PCF Group plc
Annual Report &
Financial Statements
2019
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, equipment and property.
Our commitment is to provide great customer service
through expertise and simplicity.
Contents
Company Information
Strategic Report
Chairman’s Statement
Chief Executive’s Statement
Market and Business Overview
Risk Overview
Corporate Governance Report
Audit & Risk Committee Report
Nomination Committee Report
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
Mark Brown Non-executive
Christine Higgins Non-executive
Marian Martin Non-executive (appointed 25 July 2019)
David Morgan 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
Shore Capital Limited
Cassini House
57 St. James’s Street
London SW1A 1LD
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.
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Strategic Report
The strategic report provides readers with a holistic view of PCF Group’s business model, strategy, 2018/19
performance and future prospects.
Business highlights
l Total new business originations up 86% to £276 million (2018 – £148 million) comprising
l New business origination for ‘own portfolio’ increased by 50% to £222 million (2018 – £148 million); and
l £54 million of ‘placed’ Azule new business origination generating £1 million of broker commission income
l Portfolio growth of 55% to £339 million (2018 – £219 million)
l Growth focus is on the prime end of the credit spectrum, with 74% (2018 – 70%) of originations in our top
four credit grades
l Retail deposits total £267 million (2018 – £191 million) with over 6,250 customers (2018 – 4,500)
l Azule acquisition completed in early November 2018 and is performing ahead of expectation, generating
£69 million of originations in the 11 months of ownership (12 months to June 2018 – £55 million)
l Nascent bridging property finance operation originated £14 million of lending in first nine months
l £10.75 million of new share capital was raised in February 2019
l New £15 million Tier 2 capital facility put in place to support growth. This was undrawn at 30 September 2019
Financial highlights
l Operating income up 51% to £22.2 million (2018 – £14.7 million)
l Statutory profit before tax up 54% to £8.0 million (2018 – £5.2 million)
l Earnings per share up 35% to 2.7p (2018 – 2.0p)
l After-tax return on equity increased to 12.6% (2018 – 10.3%), ahead of our medium-term target of 12.5%
l Return on assets of 2.9% (2018 – 3.0%)
l Recommended final dividend of 0.4p (2018 – 0.3p) which, if approved, will be paid on 9 April 2020 to
shareholders on the Register at 20 March 2020
l Net Interest Margin (‘NIM’) reduced slightly to 7.8% (2018 – 8.2%) with continued active management of
lending quality through the cycle
l Impairment charge of 0.8% (2018 – 0.5%), including the adoption of IFRS 9 which accounted for 0.1% of the
increase
l CET1 Capital Ratio of 18% (2018 – 19.3%)
l Liquidity Coverage Ratio of 715% (2018 – 499%)
l £63 million (2018 – £47 million) of unearned finance charges to contribute to earnings in future years
Annual Report & Financial Statements 2019
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Governance and culture
The Board plays a key role in supporting and
challenging the Group’s long-term strategic planning.
This includes the responsibility to provide effective
governance and a rigorous assessment of risk. This
continues to be my focus. We completed a board
effectiveness review in July 2019, and we believe the
Board and its committees are working well. We have
continued to strengthen this area with the recruitment of
a new independent non-executive director, Marian Martin.
This was in response to the recent changes in the UK
Corporate Governance Code and in consultation with
the Prudential Regulation Authority. The structure and
effectiveness of our governance regime is fundamental
to our success in bringing together the Group’s
purpose, strategy, culture and standards of conduct.
Outlook
This has been a year of significant achievement. The
Group has delivered financial success and diversified
into two new business areas, while maintaining a
prudent approach to lending. We are cognisant that
growth is ahead of our original plan and we will
therefore continue to invest in our infrastructure and
operating model. Some of these costs are being brought
forward ahead of plan and will help us build a robust
structure for sustainable growth and continued success.
Our lending portfolio is performing well, however, we
acknowledge that there may well be some worsening
of credit conditions over the next 12 to 24 months and
we will maintain a cautious outlook. Given our still
relatively small market share, we remain confident that
we can continue to grow as planned, whilst maintaining
our appetite for risk.
We will continue to set ambitious targets and I look
forward to building on the successes of 2019 in the
coming year.
Tim Franklin
Chairman
7 February 2020
Strategic Report (cont’d)
Chairman’s Statement
for the year ended 30 September 2019
I am delighted to report the Group’s results for the
year ended 30 September 2019, which show continued
growth in our lending portfolio, profits and return on
equity. The last 12 months have seen the delivery of
key performance targets and accelerated progress and
success on many fronts. Most notably, the Bank has
successfully achieved our ambitious medium-term
targets for our loan portfolio and return on equity. We
are fortunate to have a highly committed and talented
team at all levels of the business. On behalf of the
Board, I would like to extend my congratulations to all
our colleagues for their commitment and dedication in
achieving these results and for the foundations this
creates for the future.
Over the year, we have continued to increase our
lending to prime customers, whilst maintaining healthy
margins, supported by retail deposits at an attractive
funding cost. Our move towards better quality prime
lending is aligned to our cautious outlook for the UK
economy and we continue to reflect our appetite for
risk through the pricing of our lending products. During
the year we diversified our operating model by entering
into new markets through the acquisition of the
broadcast and media asset finance specialist, Azule, and
the launch of a property bridging finance division.
Through providing high levels of customer service and
competitive rates, we have continued to welcome new
retail deposit customers to the Bank. At 30 September
2019, over 6,250 customers held deposit balances with
PCF Bank totalling £267 million (2018 – £191 million).
Profits, shareholder return and capital
Profit before tax for the year ended 30 September
2019 was £8.0 million (2018 – £5.2 million), an increase
of 54%. This delivered 35% growth in earnings per
share to 2.7p (2018 – 2.0p) in a year during which we
successfully raised £10.75 million of new capital. These
results are particularly pleasing as they include the
cost of a new property bridging finance operation, as
well as a small amount of further one-off costs related
to the acquisition of Azule. These costs amounted to
£517,000 in the year (2018 – £270,000).
This strong set of results demonstrates our ability to
grow our portfolio and improve earnings through
operational gearing, putting to work our capital base and
utilising our cheaper funding to scale up our banking
platform. All the while, we have continued investment for
the future through the recruitment of new staff and by
making technology enhancements to promote
efficiencies and meet the needs of our customers.
Net assets increased by 38% to £58.8 million (2018 –
£42.6 million), following the equity fund raising, and
the Group Common Equity Tier 1 Ratio (‘CET1’)
remained a healthy 18% (2018 – 19.3%). This capital
position has been supplemented with a new £15 million
Tier 2 capital facility which can be drawn, as required.
The Board recommends the payment of a final
dividend of 0.4p per ordinary share (2018 – 0.3p),
which is a 33% increase over the previous year but
retains a significant proportion of retained profits for
growth. If approved, the dividend will be paid on
9 April 2020 to shareholders on the register at
20 March 2020. We continue to make a good return
on our capital and intend to maintain a dividend policy
that supports the capital requirement of the business
and reinvests for the future.
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Strategic Report (cont’d)
Chief Executive’s Statement
for the year ended 30 September 2019
Diversification while protecting the core business
We have made strong progress across the whole
business this year. The strategy to diversify our asset
classes and income streams is proving a great success
and will play an important role in growing our lending
portfolio in the coming years. Our established core
business lines have made excellent progress against
ambitious targets and we continue to deliver strong
growth despite the challenging economic and political
backdrop.
The benefits of our strategic decision to become a bank
are becoming increasingly evident. These include lower
funding costs, an ability to reach and retain a wider
range of customers, greater flexibility to diversify our
business and a reduced reliance on wholesale debt. We
have executed a low-risk growth strategy by initially
growing in existing markets in which we already had an
established risk appetite and control framework before
looking to diversify our asset classes.
This year’s results demonstrate the strength of this
approach, delivering record portfolio growth. The
benefits of scale will continue to accrue as operational
gearing increases our earnings, against the significant
fixed cost of establishing our banking platform.
Increasing profitability
Statutory profit for the year has increased to £8.0 million
(2018 – £5.2 million). This is an increase of 54% and a
considerable achievement, given the expense of
establishing the property bridging finance division.
Operating income increased to £22.2 million in the year
(2018 – £14.7 million) as a result of strong portfolio
growth. As expected, we experienced a decrease in
our Net Interest Margin (‘NIM’), from 8.2% to 7.8%, as
we continued to actively manage quality and a greater
proportion of our portfolio became lower yielding,
prime quality lending.
Earnings per share increased strongly, up 35% to 2.7p
(2018 – 2.0p). This is calculated off a larger capital base
with an average number of shares in issue of 234 million
(2018 – 212 million shares).
Return on equity increased to 12.6% (2018 – 10.3%),
taking us past our medium-term target of 12.5%. Return
on assets reduced slightly in the year to 2.9%
(2018 – 3.0%). The profit after tax for the year was
£6.4 million (2018 – £4.2 million) on an effective
Corporation Tax rate of 20% (2018 – 19%).
Our cost-to-income ratio(1) reduced to 55.6% (2018 –
57.1%). During a growth phase, the costs to build a
bank operating model in areas such as IT, risk,
compliance and audit are significant. Despite continued
investment in the platform, staff resource and new
business lines, I am pleased to report that income
growth has kept pace with costs.
We have recommended an increased final dividend of
0.4p (2018 – 0.3p). It is our intention to retain 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.
(1) The cost-to-income ratio is now calculated as ‘cost
over net interest margin’, previously it was ‘cost over
gross interest’.
2019 achievements
Our achievements this year are the result of delivering
on our key objectives. The main areas of achievement
for the year have been
l continued growth of the core businesses of asset
finance and consumer motor finance by increased
lending, particularly into the prime segments of
each market;
l diversification of the balance sheet, introducing
new asset classes and new products either
organically or through acquisition;
l success against our £350 million portfolio and 12.5%
return on equity targets;
l development of a much-improved proposition to
the broker-introduced consumer motor finance
market by automating credit decision making and
proposal acceptance;
l capital planning to maintain shareholder return
while preparing for the next stage of growth; and
l continued investment in people, systems and
infrastructure to build a bank that can in the longer
term support a £1 billion portfolio.
Business lines and portfolio
New business originations in the year increased by
86% to £276 million (2018 – £148 million), meeting our
volume targets. The acquisition of Azule introduces a
‘hybrid’ origination model where an element of new
business is brokered to generate fee income. New
business is placed with third party banks and finance
companies for risk, pricing or concentration of
exposure reasons, whilst enhancing return on equity
for the Group. Azule placed £54 million of new
business. The remainder of new business origination
was for our own portfolio, amounting to £222 million
(2018 – £148 million).
The quality of new business origination met management
expectation, with 74% of new business origination being
to prime customers (2018 – 70%). Prime credit for PCF is
defined as our top four credit grades where the customer
has a clean credit profile and a low probability of default.
Two of these credit grades have only been achievable
since a lower cost of funds enabled the launch of lower
yielding, lower risk products.
Our total customer base is continuing to grow and at
30 September 2019 totalled over 21,250 (2018 – 17,000).
The lending portfolio grew by 55% to £339 million
(2018 – £219 million). The portfolio is reported net of
unearned finance charges of £63 million (2018 – £47
million). These finance charges are future operating
income already on the balance sheet and at this level
provide almost 65% of next year’s operating income
expectation. These future finance charges provide a
level of certainty of earnings for future periods.
Earnings are underpinned by the quality of the
portfolio, which continues to perform well. We remain
alert to trends in the credit cycle and the collection
environment, which is less benign than at any time in
the last five years. Impairment losses in the year were
£2.2 million (2018 – £0.9 million), which represents a
charge of 0.8% (2018 – 0.5%), of which 0.1% of the
increase was attributable to the adoption of IFRS 9.
Annual Report & Financial Statements 2019
7
Strategic Report (cont’d)
This charge is consistent with the underlying loss rates
expected from the portfolio going forward and, in the
second half of the year, we saw a slight reduction in
the rate from 0.9% to 0.8%. The part of the portfolio
reported as ‘up to date’ deteriorated slightly in the
period to 95% (2018 – 96%). The less benign
environment has been most noticeable in our Business
Finance Division where the UK is experiencing an
increased incidence of business failure across most
industry sectors. The diversification of business lines will
strengthen our asset base and widen our sources of
income. In conjunction with our considerable experience
in our two existing markets, we will continue to build a
quality portfolio by maintaining the disciplines that have
stood us in good stead over past credit cycles.
The Group remains committed to its core markets,
supporting consumers and SMEs in the purchase of
motor vehicles, plant and machinery. We have
considerable experience in these markets which
continue to produce attractive returns and where the
lending is supported by assets with strong collateral
characteristics. We currently have no greater than a
1% share in each of these existing markets and there is
further scope to increase this. We are also excited to
be introducing new business lines and products that
show the same characteristics of margin and quality to
build a sustainable, diversified portfolio for the future.
Segmental business review
Business finance
The Business Finance Division has provided strong
growth. Lending to SMEs to enable them to invest in
vehicles, plant and machinery increased by 40% to £120
million (2018 – £86 million). With our reduced cost of
funds and longstanding relationships with introducers, we
have been better able to penetrate the prime segments
of this market, with 71% of originations being to prime
customers. In addition, we have made extensive efforts
in 2019 to increase our introducer database by recruiting
additional business development managers.
At 30 September 2019, the business finance portfolio
had increased to £178 million (2018 – £121 million). This
business line now makes up 52% of our total lending
portfolio (2018 – 55%). Azule offers a product range
similar to our Business Finance Division but, in this first
year of ownership, we report on it separately below.
Consumer finance
Origination growth in consumer finance was also strong,
considering the well documented decline in new motor
vehicle sales. Consumer finance lending increased by 18%
in the year to £73 million (2018 – £62 million). Our
success is a result of our relative size in the used vehicle
market, which has been much more resilient to the
weakening consumer demand for cars, which has
primarily affected new car sales. 96% of our consumer
finance originations are for nearly new or older vehicles
and PCF does not take residual risk by offering a
Personal Contract Purchase (‘PCP’) product. Our success
in consumer finance is also in part due to a specialisation
in niche, leisure vehicles such as horseboxes and
motorhomes. We also continue to have good customer
retention with 10% of the total consumer finance volume
this year being for existing customers of PCF.
Our finance proposition in this market has undergone
change over the year and this will continue to evolve in
2020 as we extend auto-decisioning, which is a
standard capability for operating in the prime consumer
market. At 30 September 2019, the consumer finance
motor portfolio was £128 million (2018 – £98 million).
Azule asset finance
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 the UK. Azule has a sales capability to place asset
finance with banks and lending institutions, as well as
originating asset finance for its own portfolio. One of
the attractions of the acquisition was the synergies
with PCF’s existing asset finance operations, given
Azule’s focus on financing business-critical assets for
prime credit grade customers.
In the 11 months of ownership, Azule originated £69
million of asset finance (12 months to June 2018 – £55
million), £54 million of this was placed and contributed
£1 million of fee income. The first year has been a great
success and has triggered the payment of the first
contingent consideration payment of £750,000, which
was made on 5 November 2019.
Our initial focus for Azule was very much on
supporting the business, understanding the market
dynamics and nurturing the successful sales culture
within the organisation. Over the course of 2020, we
will look to centralise some functions and monetise the
synergies between the two businesses.
Property bridging finance
PCF recruited a small team of experienced staff to
commence this operation organically. It provides
finance for terms up to 18 months to property investors
for the purpose of bridging and refurbishment. This is
an opportunity to enter a £4 billion market place in a
measured way. This product complements our existing
businesses with a shorter duration profile and improved
capital efficiency through a lower risk weighting. We
commenced operations in January 2019 and transacted
£14 million of new business in the first nine months.
As a new business line, there was a cost to establishing
the operation and the division contributed a loss before
tax of £428,000 in the year. We expect a strong
contribution to profits in 2020.
Capital management and funding
The net assets of the Group increased by 38% to £58.8
million (2018 – £42.6 million). At 30 September 2019
the CET1 Capital Ratio was 18.0% (2018 – 19.3%) and
the liquidity measurement of Liquidity Coverage Ratio
was 715% (2018 – 499%). These ratios were ahead of
the minimum requirement.
During the year, we successfully raised £10.75 million
of new equity and supplemented this with a £15 million
Tier 2 capital facility, with the ability to access this in
tranches as required. In combination, these provide
capital to support our strategic plan.
The Bank increased retail deposit balances in the year
to £267 million (2018 – £191 million). We now have over
6,250 retail deposit customers (2018 – 4,500). We offer
a range of products, with maturities from 100 days to
7 years, and have an average balance outstanding of
approximately £43,000 (2018 – £42,000) for an
average term of 2.9 years (2018 – 2.5 years). The
average cost of retail deposits has increased slightly in
the year to 2.2% (2018 – 2.1%). The savings products are
targeted at middle to older aged savers, providing ease
of service by utilising our on-line application portal or
by postal application if they prefer.
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Wholesale funding capacity has been enhanced through
a new £30 million revolving credit facility. In addition,
the Bank is a member of the Bank of England’s Sterling
Monetary Framework, which provides access to
schemes such as the Discount Window Facility and the
Term Funding Scheme.
Our funding strategy is to use retail deposits to fund
growth, by matching business origination with fixed
rate, fixed term deposits to preserve profit margin and
reduce interest rate volatility. The Bank uses wholesale
facilities to smooth liquidity and maturities where
required, and to provide a diversified funding
alternative to the retail deposit market.
Regulation and the competitive environment
Operational resilience creates a robust business model and
it remains a matter for close scrutiny. We have adopted a
proactive approach, having carefully considered the
Prudential Regulation Authority (‘PRA’s’) Discussion Paper
on ‘Building the UK finance sector’s operational resilience’.
We have updated our plan to ensure we continue to focus
and invest in operational resilience. The key is to ensure the
Group is adequately identifying, assessing and managing
its risks. This extends to managing the third-party risks that
may arise within outsourced activities.
In response to the PRA’s Supervisory Statement
‘Enhancing banks’ and insurers’ approaches to managing
the financial risks from climate change’, the Group is
formalising its plan to respond to these future risks and
will provide further detail as the year progresses.
On 15 October 2019, the Financial Conduct Authority
(‘FCA’) announced plans to regulate the way in which
car retailers and brokers in the motor finance sector
receive commission. A set of clear rules will be
introduced in 2020 to address a lack of transparency
and serve consumers better. PCF welcomes this
initiative from the FCA, as we believe that disclosed
and standardised commission rates will ensure better
outcomes for customers and a level playing field for
motor finance providers such as PCF. We do not
envisage that our adherence to the new rules will have
a significant impact on our operations.
This is the first full year for implementation of accounting
standard IFRS 9 ‘Financial Instruments’ requiring
extensive work to model the impairment provision for
our portfolio of loans. The Notes to the Financial
Statements contain an explanation of the methodology.
Over the course of the year our views on the political and
credit environment have changed and, as a result, we
have amended our risk weightings to reflect a less benign
credit environment and a more uncertain outcome for
Brexit. At the start of the year we increased the provision
by a net £0.5 million as we moved from an incurred loss
basis, IAS 39 to the expected loss basis, IFRS 9. This
one-off increase is treated as an adjustment to brought-
forward retained profits and not as an expense in the
current year income statement. The quantum of this
adjustment is consistent with what would be expected
from a collateralised lending portfolio. The IFRS 9
provision at 30 September 2019 has increased in line with
the growth in the portfolio as well as our changes in risk
weightings. Our views on risk weightings will continue to
reflect the wider global economic outlook, in addition to
Brexit, as well as emerging risks such as the financial risk
associated with climate change.
People and resources
During the course of the year PCF moved to larger
premises, providing staff with a much-improved
working environment and the capacity necessary to
embark on the next stage of our growth. We have also
taken the opportunity to improve the environment in
the available space at Azule’s offices in Berkshire. The
office relocation was successfully completed without
disruption and I would like to thank the project teams
for their commitment and excellence in delivery.
Our staff numbers have now reached 110 full time
employees (2018 – 73) split between the City of
London and Berkshire offices and I would like to thank
everyone for their contribution this year. During the
year we welcomed Azule staff to PCF and we have
enjoyed working with our new colleagues, who have
proved to be an ideal fit. We also recruited a new Head
of Human Resources, Suzie Yong, and I look forward to
working with her on new programmes including topics
such as culture, staff development and diversity.
2020 strategic objectives
We continue to set ambitious targets and objectives and
our focus in 2020 will be to
l launch our new streamlined system for consumer
motor finance;
l trial direct to consumer products on our new
consumer platform;
l develop a market leading portal for SME lending;
l build out our property bridging finance division
beyond the pilot initiative;
l evaluate how Azule’s European capabilities could
enhance PCF’s business in the future;
l complete the integration of Azule operations to
maximise its sales potential;
l improve our customer journey for savers and
borrowers with additional online functionality; and
l optimise technology across the organisation to
support scale and gain efficiencies.
Current trading and outlook
We have once again delivered on our strategic
objectives, achieving our initial targets for portfolio size
and return on equity ahead of time. Our next targets of a
portfolio of £750 million and a return on equity of 15% by
30 September 2022 remain in place, but our progress to
date suggests that an aspiration of a £1 billion portfolio
should not be beyond our reach in the medium-term.
New business originations remain strong and we
continue to maintain prudent underwriting standards, a
cautious risk appetite and sensible terms of business.
Our goal is to generate sustainable returns and, with
our focus on a greater proportion of prime quality
customers, our portfolio continues to perform well. We
have a lending portfolio that has a wide spread of risk
and, while we are not sanguine about the economic
outlook, we feel our size, agility and well-established
business model provide confidence for the future.
Economic uncertainty does, however, remain a risk.
This could manifest itself as reduced demand in our
market places, a fall in our growth rate or rising
impairments due to an economic downturn. Should
these circumstances arise, we recognise this could
slow our progress, but we have built and will continue
to build PCF’s lending model on sound foundations,
which will provide for our continued success.
New business momentum has built up throughout the
year, with September 2019 being a record month for the
Group, which continued in October. Our diversification
strategy has been a success and provides the Group
with extra strength in depth. The Group is ahead of its
plans in terms of growth, so we have accelerated
investment in our technology platform, talent and
governance framework. All this will leave us well placed
to take advantage of market opportunities as they arise.
Scott Maybury
Chief Executive
7 February 2020
Annual Report & Financial Statements 2019
9
Strategic Report (cont’d)
Market and Business Overview
Business model
The Group’s core business has historically been the
provision of vehicle and asset finance to consumers
and SMEs, but during the year it diversified its lending
operations by way of the acquisition of Azule Limited
(‘Azule’) in November 2018 and the launch of a
property bridging finance business in January 2019.
As a result, we now have four lending divisions.
l Business Finance Division, which provides finance
for vehicles, plant and equipment to SMEs;
l Consumer Finance Division, which provides finance
for motor vehicles to consumers;
l Azule, which specialises in providing finance to the
broadcast and media industry; and
l Bridging Finance Division, which provides property
finance to professional property investors for the
purpose of bridging, refurbishment and developer exit.
These divisions are supported by a savings operation
which offers notice and term deposit accounts to retail
savers.
Simple banking. At your service.
We offer simple, easy to understand finance products
using loan, conditional sale, hire purchase and finance
lease agreements.
Customers repay us by way of instalments and, where
applicable, by a final balloon payment, 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 risk philosophy
The Group’s risk philosophy is to
l provide finance for assets (vehicle, plant,
equipment and property) which have strong
collateral characteristics and readily identifiable
re-sale markets;
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 2019
Our strategic objectives for the year ended
30 September 2019 were to
l grow the core Consumer and Business Finance
Divisions by way of increased lending to prime
customers, who are defined as being in the top four
of our eight credit grades, have clean credit profiles
and a low probability of default;
l improve the proposition for the broker-introduced
consumer finance market by developing a new
scorecard and using automation to enhance
decision-making;
l integrate and grow the Azule business;
l complete the £20 million pilot scheme for property
bridging finance; and
l review capital optimisation and put in place a Tier 2
capital facility to support our strategic plan.
The Group had a successful year with new business
originations reaching a record-breaking level of
£276 million (2018 – £148million) due to the growth of
the existing Consumer and Business Finance Divisions,
as well as the impact of the recent diversifications into
the broadcast, media and property sectors. The total
of £276 million was comprised of the following.
10
l Business Finance Division
l Consumer Finance Division
l Azule
l Bridging Finance Division
£120 million
£ 73 million
£ 69 million
£ 14 million
New business originations across the various business
lines met management expectations for the year.
Group new business volumes
£300m
£250m
£200m
£150m
£100m
£50m
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
Sep 19
Savings
The Bank’s target savings market is UK-domiciled, middle
to older aged savers, and is estimated to be worth
approximately £154 billion in size. Our current market
share represents 0.2%, estimate provided by PRA.
We offer term deposits, ranging from 1 year to 7 years,
together with 100-day and 180-day notice accounts, to
retail customers, with interest rates appropriate to
each duration. We look to naturally match the tenor of
the deposits to our lending book but also ensure there
is no one month concentration.
Amounts on deposit with PCF Bank increased from
£190 million to £267 million to fund the growth of the
lending operations. We now have over 6,250 savings
customers. Most of our customers apply on-line to
open an account, using our portal, which is both quick
and simple to understand. On-line applications are
typically completed and the account opened within
20 minutes. However, we are one of a small number of
banks who also offer a postal application and accept
cheques and 30% of our customers opened their
account with us using this method.
Savings
£300m
£250m
£200m
£150m
£100m
£50m
Sep 17
Mar 18
Sep 18
Mar 19
Sep 19
The average deposit balance is £43,000 (2018 – £42,000).
Growth of savings year on year
2019
2018
2017
£70m
£60m
£50m
£40m
£30m
£20m
£10m
12M
24M 30M
100D 180D
36M 48M 60M
18M
PCF Banks' retail deposit portfolio has a longer
blended average term following careful management
of the concentration in 1 year deposits. The longer
term products attract a slightly higher interest rate but
better match to the duration of our lending portfolio.
84M
Business Finance
The Business Finance Division, which was established
in 1998, provides hire purchase and finance lease
agreements to sole traders, partnerships and limited
companies to help them acquire vehicles, plant and
equipment. Lending is typically for up to five years with
longer terms of up to ten years for specialist niche assets.
Vehicle and asset finance are commonly used sources
of finance for businesses, providing significant cash
flow benefits for those using them. The market in the
UK is both mature and vast, with PCF Bank having a
share of no greater than 1%.
The asset finance market has performed strongly in
recent years and, in the 12 months to September 2019,
members of The Finance & Leasing Association (‘FLA’)
reported new business lending of £34.5 billion, which
represented a 7% increase on the previous year.
The division predominantly uses broker intermediaries
as its route to market, with transactions being
processed through eQuote, the Bank’s internet-based
proposal system. eQuote, which is able to underwrite
high volumes of proposals quickly and at low cost,
enables us to send information and documentation to
our customers, dealers and introducers electronically,
therefore speeding up the application process.
The division had another strong year of growth,
increasing new business originations by 39% from
£86 million to £120 million, of which 71% was for prime
customers. As a bank, with a much-reduced cost of
funds, we are now better able to penetrate the prime
segment of the market and, as it represents
approximately 80% of the total market, it remains an
area where we believe that PCF Bank can continue
to grow.
Prime customers tend to acquire newer and more
expensive vehicles and equipment, resulting in our
average transaction increasing from £40,600 to £45,300
during the year. We expect this trend to continue.
Business finance volumes
£140m
£120m
£100m
£80m
£60m
£40m
£20m
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
Sep 19
As a result of the increase in new business originations,
the division’s portfolio also increased. At 30 September
2019, it had grown by 49.5% to £175.7 million (2018 –
£117.5 million). We expect the division’s recent growth
record to continue and for it to remain the dominant
part of our business in future years.
£30,700 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
many of them having had agreements with PCF for
more than ten years. Prime business now accounts for
72% (2018 – 74%) of the portfolio.
Consumer Finance
The Consumer Finance Division, which was established
in 1994, 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. Lending on these assets is for periods up to
five years. 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. Lending for
these niche assets can be for periods up to ten years.
According to the FLA Motor Finance Summary, the
consumer car finance market grew slightly in the 12
months period ending in September 2019, with the
number of transactions increasing by 3% and the value
of completed transactions increasing by 5%. The used
car finance market, in which PCF predominantly
operates, showed better growth than the new car
finance market. Advances in the used car finance
market increased by 4% to £18.2 billion and the number
of used cars financed increased by 2% to 1.48 million.
This division also predominantly uses broker
intermediaries as its route to market, with transactions
being processed through eQuote, the Bank’s internet-
based proposal system.
During the year, we completed a project to improve
our credit decision making processes. This involved
working with our preferred credit reference agency to
develop a new scorecard, which was modelled on over
320,000 applications which we had received over the
last two years. By completing a retrospective analysis
of the applicants, we were able to create a scorecard
which reflects more accurately the likely risk of default
by these applicants and therefore improves our
decision making.
This division also performed well during the year,
increasing new business originations by 17.5% from
£62.2 million in 2018 to £73.1 million. Following on from
the successes of last year, the division increased 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 £29.5 million
(2018 – £11 million) of our new business originations
during the year and was typically for prime customers.
Business finance portfolio
Consumer finance volumes
£200m
£175m
£150m
£125m
£100m
£75m
£50m
£25m
£80m
£70m
£60m
£50m
£40m
£30m
£20m
£10m
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
Sep 19
The portfolio is made up of over 5,700 individual
agreements with an average size of approximately
Sep 12
Sep 13
Sep 19
Sep 15
Our Consumer Finance Division’s portfolio increased
by 44% during the year from £96 million to £138 million.
Sep 14
Sep 16
Sep 18
Sep 17
Annual Report & Financial Statements 2019
11
Strategic Report (cont’d)
Consumer finance portfolio
£160m
£140m
£120m
£100m
£80m
£60m
£40m
£20m
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
Sep 19
The portfolio is made up of almost 11,000 individual
agreements with an average size of £12,575. Prime business
now accounts for 66% (2018 – 53%) of the consumer
finance portfolio.
Azule
Azule was established in 1996 and acquired by PCF
Bank in November 2018. It provides direct to end-user
asset finance in the UK and across Europe to niche
markets, focused on broadcast & media, sound,
lighting and audio visual. Business is generated
through direct end user relationships along with
manufacturer, distributor and dealer introductions.
Azule’s deals are either written on the Group’s balance
sheet or placed with other banks, for which Azule
receives a commission. Deals placed with other banks
are done so for risk, pricing and concentration of
exposure reasons.
Azule had its best ever year in terms of originations,
writing over £69 million of new business, an increase of
26% on Azule’s previous financial year. The average
deal size was £45,000. Following the acquisition, there
has been a measured focus on increasing Azule ‘own
book’ funded deals, which resulted in £14 million of
originations being funded on ‘own book’, an increase of
36%. This increase has been possible due to Azule’s
access to PCF’s lower cost of funds, which was
previously not available to it through its other funding
sources. 76% of the ‘own book’ originations came from
customers in our top four credit grades. Azule generated
£1 million of fee income from the business it brokered,
which is an increase of 33%. The number of deals in
arrears was low and the impairment charge was £33,576.
Azule also operates across Europe to support its
manufacturers. This business is funded by local partner
banks from whom Azule receives an introductory
commission. Europe provides a great opportunity for
growth as there are no other specialist niche finance
providers serving the markets in which Azule operates.
The outlook for the next 12 months looks positive and
the division is looking to increase further the growth it
has achieved this year. Whilst there are concerns over
the economy, the sectors in which Azule operates
remain healthy. The television sector continues to grow
as a direct result of streaming services such as Netflix
and Amazon Prime. The need for these providers to
produce high-end content is driving demand for
services and studio space across the UK. Recently, both
Netflix and Disney have made long-term commitments
to the UK by signing leases for studios at Pinewood
and Shepperton. The live entertainment market
continues to see growth in the number of music
festivals and artists touring, all of which require
12
increased levels of sound, lighting and audio-visual
equipment. The application of LED screens across
retail, public spaces, corporate offices and education
provides great opportunity for Azule to increase its
share of the audio-visual finance market.
Bridging Finance
The Bridging Finance Division provides unregulated
finance towards the purchase or re-mortgage of a
property for the purpose of bridging, refurbishment
and developer exit. Finance is available to experienced
property investment businesses ranging from sole
traders to partnerships and limited companies. Security
is by way of a first charge and facilities are typically
between 6 and 18 months, with a maximum loan to
value of 75%.
PCF wrote £14.1 million of bridging business in the nine
months to September 2019 and, therefore, represents a
very small percentage of the industry.
The division was set up in late 2018 and launched its
product in January 2019, with the Board having
committed to an initial ‘pilot scheme’ of £20 million. In
its first nine months of operation, the division
completed transactions aggregating £14.1 million
across a wide range of properties and customers.
The portfolio has performed well, with a number of
transactions having been redeemed. Based on the
success to date, we are targeting originations of £60
million in the coming year and will be expanding our
team to ensure we deliver this target as well as
maintain our personal service levels.
Group portfolio performance
The Group portfolio increased by 54% from £219 million
to £338 million and performed in line with our
expectations, with the impairment charge increasing to
0.8%. This charge is consistent with the underlying loss
rates expected from the portfolio going forward. The
collection environment is less benign than in recent
years, however, we saw a slight reduction in the loan
loss charge in the second half of the year. The adoption
of IFRS 9 added 0.1% to the charge for this year.
The quality of our portfolio is, however, improving as
we write increasing levels of prime business. The
percentage of our portfolio which is prime business
increased from 64.53% to 69.41% during the year. Our
continued focus on the prime segments of our markets
should enable us to maintain the quality of our
portfolio, although uncertainty and economic
conditions in the UK remain a potential threat.
Impairment Charges
l
s
e
c
n
a
a
b
n
a
o
l
e
g
a
r
e
v
a
%
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
Sep 19
At September 2019, 95% of all customers’ agreements
were up to date.
Annual Report & Financial Statements 2019
13
Strategic Report (cont’d)
Risk Overview
Overview and culture
Managing risk effectively is essential to the Group and
is fundamental to our strategy. PCF is a specialist UK
bank focused on retail and commercial lending
business. This is 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.
A clearly defined Risk Appetite Statement is in place
which sets out the level of risk that the Group is willing
to take in pursuit of its business objectives.
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 across the Group, with a strong focus on
the adherence to risk appetite in all metrics. 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.
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’).
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 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 that could prevent
the Group from achieving its strategic objectives. Risk
management is integrated into the corporate
framework and business planning with regular
reporting to the Board and other committees, such as
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
optimise profits, within the approved risk appetite.
Key mitigating factors and controls
l The Group does not intend to undertake any
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 define risk appetite and ensure that the strategic
l The Group will not put its core strategic and
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;
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 ensure that remuneration practices take into
l The Board will align the remuneration of staff to key
account prudent risk taking;
strategic objectives.
l provide enhanced training and compliance
awareness sessions to all employees; and
l The Board will be alert to emerging risks to the
business.
14
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
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 will embed lending policies, a risk
control framework and risk management
procedures in all business areas.
l The Group will actively manage lending quality
through the credit cycle.
l The Group will review performance against risk
appetite.
l The Group will hold credit committee meetings for
larger exposures, embedding new business lines 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.
l The Group will endeavour to avoid concentrations
of risk by geography, sector, asset class, single
debtor and counterparty name.
l The Group will embed effective collection
strategies.
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 Capital Requirements Directive IV
(‘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 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
management buffer, over and above the PRA and
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
a diversified funding strategy and strong relationships
with its banks for funding purposes, be active in the
retail deposit taking market and 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 facility
headroom.
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 unencumbered 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 ensure that its HQLA will enable it to
survive at least 30 days of a worse-case stress
scenario.
l The Group will maintain its Net Stable Funding
Ratio (‘NSFR’) above the regulatory minimum of
100%.
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.
Annual Report & Financial Statements 2019
15
Strategic Report (cont’d)
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.
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 does not trade wholesale financial
instruments and so does not have a trading book.
l The Group’s balance sheet exposures are
predominantly in Sterling, so it has little foreign
exchange risk. Some assets are bought or sold in
foreign currency, as are broking transactions, but
these are short-term exposures and are managed
within Value at Risk (‘VaR’) limits.
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 resulting
from inadequate or failed internal processes, people
and systems or from external events. This includes
legal risk but excludes strategic and reputational risk.
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. The Group will mitigate and limit the
impact on business operations and decisions of its
cyber risk exposure.
Key mitigating factors and controls
l The Group will continue to implement a robust
Operational Resilience Framework and regularly
test the ongoing resilience of its operational and IT
services, including Business Continuity
Management, Disaster Recovery, Incident
Management, Crisis Management, Third Party
Management and the Cyber Strategy.
l The Group will continue to 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 continue to 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 continue to 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 continue to implement a robust
Supplier and Outsourcing Assurance Framework
and undertake ongoing due diligence on third
parties.
l The Group will continue to maintain competitive
working practices to attract, retain and engage
high quality employees.
l The Group will continue to invest in enhanced
systems and robust processes to protect customer
information, including limiting access to key
systems and enhancing the security, durability and
accessibility of critical information.
l The Group will continue to manage change projects
effectively so that they do not cause serious
disruption or create processing inefficiencies to the
business during or after their implementation.
l The Group will continue to maintain a strong
internal control environment and adopt policies and
procedures to detect and prevent the use of its
business for money laundering, facilitating tax
evasion, bribery and activities prohibited by legal
and regulatory requirements.
l The Group will continue to provide enhanced
operational risk training and compliance awareness
sessions to all employees.
l The Group will continue to review and ratify all new
products and business lines through its Marketing &
New Products Approval Committee (‘MNPA’).
l The Group, through continual investment in its IT
infrastructure, resilience and security, will maintain
appropriate levels of control and ongoing testing to
identify and counter the increasing level of threat
arising from cyber-crime.
l The Group will continue to embed cyber security in
the design of technology and services and reduce
cyber risk exposure to an acceptable level before
deployment.
l The Group will continue to maintain cyber risk
insurance and review the policy no less than
annually.
l The Group will continue to maintain a robust
system of controls in order to prevent the Group
being used to further financial crime and minimise
the impact of external and internal fraud.
l The Group will continue to maintain external and
internal fraud insurance and review the policy no
less than annually.
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.
16
Statement – The Group has no appetite for 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
advisors 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.
l The Group will implement actions from internal
assurance regulatory reviews to enhance the
resilience of critical reporting systems and processes.
Conduct risk
Definition - Conduct risk is the risk of customer
detriment 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 inappropriate 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
including Treating Customers Fairly (‘TCF’) and
vulnerable customers. These reflect the customer
outcomes the Board intends to achieve (e.g.
product development, governance and
distribution).
l Customer needs are explicitly considered within
business and product level planning and strategy.
l Enhanced product governance framework and The
Marketing and New Products Approval Committee
(‘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 Bank’s
strategy, business model and performance.
The most prominent or present emerging risks are
detailed below. The Group monitors a wide range of
emerging risks, some of which have longer time frames
and others which may have more immediate effect.
Climate risk is the most obvious of these and the social
and economic policy is changing at a fast pace. The
Group is developing a roadmap for a climate risk
strategy in accordance with PRA guidance. Other risks
such as global tensions on trade or other geo-political
matters require constant monitoring and consideration.
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.
Management believes that Brexit’s potential effect on
the Group would be indirect or limited to a small
number of industry sectors. Management’s immediate
concern is primarily focused on the negative effect
that the prolonged process of Brexit may have on the
economy, capital markets and consumer and business
sentiment and the effect may have on demand.
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. The Bank has increased its pessimistic
economic weightings to reflect the uncertainty of an
outcome, particularly around a no Brexit deal.
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 they may 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 data is
managed, controlled and protected can have a
significant impact on the delivery of its services and
the security of its customers. Data must be protected
from unauthorised use, disclosure, modification,
damage and loss.
Annual Report & Financial Statements 2019
17
Strategic Report (cont’d)
Mitigation - The Board has approved a Cyber
Strategy using best practice guidelines from the
National Cyber Security Centre, the Financial
Conduct Authority (‘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-attacks. 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 to understand cyber risk and act responsibly;
l to understand the extent and potential impact of
exposure to the attack;
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 will monitor data, consumer
trends and national and local legislation to continue to
form a view as to the expected path for diesel vehicle
prices and the implications for credit policy and back-
book management.
By order of the Board
Scott Maybury
l to operate defences consistently across the Group’s
cyberspace, physical site and organisations;
7 February 2020
l to have a robust incident response process in place;
and
l to strengthen collaboration with industry
specialists. 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. The Group
continues to invest in its information security controls
in response to emerging cybercrime threats and to
ensure that controls for known threats remain robust.
Technological and competitive change to the
motor vehicle market
Risk - Over 30% of the Bank’s total portfolio of loans
and receivables is in respect of finance agreements
where the asset financed is a motor car. Technological
and physical obsolescence, in particular relating to
diesel cars, could lead to a diminution of the Bank’s
underlying security if defensive action is not taken.
Several factors may lead to reductions in values for
used diesel vehicles.
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. The Group serves the UK used car
market, which unlike the supply of new vehicles, often
originating from EU markets and attracting increased
tariffs, is largely self-contained.
18
Annual Report & Financial Statements 2019
19
We completed a board effectiveness review in July
2019. The review concluded that the composition of
the Board, its understanding of the business and its
leadership were of a high standard. The existing
governance framework has proved effective in 2019
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
continues to increase and the appointment of an
additional non-executive during the year is recognition
of this evolution. The Board is cognisant that the
Group’s culture has to evolve as the Group continues
to grow.
Tim Franklin
Chairman
7 February 2020
Corporate Governance Report
The Board of Directors (the 'Board') is committed to
the high standards of corporate governance, details of
which are set out in this report. In considering the
standards of Corporate Governance to apply, the
Board has consideration of, but does not purport to
fully comply with, the UK Corporate Governance Code
issued by the Financial Reporting Council. The Board
has adopted the UK Corporate Governance Code 2018
which became effective for the Group in the
accounting period commencing 1 October 2019. The
Code sets out the principles relating to the good
governance of companies.
The Code is available at www.frc.orq.uk
The current composition of the Board and Audit & Risk
Committee ('ARC') represents a departure from the
application of the Code. From independence
perspective, the Board does not contain an equal
balance of non-executive directors. Also, ARC only
included one independent non-executive director for
the majority of the year representing a departure from
the Code. In response to these departures, the Group
appointed an additional independent non-executive
director, Marian Martin, to the Board on 25 July 2019.
She was an attendee at ARC in September 2019 and
was appointed a full member of ARC in November 2019.
It is our intention to have a balanced Board in respect
of independence by 30 September 2020.
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 will re-consider whether to appoint a
senior independent director during 2020.
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.
This Corporate Governance Report provides a clear
and comprehensive description of the Group’s
governance arrangements.
Chairman’s introduction
Dear shareholder,
As the Chairman of PCF Group plc, I am delighted to
present our Corporate Governance Report for the year
ended 30 September 2019.
The Board consists of nine directors, six of whom are
non-executive and three of whom are executive. Two
non-executives have been nominated by the majority
shareholder. The following pages describe how we
comply with the main principles of our Corporate
Governance arrangements, how the Board and
Committee structures operate and the key areas of focus
for both the Board and its committees during the year.
20
Board of Directors
Tim Franklin
Non-executive Chairman,
appointed 6 December 2016
Marian Martin
Independent non-executive director,
appointed 25 July 2019
Tim has extensive experience in the
financial services industry, having
worked for over 30 years in the
retail banking and building
society sectors. Tim served as a
non-executive director of the
Post Office for 7 years until
December 2019 and remains
Chairman of Post Office Insurance.
Additionally, he is a non-executive
Marian Martin is a chartered
accountant with a background in
risk management and audit. Most
recently, Marian was at Virgin
Money for 11 years and was
Chief Risk Officer throughout a
period of significant growth and
strategic development of Virgin
Money and its risk function,
including its successful listing on
the London Stock Exchange. Marian
director of Computershare Loan Services. 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. In addition,
he is an Associate of the Chartered Institute of Bankers.
Tim is Chairman of the Nomination Committee and a
member of the Remuneration Committee.
was an executive director of the main trading
companies of the Virgin Money group during this
period. In addition, Marian is a non-executive director of
Castle Trust and Starling Bank.
Marian is a member of the Audit & Risk Committee,
the Nomination Committee and the Remuneration
Committee.
Mark Brown
Non-executive director,
appointed 1 December 2015
Mark was Chairman of Stockdale
Securities from November 2014,
until it was bought by Shore
Capital in April 2019. He was
previously Chief Executive of
Collins Stewart Hawkpoint and
brings a wealth of experience
and leadership in both small and
large financial services businesses.
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 of the Nomination Committee and
the Remuneration Committee.
Christine Higgins
Independent non-executive director,
appointed 13 June 2017
Christine is a chartered
accountant with over 25 years’
experience in asset finance for
UK and international banks.
Over the last 9 years, she has
served as non-executive
director on a number of boards
David Morgan
Non-executive director,
appointed 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, the
Nomination Committee and the Remuneration Committee.
David Titmuss
Independent non-executive director,
appointed 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. David
in the health, housing, leisure
and finance sectors, including as
chair of the audit committee. She is
currently a non-executive director of Buckinghamshire
Building Society and chairs its audit committee and is
a Trustee at Refuge.
Christine is Chair of the Audit & Risk Committee and
a member of the Nomination Committee and the
Remuneration Committee.
has direct experience of credit decisioning and debt
collection for companies and consumers gained from
holding senior roles in the finance industry over a
number of years. 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 Chairman of the Remuneration Committee and
a member of the Nomination Committee.
Annual Report & Financial Statements 2019
21
Scott Maybury
Chief Executive (‘CEO’),
appointed 12 January 1994
Scott holds a degree in business
studies and is a qualified
accountant. He spent 6 years
with BHP Billiton, Australia’s
largest multi-national
corporation, and 5 years with
McDonnell Douglas Bank. He is
one of the founding directors of
PCF Group plc and was previously
Finance Director until October 2008.
Robert Murray
Managing Director (‘MD’),
appointed 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 3 August 2015
David holds a first-class degree in
Mathematics and Statistics and is
a qualified 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 a Director of Finance and
Company Secretary at Hampshire Trust Bank plc, a
specialist challenger bank, where he was instrumental
in setting up their banking operations.
Appointment & resignation of directors during the year
Marian Martin was appointed on 25 July 2019, and
there were no resignations during the year.
22
Corporate Governance Structure
Group Board
Chair Tim Franklin
Members
Non-executive directors,
executive directors
(CEO, MD, FD)
Bank Board
Chair Tim Franklin
Members
Non-executive directors,
executive directors
(CEO, MD, FD)
Audit & Risk
Committee
Executive
Committee
Nomination
Committee
Remuneration
Committee
Chair Scott Maybury
Chair Tim Franklin
Chair David Titmuss
Members
MD, FD, HoCD, HoIT,
HoRC, HoT, HoHR,
Azule
Members
Non-executive
directors
Members
Non-executive
directors
Chair Christine
Higgins
Members
David Morgan,
Marian Martin
CEO Chief Executive
HoRFR Regulatory & Financial Reporting
HoIT Information Technology
HoRC Risk & Compliance
HoCD Commercial Development
Executive Directors
MD Managing Director
Heads of Department
HoNB New Business
HoCSS Client Services & Savings
HoT Treasury
HoPO Payouts
FD Finance Director
HoCC Credit Control
HoHR Human Resources
HoMR Management Reporting
Azule Managing Director
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 Board 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 review the
Chairman's performance. The performance of the Chief
Executive is appraised annually by the Chairman and
the other members of the Remuneration Committee.
The Boards are supported by a number of established
Board committees, namely the Executive Committee,
Audit & Risk Committee, Nomination Committee and
Remuneration Committee. Each committee has a set of
clearly defined Terms of Reference. Responsibility for
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 four
independent non-executive directors, two non-executive
directors and three executive directors and are
chaired by Tim Franklin, an independent non-executive
director. The profiles of the members of the Board are
provided on pages 21 and 22. The tenure of each of
the independent non-executive directors is less than
nine years, which is in accordance with the Code.
The Boards comprise of members with diverse
professional backgrounds, skills, extensive experience
and knowledge in the areas of banking, finance, risk,
marketing, 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 Committee (‘NomCo’) reviews the
structure and size of the Board. The committee
considered the appropriateness of the Board’s
composition during the year and concluded that,
following the appointment of Marian Martin, it has the
appropriate mix of skills and experience to fulfil its
responsibilities.
The Remuneration Committee (‘RemCo’) appraises the
performance and remuneration of the executive
directors and other senior executives.
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 2019
23
Roles and responsibilities
The Board’s role is to provide entrepreneurial
leadership within a framework of prudent and effective
controls which enables risk to be assessed and
managed. The Board sets the strategic aims, reviews
management performance and ensures that the
necessary financial and human resources are in place
to meet objectives.
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 the senior
management positions are of sufficient calibre and
that there are programmes in place to enable
orderly succession of senior management;
l ensuring effective communication with the
shareholders and other stakeholders;
l reviewing the efficacy of internal controls and
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 all stakeholders are
understood and met;
l approval of risk management framework, insurance
and mitigation;
l reviewing and approving acquisitions and disposals
of undertakings and major investments;
l assessing, monitoring and prompting a sound
corporate culture within the organisation; and
l ensuring that appropriate systems are in place to
promote whistleblowing and protect confidentiality
of whistleblowers.
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 clear
division of responsibilities at the head of the company to
ensure 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 challenge 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 expressly 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 any or all of the Executive Committee,
Audit & Risk Committee and the Board for effective
supervisory decision-making and proper governance.
As the Group is expanding and its business growing,
the division of authority is constantly reviewed to
ensure that management’s efficiency and performance
remain at its best level.
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 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.
Any director wishing to do so may take independent
professional advice at the expense of the Company. All
directors are able to consult with the Company
Secretary, who is responsible for ensuring that Board
procedures are followed.
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 on page 25.
24
Number of meetings attended/(eligible)
Board
Audit & Risk
Committee
Nomination
Committee
Remuneration
Committee
Executive
Committee
Number of meetings held
11
9
4
6
Chairman
Tim Franklin (2)
Chief Executive
Scott Maybury (1) (3)
Non-executive directors
David Morgan
Mark Brown
Independent non-executive directors
Christine Higgins
Marian Martin (2)
David Titmuss
Executive directors
Robert Murray
David Bull (1)
16
–
11 (11)
1 (1)
4 (4)
6 (6)
11 (11)
8 (9)
4 (4)
6 (6)
16 (16)
10 (11)
11 (11)
11 (11)
3 (3)
11 (11)
10 (11)
11 (11)
9 (9)
–
9 (9)
1 (1)
–
–
9 (9)
4 (4)
4 (4)
4 (4)
1 (1)
4 (4)
–
–
6 (6)
6 (6)
6 (6)
1 (1)
6 (6)
–
–
–
–
–
–
–
11 (16)
16 (16)
(1) Attended as standing attendee at Audit & Risk Committee meetings.
(2) Attended as a guest at Audit & Risk Committee meeting.
(3) Attended as a guest at Nomination and Remuneration Committee meetings.
Corporate Governance Code. The Board also held a
session on culture, diversity and inclusion at the Annual
Strategy day. Board members are encouraged to
attend relevant training programmes as part of their
continuing professional development 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.
Appointments to the Board
The Nomination Committee (‘NomCo’) consists of
two non-executive directors and four independent
non-executive directors and is chaired by Tim Franklin.
NomCo makes independent recommendations for
appointments to the Board. In making these
recommendations, NomCo assesses the suitability of
candidates, taking into account the required mix of
skills, knowledge, expertise, experience,
professionalism, integrity, gender diversity,
competencies and other qualities, before
recommending them to the Board for appointment.
NomCo 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 annually, subject to continued
satisfactory performance.
With effect from the AGM to be held on 6 March 2020,
the Board will comply with the UK Corporate
Governance Code 2018 and all directors will be subject
to annual re-election.
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.
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, AIM Rules and the
Annual Report & Financial Statements 2019
25
board director of the Finance and Leasing Association
(‘FLA’), also 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’).
Andrew Barber
Head of IT (‘HoIT’)
Andrew joined PCF Group in June 2002 and is
responsible for developing and managing the IT and
cyber strategy within the Group. Andrew oversees the
management of systems, operational resilience and
third-party vendor management. As a PRINCE2
Registered Practitioner, Andrew is instrumental in
ensuring change is managed successfully within the
Group. Andrew is a member of the Smaller Banks
Operations & IT Forum (‘SBOITF’) and is one of the
founding members of the recently established
Specialist Bank Security Forum (‘SBSF’).
Jim Coleman
Head of Treasury (‘HoT’)
Jim joined PCF in October 2016 to oversee the
establishment of a Treasury function in preparation for
bank mobilisation in 2017. Since mobilisation, he has
been responsible for funding, liquidity, 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.
Suzie Yong
Head of Human Resources (‘HoHR’)
Suzie joined PCF Group in August 2019 and is
responsible for Human Resources and Office
Management for the Company. Suzie has over 20 years’
HR management experience in both the private and
public sectors, with her last role as Head of HR in
Fintech, where she was responsible for the set up and
management of HR operations globally. Suzie has
several years’ experience working as an Associate
Lecturer and Assessor on CIPD courses at the
International Financial Services Centre (Dublin) and is a
Chartered Member of the Chartered Institute of
Personnel and Development.
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.
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 23. Each committee has written
Terms of Reference setting out the committee’s role
and responsibilities and the extent of the authority
delegated by the Board. Minutes of each committee
are circulated to the Board on a regular basis.
Reports of certain Board’s committees are set out later
in this 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 and Finance Director on the
performance and results of the Group. The Managing
Director updates the Board on performance, strategic
developments and the legal and regulatory affairs of
the Group and the Bank. In addition, the Board
receives regular updates from the Executive
Committee (‘ExCo’) which collates updates from the
Credit Committee, Risk, Compliance & Operations
Committee (‘RCO’), Marketing & New Products
Approval Committee (‘MNPC’) 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 its day-to-day management
duties to ExCo, which meets 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 22. The other members of ExCo are as follows.
Gerald Grimes
Head of Commercial Development (‘HoCD’)
Gerald joined the Group in July 2018 to help focus on
the introduction of new products and markets and to
head up Business & Broker Development. He has 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
26
Executive Committee
Chair Scott Maybury
Members MD, FD, HoCD, HoIT, HoRC, HoT, HoHR, Azule
Credit Committee
Risk, Compliance
& Operations
Committee
Marketing & New
Products Approval
Committee
Asset & Liability
Committee
Chair CEO
Members MD, FD,
HoCC, HoNB, HoRC,
Senior Credit Risk
Manager
Chair FD
Members HoCC,
HoCD, HoMR, HoIT,
HoNB, HoPO, HoRC,
HoCSS, HoT, HoHR,
HoRFR
Chair CEO
Chair FD
Members MD, FD,
HoMR, HoIT, HoNB,
HoPO, HoRC, HoCSS,
HoT
Members MD, HoMR,
HoRC, HoCSS, HoT,
HoRFR
IT Operations
Committee
Chair HoIT
Members HoMR,
HoRC, IT Manager
CEO Chief Executive
HoRFR Regulatory & Financial Reporting
HoIT Information Technology
HoRC Risk & Compliance
HoCD Commercial Development
Executive Directors
MD Managing Director
Heads of Department
HoNB New Business
HoCSS Client Services & Savings
HoT Treasury
HoPO Payouts
Where appropriate, delegates attend where members are absent.
Liquidity & Pricing
Committee
Chair HoT
Members HoMR,
HoNB, HoRC, HoCSS,
Treasury Manager
FD Finance Director
HoCC Credit Control
HoHR Human Resources
HoMR Management Reporting
Azule Managing Director
Executive Directors
CEO – Chief Executive
MD – Managing Director
FD – Finance Director
Heads of Department
HoRFR – Regulatory & Financial Reporting
HoIT – Information Technology
HoRC – Risk & Compliance
HoCD – Commercial Development
HoNB – New Business
HoCSS – Client Services & Savings
HoT – Treasury
HoPO – Payouts
HoCC – Credit Control
HoHR – Human Resources
HoMR – Management Reporting
Azule – Managing Director
Annual Report & Financial Statements 2019
27
28
Audit & Risk Committee Report
Committee members during the year
Christine Higgins Non-executive director (Chair)
David Morgan Non-executive director
Anthony Nelson Advisor (resigned 29 November 2019)
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 by debating and challenging critical
estimates and judgements and oversee the external
audit.
l Advise the Board on the Group’s overall risk
appetite, tolerance and strategy.
l Monitor the work and effectiveness of the internal
audit function and oversee the internal audit.
l Assess and monitor the activities and effectiveness
of the Risk & Compliance function.
l Oversee whistleblowing arrangements. The Chair of
ARC is the Whistleblowing Champion and an
independent point of escalation in accordance with
the Group’s Whistleblowing Policy.
l Review procedures in place for detecting fraud and
financial crime and preventing bribery and money
laundering.
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 on the work of
the Audit & Risk Committee (‘ARC’/’the Committee’)
during the year.
One of the Committee’s most significant activities was
overseeing the implementation of the new accounting
standard IFRS 9, which introduces a forward-looking
expected credit loss model designed to recognise
potential losses earlier. Information on the impact of
IFRS 9 is set out in note 1.5.2.
In November 2019, Tony Nelson stepped down as an
advisor from the Committee. I would like to thank Tony
both personally and on behalf of the Committee for his
insights and dedication. Tony has been replaced by
Marian Martin, who has recently joined the Board. Marian
was formerly the Chief Risk Officer at Virgin Money.
Meetings
ARC met nine times during the year. The Chief Executive,
Finance Director, Head of Risk & Compliance, internal
audit and the external auditor attended these meetings
as standing invitees. 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 and challenged
management’s analysis and judgements and the
external auditor’s report, focusing particularly on a
number of significant areas of potential risk and key
audit matters as follows.
l Risk of fraud in the recognition of revenue through
the Effective Interest Rate (‘EIR’) methodology.
l Impairment of loans and advances to customers in
accordance with the IFRS 9 expected credit loss
model (fraud risk).
l Purchase price allocation and disclosure of
acquisition of Azule Limited (fraud risk).
Other areas of audit focus were as follows.
l Management override of controls – this is mandated
by International Standards on Auditing (UK) and is
considered as part of the fraud risks detailed above,
as well as through the execution of general
procedures.
l Impairment of Goodwill – annual review.
l Adoption of IFRS 15 ‘Revenues from Contracts with
Customers’ – impact and disclosures.
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 and
concluded it was appropriate.
ARC reviewed the content of the Annual Report and
Financial Statements for the year ended 30 September
2019 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.
Members of the Committee have recent and relevant
financial experience and extensive experience of
corporate financial matters in the banking and financial
services industry. The Board is satisfied that the
committee members have the skills and competence
required to fulfil the Committee’s duties and
responsibilities as set out within the Terms of Reference.
Grant Thornton, our internal auditors, completed six
internal audits during the year and we are pleased to
report that their overall assessment was that based on
their internal audit work over the year ‘the governance
and risk and control framework is operating
effectively to support PCF Group in adhering to its
agreed risk appetite’.
Annual Report & Financial Statements 2019
29
The annual internal audit plan was developed in
conjunction with the Second Line of Defence
Compliance Monitoring Plan. The areas for audit are
linked to strategic objectives, key risks and the core
areas of regulatory oversight.
The Committee has satisfied itself as to the
effectiveness of the internal audit function during the
year through the review of the audit strategy and
annual audit plan, discussion of internal audit reports,
private meetings with Grant Thornton.
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 - The audit reports completed by
Grant Thornton this year covered Senior Manager
and Certification Review (‘SMCR’), IT General
Controls, Disaster Recovery Planning and Crisis
Management, Third Party Management, Financial
Controls and Regulatory Reporting. 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 management have been fully engaged in the
audits and respond positively to recommendations.
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.
l External audit - The external auditors, EY, provided
the Committee with an update on the
implementation of their 2017/18 recommendations
and their risk assessment for 2018/19. The
Committee also met privately with EY during the
year, which provided an opportunity for relevant
issues to be discussed directly.
l Risk and Compliance - ARC considered reports from
the Head of Risk & Compliance at its meetings which
included performance against risk appetite,
complaints, financial crime and anti-money
laundering compliance, fraud, vulnerable customers,
outcomes testing, responsible lending and upcoming
regulatory changes. The Committee received
presentations from the Head of IT and the Head of
Treasury on the key risks in their areas.
The Committee also oversaw the development of further
strategic metrics during the year, including those in
relation to Azule. A number of policies were approved
and reports completed during the year in line with the
Compliance Monitoring Plan, with recommendations
made and timely plans to implement them.
ARC considered emerging risks and management’s plans
for avoiding and mitigating these risks. This year, this
included the impact of the FCA report on motor finance,
fraud, Brexit and headwinds in the wider economy.
A revised Financial Crime Framework, Risk Management
Framework and Risk Appetite Statement was reviewed
by the Committee during the year and recommended to
the Board for approval.
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 audit partner for this year is Gary Adams. Gary
replaced Michael-John Albert, who had 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 highlighted 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’) 2019 Audit
Quality Inspection 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.
The level of audit fees charged by the Group’s auditor is
set out in note 10. There was no non-audit work carried
out by EY during the year.
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.
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 this year the results
of an effectiveness survey which included feedback
from management. Following its review of the
2018/19 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.
30
In terms of re-tender, the Committee decided after
further consideration not to put external audit out for
tender for the year ending 30 September 2020, but
will keep the situation under review. 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.
Whistleblowing
ARC has reviewed the effectiveness of whistleblowing
arrangements in place within the Group and adherence
to the FCA Rules on Whistleblowing. During the year,
the Committee received a report on a review and test
of the whistleblowing framework, which included the
results of mandatory training provided to staff. There
have been no whistleblowing reports this year.
Committee effectiveness
ARC undertook an annual review of its own
effectiveness during 2019 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 7 February 2020.
Christine Higgins
Chair of the Audit & Risk Committee
7 February 2020
Annual Report & Financial Statements 2019
31
32
This year NomCo met four times. Meeting agendas have
included items on succession planning, diversity, staff
relations, board training and effectiveness.
This report was approved by the Nomination Committee
on 29 November 2019.
Tim Franklin
Chairman of the Nomination Committee
31 January 2020
Nomination Committee Report
Dear shareholder,
I am pleased to present my report to you as Chairman
of the Nomination Committee.
Introduction
The Nomination Committee (‘NomCo’) has delegated
responsibility from the Board for reviewing the
structure, size and composition of the Board.
Following advice received from an external review
during the year, the activities of the Nomination
Committee were separated from the Remuneration
Committee and, accordingly, each meeting is held
separately.
Membership of NomCo is limited to non-executive
directors and was chaired by David Titmuss or myself.
Scott Maybury is invited to NomCo on an ad hoc basis
as an attendee for agenda points linked to our
consideration of succession plans and other matters
where his input is valued.
Role and activities of the Nomination Committee
In March 2019, we assessed the composition of the
Board and its Committees and the balance between
independent non-executive directors and non-executive
directors in line with the proposals in the UK Corporate
Governance Code 2018 and the on-going requirements
of our regulators, the Prudential Regulation Authority and
the Financial Conduct Authority. The result was the decision
to recruit an additional independent non-executive director.
We determined the candidate should have risk
experience in a banking environment and, ideally, listed
company experience. We undertook a recruitment
process based on these identified skills whilst also
having regard for board diversity. The search culminated
in the appointment of Marian Martin to the Board as an
independent non-executive director on 25 July 2019.
Marian received thorough induction into her role by
meeting senior management and functional heads.
Marian was appointed a member of Audit & Risk
Committee on the retirement of Tony Nelson in
November 2019. I would like to take this opportunity to
thank Tony for his many years’ service to ARC and we
wish him well in retirement.
The Board underwent a questionnaire-based skills
assessment in July 2019. The overall outcome of this
evaluation provided confidence that the Board has a
broad range of key skills to perform its role in regard to
strategic direction, advice and judgement and to the
standard required of a dual-regulated bank. Whilst the
Board concluded that it is performing well and is effective,
a program of continuous board training will remain in
place to ensure the skill base is improved further.
Board training is held on a regular basis to provide
board members with continuing professional
development and updates on regulatory, financial and
governance developments. The Board calls upon
external organisations where specialist input is required.
In addition, the Board will co-opt its own Heads of
Department where the specialist skills are available
in-house. This has been especially useful in the areas of
compliance and human resources.
Annual Report & Financial Statements 2019
33
Remuneration Committee Report
Dear shareholder,
I am pleased to present my report to you as Chairman
of the Remuneration Committee.
Introduction
The Committee (‘RemCo’) has delegated responsibility
from the Board for reviewing 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 is chaired by me. 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. In addition, the committee
gathers information regarding the pay and rewards
offered to executives of similar companies.
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. The level of
expertise and experience of the executive team also
requires the committee to benchmark remuneration and
rewards to a peer group of similar companies.
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 regulatory 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. 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, support 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 The recognition that the Group operates in a
competitive environment for experienced and
valued executives.
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.
As a Level 3 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); and
– 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.
Share-based payments
During the year, the Company introduced a share-based,
long-term incentive plan for senior executives and
other key staff. The plan has performance criteria
attached in regard to Group performance and
shareholder return. Share options under the plan are
only settled on achievement of the criteria.
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 where annual or
lifetime pension allowances have been reached.
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 2019, 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.
34
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
2018
£’000
incentive
£’000
2019
£’000
Executive directors
S D Maybury*
R J Murray
D R Bull**
Non-executive directors
M F Brown
T A Franklin
C A Higgins
M Martin***
D J Morgan
D Titmuss
250
175
185
197
89
90
43
95
57
11
43
52
911
–
–
–
–
–
–
376
2
3
1
–
–
–
–
–
–
6
25
18
18
–
–
–
–
–
–
61
2
–
2
–
–
–
–
–
–
4
476
285
296
43
95
57
11
43
52
439
298
332
37
90
51
–
37
47
1,358
1,331
* Pension received in cash
** Part of the pension received in cash
*** Appointed 25 July 2019
Non-executive directors
Non-executive directors are engaged under letters of
appointment. Non-executive directors retire and seek
re-election at the next AGM on an annual basis, in
accordance with the Corporate Governance Code 2018.
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 and if the non-executive director has
undertaken any additional duties during the year.
The non-executive directors do not receive variable
remuneration.
Remuneration disclosures
Information on the Group’s Remuneration Code is set
out in the Pillar 3 disclosures and will be published on
our website www.pcf.bank
This report was approved by the Remuneration
Committee on 31 January 2020.
David Titmuss
Chairman of the Remuneration Committee
31 January 2020
Annual Report & Financial Statements 2019
35
36
Directors’ Report
for the year ended 30 September 2019
The directors present their report and audited financial
statements for the year ended 30 September 2019.
Results and dividends
The consolidated results for the year are set out in the
Consolidated Income Statement on page 48.
The directors recommend the payment of a final
dividend of 0.4p per share in respect of the year
ended 30 September 2019 (year ended 30 September
2018 – final dividend of 0.3p per share). Subject to
approval at the Annual General Meeting to be held on
6 March 2020, the final dividend will be paid on 9 April
2020 to shareholders on the register at 20 March 2020.
Principal activities
The Group’s principal activities are the purchase, hire,
financing and sale of vehicles, equipment and property,
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.
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
2019 are listed below.
At 30 September 2019
No. of ordinary shares of 5p each
At 30 September 2018
No. of ordinary shares of 5p each
Scott Maybury
Robert Murray
David Bull
Mark Brown
Tim Franklin
Christine Higgins
Marian Martin
David Morgan
David Titmuss
1,717,653
998,340
230,568
200,000
125,783
33,204
14,771
500,000
50,000
1,717,653
998,340
230,568
135,000
90,173
19,500
–
500,000
–
The following directors also held options in the Company’s share option plans. Further details are provided in the
Remuneration Committee Report on pages 34 to 35 and in note 9.
Scott Maybury
Robert Murray
David Bull
At 30 September 2019
No. of ordinary shares of 5p each
At 30 September 2018
No. of ordinary shares of 5p each
2,547,082
1,680,465
1,310,465
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 2019, 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
54.32%
8.40%
9.22%
3.31%
Annual Report & Financial Statements 2019
37
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 that they present
fairly the financial position, financial performance and
cash flows of the Group for that year. 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.
Financial risk management objectives and policies
Information about financial risk management systems
in relation to financial reporting and financial risk
management objectives and policies in relation to the
use of financial instruments can be found in the
following sections of the Annual Report which are
incorporated into this report.
Further information on internal control and financial
risk management systems in relation to financial
reporting of the Group, please refer to the Risk
Management report (pages 39 to 42).
Further information on financial risk management
objectives and policies in relation to the use of financial
instruments of the Group, please refer to the Risk
Management report (pages 39 to 42).
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 such as 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.
Corporate governance
The Corporate Governance section provides disclosure
of the Group’s corporate governance arrangements.
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 or she is obliged to take as a
director in order to make himself or herself 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
7 February 2020
38
Risk Management
for the year ended 30 September 2019
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 Risk Management Framework 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 ExCo 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. The Third Line provides independent
assurance to senior management and the Board on
the effectiveness of risk management policies,
processes and practices in all areas.
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 ARC.
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 External 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. A clearly
defined RAS allows the setting of detailed risk appetite
and reporting metrics for principal risks. The RAS sets
out the level of risk that the Group is willing to take in
pursuit of its business objectives. 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 RMF.
Throughout the year, all aspects of the risk appetite
statements and metrics are reported to ARC and the
Board by the Head of Risk & 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.
Annual Report & Financial Statements 2019
39
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’ governance 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 Lines and
Central Functions
First Line of Defence
(‘1LoD’)
Operational Control
by Business Function
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.
l Focus on achieving good
customer outcomes.
Risk Functions
Internal Audit Function
Third Line of Defence
(‘3LoD’)
Internal Audit
l Internal Audit provides
independent assurance on
the effectiveness of 1LoD,
2LoD and the risk
governance framework.
Second Line of Defence
(‘2LoD’)
Independent Risk
Management & Compliance
l Develop robust
frameworks and policies to
manage risk.
l Facilitate and oversee
implementation of
effective risk management
practices by business
owners.
l Co-ordinate the Group’s
approach to setting and
reporting on risk appetite.
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 to support each other in ensuring fair outcomes 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. They ensure that the Group’s activities are
conducted by staff with the necessary experience,
technical capabilities and access to resources. Staff
responsible for monitoring and enforcing compliance
with the Group’s risk policies have authority
independent from the units they oversee.
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 effectively manage all Group mandated 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.
A strong risk culture and good communication among
the ‘Three Lines of Defence’ are important
characteristics of good risk management governance.
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 in order to
maintain appropriate risk management skills and
processes to act within the Group’s risk appetite
parameters set and approved by the Board.
40
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 relation to the Group’s risk appetite,
monitors changes in and compliance with external
regulation, undertakes compliance monitoring and risk
reviews 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
The methods of assurance are
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 – ARC receives reporting from the
external auditor periodically throughout the year on
matters concerning their areas of risk focus, the
results of the audit, financial control observations as
well as any audit differences identified. ARC may also
commission third parties to undertake specific
reviews on matters, as considered necessary.
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
Oversight & Advisory
Internal Audit
Internal Control
Measures
Operational Risk
Management
Credit Risk
Management
Quality Assurance
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 2019
41
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. ALCO will review,
challenge and recommend to ExCo and the 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.
42
Annual Report & Financial Statements 2019
43
Independent Auditor’s Report
to the members of PCF Group plc
for the year ended 30 September 2019
Opinion
In our opinion
l PCF Group plc’s group 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 2019 and of the Group’s profit
for the year then ended;
l the group financial statements have been properly
prepared in accordance with 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 and as applied in
accordance with the provisions of the Companies
Act; and
l the financial statements have been prepared in
accordance with the requirements of the
Companies Act 2006.
We have audited the financial statements of
PCF Group plc which comprise
Group
l Consolidated income statement for the year then
ended;
l Consolidated balance sheet as at 30 September 2019;
l Consolidated statement of comprehensive income
for the year then ended;
l Consolidated statement of changes in equity for
the year then ended;
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 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 as
l Consolidated statement of cash flows for the year
per IFRS 9 expected credit loss model.
then ended; and
l Related notes 1 to 34 to the financial statements,
including a summary of significant accounting
policies.
Parent company
l Balance sheet as at 30 September 2019;
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 34 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 International
Financial Reporting Standards (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
l Purchase price allocation and disclosure of
acquisition of Azule Limited.
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
trading subsidiaries (two non-trading subsidiaries
were excluded).
Materiality
l Overall group materiality of £400,000, 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.
44
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 £34,499 million
(2018 – £25,494 million).
Refer to the Audit & Risk Committee Report on page 29,
accounting policies (note 1.6.1) and note 4 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. Due to the complexity of calculations,
the degree of judgement exercised by the Group in
respect of the expected lives of the product and the
different products for which fees are recognised, this is
considered a key audit matter.
Our response to the risk
We identified and tested the design and, where
relevant, the operating effectiveness of key controls
over the effective interest rate model. We determined
that we could place reliance on these controls for the
purposes of our audit. This is with the exception of
interest booked within Azule Limited, for which we
concluded that we could not rely on controls, and so
we took a fully substantive approach.
We tested the key assumptions used in the EIR
calculation including the expected lifecycle of the
products. We concluded that the model is appropriate.
We utilised an independent leasing valuation specialist
to recalculate the finance lease income using EIR
methodology for each product on sample basis. In
addition we recalculated finance lease income on a
sample of leases and 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 selected a risk-based sample of journal entries and
examined 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 of journal entries did not highlight any
issues and there was no evidence of management
override of controls from the sample of journals we
examined.
Impairment of loans and advances to customers
as per IFRS 9 expected credit loss model
Loans and advances to customers.
£338,503 million (2018 – £219,322 million).
Impairment on loans and advances.
£7,647 million (2018 – £4,370 million).
The application of IFRS 9 results in fundamental
changes to how impairment provisions are determined
as IFRS 9 requires a forward looking assessment of
expected loss, as opposed to the incurred loss model
used under IAS 39. There are also significant changes
in disclosures.
Impairment of loans and advances carries a high
degree of estimation uncertainty derived from key
model assumptions used to build the provision. Such
assumptions include probabilities of default, loss given
default, exposure at default, assessment of significant
increase in credit risk, incorporation of forward-looking
information and appropriateness of the staging.
Given the level of judgement and subjectivity involved,
there is a risk that the impairment provision could be
materially misstated.
Our response to the risk
We understood and evaluated the design effectiveness
of key controls. We concluded that there was a lack of
sufficient controls over the ECL provision including
review of input and output data, data validation, model
governance and model testing. Accordingly, we
adopted a fully substantive approach.
We read all accounting interpretations and assessed
for compliance with IFRS 9.
We performed testing over the completeness and
accuracy of the data inputs into the IFRS 9 model.
EY credit risk specialists supported our audit of the
IFRS 9 model design, operation integrity, assumptions
used, staging methodology and criteria.
We understood and challenged management’s key
model assumptions and any changes including macro
economic factors, the relationship between economic
parameters and credit risk, and the methodology for
determining significant increases in credit risk.
We tested the mathematical accuracy to confirm
internal consistency of the formulae used within the
models. We assessed whether material post model
adjustments made were appropriate.
We assessed the sensitivity analysis over inputs and
assumptions performed by management.
We agreed the quantitative disclosures to source data
and assessed the consistency of qualitative disclosures
with accounting policies, model documentation and
risk governance papers.
Key observations communicated to the
Audit & Risk Committee
We concluded to the Audit & Risk Committee that
following our challenge of the approach taken in a
number of areas, the impairment models and
assumptions employed by the Group were reasonable as
at 30 September 2019, and for opening balances as at
1 October 2018. We noted that the provision levels held in
relation to credit impairment were reasonably estimated
and in line with the requirements of IFRS 9.
We highlighted to the Audit & Risk Committee the
control observations set out in the ‘Our response to
the risk’ column.
Purchase price allocation and disclosure of
acquisition of Azule Limited
Goodwill and other intangible assets relating to the
acquisition of Azule Limited £2,500,000 (2018 – nil).
Refer to the Audit & Risk Committee Report on page 29,
accounting policies (note 1.5.3) and note 16 of the
financial statements.
Refer to the Audit & Risk Committee Report on page 29,
accounting policies (note 1.6.21), note 2 and 19 of the
financial statements.
Annual Report & Financial Statements 2019
45
On 5 November 2018, the Group acquired 100%
shareholding of Azule Limited. Accounting standards
require the directors to determine the fair value of
assets and liabilities acquired including identification of
intangible assets on acquisition date and fair value of
consideration. Additionally, there is a requirement to
perform a purchase price allocation of goodwill, and
whether any portion should be reclassified to purchased
intangible assets, such as brands or customer lists, if any.
Due to complexity of calculations, degree of
judgement in determining fair values and the inherent
ability of management to override internal controls in
relation to fair value estimation, this is considered a
key audit matter.
Our response to the risk
We understood and evaluated the design effectiveness
of key controls. We concluded that we could not rely
on controls over the acquisition process including
valuation methodology, determination of discount rate
and identification of intangible assets. Accordingly, we
adopted a fully substantive approach.
We examined the agreements and legal documentation
entered into for the acquisition of Azule Limited to
understand the nature of the transaction.
We tested the key assumptions used, including
valuation methodology adopted, reasonableness of
future cash flows and discount rate used for
determination of fair value of assets and liabilities of
Azule Limited on acquisition date.
The directors did not identify any intangible assets
other than goodwill. In the absence of a detailed,
documented analysis to support this, we engaged EY
valuation specialists to challenge this assumption.
We tested the assumptions and methodologies used
for determination of fair value of consideration.
We validated that the acquisition of the subsidiary was
appropriately accounted for in the financial statements,
and that appropriate disclosures have been made.
Key observations communicated to the
Audit & Risk Committee
We concluded to the Audit & Risk Committee that
following our challenge of the approach taken in
determining the fair values and discount rate used
(following which updates were made by management),
that the methodologies adopted by the Group were
appropriate.
We reported that we concurred with the directors’
assessment that there were no material, separately
identifiable intangible assets, other than goodwill.
Our testing concluded that acquisition transaction was
correctly accounted for and appropriately disclosed in
the Group financial statements.
We addressed the risk of management override of
controls leading to material misstatement, through the
execution of our audit procedures in response to the
three risks of fraud outlined.
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. We take into account size, risk profile, the
organisation of the Group and effectiveness of Group
wide controls, changes in the business environment
and other factors such as recent internal audit results
when assessing the level of work to be performed at
each entity. All the Group’s subsidiary entities, except
for two non-trading entities, were subject to a full scope
audit; all work was performed by the UK audit team.
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
£400,000 (2018 – £259,000), which is 5% (2018 – 5%)
of statutory profit before tax. We believe that profit
before tax is the most appropriate basis for
determining our materiality as it is one the most
important considerations for shareholders of the Group
in assessing the financial performance of the Group,
and is consistent with the wider industry and is the
standard for listed and regulated entities. Materiality
has increased since the prior year due to higher levels
of profitability of the Group.
We determined materiality for the Parent Company to be
£350,000 (2018 – £240,000), which is 1% (2018 – 1%)
of net equity. Materiality has increased since the prior
year, principally due to the issuance of shares during
the period.
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
50% (2018 – 75%) of our planning materiality, namely
£200,000 (2018 – £194,000). We have set performance
materiality at this percentage due to the extent of
audit differences identified during the prior year audit.
Audit work at component 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 component 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 range of
performance materiality allocated to components was
£40,000 to £150,000 (2018 – £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 £20,000 (2018 – £13,000), which is set at
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.
46
In preparing the financial statements, the directors are
responsible for assessing the Group and parent
company’s ability to continue as a going concern,
disclosing, as applicable, matters related to going
concern and using the going concern basis of
accounting unless the directors either intend to
liquidate the Group or the parent company or to cease
operations, or have no realistic alternative but to do so.
Auditor’s responsibilities 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.
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.
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.
Gary Adams (Senior Statutory Auditor)
for and on behalf of Ernst & Young LLP
Statutory Auditor
London
12 February 2020
Notes
1
The maintenance and integrity of the PCF Group plc
website 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.
Other information
The other information comprises the information
included in the Annual Report set out on pages 2 to 42,
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, 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 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.
Responsibilities of directors
As explained more fully in the directors’ responsibilities
statement set out on page 38, 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.
Annual Report & Financial Statements 2019
47
Consolidated Income Statement
for the year ended 30 September 2019
Interest revenue calculated using the effective interest method
Interest expense calculated using the effective interest method
Net interest income
Fees and commission income
Fees and commission expense
Net fees and commission income/(expense)
Net loss on financial instruments mandatorily at
fair value through profit or loss
Net operating income
Personnel expenses
Depreciation of office equipment, fixtures,
fittings and motor vehicles
Amortisation of intangible assets
Other operating expenses
Impairment loss on financial assets
Total operating expenses
Profit before tax
Income tax charge
Profit after tax
Earnings per 5p ordinary share – basic and diluted
Year ended
30 September
2019
£’000
Year ended
30 September
2018
£’000
Note
4
5
6
8
18
19
10
7
11
12
34,499
(12,884)
21,615
1,815
(1,154)
661
(63)
22,213
7,640
137
416
3,827
2,175
14,195
8,018
(1,624)
6,394
2.7p
25,494
(10,492)
15,002
492
(844)
(352)
–
14,650
5,186
84
385
2,907
915
9,477
5,173
(981)
4,192
2.0p
Consolidated Statement of Comprehensive Income
for the year ended 30 September 2019
Profit after taxation
Other comprehensive income that will be reclassified
to the income statement
Fair value (loss)/gain on AFS financial instruments (note 1.5.3)
Fair value loss on FVOCI financial instruments (note 1.5.3)
Deferred tax income/(expense)
Total items that will be reclassified to the income statement
Year ended
30 September
2019
£’000
Year ended
30 September
2018
£’000
6,394
4,192
–
(10)
2
(8)
18
–
(3)
15
Total comprehensive income, net of tax
6,386
4,207
The accounting policies and notes on pages 52 to 95 form part of, and should be read in conjunction with, these
financial statements. All activities in the current and prior year relate to continuing operations.
48
Consolidated Balance Sheet
at 30 September 2019
Asset
Cash and balances at central banks
Debt instruments at FVOCI
Available-for-sale financial instruments
Loans and advances to customers
Due from Group companies
Investment in subsidiary undertakings
Office equipment, fixtures,
fittings and motor vehicles
Other assets
Deferred tax assets
Goodwill and other intangible assets
Total assets
Liabilities
Due to banks
Due to customers
Due to Group companies
Derivative financial instruments
Current tax liabilities
Other liabilities
Total liabilities
Equity
Issued capital
Share premium
Other reserves
Own shares
Retained earnings
Total equity
Group
Company
30 September
2019
£’000
30 September
2018
£’000
30 September
2019
£’000
30 September
2018
£’000
Note
13
14
15
16
17
18
21
20
19
22
23
25
26
27
27
27
27
7,371
19,638
–
338,503
–
–
579
4,932
1,105
5,941
21,338
–
39,902
219,322
–
–
224
1,542
1,185
2,957
123
–
–
–
6,927
32,000
–
896
135
–
11
–
–
–
2,912
22,000
–
817
196
–
378,069
286,470
40,081
25,936
44,412
267,070
–
63
1,521
6,248
319,314
12,510
17,619
7
(355)
28,974
58,755
48,881
191,139
–
–
414
3,485
243,919
10,611
8,527
15
(355)
23,753
42,551
–
–
3,239
–
–
1,692
4,931
12,510
17,619
–
(355)
5,376
–
–
–
–
–
1,551
1,551
10,611
8,527
–
(355)
5,602
35,150
24,385
Total liabilities and equity
378,069
286,470
40,081
25,936
The Company reported a profit for the financial year ended 30 September 2019 of £445,000 (year ended
30 September 2018 – profit of £nil).
The financial statements were approved and authorised for issue by the Board on 7 February 2020.
On behalf of the Board
S D Maybury
Director
D R Bull
Director
The accounting policies and notes on pages 52 to 95 form part of, and should be read in conjunction with, these
financial statements. All activities in the current and prior year relate to continuing operations.
Annual Report & Financial Statements 2019
49
Consolidated Statement of Changes in Equity
for the year ended 30 September 2019
Attributable to equity holders of the Group
Non-distributable
Distributable
Group
Balance at 1 October 2018
Impact on transition to IFRS 9
Restated balance at 1 October
Profit for the year
Issuance of new shares
Fair value loss on FVOCI
financial instruments
Share-based payments
Cash dividends
Issued
capital
£’000
10,611
–
10,611
–
1,899
–
–
–
Share
Own
premium shares
£’000
£’000
8,527
–
8,527
–
9,092
–
–
–
(355)
–
(355)
–
–
–
–
–
Balance at 30 September 2019
12,510
17,619
(355)
Balance at 1 October 2017
Profit for the year
Issuance of new shares
Fair value loss on AFS
financial instruments
Share-based payments
Cash dividends
10,611
–
–
8,524
–
3
(355)
–
–
–
–
–
–
–
–
–
–
–
Balance at 30 September 2018
10,611
8,527
(355)
Other
reserves
£’000
Retained
earnings
£’000
Total
equity
£’000
15
–
15
–
–
(8)
–
–
7
–
–
–
15
–
–
15
23,753
(502)
42,551
(502)
23,251 42,049
6,394 6,394
10,991
–
–
79
(750)
(8)
79
(750)
28,974 58,755
19,880 38,660
4,192
3
4,192
–
–
84
(403)
15
84
(403)
23,753
42,551
Attributable to equity holders of the Company
Non-distributable
Distributable
Company
Balance at 1 October 2018
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
–
1,899
–
–
8,527
–
9,092
–
–
(355)
–
–
–
–
5,602 24,385
445
10,991
79
(750)
445
–
79
(750)
Balance at 30 September 2019
12,5109
17,619
(355)
5,376
35,150
Balance at 1 October 2017
Profit for the year
Issuance of new shares
Share-based payments
Cash dividends
Balance at 30 September 2018
10,611
–
–
–
–
10,611
8,524
–
3
–
–
(355)
–
–
–
–
5,921
–
–
84
(403)
24,701
–
3
84
(403)
8,527
(355)
5,602 24,385
The accounting policies and notes on pages 52 to 95 form part of, and should be read in conjunction with, these
financial statements. All activities in the current and prior year relate to continuing operations.
50
Consolidated Statement of Cash Flows
for the year ended 30 September 2019
Group
Company
30 September
2019
£’000
30 September
2018
£’000
30 September
2019
£’000
30 September
2018
£’000
Note
Operating activities
Profit before tax
Other non-cash items included in
profit/(loss) before tax
Depreciation of office equipment,
fixtures, fittings and motor vehicles
Amortisation of other intangible assets
Net change in AFS financial instruments
Net change in FVOCI financial instruments
Share-based payments
Impairment losses on financial assets
Income tax (paid)/due
Adjustment for change in
operating assets
Net change in loans and advances
Net change in Group company lending
Net change in other assets
18
19
7
Change in operating liabilities
Net change in derivative financial instruments
Net change in amounts due to customers
Net change in Group company borrowing
Net change in other liabilities
Net cash flows from/(used in)
operating activities
Investing activities
Cash paid for Investment in subsidiary
Net sale of debt instruments at FVOCI
Net purchase of AFS financial instruments
Purchase of office equipment, fixtures,
fittings and motor vehicles
Purchase of intangible assets
18
19
Net cash flows from/(used in)
investing activities
Financing activities
Proceeds from share issue during the year
Net proceeds from borrowings
Dividends paid to equity holders
24
Net cash flows (used in)/from
financing activities
Net increase/(decrease) in
cash and cash equivalents
Cash and cash equivalents brought forward
Cash and cash equivalents carried forward
8,018
5,173
558
33
137
416
–
(8)
79
2,175
(633)
(106,348)
–
(2,231)
63
75,931
–
(1,492)
84
385
15
–
34
915
(668)
(74,519)
–
(502)
–
138,019
–
31
–
–
–
–
79
–
(113)
–
(4,015)
(18)
–
–
3,239
141
–
–
–
–
34
–
–
4,853
–
57
–
–
–
416
(23,893)
68,967
(129)
5,393
(2,283)
20,264
–
(384)
(900)
–
–
(35,390)
(36)
(637)
(10,000)
–
–
(5,000)
–
–
–
–
–
–
16,697
(36,063)
(10,000)
(5,000)
10,991
(17,012)
(750)
3
(28,184)
(403)
10,991
–
(750)
3
–
(403)
(6,771)
(28,584)
10,241
(400)
(13,967)
21,338
7,371
4,320
17,018
21,338
112
11
123
(7)
18
11
The accounting policies and notes on pages 52 to 95 form part of, and should be read in conjunction with, these
financial statements. All activities in the current and prior year relate to continuing operations.
Annual Report & Financial Statements 2019
51
Notes to the Financial Statements
for the year ended 30 September 2019
1
1.1
Basis of preparation and significant accounting policies
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 wholly owned subsidiary PCF Bank Limited (the ‘Bank’) is a specialist bank, offering retail savings
products for individuals and lending products for consumers and businesses to finance motor vehicles,
plant, bridging finance, equipment and property.
The Group's consolidated financial statements for the year ended 30 September 2019 were authorised
for issue in accordance with a resolution of the Board on 7 February 2020.
1.2 Basis of preparation
The consolidated financial statements of the Group have been prepared on a historical cost basis,
except for debt financial instruments at fair value through other comprehensive income (‘FVOCI’) and
derivatives at fair value through profit or loss (‘FVTPL’). The financial statements are presented in
Pound Sterling (£) and all values are rounded to the nearest thousand (£'000), except where otherwise
indicated.
1.3
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.
1.4 Basis of consolidation
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, £445,000 (30 September 2018 – £nil) was attributable to the
Company.
Summary of significant accounting policies
1.5
1.5.1 New standards, interpretations and amendments adopted by the Group
From 1 October 2018, a number of new and revised standards issued by the International Accounting
Standards Board, and endorsed for use in the EU, came into effect for the Group. New and revised
standards adopted in the year that are deemed significant to the Group are outlined below. A number
of other new standards are also effective from 1 October 2018, but they do not have a material effect
on the Group’s financial statements.
1.5.2 Changes in accounting policies and disclosures
The accounting policies applied by the Group differ from those in the 2018 Annual Report, partly due
to new standards and interpretations becoming effective. The following amendments to standards have
been disclosed, as they were applied for the first time in the 2019 financial year, resulting in
consequential changes to the accounting policies and other note disclosures, where applicable.
l IFRS 9 'Financial Instruments'
l IFRS 15 ‘Revenue from Contracts with Customers’
IFRS 9 ‘Financial instruments’
IFRS 9 ‘Financial Instruments’ replaces IAS 39 ‘Financial Instruments: Recognition and Measurement‘
with effect for the Group from 1 October 2018, in line with the Standard’s requirements of applying the
Standard for financial periods beginning on or after 1 January 2018, bringing together all three aspects
of the accounting for financial instruments; classification and measurement, impairment, and hedge
accounting.
Accounting policies for comparative information measured under IAS 39 are disclosed in the 2018
Annual Report.
52
Transition
On implementation, the Group has not provided a full restatement of comparatives but has instead
reflected changes through the opening balance of retained earnings, as permitted by IFRS 9, and
disclosed in the financial statements under consolidated statement of changes in equity.
Classification and measurement
IFRS 9 makes changes to the measurement categories for financial assets and liabilities, with the former
categories under IAS 39 such as ‘available-for-sale’ (‘AFS’) and ‘held to maturity’ being replaced.
The measurement categories under IFRS 9 are
l assets, primarily the Group’s conditional sale, hire purchase and personal loan receivables, which are
deemed to consist solely of payments of principal and interest (‘SPPI’) and are intended to be held
and collected and not sold, are held at amortised cost (note 1.5.3);
l instruments meeting the SPPI criteria, but which may be sold, which are held at fair value through
other comprehensive income (‘FVOCI’) (note 1.5.3); and
l assets not meeting the SPPI criteria and not classified under FVOCI, such as derivatives, which are
held at fair value through profit or loss (‘FVTPL’).
The accounting for the Group’s financial liabilities remains the same as it was under IAS 39.
The Group’s approach to the adoption of IFRS 9 and a reconciliation of the changes from IAS 39 are set
out in note 1.5.3, which applied from 1 October 2018. This resulted in an increase in impairment provisions
previously held under IAS 39, which was adjusted through retained earnings. IFRS 9 was applied
retrospectively, but the Group did not restate comparatives as permitted by IFRS 9.
The following table shows the original measurement categories in accordance with IAS 39 and the
new measurement categories under IFRS 9 for the Group’s financial assets and financial liabilities at
1 October 2018.
Original
classification
under IAS 39
New
classification
under IFRS 9
Original carrying New carrying
amount under amount under
IFRS 9 at
1 October
2018
£’000
IAS 39 at
30 September
2018
£’000
Financial assets
Cash and balances at central banks
Loans and advances to customers
Quoted debt instruments
Loans and receivables Amortised cost
Loans and receivables Amortised cost
Available-for-sale
FVOCI
21,338
219,322
39,902
21,338
218,718
39,902
Total financial assets
Due to banks
Due to customers
Total financial liabilities
280,562
279,958
Amortised cost
Amortised cost
Amortised cost
Amortised cost
48,881
191,139
48,881
191,139
240,020
240,020
The movement in ‘Loans and advances to customers’ is explained below and is due to an increase in the
impairment provision from IAS 39 to IFRS 9.
1 October 2018
Under
IAS 39
Loan provisions £’000
Consumer Finance 2,286
Business Finance 2,084
4,370
Increase
under
IFRS 9
£’000
77
498
575
PMA
£’000
Total
provision
£’000
Day one
adjustment
£’000
14
15
29
2,377
2,597
4,974
91
513
604
Post Model Adjustment (‘PMA’) is a provision overlay.
Derivative financial instruments
The Group uses derivative financial instruments in the form of interest rate swaps to manage its
exposure to the interest rate risk. In accordance with its treasury policy, the Bank does not hold or issue
derivatives for proprietary trading.
Derivatives are entered into only for the purposes of matching or eliminating risk from potential
movements in interest rates in the Bank’s assets and liabilities. The Bank uses the International Swaps
and Derivatives Association Master Agreement to document these transactions in conjunction with a
Credit Support Annex.
Annual Report & Financial Statements 2019
53
The derivatives are not designated as part of an accounting hedge relationship, and gains and losses
arising from changes in fair value are recognised in net gains/(losses) on financial instruments at fair
value through profit or loss in the Income Statement. To calculate fair values, the Bank typically applies
discounted cash-flow models using yield curves that are based on observable market data. For
collateralised and non-collateralised positions, the Bank uses discount curves based on overnight
indexed swap rates.
Derivatives are classified as financial assets where their fair value is positive and financial liabilities where
their fair value is negative. Where there is the legal right and intention to settle on a net basis, then the
derivative is classified as a net asset or net liability, as appropriate.
Credit risk derived from derivative transactions is mitigated by entering into master netting
agreements and holding collateral. Such collateral is subject to the standard industry Credit Support
Annex and is paid or received on a regular basis. At 30 September 2019, net cash collateral posted is
nil (2018 – nil).
IFRS 15 ‘Revenue from contracts with customers’
IFRS 15 ‘Revenue from contracts with customers’ supersedes IAS 11 ‘Construction Contracts’, IAS 18
‘Revenue and related Interpretations’ and applies to all revenue arising from contracts with customers,
unless those contracts are in the scope of other standards. The new standard establishes a five-step
model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is
recognised at an amount that reflects the consideration to which an entity expects to be entitled in
exchange for transferring goods or services to a customer.
The standard requires entities to exercise judgement, taking into consideration all the relevant facts and
circumstances when applying each step of the model to contracts with their customers. The standard
also specifies the accounting for the incremental costs of obtaining a contract and the costs directly
related to fulfilling a contract. IFRS 15 is effective for the Group from 1 October 2018.
The Group has assessed the impact of the above and concluded that there is no material impact due to
the nature of its business.
1.5.3 Financial Instruments – initial recognition and subsequent measurement
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 on which the Group becomes a
party to the contractual provisions of the instrument). This includes regular way trades, (i.e. 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’ accounts. The Group recognises balances due to customers
when funds are transferred to the Group.
Initial measurement of financial instruments
The classification of financial instruments at initial recognition depends on their contractual terms and
the business model for managing the instruments, as described in note 1.5.2. Financial instruments are
initially measured at their fair value and, except in the case of financial assets and financial liabilities
subsequently measured at FVTPL, transaction costs are added to, or subtracted from, this amount.
Trade receivables are measured at the transaction price.
Measurement categories of financial assets and liabilities
From 1 October 2018, the Group classifies all its financial assets based on the business model for
managing the assets and the asset’s contractual terms, measured at either
l amortised cost, as explained in note 1.5.2; or
l FVOCI, as explained in note 1.5.2.
Financial liabilities are measured at amortised cost, and derivatives at FVTPL (note 1.5.2).
Financial assets and financial liabilities
Balances at central banks, loans and advances to customers, other assets at amortised cost
From 1 October 2018, the Group measures balances at central banks, loans and advances to customers
and other assets at amortised cost if both of the following conditions are met.
l The financial asset is held within a business model with the objective to hold financial assets in order
to collect contractual cash flows.
l The contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest (‘SPPI’) on the principal amount outstanding.
The details of these conditions are outlined as follows.
54
Business model assessment
The Group determines its business model at the level that best reflects how it manages groups of
financial assets to achieve its business objective.
l The risks that affect the performance of the business model (and the financial assets held within that
business model) and, in particular, the way those risks are managed.
l How managers of the business are compensated (for example, whether the compensation is based
on the fair value of the assets managed or on the contractual cash flows collected).
The expected frequency, value and timing of sales are also important aspects of the Group’s assessment.
The business model assessment is based on reasonably expected scenarios without taking 'worst case'
or 'stress case’ scenarios into account. If cash flows after initial recognition are realised in a way that is
different from the Group's original expectations, the Group does not change the classification of the
remaining financial assets held in that business model but incorporates such information when assessing
newly originated or newly purchased financial assets going forward.
The SPPI test
As a second step of its classification process, the Group assesses the contractual terms of the financial
asset to identify whether they meet the solely payments of principal and interest (SPPI) test. The
Group’s loans assets of Hire Purchase and Conditional Sales Agreements are repaid by instalments of
principal and interest with a fee upfront. These meet the SPPI test.
‘Principal’, for the purpose of this test, is defined as the fair value of the financial asset at initial
recognition and may change over the life of the financial asset (e.g. if there are repayments of principal
or amortisation of the premium/discount).
The most significant elements of interest within a lending arrangement are typically the consideration
for the time value of money and credit risk. To make the SPPI assessment, the Group applies judgement
and considers relevant factors such as the currency in which the financial asset is denominated, and the
period for which the interest rate is set.
In contrast, contractual terms that introduce a more than de minimis exposure to risks or volatility in the
contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual
cash flows that are solely payments of principal and interest on the amount outstanding. In such cases,
the financial asset is required to be measured at FVTPL.
Debt instruments at FVOCI
The Group applies the new category under IFRS 9 of debt instruments measured at FVOCI when both
of the following conditions are met.
l The instrument is held within a business model, the objective of which is achieved by both collecting
contractual cash flows and selling financial assets.
l The contractual terms of the financial asset meet the SPPI test.
These instruments largely comprise assets that had previously been classified as financial investments
available-for-sale under IAS 39.
FVOCI debt instruments are subsequently measured at fair value with gains and losses arising due to
changes in fair value recognised in OCI. Interest income and foreign exchange gains and losses are
recognised in profit or loss. The calculation of Expected Credit Losses (‘ECL’) for debt instruments at
FVOCI is explained in note 1.5.3. On derecognition, cumulative gains or losses previously recognised in
OCI are reclassified from OCI to profit or loss.
Due to banks and due to customers
After initial measurement, due to banks and due to customers are subsequently measured at amortised
cost. Amortised cost is calculated by taking into account any discount or premium on issued funds, and
costs that are an integral part of the EIR.
Reclassification of financial assets and liabilities
From 1 October 2018, the Group does not reclassify its financial assets subsequent to their initial
recognition, apart from the exceptional circumstances in which the Group acquires, disposes of, or
terminates a business line. Financial liabilities are never reclassified. The Group did not reclassify any of
its financial assets or liabilities for the year ended 30 September 2019.
Annual Report & Financial Statements 2019
55
Derecognition of financial assets and liabilities
Financial assets
A financial asset (or where applicable, a part of a financial asset or part of a group of similar financial
assets) is derecognised where
l the rights to receive cash flows from the asset have expired; or
l the Group retains the right to receive cash flows from the asset, but has assumed an obligation to
pay them in full without material delay to a third party under a ‘pass through’ arrangement; or
l the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred
substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained
substantially all the risks and rewards of the asset but has transferred control of the asset.
When the Group has transferred its rights to receive cash flows from an asset and has neither
transferred nor retained substantially all the risks and rewards of the asset, nor transferred control of
the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at
the lower of the original carrying amount of the asset and the maximum amount of consideration that
the Group could be required to repay.
Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or
expired. 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 derecognition of the original liability and the recognition of a new liability.
Impairment of financial assets
From 1 October 2018, the Group is required to recognise Expected Credit Losses (‘ECL’) based on
unbiased forward-looking information for all financial assets at amortised cost, lease receivables, debt
financial assets at fair value through other comprehensive income, loan commitments and financial
guarantee contracts.
The Group uses the three-stage model for determination of expected credit losses. (i) For loans where
the credit risk has not increased significantly since initial recognition, a provision is recognised for the
expected 12 month credit losses expected to be incurred. (ii) For loans where there is deemed to be a
significant increase in credit risk, a provision for the expected lifetime credit loss is recognised across
the segment, as defined below. (iii) For loans that are in default, the Bank undertakes a specific
impairment assessment. For loans classified as Stage 1, 2 or 3, an assessment is performed on a portfolio
wide basis for impairment, with the key judgements and estimates being
l the determination of significant increase in credit risk;
l the probability of an account falling into arrears and subsequently defaulting;
l loss given default; and
l forward-looking information.
In addition, for loans that are greater than £100,000 in Stage 3, a further review of the recoverability of
the exposure is performed. This includes assessing the value of any collateral held and what form of
recovery action the Bank has assessed the exposure to be in. Recoverable actions could include
achieving a repayment plan, or charging order.
Significant increase in credit risk
The Group applies a series of quantitative, qualitative and backstop criteria to determine if an account
has demonstrated a significant increase in credit risk and should therefore be moved to Stage 2.
l Quantitative criteria – This considers the increase in an exposure’s remaining lifetime Probability of
Default (‘PD’) at the reporting date compared to the expected residual lifetime PD when the
exposure was originated. The Group segments its credit portfolios into PD bands and has determined
a relevant threshold for each PD band, where a movement in excess of threshold is considered to be
significant. These thresholds have been determined separately for each portfolio, based on historical
evidence of delinquency.
l Qualitative criteria – This includes the observation of specific events such as short-term forbearance,
payment cancellation, historical arrears or extension to customer terms.
l Backstop criteria – IFRS 9 includes a rebuttable presumption that 30 days past due is an indicator of
a significant increase in credit risk. The Group considers 30 days past due to be an appropriate
backstop measure and does not rebut this presumption.
56
Definition of default, credit-impaired assets, cures, write-offs and interest income recognition
The definition of default for the purpose of determining ECLs has been aligned to the Capital
Requirements Regulation (‘CRR’) article 178 definition of default to maintain a consistent approach with
IFRS 9. When exposures are identified as credit impaired, such interest income is calculated on the
carrying value, net of the impaired allowance.
The Group applies a series of quantitative and qualitative criteria to determine if an account meets the
definition of default and should therefore be moved to Stage 3. These criteria include
l when the borrower is more than 90 days past due on any material credit obligation to the Group;
l significant financial difficulty of the issuer or the borrower;
l a breach of contract, such as default or past due event; and
l it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation.
When a loan falls into default and a formal process of recovering the loan has taken place, the loan will
initially be fully impaired. The recovery will include a number of actions such as selling the underlying
assets and agreeing an arrangement to repay. The Group will assess the likeliness of full recovery and
assign each loan into categories for which each will have a different recovery percentage assigned.
The Bank writes off an impaired financial asset, and the related impairment allowance, either partially or
in full, when there is no realistic prospect of recovery. Where financial assets are secured, write-off is
generally after receipt of any proceeds from the realisation of security. In circumstances where the net
realisable value of any collateral has been determined and there is no reasonable expectation of further
recovery, write-off may be earlier. All write-offs are written down to the average value of a future debt
sale. In subsequent periods, any recoveries of amounts previously written off are credited to the
provision for credit losses in the profit or loss statement.
The impairment policy does not allow an exposure to be cured (i.e. once a loan goes into default, it stays
in default).
Forward-looking information
Expected credit losses (‘ECL’)
ECLs are an unbiased, probability-weighted estimate of credit losses determined by evaluating a range
of possible outcomes. They are measured in a manner that reflects the time value of money and use
reasonable and supportable information that is available without undue cost or effort at the reporting
date about past events, current conditions and forecasts of future economic conditions. Measurement
of ECLs depends on the ‘stage’ of the financial asset, based on changes in credit risk occurring since
initial recognition, as described below.
l Stage 1 – When a financial asset is first recognised, it is assigned to Stage 1. If there is no significant
increase in credit risk from initial recognition, the financial asset remains in Stage 1. Stage 1 also
includes financial assets where the credit risk has improved, and the financial asset has been
reclassified back from Stage 2. For financial assets in Stage 1, a 12 month ECL is recognised.
l Stage 2 – When a financial asset shows a significant increase in credit risk from initial recognition, it
is moved to Stage 2. For financial assets in Stage 2, a lifetime ECL is recognised.
l Stage 3 – When there is objective evidence of impairment and the financial asset is considered to
be in default, or otherwise credit-impaired, it is moved to Stage 3. For financial assets in Stage 3,
a lifetime ECL is recognised.
l Lifetime ECL is defined as ECLs that result from all possible default events over the expected
behavioural life of a financial instrument.
l 12 month ECL is defined as the portion of lifetime ECL that will result if a default occurs in the
12 months after the reporting date, weighted by the probability of that default occurring.
l PCF Group has adopted the general approach for ECLs.
The Group considers three forward-looking economic indicators for each business line as follows.
Unemployment rate
ONS Used Car Price Index
CPI
GDP
Consumer
finance
Business
finance
3
3
3
3
3
3
Azule
finance
3
3
3
The key source of these data sets is the Office of National Statistics (‘ONS’).
Annual Report & Financial Statements 2019
57
The Group considers these indicators in forming the baseline, optimistic and pessimistic scenarios. The
scenarios for UK economic growth, inflation, residential property prices and unemployment have been
benchmarked against the UK banking sector as a whole. For the used car index, data has been obtained
from the ONS and extrapolated for each scenario consistently with the other data. Bridging finance will
use these indicators as the book grows. Currently an estimate is made as part of a post model
adjustment whilst historical data is collected.
The method of weighting the economic scenarios was based on the Board’s view of key risks to the
Group’s loan book. The Board’s key risks were the Brexit outcome and the credit environment. In both
cases it was thought there was more uncertainty on the Brexit outcome and a deterioration of the
credit environment, mainly seen in the increase of business failures, thus giving rise to increase in
weighting. Whilst the overall pessimistic weighting has increased, the Board also concluded that there
continues to be favourable outcomes such as an orderly Brexit, to the extent that the optimistic
weighting is unchanged from the first implementation of IFRS 9. In conclusion, the Board approved in
September 2019 a reduction, from the initial weightings at 1 October 2018, in the base case weighting,
from 80% to 65%, an increase in the optimistic weighting from 5% to 10% and an increase in the
pessimistic weighting, from 10% to 25%. These scenarios are uniformly applied across all business lines.
The changes for loans greater than £100k and in Stage 3 has increased the provision by £73,000.
Model calculation
The definitions of the ECL calculations are outlined below and the key elements are, as follows.
l The Probability of Default (‘PD’) is an estimate of the likelihood of default over a given time horizon.
A default may only happen at a certain time over the assessed period, if the facility has not been
previously derecognised and is still in the portfolio.
l The Exposure at Default (‘EAD’) is an estimate of the exposure at a future default date, taking into
account expected changes in the exposure after the reporting date, including repayments in full,
continued repayments of principal and interest, whether scheduled by contract or otherwise,
expected drawdowns on committed facilities and accrued interest from missed payments.
l The Loss Given Default (‘LGD’) is an estimate of the loss arising in the case where a default occurs at
a given time. It is based on the difference between the contractual cash flows due and those that the
lender would expect to receive, including from the realisation of any collateral. It is usually expressed
as a percentage of the EAD.
ECLs are calculated by multiplying three main components, being the PD, LGD and the EAD, discounted
at the original Effective Interest Rate (‘EIR’).
Management adjustments are made to modelled output to account for situations where known or
expected risk factors and information have not been considered in the modelling process.
Post model adjustment (‘PMA’)
The Group assesses the modelled output and where known or expected risk factors and information
have not been considered in the modelling process the bank makes a PMA.
These are summarised as follows.
l Management apply a 0.05% provision of the capital balance for the Bridging portfolio. This is due to
the lack of historical PD and LGD information in its first year of trading.
l Management has adjusted a customer’s provision in Stage 3 due to specific knowledge on the
valuation of assets and a charging order in place.
l Management has applied an estimated recovery on debts that will be passed to a debt sales agent
based on historical debt sales income.
Total of the PMAs is a net reduction to the impairment provision of £0.3m.
Expected life
Lifetime ECLs must be measured over the expected life. This is restricted to the maximum contractual
life and considers expected prepayment and extension.
Discounting
ECLs are discounted at the EIR at initial recognition or an approximation thereof and consistent with
income recognition. Lease receivables are discounted at the rate implicit in the lease.
When estimating the ECLs, the model considers three scenarios, a base case, an upside and a downside.
Each of these is associated with different PDs, EADs and LGDs. When relevant, the assessment of
multiple scenarios also incorporates how defaulted loans are expected to be recovered.
The model assesses both Stage 1 on a 12 month ECL and Stage 2 on a lifetime ECL basis.
For Stage 3 where loans are in default, but are not in a formal recovery process, the model above is
followed and assesses ECL on a lifetime basis.
58
Those loans in formal recovery are assessed on a recovery basis having initially recognised a 100%
impairment charge. The Group will assess the likelihood of full recovery and assign each loan into
categories for which each will have a different recovery percentage assigned.
The baseline recovery rate is the current rate of recovery for the category and is routinely back tested
for accuracy. Each category will have a pessimistic and optimistic rate. The pessimistic rate is
formulated as the worst recovery rate achieved in the preceding ten years, excluding outliers. The
optimistic rate is formed from the best recovery rates achieved over the past ten years and where the
rate is at its highest level and used as the current rate, management has agreed a small increase of up
to 5% to the current rate.
The Board agreed to take the worst recovery rates in the preceding ten years to further illustrate its
concern around the implications of an unknown Brexit outcome.
The Group has an IFRS 9 Model Governance Control Framework which states its objective to ensure the
models inputs and outputs are understood and agreed by relevant stakeholders. The models have
continued to be developed through the year and will be expanded across all products in the future.
Critical accounting estimates and judgements
IFRS 9 impairment involves several important areas of judgement, including estimating forward-looking
modelled parameters (PD, LGD and EAD), developing a range of unbiased future economic scenarios,
estimating expected lives and assessing significant increases in credit risk, based on the Group’s
experience of managing credit risk.
Within the Business Finance and Consumer Finance portfolios, which comprise large numbers of small
homogenous assets with similar risk characteristics, where credit scoring techniques are generally used,
the impairment allowance is calculated using forward-looking modelled parameters which are typically
run at a cohort level.
For assets in Stage 3, impairment allowances are calculated on an individual basis and all relevant
considerations that have a bearing on the expected future cash flows across a range of recovery options are
taken into account. These considerations can be subjective, but the recovery rates are routinely back-tested
and used as the base case.
The Asset & Liability Committee considers the recovery rates, weightings and economic factors on at
least a quarterly basis and, where necessary, puts forward changes to the Board for approval.
The adoption of the ECL requirements of IFRS 9 resulted in increases in impairment allowances of the
Group’s debt financial assets. The increase in allowance resulted in adjustment to retained earnings.
Upon adoption of IFRS 9, the Group recognised additional impairment on its loans and receivables of
£604,457.
Set out below is the reconciliation of the ending impairment allowances in accordance with IAS 39 to
the opening loss allowances determined in accordance with IFRS 9.
Allowance for
impairment
under IAS 39
as at
30 September
2018
£’000
Consumer lending 2,286
Business lending 2,084
Azule lending –
Bridging loans –
4,370
Remeasurement of ECL under IFRS 9
Deferred tax on remeasurement
Change in Equity due to impact on transition to IFRS 9
Deferred tax asset will be deferred over a ten year period.
ECL under
IFRS 9
as at
1 October
2018
£’000
ECL under
IFRS 9
as at
30 September
2019
£’000
Remeasurement
£’000
91
513
–
–
604
2,377
2,597
–
–
4,974
3,048
4,471
122
6
7,647
£’000
604
(102)
502
1.6
Significant accounting policies
With the exception of changes to the Bank’s accounting policies resulting from new and revised
accounting standards (note 1.5.1), the Bank has consistently applied the following accounting policies to
all periods presented in the financial statements.
Annual Report & Financial Statements 2019
59
1.6.1 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.
Effective Interest Rate (‘EIR’) method
The Group’s EIR methodology 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 potentially different interest rates charged at various stages and 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 lifecycle
of the instruments, as well as expected changes to the Bank of England Base Rate and other fee
income/expense that are integral parts of the instrument.
Interest and similar income and expense
For all financial instruments measured at amortised cost and interest-bearing financial assets classified
as FVOCI, 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.
1.6.2 Dividend income
Dividend income is recognised when the Group’s right to receive the payment is established, which is
generally when the shareholders approve the dividend.
1.6.3 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.
1.6.4 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.
1.6.5 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.
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.
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.
1.6.6 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.
l Fees earned from commissions, late payment charges and recharge of costs incurred from the
recovery of assets under hire purchase and finance lease agreements.
60
1.6.7 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 1.6.10.
1.6.8 Cash and cash equivalents
Cash and cash equivalents as referred to in the Consolidated Statement of Cash Flows comprise 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.
1.6.9 Office equipment, fixtures, fittings and motor vehicles
Office equipment, fixtures, fittings and motor vehicles 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 office equipment,
fixtures, fittings and motor vehicles to their residual values over their estimated useful lives as follows.
Office equipment, fixtures and fittings – Between 3 to 10 years
Motor vehicles
– 4 years
Office equipment, fixtures, fittings and motor vehicles are derecognised on disposal or when no future
economic benefits are expected from their use. Any gain or loss arising on derecognition 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 derecognised.
1.6.10 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 an operation, the attributable amount of goodwill is included in the determination of the
profit or loss on disposal.
1.6.11
Intangible assets
The Group's other intangible assets consist solely of computer software and capitalised expenses
incurred in the project of applying to become 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.
Intangible assets and amortisation
Other Intangible assets held by the Group consist of computer software.
Externally acquired computer software is measured at cost less accumulated amortisation and any
accumulated impairment losses. Cost includes the original purchase price of the asset and any directly
attributable costs of preparing the asset for its intended use.
Internally developed computer software is recognised as an asset only when the Bank is able to
demonstrate that the following conditions have been met
l expenditure can be reliably measured;
l the product or process is technically and commercially feasible;
l future economic benefits are probable; and
l the Bank has the intention and ability to complete development and subsequently use or sell the asset.
Annual Report & Financial Statements 2019
61
If these conditions are not met, expenditure is recognised in administrative expenses in the statement of
profit and loss as incurred. Capitalised costs include all costs directly attributable in preparing the asset so
that it is capable of operating in its intended manner. Internally developed computer software is measured
at capitalised cost less accumulated amortisation and any accumulated impairment losses. Subsequent
expenditure on software assets is capitalised only when it increases the future economic benefits
embodied in the specific asset to which it relates. All other expenditure is recognised in administrative
expenses in the statement of profit and loss as incurred. Computer software is amortised on a straight-line
basis over its estimated useful life of between three and ten years. Amortisation is recognised in
administrative expenses in the statement of profit and loss. The amortisation method, useful lives and
residual values are reviewed at each reporting date and adjusted if appropriate. All intangible assets are
reviewed for indicators of impairment at each reporting date. If such an indication exists, the asset’s
recoverable amount, being the greater of value-in-use and fair value less costs to sell, is estimated and
compared to the carrying amount. If the carrying amount of the asset exceeds the recoverable amount an
impairment loss is recognised in administrative expenses in the statement of profit and loss. Intangible
assets not brought-to-use are also subject to annual impairment assessment by the Group.
1.6.12 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, 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 1.7.3.
1.6.13 Share-based payment transactions
The Company operates two equity-settled share option plans for its employees. The cost of equity-settled
transactions is determined by the fair value at the date when the grant is made using an appropriate
valuation model, further details of which are given in note 9. 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 period in which the service and, where applicable, the
performance conditions are fulfilled (the vesting period). The cumulative expense recognised for equity-
settled transactions at each reporting date until the vesting date reflects the extent to which the vesting
period has expired and the Group's best estimate of the number of equity instruments that will ultimately
vest. The expense or credit in the statement of profit or loss for a period represents the movement in
cumulative expense recognised at the beginning and end of that period.
Service and non-market performance conditions are not taken into account when determining the grant
date fair value of awards, but the likelihood of the conditions being met is assessed as part of the
Group's best estimate of the number of equity instruments that will ultimately vest. Market performance
conditions are reflected within the grant date fair value. Any other conditions attached to an award, but
without an associated service requirement, are considered to be non-vesting conditions. Non-vesting
conditions are reflected in the fair value of an award and lead to an immediate expensing of an award
unless there are also service and/or performance conditions.
1.6.14 Pension benefits
The Group operates a defined contribution pension plan. The contributions payable to a defined
contribution plan is 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.
62
1.6.15 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.
1.6.16 Taxes
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. Calculations of tax are mentioned in note 11.
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 temporary 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 FVOCI assets and foreign exchange
differences 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 a legal right to offset, it is
the Group’s intention to settle on a net basis and that approval has been permitted by the tax authority.
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.
1.6.17 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.
1.6.18 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.
Annual Report & Financial Statements 2019
63
1.6.19 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.
1.6.20 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.
1.6.21 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.
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 IFRS 9 ‘Financial Instruments’, is measured at fair value
with the changes in fair value recognised in the statement of profit or loss in accordance with IFRS 9.
Other contingent consideration that is not within the scope of IFRS 9 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 reassesses 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 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.
1.6.22 Fair value measurement
The Group measures financial instruments, such as covered bonds and derivatives, at fair value at each
balance sheet date.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The fair value measurement is based
on the presumption that the transaction to sell the asset or transfer the liability takes place either
l in the principal market for the asset or liability; or
l in the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Group.
The fair value of an asset or a liability is measured using the assumptions that market participants would
use when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market participant's ability to
generate economic benefits by using the asset in its highest and best use or by selling it to another
64
market participant that would use the asset in its highest and best use. The Group uses valuation
techniques that are appropriate in the circumstances and for which sufficient data are available to
measure fair value, maximising the use of relevant observable inputs and minimising the use of
unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are
categorised within the fair value hierarchy, based on the lowest level input that is significant to the fair
value measurement as a whole.
l Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities.
l Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value
measurement is directly or indirectly observable.
l Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value
measurement is unobservable.
For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis,
the Group determines whether transfers have occurred between levels in the hierarchy by reassessing
categorisation (based on the lowest level input that is significant to the fair value measurement as a
whole) at the end of each reporting period.
Fair value related disclosures for financial instruments and non-financial assets that are measured at fair
value or where fair values are disclosed, are summarised in the following notes.
Disclosures for valuation methods, significant estimates and assumptions.
l Quantitative disclosures of fair value measurement hierarchy - note 28.4
l Financial instruments (including those carried at amortised cost) - note 28.4
1.7
Significant accounting judgements, estimates and assumptions
The preparation of financial statements in conformity with IFRS requires the directors to make judgements,
estimates and assumptions that affect the application of accounting policies and the reported amounts of
assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates
are recognised in the period in which the estimates are revised and in any future periods affected.
The areas involving a higher degree of judgement or complexity, or areas where assumptions and
estimates are significant to the financial statements, are as follows.
1.7.1 Effective interest rate (estimate)
Under both IFRS 9 and IAS 39, interest income is recorded using the effective interest rate method.
Management must use judgement to estimate the expected life of each instrument and hence the
expected cash flows relating to it. Management reviews the expected lives on a segmental basis,
whereby products of a similar nature are grouped into cohorts that exhibit homogenous behavioural
attributes. The key assumptions applied by management in the effective interest rate methodology is
the behavioural life of the assets. The expected life behaviours are subjected to changes in internal and
external factors and may result in adjustments to the carrying amount of loans which must be
recognised in the statement of profit and loss. The effective interest rate behavioural models are based
on market trends and experience.
1.7.2 Impairment losses on financial assets (judgement and estimate)
The measurement of impairment losses both under IFRS 9 and IAS 39 across all categories of financial
assets in scope requires judgement, in particular the estimation of the amount and timing of future cash
flows and collateral values when determining impairment losses and the assessment of a significant
increase in credit risk. These estimates are driven by a number of factors, changes in which can result
in different levels of allowances.
The Group’s ECL calculations are outputs of complex models with a number of underlying assumptions
regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that
are considered accounting judgements and estimates include
l the Group’s internal credit grading model, which assigns PDs to the individual grades;
l the Group’s criteria for assessing if there has been a significant increase in credit risk and so
allowances for financial assets should be measured on a Lifetime Expected Credit Loss(‘LTECL’) basis
and the qualitative assessment;
l the segmentation of financial assets when their ECL is assessed on a collective basis;
l development of ECL models, including the various formulas and the choice of inputs;
l determination of associations between macroeconomic scenarios and, economic inputs, such as
unemployment levels and collateral values, and the effect on PDs, EADs and LGDs; and
l selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the
economic inputs into the ECL models.
It has been the Group’s policy to regularly review its models in the context of actual loss experience and
adjust when necessary.
Annual Report & Financial Statements 2019
65
1.7.3 Impairment testing of investment in subsidiaries (judgement)
The Group assesses, at each reporting date, whether there is an indication that goodwill acquired
through acquisitions 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.
The review of goodwill for impairment reflects the Board’s best estimate of future cash flows of the
investment Group’s CGUs and the rates used to discount these cash flows. Both these variables are
subject to judgement and estimation uncertainty as follows.
l The future cash flows of the CGUs are sensitive to projected cash flows based on the forecasts and
assumptions regarding the projected periods and the long-term pattern of sustainable cash flows
thereafter.
l The rates used to discount future expected cash flows can have a significant effect on their valuations
and are based on the price-to-book ratio method which incorporates inputs reflecting a number of
variables.
An impairment is recognised if impairment testing finds that the carrying amount of a CGU exceeds its
recoverable amount. The recoverable amount of the CGU is calculated based on its value-in-use, determined
by discounting the future cash flows (pre-tax profits) to be generated from its continuing use. Forecast cash
flows are reduced by any earnings retained to support the growth in the underlying CGU’s loan books
through higher regulatory capital requirements. Forecast post-tax profits are based on expectations of
future outcomes taking into account past experience and adjusted for anticipated revenue growth.
The key assumptions used in the calculation of value-in-use are as follows.
Discount rate
The pre-tax discount rate is an estimate of the return that investors would require if they were to choose
an investment that would generate cash flows of amount, timing and risk profile equivalent to those that
the entity expects to derive from the asset. The Group calculates discount rates using the price-to-book
ratio method which incorporates target return on equity, growth rate and price-to-book ratio. The
discount rate for each CGU is adjusted to reflect the risks inherent to the individual CGU.
Discount rates used were as follows.
PCF Credit Limited
Azule Limited
14.77%
14.52%
Cash flow period
PCF Credit Limited - Six years of cash flows (pre-tax profits) are included in the discounted cash flow
model based on the Bank’s business plan.
Azule Limited - Five years of cash flows (pre-tax profits) are included in the discounted cash flow model
based on the Bank’s business plan.
Terminal value growth rate
A terminal value growth rate is applied into perpetuity to extrapolate cash flows beyond the cash flow
period. The terminal value growth rate of 5.0% per annum is estimated by the Board.
1.8
Standards issued but not yet effective
A number of new and revised standards issued by the International Accounting Standards Board have
not yet come into effect. Those deemed relevant to the Group are as follows.
IFRS 16 ‘Leases’ (effective 2020 financial year).
IFRS 16 ‘Leases’
IFRS 16 was issued in January 2016 and replaces IAS 17 ‘Leases’, IFRIC 4 ‘Determining whether an
Arrangement contains a Lease’, SIC-15 ‘Operating Leases - Incentives’ and SIC-27 ‘Evaluating the
Substance of Transactions Involving the Legal Form of a Lease’. IFRS 16 sets out the principles for the
recognition, measurement, presentation and disclosure of leases and requires lessees to account for all
leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17.
The standard includes two recognition exemptions for lessees – leases of ’low-value’ assets (e.g.
personal computers) and short-term leases (i.e. leases with a lease term of 12 months or less). The Group
will make use of both exemptions.
At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e. the
lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e.
the right of-use asset). Lessees will be required to separately recognise the interest expense on the
lease liability and the depreciation expense on the right-of-use asset, which will lead to a higher charge
being recorded in the income statement compared to IAS 17. Lessees will be also required to remeasure
the lease liability upon the occurrence of certain events (e.g. a change in the lease term, a change in
future lease payments resulting from a change in an index or rate used to determine those payments).
The lessee will generally recognise the amount of the remeasurement of the lease liability as an
adjustment to the right-of-use asset.
66
During 2019, the Group performed a detailed impact assessment of IFRS 16 and will apply the modified
retrospective approach as permitted by the standard. The Group will recognise a right-of-use asset at the
date of initial application for leases previously classified as an operating lease applying IAS 17. As
permitted by the standard, this amount will be equal to the lease liability, adjusted for any prepayments
or accrued lease payments relating to that lease. The lease liability will be measured at an amount equal
to the outstanding lease payments at the date of initial application, considering extension and termination
options, discounted at the Group’s incremental borrowing rate in the economic environment of the lease.
The capitalised right-of-use asset will mainly consist of office property, namely the Head office in London,
and the property in Datchet which is due to the acquisition of Azule.
In summary, the adoption of IFRS 16 is expected to have a £0.1 million impact on retained earnings, while
the CET 1 capital is expected to decrease by 15 bps as a result of the increase in the risk-weighted assets
(treated as 100% risk-weighted, consistently with the nature of the underlying asset). The recognised
right-of-use asset and lease liability will be approximately £2.6 million and £2.2 million respectively.
The Group does not intend to early adopt IFRS 16 and thereby will adopt it from 1 October 2019.
2
Business combinations
Acquisition of Azule Limited and its subsidiaries (‘Azule Group’)
On 5 November 2018, 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. 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.
Assets acquired and liabilities assumed
The fair values of the identifiable assets and liabilities of Azule Limited at the date of acquisition were
Assets
Property, plant and equipment
Cash and cash equivalents
Hire purchase, leasing and loans
Prepayment and other debtors
Liabilities
Due to banks
Due to related companies
Current tax liabilities
Other liabilities
Total identifiable net assets
at carrying value
Fair value of consideration
Goodwill
Net cash acquired with the subsidiary
Cash paid
Net cash flow on acquisition
Purchase consideration
Issue of shares
Cash paid
Contingent consideration
Fair value
on acquisition
£’000
108
900
15,612
977
17,597
(11,593)
(950)
(116)
(2,005)
Book
values
£’000
108
900
15,612
977
17,597
(11,593)
(950)
(116)
(2,005)
(14,664)
(14,664)
2,933
(5,433)
2,500
900
(3,183)
(2,283)
750
3,183
1,500
5,433
The Company issued 1,923,076 ordinary shares in PCF Group plc as part consideration for 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 £0.39 per share. The fair value
of the consideration given in shares was, therefore, £750,000.
Transaction costs of £270,000 were expensed and are included in administrative expenses for the year
ended 30 September 2018. A further £89,000 of costs were paid and included as an expense in the
income statement for the year ended 30 September 2019.
Annual Report & Financial Statements 2019
67
Contingent consideration
As part of the purchase agreement with the previous owners of Azule Limited and its subsidiaries, two
contingent considerations have been agreed. The first consideration totalling £1,500,000 over two years
is subject to the level of aggregate new business originations upon the first and second anniversaries
of the acquisition. This comprises £750,000 at each anniversary. The second consideration is for £62,500
and is paid if impairment targets are achieved.
The fair value of the contingent consideration at the acquisition date and signing date was £1,500,000.
Since the date of acquisition, Azule Group has contributed £960,000 of net operating income and
£283,000 to the net profit before tax to the continuing operations of the Group. If the acquisition had
taken place at the beginning of the year, revenue from continuing operations would have been
£22,363,000 and the profit from continuing operations for the year before tax and dividends would
have been £8,018,000.
3
Segment information
The Group operates in the principal areas of consumer finance for motor vehicles and business finance
for vehicles, plant and equipment, specialist funding in the broadcast and media industry and bridging
property finance.
For management purposes, the Group has been organised into four operating segments based on
products and services.
Consumer finance
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.
Azule finance
Specialist funding and leasing services direct to individuals and businesses in the broadcast and media
industry. Azule Group was acquired on 5 November 2018.
Bridging finance
Bridging property finance commenced operations in January 2019, for residential, semi-commercial and
commercial properties.
The Group’s 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 2018 and 30 September 2019.
Segment assets include cash and balances at central banks, loans and advances to customers, financial
instruments and tax assets. Segment liabilities comprise amounts due to banks, amounts due to
customers, derivative financial instruments and tax liabilities but exclude certain borrowings that are for
general corporate purposes.
The following table presents income and profit and certain asset and liability information for the Group’s
operating segments.
For the year ended 30 September 2018, the profit for the year was allocated based on balance sheet
size. For 30 September 2019, the profit for the year has been prepared on an actual profit centre basis,
where income and expenses are allocated specifically.
68
Group
Year ended 30 September 2019
Interest and similar revenue calculated
using the effective interest method
Interest and similar expense calculated
using the effective interest method
Consumer
finance
£’000
Business
finance
£’000
Azule
finance
£’000
Bridging
finance
£’000
Total
segments
£’000
15,505
16,936
1,705
353
34,499
(5,752)
(6,610)
(496)
(26)
(12,884)
Net interest income
9,753
10,326
1,209
327
21,615
Fee and commission income
Fee and commission expense
Net fees and commission (expense)/income
Net loss on financial instruments mandatorily
at fair value through profit or loss
121
(602)
(481)
370
(531)
1,324
(21)
(161)
1,303
–
–
–
1,815
(1,154)
661
(23)
(34)
(4)
(2)
(63)
Net operating income
9,249
10,131
2,508
325
22,213
Personnel expenses
Depreciation of office equipment, fixtures,
fittings and motor vehicles
Amortisation of intangible assets
Other operating expenses
Impairment loss on financial instruments
2,858
2,884
1,360
538
7,640
42
158
1,533
778
57
218
1,720
1,345
34
24
381
46
4
16
193
6
757
137
416
3,827
2,175
14,195
Total operating expenses
5,369
6,224
1,845
Segment profit/loss before tax
Income tax expense
Profit for the year
3,880
(803)
3,907
(782)
3,077
3,125
663
(129)
534
(432)
90
8,018
(1,624)
(342)
6,394
Assets
Additions to office equipment, fixtures,
fittings and motor vehicles
Additions to other intangible assets
Loans and advances to customers
Total assets
Total liabilities
160
366
128,854
211
483
186,989
108
21
9,712
13
30
12,948
492
900
338,503
153,660
129,784
202,855
171,325
8,921
7,535
12,633
10,670
378,069
319,314
Annual Report & Financial Statements 2019
69
Consumer
finance
£’000
Business
finance
£’000
Azule
finance
£’000
Bridging
finance
£’000
Total
segments
£’000
Group
Year ended 30 September 2018
Interest and similar revenue calculated
using the effective interest method
Interest and similar expense calculated
using the effective interest method
Net interest income
Fee and commission income
Fee and commission expense
Net fees and commission (expense)/income
Net loss on financial instruments mandatorily
at fair value through profit or loss
Net operating income
Personnel expenses
Depreciation of office equipment, fixtures,
fittings and motor vehicles
Amortisation of intangible assets
Other operating expenses
Impairment loss on financial instruments
13,108
12,387
(5,404)
(5,089)
7,704
7,298
96
(435)
(339)
396
(409)
(13)
–
–
7,365
7,285
2,667
2,519
43
198
1,494
601
41
187
1,413
314
Total operating expenses
5,003
4,474
Segment profit/loss before tax
Income tax expense
Profit for the year
Assets
Additions to office equipment, fixtures,
fittings and motor vehicles
Additions to other intangible assets
Loans and advances to customers
Total assets
Total liabilities
2,362
(448)
2,811
(533)
1,914
2,278
18
327
98,440
19
310
120,832
128,863
109,535
157,607
134,384
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
25,494
(10,492)
15,002
492
(844)
(352)
–
14,650
5,186
84
385
2,907
915
9,477
5,173
(981)
4,192
37
637
219,322
286,470
243,919
4
Interest and similar revenue calculated using the effective interest method
Cash and short-term funds
Loans and advances to customers
Financial instruments - FVOCI
Financial instruments - available-for-sale
Total interest and similar income
Year ended
30 September
2019
£’000
Year ended
30 September
2018
£’000
67
33,954
478
–
34,499
75
25,203
–
216
25,494
5
Interest and similar expense calculated using the effective interest method
Due to banks
Due to customers
Total interest and similar income
70
Year ended
30 September
2019
£’000
Year ended
30 September
2018
£’000
836
12,048
12,884
3,125
7,367
10,492
6
Net fee and commission income/(expense)
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 income/(expense)
Year ended
30 September
2019
£’000
Year ended
30 September
2018
£’000
385
1,430
1,815
(195)
(959)
(1,154)
661
312
180
492
(338)
(506)
(844)
(352)
7
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 29.3. The charge during
the year was as follows.
30 September 2019
Impairment charge for the year on loans and
advances to customers
30 September 2018
Impairment charge for the year on loans and
advances to customers
Azule
finance
£’000
Bridging
finance
£’000
Consumer
finance
credit
£’000
Business
finance
lease
Total
£’000 £’000
46
–
6
–
778
1,345
2,175
601
314
915
8
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
Other benefits
Year ended
30 September
2019
£’000
Year ended
30 September
2018
£’000
6,054
773
267
132
414
7,640
4,271
491
147
34
243
5,186
The average monthly number of persons employed by the Group during the year was 93 (year ended
30 September 2018 – 67). The number of employees at 30 September 2019 was 110.
Annual Report & Financial Statements 2019
71
9
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
2019
£’000
Year ended
30 September
2018
£’000
1,293
61
4
1,358
1,257
55
19
1,331
There are three directors receiving company contributions to personal pension schemes (September
2018 – three).
Table of directors’ remuneration
A summary of the total remuneration paid to directors is set out below.
Salary
Benefits
in kind contributions
£’000
£’000
Year ended
Pension Long-term 30 September 30 September
2018
£’000
incentive
£’000
2019
£’000
Year ended
Executive directors
S D Maybury*
R J Murray
D R Bull**
Non-executive directors
M F Brown
T A Franklin
C A Higgins
M Martin***
D J Morgan
D Titmuss
and fees Bonus
£’000 £’000
250
175
185
197
89
90
43
95
57
11
43
52
911
–
–
–
–
–
–
376
* Pension received in cash
** Part of the pension received in cash
*** Appointed 25 July 2019
2
3
1
–
–
–
–
–
–
6
25
18
18
–
–
–
–
–
–
61
2
–
2
–
–
–
–
–
–
4
476
285
296
43
95
57
11
43
52
439
298
332
37
90
51
–
37
47
1,358
1,331
Share-based payments
At 30 September 2019, the Company has two share option plans as follows.
l Senior executive equity-settled share option plans
l Company equity-settled share option plans
During the year, the Company introduced a share-based long-term incentive plan for senior executives
and other key staff. The plan has performance criteria attached in regard to Group performance and
shareholder return. Share options under the plan are only settled on achievement of the criteria.
Senior executive equity-settled share option plans
The grant price is determined by reference to the average mid-market price of the Company’s ordinary
shares 9 April 2018, 1 November 2018 and 16 January 2019. The options are both conditional on
continued employment with a minimum vesting period of three years and a performance criterion of
the Group market value on 9 April 2021 reaching a target price. The target price is in three parts, if
42.41p is reached 3,183,443 options are effectively granted, if 49.47p is reached 4,775,264 options are
effectively granted and if 56.54p is reached 6,366,886 are effectively granted. 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 2018 – seven years).
Of the pool, the following options have been granted with reference to notionally reaching the
performance criteria of 56.54p. The model, however, values the options on a weighted basis across the
three performance targets to ensure all outcomes are considered.
72
Company
Granted during the year
Outstanding at the end of the year
Exercisable at the end of the year
30 September
2019
£’000
5,960
5,960
–
Weighted
average
exercise
price
(pence)
30 September
2018
£’000
Weighted
average
exercise
price
(pence)
34
34
–
–
–
–
–
–
–
During the year ended 30 September 2019
The fair value was measured at the grant date using the Black-Scholes model. The inputs were as follows.
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
1 November 2018 and 16 January 2019
36.5p
Range 32.9p – 36.5p
5,959,783
3 – 10 years
30%
6.5 years
0.45%
nil
Range 4.7p to 5.9p
Above plan is introduced in current year, hence no comparatives are provided with respect to model
inputs.
Company equity-settled share option plans
This share option plan carries on from prior periods.
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 2018 – seven years).
Company
Outstanding at the beginning of the year
Granted during the year
Exercised during the year
Expired during the year
Outstanding at the end of the year
Exercisable at the end of the year
During the year ended 30 September 2019
No options were granted.
30 September
2019
£’000
Weighted
average
exercise
price
(pence)
30 September
2018
£’000
Weighted
average
exercise
price
(pence)
3,210
–
195
–
3,015
2,420
17
–
21
–
17
15
2,960
250
–
–
3,210
2,100
16
28
–
–
17
13
During the year ended 30 September 2018
The fair value was measured at the grant date using the Black-Scholes model. The inputs were as follows.
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
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 2019
73
10 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
2019
£’000
Year ended
30 September
2018
£’000
271
1,073
995
957
433
98
3,827
217
617
717
769
464
123
2,907
Professional fees include fees payable to the auditor of £274,000 (year ended 30 September 2018 -
£152,000), as analysed below.
Group
Statutory audit of the Company
Statutory audit of the Company’s subsidiaries
Half year independent review report
Year ended
30 September
2019
£’000
Year ended
30 September
2018
£’000
39
235
30
304
87
65
-
152
11
Income tax
(a) The components of income tax expense for the year ended 30 September 2019 and its comparatives
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 directly in equity
Group
Share-based payments
Deferred tax on share-based payments
Statement of changes in equity
Year ended
30 September
2019
£’000
Year ended
30 September
2018
£’000
(1,507)
(65)
(1,572)
(98)
36
10
(52)
(1,624)
(829)
(85)
(914)
(175)
90
18
(67)
(981)
Year ended
30 September
2019
£’000
Year ended
30 September
2018
£’000
131
(52)
79
34
50
84
74
(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%
(year ended 30 September 2019 – 19%). The differences are explained below.
The Finance (No.2) Act 2015 enacted a reduction in the Corporation Tax, for all profits except ring
fence profits, to 19% for the years starting 1 April 2017, 2018 and 2019. The Finance Act 2016
enacted a reduction in the Corporation Tax main rate at 17% for the years starting 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.
Therefore, the deferred tax balances have been calculated with reference to these rates.
Group
Accounting profit before tax
UK Corporation Tax of 19%
(year ended 30 September 2018 – 19%)
Effects of
Expenses not deductible for taxation purposes
Adjustments in respect of prior years
Change in tax rate
Other differences
Year ended
30 September
2019
£’000
Year ended
30 September
2018
£’000
8,018
5,173
(1,523)
(983)
(45)
(29)
15
(42)
(47)
5
18
26
(981)
19%
Income tax expense as reported in the consolidated income statement
(1,624)
Effective tax rate for the year
20%
12 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 and diluted EPS calculations.
Company
Net Company profit attributable to ordinary
shareholders adjusted for the effect of dilution
Share-based payments
Basic and diluted weighted average number of shares
30 September
2019
£’000
30 September
2018
£’000
6,394
4,192
30 September
2019
’000 units
30 September
2018
’000 units
234,102
212,225
Basic and diluted earnings per 5p ordinary share
2.7
2.0
13 Cash and balances at central banks
Cash and demand deposits
30 September
2019
£’000
Group
30 September
2018
£’000
Company
30 September
2019
£’000
30 September
2018
£’000
7,371
7,371
21,338
21,338
123
123
11
11
The Group and the Company do not have monies held in trust for clients. The book value of cash and
balances at central banks is assessed to approximate its fair value. Fair value approximates to carrying
amount as cash and balances at central banks have minimal credit losses and are either short-term
in nature or re-price frequently.
Annual Report & Financial Statements 2019
75
14 Debt instruments at FVOCI
Group
Covered bonds
30 September
2019
£’000
30 September
2018
£’000
19,638
19,638
–
–
As from 1 October 2018, financial assets previously classified as available-for-sale were reported as debt
instruments at FVOCI (see note 15 for comparatives). There are no material impairment losses on debt
instruments at FVOCI during the year and at year end.
15 Available-for-sale financial instruments
Group
UK Government debt securities
Other OECD sovereign guaranteed debt securities
Multilateral development bank debt securities
Share-based payments
30 September
2019
£’000
30 September
2018
£’000
–
–
–
–
–
509
7,517
18,185
13,691
39,902
As from 1 October 2018, financial assets previously classified as available-for-sale were reported as debt
instruments at FVOCI (note 14).
16 Loans and advances to customers
Group
Consumer lending - gross
Business lending - gross
Azule lending - gross
Bridging lending - gross
Allowance for impairment losses
30 September
2019
£’000
30 September
2018
£’000
131,902
191,460
9,834
12,954
100,776
122,916
–
–
346,150
223,692
(7,647)
(4,370)
338,503
219,322
A reconciliation of the allowance for impairment losses for loans and advances, by class, is as follows.
Group
At 1 October 2018
Adoption of IFRS 9 (note 1.5.3)
Charge for the year (note 7)
(Recoveries)/write offs
At 30 September 2019
Made up of
Individual impairment
Collective impairment
Total impairment
Consumer
finance
£’000
Business
finance
£’000
Azule
finance
£’000
Bridging
finance
£’000
2,286
91
2,377
778
(107)
3,048
724
2,324
3,048
2,084
513
2,597
1,345
529
4,471
1,163
3,308
4,471
–
–
–
46
76
122
–
122
122
–
–
–
6
–
6
–
6
6
Total
£’000
4,370
604
4,974
2,175
498
7,647
1,887
5,760
7,647
76
Group
Consumer
finance
£’000
Business
finance
£’000
Azule
finance
£’000
Bridging
finance
£’000
At 1 October 2017
Charge for the year
(Recoveries)/write offs
2,233
601
(548)
1,732
314
38
At 30 September 2018
2,286
2,084
Made up of
Individual impairment
Collective impairment
2,186
100
1,940
144
Total impairment
2,286
2,084
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£’000
3,965
915
(510)
4,370
4,126
244
4,370
Loss allowance at 30 September 2019 reflects expected credit losses calculated in accordance with
IFRS 9. Impairment allowance at 30 September 2018 reflects impairment losses calculated in accordance
with IAS 39. As per note 1.5.2 (transition), the opening balances were adjusted for the change in the
accounting standard rather than a full restatement.
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.
Due from Group companies is entirely allocated to Stage 1 and based on materiality considerations, no
provision has been provided.
17
Investment in subsidiary undertakings
Company
The following UK subsidiaries will take advantage of the audit exemption set out within section 479A of
the Companies Act 2006 for the year ended 30 September 2019.
Company Name Registration number
PCF Credit Limited 01775045
Azule Limited 03151043
The consolidated financial statements include the financial statements of the Company and its subsidiary
undertakings. The Company does not have any joint ventures or associates. Significant subsidiaries of the
Company were as follows.
Name of company
PCF Bank Limited
PCF Credit Limited
PCF Equipment Leasing Limited
PCF Financial Leasing Limited
Azule Limited
Azule Finance Limited
Azule Finance GMBH
*Held by a subsidiary of the Company
Incorporated
Nature of business
UK
UK
UK
UK
UK
IE
DE
Banking, hire purchase,
leasing & bridging
Leasing & hire purchase
Leasing & hire purchase
Leasing & hire purchase
Leasing & hire purchase
Leasing & hire purchase
Leasing & hire purchase
Percentage of
equity interest
30 September
2019
Percentage of
equity interest
30 September
2018
100
100*
100*
100*
100*
100*
100*
100
100
100
100
–
–
–
The registered office of all subsidiaries incorporated in the United Kingdom is Pinners Hall, 105-108 Old
Broad Street, London EC2N 1ER.
The registered office of Azule Finance Limited is Suite 104, 4/5 Burton Hall Road, Sandyford, Dublin 18.
The registered office of Azule Finance GMBH is Domgarten 12, 47877 Willich, Germany.
All companies have an Accounting Reference Date of 30 September.
Azule Limited, which owns 100% of Azule Finance Limited and Azule Finance GMBH, was acquired by
PCF Bank Limited on 5 November 2018 (note 2).
Annual Report & Financial Statements 2019
77
Company
Cost and net book value
At beginning of the year
Increase in investments
At 30 September
30 September
2019
£’000
30 September
2018
£’000
22,000
10,000
32,000
17,000
5,000
22,000
The Company has an investment in PCF Bank Limited (the 'Bank'). The net asset value of the Bank at
30 September 2019 was £54,938,000 (30 September 2018 – £36,938,000)(2). 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 £10,000,000 in the Bank during
the year (30 September 2018 – £5,000,000).
It is the opinion of the directors that the recoverable amount of the Company’s investment in
subsidiaries is not less than the amount at which it is stated in the Company’s financial statements.
18 Office equipment, fixtures, fittings and motor vehicles
Group
Cost
At 1 October 2018
Additions during the year
Acquisitions through business combinations
Disposals during the year
At 30 September 2019
Accumulated depreciation
At 1 October 2018
Depreciation during the year
Disposals during the year
At 30 September 2019
Net book value
Group
Cost
At 1 October 2017
Additions during the year
At 30 September 2018
Accumulated depreciation
At 1 October 2017
Depreciation during the year
At 30 September 2018
Net book value
Office equipment,
fixtures and fittings Motor vehicles
30 September
2019
£’000
30 September
2019
£’000
Total
30 September
2019
£’000
470
381
21
(37)
835
246
111
(37)
320
515
–
3
87
–
90
–
26
–
26
64
470
384
108
(37)
925
246
137
(37)
346
579
Office equipment,
fixtures and fittings Motor vehicles
30 September
2018
£’000
30 September
2018
£’000
Total
30 September
2018
£’000
433
37
470
162
84
246
224
–
–
–
–
–
–
–
433
37
470
162
84
246
224
The majority of the office equipment, fixtures and fittings is computer hardware, office furniture and
fixtures.
(2) 2018 comparative in the note above has been updated from the prior period annual report.
78
19 Goodwill and other intangible assets
For the year ended 30 September 2018, all the goodwill related to the Group’s Consumer Finance Division.
For the year ended 30 September 2019, goodwill relates partly to the Group’s Consumer Finance
Division which arises from the acquisition of a subsidiary company, TMV Finance Limited (‘TMV’), acquired
November 2000, and the remainder for the acquisition of Azule on 5 November 2018 (note 2).
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. New business in respect
of the Azule franchise is written in PCF Bank.
The rationale for the TMV 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 amount against its recoverable amount,
and there is no indication of impairment.
The rationale for the Azule acquisition was to diversify and it offers revenue synergies in a niche class
of business-critical assets with strong collateral characteristics and lending to prime credit grade
customers. The directors believe that the underlying net assets from Azule’s business are sufficient to
cover the carrying amount against its recoverable amount, and there is no indication of impairment.
In performing the annual impairment test, the Group assesses the economic performance of each
acquisition, then there is a need to look at the future of the business acquired and to ensure that the
useful economic life of each acquisition is finite, and that growth and profitability are at least the same
value as the amount that was paid ‘over and above’ for the fair value of the assets and liabilities
acquired. To assess this, forecasted Board approved profitability has been used and discounted back to
present value.
Both the CGU’s acquired are expected to continue to perform, but forecasting is only over the next 5
to 6 years, therefore there is requirement to capture expected growth and cashflows beyond these
dates. To complete this, there is a terminal valuation that is required to be performed to assess if goodwill
has been impaired or not. Terminal value often comprises a large percentage of the total assessed value.
TMV CGU
The recoverable amount of the TMV CGU of £410 million at 30 September 2019 has been determined
based on a value-in-use calculation using cash flow projections from financial budgets approved by the
Board covering a six year period, and a terminal valuation based on the last year forecast. The projected
cash flows have been updated to reflect the increased business over this period which is aligned with
recent demand and future expected growth in its products and services. The pre-tax discount rate
applied to cash flow projections is 14.5% per annum over a six year period and for the period beyond, a
terminal growth rate of 5.0% is used being the expected long-term average growth rate for the Group.
It was concluded that the fair value less costs of disposal exceeded the value-in-use. In conclusion, there
is no obvious impairment loss existing at balance sheet date and the current goodwill remains appropriate
for the carrying value for the TMV acquisition.
Azule CGU
The recoverable amount of the Azule CGU of £13 million at 30 September 2019 has been determined
based on a value-in-use calculation using cash flow projections from financial budgets approved by
senior management covering a five year period, and a terminal valuation based on the last year forecast.
The projected cash flows have been updated to reflect the increased business over this period which is
aligned with recent demand and future expected growth in its products and services. The pre-tax
discount rate applied to cash flow projections is 14.5% per annum over a five year period and for the
period beyond, a terminal growth rate of 5.0% per annum is used being the expected long-term average
growth rate for the Group. It was concluded that the fair value less costs of disposal exceeded the
value-in-use. In conclusion, there is no obvious impairment loss existing at balance sheet date and the
current goodwill remains appropriate.
Key assumptions used in value-in-use calculations and sensitivity to changes in assumptions
The calculation of value-in-use for both TMV and Azule is most sensitive to the following assumptions.
l Terminal value
l Terminal growth rate
l Discount rates
l Free cash flow for the last forecasted year
Annual Report & Financial Statements 2019
79
Terminal value (using the perpetuity method) – Discounting is necessary because the time value of
money creates a discrepancy between the current and future values of a given sum of money. In business
valuation, free cash flow or dividends can be forecast for a discrete period of time, but the performance
of ongoing concerns becomes more challenging to estimate as the projections stretch further into the
future. Moreover, it is difficult to determine the precise time when a company may cease operations.
To overcome these limitations, investors can assume that cash flows will grow at a stable rate forever,
starting at some point in the future. This represents the terminal value.
Terminal value is calculated by dividing the last cash flow forecast by the difference between the
discount rate and terminal growth rate. The terminal value calculation estimates the value of the
company after the forecast period.
Terminal growth rate – The terminal growth rate is the constant rate that a company is expected to
continue to grow at. This growth rate starts at the end of the last forecasted cash flow period in a
discounted cash flow model and goes into perpetuity.
Discounted rates – Discount rates represent the current market assessment of the risks specific to each
CGU, taking into consideration the time value of money and individual risks of the underlying assets that
have not been incorporated in the cash flow estimates. The discount rate calculation is based on the
specific circumstances of the Group and its operating segments and is derived from its weighted
average cost of capital.
Growth rate estimates – Both the businesses acquired are expected to continue to grow over the next
five years.
Group
TMV Finance Limited acquisition
Azule acquisition
Group
Cost and net book value
At 1 October
Additions during the year
At 30 September
Year ended
30 September
2019
£’000
Year ended
30 September
2018
£’000
397
2,500
2,897
397
–
397
Year ended
2019
£’000
Year ended
2018
£’000
397
2,500
2,897
397
–
397
Other intangible assets
The Group's other intangible assets consist solely of computer software and capitalised expenses
incurred in the project of applying to become a bank.
Group
Cost
At 1 October
Additions during the year
At 30 September
Accumulated depreciation
At 1 October
Amortisation during the year
At 30 September
Net book value at 30 September
Group
Net book value of combined goodwill
and other intangible assets
80
Year ended
30 September
2019
£’000
Year ended
30 September
2018
£’000
5,249
900
6,149
2,689
416
3,105
3,044
4,611
638
5,249
2,304
385
2,689
2,560
Year ended
30 September
2019
£’000
Year ended
30 September
2018
£’000
5,941
2,957
20 Deferred tax assets
Group
Company
30 September
2019
£’000
30 September
2018
£’000
30 September
2019
£’000
30 September
2018
£’000
Accelerated capital allowances
Decelerated capital allowances
Other temporary differences
At 1 October
Recognised in income
Adjustment in respect of
prior year timing difference
Adjustments to opening reserves - IFRS 9
On acquisition
Recognised in other comprehensive income
Recognised in equity
(17)
904
218
1,105
1,185
(152)
36
103
(17)
2
(52)
994
85
106
1,185
1,205
(66)
–
–
–
(3)
49
At 30 September
1,105
1,185
–
65
70
135
196
(8)
(1)
–
–
–
(52)
135
–
80
116
196
163
(9)
(8)
–
–
–
50
196
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 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% is £15,904. 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 2018 – £1,839). This asset relates to
tax losses arising in prior years that are unlikely to be offset against future profits.
21 Other assets
Prepayments
Other receivables
Group
Company
30 September
2019
£’000
30 September
2018
£’000
30 September
2019
£’000
30 September
2018
£’000
807
4,125
4,932
1,394
148
1,542
771
125
896
788
29
817
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 approximates to the carrying amount.
Annual Report & Financial Statements 2019
81
22 Due to banks
Group
Current
Secured loans and borrowings
Non-current
Secured loans and borrowings
30 September
2019
£’000
30 September
2018
£’000
16,644
9,323
27,768
44,412
39,558
48,881
Bank overdrafts
The Group had no bank overdraft facility at 30 September 2019.
Interest-bearing loans and borrowings
£4.4 million block discounting facilities granted to PCF Credit Limited
These facilities when drawn as loans have fixed interest rates and maturity dates of up to five years. The
facilities are secured by assigned receivables of PCF Credit.
£6.0 million block discounting facilities granted to Azule Limited
These facilities when drawn as loans have fixed interest rates and maturity dates of up to five years. The
facilities are secured by assigned receivables of Azule Limited.
£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 is repayable in February 2022.
The loan is secured by a charge over specified loans and receivables and the guarantee of the Company.
£30.0 million revolving credit facility granted to PCF Bank by Leumi ABL Limited
This facility when drawn as a loan has a variable rate linked to 3 month LIBOR plus a margin and a
maturity date of up to five years. The facility is secured by a charge over specified loans and receivables
and the guarantee of the Company.
£25.0 million repo facility granted to PCF Bank by NatWest Markets plc
This facility when drawn as a loan has a fixed interest rate and maturity dates of up to 1 year. The facilities
are secured by bonds owned by the Company.
23 Due to customers
Group
Retail customers
Notice account
Term deposit
30 September
2019
£’000
30 September
2018
£’000
32,835
234,235
267,070
14,107
177,032
191,139
Included in amounts due to customers is accrued interest amounting to £1,681,000 (30 September 2018 –
£1,086,000) and £220,000 (30 September 2018 – £58,000) for term deposits and notice accounts
respectively.
24 Financing activity
The table below details changes in the Group’s liabilities arising from financing activities.
1 October
2018
£’000
48,881
48,881
1 October
2017
£’000
77,065
77,065
Azule
acquisition
£’000
12,543
12,543
Azule
acquisition
£’000
–
–
Cash flows
£’000
(17,012)
(17,012)
Cash flows
£’000
(28,184)
(28,184)
30 September
2019
£’000
44,412
44,412
30 September
2018
£’000
48,881
48,881
Note
22
22
Note
22
22
Due to banks
Due to banks
82
25 Derivative financial instruments
The fair value of derivative financial instruments included in the financial statements, together with their
notional amounts is summarised as follows.
Interest rate swaps
26 Other liabilities
Other payables
Accruals
Fair value
30 September
2019
£’000
Notional
30 September
2019
£’000
Fair value
30 September
2018
£’000
Notional
30 September
2018
£’000
(63)
(63)
10,000
10,000
–
–
8,000
8,000
Group
Company
30 September
2019
£’000
30 September
2018
£’000
30 September
2019
£’000
30 September
2018
£’000
228
6,020
6,248
210
3,275
3,485
412
1,280
1,692
242
1,309
1,551
Other liabilities includes other payables and accruals that are not interest-bearing and are normally settled
on 30 day terms.
27 Issued capital and reserves
Company
Ordinary shares issued and fully paid
At 1 October
Issuance of new shares during the year
Issue of shares for part payment
of Azule Limited
Dividend reinvestment
30 September
2019
‘000 units
30 September
2018
‘000 units
30 September
2019
£’000
30 September
2018
£’000
212,230
36,028
1,923
16
212,220
–
–
10
10,611
1,802
96
1
10,611
–
–
–
At 30 September
250,197
212,230
12,510
10,611
Share premium
At 1 October
Issuance of new shares during the year
Dividend reinvestment
At 30 September
Company
30 October 2018
Shares issued as part of the consideration
on acquisition of Azule Limited
11 March 2019
Shares issued to support increased lending
Fees relating to share issue
29 March 2019
Shares issued pursuant to Employee
Share Scheme – Exercise of Options
12 April 2019
Dividend reinvestment
Number of
shares
Issue
price
1,923,076
39.00p
35,833,333
30.00p
195,000
21.17p
15,703
34.5p
30 September
2019
£’000
30 September
2018
£’000
8,527
9,092
–
17,619
Change
in share
capital at 5p
per share
£’000
96
1,792
10
1
8,524
–
3
8,527
Change
in share
premium
£’000
654
8,958
(556)
31
5
1,899
9,092
Other reserves
The 'revaluation reserve' for debt instruments at FVOCI (30 September 2018 – AFS financial instruments,
note 15) also appears in 'Other reserves'.
Annual Report & Financial Statements 2019
83
Own shares (Employee Share Option Plans)
Own shares represent 751,764 (30 September 2018 – 1,237,925) ordinary shares held by the Company's
Employees Benefits Trust 2003 to meet obligations under the Company’s Share Option Plans. The shares
are stated at cost and their market value at 30 September 2019 was £263,117 (30 September 2018 – £354,666).
If they had been sold at this value, there would have been a capital gain of £58,651 (30 September 2018
– £250,680) arising on the sale.
At 1 October 2018
At 30 September 2019
£’000
(355)
(355)
Dividend
At the forthcoming Annual General Meeting, a final dividend of 0.4 pence per share in respect of the
year ended 30 September 2019 (year ended 30 September 2018 – 0.3 pence per share), amounting to
a dividend payable of £1,000,787 (year ended 30 September 2018 – £636,689) 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
distribution of retained earnings in the year ending 30 September 2020.
28 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 1.5.3.
28.1 Valuation techniques
Debt instruments at FVOCI
Covered bonds debt securities are financial instruments issued by banks or building societies and
collateralised against a pool of assets that, in case of failure of the issuer, can cover claims at any point
in time. They are subject to specific legislation to protect bondholders. 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.
Derivative financial instruments
Fair values of derivatives are obtained from quoted market prices in active markets and, where these
are not available, from valuation techniques including discounted cash flows.
28.2 Valuation principal
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 28.4.
28.3 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 Treasury function, which reports to
the Finance Director.
84
28.4 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 2019
Cash and balances at central banks
Loans and advances to customers
Derivative instruments at FVOCI
Total financial assets
Office equipment, fixtures, fittings and motor vehicles
Other assets
Deferred tax assets
Goodwill and other intangible assets
Amortised
cost
£’000
7,371
338,503
–
345,874
FVTPL
£’000
FVOCI
£’000
Total
£’000
–
–
–
–
–
–
19,638
19,638
Total assets
Due to banks
Due to customers
Derivative financial instruments
Total financial liabilities
Current tax liabilities
Other liabilities
Total liabilities
Group
30 September 2018
Cash and balances at central banks
Loans and advances to customers
Available-for-sale financial instruments
Total financial assets
Office equipment, fixtures, fittings and motor vehicles
Other assets
Deferred tax assets
Goodwill and other intangible assets
Total assets
Due to banks
Due to customers
Total financial liabilities
Current tax liabilities
Other liabilities
Total liabilities
7,371
338,503
19,638
365,512
579
4,932
1,105
5,941
378,069
44,412
267,070
63
311,545
1,521
6,248
319,314
44,412
267,070
–
311,482
–
–
63
63
–
–
–
–
Amortised
cost
£’000
21,338
219,322
–
240,660
48,881
191,139
240,020
FVTPL
£’000
FVOCI
£’000
Total
£’000
–
–
–
–
–
–
–
–
–
39,902
21,338
219,322
39,902
39,902
280,562
224
1,542
1,185
2,957
286,470
48,881
191,139
240,020
414
3,485
243,919
–
–
–
Annual Report & Financial Statements 2019
85
Company
30 September 2019
Cash and balances at central banks
Due from Group companies
Investment in subsidiary undertakings
Total financial assets
Other assets
Deferred tax assets
Total assets
Due to Group companies
Total financial liabilities
Other liabilities
Total liabilities
Company
30 September 2018
Cash and balances at central banks
Due from Group companies
Investment in subsidiary undertakings
Total financial assets
Other assets
Deferred tax assets
Total assets
Due to Group companies
Total financial liabilities
Other liabilities
Total liabilities
Amortised
cost
£’000
123
6,927
32,000
39,050
3,239
3,239
Amortised
cost
£’000
11
2,912
22,000
24,923
–
–
FVTPL
£’000
FVOCI
£’000
Total
£’000
–
–
–
–
–
–
–
–
–
–
–
–
123
6,927
32,000
39,050
896
135
40,081
3,239
3,239
1,692
4,931
FVTPL
£’000
FVOCI
£’000
Total
£’000
–
–
–
–
–
–
–
–
–
–
–
–
11
2,912
22,000
24,923
817
196
25,936
–
–
1,551
1,551
The Group holds certain financial assets at fair value grouped into Levels 1 to 3 of the fair value
hierarchy, as explained below.
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 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.
86
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 2019
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 2018
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
7,371
-
7,371
44,412
-
44,412
-
-
-
-
-
-
-
338,503
7,371
338,503
7,371
376,343
338,503
345,874
383,714
-
267,070
44,412
44,412
267,070 267,070
267,070
311,482
311,482
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
48,881
191,139
48,881
191,139
191,139
240,020 240,020
The following table shows an analysis of financial instruments recorded at FVOCI/AFS by level of the
fair value hierarchy.
Group
Financial instruments at fair value through Other
Comprehensive Income (FVOCI) 30 September 2019
Level 1
£’000
Level 2
£’000
Level 3
£’000
Fair
value
£’000
Quoted debt instruments
19,638
-
-
19,638
Group
Financial instruments at available-for-sale
(AFS) cost 30 September 2019
Level 1
£’000
Level 2
£’000
Level 3
£’000
Fair
value
£’000
Quoted debt instruments
39,902
–
- 39,902
Following the implementation of IFRS 9, effective from 1 October 2018, quoted debt instruments are
now classified as FVOCI instead of previously being valued at available-for-sale.
Group
Derivative financial instruments
30 September 2019
Financial assets
Financial liabilities
30 September 2018
Financial assets
Financial liabilities
Notional
Level 1
£’000
Notional
Level 2
£’000
Notional
Level 3
£’000
Carrying
value
£’000
Fair
value
£’000
–
–
–
–
10,000
10,000
8,000
8,000
–
–
–
–
–
–
(63)
(63)
–
–
–
–
Annual Report & Financial Statements 2019
87
28.5 Impairment allowance for loans and advances to customers
The table below shows the credit quality and the maximum exposure to credit risk based on the Bank’s
internal credit rating system and year end stage classification. The amounts presented are gross of
impairment allowances.
Group
At 30 September 2019
Gross carrying amounts
Performing
High grade
Standard grade
Sub-standard grade
Non-performing
Individually impaired
Collectively impaired
Total
Group
At 1 October 2018
Gross carrying amounts
Performing
High grade
Standard grade
Sub-standard grade
Non-performing
Individually impaired
Collectively impaired
Total
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
90,161
179,162
37,430
–
15,603
4,190
286 90,447
214 194,979
29 41,649
–
541
–
2,632
4,945
10,957
4,945
14,130
307,294
22,425
16,431 346,150
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
40,694
135,867
19,018
–
14,362
2,623
– 40,694
294 150,523
49 21,690
–
–
–
1,565
4,280
5,559
4,280
7,124
195,579
18,550
10,182 224,311
An analysis of changes in the gross carrying amount and the corresponding ECLs is as follows.
Gross carrying amounts
At 1 October 2018
New assets originated or purchased
Assets derecognised or matured
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Amounts written off
At 30 September 2019
ECL allowance
At 1 October 2018
New assets originated or purchased
Assets derecognised or matured
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
ECL transfers
Amounts written off
At 30 September 2019
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
195,580
238,564
(106,857)
2,294
(16,706)
(5,581)
–
18,550
105
(7,814)
(2,294)
16,706
(2,829)
–
10,183 224,313
45 238,714
(640) (115,311)
–
–
–
(1,566)
–
–
8,410
(1,566)
307,294
22,424
16,432 346,150
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
757
1,223
(339)
136
(64)
(25)
(112)
–
765
7
(72)
(136)
64
(221)
1,051
–
3,452
13
(281)
–
–
246
2,749
(1,566)
4,974
1,243
(692)
–
–
–
3,688
(1,566)
1,576
1,458
4,613
7,647
29 Financial risk management
The Group is based and its operations are predominantly in the United Kingdom, although Azule does
operate as a finance broker in the EU. Whilst risk is inherent in the Group’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.
88
29.1 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 seeks to manage its liquidity by matching the maturity of loans and advances with the
maturity of deposits from customers.
The Group maintains a portfolio of highly marketable and diverse assets that may be liquidated quickly
in the event of an unforeseen interruption in cash flow, the liquidity of which is regularly tested. The
Group also has central bank facilities and 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 deposits from customers 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
2019
£’000
30 September
2018
£’000
1.3
1.2
1.1
1.5
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) Undiscounted contractual cash flows
Group
At 30 September 2019
Financial assets
Cash and balances at central banks
Loans and advances to customers
Debt instruments at FVOCI
Other assets
On
demand
£’000
Less
than 3
months
£’000
3 to 12
months
£’000
1 to 5
years
£’000
Over
5 years
£’000
Total
£’000
7,371
13,492
–
–
–
29,692
–
4,932
–
–
7,371
92,009 247,504 24,593 407,290
20,753
4,932
20,502
–
251
–
–
–
–
Total undiscounted financial assets
20,863
34,624
92,260 268,006 24,593 440,346
Financial liabilities
Due to banks
Due to customers
Other liabilities
Total undiscounted financial liabilities
–
–
–
–
11,607
9,780
7,769
5,535
28,043
120,859 128,885
–
–
–
45,185
20,621 280,145
7,769
–
29,156
126,394 156,928
20,621 333,099
Surplus/(shortfall)
20,863
5,468
(34,134)
111,078
3,972 107,247
Annual Report & Financial Statements 2019
89
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
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 2019 the Group had total wholesale and retail
funding of £311.1 million (at 30 September 2018 – £240.0 million) that supported net loans and
advances of £337.9 million (at 30 September 2018 – £219.3 million). Moreover, at 30 September 2019
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.
Company
At 30 September 2019
Financial assets
Cash and balances at central banks
Due from Group companies
Other assets
Total undiscounted financial assets
Financial liabilities
Due to Group companies
Other liabilities
Total undiscounted financial liabilities
Surplus
Company
At 30 September 2018
Financial assets
Cash and balances at central banks
Due from Group companies
Other assets
Total undiscounted financial assets
Financial liabilities
Other liabilities
Total undiscounted financial liabilities
Surplus
90
On
Over
demand 5 years
£’000
£’000
123
6,927
896
7,946
3,239
1,692
4,931
3,015
–
–
–
–
–
–
–
–
On
Over
demand 5 years
£’000
£’000
11
2,912
817
3,740
1,551
1,551
2,189
–
–
–
–
–
–
Total
£’000
123
6,927
896
7,946
3,239
1,692
4,931
3,015
Total
£’000
11
2,912
817
3,740
1,551
1,551
2,189
(c) Analysis of encumbered and unencumbered assets
Group
Encumbered
Unencumbered
Available
as collateral
£’000
£’000
Other
£’000
Total
£’000
At 30 September 2019
Debt financial instruments at FVOCI
Loans secured on equipment, plant and
vehicles under conditional
sale/hire purchase agreements
Unsecured loans
Finance leases of equipment,
plant and vehicles
Bridging loans
Gross assets
9,083
10,555
–
19,638
48,437
572
17,537
–
75,629
186,899
621
18,564
12,305
228,944
43,012
129
10,427
–
53,568
278,348
1,322
46,528
12,305
358,141
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
Bridging loans
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
–
–
229,633
365
40,187
–
367
310,087
29.2 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 interest rate risk.
The Group lends on an instalment credit basis for up to ten years and holds a portfolio of variable rate
liquid assets. It funds itself from a combination of fixed rate retail deposits from 1 year to 7 years,
variable rate Term Funding Scheme (‘TFS’) funding, variable rate retail notice accounts and fixed rate
wholesale funding. The Group seeks to match the repayment profile of fixed rate instalment credit with
the fixed rate retail and wholesale funding, but it is impossible to match them perfectly. This mismatch
gives rise to interest rate sensitivity, which is managed using interest rate swaps as required.
Based on the exposure to interest rate risk, an increase in SONIA by 0.5 percentage point for the whole
financial year would have a favourable effect on profits of £21,024 (30 September 2018 – £37,151) and
a favourable impact on capital of £17,029 (30 September 2018 – £30,092).
Annual Report & Financial Statements 2019
91
29.3 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, including regular collateral revisions for the entire
Group. 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.
Analysis of maximum exposure to credit risk and collateral
Financial assets
Cash and balances at central banks
Cash and demand deposits
Loans and advances to customers
Consumer lending (net)
Business lending (net)
Azule lending
Bridging finance
Due from Related companies
Available-for-sale financial investments
Debt instruments at FVOCI
Other assets
Group
Company
30 September
2019
£’000
30 September
2018
£’000
30 September
2019
£’000
30 September
2018
£’000
7,371
21,338
128,854
186,989
9,712
12,948
–
–
19,638
4,932
125,689
140,127
–
–
–
39,902
–
1,542
370,444
328,598
123
–
–
–
–
6,927
–
–
896
7,946
11
–
–
–
–
2,912
–
–
817
3,740
The amount and type of collateral required depends on an assessment of the credit risk of the counterparty.
Guidelines are in place covering the acceptability and valuation of each type of collateral. The main
types of collateral obtained are as follows.
l For securities lending and reverse repurchase transactions, cash or securities.
l For corporate and small business lending, charges over inventory and trade receivables.
l For bridging finance, lending over residential properties.
Management monitors the market value of collateral and will request additional collateral in accordance
with the underlying agreement.
In its normal course of business, the Bank engages external agents to recover funds from repossessed
assets in its retail portfolio, generally at auction, to settle outstanding debt. Any surplus funds are
returned to the customers.
29.4 Impairment assessment
The references below show where the Group’s impairment assessment and measurement approach is set
out in this report. It should be read in conjunction with the summary of significant accounting policies.
l The Group’s definition and assessment of default (note 29.4.2).
l An explanation of the Group’s internal grading system (note 29.4.3).
l How the Group defines, calculates and monitors the probability of default, exposure at default and
loss given default (notes 29.4.3, 29.4.4 and 29.4.5 respectively).
l When the Group considers there has been a significant increase in credit risk of an exposure (note 29.4.5).
l The Group’s policy of segmenting financial assets where ECL is assessed on a collective basis (note
29.4.5).
92
29.4.1 Definition of default
The Group considers a financial instrument defaulted and therefore Stage 3 (credit-impaired) for ECL
calculations in all cases when the borrower becomes 90 days past due on its contractual payments.
As a part of a qualitative assessment of whether a customer is in default, the Group also considers a
variety of instances that may indicate unlikeliness to pay. When such events occur, the Group carefully
considers whether the event should result in treating the customer as defaulted and therefore assessed
as Stage 3 for ECL calculations or whether Stage 2 is appropriate. Such events include
l the borrower is deceased;
l the borrower (or any legal entity within the debtor’s group) filing for bankruptcy application/protection; or
l the borrower is in default of the legal agreement, i.e. not paid or breached covenants.
29.4.2 The Group’s internal rating and PD estimation process
The Group operates an internal rating model. The Group assesses its customers who are rated from
AAA to D using an internal credit classification model. The models incorporate both qualitative and
quantitative information and, in addition to information specific to the borrower, utilise supplemental
external information that could affect the borrower’s behaviour. These information sources are first used
to determine the probability of defaults (‘PDs’) for each segment. PDs are then adjusted for IFRS 9 ECL
calculations to incorporate forward-looking information and the IFRS 9 Stage classification of the exposure.
Corporate lending
Corporate lending comprises hire purchase, lease or bridging loans. The borrowers are assessed by
credit risk employees of the Group. The credit risk assessment is based on a credit scoring model that
takes into account various historical, current and forward-looking information such as
l historical financial information;
l any publicly available information on the clients from external parties; and
l any other objectively supportable information on the quality and abilities of the client’s management
relevant for the company’s performance.
The complexity and granularity of the rating techniques varies based on the exposure of the Group and the
complexity and size of the customer. Some of the less complex small business loans are rated within the
Group’s models for retail products.
Consumer lending
Consumer lending comprises hire purchase or conditional sale agreements. These products are rated
by an automated scorecard tool primarily driven by credit reference agency data. Additional checks on
affordability are made using credit reference agency data and bank statements.
The Group’s internal credit rating grades
Business Finance, Bridging and Azule
Internal rating grade
Internal Rating Description
Internal PD range
1
2
3
4
5
6
7
AAA & AA, LTV <=80%
AAA & AA, LTV > 80%
A & B+, LTV <=80%
A & B+, LTV > 80%
B & B-, LTV <=80%
B & B-, LTV > 80%
C & D
1.93-2.15%
2.71-4.29%
3.80-4.23%
7.24-8.35%
5.67-7.18%
11.87-13.29%
13.98-16.35%
Consumer Finance
Internal rating grade
Internal Rating Description
Internal PD range
1
2
3
4
5
6
7
8
AAA & AA, LTV <=80%
AAA & AA, LTV > 80%
A & B+, LTV <=80%
A & B+, LTV > 80%
B & B-, LTV <=80%
B & B-, LTV > 80%
C & D, LTV <=80%
C & D, LTV > 80%
3.30-3.58%
4.74-5.06%
6.45-6.98%
9.14-9.75%
8.96-9.95%
14.11-15.20%
12.07-13.06%
20.80-22.88%
Annual Report & Financial Statements 2019
93
29.4.3 Exposure at default
The exposure at default (‘EAD’) represents the gross carrying amount of the financial instruments
subject to the impairment calculation, addressing both the client’s ability to increase its exposure while
approaching default and potential early repayments. To calculate the EAD for a Stage 1 loan, the Group
assesses the possible default events within 12 months for the calculation of the 12 month ECL. For Stage 2
and Stage 3, the exposure at default is considered for events over the lifetime of the instruments. The
Group determines EADs by modelling the range of possible exposure outcomes at various points
in time, corresponding the multiple scenarios. The IFRS 9 PDs are then assigned to each economic
scenario based on the outcome of the Group’s models.
29.4.4 Loss given default
The credit risk assessment is based on a standardised LGD assessment framework that results in a
certain LGD rate. These LGD rates take into account the expected EAD in comparison to the amount
expected to be recovered or realised from any collateral held. The Group segments are made up of
small homogeneous portfolios, based on the internal credit rating. The applied data is based on
historically collected loss data as well as borrower characteristics.
Further recent data and forward-looking economic scenarios are used in order to determine the IFRS 9
LGD rate for each segment of each division. When assessing forward-looking information, the
expectation is based on multiple scenarios. The inputs for these LGD rates are estimated and, where
possible, calibrated through back testing against recent recoveries.
29.4.5 Significant increase in credit risk
The Group continuously monitors all assets subject to ECLs. In order to determine whether an instrument
or a portfolio of instruments is subject to 12 month ECL or Lifetime ECL, the Group assesses whether there
has been a significant increase in credit risk since initial recognition. The Group considers an exposure to
have significantly increased in credit risk when the IFRS 9 lifetime PD has increased by a factor of 1.6.
The Group also applies a secondary qualitative method for triggering a significant increase in credit risk
for an asset, such as moving a customer to the watch list, or the account becoming forborne. In certain
cases, the Group may also consider that events explained in note 29.4.2 are a significant increase in credit
risk as opposed to a default. Regardless of the change in credit grades, if contractual payments are more
than 30 days past due, the credit risk is deemed to have increased significantly since initial recognition.
30 Commitments and guarantees
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 were as follows.
Group and Company
Within one year
After one year but not more than five years
30 September
2019
£’000
30 September
2018
£’000
611
2,443
3,054
223
–
223
31 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 1. At year end,
there had been no material litigation against the Group or the Company.
32 Related parties
Apart from non-executive directors holding a total of £186,756 in savings accounts in the Bank at
30 September 2019 (30 September 2018 – £102,805), directors' remuneration disclosed in note 9, and
guarantees as also disclosed in note 22, there were no other related party transactions during the year.
The Group had a borrowing arrangement from Bermuda Commercial Bank amounting to £83 million
which was repaid fully during 2019. Such arrangement was at arm’s length and the total interest
expense recorded during the year was £214,342.
94
33 Events after the balance sheet date
Subsequent to the year end, the Group made the payment of £750,000 in respect of Azule’s contingent
consideration which is considered to be a non-adjusting event.
34 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 maintain strong credit ratings and
healthy capital ratios in order to support its business and to maximise shareholder value.
The Group has a number of measures which it takes to manage its capital position. Further details of
this are provided in the Chief Executive’s statement.
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 a periodic 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 above minimum regulatory requirements.
Annual Report & Financial Statements 2019
95
Notice of Annual General Meeting
Dear shareholder,
I am pleased to invite you to the PCF Group plc Annual General Meeting, which will be held at 1 Cornhill,
London EC3V 3ND at 10.00 a.m. on Friday 6 March 2020. The relevant Notice of Annual General Meeting
follows on the next page.
You will note that, for the first time, all directors will be retiring as directors and then seeking re-election.
The background to this is that whilst 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, the Board has confirmed that it will comply with the Corporate
Governance Code 2018 (the ‘Code’), which took effect for the Company from 1 October 2019. The Code
states that all directors should be subject to annual re-election. In addition, the Code states that the Board
should set out in the papers accompanying the Notice of Annual General Meeting the specific reasons why
each director’s contribution is, and continues to be, important to the Company’s long-term sustainable
success. This information is contained in the Appendix to the Notice of Annual General Meeting.
All the other proposed resolutions are consistent with resolutions from previous Annual General Meetings.
In the event that you are unable to attend the Annual General Meeting, you are entitled to appoint a proxy
to attend and vote on your behalf. A Form of Proxy is enclosed and the Notes to the Notice of Annual
General Meeting set out the process and timelines for appointing a proxy.
Robert Murray
Company Secretary
12 February 2020
96
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 6 March 2020 to consider and, if thought fit, pass the
following resolutions, of which resolutions 1 to 14 will be proposed as ordinary resolutions and resolution 15
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 2019.
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 2019.
3 To re-elect Tim Franklin, who is retiring as a director and seeking re-election.
4 To re-elect Mark Brown, who is retiring as a director and seeking re-election.
5 To re-elect Christine Higgins, who is retiring as a director and seeking re-election.
6 To re-elect Marian Martin, who is retiring as a director pursuant to Article 93 of the Company’s Articles
of Association, and seeking re-election.
7
To re-elect David Morgan, who is retiring as a director and seeking re-election.
8 To re-elect David Titmuss, who is retiring as a director and seeking re-election.
9 To re-elect Scott Maybury, who is retiring as a director and seeking re-election.
10 To re-elect Robert Murray, who is retiring as a director and seeking re-election.
11 To re-elect David Bull, who is retiring as a director and seeking re-election.
12 To re-appoint Ernst & Young LLP as auditors of the Company and to authorise the directors to determine
their remuneration.
13 To declare a final dividend of 0.40 pence per ordinary share in respect of the year ended 30 September 2019.
Special Business
14 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’.
15 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 9 set out
in the Notice of Annual General Meeting of the Company dated 12 February 2020, 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 £500,000,
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
12 February 2020
Registered Office
Pinners Hall
105-108 Old Broad Street
London
EC2N 1ER
Annual Report & Financial Statements 2019
97
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 Friday
6 March 2020 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 Friday 6 March 2020 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.
98
Tim Franklin
Non-executive Chairman, appointed 6 December 2016
Tim has extensive experience in the financial services industry having worked for over 30 years in the retail
banking and building society sectors. Tim served as a non-executive director of the Post Office for 7 years
until December 2019 and remains Chairman of Post Office Insurance. Additionally, he is a non-executive
director of Computershare Loan Services. 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. In
addition, he is an Associate of the Chartered Institute of Bankers.
Tim is Chairman of the Nomination Committee and a member of the Remuneration Committee.
Contributions and reasons for re-election
Tim has spent his entire career in the financial services sector and was appointed as a director and Chairman
of the Board at the time when PCF was granted its banking licence. He is an experienced main board director
with a track record of delivery across a wide variety of businesses.
He has been instrumental in leading the Board during a period of sustained growth, ensuring that the growth
is measured and that the appropriate governance is in place. In particular, he has re-constituted the Board
with the appointment of three new, independent non-executive directors who have added breadth, depth
and diversity to the Board. Tim leads the Board with a high degree of professionalism, encouraging full
participation and contribution from the other members of the Board.
Mark Brown
Non-executive director, appointed 1 December 2015
Mark was Chairman of Stockdale Securities from November 2014 until it was bought by Shore Capital in April
2019. He was previously Chief Executive of Collins Stewart Hawkpoint and brings a wealth of experience and
leadership in both small and large financial services businesses. 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 of the Nomination Committee and the Remuneration Committee.
Contributions and reasons for re-election
Mark has over 30 years of experience in the financial services sector, the last 15 of which have been spent
assisting companies with listing and equity raising. His experience and in-depth knowledge of the stock
market has proved invaluable as PCF has sourced new equity and expanded its shareholder register. Mark
also has extensive experience of running financial services businesses and, in particular, delivering change to
improve profitability.
Christine Higgins
Independent non-executive director, appointed 13 June 2017
Christine is a chartered accountant with over 25 years’ experience in asset finance for UK and 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 committee. She is currently a
non-executive director of Buckinghamshire Building Society and chairs its audit committee.
Christine is Chair of the Audit & Risk Committee and a member of the Nomination Committee and the
Remuneration Committee.
Contributions and reasons for re-election
Christine is an experienced non-executive director with extensive knowledge of the financial services sector
and, in particular, asset finance. With a background in accountancy, she has in depth knowledge of accounting
standards and financial reporting, as well as a strong eye for detail. She chairs the Audit & Risk Committee
in an energetic and collegiate style, ensuring that controls, governance and risk management are of the
highest standards.
Marian Martin
Independent non-executive director, appointed 25 July 2019
Marian Martin is a chartered accountant with a background in risk management and audit. Most recently,
Marian was at Virgin Money for 11 years and was Chief Risk Officer throughout a period of significant growth
and strategic development of Virgin Money and its risk function, including the successful listing of Virgin
Money on the London Stock Exchange. Marian was an executive director of the main trading companies of
the Virgin Money group during this period. In addition, Marian is a non-executive director at Castletrust and
Starling Bank.
Marian is a member of the Audit & Risk Committee, the Nomination Committee and the Remuneration Committee.
Contributions and reasons for re-election
Marian has a wealth of experience in the financial services sector and has quickly made a contribution to the
Board at PCF with her detailed knowledge and skills in risk management. In particular, she has very recent,
relevant experience in an executive role of a retail bank whose shares are listed on the Stock Exchange.
Annual Report & Financial Statements 2019
99
David Morgan
Non-executive director, appointed 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, the Nomination Committee and the Remuneration Committee.
Contributions and reasons for re-election
David is a highly experienced non-executive director who has significant banking experience, both at an
executive and non-executive level. He brings a high level of challenge and direction to the Board, especially
in terms of strategy and business development.
David Titmuss
Independent non-executive director, appointed 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 Chairman of the Remuneration Committee and a member of the Nomination Committee.
Contributions and reasons for re-election
David adds breadth to the Board with a wide experience in business which covers a number of different
sectors, including, but not limited to, financial services. His specialism and expertise in marketing and the
digital landscape has proved to be vital. In addition, he has direct experience of credit decisioning and debt
collections for retail and corporate customers, gained from holding senior roles in the finance industry for a
number of years. David has an abundance of energy, enthusiasm, ideas and passion and provides positive
challenge to the Board.
Scott Maybury
Chief Executive, appointed 12 January 1994
Scott holds a degree in business studies and is a qualified accountant. He spent 6 years with BHP Billiton,
Australia’s largest multi-national corporation, and 5 years with McDonnell Douglas Bank. He is one of the
founding directors of PCF Group plc and was previously Finance Director until October 2008.
Contributions and reasons for re-election
Scott is one of the founding directors of PCF and has detailed knowledge of its finances, having previously
been the Company’s Finance Director. He has been Chief Executive for the past 11 years, successfully steering
it through the Global Financial Crisis before subsequently leading it through the banking licence application
process and delivering its strategic plan as a bank. He has over 20 years’ experience of managing a business
which is listed on AIM.
Robert Murray
Managing Director, appointed 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.
Contributions and reasons for re-election
Robert has spent his entire career in the financial services sector and is one of the founding directors of PCF.
He has detailed knowledge of the business and, in particular, its lending activities, customers and
introductory sources. He was instrumental in the acquisition of Azule in 2018 and the setting up of the
bridging finance operation in 2019. He has over 40 years of banking experience, lending to consumers and
corporates as well as over 20 years’ experience of managing a business which is listed on AIM.
David Bull
Finance Director, appointed 3 August 2015
David holds a first-class degree in Mathematics and Statistics and is a qualified 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 a Director of Finance and Company Secretary at Hampshire Trust Bank plc, a specialist
challenger bank, where he was instrumental in setting up their banking operations.
Contributions and reasons for re-election
David has extensive experience in accounting, regulatory reporting and managing the capital and liquidity
requirements of a bank. He was instrumental in the execution of PCF’s plan to become a bank, taking a
leading role in establishing and embedding the governance and risk management framework.
He has over 25 years of banking experience, including strong operational skills, covering areas such as
savings and customer services.
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Avocette Limited, London
PCF Bank Limited Pinners Hall, 105-108 Old Broad Street, London EC2N 1ER
www.pcf.bank
Lending Consumer Finance 020 7227 7506 Business Finance 020 7227 7560
Azule Finance 01753 580 500 Bridging Finance 020 3848 7802
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 offices are at Pinners Hall, 105-108 Old Street, London EC2N 1ER.