Paragon Banking Group PLC
Annual Report 2024
For the year ended 30 September 2024
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.
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
P344
F1. Glossary
P348
F2. Shareholder information
P349
F3. Other public reporting
P350
F4. Contacts
Useful Information
Additional information for shareholders
and other users
P8
A1. Chair of the Board's
introduction
P10
A2. Business model and
strategy
P24
A3. Chief Executive’s review
P27
A4. Review of the year
P55
A5. Future prospects
P58
A6. Citizenship and
sustainability
P87
A7. Approval of
Strategic Report
Strategic Report
The business and its performance
in the year
P4
Financial highlights
Financial and
Operating Highlights
Results in brief
P202
D1. Financial statements
P209
D2. Notes to the accounts
The Accounts
The financial statements of the Group
P338
E1. Appendices to the
Annual Report
Appendices to
the Annual Report
Additional financial information
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
P136
B7. Remuneration Committee
P168
B8. Risk management
P184
B9. Directors’ report
P187
B10. Statement of directors’
responsibilities
Corporate Governance
How the business is controlled
and how risk is managed
P190
C1. Independent auditor’s report
to the members of Paragon
Banking Group PLC
Independent
Auditor’s Report
On the financial statements
Financial and operating highlights
Strong operational and
financial performance
Underlying return on
tangible equity
20.3%
(2023: 20.2%)
1 October 2023 to 30 September 2024 (4,833 responses)
Underlying profit before
tax increased 5.4%
(2023: £277.6 million)
£292.7 million
New mortgage
platform
launched
Total loans and advances
to customers
£15.7 billion
(30 September 2023: £14.9 billion)
(30 September 2023: £0.59 billion)
£0.88 billion (up 48.2%)
(30 September 2023: £0.15 billion)
£0.20 billion (up 31.0%)
Strong new business pipeline
Total capital returned to
shareholders in 2024
£159.2 million
Combined Trustpilot rating awarded by savings customers
and buy-to-let customers with newly originated loans
4.7/5.0
Ordinary dividend
Share buy-back
40.4 pence per share
+8.0%
£76.2 million1
New, digital mortgage
application platform
featuring real-time data
integration from trusted
sources and faster
decisions-in-principle.
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
Buy-to-let mortgages
Development finance
1£76.2 million completed by 30 September 2024, £16.3 million completed post year end
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 (‘underlying profit’) and other underlying
measures is described in Appendix A.
£292.7 million 5.4% higher (2023: £277.6 million)
£253.8 million 27.0% higher (2023: £199.9 million)
40.4 pence 8.0% higher (2023: 37.4 pence)
14.2% Stable in the year (2023: 15.5%)
20.3% (2023: 20.2%)
15.0% (2023: 12.7%)
101.1 pence 7.3% higher (2023: 94.2 pence)
88.5 pence 28.8% higher (2023: 68.7 pence)
£15.7 billion 5.6% higher (2023: £14.9 billion)
£16.3 billion 22.9% higher (2023: £13.3 billion)
£1,419.5m (2023: £1,410.6m)
£6.11 (2023: £5.79)
Underlying profit before tax
Underlying basic earnings per share
Dividend per share
Total loans to customers
Underlying return on tangible equity
Equity
Profit before tax
Basic earnings per share
Capital – CET1 Ratio
Retail deposits
Return on tangible equity (‘RoTE’)
Tangible net assets per share
£ million
2024
2023
2022
2021
2020
292.7
277.6
221.4
194.2
120.0
Pence
2024
2023
2022
2021
2020
40.4
37.4
28.6
26.1
14.4
Percent
2024
2023
2022
2021
2020
20.3
20.2
16.0
14.7
9.8
£ million
2024
2023
2022
2021
2020
253.8
199.9
417.9
213.7
118.4
Percent
2024
2023
2022
2021
2020
14.2
15.5
16.3
15.4
14.3
Percent
2024
2023
2022
2021
2020
15.0
12.7
27.2
16.2
9.7
£ million
2024
2023
2022
2021
2020
253.8
199.9
417.9
213.7
118.4
£ million
2024
2023
2022
2021
2020
292.7
277.6
221.4
194.2
120.0
Pence
2024
2023
2022
2021
2020
40.4
37.4
28.6
26.1
14.4
Percent
2024
2023
2022
2021
2020
14.2
15.5
16.3
15.4
14.3
Percent
2024
2023
2022
2021
2020
20.3
20.2
16.0
14.7
9.8
Percent
2024
2023
2022
2021
2020
15.0
12.7
27.2
16.2
9.7
Pence
2024
2023
2022
2021
2020
0
20
40
60
80
100
120
36.5
59.3
69.9
94.2
101.1
Pence
2024
2023
2022
2021
2020
0
20
40
60
80
100
120
36.5
59.3
69.9
94.2
101.1
Billion
2024
2023
2022
2021
2020
0
5
10
15
20
12.6
13.4
14.2
14.9
15.7
Pence
2024
2023
2022
2021
2020
0
50
100
150
36.0
65.2
129.2
68.7
88.5
Billion
2024
2023
2022
2021
2020
0
5
10
15
20
12.6
13.4
14.2
14.9
15.7
Million
2024
2023
2022
2021
2020
0
500
1,000
1,500
1,156
1,242
1,417
1,411
1,420
Billion
2024
2023
2022
2021
2020
0
5
10
15
20
7.9
9.3
10.7
13.3
16.3
Billion
2024
2023
2022
2021
2020
0
5
10
15
20
7.9
9.3
10.7
13.3
16.3
Million
2024
2023
2022
2021
2020
0
500
1,000
1,500
1,156
1,242
1,417
1,411
1,420
Pounds
2024
2023
2022
2021
2020
0
2
4
8
6
3.90
4.34
5.33
5.79
6.11
Pounds
2024
2023
2022
2021
2020
0
2
4
8
6
3.90
4.34
5.33
5.79
6.11
Pence
2024
2023
2022
2021
2020
0
50
100
150
36.0
65.2
129.2
68.7
88.5
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 business does, its purpose and strategy,
and the significant risks to which it is exposed
P24
A3. Chief Executive’s review
Strategic summary of financial and operational performance,
our position at the year end and our future prospects
P27
A4. Review of the year
Our financial and operational performance in the year
P55
A5. Future prospects
Our financial position, stability and resilience looking forward
P58
A6. Citizenship and sustainability
Our impact on customers, employees, the environment and the
community, including non-financial reporting
P87
A7. Approval of the Strategic Report
Approval of the Strategic Report
This section includes
Page 8
Dear Shareholder
I am pleased to report that Paragon has delivered another good
year of performance and strategic progress. We have paid close
attention to shifts in the external environment and responded
well to the challenges and opportunities these have presented.
There are now clear signs of more positive sentiment with inflation
having fallen materially and interest rates being reduced although
at a more modest rate than expected. Economic growth has
strengthened during the year but the scope for growth above
current trends looks modest, without regulatory change and
increased investment, given some of the structural challenges in
the UK and the geopolitical factors which are unpredictable and
difficult to plan for.
The last year has been one of continued and sustainable
growth for Paragon. We have increased our lending by 5.6%
to £15.7 billion and our deposits by 22.9% to £16.3 billion.
In total, we provide finance to over 90,000 customers and
a good home for the savings of over 300,000 people. Our
customer satisfaction levels are high as measured by external
research and by our combined Trustpilot rating of 4.7 / 5.0. Our
employee engagement remains strong and culture positive as
demonstrated by recent surveys, low employee attrition and
the results of sampling employees’ views.
Our purpose continues to be to support the ambitions of the
people and businesses of the UK by delivering specialist financial
services. This purpose is reflected in all our activities and
investments, and in the values that underpin how we operate.
In the challenging backdrop of recent years, we have remained
relentlessly focused on our purpose, putting our strategies into
action and on conservative management of our business such
that we deliver sustainable returns for our shareholders.
This annual report sets out our progress in fulfilling this purpose,
the positive steps we have taken towards meeting our strategic
goals, and the positive results we have delivered in the year. I hope
you will find it interesting and useful.
Our businesses
Our mortgage lending supports landlords renting over 70,000
properties into the private rental sector. Our specialist focus is
on supporting professional landlords who operate portfolios of
properties, and this gives us a deep understanding of the sector.
Our mortgage book grew by 4.0% to £13.42 billion in the year.
This includes retention of a high proportion of those customers
whose mortgages reached the end of their initial fixed rate
period in the year.
These specialist landlords provide much needed supply of
property to those who rent their home. The sector has been
subject to increased regulation and higher interest rates in
recent years and this, along with short supply and high demand,
has driven rents higher. For property investors, the balance of
regulation and investment return needs to remain appropriate as
otherwise supply will reduce as funds are invested elsewhere to
the long-term detriment of those wishing to rent their home.
Diversification of our lending business is one of our key
strategic objectives, and I am pleased that our commercial
lending businesses have continued to grow, with the loan book
increasing 16.1% in the year to £2.29 billion. We operate in selected
sectors where our specialist knowledge helps us to support our
customers’ business objectives, while underwriting assets at
appropriate risk and return. We have seen strong demand across
all of our business lines, especially as the year progressed, closing
the period with healthy lending pipelines which will support activity
into the new year.
Our savings business has also grown strongly with deposits
increasing by 22.9% to £16.3 billion as we continued to develop
our range of deposit products, while offering attractive pricing
and good service to savers. As a result, our lending businesses
are now predominantly funded by our savings business, while at
the same time we have strengthened our access to contingent
funding sources.
The long-term digitalisation strategy, which is key to the delivery
of our purpose, continued to make strong progress in the year. We
have continued to invest in our technology platforms across our
businesses improving efficiency and productivity, and enhancing
service to both customers and business introducers.
During the year I was particularly pleased to see the completion
of two major projects, with the transfer of our principal
administration systems to a cloud-based solution and with the
launch of our thoroughly reengineered mortgage application
system to the broker community towards the end of the year. This
represents a major enhancement to the services we can provide,
and I congratulate all our people who have been part of its
long-term development.
Our purpose and strategic objectives, which the Board
reapproved in the year, have remained a constant through
the changes in the UK’s economic, regulatory and political
environment of recent years, and continue to provide the
framework which guides the business and ensures the delivery
of positive results for our stakeholders.
The Group’s business model and purpose are described
more fully in Section A2
Our performance
During the year, we have been particularly focused on the
delivery of our investments in digitalisation and in embedding
the FCA Consumer Duty into our processes, on both of which
we have made good progress. At the same time, we have
maintained our concentration on doing the basics of any
banking business well, including careful management of risk,
particularly credit risk, given the impact of higher interest rates
on borrowing customers, management of interest margins
during a period when interest rates have continued to be volatile,
the maintenance of strong liquidity, and ensuring our capital
allocations optimise returns for shareholders. We have kept an
intense focus on reducing complexity and management of costs,
leading to a reduction in the number of posts in the year and,
sadly, a small number of redundancies.
A1. Chair of the
Board's introduction
Page 9
This focus has resulted in the delivery of an increase in
underlying profit by 5.4% to £292.7 million (2023: £277.6 million),
earnings per share on an underlying basis increasing by 7.3% to
101.1 pence per share (2023: 94.2 pence) and an underlying return
on equity of 20.3% (2023: 20.2%).
On the statutory basis, which includes the impact of fair
value fluctuations from hedging, profit before tax increased by
27.0% to £253.8 million (2023: £199.9 million), earnings per share
increased by 22.8% to 88.5 pence per share (2023: 68.7 pence)
and return on equity was 15.0% (2023: 12.7%).
Regulatory capital has remained strong, with a CET1 ratio of
14.2% (2023: 15.5%), and we have continued to make progress
with our IRB application which will support capital allocation
decisions in the future.
This performance has allowed us to pay an interim dividend of
13.2 pence per share during the year and declare a final dividend
of 27.2 pence per share. This represents a total dividend for
the year of 40.4 pence per share, with the dividend covered
approximately 2.5 times by underlying earnings, in line with our
policy. The Board has also authorised a further share buy-back
programme of up to £50.0 million, building on the share
buy-backs of up to £100.0 million authorised in the last year.
Last year, I highlighted a frustration about our historical
performance not being reflected in the price of our shares and
the challenges of the UK equities market. I am pleased to say
the share price has increased to better reflect the underlying
performance of the business, rising from 492.0 pence per share to
777.5 pence per share during the year. We continue to support the
initiatives in respect of the UK equities market which we regard as
a critical underpinning to the UK economy.
The financial results and operational performance are
reviewed in Section A3 and A4
Sustainability and citizenship
As a business we have continued to focus on a wide range of
sustainability issues over the year, particularly those relating to the
welfare of our employees and the provision of good outcomes to
our customers. I regard the threats posed by climate change as
some of the most serious sustainability challenges faced by us, or
any other business.
We have set a target of reaching net zero for emissions
attributable to our own operations by 2030, and, as part of our
roadmap for reaching that goal, we have consolidated the number
of office properties that we occupy and we will begin a major
upgrade of our head office premises in Solihull in the new
financial year to improve its EPC rating.
Our lending businesses finance a range of ‘green’ assets including
battery electric vehicles and electric refuse collection vehicles for
local authorities, while supporting buy-to-let landlords investing
in more energy efficient properties or refurbishing their existing
portfolios to improve their EPC, and providing funding to property
developers who wish to construct higher EPC rated homes.
As tangible examples of the role we can play, the Green Homes
Initiative in our development finance business has so far provided
£220.7 million of funding towards the development of properties
qualifying for an EPC grade of A, the most energy-efficient, while
over half of our lending to buy-to-let landlords in the year (53.3%)
was on properties with an EPC of C or better, the benchmark for
energy-efficiency used by the UK Government. At 53.4%, over half
of the properties we finance for landlords would be considered
energy-efficient on this basis, compared to 49.9% last year.
The poor energy efficiency of the UK’s housing stock will only be
resolved by building energy-efficient properties and upgrading
existing ones, coupled with continued decarbonisation of the
power grid. Whilst we should all acknowledge that progress is
being made, there still is much to do. As a business we recognise
the imperative for financial institutions to play a prominent role
in supporting a sustainable future and we are active in several
industry initiatives to promote engagement with this agenda.
However, as a global community, we are at the beginning of what
is needed to tackle climate change. The next steps will require
bravery and consistency from governments, together with policies
that feel economically rational and represent attractive options for
consumers and businesses to undertake or invest in, particularly
when they have many other demanding priorities. This is not easy
to do, and does not lend itself to short-term decision-making time
horizons, but is essential if future generations are not to look back
and judge us as being slow to act. We are encouraged by the early
steps being taken by the new Government, particularly by recent
steps to progress decarbonising the electricity grid.
Sustainability, social responsibility and citizenship
issues are discussed in Section A6
Governance
At the end of the previous financial year, I was reassured by the
positive outcome of the board performance review carried out by
an independent third party, and this year the Board has worked
to address the few opportunities found for improvement. Our
internal review this year has confirmed the Board continues to
operate effectively, and we remain focused on ensuring we have
effective governance, controls and processes and operate in
line with the UK Corporate Governance Code. We welcome and
support the modifications made to the Code during the year and
other steps to ensure regulation is proportionate and encourages
competition and growth.
The Group’s approach to corporate governance is
discussed in Sections B3 and B4
Conclusion
I am proud of what Paragon has achieved in the last year. Our
teams have used their specialist knowledge to support our
customers in growing their businesses. This focus has resulted
in strong growth in our lending and savings portfolios and with
sustained margins, while delivering tangible results on our
diversification and digitalisation strategies and providing strong
returns for shareholders.
Looking ahead, we expect further external uncertainties to
challenge the UK economy and its banking sector. There will
undoubtedly be difficult trade-offs for the new government as it
implements its plans, including both the pro-growth economic
initiatives and the regulatory and fiscal reforms it has committed
itself to. Whilst these risks may affect our plans, we believe our
business is well positioned to respond effectively to them and to
support growth in the UK economy.
I would like to express my thanks to all my colleagues on the
Board, and our talented and dedicated employees for their hard
work and commitment throughout the year. We are fortunate
to have a team of people with a blend of long experience with
Paragon and fresh perspectives from other businesses and
backgrounds, united behind our purpose of supporting the
ambitions of the people and businesses of the UK by delivering
specialist financial services and generating long-term value for
our shareholders.
Robert East
Chair of the Board
3 December 2024
A2. Business model
and strategy
At a glance
Paragon is a specialist banking group. We offer a range of savings accounts and provide finance for landlords and small
and medium-sized businesses (‘SMEs’) and residential property developers in the UK. Founded in 1985 and listed on the
London Stock Exchange, we are a FTSE-250 company. Headquartered in Solihull, we employ more than 1,400 people.
Our operations are organised into two lending divisions and lending is funded largely by retail deposits.
Our purpose
Our values
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 mostly 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 inform
the way we operate, what we stand for and how we work together to achieve our goals.
Fairness
Commitment
Respect
Professionalism
Humour
Creativity
Integrity
Teamwork
Our principal source of funding for
our lending activities is a 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 tactical use of wholesale funding and
central bank facilities. Central funding is
provided through corporate bonds.
Mortgage Lending
Savings
Commercial Lending
47,950+
Landlord customers
£1.49 billion
New lending
(2023: £1.88 billion)
£13.42 billion
Loan assets
(+4.0%)
307,500+
Direct customers
£16.3 billion
Savings deposits
(+22.9%)
4.7/5.0
Trustpilot
customer rating
1 October 2023 to
30 September 2024
43,000+
Business customers
£1.24 billion
New lending
(2023: £1.13 billion)
£2.29 billion
Loan assets
(+16.1%)
Since the introduction of our first commercial lending products for
SME customers in 2014, carefully targeted expansion in the commercial
lending market has been an area of strategic focus. We concentrate our
specialist expertise in four areas.
New lending
£0.48 billion (2023: £0.45 billion)
Loan assets
£0.82 billion (+7.9%)
SME lending
Supporting customers across construction, transport, manufacturing, agriculture,
technology and professional services with finance to invest in assets and improve
cashflow. Our products include hire purchase, and operating and finance leases.
New lending
£0.51 billion (2023: £0.52 billion)
Loan assets
£0.88 billion (+18.2%)
Development finance
Helping property developers to bring their plans to life with competitive
and flexible finance, including residential development loans, bridging and
pre-planning finance, as well as finance for purpose-built student
accommodation and build-to-rent developments.
Total facilities
£0.33 billion (2023: £0.24 billion)
Loan assets
£0.26 billion (+52.0%)
Structured lending
Delivering finance for non-bank specialist lenders.
New lending
£0.16 billion (2023: £0.16 billion)
Loan assets
£0.33 billion (+11.3%)
Motor finance
Providing finance through approved intermediaries and dealers for cars, light
commercial vehicles and leisure assets, including motor homes and caravans.
We offer buy-to-let mortgage finance for landlords operating in the
UK’s Private Rented Sector. A pioneer in this segment of the mortgage
market, we have originated £30.7 billion of buy-to-let lending since 1996.
We support landlords at all stages of their development and a large proportion
of our customers have portfolios of four or more properties, invest in a range of
different property types and have built their business via corporate structures.
Supporting our
customers
We are proud of our customer-focused culture. Delivering good outcomes for our customers is a top priority,
and the implementation of the FCA Consumer Duty has given us the opportunity to innovate in the way we
approach customer understanding, customer support, price and value, and product design and governance.
Alongside this, we’ve taken steps to further embed a customer perspective in everything we do by boosting
our learning and objective-setting framework and continuing to develop our support for customers in
vulnerable circumstances.
Customer journey mapping
Consistent service
Communications testing
Following extensive customer journey mapping, our savings and motor finance
teams were able to identify and implement a range of improvements to customer
processes, and boost information and support around critical tasks.
Maintaining consistent service in periods of high demand is not
easy but a commitment to continuous improvement has meant our
Savings team has been able to maintain a monthly Trustpilot rating
of 4.6 out of 5.0 or above since October 2023.
Processing an average of 17,500 new account applications from
direct savings customers each month, peaking at almost 27,500 in
the April 2024 ISA season, the team has kept satisfaction high by
developing a ‘surge management toolbox’, with a menu of protocols
that help to close the gap between planned and actual performance
as quickly as possible.
We introduced a new type of communications testing, reaching out directly to
a customer panel to identify how we could make our language more simple and
easier to understand on key customer letters and emails around sensitive topics,
including account arrears and bereavement.
new account applications from
direct savings customers processed
each month on average
17,500
ACE-ing it!
Customer-focused objectives
Customers in vulnerable circumstances
As part of Consumer Duty implementation, over 260 customer-facing
employees across our businesses took part in ACE training. Also known as
Applying Customer Excellence, this thought-provoking, actor-led training
challenges employees to look closely at customer experience and consider
how to improve customer outcomes. In addition to this, all employees took
part in customer-focused e-learning.
We introduced Purpose and Performance Profiles for each employee to help
everyone see the link between Paragon’s purpose and strategy and their own
individual role, and to set objectives that span five critical success areas:
customers, colleagues, commercial performance, risk and sustainability.
We work consistently to identify and tailor support for customers in vulnerable
circumstances including those in financial difficulties. As an example, our
customer journey mapping highlighted an important opportunity to improve
support for those registering or activating a Power of Attorney by simplifying our
Power of Attorney Guide and streamlining our customer processes.
Price and fair value
Following the
implementation of the
Consumer Duty, we have
enhanced the framework
we use to ensure our
products are priced
appropriately and offer fair value to
customers and continue to develop our
approach as best practice evolves.
Page 14
Our business model
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.
Our business model is designed to enable us to add value by focusing
on meeting the specialist needs of a range of different customers,
while positioning ourselves to deliver returns for shareholders and
meet our broader obligations to society.
We focus on building our
asset base by originating
new loans, developing new
products and diversifying
into new markets.
Customer expertise
Technology
Risk management
Management expertise
We have a deep understanding
of our customers and their
markets, designing products
to meet their needs and
continually striving to exceed
their expectations.
We are utilising digital technology to improve productivity,
enhance service to customers and access new markets.
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.
We have an experienced management team with a
through-the-cycle track record.
15.9 years
784
million +
£24.5
million
items of customer data
analysed each month
launched to broker community
Impairment charge
Average length of service of the executive management team
We have a broadly-based funding capability
We lend on diversified assets
We use our core strengths to achieve success
New digital mortgage
origination platform
Buy-to-let
mortgages
Retail
deposits
Development
finance loans
Securitisation
SME lending
Bonds
Motor finance
Central bank
funding
Structured
lending
Cost control
Culture
Our people
Strong financial foundations
Distributing loan products
principally via third party brokers
and collecting savings deposits
online and operating mainly from
a centralised location means we
run a cost-efficient business.
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.
We are committed to helping
all of our employees reach their
potential and recognise the
importance of development
and diversity in maintaining a
skilled and engaged workforce.
We utilise capital
and debt positions
efficiently to maintain
balance sheet strength.
14.2%
36.1%
CET1 ratio
Underlying cost:
income ratio
We deliver value for all our stakeholders
Our Section 172 statement can be found on pages 107-114
Shareholders
Employees
40.4p
Dividend per share
4.4 days
Average training per
employee in 20242
Creating long-term shareholder value
by growing profits and dividends.
See page 108
Helping our people develop their
career and reach their potential.
See page 110
Society
460
paid volunteering days
supporting charities and
local community groups
Helping the UK economy grow and
supporting the communities in
which we operate.
See page 112
Customers
Environment
+66
53.4%
Net Promoter Score
('NPS') for savings
account opening
New mortgage lending
on properties with an
EPC rating of A-C
Providing specialist lending products
and saving accounts to help our
customers achieve their ambitions.
See page 109
Continually reducing our environmental impact
and designing products that support positive
environmental change.
See page 113
96%
82
of our people
are proud to work
at Paragon1
employees receiving
support with
apprenticeships and
professional qualifications
1Based on a survey of new starters after completing their probationary period.
2Employer skills survey, UK average 3.6 days
Page 16
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.
Our strategic priorities
Find out more about the progress we are making on each of our strategic
priorities on pages 18-23
Growth Read more on page 18
Delivering consistent growth in loan assets and funding
by focusing our expertise in specialist lending markets
and building an award-winning savings franchise.
Progress
• 5.2% five-year compound annual growth rate
in the net loan book
• Strong new business pipeline at 30 September 2024
– Buy-to-let mortgages £0.88 billion (up 48.2%)
– Development finance £0.20 billion (up 31.0%)
Diversification Read more on page 19
Developing resilience by diversifying into commercial
lending alongside our traditional stronghold in buy-to-let
and maintaining a broadly-based funding capability.
Progress
• 45.3% of new lending now Commercial Lending
• £16.3 billion retail deposits, 22.9%
year-on-year growth
Digitalisation Read more on page 20
Transforming our business using digital, cloud-based
technology to enhance customer service, productivity
and growth.
Progress
• 94% + of core and support systems now
cloud-based
• New digital mortgage application platform launched
to the broker community
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.
Progress
• £1.2 billion tier 1 equity
• 20.3% underlying return on tangible equity
Sustainability Read more on page 22
Moving towards net zero, building skills and
capability to support long-term growth and
maintaining strong stewardship.
Progress
• 48% reduction in market-based emissions since
2019 base year
• £795.3 million new mortgage lending to
EPC A-C properties
Our strong performance reflects our
growing specialist franchise, the resilient
nature of our business and the continued
strong progress in our purpose-driven
strategy of supporting our customers in
achieving their ambitions.
Nigel Terrington, Chief Executive
Page 17
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.
Our strategic pillars
Principal risks
We have identified a number of principal risks, arising from both the environment in which we operate and our business model,
which could impact our ability to achieve our strategic priorities. We have an Enterprise Risk Management Framework (‘ERMF’) in
place to ensure that these risks are monitored and managed in accordance with the Group’s risk appetite.
Capital
Risk of insufficient capital to operate effectively and
meet minimum requirements.
Market
Risk of changes in the net value of, or net income
arising from, our assets and liabilities from adverse
movements in market prices.
Model
Risk of making incorrect decisions based on the
output of internal models.
Strategic
Risk that the corporate plan does not fully align
to and support strategic priorities or is not
executed effectively.
Conduct
Risk of poor behaviours or decision making leading
to failure to achieve good outcomes for customers
or to act with integrity.
Liquidity and funding
Risk of insufficient financial resources to enable us
to meet our obligations as they fall due.
Credit
Risk of financial loss arising from a
borrower or counterparty failing to meet
their financial obligations.
Reputational
Risk of failing to meet the expectations and
standards of our stakeholders.
Climate change
Risk of financial risks arising through climate change
impacting the Group and our strategy.
Operational
Risk resulting from inadequate or failed internal
procedures, people, systems or external events.
Strong financial foundations
Prudentially strong, with a low-risk
approach to lending, reducing volatility
of underlying earnings and enhancing
sustainability of dividends.
These risks and the steps the Group has taken to safeguard
against them are discussed in more detail in Section B8.
Page 18
We grow our lending in specialist market segments where customers
are underserved by the large high street banks. We use our expert
knowledge 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
Growing market share in buy-to-let
Expanding our distribution reach
Stokey Plant Hire celebrates
new deal with Paragon
• Focus on specialist market segments with underlying growth potential
• Build market share by launching new products and extending distribution
• Grow retention, encourage repeat business and extend customer lifecycle
We increased our share of new lending in
the buy-to-let mortgage market from 3.7% in
2022 to 5.4%, climbing from the ninth largest
buy-to-let lender in the UK market up to fifth
place. Our focus on professional landlords –
those with larger and more complex property
portfolios – continues to be a key factor in our success as this segment
of customers continues to invest and grow.
Almost one third of new buy-to-let mortgage lending this year was
introduced by brokers who had not used Paragon before, or who had only
recently re-engaged with us. This follows a concerted effort to strengthen
our relationships with mortgage networks and clubs across the UK,
investing time to introduce Paragon to their members at different events
and simplifying our product range and criteria to broaden our appeal.
Our specialist asset knowledge is critical to our success in the SME lending
market, helping us to forge long-term relationships and encouraging
customers to return year after year. Building on an eight year relationship,
Telford-based, Stokey Plant Hire turned to Paragon again to secure an
£800,000 finance package to purchase two dump trucks and an excavator.
Mortgage Lending
Mortgage Lending
Commercial Lending: SME lending
Source: UK Finance, July 2024
Stokey Plant Hire Managing Director Sarah Jones
£0.88 billion (+ 48.2%)
£0.20 billion (+ 31.0%)
Business pipeline
Buy-to-let (30 September 2024)
Development finance
(30 September 2024)
£15.71 billion
5.2%
Loan book
Total loans and advances to customers
(30 September 2024)
Five-year compound annual growth rate
2019-2024
of new applications from
new introducers
32%
lender in the market
5th largest
We continue to work with Paragon because of
its efficiency and knowledge of the industry. It’s
refreshing to work with a lender that understands
the industry we operate in and the machinery that
we’re looking to purchase
Strategy in action:
Growth
Delivering progress
Page 19
We develop specialist lending products and savings accounts
in new and existing markets to grow our business and help us
succeed in becoming the UK’s leading technology-enabled
specialist bank.
Our approach
Commercial Lending expansion
Savings success
Delivering progress
• 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
increase in value of
new ISA accounts
36%+
of standard
business now
received through
the portal
69%
Busiest ever ISA season
Auto-decisioning expands capacity for SME lending
Our award-winning, retail deposit franchise has provided a
strong foundation for lending growth and diversification since
inception in 2014. This year, against the backdrop of higher interest
rates, we achieved a 36% year-on-year increase in the value of new
ISA accounts. We believe our consistent focus on cash ISAs is one of
the key factors that puts us ahead of many of our direct competitors
in this market.
Enhanced, automated support for decisioning, introduced as part of a
new digital origination portal for brokers in SME lending last year, has
given rise to a step-change in the operation’s ability to handle smaller
value loans more efficiently. This has increased applications for these
products, reduced the size of the average balance and risk in the
portfolio, and given our specialists more time to focus on larger, more
complex transactions.
Development finance pass £3 billion lending milestone
Since launching into the market in 2016, Paragon’s development finance
team has made a big impact, lending over £3 billion in total, funding
approximately 13,000 new homes across the UK, launching into the
Purpose-Built Student Accommodation (‘PBSA’) market and adding a
Build-to-Rent proposition to serve this growing market.
new homes
13,000+
£16.3 billion
Retail savings deposits at
30 September 2024
(30 September 2023: £13.3 billion)
£88.3 million
Commercial Lending profit contribution
(2019: £44.9 million)
45.3%
Commercial Lending as a proportion
of new lending in 2024
Strategy in action:
Diversification
Page 20
We are transforming our technology by implementing
digitally-enabled, API-driven, cloud-based platforms. This allows
us to deliver outstanding customer service, become more efficient,
support decision-making and reach more customers in new markets.
Our approach
A fast-paced transformation
Next on our digitalisation roadmap
• 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
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.
In September, we began a phased roll-out of our new mortgage
origination system that will accelerate and simplify the mortgage
application process for mortgage brokers and customers.
The culmination of over 90,000 hours of planning, development and
testing, the new platform delivers a powerful combination of advanced
technology and integrated data inputs.
It will transform the way we work, removing time-consuming manual
tasks and re-checking so that we can focus on more complex tasks.
This means, by cutting the time from application to offer, we can scale
up to deliver higher volumes than ever before.
We are currently preparing for enhancements to our back-office
platform in SME lending, and exploring the potential of generative AI,
alongside machine-learning AI which is already actively used and well
established in the business.
New buy-to-let origination
system now live
Strategy in action:
Digitalisation
Customers and brokers can add up to four applicants, include multiple
properties on one application, and save and resume their work at any time
Dynamic filtering means we only show customers relevant products,
ask the questions and request the documents we absolutely need
Real-time data inputs allow for early checks and real-time
decisions-in-principle
Faster application
Quicker decisions
Dynamic filtering
Flexible processing
Pre-populated data from trusted sources including Land Registry,
Companies House, Hometrack and Experian dramatically cuts
application time
Proportion of core and
support systems now
cloud-based
Systematically
transforming
customer-facing
platforms across
every part of
the business
94% +
The system is modern and
user friendly. It picks up all the
information from Companies House
without us having to type it in
which is great!
Sarah Golding – Team Leader, The Buy to Let Broker
Page 21
A strong balance sheet and diverse funding capability is fundamental to our success.
Capital management 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
Strong capital generation
Consistent shareholder returns
Capital requirements and growth
• 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
Internal capital generation is a demonstrable strength of the Group and provides the ability to both support growth
and enhance returns to shareholders. Since 2019, our trading performance has added 13.5 percentage points to our
Common Equity Tier 1 (‘CET1’) ratio, before investing in growth and making distributions to shareholders, as shown below.
We aim to enhance shareholder returns on a sustainable basis, while
protecting the capital base. In ordinary circumstances, we distribute 40%
of consolidated underlying 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.
We continue constructive engagement with the PRA regarding our
application for an Internal Ratings Based (‘IRB’) accreditation. An
IRB accreditation will enable us to match the risk weighted capital we
need for buy-to-let and development finance lending more closely with the
proven, long-term credit performance of these loan portfolios, potentially
freeing up additional capital for growth.
Starting from 1 January 2026, the PRA is phasing in changes to its Rulebook
over a four-year period to reflect revisions to the Basel framework for all
banks – known as Basel 3.1 – relating to capital requirements for credit risk.
If implemented fully on 30 September 2024, these would have had the effect
of reducing the Group’s CET1 ratio by 104 basis points, still comfortably
above the regulatory minimum.
Total Capital Ratio
30 September 2024
16.0%
Common Equity
Tier 1 Ratio
30 September 2024
14.2%
Total dividends since 2015
£548.7 million
Total capital returned to
shareholders through share
buy-backs announced since 2015
£533.0 million1
Movement in capital 2019-2024
Strategy in action:
Capital management
1Including £100.0 million share buy-back
announced in the year (of which £76.2 million completed
by 30 September 2024 and £16.3 million completed
post year end) and a further £50.0 million share
buy-back announced on 3 December 2024
0%
CET1 ratio
(Sep-19)
Retained
earnings
Net lending
Dividends
Share
buy-backs
Other
movements
CET1 ratio
(Sep-24)
Total capital ratio
(Sep-24)
IFRS 9 transitional
adjustment
5%
10%
15%
20%
25%
30%
13.7%
13.5%
(0.3%)
(3.5%)
(4.9%)
(4.7%)
0.4%
14.2%
1.8%
14.2%
CET1
Tier 2
0%
CET1 ratio
(Sep-19)
Retained
earnings
Net lending
Dividends
Share
buy-backs
Other
movements
CET1 ratio
(Sep-24)
Total capital ratio
(Sep-24)
IFRS 9 transitional
adjustment
5%
10%
15%
20%
25%
30%
13.7%
13.5%
(0.3%)
(3.5%)
(4.9%)
(4.7%)
0.4%
14.2%
1.8%
14.2%
CET1
Tier 2
Page 22
Strategy in action:
Sustainability
At Paragon, sustainability means understanding our responsibilities
towards the environment and the communities in which we live
and work, focusing our agenda on doing the right thing for all our
stakeholders and contributing to a world in which we can all thrive.
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 to our people, customers and communities
• Achieving the highest standards of business integrity and professionalism
Reducing our operational impact
We want to make a positive contribution to the challenge of climate change
and one area of focus is reducing the environmental impact of our everyday
business activities.
Consolidating our office space
Electrifying our fleet
This year, we consolidated two office buildings in Solihull,
bringing our people together in one location. This reduction
in office capacity is made possible by our flexible, hybrid
working model and will let us focus future upgrade
investment more effectively.
Some roles at Paragon come with a car, so employees
can meet with their broker and customer contacts. Since
January 2022, we have transitioned this fleet to 95% hybrid
or fully electric vehicles.
reduction in market-based
emissions compared to
2019 baseline
of total electricity from
renewable sources (2024)
of waste diverted from landfill
48%
91%
70%
Making a difference
Customers
Financing a greener world
When it comes to social matters, the
needs of our people, customers
and communities are a priority. We
continue to think globally and deliver
locally across the UK.
We work with industry, partners and policy makers
to play a proactive part in supporting our customers’
transitions to net zero and embed sustainable
finance throughout our business.
Commercial Lending: Development finance
£300 million fund
Green Homes Initiative in development
finance to support the building of
energy-efficient properties.
Equality, Diversity and Inclusion (‘EDI’)
Since 2017, we have delivered a comprehensive
programme of action to expand diversity and inclusion,
introducing our EDI Network in 2020 amongst
other initiatives. This year, we outlined a new EDI
strategy and targets for female and ethnic minority
representation. These include:
• 40% female senior management representation by
2025 (30 September 2024: 37.9%)
• New target set for 5% ethnic minority senior
management representation by 2027
donated to good causes
£40,000
Mortgage Lending
£795.3 million
new mortgage lending on EPC A-C properties.
Commercial Lending: SME lending
Zero-emission taxi fleet funding
In a first for our SME lending team, we provided funding for Otto Cars to acquire
a fleet of zero-emission taxis, using an innovative pay-per-use funding model.
raised by employees for
Molly Ollys, our charity of the year
volunteer days contributed to
community projects across the UK
£49,000
460
rated by 4,833 savings and mortgage customers
1 October 2023 – 30 September 2024
4.7 out of 5.0
Trustpilot score
People
Communities
Refurb-to-let
We launched a new refurb-to-let mortgage product that
gives landlords the opportunity to upgrade their property,
including its energy-efficiency, before letting it to tenants.
Paragon’s consistent focus
on sustainable growth, enabled
by an increasingly diversified
and digitalised operating
model, and supported by strong
internal capital generation,
puts us in a strong position to
continue delivering superior
returns to shareholders whilst
continually supporting our
customers’ ambitions.
Nigel Terrington, Chief Executive
A3. Chief Executive’s review
Page 25
Strategic Report
Introduction
The period ended 30 September 2024 has been another year of
strong financial and operational performance, building on our
consistent track record over the past decade, underpinned by
the strength of our business model and long-term strategy.
A combination of new lending towards the top end of
expectations and the strong retention of customers reaching
product maturity saw our total loan portfolio grow to £15.7 billion
at 30 September 2024, up 5.6% in the year and in line with
our 10-year loan book CAGR of 5.4%. In addition to loan book
growth, our savings franchise has also continued to develop, with
balances up almost 23% in the year, supporting a strong liquidity
position and the accelerated repayment of the majority of our
TFSME drawings.
Net loan growth totalled 4.0% in Mortgage Lending and 16.1%
in our Commercial Lending division, underlining the ongoing
delivery of our diversification strategy. Commercial Lending now
comprises 14.6% of the net balance sheet loans but generates
27% of our total income. With Commercial Lending generating
a stronger margin than Mortgages this mix effect has been an
important factor in our continued strong NIM performance for
the year.
Our digitalisation programme reached one of its most significant
milestones to date, with our new buy-to-let origination platform
being rolled out internally and to a first wave of brokers during
the final quarter. This more digitalised, AI-enabled, operating
model will further expand our already extensive data, support
improved efficiency and enhance customer interactions, whilst
not diluting the specialist nature of our lending or our vital broker
and customer relationships.
Financial performance
A combination of stronger margins and higher loan volumes
resulted in net interest income rising by 7.6% from its 2023 level
to £483.2 million. Within this, our net interest margin rose to
316 basis points (2023: 309 basis points), where the effects of
the net free reserve hedge created during the year, and
asset-side margin strength, have served to more than offset
the effects of lower spreads between deposit rates and SONIA.
Operating costs, which now include the new PRA levy, came
in around expectations at £179.2 million (2023: £170.4 million).
With income rising faster than expenditure the cost-to-income
ratio improved further in the year, to 36.1% (2023: 36.6%). We
continue to expense the bulk of our digitalisation investment
spend, with only £4.5 million being capitalised to software
intangibles in the year, taking the year-end balance to
£8.0 million (2023: £4.4 million). Our investment in digitalisation
continues to support improved operational efficiency, which
remains an important area of focus. At 1,411, our year-end
headcount was 7.3% lower than its September 2023 level.
The higher interest rate environment saw some greater
pressure on customers with variable rate loans in our buy-to-let
and development finance books. Overall impairments rose to
£24.5 million from £18.0 million in 2023, reflecting a cost of risk of
16 basis points (2023: 12 basis points). The arrears performance
in the buy-to-let book has improved in the second half of the
year, with 30 September three-month plus arrears standing at
38 basis points compared to 34 basis points at September 2023
and 68 basis points at March 2024, while buy-to-let security
levels remain robust, with a loan-to-value ratio of 62.8%
(2023: 62.8%).
Underlying operating profit, before fair value items, rose 5.4%
from its 2023 level to £292.7 million (2023: £277.6 million). When
applied to the lower share count arising from the share buy-back
programme, underlying basic earnings per share rose 7.3% to
101.1 pence per share.
Our dividend is based on underlying earnings per share
and increased by 8.0% year-on-year to 40.4 pence per share
(2023: 37.4 pence), in line with policy.
Fair value balances continued to unwind during the year, but at
a slower rate than in 2023 at £38.9 million (2023: £77.7 million).
Consequently, statutory pre-tax profits rose 27.0% from their
2023 level to £253.8 million (2023: £199.9 million).
Tax, at 26.7%, took statutory post-tax profit to £186.0 million
(2023: £153.9 million), and basic earnings per share to
88.5 pence (2023: 68.7 pence), an increase of 28.8%.
Trading performance
New lending levels have been strong in each of our divisions,
with a notable uptick in the second half of the year reflecting
strengthening confidence amongst our customers as interest
rates started to reduce, inflation fell and the outlook for property
prices improved.
For the full year, total new lending of £2.73 billion was
delivered, in line with market guidance (2023: £3.01 billion),
with £1.49 billion of new buy-to-let mortgage business
(2023: £1.88 billion) and £1.24 billion of advances in our
Commercial Lending division (2023: £1.13 billion).
Total new advances in the second half of the year were
20.3% higher than in the first six months, and the year-end
pipelines in both buy-to-let and development finance, at
£0.88 billion and £0.20 billion respectively, were 47.7% and 31.0%
higher than their positions at September 2023, which will drive
volumes in the new financial year.
Customer retention remains strong, with aggregate buy-to-let
redemptions of £0.86 billion compared to £1.11 billion in 2023,
representing a redemption rate of 6.7% compared to 9.0% a year
before. Together these factors drive the continuing growth of
our loan book, which increased 5.6% in the year, reaching
£15.7 billion, its highest ever level.
The motor finance industry has seen regulatory and legal
intervention during 2024, initially with the FCA review of
discretionary commission arrangements, and more recently
on commission disclosures more generally, following a
Court of Appeal ruling after the year end. Motor finance is a
very small part of our business, but with so much uncertainty
around how the regulators and courts will finally conclude on the
various issues, the different customer journeys and fact patterns
for our business when compared to the Court of Appeal cases
and the potential implication for us, we have made no provision
for potential redress or other costs, given our limited exposure
to cases similar to those before the Court.
Sustainability
At 53.3%, over half of our new buy-to-let lending in the year was
on more energy-efficient properties, those with EPC ratings of
C or above, compared to 49.9% in 2023 and 45.1% in 2022.
We also extended our Green Homes Initiative for property
developers and increased our lending on electric vehicles.
At the same time we continue to make strong progress on
our own operational emission reductions, with 2024’s levels
representing a 48% reduction against our 2019 baseline. Further
enhancements are planned over the coming years, particularly in
respect of our head office building.
Page 26
Capital and funding
Deposit generation has been very strong in the year, with
growth from both direct business and our presence on third
party platforms. Total balances ended the year at £16.3 billion
(2023: £13.3 billion), with 23% having been accessed via
platforms (2023: 22%). This range of alternative routes to market
optimises our access to liquidity and is an important aspect of
our diversified funding mix. Across all our funding sources, we
continue to operate in both the fixed and variable rate markets,
the latter having underpinned the majority of the growth seen
in 2024. At the end of the period the fixed-to-variable split was
50.7% : 49.3% (2023: 65.5% : 34.5%).
The strong deposit flows resulted in an average LCR of 211.5%
for the year (2023: 193.7%) which has facilitated the refinancing
of £2.0 billion of our TFSME drawings together with our last
outstanding public securitisation and our final retail bond.
Our capital ratios are prepared using the standardised approach,
which results in a CET1 of 14.2% and a total capital ratio of 16.0%
(2023: 15.5% and 17.5% respectively), which remain comfortably
above the regulatory requirements.
We have now seen the PRA near-final proposals in respect of
capital under Basel 3.1. For a buy-to-let dominated balance sheet
the proposals increase capital requirements, albeit materially
less so than the first consultation paper suggested. We estimate
that the proposals would reduce our CET1 ratio by around
104 basis points, compared with the around 210 basis points
effect of the earlier draft.
However, our objective remains to obtain an IRB accreditation,
initially for our buy-to-let business, and 2024 has seen a far
greater level of engagement with the PRA’s specialist teams
than had been the case in the recent past. With currently
authorised IRB banks making more progress with their new
hybrid models, we now have a clearer understanding of the
regulator’s expectations for our book in the context of this new
approach. However, it should be noted that our specialist
buy-to-let portfolio is, by definition, more complex than the more
commoditised mortgage portfolios the regulator tends to see
in the wider banking sector.
The planned share buy-back for 2024 was still in progress
at the year end, with £76.2 million invested from the
£100.0 million programme. An irrevocable instruction was put
in place in September 2024 to continue the buy-back into
October, when a further £16.3 million was utilised. This left
£7.5 million of the original £100.0 million outstanding, which
will be completed in the 2025 financial year alongside a newly
announced programme of up to £50.0 million for that year.
Strategic outlook
We continue to build on our strong lending and savings
franchises, providing attractive products to our customers.
Over the coming years, our customers will be served in an
increasingly efficient and effective manner as we deliver our
digitalisation plans.
Strong positions in our chosen markets, together with
diversification on both sides of our balance sheet, combine to
deliver robust earnings from our operating model and we intend
to maintain this approach into the future.
Capital management and prudential discipline remain
key areas of focus, ensuring sufficient funds to grow in a
prudentially strong manner, whilst at the same time distributing
any excess through dividends and buy-backs. Our distribution
policy for the forthcoming financial year remains unchanged,
with a central assumption of distributing around 40% of
underlying basic earnings per share, augmented by our
share buy-back programmes.
Conclusion
Our 2024 results demonstrate the strength of our franchise
and operating model and are especially pleasing after the
challenging opening to the year, impacted by subdued demand
in our key sectors during 2023.
We have seen accelerating momentum throughout the year, with
new lending levels reaching the upper range of our expectations
and strong customer retention. Improving customer sentiment,
robust year-end pipelines, and our strategic focus on specialist
markets, gives us confidence as we enter the new financial year.
Our savings franchise also continues to grow at pace, with retail
deposits up almost 23%, supporting our growth ambitions and
providing strong liquidity.
Paragon’s consistent focus on sustainable growth,
enabled by an increasingly diversified and digitalised operating
model, and supported by strong internal capital generation,
puts us in a strong position to continue delivering superior
returns to shareholders whilst continually supporting our
customers’ ambitions.
Nigel Terrington
Chief Executive Officer
3 December 2024
Page 27
Strategic Report
A4. Review of the year
This section describes our activities in the year under these headings:
Business
review
Funding
review
Capital and
liquidity review
Financial
results
Operational
review
Lending and the
performance of each
of our business lines
A4.1
Deposit-taking and
the other sources of
funding used
A4.2
Our regulatory
capital, liquidity and
distributions
A4.3
Our results for the
financial year
A4.4
Systems, people,
sustainability and
risk highlights for
the period
A4.5
A4.1 Business review
We report results analysed between two principal 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
for these segments are summarised below:
Advances
in the year
Net loan balances
at the year end
2024
2023
2024
2023
£m
£m
£m
£m
Mortgage Lending
1,493.2
1,879.9
13,415.7
12,902.3
Commercial Lending
1,236.8
1,128.7
2,289.8
1,972.0
2,730.0
3,008.6
15,705.5
14,874.3
Total loan balances increased by 5.6% in the year, as we pursued
our strategic objective of managed, targeted growth. Total
advances decreased 9.3% year-on-year, although the pattern of
movements was not consistent between our specialist markets,
with Mortgage Lending, in particular, reflecting a weak opening
pipeline following the rapid escalation of base rates seen during
the summer of 2023.
A4.1.1 Mortgage Lending
Our Mortgage Lending division principally provides buy-to-let
mortgages secured on UK residential property to specialist
landlords. We have been active as a specialist in this market
for almost thirty years, which gives us deep data on the market
through various economic cycles. We have also developed
strong relationships with business providers, landlords and trade
bodies. These provide an unparalleled understanding of both
the buy-to-let market and the specialist landlord customer base
we target.
During the year we also offered a limited volume of loans to
non-specialist landlords, although this activity is non-core and has
diminished over recent periods. The segment also includes legacy
assets from discontinued product lines, principally residential
first and second charge mortgages, although these form a small
fraction of the portfolio and are running off over time.
Our focus on the specialist buy-to-let market facilitates
detailed, case-by-case underwriting, where our unique
approach to managing property risk and building customer
relationships differentiate us from both mass market and
other specialist lenders.
Housing and mortgage market
The level of economic uncertainty in the UK over the
year, coupled with the impact of higher interest rates and
cost-of-living issues on mortgage affordability has significantly
impacted the housing market. Activity remained subdued, with
transactions for the year ended September 2024 reported
by HMRC, at 1,048,000, 3.5% lower than the 1,086,000 in the
previous year.
However, signs were more positive towards the year end, with
the RICS September 2024 Residential Market Survey reporting
stronger demand in the last months of the financial year, and
RICS members being generally more optimistic on both demand
and prices than in some time.
These factors led to a broadly stable performance by UK house
prices in the period, with the Nationwide House Price Index
recording a year-on-year increase of 3.2% to September 2024
(2023: decrease of 5.3%), although prices still remain around
2% below their August 2022 peak. This was a more resilient
performance than some had predicted, however, the impact
of inflation over the period means that prices fell in real terms,
potentially benefitting affordability going forward.
Page 28
In response to the level of activity in the housing market,
new mortgage lending remained historically weak in the year,
albeit with some recovery from the extreme low point of 2023.
However, values remain below both 2022 and longer-term
averages. The Bank of England reported new approvals of
£242.4 billion for the year ended 30 September 2024, an
increase of 14.2% on the £212.2 billion reported for the previous
financial year. The increase was driven by mortgages for new
purchases where the value of transactions increased by 28.7%.
Remortgage activity, in contrast, fell by 8%, potentially as a result
of the level of availability of attractive market rates, with the value
of mortgages refinanced with their existing lender also falling,
by 5.7%.
Quarterly Bank of England UK mortgage approval data for the
last five financial years is set out below.
0m
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Dec ’19
Mar ’20
Jun ‘20
Sep ‘20
Dec ‘20
Mar ‘21
Jun ‘21
Sep ‘21
Dec ‘21
Mar ‘22
Jun ‘22
Sep-22
Dec ‘22
Mar ‘23
Jun ‘23
Sep ‘23
Dec ‘23
Mar ‘24
Jun ‘24
Sep ‘24
UK mortgage approvals (£m)
Five years ended 30 September 2024
At 30 September 2024 the UK Finance (‘UKF’) survey of mortgage
market arrears and possessions reported arrears levels easing in
the last quarter of the financial year after building for most of the
period. Possession numbers remained largely stable through the
year, but at a level higher than seen for some years.
Private Rented Sector (‘PRS’) and buy-to-let mortgage market
Our target customers in the buy-to-let sector are specialist
landlords active in the PRS. Such landlords will typically let 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. We are 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, our experience is that this reaction is
concentrated amongst some smaller non-specialist amateur
landlords, while our specialist customers remain committed to
the sector.
The experience of these professional landlords, their level of
involvement with their lettings business 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.
The development of the regulatory landscape for the PRS has
been dominated for some time by the Renters (Reform) Bill
proposed by the last UK Government, which failed to become law
before the dissolution of Parliament in May 2024, and its successor
Renters’ Rights Bill introduced by the new administration.
The new bill is largely based on the original proposals, on
which a significant amount of work has already been done by
organisations representing lenders, tenants and landlords since
the publication of the original White Paper in 2022. As the Bill
passes through the UK Parliament, we hope that care will be
taken to ensure the measures in the final Act are practical and
fully resourced, and that they balance the needs of both tenants
and landlords, recognising the important role which responsible
landlords play in satisfying the UK’s housing needs, and in the
economy more generally.
The importance of the PRS to the UK economy was
demonstrated by research into the sector carried out for the
Group and the National Residential Landlords Association
(‘NRLA’) by the professional services firm PwC. This concluded
that the PRS directly or indirectly supports 390,000 jobs in
the UK and contributes £45 billion per year to the country’s
economy. The full report is available on our corporate website at
www.paragonbankinggroup.co.uk, in the ‘Insights’ section of our
‘News’ pages.
The 2023-2024 English Housing Survey, published by the
Ministry of Housing, Communities and Local Government in
November 2024, shows that the PRS continues to represent
around 19% of English households, as it has consistently done
for some time. With research published in May 2024 by the
Nationwide Building Society, indicating households deferring
their first house purchase due to economic pressures, this
makes the role of the rented sector particularly important
at present.
The impact on this demand for rental property can be seen in
the lettings market data published in the RICS September 2024
UK Residential Market Survey. This reported continuing strong
tenant demand coupled with a shortage of new instructions from
landlords, which was pushing rents upwards, with RICS members
expecting further rent rises in the short term.
Research published by Zoopla suggested that, on average, rents
for new tenancies across the UK had increased by 5.4% in the year
to July 2024 (the most recent published figure), after three years
of growth at even higher levels, driven by demand outpacing the
supply of new properties to rent. Zoopla predicts rents to continue
increasing in the short term, but at a slower rate.
Around two thirds of properties in the PRS in England are funded
through buy-to-let mortgages (based on UK Government data),
although buy-to-let mortgage activity in the year showed less
evidence of improvement than the general market. New
advances reported by UKF were £31.2 billion for the year ended
30 September 2024, 17.2% lower than for the previous year
(2023: £37.7 billion), with the value of both house purchase and
remortgage cases falling by similar proportions.
The propensity of borrowers to transfer to new products offered
by their existing lender has also been affected. While such
cases are not included in data for new mortgages, information
published by UKF showed that around two thirds of landlords
refinancing their mortgage in the year ended 30 September 2024
switched to a new product with the same lender, rather than
remortgaging with a new provider. This represented a similar
proportion to the previous year, but the value of these cases was
reduced, with a significant number of landlords clearly deferring
any refinancing of their property, either as a result of affordability
issues, or in anticipation of more competitive rates becoming
available in the short term.
This mixed outlook for the sector was borne out by our own
independently commissioned research amongst landlords and
mortgage intermediaries.
Page 29
Strategic Report
In the Group’s quarterly survey of buy-to-let landlords for the
quarter ended 30 September 2024, 79% of landlords reported
they were experiencing strong tenant demand, including 40%
who reported very strong demand. Rental yields continued
to move upwards, with 74% of respondents having made rent
increases over the year, and landlords reported that rental
arrears had plateaued at a low level.
However, expectations for future rental yields had fallen
year-on-year and the proportion of landlords who are optimistic
about their business prospects was only 33%, with the number
of landlords looking to expand their portfolios at an historically
low level. Only a very small number of landlords were positive
about the UK economy, with a large proportion of respondents
nervous that the incoming government’s policies might affect
their business negatively.
Amongst specialist mortgage intermediaries, our half-yearly
insight survey, published in July 2024, showed the vast majority
of intermediaries were confident or very confident about the
prospects for their firms, the intermediary sector and the
mortgage industry. The number who were confident about their
buy-to-let business was lower, at 65%, but this was substantially
more positive than the 56% reported a year earlier. The principal
issues concerning the respondents were the impact of the
change in UK Government and the level of interest rates, even
after those rates had stabilised.
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 easing in the last months
of the period after moving upwards through most of the year to
that point.
Overall, this data indicates that the buy-to-let mortgage market
remains fundamentally robust, even in the face of economic
pressures, albeit with a degree of caution on its future prospects,
both on an economic and a regulatory basis. It therefore
underpins the strength of our proposition, particularly given our
focus on specialist landlords, who may be best placed to deal
with these headwinds.
Mortgage Lending activity
New mortgage lending activity during the year is set out below.
Almost all the division’s lending in the period was to its target
specialist landlord customers.
2024
2023
£m
£m
Originated assets
Specialist buy-to-let
1,477.9
1,857.6
Non-specialist buy-to-let
15.3
22.3
Total buy-to-let
1,493.2
1,879.9
Total mortgage originations decreased by 20.6%, broadly in
line with the reductions in business volumes seen across the
buy-to-let market. This was impacted by the low pipeline, the
loans passing through the underwriting process, coming into the
year, which led to low volumes in the early months of the period.
However, demand built during the year with business levels
strengthening quarter by quarter, finishing the year positively.
This resulted in a new business pipeline of £881.4 million at the
year end, 48.2% higher than the previous year end, reflecting
increased market activity as the economic outlook became more
stable (2023: £594.6 million).
Our 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.
The majority of our mortgage lending products offer fixed rates
for an initial period, with many customers choosing a new
product at the end of this fixed period. Since 2017 five-year fixes
have been the dominant product, which means those customers
whose loans are now reaching the end of the five-year period, are
having to refix their mortgage rates at a higher level.
We have well-established, digitally-enabled retention procedures
in place to support customers as their fixed rates expire. We
offer track-to-fixed products as an alternative to fixed-rate
loans, allowing customers to delay fixing their interest rates; this
flexibility has helped to support retentions in the period, as well
as providing an attractive option for new customers. Over 85%
of the specialist landlord customers whose products matured in
the past year remained with us at the period end.
Specialist intermediaries are the principal source of our
buy-to-let applications, and we continue to strategically focus on
ensuring that the service they receive is excellent. Our regular
intermediary insight surveys in the year showed 95% were
satisfied with the ease of obtaining a response from our team
(2023: 95%), delivering a Net Promoter Score (‘NPS’) at offer
stage of +55 (2023: +60).
78% of intermediaries dealing with us rated our service as
good or better than that provided by other lenders (2023: 75%).
Paragon Mortgages was also named ‘Best Buy-to-Let Lender’
at the 2024 Mortgage Strategy Awards and
‘Specialist Lender of the Year’ at the Mortgage Awards 2024.
Our long-term programme of re-engineering our mortgage
business continued through the year. All systems and
operational processes have been thoroughly reviewed and are
being refined and upgraded to align them with our strategy for
the division and the overarching plan of digitalising the business.
A major system upgrade, covering the process from application
to offer, was launched to our people and began to be rolled out to
the broker community during the period. As well as being easier
to navigate and more intuitive for users, it now offers enhanced
functionality to introducers. The new platform uses API
technology to enable brokers to have real-time access to data
related to an application, both from the Group and third parties,
including credit bureaux and Companies House, enabling
significantly more efficient application processing. This will also
support more effective assessment processes, delivering more
capacity to our buy-to-let new lending function.
The new platform has been well received so far, both externally
and internally, and the wider rollout of the new functionality
across our full broker network has continued into the new
financial year. We also expect that the new system will enable
us to expand our broker relationships, giving access to more
opportunities in the future.
Enhancements already delivered under the mortgage
digitalisation programme continue to demonstrate their value
to our business. The redemption and retention process which
went live in 2022 continues to underpin the division’s success
in this area, while the landlord self-service portal introduced in
2023 is now used by 25% of the operation’s customers and was
used to initiate around half of all product renewals in the period.
This gives us confidence in the benefits that our new system and
subsequent stages of this project will bring to the business and
its customers as they are rolled out.
Page 30
Environmental impacts
We understand the potential for climate change to affect our
mortgage business and seek to mitigate this risk, both through
the application of scenario analysis to the development of our
underwriting procedures, and through careful consideration of
the specific risks relating to properties on which we will lend. We
also continue to develop systems and refine data to allow our
overall exposure to be measured and the behaviour of the security
portfolio under climate-related stresses to be better understood.
As part of our response to combatting climate change, a range
of green buy-to-let mortgages is offered on all types of property
within our lending criteria. These products offer lower interest
rates for energy-efficient properties with EPC ratings of C or
higher, the currently accepted benchmark for energy-efficient
properties, which the UK Government proposes to make a
requirement for buy-to-let properties by 2030.
Together with other UK banking entities, we have been working
with the UK Government to develop a more consistent approach to
the definition of green activities in the housing market and housing
finance sectors. It is unlikely that significant progress can be made
in greening the UK housing stock until all market participants have
a shared concept of what that should mean in detail.
Our new buy-to-let lending volumes on energy-efficient
properties, which have decreased by 15.1% in the year, less than
the reduction in total mortgage lending, are set out below.
2024
2023
£m
£m
EPC rated A or B
189.1
187.6
EPC rated C
606.2
749.1
Total rated A to C
795.3
936.7
Percentage with available
data (UK)
99.8%
99.9%
Our latest analysis identified EPC grades for 95.4% by value of
the mortgage book at 30 September 2024 (2023: 94.2%). Of
these properties, 99.4% were graded E or higher (2023: 99.2%)
with 45.4% rated A, B or C (2023: 41.8%). The year-on-year
movements are principally a result of the balance of new
business, with over half of the advances in the current year,
53.3% (2023: 49.9%) having one of the top three grades.
While we monitor EPC ratings, we are 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.
Potential physical risks to security values arising from
climate change are also monitored. 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. The latest
data, at 30 September 2024, showed that approximately 3.1%
of properties securing buy-to-let mortgages, where data was
available, were at ‘higher’ risk (2023: 3.0%).
According to our quarterly landlord survey, 67% of landlords
understand the proposals for new EPC C requirements trailed by
the UK Government, with 92% having at least some awareness.
Around two thirds of landlords have at least one property with an
EPC grade of D or lower, with at least 42% planning to carry out
some form of remediation.
We are currently working to develop more products to support
existing 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 net zero target.
Further information on these metrics and our wider
climate change agenda is given in Section A6.4.
Performance
The outstanding first and second charge mortgage balances in
the segment are set out below, analysed by business line.
2024
2023
£m
£m
Post-2010 assets
First charge buy-to-let
10,620.9
9,679.5
First charge owner-occupied
16.2
22.5
Second charge
56.7
75.8
10,693.8
9,777.8
Legacy and acquired assets
First charge buy-to-let
2,658.4
3,040.6
First charge owner-occupied
4.1
5.2
Second charge
59.4
78.7
13,415.7
12,902.3
Balances within the mortgage portfolio have continued to
increase steadily, reflecting, in particular, the success of the
business in retaining existing customers. At 30 September 2024,
the total net mortgage portfolio was 4.0% 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 9.7% and now represents 79.2% of the division’s total loan
assets (2023: 75.8%).
The annualised redemption rate on buy-to-let mortgage assets,
at 6.7% (2023: 9.0%), has continued at a relatively low level. This
is despite the potential impact of higher 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. The redemption rate during the
year resulted partly from market pressures which depressed
new lending, and partly from the willingness of customers to
remain on reversionary interest rates for longer, in anticipation of
fixed interest rates being offered in the market becoming more
attractive in future. However, this also reflects the business’s
strategic priority of managing customer behaviour at the end
of fixed-rate periods, with significant operational, product and
systems focus placed on customer retention.
Arrears on the buy-to-let book increased marginally in the year
to 0.38% (2023: 0.34%), with the payment performance of our
customers remaining strong, despite the economic pressures in
the UK. Arrears on post-2010 lending were even lower, at 0.11%
(2023: 0.06%). Our arrears remain very low compared to the
national buy-to-let market, as they have always been historically,
highlighting the strength of our credit standards and account
management processes. UKF reported arrears of 0.86% across
the buy-to-let sector at 30 September 2024, sharply increased
year-on-year (2023: 0.64%), though still less than the arrears
seen in the wider mortgage market.
Page 31
Strategic Report
Our buy-to-let underwriting is focussed on a potential
customer’s credit quality and financial capability, underpinned
by a robust assessment of the security offered. 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 times of economic stress.
The loan-to-value coverage in our buy-to-let loan book, at
62.8% (2023: 62.8%), represents significant security, supported
by the strength of UK house prices over the year. Levels
of interest cover and affordability in the portfolio remain
substantial, even on a stressed basis, leaving customers well
placed to develop their businesses going forward; indeed, on a
simple weighted average basis, our landlord customers now have
around £9.3 billion of equity in their mortgaged properties.
Arrears on the closed second charge mortgage lending portfolios
increased to 24.63% (2023: 23.48%) as the books continue to run
off, with the total balance on such loans reducing by 24.9% in the
year. These levels of arrears remain higher than the average for
the sector, reflecting the history and seasoning 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 in line with expectations
and we benefit from substantial security on these assets, with
an average loan-to-value ratio of 50.3% (2023: 52.3%) providing a
significant mitigant to credit risk.
For accounting purposes, 5.8% of the segment’s gross
balances were considered as having a significant increase in
credit risk (‘SICR’) at the year end (2023: 6.5%), including 1.4%
which were credit impaired (2023: 1.2%). This resulted principally
from a reduction in arrears cases, offset by an increase in
the number of accounts where the property was being sold.
However, the level of security on the particular cases involved
meant that provision coverage was reduced in the year to
26 basis points (2023: 33 basis points). Coverage on fully
performing accounts, however, remained at a broadly similar
level to the previous year at 3 basis points (2023: 4 basis points).
Our receiver of rent process for buy-to-let assets helps to reduce
the level of losses by giving us direct access to rental flows
from the underlying properties, while allowing tenants to stay in
their homes. At the year end, 643 properties were managed by
a receiver on the customer’s behalf, an increase of 14.0% over
the year (2023: 564 properties). This increase was driven by the
appointment of receivers on a number of legacy portfolios, with
the resolution of long-standing cases continuing.
Almost all current receiver of rent arrangements relate to
pre-2010 lending, with cases being resolved on a long-term
basis to ensure the best outcome for the business, our landlord
customers and their tenants. As part of the receivership process,
an up-to-date valuation of the property is obtained, therefore
provision on these cases is based on up-to-date security values.
A4.1.2 Commercial Lending
The Commercial Lending division includes four key specialist
business streams lending to, or through, commercial
organisations, mostly on a secured basis. This division provides
a major source of both growth and diversification in our lending
operations, two of our major strategic priorities.
The four business lines address:
• Development finance, funding property development
projects, mostly houses and flats
• SME lending, providing leasing for business assets and
unsecured cash flow lending for professional services firms,
amongst other products
• Structured lending, providing finance for niche
non-bank lenders
• Motor finance, focussed on specialist parts of the sector
Each of these businesses is led by a specialist management
team with a strong understanding of their market. The principal
competitors for each are small banks and non-bank lenders.
We operate principally in markets where the largest lenders
have little presence, creating both a credit availability issue for
customers and significant opportunities for our businesses.
Our strategy in Commercial Lending is to target niches
(either product types or customer groups) where our skill sets
and customer service culture can be best applied, and capital
effectively deployed to optimise the relationship between
growth, risk and return.
Commercial Lending activity
New lending in the Commercial Lending segment increased
by 9.6% in the year against an economic background which
generally depressed customer demand and completion levels.
However, the extent and impact on the division’s four principal
business lines varied. Performance in both the SME lending
and structured finance businesses was stronger than in 2023.
However, advances in development finance and motor finance
fell, with the development finance reduction due, in large part,
to the lower levels of pipeline business brought forward at the
beginning of the year.
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 (which can be negative).
2024
2023
£m
£m
Development finance
511.9
528.1
SME lending
480.7
447.9
Structured lending
87.8
(9.5)
Motor finance
156.4
162.2
1,236.8
1,128.7
Page 32
These advances continued the growth of the overall
Commercial Lending portfolio, with the total loan book
increasing by 16.1% in the year to £2,289.8 million
(2023: £1,972.0 million), its highest level to date. The increase
in the portfolio over the last seven years, and its impact on our
diversification strategy is illustrated by the chart below.
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2018
2019
2020
2021
2022
2023
2024
Development finance
SME lending
Structured lending
Motor finance
Commercial Lending balance outstanding (£m)
30 September 2018 - 2024
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2018
2019
2020
2021
2022
2023
2024
Development finance
SME lending
Structured lending
Motor finance
Development finance
The level of new advances in our development finance business
was affected by economic and political uncertainty in the UK,
particularly around the start of the year, which resulted in
developers taking a more cautious approach to the timing of
phased drawings on existing facilities, and led to a lower new
business pipeline entering the period. However, advances for
the year as a whole only declined by 3.1%, despite the weak start
to the period, and the year saw the operation’s total lending to
date reach £3 billion since 2018, supporting the development of
around 13,000 new homes.
The financial year began with both undrawn balances on
agreed facilities, and cases in the process of underwriting,
at an historically low level. Unsurprisingly, this led to a reduced
level of lending in the early months of the year, with advances for
the first six months of the period, at £243.8 million, 10.7% lower
than those seen in the first six months of the 2023 financial year.
However, as the year progressed increased levels of proposals
were received, with these proposals generally of higher average
quality, leading to a rising conversion rate in the period.
Completions in the second half increased by 10.0% to
£268.1 million, 5.1% higher than in the comparable period in 2023.
Our customer base comprises primarily smaller scale property
developers, whose business model relies on a continuing flow
of new projects, and during the year we have seen a flow of
proposals that are economically feasible in spite of the prevailing
conditions of higher costs and interest rates than seen in recent
years. Concern over the availability of labour and supplies has
reduced, which has helped boost confidence in the sector, as
have positive statements on housebuilding and planning from
the incoming UK Government.
This resulted in a level of enquiries in the period which was 31.1%
higher than that seen in the previous year, and the commitment
value of new facilities which made their first drawing in the period
reaching £558.2 million (2023: £365.0 million).
Undrawn balances on projects in progress increased by
23.1% year-on-year, to £497.7 million (2023: £404.1 million),
while the new business credit approved pipeline recovered to
£202.1 million, 31.0% higher than its September 2023 low point
(2023: £154.3 million). These projects will provide advances
into the new financial year, laying the foundations for a strong
performance in 2025.
Our product range was expanded during the year to include
projects under the Build-to-Rent (‘BTR’) initiative. This
proposition supports the full lifecycle of BTR schemes in
established residential locations in cities and large towns across
the UK, including site acquisition, development, the letting of
a completed scheme and a short-term stabilisation facility,
before the property can be refinanced or sold as a buy-to-let
investment.
We extended our Green Homes Initiative Fund by a
further £100.0 million during the year, to £300.0 million.
This scheme provides beneficial terms for projects which
focus on the development of energy-efficient properties with
an EPC A grade, and by 30 September 2024, £220.7 million
of new lending facilities had been agreed under this initiative
(2023: £175.2 million), with drawings in the year of £66.8 million
(2023: £43.7 million) and several major projects completed. This
initiative rewards energy-efficiency, improving the environment
and reducing fuel bills for the ultimate residents, while providing
financial benefits to customers.
The regional spread of development finance lending has
continued to broaden gradually. While the proportion of the
portfolio located in London and the South-East of England
decreased only marginally, to 45.1% from the 45.8% recorded at
30 September 2023, it was still significantly less than the 53.7%
recorded in September 2022. During the period the business
also appointed a new relationship director for Yorkshire and the
North East of England, to increase its presence in this
under-represented area.
The underprovision of new homes in the UK, based on
long-standing requirements set out in government forecasts, has
been stated as a priority issue by the incoming UK Government.
Meeting this demand could, subject to the effect of any policy
interventions, offer significant expansion opportunities for
smaller developers and for our development finance business
to support them. We also have a strong presence in the
purpose-built student accommodation market, where evidence
suggests there is a significant shortfall in high quality provision.
SME lending
Our 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 in the UK and the impact of relatively
high interest rates serve 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, total volumes increased by 7.3% year-on-year, with
much of the increase focussed on longer-term products.
Following the major update to its front-end IT systems two
years ago, the business has continued to roll out incremental
system changes, delivering operational efficiencies and an
enhanced experience to its business partners, which have led
to growth in application flows. Auto-decisioning systems, which
use machine-learning AI to support our specialist underwriters,
helping to give a quick response to proposals, have been
extended and refined in the period. The enhanced underwriting
system now handles 69% of the division’s cases and its
increased level of automation has also facilitated the efficient
processing of the increased number of applications for smaller
value arrangements dealt with in the period. This enables us to
decrease average exposures and reduce risk in the business at
the same time as delivering growth.
Page 33
Strategic Report
Asset leasing volumes increased by 15.4% year-on-year
to £330.7 million excluding government-backed balances
(2023: £286.4 million), considerably exceeding the 1.1%
increase in new leasing business, excluding cars and high
value items, in the year to 30 September 2024 reported by the
Finance and Leasing Association (‘FLA’), and the 0.6% increase
in lending to SMEs reported in the same data. Investment in
operating leases has also continued with £13.1 million of assets
acquired in the period (2023: £15.3 million). New business
applications were strong throughout the year, providing positive
indications for new business going forward.
Short-term lending to professional services firms outside
government-supported schemes reduced by 1.8% to £135.2 million
(2023: £137.7 million). These loans are often used to spread the
impact of tax and other significant liabilities, and the level of
take-up will be influenced by both the confidence and the
profitability levels of the underlying customer base, both of which
are likely to have been adversely affected by the economic climate.
However, the underlying requirement for this form of finance
remains for the longer-term.
We monitor the potential impact on climate change of the
industries we do business with, and support UK SMEs with
green propositions, initially with funding for alternative fuelled
assets in the transport, manufacturing and construction sectors,
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.
Overall sentiment in the SME market remains mixed, with a
majority of SMEs becoming more confident, especially for the
longer term, whilst others still have a more negative outlook. There
are also marked differences between SMEs in different industries.
This is confirmed by published SME surveys, which show SMEs’
confidence in their business prospects and willingness to invest
becoming much more positive in the third calendar quarter of
2024, although concerns over inflation remain.
While potential challenges remain in the operating environment,
and the future impact of the new UK Government’s policies on
the economic prospects for SME businesses and their general
appetite for capital investment is not yet clear, our customer
base continues to respond robustly. The outlook for SMEs in
the UK, while more stable than twelve months ago, still presents
significant potential threats. However, the decision announced
in the 2024 Spring budget, and endorsed by the incoming
administration, to extend full expensing for tax purposes to
leased assets, is a welcome initiative and may encourage some
growth in new business.
Ultimately, the level of customer understanding in our
SME lending business, supported by its ongoing programme of
systems and process enhancements, positions it well to deal
with customer requirements going forward, building on a
positive reputation in the marketplace.
Structured lending
Despite the challenging economic conditions, activity levels
in our structured lending business were much higher than in the
previous year. Drawn balances increased by 52.0% from
£169.0 million at 30 September 2023 to £256.9 million at the end of
September 2024, with the total amount of the outstanding facilities
increased by 40.0% to £330.0 million (2023: £235.7 million). This
resulted from three new facilities totalling £55.0 million which
made their first drawings in the period, and a positive retention
performance on maturing facilities. All facilities continued to be
managed in line with their agreements.
These facilities generally fund non-bank lenders of various
kinds, provide us with increased product diversification and are
constructed to provide a credit buffer in the event of default in the
ultimate customer population. The business has an experienced
team of account managers who 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 we have not
recorded any losses on structured lending facilities.
We continue to assess 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
Our 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 (‘LCVs’), motorhomes and leisure vehicles including
caravans, static caravans and campervans. New business is
largely sourced through specialist brokers, however there is a
small flow generated through motor dealerships.
During the early part of the year new business volumes were
constrained by market conditions, which continued to be affected
by the elevated interest rate environment, resulting in new lending
falling by 3.6% to £156.4 million (2023: £162.2 million). However,
volumes recovered somewhat in the second half of the year as
rate expectations moderated, with new business at
£84.8 million, 18.4% higher than the level for the first half and 11.6%
higher than the comparable period in 2023. This result exceeded
expectations, as the business was focussed on managing its
margins, despite some aggressive pricing in the market, which
also impacted short-term volumes.
Car finance volumes reported by the FLA fluctuated significantly
in the period, with used cars particularly affected. The FLA’s data
showed new consumer car lending down by 0.6% overall for the
year ended 30 September 2024, although the amount of used
car business, which represents a significant part of our portfolio,
fell by 4.1%.
Our lending to finance battery-powered electric vehicles
(‘BEVs’), including LCVs, continued to expand in the year. These
vehicles increasingly contribute towards greenhouse gas (‘GHG’)
reduction, with data from the Society of Motor Manufacturers and
Traders (‘SMMT’) suggesting that by the year end BEVs formed
21% of all new UK car registrations and 6.2% of those for new
LCVs. We advanced £9.1 million of new loans on BEVs in the year,
an increase of 16.7% (2023: £7.8 million), reflecting our continuing
growth in this part of the motor finance 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 6% of new lending
relating to such vehicles. This initiative will support the green
aspirations of our customers, as electric vehicles become a
more widely viable and popular option and increasing numbers
enter the used car market.
Our motor finance business remains a stable, specialist
franchise, which is well placed to continue to develop into
the future.
Page 34
Performance
The size of our Commercial Lending book increased by 16.1%
in the year, driven by our strategic focus on diversifying into
this asset class over recent years. The loan balances in the
Commercial Lending segment, analysed by product type, are
set out below.
2024
2023
£m
£m
Asset leasing
664.4
586.0
Professions finance
53.0
52.2
CBILS, BBLS and RLS
41.5
67.2
Invoice finance
32.7
31.7
Unsecured business lending
25.9
20.4
Total SME lending
817.5
757.5
Development finance
884.0
747.8
Structured lending
256.9
169.0
Motor finance
331.4
297.7
2,289.8
1,972.0
The economic pressures in the UK generated an increased
number of issues on development finance projects during the
year, mostly relating to increased build costs or delays. This
type of issue is typical of the development finance product in a
stressed environment, and our experience is not dissimilar to
that of other lenders in the field.
Development finance exposures are regularly monitored
internally and graded on a case-by-case basis and by
30 September 2024 there were 19 accounts identified as
being at risk and therefore attributed to IFRS 9 Stage 3
for impairment purposes (2023: 12), with one additional
long-standing legacy case (2023: one).
These accounts have been carefully examined and projections
stressed for the purposes of our IFRS 9 provisioning, generating
an additional impairment charge. The majority of issues relate
to projects which were evaluated by both us and the customer
before late 2022, prior to the sharp rise in input costs and
interest rates seen since then, which has led to a significant
reduction in headroom. Additional provision has been made to
allow for any further such cases, but security across the portfolio
more generally remains strong. The average loan to gross
development value for the portfolio at the year end was 63.0%
(2023: 63.1%), which provides a substantial buffer if projects
encounter problems.
In the SME lending and motor finance businesses, credit
performance on our finance leasing portfolios has been
generally strong, despite the adverse headwinds in the UK
economy. Arrears in asset leasing, at 0.14%, remained very low
(2023: 0.23%) and motor finance arrears improved slightly to
1.06% (2023: 1.08%). Despite these positive trends, we continue
to monitor performance carefully and have processes in place to
ensure any customers encountering problems achieve
good outcomes.
In January 2024 the FCA announced a review of discretionary
commission arrangements across the motor finance industry.
While we offered products which might fall within the scope of
the review, our expectations of exposure remain low at this stage.
The FCA was unable to complete its work in accordance with its
originally anticipated timescales and now does not expect to report
its conclusions before May 2025. There are also legal issues in
progress on an industry-wide basis on related matters, particularly
the recent Court of Appeal ruling in the cases of Johnson, Wrench
and Hopcraft, which may result in additional exposure.
Where possible we have evaluated this potential probable
exposure and determined that no material provision is required.
However, it is not possible to quantify the potential impact of any
of these matters on our historical motor finance commissions
more broadly at this stage, due to the many factors involved and
the case specific nature of the information which is available. We
will report on any impacts when it is practicable to do so. Further
information on these matters is given in note 43 to the accounts.
We continue to closely monitor the government-guaranteed
portfolio for any adverse indications. Some lenders have
reported significant performance issues with their CBILS, RLS
and particularly BBLS lending related to either credit quality or
fraud, with over 20% of loans under these schemes resulting in
default. However, we have not yet seen any serious impacts of
this type, possibly due to our primary focus on lending to existing
customers, whose credit history was already well known to us,
and to our limited exposure to the BBLS product.
These portfolios contained only £1.3 million of Stage 2
accounts at gross carrying value at 30 September 2024, and
only £1.1 million of credit impaired cases. Our total claims made
up to 30 September 2024 under the government guarantee
were £4.4 million, only 3.4% of the £130.9 million advanced since
the schemes began, with £4.1 million of this balance already
recovered at the year end.
In the structured lending business, we carefully monitor the
performance of the underlying asset pool on a monthly basis,
to ensure the value of security remains adequate. We rely on
our data monitoring and verification processes to ensure these
reviews are able to detect any credit issues. Performance in the
year has been broadly in line with expectations, with generally
stable metrics across the book and all but one account classified
in IFRS 9 Stage 1 at the year end. The one Stage 2 case is being
carefully managed, with no losses expected.
For IFRS 9 impairments purposes, 12.7% of gross balances for
the Commercial Lending segment as a whole were considered
as having an SICR (2023: 9.5%) including 5.1% which were credit
impaired (2023: 3.3%). The increase in credit impaired cases
related mostly to the development finance projects noted above.
Provision coverage in the division increased to 177 basis points
(2023: 156 basis points), principally as a result of the greater
number of credit impaired cases. Coverage on fully performing
accounts reduced from 82 basis points at 30 September 2023
to 62 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.
A4.2 Funding review
Paragon Bank’s retail banking operation is central to our funding
strategy. This is supplemented with central bank and wholesale
funding and other liquidity sources to create an adaptable
and sustainable funding model, including contingent funding
options, which can respond to developments in our business,
its operating environment and the external economic and
regulatory landscape.
Our parent company debt has an investment grade credit rating,
confirmed by Fitch in February 2024, which supports its status
as a debt issuer. Following the year end this was supplemented
when Moody’s began coverage, with an initial rating of Baa3
for the Group. These ratings enable us to access cost-effective
funding, as well as enhancing options for raising finance for
strategic initiatives on a timely basis.
Page 35
Strategic Report
The retail deposit portfolio expanded in the year, both to support
new lending and to enable early repayment of central bank
borrowings and wholesale debt, reducing funding costs. This
was achieved despite continuing cost-of-living pressures on
savers, although there was some evidence of increased demand
for fixed rate term deposits particularly in the first half as the
upward trend in rates began to reverse. This growth in fixed term
deposits has generated a flow of funds from clearing banks to
smaller deposit takers, whose market focus has historically been
on this type of product. We also continued to strengthen our
position in the cash ISA market.
At the same time we have continued to pay down wholesale and
central bank debt, with substantial early repayments made on
Bank of England facilities.
Our funding at 30 September 2024 is summarised as follows:
2024
2023
2022
£m
£m
£m
Retail deposit balances
16,298.0
13,265.3
10,669.2
Securitised and
warehouse funding
-
28.0
995.3
Central bank facilities
755.0
2,750.0
2,750.0
Tier-2 and retail bonds
149.9
258.2
261.5
Sale and repurchase
agreements
100.0
50.0
-
Total on balance
sheet funding
17,302.9
16,351.5
14,676.0
Off balance sheet
liquidity facilities
150.0
150.0
150.0
17,452.9
16,501.5
14,826.0
The rising interest rate environment in the second half of 2022
and through most of 2023 saw a material switch in savers’
preferences towards fixed rate deposits. This slowed, and then
reversed, our long-term strategy of increasing the proportion of
easy access products, which are repayable on demand, in our
funding mix, more in line with normal industry practice. With
a growing customer perception that market rates had peaked
during 2024, demand for easy access products has strengthened,
and we have been able to resume progress towards a higher easy
access funding level. At 30 September 2024 the proportion of
easy access deposits had risen to 44.6% of total on balance sheet
funding (2023: 25.7%).
At the end of the year £2,844.8 million of cash and
investments were available for liquidity and other purposes
(2023: £2,907.7 million), with the liquidity portfolio diversifying
to include UK government securities and covered bonds issued
by UK financial institutions in the year. The overall level of liquid
resources remains broadly similar to that twelve months earlier.
These resources provide sufficient operational liquidity and cash
to make further TFSME repayments. The appropriate level of
cash reserves is monitored on an ongoing basis as part of our
capital and liquidity strategy, which continues to be based on a
conservative view of the economic outlook, while allowing for the
developing needs of the business.
Our long-term funding strategy, following the granting of our
banking licence in 2014, has been to move to using retail
deposits as our primary funding source, accessing the debt
markets on an opportunistic basis for additional funding
requirements. 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 –2024
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2016
2017
2018
2019
2020
2021
2022
2023
2024
Securitisation
Bonds
Central Bank
Retail deposits
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2016
2017
2018
2019
2020
2021
2022
2023
2024
Securitisation
Bonds
Central Bank
Retail deposits
While the position at 30 September 2024, at 94.2%, represents
the maximum proportion of our funding represented by retail
balances historically (2023: 81.1%), we continue to evaluate the
cost-effectiveness of new wholesale debt and it is likely that this
funding source will be accessed again in the future.
We have also focussed on developing contingent funding sources
as part of our overall strategy. Holdings of our own securities,
investment securities issued by others and assets pre-positioned
with the Bank of England provide ready access to additional
funding, if required, without incurring the carry cost of additional
borrowings.
Hedging strategies continue to form an important part of
our balance sheet risk management. This includes the use of
derivative financial instruments, such as interest rate swaps, to
protect our income and operating model from adverse fluctuation
in market interest rates. This was particularly important during the
year, with large fluctuations in market expectations for interest
rates, and we extended our balance sheet reserves hedging,
providing protection to returns in a falling base rate scenario.
A4.2.1 Retail funding
The UK savings market is a reliable, scalable and cost-effective
source of funding, with our strategy centred on offering sterling
deposit products to UK households through a streamlined online
presence. Our in-house offering, supported by an outsourced
administration function, is supplemented by additional routes
to market provided by a presence on third party platforms.
Development of this strategy is focussed on the management
of the Bank’s digital footprint, supported by investment in our
people, systems and relationships.
Our proposition is based on generating and retaining customer
accounts by providing competitive interest rates, attractive and
innovative products and high-quality customer service. Products
currently offered include cash ISAs, term and notice deposits, and
easy access accounts, with the substantial majority of balances
insured by the Financial Services Compensation Scheme
(‘FSCS’). We enjoy a significant market position in the cash ISA
market, developed over eight years, which has benefitted margins
as interest rates have increased in recent periods.
Page 36
The protection provided to depositors by the FSCS both
incentivises larger savers to divide their deposits between several
institutions and reduces the risk perceived by customers in
using institutions other than major banks and building societies,
supporting our proposition. At 30 September 2024, this FSCS
protection covered around 95% of our deposit balances.
The retail deposit franchise continued to perform strongly
over the year, with balances increasing by 22.9% in the period,
meeting our funding needs at an attractive cost, compared to
other alternatives. A strong performance in the cash ISA market,
which is concentrated in the second half of the year helped drive
this performance, with the value of new ISA accounts opened
increasing by 36% year-on-year. Market pricing remained volatile
with different deposit takers responding to changes in interest
rate expectations in different ways and over differing time frames.
The growth of the retail funding balance over recent years is set
out below.
Retail deposits (£m)
At 30 September 2016 – 2024
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2016
2017
2018
2019
2020
2021
2022
2023
2024
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2016
2017
2018
2019
2020
2021
2022
2023
2024
During the year, UK deposit balances from individuals
reported by the Bank of England remained relatively stable,
despite increasing pressures on living costs. Balances at
30 September 2024 reached £1.75 trillion (2023: £1.67 trillion),
a year-on-year increase of 4.9%. While, given the rate of inflation
in the period, this represents only a small real-terms increase in
total savings, it is not so marked as might have been expected
from the pressure on household incomes.
Against this relatively static background, the 22.9% increase in
our deposit balance has considerably outpaced the overall
market, reflecting both the attractiveness of our proposition and
our ongoing programme of business and systems development,
which continued in the year.
Within the savings market there was also a move towards
fixed-term and notice deposits, with the Bank of England
reporting a 5.9% (£13.8 billion) increase in such deposits from
individuals during the year, greater than the growth in the overall
savings base. National Savings (‘NS&I’) deposits by individuals,
which fulfil a similar function for consumers, also increased in
the period but at a slower rate. Volumes of cash ISAs, a product
where we have had a consistently strong presence, increased by
16.6%, year-on-year, representing a £379.2 billion market, with
our growth significantly outpacing the market.
Despite the broader market trend, we have also seen strong
growth in variable interest rate products over the year, as new
fixed rates on offer began to anticipate future falls in base rates,
and as we maintained our strategic target to increase easy access
balances as a proportion of the portfolio.
Customer retention, increasing diversification and the
FSCS guarantee are likely to reduce the potential for liquidity
impacts and the profiling of our 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
2024
2023
2024
2023
%
%
%
%
Fixed rate deposits
4.77
4.07
50.7
65.5
Variable rate deposits
4.19
3.74
49.3
34.5
All balances
4.49
3.95
100.0
100.0
Average interest rates paid to our savers continued to move up
during the year as base rate rises during 2023 continued to work
their way through market pricing, with the rate cuts towards the
end of the current year, which began to be reflected in our pricing
for new accounts as the period closed, having little impact on
average fixed rates as yet. The Bank of England has reported
average interest rates at 30 September 2024 for new 2-year fixed
rate deposits at 4.00% (2023: 5.50%), and at 2.60% for instant
access balances (2023: 2.68%), with similar falls across other
product types. These year-end averages for new business will
reflect the impact of the most recent base rate cut.
Market savings rates remain at below SONIA levels, with the
overnight benchmark decreasing 23 basis points from 5.18%
at 30 September 2023 to 4.95% at 30 September 2024. The
change in the mix of our accounts, however, means that the
average variable rate we were paying at the year end represented
a 76 basis point discount to SONIA (2023: 144 basis points)
reversing the widening trend seen in the previous financial
year. This was an expected effect of the more stable interest
rate environment nationally and a similar narrowing of the gap
between average deposit and lending rates can be seen across
the banking industry.
The average initial term of fixed rate deposits was 20 months
(2023: 22 months), with such products still representing over half
the deposit book, despite the increase in variable deposits in the
period. The proportion of the deposit portfolio represented by
these products reduced in the year, with an increase in variable
rate balances being strategically targeted.
Significant optionality is provided by our presence on third party
investment platforms and digital banks’ savings marketplaces,
which accounts for almost a quarter of the savings book. These
channels provide access to customer demographics which differ
from the customers of our in-house offering and between the
various platforms, 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 balances, which can be far lower than
that seen on direct business. We have nine such relationships,
all of which were in place throughout the year. These channels
represent around 23% of the total deposit base (2023: 22%) and
we have the systems and control framework in place to further
increase our reach through these channels, if appropriate and
cost-effective.
Page 37
Strategic Report
Our strategy in the savings market relies on providing a
high-quality customer offering and we conduct insight surveys
throughout the customer journey. Results in the year are
summarised below:
Survey timing
2024
2023
At account opening
Would ‘probably’
or ‘definitely’ take a
second product
89%
88%
NPS
+66
+62
At maturity
Would ‘probably’
or ‘definitely’ take a
second product
89%
88%
NPS
+63
+59
These results maintain our strongly positive position, despite the
downward trend of interest rates towards the end of the period,
demonstrating that our customer-facing infrastructure serves
us well in retaining and developing customers in this active and
competitive market.
This is further borne out by our customer retention levels. Despite
the short-term nature of the product and the ease with which
deposits can be moved between institutions, 42.4% of our deposit
balances at 30 September 2024 relate to customers who have
been with us for five years or more.
Our service standards were also recognised when
Paragon Bank won the 2024 Award for Customer Service at
the Savings Champion Awards. Other recognition came in the
2024 MoneyComms Top Performers list, where it was recognised
as both ‘Best Easy Access Savings Provider’ and ‘Cash ISA
Provider of the Year’.
Retail deposits continue to provide a stable foundation for our
funding strategy, allowing volumes and rates to be effectively and
flexibly managed. It is a key strategic objective to develop this
business further, broadening the product range and employing
increased digitalisation to enhance the service proposition and
address wider demographics. At the same time we will continue
to develop our systems and processes to ensure we are able to
address the increasingly sophisticated needs of savers, while
expanding our presence on third party platforms.
A4.2.2 Central bank facilities
Wholesale funding comprises principally the Bank of England
Term Funding scheme for SMEs (‘TFSME’), introduced to support
SME lending during the Covid pandemic. We also have access
to other, shorter-term, facilities offered by the Bank, which are
utilised from time-to-time as part of our overall funding strategy.
TFSME is the main wholesale funding source, with borrowings
under this scheme at 30 September 2024 of £750.0 million
(2023: £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 during the year the
outstanding balance has been strategically reduced by
£2,000.0 million, providing cost benefits and mitigating the
liquidity risk of any payment shock when the majority of the
balance reaches its October 2025 maturity date.
We also have access to other Bank of England funding channels,
including the Indexed Long-Term Repo (‘ILTR’) and Short-Term
Repo (‘STR’) schemes, providing shorter term funding for
liquidity purposes, with outstanding ILTR drawings at the year
end of £5.0 million (2023: £nil).
Central bank facilities will continue to be utilised going forward, in
accordance with the objectives of the schemes, where their use is
appropriate and cost-effective, or to test operational access.
To provide contingent funding, if and when required, mortgage
loans have been pre-positioned with the Bank of England to act
as collateral for any future drawings. This provides access to
potential liquidity at 30 September 2024 of up to £4,445.9 million
(2023: £1,715.4 million). Additionally, our retained AAA-rated asset
backed notes and investment securities can also be used to
access Bank of England funding arrangements.
A4.2.3 Wholesale funding
Our wholesale funding options include securitisation funding,
warehouse bank debt and bond issuance, including senior and
subordinated corporate bonds, each of which can be accessed
from time-to-time as appropriate.
The Company’s Long-Term Issuer Default Rating was confirmed
at BBB+ by Fitch in February 2024 with a stable outlook, with
Paragon Bank PLC, its principal operating subsidiary, also given
a BBB+ rating for the first time as part of this rating exercise.
In November 2024, following the year end, Moody’s published
its first ratings on our business, with the Company assigned a
Long-Term Issuer rating of Baa3 and the Bank rated Baa2. These
additional ratings will allow more flexibility in funding options in
future, while potentially helping to manage funding costs.
During the year the Paragon Mortgages (No. 29) PLC
securitisation was issued. This transaction is secured on
buy-to-let mortgages and comprises £855.0 million of rated
notes, denominated in sterling and bearing interest at a
SONIA-linked floating rate. All these notes were retained, and
the AAA-rated notes can be used to access contingent funding,
through use as security against borrowing and
liquidity transactions.
While historically we have been one of the principal issuers of
UK residential mortgage-backed securities (‘RMBS’), our
reliance on this funding source has been significantly reduced
over recent periods, with Paragon Mortgages (No. 26) PLC
being repaid in the year. This leaves no external securitisation
indebtedness, with all outstanding issuances held internally as
contingent funding, rather than placed in the market.
The final outstanding retail bond issuance under our
Euro Medium-Term Note programme was also paid down in
the year, having reached its term. Our only remaining bond debt
is the 2021 Tier-2 Bond.
We access the short-term repo market from time-to-time with
£100.0 million of sale and repurchase transactions with financial
institutions outstanding at the year end (2023: £50.0 million).
During the period we broadened the range of counterparties
used for such transactions, increasing our liquidity and
contingent funding options.
The wholesale funding position currently satisfies only a small
part of our overall funding requirements, with the proportion
supplied by wholesale debt the lowest since we received our
banking licence in 2014. This will reduce further as prepayments
of TFSME funding continue to be made. However, wholesale
funding capacity remains available for use on a tactical basis,
when interest rates and conditions are attractive, and to provide
contingent funding and support liquidity.
Page 38
During the year we have worked to develop increased optionality
around our wholesale funding position, obtaining our Moody’s
ratings, but also investigating the possibilities of joining the
thirteen UK banks and building societies authorised as covered
bond issuers by the FCA. Our work on structuring has been
completed, and a formal application for authorisation submitted
to the FCA, with the process expected to be completed in the
coming financial year. This will provide a flexible funding route for
use in future periods, as required.
While capital markets in the UK remained volatile in the period,
influenced by speculation over the likely direction of interest
rates, the outlook towards the year end was more positive
than for some time, with demand for credit risk solid across
most classes of debt, and margins tightening. Coupled with
movements in retail deposit rates, this has served to make
wholesale funding relatively more attractive than it has been for
some time, and our strategy is to maintain as wide a range of
funding and contingent funding options as possible.
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. We
pre-hedge a proportion of our lending pipeline, which can result
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 2024 position was reduced from the previous
financial year end as the position unwound, and as swap rates
trended lower overall during the year.
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 our lending and deposit-taking activities and we undertake no
trading in derivatives.
We also hedge our tier-2 fixed interest rate borrowings, and have
hedged the interest rate risk on the investments in gilts acquired
as part of the liquidity buffer in the year.
During the year we have continued to develop our balance sheet
hedging strategy. This is intended to protect net interest margins
from the impact of future falls in interest rates on equity, which
otherwise would cause a fixed / floating mismatch between the
asset and liability sides of the balance sheet.
In order to mitigate this risk, an amount of fixed rate
mortgage lending has been attributed to provide natural
equity hedging, forming a net free reserve hedge.
At 30 September 2024, £1,200.0 million had been attributed
in this way (2023: £313.0 million). The year-end hedge represents
our current target hedging level, covering the majority of the
equity balance. However, this form of hedging has no direct
accounting impact.
Further information on all the above borrowings is given
in notes 34 to 39, while derivatives and hedging activities
are described in more detail in note 26.
A4.3 Capital and
liquidity review
Strong financial foundations form one of the three pillars of our
strategy, with building and maintaining strong levels of core capital
through the economic cycle a key strategic priority. We manage
our balance sheet to maintain capital strength, ensuring that our
regulatory capital and liquidity positions are sufficient to safeguard
depositors and provide capacity to meet our strategic objectives
and other opportunities going forward.
The year has seen continuing developments in the UK’s economic
environment, with the majority of metrics stabilising and
sentiment becoming more cautiously optimistic towards the end
of the year. However the July UK General Election has brought
changes in political priorities for the country, the impact of which
is not yet clear, while the Basel 3.1 process to reform the regulatory
capital regime has continued to progress and while there was a
delay due to the election, near-final proposals were published on
12 September 2024.
In the face of the potential uncertainties inherent in this
environment, we have remained focussed on ensuring that
our capital strength remains sufficient to withstand potential
pressures and address future changes in requirements. At the
same time we have been able to continue our stated distribution
policy, approving buy-backs of up to £100.0 million in the period
and announcing dividends for the period in line with policy.
For regulatory purposes our capital comprises
shareholders’ equity and a tier-2 bond. We have no
outstanding Additional Tier 1 (‘AT1’) issuance, but have the
capacity to issue such securities, if considered appropriate,
under an authority granted by shareholders at the
2024 Annual General Meeting (‘AGM’), which will be
proposed for renewal at the 2025 meeting.
A4.3.1 Regulatory capital
During the year we have maintained strong regulatory capital
ratios, with capital balances being carefully managed. Our
business is subject to supervision by the Prudential Regulation
Authority (‘PRA’) and, as part of this supervision, the regulator
sets a Total Capital Requirement (‘TCR’), the minimum amount of
regulatory capital which we 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 the business incurring severe losses and includes elements
determined based on our Total Risk Exposure (‘TRE’) measure,
together with fixed elements. The TCR is specific to our business
and is set on the basis of periodic supervisory reviews carried out
by the regulator, with the most recent results received in 2021.
Our TCR at 30 September 2024 represents 8.7% of TRE, similar
to a year earlier (2023: 8.8%), compared to the minimum TCR
allowed under the Basel 3 framework of 8.0%. This low TCR level
gives us advantages in capital management and reflects the
regulator’s assessment of our risk strategy and their view of the
appropriateness of our systems for the management of capital
and risk.
We were granted transitional relief for the capital impacts of the
adoption of the IFRS 9 impairment regime, along with most other
UK banks. Additional relief was granted in 2020 for the impact on
capital of provisions created in response to the Covid pandemic.
This relief is being phased out, year-by-year, while any reversal of
Covid-related provisions will generate a corresponding reduction
in relief. The reliefs have a minimal impact on the capital position
at 30 September 2024, and were phased out entirely from
1 October 2024.
Page 39
Strategic Report
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 will converge for the financial year ending
30 September 2025. Our principal capital measures, CET1 and
Total Regulatory Capital (‘TRC’) are set out below on both bases.
Regulatory basis
Fully loaded basis
2024
2023
2024
2023
£m
£m
£m
£m
Capital
CET1 capital
1,177.9
1,188.9
1,175.2
1,175.4
Total Regulatory
Capital (‘TRC’)
1,327.9
1,338.9
1,325.2
1,325.4
Exposure
TRE
8,278.7
7,668.7
8,276.0
7,655.3
Requirements
TCR
724.1
673.4
723.8
672.2
Capital buffers
372.5
345.1
372.4
344.5
Our CET1 capital comprises 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 our Tier-2 Bond. This tier-2 capital can
be used to meet up to 25% of the TCR. Capital levels on both
measures in the year have remained broadly stable, with positive
operational performance continuing to support the capital
position, even after allowing for paid and proposed distributions.
The year-on-year increase in TCR requirements shown above
relates principally to the growth in the asset base over the
period, mitigated by a reduction in derivative exposures.
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 their TRE. The CCoB remained
at 2.5%, its long-term rate, throughout the year (2023: 2.5%), while
the UK CCyB remained at 2.0% (2023: 2.0%), which the Financial
Policy Committee (‘FPC’) of the Bank of England has stated that it
expects to be its long-term standard level. Further buffers may be
set by the PRA on a firm-by-firm basis but cannot be disclosed.
Our capital ratios, after allowing for the proposed dividend for the
year, but excluding the effect of future share buy-backs, are set
out below.
Basic
Fully loaded
2024
2023
2024
2023
CET1 ratio
14.2%
15.5%
14.2%
15.4%
Total capital ratio
16.0%
17.5%
16.0%
17.3%
UK leverage ratio
7.0%
7.6%
7.0%
7.6%
Our capital ratios show a continued 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 previous year ends. As the
IFRS 9 reliefs are phased out the fully loaded and regulatory
bases are automatically converging.
The PRA has published near-final proposals for changes to its
Rulebook to reflect the impact of the revisions to the Basel 3
framework made by the Basel Committee on Banking Supervision
(‘BCBS’), referred to as Basel 3.1. These changes would affect
both firms applying Internal Ratings Based (‘IRB’) approaches
to capital and those using the Standardised Approach. The new
requirements are to be phased in over a five-year period, currently
expected to commence from 1 January 2026.
The PRA proposals, which principally impact on buy-to-let
lending and lending to small businesses, have been evaluated as
part of our capital planning. We estimate that the changes would
reduce the CET1 ratio by 104 basis points, based on the
30 September 2024 position. However, our forecasts indicate that
sufficient capital is being held to meet the proposed scenario.
We continue to refine our IRB submission with close
engagement with the PRA. In addition to the submission for the
buy-to-let approach, which is currently being processed, we have
also prepared much of the documentation to support an IRB
approach for development finance, which represents the next
stage of our IRB roadmap.
The PRA has also set out its future approach to the supervision
of smaller UK institutions, following the country’s exit from the
EU. The regulator has defined a category of ‘Small Domestic
Deposit Taker’ (‘SDDT’) which will be subject to a lighter
regulatory touch in some areas. To apply for designation as an
SDDT an institution must operate only in the UK, have limited
trading activities and less than £20.0 billion of assets, and must
not operate an IRB approach to credit risk. The introduction of
the SDDT regime is planned for January 2027.
To reduce disruption over the period when both the SDDT and
Basel 3.1 are being introduced, the PRA has also introduced an
Interim Capital Regime (‘ICR’) which firms can join subject to
meeting the SDDT eligibility criteria, and then transition to either
the SDDT or full Basel 3.1 capital basis on the implementation of
SDDT. The ICR will allow qualifying firms to continue managing
capital on a basis equivalent to the current regime until the
SDDT capital regime is implemented, rather than transitioning to
the Basel 3.1 rules from 1 January 2026.
We believe that we would meet the criteria to qualify as an
SDDT as at 30 September 2024, and we expect to apply for ICR
approval in the short term. Longer-term, our goal is to move to
a Basel 3.1 IRB basis for capital, but this will be subject to the
regulator endorsing our methodology.
A4.3.2 Liquidity
We hold liquid assets 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.
Our policy is to maintain strong levels of liquidity cover, and this
policy impacts operational capital and funding requirements.
Our liquidity is principally held in the form of deposits at the
Bank of England, although during the year the position was
diversified with the purchase of highly rated gilts and UK
covered bonds.
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 Paragon Bank’s
regulatory group on a basis which is standardised across the
banking industry, are the Liquidity Coverage Ratio (‘LCR’) and
Net Stable Funding Ratio (‘NSFR’).
Page 40
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 211.5%
compared to 193.7% during the 2023 financial year. This increase
reflects higher levels of liquidity built up during the year to
facilitate debt repayments, in particular those on our TFSME
borrowings. Following the completion of these payments in the
year, the coverage value was moving downwards by year end.
The LCR in the year also includes the impact of £103.6 million
of swap collateral held in cash (2023: £383.4 million), which also
reduced through the year.
The NSFR is a longer-term measure of liquidity with a
one-year horizon, supporting the management of balance sheet
maturities. At 30 September 2024 the Bank’s NSFR stood at
139.5% (30 September 2023: 123.4%), higher than its position
twelve months earlier, reflecting a marginal strengthening of the
position in the year.
A4.3.3 Dividends and distribution policy
The sustainable enhancement of shareholder returns is
fundamental to our capital strategy, while protecting the capital
base. The continuing positive results and our capital outlook
support the ongoing return of capital to investors, both as
dividends and through our share buy-back programme.
Our long-standing dividend policy is to distribute 40% of
consolidated underlying earnings to shareholders in ordinary
circumstances, achieving a dividend cover ratio of approximately
2.5 times. We use market buy-backs of shares to manage overall
capital levels, 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 13.2 pence per share
(2023: 11.0 pence per share) was paid in July 2024, in line with our
policy of paying an interim dividend equal to half the previous
year’s final dividend. For our final dividend the Board is proposing,
subject to approval at the AGM on 5 March 2025, a final dividend
for the year of 27.2 pence per share (2023: 26.4 pence per share).
This would give a total dividend of 40.4 pence per share
(2023: 37.4 pence per share). We have disregarded fair value
losses in this calculation, in the same way as we have
disregarded similar gains in earlier periods.
The dividend proposed therefore represents approximately 40%
of the profit before fair value losses, giving a dividend cover on
the adjusted basis of 2.50 times (2023: 2.52 times), in line with
policy (Appendix D).
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 –2024
0
5
10
15
20
25
30
35
40
45
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
0
5
10
15
20
25
30
35
40
45
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
The directors have considered the distributable reserves
and available cash and other resources of the Company and
concluded that the proposed dividend is appropriate.
In December 2023 the Board authorised a buy-back
programme for the year of £50.0 million, which was extended
to £100.0 million in June 2024. £76.6 million, including costs,
was expended during the year (note 47) (2023: £111.5 million). An
irrevocable authority was given to our brokers at the year end
to continue this programme, and by the time that regulatory
authority for the programme had expired, £7.5 million of the
programme remained outstanding.
As part of the review of capital management described above,
the Board decided that it was appropriate to complete the
remaining balance of the 2024 programme and to authorise a
further share buy-back programme of up to £50.0 million for the
2025 financial year. These purchases will commence shortly after
the announcement of the 2024 year-end results.
The Group has the general authority to make such purchases,
granted at the AGM on 6 March 2024. 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 2024, 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.
A4.4 Financial results
Our results for the financial year ended 30 September 2024
continued the positive performance of recent periods, with
underlying profits at a record level and margins remaining
strong. We continued to deliver on our strategic targets despite
the ongoing impacts of higher interest rates and prices on our
customers and their clients, which should leave us well placed
facing a seemingly more stable economic situation.
Underlying profit (Appendix A), which excludes fair value gains,
increased by 5.4% in the year, reaching £292.7 million (2023:
£277.6 million). This, together with the impact of share buy-backs
in the period, generated growth in underlying earnings per share,
which broke the £1 per share level for the first time, reaching 101.1
pence per share, 7.3% greater than in the previous year (2023: 94.2
pence per share).
The statutory results for the year continue to be affected by the
accounting treatment required for pipeline hedging. We have
historically hedged a substantial part of our fixed rate 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 those that we recorded in the
2022 financial year.
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 unwinding process
continue, and this together with changes in expectations for future
interest rates has resulted in fair value losses being recorded.
These unwinding losses reduced profit before tax on the statutory
basis to £253.8 million (2023: £199.9 million), with earnings per
share at 88.5 pence per share (2023: 68.7 pence per share).
These fair value items have consistently been excluded from
our underlying results as the timing of their recognition does not
reflect that of their economic impact on our business.
Page 41
Strategic Report
The progression of our underlying earnings per share over the last
six years is shown below.
Underlying earnings per share (pence)
Year ended 30 September 2019 –2024
0
20
40
60
80
100
2019
2020
2021
2022
2023
2024
0
20
40
60
80
100
2019
2020
2021
2022
2023
2024
A4.4.1 Consolidated results
For the year ended 30 September 2024
2024
2023
£m
£m
Interest receivable
1,314.7
1,010.6
Interest payable and similar charges
(831.5)
(561.7)
Net interest income
483.2
448.9
Net leasing income
6.2
5.6
Other income
7.0
11.5
Total operating income
496.4
466.0
Operating expenses
(179.2)
(170.4)
Provisions for losses
(24.5)
(18.0)
Underlying profit
292.7
277.6
Fair value net (losses)
(38.9)
(77.7)
Operating profit being profit on ordinary
activities before taxation
253.8
199.9
Tax charge on profit on ordinary activities
(67.8)
(46.0)
Profit on ordinary activities after taxation
186.0
153.9
2024
2023
Dividend – rate per share for the year
40.4p
37.4p
Basic earnings per share
88.5p
68.7p
Diluted earnings per share
85.2p
66.3p
Income
Total operating income increased by 6.5% in the year, reaching
£496.4 million, compared to the £466.0 million recorded in the
previous year. Net interest on our loan books continues to be
the principal element of our income. This increased by 7.6% in
the year, from £448.9 million in 2023 to £483.2 million in 2024.
This growth was primarily driven by net loan book growth, with
average outstanding balances increasing by 5.1% to
£15,289.9 million (2023: £14,542.3 million) (Appendix B).
Net interest margin (‘NIM’) increased overall by 7 basis points,
a slower rate of improvement than in recent years, as a more
stable interest rate environment impacted on funding costs in the
retail deposit market. Given our approach to funding allocation,
this led to slightly reduced NIM in both our divisions, with
Commercial Lending particularly impacted, but correspondingly
greater unallocated income being reported, as earnings on excess
liquidity are not typically allocated to operating segments.
The progression of the Group’s NIM over the last five years is set
out below.
Total
basis points
Year ended 30 September
2024
316
2023
309
2022
269
2021
239
2020
224
The long-term improvement in NIM is a result of the careful
management of yields in the business, a prudent hedging strategy
and improvements in our cost of funds as the distribution of our
funding sources has developed over time. This is supported by the
careful strategic allocation of our capital and management of our
lending risk appetites to optimise overall returns.
Interest income from our 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 our 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.
Other operating income which represents a combination
of operating lease income and other sundry fees reduced to
£13.2 million (2023: £17.1 million). This movement was principally
a result of reduced third party servicing fees as contracts
reached their end dates.
Page 42
Costs
Our operating costs increased by 5.2% in the year to £179.2 million
(2023: £170.4 million). The largest item within costs continues to
be employment costs, which at £111.1 million form 65.2% of the
total (2023: £108.3 million), a similar level to the previous year. The
2.6% increase in employment costs arose from market-based
pay increases granted to almost all employees at the beginning
of the period, and £1.5 million of additional costs for National
Insurance on share-based awards, driven by the rising share price
in the period. These were offset by the impact of a reduction in
staff numbers with the average headcount falling by 5.4% to 1,444
(2023: 1,527).
From 1 March 2024 the PRA introduced a funding levy to replace
the cash ratio deposit (‘CRD’) scheme. This levy forms part of the
Group’s costs, unlike the CRD, resulting in a £2.1 million increase
in costs for the year.
Costs not related to employment, excluding the levy, at
£66.0 million, were 14.8% higher than those recorded in the 2023
financial year, when one-off costs in that period are excluded
(2023: £57.5 million, excluding one-off items).
Part of this increase represents the impact of inflation in the UK,
which has been particularly severe for professional services, but
it is also affected by increased outsourced administration costs
on our savings operations, which increase in line with the size of
our savings balance.
Spend on our digitalisation programme remained a significant
part of the cost base, with non-employment related IT
costs of £12.6 million incurred (2023: £13.0 million). The
digitalisation programme continues to deliver new systems
and enhancements across our businesses, and significant
milestones were achieved in the year.
The progress of our cost:income ratio over the last five years is
set out below.
Underlying
Statutory
%
%
Year ended 30 September
2024
36.1
36.1
2023
36.6
36.6
2022
39.4
38.9
2021
41.7
41.7
2020
43.0
43.0
Our cost:income ratio continued its improvement over the year,
despite the level of expenditure incurred to develop the business.
This was partly a result of margins widening, but also as a result of
cost control actions which we took last year.
Cost control is a strategic priority, but we recognise that our cost
base must also adapt to deliver our 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 competitive markets for the
kinds of specialist people and services that we need to operate.
Impairment provisions
The impairment charge recognised in our accounts for the year
ended 30 September 2024 was £24.5 million, an increase of
36.1% (2023: £18.0 million). This increase is largely a result of a
higher incidence of problem cases in our development finance
operation, together with an increased number of receiver of rent
appointments on legacy buy-to-let mortgage cases.
Apart from these cases, performance of our loan books
has remained strong, with arrears marginally increased,
but, in common with other lenders, not to the extent some
commentators had predicted for the market. The current
economic outlook also benefits our impairment position,
with inflation at a lower level than seen recently and interest
rates predicted as more likely to fall than rise, meaning future
affordability concerns are allayed to some extent.
However, it is not clear to what extent the rises in consumer and
business costs over recent years have fully impacted on credit
quality, and with new administrations in place or incoming in the
UK and USA, amongst other countries, the present, generally
positive, economic outlook may be subject to new pressures.
Our 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 our 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.
The progress of the impairment charge and cost of risk in the last
five years is set out below.
Charge /
(release)
Cost
of risk
£m
%
Year ended 30 September
2024
24.5
0.16
2023
18.0
0.12
2022
14.0
0.10
2021
(4.7)
(0.04)
2020
48.3
0.39
The fluctuations shown above demonstrate the impact of various
sources of economic and political uncertainty on our credit
profile as they arise 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, September 2022 saw the beginning of a period
of much higher interest rates and significant inflation, leading
to significantly increased economic headwinds, the impacts of
which continue to be felt.
Multiple economic scenarios and impacts
Statistical models are used to support management’s estimation
of ECLs, where possible. These are kept under review and
regularly updated. The models project losses for our 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, generally
because the number of accounts is small and historic data
insufficient for statistical forecasting methodologies to be validly
applied, we also consider the potential impact of these economic
scenarios, if this is likely to be significant. In the current
period this applied particularly to the development finance
portfolio where the potential impacts of higher build costs,
falling development values and longer project timescales were
considered in our assessment of exposures.
At 30 September 2024, there was generally more consensus
on the UK’s economic outlook than at the previous year end.
Page 43
Strategic Report
However, the majority of these forecasts remain cautious, with
a significant potential for interest rates to remain high for some
time, inflation to decline from current levels only slowly, house
prices to remain subdued and growth to remain minimal. 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.
These longer-term uncertainties include the potential for wider
geopolitical events, including the conflicts in Eastern Europe
and the Middle East, and the results of elections in the USA and
other democracies during the year, to impact further on the UK
economy. Closer to home, the detailed economic policies to be
adopted by the new UK Government, and their potential effects,
are not yet entirely clear. These factors may cause outturns to be
significantly divergent from consensus economic forecasts.
To reflect the possible range of economic outcomes, four
scenarios have been constructed for provisioning purposes,
based on a number of forecasts from public and private bodies,
synthesised to produce internally coherent sets of data. The
general trend of the central forecast follows that published by the
Bank of England in August 2024. This reflects the recent easing
of monetary policy and recovering growth. Unemployment
remains low, but trends upwards through the forecast period,
inflation is generally stable and bank rates continue to fall. House
prices, which have been more resilient than many had forecast,
continue to increase modestly. This is rather more optimistic
than the central forecast used in September 2023.
The upside and downside scenarios are derived from the
central forecast, as they have been in previous periods. The
shape of the curves representing all three scenarios are similar
across the forecast period, but the upside scenario assumes
inflation falling more rapidly, driving faster growth and enabling
the Bank of England to cut the base rate further and faster than
in the base case, while house prices recover more strongly.
Conversely, the downside case represents increased pressure
on CPI, leading to current levels of base rates persisting for
longer, with reduced economic confidence impacting on both
house price growth and unemployment levels.
The severe scenario has been derived from the most recent
Annual Cyclical Scenario (‘ACS’) published by the Bank of England,
as in recent periods. The supply shock scenario included in the
ACS published in July 2024 forms the basis for this scenario and
includes persistently high interest rates, causing a pronounced
recession impacting on growth and employment levels, with a
significant fall in house prices.
The weightings applied to each scenario have been reviewed and
revised. The consensus view for the UK economic outlook is both
more settled and more benign than it was at 30 September 2023.
However, the potential for significant downside impacts remains,
to the extent of producing substantially different outcomes. On
balance this represents an appropriate point to begin to move
back towards a more normal set of economic weightings, and the
impact of the severe scenario has been reduced. 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 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, weighting each of the
central and severe scenarios at 100%.
2024
2023
Unadjusted
provision
Cover
ratio
Unadjusted
provision
Cover
ratio
£m
£m
Weighted average
70.0
0.45%
67.1
0.44%
Central scenario
64.8
0.41%
60.9
0.41%
Severe scenario
93.9
0.59%
89.3
0.60%
Despite the economic pressures on customers during
the year, coverage levels remain similar to those seen at
30 September 2023. This will partly be a result of the stable or
positively trending scenarios which reduce predicted default rates.
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. Our models have therefore been derived from datasets
which include very few observations representative of the
current type of economic environment and little evidence on
which to base conclusions on how rapidly or severely customer
behaviour might respond to the types of economic changes we
are currently seeing.
The distribution of gross balances by IFRS 9 stage
(defined in note 22) produced by our impairment methodology
at the two most recent year ends is set out below.
2024
2023
Stage 1
93.2%
93.5%
Stage 2
4.9%
5.0%
Stage 3
1.8%
1.3%
POCI
0.1%
0.2%
Total
100.0%
100.0%
While Stage 2 cases have remained stable as a proportion of the
book, the increased proportion of Stage 3 cases shows a higher
incidence of customers impacted by the economic pressures
seen over the last two years. However, these impacts remain
modest overall.
The stability of Stage 2 is a function of the assumption of
future stable or slowly declining interest rates and inflation,
and the current relatively low level of arrears. This reduces the
calculated provision and management must assess whether the
result is appropriate, given the economic outlook, or whether
adjustments over and above our normal provisioning approach
are required.
Page 44
Judgemental adjustments
Where key economic measures are at materially different
levels to those which existed when the impairment models
were created, management may add judgemental overlays to
calculated impairment levels. These are required where it is
considered, taking account of all available evidence, that current
or anticipated levels of delinquency and / or loss in the modelled
portfolios could exceed those implied by the model outputs, or
where the normal methodology for provisioning on non-modelled
books does not cover all identified risks.
Examples of such circumstances include the period of the Covid
pandemic and its aftermath, and the recent period of rapid growth
in interest rates and inflation. Whilst the current economic outlook
at 30 September 2024 appears more stable than was seen in
those periods, the cumulative effect of a longer period of elevated
interest rates is also potentially challenging for the effectiveness
of the provisioning models, and we have seen particular
challenges in the cohort of development finance lending approved
just before inflation and interest rates started to rise.
Having reviewed these potential additional impacts we have:
• Maintained the adjustment in our buy-to-let mortgage book
at £3.0 million, to allow for the type of idiosyncratic impacts
affecting legacy portfolios which we saw in the year and which
might not be handled well by the approach in the model
(2023: £3.0 million)
• Maintained the £1.0 million adjustment in our motor finance
book while the ability of our new motor finance model, which
was introduced towards the end of the year, to respond well to
the current economic situation is assessed (2023: £1.0 million)
• Reduced the adjustment to the modelled SME lending
outputs to £1.0 million, as a result of the stable performance
in the year and satisfactory performance of the new model
introduced in 2023 (2023: £2.5 million)
• Applied a temporary uplift to provision floors in the
non-modelled development finance book, to allow for
increased incidence of distress in projects planned and
underwritten before the impact of rapidly increasing
construction costs and interest rates in the period beginning
in late 2022. This increased the impairment provision by
£1.5 million (2023: £nil)
The judgemental adjustments generated by this process,
analysed by division are summarised below.
2024
2023
£m
£m
Mortgage Lending
3.0
3.0
Commercial Lending
3.5
3.5
6.5
6.5
We 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.
Ratios and trends
The results of the ECL modelling and other provisioning,
including the impact of the economic scenarios described above,
together with the adjustments adopted to address uncertainties
over the future performance of accounts, has resulted in the
overall provision amounts and coverage ratios set out below.
2024
2023
2022
£m
£m
£m
Calculated provision
70.0
67.1
48.5
Judgemental adjustments
6.5
6.5
15.0
Total
76.5
73.6
63.5
Cover ratio
Mortgage Lending
0.26%
0.33%
0.31%
Commercial Lending
1.77%
1.56%
1.34%
Total
0.48%
0.49%
0.44%
Following the judgemental adjustments, these ratios remain
broadly in line with those seen in recent periods, although within
the numbers the provision on most performing portfolios has
reduced slightly, with more of the provision attributable to the
increased value of credit impaired cases.
These coverage levels remain higher than the 0.34% coverage ratio
observed in September 2019, before the outbreak of the pandemic,
in what was a lower interest rate environment. Further, this level
was recorded when there was less security cover in the buy-to-let
loan book, with the average loan-to-value ratio of 67.4% at that time
being higher than the 30 September 2024 value of 62.8%
(2023: 62.8%).
Future levels of coverage will be dependent on the performance
of the UK economy and its impact on our business, our
customers and their markets.
Fair value movements
The fair value line in our profit and loss account primarily
reports fair value movements arising from interest rate hedging
arrangements. These are put in place to protect margins when
fixed interest rate products are offered in either our savings or
lending markets, enabling us to continue to honour offers to
customers in the event of significant interest rate movements.
We also hedge certain fixed rate investments and liabilities.
We have a cautious approach to interest rate risk and consider
our exposures to be appropriately economically hedged. No
speculative derivative trading is undertaken, 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 such movements are essentially considered
to represent 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
was amplified by the approach adopted to pipeline hedging
at that time and the retention strategy applied to five-year
fixed loans maturing in that period, which meant that
the pipeline was larger and of longer duration
(and hence more exposed to movements in rates)
than at most other times.
Page 45
Strategic Report
In the year ended 30 September 2024 the unwinding of this
large gain, which had begun in 2023, continued to impact the
fair value line. Coupled with the accounting hedge
ineffectiveness in the period and the effect of new pipeline
hedges, this resulted in a loss on fair value items of
£38.9 million being reported (2023: £77.7 million).
We have £126.6 million (at net notional value) of derivative
contracts at 30 September 2024 which are unmatched for hedge
accounting, although form part of the economic hedging position
(2023: £14.6 million). These derivatives must be carried at a fair
value based on expected cash flows over their contractual lives.
As a substantial proportion of this balance has a lifetime of two
to five years, volatility in the interest rate markets can generate
substantial month-to-month fluctuations in this valuation which
have to be included in profit.
Tax
We operate only in the UK and materially all profit falls within
the scope of UK taxation. The standard rate of corporation tax
applicable to the business in the year was 25.0% (2023: 22.0%),
with the surcharge applicable to the profits of Paragon Bank at
3.0% (2023: 5.5%). The effective tax rate applied to our profits
has increased from 23.0% in 2023 to 26.7% during 2024, with the
increase principally relating to changes in UK tax rates (note 13).
As the bulk of the fair value loss arose in Paragon Bank, the
banking surcharge means it is subject to a higher rate of tax than
the overall effective rate for the Group. This meant the effective
tax rate on underlying profit was 27.4% (2023: 23.9%), with the
change mostly driven by the increased UK corporation tax rate
(Appendix A).
Results
Profit before tax for the year on the statutory basis was
£253.8 million (2023: £199.9 million), with the £15.1 million growth in
profit at the underlying level enhanced by a £38.8 million reduction
in the loss on fair value items. Profit after tax was increased by
20.9% at £186.0 million (2023: £153.9 million). In addition, other
comprehensive income of £5.4 million was recorded, relating to
valuation gains on the defined benefit pension scheme (the ‘Plan’).
Consolidated accounting equity at the year end, after
dividends and share buy-backs was £1,419.5 million
(2023: £1,410.6 million), and consolidated tangible equity was
£1,248.0 million (2023: £1,242.4 million), representing a tangible net
asset value of £6.11 per share (2023: £5.79 per share) and
a net asset value on the statutory basis of £6.95 per share
(2023: £6.57 per share) (Appendix E).
A4.4.2 Assets and liabilities
The main driver of movements in our balance sheet is the size
and composition of the loan book. This, together with policies on
capital and liquidity, determines our funding requirements and
hence the level of our liabilities.
The loan portfolio grew by 5.6% year-on-year during 2024, with
growth in both Mortgage Lending and Commercial Lending.
More detail on these movements is given in the business review
in Section A4.1.
Our assets and liabilities at the end of the financial year are
summarised below.
Summary balance sheet
30 September 2024
2024
2023
2022
£m
£m
£m
Investment in customer loans
Mortgage Lending
13,415.7
12,902.3
12,328.7
Commercial Lending
2,289.8
1,972.0
1,881.6
15,705.5
14,874.3
14,210.3
Hedging adjustments
(75.2)
(379.3)
(559.9)
Derivative financial assets
391.8
615.4
779.0
Cash and investments
2,952.8
2,994.3
1,930.9
Pension surplus
22.2
12.7
7.1
Intangible assets
171.5
168.2
170.2
Other assets
101.4
134.6
116.0
Total assets
19,270.0
18,420.2
16,653.6
Equity
1,419.5
1,410.6
1,417.3
Retail deposits
16,298.0
13,265.3
10,669.2
Hedging adjustments
16.7
(30.9)
(99.7)
Other borrowings
1,005.3
3,086.4
4,007.2
Derivative financial liabilities
99.7
39.9
102.1
Other liabilities
430.8
648.9
557.5
Total equity and liabilities
19,270.0
18,420.2
16,653.6
Funding structure and cash resources
Our retail and wholesale funding balance increased by 5.8%
during the year, a similar increase to the growth in the loan book.
The year-end liquidity buffer had been diversified to include
investment securities for the first time. At 30 September 2024,
£427.4 million of government and commercial bonds were held
(2023: £nil). Overall, the total amount of cash and investment
securities held remained broadly similar across the period,
reducing by only 1.4%.
The proportion represented by retail deposits increased to 94.2%
in accordance with our long-term funding strategy (2023: 81.1%),
with wholesale borrowings paid down, including substantial early
repayments of Bank of England TFSME funding. Movements in
funding balances are discussed in more detail in Section A4.2.
Derivatives and hedging
The derivative assets and liabilities 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.
Page 46
During the year, expectations of future interest rate increases
moderated, and to some extent reversed, resulting in a reduction
in the derivative valuations in the balance sheet, with swap assets
falling by 36.3% in the year to £391.8 million (2023: £615.4 million)
and swap liabilities increasing by 149.9% to £99.7 million
(2023: £39.9 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 £304.1 million in the year and that in liabilities by
£47.6 million.
Pension obligations
The IAS 19 valuation surplus on our defined benefit pension
scheme increased from £12.7 million at the start of the year to
£22.2 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 decrease in
the discount rate used in evaluating scheme liabilities, based
on long-term corporate bond yields, decreasing from 5.55% to
5.10%, and the assumed rate of RPI inflation, based on gilt yields
decreasing by a lower amount, from 3.25% to 3.05%. These
movements led to a pre-tax valuation gain of £7.2 million being
booked in other comprehensive income (2023: £2.4 million).
Other assets and liabilities
Other assets decreased from £134.6 million to £101.4 million in
the year, largely a result of the replacement of the CRD scheme,
which required regulated banks to place a designated non-interest
bearing deposit with the Bank of England, the income from which
would fund the central bank’s activities. This was replaced during
the period with the Bank of England Levy, as noted above. A CRD
asset of £38.0 million had been held at 30 September 2023 with
none held at the 2024 year end. This reduction in sundry assets
was partly offset by a higher level of accrued interest income,
which increased by £6.5 million as a result of higher interest rates.
Other liabilities reduced from £648.9 million to £430.8 million at
30 September 2024. This was principally a result of the reduced
value of collateral deposits received against swap assets, which
fell by £279.8 million, reflecting the reduced amount outstanding.
This was offset by an increase of £38.5 million in accrued interest,
as funding balances and rates continued to rise.
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.
2024
2023
£m
£m
Segmental profit
Mortgage Lending
257.7
246.6
Commercial Lending
88.3
113.2
346.0
359.8
Unallocated central costs and income
(53.3)
(82.2)
292.7
277.6
Central administration and funding costs, principally the costs of
service areas, establishment costs and bond interest have not
been allocated, nor has interest income from surplus liquidity.
The increase in unallocated interest in the year, a result of higher
interest rates, year-on-year, is the main cause of the change in
unallocated balances.
Mortgage Lending
The Mortgage Lending division continues to perform
well and grow its NIM, with margin on fixed rate accounts
protected by hedging arrangements. Net interest grew by
1.7% in the year to £282.3 million (2023: £277.6 million) with
the average net loan balance growing by 4.3% to £13,159.0 million
(2023: £12,615.5 million). NIM decreased to 215 basis points
(2023: 220 basis points), as a result of the tightening in retail
funding costs in the period.
Overall credit performance of the book has worsened slightly
in the period, with an increase in properties placed under the
control of a receiver of rent, although observable adverse credit
impacts have been minimal to date. Only 1.4% of the gross
loan book by value at the year end was considered to be credit
impaired (2023: 1.2%), including an increase in IFRS 9 Stage
3 cases from £142.2 million to £171.1 million, with increases
concentrated amongst realisation cases.
The charge for impairment decreased to £5.6 million in the year
(2023: £10.4 million) with the cost of risk for the year at 4 basis
points (Appendix B). The low cost of risk reflects the high levels
of security cover in the division’s portfolios.
Overall contribution from the division for the year increased by
4.5% to £257.7 million (2023: £246.6 million).
Page 47
Strategic Report
Commercial Lending
Average balances in the Commercial Lending division grew by
10.6% to £2,130.9 million (2023: £1,926.8 million), which, together
with a decrease in NIM from 704 basis points to 586 basis points,
generated a decrease of 8.0% in net interest to £124.8 million
(2023: £135.7 million). This reflected changes in the proportion of
segmental income generated in each of the division’s operations,
coupled with the increase in average funding costs, seen across
the business.
Impairment charges for the period, at £18.9 million, had increased
significantly from the 2023 financial year (2023: £7.6 million), with
this increase concentrated in the development finance operation.
Credit performance in the year remained largely stable in the
motor finance and SME lending elements of the portfolio, with low
arrears and relatively few defaulted cases, although we maintain a
cautious attitude towards credit prospects for the sector.
5.1% by gross value of cases in the segment’s portfolio were
considered to be credit impaired at the year end compared to
3.5% at the previous year end. However, a substantial amount
of this balance relates to development finance projects, where
security cover is generally high. In development finance an
increasing number of watchlist cases have been recorded, with
a limited number encountering significant distress, contributing
£47.3 million of the £48.7 million increase in IFRS 9 Stage 3
balances in the year. Losses in this business are highly cyclical and
generally linked to idiosyncratic factors or economic shocks and
these losses follow several years where loss levels were minimal.
These factors led to a reduction in segmental profit of 22.1% to
£88.3 million (2023: £113.3 million).
A4.5 Operations review
Our strategy relies on sector knowledge, specialist systems
and the careful management of risk across all our operations
to meet our goals. Our strategic pillars include maintaining a
customer-focussed culture and a dedicated team, highlighting
the importance of our experienced, skilled and engaged
workforce facilitated by effective systems and detailed analytics
in delivering our purpose.
This year has seen continued progress in our long-term
programme to enhance processes and technology, with significant
elements either completed in the period or nearing completion
including major infrastructure upgrades and the roll-out of the new
mortgage origination platform. The enhancements completed
address both internal systems and those facing customers and
business partners, and enhance our risk management framework
and support our digitalised vision for our future operating model. At
the same time we continue investing in our people and processes
to ensure the effectiveness of our operations going forward.
This continuing prioritisation ensures we maintain a firm
foundation for building the business and delivering our strategy
into the future.
A4.5.1 Operations
Our workforce is just over 1,400 people, most of whom work
on a hybrid basis, dividing their time between home-based
working and one of our office locations. The delivery of our
strategy requires that we optimise our IT systems and physical
infrastructure to provide the best level of service to customers,
and a rewarding working experience for employees.
Over recent years we have been undertaking a major programme
of systems re-engineering covering our IT infrastructure and
our loan origination and administration systems, to support our
digitally enabled strategic vision.
This year we continued to make progress with this programme,
with several major milestones being achieved. In December our
IT mainframe systems were migrated to a cloud-based solution,
meaning that over 90% of our major IT applications are now
cloud-based. Our largest business area, mortgage lending, saw
a major upgrade to its operational platform in the second half
of the year. The new mortgage system offers more functionality
and better service to our mortgage brokers and a better user
experience for our people, as well as increasing process efficiency.
While the main system has now been launched, the rollout to the
full broker population continued into the new financial year, and
work to deliver further enhancements continues.
The launch of the new origination platform for mortgages
means that new cloud-based, digitally-advanced application
and underwriting platforms have been rolled out for three of
our principal lending areas: buy-to-let mortgages, SME lending
and development finance. Each represents a major step in our
digitalisation journey, and with related staff training and process
enhancements, a substantial investment in the future of
our businesses.
Customer take-up of the buy-to-let self-service portal,
introduced in 2023, has increased in the period. This enables
customers to generate customised statements and update
their personal details, amongst other tasks, and has resulted
in a reduction of approximately 25% in calls to the operation’s
contact centre.
Further enhancements were also rolled out to the new
SME lending system, enabling a more seamless application
process and swifter decisions, while further improvements to
telephony, financial crime risk management, payments and
customer self-service applications were also put in place,
enhancing efficiency and the experience for internal and
external users.
As progress is made on the digitalisation roadmap, work
continues to deliver further enhancements for loan and savings
customers, business partners and employees, which will come
online in the coming periods.
We have made no significant changes in our approach to
working, with our hybrid working model remaining in place and
office occupancy remaining at similar levels to previous periods,
with most people spending just over two days a week in an office
location. This has continued to evolve in the year, with learnings
being used to refine the approach. As a specialised business we
believe that a ‘one-size-fits-all’ approach to working is unlikely
to deliver the best results across our different operations, and
business areas continue to adopt working methods which suit
the needs of their people, processes and customers, investing in
appropriate system enhancements as required.
Our office and other sites are valuable hubs where collaboration,
communication, development and the growth of our culture
and identity can be fostered, but we recognise that they must
adapt as the business evolves. During the period we continued
to review our physical footprint to ensure best use is being
made of the estate. As a result, we were able to consolidate our
Solihull-based staff in one location, while approving a long-term
plan to improve the functionality, working environment and
environmental impact of our Solihull headquarters.
Page 48
As well as providing an enhanced working environment for our
people, these developments should provide both financial and
sustainability benefits and, alongside our relatively modern
London and Southampton sites, deliver facilities well-suited to
our hybrid working approach.
The operational resilience of the business remains an important
area of focus for us and our regulators. During the year 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.
We maintained our focus on high-quality customer service
throughout the period. Regular surveys are conducted with
customers and business introducers to monitor satisfaction,
which have remained positive (as set out in Sections A4.1 and
A4.2). To ensure this continues, we reviewed the structure of
our main operational functions, reorganising reporting lines to
create synergies and share specialist expertise. Together with
enhancements to telephony and related systems, this delivers
a function well able to support our future customer
service aspirations.
The Financial Conduct Authority (‘FCA’) Consumer Duty
expanded to cover those of our legacy products which are within
the scope of the Duty from July 2024. Building on the successful
first phase introduction during 2023, which involved significant
work to embed the Duty’s requirements into our systems and
processes, the further work carried out in the year meant that
we were able to comply with the wider scope requirements
by the FCA deadline. This was confirmed by our first formal
Consumer Duty Annual Report, which was presented to, and
approved by, the Board in the year.
We continue to monitor progress on the FCA Review of Motor
Finance Commissions, which was launched in the year, together
with associated legal cases, including the current judicial review
relating to determinations made by the FOS, and the Court of
Appeal decision in the cases of Johnson, Wrench and Hopcraft.
While we were not involved in the review directly, the cases
currently in progress have a potentially significant impact across
the industry as a whole. While we have received an increased level
of contact from customers as a result of the publicity surrounding
this issue, this has remained within manageable limits. However,
we do have contingency plans in place to ensure that if volumes
do grow, all customers can be appropriately dealt with.
A4.5.2 Governance
We believe that high standards of corporate governance
are fundamental to the effective execution of our strategy.
The Group is subject to the 2018 UK Corporate Governance
Code (the ‘Code’), and we have continued to comply with the
Code’s principles and provisions throughout the period.
A new edition of the Code, most of which will apply to us from
our year ending 30 September 2026 (with provisions relating
to financial control applicable from the 2027 financial year) was
published in January 2024. We note the revisions made by the FRC
to its original proposals, and work to respond to these changes is
already in progress.
Our annual general meeting (‘AGM’) was held on 6 March 2024.
All resolutions were carried comfortably with at least 95% of
votes in favour, and the Board extends its thanks to those
shareholders who participated. Detailed results can be found on
our corporate website.
During the year, the Audit Committee conducted a tender
process in respect of the appointment of external auditors
with effect from the financial year ending 30 September 2026.
All of the six major audit firms were considered in the process
with opinions being canvassed from shareholders and their
representatives during our normal investor relations meetings.
Following detailed consideration of the various firms’ proposals
the Committee recommended the appointment of Deloitte LLP
in place of KPMG LLP, the current external auditor, once they
have completed their tenth year in office, following the signing
of the 30 September 2025 accounts. The Board accepted this
recommendation, subject to shareholder approval, which will be
sought at the 2026 AGM.
More details on our corporate governance arrangements are set
out in Section B.
Board of directors and senior management
As previously announced, Tanvi Davda, an independent
non-executive director, succeeded Hugo Tudor as Chair of
the Remuneration Committee on 7 December 2023. Hugo
remains on the Board of Directors and has been considered
a non-independent director with effect from the conclusion
of the AGM on 6 March 2024. Hugo resigned from the
Audit, Remuneration, Nomination and Risk and Compliance
Committees on this date. The Board currently comprises two
executive directors, six independent non-executive directors,
one non-independent non-executive director and the Chair, who
was considered independent on appointment.
Following the year end, on 1 November 2024, Tanvi also joined
the Audit Committee, following consideration by the Nomination
Committee of the appropriate level of resource required to fulfil
its duties, and the most appropriate way to deliver this.
At 30 September 2024, our Board included four female directors,
comprising 40% of its membership, with one of the senior
roles designated by the FCA held by a woman, Alison Morris,
the Senior Independent Director. Half of the Board’s principal
committees are also chaired by female directors.
On 13 August 2024 Louisa Sedgwick was promoted to the role
of Managing Director – Mortgages. Louisa is a well-known and
highly respected figure in the mortgage industry, with more than
30 years’ experience in leading institutions. She was most recently
Paragon’s Commercial Director of Mortgages and has overseen
the restructuring of the sales function and product offering in the
division. She replaces Richard Rowntree, who has accepted an
appointment elsewhere in the financial services sector.
During April 2024 Derek Sprawling, the Group’s Savings Director,
was appointed as Managing Director – Savings. Derek has been
part of the development of our savings proposition from its
early days, since joining the business in 2014. Michael Helsby,
who had been both Managing Director – Savings and Strategic
Development Director, retains his strategy role.
Both Louisa and Derek joined the Executive Performance
Committee and Executive Risk Committee. This increases the
membership of both committees to twelve at the year end, with
25% of members female.
In a reorganisation after the year end, Sarah Mayne, the Chief
Internal Auditor, joined the committees as a member, having
previously attended their meetings as an observer. Sarah’s
appointment brings the number of members to thirteen, and the
percentage of female members to 30.8%.
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Strategic Report
Remuneration policy
The last triennial review of our director’s remuneration policy
was approved by the 2023 AGM, and a further approval at
the 2026 AGM will be required. We will therefore be seeking
input from shareholders and other interested parties over the
course of the forthcoming financial year as our Remuneration
Committee develops a revised policy to be presented with the
2025 Annual Report and Accounts. We would urge stakeholders
to participate in this process, if invited, and representations can
be made to the Remuneration Committee Chair through the
office of the Company Secretary.
A4.5.3 Management and people
Over 1,400 people work in our business across the UK, with the
majority based at our Head Office in Solihull, but with hybrid
working arrangements. People are our most important asset, and
we are proud to be accredited as a platinum employer under the
Investors in People programme. We focus on providing people with
opportunities for varied and rewarding careers, offering extensive
training and coaching opportunities to enable them to meet their
own ambitions, whilst delivering on our strategic objectives.
Conditions and culture
We continue to refine our operating model, streamlining
and simplifying our organisational structure, ensuring that
our businesses are best positioned to continue to focus on
providing good outcomes for customers, while protecting and
developing specialist skills. We focus on ensuring the resourcing
requirements of potential future challenges and opportunities
are met, while ensuring that we can operate in the most
cost-efficient way possible.
Whilst we seek to avoid redundancies wherever possible,
consultation exercises with a small number of employees in
different business areas were entered into during the year. Some
affected employees were redeployed to alternative roles, whilst
a number left the business on a voluntary basis, minimising
compulsory redundancies.
During the period, working practices continued to be enhanced
to embed the Consumer Duty, contributing to driving good
customer outcomes. This was supported by changes in our
individual performance management approach, where formal
performance ratings have been removed and the focus of
performance conversations is based on five priority areas:
customer, risk, commercial, people, and sustainability.
We continually strive to build an engaged workforce and
encourage a culture where employees are comfortable providing
feedback. Since April 2024, surveys have been used to gather
feedback on the experiences of new hires and leavers as part
of a larger project to understand particular elements of the
employee lifecycle. Whilst still in their early days, these surveys
have produced a strong set of positive indicators, with 96% of
all new employees stating they are proud to work for the Group.
The survey asks for employees’ feedback on topics such as
inclusion, management and leadership, access to development
opportunities, and views of our commitment to delivering good
customer outcomes. It was particularly pleasing that 100% of
new employees agreed that we are committed to delivering a
good outcome to customers. Both leavers and joiners described
the business as being a welcoming, supportive, inclusive and
professional employer.
With an employee attrition rate, excluding redundancies, of
10.8% (2023: 11.4%), our retention levels continue to be better
than the national average. These high levels are further bolstered
by 58.9% of employees achieving over 5 years’ service, 12.5%
achieving over 20 years with the Group and 3.7% achieving over
30 years’ service.
Our employees continued to show flexibility during the year
with many undertaking secondments and transfers to different
areas of the business to ensure that the needs of the customers
continued to be appropriately met.
We retain our accreditation from the UK Living Wage Foundation
and minimum pay exceeds the levels set by the Foundation.
The minimum wage paid to our employees increased to
£12.69 per hour from 1 October 2024, with a higher level for
London-based employees.
The profit related pay scheme continues to provide
employees with a benefit linked to our financial performance.
In the current year, as a result of the 2023 profit, an additional
£2,400 was paid to all full-time employees below senior
management level. Employees also benefitted in the year from
our maturing 2021 three-year Sharesave scheme, being able to
buy shares with a market value in the region of £7.00 each for an
option price of £4.24.
Equality and diversity
Continued progress has been made on our equality, diversity and
inclusion (‘EDI’) agenda during the year, and in September 2024,
we launched an updated equality, diversity, and inclusion strategy
to employees, with three main focus areas: gender, ethnicity, and
socio-economic background (‘SEB’). The EDI Network continues
to inform our plans in this area, and is sponsored at executive level
by Ben Whibley, the Chief Risk Officer, who succeeded Richard
Rowntree in this role in the year.
The drive to capture diversity data for as many employees
as possible continues, with fresh initiatives in the year, and
by September 2024, 80.9% (2023: 76.8%) of employees had
completed a diversity profile on the HR management system.
The collation of this data from employees provides us with an
enhanced ability to monitor and improve the diversity of the
workforce going forward.
We remain committed to improving workforce diversity and
ensuring that talented people from all backgrounds can reach
their full potential by breaking down barriers to progression.
Progress towards our Women in Finance target of 40.0% female
representation in Senior Management roles by December 2025
continues, with female representation at 30 September 2024
at 37.9% (2023: 37.9%). Louisa Sedgwick’s appointment to the
Executive Committee in August 2024, as Managing Director
of our Mortgage Lending business was also notable, with
Louisa being the first female to hold executive committee level
responsibility for an income-generating business area. This
internal appointment also demonstrates the effectiveness of our
succession planning strategy.
In line with the expectations of the Parker Review, we have
committed to achieve 5% ethnic minority representation in
Senior Management roles by December 2027. Ethnic minority
representation in senior leadership roles currently stands at
1.7%, so developing the strength of our talent pipeline to provide
candidates for these roles in future, and critically reviewing
external recruitment procedures, will be central to achieving this
stretching target.
To support its efforts to improve socio-economic equality we
have partnered with Progress Together to participate in the
Accelerated Progress Programme, a cross-company scheme.
This programme is uniquely designed to develop, empower and
unlock the potential of high-performing middle managers from a
low SEB.
Page 50
A4.5.4 Sustainability
Sustainability, including resilience in the face of climate change
risks, is core to our 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 our business and means:
• Delivering sustainable lending through the design of products
and the choices of sectors in which to operate
• Reducing the impact of our operations on the environment
• Ensuring we have a positive effect on our stakeholders
and communities
Sustainability issues are coordinated on a group-wide basis
by the Sustainability Committee, which reports directly to
the Executive Performance Committee. The Sustainability
Committee is responsible for driving the Group’s initiatives on
climate change and progressing other projects in the field of
sustainability, ensuring that information on all such initiatives is
shared across our businesses and facilitates the development of
a coordinated and proactive approach.
During the year the Committee has overseen a sustainability
materiality exercise, facilitated by third party experts. The
exercise prioritised key sustainability areas ensuring our strategy
and reporting remain current and up to date.
In December 2024 we will publish our fourth Responsible Business
Report, our annual sustainability report. This provides more
detailed information on sustainability initiatives and demonstrates
how sustainability is embedded. It can be found, alongside other
information and documentation relevant to ESG issues, on our
corporate website at www.paragonbankinggroup.co.uk.
Climate change
We have made a commitment to achieve net zero in line with,
and in support of, UK Government commitments. In doing so
we recognise that net zero cannot be achieved by any entity
in isolation and therefore our commitment is dependent on
appropriate government and industry support and action.
As members of Bankers for Net Zero (‘B4NZ’), we are active
in providing input into the wider efforts of the financial
services industry to creating a clear pathway to support the
decarbonisation of the UK economy.
We have designated climate change as a principal risk within our
Enterprise Risk Management Framework. This means that our
response to climate change issues is considered within our overall
strategy at board level. These risks fall into two main groups:
• Physical risks (which arise from the impact of more
frequent or severe weather-related events on our business or
our customers)
• Transitional risks (which come from the speed, nature and
level of regulations designed to promote 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 of our business
lines as part of strategy deep dives which feed into the annual
board strategy event and into our business planning process.
No new material risks related to climate change were identified
during the annual risk reviews, carried out on each key business
area supported by the ESG and Credit Risk teams. The findings
have been used to inform this year’s climate change scenario
analysis exercise and to identify the key drivers of our 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, which we
are represented on, and incorporated within the broader 2024
ICAAP analysis.
As part of the ongoing development of our climate-related
reporting, we have enhanced our analysis of financed emissions,
and a more detailed emissions balance sheet is being presented
in the 2024 Annual Report and Accounts (Section A6.4).
Developments within business lines which contribute towards our
climate risk strategy are set out in the relevant business reviews.
As a financial services provider the direct environmental impact
of our operational footprint is considered low. However, we
recognise the importance of reducing the impact our operations
have on the environment. We have committed to reduce our
operational footprint to net zero by 2030 and it is now reported
on a quarterly basis to the Sustainability Committee, with a
summary report escalated to the Board.
In support of this net zero target, certified carbon offsets
equivalent to our operational footprint for the twelve months
ended 30 September 2024 have been purchased, in the same
way as for the two preceding financial years. We intend to repeat
this for each future year, but accept that reducing impacts is
preferable to offsetting, where possible.
Initiatives to reduce operational environmental impacts during
the year include:
• Initialising a project on the refurbishment and
decarbonisation of our Solihull head office building based on
the decarbonisation assessment delivered during 2023.
• Centralising Solihull-based employees in the head office
building, following changes to the working environment and
building renovations. The relocation of staff has facilitated a
reduction in operational emissions, while also delivering other
benefits, such as enhanced opportunities for collaboration
and for building our culture and communities.
• Continuing to electrify our company car fleet and working to
reduce unnecessary business travel. At 30 September 2024,
95% of all company cars were either fully electric or hybrid
(2023: 80%). We also offer an electric car scheme via salary
sacrifice to all employees, providing those not entitled to a
company vehicle with access to lower emissions travel. These
initiatives are expected to reduce both direct and indirect
travel emissions.
• Continuing to transition our electricity supplies to renewable
or low carbon sources. During the year the proportion of our
purchased electricity certified as renewable rose to 91% from
86% in the 2023 financial year.
• Enhancing ESG due diligence at the beginning of the
relationship with new suppliers, considering climate related
targets and greenhouse gas reporting.
Social engagement
During the year, the employee-led Paragon Charity Committee
raised £49,000 for Molly Ollys, the charity chosen by employees.
Molly Ollys supports children with life-threatening illnesses and
their families and helps with their emotional wellbeing.
For the financial year ending 30 September 2025, Guide Dogs
has been selected as the beneficiary of the committee’s
fundraising activities.
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Strategic Report
Our employee volunteering initiative also continued to make
an impact in our communities during the year. Employees are
entitled to an annual paid volunteering day, and opportunities
offered during the year have focussed on supporting people who
are experiencing poverty, providing educational opportunities for
children and young people and improving the local environment.
These have included initiatives building on long-standing
relationships with charities and schools.
Engagement in the volunteering programme across all our
locations has remained stable this year, with the number of
volunteer days completed in the financial year totalling 460
(2023: 469).
Customer experience
We are committed to delivering good customer outcomes
and continue to find ways to enhance the customer journey
and experience in all our operations. During the year our
comprehensive insight programme has supported the updating
of communications materials, making sure they are as clear,
accessible and understandable as possible for all customers,
including those in vulnerable circumstances. The programme
also facilitated updates of our customer websites and the
simplification of product ranges offered, all aimed at improving
the wider customer experience. Our internal Customer
Vulnerability Awareness Group continues to raise awareness
around vulnerabilities, making sure that impacted customers are
considered throughout every stage of their financial journey.
The Customer and Conduct Committee monitors complaint
volumes, identifies any trends and makes sure issues are
addressed and lessons learnt, and throughout the year
complaint metrics have remained positive, excluding the effect
of motor finance related cases.
A4.5.5 Risk
The effective management of risk remains crucial to the
achievement of our strategic objectives. Our risk governance
framework is designed around a formal three lines of defence
model (business areas, the risk and compliance function and
internal audit), which is supervised at board level.
Risk environment
The risk landscape has shifted considerably since the end of 2023.
Certain challenges which we face have remained constant, others
have receded, whilst new threats have emerged which impact on
our ongoing planning and approach to risk management.
The evolving nature of global, national and sectoral risks requires
us to monitor the environment proactively to ensure we remain
responsive in reacting to emerging threats and adjust our
assessment and management of known risks as their impact
changes. We continue to rely on our Enterprise Risk Management
Framework (‘ERMF’) to ensure that new and developing risks are
promptly identified, assessed and managed, with appropriate
escalation and oversight provided. We are committed to ensuring
that our business remains resilient in the face of such challenges
and is able to respond in an agile manner.
The importance of the ERMF has been evident throughout the
year as we have navigated the ongoing geopolitical and economic
threats that have impacted the UK through the continuing
cost-of-living challenges and high costs of doing business. Whilst
inflationary pressures have eased somewhat, and interest rates
have stabilised and are now on a downward trajectory, there is
still considerable uncertainty as to what the longer-term path and
timescale looks like. We remain cautiously optimistic, but continue
to assess a full suite of potential scenarios as part of our ongoing
financial and operational planning.
Whilst prospects of a prolonged recession seem now to have
diminished, the new UK Government has only been in office for a
few months and its full agenda and detailed policies are yet to be
clarified. Further detail was provided in October’s budget, but it is
already clear that despite the improving situation, the Chancellor
considers her policy options to be constrained by legacy issues.
The detailed longer-term impact of this is yet to be seen and we
continue to monitor developing initiatives closely to assess any
impacts on our activities.
Aside from economic policy, the UK Government has already
stated that it intends to make reforms in the private rented
sector through its ‘Renters’ Rights Bill’, including ending ‘no fault’
Section 21 evictions and introducing a ‘Decent Homes Standard’
for rental homes. We continue to engage with the government,
both directly and in conjunction with trade bodies, on how this
can be practically implemented, building on work carried out on
earlier proposals made by the outgoing UK Government. At the
same time we maintain our focus on how these proposals may
impact the risk profile of our buy-to-let portfolio.
In addition to the domestic landscape, 2024 has seen significant
global change of which the potential impacts are yet to be fully
determined. The results of the US presidential election which
took place in November 2024 will undoubtedly have far reaching
economic impacts beyond the US borders and the year has also
seen political change across a range of other democracies.
We continue to monitor the ongoing impacts of the armed
conflicts in Ukraine and the Middle East, where the situation
remains highly uncertain. Given the unfolding nature of these
events, their full potential impacts on the UK economy remain
unclear and may be wide-ranging and varied, depending on the
extent of direct UK involvement. We are keeping a close watch
on how these situations develop and continue to evaluate how
they may impact our risk profile, either by influencing macro-
economic behaviours or in areas such as global supply chain
disruption, physical security and increased cyber threats.
Despite the significant challenges these geopolitical and economic
threats bring to the overall operating environment, our businesses
continue to perform positively. Whilst these issues continue to
develop and demand ongoing vigilance, we are well-placed to
manage these and other risks as we have shown through our
approach to the significant and varied challenges of recent years:
• Interest rates are widely considered to have peaked and to
have begun a slow downward trajectory. The prevailing view is
that the outlook is more stable than at the start of the period.
However, given the higher cost environment, we continue to
closely monitor potential impacts on customers and employees
• We continue to focus on high-quality lending, applying
prudent credit policies. Actual and projected arrears trends
are assessed in setting lending criteria. However, the wider
economic challenges of recent years have yet to translate into
significant adverse performance across the lending portfolios
• Whilst the current risk profile of loans across our lending
portfolios does not indicate any noticeable signs of
significantly increased widespread financial stress, we
continue to take a forward-looking, as well as current, view
of affordability, and adjust credit policy to ensure loan
repayments are sustainable for customers where necessary:
o The credit performance of our buy-to-let lending book saw
some movement as landlords adjusted to higher interest
rates but default rates have remained broadly static. The
sustained growth in property valuations seen in the period,
coupled with very strong rental demand, provide a sound
basis for buy-to-let lending. Together with the prospects of
decreasing interest rates in the coming financial year, the
risk outlook is generally positive
o Arrears for SME lending have remained largely stable over
the year, with consistent market demand for the types
of asset we fund supporting both loan performance and
asset values
Page 52
o The development finance market has generally adjusted
to the higher costs and interest environment, with these
factored into project planning, although we have seen a
higher incidence of accounts experiencing credit issues
The availability of both labour and raw materials is also
no longer providing the level of constraint to the sector
seen in previous periods. However, the impacts of higher
costs on older inceptions and planning delays both at the
approval stage and at completion sign-off, which can lead
to extended loan periods, can erode developer profitability.
The strength of the underlying property values however
remains firm and provides a ready exit for developers
• We take our responsibilities in respect of customers
in vulnerable circumstances extremely seriously and
continue to ensure that, where appropriate forbearance
solutions are necessary, these are tailored to individual
customer circumstances and aligned to regulatory
guidance and expectations
Risk management
Our risk management framework remains core to the effective
identification, assessment and mitigation of risks and level
of maturity around risk understanding across our businesses
continues to deepen and improve.
We have invested significantly in our risk management capability
since the inception of the current ERMF in 2021, with focus on
improved design and enhancements to the risk toolkit to ensure
that the nature of risk is well-understood, accountabilities for
risk management are embedded in day-to-day operations and
material risk issues are promptly identified and escalated. By
ensuring that risk management remains a core discipline across
all business lines and support functions, we maintain the ability
to manage all categories of risk and can respond to challenges
in an agile and proportionate way. The well-understood ERMF
enables us to manage all categories of risk and further mature
our overall risk approach ensuring that risk considerations
remain central to day-to-day and strategic decision making.
Whilst the ERMF has been successfully rolled out and
embedded across our businesses, continuing development,
ensuring it remains relevant and aligns to our strategic
aspirations, are core to its ongoing effectiveness. During the year
this has included the refreshment of the principal risk policies
and associated appetites that provide the foundation and
framework for managing the individual risk exposures. Significant
work has also been undertaken in scoping the requirements
for an improved risk and compliance IT system. This will better
provide an automated solution to support the functioning of the
ERMF, the user community and to further improve the analysis
and reporting of risk-related data, giving better insight into the
risk profile at all levels.
We are committed to the further development of the ERMF, as
necessary, to ensure it remains relevant and in line with regulatory
expectations. Regular risk maturity and risk culture assessments
provide an invaluable aid to identifying potential enhancements.
The strategy of continuous improvement is underpinned by ongoing
upskilling in the risk function, ensuring that appropriately skilled
resource is available to provide oversight and assurance around the
management of all categories of risk.
Experienced hires have been onboarded during the year into the
function which bring the advantages of further benchmarking and
wider perspectives on core risk processes such as internal control
assessments and emerging risk identification as we look to refine
these over the next twelve months.
The ERMF has performed a critical role in managing the wider
geopolitical and economic challenges which have been prevalent
during the year, and continues to do so. However, there are a
number of ongoing risk management initiatives which remain key
to the successful execution of our strategy. Good progress has
been made on these and we remain focussed on delivering these
commitments which include:
• Consumer Duty – Successfully delivering Consumer Duty rules
and requirements, meeting the regulatory deadlines for all open
and closed products and services in scope, ensuring that the
Group’s culture is driving good outcomes for its customers
• Operational Resilience – Continuous embedding of
operational resilience capabilities including addressing actions
and vulnerabilities identified in the regular self-assessment
process. This includes ongoing refinement of critical business
services and tolerances, ensuring these considerations are
embedded as both part of day-to-day operations, and as a core
principle within our digital strategy and technology roadmap
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, with clear commitments made to drive net zero
ambitions in line with wider governmental strategy
• IRB – Continuing to refine established IRB model
methodologies for the buy-to-let and development finance
portfolios, while refining the embedded overarching model risk
framework to further enhance credit risk management and
support the application process. Focus is on updating buy-to-let
models, following recent PRA binding feedback as part of the
ongoing close contact with the regulator
• Stress testing – Ongoing enhancement to stress testing
procedures to ensure the robustness of capital and liquidity
positions including further refinement of our IRB models for
buy-to-let and development finance
• 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 and in support of our commitment to further
digitalisation. As the use of artificial intelligence (‘AI’) becomes
more widely embedded, we have further formalised oversight
and governance procedures in this area to ensure that
cyber defences are not compromised whilst embracing the
possibilities that AI offers
• Third-party dependency – Further strengthening the
oversight frameworks around significant third-party relationships
as reliance on such contractors continues to increase across
the industry
We continue to monitor and focus on these initiatives to ensure the
expectations of regulators and wider stakeholders are met whilst
maintaining good outcomes for customers.
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Strategic Report
Significant and emerging risks
The principal significant and emerging risk areas expected to
impact our businesses during the coming year ending
30 September 2025 and beyond include:
• Interest rates – Continuing uncertainty over the speed and
timing of any potential future reductions in interest rates
remains at the forefront of business planning. We continue to
closely monitor UK and macro-economic trends and assess
the impact on lending and savings to ensure we are well
placed to manage the associated risks
• Motor finance commissions – We continue to monitor
the FCA’s work in relation to motor finance commissions,
and other related developments in that area. Given the
comparatively small size of the motor finance portfolio, our
expectations of exposure remain low. However, the full impact
cannot be accurately assessed in full until the FCA’s proposed
approach to such complaints is known and related legal cases
resolved. We continue to manage all complaints in line with
the regulator’s requirements
• 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
finances of individuals and corporates in the UK. We remain
committed to ensuring appropriate treatment of ongoing
arrears and the position of affected customers. Key to this will
be ensuring that treatment of customers is fair and conduct
principles remain at the forefront of all interactions
• Compliance expectations – Addressing an increasing level
of regulatory standards, where we are committed to ensuring
all areas of our businesses remain compliant. Particular
focus in the year has been on meeting extended regulatory
requirements in respect of the FCA Consumer Duty for those
remaining products in scope. Our priority is to continue to
embed the Duty within all business lines, ensuring that good
outcomes and a culture of continuous improvement remain
at the forefront of all customer interactions
• Financial crime – We continue to prioritise work in this
area and have invested heavily in ensuring that regulatory
expectations in respect of anti-money laundering and
wider financial crime control frameworks are met. There is
an ongoing programme of continuous improvement in our
financial crime technology and resources, and this remains a
key focus and consideration in our wider strategic
change initiatives
• Climate – We continue to focus on increasing our
understanding of the impact of the risks associated with
climate change and related timescales. The new UK
Government has confirmed its goal of net zero carbon by
2050, however significant uncertainty remains as to the
detailed policies and regulations which might be implemented
to achieve this. As global and domestic strategies are further
refined, we seek to ensure that the impact of climate change
is considered as a core driver for our operational footprint and
our lending strategies, ensuring we are well placed to adapt
and advance as the outlook becomes more certain
Further details regarding the risk governance model,
together with the principal risks and uncertainties faced
by the Group, the ways in which they are managed and
mitigated and the extent to which these have changed
in the year, are detailed within Section B8 of this
annual report.
A4.5.6 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 subsidiary entities are authorised
and regulated by the FCA. As a result, current and projected
regulatory changes continue to pose a significant risk for our
business. All potential regulatory changes impacting on our
operations are closely monitored through the comprehensive
governance and control structures we have in place.
During the year all relevant regulatory publications have been
considered, their implications identified and required changes
implemented within an appropriate timeframe. The volume
of requests for information from the FCA has, as expected,
remained high during the year with particular concentrations
around data regarding levels of appropriate support provided
to customers and information to support the FCA’s ongoing
investigations into the motor finance market and discretionary
commission arrangements. We respond to all such requests
in a timely fashion and maintain robust controls to support the
delivery of good outcomes for customers.
The following regulatory developments currently in progress
have the greatest potential impact on our businesses:
• 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. Dates for implementation of the
rules have been staged across 2023 and 2024. This has been a
priority area during the year with activity being championed by
the Board, and a non-executive director assigned responsibility
for oversight of the programme. All areas targeted for
implementation were delivered as planned, with the focus now
on continuing to embed the introduced enhancements. As the
new rules have been updated into business-as-usual standards
and processes, this also aligns with expectations within the
FCA 2024/2025 business plan around vulnerability,
cost-of-living pressures and financial inclusion
• Basel 3.1 – In December 2023, the PRA published Part 1 of
its Basel 3.1 implementation standards. This covered a range
of areas including counterparty credit risk (‘CCR’), credit
valuation adjustment (‘CVA’) and operational risk. The final
part that focused on Pillar 1 credit risk capital requirements
was published on 12 September 2024, with publication
having been delayed by the UK election. The PRA has made
a number of changes to the proposals set out in the original
consultation reflecting the extensive industry feedback
received. These changes which will have an impact on all
firms, will take effect from January 2026, postponed from July
2025. Before implementation the PRA intends to rebase and
adjust all firms’ Pillar 2A requirements and PRA buffers
• Small Domestic Deposit Taker regime (‘SDDT’) – Alongside
the publication of the Basel 3.1 package, the PRA also set out
its approach to the capital requirements for firms qualifying
for the SDDT regulation. This builds on the liquidity, reporting
and remuneration rules for SDDTs published in 2023, and is
expected to be introduced from 1 January 2027
The capital rules include an initial Interim Capital Regime
(‘ICR’) which firms can join subject to meeting the SDDT
eligibility criteria. The ICR will allow firms to continue being
subject to current requirements until January 2027, then
transitioning to either the SDDT or full Basel 3.1 capital regime
While we are currently eligible to apply for the ICR and SDDT
regimes and expect to submit an application to join the ICR,
once the application window opens, receiving IRB model
approval would disqualify us from the point of approval and
from that point we would adopt a full Basel 3.1 approach
Page 54
• Recovery Planning – In May 2024 the PRA published
a ‘Dear CEO’ letter on its review of non-systemic firms’
recovery planning. Their review found that although many
firms understand the basics of recovery planning, there are
significant areas for improvement, most notably related to
the development of recovery scenarios and the calculation
of recovery capacity. We have reviewed the points covered in
the letter and, where appropriate, updates have been made to
the Recovery Plan
• Solvent Exit planning – In the early part of 2024, the
PRA published a final policy on solvent exit plans for
non-systemic banks and building societies (PS5/24),
which includes the Group. It requires firms to undertake a
Solvent Exit Analysis and, when the circumstances require
it, develop a Solvent Exit Execution Plan. We are fully aware
of the requirements, which will complement existing work
undertaken on recovery planning, and will be compliant by
the deadline of 1 October 2025
• MREL – Although we are not subject to MREL
(Minimum Requirement for own funds and Eligible Liabilities)
requirements currently, given our potential for growth,
we may be required to issue MREL eligible instruments at
some point in the future and therefore continue to closely
monitor developments and potential impacts
• Enhancing the Special Resolution Regime – The Bank
Resolution (Recapitalisation) Bill is currently before the
UK Parliament. This legislation would extend the powers of
HM Treasury under the Special Resolution Regime
(for example the use of partial sale, transfer, or bridge bank)
to small firms. The proposals also include a greater role for
the FSCS in the provision of funds to support recapitalisation.
This legislation is, to some extent, a response to issues
identified following the failure of Silicon Valley Bank in March
2023. We would expect to be covered by these new rules and
will actively engage with the Bank of England consultation
process once it commences
• Borrowers in financial difficulties – Following the findings
from its ‘Borrowers in Financial Difficulties’ project, the
FCA confirmed new measures to strengthen protection
for consumer credit and mortgage borrowers in financial
difficulties. We consider that we are well positioned to meet
these requirements. Supporting customers in difficulty,
including those with characteristics of vulnerability, is, and will
remain a key area of focus within our business model
• Operational Resilience – We remain on track to meet
all requirements of the final rules and guidance on
‘building operational resilience in financial services’ published
in 2021 by the FCA, PRA and Bank of England. The 2024
iteration of our self-assessment was successfully completed
in March 2024, enabling us to validate progress in addressing
any gaps identified by the 2023 assessment. Activity is
ongoing to complete the objectives identified as part of the
self-assessment for further enhancement and refinement of
the approach
We are committed to a programme of continuous
improvement in our resilience capability. Important business
services are mapped and tested using severe but plausible
scenarios to push the boundaries on the ability of the
infrastructure, key dependencies and third parties to recover
from disruption, using a scenario library which was enhanced
for this year’s testing programme. The groupwide disaster
recovery testing plan also helps support the ongoing scenario
testing programme, with clear focus on recovery of important
business services. Identified actions to manage and close
vulnerabilities identified through mapping, testing and other
activities are tracked through to completion
This approach should ensure our ability to meet the
2025 regulatory deadline, when we will need to be able to
demonstrate our ability to stay consistently within
impact tolerances
• Climate change – Work towards embedding our
approach to managing climate-related financial risks
continues. The Sustainability Committee, alongside the
executive level risk committees, ensures comprehensive
consideration of such risks across all aspects of the business,
leaving us well-positioned to address emerging challenges
Managing the impacts of climate change is seen as a key
strategic priority, with board-agreed commitments and a
detailed plan of work, which has been developed reflecting
regulatory and wider requirements. This is reviewed on
an ongoing basis to ensure it reflects new thinking and
developing expectations as they emerge
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. We consider whether and
when these regulations might apply in light of the growth implicit
in our business plans and put appropriate arrangements in place
to ensure we would be able to comply at that point.
Our governance and risk management framework continues
to be developed to ensure 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.
We are monitoring how the July 2024 change in UK Government
might impact wider national and regulatory priorities and
continue to engage proactively with the new government to fully
understand and assess the impact of proposed policy changes
on our operations and those of our customers.
We also continue to review our exposure to emerging
developments in the Brexit process as the UK’s future relationship
with the EU becomes more certain, and the process of embedding
EU legislation into UK law and regulations continues, with the
remaining parts of the EU capital regime due to be migrated to the
PRA Rulebook. However, it is clear that this is an ongoing process,
with impacts that will take time to manifest themselves fully.
Further clarity is still required from the new government on this
and other matters as it sets out its agenda.
Overall, we believe that we are well placed to address all
the regulatory changes to which our businesses are
presently exposed.
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Strategic Report
The Code requires the directors to consider and report on our
future prospects. In particular, it requires that they:
• Explain how they have assessed the prospects of the
business and whether, on this basis, they have a reasonable
expectation that it will be able to continue in operation
(the ‘viability statement’)
• State whether they consider it is appropriate 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, UK Listing Rule UKLR 6.6.6 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 nature of our business activities, current operations and
those factors likely to affect the future results and development
of the business, together with a description of our financial
position and funding position, are set out in the Chairman’s
Introduction in Section A1, Chief Executive’s Review in Section
A3 and the business review in Section A4. The principal risks and
uncertainties affecting us, and the steps taken to mitigate these
risks are described in Section B8.5.
Section B8 of this annual report describes our risk
management system and the three lines of defence model
which it is based upon.
Note 61 to the accounts includes an analysis of our working and
regulatory capital position and policies, while notes 63 to 65
include a detailed description of how the business is funded,
our use of financial instruments, our financial risk management
objectives and policies and our 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
We operate a formalised process of budgeting, reporting and
review. These planning procedures forecast 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, including detailed income
forecasts. These provide information to the directors which is
used to ensure the adequacy of resources available to meet
business objectives, both on a short-term and strategic basis.
The plans for the period which commenced on 1 October 2024
have been approved by the Board and have been compiled taking
into consideration cash flows, dividend cover, encumbrance,
liquidity and capital requirements as well as other key financial
ratios throughout the period.
Current economic and market conditions are reflected at the
start of the plan with consideration given to how these will
evolve over the plan period and affect the business model. The
economic assumptions used are consistent with the economic
scenarios considered for determining impairment provisions.
The plan is compiled by consolidating separate forecasts for
each business segment to form the top-level projection. 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 provisioning calculations at 30 September 2024.
Extensive use is made of stress testing in compiling and
reviewing the 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 principal and
emerging 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
• Reduced development finance volumes and yield. This
replicates a significant increase in competition within
the sector, reducing yields and impacting market share,
demonstrating how a lower mix of our highest margin product
impacts on contribution to costs and other profitability ratios
• 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 financing, capital and liquidity positions and highlight
any areas which might impact the 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 potential operational risks were
also assessed. This was done through 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 ability of the
business to continue as a going concern.
The potential impact of climate change on the business was also
analysed. This exercise included an assessment leveraging the
Bank of England Climate Biennial Exploratory Scenario. More
details of these analyses are set out in Section A6.4.
A5. Future prospects
Page 56
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 forecast period begins 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
• Consideration of 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 this year monitoring the
developing economic situation in the UK. Although apparently
more stable than in recent years, both the prevailing higher rates
of interest and the ongoing effects of the price rises of recent
years, which affected both consumers and businesses, continue
to impact on our operations, with increased potential for
vulnerability amongst customers and pressures on affordability.
The potential policy impacts of the incoming Labour government
in the UK, both on the economy and on the operations of our
customers have also been a significant area of focus.
In addition, the directors held ‘deep dive’ sessions into key
areas of risk focus including: the impacts of relevant regulatory
statements including those of the FCA’s review and update on
the cash savings market on our easy access offerings; potential
forward-looking economic scenarios; ongoing inflationary
challenges; and the potential wider impacts of the economic and
social policies of the incoming Labour government, including the
potential impact of the Renters’ Rights Bill.
Focussed reviews of the principal risks continued throughout
the year, including credit risk, capital risk, liquidity and funding
risk, market risk, climate change risk, conduct risk, strategic risk,
reputational risk, model risk and across the different categories
of operational risk. 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 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, 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 our designated principal
risks, including those that would threaten the 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. This includes our
retail deposits, wholesale funding, central bank lending and other
contingent liquidity options.
Retail deposits of £16,298.0 million (note 33), raised through
Paragon Bank, are repayable within five years, with 87.0% of this
balance (£14,180.4 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. We are required to hold liquid
assets in Paragon Bank to mitigate this liquidity risk. At
30 September 2024 Paragon Bank held £2,635.3 million of
balance sheet assets for liquidity purposes, in the form of central
bank deposits and investment securities (note 64). A further
£150.0 million of liquidity was provided by the off balance sheet
long / short transaction described in note 64, bringing the total
to £2,785.3 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 £4,445.9 million.
Holdings of our 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 2024,
£1,797.2 million of such notes were available for use, of which
£1,536.2 million were rated AAA. The available AAA notes would
give access to £751.9 million if used to support drawings on
Bank of England facilities. Our holdings of highly ranked
investment securities may also be used in a similar way.
The earliest maturity of any of our wholesale debt is the central
bank debt payable in 2025.
Our access to debt is enhanced by the corporate BBB+ rating
held by the Company, which was confirmed by Fitch Ratings
in February 2024, and our status as an issuer is evidenced by
the BBB-, investment grade, rating of the £150.0 million Tier-2
Bond. Additionally, during the year Fitch Ratings assigned a
BBB+ Long-term Issuer Default rating to Paragon Bank PLC,
our principal operating subsidiary, the first time a company-level
rating has been issued for this entity. This provides additional
flexibility to our wholesale funding options.
Following the year end, Moody’s also began coverage, granting
long-term issuer ratings of Baa3 to the Company and Baa2 to
Paragon Bank. These additional ratings will allow more flexibility
in funding options in future.
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Strategic Report
We have regularly accessed the capital markets for warehouse
funding and corporate and retail bonds over recent years and
continue to be able to access these markets. We also have
access to the short-term repo market which we access from
time-to-time for liquidity purposes.
Our 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 our capital base is subject to consolidated
supervision by the PRA. Capital at 30 September 2024 was in
excess of regulatory requirements and our forecasts indicate this
will continue to be the case, even allowing for currently proposed
changes in the UK’s capital requirements framework.
Viability statement
In making the viability statement the directors considered the
three-year period commencing on 1 October 2024. This aligns
with the horizons used for the risk evaluation exercise which is
performed annually and facilitated by the CRO.
The directors considered:
• The financial and business position at the year end, described
in Sections A3 and A4
• The forecasts and the assumptions on which they were based
• Prospective access to future funding, both wholesale and retail
• Stress testing carried out as part of the ICAAP, ILAAP and
forecasting processes
• The activities of the risk management process throughout
the period
• Risk monitoring activities carried out by the Risk and
Compliance Committee
• Internal Audit reports in the year
Having considered all the factors described above, the directors
believe that the Group is well placed to manage its business
risks, including solvency and liquidity risks, successfully.
On this basis, the directors have a reasonable expectation that
the Group will be able to continue in operation and meet its
liabilities as they fall due over the three-year period commencing
on 1 October 2024.
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 2029 and
the directors have no reason to believe that the business 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 financial position, the
cash flow requirements laid out in the forecasts, our access
to funding, the assumptions underlying the forecasts and
the potential risks affecting them. As part of this exercise the
potential impacts on funding, capital and cash of our exposure to
issues relating to historic motor finance commissions
was considered.
After performing this assessment, the directors concluded that it
was appropriate for them to continue to adopt the going concern
basis in preparing the Annual Report and Accounts.
Page 58
We believe that the long-term interests of shareholders,
employees, customers, communities and other stakeholders
are best served by acting in a socially responsible manner and
aim to ensure that a high standard of corporate governance and
corporate responsibility is maintained in all areas of our business
and operations.
Sustainability is central to our long-term success, and we are
committed to our responsibilities as a good corporate citizen.
We aim to reduce the impact that our operations and our
customers have on the environment, have a positive effect on
all our stakeholders and support the communities in which we
operate. In the current year our approach has been enhanced
through a comprehensive materiality assessment, highlighting
top priorities and areas where we could influence change and
have the greatest impact.
Alongside a regular strategic update on sustainability provided
by the CEO, the Board receives an annual sustainability update
that provides feedback on developments on climate and the
wider ESG framework through the year and which sets out a
proposed strategy for future initiatives. This update is supported
by a detailed assessment of climate, provided across two
modules within the ICAAP, which includes an assessment of
the inherent strategic risks and opportunities. The Risk and
Compliance Committee provides regular oversight of climate
through their review of the CRO’s risk report. The Board’s
consideration of sustainability issues in its decision making, in
accordance with Section 172 of the Companies Act, is discussed
further in Section B4.3.
The Sustainability Committee ensures that an overall
strategic focus on sustainability issues is maintained at senior
management level. The committee comprises relevant ExCo
members, including the three managing directors responsible
for our product lines, and other responsible senior managers. It
is chaired by Deborah Bateman, the External Relations Director,
meets quarterly and reports to the Executive Performance
Committee and Board on a regular basis.
The group-wide Sustainability Charter, which is supported by an
internal communication campaign and on-line training provided
to all employees, is aimed at raising awareness of a broad range
of sustainability issues.
Further information on our sustainability profile and agenda is
given in the annual Responsible Business Report, published
each December and available on our corporate website at
www.paragonbankinggroup.co.uk.
A6.1 Non-financial
and sustainability
information statement
Information on certain environmental, social and governance
matters is included in this strategic report in accordance with
Sections 414CA and 414CB of the Companies Act 2006 (the ‘Act’).
In addition to the description of our business model, discussed
in Section A2, the remaining disclosures are given in this Section
A6. This includes a discussion of our 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
Reference
(a) Environmental matters
Section A6.4
(b) Employees
Section A6.3
(c) Social matters
Section A6.5
(d) Respect for human rights
Section A6.6
(e) Anti-corruption and anti-bribery matters
Section A6.7
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.
This section also includes the information on the directors’
engagement with employees required by Section 11 (1)(b) of
Schedule 7 to the Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations 2008 (as amended)
(‘Schedule 7’) (in Section A6.3) and the information on business
relationships with suppliers and customers required by Section
11B of that schedule (in Section A6.7 and Section A6.2).
Sustainability analysts frequently request detail of significant
fines or penalties incurred by companies for ESG related
incidents, or confirmation that there were no such incidents. We
have incurred no such fines greater than US$ 100.0 million in
the year (2023: 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 we have maintained our focus on providing
high quality customer service, while continuing to align with
and embedding the FCA Consumer Duty principles as their
scope broadened in the year. While the Consumer Duty does not
cover all our customers, with some Commercial Lending
and buy-to-let mortgage activities outside its scope, the principle
of the Consumer Duty informs the approach to all customers.
Our 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 our business and, as
a specialist bank, we use our expertise to provide financial
products and support to help them achieve their ambitions.
The fair treatment of customers and the delivery of good
outcomes to them is central to the achievement of our strategic
business objectives and we have no appetite for any material
failure to deliver good outcomes for customers, offering extra
support when they need it and listening to their feedback.
A6. Citizenship and sustainability
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Strategic Report
Customers can be confident that we will always consider their
needs and act fairly and responsibly in our 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 considers those customers
in vulnerable circumstances, addressing their needs and any
additional support they require, while ensuring that our people,
processes and products are able to meet these needs. Over
the last twelve months initiatives to improve the experience of
such customers have included: enhanced training using external
actors providing an immersive role play experience to staff
covering topics which include dealing with those in vulnerable
circumstances; continued enhancement of our IT systems to
improve identification and engagement with such customers;
and using available data from outputs-based testing to identify
trends and process improvements to enhance service delivery.
While we strive to always provide excellent service, it is inevitable
that issues will arise from time-to-time. We regard these as
opportunities to improve our processes, 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. We have a well-defined and structured
project in place that focuses, where they are applicable, on the
implementation of the principle, the cross-cutting rules and the
consumer outcomes which form part of the Duty. This ensured
that the target date for the extension of the Duty to legacy
products in July 2024 was achieved.
The desire to provide a high standard of service to our customers,
while achieving good outcomes for them, is an important
commercial differentiator which has helped us build strong
relationships over many years. The ongoing and planned activity
across all business units is aimed at ensuring that 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 in vulnerable circumstances, have additional support
needs and/or in financial difficulties, a high level of support
will be provided, and they will be signposted to sources of
independent advice
• They will be made aware of the FSCS and the protection this
provides for them, with a reminder issued annually
• Our standards will protect consumers and deliver good
customer outcomes
This pro-active approach accords with the FCA’s Principles
for Business, particularly regarding delivering 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 our businesses.
One output of this process in the year was the issue of a new,
simplified Power of Attorney Guide and streamlined process,
making it easier for customers, particularly those in vulnerable
circumstances, and their representatives to register or activate a
Power of Attorney.
We are carefully monitoring the progress of the FCA review of
discretionary commission arrangements in the motor finance
sector, announced in January 2024 and the related developments
in case law in the period and following the year end. We offered
motor finance products which might fall within the scope of
the review, principally between 2014 and 2020 and have been
managing any issues in accordance with FCA guidance. While we
believe that customers have not been disadvantaged by business
practices adopted at this time, it is not possible to accurately
quantify any exposure at present. We will continue to keep
the situation under review and respond promptly to regulatory
directions and industry best practice as they emerge over the
coming months.
Complaints
There will be occasions where we do not get things right and,
consequently, this will give customers cause to complain. The
effective resolution of complaints is a key focus of our customer
service approach, with all business areas following the FCA’s
Dispute Resolution Sourcebook (‘DISP’) to ensure consistent
and good customer outcomes.
Handling
We aim to resolve complaints at the first point of contact, where
possible, but acknowledge 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.
Where applicable, ‘Alternative Dispute Resolution’ information is
provided to customers to allow them to appeal to independent
third parties if they are not satisfied with our response. These
include the FOS and the FLA. Where customers feel the need
to appeal externally, we co-operate fully and promptly with any
investigations, and support any settlements and awards made by
these parties.
Monitoring
To ensure the delivery of consistently good customer outcomes,
we have 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 take reasonable steps 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.
We actively seek feedback on our complaint handling process,
using an automated survey as appropriate, with customers
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.
Page 60
There is an active Complaints Community group that meets
regularly, where all business areas are represented. This ensures
complaints are handled consistently and that industry updates,
knowledge and best practice are shared with all business units
concerned with complaint handling.
We focus 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
2024
31 December
2023
30 June
2023
31 December
2022
Cases reported
79
48
57
44
Uphold rate
16.0%
26.1%
36.2%
15.2%
The upward movement in the number of cases reported is
principally a function of increased complaint levels around motor
finance, which have been seen across the industry, potentially
driven by publicity around the FCA’s discretionary commission
review and related litigations. Our uphold rates remain positive,
compared to industry averages.
The overall industry uphold rate reported by FOS for the
six months ended 30 June 2024 was 35% compared to 36% in
the six months ended 31 December 2023 and 37% in the
six months ended 30 June 2023. FOS data across the financial
services industry is published on the ombudsman’s website at
www.financial-ombudsman.org.uk.
We routinely benchmark our complaints performance against
the FCA bi-annual complaints data, 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
Over 1,400 people across the UK work in our businesses, with the
majority based at our Head Office in Solihull. We provide a flexible
hybrid working model, promoting a healthy work life balance by
understanding the strategic benefits a flexible workforce brings in
creating diversity, engagement, and retention.
We aim to provide opportunities for varied and rewarding
careers, offering training and coaching opportunities to enable
people to meet their own ambitions whilst delivering the
objectives of our business.
Employee engagement
We use surveys as a means of gathering employee opinion on
our approach to being a responsible business, and to assess our
progress towards becoming a more inclusive employer. During the
period new employee onboarding and leaver surveys were rolled
out, with a set of strong initial results, particularly on questions
covering culture and inclusion.
In results to date, 92% of employees onboarded in the period
believed they could bring their whole self to work, with 96% stating
they felt proud to work for us. 100% of new employees believe we
are committed to delivering good customer outcomes. Amongst
leavers, 72% reported they had had a positive working experience.
Both leavers and joiners described the business as being a
welcoming, supportive, inclusive and professional employer.
Employment conditions
All our employees are based in the UK, and we are committed
to upholding all aspects of UK employment law, including
legislation addressing terms of service, working conditions, day
one flexible working, carers leave, extended maternity, adoption
and shared parental leave protection, equality and taxation.
We minimise the use of short-term and temporary staff, with no
use of zero-hour contracts. As of 30 September 2024, people on
temporary or short-term contracts accounted for only 0.6% of
the workforce (2023: 1.2%). We will normally only employ those
over the age of 18, except in connection with apprenticeship or
other formal training programmes.
During the period the decision was made to bring together all
Solihull-based employees at our Homer Road head office building,
vacating other premises. This should bring operational areas of
the business closer together, fostering better collaboration.
During the year we signed the “The Better Hiring Charter”,
developed by the Better Hiring Institute (‘BHI’), with
Anne Barnett, our Chief People Officer, joining the BHI’s new
Parliamentary Steering Committee. The Charter, which is
available on the BHI website at www.betterhiringinstitute.co.uk,
commits signatories to ten principles to make hiring faster, fairer
and safer for all candidates, including improving transparency
in job adverts and descriptions, promoting equity, diversity and
inclusion, and reducing barriers for women.
Our voluntary employee turnover has remained stable during
the year at 9.1% (2023: 9.6%). The overall attrition rate, excluding
redundancy, at 10.8% for the year (2023: 11.4%), remains lower
than the average rate in the banking and finance sector. Overall
attrition for the sector stands at 19.8% reported by Reward
Gateway, with a rate for the financial services sector of 12.8%
published by CIPD and Office of National Statistics in May 2024.
We benefit from a diverse workforce spanning four generational
groups, with employees collaborating across our businesses to
meet strategic objectives. We retain the extensive experience of a
significant number of long-serving employees at all levels.
33.9% of the workforce at 30 September 2024 had served for
over ten years with 12.5% having been with us for more than
two decades.
Most of our roles involve hybrid working with over 65% of staff
working from home at any given time. Flexible working is strongly
encouraged across all areas to support a healthy work-life
balance and to ensure we retain the skills and experience of our
valued employees. Formal flexible working arrangements are in
place for 24.8% of employees (2023: 22.3%), with 71.4% of these
working part-time (2023: 78.5%). Compliance with the
Working Time Regulations is regularly monitored.
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Strategic Report
As part of our commitment to employee wellbeing and
recognising the importance of a healthy work-life balance,
we offer most full-time employees a minimum of 26 days
holiday per year, excluding public holidays, in excess of UK
legal requirements. In addition, all employees are granted an
additional full day’s leave for Christmas Eve and New Year’s Eve;
meaning that most full-time employees have a minimum of
28 days paid leave each year, in addition to public holidays.
We have been an accredited Living Wage Foundation employer
since June 2016. As such, we pay all employees, including
apprentices, at least the Real Living Wage, set by the Foundation.
We also ensure that wages paid by contractors and suppliers
meet the same threshold. This Real Living Wage Rate was
£12.00 per hour at 30 September 2024, rising to £12.60 per hour
in October 2024, with a higher rate payable for London-based
employees. As such, it is higher than the UK’s national minimum
wage rate, and we are therefore also compliant with the statutory
requirement. From 1 October 2024 our minimum wage rate rose
to £12.69 per hour, for all employees, equivalent to a full time
equivalent annual wage of £24,750.
As part of our sustainability strategy we operate salary
sacrifice schemes for cycle-to-work and electric vehicles. At
30 September 2024, 4.5% of employees opted for one or both
schemes, which are described further in Section A6.4.
We offer employees a defined contribution pension scheme
which complies with the UK Government’s auto-enrolment
requirements; 87.6% of employees are members of this scheme
(2023: 89.4%). Additionally, a legacy defined benefit pension
scheme is also in place for long-serving employees. Overall, the
Group is contributing towards the retirement provision of
93.9% of its employees (2023: 96.1%).
Culture
All employees are required to attest annually to our employee
Code of Conduct, confirming their understanding of the
expectations set out in the Code and, at 30 September 2024,
100% of employees had done so. The Code of Conduct provides
additional guidance on expected behaviours when interacting with
colleagues, customers, and other stakeholders, and is crucial for
fostering and embedding our strong risk culture.
During the year the Consumer Duty has been fully embedded in
the culture of our businesses, enhancing working practices to drive
good customer outcomes. To support the further strengthening of
our culture across the business, an internal “Think” campaign was
launched in the year, encouraging employees to focus on five key
areas, customer, people, risk, commercial and sustainability.
We recognise that a customer-centric approach is essential and
the introduction of a Purpose and Performance Profile (‘PPP’) for
each employee, with the inclusion of “Think Customer” objectives
for all employees ensures this focus in our culture.
Equality, diversity and inclusion
Our Equality, Diversity and Inclusion (‘EDI’) strategy was
formalised in the year, focusing on three areas: gender, ethnicity
and socio-economic background (‘SEB’).
Our vision is to:
• Ensure that all individuals, regardless of their
background, have the opportunity for personal
and professional growth, and feel included, valued
and respected
• Create and promote opportunities where diverse
talent can thrive, everyone is treated equitably, and all
perspectives are encouraged to contribute, leading to
innovative solutions
• Work towards a culture that reflects the diversity of
our communities
We chose to focus on gender, ethnicity and SEB in support
of our commitment to the FTSE Women Leaders Review and
the Parker Review. SEB has been identified in our industry to
be a “golden thread” characteristic which often intersects with
many other characteristics. This focus also supports our status
as founding members of Progress Together, the industry body
committed to promoting socio-economic diversity across the
financial services sector.
As part of our focus on these areas we have committed to
achieving 40% female representation in Senior Management
by December 2025, and 5% ethnic minority representation in
Senior Management by December 2027, where
‘Senior Management’ is defined as ExCo members and
their direct reports, excluding administrative staff, in line
with the definition adopted by the FTSE Women Leaders and
Parker Reviews.
We promote equality amongst all employees through our
policies, procedures, and practices. Every employee is entitled
to a work environment that upholds dignity, equality and
respect for all. We do 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 such as:
• 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 business. The Nomination Committee
provides board-level oversight on all inclusivity matters affecting
our employees.
Page 62
The internal EDI Network continues to shape our EDI strategy
and initiatives, and is now sponsored at executive level by
Ben Whibley, our CRO. The network continues to focus on
raising awareness and understanding of the importance of
creating an inclusive culture and diverse workforce through
varied internal communication campaigns. Celebrations in the
period included Black History Month, Disability History Month,
International Women’s Day and Pride at Paragon.
Socio-economic diversity
In support of our focus on SEB diversity and as a founding
member of Progress Together, we, along with other firms, are
participating in their Accelerated Progress Programme (‘APP’).
This is a unique, twelve-month cross-company programme,
designed to develop, empower, and unlock the potential of
high-performing middle managers from low socio-economic
backgrounds, with individuals receiving development, mentoring
and the opportunity to work collaboratively across organisations
on defined projects. This participation supports the delivery of our
EDI strategy to attract, increase and retain diverse representation.
We have continued to form working relationships with
inner-city colleges and schools as a means of attracting talent
from more diverse backgrounds. In the year, 13.3% of the
employee volunteering days described in Section A6.5 were
completed in local schools (2023: 12.8%).
The Good Youth Employment Charter
We recognise the benefits of early careers, and the diversity of
skills that young employees can bring and remain committed to
the Good Youth Employment Charter. We are also a Gold Member
of the ‘5% club’, which promotes the provision of early careers
roles such as apprenticeships, graduate positions, and student
placements. As part of this commitment we have set a target that
such early careers roles will comprise at least 5% of our workforce
by September 2027, compared to 1.6% at 30 September 2024.
As a youth-friendly employer, we work to create opportunities
for young people, and to bridge the gap between education
and employment through a range of events with schools and
colleges, helping them to gain the skills and experiences they
need, through meaningful and good quality experiences. Our
involvement in providing these opportunities is described further
in the community involvement section (Section A6.5).
Race at Work Charter
We are a signatory of the Race at Work Charter and committed
to meeting the charter requirements. This commitment includes
the continuation of ‘Mission INCLUDE’, a mentoring scheme for
employees from under-represented groups. The programme
provides high-potential employees with a mentor from another
organisation who is also a member of an under-represented group
or an ally. During the period we supported four employees through
this programme.
We have also continued our internal ‘Ignite’ development
programme, tailored for employees who have specific protected
characteristics or who may face more barriers in the workplace.
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.
Disability Confident
Employees identifying as having a disability comprise 6.3% of
those completing their diversity profile (2023: 5.6%). We are
a Disability Confident Employer under the UK Government
Disability Confident scheme. As well as continuing to provide paid
employment to people with disabilities, providing appropriate
training opportunities to such employees, and complying with
all relevant legislation, we meet the five core commitments of a
Disability Confident organisation:
• 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
Disability Confident Employer status represents level two of the
scheme, and we are working towards level three –
‘Disability Confident Leader’.
We give full and fair consideration to applications for
employment made by people with disabilities. We also make
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 we aim to
ensure all employees with disabilities have the opportunity to
fulfil their potential.
Gender diversity
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.
Ben Whibley, CRO, is the project sponsor at ExCo level and
progress against the Charter requirements is monitored by
executive management and at board level.
We are now in the second phase of our charter journey and
have committed to achieve 40% female representation in
Senior Management by 31 December 2025. At
30 September 2024, female representation in Senior
Management was 37.9% (2023: 37.9%).
Our focus on developing female talent to support our
Women in Finance Charter commitments has continued. 53%
of employees receiving management development are female,
and we continue to support the 30% Club Mission Gender Equity
cross-company mentoring programme run by Moving Ahead. In
addition, two individuals have been supported on the
Executive Accelerator programme, which offers females working
toward senior executive roles the opportunity to be mentored by a
NED or chair from another organisation. Alongside the mentoring,
the scheme offers an excellent learning programme designed to
accelerate and advance women to executive committee level.
Feedback from both mentors and mentees participating in
both programmes continues to be favourable, and 20% of
participants have progressed their careers within the business
since participating in the programme. In comparison, research
conducted for the 30% Club showed an average promotion rate
of 10% for female managers. The seventh cohort of employees
started their programme just before the year end.
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Collecting diversity monitoring data
During the year we continued to encourage employees to
complete diversity monitoring profiles in our central HR system.
Data collected includes information on gender identity, sexual
orientation, ethnicity and race, religion, socio-economic
background, disabilities, and caring responsibilities. At
30 September 2024, 80.9% of employees had completed their
profile (2023: 76.8%).
Gender Pay
As required by legislation, we have calculated our gender
pay gap as at April 2024. These results will be published on
the UK Government website and on our own website and are
summarised below.
April
April
2024
2023
Median gender pay gap
31.0%
33.5%
Mean gender pay gap
36.4%
35.0%
Median bonus pay gap
1.0%
0.5%
Mean bonus pay gap
75.4%
70.5%
This year’s gender pay measures are broadly similar to those
for 2023 and remain larger than we would like. Monitoring of
these differences continues, but analysis attributes them to be
principally 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 median pay gap.
The results are broadly in line with the median figure of 31.9% for
the financial services sector reported by the Office of National
Statistics in their 2024 Annual Survey of Hours and Earnings
(‘ASHE’), published in October 2024 (2023: 34.3%). The mean
pay gap for the industry reported by the ASHE, which is more
influenced by operational structures, was 28.0% (2023: 25.2%).
Roles in the lower pay quartiles are typically operational and
processing positions, predominantly filled by female employees.
These roles lend themselves particularly well to part-time
working arrangements. Throughout the workforce, females
account for most of the 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 majority (87.3%) of our 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. The pay gap
data includes discretionary bonus awards for 19.8% of employees
(34.3% of whom were women) and amounts for share based
awards for 5.7% of the workforce (excluding those who received
amounts in respect of the all-employee £1,000 post-Covid award
made in 2020, which matured in the year), of whom 28.4% are
female. This means that discretionary and share based bonus
schemes are disproportionately awarded to men, and the size of
the mean bonus gap is further driven by the bonuses awarded to
the most senior executives, the majority of whom are male.
We analyse gender pay gap data on an ongoing basis to identify
potential issues and determine what action might be required.
However, work carried out during the year, reviewing groups
of directly comparable positions, did not suggest evidence of
systematic gender bias or unequal pay practices.
Composition of the workforce
During the year the workforce reduced by 7.3% to 1,411
employees (2023: 1,522). Information on the composition of the
workforce at the year end is summarised below:
2024
2024
2023
2023
Females
Males Females
Males
All employees
Number
724
687
774
748
Percentage
51.3%
48.7%
50.9%
49.1%
Directors
Number
4
6
4
6
Percentage
40%
60%
40%
60%
Senior managers
Number
12
33
12
36
Percentage
26.7%
73.3%
25.0%
75.0%
Other managers
Number
110
185
119
171
Percentage
37.3%
62.7%
41.1%
58.9%
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 and
for internal purposes.
Ethnic minority representation in the workforce is analysed
below using the same categories as in the previous table. The
table shows employees identifying as members of a non-white
ethnic group as a percentage of the total workforce and as a
percentage of the 80.9% of employees declaring their ethnicity
(2023: 72.6%).
All employees
Declared ethnicities
2024
2023
2024
2023
All employees
12.9%
11.9%
16.7%
16.3%
Directors
10.0%
10.0%
10.0%
10.0%
Senior managers
2.2%
4.3%
2.6%
2.6%
Other managers
10.2%
8.9%
12.0%
11.6%
Health and wellbeing
We remain dedicated to supporting our employees’ wellbeing,
providing continued support with emotional, physical, financial
and social wellbeing issues. Anne Barnett, Chief People
Officer, the Executive Sponsor for Wellbeing, ensures that this
commitment goes to the highest levels of management.
The focus on financial wellbeing and employee benefits has
continued in response to ongoing cost-of-living issues, with
various campaigns and support avenues, including providing
access to free will writing services, support with budgeting and
debt management, as well as pensions advice.
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This year we were pleased to endorse the Mortgage Industry
Mental Health Charter (‘MIMHC’), demonstrating our
commitment to prioritising mental health within the mortgage
industry. We are working closely with MIMHC, an industry
initiative, to raise awareness, reduce stigma and help to ensure
that mental health remains a top priority in the sector, creating a
more supportive and empathetic mortgage industry.
We provide access to trained mental health first aiders, with
additional training available to all team members on grief and
bereavement, trauma, and suicide awareness from external
specialists. In addition to the support provided by our Wellbeing
team, employees also have access to a dedicated Wellbeing Hub
signposting specialist support services providing help with issues
such domestic violence or bereavement, as well as numerous
resources to help with a wide range of wellbeing issues.
During the year four Menopause Champions were designated,
two of whom are male. These champions are committed to
providing additional support to employees and managers,
focussing on employee engagement, productivity and retention
of the female workforce.
We continue to support 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.
Other wellness initiatives during the year included:
• Introduction of an enhanced fertility policy, with paid leave for
those undergoing treatment and their partners, responding to
an initiative from the People Forum
• A focus on men’s health with an International Men’s Day ‘lunch
and learn’ on prostate cancer awareness and a “tough to talk”
suicide awareness workshop specifically for male employees
• Promotion of ‘WeCare’, an online health service provided
to employees and their families, providing 24 / 7 UK-based
online GP services, mental health counselling, get fit
programmes, and legal and financial guidance.
The Vitality Health programme continues to be available to
employees, with 100% enrolment. This provides access to an
extensive range of physical wellbeing products and services,
including health reviews, online GP services and Vitality
Wellbeing Coaches. Additionally, free exercise classes are
available in our offices, as part of our commitment to enhancing
employees’ physical wellbeing.
Training and development
Our focus on providing employees with quality opportunities to
develop, whether in person or virtually, continued through the year.
Training opportunities provided included: regular online modules
undertaken by all employees on various topics including regulatory
requirements; training supporting business developments; support
for employees undertaking apprenticeships and professional
qualifications; and initiatives supporting career development.
On average employees received 4.4 days training each in the
period (2023: 3.5 days). This is above 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.
Development opportunities form a key part of our EDI strategy,
and our commitments to the Mission Gender Equity, Mission
Include and Ignite programmes are described above.
During the year new ‘Purpose and Performance Profiles’ (‘PPPs’)
were rolled out for all employees. PPPs define roles linking them
to our purpose and the contribution each individual makes
towards the delivery of our strategic priorities. They are used
as an equivalent of the role description for talent attraction and
recruitment, and a tool for ongoing performance, development
and ‘top talent’ identification, with objectives linked to our values
and priorities.
Line managers are encouraged to regularly review PPPs and
discuss individual performance throughout the year, supporting
individual performance and personal development, facilitating
the management of rising talent, and furthering our succession
planning. This initiative has been further underpinned by Talent
Calibration sessions with the leadership teams, ensuring
consistency and fairness in how performance and personal
development is managed.
During the year our learning team collaborated with focus
groups to understand the effectiveness of the “Think Customer”
approach, outcomes of which fed into the ongoing Consumer
Duty training. This included ‘Achieving Customer Excellence’
sessions, delivered to 54 operational employees using actors
to simulate customer interactions. Other initiatives included
e-learning support and an additional focus on helping support
functions understand how their roles help to ensure good
customer outcomes.
A major focus for our training team in the year was preparing
employees for the introduction of the new origination platform
in the Mortgage Lending business. A variety of support was
provided through videos and in-person sessions to help ensure
its successful introduction, providing people with confidence in
using the new tools available to them.
We continue to focus on ensuring all our employees understand
their roles in supporting vulnerable customers through e-learning,
with the roll-out of an interactive solution, supplemented with
bespoke courses for people in customer-facing roles.
At 30 September 2024, 21 apprenticeships were in progress
in a variety of roles (2023: 77). Over the last year 39 individuals
successfully completed an apprenticeship in the business. These
apprenticeships covered a range of specialist and operational
roles including IT, audit, customer services and management.
Our utilisation of available apprenticeship levy funds over the
year has fallen to 38.8% (2023: 50%), due to the drop in the
number of qualifying apprenticeships. Changes to our approach
to management development mean there are less such courses
which qualify for apprenticeship status than in previous years.
We have also pledged 10% of our levy entitlement towards
funding apprenticeships in smaller SMEs.
We currently have 61 individuals completing professional
qualifications (2023: 75), including 21 undertaking the London
Institute of Banking and Finance CeMap mortgage qualification
(2023: 35). Of these 51% are female (2023: 53%) contributing
towards our EDI objectives.
Employees’ involvement
The directors acknowledge the importance 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. Executive Committee members also
use the intranet to deliver updates on important initiatives
within the business from time-to-time. ‘Network News’, an email
newsletter, regularly provides employees with the latest news
and information from across the People Forum, Wellbeing Team,
EDI Network and Charity Committee.
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Strategic Report
The Paragon People Forum meets regularly and is attended by
employee representatives from each area of the business. Its
main purpose is to facilitate communication and information
sharing throughout the business, providing a platform for
employees to be consulted and offer 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 through directors’ attendance at
meetings or through the Chief People Officer who reports to
the 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 non-executive
directors and guest speakers to discuss topics such as pay
and benefits, the Consumer Duty, and equality and diversity.
Initiatives launched in the Forum provided input into the office
relocation and our enhanced fertility policy.
To involve employees in our financial performance, we offer a
Sharesave share option scheme and a profit-sharing scheme
to all employees below management level. The profit-sharing
scheme provided a benefit of around £2,400 to eligible
employees on a full-time equivalent basis, while employees who
were members of the 2021 three-year sharesave scheme, which
matured in the year, were able to buy shares with a market value
in the region of £7.00 each for an option price of £4.24.
At 30 September 2024, 63.6% of current employees were
members of one or more Sharesave scheme (2023: 63%) and
87.3% were eligible for profit related pay in respect of the
2024 financial year (2023: 87%).
Additionally the share based award granted to all employees
below management level in 2020 in recognition of their efforts
during the Covid pandemic matured in the year, providing an
additional benefit of around £1,400 on a full-time equivalent basis
to employees from that time who have remained on the payroll.
Health and Safety
Over the past year, we have consistently met all relevant health
and safety regulations and implemented best management
practices throughout our operations. We are committed to
ensuring a healthy and safe work environment for all employees,
contractors and visitors to our sites, as well as for those impacted
by our activities in public areas. While our primary source of
health and safety related risk arises from the vehicle maintenance
operations of Specialist Fleet Services Limited (‘SFS’), the health,
safety and wellbeing of employees across the whole business is a
key focus of our people policies.
Our 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, that our operations remain resilient, and that
adequate appropriate resources would be available to effectively
manage an incident.
A rolling programme of periodic inspections and audits is
implemented across all our premises, to identify specific health,
safety and welfare issues and highlight any emerging trends. Any
individual hazards identified have had proportionate action taken
to mitigate any recurrence via targeted safety training or specific
safety communications.
Access to appropriate equipment for employees has been
reviewed and procedures developed to ensure a safe and healthy
working environment is maintained, enabling them to work
effectively, whether they are in one of our offices or workshops,
working from home or operating off-site. The communication of
key policies and procedures remains central to our safety and
wellbeing initiatives.
Employees, wherever they are based, are encouraged to report
any concerns in line with our stated health and safety objectives.
They are provided with further opportunities to raise concerns
through engagement with their site contact for health and safety
or their People Forum representatives, and to shape future
initiatives to enhance health, safety and wellbeing.
Training and awareness
During the year 106 employees were provided with training related
to specific health and safety risks associated with their roles, as
part of our ongoing development programme. This training was
focussed in areas such as the Surveyors, Group Systems, Group
Property, Maintenance, and Development Finance teams, whose
roles include a significant element of off-site working. The initiative
aimed to increase employees’ awareness of safety information
relevant to their responsibilities.
Employees are provided with regular intranet communications
on key topics including fire evacuation, driving for work, personal
emergency evacuation plans, electrical visual inspections
of IT equipment and peoples’ individual health and safety
responsibilities. Group policies also provide further information.
SFS employees in automotive workshop roles each additionally
receive, on average, 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
A specific team within the facilities function addresses health,
safety, and operational sustainability issues. This team ultimately
reports to the Chief Operating Officer, the Executive Committee
member responsible for health and safety. Health and safety
incidents are categorised as operational risk incidents within the
risk management framework. These are monitored through the
operational risk management system and subjected to the same
risk evaluation processes as other operational risks monitored by
the Operational Risk Committee (‘ORC’).
The Group, excluding SFS, is certified to ISO45001:2018 for its
Occupational Health and Safety Management System (‘OHSMS’).
This system undergoes regular audits by the Enterprise Risk
function and is externally verified annually by a UKAS accredited
auditor to ensure compliance. The OHSMS serves as the primary
governance framework for locations not within the scope of the
OHSMS itself, ensuring adherence to all relevant health and safety
legal requirements.
SFS, as a result of the higher risk level inherent in its activities, has
its own dedicated health and safety manager and operates its own
ISO45001:2018 certified OHSMS. This is audited for compliance
on an annual basis by a UKAS accredited auditor. Incidents are
investigated using specialist local resource with access to group
support as required.
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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 2024 there were no
prosecutions or any enforcement action from visits by the
authorities for non-compliance in respect of health and safety
matters (2023: None).
Our premises have consistently adhered to all health and safety
standards and regulations throughout the year. The number of fire
marshals, first aiders and other qualified staff remains adequate.
This compliance is routinely monitored at all locations, following
a risk-based strategy that considers occupancy levels. Resource
levels for health and safety across our operations were reviewed
in the year and found to be sufficient to ensure appropriate
standards of health and safety management can be maintained.
During the financial year 17 minor incidents classified as
relating-to-work activity or the building environment were
reported across the business (2023: 27). There have been two
lost-time incidents, with no notifiable reports required under the
Reporting of Incidents, Disease and Dangerous Occurrences
Regulations 2013 (‘RIDDOR’) (2023: 1). The incidents reported
were minor and resulted in 12 lost days (2023: 3 days). Reported
‘near-miss’ incidents remain at low levels, with only 9 events
raised in the course of the year (2023: 7).
All incident reports are examined to determine the root cause
of any incidents and support trend analysis. This involves
collaboration with employees to identify any potential workplace
hazards, unknown risks or behavioural factors. Corrective and
preventive actions are then taken to address any issues identified.
A6.4 Environmental impact
Climate change is one of the biggest challenges faced by
the world today and we continue our strategic focus on both
managing our own response and supporting those of our
customers. We have committed to achieving net zero, across
all attributable greenhouse gas (‘GHG’) emissions, including
financed emissions, by 2050 but, in doing so, recognise that net
zero cannot be achieved by any organisation in isolation and
that this commitment cannot be achieved without significant
and continued government and regulatory focus and broader
industry initiatives.
In support of our long-term commitment to net zero, we have
committed to reducing the GHG emissions of our operational
footprint to net zero by 2030, acknowledging our responsibility for
these direct impacts and our responsibility for addressing them.
Through membership of a number of significant initiatives,
including Bankers for Net Zero (‘B4NZ’), the Partnership for
Carbon Accounting Financials (‘PCAF’) and the Green Finance
Institute (‘GFI’), we support the wider efforts of the financial
services industry to minimise the impact it has on climate change.
This section of our Annual Report and Accounts provides
disclosures on our climate-related impacts and the way in
which we manage them on the basis set out by the Taskforce on
Climate-related Financial Disclosures (‘TCFD’). More detail on
how the disclosures suggested by the TCFD are presented is set
out at the end of this section.
The major milestones achieved to date on our journey to net zero,
and our aspirations for the future, are set out below.
Year
Achievement / aspirations
2020
• Climate change designated as a principal risk
2021
• Sustainability Committee established to monitor progress on
climate, ESG and sustainability focus areas
• Financed emissions of the mortgage portfolio reported for
the first time
2022
• Became a member of B4NZ
• Began offsetting operational footprint emissions
• Baseline to track commitment to net zero emissions
operational footprint by 2030
2023
• Became a member of PCAF
• Enhanced climate change scenario analysis.
Science-based target pathway analysis undertaken for
the mortgage portfolio
• Expanded financed emissions balance sheet to include
elements of our Commercial Lending division
• Decarbonisation assessment of our head office
building, which contributes to over 30% of
operational footprint emissions
2024
• Refurb-to-let product launched to support landlord
customers who wish to upgrade their property
• Input to UK Government consultation on EPC data strategy,
through B4NZ membership
• Third party review of our financed emissions framework
conducted with no significant gaps identified
2025
• Project due to refurbish and decarbonise our head office
2030
• Net zero across emissions associated with our
operational footprint
2050
• Committed to net zero across all greenhouse gas
emission scopes
Impacts of climate change
Our environmental impacts can be considered under two
headings, internal impacts (or operational footprint) and the
impact of our lending activities (the external or downstream
impacts). As we are mainly engaged in the financial services
industry, operating in the UK, our own operational activities
are considered to have a relatively low direct impact on the
environment and climate change.
We have offset the emissions attributable to our operational
footprint in the year ended 30 September 2024 through the
purchase of carbon credits certified under the Gold Standard
programme, one 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’.
Our external, or downstream, impacts arise from the use to
which customers put the funds loaned to them. Most directly,
for asset-backed lending, including lending on property, it
relates to the impacts of the asset being financed and its use
by the customer.
These downstream impacts give rise to two related groups of
risks for our business:
• Physical risks – Increased financial risks as a direct result
of climate change and other environmental factors. As an
example, increased flooding risk might have an adverse
impact on security asset valuations
• Transitional risks – Financial or reputational risks arising
from policy, legal, technology and market changes aimed
at mitigating the impacts of climate change. Such changes
and pressures might impact the ability to realise a security,
continue a business line or serve certain types of customer
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Strategic Report
These classifications are used internally to categorise the financial risks of climate change and we are working to further embed the
consideration of both forms of risk across all lending activities.
While our impact on nature and biodiversity is considered low, we recognise the co-dependency between nature and climate change.
Our developing approach to managing the impact of climate change also considers any related impacts on nature and biodiversity,
both operationally and from our lending activities.
Progress during the year
During 2024 we continued to deliver on the priorities set out in previous reporting. The table below highlights progress on our climate
journey in the year, set out by the principal TCFD pillars of governance, strategy, risk management, and metrics and targets.
Governance
• Reporting and escalation to the Board has focused on providing progress updates across our sustainability strategy and
validating that the current approach is fit-for-purpose
• Update on investment in sustainability to date and the findings of the independent review of financed emissions framework
provided to the Board. No significant deficiencies were identified by the review. The update also covered progress to
date across key areas and updated the Board on developments in climate and sustainability strategy resulting from a
sustainability materiality assessment and an industry benchmarking exercise
• Qualitative review and quantitative scenario analysis assessment of climate change which was incorporated in the
2024 ICAAP approved by the Board. The assessment also outlined the implications of aligning the business model with
the UK Climate Change Committee’s net zero pathway
Strategy
• We continue to promote positive sustainable public policy, providing input to UK Government consultations on EPC data
strategy through our membership of B4NZ
• Through UK Finance, we provided input across a range of policy developments, among them the FRC review of sustainability
assurance, the Transition Plan Taskforce Disclosure Framework consultation and the BCBS consultation on climate-related
disclosures in Pillar III
• Our range of products to support customers on their journey to be more sustainable was extended. The refurb-to-let
product was launched and the funding available through the Green Homes Initiative was further increased to £300 million
• Green Champions appointed in our SME lending business to further promote our sustainable finance offering to UK SMEs
• Expanded use of scenario analysis modules to assess the alignment and resilience of the mortgage and motor finance
portfolio with 1.5° and net zero scenarios
Risk management
• Internal climate change scenario analysis exercise conducted as part of the 2024 ICAAP. No significant vulnerabilities to
climate change identified
• Ongoing programme to update credit standards and limits, managing any exposure to climate-related risks and associated
credit risk
• Continued enhancement of the way support can be provided to customers transitioning to new low-carbon technologies
whilst maintaining our robust credit standards
• Principal risk policy for climate-related risk updated and approved by the Board further embedding climate change risk
within the ERMF
Metrics and targets
• 48.3% reduction in market based emissions for our operational footprint compared to 2019 baseline (2023: 41.8%)
• Financed emissions balance sheet reporting extended to cover a larger element of the motor vehicle assets. Reporting
covers 85% of relevant balances
• Independent review of financed emissions reporting framework identified no significant gaps
• 53.4% of new advances in our mortgage portfolio were EPC rated A-C (2023: 49.9%)
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(a) Governance
i) Climate and sustainability governance structure
The governance structure
outlines how climate and
sustainability related
matters are escalated
throughout the business
and upwards to the Board.
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 provide relevant reports to the ERC
and its sub-committees where appropriate. To ensure climate
risk is adequately considered across the business the terms
of reference of key executive risk sub-committees incorporate
the consideration of climate change. The overall governance
structure is described more fully in Section B.
ii) Board oversight of climate change
Climate change risk is a principal risk within the ERMF, therefore,
information and metrics on climate change risk are considered
at board level and 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 overall
business strategy and risk appetites. Performance against this
objective is assessed annually and impacts the bonus or incentive
he receives (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
Board is also provided with more detailed updates on emerging
issues and developments through regular presentations
conducted by our sustainability team.
In addition, during the year the Board reviewed and approved
climate change scenario analysis prepared for the 2024 ICAAP. It
also considered the output of an external review which addressed
the development of our emissions reporting and benchmarked
overall progress on climate change to date, providing oversight to
management’s response.
iii) 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
committee is provided with updates on our key sustainability
focus areas, progress within business areas and any wider
industry and regulatory developments on sustainability and
climate-related issues.
The committee oversees and challenges the identification
and management of current, potential and emerging climate
change risks and opportunities across all our businesses. This
includes oversight of quarterly management information for the
mortgage portfolio on climate-related matters, such as data on
concentrations of monthly advances, pre and post offer pipeline
cases and the financed emissions of the portfolio as a whole.
A series of working groups which report directly into the
Sustainability Committee have been established, including
personnel from across the business. This ensures that the broad
scope of climate-related risks are appropriately identified and
managed with oversight through appropriate channels.
Initiatives completed during the year, with the support of
the climate change working groups and the Sustainability
Committee, include:
• Delivery of training on greenwashing and the updated
FCA guidance
• Climate change scenario analysis for inclusion in the
2024 ICAAP
• Quarterly reporting on our operational footprint to track
reductions against the 2019 baseline
• Establishing a Base Year Emissions Recalculation Policy,
as recommended by the Greenhouse Gas (‘GHG’) Protocol,
documenting the basis and context for any recalculations
made to base year emissions
• Taking part in industry benchmarking on net zero with other
UK specialist banks
• Working with UKF, B4NZ, the Climate Financial Risk
Forum (‘CFRF’) Scenario Analysis industry Working Group
(‘SAWG’) and PCAF to leverage experience and develop our
understanding whilst also providing input to discussions on
future policy and processes
Enhanced governance and increased climate-related
reporting into the Sustainability Committee and executive risk
sub-committees provide a robust process for identifying and
managing climate-related risks and opportunities across
our businesses.
Working Groups
Paragon Banking Group PLC Board
Executive Performance Committee (ExCo)
Sustainability Committee
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Strategic Report
(b) Strategy
Making a positive contribution to net zero continues to be
a focus in addressing climate change. We are committed to
achieving net zero for all operational and attributable lending
and investment emissions by 2050, supporting national
decarbonisation goals. However the scale of the challenge ahead
is considerable, and it is clear that without support both from the
industry as a whole, and from national and international policy
makers and regulators, no business is likely to achieve net zero
solely by its own efforts.
Core to our climate change strategy is to act where we can
have a positive and meaningful impact. Our decarbonisation
approach focuses on reducing the emissions associated with
our operational footprint, and on reducing financed emissions
through customer engagement and education, and by lending
on sustainable products. We also actively engage in public
policy advocacy through industry initiatives and collaborations,
including B4NZ and the GFI, promoting the development of the
policy and regulatory framework necessary to support a just and
fair transition to net zero.
Our purpose and our overall strategic objectives are not
expected to change significantly in response to the impacts
of climate change. Our products, customers and the types
of assets we fund will evolve over time as the UK economy
transitions to net zero, but this is fully aligned with our 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, to help us meet our goals, and those
of our customers. These include the availability of affordable
like-for-like replacements where customers wish to move away
from assets powered by fossil 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.
i) Climate related opportunities
Business opportunities related to climate change are
continuously identified and addressed through the efforts of
working groups and the governance and escalation structure
of the Sustainability Committee. Our strategy aims to support
customers in their transition to a low carbon economy.
In March 2021 we became the first bank in the UK to issue a green
tier-2 capital instrument. The Bond set out our ambition to finance
£150.0 million of newly originated EPC A or B buy-to-let loans. The
Green Bond Investor report, which is available on our corporate
website, outlines the progress made up to 31 March 2024, and
shows that the full targeted allocation had been reached.
Sustainable finance is a vital mechanism to drive the
transition to a low-carbon economy, and we continue to develop
products to support customers on their individual sustainability
journeys. To incentivise the purchase of more energy-efficient
properties, discounted interest rates are offered 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 these higher EPC ratings have exceeded
concentrations in the extant portfolio. We also provide support
to landlords who wish to carry out work to upgrade EPC ratings
in their existing portfolios.
In the development finance business, our Green Homes Initiative
offers reduced exit fees to customers constructing highly
energy-efficient properties, where the majority of units in a
development need to achieve the maximum EPC rating of A to
receive the discount. The initiative was launched in 2021 and has
been expanded since, following on its successful uptake, with
the available funds most recently increasing to £300.0 million in
total, during the year.
We also aim to provide support, enabling net zero transition and
identification of further opportunities, through education and
engagement with customers, brokers, stakeholders and other
industry initiatives. In particular, educational articles and blogs
have been published 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, as
these themes developed over the year.
ii) Use of scenario analysis
The risks and opportunities from climate change 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
the climate change risks which may materialise over a longer
period of time.
Our climate change scenario analysis exercise was reperformed
as part of the 2024 ICAAP, considering the longer-term risks of
climate change. This analysis built on previous risk analyses,
which had identified those areas which are most significant to
our strategic goals. The mortgage lending and motor finance
portfolios were prioritised in the quantitative climate change risk
assessment, due to the availability of climate-related data for
these asset types.
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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
Outcome
Transition risk
To assess transition risk across the mortgage portfolio the
NGFS ‘Net Zero 2050’ and ‘Fragmented World’ scenarios
were used to forecast key macroeconomic variables under
the influence of climate change.
In addition, the impact of achieving compliance with the
originally proposed EPC rating of C Minimum Energy
Efficiency Standards (‘MEES’) in the PRS was considered.
These two stress drivers were combined to assess the
outcome on credit and capital across the mortgage portfolio.
Across the motor finance portfolio, asset values were
stressed using the CBES early action and late action
scenarios to provide an additional Residual Value stress and
assess the impact on credit performance.
The outcomes of the analysis suggest that, due to the
extended time horizons over which climate risks may
materialise, the ongoing uncertainty in future UK 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.
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.
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 involvement of our experienced team of in-house
surveyors in the assessment of applications is a key factor in
ensuring that this risk is tightly managed.
Net zero scenario analysis
Analysis was performed considering the emissions across the
entirety of our value chain.
Although the assessment considered all the attributable
emissions, this scenario analysis focused on the
decarbonisation of the mortgage lending and motor finance
portfolios, aligned with the 1.5°C UK Climate Change
Committee’s Balanced Net Zero Pathway scenario.
The analysis considered the implication of a 2030 interim
decarbonisation target, and the key contributors to achieving
the required emissions reductions.
Across the mortgage lending portfolio, the analysis
identified retrofitting and the electrification of heat as key
levers. For motor finance, battery electric vehicle adoption is
a key influence.
The roll-out of low-emission electricity across the UK
also supports the decarbonisation of both asset classes
particularly as electric technology is further adopted.
The analysis indicated a key dependency for portfolio
decarbonisation on appropriate government policy and
strategy to drive consumer demand for decarbonisation,
retrofit investment and the electrification of heat
and transport.
In addition, we repeated the qualitative review of climate change risk and opportunities by business area, first undertaken in 2023. This
process is intended to ensure that climate change risks are mitigated, and opportunities captured, wherever material across our business.
The review was facilitated by the Sustainability Committee’s Financed Emissions and Opportunities Working Group and received
groupwide input. The review did not identify any significant impacts on future cash flows, financing arrangements or the cost of capital.
Climate change scenario analysis has improved our understanding of key climate change risk drivers, their potential impact, and
the available mitigants. Our approach to scenario analysis will continue to mature as the learnings from the SAWG, which this year
focused on short-term scenarios and impacts on nature, are integrated into the process.
The qualitative review and the quantitative scenario analysis performed during the year are central to identifying and assessing
the impact and materiality of climate-related risks and opportunities across all of our businesses. The results of both assessments
identified no significant gaps or vulnerabilities related to climate change, and confirmed that current processes are fit-for-purpose.
The outcomes were presented to, and approved by, the Sustainability Committee and the Board. The delivery of the review across
the business further embeds the consideration of climate change within our planning and strategic development processes on a
business-as-usual basis.
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Strategic Report
(c) Risk management
Climate change continues to be further embedded within the ERMF which is designed to align and embed risk management practices
across the organisation and for all types of risk. It also provides a methodology for identifying, escalating and monitoring each element
of our risk profile. As a designated principal risk, climate change is considered alongside all other such risks in the evaluation of all
major capital expenditure, acquisition and divesture proposals.
More detail on the ERMF and our approach to climate change as a principal risk is set out in
Sections B8.4 and B8.5.
i) Potential risks identified over the short, medium and long term
Although the impacts of climate change are already current, there is still significant uncertainty around the channels and timings
through which the related financial and non-financial risk impacts might materialise. The table below outlines examples of risk drivers
considered to be most significant to our business and strategy, and the timeframes over which they might impact. We prioritise risk by
magnitude of expected impact and likelihood of the risk materialising.
Source
Risk driver
Most relevant
lending area
Most relevant
principal risks
Timeframe
Expected impact
Transition risk
Current
and
emerging
regulation
Continued
tightening of
energy efficiency
regulations
in the private
rented sector
and buildings
regulations in
the UK
Mortgage lending
Credit, capital,
liquidity and
operational
Short and
medium term
Low
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
Scenario analysis
performed during
the year highlighted
a minor overall
impact to credit
and capital
Technology
Transition to
low-carbon
technologies which
could impact
asset values and
infrastructure
requirements
Includes the
risk that some
new low-carbon
technologies may
prove ineffective
SME lending and
motor finance
Credit
Short and
medium term
Low
A prudent
approach to new
and developing
technology is
taken and we have
robust controls
and reporting to
limit exposure
to obsolescent
technologies
Reputation
Increased
stakeholder,
shareholder and
regulatory scrutiny
if there is perceived
to be a lack of
action to mitigate
climate change
All
Reputational
Short and
medium term
Low
We have a robust
climate change
strategy, and our
businesses have a
very low exposure
to climate
sensitive sectors
Page 72
Source
Risk driver
Most relevant
lending area
Most relevant
principal risks
Timeframe
Expected impact
Physical risk
Acute
Damage to
property, business
disruption and
higher insurance
costs from climate
driven events such
as flooding
Mortgage lending
and development
finance
Credit, capital and
operational
Short, medium and
long term
Low
Both our business
assets and our
lending portfolios
have low exposure
to physical risk
and appropriate
controls and
procedures are in
place to reduce the
impact of this risk
Scenario analysis
performed on the
mortgage lending
portfolio found
that the impact
of flood risk is
not considered
significant
Chronic
Alterations
in weather
patterns affecting
subsidence and
ground stability
which may damage
mortgaged
property assets
Mortgage lending
and development
finance
Credit
Long term
Very low
Appropriate
controls are in
place, and the
longer impact
duration offers
sufficient time to
adapt to changes in
risk profiles
ii) Assessment at underwriting
One of our principal tools for managing climate related risk is the
assessment 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 business or our customers.
Assessment of current environmental risks and forward-looking
climate change risks are factored into our 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 and other climate-related factors 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.
Valuation reports are prepared by surveyors on each property
and include 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
us to ensure that a property is, and remains, insurable, including
for both subsidence and flood risk, providing cover across the
mortgage book.
In development finance the initial due diligence considers
flood risk, ground instability, local ecology and the impact of
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.
iii) Quantifying climate exposure
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, most recently in 2024,
have identified any requirement to adjust current processes or
lending criteria. Our EPC data capture process continues to be
enhanced to improve our 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.
As of 30 September 2024 UK legislation required properties
in the PRS to have EPC ratings of E or better, although the
incoming administration has indicated its desire to tighten
these rules. While the timings and impacts of future public
policy initiatives, coupled with changes in market preferences
on energy-efficiency, remain highly uncertain, some tightening
of standards and increased demand for more energy-efficient
properties are both expected in the short to medium term.
At present there is no direct significant or quantifiable link to
asset values or impairment attributable to energy-efficiency
alone. This is expected to evolve continuously throughout the
UK’s pathway to net zero by 2050.
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Strategic Report
Our most recent survey of landlords operating in the buy-to-let
sector, for the quarter ended 30 September 2024, showed that
around two thirds of those surveyed had at least one property
with an EPC grade of D or less. However, 92% had at least
some knowledge of government proposals which would require
them to upgrade such properties, with 67% claiming they had a
detailed understanding. 42% already planned to carry out works
to upgrade their properties.
The challenge of decarbonising UK residential real estate and
the related risks are shared by all property-based lenders and
their customers. We will continue to support the transition,
leveraging our strong balance sheet, robust credit standards and
long-standing relationships with professional landlords.
(d) Metrics and targets
i) Mortgage Lending
The Mortgage Lending division is focused on first charge
buy-to-let mortgages, and also includes limited balances
related to legacy owner-occupied first and second charge
mortgage books, where no new lending takes place. Energy
efficiency (measured by EPC grades) and flood risk are key
metrics used to assess climate risk across the mortgage
portfolio. Climate analysis to date has been principally
targeted on the buy-to-let portfolio.
The tables below summarise the principal exposure metrics
for first charge buy-to-let mortgages. While data for England
and Wales, which covers 93.2% of all accounts (2023: 92.2%),
has been available for some time, during the current year
comparable data for exposures in Scotland and Northern Ireland
has been sourced, increasing portfolio coverage to 95.4%
(2023: 94.2%). 2023 EPC data presented below has been
restated on a consistent basis.
The movement in EPC ratings reflects both the underwriting of
more energy-efficient loans during the period and the capture of
new ratings where an updated EPC has been obtained by
the customer.
Indicator
Measure
2024
2023
(restated)
EPC
Grading A or B
8.8%
8.3%
Grading C
36.6%
33.5%
Grading A to C
45.4%
41.8%
Grading D or E
54.0%
57.4%
Grading F or G
0.6%
0.8%
We perform an annual flood risk assessment of the mortgage
lending portfolio, based on location-specific data covering the
whole of the UK. This assessment includes flood risk from rivers,
surface water and coastal flooding. Data has been obtained
for 97.5% of properties on the mortgage book (2023: 94.0%),
summarised below as at the year end.
Indicator
Measure
2024
2023
Flood risk
Very high risk
0.1%
0.1%
High risk
3.0%
2.9%
High or very high risk
3.1%
3.0%
These results indicate that only a small balance of the property
assets securing mortgages in our portfolio are at higher risk.
We have yet to experience any loss attributable to flood or
ground instability.
As well as addressing the current flood risk, the annual
assessment also includes a projection of the potential future
flood risk out to 2080 under various climate scenarios. The
analysis was used to evaluate whether there is likely to be any
build-up of medium to long term risk if current underwriting
processes were to remain unchanged. Although some increase
in risk was projected over the period, the findings were
considered by internal property and credit risk experts, and the
marginal increase was not considered to be substantial.
The proportion of new mortgage lending on properties with
EPC grades of A to C increased by 3.5% in the year. The
distribution of EPC grades amongst the 99.8% of new buy-to-let
mortgages advanced during the year where an EPC was available
(2023: 99.9%), is set out below. During the current year EPC data
has additionally been sourced for Scotland and Northern Ireland,
as noted above and therefore the figures presented this year are
for the UK as a whole. Comparative amounts have been restated
on the same basis.
Indicator
Measure
2024
2023
(restated)
EPC
Grading A to B
12.7%
10.0%
Grading C
40.7%
39.9%
Grading A to C
53.4%
49.9%
Grading D or E
46.4%
50.0%
Grading A to E
99.8%
99.9%
Grading F or G
0.2%
0.1%
New 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.
ii) Commercial Lending
Our 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.
The exposure to carbon-related assets across the SME lending
business, which has the widest range of different exposure
types has been assessed, while acknowledging that the term
‘carbon-related assets’ can be subject to a broad range of
interpretations.
Limited company customers have been analysed into broad
industry groups using SIC (Standard Industrial Classification)
codes, with the potential exposure of each industrial sector to
increased climate risk then considered. Higher risk sectors were
identified as part of our climate risk assessment and discussed
with internal industry experts. Although these sectors are
identified as having heightened climate-related risks, regular
review of industry performance coupled with credit control and
other processes leave a low overall residual risk.
Page 74
This year’s assessment additionally identified the ‘Wholesale
and retail trade; repair of motor vehicles and motorcycles’
sector as carbon-related assets and such exposures have been
incorporated into the results below, with 2023 data restated on a
comparable basis. As part of the same exercise the ‘Real estate
activities’ sector, which had comprised 0.8% of balances in 2023
was reclassified as low impact.
The proportion of our SME lending customers by value operating
in these higher risk sectors, is broadly similar to that reported in
the previous year, and is set out below:
Sector
Relative
climate risk
exposure
Residual
risk after
controls
2024
2023
Construction
Moderately
High
Low
18.3%
16.7%
Transportation and storage
Low
12.1%
13.9%
Mining and quarrying
Low
1.2%
1.5%
Administrative and
support service activities
Medium
Low
20.8%
21.2%
Agriculture, forestry
and fishing
Low
1.9%
2.3%
Water supply, sewerage,
waste management and
remediation activities
Low
2.7%
3.7%
Manufacturing
Low
8.6%
8.7%
Wholesale and retail trade;
repair of motor vehicles
and motorcycles
Low
6.4%
5.8%
Electricity, gas, steam and
air conditioning supply
Low
0.2%
0.1%
Total increased climate
risk exposure
72.0%
73.9%
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 in this sector can be closely
aligned with the other sectors above that are identified as having
increased climate change risk.
Measures addressing other climate risk elements within the
Commercial Lending division, such as the environmental
impacts of business assets financed and the classification of
development finance projects by environmental rating, are under
development and continue to evolve.
iii) Integration of climate change within remuneration
and culture
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 operational emissions and the financed
emissions attributable to lending portfolios. More detail is set out
in the Directors’ Remuneration Report (Section B7).
Employee engagement on climate change continued in the
year, with communication campaigns on sustainability taking
place through the business. This programme aims to further
embed the consideration of climate change within
business-as-usual processes.
Campaigns delivered during the year include “Great Big Green
Week”, “exploring our strategy” and articles and stories on how
individual customers are being supported on their net zero
journeys. These update employees on our sustainability strategy
and the steps we are taking to reduce our impacts on climate
change. The new PPPs rolled out to all employees also encourage
sustainable behaviours, with a section dedicated to setting
sustainability-related and climate change related objectives.
(e) Financed emissions
Our financed, or downstream, emissions, which are considered
as Scope 3 emissions, are those generated by customers which
are facilitated by the financing we provide. As set out above, we
have committed to reaching net zero by 2050, which will include
reducing the financed emissions associated with our lending
portfolios, which make up the significant majority of emissions
across our value chain.
Strategy in this area will continue to evolve, delivering initiatives
and products to drive emission reductions across each of our
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 we operate.
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.
Emissions intensity is a measure of the amount of GHGs which
are emitted by a business for each unit of economic or physical
activity. 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.
For further details on the methodologies and data used
for financed emissions reporting refer to the 2024 basis
of reporting available on the sustainability section of our
corporate website.
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Strategic Report
i) Scope 3 financed emissions balance sheet
The financed emissions balance sheet set out below shows emissions related to 85% of assets covered by the PCAF standard by
exposure (2023: 89%). Our ambition is to increase this coverage level over time. The order of prioritisation for increasing data coverage
is based on the relative size of exposure to each particular lending stream, expected level of emissions, the availability and accuracy of
suitable emissions data and the ability to report meaningful year-on-year data.
The principal reasons for the overall decline in coverage recorded in the year are the diversification of liquidity from cash balances,
which are not covered by the PCAF Standard, to investment securities which are, combined with the relatively larger growth in the
development finance and structured lending portfolios in the year, compared to the lending portfolios for which emissions values have
been calculated. We are in the process of developing our methodology to enable us to report on the emissions associated with these
additional asset classes.
PCAF Scope 3 financed emissions balance sheet
Business
area
Asset type
Balance
Balance with
emissions
data
Data
coverage
Absolute
financed
emissions1
Economic
emission
intensity2
Physical
emissions
intensity3
Physical
activity
factor
Indicative
PCAF data
quality score2
£m
£m
kilotonnes
CO2e
tonnes
CO2e per
£ million
balance
kgCO2e per
physical
activity
factor
30 September 2024
Mortgages4
13,415.7
13,415.7
100%
234.7
17.4
44.7
/m2
3.1
Motor
finance5
Passenger
vehicles and
LCVs6
225.9
225.9
100%
14.6
65.3
0.3
/mile
2.4
Leisure
vehicles
105.5
Excluded5
SME lending
Motor
vehicles6
172.1
172.1
100%
57.9
335.5
0.3
/mile
2.9
Other assets
680.3
Under development7
Development finance
884.0
Under development8
Structured lending
256.9
Under development9
Investment securities
427.4
Under development10
Other assets
3,102.2
Not in scope of financed emissions balance sheet11
Total
19,270.0
30 September 2023
Mortgages4
12,902.3
12,902.3
100%
257.9
19.9
46.4
/m2
3.1
Motor
finance
Passenger
vehicles and
LCVs6
206.1
193.2
94%
13.2
69.1
0.3
/mile
2.6
Leisure
vehicles
91.6
Excluded5
SME lending
Motor
vehicles6
106.4
106.4
100%
37.8
356.3
0.3
/mile
2.8
Other assets
651.1
Under development7
Development finance
747.8
Under development8
Structured lending
169.0
Under development9
Investment securities
-
Under development10
Other assets
3,545.9
Not in scope of financed emissions balance sheet11
Total
18,420.2
Page 76
Notes on calculation methods
1. Absolute financed emissions are attributed to the Group on a
loan-to-value basis.
2. Economic emission intensity refers to absolute emissions per
pound of lending or investment.
3. Physical emission intensity is a measure of absolute
emissions per physical output based on the customer or
asset being financed.
4. Emissions related to mortgage assets are calculated using
EPC data which has not been altered or updated. Where EPC
data is not available, emission intensity is estimated based on
property archetypes and data available in the EPC database.
5. Motor finance data currently excludes leisure vehicles
(motor homes, caravans and campervans).
6. For lending on passenger and light commercial vehicles in the
SME lending and motor finance divisions, the number plates
provide accurate scope 1 emissions data when combined
with estimated annual mileage. Where no emissions data
is available from the DVLA, emissions data is sourced from
the PCAF emissions factor database, based on make and
model, or the UK Government GHG conversion factors. 2023
amounts only include those vehicle emissions sourced from
the DVLA.
7. SME lending also includes the financing of other types of
assets, aircraft mortgages, invoice finance, professions
finance and unsecured lending under BBB sponsored
schemes. 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 goods vehicles and plant, but these rely
heavily on assumptions and are subject to change, so have
not been adopted.
8. Attribution of financed emissions for the development finance
business is complex and while estimates can be made using
sector or industry proxies, these rely on a significant number
of assumptions which reduce the accuracy and usefulness
of the outputs. Metrics for development finance therefore
remain under development until improved industry data on
the emissions associated with the build phase of construction
projects is available.
9. Structured lending remains an area for development. The
PCAF standard does not include a methodology to attribute
emissions to this form of facility.
10. During the year the investment securities were acquired as
part of our liquidity balance. Such assets fall within scope of
PCAF, and an appropriate methodology will be developed in
due course.
11. Out of scope assets include cash, derivative financial assets,
intangible assets, pension surplus and other receivables.
Operational property, plant and equipment assets are also
out of scope for this purpose. Their attributable emissions are
considered under Scopes 1, 2 or 3 in the operational footprint
outlined in ‘(f) operational impacts’.
12. PCAF data quality score has been calculated in accordance
with the PCAF guidance. A PCAF score of 1 is considered to
be a more accurate estimation of financed emissions, while a
PCAF score of 5 is considered to have a much larger margin
of error.
(f)
Operational impact
Our principal business activity is the provision of mortgage
and commercial finance and therefore, in common with other
such businesses, the overall direct environmental impact of our
operational footprint 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 those affecting all commercial
organisations such as office and resource use, procurement in
offices and business travel.
Our operations are not considered to be significantly exposed
to the financial risks of climate change materialising from either
transitional or physical risks.
i) Policy
We comply with all applicable laws and regulations relating to
the environment and include these within our legal compliance
framework. Groupwide recycling and awareness campaigns are
run with employees to reduce various forms of waste such as
food, consumables and energy.
ii) Risk management
The Group Property function, which reports ultimately to the
Chief Operating Officer, manages the environmental risks
inherent in our operations. The second line Operational Risk
team and the ORC monitor compliance within the wider ERMF.
Group Property are responsible for the oversight of all premises
occupied by the business 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 the
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.
We comply with the Energy Savings and Opportunities Scheme
(‘ESOS’), a UK Government initiative that requires companies
to identify and report on their energy consumption. Our most
recent ESOS compliance notification was submitted to the
Environment Agency in June 2024 and work is in progress to
submit our ESOS action plan in December 2024.
iii) Supply chain and procurement
Our principal purchase ledger suppliers comprise our
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.
We remain committed to identifying, targeting and addressing
inefficiencies within our supply chain and work with key suppliers
to identify solutions to reduce the environmental impacts of our
business activities, whether direct or indirect.
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Strategic Report
The due diligence and onboarding process for new suppliers
was updated in the year, with a new IT solution rolled out. This
enables the consideration of sustainability and environmental
factors as part of the supplier approval process. In developing
the new process we considered the results and responses from
the sustainability survey sent to Group Property suppliers
during 2023, and critical suppliers across the business in the
current year.
All pre-printed stationery items used in the business are from
renewable sources certified by FSC.
95.1% (2023: 92.1%) of the electricity directly purchased in the
year was obtained from sources certified as renewable by the
Office of Gas and Electricity Markets (‘OFGEM’).
iv) Environmental initiatives
Environmental initiatives undertaken in the period include:
• Continuing to balance our approach to net zero with our
workspace needs. During the year, our Solihull premises were
consolidated, following changes to our working arrangements
over recent years and building renovations. This reduction
in our physical footprint has allowed us to reduce our
operational emissions
• Installing an additional 12 electric vehicle charging points at
our Solihull offices, bringing the total to 24
• Further improvements to the energy efficiency of the
Head Office, with wireless networks and outdoor lighting
upgraded in the year, delivering further efficiencies
• Following the relocation of IT server equipment, a
programme to decommission cooling units in our IT server
rooms has begun, reducing electricity consumption and
coolant evaporation
• The roll-out of electric and hybrid vehicles across our
company car fleet, supported by better quality emissions
factor data, has also significantly contributed to the
reductions. At 30 September 2024, 24% of all company cars
were electric-only
• Our green car salary sacrifice scheme continues to support
increased take-up of electric vehicles amongst employees,
reducing the emissions impact of commuting
v) Performance indicators
Our environmental key performance indicators 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.
We do not consider that we have significant direct 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 our business activities.
This information is presented for the twelve months ended
30 September in each year and includes all entities consolidated
in the financial statements. Normalised data is based on total
operating income of £496.4 million (2023: £466.0 million).
In 2022 we designated 2019 as the operational footprint baseline
against which we measure progress on carbon reduction, and
data for this year is presented below.
2024
2023
2019
Baseline
Tonnes
CO2e
Tonnes
CO2e
Tonnes
CO2e
Scope 1 (Direct emissions)
Combustion of fuel:
Operation of gas heating boilers
468
504
520
Petrol and diesel used
by company cars
323
450
465
Operation of facilities:
Air conditioning systems
27
22
24
818
976
1,009
Scope 2 (Energy indirect emissions)
Electricity consumption
(Location-based)
475
524
995
Electricity consumption
(Market-based)
70
62
990
Total scopes 1 and 2 (Location-based)
1,293
1,500
2,004
Total scopes 1 and 2 (Market-based)
888
1,038
1,999
Normalised tonnes - Scope 1 and 2
CO2e per £m income (Location-based)
2.6
3.2
6.6
Normalised tonnes - Scope 1 and 2
CO2e per £m income (Market-based)
1.8
2.2
6.7
Scope 3 (Other indirect emissions)
Fuel and energy related activities not
included in scope 1 or 2
421
433
520
Water consumption
3
4
14
Waste generated in operations
44
50
88
Total scope 3
468
487
622
Total scopes 1, 2 and 3 (Location-based)
1,761
1,987
2,626
Total scopes 1, 2 and 3 (Market-based)
1,356
1,525
2,621
Normalised tonnes Scope 1,2 and 3
CO2e per £m income (Location-based)
3.5
4.3
8.8
Normalised tonnes Scope 1,2 and 3
CO2e per £m income (Market-based)
2.7
3.3
8.8
Operational footprint greenhouse gas (‘GHG’) emissions
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.
CO2 equivalent (‘CO2e’) values above, other than for
market-based Scope 2 elements, are calculated using the
UK Government GHG Conversion Factors for Company Reporting
published on 8 July 2024. Market-based emissions have been
calculated in accordance with GHG Protocol guidelines.
Page 78
The market-based method for calculating emissions relating
to electricity use reflects the specific source of the electricity
purchased and derives emission factors from information
provided by suppliers and related data, where such 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.
Where our available data does not meet the Scope 2 Quality
criteria the emissions are estimated utilising the UK grid
conversion factor. The methodology is detailed in the
Basis of Reporting, as noted above.
The majority of emissions reported relate to the provision of
heat, light and power to offices and other operational premises.
Emissions attributable to employees working from home are not,
at present, included within the scope of the regulations.
GHG emissions reduction target
Our target is to achieve net zero across our 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 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
To date, a 48% reduction in market-based emissions compared to
the 2019 baseline has been achieved (2023: 42%). This reduction
continues to be principally driven by the shift to hybrid working.
Further reductions in both location and market-based emissions
compared to 2023 reflect the electrification of the company car
fleet and the reduction in gas use following the centralisation of
our Solihull operations in one building. Although the electrification
of the fleet has reduced emissions overall, it has increased scope
2 emissions with travel-related emissions moving from scope 1 to
scope 2 as fuel is no longer directly consumed.
Our aim is to deliver our net zero operational footprint
commitment through the decarbonisation of heating across
our offices and other sites, the electrification of business travel,
switching to low-carbon green electricity where possible, and
the reduction and recycling of waste across all our locations. It
cannot be expected that progress towards net zero emissions
will be smooth, nor that significant reductions can be delivered
every year. Emissions reductions will result from the delivery of
specific initiatives, rather than gradually, although they should
also be reduced by the wider roll out of low-carbon infrastructure
and technology across the UK.
Carbon offsetting
The emissions attributable to our operational footprint for the
year ended 30 September 2024, set out in the table above, have
been offset. Offsetting has been achieved through the purchase,
after the year end, of carbon credits certified under the Gold
Standard, one of the most widely accepted international
certification systems. Emissions for the preceding year ended
30 September 2023 were offset following the end of that year in
a similar way.
Offsetting is not regarded as a long-term solution for operational
emissions, and our offsetting commitment is supported by
an ambition to achieve net zero across these emissions by
2030, without their use. We see responsible involvement in the
voluntary carbon market as a crucial step to driving internal
investment and change, with offsetting the operational footprint
formulating a carbon price which can be used to support
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
an appropriate level of assurance that the emissions produced
have been offset, with the level of assurance having been
considered and approved by the Audit Committee.
The 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 stated 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
Mains electricity and natural gas from the UK grid is used to
provide heat, light and power to our office buildings and other
premises, with a proportion of this power certified as renewable
by suppliers. Energy is also consumed in powering company
vehicles, which is included in Scope 1 and 2 above, and through
business travel of employees, which is included in Scope 3. The
amount of power used in the year ended 30 September 2024 is
shown below.
2024
2023
2019
Baseline
MWh
MWh
MWh
Renewable electricity
2,106.8
2,330.0
3,123.5
Other electricity
199.1
200.7
768.1
Electricity
2,305.9
2,530.7
3,891.6
Natural gas
2,560.6
2,754.9
2,817.1
Motor fuel
1,636.1
2,118.9
2,303.7
Total
6,502.6
7,404.5
9,012.4
Normalised MWh per £m income
13.1
15.9
30.3
Consumption levels have seen a general decrease from 2023
linked to reduced electricity consumption following the delivery
of energy savings measures at our principal Solihull office and
the centralisation of Solihull-based employees there. Reported
motor fuel consumption has decreased, due to improved data
quality that enables more precise categorisation by fuel type.
The electrification of the fleet has shifted power consumption for
business travel from ‘Motor fuel’ to ‘Other electricity’ but total
power usage remained lower during the period.
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Strategic Report
Gas and electricity usage are based on consumption recorded
on purchase invoices. Vehicle usage is based upon expense
claims and recorded mileage. Energy is classified as renewable
based on OFGEM accreditation received from the suppliers. In
addition, our London office purchased gas through the Green
Gas Certification Scheme (‘GGCS’) meaning it has lower carbon
emissions and supports the greening of the UK gas network.
Water usage
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 2024 was 7,910m3 (2023: 10,002m3), based
on consumption recorded on purchase invoices. Normalised
consumption was 15.9m3 per £m income (2023: 21.5m3 per £m
income). Water usage has decreased due to a combination
of consolidating office space and reducing consumption in
our office buildings. Office occupancy levels under the hybrid
working approach remain largely similar year-on-year.
Waste
SFS is the most significant producer of waste amongst our
businesses. 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.
Waste output excluding SFS consists of a mixture of general
office waste types, principally paper and cardboard with some
wood, plastic and metals. Facilities are provided in our 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
our recycled outputs relates to waste paper.
Since June 2023 we have partnered with a specialist 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 targeted. All waste is either recycled,
used in waste-to-energy initiatives or sent to landfill.
Amounts of waste generated in the year ended
30 September 2024 together with the methods of disposal are
shown below.
2024
2023
2019
Baseline
Tonnes
Tonnes
Tonnes
Recycled
151
44
122
Recovery through
Waste-to-Energy Initiatives
45
37
-
Landfill
85
95
187
281
176
309
Normalised tonnes per £m income
0.57
0.38
0.75
Waste generation data is based upon volumes reported on
disposal invoices.
Our long-term aim is to increase the proportion of waste which
is diverted from landfills, prioritising recycling over recovery
initiatives. Total waste increased compared to 2023, mainly due
to the clearing of office space as part of office consolidation
in the period, but remains lower than the 2019 Baseline. The
amount of waste being sent to landfill has continued to reduce.
Travel and commuting
Our company car policy supports our 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 on a
permanent basis since January 2022
• CO2 emissions for fleet vehicles 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 and the availability of
suitable vehicles
• All non-electric cars will be removed from the company car
fleet by 30 September 2031
At 30 September 2024 only 5% of our company car fleet was
petrol or diesel (2023: 20%), with 24% electric-only (2023: 16%).
We continue to expand the number of EV charging points
available to employees. Our aim is to reduce emissions from
commuting and business travel by employees. Other initiatives
include our green car and cycle-to-work schemes, offering
employees a tax-efficient way to purchase an electric or plug-in
hybrid vehicle or a new bicycle via salary sacrifice arrangements.
(g) Future developments
Activities in our climate change programme going forward
also include:
• Refurbishment and decarbonisation of our Solihull
head office
• Expansion of the financed emissions balance sheet to fully
cover Commercial Lending balances
• Development of our internal resources for understanding
and reporting of financed emissions and portfolio
decarbonisation pathways
• Education and engagement with SME customers through our
newly appointed Green Champions
• Continuing to work towards reducing the operational footprint
to net zero by 2030
• Further engaging and promoting positive sustainable public
policy across industry and government, through membership
of B4NZ and other industry bodies
Page 80
i) Emissions across the value chain
There are significant challenges in data collection and accurate calculation for Scope 3 emissions, however we are committed to
disclosing downstream Scope 3 emissions where significant and relevant to our stakeholders, and where the data is sufficiently
mature to form a reliable basis for analysis and 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 value chain and their current reporting status. During the
year we updated our approach for categorising operating leases in our SME lending business. Due to the similarity between the
types of assets funded in that business under finance leases and operating leases, emissions attributable to operating leases will be
considered within the financed emissions balance sheet.
To date our emissions reporting has focussed on the operational footprint, where good progress has been made on emissions
reductions, and financed emissions, which are the most significant emissions across our value chain. During the year the financed
emissions balance sheet was enhanced, now covering a greater proportion of motor finance exposures, where data was not previously
available. We continue to work towards expanding the emissions sources we are able to report on.
Scope
Emissions source
Significance
of emissions
Approach
Commitments
Scope 1
Combustion of fossil fuels and the
evaporation of coolants in owned or
controlled assets
Very Low
Included within ‘(f)
Operational impact'
Offset from 2022
Commitment to net zero
by 2030
Scope 2
Purchased electricity, heat and steam
Very Low
Included within ‘(f)
Operational impact’
Scope 3
Fuel and energy related activities not
in Scope 1 or 2
Very Low
Included within ‘(f)
Operational impact’
Waste generated in operations
Water consumption
Scope 3
Working from home emissions and
employee commuting
Very Low
Under development
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
Supply chain emissions
Low
Under development
Scope 3
Financed emissions – Mortgages
High
Reported in ‘(e) Financed
emissions’
Scope 3
Financed emissions –
Commercial Lending
Very High
Under development but
partially reported in ‘(e)
Financed emissions’
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Strategic Report
(h) TCFD reporting
UK Listing Rule UKLR 6.6.6(8) requires the Group to disclose whether it has included climate-related financial disclosures consistent
with the TCFD recommendations and explain any areas of non-consistency. The climate-related disclosures set out above 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 above, consideration has been given to the 2021 TCFD Implementing Guidance and the
Supplemental Guidance for Banks, the FRC 2023 and 2024 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 our climate-related activities
and highlight those areas for future development, at an appropriate level to enable users to assess our exposure to, and approach to
addressing, climate-related risks and opportunities.
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
Relevant section
Disclose the organisation’s governance around climate-related risks and opportunities
a.
Describe the board’s oversight of climate-related risks and opportunities.
(a) ii) and iii)
b.
Describe management’s role in assessing and managing climate-related risks and opportunities.
(a) i), ii) and iii)
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
a.
Describe the climate-related risks and opportunities the organisation has identified over the short,
medium, and long term.
(b) i) and ii)
(c) i)
b.
Describe the impact of climate-related risks and opportunities on the organisation’s businesses,
strategy, and financial planning.
(b) i) and ii)
(f) iii) and iv)
c.
Describe the resilience of the organisation’s strategy, taking into consideration different climate-
related scenarios, including a 2°C or lower scenario.
(b) ii)
(g)
Risk management
Disclose how the organisation identifies, assesses, and manages climate-related risks
a.
Describe the organisation’s processes for identifying and assessing climate-related risks.
(a) i) and iii)
(b) ii)
b.
Describe the organisation’s processes for managing climate-related risks.
(b) i)
(c) ii) and iii)
(d) i) and ii)
c.
Describe how processes for identifying, assessing, and managing climate-related risks are
integrated into the organisation’s overall risk management.
(a) i) and iii)
(c) ii) and iii)
Metrics and targets
Disclose the metrics and targets used to assess and manage relevant climate-related risks and
opportunities where such information is material
a.
Disclose the metrics used by the organisation to assess climate-related risks and opportunities in
line with its strategy and risk management process.
(b) ii)
(c) iii)
(d) i), ii) and iii)
b.
Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 GHG emissions and the related risks.
(e) i)
(f) v)
(g) i)
c.
Describe the targets used by the organisation to manage climate-related risks and opportunities
and performance against targets.
(b) i)
(f) v)
Page 82
A6.5 Social and community
We operate entirely within the United Kingdom and therefore
within the legal and regulatory framework of the UK, but we also
acknowledge the importance of corporate responsibility and
citizenship, striving to go beyond what is required in relationships
with customers, the wider community and other stakeholders.
We are 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. We also support the provision of housing in the UK
through buy-to-let lending to the PRS.
Where possible, we use our lending relationships to promote good
practice amongst our customers. The buy-to-let mortgage division
requires minimum standards from its landlord customers in the
properties we fund, helping to drive up standards in the PRS for
tenants and potential tenants.
As described in Section A6.4, we have products structured to
encourage customers to reduce their environmental impacts,
helping to drive action on climate change, and we continue to
develop our offerings in these areas, recognising the challenges
some of our customer groups face in progressing towards net zero.
We also actively engage with industry and other 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 our activity with trade organisations in the UK, we are
helping to formulate public policy and share experience on best
practice to drive forward better financial provision. We have been
particularly active in initiatives to enable the PRS to serve the UK
housing market more effectively.
We also regularly engage directly with Government to help
inform departments on how market trends are impacting
landlords, their sentiment and behaviours. Nigel Terrington,
our CEO, is a member of HM Treasury’s Home Finance Forum
and during the year we have been represented on 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 and Welsh parliamentary
committees during the year.
Membership of bodies such as UKF and the FLA enables us
to be part of shaping the future provision of financial services
to the benefit of the whole community. We play an active role in
these bodies, with representatives on working groups covering a
range of topics. John Phillipou, the Managing Director of our
SME lending operation, currently serves as Chair of the FLA,
while Louisa Sedgwick, Managing Director – Mortgage Lending
is currently a Deputy Chair of the Intermediary
Mortgage Lenders Association.
Our 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.
Through the Better Hiring Institute, our Chief People Officer,
Anne Barnett, has worked with the All-Party Parliamentary Group
on Modernising Employment, enhancing parliamentarians
knowledge of employment issues, with reform in this area a
primary focus of the new UK Government.
As part of the development of our sustainability strategy we are
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.
We have also been active in industry diversity initiatives and are
represented in the Women in Property initiative.
Supporting charity
As part of our commitment to corporate citizenship we support
charity initiatives, both by making direct donations and also
by supporting the fundraising activities of the employee-led
Paragon Charity Committee. A designated member of our
executive committees, Deborah Bateman, the External Relations
Director and Chair of the Sustainability Committee, oversees
strategy in this area.
For direct donations, we focus on supporting organisations
serving the communities in which we operate, as well as the
fundraising efforts of individual employees. We also operate a
Give-As-You-Earn Scheme through payroll. Contributions made
in the year across these initiatives totalled £42,000
(2023: £56,000).
Charities which benefitted from donations included
Down’s Syndrome Association, Sunny Days Children’s Fund,
Lupus UK, The Superhero Series, Myton Hospice and Brent
Lodge Wildlife Hospital, as well as many local sports clubs
and community groups. During Pride month we encouraged
fundraising for LGBTQ+ affiliated charities with one of the
beneficiaries being Birmingham LGBT.
Our Charity Committee consists of employees who give up
their own time to organise a variety of fundraising activities
throughout the year, with support from the business. All
employees are given the opportunity to nominate a ‘Charity
of the Year’ for each financial year, and a vote is carried out
amongst employees to select the charity to benefit from the
year’s fundraising activities.
During the year ended 30 September 2024, £49,000 was raised
for Molly Ollys, which supports children with life-threatening
illnesses and their families, helping with their emotional wellbeing.
The chosen charity for the year ending 30 September 2025 is
Guide Dogs, with a new year of fundraising already under way and
more events being planned across our locations.
Community volunteering
We are involved in a number of initiatives within our local
communities, both on a corporate level and through our
employees volunteering programmes.
Employees are encouraged to undertake at least one
paid volunteering session each year as part of our sustainability
strategy. As a specialist lender, we are conscious of the potential
impact our operations may have on society and the environment.
Therefore, community volunteering opportunities have
focussed on supporting people experiencing poverty, providing
educational opportunities for children and young people and
improving the local environment. These have included
initiatives building on long-standing relationships with
charities and schools.
Engagement in the volunteering programme across all our
locations has remained stable this year, with the number of
volunteer days completed in the financial year totalling
460 (2023: 469).
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Strategic Report
Some examples of community projects supported are
highlighted below.
People experiencing 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 eight
employees volunteered their services to help prepare food at the
drop-in centre and lend a friendly ear to their clients.
St Basils is a charity which works with 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.
20 of our people worked on crafting projects aimed at helping to
engage individuals who are in the charity’s care.
Foodbanks – 14 employees volunteered their time across the
UK, including in Hedge End, Poole, Bedworth and Birmingham.
For Christmas 2023, employees again donated food and luxury
items to Christians Against Poverty, in what has become a
festive tradition. 50 hampers were donated to families in need
across the West Midlands.
Educational opportunities
Working with schools. In total 61 employees supported
careers fairs and work experience events, including interview
skills preparation. We worked with schools and colleges local
to our Solihull head office, including Tudor Grange Academy,
Alderbrook School and Solihull Sixth Form College, whilst
supporting schools across the West Midlands, including Colmers
School, Starbank Academy and Small Heath Academy, with
activities ranging from careers days, financial literacy skills
sessions, workshops and mentoring sessions.
Support has also been provided to help improve the
outdoor wildlife areas for Heronswood Primary School and
Evergreen School.
Enhancing employability. Our strategy focused on bridging
the gap between education and employment, with a focus on
supporting young people from under-represented groups. From
March 2024 this included a new partnership with Future First, a
charity which aims to improve social mobility in the UK. Our input
centred on working with King Edward VI Sheldon Heath Academy
in Birmingham, creating opportunities for 26 mixed-ability year 10
students to attend an insights day to understand pathways into
careers and success.
During the year we also participated in the Smart Futures
Programme for Year 12 students from low-income backgrounds.
This included providing work experience, mentoring and
interactive training, helping the students to gain useful skills for
future employment.
These initiatives are intended to break down barriers which
might unfairly exclude 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.
In addition, as part of a new ‘Community Parenting’ partnership
we supported care-experienced young people by hosting insight
sessions and donating laptops.
Environmental benefits
The Canal and River Trust care for the UK’s network of canals,
rivers and reservoirs. Their vision is to have living waterways that
transform places, enrich lives and bring wellbeing opportunities to
millions. 21 employees completed clear-up projects on sections of
waterways during the year.
Thrive uses gardening to bring about positive changes in the lives
of people living with disabilities or ill health, or who are isolated,
disadvantaged or vulnerable. This year 12 of our London-based
people worked on a gardening project at Battersea Park.
Newlife undertakes de-labelling activities to recycle clothing,
allowing them to sell items in their stores. Clothing recycling
prevents items from going to landfill where they contribute to
pollution. In total, 29 employees volunteered at the Newlife
warehouse in Cannock.
EcoBirmingham is a charity with a mission to give the people of
Birmingham the tools they need to take positive environmental
action and live more sustainable lives. They are our newest
volunteering partner and during the year more than 30
employees supported their work, taking part in cleaning, weeding
and planting tasks in the EcoBirmingham community garden.
There were also multiple gardening and general cleaning
projects, including with the Solihull MIND Horticultural Project
and Longdown Dairy Farm.
Other projects
Other projects supported include the Royal Star and Garter,
which provides care to veterans and their partners living with
disability or dementia and Sophie’s Legacy which provides end-
of-life support to young children and their families. 51 employees
volunteered at Wythall Animal Sanctuary which cares for sick,
injured or orphaned wildlife. 19 employees also volunteered their
time to support Rowan’s Hospice in Portsmouth and St Richard’s
Hospice in Worcester.
Taxation policy and payments
Materially all our taxable income arises in the UK and therefore
we have no presence in jurisdictions considered to enable tax
base erosion and profit shifting.
Our tax strategy is to comply with all relevant tax obligations
whilst co-operating fully with the tax authorities. We recognise
that in generating profits which can be distributed to
shareholders the business benefits from resources provided by
government and the payment of tax is a contribution towards the
cost of those resources. We will only undertake such tax planning
as supports commercial activities and, in the UK context, is not
contrary to the intention of Parliament.
As a group containing a bank, we are 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. We have previously confirmed to HMRC that we are
unconditionally committed to complying with the Bank Tax Code,
and formally re-approved the tax governance policies and the tax
strategy outlined above.
During each financial year since 2018 a tax strategy document
for that period, approved by the Board of Directors, has been
published on the Group’s corporate website, in accordance with the
Finance Act 2016. These documents address the following matters:
• our approach to risk management and governance
arrangements in relation to UK taxation
• our attitude towards tax planning
(so far as affecting UK taxation)
• the level of risk in relation to UK taxation that we are prepared
to accept
• our approach towards our dealings with HMRC
The most recent such statement was published during the year
and can be found in the Investor Relations section of the website
in ‘Results, Reports and Presentations’.
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 our policies
each year and certifies the appropriateness of our tax accounting
arrangements to HMRC.
We have an open and positive relationship with HMRC, meeting
with their representatives on a regular basis, and are 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 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, we are unable to recover the majority of the VAT
charged by suppliers and this represents a cost of doing business.
Taxes collected on behalf of HMRC include payroll deductions
from our 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.
2024
2024
2023
2023
£m
£m
£m
£m
Taxes borne directly
UK Taxation
Corporation tax
70.2
75.1
Employers’ payroll taxes
12.2
11.6
Irrecoverable VAT and other
indirect taxes
6.7
7.4
Stamp duty
-
0.6
Total UK national taxation
89.1
94.7
Local taxation
Business rates
1.8
1.4
90.9
96.1
Taxes collected
Employees' payroll taxes
30.7
28.7
VAT
0.4
0.3
31.1
29.0
122.0
125.1
Overall, the tax borne and that collected on behalf of the
UK Government demonstrates the economic activity of our
business, its contribution to the UK economy and state, and the
value added to society more broadly.
A6.6 Human rights
We respect all human rights in conducting our business, and
regard 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 our key stakeholder groups:
customers, employees and suppliers. These principles are
embedded in our culture and reflected in our Code of Conduct.
Our commitment to supporting our people’s employment rights
is described in Section A6.3.
We conduct business exclusively in the UK and, as such, are
subject to the UK Human Rights Act 1998, which incorporates
the European Convention on Human Rights into UK law. There
are systems in place to ensure our policies and procedures are
compatible with all legal requirements applicable to us and to
identify any new or emerging requirements.
The Board and the CEO have overall responsibility for ensuring
that all areas within the business uphold and promote respect
for human rights. We seek to anticipate, prevent and mitigate
any potential negative human rights impacts as well as enhance
positive impacts through policies and procedures and, in
particular, through our policies regarding employment, equality
and diversity, application of the FCA Consumer Duty, treating
customers fairly and information security.
Our policies seek to ensure that employees and business
partners comply with the relevant UK legislation and regulations
and to promote good practice. These policies are formulated and
kept up-to-date by the relevant business areas, authorised in
accordance with governance procedures and are communicated
to all employees.
Compliance with human rights regulation falls within our overall
compliance regime, and any breaches or potential breaches would
be investigated and addressed through the risk management
framework and, if appropriate, our disciplinary procedures.
We comply with and support the objective of the
Modern Slavery Act 2015, in raising awareness of modern
slavery and human trafficking.
We are committed to ensuring there is no modern slavery or
human trafficking in our supply chains or in any part of the
business, and to acting ethically and with integrity in all business
relationships. We actively engage with suppliers to ensure
compliance with Modern Slavery legislation is achieved.
This commitment is reflected in our policies and the
Supplier Code of Conduct.
An annual Modern Slavery and Human Trafficking Statement is
published for the Group, describing our policies for achieving this
commitment. This can be found on our corporate website:
www.paragonbankinggroup.co.uk.
Extensive monitoring of the implementation of all these policies
is undertaken and we are 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 (2023: none).
Page 85
Strategic Report
A6.7 Business practices
Our approach to doing business is set out in our 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 we provide training 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 our
corporate website at www.paragonbankinggroup.co.uk.
Business partners
Our business model relies on maintaining good relationships
with our 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
our approach. In return, we expect suppliers to help deliver a high
standard of service to our customers and act responsibly.
Our Supplier Code of Conduct sets out our overall approach to
supplier engagement and corporate responsibility and, importantly,
the standards of behaviour expected from suppliers. The code is
available on our website (www.paragonbankinggroup.co.uk).
We place great importance on positive supplier relationships,
both with intermediaries and with our suppliers of goods and
services. Major suppliers have strong relationships with the
relevant areas of the business, but we also recognise the
importance of smaller providers.
In 2023 we conducted a survey of principal suppliers, to gather
information on sustainability matters such as employment
practices, environmental impacts and procedures to ensure
compliance with laws and regulations, to ensure these aligned
with our expectations and values. Our purchasing process
now collects this data as part of the due diligence process at
onboarding for significant suppliers, and it is intended that data
held is validated from time-to-time on a continuing basis.
The Supplier Code of Conduct also includes our conduct
commitments and our expectations of business partners
in relation to bribery and corruption, data protection and
modern slavery. It contains important information concerning
employment practices, approach to health and safety,
community matters and environmental policies.
The only significant outsourcing arrangements used in the year
relate to:
• the administration of 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 IT systems for payment processing by a leading
business in this field
• provision of the hosted administration platform for our invoice
finance business by an industry specialist
All these activities take place within the UK and all data
remains onshore.
When outsourcing activities, we retain responsibility for those
services and the associated risks. We remain focused on meeting
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. Our alignment with
these requirements strengthens resilience throughout the
supply chain.
Our aim is to pay all our suppliers within 30 days of receiving
a valid invoice, where correct procedures are followed, and
we actively engage with suppliers if issues arise. To support
suppliers in avoiding such issues, invoicing guidance is published
on our website.
We are a signatory to the UK’s Prompt Payment Code (‘PPC’),
administered by the Office of the Small Business Commissioner
and as such commit 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.
Our 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
2024
2023
2022
Average time to pay invoices (days)
22
21
22
Invoices paid within 60 days
95%
94%
94%
Sensitive business sectors
As a matter of credit policy, we do 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
• Adult entertainment businesses
• Gambling and betting activities
• Political organisations
• Manufacturers of weapons and ammunition
This list is kept under review as part of our sustainability strategy.
Page 86
Anti-corruption
We carry out business fairly, honestly and openly. Our
comprehensive anti-bribery and anti-corruption policy, endorsed
by the directors, forms part of our Code of Conduct. These
policies cover all employees and are operated throughout the
business. We will not make or accept bribes, nor will we condone
the offering or receiving of bribes on our behalf. We will always
avoid doing business with those who do not accept our values
and who may harm the reputation of our businesses.
An annual bribery risk assessment is carried out, as required by
the Bribery Act 2010 and continues to conclude that the Group
is not a company with a high risk of bribery. We conduct all our
business within the UK and all significant outsourced operations
also take place within the country. The UK is not considered a
jurisdiction with a high incidence of corrupt practices, ranking
twentieth safest out of 180 countries and territories in the
Corruption Perceptions Index for 2023, the most recent to be
published. However, we take our responsibilities seriously and
do not tolerate bribery in any form, on any scale and therefore
keep policies and procedures under regular review. We have
committed to self-reporting any identified serious incident of
bribery or corruption.
Group policies cover the conduct of our business, interaction
with suppliers and contractors and the giving or receiving of gifts
and corporate hospitality. They prohibit facilitation payments.
Before new suppliers are approved, our procedures require that
they must be assessed against our anti-bribery and corruption
policy standard, which is a key document within our 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 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 2024.
The Head of Financial Crime Risk, who also holds the
Money Laundering Reporting Officer (‘MLRO’) responsibility
for the Group, is responsible for ensuring the Bribery Act risk
assessment and resulting policies and procedures are in place
and reviewed on a regular basis. This role is part of the ‘second
line’ Risk and Compliance function and reports to the CRO.
They are also responsible for ensuring any changes in the law
are noted and applied to our 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 (2023: none).
Anti-money laundering and financial crime
As a financial services entity, we also have procedures in place
to ensure that our business cannot be used to facilitate money
laundering, sanctions abuse or other forms of financial crime.
These are consistently reviewed to ensure they remain robust.
We continue 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 continued investment
has been made in both resources and technology to ensure that
our anti-money laundering and financial crime infrastructure and
processes continue to operate rigorously and meet the changing
legal and regulatory landscape.
We are covered by the UK Market Abuse Regulation (‘MAR’)
which contains prohibitions of insider dealing, unlawful
disclosure of inside information and market manipulation, and
provisions to prevent and detect these. Our internal policies,
including the group-wide dealing policy, ensure that any inside
information is properly identified and controlled, and that any
employee or third party in possession of such information is
identified and monitored. The identification of inside information
is supervised by the Disclosure Committee, a committee of the
Board of Directors (Section B4.1).
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 where appropriate.
Management responsibility
Our senior legal officer is the General Counsel, Marius van
Niekerk, who is a member of the Executive Committee and
attends meetings of the Board. The CRO, Ben Whibley, 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 our
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 our 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
our business practices. This is described further in Section B4.6.
Page 87
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
3 December 2024
A7. Approval of Strategic Report
Corporate Governance
How we run our business and how risk is managed
P90
B1. Chair of the Board’s statement
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 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 we control our external and internal audit processes and
our financial reporting systems
P136
B7. Remuneration Committee
Policies and procedures determining how directors
are remunerated
P168
B8. Risk management
How we identify and manage risk in our businesses
P184
B9. Directors’ report
Other information about the structure of the Company required
by legislation
P187
B10. Directors’ responsibilities
Statement of the responsibilities of the directors in relation to
the preparation of the financial statements
Page 90
B1. Chair’s statement on
corporate governance
Dear Shareholder
In this section of the Annual Report we describe
our corporate governance approach and the
activities of the Board and its committees in
the year, including the most significant issues
we have considered. We also explain how we
comply with the UK Corporate Governance Code
and with stakeholder expectations as to how a
business like ours should be run.
This year has been focussed on the progress
of the strategy we have previously set out. The
economic environment has become progressively
more stable, allowing the Board to focus more on
the growth and development of our businesses
while we also saw the completion of significant
steps in our digitalisation roadmap and the full
implementation of the FCA Consumer Duty.
The Board was also focussed on challenges
for the future. The financial policies of the new
UK Government will undoubtedly have an impact
on the UK economy, impacting us and our
customers, while other policy initiatives may also
affect some sectors in which we operate.
In the regulatory sphere we saw some
additional clarity in the year, with an updated UK
Corporate Governance Code (the ‘2024 Code’)
published and the PRA moving its work on the
implementation of the Basel 3.1 capital rules
towards completion.
All these topics were significant considerations
for the Board in the year and will continue to be
so going forward.
The year also saw the completion of a tender
process for our external audit arrangements
for the year ending 30 September 2026,
which, after careful consideration, resulted in a
recommendation from the Audit Committee to
appoint Deloitte LLP in place of KPMG.
During the year we followed up the independent
external board performance review carried out
last year with an internal review and I was pleased
with the progress made on the actions identified,
and with the conclusion that the Board continued
to perform effectively.
Page 91
Corporate Governance
We have begun the process of reviewing the 2024 Code to
determine what actions will be required before it begins to
apply to us in our financial year ending 30 September 2026. The
flexibility which the 2024 Code gives to boards to design systems
of governance, risk management and control which are specific
to their operations is very welcome and the risk management
framework we already have in place addresses many of the
requirements of the new Code. In common with other entities
in the regulated financial services sectors, the disciplines of
governance and risk management are well established in our
business, which should make transition to the 2024 Code
smoother than for some other sectors.
The Board appreciates the value which our corporate
governance framework brings to the activities of the business
and the discipline which the UK corporate governance
framework has instilled over time. We seek to comply with the
Code wherever possible, in a way that is proportionate and
relevant to our activities and are confident that we can continue
to do so as the 2024 Code is introduced.
During the year we also followed with interest the development
of UK Government policy on corporate governance, directors’
duties and audit regulation. While developments in the year were
more limited than we might have expected at the beginning of
the period, the new UK Government has clearly signalled its
appetite for reform in these areas, and we await its proposals
with interest.
Engagement
The Board values feedback from investors and other stakeholders
and I was pleased to note the high level of shareholder support
for the resolutions proposed at the 2024 AGM. I also value the
feedback received from investors and their representatives in
the run-up to the meeting. We take careful note of the analysis
provided and would encourage all shareholders to engage in
this process.
I have also been pleased to have had the opportunity of
meeting a number of shareholders during the year. These
conversations allow me to share investor insights and
priorities with the Board and enable us to include these in our
considerations of group strategy. 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.
At our 2026 AGM we are due to put a revised directors’
remuneration policy before shareholders for approval. This
will be developed in the coming year and our interactions with
shareholders, proxy agencies and other representatives will form
an important part of this process. It is therefore important that
anyone who has a particular interest in this area of policy should
take the opportunity to make their feelings known.
Members of the Board have continued to attend some of the
meetings of our People Forum, and value the insights provided
on many operational and strategic matters. I have also continued
to spend time with employees in many areas of the business, and
I thank them for their time and input.
Inclusion
During the year we have been encouraged by the development
of the EDI network and our wider inclusion and diversity strategy.
Our strategy requires continuous development of products,
people and processes and that cannot be achieved without
diversity of thought and outlook at all levels.
At board level I am pleased to be able to report that we have
been able to set a target for ethnic minority representation in
senior management, as requested by the Parker Review. We
have chosen to set this target on the same basis already used for
our commitments under the FTSE Women Leaders initiative.
I was also pleased to welcome Louisa Sedgwick to our executive
committees, as Managing Director – Mortgages, the first woman
to be responsible for a profit-generating division in our history.
It is also a credit to our succession planning arrangements that
this was an internal promotion.
We continue to monitor developments in this area, particularly
as further government intervention seems likely under the
new administration. We hope that any such intervention will be
proportionate and will help to support industry, regulatory and
other initiatives already in place.
Board and committee membership
Board membership was stable in the period, with the only
changes those indicated in my report last year. Hugo Tudor
handed over his responsibilities as Remuneration Committee
Chair to Tanvi Davda in December 2023, once the committee’s
work on the 2022/23 remuneration cycle was complete. We
ceased to consider Hugo as independent on 6 March 2024 at
the conclusion of the 2024 AGM, given his length of service, and
he stepped down from his committee memberships. However,
he continues to make a significant contribution to the Board’s
activities as a non-independent non-executive director, and we
are proposing him for a further term at the forthcoming AGM.
Following the year end, Tanvi joined the Audit Committee,
strengthening that committee’s available resources and
providing a further bridge between our discussions of results and
remuneration. I consider that our board is well placed to continue
to fulfil the role expected of it.
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 our
operations. I invite shareholders to join us on 5 March 2025 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
3 December 2024
Page 92
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’). The Code is publicly available on the FRC website at www.frc.org.uk.
Throughout the year ended 30 September 2024, the Company complied with the principles and provisions of the Code.
The Board has noted the publication of an updated version of the Code by the FRC in January 2024. These changes will not apply to
the Group until its financial year ending 30 September 2026, at the earliest, and work has commenced to ensure that the Company
will be compliant with the new Code on implementation.
The table below cross-references the individual Code Principles to the sections of this report which explain how they have been
applied in our corporate governance structure.
Section 1: Board Leadership and Company Purpose
Section
A.
The Company is led by an effective and entrepreneurial board, who promote the long-term sustainable
success of the Company, generating shareholder value and contributing to wider society
B3
B.
The Company’s purpose, values and strategy, which align with its culture, have been established and are
promoted by the Board
B1
C.
The Board ensures that necessary resources are in place for the Company to meet its objectives and
measure performance and has established a framework of effective controls, which enables risk to be
assessed and managed
B8
D.
The Board ensures effective engagement with stakeholders and encourages their participation
B4.3
E.
The Board ensures that workforce policies and practices are consistent with the Company’s values and
support its long-term sustainable success. The workforce should be able to raise any matters of concern
B4.3
Section 2: Division of Responsibilities
Section
F.
The Chair is objective and leads the Board effectively, facilitating constructive relations and effective
contribution from non-executive directors
B4.1
G
The Board includes an appropriate combination of executive and non-executive directors, with a clear
division of responsibilities
B4.1
H.
Non-executive directors have sufficient time to meet their board responsibilities. They provide constructive
challenge, strategic guidance, offer specialist advice and hold management to account
B4.1
I.
The Board, supported by the Company Secretary, has the policies, processes, information, time and
resources required to function effectively and efficiently
B4.1
Page 93
Corporate Governance
Section 3: Composition, Succession and Evaluation
Section
J.
Appointments to the Board are subject to a formal, rigorous and transparent procedure, and an effective
succession plan is in place for Board and senior management. Appointments and succession plans are
based on merit and objective criteria and promote diversity
B5
K.
There is an appropriate mix of skills, experience and knowledge. Tenure and membership of the Board and
its committees are regularly reviewed
B5
L.
The annual board evaluation provides an opportunity for the directors to consider their collective and
individual effectiveness and decide where there are areas for improvement
B4.4
Section 4: Audit, Risk and Internal Control
Section
M.
The policies and procedures, established by the Board, ensure the independence and effectiveness
of internal and external audit functions. The Board has satisfied itself of the integrity of financial and
narrative statements
B6
N.
The Board presents a fair, balanced and understandable assessment of the Company’s position
and prospects
B6
O.
The Board has established procedures to manage risk, oversee the internal control framework and determine
the principal risks the Company is willing to take in order to achieve its long-term strategic objectives
B8
Section 5: Remuneration
Section
P.
Remuneration policies and practices support strategy and promote long-term sustainable success. Executive
remuneration is aligned to the Company’s purpose, values and successful delivery of long-term strategy
B7
Q.
A formal and transparent procedure has been established to develop policy and determine director and
senior management remuneration. No director is involved in deciding their own remuneration outcome
B7
R.
The directors exercise independent judgement and discretion over remuneration outcomes, taking account
of company and individual performance and wider circumstances
B7
Page 94
B3. Board of Directors and
senior management
* All directors have a broad knowledge of our business, but the ‘areas of expertise’ highlight specific areas in relation to an individual’s contribution to its long-term
sustainable success
B3.1 Board of Directors
Members of the Board of Directors at the date of approval of the Annual
Report are set out below.
Appointed to the Board as
independent non-executive 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
Robert D East
Chair of the Board
Nomination Committee Chair
(Age 64)
Nomination Committee
Key
Audit Committee
Risk and Compliance Committee
Remuneration Committee
Disclosure Committee
Committee memberships
at 30 September 2024 are
indicated as follows.
Page 95
* All directors have a broad knowledge of our business, but the ‘areas of expertise’ highlight specific areas in relation to an individual’s contribution to its long-term
sustainable success
Appointed to the Board as Treasury Director
in 1990, became Finance Director in 1992 and
CEO in 1995
Experience
Nigel’s early career began in investment
banking, which included working for UBS,
where he ran its Financial Institutions Group.
He joined Paragon 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 previously
was a member of the Bank of England
Residential Property Forum.
Until September 2023, Nigel was a member
of the Board of UK Finance, having previously
served as 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.
Nigel is a trustee of the Banking for
Barnardo’s charity.
Specific areas of expertise*
• Strategic and detailed understanding of
banking and of our business, its markets, its
operations and its people
• Leadership of Paragon’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
business through the 1992 and 2007
financial crises
Current external appointments
Member of HM Treasury’s Home Finance Forum
Nigel S Terrington
Chief Executive Officer
(Age 64)
Appointed to the Board as Director
of Corporate Development in 2012
and became CFO in June 2014
Experience
Richard joined the business 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
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 our business, 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
CRO, Richard takes a lead on
progressing Paragon’s IRB
accreditation
Current external appointments
Director of Woodman Portfolio
Holdings Limited
Director of Rose Wine Limited
Director of Chalet Woodman
S.à r.l.
Richard J Woodman
Chief Financial Officer
(Age 59)
Appointed in 2020 – four years served
Senior Independent Director since
August 2023
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.
Until recently Alison was a
non-executive director of M&G Group
Limited, where she was also audit
committee chair, M&G Investment
Management Limited and M&G
Alternatives Investment Management
Limited, all companies within the
M&G plc group.
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 Sabre
Insurance Group PLC and Sabre
Insurance Company Limited, and
chair of the Sabre Insurance Group
audit committee
Non-executive director of Quilter plc
and its subsidiaries, Quilter Life &
Pensions Limited, Quilter Investment
Platform Limited and Quilter Financial
Planning Limited, and member of the
Quilter plc audit, risk and
remuneration committees
Alison C M Morris
Non-executive director
Audit Committee Chair
(Age 64)
Alison C M Morris
Non-executive director
Audit Committee Chair
(Age 65)
Appointed in 2020 – four years served
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, secretary,
treasurer and chair of the finance and
governance committee of Leeds
Rugby Foundation
Deputy chair and treasurer, Leeds
Rugby Foundation Services Limited
Peter A Hill
Non-executive director
Risk and Compliance
Committee Chair
(Age 63)
Appointed in 2017 – seven years served
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 and
Change 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
Member of the International Advisory
Council of the Institute of
Business Ethics
Barbara A Ridpath
Non-executive director
(Age 68)
Appointed in 2014 – ten 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 Sevenoaks Vine Cricket
Club Limited
Director of Vitec Global Limited, Vitec
Air Systems Limited and Vitec Aspida
Limited
Hugo R Tudor
Non-independent non-executive
director
Remuneration Committee Chair
(until 7 December 2023) (Age 61)
* All directors have a broad knowledge of our business, but the ‘areas of expertise’ highlight specific areas in relation to an individual’s contribution to its long-term
sustainable success
Appointed in 2017 – seven years served
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
Director of Calon Lan Consultancy
Appointed in 2023 – one year served
Experience
Zoe’s extensive 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 at 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
Appointed in 2022 – two years served
Chair of the Remuneration Committee
since 7 December 2023
Became a member of the Audit
Committee from 1 November 2024
Experience
Tanvi brings a diverse range of skills
and knowledge to the Board, built up
over an executive career of more than
25 years.
She 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
Graeme H Yorston
Non-executive director
(Age 67)
Zoe L Howorth
Non-executive director
(Age 53)
Tanvi P Davda
Remuneration Committee Chair
Non-executive director
(Age 52)
* All directors have a broad knowledge of our business, but the ‘areas of expertise’ highlight specific areas in relation to an individual’s contribution to its long-term
sustainable success
Anne Barnett
Chief People Officer (‘CPO’)
Since 2009
B3.2 Executive Committees
The membership of our executive committees is set out below, together with their tenure in their current role.
* Louisa was appointed with effect from 13 August 2024. Richard Rowntree held this role until he left the business in the year.
† Michael Helsby also held ExCo responsibility for our savings operation until Derek Sprawling joined the committees in the year.
All members sit on both the Executive Performance Committee and the Executive Risk Committee (‘ERC’). The Chief Internal Auditor, Sarah Mayne,
attended meetings of both committees as an observer during the year and became a member of the committees in October 2024, after the year end.
Nigel Terrington
Chief Executive Officer (‘CEO’)
Since 1995
Peter Shorthouse
Treasury and Structured Finance Director
Since 2010
Dave Newcombe
Managing Director – Commercial Lending
Since 2019
Marius van Niekerk
General Counsel
Since 2019
Richard Woodman
Chief Financial Officer (‘CFO’)
Since 2014
Deborah Bateman
External Relations Director
Since 2009
Michael Helsby
Strategic Development Director†
Since 2018
Ben Whibley
Chief Risk Officer (‘CRO’)
Since 2019
Derek Sprawling
Managing Director – Savings†
Since 2024
Louisa Sedgwick
Managing Director – Mortgages*
Since 2024
Zish Khan
Chief Operating Officer (‘COO’)
Since 2022
Page 99
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 movements, inflation and other macro-economic uncertainties in the UK on
our businesses
• Monitoring progress of our digitalisation programme
• Oversight of our implementation of the FCA Consumer Duty, the scope of which extended to legacy products in the year
In addition, the Board regularly receives and reviews reports prior to its meetings covering such matters as strategy, market
competition, business performance and results in each of our business areas. The Board also receives updates on potential corporate
development opportunities, legal and governance matters, regulatory changes, treasury and funding, the work of its committees and
investor relations and shareholder feedback.
Information regarding the Board’s programme of training and development can be found in Section B4.5. A non-exhaustive list of
other significant matters overseen by the Board during the year is set out below by theme:
Topic
Meeting
Business strategy
Update on our change programme
Oct 2023, Feb,
Apr, Jul 2024
Deep dive review of the motor finance business provided by senior management
Oct 2023
Deep dive review of the structured lending business provided by senior management
Oct 2023
Deep dive review of the Mortgage Lending business provided by the then Managing Director – Mortgages,
including an update on the Private Rented Sector and the mortgage market
Oct 2023
Approval of the corporate plan for the financial years ending 2023 to 2028. More detail on the Group’s
strategy can be found in Sections A3 and A4
Nov 2023
Update on matters discussed at the NED Technology Change Group meeting
Dec 2023, Apr,
Jul, 2024
Detailed update on progress of significant elements of our digitalisation strategy
Feb 2024, Sep
2024
Deep dive review of SME lending provided by senior management from the area
May 2024
Reviewed the implications of political change, including the impact of elections in Europe
Jul 2024
Deep dive review into the banking and macro-economic environment, including the output of the inflation
shock, competition and demographics
Jul 2024
Risk and regulation
Review of our procurement approach, supplier base, assurance approach and timeliness of payments
Oct 2023
Approval of the 2023 ILAAP (the 2024 ILAAP was due to be presented for approval after year end)
Nov 2023
Progress update on our Consumer Duty project and the approval of its closure
Dec 2023, Jul
2024
Approval of Consumer Duty Annual Report for 2024
Jul 2024
Update on our IRB application
Jul 2024
Approval of the 2024 ICAAP
Apr 2024
Approval of the 2024 Recovery Plan
Jul 2024
Page 100
Topic
Meeting
Risk and regulation
Update on regulatory and other matters (including expected impact of the new government, regulatory
issues and opportunities, broader opportunities and challenges, and financial crime risk management and
intervention) delivered by external experts
Jul 2024
Annual review and approval of the Group’s principal risk categories
Jul 2024
Cyber security / operational resilience
Approval of 2024 operational resilience self-assessment
Mar 2024
Update on procurement and suppliers including material outsourcing arrangements
Oct 2023
Update on cyber security, delivered by the IT Director
Nov 2023
Update from the COO on technology and change across the business
Apr 2024
Corporate governance
Review and approval of the board skills matrix, as recommended by the Nomination Committee (Further
details of this process are given in Sections B4.5 and B5.3)
Oct 2023
Consideration of the output of the 2023 board evaluation and progress on prioritised actions arising
(Further detail can be found in Section B4.4)
Oct 2023, Feb
2024
Recommendation of the declaration of a final dividend of 26.4 pence per share in respect of the financial
year ended 30 September 2023 and of a share buy-back programme for 2024 (with up to £50.0 million
announced with the preliminary results)
Dec 2023
Annual review of the Corporate Governance Policy Framework
Feb 2024
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
Mar 2024
Approval of the Modern Slavery and Human Trafficking Statement and Policy following an annual review
Mar 2024
Annual review of tax strategy and compliance, and approval of policy statement
Mar 2024
Approval of the declaration of an interim dividend of 13.2 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
May 2024
Consideration of the proposed approach for the 2024 Board evaluation
May 2024
Annual consideration of our Purpose and its alignment to our culture, as part of the 2024 internal
performance review
Sep 2024
Approval of external audit arrangements for the financial year ending 30 September 2026 and thereafter,
following a tender process conducted by the Audit Committee, subject to shareholder approval at the
2026 AGM
Sep 2024
Approval of appointment of Tanvi Davda as a member of the Audit Committee with effect from 1 November
2024, on the recommendation of the Nomination Committee
Sep 2024
Sustainability
Consideration of employee feedback and other matters raised and discussed at November’s People
Forum meeting
Nov 2023, May
2024
Consideration of shareholder feedback following the year-end results announcement
Dec 2023, Feb
2024
Reflection on 2024 AGM and related shareholder engagement
Mar 2024
Approval of 2024 all-employee Sharesave invitation
Apr 2024
Page 101
Corporate Governance
Topic
Meeting
Sustainability
Savings customer insight presentation delivered by senior management from the Insight and Savings teams
May 2024
Consideration of shareholder feedback following the half-year results announcement
Jul 2024
Update on ESG / sustainability and climate change related issues delivered by the Chair and Deputy Chair
of the Sustainability Committee
Sep 2024
Annual review and approval of our Equality, Diversity and Inclusion Policy
Sep 2024
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:
• Key strategic priorities
• Change programme
• Operational resilience
• Sustainability
• Customers
• People
• Public affairs
• Corporate development opportunities
The activities of the Board’s principal committees are discussed in their respective reports in Sections B5 to B8.
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 also attended
a number of ad hoc meetings (not included in the table below), workshops and training sessions during the year and have contributed
to discussions outside the meeting calendar.
Board and committee attendance
Director
Board
Audit
Committee
Risk and Compliance
Committee
Remuneration
Committee
Nomination
Committee
Robert D East
10 (10)
-
5 (5)
4 (4)
2 (2)
Nigel S Terrington
10 (10)
-
-
-
-
Richard J Woodman
10 (10)
-
-
-
-
Tanvi P Davda
10 (10)
-
5 (5)
4 (4)
2 (2)
Peter A Hill
10 (10)
5 (5)
5 (5)
-
-
Zoe L Howorth
10 (10)
-
5 (5)
3* (4)
-
Alison C M Morris
10 (10)
5 (5)
5 (5)
4 (4)
2 (2)
Hugo R Tudor
10 (10)
2 (2)
3 (3)
2 (2)
-
Barbara A Ridpath
10 (10)
5 (5)
5 (5)
-
2 (2)
Graeme H Yorston
10 (10)
-
5 (5)
4 (4)
2 (2)
Directors also attended an annual two-day strategy event, to enable more detailed discussion of strategy and potential future
developments. This event has been a regular fixture in our governance calendar for a number of years, and is also attended by
executive management.
* Zoe Howorth was unable to attend the November 2023 Remuneration Committee meeting due to prior commitments that were notified to, and pre-agreed with, the Chair in
advance of her appointment to the Board.
Page 102
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 our business, generating value for
shareholders and contributing to wider society. It establishes our overall purpose, values and strategy and ensures that these and our
culture are aligned. The Board is also responsible for the 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 Board
Paragon Board Commitee
Executive Commitee
Executive Sub-Commitee
Risk and Compliance Sub-Commitee
Sub-Commitee
Legal Ownership
Delegated Authority
Performance
oversight
Risk oversight
Paragon Banking Group PLC Board
Paragon Bank PLC Board
Paragon CEO
Nomination
Commitee
Remuneration
Commitee
Executive
Performance Commitee
(Performance ExCo)
Executive
Risk Commitee
(ERC)
Audit
Commitee
Disclosure
Commitee
Model Risk
Commitee
Risk and Compliance
Commitee
Credit
Commitee
Transaction
Commitee
Sustainability
Commitee
Operational Risk
Commitee
Asset and Liability
Commitee
Customer and
Conduct Commitee
Sanctioning
Commitee
Pricing
Commitee
Capital
Commitee
Liquidity Outlook
Commitee
B4. Governance Framework
This section describes how Corporate Governance operates within our business, setting out:
B4.1
B4.4
B4.2
B4.5
B4.3
B4.6
Board and committee structure – the
forums through which corporate
governance operates and how they
relate to each other
Board evaluation – how the Board
ensures the framework is, and will
remain, fit-for-purpose
Elements of the governance
framework – how the framework
operates
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
Board and stakeholders – how the
Board discharges its duty to promote
the success of the business having
regard to stakeholder interests
Whistleblowing – how concerns may
be raised and the action that is taken
Page 103
Corporate Governance
Summarised information on each of the board committees is set out below.
Committee
Audit
Remuneration
Risk and
Compliance
Nomination
Chair
A C M Morris
T P Davda (from 7
December 2023)
P A Hill
R D East
Minimum number of meetings
4
3
4
2
Further information
Section B6
Section B7
Section B8
Section B5
Members
Independent
non-executive
Audit
Remuneration
Risk and
Compliance
Nomination
R D East
Chair *
No
Yes
Yes
Yes
T P Davda
Yes
No ‡
Yes
Yes
From 7 December 2023
P A Hill
Yes
Yes
No
Yes
No
Z L Howorth
Yes
No
Yes
Yes
No
A C M Morris
Yes
Yes
Yes
Yes
Yes
B A Ridpath
Yes
Yes
No
Yes
Yes
H R Tudor
No †
Until 6 March 2024
Until 6 March 2024
Until 6 March 2024
Until 6 March 2024
G H Yorston
Yes
No
Yes
Yes
Yes
* Considered independent on appointment as Chair of the Board of Directors on 1 September 2022.
† Ceased to be considered independent from 6 March 2024.
‡ Appointed to Audit Committee 1 November 2024, after the year end.
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 agreed at the time that his appointment would be
renewed for a further twelve months, but that he would be deemed to be a non-independent non-executive director from the conclusion
of the 2024 AGM on 6 March 2024. He handed 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.
Due to the skills and experience that Hugo brings to the Board, particularly in respect of strategy and remuneration, it was
subsequently agreed that he would remain a director for a further twelve months, to 23 November 2025, subject to his re-election at
the 2025 AGM.
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.
The informal ‘NED Technology Change Group’, established in 2021 comprises some of the non-executive directors, the COO and
senior managers from the IT and Change functions. The group met on a number of occasions in the year as part of an ongoing
programme of meetings to receive and discuss updates on the change programme (the methods and processes of making changes to
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.
Following a review of the group’s role during the year, and given the significant progress on change and the IT strategy amongst other
matters, it was agreed that the group would meet on an as-needed basis going forward to receive more high-level, strategic updates.
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.
More information on the work of the ERC is provided in Section B8.2
Page 104
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, Managing Director - Savings, COO, 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.
More information on the work of the Sustainability Committee is provided in Section A6
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
We are proud of the culture embedded in our business, and the Board monitors the alignment of this culture with our purpose, values
and strategy on an ongoing basis. In the event of a change in business model, operations and / or strategy, the Board would consider
the culture of the business as part of a review of our purpose as a whole. The interests of customers and employees are at the heart of
our strategy, business and culture.
While the assessment and monitoring of our culture is a business-as-usual activity for the Board, it also considers culture as part of
its annual review of our purpose. This took place in July 2024 with no amendments made to the purpose and no material actions in
respect of culture identified. The Board considered its own effectiveness in promoting and monitoring our culture as part of its 2023
external performance evaluation, and again as part of the 2024 internal evaluation. No significant issues in this respect were noted on
either occasion.
Our cultural focus is demonstrated through our accreditation as a Platinum Investors in People (‘IIP’) employer, highlighting our
commitment to a structured and highly effective framework for leading, developing and rewarding our people. We are also accredited
by the Living Wage Foundation, and we encourage our suppliers to apply the same standards. When dealing with customers, our
cultural focus on delivering good outcomes predates the introduction of the FCA Consumer Duty and has long been fundamental to
our outlook.
To assess and promote our corporate culture, non-executive directors have attended People Forum meetings as part of the Board’s
commitment to engage directly with the workforce and to assess whether purpose, values, strategy and culture are aligned. Further
detail can be found at B5.3. Direct employee feedback, which included consideration of our culture, together with feedback received
through the People Forum, were reviewed in depth by the Nomination Committee on behalf of the Board. The strong employee
engagement and employee attestations, including that the employees lived the Company’s values and purpose, were noted.
The citizenship and sustainability section (A6) demonstrates how our culture is reflected in relationships
with customers, employees and the wider community
Matters Reserved for the Board
The schedule of matters reserved for the Board is reviewed annually and made available on our corporate 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.
Page 105
Corporate Governance
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. 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 our corporate website.
The Chair’s other business commitments are set out in the biographical details section (Section B3.1).
Role of 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 determined that Hugo Tudor ceased to be considered independent following the 2024 AGM, independent
non-executive directors continue to form the majority of our Board.
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 employees. More detail on these interactions can be found in Section A6.3.
During the year Hugo Tudor attended the MRC on behalf of the non-executive directors. Throughout the year, Graeme Yorston served
as the Consumer Duty Board Champion, as part of our implementation of the FCA Consumer Duty principles. As outlined in Section
B4.1, certain non-executive directors also met 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 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 has served as Senior Independent Director throughout 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.
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 internal board evaluation carried out in the year, which is described in Section B4.4, an appraisal of
the Chair was carried out by the Senior Independent Director in conjunction with the non-executive directors.
Conflicts of interest
The Board has agreed a policy for managing conflicts and a process to identify and, if appropriate, authorise any conflicts that might
arise in relation to significant shareholdings and / or third parties. At each meeting of the Board and its committees, actual or potential
conflicts of interest in respect of any director are reviewed. A conflicts register is also maintained by the Company Secretary, 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 business.
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, Ciara Murphy, 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.
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Subsidiary governance
A number of the corporate entities within the Group are regulated either by the PRA and / or the FCA. The Company has oversight of
these entities as part of its overall responsibility for the management of the Group and ensures that the Group’s values and standards
in regulated spheres are met.
Composition and succession
Composition and succession for the Board and senior management are considered within the Nomination Committee’s report (see
Section B5).
The Board is mindful of the FCA Listing Rule requirements in relation to gender and ethnic diversity at board and executive
management level, which are 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 2024 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 B5.4.
Board performance review and training
The performance of the Board, individual directors and the Board’s main committees are reviewed annually, and our policy is that
externally facilitated reviews should take place triennially, as required by the Code. The most recent externally facilitated board
evaluation took place during the financial year ended 30 September 2023. During the most recent financial year an internal evaluation
was conducted. Further details are given in Section B4.4.
The non-executive directors have received training during the year on various topics relevant to the Group. Further detail on the
training undertaken is set out in Section B3.3 and Section B4.5.
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 Sections B6
and B8.
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 our corporate 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
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Corporate Governance
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 our 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 our approach to corporate responsibility and sustainability, including 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 stakeholders and, where applicable,
considers the impact of those decisions on the communities and environment within which we operate. The Board is mindful of its
duty to act in good faith and to promote the long-term, sustainable success of the business for the benefit of its shareholders and with
regard to the interests of all 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 2024, it has acted to promote the long-term sustainable 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 our key stakeholders, how this is aligned to our strategic priorities and culture and why the stakeholders listed are
significant for us.
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Shareholders
Creating long-term shareholder value through growing profits and dividends (s172(1) 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
• 81 meetings were held with shareholders and analysts under our Investor Relations
Programme. 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
• The Remuneration Committee carries out comprehensive engagement and seeks the views
of major shareholders and shareholder advisory groups. It considers these views when
drafting and applying the Remuneration Policy
• The Board receives an in-depth update on Investor Relations, which includes investor
feedback, following the publication of our financial results
Outcome
• The data on shareholder feedback provided helps the Board align our strategy with the
interests of shareholders
• Increasing shareholder interaction is helping to frame our response to reporting and targeting
in relation to sustainability matters, in particular climate change risk
• At the AGM in March 2024, all resolutions were approved by shareholders with over 95% of
votes cast in favour of each resolution
• A total dividend for the year of 40.4 pence per share is proposed, and a further share buy-
back programme of up to £100.0 million was authorised in the year
Further information on how we seek to engage with and consider the views of all shareholders
is given below.
Our 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)
Capital
management
Growth
Diversification
Digitalisation
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Corporate Governance
Customers
Supporting the ambitions of the people and businesses of the UK by delivering specialist financial services (s172(1) 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
• Savings customer survey conducted during the year, including questions about customers’
spending habits and sentiment regarding their financial position
• Focussed analysis on key customer groups is undertaken, including quarterly surveys of SME
and buy-to-let customers
• The Board receives Customer Insight updates annually
• The Board received periodic updates on progress towards implementing the new FCA
Consumer Duty, which was extended to legacy products in the year, and received its first
Consumer Duty Annual Report
• The Board continues to oversee DCA complaints and reviews related guidance in light of the
FCA review of UK Motor Finance commission arrangements and associated issues
• Graeme Yorston, an independent non-executive director acts as the Board’s Consumer
Duty Champion
• The in-depth Next Generation Landlord Report was commissioned, enabling a better
understanding of current and prospective customers
• Customer metrics are a key element of the Performance Share Plan (‘PSP’)
Outcome
• Roll-out of ‘Think Customer!’ training for all employees
• Greater understanding of customers and their priorities is used to refine product offerings,
documentation and processes
• All employees receive training on how to identify and support customers in vulnerable
circumstances, with customer-facing employees receiving additional in-depth training
• Complaint levels remain low by industry standards
Further information on the Group’s relationship with its customers is set out in Section A6.2
Digitalisation
Sustainability
Diversification
Growth
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Employees
Helping all of our people to develop their career and reach their potential (s172(1) 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 all-employee anonymous engagement surveys are conducted, most recently in 2023
• All-employee benefits survey carried out in the year
• New onboarding and leaver surveys were launched to enhance feedback opportunities and
drive improvements
• Chief People Officer updates the Board and ExCo on employee feedback from surveys and
from the People Forum, as well as other metrics
• Chair and non-executive directors attend our 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
• EDI network is sponsored by a member of ExCo and, during the year, members of the Board
and ExCo are invited to attend employee listening circles
• Nomination Committee receives six-monthly updates on succession planning and EDI
network feedback from the Chief People Officer
• People metrics are a key element of the PSP
Outcome
• We are accredited as an Investor in People with Platinum IiP employer status
• We signed the Mortgage Industry’s Mental Health Charter
• We pledged our support to the Better Hiring Charter
• 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 are embedded at all levels
• Purpose and Performance Profiles for career development were introduced, in response to
employee feedback
Further information on the involvement of the Group’s people and the impact of policies on them, can
be found in Section A6.3
Sustainability
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Corporate Governance
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(1) 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 Board are kept updated on all interaction with the FCA and PRA
• SMCR is embedded throughout the organisation, with conduct measures monitored
monthly, overseen by the ERC
• Dialogue maintained with HMRC, with the CFO designated as Senior Accounting Officer,
directly responsible for our tax policies
• The risk element of the PSP includes an assessment of any material regulatory breaches
Outcome
• All changes to the Board and Senior Management Functions are approved by the regulator,
where required
• The Risk Adjustment Review Group, with authority delegated by the Remuneration
Committee, identifies and considers instances of potential risk adjustment for MRTs and
others on a more formal and structured basis
Further information on our tax policies is set out in Section A6.5
Capital
management
Sustainability
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Society and community
Helping the UK economy grow and supporting the communities in which we operate (s172(1) 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
• 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
• We partnered with Future First, supporting young people from disadvantaged and low-
income backgrounds
• In the twelve months ended 30 September 2024 employees raised £49,000 for Molly Ollys
• Our employee-led Charity Committee is sponsored by a member of ExCo
• Employees were supported to take part in a range of volunteering activities
• 460 employee volunteering days were used to support specific initiatives in
local communities
Further information about our charitable and community involvement is set out in Section A6.5
Sustainability
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Corporate Governance
Environment and climate change
Continually reducing our environmental impact and designing products that support positive environmental change
(s172(1) d)
We take care to identify, manage and minimise our impact on the environment, both in terms of the impact of our lending
products and our own operational impact.
How we engage and / or monitor
• The executive level Sustainability Committee addresses all climate-related issues across the
business, escalating to the Board as appropriate
• Climate change is designated as a principal risk
• The Board receives updates on the potential risks and strategic impacts of climate change
• We are a member of Bankers for Net Zero
• The CFO has been designated as the responsible director for climate change matters
• The annual ICAAP, approved by the Board, includes climate change scenario analysis
Outcome
• Our range of buy-to-let mortgage products includes incentives for those landlords who wish
to invest in energy-efficient properties
• The Green Homes Initiative in our development finance business was extended in the year
• Our motor finance business offers loans to finance battery electric vehicles, including light
commercial vehicles
• 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 programme
• Environmental / climate change targets are considered as part of the Remuneration Policy
• Our Responsible Business Report is published annually and our corporate website has a
dedicated sustainability section
Further information on our management of climate change risk and our environment policies is set
out in Section A6.4
Sustainability
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Business partners and suppliers
Commitment to the fair treatment of all business partners. In return, we expect our partners to help us deliver a high
standard of service to our customers and act responsibly (s172(1) 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 was provided with an update on our procurement approach, and composition of
the supplier base, including material outsourcing arrangements, the assurance approach and
timeliness of payments
• Regular feedback surveys conducted amongst intermediaries with the results fed back to
ExCo and Board
• Our Supplier Code of Conduct sets out our overall approach to supplier engagement and our
expectations of suppliers
• A questionnaire covering broad sustainability topics is issued to new suppliers as part of the
onboarding process
Outcome
• New digital platform launched to mortgage intermediaries, reflecting feedback received
from brokers
• Intermediary feedback key to updating and streamlining other operational systems
and processes
• 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
• We are a signatory to the UK’s Prompt Payment Code, and ensuring that suppliers are paid
promptly is a priority
Our management of business partner relationships is discussed further in Section A6.7
Digitalisation
Sustainability
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Corporate Governance
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 our 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 2025 AGM will take place at 9am on 5 March 2025, at the offices of the Company at 25th Floor, 20 Fenchurch Street, London
EC3M 3BY.
The CEO and CFO have a full programme of meetings with institutional investors and during the year ended 30 September 2024,
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 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
2023 Annual Report and Accounts and the 2024 AGM notice, we invited our largest stakeholders, who collectively represent over 94%
of the Company’s total voting rights to share their views ahead of the Company’s 2024 AGM.
The Board believes that engagement with shareholders is an important part of both our governance framework and the stewardship
aims of investors, and investors’ comments from these interactions are communicated to the Board who take those views into
account when determining strategy.
The Senior Independent Director, Alison Morris, is also made aware of views expressed by shareholders whether to other members
of the Board, via our brokers or through the Investor Relations team. Meetings between the Senior Independent Director and
shareholders can be arranged through the offices of 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 performance review
The effectiveness of the Board, individual directors and the Board’s main committees is reviewed annually. An internal performance
review, which is described below, was completed in the year while work continued in the period to address and close the key findings
of the externally facilitated review carried out towards the end of the preceding financial year.
2024 board performance review
In line with recognised best practice, board performance reviews are undertaken on an annual basis to increase board effectiveness and
to identify areas for improvement. The 2024 review was carried out on an internal basis, using the process outlined below.
In drafting this disclosure on our board performance review, the Corporate Governance Institute (‘CGI’) guidance note ‘Reporting on board
performance reviews: Guidance for listed companies’, published in September 2023, was consulted.
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Performance review methodology
Following the thorough, externally facilitated, review which was undertaken in 2023, the surveys completed by board members as part
of that exercise were used again and directors were asked whether any of their responses differed for 2024. If they answered in the
affirmative, they were asked to provide more detail.*
The steps involved in the performance review process and their timings are set out below.
Phase and timing
Activities
Review and completion of surveys (July 2024)
Board members reviewed the 2023 surveys which assessed the
performance of the Board and each of its committees, as well as the
performance of the Chair of the Board.
Each director also reviewed the self-assessment questionnaire they
completed in 2023 addressing their own performance. Any changes to
their assessment responses from 2023 were provided.
Meetings (August 2024)
The Chair of the Board appraised the performance of the non-executive
directors, meeting with each non-executive director on a one-to-one
basis to evaluate their performance and agree development areas.
The Senior Independent Director, in conjunction with the non-executive
directors and without the Chair present, appraised the performance of
the Chair.
Board discussion and presentation
(September and October 2024)
In advance of discussion at the relevant board and committee meetings,
summaries of findings were shared with the Chair of the Board and
summaries of findings in respect of each board committee were shared
with the respective committee chair for discussion.
Actions were agreed for implementation and monitoring.
* With the exception of Zoe Howorth who did not complete the 2023 surveys, having only been appointed to the Board on 1 June 2023. Zoe received a copy of the 2023 surveys for
completion in respect of the 2024 evaluation.
Key findings
Overall, the review confirmed that the Board continued to operate effectively and with the right culture. The majority of directors had
no additional comments to their feedback provided in 2023 as part of the external performance review. Some scope for improvement
was identified, with some aspects already in progress. These related to a number of focus areas, with agreed initiatives including:
• A business performance review template will be put in place to ensure consistent assessment of, and focus on, the performance of
each business area
• In response to employee feedback, People Forum sessions with non-executive directors will be more informal and unstructured in
future, so that better engagement can be generated
• Whilst competitive insight is already considered as part of board discussions, a greater emphasis on competitor analysis will be
factored into future presentations
• So as to ensure an appropriate balance between debate and presentation, presenters are advised to take papers as read when
appropriate, with the introduction of the revised review template noted above helping to ensure time is focused on key debating /
discussion points
An update on progress with addressing these key findings will be given in the governance section of next year’s annual report
and accounts.
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Corporate Governance
2023 external board performance review
During the financial year ended 30 September 2023, Lintstock Limited (‘Lintstock’) was engaged to conduct an external review of the
performance of the Board and its committees. The review process is described in Section B4.4 of the Group’s annual report and accounts
for that year.
The review identified a number of focus areas, and recommendations which have been addressed in the course of the previous and
current financial year as follows:
Recommendation
Actions taken
Providing opportunities for informal strategic
discussion throughout the year, to supplement
existing board strategy sessions
Business areas are requested to include a summary of their strategy
and current competitive dynamics in business performance updates.
Strategic issues are considered by the Board during the year as part
of various discussions.
Continuing to strengthen the Board’s familiarity with
relevant technological developments
Technology was a core theme at the strategy offsite.
Externally facilitated cyber training was provided during the year and
a training session created by the COO with third party providers for
presentation to the Board.
Further enhancing the Group’s focus on customers,
including the user experience and various target
customer groups across the business
Several Consumer Duty updates were considered by the Board
during the year, in addition to the inaugural Consumer Duty Annual
Report in July 2024.
Customers were a key focus of numerous board discussions on
funding strategy throughout the year.
A Customer Board Report was developed during the year, which
will be included in monthly board papers from the start of the 2025
financial year.
Continuing to monitor executive succession
plans closely
Succession planning was considered by the Nomination Committee
during the year, with a focus on building bench strength.
Other evaluation activities
In addition to the 2024 internal performance 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 2025 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 any observations from the internal board performance review, took
place at the Remuneration Committee meeting in September 2024 that considered remuneration packages for 2024/25 and variable
remuneration outcomes for 2023/24. Further information on this process is given in the Directors’ Remuneration Report (Section B7).
At the 2025 AGM, the Chair will confirm to shareholders, when proposing the election or re-election of any non-executive director that,
following formal performance evaluation, their performance continues to be effective and demonstrates commitment to their role.
The letters of appointment of the non-executive directors will be available for inspection at the AGM.
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B4.5 Board training and development
Oversight of the Board’s training and development programme is the responsibility of the Nomination Committee and contributes
to ensuring the ongoing effectiveness of the Board. Details of the committee’s activities in this area are set out in the Nomination
Committee section (B5).
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.
Zoe Howorth, who was appointed to the Board on 1 June 2023, completed her induction programme during the year, meeting
stakeholders across the business. Further, Tanvi Davda, who became chair of the Remuneration Committee on 7 December 2023
received induction training for her new role, building on her experience as a member of that committee.
Development
Following Board approval in October 2023, an updated 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.
A number of topics agreed for board development were delivered during the financial year, with further topics agreed for the coming
period. This programme aims 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 have been provided during the period and will continue to be made
available during the forthcoming financial year. A training schedule is maintained by our Human Resources department in conjunction
with the Company Secretary.
The non-executive directors have received presentations during the year on various aspects of the activities of the business, to
support their on-going awareness and development. The Board has dedicated a number of days during the year to training and will
undertake additional training as required by our strategy and operational needs.
Topics for board training sessions are recommended to, and approved 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 all our employees. These are delivered online, and cover risk management, financial crime, customer
outcomes, regulatory requirements and sustainability matters including EDI, amongst other matters.
Business insight and awareness sessions, and deep dives covering particular areas are held regularly to provide non-executive
directors with the appropriate depth of knowledge to contribute effectively at board meetings on key business topics.
Specific detailed training sessions were provided in the year on the following subjects:
Topic
Board meeting
Legal and regulatory: covering topics including UK MAR, directors’ duties, key prudential priorities,
conduct and the Consumer Duty
Mar 2024
Remuneration: covering risk adjustment and variable pay awards
(attended by Remuneration Committee members)
Apr 2024
Cyber: delivered by a combination of in-house experts and an external cyber security solutions provider
Apr 2024
Surveyor management and the Receiver of Rent: including a comparison between in-house and panel
surveyors delivered by in-house experts
Apr 2024
Artificial intelligence in banking: covering market challenges common to lenders and AI in the current market
Jul 2024
Challenges for specialist lenders and the future of UK banking: delivered by a professional services firm
Jul 2024
Expected credit loss benchmarking: delivered by a professional services firm
Jul 2024
Regulatory: which covered topics such as the expected impact of the new UK Government, FCA and PRA
priorities and financial crime risk management and intervention, delivered by a professional services firm
Jul 2024
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Corporate Governance
B4.6 Whistleblowing
We have an established policy whereby employees can make disclosures regarding potential wrongdoing within our operations on
a confidential basis, in accordance with the Public Interest Disclosure Act 1998 (‘PIDA’). Paragon appreciates the importance of
generating an environment where employees feel able to raise concerns safely, and therefore the policy provides that no employee
making such a disclosure should suffer any detriment by doing so. Our whistleblowing advisory service is operated 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 Senior Independent Director and Chair of the Audit Committee, Alison Morris, is our 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, Chief Internal Auditor, 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 throughout our operations, all employees received training on the requirements of PIDA and
our whistleblowing policy during the year. After the year end external training was provided to members of the Whistleblowing Group
by Protect, to ensure they continue to manage the process in accordance with prescribed procedures. There were also internal
publicity campaigns promoting the whistleblowing procedures.
During the year ended 30 September 2024, there were three instances of whistleblowing which resulted in a requirement for full
consideration and investigation by the Whistleblowing Group (2023: one). These cases were fully investigated and concluded, with
appropriate control enhancements implemented where necessary.
Procedures whereby customers who are dissatisfied with our response to any complaint about their treatment may seek recourse to
an external party are discussed in Section A6.2.
B5. Nomination Committee
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Corporate Governance
B5.1 Introduction by the Chair
Dear Shareholder
As the Chair of the Nomination Committee, I am pleased to
present our report for the year. The Committee is tasked by the
Board with supporting delivery of strategy through oversight of the
composition of the Board and its committees, robust succession
planning, supervising our diversity and inclusion strategy and
monitoring workforce engagement.
We take these matters seriously as part of our duty to
stakeholders, and as part of our objective of ensuring our
governance arrangements are consistent with the highest
corporate standards. In this context, we have been paying careful
attention to developments in UK governance expectations in the
year, while awaiting an indication from the new UK Government as
to its policy intentions in this area.
During the year the composition of the Board has remained
unchanged. Following several changes in recent years we believe
that the Board has the right skills, experience and diversity of
background and thought to be able to provide informed and
constructive challenge to management while acting fairly in the
interests of all shareholders.
Tanvi Davda replaced Hugo Tudor as Chair of the Remuneration
Committee on 7 December 2023, which coincided with the
completion of the Committee’s work on the 2023 remuneration
cycle. Hugo’s third three-year appointment period came to an end
in November 2023 at which point the Committee recommended
his reappointment as a director for a further twelve-month period.
Due to the skills and experience Hugo brings to board activities,
the Committee has recommended to the Board that Hugo be
reappointed for a further year, until November 2025.
The Committee has overseen two internal promotions to the
Executive Committees during the year. Having led our Savings
business since 2014, Derek Sprawling was promoted to the
Managing Director - Savings in April, joining the committees. In
August, Louisa Sedgwick was promoted to the role of Managing
Director - Mortgages. Both appointments are testament to the
succession planning activity undertaken within the business,
which the Committee oversees.
Our commitment to diversity and inclusion remains a
cornerstone of our nomination process, and we continue to
strive for a broader and wider workforce whose composition
reflects the diverse perspectives and expertise necessary to
drive sustainable growth and value creation. During the year
the Committee has overseen the development of our equality,
diversity and inclusion strategy, including the introduction of a
new 5% target for ethnic diversity in senior leadership roles. This
new target addresses the request made by the Parker Review for
all FTSE-250 companies to set a voluntary target to increase the
number of ethnic minority appointments across senior leadership
by 31 December 2027. It also complements our gender diversity
target of having 40% of senior leadership roles filled by women by
December 2025.
Employee feedback continues to provide an important source
of insight into the organisational culture of the business for the
Committee, and various members of the Committee have met
with both our employee-led People Forum and our EDI network
during the year. Employee voice has underpinned a number of
initiatives during the year including the consolidation of our office
locations in Solihull, initiatives to improve sustainability and the
introduction of a new policy to provide paid time off to employees
undergoing fertility treatment. I particularly value the varied
perspectives on the business provided to the Committee by
these contacts along with those I have received through my own
interactions with employees across the business.
Overall, I consider that the Committee has fully satisfied its
mandate from the Board during the year.
Robert East
Chair of the Board and the Nomination Committee
3 December 2024
Page 122
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 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 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 initiatives on the promotion of equality, diversity
and inclusion (‘EDI’) in our workforce, with a particular focus
on our participation in external programmes, such as the
Women in Finance Charter, the FTSE Women Leaders Review
and the Parker Review, and on reporting including pay gap
reporting
• Monitoring workforce engagement and seeking employee
feedback on behalf of the Board as a barometer of
organisational culture
The Committee has formal written terms of reference which are
reviewed annually and approved by the Board, most recently in
September 2024. The most recent review considered the impact
of the 2024 Code and its associated Guidance on its remit and
made appropriate amendments where required. These terms of
reference are available on our corporate website.
The membership of the Committee and the record of members’
attendance at meetings is given in Section B3.3.
B5.3 Matters considered
by the Committee during
the year
Board appointments
In November 2023, Hugo Tudor reached his nine-year tenure
on the Board. During the year ended 30 September 2023 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, while Tanvi Davda succeeded
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.
At the conclusion of Hugo’s first nine years in office the
Committee recommended that he should continue as a director
for a further twelve-month period, but that he should be deemed
to be a non-independent non-executive director from the
conclusion of the 2024 AGM in March 2024.
In September 2024, the Committee recommended to the Board
that this appointment should be extended for a further year until
November 2025. This recommendation was on the basis of the
skills and experience that Hugo brings to the Board, particularly
in respect of remuneration matters, and his insights into investor
priorities, debt and equity markets and fund management.
During the year the Committee also considered the membership
of the main board committees. As a result it recommended
that Tanvi Davda should be appointed to the Audit Committee
from 1 November 2024, which will restore the size of the Audit
Committee to four members, and also provide her, as Chair
of the Remuneration Committee, with deeper insight into our
financial metrics. The Committee considers that Tanvi has the
appropriate skills and experience required to contribute fully to
the work of the Audit Committee.
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.
Senior management appointments
The Committee has overseen two internal promotions to our
executive committees (the Performance ExCo and ERC) during
the year. Having led our Savings business since 2014, Derek
Sprawling was promoted to be Managing Director – Savings
in April, taking executive committee responsibility for the
operation. This change was in recognition of the growth in size of
the Savings business.
In August, following the departure of Richard Rowntree, Louisa
Sedgwick was promoted to Managing Director – Mortgages.
Louisa had previously served as Commercial Director with the
Mortgage Lending operation, and the Committee views her
appointment as a particularly positive step forward towards its
gender diversity targets, as it is the first time a female has held
a Managing Director role in the Group, with responsibility for
income generation.
Both appointments are testament to the high-quality succession
planning activity that the Group undertakes, and the Committee
oversees, and their appointments are supported by stretching
personal development plans.
Page 123
Corporate Governance
It was also decided that Sarah Mayne, the Chief Internal Auditor
would become a member of the executive committees from
1 October 2024, rather than attending their meetings as
an observer.
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 also
in place for executive directors and their direct reports.
The Human Resources division develops and maintains succession
plans for senior leadership roles. Effective succession planning,
supported by the Group’s talent management processes, helps
leadership to identify and nurture internal talent, ensuring a
pipeline of capable leaders ready to step into key roles as needed,
particularly where recruitment is expected within the next five years.
Where the risk of current senior leaders leaving the business is
deemed to be high, bespoke development plans are in place for
strong performers identified as having high potential, and their
progress is overseen by the Committee.
Our preference, where possible, is that internal candidates are
developed and supported to undertake more senior roles, as
this assists in the ongoing maintenance of our strong culture and
values. We also acknowledge the benefits which can arise from the
hire of capable external candidates to add experience and bring a
fresh perspective to strategic thinking.
Board skills matrix
The Board Skills Matrix is reviewed annually by the Committee
and forms the basis for continuing professional development
and future succession plan requirements. The Committee
reconsidered the matrix at its September 2024 meeting in light
of the outputs from the strategy event in July 2024 and a revised
matrix was reviewed and subsequently approved by the Board in
September 2024.
The matrix reflects our strategic aim of becoming a
technology-enabled specialist bank and considers technical
competencies that are relevant to the corporate plan, and
behavioural competencies which are aligned to the priorities set
out by the PRA and FRC’s Guidance on Effective Boards.
The application of the skills matrix in developing board training
for the year is described in Section B4.5.
Diversity
We recognise the importance of diversity, including gender and
ethnic diversity, at all levels of the organisation. During the year
the Committee approved the EDI strategy, and it will continue to
monitor progress against this through the use of both qualitative
and quantitative metrics.
The Board is pleased to have maintained a consistent female
representation of 40.0% at board level (2023: 40.0%) and 37.9%
at senior management level (2023: 37.9%), exceeding the original
Hampton-Alexander Review targets, where senior manager is
defined as members of the executive committees and their direct
reports. We are aligned to the ongoing objectives of the FTSE
Women Leaders Review and are committed to increasing the
number of women in senior roles. The Committee is monitoring
progress towards our phase two Women in Finance target of 40%
female representation at board and senior management level by
31 December 2025.
During the year the Committee also approved a new target
of achieving 5% ethnic minority representation in senior
management, using the same definition, by December 2027. This
was a response to the Parker Review request that all FTSE-250
companies should set their own voluntary target to increase the
number of ethnic minority appointments across senior leadership
by 31 December 2027.
We continue to monitor the PRA’s progress on their proposals
on diversity and inclusion in the financial services sector. These
were set out in October 2023 in their consultation paper CP 18/23,
although final proposals are still awaited.
Page 124
Board and executive management diversity
We strongly value 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 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.
Our adherence to the FCA Listing Rule requirement and our agreement of voluntary targets to meet the expectation of the Parker Review
and Women in Finance Charter demonstrate our commitment to achieving a diverse workforce at all levels.
The data on diversity amongst the Board and senior management as required by UK Listing Rule UKLR 6.6.6R (10) is set out below.
Gender
Number of board
members
Percentage of
the board
Number of senior
positions on the board
Number in executive
management
Percentage of executive
management
30 September 2024
Men
6
60%
3
9
64%
Women
4
40%
1
5
36%
Not specified /
prefer not to say
-
-
-
-
-
Total
10
100%
4
14
100%
30 September 2023
Men
6
60%
3
9
69%
Women
4
40%
1
4
31%
Not specified /
prefer not to say
-
-
-
-
-
Total
10
100%
4
13
100%
Ethnic background
Number of board
members
Percentage of
the board
Number of senior
positions on the board
Number in executive
management
Percentage of executive
management
30 September 2024
White British or
other White
9
90%
4
13
93%
Mixed / multiple
ethnic groups
-
-
-
-
-
Asian / Asian British
1
10%
-
1
7%
Black / African /
Caribbean /
Black British
-
-
-
-
-
Other ethnic group
including Arab
-
-
-
-
-
Not specified /
prefer not to say
-
-
-
-
-
Total
10
100%
4
14
100%
30 September 2023
White British or
other White
9
90%
4
12
92%
Mixed / multiple
ethnic groups
-
-
-
-
-
Asian / Asian British
1
10%
-
1
8%
Black / African /
Caribbean /
Black British
-
-
-
-
-
Other ethnic group
including Arab
-
-
-
-
-
Not specified /
prefer not to say
-
-
-
-
-
Total
10
100%
4
13
100%
Page 125
Corporate Governance
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.
We have interpreted this definition as including the Chief Internal Auditor, who attended the executive committees as an observer in
the periods shown above, and reports directly to the Chair of the Audit Committee, a member of the Board. She became a member of
the executive committees with effect from 1 October 2024, after the end of the year.
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 2024 and 30 September 2023 the Company therefore met the following targets specified in the FCA UK Listing
Rules at UKLR 6.6.6R(9).
• 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 is 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.
Wider diversity within the Group
We believe that the achievement of a diverse workforce at all levels delivers the best culture, behaviours, customer outcomes,
profitability and productivity and therefore supports our success as a business.
We are committed to eliminating discrimination and promoting equality, diversity and inclusion amongst all employees through our
policies, procedures, and practices and through professional dealings with each other, customers and third parties.
The objective of the EDI policy is to outline our approach and to set out our expectations of employees and, in particular, line
managers, to ensure this approach is understood throughout the workforce and appropriately managed.
The EDI policy is implemented through the development and communication of people processes and procedures to support it, by
making the policy available to all our people and by engaging with and supporting them in displaying the policy’s intent through the
provision of regular training.
The Committee is pleased that 76.8% of employees provided diversity data for analysis at the beginning of the year and this increased
to 80.9% by 30 September 2024. This supports our 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 progress
in this area.
More details of the activities delivered with the involvement of the EDI Network, including our commitments made under the
Race at Work Charter and the Disability Confident Employer Scheme are provided in Section A6.3.
During the year the Committee reviewed our 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 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.
Our 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. Our gender pay gap statistics are also
discussed in that section.
Workforce engagement
The Committee has received regular updates on workforce engagement and the Chair and other 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; sustainability; and hybrid working practices. 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.
Culture
The Board recognises the importance of providing oversight of our organisational and risk culture and seeks to do this through a
variety of methods, ensuring that a wide range of cultural indicators are considered at a number of board-level committees. The
Committee plays a role in the regular analysis of reports on metrics which illustrate aspects of our culture, including both employee
engagement scores and diversity data, as well as reviewing progress on diversity and inclusion initiatives.
Page 126
B6.1 Statement by the Chair of the Audit Committee
Dear Shareholder
While the economic outlook for the UK has a more settled
feel than it has had for some time, it remains, to some extent,
uncharted territory, with the potential for further negative impacts
still a concern. In the face of this climate, the challenge for the
Audit Committee has been to ensure that information provided
to shareholders, other stakeholders and users of these accounts
more widely remains objective, understandable and informative.
External audit arrangements have also been a major focus for us
during the year, with a full tender process carried out, resulting in
the selection of new external auditors for the 2026 financial year
and thereafter.
At the same time changes in the UK regulatory environment have
continued to provide us with additional challenges, with a new
Corporate Governance Code published, one set of proposals,
together with draft legislation relating to governance disclosures,
abandoned by the outgoing government, and fresh legislation
signposted by the incoming one in its first King’s Speech,
although little detail is yet available. We have also seen an
update to international standards for internal audit, which we are
reflecting in our internal procedures.
Overall these presented my colleagues and I with a variety of
complex and interesting challenges across the broad spectrum of
our responsibilities as a committee.
The IFRS 9 accounting standard, which covers impairment
provisioning and income recognition on loan assets is to a
great degree forward-looking, requiring approaches which rely
on assumptions about future behaviours. These will always
be subjective, and the Committee has engaged with both
financial and operational management, and with KPMG, the
external auditor, to ensure that all assumptions and judgements
underlying the accounting are rigorously challenged.
These judgements are impacted by the underlying economics
of the UK and their impacts on our customers. In particular,
the continuation of interest rates at a higher level than we have
been used to in the recent past, and the cost burdens faced
by businesses and consumers still impacted by the inflation
experienced in the last two years are significant factors affecting
customer behaviours. Future behaviours may also be affected by
the policy choices being made by the incoming UK Government
and by wider geopolitical factors.
For impairment provisions, the resilience of the majority of
our loan books over the year has been very pleasing, with loss
outcomes less severe than many had feared, although the
Committee has been careful to consider the potential that this
may only represent a delayed impact. We were pleased to see the
adoption of a second generation impairment model in our motor
finance portfolio during the year, meaning that all the models
used for provisioning on our open portfolios have been fully
refreshed since the introduction of IFRS 9 for our 2019 accounts.
The outputs of our impairment models provide the Committee
with a useful framework for considering the adequacy of
provisioning, but the overriding requirement for the final position
to be truly representative of our exposures and credit risks is the
focus for evaluating and challenging the judgements made.
In the non-modelled portfolios, a particular area of focus for
the Committee was the development finance book, where the
incidence of loss recorded in the year was greater than we have
seen historically. The Committee challenged management
explanations on the reasons behind the loss incidence and the
implications of these losses on future prospects.
For income recognition, the apparent peaking of interest rates in
the year, and their gradual move towards a downward trend, had
an impact on the behaviour of customers with maturing accounts.
As the EIR method, which aims to spread income over the life of
a loan, requires this behaviour to be projected for current loans,
the level of judgement required is substantial, and the lack of
recent experience of a change in the direction of interest rate
expectations adds complexity to the exercise. The Committee
has had to carefully consider and weigh the assumptions
being made to ensure that the final results were appropriately
representative.
The Committee greatly values the role of external audit in
ensuring that our financial reporting fulfils the expectations that
users rightly have of information provided by a listed, regulated
entity. I and my fellow committee members were therefore
fully engaged in the tender process for external audit services
which was conducted during the year, in accordance with legal
requirements. I engaged with all six firms who were part of the
process and gained a good deal of additional insight into the
current state of the audit market as a result.
B6. Audit Committee
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Corporate Governance
After conducting a thorough process, with involvement from the
whole Committee at all stages, Deloitte LLP were recommended
as external auditors from the year ending 30 September 2026,
and I look forward to engaging with them going forward. Our final
decision required careful consideration and I would like to take
this opportunity to thank the unsuccessful firms, including the
current incumbents, for the enthusiasm and commitment with
which they engaged with the process.
The Committee continues to appreciate the benefits which
our strong and effective Internal Audit function brings to the
business, and the confidence it provides over the systems of
internal control. I was pleased to note the positive output of this
year’s internal review of effectiveness and offer the Committee’s
thanks to Sarah Mayne and her team for their diligence over
the course of the year. I was pleased to support the renaming
of Sarah’s role from Internal Audit Director to Chief Internal
Auditor, reflecting the importance of the position in the executive
management of the organisation.
Following the year end the Committee considered the
newly-updated Global Internal Auditing Standards. These have
been reviewed against our current arrangements and I was
pleased to note that only minimal changes were required to
comply with the new standards.
The year also saw continuing change in the UK’s corporate
governance and reporting landscape. A new edition of the
Corporate Governance Code was published, together with
associated guidance. Most of its provisions will apply to us from
our financial year ending 30 September 2026, and we have begun
the process of considering its implications on the Committee
and our governance structure more widely. As a first stage the
Committee’s operating procedures and terms of reference were
reviewed, and I am pleased to confirm that only minimal changes
were considered necessary.
We continue to monitor developments as firms in the sector and
across industry more widely develop best practice in addressing
the new Code, particularly matters relating to material controls
reporting, which will apply to us from our 30 September 2027
year end.
We began the year in the expectation of new legislation in
the corporate governance and reporting space, and a new
mandate for the FRC, which was expected to become the
Auditing, Reporting and Governance Authority (‘ARGA’). These
proposals were dropped by the outgoing UK Government, but
in its first King’s Speech, the new administration has committed
to revisiting this area. The Committee will continue to monitor
developments, evaluating potential impacts on our audit,
reporting and governance arrangements.
For the coming year ending 30 September 2025, 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
our modelling approaches
• Ensuring that our control processes and internal audit
capabilities continue to evolve alongside developments in the
business and emerging best practice
• Monitoring planning activities for the external audit transition,
which will take place following the completion of reporting on
the 2025 financial year
• Analysing how the business might be impacted by new
accounting, reporting and governance initiatives, particularly
the detailed requirements of the 2024 Code and the new UK
Government’s developing corporate governance and auditing
agenda, and ensuring we are properly positioned to respond
to them
Tanvi Davda, the Chair of our Remuneration Committee, became
a member of the Committee from 1 November 2024. I would like
to welcome Tanvi to the Committee, and I look forward to her
impact on these and other issues.
The 2024 financial year overall has been a particularly busy
one for my colleagues on the Committee, but also a varied
and interesting one. Accounting judgements have continued
to be complex and nuanced, forming much of our workload,
but the internal audit landscape, the external audit tender and
developments in the regulatory landscape have also demanded
active engagement. I thank my colleagues on the Committee for
their efforts in meeting these challenges, and the wider Board for
their support. I would also like to thank my colleagues across the
business whose input has supported the Committee’s work in
the year and who have contributed to the creation of this Annual
Report and Accounts.
The Committee and I are pleased with the way in which the
Annual Report represents our business, its risk profile, financial
position and results, and we commend it to shareholders for
approval at the AGM in March 2025, along with the resolutions
concerning the reappointment of KPMG, for their final year as
external auditors, and the fixing of their remuneration.
Alison Morris
Chair of the Audit Committee
3 December 2024
Page 128
B6.2 Operations of the
Committee
At the year end the Audit Committee comprised three
independent non-executive directors of the Company.
Additionally, Hugo Tudor served as a member of the Committee
until 6 March 2024, when he ceased to be considered
independent. Following the year end Tanvi Davda became a
member of the Committee on 1 November 2024, bringing the
current membership to four.
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 2024 and are available on our corporate website. The
Committee’s key responsibilities include:
• Monitoring the integrity of financial reporting
• Reviewing the risk management and internal financial
control systems
• Monitoring and reviewing the effectiveness of the internal
audit function
• Monitoring the relationship between the business and the
external auditor
It also provides a forum through which the external auditor and
the internal audit function 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 Chief Internal Auditor, 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 we operate required
by the Code. 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 our 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, Chief Internal Auditor 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 with representatives
of the external auditor without management present. Similar
meetings, in the absence of management, are also held with the
Chief Internal Auditor.
During the year ended 30 September 2024, the Committee met
five times. Its principal activities were:
• Review of the annual and half-yearly financial statements to
ensure these properly present the activities of the business in
accordance with accounting standards, law, regulations and
market practice
• Consideration of the appropriateness and application of our
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 annual and half-yearly financial
reporting including their views on significant judgements,
disclosures and the control environment
• Considering and concluding upon the annual report on the
effectiveness of risk management controls, prepared by
Internal Audit and the CRO
• Conducting a tender process in respect of external audit
arrangements for the year ending 30 September 2026 and
thereafter
• Review of other financial information published, such as
Pillar III disclosures required by banking regulations
• Considering the level of assurance to be obtained in
respect of climate-related disclosures published in the
2024 Annual Report
• Review of the terms of reference of the Committee,
particularly in light of the 2024 Code, and recommendation of
revised terms to the Board for approval
• Consideration of the potential impact of the ongoing
developments in corporate governance reform, including the
introduction of the 2024 Code, on our business and on the
role and activities of the Committee
• Consideration of our readiness to address other
forthcoming accounting and reporting changes which
will affect the business
• Consideration of the results of the Internal Quality
Assessment of the Internal Audit function carried out in
the year
• Approval of the 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 throughout the business
From time-to-time, where there are major changes in accounting
policies or audit arrangements in progress, the Chair of the
Committee may seek engagement or hold meetings with
shareholders.
Details of the Committee members’ attendance at meetings are
given in Section B3.3.
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Corporate Governance
B6.3 Significant issues
addressed by the Committee
in relation to the Financial
Statements
The Committee considers whether the accounting policies
we adopt are suitable and whether significant estimates and
judgements made by management are appropriate. In evaluating
these financial statements for the year ended 30 September 2024
the Committee particularly considered:
• The levels of impairment provision against loan assets under
IFRS 9 and particularly the uncertainties arising from the
higher interest rate environment, the inflationary pressures
of recent years, and the potential impact of both geopolitical
events and the policies of the incoming UK Government on the
economy and on our customers
• The calculation of interest income under the Effective Interest
Rate (‘EIR’) method, particularly for buy-to-let mortgage assets
• The requirement for any impairment provision against the
purchased goodwill carried in the balance sheet, based on the
most recent forecasts for the businesses concerned
• The potential impact of legal and regulatory issues in respect
of commissions on historical motor finance business and
the appropriateness of related disclosures in the financial
statements and the annual report more widely
• The valuation of the surplus in our defined benefit
pension scheme
• The viability statement which we are required to make under
the Code
• The capital and funding position, our forecasts for future
periods, and their impact on the going concern assessment
required in preparing the financial statements
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 130
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. These provisions are forward-looking in nature so are heavily
dependent on the use of judgement and estimation techniques to evaluate both the likelihood and
potential amount of loss.
The current economic environment, although more stable than in previous years still features higher
interest rates than seen for some time, with the costs of living and doing business still elevated
by the inflation of recent years. Coupled with uncertainty as to the detailed policies of the new UK
Government and the potential impact of global events more generally, this adds complexity to
the consideration of ECL. Our 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.
In order to satisfy itself that the process applied resulted in an appropriate level of provisioning, the
Committee considered particularly:
• The methods used to estimate probabilities of loss and potential losses, both mechanical and
judgemental, including the new model for motor finance 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 our customers’ credit prospects 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 our 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 69(a) to the accounts, the impairment
charge for the year and the movements in provision for impairment are shown in notes 20 to 25.
Exposure to credit risk is discussed in note 63.
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Corporate Governance
Matter
Particular areas of focus
Interest income
recognition
Income from loan balances is recognised 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 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 recognised on this basis is shown in note 4
Goodwill
impairment
An assessment of whether the carrying value of the acquired goodwill carried in our balance sheet,
which is not subject to amortisation under IFRS, remains appropriate or whether any impairment
has occurred is required at least annually.
In considering whether any impairment of goodwill had occurred, the Committee particularly
considered forecasts for the future cash flows of the acquired businesses and their reasonableness
in light of current trading performance, together with our 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 our 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 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 our 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 our 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 higher interest rates and costs for
our customers, the UK economy generally and our 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 132
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 our
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 senior
management and our management information.
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 activities of the business, its financial
position and its 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 our half-yearly financial report for the six months ended 31 March 2024 to the Board for approval.
The Committee’s consideration of the financial statements for the year ended 30 September 2023, 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 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.
B6.4 External Auditor
The Committee is responsible for assessing the effectiveness
of the external audit process, for monitoring the independence
and objectivity of the external auditor, and for making
recommendations to the Board in relation to the appointment
and remuneration of external auditors. The Committee is also
responsible for developing and implementing our policy on the
provision of non-audit services by the external auditor, which was
reviewed in the year. In managing the external audit relationship,
the Committee has had regard to the FRC Minimum Standard:
Audit Committees and the External Audit, published in
May 2023.
Audit tendering
The Statutory Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive Tender Processes
and Audit Committee Responsibilities) Order 2014 (the ‘Order’)
requires that only the Committee can agree the fees and terms of
service of the external auditors, initiate and supervise a tendering
process, or recommend the appointment of an external auditor
to the Board following a tender process. The Group has complied
with the requirements of the Order during the year.
KPMG were appointed as auditors, following a
competitive tender process, with effect from the year ended
30 September 2016 at the AGM in February 2016. The financial
year ended 30 September 2024 is the ninth reported on by
KPMG. Michael McGarry has been the KPMG engagement
partner since the year ended 30 September 2023 and the
current year is the second for which Michael has held this
responsibility. It is the policy of both the Group and the external
auditor that no engagement partner should serve for more than
five years.
We are not subject to a legal requirement to undertake an audit
tender until ten years have elapsed, however, as reported in last
year’s Audit Committee report, the directors concluded that it
would be beneficial to conduct a tender process for external
audit services for the year ending 30 September 2026 during this
financial year, to avoid any issues of independence for potential
bidders. This process was duly completed, and is reported
on below.
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.
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Corporate Governance
Audit effectiveness
Notwithstanding the audit tender process carried out in the year,
the Committee has considered the effectiveness of the external
audit for the year ended 30 September 2024 and our 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 senior financial management without the
external auditor present
• The Committee then addressed the evaluation, as
appropriate, with the external auditors
The Committee was able to conclude, on the basis of this
exercise and its experience over the year, that the external
audit process remained effective, and that the auditor was
independent and objective, up to the signing date of this report.
A further review will be carried out following the completion of
audit procedures on all group companies and reported on in next
year’s Annual Report.
The effectiveness review addressing the conduct of the
2023 audit, undertaken at the time of approval of the 2023
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 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 we operate were
appropriate to our needs. As part of this exercise the Committee
also considered the transparency report published by the
external auditor, and the FRC’s most recent Audit Quality Review
(‘AQR’) audit inspection review on KPMG, published in July 2024.
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
2025 should be proposed at the forthcoming AGM.
Independence policy
Both the Committee and the external auditor have safeguards
in place to avoid any compromise of the independence and
objectivity of the external auditor. The Committee considers
the independence of the external auditor annually and there is 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 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 to identify any matters which might impact on those
firms’ ability to tender for the group audit at any future date.
Fees paid to the external auditor
Fees paid to the external auditor are shown in note 9 to the
accounts. The ‘other services’ provided by KPMG include
only services required to be provided by external auditors by
legislation or regulation, including the review of half-yearly financial
information and profit verification for regulatory purposes.
Audit fees of group entities for the year, including fees for
the review of the half-year report, have increased by 18.1% to
£2,817,000 (2023: £2,385,000). 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 2024 should be no more than 70% of the average
of the audit fees for 2021, 2022 and 2023. As this average was
£2,329,000, the non-audit fee cap for the year was £1,630,000.
Fees paid to KPMG, the external auditor, for non-audit services, as
defined by the Regulation, during the year were £200,000 (2023:
£192,000), well within the cap. All these fees were for services
related to the external audit, as described above.
We actively consider other providers for the type of non-audit
services typically provided by accounting firms. We maintain
on-going relationships relating to tax, remuneration and regulatory
advice with firms other than the external auditor’s firm and
consider discrete projects on a case-by-case basis. We 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 external audit
and related fees can be analysed as shown below:
2024
2023
£000
£000
Auditors – KPMG
-
-
Other big four firms
1,177
1,148
Other firms
42
-
1,219
1,148
Page 134
We maintain relationships with all the major accounting firms,
which have been enhanced in the course of this year’s tender
process and consider a variety of providers for these types
of assignment.
Audit tender
As reported in last year’s annual report, during the year
ended 30 September 2023 the Committee resolved to hold a
tender process for external audit services for the year ending
30 September 2026 and thereafter, and had considered the
planning for the process, approved a structure and an
outline timetable.
In designing the process the Committee took 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. The tender was
conducted on a price blind basis with firms being ranked before
any information on cost was provided to the committee members.
During the current year the process took place and involved all six
of the firms forming the FRC’s designated ‘Tier 1’. As a preliminary
to the process, the Committee considered whether any form of
joint audit arrangement might be appropriate, but concluded
that the very centralised nature of our corporate structure,
administration processes and IT systems made it likely that such
an approach would not promote an effective audit.
The process was supervised by the Chair of the Committee, who
ensured that all members were involved in the progress of the
project throughout. All six bidding firms were invited to present
sessions to the Committee and other board members during the
process on unrelated topics, to increase members’ familiarity with
these organisations.
The principal stages of the formal process were:
• Shareholder input was specifically sought through our
programme of investor meetings and comments relayed to
the Committee
• The two smaller firms were asked to provide a detailed
statement of qualifications, which they then discussed with
the Chair of the Committee. The Committee reviewed the
statements, together with the Chair’s assessment and the
FRC’s annual Audit Quality Assessments of the firms and then
considered the merits of appointing either firm, considering
their current experience and resourcing set against the size,
complexity and regulatory exposure inherent in our business
• Four firms were asked to participate in the main phase of the
tender process, in which bidders were provided with access
to management information, and were invited to meet with
the Chair of the Committee and senior financial, risk and
operational management to develop their understanding of our
business and the significant areas for its audit
• Bidders were asked to provide references from firms
where they had a current audit relationship at both a senior
management and audit committee level. Meetings with the
referees were conducted by the CFO and the Chair of the
Committee who reported their conclusions to the other
committee members
• Each firm was asked to submit a written proposal setting
out how they would approach the provision of external audit
services, demonstrating their understanding of our significant
audit and business risks and our regulatory environment and
explaining how they would ensure an effective audit
• Firms were also each invited to a challenge session
with a panel comprising committee members and other
non-executive directors. Firms set out the most significant
factors in their approach and were questioned in detail by
the panel
• Committee members were provided with copies of the most
recent AQR review on each firm for consideration
The results of these processes were considered by the Audit
Committee at its meeting in September 2024. While recognising
that all the bidding firms had factors recommending them, the
Committee decided, on balance, to recommend the appointment
of Deloitte LLP to serve as external auditor with effect from
the year ending 30 September 2026. The Board accepted the
recommendation of the Committee, subject to shareholder
approval at the 2026 AGM.
KPMG will remain in office for the year ending 30 September 2025,
as noted above.
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 management’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
Internal Audit receives its authority through the mandate granted
by the Audit Committee. The primary purpose of Internal Audit
is to help the Board and senior management to protect the
assets, reputation and sustainability of the Group. It does this
by providing independent, risk-based and objective assurance,
advice, insight and foresight and challenging and influencing
senior management to improve the effectiveness of governance,
risk management and internal controls.
Internal Audit forms the third line of defence in our 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
2024, with an additional review in November 2024, after the year
end, to address the introduction of the new UK Internal Auditing
Code of Practice and Global Internal Auditing Standards in 2025.
A copy of the current Charter is available in the Governance
section of our corporate website.
Internal Audit maintains a good working relationship with the
external audit team, meeting regularly throughout the year,
independently of other senior management.
The function is led by the Chief Internal Auditor, Sarah Mayne, who
reports directly to, and has a close working relationship with, the
Chair of the Committee. She attended all meetings of Performance
ExCo and ERC as an observer and became a member of those
committees on 1 October 2024, after the year end.
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Corporate Governance
Operations
In September 2024, the Committee considered and approved
the annual IAP for the year ending 30 September 2025, 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 2024 was approved
before the beginning of the year, with the plus six half-year review
of the IAP completed by the Committee in March 2024, when a
small number of changes were approved.
Progress in respect of the plan is monitored throughout the
year with the Chief Internal Auditor providing an update to
each meeting of the Committee. A private session is also held
between the Chief Internal Auditor and the Committee without
management present at least twice a year.
The Chief Internal Auditor 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 2025, the Chair of the Committee met with the
Chief Internal Auditor 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 areas; management of financial crime; change
management; and IT.
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 Chief Internal Auditor 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 2024, 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 Chief Internal Auditor 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 approves the budget for Internal
Audit and assesses the resource plan on an ongoing basis,
to ensure that the internal audit function has sufficient and
appropriately skilled resources to complete the plan and that the
ongoing capabilities of Internal Audit remain strong, to support
future assurance. Alongside the 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 Chief
Internal Auditor that such skills would complement and develop
those of the internal team. Provisions for these arrangements
were reviewed in light of the audit tender process described
above, and it was concluded that any independence issues could
be appropriately managed, given the timescales involved.
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 2024, the Committee considered the output of an
internally produced effectiveness review, following the external
quality assessment (‘EQA’), undertaken by an independent
specialist firm during 2023.
The internal effectiveness review, which was supported by
feedback from stakeholders across our businesses, concluded
that the function was operating effectively in accordance with
required standards.
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.
In January 2025 the existing CIIA standards will be replaced by
new Global Internal Audit Standards. To ensure Internal Audit is
able to meet the new requirements, a gap analysis and action
plan has been completed and reviewed by the Committee.
This will be monitored through to completion, with the first
assessment of compliance with the new requirements to be
undertaken as part of the next internal effectiveness review in
May 2025.
B7. Remuneration Committee
This report covers the activities of the Remuneration Committee for the year ended 30 September 2024 and sets out the
remuneration details for the executive and non-executive directors of the Company. It has been prepared in accordance with
Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, as amended, and
the principles of the Code.
This report consists of the Statement by the Chair of the Committee B7.1 and the Annual Report on Remuneration B7.2. A summary of
the Remuneration Policy approved at the Annual General Meeting held on 1 March 2023 is included 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.
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Corporate Governance
B7.1 Statement by the
Chair of the Remuneration
Committee
The information provided in this section is not subject to audit
Dear Shareholder
Following last year’s results announcement, I became
Chair of the Remuneration Committee taking on the role from
Hugo Tudor who had been Chair since June 2018. My thanks and
that of the Committee go to Hugo for his leadership over a period
of significant change for our remuneration policy. I would also like
to express my personal gratitude to Hugo and the Committee
for their support during my first year as Remuneration
Committee Chair.
As incoming Chair I was pleased that the results of this year’s
committee evaluation reiterated last year’s external evaluation
findings – that the Committee’s management, composition
and the information provided to it were excellent and that all
these factors enable the Committee to discharge its mandate
effectively. The evaluation outcomes provide reassurance of our
alignment to the UK Corporate Governance Code.
The Committee remains confident that, within the regulatory
framework that applies at Paragon, the remuneration structure
in place supports the delivery of our business strategy and
appropriately rewards a management team that is committed
to delivering consistently strong performance while ensuring a
sustainable business.
Remuneration philosophy
Our remuneration philosophy remains unchanged in seeking
to recognise fairly the contribution of all employees. We have
for many years been an accredited Real Living Wage employer
and when the Committee undertook its annual review related
to the fair pay agenda this year it re-confirmed that we are a
fair pay employer.
Alignment with shareholder interests on an all-employee basis
as well as for the executive directors, remains important to
our business as a whole. Across the all-employee Sharesave
schemes, as at the end of the financial year, approximately 64%
of employees held Sharesave options. Both executive directors
continue to hold personal shareholdings materially above our
shareholding policy requirements with 20% of their salary also
paid in shares.
Additional information on fair pay is set out in
Section B7.2.4.
Business performance and variable pay earned in the year
The year ended 30 September 2024 was a year of strong
financial performance against a set of stretching targets.
Accordingly, variable pay awards for executive directors reflect
the exceptionally strong performance during the year. Both
executive directors are being awarded an annual bonus of 95.7%
of maximum opportunity. The balanced scorecard assessment
shown later in this report records and expands on the excellent
performance in all areas and provides the basis for this award.
The Performance Share Plan (‘PSP’) awards that are due to
vest in December 2024 will vest at 95.21% of maximum. This
also reflects strong performance over the period including TSR
performance of over 60%, being above the upper quartile of the
peer group. Underlying EPS was materially above the threshold
for maximum vesting, being up 70.5% across the three years, and
this growth translated to a 54.8% increase in our dividend to
40.4 pence per share.
The level of vesting is reflective of the wider shareholder
experience as each of our profit, RoTE, earnings per share and
dividend returns have reached record levels during 2024. In
respect of both absolute and relative TSR, only one firm of the
peer group, in addition to Paragon, produced over 50% TSR
across the three-year period, with eight of the comparators
actually delivering a negative outcome over the same period.
The risk portion of the PSP, which considers both key elements
of our risk appetite, and strategic risk across the medium term,
provided a strong outturn for each element. The customer and
people metrics also performed in the top quartile representing
the delivery of good customer outcomes as well as our focus on
people and culture.
The full details of the remuneration paid to the executive
directors in respect of the financial year and the basis for
its determination are set out in Section B7.2.
Fixed to variable pay ratio: regulatory bonus cap
The regulatory requirement for a 2:1 ratio between variable and
fixed pay in bank remuneration was removed in October 2023,
and whilst a cap continues to be a requirement, it is now for
each firm to determine the most appropriate ratio for their own
business. The Committee will therefore ask shareholders at our
forthcoming AGM to formally agree to return the responsibility
for setting an appropriate ratio between fixed and variable
pay for all employees classed as Material Risk Takers (‘MRTs’)
under the PRA and FCA remuneration rules to the Committee.
This will provide the Committee with flexibility, should it be
required, to address recruitment and retention objectives as the
employment market evolves. The removal of the 2:1 cap has no
impact on the executive directors, as the relationship between
their fixed and variable pay continues to be governed by the
policy agreed at the AGM in 2023.
Remuneration for the year ending 30 September 2025
The Committee is satisfied that the directors’ remuneration policy
approved at the 2023 AGM has operated as intended and no
changes are being made to the structure of executive director
remuneration for the year ending 30 September 2025. Salaries for
the executive directors have been increased by 3%, which is in line
with the workforce average.
Page 138
Work of the Committee
Since assuming the role of Committee Chair, I have met with
a number of our larger shareholders and intend to meet more
in the coming year. I have also met with our People Forum to
discuss both executive director and all-employee remuneration.
Both of these interactions contribute to ensuring that the
views and reflections of stakeholders are incorporated into the
Committee’s deliberations and decision making.
This year the Committee has considered amongst other items:
• executive directors’ remuneration
• senior managers’ remuneration
• the Chair of the Board’s remuneration
• wider workforce remuneration
• discretionary share plans
• this Directors’ Remuneration Report
A range of other governance matters were also considered.
At the 2026 AGM, a new directors’ remuneration policy will be
put to shareholders with detailed proposals for any changes
to the current policy that the Committee consider necessary.
Any proposals will be discussed with shareholders and other
stakeholders during 2025, should the proposed changes be of a
substantive nature. As part of that policy review, the Committee
will also look at the constituents of the peer group for the
total shareholder return element of the PSP given the ongoing
consolidation in the listed financial services sector.
Conclusion
Our remuneration policy continues to be consistently applied,
with the outcomes for the executive directors in the year reflecting
Paragon’s strong absolute and relative performance. I want to
take this opportunity to thank those shareholders who have met
with me this year for their valuable input, and to thank all our
shareholders for their continued support.
I trust that shareholders will continue to be supportive of the
operation of our remuneration approach during the year and
vote in favour of both the resolution to approve the Directors’
Remuneration Report set out in Section B7.2 and the resolution
to remove the 2:1 bonus cap for MRTs, which are being put to the
AGM in March 2025.
Tanvi Davda
Chair of the Remuneration Committee
3 December 2024
Page 139
Corporate Governance
Contents of the annual remuneration report:
• The Remuneration Committee, key responsibilities and advisers (B7.2.1)
• Directors’ remuneration for the year ended 30 September 2024 (B7.2.2)
• Application of the remuneration policy for the year ending 30 September 2025 (B7.2.3)
• Other information including Fair Pay (B7.2.4)
B7.2 Annual Report on Remuneration
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
Growing profitability beyond
buy-to-let
Risk measures and financial
performance
EPS, relative TSR and risk
assessment
Digitalisation
Increasing direct business flows
and reducing customer lead times
Financial performance
EPS and relative TSR
Capital
management
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
Relative TSR, EPS and risk
assessment
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
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 140
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): Robert East (Chair of the Board), Tanvi Davda, Alison Morris, Hugo Tudor, Graeme
Yorston and Zoe Howorth. Tanvi Davda became Chair of the Committee on 7 December 2023, succeeding Hugo Tudor, who
stepped down from the Committee on 6 March 2024.
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 and 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. This includes all members of the
Executive Committee including the Chief Internal Auditor and the Chief Risk Officer
• Reviews workplace remuneration and related policies and the alignment of incentives and rewards with culture; and takes
those matters into account when setting the remuneration policy for executive directors
• Considers the group-wide Internal Remuneration Policy for all employees and considers and approves the identification of
the MRTs under financial services regulatory remuneration rules
Attendees
The CEO, CFO, Chief People Officer, Chief Risk Officer, General Counsel, External Relations Director, other non-executive
directors (including the Chair of the Risk and Compliance Committee) and external remuneration advisors attend by invitation.
Page 141
Corporate Governance
Advisors
When deciding the remuneration for the year for executive directors and senior management the Committee considered
advice from:
• Independent advisors – PricewaterhouseCoopers LLP (‘PwC’)
• The CEO, the CFO, the Chair of the Risk and Compliance Committee, the Chief People Officer, the Chief Risk Officer and
the External Relations Director
Independent advisors: additional information
Appointment process – PwC were appointed by the Committee following review processes in the financial year ended 2021
and are members of the Remuneration Consultants Group and as such voluntarily operate under its Code of Conduct in
relation to executive remuneration in the UK. This supports the Committee’s view that all advice received during the year was
objective and independent.
Connections to the Group – the Committee is satisfied that the PwC team providing remuneration advice to the Committee
does not have any connection with the Group, or any individual director, that may impair its independence and / or objectivity.
Fees – the total fees paid to PwC for advice to the Committee during the year amounted to £106,997 (including VAT) on a part
fixed-fee and a part time and materials basis.
Other services – PwC provided the business with other professional services during the year including regulatory support and
support with our IRB implementation.
Statement of voting at Annual General Meeting
The voting outcome for the resolution to approve the Annual Report on Remuneration at our AGM held on 6 March 2024, and the
resolution to approve the Director’s Remuneration Policy at the 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 (2024)
166,004,920
95.81%
7,256,290
4.19%
173,261,210
2,371,184
Remuneration Policy (2023)
177,558,900
96.99%
5,517,947
3.01%
183,076,847
5,928,955
Page 142
B7.2.2 Directors’ remuneration for the year ended 30 September 2024
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. It also sets out the shareholding requirements
expected of executive directors.
Single total figure of remuneration and supporting disclosures
Single total figure of remuneration for executive directors
Note
N S Terrington
R J Woodman
Total
Year ended 30 September 2024
£000
£000
£000
Fixed remuneration
Salaries
(a)
949
600
1,549
Allowances and benefits
(b)
22
15
37
Pension allowance
(c)
76
48
124
Total fixed remuneration
1,047
663
1,710
Variable remuneration
Bonus
(d)
890
562
1,452
Long-term share awards
(e)
1,707
1,075
2,782
Total variable remuneration
2,597
1,637
4,234
Total
3,644
2,300
5,944
Note
N S Terrington
R J Woodman
Total
Year ended 30 September 2023
£000
£000
£000
Fixed remuneration
Salaries
(a)
921
582
1,503
Allowances and benefits
(b)
20
15
35
Pension allowance
(c)
74
47
121
Total fixed remuneration
1,015
644
1,659
Variable remuneration
Bonus
(d)
876
553
1,429
Long-term share awards
(e)
1,396
880
2,276
Total variable remuneration
2,272
1,433
3,705
Total
3,287
2,077
5,364
Page 143
Corporate Governance
Notes to the single total figure table for executive directors
a)
Salaries
20% of each executive directors’ salary is 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
This includes private health cover and a company car allowance (£10,000 to £12,000). Also included is the reimbursement of: (i) costs
associated with the purchase of shares in respect of salary as shares arrangements and (ii) certain travel costs incurred in connection
with the performance of executive director duties which constitute a taxable benefit in kind. The amounts are those that HMRC treat
as taxable together with an allowance provided to cover the tax liability. The amount will vary with the amount of brokerage costs /
travel undertaken by the executive director.
c)
Pension allowance
Both executive directors received a cash allowance in lieu of pension of 10% of cash salary.
d)
Bonus
Maximum bonus opportunity during the year was 98% of salary (2023: 98%), in line with the remuneration policy. Based on the
performance measures set out below, a bonus of 95.7% of maximum opportunity was awarded. The Committee determined that the
formulaic outcomes under the bonus framework were fair and appropriate because 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.
Delivered in
Executive
director
Salary
Maximum
opportunity
Percentage
award
Total bonus
Upfront cash
Upfront shares1
DSBP awards2
£000
% of salary
% of max
£000
£000
£000
£000
N S Terrington
949
98.0
95.7
890
402
402
86
R J Woodman
600
98.0
95.7
562
254
254
54
1.
Delivered as shares, with all shareholder rights except the right to transfer or sell shares until a year from the award date has lapsed.
2.
Bonus deferred under the Deferred Share Bonus Plan (‘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 after vesting.
Page 144
Balanced scorecard assessment
Measure
Weighting
Threshold
Target
Maximum
Actual
Outcome
Financial performance
60%
60%
Operating profit
24%
£249.1m
£273.7m
£286.0m
£292.7m
24%
RoTE (underlying)
24%
17.0%
19.2%
20.3%
20.3%
24%
NIM
6%
2.79%
3.06%
3.11%
3.16%
6%
Cost:income ratio
6%
40.0%
38.2%
37.2%
36.1%
6%
Measure
Weighting How measured
Outcome
Risk
20% Qualitative assessment by the Remuneration Committee of:
17.7%
• Strong credit performance across all portfolios
• Capital and liquidity measures all significantly within risk appetite
• Operational risk covers numerous areas including operational losses, IT
security, data protection and third party suppliers and the majority of
metrics were within risk appetite for the whole period
Measure
Weighting How measured
Outcome
Personal performance
20% Qualitative assessment by the Remuneration Committee of individual targets
as detailed below for each director
18%
Overall outcome
95.7%
Page 145
Corporate Governance
Individual targets
Actual performance
Nigel Terrington
Strong leadership to deliver
the business plan and financial
performance, within agreed risk
appetites, upholding our values
and always delivering good
customer outcomes
• Record operating profit before tax of £292.7 million increased
by 5.4% from 2023
• Savings expansion to £16.3 billion
• £2.0 billion TFSME repaid early in 2024 financial year ahead of
2025 maturity
• Tight management of costs with strategies deployed to avoid
material inflation
• Consumer Duty delivered on time and with full compliance
Continue with technology
development to digitalise the
business for our customers, with
improved service delivery, faster
decision making and improved
cost efficiencies
• Significant activity with the delivery and launch of the new
buy-to-let origination platform
• IBMi migration delivered, resulting in over 90% of core
systems now being in the cloud
• Machine learning actively used across the business and Gen
AI pilots in progress with 100 software licences acquired for
development and testing purposes
Continue to develop the
savings strategy, expanding
the addressable market and
over time, utilising technology,
including open banking, to
broaden the customer reach
• Very strong savings deposit growth delivering £3.0 billion
in excess of plan enabling good liquidity management and
supporting NIM expansion
• Enhanced optionality through third-party relationships, with
£3.8 billion of the total savings balances sourced through
external platforms (2023: £2.9 billion)
• Various awards for savings products including Savings
Champion Award for customer service
Continue to progress the
sustainability strategy by
supporting customers to meet
their climate change requirements
and obligations
• Operational footprint emissions reduction from 2019 baseline
reached 48% (2023: 42%)
• Further product development including expansion of the
development finance Green Homes Initiative by £100.0 million
during the year
• New EPC rated A to C advances continued to deliver
month-on-month improvements in stock. 53.4% of new
mortgage advances in the year were EPC rated A to C
(2023: 49.9%)
Continue to build a succession
plan pipeline for executive
committee roles
• Succession planning firmly established for executive
committee and other senior leadership roles with internal
replacements developed for known near term departures
• Seamless and successful transition on the departure of the
Managing Director – Mortgages
• Development and internal promotion of Savings Director onto
executive committees
Page 146
Individual targets
Actual performance
Richard Woodman
Strong leadership to deliver
the business plan and financial
performance, within agreed risk
appetites, upholding our values
and always delivering good
customer outcomes
• Record operating profit before tax of £292.7m increased by
5.4% from 2023
• Savings expansion to £16.3 billion
• Strong liability management saw £2.0 billion of TFSME repaid
in the financial year
• Product pricing tightly managed to maintain growth and
ensure delivery of good customer outcomes
Maintain appropriate capital,
liquidity and funding buffers
to allow the business to both
support its customers and
other stakeholders in stress and
enhance capital efficiency
• Strong capital buffers maintained. CET1 ratio of 14.2%
(2023: 15.2%)
• Continuing share buy-back programme to optimise
shareholder equity (programme of up to £100m for the year)
• Enhanced modelling of savings customer behaviours
undertaken to support ILAAP completed in the year
Further develop our thinking
on the risks of climate change
and embed the management of
climate-related risks within our
strategic plans, risk appetites and
disclosures
• Risk and opportunity assessment undertaken across all
portfolios in support of strategic overview of climate change
• Decarbonisation assessment for mortgage and motor finance
portfolios delivered to the Board as part of ICAAP
• Independent benchmarking review completed. The review
considered:
o approach to calculating and reporting financed emissions
o methodology and disclosure frameworks to assess
assurance readiness
o target setting (decarbonisation assessment) approach
Broaden funding options, actual
and contingent, including the
addition of a Covered Bond
capability
• Covered Bond documents prepared and with the regulator
for review
• Moody’s ratings of Baa3 issued for the Company and Baa2 for
Paragon Bank
• Available contingent funding utilising mortgage assets
prepositioned at the Bank of England more than doubled,
from £2.4 billion at 30 September 2023 to £5.2 billion at
30 September 2024
• Repo facilities with approved counterparty banks utilised
regularly in order to test and maintain the availability of credit
lines. Two new counterparties added in the year
Prioritise and embed IRB to boost
risk capability and longer-term
capital efficiency
• Capital planning reflects macro-level implications of IRB
accreditation as well as at a product level
• Individual decisions increasingly being based on an IRB
outturn (for longer-dated products)
• IRB programme continues to develop in line with
regulatory feedback following extensive engagement
during the financial year
Page 147
Corporate Governance
e)
Share awards: Paragon Performance Share Plan
The amount shown in the single figure table in respect of share awards represents the value of those awards for the performance
period ended 30 September 2024, as set out below.
Vesting in year to 30 September 2024
Vesting in year to 30 September 2023
N S Terrington
R J Woodman
N S Terrington
R J Woodman
Grant date
Dec 2021
Dec 2021
Dec 2020
Dec 2020
Shares granted
Vesting percentage
208,611
95.21%
131,325
95.21%
236,661
96.41%
149,046
96.41%
Shares vesting
198,618
125,034
228,164
143,695
£
£
£
£
Share price at vesting
Dividend equivalent per share
7.6141
0.981
7.6141
0.981
5.3202
0.801
5.3202
0.801
Value per share at vesting
8.595
8.595
6.121
6.121
Value of award at vesting
1,707,181
1,074,705
1,396,592
879,557
Value of award at vesting attributable to share
price appreciation only
434,437
273,487
174,774
110,070
1.
The PSP value for the year ended 30 September 2024 has been determined using the average closing share price for the three months ended 30 September 2024 as an
estimate. The actual value of the awards will not be finalised until the share price on the vesting date in December 2024, following the Preliminary Results announcement, is
known.
2.
The PSP value for the year ended 30 September 2023 has been restated based on the market value of the shares at the vesting date, 6 December 2023.
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 remuneration policy. During this period the executive directors will continue to be entitled to
dividend equivalents.
The vesting value in 2024 reflected a 40.3% increase in the share price between grant and vesting. The Committee considered the
impact of share price movement over the period between grant and vesting to be consistent with the underlying performance,
including strong TSR performance (second in our comparator group) and EPS at over 40% above the maximum target. The
Committee concluded that the increase in share price did not constitute a windfall gain.
The determination of the vesting outcomes for the December 2021 grant is described below. The determination for the
December 2020 grant was set out in the Directors’ Remuneration Report for the year ended 30 September 2023.
Page 148
Awards vesting in respect of the year ended 30 September 2024
Awards granted in December 2021 under the PSP are subject to performance conditions measured over the three financial years
ended 30 September 2024. 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 171.38%.
The detail of the outturns of each of the conditions was as follows:
PSP grant in December 2021: non-financial performance conditions
Weighting
Actual
performance
Vesting
outcome
Risk
12.5%
50% of the risk metric is determined by the Committee based on an
assessment by the CRO of five key elements of our risk appetite: regulatory
breaches, 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 firmly within risk appetite across all our loan
portfolios for the overwhelming majority of the year
• 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 throughout most of the year
• No breaches of risk appetite throughout the period. Surplus capital
has been maintained and managed effectively, with a share buy-back
programme in place for part of last three financial years
10.5%
Based on a strategic risk assessment by the Committee reflecting the
management of risk with regard to the delivery of our medium-term strategy
noting that over the vesting period:
• Strong capital ratios with earnings-led CET 1 accretion stronger than
growth in capital requirements and dividend
• Building a diversified funding profile is important and significant progress
has been achieved to date. Deposit balances from platforms increased
to £3.8 billion; strong liquidity growth and the building of contingent
funding capacity (currently £5.2 billion)
• Earnings have diversified, with the Commercial Lending division
contribution increasing from £76.4 million in 2021 to £88.3 million for
the 2024 financial year
• Extensive succession plans in place, demonstrated by the internal
appointment to the role of Managing Director - Mortgages within days of
the former incumbent resigning
• Pension plan moved from £10.3 million deficit at 30 September 2021 to a
£22.2 million surplus at 30 September 2024
12.5%
12.5%
Customer
12.5%
Customer insight feedback on key
product lines
• NPS scores were maintained or
improved across the period with the
majority of scores being above the
industry average
• Customer satisfaction was 79% which
was above the industry average of
78%
10.87%
Customer complaints and
associated customer outcomes
• Complaints consistently below risk
appetite tolerance
• Complaints resolved within eight
weeks was on average 96.6%
PSP grant in December 2021: financial performance conditions
Weighting
Threshold vesting for
25% of maximum award
Maximum
vesting
Actual
performance
Vesting
outcome
Relative TSR
25%
Median
performance
(being (21.60)%)
Upper quartile
performance
(being 42.12%)
Above upper quartile
performance
(being 63.17% and
ranked second out of 14)
25%
Underlying basic EPS
25%
63.0 pence
72.0 pence or more
101.1 pence
25%
Page 149
Corporate Governance
PSP grant in December 2021: non-financial performance conditions
Weighting
Actual
performance
Vesting
outcome
People
12.5%
Employee engagement
• Employee engagement excellent across the
whole period measured using employee
surveys, including the independent all-
employee survey for Investors in People (‘IiP’)
which achieved scores at or above the IiP
average, and feedback from leavers and joiners
11.34%
Voluntary attrition
compared to the
industry averages
• Attrition data compared to the industry
average for financial services remained
positive in the period, at or below the average
Gender diversity of
senior management
• Gender diversity above the target level set in
2021 throughout the performance period with
the focus on increasing the number of female
senior appointments
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 business were satisfactory given the level of vesting. In respect of both these points the Committee concluded that the vesting
level was appropriate for all participants.
Awards granted during the year ended 30 September 2024
On 15 December 2023 the following awards were granted as part of the executive directors’ variable remuneration in respect of the
year ended 30 September 2023. These awards are designed to fulfil the majority of the regulatory requirement that 60% of executive
directors’ variable remuneration is 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 118% of salary in line with the Policy.
Executive director
Salary
Percentage grant
Face value of grant
Number of shares
£000
£000
N S Terrington
921
118%
1,087
265,164
R J Woodman
582
118%
687
167,539
The value of these awards will be disclosed in the single figure table for the year ending 30 September 2026, at the end of the
performance period.
These awards have a three-year performance period, from 1 October 2023 to 30 September 2026 and are 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 our results for the year ended 30 September 2023, 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 £4.678, with the prices of the tranches which become exercisable in the four succeeding years being £4.388, £4.116, £3.862 and
£3.622 respectively reflecting the dividend yield adjustment.
Page 150
These awards are subject to the following performance conditions.
Financial measures
Performance
measure
Weighting
Threshold vesting for
25% of maximum award
Maximum
vesting
Relative TSR
25.0%
Median performance
Upper quartile performance
Underlying Basic EPS
25.0%
80.0 pence
100.0 pence or more
Non-financial measures
Measures
Weighting
Risk
20.0%
50% weighting is determined by the Committee based on an assessment by the CRO of the six key
elements of our 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 our medium-term strategy
Climate
10.0%
Consideration will be given to (i) customer insight feedback on key product lines and (ii) customer
complaints relative to risk appetite levels
Consideration will be given to i) operational footprint emissions reduction ii) financed emissions
decarbonisation assessments; iii) development of sustainable products and iv) education
and engagement
Customer
10.0%
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) 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. The other metrics are assessed based on a number of elements, as set out above, which 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 151
Corporate Governance
Single figure of total remuneration for the Chair of the Board and non-executive directors
Year ended 30 September 2024
Year ended 30 September 2023
Fees
Benefits1
Total
Fees
Benefits1
Total
£000
£000
£000
£000
£000
£000
Chair of the Board
R D East
280
2
282
255
2
257
Non-executive director
T P Davda2
100
-
100
80
-
80
P A Hill
104
-
104
100
-
100
Z L Howorth3
83
-
83
27
-
27
A C M Morris4
124
-
124
103
-
103
B A Ridpath
83
-
83
80
-
80
H R Tudor5
81
-
81
117
-
117
G H Yorston
83
-
83
80
-
80
Total
938
2
940
842
2
844
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.
2 T P Davda became Chair of the Remuneration Committee on 7 December 2023.
3 Z L Howorth was appointed to the Board on 1 June 2023.
4 A C M Morris became Senior Independent Director on 14 August 2023.
5 H R Tudor ceased to be Senior Independent Director on 14 August 2023 and Chair of the Remuneration Committee on 7 December 2023 and ceased to be a member of all board
sub-committees on 6 March 2024.
Payments for loss of office
No payments for loss of office were made during the year ended 30 September 2024.
Page 152
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 2024 (including those held by their
connected persons) were:
N S Terrington
R J Woodman
Number
Number
Unvested awards subject to performance conditions
PSP
555,495
350,386
Unvested awards not subject to performance conditions
DSBP
120,240
74,065
Sharesave
4,245
4,245
Total unvested awards
679,980
428,696
Vested but unexercised awards
PSP1
717,747
451,974
DSBP
-
-
Total vested but unexercised awards
717,747
451,974
Shares beneficially held
Acquired as salary in shares / RBA or regulatory related
annual bonus requirements and subject to restrictions related to disposal
86,675
55,248
Not subject to restrictions on disposal
1,237,483
535,867
Total shares beneficially held
1,324,158
591,115
Total interest in shares
2,721,885
1,471,785
Awards exercised in the year
DSBP
243,291
82,099
Total awards exercised in the year
243,291
82,099
1 For the purposes of the table above, the awards granted in December 2021 are assumed to be vested but unexercised in respect of the percentage which will vest, 95.21%, 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 2024, which consist entirely of ordinary
shares, beneficially held, were as follows:
2024
R D East
10,000
T P Davda
6,019
P A Hill
2,907
Z L Howorth
6,541
A C M Morris
4,168
B A Ridpath
4,358
H R Tudor
59,790
G H Yorston
8,642
As at 28 November 2024, the last practicable date prior to approving this Report, the Company has not been advised of any changes
to the interests of the directors and their connected persons as set out in the tables above.
Page 153
Corporate Governance
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.
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 value of shares is calculated on a net of
income tax and national insurance basis where relevant.
The chart below compares the executive directors’ holdings at 30 September 2024 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 2024.
Policy requirement
N S Terrington
R J Woodman
0%
100%
200%
300%
400%
500%
600%
% of salary
700%
800%
900%
1000%
1100%
1200%
1300%
1400%
1500%
Directors’ shareholding guidelines
30 September 2024
Policy requirement
N S Terrington
R J Woodman
0%
100%
200%
300%
400%
500%
600%
% of salary
700%
800%
900%
1000%
1100%
1200%
1300%
1400%
1500%
At 30 September 2024, 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 154
B7.2.3 Application of remuneration policy for the year ending 30 September 2025
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 2025
in the same way as it was applied in the preceding year.
Executive directors
Fixed pay
The salaries of the executive directors, set out below, were increased by 3% from 1 October 2024. This increase was in line with the
average increase applicable to the wider workforce.
.
Salary
1 October 2024
Salary with effect from
1 October 2023
£000
£000
N S Terrington
Salary – paid in cash
782
759
Salary – paid in shares
195
190
Total salary
977
949
R J Woodman
Salary – paid in cash
494
480
Salary – paid in shares
124
120
Total salary
618
600
Delivery of fixed remuneration, pension allowance and benefit entitlements for the year ending 30 September 2025 are as described
above for the year ended 30 September 2024.
Annual bonus
In line with Policy, the bonus opportunity for the financial year ending 30 September 2025 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 our 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 2025 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 2024 are expected to be made in December 2024.
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.
Prior to granting the PSP in December 2024, 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 2023, the Committee does not consider that any adjustment is needed; however, this will be kept under review.
In line with previous years, the Committee will take into account the lack of dividends (or dividend equivalents) in determining the
applicable share price on grant.
The intended performance conditions and weightings are set out below.
In addition, there is an individual performance condition and a group underlying performance underpin which must be met prior to
vesting occurring.
Page 155
Corporate Governance
Financial metrics
Performance
measure
Weighting
Threshold vesting for
25% of maximum award
Maximum
vesting
Relative TSR
25%
Median performance
Upper quartile performance
Basic EPS
25%
104 pence
125 pence or more
Non-financial metrics
Performance
measure
Weighting
Risk
20%
50% weighting is determined by the Committee based on an assessment from the CRO of the six key
elements of our 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 our medium-term strategy
Climate
10%
Consideration will be given to i) operational footprint emissions reduction ii) financed emissions
decarbonisation assessments; iii) development of 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
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%.
Customer metric
As the FCA Consumer Duty requirements came fully into force from July 2024, the condition hurdle that is in place for the grants
made in 2022 and 2023 is removed for the 2024 grant as this regulation has moved from the implementation phase to being part of
business-as-usual.
TSR metric
The TSR metric is unchanged, except that the comparator group no longer includes Virgin Money UK PLC following its delisting on
1 October 2024.
EPS metric
The underlying EPS targets have been updated using the financial forecasts for the period beginning on 1 October 2024. These
detail the plans for the next two years with a longer-term forecast covering a five-year period, and include detailed income forecasts.
These forecasts have been approved by the Board and have been compiled taking into consideration cash flow, dividend cover,
encumbrance, liquidity and capital requirements as well as other key financial ratios throughout the period. These forecasts are
rigorously challenged during the Board approval process, and the Committee then uses the outcome from that process to determine
the EPS target and ensure it is stretching across the LTIP’s three-year performance period.
Page 156
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 increases set out below approved to take effect from 1 October 2024. Both the Chair and
base non-executive director fee will be increased by 3% in line with the rate applied for the executive directors and the average of the
wider workforce.
Each non-executive director receives a base annual fee of £75,705 (2023: £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.
Fee with effect from
1 October 2024
1 October 2023
£000
£000
Chair of the Board
289.0
280.5
Non-executive directors
Senior independent director (when also a committee chair)
125.7
123.5
Other committee chairs
105.7
103.5
Other non-executive directors who are committee members
85.7
83.5
Other non-executive directors
75.7
73.5
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 our business. It includes a description of the overall
approach to employee remuneration, 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
We are committed to rewarding all employees fairly for their contribution, whilst ensuring they are motivated to always deliver the best
outcomes for customers. This remuneration philosophy reflects our culture, vision and values and supports our purpose whilst being
aligned both to our long-term strategy and to helping to deliver fair customer outcomes.
We are a fair pay employer and for several years the Committee has undertaken an annual review of various data related to the fair pay
agenda, to confirm that this continues to be the case. This is reflected in our:
• Commitment to pay all employees at least the ‘Real Living Wage’ set by the Living Wage Foundation. During the year this was
£12.00 per hour outside London, equivalent to £23,400 per annum for full-time workers. This benchmark increased to £25,570 per
annum in October 2024, when we increased our minimum wage to £25,750
• Payment of Profit Related Pay (‘PRP’) to around 87% of the workforce
• Making share schemes available at both an all-employee and senior management level which align employees’ interests with those
of shareholders
• Alignment between executive pay and that of other senior managers as well as other employees
• People Forum which provides an additional arena for discussion and feedback on executive and all-employee
remuneration structures
This section provides further information on all of these matters. In addition, our commitment to fair pay is reflected in our approach
to various sustainability-related matters which support and enhance fair pay, as detailed in Section A6.
Page 157
Corporate Governance
How our pay principles aligned to the Code during the year ended 30 September 2024
Principle
Application
Example
Clarity
The executive director and all-employee
remuneration policies are clearly
communicated to directors and all employees
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
The Remuneration Report in this document is
available to all employees as is the group-wide
Internal Remuneration Policy
Details on the application of the Directors’
Remuneration Policy, including incentive outcomes
for the current year, as well as proposed performance
measures and targets for future years, are clearly
set out in this report. The internal policy details the
available remuneration structures which are aligned
across the business and consist of salary; pension;
variable cash bonuses; share schemes and benefits
Discussion on executive remuneration and how it
aligns to the workforce forms part of the regular
People Forum discussions with the committee chair
Simplicity
Straightforward remuneration structures
apply to all levels of our employees
The Committee has sought to ensure that
the Directors’ Remuneration Policy and
outcomes which result from it are easy
to understand for both participants and
shareholders
Proportionality
Bonus awards reflect annual performance,
while 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
The links between awards and delivery of strategy
and performance are shown in the table above,
providing 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
The current Policy in full is set out in Section B7.3 of
the Annual Report and Accounts for 2022
Alignment to culture
The demonstration of our values and
strong culture are reflected throughout
our pay structure. This alignment applies
when determining incentive outcomes
for all employees as well as through our
commitments to EDI policies and the Living
Wage Foundation
The current Remuneration Policy is fully
aligned with our pay principles
Demonstration of our 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
We have paid at least the Living Wage Foundation
rate to all employees for a number of years as part
of our commitment to workforce equality and we are
committed to reducing our 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 our
risk appetite
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
The risk conditions for the annual and long-
term incentive plans are tested annually by the
Committee. The Committee has discretion to
override formulaic outcomes
Both annual bonuses for MRTs and PSP outcomes
for all participants are subject to malus and clawback
provisions
Page 158
How the Committee considers the views of all employees
The People Forum considers the relationship between executive remuneration and pay-and-reward across the business on a regular
basis. In November 2023 and November 2024 the Forum met with the Chair of the Committee to engage on and explain the process
of determining executive remuneration, and to discuss remuneration across the wider workforce. These meetings form a regular part
of the Forum’s annual calendar.
Additionally, employees have the opportunity to make comments on any aspects of our activities both through the regular People
Forum meetings 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 her attendance at board committee meetings as a regular invitee
also helps to ensure that decisions are made with appropriate insight into those views.
How malus and clawback have operated during the year
Details of how malus and clawback operate, and the selected periods over which they are enforceable, are shown in the full
Remuneration Policy set out in the Annual Report and Accounts for the year ended 30 September 2022. The selected periods have
been designed to meet regulatory requirements. Malus and clawback have not been used during the financial year under review.
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. The tables below show how
employee remuneration operates using the same framework. 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 2024, 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 through this tax-efficient mechanism.
Take-up in currently outstanding SAYE grants is approximately 64% of eligible employees, reflecting the continued and ongoing
alignment between employees and shareholders as well as employee commitment to our growth.
Operation
Maximum opportunity
Performance conditions
Salary
Same as executive directors, though
the majority of employees do not
receive salary in shares (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 business before it determines those
of the executive directors, Company Secretary and
MRTs.
All employees, other than those on a training rate of pay
(for example apprenticeships), receive at least the Living
Wage Foundation minimum rate, as do contractors’ staff
employed at our sites, including cleaners and security
personnel
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
enable 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.
The maximum level of benefits for all employees is
determined on the same basis as the executive directors.
None.
Page 159
Corporate Governance
Operation
Maximum opportunity
Performance conditions
Retirement benefits
The majority of employees
can join the Paragon
Worksave Pension Plan, our
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 defined benefit Paragon
Pension Plan.
Maximum contribution for the Paragon Worksave Pension Plan is
10.0% of salary.
Maximum contribution to the Paragon Pension Plan during the
year was 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.
None.
In respect of annual bonus and PSP the comparison is made between the executive directors and senior employees. The
purpose and link to strategy is the same as for the executive directors and therefore not repeated.
Annual bonus
This operates for senior
management as it does
for the executive directors
except that malus and
clawback and deferral* apply
to a small number of senior
management and MRTs only.
Maximum bonus potential varies across the business 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.
* Deferral:
All MRTs will have deferral in line with regulatory requirements. Other employees may be subject to deferral from time-to-time
in line with operational requirements and the Committee’s decision.
Paragon Performance Share Plan (‘PSP’)
Same as executive directors
(see Policy Summary
Section B7.3) excepting the
applicability, or otherwise,
to an individual of regulatory
remuneration rules in respect
of post-performance period
deliverability of the award
outcomes.
The maximum award level (except in exceptional circumstances)
for employees other than 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
B7.3).
Other variable pay opportunities
We provide other variable pay opportunities to certain groups of employees:
• PRP – a cash-based PRP distribution of 1% of underlying profit is paid and forms a part of our 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
• Discretionary bonus – all employees whose performance has exceeded expectations are eligible for a discretionary bonus
• Other – certain employees below management level are eligible for overtime pay
Further, there are a small number of financial incentive schemes, separate to the annual variable bonus described above, which are
available to 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 160
Remuneration comparisons
Comparison of annual change in directors’ pay with the average employee
The table below shows, for the last five 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. Information on directors who were no longer directors at the beginning of the current
financial year is not included in the prior year data. Neither do these tables contain information for any director in their year of
appointment as they would have received no remuneration in the comparator period.
Salaries and fees
Allowances and benefits
Bonus
2024
N S Terrington
3.0%
0.0%
1.6%
R J Woodman
3.1%
0.0%
1.6%
R D East
10.0%
0.0%
-
T P Davda
(a)
25.0%
-
-
P A Hill
4.0%
-
-
Z L Howorth
From 01/06/23
(b)
207.4%
-
-
A C M Morris
(a)
20.4%
-
-
B A Ridpath
3.8%
-
-
H R Tudor
(a)
(30.8)%
-
-
G H Yorston
3.8%
-
-
Average employee
6.6%
4.1%
16.3%
2023
N S Terrington
46.4%
17.6%
(3.2)%
R J Woodman
47.0%
7.1%
(3.0)%
R D East
From 01/09/22
(b)
1,114.2%
-
-
T P Davda
From 01/09/22
(b)
1,233.3%
-
-
P A Hill
11.1%
-
-
A C M Morris
14.4%
-
-
B A Ridpath
14.2%
-
-
H R Tudor
17.0%
-
-
G H Yorston
14.2%
-
-
Average employee
4.9%
(4.5)%
(13.2)%
2022
N S Terrington
5.0%
21.4%
4.9%
R J Woodman
5.0%
16.7%
4.8%
P A Hill
From 27/10/20
(b)
18.4%
-
-
A C M Morris
5.9%
-
-
B A Ridpath
7.7%
-
-
H R Tudor
5.3%
-
-
G H Yorston
7.7%
-
-
Average employee
5.1%
(2.1)%
15.0%
2021
N S Terrington
6.4%
(46.2)%
45.3%
R J Woodman
6.5%
-
45.5%
A C M Morris
From 26/03/20
(b)
93.2%
-
-
B A Ridpath
-
-
-
H R Tudor
(a)
9.2%
-
-
G H Yorston
-
-
-
Average employee
1.0%
(5.9)%
101.7%
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Corporate Governance
Salaries and fees
Allowances and benefits
Bonus
%
%
%
2020
N S Terrington
11.9%
4.0%
(33.9)%
R J Woodman
11.7%
-
(33.9)%
B A Ridpath
-
-
-
H R Tudor
(a)
2.3%
-
-
G H Yorston
-
-
-
Average Employee
8.5%
19.2%
(25.7)%
(a) Change of responsibilities in the year
(b) Appointed during the comparator year
Further information in respect of the constituents of the above table is provided below.
For commentary on movements between prior years please see the relevant years’ Annual Report.
(a)
Change of responsibilities during the year and (b) appointed during the comparator year
‘Salaries and fees’ – T P Davda succeeded H R Tudor as Chair of the Remuneration Committee in December 2023.
A C M Morris became Senior Independent Director in August 2023 consequently the 2023 information includes the
Senior Independent Director fee for less than two months, whereas the 2024 data includes a full year of this fee. Similarly, in
2023 Z L Howorth received only four month’s fees, but received a full year’s fees in 2024.
Other information
‘Allowances and benefits’ – are calculated using the data provided in the single figure tables and their composition is described in
note (b) to the executive directors’ single figure table and in the notes to the other directors’ single figure table for the Chair.
‘Bonuses’ – The increase in the average employee bonus is mainly attributable to the impact on amounts included for the PSP awards
vesting in each period of share price appreciation between the vesting dates.
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, over the past ten years.
Single figure of
total remuneration
Annual bonus earned
against maximum opportunity
Long-term incentive vesting outcome
against maximum opportunity
£000
%
%
2024
3,644
95.7
95.21
2023
3,287
97.0
96.41
2022
3,377
96.0
93.13
2021
2,991
96.1
97.00
2020
2,174
66.1
72.00
2019
3,001
89.4
95.44
2018
2,426
90.0
72.47
2017
2,305
90.0
63.51
2016
1,956
75.0
50.00
2015
2,546
100.0
100.00
Page 162
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 2024, of £100 invested in Paragon Banking Group PLC on 30 September 2014, compared with £100
invested in the FTSE-250 index. We selected this index because it represents a cross-section of UK companies of comparable size
to Paragon.
£100
£150
£50
£200
£250
£300
£350
£400
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Value (£)
FTSE-250
Paragon
Ten-year return index for the FTSE-250
Ten years ended 30 September 2024
CEO pay ratio
The table below sets out the CEO pay ratio compared to the 25th, median and 75th percentile employee. In each of the years
reported, we have 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 2024.
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 our remuneration
philosophy. The CEO pay ratio, as an outcome of those decisions, is therefore reflective of our reward and progression policies.
Year
Method
25th percentile pay ratio
Median pay ratio
75th percentile pay ratio
2024
Option A
117:1
83:1
53:1
2023
Option A
110:1
81:1
52:1
2022
Option A
112:1
84:1
52:1
2021
Option A
113:1
83:1
50:1
2020
Option A
88:1
64:1
37:1
2019
Option A
125:1
95:1
55:1
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Corporate Governance
The base salaries and total remuneration details relating to the relevant identified employees in the two most recent years are shown below.
2024
2023
25th percentile pay
Median pay
75th percentile pay
25th percentile pay
Median pay
75th percentile pay
£
£
£
£
£
£
Base salary
26,000
40,000
55,000
26,000
35,000
56,000
Total remuneration
31,000
44,000
69,000
30,000
40,000
64,000
Change in CEO pay ratios
The limited changes in the CEO pay ratios shown above across all three datapoints (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 six years for which data is
presented.
The median pay ratio for each financial year is consistent with Paragon’s remuneration and career progression policies as it shows that
Paragon continues to recognise all employees consistently and equitably.
Gender pay
Details of our gender pay gap analysis are shown in Section A6.3. Gender pay review and reporting are overseen by the Nomination
Committee (Section B5) as part of its responsibilities in respect of diversity.
Relative importance of spend on pay
Set out below is a summary of our levels of expenditure on pay and other significant cash outflows.
Note
2024
2023
Change
£m
£m
£m
Wages and salaries
57
86.5
84.6
1.9
Dividend paid
48
83.5
67.9
15.6
Share buy-backs
47
76.6
111.5
(34.9)
Loan advances
2,730.0
3,008.6
(278.6)
Corporation tax paid
49
70.3
75.1
(4.8)
Loan advances are shown above as this is the principal application of cash used to generate income. Corporation tax is contributed
out of profit to the UK Government.
Page 164
Other information
Notice periods and terms of engagement
The maximum notice period required under the executive directors’ contracts is one year. Their contracts 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
Original appointment date
Current letter of appointment end date
R D East
1 September 2022
31 August 2025
T P Davda
1 September 2022
31 August 2025
P A Hill
27 October 2020
26 October 2026
Z L Howorth
1 June 2023
31 May 2026
A C M Morris
26 March 2020
25 March 2026
B A Ridpath
20 September 2017
19 September 2026
H R Tudor
24 November 2014
23 November 2025
G H Yorston
20 September 2017
19 September 2026
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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. Outline information only is included in respect of the executive directors, 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
Delivered as
Salary
Shares
20%
Cash
80%
Pension
10% of cash salary
All in cash
Annual bonus*
98% of salary
Shares
50%
Cash
50%
Paragon Performance Share Plan
118% of salary
All in shares
* Where the PSP is insufficient to meet regulatory deferral requirements, the annual bonus shall be used to the remaining extent required and that portion of the annual bonus
shall be deferred into share awards granted under the DSPB.
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
business 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 is 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 defined
contribution pension scheme or a cash supplement in lieu of contribution
(or a combination thereof).
Page 166
Purpose and link to strategy
Operation
Annual bonus
To incentivise executive directors to achieve
specific, predetermined goals that drive
delivery of our 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.
PSP
To incentivise executive directors to achieve
enhanced returns for shareholders.
To encourage long-term retention of key
executives.
To align the interests of executives and
shareholders.
An annual award of shares subject to continued service and performance
conditions assessed over a three-year performance period.
The performance conditions used are reviewed on an annual basis to ensure
they remain appropriate.
At the end of the performance period, the performance outcome will be used
to assess the percentage of the awards that will vest in five equal tranches, with
the first vesting on or around the third anniversary of the grant date and the last
instalment vesting on or around the seventh anniversary of the grant date, in
accordance with the PRA remuneration rules.
Each vested tranche will be subject to an additional one year holding period,
taking the form of shares which must be retained for at least the holding period.
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 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
guidelines 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 guidelines are 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
guidelines (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.
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Corporate Governance
B7.4 Approval of Directors’ 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.
Tanvi Davda
Chair of the Remuneration Committee
3 December 2024
Page 168
B8. Risk management
B8.1 Statement by
the Chair of the Risk
and Compliance
Committee
Dear Shareholder
The Risk and Compliance Committee is the body
responsible for the oversight of all risk matters
within the Group and is charged with assessing the
effectiveness of our risk management framework
including risk strategy, appetite and culture and
advising the Board on all material risk matters.
As Chair of the Committee I am writing to you to
confirm how we, as a committee, have discharged
our responsibilities in this respect during the
year. This includes how we have successfully
fulfilled our mandate in overseeing the ongoing
management of principal risks, including liquidity
and capital requirements and the adequacy
of non-financial reporting and compliance
obligations, balancing this with the need to be
dynamic and responsive as new and changing
threats emerge.
The last twelve months has appeared more
benign than prior periods in some respects, with
interest rates seeming to stabilise and embark
on a slow downward trajectory, and the banking
crisis that crystallised in early 2023 with the failure
of a number of institutions having appeared to
subside. However, the volatility of the Covid period
and the economic challenges of the last few years
continue to have a long-term impact.
The Committee remains mindful that despite
the risk profile remaining broadly consistent
over the last twelve months we need to
remain forward-looking and pre-emptive in
our assessment of risk. This is particularly so
as we embark on a new era under the Labour
government which brings a degree of uncertainty
around economic and legislative developments,
coupled with evolving wider geopolitical threats
which are not yet fully understood and will need to
be continually monitored to assess the impact to
the Group’s operations.
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Corporate Governance
Given the diverse risk agenda, the Committee continues to
provide oversight and challenge across all such issues. I remain
pleased with the effectiveness of the way the Committee
appropriately assesses the impact of a broad range of risks and
their implications for all stakeholders.
The Committee’s proven capability in dealing with the challenges it
has faced in recent periods will be important looking forward, with
several known regulatory and economic issues requiring detailed
analysis and response likely to impact over the next financial
year and beyond. The Enterprise Risk Management Framework
(‘ERMF’) will continue to provide the toolkit to identify, assess and
manage all such risks on an ongoing basis.
The ERMF is well-understood across our businesses, and the
Committee provides oversight as to its appropriateness. The
Committee has seen this mature and embed over the last few
years in line with broader strategy and advocates for continuous
improvement in the framework’s capability to ensure we are
well-placed to address future risk challenges and increasing
regulatory expectations. The Committee is firmly committed
to supporting investment in refining the ERMF to ensure that
robust systems and controls remain a core priority and a key
consideration as all of our business lines undergo
wide-ranging transformation.
The increasing maturity of our risk management processes is
evident through the results of the annual risk maturity survey
reported to the Committee which, together with the regular risk
culture reporting received, pleasingly demonstrates that risk
awareness continues to be embedded across all areas of the
business and individual accountability is well-understood.
Our strong risk culture is imperative in driving the right behaviours
and understanding the implications of our strategy and operations
to ensure that we achieve good outcomes for all customers. The
Committee therefore continues to ensure that good customer
treatment remains at the forefront of its agenda, and the risk
framework is crucial in driving this through its policy framework,
risk appetite and risk and control assessment approach.
The advent of the Consumer Duty has helped strengthen this
relationship and during the year the Committee has continued to
spend considerable time in ensuring that the changes developed
to meet last year’s July 2023 deadline for open book products
have been firmly embedded in day-to-day operational and risk
management processes. At the same time the Committee has
overseen progress towards successfully completing the roll-out
of the Duty to the remaining legacy products in the Duty’s scope,
meeting the July 2024 deadline.
The Committee received the first Consumer Duty
self-assessment in July 2024 ahead of review by the Board which
provided a clear articulation of the comprehensive programme of
activity which has occurred. This has ensured that we successfully
met both regulatory deadlines, and the robust and transparent
practices implemented will drive forward a culture of continuous
challenge and improvement in striving to achieve good customer
outcomes. The Committee will continue to receive regular
reporting to ensure this remains a priority and to provide oversight
on identification and resolution of any issues that need to
be addressed.
The importance of good customer outcomes will clearly be a
key driver in the ongoing uncertainties around the resolution of
complaints in respect of motor commissions which have come
to feature heavily in regulatory communications during the year.
Following the Court of Appeal judgement in the cases of Johnson,
Wrench and Hopcraft on 25 October 2024, the potential impacts
on the wider industry are being analysed and the Committee will
continue to ensure that the risk profile of the business and the
needs of our customers are appropriately considered as the legal
and regulatory position becomes clearer.
Focus during 2024
Last year I set out the Committee’s priorities for the 2024 financial
year and I am pleased to say that these commitments have been
met comprehensively. These areas of focus have remained high
priority ensuring they have been tracked on an ongoing basis and
concluded as appropriate despite new and emerging risk issues
requiring attention. I can therefore confirm the Committee has
diligently provided oversight and consideration of the following
key areas:
• Close monitoring of wider industry trends in rising levels
of claims management company activity and claims more
generally in light of the FCA’s announcements on motor
commissions. The Committee has continued to track the
progress of industry and regulatory developments in this area
to ensure any complaints received are dealt with in line with
the FCA’s approach and timeframes
• Ongoing review of the final policy implications of Basel 3.1. With
the publication of the final rules for Pillar 1 in September 2024,
the Committee will continue to review the impacts of these as
we prepare to meet the associated implementation deadlines
• Ongoing monitoring of the embedding of the FCA Consumer
Duty for those products that were in scope for the July 2023
deadline, including review of the first self-assessment, and
oversight of the work undertaken ensuring that the Group
successfully met the July 2024 deadline for the closed book
products in the second phase. 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
• Continued focus on ensuring that the Group maintains
processes and controls to identify and support customers
displaying any signs of vulnerability as economic challenges
continue to manifest themselves ensuring that the Group
provides appropriate forbearance and delivers good outcomes
for all customers
• Close monitoring of the impacts of strategic transformation
on the risk profile, given the volume of change that has
occurred across all business lines during the year and further
transformative activity planned in future periods. 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 as it looks to harness new technologies
that can also bring new threats
• Oversight and review of the Group’s progress in obtaining IRB
accreditation as the Group continues to respond to
PRA feedback
• Detailed oversight of liquidity management and funding given
the focus on banking failures such as Silicon Valley Bank
and Credit Suisse in 2023 but also close monitoring of the
pay down profile of TSFME funding and the impacts of this
schedule on the liquidity position
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:
• Regular oversight of our financial crime profile as we remain
committed to a goal of continuous improvement in AML
systems and processes
• Monitoring the impact of the wider economic trends across the
suite of principal risks. Whilst the volatility of previous periods
has stabilised, the impacts of elevated levels of inflation have
still manifested themselves during the year and the directional
change in interest rates has been considered in terms of
liquidity and market risk exposures as well as impacts on the
lending profile
Page 170
• Ongoing cyber threats in the face of high-profile incidents
that continue to impact global institutions. The Committee
continues to receive regular updates on the oversight and
assurance of this risk to ensure it remains vigilant and robust in
its detection and response
• Continuing focus on the legacy impact of the economic
downturn on the lending lines and the impacts on credit
policy. Particular focus has been on an uptick in credit issues
in development finance, where higher costs and slower sales
have been a market-wide characteristic of the sector. The
Committee has reviewed regular updates on trends and
overseen and approved credit policy decisions across all
lending activity
• Reviewing and challenging risk management arrangements in
line with our growth and strategy including review of assurance
reporting over key risk exposures and themes provided by the
Second Line Assurance function
Other items addressed by the Committee, including 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 Recovery and Resolution Framework and Plan, and 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 continues
to review a range of economic scenarios and 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 the management of such
risks remains prudent and well within buffers. 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 for all risk types.
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 in an effective manner.
2025 and beyond
Whilst the economic outlook appears more stable and the
volatility of recent years has somewhat diminished, the broader
uncertainties of geopolitical threats and a new UK Government
still provide an element of uncertainty as to whether these trends
will continue longer term. The Committee remains mindful that
there are a range of scenarios that could manifest themself as
global tensions play out and will continue to monitor these closely
and assess the potential impacts on our principal risks. However,
given the Committee’s proven ability to effectively oversee and
provide a strong steer over the varied challenges of the last few
years I am confident that it is well-placed to continue to maintain
close oversight of known and emerging financial and
non-financial risks.
The Committee is keenly aware of a number of ongoing risk issues
that are already being considered and will need to be tracked
over the coming year. In particular, the new UK Government has
already published its Renters’ (Reform) Bill, intended to provide
better protection for both tenants and landlords. The progress
of the bill, its implications for the buy-to-let market and any
impact on the risk profile of our portfolio are matters which the
Committee will remain close to over the coming months.
As further clarity is received on this and other regulatory and
legislative changes, the Committee will play a key role in ensuring
the impacts are fully assessed and understood, any new and
emerging issues are identified and that a robust assessment of
these takes place, to ensure effective management in accordance
with our risk appetite.
Other priorities for the Committee will include:
• Ongoing review of our progress in addressing the requirements
of Basel 3.1 to meet the revised implementation deadline
• Ensuring that the business continues to maintain strong
oversight of complaints activity in respect of motor
commissions and is well-placed to address regulatory and
legislative expectations once the FCA pause comes to an end
in December 2025
• Continued focus on the impacts of the planned strategic
transformation activity on the risk profile, given the level of
change in progress and planned across all business lines,
ensuring that resilience remains a priority consideration with a
particular focus on ensuring that new and existing third-party
relationships are managed in line with risk appetite
• Ensuring that the business remains firmly on track to meet the
March 2025 regulatory deadline for full compliance in respect
of operational resilience requirements. This will require the
business to demonstrate it can operate consistently within
stated impact tolerances
• Oversight and review of progress in obtaining IRB accreditation
as the business seeks to address PRA feedback
• Close monitoring of the cyber profile of the business as it
continues on its journey of digitalisation, against a background
of ever more sophisticated and dynamic threats in this arena,
including those risks brought through more extensive use of
artificial intelligence
• Ongoing monitoring of the embedding of the FCA Consumer
Duty following closure of the project phase. The Committee
is focussed on ensuring delivery of good outcomes for all
customers, prompt identification of any signs of customer
vulnerability and the provision of appropriate forbearance
as necessary
Our risk profile is a core consideration in all operational and
strategic decision-making and the Committee is central to
ensuring that all known and emerging risk impacts are adequately
considered, challenged and mitigated.
In my opinion, the Committee has executed its responsibilities
in line with its Terms of Reference and has met its objective of
advising the Board on all material risk matters. The Committee’s
effectiveness in overseeing risk issues on a timely and
proportionate basis is enabled through its embedded risk
practices which ensure that the right issues are escalated
through the established and well-understood risk and governance
reporting processes.
The risk management framework and the three lines of defence
model it is based upon continue to provide a sound mechanism
on which the Committee can rely as it moves into the new financial
year. I am therefore confident and pleased to report that the
Committee remains well-placed to assess and manage any risk
issues that may arise over the coming year.
Peter Hill
Chair of the Risk and Compliance Committee
3 December 2024
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Corporate Governance
This report sets out our approach to the management of risk in executing our business strategy.
B8.2
B8.3
Risk governance
How the Board, through the Risk and Compliance Committee
sets objectives for risk management in the business, and
assesses their achievement.
This includes the processes through which risk exposure is
monitored at a senior level.
Risk management culture
The overall approach to risk management in the business, set
by the Board and disseminated to all levels of its operations,
which informs the development of the risk management
framework.
B8.4
B8.5
Risk management framework
The systems adopted to achieve the Board’s objectives,
including the processes for setting risk appetites and
monitoring performance against them.
Principal risks and mitigations
The principal risks identified by these systems, how they
are mitigated and the extent to which these exposures have
developed over the reporting period
B8.2 Risk governance
The Board has overall responsibility for the approach to risk management and internal control within the Group, including the
establishment and monitoring of the risk management and internal control framework, identifying the nature and extent of the
principal risks faced by the business and setting risk appetites in respect of each of those risks. It has established the
Risk and Compliance Committee to support it in fulfilling these responsibilities.
The Board’s approach to governance and its committee structures are described in Section B4.1. The committee structure and lines
of oversight in relation to risk management, which were in place throughout the year, are set out below.
Risk and
Compliance
Commitee
Chief
Executive
Officer
Executive Risk
Commitee
(‘ERC’)
Asset and Liability
Commitee
(‘ALCO')
Customer and
Conduct Commitee
(‘CCC')
Credit
Commitee
Operational Risk
Commitee
(‘ORC')
Model Risk
Commitee
(‘MRC')
Page 172
Risk and Compliance Committee
The Risk and Compliance Committee 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 November 2023 and again in October 2024, after
the end of the year, align with the Code and good practice.
Changes made to the terms of reference in October 2024 reflect
the 2024 Code and associated Guidance.
The Committee’s responsibilities include reviewing, on behalf of
the Board:
• Recommendations and matters escalated from the ERC
• Current and future risk appetite, including the extent and
categories of risk which the Board regards as acceptable
• The effectiveness of the ERMF and the extent to which risks
inherent in our business activities and strategic objectives are
controlled within the risk appetite established by the Board
• The effectiveness of systems and controls for compliance
with statutory and regulatory obligations
• The appropriateness of our risk culture, to ensure it supports
the Board’s agreed risk appetite
• The effectiveness of our strategies to promote good
outcomes for customers and integrity in the market as central
to our operations and culture
• The effectiveness of the business 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
• Processes for compliance with laws, regulations and ethical
codes of practice and the prevention of fraud
• Reports from the Internal Audit function relating to matters
within its remit
The Committee provides oversight and challenge to
enterprise-wide risk management arrangements, which are
managed through the ERC. It also retains oversight responsibility
for model risk. 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 Model Risk
Committee (‘MRC’).
The Committee meets at least four times a year and covers
an evolving and diverse agenda striking a balance between
ongoing and standing items, together with focussing on topical
or emerging issues that require timely attention. The executive
directors, CRO, Chief Operating Officer, General Counsel and
Chief Internal Auditor 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 employee.
At each meeting the Committee reviews the report from the CRO
which details a summary of the risk profile across all principal
risks and any changes since the prior period. This includes
analysis of risks arising from the economic outlook together with
geopolitical, regulatory change and legislative risks that may
impact the Group and its customers.
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 Chief Internal Auditor 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
• Review of the emerging and corporate risk register, including
the consideration of new or emerging risks and regulatory
developments and their impacts. Particular focus in the year
was given to Consumer Duty, Operational Resilience and the
capital impacts of Basel 3.1
• Consideration and challenge of management’s rating of the
various risk categories
• 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 risk appetite for each of our principal risks to
ensure they remained consistent with the delivery of our
strategic objectives, proposing any required changes to the
Board, as required
• Reviewed the ongoing enhancements to the ERMF including
the approach to assessing risk culture and its maturity
• Continued to monitor progress in respect of the application
for regulatory approval of our IRB approach to credit risk
management
• Maintained its ongoing focus on fair treatment of customers
to ensure that appropriate support is in place for those
customers facing financial difficulties
• Provided ongoing oversight to the project to implement the
requirements of the FCA Consumer Duty on our products
and services to ensure that the July 2024 deadline for legacy
products was successfully met, and reviewed the first
annual Consumer Duty report, which covered Phase 1 of the
Consumer Duty, implemented in July 2023
• Reviewed the ongoing embedding of our approach to
Operational Resilience, ensuring we are well-placed to meet
the March 2025 regulatory deadline for demonstrating
the ability of the business to remain within stated impact
tolerances. This has also included regular focus on the
impacts of our technology transformation programme on the
risk and resilience profile
• Received ongoing updates on the broader cyber landscape
and the potential risks this may pose to resilience. The global
CrowdStrike outage was specifically considered, in light of
the potential impact on third party IT service providers, both
within the business and across the industry more generally
• Maintained oversight of our 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
• Reviewed a detailed update on the risk profile and credit
performance of the development finance business in light of
the impacts of the interest rate environment and elevated
costs in the construction industry
• Provided oversight on our progress in 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 our
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 risk appetite
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Corporate Governance
• Provided oversight of engagement in the PRA consultation
process on the implementation of Basel 3.1 prior to its
publication of the policy statement in September 2024, and
considered analysis on the potential impacts on capital
requirements
• Monitored the ongoing developments surrounding the
FCA’s investigation into the propriety of certain commission
structures and processes in the motor finance market
• 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:
-
a detailed analysis of the impacts of relevant regulatory
statements including the FCA’s review and update on the
cash savings market on our easy access offerings
-
the impact on motor finance exposures of the FCA’s
ongoing review into historical commission arrangements in
the UK motor finance market
-
potential economic scenarios, with UK interest rates
perceived to have stabilised after the increases of
recent years
-
ongoing inflationary challenges and the potential wider
impacts of the economic and social policies of the
incoming Labour government, including the potential
impact of the Renters’ Rights Bill on our buy-to-let strategy
• Undertook focussed reviews of each of the principal risks
individually on a regular basis
• 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
• Provided review and challenge to the Second Line Risk
Assurance Plan
• Reviewed, challenged and approved the annual report of the
Money Laundering Reporting Officer (‘MLRO’), in addition
to providing continued oversight of the ongoing work to
strengthen AML controls
• Considered and approved the scenario library, which
underlies the stress testing conducted for ICAAP, ILAAP and
forecasting purposes
• Considered and challenged reports in relation to the ICAAP
and Recovery Plan, recommending approval to the Board
• Considered and challenged reports in relation to the 2023
ILAAP, recommending approval to the Board and undertook
preliminary work in respect of the 2024 ILAAP, scheduled to
be presented for approval after the year end
• Provided oversight of balance sheet hedging arrangements
• 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 business areas;
conduct and regulatory updates, including revisions to the Code;
external risk management perspectives and best practice; AI in
banking; cyber risk; 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 risk management framework, monitoring
adherence to risk appetite statements and identifying, assessing
and controlling the principal risks. The ERC was established
under the specific authority of the CEO, is chaired by the CRO,
and includes all Executive Committee members, with the Chief
Internal Auditor attending as an observer during the year. The
ERC monitors the interaction and integration of business
objectives, strategy and business plans with 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 approach to controlling each principal risk and
its capability to identify and manage such risks
• Reviewing the emerging and corporate risk register, including
reviewing emerging risks as they arise, considering their
potential impact on business objectives, strategy and business
plans, as well as risk choices, appetite and thresholds
• Periodically reviewing the effectiveness of internal control and
risk systems, including material outsourced arrangements
and risks associated therewith, particularly where they might
impact customers
• Ensuring compliance with relevant PRA and FCA
regulations (excluding the SMCR, which is overseen by
the Performance ExCo)
• Reviewing the process and outcome of the ICAAP, ILAAP and
Recovery Plan and making recommendations to the Risk and
Compliance Committee and Board for approval
• Considering the implications of any proposed legislative or
regulatory changes that may be material to risk appetite, risk
exposure, risk management and regulatory compliance
Page 174
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 bodies 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’)
The ALCO comprises heads of relevant functions and is chaired
by the Balance Sheet Risk Director.
The principal purpose of the 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 and funding risk, pricing and capital management
as well as the treasury control framework. The ALCO operates
within clearly delegated authorities, monitoring exposures and
providing recommendations on actions required. It also monitors
performance against risk 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
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 oversight both during the
implementation project and subsequently, 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 Operations 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. It also provides guidance and makes
recommendations to implement 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 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 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 retains oversight through
the annual review of the MLRO 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 our 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 and embedded risk
culture is seen as a key enabler to the successful delivery and
execution of the 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 our performance management process driving specific
risk management objectives for all employees. Our Code of
Conduct, which applies to all employees, further underlines the
importance of, and individual responsibility for, risk management.
We continue to ensure that our approach to measuring and
monitoring risk culture remains proportionate and evolves in line
with our overarching strategy and with regulatory expectations.
With the embedding of the initial phase and further roll-out of
phase 2 of the new Consumer Duty regime during the year, our
risk culture and our widely understood ERMF have provided both
a strong foundation and a mechanism to support the successful
implementation of the Duty.
Ongoing activities have been undertaken during the year
demonstrating the importance of a robust risk culture in
continuing to support our approach to managing risk.
These included:
• Regular reporting to risk committees on risk culture based on
four agreed components: Leadership and Direction; Individual
Commitment; Joint Ownership; and Governance, together
with clear measures to evidence these
• Launch of Purpose and Performance Profiles
(‘PPPs’) ensuring that all employees have formal objectives
relevant to their role reinforcing our commitment to the
“Think Risk” initiative
Page 175
Corporate Governance
• Undertaking an annual risk maturity assessment across each
area of the business including an evaluation of each area’s
perception of risk and how its risk management activities are
viewed and put into practice
• Strengthening and supporting the community of risk
champions, who represent each of the business areas, to
promote and embed a risk-aware culture across the business
These enhancements are designed to reinforce our existing
strong risk culture, which is embedded through various
practices, supporting and protecting our wider strategic
goals. This approach is essential to protecting customers,
shareholders, creditors and our 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 our risk management approach and is
aligned with the further 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
Our risk culture has been central in ensuring historically low
levels of credit and operational losses, and a positive record on
conduct issues.
B8.4 Risk management
framework
Introduction
The 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 our strategy.
We continue to ensure that the framework evolves to reflect
the changing business, regulatory and economic landscape and
emerging threats. Therefore, we remain committed to continuous
improvement in our 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 businesses.
The past twelve months have seen continuing good progress in
embedding the ERMF to ensure that its principles are adopted
into business practice, and that it is well-placed to manage
all categories of risk and respond to the changing business
environment in a proportionate manner. Activity during the year
has included the annual refresh of all principal risk policies,
ensuring they remain relevant and reflect the minimum controls
expected to manage the principal risks. Conduct risk policies
have been further enhanced to ensure full alignment to the
expectations of the FCA Consumer Duty. A comprehensive
assessment of the appropriateness of our risk management
software was also undertaken and further work will continue over
the next year to ensure the software can continue to meet future
risk management requirements.
Given the work already undertaken over the last three years
on developing the ERMF, our present focus is on ensuring that
it operates in line with expectations. This is enabled through
a more structured programme of assurance and regular
formal assessment of the ongoing effectiveness of the ERMF
throughout the business, underpinned by continued embedding
of our risk culture and by targeted risk management education.
Robust foundations and practices have been established over
the last few years, which are driving effective risk management
throughout the organisation. However, it is recognised that risk
management practices need to remain dynamic, and we are
committed to a programme of continuous improvement in our
ERMF. This will ensure that refinements continue to be made,
maintaining ongoing effectiveness and embedding the risk
toolkit across our business, while remaining focussed on the
identification and management of material risks and key controls.
Over the next twelve months particular emphasis will be on
revisiting the current risk and control assessment process
(‘RCSA’) to ensure it remains aligned to our strategic priorities
and the structure of the business. In turn this will drive further
review of risk indicators to enhance and support insight into the
effectiveness of risk management activities. These activities
will complement the maturing risk assurance approaches and
risk management information including policy frameworks, all of
which remain core to the ERMF.
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 our
strategic objectives. The key objectives of the ERMF are to:
• Define a strategy to support our attitude to risk, including
outlining the approach taken to setting qualitative statements
and quantitative metrics to define and assess our appetite and
tolerance for risk across 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 business,
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
• 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 principal risks and
identify the minimum control requirements and key indicators
to manage and measure these risks
Page 176
Three lines of defence model
We employ a ‘three lines of defence model’ to delineate
responsibilities in the management of risk ensuring adequate
segregation in the oversight and assurance of risk as follows:
Three lines of defence
Line 1
Line 2
Line 3
Operational
and support
areas that own
and manage
risk within
agreed limits
Risk and Compliance
function designing,
implementing and
overseeing the
ERMF and providing
support and
challenge
Internal Audit
function
independently
assessing
effectiveness
of risk
management
• The first line of defence (‘Line 1’), comprising executive
directors, managers and employees in operational and
support areas. Line 1 has day-to-day responsibility for:
o Risk identification, assessment, treatment, monitoring
and reporting
o Control implementation, and ongoing monitoring and
assessment of operations
o Management, escalation and reporting of risk issues
against stated appetites
Risk Champions are appointed within all business areas to
support the embedding of an effective risk culture across
our business
• 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 Executive
Performance 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 business
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
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 Chief Internal Auditor
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
o Appropriateness and effectiveness of internal controls
o Effectiveness of policy implementation
Further information on the work of the Internal Audit function
is given in the report of the Audit Committee (Section B6 ).
Risk appetite framework
The risk appetite framework outlines our 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 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
We have developed a tiered approach to setting and
monitoring 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. All metrics and thresholds are reviewed
regularly to reflect any changes in risk appetite, to ensure
they remain 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 177
Corporate Governance
Capital Risk
Description
Mitigation
Year-on-year change
The risk that our capital
becomes insufficient to
operate effectively, including
meeting minimum regulatory
requirements, operating
within board-approved risk
appetite, and supporting our
strategic goals.
Whilst the Bank of England
has published its final policy
for the implementation of the
Basel 3.1 standards in the UK,
which is currently intended
to be effective from 1 January
2026, a final consultation on
the implications for Pillar 2
capital is still to be delivered.
A robust process exists over reporting capital
metrics, 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.
We continue to engage with the PRA in respect
of the application for the accreditation of our
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 final policy
responded to important sector feedback,
mitigating some of the impact set out in the
original consultation, for example, on residential
collateral valuations. The final policy also
maintained proposals for the IRB accreditation
process that are potentially helpful to our
application.
We expect to apply for the Interim Capital Regime
in due course, which will have the effect of
delaying the implementation of Basel 3.1 until
1 January 2027.
The delivery of the Basel 3.1 policy
statement package has been a significant
milestone for the overall UK capital risk
framework, but there are still certain
areas (particularly Pillar 2 capital) that
must be finalised through a
new consultation.
The global and UK economic outlook has
continued to be subject to pressures that
are driven by the continuing intervention
of Russia in Ukraine and the ongoing
unrest in the Middle East.
Although downside risks will present
headwinds, our 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 for us
to support lending to households
and businesses.
Further information about our management of capital, including quantitative capital measures, is set out in note 61
to the accounts.
B8.5 Principal risks and mitigations
The Group is exposed to a number of principal risks and uncertainties that arise from the operation of our business model and
strategy. A summary of those risks and uncertainties which could prevent the achievement of our strategic objectives, how we seek
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 our Pillar 3 report, published on our corporate website.
This analysis represents the gross risk position as presented to, and discussed by, the Risk and Compliance Committee as part of its
ongoing monitoring of our risk profile.
The risks are set out in accordance with our classification of principal risks, approved by the Board during the year.
Capital
risk
Liquidity and
funding risk
Market
risk
Credit
risk
Model
risk
Reputational
risk
Strategic
risk
Climate
risk
Conduct
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
Page 178
Liquidity and Funding Risk
Description
Mitigation
Year-on-year change
The risk that we have
insufficient funds to meet our
obligations as they fall due.
Retail deposit-taking is central
to our 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.
We maintain 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.
We have a dedicated Treasury function,
responsible for the day-to-day management
of 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, provide ready access
to wholesale funding or liquidity if required.
We remain well placed to access funding
from a wide range of sources to meet
future funding requirements. Access
to the retail savings market has been
effective during the year through both
direct and intermediated deposit platform
distribution channels. To supplement the
existing RMBS issuance platform, we are
in the process of establishing a covered
bond programme which will further
enhance access to wholesale
funding markets.
Liquidity and Funding Risk is considered
to have reduced from its level at the
start of the year given the repayment
of the majority of TFSME funding. Out
of £2,750.0 million of TFSME funding
outstanding in September 2023, we have
repaid £2,000.0 million leaving £750.0
million to be repaid, mostly in the coming
financial year. The collateral released by
this prepayment has materially increased
our capacity to access contingent liquidity
in the year.
More detailed information on our liquidity risk profile, including quantitative data, is set out in note 64 to the accounts.
Market Risk
Description
Mitigation
Year-on-year change
The risk that changes in
interest rates at which we
lend and those at which we
borrow may adversely affect
net interest income and
profitability.
This risk is managed within board-approved risk
appetite limits with comprehensive treasury
policies 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.
We seek to match the maturity profile of assets
and liabilities and use financial instruments, such
as interest rate swaps, to hedge the exposure
arising from repricing mismatches.
The recent reduction in the Bank of
England base rate was the first since
2020 and is expected to be the first of a
rate cutting cycle. Consequently, there is
a particular focus on risk management in
this area to ensure net interest margin is
managed effectively, enhanced during the
year by the creation of a net free
reserves hedge.
However, despite the projected interest
rate trajectory, our overall market risk
profile, relative to the balance sheet, has
remained broadly similar to that at the
previous year end and associated risk
levels remain generally stable.
More detailed information on our management of market risk is set out in note 65 to the accounts.
Page 179
Corporate Governance
Credit Risk
Description
Mitigation
Year-on-year change
Credit risk elements which
could carry 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
We have 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.
A range of sources are used to inform
expectations of key external factors such as
interest rate movements and house price inflation
which, in turn, guide policy and underwriting.
We also continue to develop opportunities
to diversify the range of activities and income
streams, consistent with the strategic objective of
operating as a prudent, risk-focussed
specialist lender.
The majority of our 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 set out in our comprehensive
treasury policies. Exposure to approved
counterparties is monitored daily by senior
management within the Treasury function with all
exposures managed in accordance with ALCO-
approved limits.
Ongoing monitoring of the credit rating and
financial performance of all outsourced
relationships and critical suppliers is undertaken.
Credit risk pressure has generally eased
throughout the second half of the 2024
financial year with borrowers gradually
acclimatising to the higher interest rate
and cost environment, albeit certain
development finance facilities agreed
prior to the rapid escalation in interest
and inflation rates did face challenges.
Adjustment to those higher rates in the
buy-to-let mortgage business has been
greatly mitigated by the widespread
utilisation of fixed rate products which have
both staggered the impact of higher loan
repayments as well as providing a bridge
to loans with lower interest rates than were
available a year earlier.
The more favourable outlook for interest
rates has been reflected in market
pricing for mortgage products and this
has supported customer demand for
residential property. Asset values have
been, and are expected to remain, firm as
a result, although sales are anticipated to
take longer to realise.
Prudent lending policies have been
maintained throughout the period, with
added insight and control supported by the
broader sourcing and usage of digitalised
data. Machine learning tools have
supported the efficient identification of
higher-risk loans and have helped provide a
basis for policy enhancement.
The more positive economic outlook
coupled with the expectation of minor
interest rate reductions over the next
reporting period, mean that the forecast for
credit risk remains stable.
More information on our retail and wholesale credit risk profiles, including quantitative credit measures, is set out in note 63 to
the accounts.
Page 180
Model Risk
Description
Mitigation
Year-on-year change
Statistical models are used
across the business to inform
financial decision making and
hence it is imperative that the
environment in which these
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 used in the business.
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, was published in May 2023 and applies to
firms with permission to use internal models to
calculate regulatory capital from May 2024. We
are undertaking a programme of work to ensure
compliance with the principles in advance of
receiving IRB accreditation and are therefore
well-placed to meet the requirements within the
timeframes required.
It is recognised that the increasing use of
internally developed models will drive a
commensurate risk. However, given the
strength of the framework and oversight
processes and our continuing investment
in this area, model risk remains within
appetite and the outlook remains stable.
Information on our use of models in impairment provision calculations is given in note 21 to the accounts.
Reputational Risk
Description
Mitigation
Year-on-year change
Maintenance of a strong
reputation across all business
lines, operational activities,
and the conduct of employees
and associated third parties is
core to our philosophy.
Detrimental reputational
impacts could result from
either internal actions
and/or external events,
as a consequence of the
crystallisation of other
principal risks, or through
failure to safeguard the
integrity of our brand or meet
external expectations in our
business practices.
The reputational risk policy supports reputational
risk management across the business.
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 our
decision-making processes and are reviewed
by the External Relations Director. We will not
undertake any activity which we consider might be
damaging to our reputation.
Employees adhere to defined standards of
conduct, encompassing policies, procedures and
ways of working. These are set out in our publicly
available Code of Conduct.
We have an experienced External Relations
function which manages all our communications
and ensures that our reputational profile is
protected. Reputational risk is monitored through
tracking traditional media 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.
We continue to manage our reputation
effectively in all our dealings. Whilst we
are mindful that reputational threats
can emanate from a variety of different
sources, we remain well-placed to respond
quickly and efficiently to any potential
reputational issue.
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Corporate Governance
Strategic Risk
Description
Mitigation
Year-on-year change
Our strategy as a specialist
lender is key to our operating
model and business planning.
However, there is a risk that
changes to the business
model, or macro-economic,
geopolitical, regulatory,
competitive or other external
factors may impact delivery of
strategic objectives.
We closely monitor economic developments in
the UK and overseas, with support from leading
independent macro-economic and
other advisors.
Stress testing is performed to assess the
expected performance of our business under
a range of operating conditions. This provides
the Board with an informed understanding and
appreciation of the capacity of the business to
withstand shocks of varying severities.
We continue to exploit opportunities to diversify
the range of our activities and income streams,
consistent with the strategic objective of
operating as a prudent, risk-focussed lender.
A change in government and change
in the interest rate cycle has led to an
improvement in the domestic political and
economic landscape over the past year.
Consumers and corporates look to have
largely weathered the cost-of-living crisis
and the peak in interest rates, and now look
set to benefit as inflation and interest rates
fall. While these are positive developments
there remains some uncertainty around the
performance of the UK economy in both
the medium and longer term and globally
geopolitical risks remain elevated.
Despite a continued volatile environment,
our businesses have remained resilient
throughout the year, and we have made
strong progress in meeting the strategic
targets in the corporate plan. In particular,
we have continued to make significant
progress with our digitalisation programme,
with key deliverables completed in the year.
This remains a key priority.
Despite the more positive economic
situation and our own continuing strong
activity levels, we recognise that the
potential for geopolitical and associated
macro-economic impacts remains elevated.
This in turn could lead to further economic
and property market disruption within the
UK, presenting a risk to the execution of
our strategy.
Page 182
Climate Risk
Description
Mitigation
Year-on-year change
We consider the
impact of climate
change both directly
on our business and
indirectly through
our third-party
relationships or
lending activities.
This includes both the
transitional risk to our
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.
We proactively manage physical risk and have
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. Other
climate risk mitigation levers, such as offering
sustainable products, are available to support
the evolution of our balance sheet in line with the
markets in which we operate, mitigating stranded
asset risk.
We continue to actively engage with public
forums such as Bankers for Net Zero (‘B4NZ’)
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
enhanced and expanded to cover a broader asset
range to inform longer-term strategic planning.
The Sustainability Committee provides
comprehensive oversight of climate initiatives
across each business line, whilst the Credit
Committee additionally monitors the performance
of mortgaged property collateral against EPC data,
and concentration of electric vehicles.
We have continued to make progress on our
climate change agenda, with activity focused on
enhancing our financed emissions balance sheet,
continued public policy advocacy through B4NZ,
and enhancing our approach to climate change
scenario analysis with an expanded focus.
The levels of regulatory scrutiny and public interest
in this area continue to be high. However, our
approach has further matured in the year whilst
maintaining a proportionate approach to managing
the risks and opportunities associated with
climate change.
Although there is significant uncertainty in
respect of the direction of government policy
and regulation in this area, our scenario analysis
assessment indicates that exposure to climate
change impacts is being managed appropriately
and does not pose a significant or increasing risk.
Information on our management of climate related risks, including our financed emissions balance sheet, 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 our
culture and strategy.
Conduct risk arises
where culture and
behaviours fail
to promote the
customer’s best
interests and avoid
foreseeable consumer
harm, resulting in poor
outcomes for them.
The management of conduct risk is tailored
to each specific product and customer type
and includes dedicated quality and control
teams. Control teams focus on validating
process adherence, measuring the delivery of
good customer outcomes, and overseeing the
appropriate management of those customers
showing signs of vulnerability, including those in
financial difficulties.
During the year work continued to review and
enhance our management of conduct risk to
support adherence to new Consumer Duty rules
for all open and closed retail products within its
scope. This work included ensuring all employees
had customer-focused objectives and completed
conduct risk related training.
Our approach to employee remuneration means
that very few employees are included in financial
incentive schemes. The remuneration policy
is reviewed by the Remuneration Committee
annually and individual schemes require approval
from the Chief People Officer, CFO and Conduct
and Compliance Director before implementation.
We continue to monitor the progress of the FCA’s
investigation into historical commission practices
in the motor finance industry and are assessing the
impact of any developments in this area, particularly
in light of the Court of Appeal decision in respect of
such practices in October 2024. We are committed to
ensuring that our customers receive good outcomes
and while our expectations of conduct risk exposure
in this sector remain low, we will ensure that we
respond to the FCA findings following the lifting of
the regulatory pause in handling these complaints in
December 2025, once clarity is received.
While we are committed to providing appropriate
support to all our customers, regulatory expectations
around the tailoring of support to individual
customer circumstances continues to increase,
and with it the requirements for ongoing training
and development of customer-facing teams. The
change of government creates a degree of economic
uncertainty which will require ongoing analysis to
understand and anticipate the potential impact on
our various customer cohorts, and to
respond accordingly.
Page 183
Corporate Governance
Operational Risk
Description
Mitigation
Year-on-year change
Operational risk arises
across the business
through the possible
inadequacy or failure
of internal processes,
people and systems or
from external events.
Operational risk is
inherently diverse in
nature. All our 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.
We have 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
and Security (including cyber risks),
Data Protection, Third Parties, Change
Management, Financial Crime and People.
We are committed to ensuring the
business remains resilient, particularly in
respect of IT capability and security against
a backdrop of ever more sophisticated
cyber threats. This remains a priority area
for investment as we increasingly move
to cloud-based infrastructure and look
to harness digital capability as part of our
IT roadmap. As the use of AI becomes
more established, we remain alert to the
additional risks this may bring to our own
operations and the wider industry as well
as the opportunities this may also create in
enhancing risk management approaches.
While we continue to drive through
strategic transformation across all
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 continues to rely on and expand
the use of 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 critical to overall resilience.
We are focussed on building an engaged
and highly-skilled workforce through the
delivery of effective reward, succession
planning, recruitment, development
and retention strategies. In addition, we
remain committed to the wellbeing of
all employees and responding to their
feedback, enabled through our multiple
employee networks.
Whilst the nature and volume of cyber-attacks across
the broader landscape continues to evolve and such
attacks are apparently more frequent, based on
public reporting, the Group does not consider that we
have a higher than average likelihood of being subject
to a cyber threat.
The general threat level for cyber-attacks remains
elevated in light of geopolitical factors and we
continue to invest heavily in this area, particularly
in key areas such as data loss prevention and
vulnerability management. Ongoing cyber risk
assessment is undertaken and is fully embedded in
our approach to transformation activity, with cyber
risk mitigation remaining a key driver of activities
such as technology strategy and corporate insurance.
Ongoing assessment of, and response to, the Group’s
cyber profile remains integral to the successful
execution of our 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. We also continue to monitor the
impacts of the wider cost-of-living challenges and
how these may manifest themselves as potentially
heightened risk exposures across key operational
risk categories, such as financial crime. However, we
actively assess our resource profile and capabilities
to ensure resources are deployed appropriately in
such areas to manage any associated risks.
Regulatory compliance expectations continue to
rise, and we are committed to ensuring that we
remain compliant in our operational activities. There
is potential that as expectations increase, gaps may
be identified which will need addressing to reduce
inherent operational risk exposures.
We continue to make strong progress on our strategic
transformation programme, which we believe 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.
Operational risks are diverse in nature with
the operating environment constantly evolving
through dynamic technologies and the changing
external landscape. Despite these challenges we
continue to maintain a robust control environment
with operational risk related losses remaining
at comparable levels to previous years, and the
business has therefore seen no material adverse
changes to its operational risk profile during the year.
Page 184
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 UK Listing Rules (‘UKLR’) and the Disclosure Guidance
and Transparency Rules (‘DTR’) issued by the FCA.
Certain information required by these requirements is included
in other sections of this Annual Report and incorporated in this
Directors’ Report by reference. These items are discussed in
detail at the end of this report.
Directors
The names of the directors of the company at the date of this
report, together with their biographical details, are given in
Section B3.1. All the directors listed in that section were directors
of the company throughout the year.
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 2024.
Other than as outlined in the Directors’ Remuneration Report in
Section B7, the directors had no interests in securities issued by
the Company. The directors have no interests in the shares or
debentures of the Company’s subsidiary companies.
A director has a statutory duty to avoid a situation in which he or
she has, or can have, an interest that conflicts or possibly may
conflict with the interests of the Company. A director will not be
in breach of that duty if the relevant matter has been authorised
in accordance with the Articles of Association of the Company
(the ‘Articles’) by the other directors. The Articles include the
relevant authorisation for directors to approve such conflicts,
if appropriate.
None of the directors had, either during or at the end of the year,
any material interest in any contract of significance with the
Company or its subsidiaries. Further details on the directors’
remuneration and service contracts / appointment letters can be
found in the Directors’ Remuneration Report in Section B7.
Directors’ powers and appointment of directors
The appointment and replacement of the Company’s directors is
governed by the Articles, the Code, the Companies Act 2006 and
related legislation, and the individual service contracts and terms
of appointment of the directors. The powers of the directors, and
their service contracts and terms of appointment, are described in
the Corporate Governance section, Section B4.
The Articles may only be amended by special resolution of the
Company’s shareholders in a general meeting and were last
amended in 2021. The Company’s Articles set out the powers of
the directors and rules governing the appointment and removal
of directors. The Articles can be viewed at the Group’s corporate
website at www.paragonbankinggroup.co.uk.
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 forthcoming AGM, in March 2025.
None of the directors has a service contract with the Company
requiring more than twelve months’ notice of termination to
be given.
Directors’ indemnity and insurance
Under Article 159 of the Articles, the Company has qualifying third
party indemnity provisions for the benefit of its directors, for the
purposes of Section 234 of the Companies Act 2006, which were
in place throughout the year, and which remain in force at the
date of this report, in the form of directors’ and officers’ liability
insurance. The directors’ and officers’ liability insurance covers all
directors of the Company’s subsidiary entities.
Share capital and distributions
Share capital
Details of the issued share capital of the Company, together with
details of movements in its issued share capital in the year, are
given in note 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.
The Company presently has the authority to issue ordinary
shares up to a value of £77.0 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 5 March 2025 and resolutions will be put to that meeting
proposing that they are renewed.
Purchase of own shares
The existing authority under Section 724 of the Companies Act
2006, referred to above, given to the Company at the AGM on
6 March 2024 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 185
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 6 December 2023 a share buy-back programme of up to
£50.0 million was announced. The reasons for this programme
were set out in Section 3.3 of the preliminary results
announcement for the year ended 30 September 2023. The
programme was extended to £100.0 million on 5 June 2024 for
reasons set out in Section 4.3 of the Half Year Financial Report
for the six months ended 31 March 2024, published on that day.
During the year 10,798,682 £1 ordinary shares
(2023: 20,721,957) having an aggregate nominal value of
£10,798,682 (2023: £20,721,957), were purchased under
this programme and initially held as treasury shares. Total
consideration paid in the year was £76.6 million, including
costs (2023: £111.5 million). This programme continued during
October 2024, the Company having entered into an irrevocable
agreement with its brokers for the completion of the programme
prior to the year end. The programme concluded on
31 October 2024, when regulatory approval expired, with
£7.5 million of the programme outstanding.
On 23 February 2024, 12,095,453 ordinary shares previously held
in treasury were cancelled, leaving a balance held in treasury of
1,616,343 shares. The cancelled shares had a nominal value of
£12,095,453 and represented 5.6% of the issued share capital
excluding treasury shares at that time.
On 30 August 2024 6,000,000 ordinary shares previously held
in treasury were cancelled leaving a balance held in treasury of
680,378 shares. The cancelled shares had a nominal value of
£6,000,000 and represented 2.9% of the issued share capital
excluding treasury shares at that time.
During the year 653,069 shares held in treasury were transferred
to the holders of maturing options granted under the Group’s
Sharesave share option plan (2023: 1,418,430). Consideration
received in respect of these shares was £2.1 million
(2023: £4.0 million).
The number of treasury shares held at 30 September 2024
was 2,124,162 (2023: 10,074,002), representing 1.02% of the
issued share capital excluding treasury shares (2023: 4.61%).
The maximum holding of treasury shares during the year was
13,711,796 (2023: 14,870,044) representing 6.38% of the issued
share capital excluding treasury shares at that time
(2023: 6.56%).
Dividends
An interim dividend of 13.2 pence per share was paid during the
year (2023: 11.0 pence per share).
The directors recommend a final dividend of 27.2 pence per share
(2023: 26.4 pence per share) which would give a total dividend
for the year of 40.4 pence per share (2023: 37.4 pence per share)
subject to approval at the forthcoming AGM.
Major shareholdings
Notifications of the following major voting interests in the
Company’s ordinary share capital, notifiable in accordance with
Chapter 5 of the DTR, had been received by the Company as at
30 September 2024.
Shareholder
% Held
Notification
date
Janus Henderson Group
4.99
20/03/2024
Liontrust Investment Partners LLP
4.99
15/05/2024
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 18 November 2024 Black Rock Inc. notified the Company
that its voting interest in the Company’s shares had increased
to 5.00%.
The percentages quoted above were calculated by reference to
the total voting rights (‘TVR’) at the relevant date.
As at 28 November 2024, no further changes had been notified
to the Company.
Significant agreements
A change of control of the Company, following a takeover bid,
may cause a number of agreements to which the Company is
a party to alter or terminate. These include certain insurance
policies and employee share plans.
The Company does not have any agreements with any director
or employee that would provide compensation for loss of office
or employment resulting from a takeover of the Company, except
that provisions of the Company’s share based remuneration
arrangements may cause outstanding awards and options to
vest and become exercisable on a change of control, subject,
where applicable, to the satisfaction of any performance
conditions at that time and any required pro-rating of awards.
Research and development
During the year, the Group undertook certain projects to develop
its IT capabilities which met the definition of research and
development set out in the guidelines issued by the Department
of Business, Innovation and Skills in 2010. Claims in respect of
these activities were made in the Group’s tax returns. The amounts
involved were modest in the context of the Group’s accounts.
Political expenditure
During the year ended 30 September 2024 no political donations
were made by any group company (2023: £nil).
Page 186
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.
Having regard to regulatory requirements relating to external
auditor tenure, the directors undertook a tender process in
the year in respect of the external audit for the year ending
30 September 2026. The form and results of this process are
described in the report of the Audit Committee (Section B6).
With respect to the financial year ending 30 September 2025,
the directors, having considered the requirements for rotation
of auditors, the tender process described above, the length of
service of KPMG and the conduct of the audit, concluded there
was no 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 Report, Section B6.
Annual General Meeting
The AGM of the Company will take place on 5 March 2025
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 UKLR 6.6.1R
There are no matters which the Company is required to report
under Listing Rule UKLR 6.6.1, 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 2.0
million ordinary shares (2023: 1.5 million). As the shares included in
these arrangements are held on the consolidated balance sheet,
this has no effect on the amounts reported by the Group.
The trustee will only vote on those shares in accordance with
the instructions given to the trustee and in accordance with the
terms of the trust deed. The trustee has waived the trust’s right
to dividends on all shares held within the trust.
Details of the shares held by the trust are set out in note 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 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 DTR 7.2.1 of the DTR 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 DTR 4.1.5 of the DTR 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 2024, for the purposes of the DTR.
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
3 December 2024
Page 187
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 2024, 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)
G H Yorston
(Non-executive director)
N S Terrington
(CEO)
A C M Morris
(Senior Independent Director)
R J Woodman
(CFO)
P A Hill
(Non-executive director)
H R Tudor
(Non-executive director)
T P Davda
(Non-executive director)
B A Ridpath
(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
3 December 2024
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.
Page 190
C1. Independent auditor’s report
To the members of Paragon Banking Group PLC
1. Our opinion is unmodified
We have audited the financial statements of
Paragon Banking Group PLC (‘the Company’) for the
year ended 30 September 2024 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 2024 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 nine financial years ended 30 September 2024. We
have fulfilled our ethical responsibilities under, and we remain
independent of the Group in accordance with, UK ethical
requirements including the FRC Ethical Standard as applied to
listed public interest entities. No non-audit services prohibited
by that standard were provided.
2. Key audit matters: our assessment
of risks of material misstatement
Key audit matters are those matters that, in our professional
judgement, were of most significance in the audit of the
financial statements and include the most significant assessed
risks of material misstatement (whether or not due to fraud)
identified by us, including those which had the greatest effect
on: the overall audit strategy; the allocation of resources in the
audit; and directing the efforts of the engagement team. We
summarise below the key audit matters (unchanged from 2023),
in decreasing order of audit significance, in arriving at our audit
opinion above, together with our key audit procedures to address
those matters and, as required for public interest entities, our
results from those procedures. These matters were addressed,
and our results are based on procedures undertaken, in the
context of, and solely for the purpose of, our audit of the financial
statements as a whole, and in forming our opinion thereon,
and consequently are incidental to that opinion, and we do not
provide a separate opinion on these matters.
Page 191
Auditors Report
Key audit matter
Our response
Impairment allowances on loans to customers
Risk vs 2023
(£76.5 million; 2023: £73.6 million)
Refer to the Audit Committee Report, accounting
policy note and notes 21 to 25 (financial disclosures).
Subjective estimate
The measurement of expected credit losses (‘ECL’)
involves significant judgements and estimates. The
economic uncertainty in the UK economy has reduced,
with lower volatility in rates of interest and inflation.
However, there continues to be subjectivity in
the estimate.
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, 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.
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
model assumptions 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. In addition, there are unmodelled portfolios
where judgement is involved in determining the
ECL estimate.
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.
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:
• Our economics expertise: We involved our own
economic specialists, who assisted us in:
-
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 and
other benchmarks.
• Our credit risk modelling expertise: We involved
our own credit risk modelling team, 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:
-
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.
-
For a selection of performing and credit-impaired
loans within the unmodelled portfolios, assessing
the reasonableness of the ECL measured.
Page 192
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 assessed 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
(2023: acceptable).
Key audit matter
Our response
Interest receivable on originated loan accounts
Risk vs 2023
(£819.8 million; 2023: £642.9 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, most critical of
which are the loans’ expected behavioural life assumption
and the expected reversionary interest rate assumption.
The economic uncertainty in the UK economy has
reduced, with lower volatility in rates of interest and
inflation, reducing the risk on the estimate. However,
there continues to be subjectivity in the estimate.
The Group determines its expected behavioural life
assumptions and reversionary rate assumptions based
on its forecasting processes which incorporates historical
experience and judgement on what the future rates will
be and what the customers will be expected to pay. This
judgement extends significantly into the future which
creates a high degree of estimation uncertainty and
subjects the judgement to future market changes.
The cohorts of loans and advances for which the
assumptions are most significant are buy-to-let products
which were originated by the Group post 2010.
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 the current economic environment on the
behavioural life assumptions.
• 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.
Page 193
Auditors Report
Key audit matter
Our response
The effect of these matters is that, as part of our risk
assessment, we determined that the EIR adjustment
and corresponding 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.
• Sensitivity analysis: We performed sensitivity
analysis over the behavioural life profiles by applying
alternative profiles incorporating the results from the
above procedures. We also stressed the underlying
reversionary rate assumption to evaluate the impact
on the estimate.
• Assessing transparency: We assessed whether
the disclosures appropriately reflect and address
the estimation 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 (2023: acceptable).
Key audit matter
Our response
Recoverability of goodwill
Risk vs 2023
(£162.8 million; 2023: £162.8 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 (projected income) and
the discount rate.
The economic uncertainty in the UK economy has
reduced, with lower volatility in rates of interest and
inflation. However, there continues to be subjectivity in
the assessment for recoverability of goodwill.
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.
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 to 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. We involved
our valuations specialists to independently assess the
appropriateness of the discount rate and benchmark
the rate against market participants’ views.
• 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 assessed 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 (2023: acceptable).
Page 194
Key audit matter
Our response
Valuation of the retirement benefit
pension obligation
Risk vs 2023
(£91.5 million, 2023: £89.3 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 surplus on the balance sheet, which
includes the gross pension obligations.
The valuation of the retirement benefit pension
obligation is subjective due to the inherent judgement
involved in determining the assumptions used in the
assessment. 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.
The economic uncertainty in the UK economy has
reduced, with lower volatility in rates of interest and
inflation. However, there continues to be subjectivity
in the assumptions used in the valuation of retirement
benefit pension obligation.
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.
• Our pensions actuarial expertise: We critically
assessed, using our own actuarial specialists,
the key assumptions applied, such as the
discount rate, inflation rate and mortality rates / life
expectancy against externally derived data
and internal experience.
• Assessing transparency: We assessed 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 (2023: acceptable).
Key audit matter
Our response
Recoverability of Parent Company’s investment
in subsidiaries
Risk vs 2023
(£636.8 million; 2023: £637.4 million)
Refer to the accounting policy note and note 32
(financial disclosures).
Low risk, high value
The carrying amount of the parent company’s
investment in subsidiaries represents 67.3%
(2023: 60.2%) 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 compared the carrying amount
of 100% of the investments in subsidiaries 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 assessed whether those
subsidiaries have historically been profit-making.
Our results
We found the balance of the Company’s investments in
subsidiaries and the related impairment charge to be
acceptable (2023: acceptable).
Page 195
Auditors Report
3. Our application of materiality and
an overview of the scope of our audit
Materiality for the Group financial statements as a whole was set
at £11.0 million (2023: £10.0 million) determined with reference to
a benchmark of Group profit before tax, normalised to exclude
fair value movements (2023: determined with reference to a
benchmark of Group profit before tax normalised to exclude
fair value movements and discontinuing operations from TBMC
subsidiary closure costs). This materiality level represents 3.8%
(2023: 3.6%) of the stated benchmark.
Materiality for the parent company financial statements as a
whole was set at £7.0 million (2023: £7.0 million), determined with
reference to a benchmark of current year net assets, of which it
represents 1.0% (2023: 1.0%).
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% (2023: 75%) of
materiality for the financial statements as a whole, which
equates to £8.25 million (2023: £7.5 million) for the Group and
£5.2 million (2023: £5.2 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
£0.55 million (2023: £0.50 million), in addition to other identified
misstatements that warranted reporting on qualitative grounds
for the Group and £0.35 million (2023: £0.35m) for the
parent company.
Of the Group’s two (2023: two) reporting components, we
subjected one (2023: one) to a full scope audit for group
purposes. We conducted reviews of financial information
(including enquiry) at a further one (2023: one) non-significant
component as it was neither individually financially significant
enough to require a full scope audit for group purposes, nor did it
present specific individual risks that needed to be addressed.
The components within the scope of our work accounted for
99.9% (2023: 99.9%) of total Group revenue, 98.8% (2023: 98.9%)
of Group profit before tax, and 99.7% (2023: 99.8%) of Group total
assets. The work on the two components was performed by the
Group team. The Group team also 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.
4. The impact of climate change on
our audit
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
2024 Annual Report, Section A6.4, on pages 66 to 81.
Climate change risks and opportunities, the Group’s own
commitments and changing regulations could have a significant
impact on the Group’s business and operations. There is
the possibility that climate change risks, both physical and
transitional, could affect financial statement balances through
estimates such as credit risk and the forward-looking cash flows
used in goodwill impairment assessments. There is enhanced
narrative in the Annual Report on climate matters.
As part of our audit we performed a risk assessment of the
impact of the climate change risk on the financial statements
and our audit approach. As a part of this we held discussions
with our own climate change professionals to challenge our risk
assessment. In doing this we performed the following:
• Understanding management’s processes: We made
enquiries to understand management’s assessment of the
potential impact of climate change risk on the Group’s
Annual Report and the Group’s preparedness for this. As a
part of this we made enquiries to understand management’s
risk assessment process as it relates to the possible effects
of climate change on the Annual Report.
• Credit risk: We assessed how the Group
considers the impact of physical risks on the valuation of
mortgage collateral. Specifically, we performed data and
analytics-driven risk assessment procedures to understand
the potential impact of flooding and subsidence on the
valuation of mortgage collateral and made enquiries of
management to understand how this is considered within its
own collateral valuation process.
• Forward looking estimates: We considered how the
Group’s forward looking cash flows may be impacted within
the relevant CGUs. As part of this, we made enquiries to
understand management’s own considerations and assessed
the reasonableness of the forward-looking forecasts in the
context of the business.
• Annual Report narrative: We made enquiries of
management to understand the process by which climate-
related narrative is developed including the primary sources
of data used and the governance process in place over the
narrative. As a part of our risk assessment, we read the
climate-related information in the front half of the Annual
Report and considered its consistency with the financial
statements and our audit knowledge.
On the basis of the procedures performed above, taking into
account the nature of the Group’s lending exposures and the
extent of the headroom of the recoverable amount over the
carrying amount of the cash generating units, we concluded that,
while climate change posed a risk to the determination of asset
values in the current year, the risk was not significant when we
considered the nature of the assets and the relevant contractual
terms. As a result, there was no material impact from climate
change on our key audit matters.
Page 196
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 57 is materially consistent with the
financial statements and our audit knowledge.
However, as we cannot predict all future events or conditions
and as subsequent events may result in outcomes that are
inconsistent with judgements that were reasonable at the time
they were made, the above conclusions are not a guarantee that
the Group or the Company will continue in operation.
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 and Internal Audit as to whether they
have knowledge of any actual, suspected or alleged fraud,
and inspection of policy documentation around the Group’s
high-level policies and procedures to prevent and detect
fraud, including the Internal Audit function, and the Group’s
internal channel for ‘whistleblowing’.
• 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 professionals to assist with identifying
fraud risks, as well as designing relevant audit procedures to
respond to the identified 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 also identified a fraud risk related to impairment allowance
on loans to customers and the recoverability of goodwill due
to the fact these involve significant estimation uncertainty and
subjective judgements that are inherently uncertain.
Further detail in respect of impairment allowances on loans
to customers, interest income on originated loans and the
recoverability of goodwill is set out in the key audit matter
disclosures in section 2 of this report.
We also performed procedures including:
• Identifying journal entries to test based on risk criteria and
testing the identified high risk journal entries to supporting
documentation. This included searching for those journals
with specific key words in the description, journals posted
by seldom users, journals posted without user IDs and
unbalanced journal postings;
• Assessing whether the judgements made in making
accounting estimates are indicative of a potential bias.
Page 197
Auditors Report
Identifying and responding to risks of material misstatement
related to 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.
Firstly, the Group is subject to laws and regulations that
directly affect the financial statements including financial
reporting legislation (including related companies’ legislation),
distributable profits legislation and taxation legislation and
we assessed the extent of compliance with these laws and
regulations as part of our procedures on the related financial
statement items.
Secondly, the Group is subject to many other laws and
regulations where the consequences of non-compliance
could have a material effect on amounts or disclosures in the
financial statements, for instance through the imposition of
fines or litigation or the loss of the Group’s licence to operate.
We identified the following areas as those most likely to have
such an effect: specific areas of regulatory capital and liquidity,
conduct (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 and its legal form. Auditing standards limit the required
audit procedures to identify non-compliance with these laws and
regulations to enquiry of the directors and other management
and inspection of regulatory and legal correspondence, if any.
Therefore, if a breach of operational regulations is not disclosed
to us or evident from relevant correspondence, an audit will not
detect that breach.
In relation to the Court of Appeal judgment in the cases of
Hopcraft, Wrench and Johnson on 25 October 2024 as well as
the FCA’s ongoing review of the historical use of discretionary
commission arrangements across the motor finance industry,
discussed in note 43, we assessed the Group’s disclosures
against our understanding from inspecting regulatory
correspondence, involving our legal specialists and holding
enquiries with the Group’s internal legal counsel.
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 fraud 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.
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:
• we have not identified material misstatements in the
Strategic Report and the Directors’ Report;
• in our opinion the information given in those reports for the
financial year is consistent with the financial statements; and
• in our opinion those reports have been prepared in
accordance with the Companies Act 2006.
Directors’ Remuneration Report
In our opinion the part of the Directors’ Remuneration Report to
be audited has been properly prepared in accordance with the
Companies Act 2006.
Page 198
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 56 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 57 under the Listing Rules. Based on the above procedures,
we have concluded that the above disclosures are materially
consistent with the financial statements and our
audit knowledge.
Our work is limited to assessing these matters in the
context of only the knowledge acquired during our financial
statements audit. As we cannot predict all future events or
conditions and as subsequent events may result in outcomes
that are inconsistent with judgements that were reasonable at the
time they were made, the absence of anything to report on these
statements is not a guarantee as to the Group’s and Company’s
longer-term viability.
Corporate governance disclosures
We are required to perform procedures to identify whether there
is a material inconsistency between the directors’ corporate
governance disclosures and the financial statements and our
audit knowledge.
Based on those procedures, we have concluded that each of the
following is materially consistent with the financial statements
and our audit knowledge:
• the directors’ statement that they consider that the annual
report and financial statements taken as a whole is fair,
balanced and understandable, and provides the information
necessary for shareholders to assess the Group’s position
and performance, business model and strategy;
• the section of the Annual Report describing the work of
the Audit Committee, including the significant issues that
the Audit Committee considered in relation to the financial
statements, and how these issues were addressed; 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.
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.
9. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out in Section B10,
the directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and
fair view; such internal control as they determine is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error; assessing
the Group and parent company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going
concern; and using the going concern basis of accounting unless
they either intend to liquidate the Group or the parent company or
to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue our
opinion in an auditor’s report. Reasonable assurance is a high level
of assurance, but does not guarantee that an audit conducted
in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud
or error and are considered material if, individually or in aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC’s
website at www.frc.org.uk/auditorsresponsibilities.
The Company is required to include these financial statements in
an annual financial report prepared under Disclosure Guidance
and Transparency Rule 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.
Page 199
Auditors Report
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
3 December 2024
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
D1.1
Consolidated statement of profit or loss
P203
D1.2
Consolidated statement of comprehensive income
P204
D1.3
Consolidated balance sheet
P205
D1.4
Company balance sheet
P206
D1.5
Consolidated cash flow statement
P206
D1.6
Company cash flow statement
P207
D1.7
Consolidated statement of movements in equity
P208
D1.8
Company statement of movements in equity
P209
D2. Notes to the Accounts
P209
D2.1 Analysis
P278
D2.2 Employment costs
P292
D2.3 Capital and financial risk
P317
D2.4 Basis of preparation
Page 202
D1. Primary Financial Statements
D1.1 Consolidated statement of profit or loss
For the year ended 30 September 2024
Note
2024
2024
2023
2023
£m
£m
£m
£m
Interest receivable
4
1,314.7
1,010.6
Interest payable and similar charges
5
(831.5)
(561.7)
Net interest income
483.2
448.9
Other leasing income
6
30.4
27.4
Related costs
6
(24.2)
(21.8)
Net operating lease income
6.2
5.6
Other income
7
7.0
11.5
Other operating income
13.2
17.1
Total operating income
496.4
466.0
Operating expenses
8
(179.2)
(170.4)
Provisions for losses
11
(24.5)
(18.0)
Operating profit before fair value items
292.7
277.6
Fair value net (losses)
12
(38.9)
(77.7)
Operating profit being profit on ordinary activities before taxation
253.8
199.9
Tax charge on profit on ordinary activities
13
(67.8)
(46.0)
Profit on ordinary activities after taxation for the financial year
186.0
153.9
Note
2024
2023
Earnings per share
- basic
15
88.5p
68.7p
- diluted
15
85.2p
66.3p
The results for the current and preceding years relate entirely to continuing operations.
Page 203
The Accounts
D1.2 Consolidated statement of comprehensive income
For the year ended 30 September 2024
Note
2024
2024
2023
2023
£m
£m
£m
£m
Profit for the year
186.0
153.9
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Actuarial gain on pension scheme
60
7.2
2.4
Tax thereon
(1.8)
(0.8)
Other comprehensive income for the year net of tax
5.4
1.6
Total comprehensive income for the year
191.4
155.5
Page 204
D1.3 Consolidated balance sheet
For the year ended 30 September 2024
Note
2024
2023
2022
£m
£m
£m
Assets
Cash – central banks
16
2,315.5
2,783.3
1,612.5
Cash – retail banks
16
209.9
211.0
318.4
Investment securities
17
427.4
-
-
Loans to customers
18
15,630.3
14,495.0
13,650.4
Derivative financial assets
26
391.8
615.4
779.0
Sundry assets
27
20.7
51.0
39.2
Current tax assets
28
9.7
8.9
5.4
Retirement benefit obligations
60
22.2
12.7
7.1
Property, plant and equipment
29
71.0
74.7
71.4
Intangible assets
30
171.5
168.2
170.2
Total assets
19,270.0
18,420.2
16,653.6
Liabilities
Short-term bank borrowings
0.4
0.2
0.4
Retail deposits
33
16,314.7
13,234.4
10,569.5
Derivative financial liabilities
26
99.7
39.9
102.1
Asset backed loan notes
34
-
28.0
409.3
Secured bank borrowings
35
-
-
586.0
Retail bond issuance
36
-
112.4
112.3
Corporate bond issuance
37
149.9
145.8
149.2
Central bank facilities
38
755.0
2,750.0
2,750.0
Sale and repurchase agreements
39
100.0
50.0
-
Sundry liabilities
40
417.4
631.2
513.1
Deferred tax liabilities
44
13.4
17.7
44.4
Total liabilities
17,850.5
17,009.6
15,236.3
Called up share capital
45
210.6
228.7
241.4
Reserves
46
1,274.3
1,257.5
1,223.9
Own shares
47
(65.4)
(75.6)
(48.0)
Total equity
1,419.5
1,410.6
1,417.3
Total liabilities and equity
19,270.0
18,420.2
16,653.6
Approved by the Board of Directors on 3 December 2024
Signed of behalf of the Board of Directors.
N S Terrington
R J Woodman
Chief Executive
Chief Financial Officer
Page 205
The Accounts
D1.4 Company balance sheet
For the year ended 30 September 2024
Note
2024
2023
(restated*)
2022
(restated*)
£m
£m
£m
Assets
Cash – retail banks
16
18.3
28.1
21.1
Sundry assets
27
128.6
228.7
39.2
Deferred tax assets
44
-
1.6
-
Property, plant and equipment
29
11.8
13.2
14.6
Investment in subsidiary undertakings
32
786.8
787.5
895.7
Total assets
945.5
1,059.1
970.6
Liabilities
Retail bond issuance
36
-
112.4
112.3
Corporate bond issuance
37
149.6
149.4
149.2
Sundry liabilities
40
61.4
38.4
51.1
Current tax liabilities
28
-
1.8
-
Deferred tax liabilities
44
0.1
-
0.1
Total liabilities
211.1
302.0
312.7
Called up share capital
45
210.6
228.7
241.4
Reserves
46
589.2
604.0
464.5
Own shares
47
(65.4)
(75.6)
(48.0)
Total equity
734.4
757.1
657.9
945.5
1,059.1
970.6
* Restated as described in note 66
Approved by the Board of Directors on 3 December 2024.
Signed of behalf of the Board of Directors.
N S Terrington
R J Woodman
Chief Executive
Chief Financial Officer
Page 206
D1.5 Consolidated cash flow statement
For the year ended 30 September 2024
Note
2024
2023
£m
£m
Net cash generated by operating activities
49
2,216.4
2,171.7
Net cash (utilised) by investing activities
50
(424.7)
(3.1)
Net cash (utilised) by financing activities
51
(2,260.8)
(1,105.0)
Net (decrease) / increase in cash and cash equivalents
(469.1)
1,063.6
Opening cash and cash equivalents
2,994.1
1,930.5
Closing cash and cash equivalents
2,525.0
2,994.1
Represented by balances within:
Cash
16
2,525.4
2,994.3
Short-term bank borrowings
(0.4)
(0.2)
2,525.0
2,994.1
D1.6 Company cash flow statement
For the year ended 30 September 2024
Note
2024
2023
(restated)
£m
£m
Net cash generated by operating activities
49
276.3
85.8
Net cash generated by investing activities
50
-
107.0
Net cash (utilised) by financing activities
51
(286.1)
(185.8)
Net (decrease) / increase in cash and cash equivalents
(9.8)
7.0
Opening cash and cash equivalents
28.1
21.1
Closing cash and cash equivalents
18.3
28.1
Represented by balances within:
Cash
16
18.3
28.1
Short-term bank borrowings
-
-
18.3
28.1
Page 207
The Accounts
D1.7 Consolidated statement of movements in equity
For the year ended 30 September 2024
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
Profit
and loss
account
Own
shares
Total
equity
£m
£m
£m
£m
£m
£m
£m
Transactions arising from
Profit for the year
-
-
-
-
186.0
-
186.0
Other comprehensive income
-
-
-
-
5.4
-
5.4
Total comprehensive income
-
-
-
-
191.4
-
191.4
Transactions with owners
Dividends paid (note 48)
-
-
-
-
(83.5)
-
(83.5)
Own shares purchased
-
-
-
-
-
(89.5)
(89.5)
Irrevocable instruction accrual
-
-
-
-
-
(23.8)
(23.8)
Exercise of share awards
-
-
-
-
(12.8)
13.5
0.7
Shares cancelled
(18.1)
-
18.1
-
(110.0)
110.0
-
Capital reorganisation
-
-
-
-
-
-
-
Charge for share based
remuneration (note 57)
-
-
-
-
9.2
-
9.2
Tax on share based remuneration
-
-
-
-
4.4
-
4.4
Net movement in equity in
the year
(18.1)
-
18.1
-
(1.3)
10.2
8.9
Opening equity
228.7
71.4
12.9
(70.2)
1,243.4
(75.6)
1,410.6
Closing equity
210.6
71.4
31.0
(70.2)
1,242.1
(65.4)
1,419.5
For the year ended 30 September 2023
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
Profit
and loss
account
Own
shares
Total
equity
£m
£m
£m
£m
£m
£m
£m
Transactions arising from
Profit for the year
-
-
-
-
153.9
-
153.9
Other comprehensive income
-
-
-
-
1.6
-
1.6
Total comprehensive income
-
-
-
-
155.5
-
155.5
Transactions with owners
Dividends paid (note 48)
-
-
-
-
(67.9)
-
(67.9)
Own shares purchased
-
-
-
-
-
(120.5)
(120.5)
Irrevocable instruction accrual
-
-
-
-
-
10.8
10.8
Exercise of share awards
0.2
0.3
-
-
(11.4)
14.8
3.9
Shares cancelled
(12.9)
-
12.9
-
(67.3)
67.3
-
Capital reorganisation
-
-
(71.8)
-
71.8
-
-
Charge for share based
remuneration (note 57)
-
-
-
-
9.6
-
9.6
Tax on share based remuneration
-
-
-
-
1.9
-
1.9
Net movement in equity in
the year
(12.7)
0.3
(58.9)
-
92.2
(27.6)
(6.7)
Opening equity
241.4
71.1
71.8
(70.2)
1,151.2
(48.0)
1,417.3
Closing equity
228.7
71.4
12.9
(70.2)
1,243.4
(75.6)
1,410.6
Page 208
D1.8 Company statement of movements in equity
For the year ended 30 September 2024
Share
capital
Share
premium
Capital
redemption
reserve
Merger
reserve
Profit
and loss
account
Own
shares
Total
equity
£m
£m
£m
£m
£m
£m
£m
Transactions arising from
Profit for the year
-
-
-
-
164.4
-
164.4
Other comprehensive income
-
-
-
-
-
-
-
Total comprehensive income
-
-
-
-
164.4
-
164.4
Transactions with owners
Dividends paid (note 48)
-
-
-
-
(83.5)
-
(83.5)
Own shares purchased
-
-
-
-
-
(89.5)
(89.5)
Irrevocable instruction accrual
-
-
-
-
-
(23.8)
(23.8)
Exercise of share awards
-
-
-
-
(12.8)
13.5
0.7
Shares cancelled
(18.1)
-
18.1
-
(110.0)
110.0
-
Capital reorganisation
-
-
-
-
-
-
-
Charge for share based
remuneration (note 57)
-
-
-
-
9.2
-
9.2
Tax on share-based remuneration
-
-
-
-
(0.2)
-
(0.2)
Net movement in equity in
the year
(18.1)
-
18.1
-
(32.9)
10.2
(22.7)
Opening equity
As originally reported
228.7
71.4
12.9
(23.7)
521.8
(54.0)
757.1
Change in accounting policy
(note 66)
-
-
-
-
21.6
(21.6)
-
As restated
228.7
71.4
12.9
(23.7)
543.4
(75.6)
757.1
Closing equity
210.6
71.4
31.0
(23.7)
510.5
(65.4)
734.4
For the year ended 30 September 2023 (restated)
£m
£m
£m
£m
£m
£m
£m
Transactions arising from
Profit for the year
-
-
-
-
263.3
-
263.3
Other comprehensive income
-
-
-
-
-
-
-
Total comprehensive income
-
-
-
-
263.3
-
263.3
Transactions with owners
Dividends paid (note 48)
-
-
-
-
(67.9)
-
(67.9)
Own shares purchased
-
-
-
-
-
(120.5)
(120.5)
Irrevocable instruction accrual
-
-
-
-
10.8
10.8
Exercise of share awards
0.2
0.3
-
-
(11.4)
14.8
3.9
Shares cancelled
(12.9)
-
12.9
-
(67.3)
67.3
-
Capital reorganisation
-
-
(71.8)
-
71.8
-
-
Charge for share based
remuneration (note 57)
-
-
-
-
9.6
-
9.6
Tax on share-based remuneration
-
-
-
-
-
-
-
Net movement in equity in
the year
(12.7)
0.3
(58.9)
-
198.1
(27.6)
99.2
Opening equity
As originally reported
241.4
71.1
71.8
(23.7)
326.3
(29.0)
657.9
Change of accounting policy
(note 66)
-
-
-
-
19.0
(19.0)
-
As restated
241.4
71.1
71.8
(23.7)
345.3
(48.0)
657.9
Closing equity
228.7
71.4
12.9
(23.7)
543.4
(75.6)
757.1
Page 209
The Accounts
D2. Notes to the Accounts
For the year ended 30 September 2024
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 2024
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 2024 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 2023.
Dedicated financing and administration costs of each of these businesses, including the interest impacts of fair value hedging, are
allocated to the segment. Shared central costs are not allocated between segments, nor is income from central cash balances or the
carrying costs of unallocated savings balances.
Loans to customers and operating lease assets (other than those related to the internal green car scheme (note 54)) 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 210
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 2024
Mortgage
Lending
Commercial
Lending
Unallocated
items
Total
£m
£m
£m
£m
Interest receivable
914.9
234.7
165.1
1,314.7
Interest payable
(632.6)
(109.9)
(89.0)
(831.5)
Net interest income
282.3
124.8
76.1
483.2
Other leasing income
-
30.1
0.3
30.4
Related costs
-
(24.0)
(0.2)
(24.2)
Net operating lease income
-
6.1
0.1
6.2
Other income
3.8
3.2
-
7.0
Other operating income
3.8
9.3
0.1
13.2
Total operating income
286.1
134.1
76.2
496.4
Operating expenses
(22.8)
(26.9)
(129.5)
(179.2)
Provisions for losses
(5.6)
(18.9)
-
(24.5)
Segment profit
257.7
88.3
(53.3)
292.7
Year ended 30 September 2023
Mortgage
Lending
Commercial
Lending
Unallocated
items
Total
£m
£m
£m
£m
Interest receivable
713.6
207.4
89.6
1,010.6
Interest payable
(436.0)
(71.7)
(54.0)
(561.7)
Net interest income
277.6
135.7
35.6
448.9
Other leasing income
-
27.3
0.1
27.4
Related costs
-
(21.7)
(0.1)
(21.8)
Net operating lease income
-
5.6
-
5.6
Other income
5.6
5.9
-
11.5
Other operating income
5.6
11.5
-
17.1
Total operating income
283.2
147.2
35.6
466.0
Operating expenses
(26.2)
(26.4)
(117.8)
(170.4)
Provisions for losses
(10.4)
(7.6)
-
(18.0)
Segment profit
246.6
113.2
(82.2)
277.6
The segmental profits disclosed above reconcile to the Group results as shown below.
2024
2023
£m
£m
Results shown above
292.7
277.6
Fair value items
(38.9)
(77.7)
Operating profit
253.8
199.9
Page 211
The Accounts
The assets and liabilities attributable to each of the segments at 30 September 2024, 30 September 2023 and 30 September 2022 on
the basis described above were:
Note
Mortgage
Lending
Commercial
Lending
Total
Segments
£m
£m
£m
30 September 2024
Segment assets
Loans to customers
18
13,415.7
2,289.8
15,705.5
Operating lease assets
29
-
43.9
43.9
Securitisation cash
16
107.9
-
107.9
13,523.6
2,333.7
15,857.3
Segment liabilities
Allocated deposits
13,829.3
2,509.9
16,339.2
Securitisation funding
-
-
-
13,829.3
2,509.9
16,339.2
Note
Mortgage
Lending
Commercial
Lending
Total
Segments
£m
£m
£m
30 September 2023
Segment assets
Loans to customers
18
12,902.3
1,972.0
14,874.3
Operating lease assets
29
-
44.3
44.3
Securitisation cash
16
86.1
-
86.1
12,988.4
2,016.3
15,004.7
Segment liabilities
Allocated deposits
13,160.4
2,199.4
15,359.8
Securitisation funding
28.0
-
28.0
13,188.4
2,199.4
15,387.8
Note
Mortgage
Lending
Commercial
Lending
Total
Segments
£m
£m
£m
30 September 2022
Segment assets
Loans to customers
18
12,328.7
1,881.6
14,210.3
Operating lease assets
29
-
41.6
41.6
Securitisation cash
16
240.5
-
240.5
12,569.2
1,923.2
14,492.4
Segment liabilities
Allocated deposits
11,864.7
2,193.7
14,058.4
Securitisation funding
995.3
-
995.3
12,860.0
2,193.7
15,053.7
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.
The additions to non-current assets, excluding financial assets, in the year which are included in segmental assets above, are
investments of £13.1m (2023: £15.3m) in assets held for leasing under operating leases (note 29). These are included in the
Commercial Lending segment. No other fixed asset additions were allocated to segments.
Page 212
The segmental assets and liabilities may be reconciled to the consolidated balance sheet as shown below.
2024
2023
£m
£m
Total segment assets
15,857.3
15,004.7
Unallocated assets
Central cash and investments
2,844.9
2,908.2
Derivative financial instruments
391.8
615.4
Fair value hedging adjustments
(75.2)
(379.3)
Operational property, plant and equipment
27.1
30.4
Retirement benefit obligations
22.2
12.7
Intangible assets
171.5
168.2
Other
30.4
59.9
Total assets
19,270.0
18,420.2
2024
2023
£m
£m
Total segment liabilities
16,339.2
15,387.8
Unallocated liabilities
Unallocated retail deposits
(41.2)
(2,094.5)
Derivative financial instruments
99.7
39.9
Central borrowings
1,005.3
3,058.4
Tax liabilities
13.4
17.7
Other
434.1
600.3
Total liabilities
17,850.5
17,009.6
3. Revenue
Note
2024
2023
£m
£m
Interest receivable
4
1,314.7
1,010.6
Operating lease income
6
30.4
27.4
Other income
7
7.0
11.5
Total revenue
1,352.1
1,049.5
Arising from:
Mortgage Lending
918.7
719.2
Commercial Lending
268.0
240.6
Total revenue from segments
1,186.7
959.8
Unallocated revenue
165.4
89.7
Total revenue
1,352.1
1,049.5
Page 213
The Accounts
4. Interest receivable
Interest receivable is analysed as follows.
Note
2024
2023
£m
£m
Interest receivable in respect of
Loans and receivables
819.8
642.9
Finance leases
73.4
59.6
Invoice finance income
5.8
4.3
Interest on loans to customers
899.0
706.8
Effect of fair value hedging of loan assets
245.8
210.0
Interest on loans to customers after hedging
1,144.8
916.8
Pension scheme surplus
60
0.8
0.4
Investment securities
8.0
-
Effect of fair value hedging of securities
2.4
-
Other interest receivable
158.7
93.4
Total interest on financial assets
1,314.7
1,010.6
The above amounts relate to:
2024
2023
£m
£m
Financial assets held at amortised cost
992.3
740.6
Finance leases
73.4
59.6
Pension scheme surplus
0.8
0.4
Derivative financial instruments held at fair value
248.2
210.0
1,314.7
1,010.6
Other interest receivable relates principally to cash deposits at central and retail banks.
Page 214
5. Interest payable and similar charges
Note
2024
2023
£m
£m
On financial liabilities
Retail deposits
667.0
334.1
Effect of fair value hedging of deposits
33.6
54.4
Interest on retail deposits after hedging
700.6
388.5
Asset backed loan notes
2.6
10.9
Bank loans and overdrafts
14.1
34.8
Corporate bonds
6.6
6.6
Effect of fair value hedging of bonds
1.8
0.6
Retail bonds
5.7
6.5
Central bank facilities
95.2
111.9
Sale and repurchase agreements
4.0
0.7
Total interest on financial liabilities
830.6
560.5
Discounting on lease liabilities
0.3
0.3
Other finance costs
0.6
0.9
831.5
561.7
The above amounts relate to:
2024
2023
£m
£m
Financial liabilities held at amortised cost
795.2
505.5
Derivative financial instruments held at fair value
35.4
55.0
Other items
0.9
1.2
831.5
561.7
Amounts payable in respect of bank loans and overdrafts include interest and fees payable in respect of collateral amounts received
in respect of derivative financial instruments (note 40).
6. Net operating lease income
Note
2024
2023
£m
£m
Income
Operating lease rentals
21.3
19.5
Maintenance income
9.1
7.9
Total operating lease income
30.4
27.4
Costs
Depreciation of lease assets
29
(11.6)
(10.7)
Maintenance salaries
57
(3.7)
(3.2)
Other maintenance costs
(8.9)
(7.9)
Total operating lease costs
(24.2)
(21.8)
Net operating lease income
6.2
5.6
Page 215
The Accounts
7. Other income
2024
2023
£m
£m
Loan account fee income
4.5
4.8
Broker commissions
1.6
2.1
Third party servicing
0.7
4.3
Other income
0.2
0.3
7.0
11.5
All loan account fee income arises from financial assets held at amortised cost.
8. Operating expenses
Note
2024
2023
£m
£m
Employment costs
57
111.1
108.3
Auditor remuneration
9
3.6
2.9
Bank of England Levy
2.1
-
Amortisation of intangible assets
30
1.2
1.8
Depreciation of operational assets
29
5.4
3.9
TBMC closure
10
-
2.0
Restructuring costs
-
2.6
Other administrative costs
55.8
48.9
179.2
170.4
Restructuring costs in 2023 arose 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 Bank of England Levy was introduced from 1 March 2024. Accounting standards require that the Levy is accounted for in full on
the first day of each annual Levy period.
The Group incurred no costs in respect of short-term operating leases in the year (2023: none).
Page 216
9. Auditor remuneration
The analysis of fees payable to the Company’s auditors (KPMG LLP) and their associates, excluding irrecoverable VAT, required by the
Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 is set out below.
2024
2023
£m
£m
Audit fee of the company
1.1
0.7
Other services
Audit of subsidiary undertakings pursuant to legislation
1.7
1.5
Total audit fees
2.8
2.2
Audit related assurance services
Interim review
0.2
0.2
Other
-
-
Total fees
3.0
2.4
Irrecoverable VAT
0.6
0.5
Total cost to the Group (note 8)
3.6
2.9
Fees paid to the auditors and their associates for non-audit services to the Company are not disclosed because the consolidated
accounts of the Group are required to disclose such fees on a consolidated basis.
10. TBMC closure
During the year ended 30 September 2023, 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 were derecognised.
The total amount expensed to the profit and loss account on the closure is set out below.
Note
2023
£m
Goodwill derecognised
30
1.6
Intangible assets derecognised
30
0.2
Other closure costs
0.2
Total closure costs
8
2.0
The contribution to profit of the closed business in that year, which was included in the Mortgage Lending segment, was a loss of
£0.5m excluding the costs shown above.
Page 217
The Accounts
11. Loan impairments provisions charged to income
The amounts charged to the profit and loss account in the year are analysed as follows.
Mortgage
Lending
Commercial
Lending
Total
£m
£m
£m
30 September 2024
Provided in period (note 23)
6.0
20.4
26.4
Recovery of written off amounts
(0.4)
(1.5)
(1.9)
5.6
18.9
24.5
Of which
Loan accounts
5.6
17.9
23.5
Finance leases
-
1.0
1.0
5.6
18.9
24.5
30 September 2023
Provided in period (note 23)
10.8
8.3
19.1
Recovery of written off amounts
(0.4)
(0.7)
(1.1)
10.4
7.6
18.0
Of which
Loan accounts
10.4
10.5
20.9
Finance leases
-
(2.9)
(2.9)
10.4
7.6
18.0
12. Fair value net (losses)
2024
2023
£m
£m
Ineffectiveness of fair value hedges (note 26)
Portfolio hedges of interest rate risk
Deposit hedge
7.3
7.8
Loan hedge
(3.1)
(23.7)
4.2
(15.9)
Individual hedges of interest rate risk
-
-
4.2
(15.9)
Other hedging movements
(26.2)
(53.5)
Net (losses) on other derivatives
(16.9)
(8.3)
Total net (loss)
(38.9)
(77.7)
The fair value net (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 218
13. Tax charge on profit on ordinary activities
(a)
Analysis of charge in the year
2024
2023
£m
£m
Current tax
UK Corporation Tax on profits of the period
75.4
73.6
Adjustment in respect of prior periods
(4.5)
(1.1)
Total current tax
70.9
72.5
Deferred tax (note 44)
(3.1)
(26.5)
Tax charge on profit on ordinary activities
67.8
46.0
The standard rate of corporation tax in the UK applicable to the Group in the year was 25.0% (2023: 22.0%), 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. 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 3.0% on earnings over £100.0m. 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 28.0% in the
current year (2023: 27.5%).
(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 25.0% (2023: 22.0%).
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.
2024
2023
£m
£m
Profit on ordinary activities before taxation
253.8
199.9
Profit on ordinary activities multiplied by the UK standard rate of corporation tax
63.5
44.0
Effects of:
Permanent differences
Recurring disallowable expenditure and similar items
0.2
0.5
Mismatch in timing differences
1.4
(1.3)
Change in rate of taxation on current and deferred tax (excluding Bank Surcharge)
-
(2.1)
Impact of Bank Surcharge on current and deferred tax
1.1
5.1
Prior year charge
1.6
(0.2)
Tax charge for the year
67.8
46.0
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 219
The Accounts
(c)
Factors affecting future tax charges
No legislation which will have the effect of changing the rates of tax applicable to the Group from those shown above has currently been
enacted. However, 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.
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’).
14. Profit attributable to members of Paragon Banking Group PLC
The Company’s profit after tax for the financial year amounted to £164.4m (2023: £263.3m – restated (note 66)). 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 2024 or 30 September 2023.
15. Earnings per share
Earnings per ordinary share is calculated as follows:
2024
2023
Profit for the year (£m)
186.0
153.9
Basic weighted average number of ordinary shares ranking for dividend during the year (m)
210.1
224.1
Dilutive effect of the weighted average number of share options and incentive plans in issue during the year (m)
8.3
8.0
Diluted weighted average number of ordinary shares ranking for dividend during the year (m)
218.4
232.1
Earnings per ordinary share
- basic
88.5p
68.7p
- diluted
85.2p
66.3p
Page 220
16. Cash and cash equivalents
‘Cash and Cash Equivalents’ includes current bank balances, money market placements and fixed rate sterling term deposits with
London banks, and balances with the Bank of England. It is analysed as set out below.
2024
2023
2022
£m
£m
£m
Deposits with the Bank of England
2,315.5
2,783.3
1,612.5
Balances with central banks
2,315.5
2,783.3
1,612.5
Deposits with other banks
209.9
211.0
318.4
Balances with other banks
209.9
211.0
318.4
Cash and cash equivalents
2,525.4
2,994.3
1,930.9
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 ‘Cash and Cash Equivalents’ balance may be analysed as shown below:
2024
2023
2022
£m
£m
£m
The Group
Available cash
2,417.4
2,907.7
1,689.1
Securitisation cash
107.9
86.1
240.5
ESOP cash
0.1
0.5
1.3
2,525.4
2,994.3
1,930.9
2024
2023
(restated)
2022
(restated)
£m
£m
£m
The Company
Available cash
18.2
27.6
19.8
ESOP cash
0.1
0.5
1.3
18.3
28.1
21.1
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.
17. Investment securities
The Group’s investment securities, which are held as part of Paragon Bank’s liquidity buffer, are analysed as follows:
Principal amount
Carrying value
2024
2023
2024
2023
£m
£m
£m
£m
UK Government securities
400.0
-
404.4
-
Covered bonds
23.0
-
23.0
-
423.0
-
427.4
-
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The Accounts
The UK Government securities (‘gilts’) bear interest at a fixed rate, the average maturity of the gilts is 20.5 years, and the average fixed
rate coupon is 4.5%. Hedging arrangements in respect of these securities are described in note 26.
The covered bonds are issued by UK financial institutions, are denominated in sterling and bear interest at a variable rate of interest
based on SONIA. The average maturity of the covered bonds is 5.0 years and the average interest margin above SONIA is 0.51%.
All the investment securities bear credit risk and are classified as Stage 1 exposures (see note 22 for IFRS 9 impairment purposes.
As the securities are UK sovereign exposures, or secured exposures to UK financial institutions, the probability of default has been
assessed to be so low that no significant impairment provision is required.
While the securities are available to use as security against funding arrangements, such as sale and repurchase transactions, none
were used in this way at 30 September 2024.
18. Loans to customers
The Group’s loans to customers at 30 September 2024, analysed between the segments described in note 2 are as follows:
Note
2024
2023
2022
£m
£m
£m
First mortgages
13,299.6
12,747.8
12,122.4
Second charge mortgages
116.1
154.5
206.3
Total Mortgage Lending
13,415.7
12,902.3
12,328.7
Finance lease receivables
19
995.6
907.3
825.2
Development finance
884.0
747.8
719.9
Other secured commercial lending
320.8
227.6
238.1
Other commercial loans
89.4
89.3
98.4
Total Commercial Lending
2,289.8
1,972.0
1,881.6
Loans to customers
15,705.5
14,874.3
14,210.3
Fair value adjustments from portfolio hedging
26
(75.2)
(379.3)
(559.9)
15,630.3
14,495.0
13,650.4
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 schemes
sponsored by the British Business Bank (‘BBB’) and other short term commercial balances.
The Group’s purchased loan portfolios are analysed below.
2024
2023
£m
£m
First mortgage loans
5.1
9.6
Consumer loans
36.0
49.0
Motor finance loans
-
0.2
41.1
58.8
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.
Page 222
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.
2024
2023
2022
£m
£m
£m
Pledged as collateral in respect of
Asset backed loan notes
2,108.7
1,529.5
2,099.8
Warehouse facilities
-
-
850.8
Central bank facilities
1,097.8
4,109.0
3,790.9
Total pledged as collateral
3,206.5
5,638.5
6,741.5
Prepositioned with Bank of England
6,571.3
2,568.7
2,675.5
Other first mortgage assets
3,521.8
4,540.6
2,705.4
Total first mortgage assets
13,299.6
12,747.8
12,122.4
No assets of other classes were pledged as collateral at 30 September 2024, 30 September 2023 or 30 September 2022.
19. Finance lease receivables
The Group’s finance leases can be analysed as shown below.
2024
2023
2022
£m
£m
£m
Motor finance
331.4
297.7
261.3
Asset finance
633.2
559.1
498.8
BBB sponsored schemes
31.0
50.5
65.1
Carrying value
995.6
907.3
825.2
The minimum lease payments due under these loan agreements are:
2024
2023
2022
£m
£m
£m
Amounts receivable
Within one year
279.4
318.5
284.7
Within one to two years
285.0
269.9
244.4
Within two to three years
255.4
218.7
189.5
Within three to four years
190.9
143.5
136.5
Within four to five years
104.8
67.1
60.5
After five years
104.1
60.2
46.2
1,219.6
1,077.9
961.8
Less: future finance income
(213.1)
(158.1)
(119.8)
Present value
1,006.5
919.8
842.0
The present values of those payments, net of provisions for impairment, carried in the accounts are:
2024
2023
2022
£m
£m
£m
Amounts receivable
Within one year
230.5
272.9
248.7
Within two to five years
690.5
597.0
554.0
After five years
85.5
49.9
39.3
Present value
1,006.5
919.8
842.0
Allowance for uncollectible amounts
(10.9)
(12.5)
(16.8)
Carrying value
995.6
907.3
825.2
Page 223
The Accounts
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 11.
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 models
were developed through the 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, including the use of receivers of rent in buy-to-let cases. 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 cost monitoring
practices and professional credit judgement. For each of these portfolios, minimum provision levels are set based on overall
performance for the asset class and the risk appetites informing underwriting processes.
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 (around 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, performed within the business and subject to a process of
challenge by the finance and credit risk functions.
Page 224
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 maintained the highest levels seen in some time, having reached this point with
unusual speed, putting financial pressure on businesses and households. Rates of inflation began the year at what were historically
relatively high levels and declined only slowly. 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 a rapidly developing economic situation is
likely to 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.
The methodologies used to derive the Group’s ECL provisions at 30 September 2024 are analysed below.
Gross
Impairment
Net
£m
£m
£m
30 September 2024
Modelled portfolios
14,418.7
(41.2)
14,377.5
Judgemental adjustments thereon
-
(5.0)
(5.0)
14,418.7
(46.2)
14,372.5
Non-modelled portfolios
1,363.3
(30.3)
1,333.0
Total
15,782.0
(76.5)
15,705.5
Gross
Impairment
Net
£m
£m
£m
30 September 2023
Modelled portfolios
13,825.4
(48.3)
13,777.1
Judgemental adjustments thereon
-
(6.5)
(6.5)
13,825.4
(54.8)
13,770.6
Non-modelled
1,122.5
(18.8)
1,103.7
Total
14,947.9
(73.6)
14,874.3
In addition to the judgemental adjustments to model outputs shown above, management have applied a £1.5m uplift to provision
floors in the development finance operation, reflecting specific economic risks to that business, meaning that total uplifts were
£6.5m (2023: £6.5m). The derivation of these adjustments is discussed further below.
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.
Loans will generally be considered to retain significantly increased credit risk for a period after the SICR trigger no longer remains.
Page 225
The Accounts
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 2024 or 30 September 2023, 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 the Group’s definitions of default for its various portfolios are materially aligned to the regulatory definitions
of default used internally, and are broadly aligned to its internal operational procedures, allowing for the arbitrary nature of the
90-day cut-off, which is a regulatory rather than an operational requirement. In particular the Group’s receiver of rent cases are
defined as defaulted for modelling purposes as the behaviour of the case after that point is significantly influenced by internal
management decisions.
iv)
Credit Impaired loans
IFRS 9 defines a credit impaired account as one where an account has suffered one or more events which have had a detrimental
effect on future cash flows. It is thus a backward-looking definition, rather than one based on future expectations.
Credit impaired assets are identified either through quantitative measures or by operational status. Designations of accounts
for regulatory capital purposes are also taken into account. Assets may also be assigned to Stage 3 if they are identified as credit
impaired as a result of management review processes.
All loans which are in the process of enforcement, from the point where this becomes the administration strategy, are classified as
credit impaired.
Loans are retained in Stage 3 for three months after the point where they cease to exhibit the characteristics of default. After this
point, they may move to Stage 2 or Stage 1 depending on whether an SICR trigger remains.
All default cases are considered to be credit impaired, including all receiver of rent cases and all cases with at least one payment more
than 90 days overdue, even where such cases are being managed in the expectation of realising all of the carrying balance.
In order to provide better information for users, additional analysis of credit impaired accounts has been presented 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.
Page 226
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 2024 a major update to the
Motor Finance PD model took place, meaning that three of the Group’s four principal PD models, covering over 99% of modelled
balances, have been updated since IFRS 9 was implemented.
The adoption of the new Motor Finance model has enabled the reporting process in the year to be more streamlined, supported
increased use of scenario analysis, and increased the ability of the model to respond to economic inputs and wider customer credit
data. It is also based on a greater volume of current data, as the Group only re-entered this market in 2014, four years before the
implementation date of the first generation PD model.
The impacts of the adoption of the new Motor Finance PD model in the year ended 30 September 2024 on a like-for-like basis were to
increase provision by £0.8m and transfer £6.5m of gross balances from Stage 1 to Stage 2.
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.
vii)
Judgemental adjustments
To ensure that the Group’s loan portfolios are properly provisioned, the Group considers factors that might impact on customers,
but which may either not be reflected by its provision processes, be only partially reflected or not be reflected sufficiently quickly.
These may include consideration of the likely impact of the broad economic environment, customer and market sentiment and expert
knowledge within the Group’s businesses.
In the year ended 30 September 2024 the most significant factors in these considerations were the extent to which uncertainties in
the UK economy arising from the rapidly rising interest rates, and increases in the cost of living and doing business in the UK seen in
recent periods, and the impacts of continuing world conflicts 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. These impacts were felt particularly in the Group’s development finance business where some projects priced before
recent rises in costs and interest rates came under stress in the period.
The divergence of the current economic environment from those experienced over much of recent history inevitably weakens the
ability of any experience-based model to predict credit performance accurately, and means that management have to consider
carefully the requirement for the mechanically generated provision to be adjusted.
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. Similarly where non-modelled books come under stress, methodologies may be adjusted to
ensure coverage is sufficient.
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 rates and sharp price rises 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.
Current model behaviours and the potential for unobserved credit issues have meant that the requirement for such adjustments
over recent periods has been significant, even given the work done to replace and enhance the Group’s first generation of IFRS 9
impairment models. Evidence considered by management in order to assess the size of the adjustments required 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.
A similar process was undertaken in respect of non-modelled books to ensure that specific issues and impacts were being identified,
and the minimum provisions set for each portfolio remained sufficient.
As part of these exercises, 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.
Page 227
The Accounts
The total amounts of judgemental adjustments provided across the Group are set out below by segment.
2024
2024
2023
2023
£m
£m
£m
£m
Mortgage Lending – modelled
3.0
3.0
Commercial Lending – modelled
2.0
3.5
Commercial Lending – non-modelled
1.5
-
3.5
3.5
6.5
6.5
The position at 30 September 2024 is broadly similar to that at 30 September 2023, representing the extent to which the concerns
over future customer performance and the potential for future economic headwinds which gave rise to the original adjustments
remain in place. While some adverse trends in performance have been noted in the portfolios, these have been offset, to some extent,
by the impact of forecast downward trends in future inflation and interest rates in the scenarios underlying the impairment models.
Within the overall position, there has been some movement on individual books, with the solid performance of the SME asset finance
book reducing the need for overlay, while the conditions faced by developers in the current economic situation generated a need for
additional overlay.
The adjustment in the Mortgage Lending book at the previous year end had represented the level to which the credit metrics and
other model inputs did not produce a result for the buy-to-let portfolio which accorded with the credit expectations of management,
brokers and customers, particularly in respect of legacy assets. While there has been some upward movement in arrears metrics,
both for the Group and the buy-to-let market more generally, and some long standing cases have been resolved, future expectations
remain broadly in line with those twelve months earlier. In response to these factors, management decided that it was appropriate to
maintain the level of overlay at 30 September 2024.
The Group’s SME lending portfolio performed generally strongly in the period, with a consequent impact on the calculated provision.
However, a level of caution remains as to the broader outlook for UK SMEs in the current economic climate, and there remain
concerns as to the effectiveness of the Group’s provisioning model in a high interest rate environment. On this basis the judgemental
adjustment has been reduced to £1.0m for the current year (2023: £2.5m).
For the motor finance portfolio, the £1.0m overlay to the modelled provision, first included at 30 September 2023, has been
maintained (2023: £1.0m). While early indications show the second generation model to be more effective at identifying credit risk
cases, the data it is built on still includes little information corresponding to a period of falling inflation rapidly following a period of
sharp price rises. Therefore the overlay has been retained to ensure provision in that book remains reasonable overall, considering
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 on modelled balances 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.
Within the development finance book, performance deteriorated in the year, impacted by increased materials and labour costs and
higher interest rates, particularly on projects approved and costed before these became likely. In response, as well as focussed
reviews on individual cases, the Group determined that the minimum provision for all cases should be uplifted from normal levels,
generating an additional provision of £1.5m, focussed on older cases (2023: £nil).
The Group will continue to monitor the requirement for all 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 228
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.
An analysis of the Group’s loan portfolios between the stages defined above is set out below.
Stage 1
Stage 2*
Stage 3*
POCI
Total
£m
£m
£m
£m
£m
30 September 2024
Gross loan book
Mortgage Lending
12,670.3
598.9
171.1
10.7
13,451.0
Commercial Lending
2,034.9
177.2
112.5
6.4
2,331.0
Total
14,705.2
776.1
283.6
17.1
15,782.0
Impairment provision
Mortgage Lending
(3.4)
(2.2)
(29.7)
-
(35.3)
Commercial Lending
(12.6)
(5.0)
(21.1)
(2.5)
(41.2)
Total
(16.0)
(7.2)
(50.8)
(2.5)
(76.5)
Net loan book
Mortgage Lending
12,666.9
596.7
141.4
10.7
13,415.7
Commercial Lending
2,022.3
172.2
91.4
3.9
2,289.8
Total
14,689.2
768.9
232.8
14.6
15,705.5
Coverage ratio
Mortgage Lending
0.03%
0.37%
17.36%
-
0.26%
Commercial Lending
0.62%
2.82%
18.76%
39.06%
1.77%
Total
0.11%
0.93%
17.91%
14.62%
0.48%
* Stage 2 and 3 balances are analysed in more detail below.
Page 229
The Accounts
Stage 1
Stage 2*
Stage 3*
POCI
Total
£m
£m
£m
£m
£m
30 September 2023
Gross loan book
Mortgage Lending
12,159.7
625.0
142.2
17.7
12,944.6
Commercial Lending
1,812.6
119.8
63.8
7.1
2,003.3
Total
13,972.3
744.8
206.0
24.8
14,947.9
Impairment provision
Mortgage Lending
(4.8)
(6.1)
(31.4)
-
(42.3)
Commercial Lending
(14.8)
(3.3)
(8.4)
(4.8)
(31.3)
Total
(19.6)
(9.4)
(39.8)
(4.8)
(73.6)
Net loan book
Mortgage Lending
12,154.9
618.9
110.8
17.7
12,902.3
Commercial Lending
1,797.8
116.5
55.4
2.3
1,972.0
Total
13,952.7
735.4
166.2
20.0
14,874.3
Coverage ratio
Mortgage Lending
0.04%
0.98%
22.08%
-
0.33%
Commercial Lending
0.82%
2.75%
13.17%
67.61%
1.56%
Total
0.14%
1.26%
19.32%
19.35%
0.49%
* Stage 2 and 3 balances are analysed in more detail below.
Finance leases included above, analysed by staging, were:
Stage 1
Stage 2
Stage 3
POCI
Total
£m
£m
£m
£m
£m
30 September 2024
Gross loan book
958.1
40.7
7.7
-
1,006.5
Impairment provision
(4.9)
(2.8)
(3.2)
-
(10.9)
Net loan book
953.2
37.9
4.5
-
995.6
Coverage Ratio
0.51%
6.88%
41.56%
-
1.08%
30 September 2023
Gross loan book
873.0
40.6
6.0
0.2
919.8
Impairment provision
(8.0)
(1.9)
(2.6)
-
(12.5)
Net loan book
865.0
38.7
3.4
0.2
907.3
Coverage Ratio
0.92%
4.68%
43.33%
-
1.36%
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 secured 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.
Page 230
Acquired portfolios of second charge mortgage assets 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. These balances continue to reduce as customers make payments.
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 at which a payment is one day past due until it is thirty days past due.
The value of Stage 2 loans in the mortgage segment has declined somewhat in the year as a result of more benign economic
conditions. This has resulted in fewer cases of accounts between one and three months in arrears, with older Stage 2 cases either
curing or passing to Stage 3 and a lower incidence of new arrears in the year. The most significant part of the Stage 2 balance remains
cases identified through their PD scores, although the size of this balance remained stable in the period.
Both provision coverage levels for Stage 2 Mortgage Lending cases, and the absolute level of provision have reduced in the period.
This is partly a result of the reduction in current arrears cases, which tend to attract the highest provision relatively, but is also an
effect of the slow, but continuing growth in house prices, and therefore security values, in the period. The coverage levels have also
been reduced as a result of some long standing, high provision cases having moved though to Stage 3, and in some cases realisation,
in the year.
For Commercial Lending cases values of Stage 2 accounts have increased significantly, with the most marked growth in the
non-arrears cases. This includes the Stage 2 element of the development finance book, which accounted for almost all of the growth,
reflecting the additional scrutiny applied in what has been a difficult period for the construction industry. The trend for Stage 2 arrears
cases in the period was largely positive, reflecting the more stable economic environment.
Stage 2 coverage has increased slightly in the Commercial Lending segment. While the high theoretical levels of real estate security
available in the development finance business tend to reduce potential impairment calculated, the uplift in minimum provision applied
in response to the issues seen in the business in the year, described above, has enhanced coverage levels. This has caused an
increased coverage on non-arrears accounts. Coverage on the relatively low number of Stage 2 arrears cases in the segment tends to
be idiosyncratic, based on the nature of security available on each of the cases included.
< 1 month
arrears
Recent
arrears
> 1 <= 3 months
arrears
Total
£m
£m
£m
£m
30 September 2024
Gross loan book
Mortgage Lending
521.8
13.5
63.6
598.9
Commercial Lending
171.9
2.7
2.6
177.2
Total
693.7
16.2
66.2
776.1
Impairment provision
Mortgage Lending
(1.7)
-
(0.5)
(2.2)
Commercial Lending
(4.5)
(0.1)
(0.4)
(5.0)
Total
(6.2)
(0.1)
(0.9)
(7.2)
Net loan book
Mortgage Lending
520.1
13.5
63.1
596.7
Commercial Lending
167.4
2.6
2.2
172.2
Total
687.5
16.1
65.3
768.9
Coverage ratio
Mortgage Lending
0.33%
-
0.79%
0.37%
Commercial Lending
2.62%
3.70%
15.38%
2.82%
Total
0.89%
0.62%
1.36%
0.93%
Page 231
The Accounts
< 1 month
arrears
Recent
arrears
> 1 <= 3 months
arrears
Total
£m
£m
£m
£m
30 September 2023
Gross loan book
Mortgage Lending
518.1
15.8
91.1
625.0
Commercial Lending
116.3
0.4
3.1
119.8
Total
634.4
16.2
94.2
744.8
Impairment provision
Mortgage Lending
(2.3)
(0.1)
(3.7)
(6.1)
Commercial Lending
(2.9)
-
(0.4)
(3.3)
Total
(5.2)
(0.1)
(4.1)
(9.4)
Net loan book
Mortgage Lending
515.8
15.7
87.4
618.9
Commercial Lending
113.4
0.4
2.7
116.5
Total
629.2
16.1
90.1
735.4
Coverage ratio
Mortgage Lending
0.44%
0.63%
4.06%
0.98%
Commercial Lending
2.49%
-
12.90%
2.75%
Total
0.82%
0.62%
4.35%
1.26%
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’). This category includes accounts identified as defaults
using non-arrears based unlikeliness to pay (‘UTP’) indicators
• 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 value of Stage 3 cases has increased in the period, as cases impacted by the economic issues of recent years continue to make
their way through the system. Increases have been registered across almost all categories, although the receiver of rent book in the
Mortgage Lending segment continues to reduce as older cases are worked out.
While the incidence of new receivership arrangements in the year has increased, these have generally moved to sale more quickly,
based on the positive property market in the year, accounting for the increased number shown in the realisations column. However,
the Group continues to use the receivership process to ensure good outcomes for its landlord customers, their tenants and itself and,
where appropriate, will manage these accounts on a longer-term basis.
Stage 3 coverage levels in the Mortgage Lending segment are a little reduced, a result of increasing property values in the period
providing enhanced security and also of the crystallisation of losses on some older, heavily provided, receivership cases.
Page 232
The growth in Stage 3 cases in the Commercial Lending division is attributable largely to a number of cases in the development
finance business impacted by issues in the UK building sector over recent periods. These appear in the ‘>3 month arrears’ column.
While such cases enjoy security over the development funded, the Group has taken a careful approach to estimating recoverable
values, especially where the security may comprise an unfinished structure. This has also driven a growth in provision coverage in the
period for the segment.
Probation
> 3 month arrears
RoR managed
Realisations
Total
£m
£m
£m
£m
£m
30 September 2024
Gross loan book
Mortgage Lending
10.3
44.6
45.2
71.0
171.1
Commercial Lending
0.4
105.0
-
7.1
112.5
Total
10.7
149.6
45.2
78.1
283.6
Impairment provision
Mortgage Lending
-
(0.7)
(11.2)
(17.8)
(29.7)
Commercial Lending
(0.1)
(17.7)
-
(3.3)
(21.1)
Total
(0.1)
(18.4)
(11.2)
(21.1)
(50.8)
Net loan book
Mortgage Lending
10.3
43.9
34.0
53.2
141.4
Commercial Lending
0.3
87.3
-
3.8
91.4
Total
10.6
131.2
34.0
57.0
232.8
Coverage ratio
Mortgage Lending
-
1.57%
24.78%
25.07%
17.36%
Commercial Lending
25.00%
16.86%
-
46.48%
18.76%
Total
0.93%
12.30%
24.78%
27.02%
17.91%
Probation
> 3 month arrears
RoR managed
Realisations
Total
£m
£m
£m
£m
£m
30 September 2023
Gross loan book
Mortgage Lending
8.8
40.4
50.3
42.7
142.2
Commercial Lending
1.1
57.8
-
4.9
63.8
Total
9.9
98.2
50.3
47.6
206.0
Impairment provision
Mortgage Lending
-
(1.2)
(16.6)
(13.6)
(31.4)
Commercial Lending
(0.3)
(5.5)
-
(2.6)
(8.4)
Total
(0.3)
(6.7)
(16.6)
(16.2)
(39.8)
Net loan book
Mortgage Lending
8.8
39.2
33.7
29.1
110.8
Commercial Lending
0.8
52.3
-
2.3
55.4
Total
9.6
91.5
33.7
31.4
166.2
Coverage ratio
Mortgage Lending
-
2.97%
33.00%
31.85%
22.08%
Commercial Lending
27.27%
9.52%
-
53.06%
13.17%
Total
3.03%
6.82%
33.00%
34.03%
19.32%
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.
2024
2023
£m
£m
First mortgages
119.1
89.5
Second mortgages
8.0
10.2
Asset finance
1.9
1.6
Motor finance
1.2
1.2
130.2
102.5
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.
While legacy cases continued to be resolved in the period, economic pressures have led to an increasing number of new receiver of
rent appointments in the year, including some larger portfolio cases. These overwhelmingly relate to legacy cases advanced before
2009 and will therefore have a long rental history, with tenants in place in many cases.
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.
30 September 2024
30 September 2023
No.
£m
No.
£m
Managed accounts
Appointment date
2010 and earlier
94
14.6
135
20.1
2011 to 2015
16
2.2
31
4.5
2016 to 2020
6
0.8
15
2.0
2021 and later
167
27.6
154
23.7
Total managed accounts
283
45.2
335
50.3
Accounts in the process of realisation
356
57.6
225
41.0
639
102.8
560
91.3
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
(2023: four), meaning that the Group’s total of receiver of rent cases at 30 September 2024 was 643 (2023: 564).
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.
Mortgage
Lending
Commercial
Lending
Total
£m
£m
£m
At 30 September 2023
42.3
31.3
73.6
Provided in period (note 11)
6.0
20.4
26.4
Amounts written off
(13.0)
(10.5)
(23.5)
At 30 September 2024 (note 22)
35.3
41.2
76.5
At 30 September 2022
38.0
25.5
63.5
Provided in period (note 11)
10.8
8.3
19.1
Amounts written off
(6.5)
(2.5)
(9.0)
At 30 September 2023 (note 22)
42.3
31.3
73.6
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 2024, enforceable contractual balances of £15.3m (2023: £7.6m) were outstanding on non-POCI assets written off in
the period. This excludes those accounts where a full and final settlement was agreed and those where the contractual terms do not
permit any further action. Enforceable balances are kept under review for operational purposes, but no amounts are recognised in
respect of such accounts unless further cash is received or there is a strong expectation that it will be.
A more detailed analysis of these movements by IFRS 9 stage on a consolidated basis for the years ended 30 September 2024 and
30 September 2023 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.
Page 235
The Accounts
Stage 1
Stage 2
Stage 3
POCI
Total
£m
£m
£m
£m
£m
Loss allowance at 30 September 2023
19.6
9.4
39.8
4.8
73.6
New assets originated
6.5
-
-
-
6.5
Changes in loss allowance
Transfer to Stage 1
2.0
(1.8)
(0.2)
-
-
Transfer to Stage 2
(2.2)
3.0
(0.8)
-
-
Transfer to Stage 3
(0.2)
(4.5)
4.7
-
-
Changes on stage transfer
(1.6)
2.4
26.4
-
27.2
Changes due to credit risk
(8.1)
(1.3)
4.4
(2.3)
(7.3)
Write offs
-
-
(23.5)
-
(23.5)
Loss allowance at 30 September 2024
16.0
7.2
50.8
2.5
76.5
Loss allowance at 30 September 2022
25.5
8.0
28.5
1.5
63.5
New assets originated
9.5
-
-
-
9.5
Changes in loss allowance
Transfer to Stage 1
2.8
(2.7)
(0.1)
-
-
Transfer to Stage 2
(1.7)
2.0
(0.3)
-
-
Transfer to Stage 3
(0.2)
(1.9)
2.1
-
-
Changes on stage transfer
(2.5)
2.3
14.6
-
14.4
Changes due to credit risk
(13.8)
1.7
4.0
3.3
(4.8)
Write offs
-
-
(9.0)
-
(9.0)
Loss allowance at 30 September 2023
19.6
9.4
39.8
4.8
73.6
During the year ended 30 September 2024, provision levels remained broadly stable overall, although the generally more benign
economic climate and increased confidence in the UK saw provision in Stages 1 and 2 falling, compensated by an increase in Stage 3
provision as problem cases moved through the credit cycle, but were not generally replaced by new arrears accounts at the same rate.
Provision levels on secured lending tended to decline, especially for loans secured on property, with prices in most areas growing in
the year. However, a number of problem cases in development finance saw an increased level of provision being booked, as issues
with project progress and financing emerged in the year, with these changes being recognised in the Stage 3 movements.
The level of write-offs in the year was higher than in the previous period as some long-term cases were finally resolved and the related
provision applied.
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 in that year included 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.
Page 236
The movements in the Loans to Customers balances in respect of which these loss allowances have been made are set out below.
Stage 1
Stage 2
Stage 3
POCI
Total
£m
£m
£m
£m
£m
Balance at 30 September 2023
13,972.3
744.8
206.0
24.8
14,947.9
New assets originated
2,757.4
-
-
-
2,757.4
Changes in staging
Transfer to Stage 1
329.3
(325.9)
(3.4)
-
-
Transfer to Stage 2
(566.5)
585.2
(18.7)
-
-
Transfer to Stage 3
(38.1)
(137.6)
175.7
-
-
Redemptions and repayments
(2,558.0)
(137.2)
(76.0)
(11.0)
(2,782.2)
Write offs
-
-
(23.5)
-
(23.5)
Other changes
808.8
46.8
23.5
3.3
882.4
Balance at 30 September 2024
14,705.2
776.1
283.6
17.1
15,782.0
Loss allowance
(16.0)
(7.2)
(50.8)
(2.5)
(76.5)
Carrying value
14,689.2
768.9
232.8
14.6
15,705.5
Balance at 30 September 2022
12,157.0
1,963.6
124.4
28.8
14,273.8
New assets originated or purchased
3,128.4
-
-
-
3,128.4
Changes in staging
Transfer to Stage 1
1,258.9
(1,255.7)
(3.2)
-
-
Transfer to Stage 2
(365.6)
372.9
(7.3)
-
-
Transfer to Stage 3
(28.9)
(104.7)
133.6
-
-
Redemptions and repayments
(2,773.3)
(250.6)
(44.8)
(10.5)
(3,079.2)
Write offs
-
-
(9.0)
-
(9.0)
Other changes
595.8
19.3
12.3
6.5
633.9
Balance at 30 September 2023
13,972.3
744.8
206.0
24.8
14,947.9
Loss allowance
(19.6)
(9.4)
(39.8)
(4.8)
(73.6)
Carrying value
13,952.7
735.4
166.2
20.0
14,874.3
Other changes includes interest and similar charges.
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 internally 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 and industry
sources. 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 2024 forecasting
cycle (the ‘October forecast’), the Group has adopted a central economic scenario derived using a broadly equivalent approach to that
used in September 2023, with the starting point of the scenario updated to reflect the actual movements of economic variables in
the year.
The general trend of the Group’s central forecast follows that published by the Bank of England in August 2024. This reflects the recent
easing of monetary policy and recovering growth. Unemployment remains low, but trends upwards through the forecast period, inflation
is generally stable and bank rates continue to fall. House prices, which have been more resilient than many had forecast, continue to
increase modestly.
Page 237
The Accounts
Compared with the central forecast adopted at 30 September 2023, this is rather more optimistic, with unemployment and interest rates
at lower levels and a more positive outlook for house prices in the short term. However, GDP and inflation remain on a similar trajectory.
The scenario also begins from the actual September 2024 position, so that variances against the 2023 scenarios in the year are reflected,
with house prices at 30 September 2024, especially, starting the forecast period at a higher level than previously modelled.
The upside and downside scenarios are derived from the central forecast, as they have been in previous periods. The shape of the curves
representing all three scenarios are similar across the forecast period, but the upside scenario assumes inflation falling more rapidly,
driving faster growth and enabling the Bank of England to cut the base rate further and faster than in the base case, while house prices
recover more strongly. Conversely, the downside case represents increased pressure on CPI, leading to current levels of base rates
persisting for longer, with reduced economic confidence impacting on both house price growth and unemployment levels.
The severe scenario has been derived from the most recent Annual Cyclical Scenario (‘ACS’) published by the Bank of England, as in
recent periods. The supply shock scenario included in the ACS published in July 2024 forms the basis for the Group’s scenario and
includes persistently high interest rates, causing a pronounced recession impacting on growth and employment levels, with a significant
fall 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.
The forecast levels of house price inflation, the economic variable which has the most significant impact on the size of the Group’s
impairment provision, are also shown.
Historical and forecast unemployment rates (End point measure)
As at September 2024
0.0%
2021 -
2023 FY
2024 -
2025 FY
2025 -
2026 FY
2026 -
2027 FY
2027 -
2028 FY
2028 -
2029 FY
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Downside
Central
Upside
Severe
Reporting date
End of forecast period used for modelling
Historical and forecast unemployment rates (End point measure)
As at September 2023
0.0%
2021 -
2023 FY
2023 -
2024 FY
2024 -
2025 FY
2025 -
2026 FY
2026 -
2027 FY
2027 -
2028 FY
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Downside
Central
Upside
Severe
Reporting date
End of forecast period used for modelling
Page 238
Historical and forecast HPI rates (Annual Change)
As at September 2024
-0.20%
2021 -
2023 FY
2023 -
2024 FY
2024 -
2025 FY
2025 -
2026 FY
2026 -
2027 FY
2027 -
2028 FY
-0.15%
-0.10%
-0.05%
-
0.05%
0.10%
Downside
Central
Upside
Severe
Reporting date
End of forecast period used for modelling
Historical and forecast HPI rates (Annual Change)
As at September 2023
-0.20%
2021 -
2023 FY
2023 -
2024 FY
2024 -
2025 FY
2025 -
2026 FY
2026 -
2027 FY
2027 -
2028 FY
-0.15%
-0.10%
-0.05%
-
0.05%
0.10%
Downside
Central
Upside
Severe
Reporting date
End of forecast period used for modelling
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 adjust the scenario weightings used at 30 September 2024.
The consensus view for the UK economic outlook is both more settled and more benign than it was at 30 September 2023, however,
the potential for significant downside impacts from geopolitical factors, including conflicts in Eastern Europe and the Middle East,
remains. The emerging policies of the new UK Government and the outcome of November’s US elections are both likely to impact
economic sentiment, to the extent of producing substantially different outcomes.
Balancing these factors the Group determined that this was an appropriate point to begin to move back towards a more normal set
of economic weightings, closer to those seen in the early years of IFRS 9, before the impacts of Brexit and Covid. As a first step, the
impact of the severe scenario has been reduced in the weightings set out below.
Sensitivities comparing the effect of these weightings with those adopted in the previous year and those which might be seen in a
more normal economic environment are set out in note 25.
2024
2023
Central scenario
45%
40%
Upside scenario
10%
10%
Downside scenario
30%
30%
Severe scenario
15%
20%
100%
100%
Page 239
The Accounts
The Group’s economic scenarios comprise seven variables based on standard publicly available metrics for the UK. These variables are:
• Year-on-year change in Gross Domestic Product (‘GDP’) as measured by the Office of National Statistics (‘ONS’)
• Year-on-year change in the House Price Index (‘HPI’) as measured by the Nationwide Building Society
• Bank Base Rate (‘BBR’), as set by the Bank of England
• Consumer Price Inflation (‘CPI’) rate, as measured by the ONS
• Unemployment rate, as measured by the ONS
• Annual change in secured lending, as measured by the Bank of England ‘mortgage advances’ data series
• Annual change in consumer credit, as measured by the Bank of England ‘unsecured advances’ data series
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 2024
GDP (year-on-year change)
2025
2026
2027
2028
2029
Central scenario
1.4%
1.2%
1.6%
1.6%
1.6%
Upside scenario
2.9%
2.4%
2.3%
1.7%
1.6%
Downside scenario
0.5%
0.5%
1.3%
1.6%
1.6%
Severe scenario
(0.5)%
(3.1)%
(0.1)%
1.9%
1.8%
HPI (year-on-year change)
2025
2026
2027
2028
2029
Central scenario
-
2.3%
4.4%
3.2%
2.4%
Upside scenario
2.7%
4.6%
5.0%
4.5%
3.4%
Downside scenario
(2.4)%
0.5%
4.0%
2.6%
1.7%
Severe scenario
(1.9)%
(11.0)%
(14.6)%
-
6.5%
BBR (rate)
2025
2026
2027
2028
2029
Central scenario
4.3%
3.6%
3.4%
3.3%
3.3%
Upside scenario
4.1%
3.2%
3.0%
3.0%
3.0%
Downside scenario
5.0%
5.0%
4.6%
3.7%
3.5%
Severe scenario
7.1%
8.8%
6.3%
4.3%
3.5%
CPI (rate)
2025
2026
2027
2028
2029
Central scenario
2.6%
1.9%
1.5%
1.7%
2.0%
Upside scenario
2.1%
1.9%
2.0%
2.0%
2.0%
Downside scenario
2.5%
2.5%
2.3%
1.9%
2.0%
Severe scenario
4.7%
11.9%
4.7%
2.1%
2.0%
Page 240
Unemployment (rate)
2025
2026
2027
2028
2029
Central scenario
4.5%
4.8%
4.7%
4.2%
4.0%
Upside scenario
4.1%
4.4%
4.3%
3.9%
3.6%
Downside scenario
4.9%
5.6%
5.8%
5.3%
4.5%
Severe scenario
5.0%
7.5%
8.4%
7.8%
7.1%
Secured lending (annual change)
2025
2026
2027
2028
2029
Central scenario
0.3%
1.8%
3.0%
3.0%
3.0%
Upside scenario
1.3%
2.8%
3.3%
3.0%
3.0%
Downside scenario
(0.5)%
1.0%
2.8%
3.0%
3.0%
Severe scenario
(1.8)%
(0.3)%
2.5%
3.0%
3.0%
Consumer credit (annual change)
2025
2026
2027
2028
2029
Central scenario
6.8%
5.1%
4.8%
5.0%
5.0%
Upside scenario
7.5%
5.9%
5.0%
5.0%
5.0%
Downside scenario
5.8%
4.1%
4.6%
5.0%
5.0%
Severe scenario
4.3%
2.6%
4.2%
5.0%
5.0%
30 September 2023
GDP (year-on-year change)
2024
2025
2026
2027
2028
Central scenario
0.4%
0.9%
1.0%
1.2%
1.2%
Upside scenario
1.6%
1.4%
1.0%
1.2%
1.2%
Downside scenario
(0.4)%
0.7%
1.0%
1.2%
1.2%
Severe scenario
(3.6)%
(0.2)%
1.2%
1.2%
1.2%
HPI (year-on-year change)
2024
2025
2026
2027
2028
Central scenario
(6.4)%
(1.7)%
4.7%
4.4%
3.2%
Upside scenario
(1.1)%
5.8%
6.8%
5.0%
4.5%
Downside scenario
(10.7)%
(2.2)%
4.0%
4.0%
2.6%
Severe scenario
(13.1)%
(15.1)%
-
7.0%
5.6%
BBR (rate)
2024
2025
2026
2027
2028
Central scenario
5.5%
5.4%
4.8%
4.4%
4.1%
Upside scenario
5.2%
4.4%
3.7%
3.5%
3.5%
Downside scenario
5.6%
3.8%
2.6%
2.0%
2.0%
Severe scenario
6.0%
5.8%
5.1%
4.3%
3.4%
Page 241
The Accounts
CPI (rate)
2024
2025
2026
2027
2028
Central scenario
4.4%
2.6%
1.6%
1.8%
2.0%
Upside scenario
3.7%
2.1%
2.1%
2.0%
2.1%
Downside scenario
4.5%
1.0%
0.7%
1.8%
2.0%
Severe scenario
15.7%
12.8%
3.7%
2.4%
2.1%
Unemployment (rate)
2024
2025
2026
2027
2028
Central scenario
4.8%
5.6%
6.0%
5.6%
4.9%
Upside scenario
4.3%
4.6%
4.8%
4.4%
3.9%
Downside scenario
5.3%
6.4%
6.7%
6.1%
5.4%
Severe scenario
6.9%
8.4%
7.8%
7.2%
6.6%
Secured lending (annual change)
2024
2025
2026
2027
2028
Central scenario
0.8%
0.3%
1.8%
3.0%
3.0%
Upside scenario
1.5%
1.0%
2.5%
3.2%
3.0%
Downside scenario
-
(0.5)%
1.0%
2.8%
3.0%
Severe scenario
(1.3)%
(1.8)%
(0.3)%
2.5%
3.0%
Consumer credit (annual change)
2024
2025
2026
2027
2028
Central scenario
3.5%
2.3%
3.9%
4.9%
5.0%
Upside scenario
4.3%
3.0%
4.7%
5.1%
5.0%
Downside scenario
2.8%
1.5%
3.2%
4.8%
5.0%
Severe scenario
1.5%
0.3%
1.9%
4.4%
5.0%
After the end of the initial five year period, the final rate or rate of change (as appropriate) is assumed to continue into the future in
each scenario.
Page 242
To illustrate the levels of non-linearity in the various scenarios, the maximum and minimum quarterly levels for each variable over the
five year period commencing on the balance sheet date are set out below.
30 September 2024
Central scenario
Upside scenario
Downside scenario
Severe scenario
Max
Min
Max
Min
Max
Min
Max
Min
%
%
%
%
%
%
%
%
Economic driver
GDP
2.0
1.0
3.0
1.6
1.6
(0.3)
1.9
(3.7)
HPI
4.4
(1.3)
5.1
1.7
4.0
(4.6)
6.9
(15.9)
BBR
4.5
3.3
4.5
3.0
5.0
3.5
9.0
3.5
CPI
2.7
1.5
2.2
1.7
2.7
1.7
12.3
1.9
Unemployment
4.8
4.0
4.4
3.6
5.8
4.2
8.5
4.3
Secured lending
3.0
-
4.0
1.0
3.0
(0.8)
3.0
(2.0)
Consumer credit
7.0
4.5
7.8
4.8
6.0
3.5
5.0
2.0
30 September 2023
Central scenario
Upside scenario
Downside scenario
Severe scenario
Max
Min
Max
Min
Max
Min
Max
Min
%
%
%
%
%
%
%
%
Economic driver
GDP
1.2
0.3
2.3
0.9
1.2
(0.8)
1.2
(5.0)
HPI
4.4
(8.2)
7.4
(3.1)
4.1
(13.4)
7.2
(16.4)
BBR
5.5
4.0
5.3
3.5
5.8
2.0
6.0
3.3
CPI
5.0
1.5
4.3
1.8
6.0
0.4
17.0
2.0
Unemployment
6.0
4.5
4.8
3.8
7.0
5.0
8.5
5.2
Secured lending
3.0
-
3.8
0.8
3.0
(0.8)
3.0
(2.0)
Consumer credit
5.0
2.0
5.8
2.8
5.0
1.3
5.0
-
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.
2024
2023
£m
£m
Provision using central scenario 100% weighted
Mortgage Lending
31.6
38.4
Commercial Lending
39.7
29.0
71.3
67.4
Calculated impairment provision
76.5
73.6
Effect of multiple economic scenarios
5.2
6.2
Page 243
The Accounts
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
2024
2023
Provision
Difference
Provision
Difference
£m
£m
£m
£m
Central
71.3
(5.2)
67.4
(6.2)
Upside
68.0
(8.5)
59.0
(14.6)
Downside
76.8
0.3
73.4
(0.2)
Severe
100.4
23.9
95.7
22.1
The weighted average of these 100% weighted provisions need not equal the weighted average ECL due to the impact of the differing
PDs on staging.
Scenario weightings
In order to illustrate the impact of scenario weightings on the outcomes, the impairment provision requirements were sensitised using
alternative weightings. Sensitivity A is based on the weightings used at IFRS 9 transition on 1 October 2018. The use of the
2018 weighting is intended to represent a more settled outlook than has been evident at any of the most recent year ends. Sensitivity
B is based on the weightings used at the previous year end, to demonstrate the impact of the adoption of the new weightings.
The weightings used, and the results of applying these sensitivities to the 30 September 2024 scenarios are set out below.
Weighting
Impairment
Difference
Central
Upside
Downside
Severe
£m
£m
As reported
45%
10%
30%
15%
76.5
-
Sensitivity A
40%
30%
25%
5%
72.9
(3.6)
Sensitivity B
40%
10%
30%
20%
77.8
1.3
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 £44.4m would transfer from Stage 1 to Stage 2 (2023: £68.4m), and the total provision would increase
by £0.3m 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 (2023: £0.8m).
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 £0.5m (2023: £0.7m).
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 £0.4m (2023: £0.1m).
Page 244
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 assets or 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.
While the Group utilises economic hedging strategies to mitigate the impact of the changes in market interest rates on its capital
base, these activities do not give rise to accounting entries.
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.
2024
2024
2023
2023
Assets
Liabilities
Assets
Liabilities
£m
£m
£m
£m
Derivatives in hedge accounting relationships
Fair value portfolio hedges
Interest rate swaps
Fixed to floating
216.3
(44.7)
519.0
(5.1)
Floating to fixed
123.8
(1.7)
76.2
(27.0)
Total derivatives in portfolio fair value hedging relationships
340.1
(46.4)
595.2
(32.1)
Individual fair value hedges
Fixed to floating
5.9
(8.4)
-
-
Floating to fixed
0.3
-
-
(3.7)
Total derivatives in hedge accounting relationships
346.3
(54.8)
595.2
(35.8)
Other derivatives
Interest rate swaps
45.5
(44.9)
20.2
(4.1)
Currency futures
-
-
-
-
Total recognised derivative assets / (liabilities)
391.8
(99.7)
615.4
(39.9)
The credit risk inherent in the derivative financial assets shown above is discussed in note 63.
Page 245
The Accounts
The balances held on the Group’s balance sheet relating to the hedging of interest rate risk on its fixed rate customer loan and deposit
balances are summarised below.
Note
2024
2023
£m
£m
Derivative financial instruments
Assets
391.8
615.4
Liabilities
(99.7)
(39.9)
292.1
575.5
Fair value hedging adjustments
On loans to customers
18
(75.2)
(379.3)
On investment securities
17
7.7
-
On retail deposits
33
(16.7)
30.9
On borrowings
(0.3)
3.7
(84.5)
(344.7)
Net balance sheet position
207.6
230.8
Collateral balances
Posted (in sundry assets)
27
-
-
Received (in sundry liabilities)
40
(103.6)
(383.4)
(103.6)
(383.4)
(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 the Group has continued to hedge interest rate risk on fixed rate CBILS and BBLS exposures using SONIA-linked
balance guaranteed swaps, which are included in the loan hedge.
Page 246
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.
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 2024 and 30 September 2023 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.
Page 247
The Accounts
The principal terms of the hedging instruments are set out below, analysed between the two directions of the swap.
2024
2023
Deposit Hedge
Loan Hedge
Deposit Hedge
Loan Hedge
Average fixed notional interest rate
4.73%
2.53%
4.22%
1.77%
Average notional margin over SONIA
-
-
-
-
£m
£m
£m
£m
Notional principal value
SONIA BGS
-
17.7
-
31.6
Other SONIA swaps
6,119.2
8,081.2
6,257.0
7,781.8
6,119.2
8,098.9
6,257.0
7,813.4
Maturing
Within one year
4,942.2
1,234.1
5,253.5
1,616.3
Between one and two years
1,097.0
1,930.7
857.5
1,238.0
Between two and five years
80.0
4,916.4
146.0
4,959.1
More than five years
-
17.7
-
-
6,119.2
8,098.9
6,257.0
7,813.4
Fair value
122.1
171.6
49.2
513.9
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 changes in the levels of hedging shown above arise from the growth in the Group’s loan book and the decline in the fixed rate
deposit book in the year. 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 248
Accounting impacts
Movements affecting the portfolio fair value hedges during the year are set out below.
2024
2023
Deposit hedge
Loan hedge
Deposit hedge
Loan hedge
£m
£m
£m
£m
Hedging instruments
Interest rate swaps
Included in derivative financial assets
123.8
216.3
76.2
519.0
Included in derivative financial liabilities
(1.7)
(44.7)
(27.0)
(5.1)
122.1
171.6
49.2
513.9
Notional principal value
6,119.2
8,098.9
6,257.0
7,813.4
Change in fair value used in calculating hedge ineffectiveness
48.7
(339.6)
77.7
(262.2)
2024
2023
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
5,568.6
-
5,758.1
-
Fixed rate loans
Monetary amount of risk relating to Loans to Customers
-
8,135.2
-
8,043.5
Accumulated amount of fair value hedge adjustments included on balance
sheet (notes 33 and 18)*
(16.7)
(75.2)
30.9
(379.3)
Of which: amounts related to discontinued hedging relationships
being amortised
(0.6)
73.4
(4.3)
108.2
Change in fair value used in recognising hedge ineffectiveness
(41.4)
336.5
(69.9)
238.5
Hedge ineffectiveness recognised
Included in fair value gains / (losses) in the profit and loss account (note 12)
7.3
(3.1)
7.8
(23.7)
*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 and its
investments in fixed rate securities. The structure of these borrowings and investments exposes the Group to interest rate risk, in the
event of an adverse movement in market interest rates and it hedges against such movements.
In each case 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 or investment. The terms of the fixed rate leg of the derivative match the terms of the borrowing or
investment as far as possible and each hedging relationship was designated at the point at which the swap contract was entered into.
Each 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 249
The Accounts
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 derivatives used in the Group’s individual fair value hedges are sterling denominated interest rate swaps, with a single
derivative used to hedge each individual asset or liability. Settlement is twice yearly, on the same days as payments for the associated
hedged item fall due. For derivatives hedging liabilities, payments received by the Group are calculated based on a fixed rate of
interest, while payments made are calculated based on a floating interest rate set by reference to the compound SONIA reference
rate. For derivatives hedging assets, the converse is true.
The principal terms of the hedging instruments are set out below, analysed by the two directions of the swaps.
2024
2023
Asset hedges
Liability hedge
Asset hedges
Liability hedge
Average fixed notional interest rate
4.50%
3.99%
-
3.99%
Average notional margin over SONIA
-
-
-
-
£m
£m
£m
£m
Notional principal value
SONIA swaps
400.0
150.0
-
150.0
400.0
150.0
-
150.0
Maturing
Within one year
-
-
-
-
Between one and two years
-
150.0
-
-
Between two and five years
-
-
-
150.0
More than five years
400.0
-
-
-
400.0
150.0
-
150.0
Fair value
(2.5)
0.3
-
(3.7)
Page 250
Accounting impacts
Movements affecting the micro fair value hedges during the year are set out below.
2024
2023
Asset hedges
Liability hedge
Asset hedges
Liability hedge
£m
£m
£m
£m
Hedging instruments
Interest rate swaps
Included in derivative financial assets
5.9
0.3
-
-
Included in derivative financial liabilities
(8.4)
-
-
(3.7)
(2.5)
0.3
-
(3.7)
Notional principal value
400.0
150.0
-
150.0
Change in fair value used in calculating hedge ineffectiveness
(4.3)
4.0
-
(3.7)
2024
2023
Asset hedges
Liability hedge
Asset hedges
Liability hedge
£m
£m
£m
£m
Hedged items
Fixed rate borrowings
Corporate bond
-
(150.0)
-
(150.0)
Fixed rate assets
Investment securities
400.0
-
-
-
400.0
(150.0)
-
(150.0)
Accumulated amount of fair value hedge adjustments included in
carrying value
4.3
(4.0)
-
3.7
Of which: amounts related to discontinued hedging relationships
being amortised
-
-
-
-
Change in fair value used in recognising hedge ineffectiveness
4.3
(4.0)
-
3.7
Hedge ineffectiveness recognised
Included in fair value gains / (losses) in the profit and loss account
(note 12)
-
-
-
-
Page 251
The Accounts
(c)
Derivatives not in a hedge 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.
Interest rate swaps
2024
2023
Pay fixed
Pay floating
Pay fixed
Pay floating
Average fixed notional interest rate
2.22%
2.58%
3.88%
5.52%
Average notional margin over SONIA
-
-
-
-
£m
£m
£m
£m
Notional principal value
SONIA swaps
1,058.1
1,184.7
708.0
722.6
1,058.1
1,184.7
708.0
722.6
Maturing
Within one year
78.0
385.0
7.5
583.5
Between one and two years
218.6
209.6
23.5
126.0
Between two and five years
761.5
590.1
457.0
13.1
More than five years
-
-
220.0
-
1,058.1
1,184.7
708.0
722.6
Fair value
44.2
(43.6)
15.2
0.9
Currency futures
2024
2023
US dollar futures
Average future exchange rate
1.34
1.22
£m
£m
Notional principal value
4.5
7.6
Maturing
Within one year
4.5
7.6
Between one and two years
-
-
Between two and five years
-
-
4.5
7.6
Fair value
-
-
Page 252
27. Sundry assets
(a)
The Group
Note
2024
2023
2022
£m
£m
£m
Receivable in less than one year
Accrued interest income
11.1
4.6
1.0
Trade receivables
1.5
1.5
1.9
CSA assets
26
-
-
-
CRDs
-
38.0
30.2
Sovereign receivables
0.2
0.1
0.3
Other receivables
3.0
1.8
2.0
Sundry financial assets
71
15.8
46.0
35.4
Prepayments
4.9
5.0
3.8
20.7
51.0
39.2
Cash ratio deposits (‘CRDs’) were non-interest-bearing deposits lodged with the Bank of England, based on the value of the
Bank’s eligible liabilities. These deposits were required to comply with regulatory rules, but the scheme was terminated by the
Bank of England during the year.
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 BBB sponsored 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
2024
2023
2022
£m
£m
£m
Receivable in less than one year
Intra-group treasury deposit
107.6
193.6
-
Amounts owed by group companies
20.9
35.0
39.1
Accrued interest income
0.1
0.1
0.1
128.6
228.7
39.2
The intra-group treasury balances comprise a 100-day notice balance and a current balance, both with the Company’s subsidiary,
Paragon Bank PLC, which invests cash with the Bank of England on a centralised basis.
The amounts owed to the Company by other group entities are considered to be Stage 1 balances for IFRS 9 impairment purposes.
The PD of the subsidiaries has been assessed in the context of the Group’s overall funding and asset position, and is considered to be
so low as to require no significant impairment provision.
Page 253
The Accounts
28. Current tax assets / liabilities
Current tax in the Group and the Company represents UK corporation tax owed or recoverable.
29. Property, plant and equipment
(a)
The Group
Leased
assets
Land and
buildings
Plant and
machinery
Total
£m
£m
£m
£m
Cost
At 1 October 2022
72.2
35.7
14.0
121.9
Additions
15.9
1.4
2.6
19.9
Disposals
(6.6)
(0.1)
(1.9)
(8.6)
At 30 September 2023
81.5
37.0
14.7
133.2
Additions
13.6
0.3
2.5
16.4
Disposals
(7.1)
(0.8)
(2.2)
(10.1)
At 30 September 2024
88.0
36.5
15.0
139.5
Accumulated depreciation
At 1 October 2022
30.6
8.8
11.1
50.5
Charge for the year
10.7
2.2
1.7
14.6
On disposals
(4.6)
(0.1)
(1.9)
(6.6)
At 30 September 2023
36.7
10.9
10.9
58.5
Charge for the year
11.6
3.7
1.7
17.0
On disposals
(4.9)
(0.7)
(1.4)
(7.0)
At 30 September 2024
43.4
13.9
11.2
68.5
Net book value
At 30 September 2024
44.6
22.6
3.8
71.0
At 30 September 2023
44.8
26.1
3.8
74.7
At 30 September 2022
41.6
26.9
2.9
71.4
Land and buildings and plant and machinery shown above are used within the Group’s business. Leased assets includes £30.4m
in respect of assets leased to customers under operating leases (2023: £31.3m), £0.7m of vehicles leased to employees under the
Group’s green car salary sacrifice scheme (2023: £0.5m) and £13.5m of assets available for hire (2023: £13.0m).
Page 254
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.
Leased
assets
Land and
buildings
Plant and
machinery
Total
£m
£m
£m
£m
Cost
At 1 October 2022
-
11.6
1.8
13.4
Additions
0.6
1.0
1.4
3.0
Disposals
-
(0.1)
(0.4)
(0.5)
At 30 September 2023
0.6
12.5
2.8
15.9
Additions
0.5
0.3
1.6
2.4
Disposals
-
(0.8)
(1.6)
(2.4)
At 30 September 2024
1.1
12.0
2.8
15.9
Accumulated depreciation
At 1 October 2022
-
3.7
1.1
4.8
Charge for the year
0.1
1.7
0.7
2.5
On disposals
-
(0.1)
(0.4)
(0.5)
At 30 September 2023
0.1
5.3
1.4
6.8
Charge for the year
0.3
3.1
0.7
4.1
On disposals
-
(0.8)
(0.9)
(1.7)
At 30 September 2024
0.4
7.6
1.2
9.2
Net book value
At 30 September 2024
0.7
4.4
1.6
6.7
At 30 September 2023
0.5
7.2
1.4
9.1
At 30 September 2022
-
7.9
0.7
8.6
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 £16.4m (2023: £16.8m).
Depreciation on property, plant and equipment is included in the Group’s profit and loss account as set out below.
Note
2024
2023
£m
£m
Operating expenses
8
5.4
3.9
Leasing costs
6
11.6
10.7
Total depreciation
17.0
14.6
Depreciation of £11.4m included in leasing costs (2023: £10.6m) is attributable to the Commercial Lending segment described in
note 2. No other depreciation is allocated to a segment.
Page 255
The Accounts
(b)
The Company
The property, plant and equipment balance of the Company represents a right of use asset in respect of a building leased from a
fellow group entity. The carrying value of this asset is set out below.
Land and
buildings
£m
Cost
At 1 October 2022, 30 September 2023 and 30 September 2024
18.8
Accumulated depreciation
At 1 October 2022
4.2
Charge for the year
1.4
On disposals
-
At 30 September 2023
5.6
Charge for the year
1.4
On disposals
-
At 30 September 2024
7.0
Net book value
At 30 September 2024
11.8
At 30 September 2023
13.2
At 30 September 2022
14.6
Page 256
30. Intangible assets
Goodwill
(note 31)
Computer
software
Other intangible
assets
Total
£m
£m
£m
£m
Cost
At 1 October 2022
170.4
16.5
10.6
197.5
Additions
-
1.6
-
1.6
Derecognition
(7.6)
-
(8.1)
(15.7)
At 30 September 2023
162.8
18.1
2.5
183.4
Additions
-
4.5
-
4.5
Derecognition
-
-
-
-
At 30 September 2024
162.8
22.6
2.5
187.9
Accumulated amortisation and impairment
At 1 October 2022
6.0
12.6
8.7
27.3
Amortisation charge for the year
-
1.1
0.7
1.8
Derecognition
(6.0)
-
(7.9)
(13.9)
At 30 September 2023
-
13.7
1.5
15.2
Amortisation charge for the year
-
0.9
0.3
1.2
Derecognition
-
-
-
-
At 30 September 2024
-
14.6
1.8
16.4
Net book value
At 30 September 2024
162.8
8.0
0.7
171.5
At 30 September 2023
162.8
4.4
1.0
168.2
At 30 September 2022
164.4
3.9
1.9
170.2
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 10).
Amortisation charges in respect of intangible assets are included in operating expenses (note 8).
31. Goodwill
The goodwill carried in the accounts is attributable to two 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:
2024
2023
£m
£m
CGU
SME lending
113.0
113.0
Development finance
49.8
49.8
162.8
162.8
Page 257
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 2024 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 2024 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 11.7%, compared with 14.1% used in the calculation at 30 September 2023. 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 1.2% (2023: 1.2%) 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 16.5% (2023: 16.2%)
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 a 19.8% reduction in profit levels would eliminate the projected headroom of £91.7m. 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 22.6% reduction in profit levels would generate a write down of £10.0m.
In the testing carried out at 30 September 2023, a 0.0% growth rate combined with an 11.5% reduction in profit levels, would have
eliminated the projected headroom at that date of £59.1m. A 0.0% growth rate combined with a 14.4% 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 2024 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 2024 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 15.6%, compared with 11.1% used in the calculation at 30 September 2023. Cash flows beyond the five-year
budget are extrapolated using a constant growth rate of 1.2% (2023: 1.2%) 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 16.4% (2023: 15.9%)
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 a 9.5% reduction in profit levels would eliminate the projected headroom of £53.2m. 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 a 12.1% reduction in profit levels would generate a write down of £10.0m.
In the testing carried out at 30 September 2023 a 1.1% growth rate combined with a 3.1% reduction in profit levels would have
eliminated the projected headroom at that date of £13.9m. A 0.2% growth rate combined with a 2.9% reduction in profit would have
generated a write down of £10.0m.
Page 258
32. Investment in subsidiary undertakings
Shares in group
companies
Loans to group
companies
Total
£m
£m
£m
At 1 October 2022
638.7
257.0
895.7
Loans repaid
-
(107.0)
(107.0)
Provision movements
(1.2)
-
(1.2)
At 30 September 2023
637.5
150.0
787.5
Loans repaid
-
-
-
Provision movements
(0.7)
-
(0.7)
At 30 September 2024
636.8
150.0
786.8
Amounts shown above for 2022 and 2023 have been restated as described in note 66.
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 2024 the Company received £161.9m in dividend income from its subsidiaries (2023: £262.5m)
and £19.4m of interest on loans to group companies (2023: £18.6m).
The Company’s subsidiaries, and the nature of its interest in them, are shown in note 72.
Page 259
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:
2024
2023
2022
£m
£m
£m
Fixed rate
8,257.2
8,690.2
6,201.3
Variable rates
8,040.8
4,575.1
4,467.9
16,298.0
13,265.3
10,669.2
The weighted average interest rate on retail deposits at 30 September 2024, analysed by the charging method, was:
2024
2023
2022
%
%
%
Fixed rate
4.77
4.07
1.74
Variable rates
4.19
3.74
1.55
All deposits
4.49
3.95
1.66
The contractual maturity of these deposits is analysed below.
2024
2023
2022
£m
£m
£m
Amounts repayable
In less than three months
1,621.4
1,589.4
929.0
In more than three months, but not more than one year
4,847.1
5,193.7
3,732.1
In more than one year, but not more than two years
1,502.6
1,643.0
1,627.3
In more than two years, but not more than five years
615.0
631.8
421.4
Total term deposits
8,586.1
9,057.9
6,709.8
Repayable on demand
7,711.9
4,207.4
3,959.4
16,298.0
13,265.3
10,669.2
Fair value adjustments for portfolio hedging (note 26)
16.7
(30.9)
(99.7)
16,314.7
13,234.4
10,569.5
Page 260
34. Asset backed loan notes
While the Group has several issues of asset-backed loan notes outstanding, at 30 September 2024 all of these were held internally
and used as security for other borrowings.
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.
Interest is payable on the notes at a fixed margin above the compounded Sterling Overnight Interbank Average Rate (‘SONIA’) and
they are all denominated in sterling.
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 2024 and 30 September 2023, net of any held by the Group, were:
Issuer
Maturity date
Call date
Principal
outstanding
Average
interest margin
2024
2023
2024
2023
£m
£m
%
%
Paragon Mortgages (No. 26) PLC
15/05/45
15/08/24
-
28.4
-
1.05
Paragon Mortgages (No. 27) PLC †
15/04/47
15/10/25
-
-
-
-
Paragon Mortgages (No. 28) PLC †
15/12/47
15/12/25
-
-
-
-
Paragon Mortgages (No. 29) PLC †
15/12/55
15/12/28
-
-
-
-
†All notes issued by Paragon Mortgages (No. 27), Paragon Mortgages (No. 28) and Paragon Mortgages (No. 29) 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 August 2024, the Group redeemed all of the outstanding notes of the Paragon Mortgages (No. 26) PLC
securitisation at par. The underlying assets were subsequently funded by other group companies.
On 1 November 2023, 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
£m
A
AAA
Aaa
1.20%
747.0
B
AA
Aa1
1.90%
33.7
C
A-
Aa2
2.75%
29.3
D
B+
A2
3.80%
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 261
The Accounts
35. Bank borrowings
Historically new first mortgage lending was partly funded through secured bank loans, referred to as ‘warehouse facilities’ before
being refinanced with either wholesale or retail funding.
The last of these facilities was repaid in the financial year ended 30 September 2023 and no amounts were outstanding or available at
any time in the current year.
The available facilities in the year ended 30 September 2023 were:
i) The Paragon Second Funding warehouse which was available for 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) The Paragon Seventh Funding warehouse facility, originally of £200.0m, which was agreed in November 2018. The facility was
secured over all the assets of Paragon Seventh Funding Limited. This facility was renewed and revised from time-to-time and by
the year ended 30 September 2023 the maximum drawing had increased to £450.0m, with interest payable at 0.5% above SONIA.
The facility expired on 24 July 2023.
36. Retail bonds
The Group’s final outstanding issue of retail bonds, issued under its Euro Medium Term Note Programme, was repaid in
the year, on 28 August 2024. These bonds were listed on the London Stock Exchange. The principal amount of notes in issue at
30 September 2023 was £112.5m and they bore interest at a fixed rate of 6.0% per annum.
The notes were unsubordinated unsecured liabilities of the Company and the amount included in the accounts of the Group and the
Company in respect of these bonds at 30 September 2023 was £112.4m. No bonds remained outstanding at 30 September 2024.
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 2024 was £149.9m (2023: £145.8m), while the
carrying value of the bonds in the accounts of the Company at 30 September 2024 was £149.6m (2023: £149.4m), with the difference
arising as a result of the hedging treatment described in note 26.
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
Bank Base Rate (‘BBR’). The average remaining maturity of the Group’s drawings is 14 months (2023: 25 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. At 30 September 2024, the average rate of interest on the Group’s ILTR drawings was 0.15% above BBR. The Group makes
drawings under the ILTR programme from time-to-time for liquidity purposes.
Page 262
The amounts drawn under these facilities are set out below.
2024
2023
£m
£m
TFSME
750.0
2,750.0
ILTR
5.0
-
Total central bank facilities
755.0
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 18.
The balances arising from the TFSME carried in the Group accounts are shown below.
2024
2023
£m
£m
TFSME at IAS 20 carrying value
745.2
2,716.3
Deferred government assistance
4.8
33.7
750.0
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 2024, £100.0m was outstanding under such arrangements (2023: £50.0m). The average term of the agreements was
3.0 months (2023: 3.0 months) and the average remaining term 1.0 month (2023: 2.8 months). The average interest rate payable was
0.44% (2023: 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 263
The Accounts
40. Sundry liabilities
(a)
The Group
Note
2024
2023
2022
£m
£m
£m
Amounts falling due within one year
Accrued interest
191.7
156.7
42.2
Trade creditors
1.0
1.6
0.7
CSA liabilities
26
103.6
383.4
388.6
Purchase of own shares
47
23.8
-
10.8
Other accruals
41.6
35.6
35.9
Sundry financial liabilities at amortised cost
361.7
577.3
478.2
Contingent consideration
41
-
-
2.2
Sundry financial liabilities
361.7
577.3
480.4
Lease payables
42
2.9
2.6
2.2
Deferred income
4.8
5.9
3.7
Conduct
43
-
-
-
Other taxation and social security
2.7
4.1
3.7
372.1
589.9
490.0
Amounts falling due after more than one year
Accrued interest
35.0
31.5
13.0
Other accruals
1.4
-
-
Sundry financial liabilities at amortised cost
36.4
31.5
13.0
Lease payables
42
5.0
6.3
6.8
Deferred income
3.9
3.5
3.3
45.3
41.3
23.1
Total sundry financial liabilities at amortised cost
398.1
608.8
491.2
Total sundry financial liabilities at fair value
-
-
2.2
Total other sundry liabilities
19.3
22.4
19.7
Total sundry liabilities
417.4
631.2
513.1
CSA liabilities represent collateral received in respect of interest rate swap agreements and are described further in notes 26 and 63.
Other accruals relate principally to the operating cost accruals, including annual bonus schemes.
(b)
The Company
Note
2024
2023
2022
£m
£m
£m
Amounts falling due within one year
Amounts owed to Group companies
23.6
24.0
23.2
Accrued interest
0.1
0.7
0.7
Purchase of own shares
47
23.8
-
10.8
Other financial liabilities
1.5
-
1.4
Sundry financial liabilities at amortised cost
49.0
24.7
36.1
Lease payables
42
1.4
1.3
1.3
50.4
26.0
37.4
Amounts falling due after more than one year
Lease payables
42
11.0
12.4
13.7
Total sundry liabilities
61.4
38.4
51.1
Page 264
41. Contingent consideration
The contingent consideration represented consideration payable in respect of corporate acquisitions which were dependent on the
performance of the acquired businesses. Movements in the balance are set out below.
2024
2023
£m
£m
At 1 October 2023
-
2.2
Payments
-
(1.5)
Revaluation
-
(0.7)
Unwind of discounting
-
-
At 30 September 2024 (note 40)
-
-
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.
The Group
The Company
2024
2023
2024
2023
£m
£m
£m
£m
Leasing liabilities falling due:
In more than five years
-
0.5
5.2
6.7
In more than two but less than five years
2.9
3.4
4.4
4.3
In more than one year but less than two years
2.1
2.4
1.4
1.4
In more than one year (note 40)
5.0
6.3
11.0
12.4
In less than one year (note 40)
2.9
2.6
1.4
1.3
7.9
8.9
12.4
13.7
Page 265
The Accounts
43. Conduct
The Group, as a regulated 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 additional liabilities. The objective of the Group’s compliance and conduct
framework, which is supervised by the second line compliance function, is to provide a strong mitigant to this risk, although it is
impossible to eliminate it entirely.
As described below, there is significant uncertainty with regard to legal and regulatory interventions around commissions paid in the
motor finance market. These processes are far from complete, and therefore the scope and extent of any exposure is unclear. It is
also possible that the principles articulated in relation to the motor finance market may turn out to have a broader application.
The broader regulatory environment continues to develop, through regulatory policies, legislative rules and court rulings, and the
Group’s assessment of potential liabilities for issues relating to motor finance commission or other conduct issues, is based on our
current interpretation of requirements and hence further liabilities may arise as these develop over time.
Motor finance commissions
During the year a number of issues were raised surrounding historical practices for the payment of commissions by lenders in the
motor finance market. These claims have been pursued through various regulatory and legal routes, and these approaches are
not mutually exclusive. Paragon Bank, the Group’s principal operating subsidiary was active in this market from 2014, the date of
its authorisation, and had written approximately £1,270.0m of motor finance loans by 30 September 2024, and paid out £48.8m of
commissions to support the origination of the loans. While the Group has not knowingly breached relevant regulations and does not
believe that it has disadvantaged customers, the extent of any potential exposure will not become clear until the issues raised in these
claims are clarified.
In January 2024 the FCA announced that it was conducting a review of the historical use of discretionary commission arrangements
across the motor finance industry, following action taken in this field by the courts and the Financial Ombudsman Service (‘FOS’).
At the same time it imposed a pause on the handling of such complaints. The FCA’s original intention was to publish its policy on
the treatment of such matters before 30 September 2024, but in July 2024 it announced that it required more time to address
these issues and now expects to set out its next steps in May 2025. It also proposed to extend its pause on complaint handling until
December 2025, to allow for the development of any redress scheme that might be required.
On 25 October 2024, following the year end, the Court of Appeal handed down judgment in the cases of Hopcraft, Wrench and
Johnson (the ‘Hopcraft case’). This provided a ruling on claims relating to motor finance loans involving ‘secret’ or ‘half secret’
commissions paid to the motor dealer who arranged the finance (a ‘broker-dealer’) by the lender. In these cases, the disclosure of
commission was deemed to be either: (a) either absent or insufficient to negate secrecy (and thus the commission was ‘secret’); or
(b) insufficient to obtain the customer’s fully informed consent (and therefore the commission was ‘half-secret’). The lenders were
deemed to have primary or accessory liability due to the commission paid to the broker-dealer and the claimants were awarded
damages against the lenders. The Court of Appeal’s common law principle goes over and above the current regulatory requirements
and guidance concerning disclosure of commission (including the FCA’s CONC rules). We are awaiting confirmation as to whether the
Hopcraft case will be successfully appealed to the Supreme Court.
From 2014 to September 2024, the Group paid £9.0 million of commission to broker-dealers, comprising 18% of all motor
commissions paid, with the balance being paid to finance brokers and a variety of other different forms of introducers, independent of
the vehicle retailer, reflecting differing customer journeys.
The Group has reviewed its own lending practices for motor finance and has issued revised terms and conditions for both customers
and intermediaries in late October 2024, addressing the points of law in Hopcraft.
The Group has considered its various exposures at 30 September 2024 and the differing customer journeys and fact patterns
underlying them, together with both the potential costs of any remediation or settlement, any interest payable thereon, and the legal
and administrative costs which might be involved with the processing of any claims. For the broker-dealer cases noted above, where
the broad fact patterns are similar to those in the Hopcraft case, and £9.0m of total commissions were originally paid, an estimate of
the liability has been made, and no material provision was identified.
However, the case law in Hopcraft is specific to the fact patterns considered by the Court and therefore additional liabilities may
exist in respect of other fact patterns, or from the results of the FCA review and other ongoing legal and regulatory processes which
address different issues related to motor finance commissions. While these might impact on the Group’s historical lending and result
in additional cash outflows, any such amount is uncertain and therefore these are disclosed as contingent liabilities.
It should be noted that the ultimate liability, if any, will be dependent on the resolution of various legal and regulatory processes
currently in progress, including, but not limited to, the FCA review, or any further regulatory action, and any further appeal arising
from the Hopcraft litigation. These will determine the types of products and lending dates to be considered and thus the size of the
customer population impacted, together with the amount and timing of any cash outflows which might be required in respect of those
customers. However, at this stage the potential total liability remains uncertain.
Page 266
44. Deferred tax
(a)
The Group
The net deferred tax 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
Current
Prior
£m
£m
£m
£m
£m
Year ended 30 September 2024
Accelerated tax depreciation
(8.3)
(0.3)
5.8
-
(2.8)
Retirement benefit obligations
3.1
0.6
-
1.8
5.5
Interest rate hedging
32.8
(13.2)
-
-
19.6
Loans and other derivatives
1.4
(0.1)
(0.1)
-
1.2
Share based payments
(7.5)
0.8
-
(3.0)
(9.7)
Tax losses
(3.0)
2.9
0.1
-
-
Other timing differences
(0.8)
0.2
0.2
-
(0.4)
Total
17.7
(9.1)
6.0
(1.2)
13.4
Year ended 30 September 2023
Accelerated tax depreciation
(6.9)
(5.0)
3.6
-
(8.3)
Retirement benefit obligations
0.5
1.8
-
0.8
3.1
Interest rate hedging
53.2
(20.4)
-
-
32.8
Loans and other derivatives
2.2
(0.8)
-
-
1.4
Share based payments
(3.7)
(2.8)
-
(1.0)
(7.5)
Tax losses
(0.1)
0.1
(3.0)
-
(3.0)
Other timing differences
(0.8)
(0.2)
0.2
-
(0.8)
44.4
(27.3)
0.8
(0.2)
17.7
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 (such as the timing and nature of the refinancing of certain portfolios) and matters outside the Group’s control
(for example, the timing of the Group’s contributions to its 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.
The Group has no tax losses in entities whose current taxable profits are insufficient to support the recognition of a deferred tax asset
(2023: £3.7m).
Page 267
The Accounts
(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
Current
Prior
£m
£m
£m
£m
£m
Year ended 30 September 2024
Accelerated tax depreciation
0.1
-
-
-
0.1
Tax losses carried forward
(1.7)
1.7
-
-
-
Other timing differences
-
-
-
-
-
Total
(1.6)
1.7
-
-
0.1
Year ended 30 September 2023
Accelerated tax depreciation
0.1
-
-
-
0.1
Tax losses carried forward
-
-
(1.7)
-
(1.7)
Other timing differences
-
-
-
-
-
0.1
-
(1.7)
-
(1.6)
Page 268
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:
2024
2023
Number
Number
Ordinary shares
At 1 October 2023
228,700,413
241,409,624
Shares issued
-
160,833
Shares cancelled
(18,095,453)
(12,870,044)
At 30 September 2024
210,604,960
228,700,413
During the year ended 30 September 2023, the Company issued 160,833 shares to satisfy options granted under Sharesave schemes
for a consideration of £543,954. No such issues were made in the year ended 30 September 2024.
On 1 June 2023, 12,870,044 of the shares held in treasury at that date were cancelled, with 12,095,453 further shares cancelled on
23 February 2024, and 6,000,000 cancelled on 30 August 2024 (note 47).
46. Reserves
(a)
The Group
2024
2023
2022
£m
£m
£m
Share premium account
71.4
71.4
71.1
Capital redemption reserve
31.0
12.9
71.8
Merger reserve
(70.2)
(70.2)
(70.2)
Profit and loss account
1,242.1
1,243.4
1,151.2
1,274.3
1,257.5
1,223.9
(b)
The Company
2024
2023
(restated)
2022
(restated)
£m
£m
£m
Share premium account
71.4
71.4
71.1
Capital redemption reserve
31.0
12.9
71.8
Merger reserve
(23.7)
(23.7)
(23.7)
Profit and loss account
510.5
543.4
345.3
589.2
604.0
464.5
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 269
The Accounts
47. Own shares
The Group
The Company
2024
2023
2024
2023
(restated*)
£m
£m
£m
£m
Treasury shares
Opening balance
54.0
18.2
54.0
18.2
Shares purchased
76.6
111.5
76.6
111.5
Options exercised
(4.3)
(8.4)
(4.3)
(8.4)
Shares cancelled
(110.0)
(67.3)
(110.0)
(67.3)
Closing balance
16.3
54.0
16.3
54.0
ESOP shares
Opening balance
21.6
19.0
21.6
19.0
Shares purchased
12.9
9.0
12.9
9.0
Options exercised
(9.2)
(6.4)
(9.2)
(6.4)
Closing balance
25.3
21.6
25.3
21.6
Irrevocable authority to purchase
Opening balance
-
10.8
-
10.8
Given in year
23.8
-
23.8
-
Expiring / utilised in year
-
(10.8)
-
(10.8)
Closing balance
23.8
-
23.8
-
Total closing balance
65.4
75.6
65.4
75.6
Total opening balance
75.6
48.0
75.6
48.0
* Restated – see note 66
At 30 September 2024 the number of the Company’s own shares held in treasury was 2,124,162 (2023: 10,074,002). These shares had a
nominal value of £2,124,162 (2023: £10,074,002). These shares do not qualify for dividends.
At 30 September 2024 an irrecoverable instruction for the purchase of shares with a market value of £23.8m to be held in treasury
was in place. At 31 October 2024, when regulatory approval for the buy-back programme lapsed, £7.5m of this instruction remained
outstanding.
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 2024, the trust held 4,182,232 ordinary shares (2023: 4,009,490) with a nominal value of £4,182,232
(2023: £4,009,490) and a market value of £32,516,854 (2023: £19,727,084). Options, or other share-based awards, were outstanding
against all of these shares at 30 September 2024 (2023: all). The dividends on all of these shares have been waived (2023: all).
Page 270
48. Equity dividend
Amounts recognised as distributions to equity shareholders in the Group and the Company in the period:
2024
2023
2024
2023
Per share
Per share
£m
£m
Equity dividends on ordinary shares
Final dividend for the previous year
26.4p
19.2p
56.1
43.7
Interim dividend for the current year
13.2p
11.0p
27.4
24.2
39.6p
30.2p
83.5
67.9
Amounts paid and proposed in respect of the year:
2024
2023
2024
2023
Per share
Per share
£m
£m
Interim dividend for the current year
13.2p
11.0p
27.4
24.2
Proposed final dividend for the current year
27.2p
26.4p
55.6
56.7
40.4p
37.4p
83.0
80.9
The proposed final dividend for the year ended 30 September 2024 will be paid on 7 March 2025, subject to approval at the AGM, with
a record date of 7 February 2025. The dividend will be recognised in the accounts when it is paid.
Page 271
The Accounts
49. Net cash flow from operating activities
(a)
The Group
2024
2023
£m
£m
Profit before tax
253.8
199.9
Non-cash items included in profit and other adjustments:
Depreciation of operating property, plant and equipment
5.4
4.0
(Profit) on disposal of operating property, plant and equipment
(0.1)
(0.1)
Amortisation and derecognition of intangible assets
1.2
3.6
Non-cash movements on investment securities
(7.8)
-
Non-cash movements on borrowings
4.5
(2.5)
Impairment losses on loans to customers
24.5
18.0
Charge for share based remuneration
9.2
9.6
Net (increase) / decrease in operating assets:
Assets held for leasing
0.7
(2.7)
Loans to customers
(855.7)
(682.0)
Derivative financial instruments
223.6
163.6
Fair value of portfolio hedges
(304.1)
(180.6)
Other receivables
28.0
(15.0)
Net increase / (decrease) in operating liabilities:
Retail deposits
3,032.7
2,596.1
Derivative financial instruments
59.8
(62.2)
Fair value of portfolio hedges
47.6
68.8
Other liabilities
(236.6)
128.3
Cash generated by operations
2,286.7
2,246.8
Income taxes (paid)
(70.3)
(75.1)
2,216.4
2,171.7
Cash flows relating to plant and equipment held for leasing under operating leases are classified as operating cash flows.
Page 272
(b)
The Company
2024
2023
(restated)
£m
£m
Profit before tax
165.7
264.2
Non-cash items included in profit and other adjustments:
Depreciation on property, plant and equipment
1.4
1.4
Non-cash movements on borrowings
0.3
0.3
Impairment provision on investments in subsidiaries
0.7
1.2
Charge for share based remuneration
9.2
9.6
Net decrease / (increase) in operating assets:
Other receivables
100.1
(189.5)
Net increase / (decrease) in operating liabilities:
Other liabilities
0.5
(0.6)
Cash generated by operations
277.9
86.6
Income taxes (paid)
(1.6)
(0.8)
276.3
85.8
50. Net cash flow from investing activities
The Group
The Company
2024
2023
2024
2023
(restated)
£m
£m
£m
£m
Investment in securities
(419.6)
-
-
-
Proceeds from sales of operating property, plant and equipment
0.3
0.1
-
-
Purchases of operating property, plant and equipment
(0.9)
(1.6)
-
-
Purchases of intangible assets
(4.5)
(1.6)
-
-
Repayment of loans by subsidiary entities
-
-
-
107.0
Net cash (utilised) / generated by investing activities
(424.7)
(3.1)
-
107.0
Page 273
The Accounts
51. Net cash flow from financing activities
The Group
The Company
2024
2023
2024
2023
(restated)
£m
£m
£m
£m
Shares issued (note 45)
-
0.5
-
0.5
Dividends paid (note 48)
(83.5)
(67.9)
(83.5)
(67.9)
Repayment of asset backed floating rate notes
(28.3)
(382.1)
-
-
Repayment of retail bond
(112.5)
-
(112.5)
-
Repayment of long-term central bank facilities
(2,000.0)
-
-
-
Movement on short-term central bank facilities
5.0
-
-
-
Movement on other bank facilities
-
(586.0)
-
-
Movement on sale and repurchase agreements
50.0
50.0
-
-
Capital element of lease payments
(2.7)
(2.4)
(1.3)
(1.3)
Purchase of own shares (note 47)
(89.5)
(120.5)
(89.5)
(120.5)
Exercise of share awards
0.7
3.4
0.7
3.4
Net cash (utilised) by financing activities
(2,260.8)
(1,105.0)
(286.1)
(185.8)
Page 274
52. Reconciliation of net debt
(a)
The Group
Cash flows
Opening
debt
Debt
issued
Other
Non-cash
movements
Closing
debt
£m
£m
£m
£m
£m
30 September 2024
Asset backed loan notes
28.0
-
(28.3)
0.3
-
Bank borrowings
-
-
-
-
-
Corporate bonds
145.8
-
-
4.1
149.9
Retail bonds
112.4
-
(112.5)
0.1
-
Long-term central bank borrowings
2,750.0
-
(2,000.0)
-
750.0
Short-term central bank borrowings
-
-
5.0
-
5.0
Sale and repurchase agreements
50.0
-
50.0
-
100.0
Lease liabilities
8.9
-
(2.7)
1.7
7.9
Bank overdrafts
0.2
-
0.2
-
0.4
Gross debt
3,095.3
-
(2,088.3)
6.2
1,013.2
Cash
(2,994.3)
-
468.9
-
(2,525.4)
Net debt/(funds)
101.0
-
(1,619.4)
6.2
(1,512.2)
30 September 2023
Asset backed loan notes
409.3
-
(382.1)
0.8
28.0
Bank borrowings
586.0
-
(586.0)
-
-
Corporate bonds
149.2
-
-
(3.4)
145.8
Retail bonds
112.3
-
-
0.1
112.4
Long-term central bank borrowings
2,750.0
-
-
-
2,750.0
Short-term central bank borrowings
-
-
-
-
-
Sale and repurchase agreements
-
-
50.0
-
50.0
Lease liabilities
9.0
-
(2.4)
2.3
8.9
Bank overdrafts
0.4
-
(0.2)
-
0.2
Gross debt
4,016.2
-
(920.7)
(0.2)
3,095.3
Cash
(1,930.9)
-
(1,063.6)
-
(2,994.3)
Net debt
2,085.3
-
(1,984.1)
(0.2)
101.0
Non-cash movements 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 275
The Accounts
(b)
The Company
Cash flows
Opening
debt
Debt
issued
Other
Non-cash
movements
Closing
debt
£m
£m
£m
£m
£m
30 September 2024
Corporate bonds
149.4
-
-
0.2
149.6
Retail bonds
112.4
-
(112.5)
0.1
-
Lease liabilities
13.7
-
(1.3)
-
12.4
Gross debt
275.5
-
(113.8)
0.3
162.0
Cash
(27.6)
-
9.4
-
(18.2)
Net debt
247.9
-
(104.4)
0.3
143.8
30 September 2023
Corporate bonds
149.2
-
-
0.2
149.4
Retail bonds
112.3
-
-
0.1
112.4
Lease liabilities
15.0
-
(1.3)
-
13.7
Gross debt
276.5
-
(1.3)
0.3
275.5
Cash
(19.7)
-
(7.9)
-
(27.6)
Net debt
256.8
-
(9.2)
0.3
247.9
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 £0.4m is included in third party servicing fees (note 7) (2023: £1.3m) and £0.1m is included
in other debtors in respect of unpaid fees at the year end (2023: £0.5m). Outstanding collection monies due to the structured entity of
£1.1m are included in other creditors at 30 September 2024 (2023: £0.1m).
Page 276
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
Note
Investment in finance leases
19
Finance income on net investment in finance leases
4
Assets leased under operating leases
29
Operating lease income
6
The undiscounted future minimum lease payments receivable by the Group under operating lease arrangements may be analysed
as follows:
2024
2023
£m
£m
Amounts falling due:
Within one year
10.2
14.5
Within one to two years
9.0
9.3
Within two to three years
6.3
5.8
Within three to four years
4.5
3.5
Within four to five years
2.9
1.6
After more than five years
2.6
0.3
35.5
35.0
(b)
As Lessee
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 7 years (2023: 8 years) with rents subject to review
every five years, while the average term of the vehicle leases is 4 years (2023: 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
Note
Depreciation on right of use assets
29
Interest expense on lease liabilities
5
Expense relating to short-term leases
8
Additions to right of use assets
29
Carrying amount of right of use assets
29
Maturity analysis of lease liabilities
64
Salary sacrifice amounts of £0.3m in respect of the green car scheme (2023: £0.1m) 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
£3.0m (2023: £2.3m).
Page 277
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 £850,000 were outstanding at the year end (2023: £720,000), and the
maximum amounts outstanding during the year totalled £939,000 (2023: £771,000).
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 £1.7m in respect of borrowings from its subsidiaries (2023: £1.5m).
The Company leased an office building from a subsidiary entity (note 54(b)). Finance charges recognised in respect of this lease were
£0.3m (2023: £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 as defined by EU Regulation No. 575/2013 (the capital requirements regulation). 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 2024 were:
United Kingdom
£m
Year ended 30 September 2024
Total operating income
496.4
Profit before tax
253.8
Corporation tax paid
70.3
Public subsidies received
-
Average number of full time equivalent employees
1,356
United Kingdom
£m
Year ended 30 September 2023
Total operating income
466.0
Profit before tax
199.9
Corporation tax paid
75.1
Public subsidies received
-
Average number of full time equivalent employees
1,435
The Group’s participation in Bank of England funding schemes is set out in note 38.
Page 278
D2.2 Notes to the Accounts – Employment costs
For the year ended 30 September 2024
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 1,444 (2023: 1,527). The number of
employees at the end of the year was 1,411 (2023: 1,522).
Costs incurred during the year in respect of these employees were:
2024
2024
2023
2023
£m
£m
£m
£m
Share based remuneration
9.2
9.6
Other wages and salaries
86.5
84.6
Total wages and salaries
95.7
94.2
National Insurance on share based remuneration
3.4
1.9
Other social security costs
10.5
10.2
Total social security costs
13.9
12.1
Defined benefit pension cost
0.4
0.5
Other pension costs
4.8
4.7
Total pension costs
5.2
5.2
Total employment costs
114.8
111.5
Of which
Included in operating expenses (note 8)
111.1
108.3
Included in maintenance costs (note 6)
3.7
3.2
114.8
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.
Page 279
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.
2024
2024
2023
2023
£m
£m
£m
£m
Salaries and fees
5.9
5.3
Cash amount of bonus
3.6
3.3
Social security costs
1.3
1.2
Short-term employee benefits
10.8
9.8
Post-employment benefits
0.5
0.5
IFRS 2 cost in respect of key management
4.6
4.3
National Insurance thereon
0.6
1.0
Share based payment
5.3
5.3
16.6
15.6
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.
2024
2023
£m
£m
Aggregate amount of remuneration
4.0
3.7
Pension allowances
0.1
0.1
Gains on exercise of share options
2.3
0.7
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 280
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 2024 and at 30 September 2023 is set
out below.
Number
Number
2024
2023
(a) Sharesave Plan
2,578,757
3,077,077
(b) Performance Share Plan
5,939,690
5,365,646
(c) Company Share Option Plan
32,940
56,591
(d) Deferred Bonus Plan
493,208
1,123,936
(e) Restricted Stock Units
382,483
412,676
9,427,078
10,035,926
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 2024 and the year ended 30 September 2023 is shown below.
2024
2024
2023
2023
Number
Weighted average
exercise price
Number
Weighted average
exercise price
p
p
Options outstanding
At 1 October 2023
3,077,077
365.76
3,613,777
318.46
Granted in the year
370,565
603.20
1,235,757
400.40
Exercised or surrendered in the year
(653,069)
320.99
(1,579,263)
285.67
Lapsed during the year
(215,816)
392.62
(193,194)
357.44
At 30 September 2024
2,578,757
408.97
3,077,077
365.76
Options exercisable
69,931
409.80
439,546
279.43
The weighted average remaining contractual life of options outstanding at 30 September 2024 was 29.1 months (2023: 32.8 months).
The weighted average market price at exercise for share options exercised in the year was 663.87p (2023: 515.86p).
Page 281
The Accounts
Options are outstanding under the Sharesave plans to purchase ordinary shares as follows:
Grant date
Period exercisable
Exercise price
Number
Number
2024
2023
31/07/2018
01/09/2023 to 01/03/2024
408.80p
-
2,933
30/07/2019
01/09/2024 to 01/03/2025
360.16p
832
4,577
29/07/2020
01/09/2023 to 01/03/2024
278.56p
6,461
436,613
29/07/2020
01/09/2025 to 01/03/2026
278.56p
400,804
449,263
28/07/2021
01/09/2024 to 01/03/2025
424.00p
62,638
257,591
28/07/2021
01/09/2026 to 01/03/2027
424.00p
48,671
54,118
27/07/2022
01/09/2025 to 01/03/2026
391.20p
485,510
528,429
27/07/2022
01/09/2027 to 01/03/2028
391.20p
93,388
108,722
15/09/2023
01/10/2026 to 01/04/2027
400.40p
925,076
1,022,746
15/09/2023
01/10/2028 to 01/04/2029
400.40p
188,287
212,085
31/07/2024
01/09/2027 to 01/03/2028
603.20p
306,609
-
31/07/2024
01/09/2029 to 01/03/2030
603.20p
60,481
-
2,578,757
3,077,077
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 2024
and the year ended 30 September 2023, are shown below.
Grant date
31/07/24
31/07/24
15/09/23
15/09/23
Number of awards granted
309,037
61,528
1,203,672
212,085
Market price at date of grant
804.0p
804.0p
506.5p
506.5p
Contractual life (years)
3.5
5.5
3.5
5.5
Fair value per share at date of grant (£)
1.88
1.95
1.10
1.09
Inputs to valuation model
Expected volatility
29.02%
35.97%
31.02%
35.67%
Expected life at grant date (years)
3.43
5.41
3.43
5.42
Risk-free interest rate
3.78%
3.71%
4.64%
4.39%
Expected annual dividend yield
4.93%
4.93%
5.96%
5.96%
Expected annual departures
5.00%
5.00%
5.00%
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 282
(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
(‘MRTs’) 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 and December 2023 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 day before 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 283
The Accounts
The conditional entitlements outstanding under this scheme at 30 September 2024 and 30 September 2023 were:
Grant date
Period exercisable
Number
Number
2024
2023
10/12/2013
10/12/2016 to 09/12/2023 †
-
2,132
18/12/2014
18/12/2017 to 17/12/2024 †
1,465
5,005
22/12/2015
22/12/2018 to 21/12/2025 †
1,899
10,473
01/12/2016
01/12/2019 to 30/11/2026 †
26,406
33,493
08/12/2017
03/12/2020 to 07/12/2027 †
15,664
29,675
14/12/2018
14/12/2021 to 13/12/2028 †
33,883
61,952
06/07/2020
06/12/2022 to 05/07/2030 †
47,784
149,151
06/07/2020
07/12/2024* to 05/07/2030 †
474,210
474,210
11/12/2020
06/12/2023 to 10/12/2030 δ
85,512
1,074,596
11/12/2020
07/12/2025* to 10/12/2030 δ
371,859
385,707
15/12/2021
07/12/2024* to 14/12/2031 λ
1,030,106
1,034,343
15/12/2021
07/12/2026* to 14/12/2031 λ
339,936
339,936
16/12/2022
07/12/2025* to 15/12/2032 ψ
927,038
932,315
16/12/2022
07/12/2026* to 15/12/2032 ψ
259,233
259,233
16/12/2022
07/12/2027* to 15/12/2032 ψ
268,683
268,683
16/12/2022
07/12/2028* to 15/12/2032 ψ
148,229
148,229
16/12/2022
07/12/2029* to 15/12/2032 ψ
156,513
156,513
15/12/2023
07/12/2026* to 14/12/2033 φ
897,767
-
15/12/2023
07/12/2027* to 14/12/2033 φ
271,818
-
15/12/2023
07/12/2028* to 14/12/2033 φ
277,361
-
15/12/2023
07/12/2029* to 14/12/2033 φ
147,294
-
15/12/2023
07/12/2030* to 14/12/2033 φ
157,030
-
5,939,690
5,365,646
* 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.
δ 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 66.0p, 25% vesting if EPS in this year is 58.0p 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 trance 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
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.
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 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
ψ These awards are subject to performance criteria, similar to those described at λ 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
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 100.0p, 25% vesting if EPS in that year is 80.0p and vesting
between those points is on a straight line basis.
• The diversity element of the people condition is based on wider diversity of senior management rather than simply gender diversity
• The climate condition is based on: operational footprint emission reduction; financed emissions decarbonisation assessments; sustainable products; and
education and engagement
Page 284
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.
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 2024 and the
year ended 30 September 2023 are shown below:
Grant date
15/12/23
16/12/22
Market price at date of grant
627.5p
541.5p
Contractual life (years)
10.0
10.0
Expected volatility
30.01%
40.54%
Risk-free interest rate
3.85%
3.27%
Expected annual dividend yield
5.96%
5.28%
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
15/12/23
16/12/22
Time to exercise
(Years)
Number of awards
IFRS 2 fair value
Number of awards
IFRS 2 fair value
3
897,767
403.29p
926,721
423.32p
4
271,818
388.63p
259,233
404.23p
5
277,361
372.89p
268,683
385.55p
6
147,294
356.71p
148,229
367.43p
7
157,030
340.46p
156,513
349.93p
1,751,270
1,759,379
(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. No
new CSOP awards were made in the years ended 30 September 2024 or 30 September 2023, and the current PSP rules contain 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 2024 and the year ended 30 September 2023 is shown below.
2024
2024
2023
2023
Number
Weighted average
exercise price
Number
Weighted average
exercise price
p
p
Options outstanding
At 1 October 2023
56,591
402.29
87,716
406.31
Exercised or surrendered in the year
(23,651)
419.16
(28,715)
408.25
Lapsed during the year
-
-
(2,410)
477.76
At 30 September 2024
32,940
390.17
56,591
402.29
Options exercisable
32,940
390.17
56,591
402.29
The weighted average remaining contractual life of options outstanding at 30 September 2024 was 36.5 months (2023: 49.9 months).
The weighted average market price at exercise for share options exercised in the year was 699.67p.
Page 285
The Accounts
The entitlements outstanding under this scheme at 30 September 2024 and 30 September 2023 were:
Grant date
Period exercisable
Exercise price
Number
Number
2024
2023
01/12/2016
01/12/2019 to 30/11/2026
361.88p
16,317
21,732
08/12/2017
08/12/2020 to 07/12/2027
477.76p
4,455
13,409
14/12/2018
14/12/2021 to 13/12/2028
396.04p
12,168
21,450
32,940
56,591
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.
(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, from time-to-time, to facilitate other
long-term incentive arrangements.
Before the financial year ended 30 September 2023 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 2024 and 30 September 2023 were:
Grant date
Period exercisable
Number
Number
2024
2023
18/12/2014
18/12/2017 to 17/12/2024
-
52,888
22/12/2015
22/12/2018 to 21/12/2025
-
60,042
11/12/2020
11/12/2023 to 10/12/2030
4,223
382,334
11/12/2020 †
11/12/2023 to 01/06/2024
-
206,135
15/12/2021
15/12/2024 to 10/12/2031
244,953
244,953
16/12/2022
06/12/2023 to 15/12/2032
-
5,011
16/12/2022
07/12/2024 * to 15/12/2032
104,089
104,089
16/12/2022
07/12/2025 * to 15/12/2032
14,742
14,742
16/12/2022
07/12/2026 * to 15/12/2032
15,565
15,565
16/12/2022
07/12/2027 * to 15/12/2032
16,018
16,018
16/12/2022
07/12/2028 * to 15/12/2032
10,775
10,775
16/12/2022
07/12/2029 * to 15/12/2032
11,384
11,384
15/12/2023
07/12/2024 * to 14/12/2033
2,712
-
15/12/2023
07/12/2025 * to 14/12/2033
5,821
-
15/12/2023
07/12/2026 * to 14/12/2033
16,425
-
15/12/2023
07/12/2027 * to 14/12/2033
17,449
-
15/12/2023
07/12/2028 * to 14/12/2033
11,139
-
15/12/2023
07/12/2029 * to 14/12/2033
8,667
-
15/12/2023
07/12/2030 * to 14/12/2033
9,246
-
493,208
1,123,936
* Estimated date
† All-employee award
Awards made to executive directors and other MRTs in December 2022 and December 2023 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 and December 2023 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 286
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 vested on the third anniversary of the grant date and the shares were automatically transferred to the
participants as soon as reasonably practicable thereafter.
In the event of death or redundancy the all-employee awards could vest early. Awards lapsed on the cessation of employment,
other than in ‘good leaver’ circumstances. Except in these regards the all-employee awards operated 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 and subsequently 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 2024 and the year ended
30 September 2023 are shown below.
Grant date
15/12/23
16/12/22
Market price at date of grant
627.5p
541.5p
Expected annual dividend yield
5.96%
5.28%
No departures are expected for grantees under this plan. Grantees are assumed to exercise their awards at the earliest
possible opportunity.
The number of awards granted and their fair values for IFRS 2 purposes are set out below
Grant date
15/12/23
16/12/22
Time to exercise
(Years)
Number of awards
IFRS 2 fair value
Number of awards
IFRS 2 fair value
1
5,643
591.9p
5,011
513.6p
2
9,080
557.0p
104,089
487.2p
3
16,771
524.8p
14,742
462.2p
4
10,913
494.4p
15,565
438.4p
5
11,139
465.8p
16,018
415.9p
6
8,667
438.8p
10,775
394.5p
7
9,246
413.5p
11,384
374.2p
71,459
177,584
(e)
Restricted Stock Units (RSU)
The Company permitted certain employees to elect to receive RSU awards instead of PSP awards in respect of financial years
between 2016 and 2022. The use of such awards is no longer part of the Group’s remuneration policy and hence no RSU awards have
been made in recent years.
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.
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 must also be met. The level
to which this condition is met will be determined by the Remuneration Committee and vesting levels scaled back as appropriate.
The conditional entitlements outstanding under this scheme at 30 September 2024 and 30 September 2023 were:
Grant date
Period exercisable
Number
Number
2024
2023
11/12/2020
06/12/2023 to 10/12/2030
-
30,193
15/12/2021
07/12/2024* to 15/12/2031
26,603
26,603
15/12/2021
07/12/2025* to 15/12/2031
355,880
355,880
382,483
412,676
* Estimated date
Page 287
The Accounts
60. Retirement benefit obligations
(a)
Defined benefit plan – description
The Group operates a funded defined benefit pension scheme in the UK, the Paragon Pension Plan (the ‘Plan’). The Plan assets are held
in a separate fund, administered by a corporate trustee, to meet long-term pension liabilities to past and present employees. The Trustee
of the Plan is required by law to act in the best interests of the Plan’s beneficiaries and is responsible for the investment policy adopted in
respect of the Plan’s assets. The appointment of directors to the Trustee is determined by the Plan’s trust documentation. The Group has
a policy that one third of all directors of the Trustee should be nominated by active and pensioner members of the Plan.
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 has been derisked and now only around 20% is invested in equity assets and diversified growth funds. 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% annual cap on
individual pensionable salary increases applies, mitigating this risk
The risks relating to death in service payments are insured with an external insurance company.
As a result of the Plan having been closed to new entrants since February 2002, the service cost as a percentage of pensionable salaries
is expected to increase as the average age of active members rises over time. However, the membership is expected to reduce so that
the service cost in monetary terms will gradually reduce. The changes referred to above will also reduce this cost going forward.
Actuarial valuation and recovery plan
The most recent full actuarial valuation of the Plan’s liabilities, obtained by the Trustee, was carried out at 31 March 2022, by
Aon Solutions UK Limited, the Plan’s independent actuary. This showed that the value of the Plan’s liabilities on a buy-out basis in
accordance with Section 224 of the Pensions Act 2004, the level of assets which would be required to buy insurance policies for benefits
earned to the valuation date, was £195.5m, with a shortfall against the assets of £44.2m (2019: £85.0m). The deficit on the Technical
Provisions 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). Many of the demographic assumptions used within the Technical Provisions Basis are also used
within the IAS 19 valuation.
Following the agreement of the 2022 actuarial valuation, the Trustee put in place a revised recovery plan. This recovery plan was
designed to ensure that the statutory funding objective was met during the 2024 financial year, but included provision for the Group
to make further additional payments after that point. The 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 certain payments under
the plan (note 29). However, payments under the PFP are paused when the Plan reaches a prescribed funding level, and this point was
reached in April 2024. 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.
Page 288
(b)
Defined benefit plan – financial impact
For accounting purposes, the valuation at 31 March 2022 was updated to 30 September 2024 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 2024, 30 September 2023 and 30 September 2022 and their fair values were:
2024
2023
2022
£m
£m
£m
Cash and cash equivalents
1.1
0.6
0.7
Equity instruments
21.2
44.8
56.6
Debt instruments
91.4
56.6
47.4
Total fair value of Plan assets
113.7
102.0
104.7
Present value of Plan liabilities
(91.5)
(89.3)
(97.6)
Surplus in the Plan
22.2
12.7
7.1
The Group has recognised the surplus as an asset at the balance sheet date as it anticipates being able to access economic benefits
at least as great as the carrying value. However, such assets are eliminated from capital for regulatory purposes (note 59).
At 30 September 2024 the Plan assets were invested in a diversified portfolio that consisted primarily of debt and equity investments.
The majority of the equities held by the Plan are in developed markets. During the year the Trustee has revised its investment strategy,
reducing the proportion of growth assets, including equities, held by the Plan.
The Plan has a benchmark allocation at 30 September 2024 of 54% of total assets to Liability Driven Investments (‘LDI’) to provide
hedging against inflation and interest rate risk. This target was maintained at 42% for much of the period (2023: 28%). The hedging
provided now represents some 85% of the Plan’s risks (2023: 60%), with the increased hedging protecting the current surplus position.
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 at that time.
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. During the year, 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.
In June 2023, the High Court made a ruling in the case of Virgin Media, which related to the validity of changes made to a pension
scheme where an actuarial certificate could not be produced. In July 2024, the Court of Appeal dismissed an appeal brought against
aspects of this ruling, and the conclusions reached in this case may have consequences for other UK defined benefit plans, such as
the Group’s. The Group and the Trustee have identified a number of amendments made to the Plan which are within the scope of this
ruling. Work is ongoing to confirm that the correct actuarial certificates are available in respect of each such amendment. However,
at present, the directors of the Trustee have no reason to believe that any are not in place. The defined benefit liability has therefore
been calculated on the basis that no additional liabilities arise as a result of the Virgin Media ruling.
The movement in the fair value of the Plan assets during the year was as follows:
2024
2023
£m
£m
At 1 October 2023
102.0
104.7
Interest on Plan assets
5.7
5.2
Cash flows
Contributions by the Group
2.8
3.9
Contributions by Plan members
0.2
0.2
Benefits paid
(3.1)
(3.6)
Administration expenses paid
(0.9)
(0.6)
Remeasurement gain / (loss)
Return on Plan assets (excluding amounts included in interest)
7.0
(7.8)
At 30 September 2024
113.7
102.0
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The Accounts
The actual return on Plan assets in the year ended 30 September 2024 was a gain of £12.7m (2023: loss of £2.6m).
The movement in the present value of the Plan liabilities during the year was as follows
2024
2023
£m
£m
At 1 October 2023
89.3
97.6
Current service cost
0.4
0.5
Past service cost
-
-
Funding cost
4.9
4.8
Cash flows
Contributions by Plan members
0.2
0.2
Benefits paid
(3.1)
(3.6)
Remeasurement loss / (gain)
Arising from demographic assumptions
(2.4)
(0.9)
Arising from financial assumptions
3.7
(11.1)
Arising from experience adjustments
(1.5)
1.8
At 30 September 2024
91.5
89.3
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.
The major weighted average assumptions used by the actuary were (in nominal terms):
2024
2023
2022
In determining net pension cost for the year
Discount rate
5.55%
5.00%
2.00%
Rate of compensation increase:
Pre 1 July 2021 accrual
3.25%
3.55%
3.40%
Post 1 July 2021 accrual
2.50%
2.50%
2.50%
Rate of price inflation
3.25%
3.55%
3.40%
Rate of increase of pensions
3.00%
3.25%
3.15%
In determining benefit obligations
Discount rate
5.10%
5.55%
5.00%
Rate of compensation increase:
Pre 1 July 2021 accrual
3.05%
3.25%
3.55%
Post 1 July 2021 accrual
2.50%
2.50%
2.50%
Rate of price inflation
3.05%
3.25%
3.55%
Rate of increase of pensions
2.85%
3.00%
3.25%
Further life expectancy at age 60
Male member aged 60
27
27
27
Female member aged 60
29
29
29
Male member aged 40
29
29
29
Female member aged 40
31
31
31
In the 2024 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.
Page 290
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.
The amounts charged in the consolidated income statement in respect of the Plan are:
Note
2024
2023
£m
£m
Current service cost
0.4
0.5
Past service cost
-
-
Total service cost
57
0.4
0.5
Administration expenses
0.9
0.6
Included within operating expenses
1.3
1.1
Funding cost of Plan liabilities
4.9
4.8
Interest on Plan assets
(5.7)
(5.2)
Net interest (income)
4
(0.8)
(0.4)
Components of defined benefit costs recognised in profit or loss
0.5
0.7
The amounts recognised in the consolidated statement of comprehensive income in respect of the Plan are:
2024
2023
£m
£m
Return on Plan assets (excluding amounts included in interest)
7.0
(7.8)
Actuarial gains / (losses)
Arising from demographic assumptions
2.4
0.9
Arising from financial assumptions
(3.7)
11.1
Arising from experience adjustments
1.5
(1.8)
Total actuarial gain
7.2
2.4
Tax thereon
(1.8)
(0.8)
Net actuarial gain
5.4
1.6
Of the remeasurement movements reflected above:
• The return on plan assets to 30 September 2024 reflects a recovery in the value of investment assets in the year, from the losses
seen in 2023, as a result of a generally more benign global economic climate.
• The gain attributable to changed demographic assumptions in the current year reflects the adoption of revised commutation
factors by the Trustee. The gain in the 2023 financial year related to the adoption of revised mortality tables indicating a marginal
reduction in life expectancies.
• The change in financial assumptions in the year ended 30 September 2024 reflects principally a widening of the gap between the
assumed discount and inflation rates as bond yields, which form the basis of the discount rate assumption, fell faster than gilt
yields, which are used to predict inflation. The gain seen in the year ended 30 September 2023 resulted from the continuation of
the upward trend in bond yields seen in the prior periods, which was not matched by the long-term inflation expectations implied
by gilt rates.
• The experience adjustments in both years shown represent the impact of the difference between actual and forecast UK inflation in
the year on expected benefits, which is more significant than in previous years due to the inflation levels recorded in these periods.
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The Accounts
(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 2024,
calculating the obligation on the same basis as used in determining the IAS 19 value, is as follows:
Assumption
Increase in assumption
Impact on scheme liabilities
2024
2023
Discount rate
0.25% per annum
(3.9)%
(3.8)%
Rate of inflation*
0.25% per annum
3.9%
3.8%
Rate of salary growth
0.25% per annum
0.8%
0.9%
Rates of mortality
1 year of life expectancy
3.1%
2.5%
* maintaining a 0.0% assumption for real salary growth
The rate of growth for pensions in payment primarily relates to forecast inflation rates.
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, except that 25 basis point sensitivities have been
presented rather than 10 basis points, in accordance with current actuarial good practice. Revised sensitivities for 2023 have been
provided on the same basis. The impacts of equivalent decreases in assumptions are broadly equal and opposite to the effects of the
increases shown above.
In conjunction with the Trustee, the Group has continued to conduct asset-liability reviews of the Plan. These studies are used to
assist the Trustee and the Group to determine the optimal long-term asset allocation with regard to the structure of liabilities within
the Plan. The results of the studies are used to assist the Trustee in managing the volatility in the underlying investment performance
and risk of a significant increase in the scheme deficit by providing information used to determine the investment strategy of the Plan.
There have been no changes in the processes by which the Plan manages its risks from previous periods.
Following a review of the Plan’s investment strategy, the current target asset allocations for the year ending 30 September 2025 are
38% growth assets (primarily equities), and 62% matching assets (primarily bonds) which includes LDI balances, with the hedge ratio
remaining at 85%.
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. 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 per annum
contribution for deficit reduction included in the previous funding plan. The additional contribution is reduced to a rate of £1.9m per
annum if the funding level meets the target set by the PFP arrangement, which was reached in April 2024. 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 2025 is £2.7m.
The average durations of the discounted benefit obligations in the Plan at the year end are shown in the table below:
2024
2023
Years
Years
Category of member
Active members
19
18
Deferred pensioners
18
18
Current pensioners
11
11
All members
16
16
(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 2024, which represent the total cost
charged against income, were £4.8m (2023: £4.7m) (note 57).
Page 292
D2.3 Notes to the Accounts – Capital and financial risk
For the year ended 30 September 2024
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 through the business cycle. This
requirement is set in accordance with the international Basel 3 rules, issued by the Basel Committee on Banking Supervision
(‘BCBS’), which 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 current 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). From 1 October 2024 the reliefs will be fully phased out and the fully loaded and regulatory bases for the
Group will be equal.
The tables below demonstrate that at 30 September 2024 the Group’s total regulatory capital of £1,327.9m (2023: £1,338.9m)
exceeded the amounts required by the regulator, including £724.1m (2023: £673.4m) 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 2024 on the fully loaded basis of £1,325.2m (2023: £1,325.4m) was in excess of the
TCR of £723.8m (2023: £672.2m) on the same basis (amounts not subject to audit).
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The Accounts
At 30 September 2024, the Group’s TCR represented 8.7% of TRE (2023: 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 2024) (2023: 2.5%) and a Counter-cyclical Capital Buffer (‘CCyB’), currently 2.0% of TRE (2023: 2.0%). This is
expected to be the long term rate of the CCyB 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. A reconciliation of the
Group’s equity to its regulatory capital determined in accordance with the PRA Rulebook at 30 September 2024 is set out below.
Regulatory basis
Fully loaded basis
Note
2024
2023
2024
2023
£m
£m
£m
£m
Total equity
1,419.5
1,410.6
1,419.5
1,410.6
Deductions
Proposed final dividend
48
(55.6)
(56.7)
(55.6)
(56.7)
IFRS 9 transitional relief
*
2.7
13.5
-
-
Intangible assets
30
(171.5)
(168.2)
(171.5)
(168.2)
Pension surplus net of deferred tax
60
(16.7)
(9.6)
(16.7)
(9.6)
Prudent valuation adjustments
§
(0.5)
(0.6)
(0.5)
(0.6)
Insufficient coverage
ψ
-
(0.1)
-
(0.1)
Common Equity Tier 1 (‘CET1’) capital
1,177.9
1,188.9
1,175.2
1,175.4
Other Tier 1 capital
-
-
-
-
Total tier 1 capital
1,177.9
1,188.9
1,175.2
1,175.4
Corporate bond
[37]
150.0
150.0
150.0
150.0
Eligibility cap
Ф
-
-
-
-
Total tier 2 capital
150.0
150.0
150.0
150.0
Total regulatory capital (‘TRC’)
1,327.9
1,338.9
1,325.2
1,325.4
* 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 remained in force in the UK, under the Brexit
arrangements, but was removed by the PRA with effect from 14 November 2023.
Ф The PRA Rulebook restricts the amount of tier 2 capital which is eligible for regulatory purposes to 25% of TCR.
Page 294
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.
Regulatory basis
Fully loaded basis
2024
2023
2024
2023
£m
£m
£m
£m
Credit risk
Balance sheet assets
7,303.0
6,784.2
7,303.0
6,784.3
Off balance sheet
95.8
87.2
95.8
87.2
IFRS 9 transitional relief
2.7
13.5
-
-
Total credit risk
7,401.5
6,884.9
7,398.8
6,871.5
Operational risk
848.0
740.2
848.0
740.2
Market risk
-
-
-
-
Other
29.2
43.6
29.2
43.6
Total risk exposure amount (‘TRE’)
8,278.7
7,668.7
8,276.0
7,655.3
Solvency ratios
%
%
%
%
CET1
14.2
15.5
14.2
15.4
TRC
16.0
17.5
16.0
17.3
This table is not subject to audit
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 295
The Accounts
Leverage ratio
The table below shows the calculation of the Group’s leverage ratio as defined in the PRA Rulebook. This rate is based on
consolidated balance sheet assets adjusted as shown. The PRA has set a minimum UK leverage ratio of 3.25% for UK firms with retail
deposits of over £50.0 billion, or with significant overseas assets. In addition, in October 2021 the PRA stated its expectation that all
other UK firms, such as the Group, should manage their leverage risk so that this ratio does not ordinarily fall below 3.25%.
Note
2024
2023
£m
£m
Total balance sheet assets
19,270.0
18,420.2
Add: Credit fair value adjustments on loans to customers
18
75.2
379.3
Debit fair value adjustments on retail deposits
33
-
30.9
Adjusted balance sheet assets
19,345.2
18,830.4
Less: Derivative assets
26
(391.8)
(615.4)
Central bank deposits
16
(2,315.5)
(2,783.3)
CRDs
27
-
(38.0)
Accrued interest on sovereign exposures
(3.8)
(4.2)
On balance sheet items
16,634.1
15,389.5
Less: Intangible assets
30
(171.5)
(168.2)
Pension surplus
60
(22.2)
(12.7)
Total on balance sheet exposures
16,440.4
15,208.6
Regulatory exposure for derivatives
154.7
179.6
Total derivative exposures
154.7
179.6
Post offer pipeline at gross notional amount
1,210.2
993.3
Adjustment to convert to credit equivalent amounts
(1,000.1)
(815.7)
Off balance sheet items
210.1
177.6
Tier 1 capital
1,177.9
1,188.9
Total leverage exposure before IFRS 9 relief
16,805.2
15,565.8
IFRS 9 relief
2.7
13.5
Total leverage exposure
16,807.9
15,579.3
UK leverage ratio
7.0%
7.6%
This table is not subject to audit
The fully loaded leverage ratio is calculated as follows
2024
2023
£m
£m
Fully loaded tier 1 capital
1,175.2
1,175.4
Total leverage exposure before IFRS 9 relief
16,805.2
15,565.8
Fully loaded UK leverage ratio
7.0%
7.6%
This table is not subject to audit.
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 296
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 2024 is derived as follows:
Note
2024
2023
£m
£m
Profit for the year after tax
186.0
153.9
Amortisation and derecognition of intangible assets
30
1.2
3.6
Adjusted profit
187.2
157.5
Divided by
Opening equity
1,410.6
1,417.3
Opening intangible assets
30
(168.2)
(170.2)
Opening tangible equity
1,242.4
1,247.1
Closing equity
1,419.5
1,410.6
Closing intangible assets
30
(171.5)
(168.2)
Closing tangible equity
1,248.0
1,242.4
Average tangible equity
1,245.2
1,244.7
Return on Tangible Equity
15.0%
12.7%
This table is not subject to audit
(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, the Board determined that an interim dividend in line with this policy was
appropriate. It therefore declared an interim dividend for the year of 13.2p per share (2023: 11.0p 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 297
The Accounts
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. This is in line with the approach adopted in previous years.
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 27.2p per share (2023: 26.4p per share) for approval at the 2025 AGM,
making a total dividend for the year of 40.4p per share (2023: 37.4p per share).
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 2023 results announcement. This was extended to £100.0m in June 2024. The amount expended in the year was £76.6m
(note 47) and the share buy-back continued after the year end, until regulatory authority for the programme lapsed on
31 October 2024, under an irrecoverable purchase instruction given to the Group’s brokers shortly before the end of the financial year.
As part of its consideration of capital described above the Board of Directors authorised the completion of the remaining £7.5m of the
buy-back programme described above together with a new buy-back of up to £50.0m to commence shortly after the announcement
of the 2024 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 2024, 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 298
63. Credit risk
The assets of the Group and the Company which are subject to credit risk are set out below.
The Group
The Company
Note
2024
2023
2024
2023
£m
£m
£m
£m
Financial assets at amortised cost
Loans to customers
18
15,705.5
14,874.3
-
-
Trade receivables
27
1.5
1.5
-
-
Intra-group cash deposits
27
-
-
107.6
193.6
Amounts owed by Group companies
27
-
-
20.9
35.1
Investment securities
17
427.4
-
-
-
Cash
16
2,525.4
2,994.3
18.2
27.6
CRDs
27
-
38.0
-
-
Accrued interest income
27
11.1
4.6
0.1
0.1
18,670.9
17,912.7
146.8
256.4
Financial assets at fair value
Derivative financial assets
26
391.8
615.4
-
-
Maximum exposure to credit risk
19,062.7
18,528.1
146.8
256.4
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
• Investment securities
• 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 299
The Accounts
This section sets out information relevant to assessing the credit risk inherent in the Group’s loans to customers balances. It is set out
in the following subsections:
• Types of lending and related security
• Overall credit grading
• Credit characteristics of particular portfolios
• Arrears performance
• Acquired assets
Types of lending
The Group’s balance sheet loan assets at 30 September 2024 are analysed as follows:
2024
2023
£m
%
£m
%
Buy-to-let mortgages
13,279.3
84.6%
12,720.1
85.5%
Owner-occupied mortgages
20.3
0.1%
27.7
0.2%
Total first charge residential mortgages
13,299.6
84.7%
12,747.8
85.7%
Second charge mortgage loans
116.1
0.7%
154.5
1.0%
Loans secured on residential property
13,415.7
85.4%
12,902.3
86.7%
Development finance
884.0
5.6%
747.8
5.0%
Loans secured on property
14,299.7
91.0%
13,650.1
91.7%
Asset finance loans
633.2
4.1%
559.1
3.8%
Motor finance loans
331.4
2.1%
297.7
2.0%
Aircraft mortgages
31.2
0.2%
26.9
0.2%
Secured BBB schemes
31.0
0.2%
50.5
0.4%
Structured lending
256.9
1.6%
169.0
1.1%
Invoice finance
32.7
0.2%
31.7
0.2%
Total secured loans
15,616.1
99.4%
14,785.0
99.4%
Professions finance
53.0
0.3%
52.2
0.4%
Unsecured BBB schemes
10.5
0.1%
16.7
0.1%
Other unsecured commercial loans
25.9
0.2%
20.4
0.1%
Total loans to customers
15,705.5
100.0%
14,874.3
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 BBB supported schemes have the benefit of a guarantee underwritten by the UK Government.
Page 300
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.
2024
2023
£m
£m
Buy-to-let mortgages
162.0
149.6
Development finance
497.9
390.6
Structured lending
239.3
160.3
Asset finance
11.5
24.6
910.7
725.1
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 2024 is set out below. The analysed
amount represents gross carrying amount.
Stage 1
Stage 2
Stage 3
POCI
Total
£m
£m
£m
£m
£m
30 September 2024
Very low risk
12,028.0
75.6
1.1
3.3
12,108.0
Low risk
2,194.7
343.9
44.9
0.7
2,584.2
Moderate risk
182.1
199.5
16.4
1.4
399.4
High risk
127.6
78.1
12.4
3.0
221.1
Very high risk
37.0
76.3
205.2
8.2
326.7
Not graded
135.8
2.7
3.6
0.5
142.6
Total gross carrying amount
14,705.2
776.1
283.6
17.1
15,782.0
Impairment
(16.0)
(7.2)
(50.8)
(2.5)
(76.5)
Total loans to customers
14,689.2
768.9
232.8
14.6
15,705.5
30 September 2023
Very low risk
11,393.7
23.0
1.9
6.6
11,425.2
Low risk
2,236.4
395.5
73.8
2.5
2,708.2
Moderate risk
157.1
147.3
9.7
1.8
315.9
High risk
34.0
113.3
13.6
3.2
164.1
Very high risk
37.7
63.3
104.1
9.3
214.4
Not graded
113.4
2.4
2.9
1.4
120.1
Total gross carrying amount
13,972.3
744.8
206.0
24.8
14,947.9
Impairment
(19.6)
(9.4)
(39.8)
(4.8)
(73.6)
Total loans to customers
13,952.7
735.4
166.2
20.0
14,874.3
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 (2024: 0.9%, 2023: 0.8%) 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 301
The Accounts
Credit characteristics by portfolio
Loans secured on residential property
First mortgage loans have a contractual term of up to thirty-five 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 2024 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
2024
2023
2024
2023
%
%
%
%
Loan to value ratio
Less than 70%
71.5
72.7
96.1
94.6
70% to 80%
25.9
23.8
2.3
3.2
80% to 90%
1.7
2.5
0.8
0.9
90% to 100%
0.2
0.2
0.2
0.3
Over 100%
0.7
0.8
0.6
1.0
100.0
100.0
100.0
100.0
Average LTV ratio
62.8
62.7
50.3
52.3
Of which:
Buy-to-let
62.8
62.8
Owner-occupied
38.9
39.0
The regionally indexed LTVs shown above are affected by changes in house prices, with the Nationwide house price index, for the UK
as a whole, registering an annual increase of 3.2% in the year ended 30 September 2024 (2023: decrease of 5.3%).
The geographical distribution of the Group’s residential mortgage assets by gross carrying value is set out below.
First charge
Second charge
2024
2023
2024
2023
%
%
%
%
East Anglia
3.3
3.3
3.3
3.4
East Midlands
6.0
5.9
6.3
6.2
Greater London
18.0
18.2
7.5
7.4
North
3.4
3.5
4.4
4.2
North West
10.1
10.3
7.4
7.5
South East
31.0
30.6
37.8
37.8
South West
9.1
9.0
8.0
8.4
West Midlands
6.3
6.2
7.2
7.3
Yorkshire and Humberside
7.1
7.4
6.0
6.2
Total England
94.3
94.4
87.9
88.4
Northern Ireland
-
-
2.5
2.3
Scotland
2.6
2.5
5.8
5.5
Wales
3.1
3.1
3.8
3.8
100.0
100.0
100.0
100.0
Page 302
Development finance
Development finance loans have an average term of 28 months (2023: 26 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.
2024
2024
2023
2023
By value
By number
By value
By number
%
%
%
%
LTGDV
50% or less
12.4
8.9
8.2
6.1
50% to 60%
13.4
20.1
17.3
21.7
60% to 65%
27.5
27.3
37.7
33.0
65% to 70%
24.1
30.1
25.5
27.4
70% to 75%
8.1
7.2
5.8
7.4
Over 75%
14.5
6.4
5.5
4.4
100.0
100.0
100.0
100.0
The average LTGDV cover at the year end was 63.0% (2023: 63.1%).
LTGDV is calculated by comparing the current expected end of term exposure with the latest estimate of the value of the completed
development based on surveyors’ reports. The focus on residential property development within the portfolio means that asset values
will generally move in line with the UK residential property market.
At 30 September 2024, the development finance portfolio comprised 251 accounts (2023: 230) with a total carrying value of
£884.0m (2023: £747.8m). Of these accounts 17 were included in Stage 2 at 30 September 2024 (2023: 15), with 19 accounts classified
as Stage 3 (2023: 12). In addition, one acquired account had been classified as POCI (2023: 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.
2024
2023
%
%
East Anglia
4.6
4.4
East Midlands
11.2
11.8
Greater London
11.0
11.8
North
0.6
0.8
North West
0.7
0.4
South East
33.9
34.0
South West
19.7
21.3
West Midlands
7.9
6.2
Yorkshire and Humberside
6.1
6.6
Total England
95.7
97.3
Northern Ireland
-
-
Scotland
3.8
2.7
Wales
0.5
-
100.0
100.0
Page 303
The Accounts
Asset finance and motor finance
Asset and motor finance lending includes finance lease and hire purchase arrangements, which are accounted for as finance leases
under IFRS 16. The average contractual life of the asset finance loans was 51 months (2023: 49 months) while that of the motor finance
loans was 69 months (2023: 68 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, including loans financed through BBB sponsored schemes, by gross carrying value is set out below.
2024
2023
%
%
Commercial vehicles
45.3
41.9
Construction plant
29.4
30.9
Manufacturing
5.3
6.3
Technology
4.2
4.8
Other vehicles
4.4
4.7
Refuse disposal vehicles
4.2
3.4
Agriculture
1.6
2.1
Print and paper
1.1
1.6
Other
4.5
4.3
100.0
100.0
Motor finance loans are secured over cars, leisure vehicles (motorhomes, caravans and campervans) 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.
2024
2023
Number of active facilities
11
9
Total facilities (£m)
330.0
235.7
Carrying value (£m)
256.9
169.0
The maximum advance under these facilities is generally 80% of the underlying assets, except where loans secured by residential
property form the security for the facility, where 90% is permissible.
Customers are charged interest on their drawn balance at a rate linked to SONIA, and a commitment fee on the undrawn amount of
their facility. However, there is generally no requirement to make regular payments of specific amounts, with the facilities operating on
a revolving basis, able to be paid down and redrawn over their term.
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 2024 one of these facilities was identified as Stage 2 (2023: none) with the remainder in Stage 1.
Page 304
BBB supported schemes
These schemes are managed by the British Business Bank (‘BBB’) and loans made under them have the benefit of guarantees
underwritten by the UK Government. They were originally launched as a response to the impact of Covid on UK SMEs, but remain
in place.
The Coronavirus Business Interruption Loan Scheme (‘CBILS’) and the Bounce Back Loan Scheme (‘BBLS’) were launched in
2020 and remained open for new applications until March 2021. The Recovery Loan Scheme (‘RLS’) was launched in April 2021 as a
successor scheme and has subsequently been extended twice. It was available for new lending until June 2024 at which point it was
rebranded as the Growth Guarantee Scheme (‘GGS’), on broadly similar terms.
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 under the
RLS or under the successor GGS.
The Group’s outstanding RLS / GGS, CBILS and BBLS loans at 30 September 2024 were:
2024
2023
£m
£m
RLS / GGS
Term loans
0.6
1.0
Asset finance
23.4
36.0
Total RLS / GGS
24.0
37.0
CBILS
Term loans
7.7
12.6
Asset finance
7.6
14.5
Total CBILS
15.3
27.1
BBLS
2.2
3.1
41.5
67.2
Total term loans
10.5
16.7
Total asset finance (note 19)
31.0
50.5
41.5
67.2
At 30 September 2024, £0.5m of this balance was considered to be non-performing (2023: £0.7m).
Page 305
The Accounts
Arrears performance
The number of accounts in arrears by asset class, based on the most commonly quoted definition of arrears for the type of asset, at
30 September 2024 and 30 September 2023, compared to the industry averages at those dates published by UK Finance (‘UKF’) and
the Finance and Leasing Association (‘FLA’), was:
2024
2023
%
%
First mortgages
Accounts more than three months in arrears
Buy-to-let accounts including receiver of rent cases
0.38
0.34
Buy-to-let accounts excluding receiver of rent cases
0.19
0.15
Owner-occupied accounts
6.59
2.93
UKF data for mortgage accounts more than three months in arrears
Buy-to-let accounts including receiver of rent cases
0.86
0.64
Buy-to-let accounts excluding receiver of rent cases
0.76
0.60
Owner-occupied accounts
0.97
0.87
All mortgages
0.93
0.82
Second charge mortgage loans
Accounts more than 2 months in arrears
All accounts
24.63
23.48
Post-2010 originations
2.92
2.42
Legacy cases (pre-2010 originations)
26.88
26.58
Purchased assets
31.47
30.10
FLA data for second mortgage loans
6.50
6.30
Motor finance loans
Accounts more than 2 months in arrears
All accounts
1.06
1.08
Originated cases
1.06
1.07
Purchased assets
1.13
1.32
FLA data for consumer point of sale hire purchase
4.10
3.60
Asset finance loans
Accounts more than 2 months in arrears
0.14
0.23
FLA data for business lease / hire purchase loans
0.70
0.60
No published industry data for asset classes comparable to the Group’s other books has been identified. Where revised data at
30 September 2023 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.
No figure has been calculated for unsecured commercial lending balances due to the size of the exposure.
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 306
Acquired assets
A significant proportion of the Group’ second charge mortgage balances 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 2023 or the year ended 30 September 2024.
Collections on purchased accounts have been comfortably in excess of those implicit in the purchase prices.
In the debt purchase industry, Estimated Remaining Collections (‘ERC’) is commonly used as a measure of the value of a portfolio.
This is defined as the sum of the undiscounted cash flows expected to be received over a specified future period. In the Group’s view,
this measure may be suitable for heavily discounted, unsecured, distressed portfolios (which will be treated as POCI under IFRS 9),
but is less applicable for the types of portfolio in which the Group has invested, where cash flows are higher on acquisition, loans may
be secured on property and customers may not be in default. In such cases, the IFRS 9 amortised cost balance, at which these assets
are carried in the Group balance sheet, provides a better indication of value.
However, to aid comparability, the 84 and 120 month ERCs value for the Group’s purchased consumer loan assets, are set out below.
These are derived using the same models and assumptions used in the EIR calculations. ERCs are set out both for all purchased
consumer portfolios and for those classified as POCI under IFRS 9.
2024
2023
2022
£m
£m
£m
All purchased consumer assets
Carrying value
41.1
58.6
75.3
84 month ERCs
48.6
68.9
88.6
120 month ERCs
52.9
73.4
94.2
POCI assets only
Carrying value
10.6
17.7
21.4
84 month ERCs
15.6
24.5
29.9
120 month ERCs
18.7
27.8
33.0
Amounts shown above are disclosed as loans to customers (note 18). They include first mortgages and second charge mortgage loans.
Investment securities
The credit risk inherent in the Group’s investment securities is controlled by ALCO, which determines the nature of securities which
may be invested in and the types of issuers in whose securities the Group may invest. The Group has formal risk appetites, policies
and limits, approved by the Risk and Compliance Committee.
The Group’s holdings at 30 September 2024, described in note 17, comprise gilts issued by the UK Government and covered bonds
issued by UK institutions.
The Group’s investments are analysed below according to the public credit rating assigned to institutional exposures, or by the credit
ratings assigned by Fitch for sovereign (UK Government) exposures.
2024
2023
Sovereign
Institutional
Total
Sovereign
Institutional
Total
£m
£m
£m
£m
£m
£m
Rating
AAA
-
23.0
23.0
-
-
-
AA-
404.4
-
404.4
-
-
-
404.4
23.0
427.4
-
-
-
Page 307
The Accounts
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 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.
2024
2023
£m
£m
The Group
Cash with central banks rated:
AA-
2,315.5
2,783.3
Cash with retail banks rated:
AA-
98.2
78.9
A+
111.7
132.1
209.9
211.0
Total exposure
2,525.4
2,994.3
The Company
Cash with retail banks rated:
A+
18.3
28.1
CRDs were 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 308
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.
2024
2023
£m
£m
Carrying value of derivative financial assets
Counterparties rated
AA
0.4
-
AA-
2.0
3.3
A+
357.8
588.9
A
-
5.5
A-
31.6
17.7
Gross exposure (note 26)
391.8
615.4
Collateral amounts posted
CSA collateral amounts (note 40)
(103.6)
(383.4)
Total collateral
(103.6)
(383.4)
Net exposure
288.2
232.0
Page 309
The Accounts
64. Liquidity risk
Liquidity risk is the risk that the Group might be unable to meet its liabilities and financial commitments as they fall due.
The Group’s principal source of liquidity risk is from its retail deposit funding. Amounts 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.
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
In more than
five years
Total
£m
£m
£m
£m
£m
30 September 2024
Retail deposits
14,559.7
1,657.2
740.7
63.0
17,020.6
Borrowings
150.3
761.6
28.0
163.0
1,102.9
Total non-derivative liabilities
14,710.0
2,418.8
768.7
226.0
18,123.5
Derivative liabilities
21.8
31.3
52.0
7.5
112.6
14,731.8
2,450.1
820.7
233.5
18,236.1
30 September 2023
Retail deposits
11,278.3
1,782.5
734.5
44.4
13,839.7
Borrowings
327.1
160.3
2,811.3
170.1
3,468.8
Total non-derivative liabilities
11,605.4
1,942.8
3,545.8
214.5
17,308.5
Derivative liabilities
52.8
(5.9)
8.7
0.3
55.9
11,658.2
1,936.9
3,554.5
214.8
17,364.4
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 correspond to
amortised cost or fair value amounts reported in the balance sheet.
Page 310
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 and/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.
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:
2024
2023
£m
£m
Payable on demand
7,697.6
4,181.5
Payable in less than three months
1,718.0
1,649.5
Payable in less than one year but more than three months
5,144.1
5,447.3
Payable in less than one year or on demand
14,559.7
11,278.3
Payable in one to two years
1,657.2
1,782.5
Payable in two to five years
740.7
734.5
Payable after more than five years
63.0
44.4
17,020.6
13,839.7
In order to reduce the liquidity risk inherent in the Group’s retail deposit balances, the PRA requires that the Bank, like other regulated
banks, maintains a buffer of liquid assets to ensure it has sufficient available funds at all times to protect against unforeseen
circumstances. The amount of this buffer is calculated using Individual Liquidity Guidance (‘ILG’) set by the PRA based on the Internal
Liquidity Adequacy Assessment Process (‘ILAAP’) undertaken by the Bank. The ILAAP determines the liquid resources that must be
maintained in the Bank to meet 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 2024 the liquidity buffer comprised the following on and off balance sheet assets. All these assets are held within
Paragon Bank. Balances with central banks are immediately available, while investment securities can be readily monetised with third
parties, through repo transactions or by use of liquidity facilities available at the Bank of England.
Note
2024
2023
£m
£m
Balances with central banks
2,207.9
2,589.7
Investment securities
17
427.4
-
Total on balance sheet liquidity
2,635.3
2,589.7
Long / short repo transaction
150.0
150.0
2,785.3
2,739.7
Balances with central banks above exclude group treasury balances placed on deposit at the Bank of England through Paragon Bank
(note 27).
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 2024, the Bank’s LCR was comfortably above the required minimum regulatory standard. The Bank also monitors its
Net Stable Funding Ratio (‘NSFR’) which measures the stability of the funding profile in relation to the composition of its assets and
off balance sheet activities.
Liquidity is not regulated at Group level.
Page 311
The Accounts
Borrowings
Set out below is the contractual maturity profile of the Group’s and the Company’s borrowings at 30 September 2024 and
30 September 2023 based on their carrying values. These are analysed between non-recourse (securitisation) and other funding,
with the liquidity position arising principally from the other funding.
The Group
Financial liabilities falling due:
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
In more than
five years
Total
£m
£m
£m
£m
£m
30 September 2024
Asset backed loan notes
-
-
-
-
-
Total non-recourse funding
-
-
-
-
-
Bank overdrafts
0.4
-
-
-
0.4
Retail bonds
-
-
-
-
-
Corporate bond
-
-
-
149.9
149.9
Central bank facilities
5.0
744.8
5.2
-
755.0
Sale and repurchase agreements
100.0
-
-
-
100.0
Lease liabilities
2.9
2.1
2.9
-
7.9
108.3
746.9
8.1
149.9
1,013.2
30 September 2023
Asset backed loan notes
-
-
-
28.0
28.0
Total non-recourse funding
-
-
-
28.0
28.0
Bank overdrafts
0.2
-
-
-
0.2
Retail bonds
112.4
-
-
-
112.4
Corporate bond
-
-
-
145.8
145.8
Central bank facilities
-
-
2,750.0
-
2,750.0
Sale and repurchase agreements
50.0
-
-
-
50.0
Lease liabilities
2.6
2.4
3.4
0.5
8.9
165.2
2.4
2,753.4
174.3
3,095.3
The Company
Financial liabilities falling due:
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
In more than
five years
Total
£m
£m
£m
£m
£m
30 September 2024
Retail bonds
-
-
-
-
-
Corporate bond
-
-
-
149.6
149.6
Lease liabilities
1.4
1.4
4.4
5.2
12.4
1.4
1.4
4.4
154.8
162.0
30 September 2023
Retail bonds
112.4
-
-
-
112.4
Corporate bond
-
-
-
149.4
149.4
Lease liabilities
1.3
1.4
4.3
6.7
13.7
113.7
1.4
4.3
156.1
275.5
Page 312
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.
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 with no external balances outstanding at 30 September 2024. 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 either to external investors
in a public offer, or to another group company. Notes held internally can be used as security to access other funding sources.
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, whether the notes are issued externally or retained.
Cash received from time-to-time in each SPV is held until the next interest payment date when, following payment of principal,
interest and the associated costs of the SPV, the remaining balances become available to the Group. Cash balances are also held
within each SPV to provide credit enhancement for the particular securitisation, allowing interest and principal payments to be made
even if some of the loans default. The cash balances of the SPV companies are included within the restricted cash balances disclosed
in note 16 as ‘securitisation cash’.
The sterling principal amount outstanding at 30 September 2024 under the SPV and warehouse arrangements was
£nil (2023: £28.4m). The total sterling amount payable under these arrangements, were these principal amounts to remain
outstanding until the final repayment date, would be £nil (2023: £43.3m). 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
The Group issued £150.0m of 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.
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 last of these bonds
was repaid in the year.
The Group’s ability to issue debt is supported by its credit rating issued by Fitch which was affirmed at BBB+ in February 2024. At the
same time, the Group’s principal operating subsidiary, Paragon Bank PLC, was also guaranteed a Long-term Issuer Default rating of
BBB+ by Fitch, increasing the range of funding solutions available.
Central bank facilities
The Group has accessed term credit facilities under the central bank schemes described in note 38. No amounts fall due under these
schemes before October 2025, but substantial repayments have already been made. 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 2024 the amount of
drawings available in respect of prepositioned assets was £4,445.9m (2023: £1,715.4m).
Page 313
The Accounts
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.
2024
2023
Utilised
Available
Total
Utilised
Available
Total
£m
£m
£m
£m
£m
£m
Rating
AAA
225.5
1,536.2
1,761.7
222.1
986.9
1,209.0
AA+ / AA / AA-
5.8
109.4
115.2
5.3
100.9
106.2
A+ / A / A-
3.7
70.0
73.7
3.1
59.9
63.0
BBB+ / BBB / BBB-
4.3
81.6
85.9
3.1
57.9
61.0
239.3
1,797.2
2,036.5
233.6
1,205.6
1,439.2
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 £751.9m (2023: £769.8m) if used to secure drawings on Bank of England facilities.
The Group’s holdings of investment securities (note 17) are also available to access term credit and other facilities in a similar way.
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 (2023: £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, including during the current year, and maintains the
capability to access the repo market for liquidity purposes. Transactions in place at 30 September 2024 (note 39) utilised £111.0m of
the loan notes shown above (2023: £58.5m).
Page 314
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 2024
Payable in:
Less than one year
6.6
-
39.4
101.4
2.9
150.3
One to two years
6.6
-
752.9
-
2.1
761.6
Two to five years
19.7
-
5.3
-
3.0
28.0
Over five years
163.0
-
-
-
-
163.0
195.9
-
797.6
101.4
8.0
1,102.9
30 September 2023
Payable in:
Less than one year
6.6
119.3
147.8
50.8
2.6
327.1
One to two years
6.6
-
151.3
-
2.4
160.3
Two to five years
19.7
-
2,788.2
-
3.4
2,811.3
Over five years
169.6
-
-
-
0.5
170.1
202.5
119.3
3,087.3
50.8
8.9
3,468.8
Corporate
bonds
Retail
bonds
Lease
liabilities
Total
£m
£m
£m
£m
b) The Company
30 September 2024
Payable in:
Less than one year
6.6
-
1.7
8.3
One to two years
6.6
-
1.7
8.3
Two to five years
19.7
-
5.0
24.7
Over five years
163.0
-
4.9
167.9
195.9
-
13.3
209.2
30 September 2023
Payable in:
Less than one year
6.6
119.3
1.7
127.6
One to two years
6.6
-
1.7
8.3
Two to five years
19.7
-
5.0
24.7
Over five years
169.6
-
7.0
176.6
202.5
119.3
15.4
337.2
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 2024 disclosed in note 40.
Page 315
The Accounts
The cash flows which are expected to arise from derivative contracts in place at the year end, estimating future floating rate payments
and receipts on the basis of the yield curve at the balance sheet date are as follows:
2024
2023
Total cash
outflow / (inflow)
Total cash
outflow / (inflow)
£m
£m
On derivative liabilities
Payable in less than one year
21.8
52.8
Payable in one to two years
31.3
(5.9)
Payable in two to five years
52.0
8.7
Payable in over five years
7.5
0.3
112.6
55.9
On derivative assets
Payable in less than one year
(117.4)
(218.2)
Payable in one to two years
(106.5)
(175.4)
Payable in two to five years
(46.5)
(162.3)
Payable in over five years
(8.4)
-
(278.8)
(555.9)
(166.2)
(500.0)
65. Market risk
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, principally SONIA, some at variable rates,
controlled by the Group, subject to market pressures, 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 Group balance sheet also includes assets, liabilities and equity which, by their nature, do not attract interest.
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.
In developing this strategy, the Group also has regard to the potential impact of fixed rate lending and deposit pipelines, and of the
difference in value between total interest-earning assets and total interest-bearing liabilities, largely represented by the Group’s
equity, both of which can lead to additional exposure to interest rate movements.
Day-to-day management of interest rate risk is the responsibility of the Group’s Treasury function, with control and oversight
provided by ALCO.
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.
Page 316
IRRBB exposures
Risk exposure in the Group’s operations might occur through:
• Duration or re-pricing risk. The risk created when interest rates on assets, liabilities and off balance sheet items reprice at different
times causing them to move by different amounts
• Basis risk. The risk arising where assets and liabilities re-price with reference to different reference interest rates, for example rates
set by the Group and market rates, such as Bank of England base rate 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 re-pricing at different times
• Net Interest Income (‘NII’) - impact on earnings from a range of interest rate stresses
The Group’s use of financial derivatives for hedging interest rate risk relating to its fixed rate lending, deposit taking, investing 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 2024, 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 £3.5m (2023: increase by £16.1m).
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
£14.1m (2023: increase by £16.0m). 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 £107.6m which is placed on deposit with the Bank of England (2023: £193.6m). 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.
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 2024 and 30 September 2023 are denominated in sterling.
The SME lending business has a limited amount of lending denominated in US dollars, principally £4.4m of aircraft mortgage balances
(2023: £7.6m). 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.
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D2.4 Notes to the Accounts – Basis of preparation
For the year ended 30 September 2024
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 2024 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.
Change in accounting policy
During the year the directors reviewed the accounting treatment of the ESOP trusts described in note 47. Where previously the trusts
had been considered separate entities within the group consolidation it was considered that it was more appropriate to include them
as if the assets and liabilities of the trusts were assets and liabilities of the Company.
The principal impact of this is in the inclusion of the shares in the Company held by the ESOP trust with other treasury shares
(note 47) and transactions in those shares as transactions of the Company. Therefore, shares purchased by the trust are immediately
recognised in ‘own shares’ in the Company and deducted from its equity in the same way as they are in the consolidated accounts.
Previously loans made by the Company to the trust were recognised as assets of the Company and impairment on them charged
to profit.
This change has been applied retrospectively, with the restatement increasing the Company’s profit after tax for the year ended
30 September 2023 by £8.7m. The corresponding movement impacts reserves in that year. The impact on net assets and operating
cash flows is not material.
This change has no effect on the consolidated accounts of the Group.
Standards not yet adopted
IFRS 18
On 9 April 2024 the IASB issued IFRS 18 – ‘Presentation and Disclosure in Financial Statements’. This is expected to impact the
way in which information is disclosed in financial statements without impacting materially on the underlying accounting.
IFRS 18 is expected to apply to the Group and the Company with effect from its financial year ending 30 September 2028, if the
standard is endorsed for use in the UK. A detailed exercise to determine the impact of the new Standard on the Group’s annual
reporting will be carried out before the implementation date. However, it is expected that the impact of the new standard on banking
companies will be less than that for companies in general.
Other than IFRS 18, described above, there are no new reporting standards and interpretations in issue but not effective which
address matters relevant to the Group’s accounting and reporting.
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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 2024.
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.
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)
Investment in securities
The Group’s investments in securities are held as part of its liquidity buffer. They are therefore classified as ‘held to collect’ following
an example set out in IFRS 9. These securities are carried at amortised cost, with income recognised on an effective interest rate
(‘EIR’) basis.
(g)
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.
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The Accounts
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. This policy applies both to assets leased to
external customers and to vehicles leased to employees under the Group’s green car scheme.
(h)
Loans to customers
Loans to customers includes assets accounted for as financial assets and finance leases. The Group assesses the classification and
measurement of a financial asset based on the contractual cash flow characteristics of the asset and its business model for managing
the asset. The Group has concluded that its business model for its customer loan assets is of the type defined as ‘Held to collect’ by
IFRS 9 and the contractual terms of the asset should give rise to cash flows that are solely payments of principal and interest (‘SPPI’).
Such loans are therefore accounted for on the amortised cost basis.
Loans advanced are valued at inception at the initial advance amount, which is the fair value at that time, inclusive of procuration
fees paid to brokers or other business providers and less initial fees paid by the customer. Loans acquired from third parties are
initially valued at the purchase consideration paid or payable. Thereafter, all loans to customers are valued at this initial amount less
the cumulative amortisation calculated using the EIR method. The loan balances are then reduced where necessary by an
impairment provision.
The EIR method spreads the expected net income arising from a loan over its expected life. The EIR is that rate of interest which, at
inception, exactly discounts the future cash payments and receipts arising from the loan to the initial carrying amount.
Where financial assets are credit-impaired at initial recognition the EIR is calculated on the basis of expected future cash receipts
allowing for the effect of credit risk. In other cases, the expected contractual cash flows are used.
(i)
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.
(j)
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 credit impaired assets in
those portfolios are treated as POCI. For these assets, the Group recognises all changes in future cash flows arising from changes in
credit quality since initial recognition as a loss allowance with any changes recognised in profit or loss.
For financial accounting purposes, provisions for impairments of loans to customers are held in an impairment allowance account from
the point at which they are first recognised. These balances are released to offset against the gross value of the loan when it is written
off for accounting purposes. This occurs when standard enforcement processes have been completed, subject to any amount retained
in respect of expected salvage receipts. Any further gains from post-write off salvage activity are reported as impairment gains.
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(k)
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.
(l)
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.
(m)
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.
(n)
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.
(o)
ESOP trusts
Where trusts have been set up to hold shares in the Company in conjunction with the Group’s employee share ownership
arrangements, the assets, liabilities and transactions of those trusts are accounted for within the accounts of the Company.
(p)
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.
(q)
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 statement of profit or loss as interest payable over the deposit term on an EIR basis.
(r)
Borrowings
Borrowings from external third parties 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 statement of profit or loss as interest payable over the term of the borrowing on an EIR basis.
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(s)
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.
(t)
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 EIR method.
(u)
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 statement of
profit or loss.
(v)
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.
(w)
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.
(x)
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.
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(y)
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 statement of profit or loss. 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 asset recognised in the balance sheet represents the excess of the fair value of the scheme assets
over the present value of the defined benefit obligation.
The expected finance income from the surplus, as estimated at the beginning of the period is recognised in the result for the period
within interest receivable. 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.
(z)
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.
(aa)
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
(bb) 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 statement of
profit or 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.
(cc)
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.
(dd) 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.
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The Accounts
(ee) 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. Attributable hedging
transactions are also included in segment results. 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 the 12-month expected loss, and the overall provision charge would be
higher. Conversely, if cases are incorrectly identified as SICR, impairment provisions will be overstated. Furthermore, adjustments to
current PD estimates in the Group’s models may also have the effect of identifying more or less accounts as having an SICR.
More information on the definition of SICR adopted is given in note 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, internal grading processes 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.
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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 for the majority of 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 2024 there is little recent history against which to
benchmark likely customer behaviour. Interest rates in the UK increased rapidly in the preceding year and have remained at elevated
levels throughout the period. The UK base rate remained at 5.25% throughout most of the period, a level it 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 these factors 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 some disagreement among economic forecasters as to the future direction of the UK economy, exacerbated by
uncertainties as to the impact of the policies of the new UK Government. 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 two years. However, considerable uncertainty exists 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 challenging.
The accuracy of the impairment calculations would 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 models 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 2024 have been derived in light of the current economic situation 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, and although these have converged, to some extent, over recent months, the medium-term uncertainty over the direction and
impact of UK economic policy under the new administration adds inherent complexity to any forecasting exercise.
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 HPI
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 these models may not be able to fully allow for potential economic impacts on the loan portfolios. The
Group therefore assessed, for each class of asset, whether any adjustment to the normal approach was required to ensure sufficient
provision was created by the models. It 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.
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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 loans 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 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, but beginning to fall. 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.
The application of these estimates results in an overall decrease in the carrying value of the Group’s loans to customers, including
POCI accounts, at 30 September 2024 of £4.4m (2023: increase 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
48 months (2023: 49 months), was 80 months (2023: 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 (2023: £9.3m), while an increase of the assumed asset lives of such assets by three months would increase
balance sheet assets by £9.1m (2023: £9.2m). £8.9m of the increase (2023: £8.8m) and £9.1m of the decrease (2023: £8.8m) 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 (2023: £18.5m), while an increase of the assumed asset lives of such assets by six months would increase
balance sheet assets by £17.5m (2023: £18.4m). £17.2m of the increase (2023: £17.5m) and £18.2m of the decrease (2023: £17.5m)
related to non-legacy buy-to-let assets.
Page 326
• 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 £12.3m (2023: decrease by £3.0m).
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 £26.1m (2023: increase by £3.9m).
• 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 £9.9m (2023: £9.6m).
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 327
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, including liquidity and capital,
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, including its regulatory capital position, funding requirement and cash flows. Detailed plans are produced for two year
periods with longer-term forecasts covering a five year period, including 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 2024.
The Group makes extensive use of stress testing in compiling and reviewing its forecasts. This stress testing approach was reviewed
in detail during the year as part of the annual Internal Capital Adequacy Assessment Process (‘ICAAP’) cycle, where testing considered
the impact of a number of severe 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
• Reduced development finance volumes and yield. This replicates a significant increase in competition within the sector, reducing
yields and impacting market share, demonstrating how a lower mix of the Group’s highest margin product impacts on contribution
to costs and other profitability ratios
• 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 was able 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 328
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 £16,298.0m (note 33), raised through Paragon Bank, are repayable within five years, with 87.0% of this
balance (£14,180.4m) 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 2024 Paragon Bank held £2,635.3m of balance sheet assets for liquidity purposes, in the form of
central bank deposits and investment securities (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 £2,785.3m.
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 Individual Liquidity Adequacy Assessment Process (‘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 further drawings of
£4,445.9m (2023: £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 2024 the Group had £1,797.2m (2023:
£1,205.6m) of such notes available for use, of which £1,536.2m (2023: £986.9m) were rated AAA. The available AAA notes would give
access to £751.9m (2023: £769.8m) if used to support drawings on Bank of England facilities.
The earliest maturity of any of the Group’s wholesale debt is the central bank debt payable in 2025.
The Group’s access to debt is enhanced by its corporate BBB+ rating, confirmed by Fitch Ratings in February 2024, and its status as
an issuer is evidenced by the BBB- investment grade rating of its £150.0m Tier-2 Bond.
Additionally, during the year Fitch Ratings assigned a BBB+ Long-term Issuer Default rating to Paragon Bank PLC, the Group’s
principal operating subsidiary, the first time a company-level rating has been issued for this entity. This provides additional flexibility to
the Group’s wholesale funding options.
The Group 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. It also has access to the short-term repo market which it accesses from time-to-time
for liquidity purposes.
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. Its capital at 30 September
2024 was in excess of regulatory requirements and its forecasts indicate this will continue to be the case, even allowing for currently
proposed changes in the UK’s capital requirements framework.
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.
As part of this exercise, the potential impacts on funding, capital and cash of the contingent liabilities described in note 43
were considered.
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 329
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 at 30 September 2024 or 30 September 2023 carried at fair value and valued using
level 3 measurements.
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.
Note
2024
2023
£m
£m
Financial assets
Derivative financial assets
26
391.8
615.4
Financial liabilities
Derivative financial liabilities
26
99.7
39.9
All of these financial assets and financial liabilities are required to be carried at fair value by IFRS 9.
The Company has no financial assets or liabilities carried at fair value.
Derivative financial assets and liabilities
Derivative financial instruments are stated at their fair values in the accounts. The Group uses a number of techniques to determine
the fair values of its derivative assets and liabilities, for which observable prices in active markets are not available. These are principally
present value calculations based on estimated future cash flows arising from the instruments, discounted using a market interest rate,
adjusted for risk as appropriate. The principal inputs to these valuation models are 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 330
(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.
Note
2024
2024
2023
2023
Carrying amount
Fair value
Carrying amount
Fair value
£m
£m
£m
£m
The Group
Financial assets
Cash
16
2,525.4
2,525.4
2,994.3
2,994.3
Investment securities
17
427.4
422.0
-
-
Loans to customers
18
15,705.5
15,772.5
14,874.3
14,524.0
Sundry financial assets
27
15.8
15.8
46.0
46.0
18,674.1
18,735.7
17,914.6
17,564.3
Financial liabilities
Short-term bank borrowings
0.4
0.4
0.2
0.2
Asset backed loan notes
-
-
28.0
28.0
Retail deposits
33
16,298.0
16,334.2
13,265.3
13,177.3
Corporate and retail bonds
149.9
145.5
258.2
234.8
Sale and repurchase agreements
39
100.0
100.0
50.0
50.0
Other financial liabilities
40
398.1
398.1
608.8
608.8
16,946.4
16,978.2
14,210.5
14,099.1
Note
2024
2024
2023
(restated)
2023
(restated)
Carrying amount
Fair value
Carrying amount
Fair value
£m
£m
£m
£m
The Company
Financial assets
Cash
16
18.3
18.3
28.1
28.1
Intra-group cash deposits
27
107.6
107.6
193.6
193.6
Amounts owed to group companies
27
20.9
20.9
35.0
35.0
Sundry financial assets
27
0.1
0.1
0.1
0.1
146.9
146.9
256.8
256.8
Financial liabilities
Corporate and retail bonds
149.6
145.5
261.8
234.8
Amounts owed by group companies
40
23.6
23.6
24.0
24.0
Other financial liabilities
40
25.4
25.4
0.7
0.7
198.6
194.5
286.5
259.5
The fair values of retail deposits and corporate and retail bonds shown above will include amounts for the related accrued interest.
Cash, sale and repurchase agreements, bank borrowings and securitisation borrowings
The fair values of cash and cash equivalents, sale and repurchase agreements, bank borrowings 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.
Page 331
The Accounts
Investment securities
The Group’s investment securities are of types for which a liquid market exists, and for which quoted prices are available. It is
therefore appropriate to consider that the market price of these assets constitutes a fair value. As this valuation is based on a market
price it is considered to be a level 1 measurement.
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 332
72. Details of subsidiary undertakings
Subsidiary undertakings of the Group at 30 September 2024, 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
100%
Deposit taking, residential mortgages and loan and vehicle finance
Paragon Car Finance Limited
100%
Vehicle Finance
Idem Capital Holdings Limited
100%
Intermediate holding company
Redbrick Survey and Valuation Limited
100%
Surveyors and property consulting
Paragon Mortgages (No. 12) PLC
100% *
Residential mortgages
Colonial Finance (UK) Limited
100%
Non-trading
Earlswood Finance Limited
100%
Non-trading
Herbert (1) PLC
100%
Non-trading
Herbert (2) PLC
100%
Non-trading
Herbert (4) PLC
100%
Non-trading
Herbert (5) PLC
100%
Non-trading
Herbert (6) PLC
100%
Non-trading
Herbert (7) PLC
100%
Non-trading
Herbert (8) PLC
100%
Non-trading
Herbert (9) PLC
100%
Non-trading
Herbert (10) PLC
100%
Non-trading
Moorgate Asset Administration Limited
100%
Non-trading
Paragon Car Finance (1) Limited
100%
Non-trading
Paragon Dealer Finance Limited
100%
Non-trading
Paragon Loan Finance (No. 3) Limited
100%
Non-trading
Paragon Mortgages (No. 5) PLC
100%
Non-trading
Paragon Pension Investments GP Limited
100%
Non-trading
Paragon Pension Plan Trustees Limited
100%
Non-trading
Paragon Personal Finance (1) Limited
100%
Non-trading
Paragon Third Funding Limited
100%
Non-trading
Paragon Vehicle Contracts Limited
100%
Non-trading
The Business Mortgage Company Limited
100%
Non-trading
Universal Credit Limited
100%
Non-trading
Yorkshire Freeholds Limited
100%
Non-trading
Yorkshire Leaseholds Limited
100%
Non-trading
Page 333
The Accounts
Company
Holding
Principal activity
Direct and indirect subsidiaries of Paragon Bank PLC
Paragon Finance PLC
100%
Residential mortgages and asset administration
Mortgage Trust Limited
100%
Residential mortgages
Paragon Mortgages Limited
100%
Residential mortgages
Paragon Mortgages (2010) Limited
100%
Residential mortgages
Mortgage Trust Services PLC
100%
Residential mortgages and asset administration
Paragon Asset Finance Limited
100%
Holding company and portfolio administration
Paragon Business Finance PLC
100%
Asset finance
Paragon Development Finance Limited
100%
Development Finance
Paragon Development Finance Services Limited
100%
Development Finance
Paragon Technology Finance Limited
100%
Asset finance
PBAF Acquisitions Limited
100%
Residential mortgages and loan finance
Premier Asset Finance Limited
100%
Asset finance broker
Specialist Fleet Services Limited
100%
Asset finance and contract hire
Collett Transport Services Limited
100%
Non-trading
Homer Management Limited
100%
Non-trading
Lease Portfolio Management Limited
100%
Non-trading
Paragon Commercial Finance Limited
100%
Non-trading
Paragon Options PLC
100%
Non-trading
Paragon Second Funding Limited
100%
Non-trading
Other indirect subsidiary undertakings
Moorgate Loan Servicing Limited
100%
Asset administration
Idem Capital Securities Limited
100%
Asset investment
Paragon Personal Finance Limited
100%
Consumer loan finance
Buy to Let Direct Limited
100%
Non-trading
TBMC Group Limited
100%
Non-trading
The Business Mortgage Company Services Limited
100%
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 334
The principal companies party to these arrangements at 30 September 2024 comprise:
Company
Principal activity
Paragon Mortgages (No. 26) Holdings Limited
Holding company
Paragon Mortgages (No. 26) PLC
Residential mortgages
Paragon Mortgages (No. 27) Holdings Limited
Holding company
Paragon Mortgages (No. 27) PLC
Residential mortgages
Paragon Mortgages (No. 28) Holdings Limited
Holding company
Paragon Mortgages (No. 28) PLC
Residential mortgages
Paragon Mortgages (No. 29) Holdings Limited
Holding company
Paragon Mortgages (No. 29) PLC
Residential mortgages
Arianty Holdings Limited
Non-trading
Arianty No. 1 PLC
Non-trading
Paragon Fifth Funding Limited
Non-trading
Paragon Seventh Funding Limited
Non-trading
Paragon Sixth Funding Limited
Non-trading
Paragon Mortgages (No. 25) Holdings Limited
Non-trading
Paragon Mortgages (No. 25) PLC
Non-trading
Paragon Covered Bonds Finance Limited
Non-Trading
Paragon Covered Bonds (Holdings) Limited
Non-Trading
All these companies are registered and operate in the UK.
Paragon Covered Bonds LLP is a limited liability partnership registered in England and Wales, in which control is vested in certain
other Group entities. It is therefore considered to be a subsidiary of the Group. This entity operates 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.
Page 335
The Accounts
Companies in liquidation
The following legal subsidiaries of the Group were in liquidation at 30 September 2024. 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 †
100%
Non-trading
Paragon Mortgages (No. 11) PLC †
100% *
Non-trading
Paragon Mortgages (No. 13) PLC †
100% *
Non-trading
Paragon Mortgages (No. 14) PLC †
100% *
Non-trading
Paragon Mortgages (No. 15) PLC †
100% *
Non-trading
Plymouth Funding Limited †
100%
Non-trading
Direct and indirect subsidiaries of Paragon Bank PLC
City Business Finance Limited †
100%
Non-trading
Fineline Holdings Limited
100%
Non-trading
Fineline Media Finance Limited
100%
Non-trading
PBAF (No.1) Limited †
100%
Non-trading
State Securities Holdings Limited †
100%
Non-trading
State Security Limited †
100%
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.
† These companies were dissolved in November 2024, after the year end.
P338
E1. Appendices to the Annual Report
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.
Page 338
E1. Appendices to the Annual Report
For the year ended 30 September 2024
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.
However, it should be noted that definitions used for these measures differ between firms, and caution should be exercised in making
direct comparisons.
Note
2024
2023
£m
£m
Profit on ordinary activities before tax
253.8
199.9
Add back: Fair value adjustments
12
38.9
77.7
Underlying profit
292.7
277.6
Underlying basic earnings per share, calculated on the basis of underlying profit adjusted for tax, is derived as follows.
2024
2023
£m
£m
Underlying profit
292.7
277.6
Tax on underlying result
(80.3)
(66.4)
Underlying earnings
212.4
211.2
Basic weighted average number of shares (note 15)
210.1
224.1
Underlying earnings per share
101.1p
94.2p
Tax has been charged on the underlying profit at 27.4%, being the effective rate which would result from the exclusion of the adjusting
items from the corporation tax calculation (2023: 23.9%).
Page 339
Appendices
Underlying return on tangible equity is derived using underlying earnings calculated on the same basis shown above. Tangible equity
is adjusted to exclude the impacts of fair value hedging.
Note
2024
2023
£m
£m
Underlying earnings
212.4
211.2
Amortisation and derecognition of intangible assets
8
1.2
3.6
Adjusted underlying earnings
213.6
214.8
Opening underlying tangible equity
Equity
1,410.6
1,417.3
Intangible assets
30
(168.2)
(170.2)
Balance sheet impact of fair values
26
(230.8)
(216.7)
Deferred tax thereon
44
32.8
53.2
1,044.4
1,083.6
Closing underlying tangible equity
Equity
1,419.5
1,410.6
Intangible assets
30
(171.5)
(168.2)
Balance sheet impact of fair values
26
(207.6)
(230.8)
Deferred tax thereon
44
19.6
32.8
1,060.0
1,044.4
Average underlying tangible equity
1,052.2
1,064.0
Underlying RoTE
20.3%
20.2%
The Group has noted that several comparable entities present underlying RoTE adjusting only the earnings figure, and this practice is
more common than the approach taken by the Group. It has therefore decided to present an alternative underlying RoTE measure on
this basis for the current year and to adopt this as its principal underlying RoTE measure in future periods. This measure is calculated
as follows:
Note
2024
2023
£m
£m
Adjusted underlying earnings
213.6
214.8
Average tangible equity
61
1,245.2
1,244.7
Alternative underlying RoTE
17.2%
17.3%
Page 340
B. Income statement ratios
NIM and cost of risk (impairment charge as a percentage of average loan balance) for the Group and its segments 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 (see note 2).
Year ended 30 September 2024
Note
Mortgage
Lending
Commercial
Lending
Group
Total
£m
£m
£m
Opening loans to customers
18
12,902.3
1,972.0
14,874.3
Closing loans to customers
18
13,415.7
2,289.8
15,705.5
Average loans to customers
13,159.0
2,130.9
15,289.9
Net interest
2
282.3
124.8
483.2
NIM
2.15%
5.86%
3.16%
Impairment provision charge
11
5.6
18.9
24.5
Cost of risk
0.04%
0.89%
0.16%
Year ended 30 September 2023
Note
Mortgage
Lending
Commercial
Lending
Group
Total
£m
£m
£m
Opening loans to customers
18
12,328.7
1,881.6
14,210.3
Closing loans to customers
18
12,902.3
1,972.0
14,874.3
Average loans to customers
12,615.5
1,926.8
14,542.3
Net interest
2
277.6
135.7
448.9
NIM
2.20%
7.04%
3.09%
Impairment provision charge
11
10.4
7.6
18.0
Cost of risk
0.08%
0.39%
0.12%
Page 341
Appendices
C. Cost:income ratio
Cost:income ratio is derived as follows:
Note
2024
2023
£m
£m
Cost – operating expenses
8
179.2
170.4
Total operating income
496.4
466.0
Cost / Income
36.1%
36.6%
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 2024 final dividend
at the AGM in March 2025 is therefore as set out below.
Note
2024
2023
Earnings per share (p)
15
88.5
68.7
Attributable fair value gains (p)
18.5
34.7
Attributable tax thereon (p)
(5.9)
(9.2)
Adjusted earnings (p)
101.1
94.2
Proposed dividend per share in respect of the year (p)
48
40.4
37.4
Dividend cover (times)
2.50
2.52
E. Net asset value
Note
2024
2023
Total equity (£m)
1,419.5
1,410.6
Outstanding issued shares (m)
45
210.6
228.7
Treasury shares (m)
47
(2.1)
(10.1)
Shares held by ESOP schemes (m)
47
(4.2)
(4.0)
204.3
214.6
Net asset value per £1 ordinary share
£6.95
£6.57
Tangible equity (£m)
61
1,248.0
1,242.4
Tangible net asset value per £1 ordinary share
£6.11
£5.79
P344
F1. Glossary
A summary of abbreviations used in the
Annual Report and Accounts
P348
F2. Shareholder information
Information about dividends, meetings and
managing shareholdings
P349
F3. Other public reporting
Current and future public reporting information
P350
F4. Contacts
Names and addresses of our advisers
Useful Information
Information which may be helpful to shareholders
and other users of the Annual Report and Accounts
This section includes
Page 344
F1. Glossary
ACS
Annual Cyclical Scenario published by
the Bank of England
Act
The Companies Act 2006
AGM
Annual General Meeting
AI
Artificial Intelligence
ALCO
Asset and Liability Committee
APP
Accelerated Progress Programme
AQR
Audit Quality Review
ARGA
Auditing, Reporting and Governance Authority
Articles
The Articles of Association of the Company
ASHE
Annual Survey of Hours and Earnings
AT1
Additional Tier 1
Paragon Bank
or The Bank
Paragon Bank PLC
Bank Tax Code
The Code of Practice on Taxation for Banks
BBB
British Business Bank
BBLS
Bounce Back Loan Scheme
BBR
Bank Base Rate
BCBS
Basel Committee on Banking Supervision
BEIS
Department for Business, Energy and
Industrial Strategy
BEPS
Base Erosion and Profit Shifting
BEVs
Battery-powered Electric Vehicles
BGS
Balance Guarantee Swaps
BHI
Better Hiring Institute
BTR
Build-to-Rent
B4NZ
Bankers For Net Zero
CAGR
Compound Annual Growth Rate
CBES
Climate Biennial Exploratory Scenario
CBI
Confederation of British Industry
CBILS
Coronavirus Business Interruption
Loan Scheme
CCC
Customer and Conduct Committee
CCoB
Capital Conservation Buffer
CCP
Central Clearing Counterparty
CCR
Counterparty Credit Risk
CCyB
Counter-Cyclical Capital Buffer
CEO
Chief Executive Officer
CET1
Common Equity Tier 1
CFO
Chief Financial Officer
CFRF
Climate Financial Risk Forum
CGI
Chartered Governance Institute UK & Ireland
CGU
Cash Generating Unit
CIB
Chartered Institute of Bankers
CIIA
Chartered Institute of Internal Auditors
CML
Council of Mortgage Lenders
Code
UK Corporate Governance Code
CO2e
CO2 Equivalent
COO
Chief Operating Officer
Company
Paragon Banking Group PLC
CP
Consultation Paper
CPI
Consumer Price Index
CPO
Chief People Officer
CRDs
Cash Ratio Deposits
CRO
Chief Risk Officer
CRR
Capital Requirements Regulation –
EU Regulation 575/2013
Page 345
Glossary
CSA
Credit Support Annex
CSOP
Company Share Option Plan
CVA
Credit Valuation Adjustment
DECL
Task Force on Disclosure about Expected
Credit Loss
DEFRA
Department for Environment, Food
and Rural Affairs
DISP
FCA’s Dispute Resolution: Complaints
Sourcebook
DSBP
Deferred Share Bonus Plan
DTR
Disclosure and Transparency Rule
ECL
Expected Credit Loss
EDI
Equality, Diversity and Inclusion
EIR
Effective Interest Rate
EPC
Energy Performance Certificate
EPS
Earnings per Share
EQA
External Quality Assessment
ERC
Executive Risk Committee
ERMF
Enterprise Risk Management Framework
ESG
Environmental, Social and Governance
ESOP
Employee Share Ownership Plan
ESOS
Energy Savings and Opportunities Scheme
EU
European Union
EV
Economic Value
EWI
Early Warning Indicators
ExCo
Executive Performance Committee
FCA
Financial Conduct Authority
FLA
Finance and Leasing Association
FOS
Financial Ombudsman Service
FPC
Financial Policy Committee
(of the Bank of England)
The Framework
The Group Corporate Governance
Policy Framework
FRC
Financial Reporting Council
FRN
Floating Rate Note
FSCS
Financial Services Compensation Scheme
FVTPL
Fair Value Through Profit and Loss
GDP
Gross Domestic Product
GFI
Green Finance Institute
GGS
Growth Guarantee Scheme
GHG
Greenhouse Gases
Gilts
UK Government securities
GMP
Guaranteed Minimum Pension
Group
The Company and all its subsidiary
undertakings
HMRC
His Majesty’s Revenue and Customs
HPI
House Price Index
HQLA
High Quality Liquid Assets
IAP
Internal Audit Plan
IAS
International Accounting Standard(s)
IASB
International Accounting Standards Board
ICAAP
Internal Capital Adequacy
Assessment Process
ICR
Interim Capital Regime
IFRS
International Financial Reporting Standard(s)
IIP
Investors In People
ILAAP
Internal Liquidity Adequacy
Assessment Process
ILG
Individual Liquidity Guidance
ILTR
Indexed Long Term Repo Scheme
IMLA
Intermediary Mortgage Lenders Association
IRB
Internal Ratings Based
IRRBB
Interest Rate Risk in the Banking Book
ISAs
International Standards on Auditing
Page 346
ISDA
International Swaps and Derivatives
Association
ISO14001:2015
ISO14001:2015,
‘Environmental Management Systems’
ISO45001:2018
ISO45001:2018, ‘Management Systems
of Occupational Health and Safety’
KPMG
KPMG LLP, the Group’s auditor
LCR
Liquidity Coverage Ratio
LCV
Light Commercial Vehicles
LDI
Liability Driven Investments
LGD
Loss Given Default
Lintstock
Lintstock Limited
LTGDV
Loan to Gross Development Value
LTV
Loan to Value
M&A
Mergers and Acquisitions
MAR
Market Abuse Regulation
MEES
Domestic Minimum Energy Efficiency
Standard as proposed by the
UK Government
MES
Multiple Economic Scenarios
MIMHC
Mortgage Industry Mental Health Charter
Minimum
Standard
FRC Minimum Standard: Audit Committee
and the External Audit
MLRO
Money Laundering Reporting Officer
MRC
Model Risk Committee
MREL
Minimum Requirement for own funds
and Eligible Liabilities
MRT
Material Risk Taker
MWh
Mega-Watt Hours
NGFS
Network for Greening the Financial System
NI
National Insurance
NII
Net Interest Income
NIM
Net Interest Margin
Notes
Asset backed loan notes
NPS
Net Promoter Score
NRLA
National Residential Landlords Association
NSFR
Net Stable Funding Ratio
NS&I
National Savings and Investments
OBR
Office of Budget Responsibility
OCI
Other Comprehensive Income
OFGEM
Office of Gas and Electricity Markets
OHSMS
Occupational Health and
Safety Management System
OLAR
Overall Liquidity Adequacy Requirement
ONS
Office for National Statistics
ORC
Operational Risk Committee
Order
The Statutory Audit Services for Large
Companies Market Investigation (Mandatory
Use of Competitive Tender Processes and
Audit Committee Responsibilities) Order 2014
PAYE
Pay As You Earn
PBSA
Purpose-Built Student Accommodation
PD
Probability of Default
PCAF
Partnership for Carbon Accounting Financials
Performance
Exco
Executive Performance Committee
PFP
Pension Funding Partnership
PIDA
Public Interest Disclosure Act 1998
PIEs
Public Interest Entities
Plan
The Paragon Pension Plan
PLC
Public Limited Company
PMA
Post-Model Adjustments
POCI
Purchased or Originated
Credit Impaired (assets)
PPC
Prompt Payment Code
PPP
Purpose and Performance Profiles
PRA
Prudential Regulation Authority
(of the Bank of England)
Page 347
Glossary
PRS
Private Rented Sector
PRP
Profit Related Pay
PSP
Performance Share Plan
PwC
PricewaterhouseCoopers LLP
RBA
Role Based Allowance
RCP
Representative Concentration Pathway
RCSA
Risk and Control Self Assessment
RCV
Refuse Collection Vehicles
Repo
Sale and repurchase transactions
RICS
Royal Institution of Chartered Surveyors
RIDDOR
Reporting of Incidents, Disease and
Dangerous Occurrences Regulation 2013
RLS
Recovery Loan Scheme
RMBS
Residential Mortgage Backed Securities
RNS
Regulatory News Service
RoR
Receiver of Rent
RoTE
Return on Tangible Equity
ROU
Right of Use
RPI
Retail Price Index
RSU
Restricted Stock Unit
RWA
Risk Weighted Assets
SA
Standardised Approach
SAWG
Scenario Analysis industrial Working Group
SA-CCR
Standardised Approach for Counterparty
Credit Risk
Schedule 7
Schedule 7 to the Large and Medium-sized
Companies and Groups
(Accounts and Reports) Regulations 2008
SDDT
Small Domestic Deposit Taker
SEB
Socio-Economic Background
SFS
Specialist Fleet Services Limited
SIC
Standard Industrial Classification
SICR
Significant Increase in Credit Risk
Sharesave
All-employee Share Option scheme
SME
Small and / or Medium-sized Enterprise(s)
SMF
Senior Management Function
SMCR
Senior Managers and Certification Regime
SMMT
Society of Motor Manufacturers and Traders
SONIA
Sterling Overnight Interbank Average
SPPI
Solely Payments of Principal and Interest
SPV
Special Purpose Vehicle
STR
Short-Term Repo (scheme)
TBMC
The Business Mortgage Company
TCFD
Taskforce on Climate-related
Financial Disclosures
TCR
Total Capital Requirement
TFSME
Term Funding Scheme with
additional incentives for SMEs
TRC
Total Regulatory Capital
TRE
Total Risk Exposure
TSR
Total Shareholder Return
TVR
Total Voting Rights
UK
United Kingdom
UKF
UK Finance
UKLR
UK Listing Rules
UTP
Unlikeliness To Pay
You can view and manage your shareholding online by registering with
Computershare’s Investor Centre service. To register:
• Visit www.investorcentre.co.uk
• Click on ‘Register now’
• 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.
Electronic communications
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
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.
Website
Shareholder fraud warning
Duplicate documents and communications
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.
Want more information or help?
F2. Shareholder information
F3. Other public reporting
In addition to its annual financial reporting the Group has published, or will publish, the following documents in respect of the year
ended 30 September 2024, as required by legislation or regulation, relating to the Group or its constituent entities.
• Annual and half-year Pillar III 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 2024, the Group has
published bi-annual statements on supplier payments under the Reporting on Payment Practices and Performance Regulations 2017.
It also made its eighth report against its Women in Finance charter commitments in September 2024.
All this reporting will be continued in the financial year ending 30 September 2025.
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 2024 Responsible Business Report will be published
in December 2024 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.
Financial calendar
Annual General Meeting
Dividend calendar
January 2025
Quarter 1 trading update
5 March 2025
6 February 2025
Ex-dividend date for 2024 final dividend
3 July 2025
Ex-dividend date for 2025
interim dividend
7 February 2025
Record date for 2024 final dividend
4 July 2025
Record date for 2025 interim dividend
7 March 2025
Payment date for 2024 final dividend
25 July 2025
Payment date for 2025 interim dividend
July 2025
Quarter 3 trading update
June 2025
Half-year results
December 2025
Full-year results
F4. Contacts
Registered and head office
Brokers
Investor Relations
Remuneration consultants
Corporate website
Auditor
Solicitors
Registrars
Company Secretariat
Consulting actuaries
Customer website
51 Homer Road, Solihull, West Midlands B91 3QJ
Telephone: 0345 849 4000
Jefferies International Limited
100 Bishopsgate
London EC2N 4JL
Peel Hunt LLP
100 Liverpool Street
London EC2M 2AT
UBS Limited
5 Broadgate
London EC2M 2QS
(Institutional investors)
investor.relations@paragonbank.co.uk
PricewaterhouseCoopers LLP
1 Embankment Place
London WC2N 6RH
www.paragonbankinggroup.co.uk
KPMG LLP
One Snowhill
Snow Hill Queensway
Birmingham B4 6GH
Slaughter and May
One Bunhill Row
London EC1Y 8YY
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Telephone: 0370 707 1244
(Retail investors)
company.secretary@paragonbank.co.uk
Mercer Limited
Four Brindleyplace
Birmingham B1 2JQ
www.paragonbank.co.uk
GRP0213-001 (01/2025)
PARAGON BANKING GROUP PLC
51 Homer Road, Solihull, West Midlands B91 3QJ
Telephone: 0345 849 4000
www.paragonbankinggroup.co.uk
Registered No. 02336032