19. 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 55 to 58) 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 for accounting purposes 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 were used during the year to manage the foreign exchange and interest rate risk inherent in its
currency borrowings
An economic hedge of the interest rate risk in fixed rate lending must 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. These are not treated as hedges for accounting purposes due to the low level of exposure.
Page 214
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 2021 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
2021
Assets
£m
2021
Liabilities
£m
2020
Assets
£m
2020
Liabilities
£m
35.9
2.8
38.7
-
-
-
(35.8)
(5.9)
(41.7)
-
-
-
-
14.4
14.4
213.2
232.1
445.3
(130.0)
-
(130.0)
-
-
-
Total derivatives in hedge accounting relationships
38.7
(41.7)
459.7
(130.0)
Other derivatives
Interest rate swaps
Currency futures
Total recognised derivative assets/(liabilities)
5.5
-
44.2
(2.0)
(0.2)
(43.9)
3.4
0.2
463.3
(2.4)
-
(132.4)
The credit risk inherent in the derivative financial assets shown above is discussed in note 55.
(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 57. 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 Asset and Liability 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
• 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
Page 215
The Accounts
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 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, PM26, PM27 and PM28, where the funding
rate is SONIA-linked, was also undertaken with reference to SONIA.
During the year the Group has continued to hedge interest rate risk on fixed rate CBILS and BBLS exposures using SONIA-linked
basis guarantee swaps, which are included in the loan hedge.
As part of an agreement reached with the noteholders of PM25, described in note 28, to transition that transaction to a SONIA-linked
basis, all LIBOR-linked derivatives owned by that entity will transition to SONIA on an agreed basis by 15 February 2022, with the final
reset of each falling in or before December 2021.
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 scheduled to become unavailable. The ISDA, the trade
organisation for derivatives, have released a protocol which incorporates fallback provisions to facilitate transition to SONIA when
LIBOR ceases and the Group expects to transition its remaining LIBOR-linked derivatives in accordance with the protocol before
LIBOR cessation.
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.
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 55)
• 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.
Page 216
Hedging Instruments
The hedging portfolios at 30 September 2021 and 30 September 2020 consist of a large number of sterling denominated swaps. In
addition, there are a small number of Balance Guarantee Swaps (‘BGS’) in place at both dates. 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
2021
2020
Deposit hedge
Loan hedge
Deposit hedge
Loan hedge
0.16%
0.69%
0.42%
0.91%
-
-
£m
471.5
-
2,415.0
2,886.5
2,224.5
422.0
240.0
-
2,886.5
-
-
£m
3,121.4
62.6
2,876.2
6,060.2
920.7
1,712.7
3,421.3
5.5
6,060.2
-
-
£m
1,147.5
-
1,043.0
2,190.5
1,287.5
669.0
234.0
-
2,190.5
-
-
£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
Fair value
(3.1)
0.1
14.3
(129.9)
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 217
The Accounts
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
2021
2020
Deposit hedge
Loan hedge
Deposit hedge
Loan hedge
£m
£m
£m
£m
2.8
(5.9)
(3.1)
2,886.5
(15.4)
35.9
(35.8)
0.1
6,060.2
128.6
14.3
-
14.3
2,190.5
6.6
-
(129.9)
(129.9)
5,311.3
(48.1)
2021
2020
Deposit hedge
Loan hedge
Deposit hedge
Loan hedge
Hedged items
Fixed rate deposits
Monetary amount of risk relating to Retail Deposits
2,730.4
-
2,083.9
Fixed rate loans
£m
£m
£m
£m
-
Monetary amount of risk relating to Loans to Customers
-
6,120.7
-
5,353.4
Accumulated amount of fair value hedge adjustments included on
balance sheet (notes 15 and 26)*
Of which: amounts related to discontinued hedging relationships
being amortised
Change in fair value used in recognising hedge ineffectiveness
3.0
(1.7)
15.1
5.5
6.9
(122.0)
(10.4)
-
(6.4)
109.7
(11.6)
48.2
Hedge ineffectiveness recognised
Included in fair value gains / (losses) in the profit and loss account
(0.3)
6.6
0.2
0.1
* 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 historically entered into cross-currency basis swap agreements which formed part of certain of its securitisation
arrangements, providing an economic hedge against financial risks inherent in the deal structures, as described below. The last of
these arrangements terminated during the year ended 30 September 2021. These hedging relationships were 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 (‘EUR’)), 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 Euro Interbank Offered
Rate (‘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 a deterioration in credit quality of the
counterparty, collateral must be posted. The collateral requirement is supervised by the independent third-party rating agencies.
Page 218
Hedging instruments
Under these swap agreements
• The Group made quarterly payments of principal and floating rate interest in sterling and received 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 took place on the same date. The Group
made a single payment in sterling to the swap provider who then made the corresponding swap payment in currency to the
external principal paying agent. The principal paying agent then used the funds immediately upon receipt to make the payments
required on the currency notes
• The nominal amount of the swaps was adjusted automatically, quarter by quarter, such that it always amortised 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 was 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 were the same (to the day) for the swaps as for their underlying notes
• The swaps had to remain in place for as long as the notes were 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)
2021
Swap currency
USD
EUR
-
-
-
-
-
-
-
-
-
-
-
-
2020
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
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 lives were, in practice, much shorter.
The absolute value of these swaps was relatively large as the majority of the instruments dated from before the 2008 credit crisis,
when a major dislocation in rates occurred, creating significant market value in the instruments. However, economically, this was
offset by the corresponding increase in the carrying value of the currency denominated notes. All the balances shown above related
to swaps with inception dates in 2008 or earlier and all were terminated in the course of the year when the related borrowings
were repaid.
Sources of potential ineffectiveness
All cross-currency basis swap agreements were 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
matched those of the hedged currency denominated FRNs. This resulted 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 could be partially collateralised, depending on the rating of the counterparties
from time to time. Additional collateral was conditionally available, as described in note 55, under the terms of the instruments.
This generated 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 219
The Accounts
Accounting impacts
Movements affecting the cash flow hedge relationships in the year are set out below.
2021
Swap currency
2020
Swap currency
Hedging Instruments
Cross-currency basis swaps
Included in derivative financial assets
Included in derivative financial liabilities
Notional principal value
USD
£m
-
-
-
-
EUR
£m
-
-
-
-
Change in fair value used in calculating hedge ineffectiveness
(29.1)
(28.3)
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
-
(29.1)
-
-
(28.3)
-
USD
£m
213.2
-
213.2
397.0
(29.5)
397.0
(29.5)
0.7
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
EUR swaps
Amount reclassified from cash flow hedge reserve to profit, recognised as foreign exchange differences and
interest on notes, both included within interest payable
US dollar swaps
EUR swaps
Net amount recognised in Other Comprehensive Income before tax
2021
£m
(29.1)
(28.3)
(57.4)
(28.4)
(26.0)
(54.4)
(3.0)
EUR
£m
232.1
-
232.1
687.5
(42.6)
687.5
(42.6)
2.3
2020
£m
(29.5)
(42.6)
(72.1)
(29.0)
(42.5)
(71.5)
(0.6)
All amounts reclassified to profit in the financial year have been transferred because the hedged item has affected profit or loss.
Page 220
(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
Average fixed notional interest rate
Average notional margin over LIBOR
Average notional margin over SONIA
Notional principal value
LIBOR swaps
SONIA swaps
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
2021
2020
Pay fixed
Pay floating
Pay fixed
Pay floating
0.49%
0.35%
0.28%
0.23%
-
-
£m
86.1
595.5
681.6
83.6
85.5
265.0
247.5
681.6
4.2
-
-
£m
98.5
585.0
683.5
270.5
331.0
82.0
-
683.5
(0.7)
-
-
£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)
2021
2020
1.36
1.27
£m
11.9
11.9
-
-
11.9
(0.2)
£m
14.1
14.1
-
-
14.1
0.2
Page 221
The Accounts
20. 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
2021
£m
-
1.3
36.6
23.7
0.9
3.2
65.7
3.5
-
69.2
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
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.
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
2021
£m
73.0
0.1
73.1
2020
£m
84.0
0.6
84.6
2019
£m
106.6
0.7
107.3
The amounts owed to the Company by other group entities are considered to be Stage 1 balances for IFRS 9 impairment purposes.
The PD 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.
Page 222
21. 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 credit / (charge)
Credit to equity
Closing net asset
Note
59
11
The net deferred tax asset for which provision has been made is analysed as follows:
Accelerated tax depreciation
Retirement benefit obligations
Loans and derivatives
Share based payments
Tax losses
Other timing differences
Net deferred tax asset
2021
£m
6.2
-
6.2
-
-
6.9
1.3
14.4
2021
£m
5.9
4.4
(0.7)
5.2
0.4
(0.8)
14.4
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
(5.2)
1.7
1.3
(1.2)
6.2
£m
2.3
5.9
(3.8)
2.9
0.4
(1.5)
6.2
Classification of deferred tax amounts has been updated in the year to provide better information for users. Comparative amounts
have been restated for consistency.
As stated in note 11, legislation in the year has increased the rate of corporation tax in the UK to 25.0% from April 2023. 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. While the UK Government
announced a reduction in the banking surcharge in its October 2021 budget, as this had not been substantially enacted at the balance
sheet date, no account is taken of it in these accounts.
In addition to the temporary differences, the Group has tax losses of £4.0m (2020: £2.3m) in entities whose current taxable profits are
insufficient to support the recognition of a deferred tax asset.
Page 223
The Accounts
(b) The Company
The movements in the net deferred tax liability are as follows:
Opening net liability
Income statement charge / (credit)
Closing net liability
The net deferred tax liability for which provision has been made is analysed as follows:
Other timing differences
Net deferred tax liability
22. Property, plant and equipment
(a) The Group
2021
£m
1.8
-
1.8
2021
£m
1.8
1.8
Cost
At 30 September 2019
Adoption of IFRS 16 (note 59)
Additions
Disposals
At 30 September 2020
Additions
Disposals
At 30 September 2021
Accumulated depreciation
At 30 September 2019
Charge for the year
On disposals
At 30 September 2020
Charge for the year
On disposals
At 30 September 2021
Net book value
At 30 September 2021
At 30 September 2020
At 30 September 2019
Leased
assets
£m
Land and
buildings
£m
52.7
-
12.9
(7.5)
58.1
13.0
(8.2)
62.9
16.4
8.3
(6.1)
18.6
8.9
(3.9)
23.6
39.3
39.5
36.3
22.8
6.0
0.7
-
29.5
7.1
(0.8)
35.8
4.1
1.8
-
5.9
2.7
(0.8)
7.8
28.0
23.6
18.7
2020
£m
1.6
0.2
1.8
2020
£m
1.8
1.8
Plant and
machinery
£m
10.6
1.0
1.5
(0.6)
12.5
1.8
(0.9)
13.4
8.3
1.7
(0.5)
9.5
1.6
(0.8)
10.3
3.1
3.0
2.3
2019
£m
1.8
(0.2)
1.6
2019
£m
1.6
1.6
Total
£m
86.1
7.0
15.1
(8.1)
100.1
21.9
(9.9)
112.1
28.8
11.8
(6.6)
34.0
13.2
(5.5)
41.7
70.4
66.1
57.3
Land and buildings and plant and machinery shown above are used within the Group’s business. Leased assets includes £26.8m in
respect of assets leased under operating leases (2020: £27.0m) and £12.5m of assets available for hire (2020: £12.5m).
Page 224
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
Cost
At 30 September 2019
Adoption of IFRS 16 (note 59)
Additions
Disposals
At 30 September 2020
Additions
Disposals
At 30 September 2021
Accumulated depreciation
At 30 September 2019
Charge for the year
On disposals
At 30 September 2020
Charge for the year
On disposals
At 30 September 2021
Net book value
At 30 September 2021
At 30 September 2020
At 30 September 2019
£m
-
6.0
-
-
6.0
6.1
(0.6)
11.5
-
1.4
-
1.4
2.2
(0.6)
3.0
8.5
4.6
-
£m
-
1.0
0.3
(0.1)
1.2
0.9
(0.6)
1.5
-
0.6
(0.1)
0.5
0.6
(0.4)
0.7
0.8
0.7
-
Total
£m
-
7.0
0.3
(0.1)
7.2
7.0
(1.2)
13.0
-
2.0
(0.1)
1.9
2.8
(1.0)
3.7
9.3
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 £17.4m (2020: £17.7m).
Page 225
The Accounts (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.
Land and
buildings
£m
-
18.8
-
-
18.8
-
-
18.8
-
1.4
-
1.4
1.4
-
2.8
16.0
17.4
-
Cost
At 30 September 2019
Adoption of IFRS 16 (note 59)
Additions
Disposals
At 30 September 2020
Additions
Disposals
At 30 September 2021
Accumulated depreciation
At 30 September 2019
Charge for the year
On disposals
At 30 September 2020
Charge for the year
On disposals
At 30 September 2021
Net book value
At 30 September 2021
At 30 September 2020
At 30 September 2019
Page 226
23. Intangible assets
Cost
At 30 September 2019
Additions
At 30 September 2020
Additions
At 30 September 2021
Accumulated amortisation and impairment
At 30 September 2019
Amortisation charge for the year
At 30 September 2020
Amortisation charge for the year
At 30 September 2021
Net book value
At 30 September 2021
At 30 September 2020
At 30 September 2019
Goodwill
(note 24)
£m
170.4
-
170.4
-
170.4
6.0
-
6.0
-
6.0
164.4
164.4
164.4
Computer
software
Other intangible
assets
£m
11.4
1.0
12.4
2.4
14.8
9.0
1.2
10.2
1.2
11.4
3.4
2.2
2.4
£m
10.6
-
10.6
-
10.6
6.3
0.8
7.1
0.8
7.9
2.7
3.5
4.3
Total
£m
192.4
1.0
193.4
2.4
195.8
21.3
2.0
23.3
2.0
25.3
170.5
170.1
171.1
Other intangible assets comprise brands and the benefit of business networks recognised on the acquisition of businesses.
24. 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
2021
£m
113.0
49.8
1.6
164.4
2020
£m
113.0
49.8
1.6
164.4
The goodwill carried in the accounts relating to the SME lending CGU was recognised on acquisitions in the years ended
30 September 2016 and 30 September 2018.
An impairment review undertaken at 30 September 2021 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 in November 2021 covering a five-year period.
These forecasts reflect the projected trajectory of the business recovery from the Covid pandemic with the five year average growth
rate beginning to normalise following the initial bounce back phase in 2021, as well as the Group’s current strategy for the business.
Page 227
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 13.9%, compared with 19.7% used in the calculation at 30 September 2020. Cash flows
beyond the five-year budget are extrapolated using a constant growth rate of 1.6% (2020: 1.5%) 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 13.4% (2020: 15.0%)
As an illustration of the sensitivity of this impairment test to movements in the key assumptions, the Group has calculated that a 0%
growth rate combined with a 15.0% reduction in profit levels and a 159 basis point increase in the pre-tax discount rate would eliminate
the headroom in the projection. A 0% growth rate combined with a 20.7% reduction in profit levels and a 125 basis point increase in the
pre-tax discount rate would generate a write down of £10.0m.
In the testing carried out at 30 September 2020, a 10.0% reduction in profit levels coupled with a 100 basis point increase in the
pre-tax discount rate would eliminate the headroom.
(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 2021 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 in November 2021 covering a five-year period.
These forecasts show growth slower than that originally forecast for 2021 which was inflated by the impact of the initial post Covid
bounce back.
The key assumptions underlying the value in use calculation for the development finance CGU are:
• Level of business activity, based on management expectations. The forecast assumes a CAGR for drawdowns over the five-year
period of 13.2%, compared with 16.9% used in the calculation at 30 September 2020. Cash flows beyond the five-year budget are
extrapolated using a constant growth rate of 1.6% (2020: 1.5%) 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 13.2% (2020: 14.2%)
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 2020.
(c) TBMC
The goodwill carried in the accounts relating to the TBMC CGU was recognised on an acquisition in December 2008 and impaired by
£6.0m in 2009.
An impairment review was undertaken at 30 September 2021 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 4.94% (2020: 4.41%) and cash flows beyond the five year budget are extrapolated using a 1.6% (2020: 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 2020.
Page 228
25. Investment in subsidiary undertakings
At 30 September 2019
Capital distributions
Loans advanced
Loans repaid
Provision movements
At 30 September 2020
Capital distributions
Loans advanced
Loans repaid
Provision movements
At 30 September 2021
Shares in group
companies
Loans to group
companies
Loans to ESOP
Trusts
£m
640.5
(15.6)
-
-
14.7
639.6
(0.7)
-
-
(0.2)
638.7
£m
300.0
-
90.0
-
-
390.0
-
256.0
(306.5)
-
339.5
£m
0.2
-
4.7
-
(4.4)
0.5
-
3.9
-
(4.1)
0.3
Total
£m
940.7
(15.6)
94.7
-
10.3
1,030.1
(0.7)
259.9
(306.5)
(4.3)
978.5
During the years ended 30 September 2021 and 30 September 2020, 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 2021 the Company received £97.8m in dividend income from its subsidiaries (2020: £113.9m)
and £22.5m of interest on loans to group companies (2020: £18.2m).
The Company’s subsidiaries, and the nature of its interest in them, are shown in note 66.
26. 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
2021
£m
5,466.0
3,834.4
9,300.4
2020
£m
4,975.9
2,880.7
7,856.6
The weighted average interest rate on retail deposits at 30 September 2021, analysed by charging method, was:
Fixed rate
Variable rates
All deposits
2021
%
1.25
0.42
0.91
2020
%
1.69
0.72
1.34
2019
£m
4,154.4
2,237.5
6,391.9
2019
%
2.02
1.43
1.81
Page 229
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 19)
2021
£m
789.0
3,105.4
1,580.1
507.4
5,981.9
3,318.5
9,300.4
(3.0)
9,297.4
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
27. 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 the Notes on any issue at an earlier date (the ‘call date’), at their outstanding
principal amount.
During the year ended 30 September 2021 interest was payable at a fixed margin above:
• LIBOR on notes denominated in sterling, other than notes issued by Paragon Mortgages (No. 26) PLC, Paragon Mortgages (No. 27)
PLC and Paragon Mortgages (No. 28) PLC
• The compounded Sterling Overnight Interbank Average Rate (‘SONIA’) on notes denominated in sterling issued by
Paragon Mortgages (No. 26) PLC, Paragon Mortgages (No. 27) PLC and Paragon Mortgages (No. 28) PLC
• EURIBOR on notes denominated in EUR
• The London Interbank Offered Rate (‘US dollar LIBOR’) on notes denominated in US dollars
At 30 September 2021 all notes remaining in issue paid interest at rates referencing SONIA, other than those issued by Paragon
Mortgages (No. 25) PLC, where LIBOR was used. An agreement for the transition of this arrangement to a SONIA basis was completed
in the year, and is described below.
The Group therefore has no remaining loan note liabilities which will be affected by the withdrawal of IBOR rates, including LIBOR.
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 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 56.
On 11 November 2020, a group company, Paragon Mortgages (No. 28) PLC, issued £703.1m 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
0.95%
1.35%
1.65%
1.95%
623.8
39.7
21.6
18.0
703.1
All the above notes were retained by the Group.
Page 230
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. 11) PLC
Paragon Mortgages (No. 13) PLC
Paragon Mortgages (No. 14) PLC
Paragon Mortgages (No. 15) PLC
Paragon Mortgages (No. 25) PLC
Interest based on SONIA
Paragon Mortgages (No. 26) PLC
Paragon Mortgages (No. 27) PLC†
Paragon Mortgages (No. 28) PLC†
US dollar notes
Paragon Mortgages (No. 13) PLC
Paragon Mortgages (No. 14) PLC
Paragon Mortgages (No. 15) PLC
EUR notes
Paragon Mortgages (No. 11) PLC
Paragon Mortgages (No. 13) PLC
Paragon Mortgages (No. 14) PLC
Paragon Mortgages (No. 15) PLC
15/10/41
15/01/39
15/09/39
15/12/39
15/05/50
15/05/45
15/04/47
15/12/47
15/01/39
15/09/39
15/12/39
15/10/41
15/01/39
15/09/39
15/12/39
15/04/10
15/10/10
15/03/11
15/06/11
15/05/23
15/08/24
15/10/25
15/12/25
15/10/10
15/03/11
15/06/11
15/04/10
15/10/10
15/03/11
15/06/11
2021
£m
-
-
-
-
338.9
2020
£m
221.1
416.4
390.0
108.5
379.4
2021
%
-
-
-
-
0.73
2020
%
0.15
0.27
0.23
0.30
0.72
179.2
231.3
1.05
1.05
-
-
$m
-
-
-
€m
-
-
-
-
-
-
$m
134.6
150.7
502.1
€m
182.4
268.3
317.0
244.0
%
%
-
-
-
-
-
-
-
-
-
-
-
%
0.18
0.20
0.19
%
0.54
0.42
0.48
0.73
† All notes issued by Paragon Mortgages (No. 27) and Paragon Mortgages (No. 28) were retained by the Group (see note 56)
The details of the assets backing these securities are given in note 16.
On 25 August 2021 an agreement was reached with the senior noteholders of Paragon Mortgages (No. 25) PLC to transition to a
SONIA-linked basis for interest charging, effective from the interest payment date on 15 February 2022. From that date the notes will
bear interest calculated with reference to SONIA rather than LIBOR and the note margins will be increased by 0.12% in line with the
ISDA fallback adjustment rate. Other terms of the notes remain unchanged. The agreement also provided for the transition of hedging
arrangements in the securitisation to a SONIA basis.
During the year, the Group redeemed all of the outstanding notes of the following securitisations at par:
• Paragon Mortgages (No. 11) PLC on 15 October 2020
• Paragon Mortgages (No. 13) PLC on 15 April 2021
• Paragon Mortgages (No. 14) PLC on 15 June 2021
• Paragon Mortgages (No. 15) PLC on 15 December 2020
The underlying assets were subsequently funded by other group companies.
On 26 June 2019, the Group disposed of its beneficial interest in the Paragon Mortgages (No. 12) PLC securitisation. 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 45.
Page 231
The Accounts 28. Bank borrowings
New first mortgage loans may be financed by a secured bank loan, referred to as a ‘warehouse facility’. The Group’s warehouse
facilities may also be used to acquire accounts from other group companies to be held on a temporary basis as part of the Group’s
overall management of funding and liquidity. Such internal transfers are on a no gain / no loss basis.
These facilities are drawn on the completion or acquisition of a mortgage and repayment of the facilities is restricted to the principal
cash received in respect of the funded mortgages. Loans held 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 56 and details of assets held within the warehouse facilities are given in note 16. Details of the Group’s bank
borrowings are set out below.
i) Paragon Second Funding
ii) Paragon Seventh Funding
Principal
value
£m
529.0
201.0
730.0
2021
Maximum
available
facility
£m
529.0
400.0
929.0
Carrying
value
Principal
value
£m
529.0
201.0
730.0
£m
657.8
-
657.8
2020
Maximum
available
facility
£m
657.8
400.0
1,057.8
Carrying
value
£m
657.8
-
657.8
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 was payable monthly at 0.675% above LIBOR
until 26 February 2021 and at 0.704% above SONIA thereafter.
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 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 month commitment on 25 September 2020. Interest was payable at 0.95% over three month LIBOR up to 25 September 2020,
1.05% over three month LIBOR between that date and 25 March 2021 and 0.60% over three month LIBOR thereafter. The renewal
also included terms on which the reference rate would be transitioned to SONIA during the commitment period.
On 8 November 2021, after the year end, revisions to the facility were agreed extending the commitment period for an initial 13-month
period with the ability to extend monthly until a potential final maturity date of 24 November 2024. The maximum drawing was
increased to £450.0m and the interest rate payable was transitioned to 0.5% above SONIA.
29. 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
2021
£m
-
125.0
112.5
237.5
2020
£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 £237.1m (2020: £296.8m), of which £125.0m falls due within one year (2020: £60.0m).
Page 232
30. Corporate bonds
On 25 March 2021 the Company issued £150.0m of Fixed Rate Callable Subordinated Tier-2 Notes due 2031 at par. These Notes bear
interest at a rate of 4.375% per annum until 25 September 2026 after which interest will be payable at a reset rate which is 3.956%
over that payable on UK Government bonds of similar duration at that time. These Notes are callable at the option of the Company
between 25 June 2026 and 25 September 2026 and may be called at any time in the event of certain tax or regulatory changes. The
Notes are unsecured and subordinated to all creditors of the Company. The Notes are rated BB+ by Fitch. The proceeds of the Notes
are utilised in accordance with the Group’s Green Bond Framework, which is available on its investor website.
At the same time as this issuance the Group purchased £130.9m of nominal value of its 2016 Tier-2 Notes by market tender for a total
consideration of £134.6m. These Notes were derecognised and the premium paid taken to profit and loss as interest payable and
similar charges. The remaining 2016 Bonds were redeemed at par at their call date in September 2021.
The redeemed notes were issued on 9 September 2016 and comprised £150.0m of 7.25% Fixed Rate Reset Callable Subordinated
Tier-2 Notes due 2026 at par, issued to provide long term capital for the Group. These bonds bore interest at a fixed rate of 7.25% per
annum until 9 September 2021, after which interest would have been payable at a fixed rate which was 6.731% over the sterling 5-year
mid-market swap rate at that time. These bonds were unsecured and subordinated to any other creditors of the Company. At 30
September 2019 the Notes were rated BBB- by Fitch and, during the year ended 30 September 2020, the Notes were downgraded to
BB+ following the application of updated bank rating criteria.
The carrying value of corporate bonds in the accounts of the Group and the Company at 30 September 2021 was
£149.0m (2020: £149.8m).
31. 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 PLC (‘Paragon Bank’ or ‘the Bank’)
on the security of designated pools of the Bank’s first mortgage assets and/or the retained Notes described in note 56, with the
amount available based on the value of the security given, subject, where appropriate, to a haircut.
Drawings under the Term Funding Scheme for SMEs (‘TFSME’) have a maturity of four years and bear interest at BBR. The average
remaining maturity of the Group’s drawings is 40 months (2020: 46 months). As these drawings were provided at rates below those
available commercially, by a government agency, they were accounted for under IAS 20.
Drawings under the original Term Funding Scheme (‘TFS’) have a maturity of four years and bear interest at BBR. The average
remaining maturity of the Group’s drawings at 30 September 2021 was 4 months (2020: 9 months). As these drawings were provided
at rates below those available commercially, by a government agency, they were accounted for under IAS 20. The TFS is no longer
available for new drawings.
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 the Group did not access the ILTR during the year, it retains access to this programme for liquidity purposes.
During the year ended 30 September 2020, 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 pandemic.
Drawings under the Funding for Lending Scheme (‘FLS’) were used to provide off balance sheet liquidity and formed part of the Bank’s
High Quality Liquid Assets (‘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.
The amounts drawn under these facilities are set out below.
TFSME
TFS
ILTR
2021
£m
2,750.0
69.0
-
2020
£m
910.0
944.4
-
Total central bank facilities
2,819.0
1,854.4
At 30 September 2021 £69.0 million of TFS borrowings were due within one year (2020: £700.0m). All TFSME borrowings fall due after
more than one year.
Following the year end all the TFSME borrowings were repaid and redrawn, extending the maturity date to 21 October 2025.
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 56). The mortgage assets pledged in support of these drawings
are set out in note 16.
Page 233
The Accounts The balances arising from the TFSME and TFS carried in the Group accounts are shown below.
2021
£m
2,657.8
92.2
68.7
0.3
2021
£m
2,750.0
69.0
2,819.0
2021
£m
22.2
1.4
33.1
56.7
4.6
61.3
1.5
3.3
-
2.5
68.6
9.5
-
9.5
2.9
12.4
8.0
1.7
22.1
66.2
7.5
17.0
90.7
2020
£m
874.1
35.9
937.5
6.9
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
910.0
944.4
1,854.4
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
TFSME at IAS 20 carrying value
Deferred government assistance
TFS at IAS 20 carrying value
Deferred government assistance
32. Sundry liabilities
(a) The Group
Current liabilities
Accrued interest
Trade creditors
Other accruals
Sundry financial liabilities at amortised cost
Contingent consideration (note 33)
Sundry financial liabilities
Lease payables (note 34)
Deferred income
Conduct (note 35)
Other taxation and social security
Non-current liabilities
Accrued interest
Other accruals
Sundry financial liabilities at amortised cost
Contingent consideration (note 33)
Sundry financial liabilities
Lease payables (note 34)
Deferred income
Total sundry financial liabilities at amortised cost
Total sundry financial liabilities at fair value
Total other sundry liabilities
Total sundry liabilities
Page 234
(b) The Company
Current liabilities
Amounts owed to Group companies
Accrued interest
Other financial liabilities
Sundry financial assets at amortised cost
Lease payables (note 34)
Non-current liabilities
Lease payables (note 34)
Total sundry liabilities
2021
£m
22.6
2.0
1.0
25.6
1.3
26.9
15.0
41.9
2020
£m
22.7
2.9
-
25.6
1.2
26.8
16.3
43.1
33. 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 2020
Payments
Revaluation
Unwind of discounting (note 5)
At 30 September 2021 (note 32)
2021
£m
13.5
(2.5)
(3.8)
0.3
7.5
2019
£m
23.8
3.6
-
27.4
-
27.4
-
27.4
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, and the impact of the
speed of post-Covid recovery on the contingent consideration calculation.
34. Lease payables
The Group’s lease liabilities arise under the leasing arrangements described in note 46. Related right of use assets are shown
in note 22.
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 32)
In less than one year (note 32)
The Group
The Company
2021
£m
2.3
3.8
1.9
8.0
1.5
9.5
2020
£m
0.6
2.4
1.1
4.1
1.5
5.6
2021
£m
9.6
4.1
1.3
15.0
1.3
16.3
2020
£m
11.0
4.0
1.3
16.3
1.2
17.5
Page 235
The Accounts 35. 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.
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.
36. Current tax liabilities / assets
Current tax in the Group and the Company represents UK corporation tax owed or recoverable.
37. 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 2020
Shares issued
Shares cancelled
At 30 September 2021
2021
Number
2020
Number
261,777,972
261,573,351
717,213
204,621
-
-
262,495,185
261,777,972
During the year, the Company issued 717,213 shares (2020: 204,621) to satisfy options granted under Sharesave schemes for a
consideration of £2,196,934 (2020: £585,315).
On 24 November 2021, after the year end 12,100,834 shares, held in treasury at 30 September 2021 were cancelled.
2021
£m
70.1
50.3
(70.2)
-
1,005.9
1,056.1
2020
£m
68.7
50.3
(70.2)
2.5
880.7
932.0
2019
£m
68.3
50.3
(70.2)
3.0
835.9
887.3
38. Reserves
(a) The Group
Share premium account
Capital redemption reserve
Merger reserve
Cash flow hedging reserve (note 19)
Profit and loss account
Page 236
(b) The Company
Share premium account
Capital redemption reserve
Merger reserve
Profit and loss account
2021
£m
70.1
50.3
(23.7)
358.9
455.6
2020
£m
68.7
50.3
(23.7)
319.1
414.4
2019
£m
68.3
50.3
(23.7)
256.3
351.2
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.
39. Own shares
Treasury shares
At 1 October 2020
Shares purchased
Shares cancelled
At 30 September 2021
ESOP shares
At 1 October 2020
Shares purchased
Options exercised
At 30 September 2021
Balance at 30 September 2021
Balance at 1 October 2020
The Group
The Company
2021
£m
23.0
37.7
-
60.7
14.8
4.5
(3.3)
16.0
76.7
37.8
2020
£m
23.0
-
-
23.0
17.5
5.2
(7.9)
14.8
37.8
40.5
2021
£m
23.0
37.7
-
60.7
-
-
-
-
60.7
23.0
2020
£m
23.0
-
-
23.0
-
-
-
-
23.0
23.0
At 30 September 2021 the number of the Company’s own shares held in treasury was 12,100,834 (2020: 5,218,702). These shares had
a nominal value of £12,100,834 (2020: £5,218,702). These shares do not qualify for dividends. All these shares were cancelled on
24 November 2021, after the year end.
The 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 PSP and Deferred Share Bonus Plan. The trustees’ costs are included in the operating expenses of
the Group.
At 30 September 2021, the trust held 3,732,324 ordinary shares (2020: 3,636,218) with a nominal value of £3,732,324
(2020: £3,636,218) and a market value of £20,359,827 (2020: £12,108,606). Options, or other share-based awards, were outstanding
against all of these shares at 30 September 2021 (2020: all). The dividends on all these shares have been waived (2020: all).
Page 237
The Accounts 40. 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
2021
Per share
2020
Per share
14.4p
7.2p
21.6p
14.2p
-
14.2p
2021
Per share
2020
Per share
7.2p
18.9p
26.1p
-
14.4p
14.4p
2021
£m
36.5
18.1
54.6
2021
£m
18.1
46.6
64.7
2020
£m
35.9
-
35.9
2020
£m
-
36.4
36.4
The proposed final dividend for the year ended 30 September 2021 will be paid on 4 March 2022, subject to approval at the AGM, with
a record date of 28 January 2022. The dividend will be recognised in the accounts when it is paid.
Page 238
41. 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
2021
£m
213.7
4.3
0.1
2.0
2020
£m
118.4
3.5
-
2.0
Movements related to asset backed loan notes denominated in currency
(442.3)
(136.8)
Other non-cash movements on borrowings
Impairment losses on loans to customers
Charge for share based remuneration
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)
2.5
(4.7)
8.9
0.2
(766.6)
419.1
104.2
58.8
1.5
48.3
2.7
(3.2)
(493.6)
129.1
(45.5)
(35.6)
1,443.8
1,464.7
(88.5)
(13.4)
(15.7)
926.4
(48.3)
878.1
51.9
6.5
(39.1)
1,074.8
(46.1)
1,028.7
Cash flows relating to plant and equipment held for leasing under operating leases are classified as operating cash flows.
Page 239
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
42. Net cash flow from investing activities
The Group
The Company
2021
2020
The Group
The Company
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
Net cash (utilised) / generated by investing activities
43. Net cash flow from financing activities
Shares issued (note 37)
Dividends paid (note 40)
Issue of Tier-2 bond
Repayment of asset backed floating rate notes
Repayment of Tier-2 bond
Repayment of retail bond
Movement on central bank facilities
Movement on other bank facilities
Capital element of lease payments
Purchase of shares (note 39)
Sale of shares
£m
-
(1.9)
(2.4)
-
(4.3)
2021
£m
2.1
(54.6)
148.9
(2,313.1)
(153.7)
(60.0)
964.6
71.9
(2.5)
(42.2)
-
£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
Net cash (utilised) by financing activities
(1,438.6)
(325.7)
Page 240
2021
£m
84.0
1.4
4.3
4.3
8.9
2020
£m
93.7
1.4
0.5
5.3
2.7
11.5
22.7
-
114.4
1.5
115.9
2021
£m
-
-
-
47.3
47.3
2021
£m
2.1
(54.6)
148.9
-
(153.7)
(60.0)
-
-
(1.2)
(37.7)
-
(156.2)
(1.8)
124.5
5.3
129.8
2020
£m
-
-
-
(94.7)
(94.7)
2020
£m
0.6
(35.9)
-
-
-
-
-
-
(1.3)
-
-
(36.6)
44. Reconciliation of net debt
(a) The Group
Cash flows
Non-cash movements
30 September 2021
Asset backed loan notes
Bank borrowings
Corporate bonds
Retail bonds
Opening
debt
£m
3,270.5
657.8
149.8
296.8
Central bank borrowings
1,854.4
Lease liabilities
Bank overdrafts
Gross debt
Cash
Net debt
5.6
0.4
6,235.3
(1,925.0)
4,310.3
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
787.5
149.6
296.5
994.4
-
1.0
6,648.4
(1,225.4)
5,423.0
Debt
issued
£m
-
-
148.9
-
-
-
-
148.9
(148.9)
-
-
-
-
-
-
-
-
-
-
-
Other
Recognition
Currency
loan notes
Other
£m
£m
£m
(2,313.1)
71.9
(153.7)
(60.0)
964.6
(2.5)
(0.1)
(1,492.9)
713.8
(779.1)
(1,013.3)
(130.1)
-
-
860.0
(2.0)
(0.6)
(286.0)
(699.6)
(985.6)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7.3
-
7.3
-
7.3
(442.3)
-
-
-
-
-
-
(442.3)
-
(442.3)
(136.8)
-
-
-
-
-
-
(136.8)
-
(136.8)
£m
0.9
0.3
4.0
0.3
-
6.4
-
11.9
-
11.9
1.2
0.4
0.2
0.3
-
0.3
-
2.4
-
2.4
Closing
debt
£m
516.0
730.0
149.0
237.1
2,819.0
9.5
0.3
4,460.9
(1,360.1)
3,100.8
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
Other cash movements relating to currency loan notes shown above relate to the settlement and translation of asset backed loan
notes denominated in US dollars and euros (note 27), which are cashflow hedged under the arrangements described in note 19(b).
The effect of these borrowings is described further in note 58. None of these notes remained outstanding at 30 September 2021.
Other non-cash changes shown above represent:
• EIR adjustments relating to the spreading of initial costs of the facilities concerned
• Premiums on redemptions of corporate bonds
•
Inception of new lease assets under IFRS 16
Non-cash movements arising from recognition in the year ended 30 September 2020 include amounts recognised on transition
to IFRS 16.
Page 241
The Accounts (b) The Company
30 September 2021
Corporate bonds
Retail bonds
Lease liabilities
Gross debt
Cash
Net debt
30 September 2020
Corporate bonds
Retail bonds
Lease liabilities
Gross debt
Cash
Net debt
Opening
debt
£m
149.8
296.8
17.5
464.1
(12.6)
451.5
149.6
296.5
-
446.1
(14.1)
432.0
Cash flows
Non-cash movements
Debt
issued
£m
148.9
-
-
148.9
(148.9)
-
-
-
-
-
-
-
Other
Recognition
Other
£m
£m
(153.7)
(60.0)
(1.2)
(214.9)
141.9
(73.0)
-
-
(1.3)
(1.3)
1.5
0.2
-
-
-
-
-
-
-
-
18.8
18.8
-
18.8
£m
4.0
0.3
-
4.3
-
4.3
0.2
0.3
-
0.5
-
0.5
Closing
debt
£m
149.0
237.1
16.3
402.4
(19.6)
382.8
149.8
296.8
17.5
464.1
(12.6)
451.5
Other non-cash changes shown above represent EIR adjustments relating to the spreading of initial costs of the bonds and premium
paid on redemption. Recognition includes amounts recognised on transition to IFRS 16 in the year ended 30 September 2020.
45. Unconsolidated structured entities
Following the Group’s disposal of its residual interest in the Paragon Mortgages (No. 12) PLC securitisation 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 £1.6m is included in third party servicing fees (note 7) (2020: £1.9m) and £0.3m is included
in other debtors in respect of unpaid fees at the year end (2020: £0.3m). Outstanding collection monies due to the structured entity of
£0.3m are included in other creditors at 30 September 2021 (2020: £0.4m).
46. 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.
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 242
Note
17
4
22
6
The undiscounted 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
2021
£m
11.4
6.8
4.8
3.3
1.9
1.0
29.2
2020
£m
12.4
6.8
4.3
2.9
1.7
1.3
29.4
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 (2020: 9 years) with rents subject to review
every five years, while the average term of the vehicle leases is 3 years (2020: 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
22
5
8
22
22
56
There was no subleasing of any right of use asset and the total cash flows relating to leasing as a lessee were £2.0m (2020: £2.2m).
47. Related party transactions
(a) The Group
During the year, certain 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 £16,000 were outstanding at the year-end
(2020: £301,000), and the maximum amount outstanding during the year was £301,000 (2020: £500,000).
The Paragon Pension Plan (‘the Plan’) is a related party of the Group. Transactions with the Plan are described in note 52.
The Group had no other transactions with related parties other than the key management compensation disclosed in note 50.
(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 51.
Details of the Company’s investments in subsidiaries and the income derived from them are shown in notes 25 and 66.
Outstanding current account balances with subsidiaries are shown in notes 20 and 32.
During the year the Company incurred interest costs of £0.8m in respect of borrowings from its subsidiaries (2020: £1.0m).
The Company leased an office building from a subsidiary entity (note 46). Finance charges recognised in respect of this lease were
£0.5m (2020: £0.5m).
Page 243
The Accounts
48. 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 2021 were:
Year ended 30 September 2021
Total operating income
Profit before tax
Corporation tax paid
Public subsidies received
Average number of full time equivalent employees
Year ended 30 September 2020
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 31.
United Kingdom
£m
324.9
213.7
48.3
-
1,327
United Kingdom
£m
295.1
118.4
46.1
-
1,285
Page 244
D2.2 Notes to the Accounts – Employment costs
For the year ended 30 September 2021
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.
49. Employees
The average number of persons (including directors) employed by the Group during the year was 1,426 (2020: 1,385). The number of
employees at the end of the year was 1,441 (2020: 1,391).
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 8)
Included in maintenance costs (note 6)
2020
£m
2.7
64.0
(0.1)
8.0
2.0
3.1
2021
£m
8.9
65.1
2.4
8.3
1.8
3.7
2021
£m
74.0
10.7
5.5
90.2
87.9
2.3
90.2
Details of the pension schemes operated by the Group are given in note 52.
The Company has no employees. Details of the directors’ remuneration are given in note 50.
2020
£m
66.7
7.9
5.1
79.7
77.6
2.1
79.7
Page 245
The Accounts 50. 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
2021
£m
1.9
0.7
0.3
1.5
0.3
2021
£m
2.9
0.2
1.8
4.9
2020
£m
1.9
-
0.5
0.7
(0.1)
2020
£m
2.4
0.3
0.6
3.3
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.
Directors’ bonuses in the year ended 30 September 2020 were entirely deferred in shares, in response to the Covid pandemic.
Normal payment arrangements have resumed in the current year. 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 Annual Report on Remuneration.
51. 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 49.
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 2021 and at 30 September 2020 is
set out below.
2021
Number
3,561,675
5,375,494
241,574
1,387,137
273,193
2020
Number
4,134,577
4,842,196
444,771
819,265
265,672
10,839,073
10,506,481
(a) Sharesave Plan
(b) Performance Share Plan
(c) Company Share Option Plan
(d) Deferred Bonus Plan
(e) Restricted Stock Units
Page 246
(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 2021 and the year ended 30 September 2020 is shown below.
Options outstanding
At 1 October 2020
Granted in the year
Exercised or surrendered in the year
Lapsed during the year
At 30 September 2021
2021
2021
2020
2020
Number Weighted average
exercise price
Number Weighted average
exercise price
p
295.40
424.00
306.32
319.15
306.89
2,558,569
2,748,494
(940,709)
(231,777)
4,134,577
p
338.06
278.56
348.35
351.68
295.40
4,134,577
432,095
(717,213)
(287,784)
3,561,675
Options exercisable
105,945
303.07
345,756
341.85
The weighted average remaining contractual life of options outstanding at 30 September 2021 was 32.4 months (2020: 36.8 months).
The weighted average market price at exercise for share options exercised in the year was 526.83p (2020: 441.06p).
Options are outstanding under the Sharesave plans to purchase ordinary shares as follows:
Grant date
11/06/2015
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
28/07/2021
28/07/2021
Period exercisable
Exercise price
Number
Number
01/08/2020 to 01/02/2021
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
01/09/2024 to 01/03/2025
01/09/2026 to 01/03/2027
345.68p
249.44p
341.76p
341.76p
408.80p
408.80p
360.16p
360.16p
278.56p
278.56p
424.00p
424.00p
2021
-
68,546
2,633
20,971
34,766
21,124
379,915
5,409
2,078,709
518,610
350,345
80,647
2020
8,242
432,210
337,514
22,726
169,359
21,124
411,334
6,574
2,187,502
537,992
-
-
3,561,675
4,134,577
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 holder’s decease). Awards lapse on cessation of
employment, other than in ’good leaver’ circumstances.
Page 247
The Accounts The fair value of options granted is determined using a trinomial model. Details of the awards made in the year ended
30 September 2021 and the year ended 30 September 2020, 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
28/07/21
28/08/21
351,448
554.5p
3.5
1.41
80,647
554.5p
5.5
1.17
27/07/20
2,210,502
343.2p
3.5
0.62
27/07/20
537,992
343.2p
5.5
0.55
38.77%
33.10%
3.42
0.19%
3.90%
5.00%
5.43
0.31%
3.90%
5.00%
34.24%
3.45
(0.13)%
4.34%
5.00%
32.98%
5.45
(0.11)%
4.34%
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’)
PSP awards are made annually to executive directors and other senior employees as part of their variable remuneration. The grantees,
and the values of their grants, are approved by the Remuneration Committee.
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 and subsequently 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. Malus and clawback provisions apply to awards granted under the PSP as detailed in the Directors’
Remuneration Policy.
The conditional entitlements outstanding under this scheme at 30 September 2021 and 30 September 2020 were:
Grant date
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
11/12/2020
11/12/2020
* Estimated date
Period exercisable
Number
Number
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 30/11/2026†
03/12/2020* to 07/12/2027β
14/12/2021* to 13/12/2028ψ
07/12/2022* to 05/07/2030φ
07/12/2024* to 05/07/2030φ
07/12/2023* to 10/12/2030δ
07/12/2025* to 10/12/2030δ
2021
-
5,093
4,578
2,132
5,366
14,927
341,168
347,715
1,477,203
1,153,178
509,192
1,129,235
385,707
5,375,494
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
† 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.
Page 248
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
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
An ‘underpin’ condition also operates, such that the Remuneration Committee has to be satisfied with the Group’s underlying financial performance over the performance period.
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 and underpin, similar to those described at β above, except that:
• Under the EPS condition full vesting occurs if basic 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
An individual performance condition relating to the grantee’s performance in the final financial year of the vesting period also applies.
φ These awards are subject to performance criteria, similar to those described at ψ above, except that:
• The TSR condition related to 25% of the grant, not 50%
• Under the EPS condition full vesting occurs if basic 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 CRO 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. 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
δ These awards are subject to performance criteria, similar to those described at φ above, except that:
• Under the EPS condition full vesting occurs if EPS for the third year of the test period is at least 66p, 25% vesting if EPS in this year is 58p and vesting between those
points on a straight line basis
• The ability of the Remuneration Committee to adjust specifically for windfall gains was not a condition of this grant
For each of the 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 2021 and the year
ended 30 September 2020 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
11/12/20
1,539,645
446.8p
3.0
407.50p
37.85%
3.0
(0.12)%
06/07/20
1,694,982
360.60p
2.4
301.32p
33.93%
2.4
(0.06)%
For all 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 249
The Accounts
(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 employee may be granted up to a maximum
total value of £30,000 of tax benefitted options. No new CSOP awards were made in the years ended 30 September 2021 or
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 2021 and the year ended 30 September 2020 is shown below.
Options outstanding
At 1 October 2020
Exercised or surrendered in the year
Lapsed during the year
At 30 September 2021
2021
2021
2020
2020
Number Weighted average
exercise price
Number Weighted average
exercise price
p
419.97
397.33
471.06
403.66
730,816
(218,008)
(68,037)
444,771
p
398.19
361.88
372.15
419.97
444,771
(87,377)
(115,820)
241,574
Options exercisable
62,049
425.70
93,974
361.88
The weighted average remaining contractual life of options outstanding at 30 September 2021 was 81.5 months (2020: 89.5 months).
The weighted average market prices at exercise for share options exercised in the year was 466.70p.
The conditional entitlements outstanding under this scheme at 30 September 2021 and 30 September 2020 were:
Grant date
01/12/2016
08/12/2017
14/12/2018
Period exercisable
Exercise price
01/12/2019 to 30/11/2026†
08/12/2020 to 07/12/2027β
14/12/2021 to 13/12/2028β
361.88p
477.76p
396.04p
Number
2021
27,875
34,174
179,525
241,574
Number
2020
93,974
169,502
181,295
444,771
† 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 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.
Page 250
(d) Deferred Bonus awards
These plans are generally used for the deferral in shares of annual bonus awards made to executive directors and certain other senior
managers (‘executive awards’). Additionally in 2020 a one-off award was made on an all-employee basis.
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 2021 and 30 September 2020 were:
Grant date
10/12/2013
18/12/2014
22/12/2015
01/12/2016
08/12/2017
14/12/2018
12/12/2019
11/12/2020
11/12/2020*
*All-employee award.
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
11/12/2023 to 10/12/2030
11/12/2023 to 01/06/2024
2021
55,302
52,888
60,042
71,235
67,572
334,498
108,701
382,334
254,565
2020
55,302
52,888
60,042
105,318
102,516
334,498
108,701
-
-
1,387,137
819,265
The Deferred Bonus shares granted under the executive awards can be exercised from the third anniversary of the award date until
the day before the tenth anniversary of the date of grant.
The all-employee awards will vest on the third anniversary of the grant date and the shares will be automatically transferred to the
participants as soon as reasonably practicable thereafter. The period exercisable shown above therefore illustrates the latest date by
which it is anticipated that these transfers will have been made.
In the event of death or redundancy the all-employee awards may vest early. Awards lapse on the cessation of employment, other than
in ‘good leaver’ circumstances. Except in these regards the all-employee awards operate in the same way as the executive awards.
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 made in the year ended 30 September 2021 and the year ended 30 September 2020 are shown below.
Grant date
Number of awards granted
Market price at date of grant
Fair value per share at date of grant
11/12/20
All employee
275,029
446.80p
353.62p
11/12/20
Executive
382,334
446.80p
446.80p
12/12/19
Executive
108,701
489.20p
489.20p
No departures are expected for grantees under this plan, except for grants under the all-employee grant in 2020, where a departure
rate of 7.5% per annum is expected.
(e) Restricted Stock Units (‘RSUs’)
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, for the July 2020 grant only, 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 2021 and 30 September 2020 were:
Grant date
08/12/2017
14/12/2018
06/07/2020
11/12/2020
* Estimated date.
Period exercisable
03/12/2020 to 07/12/2027
14/12/2021* to 13/12/2028
07/12/2022* to 05/07/2030
11/12/2023* to 10/12/2030
Number
2021
-
52,040
190,960
30,193
273,193
Number
2020
22,672
52,040
190,960
-
265,672
Page 251
The Accounts
The fair value of RSU awards issued in the year was determined using a Black-Scholes Merton model. Details of the awards made in
the year ended 30 September 2021 and the year ended 30 September 2020 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 these grants no departures are expected.
52. Retirement benefit obligations
(a) Defined benefit plan – description
11/12/20
30,193
446.80p
3.0
446.80p
06/07/20
190,690
360.60p
2.4
360.60p
The Group operates a funded defined benefit pension scheme in the UK, the Paragon Pension Plan (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.
Scheme benefit changes
During the year, following consultation with the active members of the Plan, changes were made affecting the accrual of benefits by
members after 1 July 2021. The principal changes were:
• The earliest age that members can access benefits building up after 1 July 2021 without any reduction for early payment is 65,
rather than 60
• The rate of salary increase counting towards benefits and contributions in the Plan is capped at 2.5% per annum
• Members were allowed to elect to either contribute 8% of capped salary to accrue benefits at the rate of 1/70 of capped final salary
per year or continue to contribute 5% of capped salary to accrue benefits at the rate of 1/75 of capped final salary per year
The changes do not affect benefits already accrued to that date.
Employee contributions and benefits
The scheme was closed to new entrants in February 2002. Employees who are members of the plan are entitled to receive a pension
of 1/60 of their final basic annual salary per year of service up to 30 June 2021. After that date further accrual is at a rate of 1/70 or 1/75
of capped final salary depending on the level of contributions. After 1 July 2021 employee contributions were either 5% or 8% of capped
salary. Before that date all active members contributed at a rate of 5% of salary.
Dependants of Plan members are eligible for a dependant's pension and the payment of a lump sum in the event of death in service.
Actuarial risks
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 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
Page 252
• 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 the expected rate of inflation. Should
the salaries of Plan members increase at a higher rate, then the deficit will be higher. For service from 1 July 2021, a 2.5% cap on
individual pensionable salary applies, mitigating this risk
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 changes referred to above will also reduce this cost
going forward.
Actuarial valuation and recovery plan
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 forms the basis of the IAS 19 valuation.
Following the agreement of the 2019 actuarial valuation, 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 22). 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 22) 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 2021 in accordance with the requirements of
IAS 19 (revised) by Mercer, the Group’s independent consulting actuary.
As the changes in the Plan described above did not affect benefits built up before 1 July 2021, the impact on the IAS 19 basis was
immaterial and no remeasurement of assets and liabilities at 30 June 2021 has taken place. The service cost for the period between
1 July 2021 and 30 September 2021, and the associated interest cost and expected return, have been adjusted to reflect the value of
benefits accruing from 1 July 2021.
The major categories of assets in the Plan at 30 September 2021, 30 September 2020 and 30 September 2019 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
2021
£m
17.1
73.4
54.8
-
145.3
(155.6)
(10.3)
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)
At 30 September 2021 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.
Towards the end of the year the Plan disposed of its holdings in real estate funds, following a review of its investment strategy. These
are currently in the process of reinvestment in other asset classes, with part of the proceeds held in cash at the year end.
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.
Page 253
The Accounts
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.
A further judgement relating to GMP equalisation within historic transfer values was handed down in November 2020. The impact has
been allowed for in employment cost for the year ended 30 September 2021, but is not significant.
The movement in the fair value of the Plan assets during the year was as follows:
At 1 October 2020
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 2021
2021
£m
134.5
2.4
4.8
0.2
(6.8)
(0.8)
11.0
145.3
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 that year.
The actual return on Plan assets in the year ended 30 September 2021 was £13.4m (2020: £0.5m).
The movement in the present value of the Plan liabilities during the year was as follows:
2021
£m
154.9
1.8
-
2.7
0.2
(6.8)
1.1
1.7
-
155.6
2020
£m
147.3
2.0
-
2.7
0.2
(2.9)
1.2
6.0
(1.6)
154.9
At 1 October 2020
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 2021
Page 254
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.
Following the changes in the plan described above, liabilities for benefits accruing for service up to 1 July 2021 are calculated
separately from those accruing in respect of service after that date.
The major weighted average assumptions used by the actuary were (in nominal terms):
In determining net pension cost for the year
Discount rate
Rate of compensation increase
Pre July 2021-accrual
Post 1 July 2021 accrual
Rate of price inflation
Rate of increase of pensions
In determining benefit obligations
Discount rate
Rate of compensation increase:
Pre 1 July 2021 accrual
Post 1 July 2021 accrual
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
2021
1.75%
2.95%
2.50%
2.95%
2.85%
2.00%
3.40%
2.50%
3.40%
3.15%
28
29
29
31
2020
1.85%
3.20%
n/a
2.70%
2.65%
1.75%
2.95%
2.50%
2.95%
2.85%
28
29
30
31
2019
2.95%
3.60%
n/a
3.10%
2.95%
1.85%
3.20%
n/a
2.70%
2.65%
28
29
30
31
In determining benefit obligations, mortality is projected using the S3PA Chartered Management Institute (‘CMI’) Projection Model
with a 1.5% long-term improvement rate. At 30 September 2021 the 2020 (All) Year of Birth version of the model was used
(2020: 2019 (All) Year of Birth, 2019: 2018 Light Year of Birth)
The amounts charged in the consolidated income statement in respect of the Plan are:
Note
2021
2020
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
49
5
£m
1.8
-
1.8
0.8
2.6
2.7
(2.4)
0.3
2.9
£m
2.0
-
2.0
0.6
2.6
2.7
(2.3)
0.4
3.0
Page 255
The Accounts
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 gain / (loss)
Tax thereon
Net actuarial gain / (loss)
Of the remeasurement movements reflected above:
2021
£m
11.0
(1.1)
(1.7)
-
8.2
(0.9)
7.3
2020
£m
(1.8)
(1.2)
(6.0)
1.6
(7.4)
2.1
(5.3)
• The return on plan assets to 30 September 2021 represents better than expected investment performance, including an element
of post-Covid recovery in investment markets generally, as well as a reversal of the lower than expected returns in the year ended
30 September 2020.
• The change in demographic assumptions in the year ended 30 September 2021 predominantly reflects the adoption of new
commutation factors by the Trustee from January 2021, which increased liabilities in respect of non-retired members. For the year
ended 30 September 2020, the change in demographic assumption related to updated 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
• The change in financial assumptions in the year ended 30 September 2021 reflects principally the impact of market implied
inflation expectations increasing the value of Plan liabilities, although this was partially offset by higher discount rates, which are
derived from market bond yields. Much of the change in the year ended 30 September 2020 resulted from the impact of falling
bond yields on the discount rate used in the valuation
• The experience adjustments in 2020 arose on the adoption of the 2019 Plan valuation as the basis of the IAS 19 valuation in that
year. This exercise only takes place triennially
(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 2021,
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%
0.1%
0.1%
1 year of life expectancy
(2.2)%
2.0%
0.4%
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. The impacts of equivalent decreases in
assumptions are broadly equal and opposite to the effects of the increases shown above.
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.
Following a review of the Plan’s investment strategy, the current target asset allocations for the year ending 30 September 2022 are
60% growth assets (primarily equities), and 40% matching assets (primarily bonds).
Following the finalisation of the March 2019 valuation, the agreed rate of employer contributions in respect of future service 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. With effect from 1 July 2021, when the changes in the Plan benefits described above
were implemented, the level of employer contributions for future service reduced to 25.0% of capped salary.
Page 256
The present best estimate of the contributions to be made to the Plan by the Group in the year ending 30 September 2022 is £4.1m.
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
2021
Years
24
23
15
22
2020
Years
24
23
15
22
(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 ended 30 September 2020 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.
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 2021, which represent the total cost
charged against income, were £3.7m (2020: £3.1m) (note 49).
D2.3 Notes to the Accounts – Capital and financial risk
For the year ended 30 September 2021
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.
53. 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 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.
Page 257
The Accounts 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) 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 CRR. Following the UK’s exit from the EU in December 2020 the PRA launched a
consultation in February 2021 which would result in the Basel III rules being applied in the UK through the PRA Rulebook.
The Group’s regulatory capital is monitored by the Board, its Risk and Compliance Committee and the Asset and Liability Committee,
which 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, 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 ended 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 2021 and 30 September 2020.
Where these reliefs are taken, firms are also required to disclose their capital positions calculated as if the reliefs were not available
(the ‘fully loaded’ basis).
The tables below demonstrate that at 30 September 2021 the Group’s regulatory capital of £1,205.8m (2020: £1,141.2m) exceeded the
amounts required by the regulator, including £604.2m (2020: £749.6m) in respect of its Total Capital Requirement (‘TCR’), which is
comprised of fixed and variable elements (amounts not subject to audit).
The total regulatory capital at 30 September 2021 on the fully loaded basis of £1,176.1m (2020: £1,098.9m) was in excess of the TCR of
£601.8m (2020: £745.3m) on the same basis (amounts not subject to audit).
During the year the Group’s TCR reduced from 10.8% of Total Risk Exposure (‘TRE’) at 30 September 2020 to 8.8% of TRE at
30 September 2021, principally as a result of the regulator’s most recent review of the Group’s risk profile and exposures.
The CRR also requires firms to hold additional capital buffers, including a Capital Conservation Buffer (‘CCoB’) of 2.5% of risk
weighted assets (at 30 September 2021) (2020: 2.5%) and a Counter-Cyclical Buffer (‘CCyB’), currently 0.0% of risk weighted assets
(2020: 0.0%). The long term rate of the UK CCyB in a standard risk environment is expected to be 2.0%. Firm specific buffers may also
be required.
Page 258
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 2021 is set out below.
Total equity
Deductions
Proposed final dividend
IFRS 9 transitional relief
Intangible assets
Software relief
Prudent valuation adjustments
Common Equity Tier 1 (‘CET1’) capital
Other tier 1 capital
Total Tier 1 capital
Corporate bond
Eligibility cap
Total Tier 2 capital
Note
40
*
23
†
§
30
Ф
Regulatory basis
Fully loaded basis
2021
£m
1,241.9
(46.6)
29.7
(170.5)
1.4
(0.1)
1,055.8
-
1,055.8
150.0
-
150.0
2020
£m
1,156.0
(36.4)
42.3
(170.1)
-
(0.6)
991.2
-
991.2
150.0
-
150.0
2021
£m
1,241.9
(46.6)
-
(170.5)
1.4
(0.1)
1,026.1
-
1,026.1
150.0
-
150.0
2020
£m
1,156.0
(36.4)
-
(170.1)
-
(0.6)
948.9
-
948.9
150.0
-
150.0
Total regulatory capital (‘TRC’)
1,205.8
1,141.2
1,176.1
1,098.9
*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.
† Under a relief enacted by the EU in December 2020 an amount in respect of software assets in intangibles is added back to capital. This is calculated in accordance with Article
36 (1) (b) of the CRR. In July 2021 the PRA reaffirmed its view that software assets would not absorb losses effectively in a stress. It therefore commenced a consultation on a
proposal to remove this relief with effect from 1 January 2022.
Ф CRD IV restricts the amount of tier 2 capital which is eligible for regulatory purposes to 25% of TCR.
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
Regulatory basis
Fully loaded basis
2021
£m
6,073.5
143.9
29.7
6,247.1
576.0
-
13.7
2020
£m
6,171.7
104.1
42.3
6,318.1
544.3
-
85.7
2021
£m
6,073.5
143.9
-
6,217.4
576.0
-
13.7
2020
£m
6,171.7
104.1
-
6,275.8
544.3
-
85.7
Total risk exposure amount (‘TRE’)
6,836.9
6,948.1
6,807.2
6,905.8
Solvency ratios
CET1
TRC
This table is not subject to audit
%
15.4
17.6
%
14.3
16.4
%
15.1
17.3
%
13.7
15.9
The CRD IV risk weightings for credit risk exposures are currently calculated using the Standardised Approach (‘SA’). The Basic
Indicator Approach is used for operational risk.
Page 259
The Accounts 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, with retail deposits of over £50.0 billion. In addition, in
October 2021 the PRA stated its expectation that all other UK firms should manage their leverage risk so that this ratio does not
ordinarily fall below 3.25%.
Total balance sheet assets
Less: Derivative assets
Central bank deposits
CRDs
Accrued interest on sovereign exposures
On-balance sheet items
Less: Intangible assets
Add back: Software relief
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
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
Note
19
14
20
23
19
2021
£m
15,137.0
(44.2)
(1,142.0)
(23.7)
-
13,927.1
(170.5)
1.4
2020
£m
15,505.5
(463.3)
(1,637.1)
(15.1)
-
13,390.0
(170.1)
-
13,758.0
13,219.9
44.2
36.3
80.5
1,380.3
(1,128.3)
252.0
463.3
92.3
555.6
949.1
(773.8)
175.3
1,055.8
991.2
14,090.5
29.7
14,120.2
13,950.8
42.3
13,993.1
7.5%
7.1%
2021
£m
1,026.1
14,090.5
7.3%
2020
£m
948.9
13,950.8
6.8%
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.
Page 260
(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 2021 is derived as follows:
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
Note
23
23
23
2021
£m
164.5
2.0
166.5
1,156.0
(170.1)
985.9
1,241.9
(170.5)
1,071.4
2021
£m
91.3
2.0
93.3
1,108.4
(171.1)
937.3
1,156.0
(170.1)
985.9
1,028.7
961.6
16.2%
9.7%
(c) Dividend and distribution 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 38) 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.
To provide greater transparency, the Board also adopted a policy of paying an interim dividend in each year equivalent to half of the
preceding final dividend in the absence of any factors which might make such a distribution inappropriate. After consideration of the
Group’s capital position an interim dividend for the year of 7.2p per share was declared, in line with this policy (2020: nil).
The Group’s dividend and distribution decisions in the 2020 financial year were dominated by the potential impact of the Covid
pandemic. The strategic decision to build capital in response to the inherent risks posed by the virus meant that no interim dividend
was declared for the year. However, at the 2020 year end a dividend was declared in line with the Group’s stated policy.
The appropriate level of final dividend for the current year was considered by the Board in light of economic and regulatory
developments in the year, and the various potential paths for the UK economy as the pandemic recedes. 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 impacts of stress testing carried out as part of the ICAAP and forecasting processes, discounting the effects of the current
temporary reduction in regulatory buffers. 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.
Page 261
The Accounts The Board will therefore propose a final dividend for the year of 18.9p per share (2020: 14.4p per share) for approval of the 2022 AGM,
making a total dividend for the year of 26.1p per share (2020: 14.4p per share).
In addition, at the time of approving the half year report in June 2021, the Board authorised a buy-back of up to £40.0m of shares in the
market, initially to be held in treasury. This programme commenced that month, and by the year end funds of £37.7m (including costs)
had been disbursed. This programme will be completed following the publication of the results for the year.
At the time of approving the final dividend for the year the Board also authorised a further buy-back programme of £50.0m.
This programme will commence after the completion of the June 2021 programme and the shares purchased will initially be held
in Treasury.
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
13
40
2021
65.2
26.1
2.50
2020
36.0
14.4
2.50
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 2021, 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.
54. 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 55 to 58 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 the Asset and Liability Committee (‘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 55 to 58 is materially similar to that existing throughout the year.
Page 262
55. 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
2021
£m
2020
£m
15
20
20
14
20
20
20
19
13,402.7
12,631.4
1.3
-
1,360.1
36.6
23.7
-
3.2
-
1,925.0
103.5
15.1
0.1
14,824.4
14,678.3
44.2
14,868.6
463.3
15,141.6
2021
£m
-
-
73.0
19.6
-
-
0.1
92.7
-
92.7
2020
£m
-
-
84.0
12.6
-
-
0.6
97.2
-
97.2
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 56, 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 statistically-based decision making models. Information on each applicant is combined with data taken from credit
reference agencies and other external sources 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. Similarly, where assets form part of the
security to support the loan, robust asset valuation processes ensure appropriate risk mitigation is in place. Even so, in assessing
credit risk an applicant’s ability and propensity to repay the loan remain the principal factors in the decision to lend, even where the
Group would have security on the proposed loan.
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.
Page 263
The Accounts
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
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
RLS, CBILS and BBLS
Other unsecured commercial loans
Unsecured consumer loans
Total loans to customers
2021
£m
11,424.3
36.3
11,460.6
281.7
11,742.3
608.2
12,350.5
440.5
229.2
28.2
118.9
20.9
2021
%
85.2%
0.3%
85.5%
2.1%
87.6%
4.5%
92.1%
3.3%
1.7%
0.2%
0.9%
0.2%
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
13,188.2
98.4%
12,459.2
33.1
83.8
10.3
87.3
0.3%
0.6%
0.1%
0.6%
13,402.7
100.0%
22.3
25.2
15.0
109.7
12,631.4
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%
98.6%
0.2%
0.2%
0.1%
0.9%
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 balances are generally short term unsecured loans made to firms of lawyers and accountants for working
capital purposes.
Loans made under the Recovery Loan Scheme (‘RLS’), 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.
Page 264
Buy-to-let mortgages
Development finance
Structured lending
Asset finance
2021
£m
163.3
217.9
108.7
10.4
500.3
2020
£m
154.3
240.0
72.7
-
467.0
The threshold of £10.0m is used internally for monitoring large exposures.
Credit grading
An analysis of the Group’s loans to customers by absolute level of credit risk at 30 September 2021 is set out below. The analysed
amount represents gross carrying amount.
30 September 2021
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 2020
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
9,834.5
1,716.9
149.2
42.0
42.0
115.8
11,900.4
(15.0)
11,885.4
8,771.2
1,229.2
742.2
285.2
48.3
253.6
11,329.7
(22.2)
11,307.5
Stage 2
£m
563.8
532.2
130.2
23.7
27.5
1.7
1,279.1
(11.3)
1,267.8
453.3
120.9
184.7
143.9
67.9
74.7
1,045.4
(15.8)
1,029.6
Stage 3
£m
1.3
78.5
3.8
11.6
62.0
7.1
164.3
(38.9)
125.4
20.8
10.7
12.1
50.7
49.9
31.9
176.1
(43.4)
132.7
POCI
£m
41.9
16.3
22.4
21.7
17.4
4.6
124.3
(0.2)
124.1
45.9
21.7
32.8
32.0
22.9
6.7
162.0
(0.4)
161.6
Total
£m
10,441.5
2,343.9
305.6
99.0
148.9
129.2
13,468.1
(65.4)
13,402.7
9,291.2
1,382.5
971.8
511.8
189.0
366.9
12,713.2
(81.8)
12,631.4
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 18, other than those shown as ‘realisations’.
Examples of lower risk cases in higher IFRS 9 stages include fully up-to-date receiver of rent cases; accounts where the customer is
in arrears on their account with the Group but up to date on accounts with other lenders, creating a overall positive credit rating; and
accounts where the default on the Group’s loan has yet to impact on the external credit score.
A small proportion of the loan book (2021: 1.0%, 2020: 2.9%) 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.
Page 265
The Accounts 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 customer is entitled to settle the loan at any point and in most cases early settlement does take place. All customers on
these accounts are required to make monthly payments.
An analysis of the indexed Loan-to-Value (‘LTV’) ratio for those loan accounts secured on residential property by value at 30
September 2021 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
2021
%
83.8
14.3
0.5
0.3
1.1
100.0
61.1
61.2
42.0
2020
%
59.9
35.9
2.3
0.4
1.5
100.0
65.7
65.8
49.2
2021
%
88.4
8.5
1.5
0.6
1.0
100.0
56.1
2020
%
74.5
16.7
5.2
1.2
2.4
100.0
62.2
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 10.0% in the year ended 30 September 2021 (2020: 5.0%).
The geographical distribution of the Group’s residential mortgage assets by gross carrying value is set out below.
First charge
Second charge
2021
2020
2021
2020
%
3.3
5.5
18.5
3.1
10.3
31.8
8.7
5.5
8.1
94.8
0.1
2.0
3.1
%
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
%
3.3
6.3
7.8
4.0
7.4
39.3
8.3
7.1
6.0
89.5
1.8
5.2
3.5
%
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
100.0
100.0
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 266
Development finance
Development finance loans have an average term of 21 months (2020: 21 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 against the costs and progress in the agreed development
programme 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%
2021
2021
By value
By number
%
2.9
27.3
44.3
22.8
1.4
1.3
%
5.3
20.6
49.4
21.9
1.6
1.2
2020
By value
%
7.6
22.4
34.0
31.3
2.8
1.9
2020
By number
%
4.8
13.2
41.0
36.1
4.0
0.9
100.0
100.0
100.0
100.0
The average LTGDV cover at the year end was 61.7% (2020: 63.1%).
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 focus on residential property development within the portfolio means that asset values
will generally move in line with the UK residential property market.
At 30 September 2021, the development finance portfolio comprised 247 accounts (2020: 229) with a total carrying value of £608.2m
(2020: £609.0m). Of these accounts only 10 were included in Stage 2 at 30 September 2021 (2020: seven), with no accounts classified
as Stage 3 (2020: one). In addition, one acquired account had been classified as POCI (2020: one). An allowance for this loss 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.
East Anglia
East Midlands
Greater London
North
North West
South East
South West
West Midlands
Yorkshire and Humberside
Total England
Northern Ireland
Scotland
Wales
2021
2020
%
3.6
6.3
6.1
2.4
1.1
57.5
13.5
4.8
3.5
98.8
-
1.2
-
%
5.1
5.5
8.2
1.8
0.4
58.8
14.0
4.0
1.1
98.9
-
1.1
-
100.0
100.0
Page 267
The Accounts 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. The average contractual life of the asset finance loans was 51 months (2020: 52 months) while that of the motor
finance loans was 64 months (2020: 60 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
2021
%
33.4
34.2
7.0
6.2
2.3
4.3
4.3
3.1
5.2
2020
%
32.0
33.7
6.9
6.7
3.7
4.8
3.6
2.9
5.7
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 active facilities
Total facilities (£m)
Carrying value (£m)
2021
8
185.5
118.9
2020
8
139.0
94.9
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 2021, one of these facilities was identified as Stage 2 (2020: four) with the remainder in Stage 1.
Page 268
RLS, CBILS and BBLS
Loans under these schemes have the benefit of guarantees underwritten by the UK Government, which launched them as a response
to the impact of Covid on UK SMEs.
CBILS and BBLS were launched in 2020 and remained open for new applications until March 2021. RLS was launched in April 2021 as
a successor scheme and is expected to be available until June 2022.
The Group offered 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 covers up to 80% of the lender’s principal loss after the application of any
proceeds from the asset financed (if applicable).
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 offers term loans and asset finance loans under the RLS. Interest and fees are payable by the customer from inception.
The Government guarantee covers up to 80% of the lender’s principal loss, after the application of any proceeds from the asset
financed (if applicable), although the Government has announced its intent to reduce this cover to 70% for applications received after
1 January 2022.
The Group’s outstanding RLS, CBILS and BBLS loans at 30 September 2021 were:
RLS
Term loans
Asset finance
Total RLS
CBILS
Term loans
Asset finance
Total CBILS
BBLS
2021
£m
0.1
20.7
20.8
28.1
29.9
58.0
5.0
83.8
2020
£m
-
-
-
20.6
1.0
21.6
3.6
25.2
At 30 September 2021, only £0.2m of this balance was considered to be non-performing (2020: £nil).
Unsecured consumer loans
Almost all 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 269
The Accounts 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 2021 and 30 September 2020, compared to the industry averages at those dates published by UK Finance (‘UKF’) and
the FLA, was:
2021
%
2020
%
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
Asset finance loans
Accounts more than 2 months in arrears
FLA data for business lease / hire purchase loans
0.21
0.14
4.48
0.45
0.43
0.85
0.78
19.08
1.18
23.12
24.76
8.60
4.15
2.30
14.07
0.27
0.60
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
No published industry data for asset classes comparable to the Group’s other books has been identified. Where revised data at
30 September 2020 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 appropriate.
It should be noted that, where customers were allowed to defer payments as part of Covid reliefs, these deferrals were not classified
as arrears, in accordance with regulatory guidance.
Few of these arrangements remained in place at 30 September 2021, meaning that some of the increases shown above will relate to
the suppression of arrears at the previous year end.
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 270
Acquired assets
Almost all the Group’s unsecured consumer loan assets are part of purchased debt portfolios where the consideration paid was 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 2021.
Collections on purchased accounts have been comfortably in excess of those implicit in the purchase prices.
In the debt purchase industry, Estimated Remaining Collections (‘ERC’) 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 ERCs value 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
2021
£m
185.2
221.2
245.2
113.2
143.9
163.4
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
Amounts shown above are disclosed as loans to customers (note 15). 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 which
institutions deposits may be placed with. The Group has formal risk policies, approved by the Risk and Compliance Committee. These
include limitations on large exposures to mitigate any concentration risk in respect of its investments.
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 from time to time.
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-
Cash with retail banks rated:
AA-
A+
Total exposure
2021
£m
2020
£m
1,142.0
1,142.0
1,637.1
1,637.1
50.5
167.6
218.1
112.0
175.9
287.9
1,360.1
1,925.0
Page 271
The Accounts
The Company
Cash with retail banks rated:
A+
2021
£m
2020
£m
19.6
12.6
CRDs are exposures to the Bank of England and thus share the central bank rating noted above while CSA assets, placed with retail
banks, have similar ratings to those shown above for retail bank deposits.
Credit risk on all 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 PD 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 derivative financial instruments used for hedging purposes (note 19).
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.
The Group uses the ISDA Master Agreement for documenting certain derivative activity. For certain counterparties a 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 20, while collateral pledged to the Group is shown in note 32.
Since June 2019, the Group has been centrally clearing certain 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.
The Group’s cross-currency basis swaps, the last of which terminated in the year, had arrangements requiring any counterparty
failing to meet required credit criteria, to provide a cash collateral deposit. These cash collateral deposits were held in escrow and not
recognised as assets of the Group so did not form part of the Group’s cash position.
Page 272
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
Gross exposure (note 19)
Collateral amounts posted
Cross-currency basis swap arrangements
CSA collateral amounts (note 33)
Total collateral
Net exposure
2021
£m
0.1
0.4
43.1
0.6
44.2
-
-
-
2020
£m
-
97.8
364.2
1.3
463.3
-
-
-
44.2
463.3
The reduction in exposure shown above relates principally to the termination of cross-currency basis swaps on the repayment of the
related securitisation borrowings.
56. 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
• 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 273
The Accounts
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 2021
Retail deposits
Borrowings
Total non-derivative liabilities
Derivative liabilities
30 September 2020
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
7,306.3
220.3
7,526.6
1.8
7,528.4
5,740.0
792.9
6,532.9
5.1
6,538.0
1,626.9
25.0
1,651.9
11.7
1,663.6
1,608.2
398.1
2,006.3
5.2
2,011.5
540.1
2,913.7
3,453.8
28.9
3,482.7
704.5
1,079.0
1,783.5
1.8
1,785.3
In more than
five years
£m
12.3
185.6
197.9
0.4
198.3
-
161.5
161.5
-
161.5
Total
£m
9,485.6
3,344.6
12,830.2
42.8
12,873.0
8,052.7
2,431.5
10,484.2
12.1
10,496.3
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 274
Retail deposits
The Group’s retail funding strategy is focussed on building a stable mix of deposit products. A high proportion of balances, 97.0%
(2020: 97.3%), are protected by the 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
Payable after more than five years
2021
£m
3,308.7
808.1
3,189.5
7,306.3
1,626.9
540.1
12.3
9,485.6
2020
£m
2,363.8
598.3
2,777.9
5,740.0
1,608.2
704.5
-
8,052.7
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 2021 the liquidity buffer comprised the following on and off balance sheet assets. All these assets are held within the
Bank and are readily realisable.
Balances with central banks
Total on balance sheet liquidity
Long / short repo transaction
2021
£m
942.7
942.7
150.0
1,092.7
2020
£m
1,386.9
1,386.9
150.0
1,536.9
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 2021, 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.
Borrowings
Set out below is the contractual maturity profile of the Group’s and the Company’s borrowings at 30 September 2021 and
30 September 2020 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.
Page 275
The Accounts The Group
30 September 2021
Secured bank borrowings
Asset backed loan notes
Total non-recourse funding
Bank overdrafts
Retail bonds
Corporate bond
Central bank facilities
Lease liabilities
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
The Company
30 September 2021
Retail bonds
Corporate bond
Lease liabilities
30 September 2020
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
201.0
-
201.0
0.3
125.0
-
69.0
1.5
396.8
-
-
-
0.4
60.0
-
700.0
1.5
761.9
-
-
-
-
-
-
-
1.9
1.9
-
-
-
-
124.8
-
244.4
1.1
370.3
-
-
-
-
112.1
-
2,750.0
3.8
2,865.9
-
-
-
-
112.0
-
910.0
2.4
529.0
516.0
1,045.0
-
-
149.0
-
2.3
1,196.3
657.8
3,270.5
3,928.3
-
-
149.8
-
0.6
1,024.4
4,078.7
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
125.0
-
1.3
126.3
60.0
-
1.2
61.2
£m
-
-
1.3
1.3
124.8
-
1.3
126.1
£m
112.1
-
4.1
116.2
112.0
-
4.0
116.0
£m
-
149.0
9.6
158.6
-
149.8
11.0
160.8
730.0
516.0
1,246.0
0.3
237.1
149.0
2,819.0
9.5
4,460.9
657.8
3,270.5
3,928.3
0.4
296.8
149.8
1,854.4
5.6
6,235.3
Total
£m
237.1
149.0
16.3
402.4
296.8
149.8
17.5
464.1
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 276
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 27 and the assets backing the Notes are shown in note 16.
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 existed which caused additional cash to be
retained in the SPV rather than being transferred to the Group. While the Group could, if it chose, contribute additional cash to cover
these requirements, it was under no obligation to do so. No such events occurred in the year ended 30 September 2021 or the year
ended 30 September 2020 and no such SPVs remained live at 30 September 2021. The cash balances of the SPV companies are
included within the restricted cash balances disclosed in note 14 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 commitment period. There is no further recourse to other assets of
the Group in respect of either interest or principal on the borrowings.
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. Credit enhancement in the active warehouse at 30 September 2021 was £27.4m (2020: £nil) and
undrawn facilities of £199.0m were available at the year-end (2020: £400.0m).
Further details of the warehouse facilities are given in note 28 and details of the loan assets within the warehouses are given in
note 16.
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 2045 and the latest in 2050.
The equivalent sterling principal amount outstanding at 30 September 2021 under the SPV and warehouse arrangements, allowing for
the effect of the cross-currency basis swaps, described under currency risk (note 58), which are net settled with the loan payments,
was £1,248.1m (2020: £3,489.1m). The total sterling amount payable under these arrangements, were these principal amounts to
remain outstanding until the final repayment date, would be £1,886.9m (2020: £4,423.0m). 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. The oldest outstanding bond was redeemed in the year in accordance with its terms of issue,
reducing the outstanding principal to £237.5m. This programme offers the Group opportunities to raise further working capital
if needed.
The Group issued £150.0m of tier 2 debt in September 2016 with an optional call date in September 2021 and a final maturity of
September 2026. This was called during the year and a replacement green bond was issued in March 2021. This bond is optionally
callable between 25 June 2026 and 25 September 2026 and has a final maturity date of 25 September 2031.
The Group’s ability to issue debt is supported by its credit rating issued by Fitch which was confirmed at BBB- in March 2021 with the
published outlook for the rating revised to stable (from negative), in common with the ratings of other UK banks.
Of the Group’s corporate and retail bond issuance, £125.0m falls due for payment in the next twelve months.
Page 277
The Accounts Central bank facilities
The Group has accessed term facilities under the central bank schemes described in note 31. 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 2021 the
amount of drawings available in respect of prepositioned assets was £1,424.2m (2020: £684.0m).
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
1,276.1
5.3
4.6
4.3
1,290.3
2021
Available
£m
287.0
100.9
59.9
81.4
529.2
Total
£m
1,563.1
106.2
64.5
85.7
1,819.5
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
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 16.
Utilised notes includes those which the Group is obliged to hold under regulations governing securitisation issuance.
The available AAA notes would give access to £149.3m (2020: £502.5m) if used to secure drawings on Bank of England facilities. This is
expected to increase to £297.1m when approval of the Group’s LIBOR transition arrangements is received.
During the year ended 30 September 2020, the Group entered into a back-to-back long / short sale and repurchase ('repo')
transaction with a UK bank which continued throughout the current year. This provides £150.0m of liquidity (2020: £150.0m), utilising
£26.8m of the loan notes shown above, but does not appear on the Group’s balance sheet.
The Group has also entered into short-term repo transactions from time to time during the year and maintains the capability to access
the repo market for liquidity purposes.
Page 278
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 2021
Payable in:
Less than one year
One to two years
Two to five years
Over five years
30 September 2020
Payable in:
Less than one year
One to two years
Two to five years
Over five years
b) The Company
30 September 2021
Payable in:
Less than one year
One to two years
Two to five years
Over five years
30 September 2020
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
£m
Lease
liabilities
£m
4.6
3.0
-
-
7.6
3.2
5.0
5.8
-
14.0
6.6
6.6
19.7
182.7
215.6
10.9
10.9
32.6
160.9
215.3
Corporate
bonds
£m
6.6
6.6
19.7
182.7
215.6
10.9
10.9
32.6
160.9
215.3
135.6
6.8
119.2
-
261.6
75.3
135.6
126.0
-
336.9
Retail
bonds
£m
135.6
6.8
119.2
-
261.6
75.3
135.6
126.0
-
336.9
71.8
6.7
2,770.9
-
2,849.4
701.9
245.4
912.0
-
1,859.3
1.7
1.9
3.9
2.9
10.4
1.6
1.2
2.6
0.6
6.0
Lease
liabilities
£m
1.7
1.7
5.0
10.3
18.7
1.7
1.7
5.0
12.0
20.4
Total
£m
220.3
25.0
2,913.7
185.6
3,344.6
792.9
398.1
1,079.0
161.5
2,431.5
Total
£m
143.9
15.1
143.9
193.0
495.9
87.9
148.2
163.6
172.9
572.6
Amounts payable in respect of the ‘other accruals’ and ‘trade creditors’ shown in note 32 fall due within one year. The cash flows
described above will include those for interest on borrowings accrued at 30 September 2021 disclosed in note 32.
Page 279
The Accounts 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
2021
2020
Total cash
outflow / (inflow)
Total cash
outflow / (inflow)
£m
1.8
11.7
28.9
0.4
42.8
(25.1)
(13.6)
(3.8)
-
(42.5)
£m
5.1
5.2
1.8
-
12.1
(38.1)
(43.4)
(45.7)
(0.1)
(127.3)
0.3
(115.2)
The reduction in the level of expected flows is a result of the termination of cross-currency basis swaps in the year.
57. 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, principally
SONIA, during the year. All new wholesale debt and interest rate swaps recognised since that point have referenced SONIA, while
existing LIBOR linked instruments have either been transitioned or are in the process of transitioning in response to the expected
withdrawal of LIBOR from late 2021. This process is expected to be completed in the first half of new financial year, before the LIBOR
withdrawal date.
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
• 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 280
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
The Group’s use of financial derivatives for hedging interest rate risk is discussed further in note 19.
IBOR transition
In July 2017 the FCA announced 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 will be discontinued in the early part of the financial year ending 30 September 2022. The UK
Working Group on Sterling Risk-Free Interest Rates has recommended SONIA as its replacement and this recommendation has been
adopted by the Group where appropriate.
LIBOR was historically used in setting interest rates on significant amounts of the Group’s loan assets and borrowings and an internal
working group was established to identify the impact on the business and ensure an orderly transition from LIBOR to other reference
rates across all classes of financial instrument. This process is well progressed and the Group is on course to complete its transition
ahead of the required date.
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 rates are set out below.
First mortgages
Development finance facilities
Second charge mortgages
Structured lending
Aviation mortgages
2021
£m
-
63.3
45.0
43.4
12.1
163.8
2020
£m
3,750.0
234.6
61.4
94.9
24.1
4,165.0
All these loans reference sterling LIBOR, except certain aviation mortgages denominated in US dollars which reference
US dollar LIBOR.
All of the Group’s LIBOR-linked first mortgage loans were transitioned to a SONIA-linked basis in line with appropriate regulatory
expectations during the year.
The Group’s development finance operation ceased to lend on a LIBOR linked basis from 1 April 2020. A programme to transition
the remaining LIBOR linked facilities to the Group’s Commercial Variable Rate (‘CVR’) commenced in the year. Of the balance shown
above, £21.0m transitioned with effect from 1 October 2021 and the remaining balances are expected to be repaid before
31 December 2021.
The second charge mortgages shown above were moved to LIBOR as a temporary measure following the withdrawal of the Finance
House Base Rate in 2020. These will be transitioned to a basis linked to Bank Base Rate (‘BBR’) by 31 December 2021.
Structured finance facilities agreed since 22 February 2021 have interest rates linked to Daily Compounded SONIA. The majority of
extant LIBOR loans were transitioned to the SONIA basis during the year with the remainder expected to transition before the end of
December 2021.
No new aviation mortgages referencing sterling LIBOR have been written since 1 October 2020. During the year all extant LIBOR
linked loans were transitioned to BBR linked arrangements.
Aviation mortgages referencing US Dollar LIBOR remained in place at year end. US Dollar LIBOR will continue to be published until
June 2023.
Borrowings where interest rates are based on LIBOR and other IBOR rates are shown in notes 27 and 28. All such arrangements have
either expired, transitioned to SONIA in the year, or an agreement to transition to SONIA on an appropriate timescale is in place.
Derivative financial assets and liabilities where cash flows are based on IBOR rates are shown in note 19. All remaining LIBOR linked
derivatives will transition to SONIA in line with ISDA protocols at the LIBOR withdrawal date.
Page 281
The Accounts
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 2021, 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 2021 by £25.6m
(2020: reduced by £0.9m) and increase profit before tax by £16.7m (2020: increase by £19.8m).
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.
In previous years certain of the Group’s borrowings have had interest rates dependent on US dollar and Euro LIBOR rates, with the
effect of related cross-currency basis swaps being such that the Group’s results had no material exposure to movements in these
rates. None of these borrowings remained in place at 30 September 2021 and therefore independent 1.0% increases in US dollar or
Euro interest rates would have no impact on the Group’s equity (2020: increase by £0.3m and £0.9m respectively).
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. The Company’s investments in loans to subsidiary companies include a
Tier-2 Bond issued by Paragon Bank PLC, with terms matching the Tier-2 Bond issued by the Company. Its intercompany balance with
Paragon Bank also includes £199.3m which is placed on deposit with the Bank of England. Interest is received on this balance at the
same rate as that paid by the Bank of England. Other assets and liabilities with group entities bore interest at rates based on LIBOR
up to 30 September 2021, after which they were transitioned to a SONIA basis. All other balances in the Company balance sheet are
non-interest bearing.
58. 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 the Group’s significant assets and liabilities at 30 September 2021 are denominated in sterling. In previous years certain of the
asset backed loan notes were denominated in US dollars or euros, as described in note 27. Although IFRS 9 required that they were
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, the amount of the currency borrowing translated at the exchange rate on inception, is referred to as the
‘equivalent sterling principal’. The final examples of such notes were repaid in the year.
The equivalent sterling principal amounts of notes in issue under the arrangements described above, and their carrying values at
30 September 2021 and 30 September 2020 are set out below:
US dollar notes
Euro notes
£m
-
-
-
£m
-
-
-
£m
397.0
687.5
1,084.5
1,527.4
2021
2021
2020
Equivalent
sterling principal
Carrying
value
Equivalent
sterling principal
2020
Carrying
value
£m
609.6
917.8
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 19.
None of the assets or liabilities of the Company are denominated in foreign currencies.
Page 282
D2.4 Notes to the Accounts – Basis of preparation
For the year ended 30 September 2021
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.
59. Basis of preparation
The Group is required to prepare its financial statements for the year ended 30 September 2021 in accordance with IFRS in
conformity with the requirements of the Companies Act 2006. They must also be prepared in accordance with IFRS adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union (‘EU’). In the financial years reported on this will also
mean that, in the Group’s circumstances, the financial statements also accord with IFRS as approved by the International Accounting
Standards Board.
The “requirements of the Companies Act 2006” here means accounts being prepared in accordance with “IAS” as defined in section
474(1) of that Act, as it applied immediately before IP Completion Day (the end of the UK’s transition period following its departure
from the EU) (‘IPCD’), including where the Company also makes use of standards which have been adopted for use within the United
Kingdom in accordance with regulation 1(5) of the IAS and European Public Limited Liability Company (Amendment etc.) (EU Exit)
Regulations 2019, subsequent to the IPCD.
Under the Listing Rules of the FCA, 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 IPCD on 31 December 2020.
Therefore, while EU endorsed IFRS applies to these financial statements, those for the year ending 30 September 2022 will instead be
prepared under ‘UK-adopted IAS.
The changes in the way that the basis of preparation is described, which result from the UK’s exit from the EU, including the move to
UK-adopted IAS from the Group’s financial year commencing 1 October 2021, do not represent a change in the basis of accounting
which would necessitate a prior year restatement.
The particular accounting policies adopted have been set out in note 61 and the critical accounting judgements and estimates which
have been required in preparing these financial statements are described in notes 62 and 63 respectively.
The Group has historically chosen to present an additional comparative balance sheet.
Adoption of new and revised reporting standards
In the preparation of these financial statements, the following accounting standard is being applied for the first time.
• 2020 amendments to IAS 39 – ‘Interest Rate Benchmark Reform’ and consequential amendments to IFRS 7
Comparability of information
IFRS 16 did not require that the balance sheet information at 30 September 2019 was restated on the adoption of the Standard.
The information presented for that period 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 2021 and 30 September 2020 which are prepared
under IFRS 16.
Standards not yet adopted
There are no standards and interpretations in issue but not effective which address matters relevant to the Group’s accounting
and reporting.
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The Accounts 60. Changes in accounting standards
IAS 39 amendments ‘Interest Rate Benchmark Reform’
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. It also affects the Group’s LIBOR (and other IBOR) referenced derivative assets and liabilities 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 has been endorsed by both the EU and
the UK and has been early adopted by the Group as permitted. The Group has utilised, and will continue to utilise, the provisions
of the amendment as it transitions its IBOR-linked assets and liabilities. The impact of the amendment will depend upon the IBOR
related assets, liabilities and hedging relationships at the point at which transition occurs.
61. 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 2021. 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 2021.
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.
The directors have adopted this basis following a going concern assessment for the Group and the Company covering a period of at
least twelve months following the date of approval of these financial statements. Details of this assessment are set out in note 64.
(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.
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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.
(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
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.
(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 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.
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.
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The Accounts An impairment allowance is provided on an account by account basis:
• For Stage 1, at an amount equal to 12-month ECL, 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
• For Stage 2 and 3 accounts, at an amount equal to lifetime ECL, 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 PD, LGD 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.
While the Group uses statistical models as the basis for its calculation of ECLs where appropriate, expert judgement will always be
used to assess the adequacy of any calculated amount and additional provision made if required.
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.
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(m)
Investments in subsidiaries
The Company’s investments in subsidiary undertakings are valued at cost less provision for impairment.
(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.
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The Accounts (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.
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(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.
62. Critical accounting judgements
The most significant judgements which the directors have made in the application of the accounting policies set out in note 61 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 PD, 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 environment the granting of Covid 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-related 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 18.
(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 18.
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The Accounts (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
• The nature of the contractual cash flows inherent in the assets
Financial assets are classified as held at amortised cost, at fair value through OCI, 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 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.
63. Critical accounting estimates
Certain 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 (such as 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 the ongoing effects of the Covid pandemic, 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 2021 have been derived in light of the current economic situation, modelling
a variety of possible outcomes as described in note 18. It should be noted, however, that there remains a significant range of different
opinions amongst economists about the longer-term prospects for the UK and, while these positions are converging, this is likely to
remain the case for some time to come.
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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.
As a result of this exercise additional requirements for provision were identified, to compensate for potential model weakness and
to allow for economic pressures in the wider economy which cannot be identified by a modelled approach. By their nature such
adjustments are less systematic and therefore subject to a wider range of outturns. The nature and amounts of these PMA’s are set
out in note 18.
The position after considering all these matters is set out in note 18, together with further information on the Group’s approach and
sensitivity analysis. The 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. For each portfolio a model is
in place to ensure that income is appropriately spread.
The underlying 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.
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 £12.0m (2020: £11.2m), while an increase of the assumed asset lives of such assets by three months would increase
balance sheet assets by £12.1m (2020: £10.3m)
• 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 £11.2m (2020: £7.3m)
• A reduction (or increase) in estimated cash flows from purchased loan assets of 5% would reduce (or increase) balance sheet
assets by £7.1m (2020: £9.4m)
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 24, 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. As the Group forecasts are based on the Group’s central
economic scenario, any variance from this will potentially impact on the valuation. 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 24.
(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 52. 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 52.
Page 291
The Accounts
64. Going concern
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. The guidance requires that this assessment covers a period of at least
twelve months from the date of approval of these financial statements.
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 ICAAP cycle, where testing considered the impact of a number of severe but plausible
scenarios. During the planning process, sensitivity analysis was carried out on a number of key assumptions that underpin the
forecast to evaluate the impact of the Group’s principal risks.
The key stresses modelled in detail to evaluate the forecast were:
•
Increased business volumes an increase of 20% in buy-to-let application 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 – 25bps higher cost on all new savings deposits throughout. This scenario illustrated the impact of a
significant prolonged margin squeeze on profitability and whether this would cause significant impacts on any capital, liquidity or
encumbrance ratios
• Lower development finance growth – 50% lower loan book growth across the plan horizon coupled with a 50bp margin reduction.
This scenario replicated a significant increase in competition within the sector, illustrating the impact of a lower proportion of the
high-yielding development finance product in the Group’s long-term asset mix on contribution to costs and other key ratios for
the Group
• Higher buy-to-let redemptions – double redemption rates on all cohorts for the first three months post-reversion. With a significant
volume of five-year fixes coming to an end in 2022, this scenario highlighted the potential risk that is inherent in the accounting
difference between current and amortised cost balances on such loans, and invited discussion as to what mitigating action could
be taken to avoid such an impact
• High impairment a stress that modelled the IFRS 9 year end severe scenario across the plan horizon, simulating a significant
short-term capital and profitability shock with prolonged house price deflation, but maintaining the same lending levels as the
base case. This scenario is described in more detail in Note 18 and is derived from, but more severe than the stress testing
scenario published by the Bank of England in January 2021. 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.
As part of the ICAAP process the Group also assessed the potential operational risks it could face. This was done through the analysis
of the impact and cost of a series of severe but plausible scenarios. This analysis did not highlight any factors which cast doubt on the
Group’s ability to continue as a going concern.
The Group begins the forecast period with a strong capital and liquidity position, enabling the management of any significant outflows
of deposits and / or reduced inflows from customer receipts. 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 £9,300.4m (note 26), raised through Paragon Bank, are repayable within five years, with 77.6% of this
balance (£7,212.9m) 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 2021 Paragon Bank held £942.7m of balance sheet assets for liquidity
purposes, in the form of central bank deposits (note 56). A further £150.0 million of liquidity was provided by an off balance sheet swap
arrangement (note 56), bringing the total to £1,092.7m.
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, updated annually. 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 £1,424.2m. 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 2021 the Group had £529.2m of such notes available for use, of which £287.0m were rated AAA. The available
AAA notes would give access to £149.3m if used to support drawings on Bank of England facilities.
Page 292
The Group’s securitisation funding structures, described in note 56, provide match funding for part of the asset base. 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
remains active with strong levels of demand and the Group maintains the infrastructure required to access it.
The earliest maturity of any of the Group’s bond debt is the £125.0m retail bond, due January 2022. £69.0m of TFS debt was paid down
after the year end and all other central bank debt was refinanced and is not payable until 2025.
The Group’s access to debt is enhanced by its corporate BBB rating, affirmed by Fitch Ratings in March 2021, and its status as an
issuer is evidenced by the BB+ rating of its £150.0m Tier-2 bond issued in the year. 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 has access to the short-term repo market for liquidity purposes which it uses from time to time, including during the
financial year ended 30 September 2021.
The Group’s cash analysis, which includes the impact of all scheduled debt and deposit repayments, continues to show a strong
position, even after allowing scope for significant discretionary payments and capital distributions.
As described in note 53 the Group’s capital base is subject to consolidated supervision by the PRA. The most recent review of the
Group’s capital position and management systems resulted in a reduction of the minimum capital level. Its capital at 30 September
2021 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 there was no material uncertainty as to whether the Group and the
Company would be able to maintain adequate capital and liquidity for at least twelve months following the date of approval of these
financial statements and consequently that it was appropriate for them to continue to adopt the going concern basis in preparing the
financial statements of the Group and the Company.
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 2021 or the year ended 30 September 2020 carried at
fair value and valued using level 3 measurements, other than contingent consideration amounts (note 33).
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.
Page 293
The Accounts (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
19
19
33
2021
£m
44.2
44.2
43.9
7.5
51.4
2020
£m
463.3
463.3
132.4
13.5
145.9
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 market
interest rate, adjusted for risk as appropriate.
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, euro and 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 19.
Contingent consideration
The value of the contingent consideration balances shown in note 33 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.
Page 294
(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
2021
2021
2020
2020
Carrying amount
Fair value
Carrying amount
Fair value
£m
£m
£m
£m
14
15
20
26
32
1,360.1
13,402.7
65.7
14,828.5
0.3
516.0
730.0
9,300.4
386.1
66.2
1,360.1
13,470.6
65.7
14,896.4
0.3
516.0
730.0
9,308.5
411.9
66.2
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
10,999.0
11,032.9
12,306.5
12,359.6
Note
2021
2021
2020
2020
Carrying amount
Fair value
Carrying amount
Fair value
£m
£m
£m
£m
14
20
20
32
32
19.6
73.0
0.1
92.7
386.1
22.6
3.0
411.7
19.6
73.0
0.1
92.7
411.9
22.6
3.0
437.5
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
The fair values of retail deposits and corporate and retail bonds shown above will include amounts for the related accrued interest.
Page 295
The Accounts
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 296
66. Details of subsidiary undertakings
Subsidiary undertakings of the Group at 30 September 2021, 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 Bank PLC
Paragon Car Finance Limited
Idem Capital Holdings Limited
Moorgate Servicing Limited
The Business Mortgage Company Limited
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
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 Loan Finance (No. 3) Limited
Paragon Mortgages (No. 5) PLC
Paragon Pension Investments GP Limited
Paragon Pension Plan Trustees Limited
Paragon Personal Finance (1) Limited
Paragon Third Funding Limited
Paragon Vehicle Contracts Limited
Plymouth Funding Limited
Universal Credit Limited
Yorkshire Freeholds Limited
Yorkshire Leaseholds Limited
Plymouth Funding Limited
Universal Credit Limited
Yorkshire Freeholds Limited
Yorkshire Leaseholds Limited
100%
100%
100%
100%
100%
100%*
100%*
100%*
100%*
100%*
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Deposit taking, residential mortgages and loan and vehicle finance
Vehicle finance
Intermediate holding company
Intermediate holding company
Mortgage broker
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
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
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Page 297
The Accounts Direct and indirect subsidiaries of Paragon Bank PLC
Paragon Finance PLC
Mortgage Trust Limited
Paragon Mortgages Limited
Paragon Mortgages (2010) Limited
Mortgage Trust Services PLC
Paragon Second Funding Limited
Paragon Asset Finance Limited
Paragon Business Finance PLC
Paragon Commercial Finance Limited
Paragon Development Finance Limited
Paragon Development Finance Services Limited
Paragon Technology Finance Limited
PBAF Acquisitions Limited
PBAF (No.1) Limited
Premier Asset Finance 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
Other indirect subsidiary undertakings
Moorgate Loan Servicing Limited
Idem Capital Securities Limited
Paragon Personal Finance Limited
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%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Residential mortgages and asset administration
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages and asset administration
Residential mortgages and loan and vehicle finance
Holding company and portfolio administration
Asset finance
Asset finance
Development Finance
Development Finance
Asset finance
Residential mortgages and loan finance
Holding Company
Asset finance broker
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
Consumer loan finance
Surveyors and property consulting
Non-trading
Non-trading
Non-trading
Non-trading
Page 298
The financial year end of all 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.
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 2021 comprise:
Company
Paragon Seventh Funding Limited
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
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
Paragon Mortgages (No. 23) Holdings Limited
Paragon Mortgages (No. 23) PLC
Paragon Mortgages (No. 24) Holdings Limited
Paragon Mortgages (No. 24) PLC
Principal activity
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
Non-trading
Non-trading
Non-trading
All 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 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.
Page 299
The Accounts 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 was Greenmeadow House, 2 Village Way, Greenmeadow Springs Business Park,
Cardiff, CF15 7NE at 30 September 2021, and was changed on 1 November 2021 to Regus House, Malthouse Avenue, Cardiff Gate
Business Park, Cardiff CF23 8RU
• 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
All the entities listed above are included in the consolidated accounts of the Group.
The following legal subsidiaries of the Group are currently in liquidation. They do not form part of the consolidation as they are
considered to be controlled by the liquidator.
Company
Holding
Principal activity
Direct subsidiaries of Paragon Banking Group PLC
First Flexible (No.7) PLC
Paragon Fourth Funding Limited
Paragon Loan Finance (No. 1) Limited
Paragon Loan Finance (No. 2) Limited
Paragon Mortgages (No. 9) PLC
Paragon Mortgages (No. 10) PLC
Paragon Secured Finance (No. 1) PLC
Indirect subsidiaries
First Flexible No.6 PLC
Idem (No.3) Limited
100%*
Non-trading
100%
100%§
100%§
100%*
100%*
100%
Non-trading
Non-trading
Non-trading
Residential mortgages
Residential mortgages
Non-trading
100%§
100%
Residential Mortgages
Asset investment
The shareholdings of the Company in each of the direct subsidiaries shown above is the same as that of the Group, except for
companies marked * where the shareholding of the company is 74%. The issued share capital of each of the companies listed above
consists of ordinary shares only, except for companies marked § which have additional preference share capital held within the Group.
First Flexible No.5 PLC a company previously controlled but not legally owned by the Group which had been party to the type of
financing arrangements described above was also in liquidation at 30 September 2021.
Page 300
Page 301
The Accounts LEARNING &
DEVELOPMENT
In 2021, Paragon launched an exciting, new development
programme, welcoming a range of people from across
Group to the High Potential Programme.
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.
P304
E1. Appendices to the Annual Report
E1. Appendices to the Annual Report
For the year ended 30 September 2021
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
Add back: Fair value adjustments
Underlying profit
2021
£m
213.7
(19.5)
194.2
2020
£m
118.4
1.6
120.0
Underlying basic earnings per share, calculated on the basis of underlying profit, charged at the overall effective tax rate, is derived
as follows.
2021
£m
194.2
(44.7)
149.5
252.3
59.3p
2021
£m
149.5
2.0
151.5
1,028.7
14.7%
2020
£m
120.0
(27.5)
92.5
253.6
36.5p
2020
£m
92.5
2.0
94.5
961.6
9.8%
Underlying profit
Tax at effective rate (note 11)
Underlying earnings
Basic weighted average number of shares (note 13)
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 8)
Adjusted underlying earnings
Average tangible equity (note 53(b))
Underlying RoTE
Page 304
B. Income statement ratios
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 2021
Opening loans to customers
Closing loans to customers
Average loans to customers
Net interest
NIM
Impairment provision (release) / charge
Cost of risk
Year ended 30 September 2020
Opening loans to customers
Closing loans to customers
Average loans to customers
Net interest
NIM
Impairment provision charge
Cost of risk
Not all interest is allocated to segments (note 2).
Note
Mortgage
Lending
Commercial
Lending
15
15
2
18
Note
15
15
2
18
£m
10,819.5
11,608.7
11,214.1
219.2
1.95%
(5.9)
(0.05)%
Mortgage
Lending
£m
10,344.1
10,819.5
10,581.8
190.0
1.80%
25.8
0.24%
£m
1,514.8
1,568.8
1,541.8
94.5
6.13%
2.9
0.19%
Commercial
Lending
£m
1,452.1
1,514.8
1,483.4
82.1
5.53%
21.7
1.46%
Idem
Capital
£m
297.1
225.2
261.1
20.2
7.74%
(1.7)
(0.65)%
Idem
Capital
£m
389.9
297.1
343.5
26.1
7.60%
0.8
0.23%
Total
£m
12,631.4
13,402.7
13,017.0
310.5
2.39%
(4.7)
(0.04)%
Total
£m
12,186.1
12,631.4
12,408.7
278.1
2.24%
48.3
0.39%
Page 305
Appendices Note
8
Note
37
39
39
53
2021
£m
135.4
324.9
41.7%
2021
1,241.9
262.5
(12.1)
(3.7)
246.7
£5.03
1,071.4
£4.34
2020
£m
126.8
295.1
43.0%
2020
1,156.0
261.8
(5.2)
(3.6)
253.0
£4.57
985.9
£3.90
C. Cost:income ratio
Cost:income ratio is derived as follows:
Cost – operating expenses
Total operating income
Cost / Income
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 306
Page 307
Appendices Each year, employees vote to support a focus
charity. Alzheimer’s Society was chosen as Charity
of the Year for 2021, inspiring a wide range of
fundraising activities across the Group
F. Useful information
Information which may be helpful to shareholders and other users of the
Annual Report and Accounts
P310
F1. Glossary
A summary of abbreviations used in the Annual Report and Accounts
P312
F2. Shareholder information
Information about dividends, meetings and managing shareholdings
P314
F3. Other public reporting
Current and future public reporting information for the Group
P315
F4. Contacts
Names and addresses of the Group’s advisers
F1. Glossary
The Act
The Companies Act 2006
AGM
ALCO
AQR
Annual General Meeting
Asset and Liability Committee
Audit Quality Review
The Articles
The Articles of Association of the Company
ASHE
AT1
Annual Survey of House and Earnings
Additional Tier 1
The Bank
Paragon Bank PLC
BBLS
BBR
BCBS
BEIS
BEPS
BGS
CAGR
CBI
CBILS
CCC
CCoB
CCP
CCyB
CEO
CET1
CFO
CGU
CIPD
CMI
CML
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 Personnel Development
Chartered Management Institute
Council of Mortgage Lenders
The Code
UK Corporate Governance Code
CO2e
The Company
CO2 Equivalent
Paragon Banking Group PLC
COO
Chief Operating Officer
Compliance
Plan
Compliance Monitoring Plan
CPI
CRD IV
CRD V
CRDs
CRO
CRR
CSA
CSOP
CTRF
DEFRA
Deloitte
DISP
Consumer Price Index
The current EU Capital Requirements
Regulation and Directive Regime
Capital Requirements Directive V
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
Page 310
DTR
ECL
EDI
EIR
EPC
EPS
EQA
ERC
ERMF
ESG
ESOP
ESOS
EU
EUR
Disclosure and Transparency Rule(s)
Expected Credit Loss
Equality, Diversity and Inclusion
Effective Interest Rate
Energy Performance Certificate
Earnings per Share
External Quality Assessment
Estimated Remaining Collections
Enterprise Risk Management Framework
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
Economic Value
Executive Performance Committee
Financial Conduct Authority
Finance and Leasing Association
Funding for Lending Scheme
Financial Ombudsman Service
The Framework The Group Corporate Governance Policy
FRC
FRN
FSCS
FVTPL
GDP
GDV
GHG
GMP
Framework
Financial Reporting Council
Floating Rate Note
Financial Services Compensation Scheme
Fair Value Through Profit and Loss
Gross Domestic Product
Gross Development Value
Greenhouse Gases
Guaranteed Minimum Pension
The Group
The Company and all of its subsidiary
undertakings
HMOs
HMRC
HPI
HQLA
HR
IAS
IASB
IBE
ICAAP
IFRS
ILAAP
ILG
ILTR
IMLA
IRB
IRRBB
ISDA
Houses in Multiple Occupation
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
Internal Capital Adequacy Assessment Process
International Financial Reporting Standard(s)
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
International Swaps and Derivatives Association
ISO14001:2015 International Organization for Standardization
14001:2015, ‘Environmental Management
Systems’
ISO45001:2018 International Organization for Standardization
KPMG
LCR
LGD
LIBOR
Line 3
LTGDV
LTV
M&A
MRC
MRT
MWh
NI
NII
NIM
Notes
NPS
NSFR
OBR
OCI
OFGEM
OHSMS
OLAR
ONS
ORC
The Order
45001:2018, ‘Management Systems of
Occupational Health and Safety’
KPMG LLP, the Group’s auditor
Liquidity Coverage Ratio
Loss Given Default
London Interbank Offered Rate
The third line of defence
Loan to Gross Development Value
Loan to Value
Mergers and Acquisitions
Model Risk Committee
Material Risk Taker
Mega-Watt Hours
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
The Statutory Audit Services for Large
Companies Market Investigation (Mandatory
Use of Competitive Tender Processes and
Audit Committee Responsibilities) Order 2014
PAYE
PD
Pay As You Earn
Probability of Default
RBA
RICS
RIDDOR
RLS
RMBS
RoR
RoTE
ROU
RPI
RSU
RWA
SA
Role Based Allowance
Royal Institution of Chartered Surveyors
Reporting of Incidents, Disease and Dangerous
Occurrences Regulation 2013
Recovery Loan Scheme
Residential Mortgage Backed Securities
Receiver of Rent
Return on Tangible Equity
Right of Use
Retail Price Index
Restricted Stock Unit
Risk Weighted Assets
Standardised Approach
Schedule 7
Schedule 7 to the Large and Medium-sized
Companies and Groups (Accounts and Reports)
Regulations 2008
SFS
SICR
Specialist Fleet Services Limited
Significant Increase in Credit Risk
Sharesave
All Employee Share Option scheme
SME
SMF
SMCR
SONIA
SPPI
SPV
TBMC
TCFD
TCR
TFS
Small and / or Medium-sized Enterprise(s)
Senior Management Function
Senior Managers and Certification Regime
Sterling Overnight Interbank Average
Solely Payments of Principal and Interest
Special Purpose Vehicle
The Business Mortgage Company
Taskforce on Climate-related Financial
Disclosures
Total Capital Requirement
Term Funding Scheme
TFSME
Term Funding Scheme for SMEs
TRC
TRE
TSR
UK
UKF
Total Regulatory Capital
Total Risk Exposure
Total Shareholder Return
United Kingdom
UK Finance
Performance
Exco
PFP
PIDA
PIE
Executive Performance Committee
UK GAAP
UK Generally Accepted Accounting Practice
Pension Funding Partnership
Public Interest Disclosure Act 1998
Public Interest Entity
USD
US Dollar
US Dollar LIBOR The London Interbank Offered Rate on
balances denominated in US dollars
The Plan
The Paragon Pension Plan
PLC
PMA
POCI
PPC
PRA
PRP
PRS
PSP
PwC
Public Limited Company
Post-model Adjustments
Purchased or Originated Credit Impaired (assets)
Payment Protection Insurance
Prudential Regulation Authority
(of the Bank of England)
Profit Related Pay
Private Rented Sector
Performance Share Plan
PricewaterhouseCoopers
Page 311
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 312
Financial calendar
January 2022
Trading update
June 2022
Half-year results
Dividend calendar
July 2022
Trading update
December 2022
Full-year results
27 January 2022
7 July 2022
Ex-dividend date for 2021 final dividend
Ex-dividend date for 2022 interim dividend
28 January 2022
8 July 2022
Record date for 2021 final dividend
Record date for 2022 interim dividend
4 March 2022
29 July 2022
Payment date for 2021 final dividend
Payment date for 2022 interim dividend
Annual General Meeting
2 March 2022
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 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 313
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 2021, 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 2021, 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 fifth report against its Women in Finance charter commitments in September 2021.
All this reporting will be continued in the financial year ending 30 September 2022.
The Group will publish its Responsible Business Report: 2021, its first sustainability report, in December 2021. This will give additional
information on ESG issues and illustrate the application of the Group’s ESG strategy in practice. This is intended to be the first in an
annual series of reports.
The Group also publishes on its website a statement setting out how it has applied the PRA / FCA dual regulated firms Remuneration
Code, as required by the Rule 7.5 of the Remuneration part of the PRA Rulebook and FCA standard SYSC19D.3.13R.
Page 314
F4. Contacts
Registered and head office
51 Homer Road
Solihull
West Midlands B91 3QJ
Telephone: 0121 712 2323
Investor Relations
investor.relations@paragonbank.co.uk
Company Secretariat
company.secretary@paragonbank.co.uk
Internet
www.paragonbankinggroup.co.uk
Auditor
Solicitors
Registrars
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
Brokers
Jefferies International Limited
100 Bishopsgate
London EC2N 4JL
Peel Hunt LLP
100 Liverpool street
London EC2M 2AT
UBS Limited
5 Broadgate
London EC2M 2QS
Remuneration consultants
PricewaterhouseCoopers LLP
1 Embankment Place
London WC2N 6RH
Consulting actuaries
Mercer Limited
Four Brindleyplace
Birmingham B1 2JQ
U
s
e
f
u
l
I
n
f
o
Page 315
PARAGON BANKING GROUP PLC
51 Homer Road, Solihull,
West Midlands B91 3QJ
Telephone: 0345 849 4000
www.paragonbankinggroup.co.uk
Registered No. 2336032
GRP0054-001 (12/2021)