PCF Group plc
Annual Report &
Financial Statements
2020
PCF Group plc is the AIM-listed parent company of the
specialist bank, PCF Bank Limited.
PCF Bank Limited 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 Officers review
Market and Business Overview
Risk Overview
Stakeholder Engagement Report
Sustainability Report
Corporate Governance Report
Nomination Committee Report
Remuneration Committee Report
Audit & Risk Committee Report
Board Risk Committee Report
Directors’ Report
Risk Management Report
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
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Company Information
PCF Group plc
Directors
Company Secretary
Registered Office
Tim Franklin Non-executive Chairman
Mark Brown Non-executive
Christine Higgins Non-executive
Marian Martin Non-executive
David Morgan Non-executive
David Titmuss Non-executive
Garry Stran Interim Chief Executive Officer (appointed 5 October 2021)
Caroline Richardson Chief Financial Officer (appointed 5 October 2021)
Scott Maybury Chief Executive Officer (resigned 21 May 2021)
Robert Murray Managing Director (resigned 26 March 2021)
David Bull Finance Director (resigned 16 March 2020)
Robert Murray (resigned 31 March 2021)
LDC Nominee Secretary Limited (appointed 31 March 2021)
Pinners Hall
105-108 Old Broad Street
London EC2N 1ER
Registered Number
02863246
Auditors
Nominated Adviser & Broker
(‘NOMAD’)
Joint Broker
Registrars
Media & Investor Relations
Ernst & Young LLP
25 Churchill Place
Canary Wharf
London E14 5EY
Peel Hunt LLP
100 Liverpool Street
London EC2M 2AT
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 Group plc, a company registered in England and Wales, registration
number 02863246, and listed on the Alternative Investment Market. PCF Bank
Limited (‘PCF Bank’) is a wholly owned subsidiary of PCF Group plc and is
registered in England and Wales, registration number 02794633. PCF Bank is
authorised by the Prudential Regulation Authority and regulated by the
Financial Conduct Authority and the Prudential Regulation Authority, FRN
number 747017. Certain subsidiaries of PCF Bank are authorised and regulated
by the Financial Conduct Authority for consumer credit activities and the
registered offices of which are at Pinners Hall, 105-108 Old Broad Street,
London EC2N 1ER.
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Strategic Report
The Strategic Report provides a holistic view of PCF Group plc’s (the ‘Group’) business model, strategy and
performance in the year ended 30 September 2020 along with its future prospects.
The Group issued its Preliminary Results for 2020 on 9 December 2020. As disclosed on 21 October 2021, a
number of items have caused a reduction to profit before tax of approximately £7 million for the twelve months to
30 September 2020, compared with the preliminary results published in December 2020.
This was driven predominantly by an approximate £6 million revision to the impairment methodology for
defaulted receivables, adjustments principally from the financial controls review increased cost of the 2020 audit
and audit adjustments as disclosed in the Regulatory News Service (‘RNS’) published on 11 March 2021.
Business and financial highlights
l Underlying loss before tax1 of £(3.1) million (2019 – profit of £8.0 million).
l Underlying profit reduction driven by credit impairment charges of £14.4 million (2019 – £3.3 million), including
the incremental cost of potential pandemic related credit losses.
l Statutory loss before tax was £(4.8) million (2019 – profit of £8.0 million), including a partial impairment of
goodwill arising on the acquisition of Azule Limited2 £1.75 million.
l Focus on portfolio quality with 85% (2019 – 73%) of year to 30 September 2020 originations in the highest
quality segments3 of the Group’s credit grades.
l Net Loan book increased to £427 million (2019 – £339 million).
l Portfolio forbearance has reduced since the early stages of the pandemic and as at 30 September 2020 only
9% of balances were in forbearance. The improving trend has continued into 2021.
l Operating income increased by 15% to £26.7 million (2019 – £23.3 million).
l Net interest margin reduced to 6.9% (2019 – 7.8%) reflecting the focus on higher quality lending partially offset
by a cheaper cost of funds.
l Cost to income ratio4 increased to 57.5% (2019 – 51.6%).
l £272 million (2019 – £276 million) of new business originations comprising:
l New business origination for ‘own portfolio’ increasing by 11% to £246 million (2019 – £222 million).
l £26 million (2019 – £54 million) of brokered Azule new business origination, generating commission income.
l Bridging finance lending of £61 million in first full year of operation (2019 – 9 months – £14 million).
l Total deposits of £342 million (2019 – £267 million) with over 7,950 retail deposit customers (2019 – over 6,100).
l Drawings of £62.4 million (2019 – £25.0 million) under the Bank of England’s Term Funding Scheme (‘TFS’) and
Term Funding Scheme with additional incentives for small and medium sized entities (‘TFSME’).
l Earnings per share of (1.7)p (2019 – 2.7p).
l Underlying return on equity5 of (4.5)% (2019 – 12.6%).
l Statutory return on equity of (7.6)% (2019 – 12.6%).
l CET1 capital ratio of 15.1% (2019 – 18.0%).
l Liquidity coverage ratio of 673% (2019 – 715%).
l Leverage ratio6 of 11.5% (2019 – 14.8%).
l Total capital ratio of 16.8% (2019 – 18%).
1 Underlying loss before tax is before the deduction of impairment to goodwill of £1.75 million.
2 Azule was acquired in November 2018 and therefore 2019 comparative figures relating to Azule represent 11 months
to 30 September 2019.
3 Highest quality credit grades refer to internal rating grades 1 to 4. Refer to the Risk Management Report (‘RMF’) for
further details.
4 Cost to income ratio excludes impairment of goodwill and impairment losses on financial assets.
5 Underlying return on equity adds back the impairment of goodwill of £1.75 million.
6 Leverage ratio – transitional definition of Tier 1 capital.
Annual Report & Financial Statements 2020
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Strategic Report (cont’d)
Chairman’s Statement
for the year ended 30 September 2020
Before commenting on the financial year ended
30 September 2020, I begin my statement with an
apology on behalf of the Group and the Board to all
stakeholders and shareholders in particular for the delay
in publishing this report and for the reporting, control
and governance shortcomings that caused this delay
and the continuing suspension of trading in the Group’s
shares on AIM.
Post 30 September 2020 events
Accounting errors and misstatements, initially identified
by the Group’s new Chief Financial Officer as a result of
audit enquiries, resulted in trading in the Group’s shares
being suspended on 19 May 2021 after discussions with
the Group’s nominated adviser (‘NOMAD’).
This situation has been deeply concerning, unsatisfactory
and a huge disappointment to your Board. For further
details please refer to pages 41 to 42 of the Audit & Risk
Committee Report.
Putting it right
Since the discovery of and in response to these events
the Board has taken, and is in the progress of taking,
the following actions:
1 Discovery and investigation
l Commissioned PricewaterhouseCoopers LLP
(‘PwC’) to conduct independent forensic
investigations into accounting errors and
misstatements, see page 41 for more information.
l The Group’s Finance team then reviewed the
output of the PwC investigations and also
performed a further detailed review of the
Group’s balance sheet. Details of this finance
review, overseen by the CFO is set out in the
Audit & Risk Committee report.
l Appointed Garry Stran as interim Chief
Executive Officer to lead the Group and the
remediation programme.
2 Short-term mitigation
l New executive appointments in the key roles of
Chief Risk Officer, Chief Operating Officer,
General Counsel, and Chief of Staff, provide
significant industry knowledge and experience.
l Strengthen the Risk, Finance and Change
functions to deliver the short-term ‘repair’
activity, whilst supporting the longer-term,
more efficient, sustainable solutions.
l Instigated cultural change initiatives in advance
of a wider culture programme, focusing on
understanding personal responsibility for risk,
active listening and speaking up. This includes
clear and open communications to all our
stakeholders whilst adhering to market rules.
l Initiating longer-term programmes to deliver
the required changes in Corporate Governance,
financial control and Culture that will underpin
the Group now and into the future.
3 Longer-term sustainable solutions
l Deliver and embed a culture programme across
the Group as part of building back our
reputation with key stakeholders.
l Deliver and embed a comprehensive RMF,
embedding this across the Group, in
conjunction with the planned appointment of a
Senior Independent Director to the Board.
l Deliver the Finance transformation programme
focused on financial controls and the provision
of timely and accurate data.
l Continue our investment in IT systems to
develop a technologically advanced digital and
modern operating platform replacing residual
manual processes.
The discovery and investigation phase is complete,
with short-term mitigation actions in place. We are
mobilising the programmes to deliver sustainable
solutions, demonstrating our long-term commitment
to change.
Lifting the suspension of share trading
The remediation phases required to enable the lifting of
the suspension of trading in the Group’s shares are well
underway, and the Board and Executive Team continue
to work closely with the Group’s NOMAD with the goal
of achieving the lifting of that suspension as soon as
possible.
Moreover, we are in the process of updating our
Financial Position and Prospects Procedures
memorandum (‘FPPP’) which will be completed
following publication of this Annual Report & Financial
Statements.
Following publication of this Annual Report & Financial
Statements, we will further communicate progress in
lifting the suspension of trading in the Group’s shares
once we have more certainty on its timing towards the
end of January 2022.
It should be noted by the shareholders that the London
Stock Exchange can apply and/or provide derogations
to the AIM Rules at their discretion, including in respect
of the suspension of trading in the Group's shares and its
continued listing on AIM. The Group, through its NOMAD,
remains in an ongoing dialogue with the Exchange on
these matters.
Business’ performance for the year ended
30 September 2020
Turning to the Group’s business performance for the
year ended 30 September 2020, the pandemic was
completely unforeseen and has presented individuals,
families, businesses and economies with challenges not
seen in living memory. However, with significant effort
and support from all colleagues, the business remained
operational throughout, whilst maintaining customer and
colleague wellbeing.
I therefore thank all my colleagues for their efforts and
dedication to serving the Group’s customers through a
hugely challenging period for everyone.
Profitability, balance sheet strength and the
effect of the pandemic
Net operating income increased by 15% in the twelve
months driven by strong loan growth which more than
offset the reduction in the net interest margin which
reflected a particular focus on a tightening of the Group’s
credit risk appetite throughout the pandemic. Lending in
Consumer finance and Bridging finance was strong, while
Business finance experienced lower demand due to
competing Government support schemes such as the
Coronavirus Business Interruption Loan Scheme
(‘CBILS’). The continuing presence of similar schemes will
restrict growth in this segment.
Annual Report & Financial Statements 2020
5
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training and development to enable each of them to
achieve their potential. The Board is determined that the
Group, alongside cultural change, will drive programmes
around governance and financial control. This will
provide a fit for purpose, long term and sustainable
platform to build long-term value for stakeholders.
Outlook
This outlook should be read in conjunction with the
emerging risks and uncertainties section on page 16.
The Group has a well-established business model, which
gives the Board confidence that the business will
overcome the current challenges and return to growth
over the medium-term.
Given the current credit environment, including the
potential impact of COVID-19 on impairment losses, and
the level of remediation actions and change underway in
the Group, bringing with it substantial short-term costs,
the Board does not believe that it is appropriate to
provide firm guidance on future performance. Therefore,
the Group’s previous operating targets remain
withdrawn. The Group will seek to re-establish guidance
once its remediation activity is more fully complete.
Moreover, increased operating costs are expected as the
Group significantly increases headcount and the
investment in IT to improve and embed the new
reporting controls and systems. In addition, the Group
expects to continue to incur high remediation costs while
it addresses the issues identified and implements the
required remediation actions.
Conclusion
In conclusion, since my last statement the Group has
faced substantial difficulties, your Board is confident that
the business is on the path to recovery from these
challenges, after which all colleagues will be able to turn
their full focus to the delivery of sustainable profits and
long-term value for all stakeholders.
Tim Franklin
Chairman
22 December 2021
Strategic Report (cont’d)
Chairman’s Statement
for the year ended 30 September 2020
Operating expenses, excluding the impairment of
goodwill and credit impairment charges, were well
managed but increased to support the growth of the
business. As a result, profit before tax, excluding the
impairment of goodwill and credit impairment charges,
increased to £11.4 million (2019 – £11.3 million),
demonstrating that the core business performed well.
The Group’s credit impairment charge increased
significantly in 2020 to £14.4 million (2019 – £3.3 million),
reflecting the impact of COVID-19, a more cautious
economic outlook on future expected losses and
significant items of £8.5 million set out below. Under
IFRS 9, credit impairment charges cover the potential
future losses which would arise from the effects of
COVID-19 on the performance of the loan book. The
charge for the year also includes the previously
announced £6 million increase to impairments on
defaulted receivables2, resulting from revisions to
recovery expectations against those exposures. There
are also additional specific provision increases related to
forbearance and COVID-19 provisions (£1.1 million) and
customer specific provisions (£1.4 million).
This resulted in the Group generating an underlying loss
before tax of £(3.1) million1 (2019 – profit of £8.0 million)
for the twelve months to 30 September 2020.
In addition, the Group impaired the value of goodwill in
respect of the purchase of Azule Limited by £1.75 million,
which meant that on statutory basis, the Group
generated a loss before tax of £(4.8) million (2019 –
profit of £8.0 million). The loss after tax was £(4.3)
million (2019 – a profit of £6.4 million), equivalent to a
return on equity of (7.6)% (2019 – 12.6%) and earnings
per share of (1.7)p (2019 – 2.7p).
The Group’s net assets decreased to £53.9 million (2019
– £58.8 million). At 30 September 2020, the Group’s total
capital ratio of 16.8% (2019 – 18.0%) remain comfortably
above the regulatory requirement. Liquidity was
managed in excess of risk appetite and regulatory
requirements throughout the period.
Given the financial performance for the year and to
maintain our capital position, the Board is not
recommending a dividend in respect of the twelve
months to 30 September 2020.
1 Underlying loss before tax is before the deduction of impairment
to goodwill of £1.75 million.
2 receivables that were either seriously in arrears or where the asset
which acted as security for the receivable had been sold and a
balance of the receivable remained outstanding.
Governance and culture
The discovery of reporting, control and governance
shortcomings is hugely disappointing. The management
team is absolutely focused on building the tactical
initiatives already undertaken into a full cultural
programme of change alongside RMF.
The commitment of colleagues continues to be one of
the Group’s greatest strengths. The Board and
management have supported and will continue to
support colleagues with a safe, healthy working
environment and with increased communications,
Annual Report & Financial Statements 2020
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Strategic Report (cont’d)
Chief Executive Officer’s review
for the year ended 30 September 2020
This is my first report as your CEO following my
appointment in May 2021. The circumstances that led
to my appointment have created many challenges for
the business in addition to those already in existence
due to the COVID-19 pandemic, and these challenges
have dominated my time in the role to date.
Where our customers have approached us to assist them,
we have met our regulatory obligations. At 30 September
2020, 9% of our total loan book was in forbearance or
COVID-19 related payment deferral plans. This has
reduced since the early stages of the pandemic and the
improving trend has continued into 2021.
I regret that the time since my appointment has been
an uncertain one for shareholders, but it was absolutely
essential that my team and I focused on carrying out
the review of the Group’s financial controls and
processes to ensure that the Group could plan for the
future with confidence. The issues facing us were inter-
linked and complex and have taken time to resolve. For
further details please refer to 50 to 53 of the Audit &
Risk Committee Report.
I am fully aware that during this period of uncertainty
some shareholders may have been disappointed with
the frequency and granularity of the information that
we have supplied. However, I can assure you that at all
times the interests of shareholders were front of mind
for both the executive team and the Board, but the
need to take account of a number of regulatory and
legal issues had an impact on the timing, content and
our ability to make these disclosures.
Moreover, I thank all my colleagues who make up the
PCF team for their commitment and support during a
difficult period. Many of them are long serving and
have been devastated by the discovery of the issues
that have so consumed us over the last few months.
This, combined with the challenges of the pandemic,
including working remotely for 18 months, has
undoubtedly resulted in many colleagues experiencing
circumstances in their work and personal lives that they
would never wish to see repeated. Their commitment
and desire to see PCF repair its reputation is clear to
me and the executive team.
Turning to business performance, taking account of the
pandemic impacts and before the higher one-off
impairment charges the underlying business
performance of our core business was resilient.
Response to the pandemic
The second half of the financial year to September 2020
was disrupted by the operational and economic impacts
of the pandemic. The business acted swiftly to deploy
home working and, supported by our technology team,
our entire team was working from home within days
without business interruption.
Throughout the pandemic period, our focus has been on
protecting our core assets – our people, our customers
and our balance sheet. These have been challenging times
for both our colleagues and our customers and of
particular importance to us was our effort to support
colleague wellbeing and to assist customers who may
have suffered hardship through no fault of their own.
In respect of our colleagues, we have put in place support
mechanisms and new ways of working which have
enabled them to have the flexibility to continue to
contribute fully to our business whilst ensuring that they
are able to dedicate time to take care of themselves and
their loved ones. We are proud of the way they have risen
to the challenges they have faced.
Trading and profitability
In the twelve months to 30 September 2020, the Group
incurred an underlying loss before tax of £(3.1) million
(2019 – profit of £8.0 million). This was driven by a
significant increase in credit impairment charges which
more than offset the increase in net operating income.
Net operating income of £26.7 million increased 15% in
the year (2019 – £23.3 million) and was supported by
loan growth, particularly in consumer and Bridging
finance. Net loans and advances to customers
increased to £427 million (2019 – £339 million). The
quality of new business improved, with 85% of business
written in our highest credit grades, compared to 73%
in 2019. Whilst this improved the overall quality of the
loan book, it has led to some compression to the
Group’s net interest margin which fell to 6.9% (2019 –
7.8%).
Operating expenses, excluding the impairment of
goodwill and credit impairment charges, increased to
£15.4 million from £12.0 million in 2019. The Group’s
cost:income1 ratio increased to 57.5% (2019 – 51.6%).
Profit before tax, excluding the impairment of goodwill
and credit impairment charges, increased to £11.4
million (2019 – £11.3 million).
The Group’s credit impairment charge increased
significantly in 2020 to £14.4 million (2019 – £3.3
million), reflecting the impact of COVID-19 and a more
cautious economic outlook on future expected losses.
Under IFRS 9, credit impairment charges cover the
potential future losses which would arise from the
effects of COVID-19 on the performance of the loan
book. The charge for the year also includes the
previously announced £6 million increase to
impairments on ‘defaulted receivables’ (receivables that
were either seriously in arrears or where the asset
which acted as security for the receivable had been
sold and a balance of the receivable remained
outstanding), resulting from revisions to recovery
expectations against those exposures. There are also
additional specific provision increases related to
forbearance and COVID-19 provisions (£1.1 million) and
client specific provisions (£1.4 million).
The Group’s impairment charge for the year, as a
percentage of average gross loan balances was 3.6%
(2019 – 1.1%). The IFRS 9 expected credit loss provision
on the balance sheet, as a percentage of gross loan
balances, increased to 4.2% (2019 – 2.0%).
As a result, the Group generated an underlying loss
before tax of £(3.1) million (2019 – profit of £8.0 million)
for the year.
The Group partially impaired the goodwill paid on the
acquisition of Azule, the broadcast and media specialist
finance business acquired in 2018, by £1.75 million. This
impairment of goodwill was driven by the likelihood of
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reduced profitability in the near-term, as a result of the
impact of COVID-19 and lower new business
originations on the future expected cash flows relating
to the Azule business.
On a statutory basis, therefore, the Group generated a
loss before tax of £(4.8) million (2019 – profit of £8.0
million). This represents a return on equity of (7.6)%
(2019 – 12.6%) and an earnings per share of (1.7)p
(2019 – 2.7p).
1 Cost:income ratio calculated excluding impairment on goodwill and
credit impairment charges.
Business lines and portfolio quality
New business origination in the year fell slightly to
£272 million (2019 – £276 million) which is a strong
performance in the context of the pandemic with the
diversification into Bridging finance contributing to
that success. The quality of new business origination
continued to improve with 85% of originations in our
highest credit grades, compared to 73% in the
previous year.
The total gross loan book grew to £446 million (2019 –
£345 million) and the overall quality of the loan book
improved, with 78% of the portfolio in our highest
credit grades (2019 – 68%).
The Group continued to be cash generative through all
trading months by way of a combination of the
embedded recurring cashflows from our loan book and
a continued focus on cost control.
Segmental business review
Consumer finance division
The used motor vehicle finance market has proved
resilient throughout the period. After an initial fall in
demand following lockdown in March 2020, new
business origination picked up in May 2020 and further
increased when dealerships reopened on 1 June 2020.
This is consistent with data on used car sales and used
car asset values. The leisure market has also been
buoyant, in particular for motorhome finance, as a
greater number of people took holidays in the UK.
New business originations in the year were £91 million
(2019 – £73 million), an increase of 24%, and the loan
book grew by 31% to £172 million (2019 – £131 million).
Credit quality was strong with 93% of originations in our
highest credit grades (2019 – 80%), and we have
maintained cautious underwriting terms in respect of
loan to values.
Levels of forbearance and COVID-19 related payment
deferrals in this portfolio are relatively low at less than
4% of balances at 30 September 2020. The impairment
charge for the year was £4.9 million (2019 – £1.0 million).
New business originations in the year were £81 million
(2019 – £120 million), a decrease of 33%. However, the
gross loan book grew to £190 million (2019 – £181 million)
with 78% of origination in our highest credit grades
(2019 – 71%).
Levels of forbearance and COVID-19 related payment
deferrals have been high in this portfolio but had
reduced to 13% of balances at 30 September 2020. The
impairment charge for the year was £8.4 million (2019 –
£2.2 million).
Azule
Azule Limited, PCF’s specialist broker of funding for the
broadcast and media sector, has been particularly affected
by the lockdown with TV, film, sports, and live events all
severely impacted. In the second half of the year the
division focused its activity on assisting customers with
applications under the UK Government’s CBILS scheme.
The business has more recently seen increased activity as
the sector returns to business as usual.
Despite the goodwill impairment for this division, we
expect it to recover over time as the need for content to
support on-demand streaming services drives
investment in new equipment.
New business originations in the year were £39 million
(2019 – £69 million), a decrease of 43%, and the loan
book in relation to the broadcast and media sector
stands at £23 million (2019 – £20 million).
The impairment charge for the year was £0.6 million
(2019 – £nil).
Azule was acquired in November 2018 and therefore
2019 comparative figures relating to Azule represent
11 months to 30 September 2019.
Bridging finance
This division has seen strong demand. The Group took
advantage of several non-bank competitors
withdrawing from the market in the early months of the
pandemic and this has allowed us to build relationships
with new introducers. We are pleased with the quality
and terms of business in this market and encouraged
by the performance and outlook for this sector.
Originations in the year were £61 million (2019 9
months – £14 million) and from a small base this division
has been a key contributor to the Group’s asset growth
with a gross loan book of £61 million (2019 – £13
million). We lend primarily on residential property with
first charge security and conservative loan to values.
While the portfolio experienced no actual losses in the
year, the IFRS 9 Expected Credit Loss provision for
potential future losses was £0.5 million (2019 – £nil).
Business finance division
New business origination in this division has been more
noticeably affected by lower demand. Sole traders and
small companies understandably deferred investment
decisions and, where working capital can be accessed
through one of the Government’s support schemes at
preferential terms, our asset finance products have
become less competitive. We remain focused on prudent
underwriting as the difficult trading conditions for most
small and medium sized enterprises (‘SME’) raises
questions about the long-term sustainability of SME
financial commitments.
Savings
We continued to offer a range of good value savings
products through the year, increasing savings balances
to £342 million (2019 – £267 million) demonstrating our
ability to raise funds as required at rates which
facilitate our business objectives. The Group offers a
range of fixed term and notice accounts that are
designed to offer good value to our retail customers
whilst meeting our need to manage the liquidity and
interest rate risks associated with our loan books.
Savings customer numbers grew to over 7,950 in 2020,
from just over 6,100 in 2019.
Annual Report & Financial Statements 2020
9
10
Strategic Report (cont’d)
Chief Executive Officer’s review
for the year ended 30 September 2020
Capital management and treasury
The Group entered the pandemic period with a
diversified funding model utilising retail deposits,
wholesale debt and drawings from the Bank of
England’s Term Funding Schemes. At 30 September
2020, we had drawn £62.4 million (2019 – £25 million)
from TFS and TFSME and held £342 million in retail
deposits (2019 – £267 million). Our retail deposits have
been relatively consistent, with an average balance of
£42,500 (2019 – £42,200).
The Group’s cost of funding fell to 1.7% (2019 – 2.2%)
and we retain a strong liquidity position with a
Liquidity Coverage Ratio of 673% at 30 September
2020 (2019 – 715%).
The Group had a total capital ratio of 16.8% (2019 –
18.0%) which exceeds our regulatory minimum total
capital requirement. The Group has utilised its Tier 2
capital facility, issuing a total of £7 million of
subordinated notes to British Business Investments
Limited (‘BBI’) between November 2019 and May 2020
(2019 – £nil). Prudent management of capital resources
has been a particular focus since the start of the
pandemic.
Regulatory capital and ratios are set out in the Risk
Management Report on pages 59 to 60.
2021 strategic objectives, current trading and
outlook
This outlook should be read in conjunction with the
emerging risks and uncertainties section on page 16.
The objectives for 2021 were to maintain and stabilise
the business following the pandemic, to maintain credit
quality and to continue to invest in our IT infrastructure.
Events have overtaken a significant part of our
strategic objectives and whilst we have remained
focused on the credit quality of our lending and
continued investment in our IT infrastructure, a
significant amount of management time has inevitably
been directed to the remediation activities highlighted
elsewhere in this report.
As a result of the current position in respect of our
controls framework and the pandemic, we have taken
the decision to manage our lending volumes carefully
to ensure that the next stage of our development is
built on firm governance, culture, systems and controls,
and we continue to focus on maintaining credit quality.
However, once our planned remedial actions have been
completed, we will be well placed to return to a
strategy of controlled and prudent growth.
Delayed interim financial report and
completion of the Annual Report & Financial
Statements
The Chairman’s report on pages 5 to 7 sets out the steps
that led to the share trading suspension and a RNS
detailing the initial findings was issued on 28 June 2021.
The work undertaken is set out in more detail in the Audit
& Risk Committee (‘ARC’) Report which highlights how
these developments have delayed the finalisation of these
Annual Report & Financial Statements as well as
impacting the issuance of our interim results for the
current year.
Since my appointment as Interim Chief Executive Officer
in May 2021, my immediate focus has been to develop a
remediation plan to address the issues set out above and
start its implementation.
Implementation of the remediation plan
I anticipate the implementation of our remediation plan
by the executive team will take a further 18-24 months
to fully complete.
The aim of this plan is to build firm foundations for the
future growth of the business, restore confidence with
our investors and our regulators and following the
suspension of the trading of our shares on 19 May 2021,
move as quickly as possible to meet the requirements
for this suspension to be lifted.
The Group’s transformation programme started with
experienced financial services hires joining my
executive team including a General Counsel, a Chief
Risk Officer, and Chief of Staff, and a replacement Chief
Operating Officer (more detail on pages 33 to 34). This
strengthened executive team is already making
significant change.
Conclusion
Despite the challenges, the core competencies within
our customer facing business remain strong and we
have long established relationships with our customers
and intermediaries.
Our core operating platform and balance sheet are
robust and through utilisation of an increased
headcount, assistance from our external advisers, and
close governance, we will successfully deliver the
transformation required. Combining this with a new
progressive ethos, the underlying strength of the
business model and the direction that the executive
team will give will make the Group unrecognisable
when compared to the past. This will be supported by a
data driven, automated and digitalised operating
platform providing remarkable service and products to
drive shareholder value.
We remain confident that the opportunity for growth
will return once our remediation is complete. We have
relatively small shares of our chosen lending markets
and the potential to grow them and to develop new
products remains unchanged.
I am proud to be leading the PCF team towards a
brighter future and thank all my colleagues at PCF and
our investors, regulators, and all stakeholders for the
patience they have shown during these difficult times.
Finally, I join the Chairman in apologising once again for
the legacy challenges faced by the business and the
impact on shareholders and other stakeholders.
G G Stran
Interim Chief Executive Officer
22 December 2021
Annual Report & Financial Statements 2020
11
Strategic Report (cont’d)
Market and Business Overview
The market and business overview stated below has
described our performance for the year ended 30
September 2020.
PCF Bank. At your service
The Group offers a range of savings products for retail
customers that are term or notice. The Group offers
straightforward lending products using loans,
conditional sales, hire purchases and finance lease
agreements which are available to individuals and
businesses. Lending customers primarily repay through
monthly instalments, and we maintain a focus on
ensuring that these payments are affordable.
We seek to improve our service to our customers,
intermediaries and dealers by adopting technology to
simplify and speed up processes.
Borrowers
The Group categorises its borrowing customers
according to their type and needs and supports them
with four lending divisions:
l SMEs and business owners requiring finance for
vehicles, plant and equipment are supported by the
Group’s Business Finance Division (‘BFD’).
l Consumers’ needs for motor vehicle finance are met
by the Consumer Finance Division (‘CFD’).
l Specialist finance for business customers in the
broadcast and media industry is arranged by Azule.
l Professional property investors requiring finance for
bridging, refurbishment and developer exit are
supported by Bridging finance.
The Group’s two largest and most established lending
divisions, CFD and BFD, provide hire purchase and
finance lease facilities to consumers and corporate
customers respectively. Both divisions operate a
finance broker-introduced model, which provides a
cost-effective route to market and enables a national
presence without the costs of a sales force. Some
repeat business is also achieved directly with existing
customers. CFD specialises in financing used motor
vehicles. BFD specialises in financing a wide range of
vehicles including cars, light and heavy commercial
vehicles, coaches, buses and minibuses. In addition, it
finances equipment for the construction, engineering
and manufacturing industries.
Azule specialises in originating financing for equipment
such as cameras, lenses, audio-visual equipment,
lighting and post-production equipment. This business is
sourced through direct relationships with
manufacturers, distributors and customers. The business
also has a sales capability to place equipment finance to
a wide range of banks and lending institutions for a
commission, as well as originating transactions for the
Group’s own portfolio.
Wales only. The Group has a small legacy portfolio of
euro denominated loans to broadcast and media
customers through its Irish subsidiary, Azule Finance
Limited.
The Group’s portfolio risk is managed and diversified
through asset-backed lending, providing a wide spread
of risk by asset type, contract size, industry sector and
UK geographical spread.
Our lending philosophy
The Group’s lending philosophy is to:
l Provide finance for assets (vehicles, plant,
equipment and property) which have strong
collateral characteristics and readily identifiable
resale markets.
l Have a diverse spread and avoid large
concentrations of risk.
l Ensure we understand our customers’ needs, that
they are creditworthy and can afford the payments
due to us.
Savers
Through PCF Bank Limited, the Group accepts sterling
denominated deposits from UK resident individuals,
with products targeted at specific customer segments,
namely:
l Customers looking to maximise their return whilst
preserving capital and who are willing to commit to
leave their money with the Bank for an agreed term
are offered competitive fixed term, fixed rate
deposit products with terms of between 12 months
and 84 months.
l Savers requiring more immediate access to their
money have the option of competitive variable rate
accounts with notice periods of 100 and 180 days.
The Bank offers online and telephone service to its
savings customers, enabling them to service their
accounts in the way they prefer.
For customers whose fixed term deposits are nearing
maturity, the Bank ensures that it offers a range of
renewal products with fixed rates that are at least as
attractive as those offered to new depositors.
Strategy for 2020
Our strategic objectives for the year ended
30 September 2020 were to:
l Launch our new streamlined, automated decisioning
system for consumer motor finance, as well as a
more ‘prime proposition’.
l Trial new direct to consumer products on the new
consumer finance platform.
l Build out our Bridging finance division beyond the
pilot initiative.
In early 2019, the Group established the Bridging finance
division and since then has built a team of experienced
industry professionals. The business is sourced from
brokers and repeat customer relationships.
l Evaluate how Azule’s European capabilities could
enhance the Group’s business in the future.
l Complete the integration of Azule operations to
maximise its sales potential.
Lending activities by CFD, BFD and Azule are
undertaken solely within the United Kingdom and are
denominated in sterling. Bridging finance also lends
exclusively in sterling and operates in England and
l Improve our customer journey for savers and
borrowers with additional online functionality.
l Optimise technology across the organisation to
support scale and gain efficiencies.
12
Whilst we were successful with a number of these
objectives, in particular, those relating to our CFD and
Bridging finance divisions, some were curtailed by the
onset of the pandemic in March 2020. Our new,
automated decisioning system for consumer motor
finance and the launch of a prime proposition into that
market were undoubted successes, resulting in CFD
increasing gross new business originations by 24% to
£91 million. Similarly, bridging finance achieved a year of
significant growth, lending £61 million. Work is underway
to increase the level of automation across all our
operations. However, our plans to enhance Azule’s
capabilities in Europe were hampered by the effects of
the pandemic and Brexit and have not been implemented.
The Group’s new business originations across the four
lending divisions combined was £272 million (2019 – £276
million). The pandemic obviously had an impact on
origination levels, especially in the early months of lockdown
when they fell quite dramatically. This was followed by an
encouraging rebound in the summer months. The impact
of the pandemic is best highlighted by the difference
between origination levels in the first half of the year,
£153 million, and the second half, £119 million, and by the
differing results in each of our lending divisions, which
saw growth in CFD and Bridging finance, but a reduction
in new business originations in BFD and Azule.
The total of £272 million was comprised of:
l Business Finance Division
£81 million (2019 – £120 million)
l Consumer Finance Division
£91 million (2019 – £73 million)
l Azule
£39 million (2019 – 11 months – £69 million)
l Bridging Finance
£61 million (2019 – 9 months – £14 million)
Group new business volumes
276m 272m
£300m
£250m
£200m
£150m
£100m
£50m
149m
85m
Sep 17
Sep 18
Sep 19
Sep 20
Savings
Amounts on deposit with the Group increased from £267
million to £342 million to fund the growth of the lending
operations. We now have over 7,950 savings customers
as of 30 September 2020. We offer an online application
process to all our customers, using our own portal, which
is both quick and simple to understand and operate.
Online applications are typically completed and the
account opened within 15 minutes.
Outstanding balances across Savings product terms (Sep 20)
2018
2020
2017
M - Months
D - Days
£70m
£60m
£50m
£40m
£30m
£20m
£10m
100D 180D
12M
18M
24M 30M
36M 48M 60M
84M
The average deposit balance has been relatively stable at
approximately £42,500 (2019 – £42,200).
Business Finance Division
BFD 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 5 years with
longer terms of up to 10 years for specialist niche
assets. The average transaction size of agreements
written in 2020 was approximately £46,800 (2019 –
£45,200).
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 the Group having a
share of less than 1%. (2019 – less than 1%).
The business asset and vehicle finance markets were
affected by the pandemic, in particular during the
period April to June 2020 when new business lending
dropped to its lowest levels since 2014.
The division predominantly uses broker intermediaries
as its route to market, with transactions being
processed through the Group’s internet-based proposal
system.
The division’s activities were noticeably affected in the
second half of the year by the pandemic, which
resulted in many SMEs putting their investment plans
on hold or using the UK Government’s CBILS scheme
and Bounce Back Loan Scheme (‘BBLS’) as a more
preferable form of finance than that offered by the
Group. Volumes in the second half of the year totalled
only £14 million, compared to £67 million in the first
half. Consequently, new business origination levels for
the full year were below our forecasts at £81 million
(2019 – £120 million). The pandemic also caused us to
review our risk appetite, resulting in the percentage of
business written to customers in our top four credit
grades increasing from 71% to 78%. We will keep our
lending strategy, and the focus on the higher quality
risk grades, under review. The impairment charge for
the year was £8.4 million (2019 – £2.2 million).
Business finance - new business volumes
£140m
£120m
£100m
£80m
£60m
£40m
49m
£20m
120m
86m
81m
Sep 17
Sep 18
Sep 19
Sep 20
Business finance - gross portfolio
£250m
£200m
£150m
£100m
£50m
181m
190m
123m
80m
Sep 17
Sep 18
Sep 19
Sep 20
Notwithstanding the fall in annual new business
originations from 2019 levels, the division’s gross lending
portfolio has slightly increased, with new business
replacing maturing agreements. At 30 September 2020
gross lending was £190 million (2019 – £181 million). The
portfolio is made up of over 5,850 (2019 – 5,800)
individual agreements with an average balance of
approximately £32,550 (2019 – £32,960) with no
customer having an aggregate exposure of more than
Annual Report & Financial Statements 2020
13
Strategic Report (cont’d)
Market and Business Overview
1% (2019 – 1%) of the Group’s total portfolio. Most of our
largest customers are longstanding, with many of them
having had agreements with the Group for more than
10 years.
We expect demand for our Business Finance products
to remain subdued in the coming year due to the
economic situation and the continuation of the
Government’s financial support schemes. We will remain
cautious in our risk appetite during this period.
Consumer Finance Division
CFD provides hire purchase and conditional sale
agreements to retail customers. Whilst most of the
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.
Most of the vehicles financed are used, so have suffered
their initial depreciation and, therefore, represent good
collateral to support our finance. CFD provides terms of
up to five years on cars and up to ten years on leisure
vehicles. The average transaction size of agreements
written in 2020 was approximately £18,000 (2019 –
£17,100).
The consumer car finance market experienced a
contraction during the year as a result of the lockdown
in spring 2020, when many dealerships were forced to
close temporarily and business picked up strongly when
they reopened on 1 June 2020. Terms of business over
the past three years has progressively limited exposure
to diesel cars.
As with BFD, this division also predominantly uses
broker intermediaries as its route to market, with
transactions being processed through the Group’s
internet-based proposal system.
During the year ended September 2020, we launched
an improved product to the broker base aimed at
attracting increased business volumes through
technology led automated decisioning functionality to
support the point-of-sale market. The proposition, which
provides instant credit and affordability assessments in
line with our responsible lending guidelines, proved to
be a success, particularly following the onset of the
pandemic lockdown in March 2020 as independent,
non-bank competitors withdrew from the market or cut
back on their lending activities.
In addition, the Group’s offering in the leisure vehicle
market continued to be well received and during the
peak season of June to August 2020 accounted for over
60% of all business written in CFD. The Group now has
an established foothold and good reputation in this
specialist market where there are only a handful of
competitors.
Consumer finance - new business volumes
91m
73m
63m
£100m
£80m
£60m
£40m
£20m
36m
Sep 17
Sep 18
Sep 19
Sep 20
14
Consumer finance - gross portfolio
£200m
£150m
£100m
£50m
70m
172m
131m
101m
Sep 17
Sep 18
Sep 19
Sep 20
Our CFD portfolio increased by 31% during the year
from £131 million to £172 million.
The portfolio is made up of almost 12,680 (2019 –
10,960) individual agreements with an average balance
of £13,550 (2019 – £11,980). Our highest credit grades
now account for 81% (2019 – 66%) of the total portfolio
and we will keep this strategy under review. The
impairment charge for the year was £4.9 million (2019 –
£1.0 million).
In January 2021, we introduced new commission
structures for our motor finance products, in line with
new FCA rules and guidance, and will closely monitor
these to ensure we remain competitive in our chosen
markets.
Azule
In 2018 the Group acquired Azule, a broadcast and
media lending and broking specialist. Azule provides
direct to end user asset finance origination in the UK
and across Europe to niche markets, including
broadcast and media, sound, lighting and audio visual.
It finances assets such as cameras, lenses, sound
equipment, lighting equipment, post-production
equipment and audio-visual equipment. Business is
generated through direct end user relationships along
with manufacturer, distributor and dealer introductions.
The broadcast and media loans are either written on
the Group’s balance sheet or placed with other banks
for which Azule receives a commission. Loans placed
with other banks are done so for risk, pricing and
exposure reasons. Azule has historically operated
across Europe to support its manufacturers, funded by
local partner banks for which Azule receives a
commission. During the year the level of business
undertaken was particularly affected by the pandemic
lockdown with the social distancing restrictions
affecting TV, film, sports and live events. As a result,
new business originations decreased from £69 million
last year to £39 million, which represented a 43%
reduction. The impairment charge for the year was
£0.6 million (2019 – £0.05 million). The Group impaired
the value of goodwill in respect of the purchase of
Azule by £1.75 million.
Azule was acquired in November 2018 and therefore
2019 comparative figures relating to Azule represent
11 months to 30 September 2019.
Whilst there continue to be concerns over the
economy and the pandemic and having direct impacts
of both on the broadcast and media sector, the film
and television sector is likely to see an improvement as
a direct result of streaming services such as Netflix,
Disney+ and Amazon Prime. The need for these
providers to produce high-end content is driving
demand for services and studio space across the UK.
Both Netflix and Disney have made long-term
commitments to the UK by signing leases for studios at
Pinewood and Shepperton.
Bridging Finance
The division launched its first product in early 2019.
It provides unregulated Bridging finance facilities to
experienced property investment businesses, ranging
from sole traders to partnerships and limited
companies, secured on residential and commercial real
estate in England and Wales. The primary focus is
lending for the purchase, refinance and refurbishment
of property. Facilities are typically for between 6 and
18 months with a maximum loan to value of 75%, and
the Group wrote £61 million of bridging business in the
year (2019 – 9 months – £14 million). The impairment
charge for the year was £0.5 million (2019 – £nil).
Short-term finance for developers has been the
predominant product, accounting for 45% (2019 – 13%)
of all business and benefitting from a noticeable
increase in transactions between April and June 2020
as we took the opportunity to gain a greater foothold
in the market whilst competitors took defensive
positions withdrawing or cutting back on lending
activities. Traditional Bridging finance has accounted
for 41% (2019 – 55%) of business and refurbishment
finance for 14% (2019 – 32%). 81% (2019 – 82%) of
business written was on residential properties with the
other 19% written on semi commercial and commercial
properties.
Group portfolio performance
The portfolio increased by 29% from £345 million to
£446 million.
Due to the growth in CFD and Bridging finance, the
composition of the Group portfolio by division has
changed over the course of the year as follows:
September September
2020 2019
£’000 £’000
Business Finance Division 190,462 43% 180,822 52%
Consumer Finance Division 171,854 38% 131,425 38%
Azule 23,001 5% 20,142 6%
Bridging Finance 60,612 14% 12,954 4%
Gross lending 445,929 100% 345,343 100%
Our focus since becoming a bank in 2017 has been to
grow the business in distinct segments of our chosen
markets. Our portfolio is secured on vehicles, assets and
property and our prudent and resilient business model
has served us well over 25 years.
Forbearance levels were impacted by the COVID-19
pandemic but recovered during the year.
Annual Report & Financial Statements 2020
15
Strategic Report (cont’d)
Risk Overview
Risk is a natural consequence of the Group’s business
activities and the environment in which it operates.
Managing risk is therefore essential to the Group and is
fundamental to the successful implementation of its
strategy.
Following the announcements in 2021, and the events
that led to them, significant remediation work has been,
and continues to be, undertaken. A strong culture of
risk awareness, listening and speaking up need to be at
the heart of PCF and its RMF. Strong frameworks guide
colleagues’ approach to their work, the way they
behave and the decisions they make. They make clear
the type and level of risk which the business is
prepared to tolerate in pursuit of its business
objectives; the ‘risk appetite’.
Through its recently launched culture project the Board
seeks to ensure that the Group actively embraces a
culture of risk awareness, where colleagues are
accountable for assessing, controlling and mitigating
risks; where colleagues are encouraged to speak up if
they see something that does not look or feel right, and
where any concerns will be listened to. Colleague
performance management and reward practices will all
have key risk inputs and a focus on risk management in
their design. The Group aims for colleagues to be risk
aware and to strike the right balance between
delivering on objectives, individual accountability and
maintaining a safe and secure business.
Risk within the Group is managed using a ‘Three Lines
of Defence’ model, separating risk origination (First
Line) from risk oversight (Second Line) and internal
audit (Third Line). Controls and expertise are being
strengthened across the two internal lines of defence
(First & Second), and significant additional Third Line
assurance is now being provided by external parties.
The Corporate Governance structure, described on
pages 28 to 34, includes the Executive Risk Committee
(‘ERC’) and the Audit & Risk committee which has
subsequently separated into the Board Risk Committee
(‘BRC’) and Board Audit Committee (‘BAC’). The Board
acknowledges its systems and controls did not operate
to prevent the financial and regulatory misstatements
that have come to light since 30 September 2020, and
it is remediating this.
Risk strategy
The Group has defined its risk management objectives
and strategy and is building up the culture of risk
awareness. Ongoing activities that continue to support
the strategy include:
l Strengthening the RMF and control environment to
be appropriate for future business aspirations.
l Articulating the Group’s risk profile, ensuring that
principal and emerging risks are appropriately
identified, owned and managed.
l Defining risk appetite and ensuring that the strategic
plans are consistent with it.
l Ensuring an appropriate return for risks taken within
product pricing.
l Continuing to develop the Risk function with
programmes covering the independent oversight of
business risk exposures, as well as comprehensive
risk and compliance monitoring.
l Utilising stress testing to support robust business
strategy able to withstand a range of adverse
conditions.
l Reviewing remuneration practices to ensure these
do not detract from prudent risk taking.
l Providing enhanced risk and compliance awareness
sessions to all employees.
The Board focuses on the principal risks that could
prevent the Group from achieving its strategic
objectives.
Principal risks
Principal risks are the inherent risks faced by the Group
in pursuit of its strategic objectives.
The Group has identified eight principal risks that could
impact the delivery of its strategic objectives, and each
has a Board approved risk appetite, and the RMF
identifies ownership, responsibilities, management
approaches, mitigants and controls. Each of these risks
is defined and considered in more detail within the Risk
Management Report on pages 53 to 64. In future
reporting periods Climate Change risk will be added as
an additional principal risk.
l Strategic and business risk
l Credit risk
l Capital risk
l Liquidity and funding risk
l Market risk
l Operational risk
l Regulatory risk
l Conduct risk
Emerging risks and uncertainties
Corporate Governance and the RMF need to operate
effectively to manage risk appropriately, with the
Group focused on delivering improvements in both
these key areas. Emerging risks and uncertainties are
either newly identified risks with the inherent potential
to impact the Group’s strategy, business model or
material performance; or a previously identified
principal risks where the residual risk has materially
increased.
COVID-19 Pandemic and macro-economic
uncertainty
Uncertainties arising from the longer-term impacts of
the COVID-19 pandemic continue to affect many of the
key risks faced by the Group.
l Ensuring risk appetite metrics are proportionate and
regularly reported to ERC, Executive Committee
(‘ExCo’), BRC and the Board to support oversight
and the scope of mitigation strategies.
As COVID-19 financial support measures unwind,
including the loan payment deferral scheme, job
retention and various other lending schemes available
to small business, the impact on credit arrears and
16
losses is not clear. The Group has so far seen that the
majority of its customers who had requested COVID-19
related payment deferrals have returned to full
servicing of their loans. The Group continues to monitor
this and any subsequent payment arrears that might
result in higher credit losses closely.
The Bank is a member of the Sterling Monetary
Framework (‘SMF’) through which it obtains TFSME
funding and liquidity facilities from the Bank of England
(‘BoE’). Such facilities are collateralised, and the BoE
currently only accepts into its collateral pools business
finance loan receivables written by PCF Bank that are
not subject to the provisions of the Consumer Credit
Act. The pandemic has significantly reduced the
quantum of such loans written and as a consequence it
may be necessary to redeem TFSME funding before its
final maturity in 2024.
The pandemic has had an unprecedented impact on
the world economy, with the Office for National
Statistics (‘ONS’) initially estimating a decline in UK
GDP of more than 20% during the early part of 2020.
Nevertheless, despite a downturn of 9.7% in 2020, the
UK economy has rebounded significantly since
vaccination against COVID-19 was rolled out in the first
half of 2021. Therefore, as of October 2021, Oxford
Economics (‘OE’) is forecasting the UK economy to
grow by 7.2% in 2021 and 5.7% in 2022.
OE identifies several risks to the UK economic recovery
it forecasts for late 2021 and 2022. The greatest risk to
this forecast comes from the potential for rising
COVID-19 cases, especially as the weather cools and
there is greater indoor mixing, which in turn could
damage consumer confidence and discourage social
consumption; and the reimposition of some restrictions
cannot be ruled out. Rising unemployment is also a risk,
given financial pressures on the corporate sector and
the ending of the Job Retention Scheme at the end of
September 2021. Inflation also presents a risk, with the
potential for consumer price inflation to increase on the
back of higher commodity prices, higher inflation
expectations, and a disappointing recovery in labour
market participation, which in turn leads to a downturn
in domestic demand.
While these macroeconomic risks are far from certain,
if one or more of them materialise it may restrict market
prospects for the Group and increase the risk of loan
impairments.
Implications of the delayed finalisation of the
Annual Report & Financial Statements, share
trading suspension and the resulting
remediation project
As highlighted in the Chairman’s Statement, accounting
errors and misstatement uncovered by the new CFO as
a result of audit enquiries have resulted in a delay in the
finalisation of the Annual Report & Financial Statements
and trading in the Group’s shares being suspended. The
Board is particularly conscious of the risk of potential
impacts arising from this. The specific risks identified,
together with appropriate mitigation, are reviewed by
the Board Risk Committee.
During this period of remediation, which commenced
in the 2021 financial year, the Group’s cost base has and
will continue to increase significantly, both in the short
term, due to advisor fees and remediation activity, and
in the longer-term as the Group ensures sufficiently
qualified and experienced colleagues are in place to
ensure an appropriate level of accountability, control
and oversight.
We have kept in close contact with our regulators as
we have finalised the Annual Report & Financial
Statements and will continue to do so as we implement
the necessary changes. We also continue to work
closely with our NOMAD, to enable compliance with
AIM regulation requirements. The Chairman’s statement
sets out activities that are underway that should lead to
the lifting of the suspension of trading in the Group’s
shares by AIM. However, if our NOMAD and AIM are
not satisfied with the progress made or any other
matter then the London Stock Exchange could cancel
the admission of the Group's shares on AIM.
The remediation required in the Group’s control
functions has dependencies on both systems and
people and will take time to develop and embed fully.
A culture programme, recently approved by the Board,
with risk at the heart of it is also being implemented.
There is a risk that the remediation required is not
implemented effectively, on a timely basis, or to the
required scope and expected cost. Additionally, there
is the risk that whilst manual processes, controls and
models persist and whilst the Financial Control
Framework is being further developed and
implemented, new errors could arise in financial
reporting. This together with the potential impact of
ineffective remediation could result in increased cost,
continuing higher levels of operational and people risk,
an extended remediation period and further
management distraction.
Recognising the particular importance of a successful
remediation programme the Group has invested in
additional senior change resources and updated the
governance of change so that there is appropriate
oversight of the remediation programme by the
Executive Committee and the Board. This reinvigorated
change governance will, once fully embedded, monitor
and ensure progress on all change including the
remediation programme and provide oversight to
management and the Board.
At 30 September 2020 and currently, capital and
liquidity metrics were above regulatory requirements.
However, options to access capital and financial
markets are limited in the current circumstances,
reducing the Group’s ability both to raise capital and
transact financial instruments for the purpose of
interest rate hedging. There is a risk that the Group
may experience volatility in its profit and loss should it
not be able to freely adjust its interest rate swap
positions as facilities are currently restricted.
Management believe that following the Annual Report
& Financial Statements 2020 finalisation and the lifting
of the suspension in trading of the Group’s shares, our
bankers will reinstate these facilities once these
changes are reviewed. Management monitors the
interest rate gap risk closely and, where required, seeks
to hedge asset exposures naturally with appropriate
tenor retail deposits.
The Bank has a term loan facility from the Bank of
England under the Term Funding Scheme with
additional incentives for SMEs (‘TFSME’), a
subordinated note facility from British Business
Investments Limited (‘BBI’) and a revolving credit
facility from Leumi ABL Limited (‘Leumi’). The Group
and the Bank are required under the terms of the
facilities to file their Annual Report & Financial
Statements 2020 with BBI and Leumi. BBI has since
agreed a filing extension to
31 December 2021 whereas Leumi has not agreed a
formal extension and the facility will be terminated by
31 December 2021.
Annual Report & Financial Statements 2020
17
Strategic Report (cont’d)
Risk Overview
Currently the Bank has £7m drawn down under the BBI
facility and no drawings under the Leumi facility. The
Group has agreed with BBI that no new drawings will
be undertaken under the facility until the Annual
Report & Financial Statements 2020 have been
published. The Group has agreed with Leumi that no
drawings will be undertaken under the facility as the
facility will be terminated by 31 December 2021.
Regulatory risk and legislative change
The issues leading to the delay in the finalisation of the
financial reports has been discussed extensively with
both the Prudential Regulatory and the Financial
Conduct Authorities. The control and other issues
identified have resulted in an increased level of
interaction with both regulators. The current position
gives rise to an increased level of risk of regulatory
scrutiny, which in turn may lead to regulatory action
and/or increased levels of regulatory requirements.
The UK regulatory landscape continues to move at
pace. Regulators’ continued guidance on COVID-19
financial support measures place considerable
responsibility on technology, control and operations
functions. Significant policy initiatives including
operational resilience, climate stress testing, UK Capital
Requirements Regulation (‘CRR’) and the Basel 3.1
package of capital framework reforms will require
significant consideration and implementation effort. In
addition, the pace of regulatory change and evolving
practice results in a risk that the Group does not meet
new requirements on a timely basis and may therefore
leave itself open to regulatory action, increased
operational risk or speculative approaches from claims
management companies.
The Group has increased the size and experience of its
Risk, Compliance and Legal teams to help position itself
appropriately to address these issues. It also is
engaging with regulators and industry trade bodies,
such as the Finance and Leasing Association, on these
and other industry significant issues arising.
Planning uncertainties
A reduced level of retained profits, combined with the
suspension of trading of shares will affect the Group’s
ability to grow capital reserves and its balance sheet
over the coming year. Therefore, the Group will
effectively be capital constrained during this period,
which will impact its ambitions for growth.
The Group is currently rebuilding the level of surplus
capital it holds to remain well capitalised by lowering
new business volumes below those required to replace
lending paid down. The future plans will use the surplus
capital above the Board’s risk appetite to lend
sustainably with the intention of maintaining its capital
buffers at this level.
The business is currently capital constrained with
resulting reductions in business lending as set out
above. The strategic plan for the Group includes costs
associated with remediation activity, but a return to
profitability and growth that will once again enable
the Group to generate shareholder value and
capitalise on significant growth opportunities in our
core operating segments.
The Group’s performance, and return to profitability in
the medium-term plan, is underpinned by a number of
key inputs and assumptions which cover:
l The raising of external capital.
l The funding of new business through retail deposits
and other wholesale funding.
l New business origination levels.
l Net interest margin on new business originations.
l The expected date of completion of the Group’s
remediation activities and the impact on the
Group’s expenses.
l The level of impairment losses on financial assets.
l Capital requirements, both from a regulatory and
internal management perspective.
l Dividends, which have been assumed at zero in the
medium-term plan.
As with any medium-term planning process, there is a
risk that these assumptions do not materialise. The most
significant of these are the raising of external capital and
the extent to which we can raise funding through our
retail deposit franchise and wholesale funding.
In addition to this, the overall shape and outcome of
the medium-term plan could be adversely impacted by
a number of factors, including an extended period of
remediation activity, a deterioration in the credit
outlook, levels of new business originations, an increase
in the cost of funding, increases to the amount of
regulatory capital that the Group is expected to hold or
other future regulatory measures the Group may
become subject to.
As discussed in the Directors’ Report and the Board
Audit Committee report, there is a risk that this cannot
be achieved in line with the plan, which indicates a
material uncertainty in respect of going concern and is
summarised in note 1.2 Basis of Preparation to the
financial statements.
People risk
People risk can arise in many forms and continues to be
the subject of close management attention. The
COVID-19 pandemic has given rise to remote working
together with new operational processes. Additionally,
increased flexibility in working arrangement across
many different sectors has given rise to new norms and
the Group has sought to ensure that new working
arrangements continue to deliver high standards of
competency, compliance and oversight, whilst ensuring
that we remain an employer of choice that is able to
attract, develop and retain the best talent.
The Group recognises the impact COVID-19 has had on
colleagues. Significant investment has been made in
adapting systems to enable colleagues to work
remotely during the pandemic. It has also adopted a
hybrid return to the office policy, which will support
colleagues to continue to work from home for part of
the working week. This is part of the Group’s approach
to ensure that it remains an attractive choice for
employment.
18
The uncovering of issues leading to a delay in finalising
the Annual Report & Financial Statements and
subsequent share trading suspension, may also lead to
uneasiness amongst colleagues, and may result in
higher levels of unplanned attrition. Additionally, the
Group is increasing the skills and resources in new
hirings however the recruitment market is competitive
for financial services control function skillsets. The
executive team has adopted a strategy of regular and
open communication with all colleagues. A recent
colleague survey shows evidence that this is providing
reassurance to colleagues. The executive team monitors
risk associated with its people and is seeking to reduce
key person dependencies in the Group and improving
the skills and colleague resources through additional
recruitment and increased learning and development
opportunities. Finally, succession planning is being
improved to ensure key roles have appropriate cover.
Operational resilience including cyber risk
Operational resilience is the ability of firms and the
financial sector as a whole to prevent, adapt, respond
to, recover and learn from operational disruptions.
These disruptions and the unavailability of important
business services have the potential to cause wide-
reaching harm to consumers and market integrity,
threaten the viability of firms and cause instability in
the financial system.
In December 2019, the FCA consulted – in CP19/32 – on
proposed changes to how firms approach their
operational resilience. By 31 March 2022, firms must
have identified their important business services, set
impact tolerances for the maximum tolerable disruption
and carried out mapping and testing to a level of
sophistication necessary to do so. Firms must also have
identified any vulnerabilities in their operational
resilience. PCF Group has established an Operational
Resilience Framework with an independent review of
the design, but these have not currently been
presented to Regulators.
The dependency on suppliers and outsourcing of
services introduces risk where the failure of specific
suppliers could have an impact on the Group’s ability
to continue to provide important services to its
customers. A Supplier & Outsourcing Assurance
Framework provides corporate visibility of risks arising
from contracts with third-party suppliers and
confidence that they are being effectively identified
and proportionately managed.
Cyberattacks continue to be a threat globally that is
inherent across all industries, with PCF Group
observing a 500% increase in the number of phishing
attacks observed during the pandemic.
With more people working from home came an
increase in vulnerability to cyber fraud, as criminals
sought to exploit the changing circumstances. To
ensure the Group continued to remain secure a cyber
and working from home internal audit was completed
focusing on remote working guidance/standards;
maintaining data protection and privacy good practice;
and information and system security including data loss
prevention.
We continue to invest in the Cyber Control
Environment, including in Cyber protection,
benchmarking ourselves using the Cyber Essentials
Framework, and significantly enhanced our cyber
control profile to support increased remote working
with no significant risk events or change in security
posture.
The Group acknowledges the evolving threat and will
continue to focus on the ‘Defend, Deter, Develop’
themes as recommended by the National Cyber
Security Centre: These key themes have been broken
down into a series of initiatives that will be
implemented using best practice guidance published
by the National Cyber Security Centre, the FCA, PRA,
and based upon established frameworks including PCI-
DSS, 10 Steps to Cyber Security, and Cyber Essentials.
Financial loss resulting from physical or
transitional impacts of climate change
Climate change represents a material financial risk to
regulated firms as social and economic policy is
changing at a fast pace. Climate change risk is defined
as the risk of financial or reputational loss as a result of
the inadequate management of the transition to a low
carbon economy (climate change transition risk) or the
inadequate management of the risks associated with
global warming (climate change physical risk).
The Group is developing a roadmap for the
development of a model framework to manage
financial risks from climate change in accordance with
PRA guidance including consideration of the impacts
on the Group’s business strategy relating to vehicle
financing. Senior management responsibility for the
oversight of the management of financial risks from
climate change is assigned to the Group’s Chief
Compliance Officer. The Group’s approach to
identifying and managing climate change risk is
founded on it impacting other principal risks: strategic
and business risk, credit risk, market risk, capital risk,
operational risk, regulatory risk and conduct risk.
Benchmark interest rate reforms
The BoE set out a timeline to achieve the transition
from London Interbank Offered Rate (‘LIBOR’) by no
later than the end of 2021, with the expectation that
firms use other rates such as the Sterling Overnight
Index Average (‘SONIA’). Legislation to enhance
regulator powers around benchmarking rates and to
support firms in moving legacy contracts away from
LIBOR continues to be developed.
In 2017 the Group’s Asset & Liability Committee
(‘ALCO’) set a policy that the Group would wherever
possible avoid the use of LIBOR rates in its lending,
borrowing or derivative activities. In compliance with
this policy, all floating rate assets, liabilities and interest
rate swaps are linked to either SONIA, BoE rate or a
PCF managed rate. The sole exception to this policy is
the revolving credit facility provided by Leumi ABL
Limited, which when drawn accrues at overnight LIBOR
plus a fixed spread. Leumi has advised that it intends to
rebase the facility to SONIA by the end of 2021 in line
with the LIBOR transition.
Annual Report & Financial Statements 2020
19
Strategic Report (cont’d)
Stakeholder Engagement Report
Section 172 Statement
Section 172 of the Companies Act 2006 requires a
director of a company to act in a way that he or she
considers, in good faith, would be most likely to
promote the success of the company for the benefit of
its members as a whole, and in doing so have regard,
amongst other factors, to:
l The likely consequences of any decision in the long
l The Board is confident that the remediation
programme when complete will improve the quality
and timeliness of reporting to our investors, with
short-term actions ensuring safeguards against the
recurrence of recent events. The Board are
confident that our proven business model will
deliver once again an attractive return on equity in
the medium to long term and recognise that it will
take time to rebuild the goodwill of our investors.
term.
l The interests of the company's employees.
l The need to foster the company's business
relationships with suppliers, customers and others.
l The impact of the company's operations on the
community and the environment.
l The desirability of the company maintaining a
reputation for high standards of business conduct.
l The need to act fairly, as between members of the
company.
Members (shareholders and investors)
l We remain committed to communicating with
members openly and transparently. However, our
ability to update investors is constrained by our
legal, regulatory and market obligations.
l We have historically maintained engagement with
existing and potential new members through our
Annual Report & Financial Statements and Interim
Reports, trading updates, presentations and
attendance at investor forums.
l Our Annual General Meeting held on 6 March 2020,
a matter of days before the first national lockdown,
included, for the first time, a live online video stream
for those shareholders who felt unable to attend the
meeting in person.
l In April 2020, when other companies were
cancelling their dividends, the Board decided to
proceed with payment of the final dividend for the
year ended 30 September 2019, which had been
approved by shareholders at the Annual General
Meeting. A final dividend for the year ended
30 September 2020 was not recommended.
l We acknowledge that recent events, specifically the
delay to the Annual Report & Financial Statements
2020 and the suspension of trading in the Group’s
shares on AIM has affected the goodwill we have
built up with our many investors. The significant
uncertainty on the rate of progress and outcome of
the independent forensic investigation, further
finance review and audit, set out on page 40, which
completed in November 2021 have meant it has not
been possible to update shareholders with regular,
timely and granular information. Reporting precise
and accurate information was a key factor in
considering what, and when, the Group
communicated to shareholders. Furthermore, as set
out in the Chairman’s report we do not yet have
certainty on when our share trading suspension
might be lifted.
Employees
l Our employees are important to us. We seek to
ensure that we attract, develop and retain talent.
We actively encourage our employees to gain
professional qualifications and are pleased to have
seen a number of our team do so.
l Historically we have maintained a small company
ethos which has helped us to maintain a high
colleague retention rate over many years. Since the
year end, we have significantly increased our
headcount with new employees, contractors and
advisors both to support our remediation and to
support our existing employees through the
changes we are undertaking.
l We provide our employees with regular updates on
all issues relating to the business and in the last year
this engagement was enhanced during the
pandemic to include our response to lockdown and
the introduction of remote working from home. The
wellbeing and mental health of our workforce
during COVID-19 have been carefully supported
through our HR team and through access to
employee helplines.
l Our new executive team has put a programme of
cultural change in place covering more tactical
short-term solutions and longer-term initiatives
including:
l Ensuring new employees are adequately
supported on joining, especially when joining
remotely and can assimilate the new Group
culture whether in the office or homeworking.
l Promoting colleague engagement initiatives
through our Human Resources team and
encouraging colleague engagement through a
variety of colleague working groups such as our
Diversity & Inclusion group who worked with our
Human Resources team to develop our new
Diversity and Inclusion policy.
l We have recently launched a new culture which we
will report on in our 2021 Annual Report and
Financial statements.
Customers
l Our customers are at the heart of our business, and
we treat them fairly, professionally and respectfully
in line with regulatory rules and guidance.
l We provide our savings customers with high levels
of services, as evidenced by our achievement of
receiving the ‘Feefo’ Platinum Trusted Service
Award, which is only available to businesses which
have been awarded the Gold Trusted Service Award
for three successive years.
20
Communities and the environment
l We commenced participation in a scheme which
restores the wilderness through rewilding and
reforestation projects across a variety of
ecosystems around the world (the Mossy Earth
project).
l Employees collectively contributed to a number of
charitable causes, such as Headway, Macmillan
Cancer Support and KidsOut, by way of a variety of
engagement initiatives throughout the year.
The Strategic Report has been approved by the
Board and signed on its behalf by:
G G Stran
Interim Chief Executive
22 December 2021
l We responded to our customer’s requests for
financial assistance during the COVID-19 pandemic
effectively and efficiently.
l We developed an online application process to
speed up the processing of forbearance requests.
l We regularly reviewed the numbers and details of
customers in forbearance and COVID-19 related
payment deferrals as to how best to deal with their
requests for assistance.
l We maintained good customer service levels and
remained open to new lending throughout the year,
albeit focusing on our highest credit grades, given
the COVID-19 pandemic.
Suppliers
l We take pride in the longstanding nature of our
relationships with many suppliers, including our
intermediaries and others such as software
providers and credit information bureau.
l We review our Supplier & Outsourcing Assurance
Framework, which provides the Board with
oversight of the risks arising from third party
supplier contracts, on an annual basis.
l During the year, we implemented a new purchase
order and invoice processing system to enhance
efficiency and improve internal and external process
of payment to our suppliers.
Regulators
l Our compliance with regulation is overseen by our
Board Audit and Risk Committees.
l Our executive team is committed to maintaining
open and transparent regular direct engagement
with our regulators. In 2021 we have increased the
focus and depth of engagement with our regulators
with senior hires in our Risk function, ensuring they
are kept up to date with progress on our
remediation programme.
l We review and act on regulatory developments and
monthly digests from the PRA and FCA. We
increased interactions during the COVID-19
pandemic, ensuring that our operations complied
with regulatory rules and guidance.
l Given weaknesses identified in our Regulatory
reporting we have undertaken a thorough
independent review of our regulatory reporting this
work is expected to complete in 2022. We will
continue to invest in our regulatory reporting
processes, systems and staffing.
Annual Report & Financial Statements 2020
21
22
Sustainability Report
In July 2019, the Financial Reporting Council issued a
joint statement with other regulators on how
companies should report on the effect of their activities
on climate change. This follows the Government’s
publication of its Green Finance Strategy which
anticipates mandatory disclosures by 2022.
PCF’s Consumer Finance and Business Finance
Divisions provide finance to consumers and businesses
to acquire a wide range of vehicles. Whilst we have no
control over our customers’ choice of vehicles, we do
have the ability to adapt our lending policies to ensure
that we are making a contribution to climate change
and a carbon neutral economy. We have started to
achieve this by limiting the term of finance for certain
diesel vehicles and we monitor and review this policy
on at least an annual basis.
At a corporate level, we are implementing two new
initiatives to demonstrate our commitment to the
environment and the transition to a carbon neutral
economy:
l In financial year 2021, we commenced participation
in the Mossy Earth project, which restores the
wilderness through rewilding and reforestation
projects across a variety of ecosystems around the
world. Our commitment to this project takes the
form of a donation of £2 for every finance
agreement we process.
l We are seeking to introduce electric vehicle
company cars for our sales employees.
GHG Emissions and Energy Use Summary
The Group takes its responsibility towards the
environment seriously and recognises the important
part it has to play in supporting the transition to a
carbon neutral economy. We will consider our
approach to the Taskforce for Climate Related
Financial Disclosures (‘TCFD’) in the coming year. The
Group's emissions have been calculated in line with the
Greenhouse Gas Protocol Standard, using the
Environmental Reporting Guidance published by the
UK Government. All our emissions are UK based.
UK tCO2e kWh
Scope 1
Emissions from activities for which the Company is responsible 3 14,037
Scope 2
Emissions from the purchase of electricity for own use 32 138,837
Total
Scope 1 and Scope 2 emissions 35 152,873
Emission intensity
Scope 1 and Scope 2 in tCO2e/Net operating income in £m 1.3
Annual Report & Financial Statements 2020
23
In addition to its scheduled eleven meetings during the
financial year, the Board met on a weekly basis during
the first two months of the COVID-19 pandemic and
later at the time of the suspension of trading in PCF’s
shares to monitor the impact of it on colleagues,
customers, other stakeholders and the financial
wellbeing of the Group. In the circumstances, meetings
were held using video conferencing facilities.
The effectiveness of the Board was reviewed during
the year. This review was a self-assessment which was
externally facilitated by Independent Audit Limited,
using their online self-assessment service Thinking
Board®. The primary purpose of the review was to
direct the Board’s attention to areas where there might
be opportunities to improve its performance. As part of
their review, Independent Audit Limited also attended a
Board meeting.
Recent events demonstrate that learnings and
improvements are required, and these are and will
inform the future development of the Board individually
and collectively. Furthermore, to increase its
capabilities, the Board is seeking to appoint a Senior
Independent Director.
The Board recognises that one of the keys to the
Group’s long-term success is the development of its
new culture, coupled with improved governance and
effective controls, and this will be our significant focus
in the coming year.
Tim Franklin
Chairman
22 December 2021
Corporate Governance Report
Chairman’s introduction
Dear Shareholder,
As the Chairman of PCF Group plc, I present our
Corporate Governance Report for the year ended
30 September 2020. This report is dated 22 December
2021. Given the passage of time since the year end,
where appropriate, it is brought up to date for recent
events and matters relevant to the Group’s current
operating model.
In light of the events and issues that have come to the
attention of the Board since the 2020 year end and
which have been the subject of the independent
investigations, ensuring more effective corporate
governance and oversight is a priority of the Board.
The Board has brought in a substantially new executive
management team for the business. The Board is now
taking steps to remediate the deficiencies identified in
financial controls and corporate governance.
We have also since embarked on the culture initiative
and training programme to make risk at the centre of
all that we do at PCF. The Board, together with the
Executive Committee, is driving those values,
behaviours and attitudes to support the Group’s
strategy.
At an operational level, the Group applies the UK
Corporate Governance Code 2018 (the ‘Code’). The
Code sets out the principles and provisions relating to
the good governance of companies. This report
describes how we comply with the principles and
provisions of the Code, how the Board and committee
structures operate and the key areas of focus for both
the Board and its committees during the year. In
accordance with the terms of the Code, an explanation
is provided for those instances where we do not
comply with its provisions.
The Board consists of eight directors, six of whom are
non-executive and two of whom are executive. One
non-executive director has been nominated by the
majority shareholder. David Bull resigned as a director
on 16 March 2020 and left the Group’s employment on
30 September 2020. The process of recruiting a new
Chief Financial Officer (‘CFO’) to replace David Bull was
completed and, we appointed Caroline Richardson to
the role of CFO on 15th March 2021. Since then, Robert
Murray resigned as Managing Director on 26 March
2021 and Company Secretary on 31 March 2021 and
Scott Maybury resigned as the Chief Executive Officer
on 21 May 2021. Scott was replaced as CEO on an
interim basis by Garry Stran, the then Chief Operating
Officer of the Group. Garry and Caroline were
appointed to the Board on 5 October 2021 having
confirmed their regulatory approvals.
The Audit & Risk Committee separated into a separate
Board Audit Committee and a separate Board Risk
Committee towards the end of the financial year. The
current corporate governance structure of the Group
and its committees is set out below with an explanation
of changes from the 2019 report and account. Christine
Higgins, an independent non-executive director, is
Chair of Board Audit Committee and Marian Martin,
also an independent non-executive director, is the
Chair of the Board Risk Committee.
24
The UK Corporate Governance Code 2018 (the ‘Code’)
The Board of Directors (the ‘Board’) is committed to
high standards of corporate governance, details of
which are set out in this report. In terms of corporate
governance, the Board has adopted the Code, which is
issued by the Financial Reporting Council, but does not
purport to fully comply with all of its provisions for 2020.
The Code is available at www.frc.org.uk
It is the Board’s view that it complies with the principles
and provisions set out in the Code with the exception
of the following:
l Lack of Workforce Director (Code Provision 5)
The Board has not appointed a director from the
workforce, created a formal workforce advisory
panel or appointed a designated non-executive
director to maintain engagement with the
workforce. The Board contains two executive
directors who have daily contact with colleagues
and has an experienced Chief People Officer who is
regularly invited to report to the Board on colleague
matters, including colleague engagements. Given
the size of the workforce a full-time, experienced
Chief People Officer is considered the most
effective means of developing and monitoring
colleague engagement.
l Less than half of Board, excluding the Chairman are
independent non-executive directors (Code
Provision 11) The Board consists of four
independent non-executive directors (including the
Chairman, Tim Franklin), two non-executive
directors and two executive directors (although
until 16 March 2020 there were three executive
directors). As a result, less than half of the Board,
excluding the Chairman, is made up of independent
non-executive directors. The Board is in the process
of recruiting a Senior Independent Director which,
once appointed, will result in half the Board
comprising independent non-executive directors.
l Lack of a Senior Independent Director and lack of
Chairman’s appraisal (Code Provision 12) As
mentioned above, the Board is seeking to appoint a
Senior Independent Director. In the absence of the
Senior Independent Director role, an appraisal of the
Chairman’s performance was not conducted. Once
appointed, the Senior Independent Director will be
responsible for appraising the Chairman’s
performance.
l Evaluation of the performance of individual
directors (Code provision 21) As reported in the
Chairman’s introduction to this section whilst the
effectiveness of the Board, as a whole, was
evaluated during the year, there was not a formal
evaluation of the performance of individual
directors. An assessment of the individual director’s
skills and their training needs was undertaken in
July 2021 and individual evaluations are to be
undertaken in the current financial year.
l Lack of Diversity Policy (Code Provision 23) The
Group does have various diversity initiatives in place
and an active Diversity and Inclusion committee was
set up in December 2020 with colleague
representation from across the Group. However, until
recently the Group did not have a formal Diversity
and Inclusion policy in place but for future reporting
periods the Group expects to be Code compliant in
respect of Diversity & Inclusion policy.
l Policies and procedures to ensure effectiveness
internal and external audit function (Code Provision 25)
The Audit Committee has not yet concluded its
reviews of the effectiveness of the internal and
external audit functions due to the delay in finalising
the Annual Report & Financial Statements but both
will be concluded now that they have been finalised.
l Lack of a Viability Statement (Code Provision 31)
The Board should provide an explanation of how it
assessed the prospects of the Group over a given
period. In light of the circumstances of the Group’s
suspension of shares on AIM, a viability assessment
has not been prepared and no statement is made in
this Annual Report. Please refer to the Directors’
Report for the Board’s assessment of Going
Concern.
l Disparity in Pension Contribution Rates (Code
Provision 38) The pension contribution rates for
executive directors are 10% whereas they are 7% for
the workforce. The Remuneration Committee will be
giving further consideration to this discrepancy for
new Executive hirings with a view to being Code
compliant for those hirings.
l Engagement with shareholders and workforce on
remuneration matters (Code Provision 41) There has
been no specific engagement to report on in this year
with (i) the shareholders to seek feedback on
remuneration policy and outcomes and/or (ii) the
workforce to explain the alignment of executive pay
with wider Company pay policy. The Company has
not yet made plans to do so but will continue to
consider this in the current financial year.
Internal controls
Board responsibility
The Board is responsible for the Group’s risk
management and system of internal controls and is
committed to ensuring that a suitable internal control
framework is maintained to deliver effective risk
management. Owing to the limitations inherent in any
internal control framework as evidenced by the events
and issues that have come to the attention of the
Board since the 2020 year end, the Board is particularly
focused on reviewing and improving that framework to
ensure more effective corporate governance and
oversight including the improvement in the controls
and risk frameworks set out in the Board Audit and
Board Risk Committee reports.
Reviews by the Board
The effectiveness of the RMF and internal control
systems is and will continue to be reviewed by the
Board Risk Committee and Board Audit Committee.
The Board Risk Committee is responsible for providing
oversight and advice to the Board in relation to current
and potential future risk exposures. The Board Audit
Committee assists the Board in discharging its
responsibilities with regard to financial reporting,
oversight of external and outsourced internal audit
activities, controls, compliance and whistleblowing.
Overall assessment
As described elsewhere in this report, the Board has
considered accounting errors and control observations
reported by the external auditor; the accounting errors
and misstatements identified since the September
2020 year end and the findings of the PwC independent
forensic investigation into these matters; the external
review of the Group's regulatory reporting and its Risk
Management Framework, and the reports of the
outsourced internal audit provider. Appropriate actions
have been or are being taken as a result of this work.
Annual Report & Financial Statements 2020
25
Corporate Governance Report (cont’d)
Board of Directors
Tim Franklin
Non-executive Chairman,
appointed 6 December 2016
Christine Higgins
Independent non-executive director,
appointed 13 June 2017
Christine is a chartered
accountant with over 25 years’
experience in asset finance,
both UK and international.
Over the last 11 years, she has
served as non-executive
director on boards in the
health, housing, leisure and
finance sectors. Christine is
currently a non-executive director
at Buckinghamshire Building
Society and Macquarie Capital Europe Ltd and is a
Trustee at Refuge and she chairs their audit
committees.
Christine is the Chair of Board Audit Committee and a
member of the 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 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. He is also a Trustee of
the Cystic Fibrosis Trust.
David is the Chairman of the Remuneration Committee
and a member of the Nomination Committee.
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 over 7 years until
December 2019. He 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 Banker.
Tim is the Chairman of the Nomination Committee and a
member of the Remuneration Committee.
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 and Waverton Investment
Management Limited. He is also the Chairman of
Harlequin FC, the Premiership rugby club.
David is a member of the 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 and is now
Vice Chairman of Shore
Capital Markets. 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 Board Audit Committee,
Nomination Committee and Remuneration Committee.
26
Appointment & resignation of directors during the year
David Bull resigned as a director on 16 March 2020 and
left the Company’s employment on 30 September 2020.
Robert Murray resigned as a director on 26 March 2021
and Scott Maybury resigned as a director on 21 May 2021.
Caroline Richardson and Garry Stran were appointed as
directors on 5 October 2021.
Marian Martin
Independent non-executive director,
appointed 27 July 2019
Marian Martin is Chairman of the
Board Risk Committee and is a
member of Board Audit
Committee, the Nomination
Committee and the
Remuneration Committee.
Marian is a chartered
accountant with a background in
risk management and audit and
has spent her career in the financial
services sector. She is also a non-
executive director at Starling Bank and Castle Trust
Bank where she is Chair of the Board Risk Committee.
As an executive, Marian has significant experience in
retail banking and financial services most recently as
Chief Risk Officer (‘CRO’) at Virgin Money throughout a
period of significant growth and strategic change.
Garry Stran
Executive director,
appointed 5 October 2021
Garry Stran is the interim Chief
Executive Officer (‘CEO’). Garry
joined the Group in July 2020
and was originally appointed
Chief Operating Officer on
1 March 2021 and was
subsequently appointed interim
CEO on 21 May 2021. Garry is an
experienced Financial Services
professional and has previously had
roles within banking, credit management, corporate
finance, advisory and most recently in the Fintech
sector. Garry assumed the role of Chief Operating
Officer on the retirement of the former Managing
Director Robert Murray, a founding director of PCF,
and assumed the role of interim CEO on the resignation
of the former CEO Scott Maybury, also a founding
director of PCF.
Caroline Richardson
Executive director,
appointed 5 October 2021
Caroline Richardson is the Chief
Financial Officer (‘CFO’). Caroline
has significant experience as a
finance director, most recently
as CFO and Board member at
White Oak UK, where she was
responsible for the Finance and
Treasury teams. During her 25
years of experience in finance and
banking, Caroline has developed
significant listed entity and banking
expertise through her roles as Group Finance and
Transformation Director at Arrow Global plc, her role as
Chief Accounting Officer of the Co-operative Bank plc
and during nearly twelve years at Deutsche Bank, latterly
as UK Finance Director. Caroline’s experience, notably at
the Co-operative Bank plc has included close liaison with
the Prudential Regulation Authority. Caroline is a
Chartered Accountant and has a First-class Honours
Degree in Economics from the University of Hull.
Annual Report & Financial Statements 2020
27
Corporate Governance Report (cont’d)
Corporate Governance Structure
The Board is principally supported by and delegates specific powers to a number of established Board committees,
namely the:
l Nomination Committee.
l Remuneration Committee.
l Board Audit Committee.
l Board Risk Committee.
l Executive Committee.
The overall Group corporate governance structure is as set out below
Group Board
Board Audit
Committee
Board Risk
Committee
Remuneration
Committee
Nomination
Committee
Executive
Committee
Asset &
Liability
Committee
Executive Risk
Committee
Change
Board
Operations &
IT Committee
Retail Pricing
Committee
Retail Credit
Committee
Operational
Risk
Committee
Model
Governance
Committee
Directors
Executive Directors and Senior Executives set out on pages 26 to 27 and 33 to 34
Executive Directors, Senior Executives and nominated Heads of Department
The composition of the Board is usually replicated and
operates concurrently at Group and PCF Bank Limited
(the ‘Bank’). 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 at regular Board meetings.
The performance of the Chief Executive is appraised
annually by the Chairman and the other members of
the Remuneration Committee.
Each of the Executive Committee, the Board Audit
Committee, the Board Risk Committee, the Nomination
Committee and the Remuneration Committee has a set
of clearly defined Terms of Reference. Responsibility
for the implementation of Group’s strategies and
day-to-day business are 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.
As highlighted in the Chairman’s statement, improvements
in Governance are a remediation priority. The Chief Risk
Officer (‘CRO’) has recently started to address this by
making changes to governance through a new
committee structure and responsibilities for those
committees that are not direct committees of the
Board. These changes, together with additional
resourcing, are designed to support the improvements
required in governance. Changes in the committee
governance structure since the 30 September 2019
Annual Report & Financial Statements include.
28
l A new Executive Risk Committee has been created,
reporting directly to the Board Risk Committee.
Chaired by the CRO, this committee has taken over
the Risk and Compliance elements of the previous
Risk, Compliance and Operations committee and
now reports into the Board Risk Committee as well
as the Executive Committee. An outline of the
Executive Committee responsibilities are set out on
page 33.
l Assets & Liability Committee. This committee now
reports into the Board Risk Committee as well as
the Executive Committee. An outline of the Asset
and Liabilities Committee responsibilities are set out
on page 55.
l The Marketing and New Products Approval
Committee has been disbanded with its
responsibilities now being met directly by the
Executive Committee for new products and the
Retail Pricing Committee, (see below), for pricing.
At a level beneath the Executive Committee, the Asset
and Liability Committee and the Executive Risk
committees, the following changes have been made:
l The Change Board oversees the prioritisation,
delivery, progress, risks and issues associated with
change across the Group.
l The Operations & IT committee incorporates the
operational elements of the previous Risk
Compliance & Operations committee and the
activities of the previously separate IT committee.
This committee has a wider remit and meets more
frequently than its predecessor committees.
l The Retail Pricing Committee, formerly the Liquidity
and Pricing Committee with additional responsibility
for retail asset pricing and reviewing marketing
activity, meets more frequently, and continues to
report into the Asset and Liability committee.
l The Retail Credit Committee (previously the Credit
Committee) now reports into the Executive Risk
Committee not the Executive Committee and will
be chaired by the CRO pending appointment of a
new Head of Credit Risk role. This committee has
responsibility for monitoring loan portfolio
performance and reviewing retail lending policy, as
well as approving higher value loans.
l A new Operational Risk Committee reports into the
Executive Risk Committee.
l The Model Governance committee is a new
committee, which reports into the Executive Risk
Committee.
In addition to the above committees, a Recovery and
Resolution Committee will continue to meet on an ad
hoc basis.
Board balance and independence
The Group Board and Bank Board consist of four
independent non-executive directors, two non-
executive directors and two executive directors in
Garry Stran and Caroline Richardson. The Board is
chaired by Tim Franklin, an independent non-executive
director. The profiles of the members of the Board are
provided on pages 26 to 27. The tenure of each of the
four independent non-executive directors is less than
nine years, which is in accordance with the Code.
The Boards comprise 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.
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, colleagues, customers, suppliers
and other communities in which the Group conducts
its business are well represented and considered.
The Board Audit Committee monitors
the
effectiveness of the Group’s financial reporting
systems, internal control and the integrity of the
Group’s external and internal audit process. The Board
has outsourced its internal audit activities to Grant
Thornton, UK LLP (‘Grant Thornton’). The Audit
Committee is responsible for agreeing and overseeing
the internal audit plan.
The Board Risk Committee provides oversight of risk
management across the Group.
The Nomination Committee reviews the structure and
size of the Board. The committee considered the
appropriateness of the Boards’ composition during the
year and concluded that it has the appropriate mix of
skills and experience to fulfil its responsibilities.
Subsequent to the year end a decision has been made
to appoint a Senior Independent Director (‘SID’) to
increase the resources of the Board and improve
governance through fulfilment of the SID functions
recommended by the Corporate Code.
The Remuneration Committee appraises the performance
and remuneration of the executive directors and other
senior executives.
The Boards of PCF Group plc and PCF Bank Limited
are collectively responsible for the success of the
Group and the Bank.
Roles and responsibilities
The Board is responsible for corporate governance,
leadership, developing strategy, promoting an
appropriate culture and the overall management of
risk. 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.
Annual Report & Financial Statements 2020
29
Corporate Governance Report (cont’d)
Corporate Governance Structure
l Assessing, monitoring and promoting a sound
corporate culture within the organisation including
setting the Group’s values and standards and
ensuring that its obligations to all stakeholders are
understood and met.
l Identifying principal risks and ensuring the
implementation of appropriate systems to manage
and monitor identified risks effectively.
l Reviewing the efficacy of internal control and of
management information, including systems for
compliance with applicable laws, regulations, rules,
directives, and guidelines.
l Approval of RMF, insurance, and mitigation.
l Ensuring that appropriate systems are in place to
promote whistleblowing and protect confidentiality
of whistleblowers.
l Ensuring effective communication with the
shareholders and other stakeholders.
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 Reviewing and approving acquisitions and disposals
of undertakings and major investments.
The Board monitors the Group’s risk management and
internal control systems, including financial, operational
and compliance controls, through the Audit and Risk
Committees, whose chairs provide oral reports, minutes
and updates to the Board. The Audit and Risk
Committees review the effectiveness of the controls
through the Second and Third Lines of Defence (as set
out in the Risk Management Report). Further details of
the work of the Audit and Risk Committees can be
found on pages 40 to 45.
Whilst the Board delegated the role of assessing
principal risks of the Group and PCF Bank to the Board
Audit and Risk Committee (split out into the Board
Audit Committee and Risk Committee during the
financial year), during the financial year the Head of
Risk and Compliance submitted a Risk, Compliance &
Financial Crime Report to the Board at each scheduled
Board meeting to bring to it attention matters of note
for it to assess and action as well as update on
progress on the strategic action planner to ensure the
Board tracked relevant matters were being actioned.
The Board has adopted Terms of Reference (‘ToR’),
which set out the Board’s roles and responsibilities. The
ToR is a source reference and primary induction
literature for existing and prospective members of the
Board.
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 required to be reviewed at least once a
year.
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.
The business affairs of the Group are governed by the
Group’s delegated authorities and its policy and
procedures manuals.
The division of authority is regularly reviewed to ensure
that management’s efficiency and performance remain
optimal.
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. In May 2021 Garry Stran replaced Scott
Maybury on an interim basis. The Chief Executive is
responsible for the day-to-day management and
executive leadership of the business. 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. The Chief Executive 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 can consult with the Company Secretary, who
is responsible for ensuring that Board procedures are
followed.
The directors also have direct access to the fully
outsourced Internal Audit function services provided
by Grant Thornton in addition to other members of the
senior management team. There is an agreed audit plan
and the Internal Audit function reports directly to
Board Audit Committee.
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 that there is proper balance of power and authority.
The Board has regular scheduled meetings. During the
year there were eleven scheduled Board meetings. As
and when the need arose, additional meetings were
held to deal with any specific time critical business
matters.
30
Annual Report & Financial Statements 2020
31
Corporate Governance Report (cont’d)
Corporate Governance Structure
Attendance at meetings
The attendance of the directors at scheduled Board
and the principal committee meetings that took place
during the year is shown below. In addition to the
scheduled Board meetings, a further 12 meetings were
held following the introduction of ‘lockdown’
restrictions in March 2020 to ensure that the Board had
clear oversight of the issues facing the business, its
colleagues, customers and operations and was able to
respond quickly to fast changing events. Some
directors also attended committee meetings as invitees
during the year, which is not reflected in the table.
Audit &
Risk
Board Committee
(up to
15 May
2020)
(ad hoc
Covid-19)
related
Board
Audit
Committee
(15 May
2020
onwards)
Board
Risk
Committee
(15 May
2020
onwards)
Board
(Scheduled)
Number of meetings
attended/(eligible)
11
12
8
1
Tim Franklin (2)
11 (11)
12 (12)
Scott Maybury (1) (3) (4)
11 (11)
12 (12)
David Morgan
Mark Brown
Christine Higgins
Marian Martin
David Titmuss
Robert Murray (4)
David Bull (1) (4) (5)
11 (11)
11 (11)
11 (11)
11 (11)
11 (11)
11 (11)
5 (5)
12 (12)
12 (12)
12 (12)
12 (12)
12 (12)
11 (12)
1 (1)
1 (1)
8 (8)
8 (8)
–
8 (8)
8 (8)
–
–
5 (5)
1 (1)
1 (1)
–
1 (1)
1 (1)
1 (1)
–
–
–
1
–
1 (1)
1 (1)
–
1 (1)
1 (1)
1 (1)
1 (1)
–
Nominations
Committee
Remuneration
Committee
3
4
3(3)
–
3(3)
3(3)
3(3)
3(3)
3(3)
–
–
4 (4)
4 (4)
4 (4)
–
4 (4)
4 (4)
4 (4)
–
–
During the year the Audit & Risk Committee split into two separate committees – a Board Audit Committee and a
Board Risk Committee. The final meeting of the Audit & Risk Committee was on 15 May 2020.
(1) Attended as standing attendee for Audit & Risk Committee and/or Board Audit Committee meetings.
(2) Attended as a guest for Audit & Risk Committee and Board Audit Committee meetings.
(3) Attended as a guest for Remuneration Committee meetings.
(4) Attended as a standing invitee for Board Risk Committee.
(5) Attended Board meetings as a director to 16 March 2020 and continued attending Board, Audit & Risk Committee
and its successor committees Board Audit Committee and Board Risk Committee to 30 September 2020 as an
invitee. Attendance in the above table is shown only for the period whilst a director of PCF Group plc.
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, considering the required mix of skills,
knowledge, expertise and experience, professionalism,
integrity, gender diversity 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 Board complies with the provision of the Code
which requires that all directors should stand for
re-appointment annually, subject to continued
satisfactory performance.
No person other than a director retiring at the
Company’s annual general meeting shall be eligible for
appointment or re-appointment as a director at any
general meeting unless she/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.
32
Training and development of directors
Professional development
Post Balance Sheet date, specific training sessions were
held covering compliance, regulation and corporate
governance issues. Topics covered included Financial
Crime, the AIM Rules, the Corporate Governance Code
and IFRS 9. 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 programmes and additional
business, compliance and regulatory updates are also
arranged as appropriate.
Company Secretary
The Company Secretary is responsible for ensuring that
board procedures and applicable rules and regulations
are observed. It 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 can take
independent external professional advice to assist with
the performance of their duties at the Company’s
expense.
Governance structure and delegated
committee
The Board has established a number of committees to
which responsibility for certain matters has been
delegated. The Board committee structure is shown in
the diagram on page 28. 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 of the 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 CFO on the performance
and results of the Group, strategic developments and
the legal and regulatory affairs of the Group and the
Bank. In addition, the Board receives regular updates
from the ExCo. The Chief Risk Officer has a standing
invitation to attend all scheduled Board meetings.
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 enough 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
responsibilities to ExCo, which meets at least monthly
to deliberate and take policy decisions on the effective
and efficient management of the Group and to monitor
its performance. ExCo’s primary responsibility is to
ensure the implementation of strategies and culture
approved by the Board, provide leadership to the
senior management team and ensure appropriate
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.
In addition to Garry Stran (interim Chief Executive
Officer) and Caroline Richardson (Chief Financial
Officer) at 22 December 2021, the other members of
ExCo are as follows:
Andrew Barber1
Chief Technology Officer
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 IT change is managed successfully within the
Group. Andrew is a member of the Smaller Banks
Operations & IT Forum (‘SBOITF’) and a founding
member of the Specialist Bank Security Forum (‘SBSF’).
Andrew is a professional member of BCS, The
Chartered Institute for IT.
Simon Baum2
Chief Risk Officer
Simon is responsible for the Risk and Compliance
function for the Group. Simon has spent 35 years
specialising in risk management within financial
services, holding several senior positions at Experian,
PricewaterhouseCoopers LLP, Alliance & Leicester and
Santander, both in the UK and overseas. Simon brings
significant experience of best practice from risk
functions within Financial Service enterprises, risk and
control improvements and experience of Board Risk
Committees.
Jim Coleman1
Chief Capital Officer
Jim joined PCF in October 2016 as Head of Treasury to
oversee the establishment of a treasury function in
preparation for bank mobilisation in 2017. Since
mobilisation, he has been responsible for funding,
liquidity and asset & liability management and funds
transfer pricing and in 2020 he took on additional
responsibility for the management of the Group’s
capital. 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.
Stuart Marshall3
Chief Operating Officer
Stuart is a qualified accountant with over 25 years of
experience in financial services. The early part of his
career was spent in Barclays working within retail
banking and group before moving into global
operations in Barclaycard. Subsequently he held senior
positions at Kleinwort Benson Group before joining the
management team of a start-up bank that took them
through to ‘Minded to Authorise’. Stuart has held a
range of senior executive positions with a breadth of
experiences across Operations, IT, Risk and Finance.
Annual Report & Financial Statements 2020
33
Corporate Governance Structure (cont’d)
Catherine Mayo2
Chief of Staff
Catherine’s role is to oversee the strategic objectives
of the Chief Executive Officer, and to both support and
hold Group executives to account. Catherine is a
Chartered Accountant with over 25 years of experience
in financial services, consulting and sales & marketing
organisations, including 11 years as a Finance Director in
Barclays in Group Finance and Treasury Finance. She
has extensive financial services finance and treasury
experience, with expertise in developing strong finance
functions, executing transactions and leading and
executing change.
Suzie Yong1
Chief People Officer
Suzie joined PCF Group in August 2019 and is
responsible for Human Resources. Suzie has over
20 years’ HR management experience in both the
private and public sectors with her last role as Head of
HR in a fintech business where she was responsible for
the setting up and management of HR operations
globally. Suzie has several years’ experience working as
an Associate Lecturer and Assessor on Chartered
Institute of Personnel and Development (‘CIPD’) courses
at the International Financial Services Centre (Dublin)
and is a Chartered Member of the CIPD.
1 Member of the Executive Committee throughout the
year to 30 September 2020.
2 Member of the Executive Committee from June
2021.
3 Member of the Executive Committee from 9 August
2021.
Where appropriate, alternates attend when members
are absent.
Jason McCabe1
Deputy Chief Risk Officer and Chief Compliance Officer
Jason joined PCF Group in October 2016 and is
responsible for compliance oversight and money
laundering reporting senior management functions. He
has over 15 years’ experience in Risk Management &
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.
Duncan McDonald2
General Counsel
Duncan is responsible for managing the Group's
in-house legal function and supporting the Company
Secretary in respect of aspects of the company
secretarial functions of the Group. Duncan is a lawyer
who has accumulated considerable experience as a
corporate commercial lawyer and General Counsel over
the years having undertaken a wide range of transactional
and general company commercial work for national and
international financial sponsors and corporates.
Gavin Scott1
Sales and Marketing Director
Gavin co-founded Azule in 2004 where he held the
position of Managing Director. Gavin was responsible
for growing the business from a small independent
brokerage to a company that had a loan portfolio of
£16 million and was originating £50 million of asset
finance per annum. Gavin was involved in expanding the
services of Azule from the UK into Europe to support its
major manufacturers, such as Sony and Canon. Azule,
which was acquired by PCF in 2018, is a specialist asset
finance provider for broadcast/media, live entertainment
and audio-visual equipment. Gavin is now responsible
for Sales and Marketing activities across the Group,
including Consumer Finance, Business Finance, Property
Finance and Azule. Gavin has over 20 years of asset
finance experience having originally started in sales for
a specialist media asset finance company in 1998.
34
Nomination Committee Report
Dear Shareholder,
I present my report to you as Chairman of the Nomination
Committee for the year ended 30 September 2020.
This report is dated 22 December 2021. Given the
passage of time since the year end, it is brought up to
date for recent events and matters relevant to the
Group’s current operating model where appropriate.
Introduction
The Nomination Committee (‘NomCo’) has delegated
responsibility from the Board for reviewing the
structure, size and composition of the Board on a
regular basis.
Membership of Nomco is limited to non-executive
directors and I am the Chairman. The CEO is invited to
meetings as an attendee on an ad hoc basis for agenda
points linked to consideration of succession plans and
other matters where his input is valuable to the
committee.
Role and activities of the NomCo
The role of NomCo is:
l To review the structure, size and composition of the
Board.
l To lead the process for appointments to the Board
and senior management.
l To ensure plans are in place for orderly succession
to the Board and senior management positions.
l To oversee the development of a diverse pipeline
for succession.
Key activities in the year
The committee’s activities during the year included a
review of the composition of the Board from a
corporate governance and regulatory perspective. In
addition, we carried out an analysis and review of
succession planning.
The effectiveness of the Board was reviewed during
the year this review was a self-assessment which was
externally facilitated by Independent Audit Limited,
using their online self-assessment service Thinking
Board. The primary purpose of the review was to direct
the Board’s attention to areas where there might be
opportunities to improve its performance. As part of
their review, Independent Audit Limited also attended
a Board meeting during the year.
During the year, the committee commenced the
process of recruiting a new Chief Financial Officer
(‘CFO’) to replace David Bull, who resigned as a
director of the Company on 16 March 2020 and left the
Company’s employment on 30 September 2020. We
engaged an external executive search firm to source
appropriate candidates. We recommended to the
Board to appoint an interim CFO until the appointment
of the new CFO, Caroline Richardson, on 15 March 2021.
Board training is held on a regular basis to provide
Board members with professional development and to
enable updates on regulatory, financial and governance
developments. The Board calls upon external
organisations where specialist input is required. Heads
of Department are called upon to facilitate training
where the specialist skills are available in house. This
has been especially useful in the areas of compliance,
Internal Liquidity Adequacy Assessment Process
(‘ILAAP’) and Internal Capital Adequacy Assessment
Process (‘ICAAP’) training and regulatory reporting
developments and human resources training.
This year the Nomco met three times. Meeting agendas
have included items on succession planning, diversity
and inclusion, colleague relations, board training and
effectiveness.
Following on from the suspension of PCF Group plc
shares on AIM in May 2021, Nomco played an active
part in the restructuring of the Executive and Senior
Management team in the business. We recommended
to the Board to appoint Garry Stran as interim CEO on
21 May 2021 and, as mentioned above, Caroline
Richardson as CFO on 15 March 2021. Nomco has also
engaged an external search firm for the appointment
of a Senior Independent Director.
Diversity and inclusion
Diversity and inclusion continue to be a focus of the
committee. Nomco considers that the Board is diverse,
drawing on the experience, knowledge and skills of
directors from a range of backgrounds, but will
continue to seek opportunities to further improve the
diversity of the Board in the future. At 30 September
2020, two of the Company’s eight directors were
women and this has now increased to three of eight
directors.
In line with the UK Corporate Governance Code 2018,
Nomco discloses that the gender balance in the
Executive Committee at 30 September 2020 was 90%
male and 10% female and in management positions was
63.5% male and 36.5% female.
This report was approved by the Nomination
Committee on 22 December 2021.
Tim Franklin
Chairman of the Nomination Committee
22 December 2021
Annual Report & Financial Statements 2020
35
Remuneration Committee Report
Dear Shareholder,
I present my report to you as Chairman of the
Remuneration Committee for the year ended 30
September 2020. This report is dated 22 December
2021. Given the passage of time since the year end, it is
brought up to date for recent events and matters
relevant to the Group’s current operating model where
appropriate.
Introduction
The Remuneration Committee (‘RemCo’) has delegated
responsibility from the Board for reviewing the
performance of the executive directors and the
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 to align with the strategic aims of the
Group and regulatory compliance requirements. Remco
did not consult with such external advisers during the
year ended 30 September 2020 but has a
benchmarking exercise planned for the future with the
Chief People Officer. During the year the committee
undertook a desktop benchmarking review of the
remuneration of three executive directors by
considering publicly available information on the
salaries and benefits applicable to such roles in similar
organisations.
Approach to remuneration
The approach taken by the Group in respect of
remunerating colleagues 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 aim to support
the recruitment and retention of colleagues, align with
risk appetite and the long-term interests of the Group.
Fundamentally, our approach to remuneration aims to
promote and reward the right behaviours to 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 Remuneration 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 those colleagues identified under the
regime as either Code or Other Certified staff. Code
staff are comprised of executive and non-executive
directors and Senior Managers covered by the Senior
Managers Regime. By application of supervisory
statement 2/17 Remuneration, the Group additionally
identifies a number of Other Certified staff with certain
managerial responsibilities which bring them within the
scope of the regime.
Remuneration policy
The Group’s remuneration policy is applicable to all its
colleagues.
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, cooperation, customer focus, risk
awareness), comply with regulation, support a
controlled environment, deliver good customer
outcomes, 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 colleagues 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 Colleagues are not to be rewarded for taking risks
that are unwarranted.
l Principles of ‘malus’ and ‘clawback’ will be
implemented where relevant.
In addition, our remuneration policy is consistent with
the principles and provisions of the 2018 UK Corporate
Governance Code in terms of:
l Clarity – this report provides open and transparent
disclosure of our remuneration policy and
remuneration received by the directors.
l Simplicity and alignment to culture – our
remuneration policy and arrangements are
straightforward and aligned to the Group’s culture
and values.
l Predictability – incentive schemes contain maximum
opportunity levels with outcomes varying
dependent on the level of performance achieved
against specific objectives.
l Proportionality and risk – variable remuneration
arrangements are designed to provide a fair and
proportionate link between Group performance and
reward, with ‘malus’ and clawback provisions in place.
36
Annual Report & Financial Statements 2020
37
Remuneration Committee Report (cont’d)
As a Level 3 firm under the Remuneration Code
guidance on proportionality (SYSC 19D), the Group
does not apply the following rules:
l Retained shares or other instruments (SYSC
19D.3.56R).
l Deferral (SYSC 19D.3.59R).
l 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 colleague may be
eligible to receive include:
l Basic salary.
l Benefits.
l Cash bonus.
l Share options.
Share-based payments and director interests
in shares
In 2018, the Company introduced a share-based
long-term incentive plan for senior executives and
other key colleagues. The plan has performance criteria
attached regarding Group performance and
shareholder return. Share options under the plan are
only settled on achievement of the criteria. No changes
or additions in the long-term incentive scheme were
made during the year.
Details of the interests in the Company’s shares of the
directors, including their connected persons and share
options granted to previous executive directors are
detailed in the Directors’ Report on pages 48 to 52.
No options were granted nor exercised during the year.
None of the executive directors received share based
remuneration in the financial year.
Other directors’ interests in the Group are disclosed in
note 31 to the financial statements.
Key activities
The committee’s activities during the year included the
review and determination of salary increases and
bonuses for both the executive directors and all Group
colleagues. In so far as it being available, the committee
gathered information regarding remuneration decisions
made by other banks and financial services companies
during the COVID-19 pandemic.
Given the effects of COVID-19 on the certainty of the
Group’s financial performance, as part of the annual
pay review, Remco concluded that there should be no
discretional payments made under the Company’s
annual bonus arrangements. A small number of adhoc
recognition payments were approved by Remco in
January 2021 for efforts in relation to the pandemic,
totalling £38,000.
The former Chief Executive Officer apprised the
committee on the efforts made by colleagues who
were required to work from home, with a special
emphasis on their wellbeing.
In terms of executive director changes during the year,
the committee considered and approved the terms
David Bull settlement package during the year when he
resigned as a director on 16 March 2020 and left the
Company’s employment on 30 September 2020.
Information on the demographics of our colleagues
were supplied to the committee, with a particular focus
on pay by gender. We are confident that positive
progress is being made in further developing a culture
which is fair to and respects customers, appropriately
manages risk, appreciates and rewards colleagues and
gives equal opportunities to all.
Remco met four times during the year to 30 September
2020.
Since 30 September 2020, the committee has met to
consider the total remuneration of the two newly
appointed executive directors as well as other key
executive appointments and changes in the Senior
Management team.
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 colleagues.
The Company has a workplace pension scheme with
Standard Life, with a Company contribution rate based
on 7% of basic salary.
The directors’ contribution rate is based on 10% of
basic salary. 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.
The Company’s contribution to the pension schemes of
the directors and other colleagues are not aligned in
accordance with the provisions of the 2018 UK
Corporate Governance Code. Remco will review this
matter during the financial year 2022 (with a view to
developing a plan to reduce such contributions so that
they align with those of the majority of the work force
for new senior Executive hires).
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 then 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
2020, but also to their individual performance, based on
a number of personal objectives. As a result of the
financial performance of the Group in the year to 30
September 2020, no annual bonuses were paid to the
executive directors.
38
Table of directors’ remuneration
A summary of the total remuneration paid to directors is set out below.
Executive directors
S D Maybury 1, 2
R J Murray 3
D R Bull 4, 5
Non-executive directors
M F Brown
T A Franklin
C A Higgins
D J Morgan
D Titmuss
M Martin
Salary
and fee
£’000
Bonus
£’000
Benefits
in kind
£’000
Pension
£’000
Year ended
Long-term 30 September
2020
£’000
incentive Other
£’000 £’000
Year ended
30 September
2019
£’000
289
190
191
43
95
57
43
52
43
1,003
–
–
–
–
–
–
–
–
–
–
2
2
2
–
–
–
–
–
–
6
–
15
19
–
–
–
–
–
–
34
– –
– –
– 202
– –
– –
– –
– –
– –
– –
– 202
291
207
414
43
95
57
43
52
43
476
285
296
43
95
57
43
52
11
1,245
1,358
1 Pension was received in cash.
2 Retired and resigned from the business on 21 May 2021.
3 Part of the pension received in cash.
4 Part of the pension was received in cash.
5 David Bull resigned as a director on 16 March 2020 and left the Company’s employment on 30 September 2020. David
Bull was treated as a good leaver on leaving the Company and the ‘other’ amount represents a payment for compensation
for loss of office, including £87k as a payment in lieu of up to six months’ notice, £85k as an incentive award measured
against specific predetermined performance criteria and £30k as an ex-gratia payment. Share options previously granted
were not cancelled on departure from the Group (see page 48).
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 22 December 2021.
David Titmuss
Chairman of the Remuneration Committee
22 December 2021
Other matters
In light of recent events and the delays in the 2020
financial statements:
l The Group has authorised the commencement of
recovery action (where it is commercially sensible
and legally feasible to instigate such action) to
recover previously paid remuneration (and
consequential losses) from individuals in the context
of certain findings of the various investigations
undertaken by the Group.
l Remco will review the output of the completed
investigation set out in the Audit and Risk
Committee report and ensure its remuneration
structure effectively deters such conduct and
promotes the long-term success of the Company.
Non-executive directors
Non-executive directors are engaged under letters of
appointment and are required to stand for
reappointment at each annual general meeting, subject
to continued satisfactory performance. Non-executive
directors participate in decisions concerning their own
fees together with the recommendation of the
executive directors, considering 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.
Annual Report & Financial Statements 2020
39
Audit & Risk Committee Report
This report is dated 22 December 2021. Given the passage
of time since the year end, it is brought up to date for
recent events and matters relevant to the Group’s current
operating model where appropriate.
This report covers the work of the following
committees for the year ended 30 September
2020
l The Audit and Risk Committee (‘ARC’) which held
its final meeting on 15 May 2020.
l The Board Audit Committee, which held its first
meeting on 10 September 2020.
A separate report for the activities of the Board Risk
Committee (‘BRC’), which held its first meeting on
24 September 2020, is presented later.
Committee members of the Audit & Risk Committee
and subsequently Board Audit Committee
Christine Higgins Independent non-executive director
(Chair)
David Morgan1 Non-executive director (Member until
10 September 2020)
Marian Martin Independent Non-executive director
(Member from 10 January 2020)
Anthony Nelson Advisor (resigned 29 November 2019)
Mark Brown Non-executive director (Member from
10 September 2020)
1 David Morgan continued as a member of BRC from
10 September 2020.
Dear Shareholder,
I present my report to you on the work of ARC until 15 May
2020 and on the work of BAC since then. This report
covers the regular work of the Committee during 2020 and
following recent events, work in relation to the delayed
completion of the Annual Report & Financial Statements
2020.
Responsibilities of the Audit & Risk Committee and
Board Audit Committee
l Monitor the integrity of the Group’s financial
statements by debating and challenging critical
estimates and accounting judgements and
overseeing the external audit.
l Advise the Board on the Group’s overall risk
appetite, tolerance and strategy1.
l Oversee the internal audit plan and effectiveness of
the fully outsourced internal audit function provided
by Grant Thornton.
l Monitor the external auditor’s independence and
objectivity and assess the effectiveness of the
external audit process.
l Assess and monitor the activities and effectiveness
of the Risk and Compliance function1.
l Oversee whistleblowing arrangements. The Chair of
ARC (now Chair of Board Audit Committee) 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
laundering1.
l Review and approve assumptions and stress
scenarios in the planning stage of the ICAAP and
ILAAP, including substantive changes to the
previous assessment1.
1 As a result of the separation of the Audit & Risk
committee, these responsibilities passed over to
Board Risk Committee on its establishment.
Composition of the Audit & Risk Committee
The ARC was made up of three non-executive directors,
two of whom are independent and all of whom have
recent and relevant financial services 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 set out within its Terms of Reference.
Standing invitees to ARC (and subsequently the Board
Audit Committee) included the Chief Executive, the
Finance Director/Chief Financial Officer, the Chief Risk
Officer or the Deputy Chief Risk Officer and Chief
Compliance Officer, and representatives of the
outsourced internal audit function and the external
auditor.
During the year, the ARC split into two separate
committees reflecting best practice – a Board Audit
Committee (‘BAC’) and a Board Risk Committee. The
Chairs of each committee are members of the other
Committee, and each is comprised of three non-executive
directors. The new Terms of Reference for BAC were
approved by ARC in its May 2020 meeting.
Meetings and areas of focus
ARC met eight times during the year. BAC met once in
the year. An oral report was made to the Board following
each meeting and the approved minutes were
subsequently provided.
The ARC/BAC met privately before each meeting and at
least once a year met privately with the external auditor,
the internal auditor and the CFO, in turn.
BAC has also met 16 times since the year end including
scheduled meetings and additional meetings to address
matters related to finalisation of the Annual Report &
Financial Statements 2020 and to lead a tender for new
auditors. The matters considered are set out more fully
throughout this report.
Given recent events and the delayed finalisation of the
Annual Report & Financial Statements, I first set out our
work in relation to this followed by the other areas of
ARC/BAC focus relating to the Annual Report & Financial
Statements 2020.
40
Completion of the Annual Report & Financial
Statements 2020
Completion
The most significant issues for the BAC relating to the 2020
financial year have been those that came to light post year
end and which resulted in the suspension of trading of the
Group’s shares and the assessment and quantification of
the impact of these on the Ernst & Young LLP (‘EY’) audit
and completion of the Annual Report & Financial
Statements 2020.
Finalisation of the Annual Report & Financial Statements
2020 and audit has taken significantly longer than
expected and this reflects a number of factors including, as
they arose:
l The disruption of the pandemic increased the
uncertainties within key accounting judgements such as
expected credit losses and goodwill impairment.
Additionally, with both Group and EY colleagues
working from home the Annual Report & Financial
Statements process was more complicated and took
longer than in previous years.
l Challenges for the Group in providing sufficient
appropriate audit evidence to the auditors because of
an absence of, or poor, underlying documentation. This
work was also hindered by virtually all of the Finance
team being completely new to the Group in financial
year 2021 and with the Finance Director having left the
Group in September 2020.
l On 11 March 2021 the Group announced that during the
process of finalising the 2020 audit a number of
adjustments to its unaudited 2020 preliminary results
(previously declared in December 2020) were required
of up to £750,000. The principal adjustments related to
the charging to the profit and loss of previously
capitalised costs for software projects, a reduction in an
interest receivable balance from the employee benefit
trust and adjustments to accruals for interest due on
stage 3 loans, offset by lower colleague incentive
rewards.
l Later in March 2021, when reviewing information
required to address EY audit enquiries for the 2020
audit, our new CFO, Caroline Richardson, became
aware of potential errors and misstatements. This was
promptly reported to the Audit Committee and Board.
l In April 2021, the Board engaged PwC to undertake an
initial independent forensic investigation of the
concerns raised (as reported in the Regulatory News
Service (‘RNS’) dated 28 June 2021) and as a result of
the findings of this review, the RNS highlighted:
l That these errors and misstatements resulted in the
failure to properly report 1) under the Prudential
Regulation Authority's Large Exposure reporting
framework between December 2018 and June 2019;
and 2) an overstatement of the Common Equity Tier
1 Ratio and Total Capital Ratio in the Group’s
30 September 2019 regulatory reporting. These two
issues had no impact on the consolidated Group
financial statements and the reported capital
positions for the financial year ending 30 September
2019 previously published.
l The review enabled the Board and Executive team
to identify a number of deficiencies and failures in
PCF Bank's financial control and reporting function,
including members of the historical Finance team,
under instruction, manually adjusting certain
accounting entries for both financial and regulatory
reporting purposes which appeared to the Board to
have been a deliberate effort to facilitate specific
results.
l That the Board believed there may have been
possible collusion by some members of the
historical Finance team in making these
adjustments, and that other contributory factors to
the control failures were under resourcing, an
inadequate level of skill and experience within the
historical Finance team, technological limitations
and a poor culture in the Finance team resulting in a
lack of, and a reluctance to, challenge its leadership.
l At the end of June 2021, following Board’s consideration
of the results from the initial PwC independent forensic
investigation, further work was commissioned to
explore a number of the initial findings in more depth
and to highlight other potential areas of concern or
misstatement in related areas.
l The Finance team, overseen by the new CFO,
undertook a detailed review to explore areas of concern
and potential misstatement, in order to provide comfort
that the Annual Report & Financial Statements 2020
were free from material misstatement. The detailed
steps of the work undertaken are set out below in the
section on the Further Finance Review.
l On 10 September 2021 the Group announced that the
adjustments to its 2020 preliminary results would
exceed the £750,000 announced on 11 March 2021 and
by way of a further announcement issued on 21 October
2021 the Group outlined the revised total adjustment to
the preliminary results for the year ended 30
September 2020 would be approximately £7 million.
The principal adjustments being a revision to the
impairment methodology for defaulted receivables as
detailed in that announcement.
All in all, there have been structural control, resourcing and
reporting weaknesses in the Group’s Finance function
contributing to the extended delay in finalising the 2020
Financial statements.
The Further Finance Review – end July to
November 2021
l The further review period started in early July 2021,
concluded in November 2021 and was undertaken
by the Group’s CFO and the Finance Team.
l The further Finance review work which ran from July
to November, involved analysing accounting
records, determining the underlying reasons for
previous entries made, assessing the appropriate
accounting treatment and the appropriate
accounting periods, undertaking profit and loss
impact analysis, full balance sheet reconciliations and
looking back to assess if any of these items resulted
in any material impact on the internal management
accounts, the Annual Report & Financial Statements
and Interim Financial Statements for the two years
ending 30 September 2019 and 30 September 2020.
Annual Report & Financial Statements 2020
41
Audit & Risk Committee Report (cont’d)
This detailed work was very time consuming and
resulted in further significant delay in the finalisation
of the Annual Report & Financial Statements.
l In addition to supporting the work of internal and
external investigations, given the deficiencies and
failures in PCF Bank's financial control and reporting
function identified by management, the Finance
team was required to provide a further substantial
amount of additional audit evidence and analysis to
support the statutory audit and entries in the
Group’s accounting records.
l In analysing the results of this further Finance
review, consideration was given to the nature of and
materiality of certain findings as well as any
adjustments required to be implemented as a result,
both on a qualitative and quantitative assessment
basis. The results of this review work have provided:
l Further examples of misstatements. These were
most prevalent in internal management
reporting but several instances of which
persisted in external reporting though not to a
material extent at Group level.
l Multiple errors that may not lead to a misstatement.
l The required adjustments in relation to the various
errors or issues identified from the further Finance
review have been reflected in these financial
statements to ensure they are free from material
misstatement. The results of this review work have
been scrutinised by the CFO, and carefully overseen
by, BAC.
This further review has also reaffirmed that there
continues to be no evidence of monies having left the
Group inappropriately as a result of any of these
practices and behaviours. However:
l The Group has authorised the commencement of
recovery action (where it is commercially sensible
and legally feasible to instigate such action) to
recover previously paid remuneration (and
consequential losses) from individuals in the context
of certain findings of the various investigations
undertaken by the Group.
l There will be costs associated with the investigation
and remediation which will be reflected in the 2021
financial statements and significantly increased
audit fees which are reflected in these 2020
financial statements.
The Committee’s Recommendation
As a result of this work and its oversight, together with
consideration of the significant accounting issues and
judgements as described below, the BAC
recommended the Group Annual Report & Financial
Statements for the financial year to 30 September
2020 to the Board, who subsequently approved the
Annual Report & Financial Statements. In order to form
this recommendation, the BAC considered the
additional audit work undertaken by EY prior to the
decision taken to cease providing audit evidence (see
Auditor opinion below), the PwC investigation, the
detailed further Finance review work overseen by the
CFO, the consequent analysis and conclusions reached
on the findings, and the papers and analysis prepared
by the CFO and Finance team being a material risk of
misstatement report for the current and prior financial
year, a Going Concern assessment, an assessment of
post balance sheet events and a fair, balanced and
understandable assessment of the same.
In addition, BAC:
l Reviewed the content of the Annual Report &
Financial Statements for the year ended
30 September 2020 for clarity and completeness of
disclosure.
l Concluded that the Annual Report & Financial
Statements as a whole were fair, balanced and
understandable and provide the information
necessary for shareholders to assess the Group’s
position, performance, business model and strategy.
Auditor opinion
The time required to perform the independent forensic
investigations and further Finance review set out above
has delayed the finalisation of the Annual Report &
Financial Statements and the audit. Given the nature
and extent of the findings identified by Management,
the final stages of the audit were very delayed and
would involve a very considerable amount of extended
testing and auditor information requests. These
requests then placing ongoing significant demands on
the Finance team. Also, given turnover in the finance
team and the past poor record keeping, it wasn’t clear
that the Group would be able to provide the level of
detailed information needed by EY for an unmodified
audit opinion. Lastly the additional assurance work
would further the extended time period to finalise the
Annual Report & Financial Statements 2020 and would
further increase audit costs.
In the circumstances, management recommended to
the Audit Committee and the Board that it was in the
best interests of the Group to proceed with the audit
work so far as was necessary for a disclaimer of opinion
on the financial statements for the year. This
recommendation meant; 1) The finance function would
no longer provide the substantial amount of additional
audit evidence requested and 2) It was solely for the
Board to reach a view on whether the Group Annual
Report & Financial Statements were free from material
misstatement, in order to prevent further additional
delays in presenting these financial statements to
stakeholders. The Audit Committee supported this
pragmatic recommendation.
Significant Accounting Issues and Judgements
In reviewing the Group’s Annual Report & Financial
Statements 2020, the BAC considered significant
accounting issues and judgements as follows:
l Risk of fraud in the recognition of revenue through
the Effective Interest Rate (‘EIR’) methodology. This
risk is consistent with last year. However, it is
potentially affected by COVID-19 and material
changes in the expected lives of products as a
result of changes in customer behaviour. The
Committee discussed and considered the key
assumptions used in the EIR methodology, including
the impact of COVID-19 forbearance and payment
deferral measures.
42
l Impairment of loans and advances to customers in
accordance with the IFRS 9 expected credit loss
(‘ECL’) model (fraud risk). The identification of this
risk is consistent with last year. However, this year it
is significantly affected by the impact of COVID-19
on the potential creditworthiness of customers. The
Committee discussed the key assumptions used in
the IFRS 9 models and the assumptions and
rationale that supported additional provisions
through overlays and post-model adjustments. The
Committee also considered the application of IFRS
9 in relation to regulatory guidance and took
account of the extensive Government support
measures and the specific circumstances of our
customers. The Committee concluded on a number
of overlays and Post Model Adjustments (PMAs). In
addition, as part of the extensive work led by the
CFO as referenced in the above section, it became
apparent that additional provisions for expected
credit loss were required for defaulted loans where
the agreements had been terminated and assets
recovered with a residual outstanding balances. The
Committee agreed the impairment methodology for
these residual balances with a resulting increase in
provisions being the significant part of the £7m
adjustment announced on 21 October 2021. Further
details of loan and advances to customers and the
IFRS 9 provision are set out in notes 1.5.3 in
Accounting Policies and also in notes 28.5 and 29.3.
l Impairment of Goodwill in relation to Azule. This is a
new risk for 2020 arising as a result of the impact of
COVID-19 on the future expected cash flows relating
to the Azule business. The Committee considered a
number of possible future growth scenarios for the
business but due to the impact of COVID-19 on the
near-term prospects for the business supported the
decision to impair the carrying value of the acquired
goodwill by £1.75m. In 2019 there had been financial
statement risks relating to the purchase price
allocation and disclosure of the acquisition of Azule
which are non-recurring.
l COVID-19 considerations have arisen across all areas
of the Committee’s work.
l Accounting for leases under IFRS16. This was a new
accounting standard for this year.
l Going Concern – Due to the events giving rise to the
delay in the 2020 ARA (set out above), the current
suspension of trading in the Group’s shares on AIM
and residual pandemic impacts, there was a detailed
consideration of the going concern assumption.
Refer to the Directors’ Report for further details and
the summary in note 1.2 Basis of preparation to the
financial statements.
l BAC assessed the appropriateness of the going
concern assumption considering planned
performance including future remediation costs,
funding, liquidity, market risks, as well as other
business and emerging risks.
l BAC also assessed the medium-term plan
against a number of sensitivities and a severe
but plausible downside scenario. Even under the
severe but plausible scenario it is was
demonstrated that the Group would continue to
operate and meet regulatory requirements for at
least the next twelve months.
l The Committee concluded that based on the
planned performance, assessments of key risks
to the business, and the exercise to confirm that
there was no material misstatement in the Group
Annual Report & Financial Statements (set out in
detail above) that the going concern basis of
accounting was appropriate.
l The Group has made a statutory loss before tax
of £(4.8) million in the year. The Board approved
a medium-term plan in which the Group returns
to profitability, but this is dependent on building
scale to support an increased cost base.
Remediation costs are expected to be incurred
for at least the next twelve months. This growth
requires capital to be raised, which given the
delay to the Annual Report & Financial
Statements 2020, the disclaimer of auditor
opinion and the temporary suspension of trading
in the Group’s shares, means there are risks
associated with our ability to raise capital, fund
planned future balance sheet growth and the
understandable increase in regulatory focus
these events have brought. Therefore, the Board
Audit Committee concluded that it was
appropriate to disclose a material uncertainty in
relation to Going Concern in these Financial
Statements.
The regular work of the ARC/BAC during the year
included the following:
Internal audit
BAC oversees the internal audit function, approving its
plans and scope, its resources and considers the
reports produced.
The Board has outsourced its internal audit function to
Grant Thornton. The ARC/BAC is responsible for
agreeing and overseeing the internal audit plan. Grant
Thornton completed six internal audits during the year
and their overall assessment was that, based on their
internal audit work over the twelve months to 18
November 2020, one report was rated Needs
Improvement, one report was rated Some Improvement
Required, two reports were rated Satisfactory and two
reports were Unrated, in relation to the work
performed, Grant Thornton stated that, ’the governance
and risk and control framework is operating effectively
to support PCF Group in adhering to its agreed risk
appetite’. This view was based on the work performed
in the preceding twelve months.
The annual internal audit plan was developed in
conjunction with the Second Line of Defence compliance
monitoring programme and was approved by ARC. The
areas for audit are linked to strategic objectives, key risks
and the core areas of regulatory oversight.
Grant Thornton the outsourced internal auditors have
observed the response from the areas they reviewed
during the year to 18 November 2020 and through
interaction with management have reported that
management had been engaged in the audits
performed and responded positively to
recommendations made.
The Chair of ARC/BAC had private discussions with
Grant Thornton during the year and the Committee met
with internal audit at least once during the year, without
management present.
Annual Report & Financial Statements 2020
43
Audit & Risk Committee Report (cont’d)
The Committee had satisfied itself as to the
effectiveness of the outsourced internal audit function
during the year through the review of the audit strategy
and annual audit plan, discussion of internal audit
reports and private meetings with Grant Thornton.
However, in view of the control weaknesses identified
since the year end the Committee have increased the
budget for and the extent of internal audit engagement
in the business.
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 delegated to ARC (now Board
Audit Committee) the responsibility for reviewing and
monitoring the effectiveness of the Group’s systems of
risk management, regulatory compliance and internal
control.
ARC considered a number of reports from the Head of
Risk and Compliance at its meetings, covering a range
of business, thematic and regulatory areas, in line with
the compliance monitoring programme.
Recommendations from the reviews and implementation
plans were agreed. The Committee received
presentations from the Head of Treasury and the Head
of Credit Control on the key risks in their areas.
Until the creation of the Board Risk Committee, which
took over this responsibility, ARC reviewed and
updated the principal risks schedule.
External Audit
ARC/BAC is responsible for overseeing the relationship
with the external auditor, including the ongoing
assessment of the auditor’s independence. ARC/BAC
makes recommendations to the Board regarding the
appointment of the external auditor and approves their
remuneration and terms of engagement.
EY was appointed as the Group’s auditor in 1994. The
audit partner for this year is Gary Adams. This is Gary’s
second year as audit partner.
ARC discussed EY’s Management Letter relating to year
ended 30 September 2019 and EY’s recommendations.
These will form part of the remediation activities.
ARC discussed and approved EY’s audit plan for the
year ended 30 September 2020 including their initial
risk evaluation, scope and the materiality, as well as the
results of the audit. The audit and the events since 30
September 2020 have highlighted significant
improvements required in the systems and controls of
the Group.
ARC also oversaw the development of further strategic
metrics during the year, approved relevant policies and
recommended risk framework documents to the Board,
in line with the Committee timetable.
The ARC/BAC Chair had discussions with EY during the
year and the BAC also met EY without management
present, which provided an opportunity for issues to be
discussed directly.
ARC considered emerging risks and management’s
plans for avoiding and/or mitigating these risks. This
year COVID-19 and its impact on the business of PCF
dominated the discussion on emerging risks and
additional internal audit work was undertaken in the
areas of Cyber and Information Security to assess the
move to ‘Working from Home’.
A revised Compliance Manual and Data Protection
Framework was reviewed by the Committee during the
year and recommended to the Board for approval.
Further consideration of recent events and the
implications for the Group’s RMF is included in the
Board Risk Committee report.
In reviewing the adequacy of internal controls, the
Committee received and discussed internal and
external reports during the year from internal audit,
external audit and Risk and Compliance.
The discovery, during 2021, of accounting errors and
misstatements, clearly demonstrates that a number
of key financial controls and processes had not been
operating effectively. See Completion of the Annual
Report & Financial Statements 2020 section of this report.
Significant improvements have been made in many
areas during 2021, in particular the recruitment of a very
experienced CFO who has rebuilt the Finance team and
a comprehensive finance remediation project, led by an
experienced change professional, overseen by BAC.
BAC is overseeing the review of the FPPP work
undertaken by the Group.
The BAC will continue to review and oversee the
recommended internal control, process and reporting
improvements identified.
During the year, ARC discussed with EY the review
procedures they have in place to ensure audit quality.
There was also a discussion of EY’s firm level results of
their Financial Reporting Council (‘FRC’) 2020 Audit
Quality Inspection, the impact of the findings on the
audit plan and any matters relevant to the execution of
the Group’s audit.
ARC has reviewed the independence and objectivity of
EY considering the auditor’s report to the Committee
on actions they take to comply with requirements for
independence and compliance with the policy for the
provision of non-audit services.
The level of audit fees charged by the Group’s auditor is
set out in note 9 to the financial statements and given
the additional work required are significantly higher this
year. There was no non-audit work carried out by EY
during the year.
ARC/BAC is responsible for evaluating the
effectiveness of the external auditor on an annual basis,
considering fees and the engagement letter, a review of
the external audit plan, the objectivity and effectiveness
of the audit and the quality of formal and informal
communications with ARC Originally ARC/BAC had
intended to complete the formal effectiveness review
on finalisation of the 2020 audit. However, given the
delays, the audit opinion disclaimer and the indicated
resignation of the auditor, BAC concluded that a formal
review of the effectiveness of the external auditor
would not be a worthwhile exercise and it would
undertake a lessons learned exercise. Following the
appointment of a new external auditor, BAC will
undertake an appropriate formal assessment of the
change in auditor and the first years’ audit.
44
Auditor appointment
EY has been PCF Group external auditors since 1994
with the audit last being retendered in 2006.
On 2 March 2021, EY advised the Board that they
intended to resign as auditor, following the issuance of
their audit report on the financial statements for the
year ending 30 September 2020. Board Audit
Committee has retendered the external audit in 2021
with a new external auditor MHA Macintyre Hudson to
be appointed after EY’s resignation, and their
appointment to be confirmed at the subsequent
General Meeting of the Company. BAC will oversee the
transition of the external audit to MHA Macintyre
Hudson for the year ended 30 September 2021.
Whistleblowing
ARC/BAC has reviewed the effectiveness of
whistleblowing arrangements in place within the Group
and adherence to the relevant regulatory requirements.
During the year the Committee received a Compliance
report that provided assurance on these matters.
However, given events leading to delay in the Annual
Report & Financial Statements 2020 we will revisit this
effectiveness assessment and are reinvigorating
communications and colleague engagement around
the importance of whistleblowing and speaking up.
Committee effectiveness
BAC undertook an annual review of its own
effectiveness during 2020 through a questionnaire sent
to BAC invitees and the conclusions were that the
Committee was operating effectively. This will be
reassessed given recent events and discussed by the
Committee and a time frame agreed for any
recommendations raised.
This report was approved by the Audit Committee on
22 December 2021.
Christine Higgins
Chair of Board Audit Committee
22 December 2021
Annual Report & Financial Statements 2020
45
Board Risk Committee Report
Committee members
Marian Martin Independent Non-executive director (Chair)
Christine Higgins Independent Non-executive director
David Titmuss Independent Non-executive director
David Morgan Non-executive director
Dear Shareholder,
I present my first report to you as Chair of the Board Risk
Committee (‘BRC’ or ‘the Committee’). During the year the
Audit & Risk Committee (‘ARC’) split into a separate Board
Audit Committee (‘BAC’) and the BRC. The inaugural
meeting of the BRC was held on 24 September 2020. This
report is dated 22 December 2021. Given the passage of
time since the year end, it is brought up to date for relevant
recent events and matters. These will be presented in more
detail in my report for the year ending September 2021.
The BRC’s principal roles and responsibilities are to support
the Board in establishing risk appetite and in its oversight of
risk management across the Group. The identification,
management and mitigation of risk is fundamental to the
success of the Group. The following sections set out the
Committee’s key responsibilities and the principal areas of
risk confirmed in the inaugural meeting. This report also
sets out upon which we have focused during the year to
30 September 2020 (the inaugural meeting), and in the
subsequent period to the date of finalisation of the Annual
Report & Financial Statements 2020.
The Committee supports the Board in setting the tone and
culture that promotes effective risk management across
the Group.
Composition and Governance
BRC consists of four non-executive directors, of which
three are independent, and all of whom have recent and
relevant financial services experience, and extensive
experience of corporate risk 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 set out within its Terms of Reference.
Standing invitees to the inaugural Board Risk Committee
were the Chief Executive, the Managing Director, the
Chief Risk Officer and the Head of Treasury. This has since
been expanded to include the Deputy Chief Risk Officer
and Chief Compliance Officer, the Chief Financial Officer,
the Chief Operating Officer, the Chief Capital Officer
(previously the Head of Treasury), and the Chief
Technology Officer.
The Chairs of BRC and BAC are each a member of the
other Committee. The Executive Risk Committee (‘ERC’)
and the ALCO now reports independently to the BRC
(from January 2021). The ERC is a new second line
committee replacing the historical Risk Compliance
Operations Committee (‘RCO’). During the financial
period under review, RCO and ALCO reported directly to
the Executive Committee.
The Chief Risk Officer is accountable to the BRC and has
a dotted line of responsibility into the Chair of BRC.
Meetings and areas of focus
The BRC met once during the reporting period with full
attendance by all its members and standing invitees. The
inaugural meeting focused on:
Responsibilities of the BRC
l Review and advise the Board on the Group’s overall
l Macroeconomic and forward-looking overview, the
treasury report and the risk report.
risk appetite, tolerance & strategy.
l Deep dive review into credit asset values and
l Review and advise the Board on the adequacy of
collateral.
the Group’s RMF.
l Review and advise the Board on the Group’s
compliance with prudential requirements.
l Advise the Board on the risk aspects of proposed
changes to strategy and strategic transactions.
l Safeguard the independence of and oversee the
performance of the Group’s Risk Function including
the sufficiency of resources.
l Monitor and review the effectiveness of the Group’s
risk management and risk related internal control
systems.
l Oversee adherence to the Group’s risk principles,
policies and standards.
l To review exceptions and breaches to Board
approved policies, including lending outside of
Credit Policy.
l Oversee the risks associated with the Group’s
complex and material financial models.
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.
l Review of the ICAAP report from Internal Audit.
l Setting the forward-looking planner for policy
reviews over the next 15 months.
l Approval of Annual Money Laundering Report.
l Approval of the Financial Crime Framework.
l Approval of the Product Governance Policy.
Since the 30 September 2020 year end, the BRC has held
six regular meetings, with four additional ad hoc meetings
in March and May 2021 to review the Internal Liquidity
Adequacy Assessment Process (‘ILAAP’). These meetings
considered matters including, but not limited to:
l Review of capital, liquidity and market risk appetite
statements and thresholds.
l The priorities for the risk management team, outlined
further below.
l The review and approval of Group risk policies on an
annual cycle.
l Consideration of compliance monitoring and Internal
Audit reports relevant to the RMF.
l The Internal Audit of IT and cyber resilience.
l Ransomware preparedness.
l An overview of the management of climate related
financial risks.
46
l Oversight of the progress of the key remediation
activities and priorities of the Chief Risk Officer
including:
l Appropriately resourcing of the second-line Risk
Management function.
l RMF improvements.
l IFRS 9 model support and redevelopment,
including improved stress-testing capabilities.
l The redevelopment of key risk metrics and
monitoring thereof for the Group.
Marian Martin
Chair of the Board Risk Committee
22 December 2021
l Credit performance of the portfolio, forbearance and
arrears monitoring.
l IFRS 9 independent model validation.
l An independent model validation of the new CFD
application scorecard.
l An external review of the ILAAP, funding plan and
associated risks, all Treasury risk policies and the
liquidity contingency plan.
Additionally, the Committee has specifically monitored the
risks both arising from the delay in finalising the 2020 ARA
and subsequent suspension of PCF Group plc shares and
the Group’s emerging risks as set out in the Strategic
Report. The Committee acknowledges that the Group
needs to focus its attention on improving its corporate
governance and remediating its RMF, therefore BRC
commissioned an external review of the RMF. The
recommendations arising from this review are included in
the Group’s remediation plans.
Looking ahead
2020 was a challenging year, particularly due to the
impacts of the COVID-19 pandemic, which endured into
2021. The Committee continued to dedicate much of its
time to ensure that the impacts of the pandemic upon
the Group’s credit portfolios and operations were and
remain understood and managed. The full work of the
committee during 2021 will be described in more detail
in the 2021 Board Risk Committee Report. The
Committee also monitors the short to medium term
plans for the improvement of risk management across
the Group, including:
l Continued development of the RMF, reflecting the
recommendations of the external review and
including the climate risk framework.
l Enhancement of the Group’s stress testing and
credit analytics capability.
l The redevelopment of the Group’s IFRS 9 and credit
risk models.
l Refinement and advancement of the Group’s
overarching operational resilience framework.
l Evolution of the Group’s risk culture framework as
set out in the Strategic Report.
l Further refinement of the conduct risk reporting
framework.
l Risk reviews of principal and emerging risks
including a review of risk appetite and tolerances for
each principal risk.
l Providing input into the Remuneration Committee
to ensure (i) that there is a link between culture, risk
and compensation; and (ii) that risk behaviours and
the management of operational risk incidents over
the course of the financial year are appropriately
reflected in decisions taken about performance and
reward.
l A review of resources within the second line risk
management team and the associated recruitment
plan to bring the experience and capability of the
team to an appropriate standard.
l A review of target risk architecture and data
infrastructure to improve the oversight of the
Group’s key risk exposures, in particular credit risk.
Annual Report & Financial Statements 2020
47
Directors’ Report
The directors present their report and audited
consolidated financial statements for PCF Group plc for
the year ended 30 September 2020.
Principal activities
The Group’s principal activities are the purchase, hire,
financing and sale of vehicles, equipment and property,
the provision of related fee-based services and the
provision of retail savings products.
Business review, Strategic review, results and
dividends
The review of the business of the Group, operations,
principal risks and outlook are contained in the
Strategic Report section on pages 3 to 22.
The consolidated results for the financial year are set
out in the Consolidated Income Statement on page 68.
The directors do not recommend the payment of a
dividend in respect of the year ended 30 September
2020 (year ended 30 September 2019 – final dividend
of 0.4p per share).
Share capital
PCF Group plc is a public limited company
incorporated in England and Wales and its shares are
quoted on the AIM market of the London Stock
Exchange, however, on 19 May 2021, trading in the
Group’s shares was temporarily suspended on AIM and
remains suspended at the date of this report. The
Company has in issue one class of ordinary shares of
5 pence each all ranking pari passu. All of the issued
ordinary shares of the Company have equal voting
rights with one vote per share. Details of changes in the
Group’s share capital are set out in note 27 of the
Annual Report & Financial Statements.
It should be noted that during the financial year there
was a recorded issue of new shares. Pursuant to its
Scrip Dividend Scheme, the Company received
elections to receive new ordinary shares in lieu of cash
in respect of the final dividend for 2019. Accordingly,
43,499 new Ordinary Shares were issued in satisfaction
of such elections at an equivalent price of 18.1p per
share.
Directors and their interests
The directors of the Company during the financial 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
2020 are listed below.
At 30 September 2020
No. of ordinary shares of 5p each
At 30 September 2019
No. of ordinary shares of 5p each
Scott Maybury
Robert Murray
David Bull*
David Morgan
Tim Franklin
Mark Brown
Christine Higgins
David Titmuss
Marian Martin
1,717,653
998,340
400,000
500,000
125,783
200,000
33,204
50,000
37,303
1,717,653
998,340
230,568
500,000
125,783
200,000
33,204
50,000
14,771
*David Bull resigned as a director on 16 March 2020 and ceased to be an employee of the Company on 30 September
2020. However, he retained his share options on his departure.
The following directors also held options in the Company’s share option plans as listed below.
Scott Maybury
Robert Murray
David Bull*
At 30 September 2020
No. of ordinary shares of 5p each
At 30 September 2019
No. of ordinary shares of 5p each
2,547,082
1,680,465
1,310,465
2,547,082
1,680,465
1,310,465
*David Bull resigned as a director on 16 March 2020 and ceased to be an employee of the Company on 30 September
2020.
On 8 March 2021 Robert Murray exercised the following
options over 750,000 ordinary shares of 5 pence each
in the Company:
l 250,000 ordinary shares granted on 3 December
2013 at an exercise price of 8.5 pence per share for
a consideration of £21,250.
l 250,000 ordinary shares granted on 10 June 2014 at
an exercise price of 9.625 pence per share for a
consideration of £24,062.50.
l 250,000 ordinary shares granted on 22 June 2015 at
an exercise price of 18.5 pence per share for a
consideration of £46,250, but using the Cashless
Exercise Facility in accordance with the terms of the
Company's Share Option Scheme.
Directors’ compensation
Details of the remuneration of the directors and other
benefits are provided in the Remuneration Committee
Report on pages 36 to 39 and in note 8 to the financial
statements.
48
Annual Report & Financial Statements 2020
49
Directors’ Report (cont’d)
Directors’ indemnification
The Company’s Articles of Association permit it to
indemnify directors in accordance with the Companies
Act. The Company granted contractual indemnities to
each of the current directors of the Company in July
2021 to cover against liabilities which they may sustain
or incur in the proper performance of their duties.
These indemnities are available for inspection at the
Company’s registered office.
Substantial shareholdings
At 30 September 2020, the Company had been notified
of the following interests of 3% or more in its issued
ordinary share capital.
Somers Limited
Bermuda Commercial Bank Limited1
Hof Hoorneman Bankiers
Hargreaves Lansdown Asset Management
Percentage
54.32%
8.40%
7.89%
4.44%
1 A wholly owned subsidiary of Somers Limited at
30 September 2020. Subsequent to the year end the
shares held by this entity were transferred to Somers
Limited and this entity is no longer a subsidiary of
Somers Limited.
Corporate governance statement
The Corporate Governance Report set out on pages 24
to 47 provides a review of the Group’s corporate
governance arrangements.
The various Board committee reports and the section
172 statement set out on page 20 and pages 28 to 47,
information that would otherwise need to be included
in the Directors’ Report (in particular but not limited to
the Stakeholder Engagement Report and the
Sustainability Report).
Political donations
The Group made no political donations during the year
to 30 September 2020 (year to 30 September 2019 –
nil).
Financial risk management objectives and policies
Information about financial risk management systems in
relation to financial reporting can be found in the Risk
Management Report on pages 53 to 64.
Financial instruments
The financial risk management objectives and policies in
relation to the use of financial instruments can be found
in the Risk Management Report on pages 53 to 64.
Going Concern Statement
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. In particular this going concern statement
should be read in conjunction with the Emerging risks
and uncertainties section of the Strategic Report which
sets out those risks and mitigations.
The financial position of the Group, its cash flows,
liquidity position and borrowing facilities are set out in
the financial statements and updated in the Strategic
Report and Risk Management Report. The Group’s
policies and processes for managing its Risks are
described in the Strategic Report and the Risk
Management Report.
After making enquiries, the directors have a reasonable
expectation that the Group has adequate resources to
continue in operational existence for at least the next
twelve months. Accordingly, they continue to adopt the
going concern basis in preparing the Annual Report &
Financial Statements.
The directors have assessed the appropriateness of the
going concern assumption taking into account of all
matters above and a detailed review of the Group’s
medium-term plan which includes increased
remediation costs alongside a consideration of capital,
funding and liquidity requirements. This consideration
also included other business and emerging risks.
The Group made a £(4.8) million statutory loss before
tax in the year. The Board has approved a medium-
term plan in which the Group returns to profitability,
but this is dependent on building scale to support an
increased cost base. Remediation costs are expected to
be incurred for at least the next twelve months. The
growth in the medium-term plan requires capital to be
raised. However, given the delay to the Annual Report
& Financial Statements 2020, the disclaimer of auditor
opinion and the temporary suspension of trading in the
Group’s shares, there are risks associated with our
ability to raise capital and fund the planned future
balance sheet growth. This indicates that the Group’s
ability to operate as a going concern is subject to
material uncertainties.
Group performance, and the return to profitability in
the medium-term plan, is underpinned by a number of
key inputs and assumptions which cover:
l The raising of external capital.
l The funding of new business through retail deposits
and other wholesale funding.
l New business origination levels.
l Net interest margin on new business originations.
l The expected date of completion of the Group’s
remediation activities and the impact on the Group’s
expenses.
l The level of impairment losses on financial assets.
l Capital requirements, both from a regulatory and
internal management perspective.
l Dividends, which have been assumed at zero in the
medium-term plan.
As with any medium-term planning process, there is a
risk that these assumptions do not materialise. As part
of the review of the medium-term plan, the Board was
presented with a severe but plausible downside in
which the Group is unable to raise external capital, and
a number of sensitivities to the medium-term plan in
which the Group’s net interest margin, impairment
losses and business volumes were subject to materially
adverse performance. Even under the severe but
plausible scenario it was demonstrated that the Group
would continue to operate and meet current regulatory
requirements for at least the next twelve months, albeit
at the expense of balance sheet growth.
The Board has concluded based on the items below
that the going concern basis of accounting was
deemed appropriate (refer to note 1.2 Basis of
preparation).
50
l Planned performance, including a medium-term plan
l Select suitable accounting policies in accordance
which returns the Group to profitability.
l The assessment of downside risk to the medium-
term plan.
Assessment of principal risks
The Board is responsible for monitoring the nature and
extent of the principal risks it faces as well as
determining the level of appetite it is willing to take in
order to achieve its strategic objectives. The principal
risks the Group actively monitors and manages are
described in the Strategic Report pages 16 to 19 and the
Risk Management Report. In line with the requirements
of the 2018 UK Corporate Governance Code (the
‘Code’), the directors have performed an assessment of
the principal and emerging risks facing the Group,
including those that would threaten its business model
and impact the Group’s performance, capital or
liquidity.
Risk management and internal controls
As described in the Corporate Governance Report on
pages 24 to 34, the Group’s risk management and
internal control systems are monitored at Board level. A
review of the Group’s RMF has been undertaken
overseen by Board Risk Committee.
The Group’s prospects are assessed primarily through a
strategic plan. This process for the production of the
strategic plan included a full review of current
performance by the CFO and the key assumptions in the
plan being proposed by the CFO and reviewed by the
interim CEO and the Executive Committee. After review
by the CFO, interim CEO and Executive Committee the
plan and key assumptions were presented to the Board
and approved by the Board. In view of the extended
time taken to complete the Annual Report & Financial
Statements 2020 the latest Strategic Plan was signed
off by the Board in October 2021.
Subsequent events disclosure
Since 30 September 2020 year end there have been
the events detailed in the Chairman’s Statement and
more particularly in the Audit and Risk Committee
Report under the heading Completion of the Annual
Report & Financial Statements. For further details
please refer to note 32 Non-adjusting events after the
balance sheet date on page 120.
Statement of directors’ responsibilities
The directors are responsible for preparing the Annual
Report & Financial Statements in accordance with
applicable United Kingdom law and regulations.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the
directors have elected to prepare the Group and parent
Company financial statements in accordance with
international accounting standards in conformity with
the requirements of the Companies Act 2006 (‘IAS’).
Under company law the directors must not approve the
financial statements unless they are satisfied that they
give a true and fair view of the state of affairs of the
Group and the Company and of the profit or loss of
the Group and the Company for that period.
In preparing these financial statements the directors are
required to:
with IAS 8 ‘Accounting policies, changes in
accounting estimates and Errors and then apply
them consistently;
l make judgements and accounting estimates that are
reasonable and prudent;
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 requirement IAS is insufficient to
enable users to understand the impact of particular
transactions, other events and conditions on the
Group and Company financial position and financial
performance;
l in respect of the Group and parent Company
financial statements, state whether IAS have been
followed, subject to any material departures
disclosed and explained in the financial statements;
and
l prepare the financial statements on the going
concern basis unless it is appropriate to presume
that the Company and the Group will not continue
in business.
The directors are responsible for keeping adequate
accounting records that are sufficient to show and
explain the Group’s and Company’s transactions and
disclose with reasonable accuracy at any time the
financial position of the Group and Company and enable
them to ensure that the Group and the Company
financial statements comply with the Companies Act
2006. They are also responsible for safeguarding the
assets of the Group and parent Company and hence for
taking reasonable steps for the prevention and detection
of fraud and other irregularities.
Under applicable law and regulations, the directors are
also responsible for preparing a Strategic Report,
Directors’ Report, Directors’ Remuneration Report,
Corporate Governance Report, Sustainability Report and
Risk Management Report that comply with that law and
those regulations. The directors are responsible for the
maintenance and integrity of the corporate and financial
information included on the Company’s website.
The directors confirm, to the best of their knowledge:
l that the consolidated financial statements, prepared
in accordance with IAS give a true and fair view of
the assets, liabilities, financial position and profit of
the parent Company and undertakings included in
the consolidation taken as a whole;
l that the Annual Report & Financial Statements,
including the strategic report, includes a fair review
of the development and performance of the
business and the position of the Company and
undertakings included in the consolidation taken as
a whole, together with a description of the principal
risks and uncertainties that they face; and
l that they consider the Annual Report & Financial
Statements, taken as a whole, is fair, balanced and
understandable and provides the information
necessary for shareholders to assess the Group’s
and the Company’s position. performance, business
model and strategy.
Annual Report & Financial Statements 2020
51
Accounts General Meeting
As this Annual Report & Financial Statements were not
ready at the time of the holding of the Group’s Annual
General Meeting on 26 March 2021 it is necessary for
the Group to convene a shareholder general meeting at
which to lay Annual Report & Financial Statements
2020. A separate letter from the Chairman summarising
the business of that General Meeting and the Notice
convening that General Meeting will be sent to the
members with this Annual Report.
The Directors’ Report was approved by the Board on
22 December 2021.
On behalf of the Board
G G Stran
Interim Chief Executive
22 December 2021
Directors’ Report (cont’d)
Disclosure of information to the auditors
As explained in the section on Auditor Opinion in the
Audit & Risk Committee Report, in order to prevent
further additional delays in presenting these financial
statements to the Group’s stakeholders, and given that
it was not clear that the Group would be able to
provide the level of detailed information needed by the
auditor for an unmodified audit opinion, the Audit
Committee and the Board approved the approach that
it was in the best interests of the Group to proceed
with such audit work and provision of information to
the auditor so far as was necessary for the Auditor to
issue a disclaimer of opinion and therefore to provide
only such information to it as the Group considered
necessary and appropriate as a result. This was with the
knowledge of the auditor.
Following this decision in July 2021, and notwithstanding
this new approach to the provision of audit information,
and that a disclaimer of audit opinion would be issued,
the Group continued to keep the auditor updated on its
ongoing investigations, as well as wider business
developments of relevance.
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, within the context of the disclaimer of
opinion referred to above, to establish that the auditor
is aware of such information as that director considers
necessary and appropriate in the circumstances
described. 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 disclaimer
of opinion, of which the auditor is unaware.
Resignation of Ernst & Young LLP and the
appointment of new auditors
After the completion of the Annual Report & Financial
Statements 2020 Ernst & Young LLP will resign as
auditor and pursuant to section 489 (3) (c ) of the
Companies Act 2006 the directors will appoint MHA
MacIntyre Hudson to replace them pending
confirmation of that appointment at the General
Meeting at which the report and audited financial
statements for the year ended 30 September 2020 will
be presented by way of a resolution to be taken to that
meeting.
52
Risk Management Report
for the year ended 30 September 2020
Introduction
The report relates to the year ended 30 September
2020. This report is dated 22 December 2021. Given the
passage of time since the year end, this report is
brought up to date for recent events and matters
relevant to the Group’s current operating model where
appropriate and where material, changes since then
have been highlighted.
The Group’s management of risk is based on the
identification of risks faced by the Group; an
assessment of each of these, determining which merit
designation as principal risks and; establishing a RMF to
create the control environment which will support the
safe delivery of the Group’s strategic objectives and
business plan.
The Board is responsible for ensuring that the RMF is
proportionate, relevant and operating effectively.
Whilst the RMF has been in place throughout the year,
it has recently been externally reviewed and a
programme of work is underway to enhance and fully
embed the RMF across the Group.
Risks are initially identified and designated as Principal
based upon their inherent impact (i.e. prior to mitigants
and controls). The level of risk post management and
mitigation is reflected in residual risk exposures. It is
these residual risk exposures upon which risk appetite
is set.
Along with the setting of risk appetite by the Board,
the control and management of risk includes the
provision of risk exposure limits, the creation of
procedures and policy to ensure risk management
techniques are consistently applied and adhered to,
and governance and oversight through risk committees
and teams who are independent from those with direct
responsibility for managing the risks. While the
framework has remained consistent throughout the
period, the level of control, governance and oversight
has been significantly enhanced during 2021.
The Group applies the ‘Three Lines of Defence’
approach which is an industry standard, and which
identifies those with responsibility for managing the
risk (the First Line), those with responsibility for
providing independent oversight of that management
(the Second Line), and those with responsibility for
providing independent assurance over both First and
Second Line activities (the Third Line).
Principal risks
The eight principal risks to which the Group’s business
model is inherently exposed to are set out below. More
information is included in the following sections of this
report. Post 2020 the Group has identified that Climate
Change risk warrants inclusion as a principal risk.
Information on the Group’s ‘emerging risks and
uncertainties’ are provided in the Strategic Report.
Risk categories and statement
Strategic and business risk
Definition – The risk that the Group is unable to achieve
its corporate and strategic objectives.
Statement – In order to maintain stakeholder
confidence and market expectations, the Board seeks
to operate the business in a way that optimises long
term returns, within approved risk appetite.
Credit risk
Definition – The risk of a borrower or wholesale
counterparty failing to meet its obligations in
accordance with agreed terms leading to a financial loss
on that borrower or counterparty’s account.
Statement – The Group aims to minimise the impact on
profitability from defaults through its diversification of
lending operations, a prudent underwriting policy, and
a considerate case management process when
customers are in difficulty.
Capital risk
Definition – The risk that the Group has insufficient capital
or contingency to maintain its required regulatory or
internally set minimum capital ratios and buffers or
sustain its long-term lending operations.
Statement – The Group seeks to maintain an appropriate
level of capital above its total capital requirements plus
capital buffers and monitor this against the business plan
as part of its Internal Capital Adequacy Assessment
Process (‘ICAAP’).
Liquidity and funding risk
Definition – The risk that the Group is unable to fund
new business originations or meet cash flow or
collateral obligations as they fall due, without adversely
affecting its deposit franchise, daily operations or
financial health.
Statement – The Group seeks to maintain a diversified
funding strategy with close relationships to its wholesale
counterparties and be an active participant in the retail
deposit market. This is supported with prudent levels of
high-quality liquid assets; in excess of that needed to
withstand a severe but plausible stress. Liquidity
requirements and buffers are monitored against the
overall business plan as part of its the Group’s Internal
Liquidity Adequacy Assessment Process (‘ILAAP’).
Market risk
Definition – The risk of losses or reduced value arising
from on and off-balance sheet exposures when impacted
by adverse movements in market prices and rates.
Statement – A chief mitigant of the Group’s market risk is
its predominance of fixed rate and term exposures
across both asset and liability sides of the balance sheet,
along with regular monitoring of its interest rate gaps
and risk metrics.
Operational risk
Definition – The risk of loss resulting from inadequate
or failed internal processes, people and systems or
from external events.
Statement – The Group will maintain a strong internal
control environment to mitigate operational risk, which
is inherent to its business activities, and to minimise the
financial impact of operational risk arising from risks
such as IT disruption, human error, a breakdown of
procedures, non-compliance with policy and internal or
external fraud. The Group will mitigate and limit the
impact of business decisions on its cyber risk exposure.
Annual Report & Financial Statements 2020
53
Risk Management Report (cont’d)
Regulatory risk
Definition – The risk that the Group is exposed to fines,
censure, legal or enforcement action, civil or criminal
proceedings due to failing to comply with applicable
laws, regulations, codes of conduct or legal obligations.
Statement – The Group actively monitors new and
emerging regulations through horizon scanning
intended to both forewarn of change and provide
guidance on interpretation and implementation. The
activities of the Group are complemented with 3rd
party legal support, and regular dialogue with its
regulators.
Conduct risk
Definition – The risk of customer detriment or a
reduction in earnings value, through financial or
reputational loss from an inappropriate or poor
customer outcome from business conduct.
Statement – The Group restricts its activities to areas of
established expertise and ensures the culture of the
organisation is focused on delivering a fair outcome for
customers. This is supported by a programme of
assurance reviews centred on the customer journey
and product lifecycle.
Controlling and managing risks
RMF
The Group recognises the importance of embedding a
framework within the organisation that applies
proportionate controls to managing risks on a
continuous basis. The Group’s approach to managing
risk within the business is governed by the Board
approved Risk Appetite Statement (‘RAS’) and the
Group’s RMF.
The Group is currently enhancing its RMF to ensure an
appropriate articulation of individual and collective
accountabilities for risk management, risk oversight and
risk assurance that supports the discharge of
responsibilities to customers, shareholders and
regulators. The RMF seeks to establish a common risk
language to facilitate the collection, analysis and
aggregation of risk data for risk reporting and
management information.
At the operational level, the RMF is the responsibility of
each business function to adhere to and manage all
Group mandated risk management processes and
standards. The business provides periodic feedback to
the Group’s Risk functions on the adequacy of risk
management processes and standards in relation to
their function.
The framework is periodically updated to reflect
changes in the business and the external environment.
As identified, the Group is currently going through a
process of further enhancing its RMF in 2021, which
was the subject of an external review that concluded in
June 2021. A roadmap to enhance and embed the
control framework referred to in the previous sections
of this Annual Report & Financial Statements 2020 is
being developed and resourced to meet the identified
roles and responsibilities across the three lines of
defence.
Three lines of defence
The Group operates a ‘Three Lines of Defence’ model
which defines clear responsibilities and accountabilities.
Business Lines and
Central Functions
First Line of Defence
(‘1LoD’)
Operational Control
by Business Functions
l Identify, assess, control
and mitigate risks within
risk appetite.
l Develop and implement
internal procedures and
controls.
l Clear definition of roles
and responsibilities.
l Escalate issues to
management and control
functions.
l Focus on achieving fair
customer outcomes.
Board Risk Strategy and Appetite
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.
54
l Business lines, as the ‘First Line of Defence’, have
the primary responsibility for risk decisions,
identifying, measuring, monitoring and controlling
risks within Board approved risk appetite. They are
required to establish effective governance and
control frameworks for their business areas that are
compliant with Group policy requirements. This
includes the need to develop and maintain
appropriate risk management skills and processes
to enable them to operate within the Group’s risk
appetite.
l The ‘Second Line of Defence’ encompasses the Risk
and Compliance function, which is independent of
other functions, reporting into the Chief Risk Officer
(‘CRO’), and which undertakes compliance
monitoring and thematic reviews. The second line
provides independent oversight and advice to the
business with assessments going up to Board Risk
Committee (‘BRC’). It is the aim of the Risk and
Compliance function to coordinate 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.
l The ‘Third Line of Defence’ is provided through an
externally sourced Internal Audit function. The Third
Line provides independent assurance to senior
management and the Board, principally through
Board Audit Committee (‘BAC’) on the
effectiveness of risk management policies,
processes and practices in all areas. The work of
Internal Audit is undertaken as part of an agreed
audit programme with activities determined by risk
based prioritisation.
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.
Throughout the year to 30 September 2020, the risk
appetite statements and metrics were reported to the
Audit & Risk Committee (‘ARC’) (now BAC and BRC)
and the Board by the Chief Risk Officer and Chief
Compliance Officer. The CRO is responsible for
assessing the impact on the Group’s risk appetite from
changes in circumstance (internal or external) that
warrant a change to the RAS, and recommending any
such changes to BRC and the Board ahead of the
scheduled annual review. During the 2019/20 financial
year, the Board undertook a review of the Group’s key
risks on 24 April 2020, with a focus on COVID-19
related risks and the associated impact on strategic
and business objectives.
The Board sets the risk appetite and culture and
cascades this into day-to-day operations through
policies, qualitative statements, risk appetite metrics,
limits, Board and committee review, monitoring,
assurance, recruitment, and training.
Governance and oversight
Governance is maintained through delegation of
authority from the Board, down to Board
sub-committees and lower-level management and risk
committees. The committee-based structure has been
enhanced to ensure that risk appetite, policies,
procedures, controls and reporting are all fully in line
with regulations, law, good corporate governance
standards and industry best practice.
The interaction of the executive and non-executive
governance structures requires a culture of
transparency and openness. Further development of
the RMF and subsequent embedding continues to be a
priority for the Group and, along with a refocus
towards a risk-centric culture, is seen as the foundation
for effective risk management going forward.
The structure of committees is set out in the Corporate
Governance Structure section of the Corporate
Governance Report on page 28 to 34. The role of key
executive led committees is given below.
Executive Committee (‘ExCo’)
The Board has delegated responsibility for the
day-to-day management of the Group to the Executive
Management team, led by the Chief Executive Officer,
through the Executive Committee. ExCo’s primary
responsibility is to lead, oversee and direct the
activities of the Group, and to ensure the
implementation of strategies approved by the Board,
provide leadership to the Management team and
ensure appropriate deployment of the Group’s
resources, including capital and liquidity.
Assets & Liabilities Committee (‘ALCO’)
The ALCO is responsible for ensuring the effective
operation of the RMF within the Bank to enable
management of Treasury including capital
management, market risk (interest rate and basis risk),
liquidity and funding risk, wholesale credit risk and
funds transfer pricing.
It monitors and ensures compliance with the approved
Treasury Policies including the Liquidity and Funding
Risk Policy, Market Risk Policy, Wholesale Credit Risk
Policy, Funds Transfer Pricing Policy and associated
risk appetite. This extends to oversight over the
Internal Capital Adequacy Assessment (ICAAP), the
Internal Liquidity Adequacy Assessment (ILAAP) and
the Recovery Plan. The ALCO also sets the operational
procedures and processes associated with these
policies.
Executive Risk Committee (‘ERC’)
The ERC is responsible for development,
implementation, monitoring and effectiveness of the
Group’s RMF.
This committee commenced duties in April 2021.
The role of the Nominations Committee, Remuneration
Committee, Board Risk Committee and Board Audit
Committee are described within the Nominations
Committee Report, Remuneration Committee Report,
Board Risk Committee Report and the Audit & Risk
Committee Report respectively.
Annual Report & Financial Statements 2020
55
Risk Management Report (cont’d)
Principal risk categories
Strategic and business risk
Strategic and business risk is the risk that the Group is
unable to achieve its corporate and strategic
objectives.
Management of strategic and business risk
The Board seeks to operate the business in such a way
as to ensure the delivery and sustainability of optimal
returns, while meeting the needs of its stakeholders
and operating within its approved risk appetite.
To achieve this, the Group does not intend to
undertake any strategic actions within its business
model that would put at risk its vision of being a
successful, specialist lender in its chosen target
markets, being backed by its savings franchise. The
Group monitors, reviews and challenges its
performance against this strategy using established
risk appetite and performance indicators; with regular
monitoring of the business and macro-economic
assumptions underlying its business, capital and
liquidity plans. The Group seeks to comply with its
stated risk appetite by not putting its core strategic
and business objectives at a level of risk which is
beyond its financial resources and operational
capabilities under both normal and stressed conditions.
To help ensure that product design and delivery meets
the Group’s strategic and business objectives, the
Group has an embedded Product Governance policy
which states the product, market and risk assessments
needed for each new product. This is reviewed annually
by the Board.
The current view of strategic and business risks along
with activities to address identified risks and issues are
included within the earlier Strategic Report to these
Annual Report & Financial Statements.
Credit risk
Credit risk is the risk of a borrower or wholesale
counterparty failing to meet its obligations in
accordance with agreed terms leading to a financial
loss on that borrower or counterparty’s account.
customer behaviour changes due to factors such as
loss of employment, family circumstances, illness,
business failure, adverse economic conditions or fraud.
In order to ensure that arrears are minimised, emphasis
is placed on retaining a diversified portfolio, using
prudent underwriting methods.
As a key mitigant to losses arising from credit risk, the
majority of the Group’s lending is secured and
amortised over the life of the assets.
The Group aims to minimise the impact on profitability
from defaults through a prudent underwriting policy
and case management process when customers are in
difficulty. The Group’s risk and underwriting philosophy
incorporates:
l The customer’s ability to afford their monthly payments,
their credit rating and their probability of default.
l The collateral value of the asset being financed, or
the security provided to support a finance
agreement; all assets financed have strong collateral
characteristics and a readily available and liquid
market for resale.
l A wide spread of risk with no unduly high exposure
to individual customers.
On a portfolio basis, credit risk arising from the build up
of concentrations is limited due to the relatively low
value of each customer’s debt, to the Group’s large and
diverse customer base, and to set and monitor limits
and exposures to different lending channels, different
classes of lending, different classes of risk.
Analysis of maximum exposure to credit risk
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. 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.
Management of credit risk
The successful management of credit risk is central to
the Group’s business. The Group therefore regularly
reviews its lending criteria as well as its credit exposure
to all customers. However, default risk may arise from
events which are outside the Group’s control, primarily
The table below presents the Group’s maximum
exposure to credit risk, before taking account of any
collateral and credit risk mitigation, arising from its on
balance sheet financial instruments. For off balance
sheet instruments, the maximum exposure to credit risk
represents the contractual nominal amounts.
Group balance sheet
Financial assets
Cash and balances at central banks
Cash and demand deposits
Loans and advances to customers (net of provisions)
Consumer lending
Business lending
Azule lending
Bridging finance
Debt instruments at fair value
Other assets
Off Balance Sheet
Undrawn facilities
56
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
24,936
7,371
164,933
180,143
22,089
60,132
9,095
1,264
462,592
128,854
176,680
20,021
12,948
19,638
4,932
370,444
17,270
1,760
In its normal course of business, the Group 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.
Forbearance and COVID-19 related payment
deferrals
Forbearance occurs when a customer is experiencing
difficulty in meeting their financial commitments and a
concession is granted by temporarily changing the
terms of the financial arrangement which would not
otherwise have been considered. The unprecedented
COVID-19 global pandemic led to significant numbers
of customers seeking COVID-19 related payment
deferrals within the Group’s lending portfolio. As a result,
the Group introduced a range of additional measures to
support its customers during this difficult period.
Additional support for customers impacted by
COVID-19
The Group recognised that the impact of COVID-19 was
a significant concern for our customers, and we offered
help and support through the introduction of several
additional concession tools. Concessions granted to
customers are varied across the Group’s lending
portfolio and in line with regulatory guidance.
The concessions include the creation of COVID-19
related payment deferrals, which are a form of
‘breathing space’ without payment followed by a
payment plan, for customers of CFD, BFD and Azule.
This period of flexibility ranged from 3 to 9 months
depending on underlying mitigating factors and is
reviewed and approved by the Group’s Customer
Operations Department.
There were no negative impacts on the customer’s
credit file as a result of these measures.
The cure periods of these forborne exposures are
subject to judgement and careful consideration. The
approach varies depending on the relevant division and
ranges from instant resumption of payments when the
period of concession ends (subject to confirmation of no
adverse performance) to a six month ‘grace’ period
applicable in relevant circumstances where payments are
either initially deferred or part payment accepted.
Analysis of forbearance and COVID-19 related
payment deferrals
At 30 September 2020, the gross carrying amount of
exposures with forbearance measures was £40.4
million (2019 – £nil). As set out in note 1.5.3, a COVID-19
related concession does not in itself constitute a
significant increase in credit risk. The full forbearance
analysis is shown in note 29.3.2.
IFRS 9 treatment of credit risk
Under IFRS 9 the Group calculates impairment
provisions on loans and advances to customers on an
expected credit loss (‘ECL’) basis. ECL provisions are
based on an assessment of probability of default, loss
given default and exposure at default in a range of
forward-looking scenarios.
IFRS 9 requires the Group to categorise customer loans
into one of three stages at the balance sheet date.
Assets that are ‘performing’ are shown in stage 1; assets
where there has been a significant increase in credit
risk (’SICR’) since initial recognition or ‘deteriorating’
assets are in stage 2; and accounts which are credit
impaired or in ‘default’ are in stage 3.
Impairment allowance for loans and advances to
customers
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 set
out in note 1.5 to the financial statements.
l The Group’s definition and assessment of default
(note 29.3.4).
l An explanation of the Group’s internal grading
system (note 29.3.5).
l How the Group defines, calculates and monitors the
probability of default, exposure at default and loss
given default (notes 29.3.5, 29.3.6 and 29.3.7
respectively).
l When the Group considers there has been a
significant increase in credit risk of an exposure
(note 29.3.8).
l The Group’s policy of segmenting financial assets
where ECL is assessed on a collective basis
(note 29.3.8).
The table below shows the credit quality and the
maximum exposure to credit risk based on the Group’s
internal credit rating system and year end stage
classification. The amounts presented show both gross
loans and advances to customers and net balance after
impairment allowances.
Group
At 30 September 2020
Loans and advances to customers
Allowance for impairment losses
Net total
Group
At 1 October 2019
Loans and advances to customers
Allowance for impairment losses
Net total
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
349,711
(3,179)
76,671
(3,300)
19,547 445,929
(18,632)
(12,153)
346,532
73,371
7,394 427,297
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
307,294
(1,576)
22,424
(1,458)
15,625 345,343
(6,840)
(3,806)
305,718
20,966
11,819 338,503
Further analysis of impairment allowance for loans and advances to customers is contained in note 28.5 to the
financial statements.
Annual Report & Financial Statements 2020
57
Risk Management Report (cont’d)
The Group’s internal rating and PD estimation
process
The Group operates an internal credit grading model
and Probability of Default estimation process. 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.
The Group assesses its customers at origination and
rates them on an internal AAA to D grade scale using
an internal credit classification model. Collateral is also
considered when grouping credit grades together. 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 used to determine the original
probability of defaults (PDs) for each segment. PDs are
then adjusted for IFRS 9 expected credit loss (‘ECL’)
calculations to incorporate forward-looking information
and the IFRS 9 stage classification of the exposure.
Corporate lending (Business Finance Division,
Bridging Finance and Azule)
Corporate lending comprises hire purchase, lease or
bridging loans. The borrowers are assessed by the
The Group’s internal credit rating grades
internal credit risk team The credit risk assessment is
based on a credit scoring model that considers
historical, current and forward-looking information
which includes:
l Historical financial information.
l Publicly available information on the clients from
external parties.
l 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
vary 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 tables below identify the internal ratings used by the Group with the highest quality grades considered to be
grades 4 and above.
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
1.37-2.15%
2.58-4.29%
2.70-4.23%
5.05-8.35%
3.72-7.18%
8.37-13.29%
9.14-16.35%
Consumer Finance
Internal rating grade
Internal Rating Description
Internal PD range
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%
2.57-3.58%
4.18-5.06%
5.06-6.98%
8.09-9.75%
7.02-9.95%
12.01-15.20%
9.26-13.06%
17.19-22.88%
1
2
3
4
5
6
7
8
58
Capital risk
Capital risk is risk that the Group has insufficient capital
or contingency to maintain its required regulatory or
internally set minimum capital ratios and buffers or
sustain its long-term lending operations.
Management of capital risk
The Group aims to maintain a sufficient level of capital
above its regulatory requirements in order to meet
both unexpected losses as they arise and maintain the
trust and confidence of investors, shareholders,
regulators and customers. Regulatory requirements are
set on a risk basis covering total capital requirements,
regulatory buffers, plus a management overlay.
The 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 Group assesses its capital position and risks
through an annual Internal Capital Adequacy
Assessment Process (ICAAP) in line with prudential
requirements; and through more regular monthly
reporting as part of its standard recovery plan early
warning indicator set. The ICAAP considers the key
Risk Weighted Asset exposure
capital risks and the amount of capital it should retain
to cover these risks. These requirements are assessed
against the current position and throughout its five
year business plan.
Stress testing is a major part of the ICAAP and ensures
the Group is resilient to a range of stresses including
the ability to meet requirements under a severe but
plausible stress.
The Group applies the Standardised approach for
calculating its credit risk and capital management. In
the UK, banks are required to meet minimum capital
requirements as prescribed by CRD IV for Pillar 1,
namely a CET1 capital requirement of 4.5% of RWAs, a
Tier 1 capital requirement of 6% of RWAs and a Total
capital requirement of 8% of RWAs.
Risk Weighted Assets
The Group does not operate a trading book and has no
Market Risk pillar 1 risk weighted asset exposure
(‘RWA’). Its RWAs are therefore driven predominantly
by Credit risk with a component of additional
Operational risk and a credit valuation adjustment
(reflecting changes in the value of derivatives which
arise from the credit risk of the derivative
counterparty).
Central Government & central banks
Institutions
Corporates
Retail
Other items
Total credit risk
Operational risk
Credit valuation adjustment
Total Risk Weighted Assets
2020
£’000
4,525
395
17,828
213,480
85,313
321,541
40,433
19
2019
£’000
2,760
453
21,772
219,559
30,386
274,930
29,833
90
361,993
304,853
Risk based capital
A Pillar 2 capital requirement reflects wider risks within
the Group’s ICAAP assessment and any capital add-ons
arising from the supervisory review of those
assessments. In addition, a PRA buffer may be applied
to reflect both the outcome of stress testing, and
where the PRA views that controls need to be
strengthened.
Capital resource and key ratios
In addition to these requirements CRD IV requires
lenders to hold supplementary capital buffers. At
30 September 2020, these included a Capital
Conservation buffer (CCoB) of 2.5%, a Systemic Risk
buffer (SRB) of 0%, and a Counter-Cyclical buffer
(CCyB) of 0% (reduced from 1% in March 2020).
Total CET1 capital
Total Tier 1 capital
Total Capital
CET1 capital ratio
Tier 1 capital ratio
Total capital ratio
2020
£’000
54,725
54,725
60,751
15.1%
15.1%
16.8%
2019
£’000
54,884
54,884
54,884
18.0%
18.0%
18.0%
Annual Report & Financial Statements 2020
59
Risk Management Report (cont’d)
Following the publication of the response to
consultation CP14/21 on the UK Leverage Framework
(PS 21/21), PCF will not have sufficient retail deposits or
non-UK exposure to be classified as an ‘LREQ’ firm and
therefore is not in scope for a formal leverage ratio
requirement under the UK CRR. However, in line with
the expectations identified in the regulation, the Group
continues to monitor its leverage ratio as though the
minimum requirement of 3.25% plus buffers was
applicable.
Leverage Ratios (%)
Leverage Ratio – using a transitional definition of Tier 1 capital
2020
11.5%
2019
14.8%
Liquidity and funding risk
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 its deposit franchise, daily
operations or financial health.
Management of liquidity & funding risk (unaudited)
At all times, the Group maintains sufficient high quality
liquid resources to ensure that there is no significant
risk from being unable to meet its liabilities as they fall
due during a severe but plausible stress. The Group
maintains a diversified funding strategy with close
relationships with its banking counterparties and being
an active participant in the retail deposit taking market,
seeking to align the tenor of its funding to the average
effective life of its loan portfolio. The current ability of
the Group to access wholesale debt facilities is
discussed further in the Emerging risks and
uncertainties section of the Strategic Report.
The Group assesses its liquidity position through both
an internal set of measures which assess adherence to
the Overall Liquidity Adequacy Rule (‘OLAR’) and
through the regulatory defined Liquidity Contingency
Ratio (LCR). The Group maintains the entirety of its
Liquid Asset Buffer (‘LAB’) in the form of high-quality
liquid assets (‘HQLA’). The amount of these, at all times,
has been significantly in excess of the 100% LCR
minimum requirement. Within both the LCR and OLAR
assessments, the Group sets an intra-day limit to
ensure that sufficient funds are held over and above
daily requirements to account for volatility in intra-day
cash flows.
In order to ensure that levels and concentrations of
funding do not lead to future liquidity risks, the Group
monitors the stability of its funding exposures through
a regulatory defined Net Stable Funding Ratio (‘NSFR’),
which is in excess of 100%.
Measure (%)
LCR %
NSFR %
2020
673%
145%
2019
715%
129%
Liquidity Resources
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.
Liquidity resources
Cash and balances with the Bank of England
UK Government securities and other qualifying securities
Sub-total High Quality Liquid Assets (HQLA)
Cash at Bank
Contingent central bank facilities
Total
2020
£’000
23,039
9,095
32,134
1,897
18,667
52,698
2019
£’000
5,277
10,800
16,077
2,094
20,080
38,251
60
Contractual maturity profile of financial assets and
liabilities
The table below analyses the carrying value of financial
assets and financial liabilities based on the remaining
contractual life to the maturity date. In practice, the
contractual maturity will differ to actual repayments;
‘on demand’ customer deposits will be repaid later than
the earliest date on which repayment can be requested,
and loans may be repaid ahead of their contractual
maturity.
Undiscounted contractual cash flows
30 September 2020
Undiscounted financial assets
Undiscounted financial liabilities
On
demand
£’000
Less
than 3
months
£’000
3 to 12
months
£’000
1 to 5
years
£’000
Over
5 years
£’000
Total
£’000
41,614
10,662
15,318
21,529
50,089 352,514 102,367 561,902
421,171
152,962 218,828
17,190
Net contractual liquidity gap
30,952
(6,211) (102,873) 133,686
85,177
140,731
30 September 2019
Undiscounted financial assets
Undiscounted financial liabilities
20,863
–
33,817
21,615
92,260 268,006 24,593 439,539
20,621 325,558
126,394 156,928
Net contractual liquidity gap
20,863
12,202
(34,134)
111,078
3,972
113,981
Asset Encumbrance
Some of the Group’s assets are used to support
collateral requirements for secured funding, central
bank operations or third-party repurchase transactions.
The assets used in this way are referred to as encumbered.
Encumbrance provides cheaper and more stable
funding, but it also creates the risk that some creditors
may be unable to benefit from the liquidation of
encumbered assets in the unlikely event that the Group
was to become insolvent. While these risks are remote,
limits on encumbrance are set by the Board and
encumbrance levels are managed within these limits.
Analysis of encumbered and unencumbered assets
Below is a summary of the Group’s encumbered and
unencumbered assets that would be available to obtain
additional funding as securities. For this purpose,
encumbered assets are assets which have been
pledged as collateral (e.g. which are required to be
separately disclosed under IFRS 7). Unencumbered
assets are the remaining assets that the Group owns.
30 September 2020
30 September 2019
Encumbered
Unencumbered
Pledged
as collateral
£’000
103,182
75,629
Other
£’000
Available
as collateral
£’000
Other
£’000
Total
£’000
–
–
287,049
46,161
436,392
228,944
53,568
358,141
Refer to note 29.1(c) for further information of encumbered and unencumbered assets by asset type.
Market risk
Market risk is the risk of losses or reduced value arising
from on and off-balance sheet exposures when
impacted by adverse movements in market prices and
rates. Market risk predominantly results from interest
rate exposures within the Group’s banking book, with
some additional risk arising from foreign exchange
movements and credit effects. Interest rate risk in the
banking book (IRRBB) is the risk that the Group will be
adversely affected by changes in the absolute level of
interest rates; the spread between two rates; the shape
of the yield curve; or in any other interest rate
relationship. The Group is exposed to foreign exchange
risk and euro interest rate risk through euro
denominated lending by Azule Finance Limited, the
Irish company, which is included in the Group’s risk
appetite and internal reporting, although this risk is not
considered material (total assets were less than
€1,000,000 throughout the year).
Management of market risk
The Group seeks to limit the adverse impact on net
interest margin (‘NIM’) and where necessary the Group
will fix the cost of borrowing using interest rate swaps
to achieve that goal.
Appetite for interest rate generated market risk is
calibrated against limiting the effect of a 2% rate shock
to approximately 1% of the value of own funds (Tier 1 +
Tier 2 capital); significantly below the regulatory
requirement to be below 20% of own funds. It is
assessed by calculating changes in Economic Value
(‘EV’) through a standardised 2% rate shock (EV 200bp).
Annual Report & Financial Statements 2020
61
Risk Management Report (cont’d)
Market risk is managed on a Group consolidated basis.
There is a risk that the Group may experience volatility
in its profit and loss should it not be able to freely
adjust its interest rate swap positions as facilities are
currently withdrawn though Management anticipate
following, the Annual Report & Financial Statements
2020 finalisation and the Group’s shares are no longer
suspended from trading our bankers will, on review,
reinstate these facilities. Management monitors the
interest rate gap risk closely and, where required, seeks
to hedge asset exposures naturally with appropriate
tenor retail deposits.
The Group will not carry out proprietary trading nor
operate a trading book.
The Group has limited appetite for foreign exchange
risk and where assets are bought or sold in foreign
currency (e.g., broking transactions), these are limited
to short-term exposures.
Shock applied
Impact on present value of assets and liabilities
at year end from a parallel change in the yield curve
+200 basis points shift
–200 basis points shift
Basis risk
The Group is exposed to the risk that the impact of
relative changes in interest rates for balance sheet
exposures that have similar tenors but are priced using
different interest rate indices. However, the Group has
limited basis risk as its balance sheet is predominantly
fixed; limiting the exposure to differing rate bases.
Interbank Offered Rate (IBOR) reform means that
interest rate benchmarks such as LIBOR are expected
to cease at the end of 2021. The movement away from
using LIBOR was undertaken by the Group’s Treasury
team with oversight from ALCO. All the Group’s swaps
are entered into at the SONIA rate, the Bank of
England’s preferred risk-free alternative rate to LIBOR.
The sole exception to this policy is the revolving credit
facility provided by Leumi ABL Limited, which when
drawn accrues at overnight LIBOR plus a fixed spread.
Leumi has advised that it intends to rebase the facility
to SONIA by the end of 2021 in line with the LIBOR
transition. As of the date of signing the Annual Report
and Financial Statements there is currently no
outstanding balance on this facility.
Option risk
The Group is exposed to the risk that an embedded
option is incorporated into a product or derivative, and
where the use of the option may change the interest
Reprice risk
The Group is exposed to interest rate risk arising from
when the Group’s assets and liabilities re-price on
different dates such that the Group is negatively
impacted. This type of risk is managed by natural
offsets across the balance sheet and through the use of
swaps and other derivatives. The Group assessed its
interest rate risk in the banking book (‘IRRBB’) primarily
through Earnings at Risk plus a series of economic
value (‘EV’) measures which included a +/–200 basis
points parallel yield curve shift. The Group has since
developed its regulatory measures to incorporate the
full suite of Supervisory Outlier Tests using economic
value of equity (‘EVE’) and Net Interest Income (NII)
measures.
2020
£’000
2019
£’000
358
(503)
74
(147)
rate exposure. For example, the ability to prepay a car
loan before the end of the loan’s term is a product
option which can create risk to the Group in a falling
rate environment. The risk predominately arises from
the early termination of fixed rate loans or deposits.
However, the contractual terms of PCF’s loans and
deposits significantly limit the propensity for option
risk.
Refinance risk
The Group is exposed to the risk that at the maturity of
an asset or liability, which may be otherwise perfectly
hedged, the rate received or paid on the replacement
asset or liability reduces the overall Net Interest Margin.
This risk is managed by limiting the concentration of
maturities across the two sides of the balance sheet.
Foreign currency risk
The Group operates primarily in sterling markets, but it
has a small book of euro denominated assets held by
Azule Limited. The total currency exposure to euro
denominated assets is managed within Board limits.
Foreign Exchange exposure to an immediate +/–15% change in the value of sterling
30 September 2020
30 September 2019
62
£’000
(12)
13
Operational risk
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.
Management of operational risk
The Group seeks to maintain an internal control
environment to both mitigate operational risk, which is
inherent to its business activities, and to minimise the
financial impact of operational risk arising from IT
disruption, human error, a breakdown of procedures,
non-compliance with policy and internal or external
fraud. Additionally, the Group will mitigate and limit the
impact of business decisions on its cyber risk exposure.
Activities against the most relevant operational risk
sub-categories are given below.
Operational resilience, information security and
information technology
The Group continues to review its IT system
architecture to ensure systems remain resilient and that
the confidentiality, integrity and availability of critical
systems and information assets are protected against
cyber attacks. This includes continuing to enhance the
resilience of systems based on emerging best practice
and seeking advice from external IT advisors where
necessary.
This overarching operational resilience framework is
supported by processes and policies for business
continuity and disaster recovery planning, crisis
communication, cyber incident response & resilience
and supplier outsourcing assurance, which are currently
all Board approved documents.
Change management
The Group has further developed its project
governance structure and delivery framework with
respect to IT and change management. This seeks to
ensure that appropriate controls are in place with the
aim of avoiding serious disruption or processing
inefficiencies to the business during or after the
implementation of change.
Third party outsourcing
The Group has a minimal amount of outsourced
functions, including postal services and payroll.
The Group continues to implement a robust Supplier
and Outsourcing Assurance Framework and
undertakes ongoing due diligence on third parties. This
includes a risk assessment which requires due diligence
on their IT security, physical and logical access to
information held on the Group’s assets or liabilities, the
commercial risks associated with a service provider,
and the processes that will be used to monitor and
oversee performance and ongoing delivery of the
service.
have taken place since then. Over the period the Group
has rolled out and enhanced its operational risk training
and compliance awareness sessions to employees.
Internal control environment
As identified in the emerging risks and uncertainties
section of the Strategic Report, the Group is making
significant investments in its RMF, controls, and
processes supporting regulatory and financial returns
and disclosures. The framework that had been in
operation had not kept pace with growth and
expectations of a new bank, exacerbated by the poor
culture and lack of expertise at that time. The
associated remediation programme to address these
issues is progressing with full embedding expected to
complete in 2023.
Regulatory risk
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.
Management of regulatory risk
A significant mitigant to regulatory risks is to be aware
of when regulatory change is being considered and
implemented. To control the risks around this, the
Group undertakes a process termed Horizon Scanning
a process of extracting new requirements by searching
web sites, correspondence (formal letters and regular
regulatory releases), accessing 3rd party training and
updates, and face to face meetings.
Horizon scanning is conducted by the second line and
is in the process of being formally split between the
Compliance team with responsibility for horizon
scanning on Conduct matters and regulation identified
by the Financial Conduct Authority (FCA), and the
Financial Risk Management team with responsibilities
covering the Bank of England’s regulatory bodies (the
Prudential Regulatory Authority and the Resolution
Directorate). That change has since been completed.
Aligned with a revised approach to risk culture, the
Board and Executive team wish to ensure
communication to all stakeholders including the
regulator is as transparent as possible; an approach the
Group believes will foster stronger relationships and
ultimately limit the regulatory risks faced by PCF.
Following the commencement of remediation activity,
the Group has access to external legal and regulatory
specialist support along with a growing level of
in-house expertise to advise the business on an
appropriate course of action. This is aided through an
engagement with industry bodies, such as UK Finance
and The Finance and Leasing Association.
People
The Group seeks to attract, retain and engage high
quality employees which was of particular significance
over the pandemic and as we work through
remediation activities, and is covered in more detail
within the Strategic Report. It has continued to make
significant investments in people in order to secure and
grow expertise across its Finance, Treasury and Risk
functions; supporting the remediation initiatives that
Group policies and procedures set out the principals
and key controls that are to be applied across the
business and which are aligned to the Group’s risk
policies. These are reassessed in the context of
revisions to the regulation by the business units with
oversight of implementation and compliance provided
by the second line Risk & Compliance function; which
can take the form of thematic reviews or gap analysis
against the regulations.
Annual Report & Financial Statements 2020
63
Risk Management Report (cont’d)
Conduct risk
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.
Management of conduct risk
The Group has no appetite for customer harm or
conduct risk events through inappropriate product
design, corporate culture, or operational processes. The
Group therefore restricts its activities to areas of
established expertise and seeks to create a culture that
delivers a fair outcome for customers.
The Group has identified customer-focused policies
and procedures including Responsible Lending,
Treating Customers Fairly (‘TCF’) and Vulnerable
Customers; reflecting the customer outcomes the
Board intends to achieve through product design,
governance and distribution.
The Group continues to perform outcomes testing and
assurance checks on fair outcomes for customers,
including monitoring and analysing key information,
training on vulnerable customers and complaints
handling, and independent assurance from Second and
Third line.
Customer needs are considered within business and
product level planning and strategy; articulated
through the product governance framework. The
framework seeks to ensure that products continue to
offer fair value and meet the needs of the relevant
target market throughout their life cycle.
The Group is enhancing its recruitment, training and
focus on management of colleague performance with
clear customer accountabilities and customer centric
feedback to be built into performance appraisals.
The Group seeks to learn from past mistakes on
customer complaints using techniques such as root
cause analysis. Complaints are viewed as a valuable
source of management information and in recognition
of that, despite an intolerance for conduct risk failures,
mistakes do happen and, when they do, they must be
rectified, fully understood, and the learning taken from
them. The programme of assurance reviews
undertaken has centred on conduct risk clusters, and
has included product design and governance, periodic
product reviews, culture measurement, marketing and
promotion, the treatment of vulnerable customers, and
complaint handling.
64
Independent Auditor’s Report
to the members of PCF Group plc
Disclaimer of opinion
We were engaged to audit the financial statements of
PCF Group PLC (the ‘Company’) and its subsidiaries
(together with the Company, the ‘Group’) for the year
ended 30 September 2020, which comprise the items
set out in the table below.
Group
l Consolidated income statement for the year ended
30 September 2020;
l Consolidated balance sheet as at 30 September 2020;
l Consolidated statement of comprehensive income
for the year ended 30 September 2020;
l Consolidated statement of changes in equity for the
year ended 30 September 2020;
l Consolidated statement of cash flows for the year
ended 30 September 2020; and
l Related notes 1 to 34 to the financial statements,
including a summary of significant accounting policies.
Company
l Balance sheet as at 30 September 2020;
l Statement of changes in equity for the year ended
30 September 2020;
l Statement of cash flows for the year ended
30 September 2020; 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
Accounting Standards in conformity with the
requirements of the Companies Act 2006.
We do not express an opinion on the accompanying
financial statements of PCF Group PLC.
Due to the significance of the matter described in the
basis for disclaimer of opinion section of our report, we
have not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion on
these financial statements.
Basis for disclaimer of opinion
As set out in the section ‘Completion of the Annual
Report and Financial Statements 2020’ of the Audit &
Risk Committee Report on pages 41 to 42 of the Annual
Report, as a result of enquiries raised by us during our
audit of the financial statements, the Group’s new Chief
Financial Officer identified certain accounting errors
and misstatements that led to the Company engaging a
third-party accounting firm to undertake an independent
forensic investigation into those errors and
misstatements. Following this, the Group Chief
Financial Officer and Finance Function undertook its
own further analysis and reconciliation procedures.
The independent forensic investigation identified
certain manual adjustments made by the Group for
internal management, financial and regulatory
reporting purposes. We concluded that certain of these
matters were indicators of fraud.
Given the potential wider consequences of this on our
audit, we sought to extend our procedures and presented
a plan to the Audit Committee in July 2021. We were
unable to complete our audit for the following reasons:
l Management was unable to provide sufficient and
appropriate audit evidence in response to our
extended testing requests.
l The Board of Directors resolved in July 2021 that
management should only continue to provide us
with the information necessary for us to issue a
disclaimer of opinion on these financial statements.
For the same reasons as set out above, we were also
unable to complete audit procedures over reclassifications
as described in note 1.9 to the financial statements.
An overview of the scope of our audit
Tailoring the scope
All audit work was planned to be performed by the
Group audit team, however as set out in the basis
for disclaimer section of our opinion, we were unable to
complete our audit work.
The Group has six reporting components. We planned
to perform an audit of the complete financial
information of four reporting components (‘full scope
components’) which represent the principal business
units within the Group. These components were PCF
Group PLC, PCF Bank Limited, Azule Limited and PCF
Credit Limited.
Of the remaining two components we planned to
perform other procedures, including analytical review,
testing of consolidation journals and intercompany
eliminations to respond to any potential risks of material
misstatement to the Group financial statements.
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.
In planning our audit, we determined materiality for
the Group to be £250k (2019: £400k), which was 5% of
projected profit before tax for the financial year,
based on management accounts for the first six
months to 31 March 2020.
Profit before tax was considered the most appropriate
basis for determining our materiality as it is a key
performance indicator for shareholders in assessing the
financial performance of the Group.
In planning our audit, we determined materiality for the
Company to be £350k (2019: £350k), which was based
on 1% (2019 – 1%) of net assets. The basis reflects the
nature of the entity being primarily a holding company.
Annual Report & Financial Statements 2020
65
Independent Auditor’s Report (cont’d)
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% (2019 – 50%) of our planning materiality, namely
£125k (2019 – £200k). We have set performance
materiality at this percentage due to the extent of audit
adjustments identified during the prior year audit.
Audit work over the Company’s subsidiaries for the
purpose of obtaining audit coverage over significant
financial statement accounts was planned to be
undertaken based on a percentage of total
performance materiality. The planned performance
materiality set for each component was 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 planned range of performance materiality allocated
to components was £25k to £125k (2019 – £40k to £150k).
Opinions on other matters prescribed by the
Companies Act 2006
Due to the significance of the matter described in the
basis for disclaimer of opinion section of our report, we
have been unable to form an opinion, whether 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
Due to the significance of the matter described in the
basis for disclaimer of opinion section of our report, we
have been unable to form an opinion as to whether
there are material misstatements in the strategic report
or the directors’ report.
Arising from the limitation of our work referred to above:
l we have not obtained all the information and
explanations that we considered necessary for the
purpose of our audit; and,
l we were unable to determine whether adequate
accounting records have not been kept by the
Company, or returns adequate for our audit have
not been received from branches not visited by us;
and,
l we were unable to determine whether the Company
financial statements are not in agreement with the
accounting records and returns; and,
l we were unable to determine whether certain
disclosures of directors’ remuneration specified by
law are not made.
Corporate Governance Statement
We planned to review the directors’ statement in
relation to going concern, longer-term viability and that
part of the Corporate Governance Statement relating
to the entity’s voluntary compliance with the provisions
of the UK Corporate Governance Code.
Due to the significance of the matter described in the
basis for disclaimer of opinion section of our report, we
have been unable to form a conclusion as to whether
each of the following elements of the Corporate
Governance Statement are materially consistent with
the financial statements or our knowledge obtained
during the audit
l Directors’ statement with regards to the
appropriateness of adopting the going concern
basis of accounting and any material uncertainties
identified;
l Director’s statement on whether it has a reasonable
expectation that the Group will be able to continue
in operation and meets its liabilities;
l Directors’ statement on fair, balanced and
understandable;
l Board’s confirmation that it has carried out a robust
assessment of the emerging and principal risks;
l The section of the annual report that describes the
review of effectiveness of risk management and
internal control systems;
l The section describing the work of the audit
committee; and
l Directors’ explanation as to its assessment of the
Company’s prospects, the period this assessment
covers and why the period is appropriate.
Responsibilities of directors
As explained more fully in the directors’ responsibilities
statement set out on page 51, the directors are
responsible for the preparation of the financial
statements and for being satisfied that they give a true
and fair view, and for such internal control as the
directors determine is necessary to enable the
preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the Group and Company’s
ability to continue as a going concern, disclosing, as
applicable, matters related to going concern and using
the going concern basis of accounting unless the
directors either intend to liquidate the Group or the
Company or to cease operations, or have no realistic
alternative but to do so.
66
Auditor’s responsibilities for the audit of the
financial statements
Our responsibility is to conduct an audit of the Group
and Company’s financial statements in accordance with
International Standards on Auditing (UK) and to issue
an auditor’s report. However, because of the matter
described in the basis for disclaimer of opinion section
of our report, we were not able to obtain sufficient
appropriate audit evidence to provide a basis for an
audit opinion on these financial statements. We are
independent of the 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, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
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
22 December 2021
Annual Report & Financial Statements 2020
67
Consolidated Income Statement
for the year ended 30 September 2020
Interest income 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
Net loss on financial instruments classified at
fair value through profit or loss
Net operating income
Impairment losses on financial assets*
Personnel expenses
Other operating expenses
Depreciation of office equipment, motor vehicles
and right-of-use assets
Amortisation of intangible assets
Impairment loss on software
Impairment losses on goodwill
Total operating expenses
(Loss)/Profit before tax
Income tax credit/(charge)
(Loss)/Profit after tax
Earnings per 5p ordinary share – basic and diluted
Year ended
30 September
2020
£’000
Year ended
30 September
2019*
£’000
Note
3
4
5
6
7
9
16
17
17
17
10
11
42,237
(15,953)
26,284
2,122
(1,602)
520
(55)
26,749
14,431
8,296
5,268
1,206
552
51
1,750
31,554
(4,805)
547
(4,258)
34,499
(12,884)
21,615
2,896
(1,154)
1,742
(63)
23,294
3,256
7,640
3,827
137
416
–
–
15,276
8,018
(1,624)
6,394
(1.7p)
2.7p
* Comparatives for the recoverable amount of fees charged on credit impaired accounts have been re-presented from
Impairment losses on financial assets to Fees and commission income to make the Income statement more relevant
following a review of the disclosures and accounting policies applied (please see note 1.9).
Consolidated Statement of Comprehensive Income
for the year ended 30 September 2020
(Loss)/Profit after taxation
Other comprehensive income that will be reclassified
to the income statement
Fair value gain/(loss) on FVOCI financial instruments (note 1.5.3)
Deferred tax income
Total items that will be reclassified to the income statement
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
(4,258)
6,394
53
(7)
46
(10)
2
(8)
Total comprehensive income, net of tax
(4,212)
6,386
The accounting policies and notes on pages 72 to 120 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.
68
Consolidated Balance Sheet
at 30 September 2020
Assets
Cash and balances at central banks
Debt instruments at FVOCI
Loans and advances to customers
Due from Group companies
Investment in subsidiary undertakings
Office equipment, motor vehicles
and right-of-use assets
Goodwill and other intangible assets
Deferred tax assets
Current tax assets
Other assets
Total assets
Liabilities
Due to customers
Due to banks
Due to Group companies
Derivative financial instruments
Lease liabilities
Current tax liabilities
Other liabilities
Subordinated liabilities
Total liabilities
Equity
Issued capital
Share premium
Other reserves
Own shares
Retained earnings
Total equity
Group
Company
30 September
2020
£’000
30 September
2019
£’000
30 September
2020
£’000
30 September
2019
£’000
Note
12
13
14
19
15
16
17
18
20
22
21
19
28
25
26
24
27
27
27
27
24,936
9,095
427,297
–
–
3,144
4,327
1,810
–
2,051
7,371
19,638
338,503
–
–
579
5,941
1,105
–
4,932
278
–
–
8,759
32,000
1,582
–
117
116
770
123
–
–
6,927
32,000
–
–
135
–
896
472,660
378,069
43,622
40,081
341,784
62,620
–
80
1,604
125
5,446
7,126
418,785
12,512
17,625
53
(147)
23,832
53,875
267,070
44,412
–
63
–
1,521
6,248
–
319,314
12,510
17,619
7
(355)
28,974
58,755
–
–
5,242
–
1,525
–
2,226
–
8,993
12,512
17,625
–
(147)
4,639
–
–
3,239
–
–
–
1,692
–
4,931
12,510
17,619
–
(355)
5,376
34,629
35,150
Total liabilities and equity
472,660
378,069
43,622
40,081
The Company reported a profit for the financial year ended 30 September 2020 of £147,000 (year ended
30 September 2019 – profit of £445,000).
The financial statements were approved and authorised for issue by the Board on 22 December 2021.
On behalf of the Board
G G Stran
Director
C Richardson
Director
The accounting policies and notes on pages 72 to 120 form part of, and should be read in conjunction with, these
financial statements.
Annual Report & Financial Statements 2020
69
Consolidated Statement of Changes in Equity
for the year ended 30 September 2020
Attributable to equity holders of the Group
Non-distributable
Distributable
Group
Balance at 1 October 2019
Loss for the year
Issuance of new shares/scrip dividend
Reclassification to
Fair value gain on FVOCI
financial instruments
Share-based payments
Cash dividends
Issued
capital
£’000
12,510
–
2
–
–
–
–
Share
Own
premium shares
£’000
£’000
17,619
–
6
–
(355)
–
–
208
–
–
–
–
–
–
Balance at 30 September 2020
12,512
17,625
(147)
Balance at 1 October 2018
Impact on transition to IFRS 9
Re-presented balance at 1 October
Profit for the year
Issuance of new shares
Fair value loss on FVOCI
financial instruments
Share-based payments
Cash dividends
10,611
–
10,611
–
1,899
–
–
–
8,527
–
8,527
–
9,092
–
–
–
(355)
–
(355)
–
–
–
–
–
Other
reserves
£’000
Retained
earnings
£’000
Total
equity
£’000
7
–
–
–
46
–
–
53
15
–
15
–
–
28,974 58,755
(4,258) (4,258)
–
208
(8)
–
–
117
(993)
46
117
(993)
23,832 53,875
23,753
(502)
42,551
(502)
23,251 42,049
6,394
6,394
10,991
–
(8)
–
–
–
79
(750)
(8)
79
(750)
Balance at 30 September 2019
12,510
17,619
(355)
7
28,974 58,755
Attributable to equity holders of the Company
Non-distributable
Distributable
Company
Balance at 1 October 2019
Profit for the year
Issuance of new shares/scrip dividend
Reclassification to cash
Share-based payments
Cash dividends
Share
Issued
Own
capital premium shares
£’000
£’000
£’000
Retained
earnings
£’000
Total
equity
£’000
12,510
–
2
–
–
–
17,619
–
6
–
–
–
(355)
–
–
208
–
–
5,376
147
(8)
–
117
(993)
35,150
147
–
208
117
(993)
Balance at 30 September 2020
12,512
17,625
(147)
4,639 34,629
Balance at 1 October 2018
Profit for the year
Issuance of new shares
Share-based payments
Cash dividends
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
12,510
17,619
(355)
5,376
35,150
The accounting policies and notes on pages 72 to 120 form part of, and should be read in conjunction with, these
financial statements.
70
Consolidated Statement of Cash Flows
for the year ended 30 September 2020
Group
Company
30 September
2020
£’000
30 September
2019
£’000
30 September
2020
£’000
30 September
2019
£’000
Note
Operating activities
(Loss)/Profit before tax
Other non-cash items included in
profit/(loss) before tax
Depreciation of office equipment,
motor vehicles and right-of-use assets
Gain on sale of motor vehicles
Amortisation of other intangible assets
Impairment loss on goodwill
Interest on lease liabilities
Accrued finance costs
Impairment loss on software
Share-based payments
Net change in FVOCI Financial Instruments
Impairment Losses on financial assets(1)
Income tax paid
Adjustment for change in
operating assets
Net change in loans and advances(1)
Net change in Group company lending
Net change in other assets
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 (used in)/from
operating activities
Investing activities
Cash paid for investment in subsidiary
Net sale of debt instruments at FVOCI
Purchase of office equipment and
motor vehicles
Reclassification from own shares to cash
Proceeds from the sale of motor vehicles
Purchase of intangible assets
Net cash flows from/(used in)
investing activities
Financing activities
Proceeds from subordinated borrowings
Proceeds from share issue during the year
Net proceeds/repayments from borrowings
Repayment of capital element of leases
Dividends paid to equity holders
Net cash flows from/(used in)
financing activities
Net increase/(decrease) in
cash and cash equivalents
Cash and cash equivalents brought forward
Cash and cash equivalents carried forward
16
16
17
17
25
23
14
19
20
28
22
19
26
13
16
16
17
23
27
22
25
(4,805)
8,018
206
558
1,206
(22)
552
1,750
55
138
51
117
–
14,431
(1,554)
137
–
416
–
–
–
–
79
(8)
3,256
(633)
724
–
–
–
50
–
–
117
–
–
(41)
–
–
–
–
–
–
–
79
–
–
(113)
(103,225)
–
2,796
(107,429)
–
(2,231)
–
(1,832)
45
–
(4,067)
(18)
17
74,714
–
(993)
63
75,931
–
(1,492)
–
–
1,887
362
–
–
3,239
141
(14,772)
(23,893)
1,518
(129)
–
10,589
(1,344)
208
25
(739)
(2,283)
20,264
(384)
–
–
(900)
–
–
–
208
–
–
(10,000)
–
–
–
–
–
8,739
16,697
208
(10,000)
7,000
–
18,196
(605)
(993)
–
10,991
(17,012)
–
(750)
–
–
–
(578)
(993)
–
10,991
–
–
(750)
23,598
(6,771)
(1,571)
10,241
17,565
7,371
24,936
(13,967)
21,338
7,371
155
123
278
112
11
123
(1) Comparatives for the recoverable amount of fees charged on credit impaired accounts have been re-presented from Allowance for
Impairment losses to Loans and advances to make the Loans and advances to customers note more relevant following a review of the
disclosure and accounting policies applied (please see note 1.9).
Annual Report & Financial Statements 2020
71
Notes to the Financial Statements
for the year ended 30 September 2020
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, bridge finance, equipment and property.
1.2 Basis of preparation
The consolidated financial statements of the Group and the separate financial statements of the Company
have been prepared on a historical cost basis, except for debt financial instruments measured at fair
value through other comprehensive income (‘FVOCI’), and derivatives measured at fair value through
profit or loss (‘FVTPL’), are presented in the Group’s and the Company’s functional currency Pound
Sterling (£) and all values are rounded to the nearest thousand (£'000), except where otherwise indicated.
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 at Group level, £147,000 (30 September 2019 – £445,000) was
attributable to the Company.
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. In particular this going concern statement
should be read in conjunction with the Emerging risks and uncertainties section of the Strategic Report
which sets out those risks and mitigations.
The financial position of the Group, its cash flows, liquidity position and borrowing facilities are set out
in the financial statements and updated in the Strategic Report and Risk Management Report. The Group’s
policies and processes for managing its Risks are described in the Strategic Report and the Risk
Management Report.
After making enquiries, the directors have a reasonable expectation that the Group has adequate
resources to continue in operational existence for at least the next twelve months. Accordingly, they
continue to adopt the going concern basis in preparing the Annual Report & Financial Statements.
The directors have assessed the appropriateness of the going concern assumption taking into account
of all matters above and a detailed review of the Group’s medium-term plan which includes increased
remediation costs alongside a consideration of capital, funding and liquidity requirements. This consideration
also included other business and emerging risks.
The Group made a £(4.8) million statutory loss before tax in the year. The Board has approved a
medium-term plan in which the Group returns to profitability, but this is dependent on building scale to
support an increased cost base. Remediation costs are expected to be incurred for at least the next
twelve months. The growth in the medium-term plan requires capital to be raised. However, given the
delay to the Annual Report & Financial Statements 2020, the disclaimer of auditor opinion and the
temporary suspension of trading in the Group’s shares, there are risks associated with our ability to raise
capital and fund the planned future balance sheet growth.
Group performance, and the return to profitability in the medium-term plan, is underpinned by a number
of key inputs and assumptions which cover:
l The raising of external capital.
l The funding of new business through retail deposits and other wholesale funding.
l New business origination levels.
l Net interest margin on new business originations.
l The expected date of completion of the Group’s remediation activities and the impact on the Group’s
expenses.
l The level of impairment losses on financial assets.
l Capital requirements, both from a regulatory and internal management perspective.
l Dividends, which have been assumed at zero in the medium-term plan.
72
This indicates that the Group’s ability to operate as a going concern is subject to material uncertainties.
As with any medium-term planning process, there is a risk that these assumptions do not materialise. As
part of the review of the medium-term plan, the Board was presented with a severe but plausible
downside in which the Group is unable to raise external capital, and a number of sensitivities to the
medium-term plan in which the Group’s net interest margin, impairment losses and business volumes
were subject to materially adverse performance. Even under the severe but plausible scenario it was
demonstrated that the Group would continue to operate and meet current regulatory requirements for
at least the next twelve months, albeit at the expense of balance sheet growth.
The Board has concluded based on the items below that the going concern basis of accounting was
deemed appropriate:
l Planned performance, including a medium-term plan which returns the Group to profitability.
l The assessment of downside risk to the medium-term plan.
1.3
Statement of compliance
The Consolidated financial statements of the Group and the separate financial statements of the Company
have been prepared in accordance with international accounting standards in conformity with the
requirements of 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. Details of the
subsidiaries are given in note 15.
1.5
Summary of significant accounting policies
1.5.1 New standards, interpretations and amendments adopted by the Group
From 1 October 2019, 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 2019, 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 do not differ from those in the 2019 Annual Report, except
for the following:
IFRS 16 Leases
IFRS 16 supersedes 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. The standard sets out the principles for the recognition, measurement, presentation and disclosure
of leases and requires lessees to recognise most leases on the balance sheet.
Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify
leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 did not
have an impact for leases where the Group is the lessor.
The Group adopted IFRS 16 using the modified retrospective method of adoption with the date of initial
application of 1 October 2019. Under this method, the standard is applied retrospectively with the cumulative
effect of initially applying the standard recognised at the date of initial application. The Group elected to
use the transition practical expedient to not reassess whether a contract is or contains a lease at 1 October
2019. Instead, the Group applied the standard only to contracts that were previously identified as leases
applying IAS 17 and IFRIC 4 at the date of initial application.
The Group has lease contracts for premises and equipment. Before the adoption of IFRS 16, the Group, as
lessee, classified each of its leases at the inception date as either a finance lease or an operating lease. Refer
to note 1.6.5 for the accounting policy prior to 1 October 2019. Upon adoption of IFRS 16, the Group applied
a single recognition and measurement approach for all leases except for short-term leases and leases of
low-value assets. Refer to note 1.6.5 for the accounting policy beginning 1 October 2019. The standard
provides specific transition requirements and practical expedients, which have been applied by the Group.
Leases previously accounted for as operating leases
The Group recognised right-of-use assets and lease liabilities for those leases previously classified as
operating leases, except for short-term leases and leases of low-value assets. The right-of-use assets for
most leases were recognised based on the carrying amount as if the standard had always been applied,
apart from the use of the incremental borrowing rate at the date of initial application. In some leases, the
Annual Report & Financial Statements 2020
73
right-of-use assets were recognised based on the amount equal to the lease liabilities, adjusted for any
related prepaid and accrued lease payments previously recognised. Lease liabilities were recognised based
on the present value of the remaining lease payments, discounted using the incremental borrowing rate
at the date of initial application. The Group also applied the available practical expedients wherein it:
l Applied a single discount rate to a portfolio of leases with reasonably similar characteristics.
l Relied on its assessment of whether leases are onerous immediately before the date of initial
application.
l Applied the short-term leases exemptions to leases with lease terms that ends within twelve months
of the date of initial application.
l Excluded the initial direct costs from the measurement of the right-of-use asset at the date of initial
application.
l Used hindsight in determining the lease term where the contract contained options to extend or
terminate the lease.
Impact on the financial statements
Based on the above, at 1 October 2019, the Group recognised lease liabilities in relation to leases which
had previously been classified as ‘operating leases’ under the principles of IAS 17. These liabilities were
measured at the present value of the remaining lease payments.
l Right-of-use assets of £2.4m were recognised and presented in the statement of financial position
within ‘Office equipment, motor vehicles and right-of-use assets’.
l Lease liabilities of £2.2 million were recognised.
The weighted average incremental borrowing rate applied to lease liabilities at transition date was 2.77%.
At 30 September 2019, IAS 17 operating lease commitments as disclosed in note 30 of the Annual Report
& Financial Statements 2019 amounted to £3.1 million. The difference between this and total lease liabilities
recognised at 1 October 2019 on transition of £2.2 million relates to termination options reasonably certain
to be exercised of £0.8 million and the impact of discounting of £0.1 million.
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 that the Group becomes a party to
the contractual provisions of the instrument). This includes regular way trades, purchases or sales of
financial assets that require delivery of assets within the time frame generally established by regulation
or convention in the marketplace. 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 received by the Group.
Initial measurement of financial assets and liabilities
The classification of financial instruments at initial recognition depends on their contractual terms and
the business model for managing the instruments. Recognised financial assets and financial liabilities are
initially measured at fair value. Transaction costs which are directly attributable to the acquisition or issue
of financial assets and financial liabilities (other than financial assets and financial liabilities at FVTPL) are
added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on
initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial
liabilities at FVTPL are recognised immediately in profit or loss. Trade receivables are measured at the
transaction price.
Measurement of financial assets and financial liabilities
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.
l Fair value through other comprehensive income (‘FVOCI’).
Financial liabilities are measured at amortised cost, and derivatives at FVTPL (see below).
Financial assets and liabilities
Balances at central banks, loans and advances to customers, other assets at amortised cost
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:
74
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 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 Solely Payments of Principal and Interest (‘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 SPPI test. The Group’s loan assets of hire purchase and conditional
sales agreements are repaid by instalments of principal and interest with an administration fee. 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, for example, 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.
Derivative financial instruments recorded at fair value through profit or loss
The Group uses derivative financial instruments in the form of interest rate swaps to manage its exposure
to interest rate risk. In accordance with its treasury policy, the Group does not hold or issue derivatives
for proprietary trading.
Derivatives are entered into only for the purposes of matching or eliminating the risk from potential
movements in interest rates in the Group’s assets and liabilities. The Group uses the International Swaps
and Derivatives Association Master Agreement to document these transactions in conjunction with a
Credit Support Annex.
The derivatives are not designated as part of an accounting hedge relationship. As such, all 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 Group typically
applies discounted cash flow models using yield curves that are based on observable market data. For
collateralised and non-collateralised positions, the Group uses discount curves based on overnight indexed
swap rates.
Derivatives are classified as financial assets where their fair value is positive and as 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 2020, net cash collateral posted is £nil (2019 – £nil).
Debt instruments at FVOCI
FVOCI debt instruments are measured at fair value with gains and losses arising due to changes in fair
value recognised in Other Comprehensive Income (‘OCI’). Interest income and foreign exchange gains and
losses are recognised in profit or loss. When a debt instrument measured at FVOCI is derecognised, the
cumulative gain/loss previously recognised in OCI is reclassified from equity to the Income Statement.
The Expected Credit Loss (‘ECL’) for debt instruments measured at FVOCI does not reduce the carrying
amount of these financial assets in the statement of financial position, which remains at fair value. Instead, an
amount equal to the allowance that would arise if the assets were measured at amortised cost is recognised
in OCI as an accumulated impairment amount, with a corresponding charge to profit or loss. The accumulated
loss recognised in OCI is recycled to the income statement upon derecognition of the assets.
Annual Report & Financial Statements 2020
75
Due to banks and due to customers
After initial measurement, amounts 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 Effective Interest Rate (‘EIR’) as defined in note 1.6.1.
Other borrowed funds
After initial measurement, other borrowed funds are subsequently measured at amortised cost. Amortised
cost is calculated by taking into account any discount or premium on funds and costs that are an integral
part of the EIR.
Foreign exchange gains and losses
The carrying amount of financial assets that are denominated in a foreign currency is determined in that
foreign currency and translated at the spot rate at the end of each reporting period. Specifically:
l For financial assets measured at amortised cost, exchange differences are recognised in profit or loss
in the ‘other income’ line item.
l For debt instruments measured at FVOCI, exchange differences on the amortised cost of the debt
instrument are recognised in profit or loss in the ‘other income’ line item.
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.
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.
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
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 contract.
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); and (iii) For loans that are in Stage 3, the Group undertakes a specific
impairment assessment.
For loans classified as Stage 1 or 2, 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 (‘LGD’).
l Forward-looking information.
In addition to the above, the Group undertakes a review of the recoverability of the exposure for loans
that are in Stage 3.
ECLs are a probability-weighted estimate of the present value of credit losses. These are measured as
the present value of the difference between the cash flows due to the Group under the contract and the
cash flows that the Group expects to receive arising from the weighting of multiple future economic
scenarios, discounted at the asset’s original EIR.
76
For undrawn loan commitments, the ECL is the difference between the present value of the difference
between the contractual cash flows that are due to the Group if the holder of the commitment draws
down the loan and the cash flows that the Group expects to receive if the loan is drawn down; and
For financial guarantee contracts, the ECL is the difference between the expected payments to reimburse
the holder of the guaranteed debt instrument less any amounts that the Group expects to receive from
the holder, the debtor or any other party.
The Group measures ECL on an individual basis or on a collective basis for portfolios of loans that share
similar economic risk characteristics.
Significant increase in credit risk (‘SICR’)
The Group applies a series of criteria to determine if an account has demonstrated a SICR 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 this threshold is considered to be
significant. These thresholds have been determined separately for each portfolio based on historical
evidence of delinquency.
l Backstop criteria – IFRS 9 includes a rebuttable presumption that 30 days past due is an indicator of
a SICR. The Group considers 30 days past due to be an appropriate backstop measure and does not
rebut this presumption.
Due to the impact and uncertainty introduced on the external environment by COVID-19, it has been
necessary to consider whether a SICR has occurred for certain loans, in particular where a COVID-19
payment concession or loan extension has been granted. The granting of such a concession or an
extension has not in itself been considered an indication of a SICR (transfer to Stage 2) in line with
regulatory guidance but nevertheless it has been considered to calculate additional Post Model
Adjustments (‘PMA’) for such exposures within the Business Finance Division (‘BFD’) and Azule. For
exposures within the Consumer Finance Division (‘CFD’), these have been assessed based on their status
immediately prior to requesting forbearance and, if up to date, the forbearance has not been considered
a SICR. In all cases these exposures have remained in Stage 1 unless in arrears, in which case the exposure
has been moved to Stage 2.
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 CRR article 1781
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.
l It is becoming probable that the borrower will enter bankruptcy or liquidation, other forms of insolvency
or financial reorganisation.
Loans remain on the balance sheet, net of associated provisions, until they are deemed to have no
reasonable expectation of recovery. Loans are generally written off after realisation of any proceeds from
collateral and upon conclusion of the collections process, including consideration of whether an account
has reached a point where continuing attempts to recover are no longer likely to be successful. Where
a loan is not recoverable, it is written off against the related provision for loan impairment once all the
necessary procedures have been completed and the amount of the loss has been determined. Subsequent
recoveries of amounts previously written off decrease the value of impairment losses recorded in the
income statement.
The impairment model does not allow an exposure to be cured (i.e. once a loan goes into default, it stays
in default). A PMA has been included for all loans that are in Stage 3 that have resumed repayment for
6 months and are current.
1 CRR Article 178 definition of default considers indicators that the debtor is unlikely to pay, includes exposures in forbearance and is
no later than when the exposure is more than 90 days past due.
Forward-looking information
Expected credit losses (‘ECL’)
ECLs are unbiased, probability-weighted estimates 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 uses
reasonable and supportable information that is both available, without undue cost or effort at the
reporting date, and about past events, current conditions, or 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 overleaf.
Annual Report & Financial Statements 2020
77
l Stage 1 – When a financial asset is first recognised, it is assigned to Stage 1. If there is no SICR 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 SICR 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 the ECL that results 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 twelve
months after the reporting date, weighted by the probability of that default occurring.
Presentation of allowance for ECL in the statement of financial position
Loss allowances for ECL are presented in the statement of financial position as follows:
l For financial assets measured at amortised cost, as a deduction from the gross carrying amount of
the assets.
l For loan commitments and financial guarantee contracts, as a provision.
l Where a financial instrument includes both a drawn and an undrawn component, and the Group cannot
identify the ECL on the loan commitment component separately from that on the drawn component,
the Group presents a combined loss allowance for both components. The combined amount is
presented as a deduction from the gross carrying amount of the drawn component. Any excess of
the loss allowance over the gross amount of the drawn component is presented as a provision.
For debt instruments measured at FVOCI, the loss allowance is recognised in the statement of
Comprehensive Income.
Economic scenarios
The Group considers three forward-looking economic indicators for each business line as follows:
Unemployment rate
Used Car Price Index
Consumer Prices Index (CPI)
UK Gross Domestic Product (GDP) growth
Nationwide House Price Index (HPI)
Consumer
finance
Business
finance
& Azule
Bridging
finance
The scenarios for UK economic growth, inflation, residential property prices, unemployment and used
car prices are obtained from a reputable economic research consultancy firm and reviewed and agreed
by the Board.
The consultancy firm combines historical forecast errors with their quantitative assessment of the current
risks facing the economy to produce robust forward-looking distributions. The method of weighting the
economic scenarios has been approved by the Board and is based on the framework provided by the
consultancy firm as detailed below. The weightings applied are based on a scenario weighting of 40%
base, 30% upside and 30% downside.
Upside
Base
Downside
5-year average
GDP (year on year change)
CPI (year on year change)
Unemployment (5-year average)
HPI (year on year change)
Used Car Price Index (year on year change)
Peak Values
GDP
CPI
Unemployment Rate
HPI
Used Car Price Index
3.26%
1.97%
3.63%
4.02%
-1.57%
9.17%
3.57%
4.89%
9.91%
0.32%
2.66%
1.68%
4.06%
1.58%
-1.61%
5.05%
1.95%
6.50%
5.60%
0.80%
1.42%
1.01%
6.69%
-3.13%
-1.62%
2.77%
2.13%
8.42%
6.22%
1.68%
78
Sensitivity analysis
The calculation of the Group’s impairment provision is sensitive to changes in the chosen weightings.
The effect on the closing modelled provision of each portfolio as a result of applying 100% weightings to
each of the chosen scenarios shown below.
30 September 2020
Business Finance Division
Consumer Finance Division
Bridging Finance
Azule Finance
Upside
£’000
Base
£’000
Downside
£’000
(123)
(636)
(27)
(7)
(91)
(27)
(2)
(5)
555
834
30
32
Model calculation
The definitions of the ECL calculations are outlined below and the key elements are, as follows:
l PD – 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 EAD – 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 LGD – 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. In particular,
where segments of the portfolio have little or no historical information to compute either PD or LGD,
ECLs are extrapolated from a related segment. This is particularly relevant for our highest credit grade
business across all divisions and, in particular, Bridging finance.
Overlays and post model adjustments (‘PMA’)
Against the background of the COVID-19 pandemic, the Group has assessed the modelled output and,
where known or expected risk factors and information have not been considered fully in the modelling
process, the Group applies an overlay or a post model adjustment (‘PMA’).
The COVID-19 related additional provisions are summarised as follows:
l A small number of provisions have been applied to large client agreements in default (Stage 3). These
overlays are based on known information about the specific cases, such as the depressed value of the
assets and whether a charging order is in place, with a recovery rate estimated on the shortfall. These
specific overlays contributed to an additional £1.4 million to the total ECL (2019 – £nil).
l The COVID-19 pandemic and subsequent national lockdown, with its adverse effect on asset values,
necessitated an overlay for recovery rates. An additional overlay was calculated for this risk. The
overlay accounted for an additional £0.2 million increase on the total ECL (2019 – £nil).
l It is perceived that the likelihood of default may have increased for those customers who have applied
for COVID-19 specific forbearance within CFD. Therefore, the Group applied an additional provision
for the Consumer Finance loans that are in forbearance. The overlay accounted for an additional £0.1
million to the total ECL (2019 – £nil).
l Due to the high level of COVID-19 forbearance experienced in the coach, bus and minibus portfolio
within BFD, a further overlay was considered appropriate. The gross carrying amount of this portfolio
in forbearance at year end was £6.1 million (September 2019 – £nil). A comprehensive review of the
portfolio was undertaken and an additional provision was made against the large exposures deemed
most at risk of entering Stage 3 or going into arrears. The overlay accounted for an additional £0.4
million in the total ECL (2019 – £nil).
l COVID-19 has had an adverse impact on the film and TV market which Azule serves. The lifting of the
initial restrictions meant that the film and TV sector could return to work, but the government continued
the ban on mass gathering events such as concerts, festivals, conferences and exhibitions. This has
Annual Report & Financial Statements 2020
79
resulted in those who service live events being forced to remain closed, therefore requiring additional
support from the government through furlough, CBILS and BBLs and then also support from their
creditors such as asset finance providers extending forbearance. Management deemed it necessary
to provide an additional overlay to cover the risks associated with agreements in forbearance in the
Azule book. The overlay accounted for an additional £0.4 million in the total ECL (2019 – £nil).
l An overlay is in place for customers who are entering their third round of forbearance, as in some
cases they may not have made full payments to the Group for nine months. Management perceives
there to be additional risk associated with these customers and therefore, an additional provision has
been applied to these agreements. The overlay accounts for an additional £0.1 million in the total ECL
(2019 – £nil).
Other PMAs
l A PMA was implemented to take additional provisions on defaulted loans, where the agreements had
been terminated and assets recovered with residual outstanding balances, resulting from revisions to
recovery expectations against those exposures. The overlay accounts for an additional £6 million in
the total ECL (2019 – £nil).
l The ECL model applied to the Group uses three economic scenarios in the impairment calculations.
Management deemed it necessary to replace the downside scenario with a severe downside scenario
in the calculations. The overlay contributed an additional £0.1 million in the total ECL (2019 – £nil).
l The ECL model does not allow an exposure to be cured (moved from Stage 3 to Stage 2) unless the
loan has returned to full payment and has been making such payments for at least the last six months.
The Group has included an overlay to account for these cured agreements which has resulted in the
provision reducing by £0.2 million (2019 – £nil).
l A PMA has been implemented to address the regrading of credit grades. The Group has carried out a
regrade of the Business Finance and Consumer Finance portfolios to address the possible deterioration
in the quality of the loan book. The overlay accounts for an additional £0.3 million in the total ECL
(2019 – £nil).
The total of the overlays and PMAs is a net increase to the impairment provision of £8.8 million
(2019 – £0.03 million).
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 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.
For those loans in formal recovery, the Group assesses the ECL by estimating future cash receipts over
the expected period before the outstanding balance is expected to be written off, discounted at the EIR
at initial recognition or an approximation thereof.
1.6
Significant accounting policies
With the exception of changes to the Group’s accounting policies resulting from new and revised
accounting standards (note 1.5.1), the Group has consistently applied the following accounting policies
to all periods presented in the financial statements.
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.
80
Amortised cost and gross carrying amount
The ‘amortised cost’ of a financial asset or financial liability is the amount at which the financial asset or
financial liability is measured on initial recognition minus the principal repayments, plus or minus the
cumulative amortisation using the effective interest method of any difference between that initial amount
and the maturity amount and, for financial assets, adjusted for any expected credit loss allowance. The
‘gross carrying amount of a financial asset’ is the amortised cost of a financial asset before adjusting for
any expected credit loss allowance.
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. The effective interest rate of a financial asset or financial liability is calculated
on initial recognition of a financial asset or a financial liability. In calculating interest income and expense,
the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not
credit-impaired) or to the amortised cost of the liability.
When the recorded value of a financial asset or a group of similar financial assets has been reduced by an
impairment loss, Stage 1 and stage 2 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. For Stage 3 the
interest income is based on amortised cost less the impairment charge, multiplied by the EIR.
1.6.2 Dividend income
Dividend income is recognised when the Group’s or Company’s right to receive the payment is
established, which is generally when the shareholders approve the dividend.
1.6.3 Fee and commission income
The Group earns fee and commission income from a range of services which 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 late payment charges and recharge of costs incurred from the recovery of assets
under hire purchase and finance lease agreements.
1.6.4 Net income from other financial instruments at fair value through profit or loss
Net income from other financial instruments at FVTPL relates to non-trading derivatives held for risk
management purposes that do not form part of qualifying hedging relationships, financial assets and
financial liabilities designated at FVTPL and non-trading assets mandatorily measured at FVTPL. The line
item includes fair value changes.
1.6.5 Leasing
Policy applicable before 1 October 2019
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.
Policy applicable after 1 October 2019
The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract
conveys the right to control the use of an identified asset for a period of time in exchange for
consideration.
Group as a lessee
The Group applies a single recognition and measurement approach for all leases, except for short-term
leases and leases of low-value assets. The Group recognises lease liabilities to make lease payments and
right-of-use assets representing the right to use the underlying assets.
Annual Report & Financial Statements 2020
81
Right-of-use assets
The Group recognises right-of-use assets at the commencement date of the lease (i.e. the date the
underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated
depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of
right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and
lease payments made at or before the commencement date less any lease incentives received. Right-of- use
assets are depreciated on a straight-line basis over the lease term.
The right-of-use assets are presented within note 16 ‘Office equipment, motor vehicles and right-of-use
assets’ and are subject to impairment in line with the Group’s policy as described in note 1.6.10 ‘Impairment
of non-financial assets’.
Lease liabilities
At the commencement date of the lease, the Group recognises lease liabilities measured at the present
value of lease payments to be made over the lease term. The lease payments include fixed payments
(less any lease incentives receivable), variable lease payments that depend on an index or a rate, and
amounts expected to be paid under residual value guarantees. The lease payments also include the
exercise price of a purchase option reasonably certain to be exercised by the Group and payments of
penalties for terminating the lease, if the lease term reflects exercising the option to terminate. Variable
lease payments that do not depend on an index or a rate are recognised as expenses in the period in
which the event or condition that triggers the payment occurs. The Group determines its incremental
borrowing rate by analysing its borrowings from various external sources and makes certain adjustments
to reflect the terms of the lease and type of asset leased.
Group as a lessor
Leases in which the Group does not transfer substantially all the risks and rewards incidental to ownership
of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis
over the lease terms and is included in revenue in the statement of profit or loss due to its operating nature.
Initial direct costs incurred in negotiating and arranging an operating lease 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 period in which they are earned.
Finance leases
A finance lease is a lease or hire purchase contract that transfers substantially all the risks and rewards
incidental to ownership of an asset to the lessee. Finance leases are recognised as loans at an amount
equal to the gross investment in the lease, which comprises the lease payments receivable and any
unguaranteed residual value, discounted at its implicit interest rate. Finance charges on finance leases are
taken to income in proportion to the net funds invested.
1.6.6 Cash and cash equivalents
Cash and cash equivalents as referred to in the Consolidated Statement of Cash Flows comprises cash
on hand, non–restricted current accounts with central banks and amounts due from banks on demand
or with an original maturity of three months or less.
1.6.7 Office equipment, motor vehicles and right-of-use assets
Office equipment, motor vehicles and right-of-use assets 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 and
motor vehicles to their residual values over their estimated useful life as follows:
Office equipment, fixtures and fittings – Between 3 to 10 years
Motor vehicles
– 4 years
Office equipment, motor vehicles and right-of-use assets 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.
Right-of-use assets are presented together with office equipment in the Balance Sheet – refer to
note 16. Right-of-use assets are depreciated on a straight-line basis over the lease term.
1.6.8 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.
82
On disposal of an operation, the attributable amount of goodwill is included in the determination of the
profit or loss on disposal.
1.6.9 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.
Internally developed intangible assets including subsequent expenditure on them, are capitalised as assets
only when the Group is able to demonstrate that the following conditions have been met. If these conditions
are not met, expenditure is recognised in administrative expenses in the income statement as incurred.
l Expenditure can be reliably measured.
l The product or process is technically and commercially feasible.
l Future economic benefits are probable.
l The Group has the intention and ability to complete development and subsequently use or sell the asset.
The cost of externally acquired computer software includes the original purchase price of the asset and any
directly attributable costs of preparing the asset for its intended use. The cost of intangible assets acquired
in a business combination is their fair value at the date of acquisition. Capitalised computer software and
intangible assets are subsequently measured at cost less accumulated amortisation and any accumulated
impairment losses.
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 income statement. 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 income statement.
1.6.10 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 other than for goodwill and other
intangible assets. Disclosures of the assumptions used to test for impairment are given in note 1.7.3.
1.6.11 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 8. 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 income statement for a period represents the movement in
cumulative expense recognised at the beginning and end of that period.
Annual Report & Financial Statements 2020
83
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.
In arriving at fair values, the Black-Scholes pricing model is used, and estimates are made of dividend
yields, share price volatility, risk-free rates and expected life of the share options.
1.6.12 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.
1.6.13 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.
1.6.14 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 disclosed in note 10.
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 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.
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 debt instruments at fair value through Other
Comprehensive Income (‘OCI’) and foreign exchange differences.
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.
84
1.6.15 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.
1.6.16 Own shares
Own equity instruments of the Group which are acquired by it or by any of its subsidiaries (treasury
shares) are deducted from equity. Consideration paid or received on the purchase, sale, issue or
cancellation of the Group’s own equity instruments is recognised directly in equity. No gain or loss is
recognised in profit or loss on the purchase, sale, issue or cancellation of own equity instruments.
1.6.17 Dividends on ordinary shares
Dividends on ordinary shares are recognised as a liability and deducted from equity when they are
approved by the Group’s shareholders. Dividends for the year that are approved after the reporting date
are disclosed as an event after the reporting date.
1.6.18 Short-term benefits
Wages, salaries, commissions, bonuses, social security contributions, paid annual leave and non-monetary
benefits, including death-in-service premiums, are accrued in the period in which the associated services
are rendered by employees of the Group.
1.6.19 Termination benefits
Termination benefits are payable when employment is terminated before the normal retirement date or
when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises
termination benefits when it is demonstrably committed to either the termination of employment or a
voluntary redundancy offer.
1.6.20 Write-offs
Financial assets are written off either partially or in their entirety only when the Group has no reasonable
expectation of recovering a financial asset in its entirety or a portion thereof. If the amount to be written
off is greater than the accumulated loss allowance, the difference is first treated as an addition to the
allowance that is then applied against the gross carrying amount. Any subsequent recoveries are credited
to the income statement.
1.6.21 Forborne and modified loans
The Group considers a loan to be forborne when such concessions or modifications to it are provided as
a result of the borrower’s present or expected financial difficulties and the Group would not have
otherwise agreed to them. Indicators of financial difficulties include temporary changes to a customer’s
circumstances, defaults on covenants or significant concerns raised by the Credit Risk Department.
Forbearance includes a variety of concessions including payment plans, reduced monthly payments,
COVID-19 related payment deferrals of three to nine months and extensions to the term of the agreement.
In all instances, the objectives are to treat customers fairly, to ensure that the forbearance is sustainable
and affordable and to ensure that the forbearance complies with regulatory rules and guidance.
During the financial year, the Group received unprecedented levels of forbearance requests from
customers as a result of the impact of the COVID-19 pandemic. Forbearance is usually considered to be
a potential indicator of a significant increase in credit risk. However, due to the impact and complexity
of COVID-19, it has been necessary to enhance the approach in determining whether this has indeed
occurred. In particular, a COVID-19 payment concession in line with regulatory guidance has not in itself
constituted that a significant increase in credit risk (transfer to Stage 2) has occurred for the majority of
the Bank’s loans. Instead, a request for COVID-19 forbearance has been considered with the usual
indicators of a significant increase in credit risk such as recent customer payment history and whether
the customer was up to date with payments at the time of granting the concession.
However, given the continuing nature of the pandemic and the requests for forbearance at the year end
an additional overlay has been applied to reflect the increased risk in the Group’s portfolio as a result of
granting forbearance due to COVID-19. Details of forborne assets are disclosed in note 29.3.2.
If modifications are substantial, the loan is derecognised, as explained in note 1.5.3.
1.6.22 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.
Annual Report & Financial Statements 2020
85
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 income statement, 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 cash-generating units 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 cash-generating unit (‘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 cash-generating
unit 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.
1.7
Significant accounting judgements, estimates and assumptions
The preparation of financial statements in accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006 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 discussed in the notes 1.7.1 to 1.7.4.
1.7.1 Effective interest rate (estimate)
Interest and termination 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 income statement. The
effective interest rate behavioural models are based on market trends and experience.
1.7.2 Impairment losses on financial assets (judgement and estimate)
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 SICR, based on the Group’s experience of managing credit risk.
Within the Group’s consumer and business finance portfolios, which comprise large numbers of small,
homogenous assets with similar risk characteristics and 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.
86
The Asset and Liability Committee (‘ALCO’) considers the recovery rates, weightings and economic
factors, and where necessary, recommends changes to the Board for approval.
The measurement of impairment losses under IFRS 9 across all categories of financial assets in scope
requires judgement and estimation, 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 therefore
allowances for financial assets should be measured on a Lifetime Expected Credit Loss (‘LTECL’) basis
and an appropriate qualitative assessment.
l Lifetime to default (‘LTD’) is the number of months that agreements are expected to default after
inception.
l Lifetime to write-off (‘LTW’) is the number of months after default that agreements are expected to
be written off.
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.
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.
The ECL provision is sensitive to judgement and estimations made with regard to the selection and
weighting of multiple macroeconomic scenarios. To supplement the models, the Group also applied
expert credit risk judgement through post-model adjustments (PMAs). These are designed to account
for factors that the models cannot incorporate or where the sensitivity is not as would be expected under
what is an unprecedented economic stress scenario. Through this process, the Group applied PMAs of
£8.8 million (September 2019 £nil) comprising overlays in relation to the Group’s expected payment
holiday experience, the evolving macroeconomic dynamics that may not be fully captured in inputs or
models and the assumptions on defaulted receivables.
Certain asset classes are less sensitive to specific macroeconomic factors, showing lower relative levels
of sensitivity. To ensure appropriate levels of ECL, the relative lack of sensitivity is compensated for
through the application of PMAs, further detail of which can be found in note 1.5.3.
The majority of the residual PMAs increases is to address a lack of sensitivity in the modelled outcome.
1.7.3 Impairment testing of investment in subsidiaries and goodwill (judgement and estimate)
The Group assesses, at each reporting date, whether there is an indication that goodwill acquired through
acquisitions or investments in subsidiaries 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 and investments in subsidiaries for impairment reflects the Board’s best estimate
of future cash flows of the Group’s subsidiaries and goodwill 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 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 the investment or
CGU exceeds its recoverable amount. The recoverable amount of the investment or 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.
The key assumptions used in the calculation of value-in-use are as follows:
Annual Report & Financial Statements 2020
87
Discount rate
The 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 used was 14.88%.
Cash flow period
Five years of cash flows (pre-tax profits) are included in the discounted cash flow model based on the
business plan and terminal value.
Terminal value growth rate
A terminal value growth rate is applied into perpetuity to extrapolate cash flows beyond the cash flow
period. A terminal value growth rate of 1.0% is estimated by the Board.
1.7.4 Estimating the incremental borrowing rate
The Group cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental
borrowing rate (‘IBR’) to measure lease liabilities. The IBR is the rate of interest that the Group would
have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an
asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore
reflects what the Group ‘would have to pay’, which requires estimation when no observable rates are
available (such as for subsidiaries that do not enter into financing transactions) or when they need to be
adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the
subsidiary’s functional currency).The Group estimates the IBR using observable inputs (such as market
interest rates) when available and is required to make certain entity-specific adjustments (such as the
subsidiary’s stand-alone credit rating, or to reflect the terms and conditions of the lease).
The range of IBRs used by the Group are 2.75% to 5.60%.
1.8
Standards issued but not yet effective
Minor amendments to IFRSs effective for the Group from 1 October 2020 have been issued by the
International Accounting Standards Board (IASB). These amendments are expected to have no or an
immaterial impact on the Group.
1.9 Amendments to prior year comparatives
Amendments to the previously reported 2019 disclosures have been made relating to the treatment of
other account charges and income on termination, in respect of defaulted agreements.
Amounts in the profit and loss account have been reclassified with the recognition of other fees and
commissions of £1.1 million and a corresponding increase in impairment losses on financial assets for the
same amount. These adjustments have no impact on the previously reported profit before or after tax,
nor on the net assets of the Group.
2
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
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.
Bridging finance
Bridging finance commenced operations in January 2019, for residential, semi-commercial and commercial
properties.
88
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.
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 2020 and 30 September 2019.
The following table presents income and profit and certain asset and liability information for the Group’s
operating segments. All of the operating segments are materially based in the United Kingdom.
Non-United Kingdom based operations are not considered material to the Group and therefore no
additional geographical information is disclosed.
Segmental allocations were revised for the year ended 30 September 2020. Comparatives for the
30 September 2019, have been re-presented in accordance with IFRS 8, paragraph 29.
Group
Year ended 30 September 2020
Interest income calculated using
the effective interest method
Interest expense calculated using
the effective interest method
Consumer Business
Azule Bridging
Finance Finance Finance Finance
£’000
£’000
£’000
£’000
17,182
20,015
1,798
3,242
(6,842)
(8,241)
(238)
(632)
Net interest income
10,340
11,774
1,560
2,610
Fee and commission income
Fee and commission expense
233
(982)
791
(584)
1,094
(24)
Net fees and commission (expense)/income
(749)
207
1,070
4
(12)
(8)
Net loss on financial instruments mandatorily
at fair value through profit or loss
(21)
(23)
(3)
(8)
Net operating income
9,570
11,958
2,627
2,594
Adjustment
at Group
Total
level segments
£’000
£’000
–
–
–
–
-
–
–
-
–
–
–
42,237
(15,953)
26,284
2,122
(1,602)
520
(55)
26,749
14,431
8,296
5,268
Impairment losses on financial assets
Personnel expenses
Other operating expenses
Depreciation of office equipment, fixtures,
fittings and right-of-use-assets
Amortisation of intangible assets
Impairment losses on software
Impairment losses on goodwill
4,930
2,690
2,421
8,407
3,001
2,531
620
1,460
448
474
1,145
(132)
429
213
20
–
470
233
21
–
151
28
3
–
156
78
7
–
–
–
–
1,750
1,206
552
51
1,750
Total operating expenses
10,703
14,663
2,710
1,728
1,750
31,554
Segment profit/(loss) before tax
Income tax credit/(expense)
Profit/(loss) after tax
(1,133)
277
(2,705)
245
(83)
152
(856) (2,460)
69
866
(127)
739
1,750
–
(4,805)
547
(1,750)
(4,258)
Total Assets
Total Liabilities
181,209 197,855 27,063 65,386
58,661
160,759 175,694 23,671
1,147 472,660
– 418,785
Annual Report & Financial Statements 2020
89
Group (Re-presentation)
Year ended 30 September 2019
Interest income calculated using
the effective interest method
Interest expense calculated using
the effective interest method
Net interest income
Fee and commission income*
Fee and commission expense
Consumer Business
Azule Bridging
Finance Finance Finance Finance
£’000
£’000
£’000
£’000
15,498
16,928
1,722
351
(5,725) (6,643)
(492)
9,773
10,285
1,230
352
(602)
1,210
(532)
1,334
(19)
(24)
327
–
(1)
(1)
Net fees and commission (expense)/income
(250)
678
1,315
Net loss on financial instruments mandatorily
at fair value through profit or loss
(24)
(33)
(4)
(2)
Net operating income
9,499 10,930
2,541
Impairment losses on financial assets*
Personnel expenses
Other operating expenses
Depreciation of office equipment, fixtures,
fittings and right-of-use-assets
Amortisation of intangible assets
1,013
2,369
2,018
2,191
3,209
1,391
46
1,655
96
39
158
54
218
40
24
324
6
407
322
4
16
Total operating expenses
5,597
7,063
1,861
755
Segment profit/(loss) before tax
Income tax expense
Profit/(loss) after tax
3,902
(790)
3,867
(783)
680
(138)
(431)
87
3,112
3,084
542
(344)
Adjustment
at Group
Total
level segments
£’000
£’000
–
–
-
–
–
–
–
–
–
–
–
–
–
–
–
–
–
34,499
(12,884)
21,615
2,896
(1,154)
1,742
(63)
23,294
3,256
7,640
3,827
137
416
15,276
8,018
(1,624)
6,394
Total Assets
Total Liabilities
140,923 194,823 25,309
163,121 26,358
118,056
14,117
11,779
2,897 378,069
319,314
–
* Segmental allocations for the recoverable amount of fees charged on credit impaired accounts were revised for the year ended
30 September 2020. Comparatives for the 30 September 2019 have been re-presented in accordance with IFRS 8, paragraph 29.
3
Interest income calculated using the effective interest method
Group
Cash and short-term funds
Loans and advances to customers
Financial instruments - FVOCI
Total interest and similar income
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
51
41,985
201
42,237
67
33,954
478
34,499
Operating lease rental income of £75,000 has not been separately disclosed as it is not considered
material and is included within interest income on loans and advances to customers.
4
Interest expense calculated using the effective interest method
Group
Paid and accrued to banks
Paid and accrued to customers
Credit related fees and commission
Interest expense on lease liabilities
Total interest and similar expense
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
994
6,950
7,954
55
15,953
836
5,323
6,725
–
12,884
90
5
Net fee and commission income
Group
Fees and commission income
Secondary lease income
Other fees not forming part of EIR*
Other fees and commissions
Fees and commission expenses
Debt recovery and valuation fees
Credit assessment costs
Net fee and commission income
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
331
1,481
310
2,122
(344)
(1,258)
(1,602)
520
385
2,511
–
2,896
(195)
(959)
(1,154)
1,742
*Comparatives for the recoverable amount of fees charged on credit impaired accounts have been re-presented from Impairment
losses on financial assets to Fees and commission income to make the Net fee and commission note more relevant following a review
of the disclosure and accounting policies applied (see note 1.9).
6
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:
Group
30 September 2020
Impairment charge for the year on loans and
advances to customers
30 September 2019*
Impairment charge for the year on loans and
advances to customers
Consumer Business
Finance
£’000
Azule
Finance Finance
£’000
£’000
Bridging
Finance
£’000
Total
£’000
4,930
8,407
620
474
14,431
1,013
2,191
46
6
3,256
*Comparatives for the recoverable amount of fees charged on credit impaired accounts have been re-presented from Impairment
losses on financial assets to Fees and commission income to make the Impairment losses on financial assets note more relevant
following a review of the disclosure and accounting policies applied (see note 1.9).
7
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
2020
£’000
Year ended
30 September
2019
£’000
6,754
925
377
–
240
8,296
6,054
773
267
132
414
7,640
The average monthly number of persons employed by the Group during the year was 128 (year ended
30 September 2019 – 93). The number of employees at 30 September 2020 was 125.
Annual Report & Financial Statements 2020
91
8
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
2020
£’000
Year ended
30 September
2019
£’000
1,211
34
–
1,245
1,293
61
4
1,358
A summary of the total remuneration paid to directors is set out below.
Table of directors’ remuneration
Salary
Benefits
Long-term
and fee Bonus
£’000 £’000
in kind Pension
£’000
£’000
incentive Other
£’000 £’000
Year ended
Year ended
30 September 30 September
2019
£’000
2020
£’000
Executive directors
S D Maybury*
R J Murray**
D R Bull***
Non-executive directors
M F Brown
T A Franklin
C A Higgins
D J Morgan
D Titmuss
M Martin
289
190
191
43
95
57
43
52
43
1,003
–
–
–
–
–
–
–
–
–
–
2
2
2
–
–
–
–
–
–
6
–
15
19
–
–
–
–
–
–
34
–
–
–
–
–
–
–
–
–
–
–
–
202
–
–
–
–
–
–
291
207
414
43
95
57
43
52
43
476
285
296
43
95
57
43
52
11
202
1,245
1,358
* Pension received in cash.
** Part of the pension received in cash.
*** Resigned 16 March 2020 and left the Company’s employment on 30 September 2020. Part of the pension
was received in cash and the ‘other’ amount represents a payment for compensation for loss of office,
including £87k as a payment in lieu of six months’ notice, £85k as an incentive award measured against
specific pre-determined performance criteria and £30k as an ex-gratia payment. Share options previously
granted were not cancelled on David Bull’s departure from the Group (see page 48).
Share-based payments
At 30 September 2020, the Company has two share option plans, as follows:
l Senior executive equity-settled share option plans.
l Company equity-settled share option plans.
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 on 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
nine years (30 September 2019, restated – ten 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.
92
Group
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 2020
No options were granted.
30 September
2020
£’000
Weighted
average
exercise
price
(pence)
30 September
2019
£’000
Weighted
average
exercise
price
(pence)
5,960
–
–
(1,988)
3,972
–
34
–
–
(35)
33
–
–
5,960
–
–
5,960
–
–
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
Company equity-settled share option plans
The grant price is determined by reference to the average mid-market price of the Company’s ordinary
shares for the three days immediately preceding the date of the grant. The options are conditional on
continued employment and have a minimum vesting period of three years. If options remain unexercised
after a period of ten years from the date of the grant, the options expire. The weighted average remaining
contractual life is five years (30 September 2019, restated – six years).
Group
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
30 September
2020
£’000
Weighted
average
exercise
price
(pence)
30 September
2020
£’000
Weighted
average
exercise
price
(pence)
3,015
–
–
300
2,715
2,715
17
–
–
(27)
15
15
3,210
–
(195)
–
3,015
2,420
17
–
(21)
–
17
15
The fair value was measured at the grant date using the Black-Scholes Model.
During the year ended 30 September 2020
No options were granted.
During the year ended 30 September 2019
No options were granted.
Annual Report & Financial Statements 2020
93
9 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
2020
£’000
Year ended
30 September
2019
£’000
283
2,156
1,054
1,695
3
77
5,268
271
1,073
995
957
433
98
3,827
Professional fees include fees payable to the auditor of £860,000 (year ended 30 September 2019 –
£304,000), 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
2020
£’000
Year ended
30 September
2019
£’000
43
817
–
860
39
235
30
304
Audit fees are allocated in line with the standard management recharge methodology adopted by the
Group.
10 Income tax
(a) The components of income tax expense for the year ended 30 September 2020 and its comparatives
Group
Current tax
UK Corporation Tax on profit for the year
Adjustments in respect of prior periods
Total current tax credit/(charge)
Deferred tax
Origination and reversal of temporary differences
Adjustments in respect of prior periods
Change in tax rate
Total deferred tax credit/(charge)
Total tax credit/(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
2020
£’000
Year ended
30 September
2019
£’000
(3)
(149)
(152)
454
104
141
699
547
(1,507)
(65)
(1,572)
(98)
36
10
(52)
(1,624)
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
136
(19)
117
131
(52)
79
94
(c) Factors affecting current tax charge for the year
The Corporation Tax main rate is 19% (30 September 2019 – 19%).
The deferred tax asset has been measured at 19% (30 September 2019 – 17%).
Group
Accounting profit/(loss) before tax
UK Corporation Tax of 19%
(year ended 30 September 2019 – 19%)
Effects of
Expenses not deductible for taxation purposes
Non-taxable income
Adjustments in respect of prior years
Change in tax rate
Unutilised Losses
Share based payment
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
(4,805)
8,018
913
(1,523)
(453)
29
(45)
141
(13)
(25)
(45)
–
(29)
15
–
(42)
Income tax expense as reported in the Consolidated Income Statement
547
(1,624)
Effective tax rate for the year
11%
20%
Factors affecting future tax charge
The budget on 3 March 2021 announced that the UK corporation tax rate will increase from 19% to
25% with effect from 1 April 2023. This will increase the Company’s future tax charge accordingly.
An increase in rate may also increase the deferred tax asset. It is not practicable to schedule the
timing of the reversal of the temporary differences giving rise to the deferred tax asset in order to
determine the precise impact of the rate change.
11
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 profit/(loss) attributable to
ordinary shareholders
Basic average number of shares
*Basic earnings per 5p ordinary share (pence)
*There were no potential dilutive shares during the year.
12 Cash and balances at central banks
30 September 30 September
2020 2019
£’000 £’000
(4,258) 6,394
30 September 30 September
2020 2019
’000 units ’000 units
242,171
234,102
(1.7)
2.7
Cash and demand deposits
Group
Company
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
24,936
24,936
7,371
7,371
278
278
123
123
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 its approximate 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 2020
95
13 Debt instruments at FVOCI
Group
Balance at 1 October 2019
Net Sale of covered bonds
Change in Fair value during the year
Covered Bonds
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
19,638
(10,589)
46
39,902
(20,256)
(8)
9,095
19,638
There were no material impairment losses on debt instruments at FVOCI during the year and at year end.
14 Loans and advances to customers
Group
Consumer lending – gross
Business lending – gross
Azule lending – gross
Bridging lending – gross
Allowance for impairment losses (see below)
Loans and advances to customers include the following receivables.
Less than one year
Between one and five years
More than five years
Impairment allowance
Finance lease receivables - Minimum lease payments
The following minimum lease payments are receivable on finance leases.
Within one year
After one year but no more than two years
After two years but no more than three years
After three years but no more than four years
After four years but no more than five years
More than five years
Year ended
30 September
2020
£’000
Year ended
30 September
2019*
£’000
171,854
190,462
23,001
60,612
131,425
180,822
20,142
12,954
445,929
345,343
(18,632)
(6,840)
427,297
338,503
Year ended
30 September
2020
£’000
Year ended
30 September
2019*
£’000
76,528
295,197
74,204
(18,632)
32,489
265,869
46,985
(6,840)
427,297
338,503
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
5,787
6,522
11,332
15,321
12,890
1,230
53,082
5,536
4,449
10,914
15,553
15,211
2,455
54,118
The following table shows a reconciliation of minimum future lease payments to the gross and net
investment in lease payments receivable.
Minimum future lease payments/gross
Investment in leases
Unearned finance income
Net investment in finance leases
96
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
53,082
(7,679)
45,403
54,118
(8,440)
45,678
A reconciliation of the allowance for impairment losses for loans and advances, by class, is as follows:
Group
Consumer
finance
£’000
Business
finance
£’000
Azule
finance
£’000
Bridging
finance
£’000
At 1 October 2019**
Charge for the year (note 6)
(Recoveries)/write-offs
2,571
4,930
(580)
4,142
8,407
(2,230)
At 30 September 2020
6,921
10,319
121
620
171
912
6
474
–
480
Total
£’000
6,840
14,431
(2,639)
18,632
Made up of
Individual impairment
Collective model provisions including
overlays and PMAs
Total impairment
776
1,642
767
180
3,365
6,145
6,921
8,677
10,319
145
912
300
480
15,267
18,632
Consumer
finance
£’000
Business
finance
£’000
Azule
finance
£’000
Bridging
finance
£’000
Group (Re-presented)**
At 1 October 2018
Adoption of IFRS 9 (see note 1.5.3)
Charge for the year (note 6)
(Recoveries)/write-offs*
2,286
91
2,377
1,013
(819)
2,084
513
2,597
2,191
(646)
At 30 September 2019
2,571
4,142
Made up of
Individual impairment
Collective impairment*
Total impairment
724
1,847
2,571
1,163
2,979
4,142
–
–
–
46
75
121
–
121
121
–
–
–
6
–
6
–
6
6
Total
£’000
4,370
604
4,974
3,256
(1,390)
6,840
1,887
4,953
6,840
* Comparatives for the recoverable amount of fees charged on credit impaired accounts have been re-presented from Allowance for
Impairment losses to Loans and advances to make the Loans and advances to customers note more relevant following a review of
the disclosure and accounting policies applied (please see note 1.9).
** Segmental allocations were revised for the year ended 30 September 2020. Comparatives for the 30 September 2019 have been
re-presented in accordance with IFRS 8, paragraph 29.
Annual Report & Financial Statements 2020
97
15
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 2020.
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
Ireland
Germany
Banking, hire purchase,
leasing & Bridging finance
Leasing & hire purchase
Leasing & hire purchase
Leasing & hire purchase
Leasing & hire purchase
Leasing & hire purchase
Leasing & hire purchase
Percentage of
equity interest
30 September
2020
Percentage of
equity interest
30 September
2019
100
100*
0
0
100*
100*
100*
100
100*
100*
100*
100*
100*
100*
PCF Equipment Leasing Limited and PCF Financial Leasing Limited were both dissolved on 26 November 2019.
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 Kirchtruderinger Straße 17, 81829 München, Germany.
All companies have an Accounting Reference Date of 30 September.
The amount paid by the Group during the year ended 30 September 2019 relating to the acquisition of
Azule Limited included amounts in respect of deferred consideration. The deferred consideration paid
was subject to the achievement of certain performance criteria relating to the level of new business
originations and bad debt provisions following acquisition, and the amount paid was reduced if these
criteria were not met.
Company
Cost and net book value
At beginning of the year
Issuance of new shares at 5p par value during the year
At 30 September
30 September
2020
£’000
30 September
2020
£’000
32,000
–
32,000
22,000
10,000
32,000
The Company has an investment in PCF Bank Limited (the 'Bank'). The net asset value of the Bank at
30 September 2020 was £52,341,000 (30 September 2019 – £54,938,000). If the investment had been
sold at this valuation, any potential capital gains arising on the sale would have been exempt under the
substantial shareholdings’ legislation. If the disposal had given rise to a loss, the loss would not be an
allowable loss for tax purposes. There was no investment in the Bank during the year (30 September
2019 – £10,000,000).
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.
98
16 Office equipment, motor vehicles and right-of-use assets
Right-of-use assets
Assets held
under operating Office Motor Land and
leases equipment vehicles buildings equipment
Group £’000 £’000 £’000
£’000
£’000
Total
Office right-of-use
assets
Total
£’000 £’000
Cost
At 30 September 2019 – 835 90
Effect of the adoption of IFRS 16 – – –
At 1 October 2019 – 835 90
Additions during the year 655 730 –
Disposals during the year – (194) (90)
–
2,408
2,408
–
–
At 30 September 2020 655 1,371 –
2,408
Accumulated depreciation
At 30 September 2019 – 320 26
Effect of the adoption of IFRS 16 – – –
At 1 October 2019 – 444 26
Depreciation during the year 60 346 26
Disposals during the year – (187) (52)
At 30 September 2020 60 479 –
–
–
–
764
–
764
Net book value 595 892 –
1,644
–
23
23
–
–
23
–
–
–
10
–
10
13
–
925
2,431 2,431
2,431 3,356
1,385
(284)
–
–
2,431 4,457
–
–
346
–
–
470
774 1,206
(239)
–
774
1,313
1,657 3,144
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
Office
equipment
£’000
Motor
vehicles
£’000
Total
£’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
The majority of the office equipment is computer hardware, office furniture and fixtures.
Annual Report & Financial Statements 2020
99
Right-of-use assets
Land and
buildings
£’000
Office
equipment
£’000
Company
Cost
At 30 September 2019
Effect of the adoption of IFRS 16
At 1 October 2019
Additions during the year
Disposals during the year
At 30 September 2020
Accumulated depreciation
At 30 September 2019
Effect of the adoption of IFRS 16
At 1 October 2019
Depreciation during the year
Disposals during the year
At 30 September 2020
–
2,283
2,283
–
–
2,283
–
–
–
714
–
714
Total
£’000
–
2,306
2,306
–
–
2,306
–
–
–
724
–
724
1,582
–
23
23
–
–
23
–
–
–
10
–
10
13
Net book value
1,569
Future minimum lease rentals receivable under non-cancellable operating leases
Group
One year or within one year
One to two years
Two to three years
Three to four years
30 September
2020
£’000
30 September
2019
£’000
214
182
151
72
619
–
–
–
–
–
100
17 Goodwill and other intangible assets
Goodwill relates partly to the Group’s Consumer Finance Division which arises from the acquisition of a
subsidiary company, TMV Finance Limited (‘TMV’), acquired in November 2000, and the remainder for the
acquisition of Azule Limited on 5 November 2018.
Subsequently, a reorganisation resulted in the assets and business model of TMV being transferred to its
related companies in the Group, PCF Credit and PCF Bank.
The rationale for the 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 performance of the CFD division is 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 as it offers revenue synergies in a niche class of
business-critical assets with strong collateral characteristics and lending to better quality credit grade
customers.
In performing the annual impairment test, the Group assesses the economic performance of each acquisition
to assess whether the value of future discounted cashflows are in excess of what was paid for the acquisition
‘over and above’ the fair value of the assets and liabilities acquired. To assess this, the Board approved
profitability forecast has been used and discounted back to present value.
Both the CGU’s acquired are expected to continue to perform for the foreseeable future. However, the
forecast covers a five year period, and 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
whether to see 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 at 30 September 2020 has been determined based on a value
in use (‘VIU’) calculation using cash flow projections from financial budgets approved by the Board
covering a five-year period, and a terminal valuation based on the last year of the forecast period. The
projected cash flows have been updated to reflect the increased business over this current year 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 14.88% per annum over a five-year period and, for the
period beyond, a terminal growth rate of 1% is used, being the expected long-term average growth rate
for the Group within the economies in which it operates. It has been concluded that the value in use
exceeds the carrying 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 at 30 September 2020 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 of the forecast.
The projected cash flows have been updated to reflect the decreased business in this current year
which is aligned with recent demand impacted by COVID-19 and reduced future expected growth in
its products and services. The pre-tax discount rate applied to cash flow projections is 14.88% per annum
over a five year period and, for the period beyond, a terminal growth rate of 1% per annum is used,
being the expected long-term average growth rate for the Group. It has been concluded that the value
in use less the carrying value resulted in an impairment £1,750,000 (30 September 2019 – £nil), which
has been taken immediately to the income statement.
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 next forecasted year
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.
Annual Report & Financial Statements 2020
101
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.
Discount 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 (‘WACC’).
Free cash flows for the next five forecasted years − Both businesses acquired are expected to continue
to grow over the next five years.
Goodwill
Group
TMV Finance Limited acquisition
Azule Limited acquisition
Group
Cost and net book value
At 1 October
Additions
Impairment
At 30 September
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
397
750
1,147
397
2,500
2,897
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
2,897
–
(1,750)
1,147
397
2,500
–
2,897
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
Write-off - impairment loss on software
Software in development
At 30 September
Accumulated depreciation
At 1 October
Amortisation during the year
Write-off - impairment loss on software
At 30 September
Net book value at 30 September
Group
Net book value of combined goodwill
and other intangible assets
102
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
6,149
487
(88)
252
6,800
3,105
552
(37)
3,620
3,180
5,249
900
–
–
6,149
2,689
416
–
3,105
3,044
Year ended
30 September
2020
£’000
Year ended
30 September
2019
£’000
4,327
5,941
18 Deferred tax assets
Group
Company
30 September
2020
£’000
30 September
2019
£’000
30 September
2020
£’000
30 September
2019
£’000
Accelerated capital allowances
Decelerated capital allowances
Provisions
IFRS 9 COAP(1) adjustments
Share based payments
Corporate Bonds
Other temporary differences
At 1 October
Recognised in income statement
Adjustment in respect of
prior year timing difference
Adjustments to opening reserves - IFRS 9
On acquisition
Recognised in other comprehensive income
Recognised in equity
Other adjustments
–
1,248
507
41
23
(9)
–
1,810
1,105
595
104
–
–
(7)
(19)
32
(17)
904
–
–
–
–
218
1,105
1,185
(152)
36
103
(17)
2
(52)
–
At 30 September
1,810
1,105
(1) COAP – Change of Accounting Practice.
The standard rate of Corporation Tax is 19% (30 September 2019 – 19%).
The deferred tax asset has been measured at 19% (30 September 2019 –17%).
19 Due from related companies
The following outstanding balances are due from and to Group companies.
–
60
34
–
23
–
–
117
135
1
–
–
–
–
(19)
–
117
–
65
–
–
–
–
70
135
196
(8)
(1)
–
–
–
(52)
–
135
Due from Group companies
Due to Group companies
Company
30 September
2020
£’000
30 September
2019
£’000
8,759
5,242
6,927
3,239
These balances are unsecured, interest free and repayable on demand.
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 recorded.
20 Other assets
Prepayments
Other receivables
Group
Company
30 September
2020
£’000
30 September
2019
£’000
30 September
2020
£’000
30 September
2019
£’000
787
1,264
2,051
807
4,125
4,932
758
12
770
771
125
896
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 other receivables closely approximates to the carrying amount.
Annual Report & Financial Statements 2020
103
21 Due to banks
Group
Current
Secured loans and borrowings
Non-current
Secured loans and borrowings
30 September
2020
£’000
30 September
2019
£’000
208
16,644
62,412
62,620
27,768
44,412
Bank overdrafts
The Group had no bank overdraft facility at 30 September 2020 (30 September 2019 – £nil).
Interest bearing facilities
£208k block discounting facilities 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. At 30 September 2019, similar facilities of
£6.0 million were outstanding to Azule Limited and £4.4 million were outstanding to PCF Credit Limited,
with the latter having been fully repaid during the year.
£25.0 million term loan facility granted to PCF Bank by the Bank of England under the Term Funding Scheme
This facility has a rate linked to the Bank of England's Base Rate and has a maturity in February 2022.
The loan is secured by a charge over specified loans and receivables and the guarantee of the Company.
£37.4 million term loan facility granted to PCF Bank by the Bank of England under the Term Funding Scheme
with additional incentives for SMEs
This facility has a rate linked to the Bank of England's Base Rate and has a maturity between June 2024
and September 2024.
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 overnight 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. At 30 September 2020, this facility was undrawn and the facility will
terminate by 31 December 2021.
£25.0 million repo facility granted to PCF Bank by NatWest Markets plc
This facility when drawn as loans has fixed interest rates and maturity dates of up to 1 year. The facilities
are secured by bonds owned by the Company. At 30 September 2020, this facility was undrawn.
22 Due to customers
Group
Retail customers
Notice account
Term deposit
30 September
2020
£’000
30 September
2019
£’000
79,634
262,150
341,784
32,835
234,235
267,070
Included in amounts due to customers is accrued interest amounting to £2,102,000 (30 September 2019 –
£1,681,000) and £855,000 (30 September 2019 – £220,000) for term deposits and notice accounts
respectively.
104
23 Financing activity
The table below details changes in the Group’s liabilities arising from financing activities.
Note
21
24
Note
21
Group
Due to banks
Subordinated liabilities
Due to banks
24 Other borrowed funds
Subordinated debt
1 October
Azule
2019 acquisition
£’000
£’000
Funding
cash flows
£’000
Interest
cash flows
£’000
30 September
2020
£’000
44,412
–
44,412
–
–
–
18,196
7,000
25,196
12
126
138
62,620
7,126
69,746
1 October
Azule
2018 acquisition
£’000
£’000
Funding
cash flows
£’000
Interest
cash flows
£’000
30 September
2019
£’000
48,881
48,881
12,543
12,543
(17,025)
(17,025)
13
13
44,412
44,412
30 September
2020
£’000
30 September
2019
£’000
7,126
7,126
–
–
£7.0 million subordinated notes issued by PCF Bank Limited
At 30 September 2020 PCF Bank Limited had a £15 million subordinated note facility from British Business
Investments Limited (30 September 2019 – £15 million). The notes may be issued once per quarter in
tranches of between £1 million and £5 million, and each tranche has a fixed coupon of 8% per annum, a
final maturity 10 years from the date of issue and is callable by the issuer 5 years from the date of issue.
These notes meet the conditions for tier 2 capital and at 30 September 2020 £7 million of notes had
been issued (30 September 2019 – £nil).
25 Lease Liabilities
Group
At 1 October – effect of adoption of IFRS 16
Accretion of interest
Payments
At 30 September
Company
At 1 October – effect of adoption of IFRS 16
Accretion of interest
Payments
At 30 September
30 September
2020
£’000
30 September
2019
£’000
2,154
55
(605)
1,604
–
–
–
–
30 September
2020
£’000
30 September
2019
£’000
2,053
50
(578)
1,525
–
–
–
–
The year ended 30 September 2020 is the year of adoption of IFRS 16.
26 Other liabilities
Other payables
Accruals
Group
Company
30 September
2020
£’000
30 September
2019
£’000
30 September
2020
£’000
30 September
2019
£’000
3,979
1,467
5,446
228
6,020
6,248
1,382
844
2,226
412
1,280
1,692
Other liabilities include other payables and accruals that are not interest-bearing and are normally settled
on 30 day terms.
Annual Report & Financial Statements 2020
105
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
2020
‘000 units
30 September
2019
‘000 units
30 September
2020
£’000
30 September
2019
£’000
250,197
–
–
43
212,230
36,028
1,923
16
12,510
–
–
2
10,611
1,802
96
1
At 30 September
250,240
250,197
12,512
12,510
Share premium
At 1 October
Issuance of new shares during the year
At 30 September
Company
9 April 2020
Dividend reinvestment
Other reserves
30 September
2020
£’000
30 September
2019
£’000
17,619
6
17,625
Change
in share
capital at 5p
per share
£’000
8,527
9,092
17,619
Change
in share
premium
£’000
Number of
shares
Issue
price
43,499
5.0p
2
6
Fair value gain/(loss) for financial
instruments FVOCI (note 1.5.3)
Fair value movements in debt instruments at FVOCI
At 30 September
30 September
2020
£’000
30 September
2019
£’000
53
53
7
7
Own shares (Employee Share Option Plans)
Own shares represent 768,377 (30 September 2019 – 751,764) ordinary shares held by the Company's
Employees Benefits Trust 2003 (‘EBT’) to meet obligations under the Company’s Share Option Plans.
The shares are stated at cost and their market value at 30 September 2020 was £141,381 (30 September
2019 – £263,117).
Own Shares
At 1 October
Reclassification to cash
At 30 September
30 September
2020
£’000
30 September
2019
£’000
(355)
208
(147)
(355)
–
(355)
At 30 September 2019, all assets held within the Employee Benefits Trust were reported as Own Shares.
At 30 September 2020, additional supporting details have been provided to reclassify this balance
between Own Shares and Cash.
Dividend
No dividend is payable to shareholders in respect of the year ended 30 September 2020 (year ended
30 September 2019 – 0.4 pence per share and £1,000,787 payable).
106
28 Financial instruments
The Group uses financial instruments to invest its liquid asset buffer (Treasury Bills, multilateral development
bank bonds, covered bonds) to raise wholesale funding (Bank of England Term Funding Scheme, revolving
credit facility, block discounting facilities, subordinated debt facilities) and to manage interest rate risks
(interest rate swaps). 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 bond 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 debt 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 this instance, 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 principles
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.
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 maintain 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
Treasury function, which reports to the Chief Financial Officer.
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 2020
Cash and balances at central banks
Loans and advances to customers
Debt instruments at FVOCI
Other assets
Total financial assets
Due to banks
Due to customers
Derivative financial instruments
Subordinated liabilities
Other liabilities
Total financial liabilities
Amortised
cost
£’000
24,936
427,297
–
1,264
453,497
62,620
341,784
–
7,126
3,979
415,509
FVTPL
£’000
FVOCI
£’000
Total
£’000
–
–
–
–
–
–
–
80
–
–
80
–
–
9,095
–
9,095
–
–
–
–
–
–
24,936
427,297
9,095
1,264
462,592
62,620
341,784
80
7,126
3,979
415,589
Annual Report & Financial Statements 2020
107
Group
30 September 2019
Cash and balances at central banks
Loans and advances to customers
Debt instruments at FVOCI
Total financial assets
Due to banks
Due to customers
Derivative financial instruments
Total financial liabilities
Company
30 September 2020
Cash and balances at central banks
Due from Group companies
Other assets
Total financial assets
Due to Group companies
Other liabilities
Total financial liabilities
Company
30 September 2019
Cash and balances at central banks
Due from Group companies
Total financial assets
Due to Group companies
Total financial liabilities
Amortised
cost
£’000
7,371
338,503
–
345,874
44,412
267,070
–
311,482
Amortised
cost
£’000
278
8,759
12
9,049
5,242
1,382
6,624
FVTPL
£’000
FVOCI
£’000
Total
£’000
–
–
–
–
–
–
63
63
–
–
19,638
19,638
–
–
–
–
7,371
338,503
19,638
365,512
44,412
267,070
63
311,545
FVTPL
£’000
FVOCI
£’000
Total
£’000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Amortised
cost
£’000
FVTPL
£’000
FVOCI
£’000
123
6,927
7,050
3,239
3,239
–
–
–
–
–
–
–
–
–
–
278
8,759
12
9,049
5,242
1,382
6,624
Total
£’000
123
6,927
7,050
3,239
3,239
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 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 unobservable 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.
108
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 2020
Cash and balances at central banks
Loans and advances to customers
Due to banks
Subordinated Liabilities
Due to customers
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
Carrying
value
£’000
Level 1
£’000
Level 2
£’000
Level 3
£’000
Fair
value
£’000
24,936
427,297
24,936
–
452,233
24,936
62,620
7,126
341,784
62,620
–
–
411,530
62,620
–
–
–
–
–
–
–
–
24,936
427,297 485,880
427,297
510,816
–
7,126
341,784
62,620
8,289
341,784
348,910
412,693
Carrying
value
£’000
7,371
338,503
345,874
44,412
267,070
311,482
Level 1
£’000
Level 2
£’000
Level 3
£’000
Fair
value
£’000
7,371
–
7,371
44,412
–
44,412
–
–
–
–
–
–
–
338,503
7,371
376,343
338,503
383,714
–
44,412
267,070 267,070
267,070
311,482
For due to banks and due to customers, carrying value is assessed to approximate fair value.
The following table shows an analysis of financial instruments recorded at FVOCI by level of the fair value
hierarchy.
Group
Financial instruments at fair value through other
comprehensive income (‘FVOCI’) 30 September 2020
Level 1
£’000
Level 2
£’000
Level 3
£’000
Fair
value
£’000
Quoted debt instruments
9,095
–
–
9,095
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
Derivative financial instruments
30 September 2020
Derivative financial assets
Derivative financial liabilities
30 September 2019
Derivative financial assets
Derivative financial liabilities
Level 1
£’000
Level 2
£’000
Level 3
£’000
value Notional
£’000
£’000
Fair
–
–
–
–
–
(80)
–
(63)
–
–
–
–
–
–
(80)
15,770
–
–
(63)
10,000
Annual Report & Financial Statements 2020
109
As part of its asset and liability management, the Group uses derivatives for economic hedging purposes
in order to reduce its exposure to market risks. This is achieved by hedging specific financial instruments,
portfolios of fixed rate financial instruments and forecast transactions, as well as hedging of aggregate
financial position exposures. The Group does not apply hedge accounting.
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.
The fair value of derivative financial instruments included in the Group financial statements, together
with their notional amounts, is summarised as follows:
At 30 September 2020
Derivatives in economic relationships
Interest rate swaps
Total derivative financial instruments
At 30 September 2019
Derivatives in economic relationships
Interest rate swaps
Total derivative financial instruments
Carrying
value
assets
£’000
–
–
Carrying
value
assets
£’000
Carrying
value
liabilities
£’000
80
80
Carrying
value
liabilities
£’000
Notional
amount
£’000
15,770
15,770
Notional
amount
£’000
–
–
(63)
(63)
10,000
10,000
28.5 Impairment allowance for loans and advances to customers
The table below shows the credit quality and the gross carrying amount based on the Group’s internal
credit rating system and year end stage classification. The amounts presented how both gross loans and
advances to customers and net balance after impairment allowances.
Group
At 30 September 2020
Gross carrying amounts
Performing
High grade
Standard grade
Sub-standard grade
Non-performing
Individually impaired
Collectively impaired
Gross total
Allowance for impairment losses
Net totaI
Undrawn commitments
Group
At 1 October 2019 (Re-presented)*
Gross carrying amounts
Performing
High grade
Standard grade
Sub-standard grade
Non-performing
Individually impaired
Collectively impaired
Gross total
Allowance for impairment losses
Net total
Undrawn commitments
110
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
276,241
40,436
33,034
60,360
7,110
7,273
896 337,497
47,546
40,307
–
–
–
–
643
1,285
2,458
16,193
3,101
17,478
349,711
76,671
19,547 445,929
(3,179)
(3,300)
(12,153)
(18,632)
346,532
73,371
7,394 427,297
17,270
–
–
17,270
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
90,161
179,162
37,430
–
15,603
4,190
286
214
29
90,447
194,979
41,649
–
541
–
2,632
4,945
10,150
4,945
14,130
307,294
22,425
15,624 345,343
(1,576)
(1,458)
(3,806)
(6,840)
305,718
20,967
11,818 338,503
1,760
–
–
1,760
An analysis of changes in the gross carrying amount of loans and advances and the corresponding ECLs
is as follows:
Gross carrying amounts
At 1 October 2019*
New assets originated or purchased
Assets derecognised or matured,
and remeasurements
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Amounts written off
At 30 September 2020
Gross carrying amounts (Re-presented)
At 1 October 2018
New assets originated or purchased
Assets derecognised or matured,
and remeasurements*
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Amounts written off
At 30 September 2019
Stage 1
£’000
307,294
219,793
Stage 2
£’000
22,424
–
Stage 3
£’000
Total
£’000
15,625 345,343
219,793
–
(86,819)
4,266
(85,441)
(9,382)
–
(19,889)
(4,265)
85,441
(7,040)
–
(9,860)
(1)
–
16,422
(2,639)
(116,568)
–
–
–
(2,639)
349,711
76,671
19,547 445,929
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
195,580
238,564
18,550
105
10,183
45
224,313
238,714
(106,857)
2,294
(16,706)
(5,581)
–
(7,814)
(2,294)
16,706
(2,829)
–
(1,447)
–
–
8,410
(1,566)
(116,118)
–
–
–
(1,566)
307,294
22,424
15,625 345,343
*Comparatives for the recoverable amount of fees charged on credit impaired accounts have been re-presented from Allowance for
Impairment losses to Loans and advances to make the Loans and advances to customers note more relevant following a review of
the disclosure and accounting policies applied (please see note 1.9).
ECL allowance
At 1 October 2019*
New assets originated or purchased
Assets derecognised or matured,
and remeasurements
Impact on ECL of transfers
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Amounts written off
At 30 September 2020
ECL allowance
At 1 October 2018
New assets originated or purchased
Assets derecognised or matured,
and remeasurements*
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
1,576
2,276
1,458
–
3,806
–
566
(158)
224
(883)
(422)
–
23
1,714
(224)
883
(554)
–
5,966
4,044
–
–
976
(2,639)
Total
£’000
6,840
2,276
6,555
5,600
–
–
–
(2,639)
3,179
3,300
12,153
18,632
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
757
1,223
(339)
136
(64)
(25)
(112)
–
765
7
3,452
13
(72)
(136)
64
(221)
1,051
–
(1,088)
–
–
246
2,749
–
Total
£’000
4,974
1,243
(1,499)
–
–
–
3,688
–
1,576
1,458
3,806
6,840
*Comparatives for the recoverable amount of fees charged on credit impaired accounts have been re-presented from Allowance for
Impairment losses to Loans and advances to make the Loans and advances to customers note more relevant following a review of
the disclosure and accounting policies applied (please see note 1.9).
ECL transfers are movements to or from other stages.
The ECL on cash and balances at central bank, debt instruments at FVOCI, due from related companies,
undrawn facilities and other assets have been assessed as zero due to having no material credit risk
exposure.
Annual Report & Financial Statements 2020
111
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 RMF, 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, credit risk and operational risk.
29.1 Liquidity risk
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. 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. Any shortfalls are managed by the treasury department of the Group to
ensure the liquidity risk strategy is executed.
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
2020
£’000
30 September
2019
£’000
1.4
1.3
1.3
1.2
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 ratio of core customer notice and savings accounts,
together with term funding with a remaining term to maturity in excess of one year.
112
(b) Undiscounted contractual cash flows
Group
At 30 September 2020
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
24,936
16,678
–
–
–
14,054
–
1,264
–
–
24,936
50,089 343,419 102,367 526,607
9,114
1,264
9,114
–
–
–
–
–
–
Total undiscounted financial assets
41,614
15,318
50,089 352,533 102,367
561,921
Financial liabilities
Due to banks
Due to customers
Derivative financial instrument
Lease liabilities
Other liabilities
24
10,638
–
–
–
23
17,362
12
153
3,979
105
152,363
36
458
–
62,476
155,166
32
1,154
–
–
62,628
17,190 352,719
80
1,765
3,979
–
–
–
Total undiscounted financial liabilities
10,662
21,529
152,962 218,828
17,190
421,171
Surplus/(shortfall)
30,952
(6,211) (102,873) 133,505
85,177 140,750
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
Company
At 30 September 2020
Financial assets
Cash and balances at central banks
Due from Group companies
Other assets
Total undiscounted financial assets
Financial liabilities
Lease liabilities
Due to Group companies
Other liabilities
Total undiscounted financial liabilities
Surplus/(shortfall)
On
demand
£’000
Less
than 3
months
£’000
3 to 12
months
£’000
1 to 5
years
£’000
Over
5 years
£’000
Total
£’000
278
8,759
12
9,049
–
5,242
1,382
6,624
2,425
–
–
–
–
145
–
–
145
–
–
–
–
435
–
–
434
–
–
–
–
1,154
–
–
1,154
(145)
(434)
(1,154)
–
–
–
–
–
–
–
–
–
278
8,759
12
9,049
1,733
5,242
1,382
8,357
692
Annual Report & Financial Statements 2020
113
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
On
demand
£’000
Less
than 3
months
£’000
3 to 12
months
£’000
1 to 5
years
£’000
Over
5 years
£’000
Total
£’000
123
6,927
896
7,946
3,239
1,692
4,931
3,015
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
123
6,927
896
7,946
3,239
1,692
4,931
3,015
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 2020, the Group had total wholesale and
retail funding of £411.5 million (30 September 2019 – £311.5 million) that supported net loans and
advances of £427.3 million (30 September 2019 – £338.5 million). Moreover, at 30 September
2020 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.
(c) Analysis of encumbered and unencumbered assets
Below is the analysis of the Group’s encumbered and unencumbered assets that would be available
to obtain additional funding as collateral. For this purpose, encumbered assets are assets which
have been pledged as collateral (e.g. which are required to be separately disclosed under IFRS 7).
Unencumbered assets are the remaining assets that the Group owns.
Group
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
Total
Group
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
Total
Encumbered
Unencumbered
Pledged
as collateral
£’000
Other
£’000
Available
as collateral
£’000
Other
£’000
Total
£’000
–
82,765
9
20,417
–
103,182
–
–
–
–
–
–
–
9,095
9,095
213,023 29,830
45
733
325,618
778
13,161
60,132
7,191
–
40,769
60,132
287,049
46,161 436,392
Encumbered
Unencumbered
Pledged
as collateral
£’000
Other
£’000
Available
as collateral
£’000
Other
£’000
Total
£’000
9,083
48,437
572
17,537
–
75,629
–
–
–
–
–
–
10,555 –
19,638
186,899 43,012 278,348
1,322
621 129
18,564 10,427
12,305 –
46,528
12,305
228,944 53,568
358,141
114
29.2 Market risk - Interest rate risk
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.
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’ and ‘TFSME’) funding, variable rate retail notice accounts and fixed
rate wholesale funding. Interest rate sensitivity is managed using interest rate swaps as required.
Based on the exposure to interest rate risk, an increase in the Sterling Overnight Index Average rate
(‘SONIA’) by 0.5 percentage point for the whole financial year would have an unfavourable effect on
profits of £145,746 (30 September 2019 – favourable £21,024) and an unfavourable impact on capital of
£(118,054) (30 September 2019 – favourable £17,029).
29.3 Credit risk
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.
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. 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
The table below presents the Group’s maximum exposure to credit risk, before taking account of any
collateral and credit risk mitigation, arising from its on balance sheet financial instruments. For off balance
sheet instruments, the maximum exposure to credit risk represents the contractual nominal amounts.
Group
Company
30 September
2020
£’000
30 September
2019
£’000
30 September
2020
£’000
30 September
2019
£’000
Financial assets
Cash and balances at central banks
Cash and demand deposits
Loans and advances to customers(1)
Consumer lending (net)
Business lending (net)
Azule lending
Bridging finance
Due from Related companies
Debt instruments at FVOCI
Other assets(1)
Off-Balance Sheet
Undrawn facilities
24,936
7,371
164,933
180,143
22,089
60,132
–
9,095
1,264
128,854
176,680
20,021
12,948
–
19,638
4,932
278
–
–
–
–
8,759
–
12
469,592
370,444
9,049
123
–
–
–
–
6,927
–
896
7,946
17,270
1,760
–
–
(1) Segmental allocations were revised for the year ended 30 September 2020. Comparatives for the 30 September 2019 have been
re-presented in accordance with IFRS 8, paragraph 29.
In its normal course of business, the Group 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.
Annual Report & Financial Statements 2020
115
29.3.1 Forborne and modified loans
As mentioned in note 1.6.21, forbearance occurs when a customer is experiencing difficulty in meeting
their financial commitments and a concession is granted by providing them a temporary payment plan
based on their ability to meet the contractual obligations. The unprecedented COVID-19 global pandemic
has led to a significant increase in customers seeking COVID-19 related payment deferrals within the
Group’s lending portfolio. The Group has introduced a range of additional forbearance measures to
support its customers during this difficult period.
Additional support for customers impacted by COVID-19
We recognise that the impact of COVID-19 is a concern for our customers, and we have offered them
help and support in these challenging times by introducing several additional concession tools.
Concessions granted to customers are varied across the Group’s lending portfolio and in line with
regulatory guidance.
The concessions included the creation of payment deferrals (COVID-19 Deferral Plans provided six months
of assistance with all payment holidays ending by 31 July 2021 in line with the guidance issued by the
Financial Conduct Authority), which are a form of ‘breathing space’ without payment followed by a
payment plan, for customers of the Consumer Finance Division (‘CFD’), the Business Finance Division
(‘BFD’) and Azule. This period of flexibility was dependent on underlying mitigating factors and is reviewed
and approved by the Group’s Collections Department.
There will be no negative impact on the customer’s credit file as a result of these measures. However,
should additional assistance be required after the six months of assistance and if full payments were not
being maintained, a true reflection of the customer repayment history would once again start being
recorded with the credit refence agencies as the agreement would move into arrears under a payment
plan as with any non-COVID-19 related support.
The cure period of these forborne exposures are subject to expert judgement and careful consideration.
The approach varies depending on the relevant division and ranges from instant resumption of payments
when the period of concession ends (subject to confirmation of no adverse performance) to a six month
‘grace’ period applicable in relevant circumstances where payments are either initially deferred or part
payment accepted.
Forbearance analysis
At 30 September 2020, the gross carrying amount of exposures with forbearance measures was
£40.4 million (30 September 2019 – £nil). This relates to 1,711 agreements in forbearance which are
COVID-19 related, with temporary modifications to terms and conditions. At 30 September 2020,
there are no loans that have had a refinancing or permanent modification to terms and conditions.
As set out in note 1.5.3, a COVID-19 related concession does not in itself constitute a significant
increase in credit risk. See the table below for forbearance analysis.
29.3.2 Forborne and modified loans
The following tables provide a summary of the Group’s forborne assets. Accounting policies for
forbearance are described in note 1.6.21.
Gross carrying amount of forborne loans
Stage 1
Stage 2
Gross Performing Performing Performing
Carrying forborne
Amount loans
Group £’000 £’000
Total
forborne forborne
forborne
loans
£’000
loans
£’000
Stage 2
loans Forbearance
ratio
£’000
30 September 2020
Due from banks – –
Loans and advances
to customers
CFD 171,854 4,512
BFD 190,462 11,290
Azule 23,001 6,662
Bridging 60,612 –
Total loans and advances
to customers 445,929 22,464
–
–
–
–
1,664
13,634
2,223
–
68
197
166
–
6,244
25,121
9,051
–
3.63%
13.19%
39.35%
0.00%
17,521
431
40,416
9.06%
116
ECLs on forborne loans
Stage 2
Stage 1 Stage 1 Stage 2
Stage 3
Individual Collective Individual Collective Individual Collective
£’000
£’000 £’000 £’000
Stage 3
£’000
£’000
Total
£’000
30 September 2020
Due from banks
Loans and advances
to customers
CFD
BFD
Azule
Bridging
– – –
–
62 14 117
151 66 392
278 22 103
– – –
–
407
–
–
Total loans and advances
to customers
491 102 612
407
–
16
–
–
–
16
–
–
–
47
36
–
83
209
1,063
439
-
1,711
The Group had no forborne loans in the prior year.
29.3.3 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 29.3.4).
l An explanation of the Group’s internal grading system (note 29.3.5).
l How the Group defines, calculates and monitors the probability of default (PD), exposure at default
(EAD), and loss given default (LGD) (notes 29.3.5, 29.3.6 and 29.3.7 respectively).
l When the Group considers there has been a significant increase in credit risk of an exposure (note
29.3.8).
l The Group’s policy of segmenting financial assets where ECL is assessed on a collective basis (note:
29.3.8).
29.3.4 Definition of default
As per note 1.5.3, the definition of default for the purpose of determining ECLs has been aligned to the
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.
l It is becoming probable that the borrower will enter bankruptcy or liquidation, other forms of insolvency
or financial reorganisation.
29.3.5 The Group’s internal rating and PD estimation process
The Group operates an internal credit grading model and Probability of Default estimation process. The
Probability of Default 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.
The Group assesses its customers and rates them from AAA to D using an internal credit classification
model. Collateral is also considered when grouping credit grades together. 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 original probability of defaults 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.
Annual Report & Financial Statements 2020
117
Corporate lending (Business Finance Division)
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 considers
various historical, current and forward-looking information such as:
l Historical financial information.
l Publicly available information on the clients from external parties.
l 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 vary 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 Finance Division)
Consumer lending comprises of 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
1.37-2.15%
2.58-4.29%
2.70-4.23%
5.05-8.35%
3.72-7.18%
8.37-13.29%
9.14-16.35%
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%
2.57-3.58%
4.18-5.06%
5.06-6.98%
8.09-9.75%
7.02-9.95%
12.01-15.20%
9.26-13.06%
17.19-22.88%
29.3.6 Exposure at default (‘EAD’)
The exposure at default 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 twelve 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 to the multiple macroeconomic scenarios. The IFRS 9 PDs are then assigned to each
economic scenario based on the outcome of Group’s models.
29.3.7 Loss given default (‘LGD’)
The credit risk assessment is based on a standardised LGD assessment framework that results in a certain
LGD rate. These LGD rates consider 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.
118
29.3.8 Significant increase in credit risk (‘SICR’)
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 SICR since initial recognition. A SICR is if a single loan is over 30 days in
arrears or it is not in default but has had a significant increase in PD, in which case the loan will move from
Stage 1 to Stage 2. This parameter (i.e. the level deemed significant) is set at the multiple of the lifetime
PD at origination at which a group of accounts are in stage 2. The movement of these agreements changes
the provisions from what the ECL is in the next twelve months, to a lifetime ECL.
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 for CFD and 1.7 for BFD and Azule finance. Bridging finance does not have
a SICR threshold due to its short-term nature.
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 as indicated
in note 29.3.1. In certain cases, the Group may also consider that events explained in note 29.3.4 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.
Sensitivity analysis
Changes to the overall SICR thresholds can also impact staging, driving accounts into higher stages with
the resultant impact on the ECL allowance.
30 September
2020
£’000
30 September
2019
£’000
Increase in SICR by 20 basis points in the Business Finance portfolio
Increase in SICR by 20 basis points in the Consumer Finance portfolio
Increase in SICR by 20 basis points in the Azule Finance portfolio
Decrease in SICR by 20 basis points in the Business Finance portfolio
Decrease in SICR by 20 basis points in the Consumer Finance portfolio
Decrease in SICR by 20 basis points in the Azule Finance portfolio
(10)
(26)
(1)
10
131
1
(2)
(101)
(1)
3
20
1
30 Commitments, contingent liabilities, and contingent assets
At 30 September 2020, the Group had undrawn commitments to lend to customers of £17.27 million
(2019 – £1.76 million).
The Group's subsidiary, PCF Bank Limited, 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.
From time to time the Group and the Bank receives legal claims relating to its business activities. The
total value of claims at 30 September 2020, assessed to have a greater than remote likelihood of
economic outflow is £135k. PCF Bank is robustly defending such matters.
The Group has begun to seek recovery of remuneration related payments and other consequential losses
suffered in relation to the events that led to the delay of this Annual Report & Financial Statements and
our shares being suspended from trading on AIM. The amount of any recoveries cannot currently be
quantified.
31 Related parties
The non-executive directors held a total of £167,932 in savings accounts in the Group at 30 September
2020 (30 September 2019 – £186,756). Directors' remuneration is disclosed in note 8.
In addition, there were other material related party transactions related to management fee recharges
of £120,000 and £13,680,000 to PCF Credit Limited and PCF Bank Limited respectively by PCF Group
plc for the year ended 30 September 2020.
Key management personnel of the Group are the Board Directors.
Further details of balances with other Group companies are given in note 19 Due from related companies.
Annual Report & Financial Statements 2020
119
32 Non-adjusting events after the balance sheet date
As the COVID-19 pandemic evolves, the UK Government is implementing additional measures to
address the resulting public health issues and the economic impact. The Group continues to monitor the
COVID-19 pandemic situation and will take further action as necessary in response to economic disruption.
There may be further adverse effects on revenue and impairments depending on severity and duration
of nationwide lockdowns.
Along with COVID-19 economic impacts, there remains the continued uncertainty of the implications for
the UK economy by reason of leaving the EU. Although a trade deal was agreed on 24 December 2020,
the Group continues to monitor Brexit and the potential economic impact on credit risk.
On 30 September 2021 the Group sold £12.4 million of gross credit impaired loans (£1.7 million net of
ECL impairments) for £2.8 million realising a profit on disposal of £1.1million.
33 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 Prudential Regulation
Authority (‘PRA’). The Group calculates the capital resources and requirements using the Basel 3
framework, as implemented in the European Union through the Capital Requirements Regulation (‘CRR’)
and the Capital Requirements Directive (‘CRD’) IV, as amended by the CRR II and CRD V. Following the
end of the Brexit transitional period, the EU rules (including binding technical standards) have been
on-shored and now form part of the domestic law in the UK virtue of the European Union (Withdrawal)
Act 2018. The Group has complied in full with all of 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 complies
with externally imposed capital requirements and maintains strong credit ratings and appropriate 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 capital position. Further details of this are provided in the Chief
Executive’s Statement.
The 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 an appropriate 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. The Group continues to maintain capital adequacy ratios above minimum regulatory
requirements.
Further details regarding the Group’s regulatory reporting processes, and the issues and misstatements
relating to those processes, are set out within the Audit & Risk Committee Report on page 41.
34 Ultimate Parent
The Group’s ultimate parent is Somers Limited, a Bermuda exempted company incorporated with limited
liability, whose shares are traded on the Bermuda Stock Exchange.
120
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.