Paragon Banking Group PLC
For the year ended 30 September 2022
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, and the extent of their impact 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; 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 UK and global economic conditions and market volatility, including currency and interest rate fluctuations and inflation or deflation; the risk of a global
economic downturn; acts of terrorism and other acts of hostility or war and responses to, and consequences of those acts; 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
The Accounts
The financial statements of the Group
P5
Financial highlights
P198
D1. Financial statements
P205
D2. Notes to the accounts
Appendices to
the Annual Report
Additional financial information
P326
E1.
Appendices to the
Annual Report
Glossary
P332
F1. Glossary
Useful information
P336
G1. Shareholder information
P337
G2. Other public reporting
Contacts
P340
H1. Contacts
Strategic Report
The business and its performance
in the year
P8
A1.
Chair of the Board's
introduction
P10
P29
P31
P54
P57
A2. Business overview
A3. Chief Executive’s review
A4. Review of the year
A5. Future prospects
A6. Citizenship and
sustainability
P81
A7.
Approval of
Strategic Report
Corporate Governance
How the business is controlled
and how risk is managed
P84
B1.
Chair's statement on
corporate governance
P86
B2. Corporate governance
statement
P88
B3. Board of Directors and
senior management
P96
B4. Governance framework
P112
B5. Nomination Committee
P116
B6. Audit Committee
P126
B7.
Remuneration Committee
P166
B8. Risk management
P180
B9. Directors’ report
P183
B10. Statement of directors’
responsibilities
Independent
Auditor’s Report
On the financial statements
P186
C1.
Independent auditor’s report
to the members of Paragon
Banking Group PLC
BUY-TO-LET MORTGAGES
Specialist landlords
generate over 98%
of new buy-to-let
business
COMMERCIAL LENDING
Customer base now
over 37,000 small and
medium sized businesses
SAVINGS
Savings deposits
pass £10 billion
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
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
2022
£m
221.4
417.9
313.6
14,210.3
1,417.3
2022
27.2%
129.2p
125.9p
28.6p
The underlying basis excludes fair value postings arising from hedging activities, but not qualifying for hedge accounting.
The other exclusions from underlying results relate principally to acquisitions and significant asset sales in the current year
and 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 calculation of return on tangible equity is shown in note 59b. The derivation of underlying profit before taxation and other
underlying measures is described in Appendix A.
Page 4
Financial highlights
Underlying profit before tax
£221.4 million 14.0% higher (2021: £194.2 million)
Profit before tax
£417.9 million 91.5% higher (2021: £218.2 million)
156.5
164.4
120.0
221.4
194.2
250
200
150
100
50
0
417.9
181.5
159.0
118.4
213.7
n
o
i
l
l
i
m
£
500
400
300
200
100
0
2018
2019
2020
2021
2022
2018
2019
2020
2021
2022
Underlying basic earnings per share
69.9 pence 17.9% higher (2021: 59.3 pence)
Basic earnings per share
129.2 pence 98.2% higher (2021: 65.2 pence)
48.2
51.2
36.5
69.9
59.3
100
80
60
40
20
0
129.2
55.9
49.4
65.2
36.0
e
c
n
e
p
150
125
100
75
50
25
0
2018
2019
2020
2021
2022
2018
2019
2020
2021
2022
Dividend per share
28.6 pence 9.6% higher (2021: 26.1 pence)
Capital – CET1 Ratio
16.3% Strengthened in the year (2021: 15.4%)
19.4
21.2
14.4
26.1
28.6
40
30
20
10
0
t
n
e
c
r
e
p
25
20
15
10
5
0
13.8
13.7
14.3
15.4
16.3
2018
2019
2020
2021
2022
2018
2019
2020
2021
2022
Total loans to customers
£14.2 billion 6.0% higher (2021: £13.4 billion)
Retail deposits
£10.7 billion 14.7% higher (2021: £9.3 billion)
12.1
12.2
12.6
13.4
14.2
20
15
10
5
0
9.3
7.9
10.7
5.3
6.4
n
o
i
l
l
i
b
£
14
12
10
8
6
4
2
0
2018
2019
2020
2021
2022
2018
2019
2020
2021
2022
Underlying return on tangible equity
16.0% (2021: 14.7%)
Return on tangible equity (‘RoTE’)
27.2% (2021: 16.2%)
14.0
14.6
14.7
16.0
9.8
20
15
10
5
0
27.2
16.1
14.1
16.2
9.7
t
n
e
c
r
e
p
30
25
20
15
10
5
0
2018
2019
2020
2021
2022
2018
2019
2020
2021
2022
n
o
i
l
l
i
m
£
e
c
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e
p
e
c
n
e
p
n
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p
Page 5
The business and its performance in the year
P8
A1. Chair of the Board's introduction
The year in summary
P10
A2. Business overview
An overview of what the Group does and the significant risks to
which it is exposed
P29
A3. Chief Executive’s review
Strategic summary of the Group’s performance and position
P31
A4. Review of the year
The financial and operational performance of the Group in
the year
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
P81
A7. Approval of Strategic Report
Approval of the Strategic Report
To work together to ensure fair outcomes for all our customers
Whether we’re working with customers or colleagues, it’s
important to be fair. If we see a customer is facing difficulties, we
don’t pre-judge what might be happening. Instead, we make sure
that we listen, show empathy and understanding, and explore a
range of different ways to move forward.
Darrel, Collections
The Group’s strategic approach
has helped to guide it through the
recent periods of turbulence and
will continue to deliver positive
results for our stakeholders into
the future.
Robert East, Chair of the Board
A1. Chair of the Board's introduction
Dear Shareholder
It gives me great pleasure to write to you for the first time as
Chair at the end of a year which has seen material changes and
challenges for the Group and for the UK economy. While the
impacts of the Covid pandemic have receded, new challenges
have emerged, including a sharp rise in energy prices and
inflation, and consequent increases in interest rates after a long
period of stability. These have been coupled with the effects of
uncertainty around UK fiscal policy and the geopolitical impacts
of the conflict in Ukraine.
Throughout this the Group has remained focussed on delivering
its strategy and purpose.
This annual report sets out how the Group has responded
to these challenges, how it has incorporated learnings from
the pandemic into its business model and its positioning as it
continues to develop its businesses. I hope that you, and other
stakeholders, will find the report useful in understanding the
Group’s story for this eventful year.
This specialist focus means that the Group is well placed to both
understand the impacts of the developing national situation on
its customers and to work with them to ensure the best possible
outcomes, whatever the future may bring.
Digitalisation is key to the Group’s strategy, and I am pleased
to note that the ongoing programmes of system and process
improvement across the Group have continued through the
year with important enhancements being delivered,
benefitting customers, business introducers and our own
operational effectiveness.
The Group’s strategic approach has helped to guide it through
the recent periods of turbulence and will continue to deliver
positive results for our stakeholders into the future.
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.
We have reviewed our reporting structure in the year, and we will
describe the business through two lending divisions, Mortgage
Lending and Commercial Lending. Given the ongoing reduction
in the size of the former Idem Capital division, it is no longer
helpful to report this separately. Each of the divisions offers a
range of specialist lending propositions, all principally funded
through our retail deposit base, supplemented with wholesale
and central bank borrowings.
Results
We are pleased with our results for the year. New lending was
£3.2 billion, a significant increase from the £2.6 billion recorded
in 2021, with lending in the early part of the preceding year
constrained by the impact of Covid. The savings deposit base
exceeded £10 billion for the first time, reaching £10.7 billion at
the year end, increased from £9.3 billion a year earlier. Wholesale
funding remained stable in the year and the Group’s credit rating
was increased to BBB+ by Fitch in March.
Underlying profit for the year, at £221.4 million, exceeded
£200 million for the first time, despite maintaining a conservative
approach towards expected loss as the economic and political
situation in the UK evolved (2021: £194.2 million). Earnings per
share on the underlying basis increased to 69.9 pence
(2021: 59.3 pence) and the underlying return on equity at 16.0%
continued to strengthen (2021: 14.7%).
Page 8
Profit before tax on the statutory basis, which also includes fair
value accounting gains recorded on hedging, was substantially
higher than underlying profit at £417.9 million (2021: £213.7 million).
Statutory EPS increased to 129.2 pence (2021: 65.2 pence) and
RoTE on the statutory basis was 27.2% (2021: 16.2%). The level
of these measures was driven by the magnitude of interest
rate movements in the year affecting the Group’s derivative
positions, which are used to hedge interest rate risk on its new
business pipeline of fixed rate mortgages. These do not reflect the
underlying performance of the business and will reverse over the
lives of the related hedges.
Regulatory capital has remained strong during the period, with
the year end Core Equity Tier 1 (‘CET1’) ratio reaching 16.3%
(2021: 15.4%) even allowing for asset growth and distributions.
Group liquidity was also maintained at a healthy level.
Stakeholders
As I have progressed through my induction programme with
the Group, I have been impressed with how seriously the Group
takes its responsibility to all stakeholders and its duties as a
corporate citizen.
During the year the Group’s people policies were endorsed
with the upgrading of its Investors in People ('IiP') status to the
Platinum level, with only 5% of all assessments being graded
this highly. The Group’s Equality, Diversity and Inclusion (‘EDI’)
network also continued to develop and has provided useful
inputs across the year.
The Group’s Sustainability Committee, established in the
previous year, continued its work coordinating a holistic
approach to ESG impacting issues across the Group. There has
been a particular focus on issues relating to climate change
and this resulted in the Group joining UK Bankers for Net Zero.
More details on climate impacts are included in Section A6.3
where the Group’s position is described in accordance with the
recommendations of the Taskforce on Climate-related Financial
Disclosure (‘TCFD’), as required by the new listing rule.
Readers interested in sustainability issues will also find the
Group’s ‘Responsible Business Report' useful. The second
edition of this report is being published during December 2022.
Governance
The Group continues to operate under the UK Corporate
Governance Code, complying with its provisions in the year. I
joined the Board on 1 September 2022, in place of
Fiona Clutterbuck, who had served more than nine years on the
Board. I would like to thank Fiona on behalf of my colleagues
for her skill in chairing the Board since 2018 and the wisdom of
her counsel through the succeeding periods of uncertainty over
Brexit, the impact of Covid and the evolution of the cost of living
crisis. On a personal note I would like to thank her for her help in
ensuring a smooth handover and supporting my induction.
Tanvi Davda, a new non-executive director, also joined the Board
in September. This represents an expansion of the Board as we
respond to growing regulatory and stakeholder expectations.
Tanvi’s appointment also broadens the range of skills and
experience available to the Board. Gender and ethnic diversity will
continue to be a key area of focus for the year ahead and the Board
and Nomination Committee have taken material steps towards
ensuring timely compliance with all regulatory targets, including
the new Listing Rule requirements, by 30 September 2023.
Several of my colleagues on the Board spent a significant
period of time towards the end of the year meeting with
shareholders to develop a revised directors’ remuneration
policy, which also reflects the latest regulatory requirements.
This has been considered carefully by the Board and we hope
that shareholders and other stakeholders will consider that it
appropriately balances all relevant factors.
Risk
The Group continues to develop its systems and processes to
manage risk. In common with other banks, the resilience
self-assessment required by the regulator was completed in the
year, with satisfactory results. In addition, significant work was
undertaken to ensure that the FCA expectations for the new
consumer duty can be met when this comes into force. This will
be an area of continued focus into the new financial year as the
implementation deadlines approach.
Shareholder returns
The Group has the strategic objective of providing a strong and
sustainable return to investors while maintaining a prudent
capital position, and due to the strength of its reserves has been
able to announce share buy-backs of £75.0 million during the
year, in addition to the declaration of an interim dividend.
Following its year-end review of the Group’s capital position, the
Board concluded that a final dividend for the year of 19.2 pence
per share can be declared, subject to shareholder approval,
giving a total dividend for the year of 28.6 pence per share, and
thereby achieving a dividend cover of 2.5 times of earnings
excluding fair value gains, broadly in line with policy. It also
authorised a further share buy back of up to £50.0 million. We
would like to thank our shareholders for their continuing support
during the year.
Conclusion
My first months with the business make me confident that the
Group’s strategy and culture are such that it is well positioned for
the future. Results for the year have been good and the Group
has the capital strength and the people and processes which will
enable it to respond effectively to the challenges arising from the
current economic situation, as well as to grasp the opportunities
which will inevitably arise as a result.
Finally I would like to thank all of my Paragon colleagues for all of
their hard work in the year, and the welcome they have afforded
me. I look forward to working with them and all of our other
stakeholders towards the Group’s continuing success.
Robert East
Chair of the Board
6 December 2022
Page 9
A2. Business overview
At a glance
Paragon is a specialist banking group. We offer a range of savings products and provide finance for landlords, small businesses and
residential property developers in the UK. Founded in 1985 and listed on the London Stock Exchange, we are a FTSE 250 company,
headquartered in Solihull, employing 1,500 people.
Our purpose is to support the ambitions of the
people and businesses of the UK by delivering
specialist financial services
Paragon’s purpose provides the foundation for everything
we do and today we are helping more than 340,000
customers to achieve their ambitions.
As a specialist bank, we focus on
lending to
customers who require specialist products in
markets typically underserved by larger high
street banks.
We have helped the UK to develop a thriving
Private Rented Sector (‘PRS’) for more
than 25 years, supporting landlords up
and down the country to invest in and
build valuable businesses that deliver
flexibility and choice for those who
choose to rent.
In addition to this, we help residential
property developers
turn unused
into new housing, addressing
sites
the continuing housing shortage
in
the UK, and we offer finance to small
and medium sized businesses operating
across a wide range of different sectors,
helping them to innovate, develop and grow.
We also support savers to reach personal goals –
providing them with better returns on their savings.
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.
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.
Page 10
Our operations
Our operations are organised into two lending divisions, with new lending funded principally by savings deposits.
We offer buy-to-let mortgages
to landlords operating in the UK’s
Private Rented Sector. A pioneer in
buy-to-let lending, we have originated
over £27.3 billion of buy-to-let
mortgages since the mid-1990s.
i
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Our customers
Why we stand out
Key facts
We provide finance to landlords
operating in the UK’s Private Rented
Sector, with a focus on professional
landlords who have a portfolio of four
or more properties, as well as those
investing in more complex property
types and via corporate structures.
Our long-standing expertise in property
valuation and risk assessment, together with
our prudent approach to underwriting and
surveying expertise make us a trusted partner
in the professional landlord community and
an authoritative voice in discussions about
the future direction of the sector.
50,000+ landlords
30 September 2022
£1.9 billion new lending (+17.2%)
12 months ended 30 September 2022
£12.3 billion loan assets (+4.2%)
30 September 2022
Since the introduction of our first commercial
lending products for small and medium sized
business in 2014, carefully targeted expansion
in this area has been a key strategic focus for
the Group. We focus on specialised assets
and underserved markets in four main areas.
SME lending
Development finance
Key facts
We offer finance to business customers
to fund assets and investment,
helping them to innovate, adapt and
grow. Supporting customers across
construction, agriculture, transport,
technology, manufacturing and
professional services, our products
include hire purchase, lease purchase,
invoice finance and commercial loans.
We support experienced small and
medium sized property developers with
competitive and flexible finance to bring
their development plans to life. As well as
residential development loans, we provide
pre-let commercial development funding
and finance for purpose-built student
accommodation, along with bridging and pre-
planning finance and marketing period loans.
Structured lending
Motor finance
Our structured lending team provide
finance to non-bank specialist lenders,
structured through secured and
committed revolving credit facilities.
Our motor finance team provides finance
through approved intermediaries and
dealers for cars, light commercial vehicles,
motorhomes and caravans.
37,000+ customers
30 September 2022
£1.3 billion new lending (+34.3%)
12 months ended 30 September 2022
£1.9 billion loan assets (+19.6%)
30 September 2022
Commercial Lending - Breakdown of new lending
SME Lending
£446.4m
Motor finance
£166.2m
Structured lending
£59.9m
Development finance
£632.2m
Our principal source of funding for our lending activities is our
range of savings products offered to UK households. Other
funding for lending is derived from the efficient use of the 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.
Savings
Key facts
We offer a range of safe, simple and transparent Easy Access, Notice and
Fixed Term savings accounts, including ISAs.
225,000+ direct savings customers
30 September 2022
Our regular customer surveys show a consistently high level of satisfaction
with our application process and customer service representatives.
Our online and postal application channels, are supplemented by digital
banking and wealth management platform relationships.
£30,200 direct customer average deposit
30 September 2022
£10.7 billion total volume of savings deposits
30 September 2022
4.2/5 Feefo customer service rating*
*Based on 1,097 reviews in the 12 months to 30 September 2022
Page 11
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.
Using our core strengths
Retail
deposits
Securitisation
Bond
issuance
Central bank
funding
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.
610
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.
Impairment provision
£14.0
million
Technology
We are utilising
digital technology to
improve productivity,
enhance service
to customers and
access new markets.
Our new digital community gathering
actionable insight from buy-to-let
landlords and intermediaries.
Management expertise
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
Our section 172 statement can be found on pages 100 to 108.
Shareholders
Employees
Society
Creating long-term shareholder
value through growing profits and
dividends. See page 41
Helping all our people develop their
career and reach their potential.
See page 59
Helping the UK economy grow and
supporting the communities in
which we operate. See page 76
Dividend per share
28.6p
Average training
per employee in 2022*
5.2 days
*Empoyer skills survey, UK average 3.6 days
286
paid volunteer days
supporting charities and
local community groups
Page 12
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
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
39.4%
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.
Platinum
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 delivering good
customer outcomes.
New Code of Conduct
introduced across
the Group
We efficiently utilise
capital and debt
positions to maintain
balance sheet strength.
CET1 ratio
16.3%
Customers
Environment
Providing tailored lending and savings products,
expertise and working with intermediaries to help our
customers achieve their ambitions. See page 57
Continually reducing our environmental impact and
designing products that support positive environmental
change. See page 64
+59
Net promoter score
('NPS') for savings
account opening
Credits purchased to
offset our Scope 1 and
Scope 2 emissions
Page 13
Our markets
Adapting to evolving trends
Our success is dependent upon on our ability to optimise the products and support we offer to customers in our specialist markets,
which is determined by our expertise in these markets and our capability to adapt to evolving trends. The overall economic landscape,
the pace of digitalisation in product distribution and customer service, and the requirement to respond to climate change are critical
factors impacting our customers and our approach. During the period, we have made considerable progress in each of these areas as
we digitalise at pace, which is providing us with increased capability and capacity to support our customers in an uncertain and more
challenging economic environment.
Buy-to-let mortgages
The Private Rented Sector (‘PRS’) is an essential component of the UK’s housing market, providing affordable and stable homes
for people who need flexibility to move for education and employment or as an alternative to house purchase. Economic, social
and demographic changes have driven considerable expansion of the PRS since the early 2000s and today it comprises 4.4 million
households in England, accounting for 19% of all homes1. It is the second most popular tenure after owner-occupation.
Market trends
UK buy-to-let mortgage lending totalled
£292.9 billion at 30 September 2022, following
a 15% increase in new lending to £53.3 billion
during the 12 months to 30 September 2022.
Remortgaging increased from 58% to 66% of new
lending as stamp duty relief on house purchases
introduced during the pandemic ended and the
first wave of five-year fixed rate mortgages, which
became more popular with landlords in 2017,
approached the end of their initial term2.
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 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.
Tenant demand for PRS housing continues to
grow3 and the sector is expected to expand as
housing provision increases across all tenures to
meet the projected housing requirement for
1.8 million additional households across the UK
over the next decade4. While purpose built,
build-to-rent accommodation will meet some of
this demand, with less than 240,000 such homes
in planning, under construction or completed, it is
likely to remain a modest proportion of the total5.
Buy-to-let mortgage finance helps to
fund an estimated
46%
of properties in
the PRS6.
1English Housing Survey, Headline Report, 2020-21. 2UK Finance. 3UK Residential Market Survey, RICS, September 2022 and Housing Insight Report, Propertymark, September
2022. 4Challenges and opportunities for the private rented sector, Capital Economics, February 2022. 5Build to Rent Q2 2022, prepared by Savills for the British Property Federation,
July 2022. 6Estimated from English Housing Survey, Headline Report, 2020-21 and UK Finance data.
Residential property development finance
The UK residential property market and rate of housebuilding drive the opportunities for development finance. UK Government
targets for new homes and planning considerations influence activity in the residential development sector, alongside interest
rates and lifestyle choices.
Market trends
The demand for housing in the UK
continues to exceed supply, driven by
population growth and new household
formation. Government forecasts
suggest 300,000 net new homes
are needed each year, and with less
than 175,000 delivered in 2021-20227,
there is significant opportunity for
residential developers looking to
expand in the UK.
Despite strong demand for new homes, residential
developments are taking slightly longer to gain planning
approval and reach completion. This is partly a result of
longer lead times to obtain planning approval, including
extra responses to the introduction of new biodiversity
requirements, and partly the result of an increase
in material costs and skilled labour shortages since
emerging from the pandemic. Uncertainty over the future
direction of house prices and concern over funding costs
are also making developers more cautious.
The Government is preparing a new Future Homes and Building Standard which will complement new Building Regulations introduced in June
2022. Taken together, it is expected that these measures will ensure that new homes built from 2025 produce 75-80% less carbon emissions
than homes delivered under the old regulations and are net zero ready, enabling them to transition without the need for retrofitting.
7Housing supply: indicators of new supply, June 2022, Department for Levelling Up, Housing and Communities.
Page 14
SME lending
The asset-backed SME finance market is broad and Paragon is focussed on specific asset classes. The general economic
conditions influence activity in these areas, together with other key drivers, including: supply issues and manufacturing
delays caused by the pandemic; the rate of new work in industries such as construction; Government regulations and trading
restrictions; advances in technology and SME growth, and a growing focus on climate and sustainability.
Market trends
In the 12 months to 30 September, the overall asset finance market grew by 2% to £30.8 billion. Within this, the plant and machinery
sub-segment expanded by 8% to reach £7.6 billion, commercial vehicles and business equipment grew 2% to £8.6 billion and £1.9 billion,
and the IT sub-segment fell back by 23% to £1.5 billion8.
While businesses started the year
with an optimistic outlook and
an appetite to boost investment,
caution increased over the
second half as the conflict in
Ukraine pushed up energy prices
and other input costs.
Research undertaken by
Paragon confirmed a high
level of interest in green
investment amongst
SMEs, with 80% saying that
sustainability is a priority
and only 5% indicating
resistance to change.
However, businesses also
said that cost concerns and
lack of certainty around
government legislation
were barriers to change9.
8Finance and Leasing Association. 9SME Green Finance, Paragon. 10SMMT.
Savings
2 out of 5
SMEs view going
green as a competitive
advantage
One area where there is
relative certainty is in the
vehicle market, where the
sale of new petrol and diesel
vehicles will be phased
out by 2030, with a further
government commitment to
phase out fossil fuel HGVs
by 2040. Between January
and September 2022,
all-electric and hybrid fuel
vehicles grew to 51% of new
registrations10.
While the UK savings market remains dominated by the large high street banks, competition from new banks continues to be
supported by the grant of new licenses, the strength of the FSCS guarantee and the development of new technology. This benefits
savers by giving them access to a wider range of savings providers and accounts which offer more competitive interest rates.
Market trends
The UK household savings market, estimated at £1.4 trillion, grew
by 4%11. Paragon’s share of this market now stands at 0.76%, a small
increase from 0.69% last year, with huge potential to develop further
to fund future growth in our lending as required.
The Bank of England began a series of Base Rate rises in
December 2021 in response to inflation and, as a result, deposit
rates began to lift across the market, giving savers more
incentive to consider switching.
The pandemic has accelerated the take up of online banking. Familiarity with online banking
increases confidence in online savings providers like Paragon and, building upon this, the
development and implementation of API and Open Finance technology will make it easier for
customers to move their money from low interest rate savings and current accounts to more
attractive competitors.
During the pandemic, the
proportion of savings held in
variable rate easy access accounts
increased from 63% to 69%11, with
fixed rate savings accounts and
ISAs taking a lower share of the
total than before. As interest rates
rise, savers may be encouraged to
return to these products.
11Bank of England.
Page 15
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
Strategic progress
Growth
Read more on pages 18 and 19
Delivering consistent growth in new lending, loan assets and funding
by focusing our expertise in specialist lending markets and building an
award-winning retail savings franchise.
Diversification
Read more on pages 20 and 21
Developing resilience by diversifying into commercial lending alongside
our traditional stronghold in buy-to-let and reducing our reliance on
wholesale funding.
Digitalisation
Read more on pages 22 and 23
Transforming all aspects of our business using digital, cloud-based
technology to enhance customer service, productivity and growth.
Capital management
Read more on pages 24 and 25
Building and maintaining strong levels of core capital to support
customers through the economic cycle, provide capacity for growth
and shareholder returns.
Sustainability
Read more on pages 26 and 27
Moving towards net zero, building skills and capability to support long
term growth and maintaining strong stewardship.
Our strategic pillars
A customer focused culture
Expert knowledge and experience, supported by proprietary
insight, data and analytics to deliver deep understanding
and good outcomes for all our customers.
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.
Capital
Liquidity and funding
Insufficient capital to operate effectively and meet
minimum requirements.
Insufficient financial resources to enable us to meet our
obligations as they fall due.
Market
Credit
Changes in the net value of, or net income arising from, our
assets and liabilities from adverse movements in market prices.
Financial loss arising from a borrower or counterparty
failing to meet their financial obligations.
Page 16
Our strategic priorities are simple, fully
integrated and work hand-in-glove with each
other in pursuit of the Group’s overall purpose.
Nigel Terrington, Chief Executive
11.6%
five year compound average growth in new lending
6.0%
net loan book growth during 2021/22
40.6%
of new lending now Commercial Lending
72.7%
savings as a proportion of total funding
Digital transformation underway across the Group
new customer-facing applications and capability
enhanced operational infrastructure
£1,221.8 million
Tier 1 equity
16.0%
underlying return on tangible equity
Commitment to net zero
operationally by 2030
Investors in People
Platinum status achieved
Strong financial foundations
Prudentially strong, with a low-risk approach to lending,
reducing volatility of underlying earnings and enhancing
sustainability of dividends.
Model
Reputational
Making incorrect decisions based on the output of
internal models.
Failing to meet the expectations and standards of
our stakeholders.
Strategic
Climate change
The corporate plan does not fully align to and support
strategic priorities or is not executed effectively.
Financial risks arising through climate change impacting the
Group and our strategy.
Conduct
Operational
Poor behaviours or decision making leading to failure to
achieve fair outcomes for customers or to act with integrity.
Resulting from inadequate or failed internal procedures,
people, systems or external events.
Page 17
Strategy
in action
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 and robust
manner, that allows us to balance our stakeholder needs
while moving towards sustainable long-term returns.
The specialist markets in which we operate are
witnessing good underlying growth levels and we have also
achieved market share gains aided by additional product
launches and improved engagement with our distribution
channels. Alongside origination, we have also focused on
customer retention, improving service to encourage repeat
business and extend customer lifetime.
Nigel Terrington, Chief Executive
Consistent progress
New lending and loan book growth achieved in the latest reporting period builds upon a long track record of strong
and consistent growth over many years.
£3.2 billion 11.6%
£14.2 billion
5.0%
New lending
12 months ended
30 September 2022
CAGR
2017 – 2022
Total loans and
advances to customers
at 30 September 2022
CAGR
2017 – 2022
Fresh approach to customer retention
With a record £1.8 billion of buy-to-let mortgages reaching the end of their initial, five-year fixed rate period during
the year, we introduced a re-engineered, technology-driven switch and further advance process to make it quick
and easy for mortgage customers and intermediaries to review and renew their mortgage finance with Paragon.
Based on in-depth customer and mortgage intermediary research, three key improvements were introduced.
1.
Switching was offered six
months prior to maturity
instead of three months.
2.
The further advance process
was streamlined to speed up
underwriting and valuation.
3.
End-to-end customer
support was introduced
from one dedicated team.
Switching is easy. Extended and switched to a new
mortgage term in literally five minutes through the online
service whereas with other companies it has taken weeks
of form-filling and being on the phone. Great service!
Page 18
Focus on specialist markets
Through our targeted approach, focused on lending in specialist markets, we help a diverse range of customers to achieve their
ambitions. We continually evolve our products and service in response to changing dynamics in the markets we serve, enabling us to
optimise our return on capital.
Helping landlords to grow
Landlords with portfolios of four or more properties and complex property types comprise the fastest
growing segment of the buy-to-let market and we have delivered a consistent stream of product and
service developments to meet their needs.
£5 to £10 million
increase in amount landlords can
borrow across their portfolio
£2 to £4 million
increase in maximum loan size
Portfolio expansion
By doubling the amount landlords can borrow and increasing the maximum
loan available on a single property, we’ve provided more headroom for landlords
to grow their portfolios, as well as helping them to pivot to meet rising demand for
more and better quality space to support higher levels of home working following
the pandemic.
Supporting residential property developers
Since expanding our property development finance capability in 2018 through the acquisition of
Titlestone, we have extended support to more residential property developers across the UK and
introduced new products to target a broader customer base.
43%
of lending to residential
property developers is
now outside of London
and the South East
Building out across the UK
Over the last five years, we have doubled our team of Relationship Directors and Portfolio
Managers to 40 specialists, extending our reach across the UK. Building from our stronghold in the
South East, we have achieved good growth in the East and West Midlands and the South West.
Standing up for British business
Our SME lending team has deep and specialist knowledge in the sectors and industries in which it
operates, offering steadfast support to British businesses throughout the pandemic and beyond with a
mix of direct and broker distribution.
A champion of change
2030
new petrol and diesel
vans to be phased out
2040
commitment to phase
out fossil fuel HGVs
The acceleration in online shopping during the pandemic has increased demand
for commercial vehicles, with tighter environmental standards on the horizon
boosting interest in new more sustainable vehicles. To help meet this demand, our
transport and logistics team have deepened relationships with commercial vehicle
dealerships to offer their customers an alternative to manufacturer funding.
Page 19
Strategy
in action
Diversification
We are continually developing our range of specialist lending and savings 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 towards an
Internal Ratings Based ('IRB') approach to capital measurement and a growing and
increasingly segmented funding strategy.
Our journey from monoline lender to diversified specialist bank has
significantly accelerated our growth, whilst enabling us to respond with
flexibility and stay resilient in the face of changing market conditions.
By adding capability in specialist commercial lending markets
alongside our core buy-to-let expertise and introducing a successful
savings franchise, we are now reaching out to a much broader
customer base than ever before from a stronger funding platform.
Michael Helsby, Managing Director – Strategic Development and Savings
Lending diversification
Product division’s share of originations
As a result of the success of our
diversification strategy, the Commercial
Lending division’s share of new lending
has grown to 40.6% of total lending and its
income contribution is now £88.6 million
compared with £19.9 million five years ago.
t
n
e
c
r
e
p
100
75
50
25
0
FY 2018
FY 2019
FY 2020
FY 2021
FY 2022
Mortgage Lending
Commercial Lending
Steady build up in commercial lending capability
Our diversification into carefully targeted commercial lending markets has been achieved through a mix of acquisition
and organic growth, resulting in good coverage across a wide range of industry sectors and a steady build-up of our
loan book. Our Commercial Lending customers are spread across the UK. SME lending customers span a wide range
of industry sectors and our development finance clients include a mix of new build and conversion projects.
3D Tooling Technologies
Sector: Manufacturing
This product and component prototype
development specialist was able to expand its
operations following the acquisition of new high-
performance machine tools funded by Paragon.
Textek
Sector: Recycling
Recycling plant, combined with fire suppression
and dust extraction systems funded by Paragon
mean this recycling pioneer can divert one
million mattress away from landfill each year.
Exeter City Council
Sector: Refuse collection
The first electric Refuse Collection Vehicles
(‘RCV’) provided by Paragon fleet management
company, SFS, began work, giving Exeter
residents cleaner air and reduced noise.
Page 20
Urbanite
Purpose-built student homes
A £14.8 million finance facility for a
457-bed development of cutting-edge,
student accommodation in Leeds.
Barry Howard Homes
New build development
Funding to support the development
of 28 new-build homes close to
Weedon in Northamptonshire.
239 Kingsway Hove Ltd
Luxury apartment scheme
An £18 million finance package to
assist with the acquisition of land and
development costs for 37 two and three-
bedroom seafront apartments in Hove.
SME
lending
Development
finance
Savings deposits
pass £10 billion
Since the introduction of our
first online saving accounts in
2014, Paragon has emerged
as an award-winning savings
provider in the UK and, this
year, total deposits passed
£10 billion. Our growth has
consistently outperformed
the industry average, shown by Bank of England data. From
September 2021 to September 2022, Paragon’s savings
deposits grew by 14.7%. This compares to total market
growth of 3.8% over the same period.
Funding diversification
Funding diversification is also a crucial value driver. This
year savings deposits passed the £10 billion milestone, with
securitised funding at 7% of the Group’s total debt compared
to 99% ten years ago.
Funding by type
(30 September 2015 –2022)
£16,000m
£14,000m
£12,000m
£10,000m
£8,000m
£6,000m
£4,000m
£2,000m
£0m
2015
2016
2017
2018
2019
2020
2021
2022
Securitisation
Bonds
Central Bank
Retail deposits
Competitive interest rates for savers
The rates we offer to our customers are carefully balanced to
ensure that we provide good customer outcomes and value while
gathering the appropriate level of deposits needed to fund our
lending needs. In calibrating our rates we make sure to benefit
both existing and new customers by remaining competitive in
a fast moving environment. While average interest rates on our
deposits have increased over the year, giving customers a better
return, we have moved our average rate from above to below the
SONIA reference rate.
Paragon vs Rest of market monthly stock growth
(Source: Bank of England)
Scoring highly with savings customers
Feedback shows customers rate us highly. We measure
customer satisfaction at three different points – when
customers open an account with us, when their fixed rate
account matures and when they close an account with us.
Satisfaction score
Net Promotor Score
74%
75%
+59
+52
Account
opening
Fixed rate
account
maturing
Account
opening
Fixed rate
account
maturing
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
Sep
2021
Oct
2021
Nov
2021
Dec
2021
Jan
2022
Feb
2022
Mar
2022
Apr
2022
May
2022
Jun
2022
Jul
2022
Aug
2022
Sep
2022
Rest of market
Paragon
Page 21
Strategy
in action
Digitalisation
The transformation of our technology is focused on implementing 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.
We are undergoing a multi-year, multi-business line
cloud-based re-platforming programme which will
transform the way we engage with both the intermediary
market and also new and existing customers. Our new
systems will make extensive use of API and Open Banking
technologies which will help to enhance our customer
propositions on an increasingly cost-effective basis.
Pam Rowland, Chief Operating Officer
Transforming our capability
The pandemic has accelerated the implementation and adoption of digital technology across the economy.
Having already embarked upon our digital journey, we are now moving further and faster to leverage the benefits
digitalisation can bring.
Broader reach and better service
Operational leverage
Digital technology gives us access to a
broader range of customers and speeds up
our response time and service capability.
Greater automation adds capacity to
take on new business at a faster rate,
accelerating scale benefits.
Better decision making
Deeper insight
More comprehensive data capture and
performance monitoring provides the
basis for enhanced decision making.
Online communities give us real-time
access to customers, speeding up the
time between insight and action.
Improved efficiency and future focus
More flexible learning
Fewer manual interventions mean
more expertise to support new product
development and future growth.
Digital technology enriches our learning,
helping our people add new skills faster
than ever before.
Enhancing performance
throughout the business
Since embarking on our digital transformation,
we have delivered a steady stream of
focused developments across
business. Over 80% of our systems
are now cloud-based and, as we
move progressively through our
current investment programme,
further developments will
continue to come on stream.
the
Page 22
Digitalisation developments delivered to date
2019
2020-
2021
2020-
2021
Moving mortgage applications online
Enabling intermediary partners to submit buy-to-let mortgage applications via a new online portal, with the benefit of
enhanced product search, pre-application mortgage illustrations, document upload and real-time case tracking.
Reaching out to new savings customers
Expanding our distribution capability, by building links to online current account providers and deposit platforms, such
as Monzo and Hargreaves Lansdown, enabling their customers to save with us.
Re-imagining our learning
Enhancing employee learning with a new e-learning portal. Since implementation, employees have completed over
9,000 hours of learning on a wide range of topics.
Accelerating SME lending growth
2021
Speeding up the loan application process for SME lending intermediaries with the introduction of a new online portal
providing 24/7 access from all devices and featuring autofill capability, links to third party data sources, drag and drop
document upload, real-time case tracking, auto-generation of finance documents and e-signature.
Digital lending is a key opportunity for competitive differentiation.
This is not just about speed of decisioning and fulfilment
(the important basics) but also about delivering personalised
customer journeys on a scale never seen before.
Why digital lending is the future for banks and SMEs, EY Global SME survey, July 2022
66%
of SMEs are
interested in access
to faster credit
55%
of SMEs would
like to be funded
within seven days
2021-
2022
2022
Re-engineering essential support systems
Boosting operational resilience and efficiency with the introduction of a
single payment platform and a cloud-based financial ledger
Simplifying the mortgage switch and further advance process
see page 18 for more
7 out
of 10
landlord customers want digital
communications rather than paper
(Source: Lets Connect member
survey, 21-30 September 2022)
Improving integration for development finance
2022
Supporting future growth through the implementation of a new end-to-end loan
management system for development finance, enabling the team to add and manage new business more effectively
from initial enquiry all the way through to repayment.
Connecting to online communities
2022
Learning more and learning faster about the issues and service features that matter to our mortgage customers and
intermediaries as we take our first steps into online research communities with Lets Connect.
Buy-to-let, end-to-end service enhancement underway
Building on these developments, we are currently working on an end-to-end service enhancement project
which will transform the business origination and account servicing experience for mortgage customers and
intermediaries. Informed by four important principles, this will help us to automate routine tasks and free up
expertise to focus on growth, while improving speed, consistency and transparency.
1.
Streamlined information
capture
2.
Easy to
use
3.
Automated
workflow
4.
Enhanced
tracking
The new origination aspect of this project is scheduled for delivery towards the end of 2023, with account servicing
following one year later.
Page 23
Strategy
in action
Capital management
A strong and diverse balance sheet is fundamental to the Group's success.
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%.
Our balance sheet is a source of great strength. We have always
sought to operate with a cautious risk appetite, both operationally
and prudentially, helping us to support our customers through
challenging times, invest for growth and offer strong and
consistent returns.
Richard Woodman, Chief Financial Officer
Strong core capital
Paragon enjoys strong levels of core capital and high levels of internally generated
capital. Since 2015, we have generated significant Core Tier 1 Equity ('CET1') before
investing in future growth and making distributions to shareholders.
Our Core Tier 1 Equity ratio and our Total Capital ratio at 30 September were both
comfortably in excess of the 8.8% regulatory minimum mandated for us by the
banking regulator, the PRA, in 2021.
Movements in capital since 2015
18.3%
Total Capital Ratio
30 September 2022
16.3%
Core Tier 1 Equity Ratio
30 September 2022
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
19.1%
21.8%
0.4%
(7.9%)
(7.1%)
(5.8%)
(4.2%)
16.3%
CET1
Tier 2
2.0%
16.3%
CET1 ratio
(Sep 2015)
Retained
earnings
IFRFS 9 transitional
adjustment
Net lending
Dividends
Share
buybacks
Other
movements
CET1 ratio
(Sep 2022)
Total capital ratio
(Sep 2022)
Supporting our customers
Our strong capital position gives us capacity to support our customers through challenging times while maintaining
the soundness and stability of the bank. During the Covid pandemic, for example, our capital strength meant we
were able to support affected customers, representing 22,000 accounts, with payment holidays and other relief
measures until they were able to get themselves back on a sound financial footing.
Underpinning our growth
ambitions
We always treat capital as a scarce resource
and maintain a disciplined approach to its
employment, prioritising the optimisation
of the returns we can achieve. We have now
achieved a return on tangible equity above
our target of 15% and we believe this level
is sustainable.
Underlying return on tangible equity
t
n
e
c
r
e
p
20
15
10
5
0
14.0
14.6
14.7
16.0
9.8
2018
2019
2020
2021
2022
Page 24
Delivering returns to shareholders
We have delivered significant lending growth while making
consistent and significant returns to our shareholders over many
years. The dividend pay-out ratio of 40% has seen £384.3 million
paid to shareholders since 2015 and this has been supplemented
by buy-back programmes totalling £322.2 million. Combined,
this amounts to £706.5 million of capital being repatriated to
shareholders since 2015, representing over 75% of our market
capitalisation at the year end.
Making progress towards IRB accreditation
£384.3 million
Total dividends paid to shareholders since 2015
£322.2 million
Total capital returned to shareholders through
share buy-backs since 2015
We are seeking accreditation to adopt an Internal Ratings Based (‘IRB’) approach when setting and managing our risk-weighted
capital requirements. We submitted our buy-to-let Phase 2 IRB application to the PRA in 2021. Engagement with the PRA has been
constructive and we continue to make good progress.
Why IRB matters?
As a conservative lender, with a proven through-the-cycle track record, IRB offers a number of advantages over a standardised
approach to setting risk-weighted capital. In particular, it will:
1.
Enable us to tailor our capital
requirements more closely to
the credit risks we face
2.
Make us more
competitive in
the market
3.
Allow us to
price for risk
4.
Free up capital to
support growth
Data analytics and technology have
been used extensively in our buy-to-let
business throughout our history and help
to support our IRB application.
Low risk and proven resilience
Our buy-to-let credit performance has always outperformed the sector and this remains the case today. Support extended during
the pandemic has been repaid and arrears stand at 15 basis points, less than half of the industry average. The asset backing of the
buy-to-let portfolio is incredibly strong, with an average loan-to-value of 57.9% and only 1.4% of the loan book at greater than 80%.
OVER
99%
of Group lending
is secured, largely
on property
Buy-to-let average loan to value
Buy-to-let arrears rate – 3 months+
V
T
L
e
g
a
r
e
v
A
80%
70%
60%
50%
>80% LTV
Average LTV
V
T
L
%
0
8
r
e
v
o
k
o
o
b
f
o
%
50%
40%
30%
20%
10%
0%
300
250
200
150
100
50
0
Paragon buy-to-let
UK Finance buy-to-let (inc. RoR)
15bp
41bp
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
2010
2011
2012
2013
2014 2015 2016 2017 2018 2019 2020 2021 2022
Enterprise Risk Management Framework
We are further strengthening our strategic and operational risk management
approach with the introduction of an Enterprise Risk Management
Framework (‘ERMF’), making sure that all risks across the Group are
prioritised and managed in a similar way.
On track for completion in 2023, key developments in 2022 included:
• Completion of the ERMF
• Updating policies to strengthen protection against risks
•
Refreshing the terms of reference for each of the Group’s
risk committees
• Group-wide, e-learning on risk management and the ERMF
Page 25
Strategy
in action
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. Strong environmental, social and
governance ('ESG') qualities are embedded in the Group's culture and values, and
influence every aspect of our business.
We published our second Responsible Business Report in December 2022, which sets
out our progress on the main ESG issues for our business and our stakeholders. We
have divided our responsibilities into the following areas and more details on each
can be found in our report.
Minimising
our footprint
As we operate in
mortgage, consumer
and commercial
finance markets,
the overall
environmental impact
of our operations is
low. However, we are
continually looking
at ways to improve
the environmental
performance of
our sites and are
committed to
reducing our
operational footprint
to net zero by 2030.
We have also offset
our carbon emissions
from 2022 through the
purchase of certified
carbon offsets.
44%
year-on-year
reduction in
market-based
emissions over the
last three years
Electrification of
our company car
fleet; all cars to be
EV or PHEV by
2031
Sustainable finance
As a diversified bank providing
products and services across
multiple sectors, we have
a responsibility to help our
customers reduce their
environmental impact and
have developed a range of
sustainable products across
our business. To plot a clear
pathway to net zero, we also
need to fully understand the
emissions we enable through
our lending.
Full
£150m
allocation of our
Tier 2 Green Bond
A range of green mortgage products
and further advances launched
Updated our credit policy to allow
applicants to apply for properties with
solar panels
Helping our customers
We are committed to supporting the ambitions of the people and businesses of the UK by
providing specialist financial services. This means using our expertise to develop products
and support to meet the needs of our customers. We are committed to delivering good
customer outcomes in line with our values and understand that at times customers may
need extra support.
4.2/5 Feefo review score from savings customers
20,298
customers surveyed during 2022 by our dedicated
customer insight team to augment customer
understanding and improve customer experience
88%
of savers would consider
taking out another savings
product with Paragon
97%
of savers achieved what
they set out to do in
their recent interaction
Page 26
Page 26
We are focused on doing the right
things for all our stakeholders, taking
action in areas where we believe we
can have the greatest impact, from a
commitment to reduce greenhouse gas
emissions and helping our customers
be more sustainable, to supporting our
people to achieve their potential and
making a difference in our communities.
Deborah Bateman, External Relations
Director and Chair of the Sustainability Committee
Building a strong team
We employ 1,500 people based across the UK who work together to help our customers achieve their
ambitions. The future of our business depends on those people – they drive Paragon’s success. That’s why
we continue to work hard to attract, develop and retain a diverse workforce, where everyone feels supported,
confident and able to reach their full potential. 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 2022, we were named as a Platinum employer by Investors in People, joining just 5% of UK companies who
have been assessed to hold this prestigious status. The accreditation is recognition of our commitment towards
high performance through excellent employee connection, engagement, wellbeing and organisational culture.
Women in Finance
Charter target of 35%
female representation
in senior management
positions exceeded
New High Potential
Programme
launched for our
rising stars in
specialist roles
Founding member of Progress Together, an
independent body created to drive socio-economic
diversity at senior levels across UK financial services
Contributing to our communities
For several years we’ve been involved with
community volunteering and charitable partnerships
to positively impact the communities in which we
operate, but 2022 saw Paragon step up to deliver
more support than ever before.
50+ different
charitable
organisations
supported
through donations and volunteering
286 volunteering days
achieved in 2022
through our community volunteer scheme
which offers every employee one paid day off
each year to help make a difference (2021: 49)
£75,000+ charitable
contributions and money
raised in 2022
including £31,000 raised by our dedicated Charity Committee
(2021: £73,000+)
Doing business responsibly
Being a responsible business and doing the right thing is engrained throughout Paragon.
We actively promote good practice on a range of important issues and expect the same
from our suppliers and other business partners. We work hard to make sure we always
do business the right way and this requires honest and proper conduct by our people,
strong and fair relationships with our stakeholders and a robust governance structure.
13
mandatory
learning courses
launched for our
people in 2022
Employee Code of
Conduct launched in
2022, setting out the high
standards of behaviour we
expect from our people.
Signatory to the UK’s Prompt Payment Code,
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.
Page 27
Our business model has been designed, using
extensive through-the-cycle experience, to be
resilient in challenging environments.
Nigel Terrington, Chief Executive Officer
A3. Chief Executive’s review
Introduction
The Group has maintained the progress seen in 2021 into 2022,
delivering strong results which reflect its strategic positioning,
strong operational performance, robust operating platform and
the commitment and professionalism of its people.
Our business model has been designed, using extensive
through-the-cycle experience, to be resilient in challenging
environments. Further, our diversification strategy and balance
sheet structuring are designed to deliver stable funding,
generate improved returns over time and also benefit in periods
of higher interest rates.
The 2022 outturns demonstrate the effectiveness of this
strategy, with the net loan book growing by 6.0%, margins
widening by 30 basis points, cost efficiency improving and the
underlying return on tangible equity rising to 16.0%. Statutory
tangible net asset value per share increased by 22.8% to
£5.33 per share (2021: £4.34).
The Group maintains close relationships with its customers,
intermediaries and other business partners which have been
particularly important with both the increase in the cost of living,
and then interest rates rising sharply during the year.
Alongside this strong financial and operational delivery, we have
continued to implement our digitalisation plans, with a number
of front and back-office developments being delivered during
the year, making immediate tangible improvements to customer
journeys and operational efficiency.
In addition to a harsher suite of assumptions, given the extreme
volatility seen, particularly in the final quarter of the year, the
Group has adjusted its downside / severe weighting mix from
35% / 15% in 2021 to 30% / 20% in the current year. We have
also released the remaining Covid overlays, but have added
£15.0 million of judgmental adjustments to reflect the lack of
observed data (notably in respect of inflation data) in the
model build.
The Group has always operated a cautious hedging strategy,
designed to minimise interest rate risk. This hedging takes place
for both completed loans and the pipeline, and the Group has
strategically increased its level of pipeline hedging in the year to
enhance the protection of future margins. Derivatives hedging
the pipeline only qualify for hedge accounting when the loan
actually completes and are measured on a fair value basis until
that point. Taking swaps out early in the process has, in a rapidly
rising rate environment, created a material (£191.9 million) fair
value gain for 2022. Whilst this will reverse over the coming
years, it evidences the value that would have been lost to the
Group had the pipeline loans only been hedged when they
actually converted.
Basic earnings per share rose 17.9% to 69.9 pence on an
underlying basis (removing the after tax impact of the fair value
gains). Including the gains, reported basic EPS rose by 98.2%
to 129.2 pence per share.
The total dividend for the year of 28.6 pence per share
represents around 40% of the underlying earnings per share,
with the effects of fair value movements removed.
Financial performance
Trading performance
Trading has been strong across the Group in the year. A
combination of strong loan growth, widening net interest margins
and tight cost control have resulted in profits before fair value
items increasing by 16.4% to £226.0 million (2021: £194.2 million).
We have updated the Multiple Economic Scenarios (‘MES’)
used for our impairment assessments, particularly in light of
recent instability arising from the end of the pandemic, the
war in Ukraine, rising inflation and interest rates and the policy
responses to this backdrop. The scenario changes are illustrated
below by comparing the weighted average forecast levels of
key variables for the quarter ending 30 September 2023 in the
current forecast to those for the same period in the forecast
used at the previous year end.
Forecast for the quarter ended
30 September 2023
GDP
CPI
Unemployment
House prices
2022 MES
2021 MES
(1.1)%
11.9%
5.3%
(8.2)%
2.9%
1.9%
5.9%
(0.7)%
Aggregate new business levels rose by 23.6% from 2021’s level
to £3.2 billion in 2022. As well as new front-end systems in the
Commercial Lending division, the Group also benefitted from
system and processing enhancements in its buy-to-let business,
most notably in its product maturity management.
Mortgage Lending new advances increased by 17.2% to
£1.91 billion (2021: £1.63 billion). The focus continues to be on
complex properties and professional landlords, with simple
business comprising just 2.1% of completions (2021: 3.2%).
Five-year fixed rate loans, which increased in popularity in 2017,
started to reach product maturity in 2022. The Group has been
particularly successful in retaining these customers, having
developed an online portal to facilitate the maturity process,
and over 70% of our maturing specialist landlord customers
chose to refinance with the Group at product maturity. The credit
performance of the buy-to-let mortgage portfolio remains strong,
with indexed loan to values falling to 57.9% at September 2022
(2021: 61.2%) and with only 1.4% of the book having an indexed
LTV above 80%. Three month plus arrears on the portfolio were
15 basis points at 30 September 2022 (2021: 21 basis points).
Commercial Lending also had a strong year, with our new
advances increasing by 34.3% to £1.30 billion, with each of the
four sub-divisions seeing year-on-year growth. A complete
end-to-end replatforming was delivered in development finance
and a new digital broker portal launched in SME Lending
during the year, the latter having an immediate impact on our
processing times and business flows, which saw a rise of
40.9% in the final quarter of the year compared to the third
quarter. Further digital enhancements will be delivered in the
next financial year.
Page 29
Strategic Report Capital and funding
Savings deposits remain the prime funding source for the Group,
with balances increasing by 14.7% in the year, to £10.7 billion. The
pricing profile of these deposits also changed during the period.
Whilst comparing very favourably to the rates paid by the larger
banks, the price of the administered rate portfolio moved from a
premium of 37 basis points above SONIA at September 2021 to a
discount of 64 basis points at September 2022. Further, for much
of the second half of the year, equivalent swap rates exceeded the
price of the Group’s fixed rate bonds, also generating post-hedging
funding below SONIA on this portion of the deposit book.
The move to a retail, rather than wholesale funded basis, has
benefitted the Group greatly during the year and is the main driver
in the outperformance of its net interest margin against both initial
guidance and expectations. This optionality provides significant
benefit and is a reflection of the Group’s diversification strategy.
The Group completed £64.2 million of its £75.0 million share
buy-back in the year. However having given an irrevocable
instruction to Peel Hunt to complete the buy-back, the full value
has been deducted from equity. The buy-back was subsequently
completed on 7 November 2022. At 30 September 2022, our
CET1 and TCR ratios stood at 16.3% and 18.3% respectively
(2021: 15.4% and 17.6% respectively).
The level of capital resources substantially exceeds the regulatory
minimum, which stands at 8.8% at the CET1 level, recognising the
Group has no AT1 issuance.
Following the year end the Bank of England published their
Consultation Paper regarding the process for the implementation
of the Basel 3.1 standards in the UK. These largely followed
the core Basel proposals and, as such, were materially in line
with expectations. The Consultation Paper also highlighted
enhancements to the IRB accreditation process and an increase
in the Bank’s threshold for Strong and Simple treatment to
£20 billion of assets, each of which would have a favourable impact
on the Group if retained in the ultimate supervisory statement.
The Group’s IRB accreditation process continues. Although it
has taken longer than initially anticipated, we now have good
engagement with the PRA team. Non-binding feedback has been
received in respect of the modelling aspects covered in Phase 2
of the process, with subsequent analysis and model remediation
underway to meet the PRA’s expectations.
Business model developments
The Group’s multi-business line digitalisation programme
continued at pace during the year. In addition to the
development finance and SME systems noted above there
were further notable developments, including the maturity
management portal in buy-to-let and the movement of our
general ledger to a cloud-based solution. An extensive change
programme remains in place, with further developments
scheduled to go live across the current and subsequent years.
The general approach to accounting for these developments is
to expense the bulk of expenditure, with the value of capitalised
computer software standing at only £3.9 million at the year end.
We are committed to demonstrating a diverse and inclusive
workplace, with the activities of our Equality, Diversity and Inclusion
(‘EDI’) network materially expanding during the year, together with
regular board engagement. Our initial HM Treasury Women in
Finance targets, set in 2017, have been substantially met.
We have been particularly aware of the challenges our people
were facing given the rapid increase in living costs in the year, and
we gave each employee below senior management level a £500
one-off payment in the summer, together with a £500 advance
on the 2022 profit related pay (‘PRP’) payment. Given the record
level of profit reported in 2022, the final element of the 2022 PRP
award will also be strong – further supporting our people.
Sustainability
In its first full year of operation the Group’s Sustainability
Committee has made much progress in fostering a holistic
approach to a range of environmental and social issues and the
related risks and opportunities. A particular area of focus has
been climate change, where we are aware of the level of interest
from stakeholders and regulators.
Policies have continued to develop in this area, while the
year also saw the first offsetting of operational emissions, the
continued greening of the Group’s office estate and significant
developments in lending on battery electric vehicles and energy
efficient properties. The Group has also joined Bankers for
Net Zero.
More widely the Group was pleased to publish its first Code
of Conduct, outlining for all stakeholders the principles which
guide its relationships with employees, customers, business
introducers, suppliers and the wider community.
Outlook
The recent economic backdrop has created a volatile operating
environment, with cost of living increases and rising interest
rates creating uncertainties which impact demand, affordability
and will potentially increase impairment levels. The Group’s
funding structure allows for a swift reaction to the changing
environment and close contact with our customers allows us to
help those who face difficulties as a result of changing rates and
inflationary pressures.
We recognise that this environment will present challenges for
the UK, its consumers and its businesses and, as an organisation
built on relationships, we stand ready to support our customers
through this difficult period.
We enter 2023 with strong margins, high quality loan books,
robust pipelines, strong capital, cautious provisioning and
well-developed franchises in each of our operating divisions.
Our digitalisation process is expected to deliver further
efficiencies and improvements for our customers and supporting
intermediaries, and together with our agile and dedicated
people, the Group is well placed to respond to the challenges
in the year ahead. The strength of our business ensures we are
well positioned to react positively to the opportunities which will
inevitably emerge.
People
The strong results for the year would not have been possible
without the continued hard work, dedication and performance of
our people. During the year we were awarded Platinum status by
Investors in People (‘IiP’), reflecting the Group’s strong training
and development approach and importantly the demonstration
of behaviours that clearly reflect our values and culture. This
status has only been attained by 5% of firms accredited by IiP.
Nigel Terrington
Chief Executive Officer
6 December 2022
Page 30
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
A4.1.1 Mortgage Lending
The Group reports its results analysed between two segments,
Mortgage Lending and Commercial Lending, based on types of
customers, products and the internal management structure.
This analysis was adopted in the year, following a review of
segmental reporting. The former Idem Capital segment is
no longer presented, and the remaining assets reanalysed.
Comparative information has been restated in line with the
new reporting structure.
New business advances in the year and year end loan balances
are summarised below, analysed by segment:
Advances
in the year
Net loan balances
at the year end
2022
£m
2021
£m
2022
£m
2021
£m
Mortgage Lending
1,910.0
1,630.0
12,328.7
11,829.6
Commercial Lending
1,304.7
971.5
1,881.6
1,573.1
The Group’s Mortgage Lending division principally provides
buy-to-let mortgages secured on UK residential property
to specialist landlords. The Group has been active in this
market for over a quarter of a century, through a wide range of
economic environments. This gives the Group deep data and
an unparalleled understanding of this form of mortgage and the
landlord customer base it targets.
During the period the Group also offered a limited volume of
loans to non-specialist landlords and owner-occupied first charge
mortgages secured on residential property. Owner-occupied
lending is carefully managed to ensure that only lending with
appropriate risks which provides an acceptable return on capital
is undertaken. The segment also includes legacy assets from
discontinued product lines, including second charge mortgage
loans formerly included in the Idem Capital segment.
In all its offerings, the Group targets niche markets where its
focus on detailed case-by-case underwriting and its unique
approach to property risk differentiate it from both mass market
and other specialist lenders.
3,214.7
2,601.5
14,210.3
13,402.7
Housing and mortgage market
The Group’s total loan balance increased by 6.0% in the year
following a 6.1% increase in the preceding twelve months. The
Group continued to pursue its strategy of focussed growth as
its markets continued to recover from the impacts of the Covid
pandemic. This growth was despite the sale of £78.9 million of
unsecured loan balances as the Group exited that market in
the year.
Total advances increased 23.6% year-on-year, although the
pattern varied across the Group’s specialist markets, as a result
of the differing impacts of the complex movements in the UK
economic situation as it developed through the year.
Activity in the UK housing market reduced year-on-year, although
this is partly attributable to the artificially high volume of
transactions in 2021, which included transactions delayed from
the previous year due to Covid restrictions, and was stimulated by
stamp duty reliefs. Transactions for the year reported by HMRC,
at 1,223,000, were 21.3% lower than the 1,554,000 in the previous
year. In their September 2022 Residential Market Survey, RICS
noted a further slowing in market activity, attributable to the
outlook on interest rates and more general economic uncertainty.
House prices saw strong growth in the year, contrary to some
expert projections, with the Nationwide House Price Index
recording a year-on-year increase of 9.5% to September 2022
(2021: 10.0%), although the rate of increase had slowed
considerably towards the end of the period. Nationwide predict
further slowing into the new financial year, due to the impact of
affordability pressures, with RICS forecasting house price falls
over a twelve month horizon.
Page 31
Strategic Report New mortgage lending in the market remained strong in the
year, with the Bank of England reporting new approvals of
£304.3 billion in the year ended 30 September 2022. This was a
decrease of only 3.6% on the record £315.9 billion reported for the
previous financial year, which had been driven by the stamp duty
holiday which ended on 30 September 2021. However, this total
included an 18.0% fall in loans for house purchase, generally in
line with the fall in transactions and greater re-mortgage activity.
Quarterly Bank of England UK mortgage approval data for the
last four financial years is set out below, where the impacts of
Covid waves and UK Government interventions on overall trends
can be clearly seen.
The Group has commissioned research on the future of the
sector with the Social Market Foundation. This exercise found
that, contrary to some widely held beliefs, most people renting
their home in the private rented sector are happy with both their
property and their landlord, and value the flexibility renting
offers to them.
The research also concluded that the attention of policy makers,
the media and society more generally, focuses on the minority
of PRS tenants who have had particularly bad experiences
with renting. However, 81% of private renters expressed their
contentment with their current property, and 85% said they were
satisfied with their landlord.
The full report on this research – Where Next for the Private
Rented Sector? – is available on the Group’s website at
www.paragonbankinggroup.co.uk.
In contrast to the wider mortgage market, new buy-to-let
advances reported by UKF, at £53.3 billion for the year ended
30 September 2022, were 14.6% higher than for the previous
year (2021: £46.5 billion). However, this was mostly driven by
remortgage activity, which increased by 23.4% while the value of
new buy-to-let mortgages for house purchase fell by 10.6%.
In the lettings market RICS’ September 2022 UK Residential
Market Survey reported continuing strong tenant demand
coupled with a dearth of supply, which was pushing rents
upwards, with an expectation of a strong growth in rental prices
in the short term. Research published by Zoopla supported
these conclusions.
This is borne out by the Group’s own independently
commissioned research for the quarter ended
30 September 2022 which showed 65% of landlords were
experiencing increased tenant demand, with 39% reporting
significant increases. Upward movements in rents were also
reported. This continuing demand will benefit affordability
and cash flows for the Group’s landlord customers. Despite
their positive view of the current situation, however, landlord
confidence had declined significantly in the last quarter of the
financial year across all metrics measured, covering their own
business, the sector and the UK economy more generally.
The UKF analysis of arrears and possessions also provided
analysis of buy-to let cases, showing a similar position to the
wider mortgage market, with arrears levels largely stable.
These factors indicate that the buy-to-let mortgage market
remains strong, even in the face of economic pressures, and
underpins the strength of the Group’s proposition.
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
2022
£m
2021
£m
1,869.5
1,562.2
39.5
52.2
1,909.0
1,614.4
1.0
-
1.5
14.1
1,910.0
1,630.0
£100,000m
£90,000m
£80,000m
£70,000m
£60,000m
£50,000m
£40,000m
£30,000m
£20,000m
£10,000m
£0m
Dec ‘18
M ar ‘19
Jun ‘19
Sep ‘19
Dec ‘19
M ar ‘20
Jun ‘20
Sep ‘20
Dec ‘20
M ar ‘21
Jun ‘21
Sep ‘21
Dec ‘21
M ar ‘22
Jun ‘22
Sep ‘22
At 30 September 2022 the UK Finance (‘UKF’) survey of
mortgage market arrears and possessions reported a largely
benign position with arrears levels holding steady or slightly
falling and possessions rising, but remaining far below the
pre-Covid levels of early 2020.
The Private Rented Sector (‘PRS’) and the buy-to-let
mortgage market
The Group’s target customers in the buy-to-let sector are
specialist landlords. Such landlords will typically let out four or
more properties, or operate with more complex properties, and
will generally run their portfolio as a business and have both a
strong understanding of their local lettings market and a high
level of personal day-to-day involvement. The Group is amongst
a small number of specialist lenders addressing this sector,
which is underserved by many of the larger lenders.
The Group’s experience over the past year is that some smaller
amateur landlords are leaving the market in the face of economic
pressures and regulatory changes, while its specialist customers
remain committed to the sector.
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.
The PRS continues to provide homes for around 19% of UK
households. With supply and pricing issues impacting
first-time buyers and the potential for incomes to become
more constrained, the sector will continue to be crucial in
national housing provision.
Page 32
Total mortgage originations in the Group increased by 17.2%,
as the housing market continued to recover from the Covid
pandemic. The Group’s focus within the mortgage sector
remained tightly on the specialist buy-to-let product, lending to
larger landlords, those operating through corporate structures
and those with complex properties, with other products ancillary
to this activity.
New lending on specialist buy-to-let mortgages increased by
19.7% as this part of the PRS remained strong. These specialist
completions, at £1,869.5 million formed 97.9% of the Group’s
new mortgage business. Restrictions in lending imposed during
the pandemic were all reversed in the first half of the year, with
further developments introduced, helping to drive volumes.
Non-specialist buy-to-let lending remains modest in comparison,
with advances continuing to decline.
The majority of the Group’s mortgage lending products offer
fixed rates for an initial period, with many customers choosing
a new product, either with the Group or elsewhere, at the end
of this fixed period. A market shift in 2017 saw five-year fixes
become the dominant product and the initial tranche of that
lending reached the end of the five-year period in the latter part
of the year. The Group has well-established retention procedures
to address accounts as their fixed rates expire and over 70%
of the specialist landlord customers whose products matured
in the year chose to refinance with the Group. This contact
programme has also helped expand the pipeline of prospective
new business.
The new business pipeline, being the loans passing through the
underwriting process, stood at a record £1,256.0 million at the
year-end, 24.6% higher than a year earlier (2021: £1,008.1 million),
providing a strong platform for growth into the 2023 financial
year. While the majority of this pipeline comprises fixed rate
loans, with rates set by reference to market expectations at the
time of offer, the Group’s policy of pipeline hedging means that
loans may be completed in a rising rate environment with limited
impact on margins.
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 89%
were satisfied with the ease of obtaining a response from the
Group (2021: 91%), delivering an NPS at offer stage of +40
(2021: +43). Two thirds (67%) of intermediaries dealing with
the Group rated its service as good or better than that provided
by other lenders (2021: 66%). Paragon Mortgages was also
named as Best Professional Buy-to-let Lender at the 2022
Your Mortgage awards.
The Group’s long-term programme of reengineering its
mortgage business continued through the year. All systems
and operational processes are being thoroughly reviewed and
refined to align them with the Group’s strategy for the division
and the overarching plan of digitalising the business. As part of
this reengineering, the capacity of the underwriting function has
been significantly increased, ensuring that service standards and
turnaround times remain excellent.
Initially, particular focus has been on those areas which can
deliver immediate impact, such as customer retention, and on
enhancing service to mortgage brokers. Improvements which
went live in the period are already playing an important role in
managing retention risk as five-year fixed rate mortgages start
to mature and have made the process of requesting a further
advance much more streamlined for the Group’s customers.
Environmental impacts
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.
As part of its response to climate change the Group offers a
range of green buy-to-let mortgages on all properties within the
Group’s lending criteria. These products offer lower interest rates
for energy efficient properties with EPC ratings of C or higher.
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 also announced a target of upgrading
as many homes as possible in the PRS to an EPC rating of C
or higher.
The Group, together with other UK banking entities, has been
working with the UK Government to develop a more consistent
approach to the definition of green activities in the housing
market and the housing finance sectors and is hopeful of
progressing these discussions further in the forthcoming year.
The Group’s new lending volumes on green buy-to-let products,
which have increased by 44.1% in the year, are set out below.
EPC rated A or B
EPC rated C
Total rated A to C
2022
£m
169.0
663.2
832.2
2021
£m
134.3
443.4
577.7
Percentage with available data
(England and Wales)
99.6%
92.6%
The increasing proportion of new accounts relating to
energy-efficient properties is important in achieving the Group’s
downstream emissions aspirations and is generating a gradual
improvement for the buy-to-let loan book as a whole.
The Group’s latest analysis identified EPC grades for 92.8%
by value of its mortgage book in England and Wales at
30 September 2022 (2021: 88.3%). Of these 98.9% were graded
E or higher (2021: 98.4%) with 39.3% rated A, B or C (2021: 37.6%).
The year-on-year movements are principally a result of the
balance of new business, with 45.1% of advances in the year
(2021: 39.7%) having one of the top three grades.
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.
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 2022, approximately 2.6% by number of
properties securing the Group’s buy-to-let mortgages in England
and Wales for which information was available were considered
to be at medium or high risk of flooding from the sea or rivers,
based on data from the Environment Agency (2021: 2.5%).
In addition, a more detailed analysis was carried out in the
period, using data which was more location specific, and also
included risk of flooding from surface water. This showed 3.0%
of properties securing buy-to-let mortgages, where data was
available, were at ‘higher’ risk.
Page 33
Strategic Report The Group’s mortgage business is currently working to develop
products to support its existing customers in making their
properties more energy efficient. Given that the majority of
properties in the PRS require some form of upgrade to meet the
Government targets, this kind of support will be vital to achieving
the UK’s net zero target.
Further information on these metrics and the Group’s wider
climate change agenda is given in Section A6.4.
Performance
The outstanding loan balances in the segment are set out below,
analysed by business line. Legacy second charge mortgage
assets and other consumer loans were previously disclosed
within the Idem Capital segment.
30 September
2022
30 September
2021
£m
£m
Post-2010 assets
First charge buy-to-let
8,536.4
7,379.0
First charge owner-occupied
Second charge
Legacy and acquired assets
28.0
104.4
35.6
148.1
8,668.8
7,562.7
First charge buy-to-let
3,549.6
4,034.2
First charge owner-occupied
Second charge
Other consumer lending
8.4
101.9
-
11.8
133.6
87.3
12,328.7
11,829.6
At 30 September 2022, the total net mortgage portfolio was 4.2%
higher than at the start of the financial year, reflecting strong
lending and retention performance. The balance of post-2010
buy-to-let lending grew by 15.7% and it now represents 69.2% of
the division’s total loan assets (2021: 62.4%).
The Group’s residual unsecured consumer lending book, shown
as ‘other consumer lending’ in the above table was disposed of in
the year, realising a gain of £4.6 million, as part of the Group’s exit
strategy for this part of the lending market.
The annualised redemption rate on buy-to-let mortgage assets, at
9.8% (2021: 6.9%), has continued at a relatively low level, with the
increase representing a reversion closer to pre-Covid levels. This
is despite increasing numbers of five-year fixed rate loans reaching
the end of their fixed period. As described above, the Group has
adopted a number of strategic initiatives to retain customers
whose mortgage accounts reach the end of their fixed rate period.
Arrears on the buy-to-let book reduced in the year to 0.15%
(2021: 0.21%), with the payment performance of the Group’s
customers remaining strong, despite the growing economic
pressures in the UK. Arrears on post-2010 lending were at
0.09% (2021: 0.09%). These arrears remain very low compared
to the national buy-to-let market, with UKF reporting arrears of
0.41% across the buy-to-let sector at 30 September 2022
(2021: 0.47%). However, as noted above, landlord’s expectations
for their businesses appear more pessimistic than this
performance data would suggest.
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. Relying on a detailed
and thorough assessment of the value and suitability of the
property as security, 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.
The loan-to-value coverage in the Group’s buy-to-let loan book,
at 57.9% (2021: 61.2%) 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, indeed, on a simple weighted average
basis, the Group’s landlord customers now have over £10.0 billion
of equity in their mortgaged properties.
Second charge arrears from post-2010 lending increased to
1.88% from 1.18% in the year, reflecting the increased seasoning
and size of the portfolio. For legacy assets arrears rose to 26.7%
(2021: 24.3%). 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
which had missed payments at some point in the past, inflating
the arrears rate. Average arrears for secured lending of 7.5% at
30 September 2022 were reported by the Finance and Leasing
Association (‘FLA’) (2021: 8.6%). The Group enjoys substantial
security on its second charge mortgage assets, with an average
loan-to-value ratio on such cases of 50.6% (2021: 56.1%) providing
a significant mitigant to credit risk.
In terms of the Group’s impairments procedures, 16.4% of the
segment’s gross balances were considered as having a significant
increase in credit risk (‘SICR’) (2021: 12.4%) including 1.1% which
were credit impaired (2021: 2.2%). This was a result of the impact
of the worsening economic outlook on probabilities of default.
However, the impact of security values meant that provision
coverage was stable, at 31 basis points (2021: 32 basis points),
although coverage on fully performing accounts had increased
from 2 basis points at 30 September 2021 to 6 basis points 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. At the year end, 475 properties were
managed by a receiver on the customer’s behalf, a reduction of
14.1% over the year (2021: 553 properties), as cases were resolved,
with generally successful results, considerably mitigating the
original potential loss. Almost all these cases currently relate to
pre-2010 lending, with cases being addressed on a long-term
basis. There were relatively low numbers of new receivership
cases in the year.
Outlook
While the increase in market interest rates has dampened the
demand for new product, the Group’s mortgage lending business
is well placed as it enters the new financial year. Its investment
in systems, which will continue going forward, enables it to
provide an effective and responsive service to brokers and
customers, whichever direction the UK economy takes, while its
underwriting standards, the strong current performance
and low loan-to-value ratio of the portfolio, and the hedging of
the fixed rate pipeline bring strong defensive qualities to the
balance sheet.
Page 34
A4.1.2 Commercial Lending
Development finance
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:
•
•
•
Development finance, funding smaller, mostly residential,
property development projects
SME lending, providing leasing for business assets and
unsecured cash flow lending for professional services firms,
amongst other products
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 are small
banks and non-bank lenders. 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.
Commercial Lending activity
The Commercial Lending segment saw a 34.3% increase in new
business during the year as UK economic activity continued
to recover from the effects of Covid, with each sub-segment
showing year-on-year growth.
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
2022
£m
632.2
446.4
59.9
166.2
1,304.7
2021
£m
510.4
336.9
24.0
100.2
971.5
The Group’s development finance business performed strongly
in the year with new lending increasing by 23.9% to £632.2 million
(2021: £510.4 million). While the volume of projects funded
increased as the UK emerged from Covid, some developers
continued to experience supply chain issues, although not to the
extent where ultimate project viability was threatened, and some
project timescales were extended. Towards the end of the year the
volume of enquiries reduced somewhat, with developers reacting
to the uncertain economic outlook by taking a cautious approach
to initiating new projects. This resulted in undrawn amounts on
live facilities at 30 September 2022, at £556.0 million, being 11.1%
higher than at the previous year end (2021: £500.4 million), while
the post-offer pipeline fell to £136.8 million (2021: £298.6 million).
During the year the business launched its first major green
finance option. Projects to develop energy-efficient properties,
those with an EPC A grade, can receive beneficial funding terms.
By 30 September 2022, £64.5 million of new lending facilities had
been agreed under the green initiative, with drawings reaching
£11.9 million by the year end. This type of project will be an area
of focus for the Group going forward, as developers increasingly
factor these discounts into their project planning.
The regional spread of the Group’s lending has broadened,
with the proportion of the portfolio located in London and
the South-East of England falling to 56.8% from 63.6% at
30 September 2021. Activity increased particularly in both the
East Midlands and West Midlands, with funding provided for a
number of flagship projects. The business has also increased
the range of specialist developments it has funded, including a
heightened focus on the later living sector. However, the vast
majority of lending relates to standard residential property.
The Group’s investment in systems for this business has
continued through this period, with a major upgrade to loan
servicing capabilities delivered in the year as well as a stream
of enhancements being delivered on a regular basis through
the year to improve process efficiency and customer service.
This drive towards digitalisation will continue, providing a solid
platform for the growth of the business and supporting the
transition to an IRB approach to capital management.
The business also saw a leadership change, with Robert Orr,
who had led the operation since the Group’s acquisition of the
Titlestone development finance business in 2018 stepping back,
to be succeeded as Managing Director by Neal Moy, who joined
the Group with wide experience in the property finance sector.
Other appointments were also made to enhance the
relationship team.
Despite an uncertain economic outlook and potential supply
chain disruptions the underlying business proposition for
developers remains fundamentally unchanged. The UK is still
failing to meet its targets for the development of new housing
and demand continues to increase. The current state of the
UK house building market gives a significant opportunity for
smaller developers to expand, if they can access reliable sources
of funding for projects. The Group’s proposition is strong and
attractive and continues to provide healthy returns for the capital
invested and opportunities for growth as it moves forward with
new systems and leadership to face the challenges ahead.
The impact of this new lending has been to increase the Group’s
overall Commercial Lending exposure by 19.6% in the year to
£1,881.6 million (2021: £1,573.1 million).
SME lending
The Group’s SME lending business is primarily focussed on
financing core business assets for SMEs. The core assets
financed included wheeled construction plant, such as
excavators, and other commercial vehicles. These customers
are therefore sensitive to sentiment around capital investment
in the UK, which has become more negative towards the latter
part of the year, resulting in a slowing of growth in the SME asset
finance market reported for the FLA, where in the early part of
the year a stronger post-pandemic recovery was seen.
Page 35
Strategic Report UK SMEs are potentially facing a difficult period as interest
rates and inflation rise and the labour market remains tight.
The FLA outlook survey for September reports significantly
negative expectations across the leasing market for business
investment and the economy more generally. In the Group’s
own independently conducted research of over 1,000 SMEs,
the majority acknowledged the seriousness of the economic
situation, particularly the potential impact of inflation and costs,
but were cautiously optimistic of managing their way successfully
through it. In this environment opportunities for the Group’s
SME business are likely to be restricted, but it will leverage its
customer relationships and account management experience
to protect its franchise and optimise customer outcomes,
whichever direction the UK economy moves in.
Structured lending
The Group’s structured lending exposure has seen an increased
level of activity in the year, with several new facilities agreed and
older balances repaid, diversifying the business’ exposures and
increasing the overall balance outstanding by 50.3%. Total facilities
also increased by 18.9% to £220.5 million (2021: £185.5 million).
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 client’s ultimate
customer population. The Group’s experienced account
managers receive regular reporting on the performance of the
security assets, and maintain a high level of contact with clients
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.
Motor finance
The Group’s motor finance business is a focussed operation
targeting propositions not addressed by mass-market lenders,
including specialist makes and vehicle types, such as light
commercial vehicles, motorhomes and caravans.
During the year the Group also began funding static caravans,
which provide good yields and fit comfortably with the Group’s
focus on specialist products.
Lending in the year grew 65.9% to £166.2 million
(2021: £100.2 million), although the business was significantly
affected by the Covid pandemic in the first part of the
2021 financial year and the current year’s business represents
a return to a more normal level.
The Group also launched its first products for financing
battery-powered electric vehicles (‘BEVs’). £6.0 million of new
loans were made, reflecting the recent growth in the availability
of these vehicles, with BEVs representing 11.8% of new vehicle
registrations in the year, as reported by the Society of Motor
Manufacturers and Traders. The offering was extended in the
second half of the year to cover light commercial BEVs. The
Group is well placed to support the green aspirations of its
customers, as electric vehicles become a more widely viable
and popular option.
Against this background the Group’s SME asset leasing business
saw volumes increase by 39.7% year-on-year to £276.9 million,
excluding government-backed balances (2021: £198.2 million), far
higher than the average of 9% reported by the FLA for the SME
sector. Investment in operating leases has also continued with
£14.5 million of assets acquired in the period (2021: £13.0 million).
Much of this success is attributable to investment made
in systems and processes, including the introduction of a
new broker portal at the start of the year. This has increased
efficiency and responsiveness in the underwriting process, as
well as enhancing the Group’s ability to handle smaller value
propositions cost-effectively. This has also enabled record
numbers of applications to be handled and improved conversion
rates. Advances in the second half were over 45% higher than
those in the first six months of the year, reflecting the roll out of
the new portal. The reduced average loan size is also beneficial
in spreading credit risk.
These service enhancements have improved the standing of
the business in the finance broker community. 88% of brokers
surveyed by the Group in the year said that they considered that
their experience with the Group was as good or better than with
other lenders and 81% stated that they were likely to provide
further business.
Following the major upgrade, the programme of investment in
system improvements to create efficiency gains has continued
throughout the year. Agile and modular delivery enables
individual improvements to go into the live system as they are
completed, providing incremental enhancements.
The Group continued to advance loans under the UK
Government-sponsored Recovery Loan Scheme, (‘RLS’) until the
second phase of that scheme closed for new applications in June
2022. The Group’s application to take part in the third phase of
that scheme is being processed. RLS loans have the benefit of an
80% government guarantee (after the proceeds of any business
assets are applied for leasing balances) for pre-January 2022
advances and a 70% guarantee for applications received between
January and June 2022. The Group’s lending on these products
primarily focussed on its existing customers, and the majority of
RLS lending has been on asset-secured products.
During the year £32.2 million was advanced under schemes
backed by a government guarantee (2021: £64.2 million), of which
£31.5 million was asset leasing business. This reduction was in line
with expectations, given that these loans were initially introduced
as a response to the Covid pandemic. The Group continues to
closely monitor the portfolio for any adverse indications.
Short-term lending to professional services firms outside
government supported schemes more than doubled to
£125.8 million (2021: £62.0 million). These loans are often used
to spread the impact of tax payments, and the availability of
tax deferrals, together with the availability of loans under the
Coronavirus Business Interruption Loan Scheme (‘CBILS’)
and similar arrangements amongst this customer group
had seriously depressed demand. However, the underlying
requirement for this form of finance remains for the longer-term,
and performance has continued to move back towards
pre-Covid levels.
The division has seen an increased level of green lending
propositions over recent months, with many SME businesses
in the transportation field and beyond seeking to reduce their
carbon footprints. The division also has a strong presence
in waste management, supporting local authorities as they
transition to greener refuse collection activities, including
funding new all-electric refuse collection vehicles for the
City of Exeter, and providing funding for the development
of recycling plants. It is a strategic priority of the Group to
support UK SMEs, whose journey towards net zero may require
significant capital investment over time, and these types of
initiatives are expected to increase going forward.
Page 36
Performance
Outlook
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
2022
£m
532.5
60.9
88.0
25.7
14.6
721.7
719.9
178.7
261.3
2021
£m
468.7
33.1
83.8
20.9
10.3
616.8
608.2
118.9
229.2
1,881.6
1,573.1
Despite the building pressures in the UK economy credit
performance in the development finance book has been good,
and the overall performance of the projects has been generally
in line with expectations. Accounts are regularly monitored and
graded on a case-by-case basis by the Credit Risk function.
At 30 September 2022 only one account had been identified as
being at risk of loss, a long standing legacy case.
The average loan to gross development value for the portfolio
at the year end, a measure of security cover, was 62.1%
(2021: 61.7%), which gives the Group a substantial buffer if
any project encounters problems. No new serious credit
issues arose during the financial year.
Credit performance in the division’s originated finance leasing
portfolios has been generally good, with improving arrears
measures in both asset leasing at 0.08% and motor finance at
1.58% (2021: 0.27% and 2.30% 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.
For UK Government guaranteed loans credit performance
remained strong. Despite widespread coverage of fraudulent
loan applications across the sector the Group’s total claims
made up to 30 September 2022 were £2.4 million, with
£2.2 million of this balance already recovered from
the Government.
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 all accounts classified in IFRS 9
Stage 1 at the year end.
In terms of the Group’s impairments procedures, 4.7% of
the segment’s gross balances were considered as having an
SICR (2021: 6.0%) including 0.7% which were credit impaired
(2021: 1.9%). Provision coverage had reduced in line with the shift
towards performing accounts, at 134 basis points (2021: 174 basis
points) although coverage on fully performing accounts had
increased from 86 basis points at 30 September 2021 to 108 basis
points at the year end as a result of management’s evaluation of
the probability of potential problem cases not registering through
the normal SICR identification procedures in the current
economic environment.
The evident headwinds in the UK economy are likely to reduce
the scope for near-term new business volume growth across
the division’s markets. However, the franchise remains strong
and the efficient and effective processes which have been rolled
out through the Group’s digitalisation programme, coupled
with strong customer relationship management and the high
standards of credit management applied over time, will both
protect the value in the businesses and allow them to gain
market share, should their broader markets see a slowdown.
A4.2 Funding
The Group is principally funded by retail deposits, but also
accesses a variety of other funding sources. This creates an
adaptable and sustainable funding position which can flex with
developments in the business, its operating environment and
the economic landscape. The Group is therefore able to access
cost-effective funding, as well as raising funding for strategic
initiatives on a timely basis.
During the year the Group’s requirements for additional funding
were satisfied through the retail deposit market. Demand for
deposit products remained strong, with nervousness amongst
consumers over impending cost of living issues motivating
customers to save, at least in the short term.
The Group’s funding at 30 September 2022 is summarised
as follows:
2022
£m
2021
£m
2020
£m
Retail deposit balances
10,669.2
9,300.4
7,856.6
Securitised and
warehouse funding
995.3
1,246.0
3,928.3
Central bank facilities
2,750.0
2,819.0
1,854.4
Tier 2 and retail bonds
261.5
386.1
446.6
Total on balance
sheet funding
Off balance sheet
liquidity facilities
14,676.0
13,751.5
14,085.9
150.0
150.0
150.0
14,826.0
13,901.5
14,235.9
The Group’s retail deposit balance grew by 14.7% in the year to
£10,669.2 million (2021: £9,300.4 million), exceeding £10 billion
for the first time and representing 72.7% of balance sheet funding
(2021: 67.6%), with wholesale borrowings continuing to reduce
over the year.
At 30 September 2022 the proportion of easy access deposits,
which are repayable on demand, was 27.0% of total on-balance
sheet funding (2021: 24.1%). This increase is partly a result of
market sentiment, with savers reluctant to commit funds to term
deposits in the anticipation of future interest rate rises, 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.
Page 37
Strategic Report 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 £1,689.1 million of cash available for
liquidity and other purposes (2021: £1,236.5 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. 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.
Funding by type
(30 September 2015 –2022)
£16,000m
£14,000m
£12,000m
£10,000m
£8,000m
£6,000m
£4,000m
£2,000m
£0m
2015
2016
2017
2018
2019
2020
2021
2022
Securitisation
Bonds
Central Bank
Retail deposits
The Group offers a variety of savings products, 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, savings balances of UK individuals
reported by the Bank of England continued to increase, despite
increasing pressures on living costs, with balances at
30 September 2022 reaching £1,402.3 billion (2021: £1,351.6
billion), an increase of 3.8% in the year. Some of this increase
may be reversed as the cost of living increases, 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 performed well in the year
and was able to deliver the required funding base at attractive
cost compared to wholesale alternatives. The growth of the retail
funding balance over recent years is set out below.
Retail deposits
(At 30 September 2016 – 2022)
£12,000m
£10,000m
£8,000m
£6,000m
£4,000m
£2,000m
£0m
The Group’s programme to transition away from the use of the
London Interbank Offered Rate (‘LIBOR’) as a reference rate
was completed during the year, in time for the withdrawal of
that rate in December 2021. This formed the culmination of a
multi-year programme to transition to other benchmarks, notably
the Sterling Overnight Index Average (‘SONIA’) for both wholesale
funding and retail lending and saving products.
The Group engages in fixed rate lending and accepts fixed
term deposits. It is therefore exposed to interest rate risk, and
it manages this position through hedging with interest rate
derivatives. Where interest rates are moving this can lead to
substantial fair value movements, but the Group has established
policies and procedures to ensure that only economically
appropriate transactions which hedge normal trading activities
are entered into.
2016
2017
2018
2019
2020
2021
2022
Savings accounts at the financial year end are analysed below.
Average
interest rate
Proportion
of deposits
2022
2021
2022
2021
%
1.74%
1.55%
1.66%
%
1.25%
0.42%
%
58.1%
41.9%
%
58.8%
41.2%
0.91%
100.0%
100.0%
Fixed rate deposits
Variable rate deposits
All balances
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 stresses including 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.
The average initial term of fixed rate deposits was 22 months
(2021: 26 months). Market savings rates in the year have begun
to increase from their historically low levels as the UK bank base
rate has moved upwards, particularly towards the end of the year.
The Bank of England has reported average interest rates
at 30 September 2022 for new 2-year fixed rate deposits at
2.67% (2021: 0.46%), at 0.6% for instant access balances
(2021: 0.10%) and similar rises across product types. This rising
rate environment has impacted on the Group’s absolute funding
cost, as shown above.
Page 38
It is notable that the SONIA market interest benchmark had
increased from 0.05% at the start of the year to 2.19% by its
close, meaning that the average variable rate paid by the Group
represented a 64 basis point discount to SONIA whereas the
opening position had been a 37 basis point premium.
The Group has continued to increase volumes through its direct
channel and through an expansion of the number and volume of
accounts opened through third party digital banking and wealth
management platforms. The use of these third parties increases
options to manage inflows and allows the Group to access a
wider base of customers. The Group now operates through eight
channels, including new relationships which commenced in the
year. These channels now represent around 13% of the total
deposit base and the Group’s infrastructure offers opportunities
to expand this further.
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 (2021: 88%). The NPS in the
same survey was +59, similar to that in the previous year
(2021: +58).
When customers with maturing savings balances in the year
were surveyed, 87% stated that they would ‘probably’ or
‘definitely’ consider taking out a replacement product with the
Group (2021: 89%) with an NPS at maturity of +52, the same
level as in the 2021 financial year (2021: +52).
This level of customer satisfaction is also demonstrated by
the Group’s continuing success in industry awards. During the
year awards won included ‘Best Fixed Term Savings Account
Provider’ at the 2022 YourMoney awards, ‘Best Fixed Rate
Cash ISA Provider’ at the 2022 Moneynet awards and ‘Most
Consistent Best Buy Savings Provider’ in the MoneyComms
2022 Top Performers list.
The Group’s direct and third party channels are both supported
by reliable and scalable infrastructure, and it continues to invest
in systems and processes to enable the business to develop.
This delivers a retail deposit stream where volumes and rates
can be effectively managed to support the Group’s requirements.
The operation will continue to develop, expanding offerings,
addressing wider customer groups and accessing new channels
while monitoring the emerging impact of the cost of living and
rising interest rates on the consumer savings market. The
Group’s profiling of its target customers suggests they may
be more resilient than average in the event of future economic
stresses, but the developing situation will remain under
close review.
A4.2.2 Central bank facilities
The Bank of England Term Funding scheme for SMEs (‘TFSME’)
continued to be available through the early part of the year to
support lenders in providing credit to SME customers through
the Covid pandemic. The Group refinanced its borrowings under
the scheme before it closed to manage its maturity dates.
During the year the amount drawn under TFSME was
£2,750.0 million (2021: £2,750.0 million). As TFSME provides
funding at or very close to base rate, in a low base rate
environment it forms a particularly cost-effective form of
borrowing for lenders which, like the Group, wished to support
their SME customers through the economic uncertainties of the
pandemic. The relative cost-effectiveness of these borrowings as
base rates begin to rise is being kept under review.
The Group’s remaining drawings under the Bank of England’s
original Term Funding Scheme (‘TFS’) were repaid in the year.
The Group retains access to other Bank of England funding
channels and utilised these to make drawings under the Indexed
Long-Term Repo Scheme (‘ILTR’) during the period. None of
these drawings remained outstanding at the year end.
The Group expects to continue to make use of these central
bank 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 at 30 September 2022 of up to £1,776.0 million
(2021: £1,424.2 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 increased to
BBB+ by Fitch in March 2022, with a stable outlook, enhancing
the Group’s funding capacity.
For much of the year the capital markets remained active, with
activity in most areas of funding. The securitisation markets
remained open, but with very few transactions coming to market.
Towards the end of the year the levels of uncertainty in the
markets effectively prevented any new deals being launched.
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 renegotiated its £400.0 million warehouse funding
facility during the period, increasing the facility size to
£450.0 million and transitioning the interest rate from 0.60%
above LIBOR to 0.50% over SONIA. 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.
The Group’s retail bond issued in January 2015 was repaid at
maturity in January 2022. The Group also entered into sale and
repurchase transactions from time to time, to ensure it retains
access to this channel for liquidity purposes.
The Group’s wholesale funding position is stable, mostly long-
dated and cost effective. It retains the infrastructure to access
all appropriate wholesale funding sources whenever appropriate.
This wholesale funding strategy is effective and adaptable, 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 ended 30 September 2022 saw the continuing
growth of the Group’s savings proposition, with total balances
exceeding £10.0 billion for the first time. The wholesale part of
the funding base continued to reduce while remaining stable,
with little requiring refinancing in the short term, providing some
protection against any developing issues in the UK economy.
Page 39
Strategic Report This has been consistent with the Group’s funding strategy,
making strategic use of wholesale 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 33 to 37.
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. As the value of reliefs
will taper over time, the difference between measures on the
regulatory and fully loaded bases will narrow and eventually
converge. The Group’s principal capital measures, CET1 and Total
Regulatory Capital (‘TRC’) are set out below on both bases.
Regulatory basis
Fully loaded basis
2022
£m
2021
£m
2022
£m
2021
£m
Capital
CET1 capital
1,221.8
1,055.8
1,196.0
1,026.1
Total Regulatory
Capital (‘TRC’)
Requirement
1,371.8
1,205.8
1,346.0
1,176.1
TCR
660.6
604.2
658.4
601.8
The Group’s CET1 capital comprises its equity shareholders’
funds, adjusted as required by Regulatory Capital Rules of the
PRA and can be used for all capital purposes. TRC, in addition,
includes tier-2 capital in the form of the Group’s green bond. This
tier-2 capital can be used to meet up to 25% of the Group’s TCR.
The increase in capital over the year has been generated by the
profits earned in the year, offset, to some extent, by the impact
of dividends and buy-backs. The capital positions set out above
include gains made on fair value accounting, which will reverse
over time. The increase in TCR on both the regulatory and fully
loaded bases shown above has arisen principally as a result of
balance sheet growth in the year.
CET1 capital must also cover the buffers required by the ‘Capital
Buffers’ part of the PRA Rulebook, 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
(2021: 2.5%), while the UK CCyB remained at 0.0% (2021: 0.0%),
having been reduced from 1.0% during 2020 as a regulatory
response to the pandemic. However, it has been announced
by the Financial Policy Committee of the Bank of England that
the CCyB will increase to 1.0% from December 2022 and 2.0%,
its expected long-term standard level, in July 2023 and this
requirement for additional capital in the future has been factored
into the Group’s capital planning.
CET1 capital required to cover CCoB and CCyB buffers
increased to £187.9 million at the year end on the regulatory basis
(2021: £170.9 million), mostly as a result of balance sheet growth.
Further buffers may be set by the PRA on a firm-by-firm basis but
cannot be disclosed.
The Group’s capital ratios, after allowing for the proposed
dividend for the year and its irrevocable buy-back commitments,
are set out below.
CET1 ratio
Total capital ratio
UK leverage ratio
Basic
Fully loaded
2022
16.3%
18.3%
7.9%
2021
15.4%
17.6%
7.5%
2022
16.0%
18.0%
7.8%
2021
15.1%
17.3%
7.3%
A4.3 Capital review
The Group manages its capital to maintain the strength of its
balance sheet, ensure that its regulatory capital and liquidity
positions are sufficient to safeguard depositors and provide
capacity to meet its strategic objectives and other opportunities
going forward.
With the increasing levels of uncertainty in the UK economy over
the year and the upward movement in interest rates and inflation
towards the end of the year, the Group focussed on ensuring
that its capital strength remains sufficient to withstand the
potential pressures.
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 2022 Annual
General Meeting (‘AGM’), which will be proposed for renewal at
the 2023 meeting.
A4.3.1 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 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. The TCR is specific to the Group and is
set on the basis of periodic supervisory reviews carried out by
the regulator, most recently in 2021.
The Group’s TCR at 30 September 2022 was 8.8% (2021: 8.8%),
compared to the minimum TCR allowed under the Basel III
framework of 8.0%. This low level gives the Group advantages
in capital management and reflects the regulator’s view of the
maturity of the Group’s systems for the management of capital
and risk.
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. This relief is being phased out,
year-by-year, while any reversal of Covid-related provisions will
generate a corresponding reduction in relief.
Page 40
All the Group’s capital ratios show strong improvement over the
period. This reflects the trading profits, including those relating
to fair values and the extinguishing of the pension scheme
liability. As the IFRS 9 reliefs are phased out the fully loaded and
regulatory bases will automatically converge.
The Basel Committee on Banking Supervision (‘BCBS’) had
set the implementation date for its revisions to the Basel 3
framework, sometimes referred to as Basel 3.1, as 1 January
2023. This is, however, subject to those revisions being enacted
in the relevant jurisdiction, which was delayed by the Covid
pandemic. In the UK these rules will be enacted through the PRA
Rulebook and the PRA has announced that it intends that these
changes will become effective in the UK from 1 January 2025,
following a consultation on the detailed requirements which was
published in November 2022.
The PRA has also launched a more extensive consultation on
a ‘strong and simple’ approach to regulating non-systemically
important banks without international activities. While its initial
proposals address the smallest banks, it has indicated that this
is a first step and that all non-systemic banks will be considered.
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 and is
currently responding to PRA feedback on various elements of
this phase, ahead of a formal PRA panel assessment. 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.
A4.3.3 Dividends and distribution policy
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 and excess capital is available,
balancing the expectations and requirements of different
investor groups.
An interim dividend for the year of 9.4 pence per share
(2021: 7.2 pence per share) was paid in July 2022 and the Board is
proposing, subject to approval at the AGM on 1 March 2023,
a final dividend for the year of 19.2 pence per share
(2021: 18.9 pence per share). This would give a total dividend
of 28.6 pence per share (2021: 26.1 pence per share). Given the
magnitude of the fair value gains recorded in the year, the Board
considered whether they should be included in the calculation of
the distribution. As these gains are considered to be essentially
timing differences it was decided to exclude them. The dividend
proposed therefore represents approximately 40% of the
adjusted profit, giving a dividend cover on the adjusted basis of
2.50 times (2021: 2.50 times) (Appendix D).
The progress of the dividend for the year is shown in the
chart below.
Dividend for the year
(In respect of the years 2014 –2022)
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 146.2%
compared to 165.6% during the 2021 financial year. These figures,
however, reflect the reduction of liquidity being held as Covid
receded in the early part of the year followed by a tightening in
the latter part of the year as the economic situation deteriorated.
The NSFR is a longer-term measure of liquidity with a one
year horizon, supporting the management of balance sheet
maturities. At 30 September 2022 the Bank’s NSFR stood at
122.3% (30 September 2021: 119.6%), reflecting the strengthening
of the overall funding and capital position over the year.
30p
25p
20p
15p
10p
5p
0p
2014
2015
2016
2017
2018
2019
2020
2021
2022
The directors have considered the distributable reserves
and available cash and other resources of the Company and
concluded that the proposed dividend is appropriate.
During the year the Board authorised the completion of
the remainder of the buy-back programme which had been
suspended at the 2021 year end. It also authorised a buy-back
programme for the year of £50.0 million, which was subsequently
extended to £75.0 million. £66.9 million, including costs, was
expended during the year (Note 45). An irrevocable instruction
for the completion of the remaining £10.8 million was given to the
Group’s brokers before the year end. This was accrued for at the
year end and was completed on 7 November 2022.
As part of the review of capital management described above
the Board decided that it was appropriate to authorise a further
buy-back programme of up to £50.0 million for the 2023 financial
year. This will commence shortly after the announcement of the
Group’s 2022 year end results.
Page 41
Strategic Report The Group has the general authority to make such purchases,
granted at the AGM on 2 March 2022. Any purchases made
under these programmes will be announced through the
Regulatory News Service (‘RNS’) of the London Stock Exchange
and the shares will be initially held in treasury.
A4.4.1 Consolidated results
Consolidated results
For the year ended 30 September 2022
The Board has affirmed the existing dividend policy going
forward, subject to an assessment of prevailing conditions at the
time, including future capital requirements, business strategy
and external economic risks.
Interest receivable
2022
£m
545.7
2021
£m
443.5
Interest payable and similar charges
(174.5)
(133.0)
A4.3.4 Capital outlook
The Group keeps its current and forecast capital position
under review in the light of economic, strategic and business
requirements and proposed or forecast changes in the capital
regime. The capital position strengthened in the year, although
part of this increase relates to fair value gains which do not form
part of underlying results.
The Group is well capitalised as it enters 2023, even after
providing for an appropriate level of dividends and share
buy-backs, the planned increases in the CCyB and the phasing
out of IFRS 9 relief. Even in light of potential worsening in the
UK’s economic position this capital strength is prudent and
sustainable and supports the overall viability of the business for
the benefit of all stakeholders.
A4.4 Financial results
The delivery of the Group’s strategy through a year of economic
turbulence in the UK saw underlying profit (Appendix A), which
excludes fair value gains and the profit arising on the sale of a
loan book, continuing to grow in the year, reaching £221.4 million,
an increase of 14.0% (2021: £194.2 million). This drove growth in
underlying earnings per share, which rose by 17.9%, reaching
69.9 pence per share (2021: 59.3 pence per share).
The Group’s statutory results for the year were significantly
inflated by the accounting treatment required for pipeline
hedging. It is the Group’s policy to hedge a substantial part of
its lending pipeline with interest rate derivatives and these can
lead to substantial fair value gains being recorded in a rapidly
changing interest rate environment before the relevant loans
complete. The actual cash flows from hedging will impact on net
margin through the subsequent life of the loan and the fair value
gains will unwind. The level of such gains recorded in the period
increased profit before tax on the statutory basis to £417.9 million
(2021: £213.7 million), with earnings per share at 129.2 pence per
share (2021: 65.2 pence per share).
The Group has consistently excluded these fair value items from
underlying results as the timing of their recognition does not
reflect that of their economic impact on the business.
Page 42
Net interest income
Net leasing income
Gain on disposal of loan assets
Other income
Total operating income
Operating expenses
Provisions for losses
Fair value net gains
Operating profit being profit on ordinary
activities before taxation
371.2
310.5
4.6
4.6
12.6
393.0
3.5
-
10.9
324.9
(153.0)
(135.4)
(14.0)
226.0
191.9
417.9
Tax charge on profit on ordinary activities
(104.3)
Profit on ordinary activities after taxation
313.6
Dividend – rate per share for the year
Basic earnings per share
Diluted earnings per share
2022
28.6p
129.2p
125.9p
4.7
194.2
19.5
213.7
(49.2)
164.5
2021
26.1p
65.2p
63.0p
Income
The Group’s total operating income increased by 21.0% in the
year, reaching £393.0 million. This included a one-off gain of
£4.6 million on the disposal of the residual unsecured consumer
lending book, which is excluded from underlying metrics.
The principal component of operating income continues to be
net interest on the Group’s lending assets. This increased from
£310.5 million in 2021 to £371.2 million in 2022, a growth rate of
19.5%. This arises both from net growth in the loan book, with
average balances increasing by 6.1% to £13,806.5 million
(2021: £13,017.0 million) (Appendix B), and from an improvement
in net interest margin (‘NIM’), in both of its divisions. This is
despite the sale of higher yielding unsecured consumer assets
in the year.
The progression of the Group’s NIM over the past five years is
set out below.
Year ended 30 September
2022
2021
2020
2019
2018
Total
Basis points
269
239
224
229
219
The Group’s other operating income (excluding the one-off
gain) increased by 19.4% to £17.2 million from £14.4 million in the
previous year, representing generally higher activity across all
elements of the business.
Costs
The Group’s cost base for the year increased by 13.0% in the year
to £153.0 million (2021: £135.4 million). The largest item within
costs continues to be employment costs, forming 67.7% of the
total at £103.6 million (2021: £87.9 million). The increase of 17.9%
in the year is partly attributable to an increase in staff numbers,
with average headcount increasing by 5.0% to 1,498, but also the
increase in the number of higher skilled, and therefore higher
paid positions as the business develops. The Group has also
been impacted by the level of UK wage inflation, which has been
particularly severe in professional and technology positions.
Costs not related to employment, at £49.4 million were
only marginally increased from those in the previous year
(2021: £47.5 million), despite the impact of Covid restrictions on
expenditure in 2021. The Group continues to channel significant
resources into its digitalisation programme, with systems and
enhancements delivered across the business in the period.
These developments are fundamental to the Group’s strategy
going forward.
Costs continue to be incurred on the Group’s IRB programme,
which is expected to deliver significant benefits to the Group’s
capital position in the longer term.
The progress of the Group’s cost:income ratio over the last five
years is set out below.
Year ended 30 September
2022
2021
2020
2019
2018
Underlying
Statutory
%
39.4
41.7
43.0
42.1
40.6
%
38.9
41.7
43.0
40.7
37.8
Cost:income continued to reduce slowly in the year with
margins on income widening. Cost control is a strategic priority
of the Group, but it recognises that the cost base must also
adapt to deliver its strategic priorities and to meet regulatory
expectations. Therefore the aim of a sustainably lower
cost:income ratio is a long-term aspiration, rather than a short
term priority.
Impairment provisions
The Group’s recognition of credit losses is governed by the
accounting standard IFRS 9, which requires the directors to take
a view on the future performance of the Group’s loan assets
and to base provisioning on expected credit losses (‘ECL’). It
is unfortunate that since the standard was introduced in 2018
the UK has encountered a series of unprecedented economic,
political and social disruptions, which have made the prediction
of future asset behaviour, and therefore the operation of the
standard very complex.
Based on the evaluation of ECL in the year, the Group has made
a charge for impairment of £14.0 million (2021: release of £4.7
million). This mostly results from a balancing of the reduced
likelihood of Covid impacts on the Group’s portfolios against
emerging economic and political issues such as the cost of living
and doing business in the UK, the potential impacts on the global
economy of the conflict in Ukraine and uncertainties over the
future direction of UK Government policy, both generally and on
issues which may affect the Group and its customers directly.
None of these issues have direct precedents and therefore a
significant exercise of judgment is required to evaluate how
these should be reflected in ECL.
The progress of the impairment charge and cost of risk in
the four years since the introduction of IFRS 9 in 2019 is set
out below.
Write
offs
£m
Charge /
(release)
£m
16.5
13.3
9.9
17.0
14.0
(4.7)
48.3
8.0
Cost
of risk
%
0.10
(0.04)
0.39
0.07
Year ended 30 September
2022
2021
2020
2019
The fluctuations shown above show the impact of these
uncertainties over time as they appear and then resolve. The
high charge in 2020 represented the initial onset of the Covid
pandemic, in 2021 the position appeared to have become a
little more stable, while 2022 has seen new challenges arising,
which have significantly reduced the level of clarity on the overall
direction of the UK economy heading into the 2023 financial year.
The application of provisions in writing off accounts has
remained more stable across the period, although the 2022
result was inflated by a large one-off case in asset finance. This
highlights both the Group’s careful approach to provisioning and
the resilient nature of its assets.
Multiple economic scenarios and impacts
In order to support management’s estimation of ECLs the
Group has developed models to project losses in its largest
books based on customer performance to the reporting date
and anticipated future economic conditions. The use of these
models therefore requires the use of a range of forward-looking
economic scenarios which are each evaluated and then weighted
to form an overall projection.
For portfolios where detailed models cannot be used the Group
will also consider the potential impact of these economic
scenarios where this might be significant.
Economic forecasting at the reporting date has become more
difficult than at the half year, with the levels of uncertainty in the UK
political environment significantly heightened at September 2022,
increasing the risk of inaccurate forecasts.
Generally the consensus of forecasters is for a worse outlook
overall than at the previous year end and the March half year,
with the magnitude of change in key economic metrics likely
to be larger than seen in some considerable time. The levels
of uncertainty also mean that the range of opinions amongst
reputable forecasters is considerable.
Page 43
Strategic Report
In the face of these uncertainties the Group has constructed the
scenarios for its ECL modelling based on a number of forecasts
from public and private bodies, synthesised to produce internally
coherent sets of data. The central scenario is that used for the
Group’s planning process, while upside and downside scenarios
have been derived from these. To allow for the wider range of
economic possibilities to be covered, the downside scenario has
been set further below the base case than has previously been
the case.
As in previous years, the severe downside scenario is based
on the Bank of England stress testing scenario published in
2022, adjusted to allow a harsher impact on house prices. This
scenario is included to represent the range of highly stressed
outcomes for the UK and the Group’s customers.
Overall the forecasts represent an environment of increased
interest rate expectations, a more subdued housing market,
especially in the short term and inflation at very high levels
compared to recent history.
Given the increased range of potential outcomes, the Group
has reviewed the weightings attributable to each scenario in its
modelling. It has determined that it is appropriate to increase the
weighting applied to the severe scenario by 5% to 20% and make
a corresponding reduction in the weighting of the downside
scenario, representing the growth in the number of plausible
severe outturns for the UK.
The forecast economic assumptions within each scenario, and
the weightings applied, are set out in more detail in note 23.
The impairment provision levels generated by the Group’s
provisioning procedures and the scenarios described above
are set out below. In order to demonstrate the impact of the
scenarios used, the provisions have also been calculated on a
single scenario basis for the central and severe scenarios.
2022
2021
Unadjusted
provision
Cover
ratio
Unadjusted
provision
Cover
ratio
£m
48.5
38.3
85.3
0.34%
0.27%
0.60%
£m
46.0
33.3
86.7
0.34%
0.25%
0.64%
Weighted average
Central scenario
Severe scenario
The increase in the provisions calculated represents a more
normal economic environment, with a reversion to longer
term relationships between customer behaviour and eventual
loss, reducing the need for other judgements to some extent.
However, observation does not suggest that this linkage is fully
re-established as yet.
The distribution of gross balances by IFRS 9 stage produced by
the Group’s impairment methodology at the two most recent
year ends is set out below.
This demonstrates the resolution of non-performing cases, the
disposal of the POCI cases in the unsecured loan business and
the increased identification of Stage 2 cases by provision models
in response to a more normal economic framework.
Judgemental adjustments
The fundamental requirement of any provisioning methodology
is that the accounts present fairly the assets of the business.
Therefore it is a vital part of the process that all mechanical
outputs are challenged based on management’s understanding
of the business to ensure that the provision is consistent with all
available information at the year end, qualitative or quantitative
and whether it can be input into the modelling process or not.
While the Group would ideally like its mechanical provisioning
procedures to allow for as much of this information as possible, it
acknowledges that this can never entirely be the case.
This is particularly true where predicted economic conditions are
not represented in the data used to develop the model, where
the inherent modelling uncertainty will increase. There is also
information which may only be relevant in certain situations, or
more qualitative data, such as internal and external feedback,
which it would be difficult to incorporate into a statistical
modelling framework.
Management use their understanding of any model limitations,
coupled with the wider ongoing and ad hoc management
information about the Group’s portfolios to determine whether
any judgemental adjustments to provisioning are required.
At 30 September 2022, the absolute magnitude of economic
indicators such as bank base rates and inflation lay significantly
outside recent historical levels, as did their rate of change, which
may decrease model reliability. The Group’s loan books were
generally performing well, with historically low arrears figures in
the principal portfolios. However, customer and market feedback
suggests that the overall effect of these may be masking a higher
ECL than that predicted.
This is particularly so in the Group’s SME lending operations
where SME businesses are known to be holding excess cash
balances, partly resulting from government-supported lending
schemes, which may be being used to delay the impact of
potential business issues.
It is also clear that some customer groups in the SME business,
such as those related to the construction industry, might be
impacted more specifically by the economic situation and any
potential governmental response to it, which might also have an
impact on the recoverable value of security assets.
To allow for these additional uncertainties the Group has
applied judgemental overlays to its SME leasing portfolio and to
its buy-to-let mortgage book.
The judgemental adjustments generated by this process,
analysed by division are set out below.
2022
2021
£m
5.0
10.0
15.0
£m
9.2
10.2
19.4
Mortgage Lending
Commercial Lending
2022
85.2%
13.7%
0.9%
0.2%
2021
88.4%
9.5%
1.2%
0.9%
100.0%
100.0%
Stage 1
Stage 2
Stage 3
POCI
Total
Page 44
Fair value movements
The fair value line in the Group’s profit and loss account primarily
reports fair value movements arising from the Group’s interest
rate hedging arrangements. These are put in place to protect
the Group’s margins when offering fixed interest rate products
in either its savings or lending markets while continuing to
honour offers to customers in the event of significant interest
rate movements. The Group maintains a cautious approach to
interest rate risk and considers its exposures to be appropriately
economically hedged. The Group does not engage in any form of
speculative derivative trading and all fair value movements relate
to banking book exposures.
The accounting entries included in this balance are primarily
non-cash items and will reverse over the life of the hedging
arrangement, although period to period movements are mostly
influenced by volatility in market interest rates.
Where derivatives are hedging active loan or savings balances
the accounting entries should broadly cancel each other out,
although this effect can be distorted in periods of greater
interest rate volatility, such as the financial year just ended.
Where derivatives are hedging the lending pipeline such offsets
are not available, and the full fair value movement will be shown
on this line. Where future interest rate expectations increase
significantly between the point at which the pipeline loans
were hedged and the point at which the loans complete, then
a substantial fair value movement will have been posted to the
balance sheet by this time. However, through the life of the loan
product the derivative will provide inflows of cash to support the
income from the loan, compensating for the difference between
the fixed rate already agreed and the fixed rates available in the
market at the time of completion.
For this reason the Group regards these movements as
essentially the anticipation of gains belonging economically
to later accounting periods and excludes them from
underlying results.
The particularly high levels of these movements in the 2022
financial year, where a gain of £191.9 million was recorded
(2021: £19.5 million) result primarily from the levels of volatility in
UK benchmark interest rate expectations in the year, the Group’s
approach to pipeline hedging and the retention strategy applying
to maturing five-year fixed loans, which meant that the pipeline
was larger and of longer duration (and hence more exposed to
movements in rates) than in earlier periods.
The Group has a net derivative position of £1,201.0 million at
30 September 2022, which is unmatched for hedge accounting,
although forming part of the economic hedging position.
These derivatives must be carried at a fair value based on
expected cash flows over their contractual lives. As a substantial
proportion of this balance has a lifetime of two to five years,
volatility in the interest rate markets can generate substantial
month to month fluctuations in this valuation which have to be
included in the Group’s profit.
The reduction in the overlay in Mortgage Lending reflects the
receding threat of Covid generated losses, compared to 2021.
There is also some transfer from overlays to the modelled
provision as a more normal linkage between customer metrics
and future performance returns. However, it is clear that there
are new concerns in the UK economy, including those arising
from living costs which are not being fully recognised in
the modelling.
In the SME lending book, it is unclear whether the long-term
damage to customer businesses from Covid shutdowns has
yet fully manifested itself. Bureau data shows that the cash
balances which had built up in the SME sector as Covid-related
funds were drawn down has still not normalised and this may
be delaying these impacts. There is also likely to be an extent to
which businesses weakened by Covid impacts are less able to
withstand the forecast economic headwinds than might ordinarily
be expected. For these reasons management determined that
the level of overlay in this part of the portfolio should be broadly
maintained in response to those concerns.
Management then considered whether there were any customer
groups (such as industries or geographies) where the risk was
particularly greater than others. No such significant groups
have yet been identified so the judgemental uplifts were applied
across all performing cases.
The application of these judgemental adjustments is
considered to align the accounting provision levels with
current loss expectations in the business, taking into account
all relevant internal information and allowing for inherent
economic uncertainties. The Group will continue to monitor the
appropriateness and scale of these overlays going forward and
consider the extent to which any of the elements giving rise
to them can or should be incorporated into models and
standard processes.
Ratios and trends
The impact of the economic scenarios adopted, together with
the judgemental adjustments 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
Judgemental adjustments
Total
Cover ratio
Mortgage Lending
Commercial Lending
Total
2022
£m
48.5
15.0
63.5
0.31%
1.34%
0.44%
2021
£m
46.0
19.4
65.4
0.32%
1.74%
0.49%
2020
£m
62.0
19.8
81.8
0.48%
1.83%
0.64%
The trend of the ratios above is back towards a more normal
measure of coverage, as the UK economic situation continues
to evolve, although without returning to the 0.34% coverage ratio
seen pre-pandemic at 30 September 2019. The downward trend
was also influenced by the resolution of some significant legacy
positions, and by the increasing levels of security coverage
generated by house price inflation in the period, with the average
loan to value in the buy-to-let mortgage portfolio falling to 57.9%
(2021: 61.2%). The future levels of coverage will be dependent
on the performance of the UK economy and its impact on the
Group’s customers and their markets, where applicable.
Page 45
Strategic Report The table below shows the movements in unmatched exposures
over the last three years alongside the maximum and minimum
five year swap rates in the year as a measure of volatility.
Opening Loan
Deposit
Net
Closing
Loan
Deposit
Net
2022
£m
681.6
683.5
2021
£m
567.7
935.0
2020
£m
315.4
562.0
(1.9)
(367.3)
(246.6)
1,578.1
377.1
1,201.0
681.6
683.5
567.7
935.0
(1.9)
(367.3)
Results
The year’s profit before tax was 95.6% higher than in 2021 at
£417.9 million (2021: £213.7 million), with much of the increase
related to fair value items. Profit after tax increased 90.6% to
£313.6 million (2021: £164.5 million).
Basic earnings per share increased to 129.2 pence
(2021: 65.2 pence) and the diluted measure was 125.9 pence
per share (2021: 63.0 pence), both inflated by the fair value
accounting adjustments.
This result increased consolidated equity to £1,417.3 million
(2021: £1,241.9 million), representing a tangible net asset value
of £5.33 per share (2021: £4.34 per share) and a net asset value
on the statutory basis of £6.06 per share (2021: £5.03 per share)
(Appendix E).
Average
599.6
(184.6)
(307.0)
Swap rate High
Low
Range
5.39%
1.11%
4.28%
1.09%
0.66%
(0.05)%
(0.08)%
1.14%
0.74%
A4.4.2 Assets and liabilities
Summary balance sheet
30 September 2022
This clearly shows a quadrupling of the interest rate range,
the doubling of the loan pipeline hedge and a reduction in the
deposit pipeline hedge which would have provided an offset.
These factors have driven the gain from pipeline hedging
recorded in the year.
As a result of these accounting transactions the Group is
carrying a net fair value hedging asset on its balance sheet of
£216.7 million (2021: £8.8 million) which will revert to zero over
the lives of the related instruments.
Tax
Accounting standards require that a company should account
for tax in its year end accounts at the rates of tax enshrined in
legislation at the reporting date, regardless of any indications
of future tax policy given by governments. This means that
these accounts are prepared on the assumption that the UK
Government increases the rate of corporation tax from 19% to
25% from April 2023 and reduces the bank surcharge from 8% to
3%, from the same date. Any deviation from this position will be
accounted for in future periods.
The effective tax rate applied to the Group’s profits has
increased from 23.0% in 2021 to 25.0% during 2022. The main
cause of this has been the recognition of the deferred tax liability
on fair value gains which are calculated on the basis of the higher
tax rates legislated for in future years. The bank surcharge
represented 313 basis points of the effective rate in the year
(2021: 496 basis points), meaning that it represented over half
the difference between the basic and effective rates.
2022
£m
2021
£m
2020
£m
Investment in customer loans
Mortgage Lending
12,328.7
11,829.6
11,101.1
Commercial Lending
1,881.6
1,573.1
1,530.3
14,210.3
13,402.7
12,631.4
Hedging adjustments
Derivative financial assets
(559.9)
779.0
5.5
44.2
109.7
463.3
Cash
Intangible assets
Pension surplus
Other assets
Total assets
1,930.9
1,360.1
1,925.0
170.2
7.1
116.0
170.5
170.1
-
-
154.0
206.0
16,653.6
15,137.0
15,505.5
Equity
1,417.3
1,241.9
1,156.0
Retail deposits
10,669.2
9,300.4
7,856.6
Hedging adjustments
(99.7)
(3.0)
10.4
Other borrowings
4,007.2
4,451.4
6,229.7
Derivative financial liabilities
102.1
Pension deficit
Other liabilities
-
557.5
43.9
10.3
92.1
132.4
20.4
100.0
Total equity and liabilities
16,653.6
15,137.0
15,505.5
As the bulk of the fair value gain arose in Paragon Bank it is
subject to a higher rate of tax than the overall effective rate for
the Group. This meant that the effective tax rate on underlying
profit was 23.4%. In previous periods the effective tax rate
on underlying profit had been materially similar to the overall
effective tax rate.
The Group’s loan portfolio grew by 6.0% during 2022, with growth
in both Mortgage Lending and Commercial Lending, despite the
disposal of its unsecured consumer lending book. 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.
Page 46
Funding structure and cash resources
A4.4.3 Segmental results
The Group’s funding balance increased by 6.7% during the
year, marginally faster than the growth in the loan book as
cash balances increased. The proportion represented by retail
deposits increased to 72.7% in accordance with the Group’s
long-term funding strategy (2021: 67.6%), with wholesale
borrowings paid down. Movements in funding balances are
discussed in more detail in Section A4.2.
Derivatives and hedging
The Group’s derivative assets shown in the table above relate
almost entirely to the hedging of interest rate risk in the lending
and deposit portfolios. Driven by interest rate volatility the
balances of both the derivative assets and liabilities, and the
related hedging adjustments on loans and deposits, have risen
sharply as the volume of the Group’s fixed rate products where
the rate significantly differs from market fixed rate positions has
grown, as market rates have increased during the year. All these
items will ultimately effectively flow to the profit and loss account
as fair value movements.
Pension obligations
The valuation of the Group’s defined benefit pension scheme
under International Accounting Standard (‘IAS’) 19 moved from
a deficit of £10.3 million at the start of the year to a surplus of
£7.1 million at 30 September 2022. This valuation is driven by
inputs based on market-derived interest rates and the volatility
in the period produced significant fluctuations. These inputs
must be based on point-in-time observations at the year end,
and market disruption around the end of September 2022 has
therefore impacted the valuation.
The principal change in inputs was the increase in the discount
rate used in evaluating scheme liabilities, which is based on
long-term corporate bond yields, from 2.00% to 5.00%, while the
assumed rate of RPI inflation, which is based on gilt yields and
would normally counteract the impact of rising discount rates
only increased from 3.40% to 3.55%. These movements led to
a pre-tax valuation gain of £15.3 million being booked in other
comprehensive income.
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 2022 was estimated at £1.4 million, an increase
of £0.4 million in the period (2021: deficit of £1.0 million),
representing a 98.7% funding level (2021: 99.4%). However, the
position was subject to significant fluctuation around the year
end date due to market conditions.
Other assets and liabilities
Sundry assets fell from £154.0 million to £116.0 million in the year,
largely a result of movements in collateral balances generated by
the movements in derivatives described above, which reduced
by £36.6 million.
Sundry liabilities grew from £92.1 million to £557.5 million, also
principally driven by derivative movements, with collateral
liabilities increasing by £388.4 million and a deferred tax
balance of £44.4 million being recognised, largely due to fair
value accounting adjustments. The increasing interest rate
environment also generated increases in accrued interest
payable of £23.5 million.
The underlying operating profits of the two 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
Unallocated central costs and
other one-off items
2022
£m
239.9
88.6
328.5
2021
£m
230.2
76.4
306.6
(102.5)
(112.4)
226.0
194.2
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 Group’s Mortgage Lending division, which now includes
second mortgage assets formerly reported in the Idem Capital
segment, continued to perform strongly and grow its NIM.
Net interest grew by 9.6% in the year to £261.5 million
(2021: £238.7 million) with average net assets growing by 5.4%
to £12,079.2 million (2021: £11,465.3 million) as NIM increased to
216 basis points (2021: 208 basis points).
Credit performance in the period was good with a provision of
£4.6 million in the year (2021: release of £7.6 million) and a cost
of risk of 4 basis points. IFRS 9 Stage 3 cases reduced from
£145.3 million to £119.3 million as the Group continued to resolve
legacy cases which had been managed on a long-term basis.
Commercial Lending
In the Commercial Lending division average balances grew
by 11.3% to £1,727.3 million (2021: £1,551.7 million), leading to
an increase of 18.8% in net interest to £113.1 million
(2021: £95.2 million). NIM grew from 614 basis points to 655 basis
points, due to the continuing focus on higher margin business,
and with lower-margin government backed lending forming a
smaller part of new business than in the previous year.
While credit performance in the period remained largely stable,
with low arrears and relatively few defaulted cases in the portfolio,
potential adverse headwinds evolved in their nature but remained
a threat. Stage 3 gross balances comprised only 0.3% of the
segment’s total gross portfolio at 30 September 2022 (2021: 1.2%).
However, the uncertain outlook for the UK economy meant that
the provision charge in the segment increased from £2.9 million in
2021 to £9.4 million in 2022, to ensure these risks are adequately
provided against.
Page 47
Strategic Report These developments are already contributing to the success
of the Group’s operations, delivering benefits to brokers and
applicants for new SME lending products and to buy-to-let
mortgage customers reaching the end of a fixed term on their
products, as already described in Section A4.1 above.
The Group considers that its office locations remain valuable as
part of its hybrid working model. Physical proximity can play a
significant role in fostering collaboration, collegiality, creativity
and the growth of the Group’s culture and identity. The Group
continues to review its locations to ensure they are optimised for
new working methods and to manage their energy efficiency. As
part of that process the Group’s SME lending hub was relocated
within the Southampton area, to a more suitable building with
a better environmental impact. The Group’s premises in Cardiff
and Poole were also replaced with more appropriate facilities.
The Group has maintained its focus on high quality customer
service throughout the period and is currently working to embed
the new FCA Consumer Duty requirements in its systems and
processes. This is a significant transformation in the way that the
regulator approaches firm’s responsibilities and a major project
is taking place to ensure that the business will be able to comply
within the deadlines set by the FCA.
On the Group’s termination of its unsecured lending activities
and the sale of its residual loan assets it was a particular focus
to ensure that customers, especially those with vulnerabilities
or potential vulnerabilities, were not adversely impacted by the
process. The Group focusses on complaints data as a high level
satisfaction metric, and incident levels remained low throughout
the period.
The operational resilience of the business remains an important
area of focus for the Group. During the period the formal
self-assessment required by regulators was successfully
completed, endorsing the Group’s investment of time and
resources in this area over recent periods.
A4.5.2 Governance
Throughout the year ended 30 September 2022, 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 tenure of Fiona Clutterbuck as Chair
past nine years for succession planning purposes and to ensure
the appointment of a suitable replacement Chair. Fiona stepped
down from the Board on 1 September 2022 on the appointment
of the new Chair, Robert East.
The appointment of the new Chair of the Board in September
2022 has also resulted in the Company adopting a ‘comply and
explain’ approach to Provision 21 of the Code, which requires a
Board to undertake a formal and rigorous annual evaluation of
the performance of the Board, its committees, the Chair and
individual directors. Given the appointment of a new Chair, the
decision was taken to defer the 2022 evaluation until 2023 to
allow the new Chair sufficient time in post to make the evaluation
more relevant, meaningful and useful. The board evaluation in
2023 will be externally facilitated.
A4.5 Operations
At the heart of the Group’s strategy is its vision to become a
leading technology-enabled specialist bank. This relies on the
strength of its people, systems and controls and the continuing
development of these alongside the evolution of its business
is an ongoing focus at senior management levels. The Covid
pandemic demonstrated the Group’s agility and flexibility in
resource deployment, which are fundamental to the execution of
this strategy and the Group’s ability to demonstrate its resilience
to its regulators also confirms the strength of this position.
It was very pleasing that the Group’s commitment to its people
was recognised by the award of Platinum Investors in People
(‘IiP’) status, the highest level available, achieved by only 5% of
employers assessed.
During the year the Group’s operational journey away from Covid
restrictions continued and a permanent commitment to hybrid
working was made. The evolution of these hybrid models in
different business areas continues to be a major area of focus.
At the same time IT and process developments continued
to progress, supporting the Group’s digitalised vision of its
future operating model, while the Enterprise Risk Management
Framework has further evolved to ensure that the business
remains robust.
All these activities combine to give the Group an evolving
operational structure on which it can rely to deliver its business
strategy in the future.
A4.5.1 Operations
The Group workforce has now exceeded 1,500 people, and they
have seen a major shift in working patterns over recent years,
which has continued through the most recent year. A hybrid
working model was adopted on an ongoing basis, following trials
and building on experience of the Covid pandemic. The majority
of employees are attached to one of the Group’s locations, with a
proportion of their time spent working from home.
In order for the Group to provide the best possible service to
customers and remain successful, individual business areas
have taken different approaches to implementing the flexibility
this offers their people. The optimisation of these arrangements
has been an area of significant operational focus in the period
and this process continues into the new financial year. The
evaluation of the potential consequences of these changes on
the Group’s social, physical and IT infrastructure will remain a
priority moving forward.
The Group’s success in continuing to progress the development
of new systems, processes and products during the Covid
pandemic meant that it entered the year well positioned to
deliver enhancements in the period, and a significant number of
technological, operational and regulatory developments were
completed or progressed.
Long-term projects to provide better technology for the
development finance, SME lending and mortgage lending
operations continued in the period, with enhancements
becoming available to support customers and intermediaries.
During the year major projects upgrading the Group’s
payment and treasury systems came on line, alongside
additional cyber-security capabilities. Shorter-term projects
provided enhancements to accounting systems, surveyors’
administration, video conferencing and interactions with
customers in vulnerable circumstances.
Page 48
Board of Directors
A4.5.3 Management and people
On 1 September Robert East was appointed as Chair of the
Board in place of Fiona Clutterbuck who stepped down from
the Board on that day. Robert has over 40 years' experience in
UK financial services, including at board level, as CEO and Chair.
During his executive career he held senior roles at Barclays.
He was also CEO of Cattles, where he led the restructuring and
wind down of its operations from 2010 to 2016. He has held
positions as Chair of Vanquis Bank, Skipton Building Society
and Hampshire Trust Bank. He has previously served as a
non-executive director on the boards of Provident Financial
Group, Skipton and Hampshire Trust Bank, where he was also
Chair of the Risk Committee.
On the same day Tanvi Davda was appointed as an additional
independent non-executive director of the Group. She brings
a diverse range of skills and knowledge to the Board following
an executive career of more than 25 years. Her career began at
Credit Suisse as a derivatives trader. She then went on to work
with IBM as a management consultant before joining ABN AMRO
and then Barclays Wealth, where she was Managing Director
of Global Research and Investments. In 2015, Tanvi co-founded
Saranac Partners, a boutique wealth manager, where she was
Managing Partner until 2021. She continued to sit on the Saranac
Partners board as a non-executive director until the end of
November 2022. She has also held non-executive roles on the
boards of Ofqual, the qualifications and examinations regulator,
and the Student Loans Company.
Following these changes the Board consists of nine directors,
three of whom are female (33.3%).
Remuneration policy
The PRA remuneration rules applicable to the Group were
changed with effect from the current financial year as it qualified
as a Proportionality Level 2 (‘Level 2’) bank, bringing it within
the scope of more onerous rules. This is a result of both 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. Affected
employees have been determined and the changes required
identified. All variable pay awards in respect of the current
period have been made in accordance with relevant regulatory
remuneration rules. The principal changes relate to the delivery
mechanisms for the provision of variable remuneration to such
people and the duration of deferral, for parts of that variable
remuneration, which they are now subject to.
The Group’s triennial review of its Directors’ Remuneration policy
commenced in the second half of the year, with consultations
taking place with shareholders, investor bodies and other
stakeholder groups. The proposed policy developed in this
process will be presented to the 2023 AGM for approval by
shareholders. We would like to thank all stakeholders who took
part in the process for their input.
The Group employs just over 1,500 people and during the year
headcount has grown by 4.3% (2021: 3.6%), largely driven by the
creation of new roles in mortgage underwriting and customer
support functions.
People and development
During the period the Group’s priority has continued to be
the wellbeing of employees, ensuring they were provided with
the necessary support to return to the office environment
safely as the restrictions from the pandemic came to an end.
This included a number of trials, managed across the Group’s
different business areas, to identify the optimum way of working
in a hybrid way, providing flexibility for employees whilst
maintaining the high standards of delivering good outcomes
for the Group’s customers. In March 2022, an announcement
was made to all employees to confirm hybrid working was being
adopted on a permanent basis following the success of the trials.
The Group’s Wellbeing team continues to play an important role
in helping employees with their mental, physical, financial and
emotional wellbeing. The Group’s introduction of The Vitality
Health programme during the year gave all employees access
allowing them to obtain personalised health reviews, discounts
and rewards through Vitality’s partner brands and Vitality
Wellbeing Coaches.
In May 2022 the Group was proud to announce the
re-accreditation of its IiP status, being recognised for the first
time as a Platinum employer. This recognition is the first for a
Solihull based employer and it means the Group is one of just 5%
of assessed organisations who have achieved this recognition.
The attrition rate of employees has increased during the period
due to an increase in the number of retirees and a buoyant
marketplace. The overall shortage of labour in the UK economy
has put pressure on attracting trained and effective resource and
the Group has experienced some of the effects of this. Whilst
the voluntary attrition rate has increased to 12.2% from 8.6% in
2021, this level is not significantly above pre-Covid levels, and
the Group continues to track below the national average of 18.6%
for the banking and finance sector in 2022, published by Reward
Gateway. Strong levels of retention remain a key feature of the
Group’s employee base with 55% of employees achieving over
5 years’ service, 12% achieving over 20 years and 4% achieving
over 30 years’ service.
Employees continued to show flexibility during the year with
many undertaking secondments and transfers to different areas
of the business to ensure the Group continued to meet the
needs of its customers. Although the decision was made to exit
the unsecured consumer loans market in the year, of the
43 employees affected, over 50% were offered similar or
alternate roles within the Group, with a number deciding to take
voluntary redundancy in August.
The Group maintains its UK Living Wage Foundation
accreditation and minimum pay exceeds the levels set by
the Foundation. In July 2022, the Group made an exceptional
payment of £1,000 to all employees below senior leader level,
including a £500 advance of profit related pay for the current
year, to assist with the cost-of-living pressures.
Holiday entitlement was enhanced during the year, with an
additional day’s leave given for an employee’s birthday and,
following a proposal from the Group’s People Forum, it was
agreed to extend the half day for Christmas Eve and New Year’s
Eve to a full day’s leave for each date. All full time employees
now enjoy at least 28 days paid leave, rising to 33 days after five
years. This is in addition to public holidays.
Page 49
Strategic Report Learning and development
The Group continues to provide employees with a range of
training and development opportunities. During the period this
has included a range of technology focused training to support
the delivery of the IT roadmap and permanent move to hybrid
working, alongside extensive leadership and management
training. Additionally, a new development programme for high
performing employees working in specialist, non-managerial
roles was launched to support the career progression of
technical experts. This training is complemented by other
development opportunities such as apprenticeships, coaching
and mentoring.
Equality and diversity
The Group made significant progress on its equality, diversity
and inclusion (‘EDI’) strategy during the year. Richard Rowntree,
Managing Director – Mortgages, continues in the role of
Executive Sponsor for EDI and sponsors the Group’s EDI
Network which continued to develop through the year. The
Network has had a positive impact on the development of the
business and has been involved in several initiatives, including
promoting the importance of diversity data collection (as at
30 September 2022 the Group had achieved 73% disclosure rate
(2021: 63%)) and arranging Listening Circles where members of
the Executive Committee meet with employees from minority
groups to discuss their experiences of working at Paragon, often
resulting in a reverse mentoring experience.
In May 2022 the Group became a founding member of ‘Progress
Together’, the City of London’s Socio-Economic Diversity
Membership Body. The Group is committed to improving
socio-economic diversity across the financial services sector
and is working on several initiatives to widen the talent pools it
is accessing.
The Group is pleased to report that it continues to achieve 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 has committed to
achieve 40% female representation in senior management by
31 December 2025, compared to the current 38.1%.
To support its efforts to improve gender equality the Group
has continued to participate in Mission Gender Equity, a cross-
company mentoring programme run by Moving Ahead. This
opportunity has proven popular with both mentors and mentees,
with 97% of mentees being retained, 30% securing a new role
within the Group and 17% being promoted. Nicki Breen, Learning
and Development Business Partner, was also recognised as a
runner-up in Moving Ahead's ‘Most Dedicated Programme Partner
of the Year’ award. The Group is pleased to be participating in a
similar scheme, Mission INCLUDE, 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.
A4.5.4 Sustainability
Sustainability, including resilience in the face of climate change
risks, is core to the Group’s strategy: to focus on specialist
customers, 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 and savings through the
design of products offered and the choices of sectors in
which to operate
The Group has a Sustainability Committee which coordinates
its overall response to climate change and other sustainability
issues and reports directly to the Executive Committee. This
provides a forum for sharing information on initiatives within
business areas and helps to develop the Group’s proactive
approach. Since its formation in 2021 it has increased the profile
of sustainability-related risks and opportunities within the
Group and driven improved reporting and understanding of
these matters.
The Group published its first sustainability report, the
Responsible Business Report, in December 2021 and has used
feedback from that exercise in the development of its 2022
report. This reporting provides more detailed information on its
sustainability initiatives and demonstrates how sustainability is
embedded throughout the Group. It is available on the Group’s
corporate website at www.paragonbankinggroup.co.uk.
Climate change
Climate change is designated as a principal risk within the
Group’s Enterprise Risk Management Framework. As a
result 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 recognises the importance of reducing the impact
that its own operations have on the environment. As a financial
services provider the Group’s overall environmental footprint
across its principal operations is low. The Group is, however,
committed to identifying, measuring and managing the impact
of its operations on the environment and to find ways to mitigate
any negative impacts. During the year key initiatives included:
•
•
•
•
•
Inclusion of conditions related to climate targets in the
Group’s long-term variable pay arrangements
Establishing a target to reduce operational footprint to
net zero by 2030 and purchasing carbon credits to offset
operational emissions in the year
Relocating the Group’s Southampton, Cardiff and Poole
operations to more energy efficient premises
Installing electric vehicle charging points at the several of the
Group’s buildings for use by employees
Updating the company car policy so that only hybrid or
electric vehicles will be provided on new leases, eliminating
diesel and petrol vehicles from the company fleet by 2025.
The Group’s target is for a completely electric-only fleet
by 2031
•
Continuing the rollout of LED lighting across the Group’s
principal sites
The Group has also joined Bankers for Net Zero.
Green product initiatives have been developed across all
the Group’s main sectors and continue to evolve. These are
discussed in the relevant business reviews in Section A4.1.
Page 50
The Group continues to develop its reporting to manage both
its risk management processes and its reporting under the
principles set out by the Taskforce on Climate-Related Financial
Disclosure (‘TCFD’). As required by the UK Listing Rules the
Group has reported on climate change risk and exposures under
the TCFD framework in its 2022 year end accounts, building on
the disclosures introduced in 2021.
o
The Group takes climate change very seriously and will only
make commitments which it objectively believes are achievable
and will deliver real benefits on climate change.
In an environment of rising interest rates and cost
pressures for both new and existing borrowers, the Group
continues to ensure that high standards of prudent lending
are maintained. The Group takes a forward-looking, as
well as current view of affordability, and has adjusted
credit policy to ensure loan repayments are sustainable
for customers and will continue to do so. The Group takes
its responsibilities in respect of customers in vulnerable
circumstances extremely seriously and continues to
ensure where appropriate forbearance solutions are
necessary these are tailored to individual customer
circumstances and aligned to regulatory guidance
and expectation
o
The Group remains committed to supporting its
employees in the face of economic challenges. Various
financial and wellbeing initiatives have been instigated to
ensure that employees have access to information and
resources to assist in navigating cost of living challenges.
The welfare of its employees is a key priority of the Group,
and it will continue to look at innovative ways of ensuring
that individuals feel fully supported during the
current uncertainty
•
•
•
The Group continues to closely monitor how changes in
political leadership and associated priorities, policies or
interventions may influence the broader economic landscape.
Following the outbreak of conflict between Russia and
Ukraine the Group identified and ringfenced any potential
exposures to Russian, Belorussian or Ukrainian customers
and suppliers. Close oversight continues to be maintained
through ongoing customer due diligence and risk assessment
processes. In addition, the Group is committed to ongoing
investment in its cyber controls, given heightened threat
assessments posed by the geopolitical situation
The embedding of the Group’s operational resilience
capability continued, given its proven criticality in the handling
of the pandemic, and the incorporation of lessons learned
into the overarching framework. The Group continues to
build out its resilience capability having identified ongoing
enhancements as a result of its initial self-assessment
undertaken in March 2022. As regulatory and industry
practice evolve following this sector-wide exercise, the Group
is well-positioned to respond accordingly. Robust operational
resilience capability is deemed to be critical as the Group
undertakes its programme of strategic transformation across
a number of legacy platforms and processes
Prioritising focus on climate change given the associated
risks, remains an ever-present challenge. The UK Government
has confirmed its goal of net zero carbon by 2050 and the
Group, and the rest of the financial services industry, have a
vital role to play in that commitment. The Group considers the
impacts of climate change risk through both its operations
and its lending activities, and continues to evolve its approach
to measure and mitigate the transition and physical risks
potentially caused by climate change
These issues are expected to continue to dominate the risk
landscape moving into 2023, particularly with the overall levels
of economic uncertainty in the UK and the prospect of levels of
inflation and interest rates not seen for many years. The Group
will carefully monitor the emerging impacts on both credit risk
and the wider risk landscape as the situation develops.
Social engagement
The Group’s Charity Committee raised almost £43,000 for the
Alzheimer’s Society, the employee’s chosen charity for 2021, an
outstanding result, given the restrictions imposed on normal
fundraising activities by the pandemic. For the nine months
ended 30 September 2022, £31,000 was raised for Mind and
employees have now selected Newlife, a disabled children’s
charity, as the beneficiary of fund raising efforts for the 2023
financial year.
Employees are also using their entitlement to an annual paid
volunteering day, particularly as more opportunities become
available with the loosening of Covid restrictions, with days
used increasing from 49 in 2021 to 286. Employees took part
in projects in the fields of homelessness, education and the
environment, with the Group promoting a wider take-up for the
coming year.
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.
Risk environment
Whilst the two previous reporting years have largely been
dominated by the response to the Covid pandemic the Group
now faces new economic and geopolitical challenges which
require it to remain agile and resilient in its risk management
capability. It is recognised that the wider pandemic is still a
global challenge, and the possibility of further waves may pose
additional issues. The Group’s ability in successfully navigating
the unprecedented situation posed by Covid in 2020 and 2021,
means that it is well-placed to address any future operational
challenges this may bring.
It is clear that the risk environment has significantly changed
due to Covid and wider global issues which have, and will
require the Group to ensure it continues to closely monitor
impacts on its operations and risk profile. The Group’s risk
management framework will continue to provide a robust
mechanism to ensure that new risks are promptly identified,
assessed, managed, and appropriately overseen from a risk
governance perspective.
There are a number of strategic issues that have been prominent
in the risk landscape during the year and are expected to
continue to pose challenges for the foreseeable future:
•
The “cost of living” crisis has escalated over recent months
and remains a dominant theme in the political and economic
agenda. The implications of increasing inflationary pressures
are far-reaching and the Group continues to monitor how this
may impact its customers and employees
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Strategic Report
Risk management
Given the spectrum of risks the Group has faced, and continues
to face, the maintenance of a robust risk management
framework, allowing it to promptly identify and assess risk
exposures and develop appropriate mitigants, remains
imperative. It therefore remains committed to further evolution
and embedding of its risk practices with significant progress
having been made in the year in further enhancing its ability to
manage all categories of risk through the ERMF.
The recruitment of experienced resource in 2021 within the
second line of defence has enabled considerable enhancement
of core risk processes during the year. This ensures that the risk
framework continues to support the strategic aspirations of the
Group in an effective and proportionate way. Good progress
has been made in refining the suite of policies that underpin
the management of each of the Group’s identified principal
risks. This, in turn, has resulted in refinement of associated risk
appetites and better articulation of the control environment for
each risk type. These activities have been accompanied by a
comprehensive programme of education aimed at bolstering the
Group’s risk culture, and ensuring that individual accountabilities
and responsibilities in respect of risk are fully understood.
A detailed roadmap supports the development of the framework,
with regular reporting against these commitments provided to
the Risk and Compliance Committee. Strong progress was made
through the year with the focus for 2023 onwards directed to
ongoing embedding and validating the success of this through a
programme of risk maturity assessments.
Despite the wider strategic challenges, the Group has identified,
focussed and delivered on a number of risk issues including:
•
•
•
•
LIBOR transition – Successfully transitioning all customers
with LIBOR-linked products to alternative rates prior to the
withdrawal of LIBOR in December 2021, while ensuring that
all strategic, operational and conduct-related risk implications
of the changes in product design, funding and operation were
fully met
Financial crime – Enhancing further the Group’s financial
crime systems and controls. Such systems have been an
area of regulatory focus across the sector and the Group
has made significant investment in both technology and
resources to support its comprehensive anti-money
laundering programme
FCA Consumer Duty – Mobilising a comprehensive
programme of work to assess the impact of the new FCA
Consumer Duty on the products and services offered across
the Group, ensuring that its culture is driving good outcomes
for its customers
IRB – Continuing to develop IRB model methodologies
for the buy-to-let and development finance portfolios,
while embedding the overarching model risk framework to
enhance credit risk management and support the Group’s
IRB application process. Following submission to the PRA
of Phase 2 of the buy-to-let application in March 2021,
initial agreed refinement points are in the process of being
addressed. Phase 3 documentation for buy-to-let, and Phase
2 documentation for development finance, are nearing
completion and waiting for PRA submission invitation prior to
concluding final internal governance steps
The Group has also continued to develop its management of
third-party outsourcing risks, climate change risk, cyber security
and data risk and stress testing, while embedding the results of
the resilience self-assessment referred to above.
The long-term impact of the UK’s exit from the EU continues
to emerge. 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 or those of its customers.
The Group also continues to monitor the wider challenges
around energy supplies given the potential threats of power
shortages and energy rationing. This is subject to ongoing
analysis and stress testing and the Group has undertaken
detailed contingency planning in the event that such a scenario
occurs. Currently the Group is comfortable that it has access to
adequate alternative energy sources, however, this continues
to be assessed as the implications and likelihood of energy
shortages becomes clearer.
Risk outlook
The principal challenges in the risk environment faced by the
Group as it moves forward into its 2023 financial year and
beyond include:
•
•
•
Risks associated with the wider economic landscape and the
impact this will inevitably have on individual living standards,
particularly expected increases in energy costs. Whilst the
level and duration of government intervention is yet unclear
given the changing political leadership 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 addressing the regulatory requirements in
respect of the new FCA Consumer Duty rules and ensuring
that it continues to meet regulatory expectations in respect
of its anti-money laundering and wider financial crime
control frameworks
Risks associated with climate change, where the UK
Government confirmed its goal of net zero carbon by 2050 in
November 2020, giving the Group, and the rest of the financial
services industry, a vital role to play in that commitment.
As global strategies continue to be refined the Group will
ensure that both its operational footprint and the impact of its
lending activities, explicitly consider climate change risks 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.
Page 52
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
continues to pose a particular challenge 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.
During the year all relevant regulatory publications have
been considered by the Group, any implications identified
and required changes implemented within an appropriate
timeframe. The volume of requests for information from the FCA
has increased during the year and this trend is anticipated to
continue, focussing on exercising forbearance for customers as
the cost of living crisis develops. The Group responds to such
requests in a timely fashion, and maintains robust controls to
support the delivery of fair customer outcomes.
The following developments currently in progress have the
greatest potential impact on the Group:
•
•
•
•
Consumer Duty – In July 2022, the FCA issued its final rules
and guidance on “A new Consumer Duty”, which seeks to set
higher expectations for the standard of support provided to
customers, and challenges firms to evidence the customer
outcomes that they are delivering. As implementation of
the new rules is staged (with the requirement for existing
products to be in compliance by July 2023, and closed
products by July 2024), previous project plans have been
revised to ensure appropriate focus and prioritisation.
This activity is being championed by the Board, with a
non-executive director having specifically been assigned
responsibility for oversight of the programme
MREL – 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. On 3 December 2021 the Bank of England
published a Statement of Policy based upon this consultation,
which took effect from 1 January 2022. Although the Group
is not subject to MREL requirements currently, given its
potential for growth it may be required to issue MREL
eligible instruments at some point in the future and
therefore continues to closely monitor developments
and potential impacts
Basel 3.1 – The PRA published a Consultation Paper on Basel
3.1 implementation in November 2022. This follows delays
driven by a need to respond to the Covid pandemic. The
PRA’s current intention is to consult on the proposals then
implement on 1 January 2025. The Group actively monitors
and manages its capital, assessing the implications of a range
of different impacts including the implementation of any
new requirements
Regulatory framework – In 2021 the PRA published
Discussion Paper 1/21, which explored options for developing
a ‘strong and simple’ prudential framework for banks and
building societies that are considered by the PRA to be
neither systemically important nor internationally active,
such as the Group. The PRA published a Consultation Paper
5/22 in April 2022 that focused on a proposed approach for
the smallest firms, which would not impact on the Group
based on the total assets threshold (£15 billion). However,
the regulator has indicated that larger institutions will be
addressed in the future. The Group continues to monitor
developments and potential implications for its operations
•
Customers in vulnerable circumstances – The treatment
of customers in vulnerable circumstances continues to be a
strong focus for the FCA, demonstrated in its business plan
and three-year strategy released in April 2022. The Group
continues to take its responsibilities in this regard very
seriously. Significant work continues to be undertaken to
revise existing procedures, controls and training provisions to
meet regulatory and industry expectations
•
Operational resilience – Following the publication of the
final rules and guidance on ‘building operational resilience
in financial services’ in 2021 by the FCA, PRA and Bank of
England, the Group successfully met the March 2022 policy
implementation deadline. This included setting of impact
tolerances for important business services, embedding a
scenario testing approach and undertaking a self-assessment
against the regulatory framework. The 2022 self-assessment
set clear objectives for further refining the Group’s approach
to resilience
The Group is committed to a programme of continuous
improvement in its resilience capability. Important business
services are mapped and tested using severe but plausible
scenarios to push the boundaries on the ability of the
infrastructure, key dependencies and third parties to recover
from disruption. This approach should ensure the Group can
meet the regulatory deadline of 2025 where it will need to
demonstrate the ability to stay consistently within
impact tolerances
•
Climate change – The Group continues to embed its
approach to managing climate-related financial risks,
described on a basis consistent with TCFD recommendations
in Section A6.4. 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
Managing the impacts of climate change is seen as a key
strategic priority for the Group and a detailed plan of work
has been developed which reflects regulatory and wider
requirements. This will continue to be refined as new
thinking emerges
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 Financial Services and Markets Bill, which sets out how the
UK financial sector will be regulated post-Brexit, was published
in July 2022 with the aim that it will obtain Royal Assent by
May 2023. The Bill will implement the outcomes of the Future
Regulatory Framework (‘FRF’) Review, revoking retained EU law
relating to financial services and enabling HM Treasury and the
financial services regulators to replace it with legislation designed
specifically for UK markets, in a way that builds on the UK’s
existing approach to financial services regulation. The Bill covers
a wide range of areas, but key elements include the introduction
of a new secondary objective for both the PRA and the FCA for
medium to long-term growth and international competitiveness
in the financial services sector, an enhancement to regulatory
powers over critical third parties and increased powers for
HM Treasury over the Bank of England and PRA on existing
and new rules. The Group continues its close monitoring of
developments in this area and the emerging implications of Brexit
more widely, and how these may ultimately impact the specific
regulatory frameworks under which the Group operates.
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.
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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 59 to the accounts includes an analysis of the Group’s
working and regulatory capital position and policies, while notes
61 to 63 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 66 and 67.
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 2022 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 forecasts for
each business segment 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.
Forecast loan impairment levels reflect the economic scenarios
and weightings used in the Group’s provisioning at
30 September 2022.
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:
•
•
•
•
•
Higher buy-to-let volumes – This scenario allows the Board to
see what impact higher buy-to-let volumes at a reduced yield
has on the profitability of the business. The higher volumes
also allow the Board to determine whether capital resources
and liquidity would be stretched due to the higher cash and
capital requirements
Higher funding costs – This scenario allows the Board to
see 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 volume and yield – This scenario
replicates a significant increase in competition within the
sector (potentially from market shrinkage), reducing yields
and impacting market share. Since development finance is
the highest yielding product, its reduction shows the Board
the impact of a lower mix on the contribution to costs and
what other ratios may be affected from such a drop in volume
Higher buy-to-let redemptions – This scenario highlights to
the Board the potential risk that is inherent in the currently
held EIR buy-to-let debtor and invites discussion as to what
mitigating action could be taken to avoid such an impact
Bad debt stress – This scenario simulates a significant
short-term capital and profitability shock with prolonged
house price deflation across the plan horizon. To ensure that
it is a worst-case stress point and also to avoid replicating
the ICAAP process, only bad debt rates are altered in these
scenarios – all new business and other assumptions remain
with no management actions included
•
Combined downside stress – This presents a plausible set
of adverse factors to the business model that allows the
Board to see how this impacts the strategy across the
five-year horizon
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 its longer term viability and ensure 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 the impact of rising interest rates,
rising inflation and broader consequences of the cost of living
crisis while continuing with 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. 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,
and the emerging long-term effects of the Covid pandemic.
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.
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 in the year monitoring
the emerging economic situation in the UK, in particular the
impact on its customers of rising prices, rising interest rates and
reducing confidence more generally. In particular the impact on
the Group’s operations of increasing customer vulnerability and
potential pressure on affordability was an important focus area.
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 £10,669.2 million (note 32), raised
through Paragon Bank, are repayable within five years, with
80.8% of this balance (£8,620.5 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 2022 Paragon Bank held
£1,505.5 million of balance sheet assets for liquidity purposes,
in the form of central bank deposits (note 62). A further
£150.0 million of liquidity was provided by an off balance
sheet swap arrangement (note 62), bringing the total to
£1,655.5 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 £1,776.0 million.
Holdings of the Group’s own externally rated mortgage backed loan
notes can also be used to access the Bank of England’s liquidity
facilities or other funding arrangements. At 30 September 2022 the
Group had £455.2 million of such notes available for use, of which
£213.0 million were rated AAA. The available AAA notes would give
access to £171.6 million if used to support drawings on Bank of
England facilities.
Page 55
Strategic Report The Group’s securitisation funding structures, described in note
62, 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
£112.5 million retail bond, due August 2024. Central bank debt
under the TFSME is not repayable until 2025.
The Group’s access to debt is enhanced by its corporate rating,
which was upgraded to BBB+ by Fitch Ratings in March 2022,
and its status as an issuer is evidenced by the BB+ rating of its
£150.0 million Tier-2 bond. It has regularly accessed the capital
markets for warehouse funding and corporate and retail bonds,
over recent years and continues to be able to access these
markets. The Group has access to the short-term repo market
for liquidity purposes which it uses from time to time.
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 59 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 during
the year ended 30 September 2021, resulted in a reduction of the
minimum capital level. Its capital at 30 September 2022 was in
excess of regulatory requirements and its forecasts indicate this
will continue to be the case.
While this statement is given in respect of the three-year period
specified above, it should be noted that its risk evaluation
exercise also includes a high-level view extending to
September 2027 and 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 for the
purposes of this viability statement.
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.
Viability statement
In making the viability statement the directors considered the
three-year period commencing on 1 October 2022. This aligns
with the horizons used for the risk evaluation exercise which is
performed annually and facilitated by the CRO.
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.
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 2022.
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.
In order to ensure that an overall strategic focus on sustainability
issues is maintained, the Group has a sustainability committee,
comprised of relevant ExCo members and other responsible
senior managers. The Committee meets regularly and is chaired
by Deborah Bateman, the External Relations Director.
Further information on the Group’s sustainability profile and
agenda is given in the annual Responsible Business Report,
published each December and available on the Group’s website
at www.paragonbankinggroup.co.uk.
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 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 (as amended)
(‘Schedule 7’) (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. The
Group has incurred no such fines greater than US$ 100.0 million
in the year (2021: none). Information on penalties and disciplinary
incidents relating to sustainability issues is given below in each
section, where relevant.
A6.2 Customers
During the year the Group has maintained its focus on providing
high quality customer service, and it is currently working to
embed the new FCA Consumer Duty requirements in its systems
and processes.
The Group’s strategic objective is to be a prudent, risk-focussed,
specialist bank with a closely controlled, cost-efficient operating
model. Customers are at the heart of the Group’s business
which, as a specialist bank, uses its expertise to provide financial
products and support to help them achieve their ambitions. The
Group is committed to treating customers fairly, offering extra
support when they need it and listening to their feedback.
The fair treatment of customers and the delivery of fair outcomes
to them is central to the achievement of the Group’s strategic
business objectives and it has no appetite for any material failure
to deliver fair outcomes for customers.
Customers can be confident that the Group will always consider
their needs and act fairly and responsibly in its dealings
with them. To ensure this, a number of customer focused
management groups are dedicated to improving customer
journeys and supporting customers on an ongoing basis.
In particular, a cross-functional working group addresses the
needs of customers in vulnerable circumstances, considering
their needs and any additional support that they require, while
ensuring that the Group’s people, processes and products
are able to meet these needs. Deliverables over the last
twelve months have been focused on identifying the drivers of
vulnerability, enhancing training for employees and enhancing IT
systems to facilitate improved identification of, and engagement
with such customers.
While the Group strives to provide excellent service at all times,
it is inevitable that issues will arise from time to time. The Group
regards these as opportunities to improve and consequently
management teams meet monthly to discuss customer
feedback and complaints to understand how the levels of service
that customers, and potential customers, demand and expect
can be maintained and enhanced.
Page 57
Strategic Report Monitoring
In order to ensure the delivery of consistent and good customer
outcomes, the Group has established complaint reporting
forums in all business areas, which enable the effective
discussion of complaint volumes, trends and root cause analysis.
This ensures that all business lines effectively resolve customer
complaints, learn from the issues raised and address any
underlying causes of those complaints.
The effectiveness of this activity is regularly assessed through
independent first line outcomes testing, ensuring ongoing
competence in the identification and resolution of complaints.
The reporting of this activity flows to the Customer and Conduct
Committee (‘CCC’), ensuring complaint visibility is provided at
the highest levels of the business.
The Group actively seeks feedback on its complaint handling
process using an automated survey, where customers are
regularly invited to provide feedback on the way in which they
feel their complaints have been dealt with. The results, where
appropriate, are used to share best practice, improve agent
education, and identify potential process improvements.
There is an active Complaints Community group that meets
regularly, where all business areas are represented. Its purpose
is to ensure complaints are handled consistently and that
industry updates, knowledge and best practice are all shared
with all business units concerned with complaint handling.
The Group focusses on FOS complaints data as a high-level
satisfaction metric, with levels of customer escalation in the
period remaining low. Consolidated information for the two
Group companies required to report to FOS, for the four most
recent FOS reporting periods, is set out below.
Six months ended
30 June
2022
31 December
2021
30 June
2021
31 December
2020
Cases reported
Uphold rate
46
34.4%
35
50
34.2%
34.0%
60
43.3%
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.
The Group routinely assesses its complaints performance
against the FCA bi-annual complaints submissions, comparing
complaint metrics to our peers and against the industry as
a whole.
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).
Customer support and understanding are also two of the
key outcomes that align to the core delivery requirements of
the FCA’s new Consumer Duty. The Group has a well-defined
and structured project in place that focuses, where they are
applicable, on the implementation of the new principle, cross
cutting rules and consumer outcomes, thereby ensuring that the
milestones for implementation in 2023 and 2024 are achieved.
The desire to achieve good outcomes for our customers is an
important commercial differentiator which has helped the Group
build strong relationships over many years. Its ongoing and
planned activity across its business units is aimed at ensuring
that all customers can be confident that:
• Products and services are designed to meet their needs
•
People they deal with will be appropriately skilled and
experienced to provide the services they require
•
Information given to them will be clear and jargon free
• Products will perform as expected
•
•
•
•
•
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, have additional support needs and/or
in financial difficulties, a high level of support will be provided,
and they will be signposted to sources of independent advice
They will be made aware of the FSCS and the protection this
provides for them
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. Performance
in respect of these requirements is monitored and procedures
regularly adjusted to deliver better customer solutions.
The Board and executive management are committed to
maintaining and developing this culture across all the
Group’s businesses.
Complaints
There will be occasions where the Group does not get things
right and, consequently, this will give customers cause to
complain. The effective resolution of complaints is a key focus of
the Group’s customer service approach, 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
externally, the Group co-operates fully and promptly with any
investigations, and supports any settlements and awards made
by these parties.
Page 58
A6.3 People
The Group employs just over 1,500 people, the majority under
hybrid working arrangements where part of their time is spent
working at home and part in one of the Group’s office locations.
The largest number are attached to the Group’s Solihull head
office, with other significant hubs in Southampton and London.
During the past year the Group has seen a 4% growth in its
headcount, predominately driven by the creation of new roles
in mortgage underwriting and customer support functions.
This investment in resource has helped the Group to serve its
customers and achieve its strategic priorities.
Investors in People
In May 2022, the Group was re-accredited as an Investors in
People (‘IiP’) employer and achieved Platinum status for the first
time. This recognition is the first for a Solihull employer and has
been attained by only 5% of employers assessed by IiP. The IiP
re-accreditation process included an all-employee survey where
73% of employees provided feedback on their experiences
working at Paragon (2019: 64% of employees responded), as
well as 10% of employees being interviewed by the IiP assessors.
The results showed a significant improvement across all
performance indicators since the previous triennial accreditation
in 2019; with the consistency of management and leadership
behaviours, and the Group’s strong culture, shaped by its values,
particularly commended.
Employment conditions
All the Group’s employees are based in the UK and the Group
is committed to upholding all aspects of UK employment law,
including legislation addressing terms of service, working
conditions, equality and taxation.
The Group continues to minimise its use of short-term and
temporary staff. As of 30 September 2022, employees on
temporary or short-term contracts accounted for 2.0% of the
workforce (2021: 2.3%) and no use was made of zero-hours
contracts. The Group usually only employs persons over the
age of 18, except in connection with apprenticeships or other
training arrangements.
Like all UK businesses, the Group has felt the impact of the
‘great resignation’ and has seen an increase in voluntary
employee turnover during the period to 12.2% (2021: 8.7%).
Whilst this represents an increase, much of this is explained by
a reversion to pre-Covid levels, with the attrition values for the
2019 and 2020 financial years being 10.4% and 11.5% respectively.
The Group’s attrition rate remains lower than the average rate
in the banking and finance sector in 2022 of 18.6%, published by
Reward Gateway and the 2021 figure for the financial services
sector of 13.7% published by XpertHR in 2021.
The Group benefits from the extensive through-the-cycle
experience of a significant number of long serving employees
at all levels. 29.4% of the workforce at 30 September 2022 had
served for over ten years with 12.0% having been with the Group
for over twenty years.
In March 2022, the Group announced its adoption of a hybrid
working model on a permanent basis. This followed the success
of several pilots and the analysis of feedback received from
employees as the UK emerged from the Covid pandemic. Today
over 40% of staff are typically working from home at any point.
Flexible working is actively encouraged across all areas, to
promote a healthy work-life balance for employees and to ensure
that the Group retains the skills and experience of its people.
Formal flexible working arrangements are in place for 22.6% of
employees (2021: 24%), with 74.0% of these working part-time
(2021: 73.6%). The Group monitors working practices to ensure
that it complies with the Working Time Regulations.
As part of its ongoing commitment to employee wellbeing and
recognising the importance of a healthy work-life balance, the
Group provides a minimum holiday entitlement for its employees
of 25 days per year for full time employees. This is in addition to
public holidays and significantly in excess of legal requirements.
In addition, all employees are now also granted an additional
day’s leave for their birthday, as well as a full day’s leave for
Christmas Eve and New Year’s Eve; this means that all full time
employees have a minimum of 28 days paid leave each year, in
addition to public holidays.
In recognition of the increased cost of living that is impacting
many of the Group’s employees, a payment of £500 was made to
all employees below senior management in July. Additionally, the
86% of employees who are eligible for the Group’s profit related
pay scheme were also given an advance payment of £500 in July.
The Group’s remuneration packages remain compliant with the
UK’s national minimum wage rates, and in addition, the Group
has maintained its Living Wage employer accreditation since
June 2016. As a Living Wage employer, the Group pays at least
the Real Living Wage (£9.90 per hour at 30 September 2022) to
all employees and also ensures that wages paid by contractors
and suppliers meet the same threshold. From 1 October 2022 the
Group will pay a minimum of £21,255 to all full-time employees,
equivalent to £10.90 per hour.
The Group seeks to avoid compulsory redundancies wherever
possible, aiming to redeploy affected employees elsewhere
in the business. On the disposal of the Group’s unsecured
loan portfolio in the year (Section A4.1.1) over 50% of the 43
employees affected were offered alternative roles, although
some of these elected to take voluntary redundancy.
The Group runs a Worksave defined contribution pension
scheme and complies with the Government’s auto-enrolment
requirements; 85% of employees are members of this scheme.
A legacy defined benefit pension scheme is also in place for
long-serving employees. Combined, the Group is contributing
towards the retirement provision of 95% of its employees.
Culture
The Group launched its employee Code of Conduct during the
period. The code provides additional guidance to employees
on the behaviours expected of them when dealing with each
other, our customers, and other stakeholders, and is a central
component of continuing to build and embed a strong risk
culture. Employees are expected to attest that they understand
the expectations set out in the code and as at 30 September
100% of employees had done so.
The Code of Conduct is published on the Group’s website at
www.paragonbankinggroup.co.uk.
Equality, diversity and inclusion
The Group is committed to creating a diverse workforce and an
inclusive culture. It promotes equality amongst all its employees
through its policies, procedures and practices. 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:
• sex
• gender reassignment
• marriage and civil partnership
• pregnancy and maternity
•
race (including ethnic origin, colour, nationality and
national origin)
Page 59
Strategic Report • 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
the success of the Group’s business. The Nomination Committee
provides board-level oversight on all inclusivity matters affecting
the Group’s people.
The Group’s Equality, Diversity and Inclusion (‘EDI’) Network
continues to shape the Group’s EDI plans and is sponsored
at executive level by Richard Rowntree, Managing Director
– Mortgages. The Network has continued to lead on
communication activities during the period with significant
communication and education campaigns being run for Black
History Month, Disability History Month, International Women’s
Day, and Pride at Paragon.
For all these high-profile campaigns, members of the Executive
Committee have attended employee listening circles, which have
provided them with the opportunity to meet with employees from
minority groups to gain an understanding of their experiences
working at Paragon. These sessions have provided Executive
Committee members with reverse mentoring opportunities as
well as providing the EDI Network with valuable feedback that is
shaping the Group’s future plans.
During the year over 78% of managers attended a half-day
Inclusive Leadership training course delivered by the Group’s
learning and development team. The course, along with a
second ‘Inclusive Workplace’ programme that was offered to all
employees, received outstanding feedback. 100% of employees
completed their annual mandatory Equality, Diversity and
Inclusion eLearning during the period.
Collecting diversity monitoring data
In September 2021 the Group began asking employees to
complete diversity monitoring profiles in CoreHR, the central
HR system. Data was requested about their gender identity,
sexual orientation, ethnicity and race, religion, socio-economic
background, disabilities and caring responsibilities outside of
work. As at 30 September 2022 over 73.1% of employees had
completed their profile. This data has provided the Group with
a better understanding of the composition of the workforce and
allowed Human Resources to analyse and monitor whether all
employees have the same access to training, development and
job opportunities.
Socio-economic diversity
The Group recognises the importance of improving
socio-economic diversity at senior levels across the UK financial
services industry and is proud be one of the Founding Members
of ‘Progress Together’, the City of London’s socio-economic
diversity membership body. Richard Rowntree, Managing
Director – Mortgages, is also an active member of the City of
London’s taskforce to improve socio-economic diversity across
the sector, and has spoken at numerous industry events on
this subject.
During the year, the Group has formed working relationships
with inner-city colleges as a means of attracting talent from
more diverse backgrounds and is continually monitoring data to
ensure that it is not creating barriers for employees from lower
socio-economic backgrounds.
The Group has also been involved in the Smart Futures
Programme during the period. This is a ten month programme
for year 12 students from low-income backgrounds and includes
work experience, mentoring and interactive training, helping
them gain useful skills for future employment.
Race at Work Charter
The Group is a signatory of the Race at Work Charter
and has taken several steps during the year to meet the
charter’s requirements. These include the development of
‘Mission INCLUDE’, a mentoring scheme for employees from
underrepresented groups.
The programme provides high potential employees from these
groups with a mentor from another organisation who is a
member of an underrepresented group or an ally. It was piloted
during the period and a full cohort of employees are enrolled to
start the programme from September 2022.
An internal development programme, ‘Ignite’ is also being
introduced, following feedback gathered through listening
circles. This will focus on providing greater career support to
employees in underrepresented groups and addressing personal
development needs such as making an impact, building your
brand and networking.
Disability Confident
Employees identifying as having a disability comprise 4.7% of
those completing their diversity profile. The Group remains
Disability Confident Committed 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 continues to meet
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
•
•
It will anticipate and provide reasonable adjustments
as required
It will support any existing employee who acquires a disability
or long-term health condition, enabling them to stay in work
During the year the Group was accredited to level 2 of the
scheme, following the completion of a self-assessment process
and the provision of evidence that all core commitments were
being met, including the agreement of an action plan.
Several communications and engagement campaigns
throughout the year have focused on raising awareness about
disability, including neurodiversity; this included the EDI Network
hosting a Webex with Alex Manners, an Asperger’s champion to
talk about his own experiences.
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, and
to ensure all its people with disabilities have the opportunity to
fulfil their potential.
Page 60
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.
Richard Rowntree, the Managing Director – Mortgages is the
project sponsor at Executive Committee 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.
The Group’s results against these targets at the January 2022
end date of the first phase of the project are set out below:
Measure
Target Result
Status
Female representation in senior
management
35%
39% Achieved
Females in workforce
50%
52% 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%
47%
Partially
achieved*
10%
11% Achieved
10%
50%
24% Achieved
78% Achieved
*During the 2022 calendar year all managers attended a series of online leadership
workshops designed to support the new hybrid working model, which restricted
opportunities for other forms of training.
At 30 September 2022, the Group had achieved 38.1% female
representation in senior management (2021: 38.7%). For the next
phase of its charter journey the Group has committed to achieve
40% female representation in senior management by
31 December 2025.
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. When that review published its
most recent report in February 2022, the Group’s level of female
representation in senior management was third highest out of
the twelve banks and similar FTSE-350 institutions covered by
the initiative.
Gender Pay
As required by legislation, the Group has calculated its gender
pay gap as at April 2022. 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
2022
32.5%
36.3%
1.9%
84.4%
April
2021
36.6%
38.4%
3.4%
76.5%
This year’s gender pay measures, although improved, are similar
to those for 2021 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.
The marginal increase in the number of women in the upper
quartile is contributing towards the small improvement in the
Group’s pay gap.
The results are broadly in line with those for the financial services
sector reported by the Office of National Statistics in their 2022
Annual Survey of Hours and Earnings (‘ASHE’) which showed a
median pay gap of 36.6% (2021: 36.5%) and a mean pay gap of
30.8% (2021: 33.2%).
Roles in the lower pay quartiles are typically operational and
processing positions, predominantly filled by female employees.
These roles lend themselves particularly well to part-time
working arrangements. Throughout the organisation females
account for most part-time working arrangements and, due to
the nature of the gender pay gap calculation taking no account
of the hours worked by employees in calculating averages, this
further increases the size of the gender pay gap.
The vast majority (86%) of the Group’s employees are eligible
for a bonus under the Profit Related Pay (‘PRP’) scheme. As all
qualifying employees receive the same bonus on an FTE basis,
these awards lead to the small median bonus pay gap. 19%
of employees are eligible for the Group’s discretionary bonus
scheme (36% of the scheme’s participants are women), and 8%
of employees are also eligible for share based awards, of which
28% 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
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 4.3% to 1,503
employees (2021: 1,441). Information on the composition of the
workforce at the year end is summarised below:
Employees
Number
Percentage
Managers
Number
Percentage
Senior managers
Number
Percentage
Directors
Number
Percentage
2022
2022
2021
2021
Females Males Females Males
764
739
757
684
50.8% 49.2% 52.5% 47.5%
126
176
128
171
41.7% 58.3% 42.8% 57.2%
9
36
8
34
20.0% 80.0% 19.0% 81.0%
3
6
3
5
33.3% 66.7% 37.5% 62.5%
Page 61
Strategic Report During the year the Group amended its internal metrics to
monitor ‘managers’ rather than ‘management level employees’,
which included senior professional and technical personnel. The
numbers shown above for 2021 have been restated in line with
the new definition.
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.
The technical training team have played a key role in ensuring
that major transformation projects undertaken by the Group
are introduced effectively and well supported through easily
accessible development. They have also provided a rich variety
of support through the means of video creation, online sessions
and classroom learning to ensure that the learning available is
both fit-for-purpose but still engaging. They have also continued
to ensure that employees are able to maximise the benefit of
working remotely by using all systems available to their
full potential.
Based on diversity profiles completed by employees, ethnic
minority employees comprised:
• 19.4% of employees (2021: 17.2%)
• 13.0% of managers (2021: 13.4%)
• 12.2% of senior managers (2021: 4.7%)
This is based on the 68% of employees who declared their
ethnicity (2021: 58%). For the purposes of this analysis, ethnic
minority employees comprise all those not identifying as
‘White British’.
Health and wellbeing
The Group has continued to focus on supporting the wellbeing
of employees throughout the year, providing support with
emotional, physical, financial, and social wellbeing issues. During
the period Anne Barnett, Chief People Officer, took on the role of
Executive Sponsor for Wellbeing.
Given the cost-of-living challenges facing employees, there
has been additional focus on financial wellbeing this year with
numerous campaigns and avenues of support being made
available to employees. These include providing access to
free will writing services, support with budgeting and debt
management, as well as pensions advice.
The Group also remains committed to providing employees
with access to trained mental health first aiders. Four members
of the Wellbeing team have undertaken mental health training
in the period and nine team members received training on
grief and bereavement from external specialists. As well as the
Wellbeing team being available to provide support to employees,
employees have access to a dedicated Wellbeing Hub where
specialist support services such as those who help with
domestic violence or bereavement are signposted, as well as
numerous resources to help with a wide range of
wellbeing issues.
In April 2022 the Group introduced The Vitality Health
programme giving all employees access to a range of physical
wellbeing products, including personalised health reviews, online
GP services, discounts and rewards through Vitality’s partner
brands and Vitality Wellbeing Coaches. Free exercise classes,
suspended during Covid, were also reintroduced as part of the
Group’s ongoing commitment to improving employees’ physical
wellbeing as more time begins to be spent in the office.
Training and development
The Group has continued to focus on providing employees
with quality opportunities to develop, whether in person or
virtually. On average employees received 5.2 days training each
in the year (2021: 4.6 days). This continues to place the Group
significantly higher than the average figure of 3.6 days per
person reported by the 2019 Employer Skills Survey, published
by the UK Department for Education in 2020, the most recent
national survey of training provision. This included online
training undertaken by all employees on various topics including
regulatory requirements.
Another continued area of focus has been ensuring all
employees understand how to support those of the Group’s
customers in vulnerable circumstances. An interactive e-learning
solution was rolled out to all employees, supplemented with
bespoke courses for all customer-facing employees.
All employees and line managers are encouraged to regularly talk
about their performance through monitoring objectives during
the year as part of frequent and timely conversations about
performance. 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
continued the development of its third cohort throughout
this financial year, with a further nine individuals undertaking
bespoke development plans. Graduates from the earlier cohorts
continued to advance in the year with several moving to more
senior roles or taking on significantly increased responsibilities.
Wider management and leadership programmes have
also continued through virtual delivery, including a suite of
leadership modules called ‘Leadership for the Future’. These
have been delivered virtually, bringing together all layers of the
Group’s management structure to share best-practice through
networking and learning together.
The Group has continued to focus on developing female talent
during the year to support our Women in Finance Charter
commitments. 48% of employees receiving management
development are female, and the Group continues to support
the 30% Club Mission Gender Equity cross-company mentoring
programme run by Moving Ahead. Feedback from both mentors
and mentees participating in the programme continues to
be favourable, and 28% of participants have progressed their
careers within the Group since participating in the programme,
despite the challenge of all meetings taking place virtually. In
comparison, research conducted for the 30% Club showed an
average promotion rate of 10% for female managers. The fifth
cohort of employees started their programme just before the
year end.
The Group has recently joined the ‘5% Club’, which promotes the
provision of early careers roles such as apprenticeship, graduate
positions and student placements. As part of this commitment
it, has set a target that such early careers roles will comprise at
least 5% of its workforce by September 2027. At 30 September
2022 the Group had 74 such employees, comprising 4.9% of
the workforce.
The Group has continued to draw down Apprenticeship Levy
funds to support its development objectives. The number of
apprenticeships has been steadily increasing over the last 12
months, with the Group having 44 apprentices (2021: 37), 2.9%
of employees (2021: 2.3%) registered under the levy scheme at
the year end. These apprenticeships cover a range of specialist
and operational roles including IT, audit, customer services and
management. The Group’s utilisation of its available levy funds
over the year has reduced to 31% (2021: 42.6%), despite the
increased participation, as a result of increased overall payroll
costs, which determine the levy payable.
There are currently 101 individuals completing professional
qualifications across the Group (2021: 101), including 40
undertaking their CeMap mortgage qualification (2021: 44).
Of these 55% are female (2021: 57%) contributing towards the
Women in Finance agenda.
Page 62
Recruitment
Headcount continued to grow during the period, with over
200 new hires commencing employment, most of which were
within Mortgages and Customer Servicing. As experienced by all
businesses, recruitment has been challenging during the period,
particularly in specialist roles, although recruitment volumes
stabilised over the final quarter of the period.
The Group also runs a successful ‘refer a friend’ scheme
whereby employees receive a referral fee if an individual
they refer passes probation. This year 28 individuals were
successfully recruited through this scheme (2021: 26).
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
Chief People Officer who reports to Executive Committee 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 and Fiona
Clutterbuck, the former Chair, attended three People Forum
meetings and discussed topics such as the role of the Board and
the Group’s strategic priorities, including the focus on organic
growth. The new Chair, Robert East, and new non-executive
director, Tanvi Davda, will meet with the Forum in the early part of
the new financial year as part of their induction programmes.
Executive directors also provide biannual updates on business
progress to the entire workforce which continue to be delivered
through video messages. Executive Committee members
also use the Group’s intranet to deliver updates on important
initiatives within the business from time to time.
The Forum also made a recommendation to grant additional
leave for employee birthdays, which took effect from March
2022. Discussions have also been held on how to assist
employees with cost-of-living pressures, and ideas including the
provision of free sanitary products, have been implemented.
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 2022,
63.9% of the Group’s employees were members of one or more
ShareSave scheme and 85.6% were eligible for profit related pay
in respect of the 2022 financial year.
Health and Safety
Throughout the year, the Group has remained compliant with all
applicable health and safety legal requirements and applied best
practice management standards across its businesses. This is
combined with a commitment to providing a healthy and safe
working environment for all employees, contractors and visitors
to its premises, and those impacted by its operations in public
areas. While the Group’s primary source of health and safety
related risk remains with the vehicle maintenance operations
of Specialist Fleet Services Limited (‘SFS’), the health, safety
and wellbeing of all employees is a key focus of the Group’s
people policies.
The key safety and wellbeing initiative during the period has
centred on the development of the Group’s hybrid working
model as pandemic restrictions lifted and people returned to
the Group’s offices on a more regular basis, while retaining
an element of offsite working. To enable employees to work
effectively and safely in a hybrid environment, access to
appropriate equipment has been reviewed and procedures, such
as remote workstation assessments, have been developed to
address the additional issues of maintaining a healthy working
environment under this model.
The Group’s head office is located in the centre of Solihull,
in proximity to properties that could indirectly impact on it.
An annual testing programme addresses fire evacuation and
network grid failures as a minimum. The focus of the programme
ensures the key controls required to mitigate any disruption are
simulated to confirm that our processes remain resilient, with
sufficient resource available to manage a potential incident,
should one occur. This is scaled accordingly throughout all
Group locations.
Periodic hazard reviews are carried out across the Group’s
premises both to identify specific issues and to highlight any
trends. In addition to actioning each individual hazard, trend
analysis allows focus on safety interventions with particular
topics at each site. This may include targeted safety training or
safety communications.
During the year all employees have undertaken e-learning
modules covering health and safety and fire awareness. These
have been upgraded during the year as a result of a focussed
review of health and safety training. Additionally, employees have
been provided with intranet communications on topics including
fire evacuation, driving for work, personal emergency evacuation
plans, electrical visual inspections of IT equipment and
employee’s individual health and safety responsibilities. Together
with information provided through Group policies, these provide
employees with appropriate levels of information, instruction,
training and supervision, to empower them to take ownership of
their individual responsibility for a healthy and safe environment.
SFS employees in automotive workshop roles additionally
receive a minimum of 40 hours of continuous training to ensure
awareness of the specific issues inherent in their duties and
working environment to mitigate the inherent heightened risk.
Employees, wherever they are based, are encouraged to
report any concerns in line with the Group’s stated health and
safety objectives. They are provided with further opportunities
to raise concerns through engagement with People Forum
representatives and to shape future initiatives to enhance
health, safety and wellbeing.
Management and systems
The Group has a dedicated Health, Safety and Environmental
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) was re-certified to ISO45001:2018 in
April 2022 and its Occupational Health and Safety Management
System (‘OHSMS’) continues to be audited for compliance
bi-annually by a UKAS accredited auditor. The OHSMS provides
the central governance framework for sites outside the OHSMS
scope to ensure the Group remains compliant with all applicable
health and safety legal requirements.
SFS has its own health and safety manager and ISO45001:2018
certified OHSMS, which is audited for compliance annually
by a UKAS accredited auditor. Incidents are investigated
using specialist local resource with access to Group support
as required.
Page 63
Strategic Report Resources within the health and safety function were reviewed
during the period and were sufficient to ensure that appropriate
standards of health and safety management have been
maintained throughout the year.
Performance
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 2022 there were no prosecutions or
any enforcement action from visits by the authorities for non-
compliance in respect of health and safety matters (2021: None).
The Group’s office premises continue to comply with all health
and safety regulations, with the number of fire marshals,
first aiders and other qualified personnel continuing to be
appropriate at all times. This continues to be regularly monitored
across all sites, based on the number of occupants, as the hybrid
working model develops.
During the year, the Group reported 20 minor incidents classified
as relating to work activity or the building environment (2021: 9).
There was one lost-time incident which was notifiable under the
Reporting of Incidents, Disease and Dangerous Occurrences
Regulations 2013 (‘RIDDOR’) (2021: nil). The incident was minor
and resulted in eight lost days.
Reported ‘near-miss’ incidents remained at low levels, with only
28 events in the course of the year (2021: 18). The year-on-year
increase was attributable to enhanced reporting procedures.
All accidents and incidents are investigated with the
co-operation of employees to identify the root cause of the
incident including any workplace / work activity hazards, systems
or behavioural errors. Corrective and preventative actions are
then implemented.
A6.4 Environmental impact
Climate change is one of the biggest challenges faced by the
world today and to ensure the Group is taking an active role in the
transition, it recently became a member of Bankers for Net Zero
(‘B4NZ’). This year, the Group has made a commitment to achieve
net zero by 2050 but, in doing so, it recognises that net zero
cannot be achieved in isolation and that its net zero commitment
may not be achieved without significant and continued support
from important government policy and broader industry
initiatives. As a member of B4NZ the Group can continue to
support the wider efforts of the financial services industry and
aims to minimise the impact it has on climate change.
The Group’s aspirations for its journey to net zero are set out below.
Year
2020
2021
2022
2030
2050
Achievement / aspirations
• Climate change designated as a principal risk
•
•
Sustainability Committee established to monitor progress on
climate focus areas
Financed emissions of the mortgage portfolio reported for
the first time
• Became a member of B4NZ
• Began offsetting operational footprint
•
2019 year end operational footprint emissions set as the
baseline to track 2030 net zero commitment
• Net zero across the operational footprint
•
The Group has committed to net zero across all emission
scopes in support of UK Government net zero commitment
Page 64
Impacts of climate change
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).
The Group continues to find ways to reduce its operational
impacts and this year the Group set out its ambition to reduce its
operational footprint to net zero by 2030.
The operational footprint is defined as the Group’s Scope 1
(direct) emissions, Scope 2 (indirect energy) emissions and
those Scope 3 (other) emissions related to power, waste, water
and business travel. It therefore excludes downstream or other
upstream emissions from our value chain. Net zero is defined as
a reduction in these emissions to zero, or to a residual level that
is consistent with reaching net zero emissions at the global or
sector level in eligible 1.5°C aligned pathways.
The Group has offset its operational footprint for the financial
year ended 30 September 2022 through the purchase of
Gold Standard or VCS (Verified Carbon Standard) certified
offsets. More detail on the Group’s approach to managing the
environmental impact of its own activities is provided under ‘(f)
Operational impacts’ below. Throughout the year the Group’s
approach to managing the environmental impacts associated
with its financing activities have been enhanced through
improved governance, risk management and the delivery of a
climate change scenario analysis module as part of the 2022
ICAAP capital adequacy assessment.
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.
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 – Policy, legal, technology and market
changes aimed at mitigating the impacts of climate change
could pose financial or reputational risks to lenders, amongst
other businesses. Such changes and pressures might impact
the ability to realise a security or 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). These timelines go beyond a typical planning horizon
of five years to appropriately consider climate change risks which
may materialise over a longer period of time.
Reporting on climate change
The UK Listing Rule 9.8.6(8) requires the Group to disclose
whether it has included climate-related financial disclosures
consistent with the Taskforce on Climate-related Financial
Disclosures (‘TCFD’) recommendations and explain any areas
of non-consistency. The Group’s climate-related disclosures set
out below are consistent with the recommendations of the TCFD
and the expectations set out in the Listing Rules.
In preparing the disclosures set out below, consideration has
been given to the 2021 TCFD Implementing Guidance and the
Supplemental Guidance for Banks, the FRC Thematic Review
of TCFD disclosures and the FCA Review of TCFD-aligned
disclosures by premium listed companies. The disclosures
articulate the current status of the Group’s climate related
activities and highlight those areas for future development, at an
appropriate level to enable users to assess the Group’s exposure
to, and approach to addressing, climate-related risks.
The following table sets out the sections of this part of the annual report in which material relevant to each TCFD pillar may be found.
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
b) Describe management’s
role in assessing and
managing climate-
related risks and
opportunities
•
•
•
•
•
•
The Board has designated climate change as a principal risk
within the Group’s ERMF
The CFO has been designated as the director responsible for
climate change matters
The Board has reviewed and approved the Group’s offsetting
approach and medium-term operational footprint targets
(a) Governance
− Board oversight
−
Sustainability
Committee and climate
change working groups
The Board is updated on sustainability through a monthly CEO
report and the Risk and Compliance Committee is engaged on
a quarterly basis through the CRO’s Report
The Sustainability Committee is a dedicated sustainability
governance forum with a broad Environmental, Social and
Governance (‘ESG’) perspective and reports to ExCo and
the Board
The terms of reference of key executive risk sub-committees
have been updated to incorporate the consideration of
climate change
(a) Governance
− 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
b) Describe the impact of
climate-related risks
and opportunities
on the organisation’s
businesses, strategy,
and financial planning
As part of the 2022 ICAAP the following have been delivered:
(b) Strategy
a quantitative scenario analysis assessment on the most
significant segment of the balance sheet, buy-to-let mortgages
−
Climate related
opportunities
a qualitative climate change risk assessment across both
Mortgage Lending and Commercial Lending, considering the
key climate related risk drivers
The expectation is that as scenario analysis matures it will
become an integral part of the process for identifying climate-
related risks and opportunities
− Use of scenario analysis
(c) Risk management
−
Potential risks identified
over the short, medium
and long term
•
•
•
•
Group has committed to net zero across its operational
footprint by 2030. The expectation is that performance against
net zero will be tracked by the Sustainability Committee and
reported up to the Board
(a) Governance
− Board oversight
Following the outcomes of the ESG focused session at the
Board strategy day, the Group released a series of sustainable
lending products
The delivery of the climate change scenario analysis module
in the Board approved 2022 ICAAP enhanced the Group’s
process for embedding climate change within planning
and strategy
The Group continues to improve the efficiency of its supply
chain and invest in internal initiatives to reduce its impact on
climate change
(b) Strategy
−
Climate related
opportunities
− Use of Scenario analysis
(f) Operational impact
−
−
Supply chain and
procurement
Environmental
initiatives
Page 65
Strategic Report
c) Describe the resilience
of the organisation’s
strategy, taking into
consideration different
climate-related
scenarios, including a
2°C or lower scenario
•
Throughout the year, a climate change scenario analysis
exercise was delivered as part of the 2022 ICAAP. The
approach aligned with the Bank of England’s Climate Biennial
Exploratory Scenario (‘CBES’) and did not identify any
significant vulnerabilities
Section
(b) Strategy
− Use of scenario analysis
(g) Future developments
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
b) Describe the
organisation’s
processes for managing
climate-related risks
c) Describe how
processes for
identifying, assessing,
and managing
climate-related risks
are integrated into the
organisation’s overall
risk management
•
•
•
•
•
•
•
•
•
The Group’s activity has focused on incorporating climate
risk considerations within the ERMF and improving risk
governance
The Sustainability Committee and the Credit Committee
track the EPC ratings of new mortgage completions on a
monthly basis
Improved governance and increased climate change reporting
into the Sustainability Committee, and the executive risk
sub-committees has enhanced the approach for identifying
and managing climate related risks
In-depth risk reviews were held with business areas ahead of
the scenario analysis exercise to identify key drivers of climate
change risk
The underwriting processes consider climate risk factors.
For mortgages and development finance this includes flood,
subsidence, coastal erosion and the EPC of the property
or development
On a regular basis the Sustainability Committee is provided
with updates on the Group’s key sustainability focus areas as
well as any wider industry and regulatory developments on
sustainability and climate related issues
The governance structure has been updated to include the
Sustainability Committee which 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 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 Group’s ERMF
•
More detail on the Group’s ERMF and approach to climate
change as a principal risk is outlined in sections B8.4 and B8.5
(a) Governance
−
Embedding climate
change within the
organisation’s
governance structure
−
Governance structure
chart
(b) Strategy
− Use of scenario analysis
(g) Future developments
(c) Risk management
−
−
Assessment at
underwriting
Quantifying our climate
exposure
(b) Strategy
−
Climate related
opportunities
(d) Metrics and targets
(a) Governance
−
−
Sustainability
Committee and climate
change working group
Embedding climate
change within the
organisation’s
governance structure
(c) Risk management
−
−
Assessment at
underwriting
Quantifying our climate
exposure
(g) Future developments
Page 66
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
b) Disclose Scope
1, Scope 2, and, if
appropriate, Scope 3
greenhouse gas (GHG)
emissions, and the
related risks
•
•
•
•
•
•
Across the Group’s mortgage portfolio energy efficiency,
flood risk and ground instability have been qualitatively and
quantitatively reviewed during risk driver assessments
Across SME lending Standard Industrial Classification (‘SIC’)
codes have been used to identify those operating in high
carbon intensive industries
Throughout the year the amount of lending on our green
mortgage range has increased
During the 2022 ICAAP the alignment of the mortgage
portfolio’s projected emissions with a well-below 2°C scenario
was assessed
Scope 3 financed emissions across the mortgage portfolio are
disclosed below
The process for measuring the carbon emissions from the
Group’s operations has been independently verified and
continues to be enhanced. Disclosures have been included for
the Group’s operational footprint (Scope 1,2 and 3 emissions)
(c) Risk management
−
Quantifying our climate
exposure
(d) Metrics and targets
(b) Strategy
− Use of scenario analysis
(e) Financed emissions
−
Scope 3 mortgage
emissions
(f) Operational impact
− Performance indicators
−
Emissions across the
value chain
c) Describe the
• The Group has become a member of B4NZ
(b) Strategy
targets used by the
organisation to manage
climate-related risks
and opportunities and
performance against
targets
•
•
In March 2021 the Company issued a £150 million Green Tier-2
Bond which as of August 2022 achieved full allocation of £150
million of EPC A / B buy-to-let loans
−
Climate related
opportunities
The Group has offset its operational footprint for the 2022
financial year and committed to reduce these emissions to net
zero by 2030
(f) Operational impact
− Performance indicators
(a) Governance
Board oversight
In 2020, the Board 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 are
tabled at Risk and Compliance Committee meetings throughout
the year as part of the wider report from the CRO. The CFO has
been designated as the director responsible for climate change
matters and has an individual performance target to understand
and assess the financial risks from climate change and oversee
these risks within the firm’s overall business strategy and risk
appetite. Actual performance on this target is assessed annually
and impacts the bonus or incentive received (see Section B7).
The Board is engaged on a regular basis through a monthly
CEO report which provides oversight of sustainability and
climate-related matters and how they impact strategy. The focus
continues to be on improving the Board’s understanding of
climate change and its associated risks and opportunities as well
as developing the Group’s internal approach and strategy.
Engagement throughout the year included:
•
As part of a broader ESG presentation, an update on
climate change maturity was presented to the Board. The
presentation gave an update on progress in delivering
regulatory expectations whilst also outlining key deliverables
and ambitions over the short term planning horizon.
•
•
A climate change scenario analysis module was delivered to
the Board as part of the 2022 ICAAP. This quantitatively and
qualitatively reviewed the Group’s exposure to climate change
risk and additionally assessed the net zero pathway for the
mortgage portfolio.
A presentation was given to the Board at its annual offsite
strategy event proposing an offsetting approach and the
setting of medium-term operational footprint targets.
Performance against these goals and ambitions will be
tracked by the Sustainability Committee and reported up to
the Board.
Sustainability Committee and climate change
working groups
The Group has established a Sustainability Committee, chaired
by Deborah Bateman, the External Relations Director. This
committee is a dedicated sustainability governance forum with
a broad ESG perspective, including climate change, and reports
to the Performance ExCo and the Board on a regular basis. On
a regular basis the Sustainability Committee is provided with
updates on the Group’s key sustainability focus areas, progress
within business areas and any wider industry and regulatory
developments on sustainability and climate-related issues.
The Sustainability Committee has oversight of monthly climate
change management information for the mortgage portfolio
which includes concentrations of monthly advances, pre and
post offer pipeline and the financed emissions of the portfolio.
Page 67
Strategic Report (b) Strategy
As set out above, the Group has made a commitment to
achieve net zero for all operational and attributable lending and
investment emissions by 2050. The Group aims to support the
UK Government’s decarbonisation goals however recognises
the scale of the challenge ahead and understands that without
the support from industry and policy makers no business can
achieve net zero. The Group has joined B4NZ acknowledging the
importance of a unified approach across the financial services
industry to achieve net zero.
As part of the Group’s commitment for net zero, the Group
offset the Scope 1, 2 and 3 emissions associated with its
operational footprint for the year ended 30 September 2022.
The Group understands that offsetting is not a long term
solution, and its offsetting commitment is supported by an
ambition to achieve net zero across these emissions by 2030.
The commitment to offset the Group’s operational footprint
formulates a carbon price which will be used internally to
drive future decision-making and investment into internal
emission reductions.
Climate related opportunities
Climate change related opportunities have been, and
continue to be, considered as part of the Group’s strategy and
it 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 Tier-2 capital instrument. The Bond set out the Group’s
ambition to finance £150.0 million of newly originated EPC A /
B buy-to-let loans. The Green Bond Investor report, which is
available on the Group’s website, outlines the progress made up
to 31 March 2022, and by August 2022 the full targeted allocation
had been reached.
Following the outcomes of the ESG focused session at the Board
strategy event the Group’s lending businesses have released a
series of green products during the year. These have included:
•
•
•
Expanding the green mortgage range to offer a green
alternative on preferential terms to every mortgage product
for any customers applying with an EPC rating of C or higher,
supporting the green bond allocation
Commencing lending on battery electric vehicles in the
Group’s motor finance operation
Launching the green homes initiative within the development
finance business in November 2021, offering a financial
incentive to developments constructing EPC A-rated homes
The Group understands the importance of sustainable finance
as a mechanism to drive the transition to a low-carbon economy.
Other ways in which the Group aims to enable the transition are
through education and engagement with customers, brokers,
stakeholders and other industry initiatives.
The Group has established a series of working groups which
report directly into the Sustainability Committee, and include
personnel from across the business. This ensures that the broad
scope of climate change related risks are appropriately identified
and managed with oversight from the appropriate channels.
Throughout the year, with the support of the climate change
working groups and the Sustainability Committee, the Group has:
•
•
•
•
•
Delivered new green products to encourage our customers to
take up lower carbon technology or help them transition to a
lower carbon economy
Delivered teach-ins on three sustainability focus areas to key
stakeholders – financed emissions, the operational footprint
and social and governance matters
Developed an approach to extrapolate the EPC and
emissions of mortgages loans where an EPC was not
matched. This was utilised within the scenario analysis
exercise
Developed the Group’s internal approach and principles
for offsetting
Reviewed the Group’s climate change maturity against
supervisory expectations and re-established short-term
deliverables and ambitions
•
Delivered a climate change scenario analysis exercise for
inclusion in the 2022 ICAAP
• Delivered the operational footprint baseline
•
Provided insight into UK Finance and the Climate Financial
Risk Forum (‘CFRF’) Scenario Analysis industry Working
Group (‘SAWG’) to leverage experience and develop the
Group’s understanding whilst also providing a voice on future
policy and processes
Embedding climate change within the governance structure
Throughout the last year, climate change continued to be
further embedded within the Group’s governance structure and
culture. The Group continues to align its approach to managing
climate change risk to its ERMF to ensure a consistent and
comprehensive approach is taken across the business. The
terms of reference of key risk committees have been updated
to reflect their responsibilities to identify and manage the wider
impacts and transmission channels of climate related risks.
Climate and sustainability governance structure chart
The Governance structure
outlines how climate and
sustainability related
matters are escalated
throughout the Group
and upwards to the
Board. In addition to this
reporting structure, the
Sustainability Committee
and its working groups
support and provide
relevant reports to the ERC
and its sub-committees
where appropriate. The
Group’s overall governance
structure is described
more fully in section B.
Paragon Banking Group PLC Board
Executive Performance Committee
Sustainability Committee
Working Groups
The process for identifying and managing climate-related
risks and opportunities has been enhanced in the year through
improved governance and increased climate-related reporting into
the Sustainability Committee and executive risk sub-committees.
Page 68
Use of scenario analysis
During the year a climate chance scenario analysis exercise
was delivered as part of the 2022 ICAAP. The analysis built on
previous risk driver assessments, which had identified the areas
most significant to the Group. The focus of the quantitative
assessment was on the mortgage portfolio due to the relative
size of the portfolio and the availability of climate related data.
The approach aligned with the Bank of England’s Climate
Biennial Exploratory Scenario (‘CBES’) to provide a comparable
and consistent outcome. The analysis considered the potential
impact that transitioning to net zero and the damages from
flooding could have on property values and credit exposure.
Details of the forecasting approaches are outlined below.
The scope of this exercise, and the approach adopted, will be
enhanced in future iterations. The outcomes were presented to
and approved by the Board.
Transition
risk
Transition
risk
Using the CBES's expanded assumptions
on transmission channels, the cost to
transition through retrofits was projected
based on the EPC data available across
the mortgage portfolio, with extrapolated
proxies used to fill data gaps.
Using internal EPC data and the
Partnership for Carbon Accounting
Financial (‘PCAF’) Standard, current
and projected financed emissions were
calculated across the portfolio out to
2050. The projected portfolio emissions
were then compared to a portfolio
decarbonisation pathway.
The scenario highlighted the importance
of the electrification of heat and the
decarbonisation of the National Grid.
This emphasised the importance of UK
Government policy which is targeting
600,000 heat pump installations per
year by 2028 and the decarbonisation of
electricity by 2035. These are both key to
the decarbonisation of buildings in the UK.
Physical risk The flood risk across the mortgage
portfolio was projected out to 2080 in
line with the CBES ‘no additional action’
scenario and to 2050 in line with the
CBES ‘Early Action’ (‘EA’) and ‘Late Action’
(‘LA’) scenarios. The analysis focused
on identifying the percentage of the
portfolio exposed to high flood risk and the
percentage that would fall into a 1-in-100
year flood risk event zone.
In addition, the analysis considered the
currently projected annualised cost of
repairs out to 2050 to model the losses
caused by physical risk.
The analysis indicated that only a very small proportion of
properties across the mortgage portfolio have high transition
risk and/or high flood risk. The assessment also indicated that
potential losses are highest across properties with lower energy
efficiency ratings and / or properties located in higher flood risk
zones. Overall the results of the assessment did not identify
any significant vulnerabilities across the Group and confirmed
that current processes are fit for purpose. Insight from this
scenario analysis was shared with the in-house surveyor team
which conducted follow-up assessments on a sample basis.
These assessments determined that the properties were not
considered at risk from flood, and that underwriting controls
focused on mitigating the assessed risks were appropriate
and robust.
In addition, a qualitative review of the Group’s exposure to
climate change risk by business area was performed to enable
a broader view of the risks and how they are mitigated. The
qualitative assessment summarises the main risk drivers
associated with each asset class and identifies mitigants that
are currently in place or are being developed. This analysis was
performed to help size the potential risks from climate change
within Paragon and the levers available to mitigate future risk
build up.
Overall, the adoption of climate change scenario analysis has
improved the Group’s understanding of the key climate change
risk drivers, the potential impact they could have on the Group
and the mitigating options available. As the Group integrates the
learnings from the SAWG, the climate change scenario analysis
process will continue to mature and become an integral process
for identifying climate-related risks and opportunities.
The outcomes of the climate change scenario analysis suggest
that currently there is not a significant and quantifiable link to
asset value or impairments due to climate-related factors. As the
Group’s approach to climate change scenario analysis continues
to develop, climate factors and their link to asset values,
impairments and future strategy will continue to be analysed.
(c) Risk management
Climate change continues to be further embedded within
the Group’s ERMF which is designed to align and embed risk
management practices across the organisation. The ERMF
provides a framework for identifying, escalating and monitoring
climate-related risks across the Group. More detail on the ERMF
and the Group’s approach to climate change as a principal risk
are outlined in Sections B8.4 and B8.5.
Potential risks identified over the short, medium
and long term
Although the impacts of climate change are current, there is
still significant uncertainty around the channels and timings
through which the related financial and non-financial risks
might materialise. The table below outlines examples of risk
drivers considered to be significant to the Group’s business and
strategy, and the timeframes over which they might impact. The
interaction of these with the traditional risk types is an area for
future development as climate change risk is embedded within
the risk management structure.
Page 69
Strategic Report Climate
change risk
Transition risk
Source
Risk driver examples
Timeframe
Current and
emerging
regulation
Technology
Continued tightening of energy efficiency regulations in the private
rented sector, which could risk creating mortgage prisoners or
impact asset values.
Short, medium
and long-term
Transition to low carbon technologies, such as electric vehicles,
which could impact asset values and infrastructure requirements.
This also includes the risk that such new, low-carbon technologies
may prove ineffective.
Short and
medium-term
Market
Change in consumer preferences, such as a shift to lower
emissions assets, such as energy efficient homes or low emission
vehicles.
Medium and
long-term
Reputation
Increased stakeholder, shareholder and regulatory scrutiny if there
is perceived to be a lack of action to mitigate climate change.
Short and
medium-term
Physical risk
Acute
Damage to property or assets, business disruption and higher
insurance costs from climate driven events such as flooding.
Short, medium
and long-term
Chronic
Alterations in weather patterns and stability of local ecosystems
affecting sea levels, flood and subsidence, ultimately impacting
productivity and asset values.
Long-term
Assessment at underwriting
Quantifying climate exposure
EPC levels and the associated regulation have been identified
as having the potential to impact the Group’s exposure to credit
risk. In response, the Credit Committee and the credit team
have an ongoing programme to analyse the potential linkage
between EPC and loan performance. In addition the EPC risk
assessment led to the launch of the green product range and
the enhancement of underwriting processes to support climate
considerations. The Sustainability Committee and the Credit
Committee monitor the energy performance of mortgaged
properties to ensure that an excessive build-up in concentration
of less efficient properties is avoided.
Since the launch of the green product range, new inflows of
mortgages with EPC ratings of C and above have exceeded
concentrations in the extant portfolio and the Group is actively
working towards developing retrofit options to support our
customers with lower rated properties as they transition.
Support is also provided to customers through engagement
and education. The Group has posted educational articles and
blogs explaining the regulations, outlining who they affect and
how they are enforced. Customers who have been identified as
having higher risk properties have been contacted directly, to
explain the regulations, highlight their implications and set out
the options available to them.
Assessment of current environmental risks and forward-looking
climate change risks are factored into the Group’s business
processes. 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.
The valuation report prepared by surveyors includes an
assessment of coastal erosion, ground stability and flood risk
based on the surveyor’s expert knowledge 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,
including for both subsidence and flood risk, providing cover
across the mortgage book.
Since 2018 all properties accepted as a security have been
required to have a minimum EPC rating of E at the time of offer
unless valid exemptions are in place. EPC data is 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.
Although UK Government policy in the private rented sector
currently requires EPC ratings of E or better, the tightening of
these standards to a minimum EPC rating of C is expected in
the short to medium term; and will likely continue to tighten
throughout the UK’s pathway to net zero by 2050. The challenge
of decarbonising UK residential real estate is shared by lenders
and mortgage customers and will continue out to 2050, with
a variety of technological and regulatory challenges. The
risks caused from the decarbonisation of UK building stock
are not idiosyncratic to the Group, or its customers, and are
industry wide. The Group will continue to support the transition,
leveraging its strong balance sheet and robust credit standards.
Page 70
New mortgage lending, for properties with EPC grades of
A to C increased by 44.1% in the year to £832.2 million
(2021: £577.7 million). For new buy-to-let mortgages in England
and Wales advanced during the year ended 30 September 2022,
the distribution of EPC grades was:
Indicator Measure
2022 Coverage
2021 Coverage
EPC
Grading A to B
9.2%
99.6%
9.3%
Grading C
Grading A to C
Grading D or E
Grading A to E
36.0%
45.2%
54.6%
99.8%
99.6% 31.0%
99.6% 40.3%
99.6% 59.2%
99.6% 99.5%
Grading F or G
0.3%
99.6%
0.5%
92.5%
92.5%
92.5%
92.5%
92.5%
92.5%
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 green mortgage range. 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.
Commercial Lending
In the Group’s SME lending business, limited company
customers have been broadly analysed by SIC codes to identify
those operating in high carbon intensive industries. The results
are set out below:
Indicator Measure
2022 Coverage
2021 Coverage
Sector
Water, sewerage
and waste
4.15%
100% 4.53%
100%
Extractive
industries
1.82%
100% 2.35%
100%
Power generation
0.10%
100% 0.01%
100%
Total carbon intensive
industries
6.01%
100% 6.89%
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, such as the classification of the
environmental impacts of business assets and motor vehicles
financed, and classification of development finance projects
by environmental rating, are under development and continue
to evolve.
(d) Metrics and targets
Mortgage Lending
The tables below summarise the principal 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 97.6% of the portfolio. Work is
ongoing to source comparable data for the Group’s Scottish and
Northern Irish exposures.
Indicator Measure
2022 Coverage
2021 Coverage
EPC
Grading A or B
8.2%
92.8%
8.1%
Grading C
Grading A to C
Grading D or E
31.1%
39.3%
59.6%
92.8% 29.5%
92.8% 37.6%
92.8% 60.8%
Grading F or G
1.1%
92.8%
1.6%
88.3%
88.3%
88.3%
88.3%
88.3%
Flood
risk
High risk
properties
Medium risk
properties
High or medium
risk properties
0.9%
99.6%
0.7%
99.6%
1.7%
99.6%
1.8%
99.6%
2.6%
99.6%
2.5%
99.6%
Flood risk in the above table is based on exposure to flooding
from rivers and seas only, whereas in the underwriting process
flood risk from other sources is also considered. This analysis
used postcode level data and indicated that only a small
proportion of properties were located within a medium or
high-risk zone.
As part of the 2022 scenario analysis risk assessment, the Group
acquired further, more detailed flood risk data which was more
location specific, addressed a wider range of flood risks, and
covered the whole of the UK. This assessment included flood risk
from rivers, surface water and coastal flooding, and generated
the results set out below.
Indicator Measure
2022 Coverage
2021 Coverage
Flood
risk
Very high risk
High risk
High or very
high risk
0.1%
2.9%
93.4%
93.4%
0.1%
3.1%
93.9%
93.9%
3.0%
93.4%
3.2%
93.9%
These results indicate that only a small balance of the Group’s
mortgages are at higher risk. The Group is yet to experience any
loss attributable to flood or ground instability.
As well as addressing the current flood risk, the assessment
also included a projection of the potential future flood risk out to
2080 under various climate scenarios. The analysis was used to
evaluate whether there was likely to be any build-up of medium
to long term risk if the underwriting process was to remain
unchanged. Although an increase in risk was projected over the
period, the findings were discussed by internal property and
credit risk experts and the marginal increase was not considered
to be substantial.
Page 71
Strategic Report (e) Financed emissions
Notes on calculation methods
Financed emissions, which are considered as Scope 3
emissions, are emissions generated by the Group’s customers
which are facilitated by the financing provided. As set out above,
the Group has made a commitment to net zero by 2050 and
in doing so has an ambition to reduce the financed emissions
associated with its lending portfolio.
Given the relative size of the Group’s lending portfolios, the
current focus is on the buy-to-let mortgage portfolio, however
the Financed Emissions working group, which reports to the
Sustainability Committee, continues to develop methods to
monitor the emissions across the Commercial Lending division.
Initial estimates for development finance lending have been
calculated using Royal Institute of British Architects (‘RIBA’)
estimates on embodied carbon in the construction of residential
and commercial buildings. For financed emissions from
vehicles funded by the Group’s motor finance and asset finance
operations, emissions have been estimated through vehicle
registration details and vehicle mileage where data is available.
These financed emission disclosures will be developed further,
adopting methodologies to increase the balance sheet coverage
as well as emission reductions. Linking up with external
initiatives such as the PCAF will allow for the development of
an emissions framework across the balance sheet. The Group’s
financed emissions are a significant contributor to our value
chain emissions and are key to monitoring the decarbonisation
of our business.
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.
2. The data contained in the EPC has not been altered
or updated.
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-value ratios.
(f) 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.
A group company, Specialist Fleet Services (‘SFS’), leases refuse
collection vehicles to local authorities throughout the UK and
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.
Scope 3 Mortgage emissions
Absolute financed emissions have been calculated across the
buy-to-let mortgage portfolio, in accordance with the PCAF
standard. 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 mortgage loans the annual emissions relating to
the financed property are attributed to the mortgage provider on
a loan-to-value basis.
PCAF Scope 3 financed emissions
Policy
The Group complies with all applicable laws and regulations
relating to the environment and includes these within its legal
compliance framework. In support of the climate change
principal risk policy, the Group is developing an operational
sustainability risk strategy which will outline its environmental
commitments. It will also further embed the consideration of
climate-related operational risks within the ERMF.
Groupwide recycling and awareness campaigns are run with
employees to reduce various forms of waste such as food,
consumables and energy.
Scope 3 Annual buy-to-let mortgage emissions
2022
2021
Balance of mortgage lending (£m)
12,015.6 11,311.9
Risk management
Balance of mortgage lending with EPC
emissions data (£m)
10,858.3 10,171.7
Absolute Financed Emissions from properties
with EPCs (kilotonnes CO2e)
Physical Emissions Intensity of properties with
EPCs (kgCO2e per m2)
Economic Emissions Intensity of properties
with valid EPCs (tonnesCO2e per £ million
balance)
208.5
208.2
46.6
47.1
19.2
20.5
The Group has restated its 2021 financed emissions due to
improvements in historical EPC data quality and EPC matching
made in the year. The restatement allows for a more informative
comparison of the financed emissions across the two periods.
This metric is the one most often disclosed by UK lenders on
property in their climate reporting.
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 team and the Operational Risk Committee.
Energy and waste 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)
generated in the normal course of 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.
Page 72
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 last submitted its ESOS compliance
notification to the Environment Agency in December 2019. The
next submission is due in 2023.
Supply chain and procurement
The principal suppliers of the Group comprise its outsourced
savings administrator, legal and professional services providers,
building lessors and IT service providers. They therefore are
exposed to similar operational environmental risks to those of
the Group.
The Group remains committed to identifying, targeting
and addressing inefficiencies within its supply chain. The
procurement function works with key suppliers to identify
solutions to reduce the environmental impacts of our business
activities, whether direct or indirectly.
Performance indicators
The environmental key performance indicators for the Group,
have been 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, and are set out below.
The Group does not consider itself to have significant
environmental impacts or risks 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 less gains on sale of £388.4 million
(2021: £324.9 million). The data for 2019 is presented as during
the year this was designated as the operational footprint
baseline against which the Group will measure its progress.
All pre-printed stationery items used by the Group are from
renewable sources certified by FSC.
Greenhouse gas (‘GHG’) emissions
86.4% (2021: 81.5%) 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,
excluding SFS locations, was disposed of 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 Southampton and Poole operations
were relocated to newly refurbished premises with energy
ratings of B and C respectively. These new premises have
reduced the Group’s operational footprint and increased
energy efficiency.
The Group’s environmental initiatives in the period include:
•
•
•
•
•
Offsetting the operational footprint through the purchase of
carbon credits
Energy efficient intelligently controlled lighting is being
installed at the Solihull head office. This project was 52%
complete at the year end with an expected completion date
in the second quarter of 2023. Internal maintenance resource
is being used for this project with waste generated being
segregated and disposed of responsibly via an approved
third-party contractor. Following completion of the upgrade
the building’s EPC will be reassessed, with a rating of C
anticipated
Electric vehicle charging points have been installed at the
Group’s two sites in Solihull and the Southampton office is
also equipped with charging facilities. Usage by the Group’s
employees is currently at 68% of capacity
Continuation of the programme upgrading washroom
facilities at the head office building. This employs touchless
energy and resource-saving technology. All construction
wastes are segregated and disposed of responsibly by the
appointed contractor
Progress towards implementing a Sustainability Management
System to accord with best practice measures from
ISO14001:2015 and ISO50001:2018 and drive support for the
management of environmental and energy performance
•
From January 2022 employees entitled to a company car were
restricted to ordering either a hybrid or full electric vehicle
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
(Location-based)
Directly purchased electricity
(Market-based)
Total scopes 1 and 2 (Location-based)
Total scopes 1 and 2 (Market-based)
Normalised tonnes - Scope 1 and 2
CO2e per £m income (Location-based)
Normalised tonnes - Scope 1 and 2
CO2e per £m income (Market-based)
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 (Location-based)
2,062
Total scopes 1, 2 and 3 (Market-based)
1,603
Normalised tonnes Scope 1,2 and 3
CO2e per £m income (Location-based)
Normalised tonnes Scope 1,2 and 3
CO2e per £m income (Market-based)
5.3
4.1
2022
2021
2019
Tonnes
CO2e
Tonnes
CO2e
Baseline
Tonnes
CO2e
507
401
33
941
450
353
33
836
519
679
24
1,222
540
641
995
81
637
990
1,481
1,022
1,477
1,473
2,217
2,212
3.8
2.6
441
4
136
581
4.5
4.5
7.5
7.4
426
542
4
60
490
1,967
1,963
6.1
6.0
14
88
644
2,861
2,856
9.6
9.6
Page 73
Strategic Report
CO2 equivalent (‘CO2e’) values above, other than for market-
based Scope 2 elements, are calculated based on the BEIS /
DEFRA guidelines published on 22 June 2022. Market-based
emissions have been calculated in accordance with GHG
Protocol guidelines. Where the Group’s data does not meet the
Scope 2 Quality criteria the emissions are estimated utilising the
UK grid DEFRA conversion factor since a UK residual mix is not
currently available.
This year the Group’s 2022 operational footprint has been offset
and independently verified to provide a higher level of assurance
over the emissions being offset. This verification was undertaken
by EcoAct, an independent carbon management company,
and was aligned with the ISO 14064-3: 2019 standard with
specification and guidance for the verification and validation of
greenhouse gas statements. EcoAct’s opinion was that nothing
had come to their attention which indicated that the location-
based and market-based emissions totals set out above were
not fairly stated and free from material error.
Offsetting has been achieved through the purchase of carbon
credits certified under the Verified Carbon Standard (‘VCS’)
programme or the Gold Standard programme, two of the most
widely accepted international certification systems.
The amounts shown above for location-based 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 in this context. All these
emissions relate to activities in the UK and its offshore area.
These emissions define the scope of the Group’s target to
achieve net zero across the operational footprint by 2030.
The reduction in emissions from the 2019 baseline continues
to be principally driven by the shift to hybrid working. There has
been a slight increase in location-based emissions compared to
2021 due to increased office occupancy. Emissions attributable
to employees working from home are not, at present, included
within the scope of the regulations.
The majority of emissions included above relate to the provision
of heat, light and power to the Group’s premises. The reduction
across market-based emissions is primarily driven from a
change in electricity supplier across the Group’s main sites to
one which sources zero carbon electricity and has improved
data availability. The market-based method for electricity
used reflects specifically the emissions from the electricity
that the Group has purchased and derives emission factors
from contracts with suppliers and related data, where data is
available. This differs from the location-based method, which
reflects average emissions for electricity supplied through the
UK grid, based on figures published by the UK Government.
The Group has not been involved in any prosecutions, accidents
or similar non-compliances in respect of environmental matters,
nor incurred any fines in respect of such matters.
Power usage
The Group uses mains electricity and natural gas from the UK
grid to provide heat, light and power to its office buildings. It
also uses fuel in company vehicles, which is included in Scope
1 above and through business travel of employees, which is
included in Scope 3. The amount of power used in the year
ended 30 September 2022 is shown below.
Renewable electricity
2,409.3
2,458.6 3,123.5
2022
2021
2019
MWh
MWh
MWh
Other electricity
Electricity
Natural gas
Motor fuel
380.7
558.9
768.1
2,790.0 3,017.5 3,891.6
2,780.2 2,454.9 2,817.1
1,877.7 1,551.7 3,099.9
7,447.9
7,024.1
9,808.6
Normalised MWh per £m income
19.2
21.6
33.0
Consumption levels have seen a small increase from 2021 linked
to increased office occupancy and increased in travel across our
SFS division and the Group. However, consumption still remains
lower than the 2019 baseline.
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.
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 2022 was 10,202m3
(2021: 8,500m3), based upon consumption recorded on purchase
invoices, a normalised amount of 26.3m3 per
£m income (2021: 26.1m3 per £m income). The increase in
usage is a result of increasing office occupancy as the Group
shifts from the lower Covid -era levels of occupancy to the new
hybrid working occupancy levels.
Waste
SFS is the Group’s primary producer of waste. Its 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 excluding SFS consists of a mixture of
general office waste types, 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.
Page 74
(g) Future developments
In addition to the actions already taken and reported above, the
Group’s climate change programme going forward also includes:
•
•
•
•
•
Embedding the climate change risk policy which clearly
documents the Group’s approach to managing climate
change risk within the ERMF. The policy documents how the
understanding and management of climate risk is distributed
across the business whilst articulating clear roles and
responsibilities across the three lines of defence 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 be further developed into short-term
and long-term climate related targets or ambitions for
the Group
Continued development of climate change scenario analysis
leveraging industry good practice to determine the resilience
of the Group’s strategy under different climate-related
scenarios. This includes further assessing the impacts
of climate-related issues on asset values and financial
performance
Development of products and initiatives to support and
educate customers through their transition to a lower
carbon economy
Continue to work towards reducing the Group’s operational
footprint to net zero by 2030 and to offset in the
intervening period
•
Enhancing reporting of emissions data to include more
elements of the value chain, as described below
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 2022 together with the methods of
disposal are shown below.
Recycled
Waste-to-Energy Initiatives
Landfill
Normalised tonnes per £m income
2022
2021
2019
Tonnes
Tonnes
Tonnes
123
21
287
431
1.11
87
17
125
229
0.70
122
-
187
309
0.75
Waste generation data is based upon volumes reported on
disposal invoices.
The increase in waste throughout the period was driven by
both increased activity in the workshops of the SFS division
and better quality reporting of waste across all of the Group’s
locations. Various office moves also took place in the year which
led to higher waste volumes as sites were cleared.
The Group’s long-term strategy is to increase the percentage
of waste which is either recycled or used in Waste-to-Energy
initiatives.
Travel and commuting
As part of the Group’s ongoing ESG commitments, new
principles were introduced into the Company Car Policy during
the year to support the Group’s efforts to decarbonise. The
Group has made the commitment that there will be no diesel
vehicles in its fleet by 31 December 2025. To meet this target the
following steps have been agreed:
• Ordering of diesel and petrol vehicles ceased in January 2022
•
•
CO2 emissions for the Group’s fleet have been restricted
to 75g/km with annual reviews set each April to ensure
continuing alignment with the objectives.
New orders will be restricted to electric-only vehicles,
from 1 October 2026, subject to the progress of the UK
Government’s decarbonisation plan.
•
All non-electric cars will be removed from the Group’s fleet by
30 September 2031.
In March 2022 the Group installed electric vehicle charging
points at its Solihull Head Office. This is in addition to the
charging points at the Southampton site, and plans are
underway to install points at other sites. The aim is to reduce
emissions from employees commuting and business travel.
In June 2022 the Group introduced a Green Car salary sacrifice
scheme, offering all employees a tax efficient way to purchase an
electric or plug-in hybrid vehicle via salary exchange. The Group
also expanded its cycle to work scheme to run year-round, with
more employees signing up each month.
Page 75
Strategic Report Emissions across the value chain
There are significant challenges in data collection and accurate calculation for Scope 3 emissions however the Group is committed to
disclosing its Scope 3 emissions where significant and relevant to our stakeholders. The table below outlines the key emissions from
Scopes 1 to 3 across our value chain and their current reporting status. The Group’s current focus remains on its operational footprint
and financed emissions where it is able to have a more direct influence on the outcomes. However it is intended that as the Group’s
understanding broadens more action will be taken to reduce these emissions.
Scope
Emissions source
Approach
Scope 1
Operating gas heating boilers
Petrol and diesel used by company cars
Air conditioning systems
Included within ‘(f)
Operational impact' above
Scope 2
Purchased electricity, heat and steam
Included within ‘(f)
Operational impact' above
Scope 3
Fuel and energy related activities not in
Scope 1 or 2
Included within ‘(f)
Operational impact' above
Waste generated in operations
Water consumption
Scope 3
Working from home emissions
Under development
Scope 3
Employee commuting
Not yet started
Scope 3
Supply chain emissions
Scope 3
Financed emissions -Mortgages
Preliminary development
work done
Reported in ‘(e) Financed
emissions’ above
Scope 3
Financed emissions – Commercial lending
Under development
Commitments
Offset from 2022
Commitment to net zero
by 2030
Offset from 2022
Commitment to net zero
by 2030
Offset from 2022
Commitment to net zero
by 2030
As set out above, in support
of the UK government goal of
net zero by 2050 the Group
has made a commitment to
achieve net zero by 2050
A6.5 Social and community
Industry initiatives
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 providing funding for
business propositions in the development finance and SME
lending markets which might struggle to attract interest from
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 its landlord customers in the
properties it funds, helping to drive up standards in the PRS for
tenants and potential tenants.
Looking forward, the Group is developing products which
encourage customers to reduce their environmental impacts,
helping to drive action on climate change.
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.
Membership of bodies such as UKF and the FLA enables the
Group to be part of shaping the future provision of financial
services to the benefit of the whole community. The Group plays
an active role in these bodies, with representatives on working
groups covering a range of topics. In 2021, this was enhanced
through work by the Mortgage Lending business, carried out in
conjunction with the Green Finance Institute, on the potential for
providing green products to the buy-to-let mortgage market. The
business has also worked with the Coalition for Energy Efficient
Buildings formed by the Institute.
As part of the development of its sustainability strategy the
Group has joined the Bankers for Net Zero initiative. As an
active member the Group will continue to support UK industry
in mobilising SMEs to take action on climate change while
providing input to the shaping of policy at a national level.
Page 76
The Group contributes to registered charities providing debt
advice to support its vulnerable customers. Contributions of
£642,000 (2021: £912,000) 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. The reduction in the year
was principally a result of the Group’s exit from the unsecured
personal finance market as fewer of the Group’s customers
made use of the charity’s services.
Supporting charity
The Group supports charity initiatives as part of its commitment
to corporate citizenship, both by making direct donations
and also by supporting the fundraising activities of Paragon’s
Charity Committee. During the year a designated member of
ExCo, Deborah Bateman, the External Relations Director, was
appointed to oversee the Group’s strategy in this area.
For direct donations the Group focusses on organisations
serving the communities in which it operates and supports the
fundraising efforts of individual employees. It also operates a
Give as You Earn Scheme through payroll. Contributions made in
the year totalled £50,100 (2021: £39,600).
Charities which benefitted from the Group’s donations included
local schools, sports clubs, hospitals and hospices, The Downs
Syndrome Association, UK Sepsis Trust, Prostate Cancer UK,
Happy Days Children’s Charity, and many others. During Pride
month the Group encouraged fundraising for LGBTQ+ affiliated
charities with one of the beneficiaries being Mind.
The Group also supports Paragon’s Charity Committee,
consisting of employees who give up their own time to 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
to benefit from the following year’s fundraising activities.
During the year the fundraising period was aligned to the Group’s
financial year rather than the calendar year, resulting in a nine
month campaign ending in September 2022 on behalf of Mind
which raised £31,000. In the twelve months ended 31 December
2021 £43,000 was raised for The Alzheimer’s Society. The
employees’ chosen charity for the year ending 30 September
2023 is Newlife, the charity for disabled children, and the process
of planning events is already under way.
Community volunteering
Employees are offered one paid volunteering day each year
to support volunteering projects as part of our corporate
responsibility strategy. As a specialist lender, the Group is
conscious of the potential impact it may have on society and the
environment. Therefore, community volunteering projects have
focussed on:
• Poverty
o supporting people who are experiencing poverty
o
developing a better environment for individuals
experiencing poverty
o offering support to help people get out of poverty
• Education
o
strengthening the education of school children (reading
and financial awareness skills)
o
supporting children to successfully transition into the
world of work (interview skills, work experience projects,
careers advice and apprenticeship events)
• Environment
o
improving the local environment (litter-picking in parks and
along canals and rivers, school garden maintenance and
hostel refurbishment)
As pandemic restrictions receded in the year, employees
welcomed the opportunity to return to face-to-face volunteering,
and a number of initiatives to raise the profile of the programme
have taken place. The number of volunteer days completed
in the financial year totalled 286 (2021: 49), bringing the total
number of volunteering hours accumulated since October 2021
to over 2,000.
Some examples of projects supported are highlighted below.
Poverty
SIFA Fireside based in central Birmingham provides a range of
ever-evolving responsive services to ensure the essential needs
of Birmingham’s homeless communities are met. This year 19
employees volunteered their services to help prepare food at the
drop-in centre and lend a friendly ear to its users.
St Basils works with young people aged 16-25 who are homeless
or at risk of homelessness, helping almost 4,000 young people
per year across the West Midlands region. This year, 178
individuals worked on decorating and gardening projects to help
improve the environment for these people.
At the outbreak of the war in Ukraine, employees co-ordinated a
food and basic supplies delivery to Poland, to support refugees
flooding across the border. Two vans were filled with donations
including food, nappies, baby milk and other basic supplies.
For Christmas 2021, the annual donations of food and luxury
items by employees for Christians Against Poverty continued.
51 hampers for families in need across the West Midlands
were delivered.
Other local projects supported include the Walsall Black Sisters
Collective, Manchester Sikh Society, and Naomi House and
Jacksplace hospices in Hampshire.
Education
In total 56 employees supported careers fairs and work
experience events, including interview skills preparation, at
schools in close proximity to the Group’s head office such as
St Peter’s School, Arden School, Tudor Grange, Alderbrook
School and Solihull College.
There has also been support for projects to help improve the
school environment for two primary schools struggling with
securing funding.
The Group has also begun participation in the SMART Futures
programme by working closely with the EY Foundation, an
independent charity which supports young people from
low-income backgrounds to get paid work experience,
employability skills training and mentoring.
This year the Group supported four students with placements
and mentoring. These are Year 12 students who have been
eligible for free school meals and/or have a household income of
under £24,421 and who are interested in careers in banking.
Page 77
Strategic Report Environment
The Canal and River Trust care for a 2,000 mile long, 200-year-old
network of canals, rivers and reservoirs. Its vision is to have living
waterways that transform places, enrich lives and bring wellbeing
opportunities to millions. Two project teams completed clear-up
projects on sections of the waterways.
LoveSolihull supports several litter-picking projects in Solihull to
improve the quality of local parks and walkways.
Volunteers from the Group’s Southampton office supported
beach cleans and caring for animals at Marwell Zoo.
Taxes borne include UK corporation tax on its profits,
including the Banking Surcharge, and payroll-based taxes,
including employers National Insurance (‘NI’) contributions
and Apprenticeship Levy payments. In addition, as a financial
institution, it is unable to recover the majority of the VAT charged
by suppliers and this represents a cost to the Group.
Taxes collected on behalf of HMRC include payroll deductions
from employees, in the form of PAYE and employees NI
contributions and VAT relating to certain income from customers.
The amounts borne and collected during the period were as follows.
Taxes borne
UK Taxation
Corporation tax
Employers’ payroll taxes
Irrecoverable VAT and other indirect
taxes
Stamp duty
Total UK national taxation
Local taxation
Business rates
Taxes collected
Employees' payroll taxes
VAT
2022
2022
2021
2021
£m
£m
£m
£m
56.5
11.6
8.2
0.3
48.3
8.1
5.1
0.2
76.6
1.4
78.0
23.8
0.7
20.6
3.8
24.5
102.5
61.7
1.3
63.0
24.4
87.4
Overall, the tax borne by the Group and collected by it on behalf
of the UK Government demonstrates its economic activity, its
contribution to the UK economy and state and the value it adds
to society more broadly.
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 His Majesty’s Revenue and Customs (‘HMRC’) in March
2013. The Group has previously confirmed to HMRC that it was
unconditionally committed to complying with the Bank Tax Code,
and formally re-approved the Group’s tax governance policies
and the tax strategy outlined above.
During each financial year since 2018 the Group has published
a tax strategy document for that year, approved by the Board
of Directors, on its website, in accordance with the Finance Act
2016. These documents address 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 most recent such statement was published during the year
and can be found in the Investor Relations section of the Group’s
website in ‘Results, reports and presentations’.
The published tax 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 and certifies the appropriateness of its tax
accounting arrangements to HMRC.
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.
The Group is resident and operates in the UK and generates
revenues for the UK authorities both through corporation tax
and other taxes directly borne, but also through substantial
payroll taxes.
Page 78
A6.6 Human rights
A6.7 Business practices
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 approach to doing business is set out in its Code
of Conduct, which draws together a framework of detailed
policies. All employees are expected to read and attest to the
code on an annual basis, and training is provided to ensure the
code is fully understood.
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 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 complies with and supports the objective of the
Modern Slavery Act 2015, in raising awareness of modern slavery
and human trafficking.
It is committed to ensuring 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
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 is not aware of any incident
in which the organisation’s activities 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 (2021: none).
The code covers obligations to colleagues and customers
and compliance with the legal, regulatory and ethical aspects
of the way people discharge their individual roles within the
organisation. The Code of Conduct is publicly available on the
Group’s website at www.paragonbankinggroup.co.uk.
Business partners
The Group’s business model relies on maintaining good
relationships with its principal business partners, primarily
financial intermediaries, such as mortgage brokers, and
purchase ledger suppliers, including those for establishment
costs and professional services.
The Group is committed to the fair treatment of all suppliers. In
return, it expects 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 (www.paragonbankinggroup.co.uk), which sets out
its overall approach to supplier engagement and corporate
responsibility and, importantly, the standards of behaviour
expected from suppliers. As part of the Group’s focus on the
enhancement of positive supplier relationships, a supplier
satisfaction survey was conducted during the year. This survey
sought to further the Group’s understanding of suppliers’
experiences in dealing with it and the findings will support the
onward development of its approach.
The Supplier 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. The Group remains
focused on its most critical suppliers to meet enhanced
regulatory requirements under the PRA Supervisory Statement
(SS2/21) on Outsourcing and Third Party Risk Management
which, inter alia, incorporates the European Banking Authority’s
Guidelines on outsourcing into UK regulation. The Group’s
alignment to these requirements strengthens resilience across
its supply chain.
The Group aims to pay all 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.
Page 79
Strategic Report 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’. Data for the most recent reporting periods up to the six
months ended 30 September 2022, calculated on the basis set
out in the regulations, is shown below.
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 (2021: none).
Anti-money laundering
As a financial services entity, the Group also has procedures in
place to ensure it cannot be used to facilitate money laundering,
sanctions abuse or other forms of financial crime. These are
consistently reviewed to ensure they remain robust. Following
the FCA “Dear CEO” letter in 2021 regarding financial crime
systems and controls, a comprehensive gap analysis was
undertaken. In parallel, the Group continues to monitor the
increasing complexity of financial crime threats and any potential
or actual changes to the legislative framework to manage the
emerging threats. Any resultant actions from these activities
have already, or are in the process of, being addressed as a
priority. During the financial year considerable investment has
been made in both resources and technology to ensure that the
Group’s anti-money laundering and financial crime infrastructure
and processes continue to operate rigorously.
Employees receive regular annual training in these areas, with
their understanding being tested and levels of completion
monitored through the governance framework and reported
to regulators.
Management responsibility
The Group’s senior legal officer is the General Counsel, 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, anti-bribery and anti-corruption
policies and procedures and other policies relating to business
practices at all times. This is monitored as part of the Group’s
risk management process and reviewed, as appropriate, by the
Internal Audit function.
Whistleblowing
A whistleblowing hotline, run by an independent third party,
Protect, is available to employees who have concerns over any
aspects of the Group’s business practices. This is described
further in Section B4.5.
Six months ended
30 September
2022
31 March
2022
30 September
2021
22
21
94%
95%
22
95%
Average time to pay
invoices (days)
Invoices paid
within 60 days
Anti-corruption
The Group carries out its business fairly, honestly and openly.
It has a comprehensive anti-bribery and anti-corruption policy,
endorsed by the directors, forming part of its Code of Conduct.
These policies cover all employees and are operated throughout
the business. The Group 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
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 2022, out of 180 countries
and territories. However, the Group takes its responsibilities
seriously and will not tolerate bribery in any form, on any scale
and therefore keeps its policies and procedures under regular
review. The Group will self-report any identified serious incident
of bribery or corruption.
The Group’s policies cover the conduct of its business, its
interaction with suppliers and contractors and the giving
or receiving of gifts and corporate hospitality. They prohibit
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
standard, which is a key document under the Group’s suite of risk
policies. This policy standard 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 standard 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 2022.
The CRO, in conjunction with the Head of Financial Crime
Risk, who also holds the Money Laundering Reporting Officer
(‘MLRO’) responsibility for the Group, are jointly responsible
for ensuring the Bribery Act risk assessment and resulting
policies and procedures are in place and reviewed on a regular
basis. Both these roles are part of the ‘second line’ Risk and
Compliance function. They are also responsible for ensuring any
changes in the law are noted and applied to the Group’s policies
and procedures, where appropriate. In the last year there have
been no material changes in legislation or guidance in the UK.
Page 80
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.
Ciara Murphy
Company Secretary
6 December 2022
Page 81
Strategic Report How the Group is run and how risk is managed
P84
B1. Chair of the Board’s statement
An overview of governance in the year
P86
B2. Corporate Governance Statement
How the Company complied with the Code in the year
P88
B3. Board and senior management
The directors and the operation of the Board during the year
P96
B4. Governance framework
The system of governance, committee structure and how the
Board fulfils its duties
P112
B5. Nomination Committee
Policies and procedures on governance, board appointments
and diversity
P116
B6. Audit Committee
How the Group controls its external and internal audit
processes and its financial reporting systems
P126
B7. Remuneration Committee
Policies and procedures determining how directors
are remunerated
P166
B8. Risk management
How the Group identifies and manages risk in its businesses
P180
B9. Directors’ report
Other information about the structure of the Company required
by legislation
P183
B10. Directors’ responsibilities
Statement of the responsibilities of the directors in relation to
the preparation of the financial statements
To maintain the highest standards and deliver our products and services with care and accuracy
Professionalism is highly valued at Paragon and there’s lots of
positive reinforcement around its importance. It’s about putting
care into what you do. If you care about your actions, you’ll pass
that care on to customers and get better results for everyone.
Josh, Climate and ESG Risk Management
B1. Chair's statement on
corporate governance
As the new Chair I am pleased with the Group’s
commitment to strong corporate governance
as a foundation for strategic success and with
the seriousness with which my new colleagues
take their responsibilities under the UK
Corporate Governance Code.
Robert East, Chair of the Board
Dear Shareholder
In this section of the Annual Report the Group presents
disclosures which describe its governance processes and outline
how the Board and its Committees addressed the important
issues facing the Group during the year.
As the new Chair I am pleased with the Group’s commitment
to strong corporate governance as a foundation for strategic
success and with the seriousness with which my new colleagues
take their responsibilities under the UK Corporate Governance
Code (the ‘Code’). As a board we understand the importance of a
robust governance structure and an effective risk management
framework in delivering sustainable growth and shareholder
returns and in protecting the interests of all stakeholders.
We continue to monitor the outputs of the BEIS review of
corporate governance, which has continued to proceed during
the year, albeit slowly, and we look forward to receiving more
clarity on the direction of policy in the coming year, both from
BEIS and from the FRC, who propose to consult on an updated
Corporate Governance Code, so that we can incorporate this
into our forward planning.
At the end of the year the Group also launched its first code of
conduct, which sets out the principles that all its people should
apply in dealing with customers, suppliers and each other. This is
publicly available on the Group’s website, and I believe will play a
valuable role in codifying the principles by which we have always
sought to operate.
Diversity and inclusion
The Group’s focus on diversity and inclusion has continued to
grow in prominence in the year. The EDI Network is becoming
an established part of the Group’s structures and during the
year I was proud that Paragon has become a founding partner of
Progress Together, an organisation to promote socio-economic
diversity at senior levels in the financial services industry,
sponsored by the City of London.
The Group continued to meet its targets for gender diversity at
board and senior management level under the FTSE Women
Leaders initiative and the Board now complies with the Parker
guidance on ethnic diversity on boards.
During the year the governance structure continued to mature.
The Board was expanded, the Sustainability Committee
completed its first full year of operation and the Board’s first
champion for the FCA Consumer Duty was appointed.
The Board continues to monitor the Group’s diversity policies
and their outcomes carefully, and I look forward to building on
the work done by my predecessor as Chair, Fiona Clutterbuck,
who rightly made this a particular priority.
Stakeholder engagement
Board effectiveness
As the restrictions of the Covid pandemic relaxed, the Group’s
programmes of stakeholder engagement began to normalise
and develop further.
During the latter part of the year the previous Chair, Fiona
Clutterbuck, together with Hugo Tudor, the Senior Independent
Director and Chair of the Remuneration Committee, met with
representatives of shareholders and proxy advisers. Given the
requirement for the approval of the directors’ remuneration
policy at the next AGM in March 2023, these discussions
centred on the Group’s approach to executive remuneration
and potential amendments to the policy, but also covered
other governance and broader sustainability issues. These
discussions, which are reported back to the Board are both
constructive and useful. I look forward to taking part in the
next round of engagements and would urge all our principal
shareholders to participate.
The Board’s primary channel of engagement with the workforce
continues to be through the Group’s People Forum. This forum
meets regularly and provides the Board with insight into the
views of the employees. The Chief People Officer 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, both through the Forum and through
group-wide communications.
During the year the previous Chair, and several non-executive
directors attended meetings of the Forum and have told me
how useful they found those interactions, and of how valuable
they found employee insights as the Group’s approach to hybrid
working was developed. I look forward to meeting with the Forum
in the near future as part of my induction.
The Board was also interested to receive the results of the
Investors in People assessment carried out in March. This
included the results of detailed independent surveys of the
workforce and an assessment of face-to-face interviews with
employees, giving insight into the way the Group’s people relate
to it and how they feel the Group relates to them.
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.
As I was not appointed until the end of the financial year, the
annual review of board effectiveness was delayed and will take
place when I have had more opportunity to familiarise myself with
the people and processes involved and to form my own views on
priorities for the review. It will be an externally facilitated review
and I look forward to sharing the results with you next year.
Board changes
I took office as Chair on 1 September 2022 following a detailed
search and selection process, regulatory approval and a full
handover from Fiona Clutterbuck, my predecessor. Fiona
stepped down both as Chair of the Board and as a director on my
appointment. I, and my fellow directors, would like to thank her
for her wise stewardship of the Board over the past few years and
particularly for her leadership through the Covid pandemic, which
posed particular practical difficulties for non-executive directors.
I am currently going through a detailed induction process,
meeting with people at all levels of the Group so I can familiarise
myself with its structure and operations. I am finding the process
most enlightening and would like to thank the people I have met
so far for their openness and engagement.
As I joined the Board, one of my first duties was to welcome
Tanvi Davda as an additional non-executive director. Tanvi’s
experience in business leadership, wealth management and
derivatives gives her a distinctly different perspective on the
financial services industry and I look forward to her contributions
to the Board’s deliberations.
The Group’s next AGM will be held on 1 March 2023 in London,
and I look forward to welcoming as many shareholders as
possible in person.
Robert East
Chair of the Board
6 December 2022
Page 85
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 2022, the Company complied with the principles and
provisions of the Code.
During the year under review, and as permitted under the Code, 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 to allow for the appointment of a suitable
replacement Chair.
After a rigorous selection process, and following regulatory approval from the FCA and PRA, Robert East was appointed as Chair with
effect from 1 September 2022. Former Chair, Fiona Clutterbuck, whose term on the Board reached nine years in September 2021,
remained in post until Robert’s appointment became effective. The Board believes that this limited extension ensured a smooth
transition of duties from Fiona to Robert. The membership of the Board was further enhanced by the appointment of Tanvi Davda on
1 September 2022. The search processes to recruit Robert and Tanvi are discussed further in the report of the Nomination Committee
in Section B5.
The appointment of the new Chair of the Board in September 2022 has also resulted in the Company adopting a ‘comply and
explain’ approach to Provision 21 of the Code, which requires a Board to undertake a formal and rigorous annual evaluation of the
performance of the Board, its committees, the Chair and individual directors. Given the appointment of a new Chair in the year, the
decision was taken to defer the 2022 evaluation until 2023 to allow Robert sufficient time in post to make the evaluation more relevant
and meaningful. The Board evaluation in 2023 will be externally facilitated. This decision is discussed further in Section B4.4.
The table below references the individual Code Principles to the sections of this report which provide supporting information
explaining how they 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.
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.
B3
B1
B8
B4.3
B4.3
Section
B4.1
B4.1
B4.1
B4.1
Page 86
Section 3: Composition, Succession and Evaluation
J.
Appointments to the Board are subject to a formal, rigorous and transparent procedure, and an effective
succession plan is in place for Board and senior management. Appointments and succession plans are based on
merit and objective criteria and promote diversity.
K. There is an appropriate mix of skills, experience and knowledge. Tenure and membership of the Board and its
committees are regularly reviewed.
L. 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
Section
B5
B4.4
B4.4
Section
M. The policies and procedures, established by the Board, ensure the independence and effectiveness of internal
and external audit functions. The Board has satisfied itself of the integrity of financial and narrative statements.
B6
N. The Board presents a fair, balanced and understandable assessment of the Company’s position and prospects.
B6
O. The Board has established procedures to manage risk, oversee the internal control framework and determine
the principal risks the Company is willing to take in order to achieve its long-term strategic objectives.
B8
Section 5: Remuneration
P. Remuneration policies and practices support strategy and promote long-term sustainable success. Executive
remuneration is aligned to the Company’s purpose, values and 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 87
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.
Robert D East
Chair of the Board (Age 62)
Nigel S Terrington
Chief Executive (Age 62)
Richard J Woodman
Chief Financial Officer (Age 57)
Appointed to the Board as
independent non-executive Chair
of the Board on 1 September 2022.
Appointed to the Board as Treasury Director in
1990, and became Finance Director in 1992 and
CEO in 1995.
Experience
Experience and expertise
Robert has over 40 years'
experience in UK financial services,
including at board level, as CEO
and Chair.
During his executive career he held
senior roles at Barclays. He was
also CEO of Cattles, where he led
the restructuring and wind down of
its operations from 2010 to 2016.
He has held positions as Chair of
Vanquis Bank, Skipton Building
Society and Hampshire Trust Bank.
He has previously served as a non-
executive director on the boards of
Provident Financial Group, Skipton
Building Society and Hampshire
Trust Bank, where he was also
Chair of the Risk Committee.
Robert holds a diploma in
Financial Studies (DipFS) from
the London Institute of Banking
and Finance and is an associate
of the Chartered Institute of
Bankers (‘CIB’).
Specific areas of expertise*
•
•
•
Strong retail and commercial
banking expertise
Detailed knowledge of the
financial services sector
Leadership of
transformational change
Committee membership
Chair: Nomination Committee
Member: Remuneration and Risk
and Compliance Committees
Current external appointments
Director of RCWJ Limited
Nigel Terrington’s early career began in
investment banking, which included working for
UBS where he trained as a credit analyst and
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 Chair of UK Finance’s Specialist
Bank Advisory Committee. Previously he was
the Chair of the Council of Mortgage Lenders
(‘CML’), Chair of the Intermediary Mortgage
Lenders Association (‘IMLA’), Chair of the
Finance and Leasing Association (‘FLA’)
Consumer Finance Division and a board
member of the FLA.
He is an associate of the CIB 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
Chair 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
Appointed to the Board
as Director of Corporate
Development in 2012 and became
CFO in June 2014.
Experience and expertise
Richard Woodman joined the
Group in 1989 and has held
various senior strategic and
financial roles, including
Director of Business Analysis and
Planning and Managing Director
of Idem Capital.
He has taken a lead role in the
Group’s strategic development
and, in particular, in the loan
portfolio acquisition programme
through Idem Capital and the
Group’s Mergers and Acquisitions
(‘M&A’) programme.
He is a member of the
Chartered Institute of
Management Accountants.
Specific areas of expertise*
Richard has broad 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
Current external appointments
Director of Woodman Portfolio
Holdings Limited
Director of Rose Wine Limited
* All directors have broad knowledge of all areas of the Group’s business, but the ‘areas of expertise’ highlight specific areas in relation to an individual’s contribution to the Group’s
long-term sustainable success.
Fiona J Clutterbuck stepped down as Chair of the Board and as a director on 1 September 2022.
Page 89
Corporate Governance Hugo R Tudor
Non-executive director (Age 59)
Peter A Hill
Non-executive director (Age 61)
Alison C M Morris
Non-executive director (Age 63)
Appointed in 2014 – eight years served.
Appointed in 2020 – two years served.
Appointed in 2020 - three 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
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.
Chair of Mortgage Brain
Holdings Limited.
He was a non-executive director and
Chair of the Risk Committee at Pure
Retirement from 2019 to 2022.
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 CIB.
Specific areas of expertise*
•
•
Specialist retail banking and
mortgage lending expertise
Detailed knowledge of the financial
services sector
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 led audit projects for a range
of banking clients, as well as other
companies across the FTSE 100
and FTSE 250 and 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
Director of Damus Capital Limited
Committee membership
Director of Porthcothan
Property Limited
Director of Vitec Global Limited,
Vitec Air Systems Limited and
Vitec Aspida Limited
Chair: Risk and Compliance Committee
Committee membership
Member: Audit Committee
Chair: Audit Committee
Current external appointments
Chair of Mortgage Brain
Holdings Limited
Director, Trustee and Chair of the
Finance & Governance Committee of
Leeds Rugby Foundation
Member: Remuneration and Risk and
Compliance Committees
Current external appointments
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
Non-executive director of Sabre
Insurance Group PLC and Sabre
Insurance Company Limited
Chair of the Audit Committee at M&G
Group and Sabre Insurance Group
Page 90
Barbara A Ridpath
Non-executive director (Age 66)
Graeme H Yorston
Non-executive director (Age 65)
Tanvi P Davda
Non-executive director (Age 50)
Appointed in 2017 – five years served.
Appointed in 2017 – five years served.
Experience
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.
Barbara is currently a non-executive
director of ORX in Switzerland, a trade
association for non-financial operating
risk professionals (including cyber risk),
and a director of ORX UK Limited.
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 and director of
ORX UK Limited
Chair of the Ethical Investment
Advisory Group of the Church
of England
Non-executive director of Open
Banking Limited and Change
Banking Limited
Member of the International
Advisory Council of the Institute
of Business Ethics
Member of the UKF Conduct
and Culture Forum
Graeme Yorston was Group Chief
Executive of Principality Building
Society, the 6th largest mutual in the
UK. He has over 48 years’ experience
in financial services having carried
out a number of senior roles in Abbey
National (now Santander) including IT
Director for the Retail Bank, Regional
Director and running a number of
significant change programmes.
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 CIB, 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
Appointed on 1 September 2022 – less
than a year served.
Experience
Tanvi brings a diverse range of skills
and knowledge to the Board. With an
executive career of more than 25 years,
Tanvi began her career at Credit Suisse
as a derivatives trader, then went on
to work with IBM as a management
consultant before joining ABN AMRO,
and then Barclays Wealth where she
was Managing Director of Global
Research and Investments.
In 2015, Tanvi co-founded the wealth
management firm, Saranac Partners,
where she was CEO until 2021, and was
a non-executive director until 2022.
Tanvi’s non-executive career has
also included roles on the Board
of Ofqual, the qualifications and
examinations regulator, and the
Student Loans Company.
Specific areas of expertise*
•
Strong finance, advisory and
regulatory experience
Committee membership
Member: Remuneration and Risk and
Compliance Committees
Current external appointments
Director of Ashrah Advisory Limited
Director of CLC Services Limited
Trustee for Cheltenham Ladies College
Page 91
Corporate Governance 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
Peter Shorthouse
Treasury and Structured Finance Director
Since 2010
Deborah Bateman
External Relations Director
Since 2009
Anne Barnett
Chief People Officer (‘CPO’)
Since 2009
Marius van Niekerk
General Counsel
Since 2019
Ben Whibley
Chief Risk Officer (‘CRO’)
Since 2019
All members sit on both the Executive
Performance Committee (‘Performance
ExCo’) and the ERC. The Internal Audit
Director, Sarah Mayne, attends meetings
of both committees as an observer.
Page 92
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 interest rate volatility, inflation and other macro-economic uncertainties on the Group
• Assessing the Group’s operational resilience
• Further developing the Group’s climate change commitments
• Monitoring the impact of new ways of working following the Covid pandemic
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
Business strategy
Meeting
Training / insight session exploring the outlook for the UK economy and housing market. The session was
facilitated by an economic research consultancy.
Oct 2021
Approval of the corporate plan for the financial years ending 2022 to 2026. More detail on the Group’s
strategy can be found in sections A3 and A4.
A deep dive review into Commercial Lending operations, which included an overview of the division’s
strategy and priorities, delivered by the managing director of the business.
Market update on the financial services sector provided by an investment bank.
Insight session on project prioritisation, delivered by the Operations, Change and IT teams.
Approval of the sale of the Group’s residual unsecured personal loan portfolio for £78.9 million and the
consequent cessation of unsecured loan administration activities.
Dec 2021
Jan 2022
Feb 2022
Apr 2022
May 2022
Deep dive review of the Group’s SME lending business provided by senior management from the area.
July 2022
Update on the Group’s change programme and on progress on the digitalisation strategy.
July 2022
Risk and regulation
Update on model risk.
Training on financial crime and regulatory expectations of firms on Anti-Money Laundering.
Consideration and approval of the 2021 ILAAP.
Update on regulatory reporting which included an overview of the Group’s regulatory reporting
assurance framework.
Training on the ICAAP stress testing framework.
Oct 2021
Oct 2021
Oct 2021
Oct 2021
Jan 2022
Insight session on developments made to the SME lending origination process and associated benefits.
Jan 2022
Update on the ICAAP and Recovery Plan.
Review and approval of the Group’s Liquidity and Funding and Market Risk Appetites.
Training on the Group’s enterprise risk management framework, delivered by in-house experts.
Training on interest rate risk in the banking book (‘IRRBB’).
Consideration and approval of the 2022 ICAAP.
Jan 2022
Feb 2022
Mar 2022
Mar 2022
Apr 2022
Page 93
Corporate Governance Topic
Risk and regulation
Approval of the 2022 Recovery Plan.
Training on, and approval of, the 2022 ILAAP.
Insight session on the Group Insurance function.
Approval of revisions to the Group’s principal risk categories.
Legal and regulatory training, which covered topics such as UK MAR and directors’ duties.
Meeting
May 2022
July 2022
July 2022
July 2022
July 2022
Annual review and approval of Anti-Bribery and Corruption and Whistleblowing Policies.
Sept 2022
Cyber security / operational resilience
Training / insight session on cyber security, presented by in-house experts.
Deep dive into operational resilience, delivered by specialists from the Operations, IT and
Cyber Security teams.
Approval of the Group’s operational resilience self-assessment.
Oct 2021
Oct 2021
Mar 2022
Insight session on the use of Cloud services for IT solutions, and risk and resilience implications.
Jul 2022
Corporate governance
Consideration of succession planning for the Board and senior management in conjunction with the
Nomination Committee.
Jan, Feb, July
and Sept 2022
Annual review of the Corporate Governance Policy Framework.
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 tax strategy and compliance, and approval of policy statement.
Annual review of the Group’s purpose, to confirm that it remained relevant and was fit for purpose for the
next twelve months. When making this assessment the Board considered the Code requirement that the
Group’s purpose should align with its culture.
Recommendation of the declaration of a final dividend of 18.9 pence per share in respect of the financial
year ended 30 September 2021 and of a share buy-back programme for 2022 (with £50 million announced
with the preliminary results in addition to the remaining £2.2 million from the 2021 buy-back).
Approval of the declaration of an interim dividend of 9.4 pence per share and an agreement to increase
the total amount of the share buy-back programme from £50 million to £75 million as part of the half year
consideration of the Group’s capital position.
Feb 2022
Mar 2022
Mar 2022
Mar 2022
Apr 2022
Dec 2021
Jun 2022
Sustainability
Deep dive into climate change and sustainability, and their impacts on the Group’s strategy and risk profile.
Oct 2021
Consideration of shareholder feedback following the full year results announcement.
Update on sustainability and the Group’s inaugural (2021) Responsible Business Report.
Training on the new FCA Consumer Duty, which included an overview of next steps for the Group in advance
of implementation of the Duty.
Dec 2021
Dec 2021
Jan 2022
Page 94
Topic
Sustainability
Meeting
Update on employee feedback through the Nomination Committee. This was obtained through surveys, the
People Forum and the IiP triennial reassessment, amongst other channels.
Feb and July
2022
Update on investor relations delivered by 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 asset management trends.
Insight session on the Group’s climate change exposures, strategy and commitments.
Annual review and approval of the Group’s Equality, Diversity and Inclusion Policy.
Consideration of shareholder feedback following the half year results announcement.
Jun 2022
Jun 2022
July 2022
July 2022
Approval of the Group’s Code of Conduct. The Code of Conduct is discussed further in section A6.
Sept 2022
Update on the Group’s Carbon Neutral Offsetting Proposal, which is discussed further in Section A6.4.
Sept 2022
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.
Board and committee attendance
Director
Robert D East
Fiona J Clutterbuck
Nigel S Terrington
Richard J Woodman
Tanvi P Davda
Peter A Hill
Alison C M Morris
Hugo R Tudor
Barbara A Ridpath
Graeme H Yorston
Board
1 (1)
9 (9)
10 (10)
10 (10)
1 (1)
10 (10)
10 (10)
10 (10)
10 (10)
10 (10)
Audit
Committee
Risk and Compliance
Committee
Remuneration
Committee
Nomination
Committee
-
-
-
-
-
5 (5)
5 (5)
5 (5)
5 (5)
-
0 (0)
5 (5)
-
-
0 (0)
5 (5)
5 (5)
5 (5)
5 (5)
5 (5)
1 (1)
4 (4)
-
-
1 (1)
-
5 (5)
5 (5)
-
5 (5)
1 (1)
2 (2)
-
-
-
-
-
3 (3)
3 (3)
3 (3)
Directors also attended an annual two-day strategy event, to enable more detailed discussion of the Group’s strategy 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 95
Corporate Governance B4. Governance Framework
This section describes how Corporate Governance operates within the Group, setting out:
B4.1
B4.2
B4.3
B4.4
B4.5
Board and committee
structure – the
forums through which
corporate governance
operates and how
they relate to
each other
Elements of
the governance
framework – how the
framework operates
Board and
stakeholders – how
the Board discharges
its duty to promote
the success of the
Group having regard to
stakeholder interests
Board evaluation and
development – how
the Board ensures
the framework is, and
will remain, fit
for purpose
Whistleblowing – how
concerns may be
raised and the action
that is taken
B4.1 Board and committee structures
Board leadership, group purpose and the Group 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
Model Risk
Committee
Executive
Performance Committee
(Performance ExCo)
Executive
Risk Committee
(ERC)
Transaction
Committee
Sustainability
Committee
Credit
Committee
Operational Risk
Committee
Asset & Liability
Committee
Customer and
Conduct Committee
Sanctioning
Committee
Pricing
Committee
Capital
Committee
Liquidity
Committee
Performance
oversight
Risk oversight
Paragon Board
Paragon Board Committee
Executive Committee
Executive Sub-Committee
Risk and Compliance Sub-Committee
Sub-Committee
Legal Ownership
Delegated Authority
Page 96
Summarised information on each of the board committees is set out below.
Committee
Chair
Minimum number of meetings
Further information
*F J Clutterbuck until 1 September 2022
Audit
Remuneration
Risk and Compliance
A C M Morris
4
H R Tudor
3
P A Hill
4
Nomination
R D East*
2
Section B6
Section B7
Section B8
Section B5
Members
R D East
Independent
non-executive
Chair*
F J Clutterbuck
Until 10 May 2018*
T P Davda
P A Hill
A C M Morris
H R Tudor
B A Ridpath
G H Yorston
Yes
Yes
Yes
Yes
Yes
Yes
Audit
Remuneration
Risk and
Compliance
Nomination
No
No
No
Yes
Yes
Yes
Yes
No
From 1 September 2022
From 1 September 2022
From 1 September 2022
Until 1 September 2022
Until 1 September 2022
Until 1 September 2022
From 1 September 2022
From 1 September 2022
No
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Yes
Yes
Yes
* Robert East was considered independent on appointment as Chair of the Board of Directors on 1 September 2022 and Fiona Clutterbuck was considered independent on her
appointment as Chair on 10 May 2018.
In addition to the memberships above, Hugo Tudor attends Model Risk Committee meetings, representing the
non-executive directors.
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.
The non-executive directors also met with senior managers from the IT and Change functions in February and August 2022 as part of
an ongoing programme of meetings to increase their 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 for 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. The ERC also supervises the evolution and further embedding of
the Group’s risk management framework and reviews and considers emerging risks facing the Group.
Sub-committees
Performance ExCo sub-committees
The Sustainability Committee 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, Chief People Officer 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 assets, where these are not large enough to require
consideration by the Board as a whole.
Page 97
Corporate Governance ERC sub-committees
Four principal 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. The governance structure also
includes further sub-committees which provide focus on specific risk elements, and report to the principal sub-committees.
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 and was accredited with Platinum Investors in People (‘IiP’) status in May 2022 (see Section A6.3).
The Board considered the Group’s culture as part of the annual review of the Group's purpose in April 2022.
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 ran an employee survey
in October 2021 and employees were also invited to complete an anonymous survey as part of the IiP triennial assessment in March
2022, which included specific questions on the Group’s culture. Results from these surveys, together with feedback received via the
People Forum, were reviewed by the Nomination Committee on behalf of the Board. The strong employee engagement and employee
attestations, including that the employees lived the Company’s values and behaviours, were noted.
Matters Reserved for the Board
The schedule of matters reserved for the Board is reviewed annually and made available on the Group website. The document details
key matters which are required to be or, in the interests of the Company and its stakeholders, should only be decided by the Board
as a whole. 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 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 overall effectiveness thereby promoting the
high standard of corporate governance to which the Company subscribes. The CEO leads the day-to-day executive management of
the business and provides regular 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 and made available on the Group’s website.
The Chair’s other business commitments are set out in the biographical details section (Section B3.1).
Role of independent non-executive directors
Throughout the year the independent non-executive directors have formed the majority of the Board, 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 non-executive directors who are also members of the Remuneration Committee
determine appropriate levels of remuneration for executive directors. Non-executive directors also take into account the views of
shareholders and other stakeholders, and certain 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.
During the year Hugo Tudor attended the MRC on behalf of the independent non-executive directors. On 27 October 2022, Graeme
Yorston was appointed as the Consumer Duty Board Champion, as part of the Group’s implementation of the new FCA Consumer
Duty rules. Non-executive directors also meet with the change and IT functions to increase their awareness of these areas and
provide counsel.
Page 98
All non-executive directors are appointed for fixed terms and 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 on 1 September 2022. The previous Chair was considered independent at her appointment, having
previously served as a non-executive director. The non-executive directors meet with the Chair, from time to time, without the
executive directors being present.
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.
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 and where contact through the normal channels has failed to resolve such concerns or
for which such contact is inappropriate.
During the year Hugo met with shareholders to discuss governance and remuneration matters and to address any queries or
concerns raised.
The Senior Independent Director also leads the appraisal of the Chair of the Board’s performance with the non-executive directors.
Conflicts of interest
The Board has agreed a policy for managing conflicts and a process to identify and, if appropriate, 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
disclose the nature and extent of any such commitments to the Board (in accordance with the Articles of Association) before entering
into any arrangements that might affect the time they can devote to the Group.
Executive directors would not normally be expected to hold any significant external directorships. However, where external
directorships are held or proposed to be held, this is discussed with the Chair and disclosed to the Company Secretary for
individual consideration.
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. The Board
approved the appointment of Ciara Murphy as Company Secretary effective from 1 October 2022, at its September meeting. The
former Company Secretary, Marius Van Niekerk, will continue to attend board meetings in his role as General Counsel.
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).
The Board is mindful of the FCA Listing Rule requirements in relation to gender and ethnic diversity at board and executive
management level, which are applicable to the Group from its financial year which began on 1 October 2022. These requirements are
and have been a particular area of focus for the Board and the Nomination Committee. Material steps have already been taken to
ensure that the Group will be fully compliant with these requirements for its year ending 30 September 2023 and thereafter.
Page 99
Corporate Governance Board evaluation and training
The Board, individual directors and the Board’s main committees are reviewed annually, and the Group’s policy is that externally
facilitated reviews should take place triennially, as required by the Code. The externally facilitated Board evaluation for 2022 has
been deferred until 2023, when the new Chair will have been in position for a reasonable period of time. This will enable a more valid,
meaningful and useful evaluation to be conducted. Further details 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 B3.3 and 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 to raise concerns anonymously. Information on whistleblowing is
provided in Section B4.5.
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
• Tax Strategy
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.
Page 100
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 2022, 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. 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, under which over forty 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 undertook a wide-ranging
consultation process, covering remuneration policy and other governance issues, with a
number of major shareholders and 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 designing the new Remuneration Policy
to be put to shareholders at the 2023 AGM
Increasing shareholder interaction is helping to frame the Group’s response to reporting and
targeting in relation to sustainability matters, in particular climate change risk
Diversification
At the AGM in March 2022, all resolutions were approved by shareholders, with over 90% of
votes cast in favour of each resolution
Specialisation
A fully hybrid AGM was held in 2022 to ensure that shareholders had the opportunity to
participate in the meeting in the event that travel restrictions were in effect
A total dividend for the year of 28.6 pence per share is proposed, and a further share
buy-back programme of up to £75.0 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 101
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 receives Customer Insight updates bi-annually
•
The Board was briefed on the new FCA Consumer Duty at one of its quarterly training
sessions and has been updated on progress throughout the year
• Customer metrics are a key element of the Performance Share Plan (‘PSP’)
Specialisation
Sustainability
Outcome
•
•
•
•
Customer feedback on key product lines, as measured by customer satisfaction surveys, has
remained strong
The Board approved the implementation plan for the new FCA Consumer Duty and a non-
executive director was recently appointed as Consumer Duty Champion
Diversification
Greater understanding of customers and their priorities is used to refine product offerings,
documentation and processes
All employees received training on how to identify and support customers in vulnerable
circumstances, with customer-facing employees receiving additional in-depth training
• Complaint levels remain low by industry standards
Further information on the Group’s relationship with its customers is set out in Section A6.2.
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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.
How we engage and / or monitor
•
•
All employees were invited to complete an anonymous survey as part of the Investor in
People (‘IiP’) triennial assessment, which included specific questions on the Group’s culture
The Chief People Officer updates the Board and ExCo on employee feedback from surveys
and from the People Forum, as well as other metrics
Sustainability
• The Chair and 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
The Group’s EDI network is sponsored by a member of ExCo and, throughout the year,
members of the Board and ExCo have attended employee listening circles
The Nomination Committee receives six-monthly updates on succession planning and
feedback from the EDI network from the Chief People Officer
• People metrics are a key element of the PSP
Outcome
• The Group was reaccredited as an Investor in People and achieved Platinum IiP status
• Adoption of a permanent hybrid working model following several successful pilots
•
•
•
Feedback from the People Forum and regular updates from the Chief People Officer enable
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
The Code of Conduct, which articulates the Group’s culture, purpose and values, was rolled
out to 100% of employees
• 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, can be found in Section A6.3.
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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
A revised framework to identify Material Risk Takers (‘MRTs’) and process their remuneration
packages was embedded during the financial year following the Bank becoming a Level 2 firm
for remuneration purposes on 1 October 2021
Sustainability
•
Dialogue maintained with HMRC, with the CFO designated as Senior Accounting Officer,
directly responsible for the Group’s tax policies
• The risk element of the PSP includes an assessment of any material regulatory breaches
Outcome
•
•
All changes to the Board and Senior Management Functions are approved by the regulator,
where required
A Risk Adjustment Review Group has been established to identify instances of potential risk
adjustment for MRTs and others on a more structured and formal basis than had previously
been the case
Further information on the Group’s tax policies is set out in Section A6.5.
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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
• All employees are given one day per year to volunteer for specific initiatives
Outcome
•
In the twelve months ended 31 December 2021 our employees had raised nearly £43,000
for the Alzheimer’s Society and during the nine months ended 30 September 2022 our
employees raised over £31,000 for Mind
• The Group’s Charity Committee is sponsored by a member of ExCo
• Employees were supported to take part in a range of volunteering activities
•
286 employee volunteering days were used to support specific initiatives in our
local communities
Further information on the Group’s community involvement is set out in Section A6.5.
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Corporate Governance 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 receives updates on the potential risks and strategic impacts of climate change
• The Group has joined Bankers for Net Zero
• The CFO has been designated as the responsible director for climate change matters
• The Group’s ICAAP includes a climate change scenario analysis module
• The Group complies with all applicable laws and regulations relating to the environment
Outcome
•
•
The Group offers a range of green mortgages which encourage landlords to invest in energy
efficient properties
Loans to finance battery electric vehicles, including light commercial vehicles, are offered by
the Group’s motor finance business
• Southampton office moved to a more energy-efficient location
•
•
•
•
The Board has objectives in place against current energy performance to further
reduce consumption
Operational emissions for the year have been offset with purchased carbon credits certified
by Gold Standard or VCS
Environmental / climate change targets are considered as part of the new
Remuneration Policy
The Group publishes an annual sustainability report 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
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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.
Sustainability
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
The Group has a Supplier Code of Conduct which sets out our overall approach to supplier
engagement and corporate responsibility
A supplier satisfaction survey was undertaken to seek the views of third party suppliers
on their experience with the Group, which will be used to identify and action any areas
for improvement
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.
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Corporate Governance Shareholders
The Board encourages communication with the Company’s institutional and private investors. All shareholders have at least twenty
working days’ notice of the AGM, at which the directors and committee chairs are available for questions. The AGM is normally held
in London during business hours and provides an opportunity for directors to report to investors on the Group’s activities, to answer
their questions and receive their views. At all 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 2023 AGM will take place at 9am on 1 March 2023 at the offices of UBS AG London Branch, 5 Broadgate, London, EC2M 2QS.
The CEO and CFO have a full programme of meetings with institutional investors and during the year ended 30 September 2022,
meetings were held with investors from the UK, Europe and North America.
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.
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.
Invitations to discuss the new remuneration policy were also extended to the Company’s largest shareholders, who collectively
represent over 79% of the Company’s total voting rights, and nearly three-quarters of these shareholders, representing 60% of the
Company’s total voting rights, responded and shared their views.
The Board believes that engagement with shareholders is an important part of both the governance framework of the Group and the
stewardship aims of investors, and investors’ comments from all of these interactions are communicated to the Board who 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 External Relations Director updates each meeting of the Performance ExCo on changes in the Group’s shareholder base and on
shareholder interactions.
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B4.4 Board evaluation and development
Board evaluation
The effectiveness of the Board, individual directors and the Board’s main committees is ordinarily reviewed annually. During the
year, the Board monitored progress on the recommendations from the internal review carried out in 2021, all of which are now fully
implemented. Given the change of Board Chair in September, a decision was made to defer the externally facilitated evaluation until
2023 given it would be more meaningful for this to take place once the new Chair has been in the role for a reasonable period of time.
The outcome of this review will be reported in the 2023 Annual Report and Accounts.
Notwithstanding the postponement of the 2022 evaluation, elements of board performance were reviewed. These included
consideration by the Nomination Committee of the time required from, and independence of, the non-executive directors, the
continuing appropriateness of the Board Skills Matrix, as well as the proposed re-election of directors at the 2023 AGM.
2021 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, with all actions completed during the year. Progress highlights are set out in the table:
Issue
Board
Length of papers
Shorten papers, where possible.
Board skills
The need to address gaps in BAME
representation / ethnic diversity and
PLC experience.
Risk
Recommendation / action
The use of the resources section of the board portal was increased,
where appropriate, and discussions were held with other presenters with
a view to making papers more concise.
Board and Nomination Committee succession planning deliberations
actively considered the need for BAME representation / ethnic diversity
on the Board. The level of PLC experience on the Board was enhanced
during the year via additional board training and an additional non-
executive director was appointed.
Wider horizon scanning to be undertaken.
The CRO and CEO regularly bring emerging risk updates to the Risk and
Compliance Committee and Board for discussion and 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,
with Audit Committee meeting attendance by additional finance team
members to be arranged when appropriate.
More work on combined assurance
is required.
The Risk and Compliance Committee monitored progress on combined
assurance work during the year 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 continued to keep its membership
and effectiveness under review.
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Corporate Governance
The Nomination Committee evaluation of non-executive directors considered: whether each director had sufficient time to devote to
their board duties; the independence of non-executive directors; and whether each director should be put forward for re-election at
the 2023 AGM, with recommendations then put to the Board for deliberation.
A review of the performance of the executive directors took place at the Remuneration Committee meeting in September 2022 that
considered remuneration packages for 2022/23.
At the 2023 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 Chief People Officer 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 Robert East, who was appointed Chair on 1 September 2022, has had meetings with senior employees from areas
across the organisation to brief him on the work of their respective areas and the particular issues within those areas most relevant to
his position as Chair of the Board.
Further, Tanvi Davda, who was appointed on 1 September 2022, began her induction programme and met with stakeholders across
the business.
Development
Further to the 2021 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 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 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, anti money laundering, the ERMF, the new FCA Consumer Duty,
cyber security, operational resilience and sustainability. More detail is available in section B3.3.
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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.
The Chair of the Audit Committee, an independent non-executive director, is the Group’s designated Whistleblowing Champion. She
is responsible for overseeing the integrity, independence and effectiveness of the Whistleblowing policy.
Management oversight of the process is provided by the Whistleblowing Group, which ensures that disclosures are properly
assessed, whistleblowers’ identities are protected, and all cases are handled in an appropriate, fair and consistent manner. The
Whistleblowing Group comprises the Chief People Officer, Chief Risk Officer, Internal Audit Director, Conduct and Compliance
Director and the Whistleblowing Champion.
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 Group to discuss the matter further.
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. There were also internal publicity campaigns promoting the whistleblowing procedures.
During the year ended 30 September 2022, there were two instances of whistleblowing which resulted in a requirement for full
consideration and investigation by the Whistleblowing Group (2021: none). Both cases have been fully investigated and concluded
with no further action required.
Procedures whereby customers who are dissatisfied with the Group’s response to any complaint about their treatment may seek
recourse to an external party are discussed in Section A6.2.
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Corporate Governance B5. Nomination Committee
The importance of employee voice has
underpinned the transition to hybrid working,
and continues to do so, as growing experience
of different ways of working refines our
approach, to provide flexibility and balance
for employees whilst supporting the Group’s
customers in the best way possible.
Robert East, Chair of the Board
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 the Committee has continued
to fulfil its duties with a full programme of activity. The Chair
of the Board serves concurrently as Chair of the Nomination
Committee, and I was pleased to take up that position in
September 2022.
During the year the Committee has overseen the appointment
of an additional non-executive director and my appointment
as the Chair of the Board. The primary aim of the Committee
in both processes was to ensure each person appointed had
the requisite skills and knowledge for their role, benchmarked
against the board skills matrix, bringing an increased diversity of
experience to complement the existing skillset of the Board.
Fiona Clutterbuck had served as Chair of the Board and of this
Committee since May 2018. However, given her tenure on the
Board reached nine years in September 2021 the Nomination
Committee, led by the Senior Independent Director, oversaw the
process to appoint a new Chair. I was delighted to take up the
role of Chair having completed an orderly handover process with
Fiona, and I look forward to working with the management team
to build on the successes of the Group.
Tanvi Davda was appointed to the Board as a non-executive
director from September 2022. Tanvi has exemplary finance,
advisory and regulatory experience, and her skillset will benefit
the Group considerably. She combines a history of working in
large global corporates with the experience of co-founding a
successful wealth management business. During her executive
career, which she retired from in 2021, Tanvi undertook a number
of non-executive director roles in a variety of organisations. The
Committee supports the objectives of the Parker Review and
Tanvi’s appointment means the Group has met its Parker Review
requirements ahead of the 2024 deadline.
The Committee has noted the new FCA Listing Rule requirements
in relation to gender and ethnic diversity at board and executive
management level, which apply for financial years beginning on
or after 1 April 2022. It will be a key priority and area of focus to
ensure these requirements are met by 30 September 2023, the
end of the Group’s first financial year for which they apply.
The remit of the Committee also covers people-related
sustainability issues. There have been noteworthy contributions
to the Group’s diversity agenda in the period, which has seen the
Group continue to meet all its Women in Finance Charter targets.
The Group became a founding partner of Progress Together,
an initiative to increase socio-economic diversity at senior
levels in the financial services sector, led by the City of London
Corporation. I would like to congratulate Richard Rowntree, the
Group’s executive sponsor for equality, diversity and inclusion,
and his colleagues across the industry for their work in getting
this important project off the ground.
The importance of employee voice has underpinned the
transition to hybrid working, and continues to do so, as growing
experience of different ways of working refines our approach, to
provide flexibility and balance for employees whilst supporting
the Group’s customers in the best way possible.
I look forward to the contribution these initiatives will continue to
make to the Group’s strategy and culture in the future.
Overall, I believe the Committee has enjoyed a year of positive
achievement and fully satisfied its mandate from the Board.
Robert East
Chair of the Board and the Nomination Committee
6 December 2022
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Corporate Governance B5.2 Operation 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 in senior management
and overseeing the development of a diverse pipeline for
succession to such roles
Overseeing the Group’s initiatives on the promotion of
diversity in the workforce, with a particular focus on its
participation in external programmes, such as the
Women in Finance Charter, and reporting including
gender paygap 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 recommended the appointment
of a new Board Chair, Robert East, to succeed Fiona Clutterbuck,
who stepped down from the Board at the beginning of September
2022. This was approved by the Board following regulatory
approval. Robert followed a structured induction and handover
prior to starting his role and his induction will continue during his
first year of appointment. Robert brings with him over 40 years’
experience in UK financial services, gained during his executive
and non-executive career. He has held positions as Chair of
Vanquis Bank, Skipton Building Society and Hampshire Trust
Bank, where he was also Chair of the Risk Committee.
The Committee also recommended the appointment of an
additional non-executive director, Tanvi Davda, who joined the
Board at the beginning of September 2022. Tanvi’s executive
career was spent in consulting, capital markets and wealth
management. She was Managing Director for Barclays Wealth
and Investment Management, having previously worked for
RBS/ABN Amro, IBM UK and Credit Suisse. She went on to
co-found Saranac Partners, a wealth management business,
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where she served as Managing Partner. Tanvi’s appointment
complements the existing skillset of the Board, broadly
maintains the balance of gender diversity on the Board and
meets the Parker Review requirements ahead of the 2024
deadline. Tanvi also joined the Risk and Compliance and
Remuneration Committees on her appointment.
The search process for the new Chair was led by Hugo Tudor,
Senior Independent Director. The search process for the
additional non-executive director, was led by the previous Chair,
Fiona Clutterbuck, with input from Robert East. Both processes
were supported by Anne Barnett, Chief People Officer, and
undertaken in conjunction with Jamie Risso-Gill from Per Ardua
Associates Limited. Per Ardua Associates do not have any
connection with the Group or any of its directors.
For both appointments, the Committee reviewed and agreed
the role profile and a shortlist of candidates. A series of
interviews with members of the Board was undertaken. For the
Chair’s appointment, interviews took place with non-executive
directors only, although the final shortlisted candidates spent
time with the then Chair and executive directors to ensure a
strong cultural fit for the Group was evident, and to support the
candidates’ own due diligence processes.
In initiating these two appointments the Committee also
considered the consequent increase in the size of the Board
from eight to nine members. This was considered appropriate in
view of the increasing size of the Group and of growing regulatory
expectations which accompany this. It also enables the Board
to maintain a female representation above 33% in support of the
original FTSE Woman Leaders target.
The Committee has noted that new Listing Rule requirements
in relation to gender and ethnic diversity at board and executive
management levels will apply to the Group from its financial
year commencing 1 October 2022, and will be working towards
meeting those requirements in the coming year.
In November 2023, Hugo Tudor will reach his nine-year tenure on
the Board. The Committee will begin the process to oversee the
appointment of his successor as a non-executive director, Senior
Independent Director and Chair of the Remuneration Committee
in the coming months.
As it has done for a number of years, the Committee considered
the appropriateness of the annual 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 Committees
were reviewed during the financial year. The tenure of non-executive
directors is monitored by the Committee. Emergency cover is in
place for 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. During the
period, this approach was extended to the senior management
teams across each business area, providing further depth of
development planning, which has been particularly beneficial in
light of the tightening of the labour market seen across financial
services this year.
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.
The Committee was pleased with the continuing development
of the Group’s Equality, Diversity and Inclusion (‘EDI’) Network
and of the broadening of the EDI agenda beyond gender and
ethnicity. In particular, the Group’s part in the launch of the
Progress Together initiative on socio-economic diversity in
senior roles in UK financial services was a notable achievement.
The Committee is pleased that 60% of employees provided
diversity data for analysis at the beginning of the year and
this increased to 73.1% by 30 September 2022. This supports
the Group’s culture and commitment to EDI matters and has
helped shape EDI activities, including focused communication
campaigns to raise awareness and celebrate differences, and to
provide more development opportunities for under-represented
groups. The Committee has monitored these activities with
interest and is pleased with the Group’s progress in this area.
More details of the activities delivered with the involvement of
the EDI Network, 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. However, the Committee was pleased
to note the improvements in the headline rates achieved in
the year, which are discussed further in section A6.3 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 and ethnic balance of those
in senior management and their direct reports is given in Section
A6.3. 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.
Additionally, non-executive directors have attended
People Forum meetings during the year to discuss topics
including executive pay and reward; pay and reward for the
wider workforce; hybrid working practices and the Group’s
sustainability goals. These meetings provide employees with
an opportunity to ask questions of board members and provide
direct feedback. These meetings form a regular feature of the
board calendar.
In February 2022, the Group received its triennial Investors
in People (‘IiP’) external assessment. Part of the assessment
included an anonymised employee survey in which 73% of
employees shared their views (2019: 64%). The overall IiP
assessment result placed the Group first in the finance and
insurance sector for firms with 1,000 or more employees, and
third for all firms with between 250 and 4,999 employees. This
resulted in the Group being awarded Platinum Status, which has
been achieved by only 5% of UK companies assessed. The full
IiP report was shared with the Committee and the strength of
workforce engagement was noted as a very positive achievement.
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
September 2022 meeting following the outputs from the Group’s
strategy event in June 2022. This was reviewed and subsequently
approved by the Board in October 2022.
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 macro
environment affecting the retail banking environment
• The Group’s key lending markets
• Understanding capital requirements and liquidity models
•
•
•
Considering the application of digital technology in a financial
services environment
Customer insight, marketing and communications in the
specialist lending sector
Sustainability matters including financed, operational and
supply chain environmental impacts, social responsibility and
governance standards.
The board skills matrix is reviewed annually by the Committee
and forms the basis for continuing professional development
and future succession plan requirements. The application of the
skills matrix in developing board training in the year is described
in section B4.4.
Diversity
The Group recognises the importance of diversity, including
gender and ethnic 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 pleased to have
maintained a consistent female representation of 38.1% at board
and senior management level (2021: 38.7%), exceeding the original
Hampton-Alexander Review targets and the Group is aligned to
the ongoing objectives of the FTSE Women Leaders Review.
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.
On 1 October 2021, the Group met this target, and all its other
Women in Finance targets, ahead of the deadline and is proud
to have maintained this position throughout the year. 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, set out in
section A6.3, helping to build a platform for the next phase of the
initiative. The Group is committed to increasing the number of
women in senior positions, and has set a new headline Woman
in Finance target of 40% female representation at board and
senior management level by 30 September 2025. Other, broader,
targets are in the process of development.
Page 115
Corporate Governance B6. Audit Committee
The principal accounting challenge for the
Group in the period has again been the
estimation of expected credit losses under
IFRS 9, one shared with many other businesses
in the banking sector... and the Committee’s
duty to rigorously challenge those judgements
is fundamental.
Alison Morris, Chair of the Audit Committee
B6.1 Statement by the Chair of the Audit Committee
KPMG LLP have now audited the last seven sets of the Group’s
accounts. Simon Ryder, the engagement partner, is to retire from
KPMG and this will be his last year in that position. I would like
to thank Simon, on behalf of the Committee, for his direction
of the engagement and for his communication and challenge
over his two years in office. 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.
In the coming financial year ending 30 September 2023, the
Committee’s main priorities will include:
•
•
•
•
•
•
Continuing to monitor the potential impacts of the developing
economic situation in the UK and more widely on the Group’s
accounting, particularly accounting for expected loss
Considering the continuing need for and appropriate level
of judgemental 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,
regulatory guidance and developments in the Group’s
businesses
Analysing regulatory developments in accounting, reporting
and auditing, particularly the progress of the BEIS proposals,
and ensuring the Group is properly positioned to respond
Supervising preparatory work for the Group’s next audit
tender, which must be completed in time for audit for the
financial year ending 30 September 2026
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 in what has turned out to be a much
more challenging year than might have been hoped for. I would
also like to note our appreciation for the work done by people
across the business to support us in our deliberations and to
ensure that this report properly reflects the Group and the story
of its year.
I commend the Annual 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 2023.
Alison Morris
Chair of the Audit Committee
6 December 2022
Dear Shareholder
The economic and political environment in which the Group
operated in the year has developed in ways which no one
could have expected and the prospects for the future remain
changeable and uncertain. This once more results in my letter
to you focussing on the level of challenge this has posed for the
Committee, as seems to have become customary in recent years.
While the impacts of the Covid pandemic have begun to recede,
the long term effects, especially for SME businesses are still to
play out fully. The geopolitical impacts of Russia’s intervention in
Ukraine have formed a backdrop to a growing cost of living crisis
in the UK during the year, and responsibility for the direction of
UK economic policy has changed hands far more frequently than
has normally been the case.
All these factors present new questions to the Committee as
it considers the appropriateness of the various accounting
judgements required to compile these accounts, assess whether
they provide the information users require and, more widely,
evaluate the continuing strength of the Group’s control systems.
The principal accounting challenge for the Group in the period
has again been the estimation of expected credit losses under
IFRS 9, one shared with many other businesses in the banking
sector. In a situation where expected future conditions have little
direct precedent in recent experience, with interest rates and
inflation rising to levels, and at speeds, not seen in many years,
models based on historic data have inherent limitations. In these
circumstances the use of management judgement to ensure
that loss expectations reflected in the accounts are appropriate
is essential, and the Committee’s duty to rigorously challenge
those judgements is fundamental to ensuring the accounts fairly
represent the position of the business.
This is a duty which the Committee takes very seriously, and
which has been the subject of much thought and discussion. We
have considered a great deal of both qualitative and quantitative
information from across the Group and engaged with financial
and operational management ,and with KPMG, the external
auditor, to support our conclusion that the numbers presented
are appropriate.
During the year the Committee was pleased to receive the
results of a review of the Group’s accounts for the year ended
30 September 2021 carried out by the Corporate Reporting
Review team of the FRC. No substantive matters were raised,
which was particularly pleasing given that these accounts
described the impacts of the Covid pandemic on the Group,
and the issues arising from it.
For the current year’s reporting, the Committee considered
particularly the development of reporting around climate change,
with a new Listing Rule coming into force for these accounts, and
the presentation of information about expected credit losses,
in light of both the developing situation and the most recent
regulatory guidance.
The progress of the BEIS review into auditing, reporting and
governance continued to be monitored by the Committee. These
proposals have not developed as quickly as might have been
expected this time last year, and it is disappointing that more
clarity on final expectations and timescales is yet to be provided.
More information is due to be published in the new financial
year and I will hopefully be able to provide you with further
information on likely impacts on the Group in next year’s Audit
Committee reporting.
The internal audit function continued to develop with the Group’s
businesses and systems, and I value the insight which it brings
to the Committee’s consideration of the effectiveness of the
Group’s control and governance systems.
Page 117
Corporate Governance B6.2 Operations of the
Committee
The Audit Committee currently comprises four independent
non-executive directors of the Company whose relevant
experience is set out in Section B3. All members served
throughout the year.
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 2022 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, Sarah Mayne, 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 2022, 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
•
•
•
•
•
•
Considering the final report of the FRC Audit Quality Review
(‘AQR’) of KPMG’s audit of the Group’s accounts for the year
ended 30 September 2020
Considering the results of the review by the FRC Corporate
Reporting Review team of the Annual Report and Accounts of
the Group for the year ended 30 September 2021
Consideration of the Group’s readiness to address other
forthcoming accounting and reporting changes which will
affect it
Approval of the Group’s Internal Audit Plan ('IAP') and
monitoring progress against it
Assessing the adequacy of the resources available to the
Internal Audit function
Receiving and considering reports on 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 management are appropriate.
In evaluating the Group’s financial statements for the year ended
30 September 2022 the Committee particularly considered:
•
•
•
•
•
•
The levels of impairment provision against loan assets under
IFRS 9 and particularly the interlinked uncertainties resulting
from increased living costs, a rising interest rate environment,
the impact on the economy of the conflict in Ukraine and the
long term damage to businesses of the Covid pandemic
The calculation of interest income under the Effective
Interest Rate (‘EIR’) method for both internally originated and
purchased loan assets
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 surplus 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
Page 118
In each case the Committee considered whether these matters were clearly and sufficiently disclosed in the accounts with
appropriate sensitivities shown for all significant estimates.
The Committee also considered whether this Annual Report, taken as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group’s performance, business model and strategy.
In each of these areas the Committee was provided with papers prepared by management and reviewed by the external auditor
discussing the position shown in the accounts, the underlying market conditions and assumptions and the methodology adopted
for any calculations. The papers also detailed any changes in approach from previous periods. These were reviewed in detail and
discussed with the relevant group employees and the results of this work were considered, together with the results of testing by the
external auditor. There were no material or significant disagreements between the management and the external auditor.
Particular matters which the Committee focussed on in each of these areas were:
Matter
Particular areas of focus
Loan impairment
IFRS 9 requires that companies provide for 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.
The current economic environment, with rising UK inflation and interest rates, and a developing cost
of living crisis, makes the consideration of ECL particularly complex. The Group’s ECL models are
based on observed data from the recent low rate, low inflation environment and therefore may not
be as reliable outside that economic framework. The longer-term impacts of the Covid pandemic
on the UK economy, and on the Group’s SME customers, also still remain uncertain. These factors
increase the potential requirement for management judgement in arriving at final ECL estimates and
hence the level of scrutiny required of the Committee.
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 and the weightings applied to each scenario
• The appropriateness of the calculated provisions in light of the economy more generally
•
The appropriateness of judgemental 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.
The Committee also considered other intelligence on the credit prospects of the Group’s customers
available through wider management information to ensure that the provisioning approach was
consistent with all known data.
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 67a to the accounts, the impairment
charge for the year and the movements in provision for impairment are shown in notes 19 to 24.
The Group’s exposure to credit risk is discussed in note 61.
Page 119
Corporate Governance 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, particularly at
the end of a fixed rate period.
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 were an area of focus, particularly as
the earliest substantial tranches of five-year fixed rate products reached maturity.
Further information on these estimates can be found in note 67b 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.
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 derivation of the discounting rate used was also an area of focus.
The potential impairment of goodwill is discussed in notes 67c and 30.
Defined benefit
pension obligations
The surplus 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 surplus, the basis of valuation and the assumptions underlying
it can be found in note 58 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 levels of potential variability in the forecasting.
A fuller discussion of the directors’ consideration of the viability statement is set out in Section A5.
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 increasing inflation and bank rates,
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.
Page 120
Matter
Particular areas of focus
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 evaluations prepared by the Risk and Internal Audit functions, 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 all significant judgement areas the
Committee considered whether the disclosures made were consistent with its understanding of
those matters and provided sufficient and appropriate information to a user of the accounts.
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 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 2022 to the Board for approval.
The Committee’s consideration of the financial statements for the year ended 30 September 2021, which took place in the year under
review, is discussed in the Audit Committee report for that year.
The PRA Rulebook and, previously 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 annual and half-yearly
Pillar 3 reports, considering whether they included all material matters required by the PRA Rulebook or the CRR and its supporting
requirements, as appropriate, and whether it formed a fair representation of these matters.
During the year the Committee considered the results of a review of the annual report and accounts for the year ended
30 September 2021 carried out by the Corporate Reporting Review team of the FRC, in accordance with Part 2 of the FRC Corporate
Reporting Review Operating Procedures. Such reviews are based solely on the annual report and accounts and do not benefit from
either a detailed knowledge of the business or an understanding of the underlying transactions entered into. They are, however,
conducted by staff of the FRC who have an understanding of the relevant legal and accounting framework.
The Committee was pleased to note that the regulator raised no questions or queries requiring a response from the Group, and
considered the other observations made by the FRC as part of the preparation of these financial statements.
Page 121
Corporate Governance B6.4 External Auditor
The Committee is responsible for assessing the effectiveness
of the external audit process, for monitoring the independence
and objectivity of the external auditor and for making
recommendations to the Board in relation to the appointment
and remuneration of external auditors. The Committee is also
responsible for developing and implementing the Group’s policy
on the provision of non-audit services by the external auditor,
which was reviewed in the year.
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, including independence requirements, the Committee
has not identified any factors which might restrict its choice of
external auditor.
AQR Review
During the year the FRC AQR team concluded 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 had been briefed by the KPMG team on the
progress of this review as it progressed, and the final report was
received during the period. 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 2022 is the seventh reported on by KPMG.
This is the second year for which Simon Ryder has served as
engagement partner. Simon has informed the committee of his
intention to step down after the completion of the current audit
and a new engagement partner will take over for the year ending
30 September 2023. It is the policy of both the Group and the
external auditor that no engagement partner should serve for
more than 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 sixth 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.
Audit effectiveness
The Committee has considered the effectiveness of the external
audit for the year ended 30 September 2022 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 2021
audit, undertaken at the time of approval of the Group’s 2021
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 published 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 2022.
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 2023
should be proposed at the forthcoming AGM.
Page 122
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
2022
£000
38
2,677
-
2021
£000
32
2,780
-
2,715
2,812
The Group maintains relationships with all the major accounting
firms and considers a variety of providers for these types 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 10 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 assurance services expected to be provided by
external auditors on central bank funding transactions
Audit fees of Group entities for the year have increased by 15.7%
to £2,102,000 (2021: £1,817,000). This was principally a result of
general inflation in professional services fees, particularly for
more specialist resource.
The EU Audit Regulation (which remains directly applicable in
the UK under Brexit legislation 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 2022 should be no more than 70% of the average
of the audit fees for 2019, 2020 and 2021. As this average was
£1,688,000, the non-audit fee cap for the year was £1,182,000.
Fees paid to KPMG, the Group’s external auditor, for non-audit
services, as defined by the Regulation, during the year were
£213,000 (2021: £210,000), well within the cap. All these
fees were for services related to the Group’s audit, as
described above.
Page 123
Corporate Governance Significant findings of internal audit reports and management’s
responses are discussed at meetings of the Committee
throughout the year. Overdue actions graded medium or above
are reviewed and challenged at both the Committee and the Risk
and Compliance Committee. The Internal Audit Director also
provides an update on key risk themes emerging from Internal
Audit reviews to the Risk and Compliance Committee and is an
attendee at all executive risk sub-committees. (see section B8.2)
On an annual basis, Internal Audit reports to the Committee on
their assessment of the effectiveness of the operation of risk
management and control arrangements, including details of
themes raised within audit reports. The last report in November
2022 concluded that these arrangements were operating
effectively (Section B6.3). The Committee also considered and
concluded upon the independence of the Internal Audit function
at this time.
Resources
The Internal Audit Director provides the Committee with regular
assessments of the skills required to conduct the IAP 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, alongside review
and approval of the IAP, formally confirms that it is satisfied that
these resources are appropriate.
During the year, several technical and specialist reviews have
been co-sourced under agreements with third-party firms 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.
Effectiveness
The Committee assesses the effectiveness of the internal audit
function by reference to standards published by the Chartered
Institute of Internal Auditors on an annual basis. In May 2022,
the Committee considered the output of an internally produced
effectiveness review which was supported by feedback from
stakeholders across the Group; this concluded that the function
was operating effectively in accordance with required standards.
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 and, as such, an EQA
review will take place during the year ending 30 September 2023.
B6.5 Internal Audit
The Committee is responsible for considering and approving the
remit of the internal audit function, approving the internal audit
plan, and ensuring it has adequate resources and appropriate
access to information to enable it to perform its function
effectively and in accordance with the relevant professional
standards. It also receives the function’s 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.
Objective
The purpose of Internal Audit is to provide independent
assurance to the Group’s Board and Audit Committee that the
governance, risk management and control systems within the
Group are adequate, effective and functioning properly, forming
the third line of defence in the risk management model
(Section B8). The scope and responsibilities of Internal Audit are
set out in the Internal Audit Charter, which is reviewed annually
by the committee, most recently in May 2022. A copy of the
current Charter is available in the Governance section of the
Group’s website.
Internal Audit maintains a good working relationship with the
external audit team, meeting regularly throughout the year,
independently of other Group management.
The function is led by an Internal Audit Director, Sarah Mayne,
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
In September 2022, the Committee considered and approved
the annual Internal Audit Plan (‘IAP’) for the year ending
30 September 2023, which is based on an assessment of the
key risks faced by the Group. The IAP is produced on a six
(month) plus six basis, to facilitate its revision during the year,
based on the ongoing assessment of key risks or in response to
the requirements of the Group. The IAP for the current financial
year ended 30 September 2022 was approved before the
beginning of the year, with the plus six review for the 21/22 plan
year completed by the Committee in March 2022, when a small
number of changes were approved.
Progress in respect of the plan is monitored throughout the
year with the Internal Audit Director providing an update to
each meeting of the Committee. A private session is also held
between the Internal Audit Director and the Committee without
management present at least twice a year.
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 2023, 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. During the
year the Board has received reports covering themes including:
prudential and credit risk management; the operation of lending
and customer servicing areas; data, IT and operational resilience;
as well as assurance over the management of the Group’s
change portfolio.
Page 124
Page 125
Corporate Governance The outstanding performance and results for
the year are reflected in the annual variable
remuneration outcomes of the executive
directors and other employees.
Hugo Tudor, Chair of the Remuneration Committee
B7. Remuneration
Committee
This report covers the activities of the Remuneration Committee for the year ended 30 September 2022 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), the Annual Report on Remuneration (B7.2)
and the full Remuneration Policy (B7.3) proposed to apply from the close of the Annual General Meeting to be held on
1 March 2023.
B7.1 Statement by the
Chair of the Remuneration
Committee
The information provided in this section is not subject to audit
Dear Shareholder
This year I undertook one of the most important and challenging
parts of the role of Remuneration Committee Chair, that of
discussing proposed changes to the Directors’ Remuneration
Policy (the ‘Policy’) with shareholders and shareholder advisory
bodies to ensure that the Policy remains effective and rewarding
for executive directors whilst stretching, risk appropriate and
aligned to the Group’s strategy and to shareholder interests.
The Group’s performance has been exceptionally strong for
the year ended 30 September 2022 and this is reflected in
the outturns for the executive directors. All of these themes
are expanded on further in this report as a whole and in the
remainder of this letter.
Business performance
The Group’s performance for the year has built on the strong
outturn for the prior year, delivering record profits, record
volumes, record NIM and a cost:income ratio below 40%. At the
same time the Group has maintained a cautious approach to
assessing expected credit losses that reflects the uncertainties
stemming from an escalating cost of living crisis on the wider
economy. In this environment, the Group’s approach to
managing interest rate risk has supported both current and
future NIM, the latter demonstrated by the £191.9 million fair
value credit reflected in the profit and loss account. This item
reverses over time but demonstrates the value of the approach
to pipeline hedging, with the full benefit reflecting the costs that
would otherwise have been borne by the Group over the coming
years if hedging only took place at loan completion.
Detailed analysis and commentary on performance is contained
throughout this report and particularly in the Chair of the Board’s
and the Chief Executive’s reports in Sections A1 and A3. The
outstanding performance and results for the year are 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 had been enhanced during the year, with the
CET1 ratio at 16.3% after growing the net loan book by 6% and
reflecting the £75 million share buy-back in the period. It also
noted the continuing development of the Group and the ongoing
delivery of its multi-business line digitalisation strategy.
Variable pay earned in the year
Both executive directors are being awarded an annual bonus of
96% of total opportunity. The balanced scorecard assessment
shown later in this report records and expands on the
outstanding performance in all areas. When determining the
annual bonus the Committee noted the outstanding financial
performance for the year with 100% outcome for both financial
metrics. This strong performance was also reflected in the
increased bonus awards to other employees, as can be seen
in the ‘Comparison of annual change in directors’ pay with the
average employee’ table in Section B7.2.
The Performance Share Plan (‘PSP’) awards that are due to vest
in December 2022 will vest at 93.13%. This also reflects strong
performance over the period including TSR performance above
the upper quartile of the peer group and EPS materially above
the threshold for maximum vesting, being up 161.6% across the
three years on the statutory basis and 36.8% on an underlying
basis. This year also saw the first vesting with non-financial
metrics relating to people and customer and despite the
challenges of the early part of the performance period caused
by the pandemic, the Committee was pleased to see a strong
performance against both of these conditions.
Windfall gains
Shareholders will recall that these PSP awards were granted in
July 2020. The Committee made a commitment to review the
extent to which any adjustment should be made on vesting
to reflect any windfall gains. The Committee considered this
and determined that participants have not benefited from
windfall gains and that therefore, no adjustment is required.
In reaching this decision the Committee considered a number
of factors including (i) the share price used for determining
the grant and subsequent share price performance over the
performance period, (ii) the degree of vesting, and (iii) the wider
shareholder experience. In particular the Committee noted the
outperformance of the share price against the comparator group
which demonstrates that the uplift in the share price was specific
to the Company’s performance.
Policy and incentive metrics review
This year, as noted above, the Committee undertook its
triennial review of the Policy, the current version of which was
approved by shareholders in 2020. This Policy was designed to
meet the regulatory requirements of a Level 2 bank, which the
Bank transitioned to on 1 October 2021. In renewing the Policy,
the Committee has sought to address both specific feedback
from and the evolving expectations of shareholders and
other stakeholders.
The primary objective has been to develop a policy that is
simpler, more transparent and fit for the long term, while aligning
with shareholder expectations. We have simplified our fixed
pay structure, ensuring that a greater proportion is delivered
in shares to further strengthen the link to the shareholder
experience. We have also aligned the pensions of executives
to those of the wider workforce.
In seeking to simplify the Policy, we have undertaken some
minor rebalancing between fixed pay and variable pay such that
total maximum pay has reduced on a 2022 equivalent basis,
while maintaining target pay. Finally, the Committee has made
a number of changes to the bonus scorecard to increase the
transparency of outcomes to shareholders, resulting in 60%
now being linked to clearly quantifiable financial metrics and
40% to non-financial metrics.
Additionally, the Committee has also reviewed the long term
incentive metrics and for the first time a climate condition will
be included in future grants from December 2022. The climate
metric is detailed later in the report and looks at the Group’s
environmental footprint both through its own operations and
its commercial activities.
Further detail on the proposed changes is included in Section
B7.3 later in this report
Page 127
Corporate Governance Other work of the Committee during the year
Conclusion
Cost of living crisis
The growing cost of living crisis during the financial year has
been closely monitored by the Committee. The Group as a whole
has been conscious of the impact of this on its employees and
the Committee considered the Group’s actions on this, which
were taken out of the usual salary review cycle, in July 2022. The
actions taken included applying a consistent salary increase
across the Group, instead of on an individual basis as is usually
the case, with most employees except senior leaders receiving
a 5% pay rise in October (and senior leaders receiving a 3% pay
rise). There were some exceptions to these reviews including
those whose roles had changed during the year receiving above
the 5% increase. The executive directors will receive a 3% pay
rise to their re-structured 2022 base pay.
Additionally, there was an out of cycle variable pay award of
£1,000 (gross) made in July to all those employees who would
usually receive a Profit Related Pay (‘PRP’) award in December.
This £1,000 being an advance on PRP of £500, together with an
additional matching payment from the Group of £500. The PRP
award will take place in December as usual (less the advance
made in July).
During the summer there was positive engagement with major
shareholders and shareholders’ advisory groups about the
proposed Policy and changes to the metrics and I would like
to thank all those who engaged with and provided views to the
Committee. These have been considered and reflected on by the
Committee when drafting the final proposed Policy and incentive
structures. In particular, as a result of the feedback received the
Committee has elected to further increase the weighting towards
clearly quantitative financial targets in the annual bonus.
I trust that shareholders will support how the Group’s
remuneration philosophy has been implemented during the
year. Further, I hope you consider that the proposed new
Policy reflects your views and that it continues to reflect the
Group’s remuneration philosophy for executive directors and
all employees. I recommend this report to shareholders and
ask you to continue to support the work of the Committee
by supporting the resolutions to approve the Company’s
Directors’ Remuneration Report set out in Section B7.2, the new
Remuneration Policy set out in Section B7.3 and the updated rules
for the Paragon Performance Share Plan and Paragon Deferred
Bonus Plan that are being put to the AGM in March 2023.
Hugo Tudor
Chair of the Remuneration Committee
6 December 2022
Updated Share Plan rules
The PSP is due for renewal at the 2023 AGM as it will reach the
end of its 10 year life cycle in February 2023. The proposed plan
incorporates updated wording to reflect general changes in the
operation of share plans over the past 10 years and to reflect
that the awards under the plan are being granted to employees
of a bank which was not the case in 2013. Further information
regarding the proposed plan can be found in the Notice of AGM.
Additionally, we have decided to put our Deferred Share Bonus
Plan (‘DSBP’) to shareholders to enable allotted shares to be used
to fulfil the awards should that be deemed appropriate. A deferred
share bonus plan has been in operation for a number of years
but to date it has been restricted to market purchase shares and
consequently not required shareholder approval. Whilst it is likely
that market purchase shares will remain the primary mechanism
for fulfilling awards under this plan, the Committee considers it
appropriate to request this additional flexibility.
Page 128
B7.2 Annual Report on Remuneration
Contents of the annual remuneration report
• The Remuneration Committee, key responsibilities and advisers (B7.2.1)
• Directors’ remuneration for the year ended 30 September 2022 (B7.2.2)
• Application of remuneration policy for the year ending 30 September 2023 (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
Examples of how we aligned remuneration to our strategy during the financial year:
Strategic priority
How success is measured
Where the priority is measured
Bonus
PSP
Growth
Loan book growth and margins
Future value of new business and
financial performance
EPS and relative TSR
Diversification
Liquidity - increasing sources of
funding
Risk measures and financial
performance
EPS, relative TSR and risk
assessment
Digitalisation
Capital
management
Growing profitability outside
buy-to-let
Increasing direct business flows
and reducing customer lead times
Future value of new business
EPS and relative TSR
Credit quality
Risk measures and financial
performance
Risk assessment and EPS
Capital strength and efficiency
Risk measures
Relative TSR and risk assessment
Cost control
Profit measures and personal
objectives
EPS
Sustainability
Sustainable earnings
Financial performance
Reducing the impact our
operations have on the
environment together with
a customer and people
focussed culture
Personal objectives include
ensuring good customer
outcomes and support for
Paragon’s customers
Relative TSR, EPS and risk
assessment
Customer metrics focus on the
views of customers across their
Paragon lifecycle, people metrics
focus on the employee journey
and climate metrics focus on
emissions of the Group and
its portfolios
Page 129
Corporate Governance
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 year comprised the following independent non-executive directors
(the Chairs of the Board being considered independent on appointment):
Name
Period of appointment
Hugo Tudor (Chair of the Committee)
All year
Fiona Clutterbuck (Chair of the Board)
Until 1 September 2022
Robert East (Chair of the Board)
Tanvi Davda
Alison Morris
Graeme Yorston
From 1 September 2022
From 1 September 2022
All year
All year
The relevant experience of each director 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
Reviews workplace remuneration and related policies and the alignment of incentives and rewards with culture; and when setting
the policy for executive director remuneration, takes into account those matters
Considers the group-wide Internal Remuneration Policy for all employees and considers and approves the identification of the
Group’s MRTs, under financial services regulatory remuneration rules
Attendees
The CEO, Chief People Officer, CRO, General Counsel, 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 - PricewaterhouseCoopers LLP (‘PwC’)
•
The CEO, the Chair of the Risk and Compliance Committee, the Chief People Officer, the CRO and the Director of External
Relations in determining remuneration for the year for executive directors and senior management
Page 130
Independent advisors: additional information
Appointment process – PwC were appointed by the Committee following review processes in the financial year ended 2021 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.
Connections to the Group – the Committee is satisfied that the PwC team providing remuneration advice to the Committee does
not have any connection with the Group, or any individual director, that may impair its independence and / or its objectivity.
Fees – the total fees paid to PwC for advice to the Committee during the year amounted to £175,680 (including VAT) on a part fixed fee
and part time and materials basis. This support splits as follows (both inclusive of VAT):
• Business as usual support: £110,280
• Support with the Director’s Remuneration Policy: £65,400
Other services – PwC provided other professional services to the Group during the year including regulatory support, risk modelling
services and support with the Group’s IRB implementation.
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 2 March 2022 and the outcome for the resolution to approve the Remuneration Policy at the AGM on 13 February 2020.
Resolution
Votes for
% for
Votes against
% against
Total votes cast Votes withheld
Annual Report on Remuneration (2022)
186,403,903
Remuneration Policy (2020)
157,352,402
97.48%
74.33%
4,825,862
54,331,483
2.52%
25.67%
191,229,765
211,683,885
39,027
3,082
Page 131
Corporate Governance B7.2.2 Directors’ remuneration for the year ended 30 September 2022
The information provided in this section of the Directors’ Remuneration Report has been audited
This section discusses the remuneration of the executive directors, the Chair and the non-executive directors in
respect of the year, together with their interests in the shares of the Company and the shareholding requirements
expected of them.
Single total figure of remuneration and supporting disclosures
Single total figure of remuneration for executive directors
Year ended 30 September 2022
£000
£000
Note
N S Terrington
R J Woodman
Fixed remuneration
Salaries
Allowances and benefits
Role based allowance
Pension allowance
Total fixed remuneration
Variable remuneration
Bonus
Share awards
Total variable remuneration
Total
(a)
(b)
(c)
(d)
(e)
629
17
140
126
912
905
1,636
2,541
3,453
396
14
90
79
579
570
1,030
1,600
2,179
Year ended 30 September 2021
£000
£000
Note
N S Terrington
R J Woodman
Fixed remuneration
Salaries
Allowances and benefits
Role based allowance
Pension allowance
Total fixed remuneration
Variable remuneration
Bonus
Share awards
Total variable remuneration
Total
(a)
(b)
(c)
(d)
(e)
599
14
140
120
873
863
1,255
2,118
2,991
377
12
90
75
554
544
791
1,335
1,889
Total
£000
1,025
31
230
205
1,491
1,475
2,666
4,141
5,632
Total
£000
976
26
230
195
1,427
1,407
2,046
3,453
4,880
a) 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 are reimbursements from the Company in respect of: (i) costs associated with the purchase of shares for the RBA and
(ii) certain travel costs incurred in connection with the performance of executive director duties, both of which constitute taxable
benefits in kind. The Group provides the amount required to cover the tax liability. The amount will vary with the amount of brokerage
costs / travel undertaken by the executive director.
Page 132
b) 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.
c) Pension allowance
Both Nigel Terrington and Richard Woodman received a cash allowance in lieu of pension of 20% of salary for the year ended
30 September 2022.
d) Bonus
Bonus opportunity during the year was, in line with the Policy, 150% of salary.
In respect of the annual bonus for the year ended 30 September 2022 a bonus of 96% of maximum opportunity was awarded to
each of the executive directors. 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 the outcomes. 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 (underlying)
CET1 ratio (adjusted for buy-backs)
30%
50%
20%
10%
10%
10%
£187.1m
£198.8m
£203.4m
£226.0m
13.1%
+3bp
44.4%
13.9%
14.4%
+7bp
43.2%
14.5%
15.3%
+11bp
42.8%
15.1%
16.0%
+30bp
39.4%
16.3%
Measure
Weighting How measured
Future value and strategy
30% Qualitative assessment by the Remuneration Committee of:
Development activities
Pipeline
25%
25%
•
Significant system development including buy-to-let customer retention,
development finance platform and SME lending portal phase 1
• Sale of residual unsecured Idem Capital portfolio
• Material reduction in buy-to-let receiver of rent portfolio
• £1.3bn buy-to-let
• £0.7m commitments in development finance
• Gross new advances up over 23%
Embedded value
25%
• Margins widened by 30 basis points
• Hedging strategy has developed significant value in protecting future NIM
• Enhanced utilisation of third party platforms
Liability management
25%
•
Deposit costs improved significantly whilst providing competitive rates
for customers
• Contingent funding capacity improved
Risk
20% Qualitative assessment by the Remuneration Committee of:
• ERMF embedding and all principal risks operating within risk appetite
• Liquidity management supporting NIM accretion
Personal performance
20%
Qualitative assessment by the Remuneration Committee of individual targets
as detailed below for each director.
30%
15.0%
6.0%
3.0%
3.0%
3.0%
Outcome
30%
7.5%
7.5%
7.5%
7.5%
18%
18%
96.0%
Page 133
Corporate Governance 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
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
Develop the Group’s sustainability
strategy by supporting customers
to meet their climate change
requirements and obligations
Continue to build a succession
plan pipeline for Executive
Committee roles
•
•
•
•
Record operating profit before tax of £226.0 million increased
by 16.4% from 2021
Savings expansion to £10.7 billion with margin enhancement
of 30 basis points
Regular surveys of intermediaries and customers show that
good outcomes were achieved
Technology roadmap delivered the Commercial Lending
origination portal, auto-decisioning, surveyors’ system,
secure payments and development finance platform
•
Significant investments in infrastructure, cybersecurity and
data controls
•
Progressed towards digital self-service for buy-to-let
• Launched a green savings bond
•
Further strengthened the Group’s platform relationships
•
Progressed plans to expand the addressable savings market
Operations:
•
•
•
Baseline year and offsetting principles approved at
Sustainability Committee
Improved energy efficiency of key sites with all new sites to be
EPC B at least
All new company cars will be PHEVs or EVs with electric
vehicles only from 2026
Lending:
•
Delivered on supervisory expectation arising from ‘Enhancing
banks’ and insurers’ approaches to managing the financial
risks from climate change’ (April 2019)
•
ICAAP climate change module delivered to Board
•
Further green product incentives launched across mortgages
and development finance
• Lending on electric vehicles in motor finance
•
•
Data enhancement – EPC MI and green bond reporting to
Sustainability Committee and Executive Committee
Succession plans detailed for management teams below
ExCo’s direct reports with leadership and specialist
development plans now in place
•
Senior leadership development programme is successfully
supporting career development for top talent
Page 134
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
Maintain appropriate capital,
liquidity and funding buffers
to allow the Group to both
support its customers and
other stakeholders in stress and
enhance capital efficiency
Further develop the Group’s
thinking on the risks of
climate change and embed
the management of climate
related risks within the Group’s
strategic plans, risk appetites and
disclosures
Prioritise and embed IRB to boost
the Group’s risk capability and
longer-term capital efficiency
Continue to provide oversight
and management of the Investor
Relations programme
• Strong financial metrics delivered during 2022
•
•
•
Capital remains strong, supporting growth and future returns
to shareholders
Group’s financial accounting system successfully moved to
the cloud during the year – project delivered ahead of target
Capital and liquidity ratios remained strong with significant
coverage over current and projected requirements
• Strong asset generation supported
• Contingent liquidity sources expanded
•
First capital impacts quantified in assessment of EPC
requirements and material enhancement to disclosures to
meet best practice and TCFD requirements
•
Strong EPC product mix improving in both new originations
and portfolio
• Further briefings given to Board
•
IRB programme managed efficiently but remains subject to
delays outside of the Group’s control
• Reporting processes running smoothly
• Close engagement with investment community
e) Share awards: Paragon Performance Share Plan:
The PSP value for the year ended 30 September 2022 has been determined using the average closing share price for the three months
ended 30 September 2022 as an estimate. The actual value of the awards, following the testing of the performance condition, will not be
finalised until the closing share price is known when the awards vest in December 2022 following the Preliminary Results announcement.
The share awards value for the year ended 30 September 2021 has been restated to reflect the market value of the shares received for
the PSP grant that vested on 14 December 2021, as at that date.
Awards vesting in respect of the year ended 30 September 2022
Awards granted in July 2020 under the Group’s PSP are subject to performance conditions measured over the three financial years
ended 30 September 2022. The metrics are split between financial and non-financial performance conditions.
The awards were granted at 180% of salary. Overall vesting as total of maximum award was 93.13% being a total of 167.63% of salary
at grant.
Page 135
Corporate Governance The detail of the outturns of each part of the condition was as follows:
PSP grant in July 2020: financial performance conditions
Weighting
Threshold vesting for
25% of maximum award
Relative TSR
EPS
25%
25%
Median performance
(being (10.0%))
Maximum
vesting
Upper quartile
performance
Actual
performance
Upper quartile
performance
(being 22.8%)
(being 32.6%)
Vesting
outcome
100.0%
60 pence
67 pence or more
69.9 pence1
100.0%
1 Reported EPS is 129.2 pence. However, the Committee chose to exclude a material fair value gain from this calculation and for the PSP metric compare the underlying
performance which provided an actual of 69.9 pence. The Committee has agreed to continue to use this measure in future years being EPS excluding fair value movements.
Vesting outcome
85.0%
98.0%
77.0%
85.0%
PSP grant in July 2020: non-financial performance conditions
Actual performance
Risk
12.5%
50% of the risk metric is determined by the Committee based on an assessment
by the CRO of six key elements of the Group’s risk appetite: regulatory breaches,
customer service, conduct, operational, capital and liquidity and credit losses. This
noted that over the vesting period:
• There were no material regulatory breaches
•
Key credit risk appetite metrics relating to arrears and losses were within risk
appetite throughout the period
• Complaints management performance was excellent throughout the period
•
Surplus capital has been maintained and excess capital has
significantly increased
12.5%
Based on an assessment by the Committee, the strategic risk assessment reflects
the management of risk with regard to the delivery of the Group’s medium-term
strategy noting that over the vesting period:
• Paragon Pension Plan is now in surplus (previously in deficit)
• Earnings have been diversified
• Operational resilience has been updated and governance restructured
Customer
12.5%
Customer insight feedback on
key product lines
Customer complaints relative
to risk appetite levels
People
12.5%
Employee engagement
Voluntary attrition compared
to the industry norm
•
•
•
•
•
•
•
•
NPS in line with industry average of +46
Industry average for customer satisfaction was
78% with the Group’s at 79%
Complaints consistently below risk appetite
tolerance
Complaints resolved within eight weeks was
above 95% for the period
Outcome for the full engagement survey in
June 2021 was +10 above industry norm
Wellbeing surveys during the pandemic
(April 2020 to October 2021) delivered
consistently positive scores for mental,
physical and overall wellbeing
Independent all-employee survey for IiP
achieved scores at or above the IiP average,
resulting in the achievement of Platinum status
Voluntary attrition increased across the period
but remained below the industry average of
13.7% as reported by XpertHR in 2021 and that
published by Reward Gateway for the banking
and finance sector in 2022 of 18.6%
Gender diversity of senior
management
•
Gender diversity above the target level
throughout the performance period
There is straight-line vesting between the threshold and maximum for the TSR and EPS conditions and for the customer and
people metrics there is 25% vesting at threshold performance and 50% vesting at target performance. There is no reward below
threshold performance.
The customer condition was amended for all extant grants with the removal of the target relating to the average overturn rate for
customer complaints relative to the FOS reported rates, as it had become apparent that the data required to enable comparisons
against other banks / financial service firms was not sufficiently and consistently available.
Page 136
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.
Awards which will vest in respect of the year ended 30 September 2022: impact of the share price on vested awards
Details of the shares which will vest in December 2022, following the announcement of the Preliminary Results, are set out below. The
table also shows that the vesting value in 2022, determined as noted below, reflected a 48.57% increase in the share price between
grant and vesting.
July 2020 PSP awards
N S Terrington
R J Woodman
Total shares
granted
Grant
basis
£
Vesting
outcome
Vested
shares
312,429
196,763
509,192
3.4496
3.4496
93.13%
93.13%
290,965
183,245
Share
price1
£
5.1250
5.1250
PSP
value2
£000
1,636
1,030
2,666
Impact of share
price appreciation
£000
487
307
794
1 The PSP value has been estimated using the average closing share price for the three months ended 30 September 2022. These awards will be revalued when the performance
condition is determined in December 2022 and valued at that date.
2 In accordance with the rules of the PSP, participants are entitled to receive dividend equivalents over the period between the grant date and vesting date. Accordingly, the share
award values also include £0.4940 per vested share in respect of such dividends.
For the executive directors the PSPs will not vest for another two years in line with the holding period in the Policy. During this period the executive directors will continue to be
entitled to dividend equivalents.
Awards which vested in respect of the year ended 30 September 2021: impact of the share price on vested awards
The final vesting value of the awards which vested in respect of the 2018 PSP showed a 15.81% increase from date of grant. This table
has been restated from that shown in the 2021 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 2021 had been used.
2018 PSP awards
N S Terrington
R J Woodman
Total shares
granted
227,156
143,059
370,215
Grant
basis
£
4.43
4.43
Vesting
outcome
Vested
shares
97.0%
97.0%
220,341
138,767
Share
price1
£
5.1305
5.1305
PSP
value1
£000
1,255
791
2,046
Impact of share
price appreciation
£000
154
97
251
1The PSP value has been restated based on the market value on the date of vesting being 14 December 2021.
Awards granted during the year ended 30 September 2022
On 15 December 2021 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
629
396
Percentage grant
Face value of grant
Share price1
Number of shares
180%
180%
£000
1,132
713
£
5.427
5.427
208,611
131,325
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 2021.
Page 137
Corporate Governance
Delivery timeframe for 2022 remuneration
Delivery of annual bonus and the PSP (ie total variable remuneration) to be awarded in December 2022 (in respect of the financial year
ended 30 September 2022) will be in line with regulatory requirements and will therefore be delivered as follows.
Executive director
N S Terrington
R J Woodman
Total
bonus
£000
905
570
Bonus delivered
in 2022
Bonus held for a
year as shares1
Deferred
bonus2
PSP
PSP and deferred bonus
delivered from Year 3 to Year 73
£000
407
257
£000
407
257
£000
£000
91
56
1,132
713
20% of vested PSP and
20% of deferred bonus
20% of vested PSP and
20% of deferred bonus
1 Bonus held for a year as shares will be delivered as shares, with all shareholder rights except the right to transfer shares until a year from award date has lapsed when the shares
can be transferred or sold.
2 In order to satisfy the regulatory requirement for 60% of total variable remuneration to be deferred, part of the bonus will be deferred under the DBSP as nil cost options which
vest in accordance with regulatory requirements from year three to year seven.
3 From year three 20% of the DBSP awards and up to 20% of the PSP will be delivered to the executive directors. All of the DBSP and PSP awards vesting will be subject to a one
year holding period post vest operating as detailed in point 1 above.
The PSP awards granted in December 2021 are subject to the following performance conditions, with a performance period of three
years, from 1 October 2021, ending on 30 September 2024. 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%
Median performance
Upper quartile performance
63.0 pence
72.0 pence or more
50% weighting is determined by the Committee based on an assessment
by 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 and (ii) customer complaints and associated customer outcomes
12.5%
Consideration will be given to (i) employee engagement, (ii) voluntary
attrition compared to industry averages and (iii) gender diversity of senior
management
There is no vesting for below threshold performance. For the EPS and TSR metrics vesting rises from 25% at threshold to 100%
at maximum on a straight line basis. For the customer and people metrics threshold vesting is 25% with 50% vesting for on-target
performance. The risk scorecard is assessed across a number of elements as set out above and can result in any outcome between
0% and 100%.
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.
Page 138
Relative TSR measure
The comparator group for the purposes of the relative TSR condition is:
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
Single figure of total remuneration for the Chair of the Board and non-executive directors
Year ended 30 September 2022
Year ended 30 September 2021
Fees
£000
Benefits1
£000
Chair of the Board
R D East2
F J Clutterbuck3
Non-executive directors
T P Davda4
P A Hill5
A C M Morris
B A Ridpath
H R Tudor
F F Williamson6
G H Yorston
Total
21
235
6
90
90
70
100
-
70
682
-
13
-
-
-
-
-
-
-
13
Total
£000
21
248
6
90
90
70
100
-
70
695
Fees
£000
-
255
-
76
85
65
95
21
65
662
Benefits1
£000
-
14
-
-
-
-
-
-
-
Total
£000
-
269
-
76
85
65
95
21
65
14
676
1 The former Chair of the Board received a company car allowance and was eligible for private health cover on an individual or family basis in the same way as the executive
directors. The current Chair does not receive a car allowance. The Chair of the Board is also eligible for life cover.
2R D East was appointed to the Board on 1 September 2022
3F J Clutterbuck resigned from the Board on 1 September 2022
4T P Davda was appointed to the Board on 1 September 2022
5P A Hill was appointed to the Board on 27 October 2020
6F F Williamson resigned from the Board on 31 December 2020
Payments for loss of office
No payments for loss of office were made during the year ended 30 September 2022.
Page 139
Corporate Governance Directors’ interest in shares and shareholding requirements
Directors’ share interests
The interests of the executive directors in the shares of the Company as at 30 September 2022 (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
DSBP
Total vested but unexercised awards
Shares beneficially held2
Total interest in shares
Awards exercised in the year
PSP
CSOP3
DSBP
Total awards exercised in the year
N S Terrington
R J Woodman
Number
Number
445,272
280,371
247,641
4,245
697,158
290,965
168,232
459,197
153,331
4,245
437,947
183,245
-
183,245
1,200,636
2,356,991
531,805
1,152,997
510,098
4,186
138,897
653,181
389,264
4,186
84,059
477,509
Awards under the PSP and DSBP schemes noted above were granted in the form of nil cost options.
1 For the purposes of the table above the awards granted in July 2020, to Nigel Terrington and Richard Woodman are assumed to be vested but unexercised in respect
of the percentage which will vest, 93.13%, and to have lapsed in respect of the balance.
2 Shares beneficially held include shares obtained under the RBA, being for Nigel Terrington 35,628 shares and for Richard Woodman 22,906 shares. These shares are
not subject to performance conditions but are subject to restrictions related to disposal.
3 As part of the December 2017 PSP award, each executive director was granted a tax-qualifying option under the Company Share Option Plan (‘CSOP’). In prior
years as the value in aggregate of the PSP which was granted at the same time as the CSOP option was equivalent to that of a PSP award once abated by the CSOP
options, the options were disregarded in determining value and not included separately in the above table. However, on exercise the abatement of the PSP award
by the CSOP occurs and it becomes possible to determine the number of each of the PSP awards and CSOP options which were exercised and this has been
shown above.
The interests of the Chair of the Board and the non-executive directors at 30 September 2022, which consist entirely of ordinary
shares, beneficially held, were as follows:
R D East
T P Davda
P A Hill
A C M Morris
B A Ridpath
H R Tudor
G H Yorston
2022
10,000
-
2,659
4,168
4,358
70,000
7,517
As at 2 December 2022, 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 140
Share ownership guidelines
Executive directors are required to hold a minimum number of shares in the Company with a value of 200% of their salary, calculated
as at 31 December each year. The valuation is calculated on a net of income tax and national insurance basis where relevant.
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 chart below compares the executive directors’ holdings at 30 September 2022 to those required by the guidelines, expressed in
value terms as a percentage of salary. Valuation is based on a three month average price at 30 September 2022.
Directors’ shareholding guidelines
(30 September 2022)
R J Woodman
N S Terrington
Policy requirement
0%
100%
200%
300%
400%
500%
600%
% of salary
700%
800%
900%
1000%
1100%
1200%
At 30 September 2022, the holdings of executive directors were in accordance with guideline levels.
Post-employment shareholding requirement
The post-cessation shareholding requirement 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 award exercise. It does not include shares acquired under item 3 above.
No former directors are subject to these guidelines.
Page 141
Corporate Governance B7.2.3 Application of remuneration policy for the year ending 30 September 2023
The information provided in this section of the Directors’ Remuneration Report is not subject to audit.
Overview
The proposed changes to the executive directors’ remuneration arising from the proposed new Policy being put to the AGM in March
2023 are detailed in B7.3. It is intended, subject to approval of the new Policy at the AGM, that the proposed changes to salary and
pension are backdated to 1 October 2022.
Executive directors
Fixed pay
The rebalancing of fixed and variable pay arising from the simplification of the remuneration policy, subject to approval at the AGM,
results in the following outcomes for fixed pay:
Fixed pay with effect from 1 October 2022
N S Terrington
Total fixed pay
R J Woodman
Total fixed pay
Salary – paid in cash
Salary – paid in shares1
Pension – 10% of cash salary
Benefits (based on 2022 information)
Salary – paid in cash
Salary – paid in shares1
Pension – 10% of cash salary
Benefits (based on 2022 information)
£000
737
184
74
17
1,012
465
116
46
14
641
1 In the financial year ending 30 September 2023, subject to approval at the AGM, salary payment will include payment in shares. This payment maintains alignment to certain of the
conditions of the RBA namely that this payment will not be pensionable and will be released to executive directors on a pro-rata basis over a five year period. However, as part of
the overall simplification of remuneration structures it will form part of the salary for the purpose of calculating variable pay awards.
The effect of the rebalancing as a whole (of which the above is only the fixed element) is detailed in the introduction to the policy
report (B7.3).
Annual bonus
In line with the new Policy, the bonus opportunity for the financial year 2023 will be 98% of salary. In combination with the PSP, the
bonus will be delivered in line with regulatory requirements.
The Committee has determined that performance will be assessed against a balanced scorecard of measures consisting of: financial
performance (60%) including core profit and RoTE, together with a range of other quantifiable metrics derived from the Group’s
financial plans and strategic development; risk management (20%); and personal performance (20%). The two primary 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 2023 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.
Page 142
PSP awards
PSP award levels for executive directors are currently 180% of base salary and this percentage will be used for the grant intended to
be made in December 2022 as this element of variable pay relates to the financial year ended 30 September 2022. The level of the
award to be made in December 2023 will reflect the new Policy to be approved at the upcoming AGM.
The performance conditions and weightings (in respect of TSR, EPS, risk, climate, customer and people metrics) are as noted below.
In addition, there is an individual performance condition and a Group underlying performance underpin which must be met prior to
any vesting occurring.
Performance
measure
Relative TSR
Basic EPS
Risk
Climate
Customer
People
TSR Metric
Weighting
Threshold vesting for
25% of maximum award
Maximum
vesting
25%
25%
20%
Median performance
Upper quartile performance
74.4 pence
88.1 pence or more
50% weighting is determined by the Committee based on an assessment
from the CRO of the six key elements of the Group’s risk appetite: regulatory
breaches, conduct, operational, capital, 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
10%
Consideration will be given to (i) the development of an emissions balance
sheet, (ii) progress in the development of targets for the management of
financed emissions and (iii) establishment and progress with a framework to
set and subsequently manage the Group’s own emission reduction targets
10%
Consideration will be given to (i) customer insight feedback on key product
lines and (ii) customer complaints relative to risk appetite levels
10%
Consideration will be given to (i) employee engagement, (ii) voluntary
attrition compared to industry averages and (iii) gender diversity of senior
management
The TSR grouping has been updated to reflect changes in the peer group by the removal of Amigo Holdings PLC. The comparator
group for the purposes of the relative TSR condition is:
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
EPS Metric
The EPS targets have 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. The EPS metrics build from the very strong
outturns in 2022 with the threshold to stretch conditions implying growth rates of between 11.7% and 27.5% over the three year period
at a time of a highly uncertain economic outlook. On this basis, the Committee was satisfied that the targets represent a very strong
performance if achieved and are therefore appropriately stretching.
Page 143
Corporate Governance
Climate metric
In developing a climate related metric, the Committee considered the Group’s strategic aims together with its environmental footprint
both through its own operations and via its commercial activities. Climate reporting is a developing area, and it is likely that the metrics
within this condition will change as recognised good practice and reporting and management frameworks are enhanced in future
awards. The climate metric, as with the other metrics, will be kept under annual review. For the grant to be made in December 2022
the Committee has agreed the following measures: development and delivery of the process to manage (i) the Group’s operational
emissions and (ii) the financed emissions attributable to asset portfolios.
In respect of the Group’s own operational footprint the Committee will consider progress in the ongoing development and delivery of
the framework to set and subsequently manage Paragon’s own emission reduction targets.
Success in respect of financed emissions will be measured by progress towards the development of an emissions balance sheet
utilising standards published by PCAF (a global organisation focussed on harmonised and transparent greenhouse gas accounting).
This will focus in part on the quality of data available to support the Group’s understanding of emissions (for example, EPC matching)
and will be used to establish internal targets that shadow Net Zero Banking Alliance expectations.
For both the Group’s operational footprint emissions and its financed emissions there will be reporting of outcomes both internally
and externally as appropriate.
Risk metric
The risk metric has been updated so that capital and liquidity now form separate parts of the assessment by the CRO of the Group’s
key risk elements.
Customer and people metrics
There have been no changes to the matters considered in the people and customer metrics.
Other factors
There is no vesting for below threshold performance. For the EPS and TSR metrics vesting rises from 25% at threshold to 100% at
maximum on a straight line basis. For the risk, climate, customer and people metrics these are assessed across a number of elements
as set out above and can result in any outcome between 0% and 100%.
In addition, prior to any awards vesting, the Committee must be satisfied that the individual performance of the employee and the
underlying financial performance of the Group are satisfactory given the level of vesting.
Chair of the Board’s and non-executive director fees
The Board reviewed and approved an increase to both the senior independent director’s fee and the fee for chairing a board
sub-committee of £10,000 per annum, effective from 1 October 2022. Additionally, a fee was introduced for non-executive directors
who are members of a committee but neither its chair nor the senior independent director. This fee is only payable up to a maximum
of £10,000 per annum as it does not increase where a non-executive director is a member of more than one committee. These
increases were approved to reflect the increasing responsibilities and time commitment of these roles as the Group grows in size
and complexity.
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
Additional fee for being a member of a committee
Fee with effect from
1 October 2022
1 October 2021
£000
255
70
20
30
10
£000
255
70
10
20
-
1 The 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 144
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 executive directors’ remuneration
aligns and compares with other employees and aligns with stakeholders’ interests.
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.
As in the previous year a review was undertaken by the Committee related to the fair pay agenda which enabled the Committee to
confirm its view that the Group is a fair pay employer. It can be seen from the comparison of the ‘Annual change in directors’ pay with
the average employee’ table that the increase in the variable remuneration percentage amount for all employees, both this year and
last, was significantly ahead of the percentage increases for executive directors, reflecting strong Group performance in both years.
This commitment to fair pay is reflected in the Group’s:
•
Support since 2016 for the minimum wage payable to all employees being that stated by the Living Wage Foundation (which from
1 October 2022 is £21,255 per annum outside London)
• Payment of PRP to around 88% 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 the Group’s commitment to various sustainability related matters which support and enhance fair pay and the
remuneration philosophy and are detailed in Section A6.
Page 145
Corporate Governance How our pay principles aligned to the Code during the year ended 30 September 2022:
Principle
Clarity
Application
Example
The executive director and Group
remuneration policies are clearly
communicated to directors and
all employees.
The Remuneration Committee Chair
and the Chair of the Board regularly
consult with our major shareholders as
part of our commitment to a transparent
and open relationship.
The Remuneration Report in this document is
available to all employees as is the group-wide
Internal Remuneration Policy.
Details on the application of the Directors’
Remuneration Policy, including incentive outcomes
for the current year as well as proposed performance
measures and targets for future years, are clearly
set out in this report. The internal policy details the
available remuneration structures which are aligned
across the Group and consist of salary; pension;
variable cash bonuses; share schemes and benefits.
Discussion on executive remuneration and how it
aligns to the workforce forms part of the regular
People Forum discussions with the Committee Chair.
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.
Proportionality
Bonus awards reflect annual performance
and PSP awards reflect performance over the
longer term with performance measures and
targets clearly linked to strategy.
The links between awards and delivery of strategy
and performance are shown in the table above which
is entitled ‘Examples of how we aligned remuneration
to our strategy during the financial year’.
The Committee also has the discretion
to override formulaic outturns to ensure
outcomes do not reward poor performance.
Performance conditions require a minimum level
of performance to be achieved before any pay-out
under variable pay schemes is considered.
Predictability
Minimum, target and maximum levels of
award for executive directors are shown
within the Remuneration Policy.
See Section B7.3 for the new Policy and Section
B6.3 in the 2019 Annual Report and Accounts for the
current full Policy.
Alignment to culture
The Group’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 current and proposed Remuneration
Policies are fully aligned with our
pay principles.
Demonstration of the Group’s values underpins
our variable incentive frameworks. Currently, 25%
of PSP awards for executive directors and other
senior managers are assessed against Customer
and People metrics. For awards to be granted
in December 2022, 30% of PSP awards will be
assessed against ESG related metrics, including
both Customer and People metrics, as well as a new
Climate condition, to ensure alignment to our full
sustainability strategy.
The Group 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.
Both annual bonus for MRTs and PSP outcomes
for all participants are subject to malus and
clawback provisions.
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 and Compliance
Committee, ensuring that risk is appropriately
taken into account when determining
remuneration policy and its outturns.
Page 146
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. Meetings with
the Chair of the Committee on executive remuneration to engage and explain its operation and to discuss remuneration across the
wider workforce took place in November 2022 and November 2021 and form a regular part of the Forum’s annual calendar.
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 Chief People Officer 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 Remuneration Policy Report (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 2022 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 64% 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 Report Section B7.3).
Salaries are determined in line with performance, culture,
external market conditions and retention factors.
The Committee is made aware of the outcomes of salary
reviews across the Group before it determines those of
the executive directors, Company Secretary and MRTs.
As it has done for a number of 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).
Same as executive
directors (see Policy
Report Section B7.3).
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.
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.
Page 147
Corporate Governance Operation
Maximum opportunity
Performance conditions
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.
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 PSP awards 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 therefore 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.
*Deferral:
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.
All MRTs will have deferral in line with regulatory requirements. Other employees may be subject to deferral from time to time in
line with the operational requirements of the Group and the Committee’s determination.
Paragon Performance Share Plan (‘PSP’)
Same as executive directors
(see Policy Report
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
Report Section B7.3).
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
• 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 Chief People Officer, CFO and Conduct and
Compliance Director before implementation and then reviewed at least annually and if they are applicable to MRTs are considered
by the Committee.
Page 148
Remuneration comparisons
Comparison of annual change in directors’ pay with the average employee
The table below shows, for the last three financial years, the percentage change in the salary, benefits and bonuses of each of the
directors who held office during both the year and the previous year, compared against the percentage change in each of those
components of pay for an average employee.
The table does not contain prior year information on directors who are no longer directors in 2022. Neither does it contain information
for the year of appointment for A C M Morris, P A Hill (appointed in financial year ended 2020 and 2021 respectively) and
R D East or T P Davda who were appointed in September 2022, as they did not receive any remuneration in the comparator period.
Salaries and fees
Allowances and benefits
2022
N S Terrington
R J Woodman
F J Clutterbuck
To 01/09/22
From 27/10/20
P A Hill
A C M Morris
B A Ridpath
H R Tudor
G H Yorston
Average Employee
2021
N S Terrington
R J Woodman
F J Clutterbuck
A C M Morris
From 26/03/20
B A Ridpath
H R Tudor
G H Yorston
Average Employee
2020
NS Terrington
RJ Woodman
F J Clutterbuck
B A Ridpath
H R Tudor
G H Yorston
Average Employee
(a) Resigned during the year
(b) Appointed during the comparator year
(c) Change of responsibilities in year
(a)
(b)
(b)
(c)
(c)
%
5.0%
5.0%
(7.8)%
18.4%
5.9%
7.7%
5.3%
7.7%
5.1%
6.4%
6.5%
-
93.2%
-
9.2%
-
1.0%
11.9%
11.7%
-
-
2.3%
-
8.5%
%
21.4%
16.7%
(7.1)%
-
-
-
-
-
Bonus
%
4.9%
4.8%
-
-
-
-
-
-
(2.1)%
15.0%
(46.2)%
-
-
-
-
-
-
45.3%
45.5%
-
-
-
-
-
(5.9)%
101.7%
4.0%
-
-
-
-
-
(33.9)%
(33.9)%
-
-
-
-
19.2%
(25.7)%
Page 149
Corporate Governance 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:
For differences between prior years please see the relevant prior years’ Annual Report and Accounts.
•
‘Salaries and fees’ – these are calculated using the ‘Salaries and fees’ data provided in the single figure tables 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
•
‘Allowances and benefits’ – these are calculated using the data provided in the single figure tables
As noted previously ‘Allowances and benefits’ include a reimbursement from the Company in respect of:
i) costs associated with the purchase of shares for the RBA
ii) certain travel costs incurred in connection with the performance of executive directors duties
both of which constitute taxable benefits in kind. The Group provides the amount required to cover the tax liability. The amount will
vary with the amount of brokerage costs / travel undertaken by the executive director.
The changes in the average employee section of the table for this item in cash terms are due to a decrease of less than £40
between 2022 and 2021.
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
3,453
2,991
2,174
3,001
2,426
2,305
1,956
2,546
3,113
2,655
%
96.0
96.1
66.1
89.4
90.0
90.0
75.0
100.0
100.0
85.0
%
93.13
97.00
72.00
95.44
72.47
63.51
50.00
100.00
100.00
100.00
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
Page 150
Performance graph and table
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 2022, of £100 invested in Paragon Banking Group PLC on 30 September 2012, compared with £100
invested in the FTSE 250 index.
Ten-year return index for the FTSE 250
(Ten years ended 30 September 2022)
£400.00
£350.00
£300.00
£250.00
)
£
(
e
u
a
V
l
£200.00
£150.00
£100.00
£50.00
£-
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
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 2022.
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
2022
2021
2020
2019
Method
25th percentile pay ratio
Median pay ratio
75th percentile pay ratio
Option A
Option A
Option A
Option A
114:1
113:1
88:1
125:1
86:1
83:1
64:1
95:1
53:1
50:1
37:1
55:1
The base salaries and total remuneration details relating to the relevant identified employees in the two most recent years are shown below.
25th percentile pay
Median pay
75th percentile pay
25th percentile pay
Median pay
75th percentile pay
Base salary
Total remuneration
£
22,000
30,000
2022
£
29,000
40,000
£
55,000
65,000
£
22,000
27,000
2021
£
33,000
36,000
£
53,000
60,000
Page 151
Corporate Governance
Change in CEO pay ratios
The changes shown in CEO pay ratios between 2022 and 2021 are reflective of the substantially different approach to remuneration
and the resulting outcomes to remuneration awards for executive directors compared to other employees. The lower ratios in 2020 are
reflective of the early part of the Covid pandemic and year-on-year comparison is more aligned between 2022, 2021 and 2019 than 2020.
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 buy-backs
Loan advances
Corporation tax paid
Note
55
46
45
47
2022
£m
81.9
68.9
66.9
3,214.7
56.5
2021
£m
65.1
54.6
37.7
2,601.5
48.3
Change
£m
16.8
14.3
29.2
613.2
8.2
Loan advances 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.
Page 152
B7.3 Policy Report
The information provided in this part of the Directors’ Remuneration Report is not subject to audit.
B7.3.1
Introduction
(This introduction does not form part of the Policy, which is set out in section B7.3.2)
This part of the Directors' Remuneration Report sets out the Directors' Remuneration Policy that will be subject to shareholder
approval at the Annual General Meeting to be held on 1 March 2023. This Policy is expected to apply for a period of three years, unless
revised by a vote of shareholders ahead of that time.
The Company’s current Directors’ Remuneration Policy was approved at the 2020 AGM and took effect from the date of that meeting.
This Policy can be found in the 2019 Annual Report and Accounts on pages 113 to 123.
As highlighted in the Remuneration Committee Chair’s statement, a number of changes are being proposed.
The changes represent a minor rebalancing between variable and fixed pay such that total maximum pay has reduced on a 2022
equivalent basis, while maintaining target pay. These changes also simplify the structure of fixed pay. Part of the simplification results
in there being no need for reliance on the EBA discount factor as is currently the case. Additionally, a greater proportion of the
package will be delivered in shares.
Overall, the rebalancing changes can be seen in the following charts and are also expanded on below:
Structure
Current plan
Schematic – 2022 equivalent
*
d
e
x
fi
f
o
%
2
3
2
y
a
p
d
e
x
i
F
H
C
A
O
R
P
P
A
F
O
N
O
I
T
A
R
T
S
U
L
L
I
LTIP
180% of salary
Shares
4,000
3,000
2,969
Annual Bonus
150% of salary
Pension
20% of salary
RBA
CEO – 140k, CFO – 90k
Salary
CEO - 628.7k, CFO - 396k
Shares (50%)
Cash (50%)
0
0
0
,
£
2,000
1,932
1,872
Cash
Shares
Cash
1,000
0
1,218
*This is permissable through application of the EBA discount factor
CEO 50% vesting
CEO max
CFO 50% vesting
CFO max
PSP
Bonus
Pension
RBA
Salary – Shares
Salary – Cash
Structure
Proposed plan
Schematic – 2022 equivalent
H
C
A
O
R
P
P
A
F
O
N
O
I
T
A
R
T
S
U
L
L
I
d
e
x
fi
f
o
%
0
0
2
y
a
p
d
e
x
i
F
LTIP
118% of salary
Shares
4,000
3,000
2,897
Annual Bonus
98% of salary
Shares (50%)
Cash (50%)
0
0
0
,
£
2,000
1,931
Pension
10% of cash salary
Cash
Salary
Shares (20%)
Cash
1,000
0
1,827
1,218
CEO 50% vesting
CEO max
CFO 50% vesting
CFO max
PSP
Bonus
Pension
RBA
Salary – Shares
Salary – Cash
Page 153
Corporate Governance
The impact on remuneration of the rebalancing as a whole (before the application of the annual 3% increase in salary) is that:
• Maximum remuneration is reduced by £71,000 for the CEO and £41,000 for the CFO
• Fixed pay increases of £71,000 for the CEO and £41,000 for the CFO
• Overall remuneration for both executive directors does not change if incentives vest at 50%
• There is a modest rebalancing towards fixed pay from 30% to 33% of total remuneration at maximum
• The proportion of fixed pay delivered in shares is increased compared to the current Policy from 15.7% to 18.5%
Proposed change
Salary
Reason for change
• Reduces complexity
20% of salary to be delivered in shares released over
five years
• Delivers a greater proportion of fixed remuneration in shares
•
Increases shareholder alignment for executive directors
Currently an RBA is in operation, and this will be removed
Pension contribution
Pension level set at 10% of cash salary (ie excluding the
share element of salary) for both current and new
executive directors
Currently incumbent executive director pension is 20% of
salary and 10% for new hires
Variable quantum
Maximum annual bonus opportunity of 98% of salary
Maximum PSP opportunity of 118% of salary
Current maximum bonus is 150% of salary and PSP
maximum is 180% of salary
Annual bonus performance assessment
To contain 60% quantifiable detailed financial
performance targets
Currently the bonus includes at least 50%
financial measures
•
Aligns pension opportunity level to that available for the
majority of employees including new hires
•
•
•
•
Improves transparency by removing the need to use the EBA
discount factor
Removes the potential for breach of bonus cap in the event of
high bonus outcomes
Improves transparency
Reflects shareholder expectations for the majority of the
performance assessment to be based on quantifiable
financial measures
Page 154
B7.3.2 Proposed policy
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 and pension scheme contributions or alternative retirement benefit provision. 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 component that reflects
the scope of individual
responsibilities and recognises
sustained individual
performance in the role.
Base salaries are typically
reviewed annually, taking into
account a number of factors
including (but not limited to) the
value of the individual to the
business, 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.
For current incumbents this
payment will be made 20% in
shares and 80% in cash.
The portion in shares will be
subject to a holding requirement
and released over a five year
period.
Whilst no formal
performance conditions
apply, an individual’s
performance in role is
taken into account in
determining any salary
increase.
While there is no maximum
salary, if the Committee
is satisfied with the
individual’s performance,
increases will usually
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 which
may include, but are not
limited to:
•
•
•
•
•
Changes in the scope
or responsibilities of a
director’s role;
Development or
performance in role;
A change in the size
and/or complexity of
the business;
Change in market
practice or a director’s
salary substantially
falling behind a market
competitive rate;
and/or
External factors
such as changes
in regulatory
requirements
Benefits
To provide market levels of
benefits on a cost-effective
basis.
None.
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.
Private health cover for the
executive and their family, life
insurance cover of up to seven
times’ salary and company car or
cash alternative.
Private health care benefits are
provided through third party
providers and therefore the cost
to the company and the value to
the director may vary from year-
to-year.
Other benefits may be offered
from time to time taking into
account individual circumstances.
Page 155
Corporate Governance Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
Retirement benefits
To provide competitive post-
retirement benefits.
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).
Maximum 10% of cash
salary (ie excluding the
element paid in shares)
for both incumbent and
newly recruited executive
directors.
None.
Annual bonus
To incentivise executive
directors to achieve specific,
predetermined goals that drive
delivery of the Company’s
operational objectives.
Each executive director’s
annual bonus is based on a mix
of financial and non-financial
performance measures measured
over one year.
To reward individual
performance.
To encourage retention and
alignment with shareholders’
interests with a proportion of
the bonus awarded in shares.
The annual bonus is
non-pensionable. Malus and
clawback apply to the annual
bonus as described in the notes
to this table.
The annual bonus will be delivered
in shares and / or cash which, in
combination with the PSP award,
will be structured in line with the
regulatory requirements on the
deferral of variable pay under the
PRA remuneration rules.
A maximum of 50% of the upfront
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.
Maximum annual bonus
potential is 98% of salary
in respect of any given
financial year.
For threshold
performance a bonus
of 25% of maximum will
be awarded, for target
50% of maximum. For
performance below
threshold, no bonus
is payable.
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.
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 CEO.
Performance measures
and their weightings are
reviewed annually to
maintain appropriateness
and relevance.
Performance is assessed
against a range of
measures, with at
least 60% relating to
quantifiable financial
metrics and any balance
reflecting non-financial
measures (including risk)
and / or achievement of
key personal and
strategic measures.
Page 156
Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
Maximum award is 118%
of salary in respect of any
financial year.
Up to 25% of the award
will vest for threshold
performance.
Where regulations prevent
the payment of dividend
equivalents over the
vesting period, the number
of shares awarded will be
calculated by reference
to a discounted share
price reflecting the lack of
entitlement to dividends or
dividend equivalents.
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 (such as
adjusted EPS and / or
relative TSR), and non-
financial measures which
may include risk-based,
people, customer, and
climate measures.
Performance measures
and their weightings,
where multiple measures
are used, are reviewed
annually to maintain
appropriateness
and relevance.
HMRC monthly savings
limits apply.
None.
Performance Share Plan (‘PSP’)
To incentivise executive
directors to achieve enhanced
returns for shareholders.
To encourage long-term
retention of key executives.
To align the interests of
executives and shareholders.
Sharesave plan
To provide all employees
with the opportunity to
become shareholders on
the same terms.
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.
At the end of the performance
period, the performance outcome
will be used to assess the
percentage of the awards that will
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.
Awards are structured as nil cost
options with a ten-year life, a
conditional award of shares or an
award of forfeitable shares.
Periodic invitations are made
to participate in the Company’s
Sharesave Plan.
A savings contract over three
or five years where the funds
are used on maturity to either
purchase shares by exercising
options or are 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.
Page 157
Corporate Governance Malus and clawback
Annual bonus and PSP awards are subject to malus and clawback provisions in exceptional circumstances including the following:
•
If a higher payment than would otherwise have been the case is paid as a result of a material misstatement of a group
company’s results
• Any error or inaccurate or misleading information or assumptions relating to a financial year
•
If an individual was party to behaviour that resulted in serious reputational damage to a group company or a relevant business unit
• Occurrence of a material corporate failure in a group company or a relevant business unit
•
If there is reasonable evidence of employee misbehaviour, material error or misconduct
•
A group company or relevant business unit suffers a material failure of risk management, taking account of the individual’s
proximity to and / or responsibility for the event
•
If the participant contributed to any regulatory sanctions
•
If the Group, Company or relevant business unit suffers a material downturn in its financial performance
• Situations where there is a significant increase in the Group's or business unit's economic or regulatory capital base
Any incentive awards may be reduced or cancelled before vesting or clawed back for a period of up to seven years from the grant date.
This may be extended to ten years in the event of ongoing internal / regulatory investigation at the end of the seven-year period.
Shareholding guidelines
All executive directors are required to hold a number of shares in the Company with a market value of 200% of their salary. The
guideline must be met within a reasonable timeframe (typically expected to be within five years of appointment) and executive
directors are normally required to retain 50% of the shares paid as salary or acquired as annual bonus, PSP or DSBP awards
(after sales to cover tax) until the guideline is met.
The number of shares, net of income tax and national insurance, subject to share-based awards that are no longer subject to
further performance requirements granted under the annual bonus, DSBP and PSP or obtained as part of the payment of the fixed
role-based allowance or salary paid in shares count towards the aggregate shares held by each director for these purposes.
Reflecting best practice, the Committee has a post-cessation shareholding requirement. This requires that for two years following
cessation of role, an executive director must retain a number of shares (determined on cessation) equal to their shareholding
guideline (or their actual shareholding if lower). Shares that have been purchased by the executive director will not be included for
the purposes of determining the number of shares to be retained.
Operation of share plans
Awards under the Company’s share plans (and any applicable performance conditions) may be adjusted in the event of any variation
of the Company’s share capital, demerger, or special dividend.
Awards under the Company’s share plans may vest early in the event of demerger, special dividend, or other event which the
Committee considers would affect the Company’s share price, or in the event of a change of control. The extent to which PSP
awards will vest will be determined considering the extent to which performance conditions have been satisfied (as assessed by the
Committee) and, unless the Committee determines otherwise, the proportion of the vesting period that has elapsed.
Awards granted over shares may be settled in cash, in whole or in part. The Company does not intend to settle awards, or dividend
equivalents on awards, granted to executive directors in cash and would do so only where the particular circumstances make that
appropriate, for example where there is a regulatory restriction on the delivery of shares or to enable the payment of tax liabilities
relating to the award.
Page 158
Illustrations of the application of the remuneration policy
The chart below illustrates the remuneration opportunity provided to each executive director at different levels of performance for the
coming year:
N S Terrington
£4,000
£3,500
£3,000
£2,500
0
0
0
£
£2,000
£1,500
£1,000
£500
£0
R J Woodman
£2,500
£2,000
0
0
0
£
£1,500
£1,000
£500
£0
100%
27%
22%
50%
36%
30%
34%
46%
25%
29%
Min £1,011
Target £2,005
Max £3,000
Max with share price appreciation £3,543
LTIP
Bonus
Total fixed
27%
22%
51%
100%
36%
30%
34%
46%
25%
29%
Min £641
Target £1,268
Max £1,895
Max with share price appreciation £2,238
LTIP
Bonus
Total fixed
The basis of calculation for the above graphs and key assumptions used are as follows:
Minimum
Target
Maximum
Maximum with 50%
share price growth
• Total fixed pay is based on the rebalanced salary including the 3% annual increase as described in Section B7.2.3
• Pension is the value of the cash supplement in lieu of pension
• Benefits are value based on the estimated cash cost to the company
0%
0%
50%
50%
100%
100%
100%
100% plus 50%
share price growth
Fixed elements of
remuneration
Annual bonus
(pay-out as percentage of
maximum opportunity)
PSP
(vesting as percentage of
maximum opportunity)
Page 159
Corporate Governance
As Sharesave awards are provided on an all employee basis, they have not been included in the above analysis.
Elements of the remuneration policy for the Chair of the Board and non-executive directors
Purpose and link to strategy
Operation
Maximum opportunity
Performance conditions
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.
Benefits
To ensure that the Group
can attract and retain the
appropriate mix of non-
executive directors with the
correct experience to provide
balance, oversight
and challenge.
None.
The Board will review
fees periodically to
assess whether they
remain competitive
and appropriate in light
of changes in roles,
responsibilities and / or
time commitment of the
non-executive directors.
Increases above those
awarded for the rest of the
organisation may be made
to reflect the periodic
nature of any review.
The Articles of Association
of the Company contain
a maximum level of fees
that can be paid annually
to non-executive directors
(currently £2,000,000).
This is reviewed by the
Board from time to time.
None.
Where benefits are
provided to non-
executive directors,
they will be provided at
a level considered to
be appropriate, taking
into account individual
circumstances.
Non-executive director fees
are reviewed annually 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 on the
basis of external advice.
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 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).
They are not entitled to
receive compensation for early
termination of their terms
of engagement.
The Chair is eligible for private
health cover on an individual or
family basis in the same way as
the executive directors. The Chair
is also entitled to life assurance.
Neither the Chair nor the non-
executive directors are eligible
to participate in any of the
Company’s incentive or
pension schemes.
The Chair and non-executive
directors may be eligible to
receive reimbursement for travel
and other reasonable expenses
incurred as part of performing
their duties.
Page 160
Choice of performance measures and approach to target setting
Annual bonus
The choice of the performance measures applicable to the annual bonus scheme reflects the Committee’s belief that incentives
should be appropriately challenging and tied to the achievement of financial and non-financial measures (including risk and other
strategic measures) and key personal objectives.
The Committee reviews the measures each year and varies them as appropriate to reflect the priorities for the business in the year ahead.
A sliding scale of targets is set for each measure to encourage continuous improvement and the delivery of above-target performance.
PSP
The Committee will take into consideration prior Group and individual performance when assessing the value of the PSP grant level
for executive directors.
Forward-looking performance is measured against a long-term scorecard of financial and non-financial performance measures that
reflect the Company’s strategic priorities.
Financial metrics could include EPS, which would measure long-term profitability, and / or TSR that considers shareholder value
creation as a measure of market expectations of future performance. Other non-financial metrics could include risk, customer, people
or climate measures that would provide a focus on key measures of the Company’s long-term sustainability-related strategic aims.
Non-financial metrics would be assessed across a range of quantitative and qualitative measures which are business critical.
Performance measures and their weightings are reviewed annually to maintain appropriateness and relevance.
Discretion
The Committee retains the flexibility to make adjustments to the formulaic vesting level of incentive awards in instances where the
outcome would otherwise be unreflective of the wider shareholder experience and / or materially inappropriate in the context of
unexpected or unforeseen circumstances relating to the Company.
Changes to performance conditions
If an event occurs which results in the annual bonus or PSP performance conditions and / or targets being deemed no longer
appropriate (eg a material acquisition or divestment) then the Committee will have the ability to adjust the measures and/or targets
and alter weightings so that the conditions achieve their original purpose.
Recruitment and conditions of service
Policy on recruitment and promotion
Salaries for newly recruited directors will be set to reflect their skills and experience, the Company’s intended pay positioning and the
market rate for the role. If it is considered appropriate to appoint a new director on a below market salary (for example, to allow the
director to gain experience in the role) the individual’s salary may be increased to a market level by way of a series of above inflation
increases over such period as the Committee determines, subject to their performance and development in the role. The Committee
will determine the proportion of salary to be delivered in shares, taking into account the circumstances of the appointment. Pension
will be in line with the Policy.
A new appointment would be offered benefits comparable to existing directors, as well as other reasonable expenses such as legal,
tax equalisation and relocation costs (if necessary, on a net of tax basis).
The prevailing maximum bonus opportunity for existing directors will not be exceeded for any newly recruited director and would
normally be pro-rated to reflect the proportion of the year worked. It may be necessary to set different performance measures and
targets initially dependent on the timing of the appointment and the nature of the role taken up. Guaranteed bonuses will not be offered.
Long-term incentive awards will be granted in line with the policy outlined for existing directors, with the same maximum opportunity
for any newly recruited director. Awards may be granted shortly after an appointment (subject to the Company not being in a
prohibited period).
The Committee may make payments or grant awards to a newly recruited executive to buy out entitlements or opportunities (for
example, bonus and share awards) which will lapse on the executive’s departure from a previous position. In doing so, the Committee
will take into account relevant factors, including performance conditions attached to the lapsing arrangements and the time over
which they would have vested. The approach to buy-out awards will be in line with the PRA remuneration rules, which state that the
terms of any replacement awards should be no more generous than the award forfeited on departure from the former employer.
Page 161
Corporate Governance 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 periodically. 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 and the executive director 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:
Original appointment date
Current letter of appointment end date
Director
R D East
T P Davda
P A Hill
1 September 2022
1 September 2022
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
Policy on termination payments
31 August 2025
31 August 2025
26 October 2023
25 March 2023
19 September 2023
23 November 2023
19 September 2023
The Company has discretion to make a payment in lieu of notice in respect of all or part of the notice period. Any such payment would
consist of salary, benefits, and pension for the relevant part of the notice period. Specific change of control provisions or entitlements
to enhanced redundancy payments are excluded.
Salary delivered in shares
Executive directors will be entitled to receive their salary delivered in shares in respect of any notice period (or any notice period that
would have applied but for the making of a payment in lieu of notice). Ordinarily these payments will be made at the usual time.
Shares delivered as part of salary will be released over the originally anticipated period, although the Committee has discretion to
release shares early in specific circumstances, for example, in the event of the death of an executive director.
Annual bonus for the year of cessation
The payment of annual bonuses will be at the discretion of the Committee on an individual basis and the decision as to whether or not
to award an annual bonus in full or in part will be dependent on a number of factors, including the circumstances of the individual’s
departure. For example, in certain good leaver situations (injury or disability, redundancy, employment transferred outside the Group,
or any other reason the Committee decides) a bonus may be payable at the Committee’s discretion, based on an assessment of
performance. Any annual bonus award amounts paid will be pro-rated for time in service during the annual bonus period and will,
subject to performance, be paid at the usual time and in the usual form (although the Committee retains discretion to pay the annual
bonus award earlier in appropriate circumstances).
Unvested DSBP Awards
For awards granted under the DSBP, good leaver status would result in awards vesting at the usual time, unless the Committee
determines they should vest earlier in appropriate circumstances. In other circumstances, DSBP awards will lapse.
Page 162
Bonus awards subject to a holding period
If an individual leaves employment during a holding period, the default position will be for the holding period to continue for its
originally anticipated length. The Committee may end the holding period early, subject to regulatory requirements.
Unvested PSP Awards
The default treatment for outstanding unvested PSP awards will be that they lapse on cessation of employment. In good leaver
circumstances (as described above), unvested awards will continue until the normal vesting date, vest subject to the satisfaction of
the performance conditions, and be released at the end of the originally anticipated holding period. However, the Committee may
permit the award to vest and be released at cessation subject to the satisfaction of the performance conditions (as assessed by the
Committee) or vest and be released at the end of the performance period subject to the satisfaction of the performance conditions. In
any such case, the extent of vesting will be reduced to reflect the proportion of the performance period that has elapsed at the date of
cessation, unless the Committee determines otherwise.
PSP Awards subject to a holding period
If an individual leaves employment during a holding period, the default position will be for the holding period to continue for its
originally anticipated length. The Committee may permit the award to be released early, subject to any regulatory considerations.
If the holding period is operated on the basis that the executive director is only entitled to acquire vested shares at the end of the
holding period, the award will lapse if the executive director is dismissed for misconduct.
Other payments
The leaver provisions for any buyout award granted in connection with the recruitment of a director would be determined at the time
of grant.
Any statutory entitlements or sums to settle or compromise claims in connection with the termination would be paid as necessary. In
the appropriate circumstances, outplacement services, legal fees and relocation expenses may be provided at normal market rates
for directors, along with payments in respect of accrued holiday.
There are no obligations in the non-executive directors’ letters of appointment that could give rise to payments for loss of office.
Consideration of employment conditions elsewhere in the Group
There is no employee representative on the Committee. However, employees have the opportunity to make comments on any
aspect of the Group’s activities through employee forums and surveys and the views of employees are taken into account by Human
Resources. One of the duties of the Chief People Officer is to brief the Board on employee views and, as a regular invitee to Committee
meetings, this ensures that decisions are made with appropriate insight to employees’ views. In addition, the People Forum will
consider the relationship between executive remuneration and pay and reward across the Group on a regular basis.
Directors and senior executives participate in the annual bonus scheme, which is designed to incentivise employees to achieve
specific, predetermined goals, reward individual performance and encourage retention through deferral of a proportion of the bonus.
All employees whose performance has exceeded expectations are eligible for a discretionary bonus.
Employees below director and head of function level are eligible to participate in the Group’s profit related pay scheme, which pays
out a flat sum to all eligible staff based on a percentage of the Group’s profits.
Directors and senior employees are eligible to participate in the PSP. The plan is in place to encourage the long-term retention of
key employees who are considered to have the potential to influence shareholder value creation and awards are not offered to
employees generally.
In determining pay levels for the employees as a whole, the Group annually considers externally provided benchmark levels for
comparable jobs as well as individual development and performance. The general level of increase resulting from this review informs
the Committee’s deliberations on appropriate pay levels for the executive directors, together with external data specific to their roles
which is used to ensure that the levels of remuneration are appropriate.
Page 163
Corporate Governance Consideration of shareholders’ views
The Committee considers shareholder feedback received in relation to the AGM each year. This feedback, plus any additional
feedback received during any meetings from time to time, is then considered as part of the annual review of the Directors’
Remuneration Policy.
In addition, the Chair of the Committee and the Chair of the Board regularly engage directly with major shareholders and their
representative bodies and report their views back to the Committee, who take them into account when formulating any material
changes to the Policy. During the year under review, for the purposes of discussing this proposed Policy, shareholders representing
60% of the Company’s equity (based on the total voting rights and shareholder analysis as at 30 September 2022) were contacted
and account was taken of their views in shaping the Policy. As a result of previously received feedback the Committee agreed to align
executive director pensions with that of the majority of the workforce and include a climate related metric in the PSP. Following the
consultation in the summer of 2022, the Committee has also elected to further increase the weighting towards financial metrics in the
annual bonus.
Legacy arrangements
The Committee retains discretion to make any remuneration payment or payment for loss of office (including the exercising of any
discretion available in respect of any such payment) outside of this Remuneration Policy:
•
Where the terms of the payment were agreed before this Remuneration Policy came into effect, provided in the case of any
payment whose terms were agreed after 6 February 2014 and before this Remuneration Policy became effective, the remuneration
payment or payment for loss of office was permitted under the Company’s relevant former Directors’ Remuneration Policy
•
Where the terms of the payment were agreed at a time when the relevant individual was not a director of the Company and, in the
opinion of the Committee, the payment was not in consideration of the individual becoming a director of the Company
For these purposes, ‘payment’ includes the satisfaction of awards of variable remuneration and, in relation to an award over shares,
the terms of the payment are agreed at the time the award is granted.
Page 164
B7.4 Approval of Director’s Remuneration Report
The information provided in this part of the Directors’ Remuneration Report is not subject to audit.
This Directors’ Remuneration Report, section B7 of the Annual Report and Accounts, including the Statement by the Chair of the
Committee, the Annual Report on Remuneration and the Policy Report, 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
6 December 2022
Page 165
Corporate Governance B8. Risk management
Significant progress has been made in further
strengthening risk culture during the year, with
a number of initiatives designed to formalise
this and ensure it is inextricably linked to the
strategy and operations of the Group.
Peter Hill, Chair of the Risk and Compliance Committee
B8.1 Statement by the Chair
of the Risk and Compliance
Committee
In my last letter last I set out the Committee’s priorities for the
current year and I am pleased to say that these commitments
have comprehensively been met, whilst balancing the need
to address any new and evolving issues. I can confirm the
Committee has effectively provided oversight and consideration
of the following:
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. The risk agenda has shifted
considerably during the year. Whilst 2021 was dominated by
navigating the challenges of the pandemic, the fall-out from
this, compounded by global economic challenges and the war
in Ukraine have provided a complex set of issues facing the
whole of the financial services sector. My priority as Chair of the
Committee continues to be 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.
Throughout the year I have remained very impressed with the
way the Group has dealt with, and continues to deal with the
differing challenges in the risk landscape.
The ability of the Group to react in an agile and effective way to
emerging risks is enabled through its robust and maturing risk
management capabilities. Significant work has been undertaken
over the last year to enhance the Enterprise Risk Management
Framework (‘ERMF’). Its evolution to ensure it is commensurate
with the size and complexity of the Group’s operations,
whilst being effective is a key strategic priority. During the
year excellent progress has been made in delivering further
components of the framework and enhancing and embedding
the work done to date. Particularly important to this has been the
roll-out of a comprehensive policy framework across all principal
risks which has in turn helped drive ownership and accountability
across all three lines of defence.
Fundamental to the successful implementation of the policies
and the wider programme has been the comprehensive work
undertaken in respect of the Group’s risk culture. The effective
operation of the ERMF is based on having a strong risk culture,
embedded in day-to-day decision making and understood at all
levels of the organisation. Significant progress has been made
in further strengthening risk culture during the year, with a
number of initiatives designed to formalise this and ensure it is
inextricably linked to the strategy and operations of the Group.
I have been pleased with the new Code of Conduct and risk
culture framework, both of which are critical to ensuring
that risk management considerations lie at the heart of all
decision-making.
As I mentioned in my last letter, a strong ERMF is key to enabling
the Committee to effectively discharge its responsibilities
and to ensure it is able to focus on those matters of greatest
significance to the Group. I feel that during the last year we have
continued to deliver in line with this objective and the continual
refinement of the risk framework remains a priority for the next
year and beyond. The Committee will continue to oversee this
as the Group focusses on embedding the components and
particularly looks to refine risk reporting now that many of the
key building blocks are in place to ensure this robustly informs
the Board’s risk strategy and appetite.
The primary responsibility of the Committee continues to
be the maintenance of oversight of the effectiveness of the
Group’s ERMF and its systems and controls for compliance with
statutory and regulatory obligations. This oversight is enabled
through strong and embedded governance structures.
•
•
•
•
•
•
Assessment of any lasting risk implications of Covid as the
immediate challenges of the pandemic period recede
Continuous assessment of the impacts on the Group of the
consequences of the UK’s withdrawal from the EU
Potential impacts on the Group from supply chain issues
including energy and other commodities across the UK,
particularly given the inherent inflationary pressures which
are now widespread
Ongoing oversight of the Group’s response to the ‘Dear
CEO’ letter on financial crime systems and controls and the
programme of work to further enhance the Group’s financial
crime framework and capabilities
Evaluating the challenges posed by Government proposals
to improve energy efficiency of both owner-occupied and
privately rented homes by mandating minimum EPC ratings
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 particularly in light of the new FCA
Consumer Duty requirements
•
Undertaking deep dives in relation to specific risk categories
and business areas on both a rolling and ad hoc basis
Whilst delivering on these priorities, the Committee’s agenda
has evolved during the year to respond promptly to new and
emerging issues, whilst balancing the need to maintain oversight
of those core responsibilities as laid out in its terms of reference.
During the year the Committee has provided close oversight of
specific risk issues including:
•
•
•
•
•
•
•
Monitoring the ongoing situation in respect of increasing
inflation and rising interest rates with the associated
implications on the cost of living for both customers
and employees
Challenges around recruitment and retention as workplace
practices evolve in the post pandemic environment
Continued oversight of the Group’s project to implement
an IRB approach for credit risk, and activity to address PRA
feedback received following submission of Phase 2 of the
buy-to-let application
Monitoring the development of the plans and progress to
address the requirements of the new FCA Consumer Duty
following the finalisation of the rules
Ongoing progress in rolling out and embedding of the ERMF
and further refinement of risk appetites to ensure these
underpin the business model
Overseeing the Group’s progress on responding to the
increasing challenges posed by climate change and the
further embedding of climate change risk into the broader
risk framework with a focus on the development of a range
of metrics to support ongoing monitoring as the Group’s
strategy in managing this risk is further defined
Review of the Group’s ongoing embedding of its approach
to Operational Resilience including the self-assessment
undertaken in March 2022 to meet regulatory deadlines
and subsequent enhancement activity identified through
this process
Page 167
Corporate Governance •
•
•
•
Oversight of the ongoing IRB application including review
of Phase 3 documentation for buy-to-let and Phase 2 for
development finance which are awaiting the PRA’s invitation
to submit
Review and oversight of the further embedding of the financial
crime risk and controls framework following the investment in
resources, systems and processes during 2022
Further assessment of the potential impacts of the
post-Brexit financial services regulatory regime as additional
clarity is received through the expected adoption of the
Financial Services and Markets Bill during 2023
Continuing to drive the embedding of the Group’s risk culture
as the key enabler of the maturing ERMF, with focus on
further refining the risk reporting capability to really enable
the Committee to focus on high materiality matters and
enhance its horizon scanning capability
Whilst this year has undoubtedly posed new challenges, I am
extremely confident that the Group has the skills and experience
to manage the risks it is likely to encounter in the next year.
It remains critical that the Group continues to anticipate any
potential impact and demonstrates its agility in the event
that circumstances change materially. However, given the
well-established Risk function which continues to provide
the Committee with oversight of the risk landscape and the
effectiveness of the three lines of defence model, I believe the
Group and the Committee are well-placed to respond to the
uncertainties ahead.
Peter Hill
Chair of the Risk and Compliance Committee
6 December 2022
In addition, aligned with its overarching governance mandate,
the Committee has reviewed the assumptions and updates to
the Group’s Recovery Plan, ICAAP and ILAAP documents.
The ability of the Committee to provide effective oversight is
complemented by a comprehensive board education programme
on risk matters. During the year the members of the Committee
have attended sessions on a wide variety of relevant risk topics
from internal and external subject matter experts including:
Consumer Duty, Stress and Scenario Testing, Interest Rate Risk,
Cyber Risk, Operational Resilience and Macro-Economic Trends.
I can also confirm that during the year the Committee held a
private session with the CRO.
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.
The year ahead promises again to be challenging given political
and economic uncertainties and the Committee will continue to
monitor these wider macro trends and their associated impacts
on the Group. Whilst the full impacts of these are being assessed
on an ongoing basis and the operating environment continues
to evolve, the Committee will continue to balance oversight of
these with its commitments to continuous improvement in its
risk framework and culture.
As we look ahead to 2023 it is anticipated many of the areas of
the Committee’s focus over the last year will again dominate
the risk agenda. Whilst the Committee will continue to oversee
all the principal risks facing the Group and ensure that robust
assessment of these is undertaken, other priorities for the
Committee will include:
•
•
•
Ongoing monitoring of the emerging economic challenges
with particular attention on the assessment of customer
affordability and the impact on lending decisions. Credit
appetites and policies are kept under constant review
and will be adjusted accordingly to reflect circumstances,
ensuring that appropriate support is provided to customers.
The Group’s response to Covid has already evidenced the
effectiveness of its approach to dealing with such challenges
Consideration of potential impacts on the Group of possible
supply issues which are anticipated to affect the distribution
of energy over the coming winter
Monitoring the programme of work being undertaken
to ensure the Group is on track to meet the 2023
implementation dates for the new FCA Consumer Duty
following formal approval of the plan by the Board in October
2022. The Committee will provide continuous oversight of
progress ensuring alignment with regulatory expectation and
the Group’s commitment to ensuring that customers receive
fair outcomes
Page 168
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 December 2021 and again in December 2022, after
the end of the year, align with the 2018 Code and good practice.
The Committee’s responsibilities include reviewing:
• Recommendations and matters escalated from the ERC
•
•
•
•
•
The effectiveness of the Group’s ERMF 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’s strategy in promoting the fair
treatment of customers and integrity in the market as central
to its operations and culture.
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 Committee
delegates day-to-day oversight for model risk to the MRC.
The Committee meets at least four times a year and normally
invites the executive directors, CRO, Chief Operating Officer,
General Counsel 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 include:
•
•
•
•
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
In addition, during the last year, the Committee:
•
•
•
•
Reviewed the Group’s risk appetite to ensure it remained
consistent with the delivery of the Group’s strategic
objectives, proposing any required changes to the Board
Continued to monitor progress in respect of the Group’s
application for regulatory approval of its IRB approach to
credit risk management
Provided ongoing oversight as the Group assesses the impact
of the FCA Consumer Duty on its products and services and
seeks to address the requirements through a dedicated project
Conducted deep dive reviews into targeted risk areas,
including the impact of rising interest rates following the Bank
of England’s increases in the base rate and expected future
rises, rising inflation and the broader consequences of the
cost of living crisis
Risk and
Compliance
Committee
Chief
Executive
Officer
Model Risk
Committee
(‘MRC')
Executive Risk
Committee
(‘ERC’)
Asset and Liability
Committee
(‘ALCO')
Credit
Committee
Customer and
Conduct Committee
(‘CCC')
Operational Risk
Committee
(‘ORC')
Page 169
Corporate Governance •
•
•
•
•
•
•
•
•
•
•
•
•
•
Continued to monitor the challenges around recruitment and
retention of employees together with the wider impacts of a
changing workplace in light of hybrid working patterns
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 closely monitor the progress of the Group in
addressing its approach to operational resilience ensuring it
successfully met the 2022 policy implementation deadline
Reviewed, challenged and approved the Management
Responsibilities Map
Reviewed, challenged and approved the terms of reference of
the MRC
•
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 risk, reputational risk and
strategic risk.
Reviewed, challenged and approved the Compliance
Monitoring Plan and subsequent updates to that plan
Asset and Liability Committee (‘ALCO’)
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
During the year, Graeme Yorston a non-executive director and
a member of the committee was designated as Consumer Duty
champion, as part of the Group’s response to the new FCA
Consumer Duty rules.
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, pricing 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.
Executive Risk Committee (‘ERC’)
Customer and Conduct Committee (‘CCC’)
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. The ERC was
established under the specific authority of the CEO, it is chaired
by the CRO and includes all Executive Committee members,
with the Internal Audit Director attending as an observer. The
ERC monitors the interaction and integration of the Group’s
business objectives, strategy and business plans with the
Group’s risk appetite and risk strategy and escalates breaches
and significant matters to the Risk and Compliance Committee,
recommending changes as appropriate.
Key areas of focus for the ERC include:
Developing and, at least annually, reviewing the
appropriateness and effectiveness of the overall risk
management framework to manage and mitigate risk
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 regulatory compliance risk. The Committee considers
conduct risk information such as details of conduct or regulatory
compliance 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.
Reviewing the Group’s approach to controlling each principal
risk and its capability to identify and manage such risks
Credit Committee
Reviewing emerging risks as they arise, including
consideration of their potential impact on the Group’s
business objectives, strategy and business plans, as well as
risk choices, appetite and thresholds
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
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.
Page 170
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, including those arising from the
use of third parties. 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 risk appetite on an on-going basis.
Model Risk Committee (‘MRC’)
The MRC reports directly to the Risk and Compliance
Committee and comprises senior managers from Risk, Finance
and the main business areas. It is chaired by the CRO and
attended by Hugo Tudor, a non-executive director. The role of
the MRC is to review and make recommendations on all material
aspects of the rating and estimation processes in relation to key
credit and finance models. The MRC also acts as the ‘Designated
Committee’ for IRB purposes, approving all material aspects of
IRB rating systems.
B8.3 Risk management
culture
The 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.
Ensuring the ongoing maturity of, and further formalising the
approach to, the Group’s risk culture has been a priority activity
throughout the financial year. An effective risk culture is seen
as a key enabler to the successful delivery and execution of the
Group’s ERMF, which remains a focus of ongoing investment.
Therefore, various initiatives have been undertaken during the
year underlining the importance of ensuring that the risk culture
continues to support the Group’s approach to its management of
risk. These include:
•
•
A series of focus groups representing a cross section of
employees which evaluated their understanding of risk
matters, leading to targeted actions to improve risk knowledge
Further formalisation of the Group’s risk culture based on
the four agreed components – Leadership and Direction,
Individual Commitment, Joint Ownership, and Governance –
together with clear measures to evidence these
•
The development of a group-wide code of conduct which
reiterates individual responsibilities in the management of risk
These enhancements are designed to reinforce the Group’s
existing strong risk culture which is embedded through various
practices which support and protect its wider strategic goals.
This approach is 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.
Page 171
Corporate Governance 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 that there is a clear
organisational structure with distinct, transparent and consistent
lines of accountability and 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 the framework evolves
to reflect the changing business, regulatory and economic
landscape and emerging threats. Therefore, the Group remains
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, monitoring and reporting are appropriate and
embedded at all levels of the Group’s businesses.
During the past twelve months significant progress has been
made in further strengthening the ERMF to support the
Group’s strategic aspirations. The recruitment of experienced
risk resource in 2021 has ensured the completion of a
comprehensive planned programme of work during the year.
Key achievements have included the roll-out of a standardised
policy framework across the principal risk categories, which has
supported refinement of risk appetites and better articulation
and measurement of risks and controls. Delivery of these
enhancements has been facilitated by further embedding the
Group’s risk culture, through effective stakeholder management,
targeted education and a collaborative approach between
business areas and the Risk and Compliance function. Work
will continue to progress this further through the coming
financial year.
Key priorities for the next twelve months include focussing on
the alignment of business areas’ risk management and control
activities to risk appetite, and the enhancement of existing risk
information to provide better insight into risk profiles and to
support decision making at senior management level.
Enterprise risk management framework
The ERMF is intended to provide a robust, proportionate,
structured and consistent 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:
•
•
•
•
Define a 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
appetite and tolerance for risk across the principal risk
exposures
Establish a consistent risk taxonomy, describing the principal
risk categories and the more granular aspects of each of
these risks
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,
assessment, treatment, monitoring 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
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 minimum control requirements and key
indicators to manage and measure 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:
Three lines of defence
Line 1
Line 2
Line 3
Operational
and support
areas that own
and manage
risk within
agreed limits
Risk and Compliance
function designing,
implementing and
overseeing the
ERMF and providing
support and
challenge
Internal Audit
function
independently
assessing
effectiveness
of risk
management
•
The first line of defence (‘Line 1’), comprising executive
directors, 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 implementation, and ongoing monitoring and
assessment of operations
o
Management, 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
Performance Executive Committee and ERC. 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, maintaining and monitoring effectiveness of
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 consistently and on a
timely basis
Page 172
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.
•
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 Effectiveness of the ERMF
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 appetite statements, measures,
tolerances and reporting requirements, 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 by the
Risk and Compliance Committee on an ongoing basis and
any threshold breaches in respect of these are immediately
escalated to the Board. These board-level metrics are
underpinned by more extensive executive-level metrics, which
are reportable to the ERC. Any threshold breaches of the
executive-level metrics are reviewed by the ERC to determine
whether these are sufficiently material to be reported to the
Risk and Compliance Committee.
Risk appetite is central to the effective implementation and
operation of the ERMF. The risk appetite framework has
been enhanced during the financial year to align with the
enhancements made to the ERMF. These enhancements have
facilitated ongoing refinement of the Group’s risk appetites for all
principal risks and ensure that:
•
•
•
All principal risks have strategically aligned qualitative risk
appetite statements and quantitative measures
There are appropriate board and executive level risk appetite
metrics monitored on an ongoing basis
Calibration of appetite thresholds is appropriate and drives
timely management action
Page 173
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’s 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 classification of its principal risks, approved by the Board in the year. The principal
risks remain consistent from the previous financial year.
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
Mitigation
Year-on-year change
The Group faces the risk
of insufficient capital to
operate effectively including
meeting minimum regulatory
requirements, operating
within Board approved risk
appetite and supporting the
Group’s strategic goals.
Following the year end the
Bank of England published
their Consultation Paper
regarding the process for the
implementation of the Basel
3.1 standards in the UK, which
will be effective from on
1 January 2025.
A robust process exists over 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 and
is currently responding to PRA feedback on various elements
of this phase, ahead of a formal PRA panel assessment. The
project continues to progress to plan, and work will continue
through the next financial year.
The Bank of England Basel 3.1 proposals largely follow the
core Basel proposals and, as such, are materially in line
with expectations. The Consultation Paper also highlighted
enhancements to the IRB accreditation process and an
increase in the Bank’s threshold for Strong and Simple
treatment to £20 billion of assets, each of which would
have a favourable impact on the Group if retained in the
ultimate rules.
While there has been
little impact on the overall
capital risk framework
in the financial year the
global and UK economic
outlook has deteriorated
significantly since Russia’s
intervention in Ukraine, with
global inflationary pressures
intensifying sharply.
Although downside risks
will present headwinds,
the Group’s strengthening
profitability and the progress
made in balance sheet
management mean that
capital ratios remain strong
with considerable headroom
over requirements. This, in
turn, provides significant
capacity to support lending to
households and businesses.
Page 174
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 funding
and liquidity resources.
The Group remains well
placed to access funding
from a wide range of sources
to meet its future funding
requirements.
Access to the retail savings
market has been effective
during the year through both
direct and intermediated
deposit platform distribution
channels.
Market Risk
Description
Mitigation
Year-on-year change
The Group is exposed to the
risk that changes in interest
rates at which it lends and
those at which it borrows
may adversely affect its
net interest income and
profitability.
This risk is managed within Board approved risk appetite
limits with comprehensive treasury polices in place to ensure
that the risks posed by changes and mismatches in interest
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 rise in the Bank
of England base rate to its
highest level in over a decade
has increased volatility in
pricing levels on both the
asset and liability sides of
the balance sheet, requiring
particular focus on risk
management in this area.
Page 175
Corporate Governance Credit Risk
Description
Mitigation
Year-on-year change
Credit risk elements which
could expose the Group to the
risk of unexpected material
losses include:
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.
•
•
•
Customer risks through
failure to screen potential
borrowers, and manage
repayments
Concentration risk in
credit portfolios through
an uneven distribution of
exposures of borrowers,
asset classes, sectors or
geographies
Reduction in value of
collateral owned by the
Group, or secured against
debt owed to it
•
Wholesale counterparty
risk
• Outsourcer default risk
The Group 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, 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 policies
combined with the Group’s
consistently high lending
standards have ensured that
customer loan repayments
have been maintained in
line with expectations, and
arrears and losses remain
at historically low levels.
Tracking of customer risk
profiles across lending
areas shows little indication
of stress, and asset equity
coverage continues to
provide significant credit risk
mitigation.
Whilst current loan
performance remains
exemplary, the Group
continues to monitor the
potential future impact of
the increasing interest rate
environment and higher costs
of living and has reviewed
and adjusted credit policy
and affordability models
accordingly. As a result of
these broader economic
movements, in particular
the rapid increase in market
interest rates, the credit
risk profile has marginally
increased compared to
30 September 2021.
Model Risk
Description
Mitigation
Year-on-year change
Models are used across the
Group to inform financial
decision making and
hence it is imperative that
the environment in which
the models are designed,
implemented and operate is
subject to appropriate rigour.
As the use of internally developed models has increased
across the Group, a robust framework and governance
has been developed to manage the associated risks.
This includes the MRC which oversees the development,
implementation and ongoing monitoring of models across
the Group.
The Model Risk Management 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. The Group
is reviewing the contents of
the recent PRA Consultation
Paper (CP 6/22) on model
risk management principles
for banks to ensure it will be
compliant with the proposed
Supervisory Statement when
published.
Page 176
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.
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.
Detrimental reputational
impacts may result from
crystallisation of other
principal risks, but also
through failure to safeguard
the integrity of the Group’s
brand or failing to meet
external expectations in its
business practices.
Strategic Risk
The Group continues to
manage its reputation
effectively in all its dealings.
Whilst it is mindful that threats
to its reputation can emanate
from many sources, the Group
remains well-placed to respond
quickly and efficiently to any
potential reputational issue.
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 its business model, or
macroeconomic, geopolitical,
regulatory, competitive or
other external 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 the UK’s
economic performance
remain uncertain. Short-term
disruption from Covid has been
replaced by a material increase
in both the cost of living and
input costs for businesses,
putting pressure on household
and corporate disposable
income. Taken alongside a
sharp reversal in monetary
policy and political instability,
the near-term economic
outlook remains uncertain
while 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.
During the year the Group
continued to make progress
against its strategy, with
significant milestones reached
in its digitalisation programme.
Whilst the Group has remained
resilient throughout this
prolonged period of economic
uncertainty, and activity levels
have been strong, the potential
for disruption as the economy
resets to higher interest rates
presents a risk.
Page 177
Corporate Governance Climate Risk
Description
Mitigation
Year-on-year change
The Group considers the
impact of climate change
either directly on the Group
or indirectly through its
third-party relationships or its
lending activities.
This includes both the
transitional risk to its strategy
and profile through external
measures to progress to a
low carbon environment and
any physical risks arising
from changes to the natural
environment that could
impact the calculation and
valuation of assets and
liabilities.
The Group proactively manages physical risk and has
specific underwriting policies aimed at the mitigation of, for
example, risks associated with flooding, coastal erosion
and subsidence.
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.
Joining Bankers For Net Zero (‘B4NZ’) and establishing
targets for offsetting the Group’s operational footprint
emissions are key building blocks in embedding governance
and oversight of the risks from climate change. Longer term
strategic planning will be informed by ongoing and enhanced
analysis, supported by scenario testing.
The Sustainability Committee provides comprehensive
oversight of climate initiatives across each business line,
whilst the Credit Committee monitors the performance of
property collateral against EPC data.
The Group has continued
to make progress on its
climate change agenda, with
activity focused on identifying
implications across business
lines and the signing up to
B4NZ.
However, the levels of
regulatory scrutiny and public
interest in this area have
continued to increase 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
good customer outcomes is
at the heart of the Group’s
culture and strategy.
Conduct risk arises where the
culture and behaviours fail
to promote the customer’s
best interests and avoid
foreseeable consumer harm,
resulting in unfair outcomes
for the customer.
The management of conduct risk within the Group is tailored
to the specific product and customer type and includes
dedicated quality and control teams which validate process
adherence, the delivery of good customer outcomes and the
appropriate management of those customers showing signs
of vulnerability.
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 Chief People Officer, CFO and Conduct and
Compliance Director before implementation.
Whilst the Group is
well-placed to provide
appropriate support, the
current economic environment
and cost of living crisis is likely
to put a strain on some of the
Group’s customers, potentially
increasing vulnerabilities.
In addition, the introduction
of the FCA’s Consumer Duty
raises the expectations of firms
to proactively seek to prevent
causes of foreseeable harm.
Page 178
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 particularly as the Group
increasingly moves to cloud-based infrastructure and looks
to harness digital capability as part of its IT roadmap.
Whilst the Group continues to drive through strategic
transformation across all its lending lines, there remains
a continuing focus on ensuring that these changes do not
compromise overall resilience. A well-embedded change
framework ensures that changes are managed in a
controlled way.
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 material IT services. The robust oversight of
third parties is also seen as critical to overall resilience.
Despite industry-wide challenges in recruiting and retaining
skilled employees, 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.
Whilst the Group continues
to maintain a robust control
environment and successfully
navigated the operational
challenges posed by Covid,
the new post-pandemic
challenges have further
impacted the operating
environment.
The Group has made progress
on its strategic transformation
programme during the year,
and it is expected that this
will benefit operational risk
management in the longer
term. However these types of
programme have an inherent
execution risk, which the
Group is managing carefully.
Changing working patterns
and economic uncertainty
have influenced the
recruitment market driving
increased competition
between firms to attract
the strongest candidates.
Impacts of the war in Ukraine
and the wider cost of living
challenges have further
increased risk exposures
across key operational risk
categories such as cyber risk
and financial crime.
Against this background,
regulatory compliance
expectations continue to rise,
and 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 179
Corporate Governance 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 Rules and the Disclosure Guidance
and Transparency 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.
Directors
The names of the directors of the company at the date of
this report, together with their 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 Robert East
and Tanvi Davda, who were appointed as directors on
1 September 2022. In addition, Fiona Clutterbuck stepped
down from the Board on 1 September 2022.
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 2022.
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,
if appropriate.
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.
Page 180
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, in March 2023.
None of the directors has a service contract with the Company
requiring more than 12 months’ notice of termination to be given.
Directors’ indemnity and insurance
Under Article 159 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 all
directors of the Company’s subsidiary entities.
Share capital and distributions
Share capital
Details of the issued share capital of the Company, together with
details of movements in its issued share capital in the year, are
given in note 43 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 57 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 £83.2 million and to make market
purchases of up to 24.8 million £1 ordinary shares. These
authorities expire at the conclusion of the forthcoming AGM
on 1 March 2023 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
2 March 2022 enables it to purchase its own ordinary shares up
to a limit of 10% of its issued share capital, excluding treasury
shares (the Company’s own shares already purchased by it but
not cancelled).
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 ordinary 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. These shares will be initially held
in treasury. 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 which was completed in
the current year. The reasons for this purchase were set
out in Section 3.3 of the Half Year Report for the six months
ended 31 March 2021. On 7 December 2021 a further buy-back
programme of £50.0 million was announced. The reasons for this
purchase were set out in Section 3.3 of the preliminary results
announcement for the year ended 30 September 2021. This
programme was extended to £75.0 million on 14 June 2022 for
reasons set out in Section 4.3 of the Half Year Financial Report
for the six months ended 31 March 2022, published on that day.
During the year 13,011,285 £1 ordinary shares
(2021: 6,882,132) having an aggregate nominal value of
£13,011,285 (2021: £6,882,132), were purchased under these
programmes and initially held as treasury shares. Total
consideration paid in the year was £66.9 million, including
costs (2021: £37.7 million). This programme was completed
on 7 November 2022, following the year end.
On 24 November 2021, 12,100,834 ordinary shares, being all the
shares then held in treasury, were cancelled. These shares had
a nominal value of £12,100,834 and represented 4.83% of the
issued share capital excluding treasury shares at that time.
On 8 September 2022, 9,370,766 of the treasury shares acquired
under the share buy-back programme were cancelled. These
shares had a nominal value of £9,370,766 and represented 3.91%
of the issued share capital excluding treasury shares at that time.
The number of treasury shares held at 30 September 2022 was
3,640,519 (2021: 12,100,834), representing 1.53% of the issued
share capital excluding treasury shares (2021: 4.83%). The
maximum holding of treasury shares during the year
was 12,100,834 (2021: 12,100,834) representing 4.83% of the
issued share capital excluding treasury shares at that time
(2021: 4.83%).
Dividends
An interim dividend of 9.4 pence per share was paid during the
year (2021: 7.2 pence per share).
The directors recommend a final dividend of 19.2 pence per share
(2021: 18.9 pence per share) which would give a total dividend for
the year of 28.6 pence per share (2021: 26.1 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 2022.
Shareholder
% Held Notification
date
Royal London Asset Management
5.99
16/06/2021
Liontrust Investment Partners LLP
5.07
21/09/2020
Janus Henderson Group PLC
Dimensional Funds Advisors LP
Pendal Group
5.01
27/09/2022
5.00
21/07/2021
4.98
20/08/2021
Franklin Templeton Fund Management
4.96
10/01/2022
On 28 March 2022 BlackRock, Inc. advised that their holding had
dropped below 5%.
On 21 June 2022 M&G Plc advised that their holding had dropped
below 5% and they no longer held a notifiable interest.
The percentages quoted above were calculated by reference to
the total voting rights (‘TVR’) at the relevant date.
The following changes to the position set out above were notified
to the Company after the year end.
•
•
On 1 November 2022, Pendal Group notified the Company
that it had reduced its interest to below 5%, calculated by
reference to the TVR at 31 October 2022
On 15 November 2022, Janus Henderson Group PLC notified
the Company that it had reduced its interest to below 5%
calculated by reference to the TVR at 14 November 2022
As at 6 December 2022, no further changes had been notified to
the Company.
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 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’s accounts.
Page 181
Corporate Governance Political expenditure
During the year ended 30 September 2022 no political donations
were made by any Group company (2021: £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 1 March 2023
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.
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 45).
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 2.5 million ordinary shares (2021: 0.8 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 45 and
details of the share-based remuneration arrangements are given
in note 57.
Information presented in other sections
•
•
•
•
•
•
•
•
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 are
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 is set out in
note 60 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 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 2022, 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.
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.
Ciara Murphy
Company Secretary
6 December 2022
Page 182
B10. Statement of directors'
responsibilities
in respect of financial statements
The directors are responsible for preparing this Annual Report,
including the consolidated and company financial statements in
accordance with applicable law and regulations.
Company law, including the Companies Act 2006 (the
‘Companies Act’), 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 2022, that law requires the directors to prepare
the consolidated financial statements in accordance with
UK-adopted international accounting standards in conformity
with the requirements of the Companies Act and they have also
elected to prepare the separate financial statements of the
Company on the same basis.
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 UK-
adopted international accounting standards
Assess the ability of the Group and the Company to continue
as a going concern, disclosing, as applicable, matters related
to going concern
Use the going concern basis of accounting unless they intend
to liquidate the Company and / or the Group or to cease
operation or they have no realistic alternative to doing so
Present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information
Provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users
to understand the impact of particular transactions, other
events and conditions on the entity’s financial position and
financial performance
The directors are responsible for keeping adequate accounting
records for the Company that are sufficient to record and explain
its transactions, disclose with reasonable accuracy at any time
its financial position and enable them to ensure that its financial
statements comply with the requirements of the 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.
In accordance with DTR 4.1.14R of the FCA Disclosure Guidance
and Transparency Rules, the financial statements will form part
of the annual financial report published in the single electronic
reporting format specified in the TD ESEF Regulation (the
UK version of the EU Commission Delegated Regulation (EU)
2019/815). The independent auditor’s report on these financial
statements provides no assurance over the ESEF format.
Confirmation by the Board of Directors
The Board of Directors currently comprises:
R D East
(Chair of the Board)
H R Tudor
(Senior Independent Director)
A C M Morris
(Non-executive director)
N S Terrington
(CEO)
B A Ridpath
(Non-executive director)
P A Hill
(Non-executive director)
R J Woodman
(CFO)
G H Yorston
(Non-executive director)
T P Davda
(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.
Ciara Murphy
Company Secretary
6 December 2022
Page 183
Corporate Governance On the financial statements
P186
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
To be honest and open in everything we do
Integrity is about building trust and you can only do that if
you’re honest. We need to be true to our values and deliver
our promises, meeting the expectations we’ve set, and taking
feedback on board so that we’re continually improving our
service to customers.
Rina, Customer Assurance
C1. Independent auditor’s report
To the members of Paragon Banking Group PLC
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 (unchanged from 2021)
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.
1. Our opinion is unmodified
We have audited the financial statements of Paragon Banking
Group PLC (‘the Company’ or the ‘Parent Company’) for the year
ended 30 September 2022 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 65
other than the disclosures labelled as unaudited in note 59.
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 2022 and of the Group’s profit for the year
then ended;
the Group financial statements have been properly
prepared in accordance with UK-adopted international
accounting standards;
the Parent Company financial statements have been properly
prepared in accordance with UK-adopted international
accounting standards and as applied in accordance with the
provisions of the Companies Act 2006; and
•
the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006.
Basis for opinion
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 seven financial years ended 30 September 2022. 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.
Page 186
Key audit matter
Our response
Impairment allowances on loans to customers
Risk vs 2021
(£63.5 million; 2021: £65.4 million)
Refer to the Audit Committee Report, accounting
policy note and notes 19 to 24 (financial disclosures).
Subjective estimate
The measurement of expected credit losses (‘ECL’)
involves significant judgements and estimates. The
risk of material misstatement of ECL is heightened
in the current year due to the increased judgement
and estimation uncertainty as a result of the ongoing
economic uncertainties. 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 current
economic environment, and the probability weightings
assigned to each economic scenario.
Qualitative adjustments – Management makes
adjustments to the model-driven ECL results to address
issues relating to model responsiveness or emerging
trends relating to the current economic environment
as well as risks not captured by the models. 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.
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 24).
Disclosure quality
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, as well
as the sensitivity of the ECL results to changes in these
judgements or management’s assumptions, in light of
the estimation uncertainty arising.
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:
-
Testing 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
-
Performing 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 arising
at the reporting date.
Qualitative adjustments: For each of the
adjustments to the model-driven ECL we assessed
the reasonableness of the adjustments by
challenging the basis of risks not addressed by
the models in the current economic environment
and the completeness of post-model adjustments
(‘PMAs’) recognised, assessing the appropriateness
of key assumptions and performing sensitivity
analysis in respect of the PMAs.
SICR: We assessed the ongoing predictability
of the SICR criteria and independently recalculated
the loans’ stage for 100% of Paragon’s loans
and receivables.
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.
Sensitivity analysis: We performed sensitivity
analysis over the key assumptions including the
economic scenarios and weightings as well as certain
PD and LGD assumptions, by applying alternative
assumptions 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 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.
•
•
•
•
•
•
Our results
The results of our testing were satisfactory, and we
considered the ECL charge, provision recognised and the
related disclosures to be acceptable (2021: acceptable).
Page 187
Auditors Report
Key audit matter
Our response
Interest receivable on originated loan accounts
Risk vs 2021
(£486.7 million; 2021: £440.0 million)
Refer to the Audit Committee Report, accounting
policy note 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.
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 historical
experience. Recent developments in the UK economy
result in an elevated degree of subjectivity in
this assessment.
The cohorts of loans and advances for which the
expected behavioural life assumptions are 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 67).
Disclosure quality
The disclosures regarding the Group’s application
of EIR accounting are important in explaining the key
judgements and material inputs to the EIR adjustment, as
well as the sensitivity of the EIR adjustment to changes in
these judgements or management’s assumptions, in light
of the estimation uncertainty arising.
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 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 potential impact of
uncertainties arising from the current economic
environment on the 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 (2021: acceptable).
Page 188
Key audit matter
Recoverability of goodwill
Risk vs 2021
(£164.4 million; 2021: £164.4 million)
Refer to the Audit Committee Report, accounting
policy note and note 30 (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 determining
the assumptions used in the assessment. The most
significant assumptions are considered to be the
forecast future cash flows and the discount rate. Recent
developments in the UK economy result in an elevated
degree of subjectivity in this assessment.
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 30) disclose the
sensitivity estimated by the Group.
Disclosure quality
The disclosures regarding the Group’s goodwill are
important in explaining the key judgements and material
inputs to the goodwill impairment assessment, as
well as the sensitivity of the recoverable amount (and
therefore the impairment conclusion) to changes in
these judgements or management’s assumptions in
light of the estimation uncertainty arising.
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 comparison: We compared the Group’s
previous forecasting of cash flows 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 the current economic
environment in the forecasts.
Our sector 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 cash flow forecasts.
Sensitivity analysis: We performed break-even
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 (2021: acceptable).
Page 189
Auditors Report
Key audit matter
Our response
Valuation of the retirement benefit
pension obligation
Risk vs 2021
(£97.6 million, 2021: £155.6 million)
Refer to the Audit Committee Report, accounting
policy note and note 58 (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 retirement
benefit scheme asset 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 pension asset.
The most significant assumptions are considered to be
the discount rate, inflation rate and mortality rates / life
expectancy. Recent developments in the UK economy
result in an elevated degree of subjectivity in this
assessment.
The effect of these matters is that, as part of our risk
assessment, we determined that the valuation of the
retirement benefit pension 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 58).
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 rate/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
(2021: acceptable).
Key audit matter
Our response
Recoverability of Parent Company’s investment
in subsidiaries
Risk vs 2021
(£638.7 million; 2021: £638.7 million)
Refer to the accounting policy note and note 31
(financial disclosures).
Low risk, high value
The carrying amount of the Parent Company’s
investments in subsidiaries represents 65.8%
(2021: 58.7%) 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’s
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 (2021: acceptable).
Page 190
3. Our application of materiality and
an overview of the scope of our audit
4. The impact of climate change on
our audit
Materiality for the Group financial statements as a whole was
set at £8.8 million, determined with reference to a benchmark
of Group profit before tax, normalised to exclude unusually
significant fair value net gains in 2022, of £226.0m
(2021: £8.1 million determined with reference to a benchmark
of Group profit before tax). This materiality level represents
3.9% (2021: 3.7%) of the stated benchmark.
Materiality for the Parent Company financial statements as a
whole was set at £3.9 million (2021: £3.9 million), determined with
reference to a benchmark of current year net assets, of which it
represents 0.6% (2021: 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% (2021: 75%) of materiality
for the financial statements as a whole, which equates to
£6.6 million (2021: £6.1 million) for the Group and £2.9 million
(2021: £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
£0.44 million (2021: £0.40 million), in addition to other identified
misstatements that warranted reporting on qualitative grounds.
Of the Group’s two (2021: two) reporting components, we
subjected two (2021: two) to full scope audits for Group
purposes. The components within the scope of our work
accounted for 100.0% (2021: 100.0%) of total Group revenue,
100.0% (2021: 100.0%) of Group profit before tax, and 100.0%
(2021: 100.0%) of Group total assets. The work on the two
components was performed by the Group team and the Group
team performed procedures on the items excluded from
normalised Group profit before tax.
We were able to rely upon the Group's internal control over
financial reporting in several areas of our audit, where our
controls testing supported this approach, which enabled us to
reduce the scope of our substantive audit work; in the other areas
the scope of the audit work performed was fully substantive.
In planning our audit, we considered the potential impact of
risks arising from climate change on the Group’s business and
its financial statements. The Group has set out its strategy
regarding climate change, together with further information, in
the Group’s Environmental Impact section of the 2022 Annual
Report on pages 64 to 76.
Climate change risks and opportunities, the Group’s own
commitments and changing regulations could have a significant
impact on the Group’s business and operations. There is
the possibility that climate change risks, both physical and
transitional, could affect financial statement balances through
estimates such as credit risk and the forward-looking cash flows
used in goodwill impairment assessments. There is enhanced
narrative in the Annual Report on climate matters.
As part of our audit we performed a risk assessment of the
impact of climate change risk on the financial statements and
our audit approach. As a part of this we held discussions with
our own climate change professionals to challenge our risk
assessment. In doing this we performed the following:
•
•
•
•
Understanding management's processes: We made enquiries
to understand management's assessment of the potential
impact of climate change risk on the Group's Annual
Report and the Group's preparedness for this. As a part of
this we made enquiries to understand management's risk
assessment process as it relates to the possible effects of
climate change on the Annual Report.
Credit risk: We assessed how the Group considers the
impact of physical risks on the valuation of mortgage
collateral. Specifically, we performed data and
analytics-driven risk assessment procedures to understand
the potential impact of flooding and subsidence on the
valuation of mortgage collateral and made enquiries of
management to understand how this is considered within its
own collateral valuation process.
Forward looking estimates: We considered how the Group’s
forward looking cash flows may be impacted within the
relevant CGUs. As part of this, we made enquiries to
understand management’s own considerations and assessed
the reasonableness of the forward-looking forecasts in the
context of the business.
Annual Report narrative: We made enquiries of management
to understand the process by which climate-related narrative
is developed including the primary sources of data used
and the governance process in place over the narrative. As
a part of our risk assessment, we read the climate-related
information in the front half of the Annual Report and
considered its consistency with the financial statements and
our audit knowledge.
On the basis of the procedures performed above, taking into
account the nature of the Group’s lending exposures and
available headroom in the impairment assessment of goodwill,
we concluded that, while climate change posed a risk to the
determination of asset values in the current year, the risk was not
significant. As a result, there was no material impact from this on
our key audit matters.
Page 191
Auditors Report 5. 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; and
•
•
the impact on regulatory capital requirements in the event of
an economic slowdown or recession.
•
6. 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.
•
Reading Board, Audit Committee and Risk Committee minutes.
Considering remuneration incentive schemes and
performance targets for management and directors, including
the Financial Performance metrics in the Annual Bonus and
Performance Share Plan.
•
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.
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,
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
impairment allowances on loans to customers and the
recoverability of goodwill.
Further detail in respect of interest income on originated
loans, impairment allowances on loans to customers and the
recoverability of goodwill is set out in the key audit matter
disclosures in section 2 of this report.
We performed procedures including:
•
•
•
Identifying journal entries to test based on risk criteria
and comparing the identified entries to supporting
documentation. These included those posted and approved
by the same user and those including specific descriptors;
Assessing whether the judgements made in making
accounting estimates are indicative of a potential bias; and
Understanding the business purpose of significant unusual
transactions.
We considered whether these risks could plausibly affect the
liquidity and regulatory capital 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 68
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 68 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 68 to be acceptable; and
•
the related statement under the Listing Rules set out on page
56 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.
Page 192
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.
7. 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
The potential effect of these laws and regulations on the financial
statements varies considerably.
Based solely on our work on the other information:
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.
•
•
•
we have not identified material misstatements in the strategic
report and the directors’ report;
in our opinion the information given in those reports for the
financial year is consistent with the financial statements; and
in our opinion those reports have been prepared in
accordance with the Companies Act 2006.
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
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.
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 the ‘Future Prospects’
section on page 55 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; and
the directors’ explanation in the Viability Statement of how
they have assessed the prospects of the Group, over what
period they have done so and why they considered that
period to be appropriate, and their statement as to whether
they have a reasonable expectation that the Group will be
able to continue in operation and meet its liabilities as they
fall due over the period of their assessment, including any
related disclosures drawing attention to any necessary
qualifications or assumptions.
We are also required to review the Viability Statement, set
out on page 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.
Page 193
Auditors Report 8. 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.
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; and
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.
Page 194
10. 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
6 December 2022
9. 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.
Page 195
Auditors Report Showing the financial position, results and cash
flows of the Group and the Company prepared in
accordance with IFRS and UK law
P198
D1. Primary Financial Statements
P198
P199
P200
P201
P202
P202
P203
P204
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
P205
D2. Notes to the Accounts
P205
P266
P280
P306
D2.1 Analysis
D2.2 Employment costs
D2.3 Capital and financial risk
D2.4 Basis of preparation
To drive the business forward with determination and to do so with effort and enthusiasm
I link commitment very closely to customer service. It means
putting myself in the customer’s shoes and making sure they
receive a high level of service. Commitment to great customer
service is one of the most important ways we can help them to
achieve their goals.
Darren, Portfolio Management
D1. Primary Financial Statements
D1.1 Consolidated statement of profit or loss
For the year ended 30 September 2022
Interest receivable
Interest payable and similar charges
Net interest income
Other leasing income
Related costs
Net operating lease income
Gain on disposal of financial assets
Other income
Other operating income
Total operating income
Operating expenses
Provisions for losses
Operating profit before fair value items
Fair value net 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
4
5
6
6
7
8
9
11
12
13
Note
15
15
2022
£m
24.6
(20.0)
4.6
4.6
12.6
2022
£m
545.7
(174.5)
371.2
21.8
393.0
(153.0)
(14.0)
226.0
191.9
417.9
(104.3)
313.6
2022
129.2p
125.9p
2021
(Restated*)
2021
(Restated*)
£m
20.4
(16.9)
3.5
-
10.9
£m
443.5
(133.0)
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
The results for the current and preceding years relate entirely to continuing operations.
*See Note 4.
Page 198
D1.2 Consolidated statement of comprehensive income
For the year ended 30 September 2022
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
Other comprehensive income / (expenditure) for the year net of tax
Total comprehensive income for the year
Note
2022
£m
58
25
15.3
(3.7)
-
-
2022
£m
313.6
11.6
-
11.6
325.2
2021
£m
8.2
(0.9)
(3.0)
0.5
2021
£m
164.5
7.3
(2.5)
4.8
169.3
Page 199
The Accounts D1.3 Consolidated balance sheet
For the year ended 30 September 2022
Assets
Cash – central banks
Cash – retail banks
Loans to customers
Derivative financial assets
Sundry assets
Current tax assets
Deferred tax assets
Retirement benefit obligations
Property, plant and equipment
Intangible assets
Total assets
Liabilities
Short-term bank borrowings
Retail deposits
Derivative financial liabilities
Asset backed loan notes
Secured bank borrowings
Retail bond issuance
Corporate bond issuance
Central bank facilities
Sundry liabilities
Current tax liabilities
Deferred tax liabilities
Retirement benefit obligations
Total liabilities
Called up share capital
Reserves
Own shares
Total equity
Note
16
16
17
25
26
27
42
58
28
29
32
25
33
34
35
36
37
38
27
42
58
43
44
45
2022
£m
1,612.5
318.4
13,650.4
779.0
39.2
5.4
-
7.1
71.4
170.2
16,653.6
0.4
10,569.5
102.1
409.3
586.0
112.3
149.2
2,750.0
513.1
-
44.4
-
2021
£m
1,142.0
218.1
13,408.2
44.2
69.2
-
14.4
-
70.4
170.5
2020
£m
1,637.1
287.9
12,741.1
463.3
128.0
5.7
6.2
-
66.1
170.1
15,137.0
15,505.5
0.3
9,297.4
43.9
516.0
730.0
237.1
149.0
2,819.0
90.7
1.4
-
10.3
0.4
7,867.0
132.4
3,270.5
657.8
296.8
149.8
1,854.4
100.0
-
-
20.4
14,349.5
261.8
932.0
(37.8)
1,156.0
15,236.3
13,895.1
241.4
1,223.9
(48.0)
1,417.3
262.5
1,056.1
(76.7)
1,241.9
Total liabilities and equity
16,653.6
15,137.0
15,505.5
Approved by the Board of Directors on 6 December 2022.
Signed of behalf of the Board of Directors.
N S Terrington
Chief Executive
R J Woodman
Chief Financial Officer
Page 200
D1.4 Company balance sheet
For the year ended 30 September 2022
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 6 December 2022.
Signed of behalf of the Board of Directors.
N S Terrington
Chief Executive
R J Woodman
Chief Financial Officer
Note
16
26
27
28
31
35
36
38
42
43
44
45
2022
£m
19.7
39.2
-
14.6
897.1
970.6
112.3
149.2
51.1
0.1
312.7
241.4
445.5
(29.0)
657.9
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
970.6
1,087.2
1,144.7
Page 201
The Accounts
D1.5 Consolidated cash flow statement
For the year ended 30 September 2022
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
D1.6 Company cash flow statement
For the year ended 30 September 2022
Net cash generated by operating activities
Net cash generated by investing activities
Net cash (utilised) by financing activities
Net (decrease) in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
Represented by balances within:
Cash
Short-term bank borrowings
Note
47
48
49
16
Note
47
48
49
16
2022
£m
1,168.7
(2.4)
(595.6)
570.7
1,359.8
1,930.5
1,930.9
(0.4)
1,930.5
2022
£m
191.3
69.5
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
(260.7)
(156.2)
0.1
19.6
19.7
19.7
-
19.7
7.0
12.6
19.6
19.6
-
19.6
Page 202
Profit
and loss
account
£m
313.6
11.6
325.2
(68.9)
-
-
(10.3)
(109.4)
9.2
(0.5)
Own
shares
Total
equity
£m
£m
-
-
-
-
(79.5)
(10.8)
9.6
109.4
-
-
313.6
11.6
325.2
(68.9)
(79.5)
(10.8)
0.7
-
9.2
(0.5)
145.3
28.7
175.4
1,005.9
1,151.2
(76.7)
(48.0)
1,241.9
1,417.3
D1.7 Consolidated statement of movements in equity
For the year ended 30 September 2022
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
Cash flow
hedging
reserve
£m
£m
£m
£m
£m
Transactions arising from
Profit for the year
Other comprehensive income
Total comprehensive income
Transactions with owners
Dividends paid (note 46)
Own shares purchased
Irrevocable instruction accrual
Exercise of share awards
Shares cancelled
Charge for share based
remuneration (note 55)
Tax on share based remuneration
Net movement in equity in
the year
Opening equity
Closing equity
-
-
-
-
-
-
0.4
(21.5)
-
-
(21.1)
262.5
241.4
For the year ended 30 September 2021
-
-
-
-
-
-
1.0
-
-
-
1.0
70.1
71.1
-
-
-
-
-
-
-
21.5
-
-
21.5
50.3
71.8
-
-
-
-
-
-
-
-
-
-
-
(70.2)
(70.2)
-
-
-
-
-
-
-
-
-
-
-
-
-
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
Cash flow
hedging
reserve
£m
£m
£m
£m
£m
Transactions arising from
Profit for the year
Other comprehensive income
Total comprehensive income
Transactions with owners
Dividends paid (note 46)
Own shares purchased
Irrevocable instruction accrual
-
-
-
-
-
-
-
-
-
-
-
-
Exercise of share awards
0.7
1.4
Shares cancelled
Charge for share based
remuneration (note 55)
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
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
50.3
50.3
(70.2)
(70.2)
Profit
and loss
account
£m
164.5
7.3
171.8
(54.6)
-
-
(3.3)
-
8.9
2.4
-
(2.5)
(2.5)
-
-
-
-
-
-
-
(2.5)
2.5
-
125.2
880.7
1,005.9
Own
shares
Total
equity
£m
£m
-
-
-
-
(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
Page 203
The Accounts D1.8 Company statement of movements in equity
For the year ended 30 September 2022
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 46)
Own shares purchased
Irrevocable instruction accrual
Exercise of share awards
Shares cancelled
Charge for share based
remuneration (note 55)
Net movement in equity in
the year
Opening equity
Closing equity
-
-
-
-
-
-
0.4
(21.5)
-
(21.1)
262.5
241.4
-
-
-
-
-
-
1.0
-
-
1.0
70.1
71.1
-
-
-
-
-
-
-
21.5
-
21.5
50.3
71.8
-
-
-
-
-
-
-
-
-
-
(23.7)
(23.7)
For the year ended 30 September 2021
136.5
-
136.5
(68.9)
-
-
-
-
-
-
-
(66.9)
(10.8)
-
(109.4)
109.4
9.2
-
(32.6)
358.9
326.3
31.7
(60.7)
(29.0)
136.5
-
136.5
(68.9)
(66.9)
(10.8)
1.4
-
9.2
0.5
657.4
657.9
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 46)
Own shares purchased
Irrevocable instruction accrual
Exercise of share awards
Shares cancelled
Charge for share based
remuneration (note 55)
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
Page 204
D2. Notes to the Accounts
For the year ended 30 September 2022
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 2022
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 internally were revised during the year, following the disposal of
the unsecured consumer loan assets of the former Idem Capital segment (note 7). The segments used at 30 September 2022 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
Comparative disclosures have been restated to correspond to the new segments.
Dedicated financing and administration costs of each of these businesses are allocated to the segment. Shared central costs are
not allocated between segments, nor are income from central cash balances, the carrying costs of unallocated savings balances, or
central treasury activities including fair value hedging.
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.
Page 205
The Accounts 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.
Financial information about these business segments, prepared on the same basis as used in the consolidated accounts of the
Group, is shown below. The presentation of interest receivable and interest payable below has been revised as described in Note 4.
Mortgage
Lending
Commercial
Lending
Unallocated
items
Total
Segments
£m
400.3
(138.8)
261.5
7.4
268.9
(24.4)
(4.6)
239.9
£m
135.8
(22.7)
113.1
9.8
122.9
(24.9)
(9.4)
88.6
£m
9.6
(13.0)
(3.4)
4.6
1.2
(103.7)
-
(102.5)
£m
545.7
(174.5)
371.2
21.8
393.0
(153.0)
(14.0)
226.0
Mortgage
Lending
Commercial
Lending
Unallocated
items
Total
Segments
£m
367.7
(129.0)
238.7
6.4
245.1
(22.5)
7.6
230.2
£m
115.0
(19.8)
95.2
8.0
103.2
(23.9)
(2.9)
76.4
£m
(39.2)
15.8
(23.4)
-
(23.4)
(89.0)
-
(112.4)
2022
£m
226.0
191.9
417.9
£m
443.5
(133.0)
310.5
14.4
324.9
(135.4)
4.7
194.2
2021
£m
194.2
19.5
213.7
Year ended 30 September 2022
Interest receivable
Interest payable
Net interest income
Other operating income
Total operating income
Operating expenses
Provisions for losses
Year ended 30 September 2021 (restated)
Interest receivable
Interest payable
Net interest income
Other operating income
Total operating income
Operating expenses
Provisions for losses
The segmental profits disclosed above reconcile to the group results as shown below.
Results shown above
Fair value items
Operating profit
Page 206
The assets and liabilities attributable to each of the segments at 30 September 2022, 30 September 2021 and 30 September 2020 on
the basis described above were:
30 September 2022
Segment assets
Loans to customers
Operating lease assets
Cross-currency basis swaps
Securitisation cash
Segment liabilities
Allocated deposits
Securitisation funding
30 September 2021 (restated)
Segment assets
Loans to customers
Operating lease assets
Cross-currency basis swaps
Securitisation cash
Segment liabilities
Allocated deposits
Securitisation funding
30 September 2020 (restated)
Segment assets
Loans to customers
Operating lease assets
Cross-currency basis swaps
Securitisation cash
Segment liabilities
Allocated deposits
Securitisation funding
Note
17
28
25
16
Note
17
28
25
16
Note
17
28
16
Mortgage
Lending
£m
Commercial
Lending
£m
Total
Segments
£m
12,328.7
-
-
240.5
12,569.2
11,864.7
995.3
12,860.0
1,881.6
41.6
-
-
14,210.3
41.6
-
240.5
1,923.2
14,492.4
2,193.7
-
2,193.7
14,058.4
995.3
15,053.7
Mortgage
Lending
£m
Commercial
Lending
£m
Total
Segments
£m
11,829.6
-
-
123.3
11,952.9
10,943.2
1,246.0
12,189.2
1,573.1
39.3
-
-
13,402.7
39.3
-
123.3
1,612.4
13,565.3
1,901.2
-
1,901.2
12,844.4
1,246.0
14,090.4
Mortgage
Lending
£m
Commercial
Lending
£m
Total
Segments
£m
11,101.1
-
445.3
223.4
1,530.3
39.5
-
-
12,631.4
39.5
445.3
223.4
11,769.8
1,569.8
13,339.6
7,914.6
3,928.3
11,842.9
1,895.9
-
1,895.9
9,810.5
3,928.3
13,738.8
An analysis of the Group’s financial assets by type and segment is shown in note 17. All the assets shown above were located in
the UK.
Page 207
The Accounts
The additions to non-current assets, excluding financial assets, in the year which are included in segmental assets above, are
investments of £14.5m (2021: £13.0m) 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.
The segmental assets and liabilities may be reconciled to the consolidated balance sheet as shown below.
2022
£m
14,492.4
1,690.4
779.0
29.8
170.2
(508.2)
16,653.6
2021
£m
13,565.3
1,236.8
44.2
31.1
170.5
89.1
15,137.0
2022
£m
2021
£m
15,053.7
14,090.4
(3,389.2)
102.1
3,011.9
44.4
-
413.4
(3,544.0)
43.9
3,205.4
1.4
10.3
87.7
15,236.3
13,895.1
2022
£m
545.7
24.6
12.6
582.9
407.7
165.6
573.3
9.6
582.9
2021
(Restated)
£m
443.5
20.4
10.9
474.8
374.1
139.9
514.0
(39.2)
474.8
Note
4
6
8
Total segment assets
Unallocated assets
Central cash and investments
Unallocated derivatives
Operational property, plant and equipment
Intangible assets
Other
Total assets
Total segment liabilities
Unallocated liabilities
Unallocated retail deposits
Derivative financial instruments
Central borrowings
Tax liabilities
Retirement benefit obligations
Other
Total liabilities
3. Revenue
Interest receivable
Operating lease income
Other income
Total revenue
Arising from:
Mortgage Lending
Commercial Lending
Total revenue from segments
Unallocated revenue
Total revenue
Page 208
4.
Interest receivable
The Group has reconsidered the analysis it presents of net interest income in its accounts in light of the increasing magnitude of
hedging impacts on these balances, with derivative income and expense attributed to the hedged transaction and shown separately.
This will provide better information to users and is consistent with approaches currently used by comparable firms. Information in
respect of the year ended 30 September 2021 has been restated on the same basis. While this change affects the total reported
amounts of interest receivable and interest payable (note 5) by the amount reported as ‘effect of fair value hedging of loan assets’
below, total net interest is unaffected.
Interest receivable is analysed as follows.
Interest receivable in respect of
Loans and receivables
Finance leases
Factoring income
Interest on loans to customers
Effect of fair value hedging of loan assets
Interest on loans to customers after hedging
Other interest receivable
Total interest on financial assets
The above amounts relate to:
Financial assets held at amortised cost
Finance leases
Derivative financial instruments held at fair value
2022
£m
486.7
45.0
3.4
535.1
(1.5)
533.6
12.1
545.7
2022
£m
502.2
45.0
(1.5)
545.7
2021
(Restated)
£m
440.0
40.4
2.3
482.7
(40.7)
442.0
1.5
443.5
2021
(Restated)
£m
443.8
40.4
(40.7)
443.5
Page 209
The Accounts 5.
Interest payable and similar charges
The Group’s interest payable disclosure has been reanalysed, and comparative amounts restated as described in note 4.
In the 2021 disclosures as originally presented, transactions relating to fair value hedging were included in ‘interest payable on retail
deposits’ (£26.3m) and ‘interest payable on asset backed loan notes’ (£8.4m). These amounts have been reanalysed between ‘effect
of fair value hedging of deposits’ below and ‘effect of fair value hedging of loan assets’ in note 4.
On financial liabilities
Retail deposits
Effect of fair value hedging of deposits
Interest on retail deposits after hedging
Asset backed loan notes
Bank loans and overdrafts
Corporate bonds
Retail bonds
Central bank facilities
Repurchase agreements
Total interest on financial liabilities
Pension scheme deficit
Discounting on contingent consideration
Discounting on lease liabilities
Other finance costs
The above amounts relate to:
Financial liabilities held at amortised cost
Derivative financial instruments held at fair value
Other items
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
Page 210
Note
58
39
Note
28
55
2022
£m
108.8
4.2
113.0
9.1
13.3
6.6
9.1
22.2
-
2021
(Restated)
£m
94.2
(6.0)
88.2
9.5
6.6
9.3
15.4
2.2
0.1
173.3
131.3
0.2
0.1
0.2
0.7
0.3
0.3
0.2
0.9
174.5
133.0
2022
£m
169.1
4.2
1.2
174.5
2022
£m
17.7
6.9
24.6
(10.1)
(2.7)
(7.2)
(20.0)
4.6
2021
(Restated)
£m
137.3
(6.0)
1.7
133.0
2021
£m
15.2
5.2
20.4
(8.9)
(2.3)
(5.7)
(16.9)
3.5
7. Gain on derecognition of financial assets
On 8 June 2022 the Group disposed of almost all of its unsecured consumer loan balances, which had been held within the
Idem Capital Segment. The Group has no continuing interest in these assets. The carrying value of the loans disposed of was
£74.1m and cash consideration of £78.9m was received, resulting in a gain on disposal of £4.6m after allowing for costs arising
from the transaction.
This disposal significantly reduced the size of the Idem Capital segment, and subsequently the Group reorganised its segmental
reporting as described in note 2.
8. Other income
Loan account fee income
Broker commissions
Third party servicing
Other income
All loan account fee income arises from financial assets held at amortised cost.
9. Operating expenses
Employment costs
Auditor remuneration
Amortisation of intangible assets
Depreciation of operational assets
Other administrative costs
2022
£m
6.1
2.3
3.5
0.7
12.6
2022
£m
103.6
2.5
2.0
3.5
41.4
153.0
Note
55
10
29
28
The Group incurred no costs in respect of short-term operating leases in the year (2021: none).
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
Page 211
The Accounts 10. Auditor remuneration
The analysis of fees payable to the Company’s auditors (KPMG LLP) and their associates, excluding irrecoverable VAT, required by the
Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 is set out below.
Audit fee of the company
Other services
Audit of subsidiary undertakings pursuant to legislation
Total audit fees
Audit related assurance services
Interim review
Other
Total fees
Irrecoverable VAT
Total cost to the Group (note 9)
2022
£m
0.7
1.2
1.9
0.2
-
2.1
0.4
2.5
2021
£m
0.7
1.0
1.7
0.2
-
1.9
0.4
2.3
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.
11. Loan impairments – provisions charged / credited to income
The amounts charged / (credited) to the profit and loss account in the year are analysed as follows.
Mortgage
Lending
Commercial
Lending
£m
5.1
(0.5)
4.6
4.6
-
4.6
(7.1)
(0.5)
(7.6)
(7.6)
-
(7.6)
£m
10.7
(1.3)
9.4
2.4
7.0
9.4
4.0
(1.1)
2.9
(2.1)
5.0
2.9
Total
£m
15.8
(1.8)
14.0
7.0
7.0
14.0
(3.1)
(1.6)
(4.7)
(9.7)
5.0
(4.7)
30 September 2022
Provided in period
Recovery of written off amounts
Of which
Loan accounts
Finance leases
30 September 2021 (Restated)
(Released) / provided in period
Recovery of written off amounts
Of which
Loan accounts
Finance leases
Page 212
12. Fair value net gains / (losses)
Ineffectiveness of fair value hedges (note 25)
Portfolio hedges of interest rate risk
Deposit hedge
Loan hedge
Ineffectiveness of cash flow hedges
Other hedging movements
Net gains / (losses) on other derivatives
2022
£m
11.6
15.1
26.7
-
4.7
160.5
191.9
2021
£m
(0.3)
6.6
6.3
-
9.9
3.3
19.5
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.
The impact of hedging arrangements on the Group’s balance sheet is summarised in note 25 which also provides a full description of
the Group’s use of derivative financial instruments for hedging purposes.
13. 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 (note 42)
Tax charge on profit on ordinary activities
2022
£m
50.6
0.3
50.9
53.4
104.3
2021
£m
54.4
1.7
56.1
(6.9)
49.2
The standard rate of corporation tax in the UK applicable to the Group in the year was 19.0% (2021 : 19.0%), based on legislation
enacted at the year end. During the year ended 30 September 2021, the UK Government enacted legislation increasing the standard
rate of corporation tax in the UK from 19.0% to 25.0% from April 2023. Therefore legislation currently in force will increase the standard
rate of corporation tax applicable to the Group to 22.0% in the year ending 30 September 2023 and to 25.0% in the year ending
30 September 2024 and thereafter. The effect of these changes on deferred tax balances was accounted for in the year ended
30 September 2021.
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
(b) below.
In the current financial year the UK Government enacted legislation which will reduce the rate of the Banking Surcharge from
8.0% to 3.0%, also from April 2023, while increasing the profit threshold at which the surcharge applies to £100.0m from £25.0m.
This will result in the surcharge applicable to Paragon Bank reducing to 5.5% with a threshold of £62.5m in the financial year ending
30 September 2023 and 3.0%, with a threshold of £100.0m, thereafter. The impact of this change on deferred tax balances has been
accounted for in the current period.
Page 213
The Accounts
(b) 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% (2021: 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 current and deferred tax (excluding Bank Surcharge)
Impact of Bank Surcharge on current and deferred tax
Prior year charge
Tax charge for the year
2022
£m
417.9
79.4
(0.1)
0.8
10.9
13.1
0.2
104.3
2021
£m
213.7
40.6
(1.1)
(0.3)
(1.4)
10.6
0.8
49.2
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.
Change in rate of taxation includes the effect of providing for deferred tax balances at rates other than the comparator rate. This
includes deferred tax provision on fair value gains in the year.
Had the reduction in the Bank Surcharge legislated for in the year been enacted at the same time as the other changes which had
been due to come into force on 1 April 2023, the tax charge for the year ended 30 September 2021 would have been reduced by
£0.5m, with a corresponding increase in the current year.
(c) Factors affecting future tax charges
While the UK Government has made various announcements on the future direction of tax policy during the period and since the year
end, none of these proposals have yet been legislated for and it is uncertain which of them might be. The future direction of UK tax
policy will significantly affect the tax payable by the Group, and this remains uncertain.
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 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.
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’).
14. Profit attributable to members of Paragon Banking Group PLC
The Company’s profit after tax for the financial year amounted to £136.5m (2021: £85.5m). 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 2022 or 30 September 2021.
Page 214
15. 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 (m)
Dilutive effect of the weighted average number of share options and incentive plans in issue during the year (m)
Diluted weighted average number of ordinary shares ranking for dividend during the year (m)
Earnings per ordinary share
- basic
- diluted
2022
313.6
242.7
6.4
249.1
2021
164.5
252.3
8.9
261.2
129.2p
125.9p
65.2p
63.0p
16. 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
2022
£m
1,612.5
1,612.5
318.4
318.4
2021
£m
1,142.0
1,142.0
218.1
218.1
2020
£m
1,637.1
1,637.1
287.9
287.9
1,930.9
1,360.1
1,925.0
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. This cash is shown as ‘securitisation cash’ below.
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. This is shown as ‘ESOP cash’ below.
The total consolidated ‘Cash and Cash Equivalents’ balance may be analysed as shown below:
Available cash
Securitisation cash
ESOP cash
2022
£m
1,689.1
240.5
1.3
1,930.9
2021
£m
1,236.5
123.3
0.3
1,360.1
2020
£m
1,701.1
223.4
0.5
1,925.0
The ‘Cash and Cash Equivalents’ amount of £19.7m (2021: £19.6m, 2020: £12.6m) shown in the Company balance sheet is not subject
to restrictions.
Cash and cash equivalents are classified as Stage 1 exposures (see note 20) 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 215
The Accounts
17. Loans to customers
The Group’s loans to customers at 30 September 2022, analysed between the segments described in note 2 are as follows:
First mortgages
Second charge mortgages
Unsecured consumer loans
Total Mortgage Lending
Finance lease receivables
Development finance
Other secured commercial lending
Other commercial loans
Total Commercial Lending
Loans to customers
Fair value adjustments from portfolio hedging
Note
18
25
2022
£m
2021
(Restated)
£m
2020
(Restated)
£m
12,122.4
11,460.6
10,636.9
206.3
-
281.7
87.3
354.5
109.7
12,328.7
11,829.6
11,101.1
825.2
719.9
238.1
98.4
720.3
608.2
168.0
76.6
724.4
609.0
134.4
62.5
1,881.6
1,573.1
1,530.3
14,210.3
(559.9)
13,650.4
13,402.7
5.5
13,408.2
12,631.4
109.7
12,741.1
The segmental analysis shown above has been restated in line with the revision of the Group’s segments described in Note 2. Total
balances of each class of lending are unaffected by this change.
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 Group’s purchased loan portfolios are analysed below.
First mortgage loans
Consumer loans
Motor finance loans
2022
£m
10.9
64.4
0.5
75.8
2021
£m
13.4
171.8
4.3
189.5
Information on the Estimated Remaining Collections (‘ERCs’), the undiscounted forecast collectible amounts, for first mortgages and
consumer loans is given in note 61. All other loans above are internally generated or arise from acquired operations.
The amounts of the Group’s first mortgage assets pledged as collateral under the central bank facilities described in note 38 or under
the securitisation and warehouse funding arrangements described in notes 34 and 35 are shown below. These include notes retained
by the Group described in note 62. The table also shows assets prepositioned with the Bank of England for use in future drawings.
Pledged as collateral in respect of
Asset backed loan notes
Warehouse facilities
Central bank facilities
Total pledged as collateral
Prepositioned with Bank of England
Other first mortgage assets
Total first mortgage assets
2022
£m
2,099.8
850.8
3,790.9
6,741.5
2,675.5
2,705.4
2021
£m
2,414.5
1,041.1
2,901.0
6,356.6
3,190.1
1,913.9
2020
£m
4,106.4
881.9
2,875.3
7,863.6
1,072.3
1,701.0
12,122.4
11,460.6
10,636.9
No assets of other classes were pledged as collateral at 30 September 2022, 30 September 2021 or 30 September 2020.
Page 216
18. Finance lease receivables
The Group’s finance leases can be analysed as shown below.
Motor finance
Asset finance
RLS and CBILS
Carrying value
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
2022
£m
261.3
498.8
65.1
825.2
2022
£m
284.7
244.4
189.5
136.5
60.5
46.2
961.8
(119.8)
842.0
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
2022
£m
248.7
554.0
39.3
842.0
(16.8)
825.2
2021
£m
229.2
440.5
50.6
720.3
2021
£m
255.5
220.3
164.8
105.0
50.5
41.6
837.7
(96.3)
741.4
2021
£m
225.0
480.2
36.2
741.4
(21.1)
720.3
2020
£m
272.4
452.0
-
724.4
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
19. Impairment provisions on loans to customers
The following notes set out information on the Group’s impairment provisioning under IFRS 9 for the loans to customers balances set
out in note 17, 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 within the following notes:
• 20 Loan impairments – Basis of provision
• 21 Loan impairments by stage and division
• 22 Loan impairments – Provision movements in the year
• 23 Loan impairments – Economic inputs to calculations
• 24 Loan impairments – Sensitivity analysis
The impact on the Group’s profit and loss account for the year is set out in note 11.
Page 217
The Accounts
20. Loan impairment – basis of provisions
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’).
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.
vii. How the Group uses judgemental adjustments 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. In determining for which portfolios a statistically modelled approach is appropriate, the Group considers the
volume of available data and the level of similarity of the credit characteristics of the underlying accounts.
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, 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. This may be the case where economic
indicators at the reporting date and future expectations for those indicators lie outside the range of the observations used to
construct the models. In such circumstances, management carefully review all outputs to ensure provision is adequate.
At 30 September 2022 the UK economy was subject to levels of inflation and interest rates not seen for some considerable time
and not represented sufficiently in the data sets used to create the Group’s models. There was also a level of uncertainty as to the
direction of government policy which was unusual for the UK. The situation was evolving rapidly at the year end, meaning that there
was a risk that credit metrics and external credit bureau data might not fully reflect increasing risks, which would lead to a potential
understatement of PDs.
These factors led management to conclude that current and forecast economic conditions were not ones under which the Group’s
models would necessarily perform well, and that judgemental adjustments might be required to compensate for these weaknesses.
Page 218
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 an SICR may differ between portfolios and will
depend, to some extent, on the level of risk originally perceived and are monitored on an ongoing basis to ensure that this calibrates
with actual experience.
It should be noted that the use of the current PD, which includes external factors such as credit bureau data, means that all relevant
information in the Group’s hands concerning the customers’ present credit position is included in the evaluation, as well as the impact
of future economic expectations.
For non-modelled portfolios, the SICR assessment is based on the credit monitoring position of the account in question and for all
portfolios a number of qualitative indicators which provide evidence of SICR have been considered.
As part of its determination of whether model outputs form a reliable basis for impairment provisioning, the Group considered
whether it had any evidence of groups of accounts demonstrating factors indicating a higher level of credit risk than other accounts in
the same portfolios. No such evidence was noted at 30 September 2022, and hence no additional accounts were identified as having
an SICR.
At 30 September 2021 the Group had identified accounts where the customer had been granted a Covid-related payment holiday as
being at increased credit risk and an additional £599.8m of balances were designated as having an SICR. The performance of such
accounts was monitored through the period and management were able to conclude that, given the passage of a further 12 months,
accounts would either have stabilised or be identified as defaulted or as at SICR through the Group’s normal process. No similar
adjustment was therefore required at 30 September 2022.
While no requirement to identify additional SICR cases has arisen in 2022, the approach is consistent with that adopted at
30 September 2021, and will be kept under review in future periods.
iii) Definitions of default
As the IFRS 9 definition of ECL is based on PD, default must be defined for this purpose. The analysis of these default cases
provides the foundation for the Group’s PD modelling. 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, combined with qualitative and quantitative factors specific
to each portfolio.
The most influential quantitative factor in the majority of portfolios is the arrears level, while the principal qualitative factors relate
to internal account management statuses. In particular the decision to commence a process of enforcement will be considered as a
default in all portfolios. In the Group’s buy-to-let mortgage portfolio the appointment of a receiver of rent to manage the property on
the customer’s behalf is considered a default, while for portfolios assessed on a case-by-case basis, such as the Group’s development
finance loans, the movement of an account to the highest risk category is considered as a default.
This ensures that Group’s definitions of default for its various portfolios are materially aligned to the regulatory definitions of default
used internally, and are broadly aligned to its internal operational procedures, allowing for the arbitrary nature of the 90-day cut-off,
which is a regulatory rather than an operational requirement. 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.
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 an SICR trigger remains.
All default cases are considered to be credit impaired, including all receiver of rent cases and all cases with at least one payment more
than 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.
Page 219
The Accounts 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.
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 the 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.
The adoption of this model has enabled the reporting process in the year to be more streamlined and supported increased use of
scenario analysis.
The Group’s programme of model development continued during the year with a particular focus on analysing how default and loss
data recorded over the period of the Covid pandemic should be reflected in forward-looking models, given the unprecedented nature
of the pandemic and the national and international response to it.
All revised models and model enhancements are carefully reviewed and tested before adoption, and are subject to a governance
process for their approval.
The impacts of the adoption of the new PD model in the year ended 30 September 2021 on the calculated provision were
not significant.
vii)
Judgemental Adjustments
In order to ensure that its loan portfolios are adequately provisioned, the Group considers whether there are factors not fully
captured by the modelling process, including economic conditions more generally, which indicate a need for judgemental
adjustments. Information considered includes credit data, customer and broker feedback received, the results of insight surveys,
industry intelligence and expert knowledge within the business lines.
During the year, the dominance of Covid in these considerations reduced as the short-term impact of the pandemic receded and
other economic factors such as the UK cost of living, rising interest rates and the conflict in Ukraine became more significant.
Towards the end of the year the consensus view of the likely severity of these impacts became markedly more pessimistic, and
together with political instability in the UK Government and emerging negative economic indicators this generated a situation where
very careful assessment of credit prospects was required.
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, judgemental adjustments 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 judgemental adjustments
required is minimal, but in economic conditions where previous relevant experience is limited or non-existent, some form of
judgemental adjustment is always likely to be necessary. While high interest rate and inflation scenarios have occurred in the UK in
the past, market conditions, products and regulatory expectations have moved on considerably in the meantime, and most such
observations would pre-date the existence of buy-to-let mortgages as a distinct asset class. This means that the value of past history
as a guide to future credit performance is reduced.
The current model behaviour and the potential for unobserved credit issues have meant that the requirement for such adjustments
over recent periods has been 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 are combined to form a broad estimate of the level of provision required across the Group.
Page 220
The requirement for judgemental adjustments is considered on a portfolio-by-portfolio basis, and the potential for the existence of
significant groups of assets being particularly exposed to credit risk in the expected economic scenarios is also considered.
The total amounts of judgemental adjustments provided across the Group are set out below by segment.
Mortgage Lending
Commercial Lending
2022
£m
5.0
10.0
15.0
2021
(Restated)
£m
9.2
10.2
19.4
The movements in the period represent a transition from Covid-related overlays to ones which relate more to the responsiveness of
the Group’s provision models to current economic conditions.
In the Mortgage Lending book it is considered that where Covid-related adjustments were made at 30 September 2021, this credit risk
is now either reflected in credit metrics or has reduced. The adjustment at 30 September 2022 is principally a result of a disconnect
between the credit metrics which drive the models and the economic expectations of management, brokers and customers at the
year end date.
In the Commercial Lending segment the adjustment has remained of a similar size, but relates to more general economic exposures
than it did at 2021, with outlook for the sector less positive than credit metrics might indicate. However, the potential long-term
impacts of Covid in the forms of business weakness and the continuing government backed funding of SMEs, through CBILS and
similar schemes, still play a part in this assessment.
The Group’s analysis found no evidence of particular concentrations of credit risk below portfolio level. Given this, and the high level
nature of the exercise undertaken, the judgemental adjustments have been apportioned across the Group’s buy-to-let mortgage and
SME lending portfolios to individual cases. As such they are included in the credit risk disclosures required by IFRS 7.
The Group will continue to monitor the requirement for these adjustments as the economic situation develops and its impacts begin
to be reflected in model outputs. It is anticipated that a more normal economic situation would require a lower value of adjustments,
but the timescale in which such a scenario might be reached appears uncertain.
The Group has adopted the terminology for impairment adjustments proposed by the Taskforce on Disclosures about Expected
Credit Loss (‘DECL’) which restricts the use of the term ‘Post Model Adjustment’ (‘PMA’) to those adjustments calculated on an
account-by-account basis and therefore no longer uses that term for other judgemental adjustments.
Page 221
The Accounts 21. Loan 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
an SICR (Stage 2); and loans which are impaired (Stage 3).
•
•
On initial recognition, and for assets where there has not been an SICR, provisions will be made in respect of losses resulting from
the level of credit default events expected in the twelve months following the balance sheet date
Where a loan has experienced an SICR, whether or not the loan is considered to be credit impaired, provisions will be made based
on the ECLs over the full life of the loan
• For credit impaired assets, provisions will also be made on the basis of lifetime ECLs
For assets which were ‘Purchased or Originated as Credit Impaired’ (‘POCI’) accounts (those considered as credit impaired at the
point of first recognition), such as certain of the Group’s acquired assets in Mortgage Lending, the carrying valuation is based on
expected cash flows discounted by the EIR determined at the point of acquisition.
An analysis of the Group’s loan portfolios between the stages defined above is set out below. The segmental analysis included in this
note for the year ended 30 September 2021 has been restated for the changes in the segments reported (Note 2).
Stage 1
£m
Stage 2*
£m
Stage 3*
£m
POCI
£m
21.4
7.4
28.8
-
(1.5)
(1.5)
21.4
5.9
27.3
Total
£m
12,366.7
1,907.1
14,273.8
(38.0)
(25.5)
(63.5)
12,328.7
1,881.6
14,210.3
0.31%
1.34%
0.44%
119.3
5.1
124.4
(26.1)
(2.4)
(28.5)
93.2
2.7
95.9
21.88%
47.06%
22.91%
-
20.27%
5.21%
30 September 2022
Gross loan book
Mortgage Lending
Commercial Lending
Total
Impairment provision
Mortgage Lending
Commercial Lending
Total
Net loan book
Mortgage Lending
Commercial Lending
Total
Coverage ratio
Mortgage Lending
Commercial Lending
Total
*Stage 2 and 3 balances are analysed in more detail below.
10,339.6
1,817.4
12,157.0
(5.8)
(19.7)
(25.5)
10,333.8
1,797.7
12,131.5
0.06%
1.08%
0.21%
1,886.4
77.2
1,963.6
(6.1)
(1.9)
(8.0)
1,880.3
75.3
1,955.6
0.32%
2.46%
0.41%
Page 222
Stage 1
£m
Stage 2*
£m
Stage 3*
£m
30 September 2021 (restated)
Gross loan book
Mortgage Lending
Commercial Lending
Total
Impairment provision
Mortgage Lending
Commercial Lending
Total
Net loan book
Mortgage Lending
Commercial Lending
Total
Coverage ratio
Mortgage Lending
Commercial Lending
Total
10,396.2
1,504.2
11,900.4
(2.1)
(12.9)
(15.0)
10,394.1
1,491.3
11,885.4
0.02%
0.86%
0.13%
*Stage 2 and 3 balances are analysed in more detail below.
Finance leases included above, analysed by staging, were:
30 September 2022
Gross loan book
Impairment provision
Net loan book
Stage 1
£m
801.7
(13.3)
788.4
1,212.7
66.4
1,279.1
(10.3)
(1.0)
(11.3)
1,202.4
65.4
1,267.8
0.85%
1.51%
0.88%
Stage 2
£m
35.4
(1.5)
33.9
145.3
19.0
164.3
(25.3)
(13.6)
(38.9)
120.0
5.4
125.4
17.41%
71.58%
23.68%
Stage 3
£m
4.4
(2.0)
2.4
Coverage Ratio
1.66%
4.24%
45.45%
30 September 2021
Gross loan book
Impairment provision
Net loan book
704.9
(7.9)
697.0
14.9
(0.5)
14.4
17.3
(12.7)
4.6
Coverage Ratio
1.12%
3.36%
73.41%
POCI
£m
113.1
11.2
124.3
-
(0.2)
(0.2)
113.1
11.0
124.1
-
1.79%
0.16%
POCI
£m
0.5
-
0.5
-
4.3
-
4.3
-
Total
£m
11,867.3
1,600.8
13,468.1
(37.7)
(27.7)
(65.4)
11,829.6
1,573.1
13,402.7
0.32%
1.74%
0.49%
Total
£m
842.0
(16.8)
825.2
2.00%
741.4
(21.1)
720.3
2.85%
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.
The Group’s acquired consumer loans are included in the Mortgage Lending segment, together with legacy (originated pre-2010)
second charge mortgages. Acquired loans which were performing on acquisition are included in the staging analysis above.
Page 223
The Accounts Acquired portfolios within the Mortgage Lending segment 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.
In all cases accounts which are more than one month in arrears, where this is a meaningful measure, are considered to have an SICR.
However, in certain loan portfolios, regular monthly payments of pre-set amounts are not required and hence this criterion cannot
be used.
The value of accounts in stage 2 has increased across all categories as a result of the generally worsening economic outlook. The
largest increase is in those cases in the buy-to-let book identified with an SICR through PD movements, a result of the updated
economic scenarios and weightings (note 23).
Provision levels and coverage in the Mortgage Lending division have both reduced, however, due to the impact of the strong growth
in house prices on security values. Coverage levels in the Commercial Lending division have increased, largely as a result of the
nature of the items included in this stage at 30 September 2022 compared to a year earlier, and a more pessimistic outlook for
security values.
< 1 month
arrears
£m
Recent
arrears
> 1 <= 3 months
arrears
£m
£m
1,850.0
74.2
1,924.2
(5.4)
(1.6)
(7.0)
1,844.6
72.6
1,917.2
0.29%
2.16%
0.36%
10.8
0.2
11.0
(0.1)
-
(0.1)
10.7
0.2
10.9
25.6
2.8
28.4
(0.6)
(0.3)
(0.9)
25.0
2.5
27.5
0.93%
-
0.91%
2.34%
10.71%
3.17%
Total
£m
1,886.4
77.2
1,963.6
(6.1)
(1.9)
(8.0)
1,880.3
75.3
1,955.6
0.32%
2.46%
0.41%
30 September 2022
Gross loan book
Mortgage Lending
Commercial Lending
Total
Impairment provision
Mortgage Lending
Commercial Lending
Total
Net loan book
Mortgage Lending
Commercial Lending
Total
Coverage ratio
Mortgage Lending
Commercial Lending
Total
Page 224
30 September 2021 (restated)
Gross loan book
Mortgage Lending
Commercial Lending
Total
Impairment provision
Mortgage Lending
Commercial Lending
Total
Net loan book
Mortgage Lending
Commercial Lending
Total
Coverage ratio
Mortgage Lending
Commercial Lending
Total
< 1 month
arrears
£m
1,187.7
61.1
1,248.8
(9.9)
(0.9)
(10.8)
1,177.8
60.2
1,238.0
0.83%
1.47%
0.86%
Recent
arrears
> 1 <= 3 months
arrears
£m
8.7
0.2
8.9
(0.1)
-
(0.1)
8.6
0.2
8.8
£m
16.3
5.1
21.4
(0.3)
(0.1)
(0.4)
16.0
5.0
21.0
1.15%
-
1.12%
1.84%
1.96%
1.87%
Total
£m
1,212.7
66.4
1,279.1
(10.3)
(1.0)
(11.3)
1,202.4
65.4
1,267.8
0.85%
1.51%
0.88%
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.
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 gross values of Stage 3 accounts at 30 September 2022 are significantly reduced from those at 30 September 2021 as the
number of new defaults in the year remained low and historic cases were resolved.
Other than the impact of the Commercial Lending write-offs, coverage levels remained broadly similar to the previous year end
position. Ratios in Stage 3 will naturally be subject to a wider range of fluctuation than those elsewhere, given the low number of
accounts involved, the consequent potential for mix effects and the idiosyncratic nature of some of the cases.
Page 225
The Accounts Probation
> 3 month arrears
RoR managed
Realisations
£m
6.0
0.2
6.2
(0.4)
-
(0.4)
5.6
0.2
5.8
£m
£m
£m
37.5
0.7
38.2
(1.0)
(0.2)
(1.2)
36.5
0.5
37.0
49.6
-
49.6
(17.2)
-
(17.2)
32.4
-
32.4
26.2
4.2
30.4
(7.5)
(2.2)
(9.7)
18.7
2.0
20.7
Total
£m
119.3
5.1
124.4
(26.1)
(2.4)
(28.5)
93.2
2.7
95.9
6.67%
-
6.45%
2.67%
28.57%
3.14%
34.68%
-
34.68%
28.63%
52.38%
31.91%
21.88%
47.06%
22.91%
Probation
> 3 month arrears
RoR managed
Realisations
£m
8.0
0.6
8.6
(0.3)
(0.1)
(0.4)
7.7
0.5
8.2
£m
£m
£m
42.0
11.4
53.4
(1.9)
(10.3)
(12.2)
40.1
1.1
41.2
80.9
-
80.9
(17.4)
-
(17.4)
63.5
-
63.5
14.4
7.0
21.4
(5.7)
(3.2)
(8.9)
8.7
3.8
12.5
Total
£m
145.3
19.0
164.3
(25.3)
(13.6)
(38.9)
120.0
5.4
125.4
3.75%
16.67%
4.65%
4.52%
90.35%
22.85%
21.51%
-
21.51%
39.58%
45.71%
41.59%
17.41%
71.58%
23.68%
30 September 2022
Gross loan book
Mortgage Lending
Commercial Lending
Total
Impairment provision
Mortgage Lending
Commercial Lending
Total
Net loan book
Mortgage Lending
Commercial Lending
Total
Coverage ratio
Mortgage Lending
Commercial Lending
Total
30 September 2021 (Restated)
Gross loan book
Mortgage Lending
Commercial Lending
Total
Impairment provision
Mortgage Lending
Commercial Lending
Total
Net loan book
Mortgage Lending
Commercial Lending
Total
Coverage ratio
Mortgage Lending
Commercial Lending
Total
Page 226
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
2022
£m
66.2
14.6
1.6
0.7
83.1
2021
£m
74.7
15.4
4.7
2.0
96.8
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.
Mortgage Lending balances with over three months arrears include 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.
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 2022
30 September 2021
No.
199
42
14
79
334
141
475
£m
31.2
6.3
1.9
10.2
49.6
23.5
73.1
No.
333
56
24
86
499
54
553
£m
56.3
9.1
3.3
12.2
80.9
10.2
91.1
Receiver of rent accounts in the process of realisation at the period end are included under that heading in the Stage 3 tables above.
Page 227
The Accounts 22. Loan impairments – provision movements in the year
The movements in the impairment provision calculated under IFRS 9, analysed by business segments, are set out below.
At 30 September 2021
Provided in period (note 11)
Amounts written off
Assets derecognised
At 30 September 2022 (note 21)
At 30 September 2020
(Released) / provided in period (note 11)
Amounts written off
Assets derecognised
At 30 September 2021 (note 21)
Mortgage
Lending
Commercial
Lending
£m
37.7
5.1
(3.6)
(1.2)
38.0
53.2
(7.1)
(8.4)
-
37.7
£m
27.7
10.7
(12.9)
-
25.5
28.6
4.0
(4.9)
-
27.7
Total
£m
65.4
15.8
(16.5)
(1.2)
63.5
81.8
(3.1)
(13.3)
-
65.4
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 2022, enforceable contractual balances of £4.9m (2021: £8.8m) 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.
A more detailed analysis of these movements by IFRS 9 stage on a consolidated basis for the year ended 30 September 2022 and
30 September 2021 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.
Page 228
There have been no changes in models creating significant movements in balances in the year.
Stage 1
Stage 2
Stage 3
Loss allowance at 30 September 2021
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
Loans sold
Write offs
Loss allowance at 30 September 2022
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
Loans sold
Write offs
Loss allowance at 30 September 2021
£m
15.0
7.2
2.6
(1.6)
(0.2)
(2.4)
4.9
-
-
25.5
22.2
8.1
4.7
(1.4)
(0.2)
(3.8)
(14.6)
-
-
15.0
£m
11.3
-
(2.3)
2.3
(0.4)
1.8
(4.7)
-
-
8.0
15.8
-
(2.6)
2.1
(0.7)
1.8
(5.1)
-
-
11.3
£m
38.9
-
(0.3)
(0.7)
0.6
4.3
3.4
(1.2)
(16.5)
28.5
43.4
-
(2.1)
(0.7)
0.9
3.1
7.6
-
(13.3)
38.9
POCI
£m
0.2
-
-
-
-
-
1.3
-
-
1.5
0.4
-
-
-
-
-
(0.2)
-
-
0.2
Total
65.4
7.2
-
-
-
3.7
4.9
(1.2)
(16.5)
63.5
81.8
8.1
-
-
-
1.1
(12.3)
-
(13.3)
65.4
During the year ended 30 September 2022 the impairment allowance remained relatively stable, due to the opposing effects of the
easing of Covid-related pressures on the UK economy and mounting concerns about the nation’s economic health more generally,
with inflation and interest rates increasing and the potential for impacts from the conflict in Ukraine.
The increase in stage 1 provision came mostly from new lending, coupled with the need to make judgemental increases in the
provision balance. Stage 2 provisions fell slightly as the impacts of additional Covid-related SICRs in 2021 fell away. Stage 3 provision
reduced as bought forward cases were resolved, in both the Commercial Lending and Mortgage Lending divisions.
The principal movements in the impairment provision in the year ended 30 September 2021 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 remained 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 fewer accounts had been granted payment holiday extensions in that year than in the year ended 30 September 2020, this had
driven further transfers from Stage 1 to Stage 2. Transfers to Stage 3 reflected principally a small number of realisation cases and
other cases identified through credit review. Write offs largely related to the realisation of already provided losses on cases being
worked out on a long-term basis.
Page 229
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 2021
New assets originated or purchased
Changes in staging
Transfer to Stage 1
Transfer to Stage 2
Transfer to Stage 3
Redemptions and repayments
Loans sold
Write offs
Other changes
Balance at 30 September 2022
Loss allowance
Carrying value
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
Loans sold
Write offs
Other changes
Balance at 30 September 2021
Loss allowance
Carrying value
Stage 1
£m
11,900.4
3,020.8
519.4
(1,365.2)
(29.5)
(2,311.2)
-
-
422.3
12,157.0
(25.5)
12,131.5
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
Stage 2
£m
1,279.1
-
(516.8)
1,378.2
(16.6)
(230.4)
-
-
70.1
1,963.6
(8.0)
1,955.6
1,045.4
-
(149.5)
519.6
(21.6)
(158.6)
-
-
43.8
1,279.1
(11.3)
1,267.8
Stage 3
£m
164.3
-
(2.6)
(13.0)
46.1
(55.6)
(1.5)
(16.5)
3.2
124.4
(28.5)
95.9
176.1
-
(9.0)
(5.4)
45.3
(35.7)
-
(13.3)
6.3
164.3
(38.9)
125.4
POCI
£m
124.3
-
-
-
-
(33.1)
(73.8)
-
11.4
28.8
(1.5)
27.3
162.0
-
-
-
-
Total
£m
13,468.1
3,020.8
-
-
-
(2,630.3)
(75.3)
(16.5)
507.0
14,273.8
(63.5)
14,210.3
12,713.2
2,419.4
-
-
-
(53.1)
(2,132.3)
-
-
15.4
124.3
(0.2)
124.1
-
(13.3)
481.1
13,468.1
(65.4)
13,402.7
Other changes includes interest and similar charges.
Page 230
23. Loan impairments – economic inputs to 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 consistent with the 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 2022
forecasting cycle (the ‘October forecast’), the Group has adopted a central economic scenario derived using a broadly equivalent
approach to that used in September 2021, with the starting point of the scenario updated to reflect the actual movements of
economic variables and expectations in the year. The general trend of the Group’s central forecast is broadly negative in the short
term, with interest rates and inflation increasing sharply by historical terms in the early part of the five year forecast period before
normalising. Short term falls in house prices are also anticipated.
Compared to the central scenario adopted at 30 September 2021, the new central forecast is based on a significantly higher
interest rate environment throughout the period, reflecting increases already seen in the second half of the year and clear market
expectations of higher rates to come. Inflation is much higher in the early years of the forecast than anticipated twelve months ago,
with credit growth more constricted. GDP growth is slowed and house prices less positive in the short term, but recover later. These
all reflect a worsening outlook for the UK than anticipated 12 months ago especially in the first two years of the period.
The upside and downside scenarios continue to be derived from the central scenario, as they have been in previous periods. The
shapes of these three scenarios are broadly similar across the period, but the degree of divergence of the upside and downside
scenarios from the central scenario has been reviewed to ensure that the asymmetrical nature of credit risk is properly accounted for
and the full universe of possible outcomes adequately represented.
The severe scenario has been derived from stress testing scenarios published by the Bank of England, as in previous periods, with
the 2022 Annual Cyclical Scenario being used at 30 September 2022. This scenario is based on a deep recession, higher interest
rates and falling asset prices. To ensure that the scenario is appropriately severe in the Group’s circumstances a slightly higher
unemployment level and a slightly worse outcome on house prices were assumed, otherwise the appreciation of security values in the
later part of the forecast period would negate other impacts.
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.
Historical and forecast Unemployment rates (End point measure)
As at September 2022
Page 231
The Accounts2021 -2022 FY2022 -2023 FYReporting dateEnd of forecast period used for modelling2023 -2024 FY2024 -2025 FY2025 -2026 FY2026 -2027 FY14.0%12.0%10.0%8.0%6.0%4.0%2.0%0.0%SevereCentralDownsideUpside Historical and forecast Unemployment rates (End point measure)
As at September 2021
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 amend the scenario weightings used at 30 September 2021 for the current year
While the direct impacts of the Covid pandemic have begun to recede, fresh uncertainties, particularly around cost of living issues
in the UK and the conflict in Ukraine, arose in the period and increased rapidly towards the year end, as the political climate in the
UK became more unstable. This expanded the range of potential economic outcomes and the Group considered it was appropriate
to increase the weighting of the severe scenario and reduce that of the downside scenario to allow for this. Sensitivities showing
the impact of this change, and comparing the effect of these weightings with those which might be seen in a more normal economic
environment are set out in Note 24.
The weightings attached to each scenario are set out below:
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
2022
40%
10%
30%
20%
100%
2021
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 232
2020 -2021 FY2021 -2022 FYReporting dateEnd of forecast period used for scenario modelling2022 -2023 FY2023 -2024 FY2024 -2025 FY2025 -2026 FY14.0%12.0%10.0%8.0%6.0%4.0%2.0%0.0%SevereCentralDownsideUpside 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 2022
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
Secured lending (annual change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
2023
0.4%
1.9%
(2.2)%
(3.6)%
2023
(0.6)%
4.7%
(6.5)%
(7.2)%
2023
4.6%
4.1%
5.0%
5.8%
2023
10.4%
9.7%
13.0%
16.7%
2023
4.2%
3.5%
4.6%
6.4%
2023
3.3%
4.1%
2.6%
0.2%
2024
1.3%
3.0%
0.6%
(0.2)%
2024
0.8%
4.7%
(3.3)%
(15.4)%
2024
4.3%
4.3%
4.4%
5.8%
2024
3.9%
2.9%
8.8%
10.0%
2024
4.9%
4.3%
5.8%
9.2%
2024
2.6%
3.3%
1.8%
(0.7)%
2025
1.3%
2.2%
1.4%
1.2%
2025
3.9%
6.8%
4.4%
(14.4)%
2025
3.8%
3.8%
3.8%
5.1%
2025
2.2%
1.9%
2.9%
3.0%
2025
4.8%
4.3%
6.3%
8.8%
2025
2.5%
3.2%
1.7%
1.3%
2026
1.9%
2.7%
1.9%
1.2%
2026
4.2%
6.8%
4.0%
2.7%
2026
3.3%
3.4%
3.3%
4.3%
2026
1.6%
2.0%
2.0%
2.3%
2026
4.6%
4.1%
6.2%
8.2%
2026
3.5%
4.2%
2.7%
3.0%
2027
1.2%
1.7%
1.2%
1.2%
2027
4.4%
5.0%
4.0%
5.5%
2027
3.0%
3.1%
3.0%
3.5%
2027
1.9%
1.9%
1.9%
2.0%
2027
4.3%
3.8%
5.7%
7.5%
2027
3.5%
4.3%
2.8%
3.7%
Page 233
The Accounts Consumer credit (annual change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
30 September 2021
2023
3.6%
4.4%
2.9%
(3.7)%
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%
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
Page 234
2024
3.1%
3.9%
2.4%
(4.4)%
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%
2025
3.6%
4.4%
2.9%
0.1%
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%
2026
3.5%
4.3%
2.8%
2.8%
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%
2027
3.5%
4.3%
2.8%
4.7%
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%
Secured lending (annual change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Consumer credit (annual change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
2022
4.4%
5.3%
3.3%
1.5%
2022
2.6%
4.3%
2.3%
0.6%
2023
3.6%
4.8%
2.8%
(2.4)%
2023
4.4%
6.5%
2.0%
5.1%
2024
3.1%
4.3%
2.9%
(1.0)%
2024
5.5%
7.3%
2.0%
1.2%
2025
3.2%
3.8%
3.6%
1.3%
2025
6.1%
8.0%
2.0%
1.7%
2026
3.3%
3.8%
3.9%
2.5%
2026
6.2%
8.3%
2.3%
4.0%
After the end of the initial five year period, the final rate or rate of change (as appropriate) is assumed to continue into the future in
each scenario.
To illustrate the levels of non-linearity in the various scenarios, the maximum and minimum quarterly levels for each variable over the
five year period commencing on the balance sheet date are set out below.
30 September 2022
Economic driver
GDP
HPI
BBR
CPI
Unemployment
Secured lending
Consumer credit
30 September 2021
Economic driver
GDP
HPI
BBR
CPI
Unemployment
Secured lending
Consumer credit
Central scenario
Upside scenario
Downside scenario
Severe scenario
Max
%
2.2
4.8
5.0
10.8
5.0
4.0
5.0
Min
%
(0.3)
(4.5)
3.0
1.4
3.9
2.3
2.5
Max
%
3.5
7.5
4.5
10.3
4.5
4.8
5.8
Min
%
1.2
3.3
3.0
1.7
3.4
3.1
3.3
Max
%
2.2
4.9
5.5
14.0
6.3
3.3
4.3
Min
%
(2.7)
(13.1)
3.0
1.8
4.1
1.6
1.8
Max
%
1.2
5.7
6.0
17.0
9.2
3.7
4.8
Min
%
(5.0)
(17.8)
3.3
1.8
4.5
(1.2)
(5.2)
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)
Page 235
The Accounts 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
Calculated impairment provision
Effect of multiple economic scenarios
2022
£m
29.1
24.2
53.3
63.5
10.2
2021
(Restated)
£m
26.7
26.0
52.7
65.4
12.7
24. Loan impairments – sensitivity analysis
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 provisions which would be
calculated if each of the economic scenarios were 100% weighted are shown below:
Scenarios
Central
Upside
Downside
Severe downside
2022
2021
Provision
Difference
Provision
Difference
£m
53.3
46.8
62.5
100.3
£m
(10.2)
(16.7)
(1.0)
36.8
£m
52.7
47.1
68.1
106.1
£m
(12.7)
(18.3)
2.7
40.7
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.
Scenario weightings
In order to illustrate the impact of scenario weightings on the outcomes, the impairment provision requirements were sensitised
using alternative weightings. Sensitivity A 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. Sensitivity
B uses the weightings used at the previous year end and is included so that the impact of the change in weightings can be seen.
Judgemental adjustments are assumed to remain constant in both cases.
The weightings used, and the results of applying these sensitivities to the 30 September 2022 scenarios are set out below.
Weighting
Impairment
Difference
Central
Upside
Downside
Severe
40%
40%
40%
10%
30%
10%
30%
25%
35%
20%
5%
15%
£m
63.5
55.5
61.1
£m
-
(8.0)
(2.4)
As reported
Sensitivity A
Sensitivity B
Page 236
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 £136.8m would transfer from Stage 1 to Stage 2 (2021: £99.0m), and the total provision would increase
by £0.9m 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 (2021: £1.1m).
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 £2.7m (2021: £3.3m).
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 £0.4m (2021: £0.6m).
25. 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 61 to 64) 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 in previous years to manage the foreign exchange and interest rate risk inherent in its currency
borrowings. No such hedges were in place during the year
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 237
The Accounts The analysis below splits derivatives between those accounted for within portfolio fair value 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 2022 or the preceding year.
Derivatives in hedge accounting relationships
Fair value hedges
Interest rate swaps
Fixed to floating
Floating to fixed
Total derivatives in hedge accounting relationships
Other derivatives
Interest rate swaps
Currency futures
Total recognised derivative assets / (liabilities)
2022
Assets
£m
652.7
0.3
653.0
125.5
0.5
779.0
2022
Liabilities
£m
2021
Assets
£m
2021
Liabilities
£m
-
(98.5)
(98.5)
(3.6)
-
(102.1)
35.9
2.8
38.7
5.5
-
44.2
(35.8)
(5.9)
(41.7)
(2.0)
(0.2)
(43.9)
The credit risk inherent in the derivative financial assets shown above is discussed in note 61.
The balances held on the Group’s balance sheet relating to the hedging of interest rate risk on its fixed rate customer loan and deposit
balances are summarised below.
Note
17
32
26
38
2022
£m
779.0
(102.1)
676.9
(559.9)
99.7
(460.2)
216.7
-
(388.6)
(388.6)
2021
£m
44.2
(43.9)
0.3
5.5
3.0
8.5
8.8
36.6
(0.2)
36.4
Derivative financial instruments
Assets
Liabilities
Fair value hedging adjustments
On loans to customers
On retail deposits
Net balance sheet position
Collateral balances
Posted (in sundry assets)
Received (in sundry liabilities)
Page 238
(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 63. 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
During the year the Group completed the process of changing the principal sterling reference rate used in its interest rate risk
management framework from LIBOR to SONIA, with all hedges which referenced LIBOR transitioned to a SONIA basis. However, for
administrative purposes, the macro hedges continued to be divided into two sections, one including the transitioned swaps and the
other those swaps which referenced SONIA at inception.
Through the year, as assets and deposits matured and were replaced by new business, the formally LIBOR-linked element of the
hedges reduced, and the originally SONIA-linked element increased.
All interest rate hedging arrangements for new fixed rate assets or liabilities since 1 February 2020 have been 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.
As part of an agreement reached with the noteholders of PM25, described in note 34, to transition that transaction to a SONIA-linked
basis, all LIBOR-linked derivatives owned by that entity were transitioned to SONIA on an agreed basis by 15 February 2022, with the
final reset of each falling in or before December 2021.
The remaining back book of swaps which referenced three-month LIBOR either ran off as the instruments reached maturity, or, where
they had a maturity date after December 2021, transitioned to SONIA in accordance with the protocol issued by ISDA, the trade
organisation for derivatives, at the point of LIBOR cessation.
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.
The designation of the four 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. These will generally be swaps taken
out to hedge the pipeline of fixed rate mortgage offers, which will match with the related loans when they complete.
At the end of each designation period the Group will assess the effectiveness of each hedge retrospectively, based on fair value
movements (relating to interest rate risk components only) which have occurred in the period. Movements are compared to
pre-determined test thresholds using regression techniques to determine whether the hedge was effective in the period.
Page 239
The Accounts Potential sources of 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 61)
• 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, particularly those relating to the lending pipeline.
Hedging Instruments
The hedging portfolios at 30 September 2022 and 30 September 2021 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 (SONIA only at 30 September 2022)
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
2022
2021
Deposit Hedge
Loan Hedge
Deposit Hedge
Loan Hedge
1.45%
N/A
-
£m
-
-
4,286.0
4,286.0
3,097.0
987.5
201.5
-
4,286.0
0.99%
N/A
-
£m
-
47.0
6,853.1
6,900.1
1,369.9
1,641.7
3,886.0
2.5
6,900.1
0.16%
0.69%
-
-
£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
Fair value
(98.2)
652.7
(3.1)
0.1
Page 240
The values 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.
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
2022
2021
Deposit hedge
Loan hedge
Deposit hedge
Loan hedge
£m
£m
£m
£m
0.3
(98.5)
(98.2)
652.7
-
652.7
2.8
(5.9)
(3.1)
35.9
(35.8)
0.1
Notional principal value
4,286.0
6,900.1
2,886.5
6,060.2
Change in fair value used in calculating hedge ineffectiveness
(94.8)
598.1
(15.4)
128.6
2022
2021
Deposit hedge
Loan hedge
Deposit hedge
Loan hedge
£m
£m
£m
£m
Hedged items
Fixed rate deposits
Monetary amount of risk relating to Retail Deposits
3,986.4
-
2,730.4
-
Fixed rate loans
Monetary amount of risk relating to Loans to Customers
-
7,168.6
-
6,120.7
Accumulated amount of fair value hedge adjustments included on balance
sheet (notes 32 and 17)*
Of which: amounts related to discontinued hedging relationships being
amortised
99.7
(7.9)
(559.9)
73.4
Change in fair value used in recognising hedge ineffectiveness
106.4
(583.0)
3.0
(1.7)
15.1
5.5
6.9
(122.0)
Hedge ineffectiveness recognised
Included in fair value gains / (losses) in the profit and loss account (note 12)
11.6
15.1
(0.3)
6.6
* 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.
Page 241
The Accounts (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.
Full details of these arrangements were set out in the Group Accounts for the year ended 30 September 2021, but are not reproduced
in these accounts as no balance sheet items were carried in respect of them at either 30 September 2022 or 30 September 2021.
(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, particularly 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
2022
2021
Pay fixed
Pay floating
Pay fixed
Pay floating
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
2.11%
N/A
-
£m
-
1,578.1
1,578.1
351.6
23.5
542.5
660.5
1,578.1
4.31%
N/A
-
£m
-
377.1
377.1
288.0
86.0
3.1
-
377.1
Fair value
124.8
(2.9)
0.49%
0.35%
-
-
£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)
Page 242
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
26. 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
2022
2021
1.07
1.36
£m
13.4
13.4
-
-
13.4
0.5
2021
£m
-
1.3
36.6
23.7
0.9
3.2
65.7
3.5
-
69.2
£m
11.9
11.9
-
-
11.9
(0.2)
2020
£m
0.1
3.2
103.5
15.1
0.2
3.2
125.3
2.7
-
128.0
Note
69
2022
£m
1.0
1.9
-
30.2
0.3
2.0
35.4
3.8
-
39.2
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.
Page 243
The Accounts
(b) The Company
Current assets
Amounts owed by Group companies
Accrued interest income
2022
£m
39.1
0.1
39.2
2021
£m
73.0
0.1
73.1
2020
£m
84.0
0.6
84.6
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.
27. Current tax assets / liabilities
Current tax in the Group and the Company represents UK corporation tax owed or recoverable.
28. Property, plant and equipment
(a) The Group
Cost
At 30 September 2020
Additions
Disposals
At 30 September 2021
Additions
Disposals
At 30 September 2022
Accumulated depreciation
At 30 September 2020
Charge for the year
On disposals
At 30 September 2021
Charge for the year
On disposals
At 30 September 2022
Net book value
At 30 September 2022
At 30 September 2021
At 30 September 2020
Leased
assets
£m
Land and
buildings
£m
58.1
13.0
(8.2)
62.9
14.5
(5.2)
72.2
18.6
8.9
(3.9)
23.6
10.1
(3.1)
30.6
41.6
39.3
39.5
29.5
7.1
(0.8)
35.8
1.6
(1.7)
35.7
5.9
2.7
(0.8)
7.8
2.2
(1.2)
8.8
26.9
28.0
23.6
Plant and
machinery
£m
12.5
1.8
(0.9)
13.4
1.1
(0.5)
14.0
9.5
1.6
(0.8)
10.3
1.3
(0.5)
11.1
2.9
3.1
3.0
Total
£m
100.1
21.9
(9.9)
112.1
17.2
(7.4)
121.9
34.0
13.2
(5.5)
41.7
13.6
(4.8)
50.5
71.4
70.4
66.1
Land and buildings and plant and machinery shown above are used within the Group’s business. Leased assets includes £31.4m in
respect of assets leased under operating leases (2021: £26.8m) and £10.2m of assets available for hire (2021: £12.5m).
Page 244
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 2020
Additions
Disposals
At 30 September 2021
Additions
Disposals
At 30 September 2022
Accumulated depreciation
At 30 September 2020
Charge for the year
On disposals
At 30 September 2021
Charge for the year
On disposals
At 30 September 2022
Net book value
At 30 September 2022
At 30 September 2021
At 30 September 2020
£m
6.0
6.1
(0.6)
11.5
1.0
(0.9)
11.6
1.4
2.2
(0.6)
3.0
1.6
(0.9)
3.7
7.9
8.5
4.6
£m
1.2
0.9
(0.6)
1.5
0.4
(0.1)
1.8
0.5
0.6
(0.4)
0.7
0.5
(0.1)
1.1
0.7
0.8
0.7
Total
£m
7.2
7.0
(1.2)
13.0
1.4
(1.0)
13.4
1.9
2.8
(1.0)
3.7
2.1
(1.0)
4.8
8.6
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 £17.1m (2021: £17.4m).
Page 245
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
-
2.8
1.4
-
4.2
14.6
16.0
17.4
Cost
At 30 September 2020
Additions
Disposals
At 30 September 2021
Additions
Disposals
At 30 September 2022
Accumulated depreciation
At 30 September 2020
Charge for the year
On disposals
At 30 September 2021
Charge for the year
On disposals
At 30 September 2022
Net book value
At 30 September 2022
At 30 September 2021
At 30 September 2020
Page 246
29. Intangible assets
Cost
At 30 September 2020
Additions
At 30 September 2021
Additions
At 30 September 2022
Accumulated amortisation and impairment
At 30 September 2020
Amortisation charge for the year
At 30 September 2021
Amortisation charge for the year
At 30 September 2022
Net book value
At 30 September 2022
At 30 September 2021
At 30 September 2020
Goodwill
(note 30)
£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
12.4
2.4
14.8
1.7
16.5
10.2
1.2
11.4
1.2
12.6
3.9
3.4
2.2
£m
10.6
-
10.6
-
10.6
7.1
0.8
7.9
0.8
8.7
1.9
2.7
3.5
Total
£m
193.4
2.4
195.8
1.7
197.5
23.3
2.0
25.3
2.0
27.3
170.2
170.5
170.1
Other intangible assets comprise brands and the benefit of business networks recognised on the acquisition of businesses.
30. Goodwill
The goodwill carried in the accounts is attributable to three cash generating units (‘CGU’s), which have not changed in the year. These
balances are reviewed for impairment annually, in accordance with the requirements of IAS 36 – ‘Impairment of Assets’. The balance is
as analysed below:
CGU
SME lending
Development finance
TBMC
(a) SME lending
2022
£m
113.0
49.8
1.6
164.4
2021
£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 2022 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 2022 covering a five-year period.
Page 247
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 lending over the five-year period of 10.56%, compared with 13.9% used in the calculation at 30 September 2021. The new
lending forecasts are the key driver for the profit and cashflow forecasts. Cash flows beyond the five-year budget are extrapolated
using a constant growth rate of 1.54% (2021: 1.6%) 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 14.8% (2021: 13.4%)
As an illustration of the sensitivity of this impairment test to movements in key assumptions, the Group has calculated that a
0% growth rate combined with a 7.5% reduction in profit levels would eliminate the projected headroom of £43.5m. While such
movements are not expected by management, they are considered ‘reasonably possible’ for the purposes of IAS 36. A 0% growth
rate combined with an 11.2% reduction in profit levels would generate a write down of £10.0m.
In the testing carried out at 30 September 2021, 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 , which were considered ‘reasonably possible’ movements, would have eliminated the
projected headroom at that date of £98.3m. 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 have generated a write down of £10.0m.
(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 2022 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 2022 covering a five-year period.
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 8.77%, compared with 13.2% used in the calculation at 30 September 2021. Cash flows beyond the five-year budget are
extrapolated using a constant growth rate of 1.54% (2021: 1.6%) which does not exceed the long-term average growth rate for the
UK economy
Management have concluded that the levels of activity assumed for the purpose of this forecast are reasonable, based on past
experience and the current economic environment
•
Discount rate, which is based on third party estimates of the implied industry cost of capital. The pre-tax discount rate applied to
the cash flow projection is 14.4% (2021: 13.2%)
Management believes any reasonably possible change in the key assumptions above would not cause the recoverable amount of the
development finance CGU to fall below the balance sheet carrying value. This was also the case in the testing carried out at
30 September 2021.
(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 2022 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 7.64% (2021: 4.94%) and cash flows beyond the five year budget are extrapolated using a 1.75% (2021: 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 2021.
Page 248
31. Investment in subsidiary undertakings
At 30 September 2020
Capital distributions
Loans advanced
Loans repaid
Provision movements
At 30 September 2021
Capital distributions
Loans advanced
Loans repaid
Provision movements
At 30 September 2022
Shares in group
companies
Loans to group
companies
Loans to ESOP
Trusts
£m
639.6
(0.7)
-
-
(0.2)
638.7
-
-
-
-
638.7
£m
390.0
-
256.0
(306.5)
-
339.5
-
164.0
(246.5)
-
257.0
£m
0.5
-
3.9
-
(4.1)
0.3
-
13.0
-
(11.9)
1.4
Total
£m
1,030.1
(0.7)
259.9
(306.5)
(4.3)
978.5
-
177.0
(246.5)
(11.9)
897.1
During the year ended 30 September 2021, 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 2022 the Company received £152.7m in dividend income from its subsidiaries (2021: £97.8m)
and £12.0m of interest on loans to group companies (2021: £22.5m).
The Company’s subsidiaries, and the nature of its interest in them, are shown in note 70.
32. 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
2022
£m
6,201.3
4,467.9
10,669.2
2021
£m
5,466.0
3,834.4
9,300.4
The weighted average interest rate on retail deposits at 30 September 2022, analysed by charging method, was:
Fixed rate
Variable rates
All deposits
2022
%
1.74
1.55
1.66
2021
%
1.25
0.42
0.91
2020
£m
4,975.9
2,880.7
7,856.6
2020
%
1.69
0.72
1.34
Page 249
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 25)
2022
£m
929.0
3,732.1
1,627.3
421.4
6,709.8
3,959.4
10,669.2
(99.7)
10,569.5
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
33. Asset backed loan notes
The Group’s 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 2022 interest was payable at a fixed margin above:
• LIBOR on Notes issued by Paragon Mortgages (No. 25) PLC until LIBOR transition in December 2021
• The compounded Sterling Overnight Interbank Average Rate (‘SONIA’) on all other Notes
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
during the current year was completed in the year ended 30 September 2021, and is described below.
In addition, during the year ended 30 September 2021 the Group had outstanding notes denominated in euros, on which interest was
based on EURIBOR, and US dollars, on which interest was based on US dollar LIBOR. The last of these notes were paid down during
that year.
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 62.
Page 250
Notes in issue at 30 September 2022 and 30 September 2021, net of any held by the Group, were:
Issuer
Maturity date
Call date
Principal
outstanding
Average
interest margin
Sterling notes
Interest based on LIBOR
2022
£m
2021
£m
2022
%
Paragon Mortgages (No. 25) PLC
15/05/50
15/05/23
-
338.9
-
Interest based on SONIA
Paragon Mortgages (No. 25) PLC
Paragon Mortgages (No. 26) PLC
Paragon Mortgages (No. 27) PLC†
Paragon Mortgages (No. 28) PLC†
15/05/50
15/05/45
15/04/47
15/12/47
15/05/23
15/08/24
15/10/25
15/12/25
302.5
107.9
-
-
-
179.2
-
-
0.86
1.05
-
-
†All notes issued by Paragon Mortgages (No. 27) and Paragon Mortgages (No. 28) were retained by the Group (see note 62).
2021
%
0.73
-
1.05
-
-
The details of the assets backing these securities are given in note 17.
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 interest on
these notes has been calculated by reference to SONIA rather than LIBOR and the note margins 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.
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 51.
34. 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 62 and details of assets held within the warehouse facilities are given in note 17. Details of the Group’s bank
borrowings are set out below.
i) Paragon Second Funding
ii) Paragon Seventh Funding
Principal
value
£m
416.0
170.0
586.0
2022
Maximum
available
facility
£m
416.0
450.0
866.0
Carrying
value
Principal
value
£m
416.0
170.0
586.0
£m
529.0
201.0
730.0
2021
Maximum
available
facility
£m
529.0
400.0
929.0
Carrying
value
£m
529.0
201.0
730.0
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.
Page 251
The Accounts
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.
On 8 November 2021, revisions to the facility were agreed extending the commitment period for an initial 13-month period with
the ability to extend monthly. The maximum drawing was increased to £450.0m and the interest rate payable was transitioned
to 0.5% above SONIA. The facility will expire on 24 July 2023.
35. 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 in certain circumstances. 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
30 January 2022
28 August 2024
6.125% p.a. fixed
6.000% p.a. fixed
par
par
GBP
GBP
2020
£m
-
112.5
112.5
2019
£m
125.0
112.5
237.5
The outstanding notes are rated BBB by Fitch Ratings.
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 £112.3m (2021: £237.1m), none of which falls due within one year (2021: £125.0m).
36. 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 were originally rated BB+ by Fitch and are currently
rated BBB-, following an upgrade on 7 March 2022. The proceeds of the Notes are utilised in accordance with the Group’s Green Bond
Framework, which is available on its investor website.
The carrying value of corporate bonds in the accounts of the Group and the Company at 30 September 2022 was £149.2m
(2021: £149.0m).
Page 252
37. 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 eligible collateral, currently in the form of designated pools of the Bank’s first mortgage assets and/or the retained
Notes described in note 62, 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 37 months (2021: 40 months). As these drawings were provided at rates below those
available commercially, by a government agency, they are accounted for under IAS 20.
Drawings under the original Term Funding Scheme (‘TFS’) had a maturity of four years and bore interest at BBR. The average
remaining maturity of the Group’s drawings at 30 September 2021 was 4 months and all outstanding drawings were repaid in the
year. 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. The Group accessed the ILTR during the year, and it retains access to this programme for liquidity purposes.
The amounts drawn under these facilities are set out below.
TFSME
TFS
ILTR
2022
£m
2,750.0
-
-
2021
£m
2,750.0
69.0
-
Total central bank facilities
2,750.0
2,819.0
All TFSME borrowings fall due after more than one year. At 30 September 2021 £69.0 million of TFS borrowings were due within
one year.
During the year all TFSME borrowings were repaid and redrawn, extending the maturity date to 21 October 2025 for the majority of
drawings, with £5.2m falling due on 31 March 2027.
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 62). The mortgage assets pledged in support of these drawings
are set out in note 17.
The balances arising from the TFSME and TFS carried in the Group accounts are shown below.
TFSME at IAS 20 carrying value
Deferred government assistance
TFS at IAS 20 carrying value
Deferred government assistance
2022
£m
2,700.2
49.8
-
-
2022
£m
2,750.0
-
2,750.0
2021
£m
2,657.8
92.2
68.7
0.3
2021
£m
2,750.0
69.0
2,819.0
Page 253
The Accounts 38. Sundry liabilities
(a) The Group
Current liabilities
Accrued interest
Trade creditors
CSA liabilities
Purchase of own shares (note 45)
Other accruals
Sundry financial liabilities at amortised cost
Contingent consideration (note 39)
Sundry financial liabilities
Lease payables (note 40)
Deferred income
Conduct (note 41)
Other taxation and social security
Non-current liabilities
Accrued interest
Other accruals
Sundry financial liabilities at amortised cost
Contingent consideration (note 39)
Sundry financial liabilities
Lease payables (note 40)
Deferred income
Total sundry financial liabilities at amortised cost
Total sundry financial liabilities at fair value
Total other sundry liabilities
Total sundry liabilities
2022
£m
42.2
0.7
388.6
10.8
35.9
478.2
2.2
480.4
2.2
3.7
-
3.7
490.0
13.0
-
13.0
-
13.0
6.8
3.3
23.1
491.2
2.2
19.7
513.1
2021
£m
22.2
1.4
0.2
-
32.9
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
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
CSA liabilities represent collateral received in respect of interest rate swap agreements and are described further in notes 25 and 61.
(b) The Company
Current liabilities
Amounts owed to Group companies
Accrued interest
Purchase of own shares (note 45)
Other financial liabilities
Sundry financial liabilities at amortised cost
Lease payables (note 40)
Non-current liabilities
Lease payables (note 40)
Total sundry liabilities
Page 254
2022
£m
23.2
0.7
10.8
1.4
36.1
1.3
37.4
13.7
51.1
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
39. 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 2021
Payments
Revaluation
Unwind of discounting (note 5)
At 30 September 2022 (note 38)
2022
£m
7.5
(4.6)
(0.8)
0.1
2.2
2021
£m
13.5
(2.5)
(3.8)
0.3
7.5
The write downs above are the 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.
40. Lease payables
The Group’s lease liabilities arise under the leasing arrangements described in note 52. Related right of use assets are shown in note 28.
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 38)
In less than one year (note 38)
The Group
The Company
2022
£m
1.1
3.8
1.9
6.8
2.2
9.0
2021
£m
2.3
3.8
1.9
8.0
1.5
9.5
2022
£m
8.2
4.2
1.3
13.7
1.3
15.0
2021
£m
9.6
4.1
1.3
15.0
1.3
16.3
41. 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 framework,
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.
Page 255
The Accounts 42. Deferred tax
(a) The Group
The net deferred tax liability / (asset) for which provision has been made and the movements in that balance are analysed as follows:
Opening
Balance
Profit and loss
Charge / (credit)
Charge / (credit)
to equity
Closing
balance
Year ended 30 September 2022
Accelerated tax depreciation
Retirement benefit obligations
Interest rate hedging
Loans and other derivatives
Share based payments
Tax losses
Other timing differences
Total
Year ended 30 September 2021
Accelerated tax depreciation
Retirement benefit obligations
Interest rate hedging
Loans and other derivatives
Share based payments
Tax losses
Other timing differences
£m
(5.9)
(4.4)
(2.2)
2.9
(5.2)
(0.4)
0.8
(14.4)
(2.9)
(6.7)
0.2
5.0
(1.7)
(1.3)
1.2
(6.2)
Current
£m
Prior
£m
(2.9)
1.3
55.4
(0.6)
0.2
0.4
(0.3)
53.5
(2.1)
1.3
(2.3)
(1.8)
(1.5)
0.9
(0.4)
(5.9)
1.9
-
-
(0.1)
(0.5)
(0.1)
(1.3)
(0.1)
(0.9)
0.1
(0.1)
0.1
(0.2)
-
-
(1.0)
£m
-
3.6
-
-
1.8
-
-
5.4
-
0.9
-
(0.4)
(1.8)
-
-
(1.3)
£m
(6.9)
0.5
53.2
2.2
(3.7)
(0.1)
(0.8)
44.4
(5.9)
(4.4)
(2.2)
2.9
(5.2)
(0.4)
0.8
(14.4)
Balances in respect of interest rate hedging in the table above relate to derivatives hedging interest rate risk in the Group’s loan and
deposit books and related pipelines, and fair value accounting adjustments.
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 (e.g. the timing and nature of the refinancing of certain portfolios) and matters outside the Group’s control (eg the
timing of the Group’s contributions to the defined benefit pension scheme).
If temporary differences reverse within Paragon Bank PLC in a period in which it is subject to the banking surcharge, then the impact
of the reversal will be at an effective tax rate that includes the banking surcharge to some extent.
In addition to the temporary differences, the Group has tax losses of £3.0m (2021: £4.0m) in entities whose current taxable profits are
insufficient to support the recognition of a deferred tax asset.
Page 256
(b) The Company
The net deferred tax liability for which provision has been made, and the movements in that balance are analysed as follows:
Year ended 30 September 2022
Accelerated tax depreciation
Other timing differences
Total
Year ended 30 September 2021
Accelerated tax depreciation
Other timing differences
Opening
Balance
Profit and loss
Charge / (credit)
Charge / (credit)
to equity
Closing
balance
£m
-
1.8
1.8
-
1.8
1.8
Current
£m
0.1
-
0.1
-
-
-
Prior
£m
-
(1.8)
(1.8)
-
-
-
£m
-
-
-
-
-
-
£m
0.1
-
0.1
-
1.8
1.8
43. 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 2021
Shares issued
Shares cancelled
At 30 September 2022
2022
Number
2021
Number
262,495,185
261,777,972
386,039
717,213
(21,471,600)
-
241,409,624
262,495,185
During the year, the Company issued 386,039 shares (2021: 717,213) to satisfy options granted under Sharesave schemes for a
consideration of £1,309,525 (2021: £2,196,934).
On 24 November 2021, 12,100,834 shares, held in treasury at 30 September 2021, were cancelled. On 8 September 2022 a further
9,370,766 shares, purchased into treasury during the year were also cancelled.
44. Reserves
(a) The Group
Share premium account
Capital redemption reserve
Merger reserve
Cash flow hedging reserve (note 25)
Profit and loss account
2022
£m
71.1
71.8
(70.2)
-
1,151.2
1,223.9
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
Page 257
The Accounts (b) The Company
Share premium account
Capital redemption reserve
Merger reserve
Profit and loss account
2022
£m
71.1
71.8
(23.7)
326.3
445.5
2021
£m
70.1
50.3
(23.7)
358.9
455.6
2020
£m
68.7
50.3
(23.7)
319.1
414.4
The share premium account and capital redemption reserve are non-distributable reserves which are required by, and operate under
the provisions of, UK company law.
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.
45. Own shares
Treasury shares
At 1 October 2021
Shares purchased
Shares cancelled
At 30 September 2022
ESOP shares
At 1 October 2021
Shares purchased
Options exercised
At 30 September 2022
Irrevocable authority to purchase
At 1 October 2021
Given in year
Expiring / utilised in year
At 30 September 2022
Balance at 30 September 2022
Balance at 1 October 2021
The Group
The Company
2022
£m
60.7
66.9
(109.4)
18.2
16.0
12.6
(9.6)
19.0
-
10.8
-
10.8
48.0
76.7
2021
£m
23.0
37.7
-
60.7
14.8
4.5
(3.3)
16.0
-
-
-
-
76.7
37.8
2022
£m
60.7
66.9
(109.4)
18.2
-
-
-
-
-
10.8
-
10.8
29.0
60.7
2021
£m
23.0
37.7
-
60.7
-
-
-
-
-
-
-
-
60.7
23.0
At 30 September 2022 the number of the Company’s own shares held in treasury was 3,640,519 (2021: 12,100,834). These shares had a
nominal value of £3,640,519 (2021: £12,100,834). These shares do not qualify for dividends.
At 30 September 2022 an irrevocable instruction for the purchase of a further £10.8m of shares to be held in treasury was in place.
This instruction was completed on 7 November 2022, before the approval date of these financial statements.
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 2022, the trust held 3,879,160 ordinary shares (2021: 3,732,324) with a nominal value of £3,879,160 (2021: £3,732,324)
and a market value of £15,314,924 (2021: £20,359,827). Options, or other share-based awards, were outstanding against all of these
shares at 30 September 2022 (2021: all). The dividends on all these shares have been waived (2021: all).
Page 258
46. 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
2022
Per share
2021
Per share
18.9p
9.4p
28.3p
14.4p
7.2p
21.6p
2022
Per share
2021
Per share
9.4p
19.2p
28.6p
7.2p
18.9p
26.1p
2022
£m
46.6
22.3
68.9
2022
£m
22.3
44.9
67.2
2021
£m
36.5
18.1
54.6
2021
£m
18.1
46.6
64.7
The proposed final dividend for the year ended 30 September 2022 will be paid on 3 March 2023, subject to approval at the AGM, with
a record date of 3 February 2023. The dividend will be recognised in the accounts when it is paid.
Page 259
The Accounts 47. 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
Movements related to asset backed loan notes denominated in currency
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)
2022
£m
417.9
3.5
(0.1)
2.0
-
1.9
14.0
9.2
(2.3)
(821.6)
(734.8)
565.4
22.9
2021
£m
213.7
4.3
0.1
2.0
(442.3)
2.5
(4.7)
8.9
0.2
(766.6)
419.1
104.2
58.8
1,368.8
1,443.8
58.2
(96.7)
416.9
1,225.2
(56.5)
1,168.7
(88.5)
(13.4)
(15.7)
926.4
(48.3)
878.1
Cash flows relating to plant and equipment held for leasing under operating leases are classified as operating cash flows.
Page 260
2022
£m
133.6
1.4
0.4
11.9
9.2
2021
£m
84.0
1.4
4.3
4.3
8.9
33.9
11.5
(0.3)
190.1
1.2
191.3
-
114.4
1.5
115.9
2021
£m
-
-
-
(259.9)
307.2
47.3
(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
48. Net cash flow from investing activities
Proceeds from sales of operating property, plant and equipment
Purchases of operating property, plant and equipment
Purchases of intangible assets
Advances of loans to subsidiary undertakings
Repayment of loans by subsidiary entities
Net cash (utilised) / generated by investing activities
The Group
The Company
2022
£m
0.6
(1.3)
(1.7)
-
-
(2.4)
2021
£m
-
(1.9)
(2.4)
-
-
(4.3)
2022
£m
-
-
-
(177.0)
246.5
69.5
The presentation of cashflows related to loans to group companies has been revised to correspond to that used in note 31 and the
comparative amounts shown for 2021 reanalysed accordingly.
Page 261
The Accounts
49. Net cash flow from financing activities
The Group
The Company
Shares issued (note 43)
Dividends paid (note 46)
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 45)
Exercise of share awards
Net cash (utilised) by financing activities
50. Reconciliation of net debt
(a) The Group
2022
£m
1.4
(68.9)
-
(107.6)
-
(125.0)
(69.0)
(144.6)
(1.7)
(79.5)
(0.7)
(595.6)
2021
£m
2.1
(54.6)
148.9
(2,313.1)
(153.7)
(60.0)
964.6
71.9
(2.5)
(42.2)
-
(1,438.6)
2022
£m
1.4
(68.9)
-
-
-
(125.0)
-
-
(1.3)
(66.9)
-
(260.7)
Cash flows
Non-cash movements
Opening
debt
£m
Debt
issued
£m
Other
Recognition
Currency loan
notes
Other
£m
£m
£m
30 September 2022
Asset backed loan notes
Bank borrowings
Corporate bonds
Retail bonds
516.0
730.0
149.0
237.1
Central bank borrowings
2,819.0
Lease liabilities
Bank overdrafts
Gross debt
Cash
Net debt
9.5
0.3
4,460.9
(1,360.1)
3,100.8
30 September 2021
Asset backed loan notes
3,270.5
Bank borrowings
Corporate bonds
Retail bonds
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
-
-
-
-
-
-
-
-
-
-
-
-
148.9
-
-
-
-
148.9
(148.9)
-
(107.6)
(144.6)
-
(125.0)
(69.0)
(1.7)
0.1
(447.8)
(570.8)
(1,018.6)
(2,313.1)
71.9
(153.7)
(60.0)
964.6
(2.5)
(0.1)
(1,492.9)
713.8
(779.1)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(442.3)
-
-
-
-
-
-
(442.3)
-
(442.3)
Page 262
£m
0.9
0.6
0.2
0.2
-
1.2
-
3.1
-
3.1
0.9
0.3
4.0
0.3
-
6.4
-
11.9
-
11.9
2021
£m
2.1
(54.6)
148.9
-
(153.7)
(60.0)
-
-
(1.2)
(37.7)
-
(156.2)
Closing
debt
£m
409.3
586.0
149.2
112.3
2,750.0
9.0
0.4
4,016.2
(1,930.9)
2,085.3
516.0
730.0
149.0
237.1
2,819.0
9.5
0.3
4,460.9
(1,360.1)
3,100.8
Other cash movements for the year ended 30 September 2021 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 33), which are cashflow hedged under the
arrangements described in note 25(b). The effect of these borrowings is described further in note 63. 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
(b) The Company
30 September 2022
Corporate bonds
Retail bonds
Lease liabilities
Gross debt
Cash
Net debt
30 September 2021
Corporate bonds
Retail bonds
Lease liabilities
Gross debt
Cash
Net debt
Opening
debt
£m
Cash flows
Debt
issued
£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
-
-
-
-
-
-
148.9
-
-
148.9
(148.9)
-
Other
Non-cash
movements
£m
-
(125.0)
(1.3)
(126.3)
(0.1)
(126.4)
(153.7)
(60.0)
(1.2)
(214.9)
141.9
(73.0)
£m
0.2
0.2
-
0.4
-
0.4
4.0
0.3
-
4.3
-
4.3
Closing
debt
£m
149.2
112.3
15.0
276.5
(19.7)
256.8
149.0
237.1
16.3
402.4
(19.6)
382.8
Non-cash changes shown above represent EIR adjustments relating to the spreading of initial costs of the bonds and premium paid
on redemption.
51. 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 £1.4m is included in third party servicing fees (note 8) (2021: £1.6m) and £0.2m is included
in other debtors in respect of unpaid fees at the year end (2021: £0.3m). Outstanding collection monies due to the structured entity of
£0.1m are included in other creditors at 30 September 2022 (2021: £0.3m).
Page 263
The Accounts
52. 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
Note
18
4
28
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
2022
£m
14.0
8.1
5.8
3.6
1.7
0.8
34.0
2021
£m
11.4
6.8
4.8
3.3
1.9
1.0
29.2
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 8 years (2021: 9 years) with rents subject to review
every five years, while the average term of the vehicle leases is 3 years (2021: 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
28
5
9
28
28
62
There was no subleasing of any right of use asset and the total cash flows relating to leasing as a lessee were £1.9m (2021: £2.0m).
Page 264
53. Related party transactions
(a) The Group
During the year, certain 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 £779,000 were outstanding at the year-end
(2021: £16,000), and the maximum amounts outstanding during the year totalled £793,000 (2021: £301,000).
The Paragon Pension Plan (the ‘Plan’) is a related party of the Group. Transactions with the Plan are described in note 58.
The Group had no other transactions with related parties other than the key management compensation disclosed in note 56.
(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 57.
Details of the Company’s investments in subsidiaries and the income derived from them are shown in notes 31 and 70.
Outstanding current account balances with subsidiaries are shown in notes 26 and 38.
During the year the Company incurred interest costs of £1.0m in respect of borrowings from its subsidiaries (2021: £0.8m).
The Company leased an office building from a subsidiary entity (note 52(b)). Finance charges recognised in respect of this lease were
£0.4m (2021: £0.5m).
54. 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 70 and the activities of the Group are
described in Section A2.
The activities of the Group, described as required by the Regulations for the year ended 30 September 2022 were:
Year ended 30 September 2022
Total operating income
Profit before tax
Corporation tax paid
Public subsidies received
Average number of full time equivalent employees
Year ended 30 September 2021
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 37.
United Kingdom
£m
393.0
417.9
56.5
-
1,397
United Kingdom
£m
324.9
213.7
48.3
-
1,327
Page 265
The Accounts D2.2 Notes to the Accounts - Employment costs
For the year ended 30 September 2022
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.
55. Employees
The average number of persons (including directors) employed by the Group during the year was 1,498 (2021: 1,426). The number of
employees at the end of the year was 1,503 (2021: 1,441).
Costs incurred during the year in respect of these employees were:
Share based remuneration
Other wages and salaries
Total wages and salaries
National Insurance on share based remuneration
Other social security costs
Total social security costs
Defined benefit pension cost
Other pension costs
Total pension costs
Total employment costs
Of which
Included in operating expenses (note 9)
Included in maintenance costs (note 6)
2021
£m
8.9
65.1
2.4
8.3
1.8
3.7
2022
£m
9.2
81.9
0.5
9.7
0.9
4.1
2022
£m
91.1
10.2
5.0
106.3
103.6
2.7
106.3
2021
£m
74.0
10.7
5.5
90.2
87.9
2.3
90.2
The charge in respect of National Insurance on share based costs is partly a function of movements in the Group’s share price.
The reduction in the current year is generated by a year-on-year fall in the share price and a reduction in the rate at which National
Insurance is expected to be charged.
Details of the pension schemes operated by the Group are given in note 58.
The Company has no employees. Details of the directors’ remuneration are given in note 56.
Page 266
56. Key management remuneration
Key Management
As part of the ongoing development of its governance framework, the Group has revised its definition of key management personnel
of the Group and the Company, as defined by IAS24 – Related Party Transactions’, to include members of its Executive Committee as
well as members of the Board of Directors of the Company.
The details of key management remuneration required by IAS 24 are set out below. Disclosures for the year ended 30 September 2021
are provided in accordance with the new definition for ease of comparison.
Salaries and fees
Cash amount of bonus
Social security costs
Short-term employee benefits
Post-employment benefits
IFRS 2 cost in respect of key management
National Insurance thereon
Share based payment
2022
£m
4.4
3.1
1.1
4.0
1.0
2022
£m
8.6
0.6
5.0
14.2
2021
(Revised definition)
2021
(Revised definition)
£m
4.2
2.4
0.9
2.8
0.5
£m
7.5
0.5
3.3
11.3
Post-employment benefits shown above include pension allowances, contributions to defined contribution pension schemes or costs
of accrual under the Group’s defined benefit pension plan.
Social security costs paid in respect of key management 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.
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
The information in respect of the remuneration of the directors of the Company required to be disclosed in the notes to the
Company’s accounts by Schedule 5 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations
2008, as applicable to quoted companies, is set out below.
Aggregate amount of remuneration
Pension allowances
Gains on exercise of share options
2022
£m
3.5
0.2
5.6
2021
£m
2.7
0.2
0.1
In the table above remuneration includes the cash amount of bonuses and the value of benefits in kind. It excludes any amounts
receivable in shares.
No director accrued benefits under either a defined benefit or defined contribution pension scheme in the year, nor did any director
receive benefits under long-term incentive schemes, other than in the form of share awards.
Further information about the remuneration of individual directors is provided in the Annual Report on Remuneration in Section B7.2.2.
Page 267
The Accounts 57. 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 55.
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 2022 and at 30 September 2021 is set
out below.
(a) Sharesave Plan
(b) Performance Share Plan
(c) Company Share Option Plan
(d) Deferred Bonus Plan
(e) Restricted Stock Units
(a) Sharesave plan
2022
Number
3,613,777
4,834,871
87,716
1,155,638
616,709
2021
Number
3,561,675
5,375,494
241,574
1,387,137
273,193
10,308,711
10,839,073
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 2022 and the year ended 30 September 2021 is shown below.
Options outstanding
At 1 October 2021
Granted in the year
Exercised or surrendered in the year
Lapsed during the year
At 30 September 2022
2022
2022
2021
2021
Number Weighted average
exercise price
Number Weighted average
exercise price
p
306.89
391.20
339.22
333.10
318.46
4,134,577
432,095
(717,213)
(287,784)
3,561,675
p
295.40
424.00
306.32
319.15
306.89
3,561,675
737,978
(386,039)
(299,837)
3,613,777
Options exercisable
109,654
359.92
105,945
303.07
The weighted average remaining contractual life of options outstanding at 30 September 2022 was 27.0 months (2021: 32.4 months).
The weighted average market price at exercise for share options exercised in the year was 507.07p (2021: 526.83p).
Page 268
Options are outstanding under the Sharesave plans to purchase ordinary shares as follows:
Grant date
20/06/2016
28/07/2017
28/07/2017
31/07/2018
31/07/2018
30/07/2019
30/07/2019
29/07/2020
29/07/2020
28/07/2021
28/07/2021
27/07/2022
27/07/2022
Period exercisable
Exercise price
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
01/09/2025 to 01/03/2026
01/09/2027 to 01/03/2028
249.44p
341.76p
341.76p
408.80p
408.80p
360.16p
360.16p
278.56p
278.56p
424.00p
424.00p
391.20p
391.20p
Number
2022
-
-
1,403
-
20,391
108,251
4,577
Number
2021
68,546
2,633
20,971
34,766
21,124
379,915
5,409
1,925,599
2,078,709
478,876
278,279
63,315
622,064
111,022
518,610
350,345
80,647
-
-
3,613,777
3,561,675
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.
The fair value of options granted is determined using a trinomial model. Details of the awards made in the year ended 30 September 2022
and the year ended 30 September 2021, are shown below.
Grant date
Number of awards granted
Market price at date of grant
Contractual life (years)
Fair value per share at date of grant (£)
Inputs to valuation model
Expected volatility
Expected life at grant date (years)
Risk-free interest rate
Expected annual dividend yield
Expected annual departures
27/07/22
27/07/22
623,122
527.0p
3.5
1.34
114,856
527.0p
5.5
1.06
27/07/21
351,448
554.5p
3.5
1.41
27/07/21
80,647
554.5p
5.5
1.17
39.36%
33.75%
38.77%
33.10%
3.42
1.69%
5.37%
5.00%
5.43
1.74%
5.37%
5.00%
3.42
0.19%
3.90%
5.00%
5.43
0.31%
3.90%
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.
Page 269
The Accounts 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 2022 and 30 September 2021 were:
Grant date
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
15/12/2021
15/12/2021
Period exercisable
Number
Number
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 07/12/2027†
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
07/12/2024* to 14/12/2031λ
07/12/2026* to 14/12/2031λ
2022
-
4,578
2,132
5,005
10,473
34,894
50,268
155,092
1,144,820
509,192
1,122,904
385,707
1,069,870
339,936
4,834,871
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
*Estimated date.
† 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.
ψThese 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 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
•
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. An individual performance condition relating to the grantee’s performance in the final financial year of the vesting period also applies.
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.
φThese 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. Following the Remuneration Committees assessment the
tranche will vest between 0% and 100%
12.5% of the grant is determined based on a customer service condition. This condition 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
δThese 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
λThese awards are subject to performance criteria, similar to those described at δ above except that:
•
Under the EPS condition full vesting occurs if EPS for the third year of the test period is at least 72p, 25% vesting if EPS in this year is 63p and vesting between those points on
a straight line basis
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.
Page 270
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 2022 and the year
ended 30 September 2021 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
15/12/21
1,411,533
549.0p
3.0
504.50p
11/12/20
1,539,645
446.8p
3.0
407.50p
38.13%
3.0
0.53%
37.85%
3.0
(0.12)%
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.
(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 2022 or
30 September 2021.
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 2022 and the year ended 30 September 2021 is shown below.
Options outstanding
At 1 October 2021
Exercised or surrendered in the year
Lapsed during the year
At 30 September 2022
2022
2022
2021
2021
Number Weighted average
exercise price
Number Weighted average
exercise price
p
403.66
402.14
402.37
406.31
444,771
(87,377)
(115,820)
241,574
p
419.97
397.33
471.06
403.66
241,574
(148,680)
(5,178)
87,716
Options exercisable
87,716
406.31
62,049
425.70
Page 271
The Accounts The weighted average remaining contractual life of options outstanding at 30 September 2022 was 66.2 months (2021: 81.5 months).
The weighted average market price at exercise for share options exercised in the year was 466.70p.
The conditional entitlements outstanding under this scheme at 30 September 2022 and 30 September 2021 were:
Grant date
01/12/2016
08/12/2017
14/12/2018
Period exercisable
Exercise price
Number
01/12/2019 to 30/11/2026†
08/12/2020 to 07/12/2027†
14/12/2021 to 13/12/2028β
361.88p
477.76p
396.04p
2022
22,802
20,557
44,357
87,716
Number
2021
27,875
34,174
179,525
241,574
† 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.
(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 2022 and 30 September 2021 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*
15/12/2021
*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
15/12/2024 to 10/12/2031
2022
55,302
52,888
60,042
-
-
26,437
108,701
382,334
224,981
244,953
2021
55,302
52,888
60,042
71,235
67,572
334,498
108,701
382,334
254,565
-
1,155,638
1,387,137
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.
Page 272
Details of the awards made in the year ended 30 September 2022 and the year ended 30 September 2021 are shown below.
Grant date
Number of awards granted
Market price at date of grant
Fair value per share at date of grant
15/12/21
Executive
244,953
549.0p
549.0p
11/12/20
All employee
275,029
446.80p
353.62p
11/12/20
Executive
382,334
446.80p
446.80p
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.
In addition, in the financial year ended 30 September 2022, a one-off RSU grant with a four-year vesting period was made to certain
employees designated as Material Risk Takers (‘MRT’).
The conditional entitlements outstanding under this scheme at 30 September 2022 and 30 September 2021 were:
Grant date
14/12/2018
06/07/2020
11/12/2020
15/12/2021
15/12/2021
*Estimated date
Period exercisable
14/12/2021 to 13/12/2028
07/12/2022* to 05/07/2030
11/12/2023* to 10/12/2030
07/12/2024* to 15/12/2031
07/12/2025* to 15/12/2031
Number
2022
-
190,960
30,193
26,603
368,953
616,709
Number
2021
52,040
190,960
30,193
-
-
273,193
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 2022 and the year ended 30 September 2021 are shown below.
Grant date
Number of awards granted
Market price at date of grant
Contractual life (years)
Fair value per share at date of grant
For all of these grants no departures are expected.
15/12/21
15/12/21
368,953
549.0p
4.0
549.0p
26,603
549.0p
3.0
549.0p
11/12/20
30,193
446.80p
3.0
446.80p
Page 273
The Accounts 58. Retirement benefit obligations
(a) Defined benefit plan - description
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 ended 30 September 2021, 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 did 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 reduce the surplus. 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
Longevity risk – The value of the Plan surplus 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 reduce the surplus 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 surplus will be lower. 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.
Page 274
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 Solutions UK Limited, 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 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 28). 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 28) but this arrangement provides the Plan with additional security in
a stress event.
A new actuarial valuation, as at 31 March 2022, is currently in progress. While the draft outputs of this process have been used as
the basis for the Group’s accounting at 30 September 2022, the process is incomplete and the final position will be reflected in the
accounts for the year ending 30 September 2023.
(b) Defined benefit plan – financial impact
For accounting purposes, the draft valuation at 31 March 2022 was updated to 30 September 2022 in accordance with the
requirements of IAS 19 (revised) by Mercer, the Group’s independent consulting actuary.
The major categories of assets in the Plan at 30 September 2022, 30 September 2021 and 30 September 2020 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
Surplus / (deficit) in the Plan
2022
£m
0.7
56.6
47.4
-
104.7
(97.6)
7.1
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)
The Group has recognised the surplus as an asset at the balance sheet date as it anticipates being able to access economic benefits
at least as great as the carrying value. However such assets are eliminated from capital for regulatory purposes (note 59).
At 30 September 2022 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.
The Plan also has a benchmark allocation of 28% of total assets to Liability Driven Investments (‘LDI’). These investments are used
to hedge 60% of the interest and inflation risks faced by the Plan. During the recent market turmoil the assets of the Plan proved
themselves to be robust in protecting the members' interests, with no requirement to either divest from LDI nor to reduce the hedge
ratio in place.
Towards the end of the year ended 30 September 2021 the Plan disposed of its holdings in real estate funds, following a review of its
investment strategy. At the 2021 year end these were in the process of reinvestment in other asset classes, with part of the proceeds
held in cash at the balance sheet date.
During October 2018, the High Court made a ruling in the Lloyds Banking Group Pension Scheme GMP (Guaranteed Minimum
Pension) equalisation case, which effectively directs defined benefit pension schemes to change their rules to equalise the benefits of
male and female members for the effects of GMPs for employees who were, at one time, contracted out of state schemes. The Court
did not specify a single method which schemes should employ and hence the impact of this on the Plan will not be certain until the
Trustee has determined which method should be adopted and detailed calculations have been performed to evaluate the impact, as
the impact on members will vary from person to person.
The estimated effect of this ruling was accounted for in the accounts of the Group for the year ended 30 September 2019 as a ‘past
service cost’. However, this estimate is based on one permissible method, method C2, and therefore the actual amount may vary due
to the method which the Trustee chooses to apply, which is yet to be finalised, idiosyncratic impacts on individual members and the
development of a wider legal and accounting consensus on the proper interpretation of the courts’ requirements as further cases
are determined.
A further judgement relating to GMP equalisation within historic transfer values was handed down in November 2020. The impact was
allowed for in employment cost for the year ended 30 September 2021, but is not significant.
Page 275
The Accounts 2021
£m
134.5
2.4
4.8
0.2
(6.8)
(0.8)
11.0
145.3
2021
£m
154.9
1.8
-
2.7
0.2
(6.8)
1.1
1.7
-
155.6
The movement in the fair value of the Plan assets during the year was as follows:
At 1 October 2021
Interest on Plan assets
Cash flows
Contributions by the Group
Contributions by Plan members
Benefits paid
Administration expenses paid
Remeasurement (loss) / gain
Return on Plan assets (excluding amounts included in interest)
At 30 September 2022
2022
£m
145.3
2.9
4.0
0.2
(3.8)
(0.8)
(43.1)
104.7
The actual return on Plan assets in the year ended 30 September 2022 was a loss of £40.2m (2021: gain of £13.4m).
The movement in the present value of the Plan liabilities during the year was as follows:
2022
£m
155.6
0.9
-
3.1
0.2
(3.8)
2.2
(61.9)
1.3
97.6
At 1 October 2021
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 2022
Page 276
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
2022
2021
2020
2.00%
1.75%
1.85%
3.40%
2.50%
3.40%
3.15%
2.95%
2.50%
2.95%
2.85%
3.20%
n/a
2.70%
2.65%
5.00%
2.00%
1.75%
3.55%
2.50%
3.55%
3.25%
27
29
29
31
3.40%
2.50%
3.40%
3.15%
28
29
29
31
2.95%
2.50%
2.95%
2.85%
28
29
30
31
In the 2022 valuation the base mortality table used was the standard S3PMA/S3PFA_M (All) Year of Birth table, with future
improvements projected by the CMI 2021 projection model with a 1.5% per annum long-term improvement rate.
In the 2021 valuation the base mortality table used was the standard S3 PA (All) Year of Birth table, with future improvements
projected using the CMI 2020 projection model with a 1.5% per annum long-term improvement rate.
The amounts charged in the consolidated income statement in respect of the Plan are:
Note
2022
2021
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
55
5
£m
0.9
-
0.9
0.8
1.7
3.1
(2.9)
0.2
1.9
£m
1.8
-
1.8
0.8
2.6
2.7
(2.4)
0.3
2.9
Page 277
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:
2022
£m
(43.1)
(2.2)
61.9
(1.3)
15.3
(3.7)
11.6
2021
£m
11.0
(1.1)
(1.7)
-
8.2
(0.9)
7.3
•
•
•
The return on plan assets to 30 September 2022 reflects the impact of generally falling global investment values over the year,
including the effect on the Group’s portfolio of its LDI hedging strategy, whereas the result for the year ended 30 September 2021
included an element of recovery from low points experienced during the Covid pandemic
The change in demographic assumptions in the year ended 30 September 2022 resulted from the adoption of new mortality
tables which included an adjustment for the impact of Covid as well as a change in the tables used; included an allowance for
updated commutation factors; updated the assumed age difference between members and their partners; and adopted different
proportion-married assumptions, all to follow the Trustee’s assumptions for the 2022 triennial valuation
In the year ended 30 September 2021 the change predominantly reflected the adoption of new commutation factors by the
Trustee from January 2021, which increased liabilities in respect of non-retired members
The change in financial assumptions in the year ended 30 September 2022 reflects principally the sharp increase in corporate
bond yields, which are used to determine the discount applied in the calculation of the pension liability. The difference between
Fixed Interest and Indexed-Linked Gilt yields, which is used to forecast market-implied inflation, increased far less and so only
partially mitigated this movement
The movement in the year ended 30 September 2021 mostly represented 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
•
The experience adjustments in 2022 arose on the adoption of the draft 2022 Plan valuation as the basis of the IAS 19 valuation.
This means that the actual pay rises, resignations, retirements and deaths of members since March 2019 are accurately
represented rather than projected. This exercise 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 2022,
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% per annum
0.1% per annum
0.1% per annum
1 year of life expectancy
2022
(1.7)%
1.7%
0.4%
2.9%
2021
(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.
Page 278
Following a review of the Plan’s investment strategy, the current target asset allocations for the year ending 30 September 2023 are
60% growth assets (primarily equities), and 40% matching assets (primarily bonds) which includes LDI balances.
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.
The present best estimate of the contributions to be made to the Plan by the Group in the year ending 30 September 2023 is £3.9m.
The average durations of the discounted 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
2022
Years
21
21
12
18
2021
Years
24
23
15
22
The principal cause of the variations in the period is the significant increase in the discount rate year-on-year.
(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 2022, which represent the total cost
charged against income, were £4.1m (2021: £3.7m) (note 55).
Page 279
The Accounts D2.3 Notes to the Accounts - Capital and financial risk
For the year ended 30 September 2022
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.
59. 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 protection of the Group’s capital base and its long-term viability are key strategic priorities.
The Group sets its target amount of capital in proportion to risk, availability and cost. The Group manages the capital structure and
makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets, having
particular regard to the relative costs and availability of debt and equity finance at any given time. In order to maintain or adjust the
capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new
shares, issue or redeem other capital instruments, such as retail or corporate bonds, or sell assets to reduce debt.
The Group is subject to regulatory capital rules imposed by the PRA on a consolidated basis as a group containing an authorised
bank. This is discussed further below.
(a) Regulatory capital
The Group is subject to supervision by the PRA on a consolidated basis, as a group containing an authorised bank. For regulatory
purposes the Company is designated as a CRR consolidation entity, as defined by the PRA rulebook. As part of this supervision the
regulator will issue a Total Capital Requirement (‘TCR’) setting the amount of regulatory capital which the Group is required to hold at
all times, in order to safeguard depositors from loss in the event of severe losses being incurred by the Group. This requirement is set
in accordance with the international Basel III rules, issued by the Basel Committee on Banking Supervision (‘BCBS’), which, following
the implementation of the Financial Services Act 2021 on 1 January 2022, are implemented 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 those years. In order to increase institutions
lending capacity in the short term, the EU 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.
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 2022 the Group’s total regulatory capital of £1,371.8m (2021: £1,205.8m)
exceeded the amounts required by the regulator, including £660.6m (2021: £604.2m) in respect of its TCR, which is comprised of fixed
and variable elements (amounts not subject to audit).
The total regulatory capital at 30 September 2022 on the fully loaded basis of £1,346.0m (2021: £1,176.1m) was in excess of the TCR of
£658.4m (2021: £601.8m) on the same basis (amounts not subject to audit).
At 30 September 2022, the Group’s TCR represented 8.8% of the total risk exposure (‘TRE’) (2021: 8.8%).
Page 280
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 2022) (2021: 2.5%) and a Counter-cyclical Capital Buffer (‘CCyB’), currently 0.0% of risk weighted
assets (2021: 0.0%). The UK CCyB will increase to 1.0% of TRE from December 2022 and to 2.0% of TRE from July 2023, which is
expected to be its long-term rate in a standard risk environment. Firm specific buffers may also be required.
The Group’s regulatory capital differs from its equity as certain adjustments are required by the PRA Rulebook or the regulator. A
reconciliation of the Group’s equity to its regulatory capital determined in accordance with the PRA Rulebook at 30 September 2022 is
set out below.
Regulatory basis
Fully loaded basis
Total equity
Deductions
Proposed final dividend
IFRS 9 transitional relief
Intangible assets
Pension surplus net of deferred tax
Software relief
Prudent valuation adjustments
Insufficient coverage
Common Equity Tier 1 (‘CET1’) capital
Other tier 1 capital
Total Tier 1 capital
Corporate bond
Eligibility cap
Total Tier 2 capital
Note
46
*
29
58
†
§
ψ
36
Ф
2022
£m
1,417.3
(44.9)
25.8
(170.2)
(5.3)
-
(0.9)
(0.0)
1,221.8
-
1,221.8
150.0
-
150.0
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
2022
£m
1,417.3
(44.9)
-
(170.2)
(5.3)
-
(0.9)
(0.0)
1,196.0
-
1,196.0
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
Total regulatory capital (‘TRC’)
1,371.8
1,205.8
1,346.0
1,176.1
*Firms are permitted to phase in the impact of IFRS 9 transition as described above.
† 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 was calculated in accordance with Article
36 (1) (b) of the CRR. This relief was rescinded for UK firms from 1 January 2022
§ 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 PRA Rulebook.
ψ Regulatory deduction where there is insufficient coverage for non-performing exposures required under Article 47(c) of the CRR which remains in force in the UK for the time
being under the Brexit arrangements. The amount required at 30 September 2022 was less than £0.1m.
ФThe PRA Rulebook restricts the amount of tier 2 capital which is eligible for regulatory purposes to 25% of TCR.
Page 281
The Accounts The total risk exposure amount calculated under the PRA Rulebook framework against which this capital is held, and the proportion of
these assets it represents, are calculated as shown below.
Credit risk
Balance sheet assets
Off balance sheet
IFRS 9 transitional relief
Total credit risk
Operational risk
Market risk
Other
Total risk exposure amount (‘TRE’)
Solvency ratios
CET1
TRC
This table is not subject to audit
Regulatory basis
Fully loaded basis
2022
£m
6,652.1
85.4
25.8
6,763.3
633.1
-
118.6
7,515.0
%
16.3
18.3
2021
£m
6,073.5
143.9
29.7
6,247.1
576.0
-
13.7
6,836.8
%
15.4
17.6
2022
£m
6,652.1
85.4
-
6,737.5
633.1
-
118.6
7,489.2
%
16.0
18.0
2021
£m
6,073.5
143.9
-
6,217.4
576.0
-
13.7
6,807.1
%
15.1
17.3
The risk weightings for credit risk exposures are currently calculated using the Standardised Approach (‘SA’). The Basic Indicator
Approach is used for operational risk.
Page 282
Leverage ratio
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
Add: Credit fair value adjustments on loans to customers
Debit fair value adjustments on retail deposits
Adjusted balance sheet assets
Less: Derivative assets
Central bank deposits
CRDs
Accrued interest on sovereign exposures
On-balance sheet items
Less: Intangible assets
Pension surplus
Add back: Software relief
Total on balance sheet exposures
Regulatory exposure for derivatives
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
2022
£m
2021
£m
16,653.6
15,137.0
17
32
25
16
26
29
58
25
559.9
99.7
17,313.2
(779.0)
(1,612.5)
(30.2)
(1.0)
14,890.5
(170.2)
(7.1)
-
-
3.0
15,140.0
(44.2)
(1,142.0)
(23.7)
-
13,930.1
(170.5)
-
1.4
14,713.2
13,761.0
434.7
-
-
434.7
1,307.9
(1,094.1)
213.8
-
44.2
36.3
80.5
1,380.3
(1,128.3)
252.0
1,221.8
1,055.8
15,361.7
25.8
15,387.5
14,093.5
29.7
14,123.2
7.9%
7.5%
2022
£m
1,196.0
15,361.7
7.8%
2021
£m
1,026.1
14,093.5
7.3%
Following regulatory changes introduced from 1 January 2022, the Group calculates regulatory exposure on derivatives using the
Standardised Approach for Counterparty Credit Risk (‘SA-CCR’), which includes elements based on the market value of derivative
assets adjusted for collateral, amongst other things, and based on potential future exposure in respect of all derivatives held. In
previous years the Mark-to-Market approach was used, however this is no longer available.
Page 283
The Accounts
The UK leverage ratio is prescribed by the PRA and differs from the leverage ratio defined by Basel due to the exclusion of central
bank balances from exposures.
Capital requirements in subsidiary entities
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.
(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 2022 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
29
29
29
2022
£m
313.6
2.0
315.6
1,241.9
(170.5)
1,071.4
1,417.3
(170.2)
1,247.1
2021
£m
164.5
2.0
166.5
1,156.0
(170.1)
985.9
1,241.9
(170.5)
1,071.4
1,159.3
1,028.7
27.2%
16.2%
(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. In addition to the payment of dividends, the Board may also consider whether it is appropriate to apply excess capital in the
market purchase of the Group’s shares.
The distributable reserves of the Company comprise its profit and loss account balance (note 44) 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 9.4p per share was declared, in line with this policy (2021: 7.2p).
Page 284
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. In particular the levels of provision in the Group’s
loan portfolios and the potential for further provision under stress in the event of a worsening UK economic position were considered
by the Board. These were compared to the regulatory capital position at the year end 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.
The Board particularly considered the appropriateness of including net gains relating to fair value adjustments from hedging in the
calculation of any dividend or distribution, as these will reverse over time. Given the size of such adjustments in the period, the Board
concluded that their inclusion was not consistent with its overarching aim of delivering a sustainable dividend which grows with the
earnings of the business.
On the basis of this analysis the Board concluded that a dividend of around 40% of earnings excluding fair value items could be paid.
The Board will therefore propose a final dividend for the year of 19.2p per share (2021: 18.9p per share) for approval at the 2023 AGM,
making a total dividend for the year of 28.6p per share (2021: 26.1p per share).
The Board authorised share buy-backs in the year: firstly the completion of the buy-back announced in 2021 and incomplete at that
year end; and secondly a new buy-back, originally of £50.0m, which was extended to £75.0m in June 2022. The amount expended
in these programmes in the year was £66.9m (note 45) and £10.8 million remained to be completed at the year end. An irrevocable
instruction to undertake the remaining purchases was given to the Group’s brokers before the year end, and the buy-back was
completed on 7 November 2022.
As part of its consideration of capital described above the Board of Directors authorised a new buy-back of up to £50.0m to
commence shortly after the announcement of the 2022 results. All shares acquired in buy-back programmes are initially held
in treasury.
The directors have considered the distributable resources of the Company and concluded that these distributions are appropriate.
The most recent policy review, in November 2022, 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. Share buy-backs will be considered
where excess capital has arisen, either operationally or as a result of changed regulatory requirements.
60. 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 a limited amount of currency risk). The nature and extent of these risks are discussed in notes 61 to 63 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 ERC. ERC discharges its duties through a
number of sub-committees and escalates issues of concern to the Risk and Compliance Committee where appropriate.
The Credit Committee and ALCO are sub-committees of the ERC which monitor performance against the risk appetites set by the
Board and make recommendations for changes in risk appetite where appropriate. They also review and, where authorised to do so,
agree or amend policies for managing each of these risks, which are summarised in the relevant note. The Corporate Governance
Statement in Section B3 (which is not subject to audit) provides further detail on the operations of these committees.
The financial risk management policies have remained unchanged throughout the year and since the year end. The position discussed
in notes 61 to 63 is materially similar to that existing throughout the year.
Page 285
The Accounts 61. 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
2022
£m
2021
£m
17
26
26
16
26
26
26
25
14,210.3
13,402.7
1.9
-
1.3
-
1,930.9
1,360.1
-
30.2
1.0
36.6
23.7
-
16,174.3
14,824.4
779.0
16,953.3
44.2
14,868.6
2022
£m
-
-
39.1
19.7
-
-
0.1
58.9
-
58.9
2021
£m
-
-
73.0
19.6
-
-
0.1
92.7
-
92.7
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 62, 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 sophisticated individual credit assessment supported by the automated efficiencies
of statistically-based evaluation 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 286
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 2022 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
2022
£m
12,086.0
36.4
12,122.4
206.3
12,328.7
719.9
13,048.6
498.8
261.3
33.7
178.7
25.7
2022
%
85.1%
0.2%
85.3%
1.4%
86.7%
5.1%
91.8%
3.5%
1.8%
0.3%
1.3%
0.2%
2021
£m
11,413.2
47.4
11,460.6
281.7
11,742.3
608.2
12,350.5
440.5
229.2
28.2
118.9
20.9
14,046.8
98.9%
13,188.2
60.9
88.0
14.6
-
0.4%
0.6%
0.1%
-
33.1
83.8
10.3
87.3
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%
98.4%
0.3%
0.6%
0.1%
0.6%
14,210.3
100.0%
13,402.7
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.
Page 287
The Accounts There are no significant concentrations of credit risk to individual counterparties due to the large number of customers included in
the portfolios. All lending is to customers within the UK. The total gross carrying value of the Group’s loans to customers due from
customers with total portfolio exposures over £10.0m is analysed below by product type.
Buy-to-let mortgages
Development finance
Structured lending
Asset finance
2022
£m
151.9
306.9
179.4
-
638.2
2021
£m
163.3
217.9
108.7
10.4
500.3
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 2022 is set out below. The analysed
amount represents gross carrying amount.
30 September 2022
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 2021
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
10,270.3
1,563.9
118.6
35.0
44.4
124.8
12,157.0
(25.5)
12,131.5
9,834.5
1,716.9
149.2
42.0
42.0
115.8
11,900.4
(15.0)
11,885.4
Stage 2
£m
846.7
932.0
114.1
34.6
35.1
1.1
1,963.6
(8.0)
1,955.6
563.8
532.2
130.2
23.7
27.5
1.7
1,279.1
(11.3)
1,267.8
Stage 3
£m
1.1
63.6
4.3
9.7
42.2
3.5
124.4
(28.5)
95.9
1.3
78.5
3.8
11.6
62.0
7.1
164.3
(38.9)
125.4
POCI
£m
9.2
1.9
2.5
4.1
9.3
1.8
28.8
(1.5)
27.3
41.9
16.3
22.4
21.7
17.4
4.6
124.3
(0.2)
124.1
Total
£m
11,127.3
2,561.4
239.5
83.4
131.0
131.2
14,273.8
(63.5)
14,210.3
10,441.5
2,343.9
305.6
99.0
148.9
129.2
13,468.1
(65.4)
13,402.7
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 20, 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 an 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 (2022: 0.9%, 2021: 1.0%) is classed as ‘not graded’ above. This rating generally relates to loans
that have been fully underwritten at origination but where the customer falls outside the automated assessment techniques used
post-completion.
Page 288
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 2022 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
2022
%
89.2
9.4
0.4
0.3
0.7
100.0
57.8
57.9
37.6
2021
%
83.8
14.3
0.5
0.3
1.1
100.0
61.1
61.2
42.0
2022
%
95.6
2.4
0.8
0.2
1.0
100.0
50.6
2021
%
88.4
8.5
1.5
0.6
1.0
100.0
56.1
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 9.5% in the year ended 30 September 2022 (2021: 10.0%).
The geographical distribution of the Group’s residential mortgage assets by gross carrying value is set out below.
East Anglia
East Midlands
Greater London
North
North West
South East
South West
West Midlands
Yorkshire and Humberside
Total England
Northern Ireland
Scotland
Wales
First charge
Second charge
2022
2021
2022
2021
%
3.3
5.7
18.2
3.3
10.3
31.2
8.8
5.9
7.8
94.5
0.1
2.3
3.1
%
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
%
3.3
6.2
7.8
4.1
7.7
38.2
8.4
7.4
6.1
89.2
2.0
5.4
3.4
%
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
100.0
100.0
100.0
100.0
Page 289
The Accounts Development finance
Development finance loans have an average term of 24 months (2021: 21 months). Settlement of principal and accrued interest takes
place either on the sale of the development, or units within it, where appropriate, or on the refinancing of the property following its
completion. 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%
2022
2022
By value
By number
%
7.9
17.0
45.0
22.2
5.8
2.1
%
5.1
21.7
39.1
27.2
6.2
0.7
2021
By value
%
2.9
27.3
44.3
22.8
1.4
1.3
2021
By number
%
5.3
20.6
49.4
21.9
1.6
1.2
100.0
100.0
100.0
100.0
The average LTGDV cover at the year end was 62.1% (2021: 61.7%).
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 2022, the development finance portfolio comprised 276 accounts (2021: 247) with a total carrying value of £719.9m
(2021: £608.2m). Of these accounts only nine were included in Stage 2 at 30 September 2022 (2021: ten), with no accounts classified
as Stage 3 (2021: nil). In addition, one acquired account had been classified as POCI (2021: 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.
2022
2021
%
2.8
11.7
10.5
1.2
0.1
46.3
13.0
7.1
6.0
98.7
-
1.3
-
%
3.6
6.3
6.1
2.4
1.1
57.5
13.5
4.8
3.5
98.8
-
1.2
-
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 290
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 52 months (2021: 51 months) while that of the motor finance
loans was 67 months (2021: 64 months), but historical behaviour suggests 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
Manufacturing
Technology
Other vehicles
Refuse disposal vehicles
Agriculture
Print and paper
Other
2022
%
37.4
33.2
6.1
4.9
4.7
3.7
2.4
1.3
6.3
2021
%
33.4
34.2
6.2
7.0
4.3
4.3
3.1
2.3
5.2
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)
2022
8
220.5
178.7
2021
8
185.5
118.9
The maximum advance under these facilities was generally 80% of the underlying assets, except where loans secured by residential
property form the security for the facility, where 90% is admissible.
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 2022, all of these facilities were identified as Stage 1. At 30 September 2021 one of these facilities was identified as
Stage 2 with the remainder in Stage 1.
Page 291
The Accounts 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 has subsequently been extended twice. It is currently expected to be available for new lending until
June 2024.
The Group offered term loans and asset finance loans under the CBIL scheme. Interest and fees were 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 paid 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), on applications received before 1 January 2022 and up to 70% for applications received thereafter.
The Group’s outstanding RLS, CBILS and BBLS loans at 30 September 2022 were:
RLS
Term loans
Asset finance
Total RLS
CBILS
Term loans
Asset finance
Total CBILS
BBLS
Total term loans
Total asset finance (note 18)
2022
£m
0.6
41.5
42.1
18.3
23.6
41.9
4.0
88.0
22.9
65.1
88.0
2021
£m
0.1
20.7
20.8
28.1
29.9
58.0
5.0
83.8
33.2
50.6
83.8
At 30 September 2022, £0.6m of this balance was considered to be non-performing (2021: £0.2m).
Unsecured consumer loans
The Group disposed of almost all its unsecured consumer loan portfolio during the year (note 7). It retains an interest only in a limited
number of unsecured accounts excluded from the sale.
Almost all the Group’s unsecured consumer loan assets were 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. Collections on purchased accounts remained
in excess of those implicit in the purchase prices until the point of sale in June 2022.
Page 292
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 2022 and 30 September 2021, compared to the industry averages at those dates published by UK Finance (‘UKF’) and
the FLA, was:
2022
%
2021
%
First mortgages
Accounts more than three months in arrears
Buy-to-let accounts including receiver of rent cases
Buy-to-let accounts excluding receiver of rent cases
Owner-occupied accounts
UKF data for mortgage accounts more than three months in arrears
Buy-to-let accounts including receiver of rent cases
Buy-to-let accounts excluding receiver of rent cases
Owner-occupied accounts
All mortgages
Second charge mortgage loans
Accounts more than 2 months in arrears
All accounts
Post-2010 originations
Legacy cases (pre-2010 originations)
Purchased assets
FLA data for secured loans
Motor finance loans
Accounts more than 2 months in arrears
All accounts
Originated cases
Purchased assets
FLA data for point of sale hire purchase
Asset finance loans
Accounts more than 2 months in arrears
FLA data for business lease / hire purchase loans
0.15
0.11
2.79
0.41
0.39
0.80
0.72
21.33
1.88
24.45
27.71
7.50
2.07
1.58
8.94
3.40
0.08
0.80
0.21
0.14
4.48
0.47
0.45
0.94
0.85
19.08
1.18
23.12
24.76
8.60
4.15
2.30
14.07
3.40
0.27
0.70
No published industry data for asset classes comparable to the Group’s other books has been identified. Where revised data at
30 September 2021 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.
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 second charge mortgage 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 293
The Accounts
Acquired assets
A significant proportion of the Group’ second charge mortgage balances and, historically, almost all its unsecured consumer loan
assets are, or were, 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 or the year ended 30 September 2022
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
2022
£m
75.3
88.6
94.2
21.4
29.9
33.0
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
Amounts shown above are disclosed as loans to customers (note 17). They include first mortgages, second charge mortgage loans
and, in the amounts shown for 2021 and 2020, unsecured consumer loans.
The reduction in the year primarily reflects the disposal of the Group’s unsecured consumer lending assets (note 7).
Page 294
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 appetites, policies and limits, 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.
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
The Company
Cash with retail banks rated:
A+
2022
£m
1,612.5
1,612.5
46.9
271.5
318.4
2021
£m
1,142.0
1,142.0
50.5
167.6
218.1
1,930.9
1,360.1
19.7
19.6
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.
Page 295
The Accounts
Financial assets at fair value
The Group’s financial assets held at fair value comprise solely derivative financial instruments used for hedging purposes (note 25).
In order to control credit risk relating to counterparties to the Group’s derivative financial instruments, ALCO reviews which
counterparties the Group will deal with, establishes limits for each counterparty and monitors compliance with those limits. Any
changes necessary are proposed to ERC for approval. The Group’s counterparties are typically highly rated banks and, for all
derivative positions held within securitisation structures, must comply with criteria set out in the financing arrangements, which are
monitored externally.
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 uses the ISDA Master Agreement and Credit Support Annex (‘CSA’) for documenting uncleared derivative activity. 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 26, while collateral pledged to the Group is shown
in note 38.
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.
2022
£m
7.0
0.5
757.0
14.5
779.0
(388.3)
(388.3)
2021
£m
0.1
0.4
43.1
0.6
44.2
-
-
390.7
44.2
Carrying value of derivative financial assets
Counterparties rated
AA
AA-
A+
A
Gross exposure (note 25)
Collateral amounts posted
CSA collateral amounts (note 38)
Total collateral
Net exposure
Page 296
62. Liquidity risk
Liquidity risk is the risk that the Group might be unable to 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 wholesale funding, including 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.
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 2022
Retail deposits
Borrowings
Total non-derivative liabilities
Derivative liabilities
30 September 2021
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
8,703.4
119.0
8,822.4
88.8
8,911.2
7,306.3
220.3
7,526.6
1.8
7,528.4
1,697.8
251.3
1,949.1
24.0
1,973.1
1,626.9
25.0
1,651.9
11.7
1,663.6
452.0
2,928.2
3,380.2
3.6
3,383.8
540.1
2,913.7
3,453.8
28.9
3,482.7
In more than
five years
£m
32.0
178.1
210.1
0.1
210.2
12.3
185.6
197.9
0.4
198.3
Total
£m
10,885.2
3,476.6
14,361.8
116.5
14,478.3
9,485.6
3,344.6
12,830.2
42.8
12,873.0
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 297
The Accounts
Retail deposits
The Group’s retail funding strategy is focussed on building a stable mix of deposit products. A high proportion of balances, around
95%, 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
2022
£m
3,934.6
955.1
3,813.7
8,703.4
1,697.8
452.0
32.0
10,885.2
2021
£m
3,308.7
808.1
3,189.5
7,306.3
1,626.9
540.1
12.3
9,485.6
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 the Overall Liquidity Adequacy Rule (‘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 2022 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
2022
£m
1,505.5
1,505.5
150.0
1,655.5
2021
£m
942.7
942.7
150.0
1,092.7
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 is set through regulation for all regulated financial institutions. As at
30 September 2022, the Bank’s LCR was comfortably above the required minimum regulatory standard. The Bank also monitors its
Net Stable Funding Ratio (‘NSFR’) which measures the stability of the funding profile in relation to the composition of its assets and
off balance sheet activities.
Liquidity is not regulated at Group level.
Page 298
Borrowings
Set out below is the contractual maturity profile of the Group’s and the Company’s borrowings at 30 September 2022 and
30 September 2021 based on their carrying values. These are analysed between non-recourse (securitisation) and other funding, with
the liquidity position arising principally from the other funding.
The Group
30 September 2022
Secured bank borrowings
Asset backed loan notes
Total non-recourse funding
Bank overdrafts
Retail bonds
Corporate bond
Central bank facilities
Lease liabilities
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
The Company
30 September 2022
Retail bonds
Corporate bond
Lease liabilities
30 September 2021
Retail bonds
Corporate Bond
Lease liabilities
In more than
five years
Total
Financial liabilities falling due:
In one year
or less, or on
demand
In more than
one year, but
not more than
two years
£m
-
-
-
0.4
-
-
-
2.2
2.6
201.0
-
201.0
0.3
125.0
-
69.0
1.5
396.8
£m
170.0
-
170.0
-
112.3
-
-
1.9
284.2
-
-
-
-
-
-
-
1.9
1.9
In more than
two years but
not more than
five years
£m
-
-
-
-
-
-
2,750.0
3.8
2,753.8
-
-
-
-
112.1
-
2,750.0
3.8
2,865.9
£m
416.0
409.3
825.3
-
-
149.2
-
1.1
975.6
529.0
516.0
1,045.0
-
-
149.0
-
2.3
1,196.3
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
-
-
1.3
1.3
125.0
-
1.3
126.3
£m
112.3
-
1.3
113.6
-
-
1.3
1.3
£m
-
-
4.2
4.2
112.1
-
4.1
116.2
£m
-
149.2
8.2
157.4
-
149.0
9.6
158.6
£m
586.0
409.3
995.3
0.4
112.3
149.2
2,750.0
9.0
4,016.2
730.0
516.0
1,246.0
0.3
237.1
149.0
2,819.0
9.5
4,460.9
Total
£m
112.3
149.2
15.0
276.5
237.1
149.0
16.3
402.4
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 299
The Accounts
Non-recourse funding
The Group has historically used securitisation as a principal source of funding, but currently only accesses this market on a strategic
basis. In a securitisation an SPV company within the Group will issue asset backed loan notes (‘Notes’) secured on a pool of mortgage
or other loan assets beneficially owned by the SPV in a public offer. The Notes have a maturity date later than the final repayment date
for any asset in the pool, typically over thirty years from the issue date. The noteholders are entitled to receive repayment of the Note
principal from principal funds generated by the loan assets from time to time, but their right to the repayment of principal is limited to
the cash available in the SPV. Similarly, payment of accrued interest to the noteholders is limited to cash generated within the SPV.
There is no requirement for any Group company other than the issuing SPV to make principal or interest payments in respect of the
Notes. This matching of the maturities of the assets and the related funding substantially reduces the Group’s exposure to liquidity
risk. Details of Notes in issue are given in note 33 and the assets backing the Notes are shown in note 17.
In each case the Group provides funding to the SPV at inception, subordinated to the Notes, which means that the primary credit
risk on the pool assets is retained within the Group. The Group receives the residual income generated by the assets. These factors
mean that the risks and rewards of ownership of the assets remain with the Group, and hence the loans remain on the Group’s
balance sheet.
Cash received from time to time in each SPV is held until the next interest payment date when, following payment of principal, interest
and the associated costs of the SPV, the remaining balances become available to the Group. Cash balances are also held within each
SPV to provide credit enhancement for the particular securitisation, allowing interest and principal payments to be made even if some
of the loans default. The cash balances of the SPV companies are included within the restricted cash balances disclosed in note 16 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 2022 was £23.2m (2021: £27.4m)
and undrawn facilities of £280.0m were available at the year-end (2021: £199.0m).
Further details of the warehouse facilities are given in note 34 and details of the loan assets within the warehouses are given in note 17.
The final repayment date for all of the securitisation borrowings and the Paragon Second Funding warehouse borrowing is more than
five years from the balance sheet date, the earliest falling due in 2045 and the latest in 2050.
The sterling principal amount outstanding at 30 September 2022 under the SPV and warehouse arrangement was £996.5m
(2021: £1,248.1m). The total sterling amount payable under these arrangements, were these principal amounts to remain outstanding
until the final repayment date, would be £1,912.3m (2021: £1,886.9m). 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. Following redemptions in the year, only the most recent bond remains outstanding.
The Group issued £150.0m of green tier-2 debt 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 upgraded from BBB to BBB+ in
March 2022.
None of the Group’s corporate and retail bond issuance falls due for payment in the next twelve months.
Central bank facilities
The Group has accessed term credit facilities under the central bank schemes described in note 37. 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 2022
the amount of drawings available in respect of prepositioned assets was £1,776.0m (2021: £1,424.2m).
Page 300
Additional Liquidity
The Group holds certain of its own listed, externally rated, asset backed securities which may be used as security to access term
credit and other 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
1,212.7
5.3
4.6
4.3
1,226.9
2022
Available
£m
213.0
100.9
59.9
81.4
455.2
Total
£m
1,425.7
106.2
64.5
85.7
Utilised
£m
1,276.1
5.3
4.6
4.3
1,682.1
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
As these notes are held internally, they are not included in balance sheet liabilities. Mortgage assets backing these securities remain
on the Group’s balance sheet and are included in amounts pledged as collateral in note 17.
Utilised notes includes those which the Group is obliged to hold under regulations governing securitisation issuance.
The available AAA notes would give access to £171.6m (2021: £149.3m) if used to secure drawings on Bank of England facilities.
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 (2021: £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, most recently in the year ended 30 September 2021,
and maintains the capability to access the repo market for liquidity purposes.
Page 301
The Accounts Contractual cash flows
The total undiscounted amounts, inclusive of estimated interest, which would be payable in respect of the non-securitisation
borrowings of the Group and the Company, should those balances remain outstanding until the contracted repayment date, or the
earliest date on which repayment can be required, are set out below.
a) The Group
30 September 2022
Payable in:
Less than one year
One to two years
Two to five years
Over five years
30 September 2021
Payable in:
Less than one year
One to two years
Two to five years
Over five years
b) The Company
30 September 2022
Payable in:
Less than one year
One to two years
Two to five years
Over five years
30 September 2021
Payable in:
Less than one year
One to two years
Two to five years
Over five years
Contingent
consideration
£m
Corporate
bonds
£m
Retail
bonds
£m
Central bank
facilities
Lease
liabilities
£m
2.2
-
-
-
2.2
4.6
3.0
-
-
7.6
6.6
6.6
19.7
176.2
209.1
6.6
6.6
19.7
182.7
215.6
Corporate
bonds
£m
6.6
6.6
19.7
176.2
209.1
6.6
6.6
19.7
182.7
215.6
6.8
119.2
-
-
126.0
135.6
6.8
119.2
-
261.6
Retail
bonds
£m
6.8
119.2
-
-
126.0
135.6
6.8
119.2
-
261.6
101.4
123.8
2,905.0
-
3,130.2
71.8
6.7
2,770.9
-
2,849.4
2.0
1.7
3.5
1.9
9.1
1.7
1.9
3.9
2.9
10.4
Lease
liabilities
£m
1.7
1.7
5.0
8.7
17.1
1.7
1.7
5.0
10.3
18.7
Total
£m
119.0
251.3
2,928.2
178.1
3,476.6
220.3
25.0
2,913.7
185.6
3,344.6
Total
£m
15.1
127.5
24.7
184.9
352.2
143.9
15.1
143.9
193.0
495.9
Amounts payable in respect of the ‘other accruals’ and ‘trade creditors’ shown in note 38 fall due within one year. The cash flows
described above will include those for interest on borrowings accrued at 30 September 2022 disclosed in note 38.
Page 302
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
63. Market risk
2022
2021
Total cash
outflow / (inflow)
Total cash
outflow / (inflow)
£m
88.8
24.0
3.6
0.1
116.5
(253.1)
(246.2)
(342.0)
(2.7)
(844.0)
£m
1.8
11.7
28.9
0.4
42.8
(25.1)
(13.6)
(3.8)
-
(42.5)
(727.5)
0.3
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
prices. The Group’s exposure to market risk is mainly through interest rate risk, though there is some minor exposure to currency
risk. These exposures arise solely through the Group’s lending and deposit taking business – no speculative trading in financial
instruments is undertaken.
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 completed its transition to 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 been transitioned.
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.
Page 303
The Accounts IRRBB exposures
Risk exposure in the Group’s operations might occur through:
•
•
Duration or re-pricing risk. The risk created when interest rates on assets, liabilities and off-balance sheet items reprice at different
times causing them to move by different amounts
Basis risk. The risk arising where assets and liabilities re-price with reference to different reference interest rates, for example rates
set by the Group and market rates, such as Bank of England base rate, SONIA and, before its withdrawal, 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.
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 25.
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 was discontinued in the early part of the financial year. The UK Working Group on Sterling Risk-Free
Interest Rates recommended SONIA as its replacement and this recommendation was 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 was completed 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.
Development finance facilities
Second charge mortgages
Structured lending
Aviation mortgages
2022
£m
-
-
-
-
-
2021
£m
63.3
45.0
43.4
12.1
163.8
All these loans referenced sterling LIBOR, except certain aviation mortgages denominated in US dollars which referenced US
dollar LIBOR.
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 that year. Of the balance shown
above, £21.0m transitioned with effect from 1 October 2021 and the remaining balances were 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. They were transitioned to a basis calculated based on movements in the Bank Base Rate (‘BBR’) in
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 that year with the remainder transitioned before the end of
December 2021.
No new aviation mortgages referencing sterling LIBOR have been written since 1 October 2020. All extant LIBOR linked loans were
transitioned to BBR-linked arrangements during the year ended 30 September 2021.
Aviation mortgages referencing US Dollar LIBOR were transitioned to reference the US Fed Funds (upper bound) rate during the year.
Borrowings where interest rates had been based on LIBOR and other IBOR rates are shown in notes 33 and 34. All such
arrangements have either expired or transitioned to SONIA during the year.
Derivative financial assets and liabilities where cash flows are based on IBOR rates are shown in note 25. All remaining LIBOR linked
derivatives at 30 September 2021 transitioned to SONIA in line with ISDA protocols at the LIBOR withdrawal date.
Page 304
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 2022, 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 increase profit before tax by £21.7m (2021: increase by £16.7m).
The principal direct point in time impact on the Group’s equity would result from the revaluation of derivative assets and liabilities
which are not part of fair value hedges at the balance sheet date. A 1.0% increase in rate expectations would increase equity by
£34.6m (2021: increase by £13.4m). For this illustration no ineffectiveness in hedging relationships is assumed.
These calculations allow 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.
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 £257.0m 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.
Currency risk
Currency risk, also referred to as foreign exchange or forex risk, is the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in foreign exchange rates.
The Group has little appetite for material amounts of exposure to currency risk 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 2022 and 30 September 2021 are denominated in sterling.
The SME lending 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 25.
None of the assets or liabilities of the Company are denominated in foreign currencies.
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The Accounts D2.4 Notes to the Accounts - Basis of preparation
For the year ended 30 September 2022
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.
64. Basis of preparation
The Group is required, by the Companies Act 2006 and the Listing Rules of the FCA, to prepare its financial statements for the year
ended 30 September 2022 in accordance with UK-adopted international accounting standards. In the financial years reported on
this also means, in the Group’s circumstances, that the financial statements also accord with IFRS as approved by the International
Accounting Standards Board.
In previous periods financial statements had been prepared under EU endorsed IFRS, however the change of framework does not
change the substance of the requirements applying to the Group and no prior-year restatement of the financial statements
is required.
The particular accounting policies adopted have been set out in note 65 and the critical accounting judgements and estimates which
have been required in preparing these financial statements are described in notes 66 and 67 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, no accounting standards are being applied for the first time.
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.
Restatement of segments
Following the scale of a substantial part of the assets of the former Idem Capital segment (note 7) the remaining segment represented
a disproportionately small part of the Group compared to the other two segments. The directors determined it was appropriate to
adopt a new segmental analysis, described in note 2 and comparative amounts have been restated.
This restatement has no impact on the overall profit, assets and liabilities, equity, capital, or cash flows of the Group.
The segmental results of the Idem Capital segment reported in 2021 (a profit of £17.1m) and the loan assets of the segment (£225.2m)
have been subsumed into the two ongoing segments in the comparative disclosures.
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65. Accounting policies
The particular policies applied by the Group in preparing these financial statements in accordance with the IFRS regime as adopted in
the UK are described below.
(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 2022.
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 70, 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 68.
(d) Acquisitions and goodwill
Goodwill arising from the purchase of subsidiary undertakings, representing the excess of the fair value of the purchase consideration
over the fair values of acquired assets, including intangible assets, is held on the balance sheet and reviewed annually to determine
whether any impairment has occurred.
As permitted by IFRS 1, the Group has elected not to apply IFRS 3 – ‘Business Combinations’ to combinations taking place before its
transition date to IFRS (1 October 2004). Therefore any goodwill which was written off to reserves under UK GAAP will not be charged
or credited to the profit and loss account on any future disposal of the business to which it relates.
Contingent consideration arising on acquisitions is first recognised in the accounts at its fair value at the acquisition date and
subsequently revalued at each accounting date until it falls due for payment or the final amount is otherwise determined.
(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 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.
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The Accounts (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 Effective Interest Rate ('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.
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.
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(j) Amounts owed by or to group companies
In the accounts of the Company, balances owed by or to other group companies are carried at the current amount outstanding less any
provision. Where balances owing between group companies fall within the definition of either financial assets or financial liabilities given
in IAS 32 – ‘Financial Instruments: Presentation’ they are classified as assets or liabilities at amortised cost, as defined by IFRS 9.
(k) Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation.
Assets held for letting under operating leases are depreciated in equal annual instalments to their estimated residual value over the
life of the related lease. Vehicles held for short term hire are depreciated in equal annual instalments to their estimated residual value
over their expected useful life. This depreciation is deducted in arriving at net lease income and is shown in note 6.
The assets’ residual values and useful lives are reviewed by management and adjusted, if appropriate, at each balance sheet date.
Depreciation on operating assets is provided on cost in equal annual instalments over the lives of the assets. Land is not depreciated.
The rates of depreciation are as follows:
Freehold premises
Short leasehold premises
Computer hardware
Furniture, fixtures and office equipment
Company motor vehicles
2% per annum
over the term of the lease
25% per annum
15% per annum
25% per annum
Depreciation on right of use assets recognised in accordance with IFRS 16 is provided on a straight line basis over the term of the lease.
(l)
Intangible assets
Intangible assets comprise purchased computer software and other intangible assets acquired in business combinations.
Purchased computer software is capitalised where it has a sufficiently enduring nature and is stated at cost less accumulated
amortisation. Amortisation is provided in equal instalments at a rate of 25% per annum.
Other intangible assets acquired in business combinations include brands and business networks and are capitalised in accordance
with the requirements of IFRS 3 – ‘Business Combinations’. Such assets are stated at attributed cost less accumulated amortisation.
Amortisation is provided in equal instalments at a rate determined at the point of acquisition.
(m)
Investments in subsidiaries
The Company’s investments in subsidiary undertakings are valued at cost less provision for impairment.
(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.
Where an irrevocable instruction for the purchase of such shares has been given, it is treated as a reduction in capital from the point
at which the instruction becomes irrevocable.
(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.
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The Accounts (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.
(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.
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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.
(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.
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The Accounts 66. Critical accounting judgements
The most significant judgements which the directors have made in the application of the accounting policies set out in note 65 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.
As part of its consideration of the adequacy of its impairment provisioning, management have considered whether there are any
factors not reflected in its normal approach which indicate that a group, or groups of accounts should be considered as having an
SICR. No such accounts were identified.
If additional accounts were determined to have an SICR, these balances would attract additional impairment provision, as such cases
are provided on the basis of lifetime expected loss, rather the 12-month expected loss, and the overall provision charge would be
higher. Conversely, if cases are incorrectly identified as SICR, impairment provisions will be overstated. Furthermore, adjustments to
current PD estimates in the Group’s models may also have the effect of identifying more or less accounts as having an SICR.
More information on the definition of SICR adopted is given in note 20.
(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 20.
(c) Classification of financial assets
The classification of financial assets under IFRS 9 is based on two factors:
• The company’s ‘business model’ – how 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. There were no significant changes in the
nature of the Group’s products, nor in the business models in which they are held, during the year.
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67. 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 important of these, those which
could, if revised significantly in the next financial year, have a material impact on the carrying amounts of assets or liabilities 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.
In evaluating the potential impact of the economic situation at 30 September 2022 this process is made more complex by both the
elevated level of uncertainties and the lack of recent experience of similar situations against which to benchmark. At the same time,
the level to which Covid-related ‘scarring’ has yet to manifest itself in credit metrics is still unclear.
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 2022 have been derived in light of the current economic situation, at that
date, modelling a variety of possible outcomes as described in note 23. It should be noted, however, that there remains a significant
range of different opinions amongst economists about the longer-term prospects for the UK, which have diverged again over the
period since September 2021, with both UK economic and geopolitical uncertainties building.
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 is considered that the current forecast
scenarios, which include higher rates of interest and inflation than in the historically observed data, represent situations where its
models may not be able to fully allow for potential economic impacts on its loan portfolios. It therefore assessed, 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 judgemental
adjustments are set out in note 20.
The position after considering all these matters is set out in notes 20 to 22, together with further information on the Group’s approach.
The economic scenarios described above and their impact on the overall provision are set out in note 23, while sensitivity analyses on
impairment provisioning are set out in note 24.
Page 313
The Accounts (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 £13.3m (2021: £12.0m), while an increase of the assumed asset lives of such assets by three months would increase
balance sheet assets by £13.3m (2021: £12.1m)
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 £8.8m (2021: £11.2m)
A reduction (or increase) in estimated cash flows from purchased loan assets of 5% would reduce (or increase) balance sheet
assets by £2.0m (2021: £7.1m)
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 30, 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 30.
(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 58. 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 58.
Page 314
68. 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.
Financial and capital forecasting
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:
•
•
•
•
•
Higher buy-to-let volumes – This scenario allows the Board to see what impact higher buy-to-let volumes at a reduced yield has
on the profitability of the business. The higher volumes also allow the Board to determine whether capital resources and liquidity
would be stretched due to the higher cash and capital requirements
Higher funding costs – This scenario allows the Board to see 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 volume and yield – This scenario replicates a significant increase in competition within the sector
(potentially from market shrinkage), reducing yields and impacting the Group’s market share. Since development finance is the
highest yielding product, its reduction shows the Board the impact of a lower mix on the contribution to costs and what other ratios
may be affected from such a drop in volume
Higher buy-to-let redemptions – This scenario highlights to the Board the potential risk that is inherent in the currently held
buy-to-let EIR debtor and invites discussion as to what mitigating action could be taken to avoid such an impact
Bad debt stress – This scenario simulates a significant short-term capital and profitability shock with prolonged house price
deflation across the plan horizon. To ensure that it is a worst-case stress point and also to avoid replicating the ICAAP process, only
bad debt rates are altered in these scenarios – all new business and other assumptions remain with no management
actions included
•
Combined downside stress – This presents a plausible set of adverse factors to the business model that allows the Board to see
how this impacts the strategy across the five-year horizon
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 status. 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.
Page 315
The Accounts Availability of funding and liquidity
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 £10,669.2m (note 32), raised through Paragon Bank, are repayable within five years, with 80.8% of this
balance (£8,620.5m) 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 2022 Paragon Bank held £1,505.5m of balance sheet assets for liquidity purposes,
in the form of central bank deposits (note 62). A further £150.0m of liquidity was provided by an off balance sheet swap arrangement
(note 62), bringing the total to £1,655.5m.
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 £1,776.0m. 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 2022 the Group had
£455.2m of such notes available for use, of which £213.0m were rated AAA. The available AAA notes would give access to £171.6m if used
to support drawings on Bank of England facilities.
The Group’s securitisation funding structures, described in note 62, 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 £112.5m retail bond, due August 2024. No central bank debt is payable
until 2025.
The Group’s access to debt is enhanced by its corporate BBB+ rating, upgraded by Fitch Ratings in March 2022, and its status as an
issuer is evidenced by the BBB- investment grade rating of its £150.0m Tier-2 bond. It has regularly accessed the capital markets for
warehouse funding and corporate and retail bonds over recent years and continues to be able to access these markets.
The Group has access to the short-term repo market for liquidity purposes which it uses from time to time.
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 59 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, during the year ended 30 September 2021, resulted in a reduction of the minimum
capital level. Its capital at 30 September 2022 was in excess of regulatory requirements and its forecasts indicate this will continue to
be the case.
Going concern assessment
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 potential risks
affecting them.
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.
Page 316
69. 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 2022 or the year ended 30 September 2021 carried at
fair value and valued using level 3 measurements, other than contingent consideration amounts (note 39).
The Group has not reclassified any of its measurements during the year.
The methods by which fair value is established for each class of financial assets and liabilities are set out below.
(a) Assets and liabilities carried at fair value
The following table summarises the Group’s financial assets and liabilities which are carried at fair value.
Financial assets
Derivative financial assets
Financial liabilities
Derivative financial liabilities
Contingent consideration
Note
25
25
39
2022
£m
779.0
779.0
102.1
2.2
104.3
2021
£m
44.2
44.2
43.9
7.5
51.4
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 SONIA (and formally LIBOR) benchmark interest rates for the currencies in which
the instruments are denominated, being sterling, EUR and dollars. The cross-currency basis swaps, which were terminated during
2021, had a notional principal related to the outstanding currency borrowings and therefore the estimated rate of repayment of these
notes also affected 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 25.
Page 317
The Accounts Contingent consideration
The value of the contingent consideration balances shown in note 39 are required to be stated at fair value in the accounts. These
amounts are valued based on the expected outcomes of the performance tests set out in the respective sale and purchase
agreements, discounted as appropriate. The most significant inputs to these valuations are the Group’s forecasts on future activity
relating to business generated by operational units acquired, business derived as a result of the vendor’s contacts or other goodwill
and any other new business flows which are or might be attributable to the acquisition agreement, which are drawn from the overall
Group forecasting model. As such, these are classified as unobservable inputs and the valuations classified as level 3 measurements.
(b) Assets and liabilities carried at amortised cost
The fair values for financial assets and financial liabilities held at amortised cost, determined in accordance with the methodologies
set out below are summarised below.
The Group
Financial assets
Cash
Loans to customers
Sundry financial assets
Financial liabilities
Short-term bank borrowings
Asset backed loan notes
Secured bank borrowings
Retail deposits
Corporate and retail bonds
Other financial liabilities
The Company
Financial assets
Cash
Loans to group companies
Sundry financial assets
Financial liabilities
Corporate and retail bonds
Amounts owed to group companies
Other financial liabilities
Note
2022
2022
2021
2021
Carrying amount
Fair value
Carrying amount
Fair value
£m
£m
£m
£m
16
17
26
32
38
1,930.9
14,210.3
35.4
16,176.6
0.4
409.3
586.0
1,930.9
13,898.4
35.4
15,864.7
0.4
409.3
586.0
10,669.2
10,592.9
261.5
491.2
254.4
491.2
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
12,417.6
12,334.2
10,999.0
11,032.9
Note
2022
2022
2021
2021
Carrying amount
Fair value
Carrying amount
Fair value
£m
£m
£m
£m
16
26
26
38
38
19.7
39.1
0.1
58.9
261.5
23.2
12.9
297.6
19.7
39.1
0.1
58.9
254.4
23.2
12.9
290.5
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
The fair values of retail deposits and corporate and retail bonds shown above will include amounts for the related accrued interest.
Page 318
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 319
The Accounts 70. Details of subsidiary undertakings
Subsidiary undertakings of the Group at 30 September 2022, 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
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
Page 320
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%
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
Residential mortgages and asset administration
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages and asset administration
Residential mortgages and loan and vehicle finance
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%
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
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 have been sold to special purpose entity companies, referred to as orphan SPEs, 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 2022 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
Principal activity
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Non-trading
Page 321
The Accounts Paragon Fifth Funding Limited
Paragon Sixth Funding Limited
Paragon Mortgages (No. 18) Holdings Limited
Paragon Mortgages (No. 19) Holdings Limited
Paragon Mortgages (No. 20) Holdings Limited
Paragon Mortgages (No. 21) Holdings Limited
Paragon Mortgages (No. 22) Holdings Limited
Paragon Mortgages (No. 23) Holdings Limited
Paragon Mortgages (No. 24) Holdings Limited
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.
The registered office of each of the entities listed in this note is the same as that of the Company (note 1), except that:
•
The registered office of The Business Mortgage Company Limited, Buy to Let Direct Limited, TBMC Group Limited, and The
Business Mortgage Company Services Limited is Regus House, Malthouse Avenue, Cardiff Gate Business Park, Cardiff CF23 8RU
• 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.
Companies in liquidation
The following legal subsidiaries of the Group were in liquidation at 30 September 2022. They do not form part of the consolidation as
they are considered to be controlled by the liquidator. All of these companies were dissolved after the year end.
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% §
Residential Mortgages
100%
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.
Page 322
The following orphan SPE companies were also in liquidation at 30 September 2022.
Company
First Flexible No.5 PLC
Paragon Mortgages (No. 18) PLC
Paragon Mortgages (No. 19) PLC
Paragon Mortgages (No. 20) PLC
Paragon Mortgages (No. 21) PLC
Paragon Mortgages (No. 22) PLC
Paragon Mortgages (No. 23) PLC
Paragon Mortgages (No. 24) PLC
Principal activity
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
First Flexible No.5 PLC was dissolved after the year end.
All the companies in liquidation listed in this section are registered and operated in the UK.
Page 323
The Accounts Additional financial information supporting
amounts shown in the Strategic Report (Section A),
but not forming part of the statutory accounts or
subject to audit.
P326
E1. Appendices to the Annual Report
To treat people as individuals and listen to their views
Respect means listening to our people and our customers, and
incorporating their viewpoint into our thinking. If I think of my
own team, they’re the ones who are closest to our customers so
it’s essential I listen to what they’re telling me, take their ideas on
board and explore them fully.
Liz, New Business Process
E1. Appendices to the Annual Report
For the year ended 30 September 2022
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
Profit on disposal of loans
Underlying profit
2022
£m
417.9
(191.9)
(4.6)
221.4
Underlying basic earnings per share, calculated on the basis of underlying profit adjusted for tax, is derived as follows.
Underlying profit
Tax on underlying result
Underlying earnings
Basic weighted average number of shares (note 15)
Underlying earnings per share
2022
£m
221.4
(51.8)
169.6
242.7
69.9p
2021
£m
213.7
(19.5)
-
194.2
2021
£m
194.2
(44.7)
149.5
252.3
59.3p
Page 326
In the year ended 30 September 2022 tax has been charged on the underlying profit at 23.4%, being the effective rate at which would
result from the exclusion of the adjusting items from the corporation tax calculation. In 2021 tax on underlying profit was allowed for at
23.0%, the overall effective rate for the year, due to the much smaller impact of the adjustments in that year.
Underlying return on tangible equity is derived using underlying earnings calculated on the same basis shown above. Tangible
equity is calculated excluding the impacts of fair value hedging. This approach has been adopted in 2022 for the first time, due to the
materiality of the balance sheet effect of the hedges. While this effect was not significant in previous years the underlying RoTE for
2021 has been restated on the new basis.
Underlying earnings
Amortisation of intangible assets (note 9)
Adjusted underlying earnings
Opening underlying tangible equity
Equity
Intangible assets
Balance sheet impact of fair values
Deferred tax thereon
Closing underlying tangible equity
Equity
Intangible assets
Balance sheet impact of fair values
Deferred tax thereon
Average underlying tangible equity
Underlying RoTE
Note
29
25
42
29
25
42
2022
£m
169.6
2.0
171.6
1,241.9
(170.5)
(8.8)
(2.2)
2021
£m
149.5
2.0
151.5
1,156.0
(170.1)
15.1
0.2
1,060.4
1,001.2
1,417.3
(170.2)
(216.7)
53.2
1,083.6
1,072.0
16.0%
1,241.9
(170.5)
(8.8)
(2.2)
1,060.4
1,030.8
14.7%
Page 327
Appendices 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 2022
Note
Mortgage
Lending
Commercial
Lending
Opening loans to customers
Closing loans to customers
Average loans to customers
Net interest
NIM
Impairment provision charge
Cost of risk
Year ended 30 September 2021 (restated)
Opening loans to customers
Closing loans to customers
Average loans to customers
Net interest
NIM
Impairment provision (release) / charge
Cost of risk
Not all interest is allocated to segments (note 2).
17
17
2
11
Note
17
17
2
11
£m
11,829.6
12,328.7
12,079.2
261.5
2.16%
4.6
0.04%
Mortgage
Lending
£m
11,101.1
11,829.6
11,465.3
238.7
2.08%
(7.6)
(0.07)%
£m
1,573.1
1,881.6
1,727.3
113.1
6.55%
9.4
0.54%
Commercial
Lending
£m
1,530.3
1,573.1
1,551.7
95.2
6.14%
2.9
0.19%
Total
£m
13,402.7
14,210.3
13,806.5
371.2
2.69%
14.0
0.10%
Total
£m
12,631.4
13,402.7
13,017.0
310.5
2.39%
(4.7)
(0.04)%
Page 328
C. Cost:income ratio
Cost:income ratio is derived as follows:
Cost – operating expenses
Total operating income
Cost / Income
Underlying cost: income ratio is derived as follows:
Cost – as above
Income – as above
Less: profit on disposal of loans
Note
9
2022
£m
153.0
393.0
38.9%
2022
£m
153.0
393.0
(4.6)
388.4
2021
£m
135.4
324.9
41.7%
2021
£m
135.4
324.9
-
324.9
Underlying cost: income ratio
39.4%
41.7%
D. Dividend cover
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.
For the current year the Board has determined that is appropriate to exclude the post-tax impact of fair value gains from its
calculation. The dividend cover for the year, subject to the approval of the 2022 final dividend at the AGM in March 2023 is therefore
as set out below.
Earnings per share (p)
Attributable fair value gains (p)
Attributable tax thereon (p)
Adjusted earnings (p)
Proposed dividend per share in respect of the year (p)
Dividend cover (times)
E. 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
Note
15
46
Note
43
45
45
59
2022
129.2
(79.1)
21.4
71.5
28.6
2.50
2022
1,417.3
241.4
(3.6)
(3.9)
233.9
2021
65.2
-
-
65.2
26.1
2.50
2021
1,241.9
262.5
(12.1)
(3.7)
246.7
£6.06
£5.03
1,247.1
£5.33
1,071.4
£4.34
Page 329
Appendices P332
F1. Glossary
A summary of abbreviations used in the Annual Report
and Accounts
To ensure we have fun while achieving success!
Whatever you do and wherever you work, if you can find a way of
having fun together and bringing some humour into your work,
you can break down barriers between people and make work feel
less like work.
Kaz, Collections
F1. Glossary
Act
AGM
ALCO
AQR
The Companies Act 2006
Annual General Meeting
Asset and Liability Committee
Audit Quality Review
Articles
The Articles of Association of the Company
ASHE
AT1
Paragon Bank
or The Bank
BBLS
BBR
BCBS
BEIS
BEPS
BEVs
BGS
B4NZ
CAGR
CBES
CBI
CBILS
CCC
CCoB
CCP
CCyB
CEO
CET1
CFO
CFRF
CGU
CIB
CML
Code
CO2e
COO
Annual Survey of Hours and Earnings
Additional Tier 1
Paragon Bank PLC
Bounce Back Loan Scheme
Bank Base Rate
Basel Committee on Banking Supervision
Department for Business, Energy and Industrial
Strategy
Base Erosion and Profit Shifting
Battery Powered Electric Vehicles
Balance Guarantee Swaps
Bankers For Net Zero
Compound Annual Growth Rate
Climate Biennial Exploratory Scenario
Confederation of British Industry
Coronavirus Business Interruption Loan Scheme
Customer and Conduct Committee
Capital Conservation Buffer
Central Clearing Counterparty
Counter-Cyclical Capital Buffer
Chief Executive Officer
Core Equity Tier 1
Chief Financial Officer
Climate Financial Risk Forum
Cash Generating Unit
Chartered Institute of Bankers
Council of Mortgage Lenders
UK Corporate Governance Code
CO2 Equivalent
Chief Operating Officer
Company
Paragon Banking Group PLC
Consultation Paper
Consumer Price Index
The EU Capital Requirements Regulation and
Directive Regime
Cash Ratio Deposits
Chief Risk Officer
Capital Requirements Regulation –
EU Regulation 575/2013
Credit Support Annex
Commercial Variable Rate
Company Share Option Plan
Task Force on Disclosures about
Expected Credit Loss
Department for Environment, Food
and Rural Affairs
FCA’s Dispute Resolution: Complaints
Sourcebook
CP
CPI
CRD IV
CRDs
CRO
CRR
CSA
CVR
CSOP
DECL
DEFRA
DISP
Page 332
DSBP
Deferred Share Bonus Plan
DTR
EA
EAD
ECL
EDI
EIR
EPC
EPS
EQA
ERC
ERMF
ESG
ESOP
ESOS
EU
EUR
Disclosure and Transparency Rule
Early Action
Exposures At Default
Expected Credit Loss
Equality, Diversity and Inclusion
Effective Interest Rate
Energy Performance Certificate
Earnings per Share
External Quality Assessment
Executive Risk Committee
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
FOS
Framework
FRC
FRF
FRN
FSCS
FVTPL
GDP
GHG
GMP
Group
HMRC
HPI
HQLA
IAP
IAS
IASB
ICAAP
IFRS
IiP
ILAAP
ILG
ILTR
IMLA
IRB
IRRBB
ISAs
Economic Value
Executive Performance Committee
Financial Conduct Authority
Finance and Leasing Association
Financial Ombudsman Service
The Group Corporate Governance Policy
Framework
Financial Reporting Council
Future Regulatory Framework
Floating Rate Note
Financial Services Compensation Scheme
Fair Value Through Profit and Loss
Gross Domestic Product
Greenhouse Gases
Guaranteed Minimum Pension
The Company and all of its subsidiary
undertakings
His Majesty’s Revenue and Customs
House Price Index
High Quality Liquid Assets
Internal Audit Plan
International Accounting Standard(s)
International Accounting Standards Board
Internal Capital Adequacy Assessment Process
International Financial Reporting Standard(s)
Investors In People
Internal Liquidity Adequacy Assessment Process
Individual Liquidity Guidance
Indexed Long Term Repo Scheme
Intermediary Mortgage Lenders Association
Internal Ratings Based
Interest Rate Risk in the Banking Book
International Standards on Auditing
ISDA
International Swaps and Derivatives Association
ISO14001:2015 ISO 14001:2015, ‘Environmental Management
Systems’
ISO45001:2018 ISO 45001:2018, ‘Management Systems of
KPMG
LA
LCR
LDI
LGD
LIBOR
LTGDV
LTV
M&A
MES
MLRO
MRC
MREL
MRT
MWh
NI
NII
NIM
Notes
NPS
NSFR
OBR
OCI
OFGEM
OHSMS
OLAR
ONS
ORC
Order
PAYE
PCAF
PD
Performance
Exco
PFP
PIDA
PIEs
Plan
PLC
PMA
POCI
PPC
PRA
Occupational Health and Safety’
KPMG LLP, the Group’s auditor
Late Action
Liquidity Coverage Ratio
Liability Driven Investments
Loss Given Default
London Interbank Offered Rate
Loan to Gross Development Value
Loan to Value
Mergers and Acquisitions
Multiple Economic Scenarios
Money Laundering Reporting Officer
Model Risk Committee
Minimum Requirement for own funds
and Eligible Liabilities
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
Pay As You Earn
Partnership for Carbon Accounting Financials
Probability of Default
Executive Performance Committee
Pension Funding Partnership
Public Interest Disclosure Act 1998
Public Interest Entities
The Paragon Pension Plan
Public Limited Company
Post-Model Adjustments
Purchased or Originated Credit Impaired (assets)
Prompt Payment Code
Prudential Regulation Authority (of the Bank of
England)
PRP
PRS
PSP
PwC
RBA
RCV
RIBA
RICS
Profit Related Pay
Private Rented Sector
Performance Share Plan
PricewaterhouseCoopers LLP
Role Based Allowance
Refuse Collection Vehicles
Royal Institute of British Architects
Royal Institution of Chartered Surveyors
RIDDOR
RLS
RMBS
Reporting of Incidents, Disease and Dangerous
Occurrences Regulation 2013
Recovery Loan Scheme
Residential Mortgage Backed Securities
RNS
RoR
RoTE
ROU
RPI
RSU
RWA
SA
Regulatory News Service
Receiver of Rent
Return on Tangible Equity
Right of Use
Retail Price Index
Restricted Stock Unit
Risk Weighted Assets
Standardised Approach
SAWG
Scenario Analysis industrial Working Group
Schedule 7
SFS
SIC
SICR
Schedule 7 to the Large and Medium-sized
Companies and Groups (Accounts and Reports)
Regulations 2008
Specialist Fleet Services Limited
Standard Industrial Classification
Significant Increase in Credit Risk
Sharesave
All Employee Share Option scheme
SME
SMF
SMCR
SONIA
SPPI
SPV
TBMC
TCFD
TCR
TFS
TFSME
TRC
TRE
TSR
TVR
UK
UKF
VCS
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
Term Funding Scheme with additional incentives
for SMEs
Total Regulatory Capital
Total Risk Exposure
Total Shareholder Return
Total Voting Rights
United Kingdom
UK Finance
Verified Carbon Standard
Page 333
Glossary Information which may be helpful to shareholders
and other users of the Annual Report and Accounts
P336
G1. Shareholder information
Information about dividends, meetings and
managing shareholdings
P337
G2. Other public reporting
Current and future public reporting information for the Group
To work in harmony and collectively towards the delivery of our overall objective
Teamwork matters because we rely on each other to serve our
customers effectively and deliver on our objectives as a business.
It’s more enjoyable to get things done together. We all have
different skills and expertise and everything we do needs the
support of a team.
Millie, Operational Risk
G1. Shareholder information
Want more information or help?
The Company’s share register is maintained by our Registrars, Computershare.
Please contact them 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
Website
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. If you
wish to receive electronic documents please contact Computershare by
telephone or online.
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
Shareholder fraud warning
Duplicate documents and communications
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.
If you receive more than one copy of
shareholder documents, it is likely that
you have multiple shareholding 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 336
Financial calendar
January 2023
June 2023
July 2023
December 2023
Quarter 1 trading update
Half-year results
Quarter 3 trading update
Full-year results
Dividend calendar
2 February 2023
Ex-dividend date for 2022
final dividend
6 July 2023
Ex-dividend date for 2023
interim dividend
Annual General Meeting
1 March 2023
3 February 2023
Record date for 2022
final dividend
7 July 2023
Record date for 2023
interim dividend
3 March 2023
Payment date for 2022
final dividend
28 July 2023
Payment date for 2023
interim dividend
G2. 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 2022, as required by legislation or regulation, relating to the Group or its constituent entities.
• Annual and half-year Pillar 3 disclosures required by the PRA Rulebook
• 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 these statements are required to be published annually. In addition, for the year ended 30 September 2022, 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 sixth report against its Women in Finance charter commitments in September 2022.
All this reporting will be continued in the financial year ending 30 September 2023.
The Group publishes an annual sustainability report, the Responsible Business Report. This gives additional information on ESG
issues and illustrates the application of the Group’s ESG strategy in practice. The 2022 Responsible Business Report will be published
in December 2022.
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 337
Useful Information P340
H1. Contacts
Names and addresses of the Group’s advisers
To identify and create new business opportunities and apply creative and effective solutions to problems
Creativity is about simplifying things, making information easy
to understand and fostering interactions that are engaging,
memorable and enjoyable. It’s a great value because it means
you’re constantly asking yourself how you can make things better
for our customers and our colleagues.
Laura, E-Learning
H1. Contacts
Registered and head office
51 Homer Road, Solihull, West Midlands B91 3QJ
Telephone: 0121 712 2323
Investor Relations
(institutional investors)
Company Secretariat
(retail investors)
investor.relations@paragonbank.co.uk
company.secretary@paragonbank.co.uk
Corporate website
Customer website
www.paragonbankinggroup.co.uk
www.paragonbank.co.uk
Auditor
KPMG LLP
One Snowhill
Snow Hill Queensway
Birmingham B4 6GH
Brokers
Solicitors
Registrars
Slaughter and May
One Bunhill Row
London EC1Y 8YY
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Telephone: 0370 707 1244
Jefferies International Limited
Peel Hunt LLP
100 Bishopsgate
London EC2N 4JL
100 Liverpool Street
London EC2M 2AT
UBS Limited
5 Broadgate
London EC2M 2QS
Remuneration consultants
Consulting actuaries
PricewaterhouseCoopers LLP
1 Embankment Place
London WC2N 6RH
Mercer Limited
Four Brindleyplace
Birmingham B1 2JQ
Page 340
Page 341
Contacts Page 342
Page 343
GRP0119-001 (01/2023)
PARAGON BANKING GROUP PLC
51 Homer Road, Solihull, West Midlands B91 3QJ
Telephone: 0345 849 4000
www.paragonbankinggroup.co.uk
Registered No. 2336032