Paragon Banking Group PLC
Annual Report 2023
For the year ended 30 September 2023
Annual Report 2023 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; social unrest; 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 and
Operating Highlights
Results in brief
P4
Financial and
operating highlights
Strategic Report
The business and its performance
in the year
P8
A1.
Chair of the Board's
introduction
P10
P24
P28
P54
P57
A2. Business model
and strategy
A3. Chief Executive’s review
A4. Review of the year
A5. Future prospects
A6. Citizenship and
sustainability
P87
A7.
Approval of
Strategic Report
Corporate Governance
How the business is controlled
and how risk is managed
P90
B1.
Chair's statement on
corporate governance
P92
B2. Corporate governance
statement
P94
B3. Board of Directors and
senior management
P102
B4. Governance framework
P120
B5. Nomination Committee
P126
B6. Audit Committee
Independent
Auditor’s Report
On the financial statements
P190
C1.
Independent auditor’s report
to the members of Paragon
Banking Group PLC
The Accounts
The financial statements of the Group
P202
D1.
Primary financial
statements
P209
D2. Notes to the accounts
Appendices to
the Annual Report
Additional financial information
P336
E1.
Appendices to the
Annual Report
Glossary
P342
F1. Glossary
Useful information
P346
G1. Shareholder information
P347
G2. Other public reporting
Contacts
P136
B7.
Remuneration Committee
P350
H1. Contacts
P168
B8. Risk management
P183
B9. Directors’ report
P186
B10. Responsibility statement
Financial and operating highlights
Our purpose is to support the
ambitions of the people and
businesses of the UK by delivering
specialist financial services
Find out how we are supporting our customers'
ambitions on pages 12 to 13
Strong performance in a dynamic environment
£3.0 billion
(2022: £3.2 billion)
New lending to support
people and businesses
across the UK
£14.9 billion
(30 September 2022: £14.2 billion)
Total loans and advances
to customers
£277.6 million
(2022: £221.4 million)
20.2%
(2022: 16.0%)
Underlying profit before tax
Underlying return on
tangible equity
£180.9 million
Total capital returned to
shareholders in 2023
90%
(2021: 87%)
Employee engagement score
in 2023 Employee Survey
Ordinary dividend
37.4 pence per share
+ 30.8%
Share buy-back
£100.0 million
4.6/5
Combined Trustpilot
rating awarded by savings
customers and buy-to-let
customers with newly
originated loans
1 May 2023 to 30 September 2023
£14.9 billion20.2% £3.0 billion90% £277.6 million£180.9 million4.6/5 Underlying profit before tax
£277.6 million 25.4% higher (2022: £221.4 million)
Profit before tax
£199.9 million 52.2% lower (2022: £417.9 million)
2023
2022
2021
2020
2019
£ million
277.6
221.4
194.2
120.0
164.4
2023
2022
2021
2020
2019
Underlying basic earnings per share
94.2 pence 34.8% higher (2022: 69.9 pence)
Basic earnings per share
68.7 pence 46.8% lower (2022: 129.2 pence)
100
80
60
40
20
0
51.2
36.5
94.2
59.3
69.9
2019
2020
2021
2022
2023
150
100
50
0
129.2
49.4
2019
36.0
2020
65.2
68.7
2021
2022
2023
Dividend per share
37.4 pence 30.8% higher (2022: 28.6 pence)
Capital – CET1 Ratio
15.5% Stable in the year (2022: 16.3%)
2023
2022
2021
2020
2019
Pence
37.4
28.6
26.1
14.4
21.2
2023
2022
2021
2020
2019
Total loans to customers
£14.9 billion 4.7% higher (2022: £14.2 billion)
Retail deposits
£13.3 billion 24.3% higher (2022: £10.7 billion)
12.2
12.6
13.4
14.2
14.9
15
10
5
0
7.9
9.3
6.4
13.3
10.7
15
10
5
0
2019
2020
2021
2022
2023
2019
2020
2021
2022
2023
Underlying return on tangible equity
20.2% (2022: 16.0%)
Return on tangible equity (‘RoTE’)
12.7% (2022: 27.2%)
2023
2022
2021
2020
2019
Percent
20.2
16.0
14.7
9.8
14.6
2023
2022
2021
2020
2019
Equity
£1,410.6 million (2022: £1,417.3m)
1,500
1,000
1,108
1,156
1,242
1,417
1,411
500
0
Tangible net assets per share
£5.79 (2022: £5.33)
8
6
4
2
0
3.71
3.90
4.34
5.33
5.79
2019
2020
2021
2022
2023
2019
2020
2021
2022
2023
£ million
199.9
417.9
213.7
118.4
159.0
Percent
15.5
16.3
15.4
14.3
13.7
Percent
12.7
27.2
16.2
9.7
14.1
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 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 61b. The derivation of underlying profit before taxation and other underlying measures is
described in Appendix A.
Page 5
Strategic Report
The business and its performance in the year
P8
A1. Chair of the Board's introduction
The year in summary
P10
A2. Business model and strategy
Overview of what the Group does and the significant risks to
which it is exposed
P24
A3. Chief Executive’s review
Strategic summary of the Group’s performance and position
P28
A4. Review of the year
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
P87
A7. Approval of the Strategic Report
Approval of the Strategic Report
To work together to
ensure good outcomes
for all our customers
A1. Chair of the Board's
introduction
Dear Shareholder
Results
In the face of a more challenging climate for new lending, I was
pleased with how well business levels were maintained during
the year. New lending was £3.0 billion, only a little down from the
£3.2 billion recorded in 2022, despite the increases in interest
rates and the consequent impacts on affordability. The savings
deposit base grew to £13.3 billion from the £10.7 billion recorded a
year earlier, and the Group’s final wholesale funding arrangement
which predated the grant of its banking licence in 2014 was repaid.
The Group’s credit rating remained strong, and I was pleased to
receive affirmation of the BBB+ rating in February 2023.
In the face of the challenging environment the Group maintained
its focus on high quality credit, disciplined pricing and the careful
control of costs, delivering a continued growth in underlying
profit for the year, at £277.6 million, despite the Group’s careful
approach to loss provisioning (2022: £221.4 million). Earnings per
share on the underlying basis increased by 34.8% to 94.2 pence
(2022: 69.9 pence) and the underlying return on equity at 20.2%
continued to strengthen (2022: 16.0%).
Profit before tax on the statutory basis, which also includes fair
value accounting losses recorded on hedging, was substantially
lower than underlying profit at £199.9 million (2022: £417.9 million).
Statutory EPS reduced to 68.7 pence (2022: 129.2 pence) and
RoTE on the statutory basis was 12.7% (2022: 27.2%). The level
of these measures was driven by the magnitude of interest rate
movements in the previous year which affected the Group’s
derivative positions causing significant gains to be recorded
in 2022. These began to unwind in 2023, with substantial fair
value losses being recorded in the process. These movements
do not reflect the underlying performance of the business and
will reverse over the lives of the related hedges, so have been
consistently excluded from underlying profit.
Regulatory capital has remained strong and broadly stable in the
year, with the small decrease reflecting the fair value effects noted
above. The Core Equity Tier 1 (‘CET1’) ratio closed the year at
15.5% (2022: 16.3%) and the Group’s projections show that it is well
placed to address the upcoming Basel 3.1 changes, even based
on the most adverse of the potential outcomes being consulted
upon. Group liquidity was also maintained at a healthy level,
growing in the year.
The financial results and operational
performance are reviewed in Sections A3 and A4
My first full year as Chair has been an eventful and challenging one
for the UK. We have seen the highest levels of interest rates and
inflation for many years, driven by a sharp increase in energy prices
caused by the ongoing conflict in Ukraine and political instability in
the UK, with a general election probably less than twelve months
away. These issues have impacted our customers and challenged
us to ensure we provide them with good support while protecting
and developing our own businesses.
As I have completed my induction process, visiting all parts of the
business, I have been impressed with how the Group’s strategy,
purpose and culture have effectively shaped our response to these
issues and the support we have provided to our customers and
business partners.
This annual report sets out the Group’s progress in the face of
these challenges and the positive results it has delivered for its
stakeholders. I hope you will find it an interesting and useful guide
to the Group’s development and achievements in the year.
The business and its purpose
The Group’s purpose, which is to support the ambitions of
the people and businesses of the UK by delivering specialist
financial services, remains particularly important at a time of
economic pressure. The Group’s focus on specialist customers
and its expert approach to the issues they are facing provides an
important alternative to the wider mass-market banking sector,
where the specific needs of these businesses and consumers
may be less well understood.
This specialist focus means that the Group is able to work
effectively with its loan customers, supporting them in the
management of their businesses as they respond to the
challenging economic environment encountered during the
year. In this context I was pleased with the Group’s progress in
implementing the new FCA Consumer Duty, which I found to be
well aligned with the Group’s existing culture.
The long-term digitalisation strategy, which is key to the delivery
of the Group’s purpose continued to make strong progress in
the year, and I was gratified to see the elements which have
already been delivered are improving customer and intermediary
experience and enhancing operational outcomes and
efficiencies. With additional major developments in the pipeline,
I look forward eagerly to further benefits for the Group’s business
and stakeholders.
The Group’s strategic objectives have remained a constant
throughout the recent upheavals in the UK economy and
provided a disciplined framework to guide it through the
challenges it has faced and to ensure it can continue to deliver
positive results for our stakeholders.
The Group’s business model and purpose are
described more fully in Section A2
Page 8
Stakeholders
Risk
Throughout the year I have continued to be impressed with the
Group’s focus on all its stakeholder groups and its duties as a
corporate citizen.
I have found my engagement with the employee representatives
on the Group’s People Forum both informative and helpful in
understanding how the business puts its values into action, and
the levels of satisfaction recorded in the employee engagement
survey carried out in the year were very gratifying.
The Group’s climate change agenda continued to progress
through the year and in this annual report you will find enhanced
TCFD disclosures covering a broader range of the Group’s
activities. You will also see details of how climate-based stress
testing has been developed and delivered to the Board, which I
found very useful in understanding the Group’s impacts.
We understand how important the provision of finance will be
to ensuring that our landlord and SME customers are able to
make progress on their own journeys to net zero and stand
ready to deliver products which will support them. Many of
our customers, have, however reported a lack of clarity in
the regulatory landscape in this area, and we would urge the
authorities to provide some certainty sooner rather than later,
so that investment plans can be developed.
I have been impressed during the year with the level of
engagement of people from across the Group with industry-led
and wider sustainability initiatives, demonstrating how these
issues are at the heart of our Group’s strategy. I would also like to
congratulate the growing number of the Group’s people who take
up their opportunity for a paid volunteering day in the community.
Sustainability, social responsibility and
citizenship issues are discussed in Section A6
Governance
The year has been one of potential change for the UK’s corporate
governance regime. Proposals to reform both the legal regime
and the UK Corporate Governance Code (the ‘Code’) have been
published, consulted upon, and in some cases withdrawn during
the course of the period. I have monitored the developments
with the hope that the final outcomes would be proportionate,
useful, efficient and effective and the Group has provided its
input to the consultation processes. We have yet to see final
proposals, but I welcome the movements seen since the year
end, which seem to show government and regulators responding
positively to the concerns of UK PLC.
The Group continues to operate under the Code, complying
with its provisions in the year. During the year I was involved in
an externally facilitated evaluation of the Board and the Group’s
governance, which I found both informative and reassuring.
Zoe Howorth joined the Board as a new non-executive director
in June. Her appointment, from a customer-facing and marketing
background, has broadened the range of skills and experience
available to the Board. My colleague, Hugo Tudor, reached the
ninth anniversary of his appointment to the Board in November,
and whilst he will continue as a non-executive director he will
no longer be considered to be independent from March 2024.
In anticipation of this Hugo handed over his responsibilities as
Senior Independent Director to Alison Morris in August, and we
have announced that Tanvi Davda will succeed Hugo as Chair of
the Remuneration Committee from 7 December. I look forward to
working with Zoe, Alison and Tanvi as they take on their new roles.
The Group’s approach to corporate governance is
discussed in Sections B3 and B4
I am pleased with the continuing development of the Group’s
risk management framework in the year and with its evolution to
manage risks as they emerge. During the year the processes for
the management of customers with vulnerabilities was a particular
focus, in light of the pressures on household and business incomes.
The fast changing landscape of cyber and financial crime risk was
also a recurring theme as we considered risk exposures. The Group
met the deadlines for the implementation of the FCA Consumer
Duty for live products during the year and is on track to meet those
for legacy products during 2024. The successful programme to
embed the duty has been a major piece of work across the Group,
informed by its existing customer service culture. This project has
been a significant area of board focus throughout the year and I
have been impressed by the way in which it was executed.
The Risk Management report is set out
in Section B8
Shareholder returns
The Group’s strategic objective is to provide a strong and
sustainable return to investors while maintaining a prudent
capital position. The consistently strong trading performance of
the Group over recent years has enabled it to complete share
buy-backs of £100.0 million during the year, in addition to the
declaration of an interim dividend. It is, though, frustrating that
this performance has not been reflected in the Group’s share
price. It is our view that a major contributory factor to this is the
relatively weak level of valuations in the UK listed market and
the consequent investment outflows from the mid-cap sector.
In this context, we support the various initiatives underway to
encourage greater investment into UK equities.
On the basis of its regular year-end review of the Group’s capital
position, the Board concluded that a final dividend for the year
of 26.4 pence per share can be declared, subject to shareholder
approval, giving a total dividend for the year of 37.4 pence per
share, and thereby achieving a dividend cover of approximately
2.5 times of earnings excluding fair value losses, in line with policy.
It also authorised a further share buy back of up to £50.0 million.
I would like to thank all our shareholders for their continuing
support during the year, but particularly those who made time to
meet with me and share their views of the Group, its businesses
and its strategic priorities. I found these interactions very useful
in developing my own views.
Conclusion
My first full year as Chair of the Board has been interesting
and challenging, with the Group seeing good progress on
strategic projects and effective responses to more unexpected
changes in the operating environment. Underlying earnings
levels have continued to grow, and the capital and funding
position remains strong.
Prospects for the future are promising, with the further benefits
from the digitalisation strategy due to be delivered, a resilient
capital base and strong businesses which are well placed
to resist economic headwinds and continue to deliver good
outcomes for customers into the new financial year.
Finally I would like to thank my colleagues on the Board and
across the Group for their contribution during the year, and the
support they provided as I have developed my understanding of
the business. I look forward to working with them and all of our
other stakeholders as the Group addresses the challenges and
opportunities of the coming years.
Robert East
Chair of the Board
6 December 2023
Page 9
A2. Business model and strategy
Mortgage Lending
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. We are headquartered in Solihull and employ more
than 1,500 people. Our operations are organised into two lending
divisions and lending is funded principally by retail deposits.
Landlord
customers
49,000+
Loan assets
New lending
£12.90 billion
(+4.7%)
£1.88 billion
(2022: £1.91 billion)
We offer buy-to-let mortgage finance for landlords operating in the UK’s
Private Rented Sector. A pioneer in this area of the mortgage market, we have
originated £29.2 billion of buy-to-let lending since 1996.
Our customer-focused approach, combined with our expertise in property valuation
and risk management, helps us to support 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.
Commercial Lending
Since the introduction of our first commercial lending products for small and
medium sized businesses (‘SME’s') 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
New lending
£0.45 billion (2022: £0.45 billion)
Supporting customers across construction, transport, manufacturing,
agriculture, technology and professional services, our products include
hire purchase and finance and operating leases.
Development finance
New lending
£0.52 billion (2022 £0.63 billion)
Helping property developers bring their plans to life with competitive and
flexible finance, including residential development loans, bridging finance and
pre-planning finance, as well as finance for purpose-built student accommodation
and build-to-rent developments.
Business
customers
40,750+
Loan assets
£1.97 billion (+4.8%)
Structured lending
Total facilities
£0.24 billion (2022: £0.22 billion)
Delivering finance for non-bank specialist lenders.
New lending
£1.13 billion
(2022: £1.30 billion)
Motor finance
New lending
£0.16 billion (2022: £0.17 billion)
Providing finance through approved intermediaries and dealers for cars,
light commercial vehicles, motorhomes and caravans.
Savings
Our principal source of funding for our lending activities is our range of
savings products offered to UK households. We offer a range of safe,
simple and transparent Easy Access, Defined Access, Notice and Fixed
Term savings accounts, including ISAs. Online and postal distribution
is supplemented by distribution through digital banking and wealth
management platforms.
Other funding for lending is derived from the efficient use
of Bank of England funding schemes, while securitisation
continues to fund elements of the lending book and is used
tactically. Central funding is provided through corporate
and retail bonds.
Direct savings
customers
260,000+
Total volume of
savings deposits
£13.27 billion
(+24.3%)
Trustpilot
customer rating
4.3/5
1 October 2022 to 30 September 2023
Our purpose is to support the ambitions of the people and businesses of the UK by delivering specialist financial services.
Delivering on our purpose is fundamental to the success of our customers, our employees, the economy and the wider world around us.
By living our purpose, we have developed and continue to evolve an innovative range of mortgage and commercial lending products to
support a unique group of customers with a distinctive set of needs, funded predominantly by retail deposits.
We focus on lending to customers who require specialist products in markets typically underserved by larger high street banks. This
approach requires us to be experts in these areas, and we seek to know more than our competitors about our customers and the
markets in which we operate, the products and services we offer, and the risks we take. We see specialisation as what makes us different
- as our competitive advantage - and it runs through our business model and strategy.
Working together as one team also provides the opportunity for our people to achieve their own ambitions to grow and develop, to enjoy
a successful career and to build strong foundations for their lives outside of work.
We have a strong and unique culture underpinned by eight values that 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.
Page 11
Supporting our customers
10 properties
average portfolio size3
17 years
average experience as a landlord3
53.7%
proportion of lending to limited
company landlords
Landlords
The Private Rented Sector ('PRS') is
an important part of the UK’s housing
mix, providing a home to approximately
one in five households1. Buy-to-let
mortgage finance is estimated to fund
36.7% of PRS properties2, with recent
regulation encouraging a trend towards
more professional landlords. While
our landlords span the full spectrum
of the market, they are concentrated
in the professional landlord segment
with larger and more complex property
portfolios and higher growth ambitions.
Professional landlords have specialist requirements and this is where our product
and service support stands out, carefully designed and constantly evolving to meet
their needs:
• Mortgage finance for a wide range of property types
• Limited company lending
• Specialist support from our team of in-house surveyors
• Fixed and discounted interest rate mortgages
• Lower interest rates for properties with higher energy efficiency ratings
10 years of excellence
Awarded Best Professional Buy-to-Let Lender by Your Mortgage for the 10th time
Decades of experience have given Paragon the confidence
and specialist expertise to make lending decisions and design
products that meet the needs of professional landlords.
Your Mortgage Awards Panel
Residential property developers
The UK’s housing shortage provides a huge opportunity for developers with the right
skills and funding to bring innovative projects to life, regenerating unused land and
brownfield sites. We work with experienced small and mid-sized property developers
across the UK on a wide variety of residential projects.
Lending up to 70%
54.2%
50% +
of Gross Development Value
for residential projects
of business outside of
London and the South East
of business from
repeat customers
Working side-by-side with our developer clients, we offer a range of lending products
and an outstanding service commitment designed to support each project from
inception to marketing:
• Development finance for multi-unit residential new build, conversion
and refurbishment projects
• Development finance for purpose-built student accommodation
and build-to-rent projects
• Bridging, pre-planning and marketing finance for development projects
• The Green Finance Initiative, offering a 50% reduction on loan exit fees
for the most energy efficient developments
• Long-term support from our experienced business development specialists
1 English Housing Survey 2021 to 2022: headline report 2 Estimated using data from Department for Levelling Up,
Housing and Communities, The Scottish Government and The Welsh Government and UK Finance
3 Paragon Customer Survey 2023
Project support from conception
to completion
Paragon has been great in
understanding our purpose
and assisting with our
growth, providing funding
to maintain our momentum
and the growth of our
company and to allow the
development of multiple sites
simultaneously.
Elevate Property Group
10 properties53.7%17 years Small and medium sized business
Small and medium sized businesses
are the lifeblood of the UK economy
and they need an expert and reliable
finance partner to help them innovate,
adapt and grow. We support business
customers across a wide range of
sectors, with a particular emphasis
on six focus sectors: construction,
transport, manufacturing, agriculture,
technology and professional services.
We have built up asset knowledge and
expertise in our focus sectors over
decades and it is this, coupled with
the wide range of finance solutions we
offer and our commitment to service,
that gives customers the confidence to
choose Paragon:
• Finance solutions for asset purchase
and refinance
• Working with manufacturers and
distributors, together with specialist
broker channels
• Support from sector experts with
deep and specialist asset knowledge
Finance for green assets
For businesses to make
the transition to green
technology it is essential
that they are able to access
the funding necessary to
do so – and Paragon is
committed to supporting
businesses in acquiring
assets that will be
beneficial for both them
and our environment in the
years ahead.
Reactive Hire
£92,000
average value of lease agreement
49 months
average term of lease agreement
Savings
Retail savings deposits provide the mainstay of funding for our specialist lending
products. In a competitive market, we attract customers by providing a broad range of
safe, straightforward and easy-to-use savings accounts across multiple channels and by
building a reputation for good value and service.
Direct savings customers
£28,000
average deposit
held in direct accounts
58%
of customers try to meet their
annual ISA allowance4
A consistent focus on
Cash ISAs
Awarded Cash ISA Provider of The Year
by Moneynet in 2023
50:50
97%
new customer application split
between fixed and variable
interest rate accounts
of customers know the
maximum limit on
the FSCS guarantee5
The sharp rise in interest rates has given savers a bigger incentive to shop around and
we have responded with speed to help them make the most of this opportunity. Higher
interest rates also mean more savers will be subject to tax on their interest income and
that is where our tax-free ISA products come into play:
• Broad range of fixed term, defined access and easy access savings accounts
• Choice of ISA and non-ISA accounts
• Online and postal accounts, backed with UK-based call centre support
• Competitive interest rates
• Tailored accounts for customers of digital banks and wealth platforms
Paragon Bank has been
a consistently strong
performer in the Cash ISA
savings market for both
easy access and fixed term
account options. It has
rarely been out of the
best buy tables in the
last year and thoroughly
deserves this title.
Andrew Hagger
Personal Finance Commentator and
Chair of the Moneynet judging panel
4 Paragon Savings Customers, Financial Outcome Survey 2023
5 Paragon Savings Customers, New Application Survey 2023
Page 13
£92,000 49 months Our business model
Our business model is designed to allow us to add value by
focusing on meeting the specialist needs of a broad range of
customers, while positioning ourselves to deliver returns for
shareholders and meet our broader obligations to society.
What we do
A broad funding base
We fund our assets using a
variety of sources and take
care to secure competitive
funding over an appropriate
term to underpin our
assets, meet working capital
requirements and maintain a
strong financial position.
Retail
deposits
Securitisation
Bond
issuance
Central bank
funding
Using our core strengths – we achieve success by…
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.
619
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 charge
£18.0
million
Technology
We are utilising
digital technology to
improve productivity,
enhance service
to customers and
access new markets.
14,500+
landlords have registered on
our new service portal
Management expertise
We have an experienced
management team with
a through-the-cycle
track record.
Average length of
service of the executive
management team is
16.5 years
To deliver value to all our stakeholders
Our section 172 statement can be found on pages 107-115
Shareholders
Employees
Society
Creating long-term shareholder value
by growing profits and dividends.
Helping our people develop their
career and reach their potential.
See page 108
See page 110
Helping the UK economy grow and
supporting the communities in
which we operate.
Average training per
employee in 2023*
3.5 days
* Employer skills survey, UK average 3.3 days
See page 112
469
paid volunteering days
supporting charities and
local community groups
Dividend per share
37.4p
Page 14
16.5 years619million +£18.0million14,500+ 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
Development
finance 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
36.6%
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.
2023 employee
engagement score1
90%
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.
97%
of employees agree Paragon
has a clear and consistent set
of values that underpin how
we operate1
1 2023 Employee Survey
We efficiently utilise
capital and debt
positions to maintain
balance sheet strength.
CET1 ratio
15.5%
Customers
Environment
Providing specialist lending products and savings
accounts to help our customers achieve their ambitions.
Continually reducing our environmental impact
and designing products that support positive
environmental change.
See page 109
+62
Net Promoter Score
('NPS') for savings
account opening
See page 113
£904.6 million
new lending to EPC A-C
properties supported by
our mortgage products
Page 15
36.6% 97%90%15.5% 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. Our
strategy is to focus on specialist customers, delivering 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.
Find out more about the progress we are making on each of our
strategic priorities on pages 18-23
Our strategic priorities
Strategic progress
Growth
Read more on page 18
Diversification
Read more on page 19
Digitalisation
Read more on page 20
Delivering consistent growth in loan assets and funding by focusing our
expertise in specialist lending markets and building an award-winning
savings franchise.
Developing resilience by diversifying into commercial lending
alongside our traditional stronghold in buy-to-let, building on a
broader funding base.
Transforming our business using digital, cloud-based technology
to enhance customer service, productivity and growth.
Capital management
Read more on page 21
Generating strong levels of core capital to support customers
through the economic cycle, provide capacity for growth and
shareholder returns.
Sustainability
Read more on pages 22 and 23
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
These risks and the steps the Group has taken to safeguard
against them are discussed in more detail in Section B8.
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
Risk of insufficient capital to operate effectively and
meet minimum requirements.
Risk of insufficient financial resources to enable us to
meet our obligations as they fall due.
Market
Credit
Risk of changes in the net value of, or net income arising
from, our assets and liabilities from adverse movements
in market prices.
Risk of financial loss arising from a borrower or
counterparty failing to meet their financial obligations.
Page 16
This year's outstanding performance reflects the
growing specialist franchise of the Group and
continued progress in our strategic development.
Nigel Terrington, Chief Executive
5.2%
five-year compound annual growth rate in new lending
4.2%
five-year compound annual
growth rate in the net loan book
37.5%
of new lending now Commercial Lending
81.1%
savings as a proportion of total funding
new customer-facing applications and capability
enhanced operational infrastructure
£1,188.9 million
Tier 1 equity
42%
reduction in market-based operational
emissions since 2019
20.2%
underlying return on tangible equity
95%
of our people are proud to
work at Paragon1
1 2023 Employee Survey
Strong financial foundations
Prudentially strong, with a low-risk
approach to lending, reducing volatility
of underlying earnings and enhancing
sustainability of dividends.
Model
Reputational
Risk of making incorrect decisions based on the
output of internal models.
Risk of failing to meet the expectations and standards
of our stakeholders.
Strategic
Climate change
Risk that the corporate plan does not fully align to and
support strategic priorities or is not executed effectively.
Risk of financial risks arising through climate change
impacting the Group and our strategy.
Conduct
Operational
Risk of poor behaviours or decision making leading
to failure to achieve fair outcomes for customers or to
act with integrity.
Risk resulting from inadequate or failed internal
procedures, people, systems or external events.
Page 17
Strategy in action
Growth
We focus 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.
Our approach
• Focus on specialist market segments with underlying growth
• Build market share by launching new products and extending distribution
• Grow retention, encourage repeat business and extend customer lifecycle
Consistent delivery
Loan book growth achieved in the latest reporting period builds upon a long track record of
consistent delivery over many years.
£3.01 billion
5.2%
£14.87 billion 4.2%
New lending
12 months ended
30 September 2023
Five-year compound
annual growth rate
2018-2023
Total loans and advances
to customers at
30 September 2023
Five-year compound
annual growth rate
2018-2023
Growth in a challenging mortgage market
In a challenging period for the mortgage market, we continued to concentrate on the needs of our target market of professional
landlords. Despite the rising interest rate environment, our focus on three related areas has delivered continued progress in
the loan book.
1
2
3
Streamlined support at product maturity
Mortgage product availability and choice
Faster, more transparent service
Over 80%
of fixed-rate mortgage accounts
maturing in the year retained
Five-year fixed rate products became
popular in the buy-to-let market
around 2017 and, with high volumes
now reaching maturity, we invested
to improve our customer proposition.
Customers and intermediaries
benefit from:
• Notification six months in advance
of their mortgage fixed-rate maturity
date, with an offer of alternative switch
and further advance products
• A fully automated, easy-to-use, online
switch and further advance process
• A dedicated customer support team to
offer extra help where needed
Against a backdrop of rising interest rates
and a volatile swap market, maintaining
mortgage product availability and choice
becomes more challenging for lenders
but remains essential for customers. We
continued to offer a wide variety of product
options for customers and even expanded
the range to include an innovative track
to fix option. This lets customers navigate
the uncertain outlook by starting on a
discounted variable rate, then converting
to a fixed rate when they choose.
Mortgage applications need expert
support to ensure a fast and transparent
turnaround. This year, we took a number
of steps to improve our effectiveness
in converting pipeline applications that
meet our criteria into new lending.
These included:
• Pre-referrals on properties, enabling
our in-house surveyors to confirm
that the property meets our standards
ahead of full application
• More comprehensive day one,
application checks to close any
information gaps
• Weekly publication of current application
processing times on our website
These measures helped to boost the
average monthly Net Promotor Score
from brokers placing new mortgage
lending business with Paragon to an
all-time high of +60.
£3.01 billion5.2%£14.87 billion4.2% Strategy in action
Diversification
We continually develop our range of specialist lending and savings products,
in both existing and new lending markets, to grow our business and to help us
succeed in becoming the UK’s leading technology-enabled specialist bank. We
also seek to reduce barriers to growth in UK banking where our long-term data
supports our move towards an Internal Ratings Based (‘IRB’) approach to capital
measurement and a growing and increasingly segmented funding strategy.
Our approach
• Build capability in specialist commercial lending markets alongside buy-to-let
• Develop a successful savings franchise, while maintaining access to central
bank and capital market funding
• Enhance flexibility to stay resilient in the face of changing market conditions
A versatile lending and funding mix
Since gaining our banking licence in 2014 and embarking on our diversification
journey, we have grown successfully in selected commercial lending markets
and built a broader funding base.
37.5%
9.7%
Commercial Lending as
a proportion of new
lending in 2023
New lending, five-year
compound annual
growth rate 2018-2023
£13.27 billion £3.09 billion
retail savings deposits
at 30 September 2023
(30 September 2018: £5.30 billion)
funding from central bank and
wholesale markets
(30 September 2018: £7.96 billion)
Adding reach and capability in property development finance
From a stronghold in London and the South East, we have expanded business across the UK,
added more capacity to finance purpose-built student accommodation and launched into the
build-to-rent market.
Purpose-built student accommodation
This year, we signed an agreement with long-standing client, Tribe, providing £29.6 million to finance
a 12-storey, 267-bed student accommodation development in Southwark, South London. The
development utilises Paragon’s stabilisation facility, which provides finance for an 18-month period
post-completion to season the development with student occupancy for up to two academic years.
Applying expertise to help SME customers adapt and grow
SME businesses need finance partners that can help them to adapt and grow. Our asset expertise
means we are well-placed to help customers fund new assets or refinance existing ones.
Recycling waste into profit
Greater Manchester-based waste management specialists SED Services expanded its
operations with the acquisition of a state-of-the art composting site with the help of funding
from Paragon raised by refinancing existing, unencumbered assets.
Providing competition and choice for UK savers
Since launching into the cash savings market in 2014 and the ISA market in 2016, we now offer a broad range of savings
accounts, reaching customers through a range of different channels.
Double and Triple Access savings accounts
In a changing interest rate environment, customers have been attracted to our Double and Triple
Access savings accounts, which provide flexibility to make limited withdrawals in 12 months while
maintaining an attractive interest rate.
Page 19
37.5%9.7%£13.27 billion£3.09 billion Strategy in action
Digitalisation
The transformation of our technology is focused on implementing
digitally-enabled, API-driven, 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.
Our approach
• Implement flexible, cloud-based and digital-first technology
• Utilise API and Open Banking technologies to enhance customer
propositions and deliver deeper insight
• Leverage data and emerging technology to enhance experience
for customers and employees
A fast-paced digital transformation
We are delivering a fast-paced digital transformation, moving through a
carefully planned, stepped programme to bring a better experience for our
customers and colleagues.
Over 80%
£24.4 million
of Paragon’s IT applications are now cloud-based
2023 IT costs as we invest in digitalisation
New service portal for landlord customers
In May 2023, we launched a new service portal for our existing landlord customers – a key milestone in our end-to-end, buy-to-let
digital transformation programme. The new portal gives landlords a clearer view of their mortgage details and introduces a range of
self-service features which will be expanded over time.
Landlords using the new portal can:
• Access their account and product details
• Update their contact details
• View and download annual statements
• Create custom mortgage statements
• Apply for a product switch or further advance
The next major milestone in our digital transformation in
Mortgage Lending will be the launch of the new mortgage
application and origination process.
Really easy to navigate. Especially liked the
custom mortgage statements.
14,500+
landlords have registered on
our new service portal
SME lending introduce auto-decisioning capability
for faster service on standard deals
Some lending decisions are more straightforward than
others. Sometimes we know the customer well, we are
familiar with the asset and its characteristics and the amount
of finance sought is relatively small. In these cases, we want
to be able to respond with speed and that’s why we have
developed an auto-decisioning capability in our SME lending
team. As the system evolves and improves, it delivers faster
service for customers with standard transactions, giving
our specialist team more time to assist customers on
more complex deals.
Over 80% £24.4 million 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 of 15-20%.
Our approach
• Maintain a cautious risk appetite, operationally and prudentially
• Deliver a sustainable return on tangible equity of 15-20%
• Grow our dividend and return excess capital through a share
buy-back programme
Strong capital generation
Movements in capital 2015-2023
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 growth and making distributions to shareholders.
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
24.9%
0.2%
(8.4%)
(8.7%)
(7.8%)
19.1%
(3.8%)
15.5%
CET1
Tier 2
2.0%
15.5%
17.5%
Total Capital Ratio
30 September 2023
15.5%
Core Tier 1 Equity Ratio
30 September 2023
CET1 ratio
(Sep-15)
Retained
earnings
IFRS 9 transitional
adjustment
Net lending
Dividends
Share
buybacks
Other
movements
CET1 ratio
(Sep-23)
Total capital
ratio (Sep-23)
Sustainable shareholder returns
We aim to enhance shareholder returns on a sustainable basis,
while protecting the capital base. In ordinary circumstances,
we distribute 40% of consolidated earnings to shareholders,
achieving a dividend cover ratio of approximately 2.5x. Our share
buy-back programmes provide flexibility to return excess capital
to shareholders as appropriate.
£465.5 million
Total dividends declared since 2015
£483.0 million
Total capital returned to shareholders through share
buy-backs announced since 2015
Moving towards IRB accreditation
We are seeking accreditation to adopt an IRB approach
when setting and managing our risk-weighted capital
requirements. We continue to work closely with the PRA,
as they consider our application, reflecting feedback and
enhancing documentation as we progress through the
regulator’s modular assessment process. As a conservative
lender, with a proven through-the-cycle track record, IRB
accreditation will allow us to tailor our capital requirements
more closely to the credit risks we face.
Page 21
£465.5 million£483.0 million Strategy in action
Sustainability
Reducing our operational impact
We want to make a positive contribution to the
challenge of climate change and one of the main
ways of doing this is by reducing the environmental
impact of our everyday business activities.
42%
reduction in
market-based emissions1
92%
of total electricity from
renewable sources
46%
of waste diverted
from landfill
1 compared to 2019 base line
For Paragon, sustainability means understanding our responsibilities towards
the environment and the societies in which we live and work, and focusing
our agenda on doing the right thing for all our stakeholders and contributing
to a world in which we can all thrive. That includes reducing the impact our
operations have on the environment, delivering sustainable lending through
products that help our customers achieve their goals, positively impacting our
people, customers and communities, and achieving the highest standards
of business integrity and professionalism. A commitment to maintaining high
environmental, social and governance (‘ESG’) standards is embedded in the
Group’s culture and values, influencing every aspect of our business.
Our approach
• Reducing our own emissions to become operationally net zero by 2030
• Financing a greener world by delivering sustainable lending products to help
achieve the UK’s 2050 net zero goal
• Making a positive difference by supporting the communities in which we
live and work
Financing a greener world
£904.6 million
new lending to EPC A-C
properties supported by our
mortgage products
We will keep working with
industry, partners and
policymakers to ensure we
are playing a proactive part
in supporting our customers’
transitions to net zero, and that
sustainable finance is embedded
throughout our business.
Achieved
£150 million
allocation of our Tier 2 Green Bond
Green Homes Initiative
funding doubled to
£200 million
Trustpilot trust score
1 May – 30 September for savings
and mortgage customers
of our people are proud
to work at Paragon
(Employee Engagement Survey 2023)
Raising and donating £100,000+ to benefit charities
and contributing 469 volunteering days to good causes across the UK
Making a difference
When it comes to social matters,
the needs of our people,
customers and communities
are priorities. We think globally,
linking our priorities to the UN’s
Sustainable Development Goals,
and deliver locally across the UK.
Progress Together
Paragon is a founding member of Progress Together, an independent
membership body, created to drive socio-economic diversity at senior levels
across UK financial services.
Page 22
£904.6 million£150 million£200 million Green Homes Initiative
Our development finance team supported Ambassador Living with Green
Homes Initiative funding of £9.5 million for the completion of its energy
efficient Wallace Park project in Wallyford, East Lothian. Each Wallace Park
home has maximum energy efficiency and is anticipated to achieve an EPC
A rating. The funding will support the project’s remaining 67 private homes,
which comprise three, four, and five-bedroom bespoke detached properties.
The high interest rate,
high inflation economic
background has led to both
market-wide reductions in
demand and challenges on
customer affordability. In
this environment the Group’s
focus on specialist products,
a robust credit approach,
high levels of customer
retention and margin
maintenance has delivered
strong results in 2023 and
these strategies will continue
into 2024 and beyond.
Nigel Terrington, Chief Executive
A3. Chief Executive’s review
The aggregate EIR debtor position on the Group’s balance sheet
at 30 September 2023 totalled £20.5 million (including the
impact of discounts on acquired loans), representing 14 basis
points of the gross loan book.
Other income was little changed year-on-year, at £17.1 million
(2022: £17.2 million, excluding the one-off impact of gains on a
disposal of loans).
Operating expenses totalled £170.4 million and include costs
associated with the closure of a Group subsidiary and an
operational restructuring. While these are one-off in nature,
they are considered immaterial and therefore no adjustment
has been made to underlying results. The 8.4% increase in
costs excluding these one-off items reflects the impact of
inflationary pressures in the year, particularly in professional
services, together with the Group’s continued investment in its
digitalisation plans.
The underlying cost: income ratio improved from 39.4% for the
2022 financial year to 36.6% in 2023, with cost discipline and the
delivery of operational synergies remaining key areas of focus.
Impairment charges rose by £4.0 million to £18.0 million
(2022: £14.0 million), reflecting the impact on customers of
higher interest rates and the broader inflationary environment.
The charge represents a cost of risk of 12 basis points. A more
stable economic outlook, together with enhancements to the
Group’s SME lending impairment models have been the main
drivers in supporting the reduction of overlays from £15.0 million
at 30 September 2022 to £6.5 million at the year end, with a
greater proportion of the expected loss being recognised by
the modelled provisions. Impairment coverage ratios at
30 September 2023 stand at 45 basis points before
judgemental overlays (2022: 37 basis points) and 49 basis
points including the overlays (2022: 44 basis points).
As noted in the 2022 accounts, the rapid increase in interest rate
expectations during 2022 generated a material fair value gain
on derivatives hedging the new business pipeline. These gains
reverse to zero over the lives of the related loan assets, and 2023
saw £77.7 million of this unwind.
The following table details the reconciliation between statutory
and underlying profits for the 2022 and 2023 financial years.
Underlying profit reconciliation
Underlying profit before tax
Gains on asset sales
Fair value movements
Statutory profit before tax
2023
£ million
2022
£ million
277.6
-
(77.7)
199.9
221.4
4.6
191.9
417.9
Introduction
The Group has reported strong results for 2023, with the loan
book growing by 4.7% from its 2022 level and net interest margin
widening to over 3%. This growth has been delivered whilst
maintaining the strong capital and liquidity that underpins the
Group’s lending and savings propositions. Gross new lending
advances again exceeded £3.0 billion, while the net increase of
£2.6 billion in the deposit base supports growth and materially
enhances liquidity.
The increasing influence of digitalisation is seen across the
business, with our asset finance portal generating material
application flows in the year, and the buy-to-let mortgage
maturities portal underpinning stronger year-on-year customer
retention at product maturity. Most recently, a post-completion
portal has been put in place for buy-to-let customers and further
functionality is being developed across the business, with
delivery planned for 2024. The value of these enhancements
is clear both from the response of our customers and from
improved operational efficiency.
2023 has seen the Group make further progress with its climate
change initiatives, which are discussed in more detail in the
third edition of its Responsible Business Report. Developments
in the year included enhanced analysis of the Group’s lending
on a financed emissions basis, a significant step towards the
compilation of an associated transition plan, and the completion
of a decarbonisation assessment of the head office building,
which contributes to over 30% of the Group’s operational
carbon footprint.
The Group’s people have responded extremely well to the effects
of the volatile macroeconomic environment seen during 2023,
rising to the various challenges, ensuring good outcomes for
customers, and continuing to support the extensive change
programmes in progress, as the Group develops its hybrid
working approach in an increasingly digitalised environment.
The strong financial performance for the year supports a
30.8% increase in the Group’s dividend to 37.4 pence per
share. The Group completed a £100.0 million share buy-back
programme in the financial year and has announced its
intention to conduct a further buy-back of up to £50.0 million
during the coming financial year. The full details of the PRA’s
approach to implementing Basel 3.1 in the UK are still not
certain, and the regulator has recently delayed implementation
to July 2025. Sufficient capital continues to be available to
address the potential impacts of the Basel 3.1 regime. The Group
also continues to progress its application for IRB accreditation
for its buy-to-let mortgage assets.
Financial performance
Underlying operating profits (excluding fair value and gains
on asset sales in 2022) increased by 25.4% year-on-year, to
£277.6 million. The principal driver remained net interest income,
which benefitted from a growing book and wider margins.
The average net loan book in Mortgage Lending rose by 4.4%
to £12.6 billion from its 2022 level, with the average value of the
Commercial Lending book increasing by 11.5% to £1.9 billion. The
net interest margin rose to 309 basis points from the 269 basis
points recorded in the previous year. These positive rate and
volume influences saw net interest income increase by 20.9% to
£448.9 million (2022: £371.2 million).
Interest income recognition follows the EIR approach set out
in IFRS 9, which requires management judgments to be made
about the future behaviour of customer accounts, in order to
spread income over the expected life of a loan. For the Group’s
buy-to-let portfolio, these judgements centre on the likely
behaviour of customers after their fixed rate period ends and
the rates of reversionary interest which will apply at that point.
The lack of recent historical precedent for the current economic
environment makes these judgements complex.
Page 25
Strategic Report Trading performance
Business model developments
The most notable developments seen in 2023 relate to the
Group’s continued digitalisation plans, which involve a phased
re-platforming of its operational systems together with
enhancements to customer and intermediary-facing portals,
improving the user experience, and helping to drive
operational efficiencies.
The buy-to-let mortgage maturities portal introduced in 2022
underpinned a material improvement in customer retention,
with over 80% of professional landlords with maturing fixed-rate
accounts taking switch products at maturity, up from over 70%
in 2022. Similarly, the roll-out of the SME lending broker portal
and enhanced automated support for decision-making in that
business has been a catalyst for increased application volumes
and more effective handling of cases.
The new financial year is scheduled to see further progress on
the Group’s digitalisation journey, with more systems moving
from on-site hardware to cloud-based hosting, and additional
functionality being developed for both the lending and savings
businesses. The majority of the cost of these developments is
included in operating expenses at the point it is incurred, with
just £1.6 million of software capitalised in the year and held on
the balance sheet (2022: £1.7 million).
The Group’s operating model was reviewed during the year –
focusing on the implications of hybrid working and critically
examining the Group’s management structure. The review was
facilitated by a third-party consultancy which provided relevant
peer and emerging trend insight to inform the Group’s analysis of
best practice. The process concluded during September 2023,
resulting in a restructuring that will see 53 people leaving the
business. Costs associated with this exercise totalled
£2.6 million and were fully expensed in 2023.
2023 also saw the closure of the Group’s mortgage brokerage
subsidiary, TBMC, following a review of buy-to-let distribution
strategy. This closure resulted in the writing off of goodwill and
other intangible assets, together with other costs, totalling
£2.0 million.
People
The Group’s 1,500 employees are its most important asset.
The outcome of the 2023 engagement survey was therefore
particularly pleasing, with 88% of employees sharing their views,
more than in any previous survey. The overall engagement
score of 90% was our highest level for eight years, a result well
above the average for the sector. Employees scored the Group
particularly well on areas such as delivering good outcomes
for customers, risk culture and positively influencing climate,
alongside organisational integrity, wellbeing, development
opportunities and employee voice.
A formal employee code of conduct has been in place
throughout the year, with 100% of the Group’s people attesting
that they understood the code’s expectations during 2023. The
Group has a thriving Equality, Diversity and Inclusion (‘EDI’)
network, sponsored at ExCo level, and a strong People Forum,
which has regular engagement with the Chair of the Board, and
the executive and non-executive directors.
New business flows for the year were in line with expectations,
although the volatile interest rate environment resulted in
substantial variations in application flows on an intra-period
basis, with the sharp movements in rate expectations influencing
demand and customer confidence.
In Mortgage Lending, £1.88 billion of new buy-to-let advances,
coupled with stronger customer retention at product maturity,
resulted in 4.7% growth in the net loan book across the year.
Credit quality remains strong, with buy-to-let three-month plus
arrears standing at 34 basis points (2022: 15 basis points), which
continues to be significantly better than industry averages, and
a weighted average indexed loan-to-value ratio of 62.7%
(2022: 57.8%) providing substantial security cover.
The annualised redemption rate for the buy-to-let portfolio as
a whole was 9.0% in 2023 (2022: 9.8%) with the legacy variable
rate book, which is more impacted by increases in variable
rates, amortising at 14.7% and the post-2010 new book seeing
redemptions of 7.0%.
The net loan book for the Commercial Lending division grew
by 4.8% in the year. Development finance grew by 3.9% to
£0.75 billion, motor finance grew by 13.9% to £0.30 billion and
SME lending grew 5.0% to £0.76 billion. The structured lending
division saw net repayments of 5.4%, taking the year end drawn
balance to £0.17 billion.
High interest rates (both spot rates and swap rates) in the final
quarter of the financial year resulted in subdued demand for
the Group’s property-focussed offerings. In the buy-to-let book,
these lower flows, coupled with disciplined management of
lending margins and a swifter turnround of offers, resulted in the
year end pipeline decreasing to £0.6 billion (2022: £1.3 billion).
The development finance pipeline also reduced, to £0.5 billion
from £0.7 billion a year before.
Capital and funding
Since the authorisation of Paragon Bank in 2014, the Group has
used retail deposits to fund the majority of its lending growth and
the systematic refinancing of its legacy wholesale facilities. This
process continued through 2023, with the deposit book growing
to £13.3 billion. Wholesale funding will continue to be used
tactically, when pricing is attractive, and to manage duration.
However, savings deposits are expected to provide the principal
source for the Group’s financing requirements over the coming
years, supporting the further growth of its business and the
repayment of its £2.75 billion TFSME drawing by October 2025.
Around 94% of our savings deposits are FSCS covered, and the
product mix remains skewed to term deposits rather than easy
access accounts, with term deposits comprising 65.5% of the
portfolio (2022: 58.1%).
The success of the Group’s savings growth has seen Paragon
Bank’s twelve-month average Liquidity Coverage Ratio (‘LCR’)
increasing to 193.8% in 2023, compared to 146.2% during 2022.
With savings deposits expected to be the Group’s primary source
of funds for the planned repayments of its TFSME borrowings,
savings inflows and, hence, the LCR are likely to remain at more
elevated levels in the near term. Once the TFSME funding is repaid
we would expect the LCR to move back towards historic levels.
The CET1 and total capital ratios at the year end were 15.5% and
17.5% respectively and remain comfortably above regulatory
requirements (2022: 16.3% and 18.3%). These requirements
increased in the year, with the Bank of England increasing the
UK CCyB rate to 2.0% (2022: 0.0%).
The Group continues to pursue an IRB accreditation, initially for
its buy-to-let portfolio, and has been in active dialogue with the
PRA for much of 2023. The Group is currently awaiting feedback
regarding its most recent submissions.
Page 26
Sustainability
During 2023 the Group joined PCAF (the Partnership for Carbon
Accounting Financials) and in its 2023 Annual Report presents
a PCAF Scope 3 financed emissions balance sheet, which
measures the emissions attributable to its lending on an industry
standard basis. Establishing a reliable benchmark forms a key
element in planning the Group’s transition path to net zero, so
this represents an important milestone in that process.
Progress is also represented by work to enhance
understanding of the potential impacts, over time, on the
Group’s buy-to-let portfolio of the UK Government’s evolving
proposals for Minimum Energy Efficiency Standards (‘MEES’)
for residential property, and by the extension of attributable
emissions reporting to include elements of the Group’s
Commercial Lending operations.
Savings deposits continue to form the core of the Group’s
funding, with 2023 having seen significant growth at attractive
costs. The Group’s TFSME drawings begin to mature in
October 2025, therefore growth in savings at a greater rate than
that for loan balances, potentially together with tactical access
to wholesale markets, should be anticipated in the coming
year. With a strong retail focus and 94% of deposits covered by
the FSCS, the Group’s savings proposition delivers a reliable,
scalable and cost-effective means of financing the growth of
the business.
Overall, the Group remains well placed to continue to support
customers in its chosen specialist markets. The strength of the
business model provides a strong foundation to capitalise on
opportunities and deliver strong returns to shareholders.
The majority of the emissions included in the Group’s operational
footprint arise from its thirty-year old head office in Solihull.
During the year a full decarbonisation report on this building
was completed, with the identified enhancement works planned
to be completed over the coming three years, well ahead of the
Group’s operational net zero target date of 2030.
Nigel Terrington
Chief Executive Officer
6 December 2023
Outlook
The high interest rate, high inflation economic background has
led to both market-wide reductions in demand and challenges
on customer affordability. In this environment the Group’s focus
on specialist products, a robust credit approach, high levels
of customer retention and margin maintenance has delivered
strong results in 2023 and these strategies will continue into
2024 and beyond.
The Group’s buy-to-let business represents its most mature
and well-established division. Overall, the buy-to-let market
slowed significantly in 2023, but the more specialist sector in
which the Group operates has been materially more resilient.
Having delivered stable and steady growth for many years,
the combination of its strong franchise, longevity of data,
planned delivery of IRB in fine-tuning capital requirements
and increasingly digitalised operations combine to provide
opportunities to maintain and accelerate this progress.
The continuing development of the Group’s Commercial
Lending division is also being driven by technological initiatives,
embedding those recently introduced and rolling-out further
elements of the Group’s digitalisation plans. Capacity exists for
each of the division’s existing business lines to grow, and this is
also an area where incremental capabilities can be strategically
added over time, either organically or through acquisition.
Operating at wider margins than the buy-to-let business, future
growth in this segment will be a core component in the structure
of the Group’s margins going forward.
Page 27
Strategic Report 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.
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
2023
£m
2022
£m
2023
£m
2022
£m
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 of the requirements of
the specialist landlords who form its customer base.
During the period the Group also offered a limited volume of
loans to non-specialist landlords, although this activity has been
increasingly non-core in recent years. The segment also includes
legacy assets from discontinued product lines, including
residential first and second charge mortgage loans.
Mortgage Lending
1,879.9
1,910.0
12,902.3
12,328.7
Commercial Lending
1,128.7
1,304.7
1,972.0
1,881.6
3,008.6
3,214.7
14,874.3
14,210.3
The Group’s focus on the specialist buy-to-let market facilitates
detailed, case-by-case underwriting, where its unique approach
to managing property risk and building customer relationships
differentiate it from both mass market and other specialist lenders.
The Group’s total loan balance increased by 4.7% in the year, as
it pursued its strategic objective of managed, targeted growth in
challenging market conditions.
Total advances decreased 6.4% year-on-year, although the
pattern of movements was not consistent between the Group’s
specialist markets, with the complex economic situation seen in
the year impacting different business lines to varying degrees.
Housing and mortgage market
The levels of economic uncertainty in the UK economy over
the year, coupled with the higher interest rate environment has
significantly impacted the housing market. Activity substantially
reduced year-on-year, with transactions for the year ended
September 2023 reported by HMRC, at 1,085,000, 11.5% lower
than the 1,226,000 in the previous year. In part this reflects a
hiatus in the mortgage market in September and October 2022
when many lenders withdrew products as a response to the
volatility in financial markets following the September 2022
mini-budget, but subsequent pressure on mortgage affordability
has kept business levels depressed.
In its September 2023 Residential Market Survey, RICS
reported continuing weak demand, although their members’
outlook was less negative than earlier in the year, attributable
to the impact of interest rates and more general economic
uncertainty on affordability.
This weakening of demand put downward pressure on house
prices, with the Nationwide House Price Index recording a year-
on-year fall of 5.3% to September 2023 (2022: increase of 9.5%),
although prices had broadly stabilised towards the end of the
year. This was a smaller fall than some had predicted and returns
house prices to February 2022 levels, although the impact of
inflation over the period means that in real terms house prices
fell by 12.6% in the year. Nationwide predicts the market to
remain subdued in the short term, with RICS forecasting further
house price falls over a twelve month horizon.
Page 28
In response to the level of activity in the housing market, new
mortgage lending was extremely weak in the year, with volumes
in all four quarters less than any in recent years, other than the
June 2020 quarter impacted by Covid. The Bank of England
reported new approvals of £212.2 billion for the year ended
30 September 2023, a reduction of 33.8% on the record
£320.8 billion reported for the previous financial year. Lending
for new purchases and for remortgages were equally impacted,
with volumes for both transaction types falling by around 18%,
although the value of mortgages refinanced with their existing
lender increased by 23%.
Quarterly Bank of England UK mortgage approval data for the
last four financial years is set out below.
UK mortgage approvals (£m)
Bank of England
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
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
Dec ‘22
M ar ‘23
Jun ‘23
Sep ‘23
At 30 September 2023 the UK Finance (‘UKF’) survey of mortgage
market arrears and possessions reported arrears levels building,
potentially in response to rising interest rates, particularly towards
the year end. Possession numbers rose through the year but
remain 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 active in the PRS. Such landlords will
typically let out four or more properties, or operate with more
complex properties. They 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 group of mostly small,
specialist lenders addressing this sector, which is underserved
by many of the larger banks.
While it is clear that the changing economic environment and
regulatory landscape has caused some landlords to step away
from the PRS, the Group’s experience is that this reaction is
concentrated amongst some smaller non-specialist amateur
landlords, while its specialist customers remain committed to
the sector.
The experience of the Group’s 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 impacting them or their tenants.
According to data from the 2021 census carried out in England
and Wales, the PRS provides homes for around 20.3% of
households in those countries, increased from 16.7% in the 2011
census. Data from the ONS Labour Force Survey suggest that
across the UK at 30 June 2023, 22.1% of households were renting
privately, a figure that has been gradually rising over recent
years. With the economic environment creating constraints on
income and mortgage affordability, it is likely that reliance on the
sector will increase.
This can be seen in the lettings market data published in the
RICS September 2023 UK Residential Market Survey. This
reported continuing strong tenant demand coupled with a
serious shortage of new instructions from landlords, which was
pushing rents upwards, with RICS members expecting rent rises
of around 5% in the next twelve months.
Research published by Zoopla suggested that, on average,
rents for new tenancies across the UK had increased by 10.3%
year-on-year, with the highest increases in Scotland, at 12.8%,
despite what is perceived as more restrictive regulation in the
Scottish PRS.
The UK Government is proposing reform of the PRS through
its Renters (Reform) Bill, which was introduced into Parliament
in May 2023. The Group has monitored the development of the
legislation to date and is largely comfortable with the reforms,
which balance the needs of tenants and landlords. However,
there are concerns over the impact of the level of new regulation
being applied to landlords. The Group would also urge the UK
Government to ensure that the introduction of the new framework
is adequately resourced to prevent disruption to both tenants and
landlords. Overall, the Group does not believe its business model
will be significantly impacted by the new legislation, and considers
that its customer base may be better prepared to face these
changes than some other parts of the PRS.
Around three quarters of properties in the PRS are funded
through buy-to-let mortgages, but buy-to-let mortgage activity
in the year was even more subdued than for mortgages more
generally, with new advances reported by UKF, at £36.8 billion
for the year ended 30 September 2023, being 32.4% lower than
for the previous year (2022: £54.5 billion). While this was mostly
led by a fall in activity for new house purchases, which were down
by 36.6%, remortgaging was also impacted, falling by 30.5%.
However, some of the downward pressure on remortgaging will
be attributable to the relative unattractiveness of fixed rates
available, coupled with the potential for affordability issues.
There is also evidence of increasing numbers of borrowers
transferring to new products offered by their existing lender,
which are not recorded as new cases in the data. Information
published by UKF showed that around two thirds of landlords
refinancing their mortgage in the year ended 30 September 2023
switched to a new product with the same lender, rather than
remortgaging with a new provider, compared to around half in
the preceding year.
This mixed outlook for the sector was borne out by the Group’s
own independently commissioned research amongst landlords
and mortgage intermediaries.
In the Group’s quarterly survey of buy-to-let landlords for the
quarter ended 30 September 2023, 71% of landlords reported
that they were experiencing increased tenant demand, with 48%
reporting significant increases. Rental yields also continued
to move upwards, with 70% of respondents having made
rent increases over the year. Landlord confidence had also
increased, year-on-year for rental expectations and for their own
businesses, where the survey reported net optimism for the first
time in a year. This was particularly the case amongst the larger
landlords who form the Group’s targeted customer base.
Expectations for capital gains, however, had fallen year-on-year
and landlords remained relatively pessimistic generally. Reported
confidence, across all metrics measured, covering their own
business, the sector and the UK economy more generally, had
declined significantly in the last quarter of the financial year.
Page 29
Strategic Report Amongst specialist mortgage intermediaries, the Group’s
half-yearly insight survey, published in August 2023, showed
that the vast majority of intermediaries were confident or very
confident about the prospects for their firms and the mortgage
industry. However, over 40% cited a lack of confidence in the
outlook for buy-to-let, although this was still an improvement
in the year. The principal issues that were concerning the
respondents were the level of interest rates, and the impact
of the cost of living on affordability.
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 moving upwards, and that
trend accelerating towards the end of the period.
Overall, this data indicates that the buy-to-let mortgage
market remains generally robust, even in the face of economic
pressures, albeit with a degree of caution on its future prospects.
It therefore underpins the strength of the Group’s proposition,
particularly given its focus on the specialist landlord.
The Business Mortgage Company (‘TBMC’)
During the year the Group conducted a review of its TBMC
mortgage brokerage business. This concluded that changes in
market dynamics had meant that this operation was no longer
contributing materially to the Group’s strategic objectives and
the decision was taken to close the operation. Costs of
£2.0 million relating to the closure, including writing off
remaining intangible balances, were expensed in the year.
By the end of the year the closure process had been largely
completed, with remaining cases processed in an orderly
fashion. The Group thanks TBMC’s employees, business
partners and customers for their support over the years and
wishes them well for the future.
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
2023
£m
2022
£m
1,857.6
1,869.5
22.3
39.5
1,879.9
1,909.0
-
1.0
1,879.9
1,910.0
Total mortgage originations in the Group decreased by only
1.6%, despite the constriction seen in the housing and mortgage
markets more generally resulting in an increased market
share of new lending. This is partly due to the Group’s pipeline
hedging policy, which enabled the mortgage offers which were
in process at the start of the year to be satisfied, at a time when
many lenders had to withdraw offers as a result of rising market
interest rates. 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 decreased by
0.6%, significantly outperforming the market, with the specialist
sector showing itself to be resilient and eager to take advantage
of opportunities created by the economic environment. These
specialist completions, at £1,857.6 million formed 98.8% of the
Group’s new mortgage business. 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 those loans are now reaching
the end of the five-year period. The Group has well-established
retention procedures to address accounts as their fixed
rates expire, which were enhanced as part of its digitalisation
programme during the previous year. Over 80% of the specialist
landlord customers whose products matured in the year
remained with the Group at the year end.
In response to the uncertainties over the future of interest rates,
the Group launched a new suite of track-to-fixed rate products,
allowing customers to delay fixing their interest rate. The early
launch of this alternative, compared to the market, helped
support both advances and retentions.
The new business pipeline, being the loans passing through the
underwriting process, stood at £594.6 million at the year-end, with
the reduction from the previous year partly reflecting the tightening
of the market in the period, but partly reflecting an enhanced
approach to managing the pipeline (2022: £1,256.0 million).
Specialist intermediaries are the principal source of the Group’s
buy-to-let applications, and it continues to strategically focus
on ensuring that the service offered to them is excellent. The
Group’s regular intermediary insight surveys in the year showed
95% were satisfied with the ease of obtaining a response from
the Group (2022: 89%), delivering an NPS at offer stage of +60
(2022: +40). 75% of intermediaries dealing with the Group rated
its service as good or better than that provided by other lenders
(2022: 67%). Paragon Mortgages was also named as Best
Professional Buy-to-Let Lender at the 2022/23 Your Mortgage
awards, its tenth victory in that category, highlighting the
effectiveness of its service proposition.
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. The value of the work completed
to improve the redemption and retention process in the previous
period is demonstrated by results in this area in the current year.
The current year saw the completion of another major phase of
the project, with the first release of a new landlord portal launched
in May 2023. This market-leading new portal offers a better user
experience and increased self-serve opportunities, and will
continue to be enhanced. The overall project continues and will
deliver additional service upgrades and new opportunities for
interaction between the Group and its customers and business
partners as further phases are rolled out.
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 types of property within the
Group’s lending criteria. These products offer lower interest rates
for energy efficient properties with EPC ratings of C or higher.
Page 30
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
as the UK Government continues to develop its approach in
this area.
The Group’s new buy-to-let lending volumes on energy-efficient
properties, which have increased by 8.7% in the year, are set
out below.
EPC rated A or B
EPC rated C
Total rated A to C
2023
£m
184.1
720.5
904.6
2022
£m
169.0
663.2
832.2
Performance
The outstanding loan balances in the segment are set out below,
analysed by business line.
2023
£m
2022
£m
Post-2010 assets
First charge buy-to-let
9,679.5
8,536.4
First charge owner-occupied
Second charge
Legacy and acquired assets
22.5
75.8
28.0
104.4
9,777.8
8,668.8
First charge buy-to-let
3,040.6
3,549.6
First charge owner-occupied
Percentage with available data
(England and Wales)
99.9%
99.6%
Second charge
5.2
78.7
8.4
101.9
12,902.3
12,328.7
The Group’s latest analysis identified EPC grades for 94.6%
by value of its mortgage book in England and Wales at
30 September 2023 (2022: 92.8%). Of these 99.2% were graded
E or higher (2022: 98.9%) with 41.5% rated A, B or C
(2022: 39.3%). The year-on-year movements are principally a
result of the balance of new business, with almost half of the
Group’s advances in the year in England and Wales, 49.5%
(2022: 45.1%) 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. In
addition, the exposure relating to the current mortgage book is
monitored using specialist bureau data. This addresses the risk
of flooding from rivers, seas or surface water. This showed that
3.0% of properties securing buy-to-let mortgages, where data
was available, were at ‘higher’ risk (2022: 3.0%).
98% of landlords surveyed in the Group’s research said that they
were aware of the EPC rules affecting their properties. 79% of
landlords stated they had no properties with EPC grades less
than E, and 64% confirmed they would upgrade any property not
meeting the standard rather than seek to sell it.
The Group’s mortgage business is currently working to develop
products to support its landlord 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
At 30 September 2023, the total net mortgage portfolio was 4.7%
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 12.8% and now represents 75.8% of
the division’s total loan assets (2022: 69.2%).
The annualised redemption rate on buy-to-let mortgage assets,
at 9.0% (2022: 9.8%), has continued at a relatively low level. This
is despite the potential impact of rising rates on customers
whose interest charges are linked to reference rates, and the
increasing numbers of five-year products now reaching the end
of their fixed rate periods. As described above, the Group has
adopted a number of strategic initiatives to retain customers
with maturing fixed rate products.
Arrears on the buy-to-let book increased in the year to 0.34%
(2022: 0.15%), 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 0.06%
(2022: 0.09%). These arrears remain very low compared to
the national buy-to-let market, highlighting the strength of the
Group’s credit standards. UKF reported arrears of 0.69% across
the buy-to-let sector at 30 September 2023, sharply increased
year-on-year (2022: 0.41%), though still less than the arrears seen
in the wider mortgage market.
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 significant
security in the face of economic stress.
The loan-to-value coverage in the Group’s buy-to-let loan book,
at 62.8% (2022: 57.9%), represents significant security, despite
the falls in house prices in the year. 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 around £9.0 billion of equity in
their mortgaged properties.
Page 31
Strategic Report Arrears on the closed second charge mortgage lending portfolios
increased to 23.48% (2022: 21.33%) as the books continue to
run off. These arrears levels remain higher than the average for
the sector, which reflects the ageing of the balances, with the
continuing upward trend reflecting 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. Credit performance is considered to be in line with
expectations and the Group benefits from substantial security
on these assets, with an average loan-to-value ratio of 52.3%
(2022: 50.6%) providing a significant mitigant to credit risk.
For accounting purposes, 6.5% of the segment’s gross balances
were considered as having a significant increase in credit risk
(‘SICR’) at the year end (2022: 16.4%), including 1.2% which were
credit impaired (2022: 1.1%). This resulted from the more stable
economic situation and some fine tuning of ECL models which
enabled a more accurate identification of increased credit risk
in performing accounts, counterbalanced, to some extent, by an
increased number of arrears cases. However, the nature of the
cases involved meant that provision coverage was stable, at
33 basis points (2022: 31 basis points), although coverage on
fully performing accounts had reduced from 6 basis points at
30 September 2022 to 4 basis points at the year end, a result of
the decreased level of overlay required.
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, 564 properties were
managed by a receiver on the customer’s behalf, an increase
of 18.7% over the year (2022: 475 properties), with receivers
appointed on a number of additional portfolios during the year,
while older cases continue to be resolved. Almost all these cases
currently relate to pre-2010 lending, with cases being addressed
on a long-term basis to ensure good outcomes for customers
and their tenants, as well as for the Group.
Outlook
In the face of a difficult operating environment the division
performed strongly in the year and the work carried out in the
year to enhance retentions and develop new products means
that it enters the new financial year with a robust proposition,
with further improvements to its processes and systems
progressing towards launch. These will ensure the Group
maintains its reputation for providing an effective and responsive
service to its customers and their brokers.
The Group’s underwriting standards, credit performance and
administration policies mean that the division is well placed to
deliver value to shareholders whatever direction the UK economy
takes, while ensuring that any issues of vulnerability amongst
customers or their tenants are appropriately addressed.
•
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 specialist management
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
New lending in the Commercial Lending segment fell by 13.4%
in the year as the UK economy slowed and customers felt the
impact of the interest rate environment. Performance varied
between business lines with development finance, where
economic and political uncertainty increased caution amongst
developers, particularly affected.
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
2023
£m
528.1
447.9
(9.5)
162.2
2022
£m
632.2
446.4
59.9
166.2
1,128.7
1,304.7
Despite this slowdown the overall Commercial Lending portfolio
continued to grow, with total exposure increasing by 4.8% in
the year to £1,972.0 million (2022: £1,881.6 million). The increase
in the portfolio over the last five years, and its impact on the
Group’s diversification strategy is illustrated by the chart below.
Commercial Lending portfolio (£m)
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
A4.1.2 Commercial Lending
The Group’s Commercial Lending division includes four key
specialist business streams lending to, or through, commercial
organisations, mostly on a secured basis. This division had been
a major source of growth within the Group before the impact of
Covid and remains a focus for growth going forward.
The four business lines address:
•
•
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
Page 32
2018
2019
2020
2021
2022
2023
Development finance
SME lending
Structured lending
Motor finance
Development finance
Activity levels across the development finance market have been
significantly depressed during the year. Political uncertainty
at the start of the year, coupled with caution over the future
directions of interest rates, build costs and property values over
the period, reduced developers’ appetite to launch new projects,
and led to increased issues arising on those projects which have
been progressed.
The Group reported lower levels of enquiries and pipeline at
the end of the previous financial year and this trend has largely
continued through the year, with advances falling 16.5%.
At the 2023 year end developers remained cautious, with
undrawn amounts on live facilities at 30 September 2023, at
£404.1 million, being 27.3% lower than those a year earlier
(2022: £556.0 million), while the post-offer pipeline fell to
£97.3 million (2022: £136.8 million).
The business extended its green financing option during the
year, with the amount of funding available increased to
£200.0 million. This product provides beneficial terms for
projects to develop energy-efficient properties, those with an
EPC A grade, and by 30 September 2023, £155.0 million of new
lending facilities had been agreed under this initiative, with
drawings in the year of £51.4 million and the first major project
completed. This type of development will be an area of focus for
the Group going forward, as customers increasingly factor these
discounts into their project planning.
The Group’s development finance lending was originally centred
on London, but has broadened, year-on-year, with the proportion
of the portfolio located in London and South-East England falling
to 45.8% from 56.8% at 30 September 2022. Activity increased
particularly in South-West England, with funding provided for a
number of major projects.
The Group’s investment in systems for this business has
continued to show benefits during the year, with systems
introduced in July 2022 enhancing process efficiency and
customer service as they have bedded in. This drive towards
digitalisation will continue, providing a solid platform for the
future of the business and supporting the transition over time
to an IRB approach to capital management.
In spite of the disruption seen in the sector during the year
and the consequent impact on new business levels, long-term
fundamentals of the business remain sound. The Group has a
strong presence in the purpose-built student accommodation
market, where evidence suggests there is a significant shortfall
in high quality provision and, following the year end, the business
expanded its product range to cover ‘Build-to-Rent’ projects,
providing a wider range of options for its developer customers.
There is wide-spread agreement that the UK provides fewer new
homes than necessary, offering significant opportunities for
smaller developers to expand and for the Group to support them.
The Group’s proposition is strong and attractive and continues to
provide healthy returns for the capital invested and opportunities
for growth.
SME lending
The Group’s SME lending business has a focus toward
construction equipment and similar wheeled plant, and therefore
is exposed to UK sentiment around capital investment. The
political uncertainties of the period and the rising interest
rate environment served to increase levels of caution around
committing to major capital projects, so the business has been
faced with a testing operating environment for most of the year.
Despite this, asset leasing volumes increased by 3.4%
year-on-year to £286.4 million excluding government-backed
balances (2022: £276.9 million). While this is less than the 8%
increase in new leasing business, excluding cars and high
value items, in the year to 30 September 2023 reported by the
Finance and Leasing Association (‘FLA’), the FLA data has sharp
variations between asset classes. The FLA reported no year-on-
year increase in new leases of plant and machinery, while new
leases of construction plant showed a decline. Investment in
operating leases has also continued with £15.3 million of assets
acquired in the period (2022: £14.5 million).
Lending under the UK Government-sponsored Recovery Loan
Scheme, (‘RLS’) to support SMEs potentially affected by the
Covid pandemic continued in the year. The reduction in the
guarantee from December 2021, and the general emergence
from Covid saw a marked drop-off in take-up of the scheme.
During the year £7.9 million was advanced under the RLS
(2022: £32.2 million), of which the majority, £6.9 million, was
asset leasing business.
The Group continues to closely monitor the government-
guaranteed portfolio for any adverse indications, particularly
in view of the performance issues with such loans reported
by other lenders, which have principally focussed on Bounce
Back Loans Scheme (‘BBLS’) lending. However, it has not yet
encountered such problems in its own portfolio.
Short-term lending to professional services firms outside
government supported schemes increased by 9.5% to
£137.7 million (2022: £125.8 million). These loans are often used
to spread the impact of tax and other significant liabilities,
and in previous periods the availability of tax deferrals, and
government-guaranteed loans under Covid-related schemes to
firms 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 Group’s investment in technology within the SME lending
operation has continued to deliver improvements in internal
efficiency and service to brokers and customers, providing an
important point of differentiation against competitors. Agile and
modular delivery enables individual improvements to go into
the live system as they are completed, providing incremental
enhancements, on an ongoing basis. During the year these
included enhanced automated support for decisioning, enabling
more efficient processing of applications.
The new broker portal launched in the previous financial year
continues to provide benefits as its use is rolled out and further
product lines added. Take-up has continued to grow with over
70% of standard SME lending applications now being received
through the portal. This interface is designed as an additional
service to brokers, with the division’s business support team
remaining fundamental to ensuring brokers and customers
receive the standard of service they require.
The portal has facilitated a step-change in the operation’s ability
to handle smaller value loans efficiently, leading to an increased
level of applications for such products, reducing the size of the
average advance, which reduces risk in the portfolio.
In a survey conducted by the Group, 75% of users were satisfied
with the new portal, with 79% considering it to be as good as or
better than other lenders’ offerings. Feedback from the survey is
being used to drive further enhancements to the portal.
More widely, the division’s ongoing broker satisfaction survey
reported that 78% of respondents were likely to do further
business with the Group (2022: 81%), with 86% reporting that
the service they had received was as good or better than that
received from other lenders (2022: 88%). The overall NPS
amongst brokers for the year was +25, significantly positive. This
was also recognised when the Group won the Leasing World
2023 Gold Award as SME Specialist of the Year. The strength of
the Group’s relationships with the broker community are key to
the success of the business going forward.
Page 33
Strategic Report The Group monitors the potential impact on climate of the
industries it does business with, and supports UK SMEs with
green propositions, such as the installation of solar power or
infrastructure for recycling, as they transition their businesses
towards net zero. These types of initiatives are expected to
increase going forward as such considerations are prioritised
by customers.
The FLA Outlook Survey for the third quarter of 2023, released
in November 2023, showed almost all of its members expected
a broadly similar economic situation for the coming year, with
almost half anticipating some decline in business investment.
82% anticipated a worsening arrears position and 89% expected
a higher level of corporate insolvencies, although a majority
in both cases felt the increases would be small. Despite these
fears, most members had become more optimistic for future
business levels, with three quarters expecting at least some
increase in lending levels in the next twelve months.
The Group’s own quarterly research among SME leaders,
conducted towards the end of the financial year, also reported
a mixed picture. Just over half of SMEs were confident of the
prospects for their own business with the remainder unsure or
negative, with similar results for their views on the sector more
generally. Substantial numbers reported declining cashflows
and turnover in recent months, although a larger number said
these had improved, with a majority expecting improvements in
the short term. Despite this, the number of SMEs expecting to
make capital investments in their business in the near future was
far greater than those who had made such investments in the
previous six months.
Overall, the outlook for the SME sector remains uncertain, with
contradictory data and a real prospect of additional headwinds
building going forward. Some SMEs are clearly becoming more
confident, especially for the longer term, but significant numbers
still have a neutral or more negative outlook.
The prospects for SMEs in the UK are clearly more stable than
at the previous year end, although the economic pressures
of high interest rates and rising costs continue to present
risks. However, the division has robust resources in place to
manage any decline in portfolio performance and has enhanced
its technology further to support recoveries. The division’s
investment in systems and its expert team ensure that it is well
placed to support those SMEs who feel ready to invest to take
advantages of the opportunities that will present themselves.
Structured lending
In response to the challenging economic conditions, activity in the
structured lending business was broadly stable in the year. Drawn
balances fell marginally from £178.7 million at 30 September 2022
to £169.0 million at the end of September 2023, although the
total amount of the outstanding facilities increased by 6.9% to
£235.7 million (2022: £220.5 million). All facilities continued to be
managed in line with their agreements.
These facilities generally fund non-bank lenders of various kinds,
providing the Group with increased product diversification and
are constructed to provide a credit buffer in the event of default
in the 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. To date the Group has recorded
no losses on any of its structured lending facilities.
Further facilities to the value of £40.0 million came on stream
after the year end, and the Group continues to examine
additional opportunities which would broaden the range of
products and industries supported, diluting the concentration
risk inherent in this form of lending. In the current economic
climate these evaluations have a significant focus on the viability
of the underlying customer activity.
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, including
static caravans. During the year the business marked the
fifth anniversary of its entry into the leisure vehicle market by
increasing its maximum lease term for motorhomes. The Group
has facilitated over £130 million of motorhome finance since
entering this growing market in 2018.
Lending in the year was broadly stable at £162.2 million
(2022: £166.2 million). Car finance volumes reported by the FLA
fluctuated significantly in the period, with amounts particularly
depressed towards the end of the year. The FLA’s data showed new
business up 4% overall for the year ended 30 September 2023,
although the amount of used car business, which represents a
significant part of the Group’s portfolio, fell by 6%.
The Group’s cautious expansion of lending to finance battery-
powered electric vehicles (‘BEVs’), including light commercial
vehicles, continued in the year. £7.8 million of new loans were
made in the year, an increase of 30.0% (2022: £6.0 million),
reflecting the continuing growth in this market. With the business
focusing on used vehicles, the proportion of BEV lending will lag
the growth in new registrations, however progress continues to
be made, with almost 5% of new lending relating to such vehicles.
The Group is well placed to support the green aspirations of its
customers, as electric vehicles become a more widely viable and
popular option and increasing numbers enter the used car market.
Performance
The loan balances in the Commercial Lending 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
2023
£m
586.0
52.2
67.2
31.7
20.4
757.5
747.8
169.0
297.7
2022
£m
532.5
60.9
88.0
25.7
14.6
721.7
719.9
178.7
261.3
1,972.0
1,881.6
The economic pressures in the UK had generated an increased
number of issues on development finance projects by the year
end, mostly relating to increased build costs or delays. Accounts
are regularly monitored and graded on a case-by-case basis by
the Credit Risk function and by 30 September 2023 there were
twelve accounts identified as being at risk (2022: none) with one
additional long-standing legacy case (2022: one).
These accounts have been carefully examined and projections
stressed for the purposes of the Group’s IFRS 9 provisioning,
generating an additional impairment charge. Security across
the portfolio more generally remains strong. The average loan
to gross development value for the portfolio at the year end was
63.1% (2022: 62.1%), which gives the Group a substantial buffer if
any project encounters problems. No write-offs were recognised
on projects completed in the year.
Page 34
Credit performance in the division’s originated finance leasing
portfolios has been generally strong, despite the adverse
headwinds in the UK economy. Arrears in asset leasing at 0.23%
remained minimal (2022: 0.08%) and motor finance arrears
improved to 1.08% (2022: 1.58%). Despite this, the Group has
reviewed its potential responses to credit issues across
the operation and is ready to support any customers
encountering problems.
Whilst some lenders have reported significant issues with
their CBILS, BBLS and RLS lending related to either credit
quality or fraud, with over 10% of loans under these schemes
resulting in default, the Group has not yet seen any serious
impacts on its lending on such products. These portfolios
contained only £3.3 million of Stage 2 accounts at gross
carrying value at 30 September 2023, and only £1.1 million
of credit impaired cases. The Group’s total claims made up
to 30 September 2023 under the government guarantee
were £3.4 million, only 2.6% of the £131.1 million advanced
since the schemes began, with £3.3 million of this balance
already recovered at the year end. The majority of the Group’s
government-backed lending was to its existing customers,
which contributed to the credit quality of this lending and
has enabled it to avoid the issues seen elsewhere.
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 broadly in line with expectations, with generally
improved metrics across the book and all but one account
classified in IFRS 9 Stage 1 at the year end.
In terms of the Group’s impairments procedures, 9.5% of the
segment’s gross balances were considered as having an
SICR (2022: 4.7%) including 3.3% which were credit impaired
(2022: 0.7%). The increase in credit impaired cases related
mostly to the development finance projects noted above.
Provision coverage increased to 156 basis points (2022: 134 basis
points), principally as a result of the greater number of credit
impaired cases. Coverage on fully performing accounts reduced
from 108 basis points at 30 September 2022 to 82 basis points
at the year end as some of the potential issues identified at the
beginning of the year were clarified in the period, or the relevant
accounts moved to Stage 2.
Outlook
All business lines within the Commercial Lending segment have
been subject to increasing economic pressure over the last
year, particularly towards the end of the period, with finance and
other costs impacting on the cash flows of the majority of UK
enterprises. This environment seems likely to continue for the
near future with clear consequences for volumes.
However, all the division’s businesses remain strong and the
efficient and effective processes which have been rolled out
through the Group’s digitalisation programme so far, coupled
with strong customer relationship management and the high
standards of credit management applied over time, will both
protect the value in the business and enable it to grow in the
longer term.
A4.2 Funding
The Group’s retail deposit-taking operation, which operates
under the Paragon Bank branding is central to its funding
strategy. This is supplemented with a variety of other sources
of central bank and wholesale funding and liquidity sources,
creating an adaptable and sustainable funding position which
can respond to developments in the business, its operating
environment and the economic landscape.
The Group’s debt has an investment grade credit rating,
confirmed by Fitch in February 2023, which supports its status
as a debt issuer. The Group is therefore able to access
cost-effective funding, as well as raising finance for strategic
initiatives on a timely basis.
During the year the Group was able to expand its retail deposit
portfolio, both to support new lending and to repay more
expensive wholesale borrowings, despite the continuing
pressures on household savings resulting from increasing costs
of living, which were mitigated by the increasing attractiveness of
term deposits for customers, compared to other forms of saving.
This growth in term deposits has generated a flow of funds from
clearing banks to smaller deposit takers, such as the Group,
whose market focus has historically been on this type of product.
The Group’s funding at 30 September 2023 is summarised
as follows:
2023
£m
2022
£m
2021
£m
Retail deposit balances
13,265.3
10,669.2
9,300.4
Securitised and
warehouse funding
28.0
995.3
1,246.0
Central bank facilities
2,750.0
2,750.0
2,819.0
Tier 2 and retail bonds
258.2
261.5
386.1
Sale and repurchase
agreements
Total on balance
sheet funding
Off balance sheet
liquidity facilities
50.0
16,351.5
14,676.0
13,751.5
150.0
150.0
150.0
16,501.5
14,826.0
13,901.5
The Group’s retail deposit balance grew by 24.3% in the year to
£13,265.3 million (2022: £10,669.2 million), representing 81.1% of
balance sheet funding (2022: 72.7%). Wholesale borrowings were
also considerably reduced during the year.
At 30 September 2023 the proportion of easy access deposits,
which are repayable on demand, was 25.7% of total on-balance
sheet funding (2022: 27.0%). This reduction is a result, in part, of
the market sentiment in favour of fixed-rate savings, especially
towards the end of the year, with some savers anticipating little
further increase in interest rates. The Group’s proportion of easy
access deposits remains low compared to the rest of the banking
sector and can be expected to increase in the future.
The Group has built cash reserves during the period, applying
them to repay wholesale borrowings, including the repayment
of the last remaining funding structure from the period before
Paragon Bank received its banking licence.
Page 35
Strategic Report At the end of the year the Group had £2,907.7 million of cash
available for liquidity and other purposes (2022: £1,689.1 million).
This included operational liquidity and cash resources assembled
in order to repay part of the Group’s central bank exposures in the
early part of the 2024 financial year. The appropriate level of cash
reserves is monitored on an ongoing basis as part of the Group’s
capital and liquidity strategy, which continues to be based on
a conservative view of the economic outlook and allows for the
developing needs of the business.
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, accessing 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 2016, the outstanding funding balance by type.
Funding by type (£m)
30 September 2016 – 2023
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
2016
2017
2018
2019
2020
2021
2022
2023
Securitisation
Bonds
Central Bank
Retail deposits
The Group continues to adopt hedging strategies, including those
using derivative financial instruments, to protect its income and
operating model from adverse fluctuation in market interest rates.
This activity was enhanced in the year in response to the higher
interest-rate environment which developed during the period.
A4.2.1 Retail funding
The UK savings market is a reliable, scalable and cost-effective
source of funding, with the Group’s strategy centred on
offering sterling deposit products to UK households through
a streamlined online presence, supported by an outsourced
administration function, with additional routes to market
provided by third party platforms.
Products include cash ISAs, where the Group has a significant
market presence, term and notice deposits and easy access
accounts. 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
protection provided to depositors by the FSCS both incentivises
larger savers to divide their deposits between several institutions
and reduces the perceived risk for customers in using less
familiar institutions, providing market opportunities for the
Group’s offering. At 30 September 2023, this FSCS protection
covered around 95% of the Group’s deposit balances.
The Group’s retail deposit franchise performed strongly in the
year and delivered the required funding base at an attractive
cost compared to wholesale alternatives. The growth of the retail
funding balance over recent years is set out below.
Retail deposits (£m)
At 30 September 2016 – 2023
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
2016
2017
2018
2019
2020
2021
2022
2023
During the year, UK deposit balances from individuals reported by
the Bank of England remained relatively stable, despite increasing
pressures on living costs, with balances at 30 September 2023
reaching £1.67 trillion (2022: £1.65 trillion), a year-on-year increase
of 1.3%. Given that recent data shows a trend of household
incomes diminishing in real terms, it is possible that overall
UK savings balances may contract in the coming year, before
returning to growth thereafter.
Against this relatively static background the Group’s customer
deposits increased much faster than the overall market,
with a 24.3% increase in balances over the year. This reflects
both the attractiveness of the Group’s proposition and its
continuing programme of business and systems development,
which continued in the year. This was achieved despite the
complexities inherent in more volatile market pricing as different
deposit-takers responded to base rate increases in different
ways and over differing time frames, and customers’ savings
preferences adapted to the higher rate environment.
Within the savings market there was a strong move towards
fixed-term and notice deposits, with the Bank of England reporting
a 60.8% (£88.9 billion) increase in such deposits from individuals
during the year, despite the stable position of the overall savings
base. National Savings deposits, which fulfil a similar function for
consumers, also increased by 8.0% (£17.0 billion) in the period.
These increases are attributable to the increasing opportunity
cost to consumers of leaving excess savings in current accounts
or low yielding deposit accounts as rates rise.
Page 36
As many of these fixed-term products are offered on a fixed-rate
basis, this market shift also increased the proportion of the market
represented by these products.
The Group benefitted from this market shift, with increasing
demand for its core products. Specialist savings providers, such
as the Group, typically have stronger product offerings in the
fixed term, notice and ISA markets, with the current account
and easy access markets dominated by the major clearing
banks. Therefore, a market where fixed-term products are more
attractive offers opportunities for the Group, evidenced by the
increased proportion of the savings book represented by fixed
rate products.
Increasing diversification and the FSCS guarantee are likely
to reduce the potential for liquidity impacts and the Group’s
profiling of its target customers suggests they may be more
resilient than average in the event of future economic stresses.
Savings accounts at the financial year end are analysed below.
Average
interest rate
Proportion
of deposits
2023
2022
2023
2022
%
4.07%
3.74%
3.95%
%
1.74%
1.55%
%
65.5%
34.5%
%
58.8%
41.2%
1.66%
100.0%
100.0%
Fixed rate deposits
Variable rate deposits
All balances
The increase in the Group’s absolute funding costs is driven
by market movements, where, following the rises in the Bank of
England base rate during the year, saving rates have also moved
sharply upwards. The Bank of England has reported average
interest rates at 30 September 2023 for new 2-year fixed rate
deposits at 5.50% (2022: 2.63%), and at 2.68% for instant
access balances (2022: 0.60%), with similar rises across
other product types.
This rise in market savings rates was, however, not as large as
that seen for market benchmark rates. During the year the SONIA
benchmark increased from 2.19% at 30 September 2022 to 5.18%
at 30 September 2023, meaning the average variable rate paid
by the Group represented a 144 basis point discount to SONIA
(2022: 64 basis points) continuing the widening trend seen in the
previous financial year. This represented a general realignment of
borrowing and lending rates across the sector and increased the
attractiveness of deposit funding compared to wholesale funds,
which are generally priced at a margin above SONIA.
The average initial term of fixed rate deposits was 20 months
(2022: 22 months), with such products representing a greater
percentage of the portfolio, reflecting the market trends
discussed above.
The Group’s presence on third party investment platforms
and digital banks’ savings marketplaces provides an important
alternative route to market for the savings operation. These
channels provide access to a different customer demographic
to the Group’s mainstream customers, with the more diversified
sourcing offering enhanced opportunities to manage inflows
and costs. The difference in profile of the platform customers is
highlighted by their average account balance, which is far lower
than that seen on direct business. The Group now has nine such
relationships, compared to eight at 30 September 2022.
These channels represent around 22% of the total deposit
base (2022: 13%) and the Group has the systems and control
framework in place to further increase its reach through these
channels, if appropriate and cost-effective.
The Group’s strategy in the savings market relies on providing a
high-quality customer offering and it conducts insight surveys
throughout the customer journey. The results of this research in
the period maintained the strongly positive position previously
reported, demonstrating that the Group’s customer interactions
infrastructure positions it well to retain customers and develop
customers in the active and competitive market it serves.
For customers opening a savings account with the Group in the
year, 88% of those who provided data stated that they would
‘probably’ or ‘definitely’ take a second product (2022: 88%). The
NPS in the same survey was +62, similar to that in the previous
year (2022: +59).
When customers with maturing savings balances in the year
were surveyed, 88% stated that they would ‘probably’ or
‘definitely’ consider taking out a replacement product with the
Group (2022: 87%) with an NPS at maturity of +59, an increase
from that seen in the 2022 financial year (2022: +52).
The Group’s savings offering continues to win recognition from
industry experts. Paragon Bank was named ‘Best Multi-Channel
Savings Provider’ at the 2023 Savings Champion awards and
‘Cash ISA Provider of the Year’ at the 2023 Moneynet awards,
endorsing the Group’s diversified approach as well as one of its
key products.
The Group’s retail deposit base continues to provide a stable
foundation for its funding strategy, allowing volumes and rates to
be effectively and flexibly managed. It is an important objective for
the Group to develop its savings business further, broadening its
product range, addressing wider demographics and expanding its
presence on third party platforms. It will also continue to develop
its systems and routes to market to ensure it is able to address
the increasingly sophisticated needs of savers and meet the
Group’s funding requirements into the future.
A4.2.2 Central bank facilities
The Group’s wholesale funding balance at the year end mostly
comprises Bank of England facilities, principally those introduced
to support SME lending during the Covid pandemic. The Group
also has access to other facilities offered by the Bank, which it
utilises from time to time as part of its overall funding strategy.
The Term Funding scheme for SMEs (‘TFSME’) provides the
largest part of this funding, with borrowings at 30 September 2023
of £2,750.0 million (2022: £2,750.0 million). Interest is payable
on these drawings at the Bank of England base rate, which is
currently less attractive than rates available on retail deposits
and the Group is seeking to strategically reduce this balance, with
£300.0 million repaid early after the year end.
The Group has access to other Bank of England funding channels,
including the Indexed Long-Term Repo (‘ILTR’) scheme, for
liquidity purposes but has made no drawings in the period.
The Group expects to make use of 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 2023
of up to £1,715.4 million (2022: £1,776.0 million). Additionally, the
Group’s retained asset backed notes can be used to access Bank
of England funding arrangements.
Page 37
Strategic Report A4.2.3 Wholesale funding
The Group’s wholesale funding options include securitisation
funding, warehouse bank debt and retail and Tier 2 corporate
bonds, which can be accessed from time to time as appropriate.
The Group’s Long-Term Issuer Default Rating was confirmed at
BBB+ by Fitch in February 2023 with a stable outlook, enhancing
the Group’s funding capability.
During the year the Group reduced its wholesale funding
significantly. The Paragon Mortgages (No. 25) PLC securitisation
was redeemed in the year, at its expected date, while the Paragon
Seventh Funding warehouse was repaid and termed out.
In September 2023, the Paragon Second Funding warehouse
structure, which had been in run-off since 2008 was redeemed in
full, closing out the Group’s final legacy funding liability from the
period prior to the licencing of Paragon Bank.
This leaves the proportion of the Group’s funding represented
by wholesale borrowings at its lowest level since it received its
banking licence. The relative attractiveness of retail funding has
led to the Group’s focus on that channel, although it retains the
capacity to raise wholesale debt as required, where appropriate.
The Group also entered into sale and repurchase transactions on
a short term basis from time to time, to ensure it retains access to
this channel for liquidity purposes, and balances of £50.0 million
were outstanding at the year end (2022: £nil).
Capital markets have remained active in the period for most
classes of debt, but the number of transactions coming to market
has been lower than average, with firms which have access to
retail funds finding wholesale pricing generally unattractive.
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 retained
internally to support wider liquidity options, rather than being
issued in the market. This was the case with the Paragon
Mortgages (No. 29) PLC securitisation, completed after the year
end, on 1 November 2023, where the £855.0 million of notes
issued can be used to access central bank and third
party facilities.
The Group’s wholesale funding position now satisfies only a
small part of its overall requirements, but remains available on
a tactical basis when rates and conditions are attractive, and to
provide contingent funding and support liquidity.
A4.2.4 Derivatives and hedging
Derivative assets and liabilities continue to be used to hedge
interest rate risk arising from fixed rate loans and deposits. The
Group pre-hedges a proportion of its lending pipeline, which
results in derivative positions being established before loans
are completed.
While this strategy has not materially changed in the period, the
movements in interest rate expectations over the most recent
financial periods have resulted in large derivative asset balances
being carried on the balance sheet at fair value, although the
30 September 2023 position was reduced from the previous
financial year end. The size of these balances and the volatility in
rates has also led to significant profit and loss account impacts.
However, any such gains or losses, which tend to zero over time,
are ancillary to the Group’s lending and deposit-taking activities
and it undertakes no trading in derivatives.
The Group’s hedging strategy has been enhanced in the year to
protect profit margins from the impact of future falls in interest
rates on fixed rate borrowings and equity, which otherwise would
cause a fixed / floating mismatch between the asset and liability
sides of the balance sheet. A one-to-one interest rate hedge has
been arranged for the Group’s Tier 2 bond and accounted for as a
micro hedge of interest rate risk (note 26).
An amount of the Group’s fixed rate mortgage lending is also being
attributed to provide natural equity hedging. At the end of the year
£313.0 million had been attributed in this way, and it is the Group’s
intention to extend this balance to around £1,200.0 million,
covering the majority of the equity balance. However, this form of
hedging has no direct accounting impact.
A4.2.5 Funding outlook
The year ended 30 September 2023 saw the continuing growth
of the Group’s savings proposition, with total balances reaching
£13,265.3 million, 24.3% higher than a year earlier. The wholesale
part of the funding base continued to reduce, a trend expected
to continue into the new financial year. However, little refinancing
is required in the short term, providing some protection against
any developing issues in the UK economy.
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 34 to 39
A4.3 Capital
The Group’s strong financial foundations form one of its three
strategic pillars, with building and maintaining strong levels of core
capital through the economic cycle a key strategic priority. The
Group manages its balance sheet to maintain capital strength,
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.
The year has seen considerable fluctuation in UK economic
metrics, coupled with changes in political priorities for the
country, while the Basel 3.1 process to reform the regulatory
capital regime has continued to progress. In the face of the
uncertainties generated by this environment the Group has
remained focussed on ensuring that its capital strength remains
sufficient to withstand the potential pressures and address
future changes in requirements.
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 2023 Annual
General Meeting (‘AGM’), which will be proposed for renewal at
the 2024 meeting.
Page 38
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 sets a Total Capital Requirement (‘TCR’)
for the Group, the minimum amount of regulatory capital which it
must hold. This is defined under the international Basel 3 rules,
implemented through the PRA Rulebook.
The TCR is held in order to safeguard depositors in the event of
severe losses being incurred by the Group and includes elements
determined based on the Group’s Total Risk Exposure (‘TRE’),
together with fixed elements. The TCR is specific to the Group and
is set on the basis of periodic supervisory reviews carried out by
the regulator, the most recent of which took place in 2021.
Strong capital and leverage ratios are fundamental to the Group’s
strategy. In 2019, along with most other UK banks, it was granted
transitional relief for the capital impacts of the adoption of the
IFRS 9 impairment regime, with additional relief granted in 2020
for the impact of provisions created in response to the Covid
pandemic. This relief is being phased out, year-by-year, and
with any reversal of Covid-related provisions also generating
a corresponding reduction in relief, the impact on the Group’s
capital position of these reliefs is no longer significant.
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. The value of the reliefs tapers over
time, and the difference between measures on the regulatory and
fully loaded bases has significantly narrowed and will eventually
converge. The Group’s principal capital measures, CET1 and Total
Regulatory Capital (‘TRC’) are set out below on both bases.
At 30 September 2023, the Group’s TCR was 8.8% (2022: 8.8%),
compared to the minimum TCR allowed under the Basel 3
framework of 8.0%. This low level gives it 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.
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
(2022: 2.5%), while the UK CCyB was increased to 2.0% in
July 2023 (2022: 0.0%), generating the increase in the buffer
amount shown above.
The Financial Policy Committee of the Bank of England has
stated that it expects 2.0% to be the long-term standard level
of the UK CCyB. 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, but excluding the effect of future share
buy-backs, are set out below.
CET1 ratio
Total capital ratio
UK leverage ratio
Basic
Fully loaded
2023
15.5%
17.5%
7.6%
2022
16.3%
18.3%
7.9%
2023
15.4%
17.3%
7.6%
2022
16.0%
18.0%
7.8%
Regulatory basis
Fully loaded basis
2023
£m
2022
£m
2023
£m
2022
£m
Capital
CET1 capital
1,188.9
1,221.8
1,175.4
1,196.0
Total Regulatory
Capital (‘TRC’)
Exposure
TRE
Requirements
TCR
Capital buffers
1,338.9
1,371.8
1,325.4
1,346.0
7,668.7
7,515.0
7,665.3
7,489.2
673.4
345.1
660.6
187.9
672.2
344.9
658.4
187.2
The Group’s CET1 capital comprises its equity shareholders’
funds, adjusted as required by the 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 decrease in capital in the period has arisen because
distributions, in the form of dividends and share buy-backs,
have exceeded accounting profit for the year. This however is
principally a result of the fair value losses on hedge accounting
reported in the year, which themselves represent an unwinding
of gains reported in the previous year. Such gains and losses,
which reverse over time, are disregarded for the purposes of
long-term capital planning. The small 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,
although the increase is less than might have been expected due
to the relative risk weightings of the assets involved.
All the Group’s capital ratios show a reversion to more normal
levels over the year. This reflects the inclusion in trading profits
of the unwind of fair value gains on hedge accounting recognised
in the year ended 30 September 2022, which temporarily inflated
capital at the previous year end. As the IFRS 9 reliefs are
phased out the fully loaded and regulatory bases are
automatically converging.
The PRA has announced that it intends to implement changes
in its Rulebook to reflect the impact of the revisions to the
Basel 3 framework made by the Basel Committee on Banking
Supervision (‘BCBS’) from 1 July 2025. These changes, referred
to as Basel 3.1, remain under consultation, and changes
would affect both firms applying Internal Ratings Based (‘IRB’)
approaches to capital and those using the Standardised
Approach. The new requirements are likely to be phased in
over a five-year period.
The Group has evaluated the initial PRA proposals and engaged
with the regulator on its results. Certain of the proposals might
adversely affect buy-to-let lending and lending to small business,
notwithstanding the PRA’s stated intention that the overall
impact of the reforms should be broadly neutral. However, the
Group’s capital planning has allowed for a range of potential
outcomes, and sufficient capital is being held to address the
most negative scenarios, which would reduce the Group’s CET 1
ratio by 2.2 percentage points.
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 continues to refine its IRB submission with close
engagement with the PRA. In addition to the submission for its
buy-to-let approach, which is currently being processed, the
Group has also prepared much of the documentation to support
an IRB approach for development finance, which represents the
next stage in the Group’s IRB roadmap.
Page 39
Strategic Report A4.3.2 Liquidity
The progress of the dividend for the year is shown in the
chart below.
Dividend for the year (pence)
In respect of the years 2015 –2023
40
35
30
25
20
15
10
5
0
2015
2016
2017
2018
2019
2020
2021
2022
2023
The directors have considered the distributable reserves
and available cash and other resources of the Company and
concluded that the proposed dividend is appropriate.
At the beginning of the financial year, the previous year’s share
buy-back programme was completed under an irrevocable
authority. In December 2022 the Board authorised a buy-back
programme for the year of £50.0 million, which was extended to
£100.0 million in June 2023, and completed in September 2023.
£111.5 million, including costs, was expended during the year
(Note 47).
As part of the review of capital management described above,
the Board decided that it was appropriate to authorise a
further share buy-back programme of up to £50.0 million for
the 2024 financial year. This will commence shortly after the
announcement of the Group’s 2023 year-end results.
The Group has the general authority to make such purchases,
granted at the AGM on 1 March 2023. Any purchases made under
these programmes will be announced through the Regulatory
News Service (‘RNS’) of the London Stock Exchange and the
shares will initially be held in treasury.
During November 2023, the Board affirmed the existing dividend
policy going forward, subject to an assessment of prevailing
conditions at the time, including future operational and
regulatory capital requirements, business strategy and external
economic risks.
Liquid assets are held in the Group’s 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. It continues to
be the Group’s policy to maintain strong levels of liquidity
cover, and this policy impacts 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 193.7%
compared to 146.2% during the 2022 financial year. This increase,
which was particularly marked towards the end of the year,
represents a build-up of retail funding in advance of settlement
of wholesale borrowings just before the year-end, and in
anticipation of payment of TFSME indebtedness in the early part
of the new financial year described above. It also includes the
impact of £383.4 million of swap collateral held in cash
(2022: £388.6 million).
The NSFR is a longer-term measure of liquidity with a one-year
horizon, supporting the management of balance sheet maturities.
At 30 September 2023 the Bank’s NSFR stood at 123.4%
(30 September 2022: 122.3%), broadly comparable to its
position twelve months earlier, and reflective of the strength
of the overall funding and capital position.
A4.3.3 Dividends and distribution policy
A fundamental part of the Group’s capital strategy has been
to enhance shareholder returns on a sustainable basis, while
protecting the capital base. In order to achieve this, it has
adopted a dividend policy of distributing 40% of consolidated
underlying 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,
addressing the expectations and requirements of different types
of investor.
An interim dividend for the year of 11.0 pence per share
(2022: 9.4 pence per share) was paid in July 2023 and the Board
is proposing, subject to approval at the AGM on 6 March 2024,
a final dividend for the year of 26.4 pence per share
(2022: 19.2 pence per share). This would give a total dividend of
37.4 pence per share (2022: 28.6 pence per share). During the
year ended 30 September 2022 substantial fair value gains on
hedge accounting were included in profit. As these gains were
considered to be essentially timing differences it was decided
to exclude them from the calculation of last year’s dividend.
During the year these gains reversed, in part, and the decision
was made to exclude the fair value losses recorded from the
current year’s dividend calculation, for consistency. The dividend
proposed therefore represents approximately 40% of the profit
before fair value losses, giving a dividend cover on the adjusted
basis of 2.52 times (2022: 2.50 times) (Appendix D).
Page 40
A4.3.4 Capital outlook
The Group’s strategy is based on the quality of its capital position
which it keeps under regular review as part of its management
reporting and more formally through the annual Internal Capital
Adequacy Assessment Process (‘ICAAP’). Impacts of economic,
strategic and regulatory factors on both the current and forecast
position are considered and subjected to stress testing,
examining the effect of a range of severe scenarios. The results
of this testing confirm that the Group’s capital position remains
strong at the year end, even allowing for the potential effects
of economic headwinds and the increase in the rate of the UK
CCyB in the year.
As the Group enters 2024 it is well capitalised, even after allowing
for forecast levels of distributions, and will remain so following the
phasing out of IFRS 9 relief and the introduction of the Basel 3.1
reforms. Meanwhile, the Group continues to progress towards IRB
accreditation, which will refine its capital requirements.
Despite the forecasts of a protracted high interest rate, low
growth period for the UK economy, the Group’s capital position is
both prudent and sustainable, supporting the overall viability of
the business for the benefit of all stakeholders.
A4.4 Financial results
The financial year ended 30 September 2023 has seen the
Group continue to deliver strong profit and margin growth at the
underlying level (Appendix A), making progress on its strategic
aims despite the economic and political uncertainties in the UK
during the year. Underlying profit (Appendix A), which excludes fair
value gains, again increased in the year, reaching £277.6 million,
an increase of 25.4% (2022: £221.4 million). This, together with the
impact of the Group’s share buy-back programme, drove growth in
underlying earnings per share, which rose by 34.8%, reaching
94.2 pence per share (2022: 69.9 pence per share).
As in the previous period, the Group’s statutory results for
the year have been significantly affected by the accounting
treatment required for pipeline hedging. The Group’s policy is 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, such as
that of the 2022 financial year, 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 current year has seen the beginning of the unwinding
process, combined with a scaling back of expectations for future
interest rates, resulting in fair value losses being recorded. The
level of these unwinding losses decreased profit before tax on the
statutory basis to £199.9 million (2022: £417.9 million), with earnings
per share at 68.7 pence per share (2022: 129.2 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.
4.4.1 Consolidated results
For the year ended 30 September 2023
Interest receivable
2023
£m
1,010.6
2022
£m
545.7
Interest payable and similar charges
(561.7)
(174.5)
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 (losses) / gains
Operating profit being profit on ordinary
activities before taxation
448.9
371.2
5.6
-
11.5
466.0
4.6
4.6
12.6
393.0
(170.4)
(153.0)
(18.0)
277.6
(77.7)
199.9
(14.0)
226.0
191.9
417.9
Tax charge on profit on ordinary activities
(46.0)
(104.3)
Profit on ordinary activities after taxation
153.9
313.6
Dividend – rate per share for the year
Basic earnings per share
Diluted earnings per share
2023
37.4p
68.7p
66.3p
2022
28.6p
129.2p
125.9p
Income
The Group’s total operating income increased by 18.6% in the year,
reaching £466.0 million, compared to the £393.0 million recorded
in the previous year, which also included a £4.6 million one-off gain
on the sale of the Group’s unsecured lending portfolio.
Net interest on lending assets continues to be the principal
element of the Group’s income. This increased from £371.2 million
in 2022 to £448.9 million in 2023, a growth rate of 20.9%. This was
driven by both net growth in the loan books, where the average
outstanding balance increased by 5.3% to £14,542.3 million
(2022: £13,806.5 million) (Appendix B), and by continuing net
interest margin (‘NIM’) improvements in both of its divisions,
with overall NIM increased by 40 basis points.
The progression of the Group’s NIM over the past five years is
set out below.
Year ended 30 September
2023
2022
2021
2020
2019
Total
basis points
309
269
239
224
229
Page 41
Strategic Report
This improving trend demonstrates the benefits of both the
Group’s hedging strategy in managing interest rate risk on fixed
rate lending, particularly in the buy-to-let business, together with
the careful long-term management of yields across all divisions.
It is also a result of the enhancements to the cost of funds
delivered by the Group’s targeted funding strategy.
Interest income from the Group’s loan assets is accounted for
using the effective interest rate method set out in IFRS 9. This
spreads the impact of initial and terminal fees received from the
customer or paid to third parties through the life of the account
and, where an account has different interest charging bases
during its life, such as the majority of the Group’s buy-to-let
mortgage accounts which have a fixed initial rate, attempts to
spread this effect. The pattern of income recognition is therefore
based on estimates of customer settlement behaviour and
future charging rates, and where the economic environment is
likely to cause these to vary, as in the current year, the rates at
which income is included in profit are adjusted.
The Group’s other operating income (excluding the one-off gain
in 2022) remained stable at £17.1 million (2022: £17.2 million),
continuing to represent a combination of operating lease income
and other sundry fees.
Costs
Operating expenses increased by 11.4% in the year to
£170.4 million (2022: £153.0 million). The largest item within
costs continues to be employment costs, forming 63.6% of the
total at £108.3 million (2022: £103.6 million). The increase of 4.5%
in the year is attributable to an increase in staff numbers, with
average headcount increasing by 1.9% to 1,527, and to the 5% pay
increase granted to most employees below senior management
level at the beginning of the year.
During the year, a strategic review of the Group’s operating
structure took place, particularly focussed on the higher
management levels, to ensure that the arrangements in place
were appropriate to meet its strategic aspirations moving
forward. As a result of this exercise a number of roles were
identified as redundant, with people leaving the business shortly
after the year end. Costs of £2.6 million related to this exercise
are included in expenses for the year.
The closure of TBMC, the Group’s mortgage brokerage
business was also announced in the year. Costs of £2.0 million,
mostly relating to the write-off of goodwill, are included in
operating expenses.
Costs not related to employment, excluding these one-off costs,
at £57.5 million were 16.4% higher than those experienced in the
previous year (2022: £49.4 million). Part of this represents the
impact of inflation in the UK, which has been particularly severe
for professional services, but also partly relates to the continued
spend on the Group’s digitalisation programme, with non-
employment related IT costs increased by 28.7% in the period to
£13.0 million (2022: £10.1 million). The digitalisation programme
continues to deliver new systems and enhancements across the
Group’s businesses, forming a fundamental part of its strategy
going forward.
The progress of the Group’s cost:income ratio over the last five
years is set out below.
Year ended 30 September
2023
2022
2021
2020
2019
Underlying
Statutory
%
36.6
39.4
41.7
43.0
42.1
%
36.6
38.9
41.7
43.0
40.7
The Group’s cost:income ratio continued to reduce in the year,
primarily as a result of margins 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. A sustainably lower cost:income ratio is
therefore a long-term aspiration, rather than a short-term priority,
particularly in the face of continued expectations for inflation
levels in the UK.
Impairment provisions
In the accounts for the year ended 30 September 2023 the
Group has recognised a charge for impairment of £18.0 million
(2022: £14.0 million), an increase of 28.6%. This results partly
from experience in the year, where a number of portfolios have
seen some increased evidence of delinquency, but also from
management’s view of the potential impact of the current high
interest rate environment on its customers. The increases in the
cost of living and of doing business, both those experienced over
the last twelve months, and the further increases expected in the
near term, being the main drivers for this behaviour.
The current year has seen both inflation and interest rates in the
UK reach their highest levels for several years, with interest rates
at the year end reaching their highest level since April 2008 and
cost pressures on both consumers and businesses increasing.
It is considered likely by most commentators that this will have
a serious short to medium-term impact on credit quality, but the
Group, in common with many lenders has seen only relatively
minor impacts in the period up to the year end.
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’). Where
the economic outlook is complex, or where there is little relevant
historical data to base loss predictions upon, this can be a
challenging exercise.
Page 42
The progress of the impairment charge and cost of risk in the five
years since the introduction of IFRS 9 in 2019 is set out below.
Year ended 30 September
2023
2022
2021
2020
2019
Charge /
(release)
£m
18.0
14.0
(4.7)
48.3
8.0
Cost
of risk
%
0.12
0.10
(0.04)
0.39
0.07
The movements shown above demonstrate the impact of the
various economic and political developments affecting the UK
in recent years as they appear and then resolve over time. The
high charge in 2020 represented the initial onset of the Covid
pandemic, whilst in 2021 the position appeared to have become
a little more stable. However, 2022 saw the transition into a
period of much higher rates of interest and building economic
headwinds which have continued into the current year.
The application of provisions in writing off accounts has generally
remained more stable across the period. This highlights both the
Group’s careful approach to provisioning and the resilient nature
of its assets.
Multiple economic scenarios and impacts
The Group has developed models in order to support
management’s estimation of ECLs, which it keeps under review
and regularly updates. These project losses for 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. In the current period
this applied particularly to the Group’s development finance
portfolio where the potential impacts of increased input costs
and falling property prices were factored into ECL estimates.
At 30 September 2023, there is considerably more consensus
on the UK’s economic outlook than at the previous year end,
which was dominated by the potential consequences of the
mini-budget in September 2022. The dominant theme of these
forecasts is generally pessimistic, with a significant potential
for relatively high inflation rates and low growth to continue for
some time, an opinion endorsed by the Bank of England’s own
predictions. This, however, is an unfamiliar position for the UK
economy, and the consequences for longer-term prospects
remain an area of significant disagreement amongst experts.
The Group has constructed the scenarios required 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 this.
As in previous years, the severe downside scenario is based
on the most recent 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 interest rate
expectations continuing at historically high levels, a decline in
property values, especially in the short term, minimal growth
and inflation generally falling, although remaining at high levels
compared to recent history.
Given the potential range of longer-term outcomes, the Group
has maintained the weightings attributable to each scenario in
its modelling at the levels used at the previous year end. The
forecast economic assumptions within each scenario, and the
weightings applied, are set out in more detail in note 24.
To illustrate the impact of these scenarios on the Group’s
IFRS 9 modelling, the impairment provisions before judgemental
adjustments are set out below on the weighted average basis,
and also shown on a single scenario basis for both the central
and severe scenarios.
2023
2022
Unadjusted
provision
Cover
ratio
Unadjusted
provision
Cover
ratio
£m
67.1
60.9
89.3
0.44%
0.41%
0.60%
£m
48.5
38.3
85.3
0.34%
0.27%
0.60%
Weighted average
Central scenario
Severe scenario
Calculated provisions have increased in the year, but remain
somewhat lower than might be expected, given the nature of
the economic outlook, some of which will relate to the ability
of the Group’s models to respond to the present economic
circumstances, although the resilience of the loan book as a
whole will also be a significant factor.
There is little recent historical evidence of the impact of
a sustained period of high interest rates and inflation on
customer credit, and both products and regulatory expectations
have evolved significantly since interest rates last reached
current levels. This means the Group’s models will have been
derived from datasets which include very few observations
representative of this type of economic environment.
The distribution of gross balances by IFRS 9 stage (defined in
note 22) produced by the Group’s impairment methodology at
the two most recent year ends is set out below.
Stage 1
Stage 2
Stage 3
POCI
Total
2023
93.5%
5.0%
1.3%
0.2%
2022
85.2%
13.7%
0.9%
0.2%
100.0%
100.0%
This demonstrates an increased number of Stage 3 cases,
although from a very low base, as problem accounts react to
economic conditions. It also shows the impact on the number of
accounts identified as Stage 2 of the assumption of future stable
or slowly declining interest rates and inflation, and the current
low level of arrears. This reduces the calculated provision and
management must assess whether the result is appropriate,
given the economic outlook.
Page 43
Strategic Report Judgemental adjustments
The fundamental requirement of any provisioning methodology
is that the accounts present fairly the assets of the business.
Therefore, it is vital to the process to challenge all mechanical
outputs, 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.
Impairment models are constructed by analysing the
historically observed linkage between actual indicators
of credit performance, whether internal, such as arrears
metrics, or external, such as credit bureau information and
economic indicators. The predictive power of any such model
will, therefore, depend on the reliability of that linkage in the
circumstances at the balance sheet date.
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.
The major issues addressed by management in considering the
needs for judgemental overlays at 30 September 2023 can be
summarised as follows:
•
•
•
•
•
How far can impairment models be relied upon in a situation
where the absolute magnitudes of economic indicators such
as bank base rates and inflation, both currently and in the
forecast period, lie significantly outside recent historical levels?
How well can the models be relied on to reflect the credit
impacts of a rapid movement in economic variables followed
by a forecast period of stability or gradual recovery in a
timely manner?
To what extent will modelling in the buy-to-let book address
the impact of payment shocks caused by customers reaching
the end of a fixed-rate period?
How may the negative outlook expressed by commentators
on credit over the past year be reconciled with the generally
mild impacts seen to date?
What continuing impacts might there be from the Covid
pandemic in terms of either corporate weakness or inflated
cash balances, which might delay or change the responses to
economic stimuli which might normally be anticipated?
The Group also considered whether some sectors served by
the SME business, particularly those related to the construction
industry, might be more vulnerable in the specific economic
situations forecast.
Following consideration of the available internal and external
evidence, the Group determined that judgemental overlays to its
SME leasing and motor finance portfolios and to its buy-to-let
mortgage book were required at the year end. The judgemental
adjustments generated by this process, analysed by division are
set out below.
Mortgage Lending
Commercial Lending
2023
£m
3.0
3.5
6.5
2022
£m
5.0
10.0
15.0
The reduction in the mortgage lending segment is principally a
result of more at risk cases being identified by the model and of
increased levels of default cases in the year, which resulted in the
first upward movement in the number of receiver of rent cases
seen for some years. However, the potential for further impacts,
as customers move off fixed rates, remains a real concern and it
was not felt appropriate to reduce the level of the overlay to zero.
The reduction in overlay in the SME lending book relates partly
to the introduction of a new impairment model, incorporating a
wider dataset and more up-to-date information, which removes
some uncertainty from the modelling process. However, the
sector has been impacted by a series of adverse situations over
recent years, which may have impacted on resilience, while there
is evidence that cash balances in the sector remain elevated,
which may serve to delay credit impacts.
There are also parts of the Group’s SME portfolio which
are connected directly or indirectly to the capital projects
sector, where timescales for impacts may be longer. Overall
management determined that the overlay in this sector should
be reduced, but not eliminated and it stands at £2.5 million at
the year end (2022: £10.0 million).
An additional overlay has been provided in the motor finance
business. The provisioning model for this business, one of the
Group’s oldest, shows the lowest probability of default in some
years, a function of the downward trend of inflation in the input
scenarios. This is seriously at odds with market sentiment and
an additional overlay of £1.0 million has been created to allow for
this (2022: £ nil).
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 each of these overlays and consider
the extent to which any of the elements giving rise to them can or
should be incorporated into models and standard processes.
Page 44
In the year ended 30 September 2023 the levels of volatility in
market rates reduced, with longer term market rate expectations
moderating, which, coupled with the conversion of loans which
had been part of the hedged pipeline at the start of the year, and
the consequent commencement of the run-off of hedging gains
related to those loans, resulted in much of the previous period’s
gain being unwound and a fair value loss of £77.7 million
being reported.
The Group has a net derivative position of £14.6 million
(at notional value) at 30 September 2023, which is unmatched
for hedge accounting, although forming part of the economic
hedging position (2022: £1,201.0 million). Therefore, the Group is
less exposed to value fluctuations on the pipeline going into the
new financial year. There are, however, substantial gains from
2022 which are still to unwind.
Tax
The effective tax rate applied to the Group’s profits has
decreased from 25.0% in 2022 to 23.0% during 2023, principally
as a result of the unwinding of deferred tax on fair value gains,
described above. The Group operates only in the UK and
materially all its profit falls within the scope of UK taxation.
The standard rate of corporation tax applicable to it in the year
was 22.0% (2022: 19.0%), with the surcharge applicable to the
profits of Paragon Bank at 5.5% (2022: 8.0%). The increase in
the standard rate was offset, to some extent, by the cut in the
surcharge as well as the increase in the profit threshold from
which it applies (note 14).
As the bulk of the fair value loss arose in Paragon Bank, the
banking surcharge means that 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 23.9% (2022: 23.4%),
broadly similar to that in the previous year (Appendix A).
Results
The Group’s profit before tax for the year on the statutory basis
was £199.9 million (2022: £417.9 million), with the increase in profit
at the underlying level reversed by a £269.6 million swing in fair
value items. Profit after tax was £153.9 million (2022: £313.6 million).
In addition, other comprehensive income of £1.6 million was
recorded, relating to valuation gains on the Group’s defined benefit
pension scheme (the ‘Plan’).
Consolidated accounting equity at the year end, after dividends
and share buy-backs was £1,410.6 million (2022: £1,417.3 million),
and consolidated tangible equity was £1,242.4 million
(2022: £1,247.1 million), representing a tangible net asset value
of £5.79 per share (2022: £5.33 per share) and a net asset value
on the statutory basis of £6.57 per share (2022: £6.06 per share)
(Appendix E).
Ratios and trends
The results of the Group’s ECL modelling, including the impact
of the economic scenarios described above, together with the
judgemental adjustments adopted to address uncertainties over
the future performance of accounts, 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
2023
£m
67.1
6.5
73.6
0.33%
1.56%
0.49%
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%
Following the judgemental adjustments, these ratios remain
broadly in line with those seen in recent periods, although a
greater proportion of the provision is generated by modelled
approaches than in previous years. These levels remain higher
than the 0.34% coverage ratio observed in September 2019,
before the outbreak of the pandemic, and in a lower interest rate
environment. This level was also recorded despite the level of
security cover in the buy-to-let loan book being lower, with the
average loan-to-value ratio being 67.4% at that time, higher than
the 62.8% recorded at 30 September 2023 (2022: 57.9%).
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.
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, which reverse over the life of the hedging
arrangement and the Group regards such movements as
essentially representing the anticipation of gains belonging
economically to later accounting periods and their subsequent
unwinding. They are therefore excluded from underlying results.
During the 2022 financial year, particularly during the second half,
there was a significant level of volatility in UK benchmark interest
rate expectations, resulting in a fair value gain of £191.9 million
being recorded in the year. This impact has been amplified by the
Group’s approach to pipeline hedging and the retention strategy
applied to maturing five-year fixed rate loans, which meant that
the pipeline was larger and of longer duration (and hence more
exposed to movements in rates) than in earlier periods.
Page 45
Strategic Report A4.4.2 Assets and liabilities
Derivatives and hedging
The main driver of movements in the Group’s balance sheet
is the size and composition of its loan book. This, together
with its policies on capital and liquidity, determines its funding
requirements and hence the level of its liabilities.
The Group’s loan portfolio grew by 4.7% during 2023, with growth
in both Mortgage Lending and Commercial Lending. More detail
on these movements is given in Section A4.1.
The Group’s assets and liabilities at the end of the financial year
are summarised below.
Summary balance sheet
30 September 2023
2023
£m
2022
£m
2021
£m
The Group’s derivative assets shown in the table above relate
almost entirely to arrangements for hedging interest rate risk
on fixed rate mortgage and savings products. These assets and
liabilities are held at fair value, with the valuation based on future
expectations of interest rates. The size of the balances is driven
by the difference between current expectations for variable
rates and the fixed rates applicable to the hedged items, set at
the point of origination, meaning that where market rates have
moved sharply, large balances will be carried.
During the year, expectations of future interest rate increases
moderated, resulting in a reduction in the derivative valuation
in the balance sheet, with swap assets falling by 21.0% in the
year to £615.4 million (2022: £779.0 million) and swap liabilities
decreasing by 60.9% to £39.9 million (2022: £102.1 million). While
these movements do contribute to the fair value differences in
the profit and loss account described above, they are mainly
offset by fair value accounting adjustments to loan assets and
deposit liabilities, with the adjustment in assets reducing by
£180.6 million in the year and that in liabilities by £68.8 million.
Investment in customer loans
Mortgage Lending
12,902.3
12,328.7
11,829.6
Pension obligations
Commercial Lending
1,972.0
1,881.6
1,573.1
14,874.3
14,210.3
13,402.7
Hedging adjustments
(379.3)
(559.9)
Derivative financial assets
615.4
779.0
5.5
44.2
Cash
Pension surplus
Intangible assets
Other assets
Total assets
2,994.3
1,930.9
1,360.1
12.7
168.2
134.6
7.1
170.2
116.0
-
170.5
154.0
18,420.2
16,653.6
15,137.0
Equity
1,410.6
1,417.3
1,241.9
Retail deposits
13,265.3
10,669.2
9,300.4
Hedging adjustments
(30.9)
(99.7)
(3.0)
Other borrowings
3,086.4
4,007.2
4,451.4
Derivative financial liabilities
Pension deficit
Other liabilities
39.9
-
102.1
-
648.9
557.5
43.9
10.3
92.1
Total equity and liabilities
18,420.2
16,653.6
15,137.0
Funding structure and cash resources
The Group’s funding balance increased by 11.4% during the
year, exceeding the growth in the loan book as cash balances
increased in order to build liquidity and enable the repayment of
wholesale borrowings in the early months of the new financial
year. Cash balances consequently increased by 55.1%.
The proportion represented by retail deposits increased to
81.1% in accordance with the Group’s long-term funding strategy
(2022: 72.7%), with wholesale borrowings paid down, including
the only remaining funding which pre-dated the licensing of
Paragon Bank in 2014. Movements in funding balances are
discussed in more detail in Section A4.2.
The IAS 19 valuation surplus on the Group’s defined benefit
pension scheme increased from £7.1 million at the start of the
year to £12.7 million at the year end. The assumptions for this
valuation are based on market-derived interest and bond rates
and can be subject to fluctuation where market rates do not
move in parallel.
The changes in inputs between the valuations at the beginning
and end of the year are smaller than those seen in some recent
periods, with the principal differences being the increase in
the discount rate used in evaluating scheme liabilities, based
on long-term corporate bond yields, from 5.00% to 5.55%,
and the assumed rate of RPI inflation, based on gilt yields,
decreasing from 3.55% to 3.25%. These movements led to a
pre-tax valuation gain of £2.4 million being booked in other
comprehensive income (2022: £15.3 million).
While the valuation under IAS 19 is that which is required to be
disclosed in the accounts, pension trustees generally use the
technical provisions basis as provided in the Pensions Act 2004
to measure scheme liabilities. On this basis, the surplus at
30 September 2023 was estimated at £11.9 million, an increase
of £7.6 million in the period (2022: surplus of £4.3 million).
Other assets and liabilities
Sundry assets increased from £116.0 million to £134.6 million in
the year, largely a result of increased cash ratio deposits, which
grew by £7.8 million as a consequence of the increased retail
deposit balance, and a higher level of accrued interest income,
which increased by £3.6 million as a result of higher interest rates.
Sundry liabilities grew from £557.5 million to £648.9 million at
30 September 2023. This was principally a result of the impact
of the increasing interest rate environment, with accrued interest
payable increasing by £133.0 million. This was offset by a fall of
£26.7 million in deferred tax, a result of the reversal of fair
value movements.
Page 46
A4.4.3 Segmental results
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
2023
2022
(restated)
£m
£m
246.6
113.2
359.8
229.6
86.7
316.3
(82.2)
(90.3)
277.6
226.0
The Group’s central administration and funding costs, principally
the costs of service areas, establishment costs and bond
interest have not been allocated. For the current financial
year, the Group’s internal cost allocation processes have been
updated to recharge items relating to certain treasury activities
to the segments, as described in note 2. Comparative amounts
have been restated accordingly.
Mortgage Lending
The Mortgage Lending division continues to perform well and
grow its NIM, with margin on fixed rate accounts protected by
the Group’s hedging arrangements. Net interest grew by 10.5% in
the year to £277.6 million (2022: £251.2 million) with the average
net loan balance growing by 4.4% to £12,615.5 million
(2022: £12,079.2 million) as NIM increased to 220 basis points
(2022: 208 basis points).
Credit performance in the period remained good, but an
increased level of arrears and defaults through the year was
noted. The charge for impairment increased to £10.4 million in
the year (2022: £4.6 million) with the cost of risk at 8 basis points
(Appendix B). IFRS 9 Stage 3 cases increased from £119.3 million
to £142.2 million, with increases in both current three-month
arrears accounts and realisation cases, although these continue
to form a very small part of the portfolio.
Overall contribution from the division increased by 7.4% to
£246.6 million (2022: £229.6 million).
Commercial Lending
Average balances in the Commercial Lending division grew by
11.5% to £1,926.8 million (2022: £1,727.3 million), which, together
with an increase in NIM from 644 basis points to 704 basis points,
generated an increase of 22.0% in net interest to £135.7 million
(2022: £111.2 million). This reflected the continuing focus on yield
management, together with changes in product mix and tighter
funding costs.
Impairment charges for the period, at £7.6 million, had reduced
a little from the 2022 financial year (2022: £9.4 million). Credit
performance in the year has remained largely stable in the motor
finance and SME lending elements of the portfolio, with low
arrears and relatively few defaulted cases, although the Group
maintains a cautious attitude towards credit prospects for the
sector. An increasing number of watchlist cases have been
recorded in the development finance business, contributing
£56.8 million of the £58.7 million increase in IFRS 9 Stage 3
balances in the year.
These factors led to an increase in segmental profit of 30.7% to
£113.3 million (2022: £86.7 million).
A4.5 Operations
The Group’s strategic pillars include a customer-focussed
culture and a dedicated team, highlighting the importance of its
experienced, skilled and engaged workforce facilitated by systems
and analytics in delivering its purpose. The Group’s strategy
relies on sector knowledge, specialist systems and the careful
management of risk across all its operations to meet its goals.
In the year the Group has continued to invest in its people,
progress its long-term programme to enhance processes and
technology, addressing both internal systems and those facing
its customers and business partners, and enhance its risk
management framework to support the digitalised vision of its
future operating model.
This continuing prioritisation ensures that the Group maintains
a firm foundation on which to build its business and deliver its
strategy in the future.
A4.5.1 Operations
The Group operates primarily on a centralised basis, with a
workforce which exceeded 1,500 people at the year end. The
majority of these people are attached to one of the Group’s
office sites in Solihull, Southampton and London, but work on a
hybrid basis. During the year the hybrid working approach has
continued to be refined to ensure both the most effective use of
the Group’s people and the optimal working experience for them,
as well as the best possible interactions with customers and
business partners.
The Group recognises that its strategy of tailoring its operational
approach to the specialist needs of its customers and markets
implies that there is unlikely to be a single preferred approach to
service delivery, and business areas are tasked with establishing
working methods to suit the needs of their operations and
customers, with the Group investing in appropriate system
enhancements as required.
The year saw continuing progress with the Group’s digitalisation
agenda, which includes major projects to improve systems
and procedures in the Group’s main lending areas. A new
customer portal in buy-to-let mortgages was a significant
deliverable during the year, while improved system-based
support for decisioning was rolled out in SME lending. Significant
enhancements made to systems in both development finance
and SME lending towards the end of the previous year also
continued to be rolled out, enabling more customers and
business partners to benefit.
Page 47
Strategic Report The digitalisation programme also includes a variety of other
enhancements to the Group’s infrastructure and operational
systems, including enhancement to the resilience of the
hardware supporting the Group’s loan administration systems,
improvements to telephony for motor finance and a new system
to improve supplier management, enabling better management
of ESG considerations in the supply chain.
Towards the end of the year considerable progress had been
made on a project which will see 28 of the Group’s 30 major
operational systems transferred from on-site mainframe
computers into the cloud in the early part of the new financial
year, opening the way to further developments and efficiencies.
The Group’s offices remain valuable as hubs for the growth of
its culture and identity, where collaboration can be fostered,
communication facilitated, and learning promoted. During the
period initiatives continued to ensure they remain fit for purpose
as working practices evolve. These included a decarbonisation
review of the Group’s head office building, initiatives to improve
energy efficiency, and the expansion of on-site charging
capabilities for electric vehicles across the Group’s estate.
The operational resilience of the business remains an important
area of focus for the Group and its regulators. During the period
the second formal self-assessment required by regulators was
successfully completed, providing an opportunity to evaluate
developments in this area since the exercise was first completed.
A significant part of the Group’s operational infrastructure
exists to drive its focus on high quality customer service.
Regular surveys are conducted with customers and business
introducers to monitor satisfaction, which have remained
positive in the period.
The first phase of the introduction of the new FCA Consumer
Duty in July 2023 required significant attention across all
operational teams to ensure that the regulator’s expectations
were embedded in systems and processes, meeting the
deadlines for the first phase of implementation. While the new
duty is a significant change in the way the regulator approaches
firms' responsibilities, the Group considers that its culture and
values have always aligned with its underlying philosophy.
The rising interest rate climate in the year, coupled with the
impacts of inflation on customers’ incomes, meant that a
significant focus for the Group’s customer service teams was
identifying the potential impact on customers who are, or
may become, vulnerable and ensuring that they receive good
outcomes. The Group monitors customer complaints as a
metric of customer outcomes and it was pleasing that these
levels remained low by industry standards, despite the
economic pressures.
A4.5.2 Governance
The Group believes that high standards of corporate governance
are fundamental to the effective execution of its strategy. It is
subject to the UK Corporate Governance Code (the ‘Code’) and
the Group has continued to comply with the Code’s principles
and provisions throughout the period.
The Group continues to adopt a ‘comply and explain’ approach
to Provision 21 of the Code. Having deferred the external board
evaluation, which had been due in 2022, until the new Chair had
been in post for a sufficient time to make such an assessment
more meaningful, relevant and useful, this evaluation was
completed in the year.
More details on the Group’s corporate governance arrangements
and of the board evaluation are set out in Section B.
Board of directors and senior management
A review of the skills and experience of the non-executive
directors determined that the Board would benefit from
additional experience in the fields of sustainability and
customer experience, and it was agreed to recruit an additional
non-executive director with particular strength in these areas.
Following an extensive search and assessment process,
Zoe Howorth was appointed to the Board on 1 June 2023.
Zoe’s breadth of knowledge, which includes branding, digital
and sustainability understanding, and her strong focus on the
customer will enhance the diversity of perspective on the Board.
Her executive experience includes 16 years with the Coca-Cola
Company across a variety of roles, culminating in her role as UK
Marketing Director. Zoe is a non-executive director, chair of the
ESG committee and a member of the remuneration committee
at AG Barr PLC, a FTSE-250 consumer goods business. In
2021, Zoe joined the board of International Schools Partnership
Limited, a global education business, where she has board
responsibility for ESG and brand. Zoe is also a director of the
Water Babies Group Limited.
Hugo Tudor, who was the Company’s senior independent
director and chair of its remuneration committee reached the
ninth anniversary of his appointment to the Board in November
2023. During the year the Board and the Nomination Committee
undertook a process to identify a successor to Hugo in each of
his roles, which resulted in the appointment of Alison Morris, the
Chair of the Audit Committee as Senior Independent Director
from August 2023 and the announcement, on 27 October 2023,
that Tanvi Davda, a non-executive director, would become Chair
of the Remuneration Committee on 7 December 2023. Hugo will
remain on the Board, but will be considered to be a
non-independent non-executive director from the
conclusion of the 2024 AGM.
Following the announcement that Pam Rowland intended to retire
as the Group’s Chief Operating Officer at the end of March 2023,
the Group was pleased to announce the appointment of Zish
Khan to the position in December 2022. Zish brings a wealth of
experience in technology, change and operations having over
20 years’ experience across the financial services sector. A
smooth transition and handover of responsibilities was
completed during the year.
The Group continues to be conscious of the need to ensure
that the Board contains an appropriate balance and diverse
set of skills and experience. It has noted statements on
diversity and governance from the PRA and the FCA, as well as
in the corporate world more generally, setting out enhanced
expectations and new regulatory requirements in this area. With
effect from 1 June 2023 the Group now complies with the new
FCA Listing Rules requirements on diversity, which apply to it for
the first time for this financial year.
As at 30 September 2023, the Board had four female directors
out of a total of ten board members, forming 40.0% of the Board,
with one senior board position, that of Senior Independent
Director, held by a female director.
Remuneration policy
The Group’s triennial review of the Directors’ Remuneration
policy was approved at the 2023 Annual General Meeting (‘AGM’)
following extensive consultation with shareholders, investor
bodies and other stakeholder groups and we thank them for their
feedback and support. The Directors’ Remuneration Report was
passed with 69.19% of votes cast in favour, which represents
a “significant vote against” the report as defined by the Code.
Accordingly, the Remuneration Committee considered carefully
the points raised by those shareholders who were not supportive
of the report seeking additional input as appropriate. As required
by the Code, the Company published an update on its position
within six months of the meeting.
Page 48
A4.5.3 Management and people
At 30 September 2023 the Group employed 1,522 people, an
increase of 1.3% year-on-year. The majority are based at its Solihull
Head Office but with hybrid working arrangements. People are the
Group’s most important asset, and it is accredited as a platinum
status employer under the Investors in People programme. The
Group focusses on providing people with opportunities for varied
and rewarding careers, offering extensive training and coaching
opportunities to meet their own ambitions whilst delivering on the
strategic objectives of the business.
Conditions and culture
During the period the Group undertook an exercise to look at
its operating model and as a result it has made some changes
to streamline and simplify its organisational structure, making
sure it is best positioned to continue its focus on providing
good outcomes for customers, while protecting and developing
specialist skills. While the business continues to be financially
strong it was considered that there was a need to examine
the resource requirements of potential future challenges and
opportunities, while ensuring the Group operates in the most
cost-efficient way possible.
As part of this process the Group has realigned non-core
origination activities and reviewed all origination activities,
reducing management layers from eight to six across most
areas, right-sizing teams, consolidating operational teams, and
restructuring its mortgage lending, SME lending and external
relations areas. This was in addition to the closure of the Group’s
non-core TBMC mortgage brokerage operation (Section A4.1.1).
Whilst the Group seeks to avoid compulsory redundancies
wherever possible, it entered into a consultation period with a
number of employees in September 2023. Some of the affected
employees secured alternative roles in the Group, and others
were made redundant, both on a voluntary and compulsory
basis. The exercise, along with reduced recruitment resulted in a
headcount reduction of around 5%, subsequent to the year end.
In May 2023 the Group conducted its first full employee
engagement survey since 2021, with 88% of employees sharing
their views (2021: 86%). The survey produced a strong set of
positive indicators, with an overall engagement score of 90%;
5% above the industry average. The survey asked for employees’
feedback on topics such as organisational integrity, leadership,
wellbeing, management, development and employee voice, and
the results remained either static or improved across all themes.
With a total employee attrition rate of 12.6% (2022: 15.7%) the
Group continues to track below the national average. These high
levels of retention are further bolstered by 56% of employees
achieving over 5 years’ service, 11.5% achieving over 20 years
with the Group 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 that the Group continued to meet the
needs of its customers.
The Group maintains its accreditation from the UK Living Wage
Foundation and minimum pay exceeds the levels set by the
Foundation. During the period the Group made the decision to
align apprentice rates to the Living Wage Foundation. The Group
increased its minimum wage to £12.00 per hour, in line with the
Foundation’s recommendations, from 1 November 2023.
During the year employees were supported through the cost
of living crisis by the Group’s profit related pay scheme, which,
as a result of the 2022 profit, provided an additional £3,300 to
all full time employees below senior management level. Many
employees also benefitted in the year from the Group’s maturing
sharesave scheme, being able to buy shares with a market value
in the region of £5.00, each for an option price of £2.79.
On 11 December 2020, all eligible employees were granted a
one-off award of £1,000 worth of shares to recognise the
contribution that they had made to the business during the
Covid pandemic. This award will mature in December 2023 with
employees being given the choice to retain or sell their shares.
Equality and diversity
The Group continued to make progress on its equality, diversity
and inclusion (‘EDI’) agenda during the year. The Group’s EDI
Network, launched in October 2020, continues to have an
important impact and has been involved in the launch of several
initiatives and offerings to all employees during the year.
The campaign to capture diversity data for all employees
continues and by September 2023, 76.8% (2022: 73.1%)
of employees had completed a diversity profile on the HR
management system. The collation of this data from employees
provides the Group with an enhanced ability to monitor and
improve the diversity of the workforce going forward.
The Group continues to be committed to improving the diversity
of its workforce and ensuring that talented people from all
backgrounds can reach their full potential by breaking down
barriers to progression. During the year the Group launched
Ignite, an internal development programme for employees in
underrepresented groups.
The Group continues to make progress towards its Women
in Finance target of 40.0% female representation in senior
management roles by December 2025, having achieved 38.6%
female representation at 30 September 2023 (2022: 38.1%).
To support its efforts to improve gender equality the Group
has continued to participate in the Mission Gender Equity
cross-company mentoring scheme, sponsored by the 30% Club.
This programme has proven popular with both mentors and
mentees and a similar scheme is being piloted for employees
from ethnic minorities and other underrepresented groups 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 offerings through
the design of products and the choices of sectors in which
to operate
Sustainability issues are coordinated on a group-wide basis
by the Sustainability Committee, which reports directly to
the Executive Committee. This ensures that information on
initiatives within business areas is shared across the Group
and facilitates the development of a coordinated and
proactive approach.
Page 49
Strategic Report During the year the Committee has overseen mapping
the Group’s strategic priorities against the United Nations
Sustainable Development Goals, a framework agreed by world
leaders which aims to end poverty, fight inequality and address
the urgency of climate change. It is also responsible for driving
the Group’s initiatives on climate change and progressing other
projects in the field of sustainability.
In December 2023 the Group will publish its third annual
sustainability report, the Responsible Business Report. This
provides more detailed information on sustainability initiatives
and demonstrates how sustainability is embedded throughout
the Group. It is published on the Group’s corporate website at
www.paragonbankinggroup.co.uk, alongside other information
and documentation relevant to ESG issues.
Climate change
The Group has made a commitment to achieve net zero in line
with, and in support of, UK Government commitments. In doing
so the Group recognises that net zero cannot be achieved by any
entity in isolation and therefore this commitment is dependent
on appropriate government and industry support and action.
As members of Bankers for Net Zero (‘B4NZ’) the Group aims
to provide input into the wider efforts of the financial services
industry in creating a clear pathway for the decarbonisation of
the UK economy.
Climate change has been designated as a principal risk within the
Group’s Enterprise Risk Management Framework. As a result, the
Group’s responses to climate change 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)
Information and measures on climate-related risks and
opportunities are considered at board level through the CEO’s
monthly reports. Developments in sustainable products and
climate-related exposures are considered for each business line
as part of strategy deep dives which feed into the annual board
strategy event and into the Corporate Plan.
During the year, in-depth risk reviews have been carried out with
input from key business areas and credit risk, which identified
no new material risks. The findings have been used to inform
the Group’s climate change scenario analysis exercise and
identify the key drivers of its climate change risk profile and
opportunities. The exercise was conducted in line with the
outputs of the Climate Financial Risk Forum (‘CFRF’) scenario
analysis working group, of which the Group is a member, and
incorporated within the 2023 ICAAP.
As part of the ongoing development of its reporting in line with the
recommendations of the Taskforce on Climate-related Financial
Disclosures, the Group has enhanced its analysis of financed
emissions and a more detailed emissions balance sheet is being
presented in the 2023 Annual Report and Accounts.
Developments within business lines which contribute towards
the Group’s climate risk strategy are set out in the relevant
business reviews.
As a financial services provider the direct environmental impact
of the Group’s operations is considered low. However, the
Group recognises the importance of reducing the impact these
operations have on the environment. The Group has committed
to reduce its operational footprint to net zero by 2030 and now
reports its operational footprint on a quarterly basis at the
Sustainability Committee with a summary report escalated to
the Board.
In support of the Group’s net zero operational footprint target,
for the 2023 financial year the Group purchased certified carbon
offsets equivalent to its operational footprint for the twelve months,
following the precedent set in the 2022 financial year. It intends to
repeat this for each year going forward, however, it acknowledges
that reducing impacts is preferable to offsetting, where possible.
Group initiatives to reduce operational environmental impacts
during the year include:
•
•
•
•
•
Decarbonisation assessment of the Group’s head office
building, which is responsible for around 30% of its
operational footprint, and the identification of actions to
further reduce emissions
Enhanced support for essential car users following the 2022
update to the company car policy which aims to eliminate
diesel and petrol vehicles from its company car fleet by 2025.
Electric vehicle users now receive a subsidy to source an
appropriate charging unit at their home address
Appointment of a new waste contractor for the Group’s head
office building, from May 2023, leading to improvements in
both waste management and reporting
Completion of the LED lighting roll-out at the Group’s
head office by April 2023, which is reducing overall
energy consumption
Development of a supplier survey, which was rolled out across
a sample of suppliers in the second half of the year, aimed
at identifying climate and other sustainability risks in those
business relationships
Social engagement
The Group’s Charity Committee raised £45,000 for Newlife,
the charity chosen by employees for the financial year, which
supports children who have cancer, birth defects, diseases and
infections, and their parents. For the next financial year, ending
30 September 2024, employees have selected Molly Ollys as the
beneficiary of the committee’s fundraising activities.
Molly Ollys supports children with life-threatening illnesses and
their families and helps with their emotional wellbeing.
The Group’s employee volunteering initiative also expanded
during the year. Employees are entitled to an annual paid
volunteering day, and the year saw an increasing number
of people taking advantage of this, with more opportunities
becoming available and teams and departments joining together
to address bigger projects. The number of days used increased
by 64.0% from 286 in 2022 to 469. Opportunities were focussed
on the areas of poverty, education and the environment, and the
Group is promoting a wider take-up for the coming year.
Page 50
A4.5.5 Risk
Risk management
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
Over the last year the principal challenges facing the Group have
shifted from those related to the direct consequences of the
Covid pandemic and the immediate post-pandemic period, to
ones arising from increasing global economic and geopolitical
threats. This shift in the risk landscape is presenting its own
unique challenges with wide ranging consequences such as
the rising costs of living and doing business in the UK, global
economic uncertainty and potential instability in the banking
sector earlier in the year.
The Group’s response to this changing risk environment requires
it to remain agile and resilient in its risk management capability,
and to monitor impacts on its operations and risk profile on an
ongoing basis. The Group’s Enterprise-wide Risk Management
Framework (‘ERMF’) provides a robust mechanism ensuring
that new risks are promptly identified, assessed, managed, and
appropriately overseen from a risk governance perspective.
The risk agenda has been dominated over the last year by
economic threats, precipitated by the global impacts of the
conflict in Ukraine and exacerbated in the UK by the impacts
of the mini-budget of September 2022, which continued to be
felt through the early part of the year. Consequences in the UK
included rising energy, utility and commodity prices and higher
interest rates, impacting the Group’s customers. Based on
current economic forecasts, these strategic issues are expected
to continue to pose challenges for the foreseeable future:
•
•
•
In an environment of rising interest rates and cost pressures
for both new and existing loan customers 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 and
loan products to ensure loan repayments are sustainable for
customers and will continue to be so
The Group takes its responsibilities in respect of customers
in vulnerable circumstances extremely seriously and
continues to ensure that, where appropriate forbearance
solutions are necessary, these are tailored to individual
customer circumstances and aligned to regulatory guidance
and expectations
The welfare of its employees is a key priority for the Group,
and it will continue to ensure that individuals feel fully
supported during this period of economic uncertainty.
Financial and wellbeing initiatives are in place to ensure that
people have access to information and resources to assist in
navigating cost of living challenges
The Group continues to closely monitor how changes in political
leadership, agenda and associated priorities, policies or
interventions may influence the broader economic landscape.
The need for a robust risk management framework as a mechanism
for identifying, mitigating and managing new and emerging risks is a
core priority, and the Group has successfully continued to enhance
and embed its ERMF to meet this need. This ongoing process
has enabled it to manage all categories of risk and further mature
its overall risk approach ensuring that risk considerations remain
central to day-to-day and strategic decision making.
Key to the Group’s approach is the evolution of the ERMF to
ensure that the framework continues to remain effective and
proportionate, in line with the Group’s strategic aspirations. This
approach has been enabled during the period by increasing
capability in the risk function, ensuring that appropriately skilled
resource is available to provide appropriate oversight and
assurance around the management of all categories of risk.
Good progress continues to be made in enhancing the suite of
policies that underpin the management of each of the Group’s
identified principal risks. This, in turn, has resulted in the
refinement of associated risk appetites and better articulation of
the control environment for each risk type. The Group continues
to promote a risk aware culture as being at the heart of its
values, ensuring that each individual fully understands their
accountabilities and responsibilities in respect of risk.
The Group remains committed to the further development of the
ERMF as necessary to ensure it remains relevant and in line with
regulatory expectations. Key to this vision will be investment in
the implementation of an enhanced risk management system
over the next 18 months, which will further improve the analysis
and reporting of risk-related data, giving better insight into the
risk profile at all levels within the Group.
Despite the pervasive impact of the rising interest rate
environment in the year coupled with inflationary challenges
which have been a significant risk focus in the year, the Group
has identified and addressed a number of additional strategic
risk issues including:
•
•
•
•
•
•
Consumer Duty – Successfully delivering the first phase of
the FCA Consumer Duty, meeting the regulatory deadlines
for those products and services in scope, ensuring that the
Group’s culture is driving good outcomes for its customers
Resilience – Further enhancing the operational resilience
framework and resilience capabilities ensuring the Group
can demonstrate it can consistently remain within stated
impact tolerances to meet the 2025 regulatory deadline. The
Group continues to refine its overarching approach, using its
programme of self-assessment and testing to ensure that
operational resilience remains a central objective during its
transformation programme, which increasingly relies on third
parties to deliver core services
Climate – Addressing the impact of climate change on
managing financial risks and considering this as part of the
wider ESG agenda across the Group, with clear commitments
made to drive net zero ambitions in line with wider
governmental strategy
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 IRB
application process
Stress testing – Enhancing stress testing procedures to
ensure the robustness of capital and liquidity positions
Cyber-security – Ensuring effective cyber-security controls
and a robust data protection approach are in place,
particularly with the evolving and increasingly sophisticated
nature of cyber threats
Page 51
Strategic Report The Group continues to review its exposure to emerging
developments in the Brexit process as further clarity is received
as to future dealings with the EU; however it is clear this will take
time to manifest itself fully and the long-term impact 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 have caused shortages in a
number of sectors. Whilst this has eased in recent months, and
the Group was not directly affected by these issues earlier in the
year, the Board continues to keep the situation under ongoing
review as future supply issues in areas such as building materials
and IT equipment could impact the Group’s operations or those
of its customers.
Risk outlook
The principal significant and emerging risk areas expected
to impact the Group during the coming year ending
30 September 2024 and beyond include:
•
•
•
•
Costs of living and doing business – Management of
risks associated with the wider economic landscape and
the impacts this has already had, and will continue to have,
on the financial position of people and corporates in the
UK. Consecutive interest rate rises, and the continuing
inflationary pressures pose an ongoing challenge to the
Group’s customers. The Group remains committed to
ensuring 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
Compliance expectations – 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 year has been on
ensuring the Group was able to meet regulatory requirements
in respect of the new FCA Consumer Duty rules for those
products in scope for the July 2023 deadline. The priority for
the Group is to continue to embed the Consumer Duty within
its business lines ensuring that good customer outcomes
and deep understanding of these remain at the forefront of all
customer interactions
Financial crime – Ensuring continuous improvement in the
Group’s capability to combat the risks of financial crime.
Significant work has been undertaken during the previous
financial year to ensure that regulatory expectations in
respect of anti-money laundering and wider financial crime
control frameworks are met, and the Group continues to
invest in this area
Climate – Risks associated with climate change remain an
ever-present challenge. The UK Government confirmed its
goal of net zero carbon by 2050 in November 2020, and the
Group, together with the rest of the financial services industry,
has a vital role to play in that commitment. As global strategies
continue to be refined, the Group is seeking to ensure that
the impact of climate change is considered as a core driver for
both its operational activities and its lending strategies
A4.5.6 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. All 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, as
expected, increased during the year with particular focus 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 – The FCA Consumer Duty sets higher
expectations for the standard of support provided to
customers, and challenges firms to evidence the customer
outcomes they are delivering. Implementation of the new
rules is staged (with the requirement for existing products to
be compliant by July 2023, and closed products by July 2024).
This has been a priority area for the Group during the year with
activity being championed by the Board, and a non-executive
director assigned responsibility for oversight of the programme.
The areas targeted for implementation during 2023 were
delivered as planned, with the focus now on implementation for
the Group’s closed products by July 2024
Basel 3.1 – The PRA published a Consultation Paper on
Basel 3.1 implementation in November 2022 (CP16/22). The
consultation closed on 31 March 2023 and the final policy
outcome has yet to be published. The expected implementation
date for Basel 3.1 is 1 July 2025. The Group proactively monitors
and manages its capital, assessing the implications of a range
of different possible impacts including potential worse case
scenarios as part of its capital planning activities
Regulatory framework – The PRA has continued to develop
its thinking on the Strong and Simple approach for small firms
with a consultation on liquidity and disclosure requirements
(CP4/23) and expansion of the definition of a simpler firm
in the Basel 3.1 consultation paper to include firms with
total assets of up to £20 billion. While the current proposals
are unlikely to apply to the Group, developments are being
monitored closely given the potential impact of future
proposals for mid-tier banks
Recovery and resolution planning – The PRA has
commenced consultations on new requirements for
‘non-systemic’ firms, which would include the Group, to
undertake ‘solvent wind down’ planning – the process through
which a firm could transfer or repay all deposits and exit the
deposit market while remaining solvent throughout. Firms
would be expected to undertake such planning in addition to
the Recovery Plan. Whilst implementation of this requirement
is not expected until the third quarter of 2025, the Group is
actively engaged in the consultation process
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
Further information on all the above borrowings is given in
notes 34 to 39
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 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.
•
•
•
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, as well as its
Consumer Duty rules and guidance. 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
Borrowers in financial difficulties – The FCA issued findings
from their ‘Borrowers in Financial Difficulties’ project, setting
out clear expectations on the level of support that firms should
provide to their customers. The regulator is also consulting on
proposals to implement the additional consumer protections
put in place during the pandemic as permanent requirements.
Considerable work has already been undertaken in this area by
the Group and therefore it considers itself well-positioned to
meet any future requirements
Operational resilience – Having successfully met the
March 2022 policy implementation requirements, the Group
has continued to embed its resilience approach to ensure it
is well positioned to meet the 2025 regulatory deadline. By
this time the Group will need to demonstrate an embedded
resilience framework and the ability to stay consistently within
impact tolerances for important business services
The 2023 self-assessment set clear objectives for the next
assessment period and clearly demonstrates the Group’s
ongoing commitment to continuous improvement in respect
of its resilience capability. It also provides evidence of
compliance with regulatory requirements which require that
‘Important Business Services’ are mapped and tested using
severe but plausible scenarios to test the boundaries of the
ability of infrastructure, key dependencies and third parties to
recover from disruption
•
Climate change – As approaches to managing climate-related
financial risks mature across the industry the Group continues
to evolve its own approach, described in Section A6.4. The
Sustainability Committee, alongside the executive-level risk
committees, ensures comprehensive consideration of climate
change across all aspects of the business and ensures the
Group is well-positioned to address the emerging challenges
A deep dive review of the Group’s climate change risk and
opportunities by business area is performed on a regular
basis to ensure risks and opportunities are captured where
material. 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
•
Regulatory reform – The Financial Services and Markets
Act 2023 is a key piece of post-Brexit legislation that came
into force in June 2023. The Act formalises new secondary
objectives for the PRA and FCA covering long-term growth
and international competitiveness. The Group continues to
closely monitor 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
•
MREL – 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 including regular engagement with regulators
Page 53
Strategic Report
A5. Future prospects
The Code requires the directors to consider and report on the
future prospects of the Group. In particular, it requires that they:
•
•
Explain how they have assessed the prospects of the
Group and whether, on this basis, they have a reasonable
expectation that the Group will be able to continue in
operation (the ‘viability statement’)
State whether they consider it is appropriate for the Group to
adopt the going concern basis of accounting in the preparation
of the financial statements presented in Section D (the ‘going
concern statement’)
In addition, Listing Rule LR9.8.6 R(3) requires the directors to
make these statements and to prepare the viability statement
in accordance with the ‘Guidance on Risk Management, Internal
Control and Related Financial and Business Reporting’ published
by the Financial Reporting Council (‘FRC’) in September 2014.
The business activities of the Group, its current operations and
those factors likely to affect its future results and development,
together with a description of its financial position and funding
position, are described in the Chairman’s Introduction 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 61 to the accounts includes an analysis of the Group’s
working and regulatory capital position and policies, while notes
63 to 65 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 68 and 69.
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 2023 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.
Page 54
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. 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 2023.
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:
•
•
•
•
An increase in buy-to-let volumes. This examined the impact of
higher volumes at a reduced yield on profitability and illustrated
the extent to which capital resources and liquidity would be
stretched due to the higher cash and capital requirements
Higher funding costs. Higher cost on all new savings deposits,
both front book and back book throughout the forecast
horizon. This scenario illustrates the impact of a significant,
prolonged margin squeeze on profitability, and whether this
would cause significant impacts on any capital, liquidity or
encumbrance ratios
Higher buy-to-let redemption rates for buy-to-let mortgages
reaching the end of their fixed rate period. This illustrates the
potential risk inherent in the five-year fixed rate business
Increased economic stress on customers. As well as
modelling the impact of each of the economic scenarios
set out in note 24 across the forecast horizon, the severe
economic scenario was also modelled over the five-year
horizon. To ensure this represented a worst-case scenario
all other assumptions were held steady, although in reality
adjustments to new business appetite and other factors
would be made
•
Combined downside stress. The IFRS 9 downside economic
scenario described in note 24 was modelled out for the plan
horizon along with a plausible set of other adverse factors to
the business model, creating a prolonged tail-risk
These stresses did not take account of management actions
which might mitigate the impact of the adverse assumptions
used. They were designed to demonstrate how such stresses
would affect the Group’s financing, capital and liquidity positions
and highlight any areas which might impact the Group’s going
concern and viability assessments. Under all these scenarios,
the Group had the ability to meet its obligations over the forecast
horizon and maintain a surplus over its regulatory requirements
for both capital and liquidity through normal balance sheet
management activities.
As part of the ICAAP process the Group also assessed the
potential operational risks it could face. This was done through the
analysis of the impact and cost of a series of severe but plausible
scenarios. This analysis did not highlight any factors which cast
doubt on the Group’s ability to continue as a going concern.
The Group also undertook analysis of the potential impact
of climate change on the business, including an assessment
leveraging the Bank of England Climate Biennial Exploratory
Scenario. More details of these analyses are set out in
Section A6.4.
The directors also received briefings and training to ensure these
impacts could be fully understood and placed in context. 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,
the emerging long-term effects of the Covid pandemic, and
the consequences for the UK economy of developing global
geopolitical issues.
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’), completed after the
year end, 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 the principal risks facing
the Group, including those that would threaten its business
model, future performance, solvency or liquidity. These principal
risks are set out in Section B8.5 of the Risk Management Report.
Availability of funding and liquidity
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 £13,265.3 million (note 33), raised
through Paragon Bank, are repayable within five years, with 82.9%
of this balance (£10,990.5 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 2023 Paragon Bank held £2,589.7 million of
balance sheet assets for liquidity purposes, in the form of central
bank deposits (note 64). A further £150.0 million of liquidity
was provided by the off balance sheet long / short transaction
described in note 66, bringing the total to £2,739.7 million.
Paragon Bank manages its liquidity in line with the Board’s risk
appetite and the requirements of the PRA, which are formally
documented in the Board’s approved ILAAP, updated annually.
The bank maintains a liquidity framework that includes a short
to medium term cash flow requirement analysis, a longer-term
funding plan and access to the Bank of England’s liquidity
insurance facilities, where pre-positioned assets would support
drawings of £1,715.4 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 2023 the
Group had £1,205.6 million of such notes available for use, of which
£986.9 million were rated AAA. The available AAA notes would give
access to £769.8 million if used to support drawings on Bank of
England facilities.
The outputs from these exercises 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.
Risk assessment
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 developing economic situation in the UK, in particular the
impact on its customers of the level of interest rates and their
rate of change, high inflation levels, falling property prices and
increased costs of doing business 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
been fed into the Group’s forecasting and risk assessment.
In addition, the directors held ‘deep dive’ sessions into key areas
of risk focus including the impact of the collapse of Silicon Valley
Bank and Credit Suisse, the unprecedented level of UK energy
prices from late 2022 into 2023, and reviewing specific scenarios
on the impact of rising interest rates following the Bank of
England’s increases in the base rate.
Focussed reviews of the principal risks continued throughout the
year, including credit risk, capital risk, liquidity and market risk,
climate change risk, conduct risk, strategic risk, reputational risk,
model risk and across the different categories of operational risk.
Page 55
Strategic Report 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 2023.
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 2028 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.
The Group’s securitisation funding structures, described in note
64, 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
during 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 BBB+
rating, confirmed by Fitch Ratings in February 2023, and its status
as an issuer is evidenced by the BBB-, investment grade, 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 61 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 2023 was in
excess of regulatory requirements and its forecasts indicate this
will continue to be the case.
Viability statement
In making the viability statement the directors considered the
three-year period commencing on 1 October 2023. 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
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.
The climate-related financial disclosures required by the Act are
presented in Section A6.4 in accordance with the approach set
out by the Taskforce on Climate-related Financial Disclosures
(‘TCFD’). This approach covers all matters set out in Section 2A
of Paragraph 414CB of the Act.
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.
During the year the Group formalised this approach by mapping
its strategic priorities against the United Nations Sustainable
Development Goals, a framework agreed by world leaders which
aims to end poverty, fight inequality and address the urgency of
climate change.
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.
During the year the Committee launched a group-wide
Sustainability Charter, supported by an internal communication
campaign and on-line training provided to all employees, aimed
at raising awareness of a broad range of sustainability issues.
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 and
sustainability information
statement
The Group includes information on certain environmental, social
and governance matters in its strategic report in accordance
with sections 414CA and 414CB of the Companies Act 2006.
In addition to the description of the Group’s business model,
discussed in section A2, the Group’s remaining disclosures are
included in this section A6. This includes a discussion of the
Group’s risk, policies, outcomes and key performance indicators
with respect to each of the five areas set out in the Act. The
matters specified in the Act are discussed in the following sections.
Area
(a) Environmental matters
(b) Employees
(c) Social matters
(d) Respect for human rights
Reference
Section A6.4
Section A6.3
Section A6.5
Section A6.6
(e) Anti-corruption and anti-bribery matters Section A6.7
This section also includes the information on the directors’
engagement with employees required by Section 11 (1)(b) of
Schedule 7 to the Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations 2008 (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).
The disclosures made by the Group in the current year reflect
amendments made to the Act’s requirements by The Companies
(Strategic Report) (Climate-related Financial Disclosure) Regulations
2022, which apply to the Group for the first time in this period.
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 (2022: 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 aligning and embedding the new
FCA Consumer Duty principles. While the Consumer Duty does
not cover all of the Group’s customers, with some Commercial
Lending activities outside its scope, the principles of the
Consumer Duty inform the Group’s approach to all its customers.
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 and,
as a specialist bank, it uses its expertise to provide financial
products and support to help them achieve their ambitions. The
Group is committed to delivering good customer outcomes,
offering its customers extra support when they need it and
listening to their feedback.
The fair treatment of customers and the delivery of good
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 good outcomes for customers.
Customers can be confident that the Group will always consider
their needs and act fairly and responsibly in dealings with them.
To ensure this, several customer-focused management groups
are dedicated to improving customer journeys and supporting
customers on an ongoing basis.
A cross-functional working group addresses the needs of those
customers in vulnerable circumstances, considering their needs
and any additional support 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.
Page 57
Strategic Report While the Group strives always to provide excellent service, 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.
Customer support and understanding are also two of the
key outcomes that align to the core delivery requirements
of the FCA’s 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. This has
ensured that the target dates for implementation in July 2023
were achieved and the Group remains on target to meet the
remaining implementation deadlines in 2024.
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 are 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
The Group’s standards will protect consumers and deliver
good customer outcomes
This pro-active approach accords with the FCA’s Principles
for Business, particularly regarding 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 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 good 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.
Monitoring
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 as appropriate, where
customers are invited to provide feedback on the way in which
they feel their complaints have been dealt with. The results
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 shared with
all business units concerned with complaint handling.
The Group focusses on FOS complaints data as a high-level
satisfaction metric, and incident rates remained low throughout
the year. Consolidated information for the two Group companies
required to report to FOS, for the four most recent FOS reporting
periods, is set out below. In the most recent period only one
of the companies met the threshold number of cases for the
publication of its data by FOS, with neither company meeting the
threshold in the preceding period.
Six months ended
30 June
2023
31 December
2022
30 June
2022
31 December
2021
Cases reported
57
44
46
Uphold rate
36.2%
15.2%
34.4%
35
34.2%
The upward movement in the number of cases reported is
principally a function of the increased number of savings
accounts, while the uphold rate in the second half of the year
reverted to around its long-run normal level, which is consistent
with industry averages.
Page 58
The overall industry uphold rate reported by FOS for the six
months ended 30 June 2023 was 37% compared to 34% in the
six months ended 31 December 2022 and 37% in the six months
ended 30 June 2022. FOS data across the financial services
industry is published on the ombudsman’s website at
www.financial-ombudsman.org.uk.
The Group routinely assesses its complaints performance
against the FCA bi-annual complaints submissions, comparing
key complaint metrics to our peers and against the industry.
Metrics on customer complaints are an important management
information measure for the Board and form part of the
determination of management bonuses and the vesting
conditions for the share-based remuneration described in the
Directors’ Remuneration Report (Section B7).
A6.3 People
The Group employs over 1,500 people in the UK with the majority
based at its Solihull Head Office but working in a hybrid way.
The Group’s people are its most important asset, and its focus
is on providing them with opportunities for varied and rewarding
careers, offering extensive training and coaching opportunities
to meet their own ambitions whilst delivering the strategic
objectives of the business.
Employee engagement
The Group conducted a full employee engagement survey in
May 2023 and 88% of employees shared their views, an increase
of 2% on the previous survey carried out in 2021 (2021: 86%). The
survey produced a strong set of positive indicators, with an overall
engagement score of 90%; 5% above the industry norm and the
Group’s highest engagement score in eight years (2021: 87%). The
survey sought views on topics such as organisational integrity,
leadership, wellbeing, management, development and employee
voice, with results remaining either static or improved across
all themes.
Questions relating to the treatment of the Group’s customers
demonstrated that 99% of employees believe that the Group is
committed to delivering good outcomes to customers
(2021: 89%), with 93% of employees believing that the Group is
taking action to positively influence climate change (2021: 84%).
The Group continues to use the survey as a means of monitoring
its risk culture, gathering employee opinion on its approach to
being a responsible business and the progress it is making to
becoming a more inclusive employer.
Employment conditions
All the Group’s employees are based in the UK, and it 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 2023, employees on
temporary or short-term contracts accounted for 1.2% of the
workforce (2022: 2.0%) and no use was made of zero-hours
contracts. The Group usually only employs persons over the
age of 18, except in connection with apprenticeship or other
training arrangements.
The Group has seen the voluntary employee turnover reduce
during the period to 9.6% (2022: 12.2%), while the total turnover
was 12.6% (2022: 15.7%). The attrition rate remains lower than
the 18.6% average rate in the banking and finance sector
published by Reward Gateway in 2022, their most recent data,
and the 31 December 2022 figure for voluntary attrition in
the financial services sector of 16.4%, the most recent to be
published by XpertHR.
The Group benefits from the extensive experience of a significant
number of long-serving employees at all levels. 31.4% of the
workforce at 30 September 2023 had served for over ten years
with 11.5% having been with the Group for over twenty years.
The Group operates a hybrid working model with over 40%
of people 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 22.3% of employees
(2022: 22.6%), with 78.5% of these working part-time
(2022: 74.0%). 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 26 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 granted an additional 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.
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 Foundation employer, the
Group pays at least the Real Living Wage (£10.90 per hour at
30 September 2023, rising to £12.00 in November 2023) to all
employees and also ensures that wages paid by contractors and
suppliers meet the same threshold. In January 2023 the Group
made the decision to align apprentice hourly rates to the Living
Wage Foundation, this being over and above the UK’s minimum
apprentice rates. From 1 November 2023 the Group will pay a
minimum of rate of £12.00 to all employees, equivalent to a full
time equivalent annual wage of £23,400. For employees based in
London, the Foundation’s London Living Wage is paid.
On the closure of the Group’s TBMC mortgage brokerage in the
year (Section A4.1.1) all 17 affected employees were either offered
alternative roles within the Group, gained employment externally,
or chose to retire.
During the year the Group undertook an exercise, supported
by external consultants, to analyse its current operating model
and identify the future requirements inherent in its business
strategy. As a result, changes have been made to streamline and
simplify its organisational structure, ensuring that it is optimally
positioned to continue its focus on providing good outcomes
for customers and to maintain and protect its specialist base.
Overall, the steps already taken, through a review of recruitment
strategy and a reduction in existing roles, have led to a reduction
in the Group’s planned future headcount of around 5%.
Whilst the Group seeks to avoid compulsory redundancies
wherever possible, aiming to redeploy affected employees
elsewhere, it entered into a consultation period with 88
employees in affected roles. 14 people chose to take voluntary
redundancy and a further 39 redundancies were made. The
Group was able to retain 35 people in affected roles.
Page 59
Strategic Report All affected employees qualifying for annual bonuses in respect
of 2023 were assessed in the normal way and any of these
people who would have normally qualified for the Group’s PRP
scheme, or who were granted post-Covid three-year share
awards in 2020, will still receive these benefits, in addition to
their normal redundancy arrangements.
The Group runs a Worksave defined contribution pension
scheme and complies with the Government’s auto-enrolment
requirements; 89.4% 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 96.1% of its people.
Culture
Following the launch of the Group’s Code of Conduct in 2022, all
employees are required to attest annually that they understand
the expectations set out in the code, and as at 30 September 2023
100% of employees had done so. The Code of Conduct provides
additional guidance to employees on the behaviours expected of
them when dealing with each other, with customers, and with other
stakeholders, and is a central component of continuing to build
and embed a strong risk culture.
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)
• 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 focus on raising
awareness and understanding of creating an inclusive culture
and diverse workforce through varied internal communication
campaigns, including internal podcasts. Celebrations in the period
included Black History Month, International Youth Day, Disability
History Month, International Women’s Day and Pride at Paragon.
Collecting diversity monitoring data
During the year the Group has continued to ask employees to
complete diversity monitoring profiles in CoreHR, the central
HR system. Data is requested about gender identity, sexual
orientation, ethnicity and race, religion, socio-economic
background, disabilities, and caring responsibilities outside
of work. As at 30 September 2023 76.8% of employees had
completed their profile (2022: 73.1%), and the Group maintains
its focus on increasing this figure.
Socio-economic diversity
As a Founding Member of ‘Progress Together’ the Group
recognises the importance of improving socio-economic
diversity at senior levels across the UK financial services industry
and has been working alongside other members to understand
and to improve socio-economic diversity across the sector.
The Group has continued to form working relationships with
inner-city colleges and schools as a means of attracting talent
from more diverse backgrounds in the year. 12.8% of employee
volunteering days were completed in seven local schools.
The Good Youth Employment Charter
The Group recognises the benefits of early careers, and the
diversity of skills that young employees bring to a company, and
consequently has signed up to the Good Youth Employment
Charter. In joining the Charter, the Group has formalised its
status as a youth-friendly employer, creating opportunities for
young people, which help them to gain the skills and experiences
they need for their future careers, through meaningful and
good-quality experiences of the world of work that raise their
aspirations, and enhance their skills and personal networks.
The Charter links to the Group’s continued involvement in
the Smart Futures Programme, 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. It also ensures
that young people from Black, Asian and ethnic minority groups,
as well as those young people from lower socio-economic
backgrounds or those with additional needs or barriers are not
unfairly excluded.
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 Launch of ‘Mission INCLUDE’, a
mentoring scheme for employees from under-represented groups.
The programme provides high-potential employees from
these groups with a mentor from another organisation who
is a member of an under-represented group or an ally.
Page 60
During the year ‘Ignite’ an internal development programme
was launched, following feedback gathered through employee
listening circles. The programme focuses on providing greater
career support to employees in under-represented groups and
addressing personal development needs such as making an
impact, building personal brand and networking.
Gender Pay
As required by legislation, the Group has calculated its gender
pay gap as at April 2023. The results will be published on the UK
Government website and on the Group’s own website and are
summarised below.
Disability Confident
Employees identifying as having a disability comprise 5.6%
of those completing their diversity profile (2022: 4.7%). 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
The Group is accredited to level two of the scheme and is
working towards level three – ‘Disability Confident Leader’.
The Group makes every effort to retrain and support employees
who are affected by disability during their employment, including
the provision of flexible working to assist their return to work,
and ensuring all its people with disabilities have the opportunity
to fulfil their potential.
Women in Finance
The Women in Finance Charter, sponsored by HM Treasury, is
an initiative amongst financial services companies in the UK,
aimed at promoting equality of opportunity in the workplace. The
Group’s project has a designated executive committee sponsor,
and progress against 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. These were all surpassed
before the target date of January 2022. The Group is in the next
phase of its charter journey and has committed to achieve
40% female representation in senior management by
31 December 2025. At 30 September 2023, the Group had
achieved 38.6% female representation in senior management
(2022: 38.1%).
The definition of senior management used in the Group’s
‘Women in Finance’ target is the same as that used by the FTSE
Women Leaders initiative. When that review published its most
recent report in February 2023, the Group’s level of female
representation in senior management was seventh highest out
of the thirteen banks and similar institutions covered by the
initiative, and above average for the sector.
Median gender pay gap
Mean gender pay gap
Median bonus pay gap
Mean bonus pay gap
April
2023
33.5%
35.0%
0.5%
70.5%
April
2022
32.5%
36.3%
1.9%
84.4%
This year’s gender pay measures, are broadly similar to those
for 2022 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 the median figure of 34.3% for
the financial services sector reported by the Office of National
Statistics in their 2023 Annual Survey of Hours and Earnings
(‘ASHE’) (2022: 36.6%). The mean pay gap for the industry
reported by the ASHE, which is more influenced by operational
structures, was 25.2% (2022: 30.8%).
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 (87%) 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 (34% 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 male.
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.
Page 61
Strategic Report Composition of the workforce
During the year the workforce has grown by 1.3% to 1,522
employees (2022: 1,503). 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
2023
2023
2022
2022
Females Males Females Males
774
748
764
739
50.9% 49.1% 50.8% 49.2%
119
171
126
176
41.1% 58.9% 41.7% 58.3%
12
36
9
36
25.0% 75.0% 20.0% 80.0%
4
6
3
6
40.0% 60.0% 33.3% 66.7%
In this table managers include all employees with management
responsibilities. The definition of ‘senior manager’ used in
the table above is that required by the Companies Act 2006
(Strategic Report and Directors Report) Regulations 2013 which
differs from that used by the FTSE Women Leaders Initiative.
Based on diversity profiles completed by employees, ethnic
minority employees comprised:
• 17.7% of employees (2022: 19.4%)
• 11.6% of managers (2022: 13.0%)
• 17.7% of senior managers (2022: 12.2%)
This is based on the 72.6% of employees who declared their
ethnicity (2022: 68.0%). For the purposes of this analysis, ethnic
minority employees comprise all those not identifying as a
member of a ‘White’ group.
Health and wellbeing
The Group continues to focus on supporting the wellbeing of
employees, providing support with emotional, physical, financial,
and social wellbeing issues. Anne Barnett, Chief People Officer,
the Executive Sponsor for Wellbeing, ensures that this focus
goes to the highest levels of the Group’s management.
With the continued cost-of-living challenges facing employees,
the Group has increased its 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 remains committed to providing employees with
access to trained mental health first aiders. Eight members of
the Wellbeing team have undertaken mental health training
in the period, with additional training available to all team
members on grief and bereavement, trauma and suicide
awareness from external specialists. As well as the Wellbeing
team being available to provide support, employees also have
access to a dedicated Wellbeing Hub where specialist support
services providing help with issues such domestic violence or
bereavement are signposted, as well as numerous resources to
help with a wide range of wellbeing issues.
In the year the Group signed the Pregnancy Loss Pledge,
encouraging a supportive environment where people feel able
to discuss and disclose pregnancy or loss without fear of being
disadvantaged or discriminated against.
Since the Group introduced The Vitality Health programme,
98% of employees have signed up to the service which gives
employees access to an extensive range of physical wellbeing
products and services, including personalised health reviews,
online GP services and access to Vitality Wellbeing Coaches.
Free exercise classes continue to be available in office locations
as part of the Group’s ongoing commitment to improving
employees’ physical wellbeing.
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 3.5 days training each in the year
(2022: 5.2 days). This is in line with the average figure of 3.6 days
per person reported by the 2022 Employer Skills Survey, published
by the UK Department for Education in September 2023, the most
recent national survey of training provision. This included online
training undertaken by all employees on various topics including
regulatory requirements.
This year has seen the implementation of the FCA Consumer
Duty, which has required a comprehensive learning and
development approach across the Group to ensure that the
required changes in behaviours are encouraged and embedded.
Learning support has ranged from podcasts with the leadership
community, interactive ‘Achieving Customer Excellence’
sessions delivered to over 350 people within operational areas,
the update of many of our pre-existing learning materials and the
review of training and competency frameworks.
Ensuring all employees understand how to support those of
the Group’s customers in vulnerable circumstances continues
to be an important focus of the development agenda. During
the year an interactive e-learning solution was rolled out to
all employees, supplemented with bespoke courses for all
customer-facing employees.
Digital learning has played a key role in ensuring that major
transformation projects undertaken by the Group are introduced
effectively and are well supported through easily accessible
development. The Group’s in-house consultants have also
delivered a rich variety of support through video creation, online
sessions and classroom interactions to ensure that the learning
available is fit-for-purpose, effective and engaging.
To help develop employees careers with the Group ‘Purpose
and Performance Profiles’ are being introduced. These link an
employee’s role to the Group Purpose and demonstrate and
how it contributes towards the delivery of the Group’s strategic
priorities. The profiles will be used for talent attraction and
recruitment, and as a tool for ongoing performance monitoring,
development and ‘top talent’ identification.
Employees and managers are encouraged to regularly discuss
performance and purpose throughout the year, which not only
supports individual performance and personal development, but
also helps the Group to effectively manage rising talent and fulfil
its succession planning objectives.
Page 62
The Group has continued to focus on developing female
talent during the year to support its diversity strategy. 53% of
employees receiving management development in the year
were female, and the Group continues to support the Mission
Gender Equity cross-company mentoring programme run by
Moving Ahead in conjunction with the 30% Club campaign. It was
particularly pleasing that during the year Moving Ahead named
the Group as its ‘Most Dynamic Mentoring Organisation’ for
2023 in recognition of the excellent support and commitment
given to the programme.
Feedback from participating mentors and mentees continues to
be favourable, with 20% of participants having progressed their
careers within the Group. In comparison, research conducted
for the 30% Club showed an average promotion rate of 10% for
female managers. The sixth cohort of employees started their
programme just before the year end.
In response to the success of the Mission Gender Equity
Programme, mentoring support was broadened in the year,
with the Group joining the Mission Include programme. This
programme has the objective of encouraging career development
in under-represented groups, and the Group has initially
supported four individuals in the cross-company mentoring
programme. In addition, the internal ‘Ignite’ programme was
launched, supporting the careers of individuals in under-
represented groups with focussed training and mentoring.
For the past year the Group has been a member of 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 set a target that early-careers roles
would comprise at least 5% of its workforce by September 2027.
This target has already been reached and, in recognition, the
Group has been appointed as a gold member of the 5% Club. At
30 September 2023 the Group had 77 such employees
(2022: 74), comprising 5.1% 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 70 apprentices (2022: 44),
4.5% of employees (2022: 2.9%) 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 increased to 50% (2022: 31%). It
has also pledged 10% of its levy entitlement towards funding
apprenticeships in smaller SMEs.
There are currently 75 individuals completing professional
qualifications across the Group (2022: 101), including 35
undertaking their CeMap mortgage qualification (2022: 40).
Of these 53% are female (2022: 55%) contributing towards the
Group’s diversity agenda.
Employees’ involvement
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 share 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 representatives met with Robert East, the
Chair, and with non-executive directors to discuss topics
such as, pay and benefits, flexibility and hybrid working and
communication and visibility.
The directors recognise the benefit of keeping all employees
informed about the progress of the business. Executive
directors provide biannual updates on business progress to the
entire workforce which continue to be delivered through video
messages. ExCo members also use the Group’s intranet to deliver
updates on important initiatives within the business. During the
year ‘Network News’ launched, regularly providing all employees
with the latest news and information from across the People
Forum, Wellbeing Team, EDI Network and Charity Committee.
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 2023,
63% of the Group’s employees were members of one or more
ShareSave scheme and 87% were eligible for profit related pay in
respect of the 2023 financial year.
On 11 December 2020, all eligible employees were granted a
one-off award of £1,000 worth of Paragon shares to recognise
the contribution that they had made to the business during the
Covid pandemic. The award will mature in December 2023
with employees being given the choice to either keep or sell
their shares.
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.
It is committed to the provision of a healthy and safe working
environment for all employees, contractors and visitors to its
premises, and those affected 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.
With the Group’s hybrid working model, the communication of key
policies and procedures remains central to its safety and wellbeing
initiatives. To enable employees to work effectively and safely,
whichever location they may be working in, access to appropriate
equipment has been reviewed and procedures developed to
ensure a healthy working environment is maintained.
The Group’s head office is in central Solihull, therefore exposed to
indirect impacts from neighbouring properties. An annual testing
programme addresses fire evacuation, network grid failures and
physical security as a minimum. This programme's focus is on
ensuring that the key processes needed to mitigate any disruption
are simulated, to ensure the Group’s operations remain resilient,
and that adequate appropriate resources would be available in
case of an incident.
A programme of periodic inspections and audits is also
conducted across the Group’s premises, to identify specific
health and safety issues and highlight any emerging trends. As
well as actioning any individual hazards identified, action will
be taken to mitigate any recurrence. This may include targeted
safety training or specific safety communications.
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.
Page 63
Strategic Report The incident was minor and resulted in three lost days
(2022: 8 days). Reported ‘near-miss’ incidents remain at low
levels, with only seven events raised in the course of the year
(2022: 28).
To identify the root cause of any incident, all reports are
investigated with the co-operation of employees to identify
any influence relating to the workplace / unknown work
activity hazards, systems or behavioural error. Corrective and
preventative measures are then implemented.
A6.4 Environmental impact
Climate change is one of the biggest challenges faced by the
world today and the Group continues to take an active role in the
transition. The Group has committed to achieve net zero, across
all attributable greenhouse gas emissions, including financed
emissions, 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.
Through its membership of numerous industry initiatives
including Bankers for Net Zero (‘B4NZ’), the Partnership for
Carbon Accounting Financials (‘PCAF’) and the Green Finance
Institute (‘GFI’), the Group supports 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
Achievement / aspirations
2020
• Climate change designated as a principal risk
2021
2022
2023
2030
2050
•
•
Sustainability Committee established to monitor progress on
climate, ESG and sustainability focus areas
Financed emissions of the mortgage portfolio reported for
the first time
• Became a member of B4NZ
• Began offsetting operational footprint emissions
•
2019 year end set as baseline to track commitment to net
zero emissions operational footprint by 2030
• Became a member of PCAF
•
Enhanced climate change scenario analysis to consider the
implications of the UK Government’s original proposals for
Minimum Energy Efficiency Standards (‘MEES’) in the PRS.
Science-based target pathway analysis undertaken for the
mortgage portfolio
Expanded the financed emissions balance sheet to include
elements of the Group’s Commercial Lending division
Decarbonisation assessment of the Group’s head office
building, which contributes to over 30% of operational
footprint emissions
Net zero across the Green House Gas (‘GHG’) emissions
associated with the Group’s operational footprint
The Group has committed to net zero across all
greenhouse gas emission scopes in support of UK
Government net zero commitment
•
•
•
•
Training and awareness
During the year 395 employees in key roles with exposure to
specific health and safety risks were provided with specific training
relevant to their role. This included employees in the Surveyors,
Group Systems, Group Property, Maintenance and Development
Finance teams, amongst others, as part of a program to enhance
employee awareness of key role-related safety messages.
All employees have been provided with intranet communications
on key 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. Group policies, also set out appropriate levels
of information, instruction, training and supervision, to empower
employees 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 each year, to ensure
awareness of the specific issues inherent in their duties and
working environment to mitigate the inherent heightened risk.
Management and systems
The Group has a dedicated health, safety and environmental
team which 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) continues to be certified to
ISO45001:2018 for its Occupational Health and Safety
Management System (‘OHSMS’) which is subject to regular audit,
by the Group’s Internal Audit function and subject to external
verification 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 retains 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.
During this period resources for health and safety have been
reviewed and remain sufficient to ensure appropriate standards
of Health and Safety management are 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 2023 there were no prosecutions or
any enforcement action from visits by the authorities for non-
compliance in respect of health and safety matters (2022: None).
Premises occupied by the Group continue to comply with all
health and safety regulations, with the required number of fire
marshals, first aiders and other qualified personnel continuing
to be appropriate. This is regularly monitored across all sites,
using a risk-based approach based on the occupancy levels.
During the year a change in approach to the Group’s fire marshal
procedures increased the number of qualified employees, better
suiting the approach to the hybrid working environment.
During the year, the Group reported 27 minor incidents classified
as relating to work activity or the building environment
(2022: 20). There was one lost-time incident, with no notifiable
reports required under the Reporting of Incidents, Disease and
Dangerous Occurrences Regulations 2013 (‘RIDDOR’) (2022: 1).
Page 64
Impacts of climate change
The Group’s environmental impacts can be considered under
two headings, its internal impacts (or operational footprint) and
the impact of its lending activities (the external or downstream
impacts). The Group is mainly engaged in the financial services
industry in the UK and therefore its operations are considered to
have a low impact on the environment and climate change.
The Group has offset the emissions attributable to its
operational footprint in the year ended 30 September 2023
through the purchase of carbon credits certified under the
Gold and VCS Standard programmes, two of the most widely
accepted international certification systems. More detail on
the Group’s approach to managing the environmental impact
of its own activities and operations is provided under
‘(f) Operational impacts’.
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. The TCFD framework
provides guidance (using a principles-based framework) for
companies to use for disclosure on climate-related risks
and opportunities.
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 2022 and
2023 Thematic Review of climate-related 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.
Page 65
Strategic Report 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
•
•
•
•
•
•
•
•
As a principal risk within the Group’s ERMF, climate change
is considered alongside all other principal risks in all major
capital expenditure, acquisition and divesture decisions
(a) Governance
− Board oversight
−
Sustainability
Committee and Climate
change working groups
During the year the Board approved the Group’s climate
change scenario analysis module which was incorporated in
the 2023 ICAAP
The CFO has been designated as the director responsible for
climate change matters
Performance against the Group’s net zero operational
footprint commitment is monitored by the Sustainability
Committee and escalated to the Board through the CEO’s
monthly report
Through the CEO’s monthly report and other regular
engagement the Board provides oversight of the sustainability
matters most relevant to the Group
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 and reports to ExCo and the Board
(a) Governance
− Board oversight
The terms of reference of key executive risk sub-committees
incorporate the consideration of climate change
−
Embedding climate
change within the
organisation’s
governance structure
Page 66
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
•
•
As part of the 2023 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
−
Use of scenario analysis
(c) Risk management
−
Potential risks identified
over the short, medium
and long term
A qualitative climate change risk assessment across both
the Mortgage Lending and Commercial Lending divisions,
considering the key climate-related risks and opportunities
The climate risk and opportunity assessment is an integral
process for assessing the impact of climate-related risks and
opportunities across the Group and their materiality
Although no significant vulnerabilities were identified, the impact
of current and emerging regulation, particularly the tightening
of energy efficiency regulations in the private rented sector, was
recognised as a potential risk. Controls are in place to reduce the
impact of this risk.
Other potential risk drivers identified include technology risk,
reputational risk and physical risk from flooding which are all
currently deemed to have a low overall impact on the Group’s
business model.
b) Describe the impact of
climate-related risks
and opportunities
on the organisation’s
businesses, strategy,
and financial planning
c) Describe the resilience
of the organisation’s
strategy, taking into
consideration different
climate-related
scenarios, including a
2°C or lower scenario
•
•
•
•
•
The Group continues to incentivise customers to be more
sustainable by offering discounted rates or reduced fees
across its sustainable products
(b) Strategy
−
Climate-related
opportunities
The climate change scenario analysis module continues to
enhance the Group’s process for embedding and considering
climate change within planning and strategy
−
Use of scenario analysis
(f) Operational impact
The Group continues to assess and improve the efficiency
of its supply chain. A pilot sustainability survey was shared with
the Group’s property suppliers with the results now
being considered
−
−
Supply chain and
procurement
Environmental
initiatives
During the year, the climate change scenario analysis exercise
was updated. The approach focused on the shorter-term risks
which could materialise within the residual life of the assets
across the portfolio. The timescales considered varied from one
to six years across the Commercial Lending portfolio to up to
and beyond seven years across the Mortgage Lending portfolio.
The assessment did not identify any significant vulnerabilities
The quantitative analysis assessed the impact of a
divergent transition and a short-term implementation
of the MEES across the PRS in the UK. The results
indicated that climate-related risks do not significantly
impact provision or asset value calculations
(b) Strategy
− Use of scenario analysis
(g) Future developments
Page 67
Strategic Report 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 climate change principal risk policy continues
to incorporate climate risk considerations within the ERMF,
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 have enhanced the approach for identifying
and managing climate-related risks
The climate risk and opportunity assessment, which has
business-wide engagement, is an integral process for
identifying climate-related risks that could impact the Group
(a) Governance
−
Embedding climate
change within the
organisation’s
governance structure
−
Governance structure
chart
(b) Strategy
−
Use of scenario analysis
(g) Future developments
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 Sustainability Committee provides a channel for climate
related issues to be raised by business areas and escalated up
and across the Group’s governance structure as appropriate
The Sustainability Committee has three working groups with
remits which cover climate change and other aspects of
sustainability. These groups include personnel from across the
business allowing for risk and opportunities to be identified
and escalated
The climate change principal risk policy articulates the Group’s
approach to climate risk management, ensuring ambitions are
achieved and necessary controls are effective. More detail on
the Group’s ERMF and its approach to climate change as a
principal risk is outlined in sections B8.4 and B8.5
(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 groups
Embedding climate
change within the
organisation’s
governance structure
(c) Risk management
−
−
Assessment at
underwriting
Quantifying our climate
exposure
(g) Future developments
Page 68
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
(c) Risk management
−
Quantifying our
climate exposure
(d) Metrics and targets
(b) Strategy
−
Use of scenario analysis
•
•
•
•
•
•
For the Group’s mortgage portfolios, energy efficiency
(measured by EPC grades) and flood risk are key metrics used
to assess climate risk
For SME lending Standard Industrial Classification (‘SIC’)
codes are used to identify customers operating in industries
with increased exposure to climate risk
Throughout the year the amount of lending on our green
mortgage range continued to increase
The 2023 ICAAP assessed the alignment of the mortgage
portfolio’s projected emissions with a well-below 2°C scenario
The Group has offset its operational footprint via the purchase
of carbon credits, formulating a carbon price helping to drive
future investment into internal emission reductions
The determination of the levels at which PSP awards for
executive directors vest include a climate metric. The metric
which is subject to annual review, focuses on the development
and delivery of the process to manage the Group’s operational
emissions and the financed emissions attributable to
asset portfolios
b) Disclose Scope 1,
Scope 2, and, if
appropriate, Scope 3
greenhouse gas (GHG)
emissions, and the
related risks
c) Describe the
targets used by the
organisation to manage
climate-related risks
and opportunities
and performance
against targets
•
Scope 3 financed emissions which make up a significant
majority of the emissions across the Group’s value chain, have
been disclosed for the mortgage portfolio and areas of the
Commercial Lending division
(e) Financed emissions
−
Scope 3 financed
emissions balance sheet
•
The Group reports the emissions associated with its
operational footprint (Scope 1,2 and 3 emissions)
•
•
•
•
The Group has become a member of B4NZ and has
committed to net zero by 2050
In March 2021 the Company issued a £150 million Green Tier-2
Bond which throughout the year was fully allocated with
EPC A / B buy-to-let loans
The Group has committed to achieve net zero across its
operational footprint by 2030
The Group continues to work towards establishing a full
financed emissions balance sheet and interim ambitions for
financed emissions reduction
(f) Operational impact
−
Performance indicators
−
Emissions across the
value chain
(b) Strategy
−
Climate-related
opportunities
(f) Operational impact
− Performance indicators
(g) Future developments
Page 69
Strategic Report During the year, with the support of the climate change working
groups and the Sustainability Committee, the Group has:
•
•
•
•
•
Developed an initial view of the Group’s financed
emissions balance sheet
Reviewed the Group’s climate change maturity against
supervisory expectations
Delivered a climate change scenario analysis exercise
included in the 2023 ICAAP
Reported on the operational footprint on a quarterly basis to
track reductions versus the 2019 baseline
Provided insight into UK Finance, B4NZ, the Climate
Financial Risk Forum (‘CFRF’) Scenario Analysis industry
Working Group (‘SAWG’) and various Partnership for Carbon
Accounting Financials (‘PCAF’) working groups to leverage
experience and develop the Group’s understanding whilst
also providing a voice on future policy and processes
Climate and sustainability governance structure
Throughout the year,
climate change continued
to be further embedded
within the Group’s
governance structure and
culture. The governance
structure outlines how
climate and sustainability
related matters are
escalated throughout the
Group and upwards to
the Board.
Paragon Banking Group PLC Board
Executive Performance Committee (ExCo)
Sustainability Committee
Working Groups
The approach to managing
climate change risk is
incorporated within
the ERMF to ensure a
consistent and comprehensive approach is taken across the
business. 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.
Improved governance and increased climate-related reporting into
the Sustainability Committee and executive risk sub-committees
provide the Group with a robust process for identifying and
managing climate-related risks and opportunities.
During the year, a sustainability training module was undertaken
by all employees to enhance their awareness of climate change
and sustainability issues across the Group.
(a) Governance
Board oversight
Climate change risk is a principal risk within the ERMF, therefore,
information and metrics on climate change risk 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
arising from climate change and to oversee these risks within the
Group’s overall business strategy and risk appetite. Performance
against this objective is assessed annually and impacts the
bonus or incentive they receive (see Section B7).
Regular engagement by the Board and enhanced governance act
as key channels for the consideration of climate change within
the setting of performance objectives and their monitoring.
The Board is updated on a regular basis through the CEO’s
monthly report, which provides oversight of sustainability and
climate-related matters and how they impact strategy. The focus
continues to be on improving the directors’ 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:
•
•
The Board was updated on the Group’s climate
change commitments across the operational footprint
and financed emissions. The briefing covered short-term
deliverables and ambitions, along with relevant updates
on other climate-related risks and opportunities. The
session highlighted the implications of net zero on business
strategy, stressing the importance of the dependency the
commitments have on wider industry and government action.
As part of the 2023 ICAAP, a climate change scenario analysis
module was presented to the Board for approval. Focused
training was delivered on the outcomes of the business-wide
climate risk review, the impact of the originally proposed
MEES in the private rented sector, and the key challenges of
net zero alignment across the mortgage portfolio.
Sustainability Committee and climate change
working groups
The Sustainability Committee, chaired by the External Relations
Director, 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. 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 data on concentrations
of monthly advances, pre and post offer pipeline cases and the
financed emissions of the portfolio.
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.
Page 70
(b) Strategy
Climate-related opportunities
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 it recognises the scale of the
challenge ahead and understands that without support from
industry and policy makers any business is unlikely to achieve
net zero by its own efforts alone.
The Group’s decarbonisation approach focuses on reducing
the emissions associated with its operational footprint, and
reducing financed emissions through customer engagement
and education, and by lending on sustainable products. The
Group also actively engages in public policy advocacy through
industry initiatives and collaborations including B4NZ and the
Mission Zero Network to promote the development of the policy
and regulatory framework necessary to support a just and fair
transition to net zero.
Overall, the Group’s strategic objectives are not expected to
change significantly due to the impacts of climate change. Its
products, customers and the types of assets funded will need
to evolve over time as the UK economy transitions to net zero –
this is core and aligned with the Group’s purpose of supporting
the ambitions of the people and the businesses of the UK by
delivering specialist financial services. There continue to be
some areas where technological advancements are required,
for instance to facilitate the replacement of fossil fuels through
electrification or the use of alternative low-carbon fuels. It
is expected that these technologies and their supporting
infrastructure will become available in the future, aligned with
the UK economy’s planned transition to net zero by 2050.
Climate change related business opportunities continue to be
addressed 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 2023, and shows the full targeted allocation
had been reached.
Sustainable finance is a vital mechanism to drive the transition
to a low-carbon economy, and the Group continues to develop
products which its customers need to support them on their
individual sustainability journeys. To incentivise the purchase
of more energy-efficient properties, the Group currently offers
a discounted rate for landlords securing their mortgage on
properties with an EPC rating of C or better. Since the launch of
these products, new inflows of mortgages with EPC ratings of C
and better have exceeded concentrations in the extant portfolio.
In its development finance business the Group offers reduced
exit fees for customers who construct highly energy-efficient
properties with the majority of units in a development needing to
achieve an EPC rating of A to receive the discount.
The Group also aims to enable the transition and identify
further opportunities, through education and engagement with
customers, brokers, stakeholders and other industry initiatives.
In particular, the Group has posted educational articles and
blogs covering the development of new EPC requirements for
the PRS as they emerge, outlining who they are likely to affect
and how they are expected to be enforced.
The challenge of decarbonising UK residential real estate and
the related risks are shared by all property-based lenders and
their customers and will continue out to 2050. The Group will
continue to support the transition, leveraging its strong balance
sheet and robust credit standards.
Page 71
Strategic Report Use of scenario analysis
During the year a climate change scenario analysis exercise was undertaken as part of the 2023 ICAAP. The analysis built on previous
risk driver assessments, which had identified the areas most significant to the Group. The Group prioritised the mortgage portfolio for
its quantitative climate change risk assessment due to the relative size of the portfolio, the potential impact of climate change risk and
the availability of climate related data. The approach leveraged the Bank of England’s Climate Biennial Exploratory Scenario (‘CBES’)
and Network for Greening the Financial System (‘NGFS’) to provide a comparable and consistent outcome. Details of the forecasting
approaches are outlined below.
Scenario
Transition risk
Outcome
The outcomes of this analysis suggest that, due to the
extended time horizons over which climate risks may
materialise, the ongoing uncertainty in Government policy
and the minor overall increase to expected credit losses in the
scenario, there is currently no significant and quantifiable link
to asset values or impairments attributable to the climate-
related factors considered.
Across the scenarios considered, the analysis indicated a
small overall impact over the short and medium term and,
considering both the lack of historic losses and the controls
currently in place, the impact of flood risk on mortgage values
is not considered to be significant.
The NGFS divergent 1.5° net zero scenario was used to
forecast key macroeconomic variables under the influence of
climate change.
In addition, the impact of achieving compliance with the
originally proposed MEES in the PRS was considered across
the mortgage portfolio.
These two stress drivers were combined to assess the
outcome on credit and capital across the mortgage portfolio.
Physical risk
The flood risk across the mortgage portfolio was projected
to 2050 and 2080 in line with the CBES scenarios. The flood
risk projections considered Representative Concentration
Pathways (‘RCP’) of varying severity with RCP 8.5 considered
in the ‘no additional action scenario’ and RCP 2.6 and 4.5
considered in the ‘early action’ and ‘late action’
scenarios respectively.
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.
Net zero scenario analysis
Analysis was performed considering the emissions across the
entirety of the Group’s value chain.
The analysis identified retrofitting, electrification of heat, and
low-emission electricity as key influences.
Although the assessment considered all the Group’s
emissions, the scenario analysis focused on the
decarbonisation of the mortgage portfolio, its most significant
asset class, aligned with a well below 2°C scenario.
The analysis indicated a key dependency of portfolio
decarbonisation on appropriate government policy and
strategy to drive consumer demand for decarbonisation and
retrofit investment.
The analysis considered the implication of a 2030 interim
decarbonisation target, and the key contributors to achieving
the required emissions reductions.
In addition, a qualitative review of the Group’s climate change risk and opportunities by business area was performed to enable a
broader view of how such risks are mitigated and how opportunities are captured where material. The review was facilitated by the
Sustainability Committee’s Financed Emissions and Opportunities Working Group and received groupwide input. The risk review did
not identify any significant impacts on cash flows, finance or the cost of capital.
Climate change scenario analysis has improved the Group’s understanding of its key climate change risk drivers, the potential impact
they could have, and the mitigating options available. The approach to climate change scenario analysis will continue to mature as the
Group integrates its learnings from the SAWG.
The results of both the qualitative and the quantitative assessments identified no significant gaps or vulnerabilities related to climate
change across the Group, and confirmed that current processes are fit for purpose. The outcomes were presented to, and approved
by, the Board.
Page 72
(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 most significant to the Group’s business and strategy, and the timeframes over which they might impact. The Group prioritises risk
by expected impact and likelihood of the risk materialising.
Source
Risk driver
examples
Most relevant
lending area
Most relevant
principal risks
Timeframe
Expected impact
Transition risk
Mortgages
Credit and
operational
Short, medium and
long term
SME lending and
motor finance
Credit
Short and
medium term
Mortgages
Reputational
Short and
medium term
Current
and
emerging
regulation
Continued
tightening of
energy efficiency
regulations
in the private
rented sector
and buildings
regulations in
the UK
Technology
Reputation
Transition to
low carbon
technologies which
could impact
asset values and
infrastructure
requirements
This also includes
the risk that such
new low-carbon
technologies may
prove ineffective
Increased
stakeholder,
shareholder and
regulatory scrutiny
if there is perceived
to be a lack of
action to mitigate
climate change
Medium
Although controls
are in place to
reduce the risk
of impacts from
current and future
regulation, the
potential fast pace
of change of policy
and regulation in
this area could
increase the impact
Low
The Group
takes a prudent
approach to new
and developing
technology and
has robust controls
and reporting to
limit its exposure
to obsolescent
technologies
Low
The Group has
a very low exposure
to climate
sensitive sectors
Page 73
Strategic Report Source
Risk driver
examples
Most relevant
lending area
Most relevant
principal risks
Timeframe
Expected impact
Acute
Chronic
Damage to
property, business
disruption and
higher insurance
costs from
climate-driven
events such
as flooding
Alterations
in weather
patterns affecting
subsidence and
ground stability
which may damage
mortgaged
property assets
Physical risk
Mortgages and
development
finance
Credit and
operational
Short, medium and
long term
Low
The Group and its
lending portfolio
have low exposure
to physical risk
and there are
numerous controls
and procedures in
place to reduce the
impact of this risk
Mortgages and
development
finance
Credit
Long term
Very low
The Group has
numerous controls
in place, and the
longer impact
duration offers
sufficient time to
adapt to changes in
risk profiles
Assessment at underwriting
Quantifying climate exposure
One of the key processes for managing climate-related risk is
through assessments made at a loan’s underwriting stage. This
acts as a key mitigant to the environmental and climate risk
factors most likely to have an impact on the Group’s business
or customers.
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. 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.
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.
In the Group’s development finance business the initial due
diligence considers flood risk, ground instability, local ecology
and current and future regulations. In addition each project has
an independent monitoring surveyor assigned throughout the
life of the build, part of whose task is to monitor these risks as
they emerge, and assess how they are being considered and
mitigated by the customer, where material.
EPC ratings assess the energy efficiency of a property and are a
key measure of transition risk across the mortgage portfolio. The
Credit Committee and the Credit Risk function have an ongoing
programme to analyse the potential for any linkage between
EPC and loan performance. To date, neither this programme,
nor the scenario analysis performed in 2023 have identified any
requirement to adjust current processes or lending criteria. The
Group’s EPC data capture process continues to be enhanced to
improve its understanding of current exposure, but also for use
in longer-term climate scenario analysis.
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.
Current UK Government policy requires properties in the PRS
to have EPC ratings of E or better. Although the timings and
impacts of future public policy initiatives and changes in market
preferences on energy efficiency remain highly uncertain, the
tightening of standards and increased demand for more
energy-efficient properties are both expected in the short
to medium term. This is expected to evolve continuously
throughout the UK’s pathway to net zero by 2050.
The Group conducted research with over 1,200 landlords which
found that the vast majority (91%) of landlords were aware of the
potential impact of the EPC regulations on their businesses,
and most (70%) have plans to address them. The results also
indicated that one in four landlords surveyed had already made,
or were in the process of making, such improvements.
The research found that the original government-proposed
MEES may have resulted in a level of divestment, albeit a low
degree. Less than one in ten landlords in the sample reported
that they had sold properties that would be too expensive to
upgrade to meet the proposed new standards.
Page 74
New mortgage lending, for properties with EPC grades of
A to C increased by 8.7% in the year to £904.6 million
(2022: £832.2 million). The distribution of EPC grades amongst
the 99.9% of new buy-to-let mortgages in England and Wales
advanced during the year where an EPC was available
(2022: 99.6%) is set out below.
Indicator Measure
EPC
Grading A to B
Grading C
Grading A to C
Grading D or E
Grading A to E
Grading F or G
2023
10.1%
39.5%
49.6%
50.3%
99.9%
0.1%
2022
9.2%
36.0%
45.2%
54.6%
99.8%
0.2%
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 continue to be accelerated by the green mortgage range.
However, banks focussing their lending on EPC A-C rated
properties will not, of itself, deliver the desired changes in the UK
housing stock, which currently has an average EPC rating of D.
Commercial Lending
The Group’s Commercial Lending division comprises SME
lending, development finance, motor finance and structured
lending operations. Within the division the initial focus of climate
analysis has been on the SME lending business.
Recognising that the term carbon-related assets is broad,
the Group has assessed the exposure to carbon-related
assets across its SME lending business, which has the most
heterogeneous exposure type. Limited company customers
have been broadly analysed by SIC codes to identify those
operating in sectors potentially exposed to increased climate
risk. These sectors were identified as part of the climate risk
assessment and discussed with industry experts across the
Group. Although the sectors are identified as having heightened
climate-related risks, the Group’s regular review of industry
performance and its credit control and other processes leave a
low overall residual risk.
(d) Metrics and targets
Mortgage Lending
The Group’s Mortgage Lending division is focused on first charge
buy-to-let mortgages, and also includes legacy owner-occupied
first and second charge mortgage books, where no new lending
takes place. Climate analysis to date has been targeted on the
buy-to-let portfolio.
The tables below summarise the principal metrics for the Group’s
exposure on first charge buy-to-let mortgages in England and
Wales. The data covers 94.6% of accounts with properties in
England or Wales (2022: 92.8%), which represent 97.4% of the total
portfolio (2022: 97.6%). Work is ongoing to source comparable
data for the Group’s Scottish and Northern Irish exposures.
Indicator Measure
EPC
Grading A or B
Grading C
Grading A to C
Grading D or E
Grading F or G
2023
8.3%
33.2%
41.5%
57.7%
0.8%
2022
8.2%
31.1%
39.3%
59.6%
1.1%
The Group’s flood risk assessment is based on location-specific
data which covers the whole of the UK. This assessment includes
flood risk from rivers, surface water and coastal flooding. Data
has been obtained for 94.0% of properties on the mortgage book
(2022: 93.4%), summarised below as at the year end.
Indicator Measure
Flood risk
Very high risk
High risk
High or very high risk
2023
0.1%
2.9%
3.0%
2022
0.1%
2.9%
3.0%
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 with internal property and
credit risk experts and the marginal increase was not considered
to be substantial.
Page 75
Strategic Report The results, which cover the entire SME lending portfolio, are set
out below:
(e) Financed emissions
Indicator Sector
Relative
climate risk
exposure
Residual
risk after
controls
2023
2022
Sector
Construction
Low 16.7% 15.9%
The Group’s financed emissions, which are considered as
Scope 3 emissions, are those generated by its customers which
are facilitated by the financing it provides. 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, which make up the significant majority
of emissions across its value chain.
The Group’s strategy will continue to evolve, delivering initiatives
and products to drive emission reductions across each of its
business areas. There continues to be an external dependency
on emissions reductions driven by policy, customer behaviour,
and infrastructure and technology developments across the
sectors in which the Group operates.
Absolute financed emissions have been calculated in
accordance with the PCAF standard. Under this approach
a lender is considered to be responsible for a proportion of
emissions relating to assets which they finance based on an
‘attribution factor’. The financed emissions reported are based
on the customers’ scope 1 and 2 emissions and do not cover any
connected scope 3 (value chain) emissions.
Moderately
High
Low 13.9% 14.9%
Low
1.5%
1.8%
Low 21.2% 20.5%
Low
2.3%
2.3%
Medium
Low
3.7%
4.1%
Low
8.7%
8.0%
Low
0.8%
0.7%
Low
0.1%
0.1%
68.9% 68.3%
Emissions intensities are calculated in accordance with the
PCAF standard to provide comparable data. However, this
comparability will be compromised by differences in method,
data quality and assumptions used by each firm in its financed
emissions calculations.
Physical emission intensity is a measure normalised by physical
output, based on customer output or asset use. Therefore
the normalisation factor will change depending on the asset
or finance provided. Economic emission intensities refer to
absolute emissions per pound of lending or investment.
Transportation
and storage
Mining and
quarrying
Administrative
and support
service activities
Agriculture,
forestry and
fishing
Water supply,
sewerage, waste
management
and remediation
activities
Manufacturing
Real estate
activities
Electricity, gas,
steam and air
conditioning
supply
Total increased climate
risk exposure
The administrative and support service sector is not typically
considered to be one with an increased level of climate risk,
however the sector includes activities such as plant hire, and
the customers and assets funded by the Group in this sector are
closely aligned with the other sectors above that are identified as
having increased climate change risk.
Measures addressing other climate risk elements within the SME
lending business, such as the environmental impacts of business
assets financed, and those elsewhere in the Commercial
Lending division, including those in its other business streams,
such as the classification of the environmental impacts of motor
vehicles financed and classification of development finance
projects by environmental rating, are under development and
continue to evolve.
Scope 3 Financed emissions balance sheet
The financed emissions balance sheet covers 89% of assets
covered by the PCAF standard by exposure (2022: 85%). The
Group’s ambition is to increase this coverage level over time. The
prioritisation for increasing data coverage is based on the size of
the Group’s exposure to a particular lending stream, expected
level of emissions, the availability and accuracy of emissions data
and the ability to report meaningful year-on-year data.
Page 76
PCAF Scope 3 financed emissions balance sheet
Business
area
Asset type
Balance
Balance with
emissions
data
Data
coverage
£m
Absolute
financed
emissions
kilotonnes
CO2e
Economic
emission
intensity
tonnes
CO2e per
£ million
balance
Physical
emissions
intensity
kgCO2e per
physical
activity
factor
Physical
activity
factor
Indicative
PCAF data
quality score
30 September 2023
100%
94%
257.9
13.2
19.9
69.1
46.4
0.3
/m2
/mile
3.1
2.6
Mortgages1
12,902.3
12,902.3
Motor
finance2
Passenger
vehicles and
LCVs
Leisure
vehicles
Motor
vehicles3
SME lending4
206.1
193.2
91.6
Excluded
106.4
106.4
100%
37.8
356.3
0.3
/mile
2.8
Other assets
651.1
Under development5
Development finance
747.8
Under development6
Structured lending
169.0
Under development7
Other assets
Total
3,545.9
Not in scope of financed emissions balance sheet8
18,420.2
30 September 2022 (restated10)
Buy-to-let mortgages10
12,086.0
12,086.0
100%
247.8
20.6
47.5
/m2
3.1
Other mortgage lending
242.7
Under development
Motor finance
SME lending
261.3
Under development
721.7
Under development
Development finance
719.9
Under development
Structured lending
178.7
Under development
Other assets8
Total
2,443.3
Not in scope of financed emissions balance sheet
16,653.6
Page 77
Strategic Report Notes on calculation methods
(f) Operational impact
1.
Emissions related to mortgage assets are calculated using EPC
data. The annual emissions relating to the financed property are
attributed to the mortgage provider on a loan-to-value basis.
The attribution factor uses outstanding loan value and original
valuation to calculate the (unindexed) loan-to-value factor – this
is aligned with the PCAF guidelines.
The data contained in the EPC has not been altered or
updated. The calculation of physical emissions intensity
used the sum of attributed floor area using loan-to-value
ratios. Where EPC data is not available, emission intensity
is estimated based on property type and age. Where no
information is available a UK average is applied from the
EPC database.
The Group is mainly engaged in mortgage 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 office and
resource use, procurement in offices and business travel.
Mortgage lending includes first charge buy-to-let and
owner-occupied mortgages and second charge mortgage loans.
The Group’s operations are not considered to be significantly
exposed to the financial risks of climate change materialising
from either transitional or physical risks.
2. Motor finance data currently excludes leisure vehicles
(motor homes and caravans). Electric vehicles are assumed
to have an emissions rate based on the DEFRA conversion
factors. Attribution is based on outstanding loan value divided
by vehicle value at point of origination.
3. For asset-backed lending in the SME lending and motor
finance divisions vehicles with matched number plates
have been identified. The number plates provide accurate
emissions data when combined with estimated annual
mileage. Attribution is based on the outstanding loan value
divided by vehicle value at point of origination.
Policy
The Group complies with all applicable laws and regulations
relating to the environment and includes these within its legal
compliance framework.
Groupwide recycling and awareness campaigns are run with
employees to reduce various forms of waste such as food,
consumables and energy.
4. SME lending includes asset finance, aircraft mortgages,
invoice finance, professions finance, RLS, CBILS and BBLS.
Risk management
5. Metrics for other loan and asset types in the SME lending
portfolio remain under development due to the complexity
in calculating emissions across the wide range of assets
financed and the industries in which customers operate.
High level estimates are available for exposures relating
to heavy good vehicles and plant, but these rely heavily on
assumptions and are subject to change.
6. Financed emissions for the development finance business
may be estimated using sector or industry proxies, but
these rely on a significant number of assumptions reducing
the accuracy and usefulness of the outputs. Metrics for
development finance remain under development until
improved industry data for more accurate and comparable
reporting becomes available.
7. Structured lending remains an area for development.
8. Out of scope assets include cash, derivative financial assets,
intangible assets, pension surplus and other receivables. Items
disclosed as property, plant and equipment are also out of
scope for this purpose. These include operational assets, where
the emissions are considered under scopes 1, 2 or 3 in the
operational footprint outlined in ‘(f) operational impacts’, and
assets leased under operating leases, where the approach for
the attributable downstream scope 3 emissions is still
under development.
9. Physical activity factor data is based on customer and loan
data where available. Where unavailable an industry average
is applied.
10. The 2022 financed emissions disclosure covered
buy-to-let mortgage emissions only. The 2022 figures have
been restated to use the extrapolation method adopted for
the 2023 disclosure for a more meaningful comparison.
This covers 100% of buy-to-let mortgage loans.
The Group Property function, which reports ultimately to the
Chief Operating Officer, manages the environmental risks
inherent in the Group’s operations. The Group’s second line
Operational Risk team and the Operational Risk Committee
monitor compliance within the Group’s wider risk
management framework.
Group Property are responsible for the oversight of all premises
occupied by the Group and compile information on energy use
and waste production. All locations, whether directly owned
or tenanted, have their energy data and emissions actively
tracked. This is reported at the Sustainability Committee and
Performance ExCo and escalated upwards to the Board.
SFS operates from a number of workshops around the UK
and has exposure to several different waste streams (oils,
vehicle parts etc) generated in the normal course of its vehicle
maintenance activities. These are effectively managed under
an environmental management system that is certificated to an
International Standard – ISO14001:2015. A dedicated health and
safety manager has direct responsibility for environmental issues
at all SFS sites.
The Group complies with the Energy Savings and Opportunities
Scheme (‘ESOS’), which is a UK Government initiative that
requires companies to identify and report on their energy
consumption. The Group last submitted its ESOS compliance
notification to the Environment Agency in December 2019. The
next submission is due in June 2024.
Page 78
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 are therefore
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 indirect.
During the year a sustainability survey was carried out to better
understand the sustainability maturity of suppliers to the Group
Property function. The results are being processed internally
with the same survey due to be sent out to a wider supplier base.
During the year, the Group upgraded its procurement systems to
improve the onboarding and oversight process for suppliers. This
enhanced infrastructure also enabled a greater understanding of
the maturity of ESG and climate change approaches across the
Group’s supplier base, through ESG scoring.
All pre-printed stationery items used by the Group are from
renewable sources certified by FSC.
92.1% (2022: 86.4%) of the Group's purchased electricity in the
year was obtained from sources certified as renewable by the
Office of Gas and Electricity Markets (‘OFGEM’).
Environmental initiatives
The Group’s environmental initiatives in the period include:
•
•
•
•
•
Carrying out a decarbonisation assessment of the head office
to identify additional initiatives for achieving greenhouse gas
emission reductions
Updating the Building Management System (‘BMS’) at the
head office building to provide improved temperature control,
which included installing occupancy sensors to power down
any heating / cooling systems when areas are unoccupied
Completing a project to install 1,550 units of energy-efficient
intelligently-controlled lighting throughout the head office site
in March 2023, with all waste generated by the project being
segregated and disposed of responsibly through an approved
third-party contractor
Reassessing the EPC rating of the head office, resulting in an
upgrade to EPC grade C from D
Installing additional electric vehicle charging points at the
Group’s locations in Solihull, bringing the total to 16 across
the two sites
•
Implementing a Sustainability Management System to the best
practices of the ISO14001:2015 and ISO50001:2018 standards
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 of £466.0 million (2022: £388.4 million
excluding gains on sale).
Data for 2019 is presented as, during 2022, this year was
designated as the operational footprint baseline against which
the Group will measure its progress on carbon reduction.
During the current year data collection procedures related
to emissions reporting have been enhanced. This included a
review of the methodology and approach used to report the
historical emissions. As a result of the updated procedures and
the increased data quality, the 2019 baseline has been restated
to be better aligned with future reporting and coverage of the
operational footprint.
Operational footprint greenhouse gas (‘GHG’) emissions
2023
2022
2019
Tonnes
CO2e
Tonnes
CO2e
Baseline
(restated)
Tonnes
CO2e
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)
1,987
Total scopes 1, 2 and 3 (Market-based)
1,525
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)
4.3
3.3
504
450
22
976
507
401
33
941
524
540
62
81
1,500
1,038
1,481
1,022
3.2
2.2
433
4
50
487
3.8
2.6
441
4
136
581
2,062
1,603
5.3
4.1
520
465
24
1,009
995
990
2,004
1,999
6.6
6.7
520
14
88
622
2,626
2,621
8.8
8.8
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. All
these emissions relate to activities in the UK and its offshore area.
Page 79
Strategic Report
CO2 equivalent (‘CO2e’) values above, other than for market-based
Scope 2 elements, are calculated using the conversion factors
published by the Department for Energy Security and Net Zero
and DEFRA on 28 June 2023. 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.
The majority of emissions included above relate to the provision
of heat, light and power to the Group’s premises. The reduction
across Scope 2 market-based emissions is driven by the
increase in the amount of electricity purchased from renewable
sources which meets the GHG protocol Scope 2 quality
criteria. 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 reduction in emissions from the 2019 baseline continues
to be principally driven by the shift to hybrid working. There has
been a slight decrease in location-based emissions compared
to 2022 due to decreased emissions attributable to electricity
consumption and waste generated on sites. Emissions
attributable to employees working from home are not, at present,
included within the scope of the regulations.
GHG emissions reduction target
The Group’s target is to achieve net zero across its operational
footprint by 2030.
•
•
Operational footprint is defined as 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 market-based
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 with any residual emissions
being neutralised by removal offsets.
The Group aims to deliver its net zero operational footprint
commitment through the decarbonisation of heating across its
office sites, the electrification of business travel, switching to
low-carbon green electricity where possible and the reduction
and recycling of waste across the sites it operates.
Carbon offsetting
The Group has offset the emissions attributable to its
operational footprint in the year ended 30 September 2023,
set out in the table above. Emissions for the preceding year
ended 30 September 2022 were offset following the end of
that year. Offsetting has been achieved through the purchase
of carbon credits certified under the Gold and VCS Standard
programmes, two of the most widely accepted international
certification systems.
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.
Assurance
The emissions data set out in the table above has been
independently verified. The limited verification procedures
provide a higher level of assurance that the emissions produced
have been 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.
The EcoAct 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.
Compliance with environmental laws and regulations
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 2023 is shown below.
2023
2022
2019
Baseline
(restated)
MWh
MWh
MWh
Renewable electricity
2,330.0 2,409.3
3,123.5
Other electricity
200.7
380.7
768.1
Electricity
Natural gas
Motor fuel
2,530.7
2,790.0
3,891.6
2,754.9
2,780.2
2,817.1
2,118.9
1,877.7
2,303.7
7,404.5
7,447.9
9,012.4
Normalised MWh per £m income
15.9
19.2
30.3
Consumption levels have seen a small decrease from 2022
linked to reduced electricity consumption following the delivery
of energy saving measures at the Group’s principal site.
Travel has increased across the Group, with higher mileage
across the company car fleet. Consumption 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 2023 was 10,002m3
(2022: 10,202m3), based on consumption recorded on purchase
invoices, a normalised amount of 21.5m3 per £m income
(2022: 26.3m3 per £m income). Water usage has remained at the
level which resulted from previously delivered water efficiency
measures, with office occupancy levels under the hybrid working
approach largely similar year-on-year.
Page 80
Waste
Travel and commuting
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.
In June 2023 the Group partnered with Reconomy, a waste solution
provider, to further segregate waste streams and maximise
recycling opportunities. The collection of better-quality data on
waste generation also means that internal recycling campaigns can
be better targetted. 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 2023 together with the
methods of disposal are shown below.
Recycled
Waste-to-Energy Initiatives
Landfill
Normalised tonnes per £m income
2023
2022
2019
Tonnes
Tonnes
Baseline
Tonnes
44
37
95
176
0.38
123
21
287
431
1.11
122
-
187
309
0.75
Waste generation data is based upon volumes reported on
disposal invoices.
The decrease in waste during the period was driven by
enhanced data collection across the SFS division and a reduction
in the number of office moves compared to the last period. This
significantly reduced the waste going to landfill and being recycled.
The increase in waste going through Waste-to Energy Initiatives
was due to our new waste contractor across our principal sites
which now provides better data covering a wider range of
waste streams.
The Group’s long-term strategy is to increase the
percentage of waste which is either recycled or used in
Waste-to-Energy initiatives.
The Group’s Company Car Policy supports the Group’s efforts to
decarbonise. It targets the elimination of diesel and petrol only
vehicles from the fleet by 31 December 2025 and to meet this
objective the following steps have been agreed:
•
•
•
No diesel or petrol vehicles have been ordered since
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 its first phase of electric
vehicle charging points at its Solihull Head Office. During the
year further charging points were installed at both Solihull sites.
In addition, the Group’s Southampton site was equipped with
charging points before the Group occupied the premises. The
aim is to reduce emissions from commuting and business travel
by employees.
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 runs a cycle-to-work scheme year-round, supporting the
purchase of new cycles by employees.
(g) Future developments
The Group’s climate change programme going forward
also includes:
•
•
•
•
•
Continued development of climate change scenario
analysis, leveraging off industry good practice to determine
the resilience of the Group’s strategy under different
climate-related scenarios
Expanding the range of sustainable products available
to customers
Educating and engaging with customers on key
climate-related issues and opportunities relevant to each
of the Group’s business lines
Continuing to work towards reducing the Group’s operational
footprint to net zero by 2030
Further engaging and promoting positive sustainable public
policy across industry and government, through membership
of B4NZ and Mission Zero Coalition
Page 81
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 and where the data is sufficiently mature to
reliably inform decision making. Although industry-wide emissions data continues to improve, the timelines for delivering
decision-useful emissions data remain uncertain.
The table below outlines the key emissions from all scopes across the Group’s value chain and their current reporting status. The
current focus remains on the Group’s operational footprint, where it is able to have a more direct influence on outcomes, and financed
emissions, which are the most significant emissions across the Group’s value chain. It is intended that as the Group’s understanding
broadens, more action will be taken to reduce emissions across all areas of the value chain.
Scope
Emissions source
Significance
of emissions
Approach
Commitments
Scope 1
Operating gas heating boilers
Petrol and diesel used by
company cars
Air conditioning systems
Scope 2
Purchased electricity, heat and steam
Very Low
Very Low
Included within ‘(f)
Operational impact'
above
Offset from 2022
Commitment to net zero
by 2030
Included within ‘(f)
Operational impact’
Offset from 2022
Commitment to net zero
by 2030
Offset from 2022
Commitment to net zero
by 2030
In support of the UK
Government goal of net
zero by 2050 the Group
has made a commitment
to achieve net zero
by 2050
Scope 3
Fuel and energy related activities not
in Scope 1 or 2
Included within ‘(f)
Operational impact’
Waste generated in operations
Very Low
Water consumption
Scope 3 Working from home emissions
Very Low
Under development
Scope 3
Employee commuting
Very Low
Not yet started
Scope 3
Supply chain emissions
Scope 3
Financed emissions – Mortgages
Scope 3
Financed emissions –
Commercial Lending
Low
High
Very High
Under development
Reported in ‘(e) Financed
emissions’
Under development but
partially reported in ‘(e)
Financed emissions’
Scope 3
Operating leases (as lessor)
Low
Under development
Page 82
The Group has also been active in industry diversity initiatives.
Richard Rowntree, Managing Director – Mortgages was
recognised by the City of London for his work in promoting
socio-economic diversity in the financial services industry and
the Group is represented in Women in Property, sponsoring the
Inspiring Women in Property awards.
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. A designated member of ExCo, Deborah Bateman,
the External Relations Director and Chair of the Sustainability
Committee, oversees 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 across these initiatives totalled £56,000 (2022: £50,100).
Charities which benefitted from the Group’s donations included
local schools, sports clubs, hospitals and hospices, Thrombosis
UK, Papyrus (Prevention of Young Suicide), Alzheimer's Society,
Wellchild, Food Life-Line, Solihull Conservation Volunteers
and many others. During Pride month the Group encouraged
fundraising for LGBTQ+ affiliated charities with one of the
beneficiaries being Birmingham LGBT.
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. For
each financial 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 ended 30 September 2023 £45,000 was raised for
Newlife, a charity which supports children who have cancer, birth
defects, diseases and infections, and their parents. The employees’
chosen charity for the year ending 30 September 2024 is Molly
Ollys, which supports children with life-threatening illnesses and
their families, helping with their emotional wellbeing. The new
year of fundraising has already begun and more events are being
planned across the Group’s locations.
A6.5 Social and community
The Group’s activities are based wholly within the United Kingdom.
It operates within the legal and regulatory framework of the
UK, acknowledging the importance of corporate responsibility
and citizenship, striving to go beyond what is required in its
relationships with its customers, the wider community and
other stakeholders.
The Group operates as a specialist lender 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. It also supports the provision of housing in the
UK through buy-to-let lending to the PRS.
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.
It also actively engages with external bodies, particularly
those focussed on climate change and diversity to ensure
best practice within the organisation. Details of some of these
initiatives are given in the people and environmental impact
sections of this report (Sections A6.3 and A6.4).
Industry initiatives
Through its activity within trade organisations in the UK, the
Group is helping to formulate public policy and share experience
on best practice to drive forward better financial provision. The
Group has been particularly active in initiatives to enable the
PRS to serve the UK housing market more effectively.
The Group also regularly engages directly with Government to
help inform departments on how market trends are impacting
landlords, their sentiment and behaviours. The Group’s CEO
is a member of HM Treasury’s Home Finance Forum and the
Managing Director – Mortgages is a member of the Bank of
England Residential Property Forum, both of which provide input
to policy at the highest levels. The Group’s senior management
have also given evidence to UK parliamentary committees
several times during the year.
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, and it was particularly pleasing that
John Phillipou, the Managing Director of the Group’s SME lending
operation, was appointed as Chair of the FLA in October 2023.
The Mortgage Lending business continues to work with a
number of industry and government initiatives on climate change
in the property sector. This has included work 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 is a member of the Bankers for Net Zero initiative, which
continues 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 83
Strategic Report Community volunteering
Sustainability
The Canal and River Trust care for a 2,000 mile long, 200-year-old
network of canals, rivers and reservoirs. Their vision is to have living
waterways that transform places, enrich lives and bring wellbeing
opportunities to millions. Three project teams completed clear-up
projects on sections of the waterways.
Thames21 works with communities in the London area to
improve rivers and canals for people and wildlife. They mobilise
volunteers every year to clean the capital’s 400-mile network of
waterways. 20 of the Group’s London-based people completed a
clear-up project at Pool Linear Park, Lewisham, during the year.
Newlife undertake de-labelling activities to recycle clothing,
allowing them to sell items in their stores. Clothing recycling
prevents items from going to landfill where it contributes to
pollution. On three occasions, Newlife visited the Group’s Solihull
and Southampton offices to set-up a temporary de-labelling
operation. In addition, 38 employees volunteered in the Newlife
warehouse in Cannock.
Employees also supported a number of litter-picking projects
around the country, including a team from Southampton who
took part in a beach clean organised by Surfers Against Sewage
in Portsmouth.
There were also multiple gardening and general cleaning
projects, supporting Solihull MIND, Solihull Synagogue and
Spencer’s Retreat.
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 ‘reports, results and presentations’.
Employees are offered one paid volunteering day each year
to support volunteering projects as part of our sustainability
strategy. As a specialist lender, the Group is conscious of the
potential impact it may have on society and the environment.
Therefore, community volunteering opportunities have focussed
on poverty, education and sustainability. These have included
initiatives building on long-standing relationships with charities
and schools.
Engagement in the Group’s volunteering programme across
all of the Group’s locations has increased throughout the year,
with the number of volunteer days completed in the financial
year totalling 469 (2022: 286), bringing the total number of
volunteering hours since October 2022, to over 3,517.
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 18
employees volunteered their services to help prepare food at the
drop-in centre and lend a friendly ear to their clients.
St Basils are a charity who work with young people aged 16 to
25 who are homeless or at risk of homelessness, helping almost
4,000 young people per year across the West Midlands region.
The Group has maintained a strong relationship with the charity,
leading to 18 individuals working on gardening projects to help
improve the environment of its premises.
Bedworth Community Grocery Store support local people
to help them keep their families fed. People can sign up to be
members where they can purchase food at a fraction of the
cost from a supermarket. 13 of the Group’s people volunteered
by stocking the shelves, working on the tills, and sharing
experiences with customers.
For Christmas 2022, employees again donated food and luxury
items to Christians Against Poverty, in what has become a festive
tradition. 114 bags of items were collected for inclusion in hampers
for families in need across the West Midlands.
Other local projects supported include the Walsall Black Sisters
Collective, St. Joseph’s Care Home in Harborne, and Blue Cross.
Education
Working with schools. In total 54 employees supported careers
fairs and work experience events, including interview skills
preparation, at schools in the Birmingham and Solihull area.
The Group worked with schools and colleges local to its Solihull
head office, including Arden School, Tudor Grange, Alderbrook
School and Solihull College, whilst supporting schools across
Birmingham, including Aston Manor Academy, Colmers School
and Park Hall Academy.
Support has also been provided to help improve the outdoor
wildlife areas for Heronswood Primary school and Hollywood
Primary School.
Enhancing employability. The Group has continued its
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 three 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 84
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.
Taxes borne directly 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 directly
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
2023
2023
2022
2022
£m
£m
£m
£m
75.1
11.6
7.4
0.6
56.5
11.6
8.2
0.3
94.7
1.4
96.1
76.6
1.4
78.0
28.7
0.3
23.8
0.7
29.0
125.1
24.5
102.5
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.
A6.6 Human rights
The Group respects all human rights and in conducting its
business regards those rights relating to non-discrimination, fair
treatment and respect for privacy to be the most relevant and to
have the greatest potential impact on its key stakeholder groups
of customers, employees and suppliers. These principles are
embedded in its culture and reflected in its Code of Conduct.
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 (2022: none).
Page 85
Strategic Report A6.7 Business practices
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 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.
A commitment to the fair treatment of all suppliers is central
to the Group’s approach. 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, which was
revised during the year. The code is available on its website
(www.paragonbankinggroup.co.uk), and sets out the Group’s
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 at the beginning of the financial year, supervised by
the Sustainability Committee. The results of the survey were
generally positive and were reported upwards to ExCo level.
The Group is continuing to invest in tools to assist in enhanced
and efficient due diligence of suppliers as appropriate, and the
findings of the survey were fed into the development of the
Group’s supplier management process.
The supplier survey will be repeated going forward in order
to monitor the effectiveness of these arrangements. Towards
the end of the year a further survey was issued, focussing on
sustainability issues and the Group’s most significant suppliers.
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.
The only significant outsourcing arrangements used by the
Group relate to:
•
•
•
the administration of its savings operations by the
outsourcing arm of a major UK building society
third-party (‘cloud-based’) hosting of IT systems by a
leading supplier
provision of the hosted administration platform for the
Group’s invoice finance business by a industry specialist
All of these activities take place within the UK and all data
remains onshore.
When outsourcing activities, the Group retains responsibility
for those services and the associated risks. The Group remains
focused on meeting enhanced regulatory requirements under
the PRA Supervisory Statement on Outsourcing and Third Party
Risk Management (SS2/21) 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. To support
suppliers in avoiding such issues, it has published invoicing
guidance on its website.
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.
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 six month
reporting periods ended 30 September in the three most
recent years, calculated on the basis set out in the regulations,
is shown below.
Six months ended 30 September
2023
2022
2021
Average time to pay invoices (days)
21
22
22
Invoices paid within 60 days
94%
94%
95%
Sensitive business sectors
As a matter of credit policy, the Group does not lend in the
following controversial business sectors which pose a potential
reputational and financial risk to the business:
• Public houses and bars
• Licensed clubs
• Gambling and betting activities
• Activities of political organisations
• Manufacturers of weapons and ammunition
This list is kept under review as part of the Group’s
sustainability strategy.
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.
Page 86
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 significant outsourced operations
also take place within the country. The UK is not considered a
jurisdiction with a high incidence of corrupt practices, ranking
eighteenth safest out of 180 countries and territories in the
Corruption Perceptions Index for 2022, the most recent to
be published. 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 2023.
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.
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 (2022: 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. The Group
continues to monitor the increasing complexity of financial crime
risk, regulatory enforcement action and any potential or actual
changes to the legislative framework to manage the emerging
threats. During the financial year additional 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 and meet the
changing legal and regulatory landscape.
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 B4.6.
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 2023
Page 87
Strategic Report Corporate Governance
How the Group is run and how risk is managed
P90
B1. Chair's statement on governance
An overview of governance in the year
P92
B2. Corporate governance statement
How the Company complied with the Code in the year
P94
B3. Board of Directors and senior management
The directors and the operation of the Board during the year
P102
B4. Governance framework
The system of governance, committee structure and how the
Board fulfils its duties
P120
B5. Nomination Committee
Policies and procedures on governance, board appointments
and diversity
P126
B6. Audit Committee
How the Group controls its external and internal audit
processes and its financial reporting systems
P136
B7. Remuneration Committee
Policies and procedures determining how directors
are remunerated
P168
B8. Risk management
How the Group identifies and manages risk in its businesses
P183
B9. Directors’ report
Other information about the structure of the Company required
by legislation
P186
B10. Responsibility statement
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
The Board appreciates the
value which the Group’s
corporate governance
framework brings to its
activities and the part which
the Code plays in that. We
seek to comply with the
Code wherever possible,
and I hope that as the Code
develops, its requirements
will remain attainable,
relevant and proportionate.
Robert East, Chair of the Board
B1. Chair’s statement on
corporate governance
At board level I am pleased to be able to report that we are
compliant with the new FCA Listing Rule on diversity, and able
to state that we have met the FCA’s diversity targets for boards.
We continue to support the Women in Finance initiative, and are
moving to a position where we will be able to announce our Parker
Review targets for ethnic diversity amongst management in line
with the timescales specified by the review committee.
Effectiveness
During the year an externally facilitated review of the Board’s
effectiveness was completed. This was delayed from 2022, due
to the board changes in that year, including my appointment as
Chair in September 2022. The results of the review were very
positive, and I found the process most helpful in forming my
views on the future development of the Board and its operations,
as an incoming chair. As a result of the review some areas for
development were identified and I look forward to the benefits
these will bring to the Board and its deliberations.
Board changes
In June I was pleased to welcome Zoe Howorth to the Board
as an additional non-executive director. Her background in
consumer-facing marketing roles brings a different perspective
to the Board’s discussions, and I look forward to her
contributions over the years to come.
In November 2023, Hugo Tudor reached the ninth anniversary
of his appointment to the Board and during the year he handed
over his responsibilities as Senior Independent Director to
Alison Morris. Preparations are also in progress for Hugo to
hand over his duties as Remuneration Committee Chair once
the Committee’s work on the 2022/23 remuneration cycle
is complete.
Conclusion
I am confident that not only has the Board complied with the
requirements of the Code and its other legal and regulatory
obligations, but that it has successfully discharged its
responsibilities to ensure the good governance of the Group
and its businesses. I cordially invite shareholders to join us on
6 March 2024 in London for our Annual General Meeting, where
there will be an opportunity to put questions to the Board. I hope
to see as many shareholders as possible in attendance.
Robert East
Chair of the Board
6 December 2023
Dear Shareholder
This section of the Annual Report and Accounts describes the
Group’s corporate governance processes and explains how
the Board and its committees have addressed the significant
strategic issues facing it in the year. This year’s challenges have
included the impact of the rapidly changing economic landscape
in the UK over the last twelve months on the Group’s strategy,
businesses and risk profile and monitoring the Group’s ongoing
digitalisation activities, which are fundamental to its strategy
going forward.
This was my first full year as Chair, having taken office on
1 September 2022, and a significant part of my tenure to date
has involved familiarising myself with the Group, its operations
and its people, and particularly how the Group’s corporate
governance framework operates.
During the year an independent external evaluation of the
Board’s effectiveness was carried out, which I found very useful
in evaluating how the Board needs to develop in the future,
adopting emerging best practice and responding to the Group’s
progress towards its strategic goals.
I have also followed with interest the emerging results of the UK
Government’s review of Corporate Governance and Auditing,
including the potential for the creation of a new regulator for
external audit, corporate reporting and governance in place
of the FRC, together with the proposals for an updated UK
Corporate Governance Code (the ‘Code’), where the regulator
has recently announced a significantly changed approach.
The Board appreciates the value which the Group’s corporate
governance framework brings to its activities and the part
which the Code plays in that. We seek to comply with the Code
wherever possible, and I hope that as the Code develops, its
requirements will remain attainable, relevant and proportionate.
In this context we welcome the recent statements by the UK
Government and the FRC, suggesting a more focussed approach
to reform than that originally consulted upon.
Engagement
As a board, we value feedback from shareholders and other
stakeholder groups, both outside and inside the organisation.
I was pleased to note the level of shareholder support for the
Group’s new remuneration policy at the 2023 AGM, a policy
which was developed through extensive consultation with
shareholders, proxy agencies and other investor groups during
the year. I have also been pleased to have had the opportunity
of meeting a number of shareholders during the year. These
conversations provide the Board with valuable insights into
other investor issues and priorities. I would like to thank those
stakeholders who made time to meet with us, and would
encourage all stakeholders to take advantage of opportunities
for dialogue when they arise in the future.
During the last twelve months I have attended several meetings
of the Group’s People Forum, and I found the perspective the
Forum members offered on the Group and its businesses
a significant help in developing my understanding of the
organisation. I have also spent time with people across the
Group as part of my induction process, and I thank them for
their insights.
Inclusion
Inclusion and diversity continue to be a priority for me and
my fellow directors, both within the boardroom and more
widely across the Group. Our strategy requires continuous
development of products, people and processes and that
cannot be achieved without diversity of thought and outlook at
all levels. I was pleased to note the continuing development of
the Group’s internal diversity networks in the year, and am proud
of the work the Group’s people have done to support industry
initiatives in this field.
Page 91
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 2023, the Company complied with the principles and
provisions of the Code.
The appointment of the new Chair of the Board in September 2022 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. During 2022 the decision was taken to defer the evaluation to the year
ended 30 September 2023 to allow the new Chair sufficient time in post to make the evaluation more relevant and meaningful. The
externally facilitated board evaluation for 2023 was completed and 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.
B.
C.
D.
E.
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
The Company’s purpose, values and strategy, which align with its culture, have been established and are
promoted by the Board
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
The Board ensures effective engagement with stakeholders and encourages their participation
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.
G
H.
I.
The Chair is objective and leads the Board effectively, facilitating constructive relations and effective
contribution from non-executive directors
The Board includes an appropriate combination of executive and non-executive directors, with a clear
division of responsibilities
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
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 92
Section 3: Composition, Succession and Evaluation
J.
K.
L.
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
There is an appropriate mix of skills, experience and knowledge. Tenure and membership of the Board and
its committees are regularly reviewed
The annual board evaluation provides an opportunity for the directors to consider their collective and
individual effectiveness and decide where there are areas for improvement
Section 4: Audit, Risk and Internal Control
M.
N.
O.
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
The Board presents a fair, balanced and understandable assessment of the Company’s position
and prospects
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
Section 5: Remuneration
P.
Q.
R.
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
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
The directors exercise independent judgement and discretion over remuneration outcomes, taking account
of company and individual performance and wider circumstances
Section
B5
B5
B4.4
Section
B6
B6
B8
Section
B7
B7
B7
Page 93
Corporate Governance B3. Board of Directors and
senior management
Robert D East
Chair of the Board
Nomination Committee Chair
(Age 63)
Appointed to the Board as
Chair of the Board in 2022.
Experience
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 track record of leading
and chairing financial services
businesses
Extensive experience in, and
understanding of, banking and
the financial services sector
•
Significant experience of leading
transformational change
Current external appointments
Director of RCWJ Limited
Key
Committee memberships
at 30 September 2023 are
indicated as follows.
Nomination Committee
Audit Committee
Remuneration Committee
Risk and Compliance Committee
Disclosure Committee
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.
Nigel S Terrington
Chief Executive
(Age 63)
Richard J Woodman
Chief Financial Officer
(Age 58)
Alison C M Morris
Non-executive director
Audit Committee Chair
(Age 64)
Appointed to the Board as Treasury Director in
1990, and became Finance Director in 1992 and
CEO in 1995.
Appointed to the Board as Director
of Corporate Development in 2012
and became CFO in June 2014.
Appointed in 2020 – three years served.
Senior Independent Director since
August 2023.
Experience
Nigel’s early career began in investment
banking, which included working for UBS, where
he ran its Financial Institutions Group. He
joined the Group in 1987, becoming Treasurer
shortly thereafter, before being appointed as
Finance Director and then Chief Executive.
Nigel takes an active role in engaging with
regulators and government on banking matters,
particularly those which impact the UK mid-tier
banking community.
He is a member of HM Treasury’s Home
Finance Forum and, until September 2023,
was on the Board of UK Finance. Nigel was
previously Chair of UK Finance’s Specialist
Bank Advisory Committee, Chair of the Council
of Mortgage Lenders (‘CML’), Chair of the
Intermediary Mortgage Lenders Association
(‘IMLA’), Chair of the 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*
•
•
•
Strategic and detailed understanding of
banking and of the Group, its markets, its
operations and its people
Leadership of the Group’s diversification
from a monoline buy-to-let lender to a
broadly-based specialist banking group
Long term, through-the-cycle expertise,
including successful management of
the Group through the 1992 and 2007
financial crises
Current external appointments
Member of HM Treasury’s Home Finance Forum
Experience
Richard 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*
•
•
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
and reporting, liquidity, stress
testing and capital management
Executive director responsible
for climate change matters
and, alongside the Group’s
Chief Risk Officer, Richard
takes a lead on progressing
Paragon’s IRB accreditation
Current external appointments
Director of Woodman Portfolio
Holdings Limited
Director of Rose Wine Limited
Experience
Alison is a chartered accountant
and was a partner in PwC's financial
services audit practice until the end
of 2019.
She joined PwC in 1982 and spent her
career with the organisation in a range
of internal and external audit roles
across asset and wealth management,
as well as banking and capital markets.
She 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
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
* 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
Page 95
Peter A Hill
Non-executive director
Risk and Compliance
Committee Chair
(Age 62)
Hugo R Tudor
Non-executive director
Barbara A Ridpath
Non-executive director
Remuneration Committee Chair
(Age 67)
(until 7 December 2023) (Age 60)
Appointed in 2020 – three years served.
Appointed in 2014 – nine years served.
Appointed in 2017 – six years served.
Senior Independent Director between
July 2020 and August 2023.
Experience
Hugo 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
Current external appointments
Director of Damus Capital Limited
Director of Porthcothan Property
Limited
Director of Vitec Global Limited,
Vitec Air Systems Limited and Vitec
Aspida Limited
Experience
Peter‘s career in financial services has
spanned over forty years, including
eight years as CEO of Leeds Building
Society between 2011 and 2019,
where he previously held the role of
Operations Director.
He is Chair of Mortgage Brain Holdings
Limited and was a non-executive
director and Chair of the Risk
Committee at Pure Retirement from
2019 until 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
Current external appointments
Chair of Mortgage Brain
Holdings Limited
Director, Trustee and Chair of the
Finance & Governance Committee of
Leeds Rugby Foundation
Deputy chair and Treasurer, Leeds
Rugby Foundation Services Limited
Experience
Barbara 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
operational risk professionals
(including cyber risk), and a director
of ORX UK Limited. Until recently she
was a non-executive director of Open
Banking Limited.
Specific areas of expertise*
•
Strong knowledge of the operation
and implementation of operational
risk management systems
•
Detailed knowledge of the
securitisation market
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 Change
Banking Limited
Member of the International
Advisory Council of the Institute of
Business Ethics
Page 96
Graeme H Yorston
Non-executive director
(Age 66)
Tanvi P Davda
Non-executive director
(Age 51)
Zoe L Howorth
Non-executive director
(Age 52)
Appointed in 2017 – six years served.
Appointed in 2022 – one year served.
Becomes Chair of the Remuneration
Committee from 7 December 2023.
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 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
Current external appointments
Director of Ashrah Advisory Limited
Director of CLC Services Limited
Trustee for Cheltenham Ladies College
Experience
Graeme Yorston was Group Chief
Executive of Principality Building
Society, the sixth largest mutual in the
UK. He has over 49 years’ experience
in financial services having carried
out a number of senior roles at Abbey
National (now Santander) including
IT Director for the Retail Bank and
Regional Director, and ran 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 the
Prince of Wales’s 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
Board Champion for
Consumer Duty
Current external appointments
None
Appointed on 1 June 2023 – less than
a year served.
Experience
Zoe brings an extensive range of
skills and experience to the Board.
Zoe’s executive career included over
sixteen years’ experience at the
Coca-Cola Company across a variety
of roles that culminated in her role as
UK Marketing Director.
Zoe is a Board member of AG Barr
PLC, a FTSE 250 consumer goods
business, where she is chair of the
ESG Committee and member of the
Remuneration Committee.
She is also a Fellow of Chapter Zero,
which works in partnership with the
Global Climate Initiative to build a
community of non-executive directors
equipped to lead crucial UK boardroom
discussions on the impact of climate
change as organisations transition
from ambition to action.
Specific areas of expertise*
•
Extensive fast-moving consumer
goods, consumer brand and digital
marketing expertise
• ESG strategy and governance
Current external appointments
Non-executive director: AG Barr PLC
Non-executive director: International
Schools Partnership Limited
Non-executive director: Water Babies
Group Limited and TCA Children
First 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
B3.2 Executive Committee
The members of the Group’s executive committees are set out below, together 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
Zish Khan
Chief Operating Officer (‘COO’)
Since 2022
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 Executive Risk Committee
(‘ERC’). The Internal Audit Director,
Sarah Mayne, attends meetings of both
committees as an observer.
Page 98
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:
•
Continued consideration of the impact of interest rate volatility, inflation and other macro-economic uncertainties in the UK
on the Group
• Monitoring progress of the Group’s digitalisation programme
• Oversight of the Group’s implementation of the FCA Consumer Duty which went live in the year
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,
regulatory changes, treasury and funding, the work of its committees and investor relations and shareholder feedback.
A non-exhaustive list of other significant matters overseen by the Board during the year is set out below by theme:
Topic
Business strategy
Update on the Group’s change programme
Approval of the corporate plan for the financial years ending 2022 to 2027. More detail on the Group’s
strategy can be found in sections A3 and A4
Meeting
Oct 2022, Jan,
Apr, Jul 2023
Nov 2022
Market update following the mini-budget announcement provided by an economic research consultancy
Nov 2022
Update on a programme of work that looks at implementing changes to the Group’s target operating model,
ways of working, governance and building requirements
Dec 2022
Detailed update on progress of significant elements of the Group’s digitalisation strategy
Jan 2023
Deep dive review of the Group’s development finance business provided by senior management from the area Mar 2023
Deep dive review of the Group’s savings business provided by the Savings Director
Market update on the financial services sector provided by an investment bank
Mar 2023
Apr 2023
Deep dive review of the Group’s SME lending business provided by senior management from the area
Apr 2023
Deep dive review of the Group’s Mortgage Lending business provided by the Managing Director - Mortgages
which included an update on the Private Rented Sector
May 2023
Update on corporate development opportunities
Risk and regulation
Approval of the Group’s Consumer Duty Implementation Plan and appointment of Graeme Yorston as
Paragon’s Consumer Duty Board Champion
Update on the Consumer Duty Programme and final approval of the detailed Consumer Duty
Implementation Plan
Sep 2023
Oct 2022
Dec 2022
Review of the proposed approach to reporting management information relating to the FCA Consumer Duty Mar 2023
Progress update on implementation of Consumer Duty management information reporting
Progress update on the Consumer Duty Programme
Update on the Group’s IRB application
Consideration of the PRA’s Consultation Paper 16/22 on the implementation of Basel 3.1 standards and its
strategic implications for the Group’s capital
Apr 2023
Jul 2023
Mar 2023
Mar 2023
Page 99
Corporate Governance Topic
Risk and regulation
Approval of the 2023 ICAAP
Review of elements of the 2023 Recovery Plan
Approval of the 2023 Recovery Plan
Training on the 2023 ILAAP
Annual review and approval of the Group’s principal risk categories
Consideration of the implications of the FCA’s 14-point action plan on savings for the Group’s
deposit business
Cyber security / operational resilience
An update from the COO on technology and change in the Group
Approval of the Group’s operational resilience self-assessment
Corporate governance
Meeting
Jul 2023
Apr 2023
Jul 2023
Jul 2023
Jul 2023
Sep 2023
Mar 2023
Mar 2023
Recommendation of the declaration of a final dividend of 19.2 pence per share in respect of the financial
year ended 30 September 2022 and of a share buy-back programme for 2023 (with £50 million announced
with the preliminary results)
Dec 2022
Consideration of succession planning for the Board and senior management in conjunction with the
Nomination Committee
Feb & Jul 2023
Annual review of the Corporate Governance Policy Framework
Approval of the cancellation of the Company’s capital redemption reserve by way of a court-approved
reduction of capital, to increase its distributable reserves
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, and approval of the Whistleblowing Policy
Approval of the Modern Slavery Statement and Policy following an annual review
Annual review of tax strategy and compliance, and approval of policy statement
Approval of the declaration of an interim dividend of 11.0 pence per share and an agreement to increase the
total amount of the share buy-back programme from £50.0 million to £100.0 million as part of the half year
consideration of the Group’s capital position
Annual review of the Group’s purpose, to confirm that it remained relevant and appropriate 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
Mar 2023
Mar 2023
Mar 2023
Mar 2023
Mar 2023
May 2023
Jul 2023
Consideration of the Board evaluation findings. Further detail on this can be found in Section B4.4
Sept 2023
Page 100
Topic
Sustainability
Consideration of shareholder feedback following the full year results announcement
Customer insights update which included intermediary and customer feedback
Meeting
Dec 2022
Jan and Apr
2023
Update on employee feedback through the Nomination Committee. This was obtained through surveys, the
EDI Network and the employee-led People Forum, amongst other channels
Feb and July
2023
Sustainability / climate change update
Annual review and approval of the Group’s Equality, Diversity and Inclusion Policy
Assessment of shareholder feedback following the half year results announcement
Consideration of insights from the Group’s employee engagement survey
May 2023
Jul 2023
Jul 2023
Sep 2023
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.
In addition the CEO’s reporting to the Board provided regular updates on:
• The Group’s change programme
• Operational resilience
• Sustainability
• People
• Corporate development opportunities
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
Nigel S Terrington
Richard J Woodman
Tanvi P Davda
Peter A Hill
Zoe L Howorth
Alison C M Morris
Hugo R Tudor
Barbara A Ridpath
Graeme H Yorston
Board
10 (10)
10 (10)
10 (10)
10 (10)
10 (10)
2 (2)
10 (10)
10 (10)
10 (10)
10 (10)
Audit
Committee
Risk and Compliance
Committee
Remuneration
Committee
-
-
-
-
5 (5)
-
5 (5)
5 (5)
5 (5)
-
5 (5)
-
-
5 (5)
5 (5)
1 (1)
5 (5)
5 (5)
5 (5)
5 (5)
5 (5)
-
-
5 (5)
-
2 (2)
5 (5)
5 (5)
-
5 (5)
Nomination
Committee
3 (3)
-
-
-
-
-
1 (1)
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 101
Corporate Governance B4. Governance Framework
This section describes how Corporate Governance operates within the Group, setting out:
B4.1
B4.2
B4.3
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
B4.4
B4.5
B4.6
Board evaluation – how the Board
ensures the framework is, and will
remain, fit for purpose
Board training – how the Board
ensures that its members develop
and maintain the necessary level
of skills and knowledge for the
framework to operate as required
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, assisted by its committees, governs 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 and are thereafter provided with
annual training updates.
Board and committee structure and membership
The Board and the CEO operate 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 102
Summarised information on each of the board committees is set out below.
Committee
Chair
Minimum number of meetings
Further information
Audit
Remuneration
Risk and Compliance
Nomination
A C M Morris
4
H R Tudor
3
P A Hill
4
Section B6
Section B7
Section B8
R D East
2
Section B5
Members
R D East
T P Davda †
P A Hill
Z L Howorth
A C M Morris
H R Tudor
B A Ridpath
G H Yorston
Independent
non-executive
Chair*
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Audit
Remuneration
Risk and
Compliance
Nomination
No
No
Yes
No
Yes
Yes
Yes
No
Yes
Yes
No
Yes
Yes
Yes
From 1 June 2023
From 1 June 2023
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Yes
Yes
Yes
Yes
* Considered independent on appointment as Chair of the Board of Directors on 1 September 2022.
† To become Chair of the Remuneration Committee and a member of the Nomination Committee from 7 December 2023.
In addition to the above, Hugo Tudor attends Model Risk Committee meetings, representing the non-executive directors.
Hugo Tudor reached nine years on the Board on 23 November 2023. The Board considered the extension of his appointment beyond
this point and agreed that it should be extended for an additional one-year period given the value and knowledge he contributes to the
Board and to ensure an effective transition of duties to the new Senior Independent Director and the new Chair of the Remuneration
Committee. The Board agreed that Hugo would be deemed to be a non-independent non-executive director from the conclusion of
the 2024 AGM. He will hand over his duties as Remuneration Committee Chair to Tanvi Davda on 7 December 2023, having taken part
in the finalisation of remuneration matters pertaining to the financial year ended 30 September 2023. Further details on Hugo’s
re-appointment and independence are set out in sections A4.5.2 and B5.3.
In addition to the board committees outlined in the above tables, the Board has established a Disclosure Committee which assists
in the design, implementation and periodic evaluation of disclosure controls and procedures. It also monitors compliance with the
Company’s disclosure controls, considers the requirements for announcements and determines the disclosure treatment of material
information. The Disclosure Committee’s members are the CEO, CFO and the External Relations Director, of which any two can form
a quorum.
An informal ‘NED Technology Change Group’ was also established in 2021 comprising some of the non-executive directors, the COO and
senior managers from the IT and Change functions. The group met in November 2022, and in March, June and September 2023 as part
of an ongoing programme of meetings to provide updates on the change programme (the methods and processes of making changes to
the Group’s IT systems and business procedures), the IT strategy and wider technology trends. The meetings also facilitated challenge by
the non-executive directors and increased 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 / or 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 reviews the appropriateness and effectiveness of the
Group’s risk management framework as appropriate from time to time, and reviews and considers emerging risks facing the Group.
Page 103
Corporate Governance 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, 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 sustainability matters, including key areas such as environmental impacts
(including climate change), social considerations, commercial implications, disclosure 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 must 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, and to provide oversight of the acquisition, due diligence and migration process.
ERC sub-committees
Four principal executive risk sub-committees, with membership consisting of appropriate senior employees, report to the ERC.
All 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, were reviewed during the year to determine whether further
enhancements could 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. The Board
considered the Group’s culture as part of the annual review of the Group's purpose in July 2023.
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 May 2023, which included specific questions on the Group’s culture. Results from this survey, together with feedback received
via the People Forum, were reviewed in depth by the Nomination Committee on behalf of the Board, with the Board subsequently
considering the results itself. The strong employee engagement and employee attestations, including that the employees lived the
Company’s values and purpose, 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.
Whilst a number of matters are reserved for the Board, the Board delegates certain responsibilities and authorities to the CEO, CFO
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.
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).
Page 104
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. While the Board has determined that Hugo Tudor will cease to be considered independent following the 2024 AGM,
non-executive directors will still form a majority of the Board at that point.
In addition to the general legal and regulatory responsibilities of all directors, non-executive directors’ more specific responsibilities
include providing independent oversight. Non-executive directors who are members of the Remuneration Committee determine
appropriate levels of remuneration for executive directors. Non-executive directors 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
principles. As outlined in section B4.1, certain non-executive directors also meet with the change and IT functions throughout the year.
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 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 or 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
Alison Morris succeeded Hugo Tudor as Senior Independent Director on 14 August 2023, during the financial year. 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 Tudor met with shareholders to discuss governance and remuneration matters and to address any queries
or concerns raised. Going forward, Alison Morris will seek engagement with, and be available to, shareholders, and the new
Remuneration Chair Tanvi Davda, will also do the same with respect to remuneration matters. More detail on the engagement with
shareholders regarding remuneration matters can be found in section B7.
The Senior Independent Director is responsible for leading the appraisal of the Chair of the Board’s performance with the
non-executive directors. As part of the external board evaluation carried out in the year, which is described in section B4.4, an
appraisal of the Chair was carried out by the external evaluator, the output of which was shared with the Senior Independent Director.
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, which is
reviewed by the Board twice a year.
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 2022 meeting.
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.
Page 105
Corporate Governance 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 current financial year which began on 1 October 2022. These
requirements are a particular area of focus for the Board and the Nomination Committee. The Group was fully compliant with these
requirements for its year ended 30 September 2023 and the Board expects that it will remain so. The Board is also mindful of the
targets set by the FTSE Women Leaders Review and Parker Review as detailed further in section B5.
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. An externally facilitated Board evaluation took place during
the year. This was deferred from 2022 to ensure that the Chair had been in position for a reasonable period of time to make the
evaluation more relevant and meaningful. 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 B4.5.
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 B4.6.
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
Page 106
B4.3 Board and Stakeholders
Consideration of 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 and sustainability, 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 long-term, sustainable success of the Group for the benefit of its
shareholders and with regard to the interests of all of its stakeholders.
The Board is kept updated on all material issues affecting stakeholders by the executive directors and receives regular updates
from ExCo members, other senior managers and external advisers. Members of the Board also engage directly with employees,
shareholders and regulators, as further detailed below.
The Board confirms that, for the year ended 30 September 2023, 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.
Page 107
Corporate Governance 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 46 meetings were
held with shareholders and analysts. In addition, the CEO and CFO hold regular analyst
briefing meetings
A comprehensive update on Investor Relations is included in the CEO’s report presented at
each Board meeting
After commencing a wide-ranging consultation process in 2022, covering remuneration policy
and other governance issues, the SID/Chair of the Remuneration Committee continued to
engage with major shareholders and shareholder advisory groups before and after the
2023 AGM
•
The Board receives an in-depth update on Investor Relations, which includes investor
feedback, following the publication of the Company’s financial results
Capital
management
Growth
Outcome
•
•
•
The data on shareholder feedback provided helps the Board align the Group’s strategy with
the interests of shareholders
Diversification
Shareholder feedback was taken into account when designing the new Remuneration Policy
which was approved at the 2023 AGM, with 96.99% of the votes cast
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
•
At the AGM in March 2023, all resolutions were approved by shareholders
•
A total dividend for the year of 37.4 pence per share is proposed, and a further share buy-back
programme of up to £100.0 million was authorised in the year
Digitalisation
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 108
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, including quarterly surveys of SME
and buy-to-let customers
Digitalisation
The Board took part in an insights day with the Mortgage Lending business, which included
visiting the team and taking part in a question and answer session with a panel of brokers
• The Board receives Customer Insight updates bi-annually
•
•
The Board received periodic updates on the Group’s progress towards implementing the new
FCA Consumer Duty throughout the year
Sustainability
Graeme Yorston, an independent non-executive director has been designated as the Board’s
Consumer Duty Champion since October 2022
• Customer metrics are a key element of the Performance Share Plan (‘PSP’)
Outcome
• Rollout of the ‘Think Customer!’ initiative to all employees
•
•
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
Growth
• Complaint levels remain low by industry standards
Diversification
Further information on the Group’s relationship with its customers is set out in Section A6.2
Page 109
Corporate Governance 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
•
•
•
•
•
•
Regular group-wide anonymous employee engagement surveys are conducted, most
recently in the current year
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 employee-led 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
•
88% of employees took part in the engagement survey, with the Group achieving an overall
engagement score of 90%, its best result in eight years
• The Group is accredited as an Investor in People with Platinum IIP status
•
•
•
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 launch of the Paragon Moments Rewards app which allows employees to recognise the
performance of colleagues who demonstrate one or more of the Group’s values
Further information on the involvement of the Group’s people and the impact of policies on them,
can be found in Section A6.3
Page 110
Regulators
Engaging transparently and openly with regulators to ensure we comply with current regulatory requirements 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
IRB implementation
• Direct contact between the Chair and non-executive directors and regulators
• ExCo and the Board are kept updated on all interaction with the FCA and PRA
Capital
management
•
•
SMCR is embedded across the Group, with conduct measures monitored monthly, overseen
by the ERC
Dialogue maintained with HMRC, with the CFO designated as Senior Accounting Officer,
directly responsible for the Group’s tax policies
Sustainability
• The risk element of the PSP includes an assessment of any material regulatory breaches
Outcome
•
•
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 formal and structured basis
Further information on the Group’s tax policies is set out in Section A6.5
Page 111
Corporate Governance 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 30 September 2023 employees raised more than £45,000 for
Newlife, a disabled children’s charity
• The Group’s Charity Committee is sponsored by a member of ExCo
• Employees were supported to take part in a range of volunteering activities
•
469 employee volunteering days were used to support specific initiatives in
local communities
Further information on the Group’s community involvement is set out in Section A6.5
Page 112
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.
Sustainability
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 as a principal risk within the Group’s risk
management framework
•
The Board receives updates on the potential risks and strategic impacts of climate change
• The Group is a member of Bankers for Net Zero and the Mission Zero Coalition
•
Strategic priorities have been mapped against the United Nations Sustainable
Development Goals
• 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
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
under the Gold Standard or VCS programmes
• Environmental / climate change targets are considered as part of the Remuneration Policy
•
The Group publishes an annual sustainability report (the Responsible Business Report) and
has a dedicated sustainability section on its website
• All employees undertook training focussed on sustainability issues during the financial year
Further information on the Group’s management of climate change risk and its environment policies is
set out in Section A6.4
Page 113
Corporate Governance Business partners and suppliers
Commitment to the fair treatment of all business partners. In return, we expect our partners to help us deliver a high
standard of service to our customers and act responsibly (s172 c)
We believe that working well with our business partners and suppliers is central to our purpose and key to our
continued success.
How we engage and / or monitor
•
•
•
•
•
Key business partner relationships, including intermediaries and suppliers, are identified,
actively monitored and reported to ExCo and the Board
The Board met with a selection of mortgage intermediaries as part of its Mortgage Lending
insight day
Digitalisation
Regular feedback surveys are conducted amongst intermediaries with the results fed back to
ExCo and Board
The Group has a Supplier Code of Conduct which sets out its overall approach to supplier
engagement and its expectations of its suppliers
A comprehensive questionnaire covering broad sustainability topics was issued to
critical suppliers
Sustainability
Outcome
•
Intermediary feedback key to updating and streamlining 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
•
•
Results of the Group’s 2022 supplier survey were used to inform the ongoing development of
its supplier management and procurement processes
The Group is a signatory to the UK’s Prompt Payment Code, and ensuring that suppliers are
paid promptly is a priority
The Group’s management of business partner relationships is discussed further in Section A6.7
Page 114
Shareholder relations
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 2024 AGM will take place at 9am on 6 March 2024 at the offices of Computershare, Moor House, 3rd Floor, 120 London Wall,
London EC2Y 5ET.
The CEO and CFO have a full programme of meetings with institutional investors and during the year ended 30 September 2023,
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 Chair of the Remuneration Committee (who, until August 2023 was also the Senior Independent
Director), held meetings with shareholder advisory groups covering governance and remuneration matters as set out in the
Remuneration Report in B7. Following the publication of the 2022 Annual Report and Accounts and the AGM notice, the Company
invited its largest stakeholders, who collectively represent over 89% of the Company’s total voting rights, to share their views, and
many of these shareholders, representing over 56% of the Company’s total voting rights, responded.
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 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. Alison Morris became Senior Independent Director during the year,
succeeding Hugo Tudor from August 2023. 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.
B4.4 Board evaluation
Board evaluation
The effectiveness of the Board, individual directors and the Board’s main committees is reviewed annually. Given the change of Board
Chair in September 2022, a decision was made to defer the externally facilitated evaluation until the current financial year, given that it
would be more meaningful for this to take place once the new Chair had been in the role for a reasonable period of time.
This review was completed in the year and is described below.
2023 external board evaluation
In line with recognised best practice, the Group undertakes board reviews on an annual basis to increase board effectiveness and to
identify areas for improvement.
A number of providers were considered to undertake this year’s review. Following consideration of prospective providers’ proposals by
the Chair, Company Secretary and a number of board members, Lintstock Ltd (‘Lintstock’) was engaged to conduct an external review
of the performance of the Board and its committees. Lintstock is an advisory firm that specialises in board reviews and has no other
connection with the Company or individual directors.
The review was conducted in line with the Code of Good Practice for Board Reviewers published by the Chartered Governance
Institute UK & Ireland (‘CGI’), and Lintstock was provided with the opportunity to comment on the description of the process followed
and the findings contained in this annual report, and agreed any opinions attributed to them.
In drafting this disclosure on the Board evaluation, the CGI guidance notes ‘Principles of Good Practice for listed companies using external
board reviewers’ and ‘Reporting on board performance reviews: Guidance for listed companies’, published in July 2023, were consulted.
The Board evaluation process was initiated before the guidance was published. However, in the main, the principles were followed.
Page 115
Corporate Governance Evaluation methodology
The steps involved in the evaluation process and their timings are set out below.
Phase and timing
Activities
The scope and objectives of the review were agreed following a
briefing meeting between the Chair of the Board, the Company Secretary
and Lintstock.
Lintstock collaborated with the Chair and the Company Secretary to
design bespoke surveys tailored to the business needs of the Group and
to ensure that key action points from the internal 2021 board review had
been addressed.
As well as covering core aspects of governance such as information,
board and committee composition, and dynamics, the review considered
people, strategy and risk areas relevant to the Group’s performance. The
review had a particular focus on the following areas:
• the Chair transition during 2022
• the Board’s understanding of digital and data opportunities
• the quality of executive succession planning
Lintstock representatives observed the May meetings of the Board and
the Audit Committee and reviewed the accompanying meeting packs. In
addition Lintstock also observed: the Board’s site visit to, and interaction
with, the Mortgage Lending division; an insight presentation attended by
the Board; and a board question and answer session with a panel of the
Group’s mortgage intermediaries.
Board members and other key stakeholders completed surveys
assessing the performance of the Board and each of its committees,
as well as the performance of the Chair of the Board. Each director also
completed a self-assessment questionnaire addressing their
own performance.
In-depth interviews with board members and key stakeholders were
conducted by two Lintstock partners. The findings from the survey
stage enabled Lintstock to focus discussions on the key priorities for
each director.
Lintstock analysed the findings from the surveys and interviews and
delivered focused reports documenting the findings, including a number
of recommendations to increase effectiveness.
Lintstock’s findings were shared with the Chair of the Board and then
discussed by the Board at its September meeting. Actions were agreed
for implementation and monitoring.
Scoping
February 2023
Tailoring
March to April 2023
Observation
May 2023
Completion of surveys
July 2023
Interviews
July 2023
Analysis and delivery of reports
August 2023
Board discussion and presentation
September 2023
Page 116
Key findings
Lintstock found the Board to be highly engaged. Effective communication has been established between the new Chair and the CEO,
and strong interaction is apparent between the non-executive directors and management. Board meetings were seen to be well-run,
and the review confirmed that non-executive directors benefit from a strong network of support and training.
The review identified a number of focus areas, including:
• Providing opportunities for informal strategic discussion throughout the year, to supplement existing board strategy sessions
• Continuing to strengthen the Board’s familiarity with relevant technological developments
•
Further enhancing the Group’s focus on customers, including the user experience and various target customer groups across
the business
• Continuing to monitor executive succession plans closely
As part of the review, Lintstock delivered a board discussion document informed by the Lintstock Governance Index, which comprises
around 60 core board performance metrics from over 200 board reviews that Lintstock has recently facilitated, specifically in financial
services. The Index provides a robust baseline for the evaluation, helping the directors to understand how the Company’s Board
compares with those of other similar organisations, putting the findings into context.
An update on progress on addressing these key findings will be given in the governance section of next year’s annual report and accounts.
Other evaluation activities
In addition to the externally facilitated evaluation, the Nomination Committee also evaluated:
• Whether each non-executive director had sufficient time to devote to their board duties
• The independence of non-executive directors
• Whether each director should be put forward for election / re-election at the 2024 AGM
• The structure, size and composition (skills, experience, knowledge and diversity) of the Board and its Committees
Where appropriate, recommendations were then put to the Board for deliberation. More details of these considerations are given in
the Report of the Nomination Committee (section B5).
A review of the performance of the executive directors, including the observations from the external board evaluation, took place
at the Remuneration Committee meeting in September 2023 that considered remuneration packages for 2023/24 and variable
remuneration outcomes for 2022/23. Further information on this process is given in the Directors Remuneration Report (section B7).
At the 2024 AGM, the Chair will confirm to shareholders, when proposing the election or re-election of any non-executive director that,
following formal performance evaluation, the individual’s performance continues to be effective and demonstrates commitment to
the role. The letters of appointment of the non-executive directors will be available for inspection at the AGM.
Page 117
Corporate Governance B4.5 Board training and development
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.
Zoe Howorth, who was appointed to the Board on 1 June 2023, commenced her induction programme and met with stakeholders
across the business. Further, Tanvi Davda, who was appointed on 1 September 2022, continued her induction. During the coming
financial year Tanvi will receive further induction training as she takes up her new role as Remuneration Committee Chair, building on
her experience as a Remuneration Committee member.
Development
Following Board approval in October 2022, a skills matrix was completed 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, customer insight, risk,
management, governance and professional development. In addition, 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. Specific detailed training
sessions were provided in the year on the following subjects.
Topic
Hedge accounting, provided by members of the finance function
Interest Rate Risk in the Banking Book, provided by members of the treasury team
Board meeting
Jan 2023
Mar 2023
ICAAP elements, provided by members of the Balance Sheet Risk, Capital and Credit Risk teams
Mar 2023
Legal and regulatory, which covered topics such as UK MAR and directors’ duties
Jul 2023
Cyber, delivered by a combination of in-house experts and an external cyber security solutions provider
Jul 2023
Sustainability / Climate Change, provided by the Chair of the Sustainability Committee and in-house experts
Jul 2023
2023 ILAAP, delivered by members of the treasury team
Jul 2023
These topics were drawn from the fields of risk, financial crime, accounting, cyber security and sustainability.
Page 118
B4.6 Whistleblowing
The Group has an established policy 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 advisory 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, CRO, 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 2023, there was one instance of whistleblowing which resulted in a requirement for full
consideration and investigation by the Whistleblowing Group (2022: two). This case was 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.
Page 119
Corporate Governance The Board supports the
drive from The Parker
Review to encourage
increased ethnic diversity
for the Group’s senior
leadership and an
appropriate target for
the Group has been
considered by the
Committee during
the year.
Robert East, Chair of the Board and the
Nomination Committee
B5. Nomination Committee
B5.1 Introduction by the Chair
Dear Shareholder
The Nomination Committee is the forum used by the Board to
consider certain governance matters. These are vital issues for the
Board and the Group, and the Committee has continued to fulfil
its duties with a full programme of activity. As Chair of the Board I
serve concurrently as Chair of the Nomination Committee.
During the year the Committee has overseen the appointment
of an additional non-executive director. Our primary aim in
this process was to ensure that the person appointed had the
requisite skills and knowledge for their role, benchmarked against
the board skills matrix, and brought an increased diversity of
experience to complement the existing skillset of the Board.
Zoe Howorth was appointed as a non-executive director
from June 2023. She has outstanding experience as a
customer-driven, brand-led and commercial executive in a PLC
environment with strong strategy and ESG capabilities. Zoe has
undertaken several non-executive director appointments since
retiring from her executive career in 2014.
In addition, the Committee has overseen the appointment of
a new Senior Independent Director, Alison Morris, in place of
Hugo Tudor, who reached his nine-year tenure on the Board in
November 2023, and also initiated a process which will result in
Hugo’s replacement as Chair of the Remuneration Committee
by Tanvi Davda on 7 December 2023, which will coincide with
the completion of the Committee’s work on the 2023
remuneration cycle.
The remit of the Committee also covers people-related
sustainability issues and during the year the Committee
has considered the application of the new FCA Listing Rule
requirements in relation to gender and ethnic diversity at
board and executive management level, which apply to the
Group from its current financial year. This has been a key
priority and area of focus to ensure these requirements were
met by 30 September 2023, and I am pleased to confirm that
this process has been successfully completed.
The Board supports the drive from The Parker Review to
encourage increased ethnic diversity for the Group’s senior
leadership and an appropriate target for the Group has been
considered by the Committee during the year. As required by
The Parker Review, the Group’s voluntary target to increase
the number of ethnic minority appointments across senior
leadership by 31 December 2027 will be published in the Annual
Report and Accounts for the year ending 30 September 2024.
The Committee also noted the PRA’s publication of a
consultation paper on Diversity and Inclusion in September 2023,
and will be monitoring the progress of this project with interest in
the coming year.
The importance of employee voice has underpinned the
transition to hybrid working over recent years, 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 particularly value the perspective provided by my
interactions with the Group’s employee-led People Forum and
other employees in the year.
Overall, I believe the Committee has enjoyed a year of positive
achievement, helping to set the course of the Group’s future
governance, and fully satisfied its mandate from the Board.
Robert East
Chair of the Board and the Nomination Committee
6 December 2023
Page 121
Corporate Governance The search process for the additional non-executive director,
was led by the Chair, Robert East. The process was supported
by Anne Barnett, Chief People Officer, and undertaken in
conjunction with Jamie Risso-Gill from Per Ardua Associates
Limited. Per Ardua Associates Limited do not have any
connection with the Group or any of its directors.
In initiating this appointment, the Committee also considered
the consequent increase in the size of the Board from nine to ten
members. It was determined that this expansion of the Board
was appropriate, in view of the increasing size of the Group and
of the growing regulatory expectations which accompany this, as
well as a desire to broaden the range of experience on the Board.
In November 2023, Hugo Tudor reached his nine-year tenure on
the Board. During the year the Committee oversaw the process
to appoint his successors as Senior Independent Director
and Chair of the Remuneration Committee. Alison Morris was
appointed as Senior Independent Director from 14 August 2023,
recognising her experience as a Board member to date and as
Chair of the Audit Committee. In addition, the Committee has
overseen the process which resulted in the announcement that
Tanvi Davda will succeed Hugo as Chair of the Remuneration
Committee with effect from 7 December 2023, following
the completion of the committee’s work on the 2022/23
remuneration cycle.
In accordance with its annual process, the Committee
considered the appropriateness of the re-appointment of
the serving directors and recommended to the Board that
resolutions for their re-appointment should be proposed at
the forthcoming AGM. The Board agreed that Hugo Tudor’s
appointment as a director should be extended for an additional
one-year period given the value and knowledge he contributes
to the Board and to ensure an effective transition of duties.
The Board agreed that Hugo would be deemed to be a
non-independent non-executive director following the
conclusion of the 2024 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 in each
business area 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.
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 capable 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.
B5.2 Operation of the
Committee
The Nomination Committee is chaired by the Chair of the Board
and includes four independent non-executive directors. The
Committee’s role is to ensure that there is a formal, rigorous
and transparent procedure for the appointment of new
directors to the Boards of the Company and of Paragon Bank
PLC; to lead the process for board appointments and make
recommendations to the Board. Ultimate responsibility for any
appointment remains with the Board. Its role also includes:
•
•
•
•
Keeping under review the structure, size and composition
of the Board (including its skills, experience, independence,
knowledge and diversity) and making any recommendations
it deems necessary to ensure that it is effective and able to
operate in the best interests of shareholders and
other stakeholders
Considering re-appointment of directors, re-election of
directors and the independence of non-executive directors
Ensuring that plans are in place for orderly succession
to positions on the Board and in senior management,
including that of Company Secretary, and for 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 the Parker Review, and reporting
including that on the gender pay gap
•
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 an additional non-executive director, Zoe Howorth, who
joined the Board at the beginning of June 2023. Zoe's executive
experience included over 16 years with the Coca-Cola Company
across a variety of roles, culminating in her role as UK Marketing
Director. Zoe is a non-executive director, chair of the ESG
Committee and member of the Remuneration Committee at
AG Barr PLC, a FTSE-250 consumer goods business. In 2021,
Zoe joined the Board of International Schools Partnership
Limited, a global education business, where she has board
responsibility for ESG and brand, and she is also a non-executive
board member of the Water Babies Group Limited.
Zoe’s breadth of knowledge, which includes branding, digital and
understanding of many aspects of the sustainability agenda,
together with her strong focus on the customer experience,
will enhance the diversity of perspective on the Board. This
appointment complements the Board’s existing skillset, and
broadly maintains the balance of gender diversity. Zoe was
also appointed to the Risk and Compliance and Remuneration
Committees on her appointment.
Page 122
Board skills matrix
The Committee considered the board skills matrix at its September 2023 meeting following the outputs from the Group’s strategy
event in July 2023 and feedback from the external board evaluation described in Section B4.4. This was reviewed and subsequently
approved by the Board in October 2023.
The matrix reflects the Group’s strategic aim of becoming a technology-enabled specialist bank, and the skills considered include
matters such as:
Economic environment
Lending markets
Funding
Sound knowledge of the UK
banking environment and macro-
economic drivers that influence and
impact the Group’s purpose and
strategic objectives
The Group’s key lending markets
Understanding capital requirements
and liquidity models
Digital technology
Customers
Sustainability
Considering the application and
emergence of digital technology
trends and developments in a
financial services environment
Customer insight, marketing and
communications in the specialist
lending sector
Sustainability matters including
government and regulatory policy
and guidance, climate change and
sustainability goals, social responsibility
and governance standards.
This 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 B4.5.
Diversity
The Group recognises the importance of diversity, including gender and ethnic diversity, at all levels of the organisation. The Board is
pleased to have maintained a consistent female representation of 38.6% at board and senior management level (2022: 38.1%), exceeding
the original Hampton-Alexander Review targets and the Group is aligned to the ongoing objectives of the FTSE Women Leaders Review.
The Group is committed to increasing the number of women in senior positions, and the Committee is monitoring its progress towards
the new Women in Finance target of 40% female representation at board and senior management level by 30 September 2025.
In September 2023 the PRA published a consultation paper (CP 18/23) on ‘Diversity and inclusion in PRA-regulated Firms’, proposing new
rules and codified expectations aimed at improving diversity in the financial services sector. This consultation builds on a 2021 discussion
paper issued by the PRA, FCA and the Bank of England, and the Committee has been monitoring regulatory progress on this agenda for
some time. In the coming year the Committee will supervise, with interest, the Group’s analysis of and response to, the consultation.
The Committee has noted with interest the part being played by the Group’s people in addressing socio-economic diversity at senior
levels within the financial services industry, with the Group being a Founder Partner of the Progress Together initiative. It was gratifying to
see this recognised in the year when Richard Rowntree – Managing Director Mortgages, and a member of the Progress Together board,
was awarded the freedom of the City of London for his work in this field.
Page 123
Corporate Governance Board and executive management diversity
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 Equality, Diversity and Inclusion (‘EDI’) policy, which applies to the Board, its committees, the executive committees and senior
management as well as the wider workforce, is set out below, under ‘wider diversity in the Group’. It addresses such matters as age,
gender, ethnicity, sexual orientation, disability and educational, professional or socio-economic background.
The Group’s adherence to the FCA Listing Rule requirement and its voluntary targets to meet the expectation of the Parker Review
and Women in Finance Charter demonstrate its commitment to achieving a diverse workforce at all levels.
The data on diversity amongst the Board and senior management at 30 September 2023 required by Listing Rule LR 9.8.6R(10) is set
out below.
Gender
Men
Women
Not specified /
prefer not to say
Total
Ethnic background
White British or
other White
Mixed / multiple
ethnic groups
Asian / Asian British
Black / African /
Caribbean /
Black British
Other ethnic group
including Arab
Not specified /
prefer not to say
Total
Number of board
members
Percentage of
the board
Number of senior
positions on the board
Number in executive
management
Percentage of executive
management
6
4
-
10
60%
40%
-
100%
3
1
-
4
9
4
-
13
69%
31%
-
100%
Number of board
members
Percentage of
the board
Number of senior
positions on the board
Number in executive
management
Percentage of executive
management
9
-
1
-
-
-
90%
-
10%
-
-
-
10
100%
4
-
-
-
-
-
4
12
-
1
-
-
-
13
92%
-
8%
-
-
-
100%
For the purposes of the tables above the senior positions on the board are the Chair of the Board, the CEO, the CFO and the Senior
Independent Director. Executive management is defined by the Listing Rules as including the executive committee members and
the Company Secretary. This definition thus differs from those used for other purposes. The Group has interpreted this definition as
including the Internal Audit Director, who attends the executive committees as an observer and reports directly to the Chair of the
Audit Committee, a member of the Board.
Gender is based on legal gender recorded in the Company’s payroll records. Ethnicity is based on each individual’s response to
a diversity questionnaire where respondents were asked to identify the most appropriate classification from a list based on the
categories used by the UK Office for National Statistics.
At 30 September 2023 the Company therefore met the following targets specified by the Listing Rules of the FCA.
• At least 40% of the directors were women
• At least one of the senior positions on the Board of Directors was held by a woman
• At least one individual on the Board of Directors was from an ethnic minority background
No changes in Board composition have occurred between the year end and the date of approval of this Annual Report and Accounts
which would affect the Company’s ability to meet these targets. The Committee expects that the Company will be able to continue to
achieve these levels of representation in the longer term.
Page 124
Wider diversity within the Group
The Group believes the achievement of a diverse workforce at all levels delivers the best culture, behaviours, customer outcomes,
profitability and productivity and therefore supports its success as a business.
The Group is committed to eliminating discrimination and promoting equality, diversity and inclusion amongst all its employees
through its policies, procedures, and practices and through its professional dealings with each other, customers and third parties.
The objective of the EDI policy is to outline the Group’s approach and its expectations of employees and, in particular, line managers
to ensure that its approach is understood and appropriately managed.
The EDI policy is implemented through the development and communication of its supporting people processes and procedures,
making this policy available to all colleagues and engaging with and supporting people to display the policy’s intent through the
provision of regular training.
The Committee is pleased that 73.1% of employees provided diversity data for analysis at the beginning of the year and this
increased to 76.8% by 30 September 2023. 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. This will
continue to be a focus for the Committee.
The Group’s diversity policies 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 communication channels. 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.
Page 125
Corporate Governance Accounting standards
require approaches to
both impairment
provisioning and income
recognition on loan assets
which rely on assumptions
about future behaviours.
The Committee has given
considerable focus to both
areas, engaging with both
financial and operational
management, and with
KPMG, the external auditor,
to ensure that all judgements
are rigorously challenged.
Alison Morris, Chair of the Audit Committee
B6. Audit Committee
B6.1 Statement by the Chair of the Audit Committee
Dear Shareholder
The changing economic landscape of the UK during this year
has continued to present accounting challenges, with the Audit
Committee fully engaged in ensuring that the Group’s response
provides the best possible information for shareholders and other
users of these accounts. The lack of recent similar experience has
meant that, once again, my colleagues and I have had a demanding,
but interesting year.
Accounting standards require approaches to both impairment
provisioning and income recognition on loan assets which rely on
assumptions about future behaviours. The Committee has given
considerable focus to both areas, engaging with both financial and
operational management, and with KPMG, the external auditor, to
ensure that all judgements are rigorously challenged.
The rate of change of interest rates, and the levels they had reached
by year end, have had a clear impact on the behaviour of customers
with maturing accounts, and on the reversionary interest rates
charged after the point of maturity. As the EIR method, which
aims to spread income over the life of a loan, requires these
factors to be projected for current loans, the level of judgement
required is substantial, and the lack of substantial recent relevant
experience makes this even more complex. The Committee has
had to carefully consider and weigh a great deal of evidence, with
members applying their experience in order to conclude on the
appropriateness of the final position reflected in these accounts.
For impairment provisions, while some deterioration in loan
performance has been seen over the period, this has been less
severe, so far, than many predictions. The Committee has had
to give much thought in the year to the extent to which this
performance merely represents a delayed impact, and to the
likely effects of an economic outlook which appears to be more
negative for a longer period than some of the potential scenarios
contemplated at the beginning of the year. Modelled approaches
provide a useful framework for these considerations, and we were
pleased to see upgrades in the Group’s impairment models in the
year, allowing us to reduce the level of judgemental adjustments
required. However, the overriding requirement for the final position
to be truly representative of the Group’s exposures and credit risks
was at the forefront of the Committee’s mind in evaluating and
challenging the judgements made.
The Committee continues to appreciate the value which the
effective operation of the Internal Audit function brings to the
Group, and the confidence it provides over the systems of internal
control. I consider that the importance of Internal Audit to the
effective governance of an organisation’s control framework
cannot be overstated, and I was gratified to receive the results
of this year’s externally conducted review of the Group’s Internal
Audit arrangements, which found that they were operating in an
appropriate manner, with very limited suggestions for improvement.
I would like to congratulate Sarah Mayne and her team on this
excellent result.
The year has also been one where the UK corporate governance
framework has been in a process of change, with the Committee
monitoring proposals from the FRC and the UK Government
which would affect its operations and the Group’s reporting. The
Committee reviewed the new FRC Minimum Standard for Audit
Committees, issued in the year, finding that it largely reflected the
Committee’s existing practice, and has ensured any changes to its
terms of reference needed to clarify conformity with the Minimum
Standard were made in the year.
As the year closes, the likely direction of the reforms remains
unclear, and, after five years of the process, I would be pleased
if the coming year brought a degree of certainty, and final
proposals which are proportionate and sensible, and have both
clear objectives and potentially significant benefits for the UK’s
attractiveness as a place to do business.
These accounts are the eighth to be reported on by KPMG as
external auditor, and, as I indicated last year, the Committee
intends to conduct a tender process in the coming financial
year with respect to its external audit arrangements for the year
ending 30 September 2026 and thereafter. We intend to conduct
the process in line with the best practice recommendations of
the FRC, but I would be grateful to receive input from interested
shareholders on the process.
Planning activities for the tender have already commenced,
including preliminary contacts with a range of potential candidates
and we expect to be able to report on the results of this process in
next year’s Audit Committee report.
For the coming year ending 30 September 2024, the main priorities
for the Committee will include:
•
•
•
•
•
Continuing to monitor the ongoing credit risk environment and
its impact on impairments, both in terms of forward-looking
indicators and in terms of the support actual results give to the
Group’s modelling approaches
Further monitoring of EIR related assumptions as more
evidence emerges of actual customer behaviour in the current
higher interest rate environment
Ensuring that the Group’s control processes and internal audit
capabilities continue to evolve alongside developments in the
business and emerging best practice
Progressing the external audit tender process, with the
intention of being able to report a decision in the Committee’s
next annual report
Analysing the impacts of new accounting, reporting and
governance initiatives on the Group, particularly the proposed
new Code and the UK Government’s corporate governance and
auditing agenda, and ensuring the Group is properly positioned
to respond to them
Overall, the year has been a challenging and busy one for the
Audit Committee and I would like to thank my colleagues for the
enthusiasm and diligence with which they have applied themselves
to the complex issues involved. I would also like to thank Hugo
Tudor for his nine years’ service on the Committee, as he steps
down from the Committee next year. His fund management
experience has helped bring a different perspective to the
Committee’s deliberations, which has been particularly useful. My
thanks also go to the people across the business whose work has
informed the Committee’s discussions in the year, and contributed
to the compilation of this Annual Report and Accounts.
The Committee and I are pleased with the way in which the
Annual Report reflects the Group’s year, and we commend it to
shareholders for approval at the AGM in March 2024, along with the
resolutions concerning the reappointment of KPMG as auditors
and their remuneration.
Alison Morris
Chair of the Audit Committee
6 December 2023
Page 127
Corporate Governance B6.2 Operations of the
Committee
The Audit Committee currently comprises four independent
non-executive directors of the Company. 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 2023 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 operations of the Committee are conducted in accordance
with the FRC ‘Audit Committees and the External Audit:
Minimum Standard’ (the ‘Minimum Standard’).
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, having been a senior partner in a
major accountancy firm, specialising in audit and assurance
for financial services entities, while other committee members
have substantial experience in various aspects of the financial
services industry obtained over the course of their careers.
Details of Committee members’ relevant experience are set out
in section B3.1.
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.
Four times a year the Committee meets separately with
representatives of the external auditor and with the Internal
Audit Director without management present.
During the year ended 30 September 2023, the Committee met
five times. Its principal activities were:
•
•
•
•
•
•
•
•
•
•
•
•
•
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
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
Consideration of the results of the work carried out by
the external auditor on the Group’s annual and half-yearly
financial reporting including their views on significant
judgements, disclosures and the control environment
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
recommendation of revised terms to the Board for approval
Consideration of the potential impact of the UK Government’s
corporate governance reform process on the Group and the
Committee itself
Ensuring that the provisions of the FRC Minimum Standard
are reflected in the Committee’s operational practice and
terms of reference
Planning for the audit tender process due to take place during
the financial year ending 30 September 2024
Consideration of the Group’s readiness to address other
forthcoming accounting and reporting changes which will
affect it
Consideration of the results of the External Quality Assessment
of the Internal Audit function carried out in the year
Approval of the Group’s Internal Audit Plan 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 are
given in section B3.3.
Page 128
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 2023 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
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.
Page 129
Corporate Governance 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 ECLs 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 high levels of UK inflation, rising 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. These factors increase the
potential requirement for management judgement in arriving at final ECL estimates and hence the
level of scrutiny required by 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, including the new model for SME lending introduced in the year
• 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 69a to the accounts. The impairment
charge for the year and the movements in provision for impairment are shown in notes 20 to 25.
The Group’s exposure to credit risk is discussed in note 63.
Page 130
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
with substantial tranches of five-year fixed rate products reaching maturity in the year.
Given the higher interest rate environment, the Committee also reviewed the assumptions
surrounding the interest rates which mortgage loans would revert to following initial fixed rate
product periods and the impact of this rate environment on customer behaviour.
Further information on these estimates can be found in note 69b 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 discount rate used was also an area of focus.
The potential impairment of goodwill is discussed in notes 69c and 31.
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 60 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 and in note 70 to the accounts.
Page 131
Corporate Governance 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 sections 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 could 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 2023 to the Board for approval.
The Committee’s consideration of the financial statements for the year ended 30 September 2022, which took place in the year under
review, is discussed in the Audit Committee report for that year.
The PRA Rulebook 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 III reports, considering whether they included all material
matters required by the PRA Rulebook and whether they formed a fair representation of these matters.
Page 132
B6.4 External Auditor
Audit effectiveness
The Committee has considered the effectiveness of the external
audit for the year ended 30 September 2023 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 external auditor was also asked to provide feedback on
the degree to which their audit plan had been efficiently and
effectively carried out
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 auditor
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 2022
audit, undertaken at the time of approval of the Group’s 2022
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, and
the FRC’s most recent AQR audit inspection review on KPMG,
published in July 2023.
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 2024
should be proposed at the forthcoming AGM.
The Committee is responsible for assessing the effectiveness
of the external audit process, for monitoring the independence
and objectivity of the external auditor, and for making
recommendations to the Board in relation to the appointment
and remuneration of external auditors. The Committee is also
responsible for developing and implementing the Group’s policy
on the provision of non-audit services by the external auditor,
which was reviewed in the year.
Audit tendering
The Statutory Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive Tender Processes
and Audit Committee Responsibilities) Order 2014 (the ‘Order’)
requires that only the Committee can agree the fees and terms of
service of the external auditors, initiate and supervise a tendering
process, or recommend the appointment of an external auditor
to the Board following a tender process. The Group has complied
with the requirements of the Order during the year.
KPMG was appointed as auditor, 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 2023 is the eighth reported on by KPMG. Michael
McGarry took over as engagement partner for the current
year in place of Simon Ryder, who has retired from KPMG. The
year ended 30 September 2023 is therefore the first for which
Michael has been engagement partner. 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 seventh 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
to report its conclusions to shareholders.
Having considered the performance of the external auditor 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
during the forthcoming financial year, to avoid any issues of
independence for potential bidders.
During the year the Committee considered the planning for the
process and approved a structure and outline timetable, with
the tender expected to take place over the second half of the
2024 financial year. This has taken account of the FRC guidance
on audit tenders and the expectations set out in the Minimum
Standard, and included consideration of how second-tier firms
can be included in the process. Full details of the tender process
and its conclusion will be provided in the Audit Committee report
in next year’s Annual Report and Accounts.
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.
Page 133
Corporate Governance 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
2023
£000
-
1,148
-
2022
£000
38
2,677
-
1,148
2,715
The Group maintains relationships with all the major accounting
firms and considers a variety of providers for these types of
assignment. There were engagements in place with non-big four
firms at the year end.
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.
Audit fees of Group entities for the year, including fees for
the review of the half-year report, have increased by 13.5% to
£2,385,000 (2022: £2,102,000). 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 2023 should be no more than 70% of the average
of the audit fees for 2020, 2021 and 2022. As this average was
£1,689,000, 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
£192,000 (2022: £213,000), well within the cap. All these fees were
for services related to the Group’s audit, as described above.
Page 134
B6.5 Internal Audit
The Committee is responsible for considering and approving the
remit of the Internal Audit function, approving the Internal Audit
Plan (‘IAP’), and ensuring the function 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 the 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, Audit Committee and Risk and
Compliance Committee that the governance, risk management
and internal 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 2023. 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 the 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 2023, the Committee considered and approved
the annual IAP for the year ending 30 September 2024, 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 financial year ended 30 September 2023 was approved
before the beginning of the year, with the plus six half-year review
of the IAP completed by the Committee in March 2023, 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 IAP for the year ending 30 September 2024,
the Chair of the Committee met with the Internal Audit Director to
discuss audit planning priorities, key business risks and to assess
current resourcing.
All internal audit reports are circulated to the Board. During the
year the Board has received reports covering themes including:
prudential, model and credit risk management; the operation
of lending and customer servicing areas; data and IT; and
assurance over the management of the Group’s change portfolio.
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 (as described in
section B8.2).
On an annual basis, Internal Audit reports to the Committee
on its assessment of the effectiveness of the operation of
risk management and control arrangements, including details
of themes raised within internal audit reports. Review of this
assessment is one of the means by which the Committee
assesses and challenges related management judgements and
conclusions as disclosed in this Annual Report and Accounts, as
noted above.
The last such report, in November 2023, 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 appropriately skilled resources to complete the plan and to
ensure the ongoing capabilities of Internal Audit remain strong
to support future assurance. Alongside review and approval of
the IAP, the Committee 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 (‘CIIA’) on an annual basis. In
May 2023, the Committee considered the output of an external
quality assessment (‘EQA’), undertaken by an independent
specialist firm, which was commissioned by the Committee to
benchmark internal audit activities against best practice and
peers, and to ensure the Group’s Internal Audit function was in
conformance with the CIIA standards.
The review concluded that Internal Audit was operating
effectively, meeting the assurance needs of the Committee and
conforming with CIIA Standards in all material respects.
As a matter of policy, the Committee intends to commission
an EQA at least every five years and, as such, an EQA review
will next take place during the year ending 30 September 2028.
In the intervening years the Committee will consider
the outputs of internal effectiveness reviews undertaken
on a self-assessment basis.
Page 135
Corporate Governance The alignment with
shareholder interests for the
executive directors remains
a key consideration for the
Committee. The Group’s
performance has been very
strong for the year and this
is reflected in the outturns
for the executive directors.
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 2023 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 (section B7.1) and the Annual Report on Remuneration
(section B7.2). The policy summary tables extracted from the Remuneration Policy approved at the Annual General Meeting
held on 1 March 2023 are reproduced for reference as section B7.3
The full Remuneration Policy is set out in the Annual Report and Accounts for the year ended 30 September 2022, a copy of
which can be found at www.paragonbankinggroup.co.uk.
B7.1 Statement by the
Chair of the Remuneration
Committee
The information provided in this section is not subject to audit
Dear Shareholder
This financial year will mark the end of my tenure as
Remuneration Committee Chair. I have been Chair since June
2018 during which time there have been two policy updates. Both
policy updates sought to further align Paragon’s remuneration
structure with that of the wider banking industry and the most
recent review included further simplification of the policy. I am
very pleased to say that the latest policy vote in March 2023
achieved over 96% of votes cast in its favour.
I am stepping down as Chair in December 2023 having reached
my nine years on the Board in November 2023. My thanks go
to the Committee and Board for their support throughout my
tenure. My successor, Tanvi Davda, has been a member of the
Committee since September 2022 and brings strong finance and
regulatory experience to the role. I wish her and the Committee
well for the future.
When considering this strong vesting performance, the Committee
also noted the price at grant of these awards was £4.554 compared
to the closing price at 30 September 2023 of £4.92. It was
determined that this 8.0% increase, when put into the context of
both the wider macro-economic environment and shareholder
experience, did not constitute a windfall gain.
As detailed in the single figure remuneration summary, the total
remuneration for the executive directors fell 3.7% from 2022 to
2023 despite these record results and distributions.
Group’s remuneration philosophy
Our remuneration philosophy remains unchanged in seeking
to recognise fairly the contribution of all employees and
consistency of the application of this approach can be seen in
the CEO pay ratio tables later in this report. During the year,
the Committee undertook its annual review related to the fair
pay agenda which confirmed its view that the Group is a fair pay
employer. The fair pay section, included in the report to provide
context for shareholders, can be found in section B7.2.4.
Further, the alignment with shareholder interests for the
executive directors remains a key consideration for the
Committee, with 20% of salary, 50% of annual bonuses and 100%
of the longer term PSP being paid in shares. Both executive
directors hold personal shareholdings materially above the
Group’s shareholding policy requirements.
Business performance
The Group’s performance has been very strong for the year
ended 30 September 2023 and this is reflected in the outturns
for the executive directors as described below. These themes
are expanded on further in this report as a whole and in the
remainder of this letter.
Variable pay earned in the year
Both executive directors are being awarded an annual bonus
of 97% of maximum opportunity. The balanced scorecard
assessment shown later in this report records and expands on
the excellent performance in all areas. When determining the
annual bonus, the Committee noted the outstanding financial
performance for the year which delivered record underlying
operating profits, capital returns and earnings per share.
The PSP awards that are due to vest in December 2023 will vest
at 96.41% of maximum. This also reflects strong performance
over the period including TSR performance of over 75%, being
above the upper quartile of the peer group. Underlying EPS was
materially above the threshold for maximum vesting, being up
158.1% across the three years, with the growth translating to a
159.7% increase in the Group’s dividend to 37.4 pence per share.
These returns to shareholders have been supplemented by
share buy-backs of £100.0 million announced in the year.
This level of vesting is reflective of the wider shareholder
experience as each of the Group’s profit, RoTE, earnings per share
and dividend returns have, since 2020, increased. In respect of
both absolute and relative TSR, only two of the peer group and the
Company produced over 75% TSR over the three year period with
four of the comparators being negative over the same period. The
risk portion of the PSP, which considers both key elements of the
Group’s risk appetite as well as strategic risk across the medium
term, provided a strong outturn for each element. The Group’s
credit, capital and liquidity risk were all well within risk appetite
during the performance period and reflect the Group’s strategic
priorities of capital management and diversification. The customer
and people metrics also performed in the top quartile and these
support the Group’s priority of having a customer and people
focused culture. Additional detail on the customer and people
outcomes is provided later in the report.
Annual General Meeting remuneration report vote 2023
At the AGM in March 2023 both the binding and advisory votes
on the directors’ remuneration policy and report were approved
by shareholders. The Committee was disappointed that the
report received a vote in favour of only 69%. Engagement
with a significant number of the Company’s shareholders was
undertaken, both before and after the AGM, and the Committee
noted that there were no consistent themes for voting against the
remuneration report by the minority of shareholders who did so.
Having reflected on the feedback received and the support of the
majority of shareholders, the Committee continues to be satisfied
that it acted in the best interests of the Company and all its
stakeholders. While there were no consistent feedback themes,
one area where the Committee acknowledges that disclosure
could be improved relates to the determination of the number of
share awards granted under the Performance Share Plan (‘PSP’).
As such, this report includes additional detail on how the PSP
awards were calculated for those awards made in December 2022
(see ‘Awards granted during the year ended 30 September 2023’).
The calculation methodology last year is in line with standard
practice in the banking industry due to the regulatory prohibition
on paying dividend equivalents and the same methodology will be
followed for the 2023 grant (with additional detail being included
in both the Stock Exchange announcement detailing the awards
made to executive directors and the 2024 Annual Report
and Accounts).
Work of the Committee during the year
Over the year, discussions have been held with shareholders
and proxy advisors regarding remuneration matters. I have
also met with our People Forum to discuss both executive
director and all-employee remuneration. Both of these
interactions contributed to ensuring that the views and
reflections of stakeholders are incorporated into the
Committee’s decision making.
Page 137
Corporate Governance Remuneration for the year ending 30 September 2024
Conclusion
Reflecting on the application of the policy over 2023, the
Committee is satisfied that the policy approved at the 2023 AGM
is working well and as such, there are no changes to the structure
of remuneration for the year ending 30 September 2024. Salaries
for the executive directors have been increased by 3%, which is
lower than the workforce average of 5%.
I trust that shareholders will support how the Group’s
remuneration philosophy has been implemented during the year. I
recommend this report to shareholders and ask you to continue to
support the work of the Committee by supporting the resolution
to approve the Company’s Directors’ Remuneration Report set
out in section B7.2, being put to the AGM in March 2024.
Hugo Tudor
Chair of the Remuneration Committee
6 December 2023
Additionally, the Committee has reviewed the PSP metrics and
has made changes to how the conditions operate, in respect of
each of the climate and people metrics, reflecting the Group’s
strategic priorities. The changes to the climate metric have been
made to reflect this new and constantly developing area. The
people metric is updated to reflect market-wide developments
and will, from the 2023 PSP grant, encompass diversity issues
broader than simply gender.
PSP awards to be granted in December 2023 – consideration
of windfall gains
Prior to granting the PSP in December 2023, the Committee
will give due consideration to the need to apply any adjustment
to reflect the potential for a windfall gain. At this stage, and
considering the current share price relative to the share price
used to grant the PSP awards in December 2022, the Committee
does not consider that any adjustment is needed; however, this
will be kept under review.
Page 138
B7.2 Annual Report on Remuneration
Contents of the annual remuneration report
• The Remuneration Committee, key responsibilities and advisers (section B7.2.1)
• Directors’ remuneration for the year ended 30 September 2023 (section B7.2.2)
• Application of remuneration policy for the year ending 30 September 2024 (section B7.2.3)
• Other information including Fair Pay (section 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
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
of BTL
Increasing direct business flows
and reducing customer lead times
Financial performance
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 139
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 Chair of the Board being
considered independent on appointment): Hugo Tudor (Chair of the Committee), Robert East (Chair of the Board), Tanvi Davda,
Alison Morris and Graeme Yorston. In addition, Zoe Howorth was appointed to the Committee from 1 June 2023 (the date of her
appointment as a director). Hugo Tudor will cease to be Chair from 7 December 2023 and Tanvi Davda will then become Chair.
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
the CRO
Reviews workplace remuneration and related policies and the alignment of incentives and rewards with culture; and when
setting the policy for executive director remuneration, takes into account those matters
Considers the group-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.
Page 140
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
Independent advisors: additional information
Appointment process – PwC was 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 objectivity
Fees – the total fees paid to PwC for advice to the Committee during the year amounted to £122,364 (including VAT) on a part
fixed fee and a part time and materials basis
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 voting outcome for the resolution to approve the Annual Report on Remuneration and the resolution to approve the
Remuneration Policy at the Company’s AGM held on 1 March 2023 are set out below.
Resolution
Votes for
% for
Votes against
% against
Total votes cast Votes withheld
Annual Report on Remuneration (2023)
126,778,994
Remuneration Policy (2023)
177,558,900
69.19%
96.99%
56,445,866
5,517,947
30.81%
3.01%
183,224,860
5,780,942
183,076,847
5,928,955
Page 141
Corporate Governance B7.2.2 Directors’ remuneration for the year ended 30 September 2023
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
Note
N S Terrington
R J Woodman
Year ended 30 September 2023
Fixed remuneration
Salaries
Allowances and benefits
Role based allowance (‘RBA’)
Pension allowance
Total fixed remuneration
Variable remuneration
Bonus
Share awards
Total variable remuneration
Total
(a)
(b)
(c)
(d)
(e)
(f)
£000
921
20
-
74
1,015
876
1,364
2,240
3,255
£000
582
15
-
47
644
553
859
1,412
2,056
Year ended 30 September 2022
£000
£000
Note
N S Terrington
R J Woodman
(a)
(b)
(c)
(d)
(e)
(f)
629
17
140
126
912
905
1,560
2,465
3,377
396
14
90
79
579
570
982
1,552
2,131
Fixed remuneration
Salaries
Allowances and benefits
Role based allowance
Pension allowance
Total fixed remuneration
Variable remuneration
Bonus
Share awards
Total variable remuneration
Total
Page 142
Total
£000
1,503
35
-
121
1,659
1,429
2,223
3,652
5,311
Total
£000
1,025
31
230
205
1,491
1,475
2,542
4,017
5,508
a) Salaries
Effective from 1 October 2022, a portion of the executive directors’ salaries has been paid quarterly in shares. The share element is
not subject to performance conditions, is not pensionable, and is released over five years in equal tranches.
b) Allowances and benefits
Included within this total in the single figure tables are private health cover and a company car allowance (£10,000 to £12,000). Also
included is a reimbursement from the Company in respect of: (i) costs associated with the purchase of shares for the RBA / salary
as shares and (ii) certain travel costs incurred in connection with the performance of executive director duties which constitute
taxable benefits in kind. These amounts represent amounts that HMRC treats as taxable together with an allowance to cover the tax.
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.
c) Role based allowance (‘RBA’)
This allowance was introduced following the AGM in 2020 and was withdrawn, effective from 1 October 2022, under the Remuneration
Policy approved at the 2023 AGM.
The RBA was paid quarterly in shares and released over five years in equal tranches. The RBA was not subject to performance
conditions. Release of shares in connection with the RBA will continue until 2027.
d) Pension allowance
Both Nigel Terrington and Richard Woodman received a cash allowance in lieu of pension of 10% of cash salary for the year ended
30 September 2023.
e) Bonus
Bonus opportunity during the year was, in line with the Policy, 98% (2022: 150%) of salary. Based on the performance measures set
out below, a bonus of 97% of maximum opportunity was awarded. 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 outcome.
The awards made and the way in which they will be delivered to satisfy the regulatory requirement for 60% of variable remuneration
(including PSP awards) to be deferred are set out below.
Executive
director
Salary
Maximum
opportunity
Percentage
award
N S Terrington
R J Woodman
£000
% of salary
% of max
921
582
98%
98%
97%
97%
Total
bonus
£000
876
553
Cash
£000
393
248
Delivered in
Shares1
DSBP
awards2
£000
393
248
£000
90
57
1. Delivered as shares, with all shareholder rights except the right to transfer shares until a year from the award date has lapsed, when the shares can be transferred or sold.
2.
Bonus deferred under the DSBP as nil cost options which vest, in accordance with regulatory requirements, in equal tranches from year three to year seven. Each tranche will
be subject to a one year holding period post-vest.
Page 143
Corporate Governance Balanced scorecard assessment
Measure
Weighting
Threshold
Target
Maximum
Actual
Outcome
Financial performance
Operating profit
RoTE (underlying)
NIM
Cost: income ratio (underlying)
CET1 ratio
Measure
Risk
60%
30%
12%
6%
6%
6%
£222.2m
15.0%
2.79%
40.0%
13.0%
£242.9m
17.25%
2.95%
38.6%
14.5%
£253.3m
£277.6m
18.4%
3.04%
37.9%
16.0%
20.2%
3.09%
36.6%
15.5%
Weighting How measured
20% Qualitative assessment by the Remuneration Committee of:
• Credit performance has been exemplary across all of the Group’s portfolios
•
•
•
Capital, liquidity and customer related risk appetite measures all
significantly within appetite
Adoption of incoming Consumer Duty regulations completed successfully
and by the required deadline
ERMF enhanced, leading to a stronger overall risk framework with a
positive culture of first line ownership of risk
Measure
Weighting How measured
Personal performance
Overall outcome
20%
Qualitative assessment by the Remuneration Committee of individual targets
as detailed below for each director.
59%
30%
12%
6%
6%
5%
Outcome
20%
Outcome
18%
97%
Page 144
Individual targets
Actual performance
Nigel Terrington
Strong leadership to deliver
the Group’s business plan and
financial performance, within
agreed risk appetites, 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
Progress 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 underlying profit before tax of £277.6 million increased
by 25.4% from 2022
Savings expansion to £13.3 billion with margin enhancement
of 40 basis points
Regular surveys of intermediaries and customers show that
levels of satisfaction were strong across all areas
Financial metrics strength has been delivered alongside
improved liquidity
Technology roadmap delivered the development finance
origination platform, first two phases of post-completion
portal for mortgages and decision accelerator for SME
lending origination platform
Additional investment in infrastructure, cybersecurity and
data controls
Continued progress made with over 82% of all applications
processed through the SME lending digital origination portal
Growth in deposits has facilitated all lending objectives and
enabled liquidity flexibility
• Significant enhancement to platform utilisation
• Artificial intelligence (‘AI’) assessment commenced
Operations:
•
•
•
Second ‘Responsible Business Report’ delivered with positive
feedback from employees, investors and other stakeholders
Decarbonisation report completed for Homer Road, Solihull
(head office) and next steps to be agreed
Using a 2019 baseline, achieved a 42% reduction for
2023 emissions
• Head office EPC rating improved to C during the year
Lending:
•
Quality of lending stock improved as new lending to EPC
rated A to C properties in the Mortgages portfolio exceeded
redemptions month-on-month
• 30% increase in lending on electric vehicles
•
•
Senior leadership programme is successfully continuing
to support career development for top talent and build
internal strengths
Internal successor for Managing Director of Premier Asset
Finance appointed and strengthening senior sales and
leadership capability in SME lending
Page 145
Corporate Governance Individual targets
Actual performance
Richard Woodman
Strong leadership to deliver
the Group’s business plan and
financial performance, within
agreed risk appetites, upholding
our values and always delivering
good customer outcomes
• Strong financial metrics delivered in 2023
•
Impairment coverage ratio increased to 49 basis points
•
EIR assumptions refined to ensure no debtor escalation in
higher interest rate environment
• Contingent liquidity enhanced
•
Investment grade corporate rating re-confirmed
•
•
•
•
Strong capital buffers maintained. Increased liquidity
facilitated repurchase of legacy funding line and the
acceleration of first TFSME payments in the first quarter of
2024, well ahead of original schedule
Share buy-back extended to £100.0 million reflecting
increased capital capacity
Delivery of enhanced climate disclosures for this
reporting cycle
Increased focus on the Group’s operational footprint and
those financed emissions under its control
•
IRB phase 2 engagement with regulator throughout 2023
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 improve financial
control and reporting systems to
enhance internal, external and
regulatory reporting
•
•
Reporting processes running smoothly including preparations
for IRB requirements, embedding stress testing frameworks
Forward-looking management of EIR approach in rising
interest rate environment confirms the strong reporting and
control focus
Page 146
f) Share awards: Paragon Performance Share Plan
The value shown in the single figure table in respect of share awards represents the value of those awards for the performance period
ended 30 September 2023, as set out below.
Grant date
Shares granted
Vesting percentage
Shares vesting
Share price at vesting
Dividend equivalent per share
Value per share at vesting
Value of award at vesting
Vesting in year to 30 September 2023
Vesting in year to 30 September 2022
N S Terrington
R J Woodman
N S Terrington
R J Woodman
Dec 2020
Dec 2020
236,661
96.41%
228,164
£
5.17621
0.8010
5.9772
1,363,775
149,046
96.41%
143,695
£
5.17621
0.8010
5.9772
858,889
Jul 2020
312,429
93.13%
290,965
£
4.86202
0.4990
5.3610
1,559,863
Jul 2020
196,763
93.13%
183,245
£
4.86202
0.4990
5.3610
982,376
1.
The PSP value for the year ended 30 September 2023 has been determined using the average closing share price for the three months ended 30 September 2023 as an
estimate. The actual value of the awards will not be finalised until the share price on the vesting date in December 2023, following the Preliminary Results announcement,
is known.
2. The value for the year ended 30 September 2022 has been restated based on the market value of the shares at the vesting date, 6 December 2022.
For the executive directors, the PSPs cannot be exercised for another two years following the completion of the three-year
performance period, in line with the holding period in the Policy. During this period the executive directors will continue to be entitled
to dividend equivalents.
The determination of the vesting outcomes for the December 2020 grant is described below. That for the July 2020 grant was set out
in the Directors’ Remuneration Report for the year ended 30 September 2022.
The vesting value in 2023 reflected a 14% increase in the share price between grant and vesting.
Page 147
Corporate Governance Awards vesting in respect of the year ended 30 September 2023
Awards granted in December 2020 under the Group’s PSP are subject to performance conditions measured over the three financial
years ended 30 September 2023. The metrics are split between financial and non-financial performance conditions.
The awards were granted at 180% of salary. Overall vesting as a percentage of maximum award was 96.41%.
The detail of the outturns of each of the conditions was as follows:
PSP grant in December 2020: financial performance conditions
Weighting
Threshold vesting for
25% of maximum award
Maximum
vesting
Relative TSR
Underlying basic EPS
25%
25%
Median
performance
Upper quartile
performance
(being 55.3%)
(being 74.7%)
Actual
performance
Above upper
quartile
performance
(being 75.2%)
Vesting
outcome
100.0%
58 pence
66 pence or more
94.2 pence
100.0%
Vesting
outcome
88%
100%
90.0%
PSP grant in December 2020: non-financial performance conditions
Weighting
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
•
Credit losses have been well within risk appetite across all the
Group’s portfolios
• Complaints management performance was strong throughout
• Conduct risk framework and quality assurance strengthened
•
Operational risk appetites include metrics relating to operational
losses, issue management, IT and cyber security and people and
outcomes as a whole have been positive
Surplus capital has been maintained and excess capital has
significantly increased with a share buyback programme in place
for part of the last three financial years
•
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:
•
The loan portfolio has performed exceptionally well, with EWIs
(‘early warning indicators’) being broadly benign. Interest rate risk
management has protected NIM and customer positions
Appropriate processes with regards to recruitment and retention of staff
have given a near full employment position
Earnings have diversified with the Commercial Lending division
contribution increasing from £45.9 million in 2020 to £113.2 million in
the year ended 2023
Paragon pension plan moved from £20.4 million deficit in 2020 to a
£13.0 million surplu s
•
•
•
Customer
12.5%
Customer insight feedback on
key product lines
Customer complaints relative
to risk appetite levels
•
•
•
•
NPS in line with industry average
of +48
Industry average for customer
satisfaction was 78% with the
Group’s at 79%
Complaints consistently below risk
appetite tole rance
Complaints resolved within eight
weeks was on average 97.6%
Page 148
PSP grant in December 2020: non-financial performance conditions
Weighting
Actual
performance
People
12.5%
Employee engagement
Voluntary attrition
compared to the
industry norm
Vesting
outcome
93.3%
•
•
•
•
Outcome for the full engagement survey in
June 2023 was +11 above the industry norm
Wellbeing surveys during the pandemic
(October 2020 to October 2021) delivered
consistently positive scores for physical, social
and overall wellbeing
Independent all employee survey for Investors
in People (‘IiP’) achieved scores at or above the
IiP average
Voluntary attrition (at 9.6%) remained
consistently below the industry average of
16.4% as reported by XpertHR in their most
recent December 2022 data
Gender diversity of
senior management
•
Gender diversity above the target level
throughout the performance period
There is no vesting for below threshold performance. There is straight-line vesting between the threshold and maximum for the TSR
and EPS conditions. For the customer and people metrics there is 25% vesting at threshold performance and 50% vesting at target
performance. For the risk metric the Committee determines the level of vesting between 0% and 100%.
Vesting was also subject to the Committee’s determination that individual performance and the underlying financial performance of
the Group were satisfactory. In respect of both these points the Committee concluded that the vesting level was appropriate for
all participants.
Awards granted during the year ended 30 September 2023
On 16 December 2022 the following awards were granted as part of the executive directors’ variable remuneration in respect of the
year ended 30 September 2022. These awards are designed to fulfil the majority of the regulatory requirement that 60% of executive
directors’ variable remuneration should be deferred, with awards under the DSBP fulfilling the remainder of the requirement.
The awards were granted as nil-cost options, under the PSP with a face value of 180% of salary in line with the then extant Policy.
Executive director
N S Terrington
R J Woodman
Salary
£000
629
396
Percentage grant
Face value of grant
Number of shares
180%
180%
£000
1,132
713
290,331
182,847
The value of these awards will be disclosed in the single figure table for the year ending 30 September 2025, at the end of the
performance period.
These awards have a three-year performance period, from 1 October 2022 to 30 September 2025, but become exercisable in equal
annual tranches from the third to the seventh anniversaries of the grant.
The prices used to translate the monetary amounts of each tranche to a number of shares were based on market price data. The
price was derived from 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 2022, discounted to allow for the fact that no dividend
equivalents are payable in connection with this grant. This dividend adjustment was based on market estimates of the expected
dividend yield.
Following these calculations, the adjusted price used for the tranche that becomes exercisable on the third anniversary of the grant
was £4.358, with the prices of the tranches which become exercisable in the four succeeding years being £4.127, £3.909, £3.703 and
£3.507 respectively reflecting the dividend yield adjustment.
Page 149
Corporate Governance These awards are subject to the following performance conditions.
Performance
measure
Relative TSR
Underlying Basic EPS
Performance
measure
Weighting
25.0%
25.0%
Weighting
Risk
20.0%
Financial measures
Threshold vesting for
25% of maximum award
Maximum
vesting
Median performance
Upper quartile performance
74.4 pence
88.1 pence or more
Non-financial measures
50% weighting is determined by the Committee based on an assessment by 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
Climate
10.0%
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
Customer
10.0%
Consideration will be given to (i) customer insight feedback on key product lines and (ii) customer
complaints relative to risk appetite levels
In addition, the Committee must be satisfied with the implementation of the FCA’s Consumer Duty
requirements before any part of the Customer tranche can vest
People
10.0%
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 other metrics the assessment is based on 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 performance of the employee and the underlying
financial performance of the Group are satisfactory.
Relative TSR measure
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
Secure Trust Bank PLC
S&U PLC
Vanquis Banking Group PLC
Virgin Money UK PLC
Page 150
Single figure of total remuneration for the Chair of the Board and non-executive directors
Year ended 30 September 2023
Year ended 30 September 2022
Fees
£000
Benefits1
£000
Chair of the Board
R D East2
F J Clutterbuck3
Non-executive directors
T P Davda4
P A Hill
Z L Howorth5
A C M Morris
B A Ridpath
H R Tudor
G H Yorston
Total
255
-
80
100
27
103
80
117
80
842
2
-
-
-
-
-
-
-
-
2
Total
£000
257
-
80
100
27
103
80
117
80
844
Fees
£000
Benefits1
£000
21
235
6
90
-
90
70
100
70
682
-
13
-
-
-
-
-
-
-
13
Total
£000
21
248
6
90
-
90
70
100
70
695
1 The Chair of the Board receives private health cover on an individual or family basis in the same way as the executive directors. The Chair is also eligible for life cover. In addition,
the previous Chair received a car allowance.
2 R D East was appointed to the Board on 1 September 2022
3 F J Clutterbuck resigned from the Board on 1 September 2022
4 T P Davda was appointed to the Board on 1 September 2022
5 Z L Howorth was appointed to the Board on 1 June 2023
Payments for loss of office
No payments for loss of office were made during the year ended 30 September 2023.
Page 151
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 2023 (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 held
Acquired as salary in shares or RBA and subject to restrictions related to disposal
Not subject to restrictions on disposal
Total shares beneficially held
Total interest in shares
Awards exercised in the year
DSBP
Total awards exercised in the year
N S Terrington
R J Woodman
Number
Number
498,942
314,172
228,499
4,245
731,686
519,129
112,930
632,059
89,802
1,224,929
1,314,731
2,678,476
142,199
4,245
460,616
326,940
-
326,940
56,947
527,844
584,791
1,372,347
97,670
97,670
25,759
25,759
1 For the purposes of the table above, the awards granted in December 2020 are assumed to be vested but unexercised in respect of the percentage which will vest, 96.41%, and to
have lapsed in respect of the balance.
Awards under the PSP and DSBP schemes noted above were granted in the form of nil cost options.
The interests of the Chair of the Board and the non-executive directors at 30 September 2023, which consist entirely of ordinary
shares, beneficially held, were as follows:
R D East
T P Davda
P A Hill
Z L Howorth
A C M Morris
B A Ridpath
H R Tudor
G H Yorston
2023
10,000
5,701
2,659
-
4,168
4,358
63,000
8,167
As at 1 December 2023, the last practicable date prior to approving this Report, the Company had not been advised of any changes to
the interests of the directors and their connected persons as set out in the tables above.
Page 152
Share ownership guidelines
Executive directors are required to hold a minimum number of shares in the Company with a value of 200% of their total salary
(both the cash and shares element), calculated as at 31 December each year (as it was approved at the AGM in 2023). The valuation is
calculated on a net of income tax and national insurance basis where relevant.
For the purposes of these guidelines, directors’ shareholdings include all beneficial holdings and unexercised share awards, other
than those which are subject to performance conditions, as set out in the table above.
The chart below compares the executive directors’ holdings at 30 September 2023 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 2023.
Directors’ shareholding guidelines
30 September 2023
R J Woodman
N S Terrington
Policy requirement
0%
100%
200%
300%
400%
500%
600%
700%
800%
900%
1000%
1100%
1200%
% of salary
At 30 September 2023, 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 guidelines, or (if lower) the number of shares actually held at the date of departure.
Relevant shares include all unexercised share awards not subject to a performance condition and those beneficial holdings acquired
as part of a director’s remuneration arrangements.
No former directors are subject to these guidelines.
Page 153
Corporate Governance
B7.2.3 Application of remuneration policy for the year ending 30 September 2024
The information provided in this section of the Directors’ Remuneration Report is not subject to audit.
Overview
It is intended that the Remuneration Policy approved at the AGM in March 2023 will be applied for the year ending 30 September 2024
in the same way as it was applied in the preceding year.
Executive directors
Fixed pay
The salaries of the executive directors were increased by 3% from 1 October 2023, as set out below.
N S Terrington
Salary – paid in cash
Salary – paid in shares
Total salary
R J Woodman
Salary – paid in cash
Salary – paid in shares
Total salary
Salary
1 October 2023
Salary with effect from
1 October 2022
£000
759
190
949
480
120
600
£000
737
184
921
466
116
582
Delivery of fixed remuneration, pension allowance and benefit entitlements remain as described above for the year ended
30 September 2023.
Annual bonus
In line with the new Policy, the bonus opportunity for the financial year ending 30 September 2024 will be 98% of salary. In
combination with the PSP, the bonus will be delivered in line with regulatory requirements.
Aligned with last year, 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 80% of the financial performance award, but the Committee
annually determines the appropriate secondary measures by reference to the strategic focus for the year. For 2024 the secondary
measures will cover margin and costs.
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.
PSP awards
PSP awards in respect of variable remuneration for the year ended 30 September 2023 are expected to be made in December 2023.
Awards made to the executive directors will represent a value of 118% of salary, with the number of shares to be awarded calculated on
the basis of market data at the grant date.
The intended performance conditions and weightings are set out below. Changes have been made to the climate and people metric,
as detailed below.
In addition, there is an individual performance condition and a Group underlying performance underpin which must be met prior to
vesting occurring.
Page 154
Performance
measure
Relative TSR
Underlying basic EPS
Performance
measure
Weighting
25%
25%
Weighting
Risk
20%
Financial measures
Threshold vesting for
25% of maximum award
Maximum
vesting
Median performance
Upper quartile performance
80.0 pence
100.0 pence or more
Non-financial measures
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
Climate
10%
Consideration will be given to i) operational footprint emissions reduction
ii) financed emissions decarbonisation assessments; iii) sustainable products and
iv) education and engagement
Customer
10%
Consideration will be given to (i) customer insight feedback on key product lines and (ii) customer
complaints relative to risk appetite levels
In addition, the Committee must be satisfied with the implementation of the FCA’s Consumer Duty
requirements before any part of the Customer tranche can vest
People
10%
Consideration will be given to (i) employee engagement, (ii) voluntary attrition compared to industry
averages and (iii) 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 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%.
TSR, Risk and Customer Metrics
No changes are proposed to the TSR, Risk and Customer metrics from those which applied to the December 2022 grant, noted above.
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.
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 and regulation 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.
Success in respect of financed emissions will be measured by progress towards the development and delivery of decarbonisation
assessments across core elements of the financed emissions portfolio, together with the continued development of the financed
emissions balance sheet. The focus will, in part, be 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.
Success in respect of sustainable products will be measured by the development of products to stimulate and meet customer
demand. For the Group’s operational footprint emissions (financed emissions and sustainable lending framework) there will be
reporting of outcomes both internally and externally as appropriate.
People metric
The matters considered in respect of the people metric have remained unchanged since it was first introduced for the grant made in
July 2020. The diversity element of the metric will, from the 2023 grant, be updated to encompass wider diversity matters, including
comparison to Women in Finance Charter and the Parker Review targets, as well as considering the Group’s compliance with relevant
regulatory requirements on such matters.
Page 155
Corporate Governance
Chair of the Board and non-executive director fees
During the year the fees payable to the Chair of the Board and non-executive directors were reviewed, by the Remuneration
Committee and Board respectively, and the following increases set out below approved to take effect from 1 October 2023.
The Chair’s fees had not increased since October 2017 and consequently a 10% increase was agreed to realign the fees to the market.
Additionally non-executive directors’ base fee increased by 5% aligned with the wider workforce (the other fees having increased or
been introduced in 2022). The intention is that future increases for both the Chair and the non-executive directors will be annual and
align with those given to the wider workforce so that spikes are less likely to occur.
Fees payable to the Chair of the Board and the non-executive directors are set out below on a per annum basis.
Chair of the Board
Non-executive directors
Senior independent director (when also a committee chair)
Other committee chairs
Other non-executive directors
Fee with effect from
1 October 2023
1 October 2022
£000
280.5
123.5
103.5
83.5
£000
255.0
120.0
100.0
80.0
Each non-executive director receives a base annual fee of £73,500 with those non-executive directors who are chairs of committees
receiving an additional £30,000 fee, while other non-executive directors receive £10,000 per annum in respect of their committee
duties. The Senior Independent Director receives an additional £20,000 per annum for undertaking that role.
B7.2.4 Other information
The information provided in this section of the Directors’ Remuneration Report is not subject to audit
This section provides information related to remuneration across the Group. This includes a description of the overall
approach to all-employee remuneration in the Group and information showing how executive directors’ remuneration
compares with that for other employees and how it aligns with stakeholders’ interests more widely.
Fair pay
Fair pay: group-wide remuneration philosophy
The Group is committed to rewarding all its employees fairly for their contribution, whilst ensuring they are motivated to always deliver
the best outcomes for customers. This approach to remuneration reflects the Group’s culture, vision and values and supports its
purpose whilst being aligned to its long-term strategy 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 confirmed its view that the
Group is a fair pay employer. 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 during
the year was £21,255 per annum outside London and was increased to £23,400 per annum in October 2023. This was applied by
the Group from 1 November 2023
• Payment of Profit Related Pay (‘PRP’) to around 87% 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 156
How our pay principles aligned to the Code during the year ended 30 September 2023
Principle
Clarity
Application
Example
The executive director and group
remuneration policies are clearly
communicated to directors and all employees
The Remuneration Report in this document is
available to all employees as is the group-wide
Internal Remuneration Policy
The Remuneration Committee Chair
and Chair of the Board regularly consult
with our major shareholders as part of
our commitment to a transparent and
open relationship
Simplicity
Straightforward remuneration structures
apply to all levels of the Group’s employees
Proportionality
The Committee has sought to ensure
that the Directors’ Remuneration Policy and
outcomes under the Policy are easy
to understand for both participants
and shareholders
Bonus awards reflect annual performance
and PSP awards reflect performance over the
longer term with performance measures and
targets clearly linked to strategy
The Committee also has the discretion
to override formulaic outturns to ensure
outcomes do not reward poor performance
Details on the application of the Directors’
Remuneration Policy, including incentive outcomes
for the current year as well as proposed performance
measures and targets for future years, are clearly
set out in this report. The internal policy details the
available remuneration structures which are aligned
across the Group and consist of salary; pension;
variable cash bonuses; share schemes and benefits
Discussion on executive remuneration and how it
aligns to the workforce forms part of the regular
People Forum discussions with the Committee Chair
The links between awards and delivery of strategy
and performance are shown in the table above which
provides examples of remuneration alignment
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 in the
Annual Report and Accounts 2022
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 its
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 Remuneration Policy is fully
aligned with our pay principles
Demonstration of the Group’s values underpins
our variable incentive frameworks. 30% of PSP
awards for directors and other senior managers are
assessed against ESG related (Customer, Climate
and People) metrics to ensure alignment to our
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 157
Corporate Governance How the Committee considers the views of all employees
The People Forum considers the relationship between executive remuneration and pay and reward across the Group on a regular
basis. 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 2023 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 the People Forum
and 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 into employees’ views.
How all-employee remuneration is aligned with stakeholders’ interests
Within the Remuneration Policy Summary (section B7.3) information is provided on how the remuneration packages for executive
directors’ link to strategy; how they operate; maximum opportunity and any performance conditions. Noted below is the equivalent
information for all employees in respect of 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:
•
•
Salary as shares – in the year ended 30 September 2023, salary in the form of shares was only paid to the executive directors and
certain members of the executive committee.
Sharesave – opportunities to participate in the Sharesave scheme 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 approximately 63% of eligible employees reflecting the continued and
ongoing alignment between employees and shareholders and employee commitment to the growth of the Group.
Operation
Salary
Maximum opportunity
Performance conditions
Same as executive directors
(see Policy Summary 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 – 2022 Annual
Report and Accounts
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.
Where private healthcare is provided as part of an
employee’s remuneration, it is on the same basis as for
the executive directors. 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 158
Operation
Maximum opportunity
Performance conditions
Maximum contribution for the Paragon Worksave Pension Plan
is 10% of salary.
None.
Maximum contribution to the Paragon Pension Plan, from
April 2023, is 12.5% of salary.
Maximum cash supplement contribution (where a former
member of the Paragon Pension Plan below executive director
level 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 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 small number of roles the
maximum can be in excess of that 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 Summary
section B7.3) excepting the
applicability, or otherwise,
to an individual of PRA
remuneration rules in
respect of post-performance
period deliverability of the
award outcomes.
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 – 2022 Annual
Report and Accounts
section B7.3).
Other variable pay opportunities
The Group provides other variable pay opportunities to certain groups of employees:
•
PRP – 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 are then reviewed at least annually. Payments under such
arrangements, if they are applicable to MRTs, are considered by the Committee.
Page 159
Corporate Governance Remuneration comparisons
Comparison of annual change in directors’ pay with the average employee
The table below shows, for the last four 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 in the prior year data, information on directors who were no longer directors at the beginning of the
current financial year. Neither does it contain information for any director in their year of appointment as they did not receive any
remuneration in the comparator period.
Salaries and fees
Allowances and benefits
%
46.4%
47.0%
1,114.2%
1,233.3%
11.1%
14.4%
14.2%
17.0%
14.2%
4.9%
5.0%
5.0%
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%
2023
N S Terrington
R J Woodman
R D East
T P Davda
P A Hill
A C M Morris
B A Ridpath
H R Tudor
G H Yorston
Average Employee
2022
N S Terrington
R J Woodman
P A Hill
A C M Morris
B A Ridpath
H R Tudor
G H Yorston
Average Employee
2021
NS Terrington
RJ Woodman
A C M Morris
B A Ridpath
H R Tudor
G H Yorston
Average Employee
2020
NS Terrington
RJ Woodman
B A Ridpath
H R Tudor
G H Yorston
Average Employee
From 01/09/22
From 01/09/22
(a)
(a)
(b)
(b)
(c)
(c)
From 27/10/20
(b)
From 26/03/20
(b)
(c)
(c)
(a) Impact of remuneration policy changes
(b) Appointed during the comparator year
(c) Change of responsibilities in the year
Page 160
%
17.6%
7.1%
-
-
-
-
-
-
-
Bonus
%
(3.2)%
(3.0)%
-
-
-
-
-
-
-
(4.5)%
(13.2)%
21.4%
16.7%
-
-
-
-
-
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)%
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:
For differences between prior years please see the relevant prior years’ Annual Report and Accounts.
(a)
Impact of remuneration policy changes
Following the approval by shareholders of a new directors’ remuneration policy at the AGM in March 2023 the remuneration packages
of the executive directors were rebalanced. The changes represent a minor rebalancing between variable and fixed pay such that total
maximum pay was reduced while maintaining target pay. This rebalancing significantly impacted individual line items, meaning that the
line-by-line comparison set out above should be set in the following context.
‘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.
Following the AGM in 2023 and effective from 1 October 2022 a new definition of salary was introduced which included salary in shares
with the RBA being removed. As such, the portion of salary used in the comparison calculation between 2023 and 2022 excludes the
RBA for 2022 but includes the proportion of salary delivered in shares for 2023.
(b) Appointed during the comparator year and (c) Change of responsibilities during the year
‘Salaries and fees’ – for non-executive directors (excluding R D East and T P Davda where the comparison is between a month’s fees
in 2022 and a full year’s fees in 2023) the increases are due to changes in the fees for chairing a committee, being senior independent
director (‘SID’) or being a member of a committee in 2023. The base fee remained unchanged between 2022 and 2023. Further,
Alison Morris became SID in August 2023 when Hugo Tudor ceased to be SID.
Other 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 certain brokerage costs
together with travel costs incurred in connection with the performance of executive director duties which constitute taxable benefits
in kind. The amounts included represent the amounts HMRC treats as taxable together with an allowance to cover the tax. The Group
provides the amount required to cover the tax liability.
The changes in the average employee section of the table for this item in cash terms are due to a decrease of around £90 between
2023 and 2022.
•
‘Bonuses’ – the decline in the bonuses between 2023 and 2022 for the average employee is primarily due to the decrease in the
level of PRP, following a record PRP payment in 2022.
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
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
£000
3,255
3,377
2,991
2,174
3,001
2,426
2,305
1,956
2,546
3,113
%
97.0
96.0
96.1
66.1
89.4
90.0
90.0
75.0
100.0
100.0
%
96.41
93.13
97.00
72.00
95.44
72.47
63.51
50.00
100.00
100.00
Page 161
Corporate Governance 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 2023, of £100 invested in Paragon Banking Group PLC on 30 September 2013, compared with £100
invested in the FTSE 250 index.
Ten-year return index for the FTSE 250
Ten years ended 30 September 2023
£250
£200
£150
£100
£50
)
£
(
e
u
a
V
l
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
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 2023.
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
2023
2022
2021
2020
2019
Method
25th percentile pay ratio
Median pay ratio
75th percentile pay ratio
Option A
Option A
Option A
Option A
Option A
113:1
112:1
113:1
88:1
125:1
83:1
84:1
83:1
64:1
95:1
53:1
52:1
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.
2023
2022
25th percentile pay
Median pay
75th percentile pay
25th percentile pay
Median pay
75th percentile pay
Base salary
Total remuneration
£
26,000
30,000
£
35,000
40,000
£
56,000
64,000
£
22,000
30,000
£
29,000
40,000
£
55,000
65,000
Page 162
Change in CEO pay ratios
The limited changes in the CEO pay ratios shown above across all percentiles (with the exception of the early part of the Covid
pandemic included in 2020) show a consistency of approach to remuneration for all employees over the noted periods. Whilst it was
expected that the CEO pay ratio might be volatile from year to year, reflective of the bonus and PSP outcomes in any year this, to date,
has not been the case.
The median pay ratio for each financial year is consistent with Paragon’s remuneration and career progression policies because it
shows that Paragon has continued to recognise all employees consistently and equitably.
Gender pay
Details of the Group’s gender pay gap analysis are shown in Section A6.3. Gender pay review and reporting are overseen by the
Nomination Committee as part of its responsibilities in respect of diversity.
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
57
48
47
49
2023
£m
84.6
67.9
111.5
3,008.6
75.1
2022
£m
81.9
68.9
66.9
3,214.7
56.5
Change
£m
2.7
(1.0)
44.6
(206.1)
18.6
Loan advances are shown above as this is the principal application of cash used to generate income for the Group. Corporation tax is
contributed out of profit to the UK Government.
Other information
Notice periods and terms of engagement
The executive directors hold one year rolling contracts in line with current market practice and the Committee reviews the terms of
these contracts 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, 10 March 2010 and 21 March 2023)
R J Woodman
8 February 1996 (as amended 10 March 2010 and 21 March 2023)
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:
Director
R D East
T P Davda
P A Hill
Z L Howorth
A C M Morris
B A Ridpath
H R Tudor
G H Yorston
Original appointment date
Current letter of appointment end date
1 September 2022
1 September 2022
27 October 2020
1 June 2023
26 March 2020
20 September 2017
24 November 2014
20 September 2017
31 August 2025
31 August 2025
26 October 2026
31 May 2026
25 March 2026
19 September 2026
23 November 2024
19 September 2026
Page 163
Corporate Governance
B7.3 Policy summary
The information provided in this part of the Directors’ Remuneration Report is not subject to audit.
This part of the Directors’ Remuneration Report summarises the Directors’ Remuneration Policy that was adopted at the AGM on
1 March 2023. This is outline information only in respect of the executive directors, included here for ease of reading the Annual
Report on Remuneration, and these pages do not constitute a Policy Statement in accordance with the Regulations.
For the full Policy Report, please refer to the Annual Report and Accounts for the year ended 30 September 2022 available at
www.paragonbankinggroup.co.uk.
The table below illustrates how the remuneration of the executive directors is structured and delivered:
Structure
Salary
Pension
10% of cash salary
Annual bonus
98% of salary
Paragon Performance Share Plan
(LTIP) 118% of salary
Delivered as
Shares
Cash
Shares
Cash
20%
80%
All in cash
50%
50%
All in shares
Elements of the remuneration policy for executive directors
Purpose and link to strategy
Operation
Salary
To provide a competitive, fixed component
that reflects the scope of individual
responsibilities and recognises sustained
individual performance in the role.
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 salary is paid 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.
Benefits
To provide market levels of benefits on a
cost-effective basis.
Private health cover for the executive and their family, life insurance cover of
up to seven times’ salary and company car or cash alternative.
Other benefits may be offered from time to time taking into account
individual circumstances.
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).
Page 164
Purpose and link to strategy
Operation
Annual bonus
To incentivise executive directors to
achieve specific, predetermined goals
that drive delivery of the Company’s
operational objectives.
To reward individual performance.
To encourage retention and alignment with
shareholders’ interests with a proportion of
the bonus awarded in shares.
Each executive director’s annual bonus is based on a mix of financial and
non-financial performance measures measured over one year.
The annual bonus is non-pensionable. Malus and clawback apply to the
annual bonus as described below.
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 at least
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.
Performance share plan (‘PSP’)
To incentivise executive directors to
achieve enhanced returns for shareholders.
An annual award of shares subject to continued service and performance
conditions assessed over a three-year performance period.
To encourage long-term retention of
key executives.
To align the interests of executives
and shareholders.
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.
Malus and clawback apply to the PSP awards as described below.
Sharesave plan
To provide all employees with the opportunity
to become shareholders on the same terms.
Periodic invitations are made to participate in the Company’s all-employee
Sharesave Plan.
A savings contract over three or five years with the funds used on maturity either
to purchase shares by exercising options or returned to the participant.
The option is granted at a discount to the share price at the time of grant of
up to 20%.
Malus and clawback
Annual bonus and PSP awards are subject to malus and clawback provisions in exceptional circumstances as detailed in the
Directors’ Remuneration Policy included in the Annual Report and Accounts 2022. Any incentive awards may be reduced or cancelled
before vesting or clawed back for a period of up to seven years from date of grant. 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.
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.
Page 165
Corporate Governance B7.4 Approval of Director’s Remuneration Report
This Directors’ Remuneration Report, section B7 of the Annual Report and Accounts, including the Statement by the Chair of the
Committee, the Annual Report on Remuneration and the Policy Summary, has been prepared in accordance with Schedule 8 to The
Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 as amended and has been approved by
the Board of Directors.
Signed on behalf of the Board of Directors.
Hugo Tudor
Chair of the Remuneration Committee
6 December 2023
Page 166
Page 167
Corporate Governance As we look ahead to 2024,
it is anticipated that many
of the issues impacting
the Group and the UK
economy more broadly
during the last twelve
months will continue to
dominate the Committee’s
agenda. We fully expect
the macroeconomic
environment to continue to
be challenging, and remain
a key area of focus.
Peter Hill, Chair of the Risk and
Compliance Committee
B8. Risk management
As the 2024 final deadline for legacy products approaches,
management information will continue to evolve and report
potential areas of poor customer outcomes across the Group’s
in-scope portfolios, with the Committee overseeing the
identification and resolution of issues.
The ongoing embedding of the obligations under the Consumer
Duty will continue to remain a priority for the Committee over the
coming years as we approach the next deadline, and continue to
implement a culture of continuous challenge and improvement in
the delivery of good customer outcomes.
Focus during 2023
Last year I set out the Committee’s priorities for the 2023 financial
year and I am pleased to say that these commitments have been
met comprehensively, despite the challenges posed by new and
emerging issues, which have required the Committee to react
promptly and reprioritise accordingly. I can therefore confirm the
Committee has diligently provided oversight and consideration of
the following key areas:
•
•
•
•
•
•
•
Ongoing monitoring of the macro-economic challenges with
particular attention paid to the assessment of customer
affordability and its impact on lending decisions. Credit
appetites and policies have been subject to constant
review and the Committee has considered the impact on
stakeholders, ensuring, in particular, that appropriate support
is provided to customers
Reviewing any impacts on the Group of possible supply issues
particularly in respect of energy, which was subject to detailed
scenario testing during the winter of 2022/23
Reviewing the implementation of the programme of work
undertaken ensuring that the Group successfully met the
July 2023 deadline for the first phase of the new FCA
Consumer Duty. The Committee has provided continuous
oversight of progress ensuring alignment with regulatory
expectation and the Group’s commitment to ensuring that
customers receive good outcomes
Oversight of the ongoing IRB application, including
refinements made following PRA feedback
Ongoing review of the Group’s refinement of its financial
crime risk and controls framework to ensure that it remains
fit for purpose and continues to evolve to meet increasing
regulatory expectations
Continuing review of the potential impacts of the post-Brexit
financial services regulatory regime with particular focus on
potential impacts on the Group and its obligations following
adoption of the Financial Services and Markets Bill in June 2023
Further embedding of the Group’s risk culture, which is key
to supporting the maturing ERMF, with ongoing enhancement
to risk reporting capabilities, ensuring appropriate focus on
high materiality matters and improving the robustness of
horizon scanning
B8.1 Statement by the Chair
of the Risk and Compliance
Committee
Dear Shareholder
As Chair of the Risk and Compliance Committee I am writing to
you to explain the work we, as a committee, have undertaken
during the last year and how we have successfully discharged our
responsibilities in this respect. The Group has faced an evolving
and diverse risk agenda over the last twelve months and the
Committee has provided oversight and challenge throughout the
period, ensuring that current and emerging risks are appropriately
assessed and managed.
Looking back over the last financial year, the start of the period
was dominated by the consequences of the mini-budget and
the ensuing market volatility. Further uncertainty was witnessed
during early 2023 with the collapse of several banks in the US
and internationally, and the potential for wider contagion to UK
banks. This has been coupled with the ongoing effects of the
conflict in Ukraine, which has continued to impact the global
economy, particularly affecting the supply of various commodities.
The combination of these factors has continued to generate
significant economic challenges and spiralling cost of living fuelled
by inflationary pressures and consecutive interest rate rises.
The Committee has responded positively to these challenges,
and I remain impressed with how these have been handled,
with appropriate strategies implemented to ensure the Group
continues to operate effectively and within its stated risk appetite.
I expect these issues to remain high on the risk agenda over the
coming months and the Group will continue to focus on managing
these impacts as a matter of course. However, it is important that
the Committee remains a forward-looking body and, as the Chair
of the Committee, my priority is to ensure that we also consider
those emerging risks that may impact the Group’s strategy or
operating capability in the future.
The Enterprise Risk Management Framework (‘ERMF’) is key in
ensuring the Group continues to identify, assess and manage
those risks which may be detrimental, and I am pleased to
see that this framework continues to mature and embed in an
appropriate way. The refinement of the ERMF is an ongoing
process, ensuring it remains proportionate, and the Committee
remains committed to continual investment to maintain an ERMF
with robust systems and controls that maintain compliance with
statutory and regulatory obligations.
The enhancements made to the ERMF over the last few years
have been enabled by a strong and pervasive risk culture
embedded in day-to-day decision making and understood
throughout the organisation. This continues to be a key
enabler of effective risk management across the Group. These
improvements have been evidenced in the regular dedicated
risk culture reporting provided to the Committee and also in the
Group’s employee engagement survey, which reflected a good
understanding of individual risk management responsibilities at
all levels.
The importance of a positive and well-understood risk culture
has also been a helpful foundation in the Group successfully
meeting the first regulatory deadlines for the FCA’s Consumer
Duty, relating to on-sale products. The Consumer Duty requires
a strong, customer-focussed culture to deliver good outcomes
for retail customers and, during the year, the Committee has
discussed and overseen the programme of work implementing the
changes required by the Consumer Duty across the business, as
a priority. Progress updates have been provided at each meeting
and reporting has been enhanced to ensure that the Committee
receives meaningful information to challenge effectively and gain
assurance that the Consumer Duty is fully embedded.
Page 169
Corporate Governance Other priorities for the Committee will include:
•
•
•
•
•
•
•
Ongoing monitoring of the embedding of the FCA Consumer
Duty with enhanced reporting and oversight of plans and
delivery to meet the final 2024 regulatory deadline
Focus on identifying any signs of customer vulnerability in light
of the continuing economic challenges and ensuring that the
Group delivers good outcomes for all customers
Review of the impacts of strategic transformation on the risk
profile given the level of change in train and planned across all
business lines. Change execution risk remains a key area of
focus as the Group looks at new and innovative ways to ensure
it remains financially and operationally resilient
Ongoing review of the final policy implications of Basel 3.1 as
the Group prepares to meet the 2025 implementation deadline
Oversight and review of the Group’s progress in obtaining
IRB accreditation
Close monitoring of wider industry trends in rising levels of
claims management company activity
Ongoing oversight of liquidity management given the failure of
Silicon Valley Bank earlier this year
Whilst the challenges this year have been significant, the Group
has clearly demonstrated its ability to react in a timely and agile
way. The Group has been able to respond quickly as new threats
have emerged, and I am confident that the skills and experience
I have seen employed during the year, in managing both actual
and emerging risks, position the Group well as circumstances
continue to evolve.
The robustness of the firmly embedded three lines of defence
model, together with the Group’s established risk governance and
reporting processes continues to ensure the Committee is able to
provide effective oversight of risk issues therefore ensuring that
the Group is well-placed to assess and manage any challenges it
may face over the coming year.
Peter Hill
Chair of the Risk and Compliance Committee
6 December 2023
In addition to these stated priorities, the Committee continues
to maintain a balance between overseeing items in line with its
core responsibilities as laid out in its terms of reference and
ensuring that new and emerging issues are appropriately included
in the agenda. During the year the Committee has provided close
oversight of specific risk issues including:
•
Monitoring the ongoing impacts of elevated levels of inflation
and rising interest rates across the suite of principal risks
In particular, the Committee has considered a range of
economic scenarios and reviewed the potential impacts
on liquidity and market risk exposures. In light of these
assessments the Committee has overseen and approved
revisions to risk appetite ensuring that the approach to
management of such risks remains prudent and well
within buffers
•
•
Continuing focus on the impact of the economic downturn
on the lending lines and the impacts on credit policy. Despite
the resilience of the buy-to-let portfolio, the Committee has
focussed heavily on monitoring trends in arrears together
with broader implications of the increased cost of living more
generally for both customers and employees
Maintaining a focus on good outcomes for customers in light
of challenging economic conditions and further guidance from
the FCA to ensure that appropriate support is in place for those
customers facing financial difficulties
Other items addressed by the Committee, including ongoing
oversight of the treatment of customers in vulnerable
circumstances, the Group’s response to climate change, and
operational resilience are set out in section B8.2.
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. This
included an overview of the scenario library which supports all
stress testing processes to ensure they remain relevant and
forward-looking. The Committee has also reviewed and approved
the risk policies for each principal risk which included review and
challenge of the relevant risk appetite measures.
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.
2024 and beyond
As we look ahead to 2024, it is anticipated that many of the issues
impacting the Group and the UK economy more broadly during
the last twelve months will continue to dominate the Committee’s
agenda. We fully expect the macroeconomic environment to
continue to be challenging, and remain a key area of focus.
However, I am confident that the Committee’s close oversight
of any credit stresses, coupled with the Group’s prudent lending
approach, effective capital management and robust liquidity levels
will position it strongly in the face of further market volatility.
Whilst these conditions will undoubtedly continue to pose
challenges across the industry, the Committee will continue to
oversee all the principal risks facing the Group, ensuring that it
remains vigilant in ensuring that any new and emerging issues
are identified, undertaking robust assessment of these to ensure
effective management in accordance with the Group’s risk appetite.
Page 170
B8.2 Risk governance
The Group’s approach to governance and the committee
structures are described in Section B4.1. 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 2022 and again in November 2023, after
the end of the year, align with the 2018 Code and good practice.
The Committee’s responsibilities include reviewing, on behalf of
the Board:
• Recommendations and matters escalated from the ERC
•
•
•
•
•
•
The Group’s current and future risk appetite, including
the extent and categories of risk which the Board regards
as acceptable
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 good
outcomes for 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 Group’s processes for compliance with laws, regulations
and ethical codes of practice and the prevention of fraud
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 the review and approval of material aspects of the
rating and estimation processes in relation to credit and finance
models to the MRC.
The Committee meets at least four times a year. The executive
directors, CRO, Chief Operating Officer, General Counsel and
Internal Audit Director are invited to attend meetings of the
Committee. However, it reserves the right to request any of
these individuals to withdraw or to request the attendance of any
other Group employee.
The Committee meets 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
•
•
•
Consideration of new or emerging risks and regulatory
developments and their impact on the Group with particular
focus in the year on Consumer Duty, Operational Resilience
and the impacts of Basel 3.1
Consideration and challenge of management’s rating of the
various risk categories to which the Group is exposed
Consideration of the root causes and impacts 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 for each of the Group’s
principal risks to ensure they remained consistent with the
delivery of the Group’s strategic objectives, proposing any
required changes to the Board, as required
Reviewed the ongoing enhancements to the Group’s ERMF
including approaches to risk acceptance and the wider risk
assurance framework
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 171
Corporate Governance •
•
•
•
•
•
•
•
•
•
•
•
•
•
Continued to monitor progress in respect of the Group’s
application for regulatory approval of its IRB approach to
credit risk management
Maintained ongoing focus on fair treatment of customers in
light of challenging economic conditions and further guidance
from the FCA to ensure that appropriate support is in place
for those customers facing financial difficulties
Provided ongoing oversight as the Group worked to
implement the requirements of the FCA Consumer Duty on
its products and services to ensure it successfully met the
July 2023 deadline
Reviewed the Group’s ongoing embedding of its approach to
Operational Resilience with a regular focus on the impacts
of the Group’s technology transformation programme on the
risk and resilience profile. The Committee also continued
to receive updates on the broader cyber landscape and the
potential risks this may pose to the Group’s resilience
Maintained oversight of the Group’s long-term digitalisation
programme, considering the execution risk inherent in
any such transformation, evaluating the impact across
the principal risks of the adoption of new systems and
ways of working and ensuring that the development of risk
management and control systems proceeds in parallel with
that of operational applications
Provided oversight on the Group’s progress on responding
to the increasing challenges posed by climate change and
the further embedding of climate change risk through
enhancements to measures and standards to support the
Group’s broader climate change commitments
Undertook ongoing oversight of third-party outsourcing
and material supplier arrangements to ensure that the
management of these remains commensurate with the
Group’s risk appetite
Provided oversight of the Group’s engagement in the PRA
consultation process on the implementation of Basel 3.1 and
reviewed its potential impacts on capital requirements
Conducted deep-dive reviews into targeted risk areas,
particularly where broader industry issues or regulatory
publications have required an internal impact analysis
During the year themes for these reviews included: the impact
of the collapses of Silicon Valley Bank and Credit Suisse;
specific scenarios on the impact of rising interest rates
following the Bank of England’s increases in the base rate;
and potential further interest rate increases, rising inflation
and the broader consequences of the cost of living crisis
Undertook regular focussed reviews of the principal risks
including credit risk, capital risk, liquidity and market risk,
climate change risk, conduct risk, strategic risk, reputational
risk, model risk and across the different categories of
operational risk
Reviewed, challenged and approved the Management
Responsibilities Map
Reviewed, challenged and approved the terms of reference of
the MRC
Reviewed, challenged and approved the Compliance
Monitoring Plan and its subsequent updates
Reviewed, challenged and approved the Money Laundering
Reporting Officer’s annual report in addition to providing
continued oversight of the ongoing work to strengthen
AML controls
•
Considered and challenged reports in relation to the ICAAP
and Recovery Plan, recommending approval to the Board
•
Undertook preliminary work in respect of the 2023 ILAAP,
scheduled to be presented for approval after the year end
• Challenged and approved various key risk policies
•
Reviewed the potential impacts of regulatory publications
including FCA and PRA priorities
To ensure the Committee is able to provide effective oversight,
members undertake regular training on risk matters through
a comprehensive board education programme (section B4.5).
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: Deep-dives
across all business areas; ICAAP and Stress and Scenario
Testing; Interest Rate Risk in the Banking Book; Cyber Risk;
ESG and Climate Change; and Macro-Economic Trends.
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.
Executive risk committees
Executive Risk Committee (‘ERC’)
The purpose of the ERC is to assist the CEO in designing and
embedding the Group’s risk management framework, monitoring
adherence to risk appetite statements and identifying, assessing
and controlling the principal risks within the Group. The ERC was
established under the specific authority of the CEO, 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:
•
•
•
•
•
•
Reviewing, as appropriate from time to time, the
appropriateness and effectiveness of the ERMF and
supporting frameworks to manage and mitigate risk
Reviewing the Group’s approach to controlling each principal
risk and its capability to identify and manage such risks
Reviewing emerging risks as they arise, including
consideration of their potential impact on the Group’s
business objectives, strategy and business plans, as well as
risk choices, appetite and thresholds
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 Performance ExCo)
Reviewing the process and outcome of the Group’s ICAAP,
ILAAP and Recovery Plan and making recommendations to
the Risk and Compliance Committee and Board for approval
Page 172
•
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.
Asset and Liability Committee (‘ALCO’)
ALCO comprises heads of relevant functions and is chaired by
the Balance Sheet Risk Director.
The principal purpose of ALCO is to monitor and review the
financial risk management of the Group’s balance sheet. As
such, it is responsible for overseeing all aspects of market
risk, liquidity risk, 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 the
ERC to the Risk and Compliance Committee.
Customer and Conduct Committee (‘CCC’)
The CCC comprises heads of relevant functions and is chaired
by the Conduct and Compliance Director.
The CCC is responsible for overseeing the management of
the Group’s conduct risk and regulatory compliance risk
(including financial crime risk), so that they are managed within
appetite and customers receive good outcomes.
The CCC considers conduct risk information such as: details
of conduct or regulatory compliance breaches; systems and
procedures for delivering good 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. It is responsible
for overseeing adherence to FCA Consumer Duty principles and
outcomes through robust project oversight and the review and
challenge of the annual Consumer Duty report prior to escalation
to the Board.
With respect to compliance, the CCC is responsible for
overseeing the maintenance of effective systems and controls
to meet conduct-related regulatory obligations. It is also
responsible for reviewing the quality, adequacy, resources, scope
and nature of the work of the Compliance function, including the
annual Compliance Monitoring Plan.
Credit Committee
The Credit Committee comprises senior managers from the
Risk and Compliance, 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 Credit 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 to the Board or the Risk and
Compliance Committee. The Credit Committee also operates
the Group’s most senior lending mandate.
Operational Risk Committee (‘ORC’)
The ORC comprises the heads of relevant functions and lines of
business 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. Although the CCC is the prime
oversight body relating to Financial Crime, the ORC retain
oversight through the annual review of the Money Laundering
Reporting Officer report, and of fraud-related risk events, given
that financial crime is an Operational Risk category.
The remit of the ORC also includes risks arising from personnel,
technology and environmental matters within the business,
including those arising from the use of third parties. The ORC
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.
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. An effective risk culture is seen
as a key enabler to the successful delivery and execution of the
Group’s ERMF.
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 and
fundamental to its Code of Conduct, which applies to
all employees.
Enhancing and embedding the formal approach to measuring
and monitoring the Group’s risk culture has been a priority
activity throughout the financial year, and the success in
achieving this was evident through the results of the employee
engagement survey in June. It was pleasing that 100% of
respondents indicated that they clearly understood their risk
management responsibilities and considered risk in their
day-to-day roles, while 95% stated that management actions
consistently aligned to their communications on
risk management.
Page 173
Corporate Governance Various initiatives have also 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 included:
•
•
•
Regular reporting to risk committees on the Group’s risk
culture based on four agreed components: Leadership and
Direction; Individual Commitment; Joint Ownership; and
Governance, together with clear measures to evidence these
Undertaking of an annual risk maturity assessment across
each area of the business that includes an evaluation of
each area’s perception of risk and how its risk management
activities are viewed and put into practice
Strengthening the community of risk champions, who
represent each of the business areas, to promote and embed
a risk-aware culture across the Group
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 good
outcomes, particularly for those customers considered to
be vulnerable, is central to the Group’s risk management
approach and is aligned with the embedding of the FCA
Consumer Duty
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.
B8.4 Risk management
framework
Introduction
The Group’s 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 provide 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 continuous improvement in its
enterprise-wide risk management system to ensure it remains
proportionate and fit for purpose. 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 the planned programme of
work to enhance the risk management approach and further
strengthen the ERMF to support the Group’s strategic
aspirations has been completed. Key achievements during the
year have included a refresh of all principal risk policies, ensuring
they remain relevant and reflect the minimum controls expected.
Particular focus has been on enhancing the Conduct risk policy
to ensure it fully aligns to the expectations under the new FCA
Consumer Duty.
Further development and refinement of risk appetite measures
and metrics remains a key priority across all risk types and
reporting has been enhanced to reflect this. Given the work
already undertaken over the last two years on developing the
framework, the present focus is on ensuring that the ERMF
operates in line with expectations, through a more structured
programme of assurance across all risk types and components
of the framework. Delivery of these enhancements has been
facilitated by further embedding the Group’s risk culture,
effective stakeholder management, targeted education, and a
collaborative approach between business areas and the Risk and
Compliance function which continues to work well.
Priorities for the next twelve months include focussing on the
alignment of business areas’ risk management and control
activities to the core control requirements set out in the Group’s
risk policies including broadening the coverage of first line
control testing around these core controls. A key objective will be
completing a comprehensive assessment of the appropriateness
of the Group’s risk management software, to ensure it can
continue to fully support its risk management capability.
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 to support 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 its 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, the
ILAAP and the Recovery Plan
Page 174
•
•
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:
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 Line 1 and Line 2. This function is overseen
by the Audit Committee and led by the Internal Audit Director
who reports directly to the Chair of the Audit Committee.
Internal Audit provides independent assurance on:
o Line 1 and Line 2 risk management activities
o Effectiveness of the ERMF
Three lines of defence
o Appropriateness and effectiveness of internal controls
Line 1
Line 2
Line 3
o Effectiveness of policy implementation
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 chairs the ERC.
The function is overseen by the Risk and Compliance
Committee, ERC 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
o
Maintaining open and constructive engagement with the
regulatory authorities
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
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 the 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 and escalated to the Risk and
Compliance Committee when appropriate.
Risk appetite is central to the effective implementation
and operation of the ERMF. The risk appetite framework
ensures 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 175
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. Further information on these risks is provided 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.
Capital
risk
Liquidity and
funding risk
Reputational
risk
Strategic
risk
Market
risk
Climate
risk
Credit
risk
Conduct
risk
Model
risk
Operational
risk
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
that it maintains insufficient
capital to operate effectively,
including meeting minimum
regulatory requirements,
operating within board-
approved risk appetite, and
supporting its strategic goals.
The Bank of England have yet
to publish their final policy
for the implementation of the
Basel 3.1 standards in the UK,
which is currently intended to
be effective from 1 July 2025.
A robust process exists over reporting capital
metrics, 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.
The Group continues to engage with the PRA in
respect of its application for the accreditation
of its IRB approach to buy-to-let credit risk
for capital adequacy purposes, responding to
feedback as the regulator proceeds with its
internal assessment process.
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,
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 continued to be
subject to the pressures which arose
following Russia’s intervention in Ukraine,
although these have not worsened
significantly over the period.
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.
Further information about the Group’s management of capital, including quantitative capital measures, is set out in note 61 to
the accounts.
Page 176
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.
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.
The Group maintains a diversified range of both
retail and wholesale funding sources to cover
current and future business requirements.
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. The Board, through the delegated
authority provided to the ALCO, sets limits for
the level, composition and maturity of funding
and liquidity resources.
The Group’s holdings of its own mortgage backed
securities, together with assets pre-positioned
with the Bank of England, mean that it has ready
access to wholesale funding or liquidity if required.
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, resulting
in increased levels of liquid assets being
held, and higher LCR and OLAR levels
year-on-year.
Despite a number of market disruptions
during the year, including a number of
bank failures in March and April 2023,
liquidity risk is considered to have
reduced from its level at the start of the
year, when it was elevated by the fallout
from the September 2022 ‘mini-budget’.
More detailed information on the Group’s liquidity risk profile, including quantitative data, is set out in note 64 to the accounts.
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 the treasury function, 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 mismatches.
While 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,
markets were generally more stable at
30 September 2023 than a year earlier.
The Group’s overall market risk profile,
relative to its balance sheet, has remained
broadly similar to that at the previous year
end, and therefore associated risk levels
remain generally stable compared to the
previous period end.
More detailed information on the Group’s management of market risk is set out in note 65 to the accounts.
Page 177
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:
•
•
•
Customer risks through
failure to screen potential
borrowers, or to manage
repayments
Concentration risk in
credit portfolios through
an uneven distribution of
exposures of borrowers,
asset classes, sectors or
geographies
Reduction in the value of
collateral owned by the
Group, or secured against
debt owed to it
•
Wholesale counterparty risk
• Outsourcer default risk
The Group has a robust credit risk framework
supported by comprehensive policies in place
that set out detailed criteria which must be met
before loans are approved. Exceptions to credit
policies require approval by the Credit Risk
function, operating under a mandate from the
Credit Committee.
The Group uses a range of sources to inform
expectations of key external factors such as
interest rate movements and house price
inflation which are in turn used to guide policy and
underwriting.
The Group also continues to develop
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.
Higher interest rates, rising costs, and
resource shortages have been a key
feature of the lending environment during
the last twelve months. However, the
Group’s prudent credit policies combined
with consistently high lending standards,
have ensured that the impact on customer
loan repayments has been modest so
far. Arrears remain favourable compared
with historical levels, with impacts being
generally confined to early arrears states
as borrowers adjust their cashflows to
accommodate the higher costs. 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
robust, the Group continues to monitor the
potential future impacts of the increased
interest rate environment, house price
movements and higher costs of living and
doing business, 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 is
considered to have increased compared
to 30 September 2022.
More information on the Group’s retail and wholesale credit risk profiles, including quantitative credit measures, is set out in note
63 to the accounts.
Page 178
Model Risk
Description
Mitigation
Year-on-year change
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 and
the Group’s continuing investment in this
area, model risk remains within appetite
and the outlook remains stable.
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.
A robust framework of management and
governance is in place to manage the risks
associated with the use of internally developed
models. 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. It includes
clear development, implementation and ongoing
oversight principles, together with requirements
for independent validation based on model
materiality criteria.
PRA Supervisory Statement SS 1/23, which
addresses model risk management principles for
banks and applies to firms with permission to use
internal models to calculate regulatory capital,
was published in the year. Firms have twelve
months from the grant of such permissions to
comply with the expectations of the SS. The
Group has begun a programme of work to ensure
compliance with the principles in advance of
the Group receiving IRB accreditation, and is
well-placed to meet the requirements within the
timeframes required.
Information on the Group’s use of models in its impairment provision calculations is given in note 21 to the accounts.
Reputational Risk
Description
Mitigation
Year-on-year change
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.
Maintenance of a strong
reputation across all business
lines, operational activities,
and the conduct of employees
and associated third parties is
core to the Group’s philosophy.
Detrimental reputational
impacts may result from
internal actions and external
events, as a consequence of
the crystallisation of other
principal risks, or through
failure to safeguard the
integrity of the Group’s brand
or meet external expectations
in its business practices.
The reputational risk policy supports reputational
risk management across the Group. Reputational
issues are considered at Board and ExCo level
and, where relevant, will be identified, reviewed and
escalated through risk committee governance.
The reputational impacts of changes to
strategy, pricing, people, processes or third-party
relationships are explicitly considered in the
decision-making process and are reviewed by
the Director of External Relations. The Group will
not undertake any activity it considers might be
damaging to its reputation.
Employees adhere to defined standards of
conduct, encompassing policies, procedures and
ways of working. These are defined in the Group’s
Code of Conduct.
The Group has an experienced External
Relations function which manages all Group
communications and ensures that the reputational
profile of the Group is protected. Reputational risk
is monitored through tracking traditional and social
media coverage, net promoter scores, review
platforms and regular customer surveys.
Any material risk events are reviewed for
reputational impact, and mitigating actions are
initiated as appropriate.
Page 179
Corporate Governance Strategic Risk
Description
Mitigation
Year-on-year change
The Group’s strategy as a
specialist lender is key to
its operating model and
business planning. However,
there is a risk that changes
to 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.
Whilst the political and economic landscape
has stabilised somewhat over the year,
there remains some uncertainty around
the performance of the UK economy in
both the near and longer term. Material
increases in the cost of living, interest rates
and businesses' input costs, continue to
put pressure on household and corporate
disposable income. The full impacts of this
uncertainty, coupled with implications of the
UK’s new trading relationships post-Brexit,
are still to be fully determined, as are those
of any potential change of political direction,
with a UK general election due before
January 2025.
Despite the wider economic challenges,
the Group has remained resilient
throughout the year, and has made strong
progress in meeting the strategic targets
in its corporate plan. In particular it has
continued to make significant progress
with its digitalisation programme which
remains a key priority.
Notwithstanding the apparently more
stable economic situation and its
continuing strong activity levels, the Group
recognises that the full impact of interest
rate rises is unlikely to be immediate, with
the potential for further economic and
property market disruption into the new
financial year presenting a further risk to
the execution of the Group’s strategy.
Page 180
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.
The Group continues to actively engage with
public forums such as Bankers for Net Zero
(‘B4NZ’), the Mission Zero Coalition and
UK Finance to support the development
of future policy and regulation.
Ongoing and enhanced climate change analysis,
supported by scenario testing, continues to be
further embedded throughout the business to
inform longer term strategic planning.
The Sustainability Committee provides
comprehensive oversight of climate initiatives
across each business line, whilst the Credit
Committee monitors the performance of
mortgaged property collateral against
EPC data.
The Group has continued to make
progress on its climate change agenda,
with activity focused on enhancing its
financed emissions balance sheet,
continued public policy advocacy through
B4NZ, and enhancing its approach to
climate change scenario analysis.
The levels of regulatory scrutiny and public
interest in this area continue to be high.
However, the Group’s approach has
matured in the year, and a proportionate
approach to managing the risks and
opportunities associated with climate
change has been maintained.
Although there is significant uncertainty
in respect of the direction of government
policy and regulation in this area, the
Group’s scenario analysis assessment
indicates that its exposure to climate
change impacts is being managed
appropriately and does not pose it a
significant or increasing risk.
Information on the Group’s management of climate-related risks is set out in Section A6.4 in accordance with the
recommendations of the TCFD.
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 poor 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,
including those in financial difficulties.
During the year work was undertaken to review
and enhance the Group’s management of conduct
risk in preparation for the introduction of the FCA
Consumer Duty in the year. 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
Remuneration Committee and 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, including the cost of living
crisis, increasing input costs for businesses,
and rising interest rates and mortgage
payments, is likely to place strain on some of
the Group’s customers. This will potentially
increase the risk of customer vulnerabilities,
particularly in relation to financial resilience.
The introduction of the FCA’s Consumer
Duty also raises the expectations of firms
to proactively seek to prevent causes of
foreseeable harm, and to identify harm
when it occurs.
Page 181
Corporate Governance Operational Risk
Description
Mitigation
Year-on-year change
Operational risk arises
across the Group through
the possible inadequacy or
failure of internal processes,
people and systems or from
external events.
Operational risk is
inherently diverse in nature.
All the Group’s activities
create various forms of
operational risk which need
to be managed through a
strong control and oversight
structure. Exposure to
operational risk will be
exacerbated through
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.
Operational risk is managed 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
Information Technology, Data Protection,
Change Management, Procurement,
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 that the Group is well-protected
in the face of the evolution of cyber threats
particularly as it 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. Operational resilience remains
a key driver with consideration at all stages of the
project lifecycle.
The Group relies on third party providers for a
number of key services including in support 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.
The Group continues to focus on building an
engaged and highly skilled workforce through
the delivery of effective reward, succession
planning, recruitment, development and
retention strategies. In addition, the Group
remains committed to the wellbeing of its
employees, and its employee networks play a
crucial role in ensuring leadership understand
and can act on employee feedback.
The Group does not consider that it
has a higher than average likelihood of
being subject to a cyber threat, however
the general threat level has significantly
increased following the impacts of the
conflict in Ukraine. Given the pace at which
the external cyber threat level continues
to evolve, the Group remains committed
to investment in this area on a long-term
basis, focussing on key areas such as
data loss prevention and vulnerability
management. Ongoing assessment of,
and response to, the Group’s cyber profile
remains integral to successful execution
of its overall strategy.
Recruitment and retention in some
specialisms remain challenging given
wider skill shortages across the industry.
Changing working patterns and economic
uncertainty continue to influence the
recruitment market. More generally,
impacts of the war in Ukraine and the
wider cost of living challenges have further
increased potential risk exposures across
key operational risk categories such as
financial crime.
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.
The Group continues to make strong
progress on its strategic transformation
programme, which it anticipates will
benefit operational risk management in
the longer term. However, it is recognised
that significant change can exacerbate
operational strains in the short term.
Potential for such issues is being carefully
managed through robust governance
and oversight.
Whilst the Group continues to
maintain a robust control environment
and operational risk related losses
remain at historically low levels, the
present operating environment poses
considerable challenges which increase
inherent operational risks.
Page 182
B9. Directors’ report
The directors of Paragon Banking Group PLC
(registered number 2336032) submit their Report prepared in
accordance with Schedule 7 to the Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations
2008 ('Schedule 7'), which also includes additional disclosures
made in accordance with the Listing Rules and the Disclosure
Guidance and Transparency Rules of the FCA.
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 2024.
None of the directors has a service contract with the Company
requiring more than 12 months’ notice of termination to be given.
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 Zoe Howorth
who was appointed as a director on 1 June 2023.
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
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 2023.
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.
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 45 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 59 to
the accounts. Votes attaching to shares held by the Group’s
employee benefit trust are not exercised at general meetings of
the Company.
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.
The Company presently has the authority to issue ordinary
shares up to a value of £11.5 million and to make market
purchases of up to 23.0 million £1 ordinary shares. These
authorities expire at the conclusion of the forthcoming AGM
on 6 March 2024 and resolutions will be put to that meeting
proposing that they be renewed.
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 corporate
website at www.paragonbankinggroup.co.uk.
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
1 March 2023 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).
Page 183
Corporate Governance This authority will expire at the conclusion of the next AGM,
and the Board considers it would be appropriate to renew this
authority. It therefore intends to seek shareholder approval to
purchase 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 14 June 2022 the Group announced an extension of its share
buy-back programme originally announced on 7 December 2021
to up to £75.0 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 2022. On
6 December 2022 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 2022. This programme was extended to
£100.0 million on 6 June 2023 for reasons set out in section 4.3 of
the Half Year Financial Report for the six months ended
31 March 2023, published on that day. During the year 20,721,957
£1 ordinary shares (2022: 13,011,285) having an aggregate
nominal value of £20,721,957 (2022: £13,011,285), were purchased
under these programmes and initially held as treasury shares.
Total consideration paid in the year was £111.5 million, including
costs (2022: £66.9 million). This programme was completed on
22 September 2023.
On 1 June 2023, 12,870,044 ordinary shares previously held in
treasury were cancelled, leaving a balance held in treasury of
2,000,000 shares. The cancelled shares had a nominal value of
£12,870,044 and represented 5.68% of the issued share capital
excluding treasury shares at that time.
During the year 1,418,430 shares held in treasury were
transferred to the holders of maturing options granted under the
Group’s Sharesave share option plan (2022: nil). Consideration
received in respect of these shares was £4.0 million (2022: nil).
The number of treasury shares held at 30 September 2023
was 10,074,002 (2022: 3,640,519), representing 4.61% of the
issued share capital excluding treasury shares (2022: 1.53%).
The maximum holding of treasury shares during the year was
14,870,044 (2022: 12,100,834) representing 6.56% of the issued
share capital excluding treasury shares at that time (2022: 4.83%).
Dividends
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 2023.
Shareholder
% Held Notification
date
Liontrust Investment Partners LLP
5.07
21/09/2020
Royal London Asset Management
5.04
26/04/2023
Dimensional Fund Advisors LP
5.00
21/07/2021
Franklin Templeton Fund
Management Limited
4.96
10/01/2022
On 1 November 2022, Pendal Group Limited notified the
Company that their interest had dropped below 5%.
On 15 November 2022, Janus Henderson Group PLC notified
the Company that their holding had reduced below 5%.
The percentages quoted above were calculated by reference to
the total voting rights (‘TVR’) at the relevant date.
As at 5 December 2023, 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.
An interim dividend of 11.0 pence per share was paid during the
year (2022: 9.4 pence per share).
Research and development
The directors recommend a final dividend of 26.4 pence per share
(2022: 19.2 pence per share) which would give a total dividend
for the year of 37.4 pence per share (2022: 28.6 pence per share)
subject to approval at the forthcoming AGM.
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.
Capital reorganisation
On 28 March 2023 the High Court confirmed the cancellation of
Company’s capital redemption reserve, following approval at the
AGM on 1 March 2023. This reserve had arisen on the cancellation
of ordinary shares which had been purchased in the market and
held in treasury. The £71.8 million balance outstanding on the
capital redemption reserve was transferred to the profit and loss
account and included within distributable reserves.
Political expenditure
During the year ended 30 September 2023 no political donations
were made by any Group company (2022: £nil).
Page 184
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 6 March 2024
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 47).
The Paragon Banking Group PLC Employee Trust is an
independent trust which holds shares for the benefit of employees
and former employees of the Group in order to satisfy awards
under employee share plans. The Company funds the trust from
time to time, to enable it to acquire shares to satisfy these awards.
During the year, the trust made market purchases of 1.5 million
ordinary shares (2022: 2.5 million). As the shares included in these
arrangements are held on the consolidated balance sheet, this
has no effect on the amounts reported by the Group.
The trustee will only vote on those shares in accordance with
the instructions given to the trustee and in accordance with the
terms of the trust deed. The trustee has waived the trust’s right
to dividends on all shares held within the trust.
Details of the shares held by the trust are set out in note 47 and
details of the share-based remuneration arrangements are given
in note 59.
Information presented in other sections
Certain information required to be included in a directors’ report
by Schedule 7 can be found in the other sections of the Annual
Report, as described below. All the information presented in
these sections is incorporated by reference into this Directors’
Report and is deemed to form part of this report. Readers are
also referred to the cautionary statement on page 2.
•
The Group’s business activities, together with commentary on
the likely future developments in the business of the Group
(including the factors likely to affect future development
and performance) and its summarised financial position 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 62 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 2023, 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.
Ciara Murphy
Company Secretary
6 December 2023
Page 185
Corporate Governance B10. Responsibility statement
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 2023, 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 Disclosure Guidance and Transparency Rule
(“DTR”) 4.1.16R, the financial statements will form part of the
annual financial report prepared in accordance with DTR 4.1.17R
and 4.1.18R. The auditor's report on these financial statements
provides no assurance over whether the annual financial report
has been prepared in accordance with those requirements.
Confirmation by the Board of Directors
The Board of Directors currently comprises:
R D East
(Chair of the Board)
N S Terrington
(CEO)
R J Woodman
(CFO)
H R Tudor
Non-executive director
B A Ridpath
(Non-executive director)
G H Yorston
(Non-executive director)
A C M Morris
(Non-executive director)
P A Hill
(Non-executive director)
T P Davda
(Non-executive director)
Z L Howorth
(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 2023
Page 186
Page 187
Corporate Governance Independent
Auditor’s Report
On the financial statements
P190
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
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 2022),
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’) for the year ended
30 September 2023 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 67
other than the disclosures labelled as unaudited in note 61.
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 2023 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 eight financial years ended 30 September 2023. 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 190
Key audit matter
Our response
Impairment allowances on loans to customers
Risk vs 2022
(£73.6 million; 2022: £63.5 million)
We performed the tests below 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.
Our procedures included:
Refer to the Audit Committee Report, accounting
policy note and notes 21 to 25 (financial disclosures).
•
Our economics expertise: We involved our own
economic specialists, who assisted us in:
Subjective estimate
The measurement of expected credit losses (‘ECL’)
involves significant judgements and estimates. The risk
of material misstatement of ECL remains 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.
Judgemental 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. The Buy-to-Let
mortgages and Asset Finance loans portfolios are the
most significant in this regard.
Model estimations – Inherently, judgemental 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 and assumptions used are the key drivers of
the Group’s ECL results and are therefore the most
significant judgemental 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
allowances on 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 25).
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.
-
-
assessing the reasonableness of the Group’s
methodology for determining the economic
scenarios used and the probability weightings
applied to them; and
assessing the overall reasonableness of the
economic forecasts by comparing the Group’s
forecasts to our own modelled forecasts.
•
Our credit risk modelling expertise: We involved
our own credit risk modelling specialists, who
assisted us in:
-
-
-
-
-
evaluating the Group’s impairment methodologies
for compliance with IFRS 9;
for models which were changed or updated
during the year, evaluating whether the changes
or updates were appropriate by assessing
the updated model methodology against the
applicable accounting standard;
for a selection of models, assessing the
reasonableness of the model predictions by
reperforming the model monitoring to compare
the predictions against actual results and
evaluating the resulting differences;
evaluating the model output for a selection of
models by independently rebuilding the model
code in line with the corresponding model
functionality and comparing our output with
management’s output; and
independently applying management’s staging
methodology and inspecting model code for
the calculation of the ECL model to assess its
consistency with the Group’s approved staging
criteria and the output of the model.
•
Test of details: Key aspects of our testing in addition
to those set out above involved:
-
-
-
-
assessing the reasonableness of each
judgemental adjustment by comparing these
against our independent assessment calculated
by applying alternative calculations and
assumptions; and performing sensitivity analysis;
testing the key LGD assumptions impacting
the Group’s overall ECL model calculation to
assess their reasonableness. This included
performing sensitivity analysis to understand
the significance of certain assumptions; and
assessing the key assumptions against the
Group’s historical experience;
for a selection of portfolios, reperforming the
calculation of the loan staging applied and
comparing to management’s staging outputs; and
for a selection of portfolios, reperforming the
calculation of the LGD and the ECL measured on
the loan portfolio.
Page 191
Auditors Report Our response
•
Benchmarking assumptions: Key aspects of our
testing involved:
-
-
assessing the completeness of judgemental
adjustments to the model-driven ECL by performing
benchmarking to comparable peer group
organisations and using our knowledge of the Group
and its industry to challenge the completeness of
risks addressed in the adjustments; and
testing the key LGD assumptions impacting the
Group's overall ECL model calculation by comparing
the Group's assumptions to those of comparable
peer group organisations.
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.
Assessing transparency: We evaluated whether
the disclosures appropriately reflect and address the
uncertainty which exists when determining the Group’s
overall ECL. We assessed the sensitivity analysis that
is disclosed. In addition, we challenged whether the
disclosure of the key judgements and assumptions
made was sufficiently clear.
•
•
Our results
As a result of our work, we found the impairment provision
recognised and the related disclosures to be acceptable
(2022: acceptable).
Key audit matter
Our response
Interest receivable on originated loan accounts
Risk vs 2022
(£642.9 million; 2022: £486.7 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 and the expectations regarding future
reversionary interest rates.
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 and reversionary
interest rate assumptions based on its forecasting
process which incorporates historical experience.
Ongoing developments in the UK economy result in a
greater degree of subjectivity in this assessment for the
current year.
We performed the tests below 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.
Our procedures included:
•
•
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. We also applied alternative repayment
profiles based on our recalculations. The historical
comparison 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 and reversionary interest rates
against our own knowledge of industry experience
and trends, including market rates. We also
challenged the appropriateness of the level of
segmentation applied to the loan portfolios
by management.
Page 192
Key audit matter
Our response
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 69).
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.
Key audit matter
Recoverability of goodwill
Risk vs 2022
(£162.8 million; 2022: £164.4 million)
Refer to the Audit Committee Report, accounting
policy note and note 31 (financial disclosures).
Forecast-based assessment
The carrying amount of goodwill is significant to the
financial statements and there may be risks to its
recoverability due to changes in market factors since
acquisition. The estimated recoverable amount is
subjective due to the inherent judgement 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.
Continued 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 recoverability of
goodwill 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 31) 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.
•
•
Sensitivity analysis: We performed sensitivity
analysis over the repayment profiles by applying
alternative profiles incorporating the results from
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. 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
As a result of our work, we found the interest receivable
on originated loan accounts and the related disclosures
to be acceptable (2022: acceptable).
Our response
We performed the tests below 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. Our
procedures included:
•
•
•
•
•
Historical comparisons: We compared the Group’s
previous cash flow forecasts 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 industry experience: We used our knowledge
of the Group and our experience of the industry that
the Group operates in to independently assess the
appropriateness of the key assumptions, including
the discount rate and cash flow forecasts.
Sensitivity analysis: We performed break-even
analysis and applied alternative scenarios considering
the discount rates and sensitising the forecast future
cash flows.
Assessing transparency: We evaluated whether
the disclosures appropriately reflect and address
the uncertainty which exists when determining the
estimated recoverable amount. We assessed the
sensitivity analysis that is disclosed. In addition,
we challenged whether the disclosure of the key
judgements and assumptions made, was
sufficiently clear.
Our results
As a result of our work, we found the resulting carrying
amount of goodwill and the related disclosures to be
acceptable (2022: acceptable).
Page 193
Auditors Report
Key audit matter
Our response
Valuation of the retirement benefit
pension obligation
Risk vs 2022
(£89.3 million, 2022: £97.6 million)
Refer to the Audit Committee Report, accounting
policy note and note 60 (financial disclosures).
Subjective valuation
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 the discount
rate, inflation rate and mortality rates/life expectancy.
Continued 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 60).
We performed the tests below 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. Our procedures included:
•
•
•
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 evaluated whether
the disclosures appropriately reflect and address
the uncertainty which exists when determining
the valuation of the retirement benefit pension
obligation. As a part of this, we assessed the
sensitivity analysis that is disclosed.
Our results
As a result of our work, we found the valuation of the
retirement benefit pension obligation and the related
disclosures to be acceptable (2022: acceptable).
Key audit matter
Our response
Recoverability of parent company’s investment
in subsidiaries
Risk vs 2022
(£637.4 million; 2022: £638.7 million)
Refer to the accounting policy note and note 32
(financial disclosures).
Low risk, high value
The carrying amount of the parent company’s
investments in subsidiaries represents 60.2%
(2022: 65.8%) 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 tests below rather than seeking to
rely on the parent company’s controls because the
nature of the balance is such that we would expect to
obtain audit evidence primarily through the detailed
procedures described. Our procedures included:
•
Tests of detail: We considered the fair value of
the Group with reference to its share price, and
also 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
As a result of our work, we found the resulting carrying
amount of the investments in subsidiaries to be
acceptable (2022: acceptable).
Page 194
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 £10.0 million determined with reference to a benchmark
of Group profit before tax, normalised to exclude fair value
movements and TBMC closure costs in 2023 as disclosed in note
13 and note 11 respectively, of £280.1 million (2022: £8.8 million
determined with reference to a benchmark of Group profit before
tax normalised to exclude fair value movements). This materiality
level represents 3.6% (2022: 3.9%) of the stated benchmark.
Materiality for the parent company financial statements as a
whole was set at £7.0 million (2022: £3.9 million), determined with
reference to a benchmark of current year net assets, of which it
represents 1.0% (2022: 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% (2022: 75%) of materiality
for the financial statements as a whole, which equates to
£7.5 million (2022: £6.6 million) for the Group and £5.2 million
(2022: £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
£0.50 million (2022: £0.44 million), in addition to other
identified misstatements that warranted reporting on
qualitative grounds for the Group and £0.35 million
(2022: £0.19 million) for the parent company.
Of the Group’s two (2022: two) reporting components, we
subjected one (2022: two) to full scope audits for group purposes
and one (2022: nil) to review of financial information (including
enquiry). The component for which we performed a review of
financial information was not individually significant enough to
require an audit for group reporting purposes, but a review was
performed for complete coverage. The components within the
scope of our work accounted for 100.0% (2022: 100.0%) of total
Group revenue, 100.0% (2022: 100.0%) of Group profit before tax,
and 100.0% (2022: 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 2023 Annual
Report, Section A6.4, on pages 64 to 82.
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. The Annual Report
includes narrative 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,
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 195
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 and Company, 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.
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
and Company’s financial forecasts.
We considered whether the going concern disclosure in note 70
to the financial statements gives a full and accurate description
of the directors’ assessment of going concern. We assessed the
completeness of the going concern disclosure.
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 70 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 70 to be acceptable; and
•
the related statement under the Listing Rules set out in
Section A5 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.
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.
Involving our forensics specialists in assessing the
completeness and appropriateness of the identified fraud risk
factors and associated fraud risks.
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.
We did not identify any additional fraud risks.
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. This included searching for those posted and
approved by the same user, journals posted to seldom used
accounts, unbalanced journal postings and those including
specific descriptors, and testing any journal entries identified
where applicable;
•
Assessing whether the judgements made in making
accounting estimates are indicative of a potential bias.
Page 196
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 correspondence and discussed with the
directors and other management, the policies and procedures
regarding compliance with laws and regulations.
As the Group is regulated, our assessment of risks involved
gaining an understanding of the control environment including the
entity’s procedures for complying with regulatory requirements.
We communicated identified laws and regulations
throughout our team and remained alert to any indications
of non-compliance throughout the audit.
The potential effect of these laws and regulations on the
financial statements varies considerably.
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
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 (including consumer duty), 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 (Section A5) 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 197
Auditors Report Our work is limited to assessing these matters in the context
of only the knowledge acquired during our financial statements
audit. As we cannot predict all future events or conditions and as
subsequent events may result in outcomes that are inconsistent
with 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.
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.
Based on those procedures, we have concluded that each of the
following is materially consistent with the financial statements
and our audit knowledge:
Auditor’s responsibilities
•
•
•
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.
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.
The Company is required to include these financial statements in
an annual financial report prepared under Disclosure Guidance
and Transparency Rule (“DTR”) 4.1.17R and 4.1.18R. This auditor’s
report provides no assurance over whether the annual financial
report has been prepared in accordance with those requirements.
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.
Page 198
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.
Michael McGarry (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
6 December 2023
Page 199
Auditors Report The Accounts
Showing the financial position, results and cash
flows of the Group and the Company prepared in
accordance with IFRS and UK law
P202
D1. Primary Financial Statements
P202
P203
P204
P205
P206
P206
P207
P208
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
P209
D2. Notes to the Accounts
P209
P275
P290
P316
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
D1. Primary Financial Statements
D1.1 Consolidated statement of profit or loss
For the year ended 30 September 2023
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 (losses) / gains
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
12
13
14
Note
16
16
2023
£m
27.4
(21.8)
5.6
-
11.5
2023
£m
1,010.6
(561.7)
448.9
17.1
466.0
(170.4)
(18.0)
277.6
(77.7)
199.9
(46.0)
153.9
2023
68.7p
66.3p
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
The results for the current and preceding years relate entirely to continuing operations.
Page 202
D1.2 Consolidated statement of comprehensive income
For the year ended 30 September 2023
Note
2023
£m
Profit for the year
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Actuarial gain on pension scheme
Tax thereon
60
2.4
(0.8)
Other comprehensive income for the year net of tax
Total comprehensive income for the year
2023
£m
153.9
1.6
155.5
2022
£m
15.3
(3.7)
2022
£m
313.6
11.6
325.2
Page 203
The Accounts D1.3 Consolidated balance sheet
For the year ended 30 September 2023
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
Sale and repurchase agreements
Sundry liabilities
Current tax liabilities
Deferred tax liabilities
Retirement benefit obligations
Total liabilities
Called up share capital
Reserves
Own shares
Total equity
Note
17
17
18
26
27
28
44
60
29
30
33
26
34
35
36
37
38
39
40
28
44
60
45
46
47
2023
£m
2,783.3
211.0
14,495.0
615.4
51.0
8.9
-
12.7
74.7
2022
£m
1,612.5
318.4
13,650.4
779.0
39.2
5.4
-
7.1
71.4
168.2
18,420.2
170.2
16,653.6
0.2
0.4
13,234.4
10,569.5
39.9
28.0
-
112.4
145.8
102.1
409.3
586.0
112.3
149.2
2021
£m
1,142.0
218.1
13,408.2
44.2
69.2
-
14.4
-
70.4
170.5
15,137.0
0.3
9,297.4
43.9
516.0
730.0
237.1
149.0
2,750.0
2,750.0
2,819.0
50.0
631.2
-
17.7
-
-
513.1
-
44.4
-
-
90.7
1.4
-
10.3
17,009.6
15,236.3
13,895.1
228.7
1,257.5
(75.6)
1,410.6
241.4
1,223.9
(48.0)
1,417.3
262.5
1,056.1
(76.7)
1,241.9
Total liabilities and equity
18,420.2
16,653.6
15,137.0
Approved by the Board of Directors on 6 December 2023.
Signed of behalf of the Board of Directors.
N S Terrington
Chief Executive
R J Woodman
Chief Financial Officer
Page 204
D1.4 Company balance sheet
For the year ended 30 September 2023
Assets
Cash – retail banks
Sundry assets
Deferred tax assets
Property, plant and equipment
Investment in subsidiary undertakings
Total assets
Liabilities
Retail bond issuance
Corporate bond issuance
Sundry liabilities
Current tax liabilities
Deferred tax liabilities
Total liabilities
Called up share capital
Reserves
Own shares
Total equity
Approved by the Board of Directors on 6 December 2023.
Signed of behalf of the Board of Directors.
N S Terrington
Chief Executive
R J Woodman
Chief Financial Officer
Note
17
27
44
29
32
36
37
40
28
44
45
46
47
2023
£m
27.6
228.8
1.6
13.2
787.9
1,059.1
112.4
149.4
38.4
1.8
-
302.0
228.7
582.4
(54.0)
757.1
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
1,059.1
970.6
1,087.2
Page 205
The Accounts
D1.5 Consolidated cash flow statement
For the year ended 30 September 2023
Net cash generated by operating activities
Net cash (utilised) by investing activities
Net cash (utilised) by financing activities
Net increase in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
Represented by balances within:
Cash
Short-term bank borrowings
D1.6 Company cash flow statement
For the year ended 30 September 2023
Net cash generated by operating activities
Net cash generated by investing activities
Net cash (utilised) by financing activities
Net increase in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
Represented by balances within:
Cash
Short-term bank borrowings
Note
49
50
51
17
Note
49
50
51
17
2023
£m
2,171.7
(3.1)
(1,105.0)
1,063.6
1,930.5
2,994.1
2,994.3
(0.2)
2,994.1
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
2023
£m
86.0
99.0
2022
£m
191.3
69.5
(177.1)
(260.7)
7.9
19.7
27.6
27.6
-
27.6
0.1
19.6
19.7
19.7
-
19.7
Page 206
D1.7 Consolidated statement of movements in equity
For the year ended 30 September 2023
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
£m
£m
£m
£m
Transactions arising from
Profit for the year
Other comprehensive income
Total comprehensive income
Transactions with owners
Dividends paid (note 48)
Own shares purchased
Irrevocable instruction accrual
Exercise of share awards
Shares cancelled
Capital reorganisation
Charge for share based
remuneration (note 57)
Tax on share based remuneration
Net movement in equity in
the year
Opening equity
Closing equity
-
-
-
-
-
-
0.2
(12.9)
-
-
-
(12.7)
241.4
228.7
For the year ended 30 September 2022
-
-
-
-
-
-
0.3
-
-
-
-
0.3
71.1
71.4
-
-
-
-
-
-
-
12.9
(71.8)
-
-
(58.9)
71.8
12.9
Transactions arising from
Profit for the year
Other comprehensive income
Total comprehensive income
Transactions with owners
Dividends paid (note 48)
Own shares purchased
Irrevocable instruction accrual
Exercise of share awards
Shares cancelled
Capital reorganisation
Charge for share based
remuneration (note 57)
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
-
-
-
-
-
-
1.0
-
-
-
-
1.0
70.1
71.1
-
-
-
-
-
-
-
21.5
-
-
-
21.5
50.3
71.8
(70.2)
(70.2)
1,151.2
1,243.4
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
£m
£m
£m
£m
Profit
and loss
account
£m
153.9
1.6
155.5
(67.9)
-
-
(11.4)
(67.3)
71.8
9.6
1.9
92.2
Profit
and loss
account
£m
313.6
11.6
325.2
(68.9)
-
-
(10.3)
(109.4)
-
9.2
(0.5)
145.3
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(70.2)
(70.2)
1,005.9
1,151.2
Own
shares
Total
equity
£m
£m
-
-
-
-
(120.5)
10.8
14.8
67.3
-
-
-
(27.6)
(48.0)
(75.6)
153.9
1.6
155.5
(67.9)
(120.5)
10.8
3.9
-
-
9.6
1.9
(6.7)
1,417.3
1,410.6
Own
shares
Total
equity
£m
£m
-
-
-
-
(79.5)
(10.8)
9.6
109.4
-
-
-
28.7
(76.7)
(48.0)
313.6
11.6
325.2
(68.9)
(79.5)
(10.8)
0.7
-
-
9.2
(0.5)
175.4
1,241.9
1,417.3
Page 207
The Accounts D1.8 Company statement of movements in equity
For the year ended 30 September 2023
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
£m
£m
£m
£m
Profit
and loss
account
£m
Own
shares
Total
equity
£m
£m
254.6
-
254.6
(67.9)
-
-
(5.3)
(67.3)
71.8
9.6
195.5
326.3
521.8
Profit
and loss
account
£m
136.5
-
136.5
(68.9)
-
-
-
(109.4)
-
9.2
(32.6)
358.9
326.3
-
-
-
-
(111.5)
10.8
8.4
67.3
-
-
(25.0)
(29.0)
(54.0)
254.6
-
254.6
(67.9)
(111.5)
10.8
3.6
-
-
9.6
99.2
657.9
757.1
Own
shares
Total
equity
£m
£m
-
-
-
-
(66.9)
(10.8)
-
109.4
-
-
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
Transactions arising from
Profit for the year
Other comprehensive income
Total comprehensive income
Transactions with owners
Dividends paid (note 48)
Own shares purchased
Irrevocable instruction accrual
Exercise of share awards
Shares cancelled
Capital reorganisation
Charge for share based
remuneration (note 57)
Net movement in equity in
the year
Opening equity
Closing equity
-
-
-
-
-
-
0.2
(12.9)
-
-
(12.7)
241.4
228.7
-
-
-
-
-
-
0.3
-
-
-
0.3
71.1
71.4
-
-
-
-
-
-
-
12.9
(71.8)
-
(58.9)
71.8
12.9
-
-
-
-
-
-
-
-
-
-
-
(23.7)
(23.7)
For the year ended 30 September 2022
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
£m
£m
£m
£m
-
-
-
-
-
-
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)
Transactions arising from
Profit for the year
Other comprehensive income
Total comprehensive income
Transactions with owners
Dividends paid (note 48)
Own shares purchased
Irrevocable instruction accrual
Exercise of share awards
Shares cancelled
Capital reorganisation
Charge for share based
remuneration (note 57)
Net movement in equity in
the year
Opening equity
Closing equity
Page 208
D2. Notes to the Accounts
For the year ended 30 September 2023
1. General information
Paragon Banking Group PLC (the ‘Company’) is a company domiciled in the United Kingdom and incorporated in England and Wales
under the Companies Act 2006 with company number 2336032. The Company controls a number of subsidiary entities and presents
financial statements on a consolidated basis for the Company and all its subsidiaries (together the ‘Group’). The address of the
Company’s 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 2023
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 at 30 September 2023 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
These segments are the same as those used at 30 September 2022.
Dedicated financing and administration costs of each of these businesses are allocated to the segment. With effect from the 2023
financial year, interest impacts of fair value hedging activities have been allocated to segments for management accounting purposes.
Comparative figures have been adjusted for consistency. Shared central costs are not allocated between segments, nor is income
from central cash balances or the carrying costs of unallocated savings balances.
Gains on derecognition of financial assets have not been allocated to segment results.
Loans to customers and operating lease assets are allocated to segments as are dedicated securitisation funding arrangements and
their related cash balances.
Retail deposits and their related costs are allocated to the segments based on the utilisation of those deposits. Retail deposits raised
in advance of lending are not allocated.
Other assets and liabilities are not allocated between segments.
All the Group’s operations are conducted in the UK, all revenues arise from external customers and there are no inter-segment
revenues. No customer contributes more than 10% of the revenue of the Group.
Page 209
The Accounts Financial information about these business segments, prepared on the same basis as used in the consolidated accounts of the
Group, is shown below.
Year ended 30 September 2023
Mortgage
Lending
Commercial
Lending
Unallocated
items
£m
713.6
(436.0)
277.6
5.6
283.2
(26.2)
(10.4)
246.6
£m
207.4
(71.7)
135.7
11.5
147.2
(26.4)
(7.6)
113.2
£m
89.6
(54.0)
35.6
-
35.6
(117.8)
-
(82.2)
Mortgage
Lending
Commercial
Lending
Unallocated
items
£m
399.7
(148.5)
251.2
7.4
258.6
(24.4)
(4.6)
229.6
£m
134.8
(23.6)
111.2
9.8
121.0
(24.9)
(9.4)
86.7
£m
11.2
(2.4)
8.8
4.6
13.4
(103.7)
-
(90.3)
2023
£m
277.6
(77.7)
199.9
Total
£m
1,010.6
(561.7)
448.9
17.1
466.0
(170.4)
(18.0)
277.6
Total
£m
545.7
(174.5)
371.2
21.8
393.0
(153.0)
(14.0)
226.0
2022
£m
226.0
191.9
417.9
Interest receivable
Interest payable
Net interest income
Other operating income
Total operating income
Operating expenses
Provisions for losses
Year ended 30 September 2022 (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 210
The assets and liabilities attributable to each of the segments at 30 September 2023, 30 September 2022 and 30 September 2021 on
the basis described above were:
30 September 2023
Segment assets
Loans to customers
Operating lease assets
Securitisation cash
Segment liabilities
Allocated deposits
Securitisation funding
30 September 2022
Segment assets
Loans to customers
Operating lease assets
Securitisation cash
Segment liabilities
Allocated deposits
Securitisation funding
30 September 2021
Segment assets
Loans to customers
Operating lease assets
Securitisation cash
Segment liabilities
Allocated deposits
Securitisation funding
Note
18
29
17
Note
18
29
17
Note
18
29
17
Mortgage
Lending
£m
Commercial
Lending
£m
Total
Segments
£m
12,902.3
1,972.0
14,874.3
-
86.1
44.3
-
44.3
86.1
12,988.4
2,016.3
15,004.7
13,160.4
28.0
13,188.4
2,199.4
-
2,199.4
15,359.8
28.0
15,387.8
Mortgage
Lending
£m
Commercial
Lending
£m
Total
Segments
£m
12,328.7
1,881.6
14,210.3
-
240.5
41.6
-
41.6
240.5
12,569.2
1,923.2
14,492.4
11,864.7
995.3
12,860.0
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
1,573.1
13,402.7
-
123.3
39.3
-
39.3
123.3
11,952.9
1,612.4
13,565.3
10,943.2
1,246.0
12,189.2
1,901.2
-
1,901.2
12,844.4
1,246.0
14,090.4
An analysis of the Group’s financial assets by type and segment is shown in note 18. All the assets shown above were located in the UK.
Page 211
The Accounts
The additions to non-current assets, excluding financial assets, in the year which are included in segmental assets above, are
investments of £15.3m (2022: £14.5m) 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.
2023
£m
2022
£m
15,004.7
14,492.4
2,908.2
615.4
(379.3)
30.4
12.7
168.2
59.9
1,690.4
779.0
(559.9)
29.8
7.1
170.2
44.6
18,420.2
16,653.6
2023
£m
2022
£m
15,387.8
15,053.7
(2,094.5)
(3,389.2)
39.9
3,058.4
17.7
600.3
102.1
3,011.9
44.4
413.4
17,009.6
15,236.3
2023
£m
1,010.6
27.4
11.5
1,049.5
719.2
240.6
959.8
89.7
1,049.5
2022
£m
545.7
24.6
12.6
582.9
407.1
164.6
571.7
11.2
582.9
Note
4
6
8
Total segment assets
Unallocated assets
Central cash and investments
Derivative financial instruments
Fair value hedging adjustments
Operational property, plant and equipment
Retirement benefit obligations
Intangible assets
Other
Total assets
Total segment liabilities
Unallocated liabilities
Unallocated retail deposits
Derivative financial instruments
Central borrowings
Tax liabilities
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 212
4.
Interest receivable
Interest receivable is analysed as follows.
Interest receivable in respect of
Loans and receivables
Finance leases
Invoice finance income
Interest on loans to customers
Effect of fair value hedging of loan assets
Interest on loans to customers after hedging
Pension scheme surplus
Other interest receivable
Total interest on financial assets
The above amounts relate to:
Financial assets held at amortised cost
Finance leases
Pension scheme surplus
Derivative financial instruments held at fair value
Other interest receivable relates principally to cash deposits at central and retail banks.
Note
60
2023
£m
642.9
59.6
4.3
706.8
210.0
916.8
0.4
93.4
1,010.6
2023
£m
740.6
59.6
0.4
210.0
1,010.6
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
Page 213
The Accounts 5.
Interest payable and similar charges
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
Effect of fair value hedging of bonds
Retail bonds
Central bank facilities
Sale and 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 214
Note
60
41
Note
29
57
2023
£m
334.1
54.4
388.5
10.9
34.8
6.6
0.6
6.5
111.9
0.7
560.5
-
-
0.3
0.9
2022
£m
108.8
4.2
113.0
9.1
13.3
6.6
-
9.1
22.2
-
173.3
0.2
0.1
0.2
0.7
561.7
174.5
2023
£m
505.5
55.0
1.2
561.7
2023
£m
19.5
7.9
27.4
(10.7)
(3.2)
(7.9)
(21.8)
5.6
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
7. Gain on derecognition of financial assets
On 8 June 2022 the Group disposed of almost all of its unsecured consumer loan balances, and 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.
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
TBMC closure
Restructuring costs
Other administrative costs
2023
£m
4.8
2.1
4.3
0.3
11.5
2023
£m
108.3
2.9
1.8
3.9
2.0
2.6
48.9
170.4
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
57
10
30
29
11
Restructuring costs arise from a strategic review of the Group’s operational structures and resources carried out in the year and
include consultancy costs and redundancy-related expenses.
The Group incurred no costs in respect of short-term operating leases in the year (2022: none).
Page 215
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)
2023
£m
0.7
1.5
2.2
0.2
-
2.4
0.5
2.9
2022
£m
0.7
1.2
1.9
0.2
-
2.1
0.4
2.5
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. TBMC closure
During the year, after a review of strategic priorities, the Group announced the closure of its TBMC mortgage brokerage business,
which it considered to be non-core. As a result of this decision the remaining goodwill balance of the TBMC CGU and the other
intangible assets relating to the business have been derecognised.
The total amount expensed to the profit and loss account on the closure is set out below.
Goodwill derecognised
Intangible assets derecognised
Other closure costs
Total closure costs
Note
2023
30
29
9
£m
1.6
0.2
0.2
2.0
The contribution to profit of the closed business in the year, which was included in the Mortgage Lending segment, was a loss of
£0.5m excluding the costs shown above (2022: loss of £0.8m).
Page 216
12. Loan impairments – provisions charged / credited to income
The amounts charged / (credited) to the profit and loss account in the year are analysed as follows.
30 September 2023
Provided in period (note 23)
Recovery of written off amounts
Of which
Loan accounts
Finance leases
30 September 2022
Provided in period (note 23)
Recovery of written off amounts
Of which
Loan accounts
Finance leases
13. Fair value net (losses) / gains
Ineffectiveness of fair value hedges (note 26)
Portfolio hedges of interest rate risk
Deposit hedge
Loan hedge
Individual hedges of interest rate risk
Other hedging movements
Net gains / (losses) on other derivatives
Mortgage
Lending
£m
10.8
(0.4)
10.4
10.4
-
10.4
5.1
(0.5)
4.6
4.6
-
4.6
Commercial
Lending
£m
8.3
(0.7)
7.6
10.5
(2.9)
7.6
10.7
(1.3)
9.4
2.4
7.0
9.4
2023
£m
7.8
(23.7)
(15.9)
-
(15.9)
(53.5)
(8.3)
(77.7)
Total
£m
19.1
(1.1)
18.0
20.9
(2.9)
18.0
15.8
(1.8)
14.0
7.0
7.0
14.0
2022
£m
11.6
15.1
26.7
-
26.7
4.7
160.5
191.9
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 26 which also provides a full description of
the Group’s use of derivative financial instruments for hedging purposes.
Page 217
The Accounts
14. 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 44)
Tax charge on profit on ordinary activities
2023
£m
73.6
(1.1)
72.5
(26.5)
46.0
2022
£m
50.6
0.3
50.9
53.4
104.3
The standard rate of corporation tax in the UK applicable to the Group in the year was 22.0% (2022 : 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. Consequently, the current year falls partly in the period during
which the 19.0% rate applies and partly in that where the rate is 25.0%. These measures will increase the standard rate of corporation
tax applicable to the Group 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 rate of tax to the extent these profits exceed a threshold. The effect of the surcharge
shown in note (b) below.
In the financial year ended 30 September 2022 the UK Government enacted legislation reducing the rate of the Banking Surcharge
from 8.0% to 3.0%, from April 2023, while increasing the profit threshold at which the surcharge applies to £100.0m from £25.0m.
This has resulted in the surcharge applying to Paragon Bank in the current year reducing to 5.5%, with a threshold of £62.5m, while
in future years a surcharge of 3.0% on earnings over £100.0m will apply. The impact of this change on deferred tax balances was
accounted for in the year ended 30 September 2022. The combination of the standard rate of tax and the surcharge results in taxable
profits in excess of the annual threshold arising in Paragon Bank being taxed at 27.5% in the current year (2022: 27.0%). This will rise to
28.0% in subsequent financial years.
(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 22.0% (2022: 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
2023
£m
199.9
44.0
0.5
(1.3)
(2.1)
5.1
(0.2)
46.0
2022
£m
417.9
79.4
(0.1)
0.8
10.9
13.1
0.2
104.3
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 movements in the year, which form the largest part of this balance.
Page 218
(c) Factors affecting future tax charges
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.
Various asset leasing businesses are included within the Group’s 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’).
15. Profit attributable to members of Paragon Banking Group PLC
The Company’s profit after tax for the financial year amounted to £254.6m (2022: £136.5m). 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 2023 or 30 September 2022.
16. 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
2023
153.9
224.1
8.0
232.1
2022
313.6
242.7
6.4
249.1
68.7p
66.3p
129.2p
125.9p
Page 219
The Accounts
17. 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
2023
£m
2,783.3
2,783.3
211.0
211.0
2022
£m
1,612.5
1,612.5
318.4
318.4
2021
£m
1,142.0
1,142.0
218.1
218.1
2,994.3
1,930.9
1,360.1
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
2023
£m
2,907.7
86.1
0.5
2,994.3
2022
£m
1,689.1
240.5
1.3
1,930.9
2021
£m
1,236.5
123.3
0.3
1,360.1
The ‘Cash and Cash Equivalents’ amount of £27.6m (2022: £19.7m, 2021: £19.6m) shown in the Company balance sheet is not subject
to restrictions.
Cash and cash equivalents are classified as Stage 1 exposures (see note 22) 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 220
18. Loans to customers
The Group’s loans to customers at 30 September 2023, 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
19
26
2023
£m
2022
£m
2021
£m
12,747.8
12,122.4
11,460.6
154.5
-
206.3
-
281.7
87.3
12,902.3
12,328.7
11,829.6
907.3
747.8
227.6
89.3
825.2
719.9
238.1
98.4
720.3
608.2
168.0
76.6
1,972.0
1,881.6
1,573.1
14,874.3
(379.3)
14,495.0
14,210.3
(559.9)
13,650.4
13,402.7
5.5
13,408.2
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
2023
£m
9.6
49.0
0.2
58.8
2022
£m
10.9
64.4
0.5
75.8
Information on the Estimated Remaining Collections (‘ERCs’), the undiscounted forecast collectible amounts, for first mortgages and
consumer loans is given in note 63. 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 64. 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
2023
£m
1,529.5
-
4,109.0
5,638.5
2,568.7
4,540.6
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
12,747.8
12,122.4
11,460.6
No assets of other classes were pledged as collateral at 30 September 2023, 30 September 2022 or 30 September 2021.
Page 221
The Accounts
19. 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
2023
£m
297.7
559.1
50.5
907.3
2023
£m
318.5
269.9
218.7
143.5
67.1
60.2
1,077.9
(158.1)
919.8
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
2023
£m
272.9
597.0
49.9
919.8
(12.5)
907.3
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
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
20. 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 18, 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:
• 21 Loan impairments – Basis of provision
• 22 Loan impairments by stage and division
• 23 Loan impairments – Provision movements in the year
• 24 Loan impairments – Economic inputs to calculations
• 25 Loan impairments – Sensitivity analysis
The impact on the Group’s profit and loss account for the year is set out in note 12.
Page 222
21. 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. 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 case monitoring
practices and professional credit judgement.
The largest portfolio where a fully modelled approach is not taken is the Group’s development finance book, which has a relatively low
number of cases (less than 250) and a low incidence of historical losses on which to base a model. For this portfolio the impairment
provision is based on the output of internal case-by-case monitoring.
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 conditions at the balance sheet date. 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.
During the current financial year interest rates have risen to their highest levels in some time, and with unusual speed. Rates of
inflation in the UK have been subject to significant fluctuations in the year, reaching 9.6% in October 2022, which the ONS suggested
was a forty-year high point. This type of economic environment is not significantly represented in the historic data sets used by the
Group to construct its IFRS 9 impairment models. It was also noted that the rate of change in the economic situation over the year
might lead to a lagging impact on the credit bureau data which forms an input to models of customer behaviour, which may delay the
recognition of an account potentially at risk.
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 223
The Accounts The methodologies used to derive the Group’s ECL provisions at 30 September 2023 are analysed below.
30 September 2023
Modelled portfolios
Judgemental adjustments thereon
Non-modelled portfolios
Total
30 September 2022
Modelled portfolios
Judgemental adjustments thereon
Non-modelled portfolios
Total
Gross
£m
13,825.4
-
13,825.4
1,122.5
14,947.9
Gross
£m
13,167.2
-
13,167.2
1,106.6
14,273.8
Impairment
£m
(48.3)
(6.5)
(54.8)
(18.8)
(73.6)
Impairment
£m
(39.9)
(15.0)
(54.9)
(8.6)
(63.5)
Net
£m
13,777.1
(6.5)
13,770.6
1,103.7
14,874.3
Net
£m
13,127.3
(15.0)
13,112.3
1,098.0
14,210.3
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, either from operational experience or its regular credit risk monitoring activities. No such evidence was noted at
30 September 2023 or 30 September 2022, and hence no additional accounts were identified as having an SICR.
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 used for internal monitoring 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.
Page 224
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 in note 22,
distinguishing between probationary accounts, receiver of rent accounts, accounts subject to realisation / enforcement procedures
and long term managed accounts, all of which are treated as credit impaired. While other indicators of default are in use, the
categories shown account for the overwhelming majority of Stage 3 cases.
v) Monitoring of ECL estimation processes
The Group’s ECL models are compiled on the basis of the analysis of relevant historical data. Before a model is adopted for use
its operations and outputs are examined to ensure that it is expected to be appropriately predictive and, if it is an updated model,
expected to be more predictive than any existing model. Before a new model is adopted the changes and impacts will be considered
by the CFO, alongside any advice from the Group’s independent model review functions. The performance of all models is reviewed on
an ongoing basis, by senior finance and risk management, including the CFO. Monitoring packs comparing actual and predicted loss
levels are produced at regular intervals, set on the basis of the materiality of each model. The continuing appropriateness of model
assumptions is also reviewed as part of this process.
Models are revisited on a regular basis to ensure that they continue to reflect the most recent data as the available information
increases over time.
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 2023 a major update to the SME
Lending PD model took place, meaning that two of the Group’s four principal PD models, covering over 96% of modelled balances,
have been updated since IFRS9 was implemented.
The adoption of the new SME lending model has enabled the reporting process in the year to be more streamlined, and supported
increased use of scenario analysis, and increased the ability of the model to respond to economic inputs and wider customer credit
data. This included more extensive use of external credit bureau data, enabling at risk cases to be identified for provisioning on a more
timely basis.
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 the next generation of 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 SME lending PD model in the year ended 30 September 2023 on a like-for-like basis were to
increase provision by £0.9m and transfer £10.8m of gross balances from Stage 1 to Stage 2.
Page 225
The Accounts 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.
In the year ended 30 September 2023 the most significant factors in these considerations were the extent to which uncertainties in
the UK economy arising from rapidly rising interest rates, increases in the cost of living and doing business in the UK and the impacts
of the continuing conflict in Ukraine were reflected in current customer performance at the period end and were being fully addressed
by the Group’s provision modelling, particularly in view of the lack of recent observations relating to similar conditions.
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.
The Group’s approach to impairment modelling is based on the analysis of historical credit data. 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 and
broker feedback, insight surveys, industry intelligence, evidence on the wider economy and quantitative and qualitative data and
statements from industry, government and regulatory bodies. These were combined with the expert knowledge within the business
to form a broad estimate of the level of provision required across the Group.
As part of this exercise, the potential for climate related issues to impact on customer business models or security values over the
timescales for ECL calculation required by IFRS 9 was considered. No specific requirement for additional impairment provisions over
the amounts already determined was identified.
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
2023
£m
3.0
3.5
6.5
2022
£m
5.0
10.0
15.0
The movements in the year represent principally the extent to which the anticipated economic and customer behaviours which
gave rise to judgemental adjustments at 30 September 2022 are now observable and thus are reflected by the Group’s models.
The movements also reflect the enhanced ability of the new SME lending PD model introduced in the year to identify potential
impairment, reducing the need for additional overlays. There has also been a reduction in the levels of economic and political
uncertainty in the UK, compared to the position at 30 September 2022, which also impacts on the level of adjustments required.
The movements in the 2022 financial year represented a transition from Covid related overlays to ones which related more to the
responsiveness of the Group’s provision models to economic conditions at the end of that year.
The adjustment at 30 September 2022 in the Mortgage Lending book was 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. While
some of the anticipated impacts have begun to manifest themselves in arrears performance, neither the Group nor the mortgage
industry more generally has seen a significant reaction to higher levels of interest rates and inflation in credit performance as yet.
Combined with potential model limitations in responding to significant rapid changes in interest and inflation rates, management
determined it was appropriate to reduce, but not remove the judgmental adjustment.
Page 226
In the Commercial Lending segment the adjustment at 30 September 2022 related to general economic exposures for SMEs, with
the outlook for the sector considered to be less positive than credit metrics indicated at that time. While business confidence is
somewhat improved over the period, views on the outlook are generally mixed, with contradictory indicators on the likely future
direction. Overall, however, the available information is indicative of a more negative position than indicated by the credit metrics in
the portfolio alone.
During the period a new SME lending model was introduced, addressing some of the weakness in the Group’s modelling approach,
reducing the need for judgemental adjustments. However, issues relating to the availability of data representing similar economic
conditions to those currently being observed remain, and it is likely that in the short term a judgemental adjustment will remain
necessary to ensure appropriate provisioning levels. These factors together reduced the SME lending overlay to £2.5m (2022: £10.0m).
In addition a £1.0m overlay was made to the modelled motor finance provision (2022: £nil) to allow for difficulties noted in that model
in responding to a period of falling inflation rapidly following a period of sharp price rises. This economic scenario depressed the
calculated provision below a level management considered reasonable, given other portfolio data.
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,
SME lending and motor finance portfolios, as appropriate, to individual Stage 1 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
are more fully 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 227
The Accounts 22. 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.
The recommendations of the taskforce on Disclosures about Expected Credit Loss (‘DECL’) suggest standard categories for analysis
of firm’s loan books. In the context of the DECL categorisation the Group’s Mortgage Lending balances are classified as ‘UK retail
mortgage’ business while its Commercial Lending balances, being advanced primarily to SME entities correspond with the ‘UK other
retail’ business classification.
The Group defines coverage as the value of the ECL provision divided by the gross carrying value of the related loans.
Page 228
An analysis of the Group’s loan portfolios between the stages defined above is set out below.
Stage 1
£m
Stage 2*
£m
Stage 3*
£m
30 September 2023
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
12,159.7
1,812.6
13,972.3
(4.8)
(14.8)
(19.6)
12,154.9
1,797.8
13,952.7
0.04%
0.82%
0.14%
625.0
119.8
744.8
(6.1)
(3.3)
(9.4)
618.9
116.5
735.4
0.98%
2.75%
1.26%
22.08%
13.17%
19.32%
-
67.61%
19.35%
* Stage 2 and 3 balances are analysed in more detail below.
Stage 1
£m
Stage 2*
£m
Stage 3*
£m
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%
POCI
£m
17.7
7.1
24.8
-
(4.8)
(4.8)
17.7
2.3
20.0
POCI
£m
21.4
7.4
28.8
-
(1.5)
(1.5)
21.4
5.9
27.3
142.2
63.8
206.0
(31.4)
(8.4)
(39.8)
110.8
55.4
166.2
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%
Total
£m
12,944.6
2,003.3
14,947.9
(42.3)
(31.3)
(73.6)
12,902.3
1,972.0
14,874.3
0.33%
1.56%
0.49%
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%
Page 229
The Accounts Finance leases included above, analysed by staging, were:
30 September 2023
Gross loan book
Impairment provision
Net loan book
Stage 1
£m
873.0
(8.0)
865.0
Stage 2
£m
40.6
(1.9)
38.7
Stage 3
£m
6.0
(2.6)
3.4
Coverage Ratio
0.92%
4.68%
43.33%
30 September 2022
Gross loan book
Impairment provision
Net loan book
801.7
(13.3)
788.4
35.4
(1.5)
33.9
4.4
(2.0)
2.4
Coverage Ratio
1.66%
4.24%
45.45%
POCI
£m
0.2
-
0.2
-
0.5
-
0.5
-
Total
£m
919.8
(12.5)
907.3
1.36%
842.0
(16.8)
825.2
2.00%
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 its closed second charge
mortgage portfolios. Acquired loans which were performing on acquisition are included in the staging analysis above.
Acquired portfolios 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 Group uses arrears multiples as a proxy for days past due, as this measure is commonly used in its arrears reporting. A loan will
generally be one month in arrears from the point it is one day past due until it is thirty days past due.
The value of accounts in Stage 2 has reduced significantly in the Mortgage Lending segment over the year. This is driven principally
by a lower number of accounts identified through model based criteria which are driven by the economic scenarios input into the
models. The economic forecasts at 30 September 2022 included significant short term shifts in interest rates and house prices. These
have been reflected in actual economic performance, to some extent, and the initial parts of the September 2023 scenarios have
lower rate movements.
The number of arrears cases being recorded has increased, as a result of increasing economic pressure on customers, to some extent
representing a proportion of the SICR cases identified at the previous year end. However the scale of this increase is less than indicated
by the Group’s modelling at 30 September 2022, with accounts not, so far, as severely impacted by rate rises and cost-of-living issues as
predicted. Together these factors have led to a reduction in the overall Stage 2 pool.
In the Commercial Lending segment the number of Stage 2 accounts has increased across all categories as the impact of economic
pressures begins to be demonstrated, but arrears levels remain low. The number of Stage 2 cases has also been increased through
the adoption of a new SME lending model, which is better able to identify cases where external data indicates a customer having
credit problems before any impact is seen on the Group’s loan book.
Page 230
Overall Stage 2 provisions have increased with the Stage 2 balance, with coverage levels, on average, also increasing. Provision
coverage levels in the Mortgage Lending segment have generally increased, partly as a result of downward pressure on property
prices impacting on security values. Coverage levels in the Commercial Lending segment increased, although this was more related to
the mix of Stage 2 assets, and the relatively small number of cases involved.
30 September 2023
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 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
< 1 month
arrears
£m
Recent
arrears
> 1 <= 3 months
arrears
£m
£m
518.1
116.3
634.4
(2.3)
(2.9)
(5.2)
515.8
113.4
629.2
0.44%
2.49%
0.82%
15.8
0.4
16.2
(0.1)
-
(0.1)
15.7
0.4
16.1
91.1
3.1
94.2
(3.7)
(0.4)
(4.1)
87.4
2.7
90.1
0.63%
-
0.62%
4.06%
12.90%
4.35%
< 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
625.0
119.8
744.8
(6.1)
(3.3)
(9.4)
618.9
116.5
735.4
0.98%
2.75%
1.26%
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%
Page 231
The Accounts 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 number and value of Stage 3 accounts has increased in the year across all books. This has mostly been driven by increases
in the number of accounts in serious arrears and by an increased number of poorly performing development finance cases in the
Commercial Lending book. This sort of increase is not unexpected in a climate of economic tightening.
Realisations cases, particularly in Mortgage Lending have increased, as the increase in arrears cases reported at the half year works
its way through the system. RoR cases in the Mortgage Lending division have remained broadly stable, however there has been a level
of churn in the book with old cases settled and new appointments made.
Coverage levels in the Mortgage Lending segment on Stage 3 cases have remained broadly similar, despite the falls in house prices
and thus security cover in the year.
The relatively low amount of Commercial Lending cases and the variety of credit profiles covered by the division’s lending means that
the coverage ratio at any particular time tends to be more a function of the particular accounts in the Stage 3 population at that point,
rather than indicative of a general trend. The increased number of development finance cases, where security cover is relatively high,
within the arrears population has reduced the overall percentage provision requirement in that division.
Page 232
30 September 2023
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 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
Probation
> 3 month arrears
RoR managed
Realisations
£m
8.8
1.1
9.9
-
(0.3)
(0.3)
8.8
0.8
9.6
£m
£m
£m
40.4
57.8
98.2
(1.2)
(5.5)
(6.7)
39.2
52.3
91.5
50.3
-
50.3
(16.6)
-
(16.6)
33.7
-
33.7
42.7
4.9
47.6
(13.6)
(2.6)
(16.2)
29.1
2.3
31.4
Total
£m
142.2
63.8
206.0
(31.4)
(8.4)
(39.8)
110.8
55.4
166.2
-
27.27%
3.03%
2.97%
9.52%
6.82%
33.00%
-
33.00%
31.85%
53.06%
34.03%
22.08%
13.17%
19.32%
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%
Page 233
The Accounts 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
2023
£m
89.5
10.2
1.6
1.2
102.5
2022
£m
66.2
14.6
1.6
0.7
83.1
The RoR managed accounts are being managed to ensure the optimal resolution for landlords, tenants and lenders and have largely
reached a long-term, stable position, 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 2015
2016 to 2020
2021 and later
Total managed accounts
Accounts in the process of realisation
30 September 2023
30 September 2022
No.
135
31
15
154
335
225
560
£m
20.1
4.5
2.0
23.7
50.3
41.0
91.3
No.
199
49
24
62
334
141
475
£m
31.2
7.1
3.2
8.1
49.6
23.5
73.1
Receiver of rent accounts in the process of realisation at the period end are included under that heading in the Stage 3 tables above.
In addition to the cases analysed above there were four other receiver of rent cases in acquired mortgage books classified as POCI
(2022: nil), meaning that the Group’s total of receiver of rent cases at 30 September 2023 was 564 (2022: 475).
Page 234
23. 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 2022
Provided in period (note 12)
Amounts written off
Assets derecognised
At 30 September 2023 (note 22)
At 30 September 2021
Provided in period (note 12)
Amounts written off
Assets derecognised
At 30 September 2022 (note 22)
Mortgage
Lending
Commercial
Lending
£m
38.0
10.8
(6.5)
-
42.3
37.7
5.1
(3.6)
(1.2)
38.0
£m
25.5
8.3
(2.5)
-
31.3
27.7
10.7
(12.9)
-
25.5
Total
£m
63.5
19.1
(9.0)
-
73.6
65.4
15.8
(16.5)
(1.2)
63.5
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 2023, enforceable contractual balances of £7.6m (2022: £4.9m) were outstanding on non-POCI assets written off in
the period. This excludes those accounts where a full and final settlement was agreed and those where the contractual terms do not
permit any further action. Enforceable balances are kept under review for operational purposes, but no amounts are recognised in
respect of such accounts unless further cash is received or there is a strong expectation that it will be.
Page 235
The Accounts A more detailed analysis of these movements by IFRS 9 stage on a consolidated basis for the year ended 30 September 2023 and
30 September 2022 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.
The changes in models introduced during the year did not create significant movements in balances.
Loss allowance at 30 September 2022
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 2023
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
Stage 1
Stage 2
Stage 3
£m
25.5
9.5
2.8
(1.7)
(0.2)
(2.5)
(13.8)
-
-
19.6
15.0
7.2
2.6
(1.6)
(0.2)
(2.4)
4.9
-
-
25.5
£m
8.0
-
(2.7)
2.0
(1.9)
2.3
1.7
-
-
9.4
11.3
-
(2.3)
2.3
(0.4)
1.8
(4.7)
-
-
8.0
£m
28.5
-
(0.1)
(0.3)
2.1
14.6
4.0
-
(9.0)
39.8
38.9
-
(0.3)
(0.7)
0.6
4.3
3.4
(1.2)
(16.5)
28.5
POCI
£m
1.5
-
-
-
-
-
3.3
-
-
4.8
0.2
-
-
-
-
-
1.3
-
-
1.5
Total
63.5
9.5
-
-
-
14.4
(4.8)
-
(9.0)
73.6
65.4
7.2
-
-
-
3.7
4.9
(1.2)
(16.5)
63.5
During the year ended 30 September 2023 the impairment allowance increased, driven mostly by the increase in Stage 3 and POCI
cases, a result of the level of actual defaults in the period, particularly in the development finance business, and by reduced levels of
available security through declining house prices in the mortgage segment.
The net reduction in Stage 1 provisions includes the effect of changes in judgemental adjustments in the period, with items formerly
addressed by these provisions beginning to move through Stage 2 and Stage 3. These movements were driven by both account
performance, and by the impact of more severe actual and forecast economic conditions.
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 in that year came mostly from new lending, coupled with the need to make judgemental increases in
the provision balance. Stage 2 provisions reduced slightly as the impacts of additional Covid-related SICRs in 2021 fell away. Stage 3
provision declined as bought forward cases were resolved, in both the Commercial Lending and Mortgage Lending divisions.
Page 236
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 2022
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 2023
Loss allowance
Carrying value
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
Stage 1
£m
12,157.0
3,128.4
1,258.9
(365.6)
(28.9)
(2,773.3)
-
-
595.8
13,972.3
(19.6)
13,952.7
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
Stage 2
£m
1,963.6
-
(1,255.7)
372.9
(104.7)
(250.6)
-
-
19.3
744.8
(9.4)
735.4
1,279.1
-
(516.8)
1,378.2
(16.6)
(230.4)
-
-
70.1
1,963.6
(8.0)
1,955.6
Stage 3
£m
124.4
-
(3.2)
(7.3)
133.6
(44.8)
-
(9.0)
12.3
206.0
(39.8)
166.2
164.3
-
(2.6)
(13.0)
46.1
(55.6)
(1.5)
(16.5)
3.2
124.4
(28.5)
95.9
POCI
£m
28.8
-
-
-
-
Total
£m
14,273.8
3,128.4
-
-
-
(10.5)
(3,079.2)
-
-
6.5
24.8
(4.8)
20.0
124.3
-
-
-
-
(33.1)
(73.8)
-
11.4
28.8
(1.5)
27.3
-
(9.0)
633.9
14,947.9
(73.6)
14,874.3
13,468.1
3,020.8
-
-
-
(2,630.3)
(75.3)
(16.5)
507.0
14,273.8
(63.5)
14,210.3
Other changes includes interest and similar charges.
Page 237
The Accounts
24. 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 2023
forecasting cycle (the ‘October forecast’), the Group has adopted a central economic scenario derived using a broadly equivalent
approach to that used in September 2022, with the starting point of the scenario updated to reflect the actual movements of
economic variables in the year.
The general trend of the Group’s central forecasts follows that published by the Bank of England in August 2023, however the Group
has taken a more pessimistic position than the Bank. Monetary policy is forecast to remain tight, with pressure on real incomes,
leading to minimal growth, rising unemployment and a slow decline in inflation. As a result, interest rates are forecast to remain high,
with a short-term decline in property values.
Compared to the central scenario adopted at 30 September 2022, the new central forecast is generally more pessimistic across
most variables, with a much more severe decline in house prices than in the earlier scenario and a more prolonged period of elevated
interest rates. The scenario also begins from the actual September 2023 economic position, so the interest rate rises, increased
inflation and house price falls observed in the period are included in the starting position.
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 forecast period, with the upside scenario having a more rapid reduction
in inflation, leading to a faster reduction in base rates and a stronger recovery. The downside includes traditional recessionary factors
with additional pressure on house prices and rising unemployment, with interest rates being reduced more rapidly in response.
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 (‘ACS’) being used at 30 September 2023. This scenario is based on a pronounced recession with
interest rates remaining high, rising unemployment and a slump in house prices.
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 2023
Page 238
2021 -2023 FY2023 -2024 FYReporting dateEnd of forecast period used for modelling2024 -2025 FY2025 -2026 FY2026 -2027 FY2027 -2028 FY12.0%10.0%8.0%6.0%4.0%2.0%0.0%SevereCentralDownsideUpside Historical and forecast Unemployment rates (End point measure)
As at September 2022
Following a review of the weightings of the different scenarios, set against the overall potential for variability in the future economic
outlook, the Group decided to maintain the scenario weightings used at 30 September 2022. While the economic outlook is more
settled than it was twelve months earlier there remains a significant divergence in opinions on the likely outlook for the UK economy,
with a potential for serious downside outcomes. This supports the maintenance of the September 2022 weightings.
Sensitivities comparing the effect of these weightings with those which might be seen in a more normal economic environment are
set out in Note 25.
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
2023
40%
10%
30%
20%
100%
2022
40%
10%
30%
20%
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 for 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 239
The Accounts2021 -2022 FY2022 -2023 FYReporting dateEnd of forecast period used for modelling2023 -2024 FY2024 -2025 FY2025 -2026 FY2026 -2027 FY12.0%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 2023
Gross Domestic Product (‘GDP’) (year-on-year change)
2024
0.4%
1.6%
(0.4)%
(3.6)%
2024
(6.4)%
(1.1)%
(10.7)%
(13.1)%
2024
5.5%
5.2%
5.6%
6.0%
2024
4.4%
3.7%
4.5%
15.7%
2024
4.8%
4.3%
5.3%
6.9%
2024
0.8%
1.5%
-
(1.3)%
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
House Price Index (‘HPI’) (year-on-year change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Bank Base Rate (‘BBR’) (rate)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Consumer Price Inflation (‘CPI’) (rate)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Unemployment (rate)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Secured lending (annual change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Page 240
2025
0.9%
1.4%
0.7%
(0.2)%
2025
(1.7)%
5.8%
(2.2)%
(15.1)%
2025
5.4%
4.4%
3.8%
5.8%
2025
2.6%
2.1%
1.0%
12.8%
2025
5.6%
4.6%
6.4%
8.4%
2025
0.3%
1.0%
(0.5)%
(1.8)%
2026
1.0%
1.0%
1.0%
1.2%
2026
4.7%
6.8%
4.0%
-
2026
4.8%
3.7%
2.6%
5.1%
2026
1.6%
2.1%
0.7%
3.7%
2026
6.0%
4.8%
6.7%
7.8%
2026
1.8%
2.5%
1.0%
(0.3)%
2027
1.2%
1.2%
1.2%
1.2%
2027
4.4%
5.0%
4.0%
7.0%
2027
4.4%
3.5%
2.0%
4.3%
2027
1.8%
2.0%
1.8%
2.4%
2027
5.6%
4.4%
6.1%
7.2%
2027
3.0%
3.2%
2.8%
2.5%
2028
1.2%
1.2%
1.2%
1.2%
2028
3.2%
4.5%
2.6%
5.6%
2028
4.1%
3.5%
2.0%
3.4%
2028
2.0%
2.1%
2.0%
2.1%
2028
4.9%
3.9%
5.4%
6.6%
2028
3.0%
3.0%
3.0%
3.0%
Consumer credit (annual change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
2024
3.5%
4.3%
2.8%
1.5%
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
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%
2025
2.3%
3.0%
1.5%
0.3%
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%
2026
3.9%
4.7%
3.2%
1.9%
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%
2027
4.9%
5.1%
4.8%
4.4%
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%
2028
5.0%
5.0%
5.0%
5.0%
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%
Page 241
The Accounts Secured lending (annual change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
Consumer credit (annual change)
Central Scenario
Upside Scenario
Downside Scenario
Severe Scenario
2023
3.3%
4.1%
2.6%
0.2%
2023
3.6%
4.4%
2.9%
(3.7)%
2024
2.6%
3.3%
1.8%
(0.7)%
2024
3.1%
3.9%
2.4%
(4.4)%
2025
2.5%
3.2%
1.7%
1.3%
2025
3.6%
4.4%
2.9%
0.1%
2026
3.5%
4.2%
2.7%
3.0%
2026
3.5%
4.3%
2.8%
2.8%
2027
3.5%
4.3%
2.8%
3.7%
2027
3.5%
4.3%
2.8%
4.7%
After the end of the initial five year period, the final rate or rate of change (as appropriate) is assumed to continue into the future in
each scenario.
To illustrate the levels of non-linearity in the various scenarios, the maximum and minimum quarterly levels for each variable over the
five year period commencing on the balance sheet date are set out below.
Central scenario
Upside scenario
Downside scenario
Severe scenario
Max
%
1.2
4.4
5.5
5.0
6.0
3.0
5.0
Min
%
0.3
(8.2)
4.0
1.5
4.5
-
2.0
Max
%
2.3
7.4
5.3
4.3
4.8
3.8
5.8
Min
%
0.9
(3.1)
3.5
1.8
3.8
0.8
2.8
Max
%
1.2
4.1
5.8
6.0
7.0
3.0
5.0
Min
%
(0.8)
(13.4)
2.0
0.4
5.0
(0.8)
1.3
Max
%
1.2
7.2
6.0
17.0
8.5
3.0
5.0
Min
%
(5.0)
(16.4)
3.3
2.0
5.2
(2.0)
-
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)
30 September 2023
Economic driver
GDP
HPI
BBR
CPI
Unemployment
Secured lending
Consumer credit
30 September 2022
Economic driver
GDP
HPI
BBR
CPI
Unemployment
Secured lending
Consumer credit
Page 242
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
2023
£m
38.4
29.0
67.4
73.6
6.2
2022
£m
29.1
24.2
53.3
63.5
10.2
25. 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.
Scenario
Central
Upside
Downside
Severe
2023
2022
Provision
Difference
Provision
Difference
£m
67.4
59.0
73.4
95.7
£m
(6.2)
(14.6)
(0.2)
22.1
£m
53.3
46.8
62.5
100.3
£m
(10.2)
(16.7)
(1.0)
36.8
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. The sensitivity is based on the weightings used at IFRS 9 transition on 1 October 2018. The use of the 2018
weighting is intended to represent a more settled outlook than has been evident at either of the three most recent year ends.
The weightings used, and the results of applying these sensitivities to the 30 September 2023 scenarios are set out below.
As reported
Sensitivity
Weighting
Impairment
Difference
Central
Upside
Downside
40%
40%
10%
30%
30%
25%
Severe
20%
5%
£m
73.6
67.6
£m
-
(6.0)
Page 243
The Accounts Significant increase in credit risk
The most important driver of SICR is relative PD. If all PDs across the Group’s principal buy-to-let mortgage book were increased by
10%, loans with a gross value of £68.4m would transfer from Stage 1 to Stage 2 (2022: £136.8m), and the total provision would increase
by £0.8m 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 (2022: £0.9m).
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 £0.7m (2022: £2.7m).
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 £0.1m (2022: £0.4m).
26. 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 62 to 65) 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
• Fair value hedges of interest rate risk relating to individual financial liabilities.
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 pre-hedging 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 244
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.
Derivatives in hedge accounting relationships
Fair value portfolio hedges
Interest rate swaps
Fixed to floating
Floating to fixed
Total derivatives in portfolio fair value hedging relationships
Individual fair value hedges
Interest rate swaps
Floating to fixed
Total derivatives in hedge accounting relationships
Other derivatives
Interest rate swaps
Currency futures
Total recognised derivative assets / (liabilities)
2023
Assets
£m
2023
Liabilities
£m
2022
Assets
£m
2022
Liabilities
£m
519.0
76.2
595.2
-
595.2
20.2
-
615.4
(5.1)
(27.0)
(32.1)
(3.7)
(35.8)
(4.1)
-
(39.9)
652.7
0.3
653.0
-
653.0
125.5
0.5
779.0
-
(98.5)
(98.5)
-
(98.5)
(3.6)
-
(102.1)
The credit risk inherent in the derivative financial assets shown above is discussed in note 63.
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.
Derivative financial instruments
Assets
Liabilities
Fair value hedging adjustments
On loans to customers
On retail deposits
On borrowings
Net balance sheet position
Collateral balances
Posted (in sundry assets)
Received (in sundry liabilities)
Note
18
33
27
40
2023
£m
615.4
(39.9)
575.5
(379.3)
30.9
3.7
(344.7)
230.8
-
(383.4)
(383.4)
2022
£m
779.0
(102.1)
676.9
(559.9)
99.7
(460.2)
216.7
-
(388.6)
(388.6)
Page 245
The Accounts
(a) Fair value macro 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 pre-hedging of assets in the pipeline. Interest rate swaps used to pre-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 ended 30 September 2022 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 and the two sections of each hedge were combined in the second
half of the financial year.
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 macro hedges is updated, on a month-by-month basis, using software which compares the overall tenor, value
and rate positions in order that the expected fair value movement of the designated swaps matches the expected interest rate risk
related movement in the fair value of the relevant assets or liabilities as closely as possible over the designation period. 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 pre-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 246
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 63)
• 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 pre-hedging of the lending pipeline.
Hedging Instruments
The hedging portfolios at 30 September 2023 and 30 September 2022 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 the
SONIA reference rate
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 SONIA
Notional principal value
SONIA BGS
Other SONIA swaps
Maturing
Within one year
Between one and two years
Between two and five years
More than five years
2023
2022
Deposit Hedge
Loan Hedge
Deposit Hedge
Loan Hedge
4.22%
-
£m
-
6,257.0
6,257.0
5,253.5
857.5
146.0
-
6,257.0
1.77%
-
£m
31.6
7,781.8
7,813.4
1,616.3
1,238.0
4,959.1
-
7,813.4
1.45%
-
£m
-
4,286.0
4,286.0
3,097.0
987.5
201.5
-
4,286.0
0.99%
-
£m
47.0
6,853.1
6,900.1
1,369.9
1,641.7
3,886.0
2.5
6,900.1
Fair value
49.2
513.9
(98.2)
652.7
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.
Page 247
The Accounts
Accounting impacts
Movements affecting the portfolio fair value hedges during the year are set out below.
Hedging instruments
Interest rate swaps
Included in derivative financial assets
Included in derivative financial liabilities
2023
2022
Deposit hedge
Loan hedge
Deposit hedge
Loan hedge
£m
£m
£m
£m
76.2
(27.0)
49.2
519.0
(5.1)
513.9
0.3
(98.5)
(98.2)
652.7
-
652.7
Notional principal value
6,257.0
7,813.4
4,286.0
6,900.1
Change in fair value used in calculating hedge ineffectiveness
77.7
(262.2)
(94.8)
598.1
2023
2022
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
5,758.1
-
3,986.4
-
Fixed rate loans
Monetary amount of risk relating to Loans to Customers
-
8,043.5
-
7,168.6
Accumulated amount of fair value hedge adjustments included on balance
sheet (notes 33 and 18)*
Of which: amounts related to discontinued hedging relationships
being amortised
Change in fair value used in recognising hedge ineffectiveness
30.9
(379.3)
(4.3)
(69.9)
108.2
238.5
99.7
(7.9)
(559.9)
73.4
106.4
(583.0)
Hedge ineffectiveness recognised
Included in fair value gains / (losses) in the profit and loss account (note 13)
7.8
(23.7)
11.6
15.1
* Under the IAS 39 rules relating to fair value hedge accounting for portfolios of interest rate risk, the change in the fair value of the hedged items attributable to the hedged risk is
shown as ‘fair value adjustments from portfolio hedging’ next to the carrying value of the hedged assets or liabilities in the appropriate note.
(b) Fair value micro hedges
Background and hedging objectives
The Group’s individual fair value hedges of interest rate risk (‘micro hedges’) relate to its long-term fixed interest rate liabilities. The
structure of these borrowings exposes the Group to interest rate risk, in the event of an adverse movement in market interest rates
and during the year the decision was taken to hedge against any future interest rate movements.
The hedge takes the form of a single interest rate swap which is intended to be in place for the expected fixed rate period of the
related borrowing. The terms of the fixed rate leg of the derivative match the terms of the borrowing as far as possible and the hedging
relationship was designated at the point at which the swap contract was entered into.
The hedging relationship is tested for effectiveness on a monthly basis by comparing the movements in the calculated fair value of the
hedged item to the fair value movement in the derivative hedge.
Page 248
Potential sources of ineffectiveness
In its interest rate hedging for individual items the Group seeks to minimise hedge ineffectiveness by aligning the terms of the hedging
instrument as closely as possible with those of the hedged item. The notional amount of the derivative matches that of the hedged
item and settlements are due on the same days and at the same intervals.
Nonetheless, the Group has identified the following possible sources of hedge ineffectiveness in its hedges of interest rate risk:
•
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 63)
•
The small difference between the fixed rate of interest charged on the hedged item and the fixed rate leg of the derivative, where
the impact of discounting will mean that movements in present values of the two flows are not exactly parallel
• The use of different discounting curves in measuring fair value changes in the hedged items and hedging instruments
Hedging instrument
The financial derivative used in the Group’s individual fair value hedge is a single sterling denominated interest rate swap with a
notional value of £150.0m.
Settlement on the swap is twice-yearly, on the same days as those when interest payments on the hedged item fall due. On settlement:
• The payment received by the Group is calculated based on a fixed rate of interest of 3.989% and the notional value of the swap
•
The opposite payment made by the Group is calculated based on the same notional value but using a floating interest rate set at
the compound SONIA reference rate
The swap matures on 25 September 2026 (between two and five years after the balance sheet date).
Accounting impacts
Movements affecting the micro fair value hedges during the year are set out below.
Hedging instruments
Interest rate swaps
Included in derivative financial assets
Included in derivative financial liabilities
Notional principal value
Change in fair value used in calculating hedge ineffectiveness
Hedged items
Fixed rate borrowings
Corporate bond
Accumulated amount of fair value hedge adjustments included in carrying value
Of which: amounts related to discontinued hedging relationships being amortised
Change in fair value used in recognising hedge ineffectiveness
Hedge ineffectiveness recognised
Included in fair value gains / (losses) in the profit and loss account (note 13)
2023
£m
-
(3.7)
(3.7)
150.0
(3.7)
2023
£m
(150.0)
3.7
-
3.7
-
2022
£m
-
-
-
-
-
2022
£m
-
-
-
-
-
Page 249
The Accounts (c) Derivatives not in a hedge accounting relationship
The Group’s other derivatives comprise:
•
•
Interest rate swaps which are economically part of the Group’s portfolio hedging arrangements but failed to find a match in the
hedge designation, particularly including swaps pre-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.
2023
2022
Pay fixed
Pay floating
Pay fixed
Pay floating
3.88%
-
£m
708.0
708.0
7.5
23.5
457.0
220.0
708.0
15.2
5.52%
-
£m
722.6
722.6
583.5
126.0
13.1
-
722.6
2.11%
-
£m
1,578.1
1,578.1
351.6
23.5
542.5
660.5
1,578.1
4.31%
-
£m
377.1
377.1
288.0
86.0
3.1
-
377.1
0.9
124.8
(2.9)
2023
1.22
£m
7.6
7.6
-
-
7.6
-
2022
1.07
£m
13.4
13.4
-
-
13.4
0.5
Interest rate swaps
Average fixed notional interest rate
Average notional margin over SONIA
Notional principal value
SONIA swaps
Maturing
Within one year
Between one and two years
Between two and five years
More than five years
Fair value
Currency futures
US dollar futures
Average future exchange rate
Notional principal value
Maturing
Within one year
Between one and two years
Between two and five years
Fair value
Page 250
27. Sundry assets
(a) The Group
Current assets
Accrued interest income
Trade receivables
CSA assets
CRDs
Sovereign receivables
Other receivables
Sundry financial assets
Prepayments
Note
71
2023
£m
4.6
1.5
-
38.0
0.1
1.8
46.0
5.0
51.0
2022
£m
1.0
1.9
-
30.2
0.3
2.0
35.4
3.8
39.2
2021
£m
-
1.3
36.6
23.7
0.9
3.2
65.7
3.5
69.2
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.
(b) The Company
Current assets
Intra-group term deposit
Amounts owed by Group companies
Accrued interest income
2023
£m
193.6
35.1
0.1
228.8
2022
£m
-
39.1
0.1
39.2
2021
£m
-
73.0
0.1
73.1
The intra-group cash deposits comprise a 100 day notice balance and a demand balance, both placed with the Company’s subsidiary,
Paragon Bank PLC, for onward placement with the Bank of England.
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.
28. Current tax assets / liabilities
Current tax in the Group and the Company represents UK corporation tax owed or recoverable.
Page 251
The Accounts 29. Property, plant and equipment
(a) The Group
Cost
At 1 October 2021
Additions
Disposals
At 30 September 2022
Additions
Disposals
At 30 September 2023
Accumulated depreciation
At 1 October 2021
Charge for the year
On disposals
At 30 September 2022
Charge for the year
On disposals
At 30 September 2023
Net book value
At 30 September 2023
At 30 September 2022
At 30 September 2021
Leased
assets
£m
Land and
buildings
£m
62.9
14.5
(5.2)
72.2
15.9
(6.6)
81.5
23.6
10.1
(3.1)
30.6
10.7
(4.6)
36.7
44.8
41.6
39.3
35.8
1.6
(1.7)
35.7
1.4
(0.1)
37.0
7.8
2.2
(1.2)
8.8
2.2
(0.1)
10.9
26.1
26.9
28.0
Plant and
machinery
£m
13.4
1.1
(0.5)
14.0
2.6
(1.9)
14.7
10.3
1.3
(0.5)
11.1
1.7
(1.9)
10.9
3.8
2.9
3.1
Total
£m
112.1
17.2
(7.4)
121.9
19.9
(8.6)
133.2
41.7
13.6
(4.8)
50.5
14.6
(6.6)
58.5
74.7
71.4
70.4
Land and buildings and plant and machinery shown above are used within the Group’s business. Leased assets includes £31.3m
in respect of assets leased to customers under operating leases (2022: £31.4m), £0.5m of vehicles leased to employees under the
Group’s green car salary sacrifice scheme (2022: £nil) and £13.0m of assets available for hire (2022: £10.2m).
Page 252
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.
Cost
At 1 October 2021
Additions
Disposals
At 30 September 2022
Additions
Disposals
At 30 September 2023
Accumulated depreciation
At 1 October 2021
Charge for the year
On disposals
At 30 September 2022
Charge for the year
On disposals
At 30 September 2023
Net book value
At 30 September 2023
At 30 September 2022
At 30 September 2021
Leased
assets
£m
Land and
buildings
£m
-
-
-
-
0.6
-
0.6
-
-
-
-
0.1
-
0.1
0.5
-
-
11.5
1.0
(0.9)
11.6
1.0
(0.1)
12.5
3.0
1.6
(0.9)
3.7
1.7
(0.1)
5.3
7.2
7.9
8.5
Plant and
machinery
£m
1.5
0.4
(0.1)
1.8
1.4
(0.4)
2.8
0.7
0.5
(0.1)
1.1
0.7
(0.4)
1.4
1.4
0.7
0.8
Total
£m
13.0
1.4
(1.0)
13.4
3.0
(0.5)
15.9
3.7
2.1
(1.0)
4.8
2.5
(0.5)
6.8
9.1
8.6
9.3
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 £16.8m (2022: £17.1m).
Page 253
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.
Cost
At 1 October 2021, 30 September 2022 and 30 September 2023
Accumulated depreciation
At 1 October 2021
Charge for the year
On disposals
At 30 September 2022
Charge for the year
On disposals
At 30 September 2023
Net book value
At 30 September 2023
At 30 September 2022
At 30 September 2021
Land and
buildings
£m
18.8
2.8
1.4
-
4.2
1.4
-
5.6
13.2
14.6
16.0
Page 254
30. Intangible assets
Cost
At 1 October 2021
Additions
Derecognition
At 30 September 2022
Additions
Derecognition
At 30 September 2023
Accumulated amortisation and impairment
At 1 October 2021
Amortisation charge for the year
Derecognition
At 30 September 2022
Amortisation charge for the year
Derecognition
At 30 September 2023
Net book value
At 30 September 2023
At 30 September 2022
At 30 September 2021
Goodwill
(note 31)
£m
170.4
-
-
170.4
-
(7.6)
162.8
6.0
-
-
6.0
-
(6.0)
-
162.8
164.4
164.4
Computer
software
Other intangible
assets
£m
14.8
1.7
-
16.5
1.6
-
18.1
11.4
1.2
-
12.6
1.1
-
13.7
4.4
3.9
3.4
£m
10.6
-
-
10.6
(8.1)
2.5
7.9
0.8
-
8.7
0.7
(7.9)
1.5
1.0
1.9
2.7
Total
£m
195.8
1.7
-
197.5
1.6
(15.7)
183.4
25.3
2.0
-
27.3
1.8
(13.9)
15.2
168.2
170.2
170.5
Other intangible assets comprise brands and the benefit of business networks recognised on the acquisition of businesses.
Derecognitions above relate to the cessation of the TBMC business (note 11).
31. 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
2023
£m
113.0
49.8
-
162.8
2022
£m
113.0
49.8
1.6
164.4
Page 255
The Accounts
(a) SME lending
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 2023 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 2023 covering a five-year period.
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 14.12%, compared with 10.56% used in the calculation at 30 September 2022. 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 1.20% (2022: 1.54%) 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 16.2% (2022: 14.8%)
As an illustration of the sensitivity of this impairment test to movements in key assumptions, the Group has calculated that a
0.0% growth rate combined with an 11.5% reduction in profit levels would eliminate the projected headroom of £59.1m. While such
movements are not expected by management, they are considered ‘reasonably possible’ for the purposes of IAS 36. A 0.0% growth
rate combined with an 14.4% reduction in profit levels would generate a write down of £10.0m.
In the testing carried out at 30 September 2022, a 0.0% growth rate combined with a 7.5% reduction in profit levels, would have
eliminated the projected headroom at that date of £45.3m. A 0.0% growth rate combined with an 11.2% reduction in profit levels 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 2023 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 2023 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 11.12%, compared with 8.77% used in the calculation at 30 September 2022. Cash flows beyond the five-year budget are
extrapolated using a constant growth rate of 1.2% (2022: 1.54%) 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 15.9% (2022: 14.4%)
As an illustration of the sensitivity of this impairment test to movements in key assumptions, the Group has calculated that a 1.07%
growth rate combined with a 3.1% reduction in profit levels would eliminate the projected headroom of £13.9m. While such movements
are not expected by management, they are considered ‘reasonably possible’ for the purposes of IAS 36. A 0.17% growth rate combined
with a 2.9% reduction in profit levels would generate a write down of £10.0m.
On the basis of the testing carried out at 30 September 2022, management concluded that no reasonably possible change in the key
assumptions above would cause the recoverable amount of the development finance CGU to fall below the balance sheet carrying value.
(c) TBMC
During the year the Group announced the closure of its TBMC mortgage brokerage business (note 11), which corresponded to the
TBMC CGU. The goodwill relating to this CGU, which was recognised on an acquisition in December 2008 and impaired by £6.0m in
2009, was therefore derecognised in the year, with the remaining net goodwill of £1.6m expensed.
An impairment review carried out in the previous year, on the basis that the business would continue to operate, indicated no
requirement for additional impairment provision at 30 September 2022.
Page 256
32. Investment in subsidiary undertakings
At 1 October 2021
Loans advanced
Loans repaid
Provision movements
At 30 September 2022
Loans advanced
Loans repaid
Provision movements
At 30 September 2023
Shares in group
companies
Loans to group
companies
Loans to ESOP
Trusts
£m
638.7
-
-
-
638.7
-
-
(1.3)
637.4
£m
339.5
164.0
(246.5)
-
257.0
-
(107.0)
-
150.0
£m
0.3
13.0
-
(11.9)
1.4
8.0
-
(8.9)
0.5
Total
£m
978.5
177.0
(246.5)
(11.9)
897.1
8.0
(107.0)
(10.2)
787.9
Loans to group companies includes principally investments in the tier 2 equity instruments issued by the Company’s banking
subsidiary, Paragon Bank PLC.
During the year ended 30 September 2023 the Company received £262.5m in dividend income from its subsidiaries (2022: £152.7m)
and £18.6m of interest on loans to group companies (2022: £12.0m).
The Company’s subsidiaries, and the nature of its interest in them, are shown in note 72.
Page 257
The Accounts 33. 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
2023
£m
8,690.2
4,575.1
13,265.3
2022
£m
6,201.3
4,467.9
10,669.2
The weighted average interest rate on retail deposits at 30 September 2023, analysed by charging method, was:
Fixed rate
Variable rates
All deposits
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 26)
2023
%
4.07
3.74
3.95
2023
£m
1,589.4
5,193.7
1,643.0
631.8
9,057.9
4,207.4
13,265.3
(30.9)
13,234.4
2022
%
1.74
1.55
1.66
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
5,466.0
3,834.4
9,300.4
2021
%
1.25
0.42
0.91
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
Page 258
34. Asset backed loan notes
The Group’s asset backed loan 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 2023 interest was payable on the notes at a fixed margin above the compounded Sterling
Overnight Interbank Average Rate (‘SONIA’).
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 64.
Notes in issue at 30 September 2023 and 30 September 2022, net of any held by the Group, were:
Issuer
Maturity date
Call date
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
Principal
outstanding
Average
interest margin
2023
£m
-
28.4
-
-
2022
£m
302.5
107.9
-
-
2023
%
-
1.05
-
-
2022
%
0.86
1.05
-
-
†All notes issued by Paragon Mortgages (No. 27) and Paragon Mortgages (No. 28) were retained by the Group (see note 64).
The details of the assets backing these securities are given in note 18.
During the year, on 15 May 2023, the Group redeemed all of the outstanding notes of the Paragon Mortgages (No. 25) PLC
securitisation at par. The underlying assets were subsequently funded by other group companies.
On 1 November 2023, after the year end, a group company, Paragon Mortgages (No. 29) PLC, issued £855.0m of sterling mortgage
backed floating rate notes, analysed below, at par.
Class
Fitch Rating
Moody’s rating
Interest margin above
compounded SONIA
Principal value
A
B
C
D
AAA
AA
A-
B+
Aaa
Aa1
Aa2
A2
1.20%
1.90%
2.75%
3.80%
£m
747.0
33.7
29.3
45.0
855.0
All the above notes were retained by the Group.
On 26 June 2019, the Group disposed of its beneficial interest in the Paragon Mortgages (No. 12) PLC securitisation. 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 53.
Page 259
The Accounts 35. 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 64 and details of assets held within the warehouse facilities are given in note 18. Details of the Group’s bank
borrowings are set out below.
i) Paragon Second Funding
ii) Paragon Seventh Funding
Principal
value
£m
-
-
-
2023
Maximum
available
facility
£m
-
-
-
Carrying
value
Principal
value
£m
-
-
-
£m
416.0
170.0
586.0
2022
Maximum
available
facility
£m
416.0
450.0
866.0
Carrying
value
£m
416.0
170.0
586.0
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. The loan was repaid in full on 29 September 2023. This loan
was a sterling facility provided to Paragon Second Funding Limited by a consortium of banks and was secured on all the assets of
Paragon Second Funding Limited, Paragon Car Finance (1) Limited and Paragon Personal Finance (1) Limited. Interest on this loan
was payable monthly at 0.704% above SONIA.
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 was 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 0.60% over three month LIBOR thereafter up to
8 November 2021.
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 expired on 24 July 2023.
36. Retail bonds
The Group has one outstanding issue of retail bonds, issued under its Euro Medium Term Note Programme. These bonds are listed on
the London Stock Exchange and mature on 28 August 2024, but are callable by the Company in certain circumstances. The principal
amount of notes in issue at 30 September 2023 is £112.5m (2022: £112.5m) and they bear interest at a fixed rate of 6.0% per annum.
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 £112.4m (2022: £112.3m), all of which falls due within one year (2022: £nil).
37. 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 at 30 September 2023 was £145.8m (2022: £149.2m), while the
carrying value of the bonds in the accounts of the Company at 30 September 2023 was £149.4m (2022: £149.2m), with the difference
arising as a result of the hedging treatment described in note 26.
Page 260
38. Central bank facilities
During the year, the Group has utilised facilities provided by the Bank of England 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 64, 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 25 months (2022: 37 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 Indexed Long-Term Repo Scheme (‘ILTR’) have a maturity of six months and a rate of interest set in an auction
process. The Group has not accessed the ILTR during the year, but retains access to this programme for liquidity purposes.
The amounts drawn under these facilities are set out below.
TFSME
ILTR
Total central bank facilities
2023
£m
2,750.0
-
2,750.0
2022
£m
2,750.0
-
2,750.0
All TFSME borrowings fall due after more than one year.
During the year ended 30 September 2022 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 64). The mortgage assets pledged in support of these drawings
are set out in note 17.
The balances arising from the TFSME carried in the Group accounts are shown below.
TFSME at IAS 20 carrying value
Deferred government assistance
2023
£m
2,716.3
33.7
2,750.0
2022
£m
2,700.2
49.8
2,750.0
39. Sale and repurchase agreements
From time to time the Group enters into short-term sale and repurchase agreements with highly-rated UK banks as part of its liquidity
management operations.
At 30 September 2023 £50.0m was outstanding under such arrangements (2022: £nil). The average term of the agreements was
3 months and the average remaining term 2.8 months. The average interest rate payable was 0.80% above compounded SONIA.
The securities subject to the sale and repurchase agreement were certain of the Group’s retained asset backed loan notes, described
in note 64.
Page 261
The Accounts 40. Sundry liabilities
(a) The Group
Current liabilities
Accrued interest
Trade creditors
CSA liabilities
Purchase of own shares (note 47)
Other accruals
Sundry financial liabilities at amortised cost
Contingent consideration (note 41)
Sundry financial liabilities
Lease payables (note 42)
Deferred income
Conduct (note 43)
Other taxation and social security
Non-current liabilities
Accrued interest
Sundry financial liabilities at amortised cost
Contingent consideration (note 41)
Sundry financial liabilities
Lease payables (note 42)
Deferred income
Total sundry financial liabilities at amortised cost
Total sundry financial liabilities at fair value
Total other sundry liabilities
Total sundry liabilities
2023
£m
156.7
1.6
383.4
-
35.6
577.3
-
577.3
2.6
5.9
-
4.1
2022
£m
42.2
0.7
388.6
10.8
35.9
478.2
2.2
480.4
2.2
3.7
-
3.7
589.9
490.0
31.5
31.5
-
31.5
6.3
3.5
41.3
608.8
-
22.4
631.2
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
CSA liabilities represent collateral received in respect of interest rate swap agreements and are described further in notes 26 and 63.
(b) The Company
Current liabilities
Amounts owed to Group companies
Accrued interest
Purchase of own shares (note 47)
Other financial liabilities
Sundry financial liabilities at amortised cost
Lease payables (note 42)
Non-current liabilities
Lease payables (note 42)
Total sundry liabilities
Page 262
2023
£m
24.0
0.7
-
-
24.7
1.3
26.0
12.4
38.4
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
41. 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 2022
Payments
Revaluation
Unwind of discounting (note 5)
At 30 September 2023 (note 40)
2023
£m
2.2
(1.5)
(0.7)
-
-
2022
£m
7.5
(4.6)
(0.8)
0.1
2.2
The write downs above were the result of the finalisation of the contingent consideration liability based on actual business volumes.
42. Lease payables
The Group’s lease liabilities arise under the leasing arrangements described in note 54. Related right of use assets are shown in note 29.
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 40)
In less than one year (note 40)
The Group
The Company
2023
£m
0.5
3.4
2.4
6.3
2.6
8.9
2022
£m
1.1
3.8
1.9
6.8
2.2
9.0
2023
£m
6.7
4.3
1.4
12.4
1.3
13.7
2022
£m
8.2
4.2
1.3
13.7
1.3
15.0
43. 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 material 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 263
The Accounts 44. 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 2023
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 2022
Accelerated tax depreciation
Retirement benefit obligations
Interest rate hedging
Loans and other derivatives
Share based payments
Tax losses
Other timing differences
£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)
Current
£m
(5.0)
1.8
(20.4)
(0.8)
(2.8)
0.1
(0.2)
(27.3)
(2.9)
1.3
55.4
(0.6)
0.2
0.4
(0.3)
53.5
Prior
£m
3.6
-
-
-
-
(3.0)
0.2
0.8
1.9
-
-
(0.1)
(0.5)
(0.1)
(1.3)
(0.1)
£m
-
0.8
-
-
(1.0)
-
-
(0.2)
-
3.6
-
-
1.8
-
-
5.4
£m
(8.3)
3.1
32.8
1.4
(7.5)
(3.0)
(0.8)
17.7
(6.9)
0.5
53.2
2.2
(3.7)
(0.1)
(0.8)
44.4
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
(e.g. 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 £3.7m (2022: £3.0m) in entities whose current taxable profits are
insufficient to support the recognition of a deferred tax asset.
Page 264
(b) The Company
The net deferred tax (asset) / liability 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 2023
Accelerated tax depreciation
Tax losses carried forward
Other timing differences
Total
Year ended 30 September 2022
Accelerated tax depreciation
Tax losses carried forward
Other timing differences
£m
0.1
-
-
0.1
-
-
1.8
1.8
Current
£m
-
-
-
-
0.1
-
-
0.1
Prior
£m
-
(1.7)
-
(1.7)
-
-
(1.8)
(1.8)
£m
-
-
-
-
-
-
-
-
£m
0.1
(1.7)
-
(1.6)
0.1
-
-
0.1
Page 265
The Accounts 45. 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 2022
Shares issued
Shares cancelled
At 30 September 2023
2023
Number
2022
Number
241,409,624
262,495,185
160,833
386,039
(12,870,044)
(21,471,600)
228,700,413
241,409,624
During the year, the Company issued 160,833 shares (2022: 386,039) to satisfy options granted under Sharesave schemes for a
consideration of £534,954 (2022: £1,309,525).
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 ended 30 September 2022 were also cancelled.
On 1 June 2023, 12,870,044 of the shares held in treasury at that date were cancelled (note 47).
46. Reserves
(a) The Group
Share premium account
Capital redemption reserve
Merger reserve
Profit and loss account
(b) The Company
Share premium account
Capital redemption reserve
Merger reserve
Profit and loss account
2023
£m
71.4
12.9
(70.2)
1,243.4
1,257.5
2023
£m
71.4
12.9
(23.7)
521.8
582.4
2022
£m
71.1
71.8
(70.2)
1,151.2
1,223.9
2022
£m
71.1
71.8
(23.7)
326.3
445.5
2021
£m
70.1
50.3
(70.2)
1,005.9
1,056.1
2021
£m
70.1
50.3
(23.7)
358.9
455.6
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.
On 28 March 2023 the High Court confirmed the cancellation of the Company’s capital redemption reserve, following shareholder
approval at the AGM on 1 March 2023. This reserve had arisen on the cancellation of ordinary shares which had been purchased in the
market and held in treasury. The balance outstanding on the capital redemption reserve at that time was transferred to the profit and
loss account.
Page 266
47. Own shares
Treasury shares
Opening balance
Shares purchased
Options exercised
Shares cancelled
Closing balance
ESOP shares
Opening balance
Shares purchased
Options exercised
Closing balance
Irrevocable authority to purchase
Opening balance
Given in year
Expiring / utilised in year
Closing balance
Total closing balance
Total opening balance
The Group
The Company
2023
£m
18.2
111.5
(8.4)
(67.3)
54.0
19.0
9.0
(6.4)
21.6
10.8
-
(10.8)
-
75.6
48.0
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
2023
£m
18.2
111.5
(8.4)
(67.3)
54.0
-
-
-
-
10.8
-
(10.8)
-
54.0
29.0
2022
£m
60.7
66.9
-
(109.4)
18.2
-
-
-
-
-
10.8
-
10.8
29.0
60.7
At 30 September 2023 the number of the Company’s own shares held in treasury was 10,074,002 (2022: 3,640,519). These shares had
a nominal value of £10,074,002 (2022: £3,640,519). These shares do not qualify for dividends.
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 2023, the trust held 4,009,490 ordinary shares (2022: 3,879,160) with a nominal value of £4,009,490 (2022: £3,879,160)
and a market value of £19,727,084 (2022: £15,314,924). Options, or other share-based awards, were outstanding against all of these
shares at 30 September 2023 (2022: all). The dividends on all of these shares have been waived (2022: all).
Page 267
The Accounts 48. 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
2023
Per share
2022
Per share
19.2p
11.0p
30.2p
18.9p
9.4p
28.3p
2023
Per share
2022
Per share
11.0p
26.4p
37.4p
9.4p
19.2p
28.6p
2023
£m
43.7
24.2
67.9
2023
£m
24.2
56.7
80.9
2022
£m
46.6
22.3
68.9
2022
£m
22.3
44.9
67.2
The proposed final dividend for the year ended 30 September 2023 will be paid on 8 March 2024, subject to approval at the AGM, with
a record date of 2 February 2024. The dividend will be recognised in the accounts when it is paid.
Page 268
49. 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 and derecognition of intangible assets
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)
2023
£m
199.9
4.0
(0.1)
3.6
(2.5)
18.0
9.6
(2.7)
(682.0)
163.6
(180.6)
(15.0)
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
2,596.1
1,368.8
(62.2)
68.8
128.3
2,246.8
(75.1)
2,171.7
58.2
(96.7)
416.9
1,225.2
(56.5)
1,168.7
Cash flows relating to plant and equipment held for leasing under operating leases are classified as operating cash flows.
Page 269
The Accounts
(b) The Company
Profit before tax
Non-cash items included in profit and other adjustments:
Depreciation on property, plant and equipment
Non-cash movements on borrowings
Impairment provision on investments in subsidiaries
Charge for share based remuneration
Net (increase) / decrease in operating assets:
Other receivables
Net (decrease) in operating liabilities:
Other liabilities
Cash generated by operations
Income taxes (paid) / received
50. 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
51. Net cash flow from financing activities
Shares issued (note 45)
Dividends paid (note 48)
Repayment of asset backed floating rate notes
Repayment of retail bond
Movement on central bank facilities
Movement on other bank facilities
Movement on sale and repurchase agreements
Capital element of lease payments
Purchase of own shares (note 47)
Exercise of share awards
Net cash (utilised) by financing activities
Page 270
2023
£m
255.5
1.4
0.3
10.2
9.6
2022
£m
133.6
1.4
0.4
11.9
9.2
(189.6)
33.9
(0.6)
86.8
(0.8)
86.0
The Group
The Company
2022
£m
0.6
(1.3)
(1.7)
-
-
(2.4)
2023
£m
-
-
-
-
99.0
99.0
The Group
The Company
2022
£m
1.4
(68.9)
(107.6)
(125.0)
(69.0)
(144.6)
-
(1.7)
(79.5)
(0.7)
(595.6)
2023
£m
0.5
(67.9)
-
-
-
-
-
(1.3)
(111.5)
3.1
(177.1)
2023
£m
0.1
(1.6)
(1.6)
-
-
(3.1)
2023
£m
0.5
(67.9)
(382.1)
-
-
(586.0)
50.0
(2.4)
(120.5)
3.4
(1,105.0)
(0.3)
190.1
1.2
191.3
2022
£m
-
-
-
(177.0)
246.5
69.5
2022
£m
1.4
(68.9)
-
(125.0)
-
-
-
(1.3)
(66.9)
-
(260.7)
52. Reconciliation of net debt
(a) The Group
30 September 2023
Asset backed loan notes
Bank borrowings
Corporate bonds
Retail bonds
Central bank borrowings
Sale and repurchase agreements
Lease liabilities
Bank overdrafts
Gross debt
Cash
Net debt
30 September 2022
Asset backed loan notes
Bank borrowings
Corporate bonds
Retail bonds
Central bank borrowings
Sale and repurchase agreements
Lease liabilities
Bank overdrafts
Gross debt
Cash
Net debt
Opening
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
Cash flows
Debt
issued
£m
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Other
£m
(382.1)
(586.0)
-
-
-
50.0
(2.4)
(0.2)
(920.7)
(1,063.4)
(1,984.1)
(107.6)
(144.6)
-
(125.0)
(69.0)
-
(1.7)
0.1
(447.8)
(570.8)
(1,018.6)
Non-cash
movements
£m
0.8
-
(3.4)
0.1
-
-
2.3
-
(0.2)
-
(0.2)
0.9
0.6
0.2
0.2
-
-
1.2
-
3.1
-
3.1
Closing
debt
£m
28.0
-
145.8
112.4
2,750.0
50.0
8.9
0.2
3,095.3
(2,994.3)
101.0
409.3
586.0
149.2
112.3
2,750.0
-
9.0
0.4
4,016.2
(1,930.9)
2,085.3
Other non-cash changes shown above represent:
• EIR adjustments relating to the spreading of initial costs of the facilities concerned
•
Inception of new lease assets under IFRS 16
• Hedging fair value adjustments on the corporate bond (note 26)
Page 271
The Accounts (b) The Company
30 September 2023
Corporate bonds
Retail bonds
Lease liabilities
Gross debt
Cash
Net debt
30 September 2022
Corporate bonds
Retail bonds
Lease liabilities
Gross debt
Cash
Net debt
Opening
debt
£m
Cash flows
Debt
issued
£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
-
-
-
-
-
-
-
-
-
-
-
-
Other
Non-cash
movements
£m
-
-
(1.3)
(1.3)
(7.9)
(9.2)
-
(125.0)
(1.3)
(126.3)
(0.1)
(126.4)
£m
0.2
0.1
-
0.3
-
0.3
0.2
0.2
-
0.4
-
0.4
Closing
debt
£m
149.4
112.4
13.7
275.5
(27.6)
247.9
149.2
112.3
15.0
276.5
(19.7)
256.8
Non-cash changes shown above represent EIR adjustments relating to the spreading of initial costs of the bonds.
53. 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 £1.3m is included in third party servicing fees (note 8) (2022: £1.4m) and £0.5m is included
in other debtors in respect of unpaid fees at the year end (2022: £0.2m). Outstanding collection monies due to the structured entity of
£0.1m are included in other creditors at 30 September 2023 (2022: £0.1m).
Page 272
54. 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.
It also leases green motor vehicles to its employees under a salary sacrifice scheme.
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
19
4
29
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
2023
£m
14.5
9.3
5.8
3.5
1.6
0.3
35.0
2022
£m
14.0
8.1
5.8
3.6
1.7
0.8
34.0
The Group’s use of leases as a lessee relates to the rental of office buildings and company cars, together with the procurement of
vehicles for leasing to employees under its green car scheme. 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 (2022: 8 years) with rents subject to review
every five years, while the average term of the vehicle leases is 3 years (2022: 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
29
5
9
29
29
64
Salary sacrifice amounts of £0.1m in respect of the green car scheme are included within operating lease income (note 6). There was
no other subleasing of right of use assets and the total cash flows relating to leasing as a lessee were £2.3m (2022: £1.9m).
Page 273
The Accounts 55. 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 £720,000 were outstanding at the year end (2022: £779,000), and the
maximum amounts outstanding during the year totalled £771,000 (2022: £793,000).
The Paragon Pension Plan (the ‘Plan’) is a related party of the Group. Transactions with the Plan are described in note 60.
The Group had no other transactions with related parties other than the key management compensation disclosed in note 58.
(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 59.
Details of the Company’s investments in subsidiaries and the income derived from them are shown in notes 32 and 72.
Outstanding current account balances with subsidiaries are shown in notes 27 and 40.
During the year the Company incurred interest costs of £1.5m in respect of borrowings from its subsidiaries (2022: £1.0m).
The Company leased an office building from a subsidiary entity (note 54(b)). Finance charges recognised in respect of this lease were
£0.4m (2022: £0.4m).
56. 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 72 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 2023 were:
Year ended 30 September 2023
Total operating income
Profit before tax
Corporation tax paid
Public subsidies received
Average number of full time equivalent employees
Year ended 30 September 2022
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 38.
Page 274
United Kingdom
£m
466.0
199.9
75.1
-
1,435
United Kingdom
£m
393.0
417.9
56.5
-
1,397
D2.2 Notes to the Accounts – Employment costs
For the year ended 30 September 2023
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.
57. Employees
The average number of persons (including directors) employed by the Group during the year was 1,527 (2022: 1,498). The number of
employees at the end of the year was 1,522 (2022: 1,503).
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)
2022
£m
9.2
81.9
0.5
9.7
0.9
4.1
2023
£m
9.6
84.6
1.9
10.2
0.5
4.7
2023
£m
94.2
12.1
5.2
111.5
108.3
3.2
111.5
Details of the pension schemes operated by the Group are given in note 60.
The Company has no employees. Details of the directors’ remuneration are given in note 58.
2022
£m
91.1
10.2
5.0
106.3
103.6
2.7
106.3
Page 275
The Accounts 58. Key management remuneration
Key management
The key management personnel of the Group and the Company, as defined by IAS 24 – Related Party Transactions’, are considered by
the Group to be the members of its Executive Committees and the members of the Board of Directors of the Company. The details of
key management remuneration required by IAS 24 are set out below. For persons joining or leaving the executive committees in the
year, all remuneration for the twelve months is shown.
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
2023
£m
5.3
3.3
1.2
4.3
1.0
2023
£m
9.8
0.5
5.3
15.6
2022
£m
4.4
3.1
1.1
4.0
1.0
2022
£m
8.6
0.6
5.0
14.2
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
2023
£m
3.7
0.1
0.7
2022
£m
3.5
0.2
5.6
In the table above, remuneration includes the cash amount of bonuses and the value of benefits in kind. It excludes any amounts
receivable under share-based payment arrangements. Where a monetary amount of salary is paid in shares based on the market price
at the payment date, this is included.
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 276
59. 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 57.
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 2023 and at 30 September 2022 is set
out below.
(a) Sharesave Plan
(b) Performance Share Plan
(c) Company Share Option Plan
(d) Deferred Bonus Plan
(e) Restricted Stock Units
Number
2023
3,077,077
5,365,646
56,591
1,123,936
412,676
Number
2022
3,613,777
4,834,871
87,716
1,155,638
616,709
10,035,926
10,308,711
Following the year end, the Remuneration Committee agreed the amounts of variable remuneration in respect of the year to be
satisfied in the form of share-based awards. These awards will be granted, following the approval of these accounts, based on the
amounts approved and market pricing data at the date of grant.
(a) Sharesave plan
The Group operates an All Employee Share Option (‘Sharesave’) plan. Grants under this scheme vest, in the normal course, after the
completion of the appropriate service period and subject to a savings requirement.
A reconciliation of movements in the number and weighted average exercise price of Sharesave options over £1 ordinary shares
during the year ended 30 September 2023 and the year ended 30 September 2022 is shown below.
Options outstanding
At 1 October 2022
Granted in the year
Exercised or surrendered in the year
Lapsed during the year
At 30 September 2023
2023
2023
2022
2022
Number Weighted average
exercise price
Number Weighted average
exercise price
p
318.46
400.40
285.67
357.44
365.76
3,561,675
737,978
(386,039)
(299,837)
3,613,777
p
306.89
391.20
339.22
333.10
318.46
3,613,777
1,235,757
(1,579,263)
(193,194)
3,077,077
Options exercisable
439,546
279.43
109,654
359.92
The weighted average remaining contractual life of options outstanding at 30 September 2023 was 32.8 months (2022: 27.0 months).
The weighted average market price at exercise for share options exercised in the year was 515.86p (2022: 507.07p).
Page 277
The Accounts Options are outstanding under the Sharesave plans to purchase ordinary shares as follows:
Grant date
28/07/2017
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
15/09/2023
15/09/2023
Period exercisable
Exercise price
Number
Number
01/09/2022 to 01/03/2023
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
01/10/2026 to 01/04/2027
01/10/2028 to 01/04/2029
341.76p
408.80p
360.16p
360.16p
278.56p
278.56p
424.00p
424.00p
391.20p
391.20p
400.40p
400.40p
2023
-
2,933
-
4,577
436,613
449,263
257,591
54,118
528,429
108,722
1,022,746
212,085
2022
1,403
20,391
108,251
4,577
1,925,599
478,876
278,279
63,315
622,064
111,022
-
-
3,077,077
3,613,777
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 2023
and the year ended 30 September 2022, 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
15/09/23
1,203,672
506.5p
3.5
1.10
15/09/23
212,085
506.5p
5.5
1.09
27/07/22
623,122
527.0p
3.5
1.34
27/07/22
114,856
527.0p
5.5
1.06
31.02%
35.67%
39.36%
3.43
4.64%
5.96%
5.00%
5.42
4.39%
5.96%
5.00%
3.42
1.69%
5.37%
5.00%
33.75%
5.43
1.74%
5.37%
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.
Page 278
(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.
These awards are the principal means of delivering deferred variable remuneration to executive directors and Material Risk Takers
(‘MRT’s) in accordance with regulatory remuneration requirements, although these are not the only employees to receive such awards.
Awards under this plan comprise a right to acquire ordinary shares in the Company for nil or nominal payment and are subject to
performance criteria measured over a three year period beginning with the financial year including the date of grant (the ‘test period’).
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 and other employees identified as MRTs for regulatory purposes,
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 2021 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.
Vested awards made to the executive directors and other MRTs in December 2022 become exercisable in annual instalments
between the end of the test period and the seventh anniversary of the grant date. The maximum deferral period is based on the
regulatory classification of the individual MRT. The latest possible exercise date is the tenth anniversary of the grant date.
Where performance conditions are not met in full, awards lapse at the point at which the determination is made. Awards will also lapse
on cessation of employment during the test period, other than in ‘good leaver’ circumstances. Malus and clawback provisions apply to
awards granted under the PSP as detailed in the Directors’ Remuneration Policy.
Page 279
The Accounts The conditional entitlements outstanding under this scheme at 30 September 2023 and 30 September 2022 were:
Grant date
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
16/12/2022
16/12/2022
16/12/2022
16/12/2022
16/12/2022
Period exercisable
Number
Number
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 13/12/2028†
06/12/2022 to 05/07/2030ψ
07/12/2024* to 05/07/2030ψ
07/12/2023* to 10/12/2030φ
07/12/2025* to 10/12/2030φ
07/12/2024* to 14/12/2031δ
07/12/2026* to 14/12/2031δ
07/12/2025* to 15/12/2032λ
07/12/2026* to 15/12/2032λ
07/12/2027* to 15/12/2032λ
07/12/2028* to 15/12/2032λ
07/12/2029* to 15/12/2032λ
2023
-
2,132
5,005
10,473
33,493
29,675
61,952
114,169
509,192
1,074,596
385,707
1,034,343
339,936
932,315
259,233
268,683
148,229
156,513
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
-
-
-
-
-
5,365,646
4,834,871
* 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.
ψ These awards were subject to performance criteria, assessed over a period of three financial years, starting with the year of grant.
• 25% 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 67.0p, 25% vesting if EPS in this year is 60.0p and vesting
between those points on a straight line basis
• 25% to a risk test. 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 Committee’s 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. The Remuneration Committee will determine the extent to which
the condition has been met between 0% and 100%. 50% of this tranche will vest for on-target performance, below a 25% threshold no vesting will occur
• 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. The Remuneration Committee will determine the extent to which the
condition has been met between 0% and 100%. 50% of this tranche will vest for on-target performance below a 25% threshold no vesting will occur
• Due to the volatility of the share price at the time of grant, the Remuneration Committee could have adjusted the vesting levels at the vesting date if it believed
that the use of this share price had created a potential windfall gain
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 test period also applies.
φ These awards are subject to performance criteria, similar to those described at ψ above, except that:
• Under the EPS condition full vesting occurs if EPS for the third year of the test period is at least 66.0p, 25% vesting if EPS in this year is 58.0p 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
δ These awards are subject to performance criteria, similar to those described at φ above except that:
• Under the EPS condition full vesting occurs if EPS for the third year of the test period is at least 72.0p, 25% vesting if EPS in this year is 63.0p and vesting
between those points on a straight line basis
• Under the risk condition, the key measures component covers: regulatory breaches; conduct; operational incidents; capital and liquidity; and credit losses
λ These 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 88.1p, 25% vesting if EPS in this year is 74.4p and vesting
between those points on a straight line basis
• The risk condition relates to 20% of the grant, the customer service condition applies to 10% of the grant and the people condition relates to 10% of the grant
• The 25% and 50% vesting thresholds no longer apply to the customer service and people conditions
• 10% of the grant relates to a climate condition. The climate condition is based on the performance of the Group against its most significant climate-related
targets, including the development of systems to quantify and manage its climate-related impacts.
On exercise, holders of awards granted between February 2013 and December 2021 receive a payment equivalent to the dividends
accruing on the vested shares during the vesting period. No such payment is made in respect of awards granted at other dates.
Page 280
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. Fair values are calculated separately for grant elements which became exercisable at different dates to
allow for the impact of dividends. The principal inputs to this model for grants made in the year ended 30 September 2023 and the
year ended 30 September 2022 are shown below.
Grant date
Market price at date of grant
Contractual life (years)
Expected volatility
Risk-free interest rate
Expected annual dividend yield
16/12/22
15/12/21
541.5p
10.0
40.54%
3.27%
5.28%
549.0p
10.0
38.13%
0.53%
N/A
For all the above grants no departures are expected and grantees are expected to exercise awards at the earliest opportunity. The
expected volatility is based on the annualised standard deviation of daily changes in price over the three years preceding the grant date.
For the purposes of the valuation, non-market conditions are assumed to be achieved 100% although this is unlikely to occur in practice.
The number of awards granted and their fair values for IFRS 2 purposes are set out below.
Grant date
Time to exercise
(Years)
3
4
5
6
7
16/12/22
15/12/21
Number of awards
IFRS 2 fair value
Number of awards
IFRS 2 fair value
926,721
259,233
268,683
148,229
156,513
1,759,379
423.32p
404.23p
385.55p
367.43p
349.93p
1,071,597
-
339,936
-
-
1,411,533
504.50p
-
504.50p
-
-
(c) Company Share Option Plan (‘CSOP’)
Before its amendment at the 2023 AGM, the PSP included a tax advantaged element under which CSOP options could 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 2023 or 30 September 2022, and the current PSP contains no provision to make CSOP grants.
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 2023 and the year ended 30 September 2022 is shown below.
Options outstanding
At 1 October 2022
Exercised or surrendered in the year
Lapsed during the year
At 30 September 2023
2023
2023
2022
2022
Number Weighted average
exercise price
Number Weighted average
exercise price
p
406.31
408.25
477.76
402.29
241,574
(148,680)
(5,178)
87,716
p
403.66
402.14
402.37
406.31
87,716
(28,715)
(2,410)
56,591
Options exercisable
56,591
402.29
87,716
406.31
The weighted average remaining contractual life of options outstanding at 30 September 2023 was 49.9 months (2022: 66.2 months).
The weighted average market price at exercise for share options exercised in the year was 563.98p.
Page 281
The Accounts The entitlements outstanding under this scheme at 30 September 2023 and 30 September 2022 were:
Grant date
01/12/2016
08/12/2017
14/12/2018
Period exercisable
Exercise price
Number
Number
01/12/2019 to 30/11/2026
08/12/2020 to 07/12/2027
14/12/2021 to 13/12/2028
361.88p
477.76p
396.04p
2023
21,732
13,409
21,450
56,591
2022
22,802
20,557
44,357
87,716
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.
No separate fair value was 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
During the current financial year this plan has been used to defer annual bonus awards for executive directors and certain other
MRTs to meet deferral levels required by regulatory remuneration rules. The plan has also been used to facilitate other long-term
incentive arrangements.
Before the current financial year such plans were 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 2023 and 30 September 2022 were:
Grant date
10/12/2013
18/12/2014
22/12/2015
14/12/2018
12/12/2019
11/12/2020
11/12/2020 †
15/12/2021
16/12/2022
16/12/2022
16/12/2022
16/12/2022
16/12/2022
16/12/2022
16/12/2022
* Estimated date
† 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
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
07/12/2023 * to 15/12/2032
07/12/2024 * to 15/12/2032
07/12/2025 * to 15/12/2032
07/12/2026 * to 15/12/2032
07/12/2027 * to 15/12/2032
07/12/2028 * to 15/12/2032
07/12/2029 * to 15/12/2032
2023
-
52,888
60,042
-
-
382,334
206,135
244,953
5,011
104,089
14,742
15,565
16,018
10,775
11,384
2022
55,302
52,888
60,042
26,437
108,701
382,334
224,981
244,953
-
-
-
-
-
-
-
1,123,936
1,155,638
Awards made to executive directors and other MRTs in December 2022 become exercisable in annual instalments after the
announcement of each year’s results from the third anniversary of the grant to the seventh anniversary. The maximum deferral for
each employee depends on the regulatory classification of the individual MRT.
Exercise arrangements for grants made to other employees in December 2022 are individually structured at the discretion of the
Remuneration Committee at the point of grant.
All of these awards will lapse if the grantee ceases employment with the Group before the grant becomes exercisable, other than in
‘good leaver’ circumstances.
Page 282
The Deferred Bonus shares granted in 2021 and earlier years under the executive awards can be exercised from the third anniversary
of the award date (or other vesting date determined by the Remuneration Committee) 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 between December 2016 and December 2021 accrue dividends over the vesting period, unlike
earlier grants which accrued dividends until the point of exercise. Awards granted in December 2022 do not include the right to
payment in lieu of dividend. The fair value of Deferred Bonus awards issued in the year was determined using a Black-Scholes Merton
model and allows for these dividend arrangements.
Details of the inputs to the valuation model for awards made in the year ended 30 September 2023 and the year ended
30 September 2022 are shown below.
Grant date
Market price at date of grant
Expected annual dividend yield
16/12/22
541.5p
5.28%
15/12/21
549.0p
N/A
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. Grantees are assumed to exercise their awards at the earliest possible opportunity.
The number of awards granted and their fair values for IFRS2 purposes are set out below.
Grant date
Time to exercise
(Years)
16/12/22
15/12/21
Number of awards
IFRS 2 fair value
Number of awards
IFRS 2 fair value
1
2
3
4
5
6
7
5,011
104,089
14,742
15,565
16,018
10,775
11,384
177,584
513.6p
487.2p
462.2p
438.4p
415.9p
394.5p
374.2p
-
-
244,953
-
-
-
-
244,953
-
-
549.0p
-
-
-
-
(e) Restricted Stock Units (‘RSUs’)
Between the 2016 and 2022 financial years, the Company permitted certain employees to elect to receive RSU awards instead of PSP
awards. Following the approval of the new PSP at the 2023 AGM the Company no longer has the capacity to make new RSU 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 MRTs.
The conditional entitlements outstanding under this scheme at 30 September 2023 and 30 September 2022 were:
Grant date
06/07/2020
11/12/2020
15/12/2021
15/12/2021
* Estimated date
Period exercisable
06/12/2022 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
2023
-
30,193
26,603
355,880
412,676
Number
2022
190,960
30,193
26,603
368,953
616,709
Page 283
The Accounts The fair value of RSU awards issued in the year ended 30 September 2022 was determined using a Black-Scholes Merton model.
Details of the awards made in that year are shown below. No awards were made in the year ended 30 September 2023.
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.
60. Retirement benefit obligations
(a) Defined benefit plan – description
15/12/21
368,953
549.0p
4.0
549.0p
15/12/21
26,603
549.0p
3.0
549.0p
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.
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.
Benefits accrued before 1 July 2021 may be accessed from the age of 60 without any reduction for early payment. Benefits accruing after
1 July 2021 may be accessed without penalty from the age of 65.
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.
Page 284
As a result of the Plan having been closed to new entrants since February 2002, the service cost as a percentage of pensionable salaries
is expected to increase as the average age of active members rises over time. However, the membership is expected to reduce so that
the service cost in monetary terms will gradually reduce. The changes referred to above will also reduce this cost going forward.
Actuarial valuation and recovery plan
The most recent full actuarial valuation of the Plan’s liabilities, obtained by the Trustee, was carried out at 31 March 2022, by Aon
Solutions UK Limited, the Plan’s independent actuary and completed in the current year. 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 £195.5m, with a shortfall against the assets of £44.2m (2019: £85.0m).
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 £5.1m (2019: £18.2m). This valuation forms the basis of the IAS 19 valuation.
Following the agreement of the 2022 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 29). 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 29) but this arrangement provides the Plan with additional security in
a stress event.
(b) Defined benefit plan – financial impact
For accounting purposes, the valuation at 31 March 2022 was updated to 30 September 2023 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 2023, 30 September 2022 and 30 September 2021 and their fair values were:
Cash and cash equivalents
Equity instruments
Debt instruments
Total fair value of Plan assets
Present value of Plan liabilities
Surplus / (deficit) in the Plan
2023
£m
0.6
44.8
56.6
102.0
(89.3)
12.7
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)
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 61).
At 30 September 2023 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 meet a hedging target of 60% of the interest and inflation risks faced by the Plan. During the market turmoil encountered during
September / October 2022 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'. This estimate is based on one permissible method, method C2. Following the year end, the Trustee, with the consent of
the Company, chose to adopt an alternative approach, method B. However, the accounting impact of this is likely to be minimal. Once
detailed calculations are performed it is possible that the final impact may vary due to idiosyncratic impacts on individual members, or
due to the development of a wider legal and accounting consensus on the proper interpretation of the courts’ requirements as further
cases are determined.
Page 285
The Accounts The movement in the fair value of the Plan assets during the year was as follows:
At 1 October 2022
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 2023
2023
£m
104.7
5.2
3.9
0.2
(3.6)
(0.6)
(7.8)
102.0
The actual return on Plan assets in the year ended 30 September 2023 was a loss of £2.6m (2022: loss of £40.2m).
The movement in the present value of the Plan liabilities during the year was as follows:
At 1 October 2022
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 2023
2023
£m
97.6
0.5
-
4.8
0.2
(3.6)
(0.9)
(11.1)
1.8
89.3
2022
£m
145.3
2.9
4.0
0.2
(3.8)
(0.8)
(43.1)
104.7
2022
£m
155.6
0.9
-
3.1
0.2
(3.8)
2.2
(61.9)
1.3
97.6
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.
Liabilities for benefits accruing for service up to 1 July 2021 are calculated separately from those accruing in respect of service after
that date.
Page 286
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 1 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
2023
2022
2021
5.00%
2.00%
1.75%
3.55%
2.50%
3.55%
3.25%
3.40%
2.50%
3.40%
3.15%
2.95%
2.50%
2.95%
2.85%
5.55%
5.00%
2.00%
3.25%
2.50%
3.25%
3.00%
27
29
29
31
3.55%
2.50%
3.55%
3.25%
27
29
29
31
3.40%
2.50%
3.40%
3.15%
28
29
29
31
In the 2023 valuation the base mortality table used was the standard S3PMA/S3PFA_M (All) Year of Birth table, with future
improvements projected by the CMI 2022 projection model with a 1.5% per annum long-term improvement rate.
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
2023
2022
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 (income) / expense
Components of defined benefit costs recognised in profit or loss
57
4 / 5
£m
0.5
-
0.5
0.6
1.1
4.8
(5.2)
(0.4)
0.7
£m
0.9
-
0.9
0.8
1.7
3.1
(2.9)
0.2
1.9
Page 287
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
Tax thereon
Net actuarial gain
Of the remeasurement movements reflected above:
2023
£m
(7.8)
0.9
11.1
(1.8)
2.4
(0.8)
1.6
2022
£m
(43.1)
(2.2)
61.9
(1.3)
15.3
(3.7)
11.6
•
The return on plan assets to 30 September 2023 reflects a general reduction in asset values in the year, though not as marked as
that seen in the year ended 30 September 2022 which saw sharp falls in global investment values over the year especially around
the year end, including the effect on the Group’s portfolio of its LDI hedging strategy.
•
In the year ended 30 September 2023 the changes in demographic assumptions reflect the updating of the maturity tables used to
the most recent versions, which show a general reduction in the expectancy compared to the previous editions.
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.
•
The change in financial assumptions in the year ended 30 September 2023 reflects principally a continuation of the recent upward
trend in bond yields, which has not been matched by long-term inflation expectations implied by gilt rates.
The movement in the year ended 30 September 2022 reflected 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 experience adjustments in the year ended 30 September 2023 represent the impact of actual UK inflation in the year on
expected benefits, which is more significant than in previous years due to the inflation levels recorded in the period.
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 were 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 2023,
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
2023
(1.6)%
1.6%
0.4%
2.5%
2022
(1.7)%
1.7%
0.4%
2.9%
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.
Page 288
There have been no changes in the processes by which the Plan manages its risks from previous periods.
Following a review of the Plan’s investment strategy, the current target asset allocations for the year ending 30 September 2024 are
50% growth assets (primarily equities), and 50% matching assets (primarily bonds) which includes LDI balances, with the hedge ratio
rising to 75%.
Following the finalisation of the March 2022 valuation, the agreed rate of employer contribution reduced to 12.5% of capped
pensionable salary from 15 March 2023, having been 25% since 1 July 2021, and 32.0% previously. An additional contribution for deficit
reduction of £1.9m payable over the nine-month period ending on 30 November 2023, and an additional contribution of £2.5m per
annum, payable monthly from 1 December 2023 were also agreed. These include amounts payable under the PRP and replace the
£2.5m contribution for deficit reduction included in the previous funding plan. The Group continues to make an additional £0.4m per
annum contribution in respect of the Plan’s running costs, payable monthly.
The present best estimate of the contributions to be made to the Plan by the Group in the year ending 30 September 2024 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
2023
Years
18
18
11
16
2022
Years
21
21
12
18
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 completed the auto-enrolment process mandated by the UK Government in November 2013, using this scheme. Since the year
ended 30 September 2020 the Group’s contribution to the scheme for those employees making the maximum 6% contribution has
been 10% of salary.
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 2023, which represent the total cost
charged against income, were £4.7m (2022: £4.1m) (note 57).
Page 289
The Accounts D2.3 Notes to the Accounts – Capital and financial risk
For the year ended 30 September 2023
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 and market 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.
61. 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 relative to its Total Risk Exposure
(‘TRE’) 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 3 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 by the Executive Risk
Committee (‘ERC’) 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 2023 the Group’s total regulatory capital of £1,338.9m (2022: £1,371.8m)
exceeded the amounts required by the regulator, including £673.4m (2022: £660.6m) 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 2023 on the fully loaded basis of £1,325.4m (2022: £1,346.0m) was in excess of the TCR of
£672.2m (2022: £658.4m) on the same basis (amounts not subject to audit).
Page 290
At 30 September 2023, the Group’s TCR represented 8.8% of TRE (2022: 8.8%).
The CRR also requires firms to hold additional capital buffers, including a Capital Conservation Buffer (‘CCoB’) of 2.5% of TRE (at
30 September 2023) (2022: 2.5%) and a Counter-cyclical Capital Buffer (‘CCyB’), currently 2.0% of TRE (2022: 0.0%). The UK CCyB
increased to 1.0% of TRE from December 2022 and to 2.0% of TRE from July 2023. This 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 2023 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
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
48
*
30
60
§
ψ
37
Ф
2023
£m
1,410.6
(56.7)
13.5
(168.2)
(9.6)
(0.6)
(0.1)
1,188.9
-
1,188.9
150.0
-
150.0
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
2023
£m
1,410.6
(56.7)
-
(168.2)
(9.6)
(0.6)
(0.1)
1,175.4
-
1,175.4
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
Total regulatory capital (‘TRC’)
1,338.9
1,371.8
1,325.4
1,346.0
* Firms are permitted to phase in the impact of IFRS 9 transition as described above.
§ 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. This requirement remained in force in the UK, at the
year end, under the Brexit arrangements but was removed by the PRA with effect from 14 November 2023. The amount required at 30 September 2022 was less than £0.1m.
Ф The PRA Rulebook restricts the amount of tier 2 capital which is eligible for regulatory purposes to 25% of TCR.
Page 291
The Accounts The TRE amount calculated under the PRA Rulebook framework against which this capital is held, which includes Risk Weighted Asset
(‘RWA’) amounts for credit risk, and the proportion of these assets which that capital 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
2023
£m
2022
£m
2023
£m
2022
£m
6,784.2
6,652.1
6,784.3
6,652.1
87.2
13.5
6,884.9
740.2
-
43.6
7,668.7
%
15.5
17.5
85.4
25.8
6,763.3
633.1
-
118.6
7,515.0
%
16.3
18.3
87.2
-
6,871.5
740.2
-
43.6
7,655.3
%
15.4
17.3
85.4
-
6,737.5
633.1
-
118.6
7,489.2
%
16.0
18.0
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 292
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
Total on balance sheet exposures
Regulatory exposure for 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
18
33
26
17
27
30
60
2023
£m
2022
£m
18,420.2
16,653.6
379.3
30.9
18,830.4
(615.4)
(2,783.3)
(38.0)
(4.2)
559.9
99.7
17,313.2
(779.0)
(1,612.5)
(30.2)
(1.0)
15,389.5
14,890.5
(168.2)
(12.7)
(170.2)
(7.1)
15,208.6
14,713.2
179.6
179.9
993.3
(815.7)
177.6
434.7
434.7
1,307.9
(1,094.1)
213.8
1,188.9
1,221.8
15,565.8
13.5
15,579.3
15,361.7
25.8
15,387.5
7.6%
7.9%
2023
£m
1,175.4
15,565.8
7.6%
2022
£m
1,196.0
15,361.7
7.8%
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.
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.
Page 293
The Accounts
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 2023 is derived as follows:
Profit for the year after tax
Amortisation and derecognition 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
30
30
30
2023
£m
153.9
3.6
157.5
1,417.3
(170.2)
1,247.1
1,410.6
(168.2)
1,242.4
2022
£m
313.6
2.0
315.6
1,241.9
(170.5)
1,071.4
1,417.3
(170.2)
1,247.1
1,244.7
1,159.3
12.7%
27.2%
(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 46) 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. For the current year, based
on its review of the Group’s capital position and forecasts, and taking account of Covid-related impacts on the relative size of interim
and final dividends in recent years and the desire to normalise the ongoing relationship between the half-year and final payments,
the Board concluded that a one-off enhancement to the interim dividend could be made. It therefore declared an interim dividend for
the year of 11.0p per share (2022: 9.4p per share). The Board also confirmed that the Group’s normal approach of paying an interim
dividend of 50% of the preceding year’s final dividend would continue to apply in future years.
Page 294
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, and the potential impacts of ongoing developments in the regulatory
regime for capital including the introduction in the UK of Basel 3.1.
The Board particularly considered the appropriateness of including net losses relating to fair value adjustments from hedging in the
calculation of any dividend or distribution, as these primarily result from the reversal of gains recorded in earlier years which were
disregarded, at the time, for the purpose of determining dividends. 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 total 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 26.4p per share (2022: 19.2p per share) for approval at the 2024 AGM,
making a total dividend for the year of 37.4p per share (2022: 28.6p per share).
During the year the share buy-back programme announced during the 2022 financial year was completed under an irrevocable
authority put in place in September 2022. A share buy-back programme for the current financial year, for up to £50.0m of ordinary
shares was authorised at the time of the Group’s 2022 results announcement. This was extended to £100.0m in June 2022. The
amount expended in these programmes in the year was £111.5m (note 47) and the share buy-back was completed before the year end.
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 2023 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 2023, 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.
62. 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
63 to 65 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 63 to 65 is materially similar to that existing throughout the year.
Page 295
The Accounts 63. 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
Intra-group cash deposits
Amounts owed by Group companies
Cash
CRDs
Accrued interest income
Financial assets at fair value
Derivative financial assets
Maximum exposure to credit risk
The Group
The Company
Note
2023
£m
2022
£m
18
27
27
27
17
27
27
26
14,874.3
14,210.3
1.5
-
-
1.9
-
2,994.3
1,930.9
38.0
4.6
30.2
1.0
17,912.7
16,174.3
615.4
18,528.1
779.0
16,953.3
2023
£m
-
-
193.6
35.1
27.6
-
0.1
256.4
-
256.4
2022
£m
-
-
39.1
19.7
-
0.1
58.9
-
58.9
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 64, 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 prudent credit management, both at the time of acquiring or underwriting a new loan,
where robust 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, which reports to the ERC, 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 296
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 2023 are analysed as follows:
2023
2022
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
Secured RLS and CBILS
Structured lending
Invoice finance
Total secured loans
Professions finance
Unsecured RLS, CBILS and BBLS
Other unsecured commercial loans
Total loans to customers
£m
12,720.1
27.7
12,747.8
154.5
12,902.3
747.8
13,650.1
559.1
297.7
26.9
50.5
169.0
31.7
14,785.0
52.2
16.7
20.4
%
85.6%
0.1%
85.7%
1.0%
86.7%
5.0%
91.7%
3.8%
2.0%
0.2%
0.4%
1.1%
0.2%
99.4%
0.4%
0.1%
0.1%
£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
65.1
178.7
25.7
14,111.9
60.9
22.9
14.6
14,874.3
100.0%
14,210.3
%
85.1%
0.2%
85.3%
1.4%
86.7%
5.1%
91.8%
3.5%
1.8%
0.3%
0.4%
1.3%
0.2%
99.3%
0.4%
0.2%
0.1%
100.0%
First and second charge mortgages are secured by charges over residential properties in England and Wales, or similar Scottish or
Northern Irish securities.
Development finance loans are secured by a first charge (or similar Scottish security) over the development property and various
charges over the build.
Asset finance loans and motor finance loans are effectively secured by the financed asset, while aircraft mortgages are secured by a
charge on the aircraft funded.
Structured lending and invoice finance balances are effectively secured over the assets of the customer, with security enhanced by
maintaining balances at a level less than the total amount of the security (the advance percentage).
Professions finance 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 297
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
2023
£m
149.6
390.6
160.3
24.6
725.1
2022
£m
151.9
306.9
179.4
-
638.2
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 2023 is set out below. The analysed
amount represents gross carrying amount.
30 September 2023
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 2022
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
11,393.7
2,236.4
157.1
34.0
37.7
113.4
13,972.3
(19.6)
13,952.7
10,270.3
1,563.9
118.6
35.0
44.4
124.8
12,157.0
(25.5)
12,131.5
Stage 2
£m
23.0
395.5
147.3
113.3
63.3
2.4
744.8
(9.4)
735.4
846.7
932.0
114.1
34.6
35.1
1.1
1,963.6
(8.0)
1,955.6
Stage 3
£m
1.9
73.8
9.7
13.6
104.1
2.9
206.0
(39.8)
166.2
1.1
63.6
4.3
9.7
42.2
3.5
124.4
(28.5)
95.9
POCI
£m
6.6
2.5
1.8
3.2
9.3
1.4
24.8
(4.8)
20.0
9.2
1.9
2.5
4.1
9.3
1.8
28.8
(1.5)
27.3
Total
£m
11,425.2
2,708.2
315.9
164.1
214.4
120.1
14,947.9
(73.6)
14,874.3
11,127.3
2,561.4
239.5
83.4
131.0
131.2
14,273.8
(63.5)
14,210.3
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 22, 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 (2023: 0.8%, 2022: 0.9%) 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 298
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 2023 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
2023
%
72.7
23.8
2.5
0.2
0.8
100.0
62.7
62.8
39.0
2022
%
89.2
9.4
0.4
0.3
0.7
100.0
57.8
57.9
37.6
2023
%
94.6
3.2
0.9
0.3
1.0
100.0
52.3
2022
%
95.6
2.4
0.8
0.2
1.0
100.0
50.6
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 decrease of 5.3% in the year ended 30 September 2023 (2022: increase of 9.5%).
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
2023
2022
2023
2022
%
3.3
5.9
18.2
3.5
10.3
30.6
9.0
6.2
7.4
94.4
-
2.5
3.1
%
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
%
3.4
6.2
7.4
4.2
7.5
37.8
8.4
7.3
6.2
88.4
2.3
5.5
3.8
%
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
100.0
100.0
100.0
100.0
Page 299
The Accounts Development finance
Development finance loans have an average term of 26 months (2022: 24 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%
2023
2023
By value
By number
%
8.2
17.3
37.7
25.5
5.8
5.5
%
6.1
21.7
33.0
27.4
7.4
4.4
2022
By value
%
7.9
17.0
45.0
22.2
5.8
2.1
2022
By number
%
5.1
21.7
39.1
27.2
6.2
0.7
100.0
100.0
100.0
100.0
The average LTGDV cover at the year end was 63.1% (2022: 62.1%).
LTGDV is calculated by comparing the current expected end of term exposure with the latest estimate of the value of the completed
development based on surveyors’ reports. The focus on residential property development within the portfolio means that asset values
will generally move in line with the UK residential property market.
At 30 September 2023, the development finance portfolio comprised 230 accounts (2022: 276) with a total carrying value of £747.8m
(2022: £719.9m). Of these accounts only 15 were included in Stage 2 at 30 September 2023 (2022: nine), with twelve accounts
classified as Stage 3 (2022: nil). In addition, one acquired account had been classified as POCI (2022: 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.
2023
2022
%
4.4
11.8
11.8
0.8
0.4
34.0
21.3
6.2
6.6
97.3
-
2.7
-
%
2.8
11.7
10.5
1.2
0.1
46.3
13.0
7.1
6.0
98.7
-
1.3
-
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 300
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 49 months (2022: 52 months) while that of the motor
finance loans was 68 months (2022: 67 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
2023
%
41.9
30.9
6.3
4.8
4.7
3.4
2.1
1.6
4.3
2022
%
37.4
33.2
6.1
4.9
4.7
3.7
2.4
1.3
6.3
100.0
100.0
Motor finance loans are secured over cars, motorhomes and light commercial vehicles and represent exposure to consumers and
small businesses.
Structured lending
The Group’s structured lending division provides revolving loan facilities to support non-bank lending businesses. Loans are made to a
Special Purpose Vehicle (‘SPV’) company controlled by the customer and effectively secured on the loans made by the SPV. Exposure
is limited to a percentage of the underlying assets, providing a buffer against credit loss.
Summary details of the structured lending portfolio are set out below.
Number of active facilities
Total facilities (£m)
Carrying value (£m)
2023
9
235.7
169.0
2022
8
220.5
178.7
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 2023 one of these facilities was identified as Stage 2 with the remainder in Stage 1. At 30 September 2022, all of
these facilities were identified as Stage 1.
Page 301
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 2023 were:
RLS
Term loans
Asset finance
Total RLS
CBILS
Term loans
Asset finance
Total CBILS
BBLS
Total term loans
Total asset finance (note 18)
2023
£m
1.0
36.0
37.0
12.6
14.5
27.1
3.1
67.2
16.7
50.5
67.2
2022
£m
0.6
41.5
42.1
18.3
23.6
41.9
4.0
88.0
22.9
65.1
88.0
At 30 September 2023, £0.7m of this balance was considered to be non-performing (2022: £0.6m).
Unsecured consumer loans
The Group disposed of almost all its unsecured consumer loan portfolio during the year ended 30 September 2022 (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 302
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 2023 and 30 September 2022, compared to the industry averages at those dates published by UK Finance (‘UKF’) and
the FLA, was:
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 second mortgage loans
Motor finance loans
Accounts more than 2 months in arrears
All accounts
Originated cases
Purchased assets
FLA data for consumer point of sale hire purchase
Asset finance loans
Accounts more than 2 months in arrears
FLA data for business lease / hire purchase loans
2023
%
0.34
0.15
2.93
0.69
0.64
0.89
0.84
23.48
2.42
26.58
30.10
6.30
1.08
1.07
1.32
3.60
0.23
0.60
2022
%
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
No published industry data for asset classes comparable to the Group’s other books has been identified. Where revised data at
30 September 2022 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 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 303
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 2022 or the year ended 30 September 2023.
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 ERC values for the Group’s purchased consumer loan assets, are set out below.
These are derived using the same models and assumptions used in the EIR calculations. ERCs are set out both for all purchased
consumer portfolios and for those classified as POCI under IFRS 9.
All purchased consumer assets
Carrying value
84 month ERCs
120 month ERCs
POCI assets only
Carrying value
84 month ERCs
120 month ERCs
2023
£m
58.6
68.9
73.4
17.7
24.5
27.8
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
Amounts shown above are disclosed as loans to customers (note 18). They include first mortgages, second charge mortgage loans
and, in the amounts shown for 2021 unsecured consumer loans.
The reduction in the year ended 30 September 2022 primarily reflects the disposal of the Group’s unsecured consumer lending
assets (note 7).
Page 304
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+
2023
£m
2,783.3
2,783.3
78.9
132.1
211.0
2022
£m
1,612.5
1,612.5
46.9
271.5
318.4
2,994.3
1,930.9
27.6
19.7
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 305
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 26).
In order to control credit risk relating to counterparties to the Group’s derivative financial instruments, ALCO reviews and approves
which counterparties the Group will deal with, establishes limits for each counterparty and monitors compliance with those limits. Any
changes necessary are advised to ERC. 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 27, while collateral pledged to the Group is shown
in note 40.
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.
2023
£m
-
3.3
588.9
5.5
17.7
615.4
2022
£m
7.0
0.5
757.0
14.5
-
779.0
(383.4)
(383.4)
(388.3)
(388.3)
232.0
390.7
Carrying value of derivative financial assets
Counterparties rated
AA
AA-
A+
A
A-
Gross exposure (note 26)
Collateral amounts posted
CSA collateral amounts (note 40)
Total collateral
Net exposure
Page 306
64. Liquidity risk
Liquidity risk is the risk that the Group might be unable meet its liabilities and financial commitments 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.
Other sources of liquidity risk in the normal course of business include that arising:
•
•
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 2023
Retail deposits
Borrowings
Contingent consideration
Total non-derivative liabilities
Derivative liabilities
30 September 2022
Retail deposits
Borrowings
Contingent consideration
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
11,278.3
327.1
-
11,605.4
52.8
11,658.2
8,703.4
116.8
2.2
8,822.4
88.8
8,911.2
1,782.5
160.3
-
1,942.8
(5.9)
1,936.9
1,697.8
251.3
-
1,949.1
24.0
1,973.1
734.5
2,811.3
-
3,545.8
8.7
3,554.5
452.0
2,928.2
-
3,380.2
3.6
3,383.8
In more than
five years
£m
44.4
170.1
-
214.5
0.3
214.8
32.0
178.1
-
210.1
0.1
210.2
Total
£m
13,839.7
3,468.8
-
17,308.5
55.9
17,364.4
10,885.2
3,474.4
2.2
14,361.8
116.5
14,478.3
Non-recourse balances are payable only to the extent that funds are available, as described further below, and do not expose the
Group to any material liquidity risk. They are therefore not included in the table above.
As the amounts set out above include all expected future cash flows, including principal and interest, they will not agree to amortised
cost or fair value amounts reported in the balance sheet.
Further information on the liquidity exposure arising from the Group’s retail deposits, securitisation and other borrowings is set out below.
The liquidity exposures of the Company arise only from its borrowings, and are set out below.
The overall responsibility for the management of liquidity risk rests with ALCO which makes recommendations for the Group’s liquidity
policy for board approval. ALCO monitors liquidity risk metrics within limits set by the Board or regulators and uses detailed cash flow
projections to ensure that an adequate level of liquidity is available at all times.
The Group’s and the Bank’s liquidity position is managed on a day-to-day basis by the treasury function, under the supervision of ALCO.
Page 307
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
2023
£m
4,181.5
1,649.5
5,447.3
11,278.3
1,782.5
734.5
44.4
2022
£m
3,934.6
955.1
3,813.7
8,703.4
1,697.8
452.0
32.0
13,839.7
10,885.2
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 2023 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
2023
£m
2,589.7
2,589.7
150.0
2,739.7
2022
£m
1,505.5
1,505.5
150.0
1,655.5
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 2023, the Bank’s LCR was comfortably above the required minimum regulatory standard. The Bank also monitors its
Net Stable Funding Ratio (‘NSFR’) which measures the stability of the funding profile in relation to the composition of its assets and
off balance sheet activities.
Liquidity is not regulated at Group level.
Borrowings
Set out below is the contractual maturity profile of the Group’s and the Company’s borrowings at 30 September 2023 and
30 September 2022 based on their carrying values. These are analysed between non-recourse (securitisation) and other funding,
with the liquidity position arising principally from the other funding.
Page 308
The Group
30 September 2023
Secured bank borrowings
Asset backed loan notes
Total non-recourse funding
Bank overdrafts
Retail bonds
Corporate bond
Central bank facilities
Sale and repurchase agreements
Lease liabilities
30 September 2022
Secured bank borrowings
Asset backed loan notes
Total non-recourse funding
Bank overdrafts
Retail bonds
Corporate bond
Central bank facilities
Sale and repurchase agreements
Lease liabilities
The Company
30 September 2023
Retail bonds
Corporate bond
Lease liabilities
30 September 2022
Retail bonds
Corporate bond
Lease liabilities
In one year
or less, or on
demand
Financial liabilities falling due:
In more than
one year, but
not more than
two years
In more than
two years but
not more than
five years
£m
£m
£m
-
-
-
0.2
112.4
-
-
50.0
2.6
165.2
-
-
-
0.4
-
-
-
-
2.2
2.6
-
-
-
-
-
-
-
-
2.4
2.4
170.0
-
170.0
-
112.3
-
-
-
1.9
284.2
-
-
-
-
-
-
2,750.0
-
3.4
2,753.4
-
-
-
-
-
-
2,750.0
-
3.8
2,753.8
In more than
five years
£m
-
28.0
28.0
-
-
145.8
-
-
0.5
174.3
416.0
409.3
825.3
-
-
149.2
-
-
1.1
975.6
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
112.4
-
1.3
113.7
-
-
1.3
1.3
£m
-
-
1.4
1.4
112.3
-
1.3
113.6
£m
-
-
4.3
4.3
-
-
4.2
4.2
£m
-
149.4
6.7
156.1
-
149.2
8.2
157.4
Total
£m
-
28.0
28.0
0.2
112.4
145.8
2,750.0
50.0
8.9
3,095.3
586.0
409.3
995.3
0.4
112.3
149.2
2,750.0
-
9.0
4,016.2
Total
£m
112.4
149.4
13.7
275.5
112.3
149.2
15.0
276.5
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 309
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 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 34 and the assets backing the notes are shown in note 18.
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 17 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 was no longer available for new drawings in the period and was repaid in September 2023.
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 and there were
no active warehouses at 30 September 2023. There were no undrawn facilities available at the year end (2022: £280.0m).
Further details of the warehouse facilities are given in note 35 and details of the loan assets within the warehouses are given in note 18.
The final repayment date for the securitisation borrowings is more than five years from the balance sheet date, falling due in 2045.
The sterling principal amount outstanding at 30 September 2023 under the SPV and warehouse arrangements was £28.4m
(2022: £996.5m). The total sterling amount payable under these arrangements, were these principal amounts to remain outstanding
until the final repayment date, would be £43.3m (2022: £1,912.3m). 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 previous years, only the most recent bond remains outstanding. This is
repayable within twelve months of the balance sheet date.
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 affirmed at BBB+ in February 2023.
Central bank facilities
The Group has accessed term credit facilities under the central bank schemes described in note 38. 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 2023
the amount of drawings available in respect of prepositioned assets was £1,715.4m (2022: £1,776.0m).
Page 310
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
222.1
5.3
3.1
3.1
2023
Available
£m
986.9
100.9
59.9
57.9
Total
£m
1,209.0
106.2
63.0
61.0
Utilised
£m
1,212.7
5.3
4.6
4.3
233.6
1,205.6
1,439.2
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
1,682.1
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 18.
Utilised notes includes those which the Group is obliged to hold under regulations governing securitisation issuance.
The available AAA notes would give access to £769.8m (2022: £171.6m) 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 (2022: £150.0m), utilising
£26.5m 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 during the current year, and maintains
the capability to access the repo market for liquidity purposes. Transactions in place at 30 September 2023 utilised £58.5m of the
loan notes shown above (2022: £nil).
Page 311
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.
Corporate
bonds
Retail
bonds
Central bank
facilities
Sale and
repurchase
transactions
Lease
liabilities
Total
£m
£m
£m
£m
£m
£m
a) The Group
30 September 2023
Payable in:
Less than one year
One to two years
Two to five years
Over five years
30 September 2022
Payable in:
Less than one year
One to two years
Two to five years
Over five years
b) The Company
30 September 2023
Payable in:
Less than one year
One to two years
Two to five years
Over five years
30 September 2022
Payable in:
Less than one year
One to two years
Two to five years
Over five years
6.6
6.6
19.7
169.6
202.5
6.6
6.6
19.7
176.2
209.1
119.3
-
-
-
119.3
6.8
119.2
-
-
126.0
147.8
151.3
2,788.2
-
3,087.3
101.4
123.8
2,905.0
-
3,130.2
50.8
-
-
-
50.8
-
-
-
-
-
2.6
2.4
3.4
0.5
8.9
2.0
1.7
3.5
1.9
9.1
Corporate
bonds
£m
Retail
bonds
£m
Lease
liabilities
£m
6.6
6.6
19.7
169.6
202.5
6.6
6.6
19.7
176.2
209.1
119.3
-
-
-
119.3
6.8
119.2
-
-
126.0
1.7
1.7
5.0
7.0
15.4
1.7
1.7
5.0
8.7
17.1
327.1
160.3
2,811.3
170.1
3,468.8
116.8
251.3
2,928.2
178.1
3,474.4
Total
£m
127.6
8.3
24.7
176.6
337.2
15.1
127.5
24.7
184.9
352.2
Amounts payable in respect of the ‘other accruals’ and ‘trade creditors’ shown in note 40 fall due within one year. The cash flows
described above will include those for interest on borrowings accrued at 30 September 2023 disclosed in note 40.
Page 312
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
65. Market risk
2023
2022
Total cash
outflow / (inflow)
Total cash
outflow / (inflow)
£m
52.8
(5.9)
8.7
0.3
55.9
(218.2)
(175.4)
(162.3)
-
(555.9)
£m
88.8
24.0
3.6
0.1
116.5
(253.1)
(246.2)
(342.0)
(2.7)
(844.0)
(500.0)
(727.5)
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 ended 30 September 2022. All new wholesale debt and interest rate swaps recognised since that point have
referenced SONIA, while existing LIBOR linked instruments were transitioned before the start of the current financial year.
The Group’s risk management framework for IRRBB continues to evolve in line with updates in regulatory guidance on methods
expected to be used by banks measuring, managing, monitoring and controlling such risks.
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 313
The Accounts IRRBB exposures
Risk exposure in the Group’s operations might occur through:
•
•
Duration or repricing 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 reprice with reference to different reference interest rates, for example rates
set by the Group and market rates, such as Bank of England base rate and SONIA. 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 repricing 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 relating to its fixed rate lending, deposit taking and borrowing
activities is discussed further in note 26.
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 2023, 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 £16.1m (2022: increase by £21.7m).
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 £16.0m
(2022: increase by £34.6m). 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 (note 27) also includes £193.6m which is placed on deposit with the Bank of England (2022: £257.0m). 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 bear
interest at rates based on SONIA. All other balances in the Company balance sheet are non-interest bearing.
Page 314
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 2023 and 30 September 2022 are denominated in sterling.
The SME lending business has a limited amount of lending denominated in US dollars, principally £7.6m of aircraft mortgage balances.
It may also 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 26.
None of the assets or liabilities of the Company are denominated in foreign currencies.
Page 315
The Accounts D2.4 Notes to the Accounts – Basis of preparation
For the year ended 30 September 2023
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.
66. 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 2023 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.
The particular accounting policies adopted have been set out in note 67 and the critical accounting judgements and estimates which
have been required in preparing these financial statements are described in notes 68 and 69 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.
Page 316
67. 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 2023.
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 72, 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 70.
(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.
Page 317
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.
Page 318
(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. Impairment is determined
based on the net asset values of subsidiary entities after provision for inter company balances and investments at the subsidiary level.
(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.
Any shortfall on disposal of such shares is offset against retained earnings. Any excess of disposal proceeds over cost is added to the
share premium account. 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.
Page 319
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) Sale and repurchase agreements
Securities, including the Group’s own retained asset-backed notes, can be sold subject to a commitment to repurchase them at a
subsequent date at a price calculated on a pre-determined basis (a repo). Where this price comprises a fixed amount plus a lenders
return, the funds received are treated as borrowings of the Group.
Where the securities concerned are retained notes no liability is recognised in asset-backed loan notes and where the securities are
recognised on the Group’s balance sheet prior to the transaction, these are not derecognised.
The difference between the sale and purchase price is accrued over the life of the agreement using the effective interest rate method.
(s) 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.
(t) 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.
(u) 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.
(v) 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.
Page 320
(w) Retirement benefit obligations
The expected cost of providing pensions within the funded defined benefit scheme, determined on the basis of annual valuations by
professionally qualified actuaries using the projected unit method, is charged to the income statement. Actuarial gains and losses are
recognised in full in the period in which they occur and do not form part of the result for the period, being recognised in the Statement
of Comprehensive Income.
The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation, as
reduced by the fair value of scheme assets at the balance sheet date.
The expected financing cost of the deficit, as estimated at the beginning of the period is recognised in the result for the period within
interest payable. Any variances against the estimated amount in the year form part of the actuarial gain or loss.
The charge to the income statement for providing pensions under defined contribution pension schemes is equal to the contributions
payable to such schemes for the year.
(x) 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.
(y) 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
(z) 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.
(aa) 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.
(bb) 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.
Page 321
The Accounts (cc) 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.
68. Critical accounting judgements
The most significant judgements which the directors have made in the application of the accounting policies set out in note 67 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 than 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 21.
(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 21.
(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.
Page 322
69. 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 (which might include 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 2023 there is little recent history against which to
benchmark likely customer behaviour. Interest rates have risen to higher levels, at a more rapid rate than at any time in recent history.
UK base rates had reached 5.25% at the balance sheet date, a level they had not touched since April 2008, since when significant
regulatory intervention in the UK’s lending markets has taken place. There have also been significant changes in product structures in
that period, including the growth of longer term fixed-rate mortgage lending in recent years. All of these make the historical record of
behaviours in higher interest rate environments an uncertain guide to the likely impact of current rate levels.
There is also little agreement between economic forecasters as to the future direction of the UK economy, exacerbated by the
potential impact of the general election which must be held within the next eighteen months. At the same time, the level to which
economic pressures on customers have yet to manifest themselves in credit metrics is still unclear, with credit performance across
the markets in which the Group is active being better than some expected over the past year, but considerable uncertainty as to
whether this represents a more benign outcome, or merely a delay in credit issues emerging beyond what was anticipated. Together,
these factors make forecasting credit behaviour in current conditions particularly challenging.
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 2023 have been derived in light of the current economic situation, at that
date, modelling a variety of possible outcomes as described in note 24.
As noted above, there remains a significant range of different opinions amongst economists about the longer-term prospects for
the UK, although these have converged, to some extent, over the twelve months since 30 September 2022, when the impact of the
September 2022 mini-budget had significantly broadened the range of plausible outcomes.
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 represented by the economic scenarios, the Group recognises that economic situations can arise which
lie outside the range of potential positions considered as a basis for its IFRS 9 approach to impairment when the current models
were built. 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.
Page 323
The Accounts 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 21.
The position after considering all these matters is set out in notes 21 to 23, 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 24, while sensitivity analyses on
impairment provisioning are set out in note 25.
(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 the cash flows relating thereto, including those relating to early redemption charges together with any initial fees
receivable from the customer or procurement fees payable to a mortgage broker or other introducer.
Where an account may have differing interest charging arrangements in different phases of its contractual life, such as the Group’s
buy-to-let mortgage accounts which have a fixed interest rate for a set period and then revert to a variable rate set by the Group (the
‘reversionary rate’), the behavioural life and the expected level of the reversionary rate will have a significant impact on the overall EIR.
For each portfolio a model is in place to ensure that income is appropriately spread.
For loan accounts such as those in the Group’s mortgage portfolios where borrowers typically repay their balances before the
contractual repayment date, the estimated life of the account will be dependent on customer behaviour. The customer may choose
to sell their property and redeem the mortgage at any point, but may also choose to refinance their account, if a more attractive
alternative is available, based on the interest rate they are being charged at that point in time, or expect to be charged in the future.
The behavioural life of the loan may therefore be influenced by levels of activity in the residential property market, or by the nature and
pricing of alternative funding sources, at each point in the loan's life and these are likely to vary over time.
For loans which have a fixed-rate period, the length of that period will have a significant behavioural impact, with many customers
choosing to consider their positions at the point at which the fixed rate expires, influenced by the market conditions then prevailing.
The future forecast future choices of customers currently on fixed-rate products at this point therefore has a significant impact on the
EIR modelling for these assets.
Where loans are more likely to run to contractual term, and interest rates are less likely to vary over that term, as is the case for the
majority of the Group’s motor finance and asset-backed SME lending, the determination of an EIR model is less judgemental, and
reflects principally the spreading of known fees and commissions.
The Group models lives for each of its asset classes, based on its current expectation of future borrower behaviour, and uses these
profiles, together with its expectations of future reversionary interest rates, to determine the correct EIR to be applied to each
account. The underlying estimates are based on historical data, adjusted for expected changes, and reviewed regularly. The accuracy
of the EIR applied would therefore be compromised by any differences between actual repayment profiles and charging rates and
those predicted, which in turn would depend directly on customer behaviour and market conditions.
The Group therefore keeps its models under review and refines its modelling in the light of any emerging deviations from expected
behaviour. These are particularly likely where the current or expected economic environment differs from historic scenarios for which
relevant data observations are available. This is currently the case, with market mortgage rates at far higher levels than have been
seen in many years. In such cases management consider carefully the impacts which any new conditions may have on customer
behaviour and reversionary rates and reflect them in the model as appropriate, revisiting these assumptions regularly as observable
data becomes available, with a detailed exercise to analyse any emerging themes taking place every six months as part of the half year
and year end results processes.
For purchased loans the EIR calculation will involve estimating the likely future credit performance of the accounts at the time of
acquisition as well as the customers’ payment behaviour. In the initial modelling historical data obtained from the vendor will be
examined, with assumptions revisited through the asset lives based on actual and expected customer behaviour.
The application of these estimates results in an overall increase in the carrying value of the Group’s loans to customers, including
POCI accounts, at 30 September 2023 of £20.5m.
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.
•
Currently the average behavioural life used in the buy-to-let modelling for non-legacy assets, which have an average fixed period of
49 months, was 83 months.
A reduction of the assumed average lives of all loans secured on residential property by three months would reduce balance sheet
assets by £9.3m (2022: £13.3m), while an increase of the assumed asset lives of such assets by three months would increase
balance sheet assets by £9.2m (2022: £13.3m). £8.8m of both the increase and decrease related to non-legacy buy-to-let assets.
A reduction of the assumed average lives of all loans secured on residential property by six months would reduce balance sheet
assets by £18.5m (2022: £25.8m), while an increase of the assumed asset lives of such assets by six months would increase
balance sheet assets by £18.4m (2022: £25.8m). £17.5m of both the increase and decrease related to non-legacy buy-to-let assets.
•
The EIR calculation is based on management estimates of the reversionary rates which would be charged to customers after the
end of their fixed rate periods.
If it was assumed that the maximum reversionary rate which could be charged in future was 6.00%, then the value of the non-legacy
buy-to-let loan book would be decreased by £3.0m (2022: £nil).
Page 324
If it was assumed that the maximum reversionary rate which could be charged in future was 8.00%, then the value of the non-legacy
buy-to-let loan book would be increased by £3.9m (2022: £nil).
•
Where fixed rate buy-to-let assets redeem before the end of their fixed rate period, an early redemption charge is made, and an
estimate for the impact of these charges must be included in the EIR calculation.
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 would increase balance sheet assets by £9.6m (2022: £8.8m).
•
A reduction (or increase) in estimated cash flows from purchased loan assets (principally buy-to-let first mortgage loans and
second charge consumer loan assets) of 5% would reduce (or increase) balance sheet assets by £1.6m (2022: £2.0m). Such assets
now represent only £58.8m of the Group’s loan portfolio (2022: £75.8m).
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 31, 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 31.
(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 60. 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 60.
Page 325
The Accounts
70. 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 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 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 forecast is updated every six months, and the directors have based their going concern assessment on the forecast for the period
beginning on 1 October 2023.
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:
•
•
•
•
An increase in buy-to-let volumes. This examined the impact of higher volumes at a reduced yield on profitability and illustrated the
extent to which capital resources and liquidity would be stretched due to the higher cash and capital requirements
Higher funding costs. Higher cost on all new savings deposits, both front book and back book throughout the forecast horizon. This
scenario illustrates the impact of a significant, prolonged margin squeeze on profitability, and whether this would cause significant
impacts on any capital, liquidity or encumbrance ratios
Higher buy-to-let redemption rates for buy-to-let mortgages reaching the end of their fixed-rate period. This illustrates the potential
risk inherent in the five-year fixed rate business
Increased economic stress on customers. As well as modelling the impact of each of the economic scenarios set out in note
24 across the forecast horizon, the severe economic scenario was also modelled over the five-year horizon. To ensure this
represented a worst-case scenario all other assumptions were held steady, although in reality adjustments to new business
appetite and other factors would be made
•
Combined downside stress. The IFRS 9 downside economic scenario described in note 24 was modelled out for the plan horizon
along with a plausible set of other adverse factors to the business model, creating a prolonged tail-risk
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 326
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 £13,265.3m (note 33), raised through Paragon Bank, are repayable within five years, with 82.9% of this
balance (£10,990.5m) payable within twelve months of the balance sheet date. The liquidity exposure represented by these deposits
is closely monitored; a process supervised by the ALCO. The Group is required to hold liquid assets in Paragon Bank to mitigate
this liquidity risk. At 30 September 2023 Paragon Bank held £2,589.7m of balance sheet assets for liquidity purposes, in the form of
central bank deposits (note 64). A further £150.0m of liquidity was provided by the off balance sheet long / short transaction described
in note 64, bringing the total to £2,739.7m.
Paragon Bank manages its liquidity in line with the Board’s risk appetite and the requirements of the PRA, which are formally
documented in the Board’s approved ILAAP, updated annually. The Bank maintains a liquidity framework that includes a short to medium
term cash flow requirement analysis, a longer-term funding plan and access to the Bank of England’s liquidity insurance facilities, where
pre-positioned assets would support drawings of £1,715.4m. 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 2023 the Group had
£1,205.6m of such notes available for use, of which £986.9m were rated AAA. The available AAA notes would give access to £769.8m if
used to support drawings on Bank of England facilities.
The Group’s securitisation funding structures, described in note 64, 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 during 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, confirmed by Fitch Ratings in February 2023, 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 61 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 2023 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 327
The Accounts 71. 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 2023 or the year ended 30 September 2022 carried at
fair value and valued using level 3 measurements, other than contingent consideration amounts (note 41).
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
26
26
41
2023
£m
615.4
615.4
39.9
-
39.9
2022
£m
779.0
779.0
102.1
2.2
104.3
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 sterling benchmark interest rates.
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 26.
Page 328
Contingent consideration
The value of the contingent consideration balances shown in note 41 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
Sale and repurchase agreements
Other financial liabilities
The Company
Financial assets
Cash
Intra-group cash deposits
Amounts owed to group companies
Sundry financial assets
Financial liabilities
Corporate and retail bonds
Amounts owed by group companies
Other financial liabilities
Note
2023
2023
2022
2022
Carrying amount
Fair value
Carrying amount
Fair value
£m
£m
£m
£m
17
18
27
33
39
40
2,994.3
14,874.3
46.0
17,914.6
0.2
28.0
-
2,994.3
14,524.0
46.0
17,564.3
0.2
28.0
-
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
13,265.3
13,177.3
10,669.2
10,592.9
258.2
50.0
608.8
234.8
50.0
608.8
261.5
-
491.2
254.4
-
491.2
14,210.5
14,099.1
12,417.6
12,334.2
Note
2023
2023
2022
2022
Carrying amount
Fair value
Carrying amount
Fair value
£m
£m
£m
£m
17
27
27
27
40
40
27.6
193.6
35.1
0.1
256.4
261.8
24.0
0.7
286.5
27.6
193.6
35.1
0.1
256.4
234.8
24.0
0.7
259.5
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
The fair values of retail deposits and corporate and retail bonds shown above will include amounts for the related accrued interest.
Page 329
The Accounts
Cash, sale and repurchase agreements, bank loans and securitisation borrowings
The fair values of cash and cash equivalents, sale and repurchase agreements, 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 and the sale and repurchase agreements 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 330
72. Details of subsidiary undertakings
Subsidiary undertakings of the Group at 30 September 2023, 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.
Company
Holding
Principal activity
Direct subsidiaries of Paragon Banking Group PLC
Paragon Bank PLC
Paragon Car Finance Limited
Idem Capital Holdings Limited
The Business Mortgage Company Limited
Paragon Mortgages (No. 12) 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
Universal Credit Limited
Yorkshire Freeholds Limited
Yorkshire Leaseholds Limited
100%
100%
100%
100%
Deposit taking, residential mortgages and loan and vehicle finance
Vehicle finance
Intermediate holding company
Mortgage broker
100%*
Residential mortgages
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Page 331
The Accounts Direct and indirect subsidiaries of Paragon Bank PLC
Paragon Finance PLC
Mortgage Trust Limited
Paragon Mortgages Limited
Paragon Mortgages (2010) Limited
Mortgage Trust Services PLC
Paragon Second Funding Limited
Paragon Asset Finance Limited
Paragon Business Finance PLC
Paragon Commercial Finance Limited
Paragon Development Finance Limited
Paragon Development Finance Services Limited
Paragon Technology Finance Limited
PBAF Acquisitions Limited
Premier Asset Finance Limited
Specialist Fleet Services Limited
Collett Transport Services Limited
Homer Management Limited
Lease Portfolio Management Limited
Paragon Options PLC
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%
Residential mortgages and asset administration
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages and asset administration
Residential mortgages and loan and vehicle finance
Holding company and portfolio administration
Asset finance
Asset finance
Development Finance
Development Finance
Asset finance
Residential mortgages and loan finance
Asset finance broker
Asset finance and contract hire
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.
Page 332
The principal companies party to these arrangements at 30 September 2023 comprise:
Company
Paragon Seventh Funding Limited
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
Paragon Mortgages (No. 29) Holdings Limited
Paragon Mortgages (No. 29) PLC
Arianty Holdings Limited
Arianty No. 1 PLC
Paragon Fifth Funding Limited
Paragon Sixth Funding Limited
Paragon Mortgages (No. 25) Holdings Limited
Paragon Mortgages (No. 25) PLC
Principal activity
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
Holding company
Residential mortgages
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 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 2023. They do not form part of the consolidation as
they are considered to be controlled by the liquidator.
Company
Holding
Principal activity
Direct subsidiaries of Paragon Banking Group PLC
Moorgate Servicing Limited
Paragon Mortgages (No. 11) PLC
Paragon Mortgages (No. 13) PLC
Paragon Mortgages (No. 14) PLC
Paragon Mortgages (No. 15) PLC
Plymouth Funding Limited
Direct and Indirect subsidiaries of Paragon Bank PLC
City Business Finance Limited
Fineline Holdings Limited
Fineline Media Finance Limited
PBAF (No.1) Limited
State Securities Holdings Limited
State Security Limited
100%
100% *
100% *
100% *
100% *
100%
100%
100%
100%
100%
100%
100%
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
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.
Page 333
The Accounts Appendices to the
Annual Report
Additional financial information supporting
amounts shown in the Strategic Report (Section A),
but not forming part of the statutory accounts or
subject to audit.
P336
E1. Appendices to the Annual Report
To work in harmony
and collectively towards
the delivery of our
overall objective
E1. Appendices to the Annual Report
For the year ended 30 September 2023
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
Note
14
7
2023
£m
199.9
77.7
-
277.6
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 16)
Underlying earnings per share
2023
£m
277.6
(66.4)
211.2
224.1
94.2p
2022
£m
417.9
(191.9)
(4.6)
221.4
2022
£m
221.4
(51.8)
169.6
242.7
69.9p
Tax has been charged on the underlying profit at 23.9%, being the effective rate which would result from the exclusion of the adjusting
items from the corporation tax calculation (2022: 23.4%).
Page 336
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.
Underlying earnings
Amortisation and derecognition of intangible assets
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
9
30
26
44
30
26
44
2023
£m
211.2
3.6
214.8
1,417.3
(170.2)
(216.7)
53.2
1,083.6
1,410.6
(168.2)
(230.8)
32.8
1,044.4
1,064.1
20.2%
2022
£m
169.6
2.0
171.6
1,241.9
(170.5)
(8.8)
(2.2)
1,060.4
1,417.3
(170.2)
(216.7)
53.2
1,083.6
1,072.0
16.0%
Page 337
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 shown below. Not all
net interest is allocated to segments and therefore total segment net interest in these tables will not equal net interest for the Group.
Year ended 30 September 2023
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 2022
Opening loans to customers
Closing loans to customers
Average loans to customers
Net interest
NIM
Impairment provision charge
Cost of risk
Not all interest is allocated to segments (note 2).
Note
Mortgage
Lending
Commercial
Lending
18
18
2
12
Note
18
18
2
12
£m
12,328.7
12,902.3
12,615.5
277.6
2.20%
10.4
0.08%
Mortgage
Lending
£m
11,829.6
12,328.7
12,079.2
251.2
2.08%
4.6
0.04%
£m
1,881.6
1,972.0
1,926.8
135.7
7.04%
7.6
0.39%
Commercial
Lending
£m
1,573.1
1,881.6
1,727.3
111.2
6.44%
9.4
0.54%
Group
Total
£m
14,210.3
14,874.3
14,542.3
448.9
3.09%
18.0
0.12%
Group
Total
£m
13,402.7
14,210.3
13,806.5
371.2
2.69%
14.0
0.10%
Page 338
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
2023
£m
170.4
466.0
36.6%
2023
£m
170.4
466.0
-
466.0
2022
£m
153.0
393.0
38.9%
2022
£m
153.0
393.0
(4.6)
388.4
Underlying cost: income ratio
36.6%
39.4%
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 and preceding years, the Board has determined that is appropriate to exclude the post-tax impact of fair value
(losses) / gains from its calculation. The dividend cover for the year, subject to the approval of the 2023 final dividend at the AGM in
March 2024 is therefore as set out below.
Earnings per share (p)
Attributable fair value (losses) / 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
16
48
Note
45
47
47
61
2023
68.7
34.7
(9.2)
94.2
37.4
2.52
2023
1,410.6
228.7
(10.1)
(4.0)
214.6
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
£6.57
£6.06
1,242.4
£5.79
1,247.1
£5.33
Page 339
Appendices Glossary
P342
F1. Glossary
A summary of abbreviations used in the
Annual Report and Accounts
To treat people as
individuals and listen
to their views
F1. Glossary
ACS
Act
AGM
AI
ALCO
AQR
Annual Cyclical Scenario published by the
Bank of England
The Companies Act 2006
Annual General Meeting
Artificial Intelligence
Asset and Liability Committee
Audit Quality Review
Articles
The Articles of Association of the Company
ASHE
AT1
Annual Survey of Hours and Earnings
Additional Tier 1
Paragon Bank
or The Bank
Bank Tax Code The Code of Practice on Taxation for Banks
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
Building Management System
Bankers For Net Zero
Compound Annual Growth Rate
Climate Biennial Exploratory Scenario
Confederation of British Industry
BBLS
BBR
BCBS
BEIS
BEPS
BEVs
BGS
BMS
B4NZ
CAGR
CBES
CBI
CBILS
CCC
Customer and Conduct Committee
CCCBNZ
Climate Change Committee Balanced Net Zero
CCoB
CCP
CCyB
CEO
CET1
CFO
CFRF
CGI
CGU
CIB
CIIA
CML
Code
CO2e
COO
Capital Conservation Buffer
Central Clearing Counterparty
Counter-Cyclical Capital Buffer
Chief Executive Officer
Core Equity Tier 1
Chief Financial Officer
Climate Financial Risk Forum
Chartered Governance Institute UK & Ireland
Cash Generating Unit
Chartered Institute of Bankers
Chartered Institute of Internal Auditors
Council of Mortgage Lenders
UK Corporate Governance Code
CO2 Equivalent
Chief Operating Officer
Company
Paragon Banking Group PLC
Consultation Paper
Consumer Price Index
Chief People Officer
The EU Capital Requirements Regulation
and Directive Regime
Cash Ratio Deposits
Chief Risk Officer
CP
CPI
CPO
CRD IV
CRDs
CRO
Page 342
CRR
CSA
CSOP
CVR
DECL
DEFRA
DISP
DSBP
DTR
EAD
ECL
EDI
EIR
EPC
EPS
EQA
ERC
ERMF
ESG
ESOP
ESOS
EU
EUR
Capital Requirements Regulation – EU
Regulation 575/2013
Credit Support Annex
Company Share Option Plan
Commercial Variable Rate
Task Force on Disclosure about Expected
Credit Loss
Department for Environment,
Food and Rural Affairs
FCA’s Dispute Resolution: Complaints Sourcebook
Deferred Share Bonus Plan
Disclosure and Transparency Rule
Exposure 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
EV
EWI
ExCo
FCA
FLA
FOS
Framework
FRC
FRF
FRN
FSCS
FVTPL
GDP
GFI
GHG
GMP
Group
HMRC
HPI
HQLA
IAP
IAS
IASB
ICAAP
IFRS
Economic Value
Early Warning Indicators
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
Green Finance Institute
Greenhouse Gas
Guaranteed Minimum Pension
The Company and all 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)
Coronavirus Business Interruption Loan Scheme
EURIBOR
Euro Interbank Offered Rate
IIP
ILAAP
ILG
ILTR
IMLA
IRB
Investors In People
Internal Liquidity Adequacy Assessment Process
Individual Liquidity Guidance
Indexed Long Term Repo Scheme
Intermediary Mortgage Lenders Association
Internal Ratings Based
IRRBB
Interest Rate Risk in the Banking Book
ISAs
ISDA
International Standards on Auditing
International Swaps and Derivatives Association
ISO14001:2015 ISO14001:2015, ‘Environmental
Management Systems’
ISO45001:2018 ISO45001:2018, ‘Management Systems of
KPMG
LA
LCR
LDI
LGD
Occupational Health and Safety’
KPMG LLP, the Group’s auditor
Late Action
Liquidity Coverage Ratio
Liability Driven Investments
Loss Given Default
LIBOR
London Interbank Offered Rate
Lintstock
Lintstock Limited
LTGDV
LTV
M&A
MEES
MES
Loan to Gross Development Value
Loan-to-Value
Mergers and Acquisitions
Domestic Minimum Energy Efficiency Standard
as proposed by the UK Government
Multiple Economic Scenarios
Minimum
Standard
MLRO
FRC Minimum Standard: Audit Committees
and the External Auditor
Money Laundering Reporting Officer
MRC
MREL
MRT
MWh
NGFS
NI
NII
NIM
Notes
NPS
NSFR
OBR
OCI
OFGEM
OHSMS
OLAR
ONS
ORC
Order
PAYE
PD
PCAF
Performance
Exco
PFP
Model Risk Committee
Minimum Requirement for own funds and
Eligible Liabilities
Material Risk Taker
Mega-Watt Hours
Network for Greening the Financial System
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
Probability of Default
Partnership for Carbon Accounting Financials
Executive Performance Committee
Pension Funding Partnership
PIDA
PIEs
Plan
PLC
PMA
POCI
PPC
PRA
PRS
PRP
PSP
PwC
RBA
RCV
RIBA
RICS
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)
Private Rented Sector
Profit Related Pay
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 343
Glossary Useful information
Information which may be helpful to shareholders
and other users of the Annual Report and Accounts
P346
G1. Shareholder information
Information about dividends, meetings and
managing shareholdings
P347
G2. Other public reporting
Current and future public reporting information for the Group
To ensure we have fun while
achieving success!
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 346
Financial calendar
January 2024
June 2024
July 2024
December 2024
Quarter 1 trading update
Half-year results
Quarter 3 trading update
Full-year results
Dividend calendar
1 February 2024
Ex-dividend date for 2023
final dividend
4 July 2024
Ex-dividend date for 2024
interim dividend
Annual General Meeting
6 March 2024
2 February 2024
Record date for 2023
final dividend
5 July 2024
Record date for 2024
interim dividend
8 March 2024
Payment date for 2023
final dividend
26 July 2024
Payment date for 2024
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 2023, 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 2023, 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 seventh report against its Women in Finance charter commitments in September 2023.
All this reporting will be continued in the financial year ending 30 September 2024.
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 2023 Responsible Business Report will be published
in December 2023 and will also be available on the Group's corporate website.
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 347
Useful Information Contacts
P350
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
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
Slaughter and May
One Bunhill Row
London EC1Y 8YY
Registrars
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 350
GRP0167-001 (01/2024)
PARAGON BANKING GROUP PLC
51 Homer Road, Solihull, West Midlands B91 3QJ
Telephone: 0121 712 2323
www.paragonbankinggroup.co.uk
Registered No. 2336032