PCF Group plc
Annual Report &
Financial Statements
2018
Simple banking. At your service.
PCF Group plc is the AIM-listed parent company of the
specialist bank, PCF Bank.
PCF Bank offers retail savings products for individuals and
lending products for consumers and businesses to finance
motor vehicles, plant and equipment.
Our commitment is to provide great customer service
through expertise and simplicity.
Contents
Company Information
Strategic Report
Chairman’s Statement
Chief Executive’s Statement
Corporate Governance Report
Audit & Risk Committee Report
Nomination & Remuneration Committee Report
Directors’ Report
Risk Management
Independent Auditor’s Report
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the Financial Statements
Notice of Annual General Meeting
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Company Information
PCF Group plc
Directors
Tim Franklin Non-executive Chairman
David Morgan Non-executive
Mark Brown Non-executive
Christine Higgins Non-executive
David Titmuss Non-executive
Scott Maybury Chief Executive
Robert Murray Managing Director
David Bull Finance Director
Company Secretary
Robert Murray
Registered Office
Pinners Hall
105-108 Old Broad Street
London EC2N 1ER
Registered Number
02863246
Auditors
Nominated Adviser & Broker
Joint Broker
Registrars
Media & Investor Relations
Ernst & Young LLP
25 Churchill Place
Canary Wharf
London E14 5EY
Panmure Gordon (UK) Limited
One New Change
London EC4M 9AF
Stockdale Securities Limited
100 Wood Street
London EC2V 7AN
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 7NH
Tavistock Communications Limited
1 Cornhill
London EC3V 3ND
PCF Bank Limited is authorised by the Prudential Regulation Authority and
regulated by the Financial Conduct Authority and the Prudential Regulation
Authority, FRN number 747017. The Bank is registered in England and Wales,
registration number 02794633, and is wholly owned by PCF Group plc, a
company registered in England and Wales, registration number 02863246
and listed on the Alternative Investment Market. Certain subsidiaries of the
Bank are authorised and regulated by the Financial Conduct Authority for
consumer credit activities. Registered offices are at Pinners Hall, 105-108 Old
Broad Street, London EC2N 1ER.
2
Strategic Report
for the year ended 30 September 2018
Business highlights
l 75% increase in new business originations to £148.4 million (2017 – £84.6 million)
l Portfolio growth of 50% to £219 million (2017 – £146 million)
l Retail deposits total £191 million (2017 – £53 million) and over 3,400 new retail deposit customers welcomed
to the Bank
l Post year end acquisition of Azule Limited on 30 October 2018
l Portfolio growth and recent acquisition puts the Group a year ahead of schedule to meet the portfolio target
of £350 million by 2020
l Continued low impairment charge of 0.5% (2017 – 0.5%)
l Awarded 2018 Best New Provider by independent savings specialist, Savings Champion
l Awarded 2018 Top New Challenger Bank by industry specialist, Leasing World
Financial highlights
l Profit before tax up 44% to £5.2 million (2017 – £3.6 million)
l Earnings per share up 33% at 2.0p (2017 – 1.5p)
l Profit before tax and earnings per share are reported after expensing £0.27 million of one-off Azule acquisition
costs
l Recommended final dividend of 0.3p (2017 – 0.19p) which, if approved, will be paid on 12 April 2019 to
shareholders on the Register at 22 March 2019
l Net Interest Margin reduced slightly to 8.2% (2017 – 8.3%)
l After tax return on equity increased to 10.3% (2017 – 8.7%)
l CET1 capital ratio of 19.3% (2017 – 26.3%)
l £47 million (2017 – £31 million) of unearned finance charges to contribute to earnings in future years
Annual Report & Financial Statements 2018
3
4
Governance and culture
The Board’s responsibility to provide effective
governance continues to be my focus. The Board and
its committees are working well and we will continue to
strengthen these areas in response to the upcoming
changes in the UK Corporate Governance Code. The
industry is heavily regulated and the structure and
effectiveness of our governance regime is instrumental
to our success and the good relationship we have with
our regulators.
The combined experience of the Board will be a
continued strength as we maintain a strong culture of
core values and behaviours.
Outlook
This has been a year of important achievements. The
Group has delivered continued financial success and
growth is ahead of our original plan, bringing forward
investment costs previously anticipated in future years.
We have set ourselves ambitious targets and we will
increase the level of investment in the resources and
technology necessary to maintain a robust governance
structure and enhance future profits growth. The
growth in the lending portfolio to £219 million at the
year end, together with the Azule acquisition, has
provided a base to achieve our medium-term target
portfolio size of £350 million, a year earlier than
previously anticipated. Likewise, our Return on Equity
of 10.3% is within reach of our target of 12.5%.
Our loan book is performing well and, whilst we are an
aspirational business, we will remain alert to current
political uncertainties in regard to Brexit and the
possible economic headwinds as we plan and pursue a
sustainable growth strategy.
I look forward with confidence to the year ahead, as we
build on the successes of 2018.
Tim Franklin
Chairman
8 February 2019
Chairman’s Statement
for the year ended 30 September 2018
I am delighted to report the Group’s first full year
results as a bank. The last 12 months have seen the
successful creation of a bank operating platform which
will be the foundation for sustainable and profitable
portfolio growth in future years. We have seen
accelerated progress and success on all fronts and,
ahead of schedule, completed our first asset
diversification opportunity post year end through the
acquisition of Azule Limited on 30 October 2018.
On behalf of the Board, I would like to extend my
congratulations and thanks to the Executive team and
all our staff for their achievements this year and the
successes that have made these results possible. I
would also like to welcome our new colleagues from
Azule to the Group and wish them well in their future
careers with us.
Our organic lending has a strategic emphasis in
the prime segment of our two existing lending
markets, Business Asset Finance and Consumer Motor
Finance. This prime focus provides resilience and this
will strengthen further as we diversify asset classes and
routes to market. The diversification of our funding
model into accepting retail deposits has also been a
great success. By providing excellent customer service,
we have welcomed over 3,400 new retail deposit
customers this year and seen high retention rates. Each
of these components contributes to a model which
aligns our risk appetite to our cautious outlook for the
UK economy over the short to medium-term.
Profits, shareholder return and capital
Profit before tax for the year ended 30 September
2018 was £5.2 million (2017 – £3.6 million). This is an
increase of 44% and has delivered a 33% growth in
earnings per share to 2.0p (2017 – 1.5p). Furthermore,
profit before tax is reported after the one-off costs of
acquiring Azule. These results have expensed costs
amounting to £0.27 million, while the corresponding
revenue benefits for Azule only start accruing from the
effective acquisition date of 30 October 2018.
This strong set of results reflects our ability to utilise
quickly our cheaper funding and scale up against a
banking platform that has a considerably higher cost
base. All the while, continued investment is being made
for the future through additional resource and
technology enhancements to promote efficiencies,
meet the needs of our customers and deliver
increasing profitability.
Net assets increased by 10.1% to £42.6 million
(2017 – £38.7 million) and the Group Common Equity
Tier 1 (‘CET1’) Ratio remained a healthy 19.3%
(2017 – 26.3%). This capital position has provided the
financial foundation to deliver on our organic portfolio
growth and diversification strategies. The Board
recommends the payment of a final dividend of
0.3p per ordinary share, which is an increase of 58%
over the previous year (2017 – 0.19p). If approved, the
dividend will be paid on 12 April 2019 to shareholders
on the register at 22 March 2019. We intend to maintain
a progressive dividend policy moving forward.
6
Chief Executive’s Statement
for the year ended 30 September 2018
A year of achievement
We have made excellent progress this year. It was
important that we executed our growth strategy
quickly as we recognised that our new banking
platform entailed significant costs and a larger capital
base, both of which require scale to deliver the benefits
of operational gearing. This growth, however, needed
to retain focus and remain prudent. Our success has
come from lending increasingly into the prime segment
of the existing markets in which we already have
considerable experience. This provided speed to
market and matched our desire for a low risk strategy.
As previously mentioned, the competitive nature of the
prime sector has started to put pressure on our Net
Interest Margin (‘NIM’), which fell from 8.3% to 8.2%.
The effect in 2018 is small but we expect this to
continue as a greater proportion of our lending
portfolio becomes prime.
The long-term benefits of transforming into a bank are
starting to accrue. These benefits include lower funding
costs, the ability to reach and retain a wider range of
customers, greater flexibility to diversify our business and
a reduction in the risks of relying on wholesale funding.
Statutory profit for the year increased to £5.2 million
(2017 – £3.6 million). This is an increase of 44% and a
considerable achievement bearing in mind the costs of
investment in the banking model and the £0.27 million
of costs expensed in the year to acquire Azule
Limited. Operating costs increased to £8.6 million
(2017 – £6.6 million) but we saw a small fall in our
cost-to-income ratio to 32.3% (2017 – 32.7%). The costs
to support the bank operating model such as IT, risk,
compliance and audit are significant. In the coming
year, we will invest an additional £0.7 million in people,
premises and our platform to keep pace with the
recent diversification initiatives and to enhance
portfolio growth.
Earnings per share increased strongly, up 33% to 2.0p
(2017 – 1.5p). This is calculated off a larger capital base
with an average number of shares in issue of 212.2m
(2017 – 190.4m shares).
Return on equity improved to 10.3% (2017 – 8.7%),
taking a significant step towards our medium-term
target of 12.5%. The profit after tax for the year was
£4.2 million (2017 – £2.8 million) on an effective
Corporation Tax rate of 19.0% (2017 – 23.3%).
We have recommended a final dividend of 0.3p
(2017 – 0.19p). PCF has grown the annual dividend
payments, following a return to the dividend list two
years ago, while retaining a dividend cover that is
commensurate with a strongly growing business and
the capital intensive nature of banking. A scrip
alternative will also be available.
Organic growth and portfolio
New business originations increased in the year by 75%
to £148.4 million (2017 – £84.6 million), achieving our
volume targets. Compared to a 24% increase the
previous year, this was an outstanding achievement by
the new business team.
The Business Finance Division provided strong growth.
Our proposition for this division has been well
received by the broker market and we are able to
leverage our service levels to achieve the desired credit
quality and yield criteria. SME lending increased in the
year by 76% to £86.2 million (2017 – £48.9 million).
At 30 September 2018, the business finance portfolio
was £121 million (2017 – £73 million). This business line
now makes up 55% of our total lending portfolio
(2017 – 50%). This proportion will grow further
following the consolidation of Azule.
Origination growth in our Consumer Finance Division
was just as pronounced with advances increasing by
75% (2017 – fall of 3%). Consumer finance lending in
the year was £62.2 million (2017 – £35.6 million). This
was a pleasing result considering the well documented
difficulties in the motor vehicle market, namely sharply
lower new car sales, the diesel emissions scandal, the
regulatory focus on Personal Contract Purchase (‘PCP’)
and the introduction of the Worldwide Harmonised
Light Vehicle Test Procedure (‘WLTP’) legislation. I
stress that our success in this market is a result of our
position in the used vehicle market, which has been
much more resilient and largely unaffected by the
headwinds noted above. 96% of all our consumer
finance originations are for nearly new or older vehicles.
It is also worth reiterating that PCF Bank does not offer
a PCP product or take a residual position on finance
contracts, therefore eliminating an element of risk from
falling values on diesels and motor vehicles in general.
Our success in consumer finance is also due in part to
a specialisation in leisure vehicles such as horseboxes,
motorhomes and caravans, as well as the continued
success of our repeat channel of returning customers.
Even greater focus will be applied to these specialist
markets in 2019 and the repeat channel will be further
developed with a broader offering to the existing
customer base. Our finance proposition in this market
will require additional automation and technology
investment to support our strategic aim of growth in
the prime sector. This will be a priority for 2019.
At 30 September 2018, the consumer finance motor
portfolio was £98 million (2017 – £72 million).
The Group remains committed to its existing markets,
supporting consumers and SMEs in the purchase of
motor vehicles, plant and machinery. We have
considerable experience in these markets, which
produce attractive returns and where the lending is
supported by assets with strong collateral
characteristics. We will, however, continue to
investigate other asset classes where we can achieve
the right balance of margin and quality.
The total lending portfolio grew during the year by
50% to £219 million (2017 – £146 million). The portfolio
is reported net of unearned finance charges of
£47 million (2017 – £31 million). These finance charges,
which will be attributed to income over the next four
years, contribute towards certainty and quality of
earnings in the forthcoming periods. These future
earnings are further underpinned by the quality of the
Annual Report & Financial Statements 2018
7
portfolio, which continues to perform well. We remain
alert to trends in the credit cycle, and, while we feel the
collection environment is less buoyant than at any time
in the last four years, the Group has been set on a
course of prime credit quality origination for many
years and our default rates reflect this. Of the total new
business originations of £148.4 million in 2018, 70% are
in our prime credit grades (2017 – 63%).
The impairment charge was maintained at 0.5%
(2017 – 0.5%). As we have highlighted previously, the
record low levels for impairment are being enhanced
by the recovery of long outstanding debts arising
during the credit crisis. These recoveries are reducing
over time and becoming less material. The actual
impairment charge for the current lending book,
therefore, should be recognised as being slightly
higher than the headline rate reported this year. This
robust impairment performance provides comfort in
the event that the broader economic backdrop
deteriorates and, by maintaining prudent underwriting
standards, we are confident that we will continue to
generate sustainable returns.
Diversification and strategic initiatives
On 30 October 2018, post year end, we completed the
acquisition of Azule Limited. Azule is a UK market leader
in providing specialist funding and leasing services direct
to individuals and businesses in the broadcast and media
industry. Azule also operates in the audio visual and
photography markets and offers its services across
Europe, as well as in the UK. Azule has been providing
finance for more than twenty years and has built a
strong market presence, with a sales capability to place
asset finance to a wide range of banks and lending
institutions, as well as originating asset finance for its
own portfolio. The acquisition offers revenue synergies
with PCF’s existing asset finance operations, given
Azule’s focus on financing a niche class of business-
critical assets with strong collateral characteristics, for
prime credit grade customers. For the year ended
30 June 2018, Azule originated £54.3 million of asset
finance, reported revenues of £3.1 million and a profit
before tax of £0.8 million. Since the acquisition, trading
has been in line with management expectations.
The acquisition delivers the strategic objectives of
diversification through a new asset class and a new
route to market. The acquisition will immediately
enhance Group earnings and the experienced team
are an ideal fit, both operationally and culturally. The
integration and growth of Azule is a priority for 2019,
including analysing how Azule’s European capabilities
could enhance PCF’s business in the future.
The Bank also has plans to enter the bridging property
finance market. We have recruited a small team of
experienced staff, the first of whom has already joined
us. This will further diversify PCF’s lending model with
a new asset class. The skill set of the team is rooted in
bridging finance, with more than 30 years’ experience
of lending to this market. This is an opportunity to
enter a large market place in a measured way. This
diversification places value in our new liquidity model
and the capital efficiencies incumbent in property
lending. The intention is to be a specialist property
finance provider, avoiding the competitive ‘master
broker’ relationships and building a new business line
that meets our NIM and return on equity targets.
This is a new market for PCF and there is cost in
building our operating model. We therefore expect this
new business line to make a contribution only at the
gross profit level in 2019.
These diversification initiatives are in addition to our
existing model, where we continue to drive growth in
our organic portfolio. We currently have no greater
than a 3.5% share in each of those existing core
markets and there is further scope to make strong
progress in those business lines. We
l have recruited Gerald Grimes to the new position
of Head of Commercial Development to enhance
the existing lending proposition and provide
resource within the new diversified business lines;
l will continue to target the prime sector to augment
the quality of our portfolio and provide resilience
should the economic environment become less
favourable;
l will make significant investment to enhance our
credit decisioning to facilitate scale; and
l will use our ever-expanding database of prime
consumers to improve customer retention with
targeted marketing campaigns and pilot schemes
of complementary product types.
Each of these initiatives will involve continued
investment in technology to modernise our service
proposition, deliver efficiencies in business delivery and
deploy automation. The use of technology has always
been integral to the success of the Group and it will
remain a key enabler of growth and increased
profitability.
The diversifications since year end and the execution
of these strategies has us on track to reach our initial
portfolio target of £350 million a year earlier than
planned. Our longer-term objective is a lending
portfolio of £750 million by 30 September 2022.
Balance sheet and liquidity
The net assets of the Group increased by 10.1% to
£42.6 million (2017 – £38.7 million). Our year end CET1
Ratio was 19.3% (2017 – 26.3%) and the liquidity
measurement of Overall Liquidity Adequacy Ratio was
221% (2017 – 126%). These ratios are ahead of the
minimum requirement and provided the capacity to
grow customer lending in 2018 and to acquire Azule.
During the year, the Bank increased retail deposit
balances to £191 million (2017 – £53 million). We now
have over 4,500 retail deposit customers (2017 – 1,060)
and the success of our deposit activities has been
matched with positive feedback from customers on the
savings platform and speed of service. We continue to
deliver on our savings proposition of ‘Simple Banking.
At your service’. We offer a range of products, with
maturities from 100 days to 7 years and have an
average balance outstanding of approximately £42,000
(2017 – £48,000) for an average term of 2.5 years
(2017 – 2.7 years). The average cost of retail deposits
has increased slightly in the year to 2.1% (2017 – 2.0%).
The savings products are targetted at middle to older
aged savers, providing ease of service by utilising our
on-line application portal or, if they prefer, by postal
application.
8
People
During the course of the year, PCF was awarded 2018
‘Best New Provider’ by the independent savings
specialist, Savings Champion and 2018 ‘Top New
Challenger Bank’ by industry specialist, Leasing World.
Therefore, both our lending and borrowing functions
have been acknowledged for their expertise and levels
of customer service, which is a great credit to all the
staff at PCF. Our staff operate to high standards,
putting the customer first and conducting business
dealings in a professional and committed manner.
I would like to thank them for their efforts in 2018.
Staff numbers have increased in the year to 73
(2017 – 59) and more recently we have welcomed the
17 staff of Azule into the PCF team.
Current trading and outlook
We have once again delivered on our own key strategic
objectives and market expectations.
New business originations remain strong and we
are currently experiencing a good impairment
performance from our lending portfolio. Our focus,
over the past few years and today, on prime quality
customers provides a level of confidence. Economic
uncertainty arising from either the current political
fallout from Brexit or other macro-economic factors
remains a risk. This could manifest itself as decreased
demand in our market places or rising impairments
through an economic downturn. Such risks have the
potential to slow our progress, but we have built PCF’s
lending model on sound credit and operational
foundations and that stands us in good stead.
The momentum of excellent portfolio growth in 2018
has carried forward into the new financial year and,
with the acquisition of Azule, we expect further
progress and financial success in 2019. We will continue
to invest in new business lines, our technology platform
and staff to build a robust structure which is able to
take advantage of the opportunities and meet the
challenges of a growing organisation.
There is immense potential at PCF Bank and, with the
execution of our strategic objectives, I have confidence
in the future growth prospects of the Group.
Scott Maybury
Chief Executive
8 February 2019
During the year, we gained membership of the Bank of
England’s Sterling Monetary Framework which provides
access to beneficial schemes, such as a Reserve
Account and the Discount Window Facility. We also
became a participant in the Term Funding Scheme
which, along with existing wholesale debt facilities,
provides a diversified funding source alongside our
retail deposits.
Our funding strategy will primarily use retail deposits
to fund growth, largely by matching business
origination with fixed rate, fixed term deposits to
preserve profit margin and reduce market volatility. On
the evidence to date, we see long-term sustainability in
this strategy and our ability to fund both organic
growth and further acquisitions.
Regulatory environment and risk
The Financial Conduct Authority recently published a
policy statement ‘Assessing Creditworthiness in
Consumer Credit’. The rules and guidance arising from
the statement have not disrupted our current practices
to any great extent, but further enhancements were
adopted in November 2018.
The General Data Protection Regulation was adopted
in the year and assurance work was completed by
internal audit ahead of the implementation. A post-
implementation review is planned for 2019.
During the year, the Board also considered the
feedback provided by the Prudential Regulation
Authority’s review of bank recovery plans. We
determined that the external assurance reviews
completed pre-mobilisation, in addition to the
indicators and governance scorecard currently in place,
met the regulatory requirements for a bank of our
scale and complexity. Further assurance work will be
scheduled for 2019. We continually review our risk
management framework to refine credit policy, monitor
the appropriateness of our risk tolerances and are alert
to emerging risks.
The Group aims to minimise the adverse impact on net
interest margin caused by any increase in the cost of
borrowing. We are a fixed rate lender and use fixed
rate retail deposits and debt to protect our profit
margin. The recent interest rate rises, therefore, have no
effect on our existing portfolio and, if we enter a higher
interest rate environment, our terms for new lending
will need to reflect any increase in funding cost.
For the next accounting year ending 30 September
2019, the Group will adopt International Financial
Reporting Standard 9 (‘IFRS 9’). IFRS 9 will
fundamentally change our loan loss impairment
methodology. The Standard will replace the previous
incurred loss approach with a forward looking
expected credit loss approach. The Bank will be
required to record an allowance for expected losses for
all loans and other debt financial assets not held at fair
value through profit or loss, together with loan
commitments and financial guarantee contracts. The
allowance is based on the expected credit losses
associated with the probability of default in the next
twelve months unless there has been a significant
increase in credit risk since origination, in which case,
the allowance is based on the probability of default
over the life of the asset. The Group expects the
impact to its impairment charge to be between 10 - 15%
of current provisioning levels. A further analysis can be
found in note 5.21.3.
Savings
The Bank’s target savings market is UK-domiciled,
middle to older aged savers, and is estimated to be
approximately £154 billion in size.
We offer Term Deposits, ranging from 1 year to 7 years,
and Notice Accounts to retail customers, with interest
rates appropriate to each duration.
Since the launch of PCF Bank, we have raised over
£190 million of deposits and now have over 4,500
savings customers. Most of our customers apply
on-line to open an account, using our portal, which is
both quick and simple to understand. However, we are
one of a small number of banks that also offer a postal
application and accept cheques.
The average deposit balance is approximately £42,000
with 92.5% of our deposit holdings in term deposit
accounts, which have an average term of 2
a blended rate of below 2.1%.
years and
½
The vehicle and asset finance markets
Vehicle and asset finance are commonly used sources
of finance for consumers and business, providing
significant cash flow benefits for those using them. The
markets in the UK are mature and vast, with PCF Bank
having a share of no greater than 3.5% of each.
The asset finance market has performed very strongly
in recent years and, in the twelve months to September
2018, members of The Finance & Leasing Association
(‘FLA’) reported new business lending of £32.1 billion,
which represented a 3% increase on the previous year.
The consumer used car finance market has performed
equally well, although there has been a decline in new
car sales. PCF Bank finances predominantly used cars
and so has not been as affected by this sharp
slowdown in the new car market. In the twelve
months to September 2018, FLA members advanced
£19.3 billion (2017 – 18.3 billion) and £17.2 billion
(2017 – £14.6 billion) in respect of new and used cars
respectively.
Competition
Due to the fact that both of our chosen markets are
mature and sizeable, there is a significantly competitive
nature to both of them. There are long established
players who have sizeable market shares, but there
are always new entrants coming into the sector, in
particular in the business finance market. This continues
to create a downward pressure on rates and margins.
As a relatively small participant, PCF Bank has never
taken the approach of writing volume for volume’s sake
and has actively adopted a pricing policy of matching
interest rate to risk. Our NIM has not been too
adversely affected in the current year, however, we
expect to see this fall in subsequent periods as we
compete increasingly in the prime markets.
Market and Business Overview
Business model
The Bank historically has had two operating divisions
l Business Finance Division, which provides finance
for vehicles, plant and equipment to SMEs; and
l Consumer Finance Division, which provides finance
for motor vehicles to consumers.
Both divisions transact prime quality, collateralised
business which is processed through eQuote, the
Bank’s internet-based proposal system, which is able to
underwrite high volumes of proposals quickly, at low
cost. It also enables us to send information and
documentation to our customers, dealers and
introducers electronically, therefore speeding up the
application process.
The Group predominantly uses broker intermediaries as
its route to market. However, it is increasingly
developing direct relationships with suppliers and
distributors in niche products and markets. Part of the
initiative to develop direct relationships resulted in the
recent acquisition of Azule Limited, a specialist lender
to the broadcast and media industry, and the decision
to diversify into bridging property finance.
Simple banking. At your service.
We offer simple, easy to understand finance products.
Finance customers repay us by way of monthly
instalments and we maintain a focus on ensuring that
these payments are affordable.
Savings customers benefit from competitive interest
rates for a range of term deposits and notice accounts.
We aim to offer excellent levels of service to our
customers, intermediaries and dealers by using
technology to speed up processes whenever we can.
Our customers are at the heart of all that we do.
Our risk philosophy
The Group’s risk philosophy is to
l finance assets which have strong collateral
characteristics and readily identifiable second-hand
markets. As such, the Group’s preference is to
finance assets such as motor cars, light and heavy
commercial vehicles, coaches, buses, manufacturing
equipment, engineering equipment, construction
equipment, broadcast equipment and property;
l have a wide spread of risk and avoid large
concentrations of risk; and
l ensure we understand our customers’ needs and
that they are creditworthy and can afford the
monthly payments due to us.
Strategy for 2018
Our strategic objective for the year was to prove the
concept of raising and utilising retail deposits as a new
bank to grow our business in our existing chosen
markets of consumer motor finance and SME asset
finance. It was pleasing to be able to achieve this
objective and to see our work recognised by winning
the Leasing World award for ‘Top New Challenger Bank
2018’ and the Savings Champion Award for ‘Best New
Provider’.
The diversification into broadcast and media
equipment finance occurred after the year end and we
will integrate and grow this new business line in 2019.
10
Business Finance Division
The Business Finance Division provides hire purchase
and finance lease agreements to sole traders,
partnerships and limited companies to help them
acquire vehicles, plant and equipment.
The division had another strong year of growth,
increasing new business originations from £49 million
to £86.2 million, which represented a 76% increase on
the previous year. 31% of the originations came from
prime customers whom PCF Bank had been unable to
attract in previous years due to its cost of funds. As a
bank, with a much-reduced cost of funds, we are now
able to penetrate this section of the market and, as it
represents approximately 80% of the total market, it
gives PCF Bank significant potential for further growth.
Prime customers tend to acquire newer and more
expensive vehicles and equipment, resulting in our
average transaction increasing from £32,800 to
£40,600. We expect this trend to continue.
New business volumes
£100,000,000
£80,000,000
£60,000,000
£40,000,000
£20,000,000
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
As a result of the increase in new business originations,
the division’s portfolio also increased significantly. At
30 September 2018, it had grown to £121 million,
representing a 66% increase. We expect the division’s
recent growth to continue and for it to be the
dominant part of our business in future years.
Portfolio
£140,000,000
£120,000,000
£100,000,000
£80,000,000
£60,000,000
£40,000,000
£20,000,000
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
The portfolio is made up of almost 4,400 individual
agreements with an average outstanding balance of
approximately £27,000 and no customer having an
aggregate exposure of more than 1% of the Group’s
total portfolio. Most of our largest customers are
longstanding, with a number of them having had
agreements with PCF Bank for more than ten years.
Consumer Finance Division
The Consumer Finance Division provides hire purchase
and conditional sale agreements to retail customers to
help them acquire vehicles. The vast majority of
vehicles which we finance are used, so have suffered
their initial depreciation and therefore represent good
collateral to support our finance. Whilst the majority of
finance we provide is in respect of motor cars, we also
have specialist knowledge to enable us to finance
classic cars, caravans, motorhomes and horseboxes.
This division also performed strongly during the year,
increasing new business originations by 75% from
£35.6 million in 2017 to £62.2 million. The major success
for the division was the level of business written using
our long-term finance product, which helps consumers
to purchase leisure vehicles such as caravans,
motorhomes and horseboxes. This product accounted
for almost £11 million of our new business originations
during the year and was typically for prime customers.
New business volumes
£70,000,000
£60,000,000
£50,000,000
£40,000,000
£30,000,000
£20,000,000
£10,000,000
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
Our Consumer Finance Division’s portfolio increased by
36% during the year from £72 million to £98 million.
The portfolio is made up of almost 10,000 individual
agreements with an average outstanding balance of
approximately £9,800.
Portfolio
£120,000,000
£100,000,000
£80,000,000
£60,000,000
£40,000,000
£20,000,000
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
Total portfolio performance
The portfolio increased by 50% from £146 million to
£219 million and performed in line with our
expectations, with impairment charges remaining stable
at 0.5%. The acquisition of Azule Limited after the year
end contributed a further increase of £16.5 million to the
size of the portfolio.
The quality of our portfolio continues to improve as we
write increasing levels of prime business. The
percentage of our portfolio which is comprised of
prime business increased from 57% to 65% during the
year. Our move into the prime segments of the market
should help to maintain the low impairment charge for
our portfolio, although we do recognise that there is
greater uncertainty in economic outlook than there has
been for some time.
Impairment Charges
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
At 30 September 2018, over 96% of all customer’s
agreements were up to date.
Annual Report & Financial Statements 2018
11
12
Risk overview
Overview and culture
Managing risk effectively is important to the Bank and
is fundamental to our strategy. PCF Bank is a low cost,
low risk, UK focused retail and commercial lending
business. This has been achieved by maintaining a
conservative business model which embodies a culture
based on a prudent appetite for risk.
The Group’s risk approach is founded on an effective
control framework which guides how our employees
approach their work, the way they behave and the
decisions they make. The type and level of risk we are
prepared to seek, accept or tolerate, otherwise known
as risk appetite, works in tandem with our strategic
plan and is approved by the Board. Our risk appetite is
then embedded within policies, authorities and limits
across the Group.
Staff performance management and reward practices
all have key risk inputs and a focus on risk management
in their design. The Group aims for employees to be
risk aware and to strike the right balance between
delivering on objectives, individual accountability and
maintaining a safe and secure business.
The RMF outlines the governance, policies, metrics,
procedures, systems, tools, techniques and activities by
which the Board and senior management establish and
monitor PCF Bank’s risk appetite and manage risk
effectively.
Risk management refers to the process of
identification, monitoring, reporting and response to
the risks to which the Group is exposed. Senior
management ensure that the RMF is embedded in its
day-to-day management and control activities. It is
important that the RMF takes account of strategic
growth and business model changes.
A clearly defined Risk Appetite Statement is in place
which allows the setting of detailed risk appetite and
reporting metrics for principal risks. The Risk Appetite
Statement sets out the level of risk that the Group is
willing to take in pursuit of its business objectives.
Risk is managed using the ‘Three Lines of Defence’
principle, separating risk origination from risk oversight
and risk assurance. Governance is provided through a
formal committee process, including the Board and the
Audit & Risk Committee (‘ARC’).
The Board ensures that the Group actively embraces a
strong risk culture, where all staff are accountable for
directly assessing, controlling and mitigating risks. The
Board leads in setting the risk appetite and ensuring
that the Risk Management Framework (‘RMF’) is fully
embedded, with a strong focus on the adherence to
risk appetite in all metrics.
Annual Report & Financial Statements 2018
13
14
Key mitigating factors and controls
l The Group does not intend to undertake any
medium to long-term strategic actions within its
business model which would put at risk its vision of
being a successful, specialist lender in its chosen
and target markets, backed by a strong and
dependable savings franchise.
l The Group will monitor, review and challenge its
performance against strategy using established key
performance indicators.
l The Group will not put its core strategic and
business objectives at a level of risk which is beyond
its financial resources and operational capabilities
under both normal and stressed conditions.
l Where the Group is going through a strategic change
programme, it will consider, in addition to readiness
and any risks to delivery, the impact of that change
on the business in terms of customers, staff, the
control environment and reputational impacts.
l The Board will set challenging but achievable
financial targets.
l The Board and its committees will regularly monitor
the business and macro-economic assumptions
underlying its business, capital and liquidity plans.
l The Board will align the remuneration of senior
management to key strategic objectives.
l The Board will be alert to emerging risks to the
business.
Risk strategy
The Group has clearly defined its risk management
objectives and has a strategy to deliver them. The risk
management strategy is to
l identify principal and emerging risks;
l define risk appetite and ensure that the strategic
plans are consistent with it;
l avoid business activities that are not aligned to the
Group’s risk appetite or that do not provide the
appropriate balance of risk and reward;
l manage risk within the business with independent
effective oversight;
l ensure that the business lines are supported by
effective risk controls, technology and technical
competencies;
l manage the risk profile to ensure that the business
strategy can withstand a range of adverse
conditions;
l ensure a sound risk control environment and risk
aware culture;
l ensure that remuneration practices take into account
prudent risk taking;
l provide enhanced training and compliance
awareness sessions to all employees; and
l aggregate and look at risk across the Group so that the
business is sufficiently aware of its key vulnerabilities.
The Board focuses on the key risks with clear risk
tolerance and accountability for risks. Risk
management focuses on the key risks that could
prevent the achievement of strategic objectives. Risk
management is integrated into the corporate
framework and business planning with regular
reporting to the Board and other committees, such as
the Audit and Risk Committee (‘ARC’) and Executive
Committee (‘ExCo’).
Principal risks
Principal risks are the primary risks that the business
faces which could impact the delivery of the Group’s
strategic objectives. The results, findings and
conclusions of the risk appetite metrics are regularly
reported to ExCo, ARC and the Board to support their
governance role in monitoring material exposures to
principal risks and the scope of mitigation strategies.
The Group has identified eight principal risks which
could impact the delivery of its strategic objectives and
has defined a Board approved risk appetite, with key
mitigating factors and controls for the following risks.
Strategic & business risk
Definition - Strategic and business risk is the risk which
affects the Group’s ability to achieve its corporate and
strategic objectives.
Statement - In order to maintain investor confidence in
the Group’s AIM listing and market expectations, the
Board operates the business in such a way as to
achieve a consistent increase in profits and
shareholders’ return.
Credit risk
Definition - Credit risk is the risk that a borrower fails
to pay the interest or to repay the capital on the
Group’s loans and receivables, thereby giving rise to
the Group incurring a financial loss on that borrower’s
account.
Statement - The Group aims to minimise the impact on
profitability from defaults through a prudent and
stringent underwriting policy and case management
when customers are in difficulty.
Key mitigating factors and controls
l The Group will focus its lending on its specific areas
of expertise.
l The Group currently limits its portfolio lending to
the UK.
l The Group will embed clear lending policies in all
business areas.
l The Group will review performance against risk
appetite.
l The Group will hold credit committee meetings for
larger exposures or new areas at risk.
l The Group will stress the portfolio to test resilience.
l The Group will conduct a product risk assessment
on any new business lines.
Capital risk
Definition - Capital risk is the risk that the Group will have
insufficient capital resources to support the business.
Statement - The Group aims to maintain a sufficient level
of capital above the total regulatory capital requirement
and CRD IV capital buffers, as detailed in the Internal
Capital Adequacy Assessment Process (‘ICAAP’). The
level of surplus capital held will be formally reviewed by
the Asset & Liability Committee (‘ALCO’), ExCo, ARC
and the Board on at least an annual basis, with metrics
produced for review by the Board.
Key mitigating factors and controls
l ARC is responsible for reviewing and approving
assumptions and stress scenarios in the planning
stages of the ICAAP and Internal Liquidity
Adequacy Assessment Process (‘ILAAP’), including
substantive changes to the previous assessment.
l The Group will consider the need for a Capital
Planning Buffer (‘CPB’), over and above the CRD IV
capital buffers, to mitigate the risks of exposures
under appropriate stress scenarios.
l The Group will monitor closely and regularly its
capital and leverage ratios to ensure that it meets
current and future regulatory requirements.
l The Group is able to accumulate additional capital
through profits and by raising new equity as a listed
company on a recognised stock exchange.
l The Group has a supportive majority shareholder
who has participated in previous capital raisings.
l The Group is able to manage the demand for
capital through management actions including
adjusting its lending strategy.
l The Group will regularly conduct stress tests and
sensitivity analysis on a forward-looking basis.
l The Group will regularly conduct forecasting and
scenario planning.
Liquidity & funding risk
Definition - Liquidity and funding risk is the risk that
the Group is not able to fund new business originations
or meet cash flow or collateral obligations as they fall
due without adversely affecting either its daily
operations or its financial health.
Statement - The Group will at all times maintain liquidity
resources that are adequate, both as to amount and
quality, to ensure that there is no significant risk that its
liabilities cannot be met as they fall due. The Group will
not tolerate liquidity risk that leads to it being unable to
meet its liabilities as they fall due in a scenario
consistent with its standard Pillar 1 and Pillar 2 ILAAP
stress tests. The Group will maintain strong relationships
with its banks for funding purposes, be active in the
retail deposit taking market and will maintain a
diversified funding strategy. The Group will align the
tenor of its funding to the average effective life of its
loan portfolio. The Group will continue to maintain
wholesale debt and have at its disposal an appropriate
level of committed facility headroom.
The Group will operate a treasury function which will
be responsible for the day-to-day management of its
liquidity and funding position and its implementation of
the Board approved funding plan.
Key mitigating factors and controls
l The Group will at all times adhere to the Overall
Liquidity Adequacy Rule (‘OLAR’) and operate
within its risk tolerance.
l The Group will ensure compliance with the OLAR
and liquidity risk tolerance and that liquidity stress
testing is conducted as part of the ILAAP review.
l The Group will maintain its liquidity resources in the
form of high quality liquid assets (‘HQLA’). The
amount of these will, at all times, exceed the
minimum required by the OLAR and liquidity risk
tolerance.
l The Group will carry out forward modelling to
identify liquidity mismatches.
Market & interest rate risk
Definition - Market risk is the risk of losses in on and
off-balance sheet positions arising from adverse
movements in market prices. Market risk, therefore,
results from all positions included in the Group’s
banking book, as well as from foreign exchange and
other risk positions. Interest rate risk is the risk that the
Group will be adversely affected by changes in the
absolute level of interest rates, in the spread between
two rates, in the shape of the yield curve or in any
other interest rate relationship.
Statement - The Group aims to minimise the adverse
impact on NIM caused by an increased cost of variable
rate borrowings and, where necessary, to fix the cost of
borrowing through the use of interest rate swaps. The
Group does not trade wholesale financial instruments
and therefore does not have a trading book.
16
l The Group will provide enhanced training and
compliance awareness sessions to all employees.
l The Group will formally review and ratify all new
products and business lines through its Marketing &
New Products Approval Committee (‘MNPA’).
Regulatory risk
Definition - Regulatory risk is the risk that the Group is
exposed to fines, censure, legal or enforcement action,
civil or criminal proceedings due to failing to comply
with applicable laws, regulations, codes of conduct or
legal obligations.
Statement - The Group has put in place appropriate
measures to avoid regulatory breaches, fines, censure,
legal or enforcement action due to failing to comply
with applicable laws, regulations and codes of conduct
or legal obligations.
Key mitigating factors and controls
l The Group engages with industry bodies, such as
UK Finance and The Finance and Leasing
Association, and seeks external advice from
auditors and consultants.
l Group policies and procedures set out the
principles and key controls that should apply across
the business and which are aligned to the Group’s
risk policies. Business units assess and implement
policy and regulatory requirements and establish
controls to ensure compliance. There is mandatory
training for all employees.
l Risk & Compliance provide oversight, proactive
support and constructive challenge to the business
in identifying and managing regulatory issues.
l When appropriate, Risk & Compliance will conduct
thematic reviews of regulatory compliance across
businesses and divisions.
Key mitigating factors and controls
l The Group does not seek to take or expose itself to
market risk and does not carry out proprietary
trading.
l The Group’s balance sheet exposures are
predominantly in Sterling, so it has little foreign
exchange risks. Some assets are bought or sold in
foreign currency as are broking transactions, but
these are short-term exposures.
l The Group manages its Interest Rate Risk in the
Banking Book (‘IRRBB’) by identifying and
quantifying interest rate risk gaps due to
mismatches between assets, liabilities and existing
interest rate swaps.
l Where a significant interest rate gap is identified, the
Group will execute an interest rate swap to hedge the
position. It will ensure that the change in Economic
Value of Equity (‘EVE’) and Earnings at Risk (‘EaR’)
are managed within policy limits at all times.
Operational risk
Definition - Operational risk is the risk of loss arising
from inadequate or failed controls or processes, people
and systems or from external events.
Statement - The Group will maintain a strong internal
control environment to mitigate operational risk which
is inherent to its business activities and to minimise the
financial impact of operational risk arising from risks
such as IT disruption, human error, a breakdown of
procedures, non-compliance with policy and internal or
external fraud.
Key mitigating factors and controls
l The Group will review IT system architecture to
ensure systems are resilient and that the
confidentiality, integrity and availability of critical
systems and information assets are protected
against cyber attacks.
l The Group will implement a robust project
governance structure and delivery framework with
respect to IT and change management to ensure
there are appropriate controls in place covering
scoping and planning, design, initiation, monitoring
and risk assessment.
l The Group will implement actions from internal and
external IT assurance reviews to enhance the
resilience of systems supporting the processes most
critical to customers.
l The Group will maintain competitive working practices
to attract, retain and engage high quality employees.
l The Group will invest in enhanced protection of
customer information, including limiting access to
key systems and enhancing the security, durability
and accessibility of critical information.
l The Group will manage effectively change projects
so that they do not cause serious disruption or
create processing inefficiencies to the business
during or after their implementation.
l The Group will maintain a strong internal control
environment and adopt policies and procedures to
detect and prevent the use of its business for
operational risk, money laundering, facilitating tax
evasion, bribery and activities prohibited by legal
and regulatory requirements.
Conduct risk
Definition - Conduct risk is the risk of customer
detriment, regulatory censure or a reduction in
earnings value, through financial or reputational loss
from an inappropriate or poor customer outcome or
from business conduct. It is the risk that the Group’s
behaviour results in poor customer outcomes, exposing
the firm to recourse from its customers, loss of
business from reduced trading and the potential for
regulatory action.
Statement - The Group has no appetite for conduct
risk events through product design, corporate culture
or operational processes. The Group restricts its
activities to areas of established expertise and ensures
the culture of the organisation delivers a fair outcome
for customers.
Key mitigating factors and controls
l The Board has an approved statement on culture,
adopted throughout the organisation.
l Customer focused policies and procedures. These
reflect the customer outcomes the Board intends to
achieve (e.g. product development, governance and
distribution).
l Conduct risk appetite is established at Group and
business area level.
l Customer needs are explicitly considered within
business and product level planning and strategy.
l Enhanced product governance framework and
MNPA ensures that products continue to offer fair
value and meet the needs of the relevant target
market throughout their life cycle.
l Enhanced recruitment, training and a focus on how
the Group manages employee performance with
clear customer accountabilities.
l Learning from past mistakes, including root cause
analysis.
l Clear customer accountabilities for staff, with
rewards and customer centric feedback built into
performance appraisals.
l Complaints are viewed as a valuable source of
management information and we recognise that,
despite our intolerance of conduct risk failures,
mistakes do happen and when they do we must
rectify and learn from them.
l A programme of assurance reviews centred on
conduct risk clusters, including product design and
governance reviews, periodic product reviews,
culture measurement, marketing and promotion
reviews, the treatment of vulnerable customers and
complaint handling.
Emerging risks
Emerging risks are those future risks which have been
identified as possibly having an impact on the Group’s
future performance, compromise its existing strategy
or threaten its business model.
Interest rate environment
Risk - The low interest rate environment, introduced to
stimulate growth following the financial crisis, has
persisted for longer than first expected. Interest rates
have since increased and, if rates continue to increase
or growth slows, unemployment or business failure
may rise and loan servicing costs may increase, which
could cause an increase in credit losses.
18
Mitigation - The Group continues to monitor these
risks, although UK growth has remained positive in the
face of domestic and international headwinds. The
Group has not felt any significant adverse
consequences but will continue to monitor the interest
rate environment. The Group also lends at fixed rates,
which mitigates the impact of rising rates on individual
borrowers.
Future direction - Market consensus is that the short-
term outlook for the UK will see interest rates increase
by between
percentage points during 2019.
and
¼
½
Brexit and economic environment
Risk - The Group has considered the potential for the
process of the UK leaving the European Union (‘EU’) to
lead to stress events in addition to those identified in
the ILAAP and ICAAP assessments. Although Brexit
has the potential to disrupt UK banks’ access to
markets in the remainder of the EU, the Group has only
limited brokerage business outside the UK following its
acquisition of Azule Limited. However, there is broad
consensus among economists that Brexit will likely, in
the short-term at least, reduce the UK’s real per-capita
income level through changes to interest rates,
employment, business profitability, household income
and indebtedness. Such a result will heighten credit risk
in the portfolio.
Management believes that Brexit’s potential effect on
the Group would be indirect and confined to the
events identified above. Management’s immediate
concern is primarily focused on the negative effect that
the prolonged process of Brexit is having on consumer
and business sentiment and the effect this is having on
demand in our core areas of business.
Mitigation - The Group continues to monitor closely
the Brexit negotiations and the potential economic
impact on credit risk and implications for the
business. It will decide whether internal scenario
planning is required as the political and economic
situation develops.
Future direction - The Government has published a
series of technical notices to allow businesses and
citizens to understand what they would need to do
under different Brexit scenarios, so they can make
informed plans and preparations. Management will
continue to review relevant technical notices as they
are released and will model different Brexit outcomes,
specifically looking at the effects it might have on the
capital and liquidity of the Group.
Technology and system security
Risk - Cyber attacks and data leakage are daily threats
to organisations globally. These threats are becoming
increasingly sophisticated. The Group recognises that
information is a critical asset and that how information
is managed, controlled and protected can have a
significant impact on the delivery of its services and
the security of its customers. Information must be
protected from unauthorised use, disclosure,
modification, damage and loss.
Mitigation - The Board has approved a Cyber Strategy
using best practice guidelines from the National Cyber
Security Centre, the FCA and the Bank of England. This
strategy sets out in detail how the Group will work to
ensure it remains protected against the increasing
threat of cyber atatcks. This strategy is the framework
for the Group’s response to these threats and sets out
five core objectives which have been delivered over the
course of the financial year by implementing a number
of cyber security led initiatives. These objectives are
l Understand cyber risk and act responsibly
l Understand the extent and potential impact of
exposure to the attack
l Operate defences consistently across the Group’s
cyberspace, physical site and organisations
l Incident report
l Strengthen collaboration
The Group continues to be accredited under the
Government’s Cyber Essentials framework and is a
member of the Cyber Security Information Sharing
Partnership (‘CiSP’).
Future direction - The prevention of cybercrime
remains a key focus for the Group. A significant
enhancement to the Group’s security is the
introduction of a Security Operation Centre (‘SOC’).
The SOC will provide 24/7 monitoring of the Group’s
network for vulnerabilities, breaches, attacks and
otherwise unusual behaviour, which could be indicative
of undesirable and potentially harmful activity within its
infrastructure.
Technological and competitive changes to the
motor vehicle market
Risk - The Group has a substantial lending portfolio in
motor cars which equates to over 48% of total loans
and receivables. Technical obsolescence could result in
a concentrated exposure to diesel vehicles and may
lead to a diminution of vehicle values if defensive
action is not taken. The evolution of electronic or
autonomous vehicles is seen as long-term risk.
Mitigation - The sector risks are mitigated by collateral
backed lending, sensible loan to value lending, low
average lending balances, a wide range of models and
marques for residual diversification and an increased
focus on prime motor finance. The Group does not
offer finance products that take a residual position in
the motor vehicle.
Future direction - Continued successful participation in
this sector requires a good understanding of the
upcoming changes in regulation, prudent lending
criteria and sensible lending practices. The Group will
monitor its portfolio on a regular basis and amend its
lending criteria to reflect changes in economic
conditions and the vehicle market, including research
into the electric vehicle sector. The Group has over
twenty years’ experience of the consumer motor
finance sector.
By order of the Board
Scott Maybury
8 February 2019
Annual Report & Financial Statements 2018
19
20
Corporate Governance Report
UK Corporate Governance Code 2016 (‘the Code’) – Statement of Compliance
Chairman’s introduction
Dear shareholder,
As the Chairman of PCF Group, I am delighted to
present our Corporate Governance Report for the year
ended 30 September 2018.
The Board consists of eight directors and the majority
shareholder currently has two representatives on it.
The following pages describe how we comply with the
main principles of the Code, how the Board and
Committee structures operate and the key areas of
focus for both the Board and its committees during the
year. The existing governance framework has proved
effective in 2018 and, where required, there have been
enhancements to the Risk Management Framework to
keep pace with changes in the business.
The Board recognises that one of the keys to the
Group’s long-term success is the development of a
healthy corporate culture. As we continue to execute
our strategy, the Group’s size and complexity will
continue to increase and the Board is cognisant that
the Group’s culture has to evolve alongside this.
Tim Franklin
Chairman
8 February 2019
The Board of Directors (the ‘Board’) is committed to
the highest standards of corporate governance and
complies with most material aspects of the UK
Corporate Governance Code 2016 (the ‘Code’). The
current composition of the Board and ARC represents
a departure from the application of the Code. ARC
includes only one independent non-executive director.
The Group will appoint an additional independent non-
executive director to the Board and ARC in 2019 and
will consider the appointment of a Senior Independent
non-executive director in 2020. Until our proposed
changes to the membership of ARC are implemented,
we consider that the experience and qualifications of
the two members of ARC who are not independent
non-executive directors continues to serve us well. The
Code sets out the principles relating to the good
governance of companies.
The Code is available at www.frc.org.uk
Corporate governance and culture starts at the top of
any company and the Board and the Executive
Committee together are driving the values, behaviours
and attitudes that support the Group’s strategy. The
Board has an agreed statement on culture which has
been adopted throughout the organisation.
Given the size of the Group and the policy of active
dialogue being maintained with institutional
shareholders by the executive directors, the Board is of
the opinion that the appointment of a Senior
Independent Director is not necessary at this current
time. The Board’s thinking on its composition in the
future is detailed above.
This Corporate Governance Report describes how the
Board has applied the principles of the Code and
provides a clear and comprehensive description of the
Group’s governance arrangements.
It is the Board’s intention to adopt the UK Corporate
Governance Code 2018 which becomes effective for
the Group in the accounting period commencing
1 October 2019.
Annual Report & Financial Statements 2018
21
Board of Directors
Tim Franklin
Non-executive Chairman,
appointed on 6 December 2016
Christine Higgins
Independent non-executive director,
appointed on 13 June 2017
Christine is a chartered
accountant with over 25 years’
experience in asset finance,
working at 9 international
banks. Over the last 9 years,
she has served as non-
executive director on a number
of boards in the health, housing,
leisure and finance sectors,
including as chair of the audit and
risk committee. She is currently a non-executive
director of Buckinghamshire Building Society and
chairs its audit committee.
Christine is the Chair of the Audit & Risk Committee
and a member of the Nomination & Remuneration
Committee.
David Titmuss
Independent non-executive director,
appointed on 11 July 2017
David has over 25 years’
experience in both large and
small financial services
organisations, with a particular
emphasis on customer
acquisition and database
management. His corporate
background includes working at
a senior level in public and
privately backed businesses. He
has also led companies both as CEO and as a board
director. Latterly, David headed the marketing function
of webuyanycar.com and is recognised as an expert
in digital marketing and advising businesses on
cost-effective customer acquisition.
David is the Chairman of the Nomination &
Remuneration Committee.
Tim has a financial services
background and has worked in
banking for a number of
organisations for over 30 years.
He is currently a non-executive
director of the Post Office,
which is the UK’s largest
financial services retailer by
number of outlets and is a
member of its Audit Committee. He
is also a non-executive director of Post Office
Insurance and Topaz Finance Limited. Tim is an
Institute of Leadership & Management Level 7 Coach
and works extensively with senior executives across
many industries, both in the UK and internationally.
Tim is a member of the Nomination & Remuneration
Committee.
David Morgan
Non-executive director,
appointed on 9 July 2012
David has over 35 years’
experience in international
banking, building his career at
Standard Chartered Bank in
Europe and the Far East. Since
leaving Standard Chartered in
2003, he has been involved in a
range of business advisory and
non-executive roles. He is
currently a non-executive director
of Somers Limited, Bermuda Commercial Bank Limited
and Waverton Investment Management Limited. He is
also Chairman of Harlequin FC, the Premiership rugby
club.
David is a member of the Audit & Risk Committee and
the Nomination & Remuneration Committee.
Mark Brown
Non-executive director,
appointed on 1 December 2015
Mark has been Chairman of
Stockdale Securities since
November 2014. He was
previously Chief Executive of
Collins Stewart Hawkpoint and
brings a wealth of experience
and leadership in both small
and large financial services
business. Having worked as Global
Head of Research for ABN AMRO
and HSBC and as Chief Executive of ABN’s UK equities
business, Mark led the successful turnaround of
Arbuthnot Securities followed by Collins Stewart
Hawkpoint.
Mark is a member the Nomination & Remuneration
Committee.
22
Scott Maybury
Chief Executive (‘CEO’),
appointed on 12 January 1994
Scott holds a degree in business
studies and is a qualified
accountant. He spent 6 years
with BHP Billiton, one of
Australia’s largest multi-
national corporations and five
years with McDonnell Douglas
Bank. He is one of the founding
directors of PCF Group plc and
was previously Finance Director
until October 2008. Scott chaired the Project Board for
the application and implementation of the banking
licence initiative at PCF.
Robert Murray
Managing Director (‘MD’),
appointed on 19 October 1993
Robert holds the ACIB Banking
diploma and has over 40 years’
banking and finance experience.
He has extensive experience in
lending to personal, corporate
and international customers.
He is one the founding directors
of PCF Group plc.
David Bull
Finance Director (‘FD’),
appointed on 3 August 2015
David holds a first-class degree in
Mathematics and Statistics and is
a chartered accountant. After
qualifying in 1996, he has
worked in the banking sector
across a number of
institutions, including KPMG,
Deutsche Bank and was interim
Chief Financial Accountant at the
Bank of England. Before joining
PCF Group, David was the Director of Finance and
Company Secretary of Hampshire Trust Bank plc, a
specialist challenger bank, where he was instrumental
in setting up their banking operations.
Resignation of directors during the year
There were no resignations during the year.
Annual Report & Financial Statements 2018
23
24
Corporate Governance Structure
Group Board
Bank Board
Chair Tim Franklin
Chair Tim Franklin
Members Non-executive
directors, executive directors
(CEO, MD, FD)
Members Non-executive
directors, executive directors
(CEO, MD, FD)
Audit & Risk Committee
Executive Committee
Chair Christine Higgins
Members David Morgan,
Anthony Nelson
Chair Scott Maybury
Members MD, FD, HoCD,
HoIT, HoRC, Hot
Nomination &
Remuneration Committee
Chair David Titmuss
Members Non-executive
directors
The Board is replicated at Group and PCF Bank Limited
(the ‘Bank’) and the composition of both Boards is
identical.
The Boards meet no less than nine times a year and
their primary responsibilities are to provide leadership,
set strategic objectives and develop robust corporate
governance and risk management practices. The
Boards delegate specific powers to other committees,
as shown in the chart above.
The effectiveness of the Boards is the responsibility of
the Independent non-executive Chairman. Board
performance is reviewed at least annually. The
Chairman will meet formally on an annual basis with
the non-executive directors to measure board
effectiveness, but this is also covered on an ongoing
basis throughout the year through regular board
meetings. The non-executive directors annually review
the Chairman’s performance. The performance of the
Chief Executive is appraised annually by the Chairman
and the other members of the Nomination &
Remuneration Committee.
The Boards are supported by a number of established
committees, namely the Executive Committee, Audit &
Risk Committee and Nomination & Remuneration
Committee.
Each committee has a set of clearly defined Terms of
Reference. Responsibility for the implementation of the
Group’s strategies and day-to-day business is
delegated to management. The organisation structure
sets out clear segregation of roles and responsibilities,
lines of accountability and levels of authority to ensure
effective and independent stewardship.
Board balance and independence
The Group Board and Bank Board consist of three
independent non-executive directors, two
non-executive directors and three executive directors,
and are chaired by Tim Franklin, one of the independent
non-executive directors. The profiles of the members of
the Board are provided on pages 22 to 23. The tenure
of each of the three independent non-executive
directors is less than nine years, which is in accordance
with Provision B.1.1 of the Code.
The Boards consist of members with diverse and
relevant professional backgrounds, skills, extensive
experience and knowledge in the areas of banking,
finance, marketing, information technology, business,
general management and strategy required for the
successful direction of the Group and the Bank.
With their diversity of skills, the Boards have been
able to provide clear and effective collective leadership
and have brought informed and independent
judgement to strategy and performance to ensure that
the highest standards of conduct and integrity are
always at the core of the Group. None of the
independent non-executive directors participate in the
day-to-day management of the Group or the Bank.
The presence of the independent non-executive
directors is essential in providing unbiased and
independent opinions, advice and judgements to
ensure that the interests, not only of the Group, but
also of shareholders, employees, customers, suppliers
and other communities in which the Group conducts
its business are well represented and considered.
The Audit & Risk Committee (‘ARC’) monitors the
effectiveness of the Group’s financial reporting
systems, internal control and risk management and the
integrity of the Group’s external and internal audit
process.
The Nomination & Remuneration Committee (‘RemCo’)
reviews the structure and size of the Board and
appraises the performance and remuneration of the
executive directors and other senior executives. The
committee considered the appropriateness of the
Board’s composition during the year and concluded
that it has the appropriate mix of skills and experience
to fulfil its responsibilities.
The Bank Board holds separate board meetings
immediately following the meetings of the Group
Board. The Boards are collectively responsible for the
success of the Group and the Bank.
Annual Report & Financial Statements 2018
25
Roles and responsibilities
The Board’s role is to provide entrepreneurial
leadership within a framework of prudent and effective
controls which enable risk to be assessed and
managed. The Board sets the strategic aims and
ensures that the necessary financial and human
resources are in place to meet objectives and review
management performance.
The Board’s roles and responsibilities include, without
limitation, the following
l developing corporate objectives, policies and
strategies;
l reviewing and adopting the strategic business plan
for the Group’s effective business performance;
l overseeing the conduct of the Group’s business to
evaluate whether the business is being managed
effectively;
l identifying principal risks and ensuring the
implementation of appropriate systems to manage
and monitor identified risks effectively;
l ensuring that all candidates appointed to senior
management positions are of the required calibre
and that there are programmes in place to enable
orderly succession of senior management;
l ensuring effective communication with shareholders
and other stakeholders;
l reviewing the efficacy of internal control and of
management information, including systems for
compliance with applicable laws, regulations, rules,
directives, and guidelines;
l setting the Group’s values and standards and
ensuring that its obligations to shareholders and
other stakeholders are understood and met;
l approving the risk management framework,
insurance and mitigation; and
l reviewing and approving acquisitions and disposals
of undertakings and major investments.
The Board has adopted Terms of Reference (‘ToR’)
which set out the Board’s strategic intent and outline
the Board’s roles and responsibilities. ToR is a source
reference and primary induction literature for existing
and prospective members of the Board and is
consistent with the Code.
The Board ToR also sets out the independence, duties
and responsibilities that the members of the Board
must observe in the performance of their duties. The
Board ToR is subject to review on at least an annual
basis.
Roles and responsibilities of the Chairman
and Chief Executive
The Code recommends that there should be a clear
division of responsibilities at the head of the Company
to ensure that there is proper balance of power and
authority.
All executive and non-executive directors have
unrestricted and timely access to all relevant
information necessary for informed decision making.
The Chairman encourages participation and
deliberation by the Board members to make best use
of their collective wisdom and to promote consensus
building.
Matters which are reserved for the Board’s approval
and delegation of powers to the Board Committees are
set out in an approved framework on limits of
authority.
The business affairs of the Group are governed by the
Group’s delegated authorities and its policy and
procedures manuals. Any non-compliance issues are
brought to the attention of the Executive Committee,
Audit & Risk Committee and/or the Board for effective
supervisory decision making and proper governance.
As the Group is expanding and its business growing,
the division of authority is reviewed constantly to
ensure that management’s efficiency and performance
remain at its level best.
Chairman
Tim Franklin served as Chairman throughout the year.
The Chairman is responsible for the leadership of the
Board and ensuring the effective running and
management of the Board. He is also responsible for
the Board’s oversight of the Group’s affairs, which
includes ensuring that the directors receive accurate,
timely and clear information, and the effective
contribution of the non-executive directors. He has
overall responsibility for leading the development of
the Group’s culture by the governing body as a whole.
Chief Executive
Scott Maybury served as Chief Executive throughout
the year. He is responsible for the day-to-day
management and executive leadership of the business.
His other responsibilities include the progress and
development of objectives for the Group, managing the
Group’s risk exposure, implementing the decisions of
the Board, staff development and ensuring effective
communication with all stakeholders and regulatory
bodies. He has overall responsibility for the Group’s
performance of its obligations under the Senior
Managers and Certification Regime.
Board meetings and supply of information
Before each Board meeting, the directors receive, on a
timely basis, comprehensive papers and reports on the
issues to be discussed at the meeting. In addition to
board papers, directors are provided with relevant
information between meetings.
The directors also have direct access to the advice and
services of the outsourced Internal Audit function, in
addition to other members of the senior management
team. There is an agreed audit plan and the Internal
Audit function reports directly to the Audit & Risk
Committee.
The Board has regular scheduled meetings. During the
year there were nine scheduled board meetings. As
and when the need arises, additional meetings are held
to deal with any specific time-critical business matters.
Attendance at meetings
The attendance of the directors at Board and the
principal committee meetings that took place during
the year are shown below.
26
Number of meetings attended/(eligible)
Number of meetings held
Chairman
Tim Franklin (1)
Chief Executive
Scott Maybury (2) (3)
Non-executive directors
David Morgan
Mark Brown
Independent non-executive directors
Christine Higgins
David Titmuss
Executive directors
Robert Murray
David Bull (2)
Board
12
Audit & Risk
Committee
4
12(12)
1(1)
Nomination &
Remuneration
Committee
Executive
Committee
4
4(4)
22
–
12(12)
3(4)
4(4)
22(22)
11(12)
12(12)
12(12)
12(12)
12(12)
12(12)
4(4)
–
4(4)
–
–
4(4)
3(4)
4(4)
4(4)
4(4)
–
–
–
–
–
–
17(22)
21(22)
(1) Attended one Audit & Risk Committee meeting as an invitee.
(2) Attended regular Audit & Risk Committee meetings as an invitee.
(3) Attended regular Nomination & Remuneration Committee meetings as an invitee.
Appointments to the Board
The Nomination & Remuneration Committee (‘RemCo’)
consists of two non-executive directors and three
independent non-executive directors and is chaired by
David Titmuss. RemCo makes independent
recommendations for appointments to the Board. In
making these recommendations, RemCo assesses the
suitability of candidates, taking into account the
required mix of skills, knowledge, expertise and
experience, professionalism, integrity, gender diversity,
competencies and other qualities before
recommending them to the Board for appointment.
RemCo will take steps to ensure that diversity in
candidates is sought for appointment to the Board.
Appointment and re-appointment
The Code requires that all directors should stand for re-
appointment at regular intervals, subject to continued
satisfactory performance. The Company’s Articles of
Association provide that directors shall retire and shall
be eligible for re-appointment if they were not
appointed or re-appointed at one of the preceding two
Annual General Meetings (‘AGM’) or if they were
initially appointed during the period following the most
recent AGM. Directors that are subject to retirement
are eligible for re-appointment at the same AGM.
No person other than a director retiring at the AGM
shall be eligible for appointment or re-appointment as
a director at any general meeting unless he is
recommended by the directors or if the resolution to
propose the person for appointment or re-appointment
as a director has been requisitioned by a member in
accordance with the Companies Act 2006.
RemCo’s role is to assess the performance, time
commitments and independence of each non-executive
director and makes a recommendation to the Board in
this regard. In addition, the performance of executive
directors is appraised. Giving consideration to the balance
of skills, knowledge and experience on the Board as a
whole, the Board concurred with the recommendation
that Scott Maybury and David Bull should be proposed
for re-appointment at the 2019 AGM.
Training and development of directors
Professional development
During the year, specific training sessions were held
covering compliance, regulation and corporate
governance issues. Topics covered included Financial
Crime, Conflicts of Interest, General Data Protection
Regulation (‘GDPR’), Cyber Crime and IFRS 9. Board
members are encouraged to attend relevant training
programmes as part of their continuing professional
development programmes and additional business,
compliance and regulatory updates are also arranged
as appropriate.
Company Secretary
The Company Secretary is responsible for ensuring
that Board procedures and applicable rules and
regulations are observed. He is responsible for advising
the Board, through the Chairman, on all governance
matters. All directors have direct access to the services
and advice of the Company Secretary. Directors are
able to take independent external professional advice
to assist with the performance of their duties at the
Company’s expense.
Governance structure and delegated committee
The Board has established a number of committees to
which responsibility for certain matters has been
delegated. The Board committee structure is shown in
the diagram on page 25. Each committee has written
Terms of Reference setting out the committee’s role
Annual Report & Financial Statements 2018
27
Andrew Barber
Head of IT (‘HoIT’)
Andrew joined PCF Group in June 2002 and is
responsible for developing and implementing IT
strategy as well as overseeing the effective and
efficient operation of all technology solutions within
the Group. Andrew also provides project management
expertise to the Group using PRINCE2 to ensure all
projects adhere to best practice.
Jim Coleman
Head of Treasury (HoT)
Jim joined PCF Group in October 2016 to oversee the
establishment of a Treasury function in preparation for
bank mobilisation in 2017. Since mobilisation, he is
responsible for funding, liquidity and asset and liability
management and funds transfer pricing. Jim has over
30 years’ experience of bank and building society
financial management, is a Fellow of the Association of
Corporate Treasurers and holds an MBA from Imperial
College Business School.
Jason McCabe
Head of Risk & Compliance (‘HoRC’)
Jason joined PCF Group in October 2016 and is
responsible for the chief risk, compliance oversight and
money laundering reporting senior management
functions. He has over 15 years’ experience in risk
management and compliance and joined from Royal
Bank of Canada, where he spent 8 years in various
senior roles, including the Global Head of Operational
Risk for Treasury Market Services and the Chief Risk
Officer for RBC Investor Services UK.
and responsibilities and the extent of the authority
delegated by the Board. Minutes of each committee
are circulated promptly following each meeting.
Reports of certain Board’s committees are set out later
in this Annual Report and provide further detail on
their roles, responsibilities and the activities they have
undertaken during the year.
Meetings of the Board
At each scheduled meeting, the Board receives reports
from the Chief Executive on strategy and the Finance
Director on the financial performance and results of the
Group. The Managing Director updates the Board on
operational performance and credit quality of the
Group and the Bank. In addition, the Board receives
minutes of the meetings of the Executive Committee
(‘ExCo’), Credit Committee (‘CreditCo’), Risk,
Compliance & Operations Committee (‘RCO’),
Marketing & New Products Approval Committee
(‘MNPA’) and Asset & Liability Committee (‘ALCO’).
There is an annual schedule of rolling agenda items to
ensure that all matters are given due consideration and
are reviewed at the appropriate point in the financial
and regulatory cycle. Meetings are structured to ensure
that there is sufficient time for consideration and
debate of all matters. In addition to scheduled or
routine items, the Board also considers key issues that
impact the Group and the Bank as they arise.
Executive Committee
The Board has delegated day-to-day management
duties to ExCo, which meets at least monthly to
deliberate and take policy decisions on the effective
and efficient management of the Group and to monitor
its performance. It also serves as a processing forum
for issues to be discussed at Board level. ExCo’s
primary responsibility is to ensure the implementation
of strategies approved by the Board, provide
leadership to the senior management team and ensure
efficient deployment of the Group’s resources,
including capital and liquidity.
ExCo meetings provide an avenue for the attendees,
which comprise senior management of various
departments, to engage and align to the strategy and
policy as approved by the Board.
Scott Maybury (Chief Executive), Robert Murray
(Managing Director) and David Bull (Finance Director)
are members of ExCo. Their profiles can be found on
page 23. The other members of ExCo are as follows.
Gerald Grimes
Head of Commercial Development (‘HoCD’)
Gerald joined PCF Group in July 2018 to help focus on
the introduction of new products and markets and to
head up Business & Broker Development. He comes
with a wealth of experience in financial services with
GE Capital, The Funding Corporation and as Managing
Director of Hitachi Capital. Until recently, Gerald was a
board director of the FLA and serving as Chairman for
a number of years and was a member of the Bank of
England Consultative Committee. Gerald now acts in
an advisory capacity to the FCA and serves on their
Smaller Business Practitioner Panel (‘SBPP’).
28
Executive Committee
Chair CEO
Members MD, FD, HoCD, HoIT, HoRC, HoT
Credit Committee
Risk, Compliance
& Operations
Committee
Marketing & New
Products Approval
Committee
Asset & Liability
Committee
Chair CEO
Chair FD
Chair CEO
Chair FD
Members MD, FD,
HoCC, HoNB, HoRC,
Senior Credit Risk
Manager
Members HoCC,
HoCD, HoF, HoIT,
HoNB, HoO, HoRC,
HoS, HoT
Members MD, FD,
HoF, HoIT, HoNB,
HoO, HoRC, HoS, HoT
Members MD, HoF,
HoRC, HoS, HoT
IT Operations
Committee
Chair HoIT
Members HoF, HoRC,
IT Manager
Liquidity & Pricing
Sub-Committee
Chair HoT
Members FD, HoF,
HoRC, HoS, HoNB,
Regulatory Accountant,
Treasury Manager
Executive directors
CEO – Chief Executive
MD – Managing Director
FD – Financial Director
Heads of Department
HoCC – Credit Control
HoIT – Information Technology
HoRC – Risk & Compliance
HoCD – Commercial Developement
HoNB – New Business
HoS – Savings
HoF – Finance
HoO – Operations
HoT – Treasury
Where appropriate, delegates attend where members are absent.
Annual Report & Financial Statements 2018
29
Audit & Risk Committee Report
Committee members
Christine Higgins Non-executive director (Chair)
David Morgan Non-executive director
Anthony Nelson Advisor
Standing invitees
Scott Maybury Chief Executive
David Bull Finance Director
Jason McCabe Head of Risk & Compliance
Grant Thornton LLP representatives (internal auditor)
Ernst & Young LLP representatives (external auditor)
Responsibilities of the Audit & Risk Committee
l Monitor the integrity of the Group’s financial
statements and oversee the external audit
relationship.
l Consider whether the Group has adopted
appropriate accounting policies and made
appropriate estimates and judgements.
l Oversight of internal controls and risk management.
l Monitor the work and effectiveness of the internal
audit function and oversee the internal audit
relationship.
l Advise the Board on the Group’s overall risk
appetite, tolerance and strategy.
l Challenge the Group’s assessment of current and
ongoing major risks to strategic objectives and
reputation.
l Assess and monitor the activities and effectiveness
of the Risk and Compliance function.
l Oversight of whistleblowing arrangements and
procedures in place for detecting fraud and
financial crime and preventing bribery and money
laundering. The Chair of ARC is the Whistleblowing
Champion and an independent point of escalation
in accordance with the Group’s Whistleblowing
Policy.
l Review and approve assumptions and stress
scenarios in the planning stage of the ICAAP and
ILAAP, including substantive changes to the
previous assessment.
Dear shareholder,
I am pleased to present my report to you as Chair of the
Audit & Risk Committee (‘ARC’/the ‘Committee’) and
I have set out below the key areas of focus for the
Committee during the year. In 2018/19 we will continue
to concentrate on these areas, as well as the new
accounting standard IFRS 9, emerging risks that could
have a material impact on the Group and the impact of
changes in the external environment to our risk appetite.
We will also be re-tendering our external audit in 2019, in
line with good governance practices.
Grant Thornton, our internal auditors, completed seven
internal audits during the year and we are pleased to
report that their overall assessment for the year was that
‘the governance and risk and control framework is
operating to support PCF Bank in adhering to its agreed
risk appetite’. The annual internal audit plan was
developed in conjunction with a Second Line of Defence
compliance monitoring programme, which was overseen
by the Committee.
Performance against risk appetite was reviewed at each
meeting during the year and challenged where
appropriate. The Committee discussed emerging risks and
received presentations from the Head of Treasury and
the Head of Credit Control on the key risks in their areas.
The Committee also oversaw the development of further
strategic metrics during the year, in particular ahead of a
full Board review of strategic risks in March.
Members
ARC members comprise two non-executive directors
and one adviser, Anthony Nelson. He is a former Chief
Executive and non-executive director of the Group, a
Fellow of the Association of Corporate Treasurers and
former solicitor with specialist legal knowledge. David
Morgan is a non-executive director and an experienced
international banker. He is also a non-executive director
of the Company’s major shareholder. I am a chartered
accountant with a background in international asset
finance. Over the last nine years, I have sat on a
number of boards as a non-executive director and
board committee chair.
Members of the Committee have recent and relevant
financial experience and extensive experience of
corporate financial matters in the banking and financial
services industry.
Meetings
ARC met four times during the year. The Chief
Executive, Finance Director, Head of Risk &
Compliance, internal audit and the external auditor are
regular invitees at these meetings.
An oral report was made to the Board following each
meeting and the approved minutes were subsequently
provided.
Areas of focus
During the year, the areas of focus for ARC were as follows.
Financial reporting
ARC considered the Group’s interim and annual
financial statements. In reviewing the annual financial
statements, the Committee discussed management’s
analysis and the external auditor’s report and also
reviewed and considered a number of significant areas
of potential risk and key audit matters as follows.
l Misstatement of loans and advances to customers,
including loan loss provisioning – ARC reviewed
changes to the way the loan loss provision was
calculated since last year.
l Fraudulent Revenue recognition through
manipulation of Effective Interest Rate (‘EIR’)
recognition – ARC reviewed the methodology used
to calculate EIR, which is unchanged since last year.
Other areas of audit focus were as follows.
l Financial Close (manual adjustments to the process
including management override of controls).
l Goodwill.
l The control environment required of a bank. Testing
during the audit confirmed that enhancements
made during the year to core banking system
controls were all adequately designed.
30
l Disclosure of the impact of IFRS 9 and the
accounting methodology to be adopted for its
implementation.
l Accounting and disclosure for proposed acquisition
of business – IFRS 3.
l Going concern – ARC assessed the appropriateness
of the going concern basis of accounting and the
statement that the Directors have a reasonable
expectation that the Group will be able to continue
in operation and meet its liabilities as they fall due.
In addition, ARC reviewed the content of the Annual
Report and Financial Statements for the year ended
30 September 2018 for clarity and completeness of
disclosure.
The Committee concluded that the Annual Report and
Financial Statements as a whole were ‘fair, balanced
and understandable’ and therefore recommended the
Annual Report and Financial Statements to the Board
for approval.
Internal audit
ARC oversees the internal audit function, approving its
plans and scope, its resources and considers the
reports produced.
The internal audit function reports directly to the Chair
of ARC and also liaises directly with the Chief
Executive and Finance Director, as appropriate. Internal
audit attends and reports on progress and issues at
each ARC meeting. The Chair of ARC meets with
internal audit regularly and the Committee meets with
internal audit at least once a year, without
management present. The effectiveness of the internal
audit function was evaluated through a discussion
between ARC members, executive directors and senior
management and the conclusion was that it was
satisfactory.
Risk management, compliance and internal controls
The Board is responsible for the overall adequacy of
the Group’s system of internal controls and risk
management. The Board has delegated to ARC the
responsibility for reviewing and monitoring the
effectiveness of the Group’s systems of risk
management, regulatory compliance and internal
control.
In reviewing the adequacy of internal controls, ARC
received and discussed a number of internal and
external reports during the year, including
l Internal audit reports - This year there have been
seven reports completed by Grant Thornton
(Governance, New Business, Treasury, Account
Management, GDPR, Cyber Risk, Conflicts of
Interest) and they were presented and discussed at
ARC meetings throughout the year. Management
has already implemented a number of the
recommendations made, with timely plans in place
to address those remaining. The internal auditors
have observed the culture within the areas they
reviewed and also through interaction with
management and have reported that it is one of
openness, good risk awareness and understanding,
and focus on achieving the right outcomes for
customers;
l External audit reports - The external auditors, EY,
provided the Committee with an update on the
implementation of their 2016/17 recommendations
and their risk assessment for 2017/18. The
Committee also met privately with EY during the
year, which provided an opportunity for relevant
issues to be discussed directly; and
l Compliance - ARC considers reports from the Head
of Risk and Compliance at its meetings which include
performance against risk appetite, complaints,
financial crime and anti-money laundering
compliance, the fraud register, upcoming regulatory
changes and emerging risks. A number of reports
were completed during the year in line with the
Compliance Monitoring Plan, with recommendations
made and timely plans to implement them.
A revised Risk Management Framework and Risk Appetite
Statement was reviewed by the Committee during the
year and recommended to the Board for approval.
ARC also aims to identify wider existing and emerging
risks and to question and, where appropriate, to
challenge the executive directors regarding their plans
for avoiding and/or mitigating these risks. Such areas
include cyber security, fraud, money-laundering,
changes to the car market with regard to electric and
self-driving cars, Brexit, liquidity and capital adequacy
and headwinds in the wider economy, including the
housing market and a new credit crunch.
External audit
ARC is responsible for overseeing the relationship with
the external auditor, including the ongoing assessment
of the auditor’s independence. ARC makes
recommendations to the Board with regard to the
appointment of the external auditor and approves their
remuneration and terms of engagement.
EY was appointed as the Company’s auditor in 1998.
The current audit partner is Michael-John Albert, who
has been in place since 2015.
ARC discussed and approved the planning of the
external audit, including risk evaluation, scope and the
materiality applied as well as the results of the audit.
The audit did not give rise to any material financial
adjustments but did highlight some areas where
management should consider improvements in
processes. Importantly, the auditor considered the
appropriateness of material judgements and concluded
that the balance was appropriate and consistent with
previous years, where applicable.
During the year, ARC discussed with EY the review
procedures they have in place to ensure audit quality.
There was also a discussion of the results of their
Financial Reporting Council (‘FRC’) inspection for
2017/18 and the impact of the findings on the audit plan.
Independence and effectiveness
ARC has reviewed the independence, objectivity
and effectiveness of EY taking into account the
auditor’s report to the Committee on actions they
take to comply with requirements for independence,
compliance with the policy for the provision of
non-audit services and conclusions from the evaluation
undertaken of external audit effectiveness.
Annual Report & Financial Statements 2018
31
The level of audit fees charged by the Group’s auditor is
set out in note 15 to the financial statements. During the
year, ARC approved two pieces of non-audit work by
EY – one in relation to Term Funding Scheme (‘TFS’)
funding and the other in relation to the acquisition of
Azule. This work was within policy thresholds.
ARC evaluates the effectiveness of the external auditor
on an annual basis, taking into account fees and the
engagement letter, a review of the external audit plan,
the objectivity and effectiveness of the audit, the
quality of formal and informal communications with
ARC and the views of management.
The Chair of ARC had private discussions with the
auditor during the year and the Committee met with
external audit at least once during the year, without
management.
Following its review of the 2017/18 external audit
process, ARC concluded that it was effective.
Re-appointment
The Group last tendered its external audit in March
2006 and appointed EY as its auditor. Based on EY’s
performance, ARC has recommended to the Board that
EY be re-appointed as auditor for the coming year. The
Board has concurred, and the re-appointment will be
proposed to shareholders at the Annual General
Meeting.
The current auditor appointment falls under the
transitional arrangements for mandatory audit firm
rotation under the EU Audit Reforms and a change of
auditor is not required at this point. The Committee
considered the most appropriate timing for the next
audit tender and, as this will be the thirteenth year
since the last tender, is recommending to the Board
that it takes place during 2019, effective for the year
ending 30 September 2020.
Committee effectiveness
ARC undertook an annual review of its own
effectiveness during 2018 through a questionnaire sent
to ARC invitees and the conclusions were that the
Committee was operating effectively.
Recommendations raised will be discussed by the
Committee and a time frame agreed for
implementation.
This report was approved by the Audit & Risk
Committee on 4 February 2019.
Christine Higgins
Chair of the Audit & Risk Committee
8 February 2019
32
Nomination & Remuneration Committee Report
Dear shareholder,
I am pleased to present my report to you as Chairman of
the Nomination & Remuneration Committee.
Introduction
The Nomination & Remuneration Committee
(‘RemCo’) has delegated responsibility from the Board
for reviewing the structure, size and composition of
the Board, the performance of the executive directors,
succession planning and remuneration of the directors
and other senior executives. Membership of RemCo is
limited to non-executive directors and chaired
throughout the year by myself. Where appropriate,
RemCo consults external advisers on remuneration
and regulatory issues so as to align with the strategic
aims of the Group and regulatory compliance
requirements.
Approach to remuneration
The approach taken by the Group in respect of
remunerating its staff emanates from a combination of
regulatory guidance and, in particular, the Dual-Regulated
Firms Remuneration Code (SYSC 19D), as appropriate
for Level 3 firms, the rules on remuneration as published
by the Prudential Regulation Authority (‘PRA’) and
Financial Conduct Authority (‘FCA’) as amended from
time to time, and its own best judgement. These
guidelines assist with the design of awards and incentive
packages which are effective in not only recruiting and
retaining staff, but also in meeting the risk appetite and
long-term interests of the Group.
Fundamentally, our approach to remuneration is based
on promoting and rewarding the right behaviours which
ensure that the interests of our customers and
stakeholder value are at the forefront of everything we do.
Due to the size of our business, the Group applies
proportionally to the principle (SYSC 19D.3.3R (2)) to
ensure the practices and processes we promote are
appropriate to size, internal organisation and the nature,
scope and complexity of activities.
In applying PRA and FCA guidance, the Group classifies
its employees as either Code or Non-Code staff. Code
staff are comprised of executive and non-executive
directors and also Senior Managers covered by the
Senior Managers Regime. No staff have been classified
as Material Risk Takers. Other key individuals are covered
under the scope of the Conduct Regime.
Remuneration policy
The Group’s remuneration policy is applicable to all its
employees and a review is undertaken on an annual
basis to assess its implementation and compliance with
the Dual-Regulated Firms Remuneration Code.
The objective of the policy is to recruit and retain high
calibre talent, capable of achieving the Group’s
objectives and to encourage and reward superior
performance and the creation of shareholder value. The
policy further sets out the use of performance-based
remuneration to motivate and reward high performers
who strengthen long-term customer relations, generate
income, demonstrate the required behaviours
(teamwork, co-operation, customer focus, risk
awareness), comply with regulation, create a control
environment, deliver good customer outcomes and
protect and enhance shareholder value.
The Group’s remuneration policy does not encourage
taking risks that exceed the risk appetite of the Group.
The remuneration policy enables incentives to be
provided with the purpose of meeting the Group’s
long-term strategic objectives and general goals in
areas of risk management, positive customer
outcomes, regulatory and statutory compliance and
other key stakeholder expectations.
The following guiding principles underpin the
remuneration policy.
l Interests of our employees are aligned with the
interests of our customers, long-term interests of
the Group, shareholders and other stakeholders in
the Group, as well as the public interest.
l Employees are not to be rewarded for taking risks
that are unwarranted.
l Principles of ‘malus’ and ‘clawback’ will be
implemented where relevant.
l As a level three firm under the Remuneration Code
guidance on proportionality (SYSC 19D), the Group
does not apply the following rules
–
retained shares or other instruments (SYSC
19D.3.56R).
– deferral (SYSC 19D.3.59R).
– performance adjustment (SYSC 19D.3.61R – 62R).
The Group seeks to combine various remuneration and
incentive components to ensure an appropriate and
balanced remuneration package that reflects
responsibilities, the employee’s role in a professional
activity as well as market practice. The four
remuneration components that every employee may be
eligible to receive include
l Basic salary;
l Benefits;
l Cash bonus; and
l Share options.
Remuneration for the year
Fixed remuneration
Fixed remuneration comprises basic salaries and
benefits including healthcare and life assurance cover.
These are provided on the same basis for all
employees. The Company has a workplace pension
scheme with Standard Life, with a Company
contribution rate based on 7% of qualifying earnings.
The Directors contribution rate is based on 10% of
qualifying earnings. These are outside the workplace
scheme and contributions are paid to a scheme of their
choice or as a cash equivalent.
Variable remuneration
The annual performance award is a significant variable
component of the overall remuneration and is at the
discretion of RemCo. In determining the level of award
paid to the Chief Executive, Managing Director and
Finance Director, consideration was given not only to
the financial performance of the Group (including
returns to shareholders and the Group’s profitability) in
2018, but also to their individual performance, based on
a number of personal objectives. In respect of the Chief
Executive, these included the strategic development of
the Group, leadership and culture, operational
performance, risk management and regulatory
compliance. RemCo, in determining both the general
level of the bonus pool and the awards to the executive
directors, also reviewed risk factors.
Annual Report & Financial Statements 2018
33
Table of directors’ remuneration
A summary of the total remuneration paid to directors is set out below.
Salary
and fees
£’000
Bonus
£’000
Benefits
in kind
£’000
Pension
contributions
£’000
Year ended
Year ended
Long-term 30 September 30 September
2017
£’000
incentive
£’000
2018
£’000
Executive directors
Scott Maybury*
Robert Murray
David Bull**
Non-executive directors
David Anthony
Andrew Brook
Anthony Nelson
Mark Brown
Tim Franklin
Christine Higgins
David Morgan
David Titmuss
205
165
180
205
111
125
–
–
–
37
90
52
37
47
–
–
–
–
–
–
–
–
813
441
1
1
1
–
–
–
–
–
–
–
–
3
21
16
18
–
–
–
–
–
–
–
–
7
4
8
–
–
–
–
–
–
–
–
439
298
332
–
–
–
37
90
52
37
47
381
242
258
8
16
19
26
62
19
26
17
55
19
1,331
1,074
* Pension received in cash
** Part of the pension received in cash
Non-executive directors
Non-executive directors are engaged under letters of
appointment. Non-executive directors are subject to
retirement by rotation every three years, or, if appointed
during the year, are subject to retirement at the next
AGM. Non-executive directors who are subject to
retirement at the AGM are eligible for re-appointment.
Non-executive directors participate in decisions
concerning their own fees together with the
recommendation of the executive directors, taking into
account comparisons with peer group companies, their
overall experience and knowledge and the time
commitment required for them to undertake their
duties, including any additional duties undertaken
during the year.
Remuneration disclosures
The Group adheres to the requirements of the Dual-
Regulated Firms Remuneration Code as defined by the
Regulator. The non-executive directors do not receive
variable remuneration. Information on the remuneration
policy applicable to the Group is set out in the Pillar 3
disclosures and is published on our website
www.pcf.bank
This report was approved by the Nomination &
Remuneration Committee on 30 November 2018.
David Titmuss
Chairman of the Nomination & Remuneration Committee
8 February 2019
34
Directors’ Report
for the year ended 30 September 2018
The directors present their report and audited financial
statements for the year ended 30 September 2018.
Results and dividends
The consolidated results for the year are set out in the
Consolidated Income Statement on page 46.
The directors recommend the payment of a final
dividend of 0.3p per share in respect of the year ended
30 September 2018 (year ended 30 September 2017 –
final dividend of 0.19p per share). Subject to approval
at the Annual General Meeting to be held on 8 March
2019, the final dividend will be paid on 12 April 2019 to
shareholders on the register at 22 March 2019.
Principal activities
The Group’s principal activities are the purchase, hire,
financing and sale of vehicles and equipment, the
provision of retail savings products and the provision
of related fee-based services. The Group will continue
to administer its portfolio of financial assets to improve
profitability for both its Consumer Finance and
Business Finance Divisions.
Directors and their interests
The directors of the Company during the year were
those listed on page 2.
The directors’ interests in the shares of the Company,
all of which were beneficial interests, at 30 September
2018 are listed below.
Scott Maybury
Robert Murray
David Bull
David Morgan
Tim Franklin
Mark Brown
Christine Higgins
At 30 September 2018
No. of ordinary shares of 5p each
At 30 September 2017
No. of ordinary shares of 5p each
1,7 17,653
998,340
230,568
500,000
90,173
135,000
19,500
1,7 17,653
998,340
230,568
500,000
8 2 , 8 1 0
80,000
–
The following directors also held options in the Company’s share option plans as listed below. Further details are
provided in the Nomination & Remuneration Committee Report on page 33 and in note 14 to the financial statements.
Scott Maybury
Robert Murray
David Bull
At 30 September 2018
No. of ordinary shares of 5p each
At 30 September 2017
No. of ordinary shares of 5p each
1,140,000
770,000
400,000
1,140,000
770,000
400,000
The Company’s Articles of Association permit it to indemnify directors in accordance with the Companies Act.
Substantial shareholdings
At 30 September 2018, the Company had been notified of the following interests of 3% or more in its issued ordinary
share capital.
Somers Limited
Bermuda Commercial Bank Limited
Hof Hoorneman Bankiers
Beleggingsclub ‘T Stockpaert
Percentage
55.78
9.90
9.02
3.23
Annual Report & Financial Statements 2018
35
Corporate governance
The Corporate Governance section provides disclosure
of the Group’s corporate governance arrangements.
The Group has complied with the provisions of the UK
Corporate Governance Code 2016 during the year to
the extent considered appropriate, given the nature
and size of the business.
Disclosure of information to the auditors
So far as each person who was a director at the date
of approving this report is aware, there is no relevant
audit information, being information needed by the
auditor in connection with preparing its report, of
which the auditor is unaware. Having made enquiries of
fellow directors and the Group’s auditor, each director
has taken all the steps that he is obliged to take as a
director in order to make himself aware of any relevant
audit information and to establish that the auditor is
aware of that information.
Re-appointment of auditors
A resolution to re-appoint Ernst & Young LLP as
auditors will be put to the members at the Annual
General Meeting.
On behalf of the Board
Robert Murray
Director and Secretary
8 February 2019
Statement of directors’ responsibilities
The directors are responsible for preparing the Strategic
Report, Directors’ Report and the Group financial
statements in accordance with applicable United
Kingdom law and those International Financial Reporting
Standards as adopted by the European Union.
Company law requires the directors to prepare financial
statements for each financial year. Under that law, the
directors must not approve the Group financial
statements unless they are satisfied they present fairly
the financial position, financial performance and cash
flows of the Group for that period. In preparing those
financial statements, the directors are required to
l select suitable accounting policies in accordance
with IAS 8 ‘Accounting policies, changes in
accounting estimates and errors’ and then apply
them consistently;
l present information, including accounting policies,
in a manner that provides relevant, reliable,
comparable and understandable information;
l 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 Group’s financial position and financial
performance; and
l state that the Group has complied with IFRS,
subject to any material departures disclosed and
explained in the financial statements.
The directors are responsible for keeping adequate
accounting records that are sufficient to show and
explain the Group’s transactions and disclose with
reasonable accuracy at any time the financial position
of the Group and enable them to ensure that the
Group financial statements comply with the Companies
Act 2006 and Article 4 of the IAS Regulation. They are
also responsible for safeguarding the assets of the
Group and hence for taking reasonable steps for the
prevention and detection of fraud and other
irregularities.
Statement of Going Concern
The Group’s business activities, together with the
factors likely to affect its future development,
performance and position are set out in the Strategic
Report. The financial position of the Group, its cash
flows, liquidity position and borrowing facilities are set
out in the financial statements. The Group’s policies
and processes for managing its capital are described in
the Strategic Report. Details of the Group’s financial
risk management objectives, its financial instruments
and hedging activities and its exposures to credit risk
and liquidity risk are also set out in the notes to the
financial statements.
The directors have completed a formal assessment of
the Group’s financial resources, including forecasts and
emerging risks, including Brexit. Based on this review,
the directors believe that the Group is well placed to
manage its business risks successfully within the
expected economic outlook.
After making enquiries, the directors have a reasonable
expectation that the Group has adequate resources to
continue in operational existence for the foreseeable
future. Accordingly, they continue to adopt the going
concern basis in preparing the Annual Report and
Financial Statements.
36
Risk Management
for the year ended 30 September 2018
The management of risk is based on an understanding
of the risks that the Group faces, an assessment of
these risks and establishing an appropriate control
environment. Risks are assessed at the inherent level
(before being mitigated by controls) and at the
residual level (once controls have been considered).
Controls include risk appetite statements, defined limits
to risk exposures, policies, procedures, mandates,
oversight, and reporting. The design and effectiveness
of controls is key and an assessment of these is
performed by all Three Lines of Defence.
Risk policies and procedures are the formal
documentation of the methods used to manage,
control, oversee and govern each principal risk. They
articulate the limits, operating standards, and
procedures by which risks are identified, assessed and
managed at all stages of the business and risk life cycle.
Risk accountability
The RMF articulates individual and collective
accountabilities for risk management, risk oversight and
risk assurance and supports the discharge of
responsibilities to customers, shareholders, and
regulators. It establishes a common risk language to
facilitate the collection, analysis and synthesis of risk
management data for risk aggregation and reporting. The
framework is continually evolving and is periodically
updated to reflect changes in the business and the
external environment.
Governance is maintained through delegation of authority
from the Board, down through the management
hierarchy to individuals, and is supported by a
committee-based structure designed to ensure that risk
appetite, policies, procedures, controls and reporting are
fully in line with regulations, law, corporate governance
and industry best practice.
Board-level engagement, coupled with the direct
involvement of senior management in Group-wide risk
issues at Executive Committee level, ensures that issues
are promptly escalated and remediation plans are
initiated where required.
The interaction of the executive and non-executive
governance structures relies upon a culture of
transparency and openness that is encouraged by both
the Board and senior management. A strong control
framework remains a priority for the Group and is the
foundation for the delivery of effective risk management.
Line management is directly accountable for identifying
and managing any risks inherent or consequential in their
individual businesses. A key objective is to ensure that
business decisions strike an appropriate balance between
risk and reward, consistent with the Group’s risk appetite.
Assurance
The Group operates a ‘Three Lines of Defence’ model
which defines clear responsibilities and accountabilities.
l Business lines as the ‘First Line of Defence’ hold the
primary responsibility for risk decisions, identifying,
measuring, monitoring, and controlling risks within
areas of accountability.
l The ‘Second Line of Defence’ encompasses the risk
oversight function, which is independent of the
business and other functions and includes
compliance monitoring and risk reviews.
l The ‘Third Line of Defence’ is provided by Internal
Audit.
l The Group’s Internal Audit function performs
independent audits of the risk management
functions, on a periodic basis, to ensure that
objectives are achieved. Any deficiencies are
reported to management, with significant
deficiencies reported to senior management and
the Audit & Risk Committee.
l The Group utilises other forms of evaluation to
obtain reasonable assurance about the
effectiveness of its risk management functions as
required.
l The Group may also periodically use independent
consultants to assess the risk management
governance structure and management processes.
Information technology and data risk management
annual independent assurance reviews include
l Cyber Essential Standards Assessment and
Penetration Test;
l External Information Technology Risk Assurance
Review;
l Payment Card Industry Data Security Standard
(‘PCI DSS’) Compliance; and
l Somers Limited Cyber Security Review.
Risk appetite and culture
The Risk Appetite Statement (‘RAS’) provides an
articulation of the Group’s tolerance for risk in both
quantitative measures and qualitative terms. It has
been created following discussions among the Group’s
executive management and the members of ARC and
the Board. It is used in mapping key risks, assessing
their materiality and ultimately for underpinning the
Group’s overall risk management framework.
Throughout the year, all aspects of the risk appetite
statements and metrics are reported to ARC and the
Board by the Head of Risk and Compliance (‘HoRC’).
The HoRC is responsible for assessing the impact on
the Group’s risk appetite of any changes in
circumstances (internal or external) that may warrant a
change to the RAS and recommending any such
changes to ARC and the Board ahead of the scheduled
annual review.
The Board sets the risk appetite and culture and
ensures that this is cascaded into day-to-day
operations through policies, qualitative statements, risk
appetite metrics, limits, Board and committee review,
monitoring and assurance, recruitment of competent
employees, training and aligning remuneration to risk
appetite.
The Board held its first Annual Strategic Risk Review
on 2 March 2018.
Annual Report & Financial Statements 2018
37
Risk governance and oversight
The Group’s business model is shaped by the assessment of risk and return, together with the management of
those risks. The Group recognises the importance of embedding a framework within the organisation that puts in
place controls to manage those risks on a continuous basis. Management of risk entails the identification and
monitoring of risk regularly and testing that the business operates within the agreed limits.
The Group operates a ‘Three Lines of Defence’ model, which defines clear responsibilities and accountabilities,
and ensures effective independent oversight and assurance activities take place covering key decisions. This
model is summarised in the diagram below.
Business Operations
Risk and Control
Functions
Audit and Governance
First Line of Defence
Second Line of Defence
Third Line of Defence
Risk management by
business functions
l Identify, assess, control
and mitigate risks.
l Develop and implement
internal policies and
procedures and controls.
l Clear definition of roles
and responsibilities.
l Escalate issues to
management and control
functions.
Independent Risk Control
Audit and Governance
l Internal Audit provide
independent assurance
on the effectiveness of
1LoD, 2LoD and the risk
governance framework.
l Risk, Compliance and
Finance functions.
l ALCO, New Product
Approval and Credit
Committees.
l Facilitate and oversee
implementation of
effective risk
management practices
by business owners.
l Advisory and oversight.
Perform oversight and
challenge on 1LoD.
All three Lines of Defence are responsible for
supporting and developing a culture of risk awareness
and for supporting each other in creating the best
outcome for the business and its customers. In this
way, risk management responsibilities are understood
at all levels, ownership and accountability is clear and
control and oversight is established throughout the
Group.
Management establishes, with Board oversight,
structures, reporting lines and appropriate authorities
and responsibilities in the pursuit of the business
objectives.
It is the aim of the Risk and Compliance function to
co-ordinate the management and reporting of the
Group’s risks, ensuring that risk management is fully
integrated into the day-to-day activities of the
business. The Group’s approach to managing risk
within the business is governed by the Board approved
RAS and the Group’s RMF. The Group will continually
enhance, design and implement a system of
operational monitoring and internal controls to monitor
and manage business risk. At the operational level, it is
the responsibility of each business function to adhere
to and manage effectively all Group risk management
processes and standards. The business provides
periodic feedback to Group risk functions on the
adequacy of risk management processes and
standards in relation to their function.
First Line of Defence (Risk management by
business functions)
The ‘First Line of Defence’ encompasses the controls
that the Group has in place to deal with day-to-day
business and manages risks in the business, to pre-
agreed tolerances or limits. It identifies, manages and
monitors risk within each area of the business,
reporting and escalating issues as necessary and
evidences control.
Business lines have primary responsibility for risk
decisions, identifying, measuring, monitoring and
controlling risks within areas of accountability. They are
required to establish effective governance and control
frameworks for their business areas that are compliant
with Group policy requirements, to maintain
appropriate risk management skills and processes to
act within the Group’s risk appetite parameters set and
approved by the Board.
Second Line of Defence (Independent risk control)
The ‘Second Line of Defence’ encompasses the risk
oversight function, which is independent of the
business and other functions. The second line supports
a structured approach to risk management by
maintaining and implementing the RMF and
Group-wide risk policies and monitoring their proper
execution by the ‘First Line of Defence’. It also provides
independent advice and oversight on risks relevant to
the Group’s strategy and activities, maintains an
aggregate view of risk, monitors performance in
38
relation to the Group’s risk appetite, monitors changes
in and compliance with external regulation, undertakes
compliance monitoring and risk review and promotes
best practice.
The ‘Second Line of Defence’ reports systematically
and promptly to the Board, ARC and senior
management about risk management, in particular
about perceived new risks or failures of existing
controls.
Third Line of Defence (Audit & governance)
Internal Audit will provide independent assurance to
the Board through ARC that the First and Second
Lines of Defence are both effective in discharging their
respective responsibilities. The use of independent
compliance monitoring and risk reviews will provide
additional support to the integrated assurance
programme and ensures that the Group is effectively
identifying, managing and reporting its risks.
Approach to assurance
l Self-review - Line management periodically review
processes, systems, and activities to ensure that all
risk management processes continue to be effective
and appropriate;
l Risk review, including Risk Control Assessment
(‘RCA’) and compliance monitoring - The purpose
is to confirm the continued effectiveness of the
management of risk within the business. This
includes identification of potential control failures;
l Internal Audit - As part of an agreed audit
programme, internal audit will provide the Group
with risk based and timely assurance on important
aspects of the Group’s risk management control
frameworks and practices. It is the responsibility of
all business heads to provide responses to audit
findings that focus on addressing root causes within
the agreed timescales; and
l External reviews - External audit reviews provide
stakeholders, the Board, the Audit & Risk
Committee, business heads, staff, and the risk
function with an independent assurance over
financial reporting.
Risk identification, measurement and control
The three lines of defence model is governed and
controlled as described in the diagram below and is
supplemented by independent external audit and
regulators.
Each line of defence reports independently of the
others to senior management. In addition, ‘Second Line
of Defence’ has a ‘dotted’ reporting line to ARC, and
‘Third Line of Defence’ reports directly to ARC.
The process of identifying risk exposures is key to the
success of the risk management process as all other
elements of the process flow from this initial step. It is
crucial, therefore, that a thorough process of risk
identification is accomplished on a regular basis.
The process for risk identification, measurement and
control is integrated into the overall framework for risk
governance. Risk identification processes are
forward-looking to ensure emerging risks are identified.
Risks are captured in a comprehensive risk register and
measured using robust and consistent quantification
methodologies.
The measurement of risks includes the application of
sound stress testing and scenario analysis and
considers whether relevant controls are in place before
risks are incurred.
When risks have been identified and assessed, the
relevant business areas determine an appropriate
method for addressing those risks.
Board / Audit & Risk Committee
Senior Management
1st Line of Defence
2nd Line of Defence
3rd Line of Defence
Management Control
Financial Controller
Internal Audit
Internal Control
Measures
Security
Risk Management
Quality
Inspection
Compliance
E
x
t
e
r
n
a
l
A
u
d
i
t
R
e
g
u
a
t
o
r
s
l
Annual Report & Financial Statements 2018
39
The Group will conduct a review of the Recovery Plan
on at least an annual basis and a review on the
Resolution Pack on at least a bi-annual basis, or more
frequently in the event of a material change in the
Group’s status, capital or liquidity position. The Board
and senior management are fully engaged in
considering the scenarios and options available for
remedial actions to be undertaken.
The Board considers that the Group’s public status, its
business model and the diversified nature of its
business markets provide it with the flexibility to
consider selective business or portfolio disposals, loan
book run-off, equity-raising, or a combination of these
actions. The Group would invoke the Recovery Plan
and Resolution Pack if required.
ILAAP, ICAAP and stress testing
The Internal Capital Adequacy Assessment Process
(‘ICAAP’), Internal Liquidity Adequacy Process
(‘ILAAP’) and associated stress testing exercises
represent important elements of the Group’s ongoing
risk management processes. The results of the risk
assessment contained in these documents are
embedded in the strategic planning process and risk
appetite to ensure that sufficient capital and liquidity
are available at all times to support the Group’s growth
plans, as well as to cover its regulatory requirements at
all times and under varying circumstances.
The ICAAP and ILAAP are reviewed on at least an
annual basis and more often in the event of a material
change in capital or liquidity. Ongoing stress testing
and scenario analysis outputs are used to inform the
formal assessments and determination of required
buffers, the strategy and planning for capital and
liquidity management and the setting of risk appetite
limits. ARC is responsible for reviewing and approving
assumptions and stress scenarios in the planning
stages of the ICAAP and ILAAP, including substantive
changes to the previous assessment. The Asset and
Liability Committee (‘ALCO’) will review, challenge, and
recommend to the Executive Committee and Board, for
approval, the Group’s ICAAP and ILAAP.
The Board and senior management have engaged in a
number of exercises which have considered and
developed stress-test scenarios. The output analysis
enables management to evaluate the Group’s capital
and funding resilience in the face of severe but
plausible risk shocks. In addition to the UK variant test
on capital prescribed by the PRA, the stress tests have
included a range of Group-wide, multi-risk category
stress tests, market-wide and idiosyncratic financial
shocks and operational risk scenario analyses. Stress-
testing is an integral part of the adequacy assessment
processes for liquidity and capital, and the setting of
tolerances under the annual review of Group risk
appetite.
The Group also performed reverse stress-tests to help
management understand the full continuum of adverse
impact and, therefore, the level of stress at which the
Group would breach its individual capital and liquidity
guidance requirements as set by the PRA under the
ICAAP and ILAAP processes.
Recovery Plan and Resolution Pack
The Group has prepared and submitted a Recovery
Plan and Resolution Pack (‘RP&RP’) in accordance with
PRA Supervisory Statements SS18/13 and SS19/13 and
submitted it to the PRA following Board approval.
The plan represents the Group’s ‘Living Will’ and
examines in detail
l The consequences of severe levels of stress
(i.e. beyond those in the ICAAP) impacting the
Group at a future date;
l The state of preparedness and contingency plan to
respond to and manage through such a set of
circumstances; and
l The options available to management to withstand
and recover from such an environment.
40
Annual Report & Financial Statements 2018
41
Independent Auditor’s Report
to the members of PCF Group plc
for the year ended 30 September 2018
Opinion
In our opinion
l PCF Group plc’s financial statements and parent
company financial statements (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 2018 and of the Group’s profit for
the year then ended;
l the Group financial statements have been properly
prepared in accordance with International Financial
Reporting Standards (‘IFRSs’), as adopted by the
European Union;
l the parent company financial statements have been
properly prepared in accordance with IFRSs, as
adopted by the European Union, as applied in
accordance with the provisions of the Companies
Act 2006; and
l the financial statements have been prepared in
accordance with the requirements of the Companies
Act 2006, and, as regards the Group financial
statements, Article 4 of the IAS Regulation.
What we have audited
The PCF Group plc financial statements comprise
Group
l Consolidated balance sheet as at 30 September 2018;
l Consolidated income statement for the year then
ended;
l Consolidated statement of comprehensive income
for the year then ended;
l Consolidated statement of changes in equity for the
year then ended;
l Consolidated statement of cash flows for the year
then ended; and
l Related notes 1 to 39 to the financial statements,
including a summary of significant accounting
policies.
Parent company
l Balance sheet as at 30 September 2018;
l Statement of changes in equity for the year then
ended;
l Statement of cash flows for the year then ended;
and
l Related notes 1 to 39 to the financial statements
including a summary of significant accounting
policies.
The financial reporting framework that has been applied
in their preparation is applicable law and IFRSs as
adopted by the European Union and, as regards to the
parent company financial statements, as applied in
accordance with the provisions 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 under those standards are
further described in the Auditor’s responsibilities for the
audit of the financial statements section of our report
below. We are independent of the Group and parent
company in accordance with the ethical requirements
that are relevant to our audit of the financial statements
in the UK, including the FRC’s Ethical Standard as
applied to listed public interest entities, and we have
fulfilled our other ethical responsibilities in accordance
with these requirements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our
opinion.
Conclusions relating to going concern
We have nothing to report in respect of the following
matters in relation to which the ISAs (UK) require us to
report to you where
l the directors’ use of the going concern basis of
accounting in the preparation of the financial
statements is not appropriate; or
l the directors have not disclosed in the financial
statements any identified material uncertainties that
may cast significant doubt about the Group’s or the
parent company’s ability to continue to adopt the
going concern basis of accounting for a period of at
least twelve months from the date when the
financial statements are authorised for issue.
Overview of our audit approach
Key audit matters
l Risk of fraud in the recognition of revenue in
respect of the application of the effective interest
rate methodology.
l Impairment of loans and advances to customers.
Audit scope
l We performed an audit of the complete financial
information of Group and parent company.
l Our Group audit scope included all PCF Group plc
subsidiaries.
Materiality
l Overall Group materiality of £258,650, which
represents 5% of profit before tax.
Key audit matters
Key audit matters are those matters that, in our
professional judgment, were of most significance in our
audit of the financial statements of the current period
and include the most significant assessed risks of
material misstatement (whether or not due to fraud)
that we identified. These matters included 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. These matters
were addressed in the context of our audit of the
financial statements as a whole, and in our opinion
thereon, and we do not provide a separate opinion on
these matters.
42
Risk
Risk of fraud in the recognition of revenue in
respect of the application of the effective
interest rate (‘EIR’) methodology
Interest and similar income £25.494 million
(2017 – £19.970 million).
Impairment of loans and advances to
customers
Loans and advances to customers.
£219.322 million (2017 – £145.718 million).
Impairment on loans and advances.
£4.369 million (2017 – £3.965 million).
Refer to the Audit & Risk Committee Report on page 30,
note 5.1.3 and note 9 of the financial statements.
For certain product fees, the Group operates a model
to recognise fee income (included within Interest
Income) under the effective interest method. The
effective interest method spreads the recognition of
product fee income over the life of the financial
instrument, as these are in substance an integral part
of the overall yield.
Effective interest rate models are sensitive to
judgements about the expected lives of the product to
which they relate. As a result of the complexity of the
calculations and the degree of judgement exercised
there is a risk of fraud from management override and,
therefore, this is considered a key audit matter.
Our response to the risk
We identified and tested key controls over the effective
interest rate model. We determined that we could
place reliance on these controls for the purposes of
our audit.
We tested the key assumptions used in the EIR
calculation including the expected behaviour and
lifecycle of the products and forecasts of future
interest rates. We checked that changes made to the
EIR model were validated and approved by
management and that the methodology applied was
in line with accounting standards.
We utilised an independent leasing valuation specialist
to recalculate the finance lease income using the EIR
methodology for each product. We examined each
product to obtain evidence that the EIR methodology
was consistently applied, and, on a sample basis, we
recalculated the finance lease income. We tested
completeness and accuracy of data through
reconciliation to source systems.
We tested that fees and commissions were
appropriately included in the EIR calculations in
accordance with the accounting standards.
We tested for management override through the use of
topside journal entries. We selected a risk based
sample of journal entries and vouched the journals for
validity and appropriateness.
Key observations communicated to the
Audit & Risk Committee
We concluded to the Audit & Risk Committee that the
EIR calculations and methodology were in accordance
with accounting policies and standards and interest
income was appropriately derived.
Our testing concluded that the controls were designed
and operating effectively.
Our testing of journal entries did not highlight any
instances of inappropriate or unapproved journal
entries that could not be traced to valid supporting
evidence.
Refer to the Audit & Risk Committee Report on page 30,
note 5.3 and note 20 of the financial statements.
The Group’s lending portfolio relates to small and
medium sized enterprises (SMEs) leasing commercial
vehicles and individual consumers leasing cars.
Estimating the Group’s collective and specific
provisioning is subjective, requires management to
exercise significant judgement and incorporates the
use of various assumptions, including second hand
asset prices and recovery rates.
Given the level of judgement and subjectivity involved,
there is a risk that the impairment provision could be
materially misstated and therefore this is considered to
be a key audit matter.
Our response to the risk
We examined the design adequacy and tested the
operating effectiveness of key controls over loan
origination, loan administration and impairment of
loans related processes.
We examined and independently tested key
assumptions including probability of default and loss
given default. We challenged the incremental costs for
selling assets for completeness, appropriateness of
methodology and accuracy of calculation.
We performed back testing on the key assumptions
used in impairment calculation for each segment
including vouching proceeds from the sale of assets
and back testing recovery rate assumptions.
We performed data integrity testing on key sources of
data and information used for calculation of
impairment including testing the ageing of loans.
We recalculated the impairment provision using
management’s provision methodology.
We reviewed the disclosure in the annual financial
statements for compliance with IFRSs.
Key observations communicated to the
Audit & Risk Committee
We concluded to the Audit & Risk Committee that the
impairment models and assumptions employed by the
Group were reasonable as at 30 September 2018.
Our testing concluded that the controls were designed
and operating effectively, and the provisioning
methodology was in line with IAS 39.
Our back testing conducted concurrently with
management resulted in adjustments to the
provisioning primarily as a result of increases in values
in the second hand car market, recovery rates and
probability of default rates. We also concluded that the
disclosures presented were in compliance with IFRSs.
In the prior year, our auditor’s report included a key
audit matter in relation to impact of banking licence on
taking of deposits, financial reporting and internal
controls. In the current year, this matter has not been
included as key audit matter as this was specific to the
Bank’s first year of operation.
Annual Report & Financial Statements 2018
43
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of
materiality and our allocation of performance materiality
determine our audit scope for each entity within the
Group. Taken together, this enables us to form an
opinion on the consolidated financial statements.
All the Group’s subsidiary entities were subject to a full
scope audit.
Our application of materiality
We apply the concept of materiality in planning and
performing the audit, in evaluating the effect of
identified misstatements on the audit and in forming
our audit opinion.
Materiality
The magnitude of an omission or misstatement that,
individually or in the aggregate, could reasonably be
expected to influence the economic decisions of the
users of the financial statements. Materiality provides a
basis for determining the nature and extent of our
audit procedures.
We determined materiality for the Group to be
£258,650 (2017 – £183,577), which is 5% (2017 – 5%)
of profit before tax. We have used profit before tax as
we consider this to be one of the most important
considerations for shareholders of the Group in
assessing the financial performance of the Group and
this approach is consistent with the wider industry and
is the standard for listed and regulated entities.
During the course of our audit, we reassessed initial
materiality and made adjustments based on the final
financial performance of the Group.
Performance materiality
The application of materiality at the individual account
or balance level. It is set at an amount to reduce to an
appropriately low level the probability that the
aggregate of uncorrected and undetected
misstatements exceeds materiality.
On the basis of our risk assessments, together with our
assessment of the Group’s overall control environment,
our judgement was that performance materiality was
75% (2017 – 75%) of our planning materiality, namely
£193,988 (2017 – £137,683). We have set performance
materiality at this percentage based on our previous
experience as auditors of the Group and no history of
material misstatements have arisen during the course
of our audit procedures.
Audit work at subsidiary level for the purpose of
obtaining audit coverage over significant financial
statement accounts is undertaken based on a
percentage of total performance materiality. The
performance materiality set for each subsidiary is
based on the relative scale and risk of the component
to the Group as a whole and our assessment of the risk
of misstatement at that component. In the current year,
the performance materiality allocated to subsidiaries
was £146,000.
Reporting threshold
An amount below which identified misstatements are
considered as being clearly trivial.
We agreed with the Audit & Risk Committee that we
would report to them all uncorrected audit differences
in excess of £12,933 (2017 – £9,179), which is set at
5% (2017 – 5%) of planning materiality, as well as
differences below that threshold that, in our view,
warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against
both the quantitative measures of materiality discussed
above and in light of other relevant qualitative
considerations in forming our opinion.
Other information
The other information comprises the information
included in the Annual Report (set out on pages 3 to 82),
including the Strategic Report (set out on page 3),
Corporate Governance Report (set out on page 21),
Directors’ Report (set out on pages 35 to 36) and Risk
Management Statement (set out on pages 37 to 41),
other than the financial statements and our auditor’s
report thereon. The directors are responsible for the
other information.
Our opinion on the financial statements does not cover
the other information and, except to the extent
otherwise explicitly stated in this report, we do not
express any form of assurance conclusion thereon.
In connection with our audit of the financial statements,
our responsibility is to read the other information and, in
doing so, consider whether the other information is
materially inconsistent with the financial statements or
our knowledge obtained in the audit or otherwise
appears to be materially misstated. If we identify such
material inconsistencies or apparent material
misstatements, we are required to determine whether
there is a material misstatement in the financial
statements or a material misstatement of the other
information. If, based on the work we have performed,
we conclude that there is a material misstatement of the
other information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the
Companies Act 2006
In our opinion, the part of the directors’ remuneration
report to be audited has been properly prepared in
accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the
course of the audit
l the information given in the Strategic Report and
the Directors’ Report for the financial year for which
the financial statements are prepared is consistent
with the financial statements; and
l the Strategic Report and Directors’ Report have
been prepared in accordance with applicable legal
requirements.
Matters on which we are required to report by
exception
In the light of the knowledge and understanding of the
Group and the parent company and its environment
obtained in the course of the audit, we have not
identified material misstatements in the Strategic Report
or the Directors’ Report.
We have nothing to report in respect of the following
matters in relation to which the Companies Act 2006
requires us to report to you if, in our opinion
l 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
l 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
l certain disclosures of directors’ remuneration
specified by law are not made; or
l we have not received all the information and
explanations we require for our audit.
44
Responsibilities of directors
As explained more fully in the directors’ responsibilities
statement set out on page 36, the directors are
responsible for the preparation of the financial
statements and for being satisfied that they give a true
and fair view, and for such internal control as the
directors determine is necessary to enable the
preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the Group and 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 the
directors either intend to liquidate the Group or the
Company or to cease operations, or have no realistic
alternative but to do so.
Auditor’s responsibilities for the audit of the
financial statements
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 an auditor’s report that includes
our opinion. Reasonable assurance is a high level of
assurance, but is not a 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 the aggregate,
they could reasonably be expected to influence the
economic decisions of users taken on the basis of
these financial statements.
Explanation as to what extent the audit was
considered capable of detecting irregularities
including fraud
The objectives of our audit, in respect to fraud, are to
identify and assess the risks of material misstatement
of the financial statements due to fraud, to obtain
sufficient appropriate audit evidence regarding the
assessed risks of material misstatement due to fraud,
through designing and implementing appropriate
responses and to respond appropriately to fraud or
suspected fraud identified during the audit. However,
the primary responsibility for the prevention and
detection of fraud rests with both those charged with
governance of the entity and management.
Our approach was as follows.
l We obtained an understanding of the legal and
regulatory frameworks that are applicable to the
Group and determined that the most significant are
the regulations, licence conditions and supervisory
requirements of the Prudential Regulation Authority
(‘PRA’) and the Financial Conduct Authority (‘FCA’).
l We understood how the Group is complying with
those frameworks by making enquiries of
management and those responsible for legal and
compliance matters. We also reviewed
correspondence between the Group and UK
regulatory bodies reviewed minutes of the Board
and Audit & Risk Committee and gained an
understanding of the Group’s approach to
governance, demonstrated by the Board’s approval
of the Group’s governance framework and the
Board’s review of the Group’s risk management
framework and internal control processes.
l We assessed the susceptibility of the Group’s
financial statements to material misstatement,
including how fraud might occur by considering the
controls that the Group has established to address
risks identified by the entity, or that otherwise seek
to prevent or detect fraud. We also considered
performance and incentive plan targets and their
potential to influence management to manage
earnings or influence the perceptions of investors.
l Based on this understanding, we designed our audit
procedures to identify non-compliance with such
laws and regulations. Our procedures involved
inquiries of executive management, internal audit,
and focused testing, as referred in the Key Audit
Matters section above.
l The Group operates in the banking industry which is
a highly regulated environment. As such, the Senior
Statutory Auditor considered and assessed the
adequacy of the experience and expertise of the
engagement team and concluded that the team was
appropriate for the size and complexity of the Group.
A further description of our responsibilities for the
audit of the financial statements is located on the
Financial Reporting Council’s website at
www.frc.org.uk/auditorsresponsibilities. This
description forms part of our auditor’s report.
Other matters we are required to address
l We were appointed by the Company on 2 March
2018 to audit the financial statements for the year
ending 30 September 2018 and subsequent
financial periods. The period of total uninterrupted
engagement including previous renewals and
reappointments is 20 years, covering the years
ending 31 December 1998 to 30 September 2018.
l The non-audit services prohibited by the FRC’s
Ethical Standard were not provided to the Group or
the Company and we remain independent of the
Group and the Company in conducting the audit.
l The audit opinion is consistent with the additional
report to the Audit and Risk Committee.
Use of our report
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-John Albert (Senior Statutory Auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
12 February 2019
Notes
1
The maintenance and integrity of the PCF Group
plc web site is the responsibility of the directors.
The work carried out by the auditors does not
involve consideration of these matters and,
accordingly, the auditors accept no responsibility
for any changes that may have occurred to the
financial statements since they were initially
presented on the website.
2 Legislation in the United Kingdom governing the
preparation and dissemination of financial
statements may differ from legislation in other
jurisdictions.
Annual Report & Financial Statements 2018
45
Consolidated Income Statement
for the year ended 30 September 2018
Interest and similar income
Interest and similar expense
Net interest income
Fee and commission income
Fee and commission expense
Net fees and commission expense
Fair value gain/(loss) on financial instruments
Net operating income
Personnel expenses
Depreciation of property and equipment
Amortisation of intangible assets
Other operating expenses
Impairment loss on financial assets
Total operating expenses
Profit before tax
Income tax expense
Profit after tax
Earnings per 5p ordinary share - basic
Year ended
30 September
2018
£’000
Year ended
30 September
2017
£’000
25,494
(10,492)
15,002
492
(844)
(352)
19,970
(8,906)
11,064
512
(702)
(190)
–
(4)
14,650
10,870
5,186
84
385
2,907
915
9,447
5,173
(981)
4,192
2.0
3,903
71
275
2,309
679
7,237
3,633
(847)
2,786
1.5
Note
8
9
10
11
13
22
23
15
12
16
17
Consolidated Statement of Comprehensive Income
for the year ended 30 September 2018
Profit after taxation
Other comprehensive income that will be reclassified
to the income statement
Fair value gain on available-for-sale (‘AFS’) financial instruments
Income tax credit/(expense)
Total items that will be reclassified to the income statement
Other comprehensive income that will not be reclassified
to the income statement
Fair value gain on cash flow hedges
Income tax credit/(expense)
Total items that will not be reclassified to the income statement
Year ended
30 September
2018
£’000
Year ended
30 September
2017
£’000
4,192
2,786
18
(3)
15
–
–
–
–
–
387
459
(86)
373
3,159
Total comprehensive income, net of tax
4,207
The accounting policies and notes on pages 51 to 82 form part of, and should be read in conjunction with, these
financial statements.
46
Consolidated Balance Sheet
at 30 September 2018
Group
Company
30 September
2018
£’000
30 September
2017
£’000
30 September
2018
£’000
30 September
2017
£’000
Note
Asset
Cash and balances at central banks
AFS financial instruments
Loans and advances to customers
Investment in subsidiary undertakings
Property, plant and equipment
Other assets
Deferred tax assets
Goodwill and other intangible assets
Total assets
Liabilities
Due to banks
Due to customers
Current tax liabilities
Other liabilities
Total liabilities
Equity
Issued capital
Share premium
Other reserves
Own shares
Retained earnings
Total equity
18
19
20
21
22
25
24
23
26
29
31
32
32
32
32
21,338
39,902
219,322
–
224
1,542
1,185
2,957
17,018
4,511
145,718
–
271
1,041
1,205
2,704
286,470
172,468
48,881
191,139
414
3,485
77,067
53,120
166
3,454
243,919
133,807
10,611
8,527
15
(355)
23,753
42,551
10,611
8,524
–
(355)
19,881
11
–
2,912
22,000
–
817
196
–
25,936
–
–
–
1,551
1,551
10,611
8,527
–
(355)
5,602
18
–
7,765
17,000
–
830
163
–
25,776
–
–
–
1,075
1,075
10,611
8,524
–
(355)
5,921
38,661
24,385
24,701
Total liabilities and equity
286,470
172,468
25,936
25,776
The Company reported a profit for the financial year ended 30 September 2018 of £nil
(year ended 30 September 2017 – profit of £427,000).
The financial statements were approved and authorised for issue by the Board on 8 February 2019.
On behalf of the Board
S D Maybury
Director
D R Bull
Director
The accounting policies and notes on pages 51 to 82 form part of, and should be read in conjunction with, these
financial statements.
Annual Report & Financial Statements 2018
47
Consolidated Statement of Changes in Equity
for the year ended 30 September 2018
Attributable to equity holders of the Group
Non-distributable
Distributable
Group
Balance at 1 October 2017
Profit for the year
Issuance of new shares
Fair value gain on AFS financial instruments
Share-based payments
Cash dividends
Balance at 30 September 2018
Balance at 1 October 2016
Profit for the year
Issuance of new shares
Fair value gain on cash flow hedges
recognised in Other Comprehensive Income
Exercise of convertible debt option
Share-based payments
Transaction costs
Cash dividends
Issued
capital
£’000
10,611
–
–
–
–
–
10,611
7,956
–
2,655
–
–
–
–
–
Share
Own
premium shares
£’000
£’000
8,524
–
3
–
–
–
8,527
174
–
8,805
–
–
–
(455)
–
(355)
–
–
–
–
–
(355)
(305)
–
–
–
(50)
–
–
–
Other
reserves
£’000
Retained
earnings
£’000
Total
equity
£’000
–
–
–
15
–
–
15
19,881
4,192
–
–
84
(403)
38,661
4,192
3
15
84
(403)
23,753
42,551
(373)
–
–
17,255 24,707
2,786
2,786
11,460
–
373
–
–
–
–
–
–
52
–
(212)
373
(50)
52
(455)
(212)
Balance at 30 September 2017
10,611
8,524
(355)
–
19,881
38,661
Attributable to equity holders of the Company
Non-distributable
Distributable
Company
Balance at 1 October 2017
Profit for the year
Issuance of new shares
Share-based payments
Cash dividends
Share
Issued
Own
capital premium shares
£’000
£’000
£’000
Retained
earnings
£’000
Total
equity
£’000
10,611
–
–
–
–
8,524
–
3
–
–
(355)
–
–
–
–
5,291
–
–
84
(403)
24,701
–
3
84
(403)
Balance at 30 September 2018
10,611
8,527
(355)
5,602 24,385
Balance at 1 October 2016
Profit for the year
Issuance of new shares
Exercise of convertible debt option
Share-based payments
Transaction costs
Cash dividends
Balance at 30 September 2017
7,956
–
2,655
–
–
–
–
10,611
174
–
8,805
–
–
(455)
–
(305)
–
–
(50)
–
–
–
5,654
427
–
–
52
–
(212)
13,479
427
11,460
(50)
52
(455)
(212)
8,524
(355)
5,921
24,701
The accounting policies and notes on pages 51 to 82 form part of, and should be read in conjunction with, these
financial statements.
48
Consolidated Statement of Cash Flows
for the year ended 30 September 2018
Operating activities
Profit before tax
Adjustment for
Change in operating assets
Net change in loans and advances
Net change in other assets
Transfer of property, plant
and equipment to subsidiary
Change in operating liabilities
Net change in amounts due to
customers
Net change in AFS financial instruments
Net change in derivative financial
instruments
Net change in debt securities in issue
Net change in other liabilities
Other non-cash items included in
profit/(loss) before tax
Depreciation of property, plant
and equipment
Amortisation of other intangible assets
Share-based payments
Impairment losses on financial assets
Fair value movement on derivative
financial instrument
Income tax paid
Group
Company
30 September
2018
£’000
30 September
2017
£’000
30 September
2018
£’000
30 September
2017
£’000
Note
5,173
3,633
33
569
(74,519)
(502)
(24,615)
(318)
4,853
57
–
–
138,019
15
–
–
31
84
385
34
915
–
(668)
22
23
12
53,120
–
(119)
–
1,547
71
275
52
679
4
(825)
–
–
–
–
–
416
–
–
34
–
–
–
4,803
–
2,056
–
–
–
(935)
–
71
275
52
–
–
–
Net cash flows from operating activities
68,967
33,504
5,393
6,891
Investing activities
Investment in subsidiary
Purchase of AFS financial instruments
Purchase of property and equipment
Purchase of intangible assets
Net cash flows used in investing activities
Financing activities
Proceeds from capital during the year
Purchase of own shares
Proceeds from borrowings
Repayments of borrowings
Dividends paid to equity holders
Net cash flows (used in)/from
financing activities
21
19
22
23
32
–
(35,390)
(36)
(637)
(36,063)
3
–
1,006
(29,190)
(403)
–
(4,511)
(195)
(2,215)
(6,921)
11,005
(50)
69,451
(95,688)
(187)
(5,000)
–
–
–
(5,000)
3
–
–
–
(403)
(16,000)
–
(195)
(2,215)
(18,410)
11,005
(50)
–
–
(187)
(28,584)
15,469
(400)
10,768
The accounting policies and notes on pages 51 to 82 form part of, and should be read in conjunction with, these
financial statements.
Annual Report & Financial Statements 2018
49
Consolidated Statement of Cash Flows
year ending 30 September 2018
Net increase/(decrease) in cash
and cash equivalents
Cash and cash equivalents
at 1 October
Cash and cash equivalents at
30 September
Operational cash flows from
interest and dividends
Interest paid
Interest received
Group
Company
30 September
2018
£’000
30 September
2017
£’000
30 September
2018
£’000
30 September
2017
£’000
4,320
17,018
11,114
5,904
21,338
17,018
3,976
510
5,002
5
(7)
18
11
–
–
(751)
769
18
–
–
The accounting policies and notes on pages 51 to 82 form part of, and should be read in conjunction with, these
financial statements.
50
Notes to the Financial Statements
for the year ended 30 September 2018
1
2
3
4
Corporate information
PCF Group plc ('the Company') is a public company limited by shares, registered in England and
domiciled in the United Kingdom together with its subsidiaries(collectively, the 'Group'). The Company's
ordinary shares are listed on the Alternative Investment Market ('AIM') of the London Stock Exchange.
The Company's registered office is at Pinners Hall, 105-108 Old Broad Street, London EC2N 1ER.
The principal activities of the Company are investment holding and support services to the subsidiary
undertakings. The Company's wholly-owned subsidiary, PCF Bank Limited (the 'Bank'), is a specialist
banking group engaged in the provision of finances for vehicles, plant and equipment for consumers and
businesses. The Bank also provides retail savings products for individuals.
The Group's consolidated financial statements for the year ended 30 September 2018 were authorised
for issue in accordance with a resolution of the Board on 5 February 2019.
Basis of preparation
The consolidated financial statements have been prepared on a historical cost basis, except for
available-for-sale financial instruments and derivative financial instruments, both of which have been
measured at fair value. The consolidated financial statements are presented in Pound Sterling (£) and
all values are rounded to the nearest thousands (£'000), except where otherwise indicated.
Statement of compliance
The consolidated financial statements of the Group have been prepared in accordance with International
Financial Reporting Standards ('IFRS'), as adopted by the European Union ('EU'), interpretations issued
by the International Accounting Standards Board ('IASB') and the Companies Act 2006.
Basis of consolidation
The consolidated financial statements consolidate the financial statements of the Company and its
subsidiary undertakings, of which there were 4 at 30 September 2018 (10 at 30 September 2017). The
financial statements of the subsidiaries are prepared for the same reporting period as the parent
undertaking, using consistent accounting policies.
All intra-group balances, transactions, income and expenses and profits and losses resulting from
intra-group transactions which are recognised in assets or liabilities, are eliminated in full.
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group
obtains control, and continue to be consolidated until the date when such control ceases.
No income statement is presented for the Company as permitted by section 408 of the Companies
Act 2006. Of the profit for the financial year, no profit (30 September 2017 – £427,000) was attributable
to the Company.
Summary of significant accounting policies
Financial instruments - initial recognition and subsequent measurement
5
5.1
5.1.1 Date of recognition
Financial assets and liabilities, with the exception of loans and advances to customers and balances due
to customers, are initially recognised on the trade date, (i.e. the date the Group becomes a party to the
contractual provisions of the instrument). This includes regular trades, purchases or sales of financial
assets that require delivery of assets within the time frame generally established by regulation or
convention in the market place. Loans and advances to customers are recognised when funds are
transferred to the customers' account. The Group recognises 'due to customers' balances when funds
reach the Group.
5.1.2 Initial measurement of financial instruments
The classification of financial instruments at initial recognition depends on their purpose and
characteristics and the management's intention when acquiring them. All financial instruments are
measured initially at their fair value plus transaction costs, except in the case of financial liabilities
recorded at fair value through profit or loss.
Annual Report & Financial Statements 2018
51
5.1.3 The effective interest rate method
The effective interest rate ('EIR') is the rate that exactly discounts estimated future cash payments or
receipts through the expected life of the financial instrument or, when appropriate, a shorter period, to
the net carrying amount of the financial asset or financial liability. The amortised cost of the financial
asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The
adjusted amortised cost is calculated based on the original or latest re-estimated EIR and the change is
recorded as ‘Interest and similar income’ for financial assets and ‘Interest and similar expense’ for
financial liabilities. The accounting policies for the EIR method vary by instrument and are further
explained in notes
5.1.5 for ‘Loans and advances to customers’;
for ‘Impairment of financial assets’; and
5.3
for ‘Recognition of income and expenses’.
5.5
5.1.4 Available-for-sale financial instruments
Available-for-sale financial instruments include debt securities. Debt securities in this category are intended
to be held for an indefinite period and may be sold in response to needs for liquidity or in response to
changes in market conditions.
The Group has not designated any loans or receivables as available-for-sale.
After initial measurement, available-for-sale financial instruments are subsequently measured at fair
value, with fair value gains recognised in other comprehensive income.
Interest earned whilst holding available-for-sale financial instruments is reported as interest income using
the EIR method, which takes into account any discount or premium and qualifying transaction costs that
are an integral part of the instrument’s yield.
5.1.5 Loans and advances to customers
Loans and advances to customers are non-derivative financial assets with fixed or determinable
payments which are not quoted in an active market.
Conditional sale agreements, hire purchase contracts and finance leases are initially recognised at the
lower of fair value of the asset financed or the present value of the minimum instalments or lease
payments. These loans and receivables are subsequently measured at an amount equal to the net
investment in the contract, less any provision for impairment. Other loans and receivables, are initially
recognised at fair value plus directly attributable transaction costs and are subsequently measured at
amortised cost using the EIR method, less any provision for impairment.
5.2 De-recognition of financial assets and financial liabilities
5.2.1 Financial assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial
assets) is de-recognised when the rights to receive cash flows from the asset have expired. The Group
also de-recognises the asset if it has both transferred the asset and the transfer qualifies for
de-recognition.
A transfer only qualifies for de-recognition if either
l The Group has transferred substantially all the risks and rewards of the asset; or
l The Group has neither transferred nor retained substantially all the risks and rewards of the asset, but
has transferred control of the asset.
In relation to the above, the Group considers control to be transferred if, and only if, the transferee has
the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that
ability unilaterally and without needing to impose additional restrictions on the transfer.
5.2.2 Financial liabilities
A financial liability is de-recognised when the obligation under the liability is discharged, cancelled or
expires. Where an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange or
modification is treated as a de-recognition of the original liability and the recognition of a new liability.
The difference between the carrying value of the original financial liability and the consideration paid is
recognised in profit or loss.
52
5.3
Impairment of financial assets
The Group assesses, on an on-going basis, whether a financial asset or group of financial assets is
impaired. If there is objective evidence that an impairment loss on loans and receivables carried at
amortised cost has been incurred, the amount of the loss is measured as the difference between the
carrying amount of the asset and the present value of estimated future cash flows (excluding future
expected credit losses that have not been incurred), discounted at the financial asset’s original EIR. The
carrying amount of the asset is reduced through the use of a loan loss provision. The amount of the loss
is recognised in the income statement as a loan loss provisioning charge.
The Group first assesses whether objective evidence of impairment exists individually for financial assets
which are individually significant and individually or collectively for financial assets that are not
individually significant. If it is determined that no objective evidence of impairment exists for an
individually assessed financial asset, the asset is included in a group of financial assets with similar credit
risk characteristics and that group of financial assets is collectively assessed for impairment. Future cash
flows for a group of loan assets that are collectively evaluated for impairment are estimated on the basis
of contractual cash flows and historical loss experience for assets with similar credit characteristics.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related
objectively to an event occurring after the impairment was recognised, the previously recognised
impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income
statement to the extent that the carrying value of the asset does not exceed its amortised cost at the
reversal date.
5.3.1 Available-for-sale financial instruments
For available-for-sale financial instruments, the Group assesses at each reporting date, whether there is
objective evidence that an investment is impaired.
In the case of debt instruments classified as available-for-sale, the Group assesses individually whether
there is objective evidence of impairment such as observable data regarding a decline in estimated
future cash-flows and/or a decline in underlying collateral impacting the Group's ability to recover all
cash flows. The amount recorded for impairment is the cumulative loss measured as the difference
between the amortised cost and the current fair value, less any impairment loss on that investment
previously recognised in the income statement. Future interest income is based on the reduced carrying
amount and is accrued using the rate of interest used to discount the future cash flows for the purpose
of measuring the impairment loss, and the interest income is recorded as part of interest and similar
income. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be
objectively related to a credit event occurring after the impairment loss was recognised in the income
statement, the impairment loss is reversed through the income statement.
5.3.2 Collateral valuation
The Group seeks to use collateral, where possible, to mitigate its risks on default of financial assets. The
collateral is the asset subject to financing. The fair value of collateral is generally assessed, as a minimum,
at inception.
5.3.3 Collateral repossessed
The Group’s policy is to sell repossessed assets. Repossessed assets are sold typically through auction
houses and should the asset generate a surplus over the outstanding debt, the surplus is returned to the
borrower.
5.4 Leasing
The determination of whether an arrangement is a lease, or contains a lease, is based on the substance
of the arrangement and requires an assessment of whether the fulfilment of the arrangement is
dependent on the use of a specific asset or assets or whether the arrangement conveys a right to use
or acquire ownership of the asset.
5.4.1 Group as a lessee
Leases that do not transfer to the Group substantially all of the risks and benefits incidental to ownership
of the leased items are operating leases. Operating lease payments are recognised as an expense in the
income statement on a straight-line basis over the lease term. Contingent rental payable is recognised
as an expense in the period in which it is incurred.
5.4.2 Group as a lessor
Leases where the Group does not transfer substantially all of the risk and benefits of ownership of the
asset are classified as operating leases. Rental income is recorded as earned based on the contractual
terms of the lease in other operating income. Initial direct costs incurred in negotiating operating leases
are added to the carrying amount of the leased asset and recognised over the lease term on the same
basis as rental income. Contingent rents are recognised as revenue in the year in which they are earned.
Annual Report & Financial Statements 2018
53
5.5 Recognition of income and expenses
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group
and the revenue can be reliably measured. The following specific recognition criteria must also be met
before revenue is recognised.
5.5.1
Interest and similar income and expense
For all financial instruments measured at amortised cost and interest bearing financial assets classified
as available-for-sale, interest income or expense is recorded using the EIR method. The calculation takes
into account all of the contractual terms of the financial instrument (e.g. prepayment options) and
includes any fees or incremental costs that are directly attributable to the instrument and are an integral
part of the EIR, but not future credit losses.
When the recorded value of a financial asset or a group of similar financial assets has been reduced by
an impairment loss, interest income continues to be recognised using the rate of interest used to
discount the future cash flows for the purpose of measuring the impairment loss.
5.5.2 Fee and commission income
The Group earns fee and commission income from a range of services it provides to its customers.
Fee income, other than that accounted for using the EIR method, is recognised immediately and can be
divided into the following two categories.
l Secondary lease income arising from finance leases which have completed their primary lease period; and
l Fees earned from late payment charges and recharge of costs incurred from the recovery of assets
under hire purchase and finance lease agreements.
5.6
Investment in subsidiaries
Investments in subsidiaries are initially and subsequently measured at cost. These are assessed for
impairment in line with the accounting policy detailed in note 5.11.
5.7 Cash and cash equivalents
Cash and cash equivalents as referred to in the Consolidated Statement of Cash Flows statement
comprises cash on hand, non–restricted current accounts with central banks and amounts due from
banks on demand or with an original maturity of three months or less.
5.8 Property, plant and equipment
Property, plant and equipment are stated at cost excluding the costs of day–to–day servicing, less
accumulated depreciation and accumulated impairment in value. Changes in the expected useful life are
accounted for by changing the amortisation period or methodology, as appropriate, and treated as
changes in accounting estimates.
Depreciation is calculated using the straight–line method to write down the cost of property, plant and
equipment to their residual values over their estimated useful live as follows.
–
Computer hardware
Office equipment, fixtures and fittings –
–
Operating lease equipment
3 to 10 years
5 years
1 to 10 years
Property, plant and equipment are de-recognised on disposal or when no future economic benefits are
expected from their use. Any gain or loss arising on de-recognition of the asset (calculated as the
difference between the net disposal proceeds and the carrying amount of the asset) is recognised in
other operating income in the income statement in the year the asset is de-recognised.
5.9 Goodwill
Goodwill arising on acquisition represents the excess of the cost of a business over the fair values of the
Group’s share of the identifiable assets, liabilities and contingent liabilities acquired. Goodwill is not
amortised but is reviewed at least annually for impairment. For the purpose of impairment testing,
goodwill is allocated to each Cash Generating Unit ('CGU'). Each CGU is consistent with the Group’s
primary reporting segments. Any impairment is recognised immediately through the income statement
and is not subsequently reversed.
On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the
profit or loss on disposal.
54
5.10 Intangible assets
The Group's other intangible assets consist solely of computer software and capitalised expenses
relating to the project of applying to become and becoming a bank.
An intangible asset is recognised only when its cost can be measured reliably and it is probable that the
expected future economic benefits that are attributable to it will flow to the Group.
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible
assets acquired in a business combination is their fair value at the date of acquisition. Following initial
recognition, intangible assets are carried at cost less any accumulated amortisation and any
accumulated impairment losses.
Acquired software and subsequent enhancements are capitalised as intangible assets and amortised
over their useful lives (3 to 10 years) on a straight-line basis. All other software development and
maintenance costs are recognised as an expense as incurred. The assets’ residual values and useful lives
are reviewed and adjusted, if appropriate, at each reporting date.
5.11
Impairment of non-financial assets
The Group assesses at each reporting date whether there is an indication that an asset may be impaired.
If any indication exists, or when annual impairment testing for an asset is required, the Group estimates
the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair
value less costs to sell and its value-in-use. Where the carrying amount of an asset or CGU exceeds its
recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
In assessing value-in-use, the estimated future cash flows are discounted to their present value using a
pre–tax discount rate that reflects current market assessments of the time value of money and the risks
specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used.
These calculations are corroborated by valuation multiples, quoted share prices for publicly traded
subsidiaries or other available fair value indicators.
For all non-financial assets, an assessment is made at each reporting date as to whether there is any
indication that previously recognised impairment losses may no longer exist or may have decreased. If
such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously
recognised impairment loss is reversed only if there has been a change in the assumptions used to
determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is
limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds
the carrying amount that would have been determined, net of depreciation, had no impairment loss
been recognised for the asset in prior years. Such reversal is recognised in the income statement.
Impairment losses relating to goodwill are not reversed in future periods. The Group did not need to
record impairment for its non-financial assets over the reported periods. Disclosures of the assumptions
used to test for impairment are given in note 23.
5.12 Share-based payment transactions
The Company operates an approved and an unapproved equity-settled share option plan for its
employees. For awards granted after 7 November 2002 (and not vested by 1 January 2006) and in
accordance with IFRS 2 ‘Share-based payment’, an expense is recognised in respect of the fair value of
employee services received in exchange for the grant of share options. A corresponding amount is
recorded as an increase in equity within retained earnings. The expense is spread over the relevant
vesting period and is calculated by reference to the fair value of the share options granted.
In arriving at fair values, the Black-Scholes pricing model is used and estimates are made of dividend
yields, share price volatility, risk-free rates and expected life of the share options.
5.13 Pension benefits
The Group operates a defined contribution pension plan. The contributions payable to a defined
contribution plan are in proportion to the services rendered to the Group by the employees and are
recorded as an expense under personnel expenses. Unpaid contributions are recorded as a liability. The
Group does not operate a defined benefit plan.
5.14 Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of
past events and it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
Annual Report & Financial Statements 2018
55
5.15 Taxes
5.15.1 Current tax
Current tax assets and liabilities for the current and prior years are measured at the amount expected
to be recovered from, or paid to, the taxation authorities. The tax rates and tax laws used to compute
the amount are those that are enacted, or substantively enacted, by the reporting date in the country
where the Group operates and generates taxable income.
Current income tax relating to items recognised directly in equity is recognised in equity and not in the
statement of profit or loss. Management periodically evaluates positions taken in the tax returns with
respect to situations in which applicable tax regulations are subject to interpretation and establishes
provisions where appropriate. The detailed approach is further explained in note 16.
5.15.2 Deferred tax
Deferred tax is provided on temporary differences at the reporting date between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities (‘DTL’) are recognised for all taxable tempory differences, except
l Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability
in a transaction that is not a business combination and, at the time of the transaction, affects neither
the accounting profit nor taxable profit or loss; and
l In respect of taxable temporary differences associated with investments in subsidiaries, where the
timing of the reversal of the temporary differences can be controlled and it is probable that the
temporary differences will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent
that it is no longer probable that sufficient taxable profit will be available to allow all or part of the
deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date
and are recognised to the extent that it becomes probable that future taxable profit will allow the
deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year
when the asset is realised or the liability is settled, based on tax rates and tax laws that have been
enacted or substantively enacted at the reporting date.
Current and deferred taxes are recognised as income tax benefits or expenses in the income statement
except for tax related to the fair value remeasurement of available-for-sale assets and foreign exchange
differences and the net movement on cash flow hedges, which are charged or credited to other
comprehensive income. These exceptions are subsequently reclassified from other comprehensive
income to the income statement together with the respective deferred loss or gain. The Group also
recognises the tax consequences of payments and issuing costs, related to financial instruments that are
classified as equity, directly in equity.
The Group only offsets its deferred tax assets against liabilities when there is both a legal right to offset
and it is the Group’s intention to settle on a net basis.
5.15.3 Value Added Tax (‘VAT’)
Revenues, expenses and assets are recognised net of the recoverable amount of VAT except in the case
of overdue loans and receivables, other receivables and other payables which are shown inclusive of VAT.
The net amount of VAT recoverable from, or payable to, the taxation authority is included as part of
other receivables or other payables in the balance sheet.
5.16 Own shares
Own equity instruments of the Group which are acquired by it or by any of its subsidiaries (treasury
shares) are deducted from equity. Consideration paid or received on the purchase, sale, issue or
cancellation of the Group’s own equity instruments is recognised directly in equity. No gain or loss is
recognised in profit or loss on the purchase, sale, issue or cancellation of own equity instruments.
5.17 Dividends on ordinary shares
Dividends on ordinary shares are recognised as a liability and deducted from equity when they are
approved by the Group’s shareholders.
Dividends for the year that are approved after the reporting date are disclosed as an event after the
reporting date.
5.18 Short-term benefits
Wages, salaries, commissions, bonuses, social security contributions, paid annual leave and non-monetary
benefits, including death-in-service premiums, are accrued in the period in which the associated services
are rendered by employees of the Group.
5.19 Termination benefits
Termination benefits are payable when employment is terminated before the normal retirement date or
when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises
termination benefits when it is demonstrably committed to either the termination of employment or a
voluntary redundancy offer.
56
5.20 IFRS 3 'Business Combinations'
Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is
measured as the aggregate of the consideration transferred, which is measured at acquisition date fair
value, and the amount of any non-controlling interests in the acquiree. For each business combination,
the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the
proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as
incurred and included in administrative expenses.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate
classification and designation in accordance with the contractual terms, economic circumstances and
pertinent conditions at the acquisition date. This includes the separation of embedded derivatives in host
contracts by the acquiree.
Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the
acquisition date. Contingent consideration classified as equity is not remeasured and its subsequent
settlement is accounted for within equity. Contingent consideration classified as an asset or liability that
is a financial instrument and within the scope of IAS 39 'Financial Instruments', is measured at fair value
with the changes in fair value recognised in the statement of profit or loss in accordance with IAS 39.
Other contingent consideration that is not within the scope of IAS 39 is measured at fair value at each
reporting date with changes in fair value recognised in profit or loss.
Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred
and the amount recognised for non-controlling interests and any previous interest held over the net
identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in
excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly
identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to
measure the amounts to be recognised at the acquisition date. If the reassessment still results in an
excess of the fair value of net assets acquired over the aggregate consideration transferred, then the
gain is recognised in profit or loss.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the
purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date,
allocated to each of the Group’s CGUs that are expected to benefit from the combination, irrespective
of whether other assets or liabilities of the acquiree are assigned to those units.
Where goodwill has been allocated to a CGU and part of the operation within that unit is disposed of,
the goodwill associated with the disposed operation is included in the carrying amount of the operation
when determining the gain or loss on disposal. Goodwill disposed of in these circumstances is measured
based on the relative values of the disposed operation and the portion of the CGU retained.
Contingent liabilities recognised in a business combination
A contingent liability recognised in a business combination is initially measured at fair value. Subsequently,
it is measured at the higher amount that would be recognised in accordance with the requirements for
provisions above or the amount initially recognised less, where appropriate, cumulative amortisation
recognised in accordance with the requirements for revenue recognition.
5.21 Standards issued but not yet effective
A number of new standards, amendments to standards and interpretations which are effective for
annual periods beginning on or after 1 October 2018 have not been early adopted in the preparation of
the Group's financial statements. New standards but not yet effective that may affect the Group are as
follows:
l IFRS 2 (amendment) 'Share Based Payments'
l IFRS 9 'Financial Instruments'
l IFRS 15 ‘Revenue from Contracts with Customers’
l IFRS 16 ‘Leases’
l IFRS 10 and IAS 28 ‘Sale or Contribution of Assets between
an Investor and its Associate or Joint Venture’
Effective from
1 January 2018
1 January 2018
1 January 2018
1 January 2019
Deferred
5.21.1 Amendment to IFRS 2 ‘Share-based payments’
These amendments were issued in June 2016 and clarify the standard in relation to the accounting
for cash-settled share-based payment transactions that include a performance condition, the
classification of share-based payment transactions with net settlement features and the accounting
for modifications of share-based transactions from cash-settled to equity-settled. This amendment is
effective for periods beginning on or after January 2018. The share-based payments managed by the
Group are equity-settled and therefore this amendment will have no impact.
Annual Report & Financial Statements 2018
57
5.21.2 IFRS 16 ‘Leases’
This standard was issued in January 2016 and it replaces the existing standard IAS 17 ‘Leases’. The
standard requires lessees to recognise assets and liabilities for most leases. For lessors, there is little
change to the existing accounting in IAS 17 ‘Leases’. The new standard is effective from periods beginning
on or after 1 January 2019 with early adoption permitted, provided the new revenue standard, IFRS 15
‘Revenue from contracts with customers’, has been applied, or is applied at the same date as IFRS 16.
This standard does not have a material impact on the Group as a lessor but during 2018/19, the Group
will be assessing the impact as a lessee. The Group does not intend to early adopt IFRS 16 and therefore
will only adopt it from 1 October 2019.
5.21.3 IFRS 9 ‘Financial instruments’
The IASB issued IFRS 9 ‘Financial Instruments’ in its final form in July 2014 and it is effective for
annual periods beginning on or after 1 January 2018. IFRS 9 sets out the requirements for
recognizing and measuring financial assets and financial liabilities, impairment of financial assets
and hedge accounting. This standard replaces IAS 39 ‘Financial Instruments: Recognition and
Measurement’.
The Group has determined the Date of Initial Application for IFRS 9 to be 1 October 2018. The
classification, measurement and impairment requirements are applied retrospectively by adjusting
the opening statement of financial position at 1 October 2018. The Group will not restate the
comparatives as permitted by IFRS 9.
(a) Classification and measurement
The classification and measurement of financial assets will depend on how these are managed
(the entity’s business model) and their contractual cash flow characteristics. These factors
determine whether the financial assets are measured at amortised cost, fair value through other
comprehensive income or fair value through statement of income.
Loans and advances to customers are held to collect contractual cash flows and are expected
to give rise to cash flows representing solely payments of principal and interest. The Group
analysed the contractual cash flow characteristics of those instruments and concluded that
they meet the criteria for amortised cost measurement under IFRS 9. Therefore, reclassification
for these instruments is not required.
Investments in Government bonds are currently classified as available-for-sale, measured at fair
value through other comprehensive income and the Group has concluded that these
investments will continue to meet the criteria for fair value through other comprehensive
income. Therefore, reclassification for these instruments is not required.
The adoption of this standard will not have a significant impact on the classification and
measurement of Group's financial assets and financial liabilities.
(b) Impairment of financial assets
The impairment requirements apply to financial assets measured at amortised cost, fair value
through other comprehensive income, lease receivables and certain loan commitments and financial
guarantee contracts. The IFRS 9 expected credit loss ('ECL') model replaces the current ‘incurred
loss’ model of IAS 39.
The ECL model contains a three stage approach which is based on the change in credit quality of
financial assets since initial recognition. Under Stage 1, where there has not been a significant
increase in credit risk since initial recognition, an amount equal to 12 months ECL will be recorded.
Under Stage 2, where there has been a significant increase in credit risk since initial recognition but
the financial instruments are not considered credit impaired, an amount equal to the default
probability-weighted lifetime ECL will be recorded. Under the Stage 3, where there is objective
evidence of impairment at the reporting date these financial instruments will be classified as credit
impaired and an amount equal to the lifetime ECL will be recorded for the financial assets.
The assessment of credit risk and the estimation of ECL are required to be unbiased and
probability-weighted, and should incorporate all available information which is relevant to the
assessment including information about past events, current conditions and reasonable and
supportable forecasts of economic conditions at the reporting date. In addition, the estimation of
ECL should take into account the time value of money. As a result, the recognition and
measurement of impairment are intended to be more forward-looking than under IAS 39 and the
resulting impairment charge will tend to be more volatile.
The Group has completed the development and testing of operating models and methodologies for
the calculation of ECL. The Group continues to revise, refine and validate the impairment models
and related process controls. The Group is in the process of finalising the potential impact of the
expected provision for credit losses in accordance with IFRS 9. As of 30 September 2018, the
transition adjustment with regard to ECL is expected to be between 10-15% of current provisioning
levels, which will be a transitional adjustment to opening retained earnings.
58
5.21.4 IFRS 15 ‘Revenue from contracts with customers’
IFRS 15 was issued by IASB on 28 May 2014, effective for annual periods beginning on or after 1 January
2018. IFRS 15 supersedes IAS 11 ‘Construction Contracts’ and IAS 18 Revenue along with related IFRIC 13,
IFRIC 15, IFRIC 18 and SIC 31 from the effective date. This new standard removes inconsistencies and
weaknesses in previous revenue recognition requirements, provides a more robust framework for
addressing revenue issues and improves comparability of revenue recognition practices across entities,
industries, jurisdictions and capital markets.
Revenue under IFRS 15 will need to be recognised as goods and services are transferred, to the extent
that the transferor anticipates entitlement to goods and services. The standard also specifies a
comprehensive set of disclosure requirements regarding the nature, extent and timing as well as any
uncertainty of revenue and corresponding cashflows with customers. The Group has assessed the
impact of IFRS 15. Based on the assessment, adoption of IFRS 15 is not expected to have any material
effect on the Group's financial statements.
5.21.5 IFRS 10 and IAS 28 ‘Sale or Contribution of Assets between an Investor and its Associate or
Joint Venture’
The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of
a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that the
gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS
3, between an investor and its associate or joint venture, is recognised in full. Any gain or loss resulting
from the sale or contribution of assets that do not constitute a business, however, is recognised only to
the extent of unrelated investors’ interests in the associate or joint venture.
The IASB has deferred the effective date of these amendments indefinitely, but an entity that early
adopts the amendments must apply them prospectively. The Group will apply these amendments when
they become effective.
6
Significant accounting judgements, estimates and assumptions
The preparation of the Group’s consolidated financial statements requires management to make
judgements, estimates and assumptions that affect the reported amount of revenues, expenses, assets
and liabilities, and the accompanying disclosures, as well as the disclosure of contingent liabilities.
Uncertainty about these assumptions and estimates could result in outcomes that require a material
adjustment to the carrying amount of assets or liabilities affected in future periods. In the process of
applying the Group’s accounting policies, management has made the following judgements and
assumptions concerning the future and other key sources of estimation uncertainty at the reporting
date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year. Existing circumstances and assumptions about future
developments may change due to circumstances beyond the Group’s control and are reflected in the
assumptions if and when they occur. Items with the most significant effect on the amounts recognised
in the consolidated financial statements with substantial management judgement and/or estimates are
collated below with respect to the judgements/estimates involved.
6.1
Impairment losses on loans and advances
The Group reviews its loans and advances at each reporting date to assess whether an impairment loss
should be recorded in the income statement.
The detailed approach for is further explained in note 5.3 which includes an element of management’s
judgement, in particular for the estimation of the amount and timing of future cash flows and collateral
values when determining impairment losses. These estimates are driven by a number of factors, the
changing of which can result in different levels of allowances.
Additionally, judgements around the inputs and calibration of the collective impairment models include
the criteria for the identification of smaller homogenous portfolios, the effect of concentrations of risks
and economic data (including levels of unemployment, repayment trends, collateral values of assets
under financing, the performance of different individual groups, and bankruptcy trends), and for
determination of the emergence period. The methodology and assumptions are reviewed regularly in
the context of actual loss experience.
The impairment methodology and its application is disclosed in more detail in notes 5.3.
6.2 Effective Interest Rate (‘EIR’) method
The Group's EIR methodology, as explained in note 5.1.3, recognises interest income using a rate of
return that represents the best estimate of a constant rate of return over the expected behavioural life
of loans and deposits and recognises the effect of other characteristics of the product life cycle
(including prepayments and penalty interest and charges). This estimation, by nature, requires an
element of judgement regarding the expected behaviour and life-cycle of the instruments, as well as
expected changes to the Bank of England’s base rate and other fee income andexpense that are integral
parts of the instrument.
Annual Report & Financial Statements 2018
59
7
Segment information
The Group has been organised into two reportable segments, with the addition of its retail deposit-taking
function being grouped into the existing consumer finance segment from July 2017, subsequent to the
banking licence being granted to its' banking subsidiary in December 2016. For management purposes,
the Group has been organised into two operating segments based on products and services, as follows.
Consumer finance
Individual customers’ deposits and consumer hire purchase, personal loan and conditional sale finance for
motor vehicles.
Business finance
Business hire purchase and lease finance for vehicles, plant and equipment.
The Executive Committee monitors the operating results of its business units separately for the purpose
of making decisions about resource allocation and performance assessment. Segment performance is
evaluated based on operating profits or losses and is measured consistently with operating profits or
losses in the consolidated financial statements. However, income taxes are managed on a Group basis
and are not allocated to operating segments.
No revenue from transactions with a single external customer or counterparty amounted to 10% or
more of the Group’s total revenue for the years ended 30 September 2017 and 30 September 2018.
Segment assets include cash and balances at central banks, loans and advances to customers, and
available-for-sale financial instruments and tax assets. Segment liabilities comprise of amount due to
banks, amount due to customers, derivative financial instruments and tax liabilities but exclude certain
borrowings that are for general corporate purposes.
No geographical analysis is presented because the Group only operates within the United Kingdom.
The following table presents income and profit and certain asset and liability information for the Group’s
operating segments.
Group
Year ended 30 September 2018
Interest and similar income
Interest and similar expense
Net interest income
Fee and commission income
Fee and commission expense
Net fees and commission (expense)/income
Net operating income
Personnel expenses
Depreciation of property and equipment
Amortisation of intangible assets
Other operating expenses
Impairment loss on financial instruments
Total operating expenses
Segment profit before tax
Income tax expense
Profit for the year
Assets
Additions to property and equipment
Additions to other intangible assets
Total assets
Total liabilities
Consumer
finance
£’000
13,108
(5,404)
7,704
96
(435)
(339)
7,365
2,667
43
198
1,494
601
5,003
2,362
–
2,362
18
327
Business
finance
£’000
12,387
(5,089)
7,298
397
(410)
(13)
7,285
2,519
41
187
1,413
314
4,474
2,811
–
2,811
18
310
Total
£’000
25,494
(10,492)
15,002
493
(845)
(352)
14,650
5,186
84
385
2,907
915
9,477
5,173
(981)
4,192
36
637
128,863
109,535
157,607
134,384
286,470
243,919
60
Group
Year ended 30 September 2017
Interest and similar income
Interest and similar expense
Net interest income
Fee and commission income
Fee and commission expense
Net fees and commission (expense)/income
Net loss on financial assets and liabilities designated
at fair value through profit or loss
Net operating income
Personnel expenses
Depreciation of property and equipment
Amortisation of intangible assets
Other operating expenses
Impairment loss on financial instruments
Total operating expenses
Segment profit before tax
Income tax expense
Profit for the year
Assets
Additions to property and equipment
Additions to other intangible assets
Total assets
Total liabilities
8
Interest and similar income
Group
Cash and short-term funds
Loans and advances to customers
Financial instruments - available-for-sale
9
Interest and similar expense
Group
Due to banks
Due to customers
Credit-related fees and commission forming part of EIR
Consumer
finance
£’000
11,292
(5,298)
5,994
115
(397)
(282)
(4)
5,708
2,207
40
156
1,306
384
4,093
1,615
–
1,615
110
1,253
85,821
93,177
Business
finance
£’000
8,678
(3,608)
5,070
397
(305)
92
–
5,162
1,696
31
119
1,003
295
3,144
2,018
–
2,018
Total
£’000
19,970
(8,906)
11,064
512
(702)
(190)
(4)
10,870
3,903
71
275
2,309
679
7,237
3,633
(847)
2,786
85
962
86,647
40,630
195
2,215
172,468
133,807
Year ended
30 September
2018
£’000
Year ended
30 September
2017
£’000
75
25,203
216
25,494
–
19,970
–
19,970
Year ended
30 September
2018
£’000
Year ended
30 September
2017
£’000
3,125
2,085
5,282
10,492
4,951
124
3,831
8,906
Annual Report & Financial Statements 2018
61
10 Net fee and commission expense
Group
Fees and commission income
Secondary lease income
Other fees not forming part of EIR
Fees and commission expenses
Debt recovery and valuation fees
Creditworthiness due diligence costs
Net fee and commission expense
Year ended
30 September
2018
£’000
Year ended
30 September
2017
£’000
312
180
492
(338)
(506)
(844)
(352)
348
164
512
(334)
(368)
(702)
(190)
11
12
Fair value (loss)/gain on financial instruments
This relates to derivative financial instruments in the form of interest rate swaps that were used by the
Group as cash flow hedging instruments. At 30 September 2018, there were no outstanding positions
(30 September 2017 – £nil). Movements in the amounts are recognised in other reserves. Once the
position has been closed, the reserves are recognised in the income statement.
Impairment losses on financial assets
Impairment losses on financial assets relates to impairment losses on loans and advances to customers.
The credit risk inherent in loans and advances to customers is detailed in note 34. The charge during the
year was as follows.
Group
30 September 2018
Impairment charge for the year on loans and
advances to customers
30 September 2017
Impairment charge for the year on loans and
advances to customers
Instalment
credit
£’000
Finance
lease
£’000
899
608
16
71
Total
£’000
915
679
Movements in impairment charge and amounts written off are further detailed in note 20.
13 Personnel expenses
The aggregate payroll costs of the Group, including Directors and Chairman, were
Group
Salaries and fees
Social security cost
Pension costs - defined contribution plan
Share-based payments
Year ended
30 September
2018
£’000
Year ended
30 September
2017
£’000
4,514
491
147
34
5,186
3,350
405
111
37
3,903
The average monthly number of persons employed by the Group during the year was 67 (year ended
30 September 2017 – 60).
62
14 Directors’ remuneration and staff costs
Group
Directors’ remuneration
Directors’ emoluments
Payments in respect of personal pension plans
Long-term incentive schemes
Year ended
30 September
2018
£’000
Year ended
30 September
2017
£’000
1,257
55
19
1,331
997
49
28
1,074
There are three directors receiving company contributions to personal pension schemes (September
2017 – three).
Directors' remunerations are disclosed in the Nomination & Remuneration Committee Report on page 33.
Share-based payments
Company equity-settled share option plans
The grant price is determined by reference to the average mid-market price of the Company’s ordinary
shares for the three days immediately preceding the date of the grant. The options are conditional on
continued employment and have a minimum vesting period of three years. If options remain unexercised
after a period of ten years from the date of the grant, the options expire. Furthermore, options are
forfeited if the employee leaves the Group before the options vest. The weighted average remaining
contractual life is seven years (30 September 2017 – seven years).
Company
Outstanding at the beginning of the year
Granted during the year
Expired during the year
Outstanding at the end of the year
Exercisable at the end of the year
30 September
2018
£’000
Weighted
average
exercise
price
(pence)
30 September
2017
£’000
Weighted
average
exercise
price
(pence)
2,960
250
–
3,210
2,100
16
28
–
17
13
2,610
350
–
2,960
1,200
15
23
–
16
9
The fair value was measured at the grant date using the Black-Scholes model. The inputs were as follows.
During the year ended 30 September 2018
Grant date
Share price at grant date
Exercise price
Shares under option
Vesting period
Expected volatility
Expected life
Risk-free rate
Expected dividends
Fair value per model at grant date
During the year ended 30 September 2017
Grant date
Share price at grant date
Exercise price
Shares under option
Vesting period
Expected volatility
Expected life
Risk-free rate
Expected dividends
Fair value per model at grant date
26 July
28.4p
28.4p
250,000
3 – 10 years
20-30%
6.5 years
0.6%
nil
8.9p
7 June
22.6p
22.6p
350,000
3 – 10 years
20-30%
6.5 years
0.3%
nil
6.9p
The expected volatility is based on historical volatility over a period consistent with the expected option
life. The risk-free rate is based on UK Government bonds.
Annual Report & Financial Statements 2018
63
15 Other operating expenses
Group
Advertising and marketing
Administrative expenses
Information technology and systems
Professional fees
Rental charges payable under operating lease
Expenses relating to banking services and licences
Year ended
30 September
2018
£’000
Year ended
30 September
2017
£’000
217
617
717
769
464
123
45
648
461
626
430
99
2,907
2,309
Professional fees include fees payable to the auditor of £152,000 (year ended 30 September 2017 –
£147,000), as analysed below.
Group
Statutory audit of the Company
Statutory audit of the Company’s subsidiaries
Year ended
30 September
2018
£’000
Year ended
30 September
2017
£’000
87
65
152
72
75
147
16 Income tax
(a) The components of income tax expense for the year ended 30 September 2018 and its comparative
Group
Current tax
UK Corporation Tax on profit for the year
Adjustments in respect of prior periods
Total current tax
Deferred tax
Origination and reversal of temporary differences
Adjustments in respect of prior periods
Change in tax rate
Total tax charge for the year
(b) Deferred tax on items recognised directl y in equity
Group
Relating to share-based payments
Year ended
30 September
2018
£’000
Year ended
30 September
2017
£’000
(829)
(85)
(914)
(175)
90
18
(67)
(981)
(558)
(143)
(701)
(129)
138
(155)
(146)
(847)
Year ended
30 September
2018
£’000
Year ended
30 September
2017
£’000
50
50
14
14
64
(c) Factors affecting current tax charge for the year
The tax assessed for the year differs from the standard rate of Corporation Tax in the UK of 19.0%
(period ended 30 September 2017 – 19.5%). The differences are explained below.
The Finance (No.2) Act 2015 enacted a reduction in the main rate of Corporation Tax main rate (for
all profits except ring fence profits) at 19% for the years starting 1 April 2017, 2018 and 2019. The
Finance Act 2016 enacted a reduction in the main rate of Corporation Tax main rate at 17% for the
year starting the 1 April 2020. Deferred tax balances should be calculated at the rate which the
balances are expected to be settled, based on tax rates that have been substantively enacted at
the balance sheet date. The deferred tax balances have been therefore calculated with reference
to these rates.
Group
Accounting profit before tax
UK Corporation Tax of 19%
(year ended 30 September 2017 – 19.5%)
Effects of
Expenses not deductible for taxation purposes
Adjustments in respect of prior years
Change in tax rate
Other differences
Year ended
30 September
2018
£’000
5,173
(983)
(47)
5
18
26
Income tax expense as reported in the consolidated income statement
(981)
Effective tax rate for the year
19%
Year ended
30 September
2017
£’000
3,633
(708)
(6)
(6)
(127)
–
(847)
23%
17 Earnings per share
Basic earnings per share ('EPS') is calculated by dividing the net profit for the year attributable to
ordinary equity holders of the Company by the weighted average number of ordinary shares
outstanding during the year.
The following table shows the income and share data used in the basic EPS calculations.
Company
Net Company profit attributable to the
adjusted for the effect of dilution
Basic weighted average number of shares
30 September
2018
£’000
30 September
2017
£’000
4,192
2,786
30 September
2018
’000 units
30 September
2017
’000 units
212,225
190,409
Basic earnings per 5p ordinary share
2.0
1.5
18 Cash and balances at central banks
Cash and demand deposits
Money market funds
30 September
2018
£’000
Group
30 September
2017
£’000
Company
30 September
2018
£’000
30 September
2017
£’000
21,338
–
21,338
1,455
15,563
17,018
11
–
11
18
–
18
The Group and the Company do not have monies held in trust for clients at the reporting date.
Annual Report & Financial Statements 2018
65
19 Available-for-sale financial instruments
Group
UK Government debt securities
Other OECD sovereign guaranteed debt securities
Multilateral development bank debt securities
Covered bond securities
30 September
2018
£’000
30 September
2017
£’000
509
7,517
18,185
13,691
39,902
4,511
-
-
-
4,511
There are no allowances for impairment losses on available-for-sale financial instruments during the year
and at year end.
20 Loans and advances to customers
Group
Consumer lending - gross
Business lending - gross
Allowance for impairment losses
Unearned future finance income
30 September
2018
£’000
30 September
2017
£’000
127,975
142,210
270,185
(4,369)
(46,494)
219,322
93,218
87,815
181,033
(3,965)
(31,350)
145,718
A reconciliation of the allowance for impairment losses for loans and advances, by class, is as follows.
Group
At 1 October 2017
Charge for the year (note 12)
(Recoveries)/write offs
At 30 September 2018
Made up of
Individual impairment
Collective impairment
Total impairment
Group
At 1 October 2016
Charge for the year (note 12)
Recoveries
At 30 September 2017
Made up of
Individual impairment
Collective impairment
Total impairment
Consumer
finance
£’000
Business
finance
£’000
2,233
601
(549)
2,285
2,185
100
2,285
1,732
314
37
2,083
1,939
144
2,083
Consumer
finance
£’000
Business
finance
£’000
2,179
384
(330)
2,233
2,058
175
2,233
1,702
295
(265)
1,732
1,645
87
1,732
Total
£’000
3,965
915
(512)
4,368
4,124
244
4,368
Total
£’000
3,881
679
(595)
3,965
3,703
262
3,965
Loans and advances at Company level relate to subsidiary undertakings and are eliminated at Group
level. These balances arose mainly from daily operations, payments on behalf of and subordinated loans
to subsidiary undertakings. Loans and advances to subsidiary undertakings are unsecured, interest-free
and repayable on demand.
66
21
Investment in subsidiary undertakings
The consolidated financial statements include the financial statements of the Company and its subsidiary
undertakings. All the subsidiaries are incorporated and operate in the United Kingdom and are registered
in England and Wales. The Company does not have any joint ventures or associates. Significant subsidiaries
of the Company were as follows.
Name of company
PCF Bank Limited
AMC Trust Limited
PCF Finance Group Limited ('PCFGL')
Private and Commercial Finance Company
Limited ('P&C Finance')
PCF Asset Finance Limited ('PCF Asset')
PCF Business Finance Limited ('PCF Business')
PCF Leasing Limited ('PCF Leasing')
PCF Credit Limited ('PCF Credit')
PCF Equipment Leasing Limited
PCF Financial Leasing Limited
Nature of business
Banking, leasing &
hire purchase
Dissolved
Dissolved
Dissolved
Dissolved
Dissolved
Dissolved
Leasing & hire purchase
Dormant
Dormant
Percentage of
equity interest
30 September
2018
Percentage of
equity interest
30 September
2017
100
–
–
–
–
–
–
100*
100*
100*
100
100*
100*
100*
100*
100*
100*
100*
100*
100*
*Held by a subsidiary of the Company
The registered office of all subsidiaries is Pinners Hall, 105-108 Old Broad Street, London EC2N 1ER.
All companies have an Accounting Reference Date of 30 September.
Company
Cost and net book value
At beginning of the year
Increase in investments
At 30 September
30 September
2018
£’000
30 September
2017
£’000
17,000
5,000
22,000
1,000
16,000
17,000
The Company has an investment in PCF Bank Limited (the 'Bank'). The net asset value of the Bank at
30 September 2018 was £36,670,000 (30 September 2017 – £25,710,000). If the investment had been
sold at this valuation, any potential capital gains arising on the sale would have been exempt under the
substantial shareholdings legislation. If the disposal had given rise to a loss, the loss would not be an
allowable loss for tax purposes. There was an additional investment of £5,000,000 in the Bank during
the year (30 September 2017 – £16,000,000).
It is the opinion of the directors that the recoverable amount of the Company’s investment in the Bank
is not less than the amount at which it is stated in the Company’s financial statements.
Annual Report & Financial Statements 2018
67
22 Property, plant and equipment
Group
Cost
At 1 October 2017
Additions during the year
Disposals during the year
At 30 September 2018
Accumulated depreciation
At 1 October 2017
Disposals during the year
Depreciation during the year
At 30 September 2018
Net book value
Group
Cost
At 1 October 2016
Additions during the year
Depreciation during the year
At 30 September 2017
Accumulated depreciation
At 1 October 2016
Disposals during the year
Depreciation during the year
At 30 September 2017
Net book value
Leasehold
improvement
30 September
2018
£’000
Office
equipment
30 September
2018
£’000
Total
30 September
2018
£’000
26
6
–
32
15
–
7
22
10
407
31
–
438
147
–
77
224
214
433
37
–
470
162
–
84
246
224
Leasehold
improvement
30 September
2017
£’000
Office
equipment
30 September
2017
£’000
Total
30 September
2017
£’000
26
–
–
26
9
–
6
15
11
254
195
(42)
407
124
(42)
65
147
260
280
195
(42)
433
133
(42)
71
162
271
The majority of the property, plant and equipment is computer hardware and office machinery.
Company
Cost
At 1 October 2016
Additions during the year
Disposals during the year
Transferred during the year
At 30 September 2017
Accumulated depreciation
At 1 October 2016
Disposals during the year
Depreciation during the year
Transferred during the year
At 30 September 2017
Net book value
68
Leasehold
improvement
30 September
2017
£’000
Office
equipment
30 September
2017
£’000
Total
30 September
2017
£’000
26
–
–
(26)
–
9
–
6
(15)
–
–
254
195
(42)
(407)
–
124
(42)
65
(147)
–
–
280
195
(42)
(433)
–
133
(42)
71
(162)
–
–
23 Goodwill and other intangible assets
Goodwill relates entirely to the Group’s Consumer Finance Division and arises from the acquisition of
a subsidiary company, TMV Finance Limited (‘TMV’), in November 2000. Subsequently, a corporate
reorganisation resulted in the assets and business model of TMV being transferred to its related
companies in the Group, PCF Credit and PCF Bank.
The rationale for the acquisition was to increase market share and adopt the business model for new business
generation which involved contractual relationship with broker introductory sources. As the business model
was new to the Group at the time of acquisition and has continued to be the primary source of new business
for the Group, the directors believe that the underlying net assets from PCF Credit and PCF Bank are
sufficient to cover the carrying value of the goodwill, and there is no indication of impairment.
Group
Cost and net book value
At 1 October and 30 September
30 September
2018
£’000
30 September
2017
£’000
397
397
Other intangible assets
Other intangible assets consist solely of computer software and capitalised expenses relating to the
project of applying to become and becoming a bank.
Cost
At 1 October
Additions during the year
Transfers during the year
At 30 September
Accumulated depreciation
At 1 October
Amortisation during the year
Transfers during the year
At 30 September
Net book value at 30 September
Group
Company
30 September
2018
£’000
30 September
2017
£’000
30 September
2018
£’000
30 September
2017
£’000
4,611
638
–
5,249
2,304
385
–
2,689
2,560
2,396
2,215
–
4,611
2,029
275
–
2,304
2,307
–
–
–
–
–
–
–
–
–
2,396
2,215
(4,611)
–
2,029
275
(2,304)
–
–
Group
Company
30 September
2018
£’000
30 September
2017
£’000
30 September
2018
£’000
30 September
2017
£’000
Net book value of combined goodwill
and other intangible assets
2,957
2,704
–
–
Annual Report & Financial Statements 2018
69
24 Deferred tax assets
Accelerated capital allowances
Decelerated capital allowances
Other temporary differences
At 1 October
Recognised in income
Adjustment in respect of prior year
timing difference
Recognised in other comprehensive income
Recognised in equity
Group
Company
30 September
2018
£’000
30 September
2017
£’000
30 September
2018
£’000
30 September
2017
£’000
994
85
106
1,185
1,205
(66)
–
(3)
49
(94)
1,239
60
1,205
1,424
(146)
–
(87)
14
–
80
116
196
163
(9)
(8)
–
50
196
–
103
60
163
89
51
9
–
14
163
At 30 September
1,185
1,205
In the Summer Budget 2015 and 2016, the UK Government announced legislation reducing the main rate
of Corporation Tax from 20% to 19% for the years starting 1 April 2017, 2018 and 2019 and to 17% for the
year starting 1 April 2020. The deferred tax asset has been calculated based on a rate of 17% to the
extent that it is expected to reverse in future years.
The impact of measuring the deferred tax asset at the current tax rate of 19.5% is £139,000. As the timing
of the reversal of the deferred tax asset is uncertain, the Group has taken the approach of measuring
the deferred tax asset at the lowest enacted tax rate.
There is an unrecognised deferred tax asset of £1,839 (30 September 2017 – £1,839). This asset relates
to tax losses arising in prior years, which are unutilised at the reporting date.
25 Other assets
Prepayments
Other receivables
Group
Company
30 September
2018
£’000
30 September
2017
£’000
30 September
2018
£’000
30 September
2017
£’000
1,394
148
1,542
871
170
1,041
788
29
817
736
94
830
Other assets are not interest-bearing and are generally on terms of up to 30 days. The maximum
exposure to credit risk and the fair value of trade and other receivables equates to the carrying amount.
26 Due to banks
Group
Current
Secured loans and borrowings
Non-current
Secured loans and borrowings
30 September
2018
£’000
30 September
2017
£’000
9,323
62,234
39,558
48,881
14,833
77,067
Bank overdrafts
The Company had no bank overdraft facility at 30 September 2018.
Interest bearing loans and borrowings
£50.0 million block discounting facilities granted to PCF Credit
These loans have fixed interest rates and maturity dates of up to five years. The facilities are secured by
assigned receivables of PCF Credit.
£83.0 million term loan facility granted to PCF Credit by a related party to the shareholders
This loan has a fixed interest rate and a maturity date of 30 June 2021. The facility is secured by a charge
over specified loans and receivables and the guarantee of the Company.
£25.0 million term loan facility granted to PCF Bank by the Bank of England under the Term Funding Scheme
This facility has a rate linked to the Bank of England's Base Rate and has a maturity in February 2022.
The loan is secured by a charge over specified loans and receivables and the guarantee of the Company.
70
27 Debt securities in issue
During the year, no debt securities were in issue.
28 Derivative financial instruments
Derivative financial instruments relates to cash flow hedge utilised by the Group for the purpose of
managing its exposure to interest rate fluctuations as the Group borrows at both fixed and floating
interest rates. The derivatives used for this hedge are interest rate swaps where the Group pays fixed
rate interest on a quarterly basis. Further details are explained in the section on financial risk
management in note 34.
As at 30 September 2018, there was an £8,000,000 open contract of cash flow hedge in place
(30 September 2017 – £nil). No valuation took place at the end of the financial period due to the
purchase being at market value on the last day of the year.
The fair value of derivative financial instruments included in the financial statements, together with their
notional amounts, is summarised as follows.
Interest rate swaps
29 Due to customers
Group
Retail customers
Notice account
Term deposit
Fair value
30 September
2018
£’000
Notional
30 September
2018
£’000
Fair value
30 September
2017
£’000
Notional
30 September
2017
£’000
–
–
8,000
8,000
–
–
–
–
30 September
2018
£’000
30 September
2017
£’000
14,107
177,032
191,139
3,245
49,875
53,120
Included in amounts due to customers is accrued interest amounting to £1,086,000 (30 September 2017 –
£118,000) and £58,000 (30 September 2017 – £5,000) for term deposits and notice accounts respectively.
30 Financing activity
The table below details changes in the Group's liabilities arising from financing activities.
Due to banks
Note
26
1 October
2017
£’000
77,067
77,067
Cash flows
£’000
(28,186)
(28,186)
30 September
2018
£’000
48,881
48,881
31 Other liabilities
Other payables
Accruals
Group
Company
30 September
2018
£’000
30 September
2017
£’000
30 September
2018
£’000
30 September
2017
£’000
210
3,275
3,485
691
2,763
3,454
242
1,309
1,551
294
781
1,075
Other liabilities includes other payables and accruals that are not interest-bearing and are normally settled
on 30 day terms.
Annual Report & Financial Statements 2018
71
32 Issued capital and reserves
Company
30 September
2018
‘000 units
30 September
2017
‘000 units
30 September
2018
£’000
30 September
2017
£’000
Authorised ordinary shares of 5p each
250,000
250,000
12,500
12,500
Ordinary shares issued and fully paid
At 1 October
Issuance of new shares during the year
Dividend reinvestment
Exercise of convertible debt options
At 30 September
Share premium
212,220
–
10
–
212,230
159,127
42,000
96
10,997
212,220
10,611
–
–
–
10,611
At 1 October
Share premium arising from issuance of new shares during the year
Share premium arising from conversion of convertible loan notes during the year
Dividend reinvestment
Transaction costs for issued share capital
At 30 September
7,956
2,100
5
550
10,611
£’000
8,524
–
–
3
–
8,527
Other reserves
From 1 April 2007, the Group adopted hedge accounting for the existing and any new derivative financial
instruments. The hedging reserve includes the effective portion of the cumulative net change in the fair
value of cash flow hedging instruments relating to hedged transactions which have not yet occurred.
The hedging reserve appears in ‘Other reserves’. As well as the hedging reserve appearing in 'Other
reserves', the 'revaluation reserve' for AFS financial instruments also appears in 'Other reserves'.
Own shares (Employee Share Option Plans)
Own shares represent 1,237,925 (30 September 2017 – 1,237,925) ordinary shares held by the Company's
Employees Benefits Trust 2003 (‘EBT’) to meet obligations under the Company’s Share Option Plans.
The shares are stated at cost and their market value at 30 September 2018 was £354,666
(30 September 2017 – £352,809). If they had been sold at this value, there would have been a capital
gain of £250,680 (30 September 2017 – £117,603) arising on the sale.
At 1 October 2017
Purchase of own shares during the year
At 30 September 2018
£’000
(355)
–
(355)
Dividend
At the forthcoming Annual General Meeting, a final dividend of 0.3 pence per share in respect of the
year ended 30 September 2018 (year ended 30 September 2017 – 0.19 pence per share), amounting to
a dividend payable of £636,689 (year ended 30 September 2017- £403,000) will be proposed for
shareholders’ approval. The financial statements for the current financial year do not reflect this
proposed dividend. Such dividend, if approved by shareholders, will be accounted for in equity as an
appropriation of retained earnings in the year ending 30 September 2019.
72
33 Financial instruments
The Group invests in highly liquid financial instruments to support its liquid asset buffer and raises
wholesale funding by issuing financial instruments. The Group also uses derivative financial instruments
to manage the risks arising from its operations. The risks associated with financial instruments represents
a significant component of the total risks faced by the Group and are analysed in more detail below.
Details of the significant accounting policies and methods adopted, including the criteria for recognition,
the basis of measurement and the basis on which income and expenses are recognised, in respect of
each class of financial asset, financial liability and equity instrument are disclosed in note 5.3.
33.1 Valuation principles
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction in the principal (or most advantageous) market at the measurement date under current
market conditions (i.e. an exit price), regardless of whether that price is directly observable or estimated
using a valuation technique.
In order to show how fair values have been derived, financial instruments are classified based on a
hierarchy of valuation techniques, as explained in note 33.3.
33.2 Valuation governance
The Group's fair value methodology and the governance over its models includes a number of controls
and other procedures to ensure appropriate safeguards are in place to ensure its quality and adequacy.
All new product initiatives including their valuation methodologies are subject to approvals by various
functions of the Group, Company and the Bank including the Risk and Finance functions. The
responsibility of ongoing measurement resides with the business and product line divisions.
Once submitted, fair value estimates are also reviewed and challenged by the Risk and Finance
functions. The independent price verification process for financial reporting is ultimately the responsibility
of the independent price verification team within the Finance function, which reports to the Finance
Director.
Annual Report & Financial Statements 2018
73
33.3 Assets and liabilities by classification, measurement and fair value hierarchy
The following table summarises the classification of the carrying amounts of the Group’s financial assets
and liabilities.
Group
30 September 2018
Cash and balances at central banks
Loan and advances to customers
Available-for-sale financial instruments
Derivative financial instruments
Total financial assets
Other non-financial assets
Total assets
Due to banks
Due to customers
Total financial liabilities
Other non-financial liabilities
Total liabilities
30 September 2017
Cash and balances at central banks
Loan and advances to customers
Available-for-sale financial instruments
Derivative financial instruments
Total financial assets
Other non-financial assets
Total assets
Due to banks
Debt securities in issue
Derivative financial instruments
Due to customers
Total financial liabilities
Other non-financial liabilities
Total liabilities
Amortised
cost
£’000
21,338
219,322
–
–
240,660
48,881
191,139
240,020
17,018
145,718
–
–
162,736
77,067
–
–
53,120
130,187
Held at fair
value as
available-for-sale
assets
£’000
–
–
39,902
–
39,902
–
–
–
–
–
4,511
–
4,511
–
–
–
–
–
Total
£’000
21,338
219,322
39,902
–
280,562
5,908
286,470
48,881
191,139
240,020
3,899
243,919
17,018
145,718
4,511
–
167,247
5,221
172,468
77,067
–
–
53,120
130,187
3,620
133,807
The Group holds certain financial assets at fair value grouped into Levels 1 to 3 of the fair value hierarchy
as explained below but no liabilities at fair value.
Level 1 – The most reliable fair values of financial instruments are quoted market prices in an actively
traded market. The Group’s Level 1 portfolio mainly comprises gilts, fixed rate bonds and floating rate
notes for which traded prices are readily available.
Level 2 – These are valuation techniques for which all significant inputs are taken from observable
market data. These include valuation models used to calculate the present value of expected future cash
flows and may be employed when no active market exists and quoted prices are available for similar
instruments in active markets.
Level 3 – These are valuation techniques for which one or more significant inputs are not based on
observable market data. Valuation techniques include net present value by way of discounted cash flow
models. Assumptions and market observable inputs used in valuation techniques include risk-free and
benchmark interest rates, similar market products, foreign currency exchange rates and equity index
prices. Critical judgement is applied by management in utilising unobservable inputs including expected
price volatilities, expected mortality rates and prepayment rates, based on industry practice or historical
observation. The objective of valuation techniques is to arrive at a fair value determination that reflects
the price of the financial instrument at the reporting date that would have been determined by market
participants acting at arm’s-length.
74
The following table shows an analysis of financial instruments recorded at amortised cost by level of the
fair value hierarchy.
Group
Financial instruments held at amortised cost
30 September 2018
Cash and balances at central banks
Loans and advances to customers
Due to banks
Due to customers
Group
Financial instruments held at amortised cost
30 September 2017
Cash and balances at central banks
Loans and advances to customers
Due to banks
Due to customers
Level 1
£’000
Level 2
£’000
Level 3
£’000
Carrying
value
£’000
Fair
value
£’000
21,338
–
21,338
48,881
–
48,881
–
–
–
–
219,322
21,338
219,322
21,338
255,922
219,322
240,660 277,260
–
191,139
191,139
–
–
–
48,881
191,139
48,881
191,139
240,020 240,020
Level 1
£’000
Level 2
£’000
Level 3
£’000
Carrying
value
£’000
Fair
value
£’000
17,018
–
17,018
77,067
–
77,067
–
–
–
–
145,718
17,018
145,718
17,018
165,984
145,718
162,736
183,002
–
53,120
53,120
–
–
–
77,067
53,120
77,067
53,120
130,187
130,187
The carrying value of amounts due to customers are considered to approximate the fair value as it would
be impractical to determine the fair value due to a lack of historical data available.
Financial instruments held at fair value through
Other Comprehensive Income 30 September 2018
Available-for-sale financial instruments
Derivative financial instruments
At 30 September 2017
Available-for-sale financial instruments
Derivative financial instruments
Level 1
value
£’000
Group
Carrying
value
£’000
Fair
value
£’000
39,902
–
39,902
–
39,902
–
4,511
–
4,511
–
4,511
–
Annual Report & Financial Statements 2018
75
33.4 Valuation techniques
Available-for-sale financial instruments
Government debt securities are financial instruments issued by sovereign governments and include both
long-term bonds and short-term bills with fixed or floating rate interest payments. These instruments are
generally highly liquid and traded in active markets resulting in a Level 1 classification. When active market
prices are not available, the Group uses discounted cash flow models with observable market inputs of similar
instruments and bond prices to estimate future index levels and extrapolating yields outside the range of
active market trading, in which instances the Group classifies those securities as Level 2. The Group does not
have Level 3 government securities where valuation inputs would be unobservable.
Government debt securities
Whilst most of these instruments are standard fixed or floating rate securities, some may have more complex
coupon or embedded derivative characteristics. The Group uses active market prices when available, or other
observable inputs in discounted cash flow models to estimate the corresponding fair value including CDS
data of the issuer to estimate the relevant credit spreads. Municipal bonds and bonds issued by financial
institutions are generally Level 1 and corporate bonds are generally Level 2 instruments as well as convertible
bonds where usually there is not sufficient third party trading data to justify Level 1 classification. Level 3
instruments are those where significant inputs cannot be referenced to observable data and, therefore,
inputs are adjusted for relative tenor and issuer quality.
Loans and advances to customers
For loans and receivables designated at FVPL, a discounted cash flow model is used based on various
assumptions, including current and expected future credit losses, market rates of interest, prepayment rates
and assumptions regarding market liquidity, where relevant. The element of fair value attributable to the
credit risk is calculated by determining the changes in credit spread implicit in the fair value of bonds issued
by entities with similar credit characteristics. All loans and advances to customers are Level 3.
34 Financial risk management
The Group and its its operations are based solely in the United Kingdom, as explained in note 7. Whilst
risk is inherent in the Bank’s activities, it is managed through an integrated risk management framework,
including ongoing identification, measurement and monitoring, subject to risk limits and other controls.
This process of risk management is critical to the Group's continuing profitability and each individual
within the Group is accountable for the risk exposures relating to his or her responsibilities. The Group
is exposed to liquidity risk, market risk and credit risk.
76
34.1 Liquidity risk
Liquidity risk is defined as the risk that the Group might encounter difficulty in meeting obligations
associated with financial liabilities that are settled by delivering cash or another financial asset. Liquidity
risk arises because of the possibility that the Group might be unable to meet its payment obligations
when they fall due as a result of mismatches in the timing of cash flows under both normal and stress
circumstances. Such scenarios could occur when funding needed for illiquid asset positions is not
available to the Group on acceptable terms. To limit this risk, management has arranged for diversified
funding sources in addition to its core deposit base, and adopted a policy of managing assets with
liquidity in mind and monitoring future cash flows and liquidity on a daily basis. The Group has
developed internal control processes and contingency plans for managing liquidity risk. This
incorporates an assessment of expected cash flows and the availability of high grade collateral which
could be used to secure additional funding if required.
The Group maintains a portfolio of highly marketable and diverse assets that are assumed to be easily
liquidated in the event of an unforeseen interruption in cash flow. The Group also has lines of credit that
it can access to meet liquidity needs. In accordance with the Group's policy, the liquidity position is
assessed under a variety of scenarios, giving due consideration to stress factors relating to both the
market in general and specifically to the Group. Net liquid assets consist of cash, short–term bank
deposits and liquid debt securities available for immediate sale, less deposit for banks and other issued
securities and borrowings due to mature within the next month. The ratios during the year were as follows.
(a) Liquidity ratios
Advances to deposit ratios
Group
Year end
Average
30 September
2018
£’000
30 September
2017
£’000
1.1
0.4
2.7
1.3
The Group recognises the importance of notice accounts and savings accounts as sources of funds
to finance lending to customers. They are monitored using the advances to deposit ratio, which
compares loans and advances to customers as a percentage of core customer notice and savings
accounts, together with term funding with a remaining term to maturity in excess of one year.
(b) Contractual maturities
Group
On
demand
£’000
Less
than 3
months
£’000
3 to 12
months
£’000
1 to 5
years
£’000
Over
5 years
£’000
Total
£’000
At 30 September 2018
Financial assets
Cash and balances at central banks
Loans and advances to customers
Available-for-sale financial investments
21,338
9,611
–
–
10,111
18,338
–
–
56,068 186,079
22,275
740
–
21,338
8,316 270,185
41,353
–
Total undiscounted financial assets
30,949
28,449
56,808 208,354
8,316 332,876
Financial liabilities
Due to banks
Due to customers
Other liabilities
Total undiscounted financial liabilities
–
–
–
–
3,526
9,885
3,485
16,693
88,034
–
30,127
94,533
–
–
50,346
8,103 200,555
3,485
–
16,896
104,727 124,660
8,103 254,386
Surplus/(shortfall)
30,949
11,553
(47,919) 83,694
213
78,490
Annual Report & Financial Statements 2018
77
Group
On
demand
£’000
Less
than 3
months
£’000
3 to 12
months
£’000
1 to 5
years
£’000
Over
5 years
£’000
Total
£’000
At 30 September 2017
Financial assets
Cash and balances at central banks
Loans and advances to customers
Available-for-sale financial investments
1,455
8,481
-
15,563
16,016
4,511
-
-
40,880 114,273
-
-
-
1,383
-
17,018
181,033
4,511
Total undiscounted financial assets
9,936
36,090
40,880 114,273
1,383 202,562
Financial liabilities
Due to banks
Due to customers
Other liabilities
Total undiscounted financial liabilities
-
-
-
-
5,068
305
3,454
57,166
14,833
17,360 32,703
-
-
-
2,752
-
77,067
53,120
3,454
8,827
74,526
47,536
2,752
133,641
Surplus/(shortfall)
9,936
27,263
(33,646) 66,737
(1,369)
68,921
The Group’s policy on funding capacity is to ensure there is always sufficient stable funding in place
to support the Group’s lending. At 30 September 2018 the Group had total wholesale and retail
funding of £240.0 million (£130.2 million at 30 September 2017) that supported net loans and
advances of £219.3 million (£145.7 million at 30 September 2017). Moreover, at 30 September 2018
the Group had a net stable funding ratio in excess of the regulatory minimum of 100%.
Surplus liquidity in periods shown above will be used to cover liquidity shortfalls in subsequent periods.
On
Over
demand 5 years
£’000
£’000
11
2,912
2,923
1,551
1,551
1,372
–
–
–
–
–
–
On
Over
demand 5 years
£’000
£’000
Total
£’000
11
2,912
2,923
1,551
1,551
1,372
Total
£’000
18
5,265
–
2,500
18
7,765
5,283
2,500
7,783
1,075
1,075
–
–
1,075
1,075
4,208
2,500
6,708
Company
At 30 September 2018
Financial assets
Cash and balances at central banks
Loans and advances to customers
Total undiscounted financial assets
Financial liabilities
Other liabilities
Total undiscounted financial liabilities
Surplus
Company
At 30 September 2017
Financial assets
Cash and balances at central banks
Loans and advances to customers
Total undiscounted financial assets
Financial liabilities
Other liabilities
Total undiscounted financial liabilities
Surplus
78
(c) Analysis of encumbered and unencumbered assets
Group
At 30 September 2018
AFS financial instruments
Loans secured on equipment, plant
and vehicles under conditional
sale/hire purchase agreements
Unsecured loans
Finance leases of equipment, plant
and vehicles
Gross assets
Group
At 30 September 2017
AFS financial instruments
Loans secured on equipment, plant
and vehicles under conditional
sale/hire purchase agreements
Unsecured loans
Finance leases of equipment, plant
and vehicles
Gross assets
Encumbered
Unencumbered
Available
as collateral
£’000
£’000
Other
£’000
Total
£’000
25,173
14,727
2
39,902
25,776
–
8,028
58,977
203,857
–
32,159
250,743
–
365
–
367
229,633
365
40,187
310,087
Encumbered
Unencumbered
Available
as collateral
£’000
£’000
Other
£’000
Total
£’000
–
4,511
–
4,511
83,918
–
18,200
102,118
60,025
–
10,698
75,234
5,250
420
2,522
8,192
149,193
420
31,420
185,544
Company
The loans and advances as shown on the Company balance sheet comprise amounts due from
subsidiary undertakings of £2,911,900 (30 September 2017 – £5,265,000) which are repayable on
demand and £nil (30 September 2017 – £2,500,000) of amounts due from subsidiary companies with
repayment terms of five years or more respectively. The amounts due from subsidiary undertakings
are interest free.
34.2 Market risk - Interest rate risk
Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due
to changes in market variables such as interest rates, foreign exchange rates and equity prices. Due to
the nature and geographical operations of the Group, the Group's market risk is primarily of interest rate
risk. The Group borrows at fixed and floating interest rates. At 30 September 2018, the proportion of the
Group's borrowings at fixed rates was 90% (30 September 2017 – 100%), fixed for an average period of
two years (30 September 2017 – three years).
Based on the exposure to interest rate risk, an increase in LIBOR by 1⁄2 of 1 percentage point for the whole
financial year would have a favourable effect on profits of £23,000 (30 September 2017 – no effect) and a
favourable impact on capital of £18,000 (30 September 2017 – no effect).
Annual Report & Financial Statements 2018
79
34.3 Credit risk
Credit risk is the risk that the Group will incur a loss because its customers or counterparties fail to discharge
their contractual obligations. The Group manages and controls credit risk by setting limits on the amount of
risk it is willing to accept for individual counterparties and for geographical and industry concentrations, and
by monitoring exposures in relation to such limits.
The Group has an established credit quality review process to provide early identification of possible changes
in the creditworthiness of counterparties. Counterparty limits are established by the use of a credit risk
classification system, which assigns each counterparty a risk rating. Risk ratings are subject to regular
revision. The credit quality review process aims to allow the Group to assess the potential loss as a result of
the risks to which it is exposed and take corrective action.
Neither
past due
nor impaired
£’000
Past due
but not
impaired
£’000
impaired
£’000
Total
£’000
Credit quality analysis at 30 September 2018
AFS financial instruments
Cash and balances at central banks
Loans and advances
Total
39,902
21,338
250,777
312,017
–
–
8,786
8,786
–
–
10,622
10,622
39,902
21,338
270,185
331,425
34.3.1 Impairment assessment
For accounting purposes, the Group uses an incurred loss model for the recognition of losses on impaired
financial assets. This means that losses can only be recognised when objective evidence of a specific loss
event has been observed as defined in note 5.3.
34.3.2 Analysis of maximum exposure to credit risk and collateral
Group
Company
30 September
2018
£’000
30 September
2017
£’000
30 September
2018
£’000
30 September
2017
£’000
Financial assets
Cash and balances at central banks
Cash and demand deposits
Money market funds
Loans and advances to customers
Consumer lending (net)
Business lending (net)
Intercompany balances
Available-for-sale financial investments
Other non-financial assets
21,338
–
125,689
140,127
–
39,902
327,056
5,908
1,455
15,563
90,985
86,083
–
4,511
198,597
5,221
332,964
203,818
11
–
–
–
2,912
–
2,923
23,013
25,936
18
–
–
–
7,765
–
7,783
17,993
25,776
35 Commitments and guarantees
(a) Operating lease commitments - Group or Company as lessee
The Company has entered into commercial leases for premises and equipment. These leases have an
average life of between three and five years with no renewal option included in the contracts. There are
no restrictions placed upon the lessee by entering into these leases (e.g. such as those concerning
dividends, additional debt and further leasing). Future minimum lease payments under non–cancellable
operating leases at 30 September are as follows.
Group and Company
Within one year
After one year but not more than five years
30 September
2018
£’000
30 September
2017
£’000
223
–
223
243
223
466
(b) Operating lease commitments - Group or Company as lessor
Future minimum rentals receivable under non-cancellable operating leases are £nil
(30 September 2017 – £nil).
80
36 Material litigation
The Group's Bank subsidiary operates in a regulatory and legal environment that, by nature, has a
heightened element of litigation risk inherent in its operations. The Group and the Bank have formal
controls and policies for managing legal claims. Based on professional legal advice, the Group provides
and/or discloses amounts in accordance with its accounting policies described in note 5.14 at year end,
there had been no material litigation against the Group or the Company.
37 Related parties
Apart from non-executive directors holding a total of £102,805 in savings accounts in the Bank at
30 September 2018, directors' remuneration disclosed in note 14, the £83 million (30 September 2017 –
£83 million) term loan facility with Bermuda Commercial Bank as disclosed in note 26 and guarantees
as also disclosed in note 35, there were no other related party transactions during the period.
The loan from Bermuda Commercial Bank is a commercial arrangement made at arm's length.
38 Events after the balance sheet date
Acquisition of Azule Limited and its subsidiaries ('Azule Group')
On 30 October 2018, and therefore after the year end, the Group acquired 100% of the voting shares of
Azule Group, a UK market leader in providing specialist funding and leasing services to individuals and
businesses in the broadcast and media industry. Azule also operates in the audio visual and photography
markets and offers its services across Europe, as well as in the UK.
Azule has been providing finance for more than 20 years and it has built a strong market presence, with
a sales capability to place asset finance to a wide range of banks and lending institutions, as well as
originating asset finance for its own portfolio. The acquisition offers revenue synergies with the Group's
existing asset finance operations, given Azule's focus on financing a niche class of business-critical
assets with strong collateral characteristics, for prime credit grade customers. For the year ended
30 June 2018, Azule originated £54.3 million of asset finance, reported revenues of £3.1 million and a
profit before tax of £0.8 million. Since the acquisition, trading has been in line with management
expectations. The purchase consideration for Azule was £5.6 million, with a contingent consideration of
£1.5 million subject to the level of aggregate new business originations in the first and second years of
the new ownership.
The Group acquired Azule Group because it offers revenue synergies in a niche class of business-critical
assets with strong collateral characteristics and lending to prime credit grade customers. Due to the
acquisition occurring subsequent to the year end, a fair value assessment of assets and liabilities had
not been performed at the time of this report. An assessment will take place during the year ending
30 September 2019.
The book value of the identifiable assets and liabilities of Azule Limited as at the date of acquisition was
as follows.
Assets
Property, plant and equipment
Cash and cash equivalents
HP and leasing loans
Prepayment and other debtors
Liabilities
Trade creditors
Corporate taxes
Other creditors
Block funding
Other funding
Total identifiable net assets at carrying value
Purchase consideration transferred, split as follows
Cash consideration
Equity consideration
Deferred equity consideration
Excess of consideration over carrying value
Book value
recognised
on acquisition
£’000
111
515
16,531
429
17,586
Book value
recognised
on acquisition
£’000
(1,141)
(304)
(311)
(12318)
(376)
(14,450)
£’000
3,136
5,636
3,386
750
1,500
2,500
Annual Report & Financial Statements 2018
81
The Company issued 1,923,076 ordinary shares as part of the consideration of the 100% acquisition of Azule
Group. The fair value of the shares was calculated with reference to the quoted price of the shares of the
Company at the date of acquisition, which was 39p per share. The fair value of the consideration given was,
therefore, £750,000.
Contingent consideration
As part of the purchase agreement with the previous owners of Azule Limited and its subsidiaries, a deferred
consideration has been agreed. This consideration is subject to the level of aggregate new business
originations in the first and second years of the new ownership. The fair value of the deferred consideration
at the acquisition date and signing date was £1,500,000, which comprises of £750,000 at each anniversary.
The deferred consideration is due for final measurement and payment at each anniversary.
39 Capital management
The Group maintains an actively managed capital base to cover risks inherent in the business and is
meeting the capital adequacy requirements of the local banking supervisor, the Bank of England. The
adequacy of the Group's capital is monitored using, among other measures, the rules and ratios
established by the Basel Committee on Banking Supervision (BIS rules/ratios) and adopted by the
Group in supervising the Bank.
The Group and the Bank have complied in full with all its externally imposed capital requirements over the
reported period.
The primary objectives of the Group's capital management policy are to ensure that the Group and the
Bank comply with externally imposed capital requirements and maintains strong credit ratings and healthy
capital ratios in order to support its business and to maximise shareholder value.
The Prudential Regulation Authority (‘PRA’) supervises the Group on a consolidated basis and receives
information on the capital adequacy of, and sets capital requirements for, the Group as a whole. In addition,
a number of subsidiaries are regulated for prudential purposes by either the PRA or the Financial Conduct
Authority (‘FCA’). The aim of the capital adequacy regime is to promote safety and soundness in the
financial system. It is structured around three ‘pillars’.
Pillar 1 - Minimum capital requirements
Pillar 2 - Supervisory review process
Pillar 3 - Market discipline
Under Pillar 2, the Group completes an annual self assessment of risks known as the ‘Internal Capital
Adequacy Assessment Process’ (‘ICAAP’). The ICAAP is reviewed by the PRA which culminates in the PRA
setting ‘Individual Capital Guidance’ (‘ICG’) on the level of capital the Group and its regulated subsidiaries
are required to hold. Pillar 3 requires firms to publish a set of disclosures which allow market participants
to assess information on that Group's capital, risk exposures and risk assessment process. The Group's Pillar
3 disclosures can be found on the group's website, www.pcf.bank/investors
The Group maintains a strong capital base to support the development of the business and to ensure the
Group meets Pillar 1 capital requirements, ICG and additional Capital Requirements Directive buffers at all
times.
As a result, the Group maintains capital adequacy ratios which are significantly above minimum regulatory
requirements.
82
Notice of Annual General Meeting
Notice is hereby given that the Annual General Meeting of PCF Group plc (the ‘Company’) will be held at
1 Cornhill, London EC3V 3ND at 10.00 a.m. on Friday 8 March 2019 to consider and, if thought fit, pass the
following resolutions, of which resolutions 1 to 7 will be proposed as ordinary resolutions and resolution 8 as
a special resolution.
Ordinary Business
1
To receive and approve the Report of the Directors and the audited Financial Statements of the Company
for the year ended 30 September 2018.
2
To receive and approve the Report on the Directors’ Remuneration as set out in the audited Financial
Statements for the year ended 30 September 2018.
3 To re-elect Scott Maybury, who is retiring as a director by rotation pursuant to Article 91 of the Company’s
Articles of Association, as a director of the Company.
4 To re-elect David Bull, who is retiring as a director by rotation pursuant to Article 91 of the Company’s
Articles of Association, as a director of the Company.
5 To re-appoint Ernst & Young LLP as auditors of the Company and to authorise the directors to determine
their remuneration.
6 To declare a final dividend of 0.3 pence per ordinary share in respect of the year ended 30 September 2018.
Special Business
7
To consider and, if thought fit, pass the following as an ordinary resolution.
‘That the directors be and are hereby generally and unconditionally authorised for the purposes of
Section 551 of the Companies Act 2006 (the ‘Act’) to exercise all the powers of the Company to allot
shares and grant rights to subscribe for or to convert into shares in the Company (‘relevant securities’)
up to an aggregate nominal amount of £2,500,000 provided that such authority shall expire (unless
previously renewed, varied or revoked by the Company in general meeting) at the conclusion of the next
annual general meeting of the Company, save that the Company may prior to the expiry of such authority
make an offer, agreement or other arrangement under which the relevant securities would be or might
fall to be allotted after such expiry and the directors may allot such relevant securities pursuant to any
such offer, agreement or other arrangement as if the authority conferred by this resolution had not
expired.’
8 To consider and, if thought fit, pass the following as a special resolution.
‘That the directors be and are hereby empowered, pursuant to Section 571 of the Companies Act 2006
(the ‘Act’), to allot equity securities for cash pursuant to the authority conferred by Resolution 8 set out
in the Notice of Annual General Meeting of the Company dated 13 February 2019, as if Section 561 (1) of
the Act did not apply to such allotment, provided that any such allotment shall be limited to
(a) the allotment of equity securities for cash where such securities have been offered by rights issue,
open offer or otherwise) to holders of equity securities in proportion (as nearly as may be) to their
holdings of ordinary shares of 5 pence each of the Company but subject to the directors having the
right to make such exclusions or other arrangements in connection with such offer as they deem
necessary or expedient to deal with fractional entitlements and legal or practical problems under the
laws of any territory or the requirements of any regulatory body or stock exchange or otherwise; and
(b) any allotment (otherwise than pursuant to sub-paragraph (a) of this resolution) of equity securities
up to an aggregate nominal value of £750,000, and shall expire (unless previously renewed, varied
or revoked) at the conclusion of the next annual general meeting of the Company but so that the
directors shall be entitled to make, at any time prior to the expiry of the power hereby conferred, any
offer, agreement or other arrangement under which the relevant securities would be or might fall to
be allotted after such expiry and the directors may allot securities pursuant to such offer, agreement
or other arrangement as if the powers conferred by this resolution had not expired’.
By order of the Board
Robert Murray
Secretary
13 February 2019
Registered Office
Pinners Hall
105-108 Old Broad Street
London
EC2N 1ER
Annual Report & Financial Statements 2018
83
Notes
1 A member entitled to attend and vote at the above Annual General Meeting is entitled to appoint a proxy to
attend and vote on their behalf. Members may appoint more than one proxy provided that each proxy is
appointed to exercise rights attached to different shares. A proxy need not be a member of the Company.
2 A Form of Proxy is enclosed. To be valid, the Form of Proxy must be lodged with the Company’s Registrars,
Computershare Investor Services plc, The Pavilions, Bridgwater Road, Bristol BS99 6ZY not less than 48
hours before the time appointed for the holding of the Annual General Meeting.
3 Completion of a Form of Proxy will not prevent a member from attending and voting in person at the Annual
General Meeting, if the member so wishes.
4 The Company, pursuant to regulation 41 of the Uncertificated Securities Regulations 2001, specifies that only
those members registered in the Register of Members of the Company at 10.00 a.m. on Wednesday 6 March
2019 shall be entitled to vote at the meeting in respect of the number of ordinary shares registered in their
name at the relevant time. Changes to entries in the Register of Members after 10.00 a.m. on Wednesday 6
March 2019 shall be disregarded in determining the rights of any person to attend or vote at the meeting.
5 CREST members who wish to appoint a proxy or proxies by utilising the CREST electronic proxy
appointment service may do so for the meeting and any adjournment(s) thereof by utilising the procedures
described in the CREST Manual. CREST personal members or other CREST sponsored members and those
CREST members who have appointed (a) voting service provider(s) should refer to their CREST sponsor or
voting service provider(s) who will be able to take the appropriate action on their behalf.
6 In order for a proxy appointment made by means of CREST to be valid, the appropriate CREST message
(a ‘CREST Proxy Instruction’) must be properly authenticated in accordance with Euroclear UK & Ireland
Limited's (‘EUI’) specifications and must contain the information required for such instructions, as described
in the CREST Manual. The message must be transmitted so as to be received by the issuer's agent
(ID 3RA50) by the latest time(s) for receipt of proxy appointments specified in the notice of the meeting.
For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied
to the message by the CREST Applications Host) from which the issuer's agent is able to retrieve the
message by enquiry to CREST in the manner prescribed by CREST.
7 CREST members and, where applicable, their CREST sponsors or voting service providers should note that
EUI does not make available special procedures in CREST for any particular messages. Normal system
timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the
responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal
member or sponsored member or has appointed (a) voting service provider(s), to procure that their CREST
sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is
transmitted by means of the CREST system by any particular time. In this connection, CREST members and,
where applicable, their CREST sponsors or voting service providers are referred, in particular, to those
sections of the CREST Manual concerning practical limitations of the CREST system and timings.
8 The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation
35(5)(a) of the Uncertificated Securities Regulations 2001.
84
Avocette Limited, London
PCF Bank Limited Pinners Hall, 105-108 Old Broad Street, London EC2N 1ER
Lending Consumer Finance 020 7227 7506 Business Finance 020 7227 7560
Savings 020 7227 7577 Credit Control 020 7227 7517 Switchboard 020 7222 2426
PCF Bank Limited Pinners Hall, 105-108 Old Broad Street, London EC2N 1ER
www.pcf.bank
www.pcf.bank
Lending Consumer Finance 020 7227 7506 Business Finance 020 7227 7560
Savings 020 7227 7577 Credit Control 020 7227 7517 Switchboard 020 7222 2426
PCF Bank Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, FRN number 747017. The Bank is registered in England
and Wales, registration number 02794633 and is wholly owned by PCF Group plc, a company registered in England and Wales, registration number 02863246 and listed on the Alternative Investment Market. Certain
subsidiaries of the Bank are authorised and regulated by the Financial Conduct Authority for consumer credit activities. Registered offi ces are at Pinners Hall, 105-108 Old Broad Street, London EC2N 1ER.
PCF Bank Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, FRN number 747017. The Bank is registered in England
and Wales, registration number 02794633 and is wholly owned by PCF Group plc, a company registered in England and Wales, registration number 02863246 and listed on the Alternative Investment Market. Certain
subsidiaries of the Bank are authorised and regulated by the Financial Conduct Authority for consumer credit activities. Registered offi ces are at Pinners Hall, 105-108 Old Broad Street, London EC2N 1ER.
C
ces are at Pinners Hall, 105-108 Old Broad Street, London EC2N 1ER.