PCF Group plc
Annual Report &
Financial Statements
2021
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
Chair’s Statement
Chief Executive Officer’s review
Review of the Group’s Performance
Risk Overview
Stakeholder Engagement Report
Sustainability Report
Corporate Governance Report
Nomination Committee Report
Remuneration Committee Report
Board Audit 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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3
5
8
12
18
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24
25
36
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42
47
49
54
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74
75
76
77
Company Information
PCF Group plc
Directors
Company Secretary
Simon Moore Independent non-executive Chair1 (appointed 9 January 2022)
Mark Brown Non-executive
Christine Higgins Independent non-executive
David Morgan Non-executive
Caroline Richardson Chief Financial Officer2 (appointed 5 October 2021)
Mark Sismey-Durrant Independent non-executive and Senior Independent
Director1 (appointed 9 January 2022)
Garry Stran Chief Executive Officer2 (appointed 5 October 2021)
David Titmuss Independent non-executive
Directors who held office during the year and resigned during or after the
year end
Tim Franklin Independent non-executive Chair (resigned 31 January 2022)
Marian Martin Independent non-executive (resigned 23 December 2021)
Scott Maybury Chief Executive Officer (resigned 21 May 2021)
Robert Murray Managing Director (resigned 26 March 2021)
Robert Murray (resigned 31 March 2021)
LDC Nominee Secretary Limited (appointed 31 March 2021 and resigned
31 March 2022)
Jonathan Dolbear (appointed 1 April 2022)
Registered Office
Pinners Hall
105-108 Old Broad Street
London EC2N 1ER
Registered Number
02863246
Auditors
MHA MacIntyre Hudson LLP (appointed 23 December 2021)
2 London Wall Place
Barbican
London EC2Y 5AU
Nominated Adviser & Broker
(NOMAD)
Joint Broker
Registrars
Media & Investor Relations
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
1 Regulatory approval received April 2022.
2 Regulatory approvals for Chief Executive Officer and Chief Financial Officer roles received September 2021 and July 2021 respectively.
With effect from 5 May 2022, Garry Stran was appointed Chief Executive Officer, having previously held the office as interim.
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 and the 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 at Pinners Hall, 105-108 Old Broad Street, London EC2N 1ER.
2
Strategic Report
Business and financial highlights for the 12 months to 30 September 2021
Business and financial performance significantly impacted by remediation of legacy governance
and control issues (Legacy issues3)
l Statutory loss before tax of £(3.1) million (2020: loss of £5.1 million).4
l Adjusted profit before tax5 of £0.7 million (2020: loss of £3.3 million).4
l Net operating income increased by 1% to £26.8 million (2020: £26.5 million).4
l Net interest margin5 reduced to 6.6% (2020: 6.8%)4 reflecting the focus on higher quality lending.
l Net loans and advances decreased by 15% to £364 million (2020: £427 million)4, although average gross loan
balances increased by 4%, which reduced the impact on net interest income.
l Staff and operating expenses increased 56% to £21.2 million (2020: £13.6 million), due to increased headcount
and professional services costs, which included £3.6 million of expenses related to the remediation of legacy
issues.
l Cost: income ratio5 increased to 85.8% (2020: 58.1%).
l Credit impairment charges reduced to £6.7 million (2020: £14.4 million) mainly due to the non-recurrence of a
£6 million provision increase on defaulted receivables in 2020, and also reflecting lower COVID-19 related
provisions and a smaller overall loan portfolio.
l New loan origination totalled £187 million (2020: £272 million) and net loans and advances to customers
reduced to £364 million (2020: £427 million)4. Included within new loan origination is Azule Limited brokered
lending6 of £30 million (2020: £26 million).
l Retail deposits of £327 million remained stable in the period (2020: £342 million).4
l Statutory return on average equity5 of (6.1)% (2020: (11.4)%).4
l Adjusted return on average equity5 of 0.7% (2020: (8.2)%).4
l Loss per share of (1.2) pence (2020: (2.6) pence).4
Balance sheet strength underpinned by prudent capital and liquidity management
l Common equity tier 1 ratio8 of 15.6% (2020: 14.7%).4
l Total capital ratio8 of 17.5% (2020: 16.4%).4
l Leverage ratio7, 8 of 11.1% (2020: 11.1%).4
l Liquidity coverage ratio of 904% (2020: 673%).
l Net stable funding ratio of 159% (2020: 145%).
3 Refer to the 2020 Annual Report and Financial Statements for more detail of ‘legacy issues’. Also, refer to ‘Remediation Activities’
section on page 10 for a brief overview.
4 The prior period balances have been restated or re-presented for the financial year. Refer to Note 1.7 for further details.
5 Refer to section non-IFRS performance measures on page 17 for further details of the definition of this non-IFRS performance measure.
6 Azule brokered lending is not included on our balance sheet, but generates commission income in our profit and loss statement.
7 Leverage ratio – using a transitional definition of Tier 1 capital.
8 Ratios are disclosed on a transition arrangement basis. Refer to page 61 for regulatory capital and leverage ratios presented on a fully
loaded basis.
Annual Report & Financial Statements 2021
3
4
Strategic Report (cont’d)
Chair’s Statement
for the year ended 30 September 2021
Overview
My first statement as Chair comes as the UK and the
world emerge from the extraordinary times brought
about by the COVID-19 pandemic, which has impacted
all our lives.
Though the 2021 financial year was a difficult one for the
PCF Group, with significant events and subsequent
change taking place in the business, I am pleased to
report that since the end of this reporting period, amidst
a challenging social and economic backdrop, the Group
has achieved major milestones in its recovery
programme.
The Group’s financial performance reflects the
challenges that were faced. While losses fell
substantially when compared with 2020, we generated
a loss before tax of £(3.1) million, which reflects an
increase in expenses incurred from the Group’s focus on
delivering its remediation activities and the impact of a
lower net interest margin.
The loan book reduced by 15% as a result of prudent
management of origination levels to ensure the Group
maintained an appropriate level of capital, above the
regulatory requirement, throughout the period.
Implementation of corporate governance,
control and cultural change
In the Annual Report & Financial Statements 2020, the
circumstances that led to the suspension of trading in the
PCF Group’s shares in May 2021 were set out in detail.
I am now pleased to report the following developments.
During the financial year a significant amount of time
was spent remediating legacy governance and control
issues. These control improvements have continued, with
good progress on the financial control framework, and
the completion of the core finance remediation activities.
We have continued to develop the Group’s Risk
Management Framework (RMF) and control
environment, reflecting the recommendations of the
external review of the RMF during the year. Since the
year end this has included the hiring of colleagues to fill
key Second Line of defence roles, enhancement of the
Group’s stress-testing and credit analytics capabilities,
and redevelopment of the Group’s IFRS 9 and credit risk
models. Further detail on this work is set out in the Board
Risk Committee report on pages 47 to 48.
During the reporting year, PCF Group appointed Garry
Stran as the interim Chief Executive Officer and Caroline
Richardson as Chief Financial Officer, both critical
appointments to ensure the Group has a suitably
experienced management team. These were followed by
new hires in the key roles of Chief Risk Officer, Chief
Operating Officer, General Counsel, and Chief of Staff.
Culture
Culture is at the heart of PCF Group’s change; we believe
in doing the right thing, in the right way for our
customers, colleagues, owners and all other stakeholders.
This is a bank where ideas are actively sought and
welcomed from everyone. Every member of the team
can bring fresh thinking and new observations, which
may be used to enhance the changes in control and
governance within the Group that are well underway. To
be effective now and into the future, our change will be
underpinned by a robust and positive culture.
In September 2021, the Board approved a new mission,
purpose and values for the Group, which outline ‘our risk
culture’, an approach that makes risk everyone’s
responsibility. These were developed by the new Executive
Team in consultation with the Culture Working Group,
which comprises colleagues from across the business.
Taking on board the findings from the legacy issues, the
Board instigated a cultural change programme, focusing
on understanding personal responsibility for risk, active
listening and speaking up. 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.
We are a simple business and our new purpose and
mission reflect this:
Our purpose
To create value for our stakeholders in a sustainable way.
Our mission
To be the go-to provider in our chosen markets and
segments, offering great value products and outstanding
service, while acting with integrity and sustainability in
everything we do.
Our values
Our T.R.U.S.T. values reflect the standards we expect of
all our colleagues and are fully incorporated into our
reinvigorated performance management process.
Our risk culture statement
Everyone at PCF manages risk and takes decisions in the
best interests of our stakeholders. We proactively raise
awareness and take personal responsibility for managing
risk, speaking up, and doing the right thing.
Annual Report & Financial Statements 2021
5
Strategic Report (cont’d)
Chair’s Statement
for the year ended 30 September 2021
Summary
It is in learning the lessons of the past, together, that we
will ensure our success in the future. We have a resilient
and able group of colleagues who have worked tirelessly
over these difficult times to ensure the future success of
PCF. It is through them that our new culture is being
embedded, the progress of which is monitored at every
Board meeting.
Balance sheet strength and financial
performance
We provide a detailed analysis of the financial
performance of the Group on pages 12 to 13. In addition, I
wanted to take a moment to share some of my own key
observations.
The cost of implementing the remediation programme
and change across the Bank has had a significant impact
on profitability and loan growth for the 2021 financial
year. This has meant recruiting experienced staff into our
control and finance functions, and using the services of
external specialists to support the remediation
programme.
Additionally, the Group has prudently managed its loan
origination levels to ensure it maintained sufficient levels
of capital and liquidity throughout the period. It is during
times of heightened risk that suitable levels of capital and
liquidity are particularly important for protecting the
overall financial health of the Group. To this end, the total
capital ratio at 30 September 2021 was 17.5% and the
liquidity coverage ratio was 904%.
As a result of the management of loan origination levels,
the net loan book reduced to £364 million (2020: £427
million). Furthermore, the Group’s net interest margin
has seen a reduction, particularly as a result of a high
concentration of new loans in our top four credit grades.
These factors have contributed to an overall statutory
loss before tax of £(3.1) million.
Events since 30 September 2021
To strengthen the Board further, in addition to my
appointment, PCF Group has also appointed Mark
Sismey-Durrant to the role of senior independent
director. A search is underway for the replacement of
Marian Martin, Chair of Board Risk Committee, who
resigned from the Board on 23 December 2021.
The progress made on the finance remediation
resulted in a comprehensive reworking of the Financial
Position and Prospects Procedures (FPPP), publication
of our March 2021 interim financial statements and the
lifting of the share trading suspension, which was
announced on 25 January 2022. Regrettably, the
historically overdue reporting has caused an
unavoidable delay in the publication of this Annual
Report & Financial Statements 2021, which has led to
the shares being suspended from trading on
Alternative Investment Market (AIM) again on 1 April
2022. We anticipate that this suspension will be
removed upon the publication of this Annual Report &
Financial Statements 2021. Following all the work we
have done during the year in strengthening our control
environment and finance department, we will resume
to a more normal reporting cycle in conformity with
our listed reporting requirements.
At the same date of publishing this report we have also
issued a RNS and the context to this is: The combined
impact of: (i) the significant remediation costs
increasing our cost base; (ii) the reduced margin of our
loan book as a result of COVID-19 related decisions to
restrict business to higher quality lending (with the
resulting lower yield impacting on net interest margin);
and (iii) the capital required to support a growing
balance sheet, has resulted in projected regulatory
capital constraints which in turn limits the volume of
new lending we can originate. Limiting our lending
volumes is not a satisfactory position and prevents us
from generating sufficient profits to grow capital
organically. As a result of all of these factors we have
updated our short-term plan, which has led to revisions
on certain key accounting judgments9 and additional
losses, that have further impacted our full year loss and
capital position. Therefore, we have decided to
accelerate an element of our capital raising, by
requesting a further investment in the Company from
our majority shareholder Somers Limited of circa £4
million10 over the next two months; at the same time,
we are investigating our strategic opportunities
including business combinations, with the Group having
received an approach and entered into discussions with
one party on these matters, as set out in the
aforementioned RNS. This decision was taken, at a time
when our shares were suspended from trading on AIM,
acting in the best interests of all of our stakeholders
and with the anticipation of the AIM suspension being
lifted on the publication of this report.
9 See Board Audit Committee report for further details of
changes in key accounting judgements relating to impairment
of intangible assets impacting on our results for 2021 and 2020.
10 An open offer to allow all shareholders to participate is
expected to follow in due course.
Strategic vision
In the months since I joined the Group in January 2022,
I have worked closely with the Executive Team to define
the Group’s strategic vision. In my role as Chair, I will
ensure that the Board sets an appropriate strategy which
the Executive Team will deliver in a way that is
consistent with the values and culture of the Bank, and
the interests of all stakeholders. This work will consider
all strategic opportunities as set out above.
The work required to complete the key restorative
actions has been the primary focus of the Board and
Executive Team, consuming a significant amount of their
time. We are now able to look forward once again.
With a number of key milestones achieved and strong
progress made against our remediation and
enhancement objectives, the Board and Executive Team
can once again begin to focus on driving increased levels
of automation and exploring product development to
diversify and develop our franchise, alongside reviewing
strategic opportunities as set out above. Together we
are supporting a strategy centred around an enhanced,
more robust Risk Management Framework underpinned
by a data-driven, automated and digitalised approach to
delivering products and services to our customers.
6
Achieving these strategic objectives will allow us to
maximise the value we create, by adopting a modern
approach to leveraging the Group’s core competencies
of originating and servicing loans, whether as part of a
standalone group or part of a business combination
should we follow that route.
You can read more about the Group’s strategic priorities
in the Chief Executive Officer’s review on pages 8 to 11.
Whilst challenges remain, PCF Group has achieved many
things over its 28-year history, and this period marks the
beginning of a new chapter, one in which I am delighted
to be involved.
I am confident that we have the right team in place, and I
look forward to working with my colleagues at all levels
within PCF Group, and with our stakeholders, to create a
modern, dynamic and differentiated business that can
leverage its historical expertise and experience through a
robust platform for growth..
Simon Moore
Chair
31 May 2022
Annual Report & Financial Statements 2021
7
8
Strategic Report (cont’d)
Chief Executive Officer’s review
for the year ended 30 September 2021
My statement for this financial year comes only five
months after we shared our Annual Report & Financial
Statements 2020. Our journey towards a return to a
normal reporting timeline continues with the publication
of our March 2022 Interim Results scheduled for June
2022. Whilst only five months have passed, there has
been considerable geopolitical change across the world
feeding into the macroeconomic backdrop which
impacts on our business. Overshadowing this, has been
the human cost of recent events which brings a sense of
perspective to all that we do.
Once again, I apologise on behalf of the Board for the
legacy issues and the impact of this on shareholders.
I would like to convey my thanks to customers and
shareholders for their continued patience, and to my
colleagues at PCF Group along with our external
partners for their continued support.
The 12 months to September 2021 proved a difficult
and challenging period for both people and businesses
in the UK due to the continuing social and economic
impacts of the COVID-19 pandemic. As we emerge
from this time of uncertainty into another, there will be
new challenges for our customers. Inflation has risen
substantially above the government’s long-term goal
and the geopolitical situation compounds this situation.
As a result, there will almost certainly be further
increases in interest rates as the Bank of England
attempts to bring inflation under control. Against this
backdrop, we will continue to support our customers,
some of whom may experience payment difficulties,
whilst continuing to offer good value products.
In his statement on pages 5 to 7, our new Chair, Simon
Moore, discussed the improvements to the Group’s
governance and culture, and I will further expand on
our strategic vision and priorities below. Before that, I
would like to share some key points about our financial
performance for the year.
Summary of the Group’s performance
The Group’s financial performance for the period
reflected the challenges of both the external environment
and the significant events and change that occurred
within the Group. At a headline level, the Group generated
a statutory loss before tax of £(3.1) million.
This loss was driven by a 56% increase in staff and
operating expenses as a result of our remediation activity
in respect of legacy issues and the need to invest in the
operating model of the business which drove increased
staffing and professional services costs.
Following a reassessment of goodwill, the Group
recognised an additional £1.1 million impairment, writing
off the balance to nil. This was partially offset by £0.9
million profit on the sale of credit-impaired loans.
Furthermore, the Group’s net interest income was 1%
higher than prior year, as increased average loan balances
broadly offset the reduction in net interest margin. The net
interest margin reduced to 6.6% (2020: 6.8%), primarily as
a result of the decision at the outset of the COVID-19
pandemic to originate lending in our top four credit
grades. This change was designed to protect the Group
from the potential effects of the economic downturn on
arrears and defaults. This has proven successful, however
it has had a detrimental impact on margin due to the lower
rates associated with these assets, and the run-off of pre-
pandemic higher yielding loans.
The Group has since reverted to a more balanced risk
profile for new business to allow us to extract higher margins,
which we expect to result in an improvement in overall net
interest margin over time. Moreover, we expect that we will
have further opportunities to increase margin compared to
the Group’s historical experience, as our improved pricing
for risk capability is complemented by the enhancements
made to our arrears management processes.
Whilst the average gross loan book over the course of
2021 was 4% up on the 2020 average, we saw a material
reduction over the second half of the year as we
prudently managed loan originations to ensure we
maintained an appropriate level of capital. Net loans and
advances to customers fell to £364 million (2020: £427
million) as a result.
The credit impairment charge for the year reduced to
£6.7 million, mainly due to the non-recurrence of a
£6 million provision increase on defaulted receivables in
2020, but also lower COVID-19 related provisions and the
overall reduction in the Group’s loan portfolio.
On an adjusted basis11, the profit before tax for the year
was £0.7 million, compared with a loss of £(3.3) million in
2020 reflecting the above factors.
On a statutory basis, the loss before tax for the year was
£(3.1) million, compared with a loss of £(5.1) million in 2020.
As a result of our approach to capital management and
loan originations, our total capital ratio remained
consistently in excess of regulatory requirements and on
30 September 2021 was 17.5% (2020: 16.4%). As we
move through the 2022 financial year, capital will be
impacted by elevated operating expenses, and the effect
on the Group’s net interest margin, reflecting the
decision to focus on higher quality lending at the start of
the COVID-19 pandemic, and the run-off of pre-pandemic
higher yielding loans. Our prudent management of
origination levels and capital has continued, and we
expect new originations in 2022 to be broadly similar to
2021, though we expect the second half of the year to be
stronger than the first half as we deploy capital released
through redemptions and focus on establishing
momentum in our new business opportunities.
The continuation of losses is unsatisfactory; however, it
is also unavoidable as we seek to establish a firm
foundation for future growth. I reiterate that we are
committed to doing everything possible to position the
Group to exploit the undoubted opportunities that exist
in our chosen markets to deliver strong and sustainable
returns for shareholders. To achieve this aim, it has
been imperative to invest in the business for the future
whilst at the same time addressing our legacy issues.
Further details of the performance by business segment
and our regulatory capital position is set out below in
the ‘Review of the Group’s Performance’ section.
11 See Review of the Group’s Performance for details of adjustments.
Annual Report & Financial Statements 2021
9
Strategic Report (cont’d)
Chief Executive Officer’s review
for the year ended 30 September 2021
Remediation activities
I updated shareholders earlier in the year of the
actions we have taken to improve our core finance
processes which resulted in a comprehensive refresh
to the Group’s FPPP memorandum, a major milestone
in the Group’s recovery programme. The further
control improvements undertaken in Finance together
with a reassessment of the carrying value of intangible
assets have resulted in restatements which are set out
in detail in Note 1.7. It is disappointing that we still
have legacy adjustments from prior periods though
also reassuring, with the embedding of our Risk
Management, and development of the Financial
Control Frameworks, additional resourcing, and with
our new auditors in place, that we can now have firmer
finance foundations for the future.
We have also commenced an extensive cultural
improvement programme to ensure our colleagues feel
comfortable and empowered to speak up and
challenge decisions should they have concerns. In many
ways this reluctance to challenge was a key driver of
many of the issues that we have faced, and the
significant effort put into cultural change is intended to
ensure that there is never a repeat of these events.
In addition, longer-term transformation and
enhancement programmes have been mobilised.
These will embed the enhanced comprehensive Risk
Management Framework across the Group, delivering
further finance transformation that is focused on
controls and more effective utilisation of data. They
will also include a continuation of the investment in
our IT system, to develop a modern digital operating
system that works on the principle of data driven
strategies delivered through automated processes and
decision making.
Progress against 2021 strategic objectives
In my statement in the Annual Report & Financial
Statements 2020, I outlined that our 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.
Progress against our strategic initiatives has been
impacted by the amount of management time and focus
that has been directed to the legacy issues and their
remediation. Nevertheless, we have remained focused on
managing the quality of our lending and have continued
to invest in our IT infrastructure.
I am very encouraged that we have continued to make
progress against many of the initiatives that we launched
in 2020, in particular the work to improve the levels of
automation and self-service. In the period up to the
publication of this report, our successes include:
l Completion of an automated collections process and
a customer self-service platform on the Bank’s
website, and an increased proportion of automated
affordability assessments.
l Revised strategies for the management of our
accounts in arrears including the introduction of a
strategy for the sale of non-performing loans, thus
enabling certainty in respect of loss rates and the
effective use of capital and operating resources.
l Investment in further developing complaint systems
and processes with a focus on root cause analysis to
drive improvements and further enhance the
customer’s experience.
l Achieving Platinum in the ‘Feefo’ Trusted Service
Awards, for our services to savings customers.
l Introduction of data science into the business
through the establishment of operational data teams.
l Enabled insights to develop and execute against our
aim to be a totally data-driven business in respect of
decision making.
l Commencement of diversification of our Azule
subsidiary into general brokerage to leverage their
skill set and market position whilst not detracting
from their specialist positioning in the Broadcast and
Media sector.
l Enhanced performance management and appraisal
processes for our colleagues, supporting the change
in culture to one of transparency, speaking up, and
taking responsibility for risk management at a
personal level. This is the first step on our journey to
transition to a group of colleagues operating as a
high performing collective where personal
responsibility, empowerment and accountability is
embedded in everything we do.
These successes are an encouraging start on our journey
towards achieving our strategic vision.
Journey to ‘remarkable’ – the Group’s
strategic vision
Internally, we have been using the term ‘repair to
remarkable’ to define our strategic journey. With good
progress made on the key remediation activities, and
the improvements to culture, governance and controls
and technology, more of our time and effort is now
focused on the transformation and enhancements
required to become ‘remarkable’.
I define ‘remarkable’ as a business which has the
following characteristics:
l A great place for great people to work.
l A brand that is trusted as a good corporate citizen,
operating in a compliant and sustainable manner that
does the right things and a culture which reflects this.
l Has a zero marginal cost operating model.
l Is a data-driven business with customers at the heart
of it.
l Has human interventions in processes only where it
demonstrably adds value.
l Has strong product and market diversification.
l Has certainty over recurring revenues.
l Is financially and morally sound.
We are striving to create a business that has all these
characteristics. To achieve this, our major focus areas
for 2022 are:
l A continued focus on strong and prudent capital
management that will be flexible to adapt to a range
of outcomes.
l To support a growing business, we will look to
execute capital raising or other strategic
opportunities as outlined in the Chair’s Statement, all
in the best interests of our stakeholders.
l Completion of our remediation and key enhancement
activities by the end of 2023.
l Continually improving customer proposition focused
on speed of decisioning, ‘no fuss’ processes and
excellent service.
10
l Continued investment in the IT infrastructure,
including a significant focus on data engineering and
implementing further opportunities for the use of
cloud data.
l Embedding of our new culture in the business and in
all stages of our colleague’s development within the
Group.
It has been a challenging year, but the quality of my
colleagues and their dedication to dealing with the
challenges we have faced has been inspirational. Against
the most difficult of backdrops, they have been
magnificent, and I look forward to delivering the next
phase in our strategic journey with them.
l Further development of our new performance
management system for colleagues supporting our
revised risk culture and a clear alignment of
performance to remuneration.
G G Stran
Chief Executive Officer
31 May 2022
l The development of our strategy to create a
diversified range of distribution channels and new
products.
I look forward to sharing a progress update on these
initiatives in future reporting periods.
Outlook
Forward-looking guidance in respect of the 2022
financial year:
l Remediation related costs in 2022 are expected to be
at a similar level to 2021.
l The Group is actively exploring capital raise and
strategic opportunities (as set out in the Chair’s
Statement) that will allow us to accelerate our
lending aspirations, though we will continue to
carefully manage origination levels in the near-term
as part of our capital management strategy.
l New origination levels are expected to be higher in
the second half of the year compared with the first
half, and broadly similar for 2022 compared with
2021.
l The Group’s margin will continue to see compression
in the near-term as a result of the concentration of
new lending in the top four credit grades during the
COVID-19 pandemic. As we return to a normal risk
appetite, margin will improve.
l The combination of these factors will give rise to a
loss for the year which is anticipated to be
significantly in excess of the loss for period ending
30 September 2021.
In driving the business forward, it is important to
acknowledge the following challenges: Whilst we have
made substantial progress in our remediation journey,
the scope of the remediation required to meet the
standards of a regulated business is significant in terms
of time, cost and effort. In limiting the volume of new
lending due to capital constraints (as explained in the
Chair’s Statement), we also limit our ability to generate
operating income and profits to provide the growth
capital necessary to increase the size of our balance
sheet to exploit economies of scale. The Board and
management remain confident of the Group’s potential
to leverage its core strengths in origination and servicing
of loans to generate value for shareholders but subject to
the ability to generate or obtain capital to support growth.
Annual Report & Financial Statements 2021
11
Strategic Report (cont’d)
Review of the Group’s performance
Year ended
30 September
2021
£’000
Year ended
30 September
2020*
£’000
Change
%
Net interest income
Net fee and commission income
Gain/(loss) on derivative
Net operating income
Staff and operating expenses
Depreciation and amortisation
Net profit on derecognition of financial assets12
Impairment on goodwill
Impairment on software and office equipment
26,253
119
378
26,750
(21,189)
(1,707)
939
(1,147)
(68)
Total operating expenses excluding credit impairment charges
(23,172)
Credit impairment charge
Statutory loss before tax
Income tax credit/(charge)
Statutory loss after tax
Memo
Deduct profit on derecognition of financial assets
Add back remediation related expenses
Add back impairment on goodwill
Adjusted profit/(loss) before tax
(6,677)
(3,099)
38
(3,061)
(939)
3,608
1,147
717
25,990
520
(55)
26,455
(13,564)
(1,758)
–
(1,750)
(51)
(17,123)
(14,431)
(5,099)
(1,198)
(6,297)
–
–
1,750
(3,349)
1
–
–
1
(56)
(3)
–
–
–
(35)
54
39
103
51
–
–
–
–
The Group manages its operational performance through a number of financial key performance indicators.
These are stated below with the comparative key performance indicators for 2020 adjusted to reflect the
prior period restatement.
Key metrics
Net loans and advances to customers
Customer deposits
Net Interest Margin (NIM)13 (%)
Cost: income ratio13 (%)
Impairment charge as % of average gross loans13 (%)
Statutory return on equity13 (%)
Loss per share (pence)
363,992
327,166
6.6
85.8
1.6
(6.1)
(1.2)
427,003
342,046
6.8
58.1
3.7
(11.4)
(2.6)
(15)
(4)
(0.2) ppt
(27.7) ppt
2.1 ppt
5.3 ppt
1.4 pence
* The restatement of prior period errors are set out in Note 1.7 to the accounts.
12 Derecognition of financial assets refers to the sale of credit-impaired loans.
13 Refer to section Non-IFRS performance measures on page 17 for further details of the definition of this non-IFRS performance measures.
In the 12 months to 30 September 2021, the Group
reported a statutory loss before tax of £(3.1) million
which reflects a challenging period both in terms of the
external operating environment and the significant events
and change that have taken place within the Group.
Net operating income of £26.8 million was 1% higher
than for the same period in 2020, which in the context
of the challenging external environment and our capital
management actions, is a good performance. Whilst net
loans and advances to customers reduced by 15% from
September 2020, over the course of the year, average
gross loans were 4% higher than for the same period in
2020. This higher average loan balance supported net
interest income, despite net interest margin
compression, reducing by 30 bps to 6.6%.
Since the onset of the COVID-19 pandemic, we have
taken an active decision to concentrate the majority of
our new lending to our top four credit grades. At the
same time, the higher yielding existing portfolio has
continued to mature and these effects have weighed
on the net interest margin. This trend is expected to
continue into the 2022 financial year, and we will be
taking action to mitigate this compression as we again
become comfortable with writing more business
outside of the top four credit grades and as we look to
optimise our cost of funding and liquidity.
Staff and operating expenses of £21.2 million were 56%
higher than in 2020. We have previously announced
that expenses in the 2021 financial year would be
higher and impacted by the cost of remediating legacy
issues. These have been complex issues that have
required significant time and effort and we have
increased the number of colleagues in key areas to
support this, notably within Finance. We have also
required expert support from external advisors,
including legal, consultancy and audit firms. The cost of
this activity for the year was £3.6 million.
12
Excluding remediation related expenses, staff and
operating expenses were £17.6 million, 30% higher than
last year. In building firmer foundations, we have made
a broader improvement in the overall size and quality
of our core back-office functions including Risk and
Compliance, Finance and Treasury and IT which
contributed to an increase in headcount of 28 by 30
September 2021 compared with 12 months earlier. This
will also support the future growth of the business.
Elsewhere, we saw increases in non-remediation related
professional services fees and marketing spend.
The Group recognised £1.1 million additional impairment
on goodwill, and a profit of £0.9 million on the sale of
credit-impaired loans (reported as ‘derecognition of
financial assets’). These financial assets relate to the £12
million of defaulted receivables that were disposed of
in September 2021.
Credit impairment charges for the year were £6.7 million,
a 54% reduction on the prior period. The significant
reduction compared with the prior period reflects lower
COVID-19 related provisions, a reduction in new lending
leading to a smaller overall size of the Group’s loan
portfolio, and the non-recurrence of specific provisions
that were taken in the 2020 financial year, including
£6 million for defaulted receivables. Credit impairment
charges as a percentage of average loans for the
period was 1.6% and our Expected Credit Loss (ECL)
provision coverage ratio as at 30 September 2021 was
3.3% (2020: 4.2%).
The Group’s statutory loss before tax of £(3.1) million
represents a return on equity for the period of (6.1)%
and an earnings per share of (1.2) pence.
On an adjusted basis, adjusting for the profit on
derecognition of financial assets, impairment on
goodwill, and remediation related expenses, the Group
generated a profit before tax of £0.7 million (2020: loss
of (£3.1) million).
In the period, demand for borrowing in certain
segments remained supressed. Businesses were able
to access preferential funding rates through the
Government support schemes, such as the
Coronavirus Business Interruption Loan Scheme
(CBILS) and the Bounce Back Loan Scheme (BBLS).
Furthermore, in the context of the uncertain external
environment and the amount of change within the
Group, the decision was taken to manage new
business origination levels to ensure a good level of
capital throughout.
Net loans and advances to customers decreased 15% to
£364 million, with the majority of the reduction in the
second half of the year. In the first half of the year, new
business origination (excluding Azule brokered business)
totalled £104 million (2020: £138 million) whilst in the
second half of the year new business origination totalled
just £53 million (2020: £108 million). This represents a full
year reduction of 36% compared with the £247 million of
total new business origination in 2020.
However, over the 12 month period, gross loans
averaged £411 million, which was 4% higher than over
the previous 12 month period. Note 15 provides a
breakdown of gross loans by segment, and a
reconciliation to net loans and advances.
The value of loans in forbearance at 30 September
2021 was less than 1%, down from 9% a year earlier.
The Group’s savings book remained resilient over the
year, reducing just 4% to £327 million. This reduction
has been managed to reflect our reduced requirement
for funding given the reduction in the size of the loan
book. Our deposit to loan ratio increased to 90%
(2020: 80%), as the loan book reduced by 15%.
Restatement of prior period financial
statements
The Group has restated prior period financial statements
for two areas. Firstly, in respect of Interest Income
(relating to the financial year ending 30 September 2020)
and secondly in respect of deferred tax assets (relating
to the financial year 2020). The details of the
adjustments made are set out in Note 1.7 to the financial
statements. In addition, the Group re-presented a small
number of 2020 Balance sheet items, and these
representations have no impact on the previously
reported profit before or after tax, nor on the net assets
of the Group for the year ended 30 September 2020,
again with further details set out in Note 1.7.
Capital, funding and liquidity management
2020
Restated*
£’000
2021
£’000
Change
%
Liquidity coverage ratio (%)
Net stable funding ratio (%)
Common Equity Tier 1 capital
Subordinated Tier 2 capital
Total regulatory capital
Counterparty and credit risk Risk Weighted Assets (RWA)
Operational risk RWA
Credit valuation adjustment RWA
Total RWA
Common Equity Tier 1 ratio (%)14
Common Equity Tier 1 ratio (%) - fully loaded
Total capital ratio (%)14
Total capital ratio (fully loaded)
Leverage ratio (%)14
Leverage ratio (%) (fully loaded)
904
159
50,111
6,136
56,247
273,282
47,812
109
321,203
15.6
14.4
17.5
16.5
11.1
10.2
673
145
52,677
6,065
58,742
316,848
40,433
19
357,300
14.7
13.5
16.4
15.3
11.1
10.1
–
–
(5)
1
(4)
(14)
18
–
(10)
–
–
–
–
–
–
14 The CET1, Tier 1 and total capital ratios are calculated applying the IFRS 9 transitional arrangements (including the changes introduced by
the 'quick fix' regulation adopted in June 2020.
*The restatement of prior period errors are set out in Note 1.7 to the accounts.
Annual Report & Financial Statements 2021
13
Strategic Report (cont’d)
As a result of the restatements set out in Note 1.7 there
has been a reduction in the 2020 Total Capital ratio has
reduced from 16.8% to 16.4% and a reduction in RWAs
of £4.7 million as at 30 September 2020. These restated
regulatory capital numbers are presented throughout
this Annual Report & Financial Statements. More
information on regulatory capital and RWAs is
contained within the Risk Management Report.
The Group maintains a diversified funding model which
includes retail deposits, access to a subordinated debt
facility (Tier 2), and drawings from the Bank of England’s
Term Funding Schemes. At 30 September 2021, the
Group had a total of £59.6 million drawn through the
Term Funding Schemes (2020: £62.4 million).
Retail deposits continue to be an important, stable,
form of funding for the Group. Deposits of £327 million
on 30 September 2021 were 4% lower than 12 months
ago. This strong deposit book and relatively stable
balance has allowed us to maintain a Liquidity
Coverage Ratio (LCR) in excess of our regulatory
requirement. The LCR increased to 904%.
The division’s performance for the year was impacted
by the continued lower level of demand than we
typically expect to see; and our own decision to
manage new business volumes and credit quality over
the period. The government’s CBILS and BBLS
schemes, which allowed drawings until 31 March 2021,
offered a preferable form of finance for many eligible
small businesses. New business origination in BFD for
2021 was £36 million, down from £81 million in 2020.
The total gross loan book reduced to £139 million
(2020: £190 million).
BFD - new business volumes
£140m
£120m
£100m
120m
£80m
86m
81m
£60m
£40m
£20m
36m
Sep 18
Sep 19
Sep 20 Sep 21
The Group’s cost of funding decreased to 1.3% (2020:
1.7%).
BFD - gross portfolio
Total regulatory capital reduced to £56.2 million in the
period, largely as a result of the loss after tax in the 2020
financial year causing a reduction in retained earnings.
However, Risk Weighted Assets (RWA) reduced by 10%,
reflecting the reduction in net loans and advances partly
offset by an increase in the operational Risk Weighted
Assets. As a result, the Group’s total capital ratio
increased to 17.5% (2020: 16.4%).
Prudent capital management continues to be a top
priority. The Group has managed capital through the
pandemic and through the 2021 financial year, including
through taking a more selective approach to credit and
new business volumes.
More detail regarding regulatory capital ratios is set out
in the Risk Management Report on pages 54 to 56, and
further details can be found in the Group’s Pillar 3
disclosure which is available on our website.
Segmental business review
Business Finance Division (BFD)
The Business Finance Division provides hire purchase
and finance lease agreements to sole traders,
partnerships, and limited companies to help them
acquire vehicles, plant and equipment. Lending is
typically for up to five years with longer terms of up to
ten years for specialist niche assets.
Vehicle and asset finance are commonly used sources
of finance for businesses, providing significant cash
flow benefits for those using them. The market in the
UK is both mature and vast, with the Group having a
share of less than 1%. (2020: less than 1%).
The division predominantly uses broker intermediaries
as its route to market, with transactions being processed
through the Group’s internet-based proposal system.
In 2021, lending in the business asset finance sector
grew by 14% compared with 2020. However, this was
still 12% lower than the levels seen in 2019. Areas of
strong growth in 2021 included plant, machinery and
business equipment.
£250m
£200m
£150m
£100m
123m
£50m
191m
190m
139m
Sep 18
Sep 19
Sep 20 Sep 21
The new business written into our top four credit grades
was 92% (2020: 78%) compared with 79% for the portfolio
overall, which had a negative impact on margin.
Net operating income for the division reduced to
£8.1 million (2020: £12 million). The impairment charge
reduced to £5 million (2020: £8.4 million).
Consumer Finance Division (CFD)
The Consumer Finance Division 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.
As with BFD, this division predominantly uses broker
intermediaries as its route to market, with transactions
being processed through the Group’s internet-based
proposal system.
During the 2020 financial year, PCF Group 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
provides instant credit and affordability assessments in
line with our responsible lending guidelines.
14
In 2021 the car market was robust, with volumes
approximately 9% higher than in 2020, although this
remained below the pre-pandemic 2019 levels by 14%.
Used cars held their value remarkably well, supported
by the global supply chain crisis that reduced the
availability of new cars within the UK.
Whilst PCF Bank’s proposition remained attractive and
the market robust, new business volumes were scaled
back to support the Bank’s capital management strategy,
as discussed herein. As a result, new business origination
for the year was £72 million, 20% lower than last year.
The total gross loan book reduced to £167 million
(2020: £172 million).
CFD - new business volumes
£100m
£80m
91m
£60m
63m
73m
72m
£40m
£20m
Sep 18
Sep 19
Sep 20 Sep 21
CFD - gross portfolio
172m
167m
£200m
£150m
131m
£100m
101m
£50m
Sep 18
Sep 19
Sep 20 Sep 21
100% of new business was written in our top four credit
grades (2020: 94%), compared with 91% for the portfolio
overall, which has had a negative impact on margin.
Net operating income for the division increased to £10.6
million (2020: £9.6 million). The impairment charge
reduced to £1.2 million (2020: £4.9 million).
Azule Limited (Azule)
In 2018 the Group acquired Azule, a broadcast and
media lending and broking specialist. Azule provides
direct to end-user asset finance origination to the niche
markets in the UK and across Europe, which include
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.
During the year, performance continued to be affected
by social restrictions, limited live events, subdued
activity in the film industry, supply chain issues and our
proactive management of new business volumes.
Total origination of £34 million was lower than the
£39 million in 2020, and we expect this will continue
into the first half of the 2022 financial year. The gross
loan book on 30 September 2021 reduced to £15 million
(2020: £23 million).
Azule - new business volumes
£80m
£70m
£60m
£50m
£40m
£30m
£20m
£10m
69m
39m
34m
Sep 18
Sep 19
Sep 20 Sep 21
Azule - gross portfolio
23m
20m
15m
£25m
£20m
£15m
£10m
£5m
Sep 18
Sep 19
Sep 20 Sep 21
Net operating income for the division reduced to £2.6
million (2020: £2.3 million). The impairment charge
increased to £0.6 million (2020: £0.6 million).
Bridging Finance
The Bridging Finance 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%.
At the end of September 2021, the bridging market
exceeded £5 billion for the first time, an increase of 11%
on the same period last year.
We are pleased with the continued success of our
product offering, and we expect it to be a driver of
future growth. New business origination for the year
was £45 million (2020: £61 million), and while volumes
will remain low in the first half of 2022, we expect the
full 2022 financial year to be higher than this year.
Bridging Finance - new business volumes
£70m
£60m
£50m
£40m
£30m
£20m
£10m
61m
45m
14m
Sep 18
Sep 19
Sep 20 Sep 21
Bridging Finance - gross portfolio
£70m
£60m
£50m
£40m
£30m
£20m
£10m
61m
55m
13m
Sep 18
Sep 19
Sep 20 Sep 21
Annual Report & Financial Statements 2021
15
Strategic Report (cont’d)
Net operating income for the division increased to
£5.5 million (2020: £2.6 million). There was a small net
impairment credit for the year of £0.2 million (2020:
£0.5 million impairment charge).
Savings
Through PCF Bank Limited (the Bank), 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 rate deposit products
with fixed terms of between 12 and 84 months.
l Savers also have the option of competitive variable
rate accounts with notice periods of 100 and 180 days.
The Bank offers online and telephone support to
savings customers, enabling them to service their
accounts in the way they prefer. The online application
process is quick and simple, typically taking less than 15
minutes to complete an application and open an account.
For customers whose fixed term deposits are nearing
maturity, the Bank offers a range of renewal products
with fixed rates that are at least as attractive as those
offered to new depositors.
Savings balances reduced by 4% in the year to £327
million, an appropriate outcome given the reduction in
the size of the loan book. However, the deposit
portfolio remains resilient and will continue to be the
primary funding source for loan growth in the future. At
30 September 2021, the Bank had over 8,100 savings
customers with an average balance of more than
£40,000.
Outstanding balances across savings product terms at
financial year end
£70m
2019
2021
2018
M - Months
D - Days
100D 180D
12M
18M
24M 30M
36M 48M 60M
84M
£60m
£50m
£40m
£30m
£20m
£10m
16
Financial Overview
Non-IFRS performance measures
The Group’s management believes that the non-IFRS
performance measures included in this Annual Report &
Financial Statements provide valuable information to
the readers of the Financial Statements as they enable
the reader to identify a more consistent basis for
comparing the businesses’ performance between
financial periods, and provide more detail concerning
the elements of performance which the managers of
these businesses are most directly able to influence or
are relevant for an assessment of the Group. They also
reflect an important aspect of the way in which
operating targets are defined and performance is
monitored by management. However, any non-IFRS
performance measures in this document are not a
substitute for IFRS measures and readers should
consider the IFRS measures as well.
Non-IFRS performance measures glossary
Net interest margin
Definition: Net interest income divided by average
customer assets. The components of the calculation are
summarised below.
2021
Net interest Average15 Net interest
income customer assets margin
£’000 £’000 %
26,253 395,498 6.6%
2020 Restated*
Net interest Average16 Net interest
income customer assets margin
£’000 £’000 %
25,990 382,606 6.8%
Cost Income ratio
Definition: Total operating expenses (excluding
impairment on goodwill, and profit on derecognition of
financial assets) divided by Net operating income.
2021
Operating Net operating Cost income
expenses income ratio
£’000 £’000 %
22,964 26,750 85.8%
2020 Restated*
Operating Net operating Cost income
expenses income ratio
£’000 £’000 %
15.373 26,455 58.1%
Statutory return on average equity
Definition: Statutory loss after tax divided by average
equity.
2021
Statutory
Statutory loss Average15 return on
after tax equity average equity
£’000 £’000 %
(3,061) 50,345 (6.1)%
Adjusted profit/(loss) before tax
Definition: This represents management’s view of
underlying performance. See table below for items
excluded from statutory profit to arrive at ’Adjusted
profit/(loss) before tax’.
2021 2020
£’000 £’000
Adjustments
Deduct: Profit on derecognition
of financial assets (939) –
Add back: Remediation related
expenses 3,608 –
Add back: Impairment on goodwill 1,147 1,750
Total 3,816 1,750
2021
Statutory
Statutory loss Adjustments Adjustments
after tax (See above) before tax
£’000 £’000 £’000
(3,099) 3,816 717
2020 Restated*
Statutory
Statutory loss Adjustments Adjustments
after tax (See above) before tax
£’000 £’000 £’000
(5,099) 1,750 (3,349)
Impairment charge as a % of average gross loans
Definition: Credit impairment charge divided by
average gross loans.
2021
Impairment
charge as %
Impairment Average15 of average
charge gross loans gross loans
£’000 £’000 %
6,677 410,999 1.6%
2020 Restated*
Impairment
charge as %
Impairment Average16 of average
charge gross loans gross loans
£’000 £’000 %
14,431 395,342 3.7%
Adjusted return on average equity
Definition: Adjusted loss after tax (equivalent to
average loss before tax above, with adjustments tax
effected) divided by average equity.
2021
Adjusted
Adjusted profit Average15 return on
after tax equity average equity
£’000 £’000 %
333 50,345 0.7%
2020 Restated*
Statutory
Statutory loss Average16 return on
after tax equity average equity
£’000 £’000 %
(6,297) 55,291 (11.4)%
2020 Restated*
Adjusted
Adjusted profit Average16 return on
after tax equity average equity
£’000 £’000 %
(4,547) 55,291 (8.2)%
15 Average of balances from 30 September 2021 and 30 September 2020.
16 Average of balances from 30 September 2020 and 30 September 2019.
*The restatement of prior period errors are set out in Note 1.7 to the accounts.
Annual Report & Financial Statements 2021
17
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.
As previously disclosed, significant remediation work
has been, and continues to be, undertaken to improve
the effectiveness of the Group’s risk management and
to put a strong culture of risk awareness, listening and
speaking up at the heart of PCF and its Risk
Management Framework (RMF). Strong culture and
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 that the
business is prepared to tolerate in pursuit of its
business objectives.
Through its culture programme, 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. We intend that our
colleague performance management and reward
practices have a key 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, demonstrating our values, and maintaining a
safe and secure business.
Risk within the Group is managed using a ‘Three Lines of
Defence’ model, separating risk management (First Line)
from risk oversight (Second Line) and internal audit (Third
Line). Controls and expertise are being further,
strengthened across the two internal lines of defence
(First & Second), with additional Third Line assurance
provided by an externally sourced internal audit function.
The Corporate Governance structure, described on pages
25 to 29, includes the Board and Executive committees
being Board Audit Committee (BAC), Board Risk
Committee (BRC), the Executive Committee, Financial
Reporting & Control Committee, Assets & Liabilities
Committee (ALCO) and Executive Risk Committee.
RMF project
Following an external review of the Group’s RMF,
activities to strengthen the framework are underway,
including but not limited to, formalisation and
documentation of the framework and policies,
simplification of risk metrics and measurement taxonomy
and the introduction of principal risk subclasses.
Risk strategy
The Group has defined its risk management objectives
and strategy and is developing a culture of risk
awareness. Its risk strategy is intended to support a
sustainable and resilient business through a
proportionate approach to risk management, which is
there to ensure that risks taken are suitably
compensated for; that the needs of all stakeholders are
considered; and that the total amount of risk under
management is appropriate for a firm of PCF’s size,
capabilities, resources, and long-term aspirations.
Ongoing activities that continue to support the
strategy include:
l Ensuring the Group’s risk profile, including principal
and emerging risks are fully identified, owned,
managed, with a proportionate risk appetite set
for each.
l Ensuring there is an appropriate return for risks
taken within product pricing.
l Enhancement of the Group’s stress-testing and
credit analytics capabilities.
l Reviewing remuneration practices to ensure these
are congruent with the Group’s risk culture and RMF.
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 nine principal risks that could
impact the delivery of its strategic objectives, each with
a Board approved risk appetite, and the RMF identifies
ownership, responsibilities, management approaches,
mitigants and controls. These risks are defined and
considered within the Risk Management Report on
pages 54 to 66.
Emerging risks and uncertainties
Outside of these principal risks, 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 risk where the residual
risk has materially increased.
COVID-19 pandemic and geopolitical
uncertainty
Uncertainties remain from the longer-term impacts of
the COVID-19 pandemic and may affect many of the
key risks faced by the Group.
As COVID-19 direct financial support measures have
unwound, the impact on credit arrears and losses has
been limited, with the majority of customers who had
requested COVID-19 related payment deferrals having
returned to full servicing of their loans. Requests for
assistance continued to fall as we moved through 2021,
and due to a change of process adopted to manage
customer forbearance, arrears have continued to trend
back to levels reported pre-pandemic. The Group
continues to monitor this.
The pandemic has had an unprecedented impact on the
world economy, more recently exacerbated by the events
currently taking place in Ukraine. As the global economy
emerges from the pandemic with inevitable upturn in
economic activity, demand for energy has increased at a
time of uncertain supply, with a consequential marked
increase in energy costs, leading to levels of inflation not
seen in the UK for over thirty years. This has led the Bank
of England to increase interest rates from record lows to
the highest level seen in the last ten years, with Oxford
Economics (OE) forecasting that the Monetary Policy
Committee of the Bank of England will increase Bank
Rate to 1.25% by the end of 2022.
l Strengthening the RMF and control environment
through enhanced governance, which includes the
embedding of a new risk committee structure,
additional experienced risk hires and an enhanced
risk and compliance team structure.
Although PCF loans are generally fixed rate, the impact
on households and businesses of rising food, energy
costs, general inflation and interest rates may be reflected
in affordability pressure. We are closely monitoring the
potential impact of this on loan repayments.
18
While there is uncertainty in these macroeconomic
risks, headwinds may restrict market prospects for the
Group and increase the risk of loan impairments, higher
prices and inflation expectations, and a disappointing
recovery in labour market participation, which in turn
leads to a downturn in domestic demand.
Implications of the delayed finalisation of the
Annual Report & Financial Statements and
share trading suspension
For the reasons set out below, on 1 April 2022 the
Group’s shares were further suspended from trading on
AIM. The publication of the delayed Annual Report &
Financial Statements for 2020 and Interim Results to
31 March 2021, along with the update of the Group’s
FPPP memorandum, allowed the Group’s shares to be
readmitted to trading on AIM on 25 January 2022.
Despite an accelerated process being put into place for
these accounts, the knock-on effect of these delays has
meant that it was not possible to complete the financial
accounts and the required audit processes prior to
31 March 2022.
The Board and management have kept in close contact
with the Group’s regulators as the Annual Report &
Financial Statements 2021 has been finalised and have
worked closely with the Group’s NOMAD, to enable
compliance with AIM regulation requirements.
However, whilst the Board expects the publication of
this Annual Report & Financial Statements to lead to
the lifting of the suspension of trading in the Group’s
shares, if the Group’s NOMAD and AIM are not satisfied
then the London Stock Exchange could cancel the
admission of the Group's shares on AIM.
Group performance and access to financial
facilities
During this period of remediation the Group’s cost base
has increased significantly and continues at raised
levels, 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 available to provide an appropriate level
of accountability, control and oversight.
The remediation required in the Group’s internal
controls has dependencies on both systems and people
and will take time to develop and embed fully. 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 remains the risk
that whilst manual processes 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.
As at 30 September 2021, and currently, capital and
liquidity metrics remain above regulatory requirements.
However, options to access capital and financial
markets have been limited, reducing the Group’s ability
both to raise growth capital and preventing it from
transacting interest rate swaps. There is a risk that the
Group may experience volatility in its profit and loss
and its capital and liquidity metrics should it not be
able to manage its interest rate risk exposure in its
balance sheet through natural hedging. Management
believes that, following the Annual Report & Financial
Statements 2021 finalisation and the lifting of the
suspension in trading of the Group’s shares, the Group’s
bankers will begin the process to reinstate access to
hedging these facilities. Management monitors the
interest rate gap risk closely and, where required, seeks
to hedge asset exposures naturally with appropriate
tenor and rate retail deposits where achievable.
The Bank has a term loan facility from the Bank of
England under the Term Funding Scheme with
additional incentives for SMEs (TFSME) and a
subordinated note facility from British Business
Investments Limited (BBI). The Group and the Bank are
required under the terms of the facilities to file their
Annual Report & Financial Statements 2021 with BBI
within 180 days of the 30 September 2021, although
BBI has agreed to a deferral until the end of May 2022
subject to no new issuance under the facility in the
meantime. The Group and the Bank had a £30 million
revolving credit facility granted by Leumi ABL Limited
(Leumi) which was not able to be drawn down due to
the late filings on the Annual Report & Financial
Statements. This Leumi facility was undrawn as at
30 September 2021 (2020: Undrawn) and was
terminated on 21 December 2021.
Uncertainties on planning assumptions and
going concern
The Group has continued to manage regulatory capital
and the level of surplus regulatory capital it holds by
managing new business volumes, with loans and
advances to customers reducing. However, as we
return to growth, it will be constrained by losses which
will result in a reduced level of retained profits and
therefore regulatory capital which will restrict the pace
of growth.
Given the uncertainties we face, the current short-term
plan for the Group covers the period to the end of
2023 and the strategic plan extends to a 5 year time
horizon from the year end. The strategic plan includes
costs associated with remediation and change activity
and over the medium term, with the new capital raised
the strategic plan shows a return to profitability and
controlled growth that the Board believe can enable
the Group to generate shareholder value and capitalise
on the significant growth opportunities in its core
operating markets and beyond.
The Group’s performance and return to profitability in
the strategic plan is underpinned by a number of key
matters and assumptions which cover:
l The raising of external capital.
l The expected date of completion of the Group’s
remediation activities and the resultant impact on
the Group’s cost base.
l The level of impairment losses on financial assets.
l Our ability to meet regulatory requirements at all
times.
l There being no additional regulatory threshold
impacting on our ability to meet our regulatory
capital or liquidity requirements.
l The support of our shareholders notably our
majority (64%) shareholder Somers Limited for any
capital raising or other strategic alternatives.
l The funding of new lending originations through
retail deposits and other wholesale funding.
l Lending origination levels.
l Net interest margin on new originations.
l The payment of dividends, which have been
assumed at zero in the medium-term plan.
l The lifting of the current suspension of trading in the
Group’s shares on AIM on publication of this report.
Annual Report & Financial Statements 2021
19
Strategic Report (cont’d)
These assumptions are obviously very similar to those
reported in the Annual Report & Financial Statements
2020 however a proportion of the additional capital
requirements assumed in the plan are required now. If
capital cannot be raised there is a risk our regulatory
ratios fall below the required levels, and this might
impact our continued operations.
As with any plan, there is a risk that certain of these
assumptions will not be borne out with time. The most
significant of these assumptions is the raising of
external capital and the costs to complete remediation.
There is a risk that these assumptions cannot be
achieved in line with the plan, and this in turn gives rise
to a material uncertainty in respect of going concern in
these financial statements and is summarised in Note
1.2 Basis of Preparation to the financial statements.
Regulatory risk and legislative change
The Board and management continue to communicate
openly and regularly with both the Prudential
Regulation (PRA) and the Financial Conduct
Authorities (FCA). The legacy 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 oversight, which in
turn may lead to regulatory action and/or increased
levels of regulatory requirements.
The UK regulatory landscape continues to move at pace
with significant policy initiatives including operational
resilience, financial impacts from climate change, and
implementation of the UK Capital Requirements
Regulation (CRR). 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, Regulatory Reporting and Legal
teams to help position itself appropriately to address
these issues. It is also engaging with regulators and
industry trade bodies, such as the Finance and Leasing
Association, on these and other significant industry
issues arising.
As set out above in the ‘Uncertainty on Planning
assumptions and the impact on going concern’ section,
there are various assumptions and risks to the strategic
plan and notably the plan assumes a capital raise.
Should the planned capital raise not proceed or not be
successful, the Group regulatory ratios would, over time,
fall below those required by our regulator and this could
impact our continued operation. Therefore, we have
decided to accelerate an element of our capital raising,
by requesting a capital injection from our majority
shareholder Somers Limited. Somers Limited has agreed
to inject circa £4 million of capital over the next two
months, and an open offer to allow all shareholders to
participate is expected to follow in due course. At the
same time, we are also investigating other strategic
opportunities as outlined in the Chair’s Statement.
People risk
People risk can arise in many forms and continues to be
the subject of close management attention.
The Group recognises the impact COVID-19 has had on
colleagues, and has adopted a hybrid working policy,
which will support colleagues who wish to continue to
work from home for part of the working week. This is
part of the Group’s approach to remaining an attractive
choice for employment.
The continued delay to publishing external financial
results, a second share trading suspension and recent
announcements, could lead to unease amongst
colleagues, and higher levels of unplanned attrition. The
recruitment market is competitive for financial services
control function skillsets and together this could impact
availability to attract and retain the right colleagues. The
Executive Management Team continues its strategy of
regular and open communication with all colleagues,
and monitors risk associated with its people. To mitigate
the risk the Executive Management Team seeks to
reduce key person dependencies, by improving
colleague skills and resources through development
opportunities and improved succession planning.
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.
The Group has identified its important business
services, including its dependency on third-party
suppliers and the outsourcing of services, set impact
tolerances for the maximum tolerable disruption and
carried out mapping and testing to a level of
sophistication necessary to enable it to comply with
the requirements set out in the FCA’s policy statement
PS21/3 which describes how firms approach their
operational resilience. The Group has also identified
potential vulnerabilities in its operational resilience and
takes and plans actions to address them. The Group
has also established an Operational Resilience
Framework with Internal Audit completing an
independent review of its design in December 2021.
Cyberattacks continue to be a threat globally,
exacerbated by current geopolitical events, and are
inherent across all industries. The Group has maintained
its investment in its Cyber Control Environment,
including Cyber protection, benchmarking using the
Cyber Essentials Framework and continues to focus on
the ‘Defend, Deter, Develop’ themes as recommended
by the National Cyber Security Centre.
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 has developed a 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. 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.
20
Stakeholder Engagement Report
Benchmark interest rate reforms
The Bank of England set out a timeline to achieve the
transition from London Interbank Offered Rate (LIBOR)
by no later than the end of 2021. At 30 September 2021
the sole exception to this was the revolving credit
facility provided by Leumi ABL Limited, which when
drawn accrued at overnight LIBOR plus a fixed spread.
This facility was terminated by the Group and Bank on
21 December 2021.
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-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.
We consider our key stakeholders to be our members,
our employees, our customers, our suppliers, our
regulators and our community and environment. We
have a governance structure which takes account of
our range of stakeholders and appropriate governance
standards. Our Code of Conduct sets out the high
standards we expect our employees to effect in our
business. Set out below are examples of how the Board
engages with and has regard to the interests of these
key stakeholders.
Members (shareholders and investors)
l We remain committed to communicating with
members openly and transparently. Due to the
legacy governance and control issues leading to the
delayed completion of our Annual Report &
Financial Statements 2020. 2021 and the
suspensions from trading in our shares, our ability to
update investors has, at times, been significantly
constrained by our legal, regulatory and market
obligations.
l Our Annual General Meeting on 26 March 2021,
during a COVID-19 lockdown, provided the option
for shareholders to attend virtually by video stream.
However, this took place before the publication of
our 2020 Annual Report & Financial Statements;
these were published on 23 December 2021 with
Interim Results 2021 published on 25 January 2022.
We held a question-and-answer session via the
Investor Meet Company platform on 27 January
2022 which we believe, was well received and
management appreciated the opportunity for direct
discussion with our shareholders and investors after
a prolonged share suspension and restriction on our
ability to hold such a meeting. On 15 February 2022
an update on the publishing of the 2021 Accounts,
Interims and trading update was provided.
l We regret that delays to delivering the Annual
Report & Financial Statements 2021 has led to a
further suspension of trading in the Group’s shares
on AIM in April 2022. The provision of these
accounts, combined with Interim 2022 results puts
the Group on track to deliver its ongoing market
commitments on a timely basis and to rebuild
confidence with its members.
l As the new Finance Team establishes itself and
control and governance improvements are
embedded across the business, the Board expects
the quality and timeliness of reporting to our
members will further improve.
Employees
l Our employees (colleagues) are important to us.
We seek to ensure that we attract, develop and
retain talent, encouraging employees to gain
professional qualifications.
l As well as developing internal talent we have hired
new talent with new colleagues, contractors and
advisors augmenting the existing team to
implement the organisational changes set out by
the Chief Executive Officer in his report.
l Regular all-colleague updates continue and hybrid
working is now embedded throughout the
organisation. The wellbeing and mental health of
our workforce remains a focus with support from
our HR team, including biweekly coffee and chat
sessions and access to a confidential Employee
Assistance 24/7 helpline.
l Our cultural change programme continues at pace
delivering real change across the business with an
empowered group of Culture Champions driving
longer-term culture as a key business priority.
l A key longer-term initiative is to embed a high-
performance culture across the business through
fostering an environment of coaching, learning and
innovation.
l We completed an anonymous company-wide
survey in August 2021 with a response rate of
83.3%. The survey has been repeated since the year
end in March 2022 with strong engagement
(response rate 80%) and feedback showing
improvement in all but one measure, work-life
balance, with 67.4% of colleagues rating it above 6,
on a scale of 1-10 (10 being extremely good), down
from 76.5%.
l Our Diversity & Inclusion (D&I) group continue to
drive initiatives across the Group working in
partnership with the HR team. The Diversity and
Inclusion survey after the year end in December
2021 received a response rate of 91%. A D&I plan is
being developed in 2022 following on from this
survey and the D&I group has engaged with the
Executive Committee on the results.
Annual Report & Financial Statements 2021
21
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.
l We have employed young people on apprenticeship
schemes and continue to explore these avenues to
support our communities.
The Strategic Report has been approved by the
Board of Directors and signed on its behalf by:
G G Stran
Chief Executive Officer
31 May 2022
Strategic Report (cont’d)
Customers
l Our customers are at the heart of our business, and
we aim to treat them fairly, professionally and
respectfully and of course in accordance with
regulatory rules and guidance.
l We provide our savings customers with a high level
of service, as evidenced by 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.
l We have responded to our customer’s requests for
financial assistance during the COVID-19 pandemic
effectively and efficiently.
l We continue to develop online self-serve capability
across Savings and Lending improving customer
service, responsiveness, and efficiency.
l We have increased our operational oversight,
enhanced our complaints management capability
and used route cause analysis to improve what we
do, focusing on meeting customer demand at the
first point of contact.
l We have maintained good customer service levels
and remained open to new lending throughout the
year, albeit focusing on our highest credit grades,
given the market wide impact of 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 bureaux.
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 We have continued to enhance our intermediary
oversight developing our broker scorecards and
completing an enhanced level of due diligence
across the broker network.
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 our
regulators 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.
l Following on from the share suspension, legacy
issues and the implementation of our new culture,
we have had periodic discussions on culture with
our regulators.
22
Annual Report & Financial Statements 2021
23
Sustainability Report
PCF Group recognises the major threat that climate
change poses to global social and economic development.
We are committed to reducing our carbon footprint and
broader environmental impact, whilst also adapting our
strategy and managing the climate change risks associated
with our portfolio.
Our bridging loans property portfolio is exposed to climate
change physical risks such as flood risk, although this is
partially mitigated by the fact that our property exposures
are mainly bridging loans with an average term of 12–18
months. Our analysis shows that only 1% of the properties in
our portfolio are at a high risk of flooding.
PCF Group developed and approved a Climate Risk
Management Framework to ensure that the risks
associated with climate change are considered across our
organisation, including at the most senior levels of our
business. The framework embeds a governance approach
to climate change credit risk management, with
appropriate oversight by the Board, senior management,
and roles and responsibilities across the Group. The Board
has ultimate oversight of climate-related matters and
received training with regards to the implications of
climate change risk on the Group.
PCF Group included climate change risk as one of the
principal risks in its enterprise-wide Risk Management
Framework. Whilst PCF Group has a low direct carbon
footprint from its own operations, its main exposure to
climate risk is technology transition risk through its lending
activities in the vehicle finance business. The Group's
property finance business exposure to climate change risk is
low and many of the effects arising from physical risks such
as from extreme acute and chronic weather-related events
will be longer-term in nature, with an inherent level of
uncertainty. We undertook a climate risk identification
exercise and an initial measurement of PCF Group’s
exposures to climate change risks, leveraging data published
by the UK Government on vehicle fuel and carbon emissions,
property energy performance and flood risk.
The key climate change risk to our vehicle finance business is
transition risk, measured through the engine types and the
carbon intensity of the vehicles in our portfolio. PCF Group
collects data on motor vehicle engine types and our
assessment shows that 97% of the vehicles in the portfolio
have diesel or petrol engines, which is broadly in line with the
proportion of diesel and petrol engines in the UK overall
motor fleet. We mapped carbon intensity data for our car
finance portfolio, which showed that the carbon intensity of
our car finance portfolio is slightly higher than the UK
average. PCF Group is refining its credit assessment
approach to ensure appropriate consideration of climate
transition risks as part of our loan origination process. 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 contributing to the management of climate
change and towards 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.
From a property transition risk perspective, the Group
undertook a mapping of the residential and commercial
properties in its bridging loans portfolio to the Energy
Performance Certificate Register. The results show that 32%
of the properties in PCF’s portfolio that were mapped to the
register have energy ratings of C or above; and 8% of the
properties have F or G energy ratings.
PCF also undertook climate scenario analysis for its vehicle
finance portfolio based on the Bank of England’s Biennial
Exploratory Scenario Exercise on the Financial Risks from
Climate Change. The scenarios were assessed on a qualitative
basis, driving conclusions and informing actions with regards
to particular areas of risk, for example risks from different
depreciation profiles and residual values for vehicles with
different engine types.
PCF takes its responsibility towards the environment
seriously and recognises the important part it has to play in
supporting the transition to a low carbon economy. 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 the 2021 financial year, 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 in the process of introducing electric vehicle
company cars for our sales employees.
While the Group is not required to report on climate change
risk and exposures under the Task Force on Climate-related
Financial Disclosures (TCFD) framework until its 2022 year
end, it will sign up as a TCFD supporter. Future Annual
Report and Account disclosures will be progressively aligned
with the TCFD strategic framework for the 2022 and 2023
financial accounting periods with expected alignment in the
2024 accounting period. As a UK company, the Group will
adopt the Department for Business, Energy and Industrial
Strategy (BEIS) mandatory climate-related financial
disclosures in its 2023 Annual Report and Accounts.
The table below provides the Group's emissions that have
been estimated in line with the Greenhouse Gas Protocol
Standard, using the Environmental Reporting Guidance
published by the UK Government. In the 2021 financial year
we have seen a reduction in our carbon emissions driven by
optimised office space.
2021 2020
UK tCO2e kWh tCO2e kWh
Scope 1
Fuel for office heating 2 8,618 3 14,037
Scope 2
Emissions from the purchase of electricity for own use 26 121,111 32 138,837
Total
Scope 1 and Scope 2 emissions 28 129,729 35 152,874
Emission intensity
Scope 1 and Scope 2 in tCO2e/Net operating income in £m 1.0 1.3
All our emissions are UK based.
24
In addition to its scheduled eleven meetings during the
financial year, the Board met regularly on specific
issues including the suspension of trading in the
Company’s shares, the progress of the independent
investigation (reported in the Annual Report &
Financial Statements 2020) and to monitor the impact
on colleagues, customers, other stakeholders and the
financial wellbeing of the Group.
The effectiveness of the Board was reviewed prior to
the year end in September 2020, through an externally
facilitated self-assessment review by Independent
Audit Limited, using their online self-assessment
service Thinking Board®. This was considered and
discussed by the Board in December 2020.
The legacy governance and control issues have
resulted in learnings and improvements including new
appointments to the Group, and these learnings will
continue to inform the development of the Group and
of the Board (both individually and collectively). In late
2021, the Board undertook a search process to identify
candidates for the roles of a new Chair as part of
planned board succession and a new Senior
Independent Director (SID) role. This resulted in the
announcement of the appointments of myself and Mark
Sismey-Durrant as non-executive directors to the
Board with effect from 9 January 2022. I have taken up
the role of Chair of the Board and Mark the role of SID.
The Board also recognises that one of the keys to the
Group’s long-term success is the embedding of its new
culture, including improved governance and effective
controls, and this will continue to be our significant
focus in the coming year.
Simon Moore
Chair
31 May 2022
Corporate Governance Report
Chair’s Introduction
Dear Shareholder,
As the Chair of PCF Group plc (the Group or
Company), I present our Corporate Governance Report
for the year ended 30 September 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.
Considering the events and issues that came to the
attention of the Board after the 2020 year end and
which have been the subject of the independent
investigations, more effective corporate governance
and oversight continues to be a priority of the Board.
The Board has brought in a substantially new Executive
Management Team for the business. The Board has
taken steps to improve the Group’s financial controls to
enable approval of its Financial Position and Prospects
Procedures (FPPP) and, as set out in the Strategic
Report, there are continuing activities to further
improve the Group’s governance and control.
We have also continued the culture initiative and
training programme to put risk at the centre of all that
we do in the Group. 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 (four of whom are considered
independent) and two of whom are executive. David
Morgan and Mark Brown are not considered
independent non-executive directors. David Morgan
has been nominated by the Company’s majority
shareholder Somers Limited.
The process of recruiting a new Chief Financial Officer
(CFO) was completed and we appointed Caroline
Richardson to the role of CFO on 15 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. Garry Stran, the
Chief Operating Officer of the Group, was appointed as
interim Chief Executive Officer (CEO) on Scott
Maybury's departure. Garry and Caroline were
appointed to the Board on 5 October 2021 having
confirmed their regulatory approvals.
The current corporate governance structure of the
Group and its committees is set out below. Christine
Higgins, an independent non-executive director, is
Chair of the Board Audit Committee and Mark Sismey-
Durrant, also an independent non-executive director
the interim Chair of the Board Risk Committee.
Annual Report & Financial Statements 2021
25
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 2021.
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 except for 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
regularly engages with the Board on colleague
matters, and colleague engagement. Given the size
of the workforce, an experienced Chief People
Officer is considered the most effective means of
developing and monitoring colleague engagement.
l Less than half the Board, excluding the Chair, are
independent non-executive directors (Code
Provision 11) From 1 October 2020 to 21 May 2021,
less than half the Board, excluding the Chair, was
made up of independent non-executive directors.
From 22 May 2021 until 4 October 2021, the Board
met Code Provision 11, as at least half the Board was
made up of independent non-executive in 2021 and
21 May 2021 respectively. From 5 October 2021, less
than half the Board, excluding the Chair, were
independent non-executive directors following the
appointments of Garry Stran and Caroline
Richardson as executive directors on this date.
While Mark Sismey-Durant was appointed as a
Senior Independent Director on 9 January 2022, the
provision will only now be met once the recruitment
of the Board Risk Committee Chair is completed
following Marian Martin’s resignation as an
independent non-executive director on 23
December 2021.
l Lack of Senior Independent Director and lack of
Chair’s appraisal (Code Provision 12) In the absence
of a Senior Independent Director (SID) an appraisal
of the Chair was not carried out. Mark Sismey-
Durrant will be responsible for the Chair’s evaluation
going forward.
l Evaluation of performance of Board committees,
individual directors and auditors (Code Provisions
21, 22 and 25) The effectiveness of the Board was not
reviewed during the financial year with the last Board
effectiveness review having taken place in September
2020. Effectiveness reviews were not extended to all
Committees of the Board. Additionally, whilst an
external assessment of the individual director’s skills
and their training needs was undertaken during the
financial year, there was no individual performance
evaluation. This was due to the ongoing significant
amount of Board time required to finalise the 2020
Annual Report & Financial Statements, published in
December 2021, and then to address remediation
required to lift the suspension from trading in the
Group’s shares together with the appointment of a
new Chair in January 2022. The new Chair has started
to address these matters. Furthermore, due to the
change in external auditors and the disclaimer of
opinion in the 2020 Annual Report & Financial
Statements, no effectiveness review was completed
on Ernst & Young LLP’s performance. Therefore, the
Group was not compliant in all of the aforementioned
regards. The governance remediation underway
includes appropriate and timely effectiveness and
performance reviews of the Board, its committees,
directors and auditors.
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. Considering the circumstances of the Group’s
suspension of shares on AIM, and the current review
of strategic opportunities (as outlined in the Chair’s
Statement), a viability assessment has not been
prepared and no statement is made in this Annual
Report. 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. With the volume of
remediation underway, the Company has not yet
instigated this change but is considering this matter
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 internal controls systems and risk frameworks set
out in the Board Audit and Board Risk Committee
reports.
Reviews by the Board
The effectiveness of the Risk Management Framework
(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 regarding
financial reporting, oversight of external and
outsourced internal audit activities, internal controls,
compliance, and whistleblowing.
Overall assessment
The Board has taken steps to improve the Group’s
financial controls, continues to monitor the effectiveness
of its RMF and internal controls systems and carefully
scrutinised the FPPP. In relation to the scrutiny of the
FPPP, this included reviewing and challenging the
Finance function’s risk assessment and ensuring
mitigating actions to the risks identified are appropriately
documented and managed, reviewing the controls
assessments of third-party advisers. Ultimately as a result
of this scrutiny, the Board approved the FPPP.
26
Board of Directors
Simon Moore
Non-executive Chair,
appointed 9 January 2022
Mark Brown
Non-executive director,
appointed 1 December 2015
Mark was Chair of Stockdale
Securities from November 2014
until it was bought by Shore
Capital in April 2019 and is now
Vice Chair 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 the Board Audit Committee,
Nomination Committee and Remuneration Committee.
Christine Higgins
Independent non-executive director,
appointed 13 June 2017
Christine is a chartered
accountant with over 25 years’
experience in UK and
international asset finance.
Over the last 12 years, she has
served as non-executive
director on boards in the
health, housing, charity and
finance sectors. Christine is
currently a non-executive director
at Macquarie Capital Europe Limited and Audit Chair.
During the year, she was a Trustee at Refuge and a
non-executive director at the Buckinghamshire
Building Society and chaired their audit committees.
Christine is the Chair of the Board Audit Committee
and a member of the Board Risk Committee,
Nomination Committee, and Remuneration Committee.
Simon has extensive regulatory and
financial services experience in
consumer, SME, and corporate
banking together with regulatory
and general financial services
experience from his roles in
Cambridge & Counties Bank,
Barclays Bank and Chase
Manhattan Bank. In addition, he was
a member of the management board
of the Confederation of British Industry. He is currently
Chair of Cambridge & Counties Bank and RCI Bank UK.
Simon has taken up the role of Chair of the Board and the
Nomination Committee. He is also a member of the
Remuneration Committee.
Mark Sismey-Durrant
Non-executive Senior Independent Director,
appointed 9 January 2022
Mark has over 40 years’ experience
in banking with a particular focus
on specialist challenger banking,
having been CEO of three such
banks over a period spanning
23 years – Sun Bank plc,
Heritable Bank plc and more
recently, Hampshire Trust Bank. He
is currently also Chair of fintech
Cashplus Bank.
Mark is the Senior Independent Director and interim Chair
of the Board Risk Committee. He is also a member of the
Board Audit Committee, Remuneration Committee and
Nomination Committee.
David Morgan
Non-executive director,
appointed 9 July 2012
David has over 40 years’
experience in international
banking, building his career at
Standard Chartered Bank. Since
leaving Standard Chartered, 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
Chair of Harlequin FC, the Premiership rugby club.
David is a member of the Board Risk Committee,
Nomination Committee, and Remuneration Committee.
Annual Report & Financial Statements 2021
27
Corporate Governance Report (cont’d)
David Titmuss
Independent non-executive director,
appointed 11 July 2017
Caroline Richardson
Executive director,
appointed 5 October 2021
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 Chair of the Remuneration Committee and
a member of the Board Risk Committee and
Nomination Committee.
Garry Stran
Executive director,
appointed 5 October 2021
Garry Stran is the Chief Executive
Officer (CEO). He joined the
Group in July 2020 and was
originally appointed Chief
Operating Officer on
1 March 2021 and was
Caroline Richardson is the Chief
Financial Officer (CFO). Caroline
has significant experience as a
Finance director, previously 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 12 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.
Appointment and resignation of directors during and
after the year ended 30 September 2021
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 resigned as a director on 23 December
2021.
Simon Moore and Mark Sismey-Durrant were appointed
as directors on 9 January 2022.
subsequently appointed interim
Tim Franklin resigned as a director on 31 January 2022.
CEO on 21 May 2021 and
confirmed as the CEO in May 2022.
Garry is a financial services
professional having had a variety of roles in listed,
owner managed, state and private equity-controlled
businesses. He has extensive experience across
financial services with a focus on credit risk
management, operation transformation and M&A.
Garry’s early career was with Nationwide Building
Society where he was a senior executive and a member
of the Retail Credit Committee. Since then, he has
worked extensively in private equity as both a founder,
CEO, non-executive director (NED) and Chair.
Garry was a NED of Computershare Loan Services Limited
for six years including chairing the Audit and Compliance
Committee for part of that time. He has joined us from a
leading fintech lender where he played a key role in
supporting their rapid growth plans. Garry is a Member of
the Institute of Credit Management and holds the Finance
and Leasing Diploma.
28
Corporate Governance Structure
The Board is principally supported by, and delegates specific powers to, several established Board committees,
namely the:
l Nomination Committee. l Board Risk Committee.
l Remuneration Committee. l Executive Committee.
l Board Audit Committee.
The overall Group corporate governance structure is as set out below:
Board
Board Audit
Committee
Board Risk
Committee
Remuneration
Committee
Nomination
Committee
Executive
Committee*
Financial
Reporting &
Control
Committee
Asset &
Liabilities
Committee
Executive Risk
Committee
Change
Board
Operations &
IT Committee
Retail Pricing
Committee
Retail Credit
Committee
Operational
Risk
Committee
Model
Governance
Committee
* The Recovery Committee, the core membership of which is comprised of senior members of ExCo, meets on an ad hoc basis and reports to the Executive Committee.
Membership
Directors
Executive Directors and Senior Executives set out on pages 27 to 28 and 34 to 35
Executive Directors, Senior Executives and nominated Heads of Department
The composition of the Board is usually replicated and
operates concurrently at PCF Group plc (the Group) and
PCF Bank Limited (the Bank). The Boards met no less
than nine times17 during the 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 Chair and this will be an
area of focus for me once the new Board Risk
Committee Chair is appointed.
Each of the Executive Committee, Board Audit
Committee, Board Risk Committee, Nomination
Committee and 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 Strategic Report, improvements
in governance are a remediation priority. The Annual
Report & Financial Statements 2020 set out the new
committee structure and the committee
responsibilities being implemented to improve
governance. One additional committee has recently
been incorporated into the Corporate Governance
structure since, namely the Financial Reporting and
Control Committee (FRCC), which reports into both
the Executive Committee and the Board Audit
Committee. An outline of the Executive Committee,
FRCC, Assets & Liabilities Committee and Executive
Risk Committee (ERC) responsibilities are set out in
the Risk Management Report on page 56. Below these
four Executive Committees there are management
committees with responsibility for specific risks and
appropriate oversight. Prior to establishment of all
management committees their responsibilities have
been undertaken by the parent Executive Committee;
with Operational Risk and Model Governance
responsibilities to transfer to those respective
committees from ERC after publication of this report.
17 Subsequent to the end of the financial year, PCF Group plc’s Board Terms of Reference were amended to allow for meetings no less than four times a year, with the
Bank’s Board continuing to meet no less than nine times a year.
Annual Report & Financial Statements 2021
29
Corporate Governance Report (cont’d)
Corporate Governance Structure
The Board’s roles and responsibilities include, without
limitation, the following:
l Developing corporate objectives, policies, and
strategies.
l Reviewing and adopting the strategic business plan
for the Group’s effective business performance.
l Overseeing the conduct of the Group’s business to
evaluate whether the business is being managed
effectively.
l 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 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 the
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 Board Audit and
Risk Committees, whose Chairs provide oral reports,
minutes, and updates to the Board. The Board 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 on pages 55 to 56.
Further details of the work of the Board Audit and Risk
Committees can be found on pages 28 to 42.
Whilst the Board delegated the role of assessing
principal risks of the Group and the Bank to the Board
Risk Committee, during the financial year the Chief Risk
and Compliance Officers submitted Risk and Compliance
Reports respectively to the Board at each scheduled
Board meeting to highlight matters of note for
consideration and action, as well as progress updates on
relevant actions and matters.
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.
Board balance and independence
The Group and the Bank Boards consist of four
independent non-executive directors, two non-
executive directors and two executive directors, Garry
Stran and Caroline Richardson. The Board is chaired
by Simon Moore, an independent non-executive
director and Mark Sismey-Durrant, a Senior
Independent Director. The profiles of the members of
the Board are provided on pages 27 to 28. 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 systems and the integrity of
the Group’s external and internal audit processes. The
Board has outsourced its internal audit activities to
Grant Thornton UK LLP (Grant Thornton). The Board
Audit Committee is responsible for agreeing and
overseeing the outsourced 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. After
the year end, a decision was made to appoint Mark
Sismey-Durrant, as a Senior Independent Director
(SID) to increase the resources of the Board and
improve governance through fulfilment of the SID
functions recommended by the Code.
The Remuneration Committee appraises the
performance and remuneration of the executive
directors and other senior executives.
The Boards of the Group and the Bank are responsible
for the success of the Group and the Bank respectively.
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.
30
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.
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.
Attendance at meetings
The attendance of the directors at scheduled Board
and principal committee meetings that took place
during the year is shown below. In addition to the
eleven scheduled Board meetings, a further eleven
meetings were held 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.
Roles and responsibilities of the Chair and
Chief Executive Officer
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 roles of Chair and Chief Executive are not
exercised by the same individual.
All executive and non-executive directors have
unrestricted and timely access to all relevant information
necessary for informed decision-making. The Chair
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.
Chair
Tim Franklin served as Chair throughout the year and
resigned as a director on 31 January 2022. Simon Moore
was appointed on 9 January 2022, as the Chair. The
Chair 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 Officer
Scott Maybury served as Chief Executive until his
resignation as a director, on 21 May 2021. Garry Stran
replaced Scott Maybury initially on an interim basis, and
was appointed to the Board on 5 October 2021. 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.
Annual Report & Financial Statements 2021
31
32
Corporate Governance Report (cont’d)
Corporate Governance Structure
Number of meetings
attended/(eligible)
Tim Franklin
Scott Maybury18
David Morgan
Mark Brown
Christine Higgins
Marian Martin
David Titmuss
Robert Murray19
Garry Stran20
Caroline Richardson20
Board Audit
Committee
Board Risk
Committee
Nominations
Committee
Remuneration
Committee
Board
22
22 (22)
13 (13)
19 (22)
13
–
–
–
21 (22)
13 (13)
22 (22)
13 (13)
21 (22)
11 (13)
22 (22)
11 (11)
–
–
–
–
–
–
8
–
–
8 (8)
–
8 (8)
8 (8)
8 (8)
–
–
–
4
8
4 (4)
–
4 (4)
4 (4)
4 (4)
4 (4)
4 (4)
–
–
–
8 (8)
–
8 (8)
8 (8)
8 (8)
8 (8)
8 (8)
–
–
–
18 Resigned 21 May 2021.
19 Resigned 26 March 2021.
20 Garry Stran, CEO, and Caroline Richardson, CFO, both attended Board meetings from the dates of their
appointments as invitees. The attendance of the CEO and the CFO in the table above reflects their tenure as
members of the Board, with both being appointed members of the Board in October 2021, after the end of the
financial year.
Appointments to the Board
The Nomination Committee (NomCo) consists of two
non-executive directors and four independent non-
executive directors and was chaired by Tim Franklin,
until his resignation on 31 January 2022. Simon Moore
has been appointed as Chair. 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.
Training and development of directors
Professional development
During the year, specific training sessions were held
covering compliance, regulation and corporate
governance issues. Topics covered included ILAAP,
L-SREP, ICAAP, C-SREP and Horizon Scanning. The
Board also held a session on culture, diversity, and
inclusion at the Annual Strategy Day. Board members
are encouraged to attend relevant training
programmes as part of their continuing professional
development and additional business, compliance and
regulatory updates are also arranged as appropriate.
Company Secretary
The Company Secretary is responsible for ensuring that
Board procedures and applicable rules and regulations
are observed. The Company Secretary is also
responsible for advising the Board, through the Chair,
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.
Annual Report & Financial Statements 2021
33
Corporate Governance Report (cont’d)
Governance structure and delegated
committees
The Board has established several committees to which
responsibility for certain matters has been delegated.
The Board Committee structure is shown in the
diagram on page 29. 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 the Nomination, Remuneration, Board Audit
and Board Risk Committees are set out on pages 36 to
48 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 CEO 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
Executive Committee (ExCo). The CRO and COO have
a standing invitation to attend all scheduled Board
meetings. Additionally, the CEO and the CFO attended
Board meetings as invitees prior to their appointment
to the Board in October 2021.
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 the Executive Committee (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 (Chief Executive Officer) and
Caroline Richardson (Chief Financial Officer) as at
22 December 2021, the other members of ExCo are as
follows:
Andrew Barber21
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 Baum22
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 Coleman23
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. 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 Marshall23
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.
Catherine Mayo22
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
at 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.
Jason McCabe21
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 eight 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.
34
Duncan McDonald22
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 Scott21
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 all savings and lending divisions. Gavin
has over 20 years of asset finance experience having
originally started in sales for a specialist media asset
finance company in 1998.
Kate Willson24
Interim Chief People Officer
Kate has worked with the Group on a consultancy basis
since August 2021 and joined the Group as interim
Chief People Officer (CPO) in April 2022 on departure
of the previous incumbent. Kate has had a 20-year
corporate career in the financial services industry,
including leadership roles with Nationwide Building
Society and Alliance & Leicester (A&L) within Human
Resources and Learning & Development functions. At
A&L Kate had board level responsibility for introducing
a succession planning process and a number of new
initiatives to support it such as ‘Women in Business’.
Since 2004 Kate has completed a wide range of
consultancy assignments with large and smaller
organisations. Kate has significant experience of
organisational change including cultural change,
organisational restructures, diversity and inclusion
strategy development and employee communications.
Kate is a chartered member of the Chartered Institute
of Personnel and Development.
21 Member of the Executive Committee throughout the year to
30 September 2021.
22 Member of the Executive Committee from June 2021.
23 Member of the Executive Committee from
August 2021.
24 Member of the Executive Committee from
April 2022.
Where appropriate, alternates attend when members
are absent.
Annual Report & Financial Statements 2021
35
Nomination Committee Report
Committee members of the Nomination
Committee (NomCo)
Simon Moore
Independent non-executive director (Chair)
(Member from 9 January 2022)
Mark Brown
Non-executive director
Christine Higgins
Independent non-executive director
David Morgan
Non-executive director
Mark Sismey-Durrant
Independent non-executive director
(Member from 9 January 2022)
David Titmuss
Independent non-executive director
Tim Franklin
Independent non-executive director
(Chair/Member until 31 January 2022)
Marian Martin
Independent non-executive director
(Member until 23 December 2021)
Dear Shareholder,
I present my report to you as Chair of the Nomination
Committee (NomCo) for the year ended 30 September
2021.
Introduction
The 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. 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 the NomCo is:
l To review the structure, size and composition of the
Board.
l To lead the process for appointments to the Board.
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.
NomCo assesses the suitability of candidates,
considering the required mix of skills, knowledge,
experience and diversity, before recommending them
to the Board for appointment. NomCo continues to
ensure that diversity in candidates is sought for
appointments to the Board.
During the year, NomCo completed the process of
recruiting a new Chief Financial Officer (CFO). 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.
NomCo also recommended the Board to appoint Garry
Stran, who had joined the Group as Chief Operating
Officer on 1 March 2021, as the new interim Chief
Executive Officer, on 21 May 2021. Following the year
end, the Committee recommended Garry Stran’s
appointment as CEO.
Tim Franklin advised NomCo of his intention to retire in
early 2022. NomCo engaged Warren Partners to source
appropriate candidates for the roles of Board Chair and
Senior Independent Director (SID). After an extensive
process, NomCo recommended to the Board that it
appoint Simon Moore as Board Chair and Mark Sismey-
Durrant as SID.
Following Marian Martin’s resignation on 23 December
2021, NomCo is engaged in the recruitment of a non-
executive director to replace her as a non-executive
director and Chair of the Board Risk Committee. Until
an appointment is made Mark Sismey-Durrant will act
as the interim Chair of the Board Risk Committee.
During the financial year regular board training was
held to provide Board members with professional
development and to enable updates on regulatory,
financial and governance developments. 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.
During the financial year NomCo met four times.
Diversity and inclusion
Diversity and inclusion continue to be a focus of the
Committee. NomCo considers that the Board can draw
on a diverse range of experience, knowledge, and skills
of directors from different backgrounds but will
continue to seek opportunities to further improve the
wider diversity of the Board in the future. At 30
September 2021, two of the Company’s six directors
were women and this is now two 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 2021 was
(72.7%) male and (27.3%) female and in management
positions was (75%) male and (25%) female.
This report was approved by the Nomination
Committee on 31 May 2022.
Simon Moore
Chair of the Nomination Committee
31 May 2022
36
Annual Report & Financial Statements 2021
37
Remuneration Committee Report
Committee members of the Remuneration
Committee (RemCo)
David Titmuss
Independent non-executive director (Chair)
Simon Moore
Independent non-executive director
(Member from 9 January 2022)
Mark Brown
Non-executive director
Christine Higgins
Independent non-executive director
David Morgan
Non-executive director
Mark Sismey-Durrant
Independent non-executive director
(Member from 9 January 2022)
Tim Franklin
Independent non-executive director
(Chair/Member until 31 January 2022)
Marian Martin
Independent non-executive director
(Member until 23 December 2021)
Dear Shareholder,
I present my report to you as Chair of the Remuneration
Committee for the year ended 30 September 2021.
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. 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. During the year the Committee
reviewed the remuneration of the CEO and CFO in
advance of their appointment.
Approach to remuneration
The approach taken by the Group in respect of
remunerating colleagues emanates from a combination
of regulatory guidance in particular, the Dual-Regulated
Firms Remuneration Code (SYSC 19D), as appropriate
for Level 3 firms, the rules on remuneration published
by the Prudential Regulation Authority (PRA) and
Financial Conduct Authority (FCA) are 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 the
Dual-Regulated Firms remuneration principles
proportionality rule (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.
By application of supervisory statement 2/17:
‘Remuneration’, and policy statement 28/21:
‘Remuneration: Identification of material risk takers’, the
Group classifies those colleagues identified under the
regime, as Renumeration Code employees, also known
as material risk takers. Renumeration Code employees
are comprised of executive and non-executive
directors, senior managers, and internally certified
employees covered by the Senior Managers 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, co-operation, 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, in applying our remuneration policy the
Group also needs to be consistent with the principles
and provisions of the 2018 UK Corporate Governance
Code in terms of:
38
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.
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. Since the 2018 scheme no
new share-based long-term incentive has been
introduced.
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 49 to 53. No
options were granted during the financial year. Options
exercised during the financial year are detailed in the
Directors’ Report. None of the executive directors
received share-based remuneration in the financial
year.
Other directors’ interests in the Group are disclosed in
Note 32 to the financial statements.
Key activities in the year
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 ad hoc
recognition payments were approved by Remco in
January 2021 for efforts in relation to the pandemic,
totalling £38,000.
As detailed above, the Committee considered the initial
remuneration packages for the newly appointed COO
and CFO, as well as a further remuneration package for
Garry Stran upon his assuming the role of interim CEO.
RemCo then gave further consideration to the interim
CEO and CFO arrangements in June 2021, in particular
to the granting of additional fixed payment allowances
for the financial year but paid in December 2021 (as
further detailed in the table in the Remuneration for the
Year section).
RemCo met eight times during the year to
30 September 2021.
Since 30 September 2021, the Committee has met to
consider the remuneration of the two newly appointed
non-executive directors, reviewed the two executive
directors’ compensation and new bonus schemes for all
employees and the Senior Management Team.
Additionally, the Committee agreed the remuneration
for the appointment of Garry Stran as CEO in
May 2022.
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
Aegon, with a Company contribution rate based on 7%
of basic salary.
The directors’ and senior executives’ contribution rate
are based on 10% of basic salary. These are inside 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, senior executives 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 for future appointments of
directors’ and senior executives’ contributions to align
with those of the majority of the work force for new
senior executive hires).
Annual Report & Financial Statements 2021
39
Remuneration Committee Report (cont’d)
Variable remuneration
The annual performance award is a significant variable
component of the overall remuneration and is at the
discretion of Remco. In determining the level of award
paid to the Chief Executive and Chief Financial Officer,
consideration was given not only to the financial
performance of the Group (including returns to
shareholders and the Group’s profitability) in 2021, 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
2021, no annual bonuses were paid to the executive
directors.
2021
Executive directors
S D Maybury25
R J Murray26
D R Bull27
Non-executive directors
M F Brown
T A Franklin28
C A Higgins
D J Morgan
D Titmuss
M Martin29
Senior executives subsequently appointed
as directors after 30 September 2021
G Stran30
C Richardson31
Total
2020
Executive directors
S D Maybury25
R J Murray26
D R Bull27
Non-executive directors
M F Brown
T A Franklin28
C A Higgins
D J Morgan
D Titmuss
M Martin29
Total
Fixed
Variable
Salary/fee
£’000
Pension
£’000
Taxable
benefits Bonus
£’000 £’000
Other
£’000
Total
£’000
215
108
–
43
95
57
43
52
59
139
124
935
–
5
–
–
–
–
–
–
–
10
12
27
– –
– –
– –
– –
– –
– –
– –
– –
– –
71
–
–
–
–
–
–
–
–
– –
10 –
10 –
138
118
327
286
113
–
43
95
57
43
52
59
287
264
1,299
Fixed
Variable
Salary/fee
£’000
Pension
£’000
Taxable
benefits Bonus
£’000 £’000
Other
£’000
Total
£’000
289
190
191
43
95
57
43
52
43
–
15
19
–
–
–
–
–
–
2 –
2 –
2 –
–
–
202
– –
– –
– –
– –
– –
– –
–
–
–
–
–
–
291
207
414
43
95
57
43
52
43
1,003
34
6 –
202
1,245
25 Retired and resigned from the business on 21 May 2021. ‘Other’ amount represents a payment for loss of office.
26 Resigned on 31 March 2021. 2021: Part of the pension received in cash. 2020: Part of the pension received in cash.
27 Resigned as a director on 16 March 2020 and left the Company’s employment on 30 September 2020. As at the time of departure from
the Group David Bull was treated as a good leaver. 2020: ‘Other’ amount represents a payment for compensation for loss of office,
including £87,000 as a payment in lieu of up to six months’ notice, £85,000 as an incentive award measured against specific
predetermined performance criteria and £30,000 as an ex-gratia payment. Share options previously granted were not cancelled on
departure from the Group.
28 Resigned on 31 January 2022.
29 Resigned on 23 December 2021.
30 Appointed as a director on 5 October 2021. Remuneration from date of appointment as interim Chief Executive Officer on 21 May 2021
(having joined the Group as COO on 5 July 2020). Pension received in cash. ‘Other’ amount represents a fixed deferred payment
relating to the period but paid in December 2021 as part of his interim CEO appointment package.
31 Appointed as a director on 5 October 2021. Remuneration from date of joining the Group as CFO on 15 March 2021. ‘Other’ amount
comprises a fixed payment relating to the period but paid in December 2021. Benefits included allowances for temporary
accommodation in London following her appointment.
40
Other matters
In light of the delays in the Financial Statements 2020,
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. RemCo is overseeing such recovery actions.
Non-executive directors
Non-executive directors are engaged under letters
of appointment and are required to stand for
re-appointment 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.
Remuneration disclosures
Information on the Group’s Remuneration Code is set
out in the Pillar 3 disclosures and published on our
website www.pcf.bank
This report was approved by the Remuneration
Committee on 31 May 2022.
David Titmuss
Chair of the Remuneration Committee
31 May 2022
Annual Report & Financial Statements 2021
41
Board Audit Committee Report
Committee members of the Board Audit
Committee (BAC)
Christine Higgins
Independent non-executive director (Chair)
Mark Brown
Non-executive director
Mark Sismey-Durrant
Independent non-executive director
(Member from 9 January 2022)
Marian Martin
Independent non-executive director
(Member until 23 December 2021)
Dear Shareholder,
I present my report to you as Chair of the Board Audit
Committee for the year ended 30 September 2021 and I
have outlined below the key work of the Committee
during the year. This year we were pleased to welcome
MHA MacIntyre Hudson LLP as our new auditors and, on
behalf of the Committee, I would like to thank them for
their work and support in this first year.
Responsibilities of the 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 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 Monitor and review the effectiveness of the Group’s
internal control systems.
l Review the Compliance Manual and Data Protection
Manual and recommend them to the Board for
approval.32
l Oversee whistleblowing arrangements. The Chair of
BAC is the Whistleblowing Champion and an
independent point of escalation in accordance with
the Group’s Whistleblowing Policy.
32 The responsibility for compliance oversight, including data privacy,
transferred to the Board Risk Committee after the year end.
Composition of the Board Audit Committee
BAC is 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.
Standing invitees to BAC included the Chief Financial
Officer, Chief Risk Officer and representatives of the
outsourced internal audit function and the external auditor.
Since his appointment, the Chair has also attended BAC as
a standing invitee.
The Chairs of the BAC and Board Risk Committee are
each a member of the other Committee.
Meetings and areas of focus
BAC met thirteen times during the year including four
scheduled meetings. An oral report was made to the
Board following each meeting and the approved minutes
were subsequently provided.
The BAC met privately before the scheduled meetings
and at least once a year with the external auditor, the
internal auditor, and the CFO, in turn.
During the year, BAC held an additional nine meetings to
address matters related to delayed completion of the
Financial Statements to 30 September 2020, financial
controls and reporting process remediation activities and
to lead a tender for a new statutory auditor.
Financial reporting and preparation of the financial
statements
The Committee scrutinised the Annual Report &
Financial Statements 2021. The Committee considered
the Annual Report & Financial Statements 2021 as a
whole and was satisfied that the reporting, including
the disclosures in the Notes to the accounts, fairly
represented the results and business performance for
the year. The Committee considered the Annual
Report & Financial Statements 2021 against a number
of hallmarks of ‘fair, balanced and understandable’,
including whether the overall portrayal of the Group
was open and fair, setting out both successes and
challenges, and whether language was used that a
person with reasonable knowledge of financial sector
financial reporting could understand. The Committee
also considered whether the reporting was relevant in
the context of the Group’s strategy and the status of
the Group’s remediation activities, and whether the
impacts of the COVID-19 pandemic and geopolitical
events were appropriately recognised.
The Committee discussed and challenged
management’s analyses, the external auditor’s work,
and conclusions on the main areas of judgement
presented in the Annual Report & Financial
Statements 2021 (see details below under ‘Significant
accounting issues and judgements’) as well as
management’s documented assessment of
compliance with the UK Corporate Governance Code
2018 including those exceptions set out on page 26.
The Committee was satisfied that internal controls
and risk management systems are in place to provide
assurance over the preparation of the Annual Report
& Financial Statements 2021. Financial information
submitted for inclusion in the financial statements was
verified by individuals with appropriate knowledge
and experience. The Annual Report & Financial
Statements 2021 was scrutinised throughout the
process by relevant senior stakeholders before being
submitted to the Board Audit Committee, who
provided debate and challenge, before
recommending to the Board for approval. Each main
area of focus in relation to the Annual Report &
Financial Statements 2021 was discussed with the
external auditor during the year and, where
appropriate, have been addressed as an area of audit
focus in the Auditor’s report. The Committee also
scrutinised the March 2021 Interim Results and the
accounting judgements made in their preparation.
42
Remediation and improvements in financial
controls and reporting processes
The Finance transformation work continues to embed
best practice and efficiency control improvements. This
transformation work is ongoing and is managed by an
experienced change professional who provides regular
oversight reports to BAC. Since the year end, BAC has
overseen the creation of a new Financial Reporting &
Control Committee which has responsibility for oversight
of financial and regulatory reporting and the development
of the Financial Control Framework. This committee met
for the first time in April 2022 and reports into both BAC
and the Executive Committee.
Accounting policies and judgements
The Committee reviewed the Group’s accounting policies
and confirmed they were appropriate to be used in the
financial statements. It also considered changes to
policies and processes. Judgments considered material
for the Annual Report & Financial Statements 2021
reporting are set out within this report.
The Committee noted that there were no new standards,
or amendments to standards, relevant to the Group that
had become effective for the reporting period as set out
in Note 1.5.1.
Non-IFRS performance measures
The Committee has paid particular attention to the non-
IFRS performance measures included in the Annual
Report & Financial Statements and as detailed on page 17.
The Group uses ’adjusted’ numbers to report its
underlying results as well as for internal reporting
purposes. The adjusted numbers strip out the accounting
impact of one-off and non-recurring items. The Group
experienced goodwill impairment, in both financial year
20 and financial year 21, in financial year 21, the Group also
recognised a profit from the sale of credit-impaired loans
and incurred significant costs in respect of remediation
activities. The Committee has reviewed the Group’s
analysis for the exclusion of these items when presenting
adjusted earnings and confirmed the consistent
application and appropriateness of this analysis from year
to year. The Committee considered the disclosure of and
prominence given to these non-IFRS performance
measures to be appropriate to aid an understanding of
the Group’s results.
Significant accounting issues and judgements
In reviewing the 2021 Financial Statements, the BAC
reviewed, discussed and challenged management’s
assessment of the following significant accounting
issues and judgements as follows:
l Impairment of loans and advances to customers in
accordance with the IFRS 9 expected credit loss
(ECL) model. The impact of COVID-19 during the year
continued to affect the potential creditworthiness of
customers. The Committee discussed management’s
assessment of key assumptions used in the IFRS 9
models and the assumptions and rationale that
supported additional provisions through overlays and
post-model adjustments described in Notes 1.5.2 and
1.6.2. The Committee is satisfied with management’s
determination of IFRS 9 expected credit loss
allowance inclusive of the post model adjustments
and IFRS 9 ECL disclosures across Notes 1.5.2, 1.6.2, 6,
15, 29.5 to 29.8 and 30.3.1 to 30.3.7 of the Financial
Statements.
l Risk of fraud in the recognition of revenue through
the Effective Interest Rate (EIR) methodology. The
Committee considered management’s assessment of
the key assumptions and judgements set out in Note
1.6.1 used in the EIR methodology for determining the
recognition of interest income on an EIR basis. The
Committee is satisfied with management’s
assessment of revenue recognised on an EIR basis.
The Committee reviewed Managements’ analysis of a
prior year error in the timing of recognition of interest
income calculated using the EIR method identified in
relation to a legacy system and agreed that a
restatement relating to 2020 should be reflected in
the Financial Statements. In this regard the
Committee has considered Management’s
explanation for the historical circumstances that gave
rise to this error and will oversee the ongoing control
enhancements and development of the Financial
Control Framework. Further details of the
restatement are set out in Note 1.7.
l Recoverability of Deferred Tax Assets (DTA) and
impairment assessment of goodwill.
l The Committee reviewed a number of papers
prepared by management on the carrying value
of these deferred tax assets and goodwill which
noted that the agreed criteria to recognise
deferred tax assets relying on future profitability
and goodwill had not been met. The recognition
assumptions having been changed from the prior
year due to an update in the phasing of the
return to profitability in the strategic plan and
additionally as the period for recovery
considered was reduced to match the period
over which going concern was considered (being
a 12-18 month period).
l As a result of this change, deferred tax asset of
£2.6 million at the substantively enacted rate of
25% (2020: £1.8 million at 19% rate) has not been
recognised: In respect of trading losses of £2.9
million (2020: £nil), with a corresponding deferred
tax asset thereon of £0.7 million (2020: nil) and
other temporary differences of £7.3 million (2020:
£9.5 million), with a deferred tax asset thereon of
£1.8 million at the substantively enacted rate of
25% (2020: £1.8 million at 19% rate).
l Given the disclosure of a material uncertainty in
relation to going concern in both the Annual
report and financial statements 2020 and 2021,
the committee judged that it was appropriate to
treat the derecognition of deferred tax assets as
a prior year adjustment, and comparatives have
been restated accordingly.
l The resulting deferred tax asset recognised at
30 September 2021 was £nil (2020: £nil) as set
out in Note 19 to the financial statements. The
carrying value of goodwill at the year end is £nil
(2020: £1.2 million) as set out in Note 18.
l Impairment assessment of tangible and intangible
assets: At 30 September 2021, the carrying value of
the Group’s tangible assets was £2.4 million (2020:
£3.1 million) as set out in Note 17, and intangible
assets was £3.1 million (2020: £3.2 million) as set
out in Note 18 to the financial statements. The
Committee considered management’s impairment
assessment of tangible and intangible assets, noting
the findings of immaterial impairments identified by
Annual Report & Financial Statements 2021
43
Board Audit Committee Report (cont’d)
management which were recorded in the financial
results. The Committee is satisfied with the
conclusion that impairments of both tangible and
intangible assets were immaterial, and the
presentation of tangible and intangible assets in the
financial statements.
l Restatements and representations. The committee
reviewed papers on proposed restatements
prepared by management. There are two areas of
prior period restatement to these financial
statements. Firstly, in respect of Interest Income
(relating to the EIR methodology applied in the 2020
financial year) and secondly in respect of deferred
tax assets. The Committee’s assessment of each of
these prior period restatements is reflected in the
respective sections above with further details set out
in Note 1.7 to the financial statements.
l Going Concern: There continues to be a material
uncertainty around the Going Concern position of the
Group, and this was considered in detail by the
Committee. As set out in the emerging risk section of
the strategic report, there are various assumptions and
risks to the Group’s strategic plan (the Plan) and the
Plan assumes capital raises. The committee reviewed
the assumptions to the Plan and the associated risks
to execution of the Plan. The Committee noted that
should the capital raise or other strategic
opportunities (as outlined in the Chair’s Statement)
not proceed then the Group regulatory ratios would
over time fall below those required by our regulator
which could impact our continued operations. The
Committee concluded that the Going Concern basis of
preparation was appropriate and furthermore, given
the lack of certainty in relation to future capital raising
or the aforementioned Strategic opportunities being
considered by the Board, it was appropriate to
disclose a material uncertainty in relation to Going
Concern in the Financial Statements 2021 as set out in
Note 1.2 of the financial statements. Refer to the
Directors’ Report on page 51 for further details and
Note 1.2 Basis of preparation to the financial
statements.
l Recoverability of Parent Company’s investment in
the Bank subsidiary: The Parent company’s carrying
value of its investment in PCF Bank Limited at 30
September 2021 was £32.0 million (2020: £32.0
million) as set out in Note 16 while Note 1.6.3 to the
financial statements sets out the accounting
judgements and assumptions for determining an
impairment in a subsidiary. The Committee
considered management’s assessment of the
recoverable amount of the investment in the Bank,
being the higher of the Bank’s cash-generating
unit’s fair value less costs of disposal, and its value in
use, was greater than the carrying value of the
Parent’s investment in the Bank; and management’s
conclusion there is no impairment of the Parent
Company’s investment in the Bank. The Committee
is satisfied that there is no impairment of the
Parent’s carrying value of its investment in Bank.
l Derecognition of loans and advances to customers
on sale of credit-impaired loans: On 30 September
2021, the Group sold a portfolio of credit-impaired
loans with a carrying value of £1.7 million, generating
a profit on disposal of £0.9 million as set out in Note
7 to the financial statements. The sale of these loans
was also disclosed in the Annual Report & Financial
Statements 2020 as a post balance sheet event in
Note 32. The Committee considered management’s
assessment that the terms and timing of the sale of
the credit-impaired loans met the derecognition
criteria of IFRS 9 at 30 September 2021, and that
the ECL allowance on the credit-impaired loan
portfolio was appropriate both at 30 September
2020 and 2021. The Committee is satisfied that both
the accounting and disclosures for the sale of the
credit-impaired loan portfolio were in accordance
with the requirements of IFRS 9, and the ECL
allowance on the remaining credit-impaired loan
portfolio was appropriate.
Auditor opinion
The Committee has overseen the transition of the
external audit from EY, who had been the Group’s
external auditor for 27 years, to MHA MacIntyre Hudson
LLP (MHA) and their first-year audit of 30 September
2021. As part of the transition arrangements, in
accordance with auditing standards, MHA inspected
EY’s audit files for the year ended 30 September 2020
and undertook additional audit procedures on the
opening balance sheet for the year ended 30
September 2021. This additional work included
inspecting and testing management’s own detailed
review work on 30 September 2020 balances which is
set out in detail in the Board Audit Committee’s report
in the Annual Report & Financial Statements 2020.
The Committee is satisfied with the additional review
work of the balance sheet undertaken by management for
the year ended 30 September 2020, and management’s
assessment of restatements relating to the recoverability
of deferred tax assets in 2020 and the impact of the
recognition of revenue through the EIR method back to
2020. However, in light of the disclaimer of opinion for the
year ended 30 September 2020, and despite the
additional opening balance sheet audit procedures
undertaken by MHA, the Committee accepted that MHA
must qualify their opinion for the year ended 31
September 2021 with respect to the opening balance
sheet.
Internal audit
BAC oversees the internal audit function, approving its
plans and scope, its resources, and considers the
internal reports issued.
The Board has outsourced its internal audit function to
Grant Thornton UK LLP (Grant Thornton). The BAC is
responsible for agreeing and overseeing the internal
audit plan. Grant Thornton issued eight internal audit
reports during the year ending 30 September 2021
(2020: six) and three started during the year and
completed after the year end. Four (GDPR Compliance,
SCV, Cyber Security and Operational Resilience) were
rated ‘Satisfactory’ (2020: two), three (Collections and
recoveries, Anti-Money Laundering and Broker
Management) were rated ‘Some Improvement
Required’ (2020: one), three (Regulatory Reporting,
Treasury Risk Management and Supplier Management)
were rated ‘Needs Improvement’ (2020: one) and one
(Regulatory Reporting PRA110) was rated
‘Unsatisfactory’ (2020: none).
The annual internal audit plan was developed in
conjunction with the Second Line of Defence
compliance monitoring programme and was approved
by BAC. The areas for internal audit are linked to
strategic objectives, key risks, and the core areas of
regulatory oversight.
44
Grant Thornton has observed the response from the
areas they reviewed during the year and through
interaction with management have reported that
management had been engaged in the internal audits
performed and responded positively to
recommendations made.
The Chair of BAC had private discussions with Grant
Thornton during the year and the Committee met with
them at least once during the year, without
management present.
The Committee has satisfied itself as to the
effectiveness of the outsourced internal audit function
during the year through the review of the internal audit
strategy and annual internal audit plan, and discussion
of issued internal audit reports with Grant Thornton.
The internal audit programme for the next twelve
months, approved by the BAC in November 2021, will
look into the enhancements made. The internal audit
budget was significantly increased this year to include
part time internal audit resource dedicated to the
Group and to provide more internal audit coverage.
Compliance and internal controls systems
The Board is responsible for the overall adequacy of the
Group’s system of internal controls and risk
management. The Board delegated to BAC the
responsibility for reviewing and monitoring the
effectiveness of regulatory compliance and internal
control systems.
The Annual Report & Financial statements 2020 set out
in detail the investigation of historical accounting errors
and misstatements and the legacy governance and
control issues identified which resulted in the delayed
publication of the Annual Report & Financial
Statements 2020 and the suspension from trading in
the Group’s shares on AIM. As a result of these findings,
the Group entered a period of remediation and
improvement in its Finance function, including
investment in experienced Banking Finance resources
together with efficiency and control improvements in
its financial and regulatory reporting processes.
Since the 2021 financial year end, further financial
control enhancements have been made including the
development of a Financial Control Framework (FCF)
which will form part of the overall Risk Management
Framework. The Committee and the CFO have utilised
independent external advisers to support the changes
required. The cost of these external advisors plus those
utilised on other remediation activities has contributed
to elevated professional services fees as set out in the
Business Performance review.
The Committee scrutinised the findings arising from an
external independent validation of the IFRS 9 ECL
model, discussed and challenged management on the
ECL modelled outputs, post model adjustments
implemented to compensate for model limitations, the
control environment, governance and oversight
findings and management’s plans to redevelop the
IFRS 9 ECL model and control environment.
During the period covered by this report and since
30 September 2021, the Committee reviewed,
challenged and approved the Group Accounting Policy
manual and a series of financial control related policies
implemented by management as part of preparing the
Annual Report & Financial Statements 2021 including:
balance sheet substantiation; manual journal review;
and materiality thresholds.
BAC considered several reports from the Chief
Compliance Officer 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.
BAC also oversaw the development of further strategic
metrics during the year, approved relevant policies and
recommended compliance framework documents to
the Board, in line with the Committee timetable.
COVID-19 and its impact on the business of the Group
continued to dominate 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’.
The revised Compliance Manual and Data Protection
Manual were reviewed by the BAC during the year and
recommended to the Board for approval. The
responsibility for the compliance oversight, including
data privacy, transferred to the Board Risk Committee
after the year end.
In reviewing the adequacy of internal controls systems,
the Committee received and discussed internal and
external reports during the year from internal audit,
external audit and Risk and Compliance.
BAC will continue to review and oversee the
implementation of recommended internal control
systems, process, and reporting improvements.
New auditor appointment
Ernst & Young LLP (EY) had been the Group’s 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.
BAC retendered the external audit in 2021 with the new
external auditor Maclyntyre Hudson LLP (MH)
appointed by the Board on BAC’s recommendation,
after EY’s resignation on 23 December 2021. At the
General Meeting of PCF Group plc on 4 February 2022,
shareholders approved the appointment of MH as the
Company’s auditors and authorised the Board to
determine their remuneration.
BAC has overseen the transition of the external audit to
MH for the year ended 30 September 2021.
External audit
BAC is responsible for overseeing the relationship with
the external auditor, including the ongoing assessment
of the auditor’s independence. BAC makes
recommendations to the Board regarding the
appointment of the external auditor and approves their
remuneration and terms of engagement.
BAC discussed and approved MH’s audit plan for the
year ended 30 September 2021 including their initial
assessment of risks, risk evaluation, areas of focus,
scope and materiality, as well as the results of the audit.
Annual Report & Financial Statements 2021
45
Board Audit Committee Report (cont’d)
BAC has reviewed the independence and objectivity of
MH considering the auditor’s report to the Committee
on actions they take to comply with requirements for
independence and compliance with professional and
ethical standards.
The level of audit fees charged by the Group’s auditor
is set out in Note 10 to the financial statements and are
significantly lower this year. Since 30 September 2021,
MH has provided two permitted engagements of non-
audit related work to the Group. This non-audit work
was deemed necessary by BAC and is in line with the
Financial Reporting Council’s Ethical Standard 2019.
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 BAC. BAC concluded that as MH,
the new external auditor, had only been appointed on
23 December 2021 BAC will undertake an appropriate
formal assessment of the change in auditor and its
effectiveness after the first year’s audit.
Whistleblowing
BAC has reviewed the effectiveness of whistleblowing
arrangements in place within the Group and adherence
to the relevant regulatory requirements. During the
year, and after the year end in November 2022, the
Committee received Compliance reports that provided
assurance on operations of these matters.
Committee effectiveness
BAC undertook an annual review of its own
effectiveness during 2021 through a questionnaire sent
to BAC invitees in 2022 and the conclusions were that
the Committee was operating effectively.
This report was approved by the Board Audit
Committee on 31 May 2022.
Christine Higgins
Chair of the Board Audit Committee
31 May 2022
46
Board Risk Committee Report
Committee members of the Board Risk Committee
(BRC)
Mark Sismey-Durrant
Independent non-executive director
(Member from 9 January 2022)
Christine Higgins
Independent non-executive director
David Titmuss
Independent non-executive director
David Morgan
Non-executive director
Marian Martin
Independent non-executive director (Chair)
(Member until 23 December 2021)
Dear Shareholder,
I present my first report to you as interim Chair of the
Board Risk Committee (BRC) for the year ended
30 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
BRC’s key responsibilities and the principal areas of risk that
we have focused on during the year to 30 September 2021.
l Review the Compliance Manual and Data Protection
Framework and recommend them to the Board for
approval.33
33 The responsibility for compliance oversight, including data privacy,
transferred to the Board Risk Committee after the year end.
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 Board Risk Committee were the
Chief Executive, Chief Risk Officer, Deputy Chief Risk
Officer and Chief Compliance Officer, Chief Financial
Officer, Chief Operating Officer, Chief Capital Officer, and
the Chief Technology Officer.
The Chairs of BRC and BAC are each a member of the
other Committee.
The Chief Risk Officer is accountable to the BRC and has
a reporting line of responsibility into the Chair of BRC.
Meetings and areas of focus
BRC has held eight meetings during the year. These
meetings considered matters including, but not limited to:
The BRC supports the Board in setting the tone and culture
that promotes effective risk management across the Group.
l Review of capital, liquidity and market risk appetite
statements and thresholds.
Responsibilities of the BRC
l Review and advise the Board on the Group’s risk
appetite, tolerance and strategy.
l Review and advise the Board on the suitability and
effectiveness of the Group’s Risk Management
Framework (RMF).
l Review and advise the Board on the Group’s
compliance with prudential and conduct regulatory
requirements.
l Safeguard the independence of and oversee the
performance of the Group’s Risk and Compliance1
Function including the sufficiency of resources.
l Advise the Board on the risk aspects of proposed
changes to strategy and strategic transactions.
l Monitor and review the effectiveness of the Group’s
risk management and risk related internal control
systems.
l The priorities for the Risk and Compliance Team,
outlined further below.
l The review and approval of the Group’s Risk
Management Framework (RMF) on an annual cycle.
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.
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
l Oversee adherence to the Group’s risk principles,
and BFD application scorecards.
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 reports from the Money Laundering
Reporting Officer and the adequacy and
effectiveness of the Group’s and the Bank’s financial
crime controls.
l Review the Group’s ICAAP, ILAAP, and Recovery
and Solvent Wind Down Plans, and recommend
them to the Board for approval.
l An external review of the ILAAP, funding plan and
associated risks, all Treasury risk policies and the
liquidity contingency plan.
l Evolution of the Group’s Risk Culture Framework as
set out in the Strategic Report.
l Refinement of the Conduct Risk Reporting
Framework.
l A review of resources within the Second Line Risk
Management Team and the execution of 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
l Ensure future risks are anticipated in terms of their
potential impact on the business through regular
horizon scanning exercises.
infrastructure to improve the oversight of the
Group’s key risk exposures, in particular credit risk
and Operational Risk.
Annual Report & Financial Statements 2021
47
Board Risk Committee Report (cont’d)
The Committee has carefully monitored the risks both
arising from the delay in finalising the Annual Report &
Financial Statements 2020 and 2021, together with the
subsequent suspensions from trading of PCF Group plc
shares as well as the Group’s emerging risks as set out in
the Strategic Report.
Since the identification of the legacy governance and
control issues, the Group has focused its attention on
improving its corporate governance and RMF, including
implementing the recommendations of an external review
thereof.
Looking ahead
The Committee continues to ensure that the impacts of
the pandemic upon the Group’s credit portfolios and
operations are managed. The Committee also continues
to monitor the short to medium-term plans for the
improvement of risk management across the Group,
including:
l Continuing to develop the RMF, reflecting the
recommendations of the external review and
including the climate risk framework.
l Continuing to enhance the Group’s stress-testing
and credit analytics capability.
l Continuing to redevelop the Group’s IFRS 9 and
credit risk models to address control weaknesses in
the current model.
l Refinement and advancement of the Group’s
overarching Operational Resilience Framework.
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 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
and Compliance function.
l RMF improvements.
l IFRS 9 model support and re-development,
including improved stress-testing capabilities.
l The redevelopment of key risk metrics and
monitoring thereof for the Group.
This report was approved by the Board Risk Committee
on 31 May 2022.
Mark Sismey-Durrant
Interim Chair of the Board Risk Committee
31 May 2022
48
Directors’ Report
The directors present their report and audited
consolidated financial statements for PCF Group plc for
the year ended 30 September 2021.
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 73.
The directors do not recommend the payment of a
dividend in respect of the year ended 30 September
2021 (year ended 30 September 2020: nil).
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. Between 19 May 2021 and 25 January 2022
and from 1 April 2022, trading in the Group’s shares was
suspended and remains suspended as 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 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 during the year are
set out in Note 27 to the Financial Statements.
On 8 March 2021, Robert Murray exercised options over
750,000 ordinary shares of 5 pence each in the
Company as detailed in Note 28.
Directors and their interests
The directors of the Company who served during the
financial year and up to the date of signing are listed on
page 2.
The directors’ interests in the shares of the Company,
all of which were beneficial interests, at 30 September
2021 are listed below.
Scott Maybury34
Robert Murray35
David Morgan
Tim Franklin36
Mark Brown
Christine Higgins
David Titmuss
Marian Martin37
At 30 September 2021
No. of ordinary shares of 5p each
At 30 September 2020
No. of ordinary shares of 5p each
-
-
500,000
125,783
200,000
33,204
50,000
37,303
1,717,653
998,340
500,000
125,783
200,000
33,204
50,000
37,303
34 Scott Maybury resigned as a director on 21 May 2021.
35 Robert Murray resigned as a director on 26 March 2021.
36 Tim Franklin resigned as a director on 31 January 2022.
37 Marian Martin resigned as a director on 23 December 2021.
The following directors also held options in the Company’s share option plans as listed below.
At 30 September 2021
No. of ordinary shares of 5p each
At 30 September 2020
No. of ordinary shares of 5p each
Scott Maybury38
Robert Murray39
38 Scott Maybury resigned as a director on 27 May 2021.
39 Robert Murray resigned as a director on 26 March 2021.
–
–
2,547,082
1,680,465
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 £24,063.
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 38 to 41 and in Note 8 to the Financial
Statements.
Annual Report & Financial Statements 2021
49
50
Directors’ Report (cont’d)
Directors’ indemnities
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 to cover
against liabilities which they may sustain or incur in the
proper performance of their duties. The Company
maintains Directors and Officers (D&O) liability
insurance for qualifying directors and officers. These
indemnities are available for inspection at the
Company’s registered office.
Substantial shareholdings
At 30 September 2021, the Company had been notified
of the following interests of 3% or more in its issued
ordinary share capital.
Somers Limited
Stichting Value Partners
Hargreaves Lansdown Asset Management
Beleggingsclub T Stockpaert
Percentage
64.41%
11.15%
4.07%
4.05%
Corporate governance statement
The Corporate Governance Report set out on pages 25
to 35 provides a review of the Group’s corporate
governance arrangements.
The various Board Committee reports, and the section
172 statement set out on page 21 and pages 36 to 48,
include 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 2021 (2020: 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 54 to 66.
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 54 to 66.
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, the 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.
In undertaking a going concern review the directors
have reviewed the short-term financial plan to
November 2023 (the Review Period). These financial
projections form part of the Group’s strategic plan
(the Plan) which contains both a base case and
downside scenarios which involved stressing various
assumptions to the Plan. In all cases, profitability is
dependent on capital being raised. However, there are
various uncertainties related to capital raising which are
noted in the Emerging risks and uncertainties section of
the Strategic Report and the associated capital raising
risks may be further exacerbated by the current
geopolitical situation.
To mitigate the regulatory capital risks and the
restriction on business lending, we have decided to
accelerate an element of our capital raising, by
requesting further investment in the Company from our
majority shareholder Somers Limited of circa £4 million
over the next two months and at the same time we are
also investigating other strategic opportunities as
outlined in the Chair’s Statement.
Should the Group not be successful in achieving its
capital raising nor any other strategic opportunities
there is no certainty that it could continue to originate
new lending given its projection that over the Review
Period regulatory capital ratios are forecast to fall
below regulatory capital minimum requirements. Should
new lending be suspended this would reduce income
and the prospect of the Group being able to generate
profits which would further impact on its ability to
generate capital organically.
In conclusion the raising or organic generation of
capital is not guaranteed, nor are the completion of
other strategic opportunities and therefore the
directors have concluded that the current lack of
certainty, and the associated risks represent a material
uncertainty which casts a significant doubt of the
Group’s ability to continue as a going concern. The
Board is confident that it will be able to affect a Capital
raise or implement strategic opportunities and
therefore holds a reasonable expectation that the
Group will have adequate resources, notably adequate
regulatory capital, to continue its operations for the
period to 31 May 2023 being at least the next twelve
months from the date of approval on the annual report
and financial statements. On this basis the directors
continue to adopt the going concern basis in preparing
these accounts.
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 to
achieve its strategic objectives. The principal risks the
Group actively monitors and manages are described in
the Strategic Report pages 18 to 20 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 25 to 35, 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 the Board Risk Committee.
Annual Report & Financial Statements 2021
51
Directors’ Report (cont’d)
The Group’s prospects are assessed primarily through a
strategic plan. This process to produce 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 CEO and the
Executive Committee. After review by the CFO, 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 Financial Statements 2020, the Strategic Plan was
signed off by the Board in October 2021. The Strategic
Plan was reforecast, and an updated Strategic Plan
approved and adopted by the Board in March 2022.
Subsequent events disclosure
Since 30 September 2021 year end there have been the
following events on:
23 December 2021
Publication of Annual Report and Financial Statements
for the year ended 30 September 2020.
Appointment of MHA MacIntyre Hudson LLP as the
Group’s new auditors following the resignation of Ernst
& Young LLP.
24 January 2022
Publication of Interim Results for six months to
31 March 2021.
25 January 2022
Restoration of Trading on AIM of PCF Group plc shares.
1 April 2022
Temporary suspension of Trading on AIM of PCF Group
plc shares.
31 May 2022
Announcement of acceleration of an element of our
planned capital raise and investigation of strategic
opportunities (as outlined in the Chair's Statement).
See non-adjusting events after the balance sheet date
on page 131 for more details.
Statement of directors’ responsibilities
The directors are responsible for preparing the Annual
Report & Financial Statements in accordance with
applicable UK 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 the
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:
l select suitable accounting policies in accordance
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 requirements in 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.
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.
Disclosure of information to the auditors
Having made enquiries of fellow directors and the
Group’s auditor, each director has taken all the steps
that he or she is obliged to take as a director in order to
make himself or herself aware of any relevant audit
information and to establish that the auditor is aware of
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.
52
Resignation of Ernst & Young LLP and the
appointment of new auditors and General Meeting
On the completion of the Financial Statements 2020,
on 23 December 2021 Ernst & Young LLP resigned as
auditors and pursuant to section 489 (3) (c) of the
Companies Act 2006 the directors appointed MHA
MacIntyre Hudson LLP to replace them on 23
December 2021.
At the General Meeting of the Company on 4 February
2022, the Company’s members passed three ordinary
resolutions:
1. To receive and approve the Report of the Directors
and the audited Financial Statements of the
Company for the year ended 30 September 2020.
2. To receive and approve the Report of the Directors’
Remuneration as set out in the audited Financial
Statements for the year ended 30 September 2020.
3. To appoint MHA MacIntyre Hudson LLP as auditors
of the Company and to authorise the directors to
determine their remuneration.
Annual General Meeting
As the Annual Report & Financial Statements 2021 was
not ready at the time of the holding of the Annual
General Meeting of the Company on 25 March 2022, it is
necessary for the Group to convene a General Meeting
at which to lay the Annual Report & Financial
Statements 2021. A separate letter from the Chair
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
31 May 2022.
On behalf of the Board
G G Stran
Chief Executive Officer
31 May 2022
Annual Report & Financial Statements 2021
53
Risk Management Report
for the year ended 30 September 2021
Introduction
The report relates to the year ended 30 September 2021.
This report is dated 31 May 2022. The report has been
brought up to date for recent events and matters
relevant to the Group’s current operating model where
appropriate.
The Group’s management of risk is based on the
identification of risks faced by the Group; an
assessment of each of these, determining those which
merit designation as principal risks and establishing a
Risk Management Framework (RMF) to create the
control environment that supports 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 undergone review and a programme of work
exists to enhance and 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 existence 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. This framework
has, together with the levels of control, governance and
oversight, been significantly enhanced since the year end.
The Group applies the ‘Three Lines of Defence’
approach, which is industry standard, and which
identifies those with responsibility for managing the
risk (the First Line), those with responsibility for
providing independent oversight and challenge (the
Second Line), and those with responsibility for
providing independent assurance over both First and
Second Line activities (the Third Line).
Principal risks
The Group has identified nine principal risks to which its
business model has an inherent exposure, as set out
below. More information is included in the following
sections of this report.
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. The Group aims to actively manage its
wholesale counterparty risk, whilst maximising its risk-
adjusted rate of return, by setting clear limits by asset
type, geography and currency denomination.
Capital risk
Definition – The risk that the Group has insufficient
contingency to deal with unexpected events; or
insufficient capital to either maintain its required
regulatory or internally set minimum capital ratios and
buffers or sustain its long-term business strategy.
Statement – The Group aims to maintain a sufficient level
of capital above its regulatory requirements to absorb
variances in losses as they arise and to maintain the
ongoing trust and confidence of investors, shareholders,
regulators and customers.
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 access to
viable alternatives and without adversely affecting its
deposit franchise, daily operations or financial health.
Statement – The Group maintains a diversified funding
strategy, with close relationships to its wholesale
counterparties, and is an active participant in the retail
deposit taking market. This is supported with prudent
levels of high-quality liquid assets, in excess of that
needed to withstand a severe but plausible stress.
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. This includes legal risk but
excludes strategic risk.
Statement – The Group actively identifies, assesses and
manages the operational risks to which it is exposed in
order to minimise the financial impact arising from risks
such as IT disruption, lack of operational resilience,
cyberattacks, human error, a breakdown of procedures,
non-compliance with policy, failure to comply with legal
requirements, late or inaccurate financial reporting and
internal or external fraud.
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 third party legal support,
and regular dialogue with its regulators.
54
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, or from poor 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.
Climate risk
Definition – The risk of financial or reputational loss
resulting from 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).
Statement – The Group seeks to reduce over time its
exposures to climate change risks and its carbon
footprint, whilst supporting the transition to a net zero
carbon economy by 2050.
Controlling and managing risks
Risk Management Framework (RMF)
The Group recognises the importance of embedding a
Risk Management Framework (RMF) 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 through its Board approved Risk Appetite
Statement (RAS) and the Group’s RMF.
The Group has made significant enhancements to its
RMF, which was the subject of an external review that
concluded in June 2021. These enhancements are
designed 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.
The activities, identified in the roadmap in last year’s
financial statements, to enhance and embed the control
framework have continued over the period of the
Annual Report & Financial Statements 2021; and while
significant positive changes have been made,
embedding those changes will continue in 2022.
At the operational level, it is the responsibility of each
business function to adhere to the RMF and manage all
Group mandated risk management processes to the
standards set therein.
At the end of 2021, PCF Group plc was recognised by
the PRA as a Financial Holding Company (FHC). This
moves the formal responsibility for meeting the
requirements of the Capital Requirements Regulation
(CRR) from the Bank to the Group. In reality, the Group
continued to approach risk management on a
consolidated basis, so the change had limited impact.
Three Lines of Defence
The Group operates a ‘Three Lines of Defence’ model
which defines clear responsibilities and accountabilities.
Board Risk Strategy and Appetite
Risk Functions
Internal Audit Function
Third Line of Defence
(‘3LoD’)
Independent Assurance
l Review and assessment of
first and second line activities.
l Provide independent
assurance of the risk
management framework.
Second Line of Defence
(‘2LoD’)
Independent Oversight
& Challenge
l Develop robust frameworks
and policies to control and
manage risks.
l Facilitate and oversee
implementation of effective
risk management practices by
business owners.
l Co-ordinate the Group’s
approach to setting and
reporting of risk appetite.
l Monitoring effectiveness of
frameworks/high-level
policies.
l Oversight of 1LoD on-going
management of compliance
with regulatory requirements.
l Advisory and oversight
Business Lines & Central
Functions
First Line of Defence
(‘1LoD’)
Risk Management
& Control
l Identify, assess, control and
mitigate risks within risk
appetite.
l Develop and implement
internal procedures, plans
and controls.
l Clear definition of roles and
responsibilities.
l Escalate issues to
management and control
functions.
l Development and
implementation of risk
management actions.
l Monitoring of risk against
expectations/appetite.
l Provide reporting to senior
management.
l Focus on achieving fair
customer outcomes.
Annual Report & Financial Statements 2021
55
Risk Management Report (cont’d)
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
& Compliance function, which is independent of
other functions, reporting into the Chief Risk Officer
(CRO), and which undertakes compliance
monitoring and thematic risk reviews. The Second
Line provides independent oversight and advice to
the business with assessments going up to the
Board Risk Committee (BRC). It is the aim of the
Risk & Compliance function to co-ordinate the
management and reporting of the Group’s risks,
ensuring that risk management is fully integrated
across the day-to-day activities of the Group.
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 the
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 2021,
compliance with risk appetite was reported to the
Board Risk Committee (BRC) and the Board by the
Chief Risk Officer. The CRO is responsible for assessing
the impact on the Group’s performance to risk appetite
from changes in circumstance (internal or external).
The Board sets the risk appetite and culture and
cascades this into day-to-day activity through policies,
qualitative statements, risk appetite metrics, limits and
committee review. Embedding risk appetite and culture
is further supported by PCF’s approach to recruitment,
onboarding 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 is
designed to enable risk appetite, policies, procedures,
controls and reporting that meet regulations, law and
relevant corporate governance standards.The
interaction of the executive and non-executive
governance structures requires a culture of transparency
and openness. A risk-centric culture is seen by the
Group as the foundation for effective risk management.
The structure of committees is set out in the Corporate
Governance Structure section of the Corporate
Governance Report on pages 29 to 35, with the roles of
the Nomination Committee, Remuneration Committee,
Board Audit Committee and Board Risk Committee,
described within their reports.
The key Executive Committees are charged with
assessing compliance with the Board approved culture,
including risk culture and T.R.U.S.T.40 values in the
activities overseen by that committee. The role of key
executive led committees is given below.
40 T.R.U.S.T. as defined on page 5.
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, 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.
Financial Reporting and Control Committee (FRCC)
The FRCC, which first met in April 2022, is responsible
for the oversight of financial and regulatory reporting
and the effectiveness and implementation of the
Financial Control Framework and is chaired by the
Group’s Chief Financial Officer.
Assets & Liabilities Committee (ALCO)
ALCO, chaired by the Group’s Chief Financial Officer, is
responsible for ensuring the effective operation of the
RMF within the Bank to enable management of balance
sheet risks under the operational control of Treasury
including capital risk, market risk (including interest
rate and basis risks), liquidity and funding risk, and
wholesale credit risk. ALCO is also responsible for
oversight of funds transfer pricing, and the Group’s
structural hedge.
ALCO monitors and ensures compliance with approved
Treasury Policies including the Liquidity and Funding
Risk Policy, Market Risk Policy, Wholesale Credit Risk
Policy, and the Funds Transfer Pricing Policy and
associated risk appetite. This extends to oversight over
the Internal Capital Adequacy Assessment process
(ICAAP), the Internal Liquidity Adequacy Assessment
process (ILAAP), and the Recovery plan. ALCO also
provides oversight over the key operational procedures
and processes associated with these policies.
Executive Risk Committee (ERC)
The ERC develops risk management strategies for
approval by the BRC and Board ensuring the economy,
efficiency, and effectiveness of the operations. It also
has internal controls over the implementation of the
approved risk management policies and procedures.
ERC has a dual reporting line to both the ExCo and to
the BRC.
The ERC is chaired by the CRO.
56
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. 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.
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
customer behaviour changing due to factors such as
loss of employment, family circumstances, illness,
business failure, adverse economic conditions or fraud.
Management of strategic and business risk
The Group 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 setting its core strategic and
business objectives at a level of risk that is beyond its
financial resources and operational capabilities under
both normal and stressed conditions.
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 this
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 counterparties account. The
Group aims to minimise the impact on profitability from
defaults through its diversification of lending products,
a prudent underwriting policy, diligent underwriting
practices, and a considerate case management process
for when customers are in difficulty. The Group aims to
actively manage its wholesale counterparty risk, whilst
maximising its risk-adjusted rate of return, by setting
clear limits by asset type, geography and currency
denomination.
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
with a readily available and liquid market for re-sale.
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 the setting and monitoring
of limits and exposures across different lending
channels, different classes of lending, and 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 using 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.
The table below presents the Group’s maximum
exposure to credit risk arising from its on-balance sheet
financial instruments before taking account of any
collateral and credit risk mitigation. For off-balance
sheet instruments, the maximum exposure to credit risk
represents the contractual nominal amounts.
On-balance sheet
Cash and balances at central banks
Cash and demand deposits
Loans and advances to customers
Consumer lending (net)
Business lending (net)
Azule lending (net)
Bridging finance (net)
Due from related companies
Debt instruments at FVOCI
Derivative financial instruments
Other assets
Off-balance sheet
Undrawn facilities
*Restated, refer to Note 1.7 for full details.
Group
Year ended
30 September
2021
£’000
Year ended
30 September
2020*
£’000
56,126
24,936
163,641
130,860
14,283
55,208
–
16,155
209
4,120
164,933
180,143
21,795
60,132
–
9,095
-
1,264
440,602
462,298
8,958
17,270
Annual Report & Financial Statements 2021
57
Risk Management Report (cont’d)
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. After which, any overpaid
funds are returned to the customer. Any residual debts
remaining after the sale of repossessed assets are
generally then sold to third parties.
Forbearance
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.
Analysis of forbearance and COVID-19 related
payment deferrals
At 30 September 2021, the gross carrying amount of
exposures with forbearance measures was £3 million
(2020: £40.4 million). As set out in Note 1.5.2, a
COVID-19 related concession does not in itself
constitute a significant increase in credit risk. The full
forbearance analysis is shown in Note 30.3.2.
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 1.5.2).
l An explanation of the Group’s internal grading
system (Note 30.3.4).
l How the Group defines, calculates and monitors the
probability of default, exposure at default and loss
given default (Notes 30.3.4, 30.3.5 and 30.3.6
respectively).
l When the Group considers there has been a
significant increase in credit risk of an exposure
(Note 30.3.7).
l The Group’s policy of segmenting financial assets
where ECL is assessed on a collective basis (Note
30.3.7).
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.
Impairment allowance for loans and advances to customers
Group
At 30 September 2021
Loans and advances to customers
Allowance for impairment losses
Net total
Group
At 30 September 2020*
Loans and advances to customers
Allowance for impairment losses
Net total
*Restated, refer to Note 1.7 for full details.
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
335,029
(3,407)
27,693
(3,005)
13,640 376,362
(12,370)
(5,958)
331,622
24,688
7,682
363,992
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
349,417
(3,179)
76,671
(3,300)
19,547 445,635
(18,632)
(12,153)
346,238
73,371
7,394 427,003
Further analysis of impairment allowance for loans and advances to customers is contained in Note 29.5 to the
financial statements.
58
The Group’s internal rating and Probability of
Default (PD) estimation process
The Group is on the standardised approach for credit
risk but operates an internal credit grading model and
Probability of Default estimation process to support its
capital assessment and to determine risk grades
associated with each lending decision through a
scorecard. 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 scale using an internal credit
classification model. Collateral type and quality are also
considered when grouping credit grades together. The
models incorporate both qualitative and quantitative
information and, in addition to information specific to
the borrower, supplement this with external
information that could affect the borrower’s behaviour.
As well as using the PD information to support the
Group’s capital assessment and scorecards, the
information is used to provide information on Expected
Credit Losses (ECLs). ECLs are used within
International Financial Reporting Standards (IFRS 9) to
determine the credit stage of borrowers; from which
impairments are derived along with the level of
required provision. The ongoing redevelopment of the
IFRS 9 model is considered necessary in order to
enhance the granular focus of credit risk under a more
standardised statistical basis and thereby allow the
model to better support the Group’s ICAAP analysis.
The Group’s internal credit rating grades
Corporate lending (Business Finance Division,
Bridging Finance and Azule)
Corporate lending comprises hire purchase, leases and
bridging loans. The borrowers are assessed by the
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, falling under the
category of SME Retail.
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 Division, Bridging Finance Division and Azule
Internal rating grade
Internal rating description
Internal PD range at
30 September 2021
Internal PD range at
30 September 2020
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
0.55%-2.69%
1.88%-9.08%
1.10%-5.29%
3.71%-9.32%
2.15%-8.04%
5.74%-13.82%
7.01%-17.25%
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 at
30 September 2021
Internal PD range at
30 September 2020
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%
2.02%-3.39%
2.57%-4.20%
3.97%-6.62%
5.04%-8.14%
5.66%-9.49%
9.67%-19.00%
7.79%-12.90%
15.22%-25.58%
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%
Annual Report & Financial Statements 2021
59
Stress-testing is a major part of the Group’s assessment
of its capital position and ensures the Group is resilient
to a range of stresses including the ability to continue
to meet requirements even 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 the Capital
Requirements Directive (CRD) for Pillar 1, namely a
CET1 capital requirement of 4.5% of Risk Weighted
Asset (RWAs), a Tier 1 capital requirement of 6% of
RWAs and a Total capital requirement of 8% of RWAs.
Risk Weighted Assets (RWA)
The Group does not operate a trading book and has no
Market Risk Pillar 1 RWAs. Its RWAs are therefore
driven predominantly by consumer and business Credit
risk, with a component of additional Operational risk.
With relatively little swap activity and most liquidity
held as cash with the Bank of England, counterparty
credit risk is not material.
2021
£’000
–
511
8,122
189,202
75,447
273,282
47,812
109
2020*
£’000
–
395
17,828
213,312
85,313
316,848
40,433
19
321,203
357,300
Risk Management Report (cont’d)
Capital risk
Capital risk is the risk that the Group has insufficient
contingency to deal with unexpected events; or
sufficient capital to either maintain its required
regulatory or internally set minimum capital ratios and
buffers or sustain its long-term business strategy.
Management of capital risk
The Group aims to maintain a sufficient level of capital
above its regulatory requirements to absorb variances
in losses as they arise and to maintain the ongoing 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.
PCF Group plc is responsible for ensuring compliance
with consolidated prudential requirements on a
consolidated basis. In addition, PCF Bank Limited is
authorised by the PRA and is required to adhere to the
same capital requirements.
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
capital risks and requirements and the amount of
capital needed to cover these risks. These requirements
are assessed against the current position and
throughout its five year business plan.
Risk Weighted Asset exposure
Central Government and central banks
Institutions
Corporates
Retail
Other items
Total credit risk
Operational risk
Credit valuation adjustment
Total Risk Weighted Assets
*Restated, refer to Note 1.7 for full details.
Additional bank specific capital requirements
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.
In line with CRD IV, UK firms are required to meet a
combined buffer requirement, which is in addition to
the Pillar 1 and Pillar 2A capital requirements. The
combined buffer includes the Capital Conservation
Buffer (CCB) and the Countercyclical buffer (CCyB)
and must be met with CET1 capital. As at 30
September 2021, CCB was 2.5% with the CCyB set at
0%. The combined buffer requirements relating to
global systemically important institutions and the
systemic risk buffer do not apply to the Group.
60
The following table shows a reconciliation between statutory equity and total regulatory capital after deductions
on a transition arrangement basis:
Equity
Issued capital
Share premium
Other reserves recognised for CET 1 capital
Investment in own shares
Retained earnings
Total equity
Adjustments to Regulatory Capital
Goodwill and intangible assets
Adjustment for prudent valuation
IFRS 9 transitional adjustment
Total deductions
Total CET 1 Capital
Other Capital
Additional Tier 1 Capital
Subordinated Debt Tier 2 Capital
Total Regulatory Capital
*Restated, see Note 1.7 for full details.
2021
£’000
12,550
17,679
9
(147)
18,771
48,862
(3,075)
(16)
4,340
1,249
50,111
–
6,136
56,247
2020*
£’000
12,512
17,625
60
(147)
21,777
51,827
(4,327)
(9)
5,186
850
52,677
–
6,065
58,742
Under UK’s Leverage Framework (PS 21/21), PCF is below the thresholds for retail deposits or non-UK exposures
for the Group to be classified as an ‘LREQ’ firm and therefore is not in scope of a formal leverage ratio
requirement under UK CRR. However, in line with regulatory expectations, the Group continues to monitor its
leverage ratio as though the minimum requirement of 3.25% plus buffers is applicable.
The following table shows the key metrics on a transitional arrangement and fully loaded basis for regulatory
capital, leverage ratio and liquidity
Available own funds
Common Equity Tier 1 (CET 1) Capital
Common Equity Tier 1 (CET 1) Capital as if IFRS 9
or analogous ECLs transitional arrangements are not applied
Tier 1 Capital
Tier 1 Capital as if IFRS 9 or analogous ECLs
transitional arrangements are not applied
Total Capital
Total Capital as if IFRS 9 or analogous ECLs
transitional arrangements are not applied
Risk Weighted Asset
Total Risk Weighted Assets
Total Risk Weighted Assets as if IFRS 9
or analogous ECLs transitional arrangement are not applied
Capital ratios (as a percentage of risk weighted exposure amount)
Common Equity Tier 1 ratio (%)
Common Equity Tier 1 ratio (%) as if IFRS 9 or analogous
ECLs transitional arrangements are not applied
Tier 1 Capital ratio (%)
Tier 1 ratio (%) as if IFRS 9 or analogous ECLs
transitional arrangements are not applied
Total Capital ratio (%)
Total Capital ratio (%) as if IFRS 9 or analogous
ECLs transitional arrangements are not applied
Leverage ratio
Total exposure measure
Leverage ratio (%)
Leverage ratio (%) as if IFRS 9 or analogous ECLs
transitional arrangement are not applied
*Restated, see Note 1.7 for full details.
2021
£’000
50,111
45,771
50,111
45,771
56,247
52,272
2020*
£’000
52,677
47,491
52,677
47,491
58,742
53,771
321,203
357,300
316,863
352,114
15.6%
14.4%
15.6%
14.4%
17.5%
16.5%
14.7%
13.5%
14.7%
13.5%
16.4%
15.3%
450,976
11.1%
474,005
11.1%
10.2%
10.1%
Annual Report & Financial Statements 2021
61
Risk Management Report (cont’d)
Liquidity and funding risk
Liquidity and funding risk is the risk that the Group is
unable to fund new business originations or meet cash
flow or collateral obligations as they fall due, without
access to viable alternatives and without adversely
affecting its deposit franchise, daily operations or
financial health. The Group maintains a diversified
funding strategy, with close relationships to its
wholesale counterparties and is an active participant in
the retail deposit taking market. This is supported with
prudent levels of high-quality liquid assets, in excess of
that needed to withstand a severe but plausible stress.
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 by
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 Coverage
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 has been
significantly in excess of the 100% LCR minimum
requirement through the year. 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.
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
maintained well in excess of the 100% regulatory limit.
Measure (%)
LCR %
NSFR %
2021
904%
159%
2020
673%
145%
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 a line 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 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
2021
£’000
53,886
16,155
70,041
2,240
13,658
85,939
2020
£’000
23,039
9,095
32,134
1,897
18,667
52,698
Given the potential for liquidity threats following the
events of 2020 and 2021 and the increase in
encumbrance due to greater TFSME funding, the Group
took the decision to hold additional liquidity in the form
of cash reserves with the Bank of England, rather than
to preposition additional collateral to support
contingent access to central bank facilities in the event
of a stress.
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.
62
Undiscounted contractual cash flows
At 30 September 2021
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
64,485
8,521
30,722
13,583
46,567 263,571
149,795 216,704
110,993 516,338
8,238 396,842
Net contractual liquidity gap
55,964
17,139 (103,228) 46,867 102,755
119,497
At 30 September 2020* #
Undiscounted financial assets*
Undiscounted financial liabilities#
41,614
10,662
15,318
21,529
49,727 352,533 102,367 561,559
421,171
152,962 218,828
17,190
Net contractual liquidity gap
30,952
(6,211) (103,235) 133,705
85,177 140,388
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 2021,
the Group had total wholesale and retail funding of
£393.9 million (2020: £411.5 million)37 that supported
net loans and advances of £363.9 million (2020: £427
million). Moreover, at 30 September 2021, the Group
had a Net Stable Funding Ratio in excess of the
regulatory minimum of 100% (2020: in excess of 100%).
Surplus liquidity in periods shown above will be used to
cover liquidity shortfalls in subsequent periods.
*Restated, see Note 1.7 for full details.
#Re-presented, see Note 1.7 for full details.
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.
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 those assets which have been
pledged as collateral (i.e. which are required to be
separately disclosed under IFRS 7). Unencumbered
assets are the remaining assets that the Group owns.
Analysis of encumbered and unencumbered assets
At 30 September 2021
At 30 September 2020
Carrying amount of
encumbered assets
as collateral
£’000
Carrying amount of
unencumbered assets
as collateral
£’000
86,663
103,182
293,484
332,916
Total
£’000
380,147
436,098
Refer to Note 30.1(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
interest rates. 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.
internal reporting, although this risk is not considered
material (net exposure was less than €50,000
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.
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
Appetite for interest rate is assessed by calculating
changes in Economic Value (EV) through a
standardised 2% rate shock (EV 200bp).
Market risk is managed on a Group consolidated basis.
There is a risk that the Group may experience volatility
in its profit and loss from IRRBB should it not be able to
manage its exposures through interest rate swaps as
facilities are currently withdrawn.
Annual Report & Financial Statements 2021
63
Risk Management Report (cont’d)
However, Management anticipates that once the
Group’s shares are no longer suspended from trading
our bankers will, on review, begin the process to
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), the currency is
bought forward to cover the purchase cost of the
asset, thereby hedging any foreign exchange risk.
Reprice risk
The Group is exposed to interest rate risk arising from
when the Group’s assets and liabilities reprice on
different dates such that the Group is negatively
impacted. This type of risk is managed by natural
offsets across the balance sheet and using swaps and
other derivatives. The Group assessed its Interest Rate
Risk in the Banking Book (IRRBB) primarily through Net
Interest Income (NII) plus Economic Value (EV)
measures which includes a +/-200 basis points parallel
yield curve shift; the latter reflecting the Group’s desire
to limit interest rate volatility and smooth earnings. The
Group also runs a number of regulatory measures to
incorporate the full suite of Supervisory Outlier Tests
using Economic Value of Equity (EVE) and Net Interest
Income (NII) measures.
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
2021
£’000
2020
£’000
411
(455)
358
(503)
Basis risk
The Group may be exposed to the impact of relative
changes in interest rates from balance sheet exposures
with similar tenors, but which 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) reforms saw the
cessation of LIBOR at the end of 2021. The Group had
no LIBOR exposure at the end of December 2021. All
the Group’s swaps are entered into at the Sterling
Overnight Index Average (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 accrued at overnight LIBOR plus a fixed spread.
This facility was undrawn at 30 September 2021 and
terminated on 21 December 2021.
Product 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
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 product
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 Finance Limited and Azule Finance GmbH. 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 2021
30 September 2020
£’000
(38)
(12)
64
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 risk. The Group actively
identifies, assesses and manages the operational risks
to which it is exposed in order to minimise the financial
impact arising from risks such as IT disruption, lack of
operational resilience, cyberattacks, human error, a
breakdown of procedures, non-compliance with policy,
failure to comply with legal requirements, late or
inaccurate financial reporting and internal or external
fraud.
Management of operational risk
The Group actively identifies, assesses and manages
the operational risks to which it is exposed in order to
minimise the financial impact arising from risks such as
IT disruption, lack of operational resilience, human
error, cyberattacks, a breakdown of procedures, non-
compliance with policy, failure to comply with legal
requirements, late or inaccurate financial reporting and
internal or external fraud.
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 and complete embedding is
expected to continue into 2023.
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
cyberattacks. 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 and resilience
and supplier outsourcing assurance.
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 number 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.
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
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.
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. 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 third-party
legal support and regular dialogue with its regulators.
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 third-party
training and updates, and face to face meetings.
Horizon Scanning is conducted by the Second Line and
is 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 Regulation
Authority and the Resolution Directorate).
Aligned with PCF’s transparent approach to risk
culture, the Board and executive team seek to ensure
communication to all stakeholders including the
regulator is as transparent as possible; an approach the
Group believes helps foster stronger relationships and
ultimately limits the regulatory risks faced by PCF.
Annual Report & Financial Statements 2021
65
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.
Climate change risk
The risk of financial or reputational loss resulting from
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).
Management of climate change risk
The Group seeks to reduce over time its exposures to
climate change risks and its carbon footprint, whilst
supporting the transition to a net zero carbon economy
by 2050.
The Group included climate change risk as one of the
principal risks in its enterprise-wide risk management
framework and developed and approved a Climate Risk
Management Framework to ensure that the risks
associated with climate change are considered across
our organisation, including at the most senior levels of
our business.
The Group identifies the climate change exposures
priority items and assesses and quantifies the risks
using relevant data and methodologies, including
climate change scenario analysis. It has also developed
appropriate risk appetite metrics and climate change
targets to manage the risks and continues to integrate
climate change considerations into the lending strategy
and policy.
Risk Management Report (cont’d)
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.
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.
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 poor business conduct. 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.
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.
As part of its culture change, the Group is enhancing its
recruitment, training and colleague performance
management. As we embed this, we will work to ensure
clear customer accountabilities and customer centric
feedback is appropriately incorporated in the
performance appraisal process.
66
Independent Auditor’s Report
to the members of PCF Group plc
For the purpose of this report, the terms ‘we’ and ‘our’
denote MHA MacIntyre Hudson in relation to UK legal,
professional and regulatory responsibilities and
reporting obligations to the members of PCF Group
plc. For the purposes of the table that sets out the key
audit matters and how our audit addressed the key
audit matters, the terms ‘we’ and ‘our’ refer to MHA
MacIntyre Hudson. The ‘Parent Company’ or ‘Company’
is defined as PCF Group plc. The relevant legislation
governing the Parent Company is the United Kingdom
Companies Act 2006 (‘Companies Act 2006’).
Qualified Opinion
We have audited the financial statements of PCF Group
plc and its subsidiaries (together the ‘Group’ or ‘PCF
Group’) for the year ended 30 September 2021. The
financial statements that we have audited comprise:
l The Consolidated Income Statement for the year then
ended.
l Consolidated Statement of Comprehensive Income for
the year then ended.
l Consolidated Balance sheet as at 30 September 2021.
l Company Balance sheet as at 30 September 2021.
l Consolidated Statement of Changes in Equity for the
year then ended.
l Company Statement of Changes in Equity for the year
then ended.
l Consolidated Statement of Cash flows for the year
then ended.
l Notes 1 to 35 of the financial statements, including the
accounting policies.
The financial reporting framework that has been
applied in the preparation of the Parent Company’s and
Group’s financial statements is applicable law and
International accounting standards in conformity with
the requirements of the Companies Act 2006.
In our opinion, except for the effects of the matter
described in the Basis of Qualified Opinion section, the
financial statements:
l give a true and fair view of the state of the Group’s
and Parent Company’s affairs as at 30 September
2021 and its loss for the year then ended;
l have been properly prepared in accordance with
International accounting standards in conformity with
the requirements of the Companies Act 2006; and
l have been properly prepared in accordance with the
requirements of Companies Act 2006.
Our opinion is consistent with our reporting to the Audit
Committee.
Basis for qualified opinion
We conducted our audit in accordance with
International Standards on Auditing (UK) (ISAs (UK))
and applicable law. Our responsibilities under those
standards are further described in the Auditor’s
Responsibilities for the Audit of the Financial
Statements section of our report. 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 as applied to listed public interest
entities, and we have fulfilled our ethical responsibilities
in accordance with those requirements. We believe that
the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our qualified opinion.
The matter set out below is material to the financial
statements, leading to our qualified opinion on the
financial statements.
1. Opening balances for the period ended
30 September 2021 – Expected Credit Losses
We performed specific audit procedures on the
opening balances in accordance with the requirements
of International Auditing Standard 510 Initial
Engagements – Opening Balances. In performing these
procedures, our objective was limited to those matters
that would relate to our audit of the financial
statements for the year ended 30 September 2021.
We were not able to perform all the procedures required
to obtain sufficient appropriate audit evidence in relation
to Expected Credit Losses as at 30 September 2020. As
such we are unable to determine whether adjustments
might have been necessary in respect of the Expected
Credit Losses as at 30 September 2020 and the impact
that these might have had on the results for the year
ended 30 September 2021.
Material uncertainty relating to going concern
We draw your attention to Note 1.2 to the financial
statements and the going concern statement in the
Directors’ Report which indicate that management has
assessed that there are material risks which have an
impact on its medium-term plan. These material risks
include increased remediation costs alongside a
consideration of capital, funding, and liquidity
requirements. This indicates that a material uncertainty
exists that may cast significant doubt upon the
Company’s ability to continue as a going concern.
Our opinion is not modified in respect of these matters.
In auditing the financial statements, we have concluded
that the Directors’ use of the going concern basis of
accounting in the preparation of the financial
statements is appropriate.
PCF Bank Limited is a wholly subsidiary of PCF Group
plc, and the main operating entity of the PCF Group.
The Directors of the PCF Group have prepared a going
concern assessment and a medium-term plan which
has a high degree of management judgement. Key to
the medium-term plan is the ability of the PCF Group
to raise capital and fund future balance sheet growth.
The material risks associated with this plan are set out
in Note 1.2 to the financial statements. For further
details, refer to the Strategic Report on page 19 and
Directors’ Report on page 51.
Our evaluation of the Management’s assessment of the
PCF Group’s and Parent Company’s ability to continue
to adopt the going concern basis of accounting included:
l Using our knowledge of the strategic objectives of the
PCF Group, including its material subsidiaries, the
financial services industry, the financial services
regulatory environment and the general economic
environment to identify inherent risks in the business
model and how such risks might affect the financial
resources or ability to continue operations over the
going concern period.
Annual Report & Financial Statements 2021
67
Independent Auditor’s Report (cont’d)
l Understanding and evaluating the current and forecast
financial position, regulatory capital adequacy and
liquidity, including internal stress tests performed on
these.
l Evaluation of the strategic plans of the Group, and the
supporting financial forecasts.
l Obtaining and reading correspondence between the
Company and its UK regulators, the Prudential
Regulation Authority (PRA) and the Financial Conduct
Authority (FCA).
l Obtaining and reading reports issued in connection
with the remediation activities of the Group.
l Obtaining and reading minutes of meetings of those
charged with governance.
l Making enquiries with management to understand the
steps taken so far in respect of the planned capital raise.
l Obtaining confirmation from the Directors of Somers
Limited in respect of their intention to invest capital in
PCF Group plc and inspection of term sheets in place
between the PCF Group plc and Somers Limited.
l Making enquiries of the Directors of the Group to
understand the period of assessment considered by
them, the assumptions they considered and the
implication of those when assessing the Group’s and
Parent Company’s future financial performance.
l Assessing the sufficiency of the Group’s capital and
liquidity and evaluating the results of management
stress testing, including consideration of principal and
emerging risks on liquidity and regulatory capital.
l Testing the mathematical accuracy and appropriateness
of the model used to prepare the forecasts
l Reading and evaluating the adequacy of the
disclosures made in the financial statements in relation
to going concern and the material uncertainty
connected to going concern.
We concur with management, that the Group has
adequate capital resources and their conclusion on the
use of the going concern basis of accounting as
appropriate. We also concur with management that a
material uncertainty risk exists in respect of the medium-
term plan which has an impact on going concern.
Our responsibilities and the responsibilities of the
Directors with respect to going concern are described in
the relevant sections of this report.
Overview of our audit approach
Key Audit Matter
The key audit matter(s) we identified in the current
year were:
l Risk of misstatement of expected credit losses on
loans and advances to customers.
l Impact of opening balances on the year ended
30 September 2021.
Materiality
Overall materiality for the Group financial statements
was £246,000 which was determined based on 0.525%
of adjusted net assets.
Performance materiality was set at 60% of materiality.
First year transition
This is the first year we have been appointed as auditor
to the Group and Parent Company. We undertook the
following transitional procedures:
l Held meetings with senior management to gain an
understanding of the Group and Parent Company’s
operations and strategic objectives.
l We held meetings with the predecessor auditor,
including reviewing their audit working papers for the
prior financial period to gain an understanding of the
Group and Parent Company’s processes, their audit
risk assessment, and the design of their audit
approach for the year ended 30 September 2020.
l Held meetings with and reviewed correspondence
between the regulated entities of the Group and their
UK regulators, the Prudential Regulation Authority
(PRA) and the Financial Conduct Authority (FCA).
l Read the reports issued in connection with the
remediation activities of the PCF Group.
The results of these procedures were used to inform
our audit planning and risk assessment for our audit for
the year ended 30 September 2021.
Due to the disclaimer of opinion issued by the
predecessor auditor on the financial statements for the
year ended 30 September 2020, we could not obtain
sufficient appropriate audit evidence regarding the
opening balances from review of the predecessor
auditor working papers in respect of their audit for the
year ended 30 September 2020. We therefore
performed specific audit procedures on the opening
balances in accordance with the requirements of
International Auditing Standard 510 Initial Engagements
– Opening Balances. We considered this to be a key
audit matter. See key audit matter number 2 below.
Group audit scope
We identified significant components based on their
significance to the Group balance sheet and operations.
We performed full scope audit work on the Parent
Company and significant components.
The components not covered by our audit scope were
subject to analytical procedures to confirm our
conclusion that there were no significant risks of
material misstatement in the aggregated financial
information.
Key Audit Matters
Key Audit Matters are those matters that, in our
professional judgement, were of most significance in
our audit of the financial statements of the current
period and include the most significant assessed risks
of material misstatement (whether or not due to fraud)
that we identified. These matters included those
matters which had the greatest effect on:
l the overall audit strategy;
l the allocation of resources in the audit;
l and directing the efforts of the engagement team and,
as required for public interest entities, our results from
those procedures.
These matters were addressed in the context of our
audit of the financial statements as a whole, and in
forming our opinion thereon, and we do not provide a
separate opinion on these matters. We have
determined the matters described below to be the key
audit matters to be communicated in our report.
68
1. Risk of misstatement of expected credit losses
(‘ECL’) on loans and advances to customers
Key audit matter description
Loans and advances to customers net of ECL:
£363,992,000 (2020: £427,003,000). Expected credit
losses recognised on loans and advances to customers:
£12,370,000 (2020: £18,632,000).
The determination of expected credit loss under IFRS 9
is an inherently judgmental area due to the use of
subjective assumptions and a high degree of
estimation. Management uses a model to determine
ECL. The key areas of judgement are:
l Staging – Qualitative and quantitative criteria applied
to effectively identify significant increase in credit risk
and determination of a default.
l Assumptions in relation to the probability of default
(PD), Loss given default (LGD) and Exposure at
default (EAD) models for computing ECL.
Appropriateness of the data used in relation to these
models for computing ECL.
l Management overlays to take into account
macroeconomic factors that have an impact in the
calculation of the ECL
l Post-model adjustments or overlays to capture
matters that are not covered by the IFRS 9 model.
The Group’s accounting policy on ECL is set out in Note
1.5.2 of the financial statements.
How the scope of our audit responded to the key
audit matter
We performed the following procedures:
Validation of design of controls around the ECL model
l We performed a walkthrough of the design of the
Group’s processes in relation to provisioning. We
noted that the ECL model and the governance
processes around it had been significantly revised
over the course of the period a result of the overall
remediation program being undertaken by the PCF
Group. As such we adopted a fully substantive
approach.
Model validation
l We tested the design of the ECL model for
compliance with IFRS 9 requirements, including ITGCS
operating within the Group that are relevant to the
determination of ECL.
l Tested the appropriateness of the Group’s impairment
policy against the requirements of IFRS 9. We have
also assessed the appropriateness of the Significant
Increase in the Credit Risk (SICR) criteria determined
by management in relation to loans and advances to
customers.
l Tested the completeness of data input into the IFRS 9
model. This included evaluation of the data quality by
agreeing data points used in ECL calculation to
relevant source systems.
l We confirmed that the output of the model,
specifically any ECL charge or reversal was correctly
reflected in the general ledger and ultimately the
financial statements.
Test of details
l For sample of exposures, we tested the
appropriateness of the staging of the exposure by
testing the correct application of SICR criteria. Our
work in this regard including validating the payment
history of the exposure to ensure that the exposure
has been correctly classified as either Stage 1, 2 or 3.
l We tested the process of allocation of customer loan
repayments and identification of missed payments.
This included testing on a sample basis that receipts
are allocated to the correct loan accounts and missed
payments are identified on a timely basis and
appropriately reported
Use of modelling and credit specialist
l We engaged with and instructed independent
modelling and credit risk specialists to test the
assumptions, inputs and formulae used in relation to
models used for computing ECL provision. This work
included evaluation of economic scenarios considered
by management and comparing these to other
scenarios from a variety of external sources.
l Performed a sensitivity analysis in relation to key
management assumptions and judgements to assess
the impact of these on the ECL provisions as at year
end.
l Tested the appropriateness of the staging of
exposures including the determination of the PD, EAD
and LGD considered by management in the
calculation of ECL.
l Tested post model adjustments and overlays. This
included assessing the completeness and
appropriateness of these adjustments.
Disclosures
l We have assessed the appropriateness of the
disclosures in the financial statements for the year
ended 30 September 2021.
Key Observations
We found the approach taken in respect of ECL to be
consistent with the requirements of IFRS 9 and that the
assumptions and judgements made by management in
the application of the ECL model were reasonable and
supportable.
2. Opening balances for the year ended
30 September 2021
Key audit matter description
Due to the disclaimer of opinion issued by the
predecessor auditor on the financial statements for the
year ended 30 September 2020, we could not obtain
sufficient appropriate audit evidence regarding the
opening balances from the review of the predecessor
auditor’s working papers in respect of their audit for
the year ended 30 September 2020.
We performed specific audit procedures on the
opening balances in accordance with the requirements
of International Auditing Standard 510 Initial
Engagements – Opening Balances. In performing these
procedures, our objective was limited to those matters
that relate to our audit of the financial statements for
the year ended 30 September 2021 and should not be
viewed as connected to the audit work completed by
the predecessor auditor on the financial statements for
the year ended 30 September 2020.
How the scope of our audit responded to the key
audit matter
We performed the following procedures:
l Obtained from management the closing trial balance,
consolidation workings and related working papers
Annual Report & Financial Statements 2021
69
Independent Auditor’s Report (cont’d)
used to prepare the financial statements for the year
ended 30 September 2020. We reconciled these to the
published financial statements of the Group and Parent
Company for the year ended 30 September 2020.
l Obtained and checked the balance sheet
substantiation reconciliations performed by
management in respect of the balances as at 30
September 2020.
l Corroborated to third-party evidence on a sample
basis for balances held as at 30 September 2020. This
included agreeing bank balances to third-party bank
statements.
l Reviewed key judgements and estimates, mainly
focusing on the judgments made in respect of the
determination of the valuation of investment in
subsidiary and recognition of the deferred tax asset as
at 30 September 2020.
l Made enquiries of management, those charged with
governance and obtaining explanations which we
deemed to be necessary for completion of our
procedures.
l Obtained and read correspondence between the
Group and its UK regulators, the Prudential Regulation
Authority (PRA) and the Financial Conduct Authority
(FCA).
l Obtained and read reports issued in connection with
the remediation activities of the PCF Group.
Key Observations
The results of these procedures were used to inform
our audit planning and risk assessment for our audit for
the year ended 30 September 2021.
The significant findings arising from our work are:
l We were not able to perform all the procedures
required to obtain sufficient appropriate audit
evidence in relation to Expected Credit Losses as at
30 September 2020.
The impact of these matters is stated in the Basis of
Qualified Opinion section of our report. We did not
identify any other matters that impacted our audit work
for the year ended 30 September 2021.
Our application of materiality
Our definition of materiality considers the value of error
or omission on the financial statements that,
individually or in aggregate, would change or influence
the economic decision of a reasonably knowledgeable
user of those financial statements. Misstatements
below these levels will not necessarily be evaluated as
immaterial as we also take account of the nature of
identified misstatements, and the particular
circumstances of their occurrence, when evaluating
their effect on the financial statements as a whole.
Materiality is used in planning the scope of our work,
executing that work and evaluating the results.
Based on our professional judgement, we determined
materiality for the financial statements as a whole as
follows:
Overall Materiality
Basis of determining overall materiality
£246,000
We determined materiality based on 0.525% of
adjusted net assets of the Company.
The shares of the Parent Company are currently
suspended for trading on the London AIM. We have
considered the primary users of the financial
statements to be shareholders of the Parent Company,
customers of the PCF Bank Limited and the UK
regulators (FCA and PRA).
In the period ended 30 September 2021 and
subsequent months, the PCF Group has been
implementing changes to remediate issues that led to
the delay in the publication of the 30 September 2020
financial statements of the PCF Group. This has
resulted in operational changes that have an impact on
the financial performance of the PCF Group, in view of
this we have concluded that the key area of focus of
the users of the financial statements would be whether
Group has adequate capital resources. We have
therefore considered net assets as an approximation of
capital resources of Group.
We selected adjusted net assets to exclude those
balances that we determined in our professional
judgement not to have an impact on our audit
sampling.
Performance materiality
Basis of determining overall performance materiality
£147,600
We determined performance materiality based on 60%
of overall materiality.
Performance materiality is the application of materiality
at the individual account or balance level, set at an
amount to reduce, to an appropriately low level, the
probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality for the
financial statements as a whole.
In determining performance materiality, we considered
the several factors including the following:
l That the current period is the first financial period of
our appointment as auditor of the Group and Parent
Company.
l Matters that led to the delay in the publication of the
30 September 2020 financial statements.
l Our understanding of the control environment of the
Group and Parent Company at this stage.
Error reporting threshold
We agreed to report any corrected or uncorrected
adjustments exceeding £12,300 to the Audit
Committee as well as differences below this threshold
that in our view warranted reporting on qualitative
grounds.
The scope of our audit
Our audit was scoped by obtaining an understanding
of the Group and Parent Company and its environment,
including the system of internal control, and assessing
the risks of material misstatement in the financial
statements. We also addressed the risk of
management override of internal controls, including
assessing whether there was evidence of bias on
significant accounting judgments and accounting
estimates by the Directors that may have represented a
risk of material misstatement.
70
We considered the matters that led to the delay in
publication of the financial statements for the year
ended 30 September 2020, and the remediation
activities undertaken by the PCF Group. We noted that
the control environment has continued to evolve during
the period and subsequent to period end as those
charged with governance continue to implement the
remediation plan. Therefore, we did not seek to rely on
controls and our audit approach was fully substantive.
Other information
The other information comprises the information
included in the annual report other than the financial
statements and our auditor’s report thereon. The
directors are responsible for the other information
contained within the annual report. Our opinion on the
financial statements does not cover the other
information and, except to the extent otherwise
explicitly stated in our report, we do not express any
form of assurance conclusion thereon. Our
responsibility is to read the other information and, in
doing so, consider whether the other information is
materially inconsistent with the financial statements, or
our knowledge obtained in the course of the audit, or
otherwise appears to be materially misstated. If we
identify such material inconsistencies or apparent
material misstatements, we are required to determine
whether this gives rise to a material misstatement in
the financial statements themselves. If, based on the
work we have performed, we conclude that there is a
material misstatement of this other information, we are
required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the
Companies Act 2006
In our opinion, based on the work undertaken in the
course of the audit:
l the information given in the Strategic Report and the
Directors’ Report for the financial year for which the
financial statements are prepared is consistent with
the financial statements; and
l the Strategic Report and the Directors’ Report have
been prepared in accordance with applicable legal
requirements.
Matters on which we are required to report by
exception
In the light of the knowledge and understanding of
the Company and its environment obtained in the
course of the audit, we have not identified material
misstatements in the Strategic Report or the
Directors’ Report.
We have nothing to report in respect of the following
matters in relation to which the Companies Act 2006
requires us to report to you if, in our opinion:
l adequate accounting records have not been kept, or
returns adequate for our audit have not been received
by branches not visited by us; or
l the financial statements are not in agreement with the
accounting records and returns; or
l certain disclosures of directors’ remuneration specified
by law are not made; or
l we have not received all the information and
explanations we require for our audit.
Corporate governance statement
We have reviewed 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.
Based on the work undertaken as part of our audit, we
have concluded that each of the following elements of
the Corporate Governance Statement is materially
consistent with the financial statements and our
knowledge obtained during the audit:
l Directors' statement with regards the appropriateness
of adopting the going concern basis of accounting
and any material uncertainties identified set out on
page 51;
l Directors’ explanation as to their assessment of the
groups prospects, the period this assessment covers
and why the period is appropriate set out on page 51;
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 set out on page 51;
l Directors' statement on fair, balanced and
understandable set out on page 52;
l Board’s confirmation that it has carried out a robust
assessment of the emerging and principal risks set out
on page 51;
l Section of the annual report that describes the review
of effectiveness of risk management and internal
control systems set out on page 45;
l Section describing the work of the audit committee
set out on page 42.
Responsibilities of the Directors
As explained more fully in the Directors’ responsibilities
statement, 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 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 Company or to cease operations, or have
no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the
financial statements
Our objectives are to obtain reasonable assurance
about whether the financial statements as a whole are
free from material misstatement, whether due to fraud
or error, and to issue an auditor’s report that includes
our opinion. Reasonable assurance is a high level of
assurance but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always
detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are
considered material if, individually or in aggregate, they
could reasonably be expected to influence the
economic decisions of users taken on the basis of these
financial statements.
Annual Report & Financial Statements 2021
71
Independent Auditor’s Report (cont’d)
Irregularities, including fraud, are instances of non-
compliance with laws and regulations. We design
procedures in line with our responsibilities, outlined
above, to detect material misstatements in respect of
irregularities, including fraud.
Because of the inherent limitations of an audit, there is
a risk that we will not detect all irregularities, including
those leading to a material misstatement in the
financial statements or non-compliance with regulation.
This risk increases the more that compliance with a law
or regulation is removed from the events and
transactions reflected in the financial statements, as we
will be less likely to become aware of instances of non-
compliance. The risk is also greater regarding
irregularities occurring due to fraud rather than error,
as fraud involves intentional concealment, forgery,
collusion, omission or misrepresentation.
The specific procedures for this engagement and the
extent to which these are capable of detecting
irregularities, including fraud is detailed below:
l Obtaining an understanding of the legal and
regulatory frameworks that the Group and Parent
Company operates in, focusing on those laws and
regulations that had a direct effect on the financial
statements. The key laws and regulations we
considered in this context included the Companies
Act 2006, regulations and supervisory requirements
of the Prudential Regulation Authority (PRA) and
Financial Conduct Authority (FCA) and UK tax
legislation.
l Reviewing key correspondence with regulatory
authorities including the PRA, FCA and HMRC.
l Enquiry of management to identify any instances of
non-compliance with laws and regulations.
l Reviewing financial statement disclosures and testing
to supporting documentation to assess compliance
with applicable laws and regulations.
l Enquiry of management around actual and potential
litigation and claims.
l Enquiry of management to identify any instances of
known or suspected instances of fraud.
l Discussing among the engagement team regarding
how and where fraud might occur in the financial
statements and any potential indicators of fraud.
l Reviewing minutes of meetings of those charged with
governance.
l Reviewing internal audit reports of the Company,
l Performing audit work over the risk of management
override of controls, including testing of journal entries
and other adjustments for appropriateness, evaluating
the business rationale of significant transactions
outside the normal course of business, and reviewing
accounting estimates for bias; and
l Challenging assumptions and judgements made by
management in their significant accounting estimates,
in particular with respect to provisions for impairment
of loans and amounts advanced to customers.
l Obtained and read reports issued in connection with
the remediation activities of the PCF Group and the
Company. We considered the results of these reports
in our audit planning and risk assessment. Our audit
work was not designed to test the design and
implementation of the remediation plan nor its
operating effectiveness.
There are inherent limitations in the audit procedures
described above and the further removed non-
compliance with laws and regulations is from the
events and transactions reflected in the financial
statements, the less likely we would become aware of
it. Also, the risk of not detecting a material
misstatement due to fraud is higher than the risk of not
detecting one resulting from error, as fraud may involve
deliberate concealment by, for example, forgery or
intentional misrepresentations, or through collusion.
We also communicated relevant identified laws and
regulations and potential fraud risks to all engagement
team members including internal specialists and
remained alert to any indications of fraud or non-
compliance with laws and regulations throughout the
audit. The engagement team includes audit partners
and staff who have extensive experience of working
with listed companies and with those in the banking
sector, and this experience was relevant to the
discussion about where the risk of irregularities,
including fraud may arise.
A further description of our responsibilities for the
financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponisbilities
Other requirements
We were appointed by the Directors on 23 December
2021 to audit the financial statements of the Group and
Parent Company for the year ended 30 September
2021 and subsequent financial periods. The period of
total uninterrupted engagement is accordingly one
year.
We did not provide any non-audit services which are
prohibited by the FRC’s Ethical Standard to the
Company, and we remain independent of the company
in conducting our audit
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.
Rakesh Shaunak FCA, CTA
Senior Statutory Auditor
For and on behalf of MHA MacIntyre Hudson
Statutory Auditor
6th Floor
2 London Wall Place
London
EC2Y 5AU
31 May 2022
72
Consolidated Income Statement
for the year ended 30 September 2021
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 gains/(losses) on financial instruments classified at
fair value through profit or loss
Net operating income
Impairment losses on financial assets
Net (profit)/loss arising from derecognition of
financial assets measured at amortised cost
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 of office equipment
Impairment losses on goodwill
Total operating expenses
Loss before tax
Income tax (charge)/credit
Loss after tax
Earnings per 5p ordinary share – basic and diluted
Group
Year ended
30 September
2021
£’000
40,790
(14,537)
26,253
1,835
(1,716)
119
378
26,750
6,677
(939)
12,619
8,570
1,068
639
55
13
1,147
29,849
(3,099)
38
(3,061)
(1.2p)
Year ended
30 September
2020
Restated*
£’000
41,943
(15,953)
25,990
2,122
(1,602)
520
(55)
26,455
14,431
–
8,296
5,268
1,206
552
51
–
1,750
31,554
(5,099)
(1,198)
(6,297)
(2.6p)
Note
3
4
5
6
7
8
10
17
18
18
17
18
11
12
The accounting policies and notes on pages 110 to 181 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.
*The prior period balances have been restated or re-presented for the financial year. Refer to Note 1.7 for further details.
Consolidated Statement of Comprehensive Income
for the year ended 30 September 2021
Loss after taxation
Other comprehensive income/(loss) that will be reclassified
to the income statement
Fair value (losses)/gains on FVOCI financial instruments (Note 14)
Deferred tax income/(charge)
Total items that will be reclassified to the income statement
Group
Year ended
Year ended
30 September
2021
£’000
Year ended
30 September
2020
Restated*
£’000
(3,061)
(6,297)
(51)
–
(51)
53
–
53
Total comprehensive loss, net of tax
(3,112)
(6,244)
*The prior period balances have been restated or re-presented for the financial year, Refer to Note 1.7 for further details.
Annual Report & Financial Statements 2021
73
Consolidated Balance Sheet
at 30 September 2021
Assets
Cash and balances at central banks
Debt instruments at FVOCI
Loans and advances to customers*
Derivative financial instruments
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
30 September
2021
£’000
Note
Group
30 September
2020
Restated*
£’000
30 September
2021
£’000
Company
30 September
2020
Restated*
£’000
13
14
15
29
20
16
17
18
19
21
23
22
20
29
26
27
25
28
28
28
28
56,126
16,155
363,992
209
–
–
2,350
3,075
–
1,675
5,169
24,936
9,095
427,003
–
–
–
3,144
4,327
–
–
2,051
318
–
–
–
8,958
32,000
1,151
–
–
1,483
1,098
278
–
–
–
8,759
32,000
1,582
–
–
116
770
448,751
470,556
45,008
43,505
327,166
59,630
–
–
1,037
–
4,929
7,127
399,889
12,550
17,679
9
(147)
18,771
48,862
342,046
62,620
–
80
1,604
69
5,184
7,126
418,729
12,512
17,625
60
(147)
21,777
51,827
–
–
5,918
–
983
–
3,211
–
10,112
12,550
17,679
–
(147)
4,814
34,896
–
–
5,242
–
1,525
–
2,226
–
8,993
12,512
17,625
–
(147)
4,522
34,512
Total liabilities and equity
448,751
470,556
45,008
43,505
*The prior period balances have been restated or re-presented for the financial year. Refer to Note 1.7 for further details.
The Company reported a profit for the financial year ended 30 September 2021 of £237,000 (2020: profit of
£46,000).
The financial statements were approved and authorised for issue by the Board on 31 May 2022.
On behalf of the Board
G G Stran
Director
C Richardson
Director
The accounting policies and Notes on pages 77 to 132 form part of, and should be read in conjunction with, these
financial statements.
74
Consolidated Statement of Changes in Equity
for the year ended 30 September 2021
Attributable to equity holders of the Company
Distributable
Non-distributable
Group
Balance at 1 October 2020
Correction of prior period error
At 1 October 2020 (Restated)*
Loss for the year
Issuance of new shares
Reclassification of own shares
Fair value gain on FVOCI
financial instruments
Share-based payments
Issued
capital
£’000
12,512
–
12,512
–
38
–
–
–
Share
Own
premium shares
£’000
£’000
17,625
–
17,625
–
54
–
(147)
–
(147)
–
–
–
–
–
–
–
Balance at 30 September 2021
12,550
17,679
(147)
Balance at 1 October 2019
Loss for the year
Scrip dividend
Reclassification to cash
Fair value gain on FVOCI
financial instruments
Share-based payments
Cash dividends
12,510
–
2
–
–
–
–
17,619
–
6
–
(355)
–
–
208
–
–
–
–
–
–
Balance at 30 September 2020
12,512
17,625
(147)
Other
reserves
£’000
Retained
earnings
£’000
Total
equity
£’000
53
7
60
–
–
–
(51)
–
9
7
–
–
–
53
–
–
60
23,832 53,875
(2,055) (2,048)
21,777 51,827
(3,061)
(3,061)
92
–
–
–
–
55
(51)
55
18,771 48,862
28,974 58,755
(6,297)
(6,297)
–
(8)
208
–
–
101
(993)
53
101
(993)
21,777
51,827
*The prior period balances have been restated or re-presented for the financial year. Refer to Note 1.7 for further details.
Attributable to equity holders of the Company
Non-distributable
Distributable
Company
Balance at 1 October 2020
Correction of prior period error
At 1 October 2020 (Restated)*
(Loss)/profit for the year
Issuance of new shares/scrip dividend
Reclassification of own shares
Share-based payments
Balance at 30 September 2021
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
12,512
–
12,512
–
38
–
–
17,625
–
17,625
–
54
–
–
12,550
17,679
12,550
–
2
–
–
–
17,679
–
6
–
–
–
(147)
–
(147)
–
–
–
–
(147)
(355)
–
–
208
–
–
Retained
earnings
£’000
Total
equity
£’000
4,639 34,629
(117)
34,512
237
92
–
55
(117)
4,522
237
–
–
55
4,814 34,896
5,376
46
(8)
–
101
(993)
35,150
46
–
208
101
(993)
Balance at 30 September 2020
12,512
17,625
(147)
4,522
34,512
*The prior period balances have been restated or re-presented for the financial year. Refer to Note 1.7 for further details.
The accounting policies and Notes on pages 77 to 132 form part of, and should be read in conjunction with, these
financial statements.
Annual Report & Financial Statements 2021
75
Consolidated Statement of Cash Flows
for the year ended 30 September 2021
30 September
2021
£’000
Note
Group
30 September
2020
Restated
£’000
30 September
2021
£’000
Company
30 September
2020
Restated*
£’000
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
Loss/(gain) on sale of motor vehicles
Loss on disposal of intangible assets
Amortisation of other intangible assets
Impairment loss on goodwill
Interest on lease liabilities
Accrued finance costs
Share-based payments
Impairment of office equipment
Impairment losses on financial assets
Reversal of office equipment, fixtures,
fittings, and motor vehicle write-off
Income tax paid
17
17
18
18
18
26
24
17
6
17
Adjustment for change in
operating assets and liabilities
Net change in loans and advances
Net change in Group company lending
Net change in other assets
Net change in derivative
29
financial instruments
Net change in amounts due to customers
23
Net change in Group company borrowing 20
27
Net change in other liabilities
15
20
21
Net cash flows (used in)/from
operating activities
Investing activities
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
14
17
17
18
Net cash flows from/(used in)
investing activities
Financing activities
Proceeds from subordinated borrowings
24
Proceeds from share issue during the year 28
(Repayment)/net proceeds
from borrowings
Repayment of capital element of leases
Dividends paid to equity holders
24
26
Net cash flows (used in)/from
financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents brought forward
Cash and cash equivalents carried forward
(3,099)
(5,099)
422
206
1,068
2
55
639
1,147
28
16
55
13
6,677
(9)
(1,706)
56,334
–
(3,118)
(289)
(14,880)
–
(255)
1,206
(22)
51
552
1,750
55
138
101
–
14,431
–
(1,538)
(102,931)
–
2,795
17
74,976
–
(1,255)
42,678
(14,773)
(7,111)
10,589
(280)
–
–
(589)
(1,385)
208
67
(739)
(7,980)
8,740
–
92
(3,005)
(595)
–
(3,508)
31,190
24,936
56,126
7,000
–
18,196
(605)
(993)
23,598
17,565
7,371
24,936
440
–
–
–
–
26
–
55
–
–
(9)
(1,552)
–
(199)
(328)
–
–
676
985
516
–
–
–
–
–
–
–
92
–
(568)
–
724
–
–
–
–
50
–
101
–
–
–
(35)
–
(1,832)
45
–
–
1,887
362
1,518
–
–
208
–
–
208
–
–
–
(578)
(993)
(476)
(1,571)
40
278
318
155
123
278
*The prior period balances have been restated or re-presented for the financial year, Refer to Note 1.7 for further details.
76
Notes to the Financial Statements
for the year ended 30 September 2021
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 UK 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 the purchase of
motor vehicles, plant, bridging 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). They are presented in the Group 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.
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.
In undertaking a Going Concern review the directors have reviewed the short-term financial plan to
November 2023 (the Review Period). These financial projections form part of the Group’s strategic plan
(the Plan) which contains both a base case and downside scenarios which involved stressing various
assumptions to the Plan. In all cases, profitability is dependent on capital being raised. However, there
are various uncertainties related to capital raising which are noted in the Emerging risks and uncertainties
section of the Strategic Report and the associated capital raising risks may be further exacerbated by
the current geopolitical situation.
To mitigate the regulatory capital risks and the restriction on business lending, we have decided to
accelerate an element of our capital raising, by requesting further investment in the Company from our
majority shareholder Somers Limited of circa £4 million over the next two months and at the same time
we are also investigating other strategic opportunities as outlined in the Chair’s Statement.
Should the Group not be successful in achieving its capital raising nor any other strategic opportunities
there is no certainty that it could continue to originate new lending given its projection that over the
Review Period regulatory capital ratios are forecast to fall below regulatory capital minimum requirements.
Should new lending be suspended this would reduce income and the prospect of the Group being able
to generate profits which would further impact on its ability to generate capital organically.
In conclusion the raising or organic generation of capital is not guaranteed, nor are the completion of
other strategic opportunities and therefore the directors have concluded that the current lack of certainty,
and the associated risks represent a material uncertainty which casts a significant doubt of the Group’s
ability to continue as a Going Concern. The Board is confident that it will be able to affect a Capital raise
or implement strategic opportunities and therefore holds a reasonable expectation that the Group will
have adequate resources, notably adequate regulatory capital, to continue its operations for the period
to 31 May 2023 being at least the next 12 months from the date of approval on the Annual Report and
Financial Statements. On this basis the directors continue to adopt the Going Concern basis in preparing
these accounts.
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.
Annual Report & Financial Statements 2021
77
1.4 Basis of consolidation
Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is
measured as the aggregate of the consideration transferred, which is measured at acquisition date fair
value, and the amount of any non-controlling interests in the acquiree. For each business combination,
the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the
proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as
incurred and included in administrative expenses. When the Group acquires a business, it assesses the
financial assets and liabilities assumed for appropriate classification and designation in accordance with
the contractual terms, economic circumstances, and pertinent conditions at the acquisition date.
Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the
acquisition date. Contingent consideration classified as equity is not remeasured and its subsequent
settlement is accounted for within equity. Contingent consideration classified as an asset or liability that
is a financial instrument and within the scope of IFRS 9 ‘Financial Instruments’, is measured at fair value
with the changes in fair value recognised in the 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 the Income Statement.
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 more
than the aggregate consideration transferred, the Group reassesses whether it has correctly identified
all the assets acquired and all 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
the Income Statement.
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 (CGU) that are expected to benefit from the
combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Impairment losses relating to goodwill are not reversed in future periods.
Where goodwill has been allocated to a CGU and part of the operation within that unit is disposed of,
the goodwill associated with the disposed operation is included in the carrying amount of the operation
when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured
based on the relative values of the disposed operation and the portion of the CGU retained.
Contingent liabilities recognised in a business combination
A contingent liability recognised in a business combination is initially measured at fair value. Subsequently,
it is measured at the higher amount that would be recognised in accordance with the requirements stated
on contingent consideration above or the amount initially recognised less, where appropriate, cumulative
amortisation recognised in accordance with the requirements for revenue recognition.
Subsidiaries
‘Subsidiaries’ are entities controlled by the Group. The Group ‘controls’ an entity if it is exposed to, or
has rights to, variable returns from its involvement with the entity and has the ability to affect those
returns through its power over the entity. The Group reassesses whether it has control if there are changes
to one or more of the elements of control. This includes circumstances in which protective rights held
(e.g. those resulting from a lending relationship) become substantive and lead to the Group having power
over an investee. The Financial Statements of subsidiaries are included in the consolidated Financial
Statements from the date on which control commences until the date on which control ceases.
Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as
equity transactions.
Loss of control
When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary,
and any related Non-Controlling Interests (NCI) and other components of equity. Any resulting gain or
loss is recognised in the Income Statement. Any interest retained in the former subsidiary is measured
at fair value when control is lost.
Transactions eliminated on consolidation
All intra-Group balances, transactions, income, expenses and profits and losses resulting from intra-Group
transactions which are recognised in assets or liabilities, are eliminated in full. Unrealised losses are
eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
78
1.5
Summary of significant accounting policies
1.5.1 New standards, interpretations and amendments adopted by the Group
In the year ended 30 September 2020, the Group adopted IFRS 16 Leases, replacing IAS 17 Leases
effective from 1 October 2019.
Interest Rate Benchmark Reform – Phase 2 amendments to IFRS 9, IAS 39, IFRS 7 and IFRS 16, along
with other minor amendments to IFRSs effective for the Group from 1 October 2021 have been issued by
the International Accounting Standards Board (IASB). These amendments are expected to have no or
an immaterial impact on the Group.
1.5.2 Financial instruments - initial recognition and subsequent measurement
Date of recognition
Financial assets and liabilities, except for 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.
Financial instruments are initially measured at their fair value and, with the exception of financial assets and
financial liabilities, subsequently measured at Fair Value Through Profit or Loss (FVTPL), transaction costs
that are directly attributable to the acquisition or issue of financial assets and financial liabilities are added
to, or subtracted from, this amount. Transaction costs directly attributable to the acquisition of financial
assets or financial liabilities at FVTPL are recognised immediately in the Income Statement. 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; or
l Fair Value Through Other Comprehensive Income (FVOCI); or
l Fair Value Through Profit or Loss (FVTPL).
Financial liabilities are measured at amortised cost, and derivatives at FVTPL (see page 80).
Annual Report & Financial Statements 2021
79
Financial assets and liabilities
Balances at central banks, loans and advances to customers, due from Group companies,
other assets at amortised cost
The Group measures balances at central banks, loans and advances to customers, due from Group
companies 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 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 below:
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 (e.g. 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 test
As a second step of its classification process, the Group assesses the contractual terms of the financial
asset to identify whether they meet the Solely Payments of Principal and Interest test. The Group’s loan
assets of hire purchase and conditional sales agreements are repaid by instalments of principal and interest
with a fee upfront. These meet the SPPI test.
‘Principal’, for the purpose of this test, is defined as the fair value of the financial asset at initial recognition
and may change over the life of the financial asset, 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 purely 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 (ISDA) Master Agreement to document these transactions in conjunction with
a Credit Support Annex (CSA).
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 master netting agreements and
holding collateral. Such collateral is subject to the standard industry CSA and is paid or received on a
regular basis.
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Debt instruments at Fair Value Through Other Comprehensive Income (FVOCI)
The Group applies the category under IFRS 9 of debt instruments measured at Fair Value Through Other
Comprehensive Income when both of the following conditions are met:
l The instrument is held within a business model, the objective of which is achieved by both collecting
contractual cash flows and selling financial assets.
l The contractual terms of the financial asset meet the SPPI test.
FVOCI debt instruments are subsequently measured at fair value with gains and losses arising due to changes
in fair value recognised in Other Comprehensive Income (OCI). Interest income is recognised in the Income
Statement. The calculation of Expected Credit Losses (ECL) for debt instruments at FVOCI is explained
below. On derecognition, cumulative gains or losses previously recognised in OCI are re-classified from OCI
to the Income Statement.
Due to banks, due to customers and due to Group companies
After initial measurement, amounts due to banks, due to customers and due to Group companies are
subsequently measured at amortised cost. Amortised cost is calculated by considering 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 and subordinated liabilities
After initial measurement, other borrowed funds and subordinated liabilities 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.
Reclassification of financial assets and liabilities
The Group does not reclassify its financial assets subsequent to their initial recognition, apart from the
exceptional circumstances in which the Group acquires, disposes of, or terminates a business line.
Financial liabilities are never reclassified.
De-recognition 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 when one or more of the following conditions has been met:
l The rights to receive cash flows from the asset have expired.
l The financial asset is written off.
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 has either (a) transferred
substantially all the risks and rewards of the asset, or (b) 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, cancelled or expired.
When 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.
Renegotiation/forbearance
Loans are identified as renegotiated and classified as credit-impaired when the Group modifies the contractual
payment terms due to significant credit distress of the borrower. Renegotiated loans remain classified as
credit-impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-
payment of future cash flows and retain the designation of renegotiated until maturity or derecognition.
A loan that has been renegotiated is derecognised if the existing agreement is cancelled and a new
agreement is made on substantially different terms, or if the terms of an existing agreement are modified
such that the renegotiated loan is a substantially different financial instrument. Any new loans that arise
following derecognition events in these circumstances are considered to be Purchase of Credit-Impaired
(POCI) loans and will continue to be disclosed as renegotiated loans.
Other than originated credit-impaired loans, all other modified loans could be transferred out of Stage 3
if they no longer exhibit any evidence of being credit-impaired and, in the case of renegotiated loans, there
is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows
over the minimum observation period, and there are no other indicators of impairment. These loans could
be transferred to Stage 1 or 2 based on the mechanism as described below by comparing the risk of a
default occurring at the reporting date (based on the modified contractual terms) and the risk of a default
occurring at initial recognition (based on the original, unmodified contractual terms). Any amount written-
off as a result of the modification of contractual terms would not be reversed.
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Loan modifications other than renegotiated loans
Loan modifications that are not identified as renegotiated are considered to be commercial restructuring.
When a commercial restructuring results in a modification (whether legalised through an amendment to
the existing terms or the issuance of a new loan contract) such that the Group’s rights to the cash flows
under the original contract have expired, the old loan is derecognised and the new loan is recognised at
fair value. The rights to cash flows are generally considered to have expired if the commercial restructure
is at market rates and no payment-related concession has been provided. Mandatory and general offer
loan modifications that are not borrower-specific, for example market-wide customer relief programmes,
have not been classified as renegotiated loans and generally have not resulted in derecognition, but their
stage allocation is determined considering all available and supportable information.
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 contracts.
The Group uses the three stage model for determination of ECL.
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 as defined below.
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.
l Forward-looking information.
Significant Increase in Credit Risk (SICR)
The Group applies a series of quantitative, qualitative and backstop criteria to determine if an account has
demonstrated a Significant Increase in Credit Risk (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 threshold is considered to be significant. These thresholds have
been determined separately for each portfolio, based on historical evidence of delinquency.
l Qualitative criteria – This includes the observation of specific events such as short-term forbearance,
payment cancellation, historical arrears or extension to customer terms.
l Backstop criteria – IFRS 9 includes a rebuttable presumption that 30 days past due is an indicator of
a significant increase in credit risk. The Group considers 30 days past due to be an appropriate
backstop measure and does not rebut this presumption.
Due to the impact and uncertainty introduced on the external environment by COVID-19, it has been
necessary to consider whether an SICR has occurred for certain loans, 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 an SICR (transfer to Stage 2) in line with regulatory guidance
but nevertheless it has been considered to calculate additional Post Model Adjustments (PMAs) 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 ECL has been aligned to the Capital Requirements
Regulation (CRR) article 17841 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.
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When a loan falls into default, a formal process of recovering the loan will commence. The recovery will
include a number of actions such as selling the underlying assets and agreeing an arrangement to repay.
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 six
months and are current are reclassified to Stage 2.
41 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)
An Expected Credit Loss (ECL) is an unbiased, probability-weighted estimate of credit loss determined
by evaluating a range of possible outcomes. It is measured in a manner that reflects the time value of
money and uses reasonable and supportable information that is available without undue cost or effort at
the reporting date about past events, current conditions and forecasts of future economic conditions.
Measurement of an ECL depends on the ‘Stage’ of the financial asset, based on changes in credit risk
occurring since initial recognition, as described below:
l Stage 1 – When a financial asset is first recognised, it is assigned to Stage 1. If there is no significant increase
in credit risk from initial recognition, the financial asset remains in Stage 1. Stage 1 also includes financial
assets where the credit risk has improved, and the financial asset has been reclassified back from Stage 2.
For financial assets in Stage 1, a 12 month ECL is recognised.
l Stage 2 – When a financial asset shows a significant increase in credit risk from initial recognition, it is
moved to Stage 2. For financial assets in Stage 2, a lifetime ECL is recognised.
l Stage 3 – When there is objective evidence of impairment and the financial asset is considered to be in
default, or otherwise credit-impaired, it is moved to Stage 3. For financial assets in Stage 3, a lifetime ECL
is recognised.
l Lifetime ECL – Defined as the ECL that results from all possible default events over the expected behavioural
life of a financial instrument.
l 12 month ECL – Defined as the portion of lifetime ECL that will result if a default occurs in the 12 months
after the reporting date, weighted by the probability of that default occurring.
All Stage 3 loans and those Stage 2 loans that are either 30 days past due or subject to an individual
recoverability assessment by the Group’s Collections Department are classified as non-performing loans.
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 Consolidated Statement
of Comprehensive Income.
Model calculation
The definitions of the ECL calculations are outlined below and the key elements are, as follows:
l The Probability of Default (PD) is an estimate of the likelihood of default over a given time horizon.
A default may only happen at a certain time over the assessed period if the facility has not been previously
derecognised and is still in the portfolio.
l The Exposure at Default (EAD) is an estimate of the exposure at a future default date, taking into account
expected changes in the exposure after the reporting date, including repayments in full, continued
repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdowns
on committed facilities and accrued interest from missed payments.
l The Loss Given Default (LGD) is an estimate of the loss arising in the case where a default occurs at a given
time. It is based on the difference between the contractual cash flows due and those that the lender would
expect to receive, including from the realisation of any collateral. It is usually expressed as a percentage of
the EAD.
ECLs are calculated by multiplying three main components, being the PD, LGD and the EAD, discounted
at the original Effective Interest Rate (EIR).
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Expected life
A Lifetime ECL 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 on initial recognition or an approximation thereof and consistent with
income recognition. Lease receivables are discounted at the rate implicit in the lease.
Expected Credit Losses
An ECL is a probability-weighted estimate of the present value of credit losses. It is measured as the
present value of the difference between the cash flow 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 EIR. This is both:
l For undrawn loan commitments, the ECL is 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.
l 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 the ECL on an individual basis or on a collective basis for portfolios of loans that
share similar economic risk characteristics including credit risk grading and vintage. The measurement of
the loss allowance is based on the present value of the asset’s expected cash flows using the asset’s original
EIR, regardless of whether it is measured on an individual basis or a collective basis.
For those Stage 3 loans in formal recovery, the ECL is determined by whichever of the as following applies:
l For those loans that are considered saleable by the Group to third parties as part of a strategy to manage
credit risk, the ECL is based on recent sale prices of formal recovery loans in a similar subcategory that
were previously sold by the Group to third parties. Until the date of sale, any subsequent recoveries from
the customer are credited to the outstanding loan balance.
l In the absence of recent sale prices, 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.
l For those loans that are not considered saleable, the ECL for formal recovery loans shall be 100% of the
remaining loan balance on the basis that the Group does not expect to recover any monies from the
customer.
Any subsequent recoveries from the customer are recognised in full in the Income Statement as a credit
to impairment losses on financial assets.
Overlays and Post Model Adjustments (PMAs)
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.
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 overlays and PMAs applied 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 £0.3 million to the total ECL (2020: £1.4 million).
l For 2021, the approach for COVID-19 pandemic related PMAs were re-assessed to reflect the economic
changes due to the country emerging from the initial impact of the COVID-19 pandemic and the lifting of
the national lockdown. As a result, management assessed that the 2020 COVID-19 related PMAs were no
longer required and were removed during the year ended 30 September 2021. For those customers granted
a COVID-19 deferral holiday during the pandemic and that had not returned to making full payments after
their deferral period, a PMA of £(0.1) million was applied to those customers to ensure any uncollateralised
exposure was fully provided for. For these customers, the modelled provision was compared to the
uncollateralised exposure reduced to prevent over provisioning.
l For the 2020, the approach for COVID-19 pandemic related PMAs was as follows:
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l The COVID-19 pandemic and subsequent national lockdown, with its adverse effect on asset values,
necessitated an overlay for recovery rates. The 2020 overlay calculated for this risk was £0.2 million.
l It is perceived that the likelihood of default may have increased for those customers who had applied
for COVID-19 specific forbearance within CFD. Therefore, the Group applied an additional provision for
the Consumer Finance loans that were in forbearance in 2020 of £0.1 million.
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 30 September 2020 was £6.1 million. 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. An overlay was calculated for this risk in 2020 of £0.4 million.
l COVID-19 has had an adverse impact on the film and TV market that Azule serves. The lifting of the
initial restrictions meant that the film and TV sector could return to work, but during 2020, the
Government continued to ban mass gathering events such as concerts, festivals, conferences and
exhibitions. This resulted in those who service live events being forced to remain closed, therefore
requiring additional support from the Government through furlough, Coronavirus Business Interruption
Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) and 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. An
overlay was calculated for this risk in 2020 of £0.4 million.
l An overlay was in place for customers who entered their third round of forbearance, as in some cases
they may not have made full payments to the Group for nine months. Management perceived there to
be an additional risk associated with these customers and therefore an additional provision has been
applied to these agreements. An overlay was calculated for this risk in 2020 of £0.1 million.
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 contributed to an additional £0.4m (2020:
£6 million).
l The ECL model applied by the Group in 2020 used three economic scenarios in the impairment
calculations. Management deemed it necessary to include a severe downside scenario in the
calculations. The overlay contributed an additional £0.1 million at 30 September 2020. During the year
ended 30 September 2021, the ECL model was enhanced to include additional scenarios thereby
removing the need for this PMA at 30 September 2021.
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 £(0.1) million (2020: £0.2 million).
l A PMA has been implemented to address the re-grading of credit grades. The Group has carried out
a re-grade of the Business Finance and Consumer Finance portfolios to address the possible
deterioration in the quality of the loan book. The overlay for this risk at 30 September 2021 was not
material (2020: £0.3 million).
The total of the overlays and PMAs is a net increase to the impairment provision of £0.5 million
(2020: increase in ECL provisions £8.8 million).
1.5.3 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
Under IFRS 9, interest income is recorded using the Effective Interest Rate (EIR) method for all financial
assets measured at amortised cost, and where applicable to interest rate derivatives for which hedge
accounting is applied and the related amortisation/recycling effect of hedge accounting. Interest income
on interest-bearing financial assets measured at FVOCI under IFRS 9 is also recorded using the EIR
method. Interest expense is also calculated using the EIR method for all financial liabilities held at
amortised cost. The EIR is the rate that exactly discounts estimated future cash receipts and payments
through the expected life of the financial asset or liability or, when appropriate, a shorter period, to the
gross carrying amount of the financial asset.
The EIR (and therefore, the amortised cost of the financial asset or financial liability) is calculated by
taking into account transaction costs and any discount or premium on the acquisition of the financial
asset, or on recognition of a financial liability, as well as fees and costs that are an integral part of the
EIR. The Group recognises interest income using a rate of return that represents the best estimate of a
constant rate of return over the expected life of the loan or deposit. Hence, the EIR calculation also takes
into account the effect of potentially different interest rates that may be charged at various stages of
the financial asset’s expected life, and other characteristics of the product life cycle (including
prepayments, penalty interest and charges).
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If expectations of fixed rate financial assets or liabilities’ cash flows are revised for reasons other than
credit risk, then changes to future contractual cash flows are discounted at the original EIR, with a
consequential adjustment to the carrying amount. The difference from the previous carrying amount is
booked as a positive or negative adjustment to the carrying amount of the financial asset or liability on
the balance sheet, with a corresponding increase or decrease in interest revenue/expense calculated
using the effective interest method.
For floating-rate financial instruments, periodic re-estimation of cash flows to reflect the movements in
the market rates of interest also alters the effective interest rate, but when instruments were initially
recognised at an amount equal to the principal, re-estimating the future interest payments does not
significantly affect the carrying amount of the asset or the liability.
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
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.
1.5.4 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.
1.5.5 Fee and commission income
The Group earns fee and commission income from a range of services it provides to its customers. Fee
income, other than that accounted for using the EIR method, is recognised immediately and can be
divided into the following two categories:
l Secondary lease income arising from finance leases which have completed their primary lease period.
l Fees earned from commissions, late payment charges and recharge of costs incurred from the recovery
of assets under hire purchase and finance lease agreements.
1.5.6 Net income from other financial instruments at Fair Value Through Profit or Loss (FVTPL)
Net income from other financial instruments at Fair Value Through Profit or Loss 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 as at FVTPL and non-trading assets mandatorily
measured at FVTPL. The line item includes fair value changes.
1.5.7 Leases
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
Contracts may contain both lease and non-lease components. At commencement or on modification of
a contract that contains a lease component, the Group allocates the consideration in the contract to the
lease and non-lease components based on their relative stand-alone prices. However, for leases of real
estate for which the Group is a lessee, it has elected not to separate lease and non-lease components
and instead accounts for these as a single lease component.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities
include the net present value of the following lease payments:
l Fixed payments (including in-substance fixed payments), less any lease incentives receivable.
l Variable lease payment that are based on an index or a rate, initially measured using the index or rate
as at the commencement date.
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l Amounts expected to be payable by the Group under residual value guarantees.
l The exercise price of a purchase option if the Group is reasonably certain to exercise that option.
l Payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option.
Lease payments to be made under reasonably certain extension options are also included in the
measurement of the liability.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be
readily determined, which is generally the case for leases in the Group, the lessee’s incremental borrowing
rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary
to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar
terms, security and conditions.
To determine the incremental borrowing rate, the Group will do the following:
l Where possible, use recent third-party financing received by the individual lessee as a starting point,
adjusted to reflect changes in financing conditions since third-party financing was received.
l Use a build-up approach that starts with a risk-free interest rate adjusted for credit risk for leases held by
the Group, which does not have recent third-party financing.
l Make adjustment specific to the lease, e.g. term, country, currency and security.
If a readily observable amortising loan rate is available to the individual lessee (through recent financing
or market data) that has a similar payment profile to the lease, then the Group will use that rate as a
starting point to determine the incremental borrowing rate.
The Group is exposed to potential future increases in variable lease payments based on an index or rate,
which are not included in the lease liability until they take effect. When adjustments to lease payments based
on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset.
Lease payments are allocated between principal and finance cost. The finance cost is charged to the
Income Statement over the lease period so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period.
Right-of-use assets
Right-of-use assets are measured at cost comprising the following:
l The amount of the initial measurement of lease liability.
l Any lease payments made at or before the commencement date less any lease incentives received.
l Any initial direct costs.
l Restoration costs.
Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term
on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use
asset is depreciated over the underlying asset’s useful life.
The right-of-use assets are presented within Note 17 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 1.5.11 Impairment
of non-financial assets.
Short-term leases and leases of low-value assets
Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets
are recognised on a straight-line basis as an expense in the Income Statement. Short-term leases are
leases with a lease term of 12 months or less without a purchase option. Low-value assets comprise IT
equipment and small items of office furniture.
The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value
assets and short-term leases, including leases of IT equipment. The Group recognises the lease payments
associated with these leases as an expense on a straight-line basis over the lease term.
Group as a lessor
At inception or on modification of a contract that contains a lease component, the Group allocates the
consideration in the contract to each lease component on the basis of their relative stand-alone selling
prices.
When the Group acts as a lessor, it determines at lease inception whether the lease is a finance lease or
an operating lease.
To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially
all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the
lease is a Finance Lease. If not, then it is an Operating Lease. As part of this assessment, the Group considers
certain indicators, such as whether the lease is for the major part of the economic life of the asset.
Annual Report & Financial Statements 2021
87
The Group applies the derecognition and impairment requirements in IFRS 9 to the net investment in
the lease. The Group further regularly reviews estimated unguaranteed residual values used in calculating
the gross investment in the lease.
Operating leases
Rental income arising from a lease is accounted for on a straight-line basis over the lease term, and is
included in revenue in the Income Statement 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.
1.5.8 Cash and cash equivalents
Cash and cash equivalents as referred to in the Consolidated Statement of Cash Flows, comprise cash
on hand, non-restricted current accounts with central banks and amounts due from banks on demand
or with an original maturity of three months or less.
1.5.9 Office equipment, fixtures, fittings and motor vehicles
Office equipment, fixtures, fittings and motor vehicles are stated at cost excluding the costs of day-to-day
servicing, less accumulated depreciation and accumulated impairment in value. Changes in the expected
useful life are accounted for by changing the amortisation period or methodology, as appropriate, and
treated as changes in accounting estimates.
Depreciation is calculated using the straight-line method to write down the cost of office equipment,
fixtures, fittings and motor vehicles to their residual values over their estimated useful lives as follows:
Office equipment, fixtures and fittings – between 3 and 10 years
Motor vehicles – 4 years
Office equipment, fixtures, fittings and motor vehicles are derecognised on disposal or when no future
economic benefits are expected from their use. Any gain or loss arising on derecognition of the asset,
calculated as the difference between the net disposal proceeds and the carrying amount of the asset, is
recognised in other operating income in the Income Statement in the year the asset is derecognised.
1.5.10 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:
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.
If these conditions are not met, expenditure is recognised in administrative expenses in the Income
Statement as incurred.
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.
1.5.11
Impairment of non-financial assets
The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any
indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s
recoverable amount. An asset’s recoverable amount is the higher of an asset’s or Cash Generating Unit’s (CGU)
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.
88
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.
Disclosures of the assumptions used to test for impairment are given in Note 1.6.3.
1.5.12 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. 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.
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.
1.5.13 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.
1.5.14 Provisions and contingent liabilities
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.
Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events
and present obligations where the transfer of economic resources is uncertain or cannot be reliably measured.
Contingent liabilities are not recognised on the balance sheet but are disclosed unless the likelihood of an
outflow of economic resources is remote.
1.5.15 Taxes
Current tax
Current tax assets and liabilities for this current year 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
Income Statement. 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.
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.
Annual Report & Financial Statements 2021
89
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 Fair Value Through Other Comprehensive
Income (FVOCI) assets and foreign exchange differences which are charged or credited to other
comprehensive income. These exceptions are subsequently reclassified from other comprehensive income
to the Income Statement together with the respective deferred loss or gain. The Group also recognises
the tax consequences of payments and issuing costs related to financial instruments that are classified
as equity, directly in equity.
Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current
tax assets against current tax liabilities and where the deferred tax assets and liabilities relate to income
taxes levied by the same taxation authority on either the same taxable entity or different taxable entities
where there is an intention to settle on a net basis.
Value Added Tax (VAT)
Revenues, expenses and assets are recognised net of the recoverable amount of Value Added Tax 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 on the balance sheet.
1.5.16 Own shares
Own equity instruments of the Group which are acquired by it or by any of its subsidiaries (Treasury
shares) are deducted from equity. Consideration paid or received on the purchase, sale, issue or
cancellation of the Group’s own equity instruments is recognised directly in equity. No gain or loss is
recognised in the Income Statement on the purchase, sale, issue or cancellation of own equity instruments.
1.5.17 Dividends on ordinary shares
Dividends on ordinary shares are recognised as a liability and deducted from equity when approved by
the Group’s shareholders. Dividends for the year that are approved after the reporting date are disclosed
as a non-adjusting event after the reporting date.
1.5.18 Short-term benefits
Wages, salaries, commissions, bonuses, social security contributions, paid annual leave and non-monetary
benefits, including death-in-service premiums, are accrued in the period in which the associated services
are rendered by employees of the Group.
1.5.19 Foreign exchange gains and losses
Transactions in foreign currencies are translated into the respective functional currencies of Group
companies at the exchange rates at the date of the transactions.
Monetary assets and liabilities denominated in foreign currencies are translated into the functional
currency at the exchange rate at the reporting date. The foreign currency gain or loss on monetary items
is the difference between the amortised cost in the functional currency at the beginning of the year,
adjusted for effective interest, impairment and payments during the year, and the amortised cost in the
foreign currency translated at the spot exchange rate at the end of the year.
Non-monetary items that are measured based on historical cost in a foreign currency are translated at
the exchange rate at the date of the transaction.
Foreign currency differences arising on translation are generally recognised in the Income Statement.
1.5.20 Parent Company investment in subsidiary undertakings
The Parent Company’s investments in its subsidiary undertakings are stated at cost less any impairment
losses (carrying value).
1.6
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 Notes 1.6.1 to 1.6.4.
90
1.6.1 Effective interest rate (EIR) (estimate)
This estimation of Effective Interest Rate, by its nature, requires an element of judgement regarding the
expected behaviour and life cycle of the instruments, as well as expected changes to the Bank of England
base rate and other fee income/expenses that are integral parts of the instrument.
Management uses 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 that must be recognised in the Income
Statement. The effective interest rate behavioural models are based on market trends and experience.
1.6.2 Impairment losses on financial assets (judgement and estimate)
IFRS 9 impairment involves several important areas of judgement, including estimating forward-looking
modelled parameters, Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default
(LGD), developing a range of unbiased future economic scenarios, estimating expected lives and assessing
Significant Increase in Credit Risk (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, that are
typically run at a cohort level.
For assets in Stage 3, impairment allowances are calculated on an individual basis, with all relevant
considerations that have a bearing on the expected future cash flows across a range of recovery options
taken into account. These considerations can be subjective, but the recovery rates are routinely
back-tested and used as the base case.
The Assets and Liability Committee (ALCO) considers the recovery rates, weightings and economic factors,
and where necessary, recommends changes to the Board for approval. The creation, ongoing measurement
or release of ECL post model adjustments and overlays are considered and approved by ALCO.
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 Expected Credit Loss (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 as set out in Note 1.5.2, the
Group applied PMAs 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.
Annual Report & Financial Statements 2021
91
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.
The majority of the residual PMAs are to address a lack of sensitivity in the modelled outcome.
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 are 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. This 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 with 2020 comparatives disclosed in brackets. For the year ended
30 September 2020, only three scenarios were used in the ECL model. Following model enhancements
during the year ended 30 September 2021, the number of scenarios were increased to five.
Mild
upside Upside
Base
Downside downside
Severe
Scenario weightings 10% 10%
(n/a) (30%)
60%
(40%)
10%
(30%)
10%
(n/a)
5-year average
GDP (year on year change) 3.57% 3.33%
(n/a) (3.26%)
CPI (year on year change) 2.39% 2.20%
(n/a) (1.97%)
Unemployment rate (5-year average) 3.61% 2.57%
(n/a) (3.63%)
HPI (year on year change) 4.04% 4.75%
(n/a) (4.02%)
Used Car Price Index (year on year change) (5.96%) (5.13%)
(n/a) (1.57%)
Peak values
GDP 10.66% 10.11%
(n/a) (9.17%)
CPI 4.05% 4.10%
(n/a) (3.57%)
Unemployment rate 4.70% 4.70%
(n/a) (4.89%)
HPI 8.37% 11.06%
(n/a) (9.91%)
Used Car Price Index (1.94)% (1.92%)
(n/a) (0.32%)
2.84%
(2.66%)
2.09%
(1.68%)
3.96%
(4.06%)
1.48%
(1.58%)
(5.92%)
(1.61%)
7.74%
(5.05%)
3.01%
(1.95%)
4.71%
(6.50%)
3.77%
(5.60%)
(1.82%)
(0.80%)
1.83%
(1.42%)
1.56%
(1.01%)
6.12%
(6.69%)
(3.15%)
(3.13%)
(5.60%)
(1.62%)
3.22%
(2.77%)
2.03%
(2.13%)
6.34%
(8.42%)
4.35%
(6.22%)
(1.12%)
(1.68%)
1.28%
(n/a)
1.34%
(n/a)
6.45%
(n/a)
(5.88%)
(n/a)
(5.53%)
(n/a)
1.71%
(n/a)
2.19%
(n/a)
6.65%
(n/a)
4.81%
(n/a)
(0.94%)
(n/a)
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 is shown below. Results reported in brackets represent a reduction in the
ECL. Performing sensitivity analysis involves a high degree of estimation uncertainty. On this basis, 100%
weighted expected credit loss provisions presented for the upside and downside scenarios should not
be taken to represent lower or upper bound of possible and actual expected credit loss outcomes. The
modelled impact presented is based on gross loans and advances to customers and it does not
incorporate future changes relating to performance, growth or credit risk.
92
Mild
Upside upside
£’000 £’000
Base
£’000
Downside
£’000
Severe
downside
£’000
30 September 2021
Business Finance Division (1,510) (1,446)
Consumer Finance Division (1,417) (1,353)
Bridging Finance Division (39) (25)
Azule Division (416) (219)
(71)
(215)
(4)
(12)
1,528
2,034
30
235
1,845
2,398
56
283
30 September 2020
Business Finance Division
Consumer Finance Division
Bridging Division
Azule Division
Upside
£’000
(123)
(636)
(27)
(7)
Base
£’000
Downside
£’000
(91)
(27)
(2)
(5)
555
834
30
32
1.6.3 Impairment testing of investment in subsidiaries and goodwill (judgement and estimate)
The Group assesses at each reporting date if there is an indication that the goodwill, acquired through
acquisitions or investments in subsidiaries, may be impaired. When annual impairment testing for an
asset is performed, or when an indicator of impairment of an asset arises outside of the annual assessment,
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 in a
subsidiary or Cash Generating Units (CGUs) exceeds its recoverable amount. The recoverable amount
of an investment in a subsidiary 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:
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 15.17%.
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.
1.6.4 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 (e.g. 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 IBR used by the Group ranges from 2.75% to 5.60%.
Annual Report & Financial Statements 2021
93
1.6.5 Climate risk
The Group makes use of reasonable and supportable information to make accounting judgments and
estimates. This includes considering wheeled-assets valuation impacts to estimated credit loss
assessments. For the purpose of the 2021 Annual Report and Accounts this did not include information
about the observable effects of physical and transition risks of climate change on the current
creditworthiness of borrowers for non-wheeled asset valuations, property portfolio valuations and market
indicators.
Many of the effects arising from physical risks such as from extreme acute and chronic weather-related
events will be longer-term in nature, with an inherent level of uncertainty, and have limited effect on
accounting judgments and estimates for the current period.
1.7
Prior period adjustments
The Group’s Financial Statements for prior years have been restated in these Financial Statements
to reflect the prior period misstatements including errors and classification changes as detailed
below.
Consolidated Statement of financial position extract at 30 September 2020
30 September
2020
(As originally
presented)
£’000
Correction of
error
£’000
Re-presentations
£’000
30 September
2020
(Restated
balance)
£’000
Assets
Cash and balances at central banks
Debt instruments at FVOCI
Loans and advances
Office equipment, fixtures, fittings and
motor vehicles
Goodwill and other intangible assets
Deferred tax assets
Other assets
24,936
9,095
427,297
3,144
4,327
1,810
2,051
–
–
(294)
–
–
(1,810)
–
Total assets
472,660
(2,104)
Liabilities
Due to banks
Due to customers
Subordinated liabilities
Derivative Financial Liability
Lease liabilities
Current tax liabilities
Other liabilities
Total liabilities
Equity
Issued capital
Share premium
Own shares
Other reserves
Retained earnings
Total equity
62,620
341,784
7,126
80
1,604
125
5,446
418,785
12,512
17,625
(147)
53
23,832
53,875
Total liabilities and equity
472,660
–
–
–
–
–
(56)
–
(56)
–
–
–
7
(2,055)
(2,048)
(2,104)
–
–
–
–
–
–
–
–
–
262
–
–
–
–
(262)
–
–
–
–
–
–
–
–
24,936
9,095
427,003
3,144
4,327
–
2,051
470,556
62,620
342,046
7,126
80
1,604
69
5,184
418,729
12,512
17,625
(147)
60
21,777
51,827
470,556
94
Consolidated Statement of Cash Flows extract at 30 September 2020
30 September
2020
(As originally
presented)
£’000
Correction of
error
£’000
Re-presentations
£’000
(4,805)
(294)
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
Loss/(gain) on sale of motor vehicles
Loss on disposal of intangible assets
Amortisation of other intangible assets
Impairment loss on goodwill
Interest on lease liabilities
Accrued finance costs
Share-based payments
Impairment of office equipment
Impairment losses on financial assets
Reversal of office equipment, fixtures,
fittings and motor vehicle write-off
Income tax paid
Adjustment for change in operating
Assets and liabilities
Net change in loans and advances
Net change in group company lending
Net change in other assets
Net change in derivative
financial instruments
Net change in amounts due to customers
Net change in group company borrowing
Net change in other liabilities
Net cash flows (used in)/from
operating activities
Investing activities
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 (used in)/from
investing activities
Financing activities
Proceeds from subordinated borrowings
Proceeds from share issue during the year
(Repayment)/net proceeds from borrowings
Repayment of capital element of leases
Dividends paid to equity holders
Net cash flows (used in)/from
financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents brought forward
1,206
(22)
51
552
1,750
55
138
117
–
14,431
–
(1,554)
–
(103,225)
–
2,796
17
74,714
–
(993)
(14,772)
10,589
(1,344)
208
25
(739)
8,739
7,000
–
18,196
(605)
(993)
23,598
17,565
7,371
Cash and cash equivalents carried forward
24,936
–
–
–
–
–
–
–
(16)
–
–
–
16
–
294
–
(1)
–
–
–
–
(1)
–
(41)
–
42
–
1
–
–
–
–
–
–
–
–
–
30 September
2020
(Restated
balance)
£’000
(5,009)
1,206
(22)
51
552
1,750
55
138
101
–
14,431
–
(1,538)
–
(102,931)
–
2,795
17
74,976
–
(1,255)
(14,773)
10,589
(1,385)
208
67
(739)
8,740
7,000
–
18,196
(605)
(993)
23,598
17,565
7,371
24,936
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
262
–
(262)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Annual Report & Financial Statements 2021
95
Consolidated income statement extract as at 30 September 2020
Interest revenue calculated using
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 mandatorily
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 before tax
Income tax (charge)/credit
Loss for the period
30 September
2020
(As originally
presented)
£’000
Correction of
error
£’000
30 September
2020
(Restated
balance)
£’000
42,237
(294)
41,943
(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)
-
(15,953)
(294)
25,990
-
-
-
-
-
-
-
-
-
-
-
(294)
(294)
(1,745)
(2,039)
2,122
(1,602)
520
(55)
26,455
14,431
8,296
5,268
1,206
552
51
(1,750)
31,554
(5,099)
(1,198)
(6,297)
96
Restatement and re-presentation explanation
There have been adjustments to prior year financial results in respect of restatements and re-presentations
which are set our below.
Restatements
l The 2020 profit and hence the 2020 retained earnings, have been restated for a historical accounting
error in relation to timing of recognition of interest income calculated using the effective interest
method. This related to the calculation of the Effective Interest Rate on a legacy system acquired with
the purchase of Azule in 2018. The error impacted the 2020 profit and loss account with overstated
income of £0.3 million (pre-tax) and loans and advances understated by the same amount. After tax
the net impact on shareholders’ funds is a reduction of £0.2 million. The impact of this error is to reduce
the interest income recognised in 2020 and increase the income recognised in 2021. There is no net
impact on retained earnings as at 30 September 2021. The error was identified as part of the
improvement in Financial Controls, including a deep dive of balances of this legacy system on which
no new trades have been booked since May 2021, and which is therefore in run-off.
l Deferred tax asset: Given the disclosure of a material uncertainty in relation to going concern in both
the Annual Report and Financial Statements in 2020 and now in 2021, deferred tax assets in respect
of future taxable profits have not been recognised in the 2021 Annual Report & Financial Statements.
Accordingly, management have judged it appropriate to also derecognise the deferred tax asset of
£1.8 million previously recognised in the 2020 Annual Report & Financial Statements and therefore
comparatives have been restated accordingly.
Re-presentation
l Amounts in the balance sheet for Due to customers have been reclassified with the recognition of Due
to customers of £0.26 million and a corresponding adjustment in other liabilities for the same amount.
l Costs and accumulated depreciation amount for intangible assets, Note 18, have been re-presented
according to those intangible assets that were ‘in-use’ or ‘under development’ at 30 September 2020
to be consistent with the current year disclosure.
l Amount in the cashflow for the Proceeds from sale of motor vehicles have been reclassified with the
recognition of sale of motor vehicles of £0.04 million and a corresponding adjustment in the Purchase
of office equipment and motor vehicles.
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
Specialist funding and leasing services direct to individuals and businesses in the broadcast and media industry.
Bridging finance
Bridging finance for residential, semi-commercial and commercial properties.
The Group’s Executive Committee monitors the operating results of its business units separately for the
purpose of making decisions about resource allocation and performance assessment. Segment
performance is evaluated based on operating profits or losses and is measured consistently with operating
profits or losses in the consolidated Financial Statements.
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 2021 and 30 September 2020.
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 UK. Non-UK based
operations are not considered material to the Group and therefore no additional geographical information
is disclosed.
Annual Report & Financial Statements 2021
97
Segment information
Group
Year ended 30 September 2021
Interest income calculated using
the effective interest method
Interest expense calculated using
the effective interest method
Consumer Business
Finance Finance
£’000
£’000
Bridging
Azule Finance
£’000
£’000
18,824
13,529
1,791
6,646
(7,409)
(5,432)
(245)
(1,451)
Net interest income
11,415
8,097
1,546
5,195
Fee and commission income
Fee and commission expense
65
(1,018)
509
(644)
1,037
(32)
Net fees and commission (expense)/income
(953)
(135)
1,005
224
(22)
202
Net loss on financial instruments mandatorily
at Fair Value Through Profit or Loss
170
136
15
57
Net operating income
10,632
8,098
2,566
5,454
Impairment losses on financial assets
Net profit arising from derecognition of
financial assets measured at amortised cost
Personnel expenses
Other operating expenses
Depreciation of office equipment, fixtures,
fittings and right-of-use-assets
Amortisation of intangible assets
Impairment of office equipment
Impairment losses on software
Impairment losses on goodwill
1,219
5,016
649
(207)
(520)
4,898
2,487
(491)
4,060
3,082
72
1,616
2,176
–
2,045
825
357
287
6
25
–
285
230
5
20
–
306
25
1
2
–
120
97
1
8
–
–
–
–
–
1,147
Adjustment
at Group
Total
level segments
£’000
£’000
–
–
–
–
–
–
–
–
–
–
–
–
40,790
(14,537)
26,253
1,835
(1,716)
119
378
26,750
6,677
(939)
12,619
8,570
1,068
639
13
55
1,147
Total operating expenses
8,759
12,207 4,847
2,889
1,147
29,849
Segment profit/(loss) before tax
Income tax credit/(expense)
1,873
–
(4,109) (2,281)
–
–
2,565
–
(1,147)
38
(3,099)
38
Profit/(loss) after tax
1,873
(4,109) (2,281)
2,565
(1,109)
(3,061)
Total assets
Total liabilities
200,911 160,540 19,521
67,779
179,314 143,283 16,799 60,493
– 448,751
– 399,889
98
Segment information (cont’d)
Group
Year ended 30 September 2020
Interest income calculated using
the effective interest method
Interest expense calculated using
the effective interest method
Consumer Business
Finance Finance
Total
Bridging
level segments
Azule Finance
Restated* Restated* Restated* Restated* Restated* Restated*
£’000
£’000
£’000
£’000
£’000
£’000
Adjustment
at Group
17,182
20,015
1,504
3,242
(6,842)
(8,241)
(238)
(632)
Net interest income
10,340
11,774
1,266
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
2,333
2,594
–
–
–
–
–
–
–
–
–
–
–
41,943
(15,953)
25,990
2,122
(1,602)
520
(55)
26,455
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)
–
(2,705)
–
(377)
–
(1,133)
(2,705)
(377)
866
–
866
1,750
(1,198)
(5,099)
(1,198)
(2,948)
(6,297)
Total assets
Total liabilities
180,390 197,134
160,842 175,790 23,383
26,116 65,770
58,714
1,147 470,556
– 418,729
*The prior period balances have been restated or re-presented for the financial year. Refer to Note 1.7 for further details.
3
Interest income calculated using the effective interest method
Group
Cash and short-term funds
Loans and advances to customers
Finance lease interest
Financial instruments - FVOCI
Total interest and similar income
*Restated, refer to Note 1.7 for full details.
Year ended
30 September
2021
£’000
Year ended
30 September
2020*
£’000
20
37,257
3,410
103
40,790
51
36,232
5,459
201
41,943
Operating lease rental income of £130,247 (2020: £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 finance lease
Interest expense on lease liabilities
Total interest and similar expense
Year ended
30 September
2021
£’000
Year ended
30 September
2020
£’000
938
5,839
7,102
630
28
14,537
994
6,950
7,035
919
55
15,953
Annual Report & Financial Statements 2021
99
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
2021
£’000
Year ended
30 September
2020
£’000
414
1,216
205
1,835
(149)
(1,567)
(1,716)
119
331
1,481
310
2,122
(344)
(1,258)
(1,602)
520
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 30.3. The charge during
the year was as follows:
Group
At 30 September 2021
Impairment charge for the year on loans and
advances to customers
Net write-off
Net termination losses/(gains)
Consumer Business
Finance
£’000
Azule
Finance Finance
£’000
£’000
Bridging
Finance
£’000
Total
£’000
745
497
(23)
4,570
590
(144)
501
164
(16)
(207)
–
–
5,609
1,251
(183)
Total impairment charge
1,219
5,016
649
(207)
6,677
At 30 September 2020
Impairment charge for the year on loans and
advances to customers
4,930
8,407
620
474
14,431
7
Net profits arising from derecognition of financial assets measured at amortised cost
During the year ended 30 September 2021, the Group sold certain credit-impaired loans and advances
to customers measured at amortised cost (2020: nil). These sales were made because the financial assets
no longer met the Group’s investment policy due to a deterioration in their credit risk.
The carrying amounts of the financial assets sold and the profit arising from the derecognition at
30 September 2021 are set out below.
Group
Loans and advances to customers
Carrying amount
of financial
assets sold
£’000
Profit arising from
derecognition
£’000
1,708
939
100
8
Personnel expenses
Personnel expenses include £0.7 million for staff hired to work specifically on remediation activity, mainly
within Finance, risk and legal departments. This is in relation to upgrading Finance and risk control
frameworks, enhanced legal support, and statutory reporting updates.
The aggregate payroll costs of the Group, including directors and Chair, were:
Group
Salaries and fees
Social security cost
Pension costs – defined contribution plan
Other benefits
Year ended
30 September
2021
£’000
Year ended
30 September
2020
£’000
10,848
1,020
407
344
12,619
6,754
925
377
240
8,296
The average monthly number of persons employed by the Group during the year was 131 (2020: 128).
The table below summarises the total number of employees by function at 30 September 2021.
Group
Front office
Risk and Compliance
Operations and IT
Finance and Treasury
Human Resources
Executives
9
Directors’ remuneration and staff costs
Group
Directors’ remuneration
Directors’ emoluments
Payments in respect of personal pension plans
Year ended
30 September
2021
£’000
Year ended
30 September
2020
£’000
28
22
47
33
7
10
147
31
22
37
21
4
10
125
Year ended
30 September
2021
£’000
Year ended
30 September
2020
£’000
1,272
27
1,299
1,211
34
1,245
A summary of the total remuneration paid to directors is set out in the Remuneration Committee Report.
Share-based payments
At 30 September 2021, 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 42.41 pence is
reached 3,183,443 options are effectively granted, if 49.47 pence is reached 4,775,264 options are
effectively granted and if 56.54 pence is reached 6,366,886 options are effectively granted. If options
remain unexercised after a period of 10 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 eight years (2020: nine years).
Of the pool, the following options have been granted with reference to notionally reaching the
performance criteria of 56.54 pence. The model, however, values the options on a weighted basis across
the three performance targets to ensure all outcomes are considered.
Annual Report & Financial Statements 2021
101
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
2021
£’000
Weighted
average
exercise
price
(pence)
30 September
2020
£’000
Weighted
average
exercise
price
(pence)
3,972
–
–
–
3,972
–
33
–
–
–
33
–
5,960
–
–
(1,988)
3,972
–
34
–
–
(35)
33
–
No options were granted during the year ended 30 September 2021 (2020: nil).
The fair value was measured at the grant date using the Black-Scholes model.
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 10 years from the date of the grant, the options expire. The weighted average remaining
contractual life is four years (2020: five 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
2021
£’000
Weighted
average
exercise
price
(pence)
30 September
2020
£’000
Weighted
average
exercise
price
(pence)
2,715
–
(750)
(20)
1,945
1,945
15
–
(12)
(26)
27
27
3,015
–
–
(300)
2,715
2,715
17
–
–
(27)
15
15
No options were granted during the year ended 30 September 2021 (2020: Nil).
The fair value was measured at the grant date using the Black-Scholes model.
10 Other operating expenses
Other operating expenses include £2.9 million of remediation expenses, primarily legal and consultancy
work in relation to non-BAU (Business as usual) activities. This predominantly includes FPPP
memorandum update, internal and external investigations into accounting errors and misstatements as
part of the completion of the Annual report & Financial Statements 2020, and upgrading risk, governance
and culture framework.
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
2021
£’000
Year ended
30 September
2020
£’000
353
2,785
1,311
4,005
–
116
8,570
283
2,156
1,054
1,695
3
77
5,268
Professional fees include fees payable to the auditor of £282,000 (year ended 30 September 2020:
£860,000) as analysed below.
Group
Statutory audit of the Company
Statutory audit of the Company’s subsidiaries
Year ended
30 September
2021
£’000
Year ended
30 September
2020
£’000
50
232
282
43
817
860
Audit fees are allocated in line with the standard management recharge methodology adopted by the Group.
102
11
Income taxes
(a) The components of income tax expense for the year ended 30 September 2021 and its comparatives
Group
Current tax
UK Corporation Tax on profit for the year
Overseas
Adjustments in respect of prior periods
Total current tax credit/(charge)
Deferred tax
Reversal previously recognised deferred tax asset
Adjustments in respect of prior periods
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
(c) Factors affecting current tax charge for the year
The Corporation Tax main rate is 19% (2020: 19%).
The deferred tax asset has been measured at 19% (2020: 19%).
Group
Accounting loss before tax
UK Corporation Tax of 19% (2020: 19%)
Effect of
Current year movement in recognised deferred
tax asset
Write-down of previously recognised deferred tax asset
Expenses not deductible for taxation purposes
Non-taxable income
Adjustments in respect of prior years
Impact on different overseas tax rate
Unutilised losses
Share-based payment
Income tax (expense)/credit as reported in the
Consolidated Income Statement
Effective tax rate for the year
*Restated, refer to Note 1.7 for full details.
Year ended
30 September
2021
£’000
Year ended
30 September
2020*
£’000
81
(2)
(41)
38
–
–
–
38
53
–
(149)
(96)
(1,206)
104
(1,102)
(1,198)
Year ended
30 September
2021
£’000
Year ended
30 September
2020*
£’000
55
–
55
136
(35)
101
Year ended
30 September
2021
£’000
Year ended
30 September
2020*
£’000
3,099
589
(154)
–
(338)
–
(42)
1
(1)
(17)
38
1%
5,099
969
(454)
(1,206)
(453)
29
(45)
–
(13)
(25)
(1,198)
23%
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.
Annual Report & Financial Statements 2021
103
12 Earnings Per Share (EPS)
Basic Earnings Per Share (EPS) is calculated by dividing the net profit for the year attributable to ordinary
equity holders of the Company, by the weighted average number of ordinary shares outstanding during
the year.
The following table shows the income and share data used in the basic and diluted EPS calculations.
Company
Net Company profit/(loss) attributable to
ordinary shareholders
Basic weighted average number of shares
Year ended Year ended
30 September 30 September
2021 2020
£’000 £’000
(3,061) (6,297)
Year ended Year ended
30 September 30 September
2021 2020
’000 units ’000 units
250,335
242,171
Basic earnings per 5p ordinary share (pence)
(1.2)
(2.6)
There were no potential dilutive shares during the year.
13 Cash and balances at central banks
Group
Company
Year ended
30 September
2021
£’000
Year ended
30 September
2020
£’000
Year ended
30 September
2021
£’000
Year ended
30 September
2020
£’000
Cash and demand deposits
56,126
24,936
318
278
The Group and the Company do not hold monies 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 the carrying amount
as cash and balances at central banks have minimal credit losses and are either short-term in nature or
re-price frequently.
14 Debt instruments at FVOCI
Group
Balance at 1 October
Net purchase/(sale) of bonds
Change in fair value during the year
Balance at 30 September
Year ended
30 September
2021
£’000
Year ended
30 September
2020
£’000
9,095
7,111
(51)
16,155
19,638
(10,596)
53
9,095
There are no material impairment losses on debt instruments at FVOCI during the year and at year end
(2020: £nil).
15
Loans and advances to customers
Group
Consumer lending – gross
Business lending – gross
Azule lending – gross
Bridging lending – gross
Allowance for impairment losses (see page 105)
*Restated, refer to Note 1.7 for full details.
104
Year ended
30 September
2021
£’000
Year ended
30 September
2020*
£’000
166,866
138,550
15,465
55,481
171,854
190,462
22,707
60,612
376,362
445,635
(12,370)
(18,632)
363,992
427,003
Loans and advances to customers include the following receivables by maturity:
Less than one year
Between one and five years
More than five years
Impairment allowance
*Restated, refer to Note 1.7 for full details.
Year ended
30 September
2021
£’000
Year ended
30 September
2020*
£’000
72,582
222,270
81,510
(12,370)
76,478
295,002
74,155
(18,632)
363,992
427,003
The Group offer Finance Lease agreements to its customers for hard assets such as motor vehicles,
plant and machinery. The Group registers its interest against the VRM, VIN and serial numbers of the
underlying assets on Finance Lease agreements to ensure clear title throughout the duration of the
rental period. Although the Group does not apply residual value guarantees or buy-back agreements,
they do apply restricted LTVs at the point of inception and perform regular in-life valuations on its
assets in order to identify any potential asset risks.
Finance lease receivables - Minimum lease payments
The following minimum lease payments are receivable on finance leases.
Group
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
Year ended 30 September
2020
Restated*
£’000
30 September
2021
£’000
2,390
6,286
9,357
10,086
2,196
258
30,573
5,783
6,518
11,325
15,311
12,882
1,229
53,048
*Restated, refer to Note 1.7 for full details.
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
*Restated, refer to Note 1.7 for full details.
Year ended
30 September
2021
£’000
Year ended
30 September
2020*
£’000
30,573
(3,633)
26,940
53,048
(7,679)
45,369
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 2020
Charge for the year (Note 6)
Release on write-off
Release against sold loans
6,921
745
(1,415)
(3,026)
10,319
4,570
(2,753)
(4,446)
At 30 September 2021
3,225
7,690
Made up of
Individual impairment
Collective model provisions including
overlays and PMAs
Total impairment
1,798
4,166
1,427
3,225
3,524
7,690
912
501
(165)
(66)
1,182
567
615
1,182
Total
£’000
18,632
5,609
(4,333)
(7,538)
480
(207)
–
-
273
12,370
273
6,804
–
5,566
273
12,370
Annual Report & Financial Statements 2021
105
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
Made up of
Individual impairment
Collective model provisions including
overlays and PMAs
Total impairment
776
1,642
6,145
6,921
8,677
10,319
121
620
171
912
767
145
912
Total
£’000
6,840
14,431
(2,639)
18,632
6
474
–
480
180
3,365
300
480
15,267
18,632
16 Investment in subsidiary undertakings
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. Subsidiaries of the Company
were as follows:
Name of company
PCF Bank Limited
PCF Credit Limited
Azule Limited
Azule Finance Limited
Azule Finance GmbH
Incorporated
Nature of business
UK
UK
UK
Ireland
Germany
Banking, hire purchase,
leasing & Bridging finance
Leasing & hire purchase
Leasing & hire purchase
Leasing & hire purchase
Leasing & hire purchase
*Held by a subsidiary of the Company.
Percentage of
equity interest
30 September
2021
Percentage of
equity interest
30 September
2020
100
100*
100*
100*
100*
100
100*
100*
100*
100*
The registered office of all subsidiaries incorporated in the United Kingdom is Pinners Hall, 105–108 Old
Broad Street, London EC2N 1ER.
The registered office of Azule Finance Limited is Suite 104, 4/5 Burton Hall Road, Sandyford. Dublin 18.
The registered office of Azule Finance GMBH is c/o Dentons Europe LLP, Markgrafenstrasse 33, 10117 Berlin.
All companies have an Accounting Reference date of 30 September, except for Azule Finance GmbH
which is 31 December.
The Company's investment in its immediate subsidiary was as follows:
Company
At 1 October
Cost and net book value
At 30 September
30 September
2021
£’000
30 September
2020
£’000
32,000
32,000
32,000
32,000
The Company has an investment in PCF Bank Limited (the Bank). The net asset value of the Bank at
30 September 2021 was £49.3 million (2020: £52.5 million)*. 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 additional investment in the Bank during the year (2020: Nil).
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.
*Restated, refer to Note 1.7 for full details.
106
17 Office equipment, motor vehicles and right-of-use assets
Right-of-use assets
Assets held
under operating Office Land and
leases equipment buildings
Group £’000 £’000
£’000
equipment
£’000
Total
Office right-of-use
assets
Total
£’000 £’000
Cost
At 1 October 2020 655 1,371
Additions during the year – 280
Disposals during the year – (50)
Impairment – (13)
At 30 September 2021 655 1,588
Accumulated depreciation
At 1 October 2020 60 479
Depreciation during the year 246 366
Disposals during the year – (48)
Write back – –
2,408
–
–
–
2,408
764
451
–
(9)
At 30 September 2021 306 797
1,206
Net book value 349 791
1,202
23
–
–
–
23
10
5
–
–
15
8
2,431 4,457
280
(50)
(13)
–
–
–
2,431 4,674
774
456
–
(9)
1,313
1,068
(48)
(9)
1,221 2,324
1,210 2,350
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 – 320 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
The majority of the office equipment is computer hardware, office furniture and fixtures.
Gain or loss on disposal of office equipment and motor vehicles
–
925
2,431 2,431
2,431 3,356
1,385
(284)
–
–
2,431 4,457
–
–
346
–
–
346
774 1,206
(239)
–
774
1,313
1,657 3,144
Cost
Accumulated depreciation
Net book value of disposed asset
Proceeds from disposal of assets
Loss/(gain) on disposal
30 September
2021
£’000
30 September
2020
£’000
50
(48)
2
–
2
284
(239)
45
(67)
(22)
Annual Report & Financial Statements 2021
107
Right-of-use assets
Land and
buildings
£’000
Office
equipment
£’000
Company
Cost
At 1 October 2020
Additions during the year
Disposals during the year
At 30 September 2021
Accumulated depreciation
At 1 October 2020
Depreciation during the year
Write back
At 30 September 2021
Net book value
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
714
435
(9)
1,140
1,143
–
2,283
2,283
–
–
2,283
–
–
–
714
–
714
Total
£’000
2,306
–
–
2,306
724
440
(9)
1,151
1,151
–
2,306
2,306
–
–
2,306
–
–
–
724
–
724
1,582
23
–
–
23
10
5
–
15
8
–
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
2021
£’000
30 September
2020
£’000
182
151
72
–
405
214
182
151
72
619
108
18 Goodwill and other intangible assets
Goodwill relates partly to the Group’s Consumer Finance Division (CFD) 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 (Azule) 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 relationships with broker introductory sources.
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 higher 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 is 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 of the Cash Generating Units (CGUs) 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 goodwill has been impaired or not. Terminal value often comprises a large
percentage of the total assessed value.
TMV and Azule Cash Generating Units
The recoverable amount of the TMV and Azule CGU at 30 September 2021 has been determined based on a
value in use (VIU) calculation that uses cash flow projections from a recent financial forecast taken to Board
extended to a five year period, and a terminal valuation based on the last year of the extended forecast period.
The financial forecast and therefore projected cash flows have been updated to reflect the latest view of
future performance in light of the current climate, which indicates a more benign demand and future expected
growth in its products and services. The pre-tax discount rate applied to cash flow projections is 15.17% 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 now no longer exceeds the carrying value. Based on this assessment outcome,
the indication is that the Goodwill should be written off in full and reduced to zero.
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 years
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 a business
valuation, free cash flow or dividends can be forecast for a discrete period of time, but the performance
of ongoing concerns becomes harder to estimate as the projections stretch further into the future.
Moreover, it is difficult to determine the precise time when a company may cease operations.
To overcome these limitations, investors can assume that cash flows will grow at a stable rate forever,
starting at some point in the future. This represents the terminal value.
Terminal value is calculated by dividing the last cash flow forecast by the difference between the discount
rate and terminal growth rate. The terminal value calculation estimates the value of the company after
the forecast period.
Terminal growth rate – This is the constant rate at which a company is expected to continue to grow at.
The end of the last forecasted cash flow period is when this growth rate starts, in a discounted cash flow
model, and it continues into perpetuity.
Discount rates – These 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).
Annual Report & Financial Statements 2021
109
Goodwill
Group
TMV Finance Limited acquisition
Azule Limited acquisition
30 September
2021
£’000
30 September
2020
£’000
–
–
–
397
750
1,147
Other intangible assets
The Group's other intangible assets consist solely of externally incurred computer software and capitalised
expenses incurred in the project of applying to become a bank which substantially related to computer
software costs.
Group
Cost
At 1 October 2020
Additions during the year
Transfers
Disposals
Impairment
At 30 September 2021
Accumulated amortisation
At 1 October 2020
Amortisation during the year
Write-off impairment loss on software
Write-off
At 30 September 2021
Net book value at 30 September 2021
Group
Cost
At 1 October 2019
Additions during the year
Transfers
Disposals
Impairment of goodwill
At 30 September 2020
Accumulated amortisation
At 1 October 2019
Amortisation during the year
Write-off impairment loss on software
At 30 September 2020
Software
Under
development
£’000
Total
intangibles
£’000
Goodwill
£’000
Total
£’000
252
364
(494)
(24)
–
98
–
–
–
–
–
98
6,800
589
–
(57)
(7)
7,325
3,620
639
(18)
9
4,250
3,075
1,147
–
–
–
(1,147)
–
–
–
–
–
–
–
7,947
589
–
(57)
(1,154)
7,325
3,620
639
(18)
9
4,250
3,075
Software
Under#
development
£’000
Total
intangibles
£’000
Goodwill
£’000
Total
£’000
–
691
(439)
–
–
252
–
–
–
–
6,149
739
–
(88)
–
2,897
–
–
–
(1,750)
9,046
739
–
(88)
(1,750)
6,800
1,147
7,947
3,105
552
(37)
3,620
–
–
–
–
3,105
552
(37)
3,620
In use
£’000
6,548
225
494
(33)
(7)
7,227
3,620
639
(18)
9
4,250
2,977
In use#
£’000
6,149
48
439
(88)
–
6,548
3,105
552
(37)
3,620
Net book value at 30 September 2020
2,928
252
3,180
1,147
4,327
#Re-presented, refer to Note 1.7 for full details.
110
19 Deferred tax assets
Group
Company
30 September
2021
£’000
30 September
2020*
£’000
30 September
2021
£’000
30 September
2020*
£’000
Losses
Decelerated capital allowances
Provisions
IFRS 9 COAP42 adjustments
Share-based payments
Other temporary differences
At 1 October
Recognised in Income Statement
Other adjustments
Recognised in other
comprehensive income
Recognised in equity
Adjustments in respect of prior periods
At 30 September
42 COAP – Change of Accounting Practice.
*Restated, refer to Note 1.7 for full details.
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,105
(1,102)
32
–
–
(35)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
135
(100)
–
–
–
(35)
–
–
Deferred tax asset of £2.6 million at the substantively enacted rate of 25% (2020: £1.8 million at 19% rate)
in total has not been recognised: In respect of trading losses of £2.9 million (2020: £nil), with a
corresponding deferred tax asset thereon of £0.7 million (2020: nil) and other temporary differences of
£7.3 million (2020: £9.5 million), with a deferred tax asset thereon of £1.8 million at the substantively
enacted rate of 25% (2020: £1.8 million at 19% rate).
20 Due from and to Group companies
The following outstanding balances are due from and to Group companies.
Due from Group companies
Due to Group companies
Company
30 September
2021
£’000
30 September
2020
£’000
8,958
5,918
8,759
5,242
These balances are unsecured, and repayable on demand. The balances are generally interest free, apart
from those between the Company and Azule Ltd, upon which interest is charged at 2.41%.
Due from/to Group companies 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, and repayable on demand.
The balances are generally interest free, apart from those between the Company and Azule Ltd, upon which
interest is charged at 2.41%. Those due from Group companies are entirely allocated to Stage 1 and based
on materiality considerations; no provision has been recorded.
21 Other assets
Prepayments
Other receivables
Group
Company
30 September
2021
£’000
30 September
2020
£’000
30 September
2021
£’000
30 September
2020
£’000
1,049
4,120
5,169
787
1,264
2,051
1,049
49
1,098
758
12
770
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 2021
111
22 Due to banks
Group
Current
Secured loans and borrowings
Non-current
Secured loans and borrowings
30 September
2021
£’000
30 September
2020
£’000
–
208
59,630
59,630
62,412
62,620
Bank overdrafts
The Group had no bank overdraft facility at 30 September 2021 (30 September 2020: £nil).
Interest bearing facilities
£208,000 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 2021, these facilities
were fully repaid (2020: £208,000).
£25 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.
At 30 September 2021, this facility had been fully settled and it will not be renewed.
£124.7 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 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. At 30 September 2021, the Group had an outstanding balance of £59.6 million
2020: £62.4 million).
£30 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 London Inter-Bank Offered Rate
(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. This facility was undrawn at
30 September 2021 (2020: £nil) and terminated on 21 December 2021.
£25 million repo facility granted to PCF Bank by NatWest Markets plc
This facility has fixed interest rates and maturity dates of up to 1 year. The facility is secured by bonds
owned by the Bank. This facility was undrawn at 30 September 2021 (2020: £nil). In September 2021, the
facility was suspended and has not been reinstated.
23 Due to customers
Group
Retail customers
Notice account
Term deposit
30 September
2021
£’000
30 September
2020#
£’000
50,016
277,150
327,166
79,634
262,412
342,046
Included in amounts due to customers is accrued interest amounting to £1.8 million (2020: £2.1 million) and
£300,700 (2020: £855,000) for term deposits and notice accounts respectively.
#Re-presented, refer to Note 1.7 for full details.
112
24 Financing activities
The table below details changes in the Group’s liabilities arising from financing activities.
Group
Due to banks
Subordinated liabilities
Group
Due to banks
Subordinated liabilities
Note
22
25
Note
22
25
25 Subordinated liabilities
Group
Subordinated debt
1 October
2020
£’000
Funding
cash flows
£’000
Interest
cash flows
£’000
30 September
2021
£’000
62,620
7,126
69,746
(3,005)
–
(3,005)
15
1
16
59,630
7,127
66,757
1 October
2019
£’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
30 September
2021
£’000
30 September
2020
£’000
7,127
7,127
7,126
7,126
£7 million subordinated notes issued by PCF Bank Limited
At 30 September 2021, PCF Bank Limited had a £15 million subordinated note facility from British Business
Investments Limited (2020: £15 million). Notes may be issued once per quarter in tranches of between
£1 million and £5 million; 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 five years from the date of issue. These notes meet the
conditions for Tier 2 capital. During the year, no new notes were issued (2020: £7 million) and at 30
September 2021, £7 million of notes remained issued (2020: £7 million).
26 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 1643
Accretion of interest
Payments
At 30 September
43 The year ended 30 September 2020 is the year of adoption of IFRS 16.
27 Other liabilities
30 September
2021
£’000
30 September
2020
£’000
1,604
28
(595)
1,037
2,154
55
(605)
1,604
30 September
2021
£’000
30 September
2020
£’000
1,525
26
(568)
983
2,053
50
(578)
1,525
Other payables
Accruals
Collateral repayable
30 September
2021
£’000
1,801
2,948
180
4,929
Group
30 September
2020#
£’000
3,717
1,467
–
5,184
Company
30 September
2021
£’000
30 September
2020
£’000
1,616
1,595
–
3,211
1,382
844
–
2,226
Other liabilities include other payables and accruals that are not interest-bearing and are normally settled
on 30 day terms.
#Re-presented, refer to Note 1.7 for full details.
Annual Report & Financial Statements 2021
113
28 Issued capital and reserves
Group and Company
Ordinary shares issued and fully paid
At 1 October
Issuance of new shares during the year
Scrip dividend
At 30 September
30 September
2021
‘000 units
30 September
2020
‘000 units
30 September
2021
£’000
30 September
2020
£’000
250,240
750
–
250,990
250,197
–
43
250,240
12,512
38
–
12,550
12,510
–
2
12,512
Called-up share capital comprises 250,990,000 (2020: 250,240,000) ordinary shares of 5p each.
Ordinary shares of 5 pence each ranking pari passu per share as a class to any return of capital, and all
ordinary dividends with one vote per share.
Share premium
At 1 October
Issuance of new shares during the year
At 30 September
Date of issue
9 April 2020
Scrip dividend
Group
Other reserves
Fair value gain/(loss) for financial instruments
Fair Value Through Other Comprehensive
Income (FVOCI)
Fair value movements in debt instruments at FVOCI
30 September
2021
£’000
30 September
2020
£’000
17,625
54
17,679
Change
in share
capital at 5p
per share
£’000
17,619
6
17,625
Change
in share
premium
£’000
Number of
shares
Issue
price
43,499
5.0p
2
6
30 September
2021
£’000
30 September
2020
£’000
9
9
60
60
Own shares (Employee Share Option Plans)
Own shares represent 768,377 (2020: 768,377) ordinary shares held by the Company's Employees
Benefits Trust 2003 to meet obligations under the Company’s Share Option Plans. The shares are stated
at cost and their market value at 30 September 2021 was £184,410 (2020: £141,381).
Group and Company
Own shares
At 1 October
Reclassification to cash
At 30 September
30 September
2021
£’000
30 September
2020
£’000
(147)
–
(147)
(355)
208
(147)
Dividend
No dividend is payable to shareholders at 30 September 2021 (2020: nil).
29 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 1.5.2.
114
29.1 Valuation techniques
Debt instruments at Fair Value Through Other Comprehensive Income (FVOCI)
Debt securities held by the Group 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.
29.2 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 29.4.
29.3 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 Treasury and Finance Division.
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.
29.4 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
At 30 September 2021
Cash and balances at central banks
Loans and advances to customers
Debt instruments at FVOCI
Derivative financial instruments
Other assets (adjusted for prepayments)
Total financial assets
Due to banks
Due to customers
Subordinated liabilities
Other liabilities (adjusted for accruals)
Total financial liabilities
Amortised
cost
£’000
56,126
363,992
–
–
4,120
424,238
59,630
327,166
7,127
1,981
395,904
FVTPL
£’000
FVOCI
£’000
Total
£’000
–
–
–
209
–
–
–
16,155
–
–
56,126
363,992
16,155
209
4,120
209
16,155
440,602
–
–
–
–
–
–
–
–
–
–
59,630
327,166
7,127
1,981
395,904
Annual Report & Financial Statements 2021
115
Group
At 30 September 2020*
Cash and balances at central banks
Loans and advances to customers*
Debt instruments at FVOCI
Other assets44
Total financial assets
Due to banks
Due to customers#
Derivative financial instruments
Subordinated liabilities
Other liabilities44
Total financial liabilities
Amortised
cost
£’000
24,936
427,003
–
1,264
453,203
62,620
342,046
–
7,126
3,717
415,509
FVTPL
£’000
FVOCI
£’000
Total
£’000
–
–
–
–
–
–
–
80
–
–
80
–
–
9,095
–
9,095
–
–
–
–
–
–
24,936
427,003
9,095
1,264
462,298
62,620
342,046
80
7,126
3,717
415,589
44 Other assets and liabilities exclude prepayments and accruals as they are not financial instruments.
* Restated, refer to Note 1.7 for full details.
# Re-presented, refer to Note 1.7 for full details.
Company
At 30 September 2021
Cash and balances at central banks
Due from Group companies
Other assets45
Total financial assets
Due to Group companies
Other liabilities44
Total financial liabilities
Company
At 30 September 2020
Cash and balances at central banks
Due from Group companies
Other assets45
Total financial assets
Due to Group companies
Other liabilities45
Total financial liabilities
Amortised
cost
£’000
FVTPL
£’000
FVOCI
£’000
318
8,958
49
9,325
5,918
1,616
7,534
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£’000
318
8,958
49
9,325
5,918
1,616
7,534
Amortised
cost
£’000
FVTPL
£’000
FVOCI
£’000
Total
£’000
278
8,759
12
9,049
5,242
1,382
6,624
–
–
–
–
–
–
–
–
–
–
–
–
–
–
278
8,759
12
9,049
5,242
1,382
6,624
45 Other assets and liabilities exclude prepayments and accruals because they are not financial instruments.
The Group holds certain financial assets at fair value grouped into Levels 1, 2 and 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 comprises mainly of fixed rate bonds and floating rate notes
for which traded prices are readily available.
Level 2 – These are valuation techniques where all significant inputs are taken from observable market
data. These include valuation models used to calculate the present value of expected future cash flows
that may be employed when no active market exists, and quoted prices that are available for similar
instruments in active markets.
Level 3 – These are valuation techniques where one or more significant inputs are not based on observable
market data. Valuation techniques include net present value by way of discounted cash flow models.
Assumptions and market observable inputs used in valuation techniques include risk-free and benchmark
interest rates and similar market products. 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.
116
The following table shows an analysis of financial instruments recorded at amortised cost by level of the
fair value hierarchy.
Level 1
£’000
Level 2
£’000
Level 3
£’000
Fair
value
£’000
Group
Financial instruments held at amortised cost
At 30 September 2021
Cash and balances at central banks
Loans and advances to customers
Due to banks
Subordinated liabilities
Due to customers
Carrying
value
£’000
56,126
363,992
420,118
59,630
7,127
327,166
56,126
–
56,126
59,630
–
–
393,923
59,630
–
–
–
–
–
–
–
–
56,126
363,992 420,378
363,992 476,504
–
7,127
327,166
59,630
8,346
327,166
334,293
395,142
Group
Financial instruments held at amortised cost
At 30 September 2020*
Cash and balances at central banks
Loans and advances to customers*
Due to banks
Subordinated liabilities
Due to customers#
Carrying
value
£’000
Level 1
£’000
Level 2
£’000
Level 3
£’000
Fair
value
£’000
24,936
427,003
24,936
–
451,939
24,936
62,620
7,126
342,046
62,620
–
–
411,792
62,620
–
–
–
–
–
–
–
–
24,936
427,003 485,546
427,297
510,482
–
7,126
62,620
8,289
342,046 342,046
349,172
412,955
For Due to banks and Due to customers, carrying value is assessed to approximate fair value.
*Restated, refer to Note 1.7 for full details.
#Re-presented, refer to Note 1.7 for full details.
The following table shows an analysis of financial instruments recorded at FVOCI by level of the fair value
hierarchy.
Group
Financial instruments held at
Fair Value Adjusted Through Other
Comprehensive Income
30 September 2021
Debt financial instruments at FVOCI
30 September 2020
Debt financial instruments at FVOCI
Carrying
value
£’000
Level 1
£’000
Level 2
£’000
Level 3
£’000
Fair
value
£’000
16,155
16,155
9,095
9,095
–
–
–
–
16,155
9,095
The following table shows an analysis of financial instruments recorded at FVTPL by level of the fair value
hierarchy.
Group
Financial instruments held at Fair Value
Through Profit or Loss (derivatives)
30 September 2021
Derivative financial assets
Derivative financial liabilities
30 September 2020
Derivative financial assets
Derivative financial liabilities
Level 1
£’000
Level 2
£’000
Level 3
£’000
value Notional
£’000
£’000
Fair
–
–
–
–
209
–
–
(80)
–
–
–
–
209
16,000
–
–
–
–
(80)
15,770
Annual Report & Financial Statements 2021
117
As part of its asset and liability management, the Group uses derivatives for economic hedging purposes
to reduce its exposure to market risks. This is achieved by economically hedging specific financial
instruments, portfolios of fixed rate financial instruments and forecast transactions, as well as economically
hedging of aggregate financial position exposures. The Group does not apply hedge accounting.
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 2021
Derivatives in economic relationships
Interest rate swaps
Total derivative financial instruments
At 30 September 2020
Derivatives in economic relationships
Interest rate swaps
Total derivative financial instruments
Carrying
value
assets
£’000
209
209
Carrying
value
assets
£’000
Carrying
value
liabilities
£’000
–
–
Carrying
value
liabilities
£’000
Notional
amount
£’000
16,000
16,000
Notional
amount
£’000
–
–
80
80
15,770
15,770
29.5 Impairment allowance for loans and advances to customers
The table below shows the credit quality and gross carrying amount 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 2021
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 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
*Restated, refer to Note 1.7 for full details.
118
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
288,497
24,504
22,028
17,724
2,576
2,729
958
–
–
307,179
27,080
24,757
–
–
1,889
2,775
9,961
2,721
11,850
5,496
335,029
27,693
13,640 376,362
(3,407)
(3,005)
(5,958)
(12,370)
331,622
24,688
7,682
363,992
8,958
–
–
8,958
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
276,009
40,402
33,006
60,360
7,110
7,273
896
–
–
337,265
47,512
40,279
–
–
643
1,285
2,458
16,193
3,101
17,478
349,417
76,671
19,547 445,635
(3,179)
(3,300)
(12,153)
(18,632)
346,238
73,371
7,394 427,003
17,270
–
–
17,270
An analysis of changes in the gross carrying amount of loans and advances and the corresponding
Expected Credit Losses (ECLs) is as follows:
Group
At 1 October 2020*
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
Debt sale
At 30 September 2021
Group
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*
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
349,417
159,493
76,671
2,066
19,547 445,635
161,764
205
(182,823)
72,726
(62,627)
(727)
(430)
–
(27,873)
(72,725)
63,311
(13,515)
(242)
–
(1,306) (212,002)
–
–
–
(6,677)
(12,358)
(1)
(684)
14,242
(6,005)
(12,358)
335,029
27,693
13,640 376,362
Stage 1
£’000
307,294
219,793
Stage 2
£’000
22,424
–
Stage 3
£’000
Total
£’000
15,625 345,343
219,793
–
(87,113)
4,266
(85,441)
(9,382)
–
(19,889)
(4,265)
85,441
(7,040)
–
(9,860)
(1)
–
16,422
(2,639)
(116,862)
–
–
–
(2,639)
349,417
76,671
19,547 445,635
* Comparative loans and advances have been restated, refer to Note 1.7 for full details.
ECL allowance
At 1 October 2020
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
Debt sale
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
3,179
692
2,422
1,365
(3,224)
(1,024)
(3)
–
3,300
12
2,861
(1,340)
3,379
(5,166)
(41)
–
12,153
52
(430)
(25)
(155)
6,190
(4,289)
(7,538)
Total
£’000
18,632
756
4,853
–
–
–
(4,333)
(7,538)
At 30 September 2021
3,407
3,005
5,958
12,370
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
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
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 2021
119
29.6 Impairment allowance for loans and advances by divisions
Gross carrying amount
30 September 2021
Loans and Advances
CFD
BFD
Azule
Bridging
Total
Gross carrying amount
30 September 2020*
Loans and Advances
CFD
BFD
Azule
Bridging
Stage 1
£’000
Not
past
due
Stage 2
£’000
<30 days
>=30 days
Total
Stage 3
£’000
Total
£’000
156,140
113,345
12,321
53,223
3,491
12,507
627
–
335,029
16,625
464
310
–
–
774
3,411
4,548
1,035
1,300
7,366
17,365
1,662
1,300
3,360
7,840
1,482
958
166,866
138,550
15,465
55,481
10,294
27,693
13,640 376,362
Stage 1
£’000
Not
past
due
Stage 2
£’000
<30 days
>=30 days
Total
Stage 3
£’000
Total
£’000
153,403
7,336
118,670 53,960
2,559
19,738
2,110
57,606
981
1,818
–
–
3,012
11,329
4,774 60,552
2,680
2,110
121
–
7,122
11,240
289
896
171,854
190,462
22,707
60,612
Total
349,417 65,965
2,799
7,907
76,671
19,547 445,635
*Restated, refer to Note 1.7 for full details.
Impairment provisions
30 September 2021
CFD
BFD
Azule
Bridging
Stage 1
£’000
Not
past
due
Stage 2
£’000
<30 days
>=30 days
Total
Stage 3
£’000
Total
£’000
972
1,905
263
267
230
1,076
95
–
38
88
–
–
377
860
235
6
645
2,024
330
6
1,608
3,761
589
–
3,225
7,690
1,182
273
Total
3,407
1,401
126
1,478
3,005
5,958
12,370
Impairment provisions
30 September 2020
CFD
BFD
Azule
Bridging
Total
Coverage ratio
30 September 2021
CFD
BFD
Azule
Bridging
Stage 1
£’000
Not
past
due
Stage 2
£’000
<30 days
>=30 days
Total
Stage 3
£’000
Total
£’000
1,206
1,063
621
289
469
1,593
185
11
3,179
2,258
66
95
–
–
161
312
557
12
–
847
2,245
197
11
4,868
7,011
94
180
6,921
10,319
912
480
881
3,300
12,153
18,632
Not
past
due
6.6%
8.6%
15.2%
–
Stage 1
0.6%
1.7%
2.1%
0.5%
Stage 2
<30 days
8.2%
28.4%
–
–
16.3%
Stage 2
<30 days
6.7%
5.2%
–
–
5.8%
>=30 days
Total
Stage 3
Total
11.1%
18.9%
22.7%
0.5%
8.8%
11.7%
19.9%
0.5%
47.9%
48.0%
39.7%
0.0%
14.4%
10.9%
43.7%
1.9%
5.6%
7.6%
0.5%
3.3%
>=30 days
Total
Stage 3
Total
10.4%
11.7%
9.9%
–
7.5%
3.7%
7.4%
0.5%
68.4%
62.4%
32.5%
20.1%
11.1%
4.3%
62.2%
4.0%
5.4%
4.0%
0.8%
4.2%
Total
1.0%
8.4%
Coverage ratio
Stage 1
30 September 2020*
CFD
BFD
Azule
Bridging
Total
*Restated, refer to Note 1.7 for full details.
0.8%
0.9%
3.1%
0.5%
0.9%
Not
past
due
6.4%
3.0%
7.2%
0.5%
3.4%
120
29.7 Stage 3 decomposition
30 September 2021
No longer credit-impaired but in cure period
that precedes transfer to Stage 2
Credit-impaired not in cure period
Total
30 September 2020
No longer credit-impaired but in cure period
that precedes transfer to Stage 2
Credit-impaired not in cure period
Total
29.8 Analysis of loans by product types
Gross carrying
amount
£’000
Stage 3
ECL
£’000
Coverage
%
342
13,298
83
5,875
13,640
5,958
Stage 3
24%
44%
Gross carrying
amount
£’000
ECL
£’000
Coverage
%
1,428
18,119
316
11,837
22%
65%
19,547
12,153
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
Gross carrying amounts
At 30 September 2021
Bridging
Finance lease
Hire purchase/conditional sale
Loans
Total
Gross carrying amounts
At 30 September 2020*
Bridging
Finance lease
Hire purchase/conditional sale
Loans
Total
*Restated, refer to Note 1.7 for full details.
Impairment provisions
At 30 September 2021
Bridging
Finance lease
Hire purchase/conditional sale
Loans
Total
At 30 September 2020*
Impairment provisions
Bridging
Finance lease
Hire purchase / conditional sale
Loans
Total
*Restated, refer to Note 1.7 for full details.
53,223
22,190
259,195
421
1,300
3,085
23,307
1
958
1,709
55,481
26,984
10,820 293,322
575
153
335,029
27,693
13,640 376,362
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
57,606
29,546
261,516
749
2,110
10,672
63,886
3
896
4,938
13,581
132
60,612
45,156
338,983
884
349,417
76,671
19,547 445,635
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
267
440
2,693
7
3,407
6
465
2,534
–
–
809
5,041
108
273
1,714
10,268
115
3,005
5,958
12,370
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
289
570
2,298
22
3,179
11
666
2,622
1
3,300
180
3,407
8,479
87
12,153
480
4,643
13,399
110
18,632
Annual Report & Financial Statements 2021
121
30 Financial risk management
The Group is based, and its operations are predominantly, in the UK, although Azule does operate as a
finance broker in the EU. While risk is inherent in the Group’s activities, it is managed through an integrated
Risk Management Framework (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.
30.1 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 from 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
2021
30 September
2020
1.1
1.2
1.4
1.3
The Group recognises the importance of notice accounts and savings accounts as sources of funds
to finance lending to customers. They are monitored using the advances to deposit ratio, which
compares loans and advances to customers as a ratio of core customer notice and savings accounts,
together with term funding with a remaining term to maturity in excess of one year.
122
(b) Undiscounted contractual cash flows
Group
At 30 September 2021
Financial assets
Cash and balances at central banks
Loans and advances
Debt instruments at FVOCI
Derivative financial instrument
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
56,126
8,359
–
–
–
–
26,602
–
–
4,120
–
–
–
56,126
42,562 251,422 110,993 439,938
16,153
4,005
1
–
4,120
–
12,148
1
–
–
–
–
Total undiscounted financial assets
64,485
30,722
46,567 263,571
110,993 516,338
Financial liabilities
Due to banks
Due to customers
Lease liabilities
Other liabilities
15
8,506
–
–
–
11,449
153
1,981
– 59,600
149,337 156,649
455
–
458
–
–
59,615
8,238 334,179
1,066
1,981
–
–
Total undiscounted financial liabilities
8,521
13,583
149,795 216,704
8,238 396,841
Surplus/(shortfall)
55,964
17,139 (103,228) 46,867 102,755
119,497
Group
At 30 September 2020*
Financial assets
Cash and balances at central banks
Loans and advances*
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
49,727 343,419 102,367 526,245
9,114
1,264
9,114
–
–
–
–
–
–
Total undiscounted financial assets
41,614
15,318
49,727 352,533 102,367 561,559
Financial liabilities
Due to banks
Due to customers#
Derivative financial instrument
Lease liabilities
Other liabilities#
24
10,638
–
–
–
23
17,624
12
153
3,717
105
152,363
36
458
–
62,476
155,166
32
1,154
–
–
62,628
17,190 352,981
80
1,765
3,717
–
–
–
Total undiscounted financial liabilities
10,662
21,529
152,962 218,828
17,190
421,171
Surplus/(shortfall)
30,952
(6,211) (103,235) 133,705
85,177 140,388
*Restated, refer to Note 1.7 for full details.
#Re-presented, refer to Note 1.7 for full details.
Annual Report & Financial Statements 2021
123
Company
At 30 September 2021
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
On
demand
£’000
Less
than 3
months
£’000
3 to 12
months
£’000
1 to 5
years
£’000
Over
5 years
£’000
Total
£’000
318
8,958
–
9,276
–
5,918
–
5,918
–
–
49
49
145
–
1,616
1,761
–
–
–
–
434
–
–
434
–
–
–
–
431
–
–
431
–
–
–
–
–
–
–
–
–
318
8,958
49
9,325
1,010
5,918
1,616
8,544
808
Surplus/(shortfall)
3,385
(1,712)
(434)
(431)
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
–
–
–
–
434
–
–
434
–
–
–
–
1,154
–
–
1,154
(145)
(434)
(1,154)
–
–
–
–
–
–
–
–
–
278
8,759
12
9,049
1,733
5,242
1,382
8,357
692
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 2021, the Group had total wholesale and
retail funding of £393.9 million (2020: £411.5 million)# that supported net loans and advances of
£363.9 million (2020: £427.3 million)*. Moreover, at 30 September 2021, the Group had a Net Stable
Funding Ratio in excess of the regulatory minimum of 100% (2020: in excess of 100%).
Surplus liquidity in periods shown above will be used to cover liquidity shortfalls in subsequent periods.
*Restated, refer to Note 1.7 for full details.
#Re-presented, refer to Note 1.7 for full details.
124
(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 that have
been pledged as collateral (i.e. which are required to be separately disclosed under IFRS 7).
Unencumbered assets are the remaining assets that the Group owns.
Carrying amount of
encumbered assets
£’000
Carrying amount of
unencumbered assets
£’000
Group
30 September 2021
Debt financial instruments at FVOCI
Hire purchase/conditional sale
Loans
Finance lease
Bridging
Total
Group
13,807
60,005
–
12,851
–
86,663
30 September 2020*
Debt financial instruments at FVOCI
Hire purchase/conditional sale
Loans
Finance lease
Bridging
Total
–
82,765
–
20,417
–
103,182
*Restated, refer to Note 1.7 for full details.
30.2 Market risk – Interest rate risk
Carrying amount of
encumbered assets
£’000
Carrying amount of
unencumbered assets
£’000
293,484
380,147
Total
£’000
16,155
283,054
460
25,270
55,208
Total
£’000
9,095
325,585
774
40,513
60,131
2,348
223,049
460
12,419
55,208
9,095
242,820
774
20,096
60,131
332,916
436,098
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 within 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 10 years and holds a portfolio of variable rate
liquid assets. It funds itself from a combination of fixed rate retail deposits from one year to seven years,
variable rate Term Funding Scheme (TFS and TFSME) funding, variable rate retail notice accounts and
fixed rate wholesale funding. Interest rate sensitivity has been managed using interest rate swaps as
required. As set out in the management of market risk within the Risk Management Report, the Group is
currently not able to manage interest rate risk in the banking book through interest rate swaps as these
facilities are currently withdrawn.
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 a favourable effect on
profits of £97,738 (2020: unfavourable £145,746) and a favourable impact on capital of £76,168
(2020: unfavourable £118,054).
Annual Report & Financial Statements 2021
125
30.3 Credit risk
Credit risk is the risk that a borrower fails to pay the interest or fails 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, 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
2021
£’000
30 September
2020*
£’000
30 September
2021
£’000
30 September
2020
£’000
Financial assets on-balance sheet
Cash and balances at central banks
Cash and demand deposits
Loans and advances to customers
Consumer lending (net)
Business lending (net)
Azule lending (net)
Bridging finance (net)
Due from related companies
Debt instruments at FVOCI
Derivative financial asset
Other assets
Off-balance sheet
Undrawn facilities
*Restated, refer to Note 1.7 for full details.
56,126
24,936
318
278
163,641
130,860
14,283
55,208
–
16,155
209
4,120
164,933
180,143
21,795
60,132
–
9,095
–
1,264
–
–
–
–
8,958
–
–
49
–
–
–
–
8,759
–
–
12
440,602
462,298
9,325
9,049
8,958
17,270
–
–
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.
Offsetting
Derivative transactions are entered into under International Swaps and Derivatives Association (ISDA)
master netting agreements. In general, under these agreements, in certain circumstances, e.g. when a
credit event such as a default occurs, all outstanding transactions under the agreement with the
counterparty are terminated, the termination value is assessed and only a single net amount is due or
payable in settlement of all transactions with the counterparty. The Group executes a credit support
annex in conjunction with the ISDA agreement, which requires the Group and its counterparties to post
collateral to mitigate counterparty credit risk.
The ISDA master netting arrangement does not meet the criteria for offsetting in the statement of financial
position. This is because they create for the parties to the agreement a right of set-off of recognised
amounts that is enforceable only following an event of default, insolvency or bankruptcy of the Group or
the counterparties or following other predetermined events. In addition, the Group and its counterparties
do not intend to settle on a net basis or to realise the assets and settle the liabilities simultaneously. The
Group receives and gives collateral in the form of cash in respect of derivative transactions. This collateral
is subject to standard industry terms including, when appropriate, an ISDA credit support annex. The
terms also give each party the right to terminate the related transactions on the counterparty’s failure
to post collateral.
The following table shows the impact on derivative financial assets and liabilities that have not been
offset but for which the Group has enforceable master netting arrangements in place with counterparties.
The net amounts show the exposure to counterparty credit risk after offsetting benefits and collateral
and are not intended to represent the Group’s actual exposure to credit risk. Financial collateral on
derivative financial instruments consists of cash settled to mitigate the mark to market exposures.
126
Derivative financial instruments
Group
30 September 2021
Derivative financial assets
Derivative financial liabilities
30 September 2020
Derivative financial assets
Derivative financial liabilities
30.3.1 Forborne and modified loans
Gross amounts
recognised
£’000
Effect of
master netting
agreements
£’000
Financial
collateral
£’000
Net amounts
after offsetting
and collateral
£’000
209
–
–
(80)
–
–
–
–
(180)
–
–
–
29
–
–
(80)
As mentioned in Note 1.5.2, 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 was no negative impact on the customer’s credit file as a result of these measures. However, where
subsequent additional assistance was required after the six months of assistance and where full payments
were not being maintained, a true reflection of the customer repayment history recommenced being
recorded with the credit reference 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 is 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 2021, the gross carrying amount of exposures with forbearance measures was £2.9
million (2020: £40.4 million). This relates to 600 agreements (2020: 1,711) in forbearance that are
COVID-19 related, with temporary modifications to terms and conditions. At 30 September 2021,
there were no loans that have had a refinancing or permanent modification to terms and conditions
(2020: nil). As set out in Note 1.5.2, a COVID-19 related concession does not in itself constitute a
significant increase in credit risk. See the table below for forbearance analysis.
Annual Report & Financial Statements 2021
127
30.3.2 Forborne and modified loans
The following tables provide a summary of the Group’s forborne assets:
Gross carrying amount of forborne loans
Stage 1
Stage 3
Non-
Gross Performing Performing performing
Carrying forborne
Amount loans
Group £’000 £’000
forborne
loans
£’000
Total
forborne forborne
loans
£’000
Stage 2
loans Forbearance
ratio
£’000
30 September 2021
Loans and advances
to customers
CFD 166,866 40
BFD 138,550 146
Azule 15,465 –
Bridging 55,481 –
Total loans and advances
to customers 376,362 186
230
1,618
232
–
69
621
–
–
339
2,385
232
–
0.20%
1.72%
1.50%
0.00%
2,080
690
2,956
0.79%
Expected Credit Losses (ECLs) on forborne loans
Stage 1 Stage 1 Stage 2
Stage 3
Individual Collective Individual Collective Individual Collective
£’000
£’000 £’000 £’000
Stage 3
Stage 2
£’000
£’000
Total
£’000
30 September 2021
Loans and advances
to customers
CFD
BFD
Azule
Bridging
Total loans and advances
to customers
– – 20
– 2 163
– – 11
– – –
8
127
33
–
19
217
–
–
– 2 194
168
236
–
–
–
–
–
47
509
44
–
600
Gross carrying amount of forborne loans
Stage 1
Stage 3
Non-
Gross Performing Performing performing
Carrying forborne
Amount loans
Group £’000 £’000
forborne
loans
£’000
Total
forborne forborne
loans
£’000
Stage 2
loans Forbearance
ratio
£’000
30 September 2020*
Loans and advances
to customers
CFD 171,854 4,512
BFD 190,462 11,290
Azule 22,707 6,662
Bridging 60,612 –
Total loans and advances
to customers 445,635 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%
Expected Credit Losses (ECLs) on forborne loans
Stage 1 Stage 1 Stage 2
Stage 3
Individual Collective Individual Collective Individual Collective
£’000
£’000 £’000 £’000
Stage 3
Stage 2
£’000
£’000
Total
£’000
30 September 2020
Loans and advances
to customers
CFD
BFD
Azule
Bridging
Total loans and advances
to customers
*Restated, refer to Note 1.7 for full details.
128
62 14 117
151 66 392
278 22 103
– – –
–
407
–
–
491 102 612
407
16
–
–
–
16
–
47
36
–
83
209
1,063
439
–
1,711
30.3.3 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 1.5.2).
l An explanation of the Group’s internal grading system (Note 30.3.4).
l How the Group defines, calculates and monitors the Probability of Default (PD), Exposure at Default
(EAD), and Loss Given Default (LGD) (Notes 30.3.4, 30.3.5 and 30.3.6 respectively).
l When the Group considers there has been a significant increase in credit risk of an exposure (Note 30.3.7).
l The Group’s policy of segmenting financial assets where ECL is assessed on a collective basis (Note 30.3.7).
30.3.4 The Group’s internal rating and Probability of Default (PD) estimation process
The Group operates an internal credit grading model and Probability of Default estimation process. The PD
is an estimate of the likelihood of default over a given time. 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.
Corporate lending (Business Finance Division, Bridging Finance and Azule)
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
The table below sets out the internal ratings, description and internal PD ranges by grade for corporate
lending and consumer lending.
Business Finance Division, Bridging Finance Division and Azule
Internal rating grade
Internal Rating Description
Internal PD range at
30 September 2021
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
0.55%-2.69%
1.88%-9.08%
1.10%-5.29%
3.71%-9.32%
2.15%-8.04%
5.74%-13.82%
7.01%-17.25%
Internal PD range at
30 September 2020
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 at
30 September 2021
Internal PD range at
30 September 2020
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%
2.02%-3.39%
2.57%-4.20%
3.97%-6.62%
5.04%-8.14%
5.66%-9.49%
9.67%-19.00%
7.79%-12.90%
15.22%-25.58%
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%
Annual Report & Financial Statements 2021
129
30.3.5 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 twelve 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 the Group’s models.
30.3.6 Loss Given Default (LGD)
The credit risk assessment is based on a standardised Loss Given Default 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.
30.3.7 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. Azule, Bridging Finance does not have a SICR
threshold due to its short-term nature.
The Group also applies a secondary qualitative method for triggering an asset’s SICR, such as moving a
customer to the watch list, or the account becoming forborne as indicated in Note 30.3.1. In certain cases,
the Group may also consider that default events explained in Note 1.5.2 are a SICR 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 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 portfolio
(10)
(37)
(3)
7
2
5
(10)
(26)
(1)
10
131
1
130
31 Commitments, contingent liabilities and contingent assets
At 30 September 2021, the Group had undrawn commitments to lend to customers of approximately
£9 million (2020: £17.3 million).
The Group's subsidiary, PCF Bank Limited (the Bank) 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 their
business activities. The total value of claims as at 30 September 2021, assessed to have a greater than
remote likelihood of economic outflow, is £nil (2020: £135,000).
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 the Annual Report & Financial Statements 2020
and the Company’s shares being suspended from trading on Alternative Investment Market (AIM) of the
London Stock Exchange. The amount of any recoveries cannot currently be quantified.
32 Related parties
The non-executive directors held a total of £0.1 million in savings accounts in the Group at 30 September
2021 (2020: £0.2 million). The directors' remuneration is disclosed in Note 9.
In addition, there were other material related party transactions related to management fee recharges
of £0.4 million and £18.9 million to PCF Credit Limited and PCF Bank Limited respectively by PCF Group
plc for the year ended 30 September 2021 (2020: £0.1 million and £13.7 million respectively).
Key management personnel of the Group are the Board Directors.
Further details of balances with other Group companies are given in Note 20: Due from related companies.
33 Non-adjusting events after the balance sheet date
The following non-adjusting events have occurred since the Balance Sheet date and do not impact on
the going concern assessment undertaken by the directors in these Financial Statements.
COVID-19 pandemic and geopolitical uncertainty
Since the year end there have been no subsequent lockdowns as a result of COVID-19 and now in May
2022 all restrictions have been lifted.
COVID-19 direct financial support measures have unwound, the impact on credit arrears and losses has
been limited, with the majority of customers who had requested COVID-19 related payment deferrals
having returned to full servicing of their loans. Requests for assistance continued to fall as we moved
through 2021, and due to a change of process adopted to manage customer forbearance, arrears have
continued to trend back to levels reported pre-pandemic. The Group continues to monitor this.
The pandemic has had an unprecedented impact on the world economy, more recently exacerbated by
the events currently taking place in Ukraine. The Group’s business is principally focused on UK based
businesses and customers and the Group does not have any direct exposure to Russia or any sanctioned
persons or entities. As the global economy emerges from the pandemic with inevitable upturn in economic
activity, demand for energy has increased at a time of uncertain supply, with a consequential marked
increase in energy costs, leading to levels of inflation not seen in the UK for over thirty years. This has
led the Bank of England to increase interest rates from record lows to the highest level seen in the last
ten years, with Oxford Economics (OE) forecasting that the Monetary Policy Committee of the Bank of
England will increase Bank Rate to 1.25% by the end of 2022.
Although PCF loans are generally fixed rate, the impact on households and businesses of rising food,
energy costs, general inflation and interest rates may be reflected in affordability pressure. We are closely
monitoring the potential impact of this on loan repayments.
While there is uncertainty in these macroeconomic risks, headwinds may restrict market prospects for the
Group and increase the risk of loan impairments, higher prices and inflation expectations, and a disappointing
recovery in labour market participation, which in turn leads to a downturn in domestic demand.
A revolving credit facility of £30 million granted to PCF Bank by Leumi ABL Limited
This facility, when drawn as a loan, had a variable rate linked to overnight LIBOR plus a margin and a
maturity date of up to five years. The facility was secured by a charge over specified loans and receivables
and the guarantee of the Company. At 30 September 2021 this facility was undrawn (2020: £nil) and the
facility was terminated on 21 December 2021.
Announcement of 31 May 2022
The Group announced that it had decided to accelerate an element of its capital raising, by requesting a
further investment from its majority shareholder, Somers Limited of circa £4 million46 over the next two
months; at the same time, the Group announced the investigation of strategic opportunities including
business combinations, with the Group having received an approach from and entered into discussions
with one party.
46 An open offer to allow all shareholders to participate is expected to follow in due course.
Annual Report & Financial Statements 2021
131
34 Capital management
The Group maintains an actively managed capital base to cover risks inherent in the business and is
meeting the capital adequacy requirements of the local banking supervisor, the Prudential Regulation
Authority (PRA).
The Group calculates the capital resources and requirements using the Basel 3 framework, as implemented
in the EU 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, by virtue of the EU (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 that it takes to manage its capital position. Further details of this are provided in the Chief
Executive Officer's Statement on page 138.
CRR regulatory requirements, which includes the undertaking of the Internal Capital Adequacy
Assessment Process (ICAAP), are focused on the consolidated Group. 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 the following three pillars:
Pillar 1 – Minimum capital requirements
Pillar 2 – Supervisory review process
Pillar 3 – Market discipline
Pillar 2 requires the Group to complete a periodic self-assessment of the ICAAP. The ICAAP is reviewed
by the PRA which culminates in the PRA setting Pillar 2 requirement 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 that 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, Pillar 2 requirements and additional Capital
Requirements Directive buffers at all times.
Further details of the Group's management of capital, including regulatory capital and ratios are described
in more detail in the Risk Management Report on pages 54 to 66.
35 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.
132
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.